Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark one)**
| **x** | ** ** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended June 30, 2008**

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

 

**Commission file number 000-53181**

 

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**SOLERANATIONAL BANCORP, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

**319 S. Sheridan Blvd.**

**Lakewood, CO 80226**

**303-209-8600**

(Address andtelephone number of principal executive offices and principal place ofbusiness)

 

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  No ̈

 

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

Largeaccelerated filer     ̈                                 Acceleratedfiler    ̈

Non-acceleratedfiler       ̈                                 Smallerreporting company  x

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).

Yes ̈  No x

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the last practicabledate:  As of August 13, 2008,2,553,671 shares of the registrant’s common stock, $0.01 par value, were issuedand outstanding.

 

 

 

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**FORM 10-Q**

**SOLERA NATIONAL BANCORP, INC.**

 

**INDEX**

 
| ** **                                                                                               | ** ** | **PAGE** |
|----------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                     |       |     |
| **INTRODUCTORY NOTE**                                                                                    | ** ** | 3        |
|                                                                                                     |       |     |
| **PART I — FINANCIAL INFORMATION**                                                             | ** ** | 5        |
|                                                                                                     |       |     |
| **ITEM 1. FINANCIAL STATEMENTS**                                                                         | ** ** | 5        |
|                                                                                                     |       |     |
| **Balance  Sheets as of June 30, 2008 and December 31, 2007**                                  | ** ** | 5        |
|                                                                                                     |       |     |
| **Statements of Operations for  the Three and Six Months Ended June 30, 2008 and 2007**             | ** ** | 6        |
|                                                                                                     |       |     |
| **Statements  of Changes in Stockholders’ Equity for the Six Months Ended June 30,  2008**     | ** ** | 7        |
|                                                                                                     |       |     |
| **Statements  of Cash Flows for the Six Months Ended June 30, 2008 and 2007**                       | ** ** | 8        |
|                                                                                                     |       |     |
| **UNAUDITED  CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**                                      | ** ** | 9        |
|                                                                                                     |       |     |
| **ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS** | ** ** | 16       |
|                                                                                                     |       |     |
| **ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                  | ** ** | 23       |
|                                                                                                     |       |     |
| **ITEM 4(T).  CONTROLS AND PROCEDURES**                                                                  | ** ** | 23       |
|                                                                                                     |       |     |
| **PART II — OTHER  INFORMATION**                                                               | ** ** | 24       |
|                                                                                                     |       |     |
| **ITEM 1. LEGAL  PROCEEDINGS**                                                                           | ** ** | 24       |
|                                                                                                     |       |     |
| **ITEM 1A. RISK FACTORS**                                                                                | ** ** | 24       |
|                                                                                                     |       |     |
| **ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**                                 | ** ** | 24       |
|                                                                                                     |       |     |
| **ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**                                                             | ** ** | 24       |
|                                                                                                     |       |     |
| **ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                         | ** ** | 24       |
|                                                                                                     |       |     |
| **ITEM 5. OTHER  INFORMATION**                                                                           | ** ** | 25       |
|                                                                                                     |       |     |
| **ITEM 6. EXHIBITS**                                                                                     | ** ** | 25       |
|                                                                                                     |       |     |
| **SIGNATURES**                                                                                           | ** ** | 26       |
|                                                                                                     |       |     |
| **EXHIBIT INDEX**                                                                                        | ** ** | 27       |

 

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# **INTRODUCTORYNOTE**

#  

This Quarterly Report on Form 10-Q contains“forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995 about Solera National Bancorp, Inc. (the “Company”)and our subsidiary, Solera National Bank (the “Bank”) that are subject to risksand uncertainties.  Forward-looking statements include informationconcerning future financial performance, business strategy, projected plans andobjectives.  Statements preceded by, followed by or that otherwise includethe words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,”“may increase,” “may fluctuate” and similar expressions of future or conditionalverbs such as “will,” “should,” “would,” and “could” are generallyforward-looking in nature and not historical facts.  Actual results maydiffer materially from those projected, implied, anticipated or expected in theforward-looking statements.  Readers ofthis quarterly report should not rely solely on the forward-looking statementsand should consider all uncertainties and risks throughout this report. Thestatements are representative only as of the date they are made, and SoleraNational Bancorp, Inc. (sometimes referred to herein as on a consolidatedbasis as the Company, we, us, or similar phrasing) undertakes no obligation toupdate any forward-looking statement.

 

These forward-looking statements, implicitly andexplicitly, include the assumptions underlying the statements and otherinformation with respect to the Company’s beliefs, plans, objectives, goals,expectations, anticipations, estimates, financial condition, results ofoperations, future performance and business, including management’sexpectations and estimates with respect to revenues, expenses, return onequity, return on assets, efficiency ratio, asset quality and other financialdata and capital and performance ratios.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  theCompany is subject to extensive regulatory oversight, which could restrain ourgrowth and profitability;

 

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

 

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

 

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

 

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

 

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

 

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·                  governmentregulation may have an adverse effect on the Company’s profitability andgrowth;

 

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

 

·                  management’sability to manage these and other risks.

 

For a discussion of these and other risks anduncertainties that could cause actual results to differ from those contained inthe forward-looking statements, see “Risk Factors” in the Company’s 2007 AnnualReport filed on Form 10-KSB with the SEC, which is available on the SEC’swebsite at www.sec.gov.  All forward-looking statements are qualified intheir entirety by this cautionary statement, and the Company undertakes noobligation to revise or update this Quarterly Report on Form 10-Q toreflect events or circumstances after the date hereof.  New factors emerge from time to time, and itis not possible for us to predict which factors, if any, will arise.  In addition, the Company cannot assess the impactof each factor on the Company’s business or the extent to which any factor, orcombination of factors, may cause actual results to differ materially fromthose contained in any forward-looking statements.

 

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# **PART I— FINANCIAL INFORMATION**

#  

# **ITEM 1. FINANCIAL STATEMENTS**

#  

**Solera National Bancorp, Inc.**

 

**Balance Sheets as of June 30, 2008 and December 31,2007**

**(Unaudited)**

 
| ** **                                                                                                                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                             | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                                                                             |       |              |       |                  |       |
| Cash and due from banks                                                                                                                                |       | $                 | 934,411    |                  | $          | 336,126 |   |
| Federal funds sold                                                                                                                                     |       | 2,835,000         |       | 4,970,000             |       |
| Total cash and cash equivalents                                                                                                                        |       | 3,769,411         |       | 5,306,126             |       |
| Investment securities, available-for-sale                                                                                                              |       | 30,553,641        |       | 13,860,781            |       |
| Interest-bearing deposits with banks                                                                                                                   |       | 598,422           |       | —                |       |
| Loans                                                                                                                                                  |       | 11,519,437        |       | 3,814,842             |       |
| Allowance for loan losses                                                                                                                              |       | (134,500          | )          | (47,396               | )          |
| Net loans                                                                                                                                              |       | 11,384,937        |       | 3,767,446             |       |
| Federal Home Loan Bank (FHLB) and Federal  Reserve Bank stock                                                                                          |       | 995,150           |       | 525,000               |       |
| Premises and equipment, net                                                                                                                            |       | 910,436           |       | 946,681               |       |
| Interest receivable                                                                                                                                    |       | 255,307           |       | 100,257               |       |
| Subscriptions receivable                                                                                                                               |       | —            |       | 1,600,000             |       |
| Other assets                                                                                                                                           |       | 129,306           |       | 281,906               |       |
| **Total assets**                                                                                                                                       |       | $                 | 48,596,610 |                  | $          | 26,388,197 |   |
|                                                                                                                                                   |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                          |       |              |       |                  |       |
| Deposits                                                                                                                                               |       |              |       |                  |       |
| Noninterest-bearing demand                                                                                                                             |       | $                 | 511,849    |                  | $          | 147,407 |   |
| Interest-bearing demand                                                                                                                                |       | 5,319,135         |       | 315,373               |       |
| Savings and money market                                                                                                                               |       | 6,720,859         |       | 1,284,212             |       |
| Time deposits                                                                                                                                          |       | 5,884,576         |       | 3,252,388             |       |
| Total deposits                                                                                                                                         |       | 18,436,419        |       | 4,999,380             |       |
|                                                                                                                                                   |       |              |       |                  |       |
| Accrued interest payable                                                                                                                               |       | 29,497            |       | 16,773                |       |
| Accounts payable and other liabilities                                                                                                                 |       | 255,146           |       | 221,772               |       |
| Federal Home Loan Bank advances                                                                                                                        |       | 10,000,000        |       | —                |       |
| Deferred rent liability                                                                                                                                |       | 48,462            |       | 30,254                |       |
| Capital lease liability                                                                                                                                |       | 174,366           |       | 191,528               |       |
| Liability for abandoned lease                                                                                                                          |       | 72,831            |       | 79,155                |       |
|                                                                                                                                                   |       |              |       |                  |       |
| **Total liabilities**                                                                                                                                  |       | $                 | 29,016,721 |                  | $          | 5,538,862 |   |
|                                                                                                                                                   |       |              |       |                  |       |
| COMMITMENTS AND CONTINGENCIES (see Note 11)                                                                                                            |       |              |       |                  |       |
|                                                                                                                                                   |       |              |       |                  |       |
| STOCKHOLDERS’ EQUITY                                                                                                                              |       |              |       |                  |       |
| Common stock, $0.01 par value; 5,000,000  shares authorized; 2,553,671 shares issued and outstanding at June 30,  2008 and December 31, 2007 |       | $                 | 25,536     |                  | $          | 25,536 |   |
| Additional paid-in capital                                                                                                                             |       | 25,472,154        |       | 25,347,342            |       |
| Accumulated deficit                                                                                                                                    |       | (5,631,487        | )          | (4,525,955            | )          |
| Accumulated other comprehensive income  (loss)                                                                                                         |       | (286,314          | )          | 2,412                 |       |
| **Total stockholders’ equity**                                                                                                                    |       | $                 | 19,579,889 |                  | $          | 20,849,335 |   |
|                                                                                                                                                   |       |              |       |                  |       |
| **Total liabilities and stockholders’ equity**                                                                                                    |       | $                 | 48,596,610 |                  | $          | 26,388,197 |   |

