Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark one)**

 

**x****      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

 

**For the quarterly period ended June 30, 2010**

 

** ̈****         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**Commission file number 000-53181**

 

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**SOLERA NATIONAL BANCORP, INC.**

(Exactname of registrant as specified in its charter)

 

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

 

**319 S. Sheridan Blvd.**

**Lakewood, CO 80226**

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch 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  ̈

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company.

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes  ̈  No x

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the last practicable date: As of August 11, 2010, 2,553,671 shares of the registrant’s commonstock, $0.01 par value, were issued and outstanding.

 

 

 

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**FORM 10-Q**

**SOLERA NATIONAL BANCORP, INC.**

 

**INDEX**

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

 

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**INTRODUCTORY NOTE. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND RISKFACTORS**

 

This Quarterly Report on Form 10-Qcontains “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995 about Solera National Bancorp, Inc.(the “Company”) and our subsidiary, Solera National Bank (the “Bank,”collectively with the Company, sometimes referred to as “we,” “us” and “our”)that are subject to risks and uncertainties.  Forward-looking statementsinclude information concerning future financial performance, business strategy,projected plans and objectives.  Statements preceded by, followed by orthat otherwise include the words “anticipates,” “believes,” “estimates,” “expects,”“intends,” “plans,” “may increase,” “may fluctuate” and similar expressions offuture or conditional verbs such as “will,” “should,” “would,” and “could” aregenerally forward-looking in nature and not historical facts.  Actualresults may differ materially from those projected, implied, anticipated orexpected in the forward-looking statements. Readers of this quarterly report should not rely solely on theforward-looking statements and should consider all uncertainties and risksthroughout this report. The statements are representative only as of the datethey are made, and Solera National Bancorp, Inc. undertakes no obligationto update any forward-looking statement.

 

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

 

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

 

·                  theCompany’s business may be adversely affected by conditions in the financialmarkets and economic conditions generally;

 

·                  continuationof the economic downturn could reduce our customer base, our level of depositsand demand for financial products such as loans;

 

·                  emergencymeasures designed to stabilize the U.S. financial system are beginning to winddown and the effect of that wind down is unpredictable;

 

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

 

·                  weare exposed to higher credit risk by commercial real estate, commercialbusiness, and construction lending;

 

·                  ourallowance for probable loan losses may be insufficient;

 

·                  interestrate volatility could significantly harm our business;

 

·                  fundingto provide liquidity may not be available to us on favorable terms or at all;

 

·                  wemay not be able to raise additional capital on terms favorable to us;

 

·                  theliquidity of our common stock is affected by its limited trading market;

 

·                  thedepartures of key personnel or directors may impair our operations;

 

·                  theBank’s legal lending limits may impair its ability to attract borrowers;

 

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·                  theCompany is subject to extensive government regulation which may have an adverseeffect on the Company’s profitability and growth;

 

·                  managingreputational risk is important to attracting and maintaining customers,investors and employees;

 

·                  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 a takeovermore difficult;

 

·                  our directors and executive officers could have theability to influence stockholder actions;

 

·                  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.

 

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

 

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**PART I — FINANCIALINFORMATION**

 

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

 

**Solera National Bancorp, Inc.**

 

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

**(unaudited)**

 
| ** **                                                                                                                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ in  thousands, except share data)**                                                                                                          | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                                                                                             |       |              |       |                  |       |
| Cash and due from banks                                                                                                                                |       | $                 | 1,064      |                  | $          | 1,696 |   |
| Federal funds sold                                                                                                                                     |       | —            |       | 820                   |       |
| Total cash and cash equivalents                                                                                                                        |       | 1,064             |       | 2,516                 |       |
| Interest-bearing deposits with banks                                                                                                                   |       | 1,265             |       | 3,784                 |       |
| Investment securities, available-for-sale                                                                                                              |       | 74,974            |       | 73,441                |       |
| Gross loans                                                                                                                                            |       | 60,768            |       | 50,504                |       |
| Net deferred (fees)/expenses                                                                                                                           |       | (83               | )          | (114                  | )          |
| Allowance for loan losses                                                                                                                              |       | (940              | )          | (830                  | )          |
| Net loans                                                                                                                                              |       | 59,745            |       | 49,560                |       |
| Federal Home Loan Bank (FHLB) and Federal Reserve Bank  stocks                                                                                         |       | 1,129             |       | 1,131                 |       |
| Premises and equipment, net                                                                                                                            |       | 806               |       | 875                   |       |
| Accrued interest receivable                                                                                                                            |       | 760               |       | 814                   |       |
| Prepaid FDIC insurance                                                                                                                                 |       | 369               |       | 471                   |       |
| Other assets                                                                                                                                           |       | 212               |       | 248                   |       |
| **Total assets**                                                                                                                                       |       | $                 | 140,324    |                  | $          | 132,840 |   |
|                                                                                                                                                   |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                          |       |              |       |                  |       |
| Deposits                                                                                                                                               |       |              |       |                  |       |
| Noninterest-bearing demand                                                                                                                             |       | $                 | 1,712      |                  | $          | 2,624 |   |
| Interest-bearing demand                                                                                                                                |       | 9,910             |       | 6,830                 |       |
| Savings and money market                                                                                                                               |       | 55,860            |       | 55,318                |       |
| Time deposits                                                                                                                                          |       | 44,863            |       | 39,629                |       |
| Total deposits                                                                                                                                         |       | 112,345           |       | 104,401               |       |
|                                                                                                                                                   |       |              |       |                  |       |
| Federal funds purchased and securities sold under  agreements to repurchase                                                                            |       | 835               |       | 326                   |       |
| Accrued interest payable                                                                                                                               |       | 91                |       | 82                    |       |
| Accounts payable and other liabilities                                                                                                                 |       | 236               |       | 344                   |       |
| Federal Home Loan Bank advances                                                                                                                        |       | 6,500             |       | 8,750                 |       |
| Deferred rent liability                                                                                                                                |       | 93                |       | 85                    |       |
| Capital lease liability                                                                                                                                |       | 97                |       | 118                   |       |
| **Total liabilities**                                                                                                                                  |       | $                 | 120,197    |                  | $          | 114,106 |   |
|                                                                                                                                                   |       |              |       |                  |       |
| COMMITMENTS AND CONTINGENCIES (see Note 10)                                                                                                            |       |              |       |                  |       |
|                                                                                                                                                   |       |              |       |                  |       |
| STOCKHOLDERS’ EQUITY                                                                                                                              |       |              |       |                  |       |
| Common stock, $0.01 par value; 5,000,000 shares  authorized; 2,553,671 shares issued and outstanding at June 30, 2010 and  December 31, 2009 |       | $                 | 26         |                  | $          | 26 |   |
| Additional paid-in capital                                                                                                                             |       | 25,860            |       | 25,768                |       |
| Accumulated deficit                                                                                                                                    |       | (7,805            | )          | (8,016                | )          |
| Accumulated other comprehensive income                                                                                                                 |       | 2,046             |       | 956                   |       |
| **Total stockholders’ equity**                                                                                                                    |       | $                 | 20,127     |                  | $          | 18,734 |   |
|                                                                                                                                                   |       |              |       |                  |       |
| **Total liabilities and stockholders’  equity**                                                                                                   |       | $                 | 140,324    |                  | $          | 132,840 |   |

 

See Notes to Consolidated FinancialStatements.

 

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**Solera National Bancorp, Inc.**

** **

**Statementsof Operations for the Three and Six Months Ended June 30, 2010 and 2009**

**(unaudited)**

 
| ** **                                                                  | ** ** | **For the Three Months********Ended  June 30,** | ** ** | **For the Six Months********Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| **($ in  thousands, except share data)**                               | ** ** | **2010**                                             | ** ** | **2009**                                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
| Interest income:                                                            |       |                                                 |       |                                                             |       |   |   |   |   |
| Interest and fees on loans                                                  |       | $                                                    | 876        |                                                             | $          | 469 |   | $ | 1,602 |   | $ | 782 |   |
| Interest on federal funds sold                                              |       | 1                                                    |       | —                                                           |       | 2 |   | 1 |   |
| Interest on investment securities                                           |       | 719                                                  |       | 650                                                              |       | 1,548 |   | 1,248 |   |
| Other interest income                                                       |       | 1                                                    |       | —                                                           |       | 6 |   | — |   |
| Dividends on FHLB and Federal Reserve Bank stocks                           |       | 10                                                   |       | 10                                                               |       | 22 |   | 20 |   |
| Total interest income                                                       |       | 1,607                                                |       | 1,129                                                            |       | 3,180 |   | 2,051 |   |
| Interest expense:                                                           |       |                                                 |       |                                                             |       |   |   |   |   |
| Deposits                                                                    |       | 492                                                  |       | 369                                                              |       | 1,010 |   | 662 |   |
| Federal Home Loan Bank advances                                             |       | 68                                                   |       | 86                                                               |       | 144 |   | 178 |   |
| Federal funds purchased and securities sold under  agreements to repurchase |       | 1                                                    |       | 4                                                                |       | 3 |   | 8 |   |
| Other borrowings                                                            |       | 2                                                    |       | 3                                                                |       | 5 |   | 7 |   |
| Total interest expense                                                      |       | 563                                                  |       | 462                                                              |       | 1,162 |   | 855 |   |
|                                                                        |       |                                                 |       |                                                             |       |   |   |   |   |
| Net interest income                                                         |       | 1,044                                                |       | 667                                                              |       | 2,018 |   | 1,196 |   |
|                                                                        |       |                                                 |       |                                                             |       |   |   |   |   |
| Provision for loan losses                                                   |       | 180                                                  |       | 135                                                              |       | 295 |   | 252 |   |
| Net interest income after provision for loan losses                         |       | 864                                                  |       | 532                                                              |       | 1,723 |   | 944 |   |
| Noninterest income:                                                         |       |                                                 |       |                                                             |       |   |   |   |   |
| Service charges and fees                                                    |       | 19                                                   |       | 71                                                               |       | 36 |   | 140 |   |
| Sublease income                                                             |       | —                                               |       | —                                                           |       | — |   | 4 |   |
| Gain on sale of securities                                                  |       | 268                                                  |       | 30                                                               |       | 531 |   | 107 |   |
| Total noninterest income                                                    |       | 287                                                  |       | 101                                                              |       | 567 |   | 251 |   |
| Noninterest expense:                                                        |       |                                                 |       |                                                             |       |   |   |   |   |
| Salaries and employee benefits                                              |       | 593                                                  |       | 686                                                              |       | 1,137 |   | 1,297 |   |
| Occupancy                                                                   |       | 142                                                  |       | 139                                                              |       | 281 |   | 275 |   |
| Professional fees                                                           |       | 55                                                   |       | 67                                                               |       | 185 |   | 184 |   |
| Other general and administrative                                            |       | 253                                                  |       | 264                                                              |       | 476 |   | 445 |   |
| Total noninterest expense                                                   |       | 1,043                                                |       | 1,156                                                            |       | 2,079 |   | 2,201 |   |
|                                                                        |       |                                                 |       |                                                             |       |   |   |   |   |
| Net income (loss) before income taxes                                       |       | 108                                                  |       | (523                                                             | )          | 211 |   | (1,006 | ) |
|                                                                        |       |                                                 |       |                                                             |       |   |   |   |   |
| Income taxes                                                                |       | —                                               |       | —                                                           |       | — |   | — |   |
|                                                                        |       |                                                 |       |                                                             |       |   |   |   |   |
| Net income (loss)                                                           |       | $                                                    | 108        |                                                             | $          | (523 | ) | $ | 211 |   | $ | (1,006 | ) |
|                                                                        |       |                                                 |       |                                                             |       |   |   |   |   |
| Basic earnings (loss) per share                                             |       | 0.04                                                 |       | (0.20                                                            | )          | 0.08 |   | (0.39 | ) |
|                                                                        |       |                                                 |       |                                                             |       |   |   |   |   |
| Diluted earnings (loss) per share                                           |       | 0.04                                                 |       | (0.20                                                            | )          | 0.08 |   | (0.39 | ) |
|                                                                        |       |                                                 |       |                                                             |       |   |   |   |   |
| Weighted-average common shares                                              |       |                                                 |       |                                                             |       |   |   |   |   |
| Basic                                                                       |       | 2,553,671                                            |       | 2,553,671                                                        |       | 2,553,671 |   | 2,553,671 |   |
| Diluted                                                                     |       | 2,553,671                                            |       | 2,553,671                                                        |       | 2,553,671 |   | 2,553,671 |   |

 

See Notes to Consolidated FinancialStatements.

