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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION********Washington, D.C. 20549**

 

**FORM 10-Q**

**(Mark one)**

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

 

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

 

o                         **TRANSITION REPORT UNDER SECTION 13OR 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)

 

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

 

**319 S. Sheridan Blvd.**

**Lakewood, CO 80226**

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

 

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

Yes x  Noo

 

Indicate by check mark whether the registrant isa large accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company.
| Large accelerated filer | o |   |   | Accelerated filer  o         |
|-------------------------|---|--------|--------|----------------------------------------|
| Non-accelerated filer   | o |   |   | Smaller reporting company  x |

 

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

Yeso  No x

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the last practicabledate:  As of November 10, 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 (unaudited)**                                                             | 5        |
| ** **                                                                                                |     |
| **Balance Sheets as of September 30, 2008 and  December 31, 2007**                              | 5        |
| ** **                                                                                                |     |
| **Statements  of Operations for the Three and Nine Months Ended September 30, 2008 and  2007**       | 6        |
| ** **                                                                                                |     |
| **Statements of Changes in Stockholders’ Equity for the  Nine Months Ended September 30, 2008** | 7        |
| ** **                                                                                                |     |
| **Statements  of Cash Flows for the Nine Months Ended September 30, 2008 and 2007**                  | 8        |
| ** **                                                                                                |     |
| **UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL  STATEMENTS**                                       | 10       |
| ** **                                                                                                |     |
| **ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS**   | 18       |
| ** **                                                                                                |     |
| **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK**                                   | 29       |
| ** **                                                                                                |     |
| **ITEM 4(T). CONTROLS AND PROCEDURES**                                                                    | 29       |
| ** **                                                                                                |     |
| **PART II  — OTHER INFORMATION**                                                                | 30       |
| ** **                                                                                                |     |
| **ITEM  1. LEGAL PROCEEDINGS**                                                                            | 30       |
| ** **                                                                                                |     |
| **ITEM  1A. RISK FACTORS**                                                                                | 30       |
| ** **                                                                                                |     |
| **ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS**                                  | 30       |
| ** **                                                                                                |     |
| **ITEM 3. DEFAULTS UPON SENIOR SECURITIES**                                                               | 30       |
| ** **                                                                                                |     |
| **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS**                                          | 30       |
| ** **                                                                                                |     |
| **ITEM  5. OTHER INFORMATION**                                                                            | 30       |
| ** **                                                                                                |     |
| **ITEM 6.  EXHIBITS**                                                                                     | 30       |
| ** **                                                                                                |     |
| **SIGNATURES**                                                                                            | 31       |
| ** **                                                                                                |     |
| **EXHIBIT  INDEX**                                                                                        | 32       |

 

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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 orconditional verbs 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. The statementsare representative only as of the date they are made, and Solera NationalBancorp, Inc. (sometimes referred to herein as on a consolidated basis asthe Company, we, us, or similar phrasing) undertakes no obligation to updateany 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;

 

·                  the Federal Deposit Insurance Corporation, (“FDIC”),has increased deposit insurance premiums to rebuild and maintain the federaldeposit insurance fund, which could have a material affect on earnings;

 

·                  the Company cannot predict the effect of therecently enacted federal rescue plan;

 

·                  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 September 30, 2008and December 31, 2007**

**(Unaudited)**

 
| ** **                                                                                                                                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                  | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                                                                                  |       |                   |       |                  |       |
| Cash and due from banks                                                                                                                                     |       | $                      | 555,808    |                  | $          | 336,126 |   |
| Federal funds sold                                                                                                                                          |       | 4,865,000              |       | 4,970,000             |       |
| Total cash and cash equivalents                                                                                                                             |       | 5,420,808              |       | 5,306,126             |       |
| Investment securities, available-for-sale                                                                                                                   |       | 31,869,142             |       | 13,860,781            |       |
| Interest-bearing deposits with banks                                                                                                                        |       | 1,287,000              |       | —                |       |
| Loans                                                                                                                                                       |       | 14,146,040             |       | 3,814,842             |       |
| Allowance for loan losses                                                                                                                                   |       | (180,000               | )          | (47,396               | )          |
| Net loans                                                                                                                                                   |       | 13,966,040             |       | 3,767,446             |       |
| Federal Home Loan Bank (FHLB) and Federal  Reserve Bank stock                                                                                               |       | 1,000,750              |       | 525,000               |       |
| Premises and equipment, net                                                                                                                                 |       | 902,198                |       | 946,681               |       |
| Interest receivable                                                                                                                                         |       | 229,552                |       | 100,257               |       |
| Subscriptions receivable                                                                                                                                    |       | —                 |       | 1,600,000             |       |
| Other assets                                                                                                                                                |       | 267,885                |       | 281,906               |       |
| **Total assets**                                                                                                                                            |       | $                      | 54,943,375 |                  | $          | 26,388,197 |   |
|                                                                                                                                                        |       |                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                               |       |                   |       |                  |       |
| Deposits                                                                                                                                                    |       |                   |       |                  |       |
| Noninterest-bearing demand                                                                                                                                  |       | $                      | 1,896,841  |                  | $          | 147,407 |   |
| Interest-bearing demand                                                                                                                                     |       | 6,403,256              |       | 315,373               |       |
| Savings and money market                                                                                                                                    |       | 8,949,396              |       | 1,284,212             |       |
| Time deposits                                                                                                                                               |       | 7,715,002              |       | 3,252,388             |       |
| Total deposits                                                                                                                                              |       | 24,964,495             |       | 4,999,380             |       |
|                                                                                                                                                        |       |                   |       |                  |       |
| Accrued interest payable                                                                                                                                    |       | 46,937                 |       | 16,773                |       |
| Accounts payable and other liabilities                                                                                                                      |       | 240,876                |       | 221,772               |       |
| Federal Home Loan Bank advances                                                                                                                             |       | 10,000,000             |       | —                |       |
| Deferred rent liability                                                                                                                                     |       | 53,132                 |       | 30,254                |       |
| Capital lease liability                                                                                                                                     |       | 165,481                |       | 191,528               |       |
| Liability for abandoned lease                                                                                                                               |       | —                 |       | 79,155                |       |
|                                                                                                                                                        |       |                   |       |                  |       |
| **Total liabilities**                                                                                                                                       |       | $                      | 35,470,921 |                  | $          | 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  September 30, 2008 and December 31, 2007 |       | $                      | 25,536     |                  | $          | 25,536 |   |
| Additional paid-in capital                                                                                                                                  |       | 25,535,074             |       | 25,347,342            |       |
| Accumulated deficit                                                                                                                                         |       | (5,977,066             | )          | (4,525,955            | )          |
| Accumulated other comprehensive income  (loss)                                                                                                              |       | (111,090               | )          | 2,412                 |       |
| **Total stockholders’ equity**                                                                                                                         |       | $                      | 19,472,454 |                  | $          | 20,849,335 |   |
|                                                                                                                                                        |       |                   |       |                  |       |
| **Total liabilities and stockholders’ equity**                                                                                                         |       | $                      | 54,943,375 |                  | $          | 26,388,197 |   |

 

See Notes to Financial Statements.

 

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**Solera National Bancorp, Inc.**

 

