As filed with the Securities and Exchange
Commission on April 13, 2011
Registration
No. 333-170862
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 2
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
WESTERN LIBERTY
BANCORP
(Exact name of registrant as
specified in its charter)
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Delaware
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6022
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26-0469120
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(State or other jurisdiction
of incorporation)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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8363 W. Sunset Road,
Suite 350
Las Vegas, Nevada 89113
(702) 966-7400
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
George A. Rosenbaum, Jr., Chief
Financial Officer
Western Liberty
Bancorp
8363 W. Sunset Road,
Suite 350
Las Vegas, Nevada
89113
(702) 966-7400
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copy to:
Jeffrey A.
Horwitz, Esq.
Frank J.
Lopez, Esq.
Proskauer Rose, LLP
Eleven Times Square
New York, New York
10036
(212) 969-3000
(212) 969-2900
Approximate date of commencement of the proposed sale of the
securities to the public: As soon as practicable after this
registration statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the
following
box: þ
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. 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. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company þ
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(Do not check if a smaller reporting company)
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as
the Securities and Exchange Commission, acting pursuant to
Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. Neither we nor the selling security holders may not
sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
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SUBJECT TO COMPLETION, DATED
APRIL 13, 2011
PROSPECTUS FOR
UP TO 1,264,848 OF COMMON STOCK
This prospectus relates to the resale of up to
1,264,848 shares of Western Liberty Bancorps
(WLBC, the Company,
we, us, or
our) common stock, par value $0.0001 per
share (Common Stock) by certain selling
security holders.
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368,306 shares of Common Stock issued in a private
placement concurrent with our initial public offering (the
Private Shares).
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503,708 shares of Common Stock issued upon exercise of
warrants of WLBC that were either (i) issued in a private
placement concurrent with our initial public offering or
(ii) exchanged for shares of Common Stock issued in a
private placement in accordance with Section 3(a)(9) of the
Securities Act of 1933, as amended (the Securities
Act), and pursuant to privately negotiated agreements
(the Private Warrants). The Private Warrants
were automatically exercised into one thirty-second of one share
of Common Stock on October 28, 2010, in connection with our
acquisition (the Acquisition) of
Service1st Bank
of Nevada, a Nevada-chartered non-member bank
(Service1st),
in accordance with the terms of that certain Second Amended and
Restated Warrant Agreement, dated September 27, 2010,
between WLBC and Continental Stock Transfer &
Trust Company, as warrant agent (the Amended
Warrant Agreement). No cash consideration was paid by
the holders of Private Warrants in connection with such exercise.
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150,000 shares of Common Stock issued by us to certain
current and former members of our board of directors (the
Board) in connection with the Acquisition.
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42,834 shares of Common Stock issuable upon exercise of
warrants of
Service1st
(the
Service1st
Warrants) that were converted into warrants of
similar tenor to purchase approximately 47.6 shares of
Common Stock per
Service1st Warrant
in connection with the Acquisition at a price of $21.01 per
share of Common Stock. We will receive the proceeds from the
exercise of the
Service1st Warrants,
but not from the sale of any of the aforementioned shares of
Common Stock.
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In addition, this prospectus relates to the issuance by us of
200,000 shares of Common Stock underlying restricted stock
units (Restricted Stock Units) granted by us
to certain of our current and former directors, officers and
consultants in connection with the Acquisition. Each Restricted
Stock Unit is immediately and fully vested and shall be settled
for one share of Common Stock on the earlier to occur of
(i) a change of control of WLBC and
(ii) October 28, 2013. Such shares of Common Stock,
when issued by us, are also being registered for resale by the
selling security holders pursuant to this prospectus.
This prospectus provides you with detailed information about
WLBC,
Service1st and
other matters. You are encouraged to read carefully the entire
document. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DISCUSSED UNDER RISK FACTORS
BEGINNING ON PAGE 3.
Our Common Stock is listed on the Nasdaq Global Market
(Nasdaq) under the symbol WLBC.
Neither the SEC nor any state securities commission has approved
or disapproved of these securities or passed upon the adequacy
or accuracy of this prospectus. Any representation to the
contrary is a criminal offense.
The prospectus is
dated ,
2011.
SUMMARY
This summary highlights selected information from this
prospectus. It may not contain all of the information that is
important to you. You are urged to carefully read the entire
prospectus and the other documents referred to in this
prospectus because the information in this section does not
provide all the information that might be important to you with
respect to purchasing our Common Stock. See the section entitled
Where You Can Find More Information on
page 144.
Western
Liberty Bancorp
WLBC became a bank holding company on October 28, 2010 with
consummation of the Acquisition. Although WLBCs goal in
2007, when it was established as a special purpose acquisition
company, was to identify for acquisition domestic and
international operating companies engaged in the consumer
products and services business, by the spring of 2009, WLBC
determined that the banking industry had become an attractive
investment opportunity, particularly the community banking
industry in Nevada. In October of 2009, WLBC changed its name to
Western Liberty Bancorp and eliminated the special purpose
acquisition company features of its governing documents. In
October 2009, WLBC also began in earnest the process that
concluded on October 28, 2010 with the Acquisition.
WLBCs sole subsidiary is
Service1st,
and it currently conducts no business activities other than
acting as the holding company of
Service1st.
Service1st
Bank of Nevada
Established on January 16, 2007,
Service1st
is a community bank, providing a full range of banking and
related services to locally owned businesses, professional
firms, real estate developers and investors, local non-profit
organizations, high net worth individuals, and other customers
in the greater Las Vegas area. Banking services provided include
basic commercial and consumer depository services, commercial
working capital and equipment loans, commercial real estate
(both owner and non-owner occupied) loans, construction loans,
and unsecured personal and business loans.
Service1st relies
primarily on locally generated deposits to fund its lending
activities. Substantially all of our business is generated in
the Nevada market.
The
Acquisition
On October 28, 2010, WLBC consummated the Acquisition
pursuant to a Merger Agreement (the Merger
Agreement), dated as of November 6, 2009, as
amended by a First Amendment to the Merger Agreement, dated as
of June 21, 2010 (Amendment No. 1 and,
together with the Merger Agreement, the Amended Merger
Agreement), each among WL-S1 Interim Bank, a Nevada
corporation and wholly-owned subsidiary of WLBC
(Acquisition Sub),
Service1st and
Curtis W. Anderson, as representative of the former stockholders
of
Service1st.
Pursuant to the Amended Merger Agreement, Acquisition Sub merged
with and into
Service1st,
with
Service1st being
the surviving entity and becoming WLBCs wholly-owned
subsidiary. WLBC previously received the requisite approvals of
certain bank regulatory authorities to complete the Acquisition
to become a bank holding company.
The former stockholders of
Service1st received
approximately 2,282,668 shares of common stock, par value
$0.0001 of WLBC (Common Stock) (net of the
exercise of dissenters rights with respect to
88,054 shares) in exchange for all of the outstanding
capital stock of
Service1st
(the Base Acquisition Consideration). In
addition, the holders of
Service1sts
outstanding options and warrants now hold options and warrants
of similar tenor to purchase up to 289,781 shares of Common
Stock.
In addition to the Base Acquisition Consideration, each of the
former stockholders of
Service1st may
be entitled to receive additional consideration (the
Contingent Acquisition Consideration),
payable in Common Stock, if at any time within the first two
years after the consummation of the Acquisition, the closing
price per share of the Common Stock exceeds $12.75 for 30
consecutive days. The Contingent Acquisition Consideration is
equal to 20% of the tangible book value of
Service1st at
August 31, 2010 (or approximately $4.4 million). The
total number of shares of our common stock issuable to the
former
Service1st stockholders
would be determined by dividing the Contingent Acquisition
Consideration by the average of the daily closing
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price of the Common Stock on the first 30 trading days on which
the closing price of the Common Stock exceeded $12.75.
At the close of business on October 28, 2010, WLBC became a
new Nevada bank holding company by consummating the acquisition
of
Service1st and
conducting operations through
Service1st.
In conjunction with the Acquisition, WLBC infused
$25 million of capital onto the balance sheet of
Service1st.
In connection with the Acquisition, on September 27, 2010,
WLBC and Continental Stock Transfer &
Trust Company, as warrant agent, entered into the Amended
Warrant Agreement, pursuant to which all of our outstanding
Warrants, including the Private Warrants, were exercised into
one thirty-second (1/32) of one share of Common Stock
concurrently with the consummation of the Acquisition. Any
Warrants that would have entitled a holder of such Warrants to a
fractional share of Common Stock after taking into account the
exercise of the remainder of such holders Warrants into
full shares of Common Stock were cancelled. As a result of the
foregoing, WLBC issued 1,502,088 shares of Common Stock and
paid each Warrant holder $0.06 per Warrant exercised. The Common
Stock issuable upon exercise of the Public Warrants was
previously registered under the Securities Exchange Act of 1934,
as amended (the Exchange Act), during
WLBCs initial public offering, and such shares were freely
tradable immediately upon issuance.
Our Common Stock trades on Nasdaq under the symbol WLBC.
The mailing address of our principal executive office is
8363 W. Sunset Road, Suite 350, Las Vegas, Nevada
89113, and our telephone number is
(702) 966-7400.
The
Offering
This prospectus relates to the resale of up to
1,416,564 shares of Common Stock by certain selling
security holders.
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368,306 Private Shares.
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503,708 shares of Common Stock issued upon exercise of all
of our outstanding Private Warrants in accordance with the
Amended Warrant Agreement.
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150,000 shares of Common Stock issued by us to certain
current and former members of our Board in connection with the
Acquisition.
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42,834 shares of Common Stock issuable upon exercise of the
Service1st
Warrants. We will receive the proceeds from the exercise of the
Service1st Warrants,
but not from the sale of any of the aforementioned shares of
Common Stock.
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In addition, this prospectus relates to the issuance by us of
200,000 shares of Common Stock underlying Restricted Stock
Units granted by us to certain of our current and former
directors, officers and consultants in connection with the
Acquisition. Such shares of Common Stock, when issued by us, are
also being registered for resale by the selling security holders
under this prospectus. For a more information about the selling
security holders, see the section entitled Selling
Security Holders. For a description of the Common
Stock and the transactions discussed above, see the sections
entitled Description of Securities Common
Stock and Certain Relationships and Related
Party Transactions Recent Sales of Unregistered
Securities.
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RISK
FACTORS
You should carefully consider the following risk factors,
together with all of the other information included in this
prospectus, before you decide whether to purchase any of our
Common Stock.
As a
newly-formed public bank holding company, we will incur
significant legal, accounting, compliance and other
expenses.
As a newly-formed public bank holding company, we will incur
significant legal, accounting and other expenses. For example,
we are required to prepare and file quarterly, annual and
current reports with the SEC, as well as comply with a myriad of
rules applicable to public companies, such as the proxy rules,
beneficial ownership reporting requirements and other
obligations. In addition, the Sarbanes-Oxley Act of 2002 and the
rules implemented by the SEC in response to that legislation
have required significant changes in corporate governance
practices of public companies. While we have had to comply with
such rules and regulations in the past, we expect these rules
and regulations to significantly affect legal and financial
compliance, and to make some activities more time-consuming and
costly.
Additionally, as a newly-formed bank holding company, we are
required to prepare supplemental qualitative disclosure
regarding our assets and operations as set forth in
Article 9 of
Regulation S-X
and Industry Guide No. 3, which includes information such
as portfolio loan composition, yield, costs, loan terms,
maturities, re-pricing characteristics, credit ratings and risk
elements such as non-accrual and past due items, which will add
to our legal and compliance costs going forward.
As the
provider of financial services, our business and earnings are
significantly affected by general business and economic
conditions, particularly in the real estate industry, and
accordingly, our business and earnings could be further harmed
in the event of a continuation or deepening of the current U.S.
recession or further market deterioration or
disruption.
The global and U.S. economies and the local economies in
the Nevada market, where substantially all of our loan portfolio
was originated, experienced a steep decline beginning in 2007,
which has continued. The financial markets and the financial
services industry in particular suffered unprecedented
disruption, causing many financial institutions to fail or
require government intervention to avoid failure. These
conditions were largely the result of the erosion of the
U.S. and global credit markets, including a significant and
rapid deterioration of the mortgage lending and related real
estate markets. We give you no assurance that economic
conditions that have adversely affected the financial services
industry and the capital, credit, and real estate markets
generally, will improve in the near term.
Our business and earnings are sensitive to general business,
economic and market conditions in the United States. These
conditions include changes in short-term and long-term interest
rates, inflation, deflation, fluctuation in the real estate and
debt capital markets, developments in national and regional
economies and changes in government policies and regulations.
Our business and earnings are particularly sensitive to economic
and market conditions affecting the real estate industry because
a large portion of our loan portfolio consists of commercial
real estate and construction loans. Real estate values have been
declining in Nevada, steeply in some cases, which has affected
collateral values and has resulted in increased provisions for
loan losses for Nevada banks.
While generally containing lower risk than unsecured loans,
commercial real estate and construction loans generally involve
a high degree of credit risk. Such loans also generally involve
larger individual loan balances. In addition, real estate
construction loans may be affected to a greater extent than
residential loans by adverse conditions in real estate markets
or the economy because many real estate construction
borrowers ability to repay their loans is dependent on
successful development of their properties, as well as the
factors affecting residential real estate borrowers. Risk of
loss on a construction loan depends largely upon whether the
initial estimate of the propertys value at completion of
construction equals or exceeds the cost of property construction
(including interest), the ability of the borrowers to stabilize
leasing or rental income to qualify for permanent financing and
the availability of permanent take-out financing, itself a
market we believe that is
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largely non-existent at present. During the construction phase,
a number of factors can result in delays and cost overruns.
Construction and commercial real estate loans also involve
greater risk because they may not be fully amortizing over the
loan period, but have a balloon payment due at maturity. A
borrowers ability to make a balloon payment may depend on
the borrower being able to refinance the loan, timely sell the
underlying property or liquidate other assets.
The current U.S. recession has resulted in a reduction in
the value of many of the real estate assets securing a large
portion of our loans. Any increase in the number of
delinquencies or defaults would result in higher levels of
nonperforming assets, net charge-offs and provisions for loan
losses, adversely affecting our results of operations and
financial condition.
Our
geographic concentration is tied to business, economic and
regulatory conditions in Nevada.
Unfavorable business, economic or regulatory conditions in
Nevada, where we conduct the substantial majority of our
business, could have a significant adverse impact on our
business, financial condition and results of operations. In
addition, because our business is concentrated in Nevada, and
substantially all of our loan portfolio originated from Nevada,
we could also be adversely affected by any material change in
Nevada law or regulation and may be exposed to economic and
regulatory risks that are greater than the risks we would face
if the business were spread more evenly by geographic region.
Furthermore, the recent decline in Nevada in the value of real
estate assets and local business revenues, particularly in the
gaming and hospitality industries, could continue and will
likely have a significant adverse impact on business, financial
conditions and results of operations. There can be no assurance
that the real estate market or local industry revenues will not
continue to decline. Further erosion in asset values in Nevada
could impact our existing loans and could make it difficult for
us to find attractive alternatives to deploy our capital,
impeding our ability to grow our business.
The
Las Vegas market is substantially dependent on gaming and
tourism revenue, and the downturn in the gaming and tourism
industries has indirectly had an adverse impact on Nevada
banks.
The economy of the Las Vegas area is unique in the United States
for its level of dependence on services and industries related
to gaming and tourism. Regardless of whether a Nevada bank has
substantial customer relationships in the gaming and tourism
industries, a downturn in the Nevada economy adversely affects
the banks customers, resulting in an increase in loan
delinquencies and foreclosures, a reduction in the demand for
products and services, and a reduction of the value of
collateral for loans, with an associated adverse impact on the
banks business, financial condition, results of
operations, and prospects.
An event or state of affairs that adversely affects the gaming
or tourism industry adversely impacts the Las Vegas economy
generally. Gaming and tourism revenue is particularly vulnerable
to fluctuations in the economy. Virtually any development or
event that dissuades travel or spending related to gaming and
tourism adversely affects the Las Vegas economy. The Las Vegas
economy is more susceptible than the economies of many other
cities to such issues as higher gasoline and other fuel prices,
increased airfares, unemployment levels, recession, rising
interest rates, and other economic conditions, whether domestic
or foreign. Gaming and tourism are also susceptible to political
conditions or events, such as military hostilities and acts of
terrorism, whether domestic or foreign. In addition, Las Vegas
competes with other areas of the country and other parts of the
world for gaming revenue, and it is possible that the expansion
of gaming operations in other states, such as California, and
other countries would significantly reduce gaming revenue in the
Las Vegas area.
The
soundness of other financial institutions with which we do
business could adversely affect us.
The financial services industry and the securities markets have
been materially adversely affected by significant declines in
values of almost all asset classes and by extreme lack of
liquidity in the capital and credit markets. Financial
institutions specifically have been subject to increased
volatility and an overall loss in investor confidence. Financial
institutions are interrelated as a result of trading, clearing,
counterparty, investment, or other relationships, including loan
participations, derivatives, and hedging transactions and
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investments in securities or loans originated or issued by
financial institutions or supported by the loans they originate.
Many of these transactions expose a financial institution to
credit or investment risk arising out of default by the
counterparty. In addition, a banks credit risk may be
exacerbated if the collateral the bank holds cannot be realized
or is liquidated at prices not sufficient to recover the full
amount of the loan or other exposure. These circumstances could
lead to impairments or write-downs in a banks securities
portfolio and periodic gains or losses on other investments
under
mark-to-market
accounting treatment. We could incur additional losses to our
securities portfolio in the future as a result of these issues.
These types of losses could have a material adverse effect on
our business, financial condition or results of operation.
Furthermore, if we are unable to ascertain the credit quality of
certain potential counterparties, we may not pursue otherwise
attractive opportunities and we may be unable to effectively
grow our business.