 

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**Solera National Bancorp, Inc.**

 

**Statements of Changes in Stockholders’ Equity for the SixMonths Ended June 30, 2010 and 2009 (unaudited)**

 
| ** **                                                                  | ** ** | ** **              | ** ** | ** **        | ** ** | **Additional**       | ** ** | ** **               | ** ** | **Accumulated  Other**    | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------|------------|-------------------|------------|----------------------|------------|--------------------------|------------|---------------------------|------------|------------|------------|
| **($ in thousands, except  share data)**                               | ** ** | **Shares  Outstanding** | ** ** | **Common  Stock** | ** ** | **Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Comprehensive  Income** | ** ** | **Total**  | ** ** |
| **Balance at December 31, 2008**                                       | ** ** | **2,553,671**           | ** ** | **$**             | **26**     | ** **           | **$**      | **25,558**               | ** ** | **$**                     | **(6,740** | **)**      | **$**      | **148** | ** ** | **$** | **18,992** | ** ** |
| Stock-based compensation                                                    |       | —                  |       | —            |       | 102                  |       | —                   |       | —                    |       | 102        |       |
| Comprehensive income (loss):                                                | ** ** | ** **              | ** ** | ** **        | ** ** | ** **           | ** ** | ** **               | ** ** | ** **                | ** ** | ** ** | ** ** |
| Net loss                                                                    |       | —                  |       | —            |       | —               |       | (1,006                   | )          | —                    |       | (1,006     | )          |
| Net change in unrealized gains on investment securities  available-for-sale |       | —                  |       | —            |       | —               |       | —                   |       | 363                       |       | 363        |       |
| Less: reclassification adjustment for net gains included in income          |       | —                  |       | —            |       | —               |       | —                   |       | (107                      | )          | (107       | )          |
| Total comprehensive income (loss)                                           |       |                    |       |              |       |                 |       |                     |       |                      |       | (750       | )          |
| **Balance at June 30, 2009**                                           | ** ** | **2,553,671**           | ** ** | **$**             | **26**     | ** **           | **$**      | **25,660**               | ** ** | **$**                     | **(7,746** | **)**      | **$**      | **404** | ** ** | **$** | **18,344** | ** ** |
| ** **                                                                  | ** ** | ** **              | ** ** | ** **        | ** ** | ** **           | ** ** | ** **               | ** ** | ** **                | ** ** | ** ** | ** ** |
| **Balance at December 31, 2009**                                       | ** ** | **2,553,671**           | ** ** | **$**             | **26**     | ** **           | **$**      | **25,768**               | ** ** | **$**                     | **(8,016** | **)**      | **$**      | **956** | ** ** | **$** | **18,734** | ** ** |
| Stock-based compensation                                                    |       | —                  |       | —            |       | 92                   |       | —                   |       | —                    |       | 92         |       |
| Comprehensive income:                                                       |       |                    |       |              |       |                 |       |                     |       |                      |       |       |       |
| Net income                                                                  |       | —                  |       | —            |       | —               |       | 211                      |       | —                    |       | 211        |       |
| Net change in unrealized gains on investment securities  available-for-sale |       | —                  |       | —            |       | —               |       | —                   |       | 1,621                     |       | 1,621      |       |
| Less: reclassification adjustment for net gains included in income          |       | —                  |       | —            |       | —               |       | —                   |       | (531                      | )          | (531       | )          |
| Total comprehensive income                                                  |       |                    |       |              |       |                 |       |                     |       |                      |       | 1,301      |       |
| **Balance at June 30, 2010**                                           | ** ** | **2,553,671**           | ** ** | **$**             | **26**     | ** **           | **$**      | **25,860**               | ** ** | **$**                     | **(7,805** | **)**      | **$**      | **2,046** | ** ** | **$** | **20,127** | ** ** |

 

See Notes to Consolidated FinancialStatements.

 

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**Solera National Bancorp, Inc.**

** **

**Statementsof Cash Flows for the Six Months Ended June 30, 2010 and 2009**

**(unaudited)**

 
| ** **                                                                                          | ** ** | **For the Six Months** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                          | ** ** | **Ended June 30,**          | ** ** |
| **($ in  thousands)**                                                                          | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                                |       |                                  |       |   |   |
| Net income (loss)                                                                                   |       | $                                     | 211        |   | $ | (1,006 | ) |
| Adjustments to reconcile net income (loss) to net cash  provided by (used in) operating activities: |       |                                  |       |   |   |
| Depreciation and amortization                                                                       |       | 88                                    |       | 83 |   |
| Provision for loan losses                                                                           |       | 295                                   |       | 252 |   |
| Net accretion of deferred loan fees/expenses                                                        |       | (31                                   | )          | (36 | ) |
| Net amortization of premiums on investment securities                                               |       | 233                                   |       | 34 |   |
| Gain on sale of investment securities                                                               |       | (531                                  | )          | (107 | ) |
| Federal Home Loan Bank stock dividend                                                               |       | (7                                    | )          | (6 | ) |
| Recognition of stock-based compensation on stock options                                            |       | 92                                    |       | 102 |   |
| Changes in operating assets and liabilities:                                                        |       |                                  |       |   |   |
| Interest receivable                                                                                 |       | 54                                    |       | (275 | ) |
| Other assets                                                                                        |       | 24                                    |       | — |   |
| Prepaid FDIC insurance                                                                              |       | 102                                   |       | — |   |
| Accrued interest payable                                                                            |       | 9                                     |       | 33 |   |
| Accounts payable and other liabilities                                                              |       | (108                                  | )          | 26 |   |
| Deferred loan fees/expenses, net                                                                    |       | —                                |       | 82 |   |
| Deferred rent liability                                                                             |       | 8                                     |       | 14 |   |
| **Net cash provided by (used in) operating  activities**                                            |       | $                                     | 439        |   | $ | (804 | ) |
|                                                                                                |       |                                  |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                                |       |                                  |       |   |   |
| Purchase of investment securities, available-for-sale                                               |       | $                                     | (34,837    | ) | $ | (29,685 | ) |
| Proceeds from sales of investment securities,  available-for-sale                                   |       | 23,564                                |       | 10,073 |   |
| Proceeds from maturities/calls/pay downs of investment  securities, available-for-sale              |       | 11,128                                |       | 7,781 |   |
| Originated loans, net of pay downs                                                                  |       | (10,448                               | )          | (17,895 | ) |
| Purchase of premises and equipment                                                                  |       | (8                                    | )          | (11 | ) |
| Proceeds from redemption of Federal Reserve Bank stock                                              |       | 9                                     |       | 22 |   |
| Purchase of interest-bearing deposits with banks                                                    |       | (1,005                                | )          | — |   |
| Maturity of interest-bearing deposits with banks                                                    |       | 3,524                                 |       | — |   |
| **Net cash used in investing activities**                                                           |       | $                                     | (8,073     | ) | $ | (29,715 | ) |
|                                                                                                |       |                                  |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                                |       |                                  |       |   |   |
| Net increase in deposits                                                                            |       | $                                     | 7,944      |   | $ | 28,597 |   |
| Net increase in federal funds purchased and securities  sold under agreements to repurchase         |       | 509                                   |       | 1,143 |   |
| Proceeds from FHLB advances                                                                         |       | —                                |       | 1,750 |   |
| Repayment of FHLB advances                                                                          |       | (2,250                                | )          | (2,250 | ) |
| Principal payments on capital lease                                                                 |       | (21                                   | )          | (19 | ) |
| **Net cash provided by financing  activities**                                                      |       | $                                     | 6,182      |   | $ | 29,221 |   |
|                                                                                                |       |                                  |       |   |   |
| **Net decrease in cash and cash  equivalents**                                                      |       | $                                     | (1,452     | ) | $ | (1,298 | ) |
|                                                                                                |       |                                  |       |   |   |
| CASH AND CASH EQUIVALENTS                                                                           |       |                                  |       |   |   |
| Beginning of period                                                                                 |       | 2,516                                 |       | 2,401 |   |
| End of period                                                                                       |       | $                                     | 1,064      |   | $ | 1,103 |   |

 

(continued)

 

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**Solera National Bancorp, Inc.**

 

**Statements of Cash Flows for theSix Months Ended June 30, 2010 and 2009, (continued)**

**(unaudited)**

 
| ** **                                                    | ** ** | **For the Six Months********Ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **($ in  thousands)**                                    | ** ** | **2010**                                                              | ** ** | **2009** | ** ** |
|                                                          |       |                                                                  |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION              |       |                                                                  |       |   |   |
| Cash paid during the period for:                              |       |                                                                  |       |   |   |
| Interest                                                      |       | $                                                                     | 1,153      |   | $ | 822 |   |
| Non-cash investing transactions:                              |       |                                                                  |       |   |   |
| Unrealized gain on investment securities,  available-for-sale |       | $                                                                     | 1,090      |   | $ | 256 |   |

 

See Notes to Consolidated FinancialStatements.

 

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**SOLERA NATIONAL BANCORP, INC.**

 

**UNAUDITED CONDENSED NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 —SUMMARY OF ORGANIZATION**

 

Solera National Bancorp, Inc.(the “Company”), is a Delaware corporation that was incorporated in 2006 toorganize and serve as the holding company for Solera National Bank (the “Bank”),a national bank that opened for business on September 10, 2007.  Solera National Bank is a full-servicecommunity, commercial bank headquartered in Lakewood, Colorado serving theDenver metropolitan area.

 

**NOTE 2 —BASIS OF PRESENTATION**

 

The accompanying unauditedcondensed consolidated financial statements contain all adjustments (consistingonly of normal recurring adjustments) which, in the opinion of management, arenecessary to present fairly the financial position of the Company as of June 30,2010, and the results of its operations for the three and six months ended June 30,2010 and 2009.  Cash flows are presentedfor the six months ended June 30, 2010 and 2009.  Certainreclassifications have been made to the consolidated financial statements andrelated notes of prior periods to conform to the current presentation. Thesereclassifications had no impact on stockholders’ equity or net income (loss)for the periods. Additionally, certain information and footnote disclosuresnormally included in financial statements have been condensed or omittedpursuant to rules and regulations of the U.S. Securities and ExchangeCommission.  The Company believes that the disclosures in the unauditedcondensed consolidated financial statements are adequate to make theinformation 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 31,2009.

 

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

 

*Critical Accounting Policies*

 

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

 

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

 

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

 

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of the loan using the loan’seffective interest rate and giving consideration to currently existing factorsthat would impact the amount or timing of the cash flows.  The second component of the allowance forloan losses represents contingent losses — the estimated probable lossesinherent within the portfolio due to uncertainties.  Factors considered by management to estimateinherent losses include, but are not limited to, 1) historical and currenttrends in downgraded loans; 2) the level of the allowance in relation to totalloans; 3) the level of the allowance in relation to the Bank’s peer group; 4)the levels and trends in non-performing and past due loans; and 5) management’sassessment of economic conditions and certain qualitative factors as defined bybank regulatory guidance, including but not limited to, changes in the size,composition and concentrations of the loan portfolio, changes in the legal andregulatory environment, and changes in lending management.  The recorded allowance for loan losses is theaggregate of the impaired loans component and the contingent loss component.

 

At June 30, 2010, theCompany had an allowance for loan losses of $940,000.  Management believes that this allowance forloan losses is adequate to cover probable losses based on all currentlyavailable evidence. Future additions to the allowance for loan losses may berequired based on management’s continuing evaluation of the inherent risks inthe portfolio.  Additional provisions forloan losses may need to be recorded if the economy declines, asset qualitydeteriorates, or the loss experience changes. Also, federal regulators, when reviewing the Bank’s loan portfolio inthe future, may require the Bank to increase the allowance for loan losses.

 

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

 

Estimationof fair value:  The estimation of fair valueis significant to a number of the Company’s assets, includingavailable-for-sale investment securities. These are all recorded at either fairvalue or at the lower of cost or fair value. Furthermore, accounting principles generally accepted in the United Statesrequire disclosure of the fair value of financial instruments as a part of thenotes to the consolidated financial statements. Fair values are volatile and may be influenced by a number of factors,including market interest rates, prepayment speeds, discount rates and theshape of yield curves.

 

Impairment of investment securities:  Investment securities are evaluated forimpairment on at least a quarterly basis and more frequently when economic ormarket conditions warrant such an evaluation to determine whether a decline intheir value below amortized cost is other-than-temporary.  Securities areevaluated for impairment utilizing criteria such as the magnitude and durationof the decline, current market conditions, payment history, the creditworthiness of the obligator, the intent of the Company to retain the securityor whether 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.  If a decline in value belowamortized cost is determined to be other-than-temporary, which does notnecessarily indicate that the decline is permanent, but indicates that theprospects for a near-term recovery of value is not favorable, the security isreviewed in more detail in order to determine the portion of the impairmentthat relates to credit (resulting in a charge to earnings) versus the portionof the impairment that is noncredit related (resulting in a charge toaccumulated other comprehensive income). A credit loss is determined by comparing the amortized cost basis to thepresent value of cash flows expected to be collected, computed using theoriginal yield as the discount rate.

 

*Recently Issued Accounting Pronouncements*

 

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

 

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Theadoption of this portion of the standard is not expected to have a materialimpact on the Company’s consolidated financial position, results of operationsor cash flows.

 

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

 

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

 

1.          A rollforward schedule ofthe allowance for credit losses from the beginning of the reporting period tothe end of the reporting period on a portfolio segment basis, with the endingbalance further disaggregated on the basis of the impairment method

2.          For each disaggregatedending balance in item (1) above, the related recorded investment in loansand leases

3.          The nonaccrual status ofloans and leases by class

4.          Impaired loans and leases byclass

5.          Credit quality indicators ofloans and leases as of each balance sheet date, presented by class

6.          The aging of past due loansand leases at the end of the reporting period by class

7.          The nature and extent oftroubled debt restructurings that occurred during the period by class and theireffect on the allowance for credit losses

8.          The nature and extent ofloans and leases modified as troubled debt restructurings within the previous12 months that defaulted during the period by class and their effect on theallowance for credit losses

9.          Significant purchases andsales of loans and leases during the reporting period disaggregated byportfolio segment.

