Edgar Filing: Solera National Bancorp, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2010

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

Commission file number 000-53181

SOLERA NATIONAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

319 S. Sheridan Blvd.

Lakewood, CO 80226

303-209-8600
(Address and telephone number of principal executive offices and principal place of business)

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

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

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

Large accelerated filer ¨		Accelerated filer ¨

Non-accelerated filer ¨		Smaller reporting company x

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

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

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FORM 10-Q

SOLERA NATIONAL BANCORP, INC.

INDEX

	PAGE

INTRODUCTORY NOTE. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND RISK FACTORS	3

PART I — FINANCIAL INFORMATION	5

ITEM 1. FINANCIAL STATEMENTS (unaudited)	5

Balance Sheets as of June 30, 2010 and December 31, 2009	5
Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009	6
Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2010 and 2009	7
Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009	8

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	10

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	22

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	38

ITEM 4(T). CONTROLS AND PROCEDURES	38

PART II — OTHER INFORMATION	40

ITEM 1. LEGAL PROCEEDINGS	40

ITEM 1A. RISK FACTORS	40

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	40

ITEM 3. DEFAULTS UPON SENIOR SECURITIES	40

ITEM 4. [Removed and Reserved]	40

ITEM 5. OTHER INFORMATION	40

ITEM 6. EXHIBITS	40

SIGNATURES	41

EXHIBIT INDEX	42

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

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

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

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

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

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

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

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

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

· our allowance for probable loan losses may be insufficient;

· interest rate volatility could significantly harm our business;

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

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

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

· the departures of key personnel or directors may impair our operations;

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

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

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

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

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

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

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

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

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

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (unaudited)

Solera National Bancorp, Inc.

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

(unaudited)

	June 30,			December 31,
($ in thousands, except share data)	2010			2009
ASSETS
Cash and due from banks	$	1,064		$	1,696
Federal funds sold	—			820
Total cash and cash equivalents	1,064			2,516
Interest-bearing deposits with banks	1,265			3,784
Investment securities, available-for-sale	74,974			73,441
Gross loans	60,768			50,504
Net deferred (fees)/expenses	(83		)	(114		)
Allowance for loan losses	(940		)	(830		)
Net loans	59,745			49,560
Federal Home Loan Bank (FHLB) and Federal Reserve Bank stocks	1,129			1,131
Premises and equipment, net	806			875
Accrued interest receivable	760			814
Prepaid FDIC insurance	369			471
Other assets	212			248
Total assets	$	140,324		$	132,840

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Noninterest-bearing demand	$	1,712		$	2,624
Interest-bearing demand	9,910			6,830
Savings and money market	55,860			55,318
Time deposits	44,863			39,629
Total deposits	112,345			104,401

Federal funds purchased and securities sold under agreements to repurchase	835			326
Accrued interest payable	91			82
Accounts payable and other liabilities	236			344
Federal Home Loan Bank advances	6,500			8,750
Deferred rent liability	93			85
Capital lease liability	97			118
Total liabilities	$	120,197		$	114,106

COMMITMENTS AND CONTINGENCIES (see Note 10)

STOCKHOLDERS’ EQUITY
Common stock, $0.01 par value; 5,000,000 shares authorized; 2,553,671 shares issued and outstanding at June 30, 2010 and December 31, 2009	$	26		$	26
Additional paid-in capital	25,860			25,768
Accumulated deficit	(7,805		)	(8,016		)
Accumulated other comprehensive income	2,046			956
Total stockholders’ equity	$	20,127		$	18,734

Total liabilities and stockholders’ equity	$	140,324		$	132,840

See Notes to Consolidated Financial Statements.

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Solera National Bancorp, Inc.

Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009

(unaudited)

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
($ in thousands, except share data)	2010		2009			2010		2009
Interest income:
Interest and fees on loans	$	876	$	469		$	1,602	$	782
Interest on federal funds sold	1		—			2		1
Interest on investment securities	719		650			1,548		1,248
Other interest income	1		—			6		—
Dividends on FHLB and Federal Reserve Bank stocks	10		10			22		20
Total interest income	1,607		1,129			3,180		2,051
Interest expense:
Deposits	492		369			1,010		662
Federal Home Loan Bank advances	68		86			144		178
Federal funds purchased and securities sold under agreements to repurchase	1		4			3		8
Other borrowings	2		3			5		7
Total interest expense	563		462			1,162		855

Net interest income	1,044		667			2,018		1,196

Provision for loan losses	180		135			295		252
Net interest income after provision for loan losses	864		532			1,723		944
Noninterest income:
Service charges and fees	19		71			36		140
Sublease income	—		—			—		4
Gain on sale of securities	268		30			531		107
Total noninterest income	287		101			567		251
Noninterest expense:
Salaries and employee benefits	593		686			1,137		1,297
Occupancy	142		139			281		275
Professional fees	55		67			185		184
Other general and administrative	253		264			476		445
Total noninterest expense	1,043		1,156			2,079		2,201

Net income (loss) before income taxes	108		(523		)	211		(1,006		)

Income taxes	—		—			—		—

Net income (loss)	$	108	$	(523	)	$	211	$	(1,006	)

Basic earnings (loss) per share	0.04		(0.20		)	0.08		(0.39		)

Diluted earnings (loss) per share	0.04		(0.20		)	0.08		(0.39		)

Weighted-average common shares
Basic	2,553,671		2,553,671			2,553,671		2,553,671
Diluted	2,553,671		2,553,671			2,553,671		2,553,671

See Notes to Consolidated Financial Statements.

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Solera National Bancorp, Inc.

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

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

Balance at December 31, 2009	2,553,671	$	26	$	25,768	$	(8,016	)	$	956		$	18,734
Stock-based compensation	—	—		92		—			—			92
Comprehensive income:
Net income	—	—		—		211			—			211
Net change in unrealized gains on investment securities available-for-sale	—	—		—		—			1,621			1,621
Less: reclassification adjustment for net gains included in income	—	—		—		—			(531		)	(531		)
Total comprehensive income												1,301
Balance at June 30, 2010	2,553,671	$	26	$	25,860	$	(7,805	)	$	2,046		$	20,127

See Notes to Consolidated Financial Statements.

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Solera National Bancorp, Inc.

Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009

(unaudited)

	For the Six Months
	Ended June 30,
($ in thousands)	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	211		$	(1,006	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	88			83
Provision for loan losses	295			252
Net accretion of deferred loan fees/expenses	(31		)	(36		)
Net amortization of premiums on investment securities	233			34
Gain on sale of investment securities	(531		)	(107		)
Federal Home Loan Bank stock dividend	(7		)	(6		)
Recognition of stock-based compensation on stock options	92			102
Changes in operating assets and liabilities:
Interest receivable	54			(275		)
Other assets	24			—
Prepaid FDIC insurance	102			—
Accrued interest payable	9			33
Accounts payable and other liabilities	(108		)	26
Deferred loan fees/expenses, net	—			82
Deferred rent liability	8			14
Net cash provided by (used in) operating activities	$	439		$	(804	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities, available-for-sale	$	(34,837	)	$	(29,685	)
Proceeds from sales of investment securities, available-for-sale	23,564			10,073
Proceeds from maturities/calls/pay downs of investment securities, available-for-sale	11,128			7,781
Originated loans, net of pay downs	(10,448		)	(17,895		)
Purchase of premises and equipment	(8		)	(11		)
Proceeds from redemption of Federal Reserve Bank stock	9			22
Purchase of interest-bearing deposits with banks	(1,005		)	—
Maturity of interest-bearing deposits with banks	3,524			—
Net cash used in investing activities	$	(8,073	)	$	(29,715	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits	$	7,944		$	28,597
Net increase in federal funds purchased and securities sold under agreements to repurchase	509			1,143
Proceeds from FHLB advances	—			1,750
Repayment of FHLB advances	(2,250		)	(2,250		)
Principal payments on capital lease	(21		)	(19		)
Net cash provided by financing activities	$	6,182		$	29,221

Net decrease in cash and cash equivalents	$	(1,452	)	$	(1,298	)

CASH AND CASH EQUIVALENTS
Beginning of period	2,516			2,401
End of period	$	1,064		$	1,103

(continued)

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Solera National Bancorp, Inc.