Our
earnings may be significantly affected by the fiscal and
monetary policies of the federal government and its
agencies.
The Federal Reserve System (the Federal
Reserve) regulates the supply of money and credit in
the United States. Federal Reserve policies determine in large
part cost of funds for lending and investing and the return
earned on those loans and investments, both of which impact net
interest margin, and can materially affect the value of
financial instruments, such as debt securities. Its policies can
also affect borrowers, potentially increasing the risk that they
may fail to repay their loans. Changes in Federal Reserve
policies will be beyond our control and difficult to predict or
anticipate. To the extent that changes in Federal Reserve
policies have a disproportionate effect on our cost of funding
or on the health of our borrowers, such changes could materially
affect our operating results.
If
there was a depletion of the FDICs Deposit Insurance Fund,
the FDIC could impose additional assessments on the banking
industry.
If there was a depletion of the Federal Deposit Insurance
Corporations (FDIC) Deposit Insurance
Fund, we believe that the FDIC would impose additional
assessments on the banking industry. In such case, our
profitability would be reduced by any special assessments from
the FDIC to replenish the Deposit Insurance Fund. Please see the
discussion in the section entitled Supervision and
Regulation Deposit Insurance.
The
financial services industry is heavily regulated by federal and
state agencies.
Federal and state regulation is to protect depositors, federal
deposit insurance funds and the banking system as a whole, not
security holders. Congress and federal regulatory agencies
continually review banking laws, regulations and policies for
possible changes. Changes to statutes, regulations or regulatory
policies, including changes in interpretation or implementation
of statutes, regulations or policies, could affect the business
going forward in substantial and unpredictable ways including
limiting the types of financial services and products we may
offer and/or
increasing the ability of nonbanks to offer competing financial
services and products. Failure to comply with laws, regulations
or policies could result in sanctions by regulatory agencies and
damage to our reputation. For further discussion of applicable
regulations, please see the section entitled
Supervision and Regulation.
We
operate in a highly regulated environment and changes in the
laws and regulations that govern our operations, changes in the
accounting principles that are applicable to us, and our failure
to comply with the foregoing, may adversely affect
us.
We are subject to extensive regulation, supervision, and
legislation that governs almost all aspects of our operations.
See the section entitled Supervision and
Regulation. The laws and regulations applicable to the
banking industry could change at any time and are primarily
intended for the protection of customers, depositors, and the
deposit insurance funds, not stockholders. Changes in these laws
or in applicable accounting principles could make it more
difficult and expensive for us to comply with laws, regulations,
or accounting principles and could affect the way we conduct
business.
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Moreover, the United States, state, and foreign governments have
taken extraordinary actions to deal with the worldwide financial
crisis and the severe decline in the global economy. Many of
these actions have been in effect for only a limited time and
have produced limited or no relief to the capital, credit, and
real estate markets. We cannot assure you that these actions or
other actions under consideration will ultimately be successful.
Although we cannot reliably predict what effect any presently
contemplated or future changes in the laws or regulations or
their interpretations would have on us, these changes could be
materially adverse to our investors and stockholders. Compliance
with the initiatives may increase our costs and limit our
ability to pursue business opportunities.
Any
current or future litigation, regulatory investigations,
proceedings, inquiries or changes could have a significant
impact on the financial services industry.
The financial services industry has experienced unprecedented
market value declines caused primarily by the current
U.S. recession and real estate market deterioration. As a
result of the current market perceptions of stockholder advocacy
groups as well as the current U.S. Administration in
Washington, D.C., litigation, proceedings, inquiries or
regulatory changes are all distinct possibilities for financial
institutions. Such actions or changes could result in
significant costs. Because we are a relatively new financial
institution, any costs
and/or
burdens imposed by such actions or changes could affect us
disproportionately from how they affect our competitors.
The
removal or reduction in stimulus activities sponsored by the
Federal Government and its agents may have a negative impact on
Service1sts
results and operations.
The Federal Government has intervened in an unprecedented manner
to stimulate economic growth. Some of these activities have
included the following:
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Target fed funds rates which have remained close to zero percent;
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Mortgage rates that have remained at historical lows in part due
to the Federal Reserve Bank of New Yorks $1.25 trillion
mortgage-backed securities purchase program;
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Bank funding that has remained stable through an increase in
FDIC deposit insurance to a covered limit of $250,000 per
account from the previous coverage limit of $100,000; and
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Housing demand that has been stimulated by homebuyer tax credits.
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The expiration of rescission of any of those programs may have
an adverse impact on
Service1sts
operating results by increasing interest rates, increasing the
cost of funding and reducing the demand for loan products,
including mortgage loans.
Current
market volatility and industry developments may adversely affect
business and financial results.
The volatility in the capital and credit markets along with the
housing declines during the last few years has resulted in
significant pressure on the financial services industry. If
current volatility and market conditions continue or worsen,
there can be no assurance that the financial services industry,
results of operations or the business will not continue to be
significantly adversely impacted. We may have further increases
in loan losses, deterioration of capital or limitations on their
access to funding or capital, if needed.
Further, if other financial institutions fail to be adequately
capitalized or funded, it may negatively impact business and
financial results. In the past, we have routinely interacted
with numerous financial institutions in the ordinary course of
business and have therefore been exposed to operational and
credit risk to those institutions. Failures of such institutions
may significantly adversely impact our operations going forward.
Strategies
to manage interest rate risk may yield results other than those
anticipated.
Changes in the interest rate environment are difficult to
predict. Net interest margins can expand or contract, and this
can significantly impact overall earnings. Changes in interest
rates can also adversely affect the application of critical
management estimates, their projected returns on investments, as
well as the
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determination of fair values of certain assets. We have certain
assets and liabilities with fixed interest rates. Unexpected and
dramatic changes in interest rates may materially impact our
operating results.
Negative
public opinion could damage our reputation and adversely impact
our business and revenues.
Financial institutions earnings and capital are subject to
risks associated with negative public opinion. Negative public
opinion could result from actual, alleged or perceived conduct
in any number of activities, including lending practices, the
failure of any product or service to meet customers
expectations or applicable regulatory requirements, corporate
governance, acquisitions, as a defendant in litigation, or from
actions taken by government regulators or community
organizations. Negative public opinion could adversely affect
our ability to attract
and/or
retain customers and can expose us to litigation or regulatory
action. We are highly dependent on our customer relationships.
Any negative perception of us which impacted our customer
relationships could materially affect our business prospects by
reducing our deposit base.
Material
breaches in security of
Service1sts
systems may have a significant effect on
Service1sts
business.
Service1st
collects, processes and stores sensitive consumer data by
utilizing computer systems and telecommunications networks
operated by both
Service1st and
third party service providers.
Service1st has
security, backup and recovery systems in place, as well as a
business continuity plan to ensure the system will not be
inoperable.
Service1st
requires its third party service providers to maintain similar
controls. However,
Service1st
cannot be certain that the measure will be successful. A
security breach in the system and loss of confidential
information could result in losing the customers
confidence and thus the loss of their business as well as
additional significant costs for privacy monitoring activities.
Service1sts
necessary dependence upon automated systems to record and
process its transaction volume poses the risk that technical
system flaws or employee errors, tampering or manipulation of
those systems will result in losses and may be difficult to
detect.
Service1st
may also be subject to disruptions of its operating systems
arising from events that are beyond its control (for example,
computer viruses or electrical or telecommunications outages).
Service1st
is further exposed to the risk that its third party service
providers may be unable to fulfill their contractual obligations
(or will be subject to the same risk of fraud or operational
errors as
Service1st).
These disruptions may interfere with service to
Service1sts
customers and result in a financial loss or liability.
Changes
in interest rates could adversely affect our profitability,
business and prospects.
Most of the assets and liabilities of a bank holding company are
monetary in nature, exposed to significant risks from changes in
interest rates that can affect net income and the valuation of
assets and liabilities. Increases or decreases in prevailing
interest rates could have an adverse effect on our business,
asset quality, and prospects. Our operating income and net
income will depend to a great extent on our net interest margin,
the difference between the interest yields we receive on loans,
securities, and other interest-earning assets and the interest
rates we pay on interest-bearing deposits, borrowings, and other
liabilities. These rates are highly sensitive to many factors
beyond our control, including competition, general economic
conditions, and monetary and fiscal policies of various
governmental and regulatory authorities, including the Federal
Reserve. If the rate of interest we pay on interest-bearing
deposits, borrowings, and other liabilities increases more than
the rate of interest we receive on loans, securities, and other
interest-earning assets, our net interest income and therefore
our earnings could be adversely affected. Our earnings could
also be adversely affected if the rates on our loans and other
investments fall more quickly than those on our deposits and
other liabilities.
In addition, loan volumes are affected by market interest rates
on loans. Rising interest rates generally are associated with a
lower volume of loan originations while lower interest rates are
usually associated with increased loan originations. Conversely,
in rising interest rate environments loan repayment rates
decline and in a falling interest rate environment loan
repayment rates increase. We cannot assure you that we will be
able to minimize our risk exposure to changing interest rates.
In addition, an increase in the general level of interest
7
rates may adversely affect the ability of certain borrowers to
pay the interest on and principal of their obligations.
Interest rates also affect how much money we can lend. When
rates rise, the cost of borrowing increases. Accordingly,
changes in market interest rates could materially and adversely
affect our net interest spread, asset quality, loan origination
volume, business, financial condition, results of operations,
and cash flows.
Increasing
our existing market share may depend on market acceptance and
regulatory approval of new products and services.
Our ability to increase our market share will depend, in part,
on our ability to create and adapt products and services to
evolving industry standards. There is increasing pressure on
financial services companies to provide products and services at
lower prices. This can reduce net interest margin and revenues
from fee-based products and services. In addition, the
widespread adoption of new technologies, including
internet-based services, could require us to make substantial
expenditures to modify or adapt our existing products and
services. We may not successfully introduce new products and
services, achieve market acceptance of products and services
and/or be
able to develop and maintain loyal customers. As a condition to
obtaining FDIC approval for WLBC to acquire
Service1st,
WLBC agreed during the first three years of operation that
Service1st
would not make any major deviation or material change to the
business plan submitted as part of WLBCs application to
acquire
Service1st.
Until such time as the FDIC terminates the September 1,
2010 Consent Order, we believe the FDIC will be reluctant to
permit the bank to make a major deviation or material change in
the FDIC-approved business plan unless the proposed change to
the FDIC-approved business plan would lower the risk profile of
the bank. The application approval condition prohibiting a
material change to the FDIC-approved business plan may limit the
banks ability to introduce new products or services until
the FDIC terminates the Consent Order.
The
historical financial information included in this prospectus is
not necessarily indicative of our future
performance.
The historical financial information included in this prospectus
is not necessarily indicative of future financial position,
results of operations and cash flows. The results of future
periods may be different as a result of, among other things, the
additional costs associated with being a public bank holding
company and the pace of growth of our business in the future,
which is likely to differ from the historical growth reflected
in the financial information presented herein.
Service1st
has experienced significant losses since it began operations in
January of 2007. There is no assurance that it will become
profitable.
Service1st commenced
operations as a commercial bank on January 16, 2007, with
initial capital of $50.0 million. Since inception,
Service1st has
not been profitable. To some extent, the lack of profitability
is attributable to the
start-up
nature of its business; time is required to build assets
sufficient to generate enough interest income to cover operating
expenses. However, in addition to the customary challenges of
building profitability for a
start-up
bank,
Service1st has
experienced deterioration in the quality of its loan portfolio,
largely as a result of the challenging economic conditions in
the Nevada market during the last two years. As a result,
Service1st experienced
losses of $4.2 million in 2007, $5.1 million in 2008,
$17.4 million in 2009 and $8.7 million through
October 28, 2010.
We have incurred certain transitional expenses that are
relatively large in proportion to the scale of our operations.
In addition, we have no earnings history and there is no
guarantee that we will ever be profitable or be able to
successfully implement an effective business model. In order for
Service1st to
become profitable, we believe that we will need to attract a
larger amount of deposits and a larger portfolio of loans than
Service1st currently
has. We must avoid further deterioration in
Service1sts
loan portfolio and increase the amount of its performing loans
so that the combination of
Service1sts
net interest income and non-interest income, after deduction of
its provision for loan losses, exceeds
Service1sts
non-interest expense. The source of the majority of
Service1sts
loan losses can be traced primarily to real estate loans that
were reliant on
8
continuation of a growing and prosperous economic environment.
Beginning in early to mid-2008, increased emphasis on
underwriting standards and risk selection was introduced, which
effectively discontinued the making of construction, land
development, other land loans and any other loans in which the
primary source of repayment was subject to greater risk than our
current standards would require (such as repayment from proceeds
from sales, rentals, leases or refinancing, including permanent
take out financing) or based upon projections, unless such loans
were accompanied by additional financial support from the
borrowers or guarantors.
Service1sts
future profitability may also be dependent on numerous other
factors, including the success of the Nevada economy and
favorable government regulation. The Nevada economy has
experienced a significant decline in recent years due to the
current economic climate. This economy, in which substantially
all of
Service1sts
loans have been made, continues to exhibit weakness, and there
can be no assurance that further material losses will not be
experienced in the portfolio. Continued deterioration of the
national
and/or local
economies, adverse government regulation or our inability to
grow our business could affect our ability to become profitable.
If this happens, there continues to be a risk that we will not
operate on a profitable basis in the near or long-term, and
Service1st
may never become profitable.
Further
deterioration in the quality of our loan portfolio may result in
additional charge-offs which will adversely affect our operating
results.
During the last two years,
Service1st
suffered from a deterioration in the quality of its loan
portfolio. The depressed economic conditions in Nevada which
contributed significantly to this deterioration are expected to
continue throughout 2011. As of December 31, 2010,
performing loans that are classified as potential problem loans
constituted approximately 11.7% of total loans. See the section
entitled Managements Discussion &
Analysis of
Service1st
Bank of Nevada Financial Condition.
A significant source of risk arises from the possibility that
the Company could sustain losses because borrowers, guarantors,
and related parties may fail to perform in accordance with the
terms of their loans. This risk is normally addressed by means
of an allowance for loan losses in the amount of
managements estimate of losses inherent in
Service1sts
loan portfolio. As explained in Note 1. Nature of
Business and Summary of Significant Accounting Policies to
the Consolidated Financial Statements, the Company was required
under generally accepted accounting principles to estimate the
fair value of its loan portfolio after the close of business on
October 28, 2010 (the Transaction Date) and
write the loan portfolio down to that fair value estimate. For
most loans, this meant computing the net present value of
estimated cash flows to be received from borrowers. The
allowance for loan and lease losses that had been maintained as
an estimate of losses inherent in the loan portfolio was
eliminated in this accounting. A new allowance for loan and
lease losses will be established for loans made subsequent to
the Transaction Date and for any subsequent lowering of the
estimate of cash flows to be received from the loans held by
Service1st that
had shown evidence of credit deterioration since origination.
The estimate of fair value as of the Transaction Date was based
on economic conditions at the time and on managements
projections regarding both future economic conditions and the
ability of
Service1sts
borrowers to continue to repay their loans. However, the
estimate of fair value may prove to be overly optimistic and
Service1st may
suffer losses in excess of those estimated as of that date. The
allowance for loan and lease losses established for new loans or
for revised estimates may prove to be inadequate to cover actual
losses, especially if economic conditions worsen.
While management believes that both the estimate of fair value
and the allowance for loan and lease losses are adequate to
cover current losses, no underwriting and credit monitoring
policies and procedures that
Service1st
could adopt to address credit risk could provide complete
assurance that there will not be unexpected losses. These losses
could have a material adverse effect on the Companys
business, financial condition, results of operations and cash
flows. In addition, the FDIC periodically evaluates the adequacy
of
Service1sts
allowance for loan losses and may require
Service1st to
increase its provision for loan losses or recognize further loan
charge-offs based on judgments different from those of
management.
9
A
substantial portion of our loan portfolio consists of loans
maturing within one year, and there is no guarantee that these
loans will be replaced upon maturity or renewed on the same
terms or at all.
As of December 31, 2010, approximately 31.00% of
Service1sts
loan portfolio consists of loans maturing within one year. As a
result, we will either need to renew or replace these loans
during the course of the year. There is no guarantee that these
loans will be originated or renewed by borrowers on the same
terms or at all, as demand for such loans may decrease.
Furthermore, there is no guarantee that borrowers will qualify
for new loans or that existing loans will be renewed by us on
the same terms or at all, as collateral values may be
insufficient or the borrowers cash flow maybe materially
less than when the loan originated. This could result in a
significant decline in the performance of our loan portfolio.
We
rely upon independent appraisals to determine the value of the
real estate which secures a significant portion of
Service1sts
loans, and the values indicated by such appraisals may not be
realizable if we are forced to foreclose upon such
loans.
A significant portion of
Service1sts
loan portfolio consists of loans secured by real estate. As of
December 31, 2010, approximately 66.04% of
Service1sts
loans were secured by real estate. We rely upon independent
appraisers to estimate the value of the real estate which
secures
Service1sts
loans. Appraisals may reflect the estimated value of the
collateral on an as-is basis, an
as-stabilized basis or an
as-if-developed basis, depending upon the loan type
and collateral. Raw land generally is appraised at its
as-is value. Income producing property may be
appraised at its as-stabilized value, which takes
into account the anticipated cash flow of the property based
upon expected occupancy rates and other factors. The collateral
securing construction loans may be appraised at its
as-if-developed value, which approximates the
post-construction value of the collateralized property assuming
that such property is developed. As-if-developed
values on construction loans often exceed the immediate sales
value and may include anticipated zoning changes, and successful
development by the purchaser.
Appraisals are only estimates of value and the independent
appraisers may make mistakes of fact or judgment which adversely
affect the reliability of their appraisal. In addition, events
occurring after the initial appraisal may cause the value of the
real estate to decrease. With respect to appraisals conducted on
an as-if-developed basis, if a loan goes into
default prior to development of a project, the market value of
the property may be substantially less than the
as-if-developed appraised value. As a result of any
of these factors, there may be less security than anticipated at
the time the loan was originally made. If there is less security
and a default occurs, we may not recover the outstanding balance
of the loan.