 

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

 

**NOTE 3 —INVESTMENTS**

 

Theamortized costs and estimated fair values of investment securities as of June 30,2010 and December 31, 2009 are as follows:

 
| ** **                                          | ** ** | **June 30, 2010** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|
| ** **                                          | ** ** | ** **             | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **Amortized**          | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| **($ in thousands)**                           | ** ** | **Cost**               | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| **Securities available-for-sale:**                  |       |                   |       |   |   |   |   |   |   |
| U.S. government agencies                            |       | $                      | 11,386     |   | $ | 67 |   | $ | — |   | $ | 11,453 |   |
| Corporate                                           |       | 10,681                 |       | 273 |   | (87 | ) | 10,867 |   |
| State and municipal                                 |       | 20,684                 |       | 863 |   | (5 | ) | 21,542 |   |
| Agency mortgage-backed securities (“MBS”) |       | 30,177                 |       | 935 |   | — |   | 31,112 |   |
| **Total securities available-for-sale**             |       | $                      | 72,928     |   | $ | 2,138 |   | $ | (92 | ) | $ | 74,974 |   |

 

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

 

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

 
| ** **                             | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **Amortized**          | ** ** | **Estimated Fair**         | ** ** | **Amortized** | ** ** | **Estimated Fair** | ** ** |
| **($ in thousands)**              | ** ** | **Cost**               | ** ** | **Value**                  | ** ** | **Cost** | ** ** | **Value** | ** ** |
| Securities available-for-sale          |       |                   | ** ** | ** **                 |       |   |   |   |   |
| Due within one year                    |       | $                      | 998        |                       | $          | 1,010 |   | $ | 1,538 |   | $ | 1,560 |   |
| Due after one year through five years  |       | 4,626                  |       | 4,728                      |       | 5,602 |   | 5,823 |   |
| Due after five years through ten years |       | 32,082                 |       | 33,066                     |       | 19,566 |   | 19,735 |   |
| Due after ten years                    |       | 35,222                 |       | 36,170                     |       | 45,779 |   | 46,323 |   |
| Total securities available-for-sale    |       | $                      | 72,928     |                       | $          | 74,974 |   | $ | 72,485 |   | $ | 73,441 |   |

 

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

 
| ** **                  | ** ** | **June 30,  2010**   | ** ** |
|-----------------------------|------------|---------------------------|------------|
| ** **                  | ** ** | **Less  than 12 months**  | ** ** | **12  months or more** | ** ** | **Total** | ** ** |
| **($ in thousands)**   | ** ** | **Estimated  Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **# of  Securities** | ** ** | **Estimated  Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **# of  Securities** | ** ** | **Estimated  Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **# of  Securities** | ** ** |
| Description of  securities: |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. government  agencies   |       | $                         | —     |   | $ | — |   | — |   | $ | — |   | $ | — |   | — |   | $ | — |   | $ | — |   | — |   |
| Corporate                   |       | 2,933                     |       | (87 | ) | 4 |   | — |   | — |   | — |   | 2,933 |   | (87 | ) | 4 |   |
| State and  municipal        |       | 550                       |       | (5 | ) | 1 |   | — |   | — |   | — |   | 550 |   | (5 | ) | 1 |   |
| Agency MBS                  |       | —                    |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Total  temporarily-impaired |       | $                         | 3,483      |   | $ | (92 | ) | 5 |   | $ | — |   | $ | — |   | — |   | $ | 3,483 |   | $ | (92 | ) | 5 |   |

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

 

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

 

The Company recorded a netunrealized gain in the investment portfolio of $2.0 million at June 30,2010.  This was an increase over the$956,000 unrealized gain at December 31, 2009.

 

In an effort to bothcapitalize on current market conditions, while funding our loan portfoliogrowth, as well as to clean-up some odd-lots within the investment portfolio,the Company sold securities for gross realized gains of $553,000 and grossrealized losses of $22,000 during the first six months of 2010.  The Company sold securities for grossrealized gains of $112,000 and gross realized losses of $5,000 during the firstsix months of 2009.  Realized gains andlosses on sales are computed on a specific identification basis based onamortized cost on the date of sale.

 

Securities with carryingvalues of $13.3 million at June 30, 2010 and $16.9 million at December 31,2009, were pledged as collateral to secure public deposits, borrowings from theFHLB, repurchase agreements and for other purposes as required or permitted bylaw.

 

**NOTE 4 —LOANS**

 

Thecomposition of the loan portfolio follows:

 
| **($ in thousands)**          | ** **                | **June 30,  2010**               | ** ** | **December 31, 2009** | ** ** |
|------------------------------------|---------------------------|---------------------------------------|------------|----------------------------|------------|
| Real estate – commercial      |                      | $                                     | 39,813     |                       | $          | 26,063 |   |
| Real estate – residential     |                      | 7,765                                 |       | 8,059                      |       |
| Construction and land  development |                      | 2,671                                 |       | 7,067                      |       |
| Commercial and industrial          |                      | 8,408                                 |       | 8,324                      |       |
| Lease financing                    |                      | 1,543                                 |       | —                     |       |
| Consumer                           |                      | 568                                   |       | 991                        |       |
| Gross loans                        |                      | 60,768                                |       | 50,504                     |       |
|                               | Less:                     | Deferred loan (fees) /  expenses, net |       | (83                        | )          | (114 | ) |
|                               | Allowance for loan losses |                                  | (940       | )                          | (830       | ) |
| Loans, net                         |                      | $                                     | 59,745     |                       | $          | 49,560 |   |

 

Asof June 30, 2010, the Bank had one nonaccrual loan for which a partialcharge-off was recognized during the second quarter 2010 taking the loan’svalue from $1.0 million to $815,000.  Noloans were transferred to foreclosed properties and no loans were past due morethan 90 days and still accruing interest as of June 30, 2010.  During all of 2009, no loans were impaired,no loans were transferred to foreclosed properties and one loan, with aprincipal balance of approximately $3,000, was past due more than 90 days butstill accruing interest.

 

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

 

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

 

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**NOTE 5 —ALLOWANCE FOR LOAN LOSSES**

 

Activityin the allowance for loan losses for the three and six months ended June 2010and 2009 is summarized as follows:

 
| ** **                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **($ in thousands)**              | ** ** | **2010**                                        | ** ** | **2009**                                      | ** ** | **2010** | ** ** | **2009** | ** ** |
| Balance, beginning of  period               |       | $                                               | 945        |                                          | $          | 385 |   | $ | 830 |   | $ | 268 |   |
| Loans charged off                           |       | (185                                            | )          | —                                        |       | (185 | ) | — |   |
| Recoveries on loans  previously charged off |       | —                                          |       | —                                        |       | — |   | — |   |
| Provision for loan losses                   |       | 180                                             |       | 135                                           |       | 295 |   | 252 |   |
| Balance, end of period                      |       | $                                               | 940        |                                          | $          | 520 |   | $ | 940 |   | $ | 520 |   |

 

Thefollowing table details information regarding impaired loans at the datesindicated:

 
| **($ in thousands)**                 | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Impaired loans with a  valuation allowance:    |       | $                       | —     |                        | $          | — |   |
| Impaired loans without a  valuation allowance: |       | 815                     |       | —                      |       |
| Total impaired loans                           |       | $                       | 815        |                        | $          | — |   |
| Valuation allowance  related to impaired loans |       | $                       | —     |                        | $          | — |   |

 

Theimpaired loan no longer has a valuation allowance, as the loan was partiallycharged-off during the second quarter 2010. No interest income has been recognized while this loan has beenclassified as impaired.  The grossinterest income that would have been recorded for the six months ended June 30,2010 if the impaired loan had been current throughout this period in accordancewith its original terms was approximately $9,000.

 

**NOTE 6 —DEPOSITS**

 

Depositsare summarized as follows:

 
| ** **                                      | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **($ in thousands)**                  | ** ** | **Amount**                  | ** ** | **% of  Total**            | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
| Noninterest-bearing demand                      |       | $                           | 1,712      |                            | 1          | % | $ | 2,624 |   | 2 | % |
| Interest-bearing demand                         |       | 9,910                       |       | 9                               |       | 6,830 |   | 7 |   |
| Money market accounts                           |       | 6,488                       |       | 6                               |       | 3,555 |   | 3 |   |
| Savings accounts                                |       | 49,372                      |       | 44                              |       | 51,763 |   | 50 |   |
| Certificates of deposit,  less than $100,000    |       | 12,598                      |       | 11                              |       | 16,624 |   | 16 |   |
| Certificates of deposit,  greater than $100,000 |       | 32,265                      |       | 29                              |       | 23,005 |   | 22 |   |
| Total  deposits                                 |       | $                           | 112,345    |                            | 100        | % | $ | 104,401 |   | 100 | % |

 

Inthe ordinary course of business, certain officers, directors, stockholders, andemployees of the Bank have deposits with the Bank.  In the Bank’s opinion, all depositrelationships with such parties are made on substantially the same termsincluding interest rates and maturities, as those prevailing at the time forcomparable transactions with other persons. The balance of related party deposits at June 30, 2010 and December 31,2009 was approximately $4.3 million and $4.0 million, respectively.

 

**NOTE 7 —STOCK-BASED COMPENSATION**

 

The Company’s 2007 StockIncentive Plan (the “Plan”) was approved by the Company’s Board of Directors(the “Board”) with an effective date of September 10, 2007 and wasapproved by the Company’s stockholders at the annual meeting held on June 17,2008.  Under the terms of the Plan,officers and key employees may be granted both nonqualified and incentive stockoptions and directors and other consultants, who are not also officers or 

 

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employees, may only begranted nonqualified stock options. The Board reserved 510,734 shares of commonstock for issuance under the Plan.  ThePlan provides for options to purchase shares of common stock at a price notless than 100% of the fair market value of the stock on the date of grant.  Stock options expire no later than ten yearsfrom the date of the grant and generally vest over four years.  The Plan provides for accelerated vesting ifthere is a change of control, as defined in the Plan.  The Company recognized stock-basedcompensation cost of approximately $92,000 and $102,000 during the six monthsended June 30, 2010 and 2009, respectively.

 

The Company accounts for itsstock-based compensation under the provisions of ASC 718-20 — *Stock Compensation — Awards Classified as Equity*.  The fair value of each option grant isestimated on the date of grant using the Black-Scholes-Merton option pricingmodel.  The Company granted 1,250 optionsduring the second quarter 2010 as incentive compensation to newly hired employeesand 16,500 options during the first quarter 2010 as incentive compensation toexisting and newly hired employees. Similarly, the Company granted 7,250 options as incentive compensationto newly hired employees during the second quarter of 2009.

 

During the six months ended June 30,2010, 5,688 options were forfeited and 4,657 vested options expiredunexercised.  No options were exercisedduring the six months ended June 30, 2010 or 2009.  The Company recognized expense forapproximately 20,000 options, representing a pro-rata amount of the optionsearned during the second quarter 2010 that are expected to vest.  As of June 30, 2010, there wasapproximately $286,000 of total unrecognized compensation cost related to theoutstanding stock options that will be recognized over a weighted-averageperiod of 1.5 years.

