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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark one)**

 

x       **QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For thequarterly period ended March 31, 2010**

 

o          **TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**Commissionfile number 000-53181**

** **

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**SOLERANATIONAL BANCORP, INC.**

(Exact name of registrant as specified inits charter)

 

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

 

**319 S.Sheridan Blvd.**

**Lakewood,CO 80226**

**303-209-8600**

(Address and telephone number ofprincipal executive offices and principal place of business)

 

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

 

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

 

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

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes  ̈  Nox

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the last practicabledate:  As of May 11, 2010, 2,553,671shares of the registrant’s common stock, $0.01 par value, were issued andoutstanding.

 

 

 

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**FORM 10-Q**

**SOLERANATIONAL BANCORP, INC.**

 

**INDEX**
| ** **                                                                                                      | **PAGE** |
|-----------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                            |     |
| **INTRODUCTORY  NOTE. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND RISK  FACTORS**            | 3        |
|                                                                                                            |     |
| **PART I —  FINANCIAL INFORMATION**                                                                   | 5        |
|                                                                                                            |     |
| **ITEM  1. FINANCIAL STATEMENTS (Unaudited)**                                                                   | 5        |
|                                                                                                            |     |
| **Balance Sheets as of March 31, 2010 and  December 31, 2009**                                        | 5        |
|                                                                                                            |     |
| **Statements  of Operations for the Three Months Ended March 31, 2010 and 2009**                           | 6        |
|                                                                                                            |     |
| **Statements of Changes in Stockholders’ Equity for the  Three Months Ended March 31, 2010 and 2009** | 7        |
|                                                                                                            |     |
| **Statements of Cash Flows for the Three Months Ended  March 31, 2010 and 2009**                           | 8        |
|                                                                                                            |     |
| **UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL  STATEMENTS**                                             | 10       |
|                                                                                                            |     |
| **ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS**         | 22       |
|                                                                                                            |     |
| **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK**                                         | 34       |
|                                                                                                            |     |
| **ITEM 4(T). CONTROLS AND PROCEDURES**                                                                          | 34       |
|                                                                                                            |     |
| **PART II  — OTHER INFORMATION**                                                                      | 35       |
|                                                                                                            |     |
| **ITEM  1. LEGAL PROCEEDINGS**                                                                                  | 35       |
|                                                                                                            |     |
| **ITEM  1A. RISK FACTORS**                                                                                      | 35       |
|                                                                                                            |     |
| **ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS**                                        | 36       |
|                                                                                                            |     |
| **ITEM 3. DEFAULTS UPON SENIOR SECURITIES**                                                                     | 36       |
|                                                                                                            |     |
| **ITEM  4. [REMOVED AND RESERVED]**                                                                             | 36       |
|                                                                                                            |     |
| **ITEM  5. OTHER INFORMATION**                                                                                  | 36       |
|                                                                                                            |     |
| **ITEM 6.  EXHIBITS**                                                                                           | 36       |
|                                                                                                            |     |
| **SIGNATURES**                                                                                                  | 37       |
|                                                                                                            |     |
| **EXHIBIT  INDEX**                                                                                              | 38       |

 

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# **INTRODUCTORYNOTE.  CAUTIONARY STATEMENT REGARDINGFORWARD-LOOKING INFORMATION AND RISK FACTORS**

 

ThisQuarterly Report on Form 10-Q contains “forward-looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995 aboutSolera National Bancorp, Inc. (the “Company”) and our subsidiary, SoleraNational Bank (the “Bank,” collectively with the Company, sometimes referred toas “we,” “us” and “our”) that are subject to risks and uncertainties. Forward-looking statements include information concerning future financialperformance, business strategy, projected plans and objectives. Statements preceded by, followed by or that otherwise include the words “anticipates,”“believes,” “estimates,” “expects,” “intends,” “plans,” “may increase,” “mayfluctuate” and similar expressions of future or conditional verbs such as “will,”“should,” “would,” and “could” are generally forward-looking in nature and nothistorical facts.  Actual results may differ materially from thoseprojected, implied, anticipated or expected in the forward-lookingstatements.  Readers of this quarterly 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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  ourallowance for probable loan losses may be insufficient;

 

·                  interestrate volatility could significantly harm our business;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  our directors and executive officers could have theability to influence stockholder actions in a manner that may be adverse toyour personal investment objectives;

 

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

 

·                  management’sability to manage these and other risks.

 

Fora discussion of these and other risks and uncertainties that could cause actualresults to differ from those contained in the forward-looking statements, see “RiskFactors” in Item 1A of the Company’s 2009 Annual Report filed on Form 10-Kwith the SEC, which is available on the SEC’s website at www.sec.gov.  Allforward-looking statements are qualified in their entirety by this cautionarystatement, and the Company undertakes no obligation to revise or update thisQuarterly Report on Form 10-Q to reflect events or circumstances after thedate hereof.  New factors emerge fromtime to time, and it is not possible for us to predict which factors, if any,will arise.  In addition, the Companycannot assess the impact of each factor on the Company’s business or the extentto which any factor, or combination of factors, may cause actual results todiffer materially from those contained in any forward-looking statements.

 

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# **PART I— FINANCIAL INFORMATION**

 

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

 

**SoleraNational Bancorp, Inc.**

** **

**Balance Sheets as of March 31,2010 and December 31, 2009**

**(Unaudited)**

 
| ** **                                                                                                                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ in thousands, except share data)**                                                                                                           | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                                                                                             |       |               |       |                  |       |
| Cash  and due from banks                                                                                                                               |       | $                  | 1,114      |                  | $          | 1,696 |   |
| Federal  funds sold                                                                                                                                    |       | 4,605              |       | 820                   |       |
| Total  cash and cash equivalents                                                                                                                       |       | 5,719              |       | 2,516                 |       |
|                                                                                                                                                   |       |               |       |                  |       |
| Interest-bearing  deposits with banks                                                                                                                  |       | 1,848              |       | 3,784                 |       |
| Investment  securities, available-for-sale                                                                                                             |       | 71,302             |       | 73,441                |       |
|                                                                                                                                                   |       |               |       |                  |       |
| Gross  loans                                                                                                                                           |       | 56,331             |       | 50,504                |       |
| Net  deferred (fees)/expenses                                                                                                                          |       | (123               | )          | (114                  | )          |
| Allowance  for loan losses                                                                                                                             |       | (945               | )          | (830                  | )          |
| Net  loans                                                                                                                                             |       | 55,263             |       | 49,560                |       |
|                                                                                                                                                   |       |               |       |                  |       |
| Federal  Home Loan Bank (FHLB) and Federal Reserve Bank stocks                                                                                         |       | 1,113              |       | 1,131                 |       |
| Premises  and equipment, net                                                                                                                           |       | 841                |       | 875                   |       |
| Accrued interest receivable                                                                                                                            |       | 675                |       | 814                   |       |
| Prepaid FDIC Insurance                                                                                                                                 |       | 419                |       | 471                   |       |
| Other  assets                                                                                                                                          |       | 353                |       | 248                   |       |
| **Total assets**                                                                                                                                       |       | $                  | 137,533    |                  | $          | 132,840 |   |
|                                                                                                                                                   |       |               |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                          |       |               |       |                  |       |
| Deposits                                                                                                                                               |       |               |       |                  |       |
| Noninterest-bearing  demand                                                                                                                            |       | $                  | 2,640      |                  | $          | 2,624 |   |
| Interest-bearing  demand                                                                                                                               |       | 5,864              |       | 6,830                 |       |
| Savings  and money market                                                                                                                              |       | 59,366             |       | 55,318                |       |
| Time  deposits                                                                                                                                         |       | 42,248             |       | 39,629                |       |
| Total  deposits                                                                                                                                        |       | 110,118            |       | 104,401               |       |
|                                                                                                                                                   |       |               |       |                  |       |
| Federal  funds purchased and securities sold under agreements to repurchase                                                                            |       | 110                |       | 326                   |       |
| Accrued  interest payable                                                                                                                              |       | 83                 |       | 82                    |       |
| Accounts  payable and other liabilities                                                                                                                |       | 220                |       | 344                   |       |
| Federal  Home Loan Bank advances                                                                                                                       |       | 7,750              |       | 8,750                 |       |
| Deferred  rent liability                                                                                                                               |       | 90                 |       | 85                    |       |
| Capital  lease liability                                                                                                                               |       | 107                |       | 118                   |       |
| **Total liabilities**                                                                                                                                  |       | $                  | 118,478    |                  | $          | 114,106 |   |
|                                                                                                                                                   |       |               |       |                  |       |
| COMMITMENTS  AND CONTINGENCIES (see Note 10)                                                                                                           |       |               |       |                  |       |
|                                                                                                                                                   |       |               |       |                  |       |
| STOCKHOLDERS’  EQUITY                                                                                                                             |       |               |       |                  |       |
| Common  stock, $0.01 par value; 5,000,000 shares authorized; 2,553,671 sharesissued and outstanding at  March 31, 2010 and December 31, 2009 |       | $                  | 26         |                  | $          | 26 |   |
| Additional  paid-in capital                                                                                                                            |       | 25,814             |       | 25,768                |       |
| Accumulated  deficit                                                                                                                                   |       | (7,913             | )          | (8,016                | )          |
| Accumulated  other comprehensive income                                                                                                                |       | 1,128              |       | 956                   |       |
| **Total stockholders’ equity**                                                                                                                    |       | $                  | 19,055     |                  | $          | 18,734 |   |
|                                                                                                                                                   |       |               |       |                  |       |
| **Total liabilities and stockholders’ equity**                                                                                                    |       | $                  | 137,533    |                  | $          | 132,840 |   |

 

SeeNotes to Consolidated Financial Statements.

 

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**SoleraNational Bancorp, Inc.**