We
currently are not permitted to expand by
acquisition
During the application process for the acquisition of
Service1st by
WLBC, we made a number of commitments to the FDIC. We assured
the FDIC in writing during the application process that we will
not seek to expand by acquisition until
Service1st is
restored to a satisfactory condition, which at a minimum means
that the September 1, 2010 Consent Order between the FDIC
and the bank must first be terminated. Until that occurs, any
growth on
Service1sts
part must be the result of organic growth in the banks
existing business. Prior to the acquisition of
Service1st,
Western Liberty had announced an intended business strategy of
using
Service1st as
the platform to grow through acquisition of failed banks. By
committing to the FDIC that Western Liberty would only acquire
Service1st with
the immediate and near-term plans to restore
Service1st to
a safe and sound, and profitable, institution, growth through
acquisition of failed banks was excluded from the application
terms that the FDIC approved. Although these growth restrictions
limit our opportunities currently, such restrictions typically
would not survive a future acquisition, assuming the acquirer is
a well-established banking organization considered by Federal
and state bank regulatory agencies to be well capitalized and
well managed.
10
Bank
regulatory restrictions with the FDIC and the Nevada Financial
Institutions Division are likely to limit growth and new product
development that were not in the business plan approved by bank
regulators at the time Western Liberty Bancorp was approved to
acquire
Service1st
Bank of Nevada.
As a condition to securing bank regulatory approval from the
FDIC and the Nevada Financial Institutions Division to acquire
Service1st,
we also agreed to seek advance approval both from the FDIC and
the Nevada Financial Institutions Division for any major
deviation from the
Service1st
three year business plan that we submitted during the
acquisition application process.
The
Service1st
three year business plan approved by the FDIC and the Nevada
Financial Institutions Division provides for modest loan growth
funded by core deposits and Federal Home Loan Bank borrowing.
Any growth in
Service1st that
occurs is expected to be the result of organic growth within the
banks existing market and its existing business profile,
without reliance on strategies such as acquisitions, branch
additions, brokered deposits, above-market-rate deposit pricing,
or significant expansion of the banks market or the
banks product and service offerings.
Service1st is
and will remain primarily a business bank, with a target market
of professionals and small and medium-sized businesses in
southern Nevada principally and potentially elsewhere as well.
Service1st has
and will continue to have a significant concentration in
commercial real estate lending, with significant construction
and land development lending and commercial and industrial
lending as well and, to a much lesser degree, consumer lending.
To manage the risks of commercial real estate lending, we
anticipate that an increasing percentage of
Service1st commercial
real estate lending concentration will come to be represented by
owner-occupied properties and less so by non-owner-occupied
commercial real estate investment properties. Until the
FDICs September 1, 2010 Consent Order is terminated,
we believe the FDIC and the Nevada Financial Institutions
Division are unlikely to agree to a major deviation or material
change in our approved business plan unless the major deviation
would reduce the risk profile of the bank. As a result, we may
not be able to implement new business initiatives, and our
ability to grow may be inhibited.
In addition to the application approval condition that we would
not make any material change in the approved three year business
plan,
Service1st
is subject to special supervisory conditions applicable to newly
chartered (so called, de novo) banks for a
probationary period of seven years. During such probationary
period, we are required to operate within the parameters of a
business plan submitted to the FDIC (an amended version of which
was most recently submitted during application processing for
the acquisition of
Service1st),
and to provide the FDIC 60 days advance notice of any
proposed material change or material deviation from the business
plan, before making any such change or deviation. During the
seven-year de novo period, we will remain on a
12-month
risk management examination cycle. Consequently, we will be
under a high degree of regulatory scrutiny, at least through
January, 2014, and proposed new business initiatives not
included in the business plan submitted to the FDIC will require
prior FDIC approval.
As a commitment made to the FDIC during acquisition application
processing, we also agreed to maintain the Tier 1 leverage
capital ratio of
Service1st at
10% or greater until October 28, 2013 or, if later, when
the September 1, 2010 Consent Order agreed to by
Service1st with
the FDIC and the Nevada Financial Institutions Division
terminates. We also agreed that for that same time period we
will make no change in the directors or executive management of
Service1st unless
we first receive the FDICs non-objection to the proposed
change.
Service1st
is subject to regulatory restrictions, including a Consent
Order, that restricts its operations, affect its ability to
obtain regulatory approval for future initiatives requiring such
approval and to hire and retain qualified senior
management.
In May of 2009,
Service1st entered
into a Memorandum of Understanding (MOU) with
the FDIC and the Nevada Financial Institutions Division.
Pursuant to the MOU,
Service1st agreed,
among other initiatives, to develop and submit a comprehensive
strategic plan covering at least a three-year operating period;
to reduce the level of adversely classified assets and review
loan grading criteria and procedures to ensure accurate risk
ratings; to develop a plan to strengthen credit administration
of construction and land loans (including the reduction of
concentration limits in land, construction and development loans
and the improvement of stress testing of commercial real estate
loan concentrations); to review its methodology for determining
the adequacy of the allowance for loan and lease losses; and to
correct apparent violations listed in its most recent report of
examination.
11
In addition, since mid-2009,
Service1st has
been required (i) to provide the FDIC with at least
30 days prior notice before appointing any new
director or senior executive officer or changing the
responsibilities of any senior executive officer; and
(ii) to obtain FDIC approval before making (or agreeing to
make) any severance payments (except pursuant to a qualified
pension or retirement plan and certain other employee benefit
plans). The FDIC is likely to use the prior notice requirement
in practice as a means of objecting to the appointment of new
directors or senior executives (or changes in the
responsibilities of senior executives) it deems not qualified
for the positions sought (or to changes in the responsibilities
of senior executives it deems not qualified for the new
responsibilities proposed). These requirements apply as well to
WLBC. These regulatory requirements could make it more difficult
for us to retain and hire qualified senior management. These
regulatory restrictions will remain in effect until modified or
terminated by the regulators.
On September 1, 2010,
Service1st,
without admitting or denying any possible charges relating to
the conduct of its banking operations, agreed with the FDIC and
the Nevada Financial Institutions Division to the issuance of a
Consent Order. The Consent Order supersedes the MOU. Under the
Consent Order,
Service1st
has agreed, among other things, to: (i) assess the
qualification of, and have retained qualified, senior management
commensurate with the size and risk profile of
Service1st;
(ii) maintain a Tier I leverage ratio at or above 8.5%
(as of December 31, 2010,
Service1sts
Tier I leverage ratio was at 18.1%) and a total risk-based
capital ratio at or above 12% (as of December 31, 2010,
Service1sts
total risk-based capital ratio was at 31.0%);
(iii) continue to maintain an adequate allowance for loan
and lease losses; (iv) not pay any dividends without prior
bank regulatory approval; (v) formulate and implement a
plan to reduce
Service1sts
risk exposure to adversely classified assets; (vi) not
extend additional credit to any borrower whose loan has been
charged-off or classified loss; (vii) not
extend any additional credit to any borrower whose loan has been
classified as substandard or doubtful
without prior approval from Service1sts board of directors
or loan committee; (viii) formulate and implement a plan to
reduce risk exposure to its concentration in commercial real
estate loans in conformance with Appendix A of
Part 365 of the FDICs Rules and Regulations;
(ix) formulate and implement a plan to address
profitability; and (x) not accept brokered deposits (which
includes deposits paying interest rates significantly higher
than prevailing rates in Service1sts market area) and
reduce its reliance on existing brokered deposits, if any.
Our
stock price could fluctuate and could cause you to lose a
significant part of your investment.
The market price of our securities may be influenced by many
factors, some of which are beyond our control, including those
described above and the following:
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changes in our perceived ability to increase our assets and
deposits;
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changes in financial estimates by analysts;
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announcements by us or our competitors of significant contracts,
productions, acquisitions or capital commitments;
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fluctuations in our quarterly financial results or the quarterly
financial results of companies perceived to be similar to us;
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general economic conditions;
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changes in market valuations of similar companies;
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terrorist acts;
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changes in our capital structure, such as future issuances of
securities or the incurrence of additional debt;
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future sales of our Common Stock;
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regulatory developments in the United States, foreign countries
or both;
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litigation involving us, our subsidiaries or our general
industry; and
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additions or departures of key personnel.
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The
trading volume of the Common Stock is limited.
The Common Stock trades on Nasdaq under the symbol
WLBC and trading volume is modest. The limited
trading market for the Common Stock may lead to exaggerated
fluctuations in market prices and possible market
inefficiencies, as compared to a more actively traded stock. It
may also make it more difficult to dispose of the Common Stock
at expected prices, especially for holders seeking to dispose of
a large number of such stock.
If we
are unable to effectively maintain a system of internal control
over financial reporting, we may not be able to accurately or
timely report financial results, which could materially
adversely affect our business.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that
a public company evaluate the effectiveness of its internal
control over financial reporting as of the end of each fiscal
year, and to include a management report assessing the
effectiveness of its internal control over financial reporting
in its annual report on
Form 10-K
for that fiscal year. Our ability to comply with the annual
internal control report requirements of Section 404 depends
on the effectiveness of our financial reporting and data systems
and controls across our operations. We expect the implementation
of these systems and controls to involve significant
expenditures, and our systems and controls will become
increasingly complex. To effectively implement these systems and
manage this complexity, we will likely need to continue to
improve our operational, financial and management controls and
our reporting systems and procedures.
Our
allowance for loan losses may not be adequate to cover actual
loan losses, which may require us to take a charge to our
earnings and adversely impact our financial condition and
results of operations.
We maintain an allowance for estimated loan losses that we
believe is adequate for absorbing the inherent losses in
Service1sts
loan portfolio. As of December 31, 2010, our allowance for
loan and lease losses was $36,000. This allowance relates to new
loan originations of $995,000 since acquisition date as there
has been no additional credit deterioration in the portfolio
acquired that has not been reflected in the fair value estimate
as of the date of acquisition.
Pursuant to the acquisition method of accounting for business
combinations, the allowance for loan losses from acquired
entities does not transfer to the acquiring entity. In addition,
the acquiring bank should establish loan loss allowances for the
acquired
held-for-investment
loans in periods after the acquisition, but only for losses
incurred on these loans due to credit deterioration after
acquisition. Therefore, management will determine the provision
for loan losses based upon an analysis of general market
conditions, credit quality of the loan portfolios, and
performance of customers relative to their financial
obligations. The amount of future losses is susceptible to
changes in economic, operating, and other conditions, including
changes in interest rates that may be beyond our control and
such losses may exceed the allowance for estimated loan losses.
Although we expect that the allowance for estimated loan losses
will be adequate to absorb any inherent losses on existing loans
that may become uncollectible, there can be no assurance that
the allowance will prove sufficient to cover actual loan losses
in the future. Significant increases to the provision for loan
losses may be necessary if material adverse changes in general
economic conditions occur or the performance of the loan
portfolio deteriorates. Additionally, banking regulators, as an
integral part of their supervisory function, periodically review
the allowance for estimated loan losses. If these regulatory
agencies require us to increase the allowance for estimated loan
losses, it could have a negative effect on our results of
operations and financial condition.
If we
are unable to recruit and retain experienced management
personnel and recruit and retain additional qualified personnel,
our business and prospects could be adversely
affected.
Our success depends in significant part on our ability to retain
senior executives and other key personnel in technical,
marketing and staff positions. There can be no assurance that we
will be able to successfully attract and retain highly qualified
key personnel, either in existing markets and market segments or
in new areas that we may enter. If we are unable to recruit and
retain an experienced management team or recruit and
13
retain additional qualified personnel, our business, and
consequently our sales and results of operations, may be
materially adversely affected.
We have approximately 40 full-time equivalent, non-union
employees. We seek to employ adequate staffing commensurate with
levels of banking activities and customer service requirements
for a community bank.
Our success depends in part on our ability to retain key
customers, and to hire and retain management and employees and
successfully manage the broader organization. Competition for
qualified individuals may be intense and key individuals may
depart because of issues relating to the uncertainty and
difficulty of integration or a general desire not to remain with
us. Furthermore, we will face challenges inherent in efficiently
managing an increased number of employees. Accordingly, no
assurance can be given that we will be able to attract and
retain key customers, management or employees, which could
result in disruption to our business and negatively impact our
operations and financial condition.
We are
exposed to risk of environmental liabilities with respect to
properties to which we take title.
In the course of our business we may foreclose and take title to
real estate, potentially becoming subject to environmental
liabilities associated with the properties. We may be held
liable to a governmental entity or to third parties for property
damage, personal injury, investigation and
clean-up
costs or we may be required to investigate or clean up hazardous
or toxic substances or chemical releases at a property. Costs
associated with investigation or remediation activities can be
substantial. If we are the owner or former owner of a
contaminated site, we may be subject to common law claims by
third parties based on damages and costs resulting from
environmental contamination emanating from the property. These
costs and claims could adversely affect our business and
prospects.
Compliance
with governmental regulations and changes in laws and
regulations and risks from investigations and legal proceedings
could be costly and could adversely affect operating
results.
Our operations could be impacted by changes in the legal and
business environments in which we operate, as well as the
outcome of ongoing government and internal investigations and
legal proceedings. Also, as a result of new laws and regulations
or other factors, we could be required to curtail or cease
certain operations. Changes that could impact the legal
environment include new legislation, new regulation, new
policies, investigations and legal proceedings and new
interpretations of the existing legal rules and regulations.
Changes that impact the business environment include changes in
accounting standards, changes in environmental laws, changes in
tax laws or tax rates, the resolution of audits by various tax
authorities, and the ability to fully utilize any tax loss carry
forwards and tax credits. Compliance-related issues could limit
our ability to do business in certain countries. These changes
could have a significant financial impact on our future
operations and the way we conduct, or if we conduct, business in
the affected countries.
The
value of the Federal Home Loan Bank stock that we own could be
adversely affected by weakness in the FHLB system.
Service1st
is a member of the Federal Home Loan Bank
(FHLB) of San Francisco, which is one of
the twelve regional banks comprising the FHLB System. The FHLB
provides credit for member financial institutions. The 12 FHLBs
obtain their funding primarily through issuance of consolidated
obligations of the FHLB System. The U.S. government does
not guarantee these obligations, and each of the 12 FHLBs is
jointly and severally liable for repayment of the debt of the
other FHLBs. Therefore, our investment in the equity stock of
the FHLB of San Francisco could be adversely affected by
the operations of the other FHLBs. Certain FHLBs, including the
FHLB of San Francisco, have experienced lower earnings from
time to time and have paid out lower dividends to their members.
If an FHLBs capital drops below 4% of its assets,
restrictions on the redemption or repurchase of member
banks FHLB stock are imposed by law. If FHLBs are
restricted from redeeming or repurchasing member banks
FHLB stock due to adverse financial conditions affecting either
individual FHLBs or the FHLB system as a whole, member banks may
be required to recognize an impairment charge on their FHLB
equity stock investments. Future problems at the FHLBs could
have an
14
impact on the collateral necessary to secure borrowings and
limit the borrowings extended to member banks, as well as
require additional capital contributions by member banks. If
this occurs, our short-term liquidity needs could be adversely
affected. If we are restricted from using FHLB advances due to
weakness in the FHLB System or weakness at the FHLB of
San Francisco, we may be forced to find alternative funding
sources. These alternative funding sources may include seeking
lines of credit with third party banks or the Federal Reserve
Bank of San Francisco, borrowing under repurchase agreement
lines, increasing deposit rates to attract additional funds,
accessing brokered deposits, or selling certain investment
securities categorized as
available-for-sale
in order to maintain adequate levels of liquidity.
Our
legal lending limit could be a competitive
disadvantage.
Service1sts
legal lending limit is approximately $8.9 million as of
December 31, 2010. Accordingly, the size of the loans which
we can offer to potential clients is less than the size of loans
our competitors with larger lending limits can offer. Our legal
lending limit affects our ability to seek relationships with the
areas larger and more established businesses. Through our
previous experience and relationships with a number of the
regions other financial institutions, we are generally
able to accommodate loan amounts greater than our legal lending
limit by selling participations in those loans to other banks,
although we tend to retain a significant portion of the loans we
originate. However, we cannot assure you of any success in
attracting or retaining clients seeking larger loans or (taking
into account the economic downturn and its effects on other
financial institutions) that we can engage in participation
transactions for those loans on terms favorable to us.
15
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made in this prospectus, including in the
sections entitled Managements Discussion and
Analysis of Financial Condition and Results of
Operations
Service1st
Bank of Nevada, Managements
Discussion and Analysis of Financial Condition and Results of
Operations Western Liberty Bancorp and
The Business of Western Liberty Bancorp,
constitute forward-looking statements. Forward-looking
statements include statements preceded by, followed by or that
include the words may, could,
would, should, believe,
expect, anticipate, plan,
estimate, target, project,
potential, intend or similar
expressions. These statements include, among others, statements
regarding our expected business outlook, anticipated financial
and operating results, business strategy and means to implement
the strategy, the amount and timing of capital expenditures, the
likelihood of our success in building our business, financing
plans, budgets, working capital needs and sources of liquidity.
We believe it is important to communicate our expectations.
However, there may be events in the future that we are not able
to predict accurately or over which we have no control.
