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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10- K**

 
| **x** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------------------|

 

**For thefiscal year ended December 31, 2009**

 

**OR**

 
| **o** | **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 registrantas specified in its charter)

 

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

 

**319South Sheridan Boulevard  Lakewood,CO  80226**

(Address of principalexecutive offices, including zip code)

 

**(303)209-8600**

(Registrant’s telephonenumber, including area code)

 

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Securities registeredpursuant to Section 12(b) of the Act: **None**

 

Securities registeredpursuant to Section 12(g) of the Act:

**Common Stock, par value**

**$.01 per share**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.   o  Yes  x  No

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.   o  Yes  x  No

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   x  Yes  o  No

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).   o  Yes  o  No

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§ 229.405 of this chapter) is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.   x

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer  o                     |   | Accelerated filer o          |
|------------------------------------------------|--------|------------------------------|
|                                           |   |                         |
| Non-accelerated filer o                        |   | Smaller reporting  company x |
| (Do not check if a smaller  reporting company) |   |                         |

 

 

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

 

The aggregate market value of the voting andnon-voting common equity held by non-affiliates of the Registrant computed byreference to the price at which the common equity was last sold as of June 30,2009 was $12,924,880.

 

The number of shares of common stock, par value $0.01share, of the Registrant outstanding as of March 17, 2010, was 2,553,671.

 

DOCUMENTS INCORPORATED BY REFERENCE: Portions of theCompany’s definitive proxy statement for the 2010 Annual Meeting ofStockholders, expected to be held in May 2010, are incorporated byreference into Part III of this Form 10-K.

 

 

 

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**SOLERANATIONAL BANCORP, INC.**

 

**ANNUALREPORT ON FORM 10-K**

 

INDEX

 
| ** **                                 | ** **                                                                                                          | ** ** | **PAGE** |
|--------------------------------------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                       |                                                                                                                |       |     |
| PART I                                |                                                                                                                |       |     |
| ITEM 1.                                    | BUSINESS                                                                                                            |       | 4        |
| ITEM 1A.                                   | RISK  FACTORS                                                                                                       |       | 27       |
| ITEM 1B.                                   | UNRESOLVED STAFF  COMMENTS                                                                                          |       | 33       |
| ITEM 2.                                    | PROPERTIES                                                                                                          |       | 33       |
| ITEM 3.                                    | LEGAL PROCEEDINGS                                                                                                   |       | 33       |
| ITEM 4.                                    | [RESERVED]                                                                                                          |       | 33       |
|                                       |                                                                                                                |       |     |
| PART II                               |                                                                                                                |       |     |
| ITEM 5.                                    | MARKET  FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER  PURCHASES OF EQUITY SECURITIES |       | 33       |
| ITEM 6.                                    | SELECTED FINANCIAL  DATA                                                                                            |       | 34       |
| ITEM 7.                                    | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                         |       | 34       |
| ITEM 7A.                                   | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                         |       | 46       |
| ITEM 8.                                    | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                                        |       | 46       |
| ITEM 9.                                    | CHANGES IN AND  DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                               |       | 46       |
| ITEM 9A(T).                                | CONTROLS AND  PROCEDURES                                                                                            |       | 46       |
| ITEM 9B.                                   | OTHER INFORMATION                                                                                                   |       | 47       |
|                                       |                                                                                                                |       |     |
| PART III                              |                                                                                                                |       |     |
| ITEM 10.                                   | DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                             |       | 48       |
| ITEM 11.                                   | EXECUTIVE  COMPENSATION                                                                                             |       | 48       |
| ITEM 12.                                   | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS                    |       | 48       |
| ITEM 13.                                   | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                          |       | 48       |
| ITEM 14.                                   | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                                             |       | 49       |
| PART IV                               |                                                                                                                |       |     |
| ITEM 15.                                   | EXHIBITS AND  FINANCIAL STATEMENT SCHEDULES                                                                         |       | 49       |
|                                       |                                                                                                                |       |     |
| INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |                                                                                                                | F-1        |

 

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**PART I**

 

**INTRODUCTORY NOTE. CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING INFORMATION AND RISK FACTORS**

 

This Report on Form 10-Kcontains “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995 about Solera National Bancorp, Inc.(the “Company”) and its subsidiary, Solera National Bank (the “Bank,” collectivelywith the Company, sometimes referred to as “we”, “us” and “our”) that aresubject to risks and uncertainties.  Forward-looking statements includeinformation concerning future financial performance, business strategy,projected plans and objectives.  Statements preceded by, followed by orthat otherwise include the words “anticipates,” “believes,” “estimates,” “expects,”“intends,” “plans,” “may increase,” “may fluctuate” and similar expressions offuture or conditional verbs such as “will,” “should,” “would,” and “could” aregenerally forward-looking in nature and not historical facts.  Actualresults may differ materially from those projected, implied, anticipated orexpected in the forward-looking statements.  Readers of this Annual Reportshould not rely solely on the forward-looking statements and should considerall 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.

 

These forward-lookingstatements, implicitly and explicitly, include the assumptions underlying thestatements 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’sexpectations and estimates with respect to revenues, expenses, return onequity, return on assets, efficiency ratio, asset quality and other financialdata and capital and performance ratios.

 

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

 

·                  the Company has a limited operating history upon which to base anestimate of its future financial performance;

 

·                  Solera National Bank’s failure to implement its business strategies mayadversely affect the Company’s financial performance;

 

·                  continuation of the economic downturn mayhave an adverse effect on our financial performance;

 

·                  the Company is subject to extensive regulatory oversight, which couldrestrain its growth and profitability;

 

·                  the Company may not be able to raise additional capital on termsfavorable to it;

 

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

 

·                  management of Solera National Bank may beunable to limit credit risk associated with Solera National Bank’s loanportfolio, which would affect the Company’s profitability;

 

·                  the effects of competition from other commercial banks, thrifts,mortgage banking firms, consumer finance companies, credit unions, securitiesbrokerage firms, insurance companies, money market and other mutual funds, andother financial institutions operating in the Bank’s 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;

 

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

 

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·                  other factors including those disclosedunder “*Part I — Item 1A Risk Factors”* inthis Annual Report on Form 10-K.

 

Any forward-looking statement made in this AnnualReport on Form 10-K or elsewhere speaks only as of the date on which it ismade. New risks and uncertainties arise from time to time, and it is impossiblefor management to predict these events or how they may affect the Company. TheCompany has no duty to, and does not intend to, update or revise theforward-looking statements in this Annual Report on Form 10-K after thedate of this filing, except as may be required by law. In light of these risksand uncertainties, any forward-looking statement made in this Annual Report on Form 10-Kor elsewhere might not occur.

 

**Item1. Business**

 

**Overview**

 

Solera National Bancorp, Inc. - The Company, headquartered inLakewood, Colorado, was organized as a Delaware corporation in 2006 to serve asa bank holding company for the Bank. The Company received approval from theFederal Reserve Bank of Kansas City to operate as a bank holding company forSolera National Bank on July 27, 2007. The Company raised a total of $25.5million in its initial public offering and used $20.0 million of the proceedsto purchase shares of the Bank’s common stock.

 

The Company chose a holding company structure becauseit believed it would provide flexibility in accommodating the Company’s andBank’s business objectives. For example, with a holding company structure, theCompany may assist the Bank in maintaining its required capital ratios byborrowing money and contributing the proceeds of that debt to the Bank asprimary capital. Additionally, under provisions of the Gramm-Leach-Bliley Act,if the Company elected to be a financial holding company, it could engage inactivities that are financial in nature or incidental or complementary to afinancial activity, including merchant banking activities, in which the Bankwould be prohibited from engaging. Although the Company does not presentlyintend to engage in these financial activities, it would be able to do sowithout notice to or a filing with the Federal Reserve if it believes thatthere is a need for these services in its market area, that it can besuccessful in these activities, and that these activities would be profitable.

 

At this time, the Company engages in no materialbusiness operations other than owning and managing the Bank.  At December 31, 2009, the Company had 23full-time equivalent employees at the Bank.

 

Solera National Bank. - On September 10, 2007, the Bank began bankingoperations as a federally-chartered national bank, having received allnecessary regulatory approvals. The Federal Deposit Insurance Corporation, (“FDIC”),insures the Bank’s deposit accounts up to the maximum amount currentlyallowable under federal law. The Bank is subject to examination and regulationby the Office of the Comptroller of the Currency, (“OCC”). The Bank is furthersubject to regulations by the Federal Reserve Board concerning reserves to bemaintained against deposits and certain other matters and is a member of theFederal Reserve Bank.

 

Solera National Bank is afull-service commercial bank headquartered in Lakewood, Colorado with 23full-time equivalent employees dedicated to serving the Denver metropolitanarea.  The Bank offers a broad range of commercial and consumer bankingservices to small- and medium-sized businesses, licensed professionals andindividuals.  While the Bank seeks to serve the entire community, the Bankhas a core specialization serving the local Hispanic population due to thesignificant growth in this demographic. The Bank’s website is www.solerabank.com.  The Company’s website contains links to theCompany’s annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934, as amended.  Theinformation on this website is not, and shall not be deemed to be, a part ofthis Report or incorporated into any other filing with the Securities andExchange Commission.

 

**Philosophy and Strategy**

 

Solera National Bank operates as a full-servicecommunity bank, offering a full array of financial products while emphasizingprompt, personalized customer service. The Bank believes that this philosophy, encompassing the service aspectsof community banking, distinguishes the Bank from its competitors.

 

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To carry out its philosophy, the Bank’s businessstrategy involves the following:

 

·                  capitalizing on the diverse communityinvolvement, professional expertise and personal and business contacts of itsdirectors and executive officers;

 

·                  hiring and retaining experienced andqualified banking personnel;

 

·                  providing individualized attention withconsistent, local decision-making authority;

 

·                  utilizing technology and strategicoutsourcing to provide a broad array of convenient products and services;

 

·                  operating from a highly visible andaccessible banking office in close proximity to concentrations of targetedcommercial businesses and professionals; and

 

·                  utilizing an effective businessdevelopment calling program.

 

**MarketOpportunities**

 

Primary Service Area.  Solera National Bank’s primaryservice area is the Denver metropolitan area. The Bank’s main office is located at 319 South Sheridan Boulevard inLakewood, Colorado.  According to information prepared by the EnvironmentalSystems Research Institute, within a three mile radius of the Bank’s mainoffice, there are approximately 5,200 businesses, 52,000 employees and 165,000residents.  The main office is targeting these small- to mid-sizedbusinesses, as well as local residents.  This location offers the abilityto target both the entire community, which is the Bank’s primary focus, as wellas the Hispanic demographic, in which the Bank has a core specialization, giventhe high predominance of Hispanic households in the area (51.8% within threemiles of the Bank’s main office).  SoleraNational Bank draws most of its customer deposits and conducts most of itslending transactions from and within its primary service areas.

 

Local Economy.  According to the Metro Denver EconomicDevelopment Corporation, economic indicators for Metro Denver suggest theregion’s economy lost some momentum in late 2009.  As policymakers continue to monitor theunfolding recovery from a nationwide perspective, other groups are tracking post-recessiontrends in U.S. regions. *Mountain Monitor:Tracking Economic Recession and Recovery in**the Intermountain West’s Metropolitan Areas*—a report jointly released by the Brookings Institution and the University ofNevada at Las Vegas — suggests the recession struck Colorado and other mountainstates the hardest.  Researchers say theeconomies of Colorado, Nevada, Utah, Arizona, Idaho, and New Mexico shiftedrapidly from a trend of “hyper growth” to one of steep contraction throughoutthe recession, and recovery throughout the mountain region is likely to lagrecovery nationwide.  The report notes,however, that recession has had disparate effects within the mountain region:for example, housing markets in Denver and Colorado Springs have fared considerablybetter than Las Vegas, Phoenix, and Boise.

 

While regulatory reforms have dominated the government’srecovery efforts, funds from the 2009 economic stimulus continue to flow.  In early January, the administration approved$2.3 billion in stimulus-funded tax credits that officials hope will spur greenjobs creation.  Six Colorado companiesreceived awards totaling $75.2 million.

 

In addition to tax credits for some renewable energycompanies, Colorado will also receive roughly $6 billion in stimulus dollarsfrom the U.S. Department of Labor for job training in renewable energy andother emerging industries.  Twoconsortiums with Colorado members are scheduled to receive $78 million instimulus grants for the development of biofuels.  Furthermore, the Colorado Department ofTransportation (“CDOT”) will receive $1.4 million in federal stimulus grants toexamine the feasibility of a high-speed rail line.

 

Colorado lawmakers are largely focused on the state’sbudget deficit of approximately $1.5 billion. While a deficit of this magnitude leaves little room for new spending,lawmakers are hoping to launch several job creation programs.

 

Since the Bank has aconcentration of loans that are secured by real estate primarily located in theMetro Denver area, management monitors economic indicators regarding thestrength of the Colorado real estate market.

 

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A fourth quarter reportby Frederick Ross Company notes that Metro Denver’s office market has weatheredthe recession better than markets elsewhere, but recovery in the local marketis expected to lag under high unemployment, reduced real estate spending bybusinesses, and weak consumer confidence. Metro Denver’s industrial market isin somewhat better condition than markets nationwide, according to theFrederick Ross Company report.  Theregion’s 6.7 percent vacancy rate has remained well below the national level of10 percent.  While vacancy rates andseveral other indicators suggest Metro Denver’s industrial market has reachedbottom, the Frederick Ross Company expects lease rates and overall markettrends to remain generally sluggish until 2011. Metro Denver’s retail market recovery will be delayed due to theconsumer impact of weak job and income growth. Delayed recovery seems particularly likely as many economists expectconsumer spending habits will not quickly regain pre-recession levels.  The report suggests more distressed retailassets will come to market in 2010, and lease rates will remain under pressureas property owners struggle to keep tenants.

 

According to the U.S.Bureau of Labor Statistics, Metro Denver’s (defined as Denver, Broomfield andAurora) unemployment rate rose from 6.8 percent in November to 7.5 percentin December as the number of unemployed rose considerably.  While year-end layoffs and weak holidayhiring trends were factors behind December’s higher unemployment rate, thenotion of an improving economy and slightly better job prospects may also bedrawing more job seekers back into the labor force.  The nationwide unemployment rate rose to 9.7percent at year-end 2009, up from 7.1% a year prior.  Metro Denver employers cut more than 4,000jobs in December, a month in which the region’s employers typically add severalthousand jobs. Data for 2009 are subject to a benchmark revision, butpreliminary figures suggest Metro Denver employment for all twelve months ofthe year fell 3.8 percent from employment in 2008.

 

Competition.  Solera National Bank facessubstantial competition in both lending and deposit originations with othercommercial banks, savings and loan associations, credit unions, consumerfinance companies, pension trusts, mutual funds, insurance companies, mortgagebankers and brokers, brokerage and investment banking firms, asset-basednon-bank lenders, government agencies and certain other non-financialinstitutions, including retail stores, that may offer more favorable financingalternatives than the Bank.  The Bankgenerally competes based on customer service, the rates of interest charged onloans and the rates of interest paid for deposits.

 

According to informationdisclosed on the FDIC’s website (www.fdic.gov), as of June 30, 2009, mostof the deposits held in traditional banking institutions in the Bank’s primarybanking market are attributable to super-regional banks (serving severalstates) and branch offices of out-of-state banks.  The Company believesthat banks headquartered outside of its primary service areas often lack theconsistency of local leadership necessary to provide efficient service toindividuals and small- to medium-sized business customers.  Through itslocal ownership and management, the Company believes Solera National Bank ispositioned to efficiently provide these customers with loan, deposit and otherfinancial products tailored to fit their specific needs.  The Companybelieves that the Bank competes effectively with larger and more established banksthrough an active business development program and by offering local access,competitive products and services, and more responsive customer service.

 

**Business Strategy**

 

Management Philosophy.  Solera National Bank is afull-service commercial bank dedicated to providing superior customer serviceto the individuals and businesses in its community.  Its primary focus ison local businesses, professionals and individuals to whom quality bankingservice is a critical, but lacking, element in their current bankingrelationships.  Management believes that this philosophy, encompassing theservice aspects of community banking, is distinguishing the Bank from itscompetitors and represents an opportunity to continue to grow marketshare.  Accordingly, the Bank has implemented the following operating andgrowth strategies:

 

Operating Strategy.  In order to achieve the level ofprompt, responsive service necessary to attract customers and to develop theBank’s image as a local bank with a community focus, Solera National Bank hasemployed the following operating strategies:

 

·                  *Experienced senior management*.  The Bank’s senior managementpossesses extensive experience in the banking industry, as well as substantialbusiness and banking contacts in its primary service area.

 

·                  *Quality employees*. The Bank has hired, and will continueto hire, highly trained and seasoned staff. Ongoing training provides the staffwith extensive knowledge of the Bank’s products and services enabling itsemployees to answer questions and resolve customer issues immediately.  The Bank has 

 

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hired primarilybilingual business development officers and branch staff to target diversebanking customers, including the Hispanic community.

 

·                  *Community-oriented Board ofDirectors*. The Bank’s directors are either experienced bankers or local business andcommunity leaders.  All of its directors are currently or have beenresidents of the Bank’s primary service areas, and most have significantbusiness ties to the Bank’s primary service areas, enabling them to besensitive and responsive to the needs of the community. Additionally, the boardof directors represents a wide variety of business experience and communityinvolvement.

 

·                  *Well situated site*.  The main office, located at 319South Sheridan Boulevard in Lakewood, Colorado, occupies a highly visiblelocation at a major traffic intersection.  This site gives the Bank anextremely visible presence in a market that is dominated by branch offices ofbanks headquartered out of the area.

 

·                  *Individual customer focus*.  The Bank is able to respond tocredit requests quickly and be more flexible in approving complex loans basedon collateral quality and personal knowledge of the customer.  Clientsenjoy the convenience of on-site visits by the Bank’s business relationshipmanagers and business consultation services.

 

·                  *Financial education and informationresource center.*Solera National Bank serves as a financial and information center for thecommunity, sponsoring professionals to conduct seminars and workshops on avariety of subjects of interest.  The Bank supports non-profit entitieswhich offer seminars and programs on financial literacy to educate and empowerthe Hispanic market.

 

·                  *Officer and Director call program.*  The Company has implemented anactive officer and director call program through business relationship managersto promote its philosophy.  The purpose of this call program is to visitprospective customers and to describe the Bank’s products, services andphilosophy and attending various business and community functions.  All ofthe Bank’s officers and directors have extensive contacts in the Denver metropolitanmarket area alliance of local professionals.

 

·                  *Marketing and advertising*.  The most significant marketing ofthe Bank are the calls on contacts provided by the officers, directors,organizers, and stockholders of Solera National Bancorp, Inc.  Additionally,the Bank expanded its outreach by forming a Community Advisory Council.  The Council meets and communicates regularlyto identify opportunities for the Bank.

 

Growth Strategies.  Solera National Bank hasimplemented the following growth strategies:

 

·                  *Capitalize on community orientation*.  Management is capitalizing on theBank’s position as an independent, community bank to attract individuals,professionals and local business customers that may be underserved by largerbanking institutions in its market area.  As discussed previously, thisincludes tailoring services to the needs of the local community, particularlythe Hispanic population.

 

·                  *Emphasize local decision-making*.  The Bank is able to differentiateitself from the major regional banks operating in the Bank’s market area byoffering local decision-making by experienced bankers.  This helps theBank attract local businesses and service-minded customers.

 

·                  *Attract experienced lending officers*.  Solera National Bank has hiredexperienced, well-trained lending officers.  By hiring experienced lendingofficers, the Bank is able to grow more rapidly than it would if it hiredinexperienced lending officers.

 

·                  *Offer fee-generating products andservices*. The Bank’s range of services, pricing strategies, interest rates paid andcharged, and hours of operation are structured to attract its target customersand increase its market share.  Solera National Bank strives to offer thesmall business person, professional, entrepreneur, and consumer competitivelypriced products and services while utilizing technology and strategicoutsourcing to increase fee revenues.

 

·                  *Small business lending.*  The Bank provides services andcapabilities for small- to medium-sized businesses utilizing long term financingfor business acquisition, debt refinancing, working capital, 

 

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real estate andequipment.  The Bank has hired loan officers with extensive knowledge ofsmall-business lending enabling the Bank to customize loan programs to provideadequate funding for the needs of these potential customers.

 

**Lending Services**

 

Lending Policy.  The Bank offers a full range oflending products, including commercial loans to small- to medium-sizedbusinesses, professionals, and consumer loans to individuals.  The Bankunderstands that it is competing for these loans with competitors who are wellestablished in its primary market area and have greater resources and lendinglimits.  A quick response to creditrequests has provided the Bank a competitive advantage.

 

The Bank’s loan approvalpolicy provides for two levels of lending authority.  When the amount oftotal loans to a single borrower exceeds the Bank’s President’s or Chief CreditOfficer’s lending authority, the Bank’s credit committee determines whether toapprove the loan request.  The Bank will not make any loans to any of itsdirectors or executive officers unless the board of directors, excluding theinterested party, first approves the loan, and the terms of the loan are nomore favorable than would be available to any comparable borrower.

 

Lending Limits.  The Bank’s lending activities aresubject to a variety of lending limits.  Differing limits apply based onthe type of loan or the nature of the borrower, including the borrower’srelationship to the Bank.  In general, however, the Bank may loan to anyone borrower a maximum amount equal to either:

 

·                  15% of the Bank’s capital and surplus; or

 

·                  25% of the Bank’s capital and surplus if the amount that exceeds 15% isfully secured by financial instruments and bullion that are salable underordinary market conditions with reasonable promptness at a fair market valuedetermined by quotations based upon actual transactions on an auction orsimilarly available daily bid and ask price market.

 

These lending limits willincrease or decrease as the Bank’s capital increases or decreases as a resultof its earnings or losses, among other reasons.

 

Credit Risks.  The principal economic riskassociated with each category of loans that the Bank expects to make is thecreditworthiness of the borrower.  Borrower creditworthiness is affectedby general economic conditions and the strength of the relevant business marketsegment.  General economic factors affecting a borrower’s ability to repayinclude inflation and employment rates, as well as other factors affecting aborrower’s customers, suppliers and employees.  The larger, well-establishedfinancial institutions in the Bank’s primary service areas are likely to makeproportionately more loans to medium- to large-sized businesses than the Bankwill make.  Some of the Bank’s commercial loans are made to small- tomedium-sized businesses that may be less able to withstand competitive,economic and financial pressures than larger borrowers.

 

Real Estate Loans.  Solera National Bank makescommercial real estate loans, construction and development loans andresidential real estate loans.  The following is a description of each ofthe major categories of real estate loans that the Bank expects to make and theanticipated risks associated with each class of loan.

 

·                  *Commercial real estate loans.*  Commercial real estate loan termsgenerally are limited to ten years or less, although payments may be structuredon a longer amortization basis.  Interest rates may be fixed oradjustable, although rates typically will not be fixed for a period exceeding60 months.  Solera National Bank will generally charge an origination feefor its services.  The Bank generally will require personal guaranteesfrom the principal owners of the property supported by a review by Bankmanagement of the principal owners’ personal financial statements.  Risksassociated with commercial real estate loans include fluctuations in the valueof real estate, new job creation trends, tenant vacancy rates and the qualityof the borrowers’ management.  The Bank will limit its risk by analyzingborrowers’ cash flow and collateral value on an ongoing basis.

 

·                  *Construction and developmentloans.* Solera National Bank generally makes owner-occupied construction loans with apre-approved take-out loan and will consider non-owner occupied constructionloans on a case-by-case basis.  The Bank will also consider constructionand development loans on a pre-sold basis.  If the borrower has enteredinto an agreement to sell the property prior to beginning construction, thenthe loan is considered to be on a pre-sold basis.  If the borrower has not

 

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entered into anagreement to sell the property prior to beginning construction, then the loanis considered to be on a speculative basis.  Construction and developmentloans are generally made with a term of twelve to eighteen months and interestis paid monthly.  The ratio of the loan principal to the value of thecollateral as established by independent appraisal typically will not exceedindustry standards.  Speculative loans will be based on the borrower’sfinancial strength and cash flow position.  Loan proceeds will bedisbursed based on the percentage of completion and only after the project hasbeen inspected by an experienced construction lender or third-party inspector. Risksassociated with construction loans include fluctuations in the value of realestate and new job creation trends.

 

·                  *Residential real estate loans.*  The Bank makes or plans to make residentialreal estate loans consisting of residential second mortgage loans, home equityloans and lines of credit, home improvement loans and traditional mortgagelending for one-to-four family residences that conform to Fannie Mae andFreddie Mac guidelines.  The amortization of second mortgages generallydoes not exceed 15 years and the rates are generally not fixed for over 60months.  The Bank expects that any long-term fixed rate mortgages would beunderwritten for resale to the secondary market.  It will offer primarilyadjustable rate mortgages.  The majority of fixed rate, conforming loanswill be sold in the secondary mortgage market.  All loans will be made inaccordance with the Bank’s appraisal policy with the ratio of the loanprincipal to the value of collateral as established by independent appraisalnot exceeding 80%, unless the borrower has private mortgage insurance. The Bank expects that these loan-to-value ratios will be sufficient tocompensate for fluctuations in real estate market value and to minimize lossesthat could result from a downturn in the residential real estate market.

 

Commercial Loans. Solera National Bank targets retail establishments and small- to medium-sizedcommercial and industrial businesses.  The terms of these loans vary bypurpose and by type of underlying collateral, if any.  The commercialloans are primarily underwritten on the basis of the borrower’s ability toservice the loan from cash flow.  The Bank typically makes equipment loansfor a term of seven years or less at fixed or variable rates, with the loanfully amortized over the term.  Loans to support working capital typicallyhave terms not exceeding one year and will usually be secured by accountsreceivable, inventory or personal guarantees of the principals of thebusiness.  For loans secured by accounts receivable or inventory,principal is repaid as the assets securing the loan are converted into cash,and for loans secured with other types of collateral, principal will beamortized during the term of the loan with remaining principal due atmaturity.  The quality of the commercial borrower’s management and itsability both to properly evaluate changes in the supply and demandcharacteristics affecting its markets for products and services and to effectivelyrespond to such changes are significant factors in a commercial borrower’screditworthiness.  The Bank also offers a number of Small BusinessAdministration (“SBA”) guaranteed loan programs to assist smallbusinesses.  The 504 program provides smallbusinesses needing “brick and mortar” financing with long-term, fixed-ratefinancing to acquire major fixed assets for expansion or modernization. The 7(a) program helps start-up and existing small businesses obtainfinancing when they might not be eligible for business loans through normallending channels.

 

Consumer Loans.  Solera National Bank offers a variety of loansto individuals for personal, family and household purposes, including securedand unsecured installment and term loans. The loan officer reviews the borrower’s past credit history, past incomelevel, debt history and cash flow to determine the impact of all these factorson the ability of the borrower to make future payments as agreed.  The principal competitors for consumer loansare the established banks and finance companies in the Bank’s market.

 

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Composition of portfolio - The following table sets forth thecomposition of the Bank’s loan portfolio.

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| **($ in thousands)**         | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Real estate — commercial     |       | $                     | 26,063     |   | $ | 7,479 |   |
| Construction and land development |       | 7,067                 |       | 3,849 |   |
| Real estate — residential    |       | 8,059                 |       | 5,043 |   |
| Commercial and industrial         |       | 8,324                 |       | 4,084 |   |
| Consumer                          |       | 991                   |       | 958 |   |
| **GROSS LOANS**                   |       | 50,504                |       | 21,413 |   |
| Net deferred (fees) / expenses    |       | (114                  | )          | (57 | ) |
| Allowance for loan losses         |       | (830                  | )          | (268 | ) |
| **LOANS, NET**                    |       | $                     | 49,560     |   | $ | 21,088 |   |

 

Average loan size of portfolio - The following table sets forth thenumber of loans, and the average size of each loan, within each class of theloan portfolio.

 
| ** **                        | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **($ in thousands)**         | ** ** | **# of********Loans**      | ** ** | **Average Loan   Size**    | ** ** | **# of********Loans** | ** ** | **Average Loan  Size** | ** ** |
| Real estate — commercial     |       | 39                         |       | $                          | 668        |   | 11 |   | $ | 680 |   |
| Construction and land development |       | 8                          |       | 883                        |       | 5 |   | 770 |   |
| Real estate — residential    |       | 24                         |       | 336                        |       | 14 |   | 360 |   |
| Commercial and industrial         |       | 42                         |       | 198                        |       | 20 |   | 204 |   |
| Consumer                          |       | 33                         |       | 30                         |       | 47 |   | 20 |   |
| **GROSS LOANS**                   |       | 146                        |       | $                          | 346        |   | 97 |   | $ | 221 |   |

 

Repricing of portfolio - The following table summarizes the maturities forfixed rate loans and the repricing intervals for adjustable rate loans.  A portion of the adjustable rate loans havefloors which will keep those loans from repricing until interest rates moveabove those floors.

 
| ** **                          | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **Principal  Balance**      | ** ** | **Principal  Balance**      | ** ** |
| **($ in thousands)  Interval** | ** ** | **Fixed  Rate**             | ** ** | **Adjustable  Rate(1)**     | ** ** | **Total** | ** ** | **Fixed  Rate** | ** ** | **Adjustable  Rate(2)** | ** ** | **Total** | ** ** |
| < 3 months                       |       | $                           | 1,340      |                        | $          | 23,970 |   | $ | 25,310 |   | $ | 11 |   | $ | 12,522 |   | $ | 12,533 |   |
| > 3 to 12 months                 |       | 979                         |       | —                      |       | 979 |   | 49 |   | — |   | 49 |   |
| > 1 to 3 years                   |       | 2,957                       |       | —                      |       | 2,957 |   | 3,026 |   | — |   | 3,026 |   |
| > 3 to 5 years                   |       | 10,319                      |       | —                      |       | 10,319 |   | 4,282 |   | — |   | 4,282 |   |
| > over 5 years                   |       | 10,939                      |       | —                      |       | 10,939 |   | 1,523 |   | — |   | 1,523 |   |
| Gross Loans Receivable              |       | $                           | 26,534     |                        | $          | 23,970 |   | $ | 50,504 |   | $ | 8,891 |   | $ | 12,522 |   | $ | 21,413 |   |

 

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(1)Of the $24.0 million adjustable rate loans, $10.8million mature after December 31, 2010.

 

(2)Of the $12.5 million adjustable rate loans, $6.9million mature after December 31, 2009.

 

Contractual maturity of portfolio - The following tables set forthinformation at December 31, 2009 and 2008, regarding the dollar amount ofloans maturing in the Bank’s portfolio based on the contractual terms tomaturity. The table does not give effect to potential prepayments. Loans thathave no stated schedule of repayments or maturity are reported as due in oneyear or less.

 

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

 
| ** **                        | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------|------------|----------------------------|------------|
| **($ in thousands)**         | ** ** | **<1 Year**             | ** ** | **1 - 5 Years** | ** ** | **5 - 15  Years** | ** ** | **Over 15  Years** | ** ** | **Total Loans** | ** ** |
| Real estate — commercial     |       | $                          | 30         |   | $ | 6,174 |   | $ | 1,275 |   | $ | — |   | $ | 7,479 |   |
| Construction and land development |       | 3,104                      |       | 745 |   | — |   | — |   | 3,849 |   |
| Real estate — residential    |       | 1                          |       | 416 |   | — |   | 4,626 |   | 5,043 |   |
| Commercial and industrial         |       | 2,267                      |       | 1,569 |   | 248 |   | — |   | 4,084 |   |
| Consumer                          |       | 242                        |       | 716 |   | — |   | — |   | 958 |   |
| Gross Loans Receivable            |       | $                          | 5,644      |   | $ | 9,620 |   | $ | 1,523 |   | $ | 4,626 |   | $ | 21,413 |   |

 

**Asset Quality**

 

General — Management, along with the Bank’s directors’ creditcommittee, consisting of the Bank’s President & Chief ExecutiveOfficer, the Bank’s Chief Credit Officer, and two independent board members,approve loans above established levels, monitor the credit quality of the Bank’sassets, review classified and other identified loans and review management’srecommendation for the proper level of allowances to allocate against the Bank’sloan portfolio, in each case subject to guidelines approved by the Bank’s boardof directors.

 

Loan delinquencies - If a borrower fails to make a required payment on aloan, the Bank will attempt to cure the deficiency by contacting the borrowerand seeking payment. Contact is generally made following the fifth day after apayment is due, at which time a late payment fee is assessed. In most cases,delinquencies are cured promptly.  Whilethe Bank generally prefers to work with borrowers to resolve such problems, ifa payment becomes 60 - 90 days delinquent, the Bank may institute foreclosureor other remedies, as necessary, to minimize any potential loss.