 

See Notes to Financial Statements.

 

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**Solera National Bancorp, Inc.**

 

# **Statements of Operations for theThree and Six Months Ended June 30, 2008 and 2007**

**(Unaudited)**

 
| ** **                                                   | ** ** | **For the Three Months Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                                              | ** ** | **2007**                                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest income:                                             |       |                                                                  |       |                                                                |       |   |   |   |   |
| Interest and fees on loans                                   |       | $                                                                     | 141,440    |                                                                | $          | — |   | $ | 228,602 |   | $ | — |   |
| Interest on federal funds sold                               |       | 15,891                                                                |       | —                                                              |       | 53,066 |   | — |   |
| Interest on investment securities                            |       | 322,009                                                               |       | —                                                              |       | 552,811 |   | — |   |
| Other interest income                                        |       | 7,545                                                                 |       | 1,328                                                               |       | 13,457 |   | 1,328 |   |
| Dividends on FHLB and Federal Reserve Bank  stocks           |       | 10,402                                                                |       | —                                                              |       | 18,277 |   | — |   |
| Total interest income                                        |       | 497,287                                                               |       | 1,328                                                               |       | 866,213 |   | 1,328 |   |
| Interest expense:                                            |       |                                                                  |       |                                                                |       |   |   |   |   |
| Deposits                                                     |       | 98,854                                                                |       | —                                                              |       | 186,804 |   | — |   |
| Note payable                                                 |       | —                                                                |       | 42,884                                                              |       | — |   | 74,569 |   |
| Federal Home Loan Bank advances                              |       | 42,346                                                                |       | —                                                              |       | 42,346 |   | — |   |
| Federal funds purchased                                      |       | 82                                                                    |       | —                                                              |       | 82 |   | — |   |
| Other borrowings                                             |       | 4,197                                                                 |       | —                                                              |       | 8,593 |   | — |   |
| Total interest expense                                       |       | 145,479                                                               |       | 42,884                                                              |       | 237,825 |   | 74,569 |   |
|                                                         |       |                                                                  |       |                                                                |       |   |   |   |   |
| Net interest income (expense)                                |       | 351,808                                                               |       | (41,556                                                             | )          | 628,388 |   | (73,241 | ) |
|                                                         |       |                                                                  |       |                                                                |       |   |   |   |   |
| Provision for loan loss                                      |       | 50,038                                                                |       | —                                                              |       | 87,104 |   | — |   |
| Net interest income (expense) after provision  for loan loss |       | 301,770                                                               |       | (41,556                                                             | )          | 541,284 |   | (73,241 | ) |
|                                                         |       |                                                                  |       |                                                                |       |   |   |   |   |
| Noninterest income:                                          |       |                                                                  |       |                                                                |       |   |   |   |   |
| Service charges and fees                                     |       | 11,644                                                                |       | —                                                              |       | 17,254 |   | — |   |
| Sublease income                                              |       | 4,950                                                                 |       | —                                                              |       | 8,700 |   | — |   |
| Gain on sale of securities                                   |       | 5,644                                                                 |       | —                                                              |       | 45,264 |   | — |   |
| Total noninterest income                                     |       | 22,238                                                                |       | —                                                              |       | 71,218 |   | — |   |
| Noninterest expense:                                         |       |                                                                  |       |                                                                |       |   |   |   |   |
| Salaries and employee benefits                               |       | 481,050                                                               |       | —                                                              |       | 985,120 |   | — |   |
| Management fees                                              |       | —                                                                |       | 204,396                                                             |       | — |   | 406,312 |   |
| Occupancy                                                    |       | 113,114                                                               |       | 54,097                                                              |       | 230,881 |   | 108,583 |   |
| Professional fees                                            |       | 73,510                                                                |       | 29,200                                                              |       | 145,545 |   | 68,297 |   |
| Consulting fees                                              |       | —                                                                |       | 6,075                                                               |       | — |   | 42,700 |   |
| Other general and administrative                             |       | 189,276                                                               |       | 162,144                                                             |       | 356,488 |   | 236,728 |   |
| Total noninterest expense                                    |       | 856,950                                                               |       | 455,912                                                             |       | 1,718,034 |   | 862,620 |   |
|                                                         |       |                                                                  |       |                                                                |       |   |   |   |   |
| Income taxes                                                 |       | —                                                                |       | —                                                              |       | — |   | — |   |
|                                                         |       |                                                                  |       |                                                                |       |   |   |   |   |
| Net loss                                                     |       | $                                                                     | (532,942   | )                                                                   | $          | (497,468 | ) | $ | (1,105,532 | ) | $ | (935,861 | ) |
|                                                         |       |                                                                  |       |                                                                |       |   |   |   |   |
| Basic earnings (loss) per share                              |       | (0.21                                                                 | )          | NA                                                                  |       | (0.43 | ) | NA |   |
|                                                         |       |                                                                  |       |                                                                |       |   |   |   |   |
| Diluted earnings (loss) per share                            |       | (0.21                                                                 | )          | NA                                                                  |       | (0.43 | ) | NA |   |
|                                                         |       |                                                                  |       |                                                                |       |   |   |   |   |
| Weighted-average common shares                               |       |                                                                  |       |                                                                |       |   |   |   |   |
| Basic                                                        |       | 2,553,671                                                             |       | NA                                                                  |       | 2,553,671 |   | NA |   |
| Diluted                                                      |       | 2,553,671                                                             |       | NA                                                                  |       | 2,553,671 |   | NA |   |

 

See Notes to Financial Statements.

 

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**Solera National Bancorp, Inc.**

 

**Statements of Changes in Stockholders’ Equityfor the Six Months Ended June 30, 2008****(Unaudited)**

 
| ** **                                                                           | ** ** | ** **      | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **      | ** ** | **Accumulated  Other** | ** **     | ** ** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|----------------|------------|-----------------|------------|------------------------|----------------|------------|------------|
| ** **                                                                           | ** ** | **Shares**      | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Accumulated** | ** ** | **Comprehensive**      | ** **     | ** ** | ** ** |
| ** **                                                                           | ** ** | **Outstanding** | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Income (loss)**      | ** **     | **Total**  | ** ** |
|                                                                                 |       |            |       |       |       |           |       |            |       |                   |           |       |       |
| **Balance at December 31, 2007**                                                | ** ** | **2,553,671**   | ** ** | **$**      | **25,536** | ** **     | **$**      | **25,347,342**  | ** ** | **$**                  | **(4,525,955** | **)**      | **$**      | **2,412** | ** ** | **$** | **20,849,335** | ** ** |
| Comprehensive income (loss)                                                          | ** ** | ** **      | ** ** | ** ** | ** ** | ** **     | ** ** | ** **      | ** ** | ** **             | ** **     | ** ** | ** ** |
| Net loss                                                                             |       | —          |       | —     |       | —         |       | (1,105,532      | )          | —                 |           | (1,105,532 | )          |
| Net change in unrealized gains (losses) on  investment securities available-for-sale |       | —          |       | —     |       | —         |       | —          |       | (288,726               | )              | (288,726   | )          |
| Total comprehensive income (loss)                                                    |       | —          |       | —     |       | —         |       | (1,105,532      | )          | (288,726               | )              | (1,394,258 | )          |
| Stock-based compensation                                                             |       | —          |       | —     |       | 124,812        |       | —          |       | —                 |           | 124,812    |       |
| **Balance at June 30, 2008**                                                    | ** ** | **2,553,671**   | ** ** | **$**      | **25,536** | ** **     | **$**      | **25,472,154**  | ** ** | **$**                  | **(5,631,487** | **)**      | **$**      | **(286,314** | **)** | **$** | **19,579,889** | ** ** |

 

See Notes to Financial Statements.