Forward-looking statements, estimates and projections are based
on managements beliefs and assumptions, are not guarantees
of performance and may prove to be inaccurate. Forward-looking
statements also involve risks and uncertainties that could cause
actual results to differ materially from those contained in any
forward-looking statement and which may have a material adverse
effect on our business, financial condition, results of
operations and liquidity. A number of important factors could
cause actual results or events to differ materially from those
indicated by forward-looking statements. These risks and
uncertainties include, but are not limited to, the following:
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revenues may be lower than expected;
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deposit attrition, operating costs and customer loss may be
greater than expected;
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local, regional, national and international economic conditions
and the impact they may have on us and our customers and our
assessment of that impact;
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changes in interest rates, spreads on earning assets and
interest-bearing liabilities, and interest rate sensitivity;
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prepayment speeds, loan originations and credit losses;
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sources of liquidity;
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our common shares outstanding and Common Stock price volatility;
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fair value of and number of stock-based compensation awards to
be issued in future periods;
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legislation affecting the financial services industry as a whole;
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regulatory supervision and oversight, including required capital
levels;
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increasing price and product/service competition by competitors,
including new entrants;
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rapid technological developments and changes;
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ability to continue to introduce competitive new products and
services on a timely, cost-effective basis;
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ability to contain costs and expenses;
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governmental and public policy changes;
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protection and validity of intellectual property rights;
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reliance on large customers;
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technological, implementation and cost/financial risks in large,
multi-year contracts;
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16
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the outcome of any pending and future litigation and
governmental proceedings;
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continued availability of financing; and
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financial resources in the amounts, at the times and on the
terms required to support our future businesses.
|
Investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of
this prospectus. Additional information on these and other
factors that may cause actual results and our performance to
differ materially is included in the section entitled
Risk Factors and elsewhere in this prospectus
and in our periodic reports filed with the SEC.
All forward-looking statements included herein are expressly
qualified in their entirety by the cautionary statements
contained or referred to in this section. Except to the extent
required by applicable laws and regulations, we undertake no
obligations to update these forward-looking statements to
reflect events or circumstances after the date of this
prospectus or to reflect the occurrence of unanticipated events.
17
SELLING
SECURITY HOLDERS
Up to 1,264,848 shares of Common Stock will be registered
for resale by the selling security holders under this
prospectus, including (i) 368,306 Private Shares,
(ii) 503,708 shares of Common Stock issued upon
exercise of the Private Warrants on October 28, 2010
pursuant to the Amended Warrant Agreement,
(iii) 150,000 shares of Common Stock issued to certain
current and former members of the Board in connection with the
Acquisition, (iv) 200,000 shares of Common Stock
underlying the Restricted Stock Units and
(v) 42,834 shares of Common Stock issuable upon
exercise of the
Service1st Warrants.
To the extent permitted by law, the selling security holders
listed below may resell the aforementioned shares of Common
Stock pursuant to this prospectus. We have registered the sale
of such shares of Common Stock to permit the selling security
holders and their respective permitted transferees or other
successors-in-interest
that receive any such shares of Common Stock from the selling
security holders after the date of this prospectus to resell
such shares of Common Stock.
The following table sets forth the unregistered Common Stock
(including shares of Common Stock underlying the Restricted
Stock Units and
Service1st Warrants)
beneficially owned and being offered by the selling security
holders as of March 30, 2011. The selling security holders
are not making any representation that any shares of Common
Stock covered by this prospectus will be offered for sale. The
selling security holders reserve the right to accept or reject,
in whole or in part, any proposed sale of Common Stock. The
following table assumes that all shares of Common Stock being
registered pursuant to this prospectus will be sold.
No selling security holders are broker-dealers. Any selling
security holder that is an affiliate of a broker-dealer acquired
his, her or its shares being registered herein for resale in the
ordinary course of business and at the time of such acquisition,
such security holder had no agreements or understandings,
directly or indirectly, with any person to distribute such
securities.
Beneficial ownership is determined in accordance with the rules
of the SEC and includes voting or investment power with respect
to shares of Common Stock. Unless otherwise indicated below, to
our knowledge, all persons named in the table have or will have
sole voting
and/or
investment power with respect to Common Stock (including the
Common Stock underlying the Restricted Stock Units) beneficially
owned by them. The inclusion of any Common Stock underlying
Restricted Stock Units in this table does not constitute an
admission of beneficial ownership for the person named below.
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Number of
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|
|
|
|
|
Number of
|
|
|
|
|
|
|
Common Shares
|
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|
|
|
|
Common Shares
|
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|
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Beneficially
|
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Beneficially
|
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|
|
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Owned
|
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Number of
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Owned
|
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% Beneficially
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Name of Selling
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Prior to
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Common Shares
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After Offering
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Owned
|
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Securityholder
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Offering(1)
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Offered(2)
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(1)(3)
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After Offering
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Jennifer Albrecht
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10,000
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10,000
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Banyan Tree Capital Limited
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30,000
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30,000
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Mira Cho
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2,500
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2,500
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Laura Conover-Ferchak(4)
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15,000
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15,000
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Robert Foresman(5)
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25,000
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25,000
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Gabelli Group Capital Partners, Inc.
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7,173
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7,173
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Cari and David Grodner
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7,886
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7,886
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Cari Grodner
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47
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47
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|
|
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|
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Cari Lehman
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7,446
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7,446
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Carl H. Hahn(5)
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25,000
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25,000
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Jonathan Hamel
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5,000
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5,000
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Samir Jain
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10,000
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10,000
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Ingrid Kvam
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4,000
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4,000
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Scott LaPorta(6)
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61,327
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61,327
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18
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|
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|
|
|
|
|
|
|
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Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Common Shares
|
|
|
|
|
|
Common Shares
|
|
|
|
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Beneficially
|
|
|
|
|
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Beneficially
|
|
|
|
|
|
|
Owned
|
|
|
Number of
|
|
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Owned
|
|
|
% Beneficially
|
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Name of Selling
|
|
Prior to
|
|
|
Common Shares
|
|
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After Offering
|
|
|
Owned
|
|
Securityholder
|
|
Offering(1)
|
|
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Offered(2)
|
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(1)(3)
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After Offering
|
|
|
Philip Marineau(5)
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25,000
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|
|
|
25,000
|
|
|
|
|
|
|
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Andrew Nelson(7)
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50,165
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|
50,165
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|
|
|
|
|
|
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Christa Short
|
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25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
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Marc Soloway(5)
|
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|
50,023
|
|
|
|
50,023
|
|
|
|
|
|
|
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|
Evan Wax
|
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|
20,289
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|
|
|
20,289
|
|
|
|
|
|
|
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Steven Westly(5)
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25,000
|
|
|
|
25,000
|
|
|
|
|
|
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David Witkin
|
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25,000
|
|
|
|
25,000
|
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|
|
|
|
|
|
|
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Jason N. Ader(8)
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450,372
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|
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|
450,372
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|
|
|
|
|
|
|
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Atlas Master Fund, Ltd.
|
|
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20,012
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|
|
|
20,012
|
|
|
|
|
|
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Tim Collins
|
|
|
312
|
|
|
|
312
|
|
|
|
|
|
|
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Doha Partners I, LP(8)
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306,960
|
|
|
|
306,960
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|
|
|
|
|
|
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FM Multi-Strategy Investment Fund LP
|
|
|
942
|
|
|
|
942
|
|
|
|
|
|
|
|
|
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HC Institutional Partners LP(8)
|
|
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652
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|
|
|
652
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|
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|
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HC Overseas Partners Ltd.(8)
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|
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18,215
|
|
|
|
18,215
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|
|
|
|
|
|
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HC Turbo Fund Ltd.(8)
|
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4,596
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|
|
|
4,596
|
|
|
|
|
|
|
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MZ Capital LLC
|
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950
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|
|
|
950
|
|
|
|
|
|
|
|
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PI Multi-Strategy Fund II LDC
|
|
|
10,117
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|
|
|
10,117
|
|
|
|
|
|
|
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Pictet & Cie
|
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|
326
|
|
|
|
326
|
|
|
|
|
|
|
|
|
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UBS Luxembourg SA Ref Notz Stucki Group
|
|
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500
|
|
|
|
500
|
|
|
|
|
|
|
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Michael Frankel(9)
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|
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50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
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|
Richard Coles(9)
|
|
|
50,195
|
|
|
|
50,195
|
|
|
|
|
|
|
|
|
|
Mark Schulhof(9)
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
Daniel B. Silvers(10)
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
Michael Tew(11)
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
Curtis Anderson(12)
|
|
|
33,032
|
|
|
|
3,046
|
|
|
|
29,986
|
|
|
|
**
|
|
Joseph Brown
|
|
|
14,945
|
|
|
|
3,046
|
|
|
|
11,899
|
|
|
|
**
|
|
Mark Brown(13)
|
|
|
12,565
|
|
|
|
3,046
|
|
|
|
9,519
|
|
|
|
**
|
|
John Dedolph(13)
|
|
|
22,085
|
|
|
|
3,046
|
|
|
|
19,039
|
|
|
|
**
|
|
Madison Graves
|
|
|
50,643
|
|
|
|
3,046
|
|
|
|
47,597
|
|
|
|
**
|
|
Steven Hill(14)
|
|
|
38,744
|
|
|
|
3,046
|
|
|
|
35,698
|
|
|
|
**
|
|
Carl Krepper(13)
|
|
|
17,325
|
|
|
|
3,046
|
|
|
|
14,279
|
|
|
|
**
|
|
Monte Miller(13)
|
|
|
143,077
|
|
|
|
3,046
|
|
|
|
140,031
|
|
|
|
**
|
|
Heather Murren
|
|
|
50,643
|
|
|
|
3,046
|
|
|
|
47,597
|
|
|
|
**
|
|
Patricia Ochal(15)
|
|
|
13,802
|
|
|
|
3,141
|
|
|
|
10,661
|
|
|
|
**
|
|
Stuart Olson
|
|
|
8,329
|
|
|
|
3,141
|
|
|
|
5,188
|
|
|
|
**
|
|
George Randall(13)
|
|
|
14,945
|
|
|
|
3,046
|
|
|
|
11,899
|
|
|
|
**
|
|
Blake Sartini(16)
|
|
|
230,276
|
|
|
|
3,046
|
|
|
|
227,230
|
|
|
|
1.51
|
%
|
Terrence Wright(17)
|
|
|
65,403
|
|
|
|
3,046
|
|
|
|
62,357
|
|
|
|
**
|
|
Sophia Adeline Ader 2005 Trust(8)
|
|
|
50
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
JMM Investment Partners, LP
|
|
|
263
|
|
|
|
263
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Common Shares
|
|
|
|
|
|
Common Shares
|
|
|
|
|
|
|
Beneficially
|
|
|
|
|
|
Beneficially
|
|
|
|
|
|
|
Owned
|
|
|
Number of
|
|
|
Owned
|
|
|
% Beneficially
|
|
Name of Selling
|
|
Prior to
|
|
|
Common Shares
|
|
|
After Offering
|
|
|
Owned
|
|
Securityholder
|
|
Offering(1)
|
|
|
Offered(2)
|
|
|
(1)(3)
|
|
|
After Offering
|
|
|
HF Investments, LP
|
|
|
200
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
Ezra Sultan
|
|
|
261
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
Jack Richard Ader Trust(8)
|
|
|
36
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
Daniel M. Groff & Lesley K. Groff
|
|
|
33
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
Pamela Ader
|
|
|
2,141
|
|
|
|
2,141
|
|
|
|
|
|
|
|
|
|
Sasson 2006 GRAT
|
|
|
964
|
|
|
|
964
|
|
|
|
|
|
|
|
|
|
Steven Starker
|
|
|
217
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
Julie Ader(8)
|
|
|
94
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
Sylvia and Robert Kirschner
|
|
|
42
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
MNF Partners, L.P.
|
|
|
447
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
Harold Reiff
|
|
|
61
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
Amber Williams as Trustee under Indenture of Michael Coles dated
September 26, 1997
|
|
|
160
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
Laura Conover-Ferchak & William Ferchak
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
Marc Soloway & Rene Soloway
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Chelsea Capital Corporation
|
|
|
280
|
|
|
|
280
|
|
|
|
|
|
|
|
|
|
Herb S. & Rachelle Soloway Family Trust dated April 9,
1996
|
|
|
36
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
Robert & Andrea Fortunoff
|
|
|
229
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
Jeffrey DeGreick
|
|
|
299
|
|
|
|
299
|
|
|
|
|
|
|
|
|
|
BABS REIFF Retirement Plan
|
|
|
84
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
Craig Colby
|
|
|
336
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
HSBC Private Bank (Suisse) SA
|
|
|
326
|
|
|
|
326
|
|
|
|
|
|
|
|
|
|
HSBCSSL A/C HSBC France A/C LMH
|
|
|
2,908
|
|
|
|
2,908
|
|
|
|
|
|
|
|
|
|
SSCSIL A/C HSBC Global Strategy Hedge Investments Limited
|
|
|
412
|
|
|
|
412
|
|
|
|
|
|
|
|
|
|
SSCSIL A/C HSBC Wealth Accumulation Investments Limited
|
|
|
163
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
SSCSIL A/C HSBC Republic US Advantedge Investments Limited
|
|
|
790
|
|
|
|
790
|
|
|
|
|
|
|
|
|
|
PFPC Trust Company F/B/O Blackrock Equity
Long/Short LP
|
|
|
460
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
PFPC Trust Company F/B/O Blackrock Equity
Long/Short Ltd
|
|
|
1,326
|
|
|
|
1,326
|
|
|
|
|
|
|
|
|
|
PFPC Trust Company F/B/O Blackrock Dynamic
Opportunities Fund Ltd.
|
|
|
1,904
|
|
|
|
1,904
|
|
|
|
|
|
|
|
|
|
|
|
|
** |
|
Less than 1%. |
|
(1) |
|
Represents shares of Common Stock currently held by such selling
security holder, including shares of Restricted Stock (as
defined herein) or shares of Common Stock underlying Restricted
Stock Units currently held by such selling security holder.
Includes Private Shares and shares of Common Stock issued upon
exercise of the Private Warrants in accordance with the Amended
Warrant Agreement. For more information concerning such
securities, see Description of Securities. |
|
(2) |
|
Unless otherwise noted, represents Private Shares or shares
issued upon exercise of Private Warrants. |
20
|
|
|
(3) |
|
This table assumes that each selling stockholder will sell all
of the shares of Common Stock being offered for sale by such
selling stockholder in this prospectus. Selling stockholders are
not required to sell their shares, and none of the selling
stockholders have indicated if and when they intend to sell
their shares. |
|
(4) |
|
Represents 10,000 Private Shares and shares of Common Stock
underlying 5,000 Restricted Stock Units granted to
Ms. Conover-Ferchak on October 28, 2010, in
consideration of her substantial service to and support of WLBC
during the period in which we sought the requisite regulatory
approval to become a bank holding company in connection with the
Acquisition. Each Restricted Stock Unit is immediately and fully
vested and shall be settled for one share of Common Stock of
WLBC on the earlier to occur of (i) a change of control and
(ii) October 28, 2013 (the Settlement
Date), and no additional consideration shall be paid by
the holders of such Restricted Stock Units in connection with
such settlement. |
|
(5) |
|
Messrs. Hahn, Marineau, Westly, Foresman and Soloway are
each former members of the Board. |
|
(6) |
|
Mr. LaPorta is our former Chief Executive Officer and
President and a former member of the Board. |
|
(7) |
|
Mr. Nelson is our former Chief Financial Officer and
Assistant Secretary, and a former member of the Board.
Represents 25,165 Private Shares, and shares of Common Stock
underlying 25,000 Restricted Stock Units granted to
Mr. Nelson on October 28, 2010, in consideration of
his substantial service to and support of WLBC during the period
in which we sought the requisite regulatory approval to become a
bank holding company in connection with the Acquisition. Each
Restricted Stock Unit is immediately and fully vested and shall
be settled for one share of Common Stock of WLBC on the earlier
to occur of (i) a change of control and (ii) the
Settlement Date, and no additional consideration shall be paid
by the holders of such Restricted Stock Units in connection with
such settlement. |
|
(8) |
|
Mr. Ader is our former Chairman and Chief Executive
Officer, and a current member of the Board and of the Board of
Directors of
Service1st.
On July 16, 2007, Hayground Cove, of which Mr. Ader is
the sole member, and the funds and accounts it manages,
purchased 8,348,500 Private Shares. On July 29, 2009, we
entered into a Private Shares Restructuring Agreement with
Hayground Cove, pursuant to which 7,618,908 of the Private
Shares were cancelled and exchanged for Private Warrants,
resulting in 368,306 Private Shares and 16,118,908 Private
Warrants. |
|
|
|
On November 27, 2007, Hayground Cove purchased 7,500,000
Private Warrants from us. As part of an Amended Warrant
Agreement entered into on September 27, 2010, all
outstanding Warrants, including Private Warrants, were exercised
into one thirty-second
(1/32)
of one share of Common Stock concurrently with the consummation
of the Acquisition. Represents 69,764 shares held in Mr.
Aders individual capacity, 330,428 shares of Common
Stock held by Hayground Cove, through Doha Partners I, LP,
HC Institutional Partners LP, HC Overseas Partners Ltd. and HC
Turbo Fund Ltd. and 180 shares held for the account of
his immediate family, each as set forth in this table. Hayground
Cove is controlled by Jason N. Ader and he and his
father are investors in Hayground Cove. |
|
|
|
Also represents shares of Common Stock underlying 50,000
Restricted Stock Units granted to Mr. Ader on October 28,
2010, in consideration of his substantial service to and support
of WLBC during the period in which we sought the requisite
regulatory approval to become a bank holding company in
connection with the Acquisition. Each Restricted Stock Unit is
immediately and fully vested and shall be settled for one share
of Common Stock of WLBC on the earlier to occur of (i) a
change of control and (ii) the Settlement Date, and no
additional consideration shall be paid by the holders of such
Restricted Stock Units in connection with such settlement. |
|
(9) |
|
Mr. Frankel is the current Chairman of the Board.
Mr. Coles is a current member of the Board.
