Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark one)**

 

| x      | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**  |
|--------|----------------------------------------------------------------------------------------------------|
|   |                                                                                               |
|   | **For  the quarterly period ended September 30, 2009**                                        |
|   |                                                                                               |
| o      | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**Commissionfile number 000-53181**

 

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**SOLERANATIONAL BANCORP, INC.**

(Exact name of registrant as specified inits charter)

 

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

 

**319 S.Sheridan Blvd.**

**Lakewood,CO 80226**

**303-209-8600**

(Address and telephone number of principalexecutive offices and principal place of business)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes xNo  ̈

 

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

 

Indicate by check mark whether the registrant isa large accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company.

 

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

 

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

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the last practicable date:  As of November 10, 2009, 2,553,671shares of the registrant’s common stock, $0.01 par value, were issued andoutstanding.

 

 

 

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**FORM 10-Q**

**SOLERANATIONAL BANCORP, INC.**

 

**INDEX**

 
| ** **                                                                                                         | **PAGE** |
|--------------------------------------------------------------------------------------------------------------------|----------|
| **INTRODUCTORY NOTE**                                                                                              | **3**    |
|                                                                                                               |     |
| **PART I  — FINANCIAL INFORMATION**                                                                      | **5**    |
|                                                                                                               |     |
| **ITEM 1. FINANCIAL STATEMENTS (Unaudited)**                                                                       | **5**    |
|                                                                                                               |     |
| **Balance Sheets as of September 30, 2009 and  December 31, 2008**                                       | **5**    |
|                                                                                                               |     |
| **Statements of Operations for the Three and Nine Months  Ended September 30, 2009 and 2008**                 | **6**    |
|                                                                                                               |     |
| **Statements of Changes in Stockholders’ Equity for the  Nine Months Ended September 30, 2009 and 2008** | **7**    |
|                                                                                                               |     |
| **Statements of Cash Flows for the Nine Months Ended  September 30, 2009 and 2008**                           | **8**    |
|                                                                                                               |     |
| **UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL  STATEMENTS**                                                | **10**   |
|                                                                                                               |     |
| **ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS**            | **22**   |
|                                                                                                               |     |
| **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK**                                            | **35**   |
|                                                                                                               |     |
| **ITEM 4(T). CONTROLS AND PROCEDURES**                                                                             | **35**   |
|                                                                                                               |     |
| **PART II  — OTHER INFORMATION**                                                                         | **37**   |
|                                                                                                               |     |
| **ITEM  1. LEGAL PROCEEDINGS**                                                                                     | **37**   |
|                                                                                                               |     |
| **ITEM  1A. RISK FACTORS**                                                                                         | **37**   |
|                                                                                                               |     |
| **ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS**                                           | **37**   |
|                                                                                                               |     |
| **ITEM 3. DEFAULTS UPON SENIOR SECURITIES**                                                                        | **37**   |
|                                                                                                               |     |
| **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS**                                                   | **37**   |
|                                                                                                               |     |
| **ITEM  5. OTHER INFORMATION**                                                                                     | **37**   |
|                                                                                                               |     |
| **ITEM 6.  EXHIBITS**                                                                                              | **37**   |
|                                                                                                               |     |
| **SIGNATURES**                                                                                                     | **38**   |
|                                                                                                               |     |
| **EXHIBIT  INDEX**                                                                                                 | **39**   |

 

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# **INTRODUCTORYNOTE**

#  

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  theCompany is subject to extensive government regulatory oversight, which couldrestrain our growth and profitability;

 

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

 

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

 

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

 

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

 

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

 

·                  the Federal Deposit Insurance Corporation, (“FDIC”),may further increase deposit insurance premiums to rebuild and maintain thefederal deposit insurance fund, which could have a material impact on earnings;

 

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

 

·                  management’sability to manage these and other risks.

 

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

 

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# **PART I— FINANCIAL INFORMATION**

#  

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

 

**SoleraNational Bancorp, Inc.**

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

**(Unaudited)**

 
| ** **                                                                                                                                                 | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                 | ** ** | **2009**               | ** **  | **2008**              | ** ** |
| **ASSETS**                                                                                                                                                 |       |                   |        |                  |       |
| Cash  and due from banks                                                                                                                                   |       | $                      | 1,087,294   |                  | $          | 1,436,241 |   |
| Federal  funds sold                                                                                                                                        |       | 4,975,000              |        | 965,000               |       |
| Total  cash and cash equivalents                                                                                                                           |       | 6,062,294              |        | 2,401,241             |       |
|                                                                                                                                                       |       |                   |        |                  |       |
| Interest-bearing  deposits with banks                                                                                                                      |       | 2,241,000              |        | —                |       |
| Investment  securities, available-for-sale                                                                                                                 |       | 73,026,028             |        | 41,557,461            |       |
|                                                                                                                                                       |       |                   |        |                  |       |
| Gross  loans                                                                                                                                               |       | 48,489,773             |        | 21,412,957            |       |
| Net  deferred (fees)/expenses                                                                                                                              |       | (134,779               | )           | (56,747               | )          |
| Allowance  for loan losses                                                                                                                                 |       | (700,000               | )           | (268,000              | )          |
| Net  loans                                                                                                                                                 |       | 47,654,994             |        | 21,088,210            |       |
|                                                                                                                                                       |       |                   |        |                  |       |
| Federal  Home Loan Bank (FHLB) and Federal Reserve Bank stocks                                                                                             |       | 1,091,900              |        | 1,079,550             |       |
| Premises  and equipment, net                                                                                                                               |       | 909,169                |        | 1,011,579             |       |
| Interest receivable                                                                                                                                        |       | 676,439                |        | 382,761               |       |
| Other  assets                                                                                                                                              |       | 751,719                |        | 222,038               |       |
| **Total assets**                                                                                                                                           |       | $                      | 132,413,543 |                  | $          | 67,742,840 |   |
|                                                                                                                                                       |       |                   |        |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                              |       |                   |        |                  |       |
| Deposits                                                                                                                                                   |       |                   |        |                  |       |
| Noninterest-bearing  demand                                                                                                                                |       | $                      | 4,346,384   |                  | $          | 3,910,236 |   |
| Interest-bearing  demand                                                                                                                                   |       | 11,536,928             |        | 2,603,923             |       |
| Savings  and money market                                                                                                                                  |       | 42,322,693             |        | 6,873,260             |       |
| Time  deposits                                                                                                                                             |       | 44,695,833             |        | 24,274,807            |       |
| Total  deposits                                                                                                                                            |       | 102,901,838            |        | 37,662,226            |       |
|                                                                                                                                                       |       |                   |        |                  |       |
| Federal  funds purchased and securities sold under agreements to repurchase                                                                                |       | 25,867                 |        | 398,162               |       |
| Accrued  interest payable                                                                                                                                  |       | 139,451                |        | 80,274                |       |
| Accounts  payable and other liabilities                                                                                                                    |       | 1,893,968              |        | 393,498               |       |
| Federal  Home Loan Bank advances                                                                                                                           |       | 7,750,000              |        | 10,000,000            |       |
| Deferred  rent liability                                                                                                                                   |       | 79,710                 |        | 60,505                |       |
| Capital  lease liability                                                                                                                                   |       | 127,809                |        | 156,388               |       |
| **Total liabilities**                                                                                                                                      |       | $                      | 112,918,643 |                  | $          | 48,751,053 |   |
|                                                                                                                                                       |       |                   |        |                  |       |
| COMMITMENTS  AND CONTINGENCIES (see Note 11)                                                                                                               |       |                   |        |                  |       |
|                                                                                                                                                       |       |                   |        |                  |       |
| STOCKHOLDERS’  EQUITY                                                                                                                                 |       |                   |        |                  |       |
| Common  stock, $0.01 par value; 5,000,000 shares authorized; 2,553,671 sharesissued and outstanding at  September 30, 2009 and December 31, 2008 |       | $                      | 25,536      |                  | $          | 25,536 |   |
| Additional  paid-in capital                                                                                                                                |       | 25,713,598             |        | 25,558,098            |       |
| Accumulated  deficit                                                                                                                                       |       | (8,007,051             | )           | (6,739,883            | )          |
| Accumulated  other comprehensive income                                                                                                                    |       | 1,762,817              |        | 148,036               |       |
| **Total stockholders’ equity**                                                                                                                        |       | $                      | 19,494,900  |                  | $          | 18,991,787 |   |
|                                                                                                                                                       |       |                   |        |                  |       |
| **Total liabilities and stockholders’ equity**                                                                                                        |       | $                      | 132,413,543 |                  | $          | 67,742,840 |   |

 

SeeNotes to Financial Statements.

 

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**SoleraNational Bancorp, Inc.**

 

# **Statementsof Operations for the Three and Nine Months Ended September 30, 2009 and2008**

**(Unaudited)**

 
| ** **                                                                  | ** ** | **For the Three Months********Ended September 30,** | ** ** | **For the Nine  Months********Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2009**                                                 | ** ** | **2008**                                                                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest  income:                                                           |       |                                                     |       |                                                                    |       |   |   |   |   |
| Interest and fees on loans                                                  |       | $                                                        | 597,990    |                                                                    | $          | 190,454 |   | $ | 1,380,404 |   | $ | 419,056 |   |
| Interest on federal funds sold                                              |       | 1,807                                                    |       | 28,068                                                                  |       | 2,902 |   | 81,134 |   |
| Interest on investment securities                                           |       | 752,236                                                  |       | 404,781                                                                 |       | 2,000,589 |   | 957,593 |   |
| Other  interest income                                                      |       | 712                                                      |       | 9,854                                                                   |       | 725 |   | 23,311 |   |
| Dividends  on FHLB and Federal Reserve Bank stocks                          |       | 10,909                                                   |       | 13,016                                                                  |       | 30,703 |   | 31,292 |   |
| Total  interest income                                                      |       | 1,363,654                                                |       | 646,173                                                                 |       | 3,415,323 |   | 1,512,386 |   |
| Interest  expense:                                                          |       |                                                     |       |                                                                    |       |   |   |   |   |
| Deposits                                                                    |       | 517,387                                                  |       | 101,798                                                                 |       | 1,179,805 |   | 288,601 |   |
| Federal  Home Loan Bank advances                                            |       | 77,874                                                   |       | 93,990                                                                  |       | 256,249 |   | 136,336 |   |
| Federal  funds purchased and securities sold under agreements to repurchase |       | 2,273                                                    |       | 28                                                                      |       | 9,796 |   | 109 |   |
| Other  borrowings                                                           |       | 3,129                                                    |       | 3,993                                                                   |       | 10,053 |   | 12,587 |   |
| Total  interest expense                                                     |       | 600,663                                                  |       | 199,809                                                                 |       | 1,455,903 |   | 437,633 |   |
|                                                                        |       |                                                     |       |                                                                    |       |   |   |   |   |
| Net  interest income                                                        |       | 762,991                                                  |       | 446,364                                                                 |       | 1,959,420 |   | 1,074,753 |   |
|                                                                        |       |                                                     |       |                                                                    |       |   |   |   |   |
| Provision  for loan losses                                                  |       | 180,000                                                  |       | 45,500                                                                  |       | 432,000 |   | 132,604 |   |
| Net  interest income after provisionfor loan losses                         |       | 582,991                                                  |       | 400,864                                                                 |       | 1,527,420 |   | 942,149 |   |
|                                                                        |       |                                                     |       |                                                                    |       |   |   |   |   |
| Noninterest  income:                                                        |       |                                                     |       |                                                                    |       |   |   |   |   |
| Service  charges and fees                                                   |       | 80,007                                                   |       | 20,591                                                                  |       | 219,949 |   | 37,846 |   |
| Sublease  income                                                            |       | —                                                   |       | 7,350                                                                   |       | 4,324 |   | 16,050 |   |
| Gain  on sale of securities                                                 |       | 97,485                                                   |       | —                                                                  |       | 204,509 |   | 45,264 |   |
| Total  noninterest income                                                   |       | 177,492                                                  |       | 27,941                                                                  |       | 428,782 |   | 99,160 |   |
| Noninterest  expense:                                                       |       |                                                     |       |                                                                    |       |   |   |   |   |
| Salaries  and employee benefits                                             |       | 591,183                                                  |       | 561,153                                                                 |       | 1,888,634 |   | 1,546,273 |   |
| Occupancy                                                                   |       | 141,624                                                  |       | 113,121                                                                 |       | 416,793 |   | 344,003 |   |
| Reversal  of loss on abandoned lease (Note 13)                              |       | —                                                   |       | (132,843                                                                | )          | — |   | (132,843 | ) |
| Professional  fees                                                          |       | 53,339                                                   |       | 21,857                                                                  |       | 237,365 |   | 167,403 |   |
| Other  general and administrative                                           |       | 235,833                                                  |       | 211,096                                                                 |       | 680,578 |   | 567,584 |   |
| Total  noninterest expense                                                  |       | 1,021,979                                                |       | 774,384                                                                 |       | 3,223,370 |   | 2,492,420 |   |
|                                                                        |       |                                                     |       |                                                                    |       |   |   |   |   |
| Income taxes                                                                |       | —                                                   |       | —                                                                  |       | — |   | — |   |
|                                                                        |       |                                                     |       |                                                                    |       |   |   |   |   |
| Net  loss                                                                   |       | $                                                        | (261,496   | )                                                                       | $          | (345,579 | ) | $ | (1,267,168 | ) | $ | (1,451,111 | ) |
|                                                                        |       |                                                     |       |                                                                    |       |   |   |   |   |
| Basic  earnings (loss) per share                                            |       | $                                                        | (0.10      | )                                                                       | $          | (0.14 | ) | $ | (0.50 | ) | $ | (0.57 | ) |
|                                                                        |       |                                                     |       |                                                                    |       |   |   |   |   |
| Diluted  earnings (loss) per share                                          |       | $                                                        | (0.10      | )                                                                       | $          | (0.14 | ) | $ | (0.50 | ) | $ | (0.57 | ) |
|                                                                        |       |                                                     |       |                                                                    |       |   |   |   |   |
| Weighted-average  common shares                                             |       |                                                     |       |                                                                    |       |   |   |   |   |
| Basic                                                                       |       | 2,553,671                                                |       | 2,553,671                                                               |       | 2,553,671 |   | 2,553,671 |   |
| Diluted                                                                     |       | 2,553,671                                                |       | 2,553,671                                                               |       | 2,553,671 |   | 2,553,671 |   |

 

SeeNotes to Financial Statements.