** **

**Statementsof Operations for the Three Months Ended March 31, 2010 and 2009**

**(Unaudited)**

 
| ** **                                                                  | ** ** | **For the Three Months********Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **($ in  thousands, except share data)**                               | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Interest  and dividend income:                                              |       |                                                 |       |   |   |
| Interest and fees on loans                                                  |       | $                                                    | 726        |   | $ | 314 |   |
| Interest on federal funds sold                                              |       | 1                                                    |       | 1 |   |
| Interest on investment securities                                           |       | 829                                                  |       | 598 |   |
| Other  interest income                                                      |       | 5                                                    |       | — |   |
| Dividends  on FHLB and Federal Reserve Bank stocks                          |       | 12                                                   |       | 10 |   |
| Total  interest income                                                      |       | 1,573                                                |       | 923 |   |
| Interest  expense:                                                          |       |                                                 |       |   |   |
| Deposits                                                                    |       | 518                                                  |       | 294 |   |
| Federal  Home Loan Bank advances                                            |       | 76                                                   |       | 92 |   |
| Federal  funds purchased and securities sold under agreements to repurchase |       | 2                                                    |       | 3 |   |
| Other  borrowings                                                           |       | 3                                                    |       | 4 |   |
| Total  interest expense                                                     |       | 599                                                  |       | 393 |   |
|                                                                        |       |                                                 |       |   |   |
| Net  interest income                                                        |       | 974                                                  |       | 530 |   |
|                                                                        |       |                                                 |       |   |   |
| Provision  for loan losses                                                  |       | 115                                                  |       | 117 |   |
| Net  interest income after provision for loan losses                        |       | 859                                                  |       | 413 |   |
|                                                                        |       |                                                 |       |   |   |
| Noninterest  income:                                                        |       |                                                 |       |   |   |
| Service  charges and fees                                                   |       | 17                                                   |       | 69 |   |
| Sublease  income                                                            |       | —                                               |       | 4 |   |
| Gain  on sale of securities                                                 |       | 263                                                  |       | 77 |   |
| Total  noninterest income                                                   |       | 280                                                  |       | 150 |   |
| Noninterest  expense:                                                       |       |                                                 |       |   |   |
| Salaries  and employee benefits                                             |       | 544                                                  |       | 612 |   |
| Occupancy                                                                   |       | 139                                                  |       | 136 |   |
| Professional  fees                                                          |       | 130                                                  |       | 116 |   |
| Other  general and administrative                                           |       | 223                                                  |       | 181 |   |
| Total  noninterest expense                                                  |       | 1,036                                                |       | 1,045 |   |
|                                                                        |       |                                                 |       |   |   |
| Income (loss) before income taxes                                           |       | 103                                                  |       | (482 | ) |
| Income taxes                                                                |       | —                                               |       | — |   |
|                                                                        |       |                                                 |       |   |   |
| Net  income (loss)                                                          |       | $                                                    | 103        |   | $ | (482 | ) |
|                                                                        |       |                                                 |       |   |   |
| Basic  earnings (loss) per share                                            |       | 0.04                                                 |       | (0.19 | ) |
|                                                                        |       |                                                 |       |   |   |
| Diluted  earnings (loss) per share                                          |       | 0.04                                                 |       | (0.19 | ) |
|                                                                        |       |                                                 |       |   |   |
| Weighted-average  common shares                                             |       |                                                 |       |   |   |
| Basic                                                                       |       | 2,553,671                                            |       | 2,553,671 |   |
| Diluted                                                                     |       | 2,553,671                                            |       | 2,553,671 |   |

 

SeeNotes to Consolidated Financial Statements.

 

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**SoleraNational Bancorp, Inc.**

** **

**Statements of Changes inStockholders’ Equity for the Three Months Ended March 31, 2010 and 2009******

**(Unaudited)**

 
| **($ in thousands, except share  data)**                               | ** ** | **Shares********Outstanding** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other****Comprehensive****Income** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|---------------------------------------------------|------------|------------|------------|
|                                                                        |       |                          |       |              |       |                             |       |                     |       |                                              |       |       |       |
| **Balance at December 31, 2008**                                       | ** ** | **2,553,671**                 | ** ** | **$**             | **26**     | ** **                       | **$**      | **25,558**               | ** ** | **$**                                             | **(6,740** | **)**      | **$**      | **148** | ** ** | **$** | **18,992** | ** ** |
| Stock-based  compensation                                                   |       | —                        |       | —            |       | 49                               |       | —                   |       | —                                            |       | 49         |       |
| Comprehensive  income (loss):                                               |       |                          |       |              |       |                             |       |                     |       |                                              | ** ** | ** ** | ** ** |
| Net  loss                                                                   |       | —                        |       | —            |       | —                           |       | (482                     | )          | —                                            |       | (482       | )          |
| Net  change in unrealized gains on investment securities available-for-sale |       | —                        |       | —            |       | —                           |       | —                   |       | 107                                               |       | 107        |       |
| Less:  reclassification adjustment for net gains included in income         |       | —                        |       | —            |       | —                           |       | —                   |       | (77                                               | )          | (77        | )          |
| Total comprehensive income (loss)                                           |       |                          |       |              |       |                             |       |                     |       |                                              |       | (452       | )          |
| **Balance at March 31, 2009**                                          |       | **2,553,671**                 | ** ** | **$**             | **26**     | ** **                       | **$**      | **25,607**               | ** ** | **$**                                             | **(7,222** | **)**      | **$**      | **178** | ** ** | **$** | **18,589** | ** ** |
|                                                                        |       |                          |       |              |       |                             |       |                     |       |                                              |       |       |       |
| **Balance at December 31, 2009**                                       | ** ** | **2,553,671**                 | ** ** | **$**             | **26**     | ** **                       | **$**      | **25,768**               | ** ** | **$**                                             | **(8,016** | **)**      | **$**      | **956** | ** ** | **$** | **18,734** | ** ** |
| Stock-based  compensation                                                   |       | —                        |       | —            |       | 46                               |       | —                   |       | —                                            |       | 46         |       |
| Comprehensive  income (loss):                                               |       |                          |       |              |       |                             |       |                     |       |                                              |       |       |       |
| Net  income                                                                 |       | —                        |       | —            |       | —                           |       | 103                      |       | —                                            |       | 103        |       |
| Net  change in unrealized gains on investment securities available-for-sale |       | —                        |       | —            |       | —                           |       | —                   |       | 435                                               |       | 435        |       |
| Less:  reclassification adjustment for net gains included in income         |       | —                        |       | —            |       | —                           |       | —                   |       | (263                                              | )          | (263       | )          |
| Total comprehensive income                                                  |       |                          |       |              |       |                             |       |                     |       |                                              |       | 275        |       |
| **Balance at March 31, 2010**                                          |       | **2,553,671**                 | ** ** | **$**             | **26**     | ** **                       | **$**      | **25,814**               | ** ** | **$**                                             | **(7,913** | **)**      | **$**      | **1,128** | ** ** | **$** | **19,055** | ** ** |

 

SeeNotes to Consolidated Financial Statements.

 

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**SoleraNational Bancorp, Inc.**

** **

**Statementsof Cash Flows for the Three Months Ended March 31, 2010 and 2009**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **For the Three Months********Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| **($ in  thousands)**                                                                   | ** ** | **2010**                                                                 | ** ** | **2009** | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES                                                        |       |                                                                     |       |   |   |
| Net  income (loss)                                                                           |       | $                                                                        | 103        |   | $ | (482 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities:    |       |                                                                     |       |   |   |
| Depreciation  and amortization                                                               |       | 42                                                                       |       | 37 |   |
| Provision  for loan losses                                                                   |       | 115                                                                      |       | 117 |   |
| Net  (accretion) amortization of deferred loan fees/expenses                                 |       | (5                                                                       | )          | (12 | ) |
| Net  amortization of premiums on investment securities                                       |       | 87                                                                       |       | 20 |   |
| Gain  on sale of investment securities                                                       |       | (263                                                                     | )          | (77 | ) |
| Federal  Home Loan Bank stock dividend                                                       |       | (4                                                                       | )          | (3 | ) |
| Recognition  of stock-based compensation on stock options                                    |       | 46                                                                       |       | 49 |   |
| Changes  in operating assets and liabilities:                                                |       |                                                                     |       |   |   |
| Interest  receivable                                                                         |       | 139                                                                      |       | (85 | ) |
| Other  assets                                                                                |       | (108                                                                     | )          | (22 | ) |
| Prepaid  FDIC Insurance                                                                      |       | 52                                                                       |       | — |   |
| Accrued  interest payable                                                                    |       | 1                                                                        |       | 29 |   |
| Accounts  payable and other liabilities                                                      |       | (124                                                                     | )          | 396 |   |
| Deferred  loan fees/expenses, net                                                            |       | 14                                                                       |       | 75 |   |
| Deferred  rent liability                                                                     |       | 5                                                                        |       | 7 |   |
| **Net cash provided by operating activities**                                                |       | $                                                                        | 100        |   | $ | 49 |   |
|                                                                                         |       |                                                                     |       |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES                                                        |       |                                                                     |       |   |   |
| Purchase  of investment securities, available-for-sale                                       |       | $                                                                        | (17,420    | ) | $ | (20,631 | ) |
| Proceeds  from sales of investment securities, available-for-sale                            |       | 14,250                                                                   |       | 6,862 |   |
| Proceeds  from maturities/calls/pay downs of investment securities, available-for-sale       |       | 5,656                                                                    |       | 3,940 |   |
| Originated  loans, net of pay downs                                                          |       | (5,827                                                                   | )          | (9,654 | ) |
| Purchase  of premises and equipment                                                          |       | (4                                                                       | )          | (3 | ) |
| Proceeds  from redemption of Federal Reserve Bank stock                                      |       | 22                                                                       |       | 13 |   |
| Purchase  of interest-bearing deposits with banks                                            |       | (498                                                                     | )          | — |   |
| Maturity  of interest-bearing deposits with banks                                            |       | 2,434                                                                    |       | — |   |
| **Net cash used in investing activities**                                                    |       | $                                                                        | (1,387     | ) | $ | (19,473 | ) |
|                                                                                         |       |                                                                     |       |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES                                                        |       |                                                                     |       |   |   |
| Net  increase in deposits                                                                    |       | $                                                                        | 5,717      |   | $ | 17,826 |   |
| Net  increase in federal funds purchased and securities sold under agreements to  repurchase |       | (216                                                                     | )          | 783 |   |
| Repayment  of FHLB advances                                                                  |       | (1,000                                                                   | )          | — |   |
| Principal  payments on capital lease                                                         |       | (11                                                                      | )          | (9 | ) |
| **Net cash provided by financing activities**                                                |       | $                                                                        | 4,490      |   | $ | 18,600 |   |
|                                                                                         |       |                                                                     |       |   |   |
| **Net increase (decrease) in cash and cash equivalents**                                     |       | $                                                                        | 3,203      |   | $ | (824 | ) |
|                                                                                         |       |                                                                     |       |   |   |
| CASH  AND CASH EQUIVALENTS                                                                   |       |                                                                     |       |   |   |
| Beginning  of period                                                                         |       | 2,516                                                                    |       | 2,401 |   |
| End  of period                                                                               |       | $                                                                        | 5,719      |   | $ | 1,577 |   |

 

(continued)

 

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**SoleraNational Bancorp, Inc.**

 

# **Statementsof Cash Flows for the Three Months Ended March 31, 2010 and 2009,(continued)**

**(Unaudited)**

 
| ** **                                                               | ** ** | **For the Three Months********Ended March 31,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| **($ in  thousands)**                                               | ** ** | **2010**                                                                 | ** ** | **2009** | ** ** |
|                                                                     |       |                                                                     |       |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION                        |       |                                                                     |       |   |   |
| Cash  paid during the period for:                                        |       |                                                                     |       |   |   |
| Interest                                                                 |       | $                                                                        | 598        |   | $ | 364 |   |
| Non-cash  investing transactions:                                        |       |                                                                     |       |   |   |
| Unrealized  gain on investment securities, available-for-sale            |       | $                                                                        | 172        |   | $ | 31 |   |
| Available-for-sale  investment securities purchased, but not yet settled |       | $                                                                        | —     |   | $ | 1,009 |   |

 

SeeNotes to Consolidated Financial Statements.

 

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**SOLERANATIONAL BANCORP, INC.**

 

# **UNAUDITED CONDENSED NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 — SUMMARY OF ORGANIZATION**

 

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

 

**NOTE 2 — BASIS OF PRESENTATION**

 

Theaccompanying unaudited condensed consolidated financial statements contain alladjustments (consisting only of normal recurring adjustments) which, in theopinion of management, are necessary to present fairly the financial positionof the Company as of March 31, 2010, and the results of its operations forthe three months ended March 31, 2010 and 2009.  Cash flows are presented for the three monthsended March 31, 2010 and 2009.  Certain reclassifications have beenmade to the consolidated financial statements and related notes of priorperiods to conform to the current presentation. These reclassifications had noimpact on stockholders’ equity or net income (loss) for the periods.Additionally, certain information and footnote disclosures normally included infinancial statements have been condensed or omitted pursuant to rules andregulations of the U.S. Securities and Exchange Commission.  The Companybelieves that the disclosures in the unaudited condensed consolidated financialstatements are adequate to make the information presented not misleading. However, these unaudited condensed consolidated financial statements should beread in conjunction with the consolidated financial statements and footnotesthereto included in the Company’s Annual Report on Form 10-K as of and forthe year ended December 31, 2009.