 

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**Solera National Bancorp, Inc.**

 

# **Statements of Cash Flows for the SixMonths Ended June 30, 2008 and 2007**

**(Unaudited)**

 
| ** **                                                                             | ** ** | **For the Six  Months Ended June 30,** | ** **  |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|-------------|
| ** **                                                                             | ** ** | **2008**                                                                  | ** **  | **2007** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                   |       |                                                                      |        |   |   |
| Net (loss)                                                                             |       | $                                                                         | (1,105,532  | ) | $ | (935,861 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:           |       |                                                                      |        |   |   |
| Depreciation and amortization                                                          |       | 54,109                                                                    |        | 31,541 |   |
| Provision for loan losses                                                              |       | 87,104                                                                    |        | — |   |
| Net amortization of deferred loan  fees/expenses                                       |       | (653                                                                      | )           | — |   |
| Discount accretion on interest-bearing  deposits with banks                            |       | (11,796                                                                   | )           | — |   |
| Federal Home Loan Bank stock dividend                                                  |       | (2,500                                                                    | )           | — |   |
| Net amortization of premiums on investment  securities                                 |       | 26,983                                                                    |        | — |   |
| Gain on sale of investment securities                                                  |       | (45,264                                                                   | )           | — |   |
| Recognition of stock-based compensation on  stock options                              |       | 124,812                                                                   |        | — |   |
| Changes in operating assets and  liabilities:                                          |       |                                                                      |        |   |   |
| Interest receivable                                                                    |       | (155,050                                                                  | )           | — |   |
| Other assets                                                                           |       | 152,600                                                                   |        | 7,590 |   |
| Deferred offering costs                                                                |       | —                                                                    |        | (45,181 | ) |
| Accrued interest payable                                                               |       | 12,724                                                                    |        | (4,728 | ) |
| Accounts payable and other liabilities                                                 |       | 9,888                                                                     |        | 160,050 |   |
| Deferred rent liability                                                                |       | 18,208                                                                    |        | 3,761 |   |
| **Net cash used in operating activities**                                              |       | $                                                                         | (834,367    | ) | $ | (782,828 | ) |
|                                                                                   |       |                                                                      |        |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                   |       |                                                                      |        |   |   |
| Purchase of investment securities,  available-for-sale                                 |       | $                                                                         | (25,889,302 | ) | $ | — |   |
| Proceeds from sales of investment  securities, available-for-sale                      |       | 4,849,038                                                                 |        | — |   |
| Proceeds from maturities/calls/pay downs of  investment securities, available-for-sale |       | 4,076,959                                                                 |        | — |   |
| Issuance of loans, net of paydowns                                                     |       | (7,703,942                                                                | )           | — |   |
| Purchase of premises and equipment                                                     |       | (17,864                                                                   | )           | (642,142 | ) |
| Purchase of Federal Home Loan Bank stock                                               |       | (500,000                                                                  | )           | — |   |
| Proceeds from redemption of Federal Reserve  Bank stock                                |       | 32,350                                                                    |        | — |   |
| Proceeds from maturity of interest-bearing  deposits with banks                        |       | 100,000                                                                   |        | — |   |
| Purchase of interest-bearing deposits with  banks                                      |       | (686,626                                                                  | )           | — |   |
| **Net cash used in investing activities**                                              |       | $                                                                         | (25,739,387 | ) | $ | (642,142 | ) |
|                                                                                   |       |                                                                      |        |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                   |       |                                                                      |        |   |   |
| Net change in deposits                                                                 |       | $                                                                         | 13,437,039  |   | $ | — |   |
| Advances from Organizers                                                               |       | —                                                                    |        | 450,000 |   |
| Proceeds from Federal Home Loan Bank advances                                          |       | 10,000,000                                                                |        | — |   |
| Proceeds from note payable                                                             |       | —                                                                    |        | 987,890 |   |
| Proceeds from subscriptions receivable                                                 |       | 1,600,000                                                                 |        | — |   |
| **Net cash provided by financing activities**                                          |       | $                                                                         | 25,037,039  |   | $ | 1,437,890 |   |
|                                                                                   |       |                                                                      |        |   |   |
| **Net (decrease)/increase in cash and cash  equivalents**                              |       | $                                                                         | (1,536,715  | ) | $ | 12,920 |   |
|                                                                                   |       |                                                                      |        |   |   |
| CASH AND CASH EQUIVALENTS                                                              |       |                                                                      |        |   |   |
| Beginning of period                                                                    |       | 5,306,126                                                                 |        | 6,978 |   |
| End of period                                                                          |       | $                                                                         | 3,769,411   |   | $ | 19,898 |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION                                      |       |                                                                      |        |   |   |
| Cash paid during the period for:                                                       |       |                                                                      |        |   |   |
| Interest                                                                               |       | $                                                                         | 225,101     |   | $ | — |   |
| Assets acquired under capital leases                                                   |       | $                                                                         | —      |   | $ | 192,350 |   |
| Non-cash investing transactions:                                                       |       |                                                                      |        |   |   |
| Unrealized loss on investment securities  available-for-sale                           |       | $                                                                         | (288,726    | ) | $ | — |   |

 

See Notes to Financial Statements.

 

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**SOLERA NATIONAL BANCORP, INC.**

 

# **UNAUDITED CONDENSED NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

#  

**NOTE 1 — SUMMARY OF ORGANIZATION**

 

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

 

**NOTE 2 — BASIS OF PRESENTATION**

 

The accompanying unaudited condensedconsolidated financial statements contain all adjustments (consisting only ofnormal recurring adjustments) which, in the opinion of management, arenecessary to present fairly the financial position of the Company as of June 30,2008, and the results of its operations for the three and six months ended June 30,2008 and 2007.  Cash flows are presentedfor the six months ended June 30, 2008 and 2007.  Certainreclassifications have been made to the consolidated financial statements andrelated notes of prior periods to conform to the current presentation. Thesereclassifications had no impact on stockholders’ equity or net loss for theperiods. Additionally, certain information and footnote disclosures normallyincluded in financial 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-KSB as of andfor the year ended December 31, 2007.

 

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

 

**CriticalAccounting Policies**

 

Income taxes:  Deferred taxes are provided on a liabilitymethod whereby deferred tax assets are recognized for deductible temporarydifferences and operating loss carryforwards, and deferred tax liabilities arerecognized for taxable temporary differences. Temporary differences are the differences between the reported amountsof assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in theopinion of management, it is more likely than not that some portion or all ofthe deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects ofchanges in tax laws and rates on the date of the enactment.

 

Securities available-for-sale:  Securities available-for-sale are reported atfair value utilizing Level 2 inputs.  Forthese securities, the Company obtains fair value measurements from independentpricing services.  The fair valuemeasurements consider observable data that may include dealer quotes, marketspreads, cash flows, the U.S. Treasury yield curve, live trading levels, tradeexecution data, market consensus prepayment speeds, credit information and thebonds’ terms and conditions, among other things.

 

Stock-based compensation:  TheCompany accounts for stock-based compensation to employees as outlined in FASBStatement No. 123(R), *Share-BasedPayment*, (SFAS 123R). The cost of employee services received in exchange for an award of equityinstruments is based on the grant-date fair value of the award.

 

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

 

The Company hasestablished a formal process for determining an adequate allowance for loanlosses.  The allowance for loan lossescalculation process has two components. The first component represents the allowance for loan losses forimpaired loans computed in accordance with FASB Statement No. 114, *Accounting by Creditors for Impairment of a Loan*(SFAS 114 Component), as amended by FASB Statement No. 118, *Accounting by Creditors for Impairment of a Loan —Income Recognition and Disclosures - an amendment of FASB Statement No. 114*.  To determine the SFAS 114 Component,collateral dependent impaired loans are evaluated using internal analyses aswell as third-party information, such as appraisals.  If an impaired loan is unsecured, it isevaluated using a discounted cash flow of the payments expected over the lifeof the loan using the loan’s effective interest rate and giving considerationto currently existing factors that would impact the amount or timing of thecash flows.  The second component is theallowance for loan losses calculated under FASB Statement No. 5, *Accounting for Contingencies* (SFAS 5 Component),and represents the estimated probable losses inherent within the portfolio dueto uncertainties in economic conditions, delays in obtaining information abouta borrower’s financial condition, delinquent loans that have not beendetermined to be impaired, trends in speculative construction real estatelending, results of internal and external loan reviews, and other factors.  This component of the allowance for loanlosses is calculated by assigning a certain risk weighting, within apredetermined range, to each identified risk factor.  The recorded allowance for loan losses is theaggregate of the SFAS 114 Component and SFAS 5 Component.