 

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

 
| ** **                           | ** ** | **Options** | ** ** | **Weighted-  Average Grant  Date Fair Value** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|--------------------------------------|------------|-------------|------------|--------------------------------------------------------------|------------|---------------------------------------------|------------|
| Outstanding at  January 1, 2010 |       | 305,353     |       | $                                                            | 2.44       |                                        | $          | 9.19 |   |
| Granted                              |       | 17,750      |       | 1.21                                                         |       | 5.29                                        |       |
| Exercised                            |       | —      |       | —                                                       |       | —                                      |       |
| Forfeited                            |       | (5,688      | )          | 1.77                                                         |       | 7.52                                        |       |
| Expired                              |       | (4,657      | )          | 2.44                                                         |       | 9.33                                        |       |
| Outstanding at June 30, 2010    |       | 312,758     |       | $                                                            | 2.38       |                                        | $          | 9.00 |   |

 

**NOTE 8 —NONINTEREST EXPENSE**

 

The followingtable details the items comprising other general and administrative expenses:

 
| ** **                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **($ in thousands)**     | ** ** | **2010**                                            | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| Data processing                    |       | $                                                   | 65         |                                              | $          | 64 |   | $ | 132 |   | $ | 130 |   |
| FDIC Assessment                    |       | 53                                                  |       | 64                                                |       | 96 |   | 80 |   |
| Marketing and promotions           |       | 26                                                  |       | 35                                                |       | 42 |   | 56 |   |
| Printing, stationery and  supplies |       | 9                                                   |       | 13                                                |       | 17 |   | 20 |   |
| Regulatory and reporting fees      |       | 38                                                  |       | 36                                                |       | 64 |   | 54 |   |
| Travel and entertainment           |       | 16                                                  |       | 10                                                |       | 24 |   | 17 |   |
| Telephone/communication            |       | 11                                                  |       | 9                                                 |       | 21 |   | 20 |   |
| Dues and memberships               |       | 6                                                   |       | 6                                                 |       | 17 |   | 16 |   |
| Insurance                          |       | 6                                                   |       | 5                                                 |       | 12 |   | 10 |   |
| Postage and shipping               |       | 4                                                   |       | 5                                                 |       | 9 |   | 11 |   |
| Training and education             |       | 2                                                   |       | 5                                                 |       | 4 |   | 7 |   |
| Miscellaneous                      |       | 17                                                  |       | 12                                                |       | 38 |   | 24 |   |
| Total                              |       | $                                                   | 253        |                                              | $          | 264 |   | $ | 476 |   | $ | 445 |   |

 

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**NOTE 9 —INCOME TAXES**

 

Deferred taxes are a result ofdifferences between income tax accounting and generally accepted accountingprinciples 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:

 
| **($ in thousands)**                       | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Deferred tax assets:                                 |       |                        |       |                            |       |
| Start-up and organizational expenses                 |       | $                           | 1,076      |                            | $          | 1,120 |   |
| Net operating loss carryforward                      |       | 1,190                       |       | 1,368                           |       |
| Allowance for loan losses                            |       | 394                         |       | 284                             |       |
| Nonqualified stock options                           |       | 34                          |       | 28                              |       |
| Other                                                |       | 68                          |       | 77                              |       |
| Total deferred tax assets                            |       | 2,762                       |       | 2,877                           |       |
| Deferred tax liabilities:                            |       |                        |       |                            |       |
| Net unrealized gain on securities available-for-sale |       | (758                        | )          | (354                            | )          |
| Federal Home Loan Bank stock dividend                |       | (12                         | )          | (9                              | )          |
| Tax over book depreciation                           |       | (5                          | )          | (26                             | )          |
| Total deferred tax liabilities                       |       | (775                        | )          | (389                            | )          |
|                                                 |       |                        |       |                            |       |
| Net deferred tax assets                              |       | 1,987                       |       | 2,488                           |       |
|                                                 |       |                        |       |                            |       |
| Valuation allowance                                  |       | (1,987                      | )          | (2,488                          | )          |
|                                                 |       |                        |       |                            |       |
| Net deferred taxes                                   |       | $                           | —     |                            | $          | — |   |

 

The Company has provided a 100%valuation allowance for its net deferred tax asset due to uncertainty ofrealization during the carryforward period. As of June 30, 2010, the Company has net operating losscarryforwards of approximately $3.2 million for federal income taxpurposes.  Federal net operating losscarryforwards, to the extent not used, will expire beginning in 2027.

 

The income tax provisiondiffers from the amount of income tax determined by applying the U.S. federalincome tax rate of 35% to pretax income from continuing operations for thethree and six months ended June 30, 2010 and 2009:

 
| ** **                                          | ** ** | **June 30, 2010**  | ** ** | **June 30, 2009** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **($ in thousands)**                      | ** ** | **Three Months  Ended** | ** ** | **Six Months  Ended**  | ** ** | **Three Months  Ended** | ** ** | **Six Months  Ended** | ** ** |
| Computed “expected” tax expense (benefit) |       | $                            | 38         |                        | $          | 74 |   | $ | (183 | ) | $ | (352 | ) |
| Change in income taxes resulting from:              |       |                         |       |                        |       |   |   |   |   |
| Change in valuation allowance                       |       | (63                          | )          | (97                         | )          | 101 |   | 259 |   |
| Other                                               |       | 25                           |       | 23                          |       | 82 |   | 93 |   |
| Income tax provision                                |       | $                            | —     |                        | $          | — |   | $ | — |   | $ | — |   |

 

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

 

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

 

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

 
| **($ in thousands)**                                          | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Financial instruments  whose contractual amounts represent credit risk: |       |                        |       |                            |       |
| Commitments to extend  credit                                           |       | $                           | 8,277      |                            | $          | 7,182 |   |
| Letters of credit                                                       |       | —                      |       | —                          |       |
| Total commitments                                                       |       | $                           | 8,277      |                            | $          | 7,182 |   |

 

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

 

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

 

**NOTE 11****—****FAIR VALUE**

 

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

 
| Level 1 —       | inputs are unadjusted  quoted prices in active markets for identical assets or liabilities that the  Company has the ability to access at the measurement date.                                                                                                                                                                                                                         |
|----------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |                                                                                                                                                                                                                                                                                                                                                                                    |
| Level 2 —       | inputs are other than  quoted prices included in Level 1 that are observable for the asset or  liability either directly or indirectly, such as quoted prices for similar  assets or liabilities; quoted prices in markets that are not active; or  model-based valuation techniques for which all significant assumptions are  observable in the market.                               |
|                 |                                                                                                                                                                                                                                                                                                                                                                                    |
| Level 3 —  | valuation is generated  from model-based techniques that use at least one significant assumption not  observable in the market. These unobservable assumptions reflect estimates of  assumptions that market participants would use in pricing the asset or  liability. Valuation techniques include use of option pricing models,  discounted cash flow models and similar techniques. |

 

The Company carries itsavailable-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, 2010 and December 31, 2009, all of the Company’savailable-for-sale securities were valued using Level 2 inputs.

 

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

 

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

 

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

 
| **($ in thousands)**             | ** ** | **Quoted  Prices in  Active  Markets for  Identical  Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------|------------|
| Assets at June 30, 2010               |       |                                                                                    |       |                                                       |       |                                                  |       |      |       |
| Investment securities, available-for-sale: |       |                                                                                    |       |                                                       |       |                                                  |       |      |       |
| U.S. government agencies                   |       | $                                                                                       | —     |                                                       | $          | 11,453                                                |       | $         | —     |   | $ | 11,453 |   |
| Corporate                                  |       | —                                                                                  |       | 10,867                                                     |       | —                                                |       | 10,867    |       |
| State and municipal                        |       | —                                                                                  |       | 21,542                                                     |       | —                                                |       | 21,542    |       |
| Agency MBS                                 |       | —                                                                                  |       | 31,112                                                     |       | —                                                |       | 31,112    |       |
| Total                                      |       | $                                                                                       | —     |                                                       | $          | 74,974                                                |       | $         | —     |   | $ | 74,974 |   |
| Assets at December 31, 2009           |       |                                                                                    |       |                                                       |       |                                                  |       |      |       |
| Investment securities, available-for-sale: |       |                                                                                    |       |                                                       |       |                                                  |       |      |       |
| U.S. government agencies                   |       | $                                                                                       | —     |                                                       | $          | 5,169                                                 |       | $         | —     |   | $ | 5,169 |   |
| Corporate                                  |       | —                                                                                  |       | 10,123                                                     |       | —                                                |       | 10,123    |       |
| State and municipal                        |       | —                                                                                  |       | 22,201                                                     |       | —                                                |       | 22,201    |       |
| Agency MBS                                 |       | —                                                                                  |       | 35,948                                                     |       | —                                                |       | 35,948    |       |
| Total                                      |       | $                                                                                       | —     |                                                       | $          | 73,441                                                |       | $         | —     |   | $ | 73,441 |   |

 

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

 

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

 

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

 
| **($ in thousands)**   | ** ** | **Quoted Prices  in Active  Markets for  Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Total** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------|------------|
| Assets at June 30, 2010     |       |                                                                                            |       |                                                       |       |                                                  |       |      |       |
| Impaired loans                   |       | $                                                                                               | —     |                                                       | $          | —                                                |       | $         | 815        |   | $ | 815 |   |
|                             |       |                                                                                            |       |                                                       |       |                                                  |       |      |       |
| Assets at December 31, 2009 |       |                                                                                            |       |                                                       |       |                                                  |       |      |       |
| Impaired loans                   |       | $                                                                                               | —     |                                                       | $          | —                                                |       | $         | —     |   | $ | — |   |

 

***Fair Value of FinancialInstruments***

 

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

 

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

 

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gains and losses can have apotential effect on fair value estimates and have not been considered in manyof the estimates.

 

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

 

*Cash and cash equivalents*:  The carrying amounts of cash and due frombanks and federal funds sold approximate their fair values.

 

*Interest-bearing deposits with banks: *The carrying amount of interest-bearing deposits with banks approximatesfair values due to the relatively stable level of short-term interest rates.

 

*Investment securities*:  Fair value measurement is obtained fromindependent pricing services which utilize observable data that may includedealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, livetrading levels, trade execution data, market consensus prepayment speeds,credit information and the bonds’ terms and conditions, among other things.

 

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

 

*Investment in FHLB and Federal Reserve Bank (FRB) stocks: *It is not practical todetermine the fair value of bank stocks due to the restrictions placed on thetransferability of FHLB stock and FRB stock.

 

*Interest receivable:*  The carrying value of interest receivableapproximates fair value due to the short period of time between accrual andreceipt of payment.

 

*Deposits:*  The fairvalue of noninterest-bearing demand deposits, interest-bearing demand depositsand savings and money market accounts is determined to be the amount payable ondemand at the reporting date.  The fairvalue of fixed rate time deposits is estimated using a discounted cash flowcalculation that utilizes interest rates currently being offered for depositsof similar remaining maturities. Carrying value is assumed to approximate fair value for all variablerate time deposits.

 

*Federal funds purchased and securities sold under agreements torepurchase: *The carryingamount of federal funds purchased and securities sold under agreements torepurchase approximates fair value due to the short-term nature of theseagreements, which generally maturewithin one to four days from the transaction date.

 

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

 

*Federal Home Loan Bank advances: *Fair value of the Federal Home Loan Bank advances is estimated using adiscounted cash flow model that utilizes current market rates for similar typesof borrowing arrangements with similar remaining maturities.

 

*Interest payable:*  Thecarrying value of interest payable approximates fair value due to the shortperiod of time between accrual and payment.

 

*Loan commitments and letters of credit: *The fair values of commitments are estimated using the fees currentlycharged to enter into similar agreements, taking into account the remainingterms of the agreements and the present creditworthiness of thecounterparties.  The difference betweenthe carrying value of commitments to fund loans or 

 

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standbyletters of credit and their fair values are not significant and, therefore, arenot included in the following table.

 

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

 
| ** **                                                                  | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                                                  | ** ** | **Carrying**                | ** ** | **Estimated Fair**         | ** ** | **Carrying** | ** ** | **Estimated Fair** | ** ** |
| **($ in thousands)**                                              | ** ** | **Value**                   | ** ** | **Value**                       | ** ** | **Value** | ** ** | **Value** | ** ** |
| Financial Assets:                                                           |       |                        |       |                            |       |   |   |   |   |
| Cash and cash equivalents                                                   |       | $                           | 1,064      |                            | $          | 1,064 |   | $ | 2,516 |   | $ | 2,516 |   |
| Interest-bearing deposits with banks                                        |       | 1,265                       |       | 1,265                           |       | 3,784 |   | 3,784 |   |
| Investment securities                                                       |       | 74,974                      |       | 74,974                          |       | 73,441 |   | 73,441 |   |
| Loans, net                                                                  |       | 59,745                      |       | 59,654                          |       | 49,560 |   | 49,230 |   |
| FHLB and FRB stocks                                                         |       | 1,129                       |       | 1,129                           |       | 1,131 |   | 1,131 |   |
| Interest receivable                                                         |       | 760                         |       | 760                             |       | 814 |   | 814 |   |
|                                                                        |       |                        |       |                            |       |   |   |   |   |
| Financial Liabilities:                                                      |       |                        |       |                            |       |   |   |   |   |
| Deposits, demand, savings and money market                                  |       | $                           | 67,482     |                            | $          | 67,482 |   | $ | 64,772 |   | $ | 64,772 |   |
| Time deposits                                                               |       | 44,863                      |       | 45,183                          |       | 39,629 |   | 39,036 |   |
| Federal funds purchased and securities sold under agreements to  repurchase |       | 835                         |       | 835                             |       | 326 |   | 326 |   |
| Federal Home Loan Bank advances                                             |       | 6,500                       |       | 6,813                           |       | 8,750 |   | 8,508 |   |
| Interest payable                                                            |       | 91                          |       | 91                              |       | 82 |   | 82 |   |

 

**NOTE 12 — SUBSEQUENT EVENTS**

 

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

 

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

 

As of the date of issuance of thisReport on Form 10-Q, the Company has determined that only theaforementioned subsequent event disclosure is necessary.

 

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

 

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

 

**ExecutiveOverview**

 

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

 

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

 

Weoffer a broad range of commercial and consumer banking services to small andmedium-sized businesses, licensed professionals and individuals who areparticularly responsive to the personalized service that Solera National Bankprovides to its customers.  We believethat local ownership and control allows the Bank to serve customers moreefficiently and effectively.  SoleraNational Bank competes on the basis of providing a unique and personalizedbanking experience combined with a full range of services, customized andtailored to fit the individual needs of its clients.  Solera National Bank serves the entire marketarea and, in addition, has a special niche focus on the local Hispanicpopulation due to the significant growth of this demographic.  Since opening the bank in September of2007, management has successfully executed its strategy of delivering prudentand controlled growth to efficiently leverage the Company’s capital and expensebase with the goal of achieving sustained profitability.  During the firstand second quarters of 2010, the Company delivered its first quarterly profits.