 

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**SoleraNational Bancorp, Inc.**

 

**Statements of Changes inStockholders’ Equity for the Nine Months Ended September 30, 2009 and 2008**

**(Unaudited)**

 
| ** **                                                                  | ** ** | **Shares********Outstanding** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** **     | **Total**  | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|-----------------------------------------------------------|----------------|------------|------------|
| **Balance at December 31, 2007**                                       | ** ** | **2,553,671**                 | ** ** | **$**             | **25,536** | ** **                       | **$**      | **25,347,342**           | ** ** | **$**                                                     | **(4,525,955** | **)**      | **$**      | **2,412** | ** ** | **$** | **20,849,335** | ** ** |
| Stock-based  compensation                                                   |       | —                        |       | —            |       | 187,732                          |       | —                   |       | —                                                    |           | 187,732    |       |
| Comprehensive  income (loss):                                               | ** ** | ** **                    | ** ** | ** **        | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **                                                | ** **     | ** ** | ** ** |
| Net  (loss)                                                                 |       | —                        |       | —            |       | —                           |       | (1,451,111               | )          | —                                                    |           | (1,451,111 | )          |
| Net  change in unrealized gains on investment securities available-for-sale |       | —                        |       | —            |       | —                           |       | —                   |       | (68,238                                                   | )              | (68,238    | )          |
| Less:  reclassification adjustment for net gains included in income         |       | —                        |       | —            |       | —                           |       | —                   |       | (45,264                                                   | )              | (45,264    | )          |
| Total comprehensive income (loss)                                           |       | —                        |       | —            |       | —                           |       | —                   |       | —                                                    |           | (1,564,613 | )          |
| **Balance at September 30, 2008**                                      | ** ** | **2,553,671**                 | ** ** | **$**             | **25,536** | ** **                       | **$**      | **25,535,074**           | ** ** | **$**                                                     | **(5,977,066** | **)**      | **$**      | **(111,090** | **)** | **$** | **19,472,454** | ** ** |
| ** **                                                                  | ** ** | ** **                    | ** ** | ** **        | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **                                                | ** **     | ** ** | ** ** |
| **Balance at December 31, 2008**                                       | ** ** | **2,553,671**                 | ** ** | **$**             | **25,536** | ** **                       | **$**      | **25,558,098**           | ** ** | **$**                                                     | **(6,739,883** | **)**      | **$**      | **148,036** | ** ** | **$** | **18,991,787** | ** ** |
| Stock-based  compensation                                                   |       | —                        |       | —            |       | 155,500                          |       | —                   |       | —                                                    |           | 155,500    |       |
| Comprehensive  income (loss):                                               |       |                          |       |              |       |                             |       |                     |       |                                                      |           |       |       |
| Net  (loss)                                                                 |       | —                        |       | —            |       | —                           |       | (1,267,168               | )          | —                                                    |           | (1,267,168 | )          |
| Net  change in unrealized gains on investment securities available-for-sale |       | —                        |       | —            |       | —                           |       | —                   |       | 1,819,290                                                 |           | 1,819,290  |       |
| Less:  reclassification adjustment for net gains included in income         |       | —                        |       | —            |       | —                           |       | —                   |       | (204,509                                                  | )              | (204,509   | )          |
| Total comprehensive income (loss)                                           |       |                          |       |              |       |                             |       |                     |       |                                                      |           | 347,613    |       |
| **Balance at September 30, 2009**                                      | ** ** | **2,553,671**                 | ** ** | **$**             | **25,536** | ** **                       | **$**      | **25,713,598**           | ** ** | **$**                                                     | **(8,007,051** | **)**      | **$**      | **1,762,817** | ** ** | **$** | **19,494,900** | ** ** |

 

SeeNotes to Financial Statements.

 

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**SoleraNational Bancorp, Inc.**

 

# **Statementsof Cash Flows for the Nine Months Ended September 30, 2009 and 2008**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **For the Nine  Months********Ended September 30,** | ** **  |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|-------------|
| ** **                                                                                   | ** ** | **2009**                                                                | ** **  | **2008** | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES                                                        |       |                                                                    |        |   |   |
| Net  (loss)                                                                                  |       | $                                                                       | (1,267,168  | ) | $ | (1,451,111 | ) |
| Adjustments  to reconcile net (loss) to net cash used in operating activities:               |       |                                                                    |        |   |   |
| Depreciation  and amortization                                                               |       | 126,993                                                                 |        | 81,862 |   |
| Provision  for loan losses                                                                   |       | 432,000                                                                 |        | 132,604 |   |
| Net  amortization of deferred loan fees/expenses                                             |       | (47,736                                                                 | )           | (2,826 | ) |
| Discount  accretion on interest-bearing deposits with banks                                  |       | —                                                                  |        | (13,374 | ) |
| Net  amortization of premiums on investment securities                                       |       | 45,903                                                                  |        | 36,207 |   |
| Gain  on sale of investment securities                                                       |       | (204,509                                                                | )           | (45,264 | ) |
| Federal  Home Loan Bank stock dividend                                                       |       | (10,200                                                                 | )           | (8,100 | ) |
| Recognition  of stock-based compensation on stock options                                    |       | 155,500                                                                 |        | 187,732 |   |
| Reversal  of loss on abandoned lease                                                         |       | —                                                                  |        | (132,843 | ) |
| Changes  in operating assets and liabilities:                                                |       |                                                                    |        |   |   |
| Interest  receivable                                                                         |       | (293,678                                                                | )           | (129,295 | ) |
| Other  assets                                                                                |       | (16,280                                                                 | )           | 87,223 |   |
| Accrued  interest payable                                                                    |       | 59,177                                                                  |        | 30,164 |   |
| Accounts  payable and other liabilities                                                      |       | (46,134                                                                 | )           | 10,614 |   |
| Deferred  loan fees/expenses, net                                                            |       | 125,768                                                                 |        | 41,166 |   |
| Deferred  rent liability                                                                     |       | 19,205                                                                  |        | 22,878 |   |
| **Net cash used in operating activities**                                                    |       | $                                                                       | (921,159    | ) | $ | (1,152,363 | ) |
|                                                                                         |       |                                                                    |        |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES                                                        |       |                                                                    |        |   |   |
| Purchase  of investment securities, available-for-sale                                       |       | $                                                                       | (56,583,279 | ) | $ | (28,370,083 | ) |
| Proceeds  from sales of investment securities, available-for-sale                            |       | 18,117,764                                                              |        | 4,849,038 |   |
| Proceeds  from maturities/calls/pay downs of investment securities, available-for-sale       |       | 9,790,375                                                               |        | 5,408,239 |   |
| Originated  loans, net of pay downs                                                          |       | (27,076,816                                                             | )           | (10,369,538 | ) |
| Purchase  of premises and equipment                                                          |       | (11,420                                                                 | )           | (48,403 | ) |
| Purchase  of Bank stocks                                                                     |       | (2,150                                                                  | )           | (500,000 | ) |
| Proceeds  from redemption of Federal Reserve Bank stock                                      |       | —                                                                  |        | 32,350 |   |
| Proceeds  from maturity of interest-bearing deposits with banks                              |       | —                                                                  |        | 2,185,000 |   |
| Purchase  of interest-bearing deposits with banks                                            |       | (2,241,000                                                              | )           | (3,458,626 | ) |
| **Net cash used in investing activities**                                                    |       | $                                                                       | (58,006,526 | ) | $ | (30,272,023 | ) |
|                                                                                         |       |                                                                    |        |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES                                                        |       |                                                                    |        |   |   |
| Net  increase in deposits                                                                    |       | $                                                                       | 65,239,612  |   | $ | 19,965,115 |   |
| Net  decrease in federal funds purchased and securities sold under agreements to  repurchase |       | (372,295                                                                | )           | — |   |
| Principal  payments on capital lease                                                         |       | (28,579                                                                 | )           | (26,047 | ) |
| Proceeds  from FHLB advances                                                                 |       | —                                                                  |        | 10,000,000 |   |
| Repayment  of FHLB advances                                                                  |       | (2,250,000                                                              | )           | — |   |
| Proceeds  from subscriptions receivable                                                      |       | —                                                                  |        | 1,600,000 |   |
| **Net cash provided by financing activities**                                                |       | $                                                                       | 62,588,738  |   | $ | 31,539,068 |   |
|                                                                                         |       |                                                                    |        |   |   |
| **Net increase in cash and cash equivalents**                                                |       | $                                                                       | 3,661,053   |   | $ | 114,682 |   |
|                                                                                         |       |                                                                    |        |   |   |
| CASH  AND CASH EQUIVALENTS                                                                   |       |                                                                    |        |   |   |
| Beginning  of period                                                                         |       | 2,401,241                                                               |        | 5,306,126 |   |
| End  of period                                                                               |       | $                                                                       | 6,062,294   |   | $ | 5,420,808 |   |

 

SeeNotes to Financial Statements.

 

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**SoleraNational Bancorp, Inc.**

 

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

**(Unaudited)**

 
| ** **                                                          | ** ** | **For the Nine Months********Ended September 30,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2009**                                                                    | ** ** | **2008** | ** ** |
|                                                                |       |                                                                        |       |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION                   |       |                                                                        |       |   |   |
| Cash  paid during the period for:                                   |       |                                                                        |       |   |   |
| Interest                                                            |       | $                                                                           | 1,396,726  |   | $ | 407,470 |   |
| Non-cash  investing transactions:                                   |       |                                                                        |       |   |   |
| Unrealized  gain (loss) on investment securities available-for-sale |       | $                                                                           | 1,614,781  |   | $ | (113,502 | ) |

 

SeeNotes to Financial Statements.

 

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**SOLERANATIONAL BANCORP, INC.**

 

# **UNAUDITED CONDENSED NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

#  

**NOTE 1 — SUMMARY OF ORGANIZATION**

 

SoleraNational Bancorp, Inc. (the “Company”), is a Delaware corporation that wasincorporated in 2006 to organize and serve as the holding company for SoleraNational Bank (the “Bank”), a national bank that opened for business on September 10,2007.  Solera National Bank is afull-service community, commercial bank headquartered in Lakewood, Coloradoserving the Denver metropolitan area.

 

**NOTE 2 — BASIS OF PRESENTATION**

 

Theaccompanying unaudited condensed consolidated financial statements contain alladjustments (consisting only of normal recurring adjustments) which, in theopinion of management, are necessary to present fairly the financial positionof the Company as of September 30, 2009, and the results of its operationsfor the three and nine months ended September 30, 2009 and 2008.  Cash flows are presented for the nine monthsended September 30, 2009 and 2008.  Certain reclassifications havebeen made to the consolidated financial statements and related notes of priorperiods to conform to the current presentation. These reclassifications had noimpact on stockholders’ equity or net loss for the periods. Additionally,certain information and footnote disclosures normally included in financialstatements have been condensed or omitted pursuant to rules andregulations of the U.S. Securities and Exchange Commission.  The Companybelieves that the disclosures in the unaudited condensed consolidated financialstatements are adequate to make the information presented not misleading. However, these unaudited condensed consolidated financial statements should beread in conjunction with the consolidated financial statements and footnotesthereto included in the Company’s Annual Report on Form 10-K as of and forthe year ended December 31, 2008.

 

TheCompany received preliminary conditional approval as a bank in organization inthe first quarter of 2007, conducted an initial closing of its common stockoffering and commenced banking operations during the third quarter of2007.  The attainment of profitable operations are dependent on future events,including the successful execution of the Company’s business plan and achievinga level of revenue adequate to support the Company’s cost structure.