# **Statementsof Operations for the Three and Nine Months Ended September 30, 2008 and2007**

**(Unaudited)**

 
| ** **                                            | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                                               | ** ** | **2007**                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest income:                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Interest and fees on loans                            |       | $                                                                      | 190,454    |                                                                  | $          | 416 |   | $ | 419,056 |   | $ | 416 |   |
| Interest on federal funds sold                        |       | 28,068                                                                 |       | 52,998                                                                |       | 81,134 |   | 52,998 |   |
| Interest on investment securities                     |       | 404,781                                                                |       | —                                                                |       | 957,593 |   | — |   |
| Interest on escrow account                            |       | —                                                                 |       | 148,995                                                               |       | — |   | 148,995 |   |
| Other interest income                                 |       | 9,854                                                                  |       | —                                                                |       | 23,311 |   | 1,328 |   |
| Dividends on FHLB and Federal Reserve Bank  stocks    |       | 13,016                                                                 |       | 1,812                                                                 |       | 31,292 |   | 1,812 |   |
| Total interest income                                 |       | 646,173                                                                |       | 204,221                                                               |       | 1,512,386 |   | 205,549 |   |
| Interest expense:                                     |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Deposits                                              |       | 101,798                                                                |       | 53                                                                    |       | 288,601 |   | 53 |   |
| Note payable                                          |       | —                                                                 |       | 39,409                                                                |       | — |   | 113,977 |   |
| Federal Home Loan Bank advances                       |       | 93,990                                                                 |       | —                                                                |       | 136,336 |   | — |   |
| Federal funds purchased                               |       | 28                                                                     |       | —                                                                |       | 109 |   | — |   |
| Other borrowings                                      |       | 3,993                                                                  |       | 375                                                                   |       | 12,587 |   | 503 |   |
| Total interest expense                                |       | 199,809                                                                |       | 39,837                                                                |       | 437,633 |   | 114,533 |   |
|                                                  |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net interest income                                   |       | 446,364                                                                |       | 164,384                                                               |       | 1,074,753 |   | 91,016 |   |
|                                                  |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Provision for loan loss                               |       | 45,500                                                                 |       | —                                                                |       | 132,604 |   | — |   |
| Net interest income after provision for  loan loss    |       | 400,864                                                                |       | 164,384                                                               |       | 942,149 |   | 91,016 |   |
|                                                  |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Noninterest income:                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Service charges and fees                              |       | 20,591                                                                 |       | 346                                                                   |       | 37,846 |   | 346 |   |
| Sublease income                                       |       | 7,350                                                                  |       | —                                                                |       | 16,050 |   | — |   |
| Gain on sale of securities                            |       | —                                                                 |       | —                                                                |       | 45,264 |   | — |   |
| Total noninterest income                              |       | 27,941                                                                 |       | 346                                                                   |       | 99,160 |   | 346 |   |
| Noninterest expense:                                  |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Salaries and employee benefits                        |       | 561,153                                                                |       | 176,675                                                               |       | 1,546,273 |   | 176,675 |   |
| Management fees                                       |       | —                                                                 |       | 136,957                                                               |       | — |   | 543,269 |   |
| Occupancy                                             |       | 113,121                                                                |       | 127,031                                                               |       | 344,003 |   | 234,597 |   |
| Loss (reversal of loss) on abandoned lease  (Note 13) |       | (132,843                                                               | )          | 169,674                                                               |       | (132,843 | ) | 169,674 |   |
| Professional fees                                     |       | 21,857                                                                 |       | 55,994                                                                |       | 167,403 |   | 124,291 |   |
| Consulting fees                                       |       | —                                                                 |       | 7,806                                                                 |       | — |   | 50,506 |   |
| Other general and administrative                      |       | 211,096                                                                |       | 241,367                                                               |       | 567,584 |   | 479,112 |   |
| Total noninterest expense                             |       | 774,384                                                                |       | 915,504                                                               |       | 2,492,420 |   | 1,778,124 |   |
|                                                  |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income taxes                                          |       | —                                                                 |       | —                                                                |       | — |   | — |   |
|                                                  |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net loss                                              |       | $                                                                      | (345,579   | )                                                                     | $          | (750,774 | ) | $ | (1,451,111 | ) | $ | (1,686,762 | ) |
|                                                  |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic earnings (loss) per share                       |       | (0.14                                                                  | )          | (0.33                                                                 | )          | (0.57 | ) | (0.75 | ) |
|                                                  |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Diluted earnings (loss) per share                     |       | (0.14                                                                  | )          | (0.33                                                                 | )          | (0.57 | ) | (0.75 | ) |
|                                                  |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Weighted-average common shares                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic                                                 |       | 2,553,671                                                              |       | 2,262,837                                                             |       | 2,553,671 |   | 2,262,837 |   |
| Diluted                                               |       | 2,553,671                                                              |       | 2,262,837                                                             |       | 2,553,671 |   | 2,262,837 |   |

 

See Notes to Financial Statements.

 

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**Solera National Bancorp, Inc.**

 

**Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30,2008****(Unaudited)**

 
| ** **                                                                           | ** ** | **Shares  Outstanding** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** **     | **Total**  | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|-----------------------------------------------------------|----------------|------------|------------|
|                                                                                 |       |                    |       |              |       |                             |       |                     |       |                                                      |           |       |       |
| **Balance at December 31, 2007**                                                | ** ** | **2,553,671**           | ** ** | **$**             | **25,536** | ** **                       | **$**      | **25,347,342**           | ** ** | **$**                                                     | **(4,525,955** | **)**      | **$**      | **2,412** | ** ** | **$** | **20,849,335** | ** ** |
| Comprehensive income (loss)                                                          | ** ** | ** **              | ** ** | ** **        | ** ** | ** **                       | ** ** | ** **               | ** ** | ** **                                                | ** **     | ** ** | ** ** |
| Net loss                                                                             |       | —                  |       | —            |       | —                           |       | (1,451,111               | )          | —                                                    |           | (1,451,111 | )          |
| Net change in unrealized gains (losses) on  investment securities available-for-sale |       | —                  |       | —            |       | —                           |       | —                   |       | (113,502                                                  | )              | (113,502   | )          |
| Total comprehensive income (loss)                                                    |       | —                  |       | —            |       | —                           |       | (1,451,111               | )          | (113,502                                                  | )              | (1,564,613 | )          |
| Stock-based compensation                                                             |       | —                  |       | —            |       | 187,732                          |       | —                   |       | —                                                    |           | 187,732    |       |
| **Balance at September 30, 2008**                                               | ** ** | **2,553,671**           | ** ** | **$**             | **25,536** | ** **                       | **$**      | **25,535,074**           | ** ** | **$**                                                     | **(5,977,066** | **)**      | **$**      | **(111,090** | **)** | **$** | **19,472,454** | ** ** |

 

See Notes to Financial Statements.

 

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** **

**SoleraNational Bancorp, Inc.**

 

**Statements of Cash Flows forthe Nine Months Ended September 30, 2008 and 2007**

**(Unaudited)**

 
| ** **                                                                               | ** ** | **For the Nine Months  Ended September 30,** | ** **  |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|-------------|
| ** **                                                                               | ** ** | **2008**                                                              | ** **  | **2007** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                     |       |                                                                  |        |   |   |
| Net (loss)                                                                               |       | $                                                                     | (1,451,111  | ) | $ | (1,686,762 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:             |       |                                                                  |        |   |   |
| Depreciation and amortization                                                            |       | 81,862                                                                |        | 51,097 |   |
| Provision for loan losses                                                                |       | 132,604                                                               |        | — |   |
| Net amortization of deferred loan  fees/expenses                                         |       | 38,340                                                                |        | — |   |
| Discount accretion on interest-bearing  deposits with banks                              |       | (13,374                                                               | )           | — |   |
| Federal Home Loan Bank stock dividend                                                    |       | (8,100                                                                | )           | — |   |
| Net amortization of premiums on investment  securities                                   |       | 36,207                                                                |        | — |   |
| Gain on sale of investment securities                                                    |       | (45,264                                                               | )           | — |   |
| Recognition of stock-based compensation on  stock options                                |       | 187,732                                                               |        | 12,502 |   |
| Loss (reversal of loss) on abandoned lease                                               |       | (132,843                                                              | )           | 169,674 |   |
| Changes in operating assets and  liabilities:                                            |       |                                                                  |        |   |   |
| Interest receivable                                                                      |       | (129,295                                                              | )           | (7,978 | ) |
| Other assets                                                                             |       | 87,223                                                                |        | (17,717 | ) |
| Deferred offering costs                                                                  |       | —                                                                |        | 131,884 |   |
| Accrued interest payable                                                                 |       | 30,164                                                                |        | (6,016 | ) |
| Accounts payable and other liabilities                                                   |       | (15,433                                                               | )           | (7,521 | ) |
| Deferred rent liability                                                                  |       | 22,878                                                                |        | 11,273 |   |
| **Net cash used in operating activities**                                                |       | $                                                                     | (1,178,410  | ) | $ | (1,349,564 | ) |
|                                                                                     |       |                                                                  |        |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                     |       |                                                                  |        |   |   |
| Purchase of investment securities,  available-for-sale                                   |       | $                                                                     | (28,370,083 | ) | $ | — |   |
| Proceeds from sales of investment  securities, available-for-sale                        |       | 4,849,038                                                             |        | — |   |
| Proceeds from maturities/calls/pay downs of  investment securities, available-for-sale   |       | 5,408,239                                                             |        | — |   |
| Originated loans, net of pay downs                                                       |       | (10,369,538                                                           | )           | (50,417 | ) |
| Purchase of premises and equipment                                                       |       | (48,403                                                               | )           | (697,110 | ) |
| Purchase of Federal Home Loan Bank stock                                                 |       | (500,000                                                              | )           | — |   |
| Purchase of Federal Reserve Bank stock                                                   |       | —                                                                |        | (525,000 | ) |
| Proceeds from redemption of Federal Reserve  Bank stock                                  |       | 32,350                                                                |        | — |   |
| Proceeds from maturity of interest-bearing  deposits with banks                          |       | 2,185,000                                                             |        | — |   |
| Purchase of interest-bearing deposits with  banks                                        |       | (3,458,626                                                            | )           | — |   |
| **Net cash used in investing activities**                                                |       | $                                                                     | (30,272,023 | ) | $ | (1,272,527 | ) |
|                                                                                     |       |                                                                  |        |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                     |       |                                                                  |        |   |   |
| Net change in deposits                                                                   |       | $                                                                     | 19,965,115  |   | $ | 406,685 |   |
| Advances from Organizers                                                                 |       | —                                                                |        | 450,000 |   |
| Repayment of Organizer advances                                                          |       | —                                                                |        | (442,801 | ) |
| Proceeds from Federal Home Loan Bank  advances                                           |       | 10,000,000                                                            |        | — |   |
| Proceeds from note payable                                                               |       | —                                                                |        | 1,420,164 |   |
| Repayment of note payable                                                                |       | —                                                                |        | (2,763,890 | ) |
| Proceeds from subscriptions receivable                                                   |       | 1,600,000                                                             |        | — |   |
| Proceeds from issuance of common stock, net  of cash paid for offering costs of $208,562 |       | —                                                                |        | 21,602,608 |   |
| **Net cash provided by financing activities**                                            |       | $                                                                     | 31,565,115  |   | $ | 20,672,766 |   |