 

Subsequent to June 30, 2010,the Bank entered into a definitive purchase and assumption agreement (the “Agreement”)with Liberty Savings Bank, FSB (“Liberty”) to assume approximately $40 millionin customer deposits from Liberty’s branch located in Lakewood, Colorado.  Additionally, the Bank will acquireapproximately $30 million in Colorado-based, performing loans from Liberty.  Pursuant to the Agreement, the Bank will paya deposit premium of 3.8% and will acquire the loans at par value.  For further disclosure, see Note 12, *Subsequent Events*, to our consolidated financial statements.

 

**Overview**

 

While the nation’s economyis still growing, many fear the pace of growth will continue to slow asdifficult labor markets and credit conditions impact households andbusinesses.  The Bureau of EconomicAnalysis’ preliminary estimate of second quarter 2010 GDP growth was 2.4%, downfrom 3.7% in the first quarter 2010.  TheFederal Reserve Open Market Committee’s mid-June assessment of economicconditions reflected a shaky recovery. The committee noted that high unemployment continues to constrainhousehold spending, new home construction has weakened, and global financialmarkets are not yet healthy.  The FederalReserve expects the nation’s economic recovery to continue despite thesechallenges, although the pace of growth could be more “moderate” than initiallyexpected.  The Open Market Committeevoted to leave the federal funds target rate in the range of zero to 0.25%.

 

The unemployment rate has remained stubbornly high.  The U.S. Bureau of Labors Statistics reportedon August 6, 2010 that total nonfarm payroll employment declined by 131,000in July, and the unemployment rate was unchanged at 9.5%.  Federal government employment fell, as143,000 temporary workers hired for the decennial census completed theirwork.  Private-sector payroll employmentedged up by 71,000.

 

Like many national andinternational economic reports, the Federal Reserve’s most recent *Beige Book*report for the Tenth District —which includes Colorado — gives a mixed assessment of current conditions.  Consumer spending, 

 

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manufacturing activity, andhousing markets have strengthened throughout the Tenth District, although stillweak commercial real estate markets and the potential for a slump in housingremain as risks.

 

Other regional economicreports also describe mixed conditions. The Brookings Institution’s latest quarterly *Mountain Monitor*report — which tracks output, jobs, andresidential real estate in Colorado and six other western states — suggests theMountain Region economy is beginning to recover but lags other regionaleconomies.  Despite these challenges,Metro Denver and many other Mountain Region metros have reportedfaster-than-average growth in output.

 

Bankfailures have continued to weigh on the industry and have increased assessmentrates for all banks.  During 2009, 140 banks failed and went intoreceivership with the FDIC.  The FDIC’s “problem list” stood at 775 at March 31,2010, up from 702 at December 31, 2009 and 252 at the end of 2008. Between January and July 9, 2010, another 90 banks have gone intoreceivership.

 

Inthe first quarter of 2010, FDIC insured commercial banks reported a combinednet income of $18 billion, up from $914 million during the fourth quarter of2009.  While net charge-offs increased for the 13th consecutive quarter, the quarterly provisionfor loan losses declined.  The overallfinancial condition of the industry continued to improve as both capital anddeposit balances grew during in the first six months of 2010.

 

*Dodd-Frank Wall Street Reform and Consumer ProtectionAct*

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

 

Weare currently evaluating the potential impact of the Act on our business butexpect that some provisions of the Act may have an adverse impact due to, amongothers, the cost of complying with the numerous new regulations and reportingrequirements mandated by the Act, a potential increase in competition fordeposits resulting from the increased cost of funding using non-depositliabilities, and the potential loss of interchange fee income from debit cardtransactions.  However, some provisionsof the Act will benefit our business, such as the permanent exemption fromSarbanes-Oxley Section 404(b) for companies with marketcapitalization of less than $75 million, which should maintain our externalaudit fees at current levels as our external auditors will not be required toprovide an attestation report on our internal control over financial reportingin our annual report on Form 10-K.

 

**Comparative Results of Operations for the Three MonthsEnded June 30, 2010 and 2009**

 

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

 

Net income for the quarter ended June 30, 2010was $108,000, or $0.04 per share, compared with an $523,000 loss, or ($0.20)per share for the second quarter of 2009.  The profitable results of thesecond quarter 2010 were primarily the result of increases in interest-earningassets and increased gains on the sale of investment securities.  Noninterest expenses were well-controlled,reducing by approximately 10% during the second quarter 2010, despite thegrowth of the Company.

 

Asof June 30, 2010, the Company had total assets of $140.3 million, anincrease of $7.5 million, or 6%, from December 31, 2009.  Net loans increased $10.2 million, or 21%,from $49.6 million at December 31, 2009 to $59.7 million at June 30,2010.  Similarly, the Company’s totaldeposits grew $7.9 million, or 8%, from $104.4 million at December 31,2009 to $112.3 million as of June 30, 2010.   This growth was achieved as a result of aneffective business development program.

 

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

 

**Table 1**

 
| ** **                                                                  | ** ** | **Three Months Ended  June 30, 2010** | ** ** | **Three Months Ended  June 30, 2009** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **($ in thousands)**                                              | ** ** | **Average  Balance**                                      | ** ** | **Interest**                                              | ** ** | **Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Cost** | ** ** |
| **Assets:**                                                                 |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                                    |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Gross loans, net of  unearned fees                                          |       | $                                                         | 59,545     |                                                      | $          | 876 |   | 5.90 | %  | $ | 33,993 |   | $ | 469 |   | 5.53 | % |
| Investment securities**                                                     |       | 73,362                                                    |       | 719                                                       |       | 3.93 |   | 51,392 |   | 650 |   | 5.07 |   |
| FHLB and FRB stocks                                                         |       | 1,120                                                     |       | 10                                                        |       | 3.58 |   | 1,065 |   | 10 |   | 3.65 |   |
| Federal funds sold                                                          |       | 1,211                                                     |       | 1                                                         |       | 0.20 |   | 253 |   | — |   | 0.17 |   |
| Interest-bearing deposits  with banks                                       |       | 1,227                                                     |       | 1                                                         |       | 0.39 |   | 16 |   | — |   | 0.30 |   |
| Total interest-earning  assets                                              |       | 136,465                                                   |       | $                                                         | 1,607      |   | 4.72 | %  | 86,719 |   | $ | 1,129 |   | 5.22 | % |
| Noninterest-earning assets                                                  |       | 2,925                                                     |       |                                                      |       |   |   | 2,505 |   |   |   |   |   |
| Total assets                                                                |       | $                                                         | 139,390    |                                                      |       |   |   |   | $ | 89,224 |   |   |   |   |   |
|                                                                        |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| **Liabilities  and Stockholders’ Equity:**                             |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                              |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Money market and savings  deposits                                          |       | $                                                         | 58,787     |                                                      | $          | 227 |   | 1.55 | % | $ | 9,386 |   | $ | 60 |   | 2.56 | % |
| Interest-bearing checking  accounts                                         |       | 7,876                                                     |       | 32                                                        |       | 1.60 |   | 4,114 |   | 21 |   | 1.99 |   |
| Time deposits                                                               |       | 43,917                                                    |       | 233                                                       |       | 2.13 |   | 40,409 |   | 288 |   | 2.86 |   |
| Federal funds purchased  and securities sold under agreements to repurchase |       | 469                                                       |       | 1                                                         |       | 1.16 |   | 2,023 |   | 4 |   | 0.86 |   |
| Federal Home Loan Bank  advances                                            |       | 6,724                                                     |       | 68                                                        |       | 4.01 |   | 10,302 |   | 86 |   | 3.36 |   |
| Other borrowings                                                            |       | 103                                                       |       | 2                                                         |       | 9.44 |   | 143 |   | 3 |   | 9.41 |   |
| Total interest-bearing  liabilities                                         |       | 117,876                                                   |       | $                                                         | 563        |   | 1.91 | % | 66,377 |   | $ | 462 |   | 2.79 | % |
| Noninterest-bearing  checking accounts                                      |       | 1,891                                                     |       |                                                      |       |   |   | 3,501 |   |   |   |   |   |
| Noninterest-bearing  liabilities                                            |       | 119                                                       |       |                                                      |       |   |   | 653 |   |   |   |   |   |
| Stockholders’ equity                                                   |       | 19,504                                                    |       |                                                      |       |   |   | 18,693 |   |   |   |   |   |
| Total liabilities and  stockholders’ equity                            |       | $                                                         | 139,390    |                                                      |       |   |   |   | $ | 89,224 |   |   |   |   |   |
|                                                                        |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net interest income                                                         |       |                                                      |       | $                                                         | 1,044      |   |   |   |   |   | $ | 667 |   |   |   |
|                                                                        |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net interest spread                                                         |       |                                                      |       | 2.81                                                      | %          |   |   |   |   | 2.43 | % |   |   |
|                                                                        |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net interest margin                                                         |       |                                                      |       | 3.07                                                      | %          |   |   |   |   | 3.08 | % |   |   |

 

----

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

 

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

 

**Table 2**

 
| ** **                                                                  | ** ** | **Three Months Ended June 30, 2010 Compared to Three  Months Ended June 30, 2009** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **($ in thousands)**                                              | ** ** | **Net Change**                                                                                                                            | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| **Interest  income:**                                                       |       |                                                                                                                                           |       |   |   |   |   |
| Gross loans, net of  unearned fees                                          |       | $                                                                                                                                              | 407        |   | $ | 33 |   | $ | 374 |   |
| Investment securities                                                       |       | 69                                                                                                                                             |       | (77 | ) | 146 |   |
| FHLB and FRB stocks                                                         |       | —                                                                                                                                         |       | — |   | — |   |
| Federal funds sold                                                          |       | 1                                                                                                                                              |       | 1 |   | — |   |
| Interest-bearing deposits  with banks                                       |       | 1                                                                                                                                              |       | — |   | 1 |   |
| Total interest income                                                       |       | $                                                                                                                                              | 478        |   | $ | (43 | ) | $ | 521 |   |
|                                                                        |       |                                                                                                                                           |       |   |   |   |   |
| **Interest  expense:**                                                      |       |                                                                                                                                           |       |   |   |   |   |
| Money market and savings  deposits                                          |       | $                                                                                                                                              | 167        |   | $ | (14 | ) | $ | 181 |   |
| Interest-bearing checking  accounts                                         |       | 11                                                                                                                                             |       | (3 | ) | 14 |   |
| Time deposits                                                               |       | (55                                                                                                                                            | )          | (83 | ) | 28 |   |
| Federal funds purchased  and securities sold under agreements to repurchase |       | (3                                                                                                                                             | )          | 2 |   | (5 | ) |
| Federal Home Loan Bank  advances                                            |       | (18                                                                                                                                            | )          | 28 |   | (46 | ) |
| Other borrowings                                                            |       | (1                                                                                                                                             | )          | — |   | (1 | ) |
| Total interest expense                                                      |       | $                                                                                                                                              | 101        |   | $ | (70 | ) | $ | 171 |   |
|                                                                        |       |                                                                                                                                           |       |   |   |   |   |
| **Net  interest income**                                                    |       | $                                                                                                                                              | 377        |   | $ | 27 |   | $ | 350 |   |

 

***Net Interest Income and Net InterestMargin***

 

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

 

TheFederal Reserve Board influences the general market rates of short-terminterest, including the deposit and loan rates offered by the Bank. The Bank’sloan portfolio is significantly affected by changes in the prime interestrate.  The prime interest rate, which isthe rate offered on loans to borrowers with strong credit, has remainedunchanged throughout 2009 and thus far in 2010 at 3.25%.  Rates on our loan portfolio have increasedslightly, up 37 basis points over the second quarter 2009, primarily due to ashift in the loan mix to more fixed-rate loans at higher interest rates.

 

The114 basis points decrease in the Bank’s investment portfolio compared to thesecond quarter of 2009 is primarily due to the sale of longer-maturity,higher-yielding investments which were reinvested in shorter-term,lower-yielding bonds to help shorten the duration of the investmentportfolio.  Also contributing to thedecrease was the action taken by Fannie Mae during the second quarter 2010 inwhich they repurchased delinquent mortgages 

 

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fromMBS pools.  The higher than normalprincipal payments resulted in higher premium amortization.

 

Theimpact of the 50 basis point decrease in the Company’s yield oninterest-earning assets was mitigated by decreases in the cost ofinterest-bearing liabilities, resulting in a flat net interest marginyear-over-year.  As reflected in Table 1,the cost of money market and savings deposits decreased 101 basis points andthe cost of time deposits decreased 73 basis points year-over-year, primarilydue to eliminating the promotional rates that were offered during the first twoyears in business and the general decline in the level of interest ratescompared to the prior year.

 

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

 

Totalinterest income was $1.6 million for the second quarter 2010, consistingprimarily of interest on loans of $876,000 and interest on investmentsecurities of $719,000.  This compared tototal interest income of $1.1 million for the same period of 2009, consistingprimarily of interest on investment securities of $650,000 and interest onloans of $469,000.  Average loans, net ofunearned fees, increased $25.6 million, from $34.0 million at June 30,2009 to $59.5 million at June 30, 2010. Average investment securities increased $22.0 million from $51.4 millionat June 30, 2009 to $73.4 million at June 30, 2010.  These increases were funded with increasedaverage deposits which grew $56.7 million from $53.9 million at June 30,2009 to $110.6 million at June 30, 2010.