 

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.  Successfulcompletion of the Company’s development program and, ultimately, the attainmentof sustained profitable operations are dependent on future events, includingthe successful execution of the Company’s business plan and achieving a levelof revenue adequate to support the Company’s cost structure.

 

**CriticalAccounting Policies**

 

The following is a description of the Company’ssignificant accounting policies used in the preparation of the accompanyingconsolidated financial statements.

 

Allowance for loan losses:  Implicit in the Company’s lendingactivities is the fact that loan losses will be experienced and that the riskof loss will vary with the type of loan being made and the creditworthiness ofthe borrower over the term of the loan. The allowance for loanlosses represents the Company’s recognition of the risks of extending creditand its evaluation of the loan portfolio. The allowance for loan losses ismaintained at a level considered adequate to provide for probable loan lossesbased on management’s assessment of various factors affecting the loanportfolio, including a review of problem loans, business conditions, historicalloss experience, evaluation of the quality of the underlying collateral, andholding and disposal costs. In addition, because the Bank has limited history on which to basefuture loan losses, a comparison of peer group allowance ratios to gross loansis made with the intention of maintaining similar levels during the Bank’s denovo period of operation.  The allowancefor loan losses is increased by provisions charged to expense and reduced byloans charged off, net of recoveries. Loan losses are charged against the allowance for loan losses whenmanagement believes 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 

 

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

 

At March 31, 2010, the Company had an allowancefor loan losses of $945,000.  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.

 

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. These are all recorded at either fair value or at the lower of costor fair value.  Furthermore, accountingprinciples generally accepted in the United States require disclosure of thefair value of financial instruments as a part of the notes to the consolidatedfinancial statements.  Fair values arevolatile and may be influenced by a number of factors, including marketinterest rates, prepayment speeds, discount rates and the shape of yieldcurves.

 

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

 

**RecentlyIssued Accounting Pronouncements**

 

In June 2009, theFASB issued Accounting Standards Update (“ASU”) No. 2009-16, *Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets,* which amendedprevious guidance relating to transfers of financial assets and eliminated theconcept of a qualifying special purpose entity. This guidance is effective forfiscal years beginning after November 15, 2009.  ASU No. 2009-16 must be applied totransfers occurring on or after the effective date.  This update also clarifies the requirementsfor isolation and limitations on portions of financial assets that are eligiblefor sale accounting.  The term ‘participatinginterest’ is defined to establish specific conditions for reporting a transferof a portion of a financial asset as a sale. The amendment requires transferred assets and liabilities incurred to berecognized and measured at fair value. The disclosure provisions were also amended and apply to transfers thatoccurred both before and after the effective date of this guidance. Theadoption 

 

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of this new guidance didnot have a material impact on the Company’s consolidated financial position,results of operations or cash flows.

 

In January 2010, theFASB issued guidance requiring increased fair value disclosures.  Thereare two components to the increased disclosure requirements set forth in theupdate:  (1) a description of, as well as the disclosure of, thedollar amount of transfers in or out of level one or level two (2) in thereconciliation for fair value measurements using significant unobservableinputs (level 3), a reporting entity should present separately informationabout purchases, sales, issuances and settlements (that is, gross amounts shallbe disclosed as opposed to a single net figure). Increased disclosuresregarding the transfers in/out of level one and two are required for interimand annual periods beginning after December 15, 2009.  The adoptionof this portion of the standard did not have a material impact on the Company’sconsolidated financial position, results of operations or cash flows.  Increased disclosures regarding the levelthree fair value reconciliation are required for fiscal years beginning after December 15,2010. The adoption of this portion of the standard is not expected to have amaterial impact on the Company’s consolidated financial position, results ofoperations or cash flows.

 

**NOTE 3 — INVESTMENTS**

 

The amortized costs and estimated fair values ofinvestment securities as of March 31, 2010 and December 31, 2009 areas follows:

 
| ** **                                           | ** ** | **March 31, 2010** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|
| ** **                                           | ** ** | ** **              | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Amortized**           | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| **($ in thousands)**                            | ** ** | **Cost**                | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| **Securities  available-for-sale:**                  |       |                    |       |   |   |   |   |   |   |
| U.S. government  agencies                            |       | $                       | 8,156      |   | $ | 50 |   | $ | (2 | ) | $ | 8,204 |   |
| Corporate                                            |       | 10,188                  |       | 247 |   | (38 | ) | 10,397 |   |
| State and municipal                                  |       | 17,411                  |       | 329 |   | (143 | ) | 17,597 |   |
| Agency mortgage-backed  securities (“MBS”) |       | 34,419                  |       | 741 |   | (56 | ) | 35,104 |   |
| **Total securities  available-for-sale**             |       | $                       | 70,174     |   | $ | 1,367 |   | $ | (239 | ) | $ | 71,302 |   |

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

 

The amortized cost and estimated fair value of debtsecurities by contractual maturity at March 31, 2010 and December 31,2009 are shown below.  Agencymortgage-backed securities are classified in accordance with their contractuallives.  Expected maturities may differfrom contractual maturities because borrowers may have the right to prepayobligations with or without call or prepay penalties.  Additionally, accelerated principal paymentsare routinely received on agency mortgage-backed securities making it commonfor them to mature prior to the contractual maturity date.

 

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| ** **                             | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **Amortized**           | ** ** | **Estimated Fair**         | ** ** | **Amortized** | ** ** | **Estimated Fair** | ** ** |
| **($ in thousands)**              | ** ** | **Cost**                | ** ** | **Value**                  | ** ** | **Cost** | ** ** | **Value** | ** ** |
| Securities available-for-sale          |       |                    |       |                       |       |   |   |   |   |
| Due within one year                    |       | $                       | 995        |                       | $          | 1,020 |   | $ | 1,538 |   | $ | 1,560 |   |
| Due after one year through five years  |       | 5,098                   |       | 5,277                      |       | 5,602 |   | 5,823 |   |
| Due after five years through ten years |       | 25,729                  |       | 25,949                     |       | 19,566 |   | 19,735 |   |
| Due after ten years                    |       | 38,352                  |       | 39,056                     |       | 45,779 |   | 46,323 |   |
| Total securities  available-for-sale   |       | $                       | 70,174     |                       | $          | 71,302 |   | $ | 72,485 |   | $ | 73,441 |   |

 

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

 
| ** **                  | ** ** | **March 31,  2010**  | ** ** |
|-----------------------------|------------|---------------------------|------------|
| ** **                  | ** ** | **Less  than 12 months**  | ** ** | **12  months or more** | ** ** | **Total** | ** ** |
| **($ in thousands)**   | ** ** | **Estimated  Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **# of  Securities** | ** ** | **Estimated  Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **# of  Securities** | ** ** | **Estimated  Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **# of  Securities** | ** ** |
| Description  of securities: |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.  government agencies   |       | $                         | 1,498      |   | $ | (2 | ) | 2 |   | $ | — |   | $ | — |   | — |   | $ | 1,498 |   | $ | (2 | ) | 2 |   |
| Corporate                   |       | 2,729                     |       | (38 | ) | 5 |   | — |   | — |   | — |   | 2,729 |   | (38 | ) | 5 |   |
| State  and municipal        |       | 7,381                     |       | (128 | ) | 12 |   | 473 |   | (15 | ) | 1 |   | 7,854 |   | (143 | ) | 13 |   |
| Agency  MBS                 |       | 12,864                    |       | (56 | ) | 12 |   | — |   | — |   | — |   | 12,864 |   | (56 | ) | 12 |   |
| Total  temporarily-impaired |       | $                         | 24,472     |   | $ | (224 | ) | 31 |   | $ | 473 |   | $ | (15 | ) | 1 |   | $ | 24,945 |   | $ | (239 | ) | 32 |   |

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

 

Management evaluates investment securities forother-than-temporary impairment taking into consideration the extent and lengthof time the fair value has been less than cost, the financial condition of theissuer, whether the Company has the intent to retain the security andwhether it is more-likely-than-not that the Company will be required to sellthe security before recovery of the value, as well as other qualitativefactors.  The one security that has been in a continuousunrealized loss position for 12 months or longer at March 31, 2010, hasfluctuated in value since the purchase date as a result of changes in marketinterest rates and not as a result of the underlying issuer’s ability torepay.  Management has reviewed thecredit rating for this security, noting that it is highly rated. Additionally,the Company has the intent to hold this security and the Company does not anticipatethat this security will be required to be sold before recovery of value, whichmay be upon maturity. Accordingly, as of March 31, 2010, no decline invalue was deemed to be other than temporary. Similarly, management’s evaluation of the three securities in acontinuous unrealized loss position for 12 months or longer at December 31,2009, determined these securities were not other than temporarily impaired.

 

The Company recorded a net unrealized gain in theinvestment portfolio of $1.1 million at March 31, 2010.  This was an increase over the $956,000unrealized gain at December 31, 2009.

 

In an effort to both capitalize on current marketconditions, while funding our loan portfolio growth, as well as to clean-upsome odd-lots within the investment portfolio, the Company sold twenty-fivesecurities for gross realized gains of $281,000 and nine securities for grossrealized losses of $18,000 during the first quarter of 2010.  The Company sold thirteen securities duringthe first quarter 2009 for a net realized gain of $77,000.  Realized gains and losses on sales arecomputed on a specific identification basis based on amortized cost on the dateof sale.

 

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Securities with carrying values of $19.2 million at March 31,2010 and $16.9 million at December 31, 2009, were pledged as collateral tosecure public deposits, borrowings from the FHLB, repurchase agreements and forother purposes as required or permitted by law.

 

**NOTE 4 — LOANS**

 

The composition of the loan portfolio follows:

 
| **($ in  thousands)**         | ** **                            | **March 31, 2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------|---------------------------------------|-------------------------|------------|-----------------------------|------------|
| Real estate –  commercial     |                                  | $                       | 36,641     |                        | $          | 26,063 |   |
| Real estate –  residential    |                                  | 8,220                   |       | 8,059                       |       |
| Construction and  land development |                                  | 2,678                   |       | 7,067                       |       |
| Commercial and  industrial         |                                  | 8,209                   |       | 8,324                       |       |
| Consumer                           |                                  | 583                     |       | 991                         |       |
| Gross loans                        |                                  | 56,331                  |       | 50,504                      |       |
| Less:                              | Deferred loan  (fees) / expenses, net |                    | (123       | )                           | (114       | ) |
|                               | Allowance for  loan losses            |                    | (945       | )                           | (830       | ) |
| Loans, net                         |                                  | $                       | 55,263     |                        | $          | 49,560 |   |

 

During the first three months of2010 one loan for $1.0 million was placed on nonaccrual and is consideredimpaired, no loans were transferred to foreclosed properties and no loans werepast due more than 90 days and still accruing interest.  During all of 2009, no loans were impaired,no loans were transferred to foreclosed properties and one loan, with aprincipal balance of approximately $3,000, was past due more than 90 days butstill accruing interest.

 

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

 

There were approximately $2.2 million and $2.6million in loans receivable from related parties at March 31, 2010 and December 31,2009, respectively.