 

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** **

**SoleraNational Bancorp, Inc.**

** **

**Statementsof Cash Flows for the Nine Months Ended September 30, 2008 and 2007,(continued)**

**(Unaudited)**

 
| ** **                                                   | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                                              | ** ** | **2007** | ** ** |
| **Net increase in cash and cash equivalents**                |       | $                                                                     | 114,682    |   | $ | 18,050,675 |   |
|                                                         |       |                                                                  |       |   |   |
| CASH AND CASH EQUIVALENTS                                    |       |                                                                  |       |   |   |
| Beginning of period                                          |       | 5,306,126                                                             |       | 6,978 |   |
| End of period                                                |       | $                                                                     | 5,420,808  |   | $ | 18,057,653 |   |
|                                                         |       |                                                                  |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION            |       |                                                                  |       |   |   |
| Cash paid during the period for:                             |       |                                                                  |       |   |   |
| Interest                                                     |       | $                                                                     | 407,470    |   | $ | 120,549 |   |
| Assets acquired under capital leases                         |       | $                                                                     | —     |   | $ | 206,819 |   |
| Non-cash investing transactions:                             |       |                                                                  |       |   |   |
| Unrealized loss on investment securities  available-for-sale |       | $                                                                     | 113,502    |   | $ | — |   |
| Organizer advances converted to equity                       |       | $                                                                     | —     |   | $ | 817,200 |   |
| Non-cash offering costs for stock warrants                   |       | $                                                                     | —     |   | $ | 745,398 |   |

 

See Notes to Financial Statements.

 

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** **

**SOLERA NATIONAL BANCORP, INC.**

 

# **UNAUDITEDCONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 — SUMMARY OFORGANIZATION**

 

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 (the “Bank”), a national bankthat opened for business on September 10, 2007.  Solera National Bank is a full-servicecommercial bank headquartered in Lakewood, Colorado serving the Denvermetropolitan 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 September 30,2008, and the results of its operations for the three and nine months ended September 30,2008 and 2007.  Cash flows are presentedfor the nine months ended September 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 basis. Deferred tax assets are reduced by a valuation allowance when, in theopinion of management, it is more likely than not that some portion or all ofthe deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects ofchanges in tax laws and rates on the date of the enactment.

 

Securities available-for-sale:  Securities available-for-sale are reported atfair value utilizing Level 2 inputs (see Note 12).  For these securities, the Company obtainsfair value measurements from independent pricing services.  The fair value measurements considerobservable data that may include dealer quotes, market spreads, cash flows, theU.S. Treasury yield curve, live trading levels, trade execution data, marketconsensus prepayment speeds, credit information and the bonds’ terms 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 has established a formal process fordetermining an adequate allowance for loan losses.  The allowance for loan losses calculationprocess has two components.  The firstcomponent represents the allowance for loan losses for impaired loans computedin accordance with FASB Statement No. 114, *Accounting by Creditors for Impairment of a Loan* (SFAS 114Component), 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 5Component), and represents the estimated probable losses inherent within theportfolio due to uncertainties in economic conditions, delays in obtaininginformation about a borrower’s financial condition, delinquent loans that havenot been determined to be impaired, results of internal and external loanreviews, and other factors.  Thiscomponent of the allowance for loan losses is calculated by assigning aprobable loss 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 (“SFAS”) No. 162,*TheHierarchy of Generally Accepted Accounting Principles, (“SFAS 162”).***SFAS 162 identifies thesources of accounting principles and the framework for selecting the hierarchyof principles to be used in the preparation of financial statements that arepresented in conformity with generally accepted accounting principles (“GAAP”)in the United States.* ***The hierarchical guidanceprovided by SFAS 162 did not have a significant impact on the Company’sfinancial statements.**

 

In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interest in ConsolidatedFinancial Statements, an amendment of ARB Statement No 51, (“SFAS 160”). *SFAS 160 amends AccountingResearch Bulletin (“ARB”) No. 51, “Consolidated Financial Statements,” toestablish accounting and reporting standards for the noncontrolling interest ina subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifiesthat a noncontrolling interest in a subsidiary, which is sometimes referred toas minority interest, is an ownership interest in the consolidated entity thatshould be reported as a component of equity in the consolidated financialstatements. Among other requirements, SFAS 160 requires consolidated net incometo be reported at amounts that include the amounts attributable to both theparent and the noncontrolling interest. It also requires disclosure, on theface of the consolidated income statement, of the amounts of consolidated netincome attributable to the parent and to the noncontrolling interest. SFAS 160will be effective on January 1, 2009 and is not expected to have an impacton the Company’s financial statements, as the Company does not have anynoncontrolling interest in a subsidiary at this time.

 

In June 2008, the FASB issued FASB Staff Position(FSP) no. EITF 03-6-1,*Determining WhetherInstruments Granted in Share-Based Payment Transactions Are ParticipatingSecurities (“FSP EITF 03-6-1”).* FSP EITF 03-6-1 provides that unvestedshare-based payment awards that contain non-forfeitable rights to dividends or dividendequivalents (whether paid or unpaid) are participating securities and shall beincluded in the computation of earnings per share pursuant to the two-classmethod. FSP EITF 03-6-1 will be effective on January 1, 2009. Allpreviously reported earnings per share data will be retrospectively adjusted toconform with the provisions of FSP EITF 03-6-1. FSP EITF 03-6-1 is not expectedto have a significant impact on the Company’s financial statements as theCompany does not have any share-based payment awards that containnon-forfeitable rights to dividends or dividend equivalents.

 

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**NOTE 3 — INVESTMENTS**

 

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

 
| ** **                              | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **          | ** ** |
|-----------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------------|------------|
| ** **                              | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated**       | ** ** |
| ** **                              | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| **Securities available-for-sale:**      |       |          |       |           |       |           |       |                |       |
| U.S. government agencies                |       | $             | 5,710,484  |           | $          | 268            |       | $                   | (60,390    | ) | $ | 5,650,362 |   |
| State and municipal                     |       | 1,121,710     |       | —         |       | (58,370        | )          | 1,063,340           |       |
| Mortgage-backed securities              |       | 25,148,038    |       | 145,026        |       | (137,624       | )          | 25,155,440          |       |
| **Total securities available-for-sale** |       | $             | 31,980,232 |           | $          | 145,294        |       | $                   | (256,384   | ) | $ | 31,869,142 |   |

 

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.  Since all of the Bank’s investment securitieswere purchased after September 30, 2007, no securities have been in acontinuous loss position for over twelve months.  However, some securities in our portfoliohave been in a continuous loss position during the nine months ended September 30,2008.  Management concluded that thecontinuous loss position on these securities is a result of the level of marketinterest rates and not a result of the underlying issuers’ ability torepay.  The Bank also has the ability andintent to hold these securities until their fair values recover to theiramortized cost, which may be maturity. Accordingly, as of September 30, 2008, no declines in value aredeemed to be other than temporary.

 

The Company recorded a netunrealized loss in the investment portfolio of $111,000 at September 30,2008.  This was an improvement over the$286,000 unrealized loss at June 30, 2008.

 

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.  No securities were soldduring the third quarter 2008.

 

Securities with carryingvalues of $5.0 million at September 30, 2008 and $495,000 at December 31,2007, were pledged as collateral to secure public deposits.  Securities with carrying values of $842,000and $0 were pledged to secure a line-of-credit with the Bankers Bank of theWest at September 30, 2008 and December 31, 2007, respectively.  Securities with carrying values of $12.9million and $0 were pledged to secure Federal Home Loan Bank advances at September 30,2008 and December 31, 2007, respectively.

 

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

 

In an effort to managethe Bank’s liquidity with the goal of maximizing the interest earned, theCompany has invested approximately $3.5 million in FDIC-insured certificates ofdeposit during the nine months ended September 30, 2008.  These deposits have a weighted-average yieldof 3.57% and mature before December 2008. As of September 30, 2008, $2.2 million of such deposits havematured.

 

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**NOTE 5 — LOANS**

 

Loans consist of thefollowing:

 
| ** **                        | ** **                           | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------|--------------------------------------|----------------------------------|------------|---------------------------------|------------|
| Real estate – commercial     |                                 | $                                | 5,097,489  |                            | $          | 3,003,274 |   |
| Real estate – residential    |                                 | 3,981,454                        |       | 190,557                         |       |
| Construction and land development |                                 | 2,593,094                        |       | 399,732                         |       |
| Commercial and industrial         |                                 | 2,255,662                        |       | 188,684                         |       |
| Consumer                          |                                 | 253,493                          |       | 29,407                          |       |
| Gross loans                       |                                 | 14,181,192                       |       | 3,811,654                       |       |
| Less:                             | Allowance for loan losses            |                             | (180,000   | )                               | (47,396    | ) |
|                              | Deferred loan fees and expenses, net |                             | (35,152    | )                               | 3,188      |   |
| Loans, net                        |                                 | $                                | 13,966,040 |                            | $          | 3,767,446 |   |

 

Duringthe first nine months of 2008, no loans were impaired, transferred toforeclosed properties 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 comparable transactionswith other persons.