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

(unaudited)

	For the Six Months Ended June 30,
($ in thousands)	2010		2009

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	1,153	$	822
Non-cash investing transactions:
Unrealized gain on investment securities, available-for-sale	$	1,090	$	256

See Notes to Consolidated Financial Statements.

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SOLERA NATIONAL BANCORP, INC.

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF ORGANIZATION

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

NOTE 2 — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position of the Company as of June 30, 2010, and the results of its operations for the three and six months ended June 30, 2010 and 2009. Cash flows are presented for the six months ended June 30, 2010 and 2009. Certain reclassifications have been made to the consolidated financial statements and related notes of prior periods to conform to the current presentation. These reclassifications had no impact on stockholders’ equity or net income (loss) for the periods. Additionally, certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the U.S. Securities and Exchange Commission. The Company believes that the disclosures in the unaudited condensed consolidated financial statements are adequate to make the information presented not misleading. However, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2009.

The Company received approval as a bank in organization in the first quarter of 2007, conducted an initial closing of its common stock offering and commenced banking operations during the third quarter of 2007. Successful completion of the Company’s development program and, ultimately, the attainment of sustained profitable operations are dependent on future events, including the successful execution of the Company’s business plan and achieving a level of revenue adequate to support the Company’s cost structure.

Critical Accounting Policies

The following is a description of the Company’s significant accounting policies used in the preparation of the accompanying consolidated financial statements.

Allowance for loan losses: Implicit in the Company’s lending activities is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan being made and the creditworthiness of the borrower over the term of the loan. The allowance for loan losses represents the Company’s recognition of the risks of extending credit and its evaluation of the loan portfolio. The allowance for loan losses is maintained at a level considered adequate to provide for probable loan losses based on management’s assessment of various factors affecting the loan portfolio, including a review of problem loans, business conditions, historical loss experience, evaluation of the quality of the underlying collateral, and holding and disposal costs. In addition, because the Bank has limited history on which to base future loan losses, a comparison of peer group allowance ratios to gross loans is made with the intention of maintaining similar levels during the Bank’s de novo period of operation. The allowance for loan losses is increased by provisions charged to expense and reduced by loans charged off, net of recoveries. Loan losses are charged against the allowance for loan losses when management believes the loan balance is uncollectible.

The Company has established a formal process for determining an adequate allowance for loan losses. The allowance for loan losses calculation has two components. The first component represents the allowance for loan losses for impaired loans; that is loans where the Company believes collection of the contractual principal and interest payments is not probable. To determine this component of the calculation, collateral-dependent impaired loans are evaluated using internal analyses as well as third-party information, such as appraisals. If an impaired loan is unsecured, it is evaluated using a discounted cash flow of the payments expected over the life

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of the loan using the loan’s effective interest rate and giving consideration to currently existing factors that would impact the amount or timing of the cash flows. The second component of the allowance for loan losses represents contingent losses — the estimated probable losses inherent within the portfolio due to uncertainties. Factors considered by management to estimate inherent losses include, but are not limited to, 1) historical and current trends in downgraded loans; 2) the level of the allowance in relation to total loans; 3) the 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’s assessment of economic conditions and certain qualitative factors as defined by bank regulatory guidance, including but not limited to, changes in the size, composition and concentrations of the loan portfolio, changes in the legal and regulatory environment, and changes in lending management. The recorded allowance for loan losses is the aggregate of the impaired loans component and the contingent loss component.

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

Share-based compensation: The Company grants stock options as incentive compensation to employees and directors. The cost of employee/director services received in exchange for an award of equity instruments is based on the grant-date fair value of the award, which is determined using a Black-Scholes-Merton model. This cost, net of estimated forfeitures, is expensed to salaries and employee benefits over the period which the recipient is required to provide services in exchange for the award, generally the vesting period.

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

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

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued guidance requiring increased fair value disclosures. There are two components to the increased disclosure requirements set forth in the update: (1) a description of, as well as the disclosure of, the dollar amount of transfers in or out of level one or level two (2) in the reconciliation for fair value measurements using significant unobservable inputs (level three), a reporting entity should present separately information about purchases, sales, issuances and settlements (that is, gross amounts shall be disclosed as opposed to a single net figure). Increased disclosures regarding the transfers in/out of level one and two are required for interim and annual periods beginning after December 15, 2009. The adoption of this portion of the standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. Increased disclosures regarding the level three fair value reconciliation are required for fiscal years beginning after December 15, 2010.