 

Non-performing assets - At December 31, 2009 and 2008, respectively,the Bank had $3,000 and no non-performing assets. Non-performing assets are definedas non-performing loans and real estate acquired by foreclosure or deed-in-lieuthereof.  Non-performing loans aredefined as non-accrual loans and loans 90 days or more past due but stillaccruing interest, to the extent applicable. A loan is impaired when, based oncurrent information and events, it is probable the Bank will be unable tocollect all amounts due according to the contractual terms of the loanagreement. Troubled debt restructurings (“TDRs”) are defined as loans which theBank has agreed to modify by accepting repayment terms substantially belowcurrent market terms such as, but not limited to, the rate of interest charged,amortization of principal longer than normal for the type of collateral oracceptance of a different type or lower amount of collateral than typicallyaccepted.  Loans are placed onnon-accrual status when, in the judgment of management, the probability ofcollection of interest is deemed to be insufficient to warrant further accrual.When any such loan is placed on non-accrual status, previously accrued butunpaid interest will be deducted from interest income.  There were no loans placed on non-accrualduring 2009 or 2008.

 

Classified assets - Federal regulations require that eachinsured financial institution classify its assets on a regular basis. Inaddition, in connection with examinations of insured institutions, federalexaminers have authority to identify problem assets and, if appropriate,classify them. The Bank has established three classifications for potentialproblem assets: “substandard,” “doubtful” and “loss.” Loans classified as “substandard”are those loans with well defined weaknesses, such that future capacity torepay the loan has been negatively impacted. Loans classified as “doubtful” are those loans that have characteristicssimilar to substandard loans, but the weaknesses have declined to the pointwhere complete collection of the obligation from all sources is unlikely and aportion of the principal may be charged-off. Although loans classified as substandard do not duplicate loansclassified as 

 

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doubtful, bothsubstandard and doubtful loans may include some loans that are past due atleast 90 days, are on non-accrual status or have been restructured. Loansclassified as “loss” are those loans that are in the process of beingcharged-off. At December 31, 2009 and 2008, Solera National Bank had noloans classified as doubtful or loss.  However, the Bank does have substandard loans, totaling $3.8million.  As of December 31, 2009,available information regarding these loans did not indicate the assets wereimpaired.  Of the $3.8 million ofsubstandard loans, only $953,000 was 30 days or more past due.

 

Allowance for loan losses - The Bank maintains an allowance forestimated loan losses based on a number of quantitative and qualitativefactors. Factors used to assess the adequacy of the allowance for loan lossesare established based upon management’s assessment of the credit risk in theportfolio, historical loan loss, changes in the size, composition andconcentrations of the loan portfolio, general economic conditions, and changesin the legal and regulatory environment, among others.  In addition, because the Bank has limitedhistory on which to base future loan losses, a comparison of peer groupallowance ratios to gross loans is made with the intention of maintainingsimilar levels during the Bank’s de novo period of operation.  Provisions for loan losses may be providedboth on a specific and general basis. Specific and general valuation allowancesare increased by provisions charged to expense and decreased by charge-offs ofloans, net of recoveries. Specific allowances are provided for impaired loansfor which the expected loss is measurable. General valuation allowances areprovided based on a formula that incorporates the factors discussed above. TheBank periodically reviews the assumptions and formula by which additions aremade to the specific and general valuation allowances for losses in an effortto refine such allowances in light of the current status of the aforementionedfactors.

 

The following table sets forth the allowance for loanlosses activity for 2009 and 2008:

 
| **($ in thousands)**                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Balance at beginning of  year               |       | $        | 268        |     | $          | 47 |   |
| Provision charged to  expense               |       | 562      |       | 221      |       |
| Loans charged off                           |       | —   |       | —   |       |
| Recoveries on loans  previously charged off |       | —   |       | —   |       |
| Balance at end of year                      |       | $        | 830        |     | $          | 268 |   |

 

As a result of management’sevaluation of all the aforementioned factors, the allowance for loan lossesincreased 39 basis points from 1.25% at December 31, 2008 to 1.64% at December 31,2009.

 

The following tablesallocate the allowance for loan losses based on management’s judgment ofinherent losses by loan category.  It isbased on management’s assessment as of a given point in time of the riskcharacteristics for each of the component parts of the total loan portfolio andis subject to changes as and when the risk factors of each such component partschange.  Such allocation is notindicative of either the specific amounts or the loan categories in whichfuture charge-offs may be taken, nor should it be taken as an indicator offuture loss trends.  By presenting suchallocation, management does not mean to imply that the allocation is exact orthat the allowance for loan losses has been precisely determined from suchallocation.  For the year ended December 31,2008, a significant portion of the general valuation allowance was notallocated to each of the five categories specified in the tables below, butrepresented loans in all categories.  Itis represented by the term “Unallocated”, and includes amounts representingrisks associated with the decline in current economic conditions as well asfactors associated with being a de novo bank. There was no unallocated component in 2009 as the current economicconditions were evaluated by loan category and allocated as such.  This resulted in a shift in the percentage ofthe allowance allocated to certain categories and is indicative of the relativeweakness, both locally and nationally, of construction and development projectsand general weaknesses in the business sector.

 

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| ** **                        | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------|------------|----------------------------|------------|
| **($ in thousands)**         | ** ** | **Amount**                 | ** ** | **Percentage of  loans in each  category to  total loans** | ** ** | **Percentage of  year-end  allowance** | ** ** | **Percentage of  reserves to total  loans by  category** | ** ** |
| Real estate — commercial     |       | $                          | 363        |   | 51.6 | % | 43.7 | % | 1.39 | % |
| Construction and land development |       | 197                        |       | 14.0 |   | 23.8 |   | 2.79 |   |
| Real estate — residential    |       | 6                          |       | 15.9 |   | 0.7 |   | 0.07 |   |
| Commercial and industrial         |       | 259                        |       | 16.5 |   | 31.2 |   | 3.11 |   |
| Consumer                          |       | 5                          |       | 2.0 |   | 0.6 |   | 0.50 |   |
| Total Allowance for Loan Losses   |       | $                          | 830        |   | 100.0 | % | 100.0 | % | 1.64 | % |

 
| ** **                        | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------|------------|----------------------------|------------|
| **($ in thousands)**         | ** ** | **Amount**                 | ** ** | **Percentage of  loans in each  category to  total loans** | ** ** | **Percentage of  year-end  allowance** | ** ** | **Percentage of  reserves to total  loans by  category** | ** ** |
| Real estate — commercial     |       | $                          | 68         |   | 34.9 | % | 25.4 | % | 0.91 | % |
| Construction and land development |       | 34                         |       | 18.0 |   | 12.7 |   | 0.88 |   |
| Real estate — residential    |       | 23                         |       | 23.5 |   | 8.6 |   | 0.46 |   |
| Commercial and industrial         |       | 31                         |       | 19.1 |   | 11.5 |   | 0.76 |   |
| Consumer                          |       | 8                          |       | 4.5 |   | 3.0 |   | 0.83 |   |
| Unallocated                       |       | 104                        |       | — |   | 38.8 |   | — |   |
| Total Allowance for Loan Losses   |       | $                          | 268        |   | 100.0 | % | 100.0 | % | 1.25 | % |

 

The allowance for loan losses reflects management’sjudgment of the level of allowance adequate to absorb estimated credit lossesin the Bank’s loan portfolio. The board of directors of the Bankapproved a policy formulated bymanagement for a systematic analysis of the adequacy of the allowance. Thepolicy requires management to perform, on a quarterly basis, an in-depthanalysis of the allowance which is presented to and approved by the Bank’sboard of directors.

 

The Bank’s external asset review system and lossallowance methodology are designed to provide for timely identification ofproblem assets and recognition of losses. The overall adequacy of the allowancefor loan losses is reviewed and approved by the board of directors, on aquarterly basis. The committee’s responsibilities consist of risk management,as well as problem loan management, which include ensuring proper risk gradingof all loans and analysis of specific valuation allowances for all classifiedloans.  The current monitoring processincludes a process of segmenting the loan portfolio into pools of loans thatshare similar credit characteristics. The loan portfolio is further segmentedinto risk grades for criticized loans. These specific pools of loans are analyzed for purposes of calculatingthe contingent losses inherent within the portfolio.

 

The portion of the allowance for loan losses relatedto contingent losses is derived by analyzing the historical loss experience ofthe Bank’s peer groups and asset quality within each loan portfolio segment,along with assessing qualitative environmental factors, and correlating it withthe delinquency and classification status for each portfolio segment.  Loans that are categorized as “substandard”or “doubtful” are reviewed in more individual detail to determine if the loanis impaired.  Those deemed not to beimpaired are assigned a loss factor based on their risk grade.

 

Loss factors for each risk graded loan segment arebased on experience of peer institutions and national and regional averagespublished by the OCC and FDIC. Given that the Bank has extremely limitedhistorical trends, peer group statistics are used to validate the loss factorsapplied to the Bank’s various loan segments. In addition, the followingqualitative environmental elements are considered in determining the lossfactors used in calculating the contingent losses: the levels of and trends inpast due, the trend in volume and terms of loans, the effects of changes incredit concentrations, the effects of changes in risk selection andunderwriting standards, and other changes in 

 

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lending policies, procedures and practices, theexperience, ability and depth of management and other relevant staff, nationaland local economic trends and conditions, and industry conditions.

 

Classified assets are reviewed on a monthly basis.This evaluation of individual loans is documented in the internal asset reviewreport relating to the specific loan. As part of that review, potentialimpairment is also considered.  Anydeficiencies outlined by the impairment analysis are accounted for in thespecific valuation allowance for the loan. A loan is determined to be impairedif management determines the recovery of the Bank’s gross investment is notprobable. A specific valuation allowance is applied if the amount of loss canbe reasonably determined. To determine impairment, management assesses the fairvalue of the loan based on the present value of expected future cash flowsdiscounted at the loan’s effective interest rate or at the loan’s observablemarket price or the fair value of the collateral, if the loan is collateraldependent.

 

The allowance requirements for any loan segment couldbe different in the future as the quantitative and qualitative factors change.Consequently, provision levels may also be influenced by changes in thequantitative and qualitative factors quarter over quarter. In addition, theOCC, as an integral part of their examination process, periodically reviews theBank’s valuation allowance. This governing agency may require increases to theallowance based on their judgments of the information available to them at thetime of their examination.

 

Management believes that the Bank’s overall assetquality is sound, as supported by the Bank’s internal risk rating process.

 

**Investments**

 

In addition to loans, the Bank makes other investmentsprimarily in obligations guaranteed as to principal and interest by the UnitedStates or by quasi-government agencies and other taxable securities. Noinvestment in any of those instruments exceeds any applicable limitationimposed by law or regulation. The asset-liability management committee reviewsthe investment portfolio on an ongoing basis in order to ensure that theinvestments conform to the Bank’s policy as set by its board of directors.

 

At the date of purchase, theBank classifies debt and equity securities into one of two categories:held-to-maturity, or available-for-sale. Investmentsecurities that management has the positive intent and ability to hold tomaturity are classified as held-to-maturity and recorded at amortized cost.  Since its inception, the Bank has not had anyheld-to-maturity investments.  Investments to be held for an indefiniteamount of time, but not necessarily to maturity, are classified asavailable-for-sale and carried at fair value with unrealized gains or lossesreported as a separate component of stockholders’ equity in accumulated othercomprehensive income (loss), net of applicable income taxes.  Since the initialclassification of its investment securities, the Bank has not transferred anyinvestment securities between categories.

 

Declines in fair value of held-to-maturity andavailable-for-sale securities below their cost that are deemed to be other thantemporary are reflected in earnings as realized losses. Gains and losses on thesale of securities are recorded on the trade date and are determined using thespecific identification method. Purchase premiums and discounts are recognizedin interest income using the interest method over the estimated lives of thesecurities.

 

The following tables setforth the estimated market values and approximate weighted average yields ofthe debt securities in the investment portfolio by contractual maturity at December 31,2009 and 2008.  Expected maturities maydiffer from contractual maturities because borrowers may have the right to callor prepay obligations with or without call or prepayment penalties.  Additionally, accelerated principal payments arecommonly received on mortgage-backed securities (“MBS”) making it common forthem to mature prior to their contractual maturity date.

 

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| ** **                        | ** ** | **At  December 31, 2009** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **Within  One Year**           | ** ** | **After  One Year but   within Five Years** | ** ** | **After  Five Years but  within Ten Years** | ** ** | **After  Ten Years** | ** ** |
| **($ in thousands)**         | ** ** | **Amount**                     | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| **Securities available-for-sale** |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.  government agencies         |       | $                              | —     |   | — | % | $ | — |   | — | % | $ | 2,954 |   | 3.81 | % | $ | 2,215 |   | 5.43 | % |
| Corporate                         |       | 1,560                          |       | 5.99 |   | 4,845 |   | 5.35 |   | 3,718 |   | 5.09 |   | — |   | — |   |
| State  and municipal              |       | —                         |       | — |   | 978 |   | 5.66 |   | 12,563 |   | 5.23 |   | 8,660 |   | 5.59 |   |
| Agency  MBS                       |       | —                         |       | — |   | — |   | — |   | 499 |   | 3.05 |   | 35,449 |   | 4.52 |   |
| **Total**                         |       | $                              | 1,560      |   | 5.99 | % | $ | 5,823 |   | 5.49 | % | $ | 19,734 |   | 4.97 | % | $ | 46,324 |   | 4.77 | % |

 
| ** **                         | ** ** | **At December 31, 2008** | ** ** |
|------------------------------------|------------|-------------------------------|------------|
| ** **                         | ** ** | **Within One Year**           | ** ** | **After One Year but   within Five Years** | ** ** | **After Five Years but  within Ten Years** | ** ** | **After Ten Years** | ** ** |
| **($ in thousands)**          | ** ** | **Amount**                    | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| **Securities  available-for-sale** |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. government agencies           |       | $                             | —     |   | — | % | $ | — |   | — | % | $ | 3,745 |   | 5.31 | % | $ | 2,001 |   | 5.53 | % |
| Corporate                          |       | 1,503                         |       | 5.99 |   | — |   | — |   | — |   | — |   | — |   | — |   |
| State and municipal                |       | —                        |       | — |   | 499 |   | 5.90 |   | 1,622 |   | 5.56 |   | 809 |   | 5.39 |   |
| Agency MBS                         |       | —                        |       | — |   | — |   | — |   | 793 |   | 4.13 |   | 30,585 |   | 5.23 |   |
| **Total**                          |       | $                             | 1,503      |   | 5.99 | % | $ | 499 |   | 5.90 | % | $ | 6,160 |   | 5.22 | % | $ | 33,395 |   | 5.25 | % |

 

The table below sets forth the amounts anddistribution of the investment securities at December 31, 2009 and 2008.

 

 
| ** **                              | ** ** | **2009**            | ** ** | **2008**                  | ** ** |
|-----------------------------------------|------------|---------------------|------------|---------------------------|------------|
| **($ in thousands)**               | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
| **Securities available-for-sale**       |       |                |       |                      |       |   |   |   |   |
| Due within one year                     |       | $                   | 1,538      |                      | $          | 1,560 |   | $ | 1,516 |   | $ | 1,504 |   |
| Due after one year through five years   |       | 5,602               |       | 5,823                     |       | 497 |   | 499 |   |
| Due after five years through ten years  |       | 19,566              |       | 19,735                    |       | 6,168 |   | 6,160 |   |
| Due after ten years                     |       | 45,779              |       | 46,323                    |       | 33,228 |   | 33,394 |   |
| **Total securities available-for-sale** |       | $                   | 72,485     |                      | $          | 73,441 |   | $ | 41,409 |   | $ | 41,557 |   |

 

At December 31, 2009 and 2008, we held $1.1million of other equity securities consisting of Federal Home Loan Bank (“FHLB”)and Federal Reserve Bank stocks with no maturity date, which are not reflectedin the above tables.

 

**Deposit Services**

 

The Bank offers a variety of deposit products andservices at competitive interest rates. The Bank utilizes traditional andinnovative marketing methods to attract new clients and deposits, includingvarious forms of advertising and significant involvement in the localcommunities. The majority of depositors are residents of, and businesses andtheir employees located in, the Bank’s primary service areas and the state ofColorado. The Bank attracts these deposits through personal solicitation by itsofficers and directors, direct mail solicitations and advertisements publishedin the local media. The Bank does not operate a money desk or otherwise solicitbrokered deposits.

 

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The following table sets forth the composition of theBank’s deposits by type at December 31, 2009 and 2008:

 
| ** **                        | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **($ in thousands)**         | ** ** | **Amount**                 | ** ** | **% of  Total**            | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
| Noninterest-bearing demand        |       | $                          | 2,624      |                       | 2          | % | $ | 3,910 |   | 10 | % |
| Interest-bearing demand           |       | 6,830                      |       | 7                          |       | 2,604 |   | 7 |   |
| Money market accounts             |       | 3,555                      |       | 3                          |       | 6,488 |   | 17 |   |
| Savings accounts                  |       | 51,763                     |       | 50                         |       | 385 |   | 1 |   |
| Time deposits, less than $100,000 |       | 16,624                     |       | 16                         |       | 6,522 |   | 18 |   |
| Time deposits, $100,000 or more   |       | 23,005                     |       | 22                         |       | 17,753 |   | 47 |   |
| Total                             |       | $                          | 104,401    |                       | 100        | % | $ | 37,662 |   | 100 | % |

 

The following table presents average deposits by typeand the related average interest rate paid by deposit type for the years ended December 31,2009 and 2008:

 
| ** **                  | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------|------------|----------------------------|------------|----------------------------|------------|
| **($ in thousands)**   | ** ** | **Average  Balance**       | ** ** | **Average  Rate**          | ** ** | **Average  Balance** | ** ** | **Average  Rate** | ** ** |
| Non-interest bearing demand |       | $                          | 3,429      |                       | —     | % | $ | 1,053 |   | — | % |
| Interest bearing demand     |       | 5,308                      |       | 2.15                       |       | 3,140 |   | 0.33 |   |
| Money market accounts       |       | 4,086                      |       | 2.02                       |       | 7,960 |   | 2.05 |   |
| Savings accounts            |       | 19,417                     |       | 2.45                       |       | 103 |   | 1.58 |   |
| Time deposits               |       | 40,342                     |       | 2.80                       |       | 7,121 |   | 3.62 |   |
| Total                       |       | $                          | 72,582     |                       | 2.48       | % | $ | 19,377 |   | 2.24 | % |

 

Scheduled maturities of time deposits at December 31,2009 are as follows:

 
| **($ in thousands)**                    | ** ** | **Time  Deposits********greater than********$100,000** | ** ** | **Time  Deposits********less than********$100,000** | ** ** | **Total Time  Deposits** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------|------------|
| Due in three months or less                  |       | $                                                      | 4,747      |                                                | $          | 3,536                    |       | $ | 8,283 |   |
| Due in over three months through six months  |       | 4,947                                                  |       | 2,330                                               |       | 7,277                    |       |
| Due in over six months through twelve months |       | 8,868                                                  |       | 4,970                                               |       | 13,838                   |       |
| Due in over twelve months                    |       | 4,443                                                  |       | 5,788                                               |       | 10,231                   |       |
| Total                                        |       | $                                                      | 23,005     |                                                | $          | 16,624                   |       | $ | 39,629 |   |

 

Included in time deposits greater than $100,000 at December 31,2009 are approximately $20.0 million of time deposits greater than $100,000 butless than $250,000.  These time depositsqualify for expanded FDIC insurance coverage until January 1, 2014, whenthe standard insurance amount will return to $100,000 per depositor for allaccount categories except certain retirement accounts, which will remain at$250,000 per depositor.

 

The following table sets forth the amount andmaturities of the time deposits at December 31, 2008.

 

 
| **($ in thousands)**                    | ** ** | **Time  Deposits********greater than********$100,000** | ** ** | **Time  Deposits********less than********$100,000** | ** ** | **Total Time  Deposits** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------|------------|
| Due in three months or less                  |       | $                                                      | 4,450      |                                                | $          | 1,020                    |       | $ | 5,470 |   |
| Due in over three months through six months  |       | 1,658                                                  |       | 431                                                 |       | 2,089                    |       |
| Due in over six months through twelve months |       | 6,999                                                  |       | 3,772                                               |       | 10,771                   |       |
| Due in over twelve months                    |       | 4,646                                                  |       | 1,299                                               |       | 5,945                    |       |
| Total                                        |       | $                                                      | 17,753     |                                                | $          | 6,522                    |       | $ | 24,275 |   |

 

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**Supervision and Regulation**

 

*The following is not intended tobe a complete discussion but is intended to be a summary of some of the moresignificant provisions of laws and regulations which are applicable to theCompany and the Bank.  This regulatoryframework is intended to protect depositors, federal deposit insurance fundsand the banking system as a whole, and not to protect security holders.  To the extent that the information describesstatutory and regulatory provisions, it is qualified in its entirety byreference to those provisions. Additionally, such statues, regulations and policies are continuallyunder review by Congress and state legislatures, and federal and stateregulatory agencies.  A change instatutes, regulations or regulatory policies applicable to the Company or theBank, including changes in interpretations, could have a material effect on theBank’s business.*

 

General. Banking is a complex, highly regulated industry. Consequently, thegrowth and earnings performance of the Company and the Bank can be affected,not only by management decisions and general and local economic conditions, butalso by the statutes administered by, and the regulations and policies of,various governmental regulatory authorities. These authorities include, but arenot limited to, the Federal Reserve, the FDIC, the OCC, the Internal RevenueService and state taxing authorities. The effect of these statutes, regulationsand policies and any changes to any of them can be significant and cannot bepredicted.

 

The primary goals of the Bank regulators are tomaintain a safe and sound banking system and to facilitate the conduct of soundmonetary policy. In furtherance of these goals, Congress has created severallargely autonomous regulatory agencies and enacted numerous laws that governbanks, bank holding companies and the banking industry. The system ofsupervision and regulation applicable to the Company and the Bank establishes acomprehensive framework for their respective operations and is intendedprimarily for the protection of the FDIC’s deposit insurance funds, the Bank’sdepositors and the public, rather than the stockholders and creditors. Thefollowing is an attempt to summarize some of the relevant laws, rules andregulations governing banks and bank holding companies, but does not purport tobe a complete summary of all applicable laws, rules and regulationsgoverning banks and bank holding companies. The descriptions are qualified intheir entirety by reference to the specific statutes and regulations discussed.

 

**SoleraNational Bancorp, Inc.**

 

General.  As a result of the acquisition ofall of the capital stock of Solera National Bank, the Company is a bank holdingcompany registered with, and subject to regulation by, the Federal Reserveunder the Bank Holding Company Act of 1956, as amended.  The Bank HoldingCompany Act and other federal laws subject bank holding companies to particularrestrictions on the types of activities in which they may engage, and to arange of supervisory requirements and activities, including regulatoryenforcement actions for violations of laws and regulations.

 

In accordance withFederal Reserve policy, the Company is expected to act as a source of financialstrength to the Bank and commit resources to support the Bank.  Thissupport may be required under circumstances when the Company might not beinclined to do so absent this Federal Reserve policy.  As discussed below,the Company could be required to guarantee the capital plan of the Bank if itbecomes undercapitalized for purposes of banking regulations.

 

Certain Acquisitions.  The Bank Holding Company Actrequires every bank holding company to obtain the prior approval of the FederalReserve before (i) acquiring more than five percent of the votingstock of any bank or other bank holding company, (ii) acquiring all orsubstantially all of the assets of any bank or bank holding company, or (iii) mergingor consolidating with any other bank holding company.

 

Additionally, the BankHolding Company Act provides that the Federal Reserve may not approve any ofthese transactions if it would result in or tend to create a monopoly orsubstantially lessen competition or otherwise function as a restraint of trade,unless the anti-competitive effects of the proposed transaction are clearlyoutweighed by the public interest in meeting the convenience and needs of thecommunity to be served. The Federal Reserve is also required to consider thefinancial and managerial resources and future prospects of the bank holdingcompanies and banks concerned and the convenience and needs of the community tobe served. The Federal Reserve’s consideration of financial resources generallyfocuses on capital adequacy, which is discussed below.  As a result of thePatriot Act, which is discussed below, the Federal Reserve is also required toconsider the record of a bank holding company and its subsidiary bank(s) incombating money laundering activities in its evaluation of bank holding companymerger or acquisition transactions.

 

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Under the Bank HoldingCompany Act, if adequately capitalized and adequately managed, any bank holdingcompany incorporated in Delaware may purchase a bank located outside ofDelaware.  Conversely, an adequately capitalized and adequately managedbank holding company incorporated outside of Delaware may purchase a banklocated inside Delaware.  In each case, however, restrictions currentlyexist on the acquisition of a bank that has only been in existence for alimited amount of time or will result in specified concentrations of deposits.

 

Change in Bank Control.  Subject to various exceptions,the Bank Holding Company Act and the Change in Bank Control Act of 1978,together with related regulations, require Federal Reserve approval prior toany person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires25% or more of any class of voting securities of the bank holdingcompany.  With respect to Solera National Bancorp, Inc., control isrebuttably presumed to exist if a person or company acquires 10% or more, butless than 25%, of any class of voting securities.

 

Permitted Activities.  Generally, bank holding companiesare prohibited under the Bank Holding Company Act, from engaging in oracquiring direct or indirect control of more than 5% of the voting shares ofany company engaged in any activity other than (i) banking or managing orcontrolling banks or (ii) an activity that the Federal Reserve determinesto be so closely related to banking as to be a proper incident to the businessof banking.

 

Activities that theFederal Reserve has found to be so closely related to banking as to be a properincident to the business of banking include:

 

·                  factoring accounts receivable;

 

·                  making, acquiring, brokering or servicingloans and usual related activities;

 

·                  leasing personal or real property;

 

·                  operating a non-bank depositoryinstitution, such as a savings association;

 

·                  trust company functions;

 

·                  financial and investment advisoryactivities;

 

·                  conducting discount securities brokerageactivities;

 

·                  underwriting and dealing in governmentobligations and money market instruments;

 

·                  providing specified management consultingand counseling activities;

 

·                  performing selected data processingservices and support services;

 

·                  acting as agent or broker in sellingcredit life insurance and other types of insurance in connection with credittransactions; and

 

·                  performing selected insurance underwritingactivities.

 

Despite prior approval,the Federal Reserve has the authority to require a bank holding company toterminate an activity or terminate control of or liquidate or divest certainsubsidiaries or affiliates when the Federal Reserve believes the activity orthe control of the subsidiary or affiliate constitutes a significant risk tothe financial safety, soundness or stability of any of its bankingsubsidiaries.  A bank holding company that qualifies and elects to becomea financial holding company is permitted to engage in additional activitiesthat are financial in nature or incidental or complementary to financialactivity. The Bank Holding Company Act expressly lists the following activitiesas financial in nature:

 

·                  lending, exchanging, transferring,investing for others, or safeguarding money or securities;

 

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·                  insuring, guaranteeing or indemnifying againstloss or harm, or providing and issuing annuities, and acting as principal,agent or broker for these purposes, in any state;

 

·                  providing financial, investment oradvisory services;

 

·                  issuing or selling instrumentsrepresenting interests in pools of assets permissible for a bank to holddirectly;

 

·                  underwriting, dealing in or making amarket in securities;

 

·                  other activities that the Federal Reservemay determine to be so closely related to banking or managing or controllingbanks as to be a proper incident to managing or controlling banks;

 

·                  foreign activities permitted outside ofthe United States if the Federal Reserve has determined them to be usual inconnection with banking operations abroad;

 

·                  merchant banking through securities orinsurance affiliates; and

 

·                  insurance company portfolio investments.

 

To qualify to become afinancial holding company, Solera National Bank and any other depositoryinstitution subsidiary that the Company may own at the time must be wellcapitalized and well managed and must have a Community Reinvestment Act ratingof at least satisfactory. Additionally, the Company would be required to filean election with the Federal Reserve to become a financial holding company andto provide the Federal Reserve with 30 days written notice prior to engaging ina permitted financial activity.  A bank holding company that falls out ofcompliance with these requirements may be required to cease engaging in some ofits activities.  The Federal Reserve serves as the primary “umbrella”regulator of financial holding companies, with supervisory authority over eachparent company and limited authority over its subsidiaries.  Expandedfinancial activities of financial holding companies generally will be regulatedaccording to the type of such financial activity: banking activities by bankingregulators, securities activities by securities regulators and insuranceactivities by insurance regulators.  The Company currently has no plans tomake a financial holding company election.

 

Sound BankingPractice. Bank holding companies are not permitted to engage in unsound bankingpractices.  For example, the Federal Reserve’s Regulation Y requires aholding company to give the Federal Reserve prior notice of any redemption orrepurchase of its own equity securities, if the consideration to be paid,together with the consideration paid for any repurchases in the preceding year,is equal to 10% or more of the company’s consolidated net worth.  TheFederal Reserve may oppose the transaction if it believes that the transactionwould constitute an unsafe or unsound practice or would violate any law orregulation. As another example, a holding company could not impair itssubsidiary bank’s soundness by causing it to make funds available tonon-banking subsidiaries or their customers if the Federal Reserve believed itnot prudent to do so.

 

The FinancialInstitutions Reform, Recovery and Enforcement Act of 1989, or FIRREA, expandedthe Federal Reserve’s authority to prohibit activities of bank holding companiesand their non-banking subsidiaries which represent unsafe and unsound bankingpractices or which constitute violations of laws or regulations.  FIRREAincreased the amount of civil money penalties which the Federal Reserve canassess for activities conducted on a knowing and reckless basis, if thoseactivities caused a substantial loss to a depository institution.  Thepenalties can be as high as $1,000,000 for each day the activitycontinues.  FIRREA also expanded the scope of individuals and entitiesagainst which such penalties may be assessed.

 

Anti-tyingRestrictions. Bank holding companies and affiliates are prohibited from tying the provisionof services, such as extensions of credit, to other services offered by aholding company or its affiliates.

 

Dividends.  Consistent with its policy thatbank holding companies should serve as a source of financial strength for theirsubsidiary banks, the Federal Reserve has stated that, as a matter of prudence,a bank holding company, generally should not maintain a rate of distributionsto stockholders unless its available net income has been sufficient to fullyfund the distributions, and the prospective rate of earnings retention appearsconsistent with the bank holding company’s capital needs, asset quality andoverall financial condition.  In addition, the Company is subject tocertain restrictions on the making of distributions as a result of therequirement that the Bank maintain an

 

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adequate level of capitalas described below.  As a Delaware corporation, the Company is restrictedunder the Delaware General Corporation Law from paying dividends under certainconditions.

 

**SoleraNational Bank**

 

Solera National Bank is subject to the supervision,examination and reporting requirements of the National Bank Act and theregulations of the OCC.  The OCC regularly examines the Bank’s operationsand has the authority to approve or disapprove mergers, the establishment ofbranches and similar corporate actions.  The OCC also has the power toprevent the continuance or development of unsafe or unsound banking practicesor other violations of law.  Solera National Bank is also subject tonumerous state and federal statutes and regulations that affect its business,activities and operations.  The Bank’s deposits are insured by the FDIC tothe maximum extent provided by law.

 

Branching and InterstateBanking. National banks are required by the National Bank Act to adhere to branchinglaws applicable to state banks in the states in which they are located. Under current Colorado law, banks are permitted to establish branch officesthroughout Colorado with prior regulatory approval.  In addition, withprior regulatory approval, banks are permitted to acquire branches of existingbanks located in Colorado.  Finally, banks generally may branch acrossstate lines by merging with banks or by purchasing a branch of another bank inother states if allowed by the applicable states’ laws.  If the resultingbank is a Colorado state bank, the merger is subject to Colorado statelaw.  If the resulting bank is an out-of-state bank, the merger will besubject to the laws of that state.  Colorado law, with limited exceptions,currently permits branching across state lines through interstate mergers ifthe bank located in Colorado has been in existence for at least fiveyears.  Under the Federal Deposit Insurance Act, states may “opt-in” and allowout-of-state banks to branch into their state by establishing a new start-upbranch in the state.  Colorado law currently does not permit*de novo* branching into the state ofColorado.