 

**CriticalAccounting Policies**

 

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

 

Securities available-for-sale: Securities available-for-sale are reported at fair value utilizing Level2 inputs (see Note 12).  For thesesecurities, the Company obtains fair value measurements from independentpricing services.  The fair valuemeasurements consider observable data that may include dealer quotes, marketspreads, cash flows, the U.S. Treasury yield curve, live trading levels, tradeexecution data, market consensus prepayment speeds, credit information and thebonds’ terms and conditions, among other things.  Unrealized gains and losses are reported as aseparate component of accumulated other comprehensive income.

 

Securities are also evaluated for impairmentutilizing criteria such as the magnitude and duration of the decline, currentmarket conditions, payment history, the credit worthiness of the obligator, theintent of the Company to retain the security or whether it ismore-likely-than-not that the Company will be required to sell the securitybefore recovery of the value, as well as other qualitative factors.  If a decline in value below amortized cost isdetermined to be other-than-temporary, which does not necessarily indicate thatthe decline is permanent, but indicates that the prospects for a near-termrecovery of value is not favorable, the security is reviewed in more detail inorder to 

 

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determine the portion of the impairment thatrelates to credit (resulting in a charge to earnings) versus the portion of theimpairment that is noncredit related (resulting in a charge to accumulatedother comprehensive income).  A creditloss is determined by comparing the present value of cash flows expected to becollected, computed using the original yield as the discount rate, to the amortizedcost basis.

 

Stock-based compensation:  The Company grants stock optionsas incentive compensation to employees and directors.  Stock-based compensation is expensed toSalaries and Employee Benefits over the service period in which it is earned.  The cost of employee/director services receivedin exchange for an award of equity instruments is based on the grant-date fairvalue of the award, which is determined using a Black-Scholes-Merton model.

 

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

 

The Company hasestablished a formal process for determining an adequate allowance for loanlosses.  The allowance for loan lossescalculation has two components.  Thefirst component represents the allowance for loan losses for impaired loans;that is loans where the Company believes collection of the contractualprincipal and interest payments is not probable.  To determine this component of thecalculation, collateral-dependent impaired loans are evaluated using internalanalyses as well as third-party information, such as appraisals.  If an impaired loan is unsecured, it is evaluatedusing a discounted cash flow of the payments expected over the life of the loanusing the loan’s effective interest rate and giving consideration to currentlyexisting factors that 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 down-graded 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.  Therecorded allowance for loan losses is the aggregate of the impaired loanscomponent and the contingent loss component.

 

**RecentlyIssued Accounting Pronouncements**

 

In April 2009, theFinancial Accounting Standards Board (FASB) amended existing guidance fordetermining whether impairment is other-than-temporary (OTTI) for debtsecurities. According to the amendment, an entity is required to assess whetherit intends to sell, or it is more likely than not that it will be required tosell a security in an unrealized loss position before recovery of its amortizedcost basis. If either of these criteria is met, the entire difference betweenamortized cost and fair value is recognized in earnings. For securities that donot meet the aforementioned criteria, the amount of impairment recognized inearnings is limited to the amount related to credit losses, while impairmentrelated to other factors is recognized in other comprehensive income.Additionally, the standard expands and increases the frequency of existingdisclosures about other-than-temporary impairments for debt and equitysecurities. This standard is effective for interim and annual reporting periodsending after June 15, 2009.   Theadoption of this standard at June 30, 2009 did not have a material impacton the results of operations or financial position.

 

In April 2009, ASC820-10, *Fair Value Measurements andDisclosures,*was issued*.*Thisstandard emphasizes that even if there has been a significant decrease in thevolume and level of activity, the objective of a fair value measurement remainsthe same. Fair value is the price that would be received to sell an asset orpaid to transfer a liability in an orderly transaction (that is, not a forcedliquidation or distressed sale) between market participants. The standardprovides a number of factors to consider when evaluating whether there has beena significant decrease in the volume and level of activity for an asset orliability in relation to normal market activity. In addition, when transactionsor quoted prices are not considered orderly, adjustments to those prices basedon the weight of available information may be needed to determine theappropriate fair value. The standard also requires increased disclosures. Thisstandard is effective for interim and annual reporting periods ending after June 15,2009, and shall be applied 

 

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prospectively.  The adoption of this standard at June 30,2009 did not have a material impact on the results of operations or financialposition.

 

In April 2009, theFASB amended existing guidance to require disclosures about fair value of financialinstruments for interim reporting periods of publicly traded companies thatwere previously only required in annual financial statements. This standard iseffective for interim reporting periods ending after June 15, 2009. Theadoption of this standard at June 30, 2009 did not have a material impacton the results of operations or financial position as it only requiredadditional disclosures which are included in Note 12.

 

During the second quarter2009, the Company adopted the amended guidance for the accounting for, anddisclosure of, events that occur after the balance sheet date but beforefinancial statements are issued or are available to be issued.  This standard requires the disclosure of thedate through which an entity has evaluated subsequent events and the basis forthat date, that is, whether that date represents the date the financialstatements were issued or were available to be issued.  See “Note 14 — Subsequent Events” forthe related disclosure. The adoption of this standard did not have a materialimpact on our consolidated financial statements.

 

In June 2009, the FASB issued *The FASB Accounting Standards Codification**TM *(Codification).  The Codification became the source ofauthoritative U.S. generally accepted accounting principles (GAAP) recognizedby the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of theSEC under authority of federal securities laws are also sources ofauthoritative GAAP for SEC registrants. The Codification supersedes all then-existingnon-SEC accounting and reporting standards. All other nongrandfathered, non-SEC accounting literature not includedin the Codification became nonauthoritative. The FASB no longer issues new standards in the form of Statements, FASBStaff Positions, or Emerging Issues Task Force Abstracts.  Instead, it issues Accounting StandardsUpdates.  This standard is effective forinterim and annual periods ending after September 15, 2009.  The Codification did not change GAAP, and,therefore, the adoption of this standard at September 30, 2009 did nothave a material impact on the Company’s financial position or results ofoperations.

 

**NOTE 3 — INVESTMENTS**

 

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

 
| ** **                               | ** ** | **September 30, 2009** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | ** **                  | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Amortized**               | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| ** **                               | ** ** | **Cost**                    | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| **Securities  available-for-sale:**      |       |                        |       |   |   |   |   |   |   |
| U.S. government  agencies                |       | $                           | 6,177,281  |   | $ | 50,733 |   | $ | — |   | $ | 6,228,014 |   |
| Corporate                                |       | 8,726,343                   |       | 207,566 |   | (285 | ) | 8,933,624 |   |
| State and municipal                      |       | 22,156,347                  |       | 849,504 |   | (78,364 | ) | 22,927,487 |   |
| Residential  mortgage-backed securities  |       | 34,203,240                  |       | 748,405 |   | (14,742 | ) | 34,936,903 |   |
| **Total securities  available-for-sale** |       | $                           | 71,263,211 |   | $ | 1,856,208 |   | $ | (93,391 | ) | $ | 73,026,028 |   |

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

 

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The amortized cost and estimated fair value of debtsecurities by contractual maturity at September 30, 2009 and December 31,2008 are shown below.  Mortgage-backedsecurities are classified 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 mortgage-backed securities making it common for themto mature prior to the contractual maturity date.

 
| ** **                             | ** ** | **Amortized Cost**     | ** ** | **Estimated Fair Value** | ** ** |
|----------------------------------------|------------|------------------------|------------|--------------------------|------------|
| ** **                             | ** ** | **September 30,** | ** ** | **December 31,**    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                             | ** ** | **2009**               | ** ** | **2008**                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Securities  available-for-sale         |       |                   |       |                     |       |   |   |   |   |
| Due within one year                    |       | $                      | 1,532,663  |                     | $          | 1,516,323 |   | $ | 1,570,896 |   | $ | 1,503,562 |   |
| Due after one year through five years  |       | 5,595,075              |       | 497,361                  |       | 5,762,358 |   | 499,470 |   |
| Due after five years through ten years |       | 14,593,009             |       | 6,167,986                |       | 15,000,860 |   | 6,160,151 |   |
| Due after ten years                    |       | 49,542,464             |       | 33,227,755               |       | 50,691,914 |   | 33,394,278 |   |
| Total securities  available-for-sale   |       | $                      | 71,263,211 |                     | $          | 41,409,425 |   | $ | 73,026,028 |   | $ | 41,557,461 |   |

 

The following tables show the estimated fair value andgross unrealized losses, aggregated by investment category and length of timethe individual securities have been in a continuous loss position as of September 30,2009 and December 31, 2008.

 
| ** **                              | ** ** | **September 30, 2009** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **Less than 12 months**     | ** ** | **12 months or more** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | **Estimated   Fair Value**  | ** ** | **Unrealized   Losses** | ** ** | **Estimated   Fair Value** | ** ** | **Unrealized   Losses** | ** ** | **Estimated   Fair Value** | ** ** | **Unrealized   Losses** | ** ** |
| Description  of securities:             |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.  government agencies               |       | $                           | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Corporate                               |       | 102,826                     |       | (285 | ) | — |   | — |   | 102,826 |   | (285 | ) |
| State  and municipal                    |       | 752,750                     |       | (22,226 | ) | 576,548 |   | (56,138 | ) | 1,329,298 |   | (78,364 | ) |
| Residential  mortgage-backed securities |       | 1,193,269                   |       | (12,756 | ) | 247,808 |   | (1,986 | ) | 1,441,077 |   | (14,742 | ) |
| Total  temporarily impaired             |       | $                           | 2,048,845  |   | $ | (35,267 | ) | $ | 824,356 |   | $ | (58,124 | ) | $ | 2,873,201 |   | $ | (93,391 | ) |

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

 

Management evaluates investment securities forother-than-temporary impairment taking into consideration the extent and lengthof time the fair value has been less than cost, the financial condition of theissuer, whether the Company has the intent to retain the security andwhether it is more-likely-than-not that the Company will be required to sellthe security before recovery of the value, as well as other qualitativefactors.  The four individual securities that have been in acontinuous unrealized loss position for 12 months or longer at September 30,2009, have fluctuated in value since their purchase dates as a result ofchanges in market interest rates and not as a result of the underlying issuer’sability to repay.  Management hasreviewed the credit rating for all securities in a continuous unrealized lossposition for 12 months or longer and determined that all securities are highlyrated.  Additionally, the Company has theintent to hold these securities and the Company does not anticipate that thesesecurities will be required to be sold before recovery of value, which may beupon maturity. Accordingly, as of September 30, 2009, no declines in valueare deemed to be other than temporary. Only one security was in a 

 

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continuous unrealized loss position for 12 months orlonger at December 31, 2008, and management’s evaluation of that securitydetermined it was not other than temporarily impaired.

 

The Company recorded a net unrealized gain in theinvestment portfolio of $1.8 million at September 30, 2009.  This was an improvement over the $148,000unrealized gain at December 31, 2008.

 

The Company sold securities for gross realized gainsof $212,000 and gross realized losses of $8,000 during the first nine months of2009.  The Company sold eleven securitiesfor gross realized gains of $46,000 and one security for a loss of $1,000during the first nine months of 2008. Realized gains and losses on sales are computed on a specificidentification basis based on amortized cost on the date of sale.

 

Securities with carrying values of $17.5 million at September 30,2009 and $15.4 million at December 31, 2008, were pledged as collateral tosecure public deposits, borrowings from the FHLB, repurchase agreements and forother purposes as required or permitted by law.

 

**NOTE 4 — INTEREST-BEARING DEPOSITS WITH BANKS**

 

In an effort to manage the Bank’s liquidity with thegoal of maximizing the interest earned, the Company invested approximately $2.2million and $3.5 million in FDIC-insured certificates of deposit during thenine months ended September 30, 2009 and 2008, respectively.  These deposits had a weighted-average yieldof 0.69% during 2009, and 3.57% during 2008, and original maturities of 30 to60 days.