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The adoption of this portion of the standard is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In April 2010, the FASB issued accounting guidance for loan modifications when the loan is part of a pool of loans accounted for as a single asset. Diversity in practice developed surrounding how to account for loans that are part of a pool subsequent to a modification that would constitute a troubled debt restructuring. To eliminate the diversity in practice, the new guidance requires loans that are accounted for as part of a pool to continue to be accounted for as part of the pool subsequent to a modification, even if the modification constitutes a troubled debt restructuring. Upon adoption of the update an entity may make a one time election to terminate accounting for loans in a pool, and the election may be applied on a pool by pool basis. This accounting treatment for the modification of loans accounted for as part of pools is effective for all interim and annual reporting periods beginning on or after July 15, 2010. As the Company does not currently have any pools of loans accounted for as a single asset, we do not expect that the adoption of this standard will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

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

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

2. For each disaggregated ending balance in item (1) above, the related recorded investment in loans and leases

3. The nonaccrual status of loans and leases by class

4. Impaired loans and leases by class

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

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

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

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

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

The increased disclosure requirements become effective for periods ending on or after December 15, 2010. The provisions of this update will expand our current disclosures with respect to the Allowance for Loan Losses.

NOTE 3 — INVESTMENTS

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

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

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

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

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

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

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

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

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

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

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

Securities with carrying values of $13.3 million at June 30, 2010 and $16.9 million at December 31, 2009, were pledged as collateral to secure public deposits, borrowings from the FHLB, repurchase agreements and for other purposes as required or permitted by law.

NOTE 4 — LOANS

The composition of the loan portfolio follows:

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

As of June 30, 2010, the Bank had one nonaccrual loan for which a partial charge-off was recognized during the second quarter 2010 taking the loan’s value from $1.0 million to $815,000. No loans were transferred to foreclosed properties and no loans were past due more than 90 days and still accruing interest as of June 30, 2010. During all of 2009, no loans were impaired, no loans were transferred to foreclosed properties and one loan, with a principal balance of approximately $3,000, was past due more than 90 days but still accruing interest.

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

There were approximately $2.1 million and $2.6 million in loans receivable from related parties at June 30, 2010 and December 31, 2009, respectively.

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NOTE 5 — ALLOWANCE FOR LOAN LOSSES

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

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

The following table details information regarding impaired loans at the dates indicated:

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

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

NOTE 6 — DEPOSITS

Deposits are summarized as follows:

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

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

NOTE 7 — STOCK-BASED COMPENSATION

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

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employees, may only be granted nonqualified stock options. The Board reserved 510,734 shares of common stock for issuance under the Plan. The Plan provides for options to purchase shares of common stock at a price not less than 100% of the fair market value of the stock on the date of grant. Stock options expire no later than ten years from the date of the grant and generally vest over four years. The Plan provides for accelerated vesting if there is a change of control, as defined in the Plan. The Company recognized stock-based compensation cost of approximately $92,000 and $102,000 during the six months ended June 30, 2010 and 2009, respectively.

The Company accounts for its stock-based compensation under 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 grant using the Black-Scholes-Merton option pricing model. The Company granted 1,250 options during the second quarter 2010 as incentive compensation to newly hired employees and 16,500 options during the first quarter 2010 as incentive compensation to existing and newly hired employees. Similarly, the Company granted 7,250 options as incentive compensation to newly hired employees during the second quarter of 2009.

During the six months ended June 30, 2010, 5,688 options were forfeited and 4,657 vested options expired unexercised. No options were exercised during the six months ended June 30, 2010 or 2009. The Company recognized expense for approximately 20,000 options, representing a pro-rata amount of the options earned during the second quarter 2010 that are expected to vest. As of June 30, 2010, there was approximately $286,000 of total unrecognized compensation cost related to the outstanding stock options that will be recognized over a weighted-average period of 1.5 years.