 

Deposit InsuranceAssessments. Banks must pay assessments to the FDIC for federal deposit insuranceprotection.  The FDIC has adopted a risk-based assessment system asrequired by the Federal Deposit Insurance Corporation Improvement Act, orFDICIA.  Under this system, FDIC-insured depository institutions payinsurance premiums at rates based on their risk classification. Institutions assigned to higher risk classifications (that is,institutions that pose a higher risk ofloss to their respective deposit insurance funds) pay assessments at higherrates than institutions that pose a lower risk.  An institution’s riskclassification is assigned based on its capital levels and the level ofsupervisory concern the institution poses to the regulators.  In addition,the FDIC can impose special assessments in certain instances.  In order torestore the deposit insurance fund to its statutorily mandated minimum of1.15 percent over a period of several years, the FDIC increased depositinsurance premium rates at the beginning of 2009.  Currently, Solera National Bank pays depositassessments ranging from 16 to 19 cents per $100 of assessabledeposits.  The FDIC also implemented a five basis point specialassessment of each insured depository institution’s assets minus Tier 1 capitalas of June 30, 2009.  This specialassessment amount was capped at 10 basis points times the institution’sassessment base for the second quarter of 2009. The Company incurredapproximately $41,000 during 2009 for this special assessment.  The FDIC may take further actions in thefuture that result in higher assessment rates that could have a materialadverse effect on earnings.  The FDIC mayterminate its insurance of deposits if it finds that the institution hasengaged in unsafe and unsound practices, is in an unsafe or unsound conditionto continue operations, or has violated any applicable law, regulation, rule,order, or condition imposed by the FDIC.  The Bank’s deposit insuranceassessments may increase or decrease depending on the risk assessmentclassification to which the Bank is assigned by the FDIC.  Any increase ininsurance assessments could have an adverse effect on the Bank’s earnings.  On November 12, 2009, the FDIC adopted afinal rule requiring insured institutions to prepay slightly over threeyears of estimated insurance assessments. The pre-payment allowed the FDIC to strengthen the cash position of theDeposit Insurance Fund immediately without impacting earnings of theindustry.  Payment of the prepaid assessment,along with the payment of the Bank’s regular third quarter assessment was dueon December 30, 2009, at which time the Bank paid approximately $471,000for its three-year prepaid assessment.

 

Expanded FinancialActivities. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 expands thetypes of activities in which a holding company or national bank mayengage.  Subject to various limitations, the act generally permits holdingcompanies to elect to become financial holding companies and, along withnational banks, conduct certain expanded financial activities related toinsurance and securities, including securities underwriting, dealing and marketmaking; sponsoring mutual funds and investment companies; insuranceunderwriting and agency activities; merchant banking activities; and activitiesthat the Board of Governors of the Federal Reserve has determined to be closelyrelated to banking.  Banks with financial subsidiaries must establishcertain firewalls and safety and soundness controls, and must deduct theirequity investment in such subsidiaries

 

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from their equity capitalcalculations.  Expanded financial activities of financial holdingcompanies and banks will generally be regulated according to the type of suchfinancial activity: banking activities by banking regulators, securitiesactivities by securities regulators, and insurance activities by insuranceregulators.

 

Community ReinvestmentAct.  TheCommunity Reinvestment Act requires that, in connection with examinations offinancial institutions within its jurisdiction, the FDIC shall evaluate therecord of each financial institution in meeting the credit needs of itsassessment area, including low- and moderate-income neighborhoods.  Thesefacts are also considered in evaluating mergers, acquisitions, and applicationsto open a branch or facility.  Failure to adequately meet these criteriacould impose additional requirements and limitations on the Bank.  Becausethe Bank’s aggregate assets are currently less than $250 million, under theGramm-Leach-Bliley Act, it is subject to a Community Reinvestment Actexamination only once every 48 months. If we receive an outstanding rating on our first examination, our nextexam will be no sooner than 60 months. Additionally, the Bank must publicly disclose the terms of variousCommunity Reinvestment Act-related agreements.

 

Other Regulations.  Interest and other chargescollected or contracted for by the Bank will be subject to state usury laws andfederal laws concerning interest rates.  The Bank’s loan operations arealso subject to federal laws applicable to credit transactions, such as:

 

·                  the federal Truth-In-Lending Act,governing disclosures of credit terms to consumer borrowers;

 

·                  the Home Mortgage Disclosure Act of 1975,requiring financial institutions to provide information to enable the publicand public officials to determine whether a financial institution is fulfillingits obligation to help meet the housing needs of the community it serves;

 

·                  the Equal Credit Opportunity Act,prohibiting discrimination on the basis of race, creed or other prohibitedfactors in extending credit;

 

·                  the Fair Credit Reporting Act of 1978,governing the use and provision of information to credit reporting agencies;

 

·                  the Fair Debt Collection Act, governingthe manner in which consumer debts may be collected by collection agencies; and

 

·                  the rules and regulations of thevarious federal agencies charged with the responsibility of implementing thesefederal laws.

 

The deposit operations ofSolera National Bank are subject to:

 

·                  the Right to Financial Privacy Act, whichimposes a duty to maintain confidentiality of consumer financial records andprescribes procedures for complying with administrative subpoenas of financialrecords; and

 

·                  the Electronic Funds Transfer Act andRegulation E issued by the Federal Reserve to implement that act, which governautomatic deposits to and withdrawals from deposit accounts and customers’rights and liabilities arising from the use of automated teller machines andother electronic banking services.

 

Dividends.  Solera National Bank is requiredby federal law to obtain prior approval of the OCC for payments of dividends ifthe total of all dividends declared by its board of directors in any year willexceed its net profits earned during the current year combined with itsretained net profits of the immediately preceding two years, less any requiredtransfers to surplus.  In addition, Solera National Bank is unable to paydividends unless and until it has positive retained earnings.

 

In addition, under theFDICIA, Solera National Bank may not pay any dividend if the payment of thedividend would cause the Bank to become undercapitalized or in the event theBank is “undercapitalized.”  The OCC may further restrict the payment ofdividends by requiring that a financial institution maintain a higher level ofcapital than would otherwise be required to be “adequately capitalized” forregulatory purposes.  Moreover, if, in the

 

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opinion of the OCC,Solera National Bank is engaged in an unsound practice (which could include thepayment of dividends), the OCC may require, generally after notice and hearing,that Solera National Bank cease such practice.  The OCC has indicated thatpaying dividends that deplete a depository institution’s capital base to aninadequate level would be an unsafe banking practice.  Moreover, the OCChas also issued policy statements providing that insured depositoryinstitutions generally should pay dividends only out of current operatingearnings.

 

Check Clearing for the21st Century Act.  The Check Clearing for the 21st  Century Act, also knownas Check 21, gives “substitute checks,” such as a digital image of a check andcopies made from that image, the same legal standing as the original papercheck.  Some of the major provisions include:

 

·                  allowing check truncation without makingit mandatory;

 

·                  demanding that every financialinstitution communicate to accountholders in writing a description of itssubstitute check processing program and their rights under the law;

 

·                  legalizing substitutions for andreplacements of paper checks without agreement from consumers;

 

·                  retaining in place the previouslymandated electronic collection and return of checks between financialinstitutions only when individual agreements are in place;

 

·                  requiring that when accountholdersrequest verification, financial institutions produce the original check (or acopy that accurately represents the original) and demonstrate that the accountdebit was accurate and valid; and

 

·                  requiring recrediting of funds to anindividual’s account on the next business day after a consumer proves that thefinancial institution has erred.

 

Capital Adequacy.  The Federal Reserve monitors thecapital adequacy of bank holding companies, such as Solera National Bancorp,and the OCC monitors the capital adequacy of Solera National Bank.  Thefederal bank regulators use a combination of risk-based guidelines and leverageratios to evaluate capital adequacy and considerthese capital levels when taking action on varioustypes of applications and when conducting supervisory activities related tosafety and soundness.  The risk-based guidelines apply on a consolidatedbasis to bank holding companies with consolidated assets of $500 million ormore and, generally, on a bank-only basis for bank holding companies with lessthan $500 million in consolidated assets.  Each insured depositorysubsidiary of a bank holding company with less than $500 million in consolidatedassets is expected to be “well-capitalized.”

 

The risk-based capitalstandards are designed to make regulatory capital requirements more sensitiveto differences in risk profiles among banks and their holding companies, toaccount for off-balance-sheet exposure, and to minimize disincentives forholding liquid assets.  Assets and off-balance-sheet items, such as letterof credit and unfunded loan commitments, are assigned to broad risk categories,each with appropriate risk weights.  The resulting capital ratiosrepresent capital as a percentage of total risk-weighted assets andoff-balance-sheet items. The minimum guideline for the ratio of total capitalto risk-weighted assets is 8%.  Total capital consists of two components,Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists of commonstock, minority interests in the equity accounts of consolidated subsidiaries,noncumulative perpetual preferred stock, and a limited amount of qualifyingcumulative perpetual preferred stock, less goodwill and other specifiedintangible assets.  Tier 1 Capital must equal at least 4% of risk-weightedassets.  Tier 2 Capital generally consists of subordinated debt, preferredstock (other than that which is included in Tier 1 Capital), and a limitedamount of loan loss reserves.  The total amount of Tier 2 Capital islimited to 100% of Tier 1 Capital.

 

In addition, the FederalReserve has established minimum leverage ratio guidelines for bank holdingcompanies with assets of $500 million or more.  These guidelines providefor a minimum ratio of Tier 1 Capital to average assets, less goodwill andother specified intangible assets, of 3% for bank holding companies that meetspecified criteria, including having the highest regulatory rating andimplementing the Federal Reserve’s risk-based capital measure for marketrisk.  All other bank holding companies with assets of $500 million ormore generally are required to maintain a leverage ratio of at least 4%. The guidelines also provide that bank holding companies of such sizeexperiencing internal growth or making acquisitions will be expected tomaintain strong capital positions substantially above the minimum supervisorylevels without reliance on intangible assets.  The Federal Reserveconsiders the leverage ratio and other indicators of capital strength inevaluating proposals for expansion or new activities.  The Federal Reserveand the FDIC recently adopted amendments to their risk-based capitalregulations to

 

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provide for theconsideration of interest rate risk in the agencies’ determination of a bankinginstitution’s capital adequacy.

 

Bank holding companieswith assets under $500 million are exempt from the capital adequacy guidelinesif they meet certain qualitative requirements.  However, a bank holdingcompany does not qualify for the exemption if it, or its nonbanking subsidiary,as applicable, (i) is engaged in significant nonbanking activities, (ii) conductssignificant off-balance-sheet activities, or (iii) has a material amountof registered debt or equity securities (other than trust preferredsecurities).  Certain transition rules apply to trust preferredsecurities, but these transition rules do not apply to Solera NationalBancorp because the Company did not issue trust preferred securities before September 28,2005.  To continue to qualify for the exemption from the capital adequacyguidelines, small bank holding companies (i) must be well-capitalized, (ii) aresubject to debt retirement requirements, and (iii) are subject to certaindebt-to-equity ratios, generally including a restriction on paying dividends ifthe bank holding company’s debt to equity ratio is not 1.0:1 or less.

 

Failure to meet capitalguidelines could subject a bank or bank holding company to a variety ofenforcement remedies, including issuance of a capital directive, thetermination of deposit insurance by the FDIC, a prohibition on acceptingbrokered deposits, and other restrictions on its business.

 

Concentrated CommercialReal Estate Lending Regulations.  The OCC, along with the Federal Reserve andthe FDIC, has promulgated guidance governing financial institutions withconcentrations in commercial real estate lending.  The guidance providesthat a bank has a concentration in commercial real estate lending if (i) totalreported loans for construction, land development, and other land represent100% or more of total capital or (ii) total reported loans secured bymultifamily and non-farm non-residential properties and loans for construction,land development, and other land represent 300% or more of total capital andthe outstanding balance of such loans has increased 50% or more during theprior 36 months.  At December 31, 2009, Solera National Bank’s ratioswere 47% and 132%, respectively, well below the regulatory guideline for highlyconcentrated.  If a concentration ispresent, management must employ heightened risk management practices includingboard and management oversight and strategic planning, development ofunderwriting standards, risk assessment and monitoring through market analysisand stress testing, and increasing capital requirements.

 

Prompt Corrective ActionRegulations. Under the prompt corrective action regulations, the FDIC is required andauthorized to take supervisory actions against undercapitalized banks. For this purpose, a bank is placed in one of the following five categoriesbased on the Bank’s capital:

 

·                  well-capitalized (at least 5% leveragecapital, 6% Tier 1 risk-based capital and 10% total risk-based capital);

 

·                  adequately capitalized (at least 4%leverage capital, 4% Tier 1 risk-based capital and 8% total risk-basedcapital);

 

·                  ·undercapitalized (less than 8% totalrisk-based capital, 4% Tier 1 risk-based capital or 3% leverage capital);

 

·                  significantly undercapitalized (less than6% total risk-based capital, 3% Tier 1 risk-based capital or 3% leveragecapital); and

 

·                  critically undercapitalized (less than 2%tangible capital).

 

Federal bankingregulators are required to take various mandatory supervisory actions and areauthorized to take other discretionary actions with respect to institutions inthe three undercapitalized categories.  The severity of the action dependsupon the capital category in which the institution is placed.  Generally,subject to a narrow exception, banking regulators must appoint a receiver orconservator for an institution that is “critically undercapitalized.”  Thefederal banking agencies have specified by regulation the relevant capitallevel for each category.  An institution that is categorized as “undercapitalized,”“significantly undercapitalized,” or “critically undercapitalized” is requiredto submit an acceptable capital restoration plan to its appropriate federalbanking agency.  A bank holding company must guarantee that a subsidiarydepository institution meets its capital restoration plan, subject to variouslimitations.  The controlling holding company’s obligation to fund acapital restoration plan is limited to the lesser of 5% of an “undercapitalized”subsidiary’s assets at the time it became

 

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“undercapitalized” or theamount required to meet regulatory capital requirements.  An “undercapitalized”institution is also generally prohibited from increasing its average totalassets, making acquisitions, establishing any branches or engaging in any newline of business, except under an accepted capital restoration plan or withFDIC approval.  The regulations also establish procedures for downgradingan institution to a lower capital category based on supervisory factors otherthan capital.

 

Restrictions onTransactions with Affiliates and Loans to Insiders.  Solera National Bancorp andSolera National Bank are subject to the provisions of Section 23A of theFederal Reserve Act.  These provisions place limits on the amount of:

 

·                  the Bank’s loans or extensions of creditto affiliates;

 

·                  the Bank’s investment in affiliates;

 

·                  assets that the Bank may purchase fromaffiliates, except for real and personal property exempted by the FederalReserve;

 

·                  the amount of loans or extensions ofcredit to third parties collateralized by the securities or obligations ofaffiliates; and

 

·                  the Bank’s guarantee, acceptance orletter of credit issued on behalf of an affiliate.

 

The total amount of theabove transactions is limited in amount, as to any one affiliate, to 10% of theBank’s capital and surplus and, as to all affiliates combined, to 20% of itscapital and surplus.  In addition to the limitation on the amount of thesetransactions, each of the above transactions must also meet specifiedcollateral requirements.  The Bank must also comply with other provisionsdesigned to avoid the taking of low-quality assets.

 

Solera National Bancorpand Solera National Bank are also subject to the provisions of Section 23Bof the Federal Reserve Act which, among other things, prohibit the Bank fromengaging in any transaction with an affiliate unless the transaction is onterms substantially the same, or at least as favorable to the Bank or itssubsidiaries, as those prevailing at the time for comparable transactions withnonaffiliated companies.

 

The Bank is also subjectto restrictions on extensions of credit to its executive officers, directors,principal stockholders and their related interests.  These types ofextensions of credit (1) must be made on substantially the same terms,including interest rates and collateral, as those prevailing at the time forcomparable transactions with third parties and (2) must not involve morethan the normal risk of repayment or present other unfavorable features.

 

Privacy.  Financial institutions arerequired to disclose their policies for collecting and protecting confidentialinformation.  Customers generally may prevent financial institutions fromsharing personal financial information with nonaffiliated third parties exceptfor third parties that market the institutions’ own products andservices.  Additionally, financial institutions generally may not discloseconsumer account numbers to any nonaffiliated third party for use intelemarketing, direct mail marketing or other marketing through electronic mailto consumers.

 

Bank Secrecy Act.  Congress enacted the Bank SecrecyAct (“BSA”) to require financial institutions to maintain certain records andto report certain transactions to prevent such institutions from being used tohide money derived from criminal activity and tax evasion. The BSA establishes,among other things: (a) record keeping requirements to assist governmentenforcement agencies in tracing financial transactions and flow of funds; (b) reportingrequirements for Suspicious Activity Reports and Currency Transaction Reportsto assist government enforcement agencies in detecting patterns of criminalactivity; (c) enforcement provisions authorizing criminal and civilpenalties for illegal activities and violations of the BSA and its implementingregulations; and (d) safe harbor provisions that protect financialinstitutions from civil liability for their cooperative efforts.  SoleraNational Bank has a Bank Secrecy Act compliance program.

 

Anti-terrorismLegislation. In the wake of the tragic events of September 11th, on October 26,2001, the President signed into law the Uniting and Strengthening America byProviding Appropriate Tools Required to Intercept and Obstruct Terrorism Act of2001.  Also known as the “Patriot Act,” the law enhances the powers of the

 

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federal government andlaw enforcement organizations to combat terrorism, organized crime and moneylaundering.  The Patriot Act significantly amends and expands theapplication of the Bank Secrecy Act, including enhanced measures regardingcustomer identity, new suspicious activity reporting rules and enhancedanti-money laundering programs.

 

Under the Patriot Act,financial institutions are subject to prohibitions against specified financialtransactions and account relationships as well as enhanced due diligence and “knowyour customer” standards in their dealings with foreign financial institutionsand foreign customers.  For example, the enhanced due diligence policies,procedures and controls generally require financial institutions to takereasonable steps:

 

·                  to conduct enhanced scrutiny of accountrelationships to guard against money laundering and report any suspicioustransaction; and

 

·                  to ascertain the identity of the nominaland beneficial owners of, and the source of funds deposited into, each account asneeded to guard against money laundering and report any suspicioustransactions.

 

Under the Patriot Act,financial institutions must also establish anti-money laundering programs. ThePatriot Act sets forth minimum standards for these programs, including: (i) thedevelopment of internal policies, procedures and controls; (ii) thedesignation of a compliance officer; (iii) an ongoing employee trainingprogram; and (iv) an independent audit function to test the programs.

 

In addition, the PatriotAct requires the bank regulatory agencies to consider the record of a bank incombating money laundering activities in their evaluation of bank merger oracquisition transactions.  Regulations proposed by the U.S. Department ofthe Treasury to effectuate certain provisions of the Patriot Act provide thatall transaction or other correspondent accounts held by a U.S. financialinstitution on behalf of any foreign bank must be closed within 90 days afterthe final regulations are issued, unless the foreign bank has provided the U.S.financial institution with a means of verification that the institution is nota “shell bank.”  Proposed regulations interpreting other provisions of thePatriot Act are continuing to be issued.

 

Under the authority ofthe Patriot Act, the Secretary of the Treasury adopted rules on September 26,2002 increasing the cooperation and information sharing among financialinstitutions, regulators and law enforcement authorities regarding individuals,entities and organizations engaged in, or reasonably suspected based oncredible evidence of engaging in, terrorist acts or money launderingactivities.  Under these rules, a financial institution is required to:

 

·                  expeditiously search its records todetermine whether it maintains or has maintained accounts, or engaged intransactions with individuals or entities, listed in a request submitted by theFinancial Crimes Enforcement Network, or FinCEN;

 

·                  notify FinCEN if an account ortransaction is identified;

 

·                  designate a contact person to receive informationrequests;

 

·                  limit use of information provided byFinCEN to: (1) reporting to FinCEN, (2) determining whether toestablish or maintain an account or engage in a transaction and (3) assistingthe financial institution in complying with the Bank Secrecy Act; and

 

·                  maintain adequate procedures to protectthe security and confidentiality of FinCEN requests.

 

Under the rules, afinancial institution may also share information regarding individuals,entities, organizations and countries for purposes of identifying and, whereappropriate, reporting activities that it suspects may involve possibleterrorist activity or money laundering.  Such information-sharing isprotected under a safe harbor if the financial institution:  (i) notifiesFinCEN of its intention to share information, even when sharing with anaffiliated financial institution; (ii) takes reasonable steps to verifythat, prior to sharing, the financial institution or association of financialinstitutions with which it intends to share information has submitted a noticeto FinCEN; (iii) limits the use of shared information to identifying andreporting on money laundering or terrorist activities, determining whether toestablish or maintain an account or engage in a transaction, or assisting it incomplying with

 

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the Security Act; and (iv) maintainsadequate procedures to protect the security and confidentiality of theinformation.  Any financial institution complying with these rules willnot be deemed to have violated the privacy requirements discussed above.

 

The Secretary ofthe Treasury also adopted a rule on September 26, 2002 intended toprevent money laundering and terrorist financing through correspondent accountsmaintained by U.S. financial institutions on behalf of foreign banks. Under the rule, financial institutions:  (i) are prohibited fromproviding correspondent accounts to foreign shell banks; (ii) are requiredto obtain a certification from foreign banks for which they maintain acorrespondent account stating the foreign bank is not a shell bank and that itwill not permit a foreign shell bank to have access to the U.S. account; (iii) mustmaintain records identifying the owner of the foreign bank for which they maymaintain a correspondent account and its agent in the United States designatedto accept services of legal process; (iv) must terminate correspondentaccounts of foreign banks that fail to comply with or fail to contest a lawfulrequest of the Secretary of the Treasury or the Attorney General of the UnitedStates, after being notified by the Secretary or Attorney General.

 

Sarbanes-Oxley Actof 2002. The Sarbanes-Oxley Act of 2002 was enacted in response to public concernsregarding corporate accountability in connection with certain accountingscandals.  The stated goals of the Sarbanes-Oxley Act are to increasecorporate responsibility, to provide for enhanced penalties for accounting andauditing improprieties at publicly traded companies, and to protect investorsby improving the accuracy and reliability of corporate disclosures pursuant tothe securities laws.

 

The Sarbanes-OxleyAct includes specific additional disclosure requirements, requires theSecurities and Exchange Commission and national securities exchanges to adoptextensive additional disclosure, corporate governance and other related rules,and mandates further studies of certain issues by the Securities and ExchangeCommission.  The Sarbanes-Oxley Act represents significant federalinvolvement in matters traditionally left to state regulatory systems, such asthe regulation of the accounting profession, and to state corporate law, suchas the relationship between a board of directors and management and between aboard of directors and its committees.

 

The Companyanticipates that it will incur additional expense in complying with theprovisions of the Sarbanes-Oxley Act and the regulations that have beenpromulgated to implement the Sarbanes-Oxley Act, particularly those regulationsrelating to the establishment of internal controls over financial reporting.

 

EmergencyEconomic Stabilization Act.  In responseto the financial crisis affecting the banking system and financial markets, theEmergency Economic Stabilization Act, (“EESA”), was signed into law on October 3,2008, and established the Troubled Asset Relief Program, (“TARP”). As part ofTARP, the U.S. Treasury established the Capital Purchase Program, (“CPP”), toprovide up to $700 billion of funding to eligible financial institutionsthrough the purchase of capital stock and other financial instruments for thepurpose of stabilizing and providing liquidity to the U.S. financial markets.Due to its strong capital position, the Company was approved for participationin CPP but declined to participate.  In connection with EESA, therehave been numerous actions by the Federal Reserve Board, Congress, the U.S.Treasury, the FDIC, the SEC and others to further the economic and bankingindustry stabilization efforts under EESA. It remains unclear at this time whatfurther legislative and regulatory measures will be implemented under EESAaffecting the Company.

 

AmericanRecovery and Reinvestment Act of 2009.  On February 17,2009, President Obama signed into law the American Recovery and ReinvestmentAct of 2009, (“ARRA”), more commonly known as the economic stimulus or economicrecovery package. ARRA includes a wide variety of programs intended tostimulate the economy and provide for extensive infrastructure, energy, health,and education needs. In addition, ARRA imposes certain new executivecompensation and corporate expenditure limits on all current and future TARPrecipients that are in addition to those previously announced by the U.S.Treasury. These limits remain in effect until the institution has repaid theU.S. Treasury, which is now permitted under ARRA without penalty and withoutthe need to raise new capital, subject to the U.S. Treasury’s consultation withthe recipient’s appropriate regulatory agency.

 

ProposedLegislation and Regulatory Action.  New regulations and statutes are regularlyproposed that contain wide-ranging proposals for altering the structures,regulations and competitive relationships of financial institutions operatingin the United States.  The Company cannot predict whether or in what formany proposed regulation or statute will be adopted or the extent to which itsbusiness may be affected by any new regulation or statute.

 

Effect ofGovernmental Monetary Policies.  The commercial banking business is affectednot only by general economic conditions but also by the fiscal and monetarypolicies of the Federal Reserve.  Some of the

 

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instruments of fiscal andmonetary policy available to the Federal Reserve include changes in thediscount rate on member bank borrowings, the fluctuating availability ofborrowings at the “discount window,” open market operations, the imposition ofand changes in reserve requirements against banks’ deposits and assets offoreign branches, the imposition of and changes in reserve requirements againstcertain borrowings by banks and their affiliates, and the placing of limits oninterest rates that banks may pay on time and savings deposits. Such policiesinfluence to a significant extent the overall growth of bank loans,investments, and deposits and the interest rates charged on loans or paid ontime and savings deposits.  The Company cannot predict the nature offuture fiscal and monetary policies and the effect of such policies on thefuture business and its earnings.

 

**All of the above laws and regulationsadd to the cost of operating the Company and the Bank.  The Company would also note that there hasbeen an expansion in recent years by certain financial service providers thatare not subject to the same rules and regulations as the Company and theBank. These institutions, because they are not so highly regulated, may have acompetitive advantage over the Company and the Bank and may continue to drawfunds away from traditional banking institutions.**

 

**Item 1A.  Risk Factors**

 

***The reader shouldcarefully consider the following risk factors and all other informationcontained in this report in connection with his, her or its ownership of orinvestment in the Company’s securities. These risks and uncertainties are notthe only ones faced by the Company or the Bank. Additional risks anduncertainties not presently known to the Company or that the Company currentlybelieves are immaterial also may impair the business of the Company or theBank. If any of the events described in the following risk factors occur, theCompany’s and the Bank’s business, results of operations and financialcondition could be materially adversely affected. In addition, the tradingprice of the Company’s stock could decline due to any of the events describedin these risks.***

 

*TheCompany’s business may be adversely affected by conditions in the financialmarkets and economic conditions generally.*

 

Since December 2007,the United States has been in a recession. Business activity across a widerange of industries and regions is greatly reduced and local governments andmany businesses are facing serious difficulties due to high unemployment, thelack of consumer spending, a faltering housing market and the lack of liquidityin the credit markets.

 

Since mid-2007, andparticularly during the second half of 2008, the financial services industryand the securities markets generally were materially and adversely affected bysignificant declines in the values of nearly all asset classes and by a seriouslack of liquidity. This was initially triggered by declines in home prices andthe values of subprime mortgages, but spread to all mortgage and real estateasset classes, to leveraged bank loans and to nearly all asset classes,including equities.  In 2009, there was somerecovery in the value of some asset classes, but the economy remains weak withhigh unemployment, lower property values, and low consumer confidence.

 

The Company’s financialperformance generally, and in particular the ability of borrowers to payinterest on and repay principal of outstanding loans and leases and the valueof collateral securing those loans and leases, is highly dependent upon thebusiness environment in the markets where the Company operates, in the State ofColorado, and in the United States as a whole. A favorable business environmentis generally characterized by, among other factors, economic growth, efficientcapital markets, low inflation, high business and investor confidence, andstrong business earnings. Unfavorable or uncertain economic and marketconditions can be caused by: declines in economic growth, declines in housingand real estate valuations, business activity or investor or businessconfidence; limitations on the availability or increases in the cost of creditand capital; increases in inflation or interest rates; natural disasters; or acombination of these or other factors.

 

Overall, during 2009, thebusiness environment has been adverse for many households and businesses in theUnited States and worldwide. It is expected that the business environment in Colorado,the United States and worldwide will be slow to recover from the 2008-2009recession. There can be no assurance that these conditions will improve in thenear term. Such conditions could materially and adversely affect the creditquality of the Company’s loans, and therefore, the Company’s results ofoperations and financial condition.

 

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*Continuation of the economic downturn could reduce ourcustomer base, our level of deposits, and demand for financial products such asloans.*

 

Our success significantlydepends upon the growth in population, income levels, deposits, and housingstarts in our market.  The currenteconomic downturn has negatively affected the market in which we operate.  If the communities in which we operate do notgrow or if prevailing economic conditions locally or nationally remainunfavorable, our business may not succeed. A continuation of the economic downturn or prolonged recession wouldlikely result in a deterioration of the quality of our loan portfolio andreduce our level of deposits, which in turn would hurt our business.  If the economic downturn continues or aprolonged economic recession occurs in the economy as a whole, borrowers willbe less likely to repay their loans as scheduled.  Moreover, in many cases the value of realestate or other collateral that secures our loans has been adversely affectedby the economic conditions and could continue to be negatively affected.  Unlike many larger institutions, we are notable to spread the risks of unfavorable local economic conditions across alarge number of diversified economies.  Acontinued economic downturn could, therefore, result in losses that materiallyand adversely affect our business.

 

*Emergencymeasures designed to stabilize the U.S. financial system are beginning to winddown.*

 

Since 2008, variouslegislative and regulatory actions have been implemented to respond to thefinancial crises affecting the banking system and financial markets and to therecession.  Many of these programs are beginning toexpire.  The wind-down of these programs may have a direct adverseeffect on us or a broader adverse impact on the financialsector.  TARP was established pursuant to EESA, as amended by ARRA,whereby the Treasury has the authority to, among other things, spend up to$700 billion to purchase equity in financial institutions, purchasemortgages, mortgage-backed securities and certain other financial instrumentsfrom financial institutions for the purpose of stabilizing and providingliquidity to the U.S. financial markets.  Though TARP was scheduledto expire on December 31, 2009, Treasury announced that it will extend TARPuntil October 3, 2010, in order to retain an adequate financial stabilityreserve if financial conditions worsen and threaten the economy.  On October 21,2009, the FDIC voted to end the Debt Guarantee Program portion of the TemporaryLiquidity Guarantee Program, which guarantees certain “newly-issued unsecureddebt” of banks and certain holding companies.  The Debt GuaranteeProgram expired on October 31, 2009, with the guarantee period on suchdebt expiring on December 30, 2012.  The Transaction AccountGuarantee portion of the program, which guarantees non-interest bearing banktransaction accounts on an unlimited basis, is scheduled to continue until June 30,2010.  The Federal Reserve will begin to sell off its portfolio ofmortgage-backed securities, which it previously purchased in order to stabilizethe residential mortgage market.

 

We cannot predict theeffect that the wind-down of these various governmental programs will have oncurrent financial market conditions, or on our business, financial condition,results of operations, access to credit and the trading price of our commonstock.

 

*Managementof Solera National Bank may be unable to adequately measure and limit creditrisk associated with the Bank’s loan portfolio, which would affect our profitability.*

 

As a material part of theBank’s business plan, it makes commercial, consumer, construction, andcommercial and residential real estate loans.  The principal economic riskassociated with each class of loans is the creditworthiness of the borrower,which is affected by the strength of the relevant business market segment,local market conditions and general economic conditions.

 

Additional factorsrelated to the credit quality of commercial loans include the quality of themanagement of the business and the borrower’s ability both to properly evaluatechanges in the supply and demand characteristics affecting its market forproducts and services and to effectively respond to those changes.  Additional factors related to the creditquality of commercial real estate loans include tenant vacancy rates and thequality of management of the property. Additional factors related to the credit quality of construction loansinclude fluctuations in the value of real estate and new job creation trends.

 

Manyof the Bank’s loans are made to small- and medium-sized businesses, andprofessionals that are less able to withstand competitive, economic andfinancial pressures than larger borrowers.  If the Bank is unable toeffectively measure and limit the risk of default associated with its loanportfolio, our profitability will be adversely impacted.

 

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*We are exposed to higher credit risk by commercial realestate, commercial business, and construction lending.*

 

Commercial real estate, commercial business, andconstruction lending usually involves higher credit risks than that ofsingle-family residential lending.  Thesetypes of loans involve larger loan balances to a single borrower or groups ofrelated borrowers.  Commercial realestate loans may be affected to a greater extent than residential loans byadverse conditions in real estate markets or the economy because commercialreal estate borrowers’ ability to repay their loans depends on successfuldevelopment of their properties, as well as the factors affecting residentialreal estate borrowers. These loans also involve greater risk because theygenerally are not fully amortizing over the loan period, but have a balloonpayment due at maturity.  A borrower’sability to make a balloon payment typically will depend on being able to eitherrefinance the loan or sell the underlying property in a timely manner.