 

**NOTE 5 — ALLOWANCE FOR LOAN LOSSES**

 

Activityin the allowance for loan losses for the first three months of 2010 and 2009 issummarized as follows:

 
| ** **                                 | ** ** | **Quarter Ended**        | ** ** |
|--------------------------------------------|------------|--------------------------|------------|
| **($ in  thousands)**                 | ** ** | **March 31,  2010** | ** ** | **March 31, 2009** | ** ** |
|                                       |       |                     |       |   |   |
| Balance, beginning of period               |       | $                        | 830        |   | $ | 268 |   |
| Loans charged off                          |       | —                   |       | — |   |
| Recoveries on loans previously charged off |       | —                   |       | — |   |
| Provision for loan losses                  |       | 115                      |       | 117 |   |
| Balance, end of period                     |       | $                        | 945        |   | $ | 385 |   |

 

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The following table details information regarding impaired loans at thedates indicated:

 
| **($ in  thousands)**                    | ** ** | **March 31,  2010** | ** ** | **December  31, 2009** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|------------------------|------------|
|                                          |       |                     |       |                   |       |
| Impaired loans with a valuation allowance:    |       | $                        | 1,000      |                   | $          | — |   |
| Impaired loans without a valuation allowance: |       | —                   |       | —                 |       |
| Total impaired loans                          |       | $                        | 1,000      |                   | $          | — |   |
| Valuation allowance related to impaired loans |       | $                        | 185        |                   | $          | — |   |

 

No interest income was recognized while the loan hasbeen classified as impaired.  The grossinterest income that would have been recorded for the quarter ended March 31,2010 if the impaired loan had been current throughout the quarter in accordancewith its original terms was approximately $2,000.

 

**NOTE 6 — DEPOSITS**

 

Deposits are summarized as follows:

 
| ** **                                     | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **Amount**               | ** ** | **% of  Total**             | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
| Noninterest-bearing demand                     |       | $                        | 2,640      |                        | 2          | % | $ | 2,624 |   | 2 | % |
| Interest-bearing demand                        |       | 5,864                    |       | 5                           |       | 6,830 |   | 7 |   |
| Money market accounts                          |       | 5,090                    |       | 5                           |       | 3,555 |   | 3 |   |
| Savings accounts                               |       | 54,276                   |       | 49                          |       | 51,763 |   | 50 |   |
| Certificates of deposit, less than $100,000    |       | 13,160                   |       | 12                          |       | 16,624 |   | 16 |   |
| Certificates of deposit, greater than $100,000 |       | 29,088                   |       | 27                          |       | 23,005 |   | 22 |   |
| Total deposits                                 |       | $                        | 110,118    |                        | 100        | % | $ | 104,401 |   | 100 | % |

 

In the ordinary course ofbusiness, certain officers, directors, stockholders, and employees of the Bankhave deposits with the Bank.  In the Bank’sopinion, all deposit relationships with such parties are made on substantiallythe same terms including interest rates and maturities, as those prevailing atthe time for comparable transactions with other persons.  The balance of related party deposits at March 31,2010 and December 31, 2009 was approximately $4.1 million and $4.0million, respectively.

 

**NOTE 7 — STOCK-BASED COMPENSATION**

 

The Company’s 2007 Stock Incentive Plan (the “Plan”)was approved by the Company’s Board of Directors (the “Board”) with aneffective date of September 10, 2007 and was approved by the Company’sstockholders at the annual meeting held on June 17, 2008.  Under the terms of the Plan, officers and keyemployees may be granted both nonqualified and incentive stock options anddirectors and other consultants, who are not also officers or employees, mayonly be granted nonqualified stock options. The Board reserved 510,734 sharesof common stock for issuance under the Plan.  The Plan provides foroptions to purchase shares of common stock at a price not less than 100% of thefair market value of the stock on the date of grant.  Stock options expire no later than ten yearsfrom the date of the grant and generally vest over four years.  The Plan provides for accelerated vesting ifthere is a change of control, as defined in the Plan.  The Company recognized stock-basedcompensation cost of approximately $46,000 and $49,000 during the three monthsended March 31, 2010 and 2009, respectively.

 

The Company accounts for its stock-based compensationunder the provisions of ASC 718-20 — *Stock Compensation —Awards Classified as Equity*. The fair value of each option grant is estimated on the date of grantusing the Black-Scholes-Merton option pricing model.  The Company granted 17,750 options during thefirst quarter 2010 as incentive compensation to existing and newly hiredemployees.  Similarly, the Companygranted 13,000 options as incentive compensation to two Bank officers duringthe first quarter of 2009.

 

During the three months ended March 31, 2010,4,406 options were forfeited and 2,813 vested options expired unexercised.  No options were exercised during the threemonths ended March 31, 2010.  TheCompany recognized expense for approximately 20,000 options, representing apro-rata amount of the options earned during the first

 

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quarter 2010 that are expected to vest.  As of March 31, 2010, there wasapproximately $332,000 of total unrecognized compensation cost related to theoutstanding stock options that will be recognized over a weighted-averageperiod of 1.6 years.

 

The following is a summary of the Company’soutstanding stock options at March 31, 2010:

 
| ** **                           | ** ** | **Options** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|--------------------------------------|------------|-------------|------------|------------------------------------------------|------------|-----------------------------------------|------------|
| Outstanding at  January 1, 2010 |       | 305,353     |       | $                                              | 2.44       |                                    | $          | 9.19 |   |
| Granted                              |       | 17,750      |       | 1.21                                           |       | 5.29                                    |       |
| Exercised                            |       | —      |       | —                                         |       |                                    |       |
| Forfeited                            |       | (4,406      | )          | 1.84                                           |       | 7.84                                    |       |
| Expired                              |       | (2,813      | )          | 2.75                                           |       | 10.00                                   |       |
| Outstanding at  March 31, 2010  |       | 315,884     |       | $                                              | 2.38       |                                    | $          | 8.98 |   |

 

**NOTE 8 — NONINTEREST EXPENSE**

 

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

 
| ** **                          | ** ** | **Three Months Ended********March 31,** | ** ** |
|-------------------------------------|------------|----------------------------------------------|------------|
| **($ in thousands)**           | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Data processing                     |       | $                                            | 68         |   | $ | 66 |   |
| FDIC assessment                     |       | 42                                           |       | 16 |   |
| Other regulatory and reporting fees |       | 26                                           |       | 18 |   |
| Marketing and promotions            |       | 16                                           |       | 21 |   |
| Telephone/communication             |       | 11                                           |       | 11 |   |
| Dues and memberships                |       | 11                                           |       | 10 |   |
| Travel and entertainment            |       | 9                                            |       | 7 |   |
| Printing, stationery and supplies   |       | 8                                            |       | 7 |   |
| Franchise taxes                     |       | 7                                            |       | 2 |   |
| ATM processing fees                 |       | 6                                            |       | 4 |   |
| Insurance                           |       | 6                                            |       | 5 |   |
| Postage and shipping                |       | 5                                            |       | 6 |   |
| Training and education              |       | 2                                            |       | 2 |   |
| Miscellaneous                       |       | 6                                            |       | 6 |   |
| Total                               |       | $                                            | 223        |   | $ | 181 |   |

 

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**NOTE 9 — INCOME TAXES**

 

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

 

| **($ in thousands)**                             | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| Deferred tax assets:                                  |       |                    |       |                       |       |
| Start-up and  organizational expenses                 |       | $                       | 1,098      |                       | $          | 1,120 |   |
| Net operating loss  carryforward                      |       | 1,295                   |       | 1,368                      |       |
| Allowance for loan  losses                            |       | 327                     |       | 284                        |       |
| Non-qualified stock  options                          |       | 31                      |       | 28                         |       |
| Other                                                 |       | 68                      |       | 77                         |       |
| Total deferred tax  assets                            |       | 2,819                   |       | 2,877                      |       |
| Deferred tax  liabilities:                            |       |                    |       |                       |       |
| Net unrealized gain on  securities available-for-sale |       | (418                    | )          | (354                       | )          |
| Federal Home Loan Bank  stock dividend                |       | (11                     | )          | (9                         | )          |
| Tax over book  depreciation                           |       | —                  |       | (26                        | )          |
| Total deferred tax  liabilities                       |       | (429                    | )          | (389                       | )          |
|                                                  |       |                    |       |                       |       |
| Net deferred tax assets                               |       | 2,390                   |       | 2,488                      |       |
|                                                  |       |                    |       |                       |       |
| Valuation allowance                                   |       | (2,390                  | )          | (2,488                     | )          |
|                                                  |       |                    |       |                       |       |
| Net deferred taxes                                    |       | $                       | —     |                       | $          | — |   |

 

TheCompany has provided a 100% valuation allowance for its net deferred tax assetdue to uncertainty of realization during the carryforward period.  As of March 31, 2010, the Company hasnet operating loss carryforwards of approximately $3.5 million for federalincome tax purposes.  Federal netoperating loss carryforwards, to the extent not used, will expire beginning in2027.

 

The income tax provision differs from the amount ofincome tax determined by applying the U.S. federal income tax rate of 35% topretax income from continuing operations for the three months ended March 31,2010 and the twelve months ended December 31, 2009 due to the following:

 
| **($ in thousands)**                            | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** | **March 31, 2009** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|-------------------------|------------|
| Computed “expected” tax  expense (benefit) |       | $                       | 36         |                       | $          | (447                    | )          | $ | (169 | ) |
| Change in income taxes  resulting from:              |       |                    |       |                       |       |                    |       |
| Change in valuation  allowance                       |       | (34                     | )          | 434                        |       | 158                     |       |
| Other                                                |       | (2                      | )          | 13                         |       | 11                      |       |
| Income tax provision                                 |       | $                       | —     |                       | $          | —                  |       | $ | — |   |

 

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

 

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

 

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At March 31,2010 and December 31, 2009 the following financial instruments wereoutstanding whose contract amounts represent credit risk:

 

| **($ in  thousands)**                                                  | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Financial instruments whose contractual amounts represent credit risk: |       |                     |       |                        |       |
| Commitments to extend credit                                                |       | $                        | 8,571      |                        | $          | 7,182 |   |
| Letters of credit                                                           |       | —                   |       | —                      |       |
| Total commitments                                                           |       | $                        | 8,571      |                        | $          | 7,182 |   |

 

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

 

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

 

**NOTE 11****—****FAIR VALUE**

 

Fair value is the exchange price that would be receivedfor an asset or paid to transfer a liability (exit price) in the mostadvantageous market for the asset or liability in an orderly transactionbetween market participants. The fair value hierarchy requires an entity tomaximize the use of observable inputs and minimize the use of unobservableinputs when measuring fair value. The standard describes three levels of inputsthat may be used to measure fair values:

 

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

 

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

 

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

 

TheCompany carries its available-for-sale securities at fair value.  Fair value measurement is obtained from independent pricingservices which utilize observable data that may include dealer quotes, marketspreads, cash flows, the U.S. Treasury yield curve, live trading levels, tradeexecution data, market consensus prepayment speeds, credit information and thebonds’ terms and conditions, among other things.  Asof March 31, 2010 and December 31, 2009, all of the Company’savailable-for-sale securities were valued using Level 2 inputs.