 

Totalinterest expense was $563,000 in the second quarter of 2010, an increase of$101,000 from $462,000 during the second quarter of 2009.  As evident in Table 2 above, this increasewas largely due to increased volumes, partially offset by lower rates ondeposits.  Overall, the interest rate ontotal interest-bearing liabilities decreased 88 basis points from 2.79% at June 30,2009 to 1.91% at June 30, 2010.

 

Netinterest income was $1.0 million in the second quarter 2010, an increase of$377,000, or 57%, from $667,000 in the second quarter of 2009.  Our annualized net interest margin was 3.07%for the three months ended June 30, 2010 which was relatively unchangedfrom the 3.08% for the three months ended June 30, 2009.

 

***Provision for Loan Losses***

 

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

 

Duringthe second quarter of 2010, our provision for loan losses was $180,000reflecting the growth of our loan portfolio and the estimated probable lossesinherent within the portfolio due to uncertainties in economic conditions.  There was one impaired loan at June 30,2010, which was written down to its estimated net realizable value during thesecond quarter, resulting in a charge-off of $185,000 (see additionaldiscussion below under *Financial Condition — LoanPortfolio*).

 

***Noninterest Income***

 

Noninterestincome for the quarter ended June 30, 2010 was $287,000, an increase of$186,000 from $101,000 for the second quarter ended June 30, 2009.  The Company sold securities for net gains of$268,000 during the second quarter 2010 compared to net gains of $30,000 duringthe second quarter of 2009.  Servicecharges on deposits decreased $52,000 from $71,000 during the second quarter2009 to $19,000 during the second quarter 2010 due to the loss of a significantmoney-services-business customer in October 2009.

 

***Noninterest Expense***

 

Ourtotal noninterest expense for the quarter ended June 30, 2010 was $1.0million, a decrease of $113,000 from $1.2 million for the quarter ended June 30,2009.  This consisted of a decrease insalaries and employee benefits of $93,000, or 14%, primarily related toincreased costs during the second quarter of 2009 for a separation agreement ofan employee who also served as a director and secondarily due to reducedincentive compensation expense during the second quarter 2010.  Occupancy expense remained constantquarter-over-quarter increasing only $3,000 during the second quarter 2010.  Professional fees decreased $12,000, or 18%,quarter-over-quarter, partially due to the 

 

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timingof outsourced internal audit reviews, which have been scheduled later in the2010 year, and partially due to decreased legal fees which were higher thanusual in 2009 in conjunction with the separation agreement of an employee whoalso served as a director.  These costreductions were partially offset by increased Compliance and Bank Secrecy Actconsulting.

 

Othergeneral and administrative expenses decreased $11,000, or 4%,quarter-over-quarter, as detailed in the following table:

 
| ** **                                  | ** ** | **Three Months Ended********June 30,** | ** ** | **Increase/** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------|------------|---------------|------------|
| **($ in thousands)**              | ** ** | **2010**                                              | ** ** | **2009**      | ** ** | **(Decrease)** | ** ** |
| Other general and  administrative expenses: |       |                                                  |       |          |       |   |   |
| Data processing                             |       | $                                                     | 65         |          | $          | 64 |   | $ | 1 |   |
| FDIC assessment                             |       | 53                                                    |       | 64            |       | (11 | ) |
| Marketing and promotions                    |       | 26                                                    |       | 35            |       | (9 | ) |
| Printing, stationery and  supplies          |       | 9                                                     |       | 13            |       | (4 | ) |
| Regulatory and reporting fees               |       | 38                                                    |       | 36            |       | 2 |   |
| Travel and entertainment                    |       | 16                                                    |       | 10            |       | 6 |   |
| Telephone/communication                     |       | 11                                                    |       | 9             |       | 2 |   |
| Dues and memberships                        |       | 6                                                     |       | 6             |       | — |   |
| Insurance                                   |       | 6                                                     |       | 5             |       | 1 |   |
| Postage and shipping                        |       | 4                                                     |       | 5             |       | (1 | ) |
| Training and education                      |       | 2                                                     |       | 5             |       | (3 | ) |
| Miscellaneous                               |       | 17                                                    |       | 12            |       | 5 |   |
| Total                                       |       | $                                                     | 253        |          | $          | 264 |   | $ | (11 | ) |

 

Themost significant changes include an increase of $6,000 in travel andentertainment costs due partially to compensating directors for theirattendance at committee meetings and partially to increased employee attendanceat seminars and conferences as the Company focused efforts on increasing itspresence in the community; an increase of $5,000 in other miscellaneous relatedto small increases in several items due to overall increases in customer andaccount activity.  These increases werepartially offset by decreases of $11,000 in Federal Deposit InsuranceCorporation (FDIC) fees due to the one-time special assessment imposed duringsecond quarter 2009 of $41,000 to help build insurance reserves.  Without that one-time special assessment,FDIC fees would have increased $30,000 during second quarter 2010 due tosignificant increases in average deposit volumes.  The $9,000 decrease in marketing costs alsocontributed to the Company’s overall reduction in other general andadministrative expenses.

 

**Comparative Results of Operations for the Six MonthsEnded June 30, 2010 and 2009**

 

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

 

Net income for the six months ended June 30,2010 was $211,000, or $0.08 per share compared with a net loss $1.0 million, or($0.39) per share for the six months ended June 30, 2009.   The profitable results of the six monthsended June 30, 2010 were primarily the result of increases in interest-earningassets combined with increased gains on the sale of investment securities whilereducing noninterest expenses.

 

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

 

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**Table 3**

 
| ** **                                                                  | ** ** | **Six Months Ended  June 30, 2010** | ** ** | **Six Months Ended  June 30, 2009** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **($ in thousands)**                                              | ** ** | **Average  Balance**                                    | ** ** | **Interest**                                            | ** ** | **Yield /  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield /  Cost** | ** ** |
| **Assets:**                                                                 |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                                    |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Gross loans, net of  unearned fees                                          |       | $                                                       | 55,520     |                                                    | $          | 1,602 |   | 5.82 | %  | $ | 29,322 |   | $ | 782 |   | 5.38 | % |
| Investment securities**                                                     |       | 73,334                                                  |       | 1,548                                                   |       | 4.26 |   | 48,806 |   | 1,248 |   | 5.16 |   |
| FHLB and FRB stocks                                                         |       | 1,122                                                   |       | 22                                                      |       | 3.97 |   | 1,070 |   | 20 |   | 3.73 |   |
| Federal funds sold                                                          |       | 1,587                                                   |       | 2                                                       |       | 0.21 |   | 835 |   | 1 |   | 0.26 |   |
| Interest-bearing deposits  with banks                                       |       | 2,136                                                   |       | 6                                                       |       | 0.59 |   | 16 |   | — |   | 0.16 |   |
| Total interest-earning  assets                                              |       | 133,699                                                 |       | $                                                       | 3,180      |   | 4.80 | % | 80,049 |   | $ | 2,051 |   | 5.17 | % |
| Noninterest-earning assets                                                  |       | 2,992                                                   |       |                                                    |       |   |   | 2,399 |   |   |   |   |   |
| Total assets                                                                |       | $                                                       | 136,691    |                                                    |       |   |   |   | $ | 82,448 |   |   |   |   |   |
|                                                                        |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Liabilities  and Stockholders’ Equity:**                             |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                              |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Money market and savings  deposits                                          |       | $                                                       | 57,472     |                                                    | $          | 488 |   | 1.71 | % | $ | 8,164 |   | $ | 99 |   | 2.44 | % |
| Interest-bearing checking  accounts                                         |       | 6,998                                                   |       | 59                                                      |       | 1.70 |   | 3,724 |   | 32 |   | 1.77 |   |
| Time deposits                                                               |       | 42,242                                                  |       | 463                                                     |       | 2.21 |   | 36,213 |   | 531 |   | 2.96 |   |
| Federal funds purchased  and securities sold under agreements to repurchase |       | 420                                                     |       | 3                                                       |       | 1.43 |   | 1,471 |   | 8 |   | 1.03 |   |
| Federal Home Loan Bank  advances                                            |       | 7,648                                                   |       | 144                                                     |       | 3.78 |   | 10,152 |   | 178 |   | 3.54 |   |
| Other borrowings                                                            |       | 108                                                     |       | 5                                                       |       | 9.48 |   | 148 |   | 7 |   | 9.44 |   |
| Total interest-bearing  liabilities                                         |       | 114,888                                                 |       | $                                                       | 1,162      |   | 2.04 | % | 59,872 |   | $ | 855 |   | 2.88 | % |
| Noninterest-bearing  checking accounts                                      |       | 2,102                                                   |       |                                                    |       |   |   | 3,136 |   |   |   |   |   |
| Noninterest-bearing  liabilities                                            |       | 358                                                     |       |                                                    |       |   |   | 612 |   |   |   |   |   |
| Stockholders’ equity                                                   |       | 19,343                                                  |       |                                                    |       |   |   | 18,828 |   |   |   |   |   |
| Total liabilities and  stockholders’ equity                            |       | $                                                       | 136,691    |                                                    |       |   |   |   | $ | 82,448 |   |   |   |   |   |
|                                                                        |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Net interest income                                                         |       |                                                    |       | $                                                       | 2,018      |   |   |   |   |   | $ | 1,196 |   |   |   |
|                                                                        |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Net interest spread                                                         |       |                                                    |       | 2.76                                                    | %          |   |   |   |   | 2.29 | % |   |   |
|                                                                        |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Net interest margin                                                         |       |                                                    |       | 3.04                                                    | %          |   |   |   |   | 3.01 | % |   |   |

 

----

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

 

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

 

**Table 4**

 
| ** **                                                                  | ** ** | **Six Months Ended June 30,  2010 Compared to Six  Months Ended June 30, 2009** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| **($ in thousands)**                                                   | ** ** | **Net Change**                                                                            | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| **Interest  income:**                                                       |       |                                                                                      |       |   |   |   |   |
| Gross loans, net of  unearned fees                                          |       | $                                                                                         | 820        |   | $ | 69 |   | $ | 751 |   |
| Investment securities                                                       |       | 300                                                                                       |       | (160 | ) | 460 |   |
| FHLB and FRB stocks                                                         |       | 2                                                                                         |       | 1 |   | 1 |   |
| Federal funds sold                                                          |       | 1                                                                                         |       | — |   | 1 |   |
| Interest-bearing deposits  with banks                                       |       | 6                                                                                         |       | — |   | 6 |   |
| Total interest income                                                       |       | $                                                                                         | 1,129      |   | $ | (90 | ) | $ | 1,219 |   |
|                                                                        |       |                                                                                      |       |   |   |   |   |
| **Interest  expense:**                                                      |       |                                                                                      |       |   |   |   |   |
| Money market and savings  deposits                                          |       | $                                                                                         | 389        |   | $ | (20 | ) | $ | 409 |   |
| Interest-bearing checking  accounts                                         |       | 27                                                                                        |       | (1 | ) | 28 |   |
| Time deposits                                                               |       | (68                                                                                       | )          | (200 | ) | 132 |   |
| Federal funds purchased  and securities sold under agreements to repurchase |       | (5                                                                                        | )          | 6 |   | (11 | ) |
| Federal Home Loan Bank  advances                                            |       | (34                                                                                       | )          | 15 |   | (49 | ) |
| Other borrowings                                                            |       | (2                                                                                        | )          | — |   | (2 | ) |
| Total interest expense                                                      |       | $                                                                                         | 307        |   | $ | (200 | ) | $ | 507 |   |
|                                                                        |       |                                                                                      |       |   |   |   |   |
| **Net  interest income**                                                    |       | $                                                                                         | 822        |   | $ | 110 |   | $ | 712 |   |

 

***Net Interest Income and Net InterestMargin***

 

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

 

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

 

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

 

Thethree basis point increase in the Company’s net interest margin, from 3.01% at June 30,2009 to 3.04% at June 30, 2010 is reflective of these minor changes in keyinterest rates.  Overall, the Bank haslost yield on interest-earning assets, dropping 37 basis points from 5.17% forthe six-months ended June 30, 2009 to 4.80% for the six months ended June 30,2010.  This decline is primarily due to adecrease in the Bank’s yield on its investment 

 

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securitieswhich decreased 90 basis points during this time period.  This decrease is primarily due to the sale oflonger-maturity, higher-yielding investments which were reinvested inshorter-term, lower-yielding bonds to help shorten the duration of theinvestment portfolio.  Also contributingto the decrease was the action taken by Fannie Mae and the Federal Home LoanMortgage Corporation to repurchase delinquent mortgages during the first andsecond quarters of 2010.  This resultedin higher than normal pay downs on our agency mortgage-backed securitiescausing an increase in premium amortization on those securities which adverselyimpacted the portfolio’s yield.  The lossin yield on the investment portfolio was partially offset by an increase in theloan yield, which increased 44 basis points year-over-year.  This increase was primarily due to a shift inthe loan mix to more fixed-rate loans at higher interest rates.

