Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended September 30, 2008

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

Commission file number 000-53181

SOLERA NATIONAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

319 S. Sheridan Blvd.

Lakewood, CO 80226

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

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

Yes x  No o

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

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

Yes o  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:  As of November 10, 2008, 2,553,671 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.

Table of Contents

FORM 10-Q

SOLERA NATIONAL BANCORP, INC.

INDEX

2

Table of Contents

INTRODUCTORY NOTE

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

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

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

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

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

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

·                  the departures of key personnel or directors may impair Solera National Bank’s operations;

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

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

·                  the Company could be negatively affected by changes in interest rates;

·                  the Company is subject to extensive regulatory oversight, which could restrain our growth and profitability;

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

·                  the liquidity of the Company common stock will be affected by its limited trading market;

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

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

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

3

Table of Contents

·                  government regulation may have an adverse effect on the Company’s profitability and growth;

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

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

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

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

For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in the Company’s 2007 Annual Report filed on Form 10-KSB with the SEC, which is available on the SEC’s website at www.sec.gov.  All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this Quarterly Report on Form 10-Q to reflect events or circumstances after the date hereof.  New factors emerge from time to time, and it is not possible for us to predict which factors, if any, will arise.  In addition, the Company cannot assess the impact of each factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

4

Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Solera National Bancorp, Inc.

Balance Sheets as of September 30, 2008 and December 31, 2007

(Unaudited)

See Notes to Financial Statements.

5

Table of Contents

Solera National Bancorp, Inc.

Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007

(Unaudited)

See Notes to Financial Statements.

6

Table of Contents

Solera National Bancorp, Inc.

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

See Notes to Financial Statements.

7

Table of Contents

Solera National Bancorp, Inc.

Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007

(Unaudited)

8

Table of Contents

Solera National Bancorp, Inc.

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

(Unaudited)

See Notes to Financial Statements.

9

Table of Contents

SOLERA NATIONAL BANCORP, INC.

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF ORGANIZATION

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

NOTE 2 — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position of the Company as of September 30, 2008, and the results of its operations for the three and nine months ended September 30, 2008 and 2007.  Cash flows are presented for the nine months ended September 30, 2008 and 2007.  Certain reclassifications have been made to the consolidated financial statements and related notes of prior periods to conform to the current presentation. These reclassifications had no impact on stockholders’ equity or net loss for the periods. Additionally, certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the U.S. Securities and Exchange Commission.  The Company believes that the disclosures in the unaudited condensed consolidated financial statements are adequate to make the information presented not misleading.  However, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-KSB as of and for the year ended December 31, 2007.

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

Critical Accounting Policies

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

Securities available-for-sale:  Securities available-for-sale are reported at fair value utilizing Level 2 inputs (see Note 12).  For these securities, the Company obtains fair value measurements from independent pricing services.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bonds’ terms and conditions, among other things.

Stock-based compensation:  The Company accounts for stock-based compensation to employees as outlined in FASB Statement No. 123(R), Share-Based Payment, (SFAS 123R).  The cost of employee services received in exchange for an award of equity instruments is based on the grant-date fair value of the award.

10

Table of Contents

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

The Company has established a formal process for determining an adequate allowance for loan losses.  The allowance for loan losses calculation process has two components.  The first component represents the allowance for loan losses for impaired loans computed in accordance with FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan (SFAS 114 Component), as amended by FASB Statement No. 118, Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures - an amendment of FASB Statement No. 114.  To determine the SFAS 114 Component, collateral dependent impaired loans are evaluated using internal analyses as well as third-party information, such as appraisals.  If an impaired loan is unsecured, it is evaluated using a discounted cash flow of the payments expected over the life of the loan using the loan’s effective interest rate and giving consideration to currently existing factors that would impact the amount or timing of the cash flows.  The second component is the allowance for loan losses calculated under FASB Statement No. 5, Accounting for Contingencies (SFAS 5 Component), and represents the estimated probable losses inherent within the portfolio due to uncertainties in economic conditions, delays in obtaining information about a borrower’s financial condition, delinquent loans that have not been determined to be impaired, results of internal and external loan reviews, and other factors.  This component of the allowance for loan losses is calculated by assigning a probable loss range, to each identified risk factor.  The recorded allowance for loan losses is the aggregate of the SFAS 114 Component and SFAS 5 Component.

Recently Issued Accounting Pronouncements

In May 2008, the FASB issued Financial Accounting Standard (“SFAS”) No. 162, The Hierarchy of Generally Accepted Accounting Principles, (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the hierarchy of principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States.  The hierarchical guidance provided by SFAS 162 did not have a significant impact on the Company’s financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB Statement No 51, (“SFAS 160”).  SFAS 160 amends Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 will be effective on January 1, 2009 and is not expected to have an impact on the Company’s financial statements, as the Company does not have any noncontrolling interest in a subsidiary at this time.