 

*RecentlyIssued Accounting Pronouncements*

 

In May 2008, the FASB issuedFinancial Accounting Standard No. 162, *The Hierarchy of GenerallyAccepted Accounting Principles, (“SFAS 162”)*. SFAS 162 identifiesthe sources of accounting principles and the framework for selecting thehierarchy of principles to be used in the preparation of financial statementsthat are presented in conformity with GAAP in the United States. Thehierarchical guidance provided by SFAS 162 did not have a significant impact onthe Company’s financial statements.

 

**NOTE 3 — INVESTMENTS**

 

The amortized costs and fairvalues of investment securities as of June 30, 2008 are as follows:

 
| ** **                              | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **          | ** ** |
|-----------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------------|------------|
| ** **                              | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated**       | ** ** |
| ** **                              | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| **Securities available-for-sale:**      |       |          |       |           |       |           |       |                |       |
| U.S. government agencies                |       | $             | 4,223,122  |           | $          | 1,044          |       | $                   | (63,381    | ) | $ | 4,160,785 |   |
| State and municipal                     |       | 1,120,227     |       | —         |       | (60,582        | )          | 1,059,645           |       |
| Mortgage-backed securities              |       | 25,496,606    |       | 32,685         |       | (196,080       | )          | 25,333,211          |       |
| **Total securities available-for-sale** |       | $             | 30,839,955 |           | $          | 33,729         |       | $                   | (320,043   | ) | $ | 30,553,641 |   |

 

Management evaluatesinvestment securities for other-than-temporary impairment taking intoconsideration the extent and length of time the fair value has been less thancost, the financial condition of the issuer and whether the Company has theintent and ability to retain the investment for a period of time sufficient toallow for any anticipated recovery in fair value.  All of the Bank’s investment securities werepurchased during either the fourth quarter of 2007 or the first six months of2008, therefore, no securities have been in a continuous loss position for overtwelve months.  As of June 30, 2008,no declines in value are deemed to be other than temporary.

 

As a consequence of higherlong-term interest rates due to wider spreads, increased volatility and a shiftin Federal Reserve sentiment, the Company recorded a net unrealized loss in theinvestment portfolio of $286,000 at June 30, 2008.  Management continued to build the Company’sinvestment portfolio which increased $16.9 million, or 122%, from an amortizedcost of $13.9 million at December 31, 2007 to an amortized cost of $30.8million at June 30, 2008.

 

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The Company sold sixsecurities during the first quarter 2008 for a realized gain of $39,620 and theCompany sold five securities during the second quarter 2008 for a net realizedgain of $5,644.

 

Securities with carryingvalues of $3.7 million at June 30, 2008 and $495,000 at December 31,2007, were pledged as collateral to secure public deposits.  Securities with carrying values of $892,000and $0 were pledged to secure a line-of-credit with the Bankers Bank of theWest at June 30, 2008 and December 31, 2007, respectively.  Securities with carrying values of $13.9million and $0 were pledged to secure Federal Home Loan Bank advances at June 30,2008 and December 31, 2007, respectively.

 

**NOTE 4 — INTEREST-BEARINGDEPOSITS WITH BANKS**

 

During the firstquarter 2008, the Company invested approximately $700,000 in FDIC-insuredcertificates of deposit that earn a weighted-average yield of 4.13% and maturebetween June and September 2008. During the second quarter 2008, $100,000 of such deposits matured.

 

**NOTE 5 — LOANS**

 

Loans consist of thefollowing:

 
| ** **                        | ** **                           | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------|--------------------------------------|-----------------------------|------------|---------------------------------|------------|
| Real estate – commercial     |                                 | $                           | 5,324,162  |                            | $          | 3,003,274 |   |
| Construction and land development |                                 | 2,904,619                   |       | 399,732                         |       |
| Commercial and industrial         |                                 | 1,018,414                   |       | 188,684                         |       |
| Real estate – residential    |                                 | 2,045,911                   |       | 190,557                         |       |
| Consumer                          |                                 | 249,449                     |       | 29,407                          |       |
| Gross loans                       |                                 | 11,542,555                  |       | 3,811,654                       |       |
| Less:                             | Allowance for loan losses            |                        | (134,500   | )                               | (47,396    | ) |
|                              | Deferred loan fees and expenses, net |                        | (23,118    | )                               | 3,188      |   |
| Loans, net                        |                                 | $                           | 11,384,937 |                            | $          | 3,767,446 |   |

 

Duringthe first six months of 2008, no loans were impaired, transferred to foreclosedproperties or past due.

 

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

 

The following table details loansreceivable from related parties as of June 30, 2008:

 

| ** **                      | ** ** | **2008** | ** ** |
|---------------------------------|------------|----------|------------|
|                            |       |     |       |
| Balance at January 1, 2008 |       | $        | —     |   |
| New loans                       |       | 811,000  |       |
| Payments                        |       | 6,733    |       |
| Balance at June 30, 2008   |       | $        | 804,267    |   |

 

There were no loansreceivable from related parties at December 31, 2007.

 

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**NOTE 6 — ALLOWANCE FOR LOANLOSSES**

 

Activityin the allowance is summarized as follows:

 
| ** **                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
|                                       |       |     |       |     |       |
| Allowance at January 1,               |       | $        | 47,396     |     | $          | — |   |
| Loans charged off                          |       | —   |       | —   |       |
| Recoveries on loans previously charged off |       | —   |       | —   |       |
| Provision for loan losses                  |       | 87,104   |       | —   |       |
| Allowance at June 30,                 |       | $        | 134,500    |     | $          | — |   |

 

**NOTE 7 — DEPOSITS**

 

Deposits aresummarized as follows:

 
| ** **                                       | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **Amount**                  | ** ** | **% of  Total**            | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
| Noninterest-bearing demand                       |       | $                           | 511,849    |                            | 3          | % | $ | 147,407 |   | 3 | % |
| Interest-bearing demand                          |       | 5,319,135                   |       | 29                              |       | 315,373 |   | 6 |   |
| Money market accounts                            |       | 6,600,700                   |       | 36                              |       | 1,271,665 |   | 26 |   |
| Savings accounts                                 |       | 120,159                     |       | —                          |       | 12,547 |   | — |   |
| Certificates of deposits, less than  $100,000    |       | 1,598,778                   |       | 9                               |       | 352,388 |   | 7 |   |
| Certificates of deposits, greater than  $100,000 |       | 4,285,798                   |       | 23                              |       | 2,900,000 |   | 58 |   |
| Total deposits                                   |       | $                           | 18,436,419 |                            | 100        | % | $ | 4,999,380 |   | 100 | % |

 

Inthe ordinary course of business, certain officers, directors, stockholders, andemployees of the Bank have deposits with the Bank.  In the Bank’s opinion, all depositrelationships with such parties are made on substantially the same termsincluding interest rates and maturities, as those prevailing at the time forcomparable transactions with other persons. The balance of related party deposits at June 30, 2008 and December 31,2007 was approximately $2.5 million and $2.1 million, respectively.

 

**NOTE 8 — STOCK-BASEDCOMPENSATION**

 

The Company’s 2007 StockIncentive Plan (the “Plan”) was approved by the Company’s Board of Directors(the “Board”) with an effective date of September 10, 2007 and wasapproved by the Company’s stockholders at the annual meeting held on June 17,2008.  Under the terms of the Plan,officers and key employees may be granted both nonqualified and incentive stockoptions and directors and other consultants, who are not also officers oremployees, may only be granted nonqualified stock options. The Board reserved 510,734shares of 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 $62,000 and $125,000 during the three andsix months ended June 30, 2008, respectively.  The Company recognized stock-basedcompensation cost of $0 during both the three and six months ended June 30,2007.  No tax benefit related tostock-based compensation will be recognized until the Company is profitable.

 

The Company accounts for itsstock-based compensation under the provisions of SFAS 123R.  The fair value of each option grant isestimated on the date of grant using the Black-Scholes-Merton option pricingmodel.  No options were granted duringthe first quarter 2008 and 1,250 options were granted during the second quarter2008.  No options were granted during thesix months ended June 30, 2007.

 

No options were exercised orvested and 500 options were forfeited during the six months ended June 30,2008.  During this same period, theCompany recognized expense for approximately 49,000 options, representing apro-rata amount of the options that will vest at the end of year one.  As of June 30, 2008, there wasapproximately $807,000 

 

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of total unrecognizedcompensation cost related to the outstanding stock options that will be recognizedover a weighted-average period of 3.23 years.