 

Thefollowing table details loans receivable from related parties as of September 30,2008:

 
| ** **                         | ** ** | **2008**  | ** ** |
|------------------------------------|------------|-----------|------------|
|                               |       |      |       |
| Balance at January 1, 2008    |       | $         | —     |   |
| New loans                          |       | 1,644,452 |       |
| Payments                           |       | (37,716   | )          |
| Balance at September 30, 2008 |       | $         | 1,606,736  |   |

 

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

 

**NOTE 6 — ALLOWANCE FOR LOANLOSSES**

 

Activity in the allowance for loan losses for the first nine months of2008 and 2007 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                  |       | 132,604  |       | —   |       |
| Allowance at September 30,            |       | $        | 180,000    |     | $          | — |   |

 

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** **

**NOTE 7 — DEPOSITS**

 

Deposits aresummarized as follows:

 
| ** **                                      | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **Amount**                       | ** ** | **% of  Total**            | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
| Noninterest-bearing demand                      |       | $                                | 1,896,841  |                            | 8          | % | $ | 147,407 |   | 3 | % |
| Interest-bearing demand                         |       | 6,403,256                        |       | 26                              |       | 315,373 |   | 6 |   |
| Money market accounts                           |       | 8,818,859                        |       | 35                              |       | 1,271,665 |   | 26 |   |
| Savings accounts                                |       | 130,537                          |       | —                          |       | 12,547 |   | — |   |
| Certificates of deposit, less than $100,000     |       | 3,914,231                        |       | 16                              |       | 352,388 |   | 7 |   |
| Certificates of deposit, greater than  $100,000 |       | 3,800,771                        |       | 15                              |       | 2,900,000 |   | 58 |   |
| Total deposits                                  |       | $                                | 24,964,495 |                            | 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 September 30, 2008 and December 31,2007 was approximately $2.2 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 reserved510,734 shares of common stock for issuance under the Plan.  The Planprovides for options to purchase shares of common stock at a price not lessthan 100% of the fair 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 $63,000 and $188,000 during the three andnine months ended September 30, 2008, respectively.  The Company recognized stock-basedcompensation cost of $12,500 during the three and nine months ended September 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.  The Company granted 10,000options during the third quarter 2008 to newly hired employees.  The Company granted 361,897 options duringthe third quarter 2007 to employees and directors in conjunction with the Bank’sopening.

 

During the nine months endedSeptember 30, 2008, 1,500 options were forfeited. No options wereexercised and 89,160 options vested during the nine months ended September 30,2008.  During this same period, theCompany recognized expense for approximately 102,000 options, representing apro-rata amount of the options that will vest at the end of year one.  As of September 30, 2008, there wasapproximately $760,000 of total unrecognized compensation cost related to theoutstanding stock options that will be recognized over a weighted-averageperiod of 3.0 years.

 

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

 
| ** **                            | ** ** | **Shares** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** |
|---------------------------------------|------------|------------|------------|----------------------------------------------------------|------------|
| Non-vested at January 1, 2008    |       | 397,846    |       | $                                                        | 2.74       |   |
| Granted                               |       | 11,250     |       | 2.11                                                     |       |
| Vested                                |       | (89,160    | )          | 2.75                                                     |       |
| Forfeited                             |       | (1,500     | )          | 2.75                                                     |       |
| Non-vested at September 30, 2008 |       | 318,436    |       | $                                                        | 2.72       |   |

 

**NOTE 9 — NONINTEREST EXPENSE**

 

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

 
| ** **                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Marketing and promotions          |       | $                                                    | 74,647     |                                                | $          | 97,291 |   | $ | 200,544 |   | $ | 166,075 |   |
| Data processing                   |       | 62,188                                               |       | 7,327                                               |       | 160,840 |   | 7,754 |   |
| Regulatory and reporting fees     |       | 20,209                                               |       | 134                                                 |       | 49,514 |   | 1,015 |   |
| Printing, stationery and supplies |       | 8,304                                                |       | 68,998                                              |       | 41,202 |   | 115,873 |   |
| Telephone/communication           |       | 7,843                                                |       | 5,600                                               |       | 21,130 |   | 18,274 |   |
| Travel and entertainment          |       | 7,331                                                |       | 6,810                                               |       | 20,013 |   | 31,680 |   |
| Postage and shipping              |       | 4,541                                                |       | 8,568                                               |       | 9,112 |   | 14,787 |   |
| Training and education            |       | 4,246                                                |       | 9,695                                               |       | 9,489 |   | 9,695 |   |
| Insurance                         |       | 4,230                                                |       | 5,354                                               |       | 13,348 |   | 8,864 |   |
| Dues and memberships              |       | 4,138                                                |       | —                                              |       | 12,149 |   | — |   |
| Temporary staffing                |       | —                                               |       | 20,100                                              |       | — |   | 81,234 |   |
| Miscellaneous                     |       | 13,419                                               |       | 11,490                                              |       | 30,243 |   | 23,861 |   |
| Total                             |       | $                                                    | 211,096    |                                                | $          | 241,367 |   | $ | 567,584 |   | $ | 479,112 |   |

 

**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:

 
| ** **                            | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Deferred tax assets:                  |       |                             |       |                            |       |
| Start-up and organizational expenses  |       | $                                | 1,229,481  |                            | $          | 1,295,346 |   |
| Net operating loss carryforward       |       | 834,524                          |       | 283,720                         |       |
| Allowance for loan losses             |       | 35,908                           |       | 7,235                           |       |
| Other                                 |       | 47,193                           |       | 71,070                          |       |
| Total deferred tax assets             |       | 2,147,106                        |       | 1,657,371                       |       |
| Deferred liabilities:                 |       |                             |       |                            |       |
| Federal Home Loan Bank stock dividend |       | (3,002                           | )          | —                          |       |
| Tax over book depreciation            |       | (12,454                          | )          | (1,895                          | )          |
| Total deferred tax liabilities        |       | (15,456                          | )          | (1,895                          | )          |
|                                  |       |                             |       |                            |       |
| Net deferred tax assets               |       | 2,131,650                        |       | 1,655,476                       |       |
|                                  |       |                             |       |                            |       |
| Valuation allowance                   |       | (2,131,650                       | )          | (1,655,476                      | )          |
|                                  |       |                             |       |                            |       |
| Net deferred taxes                    |       | $                                | —     |                            | $          | — |   |

 

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The Company has provided a 100% valuationallowance for its net deferred tax asset due to uncertainty of realizationduring the carryforward period.  As of September 30,2008, the Company has net operating loss carryforwards of approximately $2.3 millionfor federal income tax purposes.  Federalnet operating loss carry forwards, to the extent not used, will expirebeginning in 2027.

 

The income tax provisiondiffers from the amount of income tax determined by applying the U.S. federalincome tax rate of 35% to pretax income from continuing operations for the ninemonths ended September 30, 2008 and the twelve months ended December 31,2007 due to the following:

 
| ** **                                | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Computed “expected” tax benefit |       | $                                | (507,889   | )                               | $          | (851,948 | ) |
| Change in income taxes resulting from:    |       |                             |       |                            |       |
| Change in valuation allowance             |       | 476,174                          |       | 881,024                         |       |
| Other                                     |       | 31,715                           |       | (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 September 30, 2008 and December 31, 2007 the followingfinancial instruments were outstanding whose contract amounts represent creditrisk:

 
|                                                                    |   | **September 30, 2008** |      | **December 31, 2007** |   |
|-------------------------------------------------------------------------|--------|----------------------------------|-----------|---------------------------------|--------|
| Financial instruments whose contractual amounts  represent credit risk: |   |                             |      |                            |   |
| Commitments to extend credit                                            |   | $                                | 5,327,607 |                            | $      | 2,522,059 |   |
| Letters of credit                                                       |   | —                           |      | 9,000                           |   |
| Total commitments                                                       |   | $                                | 5,327,607 |                            | $      | 2,531,059 |   |

 

Total commitments of $5.3 million were outstanding at September 30,2008 and consisted of $5.2 million at variable rates and $153,000 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 

 

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to maximize the use of observable inputs andminimize the use of unobservable inputs when measuring fair value.  The standard describes three levels ofinputs, as follows, that may be used to measure fair value.

 

Level 1 –              inputsare unadjusted quoted prices in active markets for identical assets orliabilities that the Company has the ability to access at the measurement date.

 

Level 2 –              inputsare other than quoted prices included in Level 1 that are observable for theasset or liability either directly or indirectly, such as quoted prices forsimilar assets or liabilities; quoted prices in markets that are not active; ormodel-based valuation techniques for which all significant assumptions areobservable in the market.

 

Level 3 –              valuationis generated from model-based techniques that use at least one significantassumption not observable in the market. These unobservable assumptions reflect estimates of assumptions thatmarket participants would use in pricing the asset or liability.  Valuation techniques include use of optionpricing models, discounted cash flow models and similar techniques.

 

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 September 30,2008, all of the Company’s available-for-sale securities, $31.9 million, werevalued using Level 2 inputs.

 

**NOTE 13 — REVERSAL OF LOSS ONABANDONMENT OF LEASE**

 

On July 27, 2007 the Company recorded aloss of approximately $170,000 as a result of abandoning its corporateheadquarters.  On September 1, 2008,to accommodate the Bank’s continued growth, Management decided to re-occupy thepreviously abandoned facility and utilize the office space for administrativepurposes.  In accordance with SFAS No. 146,*Accounting for Costs Associated with Exit orDisposal Activities,* approximately $133,000 of the originallyrecorded loss was reversed resulting in a credit to expense during the thirdquarter 2008.  The Company intends tooccupy the space for the remainder of the original lease agreement whichexpires on August 31, 2011.  Assuch, the Company will recognize occupancy expense on a straight-line basiseach period from now until the lease expiration.