 

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

 

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***Assets 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  March 31, 2010              |       |                                                                         |       |                                                  |       |                                                   |       |      |       |
| Investment securities,  available-for-sale: |       |                                                                         |       |                                                  |       |                                                   |       |      |       |
| U.S. government  agencies                   |       | $                                                                            | —     |                                                  | $          | 8,204                                                  |       | $         | —     |   | $ | 8,204 |   |
| Corporate                                   |       | —                                                                       |       | 10,397                                                |       | —                                                 |       | 10,397    |       |
| State and municipal                         |       | —                                                                       |       | 17,597                                                |       | —                                                 |       | 17,597    |       |
| Agency MBS                                  |       | —                                                                       |       | 35,104                                                |       | —                                                 |       | 35,104    |       |
| Total                                       |       | $                                                                            | —     |                                                  | $          | 71,302                                                 |       | $         | —     |   | $ | 71,302 |   |
|                                        |       |                                                                         |       |                                                  |       |                                                   |       |      |       |
| 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 andLiabilities Measured on a Nonrecurring Basis***

Assets and liabilities measured at fair value on anonrecurring 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  March 31, 2010    |       |                                                                         |       |                                                  |       |                                                   |       |      |       |
| Impaired loans                    |       | $                                                                            | —     |                                                  | $          | —                                                 |       | $         | 815        |   | $ | 815 |   |
|                              |       |                                                                         |       |                                                  |       |                                                   |       |      |       |
| Assets at  December 31, 2009 |       |                                                                         |       |                                                  |       |                                                   |       |      |       |
| Impaired loans                    |       | $                                                                            | —     |                                                  | $          | —                                                 |       | $         | —     |   | $ | — |   |

 

***Fair Value of FinancialInstruments***

 

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

 

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

 

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

 

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

 

*Interest-bearing deposits with banks: *The carrying amount of interest-bearing deposits withbanks approximates fair values due to the relatively stable level of short-terminterest 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 current floor/ceilingrate is equivalent to current market rates, fair value is estimated to beequivalent to carrying value.  If thecurrent market rates differ from the loan’s current rate, the contractual cashflows are discounted using the current market rate to derive the loan’sestimated fair value.  Both the estimatedfair value and the carrying value have been reduced by specific and generalreserves for loan losses.

 

*Investment in FHLB and Federal Reserve Bank (FRB)stocks: *It is not practical to determine the fair value ofbank stocks due to the restrictions placed on the transferability of FHLB stockand FRB 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 utilizes interest rates currently being offered for depositsof similar remaining maturities. Carrying value is assumed to approximate fair value for all variablerate time deposits.

 

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

 

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

 

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

 

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

 

*Loan commitments and letters of credit: *The fair values of commitments are estimated using thefees currently charged to enter into similar agreements, taking into accountthe remaining terms of the agreements and the present creditworthiness of thecounterparties.  The difference betweenthe carrying value of commitments to fund loans or 

 

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

 

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

 
| ** **                                                                  | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                  | ** ** | **Carrying**            | ** ** | **Estimated Fair**         | ** ** | **Carrying** | ** ** | **Estimated Fair** | ** ** |
| **($ in thousands)**                                                   | ** ** | **Value**               | ** ** | **Value**                  | ** ** | **Value** | ** ** | **Value** | ** ** |
| Financial Assets:                                                           |       |                    |       |                       |       |   |   |   |   |
| Cash and cash  equivalents                                                  |       | $                       | 5,719      |                       | $          | 5,719 |   | $ | 2,516 |   | $ | 2,516 |   |
| Interest-bearing deposits  with banks                                       |       | 1,848                   |       | 1,848                      |       | 3,784 |   | 3,784 |   |
| Investment securities                                                       |       | 71,302                  |       | 71,302                     |       | 73,441 |   | 73,441 |   |
| Loans, net                                                                  |       | 55,263                  |       | 54,726                     |       | 49,560 |   | 49,230 |   |
| FHLB and FRB stocks                                                         |       | 1,113                   |       | 1,113                      |       | 1,131 |   | 1,131 |   |
| Interest receivable                                                         |       | 675                     |       | 675                        |       | 814 |   | 814 |   |
|                                                                        |       |                    |       |                       |       |   |   |   |   |
| Financial Liabilities:                                                      |       |                    |       |                       |       |   |   |   |   |
| Deposits, demand,  savings and money market                                 |       | $                       | 67,870     |                       | $          | 67,870 |   | $ | 64,772 |   | $ | 64,772 |   |
| Time deposits                                                               |       | 42,248                  |       | 42,575                     |       | 39,629 |   | 39,036 |   |
| Federal funds purchased  and securities sold under agreements to repurchase |       | 110                     |       | 110                        |       | 326 |   | 326 |   |
| Federal Home Loan Bank  advances                                            |       | 7,750                   |       | 8,051                      |       | 8,750 |   | 8,508 |   |
| Interest payable                                                            |       | 83                      |       | 83                         |       | 82 |   | 82 |   |

 

**NOTE 12 — SUBSEQUENT EVENTS**

 

TheCompany has considered subsequent events through the date of issuance of thisReport on Form 10-Q, and has determined that no additional disclosure isnecessary.

 

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# **ITEM 2. MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Thefollowing discussion and analysis presents the Company’s consolidated financialcondition as of March 31, 2010 and results of operations for the threemonths ended March 31, 2010 and 2009. The discussion should be read in conjunction with the financialstatements and the notes related thereto which appear elsewhere in thisQuarterly Report on Form 10-Q.

 

**Executive Overview**

 

We are a Delaware corporation that wasincorporated on January 12, 2006 to organize and serve as the holdingcompany for Solera National Bank, a national bank that opened for business on September 10,2007.  Solera National Bank is afull-service commercial bank headquartered in Lakewood, Colorado serving theDenver metropolitan area.  Our mainbanking office is located at 319 S. Sheridan Blvd., Lakewood, Colorado80226.  Our telephone number is (303)209-8600.

 

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

 

We offer a broad range ofcommercial and consumer banking services to small and medium-sized businesses,licensed professionals and individuals who are particularly responsive to thepersonalized service that Solera National Bank provides to its customers.  We believe that local ownership and controlallows the Bank to serve customers more efficiently and effectively.  Solera National Bank competes on the basis ofproviding a unique and personalized banking experience combined with a fullrange of services, customized and tailored to fit the individual needs of itsclients.  Solera National Bank serves theentire market area and, in addition, has a special niche focus on the localHispanic population due to the significant growth of this demographic.  Since opening the bank in September of2007, management has successfully executed its strategy of delivering prudentand controlled growth to efficiently leverage the Company’s capital and expensebase with the goal of achieving sustained profitability.  During the firstquarter of 2010, the Company delivered its first profitable quarter.

 

**IndustryOverview**

 

Statements made by theChairman of the Federal Reserve indicated that the recession ended and arecovery in economic activity appeared in the second half of 2009. However, there continues to be weakness in both residential and nonresidentialconstruction that will continue to hamper economic recovery.  Theimprovement in short-term credit markets has led the Federal Reserve toeliminate most of the liquidity programs that were put in place to stabilizethe financial markets.  The unemployment rate has remained high, climbingto 9.9% in April from 9.7% in March.  Bank failures have continued toweigh on the industry and have increased assessment rates for all banks. During 2009, 140 banks failed and went into receivership with the FDIC. The FDIC’s “problem list” stood at 702 at the end of 2009, up from 252 at theend of 2008.  Between January and May 7, 2010, another 68 bankshave gone into receivership.

 

In the fourth quarter of2009, FDIC insured commercial banks reported a combined net income of $914million.  While the annualized net charge-off rate for the industry set arecord high at 2.89%, the quarterly provision for loan losses declinedyear-over-year for the first time since the third quarter of 2006.  Theoverall financial condition of the industry continued to strengthen as both capitaland deposit balances grew in the quarter.  However, despite theimprovement in financial condition, loan balances have continued to decline forthe industry due to write-downs and more conservative lending policies.

 

****Comparative Results ofOperations for the Three Months Ended March 31, 2010 and 2009****

 

Thefollowing discussion focuses on the Company’s financial condition and resultsof operations for the three months ended March 31, 2010 compared to thefinancial condition and results of operations for the three months ended March 31,2009.

 

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Net income for the quarterended March 31, 2010 was $103,000, or $0.04 per share, compared with a$482,000 loss, or ($0.19) per share for the first quarter of 2009.  Theprofitable results of the first quarter 2010 were primarily the result ofincreases in interest-earning assets combined with a widening of our net interestmargin and increased gains on the sale of investment securities.  Noninterest expenses were relativelyunchanged despite the growth of the Company.

 

As of March 31, 2010, the Company had totalassets of $137.5 million, an increase of $4.7 million, or 4%, from December 31,2009.  Net loans increased $5.7 million,or 12%, from $49.6 million at December 31, 2009 to $55.3 million at March 31,2010.  Similarly, the Company’s totaldeposits grew $5.7 million, or 5%, from $104.4 million at December 31,2009 to $110.1 million as of March 31, 2010.  This growth was achieved as a result of aneffective business development program.

 

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

 

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****Table 1****

 
| ** **                                                                  | ** ** | **Three Months Ended********March 31, 2010** | ** ** | **Three Months Ended********March 31, 2009** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| **($ in  thousands)**                                                  | ** ** | **Average  Balance**                              | ** ** | **Interest**                                      | ** ** | **Yield  /  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield  /  Cost** | ** ** |
| **Assets:**                                                                 |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                   |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Gross  loans, net of unearned fees                                          |       | $                                                 | 51,450     |                                              | $          | 726 |   | 5.72 | % | $ | 24,599 |   | $ | 314 |   | 5.17 | % |
| Investment  securities**                                                    |       | 73,306                                            |       | 829                                               |       | 4.59 | % | 46,192 |   | 598 |   | 5.25 | % |
| FHLB  and FRB stocks                                                        |       | 1,124                                             |       | 12                                                |       | 4.25 | % | 1,073 |   | 10 |   | 3.81 | % |
| Federal  funds sold                                                         |       | 1,966                                             |       | 1                                                 |       | 0.21 | % | 1,424 |   | 1 |   | 0.28 | % |
| Interest-bearing  deposits with banks                                       |       | 2,462                                             |       | 5                                                 |       | 0.82 | % | — |   | — |   | — | % |
| Total  interest-earning assets                                              |       | 130,308                                           |       | $                                                 | 1,573      |   | 4.90 | % | 73,288 |   | $ | 923 |   | 5.11 | % |
| Noninterest-earning  assets                                                 |       | 3,226                                             |       |                                              |       |   |   | 2,101 |   |   |   |   |   |
| Total  assets                                                               |       | $                                                 | 133,534    |                                              |       |   |   |   | $ | 75,389 |   |   |   |   |   |
|                                                                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| **Liabilities and Stockholders’ Equity:**                              |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                              |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Money  market and savings deposits                                          |       | $                                                 | 56,143     |                                              | $          | 262 |   | 1.89 | % | $ | 6,928 |   | $ | 39 |   | 2.29 | % |
| Interest-bearing  checking                                                  |       | 6,110                                             |       | 27                                                |       | 1.80 | % | 3,329 |   | 12 |   | 1.49 | % |
| Time  deposits                                                              |       | 40,548                                            |       | 229                                               |       | 2.29 | % | 31,971 |   | 243 |   | 3.08 | % |
| Federal  funds purchased and securities sold under agreements to repurchase |       | 371                                               |       | 2                                                 |       | 1.78 | % | 913 |   | 3 |   | 1.42 | % |
| Federal  Home Loan Bank advances                                            |       | 8,583                                             |       | 76                                                |       | 3.61 | % | 10,000 |   | 92 |   | 3.74 | % |
| Other  borrowings                                                           |       | 114                                               |       | 3                                                 |       | 9.48 | % | 153 |   | 4 |   | 9.47 | % |
| Total  interest-bearing liabilities                                         |       | 111,869                                           |       | $                                                 | 599        |   | 2.17 | % | 53,294 |   | $ | 393 |   | 2.99 | % |
| Noninterest-bearing  checking accounts                                      |       | 2,316                                             |       |                                              |       |   |   | 2,768 |   |   |   |   |   |
| Noninterest-bearing  liabilities                                            |       | 168                                               |       |                                              |       |   |   | 363 |   |   |   |   |   |
| Stockholders’  equity                                                  |       | 19,181                                            |       |                                              |       |   |   | 18,964 |   |   |   |   |   |
| Total  liabilities and stockholders’ equity                            |       | $                                                 | 133,534    |                                              |       |   |   |   | $ | 75,389 |   |   |   |   |   |
|                                                                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Net  interest income                                                        |       |                                              |       | $                                                 | 974        |   |   |   |   |   | $ | 530 |   |   |   |
|                                                                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Net  interest spread                                                        |       |                                              |       | 2.73                                              | %          |   |   |   |   | 2.12 | % |   |   |
|                                                                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Net  interest margin                                                        |       |                                              |       | 3.03                                              | %          |   |   |   |   | 2.93 | % |   |   |