 

Risk of loss on aconstruction loan depends largely upon whether our initial estimate of theproperty’s value at completion of construction equals or exceeds the cost ofthe property construction (including interest) and the availability ofpermanent take-out financing.  During theconstruction phase, a number of factors can result in delays and costoverruns.  If estimates of value areinaccurate or if actual construction costs exceed estimates, the value of theproperty securing the loan may be insufficient to ensure full repayment whencompleted through a permanent loan or by seizure of collateral.

 

Commercial business loansare typically based on the borrowers’ ability to repay the loans from the cashflow of their businesses.  These loansmay involve greater risk because the availability of funds to repay each loandepends substantially on the success of the business itself.

 

Commercial real estate,commercial business, and construction loans are more susceptible to a risk ofloss during a downturn in the business cycle. Our underwriting, review, and monitoring cannot eliminate all of therisks related to these loans.

 

*Ourallowance for probable loan losses may be insufficient*.

 

We maintain an allowancefor loan losses, which is a reserve established through a provision forprobable loan losses charged to expense.  This allowance representsmanagement’s best estimate of probable losses that may exist within theexisting portfolio of loans.  The levelof the allowance reflects management’s continuing evaluation of industryconcentrations; specific credit risks; loan loss experience; current loanportfolio quality; present economic, political and regulatory conditions; andunidentified losses inherent in the current loan portfolio.  Thedetermination of the appropriate level of the allowance for probable loanlosses inherently involves a high degree of subjectivity and requires us tomake significant estimates and assumptions regarding current credit risks andfuture trends, all of which may undergo material changes.  Changes ineconomic conditions affecting the value of properties used as collateral forloans, problems affecting the credit of borrowers, new information regardingexisting loans, identification of additional problem loans and other factors,both within and outside our control, may require an increase in the allowancefor probable loan losses.  In addition, bank regulatory agenciesperiodically review our allowance for loan losses and may require an increasein the provision for probable loan losses or the recognition of further loancharge-offs, based on judgments different than those ofmanagement.  In addition, if charge-offs in future periods exceed theallowance for probable loan losses, we will need additional provisions toincrease the allowance for probable loan losses.  Any increases inthe allowance for probable loan losses will result in a decrease in net incomeand, possibly, capital, and may have a material adverse effect on our financialcondition and results of operations.

 

*Interest rate volatility could significantly harm ourbusiness.*

 

Ourresults of operations are affected by the monetary and fiscal policies of thefederal government and the regulatory policies of governmentalauthorities.  A significant component ofour earnings is our net interest income. Net interest income is the difference between income frominterest-earning assets, such as loans and investments, and the expense ofinterest-bearing liabilities, such as deposits and borrowings.  We may not be able to effectively manage changesin what we charge as interest on our earning assets and the expense we must payon interest-bearing liabilities, which may significantly reduce ourearnings.  Since rates charged on loansoften tend to react to market conditions faster than do rates paid on depositaccounts, these rate changes may have a negative impact on our earnings untilwe can make appropriate adjustments in our deposit rates.  Fluctuations in interest rates are notpredictable or controllable and, therefore, there can be no assurances of ourability to continue to maintain a consistent positive spread between theinterest earned on our interest earning assets and the interest paid on ourinterest-bearing liabilities.

 

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*Fundingto provide liquidity may not be available to us on favorable terms or at all.*

 

Liquidity is the abilityto meet cash flow needs on a timely basis at a reasonable cost.  Theliquidity of Solera National Bank is used to make loans and to repay depositliabilities as they become due or are demanded by customers.  Liquidity policies and limits are establishedby the board of directors.  Management regularly monitors the overallliquidity position of the Bank to ensure that various alternative strategiesexist to cover unanticipated events that could affectliquidity.  Management monitors guidelines to diversify the Bank’sfunding sources to avoid concentrations in excess of board approved policies inany one market source.  Funding sources include federal fundspurchased, securities sold under repurchase agreements, and non-coredeposits.  The Bank is also a member of the Federal Home Loan BankSystem, which provides funding through advances to members that arecollateralized with mortgage-related assets.

 

We maintain a portfolioof securities that can be used as a secondary source ofliquidity.  There are other sources of liquidity available to usshould they be needed.  These sources include sales of loans, ourability to acquire additional national market, non-core deposits, andadditional collateralized borrowings such as Federal Home Loan Bankadvances.  Solera National Bank also can borrow from the Federal Reserve’sdiscount window.

 

Given the volatility inthe credit and liquidity markets, there is no assurance that we will be able toobtain such liquidity on terms that are favorable to us, or atall.  For example, the cost of out-of-market deposits may exceed thecost of deposits of similar maturity in our local market area, making themunattractive sources of funding; financial institutions may be unwilling toextend credit to banks because of concerns about the banking industry and theeconomy generally; there may not be a market for the issuance of additionaltrust preferred securities; and, given recent downturns in the economy, theremay not be a viable market for raising equity capital.

 

If we were unable toaccess any of these funding sources when needed, we might be unable to meetcustomers’ needs, which could adversely impact our financial condition, resultsof operations, cash flows and liquidity, and level of regulatory-qualifyingcapital.

 

*We maynot be able to raise additional capital on terms favorable to us.*

 

We are required byregulatory authorities to maintain adequate levels of capital to support ouroperations. To support our continued growth, we may need to raise additionalcapital. Our ability to raise additional capital, if needed, will depend in parton conditions in the capital markets at that time, which are outside ourcontrol. Accordingly, we cannot assure you of our ability to raise additionalcapital, if needed, on terms acceptable to us. If we cannot raise additionalcapital when needed, our ability to further expand our operations throughinternal growth and acquisitions could be materially impaired. In addition, ifwe decide to raise additional equity capital, your interest could be diluted.

 

*Theliquidity of our common stock is affected by its limited trading market.*

 

Our shares do not, atthis time, qualify for listing on any national securities exchange, and wecannot assure that our shares will ever be listed on a national securitiesexchange.  However, our shares are traded on the OTC Bulletin Board and atleast one company makes a market in our common stock.  Because our sharesare not listed on a national securities exchange, we cannot assure you that abroadly followed, established trading market for our common stock will ever developor be maintained.  Furthermore, we cannot assure you that at least onecompany will make a market in our shares for as long as we will be quoted onthe OTC Bulletin Board.   Active trading markets generally result inlower price volatility and more efficient execution of buy and sellorders.  In addition, active trading markets tend to reduce the bid-askspreads for sales transactions.  On the other hand, the absence of anactive trading market reduces the liquidity, and is likely to have an adverseeffect on the market value of our shares.  In addition, if we cease to bequoted on the OTC Bulletin Board, stockholders will find it more difficult todispose of, or to obtain accurate quotations as to the market value of, ourcommon stock, and the market value of our common stock likely would decline.

 

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*Departuresof key personnel or directors may impair the Bank’s operations.*

 

Our success will dependin large part on the services and efforts of the Bank’s key personnel and onits ability to attract, motivate and retain highly qualified employees. Competition for employees is strong, and the process of locating key personnelwith the combination of skills and attributes required to execute our businessplan may be lengthy.

 

If the services ofany key personnel should become unavailable for any reason, or if theregulatory agencies should require the employment of additional persons to fillbanking positions, Solera National Bank would be required to employ otherpersons to manage and operate the Bank, and we cannot assure you that it wouldbe able to employ qualified persons on acceptable terms.

 

Additionally, ourdirectors’ and organizers’ community involvement, diverse backgrounds andextensive local business relationships are important to our success.  Ifthe composition of our board of directors changes materially, our business maysuffer.

 

*SoleraNational Bank faces intense competition from a variety of competitors.*

 

The banking business inour target banking market and the surrounding areas has become increasinglycompetitive, and we expect the level of competition to continue toincrease.  If this competition forces the Bank to offer aggressive loanand deposit rates or otherwise incur higher funding costs, our profitabilitywill be diminished.

 

Many of the Bank’scompetitors are larger giving them greater access to financial and personnelresources.  Many of its competitors have established customer bases andoffer services, such as extensive and established branch networks and trustservices that the Bank does not currently provide. Also, some competitors arenot subject to the same degree of regulation as the Bank and thus may have acompetitive advantage over the Bank.

 

We believe thatSolera National Bank is a successful competitor in the area’s financialservices market.  However, we cannot assure you that the Bank will be ableto continue to compete successfully with other financial institutions servingour target banking market.  An inability to compete effectively could beexpected to have a material adverse effect on our growth and profitability.

 

*The potential for businessinterruption exists throughout the Company’s organization.*

 

We rely on third-party service providers for much ofour communication, information, operating and financial control systemstechnology, including our internet banking services and data processingsystems. Any failure or interruption of these services or systems or breachesin security of these systems could result in failures or interruptions in ourcustomer relationship management, general ledger, deposit and/or loan systems.The occurrence of any failures or interruptions may require us to identifyalternative sources for such services, and we cannot be sure that we cannegotiate terms that are as favorable, or can obtain services withfunctionality similar to our existing systems without expending substantialresources, if at all.

 

*Managing reputational risk is important to attracting andmaintaining customers, investors and employees.*

 

Threats to the Company’s reputation can come from manysources, including but not limited to unethical practices, employee misconduct,failure to deliver minimum standards of service or quality, compliancedeficiencies, and questionable or fraudulent activities of our customers. Wehave policies and procedures in place to protect our reputation and promoteethical conduct, but these policies and procedures may not be fully effective.Negative publicity regarding our business, employees, or customers, with orwithout merit, may result in the loss of customers, investors and employees,costly litigation, a decline in revenues and increased governmental regulation.

 

*The Bank’s legal lending limits may impair its ability to attractborrowers.*

 

The Bank’s currentlegally mandated lending limits are lower than those of many of its competitorsbecause it has less capital than many of its competitors.  The lower lendinglimits may discourage potential borrowers who have lending needs that exceedthe Bank’s limits, which may restrict its ability to establish relationshipswith larger businesses in our area.

 

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*Governmentregulation may have an adverse effect on the Company’s profitability andgrowth.*

 

The Company and the Bankare subject to extensive government supervision and regulation. The Company’sability to achieve profitability and to grow could be adversely affected byfederal banking laws and regulations that limit the manner in which the Bankmakes loans, purchases securities, and pays dividends. It is management’s opinionthat these regulations are intended primarily to protect depositors and lossesagainst the federal bank insurance fund, not stockholders.  An exampleapplicable to the Bank because of its anticipated lending portfolio is guidancerecently finalized by the federal banking agencies to identify and manage risksassociated with concentrations in commercial real estate loans.  Theguidance states that a growing number of banks have high concentrations ofcommercial real estate loans on their balance sheets which may make the banksmore vulnerable to cyclical downturns in the commercial real estatemarkets.  Banks with high concentrations of commercial real estate loansare subject to greater supervisory scrutiny and will be required to have inplace risk management practices and capital levels that are appropriate inlight of the risk associated with these concentrations.

 

In addition, theburden imposed by federal and state regulations may place the Company at acompetitive disadvantage compared to competitors who are less regulated. Futurelegislation or government policy may also adversely affect the banking industryor the Company’s or the Bank’s operations. In particular, various provisions ofthe Gramm-Leach-Bliley Act eliminate many of the federal and state legalbarriers to affiliations among banks and securities firms, insurance companies,and other financial services providers. The Company believes the elimination ofthese barriers may significantly increase competition in its industry.

 

Finally, regulatorshave intensified their focus on bank lending criteria and controls, and on thePatriot Act’s anti-money laundering and Bank Secrecy Act compliancerequirements.  In order to comply withregulations, guidelines and examination procedures in the anti-money launderingarea, and, specifically, the Consent Order issued on March 18, 2010 (see Item9B of this Annual Report for further information), we have been required toenhance policies and procedures and to install automated monitoring systems,among other requirements. There is no assurance that in every instance we willbe in full compliance with these requirements. Our failure to comply with theseand other regulatory requirements can lead to, among other remedies, additionaladministrative enforcement actions, and legal proceedings. In addition,recently enacted and proposed future legislation and regulations have had, andare likely to continue to have, a significant effect on the financial servicesindustry. Regulatory or legislative changes could make regulatory compliancemore difficult or expensive for us, and could cause us to change or limit someof our products and services, or the way we operate our business.

 

*We donot intend to pay dividends in the foreseeable future.*

 

We currently have nomaterial source of income other than dividends that we receive from SoleraNational Bank.  Therefore, our ability to pay dividends to ourstockholders depends on the Bank’s ability to pay dividends to us.  Theboard of directors of the Bank intends to retain earnings to promote growth andbuild capital and recover any losses incurred in prior periods. Accordingly, we do not expect to receive dividends from the Bank, or paydividends to our stockholders, in the foreseeable future.  In addition,banks and bank holding companies are subject to certain regulatory restrictionson the payment of cash dividends.

 

*Ourcertificate of incorporation and bylaws, and the employment agreements of ourexecutive officers, contain provisions that could make a takeover moredifficult.*

 

Our certificate ofincorporation and bylaws include provisions designed to provide our board ofdirectors with time to consider whether a hostile takeover offer is in our andour stockholders’ best interests, but could be utilized by our board ofdirectors to deter a transaction that would provide stockholders with a premiumover the market price of our shares.  These provisions include theavailability of authorized, but unissued shares, for issuance from time to timeat the discretion of our board of directors; bylaw provisions enabling ourboard of directors to increase the size of the board and to fill the vacanciescreated by the increase; and bylaw provisions establishing advance noticeprocedures with regard to business to be presented at a shareholder meeting ordirector nominations.

 

In addition, thereare “change in control” provisions in the employment agreements of some of ourexecutive officers providing for lump-sum cash payments based on the officer’sbase compensation.

 

While we are notaware of any current takeover threats or changes in control, these provisionsmay discourage potential acquisition proposals and could delay or prevent achange in control, including under circumstances in which our stockholdersmight otherwise receive a premium over the market price of our shares. These provisions may also have the effect of making it more difficult for thirdparties to cause the replacement of 

 

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our current managementand may limit the ability of our stockholders to approve transactions that theymay deem to be in their best interests.

 

*Our directors and executive officers could have the ability toinfluence stockholder actions in a manner that may be adverse to your personalinvestment objectives.*

 

As of March 1,2010, our directors and executive officers owned 235,835 shares of our commonstock, which represents 9.2% of the number of shares outstanding. Additionally, we issued warrants to our initial stockholders and stock optionsto our directors and executive officers.  If our executive officers anddirectors exercised all of their stockholder warrants, our directors and executiveofficers would own shares upon exercise representing as much as 16.8% of ourthen existing outstanding common stock. Moreover, although the stock optionsare not immediately exercisable by their terms, upon exercise of the stockoptions granted to our directors and executive officers, our directors andexecutive officers would own shares upon exercise representing as much as 23.5%of our then existing outstanding common stock based on number of sharesoutstanding.

 

Due to theirsignificant ownership interests, our directors and executive officers will beable to exercise significant control over the management and affairs of SoleraNational Bancorp and Solera National Bank.  For example, our directors andexecutive officers may be able to influence the outcome of director electionsor block significant transactions, such as a merger or acquisition, or anyother matter that might otherwise be approved by the non-affiliatestockholders.

 

**Item 1B.  Unresolved Staff Comments**

 

None.

 

**Item 2.  Properties**

 

The Bank’s main office, which is also the principalexecutive office of the Company, is located at 319 South Sheridan Boulevard,Lakewood, Colorado 80226. The Bank occupies a 6,218 square foot one-storyfreestanding building. The Bank also leases 3,518 square feet in Lakewood,Colorado that serves as administrative offices for our executive management,accounting and credit administration functions. Finally, the bank leases 1,423 square feet in Denver, Colorado in anoffice building that is occupied by the Mexican Consulate.  The Bank hasentered into lease agreements with respect to each of the banking locations.The aggregate commitments under the leases are set forth in the notes to theaudited financial statements included in this Form 10-K. At this time, theBank does not intend to own any of the properties from which it will conductbanking operations. Management believes that these facilities are adequate tomeet the present needs of the Company and the Bank.

 

**Item3.  Legal Proceedings**

 

See description of Consent Order under Item 9B of thisAnnual Report which is incorporated herein by this reference.

 

**Item 4.  [Reserved]**

 

**PART II**

 

**Item5. Market for Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities**

 

**Market****Price of CommonStock**

 

The Company’s commonstock is traded over the counter on the OTC Bulletin Board under the symbol “SLRK.OB”.   Corporate Stock Transfer is the Company’stransfer agent and registrar, and is able to respond to inquiries fromstockholders on its website: www.corporatestock.com or at its mailing address:3200 Cherry Creek Drive South, Suite #430, Denver, CO 80209.  The followingtable sets forth the high and low sales prices for the periods indicatedbelow.  The table reflects inter-dealerprices, without retail mark-up, mark-down or commission, and may not representactual transactions.

 

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**YearEnded December 31, 2009:**

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| First Quarter  |       | $        | 8.00       |    | $          | 5.50 |   |
| Second Quarter |       | 6.50     |       | 5.00    |       |
| Third Quarter  |       | 6.50     |       | 5.75    |       |
| Fourth Quarter |       | 5.90     |       | 5.25    |       |
|                |            |          |            |         |            |  |  |

 

**YearEnded December 31, 2008:**

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| First Quarter  |       | $        | 10.50      |    | $          | 9.50 |   |
| Second Quarter |       | 9.90     |       | 9.25    |       |
| Third Quarter  |       | 9.50     |       | 8.00    |       |
| Fourth Quarter |       | 8.00     |       | 7.00    |       |
|                |            |          |            |         |            |  |  |

 

Thelast price at which the Company’s common stock was sold was $4.90 on March 17,2010.

 

**Holders**

 

As of March 12, 2010 there were approximately 750holders of record.

 

**Dividends**

 

The Company has never declared or paid dividends onits common stock. In addition, the Company expects to retain future earnings,if any, for use in the operation and expansion of the Bank’s business and doesnot anticipate paying any cash dividends in the foreseeable future. Anydetermination to pay dividends in the future will be at the discretion of theboard of directors and will, among other factors, depend upon regulatoryrequirements and restrictions, the Company’s results of operations, itsfinancial condition and capital requirements. Because, as a holding company,the Company conducts no material activities at this time other than holding thecommon stock of the Bank, its ability to pay dividends depends on the receiptof dividends from the Bank. The board of directors of the Bank intends toretain earnings to promote growth and build capital and to recover any lossesincurred in prior periods. Accordingly, the Company does not expect to receivedividends from the Bank in the foreseeable future. In addition, banks and bankholding companies are both subject to certain regulatory restrictions on thepayment of cash dividends. In the case of the Company, for example, theexistence of any cash at the Company in order to be able to pay dividends tostockholders of the Company is substantially dependent on the earnings of theBank and the payment of dividends by the Bank to the Company, as the Bank’ssole stockholder. The Bank is currently prohibited by the regulators frompaying dividends without regulatory approval until the accumulated deficit hasbeen eliminated. ** ** Foradditional discussion of legal and regulatory restrictions on the payment ofdividends, see *“Part I - Item 1.Business - Supervision and Regulation.”*

 

**Recent Sales of UnregisteredSecurities**

 

None.

 

**Issuer Purchasesof Equity Securities**

 

None.

 

**Item6.  Selected Financial Data**

 

As a smaller reportingcompany, this item is not required.

 

**Item7.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

The purpose of the following discussion is to addressinformation relating to the financial condition and results of operations ofthe Company that may not be readily apparent from the financial statements andnotes included in this Report. This discussion should be read in conjunctionwith the information provided in the Company’s financial statements and thenotes thereto. The financial information provided below has been rounded inorder to simplify its presentation. However, the ratios and percentagesprovided below are calculated using the detailed financial informationcontained in the financial statements, the notes thereto and the otherfinancial data included elsewhere in this Annual Report.

 

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**General**

 

The Company is a Delaware corporationthat was incorporated on January 12, 2006 to organize and serve as theholding company for Solera National Bank, a national bank that opened for businesson September 10, 2007.  SoleraNational Bank is a full-service commercial bank headquartered in Lakewood,Colorado serving the Denver metropolitan area. The Company’s main banking office is located at 319 South SheridanBoulevard, Lakewood, Colorado 80226.  TheBank’s telephone number is (303) 209-8600.

 

The Bank offers a broad range ofcommercial and consumer banking services to small- and medium-sized businesses,licensed professionals and individuals who management believes are particularlyresponsive to the personalized service that Solera National Bank provides toits customers.  Management believes thatlocal ownership and control allows the Bank to serve customers more efficientlyand effectively and aids in the Company’s growth and success.  Solera National Bank competes on the basis ofproviding a personalized banking experience combined with a full range ofservices, customized and tailored to fit the individual needs of itsclients.  Solera National Bank serves theentire market area and with a particular emphasis on the local Hispanicpopulation due to the significant growth in this demographic and theineffectiveness of traditional banks to fully service the needs of the Hispanicpopulation because of cultural and language barriers.

 

During the year ended December 31,2007, the Company received approval from the Federal Reserve Bank of KansasCity to operate as a bank holding company for Solera National Bank.  Additionally, the Company closed on itsinitial public offering, in which the Company raised $25.5 million, and SoleraNational Bank received final regulatory approvals and began operations on September 10,2007.

 

The following discussionfocuses on the Company’s financial condition and results of operations duringthe years ended December 31, 2009 and 2008, presented on a consolidatedbasis.

 

As of December 31, 2009, on a consolidated basis,the Company had total assets of $132.8 million, net loans of $49.6 million,total deposits of $104.4 million and stockholders’ equity of $18.7 million.

 

**Critical accounting policies**

 

This discussion and analysis of the Company’sfinancial condition and results of operations is based upon the Company’sfinancial statements, which have been prepared in accordance with United Statesgenerally accepted accounting principles. The preparation of these consolidatedfinancial statements requires management to make estimates and judgments thataffect the reported amounts of assets and liabilities, revenues and expenses,and related disclosures of contingent assets and liabilities at the date of thefinancial statements. Actual results may differ from these estimates underdifferent assumptions or conditions. The following is a description of theCompany’s significant accounting policies used in the preparation of theaccompanying consolidated financial statements.

 

*Allowance for**loan losses*

 

Implicit in the Company’s lending activities is thefact that loan losses will be experienced and that the risk of loss will varywith the type of loan being made and the creditworthiness of the borrower overthe term of the loan. The allowance for loan losses represents the Company’srecognition of the risks of extending credit and its evaluation of the loanportfolio. The allowance for loan losses is maintained at a level consideredadequate to provide for probable loan losses based on management’s assessmentof various factors affecting the loan portfolio, including a review of problemloans, business conditions, historical loss experience, evaluation of thequality of the underlying collateral, and holding and disposal costs. In addition, because the Bank has limitedhistory on which to base future loan losses, a comparison of peer groupallowance ratios to gross loans is made with the intention of maintainingsimilar levels during the Bank’s de novo period of operation.  The allowance for loanlosses 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 has established a formal process fordetermining an adequate allowance for loan losses.  The allowance for loan losses calculation hastwo components.  The first componentrepresents the allowance for loan losses for impaired loans; that is loanswhere the Company believes collection of the contractual principal and interestpayments is not probable.  To determinethis component of the calculation, collateral-dependent impaired loans areevaluated using internal analyses as well as third-party information, such asappraisals.  If an impaired loan isunsecured, it is evaluated using a discounted cash flow of the paymentsexpected over the life of the loan using the

 

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loan’s effective interest rate and givingconsideration to currently existing factors that would impact the amount ortiming of the cash flows.  The secondcomponent of the allowance for loan losses represents contingent losses — theestimated probable losses inherent within the portfolio due touncertainties.  Factors considered bymanagement to estimate inherent losses include, but are not limited to, 1)historical and current trends in downgraded loans; 2) the level of theallowance in relation to total loans; 3) the level of the allowance in relationto the Bank’s peer group; 4) the levels and trends in non-performing and pastdue loans; and 5) management’s assessment of economic conditions and certainqualitative factors as defined by bank regulatory guidance, including but notlimited to, changes in the size, composition and concentrations of the loanportfolio, changes in the legal and regulatory environment, and changes inlending management.  The recordedallowance for loan losses is the aggregate of the impaired loans component andthe contingent loss component.

 

At December 31, 2009, the Company had anallowance for loan losses of $830,000.  Managementbelieves that this allowance for loan losses is adequate to cover probablelosses based on all currently available evidence. Future additions to theallowance for loan losses may be required based on management’s continuingevaluation of the inherent risks in the portfolio.  Additional provisions for loan losses mayneed to be recorded if the economy declines, asset quality deteriorates, or theloss experience changes.  Also, federalregulators, when reviewing the Bank’s loan portfolio in the future, may requirethe Bank to increase the allowance for loan losses.  Any increase in the allowance for loan losseswould adversely affect earnings.   Ananalysis of the allowance for loan losses as well as its allocation amongcertain categories of the loan portfolio can be found in the “FinancialCondition as of December 31, 2009 and 2008” section of this “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

*Share-based compensation*

 

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

 

*Estimation of fair value*

 

The estimation of fair value is significant to anumber of the Company’s assets, including available-for-sale investmentsecurities and other real estate owned. These are all recorded at either fairvalue or at the lower of cost or fair value. Furthermore, accounting principles generally accepted in the UnitedStates require disclosure of the fair value of financial instruments as a partof the notes to the consolidated financial statements.  Fair values are volatile and may be influencedby a number of factors, including market interest rates, prepayment speeds,discount rates and the shape of yield curves.

 

*Impairment of investmentsecurities*

 

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

 

*New accounting pronouncements*

 

See Note 1 of the Notes to Consolidated FinancialStatements contained in “Item 8. Financial Statements and Supplementary Data”for information on recent accounting pronouncements and their impact, if any,on our consolidated financial statements.

 

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**Results of operations for the yearsended December 31, 2009 and 2008**

 

During the year ended December 31, 2009 theCompany had net losses of approximately $1.3 million, an improvement ofapproximately $938,000 from net losses of approximately $2.2 million during theyear ended December 31, 2008.  Theimprovement in net losses during the 2009 year is primarily attributable to theincrease in interest income outpacing the increase in interest expense byapproximately $1.4 million.  This coupledwith an increase of $468,000 in noninterest income, partially offset byincreases in the provision expense and noninterest expense account for the$938,000 improvement in net loss year over year.

 

During 2009, the Company’s overhead costs, ornoninterest expenses, totaled approximately $4.2 million compared to $3.7million for the prior year.  Thisincrease was primarily the result of increased banking activity and therefore,more full-time equivalent employees, higher occupancy costs as the bankre-occupied a previously abandoned lease in order to accommodate the growingcompany, and an increase in FDIC premiums.

 

The 2009 loss resulted in a loss on average assets of1.2% which was an improvement over the 2008 loss on average assets of4.8%.  Fiscal 2009 ended with a loss onaverage equity of 6.7% in comparison to a loss on average equity of 11.1%during 2008.

 

**Net****interest income andnet interest margin**

 

Net interest income is the difference between theincome earned on assets and interest paid on deposits and borrowings used tosupport such assets.  Net interest incomeis determined by the yields earned on the Company’s interest-earning assets andthe rates paid on its interest-bearing liabilities and the relative amounts ofinterest-earning assets and interest-bearing liabilities.  Net interest income divided by averageinterest-earning assets represents the Company’s net interest margin.

 

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The following table sets forth, for the periodsindicated, information related to the Company’s average balance sheet and itsaverage yields on assets and average costs of liabilities. These yields arederived by dividing the annualized income or expense by the average balance ofthe corresponding asset or liability.

 
| ** **                                                                  | ** ** | **2009**             | ** ** | **2008**                      | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------|------------|-------------------------------|------------|
| **($ in  thousands)**                                                  | ** ** | **Average  Balance** | ** ** | **Interest/********Dividend** | ** ** | **Average  Yield/Rate** | ** ** | **Average  Balance** | ** ** | **Interest/********Dividend** | ** ** | **Average  Yield/Rate** | ** ** |
| ASSETS                                                                      |       |                 |       |                          |       |   |   |   |   |   |   |   |   |
| Federal funds sold and other short-terminvestments                          |       | $                    | 3,082      |                          | $          | 14 |   | 0.45 | % | $ | 4,859 |   | $ | 128 |   | 2.64 | % |
| Investment securities                                                       |       | 56,943               |       | 2,896                         |       | 5.09 |   | 26,380 |   | 1,394 |   | 5.28 |   |
| Loans (a)                                                                   |       | 38,133               |       | 2,093                         |       | 5.49 |   | 11,123 |   | 658 |   | 5.91 |   |
| FHLB and Federal Reserve  Bank stocks                                       |       | 1,080                |       | 42                            |       | 3.89 |   | 841 |   | 42 |   | 4.98 |   |
| TOTAL EARNING ASSETS                                                        |       | 99,238               |       | $                             | 5,045      |   | 5.08 | % | 43,203 |   | $ | 2,222 |   | 5.14 | % |
| Non-earning assets                                                          |       | 3,053                |       |                          |       |   |   | 3,243 |   |   |   |   |   |
| TOTAL ASSETS                                                                |       | $                    | 102,291    |                          |       |   |   |   | $ | 46,446 |   |   |   |   |   |
|                                                                        |       |                 |       |                          |       |   |   |   |   |   |   |   |   |
| LIABILITIES                                                                 |       |                 |       |                          |       |   |   |   |   |   |   |   |   |
| Interest-bearing deposits                                                   |       |                 |       |                          |       |   |   |   |   |   |   |   |   |
| Interest-bearing demand                                                     |       | $                    | 5,308      |                          | $          | 114 |   | 2.15 | % | $ | 3,140 |   | $ | 10 |   | 0.33 | % |
| Savings and money market                                                    |       | 23,503               |       | 557                           |       | 2.37 |   | 8,063 |   | 165 |   | 2.04 |   |
| Time deposits                                                               |       | 40,342               |       | 1,131                         |       | 2.80 |   | 7,121 |   | 258 |   | 3.62 |   |
| TOTAL INTEREST-BEARING DEPOSITS                                             |       | $                    | 69,153     |                          | $          | 1,802 |   | 2.61 | % | $ | 18,324 |   | $ | 433 |   | 2.36 | % |
| Securities sold under agreements to repurchase and federal funds  purchased |       | 995                  |       | 12                            |       | 1.21 |   | 123 |   | 2 |   | 1.60 |   |
| Federal Home Loan Bank borrowings                                           |       | 9,040                |       | 334                           |       | 3.69 |   | 6,604 |   | 238 |   | 3.60 |   |
| Capital leases                                                              |       | 139                  |       | 13                            |       | 9.35 |   | 175 |   | 16 |   | 9.34 |   |
| TOTAL INTEREST-BEARING LIABILITIES                                          |       | $                    | 79,327     |                          | $          | 2,161 |   | 2.72 | % | $ | 25,226 |   | $ | 689 |   | 2.73 | % |
| Non-interest bearing demand deposits                                        |       | 3,429                |       |                          |       |   |   | 1,053 |   |   |   |   |   |
| Other liabilities                                                           |       | 515                  |       |                          |       |   |   | 281 |   |   |   |   |   |
| TOTAL LIABILITIES                                                           |       | 83,271               |       |                          |       |   |   | 26,560 |   |   |   |   |   |
| STOCKHOLDERS’ EQUITY                                                   |       | 19,020               |       |                          |       |   |   | 19,886 |   |   |   |   |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                             |       | $                    | 102,291    |                          |       |   |   |   | $ | 46,446 |   |   |   |   |   |
| NET INTEREST INCOME / MARGIN                                                |       |                 |       | $                             | 2,884      |   | 2.91 | % |   |   | $ | 1,533 |   | 3.55 | % |
| NET INTEREST SPREAD                                                         |       |                 |       |                          |       | 2.36 | % |   |   |   |   | 2.41 | % |

 

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(a)          Loans are presented net ofunearned income and the allowance for loan losses.