In June 2008, the FASB issued FASB Staff Position (FSP) no. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”).  FSP EITF 03-6-1 provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 will be effective on January 1, 2009. All previously reported earnings per share data will be retrospectively adjusted to conform with the provisions of FSP EITF 03-6-1. FSP EITF 03-6-1 is not expected to have a significant impact on the Company’s financial statements as the Company does not have any share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents.

11

Table of Contents

NOTE 3 — INVESTMENTS

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

Management evaluates investment securities for other-than-temporary impairment taking into consideration the extent and length of time the fair value has been less than cost, the financial condition of the issuer and whether the Company has the intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value.  Since all of the Bank’s investment securities were purchased after September 30, 2007, no securities have been in a continuous loss position for over twelve months.  However, some securities in our portfolio have been in a continuous loss position during the nine months ended September 30, 2008.  Management concluded that the continuous loss position on these securities is a result of the level of market interest rates and not a result of the underlying issuers’ ability to repay.  The Bank also has the ability and intent to hold these securities until their fair values recover to their amortized cost, which may be maturity.  Accordingly, as of September 30, 2008, no declines in value are deemed to be other than temporary.

The Company recorded a net unrealized 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 six securities during the first quarter 2008 for a realized gain of $39,620 and the Company sold five securities during the second quarter 2008 for a net realized gain of $5,644.  No securities were sold during the third quarter 2008.

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

NOTE 4 — INTEREST-BEARING DEPOSITS WITH BANKS

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

12

Table of Contents

NOTE 5 — LOANS

Loans consist of the following:

During the first nine months of 2008, no loans were impaired, transferred to foreclosed properties or past due.

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

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

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

NOTE 6 — ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses for the first nine months of 2008 and 2007 is summarized as follows:

13

Table of Contents

NOTE 7 — DEPOSITS

Deposits are summarized as follows:

In the ordinary course of business, certain officers, directors, stockholders, and employees of the Bank have deposits with the Bank.  In the Bank’s opinion, all deposit relationships with such parties are made on substantially the same terms including interest rates and maturities, as those prevailing at the time for comparable transactions with other persons.  The balance of related party deposits at September 30, 2008 and December 31, 2007 was approximately $2.2 million and $2.1 million, respectively.

NOTE 8 — STOCK-BASED COMPENSATION

The Company’s 2007 Stock Incentive Plan (the “Plan”) was approved by the Company’s Board of Directors (the “Board”) with an effective date of September 10, 2007 and was approved by the Company’s stockholders at the annual meeting held on June 17, 2008.  Under the terms of the Plan, officers and key employees may be granted both nonqualified and incentive stock options and directors and other consultants, who are not also officers or employees, may only be granted nonqualified stock options. The Board reserved 510,734 shares of common stock for issuance under the Plan.  The Plan provides for options to purchase shares of common stock at a price not less than 100% of the fair market value of the stock on the date of grant.  Stock options expire no later than ten years from the date of the grant and generally vest over four years.  The Plan provides for accelerated vesting if there is a change of control, as defined in the Plan.  The Company recognized stock-based compensation cost of approximately $63,000 and $188,000 during the three and nine months ended September 30, 2008, respectively.  The Company recognized stock-based compensation cost of $12,500 during the three and nine months ended September 30, 2007.  No tax benefit related to stock-based compensation will be recognized until the Company is profitable.

The Company accounts for its stock-based compensation under the provisions of SFAS 123R.  The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model.  The Company granted 10,000 options during the third quarter 2008 to newly hired employees.  The Company granted 361,897 options during the third quarter 2007 to employees and directors in conjunction with the Bank’s opening.

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

14

Table of Contents

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

NOTE 9 — NONINTEREST EXPENSE

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

NOTE 10 — INCOME TAXES

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

15

Table of Contents

The Company has provided a 100% valuation allowance for its net deferred tax asset due to uncertainty of realization during the carryforward period.  As of September 30, 2008, the Company has net operating loss carryforwards of approximately $2.3 million for federal income tax purposes.  Federal net operating loss carry forwards, to the extent not used, will expire beginning in 2027.

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

NOTE 11 — COMMITMENTS AND CONTINGENCIES

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

At September 30, 2008 and December 31, 2007 the following financial instruments were outstanding whose contract amounts represent credit risk:

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 fixed rates.  Total commitments of $2.5 million were outstanding at December 31, 2007 and consisted of $2.4 million at variable rates and $88,000 at fixed rates.

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

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

NOTE 12 — FAIR VALUE MEASUREMENTS (SFAS 157 DISCLOSURE)

Effective January 1, 2008, the Company determines the fair market values of its financial instruments based on the fair value hierarchy established in SFAS No. 157, Fair Value Measurements (SFAS 157), which requires an entity

16

Table of Contents

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

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

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

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

The Company carries its available-for-sale securities at fair value.  Fair value measurement is obtained from independent pricing services which utilize observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bonds’ terms and conditions, among other things.  As of September 30, 2008, all of the Company’s available-for-sale securities, $31.9 million, were valued using Level 2 inputs.