Mr. Schulhof is a former member of the Board. On
October 28, 2010, in consideration of their substantial
service to and support of WLBC during the period in which we
sought the requisite regulatory approval to become a bank
holding company in connection with the Acquisition, WLBC made a
one-time grant of 50,000 shares of Common Stock to each of
Mr. Frankel, Mr. Coles and Mr. Schulhof. |
|
(10) |
|
Mr. Silvers is our former President. Represents shares of
Common Stock underlying 100,000 Restricted Stock Units granted
to Mr. Silvers on October 28, 2010, in consideration
of his substantial service to and support of WLBC during the
period in which we sought the requisite regulatory approval to
become a bank holding company in connection with the
Acquisition. Each Restricted Stock Unit is immediately |
21
|
|
|
|
|
and fully vested and shall be settled for one share of Common
Stock of WLBC on the earlier to occur of (i) a change of
control and (ii) the Settlement Date, and no additional
consideration shall be paid by the holders of such Restricted
Stock Units in connection with such settlement. |
|
(11) |
|
Represents shares of Common Stock underlying 20,000 Restricted
Stock Units granted to Mr. Tew on October 28, 2010, in
consideration of his substantial service to and support of WLBC
during the period in which we sought the requisite regulatory
approval to become a bank holding company in connection with the
Acquisition. Each Restricted Stock Unit is immediately and fully
vested and shall be settled for one share of Common Stock of
WLBC on the earlier to occur of (i) a change of control and
(ii) the Settlement Date, and no additional consideration
shall be paid by the holders of such Restricted Stock Units in
connection with such settlement. |
|
(12) |
|
Mr. Anderson is a member of the Board. Mr. Anderson
holds 64
Service1st
Warrants exercisable into 3,046 shares of Common Stock at
an exercise price of $21.01 per share of Common Stock, which he
is offering in this prospectus. |
|
(13) |
|
Mssrs. Brown, Dedolph, Krepper, and Randall are former directors
of
Service1st.
Mr. Miller is a current director of
Service1st.
They each hold 64
Service1st
Warrants immediately exercisable into 3,046 shares of
Common Stock at an exercise price of $21.01 per share of Common
Stock, which they are offering in this prospectus. |
|
(14) |
|
Mr. Hill is a member of the Board and Chairman of the Board
of
Service1st.
Mr. Hill holds 64
Service1st
Warrants immediately exercisable into 3,046 shares of
Common Stock at an exercise price of $21.01 per share of Common
Stock, which he is offering in this prospectus. |
|
(15) |
|
Ms. Ochal is Vice President and Chief Financial Officer of
Service1st.
Ms. Ochal holds 66
Service1st
Warrants immediately exercisable into 3,141 shares of
Common Stock at an exercise price of $21.01 per share of Common
Stock, which she is offering in this prospectus. |
|
(16) |
|
Mr. Sartini is a former member of the Board and a former
director of
Service1st.
Mr. Sartini holds 64
Service1st
Warrants immediately exercisable into 3,046 shares of
Common Stock at an exercise price of $21.01 per share of Common
Stock, which he is offering in this prospectus. |
|
(17) |
|
Mr. Wright is a member of the Board and a director of
Service1st.
Mr. Wright holds 64
Service1st
Warrants immediately exercisable into 3,046 shares of
Common Stock at an exercise price of $21.01 per share of Common
Stock, which he is offering in this prospectus. |
22
USE OF
PROCEEDS
We expect the net proceeds from the sale of Common Stock upon
exercise of the
Service1st Warrants
will be $899,943.34 (based on an exercise price of $21.01 per
share of Common Stock). We intend to use the net proceeds from
the exercise of
Service1st Warrants
for general corporate purposes.
PLAN OF
DISTRIBUTION
The selling security holders and any of their pledgees, donees,
assignees, transferees and
successors-in-interest
may, from time to time, sell any or all of their shares of
Common Stock Nasdaq or any other stock exchange, market or
trading facility on which the shares of Common Stock are traded
or in private transactions. These sales may be at fixed or
negotiated prices. Subject to compliance with applicable law,
the selling security holders may use any one or more of the
following methods when selling shares of Common Stock:
|
|
|
|
|
ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
|
|
|
|
block trades in which the broker-dealer will attempt to sell the
shares of Common Stock as agent but may position and resell a
portion of the block as principal to facilitate the transaction;
|
|
|
|
purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
|
|
|
|
an exchange distribution in accordance with the rules of the
applicable exchange;
|
|
|
|
privately negotiated transactions;
|
|
|
|
settlement of short sales entered into after the date of this
prospectus;
|
|
|
|
agreements with broker-dealers to sell a specified number of
such shares of Common Stock at a stipulated price per share;
|
|
|
|
through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise;
|
|
|
|
a combination of any such methods of sale; or
|
|
|
|
any other method permitted pursuant to applicable law.
|
The selling security holders may also sell shares of Common
Stock under Rule 144 under the Securities Act
(Rule 144), if available, or in other
transactions exempt from registration, rather than under this
prospectus. The SEC has adopted amendments to Rule 144
which became effective on February 15, 2008, and apply to
securities acquired both before and after that date. Under these
amendments, a person who has beneficially owned restricted
shares of Common Stock for at least six months would be entitled
to sell their securities provided that (i) such person is
not deemed to have been one of our affiliates at the time of, or
at any time during the three months preceding, a sale and
(ii) we are subject to the Exchange Act periodic reporting
requirements for at least three months before the sale.
Persons who have beneficially owned restricted shares of Common
Stock for at least six months but who are our affiliates at the
time of, or at any time during the three months preceding, a
sale, would be subject to additional restrictions, by which such
person would be entitled to sell within any three-month period
only a number of securities that does not exceed the greater of
either of the following:
|
|
|
|
|
1% of the total number of securities of the same class then
outstanding; or
|
|
|
|
the average weekly trading volume of such securities during the
four calendar weeks preceding the filing of a notice on
Form 144 with respect to the sale;
|
provided, in each case, that we are subject to the
Exchange Act periodic reporting requirements for at least three
months before the sale. Such sales must also comply with the
manner of sale and notice provisions of Rule 144.
23
Broker-dealers engaged by the selling security holders may
arrange for other brokers-dealers to participate in sales.
Broker-dealers may receive commissions or discounts from the
selling security holders (or, if any broker-dealer acts as agent
for the purchaser of shares of Common Stock, from the purchaser)
in amounts to be negotiated. The selling security holders do not
expect these commissions and discounts to exceed what is
customary in the types of transactions involved.
The selling security holders may pledge their shares of Common
Stock to their broker-dealers under the margin provisions of
customer agreements. If a selling security holder defaults on a
margin loan, the broker-dealer may, from time to time, offer and
sell the pledged shares of Common Stock. The selling security
holders and any other persons participating in the sale or
distribution of the shares of Common Stock will be subject to
applicable provisions of the Securities Act, the Exchange Act,
and the rules and regulations thereunder, including, without
limitation, Regulation M. These provisions may restrict
certain activities of, and limit the timing of purchases and
sales of any of the shares of Common Stock by, the selling
security holders or any other person, which limitations may
affect the marketability of the shares of Common Stock.
Upon our being notified in writing by a selling security holder
that any material arrangement has been entered into with a
broker-dealer for the sale of Common Stock through a block
trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, a supplement
to this prospectus will be filed, if required, pursuant to
Rule 424(b) under the Securities Act, disclosing
(i) the name of the selling security holder and of the
participating broker-dealer(s), (ii) the number of shares
of Common Stock involved, (iii) the price at which such
shares of Common Stock were sold, (iv) the commissions paid
or discounts or concessions allowed to such broker-dealer(s),
where applicable, (v) that such broker-dealer(s) did not
conduct any investigation to verify the information set out or
incorporated by reference in this prospectus, and
(vi) other facts material to the transaction.
The selling security holders also may transfer the shares of our
Common Stock in other circumstances, in which case the
transferees, pledgees or other
successors-in-interest
will be the selling beneficial owners for purposes of this
prospectus.
The selling security holders and any broker-dealers or agents
that are involved in selling the shares of Common Stock may be
deemed to be underwriters within the meaning of the
Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any
profit on the resale of the shares of Common Stock purchased by
them may be deemed to be underwriting commissions or discounts
under the Securities Act. To our knowledge, no selling security
holder has entered into any agreement or understanding, directly
or indirectly, with any person to distribute the shares of our
Common Stock.
We are required to pay all fees and expenses incident to the
registration of shares of Common Stock. We have agreed to
indemnify the selling security holders against certain losses,
claims, damages and liabilities, including liabilities under the
Securities Act.
Common
Stock Underlying Restricted Stock Units
We are offering the shares of Common Stock underlying the
Restricted Stock Units. Each Restricted Stock Unit is
immediately and fully vested and shall be settled for one share
of Common Stock on the earlier to occur of (i) a change of
control of WLBC and (ii) October 28, 2013, and no
additional consideration shall be paid by the holders of such
Restricted Stock Units in connection with such settlement.
24
DESCRIPTION
OF SECURITIES
General
The following is a summary of the material terms of our
securities and is not intended to be a complete summary of the
rights and preferences of such securities. We urge you to read
our Second Amended and Restated Certificate of Incorporation,
filed with the Securities and Exchange Commission on our Current
Report on
Form 8-K
on October 9, 2009.
Authorized
and Outstanding Stock
Our Second Amended and Restated Certificate of Incorporation
authorizes the issuance of 100,000,000 shares of Common
Stock and 1,000,000 shares of preferred stock, par value
$0.0001 per share. In our initial public offering
31,948,850 shares of Common Stock were issued. As
of ,
2011, there were 15,088,023 outstanding shares of Common Stock,
consisting of (i) 10,590,863 shares of Common Stock
issued in our initial public offering,
(ii) 2,282,668 shares of Common Stock issued as Base
Acquisition Consideration, (iii) 1,502,088 shares of
Common Stock issued upon exercise of the Warrants in accordance
with the Amended Warrant Agreement, (iv) 368,306 Private
Shares (v) 150,000 shares of Common Stock granted to
Mr. Frankel, Mr. Coles and Mr. Schulhof in
consideration for their substantial service to and support of
WLBC during the period in which we sought the requisite
regulatory approval to become a bank holding company in
connection with the Acquisition and
(vi) 194,098 shares of restricted Common Stock
(Restricted Stock) granted in the aggregate
by WLBC to its current Chief Executive Officer, William E.
Martin, and Chief Financial Officer, George A. Rosenbaum, Jr.,
in connection with the Acquisition. The Common Stock outstanding
is duly authorized, validly issued, fully paid and
non-assessable. There are no shares of preferred stock
outstanding.
Common
Stock
We engaged in our initial public offering of units, consisting
of one share of Common Stock and one Warrant, on
November 20, 2007, and, in connection therewith, issued
31,948,850 (including the over allotment option) Public Warrants
to our public investors. Additionally, we issued 8,500,000
Private Warrants and 8,625,000 Private Shares in private
placements to certain of our affiliates concurrent with our
initial public offering, of which 637,786 Private Shares were
redeemed because the underwriters in the initial public offering
did not fully exercise their over-allotment option, resulting in
a total of 7,987,214 Private Shares outstanding after
redemption. On July 20, 2009, we entered into a Private
Shares Restructuring Agreement with Hayground Cove,
pursuant to which 7,618,908, or over 95%, of the Private Shares,
were cancelled and exchanged for Private Warrants, resulting in
368,306 Private Shares and 16,118,908 Private Warrants.
On October 7, 2009, we held a special meeting where our
stockholders approved, among other things, certain amendments to
our Amended and Restated Certificate of Incorporation removing
certain provisions specific to special purpose acquisition
companies and changing our name to Western Liberty
Bancorp and authorizing the distribution and termination
of our trust account maintained for the proceeds of our initial
public offering. On October 7, 2009, we also liquidated our
trust account. As a result, we distributed $211,764,441 from our
trust account to stockholders who elected to convert their
shares into a pro rata portion of the trust account and the
remaining $105,014,080 to us, resulting in 10,959,169
outstanding shares of Common Stock (including 368,306 Private
Shares).
In connection with the Acquisition, the former stockholders of
Service1st
received 2,282,668 shares of Common Stock as Base
Acquisition Consideration. In addition, the holders of
Service1sts
outstanding options and warrants now hold options and warrants
of similar tenor (such warrants being the
Service1st Warrants)
to purchase up to 289,781 shares of Common Stock. In
addition to the Base Acquisition Consideration, each of the
former stockholders of
Service1st may
be entitled to receive Contingent Acquisition Consideration,
payable in Common Stock, if at any time within the first two
years after the consummation of the Acquisition, which occurred
on October 28, 2010, the closing price per share of the
Common Stock exceeds $12.75 for 30 consecutive days. The
Contingent Acquisition Consideration would be equal to 20% of
the tangible book value of
Service1st at
the close of business on August 31, 2010. The total number
of shares of Common Stock issuable to the former
Service1st stockholders
would be determined by dividing the Contingent Acquisition
25
Consideration by the average of the daily closing price of the
Common Stock on the first 30 trading days on which the closing
price of the Common Stock exceeded $12.75.
In connection with the Acquisition, on September 27, 2010,
WLBC and Continental Stock Transfer &
Trust Company, as warrant agent, entered into the Amended
Warrant Agreement, pursuant to which all of our outstanding
Warrants, including the Private Warrants, were exercised into
one thirty-second (1/32) of one share of Common Stock
concurrently with the consummation of the Acquisition. Any
Warrants that would have entitled a holder of such Warrants to a
fractional share of Common Stock after taking into account the
exercise of the remainder of such holders Warrants into
full shares of Common Stock were cancelled. As a result of the
foregoing, WLBC issued 1,502,088 shares of Common Stock and
paid each Warrant holder $0.06 per Warrant exercised. The Common
Stock issuable upon exercise of the Public Warrants was
previously registered under the Exchange Act during WLBCs
initial public offering, and such shares were freely tradable
immediately upon issuance.
On October 28, 2010, in connection with the consummation of
the Acquisition, we issued Restricted Stock to William E.
Martin, who became a member of the Board and serves as our Chief
Executive Officer and as Chief Executive Officer of
Service1st,
and George A. Rosenbaum, Jr., our current Chief Financial
Officer and the Executive Vice President of
Service1st.
Mr. Martin received 155,279 shares of Restricted
Stock, which was equal to $1.0 million divided by the $6.44
closing price of the Common Stock on the closing date of the
Acquisition, in consideration for his future services in
accordance with the terms of his employment agreement with WLBC.
Mr. Rosenbaum received 38,819 shares of Restricted
Stock, which was equal to $250,000 divided by the closing price
of the Common Stock on the closing date of the Acquisition, in
consideration for his future services in accordance with the
terms of his employment agreement with WLBC. The shares of
Restricted Stock granted to each of Messrs. Martin and
Rosenbaum will vest 20% on each of the first, second, third,
fourth and fifth anniversaries of the consummation of the
Acquisition, which occurred on October 28, 2010, subject to
Messrs. Martins and Rosenbaums respective and
continuous employment through each vesting date. Fifty percent
of the shares of Restricted Stock that vest in accordance with
the prior sentence will remain Restricted Stock that will vest
upon a termination of the holders employment for any other
reason than (i) by WLBC for cause, or (ii) by the
holder without good reason prior to October 28, 2015. Such
Restricted Stock shall be subject to restrictions on transfer
for a period of one year following each vesting date.
On October 28, 2010, in consideration of their substantial
service to and support of WLBC during the period in which we
sought the requisite regulatory approval to become a bank
holding company in connection with the Acquisition, WLBC and
each of Jason N. Ader, our former Chairman and Chief Executive
Officer and a current member of the Board, Daniel B. Silvers,
our former President, Andrew P. Nelson, our former Chief
Financial Officer and a former member of the Board, Michael Tew,
an outside consultant, and Laura Conover-Ferchak, an outside
consultant, entered into the Letter Agreements, pursuant to
which each of the foregoing individuals received a grant of
Restricted Stock Units. Mr. Ader, a current director and
the former Chairman and Chief Executive Officer of WLBC,
received 50,000 Restricted Stock Units; Mr. Silvers,
WLBCs former President, received 100,000 Restricted Stock
Units; Mr. Nelson, a former director of WLBC, received
25,000 Restricted Stock Units; Mr. Tew, an outside
consultant to WLBC, received 20,000 Restricted Stock Units; and
Mrs. Conover-Ferchak, an outside consultant to WLBC,
received 5,000 Restricted Stock Units. Each Restricted Stock
Unit is immediately and fully vested and shall be settled for
one share of Common Stock, of WLBC on the earlier to occur of
(i) a change of control and (ii) the Settlement Date.
Furthermore, on October 28, 2010, in consideration of their
substantial service to and support of WLBC during the period in
which we sought the requisite regulatory approval to become a
bank holding company in connection with the Acquisition, WLBC
made a one-time grant of 50,000 shares of Common Stock to
each of Michael Frankel, the current Chairman of the Board,
Richard A.C. Coles, a current member of the Board and Mark
Schulhof, a former member of the Board.
Holders of our Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by
stockholders generally. Holders of Common Stock have exclusive
voting rights for the election of our directors and all other
matters requiring stockholder action, except as may be provided
in any certificate of designation in respect of our preferred
stock or as otherwise provided by law, including with respect to
certain amendments to our Second Amended and Restated
Certificate of Incorporation that would require approval by
26
the holders of our preferred stock, or one or more series
thereof, that may become outstanding, voting separately as a
class or series.
Holders of our Common Stock are entitled to receive such
dividends, if any, as may be declared from time to time by our
board of directors in its discretion out of funds legally
available therefor. We have not paid any dividends on our Common
Stock to date. The payment of dividends in the future will
depend on our revenues and earnings, if any, capital
requirements and general financial condition It is the intention
of our present board of directors to retain any earnings for use
in our business operations and, accordingly, we do not
anticipate the board declaring any dividends in the foreseeable
future. In addition, our board of directors is not currently
contemplating and does not anticipate declaring any stock
dividends in the foreseeable future, except if we may increase
the size of the offering pursuant to Rule 462(b) under the
Securities Act. Further, our ability to declare dividends may be
limited to restrictive covenants if we incur any indebtedness.