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

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

NOTE 8 — NONINTEREST EXPENSE

The following table details the items comprising other general and administrative expenses:

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

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NOTE 9 — INCOME TAXES

Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense recognition. The following is a summary of the components of the net deferred tax asset account recognized in the accompanying consolidated statements of financial condition:

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

Net deferred tax assets	1,987			2,488

Valuation allowance	(1,987		)	(2,488		)

Net deferred taxes	$	—		$	—

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

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

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

NOTE 10 — COMMITMENTS AND CONTINGENCIES

The Company is a party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments 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 in the consolidated balance sheet. The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.

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At June 30, 2010 and December 31, 2009 the following financial instruments were outstanding whose contract amounts represent credit risk:

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

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the commitments do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is 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 to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

NOTE 11 — FAIR VALUE

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

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

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

Level 3 —	valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

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

Impaired loans are valued at the lower of cost or fair value and are generally classified as Level 3 in the fair value hierarchy. Fair value is measured based on the value of the collateral securing the loan or discounting estimated future cash flows. Collateral is valued based on appraisals performed by qualified licensed appraisers. Such appraisal values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation and/or similar factors. Impaired loans that are not secured by collateral are valued by using the discounted estimated future cash flows at the loans’ effective interest rate. The cash flow estimates are made by management using historical knowledge, market conditions, and knowledge of the borrower’s business, among other factors.

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Assets and Liabilities Measured on a Recurring Basis

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

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

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

Assets and Liabilities Measured on a Nonrecurring Basis

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

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

Assets at December 31, 2009
Impaired loans	$	—	$	—	$	—	$	—

Fair Value of Financial Instruments

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

Fair value information is not required to be disclosed for certain financial instruments and all nonfinancial instruments. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized

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gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates.

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

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

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

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

Loans, net: The fair value of fixed rate loans is estimated by discounting the future cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are estimated to be equivalent to carrying values. Variable rate loans that are currently priced at their contractual floor or ceiling, and thus similar to fixed rate loans, are reviewed to determine the interest rate that would be currently offered on similar credits. If the current floor/ceiling rate is equivalent to current market rates, fair value is estimated to be equivalent to carrying value. If the current market rates differ from the loan’s current rate, the contractual cash flows are discounted using the current market rate to derive the loan’s estimated fair value. Both the estimated fair value and the carrying value have been reduced by specific and general reserves for loan losses.

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

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

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

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

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

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

Interest payable: The carrying value of interest payable approximates fair value due to the short period of time between accrual and payment.

Loan commitments and letters of credit: The fair values of commitments are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The difference between the carrying value of commitments to fund loans or

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

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

	June 30, 2010				December 31, 2009
	Carrying		Estimated Fair		Carrying		Estimated Fair
($ in thousands)	Value		Value		Value		Value
Financial Assets:
Cash and cash equivalents	$	1,064	$	1,064	$	2,516	$	2,516
Interest-bearing deposits with banks	1,265		1,265		3,784		3,784
Investment securities	74,974		74,974		73,441		73,441
Loans, net	59,745		59,654		49,560		49,230
FHLB and FRB stocks	1,129		1,129		1,131		1,131
Interest receivable	760		760		814		814

Financial Liabilities:
Deposits, demand, savings and money market	$	67,482	$	67,482	$	64,772	$	64,772
Time deposits	44,863		45,183		39,629		39,036
Federal funds purchased and securities sold under agreements to repurchase	835		835		326		326
Federal Home Loan Bank advances	6,500		6,813		8,750		8,508
Interest payable	91		91		82		82

NOTE 12 — SUBSEQUENT EVENTS

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

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

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

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

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

Executive Overview

We are a Delaware corporation that was incorporated on January 12, 2006 to organize and serve as the holding company for Solera National Bank, a national bank that opened for business on September 10, 2007. Solera National Bank is a full-service commercial bank headquartered in Lakewood, Colorado serving 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.

Earnings are derived primarily from our net interest income, which is interest income less interest expense, and our noninterest income earned from gains on investment securities and banking service fees, offset by noninterest expense. As the majority of our assets are interest-earning and our liabilities are interest-bearing, changes in interest rates impact our net interest margin. We manage our interest-earning assets and interest-bearing liabilities to reduce the impact of interest rate changes on our operating results.