 

**NOTE 5 — LOANS**

 

Loans consisted of the following:

 
| ** **                         | ** **                            | **September 30, 2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------|---------------------------------------|-----------------------------|------------|-----------------------------|------------|
| Real estate —  commercial     |                                  | $                           | 23,827,621 |                        | $          | 7,478,806 |   |
| Real estate —  residential    |                                  | 7,392,338                   |       | 5,043,352                   |       |
| Construction and  land development |                                  | 7,845,945                   |       | 3,848,555                   |       |
| Commercial and  industrial         |                                  | 8,382,631                   |       | 4,083,633                   |       |
| Consumer                           |                                  | 1,041,238                   |       | 958,611                     |       |
| Gross loans                        |                                  | 48,489,773                  |       | 21,412,957                  |       |
| Less:                              | Deferred loan  (fees) / expenses, net |                        | (134,779   | )                           | (56,747    | ) |
|                               | Allowance for  loan losses            |                        | (700,000   | )                           | (268,000   | ) |
| Loans, net                         |                                  | $                           | 47,654,994 |                        | $          | 21,088,210 |   |

 

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

 

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

 

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

 

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**NOTE 6 — ALLOWANCE FOR LOAN LOSSES**

 

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

 
| ** **                                 | ** ** | **Nine-Month Period Ended********September 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                 | ** ** | **2009**                                              | ** ** | **2008** | ** ** |
| Balance, beginning of period               |       | $                                                     | 268,000    |   | $ | 47,396 |   |
| Loans charged off                          |       | —                                                |       | — |   |
| Recoveries on loans previously charged off |       | —                                                |       | — |   |
| Provision  for loan losses                 |       | 432,000                                               |       | 132,604 |   |
| Balance, end of period                     |       | $                                                     | 700,000    |   | $ | 180,000 |   |

 

**NOTE 7 — DEPOSITS**

 

Deposits are summarized as follows:

 
| ** **                                     | ** ** | **September 30,  2009** | ** **  | **December 31,  2008** | ** ** |
|------------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| ** **                                     | ** ** | **Amount**                   | ** **  | **% of  Total**             | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
| Noninterest-bearing demand                     |       | $                            | 4,346,384   |                        | 4          | % | $ | 3,910,236 |   | 10 | % |
| Interest-bearing demand                        |       | 11,536,928                   |        | 11                          |       | 2,603,923 |   | 7 |   |
| Money market accounts                          |       | 3,112,038                    |        | 3                           |       | 6,488,427 |   | 17 |   |
| Savings accounts                               |       | 39,210,655                   |        | 38                          |       | 384,833 |   | 1 |   |
| Certificates of deposit, less than $100,000    |       | 16,995,536                   |        | 17                          |       | 6,521,937 |   | 18 |   |
| Certificates of deposit, greater than $100,000 |       | 27,700,297                   |        | 27                          |       | 17,752,870 |   | 47 |   |
| Total deposits                                 |       | $                            | 102,901,838 |                        | 100        | % | $ | 37,662,226 |   | 100 | % |

 

In the ordinary course ofbusiness, certain officers, directors, stockholders, and employees of the Bankhave deposits with the Bank.  In the Bank’sopinion, all deposit relationships with such parties are made on substantiallythe same terms including interest rates and maturities, as those prevailing atthe time for comparable transactions with other persons.  The balance of related party deposits at September 30,2009 and December 31, 2008 was approximately $1.4 million and $2.7million, respectively.

 

**NOTE 8 — STOCK-BASED COMPENSATION**

 

The Company’s 2007 Stock Incentive Plan (the “Plan”)was approved by the Company’s Board of Directors (the “Board”) with aneffective date of September 10, 2007 and was approved by the Company’sstockholders at the annual meeting held on June 17, 2008.  Under the terms of the Plan, officers and keyemployees may be granted both nonqualified and incentive stock options anddirectors and other consultants, who are not also officers or employees, mayonly be granted nonqualified stock options. The Board reserved 510,734 sharesof common stock for issuance under the Plan.  The Plan provides foroptions to purchase shares of common stock at a price not less than 100% of thefair 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 $156,000 and $188,000 during the nine monthsended September 30, 2009 and 2008, respectively.  No tax benefit related to stock-basedcompensation will be recognized until the Company is profitable.

 

The Company accounts for its stock-based compensationunder the provisions of ASC 718-20 — *Stock Compensation —Awards Classified as Equity*. The fair value of each option grant is estimated on the date of grantusing the Black-Scholes-Merton option pricing model.  The Company granted 42,000 options during thethird quarter 2009 as incentive compensation primarily to the President &CEO and also to newly hired employees. Similarly, the Company granted 10,000 options to newly hired employeesduring the third quarter of 2008.

 

During the nine months ended September 30, 2009,62,375 options were forfeited and 50,444 vested options expiredunexercised.  No options were exercisedduring the three or nine months ended September 30, 2009.  The Company

 

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recognized expense for approximately 16,000 options,representing a pro-rata amount of the options earned during the third quarter2009 that are expected to vest.  As of September 30,2009, there was approximately $348,000 of total unrecognized compensation costrelated to the outstanding stock options that will be recognized over aweighted-average period of 2.3 years.

 

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

 
| ** **                              | ** ** | **Options** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** |
|-----------------------------------------|------------|-------------|------------|------------------------------------------------|------------|
| Outstanding at  January 1, 2009    |       | 360,255     |       | $                                              | 2.71       |   |
| Granted                                 |       | 62,250      |       | 1.50                                           |       |
| Exercised                               |       | —      |       | —                                         |       |
| Forfeited                               |       | (62,375     | )          | 2.70                                           |       |
| Expired                                 |       | (50,444     | )          | 2.74                                           |       |
| Outstanding at  September 30, 2009 |       | 309,686     |       | $                                              | 2.46       |   |

 

**NOTE 9 — NONINTEREST EXPENSE**

 

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

 
| ** **                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Data processing                   |       | $                                          | 70,234     |                                      | $          | 62,188 |   | $ | 200,385 |   | $ | 160,840 |   |
| FDIC assessment                   |       | 45,112                                     |       | 4,782                                     |       | 125,067 |   | 10,737 |   |
| Marketing and promotions          |       | 34,370                                     |       | 74,647                                    |       | 89,951 |   | 200,544 |   |
| Printing, stationery and supplies |       | 10,852                                     |       | 8,304                                     |       | 42,387 |   | 41,202 |   |
| Regulatory and reporting fees     |       | 21,433                                     |       | 15,427                                    |       | 63,392 |   | 38,777 |   |
| Travel and entertainment          |       | 16,090                                     |       | 7,331                                     |       | 32,784 |   | 20,013 |   |
| Telephone/communication           |       | 10,166                                     |       | 7,843                                     |       | 30,386 |   | 21,130 |   |
| Dues and memberships              |       | 6,911                                      |       | 4,138                                     |       | 23,118 |   | 12,149 |   |
| Insurance                         |       | 4,735                                      |       | 4,230                                     |       | 14,316 |   | 13,348 |   |
| Postage and shipping              |       | 4,953                                      |       | 4,541                                     |       | 16,179 |   | 9,112 |   |
| Training and education            |       | 1,008                                      |       | 4,246                                     |       | 8,418 |   | 9,489 |   |
| Miscellaneous                     |       | 9,969                                      |       | 13,419                                    |       | 34,195 |   | 30,243 |   |
| Total                             |       | $                                          | 235,833    |                                      | $          | 211,096 |   | $ | 680,578 |   | $ | 567,584 |   |

 

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**NOTE 10 — INCOME TAXES**

 

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

 
| ** **                                            | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Deferred tax assets:                                  |       |                        |       |                       |       |
| Start-up and  organizational expenses                 |       | $                           | 1,141,661  |                       | $          | 1,207,526 |   |
| Net operating loss  carryforward                      |       | 1,418,186                   |       | 1,096,123                  |       |
| Allowance for loan  losses                            |       | 236,163                     |       | 76,082                     |       |
| Non-qualified stock  options                          |       | 25,262                      |       | 16,045                     |       |
| Other                                                 |       | 60,704                      |       | 40,651                     |       |
| Total deferred tax assets                             |       | 2,881,976                   |       | 2,436,427                  |       |
| Deferred tax  liabilities:                            |       |                        |       |                       |       |
| Net unrealized gain on  securities available-for-sale |       | (653,226                    | )          | (54,856                    | )          |
| Federal Home Loan Bank  stock dividend                |       | (8,041                      | )          | (4,261                     | )          |
| Tax over book  depreciation                           |       | (25,251                     | )          | (23,814                    | )          |
| Total deferred tax  liabilities                       |       | (686,518                    | )          | (82,931                    | )          |
|                                                  |       |                        |       |                       |       |
| Net deferred tax assets                               |       | 2,195,458                   |       | 2,353,496                  |       |
|                                                  |       |                        |       |                       |       |
| Valuation allowance                                   |       | (2,195,458                  | )          | (2,353,496                 | )          |
|                                                  |       |                        |       |                       |       |
| Net deferred taxes                                    |       | $                           | —     |                       | $          | — |   |

 

TheCompany has provided a 100% valuation allowance for its net deferred tax assetdue to uncertainty of realization during the carryforward period.  As of September 30, 2009, the Companyhas net operating loss carryforwards of approximately $3.8 million for federalincome tax purposes.  Federal netoperating loss carryforwards, to the extent not used, will expire beginning in2027.

 

The income tax provision differs from the amount ofincome tax determined by applying the U.S. federal income tax rate of 35% topretax income from continuing operations for the three and nine months ended September 30,2009 and 2008 due to the following:

 
| ** **                                 | ** ** | **September 30, 2009** | ** ** | **September 30, 2008** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **Three Months  Ended**     | ** ** | **Nine Months  Ended**      | ** ** | **Three Months  Ended** | ** ** | **Nine Months  Ended** | ** ** |
| Computed “expected” tax  benefit |       | $                           | (91,524    | )                           | $          | (443,509 | ) | $ | (120,953 | ) | $ | (507,889 | ) |
| Change in income taxes  resulting from:    |       |                        |       |                        |       |   |   |   |   |
| Change in valuation  allowance             |       | 86,907                      |       | 440,332                     |       | 107,350 |   | 476,174 |   |
| Other                                      |       | 4,617                       |       | 3,177                       |       | 13,603 |   | 31,715 |   |
| Income tax provision                       |       | $                           | —     |                        | $          | — |   | $ | — |   | $ | — |   |

 

**NOTE 11 —****COMMITMENTSAND CONTINGENCIES**

 

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

 

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At September 30,2009 and December 31, 2008, the following financial instruments wereoutstanding whose contract amounts represent credit risk:

 
| ** **                                                             | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Financial instruments whose contractual amounts represent credit risk: |       |                         |       |                        |       |
| Commitments to extend credit                                           |       | $                            | 5,401,768  |                        | $          | 6,715,658 |   |
| Letters of credit                                                      |       | —                       |       | —                      |       |
| Total commitments                                                      |       | $                            | 5,401,768  |                        | $          | 6,715,658 |   |

 

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

 

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

 

**NOTE 12****—****FAIR VALUE**

 

Fair value is the exchangeprice that would be received for an asset or paid to transfer a liability (exitprice) in the most advantageous market for the asset or liability in an orderlytransaction between market participants. The fair value hierarchy requires anentity to maximize the use of observable inputs and minimize the use ofunobservable inputs when measuring fair value. The standard describes threelevels of inputs that may be used to measure fair values:

 

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

 

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

 

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

 

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

 

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

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

 
| ** **                                 | ** ** | **Quoted Prices  in Active  Markets for  Identical  Assets********(Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs********(Level 3)** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------|------------|
| Assets at  September 30, 2009         |       |                                                                          |       |                                                  |       |                                                   |       |      |       |
| Investment securities,  available-for-sale |       | $                                                                             | —     |                                                  | $          | 73,026,028                                             |       | $         | —     |   | $ | 73,026,028 |   |
|                                       |       |                                                                          |       |                                                  |       |                                                   |       |      |       |
| Assets at  December 31, 2008          |       |                                                                          |       |                                                  |       |                                                   |       |      |       |
| Investment securities,  available-for-sale |       | $                                                                             | —     |                                                  | $          | 41,557,461                                             |       | $         | —     |   | $ | 41,557,461 |   |

 

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

 

***Fair Value of FinancialInstruments***

 

Disclosure of fair value information about financialinstruments, whether or not recognized in the balance sheet, for which it ispracticable to estimate that value is required. Fair value estimates aremade 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 inassumptions could significantly affect the estimates.

 

Fair value information is not required to be disclosedfor certain financial instruments and all nonfinancial instruments.  Accordingly, the aggregate fair value amountspresented may not necessarily represent the underlying fair value of theCompany.  Fair value estimates are based on financialinstruments both on and off the balance sheet without attempting to estimatethe value of anticipated future business and the value of assets andliabilities that are not considered financial instruments. Additionally, taxconsequences related to the realization of the unrealized gains and losses canhave a potential effect on fair value estimates and have not been considered inmany of the estimates.

 

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

 

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

 

*Interest-bearing deposits with banks: *The carrying amount of interest-bearing deposits withbanks approximates fair values as of September 30, 2009 due to therelatively stable level of short-term interest rates.

 

*Investment securities*: Fair value measurement is obtained from independent pricing serviceswhich utilize observable data that may include dealer quotes, market spreads,cash flows, the U.S. Treasury yield curve, live trading levels, trade executiondata, market consensus prepayment speeds, credit information and the bonds’terms and conditions, among other things.

 

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

 

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value.  If the current market rates differ from theloan’s current rate, the contractual cash flows are discounted using thecurrent market rate to derive the loan’s estimated fair value.

 

*Investment in FHLB and Federal Reserve Bankstocks: *It is not practical to determine the fair value ofbank stocks due to the restrictions placed on the transferability of FHLB stockand Federal Reserve Bank stock.

 

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

 

*Deposits:*  The fair valueof noninterest-bearing demand deposits, interest-bearing demand deposits and savingsand money market accounts is determined to be the amount payable on demand atthe reporting date.  The fair value offixed rate time deposits is estimated using a discounted cash flow calculationthat applies interest rates currently being offered for deposits of similarremaining maturities.  Carrying value isassumed to approximate fair value for all variable rate time deposits.

 

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

 

*Capital lease liability: *Management did not fair value the capital leaseliability as it is specifically excluded from the disclosure requirements.