In the event of any voluntary or involuntary liquidation,
dissolution or winding up and after payment or provision for
payment of our debts and other liabilities, and subject to the
rights of holders of shares of our preferred stock that may
become outstanding, the holders of all outstanding shares of our
Common Stock will be entitled to receive our remaining assets
available for distribution ratably in proportion to the number
of shares of Common Stock held by each stockholder.
Holders of our Common Stock have no preemptive or other
subscription rights and there are no sinking fund or redemption
provisions applicable to the Common Stock.
Preferred
Stock
Our Second Amended and Restated Certificate of Incorporation
authorizes the issuance of 1,000,000 shares of blank
check preferred stock with such designations, rights,
powers (including voting powers, full or limited) and
preferences as may be determined from time to time by our board
of directors. Accordingly, our board of directors is empowered,
without stockholder approval, to issue preferred stock with
voting powers and with dividend, liquidation, conversion or
other rights which could dilute the voting power of the Common
Stock or could result in a subordination of the rights of the
holders of the Common Stock to the prior rights and preferences
of the preferred stock, including with respect to dividends or
upon a liquidation, dissolution or winding up. In addition,
preferred stock could be utilized as a method of discouraging,
delaying or preventing a change in control of WLBC. There are no
shares of preferred stock outstanding and we do not currently
intend to issue any shares of preferred stock. Although we do
not currently intend to issue any shares of preferred stock, we
cannot assure you that we will not do so in the future.
Options
and Warrants
In connection with the Acquisition, the holders of
Service1sts
outstanding warrants now hold warrants of similar tenor (such
warrants being the
Service1st Warrants)
to purchase shares of Common Stock. The
Service1st Warrants
entitle each of the holders thereof to purchase shares of Common
Stock at a purchase price of $21.01 per share. As a result of
the foregoing, we may issue up to 42,834 shares of Common
Stock upon the exercise of all outstanding
Service1st Warrants.
The
Service1st Warrants
are fully vested and shall expire on January 17, 2012.
In connection with the Acquisition, we assumed the Stock Option
Plan of
Service1st,
which we expect will be amended to provide that stock options
granted thereunder may be exercised to purchase shares of our
Common Stock (the Stock Option Plan). The
holders of outstanding options to purchase
Service1sts
common stock that were granted under the Stock Option Plan prior
to the Acquisition now hold options of similar tenor to purchase
shares of Common Stock at a purchase price of $21.01 per share.
As a result of the foregoing, we may issue up to
246,947 shares of Common Stock upon the exercise of all
outstanding options and an additional 229,023 shares of
Common Stock are available for option grants under the Stock
Option Plan. Generally, any outstanding unvested options will
become vested and exercisable if the holder continuously
provides service to
Service1st
or an affiliate, including WLBC following the Acquisition,
through the applicable vesting date.
Our
Transfer Agent
The transfer agent for our securities is Continental Stock
Transfer & Trust Company, 17 Battery Place, New
York, New York 10004.
27
CORPORATE
GOVERNANCE
Board of
Directors
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Name
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Age
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Position
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Michael B. Frankel
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Chairman of the Board
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Terrence L. Wright
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Vice Chairman of the Board
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Jason N. Ader
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Director
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Richard A. C. Coles
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43
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Director
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Robert G. Goldstein
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55
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Director
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Curtis W. Anderson, CPA
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61
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Director
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Steven D. Hill
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51
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Director
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William E. Martin
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69
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Chief Executive Officer, Director
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Information
about the Directors
Michael B. Frankel has been a member of the Board since
December 2008 and Chairman of the Board since October 2010.
Mr. Frankel has been a private investor and advisor since
June 2008. Prior to that time, from 1982 to June 2008,
Mr. Frankel was employed at Bear, Stearns & Co.
Inc. where he was a Senior Managing Director since July 1990.
While at Bear Stearns, Mr. Frankel was responsible for
establishing and managing the Global Equity Capital Markets
Group, was a member of the Commitment Committee, and managed the
investment banking-research department relationship. Prior to
joining Bear Stearns, from 1958 to 1982, Mr. Frankel was
employed at L.F. Rothschild & Co., where he was a
General Partner since 1973. At L.F. Rothschild & Co,
Mr. Frankel managed the Institutional Equities Department.
Mr. Frankel holds a Bachelor of Science in Economics from
Lafayette College.
Terrence L. Wright has been a member of the Board since
October 2010. Mr. Wright has been a director and
shareholder and the secretary of
Service1st since
January 2007. During this time, Mr. Wright also served as
Chairman of
Service1sts
Nominating and Corporate Governance Committee. Mr. Wright
is owner and Chairman of the Board of Nevada Title Company
which provides title services through a number of locations in
southern Nevada with more than 250 employees.
Mr. Wright also is the owner and Chief Executive Officer of
Nevada Construction Services, as well as the majority owner,
Chairman of the Board, and Chief Executive Officer of Westcor
Land Title Insurance Company, the first domestic title
insurance company in Nevada, and now licensed in 40 states
Mr. Wright received his undergraduate degree in Business
Administration and his Juris Doctorate from DePaul University in
Chicago. He is a member of the California and Illinois bar
associations. Mr. Wright has served on the Board of
Directors for the Nevada Land Title Association, as well as
the Board of Directors of Pioneer Citizens Bank and First
Interstate Bank. He is also past chairman of the Nevada
Development Authority, the Nevada Chapter of the Young
Presidents Organization and the UNVL Foundation.
Additionally, Mr. Wright serves on the board of the Council
for a Better Nevada, and Southwest Gas Corporation where he is a
member of the audit and compensation committees.
Jason N. Ader has been a member of the Board since our
formation in 2007. Mr. Ader previously served as our Chief
Executive Officer and the Chairman of the Board from December
2008 through October 2010. Mr. Ader founded and serves as
Chief Executive Officer of Hayground Cove, a New York-based
investment management firm. Mr. Ader is also a co-founder
of Hayground Cove Capital Partners LLC, a merchant bank focused
on the real estate and consumer sectors formed in March 2009.
Mr. Ader is also the Executive Chairman of Reunion
Hospitality Trust, Inc., a hospitality company formed to invest
in and acquire hospitality and related investments.
Mr. Ader is also Chairman of the board of directors of
India Hospitality Corp., which owns flight catering, hotel and
restaurant businesses in India, and was, from inception until
December 2008, its Chief Executive Officer. Mr. Ader also
currently sits on the board of directors of the Las Vegas Sands
Corp. Prior to founding Hayground Cove, Mr. Ader was a
Senior Managing Director at Bear, Stearns & Co. Inc.,
from 1995 to 2003, where he performed equity and high yield
research for more than 50 companies in the gaming, lodging
and leisure industries. From 1993 to 1995, Mr. Ader served
as a Senior Analyst at Smith Barney. From 1990 to 1993,
Mr. Ader served as a buy-side analyst at Baron Capital.
Mr. Ader was rated as
28
one of the top ranked analysts by Institutional Investor
Magazine for nine consecutive years from 1994 to 2002.
Mr. Ader has a Bachelor of Arts in Economics from New York
University and an M.B.A. in Finance from New York University,
Stern School of Business.
Richard A.C. Coles has been a member of the Board since
December 2008. Mr. Coles is a Managing Principal of the
Emmes Group of Companies and is a Member of their Investment
Committee. Mr. Coles joined Emmes in 1997, became a
Managing Director in 2004, and a Partner in 2005. Mr. Coles
is the primary Principal responsible for the
day-to-day
oversight of Emmes Asset Management Company LLC and Emmes Realty
Services LLC and plays a key role in the execution of the
property level value enhancing strategies undertaken by the firm
in respect of the assets owned
and/or
managed by the firm, as well as sourcing new acquisition
opportunities for the firm and its partners and clients. Prior
to joining Emmes, Mr. Coles worked as an asset manager and
a development director of the Enterprise Development Company,
overseeing numerous development and leasing projects for retail,
urban specialty and office assets. Mr. Coles is the
co-chair of The Enterprise Foundation, a leading non-profit
provider of affordable housing, New York City advisory board. In
addition, he is an active member of the Real Estate Board of New
York as well as the Pension Real Estate Association.
Mr. Coles holds a Bachelor of Arts from Boston College and
a M.B.A. in Finance and Accounting from New York University,
Stern School of Business.
Robert G. Goldstein has been a member of the Board since
October 2010. Mr. Goldstein has been Executive Vice
President of Las Vegas Sands Corp. since July 2009, Vice
President of The Venetian Resort-Hotel-Casino since January 1999
and President and Chief Operating Officer of The Palazzo Casino
Resort since December 2008. He previously served as Senior Vice
President of Las Vegas Sands Corp. from August 2004 through July
2009 and Senior Vice President of Las Vegas Sands, LLC (or its
predecessor, Las Vegas Sands, Inc.) from 1997 through July 2009,
and served as Vice President of Las Vegas Sands, Inc. from 1995
through 1997. Mr. Goldstein is responsible for the
oversight of daily operations of the hotel, food and beverage,
casino, and retail operations. From 1992 until joining Las Vegas
Sands Corp. in December 1995, Mr. Goldstein was the
Executive Vice President of Marketing at the Sands Hotel in
Atlantic City as well as an Executive Vice President of the
parent Pratt Hotel Corporation. Mr. Goldstein holds a
Bachelor of Arts in History and Political Science from the
University of Pittsburgh and a J.D. from Temple University
School of Law.
Curtis W. Anderson, CPA has been a member of our Board
since October 2010. Mr. Anderson has been a Director of
Service1st Bank
of Nevada since the bank opened in January 2007.
Mr. Anderson is the founder, partner and Chief Executive
Officer of Fair, Anderson and Langerman CPAs, which provides
accounting and business advisory services to businesses and
individual clients. He has held that position since 1988. He is
a 1971 graduate of the University of Notre Dame. He earned his
CPA license in 1974 and is a member of the American Institute of
CPAs and the Nevada Society of CPAs. Formerly a partner with
McGladrey & Pullen, LLP, Mr. Anderson is also an
active real estate investor and developer. Mr. Anderson is
also a Broker and Officer of MDL Group, a real estate brokerage
and management firm that he started at in 1989, and since 2007
has been serving as a Manager of Triple Crown Painting and
Drywall LLC, a commercial painting subcontractor. His current
community involvement includes Opportunity Village Foundation
Board Chairman and Police Athletic League (PAL) Treasurer.
Steven D. Hill has been a member of the Board since March
2011. Mr. Hill has been a Director and the Vice Chairman of
the Corporate Governance Committee of
Service1st since
the bank opened in January 2007. In August 2010, Mr. Hill was
named Chairman of the Board for
Service1st
Bank. In addition, Mr. Hill is the Senior Vice President,
Division Manager of the California Portland Cement Company.
Prior to that, he was the founder and President of Silver State
Materials Corp, located in Las Vegas, Nevada from 1987 to 2008.
From 1981 to 1987, he held the position of Operations Manager
and General Manager at Moraine Materials Company in Dayton Ohio.
He holds a B.S.M.E. from Rose-Hulman Institute of Technology.
Mr. Hill has a number of community involvements including
participation as a member in the Clark County Growth Management
Task Force, Las Vegas Water District Water Rate Committee, RTC
Regional Fixed Guideway Citizens Advisory Committee, Trauma
Systems Development Task Force, Clark County Air Quality
Technical Advisory Committee, Clark County Clean Water Coalition
Citizens Advisory Committee, the SB432 Interim Advisory
Committee on Air Quality and the Las Vegas Chamber of Commerce.
Mr. Hill has served as Chairman of the Young Presidents
Organization, the Associated Builders and Contractors, the
Government
29
Affairs Division of the Associated General Contractors, the
Government Affairs Division of the Associated Builders and
Contractors, the Governors Construction Liability
Insurance Task Force, The Boys and Girls Club of Las Vegas, the
Las Vegas Chamber of Commerce, and the Las Vegas Chamber of
Commerce Government Affairs Division. Mr. Hill is currently
the Chairman of the Coalition for Fairness in Construction, the
Commissioner of the Savings and Government Efficiency
Commission, a member of the Clark County Growth Management Task
Force and a member of the Las Vegas Chamber of Commerce.
William E. Martin has been a member of the Board and our
Chief Executive Officer since October 2010. Mr. Martin has
been the Chief Executive Officer and Vice Chairman of the Board
of
Service1st Bank
of Nevada since December 2007. Mr. Martin graduated from
the University of North Texas and joined the Office of the
Comptroller of the Currency, where he spent fifteen years as a
national bank examiner in California and Nevada. In 1978 he was
placed in charge of that agencys national problem bank
group, was a Deputy Comptroller in charge of the OCCs
UBPR, later adopted by the FFIEC for all banking regulatory
agencies, and finally, was Deputy Comptroller for Multinational
Banking with responsibility for primary oversight of the eleven
largest national banks. He was one of three
U.S. representatives appointed to the Basel Committee. In
1983, he left the OCC and became President and Chief Executive
Officer of Nevada National Bank, a $700 million asset
statewide bank, and its parent company, Nevada National
Bancorporation, which was acquired by Security Pacific National
Bank in 1989. Later that year, he joined Pioneer Citizens Bank
of Nevada as President and Chief Executive Officer. The bank
grew from $110 million in assets to over $1.1 billion
by 1999 at which time it was acquired by Zions Bancorporation
and merged into Nevada State Bank. For the following seven years
he was Chairman, President and Chief Executive Officer of Nevada
State Bank, a $4 billion institution with seventy statewide
branch offices. He left Nevada State Bank in late 2007 and
joined
Service1st Bank
of Nevada where he serves as Vice Chairman and Chief Executive
Officer. Mr. Martin has been involved at a board or active
participation level in over thirty civic efforts in his
twenty-seven years in Nevada that included chairmanships of the
Nevada State College Foundation, Las Vegas Chamber of Commerce,
Opportunity Village for Intellectually Handicapped Citizens,
Nevada Development Capital Corporation and Water Conservation
Coalition.
Our business and affairs are overseen by the Board pursuant to
the Delaware General Corporation Law (the
DGCL), our Second Amended and Restated
Certificate of Incorporation and our Amended and Restated
Bylaws. The members of the Board are kept informed of our
business through discussions with our Chairman of the Board and
Chief Executive Officer, and with key officers, by reviewing
materials provided to them and by participating in board
meetings.
Independence
of Directors
As a result of our securities being listed on the Nasdaq, we
adhere to the rules of that exchange in determining whether a
director is independent. The Nasdaq requires that a majority of
the board must be composed of independent directors,
which is defined generally as a person other than an officer or
employee of the company or its subsidiaries or any other
individual having a relationship, which, in the opinion of the
companys board of directors, would interfere with the
directors exercise of independent judgment in carrying out
the responsibilities of a director. Consistent with these
considerations, our board of directors has affirmatively
determined that Messrs. Frankel, Wright, Ader, Coles,
Goldstein, and Anderson are the independent members of the Board.
Attendance
at Meetings
Messrs. Frankel, Wright, Ader, Coles, Goldstein, Hill,
Martin and Anderson comprise the membership of the Board. The
Board has held 5 meetings since the close of the
Acquisition and the consummation of our operations as a bank
holding company. We expect our directors to attend all board and
committee meetings and to spend the time needed and meet as
frequently as necessary to properly discharge their duties.
30
Audit
Committee Information
The Audit Committee is comprised entirely of directors who may
be classified as independent within the meaning of
Nasdaq Rule 5605(a)(2) and
Rule 10A-3
of the Exchange Act. Our Audit Committee consists of Curtis W.
Anderson, Richard A.C. Coles, Jason N. Ader, and Terrence L.
Wright. Mr. Anderson serves as the chairman of our Audit
Committee.
The Audit Committee acts pursuant to a separate written charter
which has been adopted and approved by the Board. The Audit
Committees duties, which are specified in our Audit
Committee Charter, include, but are not limited to:
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serving as an independent and objective party to monitor our
financial reporting process, audits of our financial statements
and internal control system;
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reviewing and appraising the audit efforts and independence of
our independent registered public accounting firm and internal
finance department;
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reviewing and discussing with our internal auditors and the
independent registered public accounting firm their audit scope
and plan;
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discussing with management, our internal auditors and the
independent registered public accounting firm the adequacy and
effectiveness of our internal controls over financial reporting,
disclosure controls and procedures, the integrity of our
financial reporting processes, and the adequacy of our financial
risk management programs and policies, including recommendations
for improvement;
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obtaining and reviewing written reports from the independent
registered public accounting firm regarding the firms
internal quality control procedures;
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establishing procedures for the receipt, retention and treatment
of complaints on accounting, internal accounting controls or
auditing matters;
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establishing policies for hiring employees or former employees
of our independent registered public accounting firm;
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reviewing and approving all related party transactions as
required by Nasdaq;
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reviewing with our independent registered public accounting firm
our accounting practices and policies; and
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providing an open avenue of communications among our independent
registered public accounting firm, financial and senior
management, our internal finance department, and the Board.
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Financial
Experts on Audit Committee
The Audit Committee currently is and will at all times be
composed exclusively of independent directors who
are financially literate, meaning they are able to
read and understand fundamental financial statements, including
a companys balance sheet, income statement and cash flow
statement. In addition, the Audit Committee has, and will
continue to have, at least one member who has past employment
experience in finance or accounting, requisite professional
certification in accounting, or other comparable experience or
background that results in the individuals financial
sophistication. The Board has determined that
Messrs. Anderson and Coles satisfy the definition of
financial sophistication and also qualify as audit
committee financial experts, as defined under the
SECs rules and regulations.
Code of
Ethics
We have adopted a code of conduct and ethics applicable to our
directors, officers and employees in accordance with applicable
federal securities laws and the rules of Nasdaq.
31
Compensation
Committee Information
The Compensation Committee consists of Jason N. Ader, Robert G.