 

The following is a summaryof the Company’s non-vested options at June 30, 2008:

 

| ** **                         | ** ** | **Shares** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** |
|------------------------------------|------------|------------|------------|----------------------------------------------------------|------------|
| Non-vested at January 1, 2008 |       | 397,846    |       | $                                                        | 2.74       |   |
| Granted                            |       | 1,250      |       | 2.13                                                     |       |
| Vested                             |       | —     |       | —                                                   |       |
| Forfeited                          |       | (500       | )          | 2.75                                                     |       |
| Non-vested at June 30, 2008   |       | 398,596    |       | $                                                        | 2.73       |   |

 

**NOTE 9 — NONINTEREST EXPENSE**

 

The following tabledetails the items comprising Other general and administrative expenses:

 
| ** **                        | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Marketing and promotions          |       | $                                                   | 58,739     |                                              | $          | 64,500 |   | $ | 125,897 |   | $ | 72,129 |   |
| Data processing                   |       | 51,742                                              |       | 411                                               |       | 98,652 |   | 430 |   |
| Printing, stationery and supplies |       | 23,462                                              |       | 26,324                                            |       | 32,898 |   | 46,225 |   |
| Regulatory and reporting fees     |       | 15,548                                              |       | 881                                               |       | 29,304 |   | 881 |   |
| Travel and entertainment          |       | 8,040                                               |       | 13,837                                            |       | 12,682 |   | 23,304 |   |
| Telephone/communication           |       | 6,104                                               |       | 8,239                                             |       | 13,287 |   | 11,497 |   |
| Insurance                         |       | 4,373                                               |       | 2,065                                             |       | 9,118 |   | 3,510 |   |
| Dues and memberships              |       | 2,961                                               |       | —                                            |       | 8,011 |   | — |   |
| Training and education            |       | 2,758                                               |       | —                                            |       | 5,243 |   | — |   |
| Postage and shipping              |       | 2,465                                               |       | 4,901                                             |       | 4,416 |   | 6,219 |   |
| Temporary staffing                |       | —                                              |       | 33,294                                            |       | — |   | 63,987 |   |
| Miscellaneous                     |       | 13,084                                              |       | 7,692                                             |       | 16,980 |   | 8,546 |   |
| Total                             |       | $                                                   | 189,276    |                                              | $          | 162,144 |   | $ | 356,488 |   | $ | 236,728 |   |

 

**NOTE 10 — INCOME TAXES**

 

Deferred taxes are a result of differencesbetween income tax accounting and generally accepted accounting principles withrespect to income and expense recognition. The following is a summary of the components of the net deferred taxasset account recognized in the accompanying statements of financial condition:

 

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| ** **                            | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Deferred tax assets:                  |       |                        |       |                            |       |
| Start-up and organizational expenses  |       | $                           | 1,251,436  |                            | $          | 1,295,346 |   |
| Net operating loss carryforward       |       | 681,674                     |       | 283,720                         |       |
| Allowance for loan losses             |       | 20,480                      |       | 7,235                           |       |
| Other                                 |       | 80,636                      |       | 71,070                          |       |
| Total deferred tax assets             |       | 2,034,226                   |       | 1,657,371                       |       |
| Deferred liabilities:                 |       |                        |       |                            |       |
| Federal Home Loan Bank stock dividend |       | (926                        | )          | —                          |       |
| Tax over book depreciation            |       | (9,000                      | )          | (1,895                          | )          |
| Total deferred tax liabilities        |       | (9,926                      | )          | (1,895                          | )          |
|                                  |       |                        |       |                            |       |
| Net deferred tax assets               |       | 2,024,300                   |       | 1,655,476                       |       |
|                                  |       |                        |       |                            |       |
| Valuation allowance                   |       | (2,024,300                  | )          | (1,655,476                      | )          |
|                                  |       |                        |       |                            |       |
| Net deferred taxes                    |       | $                           | —     |                            | $          | — |   |

 

The Company has provided a 100% valuationallowance for its net deferred tax asset due to uncertainty of realizationduring the carryforward period.  TheCompany has net operating loss carryforwards of approximately $1.8 million forfederal income tax purposes.  Federal netoperating loss carry forwards, to the extent not used, will expire beginning in2027.

 

The income tax provision differsfrom the amount of income tax determined by applying the U.S. federal incometax rate of 35% to pretax income from continuing operations for the six monthsended June 30, 2008 and the twelve months ended December 31, 2007 dueto the following:

 

| ** **                                | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Computed “expected” tax benefit |       | $                           | (386,937   | )                               | $          | (851,948 | ) |
| Change in income taxes resulting from:    |       |                        |       |                            |       |
| Change in valuation allowance             |       | 368,824                     |       | 881,024                         |       |
| Other                                     |       | 18,113                      |       | (29,076                         | )          |
| Income tax provision                      |       | $                           | —     |                            | $          | — |   |

 

**NOTE 11 —****COMMITMENTS AND 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.

 

At June 30, 2008 and December 31, 2007 the followingfinancial instruments were outstanding whose contract amounts represent creditrisk:

 

| ** **                                                               | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Financial instruments whose contractual amounts  represent  credit risk: |       |                        |       |                            |       |
| Commitments to extend credit                                             |       | $                           | 4,095,655  |                            | $          | 2,522,059 |   |
| Letters of credit                                                        |       | —                      |       | 9,000                           |       |
| Total commitments                                                        |       | $                           | 4,095,655  |                            | $          | 2,531,059 |   |

 

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Total commitments of $4.1 million were outstanding at June 30,2008 and consisted of $4.0 million at variable rates and $145,000 at fixedrates.  Total commitments of $2.5 millionwere outstanding at December 31, 2007 and consisted of $2.4 million atvariable rates and $88,000 at fixed rates.

 

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

 

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

 

**NOTE 12****—****FAIR VALUEMEASUREMENTS (SFAS 157 DISCLOSURE)**

 

Effective January 1, 2008, the Companydetermines the fair market values of its financial instruments based on thefair value hierarchy established in SFAS No. 157, *Fair ValueMeasurements* (SFAS 157), which requires an entity to maximize theuse of observable inputs and minimize the use of unobservable inputs whenmeasuring fair value.  The standarddescribes three levels of inputs, as follows, that may be used to measure fairvalue.

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

 

The Company carries its available-for-salesecurities at fair value.  Fair valuemeasurement 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.  As of June 30,2008, all of the Company’s available-for-sale securities, $30.5 million, werevalued using Level 2 inputs.

 

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

#  

The following discussion and analysis presentsthe Company’s consolidated financial condition as of June 30, 2008 andresults of operations for the three and six months ended June 30, 2008 and2007, respectively.  The discussionshould be read in conjunction with the financial statements and the notesrelated thereto which appear elsewhere in this Quarterly 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.

 

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

 

Asof June 30, 2008, the Company had, on a consolidated basis, total assetsof $48.6 million, net loans of $11.4 million, total deposits of $18.4 million,and stockholders’ equity of $19.6 million. In 2007, the Company completed an initial public offering of its commonstock, issuing 2,553,671 shares at a price of $10.00 per share.  The gross proceeds received from the offeringwere approximately $25.5 million.

 

****Resultsof Operations for the Three Months Ended June 30, 2008****

 

The following discussion focuses on the Company’s financial conditionand results of operations for the three months ended June 30, 2008.  The Company’s principal operations for thethree months ended June 30, 2008 consisted of the operations of SoleraNational Bank, which opened for business September 10, 2007.  The following discussion is limited and doesnot include a discussion of the comparison to prior financial results for thethree months ended June 30, 2007, since the Bank was not open for businessduring the second quarter of 2007.  Assuch, a discussion of the comparison to prior financial results is notmeaningful to an understanding of our current business and, therefore, has beenomitted from this Report.

 

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

 

Net interest income is thedifference between interest income, principally from loan and investmentsecurity portfolios, and interest expense, principally on customer deposits andborrowings.  Net interest income is ourprincipal source of earnings.  Changes innet interest income result from changes in volume, spread and margin. Volumerefers to the average dollar level of interest-earning assets andinterest-bearing liabilities.  Spreadrefers to the difference between the average yield on interest-earning assetsand the average cost of interest-bearing liabilities. Margin refers to netinterest income divided by average interest-earning assets, and is influencedby the level and relative mix of interest-earning assets and interest-bearingliabilities.

 

Net interest income was $352,000 in the second quarter of 2008. Ourannualized net interest margin was 3.55% for the three months ended June 30,2008.