 

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

 

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

 

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

 

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

 
| ** **                                                                  | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                  | ** ** | **Carrying**                 | ** ** | **Fair**                    | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| **($ in  thousands)**                                                  | ** ** | **Value**                    | ** ** | **Value**                   | ** ** | **Value** | ** ** | **Value** | ** ** |
| Financial Assets:                                                           |       |                         |       |                        |       |   |   |   |   |
| Cash and cash  equivalents                                                  |       | $                            | 6,062      |                        | $          | 6,062 |   | $ | 2,401 |   | $ | 2,401 |   |
| Interest-bearing  deposits with banks                                       |       | 2,241                        |       | 2,241                       |       | — |   | — |   |
| Investment securities                                                       |       | 73,026                       |       | 73,026                      |       | 41,557 |   | 41,557 |   |
| Loans, net                                                                  |       | 47,655                       |       | 48,430                      |       | 21,088 |   | 21,127 |   |
| FHLB and FRB stocks                                                         |       | 1,092                        |       | 1,092                       |       | 1,080 |   | 1,080 |   |
| Interest receivable                                                         |       | 676                          |       | 676                         |       | 383 |   | 383 |   |
|                                                                        |       |                         |       |                        |       |   |   |   |   |
| Financial Liabilities:                                                      |       |                         |       |                        |       |   |   |   |   |
| Deposits, demand,  savings and money market                                 |       | $                            | 58,206     |                        | $          | 58,206 |   | $ | 13,387 |   | $ | 13,387 |   |
| Time deposits                                                               |       | 44,696                       |       | 43,898                      |       | 24,275 |   | 23,657 |   |
| Federal funds purchased  and securities sold under agreements to repurchase |       | 26                           |       | 26                          |       | 398 |   | 398 |   |
| Federal Home Loan Bank  advances                                            |       | 7,750                        |       | 7,452                       |       | 10,000 |   | 9,469 |   |
| Interest payable                                                            |       | 139                          |       | 139                         |       | 80 |   | 80 |   |

 

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**NOTE 13 — REVERSAL OF LOSS ON ABANDONMENT OF LEASE**

 

OnJuly 27, 2007, the Company recorded a loss of approximately $170,000 as aresult of abandoning its corporate headquarters.  On September 1, 2008, to accommodate theBank’s growth, management decided to re-occupy the previously abandonedfacility and utilize the office space for administrative purposes.  In accordance with the accounting for costsassociated with exit or disposal activities, approximately $133,000 of theoriginally recorded loss was reversed resulting in a credit to expense duringthe third quarter 2008.  The Companyintends to occupy the space for the remainder of the original lease agreementwhich expires on August 31, 2011. As such, the Company will recognize occupancy expense on a straight-linebasis each period from now until the lease expiration.

 

**NOTE 14 — SUBSEQUENT EVENTS**

 

TheCompany has considered subsequent events through November 12, 2009, thedate of issuance of this Report on Form 10-Q, and has determined that noadditional disclosure is necessary.

 

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

 

Thefollowing discussion and analysis presents the Company’s consolidated financialcondition as of September 30, 2009 and results of operations for the threeand nine months ended September 30, 2009 and 2008.  The discussion should be read in conjunctionwith the financial statements and the notes related thereto which appearelsewhere in this Quarterly Report on Form 10-Q.

 

**Overview**

 

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

 

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

 

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

 

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

 

Net loss for the quarterended September 30, 2009 was $261,000, or ($.10) per share, compared witha $346,000 loss, or ($.14) per share for the third quarter of 2008.  Thereduction in net loss for the third quarter 2009 is attributed to higher netinterest income of $317,000 and higher noninterest income of $150,000,partially offset by higher noninterest expenses of $248,000 and a larger provisionfor loan losses of $135,000.

 

As of September 30, 2009, the Company had totalassets of $132.4 million, an increase of $64.7 million, or 95%, from December 31,2008.  Investment securities,available-for-sale, increased $31.5 million from $41.6 million to $73.0 million,including a $1.6 million increase in unrealized gains.  Net loans increased $26.6 million, or 126%,from $21.1 million at December 31, 2008 to $47.7 million at September 30,2009.  Similarly, the Company’s totaldeposits more than doubled growing $65.2 million from $37.7 million at December 31,2008 to $102.9 million as of September 30, 2009.   This growth was achieved as a result of oursuccessful business development program.

 

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

 

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****Table 1****

 
| ** **                                                                  | ** ** | **Three Months Ended********September 30, 2009** | ** **  | **Three Months Ended********September 30, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------------|-------------|-------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Average  Balance**                                  | ** **  | **Interest**                                          | ** ** | **Yield /  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield /  Cost** | ** ** |
| **Assets:**                                                                 |       |                                                  |        |                                                  |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                   |       |                                                  |        |                                                  |       |   |   |   |   |   |   |   |   |
| Gross  loans, net of unearned fees                                          |       | $                                                     | 43,484,703  |                                                  | $          | 597,990 |   | 5.46 | % | $ | 12,507,436 |   | $ | 190,454 |   | 6.06 | % |
| Investment  securities**                                                    |       | 58,202,976                                            |        | 752,236                                               |       | 5.13 |   | 31,031,230 |   | 404,781 |   | 5.19 |   |
| FHLB  and Federal Reserve Bank stocks                                       |       | 1,081,302                                             |        | 10,909                                                |       | 4.00 |   | 995,211 |   | 13,016 |   | 5.20 |   |
| Federal  funds sold                                                         |       | 2,884,783                                             |        | 1,807                                                 |       | 0.25 |   | 5,188,038 |   | 28,068 |   | 2.15 |   |
| Interest-bearing  deposits with banks                                       |       | 441,163                                               |        | 712                                                   |       | 0.64 |   | 1,136,616 |   | 9,828 |   | 3.44 |   |
| Other  interest-earning assets                                              |       | —                                                |        | —                                                |       | — |   | 16,515 |   | 26 |   | 0.63 |   |
| Total  interest-earning assets                                              |       | 106,094,927                                           |        | $                                                     | 1,363,654  |   | 5.10 | % | 50,875,046 |   | $ | 646,173 |   | 5.05 | % |
| Noninterest-earning  assets                                                 |       | 3,169,553                                             |        |                                                  |       |   |   | 2,189,976 |   |   |   |   |   |
| Total  assets                                                               |       | $                                                     | 109,264,480 |                                                  |       |   |   |   | $ | 53,065,022 |   |   |   |   |   |
|                                                                        |       |                                                  |        |                                                  |       |   |   |   |   |   |   |   |   |
| **Liabilities and Stockholders’ Equity:**                              |       |                                                  |        |                                                  |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                              |       |                                                  |        |                                                  |       |   |   |   |   |   |   |   |   |
| Money  market and savings                                                   |       | $                                                     | 25,440,757  |                                                  | $          | 171,968 |   | 2.68 | % | $ | 10,295,399 |   | $ | 53,633 |   | 2.07 | % |
| Interest-bearing  checking                                                  |       | 6,302,026                                             |        | 40,578                                                |       | 2.55 |   | 5,858,041 |   | 3,943 |   | 0.27 |   |
| Time  deposits                                                              |       | 45,092,278                                            |        | 304,841                                               |       | 2.68 |   | 5,825,567 |   | 44,222 |   | 3.02 |   |
| Federal  funds purchased and securities sold under agreements to repurchase |       | 609,651                                               |        | 2,273                                                 |       | 1.48 |   | 4,886 |   | 28 |   | 2.28 |   |
| Federal  Home Loan Bank advances                                            |       | 8,119,565                                             |        | 77,874                                                |       | 3.81 |   | 10,000,000 |   | 93,990 |   | 3.74 |   |
| Other  borrowings                                                           |       | 134,042                                               |        | 3,129                                                 |       | 9.26 |   | 171,032 |   | 3,993 |   | 9.29 |   |
| Total  interest-bearing liabilities                                         |       | 85,698,319                                            |        | $                                                     | 600,663    |   | 2.78 | % | 32,154,925 |   | $ | 199,809 |   | 2.47 | % |
|                                                                        |       |                                                  |        |                                                  |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  checking                                               |       | 4,353,314                                             |        |                                                  |       |   |   | 946,433 |   |   |   |   |   |
| Noninterest-bearing  liabilities                                            |       | 530,567                                               |        |                                                  |       |   |   | 531,712 |   |   |   |   |   |
| Stockholders’  equity                                                  |       | 18,682,280                                            |        |                                                  |       |   |   | 19,431,952 |   |   |   |   |   |
| Total  liabilities and stockholders’ equity                            |       | $                                                     | 109,264,480 |                                                  |       |   |   |   | $ | 53,065,022 |   |   |   |   |   |
|                                                                        |       |                                                  |        |                                                  |       |   |   |   |   |   |   |   |   |
| Net  interest income                                                        |       |                                                  |        | $                                                     | 762,991    |   |   |   |   |   | $ | 446,364 |   |   |   |
|                                                                        |       |                                                  |        |                                                  |       |   |   |   |   |   |   |   |   |
| Net  interest spread                                                        |       |                                                  |        |                                                  |       | 2.32 | % |   |   |   |   | 2.58 | % |
|                                                                        |       |                                                  |        |                                                  |       |   |   |   |   |   |   |   |   |
| Net  interest margin                                                        |       |                                                  |        |                                                  |       | 2.85 | % |   |   |   |   | 3.49 | % |

 

----

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

 

23

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**Thefollowing table presents the dollar amount of changes in interest income andinterest expense for the major categories of interest-earning assets andinterest-bearing liabilities.  Theinformation details the changes attributable to a change in volume (i.e. changein average balance multiplied by the prior-period average rate) and changesattributable to a change in rate (i.e. change in average rate multiplied by theprior-period average balance).  There isa component that is attributable to both a change in volume and a change inrate.  This component has been allocatedproportionately to the rate and volume columns.**

 

****Table 2****

 
| ** **                                                                  | ** ** | **Three  Months Ended September 30, 2009 Compared to  Three Months Ended September 30, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Net  Change**                                                                                         | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| **Interest  income:**                                                       |       |                                                                                                    |       |   |   |   |   |
| Gross loans, net  of unearned fees                                          |       | $                                                                                                       | 407,536    |   | $ | (20,715 | ) | $ | 428,251 |   |
| Investment  securities                                                      |       | 347,455                                                                                                 |       | (4,860 | ) | 352,315 |   |
| FHLB and Federal  Reserve Bank stocks                                       |       | (2,107                                                                                                  | )          | (3,172 | ) | 1,065 |   |
| Federal funds  sold                                                         |       | (26,261                                                                                                 | )          | (17,469 | ) | (8,792 | ) |
| Interest-bearing  deposits in banks                                         |       | (9,116                                                                                                  | )          | (5,198 | ) | (3,918 | ) |
| Other  interest-earning assets                                              |       | (26                                                                                                     | )          | — |   | (26 | ) |
| Total interest  income                                                      |       | $                                                                                                       | 717,481    |   | $ | (51,414 | ) | $ | 768,895 |   |
|                                                                        |       |                                                                                                    |       |   |   |   |   |
| **Interest  expense:**                                                      |       |                                                                                                    |       |   |   |   |   |
| Money market and  savings                                                   |       | $                                                                                                       | 118,335    |   | $ | 19,488 |   | $ | 98,847 |   |
| Interest-bearing  checking                                                  |       | 36,635                                                                                                  |       | 36,308 |   | 327 |   |
| Time deposits                                                               |       | 260,619                                                                                                 |       | (5,430 | ) | 266,049 |   |
| Federal funds  purchased and securities sold under agreements to repurchase |       | 2,245                                                                                                   |       | (13 | ) | 2,258 |   |
| Federal Home  Loan Bank advances                                            |       | (16,116                                                                                                 | )          | 1,636 |   | (17,752 | ) |
| Other borrowings                                                            |       | (864                                                                                                    | )          | (11 | ) | (853 | ) |
| Total interest  expense                                                     |       | $                                                                                                       | 400,854    |   | $ | 51,978 |   | $ | 348,876 |   |
|                                                                        |       |                                                                                                    |       |   |   |   |   |
| **Net  interest income**                                                    |       | $                                                                                                       | 316,627    |   | $ | (103,392 | ) | $ | 420,019 |   |

 

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

 

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

 

The Federal Reserve Boardinfluences the general market rates of short-term interest, including thedeposit and loan rates offered by the Bank. The Bank’s loan portfolio issignificantly affected by changes in the prime interest rate.  The prime interest rate, which is the rateoffered on loans to borrowers with strong credit, was 5.00% throughout thethird quarter of 2008.  During the fourthquarter of 2008, the prime interest rate fell 175 basis points to end 2008 at3.25%.  The prime interest rate hasremained at 3.25% for the first nine months of 2009.

 

The federal funds rate,which is the cost of immediately available, overnight funds, has moved in asimilar manner.  It averaged 1.96% duringthe third quarter of 2008 compared to 0.15% during the third quarter of 2009.