 

**NOTE 14****—****SUBSEQUENTEVENTS**

 

Effective October 27, 2008, Mr. DouglasCrichfield replaced Mr. Paul M. Ferguson as President and Chief ExecutiveOfficer of the Company and Bank, pending regulatory approval.  Mr. Crichfield has served as a directorof the Company since 2006 and a director of the Bank since 2007 and waspreviously President and Chief Executive Officer of CFX Bank in Keene, NewHampshire and President and Chief Executive Officer of Community Bankshares,Inc in Concord, New Hampshire.  TheCompany anticipates a one-time charge to expense in the fourth quarter 2008associated with the severance agreement between the Company and Mr. Ferguson. The exact amount of such charge has yetto be determined.

 

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# **ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

The following discussion and analysis presentsthe Company’s consolidated financial condition as of September 30, 2008and results of operations for the three and nine months ended September 30,2008.  The discussion should be read inconjunction with the financial statements and the notes related thereto whichappear 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.

 

****RecentEconomic Events****

 

TheUnited States economy is experiencing reduced business activity as a result of,among other factors, disruptions in the financial system during the past year.Dramatic declines in the housing market, with falling home prices andincreasing foreclosures and unemployment, have resulted in significantwrite-downs of asset values by financial institutions, includinggovernment-sponsored entities and major commercial and investment banks.  The availability of credit, confidence in thefinancial sector, and level of volatility in the financial markets have allbeen adversely affected by these events. Recently, volatility and disruption in the capital and credit marketshave reached unprecedented levels.  Insome cases, the markets have produced downward pressure on stock prices withoutregard to those issuers’ underlying financial strength.

 

Inresponse to the financial crises affecting the banking system and financialmarkets, on October 3, 2008, the Emergency Economic Stabilization Act of2008 (the “EESA”) was signed into law. Pursuant to the EESA, the U.S. Treasury will have the authority to,among other things, purchase up to $700 billion of mortgages,mortgage-backed securities and certain other financial instruments fromfinancial institutions for the purpose of stabilizing and providing liquidityto the U.S. financial markets.

 

OnOctober 14, 2008, U.S. Treasury Secretary Paulson, after consulting withthe Federal Reserve and the FDIC, announced that the Department of the Treasurywill purchase equity stakes in a wide variety of banks and thrifts. Under thisprogram, known as the Troubled Asset Relief Program Capital Purchase Program(the “TARP Capital Purchase Program”), from the $700 billion authorized bythe EESA, the Treasury will make $250 billion of capital available to U.S.financial institutions in the form of preferred stock. In conjunction with thepurchase of preferred stock, the Treasury will receive warrants to purchasecommon stock with an aggregate market price equal to 15% of the preferredinvestment. Participating financial institutions will be required to adopt theTreasury’s standards for executive compensation and corporate governance forthe period during which the Treasury holds equity issued under the TARP CapitalPurchase Program. Secretary Paulson also announced that nine large financialinstitutions have already agreed to participate in the TARP Capital PurchaseProgram.

 

Alsoon October 14, 2008, after receiving a recommendation from the boards ofthe FDIC and the Federal Reserve, and consulting with the President of theU.S., Secretary Paulson signed the systemic risk exception to the FDIC Act,enabling the FDIC to temporarily provide a 100% guarantee of the senior debt ofall FDIC-insured institutions and their holding companies, as well as depositsin noninterest-bearing transaction deposit accounts under a Temporary LiquidityGuarantee Program. Coverage under the Temporary Liquidity Guarantee Program isavailable for 30 days without charge and thereafter at a cost of 75 basispoints per annum for senior unsecured debt and 10 basis points 

 

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perannum for noninterest-bearing transaction deposits. Management is assessing theBank’s participation in both the TARP Capital Purchase Program and theTemporary Liquidity Guarantee Program as it relates to insuringnoninterest-bearing deposit accounts, but has not yet made a definitivedecision as to whether it will participate. The Company does not have senior debt at this time and, therefore, willnot be participating in that portion of the Temporary Liquidity GuaranteeProgram.

 

Itis not clear at this time what impact the EESA, the TARP Capital PurchaseProgram, the Temporary Liquidity Guarantee Program, and any additional programsthat may be initiated in the future will have on the U.S. banking and financialmarkets.  However, many banks, such asours, that were not underwriting subprime residential real estate loans havenot experienced the significant losses in their loan and investment portfoliosor liquidity concerns that larger institutions have experienced.    We are not aware of any known trends,events or uncertainties particular to our Company that will have or arereasonably likely to have a material adverse effect on the following:

 

***Investment Securities***:  Wedo not hold mortgage-backed securities backed by subprime mortgages in ourinvestment portfolio or collateralized debt obligations backed directly orindirectly by such mortgage-backed securities or other low-quality loans.  Nor do we own corporate bonds and other debtinstruments issued by entities whose values have been impacted by thedeterioration of the financial markets. We do not hold any preferred or common stock of Fannie Mae or FreddieMac.

 

***Loans – Credit Quality***:  Wehave not engaged in the origination of subprime mortgage loans or in subprimelending.  We have not engaged in realestate development lending except in accordance with our rigorous underwritingstandards involving substantial collateral protection.  To date, we have not experienced anydeterioration in credit quality.  As of September 30,2008 we have no past due loans and no nonaccrual loans.

 

***Liquidity***:  Wehave not experienced any liquidity shortfalls and we have determined that wepossess adequate sources of liquidity for all of our reasonably foreseeableneeds.  We recognize that liquidity is ofheightened concern to all banks given the recent economic events.  However, we are not aware of any regulatoryor investor concerns regarding our capital, asset quality or funding sources.

 

Asof September 30, 2008, the Company had total assets of $54.9 million, netloans of $14.0 million, total deposits of $25.0 million, and stockholders’equity of $19.5 million.  In 2007, theCompany completed an initial public offering of its common stock, issuing2,553,671 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 September 30, 2008****

 

The following discussion focuses on the Company’s financial conditionand results of operations for the three months ended September 30,2008.  The Company’s principal operationsfor the three months ended September 30, 2008 consisted of the operationsof Solera National Bank, which opened for business September 10,2007.  The following discussion islimited and does not include a discussion of the comparison to prior financialresults for the three months ended September 30, 2007, since the Bank wasonly open for business 20 days during the third quarter of 2007.  As such, a discussion of the comparison toprior financial results is not meaningful to an understanding of our currentbusiness and, therefore, has been omitted from this Report.

 

**The following table presents, for the periodindicated, average assets, liabilities and stockholders’ equity, as well as thenet interest income from average interest-earning assets and the resultantannualized yields expressed in percentages.**

 

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**** ****

****Table 1****

 
| ** **                                      | ** ** | **3 Months Ended September 30, 2008** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Average  Balance**                                           | ** ** | **Interest** | ** ** | **Annualized  Yield /   Cost** | ** ** |
| **Assets:**                                     |       |                                                           |       |   |   |   |   |
| Interest-earning assets:                        |       |                                                           |       |   |   |   |   |
| Gross loans, net of unearned fees               |       | $                                                              | 12,507,436 |   | $ | 190,454 |   | 6.06 | % |
| Investment securities, available-for-sale       |       | 31,031,230                                                     |       | 404,781 |   | 5.19 |   |
| Investment in Federal Reserve Bank stock        |       | 492,650                                                        |       | 7,390 |   | 5.97 |   |
| Investment in Federal Home Loan Bank stock      |       | 502,561                                                        |       | 5,626 |   | 4.45 |   |
| Federal funds sold                              |       | 5,188,038                                                      |       | 28,068 |   | 2.15 |   |
| Interest-bearing deposits with banks            |       | 1,136,616                                                      |       | 9,828 |   | 3.44 |   |
| Other earning assets                            |       | 16,515                                                         |       | 26 |   | 0.63 |   |
| Total interest-earning assets                   |       | 50,875,046                                                     |       | $ | 646,173 |   | 5.05 | % |
| Noninterest-earning assets                      |       | 2,189,976                                                      |       |   |   |   |   |
| Total assets                                    |       | $                                                              | 53,065,022 |   |   |   |   |   |
|                                            |       |                                                           |       |   |   |   |   |
| **Liabilities and Stockholders’ Equity:**  |       |                                                           |       |   |   |   |   |
| Savings and money market deposits               |       | $                                                              | 10,295,399 |   | $ | 53,633 |   | 2.07 | % |
| Interest-bearing demand deposits                |       | 5,858,041                                                      |       | 3,943 |   | 0.27 |   |
| Time deposits                                   |       | 5,825,567                                                      |       | 44,222 |   | 3.02 |   |
| Federal funds purchased                         |       | 4,886                                                          |       | 28 |   | 2.28 |   |
| Federal Home Loan Bank advances                 |       | 10,000,000                                                     |       | 93,990 |   | 3.74 |   |
| Other borrowings                                |       | 171,032                                                        |       | 3,993 |   | 9.29 |   |
| Total interest-bearing liabilities              |       | 32,154,925                                                     |       | $ | 199,809 |   | 2.47 | % |
| Noninterest-bearing demand deposits             |       | 946,433                                                        |       |   |   |   |   |
| Noninterest-bearing liabilities                 |       | 531,712                                                        |       |   |   |   |   |
| Stockholders’ equity                       |       | 19,431,952                                                     |       |   |   |   |   |
| Total liabilities and stockholders’ equity |       | $                                                              | 53,065,022 |   |   |   |   |   |
|                                            |       |                                                           |       |   |   |   |   |
| Net interest income                             |       |                                                           |       | $ | 446,364 |   |   |   |
|                                            |       |                                                           |       |   |   |   |   |
| Net interest spread                             |       |                                                           |       |   |   | 2.58 | % |
|                                            |       |                                                           |       |   |   |   |   |
| Net interest margin                             |       |                                                           |       |   |   | 3.49 | % |

 

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

 

Net interest income isthe difference 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.