 

----

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

 

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**Thefollowing table presents the dollar amount of changes in interest income andinterest expense for the major categories of interest-earning assets andinterest-bearing liabilities.  The informationdetails the changes attributable to a change in volume (i.e. change in averagebalance 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.**

 

****Table 2****

 
| ** **                                                                  | ** ** | **Three  Months Ended March 31, 2010 Compared to Three  Months Ended March 31, 2009** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| **($ in  thousands)**                                                  | ** ** | **Net  Change**                                                                                 | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| **Interest  income:**                                                       |       |                                                                                            |       |   |   |   |   |
| Gross loans, net  of unearned fees                                          |       | $                                                                                               | 412        |   | $ | 37 |   | $ | 375 |   |
| Investment  securities                                                      |       | 231                                                                                             |       | (64 | ) | 295 |   |
| FHLB and FRB  stocks                                                        |       | 2                                                                                               |       | 1 |   | 1 |   |
| Federal funds  sold                                                         |       | —                                                                                          |       | — |   | — |   |
| Interest-bearing  deposits with banks                                       |       | 5                                                                                               |       | — |   | 5 |   |
| Total interest  income                                                      |       | $                                                                                               | 650        |   | $ | (26 | ) | $ | 676 |   |
|                                                                        |       |                                                                                            |       |   |   |   |   |
| **Interest  expense:**                                                      |       |                                                                                            |       |   |   |   |   |
| Money market and  savings deposits                                          |       | $                                                                                               | 223        |   | $ | (6 | ) | $ | 229 |   |
| Interest-bearing  checking                                                  |       | 15                                                                                              |       | 3 |   | 12 |   |
| Time deposits                                                               |       | (14                                                                                             | )          | (252 | ) | 238 |   |
| Federal funds  purchased and securities sold under agreements to repurchase |       | (1                                                                                              | )          | 4 |   | (5 | ) |
| Federal Home  Loan Bank advances                                            |       | (16                                                                                             | )          | (3 | ) | (13 | ) |
| Other borrowings                                                            |       | (1                                                                                              | )          | — |   | (1 | ) |
| Total interest  expense                                                     |       | $                                                                                               | 206        |   | $ | (254 | ) | $ | 460 |   |
|                                                                        |       |                                                                                            |       |   |   |   |   |
| **Net  interest income**                                                    |       | $                                                                                               | 444        |   | $ | 228 |   | $ | 216 |   |

 

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

 

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

 

The Federal Reserve Boardinfluences the general market rates of short-term interest, including thedeposit and loan rates offered by the Bank. The Bank’s loan portfolio issignificantly affected by changes in the prime interest rate.  The prime interest rate, which is the rateoffered on loans to borrowers with strong credit, has remained unchangedthroughout 2009 and thus far in 2010 at 3.25%. As such, rates on our loanportfolio have remained relatively constant year over year.

 

The federal funds rate,which is the cost of immediately available, overnight funds, has behaved in asimilar manner averaging 16 basis points during 2009 and 13 basis points duringthe first quarter of 2010.

 

The 10 basis point increase in the Company’s net interest margin is dueto a significant decrease in the cost of interest-bearing liabilities partiallyoffset by a decline in the yield of interest-earning assets.  As reflected in Table 1, although the investmentportfolio has experienced a decreasing average yield, dropping 66 basis pointsyear over 

 

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year, the loan portfolio increased 55 basis points due primarily toincreased volumes and a shift in the loan mix to more fixed-rate loans athigher interest rates.  The cost of timedeposits decreased 79 basis points year over year, primarily due to thematurity of many promotional-rate time deposits that were offered when the Bankwas in the first year of business that have rolled into time deposits priced atlower rates.  Additionally, the Companyhas lowered the rates offered on money market and savings accounts by 40 basispoints year over year.  It should benoted that a contributing factor to the decrease in the investment portfolio’saverage yield is the recent action taken by the Federal Home Loan MortgageCorporation to repurchase delinquent mortgages during the first quarter2010.  This resulted in significantlyhigher than normal pay downs on our agency mortgage backed securities whichrequired increased amortization of premiums on those securities, therebynegatively influencing the yield.

 

The Company’s balance sheet is marginally asset sensitive, meaning thatinterest-earning assets generally reprice more quickly than interest-bearingliabilities. Therefore, the Company could experience expansion in its netinterest margin during periods of rising interest rates.

 

Total interest income was$1.6 million for the first quarter 2010, consisting primarily of interest oninvestment securities of $829,000 and interest and fees on loans of$726,000.  This compared to totalinterest income of $923,000 for the first quarter of 2009, consisting primarilyof interest on investment securities of $598,000 and interest and fees on loansof $314,000.  Average loans, net ofunearned fees, increased $26.9 million, from $24.6 million at March 31,2009 to $51.5 million at March 31, 2010. Average investment securities increased $27.1 million from $46.2 millionat March 31, 2009 to $73.3 million at March 31, 2010.  These increases were primarily funded withincreased average deposits which grew $60.6 million from $42.2 million at March 31,2009 to $102.8 million at March 31, 2010.

 

Total interest expensewas $599,000 in the first quarter of 2010, an increase of $206,000 from$393,000 during the first quarter of 2009. As evident in Table 2 above, this increase was largely due to increasedvolumes, partially offset by lower rates on time deposits.  Overall, the interest rate on totalinterest-bearing liabilities decreased 82 basis points from 2.99% at March 31,2009 to 2.17% at March 31, 2010.

 

Net interest income was$974,000 in the first quarter 2010, an increase of $444,000, or 84%, from$530,000 in the first quarter of 2009. Our annualized net interest margin was 3.03% for the three months ended March 31,2010 compared to 2.93% for the three months ended March 31, 2009.

 

****Provisionfor Loan Losses****

 

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

 

During the first threemonths of 2010, our provision for loan losses was $115,000 reflecting thegrowth of our loan portfolio and the estimated probable losses inherent withinthe portfolio due to uncertainties in economic conditions.  There was one impaired loan at March 31,2010 for which a specific component of the allowance for loan lossesrepresented the estimated loss on that loan (see additional discussion belowunder *Financial Condition — Loan Portfolio*).  There were no loans charged-off during thisperiod.

 

****NoninterestIncome****

 

Noninterest income forthe quarter ended March 31, 2010 was $280,000, an increase of $130,000from $150,000 at March 31, 2009. The Company sold securities for net gains of $263,000 during the firstquarter 2010 compared to net gains of $77,000 during the first quarter of2009.  Service charges on depositsdecreased $52,000 from $69,000 during the first quarter 2009 to $17,000 duringthe first quarter 2010 due to the loss of a significant money-services-businesscustomer.  Sublease income also decreasedduring the first quarter 2010 from $4,000 during first quarter 2009 to $0 dueto a change in the rental agreement, from a flat fee to a revenue sharingagreement, for the office space within the Bank’s main office building that isleased to a third party.

 

****NoninterestExpense****

 

Our total noninterest expense was $1.0 million for the quarters ended March 31,2010 and 2009.  This consisted of adecrease in salaries and employee benefits of $68,000, or 11%, primarilyrelated to reduced incentive compensation 

 

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expense during the first quarter 2010 and increased salary expensedeferral related to deferred expenses on loan originations which directlycorrelates to the increased number of loans closed during the first quarter2010 compared to the first quarter 2009. Occupancy expense remained constant quarter-over-quarter increasing only$3,000 during the first quarter 2010. Professional fees increased $14,000, or 12%, quarter-over-quarter,primarily due to increased Compliance and Bank Secrecy Act consulting and legalfees, partially offset by reduced external audit fees.

 

Other general andadministrative expenses increased $42,000, or 23%, quarter-over-quarter, asdetailed in the following table:

 
| ** **                                 | ** ** | **Three Months Ended********March 31,** | ** ** | **Increase/** | ** ** |
|--------------------------------------------|------------|----------------------------------------------|------------|---------------|------------|
| **($ in  thousands)**                 | ** ** | **2010**                                     | ** ** | **2009**      | ** ** | **(Decrease)** | ** ** |
| Other general and administrative expenses: |       |                                         |       |          |       |   |   |
| Data processing                            |       | $                                            | 68         |          | $          | 66 |   | 2 |   |
| FDIC assessment                            |       | 42                                           |       | 16            |       | 26 |   |
| Other regulatory and reporting fees        |       | 26                                           |       | 18            |       | 8 |   |
| Marketing and promotions                   |       | 16                                           |       | 21            |       | (5 | ) |
| Telephone/communication                    |       | 11                                           |       | 11            |       | — |   |
| Dues and memberships                       |       | 11                                           |       | 10            |       | 1 |   |
| Travel and entertainment                   |       | 9                                            |       | 7             |       | 2 |   |
| Printing, stationery and supplies          |       | 8                                            |       | 7             |       | 1 |   |
| Franchise taxes                            |       | 7                                            |       | 2             |       | 5 |   |
| ATM processing fees                        |       | 6                                            |       | 4             |       | 2 |   |
| Insurance                                  |       | 6                                            |       | 5             |       | 1 |   |
| Postage and shipping                       |       | 5                                            |       | 6             |       | (1 | ) |
| Training and education                     |       | 2                                            |       | 2             |       | — |   |
| Miscellaneous                              |       | 6                                            |       | 6             |       | — |   |
| Total                                      |       | $                                            | 223        |          | $          | 181 |   | 42 |   |

 

The most significantchanges include an increase of $26,000 in Federal Deposit Insurance Corporation(FDIC) fees due to significant increases in average deposit volumes; an $8,000increase in other regulatory and reporting fees primarily due to increasedOffice of the Comptroller of the Currency (our primary regulator) assessmentsdue to our total asset growth; and increased franchise taxes also related toour growth; partially offset by decreased marketing costs as the Companyreduced some of its marketing expenditures.

 

****IncomeTaxes****

 

No federal or state taxexpense has been recorded for the quarters ended March 31, 2010 and 2009,based upon significant operating loss carry-forwards that can be used to offsetapproximately $3.5 million of taxable income. Since it is uncertain that the Company will remain profitable, thedeferred tax benefit accumulated to date has a full valuation allowance so thatthe net deferred tax benefit at March 31, 2010 is $0.