 

**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 changes attributableto a change in rate (i.e. change in average rate multiplied by the prior-periodaverage balance).  There is a componentthat is attributable to both a change in volume and a change in rate.  This component has been allocatedproportionately to the rate and volume columns.**

 

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| ** **                                                                  | ** ** | **Twelve  Months Ended December 31, 2009 Compared to  Twelve Months Ended December 31, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| **($ in  thousands)**                                                  | ** ** | **Net  Change**                                                                                         | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| **Interest  income:**                                                       |       |                                                                                                    |       |   |   |   |   |
| Gross loans, net  of unearned fees                                          |       | $                                                                                                       | 1,435      |   | $ | (51 | ) | $ | 1,486 |   |
| Investment  securities                                                      |       | 1,502                                                                                                   |       | (54 | ) | 1,556 |   |
| FHLB and Federal  Reserve Bank stocks                                       |       | —                                                                                                  |       | (10 | ) | 10 |   |
| Federal funds  sold and other short-term investments                        |       | (114                                                                                                    | )          | (84 | ) | (30 | ) |
| Total interest  income                                                      |       | $                                                                                                       | 2,823      |   | $ | (199 | ) | $ | 3,022 |   |
|                                                                        |       |                                                                                                    |       |   |   |   |   |
| **Interest  expense:**                                                      |       |                                                                                                    |       |   |   |   |   |
| Interest-bearing  checking                                                  |       | $                                                                                                       | 104        |   | $ | 93 |   | $ | 11 |   |
| Savings and  money market                                                   |       | 392                                                                                                     |       | 30 |   | 362 |   |
| Time deposits                                                               |       | 873                                                                                                     |       | (71 | ) | 944 |   |
| Federal funds  purchased and securities sold under agreements to repurchase |       | 10                                                                                                      |       | (1 | ) | 11 |   |
| Federal Home  Loan Bank borrowings                                          |       | 96                                                                                                      |       | 6 |   | 90 |   |
| Other borrowings                                                            |       | (3                                                                                                      | )          | — |   | (3 | ) |
| Total interest  expense                                                     |       | $                                                                                                       | 1,472      |   | $ | 57 |   | $ | 1,415 |   |
|                                                                        |       |                                                                                                    |       |   |   |   |   |
| **Net  interest income**                                                    |       | $                                                                                                       | 1,351      |   | $ | (256 | ) | $ | 1,607 |   |

 

The rate volume tableabove illustrates the reason for the Bank’s 64 basis point decrease in netinterest margin from 3.55% for fiscal year 2008 to 2.91% during fiscal year2009.  The daily average prime rateduring 2008 was 5.07% compared to 3.25% during 2009.  This 182 basis point decrease in the averageprime rate was not fully felt by the Bank partially because it was offset byvolume increases in the Bank’s interest-earning assets, partially due to floorson the Bank’s adjustable rate loan portfolio and partially due to managementinvesting in longer-term taxable municipal bonds which were not as heavilyimpacted by the declining interest rate environment.  However, given the Bank’s focus during 2009on customer acquisitions, deposit rates on transaction accounts remainedrelatively constant between 2008 and 2009 and, therefore, the Bank did notbenefit from the lower interest rate environment.

 

On an annualized basis,the Company’s net interest spread, (the yield earned on interest-earning assetsless the cost of interest-bearing liabilities) remained fairly constantdecreasing only 5 basis points from 2.41% for 2008 to 2.36% for 2009.

 

**Provision for loan losses andallowance for loan losses**

 

The provision for loan losses is the annual cost ofproviding an allowance or reserve for estimated probable losses on loans. Theprovision for loan losses was $562,000 in 2009 and $221,000 in 2008.  The allowance for loan losses reflectsmanagement’s judgment of the level of allowance adequate to absorb estimatedcredit losses in the Bank’s loan portfolio.

 

Information regarding the calculation of the loan lossprovision, the factors considered by the Company in establishing the reservesand the quality of the Bank’s loan portfolio are included in the section ofthis Report titled *“Part I - Item 1.Business - Asset Quality.”*

 

**Noninterest income**

 

Noninterest income for the year ended December 31,2009 of $629,000, an increase of $468,000 over 2008, consisted of: (1) realizedgains, net of losses, on the sale of investment securities of approximately$377,000, an increase of $330,000 from 2008; (2) charges on depositaccounts for presentation of non-sufficient funds and service charges ofapproximately $227,000, an increase of $154,000 over 2008 partially due to anincrease in the number of accounts and partially due to amoney-services-business deposit customer whose account was open for nine months

 

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of 2009 compared to three months of 2008; (3) ATMservice charges of approximately $20,000 an increase of $2,000 over 2008; and (4) approximately$5,000 of rental income, a decrease of $20,000 from 2008 for office space inthe Bank’s main banking facility that was sub-leased only a few months of 2009compared to the full year 2008.  The Bankanticipates service charges on deposits will decrease during 2010 due to therecent loss of a money-services-business deposit customer which accounted forapproximately 70% of our 2009 service charges and fees.

 

Noninterest income for the year ended December 31,2008 of $161,000 consisted primarily of charges on deposit accounts forpresentation of non-sufficient funds and service charges of approximately$73,000; ATM service charges of approximately $18,000; realized gains, net oflosses, on the sale of investment securities of approximately $47,000; andapproximately $23,000 of rental income for office space in the Bank’s mainbanking facility that was sub-leased to a third party.

 

**Noninterest expense**

 

Noninterest expensestotaled $4.2 million for the year ended December 31, 2009 an increase of$540,000, or 15%, from the prior year which totaled $3.7 million.  The following discussion evaluates thereasons for this increase.

 

Salaries and employeebenefits increased $124,000, or 5%, from $2.3 million in 2008 to $2.4 millionin 2009 primarily due to an increase in the number of full-time equivalentemployees (“FTE”), which increased from an average of 19 FTEs in 2008 to anaverage of 21 FTEs in 2009.

 

Occupancy costs totaled$558,000 and $346,000 for the years ended December 31, 2009 and 2008,respectively.  Occupancy costs consistprimarily of lease expense, depreciation of equipment and amortization ofleasehold improvements.  During 2008, theCompany recorded a credit to occupancy expense of approximately $133,000associated with the re-occupancy of office space that had been previouslyaccounted for as an abandoned lease. Without this credit, occupancy expense would have been approximately$477,000 for the year ended December 31, 2008 resulting in an increase of$81,000 during 2009.  The $81,000increase primarily relates to approximately $38,000 of increased rent andcommon area maintenance costs associated with occupying the previouslyabandoned space for all 12 months of 2009 versus only 3 months of 2008; $36,000in increased depreciation and amortization costs associated with new equipmentand tenant improvements recorded late in 2008; and $7,000 in increased buildingmaintenance costs for repairs and janitorial services.  For a more detailed discussion of theabandoned lease, and subsequent reversal thereof, see Note 15 of the Notes toConsolidated Financial Statements contained in this Annual Report on Form 10-K.

 

Professional fees totaled$318,000 and $258,000 for the years ended December 31, 2009 and 2008,respectively.  Approximately $127,000 and$101,000 for fiscal years 2009 and 2008, respectively were related to externalaudit fees.  During 2008, approximately$75,000 was incurred for legal fees primarily associated with employmentmatters compared to $47,000 in 2009. Approximately $54,000 and $49,000 was incurred in 2009 and 2008,respectively for consulting fees related to systems design, implementation andsupport.  During 2009 and 2008,respectively, approximately $36,000 and $33,000 were incurred for operationalaudits/reviews and tax and accounting services. Additionally, in 2009 the Company incurred approximately $13,000 ininvestor relations costs and $20,000 for community outreach initiatives.  An additional $21,000 was spent during 2009for other consulting costs.

 

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The following table shows the main categories thatcomprise other general and administrative expenses for the years ended December 31,2009 and 2008 and the ensuing narrative provides explanation for the changes:

 
| ** **                          | ** ** | **12 Months Ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| **($ in  thousands)**          | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| Data processing                     |       | $                                     | 275        |   | $ | 233 |   |
| FDIC assessments                    |       | 162                                   |       | 20 |   |
| Marketing and promotions            |       | 109                                   |       | 236 |   |
| Other regulatory and reporting fees |       | 85                                    |       | 56 |   |
| Printing, stationery and supplies   |       | 56                                    |       | 51 |   |
| Travel and entertainment            |       | 49                                    |       | 32 |   |
| Telephone                           |       | 38                                    |       | 34 |   |
| Dues and memberships                |       | 34                                    |       | 19 |   |
| Postage, shipping and courier       |       | 24                                    |       | 16 |   |
| Insurance                           |       | 19                                    |       | 18 |   |
| Training and education              |       | 12                                    |       | 12 |   |
| Miscellaneous                       |       | 52                                    |       | 44 |   |
| Total                               |       | $                                     | 915        |   | $ | 771 |   |

 

*Data processing*

The $42,000 increase in data processing is primarilythe result of increased banking activity as these expenses are associated withrunning the Bank’s main banking programs.

 

*FDIC assessments*

FDIC assessments increased by $142,000 due to thefollowing:  1) an increase in averagedeposit volumes, 2) an increase in premium rates and 3) a one-time specialassessment of $41,000 assessed in June 2009.

 

*Marketing and promotions*

Marketing and promotions costs decreased $127,000during 2009 as the Company scaled back its marketing programs followingsignificant spending during its initial year of operations.

 

*Other regulatory and reporting fees*

The $29,000 increase in other regulatory and reportingfees is comprised of a $16,000 increase in OCC assessment fees due primarily toan increase in the Company’s average asset size and a $13,000 increase incorrespondent banking fees associated with increased banking activity.

 

*Travel and entertainment*

Travel and entertainment costs increased $17,000primarily due to increased business development activity.

 

*Dues and memberships*

Dues and memberships increased $15,000 as the Bankincreased involvement in the local community and banking organizations.

 

*Printing, stationery and supplies; Telephone;Postage; shipping and courier; Insurance; Training and education*

These expense items remained consistent year over yearincreasing only modestly in conjunction with our increased customer base andincreased number of employees.

 

*Miscellaneous*

The miscellaneous category increased by $8,000 andincludes items such as customer checks, franchise taxes, loan expenses, ATMcosts and other less significant operating costs.

 

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**Financial Condition as of December 31,2009 and 2008**

 

****Loans****

 

The Bank’s loan portfolio represents the highestyielding component of the Company’s earning asset base. Information regardingthe Company’s loan portfolio as of December 31, 2009 and 2008 is includedin the section of this Report titled **“Part I - Item 1. Business - Lending Services”**and **“Part I- Item 1. Business - Asset Quality.”**

 

****Securities and otherearning assets****

 

The securities portfoliois used to make various term investments, to provide a source of liquidity andto serve as collateral for certain types of deposits and borrowings.  Information regarding the Company’ssecurities portfolio as of December 31, 2009 and 2008 is included in thesection of this Report titled **“Part I - Item 1. Business - Investments.”**

 

****Nonearning assets****

 

Premises, leasehold improvements and equipment totaled$875,000 and $1.0 million at December 31, 2009 and 2008, respectively netof accumulated depreciation of $345,000 and $195,000, respectively. There areno definitive agreements regarding acquisition or disposition of owned orleased facilities and, for the near-term future, there are no significantchanges anticipated in the total occupancy expense.

 

****Deposits****

 

Deposits are the Company’s primary source of funds tosupport its earning assets. The Company has been able to effectively competefor deposits in its primary market areas by offering attractive interestrates.  Information regarding the Company’sdeposit mix as of December 31, 2009 and 2008 is included in the sectionabove titled **“Part I - Item 1. Business —Deposit Services.”**

 

****Federal Home Loan Bankborrowings****

 

The Bank is a member of the FHLB of Topeka and, as aregular part of its business, obtains advances from this FHLB.  Overnight advances bear interest at avariable rate while all other advances bear interest at a fixed rate.  All advances are collateralized by certainsecurities pledged by the Bank and some of the Bank’s qualifying loans.  As of December 31, 2009, the Bank’sauthorized borrowing line with the FHLB totaled $53.1 million, subject to theavailability of sufficient collateral to pledge against such borrowings.  Of the $53.1 million available, $8.8 millionwas outstanding at December 31, 2009. Interest rates on these outstanding FHLB borrowings ranged from 2.52% to4.89%, with a weighted-average interest rate of 3.54%.  The Bank has pledged certain qualifying loansand certain bonds from its investment portfolio as collateral.

 

As of December 31, 2008, the Bank had $10.0million in fixed rate advances from the FHLB with a weighted-average interestof 3.73%.  The Bank had pledged certainqualifying loans and certain bonds from its investment portfolio as collateral.

 

****Liquidity and capitalresources****

 

The stock offering closedwith 2,553,671 shares sold representing $25.5 million in gross total proceedsraised as of December 31, 2007.  Ofthis sum, $20.0 million was used to purchase common stock of Solera NationalBank and approximately $3.6 million was used for pre-opening costs.  During 2009, the Company invested an additional$1.0 million in common stock of Solera National Bank.  At December 31, 2009, the Company(excluding Solera National Bank) had approximately $2.9 million in remainingcash proceeds. These funds can be used for Company operations, investment, for additionalpurchase of Solera National Bank stock and other corporate activities. Theprimary source of liquidity for the Company will be dividends paid by SoleraNational Bank.  Solera National Bank iscurrently restricted from paying dividends without regulatory approval thatwill not be granted until the accumulated deficit has been eliminated.

 

Solera National Bank’sliquidity is monitored by its staff, the asset liability committee and theboard of directors, who review historical funding requirements, currentliquidity positions, sources and stability of funding, 

 

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marketability of assets,options for attracting additional funds, and anticipated future funding needs,including the level of unfunded commitments.

 

Solera National Bank’s primary sources of funds areretail and commercial deposits, loan and securities repayments, othershort-term borrowings, and other funds provided by operations. While scheduledloan repayments and maturing investments are relatively predictable, depositflows and early loan prepayments are more influenced by interest rates, generaleconomic conditions, and competition.  Fluctuations inthe balances of depositors may cause temporary increases and decreases inliquidity from time to time.  The Bankdeals with such fluctuations by using existing liquidity sources. Concerns overdeposit fluctuations with respect to the overall banking industry wereaddressed by the FDIC in September and October 2008.  The FDIC temporarily increased the individualaccount deposit insurance from $100,000 per account to $250,000 per accountthrough December 31, 2009.  During2009, the FDIC extended the temporary insurance increase.  ****The standard insurance amountcurrently is $250,000 per depositor. The $250,000 limit is permanent forcertain retirement accounts, which includes IRAs. The $250,000 limit istemporary for all other deposit accounts through December 31, 2013. On January 1,2014, the standard insurance amount will return to $100,000 per depositor forall account categories except certain retirement accounts, which will remain at$250,000 per depositor.****

 

The FDIC also implemented aTemporary Liquidity Guarantee Program, which provides for full FDIC coveragefor noninterest-bearing transaction accounts, regardless of dollar amounts.During 2009, the Bank elected to opt-in to this program, thus, our customersreceived full coverage for transaction accounts under the program.  However, the Bank elected to opt-out of thisprogram during 2010.

 

Solera National Bank maintains investments in liquidassets based upon management’s assessment of (1) the need for funds, (2) expecteddeposit flows, (3) yields available on short-term liquid assets, and (4) objectivesof the asset/liability management program.

 

Additionally, in January 2009,the Company became a member of the Certificate of Deposit Account RegistryService (“CDARS®”) program. Through CDARS®, the Bank’s customers can increasetheir FDIC insurance by up to $50 million through reciprocal certificate ofdeposit accounts. This is accomplished by the Bank entering into reciprocaldepository relationships with other member banks.  The individual customer’s large deposit isbroken into amounts below the $100,000 amount (or $250,000 if the time depositmatures prior to December 31, 2013) and placed with other banks that aremembers of the network. The reciprocal member bank issues certificate ofdeposits in amounts that ensure that the entire deposit is eligible for FDICinsurance.These sourcesprovide secondary liquidity to the Company to service its depositors’needs.  As of December 31, 2009 and2008, the Bank had $3.4 million and $0, respectively, in CDARS® deposits.

 

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 to 90% over time. Given this goal, Solera National Bank willnot aggressively pursue lending opportunities if sufficient funding sources (**e.g.**,deposits, Fed Funds, etc.) are not available, nor will Solera National Bankseek to attract volatile, non-local deposits with above market interest rates.As of December 31, 2009, the loan to deposit ratio was 48% compared to 57%as of December 31, 2008.

 

During the first quarter2008, the Bank was approved for membership by the Federal Home Loan Bank (“FHLB”)of Topeka, which gave the Bank access to a secured line of credit withapproximately $44.3 million of available funding as of December 31, 2009,subject to the availability of sufficient collateral to pledge against suchborrowings.  Additionally, the Bank hasapproved, unsecured federal funds purchase lines totaling $11.7 million withfour correspondent banks.  Each of theselines expires during 2010; however, it is anticipated the Company will beapproved for new lines once the existing lines expire.  The Bank also has the ability to borrow atthe Federal Reserve Bank Discount Window on a secured basis.

 

Solera National Bank hadcash and cash equivalents of $2.5 million, or 1.9% of total Bank assets, at December 31,2009. Management feels that with the ability to raise deposits, access tounsecured fed funds established with correspondent banks, and access to fundingfrom the FHLB, Solera National Bank should have more than adequate liquidity tomeet anticipated future funding needs.

 

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****Interest rate sensitivity****

 

Net interest income, the Bank’s expected primarysource of earnings, can fluctuate with significant interest rate movements. TheCompany’s profitability depends substantially on the Bank’s net interestincome, which is the difference between the interest income earned on its loansand other assets and the interest expense paid on its deposits and otherliabilities. A large change in interest rates may significantly decrease theBank’s net interest income. Most of the factors that cause changes in marketinterest rates, including economic conditions, are beyond the Company’scontrol. While the Bank takes measures to minimize the effect that changes ininterest rates have on its net interest income and profitability, thesemeasures may not be effective. To lessen the impact of these fluctuations, theBank attempts to structure the balance sheet so that repricing opportunitiesexist for both assets and liabilities in roughly equal amounts at approximatelythe same time intervals.  Imbalances inthese repricing opportunities at any point in time constitute interest ratesensitivity.

 

Interest rate sensitivityrefers to the responsiveness of interest-bearing assets and liabilities tochange in market interest rates. The rate sensitive position, or “gap,” is thedifference in the volume of rate sensitive assets and liabilities at a giventime interval. The general objective of gap management is to actively managerate sensitive assets and liabilities in order to reduce the impact of interestrate fluctuations on the net interest margin. The Bank attempts to maintain abalance between rate sensitive assets and liabilities as the exposure period islengthened to minimize the Bank’s overall interest rate risk. The Bankregularly evaluates the balance sheet’s asset mix in terms of severalvariables: yield, credit quality, appropriate funding sources and liquidity.

 

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The following table sets forth information concerningthe sensitivity of the Company’s interest-earning assets and interest-bearingliabilities as of December 31, 2009. The amount of assets and liabilitiesshown within a particular period were determined in accordance with theircontractual maturities, except that adjustable rate products are reflected inthe earlier period of when they are first scheduled to adjust or mature.

 
| ** **                                                  | ** ** | **As of December 31, 2009**        | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                  | ** ** | **Volumes Subject to Repricing Within** | ** ** |
| **($ in  thousands)**                                  | ** ** | **0-1 Days**                            | ** ** | **2-90 Days** | ** ** | **91-365 Days** | ** ** | **1-3 Years** | ** ** | **Over 3  Years** | ** ** | **Non-Interest  Sensitive** | ** ** | **Total** | ** ** |
| **Assets:**                                                 |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash, fed funds and  other                                  |       | $                                       | 2,516      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 2,516 |   |
| Interest-bearing  deposits with banks                       |       | —                                  |       | 3,684 |   | 100 |   | — |   | — |   | — |   | 3,784 |   |
| Investments and FHLB and  FRB stocks                        |       | —                                  |       | 2,387 |   | 3,841 |   | 10,766 |   | 56,447 |   | 1,131 |   | 74,572 |   |
| Loans (1)                                                   |       | 23,970                                  |       | 1,340 |   | 979 |   | 2,957 |   | 21,258 |   | — |   | 50,504 |   |
| Non-earning assets                                          |       | —                                  |       | — |   | — |   | — |   | — |   | 1,464 |   | 1,464 |   |
| Total Assets                                                |       | $                                       | 26,486     |   | $ | 7,411 |   | $ | 4,920 |   | $ | 13,723 |   | $ | 77,705 |   | $ | 2,595 |   | $ | 132,840 |   |
|                                                        |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Stockholders’ Equity:**             |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing demand,  savings and money market accounts |       | $                                       | 62,148     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 62,148 |   |
| Time deposits                                               |       | 24                                      |       | 8,283 |   | 21,093 |   | 8,068 |   | 2,161 |   | — |   | 39,629 |   |
| Securities sold under  agreements to repurchase             |       | 326                                     |       | — |   | — |   | — |   | — |   | — |   | 326 |   |
| Federal Home Loan Bank  borrowings                          |       | 1,000                                   |       | — |   | 2,250 |   | 4,000 |   | 1,500 |   | — |   | 8,750 |   |
| Capital lease liability                                     |       | —                                  |       | 7 |   | 32 |   | 79 |   | — |   | — |   | 118 |   |
| Noninterest-bearing  liabilities                            |       | —                                  |       | — |   | — |   | — |   | — |   | 3,135 |   | 3,135 |   |
| Stockholders’ equity                                   |       | —                                  |       | — |   | — |   | — |   | — |   | 18,734 |   | 18,734 |   |
| Total liabilities and  stockholders’ equity            |       | $                                       | 63,498     |   | $ | 8,290 |   | $ | 23,375 |   | $ | 12,147 |   | $ | 3,661 |   | $ | 21,869 |   | $ | 132,840 |   |
|                                                        |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate  sensitivity gap                              |       | $                                       | (37,012    | ) | $ | (879 | ) | $ | (18,455 | ) | $ | 1,576 |   | $ | 74,044 |   | $ | (19,274 | ) | $ | — |   |
|                                                        |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative interest rate  sensitivity gap                   |       | $                                       | (37,012    | ) | $ | (37,891 | ) | $ | (56,346 | ) | $ | (54,770 | ) | $ | 19,274 |   |   |   |   |   |
|                                                        |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative gap to total  assets                             |       | (27.9                                   | )%         | (28.5 | )% | (42.4 | )% | (41.2 | )% | 14.5 | % |   |   |   |   |

 

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(1)               Excludes deferred fees and allowance for loan losses.

 

Although the above table represents a liability-sensitivegap, it should be noted that the $62.1 million of interest-bearing checking,savings and money market accounts are not contractually bound to move wheninterest rates move.  Management hasdiscretion over when, if and by how much to adjust those deposit rates.  Additionally, a portion of the $24.0 millionadjustable rate loans have embedded floors which will keep those loans fromrepricing until interest rates move above those floors.  The Bank’s Asset Liability Committee meetsregularly to develop a strategy for the upcoming period in order to effectivelymanage the Bank’s interest rate risk.  Asthe Bank continues to grow, it will continuously structure its rate sensitivityposition in an effort to hedge against rapidly rising or falling interestrates.

 

**Off-balance-sheet arrangements**

 

In the ordinary course of business, the Company entersinto various off-balance-sheet commitments and other arrangements to extendcredit that are not reflected in the consolidated balance sheets of the Company.The business purpose of these off-balance-sheet commitments is the routineextension of credit. As of December 31, 

 

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2009, commitments to extend credit includedapproximately $7.2 million for revolving line of credit arrangements, unusedcommitments for loans and commitment letters outstanding for potential newcustomers.  As of December 31, 2008,commitments to extend credit included approximately $6.7 million for revolvingline of credit arrangements, unused commitments for loans and commitmentletters outstanding for potential new customers.  The Company faces the risk of deterioratingcredit quality of borrowers to whom a commitment to extend credit has beenmade; however, no significant credit losses are expected from these commitmentsand arrangements.

 

**Capital adequacy**

 

There are two primary measures of capital adequacy forbanks: (i) risk-based capital guidelines and (ii) the leverage ratio.The risk-based capital guidelines measure the amount of a bank’s requiredcapital in relation to the degree of risk perceived in its assets and itsoff-balance-sheet items. Under the risk-based capital guidelines, capital isdivided into two “tiers.” Tier 1 capital consists of common stockholders’equity, noncumulative and cumulative perpetual preferred stock, and minorityinterests. Goodwill, if any, is subtracted from the total. Tier 2 capitalconsists of the allowance for loan losses, hybrid capital instruments, termsubordinated debt and intermediate term preferred stock.  Banks are required to maintain a minimumrisk-based capital ratio of 8%, with at least 4% consisting of Tier 1 capital.

 

The second measure of capital adequacy relates to theleverage ratio. The OCC has established a 3% minimum leverage ratiorequirement. The leverage ratio is computed by dividing Tier 1 capital intototal assets. In the case of the Bank and other banks that are experiencinggrowth or have not received the highest regulatory rating from their primaryregulator, the minimum leverage ratio should be 3% plus an additional cushionof at least 1% to 2%, depending upon risk profiles and other factors.  Moreover, as a newly organized national bank,the Bank is required to maintain a leverage capital ratio in excess of 8% forthe first three years of operations.

 

For the years ended December 31, 2009 and 2008,the Bank met all capital adequacy requirements and was consideredwell-capitalized for all three measures, as follows:  (1) Total capital to risk-weightedassets were 21% and 46%, as of December 31, 2009 and 2008 respectively; (2) Tier1 capital to risk-weighted assets were 20% and 45%, at December 31, 2009and 2008, respectively; and  (3) Tier1 capital to average assets were 11% and 25% at December 31, 2009 and2008, respectively.

 

**Item7A.  Quantitative and QualitativeDisclosures About Market Risk**

 

As a smaller reportingcompany, this item is not required.

 

**Item8. Financial Statements and Supplementary Data**

 

The consolidated financial statements of the Company,including the notes thereto, and the report of the independent registeredpublic accounting firm is included in this Annual Report and begins on page F-1.

 

**Item9. Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure**

 

None.

 

**Item 9A(T).  Controls and Procedures**

 

**ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures**

 

Management is responsible for maintaining effectivedisclosure controls and procedures.  As of the end of the period coveredby this Annual Report on Form 10-K, management, including the PrincipalExecutive Officer and Principal Accounting and Financial Officer, 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 Financial Officer have concluded that the Company’s disclosurecontrols and procedures are effective to ensure that the information requiredto be disclosed by the Company in reports that are filed or submitted under theExchange Act are recorded, processed, summarized and reported to managementwithin the time periods specified in the Securities and Exchange Commission’s rules andforms and that such information is accumulated and communicated to managementas appropriate to allow timely decisions regarding disclosure.

 

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**Management’s Report on InternalControl Over Financial Reporting**

 

The management of Solera National Bancorp, Inc.including its consolidated subsidiary, is responsible for establishing andmaintaining adequate internal control over financial reporting. The Company’sinternal control system was designed to provide reasonable assurance to theCompany’s management and board of directors regarding the preparation and fairpresentation of published financial statements in accordance with U.S.generally accepted accounting principles. All internal control systems, nomatter how well designed, have inherent limitations. Therefore, even thosesystems determined to be effective can provide only reasonable assurance withrespect to financial statement preparation and presentation.

 

Management maintains a comprehensive system ofcontrols intended to ensure that transactions are executed in accordance withmanagement’s authorization, assets are safeguarded, and financial records arereliable. Management also takes steps to see that information and communicationflows are effective and to monitor performance, including performance ofinternal control procedures.

 

As of December 31, 2009, Solera National Bancorp, Inc.’smanagement assessed the effectiveness of the Company’s internal control overfinancial reporting based on the framework established in *Internal Control-Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).Based on this assessment, management has determined that the Company’s internalcontrol over financial reporting as of December 31, 2009, is effective.

 

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements should theyoccur. Also, projections of any evaluation of effectiveness to future periodsare subject to the risk that controls may become inadequate because of changesin conditions, or that the degree or compliance with the control procedures maydeteriorate.

 

This Annual Report does not include an attestationreport of our independent registered public accounting firm regarding internalcontrol over financial reporting. Management’s report was not subject to attestation by our independentregistered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit us to provide only management’sreport in this Annual Report on Form 10-K.

 

**Changes in Internal Control over FinancialReporting**

 

There have been no changes in internal controls overfinancial reporting during the Company’s last fiscal quarter of 2009 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal controls over financial reporting.

 

**Item 9B. Other Information**

 

**Entry into a Material Definitive Agreement**.

 

OnMarch 18, 2010, pursuant to a Stipulation and Consent to the Issuance of aConsent Order, the Bank consented and agreed to the issuance of a Consent Order(the “Order”) by the Office of the Comptroller of Currency (the “OCC”), theBank’s primary banking regulator.

 

The Order requires theBank or its Board of Directors, among other things,

 

·                  to establish a compliance committee of at least fivemembers to monitor and coordinate compliance with the Order within five (5) days;

·                  to ensure for compliance with the Bank Secrecy Act (“BSA”),the Board shall perform a comprehensive BSA risk assessment, within thirty (30)days;

·                  to revise, adopt, implement and thereafter ensure Bankadherence to a written program of policies and procedures to provide forcompliance with the BSA (“Risk-Based BSA Program”), within sixty (60) days;

·                  to determine within thirty (30) days, whether anychanges are needed regarding the Bank’s BSA Officer, including theresponsibilities, authority, structure, independence or skills of the BankSecrecy Act Officer.  In particular, theBoard shall ensure that the BSA Officer has sufficient training, authority, andskill to perform the assigned responsibilities;

·                  to ensure the Risk-Based BSA Program includes:

 

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·                  a comprehensive training program for all appropriateoperational and supervisory personnel to ensure their awareness of theirspecific assigned responsibilities for compliance with the requirements of theBank Secrecy Act;

·                  policies and procedures for the appropriate identificationand monitoring of transactions that pose greater than normal risk for elicitactivity as required by BSA;

·                  policies and procedures to provide for the Bank’smonitoring of suspicious cash, monetary instruments, wire transfers, and otheractivities for all types of transactions, accounts, customers, products,services, and geographic areas;

·                  to ensure the Risk-Based BSA Program maintainspolicies and procedures for expanded account-opening procedures for allaccounts that pose greater than normal risk for compliance with the BankSecrecy Act;

·                  to ensure that the BSA Program includes policies andprocedures for the maintenance of an integrated, accurate system for all Bankareas to produce periodic reports designed to identify unusual or suspiciousactivity, including patterns of activity, to monitor and evaluate unusual orsuspicious activity, and to maintain accurate information needed to producethese reports, within ninety (90) days;

·                  to ensure the continuance of an external BSA audit,that is independent, adequate in scope and frequency, and designed to ensurecompliance with the BSA in all areas of the Bank;

·                  to prepare and submit to the OCC for a prior writtendetermination of no supervisory objection, a program (including policies and procedures)designed to ensure the Bank manages and controls the risk in its loanportfolio, within forty-five (45) days;

 

The foregoing descriptionof the Consent Order does not purport to be complete and is qualified in itsentirety by reference to the Consent Order which is filed as Exhibit 10.13to this Annual Report and incorporated herein by reference.

 

**PART III**

 

**Item10.  Directors, Executive Officers andCorporate Governance**

 

The required information for this item is incorporatedby reference to the Company’s Proxy Statement for the 2010 Annual Meeting ofStockholders, since such Proxy Statement will be filed with the Securities andExchange Commission no later than 120 days after the end of the Company’sfiscal year pursuant to Regulation 14A.

 

**Item11.****Executive Compensation**

 

The required informationfor this item is incorporated by reference to the Company’s Proxy Statement forthe 2010 Annual Meeting of Stockholders, since such Proxy Statement will befiled with the Securities and Exchange Commission no later than 120 days afterthe end of the Company’s fiscal year pursuant to Regulation 14A.

 

**Item12. Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters**

 

The required information for this item is incorporatedby reference to the Company’s Proxy Statement for the 2010 Annual Meeting ofStockholders, since such Proxy Statement will be filed with the Securities andExchange Commission no later than 120 days after the end of the Company’sfiscal year pursuant to Regulation 14A.

 

**Item13.  Certain Relationships and RelatedTransactions, and Director Independence**

 

The required information for this item is incorporatedby reference to the Company’s Proxy Statement for the 2010 Annual Meeting ofStockholders, since such Proxy Statement will be filed with the Securities andExchange Commission no later than 120 days after the end of the Company’sfiscal year pursuant to Regulation 14A.

 

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**Item14.  Principal Accountant Fees andServices**

 

The required information for this item is incorporatedby reference to the Company’s Proxy Statement for the 2010 Annual Meeting ofStockholders, since such Proxy Statement will be filed with the Securities andExchange Commission no later than 120 days after the end of the Company’sfiscal year pursuant to Regulation 14A.