 

The Federal Reserve Boardinfluences the general market rates of interest, including the deposit and loanrates offered by the Bank. The Bank’s loan portfolio is significantly affectedby changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowerswith strong credit, was 7.75% when the Bank opened for business in September 2007.  Since then, it decreased 50 basis pointsin the fourth quarter of 2007 to end the year at 7.25%.  During the first nine months of 2008, theprime interest rate decreased another 200 basis points in the firstquarter and 25 basis points in the second quarter to end the period at5.00%.

 

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The federal funds rate,which is the cost of immediately available overnight funds, has moved in asimilar manner.  It was 4.75% on October 1,2007 and decreased 50 basis points in the fourth quarter to end the yearat 4.25%.  During the first nine monthsof 2008, the federal funds rate decreased 200 basis points in the firstquarter and 25 basis points in the second quarter to end the period at2.00%.  Subsequent to quarter-end, theFederal Reserve Board made another 100 basis point decrease to 1.00% as of November 1,2008.  The prime interest rate decreasedanother 1.00% accordingly.

 

The Company’s balance sheet is currently asset sensitive, meaning thatearning assets generally reprice more quickly than interest-bearingliabilities. Therefore, the Company could experience compression in its netinterest margin during periods of declining interest rates.

 

Net interest income was $446,000 in the third quarter of 2008. Ourannualized net interest margin was 3.49% for the three months ended September 30,2008.

 

Total interest income was$646,000 for the third quarter of 2008 consisting primarily of interest oninvestment securities of $405,000, interest and fees on loans of $190,000 andinterest on federal funds sold of $28,000. Average net loans were $12.5 million, and other average interest-earningassets were $38.4 million, consisting primarily of average available-for-salesecurities of $31.0 million, average federal funds sold of $5.2 million andaverage certificates of deposits with banks of $1.1 million.

 

Total interest expensewas $200,000 in the third quarter of 2008. This consisted primarily of interest expense on Federal Home Loan Bankadvances of $94,000, interest expense on savings and money market accounts of$54,000, and interest expense on certificates of deposit of $44,000.

 

****Provisionfor Loan Losses****

 

We determine a provisionfor loan 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.”**

 

In the third quarter of2008, our provision for loan losses was $46,000 relating to the growth of ourloan portfolio and the estimated probable losses inherent within the portfoliodue to uncertainties in economic conditions. There were no loans specifically reserved for under the SFAS 114component of the loan loss reserve. Furthermore, there were no charge-offs or non-performing loans duringthe third quarter of 2008.

 

****NoninterestIncome****

 

The noninterest incomefor the quarter ended September 30, 2008 was $28,000, consisting primarilyof deposit service charges and fees of $21,000. Additionally, the Company earned $7,000 in sublease income for officeswithin the Bank’s main office building that are leased to third parties.

 

****NoninterestExpense****

 

Our total noninterest expense was $774,000 for the quarter ended September 30,2008.  This consisted of salaries andbenefits of $561,000 related to the 21 full-time equivalent employees as of September 30,2008; professional fees of $22,000, for external audit, legal and consultingfees.  Occupancy expense was $113,000 forthe third quarter 2008 primarily for lease expense for the Bank’s main officebuilding and depreciation expense for the Bank’s furniture and equipment.  The Company recorded a credit to expense of$133,000 during the third quarter 2008 in conjunction with the re-occupancy ofits previously abandoned corporate offices. See additional discussion in Note 13.

 

Other general andadministrative expenses totaled $211,000 for the quarter ended September 30,2008 and consisted of marketing and promotional expenses of $75,000 as the Bankcontinued to raise community awareness of the Bank’s products andservices.  Data processing fees were$62,000 and include the costs to operate the Bank’s primary bankingsoftware.  Regulatory and reporting feeswere $20,000 primarily attributable to bank assessment fees paid to the Officeof the Comptroller of the Currency, the Federal Reserve Bank, and the FederalDeposit Insurance Corporation as well as fees associated with filing reportswith the Securities and Exchange Commission. 

 

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Other expenses of $54,000included $8,000 for printing, stationery and supplies, $8,000 for telephone andcommunication lines, $7,000 for travel and entertainment, $5,000 for postageand shipping and $4,000 each for insurance, dues and memberships, and trainingand education.  An additional $14,000related to other miscellaneous operating expenses.

 

****IncomeTaxes****

 

No federal or state taxexpense has been recorded for the quarter ended September 30, 2008, basedupon net operating losses.  Since it isuncertain that the Company will become profitable, the deferred tax benefitaccumulated to date has a full valuation allowance so that the net deferred taxbenefit at September 30, 2008 is $0.

 

****Results of Operations forthe Nine Months Ended September 30, 2008****

 

Thefollowing discussion focuses on the Company’s financial condition and resultsof operations for the nine months ended September 30, 2008.  The Company’s principal operations for thenine months ended September 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 thenine months ended September 30, 2007, since the Bank was open for businessonly 20 days of the first nine months of 2007. As such, a discussion of the comparison to prior financial results isnot meaningful to an understanding of our current business and, therefore, hasbeen omitted from this Report.

 

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**Thefollowing table presents, for the period indicated, average assets, liabilitiesand stockholders’ equity, as well as the net interest income from averageinterest-earning assets and the resultant annualized yields expressed inpercentages.**

 

****Table 2****

 
| ** **                                      | ** ** | **9 Months Ended September 30, 2008** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Average  Balance**                                           | ** ** | **Interest** | ** ** | **Annualized  Yield /   Cost** | ** ** |
| **Assets:**                                     |       |                                                           |       |   |   |   |   |
| Interest-earning assets:                        |       |                                                           |       |   |   |   |   |
| Gross loans, net of unearned fees               |       | $                                                              | 9,023,997  |   | $ | 419,056 |   | 6.20 | % |
| Investment securities, available-for-sale       |       | 25,089,454                                                     |       | 957,593 |   | 5.10 |   |
| Investment in Federal Reserve Bank stock        |       | 512,485                                                        |       | 23,037 |   | 6.00 |   |
| Investment in Federal Home Loan Bank stock      |       | 251,544                                                        |       | 8,255 |   | 4.38 |   |
| Federal funds sold                              |       | 4,191,038                                                      |       | 81,134 |   | 2.59 |   |
| Interest-bearing deposits with banks            |       | 753,778                                                        |       | 21,624 |   | 3.83 |   |
| Other earning assets                            |       | 16,664                                                         |       | 1,687 |   | 13.52 |   |
| Total interest-earning assets                   |       | 39,838,960                                                     |       | $ | 1,512,386 |   | 5.07 | % |
| Noninterest-earning assets                      |       | 1,845,238                                                      |       |   |   |   |   |
| Total assets                                    |       | $                                                              | 41,684,198 |   |   |   |   |   |
|                                            |       |                                                           |       |   |   |   |   |
| **Liabilities and Stockholders’ Equity:**  |       |                                                           |       |   |   |   |   |
| Savings and money market deposits               |       | $                                                              | 7,341,905  |   | $ | 125,431 |   | 2.28 | % |
| Interest-bearing demand deposits                |       | 2,821,064                                                      |       | 5,720 |   | 0.27 |   |
| Time deposits                                   |       | 5,338,560                                                      |       | 157,450 |   | 3.94 |   |
| Federal funds purchased                         |       | 6,387                                                          |       | 109 |   | 2.30 |   |
| Federal Home Loan Bank advances                 |       | 5,012,774                                                      |       | 136,336 |   | 3.63 |   |
| Other borrowings                                |       | 179,542                                                        |       | 12,587 |   | 9.36 |   |
| Total interest-bearing liabilities              |       | 20,700,232                                                     |       | $ | 437,633 |   | 2.82 | % |
| Noninterest-bearing demand deposits             |       | 561,924                                                        |       |   |   |   |   |
| Noninterest-bearing liabilities                 |       | 279,445                                                        |       |   |   |   |   |
| Stockholders’ equity                       |       | 20,142,597                                                     |       |   |   |   |   |
| Total liabilities and stockholders’ equity |       | $                                                              | 41,684,198 |   |   |   |   |   |
|                                            |       |                                                           |       |   |   |   |   |
| Net interest income                             |       |                                                           |       | $ | 1,074,753 |   |   |   |
|                                            |       |                                                           |       |   |   |   |   |
| Net interest spread                             |       |                                                           |       |   |   | 2.25 | % |
|                                            |       |                                                           |       |   |   |   |   |
| Net interest margin                             |       |                                                           |       |   |   | 3.60 | % |

 

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

 

Net interest income was $1.1 million for the nine months ended September 30,2008. Our annualized net interest margin was 3.60% for the same period.