 

****Financial Condition****

 

Customer deposits, Federal Home Loan Bank advances,and proceeds from the initial public offering completed in 2007 were primarilyinvested in loans and investment securities, resulting in total assets as of March 31,2010 of $137.5 million.

 

As of March 31,2010, stockholders’ equity was $19.1 million, as a result of the initial publicoffering, partially offset by the inception-to-date net losses.

 

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

 

**At March 31,2010, the Bank had a total of $1.1 million invested in FHLB and Federal ReserveBank stocks carried at cost consisting of $477,000 in Federal Reserve Bankstock and $636,000 in FHLB stock.  Theseinvestments allow Solera National Bank to conduct business with theseentities.  As of March 31, 2010, theFederal Reserve Bank stock is yielding an average of 6.0% and the FHLB stock isyielding an average rate of 2.5%.**

 

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****InvestmentSecurities****

 

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

 

At March 31, 2010,Solera National Bank’s securities consisted of available-for-sale securities of$71.3 million.  The following tables setforth the estimated market values and approximate weighted average yields ofthe debt securities in the investment portfolio by contractual maturity at March 31,2010 and December 31, 2009:

 
| ** **                        | ** ** | **At  March 31, 2010** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **Within  One Year**        | ** ** | **After  One Year but  within Five Years** | ** ** | **After  Five Years  but within Ten  Years** | ** ** | **After  Ten Years** | ** ** |
| **($ in thousands)**         | ** ** | **Amount**                  | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| **Securities available-for-sale** |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.  government agencies         |       | $                           | —     |   | — | % | $ | 1,000 |   | 3.05 | % | $ | 3,938 |   | 3.67 | % | $ | 3,266 |   | 5.59 | % |
| Corporate                         |       | 1,020                       |       | 5.86 |   | 3,288 |   | 4.96 |   | 6,089 |   | 4.54 |   | — |   | — |   |
| State  and municipal              |       | —                      |       | — |   | 989 |   | 5.66 |   | 15,436 |   | 5.01 |   | 1,172 |   | 5.00 |   |
| Agency  MBS                       |       | —                      |       | — |   | — |   | — |   | 486 |   | 4.26 |   | 34,618 |   | 4.36 |   |
| **Total**                         |       | $                           | 1,020      |   | 5.86 | % | $ | 5,277 |   | 4.73 | % | $ | 25,949 |   | 4.68 | % | $ | 39,056 |   | 4.48 | % |

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

 

Asevidenced by the above tables, the weighted-average book yield decreased duringthe first quarter 2010 in nearly every category.  This was due partially to declines in marketrates, the sale of longer maturity state and municipal bonds to reduce pricerisk and partially due to the Federal Home Loan Mortgage Corporation’srepurchase of substantially all 120 days or more delinquent mortgage loans,which resulted in larger than normal principal pay downs on our agency mortgagebacked securities.  This caused increasedamortization on premiums associated with these securities, since the majorityof our agency mortgage-backed portfolio was purchased at a premium.  The sudden increase in amortization ofpremiums negatively impacted our investment yields.  Management anticipates this trend to carryinto the second quarter, as the repurchasing of delinquent mortgages by governmentagencies was not complete as of March 31, 2010.

 

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****LoanPortfolio****

 

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

 
| ** **                         | ** **                           | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------|--------------------------------------|--------------------------|------------|-----------------------------|------------|
| **($ in  thousands)**         | ** **                           | **Amount**               | ** ** | **% of  Total**             | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
| Real estate —  commercial     |                                 | $                        | 36,641     |                        | 65         | % | $ | 26,063 |   | 52 | % |
| Real estate —  residential    |                                 | 8,220                    |       | 15                          |       | 8,059 |   | 16 |   |
| Construction and  land development |                                 | 2,678                    |       | 5                           |       | 7,067 |   | 14 |   |
| Commercial and  industrial         |                                 | 8,209                    |       | 14                          |       | 8,324 |   | 16 |   |
| Consumer                           |                                 | 583                      |       | 1                           |       | 991 |   | 2 |   |
| Gross loans                        |                                 | 56,331                   |       | 100                         | %          | 50,504 |   | 100 | % |
| Less:                              | Deferred loan (fees) / expenses, net |                     | (123       | )                           |       |   | (114 | ) |   |   |
|                               | Allowance for loan losses            |                     | (945       | )                           |       |   | (830 | ) |   |   |
| Loans, net                         |                                 | $                        | 55,263     |                        |       |   | $ | 49,560 |   |   |   |

 

As of March 31,2010, net loans were $55.3 million, a $5.7 million, or 12%, increase from $49.6million at December 31, 2009.  Netloans as a percentage of total assets were 40% as of March 31, 2010,compared to 37% at December 31, 2009.

 

The real estate —commercial loan portfolio consists primarily of lines of credit or term loansto businesses that are secured by real estate. Our primary focus is on owner occupied commercial real estate, includingSBA 504 loans.  At March 31, 2010,there were $36.6 million commercial real estate loans in the loan portfolio, anincrease of 41%, or $10.6 million, from $26.1 million at December 31,2009.

 

The real estate —residential loan portfolio consists of residential second mortgage loans, homeequity loans and lines of credit and home improvement loans.  At March 31,2010, $8.2 million was outstanding for residential real estate loans, anincrease of 2% from $8.1 million outstanding at December 31, 2009.

 

The construction and landdevelopment loan portfolio is comprised of construction loans forowner-occupied construction and development loans for property beingconstructed and sold to third parties. At March 31, 2010, construction and land development loans totaled$2.7 million, a decrease of $4.4 million, or 62%, from $7.1 million at December 31,2009.

 

The commercial andindustrial loan portfolio consists of loans to businesses primarily for workingcapital lines of credit.  At March 31, 2010, commercial andindustrial loans totaled $8.2 million, a $115,000 decrease from $8.3 million atDecember 31, 2009.

 

The consumer and otherloan portfolio consists of personal lines of credit, loans to acquire personalassets such as automobiles and boats and overdraft protection balances for ourdeposit customers.  As of March 31,2010, there were $583,000 consumer and other loans in the loan portfolio, adecrease of $408,000 from December 31, 2009.

 

Loan concentrations areconsidered to exist when there are amounts loaned to a multiple number ofborrowers engaged in similar activities that would cause them to be similarlyimpacted by economic or other conditions. The Company’s loan portfolio generally consists of loans to borrowerswithin Colorado.  Although the Companyseeks to avoid concentrations of loans to a single industry or based upon asingle class of collateral, the Company’s loan portfolio consists primarily ofreal estate loans secured by real estate located in Colorado, making the valueof the portfolio more susceptible to declines in real estate values and otherchanges in economic conditions in Colorado. As the Bank’s loan portfolio continues to grow, the concentration to anysingle borrower diminishes.  As of March 31,2010, the Bank’s five largest loans represented approximately 18% of the totalloan portfolio compared to 20% of the total loan portfolio as of December 31,2009.  No single borrower can be approvedfor a loan over the Bank’s current legal lending limit of approximately $2.4million.  This regulatory requirementhelps to ensure the Bank’s exposure to one individual customer is limited.

 

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

 

The following tables set forth information at March 31,2010 and December 31, 2009, regarding the dollar amount of loans maturingin the Bank’s portfolio based on the contractual terms to maturity. The tablesdo not give effect to potential prepayments. Loans that have no stated scheduleof repayments or maturity are reported as due in one year or less.

 
| ** **                        | ** ** | **March 31, 2010** | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| **($ in thousands)**         | ** ** | **<1 Year**          | ** ** | **1 - 5 Years** | ** ** | **5 - 15  Years** | ** ** | **Over 15  Years** | ** ** | **Total Loans** | ** ** |
| Real estate — commercial     |       | $                       | 6,669      |   | $ | 10,842 |   | $ | 19,130 |   | $ | — |   | $ | 36,641 |   |
| Real estate — residential    |       | —                  |       | 442 |   | — |   | 7,778 |   | 8,220 |   |
| Construction and land development |       | 2,678                   |       | — |   | — |   | — |   | 2,678 |   |
| Commercial and industrial         |       | 3,248                   |       | 3,004 |   | 1,954 |   | 3 |   | 8,209 |   |
| Consumer                          |       | 9                       |       | 423 |   | — |   | 151 |   | 583 |   |
| Gross Loans Receivable            |       | $                       | 12,604     |   | $ | 14,711 |   | $ | 21,084 |   | $ | 7,932 |   | $ | 56,331 |   |

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

 

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

 

Nonperforming assetsconsist of loans and leases on nonaccrual status, loans 90 days or more pastdue and still accruing interest, loans that have been restructured resulting ina reduction or deferral of interest or principal, other real estate owned(OREO), and other repossessed assets. As of March 31, 2010, there was $1.0million in nonperforming assets, consisting of one loan.

 

The following tablesummarizes information regarding nonperforming assets:

 
| **($ in  thousands)**                                         | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Nonaccrual loans and leases                                        |       | $                        | 1,000      |                        | $          | — |   |
| Other impaired loans                                               |       | —                   |       | —                      |       |
| Total nonperforming loans                                          |       | $                        | 1,000      |                        | $          | — |   |
|                                                               |       |                     |       |                        |       |
| Impaired loans                                                     |       | $                        | 1,000      |                        | $          | — |   |
| Allocated allowance for loan losses to impaired  loans             |       | (185)                    |       | —                      |       |
| Net investment in impaired loans                                   |       | $                        | 815        |                        | —     |   |
| Accruing loans past due 90 days or more                            |       | —                   |       | 3                           |       |
| Loans past due 30-89 days                                          |       | $                        | 1,358      |                        | $          | 1,298 |   |
|                                                               |       |                     |       |                        |       |
| Loans charged-off                                                  |       | —                   |       | —                      |       |
| Recoveries                                                         |       | —                   |       | —                      |       |
| Net charge-offs                                                    |       | —                   |       | —                      |       |
| Allowance for loan losses                                          |       | $                        | 945        |                        | $          | 830 |   |
|                                                               |       |                     |       |                        |       |
| Allowance for loan losses to loans, net of  deferred fees/expenses |       | 1.68                     | %          | 1.64                        | %          |
| Allowance for loan losses to nonaccrual loans                      |       | 94.5                     | %          | NA                          |       |
| Allowance for loan losses to nonperforming loans                   |       | 94.5                     | %          | NA                          |       |
| Nonaccrual loans to loans, net of deferred  fees/expenses          |       | 1.78                     | %          | —                      | %          |
| Loans 30-89 days past due to loans, net of  deferred fees/expenses |       | 2.42                     | %          | 2.56                        | %          |

 

Federal regulationsrequire that each insured financial institution classify its assets on aregular basis. In addition, in connection with examinations of insuredinstitutions, federal examiners have authority to identify problem assets and,if appropriate, classify them. The Bank has established three classificationsfor potential problem assets: “substandard,” “doubtful” and “loss.” Loansclassified as “substandard” are those loans with well-defined weaknesses, suchthat future capacity to repay the loan has been negatively impacted.  Loans classified as “doubtful” are thoseloans that have characteristics similar to substandard loans, but theweaknesses have declined to the point where complete collection of theobligation from all sources is unlikely and a portion of the principal may becharged-off.  Although loans classifiedas substandard do not duplicate loans classified as doubtful, both substandardand doubtful loans may include some loans that are past due at least 90 days,are on nonaccrual status or have been restructured. Loans classified as “loss”are those loans that are in the process of being charged-off. At March 31,2010, Solera National Bank had substandard loans totaling $2.5 million, adoubtful loan totaling $1.0 million, and no loans classified as loss.  Of the $2.5 million in substandard loans,none of it was 30 days or more past due. As of December 31, 2009, the Bank had no loans classified asdoubtful or loss and had substandard loans totaling $3.8 million.  Of the $3.8 million of substandard loans,only $953,000 was 30 days or more past due.