 

Thedecrease in the cost of interest-bearing liabilities was more than enough tooffset the loss of yield on interest-earning assets, which enabled the Bank’soverall net interest margin to slightly increase.  The cost of money market, savings and timedeposits all decreased year-over-year as the Bank eliminated the promotionalrates that were offered during the first two years in business along with thegeneral decline in the level of interest rates compared to the prior year.  This enabled the Bank to save 84 basis pointson the cost of interest-bearing liabilities during the six months ended June 30,2010 as compared to the same period of 2009.

 

TheCompany’s balance sheet is currently marginally liability sensitive, meaningthat interest-earning liabilities generally reprice more quickly thaninterest-bearing assets. Therefore, the Company could experience losses in itsnet interest margin during periods of rising short-term interest rates.

 

Totalinterest income was $3.2 million for the six months ended June 30, 2010,consisting primarily of interest on loans of $1.6 million and interest oninvestment securities of $1.5 million. This compared to total interest income of $2.1 million during the sixmonths ended June 30, 2009, consisting primarily of interest on investmentsecurities of $1.2 million and interest on loans of $782,000.  Average gross loans, net of unearned fees,increased $26.2 million, from $29.3 million at June 30, 2009 to $55.5million at June 30, 2010.  Averageinvestment securities increased $24.5 million from $48.8 million at June 30,2009 to $73.3 million at June 30, 2010.

 

Totalinterest expense was $1.2 million for the six months ended June 30, 2010,an increase of $307,000 from $855,000 during the same period of 2009.  This increase was due to increased depositvolumes which grew, on average, $58.6 million from June 2009 to June 2010.

 

Netinterest income was $2.0 million for the first six months of 2010, an increaseof $822,000, or 69%, from $1.2 million for the same period of 2009.  Our annualized net interest margin was 3.04%for the six months ended June 30, 2010 compared to 3.01% for the sixmonths ended June 30, 2009.

 

***Provision for Loan Losses***

 

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

 

Duringthe first six months of 2010, our provision for loan losses was $295,000compared to $252,000 for the same time period of 2009.  The amount of the provision reflects thegrowth of our loan portfolio and the estimated probable losses inherent withinthe portfolio due to uncertainties in economic conditions.  There was one impaired loan at June 30,2010, which was written-down to its net realizable value during the secondquarter resulting in a charge-off of $185,000 (see additional discussion belowunder *Financial Condition — Loan Portfolio*).  There were no impaired or charged-off loansduring the same period in 2009.

 

***Noninterest Income***

 

Noninterestincome for the six months ended June 30, 2010 was $567,000, an increase of$316,000 from $251,000 for the six months ended June 30, 2009.  The increase was due to a $424,000 increasein gains on sales of investment securities as the Bank capitalized on currentmarket conditions and sold some securities for gains, while working to shortenthe overall duration of the investment portfolio.  This increase was offset by a decrease of$104,000 in service charges and fees on deposits — a direct result of the lossof a significant money-services-business deposit customer.

 

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***Noninterest Expense***

 

Ourtotal noninterest expense was $2.1 million for the six months ended June 30,2010, a 6%, or $122,000, decrease from $2.2 million for the six months ended June 30,2009.  This consisted of a decrease insalaries and employee benefits of $160,000, or 12%, related primarily due tothe costs associated with a separation agreement of an employee who also servedas a director during 2009.  Occupancyexpense remained substantially unchanged, increasing only $6,000, or 2%year-over-year.  Professional fees alsoremained unchanged, increasing only $1,000 year-over-year.

 

Othergeneral and administrative expenses increased $31,000, or 7%, year-over-year,as detailed in the following table:

 
| ** **                                  | ** ** | **Six Months Ended********June 30,** | ** ** | **Increase/** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|---------------|------------|
| **($ in  thousands)**                  | ** ** | **2010**                                  | ** ** | **2009**      | ** ** | **(Decrease)** | ** ** |
| Other general and  administrative expenses: |       |                                      |       |          |       |   |   |   |   |   |
| Data processing                             |       | $                                         | 132        |          | $          | 130 |   | $ | 2 |   |
| FDIC assessment                             |       | 96                                        |       | 80            |       | 16 |   |
| Marketing and promotions                    |       | 42                                        |       | 56            |       | (14 | ) |
| Printing, stationery and  supplies          |       | 17                                        |       | 20            |       | (3 | ) |
| Regulatory and reporting fees               |       | 64                                        |       | 54            |       | 10 |   |
| Travel and entertainment                    |       | 24                                        |       | 17            |       | 7 |   |
| Telephone/communication                     |       | 21                                        |       | 20            |       | 1 |   |
| Dues and memberships                        |       | 17                                        |       | 16            |       | 1 |   |
| Insurance                                   |       | 12                                        |       | 10            |       | 2 |   |
| Postage and shipping                        |       | 9                                         |       | 11            |       | (2 | ) |
| Training and education                      |       | 4                                         |       | 7             |       | (3 | ) |
| Miscellaneous                               |       | 38                                        |       | 24            |       | 14 |   |
| Total                                       |       | $                                         | 476        |          | $          | 445 |   | $ | 31 |   |

 

Themost significant changes included an increase of $16,000 in FDIC assessmentsdue to increased deposit volumes; an increase of $10,000 in regulatory andreporting fees due primarily to an increase in OCC assessment fees, again dueto the Company’s overall growth; an increase of $7,000 in travel andentertainment costs due partially to compensating directors for theirattendance at committee meetings and partially to increased employee attendanceat seminars and conferences as we focused efforts on raising our presence inthe community; and an increase of $14,000 in other miscellaneous related tosmall increases in several items due to overall increases in customer andaccount activity.  These increases werepartially offset by a decrease of $14,000 in marketing and promotions as theCompany reduced some of its marketing expenditures.

 

**Income Taxes**

 

Nofederal or state tax expense has been recorded for the three or six monthsended June 30, 2010 and 2009, based upon significant operating losscarry-forwards that can be used to offset approximately $3.2 million of taxableincome.  Since it is uncertain that theCompany will remain profitable, the deferred tax benefit accumulated to datehas a full valuation allowance so that the net deferred tax benefit at June 30,2010 is $0.

 

**Financial Condition**

 

AtJune 30, 2010, the Company had total assets of $140.3 million, a $7.5million increase from $132.8 million in total assets at December 31, 2009.  The increase in assets is primarily due tothe $10.3 million increase in gross loans during this period, offset primarilyby decreases in interest-bearing deposits with banks which were not renewed inorder to help fund loan growth.

 

Asof June 30, 2010, stockholders’ equity was $20.1 million, an increase of$1.4 million from December 31, 2009, as a result of increases inaccumulated other comprehensive income, which increased $1.1 million duringthis period.  The small reduction in theaccumulated deficit, due to the profitable results of the six-months ended June 30,2010, also contributed to the increase in stockholders’ equity.

 

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***Federal Home Loan Bank (FHLB) andFederal Reserve Bank Stocks***

 

At June 30, 2010,the Bank had a total of $1.1 million invested in FHLB and Federal Reserve Bankstocks carried at cost consisting of $490,000 in Federal Reserve Bank stock and$639,000 in FHLB stock.  Theseinvestments allow Solera National Bank to conduct business with theseentities.  As of June 30, 2010, theFederal Reserve Bank stock is yielding an average of 6.0% and the FHLB stock isyielding an average rate of 2.3%.

 

***Investment Securities***

 

Ourinvestment portfolio serves as a source of interest income and, secondarily, asa source of liquidity and a management tool for our interest ratesensitivity.  We manage our investmentportfolio according to a written investment policy established by our Board ofDirectors.

 

AtJune 30, 2010, Solera National Bank’s securities consisted ofavailable-for-sale securities of $75.0 million. The following tables set forth the estimated market values andapproximate weighted average yields of the debt securities in the investment portfolioby contractual maturity at June 30, 2010 and December 31, 2009:

 
| ** **                         | ** ** | **At June 30, 2010** | ** ** |
|------------------------------------|------------|---------------------------|------------|
| ** **                         | ** ** | **Within One Year**       | ** ** | **After One Year but  within Five Years** | ** ** | **After Five Years  but within Ten  Years** | ** ** | **After Ten Years** | ** ** |
| **($ in thousands)**          | ** ** | **Amount**                | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| **Securities  available-for-sale** |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. government agencies           |       | $                         | —     |   | — | % | $ | — |   | — | % | $ | 6,437 |   | 3.03 | % | $ | 5,016 |   | 3.18 | % |
| Corporate                          |       | 1,010                     |       | 5.86 |   | 4,218 |   | 4.51 |   | 5,639 |   | 4.44 |   | — |   | — |   |
| State and municipal                |       | —                    |       | — |   | 510 |   | 5.90 |   | 20,515 |   | 4.74 |   | 517 |   | 5.23 |   |
| Agency MBS                         |       | —                    |       | — |   | — |   | — |   | 475 |   | 4.30 |   | 30,637 |   | 4.08 |   |
| **Total**                          |       | $                         | 1,010      |   | 5.86 | % | $ | 4,728 |   | 4.66 | % | $ | 33,066 |   | 4.35 | % | $ | 36,170 |   | 3.97 | % |

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

 

Asevidenced by the above tables, the weighted-average book yield decreased duringthe first six months of 2010 in nearly every category.  This was due partially to declines in marketrates, the sale of longer maturity state and municipal bonds to reduce pricerisk, and partially due to the Federal Home Loan Mortgage Corporation’s (FHLMC)and Fannie Mae’s repurchase of substantially all 120 days or more delinquentmortgage loans, which resulted in larger than normal principal pay downs on ouragency mortgage-backed securities.  TheFHLMC’s and Fannie Mae’s repurchase of delinquent loans caused increasedamortization on the purchase premiums associated with these securities.  The increased premium amortization negativelyimpacted our investment yields. Management does not anticipate accelerated premium amortization duringthe second half of 2010, as the repurchasing of currently delinquent mortgagesby government agencies was essentially complete as of June 30, 2010.

 

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***Loan Portfolio***

 

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

 
| ** **                                                         | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| **($ in thousands)**                                          | ** ** | **Amount**             | ** ** | **% of  Total**            | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
| Real estate – commercial                                      |       | $                      | 39,813     |                       | 65         | % | $ | 26,063 |   | 52 | % |
| Real estate – residential                                     |       | 7,765                  |       | 13                         |       | 8,059 |   | 16 |   |
| Construction and land  development                                 |       | 2,671                  |       | 4                          |       | 7,067 |   | 14 |   |
| Commercial and industrial                                          |       | 8,408                  |       | 14                         |       | 8,324 |   | 16 |   |
| Lease financing                                                    |       | 1,543                  |       | 3                          |       | — |   | — |   |
| Consumer                                                           |       | 568                    |       | 1                          |       | 991 |   | 2 |   |
| Gross loans                                                        |       | 60,768                 |       | 100                        | %          | 50,504 |   | 100 | % |
| Less:    Deferred  loan (fees) / expenses, net |       | (83                    | )          |                       |       | (114 | ) |   |   |
| Allowance for loan losses                                          |       | (940                   | )          |                       |       | (830 | ) |   |   |
| Loans, net                                                         |       | $                      | 59,745     |                       |       |   | $ | 49,560 |   |   |   |

 

Asof June 30, 2010, net loans were $59.7 million, a $10.2 million, or 21%,increase from $49.6 million at December 31, 2009.  Net loans as a percentage of total assetswere 43% as of June 30, 2010, compared to 37% at December 31, 2009.

 

Thereal estate — commercial loan portfolio consists primarily of lines of creditor term loans to businesses that are secured by real estate.  Our primary focus is on owner-occupiedcommercial real estate, including SBA 504 loans.  At June 30, 2010, there were $39.8million commercial real estate loans in the loan portfolio, an increase of 53%,or $13.8 million, from $26.1 million at December 31, 2009.  Given our focus on this loan category, it nowrepresents 65% of our total portfolio, which is well within our establishedconcentration guidelines.

 

Thereal estate — residential loan portfolio consists of residential secondmortgage loans, home equity loans and lines of credit and home improvementloans.  At June 30, 2010, $7.8 million was outstanding forresidential real estate loans, a decrease of 4% from $8.1 million outstandingat December 31, 2009.

 

Theconstruction and land development loan portfolio is comprised of constructionloans for owner-occupied construction and development loans for property beingconstructed and sold to third parties.  AtJune 30, 2010, construction and land development loans totaled $2.7million, a decrease of $4.4 million, or 62%, from $7.1 million at December 31,2009.

 

Thecommercial and industrial loan portfolio consists of loans to businessesprimarily for working capital lines of credit.  At June 30, 2010,commercial and industrial loans totaled $8.4 million, an $84,000 increase from$8.3 million at December 31, 2009.

 

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

 

Theconsumer and other loan portfolio consists of personal lines of credit, loansto acquire personal assets such as automobiles and overdraft protection balancesfor our deposit customers.  As of June 30,2010, consumer and other loans comprised 1% of the total loan portfolio at$568,000, a decrease of $423,000 from December 31, 2009.