 

The impact of declining interest rates can be seen in the Company’sdecreasing net interest margin, which declined 64 basis points, or 18%, fromthe third quarter 2008 to the third quarter 2009.  As evident in Table 2, the reason for 

 

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this decline is due to the declining rate environment; however, theimpact has been mitigated by the fact that the Company’s volumes have increasedsignificantly.   Since the prime interestrate is strongly tied to most borrowing rates, the average yield on loans hasdecreased from 6.06% at September 30, 2008 to 5.46% at September 30,2009.  However, the Bank’s average yieldon total interest-earning assets has increased from 5.05% during the thirdquarter of 2008 to 5.10% during the third quarter of 2009, due primarily to achange in the asset mix from lower-yielding assets (federal funds sold) tohigher-yielding assets (loans and investments). The Company’s balance sheet is currently asset sensitive, meaning thatinterest-earning assets generally reprice more quickly than interest-bearingliabilities. Therefore, the Company could experience expansion in its netinterest margin during periods of rising short-term interest rates.

 

Total interest income was$1.4 million for the third quarter of 2009, consisting primarily of interest oninvestment securities of $752,000 and interest and fees on loans of$598,000.  This compared to totalinterest income of $646,000 during the third quarter of 2008, consistingprimarily of interest on investment securities of $405,000, interest and feeson loans of $190,000 and interest on federal funds sold of $28,000.  Average loans, net of unearned fees,increased $31.0 million from $12.5 million during the third quarter ended September 30,2008 to $43.5 million during the third quarter ended September 30,2009.  Average investment securitiesincreased $27.2 million from $31.0 million during the third quarter ended September 30,2008 to $58.2 million during the third quarter ended September 30,2009.  As more of the Company’s resourceswere deployed in loans and investment securities, average federal funds solddecreased $2.3 million from $5.2 million during the third quarter ended September 30,2008 to $2.9 million during the third quarter ended September 30, 2009.

 

Total interest expensewas $601,000 in the third quarter of 2009, an increase of $401,000 from$200,000 during the third quarter of 2008. $365,000 of this increase was due to higher average deposits whichincreased $54.8 million from $22.0 million during the third quarter 2008 to$76.8 million during the third quarter 2009. The remaining increase was primarily due to an increase in interestrates on the Bank’s savings and tiered interest-bearing checking accounts inorder to attract new deposits to support the Bank’s growth.  Overall, the interest rate on totalinterest-bearing liabilities increased from 2.47% at September 30, 2008 to2.78% at September 30, 2009, despite the falling interest rateenvironment.

 

Net interest income was$763,000 in the third quarter of 2009, an increase of $317,000, or 71%, from$446,000 during the third quarter of 2008. This increase was the result of increased volumes.  Our annualized net interest margin was 2.85%for the three months ended September 30, 2009 compared to 3.49% for thethree months ended September 30, 2008. The net interest margin compression was partially due to lower interestrates which negatively impacted the Bank given its asset sensitive balancesheet, and partially due to higher-cost customer deposits and FHLB advances.

 

****Provisionfor Loan Losses****

 

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

 

During the third quarterof 2009, our provision for loan losses was $180,000 relating to the growth ofour loan portfolio and the estimated probable losses inherent within theportfolio due to uncertainties in economic conditions.  There were no impaired loans for which aspecific reserve was recorded. Furthermore, there were no charge-offs or non-performing loans duringthis period.

 

****NoninterestIncome****

 

Noninterest income forthe quarter ended September 30, 2009 was $177,000, an increase of $150,000from $28,000 for the quarter ended September 30, 2008.  $97,000 of this increase was attributable togains from the sale of investment securities. $59,000 of the increase was due to increased service charges on depositsdue partially to the significant increase in customer relationships andpartially to the addition of a money-services-business deposit customer.  The Bank anticipates service charges ondeposits will decrease during the fourth quarter 2009 due to the recent loss ofa money-services-business deposit customer which accounted for approximately70% of our 2009 service charges and fees. During the third quarter 2009, the Company had no sublease income as theBank’s lease agreement with a third party tenant expired.

 

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****NoninterestExpense****

 

Our total noninterest expense was $1.0 million for the quarter ended September 30,2009, a 32%, or $248,000, increase from $774,000 at September 30, 2008.Excluding the one-time credit taken during the third quarter of 2008 inconjunction with the re-occupancy of our previously abandoned corporate offices(see additional discussion in Note 13), total noninterest expense would haveincreased $115,000 or 13%, from third quarter 2008 to third quarter 2009.  This increase consisted of an increase insalaries and employee benefits of $30,000, or 5%, primarily due to an increasein the number of full-time equivalent employees, which increased from 21 to 23as of September 30, 2009.  Occupancyexpense increased $29,000, or 25%, quarter-over-quarter primarily due to there-occupancy of the Bank’s administrative offices resulting in increased rentexpense and increased costs associated with depreciation on furniture andequipment for the administrative office. Professional fees increased $31,000 primarily due to higher audit andaccounting fees and investor and community relations expenses.

 

Other general andadministrative expenses increased $25,000, or 12%, quarter-over-quarter.  This increase was primarily the result of a$40,000 increase in Federal Deposit Insurance Corporation (FDIC) fees due toincreases in average deposit volumes, as well as increases in FDIC premiumrates.  Travel and entertainment expensesincreased $9,000 for increased business development activity.  Data processing increased $8,000, or 13%,primarily due to increased fees from our core banking processor as a result ofincreased loan and deposit volume. Regulatory and reporting fees increased $6,000, or 39%, due in part toincreased Office of the Comptroller of the Currency (OCC) assessment fees andhigher correspondent bank fees due to increased activity.  Telephone and communication expensesincreased $2,000 for additional communication lines to the administrativeoffices.  These increases were partiallyoffset by a $40,000, or 54%, decrease in marketing and promotions as theCompany scaled back its marketing programs following significant spendingduring its initial year of operations.

 

****IncomeTaxes****

 

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

 

****Comparative Results ofOperations for the Nine Months Ended September 30, 2009 and 2008****

 

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

 

Net loss for the ninemonths ended September 30, 2009 was $1.3 million or ($.50) per share,compared with a $1.5 million loss, or ($.57) per share for the nine monthsended September 30, 2008.  The reduction in net loss for the ninemonths ended September 30, 2009 is attributed to higher net interestincome of $885,000 and higher noninterest income of $330,000, partially offsetby higher noninterest expenses of $731,000 and a larger provision for loan lossesof $299,000.  Since September 30, 2008, the Company has hiredadditional staff and re-occupied administrative offices to support the Bank’ssignificant growth.

 

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

 

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****Table 3****

 
| ** **                                                                  | ** ** | **Nine Months Ended********September 30, 2009** | ** ** | **Nine Months Ended********September 30, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Average  Balance**                                 | ** ** | **Interest**                                         | ** ** | **Yield /  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield /  Cost** | ** ** |
| **Assets:**                                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                   |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Gross  loans, net of unearned fees                                          |       | $                                                    | 34,094,867 |                                                 | $          | 1,380,404 |   | 5.41 | % | $ | 9,023,997 |   | $ | 419,056 |   | 6.20 | % |
| Investment  securities**                                                    |       | 52,623,096                                           |       | 2,000,589                                            |       | 5.08 |   | 25,089,454 |   | 957,593 |   | 5.10 |   |
| FHLB  and Federal Reserve Bank stocks                                       |       | 1,073,452                                            |       | 30,703                                               |       | 3.82 |   | 764,029 |   | 31,292 |   | 5.47 |   |
| Federal  funds sold                                                         |       | 1,525,846                                            |       | 2,902                                                |       | 0.25 |   | 4,191,038 |   | 81,134 |   | 2.59 |   |
| Interest-bearing  deposits with banks                                       |       | 148,670                                              |       | 725                                                  |       | 0.65 |   | 753,778 |   | 21,624 |   | 3.83 |   |
| Other  interest-earning assets                                              |       | —                                               |       | —                                               |       | — |   | 16,664 |   | 1,687 |   | 13.52 |   |
| Total  interest-earning assets                                              |       | 89,465,931                                           |       | $                                                    | 3,415,323  |   | 5.10 | % | 39,838,960 |   | $ | 1,512,386 |   | 5.07 | % |
| Noninterest-earning  assets                                                 |       | 1,861,661                                            |       |                                                 |       |   |   | 1,845,238 |   |   |   |   |   |
| Total  assets                                                               |       | $                                                    | 91,327,592 |                                                 |       |   |   |   | $ | 41,684,198 |   |   |   |   |   |
|                                                                        |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Liabilities and Stockholders’ Equity:**                              |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                              |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Money  market and savings                                                   |       | $                                                    | 13,986,070 |                                                 | $          | 270,857 |   | 2.59 | % | $ | 7,341,905 |   | $ | 125,431 |   | 2.28 | % |
| Interest-bearing  checking                                                  |       | 4,592,540                                            |       | 73,220                                               |       | 2.13 |   | 2,821,064 |   | 5,720 |   | 0.27 |   |
| Time  deposits                                                              |       | 39,166,786                                           |       | 835,728                                              |       | 2.85 |   | 5,338,560 |   | 157,450 |   | 3.94 |   |
| Federal  funds purchased and securities sold under agreements to repurchase |       | 1,180,869                                            |       | 9,796                                                |       | 1.11 |   | 6,387 |   | 109 |   | 2.28 |   |
| Federal  Home Loan Bank advances                                            |       | 9,467,033                                            |       | 256,249                                              |       | 3.62 |   | 5,012,774 |   | 136,336 |   | 3.63 |   |
| Other  borrowings                                                           |       | 143,212                                              |       | 10,053                                               |       | 9.39 |   | 179,542 |   | 12,587 |   | 9.36 |   |
| Total  interest-bearing liabilities                                         |       | 68,536,510                                           |       | $                                                    | 1,455,903  |   | 2.84 | % | 20,700,232 |   | $ | 437,633 |   | 2.82 | % |
| Noninterest-bearing  checking                                               |       | 3,546,393                                            |       |                                                 |       |   |   | 561,924 |   |   |   |   |   |
| Noninterest-bearing  liabilities                                            |       | 466,012                                              |       |                                                 |       |   |   | 279,445 |   |   |   |   |   |
| Stockholders’  equity                                                  |       | 18,778,677                                           |       |                                                 |       |   |   | 20,142,597 |   |   |   |   |   |
| Total  liabilities and stockholders’ equity                            |       | $                                                    | 91,327,592 |                                                 |       |   |   |   | $ | 41,684,198 |   |   |   |   |   |
|                                                                        |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Net  interest income                                                        |       |                                                 |       | $                                                    | 1,959,420  |   |   |   |   |   | $ | 1,074,753 |   |   |   |
|                                                                        |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Net  interest spread                                                        |       |                                                 |       | 2.26                                                 | %          |   |   |   |   | 2.25 | % |   |   |
|                                                                        |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Net  interest margin                                                        |       |                                                 |       | 2.93                                                 | %          |   |   |   |   | 3.60 | % |   |   |

 

----

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

 

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**Thefollowing table presents the dollar amount of changes in interest income andinterest expense for the major categories of interest-earning assets andinterest-bearing liabilities.  Theinformation details the changes attributable to a change in volume (i.e. changein average balance multiplied by the prior-period average rate) and changesattributable to a change in rate (i.e. change in average rate multiplied by theprior-period average balance).  There isa component that is attributable to both a change in volume and a change inrate.  This component has been allocatedproportionately to the rate and volume columns.**

 

****Table 4****

 
| ** **                                                                  | ** ** | **Nine  Months Ended September 30, 2009 Compared to  Nine Months Ended September 30, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Net  Change**                                                                                       | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| **Interest  income:**                                                       |       |                                                                                                  |       |   |   |   |   |
| Gross loans, net  of unearned fees                                          |       | $                                                                                                     | 961,348    |   | $ | (59,876 | ) | $ | 1,021,224 |   |
| Investment  securities                                                      |       | 1,042,996                                                                                             |       | (2,892 | ) | 1,045,888 |   |
| FHLB and Federal  Reserve Bank stocks                                       |       | (589                                                                                                  | )          | (11,053 | ) | 10,464 |   |
| Federal funds  sold                                                         |       | (78,232                                                                                               | )          | (45,894 | ) | (32,338 | ) |
| Interest-bearing  deposits in banks                                         |       | (20,899                                                                                               | )          | (10,628 | ) | (10,271 | ) |
| Other  interest-earning assets                                              |       | (1,687                                                                                                | )          | — |   | (1,687 | ) |
| Total interest  income                                                      |       | $                                                                                                     | 1,902,937  |   | $ | (130,343 | ) | $ | 2,033,280 |   |
|                                                                        |       |                                                                                                  |       |   |   |   |   |
| **Interest  expense:**                                                      |       |                                                                                                  |       |   |   |   |   |
| Money market and  savings                                                   |       | $                                                                                                     | 145,426    |   | $ | 18,846 |   | $ | 126,580 |   |
| Interest-bearing  checking                                                  |       | 67,500                                                                                                |       | 61,852 |   | 5,648 |   |
| Time deposits                                                               |       | 678,278                                                                                               |       | (54,918 | ) | 733,196 |   |
| Federal funds  purchased and securities sold under agreements to repurchase |       | 9,687                                                                                                 |       | (85 | ) | 9,772 |   |
| Federal Home  Loan Bank advances                                            |       | 119,913                                                                                               |       | (530 | ) | 120,443 |   |
| Other borrowings                                                            |       | (2,534                                                                                                | )          | 28 |   | (2,562 | ) |
| Total interest  expense                                                     |       | $                                                                                                     | 1,018,270  |   | $ | 25,193 |   | $ | 993,077 |   |
|                                                                        |       |                                                                                                  |       |   |   |   |   |
| **Net  interest income**                                                    |       | $                                                                                                     | 884,667    |   | $ | (155,536 | ) | $ | 1,040,203 |   |

 

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

 

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

 

The Federal Reserve Boardinfluences the general market rates of short-term interest, including thedeposit and loan rates offered by the Bank. The Bank’s loan portfolio issignificantly affected by changes in the prime interest rate.  The prime interest rate, which is the rateoffered on loans to borrowers with strong credit, was 7.25% on January 1,2008.  During the first nine months of2008, the prime interest rate fell 225 basis points to end the third quarter at5.00%.  During the fourth quarter of2008, it fell another 175 basis points to end the 2008 year at 3.25%.  The prime interest rate has remained at 3.25%for the first nine months of 2009.