 

Totalinterest income was $497,000 for the second quarter of 2008 consistingprimarily of interest on investment securities of $322,000, interest and feeson loans of $141,000 and dividends on bank stocks of $10,000.  Average net loans were $9.1 million, andother average interest-earning assets were $30.6 million, consisting primarilyof average available-for-sale securities of $26.9 million, average federalfunds sold of $3.0 million and average certificates of deposits with banks of$682,000.

 

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Totalinterest expense was $145,000 in the second quarter of 2008.  This consisted primarily of interest expenseon certificates of deposit over $100,000 of $47,000, interest expense onFederal Home Loan bank advances of $42,000 and interest expense on money marketaccounts of $40,000.

 

****Provision for Loan Losses****

 

We determine a provision forloan losses that we consider sufficient to maintain an allowance to absorbprobable losses inherent in our portfolio as of the balance sheet date. Foradditional information concerning this determination, see the section of thisdiscussion and analysis captioned **“Allowance for Loan Losses.”**

 

Inthe second quarter of 2008, our provision for loan losses was $50,000 relatingto the growth of our loan portfolio and the estimated probable losses inherentwithin the portfolio due to uncertainties in economic conditions.  There were no loans specifically reserved forunder the SFAS 114 Component of the loan loss reserve.  Furthermore, there were no charge-offs ornon-performing loans during the second quarter of 2008.

 

****Noninterest Income****

 

Thenoninterest income for the quarter ended June 30, 2008 was $22,000,consisting primarily of deposit service charges and fees of $12,000.  Additionally, the Company earned $5,000 insublease income for offices within the Bank’s main office building that areleased to third parties and $6,000 in net gains on investment securities soldduring the second quarter.

 

****Noninterest Expense****

 

Our total noninterest expense was $857,000 for the quarter ended June 30,2008.  This consisted of salaries andbenefits of $481,000, occupancy expenses of $113,000, primarily for leaseexpense for the bank’s main office building, and professional fees of $73,000,for external audit, legal and consulting fees. The Company employed 18 full-time equivalent employees as of June 30,2008.

 

Othergeneral and administrative expenses totaled $189,000 for the quarter ended June 30,2008 and consisted of marketing and promotional expenses of $59,000 as the Bankcontinued to raise community awareness of the Bank’s products andservices.  Data processing fees were$52,000 and include the costs to operate the Bank’s primary bankingsoftware.  Printing, stationery andsupplies were $23,000 primarily associated with the printing of the AnnualReport and Proxy statement for the first annual meeting of shareholders.  Regulatory and reporting fees were $16,000primarily attributable to bank assessment fees paid to the Office of theComptroller of the Currency, the Federal Reserve Bank, and the Federal DepositInsurance Corporation as well as fees associated with filing reports with theSecurities and Exchange Commission. Other expenses of $39,000 included $8,000 for travel and entertainment,$6,000 for telephone and communication lines, $4,000 for insurance, $3,000 fordues and memberships, $3,000 for training and education, $2,000 for postage andshipping, and $13,000 for other miscellaneous expenses.

 

****Income Taxes****

 

Nofederal or state tax expense has been recorded for the quarter ended June 30,2008, based upon net operating losses. Since it is uncertain that the Company will become profitable, thedeferred tax benefit accumulated to date has a full valuation allowance so thatthe net deferred tax benefit at June 30, 2008 is $0.

 

****Resultsof Operations for the Six Months Ended June 30, 2008****

 

The following discussion focuses on the Company’s financial conditionand results of operations for the six months ended June 30, 2008.  The Company’s principal operations for thesix months ended June 30, 2008 consisted of the operations of SoleraNational Bank, which opened for business September 10, 2007.  The following discussion is limited and doesnot include a discussion of the comparison to prior financial results for thesix months ended June 30, 2007, since the Bank was not open for businessduring the first six months of 2007.  Assuch, a discussion of the comparison to prior financial results is notmeaningful to an understanding of our current business and, therefore, has beenomitted from this Report.

 

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

 

Net interest income was $628,000 for the six months ended June 30,2008. Our annualized net interest margin was 3.68% for the same period.

 

Totalinterest income was $866,000 for the six months ended June 30, 2008consisting primarily of interest on investment securities of $553,000 andinterest on loans of $229,000.  Duringthis period, average net loans were $7.2 million and other averageinterest-earning assets were $27.3 million.

 

Totalinterest expense was $238,000 in the first six months of 2008.  This consisted primarily of interest expenseon certificates of deposit over $100,000 of $97,000, interest expense on moneymarket accounts of $72,000, and $51,000 for interest on other borrowings.

 

****Provision for Loan Losses****

 

Duringthe first six months of 2008, our provision for loan losses was $87,000relating to the growth of our loan portfolio and the estimated probable lossesinherent within the portfolio due to uncertainties in economic conditions.  There were no loans specifically reserved forunder the SFAS 114 Component of the loan loss reserve.  Furthermore, there were no charge-offs ornon-performing loans during this period.

 

****Noninterest Income****

 

Thenoninterest income for the six months ended June 30, 2008 was $71,000,consisting primarily of gains on the sale of investment securities of$45,000.  Additionally, the Companyearned $17,000 in deposit service charges and fees, and $9,000 in subleaseincome for an office within the Bank’s main office building that is leased to athird party.

 

****Noninterest Expense****

 

Our total noninterest expense was $1.7 million for the six months endedJune 30, 2008.  This consisted ofsalaries and benefits of $985,000, occupancy expenses of $231,000, primarilyfor rental expense for the bank’s main office building, and professional feesof $146,000 for external audit, legal and consulting fees.

 

Othergeneral and administrative expenses totaled $356,000 for the six months ended June 30,2008 and consisted of marketing and promotional expenses of $126,000 asmanagement focused on raising awareness in the community of the Bank’s productsand services.  Data processing fees were$99,000 and include the costs to run the Bank’s main banking software.  Printing, stationery and supplies were$33,000 and include the costs to print the Annual Report and Proxystatement.  The remainder of the expensesincluded regulatory and reporting fees of $29,000, travel and entertainmentexpenses of $13,000, telephone and communication expenses of $13,000, insuranceexpenses of $9,000, dues and memberships of $8,000, training and education of$5,000, postage and shipping of $4,000 and other miscellaneous office expensesof $17,000.

 

****FinancialCondition****

 

Customer deposits, FederalHome Loan Bank advances, and proceeds from the initial public offeringcompleted in 2007 were primarily invested in loans, investment securities andfederal funds sold, resulting in total assets as of June 30, 2008 of $48.6million.

 

Asof June 30, 2008, stockholders’ equity was $19.6 million, as a result ofthe initial public offering, partially offset by the inception-to-date lossesfrom start-up activities and current operations.

 

****Short-Term Investments and Interest-bearing Deposits in OtherFinancial Institutions****

 

AtJune 30, 2008, Solera National Bank had $2.8 million in federal funds soldand $598,000 in interest-bearing deposits with other financialinstitutions.  These short-terminvestments and interest-bearing deposits allow Solera National Bank to meetliquidity requirements and provide temporary holdings until the funds can beotherwise deployed or invested.

 

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****Federal Home Loan Bank and Federal Reserve Bank Stock****

 

**At June 30, 2008, the Bank had a total of$995,000 invested in bank stocks carried at amortized cost consisting of$493,000 in Federal Reserve Bank stock and $502,000 in Federal Home Loan Bankstock.  These investments allow SoleraNational Bank to conduct business with these entities.  As of June 30, 2008, the Federal ReserveBank stock is yielding an average of 6.0% and the Federal Home Loan Bank stockis yielding an average interest rate of 4.2%.**

 

****Investment Securities****

 

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

 

AtJune 30, 2008, Solera National Bank’s securities consisted ofavailable-for-sale securities of $30.6 million. The following table provides additional detail on the Company’sinvestment securities as of June 30, 2008 and December 31, 2007:

 

| ** **                              | ** ** | **June 30, 2008**    | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Estimated Fair  Value** | ** ** | **Weighted  Average  Yield**    | ** ** | **Estimated Fair  Value** | ** ** | **Weighted  Average  Yield** | ** ** |
| **Securities available-for-sale**       |       |                           |       |                            |       |   |   |   |   |
| U.S. government agencies                |       | $                              | 4,160,785  |                            | 5.08       | % | $ | 3,508,333 |   | 5.09 | % |
| State and municipal                     |       | 1,059,645                      |       | 5.43                            |       | 1,117,262 |   | 5.43 |   |
| Mortgage-backed securities              |       | 25,333,211                     |       | 5.19                            |       | 9,235,186 |   | 5.34 |   |
| **Total securities available-for-sale** |       | $                              | 30,553,641 |                            | 5.18       | % | $ | 13,860,781 |   | 5.29 | % |

 

****Loan Portfolio****

 