 

**PART IV**

 

**Item15.  Exhibits and Financial StatementSchedules**

 

**(a) DocumentsFiled as Part of this Report**

 

(1) FinancialStatements.  The consolidatedfinancial statements of Solera National Bancorp, Inc., which are listed onthe Index to Consolidated Financial Statements appearing on page F-1 ofthis Annual Report.

 

(2) FinancialStatement Schedules. All schedules for which provision is made in theapplicable accounting regulations of the SEC are omitted because of the absenceof conditions under which they are required or because the required informationis included in the consolidated financial statements and related notes thereto.

 

(3) Exhibits. The following is a list ofexhibits filed as part of this Annual Report on Form 10-K.

** **
| **Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                 |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                            |
| 3.1        |       | Certificate of Incorporation (incorporated by  reference to Exhibit 3.1 to the Company’s Registration Statement on  Form SB-2 (No. 333-138042) filed on October 17, 2006).                                                                                                                                             |
| 3.2        |       | Amendment to Certificate of Incorporation  (incorporated by reference to Exhibit 3.2 to the Company’s Registration  Statement on Form SB-2 (No. 333-145861) filed on September 4,  2007).                                                                                                                              |
| 3.3        |       | Bylaws (incorporated by reference to  Exhibit 3.2 to the Company’s Registration Statement on Form SB-2  (No. 333-138042) filed on October 17, 2006).                                                                                                                                                                   |
| 4.1        |       | Specimen common stock certificate (incorporated by  reference to Exhibit 4.1 to the Company’s Registration Statement on  Form SB-2 (No. 333-138042) filed on October 17, 2006).                                                                                                                                        |
| 4.2        |       | Form of Solera National Bancorp, Inc.  Organizers’ Warrant Agreement (incorporated by reference to Exhibit 4.2  to the Company’s Registration Statement on Form SB-2  (No. 333-138042) filed on October 17, 2006).                                                                                      |
| 4.3        |       | Form of Solera National Bancorp, Inc.  Shareholders’ Warrant Agreement (incorporated by reference to  Exhibit 4.3 to the Company’s Registration Statement on Form SB-2  (No. 333-138042) filed on October 17, 2006).                                                                                    |
| 4.4        |       | See Exhibits 3.1, 3.2  and 3.3 for provisions of the certificate of incorporation and bylaws  defining rights of holders of the common stock.                                                                                                                                                                                                   |
| 10.1       |       | Solera National  Bancorp, Inc. 2007 Stock Incentive Plan (incorporated by reference to  Exhibit 10.3 to the Company’s Registration Statement on Form SB-2  (No. 333-138042) filed on October 17, 2006).+                                                                                                          |
| 10.2       |       | Employment Agreement by and between Solera National  Bank and James Perez Foster (incorporated by reference to Exhibit 10.4 to  the Company’s Registration Statement on Form SB-2 (No. 333-138042)  filed on October 17, 2006).+                                                                                       |
| 10.3       |       | Employment Agreement by  and between Solera National Bank and Robert Fenton (incorporated by reference  to Exhibit 10.5 to the Company’s Registration Statement on  Form SB-2 (No. 333-138042) filed on October 17, 2006).+                                                                                            |
| 10.4       |       | Employment Agreement by  and between Solera National Bank and Mark Martinez (incorporated by reference  to Exhibit 10.6 to the Company’s Registration Statement on  Form SB-2 (No. 333-138042) filed on October 17, 2006).+                                                                                            |
| 10.5       |       | Employment Agreement by  and between Solera National Bank and Paul Ferguson (incorporated by reference  to Exhibit 10.7 to the Company’s Registration Statement on  Form SB-2 (No. 333-138042) filed on October 17, 2006).+                                                                                            |
| 10.6       |       | Lease Agreement dated  September 27, 2005, by and between Forest Park Realty Investments, LLC  and Solera National Bancorp, Inc. (f/k/a Patria Corporation)  (incorporated by reference to Exhibit 10.12 to the Company’s  Registration Statement on Form SB-2 (No. 333-138042) filed on  October 17, 2006). |

 

49

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| **Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                         |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.7       |       | Lease Agreement dated  June 16, 2006, by and between 319 South Sheridan LLC and Solera National  Bancorp, Inc. (incorporated by reference to Exhibit 10.13 to the  Company’s Registration Statement on Form SB-2 (No. 333-138042)  filed on October 17, 2006).                       |
| 10.8       |       | Lease Agreement dated  June 19, 2006, by and between Clairbridge LLC and Solera National  Bancorp, Inc. (incorporated by reference to Exhibit 10.14 to the  Company’s Registration Statement on Form SB-2 (No. 333-138042)  filed on October 17, 2006).                              |
| 10.9       |       | Data Processing  Services Agreement, dated March 22, 2006, by and between Fidelity  Information Services, Inc. and Solera Bank, N.A. (incorporated by  reference to Exhibit 10.15 to the Company’s Registration Statement on  Form SB-2 (No. 333-138042) filed on October 17, 2006). |
| 10.10      |       | Separation Agreement by  and between Solera National Bank and Paul Ferguson. (incorporated by  reference to Exhibit 10.10 to the Company’s Annual Report on  Form 10-K filed on March 26, 2009).+                                                                                                   |
| 10.11      |       | Separation Agreement by  and between Solera National Bank and James C. Foster. (incorporated by  reference to Exhibit 10.1 to the Company’s Quarterly Report on  Form 10-Q filed on August 12, 2009).+                                                                                              |
| 10.12      |       | Executive Employment  Agreement by and between Solera National Bank, Solera National  Bancorp, Inc. and Douglas Crichfield. (incorporated by reference to  Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed  on August 12, 2009).+                                            |
| 10.13      |       | Form of Consent  Order dated March 18, 2010 issued by the Office of the Comptroller of  the Currency in the matter of Solera National Bank and Stipulation and  Consent to the Issuance of a Consent Order.*                                                                                                  |
| 14.1       |       | Code of Ethics  (incorporated by reference to Exhibit 14.1 to the Company’s  Form 10-KSB filed on March 27, 2008).                                                                                                                                                                                  |
| 21.1       |       | Subsidiaries of  Registrant (incorporated by reference to Exhibit 21.1 to the Company’s  Form 10-KSB for the year ended December 31, 2007).                                                                                                                                                         |
| 23.1       |       | Consent of McGladrey  and Pullen, LLP.*                                                                                                                                                                                                                                                                                 |
| 24.1       |       | Powers of Attorney  (incorporated by reference to Signature page attached hereto).                                                                                                                                                                                                                                 |
| 31.1       |       | Certification of  Principal Executive Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act.*                                                                                                                                                                                                    |
| 31.2       |       | Certification of  Principal Financial Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act.*                                                                                                                                                                                                    |
| 32.1       |       | Certification pursuant  to Rule 13a-14(b) of the Securities Exchange Act and 18 U.S.C.  §1350.*                                                                                                                                                                                                          |

 

----

*  Filed herewith.

+  Indicates a compensatory plan or contract.

 

**(b) None**

 

50

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this AnnualReport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|   |                              |                                         |
|--------|-----------------------------------|----------------------------------------------|
|   | **SOLERA NATIONAL BANCORP, INC.** |                                         |
|   |                              |                                         |
|   |                              |                                         |
|   | By:                               | /s/ Douglas Crichfield                       |
|   |                              | Douglas Crichfield                           | Dated: March 19,  2010 |
|   |                              | President & Chief Executive Officer |   |
|   |                              | (Principal Executive Officer)                |   |

 

 

**POWER OF ATTORNEY**

 

Know all persons by these presents, that each personwhose signature appears below constitutes and appoints Douglas Crichfield orRobert J. Fenton as his or her true and lawful attorney-in-fact and agent, withfull power of substitution and resubstitution, for him or her and in his or hername, place, stead, in any and all capacities, to sign any and all amendmentsto this Annual Report on Form 10-K, and to file the same, with allexhibits thereto, and other documents in connection therewith, including allamendments thereto, with the Securities and Exchange Commission, granting untosaid attorney-in-fact and agent full power and authority to do and perform eachand every act and thing requisite and necessary to be done in connectiontherewith, as fully to all intents and purposes as he or she might or could doin person, hereby ratifying and confirming all that said attorney-in-fact andagent or his substitute or substitutes, may lawfully do or cause to be done byvirtue hereof.

 

51

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Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Annual Report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
| **SIGNATURE**          | ** ** | **TITLE**                                                                                       | ** ** | **DATE**            |
|------------------------|------------|-------------------------------------------------------------------------------------------------|------------|---------------------|
| /s/ Douglas Crichfield |       | President & Chief Executive Officer,Director(Principal Executive Officer)              |       | March 19, 2010 |
| Douglas Crichfield     |       |                                                                                            |       |
|                   |       |                                                                                            |       |                |
| /s/ Robert J. Fenton   |       | Executive Vice President, Chief Financial Officer (Principal  Accounting and Financial Officer) |       | March 19, 2010 |
| Robert J. Fenton       |       |                                                                                            |       |
|                   |       |                                                                                            |       |                |
| /s/ Norma R. Akers     |       | Director                                                                                        |       | March 19, 2010 |
| Norma R. Akers         |       |                                                                                            |       |                |
|                   |       |                                                                                            |       |                |
| /s/ Rob L. Alvarado    |       | Director                                                                                        |       | March 19, 2010 |
| Rob L. Alvarado        |       |                                                                                            |       |                |
|                   |       |                                                                                            |       |                |
| /s/ Maria G. Arias     |       | Director                                                                                        |       | March 19, 2010 |
| Maria G. Arias         |       |                                                                                            |       |                |
|                   |       |                                                                                            |       |                |
| /s/ Robert M. Gallegos |       | Director                                                                                        |       | March 19, 2010 |
| Robert M. Gallegos     |       |                                                                                            |       |                |
|                   |       |                                                                                            |       |                |
| /s/ Ronald E. Montoya  |       | Director, Vice Chairman                                                                         |       | March 19, 2010 |
| Ronald E. Montoya      |       |                                                                                            |       |                |
|                   |       |                                                                                            |       |                |
| /s/ Ray L. Nash        |       | Director                                                                                        |       | March 19, 2010 |
| Ray L. Nash            |       |                                                                                            |       |                |
|                   |       |                                                                                            |       |                |
| /s/ Basil Sabbah       |       | Director, Chairman                                                                              |       | March 19, 2010 |
| Basil Sabbah           |       |                                                                                            |       |                |
|                   |       |                                                                                            |       |                |
| /s/ F. Stanley Sena    |       | Director                                                                                        |       | March 19, 2010 |
| F. Stanley Sena        |       |                                                                                            |       |                |
|                   |       |                                                                                            |       |                |
| /s/ Larry D. Trujillo  |       | Director                                                                                        |       | March 19, 2010 |
| Larry D. Trujillo      |       |                                                                                            |       |                |
|                   |       |                                                                                            |       |                |
| /s/ Kent C. Veio       |       | Director                                                                                        |       | March 19, 2010 |
| Kent C. Veio           |       |                                                                                            |       |                |

 

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**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

 
| **REPORT  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**                   | ** ** | **F-2**               |
|--------------------------------------------------------------------------------|------------|-----------------------|
|                                                                           |       |                  |
| **FINANCIAL STATEMENTS**                                                       |       |                  |
|                                                                           |       |                  |
| **Consolidated  Balance Sheets**                                               | ** ** | **F-3**               |
| **Consolidated  Statements of Operations**                                     | ** ** | **F-4**               |
| **Consolidated Statements of Changes in Stockholders’  Equity/(Deficit)** | ** ** | **F-5**               |
| **Consolidated Statements of Cash Flows**                                      | ** ** | **F-6  and F-7**      |
| **Notes to Consolidated Financial Statements**                                 | ** ** | **F-8  through F-34** |

 

F-1

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Table of Contents

 

**Report of Independent RegisteredPublic Accounting Firm**

 

To the Board of Directors and Stockholders

 

Solera National Bancorp, Inc.

 

We have audited the accompanying consolidated balancesheets of Solera National Bancorp, Inc. (the Company) as of December 31,2009 and 2008, and the related consolidated statements of operations,stockholders’ equity/(deficit), and cash flows for each of the two years in theperiod ended December 31, 2009. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Solera National Bancorp, Inc. as of December 31, 2009 and2008, and the results of its operations and its cash flows for each of the twoyears in the period ended December 31, 2009, in conformity with U.S.generally accepted accounting principles.

 

We were not engaged to examine management’s assessmentof the effectiveness of Solera National Bancorp, Inc.’s internal controlover financial reporting as of December 31, 2009, included in theaccompanying Management’s Report On Internal Control Over Financial Reportingand, accordingly, we do not express an opinion thereon.

 

 

/s/ McGladrey & Pullen, LLP

 

Denver, Colorado

March 19, 2010

 

F-2

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Table of Contents

 

 **SOLERA NATIONAL BANCORP, INC.**

 

**CONSOLIDATEDBALANCE SHEETS**

**December 31,2009 and 2008**

 
| **($ in thousands)**                                                                                                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                                |       |     |       |     |       |
| **ASSETS**                                                                                                                                |       |     |       |     |       |
| ** **                                                                                                                                |       |     |       |     |       |
| Cash and due from banks                                                                                                                   |       | $        | 1,696      |     | $          | 1,436 |   |
| Federal funds sold                                                                                                                        |       | 820      |       | 965      |       |
| **TOTAL  CASH AND CASH EQUIVALENTS**                                                                                                      |       | 2,516    |       | 2,401    |       |
| ** **                                                                                                                                |       |     |       |     |       |
| Interest-bearing  deposits with banks                                                                                                     |       | 3,784    |       | —   |       |
| Investment securities,  available-for-sale                                                                                                |       | 73,441   |       | 41,557   |       |
| Gross loans                                                                                                                               |       | 50,504   |       | 21,413   |       |
| Net deferred  (fees)/expenses                                                                                                             |       | (114     | )          | (57      | )          |
| Allowance for loan  losses                                                                                                                |       | (830     | )          | (268     | )          |
| **NET LOANS**                                                                                                                             |       | 49,560   |       | 21,088   |       |
| ** **                                                                                                                                |       |     |       |     |       |
| FHLB and Federal  Reserve Bank stock, at cost                                                                                             |       | 1,131    |       | 1,080    |       |
| Premises and equipment,  net                                                                                                              |       | 875      |       | 1,012    |       |
| Accrued interest  receivable                                                                                                              |       | 814      |       | 383      |       |
| Prepaid Federal Deposit  Insurance Corporation (“FDIC”) premiums                                                                |       | 471      |       | —   |       |
| Other assets                                                                                                                              |       | 248      |       | 222      |       |
| **TOTAL ASSETS**                                                                                                                          |       | $        | 132,840    |     | $          | 67,743 |   |
| ** **                                                                                                                                |       |     |       |     |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                            |       |     |       |     |       |
| Deposits                                                                                                                                  |       |     |       |     |       |
| Noninterest-bearing  demand                                                                                                               |       | $        | 2,624      |     | $          | 3,910 |   |
| Interest-bearing demand                                                                                                                   |       | 6,830    |       | 2,604    |       |
| Savings and money  market                                                                                                                 |       | 55,318   |       | 6,873    |       |
| Time deposits                                                                                                                             |       | 39,629   |       | 24,275   |       |
| **TOTAL  DEPOSITS**                                                                                                                       |       | 104,401  |       | 37,662   |       |
| ** **                                                                                                                                |       |     |       |     |       |
| Securities sold under  agreements to repurchase                                                                                           |       | 326      |       | 398      |       |
| Federal Home Loan Bank  borrowings                                                                                                        |       | 8,750    |       | 10,000   |       |
| Accrued interest  payable                                                                                                                 |       | 82       |       | 80       |       |
| Accounts payable and other liabilities                                                                                                    |       | 344      |       | 394      |       |
| Capital lease liability                                                                                                                   |       | 118      |       | 156      |       |
| Deferred rent liability                                                                                                                   |       | 85       |       | 61       |       |
| **TOTAL  LIABILITIES**                                                                                                                    |       | 114,106  |       | 48,751   |       |
| ** **                                                                                                                                |       |     |       |     |       |
| Commitments and  contingencies (see Notes 16 and 17)                                                                                      |       |     |       |     |       |
| Stockholders’ equity                                                                                                                 |       |     |       |     |       |
| Common stock - $0.01  par value; 5,000,000 shares authorized; 2,553,671 shares issued and  outstanding at December 31, 2009 and 2008 |       | 26       |       | 26       |       |
| Additional paid-in  capital                                                                                                               |       | 25,768   |       | 25,558   |       |
| Accumulated deficit                                                                                                                       |       | (8,016   | )          | (6,740   | )          |
| Accumulated other  comprehensive income                                                                                                   |       | 956      |       | 148      |       |
| **TOTAL  STOCKHOLDERS’ EQUITY**                                                                                                      |       | 18,734   |       | 18,992   |       |
| **TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                      |       | $        | 132,840    |     | $          | 67,743 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

F-3

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**YearsEnded December 31, 2009 and 2008**

 
| ** ($ in thousands, except  share data)**                         | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|-----------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                                        |       |      |       |      |       |
| Interest and dividend  income                                               |       |      |       |      |       |
| Interest and fees on  loans                                                 |       | $         | 2,093      |      | $          | 658 |   |
| Federal funds sold                                                          |       | 5         |       | 87        |       |
| Investment securities,  taxable                                             |       | 2,896     |       | 1,394     |       |
| Dividends on FHLB and  Federal Reserve Bank stocks                          |       | 42        |       | 42        |       |
| Other                                                                       |       | 9         |       | 41        |       |
| Total interest and  dividend income                                         |       | 5,045     |       | 2,222     |       |
| Interest expense                                                            |       |      |       |      |       |
| Deposits                                                                    |       | 1,802     |       | 433       |       |
| Securities sold under  agreements to repurchase and federal funds purchased |       | 12        |       | 2         |       |
| FHLB borrowings                                                             |       | 334       |       | 238       |       |
| Capital leases                                                              |       | 13        |       | 16        |       |
| Total interest expense                                                      |       | 2,161     |       | 689       |       |
| Net interest and  dividend income                                           |       | 2,884     |       | 1,533     |       |
| Provision for loan  losses                                                  |       | 562       |       | 221       |       |
| Net interest and  dividend income after provision for loan losses           |       | 2,322     |       | 1,312     |       |
| Noninterest income                                                          |       |      |       |      |       |
| Customer service and  other fees                                            |       | 247       |       | 91        |       |
| Gain on sale of  securities                                                 |       | 377       |       | 47        |       |
| Sublease income                                                             |       | 5         |       | 23        |       |
| Total noninterest  income                                                   |       | 629       |       | 161       |       |
| Noninterest expense                                                         |       |      |       |      |       |
| Salaries and employee  benefits                                             |       | 2,436     |       | 2,312     |       |
| Occupancy                                                                   |       | 558       |       | 346       |       |
| Professional fees                                                           |       | 318       |       | 258       |       |
| Other general and  administrative                                           |       | 915       |       | 771       |       |
| Total noninterest  expense                                                  |       | 4,227     |       | 3,687     |       |
| Loss before income  taxes                                                   |       | (1,276    | )          | (2,214    | )          |
| Provision for income  taxes                                                 |       | —    |       | —    |       |
| Net loss                                                                    |       | $         | (1,276     | )         | $          | (2,214 | ) |
| Per share data                                                              |       |      |       |      |       |
| Loss per share — basic                                                 |       | $         | (0.50      | )         | $          | (0.87 | ) |
| Loss per share —  diluted                                              |       | $         | (0.50      | )         | $          | (0.87 | ) |
| Weighted average common  shares                                             |       |      |       |      |       |
| Basic                                                                       |       | 2,553,671 |       | 2,553,671 |       |
| Diluted                                                                     |       | 2,553,671 |       | 2,553,671 |       |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

F-4

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY/ (DEFICIT)**

**YearsEnded December 31, 2009 and 2008**

 
| **($ in thousands, except share data)**            | ** ** | **Shares********Outstanding** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  (Deficit)** | ** ** | **Accumulated  Other********Comprehensive   Income** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|----------------------------|------------|-----------------------------------------------------------|------------|-----------|------------|
|                                                                        |       |                          |       |              |       |                             |       |                       |       |                                                      |       |      |       |
| **Balance at December 31, 2007**                                       | ** ** | **2,553,671**                 | ** ** | **$**             | **26**     | ** **                       | **$**      | **25,347**                 | ** ** | **$**                                                     | **(4,526** | **)**     | **$**      | **2** | ** ** | **$** | **20,849** | ** ** |
| Stock-based  compensation                                                   |       | —                        |       | —            |       | 211                              |       | —                     |       | —                                                    |       | 211       |       |
| Comprehensive  income (loss)                                                |       |                          |       |              |       |                             |       |                       |       |                                                      |       |      |       |
| Net  loss                                                                   |       | —                        |       | —            |       | —                           |       | (2,214                     | )          | —                                                    |       | (2,214    | )          |
| Net  change in unrealized gains on investment securities available-for-sale |       | —                        |       | —            |       | —                           |       | —                     |       | 193                                                       |       | 193       |       |
| Less:  reclassification adjustment for net gains included in income         |       | —                        |       | —            |       | —                           |       | —                     |       | (47                                                       | )          | (47       | )          |
| Total comprehensive income (loss)                                           |       | —                        |       | —            |       | —                           |       | —                     |       | —                                                    |       | (2,068    | )          |
| **Balance at December 31, 2008**                                       | ** ** | **2,553,671**                 | ** ** | **$**             | **26**     | ** **                       | **$**      | **25,558**                 | ** ** | **$**                                                     | **(6,740** | **)**     | **$**      | **148** | ** ** | **$** | **18,992** | ** ** |
| Stock-based  compensation                                                   |       | —                        |       | —            |       | 210                              |       | —                     |       | —                                                    |       | 210       |       |
| Comprehensive  income (loss)                                                |       |                          |       |              |       |                             |       |                       |       |                                                      |       |      |       |
| Net  loss                                                                   |       | —                        |       | —            |       | —                           |       | (1,276                     | )          | —                                                    |       | (1,276    | )          |
| Net  change in unrealized gains on investment securities available-for-sale |       | —                        |       | —            |       | —                           |       | —                     |       | 1,185                                                     |       | 1,185     |       |
| Less:  reclassification adjustment for net gains included in income         |       | —                        |       | —            |       | —                           |       | —                     |       | (377                                                      | )          | (377      | )          |
| Total comprehensive income (loss)                                           |       | —                        |       | —            |       | —                           |       | —                     |       | —                                                    |       | (468      | )          |
| **Balance at December 31, 2009**                                       | ** ** | **2,553,671**                 | ** ** | **$**             | **26**     | ** **                       | **$**      | **25,768**                 | ** ** | **$**                                                     | **(8,016** | **)**     | **$**      | **956** | ** ** | **$** | **18,734** | ** ** |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

F-5

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**YearsEnded December 31, 2009 and 2008**

 
| **($ in thousands)**                                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                                            |       |     |       |     |       |
| Net loss                                                                          |       | $        | (1,276     | )        | $          | (2,214 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities:      |       |     |       |     |       |
| Depreciation and  amortization                                                    |       | 169      |       | 115      |       |
| Provision for loan losses                                                         |       | 562      |       | 221      |       |
| Amortization of  deferred loan fees/expenses, net                                 |       | (71      | )          | (10      | )          |
| Discount accretion on  interest-bearing deposits with banks                       |       | —   |       | (13      | )          |
| Amortization of  premiums/discounts on investment securities, net                 |       | 96       |       | 43       |       |
| Stock-based  compensation                                                         |       | 210      |       | 211      |       |
| Reversal of loss on  abandoned lease                                              |       | —   |       | (133     | )          |
| Gain on sale of  investment securities                                            |       | (377     | )          | (47      | )          |
| Federal Home Loan Bank  stock dividends                                           |       | (14      | )          | (12      | )          |
| Net changes in  operating assets and liabilities:                                 |       |     |       |     |       |
| Prepaid FDIC  assessments                                                         |       | (471     | )          | —   |       |
| Accrued interest  receivable                                                      |       | (431     | )          | (283     | )          |
| Other assets                                                                      |       | (45      | )          | 133      |       |
| Accrued interest  payable                                                         |       | 2        |       | 64       |       |
| Accounts payable and  other liabilities                                           |       | (50      | )          | 163      |       |
| Deferred loan  fees/expenses, net                                                 |       | 128      |       | 69       |       |
| Deferred rent liability                                                           |       | 24       |       | 30       |       |
| Net cash used by  operating activities                                            |       | (1,544   | )          | (1,663   | )          |
| Cash flows from  investing activities:                                            |       |     |       |     |       |
| Purchases of investment  securities, available-for-sale                           |       | (74,297  | )          | (42,854  | )          |
| Proceeds from sales of  investment securities, available-for-sale                 |       | 30,221   |       | 6,332    |       |
| Proceeds from maturity/call/paydown  of investment securities, available-for-sale |       | 13,281   |       | 8,975    |       |
| Purchase of  interest-bearing deposits with banks                                 |       | (6,623   | )          | (5,751   | )          |
| Maturity of  interest-bearing deposits with banks                                 |       | 2,839    |       | 5,764    |       |
| Purchase of Federal  Reserve Bank stock                                           |       | (37      | )          | —   |       |
| Proceeds from  redemption of Federal Reserve Bank stock                           |       | —   |       | 63       |       |
| Purchase of Federal  Home Loan Bank stock                                         |       | —   |       | (606     | )          |
| Loan originations and  principal collections, net                                 |       | (29,091  | )          | (17,600  | )          |
| Purchases of premises  and equipment                                              |       | (13      | )          | (191     | )          |
| Net cash used in  investing activities                                            |       | (63,720  | )          | (45,868  | )          |
| Cash flows from  financing activities:                                            |       |     |       |     |       |
| Net increase in  deposits                                                         |       | 66,739   |       | 32,663   |       |
| Net (decrease) increase  in securities sold under agreements to repurchase        |       | (72      | )          | 398      |       |
| Principal payments on  capital lease                                              |       | (38      | )          | (35      | )          |
| Proceeds from Federal  Home Loan Bank borrowings                                  |       | 1,000    |       | 10,000   |       |
| Repayment of Federal  Home Loan Bank borrowings                                   |       | (2,250   | )          | —   |       |
| Proceeds from  subscriptions receivable                                           |       | —   |       | 1,600    |       |
| Net cash provided by  financing activities                                        |       | 65,379   |       | 44,626   |       |
|                                                                              |       |     |       |     |       |
| Net increase (decrease)  in cash and cash equivalents                             |       | 115      |       | (2,905   | )          |
| Cash and cash  equivalents at beginning of year                                   |       | 2,401    |       | 5,306    |       |
| Cash and cash  equivalents at end of year                                         |       | $        | 2,516      |     | $          | 2,401 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

(continued)

 

F-6

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (continued)**

**YearsEnded December 31, 2009 and 2008**

 
| **($ in thousands)**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Supplemental disclosure  of cash flow information: |       |     |       |     |       |
| Interest paid                                      |       | $        | 2,159      |     | $          | 625 |   |
| Non-cash investing and  financing activities:      |       |     |       |     |       |
| Unrealized gain on  investment securities          |       | $        | 808        |     | $          | 146 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

F-7

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

Organization

 

SoleraNational Bancorp, Inc., a bank holding company, is a Delaware corporationthat incorporated in 2006 to organize and serve as the holding company forSolera National Bank (the “Bank”).  TheBank, which is chartered as a national bank by the Office of the Comptroller ofthe Currency, is a wholly-owned subsidiary of Solera National Bancorp, Inc.  Solera National Bank is a full-servicecommercial bank headquartered in Lakewood, Colorado initially serving theDenver metropolitan area.

 

Principles of Consolidation

 

Theaccompanying consolidated financial statements include the accounts of SoleraNational Bancorp and its wholly-owned subsidiary, Solera National Bank.  All entities are collectively referred to asthe Company.  All significantintercompany balances and transactions have been eliminated in consolidation.

 

Basis of Presentation

 

TheCompany received approval as a bank in organization in the first quarter of2007, conducted an initial closing of its common stock offering and commencedbanking operations during the third quarter of 2007.  The attainment ofprofitable operations are dependent on future events, including the successfulexecution of the Company’s business plan and achieving a level of revenueadequate to support the Company’s cost structure.

 

The Company uses the “managementapproach” for reporting information about segments in annual and interimfinancial statements. The management approach is based on the way the chiefoperating decision maker organizes segments within a company for makingoperating decisions and assessing performance. Based on the “managementapproach” model, the Company has determined that its business is comprised ofone operating segment: banking.  Thebanking segment generates revenues through commercial and consumer lending,management of the investment securities portfolio, and providing depositaccount services.

 

TheCompany is subject to various risks and uncertainties frequently encountered bycompanies in the early stages.  Such risks and uncertainties include, butare not limited to, its limited operating history, competition, dependence onkey personnel and management of rapid growth.  To address these risks, theCompany must, among other things, develop and retain its customer base,implement and successfully execute its business and marketing strategy,continue to develop and upgrade its technology, provide superior customerservice and attract, retain and motivate qualified personnel.  There canbe no guarantee that the Company will be successful in addressing these orother such risks.

 

Todate, the Company has funded its activities primarily through proceeds from thecommon stock offerings, deposits from bank customers and borrowings from theFederal Home Loan Bank of Topeka (“FHLB”). The Company’s cash and cash equivalents at December 31, 2009 and2008 totaled $2.5 million and $2.4 million, respectively.  Managementbelieves cash currently on hand will provide adequate funding through December 31,2010.  There can be no assurance that theCompany will achieve or sustain profitability or positive cash flow from itsoperations.

 

Theaccounting and reporting policies of the Company are in accordance withaccounting principles generally accepted in the

 

F-8

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES — continued**

 

United States of America and prevailing practiceswithin the banking industry. A summary of the significant accounting policiesconsistently applied in preparation of the accompanying financial statementsfollows:

 

Use of Estimates in the Preparation of FinancialStatements

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and contingent assets and liabilities at thedate of the financial statements and the reported amounts of certain revenuesand expenses during the reporting period. Actual results could differ from those estimates.  The significant areas requiring managementestimates include determination of the allowance for loan losses, assessment ofimpairment for investment securities, valuation of deferred tax assets andliabilities, stock compensation expense, and fair value of investmentsecurities and other financial instruments. Assumptions and factors used in making estimates are evaluated regularlyor whenever events or circumstances indicate that the previous assumptions andfactors have changed.  Estimates may beadjusted as a result of assumptions and factors being evaluated.

 

Presentation of Cash Flows

 

For the purposes of reporting cash flows, cash andcash equivalents includes cash, balances due from banks and federal funds sold.Generally, federal funds are sold for one day periods.  Cash flows from loans, deposits, andsecurities sold under agreements to repurchase are reported net.

 

Cash and Due from Banks

 

The Company maintains amounts due from banks whichexceed federally insured limits. The Company has not experienced nor does itanticipate any losses in such accounts.

 

Investment Securities

 

Investments to be held for an indefinite amount oftime, but not necessarily to maturity, are classified as available-for-sale andreported at fair value using Level 2 inputs (see Note 19).  For these securities, theCompany obtains fair value measurements from independent pricing services.  The fair value measurements considerobservable data that may include dealer quotes, market spreads, cash flows, theU.S. Treasury yield curve, live trading levels, trade execution data, marketconsensus prepayment speeds, credit information and the bonds’ terms andconditions, among other things. Unrealized gains and losses are reported as a separate component ofaccumulated other comprehensive income.  Premiums ordiscounts are amortized or accreted into income using the interest method.  Realized gains or losses are recorded usingthe specific identification method.

 

Securities are alsoevaluated for impairment utilizing criteria such as the magnitude and durationof the decline, current market conditions, payment history, the creditworthiness of the obligor, the intent of the Company to retain the security orwhether it is more likely than not that the Company will be required to sellthe security before recovery of the value, as well as other qualitative factors.  If a decline in value below amortized cost isdetermined to be other-than-temporary, which does not necessarily indicate thatthe decline is permanent, but indicates that the prospects for a near-termrecovery of value is not favorable, the security is reviewed in more detail inorder to determine the portion of the impairment that relates to credit(resulting in a charge to earnings) versus the portion of the impairment thatis noncredit related (resulting in a charge to accumulated other comprehensiveincome).  A credit loss is determined bycomparing the amortized cost basis to the present value of cash flows expectedto be collected, computed using the original yield as the discount rate.

 

F-9

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES - continued**

 

Loans Receivable

 

Loans receivable that management has the intent andability to hold for the foreseeable future or until maturity or payoff arereported at their outstanding unpaid principal balances reduced by anycharge-offs or specific valuation accounts and net of any deferred fees orcosts on originated loans.