 

The federal funds rate,which is the cost of immediately available, overnight funds, has moved in asimilar manner.  The average rate theBank has been able to earn on federal funds sold averaged 2.59% during thefirst nine months of 2008 compared to 0.25% during the same period of 2009.

 

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The impact of these decreases in interest rates can be seen in theCompany’s decreasing net interest margin, which declined 67 basis points, or19%, from the nine months ended September 30, 2008 to the nine monthsended September 30, 2009.  Asevident in Table 3, the reason for this decline is due to the declining rateenvironment; however, the impact has been mitigated by the fact that theCompany’s volumes have drastically increased.  The average yield on loans has decreased from 6.20% at September 30,2008 to 5.41% at September 30, 2009. However, the Bank’s average yield on total interest-earning assets hasincreased 3 basis points, from 5.07% during the nine months ended September 30,2008 to 5.10% for the same period in 2009, due primarily to a change in theCompany’s asset mix from lower-yielding assets (federal funds sold) tohigher-yielding assets (loans and investments). The Company’s balance sheet is currently asset sensitive, meaning thatinterest-earning assets generally reprice more quickly than interest-bearingliabilities. Therefore, the Company could experience expansion in its netinterest margin during periods of rising short-term interest rates.

 

Total interest income was$3.4 million for the nine months ended September 30, 2009, consistingprimarily of interest on investment securities of $2.0 million and interest andfees on loans of $1.4 million.  Thiscompared to total interest income of $1.5 million during the nine months ended September 30,2008, consisting primarily of interest on investment securities of $957,000,interest and fees on loans of $419,000 and interest on federal funds sold of$81,000.  Average gross loans, net ofunearned fees, increased $25.1 million, from $9.0 million at September 30,2008 to $34.1 million at September 30, 2009.  Average investment securities increased $27.5million from $25.1 million at September 30, 2008 to $52.6 million at September 30,2009.  As more of the Company’s resourceswere deployed in loans and investment securities, average federal funds solddecreased $2.7 million from $4.2 million at September 30, 2008 to $1.5million at September 30, 2009.

 

Total interest expensewas $1.5 million in the nine months ended September 30, 2009, an increaseof $1.0 million from $438,000 during the same period of 2008.  $865,000 of this increase was due to volumeas average deposits increased $42.2 million from $15.5 million at September 30,2008 to $57.7 million at September 30, 2009.  An additional $120,000 of this increase wasdue to interest expense on $9.5 million of average Federal Home Loan Bankadvances.  Overall, the interest rate ontotal interest-bearing liabilities increased from 2.82% during the nine monthsended September 30, 2008 to 2.84% for the same period of 2009; primarilydue to an increase in interest rates on the Bank’s savings and tieredinterest-bearing checking accounts in order to attract new deposits to supportthe Bank’s growth.

 

Net interest income was$2.0 million for the first nine months of 2009, an increase of $885,000, or82%, from $1.1 million during the same period of 2008.  This increase was the result of increased volumes,partially offset by increased costs on interest-bearing deposits.  Our annualized net interest margin was 2.93%for the nine months ended September 30, 2009 compared to 3.60% for thenine months ended September 30, 2008. The net interest margin compression was due to decreases in loan ratesand higher-cost customer deposits and FHLB advances.

 

****Provisionfor Loan Losses****

 

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

 

During the first ninemonths of 2009, our provision for loan losses was $432,000 relating to thegrowth of our loan portfolio and the estimated probable losses inherent withinthe portfolio due to uncertainties in economic conditions.  There were no impaired loans for which a specificreserve was recorded.  Furthermore, therewere no charge-offs or non-performing loans during this period.

 

****NoninterestIncome****

 

Noninterest income forthe nine months ended September 30, 2009 was $429,000, an increase of$330,000 from $99,000 for the nine months ended September 30, 2008.  The increase was due, in-part, to the$182,000 increase in service charges and fees on deposits — a direct result ofthe increased number of deposit accounts, as well as the addition of asignificant money-services-business deposit customer.  The Bank anticipates service charges ondeposits will decrease during the fourth quarter 2009 due to the recent loss ofa money-services-business deposit customer which accounted for approximately70% of our 2009 service charges and fees. The remainder of the increase in noninterest income was due to the$159,000 increase in realized gains on the sale of investment securities.  Investment securities are sold for a gainwhen it is in the Company’s best interest, which might include replacinglower-yielding bonds with higher-yielding bonds, or modifying the cash 

 

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flow streams from bondpayments to coincide with the Bank’s expected liquidity needs.  Sublease income decreased $12,000, as theBank’s lease agreement with a third-party tenant expired.

 

****NoninterestExpense****

 

Our total noninterest expense was $3.2 million for the nine monthsended September 30, 2009, a 29%, or $731,000, increase from $2.5 millionfor the nine months ended September 30, 2008.  This consisted of an increase in salaries andemployee benefits of $342,000, or 22%, related primarily to an increase in thenumber of full-time equivalent employees. Occupancy expense increased $73,000, or 21%, primarily due to there-occupancy of the Bank’s administrative offices resulting in increased rentexpense.  Professional fees increased$70,000, or 42%, primarily due to higher audit and accounting fees and investorand community relations expenses.

 

Other general andadministrative expenses increased $113,000, or 20%, from the nine months ended September 30,2008 to the same period in 2009.  Thisincrease was primarily the result of a $114,000 increase in Federal Deposit InsuranceCorporation (FDIC) fees due primarily to the special assessment of $41,000 tohelp build insurance reserves and secondarily due to increases in averagedeposit volumes, as well as increases in FDIC rates.  Regulatory and reporting fees increased $25,000,or 63%, due in part to increased OCC assessment fees and increasedcorrespondent bank fees due to increased activity.  Data processing increased $40,000, or 25%,primarily due to increased fees from our core banking processor as a result ofincreased loan and deposit volumes. Travel and entertainment costs increased $13,000 for increased businessdevelopment activity.  Dues andmemberships increased $11,000 as the Bank joined more community groups to helpbuild relationships.  Telephone andcommunication expense increased $9,000, or 44%, primarily due to additionaldata and telephone lines for our administrative offices that were occupiedthroughout 2009, but only during the last four months of 2008.  Postage and shipping increased $7,000primarily due to increased armored courier expenses related to ourmoney-services-business clients, of which some costs were billed back to thecustomer in their monthly service fees. These increases were partially offset by a decrease of $111,000, or 55%,in marketing and promotion costs as the Company scaled back its marketingprograms following significant spending during its initial year of operations.

 

****IncomeTaxes****

 

No federal or state taxbenefit has been recorded for the nine months ended September 30, 2009 and2008, based upon net operating losses. Since it is uncertain that the Company will become profitable, thedeferred tax benefit accumulated to date has a full valuation allowance so thatthe net deferred tax benefit at September 30, 2009 is $0.

 

****Financial Condition****

 

****FederalHome Loan Bank (FHLB) and Federal Reserve Bank Stocks****

 

**At September 30,2009, the Bank had a total of $1.1 million invested in FHLB and Federal ReserveBank stocks carried at cost consisting of $464,000 in Federal Reserve Bankstock and $628,000 in FHLB stock.  Theseinvestments allow Solera National Bank to conduct business with theseentities.  As of September 30, 2009,the Federal Reserve Bank stock is yielding an average of 6.0% and the FHLBstock is yielding an average rate of 2.3%.**

 

****InvestmentSecurities****

 

Our investment portfolio serves as a source ofinterest income and, secondarily, as a source of liquidity and a managementtool for our interest rate sensitivity. We manage our investment portfolio according to a written investmentpolicy established by our Board of Directors.

 

At September 30,2009, Solera National Bank’s securities consisted of available-for-salesecurities of $73.0 million, an increase of $31.5 million, which includes a$1.6 million increase in unrealized gains. The following table provides additional detail on the Company’sinvestment securities as of September 30, 2009 and December 31, 2008:

 

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| ** **                              | ** ** | **September 30,  2009** | ** ** | **December 31,  2008**  | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **Estimated  Fair  Value**   | ** ** | **Weighted  Average  Yield** | ** ** | **Estimated  Fair  Value** | ** ** | **Weighted  Average  Yield** | ** ** |
| Securities available-for-sale           |       |                         |       |                         |       |   |   |   |   |
| U.S. government  agencies               |       | $                            | 6,228,014  |                         | 4.45       | % | $ | 5,745,734 |   | 5.38 | % |
| Corporate                               |       | 8,933,624                    |       | 5.33                         |       | 1,503,562 |   | 5.99 |   |
| State and municipal                     |       | 22,927,487                   |       | 5.73                         |       | 2,929,838 |   | 5.59 |   |
| Residential  mortgage-backed securities |       | 34,936,903                   |       | 4.92                         |       | 31,378,327 |   | 5.20 |   |
| Total securities available-for-sale     |       | $                            | 73,026,028 |                         | 5.22       | % | $ | 41,557,461 |   | 5.28 | % |

 

****LoanPortfolio****

 

Our primary focus is income from interest on loans.The following table presents the composition of our loan portfolio by categoryas of the dates indicated:

 
| ** **                         | ** **                            | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------------|---------------------------------------|-----------------------------|------------|----------------------------|------------|
| ** **                         | ** **                            | **Amount**                  | ** ** | **% of  Total**            | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
| Real  estate — commercial     |                                  | $                           | 23,827,621 |                       | 49         | % | $ | 7,478,806 |   | 35 | % |
| Real  estate — residential    |                                  | 7,392,338                   |       | 15                         |       | 5,043,352 |   | 24 |   |
| Construction  and land development |                                  | 7,845,945                   |       | 16                         |       | 3,848,555 |   | 18 |   |
| Commercial  and industrial         |                                  | 8,382,631                   |       | 18                         |       | 4,083,633 |   | 19 |   |
| Consumer                           |                                  | 1,041,238                   |       | 2                          |       | 958,611 |   | 4 |   |
| Gross  loans                       |                                  | 48,489,773                  |       | 100                        | %          | 21,412,957 |   | 100 | % |
| Less:                              | Allowance  for loan losses            |                        | (700,000   | )                          |       |   | (268,000 | ) |   |   |
|                               | Deferred  loan (fees) / expenses, net |                        | (134,779   | )                          |       |   | (56,747 | ) |   |   |
| Loans,  net                        |                                  | $                           | 47,654,994 |                       |       |   | $ | 21,088,210 |   |   |   |

 

As of September 30,2009, net loans were $47.7 million, a $26.6 million, or 126%, increase from$21.1 million at December 31, 2008. Net loans as a percentage of total assets were 36% as of September 30,2009, compared to 31% at December 31, 2008.

 

The real estate —commercial loan portfolio consists primarily of lines of credit or term loansto businesses that are secured by real estate. At September 30, 2009, there were $23.8 million in commercial realestate loans in the loan portfolio, an increase of 219%, or $16.3 million, from$7.5 million at December 31, 2008.

 

The real estate —residential loan portfolio consists of residential second mortgage loans, homeequity loans and lines of credit and home improvement loans.  At September 30,2009, $7.4 million was outstanding for residential real estate loans, anincrease of 47% from $5.0 million outstanding at December 31, 2008.

 

The construction and landdevelopment loan portfolio is comprised of construction loans forowner-occupied construction and development loans for property beingconstructed and sold to third parties. At September 30, 2009, construction and land development loanstotaled $7.8 million, an increase of $4.0 million, or 104%, from $3.8 millionat December 31, 2008.

 

The commercial andindustrial loan portfolio consists of loans to businesses primarily for workingcapital lines of credit.  At September 30, 2009, commercial andindustrial loans totaled $8.4 million, a $4.3 million, or 105%, increase from$4.1 million at December 31, 2008.

 

The consumer and otherloan portfolio consists of personal lines of credit, loans to acquire personalassets such as automobiles and boats and overdraft protection balances for ourdeposit customers.  As of September 30,2009, consumer loans totaled $1.0 million, an increase of $83,000 from December 31,2008.