Our primary focus is incomefrom interest on loans. The following table presents the composition of ourloan portfolio by category as of the dates indicated:

 
| ** **                        | ** **                           | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------|--------------------------------------|-----------------------------|------------|---------------------------------|------------|
| ** **                        | ** **                           | **Amount**                  | ** ** | **% of  Total**            | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
| Real estate – commercial     |                                 | $                           | 5,324,162  |                            | 46         | % | $ | 3,003,274 |   | 79 | % |
| Construction and land development |                                 | 2,904,619                   |       | 25                              |       | 399,732 |   | 10 |   |
| Commercial and industrial         |                                 | 1,018,414                   |       | 9                               |       | 188,684 |   | 5 |   |
| Real estate – residential    |                                 | 2,045,911                   |       | 18                              |       | 190,557 |   | 5 |   |
| Consumer                          |                                 | 249,449                     |       | 2                               |       | 29,407 |   | 1 |   |
| Gross loans                       |                                 | 11,542,555                  |       | 100                             | %          | 3,811,654 |   | 100 | % |
| Less:                             | Allowance for loan losses            |                        | (134,500   | )                               |       |   | (47,396 | ) |   |   |
|                              | Deferred loan fees and expenses, net |                        | (23,118    | )                               |       |   | 3,188 |   |   |   |
| Loans, net                        |                                 | $                           | 11,384,937 |                            |       |   | $ | 3,767,446 |   |   |   |

 

Asof June 30, 2008, net loans were $11.4 million, a 202%, or $7.6 millionincrease from $3.8 million at December 31, 2007.  Net loans as a percentage of total assetswere 23% as of June 30, 2008, compared to 14% at December 31, 2007.

 

Thereal estate – commercial loan portfolio consists primarily of lines of creditor term loans to businesses that are secured by real estate.  At June 30, 2008, there were $5.3million real estate commercial loans in the loan portfolio, an increase of 77%,or $2.3 million from $3.0 million at December 31, 2007.

 

Theconstruction and land development loan portfolio is comprised of constructionloans for owner-occupied construction and development loans for property beingconstructed and sold to third parties. At June 30, 2008, 

 

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constructionand land development loans totaled $2.9 million, an increase of $2.5 millionfrom $400,000 at December 31, 2007.

 

Thecommercial and industrial loan portfolio consists of loans to businesses primarilyfor working capital lines of credit.  At June 30, 2008, commercialand industrial loans totaled $1.0 million, an $830,000 increase from $189,000at December 31, 2007.

 

Thereal estate – residential loan portfolio consists of residential secondmortgage loans, home equity loans and lines of credit and home improvementloans.  At June 30, 2008, $2.0 million was outstanding forresidential real estate loans, an increase of $1.9 million from $191,000outstanding at December 31, 2007.

 

Theconsumer and other loan portfolio consists of personal lines of credit, loansto acquire personal assets such as automobiles and boats and overdraftprotection balances for our deposit customers. As of June 30, 2008, there were $249,000 consumer and other loansin the loan portfolio, an increase of $220,000 from December 31, 2007.

 

Loanconcentrations are considered to exist when there are amounts loaned to amultiple number of borrowers engaged in similar activities that would causethem to be similarly impacted by economic or other conditions. The Bank’s loanportfolio generally consists of loans to borrowers within Colorado.  Although the Bank seeks to avoidconcentrations of loans to a single industry or based upon a single class ofcollateral, the Bank’s loan portfolio consists primarily of real estate loanssecured by real estate located in Colorado, making the value of the portfoliomore susceptible to declines in real estate values and other changes ineconomic conditions in Colorado.  Also,since the Bank’s loan portfolio is in the initial stages, it contains only 62funded loans, with the four largest loans comprising approximately 52% of theportfolio’s gross value.  However,management expects this concentration to diminish over time as the Bank’s loanportfolio continues to grow.  No singleborrower can be approved for a loan over the Bank’s current legal lending limitof approximately $2.5 million.  Thisregulatory requirement helps to ensure the Bank’s exposure to one individualcustomer is limited.

 

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

 

Loan terms vary according toloan type. The following table shows the contractual maturity distribution ofloans as of June 30, 2008:

 
| **** ****                    | **** **** | ****As of June 30, 2008**** | ** **     |
|-----------------------------------|----------------|-------------------------------------------------|----------------|
| **** ****                    | **** **** | ** **                                      | **** **** | ****Over 1 Year************through 5 Years**** | ** ** | ****Over 5 Years**** | ** ** | ** ** | ** ** |
| **** ****                    | **** **** | ****One Year  or Less****             | **** **** | ****Fixed************Rate**** | **** **** | ****Floating or  Adjustable  Rate**** | **** **** | ****Fixed************Rate**** | **** **** | ****Floating or  Adjustable  Rate**** | **** **** | ****Total**** | **** **** |
| Real estate – commercial     |           | $                                               |           |   | $ | 2,989,649 |   | $ | 1,334,513 |   | $ | 1,000,000 |   | $ |   |   | $ | 5,324,162 |   |
| Construction and land development |           | 560,000                                         |           | 920,000 |   | 1,424,619 |   |   |   |   |   | 2,904,619 |   |
| Commercial and industrial         |           | 869,011                                         |           | 3,243 |   | 146,160 |   |   |   |   |   | 1,018,414 |   |
| Real estate – residential    |           |                                            |           | 40,000 |   |   |   | 47,308 |   | 1,958,603 |   | 2,045,911 |   |
| Consumer                          |           | 231,499                                         |           | 17,950 |   |   |   |   |   |   |   | 249,449 |   |
| Gross loans                       |           | $                                               | 1,660,510      |   | $ | 3,970,842 |   | $ | 2,905,292 |   | $ | 1,047,308 |   | $ | 1,958,603 |   | $ | 11,542,555 |   |

 

*****NonperformingLoans, Leases and Assets*****

 

Nonperforming assetsconsist of loans and leases on nonaccrual status, loans 90 days or more pastdue and still accruing interest, loans that have been restructured resulting ina reduction or deferral of interest or principal, OREO, and other repossessedassets. As of June 30, 2008, there were no nonperforming assets.

 

Apotential problem loan is defined as a loan where information about possiblecredit problems of the borrower is known, causing management to have seriousdoubts as to the ability of the borrower to comply with the present loan paymentterms and which may result in the inclusion of such loan in one of thenonperforming asset categories. An 

 

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internallyclassified loan list is maintained that helps management assess the overallquality of the loan portfolio and the adequacy of the allowance for loanlosses. Loans classified as “special mention” are those that contain a weaknessthat, if left unattended, could develop into a problem affecting the ultimatecollectibility of the loan. Loans classified as “substandard” are those loanswith clear and defined weaknesses, such as highly leveraged positions,unfavorable financial ratios, uncertain repayment resources or poor financialcondition, which may jeopardize recoverability of the loan. Loans classified as“doubtful” are those loans that have characteristics similar to substandardloans, but also have an increased risk that loss may occur or at least aportion of the loan may require a charge-off if liquidated at present. Althoughloans classified as substandard do not duplicate loans classified as doubtful,both substandard and doubtful loans may include some loans that are past due atleast 90 days, are on nonaccrual status or have been restructured. Loansclassified as “loss” are those loans that are in the process of beingcharged-off. Solera National Bank had no loans classified in these categoriesat June 30, 2008.

 

****Allowance for Loan Losses****

 

Implicitin Solera National Bank’s lending activities is the fact that loan losses willbe experienced and that the risk of loss will vary with the type of loan beingmade and the creditworthiness of the borrower over the term of the loan. Toreflect the currently perceived risk of loss associated with the loanportfolio, additions are made to the allowance for loan losses in the form ofdirect charges against income to ensure that the allowance is available toabsorb possible loan losses. The factors that influence the amount include,among others, the remaining collateral and/or financial condition of theborrowers, historical loan loss, changes in the size and composition of theloan portfolio, and general economic conditions.

 

Theamount of the allowance equals the cumulative total of the provisions made fromtime to time, reduced by loan charge-offs and increased by recoveries of loanspreviously charged-off.  Until managementhas adequate historical data upon which to base the estimate of the allowancefor loan losses, information regarding the ability of the borrower to repay theloan, current economic conditions and other pertinent factors will beconsidered.  The allowance was $134,500,or 1.17% of outstanding principal as of June 30, 2008.

 

Creditand loan decisions are made by management and the Board of Directors inconformity with loan policies established by the Board of Directors. SoleraNational Bank’s practice is to charge-off any loan or portion of a loan whenthe loan is determined by management to be uncollectible due to the borrower’sfailure to meet repayment terms, the borrower’s deteriorating or deterioratedfinancial condition, the depreciation of the underlying collateral, the loan’sclassification as a loss by regulatory examiners, or other reasons. During thesix months ended June 30, 2008, there were no charge-offs.