 

Total interest income was$1.5 million for the nine months ended September 30, 2008 consistingprimarily of interest on investment securities of $958,000, interest and feeson loans of $419,000 and interest on federal funds sold of $81,000.  During this period, average net loans were$9.0 million and other average interest-earning assets were $30.8 million.

 

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Total interest expensewas $438,000 in the first nine months of 2008. This consisted primarily of interest expense on Federal Home Loan Bankadvances of $136,000, interest expense on savings and money market accounts of$125,000, and interest expense on certificates of deposit of $157,000.

 

****Provisionfor Loan Losses****

 

During the first ninemonths of 2008, our provision for loan losses was $133,000 relating to thegrowth of our loan portfolio and the estimated probable losses inherent withinthe portfolio due to uncertainties in economic conditions.  There were no 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.

 

****NoninterestIncome****

 

The noninterest incomefor the nine months ended September 30, 2008 was $99,000, consistingprimarily of gains on the sale of investment securities of $45,000.  Additionally, the Company earned $38,000 indeposit service charges and fees, and $16,000 in sublease income for an officewithin the Bank’s main office building that is leased to a third party.

 

****NoninterestExpense****

 

Our total noninterest expense was $2.5 million for the nine monthsended September 30, 2008.  Thisconsisted of salaries and benefits of $1.5 million, occupancy expenses of$344,000, primarily for rental expense for the Bank’s main office building anddeprecation of furniture and equipment. A credit of $132,000 was recorded for the reversal of the abandonedlease liability during the third quarter 2008. (See additional discussion in Note 13). Also included in noninterest expense is $167,000 of professional feesfor external audit, legal and consulting fees.

 

Other general andadministrative expenses totaled $568,000 for the nine months ended September 30,2008 and consisted of marketing and promotional expenses of $201,000 asmanagement focused on raising awareness in the community of the Bank’s productsand services.  Data processing fees were$161,000 and include the costs to run the Bank’s main banking software.  Regulatory and reporting fees of $50,000 areattributable to bank assessment fees paid to the Office of the Comptroller ofthe Currency, the Federal Reserve Bank, and the Federal Deposit InsuranceCorporation as well as fees associated with filing reports with the Securitiesand Exchange Commission. Printing, stationery and supplies were $41,000 andinclude the costs to print the Annual Report and Proxy statement.  The remainder of the expenses includedtelephone and communication expenses of $21,000, travel and entertainmentexpenses of $20,000, insurance expenses of $13,000, dues and memberships of$12,000, training and education of $10,000, postage and shipping of $9,000 andother miscellaneous office expenses of $30,000.

 

****Financial Condition****

 

Customer deposits,Federal Home 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 September 30, 2008 of$54.9 million.

 

As of September 30,2008, stockholders’ equity was $19.5 million, as a result of the initial publicoffering, partially offset by the inception-to-date losses from start-upactivities and current operations.

 

****Short-TermInvestments and Interest-Bearing Deposits in Other Financial Institutions****

 

At September 30,2008, Solera National Bank had $4.9 million in federal funds sold and $1.3million in interest-bearing deposits with other financial institutions.  These interest-bearing deposits andshort-term investments allow Solera National Bank to meet liquidityrequirements and provide temporary holdings until the funds can be otherwisedeployed or invested.

 

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****FederalHome Loan Bank and Federal Reserve Bank Stock****

 

**At September 30,2008, the Bank had a total of $1.0 million invested in bank stocks carried atamortized cost consisting of $493,000 in Federal Reserve Bank stock and$508,000 in Federal Home Loan Bank stock. These investments allow Solera National Bank to conduct business withthese entities.  As of September 30,2008, the Federal Reserve Bank stock is yielding an average of 6.0% and theFederal Home Loan Bank stock is yielding an average rate of 4.5%.**

 

****InvestmentSecurities****

 

Our investment portfolioserves as a source of interest income and, secondarily, as a source ofliquidity and a management tool for our interest rate sensitivity.  We manage our investment portfolio accordingto a written investment policy established by our Board of Directors.

 

At September 30,2008, Solera National Bank’s securities consisted of available-for-salesecurities of $31.9 million.  Thefollowing table provides additional detail on the Company’s investmentsecurities as of September 30, 2008 and December 31, 2007:

 
| ** **                              | ** ** | **September 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                |       | $                                | 5,650,362  |                            | 4.97       | % | $ | 3,508,333 |   | 5.09 | % |
| State and municipal                     |       | 1,063,340                        |       | 5.43                            |       | 1,117,262 |   | 5.43 |   |
| Mortgage-backed securities              |       | 25,155,440                       |       | 5.23                            |       | 9,235,186 |   | 5.34 |   |
| **Total securities available-for-sale** |       | $                                | 31,869,142 |                            | 5.19       | % | $ | 13,860,781 |   | 5.29 | % |

 

****LoanPortfolio****

 

Our primary focus isincome from interest on loans. The following table presents the composition ofour loan portfolio by category as of the dates indicated:

 
| ** **                                             | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **Amount**                       | ** ** | **% of  Total**            | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
| Real estate – commercial                          |       | $                                | 5,097,489  |                            | 36         | % | $ | 3,003,274 |   | 79 | % |
| Real estate – residential                         |       | 3,981,454                        |       | 28                              |       | 190,557 |   | 5 |   |
| Construction and land development                      |       | 2,593,094                        |       | 18                              |       | 399,732 |   | 10 |   |
| Commercial and industrial                              |       | 2,255,662                        |       | 16                              |       | 188,684 |   | 5 |   |
| Consumer                                               |       | 253,493                          |       | 2                               |       | 29,407 |   | 1 |   |
| Gross loans                                            |       | 14,181,192                       |       | 100                             | %          | 3,811,654 |   | 100 | % |
| Less:   Allowance for loan losses       |       | (180,000                         | )          |                            |       | (47,396 | ) |   |   |
|    Deferred loan fees and expenses, net |       | (35,152                          | )          |                            |       | 3,188 |   |   |   |
| Loans, net                                             |       | $                                | 13,966,040 |                            |       |   | $ | 3,767,446 |   |   |   |

 

As of September 30,2008, net loans were $14.0 million, a $10.2 million increase from $3.8 millionat December 31, 2007.  Net loans asa percentage of total assets were 25% as of September 30, 2008, comparedto 14% at December 31, 2007.

 

The real estate –commercial loan portfolio consists primarily of lines of credit or term loansto businesses that are secured by real estate. At September 30, 2008, there were $5.1 million real estatecommercial loans in the loan portfolio, an increase of 70%, or $2.1 millionfrom $3.0 million at December 31, 2007.

 

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The real estate –residential loan portfolio consists of residential second mortgage loans, homeequity loans and lines of credit and home improvement loans.  At September 30,2008, $4.0 million was outstanding for residential real estate loans, anincrease of $3.8 million from $191,000 outstanding at December 31, 2007.

 

The construction and landdevelopment loan portfolio is comprised of construction loans forowner-occupied construction and development loans for property beingconstructed and sold to third parties. At September 30, 2008, construction and land development loanstotaled $2.6 million, an increase of $2.2 million from $400,000 at December 31,2007.

 

The commercial andindustrial loan portfolio consists of loans to businesses primarily for workingcapital lines of credit.  At September 30, 2008, commercial andindustrial loans totaled $2.3 million, a $2.1 million increase from $189,000 atDecember 31, 2007.

 

The consumer and otherloan portfolio consists of personal lines of credit, loans to acquire personalassets such as automobiles and boats and overdraft protection balances for ourdeposit customers.  As of September 30,2008, there were $253,000 consumer and other loans in the loan portfolio, anincrease of $224,000 from December 31, 2007.

 

Loan concentrations areconsidered to exist when there are amounts loaned to a multiple number ofborrowers engaged in similar activities that would cause them to be similarlyimpacted by economic or other conditions. The Bank’s loan portfolio generallyconsists of loans to borrowers within Colorado. Although the Bank seeks to avoid concentrations of loans to a singleindustry or based upon a single class of collateral, the Bank’s loan portfolioconsists primarily of real estate loans secured by real estate located inColorado, making the value of the portfolio more susceptible to declines inreal estate values and other changes in economic conditions in Colorado.  Also, since the Bank’s loan portfolio is inthe initial stages, it contains only 60 funded loans, with the three largestloans comprising approximately 37% of the portfolio’s gross value.  However, management expects this concentrationto diminish over time as the Bank’s loan portfolio continues to grow.  No single borrower can be approved for a loanover the Bank’s current legal lending limit of approximately $2.5 million.  This regulatory requirement helps to ensurethe Bank’s exposure to one individual customer is limited.