NOTE 13 — REVERSAL OF LOSS ON ABANDONMENT OF LEASE

On July 27, 2007 the Company recorded a loss of approximately $170,000 as a result of abandoning its corporate headquarters.  On September 1, 2008, to accommodate the Bank’s continued growth, Management decided to re-occupy the previously abandoned facility and utilize the office space for administrative purposes.  In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, approximately $133,000 of the originally recorded loss was reversed resulting in a credit to expense during the third quarter 2008.  The Company intends to occupy the space for the remainder of the original lease agreement which expires on August 31, 2011.  As such, the Company will recognize occupancy expense on a straight-line basis each period from now until the lease expiration.

NOTE 14 — SUBSEQUENT EVENTS

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

17

Table of Contents

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

The following discussion and analysis presents the Company’s consolidated financial condition as of September 30, 2008 and results of operations for the three and nine months ended September 30, 2008.  The discussion should be read in conjunction with the financial statements and the notes related thereto which appear elsewhere in this Quarterly Report on Form 10-Q.

EXECUTIVE OVERVIEW

We are a Delaware corporation that was incorporated on January 12, 2006 to organize and serve as the holding company for Solera National Bank, a national bank that opened for business on September 10, 2007.  Solera National Bank is a full-service commercial bank headquartered in Lakewood, Colorado serving the Denver metropolitan area.  Our main banking office is located at 319 S. Sheridan Blvd., Lakewood, Colorado 80226.  Our telephone number is (303) 209-8600.

We offer a broad range of commercial and consumer banking services to small and medium-sized businesses, licensed professionals and individuals who are particularly responsive to the personalized service that Solera National Bank provides to its customers.  We believe that local ownership and control allows the Bank to serve customers more efficiently and effectively.  Solera National Bank competes on the basis of providing a unique and personalized banking experience combined with a full range of services, customized and tailored to fit the individual needs of its clients.  Solera National Bank serves the entire market area and, in addition, has a special niche focus on the local Hispanic population due to the significant growth of this demographic.

Recent Economic Events

The United 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 and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks.  The availability of credit, confidence in the financial sector, and level of volatility in the financial markets have all been adversely affected by these events.  Recently, volatility and disruption in the capital and credit markets have reached unprecedented levels.  In some cases, the markets have produced downward pressure on stock prices without regard to those issuers’ underlying financial strength.

In response to the financial crises affecting the banking system and financial markets, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (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 from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.

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

Also on October 14, 2008, after receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President of the U.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 of all FDIC-insured institutions and their holding companies, as well as deposits in noninterest-bearing transaction deposit accounts under a Temporary Liquidity Guarantee Program. Coverage under the Temporary Liquidity Guarantee Program is available for 30 days without charge and thereafter at a cost of 75 basis points per annum for senior unsecured debt and 10 basis points

18

Table of Contents

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

It is not clear at this time what impact the EESA, the TARP Capital Purchase Program, the Temporary Liquidity Guarantee Program, and any additional programs that may be initiated in the future will have on the U.S. banking and financial markets.  However, many banks, such as ours, that were not underwriting subprime residential real estate loans have not experienced the significant losses in their loan and investment portfolios or 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 are reasonably likely to have a material adverse effect on the following:

Investment Securities:  We do not hold mortgage-backed securities backed by subprime mortgages in our investment portfolio or collateralized debt obligations backed directly or indirectly by such mortgage-backed securities or other low-quality loans.  Nor do we own corporate bonds and other debt instruments issued by entities whose values have been impacted by the deterioration of the financial markets.  We do not hold any preferred or common stock of Fannie Mae or Freddie Mac.

Loans – Credit Quality:  We have not engaged in the origination of subprime mortgage loans or in subprime lending.  We have not engaged in real estate development lending except in accordance with our rigorous underwriting standards involving substantial collateral protection.  To date, we have not experienced any deterioration in credit quality.  As of September 30, 2008 we have no past due loans and no nonaccrual loans.

Liquidity:  We have not experienced any liquidity shortfalls and we have determined that we possess adequate sources of liquidity for all of our reasonably foreseeable needs.  We recognize that liquidity is of heightened concern to all banks given the recent economic events.  However, we are not aware of any regulatory or investor concerns regarding our capital, asset quality or funding sources.

As of September 30, 2008, the Company had total assets of $54.9 million, net loans of $14.0 million, total deposits of $25.0 million, and stockholders’ equity of $19.5 million.  In 2007, the Company completed an initial public offering of its common stock, issuing 2,553,671 shares at a price of $10.00 per share.  The gross proceeds received from the offering were approximately $25.5 million.

Results of Operations for the Three Months Ended September 30, 2008

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

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

19

Table of Contents

Table 1