Goldstein and Curtis W. Anderson. Each is an independent
director under Nasdaq listing standards. Mr. Ader serves as
the chairman of the Compensation Committee. The purpose of the
Compensation Committee is assist our Board in fulfilling its
fiduciary obligations with respect to the oversight of our
compensation plans, policies and programs, especially with
regard to executive compensation and employee benefits, and
producing an annual report on executive compensation for
inclusion in our proxy statement. The Compensation Committee
acts pursuant to a separate written charter which has been
adopted and approved by our Board. The Compensation
Committees duties, which are specified in our Compensation
Committee Charter, include, but are not limited to:
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overseeing succession planning for senior management;
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reviewing the performance and advancement potential of current
and future senior management and succession plans for each as
well as reviewing the retention of high-level, high-potential
succession candidates;
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assessing the compensation structure of WLBC and adopting a
written statement of compensation philosophy and strategy,
selecting a peer group and reviewing executive compensation in
relation to the peer group;
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reviewing the goals and objectives relating to compensation of
our Chief Executive Officer and evaluating the Chief
Executives Officers performance in light of those
goals and objectives, and making recommendations for improving
performance;
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reviewing and approving compensation for all other officers and
evaluating the responsibilities and performance of those
officers and making recommendations for improving performance
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administering officer compensation programs and equity-based
plans, and making recommendations to our Board with respect to
incentive compensation plans and equity-based plans;
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evaluating and making recommendations for compensation of
members of the Board in their capacities as such;
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approving, monitoring, amending and terminating ERISA-governed
employee benefit plans; and
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reviewing our Compensation Discussion and Analysis to be
included in our annual proxy statement and preparing and
approving the Report of the Compensation Committee to be
included in the annual proxy statement.
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Under its charter, the Compensation Committee is entitled to
delegate its responsibilities with respect to the administration
of incentive compensation, equity compensation and other
compensation programs as appropriate and consistent with
applicable law. The Compensation Committee has the resources and
authority to delegate its duties and responsibilities.
Compensation
Committee Interlocks and Insider Participation
None of the persons designated as our directors currently serves
on the compensation committee of any other company on which any
other director designee of WLBC or any officer or director of
WLBC or
Service1st is
currently a member. Jason N. Ader sits on the board of directors
of Las Vegas Sands Corp, and currently serves on its
compensation committee. Robert Goldstein is the Executive Vice
President of Las Vegas Sands Corp.
Governance
and Nominating Committee
Our Governance and Nominating Committee consists of Michael B.
Frankel, Jason N. Ader and Terrence L. Wright. Each is an
independent director under Nasdaq listing standards.
Mr. Frankel serves as the chairman of the Governance and
Nominating Committee. The Governance and Nominating Committee
acts pursuant to a separate written charter which has been
adopted and approved by our Board. The Governance and
32
Nominating Committees duties, which are specified in our
Governance and Nominating Charter, include, but are not limited
to:
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monitoring the independence (under Nasdaq requirements) of the
Board and the overall Board composition;
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reviewing the performance of the Board as a whole
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identifying and recommending to our Board qualified candidates
for Board membership;
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considering and recommending to the Board nominees to stand for
election at the annual meeting, including recommendations from
our stockholders;
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recommending to the Board nominees to fill Board vacancies as
they arise;
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selecting, evaluating and recommending to our Board membership
on Board committees;
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determining Board committee membership standards and overseeing
the annual committee self-evaluations;
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developing and overseeing governance principles of the Board and
a code of conduct applicable to members of the Board; and
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evaluating and approving recommendations of the Compensation
Committee for compensation of members of the Board in their
capacities as such.
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The Governance and Nominating Committee makes recommendations to
our Board of candidates for election to our Board, and our Board
makes recommendations to our stockholders. The Governance and
Nominating Committee will consider stockholder recommendations
for candidates for the Board that are submitted as provided in
Communications with the Board below. In addition to
considering candidates suggested by stockholders, the Governance
and Nominating Committee considers potential candidates
recommended by current directors, company officers, employees
and others.
Guidelines
for Selecting Director Nominees
The Governance and Nominating Committee believes that all
director nominees should meet certain qualifications and possess
certain qualities and skills that, when considered in light of
the qualities and skills of the other director nominees, assist
our board in overseeing our business and operations and
developing and pursuing our strategic objectives. The Governance
and Nominating Committee believes that persons to be nominated,
at a minimum, should be actively engaged in business endeavors,
have an understanding of financial statements, corporate
budgeting and capital structure, be familiar with the
requirements of a publicly traded company, be familiar with
industries relevant to our business endeavors, be willing to
devote significant time to the oversight duties of the board of
directors of a public company, and be able to promote a
diversity of views based on the persons professional
experience, education, skill and other individual qualities and
attributes. Thus, our Governance and Nominating Committee will
evaluate candidates from a variety of educational and
professional backgrounds to foster diversity on the Board. The
Governance and Nominating Committee will evaluate each
individual in the context of the Board as a whole, with the
objective of recommending a group of persons that can best
implement our business plan, perpetuate our business and
represent stockholder interests. The Governance and Nominating
Committee may require certain skills or attributes, such as
financial or accounting experience, to meet specific board needs
that arise from time to time. The Governance and Nominating
Committee will not distinguish among nominees recommended by
stockholders and other persons.
Changes
in Our Independent Registered Public Accountants
The personnel of Hays & Company LLP, our independent
registered public accounting firm, joined with Crowe Horwath
LLP, resulting in the resignation of Hays & Company
LLP as our independent registered public accounting firm. Crowe
Horwath LLP was appointed as our independent registered public
accounting
33
firm going forward on June 5, 2009. The decision to engage
Crowe Horwath LLP was approved by both the Board and our Audit
Committee.
The audit reports of Hays & Company LLP regarding our
financial statements as of and for the fiscal years ended
December 31, 2008 and 2007 did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles.
During our three most recent fiscal years ended
December 31, 2009, 2008 and 2007 and through
November 19, 2010, we did not consult with Crowe Horwath
LLP regarding either (i) the application of accounting
principles to a specific transaction, either completed or
proposed or (ii) the type of audit opinion that may be
rendered by Crowe Horwath LLP on our financial statements.
Neither a written report nor oral advice was provided by Crowe
Horwath LLP to us that was an important factor considered by us
in reaching a decision as to any accounting, auditing or
financial reporting issue. Prior to their appointment, we did
not consult with Crowe Horwath LLP regarding any matter that was
either the subject of a disagreement (as such term is defined in
Item 304(a)(1)(iv) and the related instructions to such
item) or a reportable event (as such term is defined
in Item 304(a)(1)(v) of
Regulation S-K).
In connection with the audits of our financial statements for
each of the fiscal years ended December 31, 2009, 2008 and
2007, the review of the interim financial statements for the
periods ended March 31, 2010, June 30, 2010,
September 30, 2010, and through November 19, 2010,
there were no disagreements between us and Crowe Horwath LLP on
any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Crowe
Horwath LLP, would have caused Crowe Horwath LLP to make
reference to the subject matter of the disagreements in
connection with their reports on our financial statements for
such years.
During the fiscal years ended December 31, 2007,
December 31, 2008, December 31, 2009, and the interim
period ended September 30, 2010 and through
November 19, 2010, there were no reportable
events (as such term is defined in Item 304(a)(1)(v)
of
Regulation S-K).
Independent
Auditors Fees
Hays & Company LLP audited our financial statements
for the period from June 27, 2007 (inception) to
December 31, 2007 and for the year ended December 31,
2008. Hays & Company LLP reported directly to our
Audit Committee. The personnel of Hays & Company LLP
joined with Crowe Horwath LLP, resulting in the resignation of
Hays & Company LLP as our independent registered
public accounting firm. Crowe Horwath LLP was appointed as our
independent registered public accounting firm going forward
June 5, 2009. Crowe Horwath LLP audited our financial
statements for the years ended December 31, 2010 and 2009.
The following is a summary of fees paid or to be paid to
Hays & Company LLP and Crowe Horwath LLP, as
applicable for services rendered:
Audit
Fees
The aggregate fees billed for professional services rendered by
Hays & Company LLP for the period ended
December 31, 2008 for the audit of our financial statements
dated December 31, 2008, review of our financial statements
dated March 31, June 30 and September 30, 2008, our
current reports on
Form 8-K
and reviews of SEC filings amounted to approximately $100,167.
The aggregate fees billed for professional services rendered by
Hays & Company LLP and Crowe Horwath LLP for the
period ended December 31, 2009 for the audit of our
financial statements dated December 31, 2009, review of our
financials statements dated March 31, June 30 and
September 30, 2009, our current reports on
Form 8-K
and reviews of SEC filings amounted to approximately $83,200.
The aggregate fees billed for professional services rendered by
Crowe Horwath LLP for the period ended December 31, 2010
for the audit of our financial statements dated
December 31, 2010, review of our financials statements
dated March 31, June 30 and September 30, 2010,
our current reports on
Form 8-K
and reviews of SEC filings amounted to approximately $269,000.
34
Audit
Related Fees
On June 5, 2009, we engaged Crowe Horwath LLP to perform
financial due diligence in connection with an acquisition. The
aggregate fees billed for financial due diligence rendered by
Crowe Horwath LLP amounted to approximately $631,900.
Tax
Fees
The aggregate fees billed for professional services rendered by
Hays & Company LLP for the fiscal year 2008 for tax
compliance amounted to approximately $11,800.
The aggregate fees billed for professional services rendered by
Hays & Company LLP and Crowe Horwath LLP for the
fiscal year 2009 for tax compliance amounted to approximately
$35,000.
The aggregate fees billed or expected to be billed for
professional services rendered by Crowe Horwath LLP for the
fiscal year 2010 for tax compliance amounted to approximately
$35,000.
All
Other Fees
We did not receive products and services provided by
Hays & Company LLP or Crowe Horwath LLP, other than
those discussed above, for either fiscal year 2008, 2009 or 2010.
Audit
Committee Pre-Approval Policies and Procedures
Since our Audit Committee was not formed until the consummation
of our initial public offering, the Audit Committee did not
pre-approve all of the foregoing services, although any services
rendered prior to the formation of our Audit Committee were
approved the Board. Since the formation of our Audit Committee,
and on a going-forward basis, the Audit Committee approved all
auditing services performed for us by Hays & Company
LLP, and will pre-approve all auditing services and permitted
non-audit services to be performed for us by Crowe Horwath LLP,
including the fees and terms thereof (subject to the de minimis
exceptions for non-audit services described in the Exchange Act
which are approved by the Audit Committee prior to the
completion of the audit). The Audit Committee may form and
delegate authority to subcommittees of the Audit Committee
consisting of one or more members when appropriate, including
the authority to grant pre-approvals of audit and permitted
non-audit services, provided that decisions of such subcommittee
to grant pre-approvals shall be presented to the full Audit
Committee at its next scheduled meeting.
Communication
with the Board
Stockholders and other interested parties may send written
communications directly to the Board or to specified individual
directors, including the Chairman or any non-management
directors, by sending such communications to George A.
Rosenbaum, Jr., our Chief Financial Officer, at our
principal executive offices: Western Liberty Bancorp,
8363 W. Sunset Road, Suite 350, Las Vegas, Nevada
89113. Such communications will be reviewed and, depending on
the content, will be:
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forwarded to the addressees or distributed at the next scheduled
Board meeting;
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if they relate to financial or accounting matters, forwarded to
the Audit Committee or distributed at the next scheduled Audit
Committee meeting;
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if they relate to executive officer compensation matters,
forwarded to the Compensation Committee or discussed at the next
scheduled Compensation Committee meeting;
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if they relate to the recommendation of the nomination of an
individual, forwarded to the Governance and Nominating Committee
or discussed at the next scheduled Governance and Nominating
Committee meeting; or
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if they relate to the operations of the company, forwarded to
the appropriate officers of the company, and the response or
other handling of such communications reported to the Board at
the next scheduled Board meeting.
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35
EXECUTIVE
OFFICER AND DIRECTOR COMPENSATION
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Name
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Age
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Position
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Michael B. Frankel
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74
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Chairman of the Board
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Terrence L. Wright
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61
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Vice Chairman of the Board
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Jason N. Ader
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43
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Director
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Richard A. C. Coles
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43
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Director
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Robert G. Goldstein
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55
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Director
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Curtis W. Anderson, CPA
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61
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Director
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Steven D. Hill
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51
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Director
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William E. Martin
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69
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Director and Chief Executive Officer
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George A. Rosenbaum Jr.
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54
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Chief Financial Officer
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Patricia A. Ochal
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46
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Vice President
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For biographical information about Messrs. Frankel, Wright,
Ader, Coles, Goldstein, Anderson, Hill and Martin, see the
section entitled Corporate Governance
Information About the Directors.
George A. Rosenbaum, Jr. currently serves as our
Chief Financial Officer and as Executive Vice President of
Service1st.
From May 2007 to December 2009, Mr. Rosenbaum has served as
Consultant for various financial entities, including two groups
starting de novo banks. From August 2003 to February
2007, Mr. Rosenbaum, served as Executive Vice President,
Chief Financial Officer and Secretary of the board of directors
of First Federal Banc of the Southwest, Inc. From May 2002 to
August 2003, Mr. Rosenbaum served as Chief Financial
Officer of Illini Corporation, a publicly traded
$280 million bank holding company. From July 2000 to May
2002, Mr. Rosenbaum worked as Senior Audit Manager at
McGladrey & Pullen LLP, working primarily on
accounting and audit matters relating to financial institutions.
Mr. Rosenbaum holds a Bachelor of Science in Accounting
from the National College of Business.
Patricia A. Ochal currently serves as our Vice President
and as Chief Financial Officer of
Service1st .
Ms. Ochal manages
Service1sts
facilities, leases, insurance and bank-wide risk assessment. At
Service1sts
inception, Ms. Ochal was in charge of Human Resources, Bank
Operations and Marketing. Bank Operations involved Compliance
(BSA/AML/OFAC), on-line banking, remote capture, ACH, wires,
ATMs, establishing new branch locations and tenant improvements.
Ms. Ochal also coordinated
Service1sts
marketing effort and website development/management.
Ms. Ochal began organizing
Service1st in
May 2006. Prior to organizing
Service1st,
Ms. Ochal was Senior Vice President, Chief Financial
Officer of Nevada First Bank from 2004 through 2006.
Ms. Ochal received her Bachelor of Science in Accounting
from the University of Nevada, Las Vegas and is Certified Public
Accountant in the state of Nevada. Ms. Ochal is an alumnus
of KPMG Peat Marwick and currently holds affiliations with the
American Institute of Certified Public Accountants (AICPA) and
the Nevada Society of Certified Public Accountants.
36
Executive
Officers and Directors of
Service1st
The board of directors and executive officers of our
wholly-owned subsidiary
Service1st are
as follows:
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Name
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Age
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Position
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Jason N. Ader
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43
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Director
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Terrence L. Wright
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61
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Director
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Monte L. Miller
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64
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Director
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Curtis W. Anderson, CPA
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61
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Director
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Steven D. Hill
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51
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Chairman of the Board
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Frances E. Moore
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63
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Director
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Jenna M. Morton
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44
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Director
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William E. Martin
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69
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Vice Chairman and Chief Executive Officer
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George A. Rosenbaum, Jr.
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54
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Chief Operating Officer
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Richard Deglman
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67
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Chief Credit Officer
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Patricia A. Ochal
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46
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Chief Financial Officer
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For biographical information about Messrs. Ader, Wright,
Goldstein, Anderson, Hill and Martin, see the section entitled
Corporate Governance Information about the
Directors. For biographical information about
Mr. Rosenbaum and Ms. Ochal, see the section above.
Monte L. Miller is a founder and Director of
Service1st Bank
of Nevada. He has held the position of Director since the bank
opened in January 2007. In addition to serving as Director, he
is the Chairman of the Loan & Investment Committee and
a Member of both the Audit and Nominating and Corporate
Governance Committees of
Service1st.
Mr. Miller started his banking career in 1971 with First
National Bank of Nevada and has 38 years of banking and
investment experience. From 1975 to 1989, Mr. Miller first
served as an officer to Valley Bank of Nevada (now Bank of
America), then as the Vice President and Manager of the
Investment Department of the Trust Division and then as the
Senior Vice President and Trust Division Manager.
Following his banking career, in 1991 Mr. Miller founded
KeyState Corporate Management, which provides corporate
management services to Nevada and Delaware investment
subsidiaries, including a number of investment subsidiaries of
community banks. As part of these corporate management services,
Mr. Miller serves as an officer
and/or
director of these Nevada or Delaware subsidiaries
(KeyStates clients), which include special purpose
entities and other subsidiaries of public companies created to
hold and manage a companys intangible assets. He holds a
Bachelor of Science in Business Administration from the
University of Nevada Reno and his M.A. in Economics from the
University of Nevada, Las Vegas. He currently serves as a
Commissioner for the Nevada Commission on Economic Development,
as a Trustee of the University of Nevada Reno Foundation, as
Chairman of Nevada Energy Assistance Corporation, on the
Executive Committee of the Board of Trustees of the Nevada
Development Authority, and on the Governors
P-16
Education Council. From January 2004 through December 2007,
Mr. Miller served on the board of the Federal Home Loan
Bank of San Francisco and served on the Audit Committee,
Finance Committee, and Personnel/Compensation Committee. He also
previously served on the Board of Directors of the Community
College of Southern Nevada Foundation and the Nevada Community
Foundation.
Frances (Fafie) Moore has been a Director of
Service1st,
as well as a Member of the Audit and Loan Investment Committees
since April 2008. In addition, Ms. Moore is the President
of FJM Corporation doing business as Realty Executives of
Nevada, a real estate brokerage firm which has been named by the
National Association of Realtors as one of the top
100 companies in the nation. She has been involved as
President of the Corporation since it was founded in 1989.