 

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

 

Additional loanconcentrations exist because the Bank’s loan portfolio is stilldeveloping.  As of September 30,2009, the Bank’s loan portfolio contained only 121 funded loans, with the fivelargest loans comprising approximately 21% of the portfolio’s gross value.  However, management expects thisconcentration to diminish over time as the Bank’s loan portfolio continues togrow.  No single borrower can be approvedfor a loan over the Bank’s current legal lending limit of approximately $2.2million.  This regulatory requirementhelps to ensure the Bank’s exposure to one individual customer is limited.

 

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

 

Loan terms vary according to loan type. The followingtable shows the contractual maturity distribution of loans as of September 30,2009 and December 31, 2008.  Loansare categorized as fixed or floating based upon the loan’s stated terms withoutconsidering floors or ceilings that may cause some variable rate loans tobehave similar to fixed rate loans — especially during periods of relativelystable prime interest rates.

 
| **** ****                     | **** **** | ****As  of September 30, 2009**** | ** **     |
|------------------------------------|----------------|----------------------------------------|----------------|
| **** ****                     | **** **** | ** **                             | **** **** | ****Over  1 Year************through 5 Years**** | ** ** | ****Over  5 Years**** | ** ** | ** ** | ** ** |
| **** ****                     | **** **** | ****One  Year************or Less****   | **** **** | ****Fixed************Rate**** | **** **** | ****Floating  or  Adjustable  Rate**** | **** **** | ****Fixed************Rate**** | **** **** | ****Floating  or  Adjustable  Rate**** | **** **** | ****Total**** | **** **** |
| Real estate —  commercial     |           | $                                      | 3,672,490      |   | $ | 9,545,589 |   | $ | 1,055,000 |   | $ | 7,465,431 |   | $ | 2,089,111 |   | $ | 23,827,621 |   |
| Real estate —  residential    |           | —                                 |           | 388,689 |   | — |   | — |   | 7,003,649 |   | 7,392,338 |   |
| Construction and  land development |           | 6,764,046                              |           | 869,275 |   | 212,624 |   | — |   | — |   | 7,845,945 |   |
| Commercial  and industrial         |           | 4,386,540                              |           | 2,782,678 |   | 124,413 |   | 1,089,000 |   | — |   | 8,382,631 |   |
| Consumer                           |           | 15,292                                 |           | 729,760 |   | — |   | 9,708 |   | 286,478 |   | 1,041,238 |   |
| Gross  loans                       |           | $                                      | 14,838,368     |   | $ | 14,315,991 |   | $ | 1,392,037 |   | $ | 8,564,139 |   | $ | 9,379,238 |   | $ | 48,489,773 |   |

**** ****
| **** ****                     | **** **** | ****As  of December 31, 2008**** | ** **     |
|------------------------------------|----------------|---------------------------------------|----------------|
| **** ****                     | **** **** | ** **                            | **** **** | ****Over  1 Year************through 5 Years**** | ** ** | ****Over  5 Years**** | ** ** | ** ** | ** ** |
| **** ****                     | **** **** | ****One  Year************or Less****  | **** **** | ****Fixed************Rate**** | **** **** | ****Floating  or  Adjustable  Rate**** | **** **** | ****Fixed************Rate**** | **** **** | ****Floating  or  Adjustable  Rate**** | **** **** | ****Total**** | **** **** |
| Real estate —  commercial     |           | $                                     | 30,000         |   | $ | 5,182,139 |   | $ | 991,531 |   | $ | 1,275,136 |   | $ | — |   | $ | 7,478,806 |   |
| Real estate —  residential    |           | 1,550                                 |           | 415,995 |   | — |   | — |   | 4,625,807 |   | 5,043,352 |   |
| Construction and  land development |           | 3,103,333                             |           | — |   | 745,222 |   | — |   | — |   | 3,848,555 |   |
| Commercial  and industrial         |           | 2,267,209                             |           | 993,550 |   | 575,207 |   | 247,667 |   | — |   | 4,083,633 |   |
| Consumer                           |           | 242,389                               |           | 716,222 |   | — |   | — |   | — |   | 958,611 |   |
| Gross  loans                       |           | $                                     | 5,644,481      |   | $ | 7,307,906 |   | $ | 2,311,960 |   | $ | 1,522,803 |   | $ | 4,625,807 |   | $ | 21,412,957 |   |

 

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*****Nonperforming Loans, Leases andAssets*****

 

Nonperforming assetsconsist of loans and leases on nonaccrual status, loans 90 days or more pastdue and still accruing interest, loans that have been restructured resulting ina reduction or deferral of interest or principal, OREO, and other repossessedassets.

 

An internal list ofclassified and criticized loans is maintained to help management assess theoverall quality of the loan portfolio and the adequacy of the allowance forloan losses. Loans classified as “substandard” are those loans with welldefined weaknesses, such that future capacity to repay the loan has beennegatively impacted.  Loans classified as“doubtful” are those loans that have characteristics similar to substandardloans, but the weaknesses have declined to the point where complete collectionof the obligation from all sources is unlikely and a portion of the principalmay be charged-off.  Although loansclassified as substandard do not duplicate loans classified as doubtful, bothsubstandard and doubtful loans may include some loans that are past due atleast 90 days, are on nonaccrual status or have been restructured. Loansclassified as “loss” are those loans that are in the process of beingcharged-off. At September 30, 2009, Solera National Bank had nononperforming assets, no loans classified as doubtful or loss and no loans atleast 90 days past due.   However, theBank does have three loans that it is closely monitoring as preliminary dataindicates that the value of the underlying collateral has decreasedsignificantly enough to cause potential weaknesses in the borrower’s ability torepay or renew the loans.  As of September 30,2009, the information about these loans was inconclusive and, therefore, theseloans were determined not to be impaired. Additionally, none of these loans were 30 days or more past due.

 

****Allowancefor Loan Losses****

 

Implicit in Solera National Bank’s lending activitiesis the fact that loan losses will be experienced and that the risk of loss willvary with the type of loan being made and the creditworthiness of the borrowerover the term of the loan. To reflect the currently perceived risk of lossassociated with the loan portfolio, additions are made to the allowance forloan losses in the form of direct charges against income to ensure that theallowance is available to absorb possible loan losses. The factors thatinfluence the amount include, among others, the remaining collateral and/orfinancial condition of the borrowers, historical loan loss, changes in the sizeand composition of the loan portfolio, and general economic conditions.

 

The amount of theallowance equals the cumulative total of the provisions made from time to time,reduced by loan charge-offs and increased by recoveries of loans previouslycharged-off.  Until management hasadequate historical data upon which to base the estimate of the allowance forloan losses, information regarding the ability of the borrower to repay theloan, current economic conditions and other pertinent factors will beconsidered.  The allowance was $700,000,or 1.44% of outstanding principal as of September 30, 2009 compared to$268,000, or 1.25% of outstanding principal as of December 31, 2008.

 

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

 

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

 

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

 

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| ** **                   | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Commitments to extend credit |       | $                            | 5,401,768  |                        | $          | 6,715,658 |   |
| Letters of credit            |       | —                       |       | —                      |       |
| Total commitments            |       | $                            | 5,401,768  |                        | $          | 6,715,658 |   |

 

Commitments to extend credit are agreements to lend to a customer aslong as there is no violation of any condition established in 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 loan facilities to customers and, therefore,the Company applies the same rigorous underwriting standards to letters of credit.

 

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

 

****Borrowings****

 

As of September 30, 2009, the Bank had $7.8million in term-advance borrowings from the Federal Home Loan Bank of Topekawith varying maturity dates between April 2010 and June 2013 at aweighted-average fixed interest rate of 3.97%.

 

The Bank has also established unsecured Federal Fundslines-of-credit totaling $11.3 million with correspondent banks.  Additionally, the Bank has access to asecured Federal Funds line with a correspondent bank and the ability to borrowat the Federal Reserve Bank Discount Window, both on a secured basis.  As of September 30, 2009, the Companyhad no amount outstanding on these lines.

 

****LoanCommitments****

 

At September 30,2009, the Company had $5.4 million in outstanding loan originationcommitments.  Management believes SoleraNational Bank has sufficient funds available to meet current origination andother lending commitments.

 

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

 

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

 

As of September 30, 2009, Solera National Bank was categorized aswell-capitalized. A well-capitalized institution must maintain a minimum ratioof total capital to risk-weighted assets of at least 10.0%, a minimum ratio ofTier 1 capital to risk-weighted assets of at least 6.0%, and a minimum ratio ofTier 1 capital to total average assets of at least 5.0% and must not be subjectto any written order, agreement, or directive requiring it to meet or maintaina specific capital level.

 

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

 

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| ****As of September 30, 2009****     | **** **** | ****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)  |           | $              | 15,566         |                                   | 20.7       | %                                                                          | $          | 6.012 |   | >8.0 | % | $ | 7,515 |   | >10.0 | % |
| Tier  1 capital (to risk-weighted assets) |           | $              | 14,866         |                                   | 19.8       | %                                                                          | $          | 3,006 |   | >4.0 | % | $ | 4,509 |   | >6.0 | % |
| Tier  1 capital (to average assets)       |           | $              | 14,866         |                                   | 13.6       | %                                                                          | $          | 4,371 |   | >4.0 | % | $ | 5,463 |   | >5.0 | % |

 

****Liquidity****

 

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

 

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

 

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

 

As loan demand increases,greater pressure will be exerted on Solera National Bank’s liquidity. However,it is management’s intention to maintain a conservative loan to deposit ratioin the range of 80 - 90% over time. Given this goal, Solera National Bank willnot aggressively pursue lending opportunities if sufficient funding sources (**e.g.**,deposits, Federal Funds, etc.) are not available, nor will Solera National Bankseek to attract transient, volatile, non-local deposits with above marketinterest rates. As of September 30, 2009, the loan to deposit ratio was47%, a decrease from 57% at December 31, 2008 due to the significantincrease in customer deposits during the third quarter 2009.

 

Solera National Bank hadcash and cash equivalents of $6.1 million, or 4.6% of total Bank assets, at September 30,2009.  Management feels Solera NationalBank should have adequate liquidity to meet anticipated future funding needs.

 

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

#  

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

 

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

#  

**Disclosure Controls andProcedures**

 

Management is responsible for maintaining effectivedisclosure controls and procedures.  As of the end of the period coveredby this Quarterly Report on Form 10-Q, management evaluated theeffectiveness and operation of the Company’s disclosure controls and procedures(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, both the Company’s Principal Executive Officer andPrincipal Accounting and Chief Financial Officer have concluded that theCompany’s disclosure controls and procedures are effective to ensure that theinformation required to be disclosed by the Company in reports that are filedor submitted under the Exchange Act are recorded, processed, summarized andreported to management within the time periods specified in the Securities andExchange Commission’s rules and forms and that such information isaccumulated and communicated to management as appropriate to allow timely decisionsregarding disclosure.

 

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**Changes in Internal Control over FinancialReporting**

 

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

 

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# **PART II— OTHER INFORMATION**

#  

# **ITEM 1. LEGAL PROCEEDINGS**

#  

Notapplicable.

 

# **ITEM1A.  RISK FACTORS**

#  

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

 

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

#  

Notapplicable.

 

# **ITEM 3. DEFAULTS UPON SENIORSECURITIES**

#  

Notapplicable.

 

# **ITEM 4. SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

#  

Notapplicable.

 

# **ITEM 5. OTHER INFORMATION**

#  

# Not applicable.

#  

# **ITEM 6. EXHIBITS**

#  

10.1                                ExecutiveEmployment Agreement by and between Solera National Bank, Solera NationalBancorp, Inc., and Douglas Crichfield dated August 1, 2009(incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Qfor the quarter ended June 30, 2009).

 

31.1                                Certificationof the Principal Executive Officer pursuant to Rule 13a-14(a) of theSecurities Exchange Act.*

 

31.2                                Certificationof the Principal Accounting and Chief Financial Officer pursuant to Rule 13a-14(a) ofthe Securities Exchange Act.*

 

32.1                                Certificationof Principal Executive Officer and Principal Accounting and Chief FinancialOfficer pursuant to Rule 13a-14(b) of the Securities Exchange Act and18 U.S.C. §1350.*

 

----

*Filed herewith.

 

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**SOLERA NATIONAL BANCORP, INC.**

 

**SIGNATURES**

 

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

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

 

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# **EXHIBITINDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                   |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description  of Exhibit**                                                                                                                                                                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                         |
| 10.1        |       | Executive Employment  Agreement by and between Solera National Bank, Solera National  Bancorp, Inc., and Douglas Crichfield dated August 1, 2009  (incorporated by reference to Exhibit 10.2 to the Company’s  Form 10-Q for the quarter ended June 30, 2009). |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                   |
| 31.1        |       | Certification of the  Principal Executive Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act                                                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                                         |
| 31.2        |       | Certification of the  Principal Accounting and Chief Financial Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act                                                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                         |
| 32.1        |       | Certification of Principal  Executive Officer and Principal Accounting and Chief Financial Officer  pursuant to Rule 13a-14(b) of the Securities Exchange Act and 18  U.S.C. §1350                                                                                            |

 

39

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