 

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

 

Loan terms vary accordingto loan type. The following table shows the contractual maturity distributionof loans as of September 30, 2008:

 
| ** **                        | **** **** | ****As of September 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     |           | $                                   | 30,000         |   | 3,233,023 |   | 991,531 |   | 842,935 |   | — |   | $ | 5,097,489 |   |
| Real estate – residential    |           | —                              |           | 416,226 |   | — |   | 46,712 |   | 3,518,516 |   | 3,981,454 |   |
| Construction and land development |           | 2,355,099                           |           | — |   | 237,995 |   | — |   | — |   | 2,593,094 |   |
| Commercial and industrial         |           | 1,310,241                           |           | 238,565 |   | 456,355 |   | 250,501 |   | — |   | 2,255,662 |   |
| Consumer                          |           | 219,050                             |           | 25,180 |   | — |   | 9,263 |   | — |   | 253,493 |   |
| Gross loans                       |           | $                                   | 3,914,390      |   | 3,912,994 |   | 1,685,881 |   | 1,149,411 |   | 3,518,516 |   | $ | 14,181,192 |   |

 

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

 

Nonperforming assets consist of loans and leases on nonaccrual status,loans 90 days or more past due and still accruing interest, loans that havebeen restructured resulting in a reduction or deferral of interest or principal,OREO, and other repossessed assets. As of September 30, 2008, there wereno nonperforming assets.

 

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A potential problem loan is defined as a loan where information aboutpossible credit problems of the borrower is known, causing management to haveserious doubts as to the ability of the borrower to comply with the presentloan payment terms and which may result in the inclusion of such loan in one ofthe nonperforming asset categories. An internally classified loan list ismaintained that helps management assess the overall quality of the loanportfolio and the adequacy of the allowance for loan losses. Loans classifiedas “special mention” are those that contain a weakness that, if leftunattended, could develop into a problem affecting the ultimate collectibilityof the loan. Loans classified as “substandard” are those loans with clear anddefined weaknesses, such as highly leveraged positions, unfavorable financialratios, uncertain repayment resources or poor financial condition, which mayjeopardize recoverability of the loan. Loans classified as “doubtful” are thoseloans that have characteristics similar to substandard loans, but also have anincreased risk that loss may occur or at least a portion of the loan mayrequire a charge-off if liquidated at present. Although loans classified assubstandard do not duplicate loans classified as doubtful, both substandard anddoubtful loans may include some loans that are past due at least 90 days, areon nonaccrual status or have been restructured. Loans classified as “loss” arethose loans that are in the process of being charged-off. Solera National Bankhad no loans classified in these categories at September 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 $180,000,or 1.27% of outstanding principal as of September 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 thenine months ended September 30, 2008, there were no charge-offs.

 

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

 

Inthe ordinary course of business, the Company enters into various off-balancesheet commitments and other arrangements to extend credit that are notreflected in the consolidated balance sheets of the Company.  The business purpose of these off-balancesheet commitments is the routine extension of credit.  The total amounts of off-balance sheetfinancial instruments with credit risk were as follows:

 
| ** **                   | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Commitments to extend credit |       | $                                | 5,327,607  |                            | $          | 2,522,059 |   |
| Letters of credit            |       | —                           |       | 9,000                           |       |
| Total commitments            |       | $                                | 5,327,607  |                            | $          | 2,531,059 |   |

 

Commitments to extend credit are for revolving lines of creditarrangements and unused commitments for commercial and real estate securedloans.  Commitments generally have fixedexpiration dates or other termination clauses and may require payment of afee.  Since many of the commitments areexpected to expire without being drawn upon, the commitments do not necessarilyrepresent future cash requirements.

 

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

 

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loan facilities to customers and, therefore, the Company applies thesame rigorous underwriting standards to letters of credit.

 

The Company faces the risk of deteriorating credit quality of borrowersto whom a commitment to extend credit has been made; however, no significantcredit losses are expected from these commitments and arrangements.

 

****Borrowings****

 

Duringthe second quarter 2008, the Bank borrowed $10.0 million from the Federal HomeLoan Bank of Topeka (FHLB) in order to finance the purchase of investmentsecurities.  The FHLB advances maturebetween April 16, 2009 and June 20, 2013.  The advances have a weighted-average fixedinterest rate of 3.73%.

 

TheBank has also established an unsecured Federal Funds line-of-credit withBankers Bank of the West, First Tennessee Bank N.A, the Independent BankersBank, and Wells Fargo.  Additionally, theBank has access to a secured Federal Funds line with Bankers Bank of theWest.  As of September 30, 2008, theCompany had $0 outstanding on these lines.

 

****Loan Commitments****

 

AtSeptember 30, 2008, the Company had $5.3 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 sheetexposure, and to minimize disincentives for holding liquid assets. Under theregulations, assets and off-balance sheet items are assigned to broad riskcategories, each with appropriate weights. The resulting capital ratiosrepresent capital as a percentage of total risk-weighted assets and off-balancesheet items. Under the prompt corrective action regulations, to be adequatelycapitalized a bank must maintain minimum ratios of total capital torisk-weighted assets of 8.0%, Tier 1 capital to risk-weighted assets of 4.0%,and Tier 1 capital to total average assets of 4.0%. Failure to meet thesecapital requirements can initiate certain mandatory, and possibly additionaldiscretionary, actions by regulators that, if undertaken, could have a directmaterial effect on Solera National Bank’s financial statements.

 

As of September 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 September 30, 2008:

 
| ** **                                           | **** **** | ****Actual**** | **** **** | ****For Capital Adequacy  Purposes**** | ** ** | ****To Be Well Capitalized  Under Prompt Corrective  Action Problems**** | ** ** |
|------------------------------------------------------|----------------|----------------|----------------|--------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ****As of September 30, 2008**** | ** **     | **Amount**     | ** **     | **%**                                            | ** ** | **Amount**                                                                                             | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| **($ in thousands)**                       |           |           |           |                                             |       |                                                                                                   |       |   |   |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)              |           | $              | 15,676         |                                             | 66.2       | %                                                                                                      | $          | 1,894 |   | >8.0 | % | $ | 2,368 |   | >10.0 | % |
| Tier 1 capital (to risk-weighted assets)             |           | $              | 15,496         |                                             | 65.4       | %                                                                                                      | $          | 947 |   | >4.0 | % | $ | 1,421 |   | >6.0 | % |
| Tier 1 capital (to average assets)                   |           | $              | 15,496         |                                             | 29.2       | %                                                                                                      | $          | 2,124 |   | >4.0 | % | $ | 2,655 |   | >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 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 are retail and commercial deposits,loan and securities repayments, other short-term borrowings, and other fundsprovided by operations. While scheduled loan repayments and maturinginvestments 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 September 30, 2008, the loan to deposit ratio was57%.

 

SoleraNational Bank had cash and cash equivalents of $5.4 million, or 10% of totalBank assets, at September 30, 2008. Management feels Solera National Bank should have adequate liquidity tomeet anticipated future funding needs.

 

# **ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

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

## ** **

# **ITEM4(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.                                                                                                 |                                                                                                                                          |   |
|                                                                                                            |                                                                                                                                          |   |
| **ITEM  1A. RISK FACTORS**                                                                                      |                                                                                                                                          |   |
|                                                                                                            |                                                                                                                                          |   |
| As  a smaller reporting company, the Company is not required to provide the  information required by this Item. |
|                                                                                                            |                                                                                                                                          |   |
| **ITEM  2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**                                        |
|                                                                                                            |                                                                                                                                          |   |
| Not applicable.                                                                                                 |                                                                                                                                          |   |
|                                                                                                            |                                                                                                                                          |   |
| **ITEM  3. DEFAULTS UPON SENIOR SECURITIES**                                                                    |                                                                                                                                          |   |
|                                                                                                            |                                                                                                                                          |   |
| Not applicable.                                                                                                 |                                                                                                                                          |   |
|                                                                                                            |                                                                                                                                          |   |
| **ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                                |
|                                                                                                            |                                                                                                                                          |   |
| Not applicable.                                                                                                 |                                                                                                                                          |   |
|                                                                                                            |                                                                                                                                          |   |
| **ITEM  5. OTHER INFORMATION**                                                                                  |                                                                                                                                          |   |
|                                                                                                            |                                                                                                                                          |   |
| Not applicable.                                                                                                 |                                                                                                                                          |   |
|                                                                                                            |                                                                                                                                          |   |
| **ITEM  6. EXHIBITS**                                                                                           |                                                                                                                                          |   |
|                                                                                                            |                                                                                                                                          |   |
| 31.1                                                                                                            | Certification  of the Principal Executive Officer pursuant to Rule 13a-14(a) of  the Securities Exchange Act.*                      |
| 31.2                                                                                                            | Certification of the Principal Accounting and  Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities  Exchange Act.* |
| 32.1                                                                                                            | Certification pursuant to  Rule 13a-14(b) of the Securities Exchange Act and 18 U.S.C. §1350.*                                 |
|                                                                                                                 |                                                                                                                                               |        |  |

 

----

* 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: November 12, 2008 | /s/ Douglas Crichfield                              |
|                         | Douglas Crichfield                                  |
|                         | President and Chief Executive Officer               |
|                         | (Principal Executive Officer)                       |
|                         |                                                |
|                         |                                                |
|                         | /s/ Robert J. Fenton                                |
|                         | Robert J. Fenton                                    |
|                         | Vice President, Secretary & Treasurer      |
|                         | (Principal Accounting and Chief Financial  Officer) |

#  

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# **EXHIBIT INDEX**

 
| **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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