We offer a broad range of commercial and consumer banking services to small and medium-sized businesses, licensed professionals and individuals who are particularly responsive to the personalized service that Solera National Bank provides to its customers. We believe that local ownership and control allows the Bank to serve customers more efficiently and effectively. Solera National Bank competes on the basis of providing a unique and personalized banking experience combined with a full range of services, customized and tailored to fit the individual needs of its clients. Solera National Bank serves the entire market area and, in addition, has a special niche focus on the local Hispanic population due to the significant growth of this demographic. Since opening the bank in September of 2007, management has successfully executed its strategy of delivering prudent and controlled growth to efficiently leverage the Company’s capital and expense base with the goal of achieving sustained profitability. During the first and second quarters of 2010, the Company delivered its first quarterly profits.

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

Overview

While the nation’s economy is still growing, many fear the pace of growth will continue to slow as difficult labor markets and credit conditions impact households and businesses. The Bureau of Economic Analysis’ preliminary estimate of second quarter 2010 GDP growth was 2.4%, down from 3.7% in the first quarter 2010. The Federal Reserve Open Market Committee’s mid-June assessment of economic conditions reflected a shaky recovery. The committee noted that high unemployment continues to constrain household spending, new home construction has weakened, and global financial markets are not yet healthy. The Federal Reserve expects the nation’s economic recovery to continue despite these challenges, although the pace of growth could be more “moderate” than initially expected. The Open Market Committee voted to leave the federal funds target rate in the range of zero to 0.25%.

The unemployment rate has remained stubbornly high. The U.S. Bureau of Labors Statistics reported on August 6, 2010 that total nonfarm payroll employment declined by 131,000 in July, and the unemployment rate was unchanged at 9.5%. Federal government employment fell, as 143,000 temporary workers hired for the decennial census completed their work. Private-sector payroll employment edged up by 71,000.

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

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manufacturing activity, and housing markets have strengthened throughout the Tenth District, although still weak commercial real estate markets and the potential for a slump in housing remain as risks.

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

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

In the first quarter of 2010, FDIC insured commercial banks reported a combined net income of $18 billion, up from $914 million during the fourth quarter of 2009. While net charge-offs increased for the 13th consecutive quarter, the quarterly provision for loan losses declined. The overall financial condition of the industry continued to improve as both capital and deposit balances grew during in the first six months of 2010.

Dodd-Frank Wall Street Reform and Consumer Protection Act

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

We are currently evaluating the potential impact of the Act on our business but expect that some provisions of the Act may have an adverse impact due to, among others, the cost of complying with the numerous new regulations and reporting requirements mandated by the Act, a potential increase in competition for deposits resulting from the increased cost of funding using non-deposit liabilities, and the potential loss of interchange fee income from debit card transactions. However, some provisions of the Act will benefit our business, such as the permanent exemption from Sarbanes-Oxley Section 404(b) for companies with market capitalization of less than $75 million, which should maintain our external audit fees at current levels as our external auditors will not be required to provide an attestation report on our internal control over financial reporting in our annual report on Form 10-K.

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

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

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

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

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The following table presents, for the periods indicated, average assets, liabilities and stockholders’ equity, as well as the net interest income from average interest-earning assets and the resultant annualized yields expressed in percentages.

Table 1

	Three Months Ended June 30, 2010						Three Months Ended June 30, 2009
($ in thousands)	Average Balance		Interest		Yield/ Cost		Average Balance		Interest		Yield/ Cost
Assets:
Interest-earning assets:
Gross loans, net of unearned fees	$	59,545	$	876	5.90	%	$	33,993	$	469	5.53	%
Investment securities**	73,362		719		3.93		51,392		650		5.07
FHLB and FRB stocks	1,120		10		3.58		1,065		10		3.65
Federal funds sold	1,211		1		0.20		253		—		0.17
Interest-bearing deposits with banks	1,227		1		0.39		16		—		0.30
Total interest-earning assets	136,465		$	1,607	4.72	%	86,719		$	1,129	5.22	%
Noninterest-earning assets	2,925						2,505
Total assets	$	139,390					$	89,224