 

Credit and loan decisions are made by management andthe board of directors in conformity with loan policies established by theboard of directors. The Company’s practice is to charge-off any loan or portionof a loan when the loan is determined by management to be uncollectible due tothe borrower’s failure to meet repayment terms, the borrower’s deterioratedfinancial condition, the depreciation of the underlying collateral, the loan’sclassification as a loss by regulatory examiners, or other reasons.

 

The Company considers a loan to be impaired when it isprobable that the Company will be unable to collect all amounts due (principaland interest) according to the contractual terms of the loan agreement.  Measurement of impairment is based on theexpected future cash flows of an impaired loan, which are to be discounted atthe loan’s effective interest rate, or measured by reference to an observablemarket value, if one exists, or the fair value of the collateral for a collateral-dependentloan. The Company selects the measurement method on a loan-by-loan basis exceptthat collateral-dependent loans for which foreclosure is probable are measuredat the fair value of the collateral. The Company recognizes interest income onimpaired loans based on its existing methods of recognizing interest income onnon-accrual loans (see *Interest and Fees on Loans*,below).

 

Provision and Allowance for Loan Losses

 

Implicit in the Company’s lending activities is thefact that loan losses will be experienced and that the risk of loss will varywith the type of loan being made and the creditworthiness of the borrower overthe term of the loan. The allowance for loan losses represents the Company’srecognition of the risks of extending credit and its evaluation of the loanportfolio. The allowance for loan losses is maintained at a level consideredadequate to provide for probable loan losses based on management’s assessmentof various factors affecting the loan portfolio, including a review of problemloans, business conditions, historical loss experience, evaluation of thequality of the underlying collateral, and holding and disposal costs. In addition, because the Bank has limitedhistory on which to base future loan losses, a comparison of peer groupallowance ratios to gross loans is made with the intention of maintainingsimilar levels during the Bank’s de novo period of operation.  The allowance for loanlosses 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 has established a formal process fordetermining an adequate allowance for loan losses.  The allowance for loan losses calculation hastwo components.  The first componentrepresents the allowance for loan losses for impaired loans; that is loanswhere the Company believes collection of the contractual principal and interestpayments is not probable.  To determinethis component of the calculation, collateral-dependent impaired loans areevaluated using internal analyses as well as third-party information, such asappraisals.  If an impaired loan isunsecured, it is evaluated using a discounted cash flow of the paymentsexpected over the life of the loan using the loan’s effective interest rate andgiving consideration to currently existing factors that would impact the amountor timing of the cash flows.  The secondcomponent of the allowance for loan losses represents contingent losses — theestimated probable losses inherent within the portfolio due touncertainties.  Factors

 

F-10

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES - continued**

 

considered by management to estimate inherent lossesinclude, but are not limited to, 1) historical and current trends in downgradedloans; 2) the level of the allowance in relation to total loans; 3) the levelof the allowance in relation to the Bank’s peer group; 4) the levels and trendsin non-performing and past due loans; and 5) management’s assessment ofeconomic conditions and certain qualitative factors as defined by bankregulatory guidance, including but not limited to, changes in the size,composition and concentrations of the loan portfolio, changes in the legal andregulatory environment, and changes in lending management.  The recorded allowance for loan losses is theaggregate of the impaired loans component and the contingent loss component.

 

Interest and Fees on Loans

 

Interest income is recognized daily in accordance withthe terms of the note based on the outstanding principal balance. Loans onwhich the accrual of interest has been discontinued are designated asnon-accrual loans. The accrual of interest on loans is discontinued whenprincipal or interest is 90 days past due based on contractual terms of theloan or when, in the opinion of management, there is reasonable doubt as tocollectability. When loans are placed on non-accrual status, all interestpreviously accrued but not collected is reversed against current period interestincome. Income on non-accrual loans is subsequently recognized only to theextent that cash is received and the loan’s principal balance is deemedcollectible. Interest accruals are resumed on such loans only when they arebrought current with respect to interest and principal and when, in thejudgment of management, the loans are estimated to be fully collectible as toall principal and interest. During 2009 and 2008 no loans were designated asnon-accrual loans.

 

Loan origination fees and certain direct originationcosts are capitalized and recognized as an adjustment of the yield of therelated loan.

 

Premises and Equipment

 

Premises and equipment are carried at cost lessaccumulated depreciation and amortization. Depreciation is computed using thestraight-line method over the estimated useful lives, which ranges from threeto seven years.  Leasehold improvementsare amortized over the shorter of their estimated useful life or the leaseterm.  Expenditures for leaseholdimprovements or major repairs are capitalized and those for ordinary repairsand maintenance are charged to operations as incurred.

 

FHLB and Federal Reserve Bank Stock

 

The Bank is a member of the FHLB of Topeka and theFederal Reserve Bank of Kansas City (“FRB”). In both banks, members are required to own a certain amount ofstock.  As such, the Bank owns stock inboth the FHLB and FRB.  Bank stocks arecarried at cost, classified as restricted securities and periodically reviewedfor impairment.  Both cash and stockdividends are reported as income in the period declared.

 

While the Federal HomeLoan Banks have been negatively impacted by the current economic conditions,the Federal Home Loan Bank of Topeka has reported profits for fiscal year 2009and 2008, remains in compliance with regulatory capital and liquidityrequirements, continues to pay dividends on the stock and make redemptions atthe par value. With consideration given to these factors, management concludedthat the stock was not impaired at December 31, 2009 or 2008.

 

F-11

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES - continued**

 

Other Real Estate Owned

 

Other real estate owned represents real estateacquired through foreclosure and is carried at its fair value less estimatedcosts to sell.  Prior to foreclosure, thevalue of the underlying loan is written down to the fair market value of thereal estate to be acquired by a charge to the allowance for loan losses, ifnecessary. Any subsequent write-downs are charged against operating expenses.Operating expenses of such properties, net of related income, are included inother expenses.  During 2009 and 2008 theCompany did not foreclose on any real estate.

 

Income Taxes

 

Deferred income taxes are computed using the asset andliability method, which recognizes a liability or asset representing the taxeffects, based on current tax law, of future deductible or taxable amountsattributable to events that have been recognized in the financial statements. Avaluation allowance is established to reduce the deferred tax asset to thelevel at which it is “more likely than not” that the tax asset or benefits willbe realized. Realization of tax benefits of deductible temporary differencesand operating loss carryforwards depends on having sufficient taxable income ofan appropriate character within the carryforward periods.

 

The Company follows the provisions of AccountingStandards Codification (“ASC”) 740, *Income Taxes,*whichprescribes a recognition threshold and a measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return.  This standard also providesguidance on the accounting for and disclosure of unrecognized tax benefits,interest and penalties.  As of December 31, 2009 and 2008, theCompany has no uncertain income tax positions.

 

Comprehensive Income

 

ASC 220, *ComprehensiveIncome,* requires the disclosure of comprehensive income and itscomponents. For the years ended December 31, 2009 and 2008, the Companyhad $956,000 and $148,000, respectively, of comprehensive gain on investmentsecurities, net of applicable taxes and no other components of comprehensiveincome other than net losses from operations. It should be noted that taxes are estimated to be $0 for both 2009 and2008, as a full valuation allowance has been established for all deferred taxassets and liabilities until it is more likely than not that the tax assets orliabilities will be realized.

 

Loan Commitments and Related Financial Instruments

 

In the ordinary course of business, the Company hasentered into off-balance-sheet financial instruments consisting of commitmentsto extend credit, commercial letters of credit, and standby letters of creditas described in Note 16. Such financial instruments are recorded in thefinancial statements when they are funded or related fees are incurred orreceived.

 

Loss Per Share

 

Basic loss per common share is based on theweighted-average number of common shares outstanding during the period.  Since the Company is in a loss position, alloptions and warrants to purchase common shares are anti-dilutive.

 

F-12

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES - continued**

 

Stock-Based Compensation

 

The Company grants stock options as incentivecompensation to employees and directors. The cost of employee/director services received in exchange for an awardof equity instruments is based on the grant-date fair value of the award, whichis determined using a Black-Scholes-Merton model.  This cost, net of estimated forfeitures, isexpensed to Salaries and Employee Benefits over the period which the recipientis required to provide services in exchange for the award, generally thevesting period.

 

The Company recorded compensation costs forstock-based compensation issued to directors in the amount of $33,000 in both2009 and 2008.  The Company recordedcompensation costs for stock-based compensation issued to employees in theamount of $177,000 and $178,000 for the years ended December 31, 2009 and2008, respectively.

 

Disclosure about Fair Value of Financial Instruments

 

ASC 825,*Financial Instruments,*specifiesthe disclosure requirements for the estimated fair value of financialinstruments. The Company’s estimated fair value amounts have been determined bythe Company using available market information and appropriate valuationmethodologies.  However, considerablejudgment is required to develop the estimates of fair value.  The use of different market assumptionsand/or estimation methodologies may have a material effect on the estimatedfair value amounts.

 

Although management is not aware of any factors thatwould significantly affect the estimated fair value amounts, such amounts havenot been comprehensively revalued for purposes of these financial statementssubsequent to the balance sheet date and, therefore, current estimates of fairvalue may differ significantly from the amounts presented in the accompanyingnotes.

 

DividendRestriction

 

Banking regulations require maintaining certaincapital levels and may limit the dividends paid by the Bank to the holdingcompany or by the holding company to stockholders.  With certain exceptions, the Company may notpay a dividend to its stockholders unless its retained earnings equal at leastthe amount of the proposed dividend.

 

Impact of Newly Issued Accounting Standards

 

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 did not have a material impact on the results ofoperations or financial position.

 

In April 2009, ASC 820-10, *Fair Value Measurements and Disclosures,*wasissued*.*This standard emphasizesthat even if there has been a significant decrease in the volume and level ofactivity, the objective of a fair value measurement remains the same. Fairvalue is the price that would be received to sell an asset or paid to transfera liability in an orderly transaction (that is, not a forced liquidation ordistressed sale) between market participants. The standard provides a number offactors to

 

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES - continued**

 

consider when evaluatingwhether there has been a significant decrease in the volume and level ofactivity for an asset or liability in relation to normal market activity. Inaddition, when transactions or quoted prices are not considered orderly,adjustments to those prices based on the weight of available information may beneeded to determine the appropriate fair value. The standard also requires increaseddisclosures. This standard is effective for interim and annual reportingperiods ending after June 15, 2009, and shall be appliedprospectively.  The adoption of thisstandard did not have a material impact on the results of operations orfinancial position.

 

In April 2009, theFASB amended existing guidance to require disclosures about fair value offinancial instruments for interim reporting periods of publicly tradedcompanies that were previously only required in annual financial statements.This standard is effective for interim reporting periods ending after June 15,2009. The adoption of this standard at June 30, 2009 did not have amaterial impact on the results of operations or financial position as it onlyrequired additional disclosures which are included in Note 19.

 

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 22 — 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 allthen-existing non-SEC accounting and reporting standards.  All other nongrandfathered, non-SECaccounting literature not included in the Codification becamenonauthoritative.  The FASB no longerissues new standards in the form of Statements, FASB Staff Positions, orEmerging Issues Task Force Abstracts. Instead, it issues Accounting Standards Updates.  This standard is effective for interim andannual periods ending after September 15, 2009.  The Codification did not change GAAP, and,therefore, the adoption of this standard did not have a material impact on theCompany’s financial position or results of operations.

 

In June 2009, the FASB issued AccountingStandards Update (“ASU”) No. 2009-16, *Transfers and Servicing(Topic 860):  Accounting for Transfers ofFinancial Assets,* which amended previous guidance relating totransfers of financial assets and eliminated the concept of a qualifyingspecial purpose entity. This guidance is effective for fiscal years beginningafter November 15, 2009.  ASU No. 2009-16must be applied to transfers occurring on or after the effective date.Additionally, on and after the effective date, the concept of a qualifying special-purposeentity is no longer relevant for accounting purposes. Therefore, formerlyqualifying special-purpose entities should be evaluated for consolidation byreporting entities on and after the effective date in accordance with theapplicable consolidation guidance. This update also clarifies the requirementsfor isolation and limitations on portions of financial assets that are eligiblefor sale accounting.  The disclosureprovisions were also amended and apply to transfers that occurred both before andafter the effective date of this guidance. The effect of adopting this newguidance is not expected to have a material impact on the Company’sconsolidated financial position, results of operations or cash flows.

 

Reclassifications

 

Certain reclassifications have been made to theprevious consolidated financial statements to conform to the 2009 presentation.

 

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**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 2 - INVESTMENT SECURITIES**

 

The amortized costs and estimated fair values ofinvestment securities are as follows:

 
| ** **                                           | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|
| **($ in thousands)**                            | ** ** | **Amortized********Cost**   | ** ** | **Gross  Unrealized********Gains** | ** ** | **Gross  Unrealized********Losses** | ** ** | **Estimated********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 mortgage-backed  securities (“MBS”) |       | 35,386                      |       | 760 |   | (198 | ) | 35,948 |   |
| **Total securities available-for-sale**              |       | $                           | 72,485     |   | $ | 1,489 |   | $ | (533 | ) | $ | 73,441 |   |

 
| ** **                              | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| **($ in thousands)**               | ** ** | **Amortized********Cost**   | ** ** | **Gross  Unrealized********Gains** | ** ** | **Gross  Unrealized********Losses** | ** ** | **Estimated********Fair Value** | ** ** |
| **Securities  available-for-sale:**     |       |                        |       |   |   |   |   |   |   |
| U.S. government  agencies               |       | $                           | 5,700      |   | $ | 47 |   | $ | (1 | ) | $ | 5,746 |   |
| Corporate                               |       | 1,516                       |       | 3 |   | (16 | ) | 1,503 |   |
| State and municipal                     |       | 3,043                       |       | 2 |   | (115 | ) | 2,930 |   |
| Agency MBS                              |       | 31,150                      |       | 345 |   | (117 | ) | 31,378 |   |
| **Total securities available-for-sale** |       | $                           | 41,409     |   | $ | 397 |   | $ | (249 | ) | $ | 41,557 |   |

 

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

 
| ** **                              | ** ** | **2009**            | ** ** | **2008**                  | ** ** |
|-----------------------------------------|------------|---------------------|------------|---------------------------|------------|
| **($ in thousands)**               | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
| **Securities available-for-sale**       |       |                |       |                      |       |   |   |   |   |
| Due within one year                     |       | $                   | 1,538      |                      | $          | 1,560 |   | $ | 1,516 |   | $ | 1,504 |   |
| Due after one year through five years   |       | 5,602               |       | 5,823                     |       | 497 |   | 499 |   |
| Due after five years through ten years  |       | 19,566              |       | 19,735                    |       | 6,168 |   | 6,160 |   |
| Due after ten years                     |       | 45,779              |       | 46,323                    |       | 33,228 |   | 33,394 |   |
| **Total securities available-for-sale** |       | $                   | 72,485     |                      | $          | 73,441 |   | $ | 41,409 |   | $ | 41,557 |   |

 

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**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 2 - INVESTMENT SECURITIES -continued**

 

The following table presents the estimated fair value,the unrealized losses and the number of securities that were temporarilyimpaired and the length of time the individual securities have been in acontinuous unrealized loss position as of December 31, 2009:

 
| ** **                  | ** ** | **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 |   |

 

The three securities that have been in continuous losspositions for 12 months or longer at December 31, 2009, have fluctuated invalue since the purchase date as a result of changes in market interestrates.  We have concluded that thecontinuous unrealized loss positions on these securities are a result of marketinterest rates and not a result of the underlying issuers’ ability torepay.  Furthermore, we have the intentto hold these securities until maturity or recovery of fair value and it is notprobable that the Company will be required to sell these securities beforerecovery of value.  Accordingly, we havenot recognized any other-than-temporary impairment on these securities.

 

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 and whether the Company has the intent to retain the investment for aperiod of time sufficient to allow for any anticipated recovery in fairvalue.  As of December 31, 2009 and2008, no declines were deemed to be other than temporary.

 

The following table presents the estimated fair value,the unrealized losses and the number of securities that were temporarilyimpaired and the length of time the individual securities have been in acontinuous unrealized loss position as of December 31, 2008:

 
| ** **                  | ** ** | **December 31, 2008** | ** ** |
|-----------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | **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    |       | $                          | 453        |   | $ | (1 | ) | 1 |   | $ | — |   | $ | — |   | — |   | $ | 453 |   | $ | (1 | ) | 1 |   |
| Corporate                   |       | 1,011                      |       | (16 | ) | 2 |   | — |   | — |   | — |   | 1,011 |   | (16 | ) | 2 |   |
| State and municipal         |       | 2,430                      |       | (115 | ) | 8 |   | — |   | — |   | — |   | 2,430 |   | (115 | ) | 8 |   |
| Agency MBS                  |       | 9,371                      |       | (103 | ) | 21 |   | 374 |   | (14 | ) | 1 |   | 9,745 |   | (117 | ) | 22 |   |
| Total  temporarily-impaired |       | $                          | 13,265     |   | $ | (235 | ) | 32 |   | $ | 374 |   | $ | (14 | ) | 1 |   | $ | 13,639 |   | $ | (249 | ) | 33 |   |

 

F-16

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Table of Contents

 

**SOLERA NATIONALBANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 2 - INVESTMENT SECURITIES -continued**

 

Sales of available-for-sale securities were asfollows:

 
| ** **                | ** ** | **Year  Ended December 31,** | ** ** |
|---------------------------|------------|-----------------------------------|------------|
| **($ in thousands)** | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| Proceeds                  |       | $                                 | 30,221     |   | $ | 6,332 |   |
| Gross gains               |       | 386                               |       | 48 |   |
| Gross losses              |       | (9                                | )          | (1 | ) |
|                           |            |                                   |            |  |  |  |  |

 

Securities with carrying values of $16.9 million and$15.4 million at December 31, 2009 and 2008, respectively, were pledged ascollateral to secure borrowings from the FHLB, public deposits and for other purposesas required or permitted by law.

 

**NOTE 3 - LOANS**

 

The composition of the loan portfolio at December 31is as follows:

 
| **($ in thousands)**          | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Real estate —  commercial     |       | $        | 26,063     |     | $          | 7,479 |   |
| Construction and land  development |       | 7,067    |       | 3,849    |       |
| Real estate —  residential    |       | 8,059    |       | 5,043    |       |
| Commercial and  industrial         |       | 8,324    |       | 4,084    |       |
| Consumer                           |       | 991      |       | 958      |       |
| **GROSS LOANS**                    |       | 50,504   |       | 21,413   |       |
| Net deferred (fees) /  expenses    |       | (114     | )          | (57      | )          |
| Allowance for loan  losses         |       | (830     | )          | (268     | )          |
| **LOANS, NET**                     |       | $        | 49,560     |     | $          | 21,088 |   |

 

Changes in the allowance for loan losses aresummarized as follows:

 
| **($ in thousands)**                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Balance at beginning of  year               |       | $        | 268        |     | $          | 47 |   |
| Provision charged to  expense               |       | 562      |       | 221      |       |
| Loans charged off                           |       | —   |       | —   |       |
| Recoveries on loans  previously charged off |       | —   |       | —   |       |
| Balance at end of year                      |       | $        | 830        |     | $          | 268 |   |

 

As of December 31, 2009, the Company had one loanpast due over 90 days but still accruing with a principal balance ofapproximately $3,000 and no loans past due as of December 31, 2008.  Further, during both 2009 and 2008, theCompany had no impaired and no non-accrual loans.

 

The Company’s loan portfolio generally consists ofloans to borrowers within Colorado. Although the Company seeks to avoid concentrations of loans to a singleindustry or based upon a single class of collateral, the Company’s loanportfolio consists primarily of real estate loans secured by real estatelocated in Colorado, making the value of the portfolio more susceptible todeclines in real estate values and other changes in economic conditions inColorado.  As the Bank’s loan

 

F-17

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 3 — LOANS****- continued**

 

portfolio grew during 2009 and 2008, the concentrationto any single borrower diminished.  As ofDecember 31, 2009, the Bank’s five largest loans represented approximately20% of the total loan portfolio in comparison to 40% as of December 31,2008.  Management expects theconcentration to any one borrower to continue to diminish as the Bank’s loanportfolio grows.  No single borrower canbe approved for a loan over the Bank’s current legal lending limit ofapproximately $2.3 million.  Thisregulatory requirement helps to ensure the Bank’s exposure to one individualcustomer is limited.

 

**NOTE 4 - FHLB AND FEDERAL RESERVEBANK STOCKS**

 

The Company, through itssubsidiary bank, is a member of both the Federal Reserve Bank of Kansas Cityand the Federal Home Loan Bank of Topeka. Membership in these banks requires the Company to maintain an investmentin the capital stock of each.  Theseinvestments are restricted in that they can only be redeemed by the issuer atpar value.  The Company’s investment at December 31was a follows:

 
| **($ in thousands)**            | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Federal Reserve Bank of  Kansas City |       | $        | 499        |     | $          | 462 |   |
| Federal Home Loan Bank  of Topeka    |       | 632      |       | 618      |       |
| Total                                |       | $        | 1,131      |     | $          | 1,080 |   |

 

**NOTE 5 - PREMISES AND EQUIPMENT**

 

The composition of Company premises and equipment at December 31is as follows:

 
| **($ in thousands)**          | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Leasehold improvements             |       | $        | 608        |     | $          | 608 |   |
| Furniture, fixtures and  equipment |       | 612      |       | 599      |       |
|                               |       | 1,220    |       | 1,207    |       |
| Less accumulated  depreciation     |       | (345     | )          | (195     | )          |
| Premises and equipment,  net       |       | $        | 875        |     | $          | 1,012 |   |

 

Depreciation and amortization expense on premises andequipment was $150,000 and $115,000 for the years ended December 31, 2009and 2008, respectively, and is included in occupancy expense in theaccompanying consolidated statements of operations.  Rent expense on premises was approximately$278,000 and $246,000 for the years ended December 31, 2009 and 2008,respectively, excluding the reversal of loss on abandoned lease.  An additional $190,000 of rent expense wasrecognized during 2007 related to the loss on abandoned lease.  Approximately $133,000 of the loss wasreversed during the third quarter of 2008 resulting in a credit to rentexpense.  See Note 15 for a more detaileddiscussion.

 

F-18

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 5 - PREMISES AND EQUIPMENT -continued**

 

The Company has noncancelable operating leases for itsmain banking office, an administrative office, space in an office building, anATM machine, and three copier/printers that expire at various points not laterthan the year 2017.  Each of the threeleases for office space have renewal options that extend through various pointsnot later than 2037.  The cost of suchrenewals is not included below.  Thefollowing table shows future minimum noncancelable operating lease payments asof December 31, 2009:

 
| **Year ending December 31,** | ** ** | **($ in  thousands)** | ** ** |
|-----------------------------------|------------|----------------------------|------------|
| 2010                              |       | $                          | 221        |   |
| 2011                              |       | 196                        |       |
| 2012                              |       | 162                        |       |
| 2013                              |       | 158                        |       |
| 2014                              |       | 161                        |       |
| Thereafter                        |       | 387                        |       |
| Total                             |       | $                          | 1,285      |   |

 

**NOTE 6 — DEPOSITS**

 

Deposits at December 31consist of the following:

 
| ** **                         | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **($ in thousands)**          | ** ** | **Amount**                 | ** ** | **% of  Total**            | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
| Noninterest-bearing  demand        |       | $                          | 2,624      |                       | 2          | % | $ | 3,910 |   | 10 | % |
| Interest-bearing demand            |       | 6,830                      |       | 7                          |       | 2,604 |   | 7 |   |
| Money market accounts              |       | 3,555                      |       | 3                          |       | 6,488 |   | 17 |   |
| Savings accounts                   |       | 51,763                     |       | 50                         |       | 385 |   | 1 |   |
| Time deposits, less  than $100,000 |       | 16,624                     |       | 16                         |       | 6,522 |   | 18 |   |
| Time deposits, $100,000  or more   |       | 23,005                     |       | 22                         |       | 17,753 |   | 47 |   |
| Total                              |       | $                          | 104,401    |                       | 100        | % | $ | 37,662 |   | 100 | % |

 

Public deposits arecollateralized by investment securities with estimated market values of $7.5million and $3.3 million as of December 31, 2009 and 2008, respectively.

 

Scheduled maturities of time deposits for the nextfive years are as follows:

 
| ** **                | ** ** | **As of December 31,** | ** ** |
|---------------------------|------------|-----------------------------|------------|
| **($ in thousands)** | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| 2009                      |       | NA                          |       | $ | 18,330 |   |
| 2010                      |       | $                           | 29,398     |   | 5,277 |   |
| 2011                      |       | 6,658                       |       | 99 |   |
| 2012                      |       | 1,412                       |       | 1 |   |
| 2013                      |       | 1,086                       |       | 568 |   |
| 2014                      |       | 1,075                       |       | — |   |
| Total                     |       | $                           | 39,629     |   | $ | 24,275 |   |

 

F-19

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 7 — SECURITIES SOLD UNDERAGREEMENTS TO REPURCHASE**

 

The following is a summaryof information pertaining to securities sold under agreements to repurchase at December 31:

 
| **($ in  thousands)**                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Ending Balance                             |       | $        | 326        |     | $          | 398 |   |
| Weighted-average interest rate at year-end |       | 1.98     | %          | 1.98     | %          |
|                                            |            |          |            |          |            |  |  |

 

Securities sold underagreements to repurchase, which are classified as secured borrowings, generallymature within one to four days from the transaction date.  Securities sold under agreements torepurchase are reflected at the amount of cash received for thetransaction.  The Company may be requiredto provide additional collateral based on the fair value of the underlyingsecurities.  The securities sold underagreements to repurchase are collateralized by government agency andmortgage-backed securities held by the Company.

 

**NOTE 8 - OTHER BORROWINGS**

 

The Bank is a member of the FHLB of Topeka and, as aregular part of its business, obtains advances from this FHLB.  Overnight advances bear interest at avariable rate while all other advances bear interest at a fixed rate.  All advances are collateralized by certainsecurities pledged by the Bank and some of the Bank’s qualifying loans.  As of December 31, 2009, the Bank’sauthorized borrowing line with the FHLB totaled $53.1 million, subject to theavailability of sufficient collateral to pledge against such borrowings.  Of the $53.1 million available, $8.8 millionwas outstanding at December 31, 2009. Interest rates on these outstanding FHLB borrowings ranged from 2.52% to4.89%, with a weighted-average interest rate of 3.54%.

 

In addition to FHLB borrowings, the Company may borrowup to $11.7 million overnight on an unsecured basis from its correspondentbanks.  As of December 31, 2009, noamounts were outstanding under these arrangements.

 

At December 31, 2009, the scheduledmaturities and weighted-average interest rate of FHLB borrowings are asfollows:

 
| **($ in  thousands)** | ** ** | **$ Amount Maturing** | ** ** | **Weighted-  Average  Interest Rate** | ** ** |
|----------------------------|------------|----------------------------|------------|--------------------------------------------|------------|
| Overnight                  |       | 1,000                      |       | 0.19                                       | %          |
| 2010                       |       | 2,250                      |       | 3.45                                       | %          |
| 2011                       |       | 2,000                      |       | 3.87                                       | %          |
| 2012                       |       | 2,000                      |       | 4.23                                       | %          |
| 2013                       |       | 1,500                      |       | 4.56                                       | %          |
| Total borrowings           |       | $                          | 8,750      |                                       | 3.54       | % |
|                            |            |                            |            |                                            |            |  |

 

Asof December 31, 2008, the authorized borrowing line with the FHLB totaled$27.1 million of which $10.0 million was outstanding.  Additionally, the Company had $11.3 millionof overnight funding available on an unsecured basis, of which no amount wasoutstanding as of December 31, 2008. The Bank also has the ability to borrow at the Federal Reserve BankDiscount Window on a secured basis.

 

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 8 - OTHER BORROWINGS - continued**

 

TheCompany has capital leases for bank equipment, furniture and signage that arebeing leased for five years with a bargain purchase option at the end of thelease term.  The following is a schedule of the future minimum lease payments undercapital leases as of December 31, 2009, with a weighted-average interestrate of 9.3%:

 
| **Year ending December 31,** | ** ** | **($ in thousands)** | ** ** |
|-----------------------------------|------------|---------------------------|------------|
| 2010                              |       | 52                        |       |
| 2011                              |       | 51                        |       |
| 2012                              |       | 30                        |       |
| Total                             |       | $                         | 133        |   |
| Operating interest                |       | (15                       | )          |
| Capital lease liability           |       | $                         | 118        |   |

 

TheCompany has capital leases for bank equipment, furniture and signage that arebeing leased for five years with a bargain purchase option at the end of thelease term.  In accordance with ASC 840, *Leases,* theasset and the capital lease liability have been recorded at the lesser of thefair market value or the present value of the future minimum lease payments.

 

**NOTE 9 - INCOME TAXES**

 

Deferred taxes are a result of differences betweenincome tax accounting and generally accepted accounting principles with respectto income and expense recognition. The following is a summary of the componentsof the net deferred tax asset accounts recognized in the accompanyingstatements of financial condition at December 31:

 
| **($ in thousands)**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                                  |       |     |       |     |       |
| Start-up and  organizational expenses                 |       | $        | 1,120      |     | $          | 1,207 |   |
| Net operating loss  carryforward                      |       | 1,368    |       | 1,096    |       |
| Allowance for loan  losses                            |       | 284      |       | 76       |       |
| Non-qualified stock  options                          |       | 28       |       | 16       |       |
| Other                                                 |       | 77       |       | 41       |       |
| Total deferred tax  assets                            |       | 2,877    |       | 2,436    |       |
| Deferred liabilities:                                 |       |     |       |     |       |
| Net unrealized gain on  securities available-for-sale |       | (354     | )          | (55      | )          |
| Federal Home Loan Bank  stock dividends               |       | (9       | )          | (4       | )          |
| Tax over book  depreciation                           |       | (26      | )          | (24      | )          |
| Total deferred tax  liabilities                       |       | (389     | )          | (83      | )          |
|                                                  |       |     |       |     |       |
| Net deferred tax assets                               |       | 2,488    |       | 2,353    |       |
|                                                  |       |     |       |     |       |
| Valuation allowance                                   |       | (2,488   | )          | (2,353   | )          |
|                                                  |       |     |       |     |       |
| Net deferred taxes                                    |       | $        | —     |     | $          | — |   |

 

F-21

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 9 - INCOME TAXES — continued**

 

The valuation allowance was established because theCompany has not reported earnings sufficient enough to support the recognitionof the deferred tax assets. The Company has net operating loss carryforwards ofapproximately $3.7 million for federal income tax purposes.  Federal net operating loss carry forwards, tothe extent not used, will expire starting in 2027.

 

The income tax provision differs from the amount ofincome tax determined by applying the U.S. federal income tax rate of 35% topretax income from continuing operations for the twelve months ended December 31,2009 and 2008, due to the following:

 
| **($ in thousands)**             | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Computed “expected” tax  benefit |       | $                               | (447       | )                               | $          | (775 | ) |
| Change in income taxes  resulting from:    |       |                            |       |                            |       |
| Change in valuation  allowance             |       | 434                             |       | 698                             |       |
| Other                                      |       | 13                              |       | 77                              |       |
| Income tax provision                       |       | $                               | —     |                            | $          | — |   |

 

**NOTE 10 - COMMON STOCK OFFERING**

 

The Company closed the initial offering for2,553,671 shares of its common stock at an offering price of $10 per share, or$25.5 million.  Approximately $233,000 of direct offering costs wereincurred to raise the Company’s initial capital and were offset against theinitial proceeds of the capital raised to yield net opening capital of $25.3million.  In addition, the Company issuedone stock warrant for every five shares of common stock purchased.  The warrants entitle the holder thereof topurchase one share of the Company’s common stock for $12.50 at any time priorto September 10, 2010 (see Note 12).

 

The offering was not underwritten.  Subject to compliance with applicable federaland state securities laws, the offering was made on a best efforts basisthrough the Company’s organizers, executive officers and directors, who did notreceive any commission or other compensation in connection with theseactivities.