 

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****Allowancefor Loan Losses****

 

Implicit in Solera National Bank’s lending activitiesis the fact that loan losses will be experienced and that the risk of loss willvary with the type of loan being made and the creditworthiness of the borrowerover the term of the loan. To reflect the currently perceived risk of lossassociated with the loan portfolio, additions are made to the allowance forloan losses in the form of direct charges against income to ensure that theallowance is available to absorb possible loan losses.  The Bank’s allowance for estimated loanlosses is based on a number of quantitative and qualitative factors.  Factors used to assess the adequacy of theallowance for loan losses are established based upon management’s assessment ofthe credit risk in the portfolio, historical loan loss, changes in the size,composition and concentrations of the loan portfolio, general economicconditions, and changes in the legal and regulatory environment, amongothers.  In addition, because the Bankhas limited history on which to base future loan losses, a comparison of peergroup allowance 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 provided both on aspecific and general basis. Specific and general valuation allowances areincreased 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 amount of theallowance equals the cumulative total of the provisions made from time to time,reduced by loan charge-offs and increased by recoveries of loans previouslycharged-off.  The allowance was $945,000,or 1.68% of outstanding principal as of March 31, 2010 compared to$830,000, or 1.64% of outstanding principal as of December 31, 2009.

 

Credit and loan decisionsare made by management and the Board of Directors in conformity with loanpolicies established by the Board of Directors. Solera National Bank’s practiceis to charge-off any loan or portion of a loan when the loan is determined bymanagement to be uncollectible due to the borrower’s failure to meet repaymentterms, the borrower’s deteriorating or deteriorated financial condition, thedepreciation of the underlying collateral, the loan’s classification as a lossby regulatory examiners, or other reasons. During the three months ended March 31,2010 and 2009, there were no charge-offs.

 

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

 

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

 
| **($ in  thousands)**                                             | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Financial instruments whose contractual amounts represent credit risk: |       |                     |       |                        |       |
| Commitments to extend credit                                           |       | $                        | 8,571      |                        | $          | 7,182 |   |
| Letters of credit                                                      |       | —                   |       | —                      |       |
| Total commitments                                                      |       | $                        | 8,571      |                        | $          | 7,182 |   |

 

Commitments to extend credit are agreements to lend to a customer aslong as there is no violation of any condition established in thecontract.  Commitments generally havefixed expiration dates or other termination clauses and may require payment ofa fee.  Commitments also includerevolving lines of credit arrangements and unused commitments for commercial andreal estate secured loans.  Since many ofthe commitments are expected to expire without being drawn upon, thecommitments do not necessarily represent future cash requirements.

 

Lettersof credit are conditional commitments issued by the Company to guarantee theperformance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially thesame as that involved in extending loan facilities to customers and, therefore,the Company applies the same rigorous underwriting standards to letters ofcredit.

 

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

 

****Borrowings****

 

As of March 31, 2010, the Bank had $7.8 millionin borrowings from the Federal Home Loan Bank of Topeka (FHLB) with varyingmaturity dates between April 2010 and June 2013 and aweighted-average fixed interest rate of 3.97%.

 

The Bank has also established unsecured Federal Fundslines-of-credit totaling $11.7 million with various correspondent banks.  Additionally, the Bank has access to asecured Federal Funds line with Bankers Bank of the West.  As of March 31, 2010, the Company had noamounts outstanding on these lines.

 

****LoanCommitments****

 

At March 31, 2010,the Company had $8.6 million in outstanding loan origination commitments.  Management believes Solera National Bank hassufficient funds available to meet current origination and other lendingcommitments.

 

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

 

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

 

As of March 31, 2010, Solera National Bank was categorized aswell-capitalized. A well-capitalized institution must maintain a minimum ratioof total capital to risk-weighted assets of at least 10.0%, a minimum ratio ofTier 1 capital to risk-weighted assets of at least 6.0%, and a minimum ratio ofTier 1 capital to total average assets of at least 5.0% and must not be subjectto any written order, agreement, or directive requiring it to meet or maintaina specific capital level.

 

Thefollowing table summarizes the ratios of the Bank and the regulatory minimumcapital requirements at March 31, 2010:

 
| ****As  of March 31, 2010****        | **** **** | ****Actual**** | **** **** | ****For Capital Adequacy  Purposes**** | ** ** | ****To Be Well-Capitalized  Under Prompt Corrective  Action Provisions**** | ** ** |
|-------------------------------------------|----------------|----------------|----------------|----------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **($ in  thousands)**                | ** **     | **Amount**     | ** **     | **%**                                  | ** ** | **Amount**                                                                 | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Total  capital (to risk-weighted assets)  |           | $              | 16,140         |                                   | 19.3       | %                                                                          | $          | 6,680 |   | >8.0 | % | $ | 8,350 |   | >10.0 | % |
| Tier  1 capital (to risk-weighted assets) |           | $              | 15,195         |                                   | 18.2       | %                                                                          | $          | 3,340 |   | >4.0 | % | $ | 5,010 |   | >6.0 | % |
| Tier  1 capital (to average assets)       |           | $              | 15,195         |                                   | 11.4       | %                                                                          | $          | 5,352 |   | >4.0 | % | $ | 6,690 |   | >5.0 | % |

 

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****Liquidity****

 

The primary source ofliquidity for the Company will be dividends paid by Solera National Bank.  Solera National Bank is currently restrictedfrom paying dividends without regulatory approval that will not be granteduntil the accumulated deficit has been eliminated.

 

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

 

Solera National Bank’sprimary sources of funds are retail and commercial deposits, loan andsecurities repayments, other short-term borrowings, and other funds provided byoperations. While scheduled loan repayments and maturing investments arerelatively predictable, deposit flows and early loan prepayments are moreinfluenced by interest rates, general economic conditions, and competition.Solera National Bank will maintain investments in liquid assets based uponmanagement’s assessment of (1) the need for funds, (2) expecteddeposit flows, (3) yields available on short-term liquid assets, and (4) objectivesof the asset/liability management program.

 

As loan demand increases,greater pressure will be exerted on Solera National Bank’s liquidity. However,it is management’s intention to maintain a conservative loan to deposit ratioin the range of 80 - 90% over time. Given this goal, Solera National Bank willnot aggressively pursue lending opportunities if sufficient funding sources (**e.g.**,deposits, Federal Funds, etc.) are not available, nor will Solera National Bankseek to attract transient volatile, non-local deposits with above marketinterest rates. As of March 31, 2010, the loan to deposit ratio was 50% aslight increase from 48% at December 31, 2009.

 

Solera National Bank hadcash and cash equivalents of $5.7 million, or 4.2% of total Bank assets, at March 31,2010.  Management feels Solera NationalBank should have adequate liquidity to meet anticipated future funding needs.

 

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

 

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

## ** **

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

 

**Disclosure Controls andProcedures**

 

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

 

**Changes in Internal Control over FinancialReporting**

 

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

 

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# **PART II— OTHER INFORMATION**

 

# **ITEM 1. LEGAL PROCEEDINGS**

 

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 the 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 atleast five members to monitor and coordinate compliance with the Order withinfive (5) days;

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

·                  to revise, adopt, implement andthereafter ensure Bank adherence to a written program of policies andprocedures to provide for compliance with the BSA (“Risk-Based BSA Program”),within sixty (60) days;

·                  to determine within thirty (30) days,whether any changes 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 Programincludes:

 

·                  a comprehensive training program for allappropriate operational and supervisory personnel to ensure their awareness oftheir specific assigned responsibilities for compliance with the requirementsof the Bank Secrecy Act;

·                  policies and procedures for theappropriate identification and monitoring of transactions that pose greaterthan normal risk for elicit activity as required by BSA;

·                  policies and procedures to provide forthe Bank’s monitoring of suspicious cash, monetary instruments, wire transfers,and other activities for all types of transactions, accounts, customers,products, services, and geographic areas;

 

·                  to ensure the Risk-Based BSA Programmaintains policies and procedures for expanded account-opening procedures forall accounts that pose greater than normal risk for compliance with the BankSecrecy Act;

·                  to ensure that the BSA Program includespolicies and procedures for the maintenance of an integrated, accurate systemfor all Bank areas to produce periodic reports designed to identify unusual orsuspicious activity, including patterns of activity, to monitor and evaluateunusual or suspicious activity, and to maintain accurate information needed toproduce these reports, within ninety (90) days;

·                  to ensure the continuance of an externalBSA audit, that is independent, adequate in scope and frequency, and designedto ensure compliance with the BSA in all areas of the Bank;

·                  to prepare and submit to the OCC for aprior written determination of no supervisory objection, a program (includingpolicies and procedures) designed to ensure the Bank manages and controls therisk in its loan portfolio, 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 included as Exhibit 10.1to this Quarterly Report and incorporated herein by reference.

 

As of the date of thisQuarterly Report, the Company has made substantial progress addressing each ofthe articles within the Order.  Thecompliance committee, formed in response to the Order, has provided allrequired reports to the Board of Directors on the progress in attainingcompliance with each of the articles of the Order.  The Board of Directors has provided progressreports to the OCC as required. Accordingly, we are in full compliance with this Order and no furthermaterial developments have occurred since the Order.

# ** **

# **ITEM1A.  RISK FACTORS**

 

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

 

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

 

Notapplicable.

 

# **ITEM 3. DEFAULTS UPON SENIORSECURITIES**

 

Notapplicable.

 

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

 

 

# **ITEM 5. OTHER INFORMATION**

 

Notapplicable.

 

# **ITEM 6. EXHIBITS**

 
| 10.1 |   | 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 (incorporated by reference to  Exhibit 10.13 to the Company’s Form 10-K filed on March 19,  2010). |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 |   | Certification of the  Principal Executive Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act.*                                                                                                                                                                                                                    |
| 31.2 |   | Certification of the  Principal Accounting and Financial Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act.*                                                                                                                                                                                                     |
| 32.1 |   | Certification  pursuant to Rule 13a-14(b) of the Securities Exchange Act and 18  U.S.C. §1350.*                                                                                                                                                                                                                              |

 

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*Filed herewith.

 

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**SOLERA NATIONAL BANCORP, INC.**

** **

**SIGNATURES**

 

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

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

 

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# **EXHIBITINDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                  |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description  of Exhibit**                                                                                                                                                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                        |
| 10.1        |       | 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 (incorporated by reference to  Exhibit 10.13 to the Company’s Form 10-K filed on March 19,  2010). |
|        |       |                                                                                                                                                                                                                                                                                                                                        |
| 31.1        |       | Certification pursuant  to Rule 13a-14(a) of the Securities Exchange Act                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                        |
| 31.2        |       | Certification pursuant  to Rule 13a-14(a) of the Securities Exchange Act                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                        |
| 32.1        |       | Certification pursuant  to Rule 13a-14(b) of the Securities Exchange Act and 18 U.S.C.  §1350                                                                                                                                                                                                                                |

 

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