 

****Non-earning Assets****

 

Premises,leasehold improvements and equipment totaled $910,000 at June 30,2008.  Due to the Bank’s growth,management has decided to re-occupy property that was abandoned in July 2007.  Management anticipates the re-occupancy tooccur on approximately September 1, 2008 with the space to be used foradministrative purposes.  Uponre-occupying the space, the remaining lease abandonment liability will bereversed resulting in a credit to rent expense during the third quarter2008.  Subsequently, rent expense willincrease for the monthly rental expense associated with occupying the premises.  At the present time, management anticipatesoccupying the premises for the remainder of the lease term, which expires in August 2011,and will determine prior to the expiration of the lease whether to renew for anadditional 5-year term.

 

*****Off-BalanceSheet Arrangements*****

 

Neitherthe Company nor Solera National Bank has any material off-balance sheetarrangements.

 

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****Borrowings****

 

During the second quarter2008, the Bank borrowed $10.0 million from the Federal Home Loan Bank of Topeka(FHLB) in order to finance the purchase of investment securities. The FHLBadvances mature between April 16, 2009 and June 20, 2013.  The advances have a weighted-average fixedinterest rate of 3.73%.

 

The Bank has alsoestablished an unsecured Fed Funds line-of-credit with Bankers Bank of the Westand First Tennessee as well as a secured Fed Funds line with Bankers Bank ofthe West. As of June 30, 2008, the Company had $0 outstanding on theselines.

 

****Loan Commitments****

 

AtJune 30, 2008, the Company had $4.1 million in outstanding loanorigination commitments.  Managementbelieves Solera National Bank has sufficient funds available to meet currentorigination and other lending commitments.

 

****Capital Resources and Capital Adequacy Requirements****

 

Therisk-based capital regulations established and administered by the bankingregulatory agencies are applicable to Solera National Bank. Risk-based capitalguidelines are designed to make regulatory capital requirements more sensitiveto differences in risk profiles among banks, to account for off-balance sheet exposure,and to minimize disincentives for holding liquid assets. Under the regulations,assets and off-balance sheet items are assigned to broad risk categories, eachwith appropriate 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 June 30, 2008, 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.

 

The following table summarizes the ratios of the Bank and theregulatory minimum capital requirements at June 30, 2008:

 
| ****As of June 30, 2008**** | **** **** | ****Actual**** | **** **** | ****For Capital Adequacy  Purposes**** | ** ** | ****To Be Well Capitalized  Under Prompt Corrective  Action Problems**** | ** ** |
|-------------------------------------------------|----------------|----------------|----------------|--------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| **($ in thousands)**                  | ** **     | **Amount**     | ** **     | **%**                                            | ** ** | **Amount**                                                                                             | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Total Capital (to risk-weighted assets)         |           | $              | 16,033         |                                             | 75.4       | %                                                                                                      | $          | 1,701 |   | >8.0 | % | $ | 2,127 |   | >10.0 | % |
| Tier 1 capital (to risk-weighted assets)        |           | $              | 15,899         |                                             | 74.8       | %                                                                                                      | $          | 851 |   | >4.0 | % | $ | 1,276 |   | >6.0 | % |
| Tier 1 capital (to average assets)              |           | $              | 15,899         |                                             | 38.4       | %                                                                                                      | $          | 1,657 |   | >4.0 | % | $ | 2,071 |   | >5.0 | % |

 

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****Liquidity****

 

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

 

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

 

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

 

Asloan demand increases, greater pressure will be exerted on Solera National Bank’sliquidity. However, it is management’s intention to maintain a conservativeloan to deposit ratio in the range of 80 - 90% over time. Given this goal,Solera National Bank will not aggressively pursue lending opportunities ifsufficient funding sources (**e.g.**,deposits, Federal Funds, etc.) are not available, nor will Solera National Bankseek to attract transient volatile, non-local deposits with above marketinterest rates. As of June 30, 2008, the loan to deposit ratio was 62%.

 

SoleraNational Bank had cash and cash equivalents of $3.8 million, or 8% of totalBank assets, at June 30, 2008. Management feels Solera National Bankshould have more than adequate liquidity to meet anticipated future fundingneeds.

 

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

#  

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

 

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

#  

**DisclosureControls and Procedures**

 

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

 

**Changes in Internal Control overFinancial Reporting**

 

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

 

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# **PART II— OTHER INFORMATION**

#  

# **ITEM 1. LEGAL PROCEEDINGS**

#  

Not applicable.

 

# **ITEM1A.  RISK FACTORS**

#  

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

 

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

#  

Not applicable.

 

# **ITEM 3. DEFAULTS UPON SENIORSECURITIES**

#  

Not applicable.

 

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

#  

On June 17, 2008,the Company held its annual meeting of stockholders. At that meeting, thesecurity holders voted on the following items:

 

1. Election of directors.  Thefollowing fifteen directors, comprising the entire board of directors on thatdate, were reelected as directors of the Company to serve until the next annualmeeting of stockholders:

 

| **Name**           | ** ** | **Term** | ** ** | **Votes Cast  For Election** | ** ** | **Votes  Withheld** | ** ** |
|--------------------|------------|----------|------------|----------------------------------------|------------|---------------------|------------|
|               |       |     |       |                                   |       |                |       |
| Norma R. Akers     |       | 1 year   |       | 1,667,440                              |       | 850                 |       |
| Rob L. Alvarado    |       | 1 year   |       | 1,664,940                              |       | 3,350               |       |
| Maria G. Arias     |       | 1 year   |       | 1,664,940                              |       | 3,350               |       |
| Douglas Crichfield |       | 1 year   |       | 1,641,346                              |       | 26,944              |       |
| Paul M. Ferguson   |       | 1 year   |       | 1,656,056                              |       | 12,234              |       |
| James C. Foster    |       | 1 year   |       | 1,664,940                              |       | 3,350               |       |
| Robert M. Gallegos |       | 1 year   |       | 1,664,940                              |       | 3,350               |       |
| Steve D. Gutterman |       | 1 year   |       | 1,657,440                              |       | 10,850              |       |
| Ronald E. Montoya  |       | 1 year   |       | 1,664,940                              |       | 3,350               |       |
| Ray L. Nash        |       | 1 year   |       | 1,657,440                              |       | 10,850              |       |
| Joel S. Rosenstein |       | 1 year   |       | 1,649,440                              |       | 18,850              |       |
| Basil Sabbah       |       | 1 year   |       | 1,649,440                              |       | 18,850              |       |
| F. Stanley Sena    |       | 1 year   |       | 1,664,940                              |       | 3,350               |       |
| Mark R. Smith      |       | 1 year   |       | 1,664,940                              |       | 3,350               |       |
| Kent C. Veio       |       | 1 year   |       | 1,649,940                              |       | 18,350              |       |

 

2.         Stockholders voted toapprove the 2007 Stock Incentive Plan. The results of the vote were as follows: votes cast for the proposal were 1,514,953; votes cast against theproposal were 81,231; and abstentions were 21,856.

 

3.         Stockholders voted toratify the selection of McGladrey & Pullen, LLP as Solera NationalBancorp’s independent registered public accounting firm for the fiscal yearending December 31, 2008.  Theresults of the vote were as follows: votes cast for the proposal were 1,651,196; votes cast against theproposal were 13,594; and abstentions were 3,500.

 

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# **ITEM 5. OTHER INFORMATION**

#  

Not applicable.

 

# **ITEM 6. EXHIBITS**

#  

| 31.1 |   | Certification of Principal Executive Officer  pursuant to Rule 13a-14(a) of the Securities Exchange Act.*                       |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of Principal Accounting and  Chief Financial Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act.* |
| 32.1 |   | Certification pursuant to  Rule 13a-14(b) of the Securities Exchange Act and 18 U.S.C. §1350.*                             |

 

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* Filed herewith.

 

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**SOLERA NATIONAL BANCORP, INC.**

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
| * *                   | *SOLERA NATIONAL  BANCORP, INC.*                    |
|----------------------------|-----------------------------------------------------|
| *** ***               | *(Registrant)*                                      |
| *** ***               | *** ***                                        |
| Date: August 14, 2008 | /s/ Paul M. Ferguson                                |
|                       | Paul M. Ferguson                                    |
|                       | President                                           |
|                       | (Principal Executive Officer)                       |
|                       |                                                |
|                       |                                                |
|                       | /s/ Robert J. Fenton                                |
|                       | Robert J. Fenton                                    |
|                       | Vice President, Secretary & Treasurer      |
|                       | (Principal Accounting and Chief Financial  Officer) |

 

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# **EXHIBITINDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                  |
|-------------|------------|-------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Exhibit**                                                                        |
| ** **  | ** ** | ** **                                                                                                  |
| 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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