 

**NOTE 11 - STOCK OPTIONS**

 

The Company’s 2007 Stock Incentive Plan (the “Plan”)was approved by the Company’s Board of Directors (the “Board”) in October 2007with an effective date of September 10, 2007 and ratified by the stockholdersat the Company’s first annual meeting 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 20% of the totalnumber of shares of common stock subscribed for in the offering for issuanceunder the Plan.  Approximately 510,700 options have been reserved forissuance under the Plan.  Of that, approximately 305,300 are issued andoutstanding, leaving 205,400 available for future grants as of December 31,2009.  The Plan provides for options topurchase shares of common stock at a price not less than 100% of the fairmarket value of the stock on the date of grant. Stock options expire no later than ten years from the date of the grantand generally vest over four years.  ThePlan provides for accelerated vesting if there is a change of control, asdefined in the Plan.  The Companyrecognized stock-based compensation costs of approximately $210,000 and$211,000 during the years ended December 31, 2009 and 2008,respectively.  No tax benefit related tostock-based compensation will be recognized until the Company is profitable.

 

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 11 - STOCK OPTIONS — continued**

 

The Company accounts for its stock-based compensationunder the provisions of ASC 718, *Compensation - StockCompensation*.  The fair valueof each option grant was estimated on the date of grant using theBlack-Scholes-Merton option pricing model with the following assumptionspresented below:

 
| **Grant-date**             | ** ** | **2009**           | ** ** | **2008**      | ** ** |
|----------------------------|------------|--------------------|------------|---------------|------------|
| Number of Options  Granted |       | 66,000             |       | 16,250        |       |
| Expected Volatility        |       | 14.46%             |       | 14.46%        |       |
| Expected Term              |       | 6.25 years         |       | 6.25 years    |       |
| Expected Dividend          |       | 0.00%              |       | 0.00%         |       |
| Risk-Free Rate             |       | 1.99% - 3.25%      |       | 2.70% - 2.98% |       |
| Grant-Date Fair Value      |       | $1.32 – $1.54 |       | $1.86 - $2.13 |       |

 

Since the Bank does not have sufficient historicalstock activity, the expected volatility is based on the historical volatilityof similar banks that have a longer trading history.  The expected term represents the estimatedaverage period of time that the options will remain outstanding.  Since the Bank does not have sufficienthistorical data on the exercise of stock options, the expected term is based onthe “simplified” method that measures the expected term as the average of thevesting period and the contractual term. The risk-free rate of return reflectsthe grant-date interest rate offered for zero coupon U.S. Treasury bonds withthe same expected term as the options. The weighted-average grant-date fair value of options granted during theyears 2009, and 2008 was $1.49, and $2.03, respectively.  Currently, the Company’s estimated forfeiturerate is 0% for executive officers, 25% for employees and 33% fordirectors.  The different ranges resultfrom certain groups of employees exhibiting different behavior.  Options forfeited impact the amount ofcompensation expense recognized.  Share-based compensation expense isbased on awards that are ultimately expected to vest; accordingly, share-basedcompensation expense may be impacted if actual forfeitures differ fromestimated forfeitures.  The estimatedforfeiture rate is reviewed at each reporting date to confirm that it is thebest estimate to support the then-current trends within the Company.  As of December 31, 2009, the Company hasyet to have sufficient evidence to support revising its estimated forfeiturerates.  The Company expects this tochange as the Company nears the end of the vesting period on its first optiongrants in September 2011.

 

No options were exercised and 64,562 options wereforfeited during 2009.  The Companyrecognized $210,000 of expense during the year ended December 31, 2009representing expense for approximately 77,000 options that vested during theyear, plus a pro-rata amount for the options that are expected to vest on theanniversary of the date granted.

 

No options were exercised and 53,841 options wereforfeited during 2008.  The Companyrecognized $211,000 of expense during the year ended December 31, 2008representing expense for the approximately 110,000 options that vested duringthe year, plus a pro-rata amount for the options that are expected to vest onthe anniversary of the date granted.

 

As of December 31, 2009, there was approximately$362,000 of unrecognized compensation cost related to non-vested stock optionsgranted under the Plan that will be recognized over a weighted-average periodof 1.14 years.  As of December 31,2009, there were no in-the-money outstanding stock options; accordingly theaggregate intrinsic value of outstanding options was $0.

 

F-23

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 11 - STOCK OPTIONS — continued**

 

A summary of the option activity under thePlan as of December 31, 2009, and changes during the year then ended ispresented below:

 
| ** **                             | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-Average  Remaining  Contractual Term** | ** ** |
|----------------------------------------|------------|-------------|------------|---------------------------------------------|------------|--------------------------------------------------------|------------|
| Outstanding  at January 1, 2009   |       | 360,255     |       | $                                           | 9.95       |                                                   | 7.76 years |   |
| Granted                                |       | 66,000      |       | 6.47                                        |       | 9.49 years                                             |       |
| Exercised                              |       | —      |       | —                                      |       | —                                                 |       |
| Forfeited                              |       | (64,562     | )          | 10.00                                       |       | —                                                 |       |
| Expired                                |       | (56,340     | )          | 9.99                                        |       | —                                                 |       |
| Outstanding at  December 31, 2009 |       | 305,353     |       | $                                           | 9.19       |                                                   | 8.14 years |   |
|                                   |       |        |       |                                        |       |                                                   |       |
| Exercisable at  December 31, 2009 |       | 135,062     |       | $                                           | 9.88       |                                                   | 7.79 years |   |

 

**NOTE 12 - WARRANTS**

 

The Company funded organizational andpre-opening expenses of approximately $3.6 million from direct cash advancesmade by its organizers and from draws made under a $2.9 million line ofcredit.  Each organizer and onenon-organizer director provided a limited guarantee on amounts drawn under theline of credit.  Accordingly, inrecognition of the substantial financial risks undertaken by the members of theorganizing group, the Company granted an aggregate of 317,335 warrants to itsorganizers and one non-organizer director. Each of the Company’s organizers who provided cash advances of at least$30,000 and a limited guarantee received warrants to purchase the lesser of16,181 shares of the Company’s common stock or the number of shares actuallysubscribed for in the offering.  Oneorganizer, both individually and through an affiliated entity, provided a cashadvance of $480,000 and a limited guarantee, and received warrants to purchase40,000 shares of the Company’s common stock. Another organizer, who provided a cash advance of $130,000 and a limitedguarantee, received warrants to purchase 25,000 shares of the Company’s commonstock.  These warrants are exercisable ata price of $10.00 per share, the initial offering price, and may be exercisedanytime prior to September 10, 2017.

 

Additionally, each of the Company’s initialstockholders were granted one warrant to purchase an additional share, at anexercise price of $12.50 per share, for every five shares purchased during theCompany’s initial public offering.  Thestockholder warrants are fully vested and exercisable at any time prior to September 10,2010.

 
| **Warrants Outstanding and Exercisable** | ** ** |
|------------------------------------------|------------|
| **Type**                                 | ** ** | **Exercise********Price** | ** ** | **Number** | ** ** | **Weighted Average********Remaining********Contractual********Life** | ** ** | **Weighted********Average********Exercise********Price** | ** ** |
|                                     |       |   |   |   |   |   |   |   |   |
| Organizer warrant                        |       | $ | 10.00 |   | 317,335 |   | 7.69 years |   | $ | 10.00 |   |
| Stockholder warrant                      |       | $ | 12.50 |   | 510,713 |   | 0.69 years |   | $ | 12.50 |   |

 

F-24

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 12 — WARRANTS - continued**

 

TheCompany determined the fair value of the warrants granted following theprovisions of ASC 505-50, *Equity-Based Payments toNon-Employees*.  The fair valueof each warrant grant was estimated on the date of grant using theBlack-Scholes-Merton option pricing model with the following assumptionspresented below:

 
| ** **                        | ** ** | **Organizer Warrants** | ** ** | **Stockholder Warrants** | ** ** | **Stockholder Warrants** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| Grant-date                        |       | September 10, 2007     |       | September 10, 2007       |       | December 31, 2007        |       |
| Total Number of  Warrants Granted |       | 317,335                     |       | 452,567                       |       | 58,166                        |       |
| Expected Volatility               |       | 14.46                       | %          | 14.46                         | %          | 14.46                         | %          |
| Expected Term                     |       | 4.6 years                   |       | 2.75 years                    |       | 2.5 years                     |       |
| Expected Dividend                 |       | 0.00                        | %          | 0.00                          | %          | 0.00                          | %          |
| Risk-Free Rate                    |       | 4.29                        | %          | 4.15                          | %          | 2.97                          | %          |
| Grant-Date Fair Value             |       | $                           | 2.19       |                          | $          | 0.53                          |       | $ | 0.39 |   |
|                                   |            |                             |            |                               |            |                               |            |  |  |  |

 

Since the Bank has no historical stock activity, theexpected volatility is based on the historical volatility of similar banks thathave a longer trading history.  Theexpected term represents the estimated average period of time that the warrantswill remain outstanding.  The risk-freerate of return reflects the grant-date interest rate offered for zero couponU.S. Treasury bonds with the same expected term as the warrants.

 

Thefair market value of the stockholder warrants totaled approximately $131,000and the fair market value of the organizer warrants totaled approximately$625,000.  This cost was treated as acomponent of equity and was included in total offering costs of approximately$990,000.

 

Organizer and initial stockholder warrants to purchasefractional shares were not issued.  Instead,rounding down to the next whole number was used in calculating the number ofwarrants issued to any stockholder. Holders of warrants will be able to profitfrom any rise in the market price of the Company’s common stock over theexercise price of the warrants because they will be able to purchase shares ofthe Company’s common stock at a price that is less than the then-current marketvalue. If the Bank’s capital falls below the minimum level required by theOffice of the Comptroller of the Currency, management may be directed torequire the holders to exercise or forfeit their warrants.

 

F-25

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 13 — LOSS PER SHARE**

 

The following table presents the net loss andweighted average common shares outstanding used to calculate earnings (loss)per share for the years ended December 31, 2009 and 2008:

 
| **($ in  thousands, except share data)**      | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|
| Basic loss per share computation                   |       |       |       |       |       |
|                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss to common stockholders                    |       | $          | (1,276     | )          | $          | (2,214 | ) |
|                                               |       |       |       |       |       |
| Weighted average shares outstanding — basic   |       | 2,553,671  |       | 2,553,671  |       |
|                                               |       |       |       |       |       |
| Basic loss per share                               |       | $          | (0.50      | )          | $          | (0.87 | ) |
|                                               |       |       |       |       |       |
| Diluted loss per share computation                 |       |       |       |       |       |
|                                               |       |       |       |       |       |
| Net loss to common stockholders                    |       | $          | (1,276     | )          | $          | (2,214 | ) |
|                                               |       |       |       |       |       |
| Weighted average shares outstanding — basic   |       | 2,553,671  |       | 2,553,671  |       |
| Shares assumed issued:                             |       |       |       |       |       |
| Stock options                                      | ** ** | **—** |       | —     |       |
| Stockholder stock warrants                         |       | —     |       | —     |       |
| Organizer stock warrants                           |       | —     |       | —     |       |
|                                               |       |       |       |       |       |
| Weighted average shares outstanding — diluted |       | 2,553,671  |       | 2,553,671  |       |
|                                               |       |       |       |       |       |
| Diluted loss per share                             |       | $          | (0.50      | )          | $          | (0.87 | ) |

** **

Sincethe Company was in a loss position for the years ended December 31, 2009and 2008, all outstanding options and warrants were anti-dilutive.

 

**NOTE 14 - RELATED PARTY TRANSACTIONS**

 

In the ordinary course of business, and only ifconsistent with permissible exceptions to Section 402 of theSarbanes-Oxley Act of 2002, the Bank may make loans to directors, executiveofficers, principal stockholders (holders of more than five percent of the outstandingcommon shares) and the businesses with which they are associated.  In the Company’s opinion, all loans and loancommitments to such parties are made on substantially the same terms includinginterest rates and collateral, as those prevailing at the time for comparabletransactions with other persons. There was approximately $2.6 million in loansreceivable from related parties at December 31, 2009 and 2008,respectively.

 

Also in the course of ordinary business,certain officers, directors, principal stockholders, and employees of the Bankhave deposits with the Bank. In the Bank’s opinion, all deposit relationshipswith such parties are made on substantially the same terms including interestrates and maturities, as those prevailing at the time for comparabletransactions with other persons. The balance of related party deposits at December 31,2009 and 2008 was approximately $4.0 million and $2.7 million, respectively.

 

TheCompany utilized a director for consulting services and incurred approximately$3,000 of consulting costs during the year ended December 31, 2009.

 

F-26

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 15**- **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 continued growth, management decided to re-occupy the previouslyabandoned facility and utilize the office space for administrativepurposes.  In accordance with theaccounting for costs associated with exit or disposal activities, approximately$133,000 of the originally recorded loss was reversed resulting in a credit toexpense during the third quarter 2008. The Company intends to occupy the space for the remainder of theoriginal lease agreement which expires on August 31, 2011.  As such, the Company has been and willcontinue to recognize occupancy expense on a straight-line basis each periodfrom September 2008 until the lease expiration.

 

**NOTE 16 - COMMITMENTS ANDCONTINGENCIES**

 

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 sheet.  TheCompany’s exposure to credit loss is represented by the contractual amount ofthese commitments.  The Company followsthe same credit policies in making commitments as it does for on-balance-sheetinstruments.

 

At December 31, 2009 and 2008 the following financial instrumentswere outstanding whose contract amounts represent credit risk:

 
| **($ in  thousands)**                                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Financial instruments whose contractual amounts  represent credit risk: |       |     |       |     |       |
| Commitments to extend credit                                            |       | $        | 7,182      |     | $          | 6,716 |   |
| Letters of credit                                                       |       | —   |       | —   |       |
| Total commitments*                                                      |       | $        | 7,182      |     | $          | 6,716 |   |

 

----

| *Of  the $7.2 million in total commitments outstanding at December 31, 2009,  $4.9 million were at variable rates, $732,000 were at fixed rates and $1.5  million were commitment letters that did not include finalized rate  agreements. Of the $6.7 million in total commitments outstanding at December 31,  2008, $4.4 million were at variable rates, $133,000 were at fixed rates and  $2.2 million were commitment letters that did not include finalized rate  agreements. |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

 

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.  Since many of the commitments are expected toexpire without being drawn upon, the commitments do not necessarily representfuture cash requirements.  The Companyevaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained is based onmanagement’s credit evaluation. Collateral held varies, but may include accounts receivable, inventory,property, plant and equipment and income producing commercial properties.

 

Letters of credit are conditional commitments issued by the Company toguarantee the performance of a customer to a third party.  Letters of credit are used to guaranteeperformance primarily on development and construction projects.  The credit risk involved in issuing lettersof credit is essentially the same as that involved in extending loan facilitiesto customers.  Those commitments areprimarily issued on behalf of local businesses.

 

F-27

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 17 — LEGAL CONTINGENCIES**

 

From time to time, the Company may be a party to or otherwise involvedin legal proceedings arising in the normal course of business, such as claimsto enforce liens, claims involving the making and servicing of real propertyloans and other issues relating to the business of the Company.  Management does not believe that there is anypending or threatening proceeding against the Company which would have amaterial effect on the Company’s consolidated financial statements.

 

**NOTE 18 — OTHER NONINTEREST EXPENSE**

 

The following table details the items comprisingOther general and administrative expenses:

 
| ** **                          | ** ** | **12 months ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| **($ in thousands)**           | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| Data processing                     |       | $                                     | 275        |   | $ | 233 |   |
| FDIC assessments                    |       | 162                                   |       | 20 |   |
| Marketing and promotions            |       | 109                                   |       | 236 |   |
| Other regulatory and reporting fees |       | 85                                    |       | 56 |   |
| Printing, stationery and supplies   |       | 56                                    |       | 51 |   |
| Travel and entertainment            |       | 49                                    |       | 32 |   |
| Telephone                           |       | 38                                    |       | 34 |   |
| Dues and memberships                |       | 34                                    |       | 19 |   |
| Postage, shipping and courier       |       | 24                                    |       | 16 |   |
| Insurance                           |       | 19                                    |       | 18 |   |
| Training and education              |       | 12                                    |       | 12 |   |
| Miscellaneous                       |       | 52                                    |       | 44 |   |
| Total                               |       | $                                     | 915        |   | $ | 771 |   |

 

**NOTE 19 — FAIR VALUE**

 

Fair value is theexchange price that would be received for an asset or paid to transfer aliability (exit price) in the most advantageous market for the asset orliability in an orderly transaction between market participants. The fair valuehierarchy requires an entity to maximize the use of observable inputs andminimize the use of unobservable inputs when measuring fair value. The standarddescribes three levels of inputs that may be used to measure fair values:

 
| Level  1 — |   | inputs  are unadjusted quoted prices in active markets for identical assets or  liabilities that the Company has the ability to access at the measurement  date.                                                                                                                                                                                                                                    |
|-----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| Level  2 — |   | inputs  are other than quoted prices included in Level 1 that are observable for the  asset or liability either directly or indirectly, such as quoted prices for  similar assets or liabilities; quoted prices in markets that are not active;  or model-based valuation techniques for which all significant assumptions are  observable in the market.

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

 

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

 

F-28

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 19 — FAIR VALUE****-continued**

 

yield curve, live trading levels, tradeexecution data, market consensus prepayment speeds, credit information and thebonds’ terms and conditions, among other things.  Asof December 31, 2009 and December 31, 2008, all of the Company’savailable-for-sale securities were valued using Level 2 inputs.

 

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

Assets and liabilities measured at fair value on arecurring 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  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 |   |
| Assets at  December 31, 2008           |       |                                                                    |       |                                                  |       |                                             |       |      |       |
| Investment securities,  available-for-sale: |       |                                                                    |       |                                                  |       |                                             |       |      |       |
| U.S. government  agencies                   |       | $                                                                       | —     |                                                  | $          | 5,746                                            |       | $         | —     |   | $ | 5,746 |   |
| Corporate                                   |       | —                                                                  |       | 1,503                                                 |       | —                                           |       | 1,503     |       |
| State and municipal                         |       | —                                                                  |       | 2,930                                                 |       | —                                           |       | 2,930     |       |
| Agency MBS                                  |       | —                                                                  |       | 31,378                                                |       | —                                           |       | 31,378    |       |
| Total                                       |       | $                                                                       | —     |                                                  | $          | 41,557                                           |       | $         | —     |   | $ | 41,557 |   |

 

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

 

***Fair Value of Financial Instruments***

 

Disclosure of fair value information about financialinstruments, whether or not recognized in the consolidated balance sheet, forwhich it is practicable to estimate that value is required. Fair valueestimates aremade at a specific point in time based on relevant market informationand information about the financial instrument. Because no market value existsfor a significant portion of the financial instruments, fair value estimatesare based on judgments regarding future expected loss experience, currenteconomic conditions, risk characteristics of various financial instruments, andother factors.  These estimates aresubjective in nature, involve uncertainties and matters of judgment, andtherefore cannot bedetermined with precision. Changes in assumptions could significantlyaffect 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 and liabilitiesthat are not considered financial instruments. Additionally, tax consequencesrelated to the realization of the unrealized gains and losses can have apotential effect on fair value estimates and have not been considered in manyof the estimates.

 

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

 

F-29

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 19 - FAIR VALUE — continued**

 

*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 December 31, 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 value. If the current market rates differ from the loan’s current rate, thecontractual cash flows are discounted using the current market rate to derivethe loan’s estimated fair value.

 

*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 andsavings and money market accounts is determined to be the amount payable ondemand at the reporting date.  The fairvalue of fixed rate time deposits is estimated using a discounted cash flowcalculation that applies interest rates currently being offered for deposits ofsimilar remaining maturities.  Carryingvalue is assumed to approximate fair value for all variable rate time deposits.

 

*Securities sold under agreements torepurchase: *The carrying amount of securities soldunder agreements to repurchase approximates fair value due to the short-termnature of these agreements, which generallymature within one to four days from the 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 borrowings: *Fair value of the Federal Home Loan Bank borrowings 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.

 

F-30

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 19 - FAIR VALUE — continued**

 

*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 at December 31 are summarized as follows:

 
| ** **                                      | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **($ in thousands)**                       | ** ** | **Carrying  Value**         | ** ** | **Fair  Value**             | ** ** | **Carrying  Value** | ** ** | **Fair  Value** | ** ** |
| Financial Assets:                               |       |                        |       |                        |       |   |   |   |   |
| Cash and cash  equivalents                      |       | $                           | 2,516      |                        | $          | 2,516 |   | $ | 2,401 |   | $ | 2,401 |   |
| Interest-bearing  deposits with banks           |       | 3,784                       |       | 3,784                       |       | — |   | — |   |
| Investment securities                           |       | 73,441                      |       | 73,441                      |       | 41,557 |   | 41,557 |   |
| Loans, net                                      |       | 49,560                      |       | 49,230                      |       | 21,088 |   | 21,127 |   |
| FHLB and FRB stocks                             |       | 1,131                       |       | 1,131                       |       | 1,080 |   | 1,080 |   |
| Interest receivable                             |       | 814                         |       | 814                         |       | 383 |   | 383 |   |
|                                            |       |                        |       |                        |       |   |   |   |   |
| Financial Liabilities:                          |       |                        |       |                        |       |   |   |   |   |
| Deposits, demand,  savings and money market     |       | $                           | 64,772     |                        | $          | 64,772 |   | $ | 13,387 |   | $ | 13,387 |   |
| Time deposits                                   |       | 39,629                      |       | 39,036                      |       | 24,275 |   | 23,657 |   |
| Securities sold under  agreements to repurchase |       | 326                         |       | 326                         |       | 398 |   | 398 |   |
| Federal Home Loan Bank  borrowings              |       | 8,750                       |       | 8,508                       |       | 10,000 |   | 9,469 |   |
| Interest payable                                |       | 82                          |       | 82                          |       | 80 |   | 80 |   |

 

**NOTE 20 - REGULATORY MATTERS**

 

The Bank is subject to various regulatory capitalrequirements administered by the federal banking agencies. Failure to meetminimum capital requirements can initiate certain mandatory and possibleadditional discretionary actions by regulators that, if undertaken, could havea direct material effect on the Company’s financial statements. Under capitaladequacy guidelines and the regulatory framework for prompt corrective action,the Bank must meet specific capital guidelines that involve quantitativemeasures of the assets, liabilities, and certain off-balance-sheet items ascalculated under regulatory accounting practices. The Bank’s capital amountsand classification are also subject to qualitative judgments by the regulatorsabout components, risk weightings and other factors.  Undercapitalized institutions are subject tocertain prompt corrective action requirements, regulatory controls andrestrictions, which become more extensive as an institution becomes moreseverely undercapitalized.

 

Quantitative measures established by regulation toensure capital adequacy require the Bank to maintain minimum amounts and ratios(set forth in the table below) of Total and Tier 1 capital (as defined in theregulations) to risk-weighted assets (as defined), and of Tier 1 capital (asdefined) to average assets (as defined).  As of December 31, 2009 and 2008, the Bank met all capital adequacyrequirements to which it is subject.

 

As of December 31, 2009 and 2008, the Bank wascategorized as well-capitalized under the regulatory framework for promptcorrective action.  To be categorized aswell-capitalized, an institution must maintain minimum Total risk-based, Tier 1risk-based and Tier 1 leverage ratios as set forth in the following table.  There are no conditions that have occurredsince December 31, 2009 that management believes has changed the Bank’sstatus as well-capitalized.

 

F-31

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 20 - REGULATORY MATTERS****— continued**

 

The Bank’s actual capital amounts as of December 31,2009 are presented below:

 
| ** **                                          | ** ** | ** **      | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | **To Be  Well-**       | ** ** |
|-----------------------------------------------------|------------|-----------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                          | ** ** | ** **      | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | **Capitalized  Under** | ** ** |
| ** **                                          | ** ** | ** **      | ** ** | ** **             | ** ** | **For  Capital**       | ** ** | **Prompt  Corrective** | ** ** |
| ** **                                          | ** ** | **Actual**      | ** ** | **Adequacy  Purposes** | ** ** | **Action  Provisions** | ** ** |
| ** **                                          | ** ** | **Amount**      | ** ** | ** **             | ** ** | **Amount**             | ** ** | ** **             | ** ** | **Amount**             | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **(thousands)** | ** ** | **Ratio**              | ** ** | **(thousands)**        | ** ** | **Ratio**              | ** ** | **(thousands)**        | ** ** | **Ratio** | ** ** |
| **As of  December 31, 2009:**                  |       |            |       |                   |       |                   |       |                   |       |                   |       |   |   |
| Total Risk-Based  Capital(to  Risk-Weighted Assets) |       | $               | 15,785     |                   | 20.8       | %                      | $          | 6,084                  |       | 8.0                    | %          | $ | 7,605 |   | 10.0 | % |
| Tier 1 Capital(to Risk-Weighted Assets)             |       | $               | 14,955     |                   | 19.7       | %                      | $          | 3,042                  |       | 4.0                    | %          | $ | 4,563 |   | 6.0 | % |
| Tier 1 Capital(to Average Assets)                   |       | $               | 14,955     |                   | 11.1       | %                      | $          | 5,382                  |       | 4.0                    | %          | $ | 6,728 |   | 5.0 | % |

 

The Bank’s actual capital amounts as of December 31,2008 are presented below:

 
| ** **                                          | ** ** | ** **      | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | **To Be  Well-**       | ** ** |
|-----------------------------------------------------|------------|-----------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                          | ** ** | ** **      | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | **Capitalized  Under** | ** ** |
| ** **                                          | ** ** | ** **      | ** ** | ** **             | ** ** | **For  Capital**       | ** ** | **Prompt  Corrective** | ** ** |
| ** **                                          | ** ** | **Actual**      | ** ** | **Adequacy  Purposes** | ** ** | **Action  Provisions** | ** ** |
| ** **                                          | ** ** | **Amount**      | ** ** | ** **             | ** ** | **Amount**             | ** ** | ** **             | ** ** | **Amount**             | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **(thousands)** | ** ** | **Ratio**              | ** ** | **(thousands)**        | ** ** | **Ratio**              | ** ** | **(thousands)**        | ** ** | **Ratio** | ** ** |
| **As of  December 31, 2008:**                  |       |            |       |                   |       |                   |       |                   |       |                   |       |   |   |
| Total Risk-Based  Capital(to  Risk-Weighted Assets) |       | $               | 15,082     |                   | 46.1       | %                      | $          | 2,618                  |       | 8.0                    | %          | $ | 3,273 |   | 10.0 | % |
| Tier 1 Capital(to Risk-Weighted Assets)             |       | $               | 14,814     |                   | 45.3       | %                      | $          | 1,309                  |       | 4.0                    | %          | $ | 1,964 |   | 6.0 | % |
| Tier 1 Capital(to Average Assets)                   |       | $               | 14,814     |                   | 25.4       | %                      | $          | 2,338                  |       | 4.0                    | %          | $ | 2,922 |   | 5.0 | % |

 

Capital adequacy ratios are not presented on aconsolidated basis, as they are only applicable for bank holding companies withconsolidated assets of $500 million or more, or for those bank holdingcompanies that are engaged in significant nonbanking activities.

 

The Bank is restricted as to the amount of dividends,which can be paid. Dividends declared by national banks that exceed net income(as defined by OCC regulations) for the current year plus retained net incomefor the preceding two years must be approved by the OCC. Also, the Bank may notpay dividends that would result in capital levels being reduced below theminimum requirements shown above.

 

With certain exceptions, the Company may not pay adividend to its stockholders unless its retained earnings equal at least theamount of the proposed dividend.

 

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 21 - SOLERA NATIONAL BANCORP,INC.**

 

Solera National Bancorp, Inc. (the “Bancorp”) hasno significant business activity other than its investment in Solera NationalBank. Financial information pertaining only to the Bancorp is as follows:

 

($ in thousands)

 
| **Condensed  Balance Sheet**                     | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **ASSETS**                                       |       |                       |       |                       |       |
| Cash                                             | ** ** | **$**                      | 2,856      | ** **                 | **$**      | 4,068 | ** ** |
| Investment in Solera  National Bank              |       | 15,911                     |       | 14,963                     |       |
| Other assets                                     |       | 7                          |       | 7                          |       |
| TOTAL ASSETS                                     | ** ** | **$**                      | 18,774     | ** **                 | **$**      | 19,038 | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**   |       |                       |       |                       |       |
| Other liabilities                                | ** ** | **$**                      | 40         | ** **                 | **$**      | 46 | ** ** |
|                                             |       |                       |       |                       |       |
| Stockholders’ equity                        |       | 18,734                     |       | 18,992                     |       |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY | ** ** | **$**                      | 18,774     | ** **                 | **$**      | 19,038 | ** ** |

 
| **Condensed  Income Statement**                          | ** ** | **For the year ended****December 31, 2009** | ** ** | **For the year ended****December 31, 2008** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| Income                                                   |       |                                             |       |                                             |       |
| Deficit in undistributed  losses of Solera National Bank | ** ** | **$**                                            | (1,037     | )                                                | **$**      | (2,105 | ) |
| Other                                                    |       | 3                                                |       | 1                                                |       |
| TOTAL INCOME                                             |       | (1,034                                           | )          | (2,104                                           | )          |
| Expenses                                                 |       |                                             |       |                                             |       |
| Salaries, benefits and other  compensation               |       | 33                                               |       | 33                                               |       |
| Occupancy                                                |       | —                                           |       | (96                                              | )          |
| Professional fees                                        |       | 167                                              |       | 135                                              |       |
| General and administrative                               |       | 42                                               |       | 38                                               |       |
| TOTAL EXPENSES                                           |       | 242                                              |       | 110                                              |       |
| Loss before income taxes                                 |       | (1,276                                           | )          | (2,214                                           | )          |
| Income tax benefit                                       |       | —                                           |       | —                                           |       |
| NET LOSS                                                 | ** ** | **$**                                            | (1,276     | )                                                | **$**      | (2,214 | ) |

 

F-33

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Table of Contents

 

**SOLERANATIONAL BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 21 - SOLERA NATIONAL BANCORP,INC. - continued**

 

($ in thousands)

 
| **Condensed Statement of Cash Flows**                                        | ** ** | **For the year ended  December 31, 2009** | ** ** | **For the year ended  December 31, 2008** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| Cash flows from operating  activities:                                       | ** ** | ** **                                     | ** ** |                                           | ** ** |
| Net loss                                                                     | ** ** | **$**                                          | (1,276     | )                                              | **$**      | (2,214 | ) |
| Adjustments to reconcile net  loss to net cash used by operating activities: | ** ** | ** **                                     |       |                                           |       |
| Deficit in undistributed  losses of subsidiary                               |       | 1,037                                          |       | 2,105                                          |       |
| Depreciation and  amortization                                               |       | —                                         |       | 1                                              |       |
| Reversal of loss on  abandoned lease                                         |       | —                                         |       | (133                                           | )          |
| Reimbursement from Bank for  prepaid rent                                    |       | —                                         |       | 62                                             |       |
| Stock-based compensation                                                     |       | 33                                             |       | 33                                             |       |
| Change in other assets and  accrued liabilities                              |       | (6                                             | )          | (27                                            | )          |
| Net cash used by operating  activities                                       |       | (212                                           | )          | (173                                           | )          |
|                                                                         |       |                                           |       |                                           |       |
| Cash flows from investing  activities:                                       |       |                                           |       |                                           |       |
| Purchase of common stock of  Solera National Bank                            |       | (1,000                                         | )          | —                                         |       |
| Net cash used by investing  activities                                       |       | (1,000                                         | )          | —                                         |       |
|                                                                         |       |                                           |       |                                           |       |
| Cash flows from financing  activities:                                       |       |                                           |       |                                           |       |
| Proceeds  from subscriptions receivable                                      |       | —                                         |       | 1,600                                          |       |
| Net cash provided by  financing activities                                   |       | —                                         |       | 1,600                                          |       |
|                                                                         |       |                                           |       |                                           |       |
| Net (decrease) increase in  cash                                             |       | (1,212                                         | )          | 1,427                                          |       |
|                                                                         |       |                                           |       |                                           |       |
| Cash at beginning of year                                                    |       | 4,068                                          |       | 2,641                                          |       |
| Cash at end of year                                                          | ** ** | **$**                                          | 2,856      | ** **                                     | **$**      | 4,068 | ** ** |

 

**NOTE 22 — SUBSEQUENT EVENTS**

 

On March 18, 2010, the Bank consented and agreedto the issuance of a Consent Order by the Office of the Comptroller ofCurrency, the Bank’s primary banking regulator. The Consent Order is primarily related to compliance with the BankSecrecy Act.  The Company does not expectthis Consent Order to have a material impact on the Company’s consolidatedfinancial position, results of operations or cash flows.

 

The Company has considered subsequent events throughthe date of issuance of this Report on Form 10-K, and has determined thatonly the aforementioned disclosure is necessary.

 

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