 

Loanconcentrations are considered to exist when there are amounts loaned to amultiple number of borrowers engaged in similar activities that would causethem to be similarly impacted by economic or other conditions.  The Company’s loan portfolio generallyconsists of loans to borrowers within Colorado. Although the Company seeks to avoid concentrations of loans to a singleindustry or based upon a single class of collateral, the Company’s loanportfolio consists primarily of real estate loans secured by real estatelocated in Colorado, making the value of the portfolio more susceptible todeclines in real estate values and other changes in economic conditions inColorado.  As the Bank’s loan portfoliocontinues to grow, the concentration to any single borrower diminishes.  As of June 30, 2010, the Bank’s five largestloans represented approximately 17% of the total loan portfolio compared to 20%of 

 

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thetotal loan portfolio as of December 31, 2009.  No single borrower can be approved for a loanover the Bank’s current legal lending limit of approximately $2.4 million.  This regulatory requirement helps to ensurethe Bank’s exposure to one individual customer is limited.

 

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

 

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

 
| ** **                        | ** ** | **June 30, 2010** | ** ** |
|-----------------------------------|------------|------------------------|------------|
| **($ in thousands)**         | ** ** | **<1 Year**         | ** ** | **1 - 5 Years** | ** ** | **5 - 15  Years** | ** ** | **Over 15  Years** | ** ** | **Total Loans** | ** ** |
| Real estate – commercial     |       | $                      | 7,400      |   | $ | 11,381 |   | $ | 21,032 |   | $ | — |   | $ | 39,813 |   |
| Real estate – residential    |       | —                 |       | 439 |   | — |   | 7,326 |   | 7,765 |   |
| Construction and land development |       | 2,671                  |       | — |   | — |   | — |   | 2,671 |   |
| Commercial and industrial         |       | 3,701                  |       | 2,815 |   | 1,892 |   | — |   | 8,408 |   |
| Lease financing                   |       | —                 |       | 1,543 |   | — |   | — |   | 1,543 |   |
| Consumer                          |       | 10                     |       | 411 |   | — |   | 147 |   | 568 |   |
| Gross Loans Receivable            |       | $                      | 13,782     |   | $ | 16,589 |   | $ | 22,924 |   | $ | 7,473 |   | $ | 60,768 |   |

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

 

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

 

Nonperformingassets consist of loans and leases on nonaccrual status, loans 90 days or morepast due and still accruing interest, loans that have been restructuredresulting in a reduction or deferral of interest or principal, other realestate owned (OREO), and other repossessed assets. As of June 30, 2010,there was $815,000 in nonperforming assets, consisting of one loan.

 

Thefollowing table summarizes information regarding nonperforming assets:

 
| **($ in thousands)**                                          | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Nonaccrual loans and  leases                                       |       | $                       | 815        |                        | $          | — |   |
| Other impaired loans                                               |       | —                  |       | —                      |       |
| Total nonperforming loans                                          |       | $                       | 815        |                        | $          | — |   |
|                                                               |       |                    |       |                        |       |
| Impaired loans                                                     |       | $                       | 815        |                        | $          | — |   |
| Allocated allowance for  loan losses to impaired loans             |       | —                  |       | —                      |       |
| Net investment in impaired  loans                                  |       | $                       | 815        |                        | —     |   |
| Accruing loans past due 90  days or more                           |       | —                  |       | 3                           |       |
| Loans past due 30-89 days                                          |       | $                       | 827        |                        | $          | 1,298 |   |
|                                                               |       |                    |       |                        |       |
| Loans charged-off                                                  |       | $                       | 185        |                        | $          | — |   |
| Recoveries                                                         |       | —                  |       | —                      |       |
| Net charge-offs                                                    |       | $                       | 185        |                        | $          | — |   |
| Allowance for loan losses                                          |       | $                       | 940        |                        | $          | 830 |   |
|                                                               |       |                    |       |                        |       |
| Allowance for loan losses  to loans, net of deferred fees/expenses |       | 1.55                    | %          | 1.64                        | %          |
| Allowance for loan losses  to nonaccrual loans                     |       | 115.34                  | %          | NA                          |       |
| Allowance for loan losses  to nonperforming loans                  |       | 115.34                  | %          | NA                          |       |
| Nonaccrual loans to loans,  net of deferred fees/expenses          |       | 1.34                    | %          | NA                          |       |
| Loans 30-89 days past due  to loans, net of deferred fees/expenses |       | 1.36                    | %          | 2.56                        | %          |

 

Federalregulations require that each insured financial institution classify its assetson a regular basis. In addition, in connection with examinations of insuredinstitutions, federal examiners have authority to identify problem assets and,if appropriate, classify them. The Bank has established three classificationsfor potential problem assets: “substandard,” “doubtful” and “loss.” Loansclassified as “substandard” are those loans with well-defined weaknesses, suchthat future capacity to repay the loan has been negatively impacted.  Loans classified as “doubtful” are thoseloans that have characteristics similar to substandard loans, but theweaknesses have moved to the point where complete collection of the obligationfrom all sources is unlikely and a portion of the principal may be charged-off.  Although loans classified as substandard donot duplicate loans classified as doubtful, both substandard and doubtful loansmay include some loans that are past due at least 90 days, are on nonaccrualstatus or have been restructured. Loans classified as “loss” are those loansthat are in the process of being charged-off. At June 30, 2010, Solera National Bank had substandard loanstotaling $3.3 million, a doubtful loan totaling $815,000, and no loansclassified as loss.  Of the $3.3 millionin substandard loans, only $757,000 was 30 days or more past due.  As of December 31, 2009, the Bank had noloans classified as doubtful or loss and had substandard loans totaling $3.8million.  Of the $3.8 million ofsubstandard loans, only $953,000 was 30 days or more past due.

 

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***Allowance for Loan Losses***

 

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

 

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

 

Theamount of the allowance equals the cumulative total of the provisions made fromtime to time, reduced by loan charge-offs and increased by recoveries of loanspreviously charged-off.  The allowancewas $940,000, or 1.55% of outstanding principal as of June 30, 2010 compared to$830,000, or 1.64% of outstanding principal as of December 31, 2009.

 

Creditand loan decisions are made by management and the Board of Directors inconformity with loan policies established by the Board of Directors. SoleraNational Bank’s practice is to charge-off any loan or portion of a loan whenthe loan is determined by management to be uncollectible due to the borrower’sfailure to meet repayment terms, the borrower’s deteriorating or deterioratedfinancial condition, the depreciation of the underlying collateral, the loan’sclassification as a loss by regulatory examiners, or other reasons. During thesix months ended June 30, 2010 the Bank recorded charge-offs of $185,000related to its one impaired loan.  Nocharge-offs were recorded during the six months ended June 30, 2009.

 

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

 

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

 
| **($ in thousands)**                                               | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| Financial instruments  whose contractual amounts represent credit risk: |       |                   |       |                       |       |
| Commitments to extend  credit                                           |       | $                      | 8,277      |                       | $          | 7,182 |   |
| Letters of credit                                                       |       | —                 |       | —                     |       |
| Total commitments                                                       |       | $                      | 8,277      |                       | $          | 7,182 |   |

 

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

 

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

 

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

 

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

 

***Borrowings***

 

Asof June 30, 2010, the Bank had $5.5 million in fixed-rate borrowings fromthe Federal Home Loan Bank of Topeka (FHLB) with varying maturity dates betweenApril 2011 and June 2013 and a weighted-average fixed interest rateof 4.19%.  Additionally, the Bank had$1.0 million in variable-rate, overnight borrowings from the FHLB.  As of June 30, 2010, the overnightadvance rate was 0.20%.

 

TheBank has also established unsecured Federal Funds lines-of-credit totaling$11.7 million with various correspondent banks. Additionally, the Bank has access to a secured Federal Funds line with acorrespondent bank.  As of June 30,2010, the Company had $400,000 outstanding on these lines.

 

***Loan Commitments***

 

AtJune 30, 2010, the Company had $8.3 million in outstanding loanorigination commitments.  Managementbelieves Solera National Bank has sufficient funds available to meet currentorigination and other lending commitments.

 

***Capital Resources and CapitalAdequacy Requirements***

 

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

 

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

 

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

 
| **As of June 30, 2010**              | ** ** | **Actual** | ** ** | **For  Capital Adequacy  Purposes** | ** ** | **To Be  Well-Capitalized  Under Prompt Corrective  Action Provisions** | ** ** |
|-------------------------------------------|------------|------------|------------|-------------------------------------|------------|-------------------------------------------------------------------------|------------|
| **($ in thousands)**                 | ** ** | **Amount** | ** ** | **%**                               | ** ** | **Amount**                                                              | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Total capital (to  risk-weighted assets)  |       | $          | 16,326     |                                | 18.6       | %                                                                       | $          | 7,036 |   | >8.0 | % | $ | 8,795 |   | >10.0 | % |
| Tier 1 capital (to  risk-weighted assets) |       | $          | 15,386     |                                | 17.5       | %                                                                       | $          | 3,518 |   | >4.0 | % | $ | 5,277 |   | >6.0 | % |
| Tier 1 capital (to average  assets)       |       | $          | 15,386     |                                | 11.1       | %                                                                       | $          | 5,566 |   | >4.0 | % | $ | 6,957 |   | >5.0 | % |

 

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**Liquidity**

 

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

 

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

 

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

 

Asloan demand increases, greater pressure will be exerted on Solera National Bank’sliquidity. However, it is management’s intention to maintain a conservativeloan to deposit ratio in the range of 80 - 90% over time. Given this goal,Solera National Bank will not aggressively pursue lending opportunities ifsufficient funding sources (e.g.,deposits, Federal Funds, etc.) are not available, nor will Solera NationalBank seek to attract transient volatile, non-local deposits with above marketinterest rates. As of June 30, 2010, the loan to deposit ratio was 54% anincrease from 48% at December 31, 2009.

 

SoleraNational Bank had cash and cash equivalents of $1.1 million, or 0.7% of totalBank assets, at June 30, 2010.  Additionally,the Bank had $75.0 million in available-for-sale investment securities, or 53%of the Company’s total assets, at June 30, 2010.  Management feels Solera National Bank shouldhave adequate liquidity to meet anticipated future funding needs.

 

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

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

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

 

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

 

**Disclosure Controls and Procedures**

 

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

 

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**Changes in Internal Control overFinancial Reporting**

 

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

 

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**PART II —OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

Notapplicable.

 

**ITEM 1A.  RISK FACTORS**

 

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

 

**ITEM 2. UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

Not applicable.

 

**ITEM 3. DEFAULTS UPON SENIORSECURITIES**

 

Not applicable.

 

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

 

**ITEM 5. OTHER INFORMATION**

 

Not applicable.

 

**ITEM 6. EXHIBITS**

 
| 2.1  | Purchase and Assumption  Agreement dated August 5, 2010 (incorporated by reference to  Exhibit 2.1 to the Company’s Form 8-K filed on August 11, 2010).                                    |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1  | Amended and Restated  Bylaws of Solera National Bancorp, Inc., effective June 17, 2010  (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K  filed on June 21, 2010). |
| 31.1 | Certification of the  Principal Executive Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act.*                                                                                       |
| 31.2 | Certification of the  Principal Accounting and Financial Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act.*                                                                        |
| 32.1 | Certification pursuant to Rule 13a-14(b) of the  Securities Exchange Act and 18 U.S.C. §1350.*                                                                                                  |

 

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* Filed herewith.

 

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**SOLERA NATIONAL BANCORP, INC.**

 

**SIGNATURES**

 

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

 
| * *                   | *SOLERA  NATIONAL BANCORP, INC.*              |
|----------------------------|----------------------------------------------------|
|                       | *(Registrant)*                                     |
|                       |                                               |
| Date: August 13, 2010 | /s/ Douglas Crichfield                             |
|                       | Douglas Crichfield                                 |
|                       | President and Chief  Executive Officer             |
|                       | (Principal Executive  Officer)                     |
|                       |                                               |
|                       |                                               |
|                       | /s/ Robert J. Fenton                               |
|                       | Robert J. Fenton                                   |
|                       | Executive Vice President,  Chief Financial Officer |
|                       | (Principal Accounting and  Financial Officer)      |

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                     |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Exhibit**                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                           |
| 2.1         |       | Purchase and Assumption  Agreement dated August 5, 2010 (incorporated by reference to  Exhibit 2.1 to the Company’s Form 8-K filed on August 11, 2010).                                    |
|        |       |                                                                                                                                                                                                           |
| 3.1         |       | Amended and Restated  Bylaws of Solera National Bancorp, Inc., effective June 17, 2010  (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K  filed on June 21, 2010). |
|        |       |                                                                                                                                                                                                           |
| 31.1        |       | Certification pursuant to  Rule 13a-14(a) of the Securities Exchange Act                                                                                                                             |
|        |       |                                                                                                                                                                                                           |
| 31.2        |       | Certification pursuant to  Rule 13a-14(a) of the Securities Exchange Act                                                                                                                             |
|        |       |                                                                                                                                                                                                           |
| 32.1        |       | Certification pursuant to  Rule 13a-14(b) of the Securities Exchange Act and 18 U.S.C. §1350                                                                                                    |

 

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