Ms. Moore is a Nevada licensed real estate broker and has
been named to the Realtor Association Hall of Fame.
Ms. Moore served four years as President of the Nevada
Forum of the International Womens Forum. She served
10 years on the Western Regional Advisory Committee of the
U.S. Civil Rights Commission. She was the 2008 Chairman of
the Las Vegas Chamber of Commerce. She is a founding board
member of FIT for Tomorrow, an organization dedicated to
breaking the cycle of dependency. Ms. Moore is currently a
member of the Regional Transportation Commission
37
Stakeholders Advisory Committee. She is a current member of the
Board of Directors of both the Greater Las Vegas Association of
Realtors and the Nevada Association of Realtors.
Jenna M. Morton has been a Director of
Service1st Bank
of Nevada since April 2008, as well as a Member of the Audit
Committee and the Compensation Committee. Jenna Morton has been
a co-owner of the N9NE Group since January 2003 and serves as
its Director of Community and Government Relations, overseeing
corporate initiatives for over 900 employees in Las Vegas
alone. The N9NE Group owns and operates multiple restaurants and
nightlife entertainment venues in Chicago, Las Vegas and Dallas.
The N9NE Group brands include N9NE Steakhouse, Nove Italiano,
Ghostbar, Moon Nightclub, Rain Nightclub, and the worlds
only Playboy Club. She is the President of the Las Vegas Springs
Preserve Foundation Board of Directors and the Vice President of
the Las Vegas Springs Preserve Board of Directors. She also
serves as the finance chair for the After School All Stars Board
of Directors. She is a founding member of Nevada Womens
Philanthropy and has served on the boards of Summerlin
Childrens Forum and Citizen Alert. She is heavily involved
with other organizations, including Proeval Raxmu in Guatemala,
Nevada Conservation League, Nevada Wilderness Project, AFAN,
Planned Parenthood and Vegas PBS. She graduated magnum cum laude
from Northwestern University, with a Bachelors of Arts in
political science.
Richard Deglman has been an Executive Vice President and
Chief Credit Officer of
Service1st Bank
of Nevada since June 2008. Prior to his employment with
Service1st,
Mr. Deglman served as Executive Vice President and
Statewide Commercial Real Estate Manager of Nevada State Bank
for ten years. Prior to that, he was the Teamleader
Emerging Technology Group for Silicon Valley Bank from 1994 to
1998. Before joining Silicon Valley Bank, Richard was with
Security Pacific Bank for over 20 years in various roles,
ending as FVP/Regional Manager of CRE before the bank was
acquired by Bank of America in 1992. After the acquisition, he
served as Credit Administrator until 1994. Richard earned his
Bachelors in Business Administration from San Francisco
State University and his MBA from St. Marys College.
His outside roles and association memberships have included the
Nevada Builders Association, Associated General Contractors,
State of Nevada Block Grant Commissioner, Board of
Directors Jump Start, and Prospectors
Reno.
Compensation
of Executive Officers
Due to the recent closing of the Acquisition, we have yet to
establish a formal policy for the compensation of our executive
officers. We intend to provide total compensation packages that
are competitive in terms of potential value to our executives,
and which are tailored to our unique characteristics and needs
within the financial services industry in order to create an
executive compensation program that will adequately reward our
executives for their roles in creating value for us
stockholders. We intend to be competitive with other similarly
situated companies in the banking industry. The compensation
decisions regarding our executives will be based on our need to
attract individuals with the skills necessary for us to achieve
our business plan, to reward those individuals fairly over time,
and to retain those individuals who continue to perform at or
above our expectations.
Our executives compensation will have three primary
components salary, cash incentive bonuses and
stock-based awards. We will view the three components of
executive compensation as related but distinct. Although our
Compensation Committee will review total compensation, we do not
believe that significant compensation derived from one component
of compensation should negate or reduce compensation from other
components. We anticipate determining the appropriate level for
each compensation component based in part, but not exclusively,
on our view of internal equity and consistency, individual
performance and other information deemed relevant and timely.
Since our Compensation Committee was only recently formed upon
the consummation of the Acquisition, we have not adopted any
formal or informal policies or guidelines for allocating
compensation between long-term and currently paid out
compensation, between cash and non-cash compensation, or among
different forms of compensation
In addition to the guidance provided by our Compensation
Committee, we may utilize the services of third parties from
time to time in connection with the hiring and compensation
awarded to executive employees. This could include subscriptions
to executive compensation surveys and other databases.
38
Our Compensation Committee is charged with performing an annual
review of our executive officers cash compensation and
equity holdings to determine whether they provide adequate
incentives and motivation to executive officers and whether they
adequately compensate the executive officers relative to
comparable officers in other companies.
Benchmarking
of Cash and Equity Compensation
We believe it is important when making compensation-related
decisions to be informed as to current practices of similarly
situated publicly held companies in the banking industry. We
expect that the Compensation Committee will stay apprised of the
cash and equity compensation practices of publicly held
companies in the banking industry through the review of such
companies public reports and through other resources. It
is expected that any companies chosen for inclusion in any
benchmarking group would have business characteristics
comparable to us, including revenues, financial growth metrics,
stage of development, employee headcount and market
capitalization. While benchmarking may not always be appropriate
as a stand-alone tool for setting compensation due to the
aspects of our post-acquisition business and objectives that may
be unique to us, we generally believe that gathering this
information will be an important part of our
compensation-related decision-making process.
Compensation
Components
Base Salary. Generally, we anticipate setting
executive base salaries at levels comparable with those of
executives in similar positions and with similar
responsibilities at comparable companies. We will seek to
maintain base salary amounts at or near the industry norms while
avoiding paying amounts in excess of what we believes is
necessary to motivate executives to meet corporate goals. It is
anticipated base salaries will generally be reviewed annually,
subject to terms of employment agreements, and that the
Compensation Committee and board will seek to adjust base salary
amounts to realign such salaries with industry norms after
taking into account individual responsibilities, performance and
experience.
Annual Bonuses. We intend to design and
utilize cash incentive bonuses for executives to focus them on
achieving key operational and financial objectives within a
yearly time horizon. Near the beginning of each year, the Board,
upon the recommendation of the Compensation Committee and
subject to any applicable employment agreements, will determine
performance parameters for appropriate executives. At the end of
each year, the Board and Compensation Committee will determine
the level of achievement for each corporate goal.
We will structure cash incentive bonus compensation so that it
is taxable to our employees at the time it becomes available to
them. At this time, it is not anticipated that any executive
officers annual compensation will exceed
$1.0 million, and we have accordingly not made any plans to
qualify for any compensation deductions under
Section 162(m) of the Internal Revenue Code.
Equity Awards. We also may use stock options
and other stock-based awards to reward long-term performance,
including stock options granted under the Stock Option Plan. We
believe that providing a meaningful portion of our
executives total compensation package in stock options and
other stock-based awards serves to align the incentives of our
executives with the interests of our stockholders and with our
long-term success. The Compensation Committee and the Board will
develop their equity award determinations based on their
judgments as to whether the complete compensation packages
provided to our executives, including prior equity awards, are
sufficient to retain, motivate and adequately award the
executives.
Other Compensation. We will establish and
maintain various employee benefit plans, including medical,
dental, life insurance and 401(k) plans. These plans will be
available to all salaried employees and we will not discriminate
in favor of executive officers. We may extend other perquisites
to our executives that are not available to our employees
generally. All of our executive officers will be eligible to
participate in non-contributory 401(k) plans, premium-paid
health, hospitalization, short and long term disability, dental,
life and other insurance plans as we may have in effect from
time to time. They also will be entitled to reimbursement for
all reasonable business travel and other
out-of-pocket
expenses incurred in the performance of their services.
39
Director
Compensation
In accordance with the policies of the Board, our Compensation
Committee recently recommended, and our Nominating and
Governance Committee recently approved, the future grant of
equity compensation to our directors in the form of stock
options to purchase shares of Common Stock to be granted under
the Stock Option Plan. Furthermore, our Compensation Committee
recently recommended, and our Nominating and Governance
Committee recently approved, annual cash compensation to our
non-executive directors and Board committee members in the
following amounts: $50,000 for the Chairman of the Board;
$20,000 for all other non-executive members of the Board; an
additional $15,000 for the Chairman of our Audit Committee; an
additional $5,000 for all other members of our Audit Committee;
and an additional $10,000 for the Chairman of our Compensation
Committee.
In addition, we issued equity grants to certain of our current
and former directors, executive officers and consultants in
connection with the Acquisition, as further discussed below.
Transaction
Related Equity Awards
On October 28, 2010, in connection with the consummation of
the Acquisition, we issued Restricted Stock to William E.
Martin, who became a member of the Board and serves as our Chief
Executive Officer and as Chief Executive Officer of
Service1st,
and George A. Rosenbaum, Jr., our current Chief Financial
Officer and the Executive Vice President of
Service1st.
Mr. Martin received 155,279 shares of Restricted
Stock, which was equal to $1.0 million divided by the $6.44
closing price of the Common Stock on the closing date of the
Acquisition, in consideration for his future services in
accordance with the terms of his employment agreement with WLBC.
Mr. Rosenbaum received 38,819 shares of Restricted
Stock, which was equal to $250,000 divided by the closing price
of the Common Stock on the closing date of the Acquisition, in
consideration for his future services in accordance with the
terms of his employment agreement with WLBC. The shares of
Restricted Stock granted to each of Messrs. Martin and
Rosenbaum will vest 20% on each of the first, second, third,
fourth and fifth anniversaries of the consummation of the
Acquisition, which occurred on October 28, 2010, subject to
Messrs. Martins and Rosenbaums respective and
continuous employment through each vesting date. Fifty percent
of the shares of Restricted Stock that vest in accordance with
the prior sentence will remain Restricted Stock that will vest
upon a termination of the holders employment for any other
reason than (i) by WLBC for cause, or (ii) by the
holder without good reason prior to October 28, 2015. Such
Restricted Stock shall be subject to restrictions on transfer
for a period of one year following each vesting date.
On October 28, 2010, in consideration of their substantial
service to and support of WLBC during the period in which we
sought the requisite regulatory approval to become a bank
holding company in connection with the Acquisition, WLBC and
each of Jason N. Ader, our former Chairman and Chief Executive
Officer and a current member of the Board, Daniel B. Silvers,
our former President, Andrew P. Nelson, our former Chief
Financial Officer and a former member of the Board, Michael Tew,
an outside consultant, and Laura Conover-Ferchak, an outside
consultant, entered into the Letter Agreements, pursuant to
which each of the foregoing individuals received a grant of
Restricted Stock Units. Mr. Ader, a current director and
the former Chairman and Chief Executive Officer of WLBC,
received 50,000 Restricted Stock Units; Mr. Silvers,
WLBCs former President, received 100,000 Restricted Stock
Units; Mr. Nelson, a former director of WLBC, received
25,000 Restricted Stock Units; Mr. Tew, an outside
consultant to WLBC, received 20,000 Restricted Stock Units; and
Mrs. Conover-Ferchak, an outside consultant to WLBC,
received 5,000 Restricted Stock Units. Each Restricted Stock
Unit is immediately and fully vested and shall be settled for
one share of Common Stock, of WLBC on the earlier to occur of
(i) a change of control and (ii) the Settlement Date.
Any cash dividends paid with respect to the shares of Common
Stock covered by the Restricted Stock Units prior to the
Settlement Date shall be credited to a dividend book entry
account as if the shares of Common Stock had been issued,
provided that such cash dividends shall not be deemed to be
reinvested in shares of Common Stock and will be held uninvested
and without interest and shall be paid in cash on the Settlement
Date.
Furthermore, on October 28, 2010, in consideration of their
substantial service to and support of WLBC during the period in
which we sought the requisite regulatory approval to become a
bank holding company in
40
connection with the Acquisition, WLBC made a one-time grant of
50,000 shares of Common Stock to each of Michael Frankel,
the current Chairman of the Board, Richard A.C. Coles, a current
member of the Board and Mark Schulhof, a former member of the
Board.
Payment
for Due Diligence Services
In October 2009, WLBC made a one-time payment of $2,600,000 to
Hayground Cove for due diligence and other services related to
various acquisition opportunities and other activities since
WLBCs inception. Proceeds from the payment were disbursed
by Hayground Cove to certain of its employees, affiliates and
consultants (some of whom also served at the time as WLBCs
officers
and/or
directors) that provided support to WLBC in connection with its
efforts in finding and pursuing potential transactions.
Employment
Agreements
The following is a summary of the material terms of the
employment agreements that we have entered into with executive
officers.
William E. Martin, Chief Executive Officer of WLBC and
Chief Executive Officer of
Service1st.
On February 8, 2010, in connection with the Acquisition, we
entered into an amended and restated employment agreement with
William E. Martin. Mr. Martin currently serves as our Chief
Executive Officer and as a member of the Board, and as Chief
Executive Officer and a member of the board of directors of
Service1st.
Pursuant to the terms of his employment agreement,
Mr. Martins employment commenced as of
October 28, 2010, the closing date of the Acquisition, and
shall continue for an initial term of three years with one or
more additional automatic one year renewal periods thereafter
unless either party elects not to renew the term.
Mr. Martin is entitled to a base salary of $325,000. In
addition to the Restricted Stock discussed above,
Mr. Martin is also eligible to receive additional equity
and long-term incentive awards under any equity-based incentive
compensation plans adopted by us for which our senior executives
are generally eligible, and an annual discretionary incentive
payment upon the attainment of one or more pre-established
performance goals established by the Compensation Committee of
the Board. Mr. Martin is entitled to employee benefits in
accordance with our employee benefits programs. In addition,
Mr. Martin is entitled to receive a one-time payment equal
to his prior years salary in the event there is a change
in control at
Service1st and
Mr. Martin remains the Chief Executive Officer through the
closing of the change in control. Mr. Martins
employment agreement contains customary representations,
covenants and termination provisions.
George A. Rosenbaum Jr., Chief Financial Officer of WLBC and
Executive Vice President of
Service1st. On
December 18, 2009, we entered into a second amended and
restated employment agreement with George A. Rosenbaum Jr.
Mr. Rosenbaums currently serves as our Chief
Financial Officer and as Executive Vice President of
Service1st.
Pursuant to the terms of his employment agreement,
Mr. Rosenbaums employment commenced as of
January 1, 2010 and will continue for an initial term of
three years with one or more additional automatic one-year
renewal periods unless either party elects not to renew the
term. Mr. Rosenbaum is entitled to a base salary of
$200,000. In addition to the Restricted Stock discussed above,
Mr. Rosenbaum was also entitled to a transaction bonus
equal to a pro rata amount of his base salary for the period
from the signing of his original employment agreement on
July 28, 2009. Mr. Rosenbaum received $85,484, which
represents payment in full of his transaction bonus.
Mr. Rosenbaum is also eligible to receive an annual
discretionary incentive payment, upon the attainment of one or
more pre-established performance goals established by the
Compensation Committee. Mr. Rosenbaum is entitled to
employee benefits in accordance with any employee benefits
programs and policies adopted by us. In addition, the employment
agreement contains customary representations, covenants and
termination provisions.
Richard Deglman, Chief Credit Officer of
Service1st.
On November 6, 2009, in connection with the Acquisition, we
entered into an employment agreement with Richard Deglman.
Mr. Deglman currently serves as the Chief Credit Officer of
Service1st.
41
Pursuant to the terms of his employment agreement,
Mr. Deglmans employment commenced as of as of
October 28, 2010, the closing date of the Acquisition, and
shall continue for an initial term of three years with one or
more additional automatic one-year renewal periods thereafter
unless either party elects not to renew the term.
Mr. Deglman is entitled to a base salary of not less than
$250,000. Mr. Deglman is eligible to receive equity and
long-term incentive awards under any equity-based incentive
compensation plans adopted by us for which our senior executives
are generally eligible, and an annual discretionary incentive
payment upon the attainment of one or more pre-established
performance goals established by the Compensation Committee of
the Board. Mr. Deglman is entitled to employee benefits in
accordance with our employee benefits programs. In addition,
Mr. Deglman shall be entitled to receive a one-time payment
equal to his prior years salary in the event there is a
change in control at
Service1st and
Mr. Deglman remains the Chief Credit Officer through the
closing of the change in control. Mr. Deglmans
employment agreement contains customary representations,
covenants and termination provisions.
We may enter into additional employment agreements with certain
of our current and future executive officers. The terms of those
agreements will be determined by the Compensation Committee and
will be commensurate with the compensation packages of
comparable level executives at similarly situated companies.
Summary
Compensation Table
The following table sets forth all compensation received during
the last fiscal year by (i) our former Chief Executive
Officer, (ii) our Chief Executive Officer, (iii) our
Chief Financial Officer, (iv) the Chief Credit Officer of
Service1st,
(v) our former President and (vi) our former Chief
Financial Officer, each of whom served as executive officers for
purposes of reporting compensation for our last fiscal year.
These executive officers are referred to as our named
executive officers or NEOs.
|
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|
|
Non-Equity
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
Name and
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Incentive
|
|
|
Deferred
|
|
|
All
|
|
|
|
|
Principal
|
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|
|
|
|
|
|
|
|
|
Awards
|
|
|
Awards
|
|
|
Plan
|
|
|
Compensation
|
|
|
Other
|
|
|
|
|
Position
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
(1)
|
|
|
(1)
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Compensation
|
|
|
Total
|
|
|
Jason N. Ader;
|
|
|
2010
|
|
|
|
|
|
|
$
|
200,000(2
|
)
|
|
$
|
322,000(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
522,000
|
|
Former Chief
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
Executive
|
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|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
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|
|
William E. Martin;
|
|
|
2010
|
|
|
$
|
237,500(4
|
)
|
|
|
|
|
|
$
|
1,000,000(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,237,500
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
George A. Rosenbaum Jr.;
|
|
|
2010
|
|
|
$
|
200,000
|
|
|
|
|
|
|
$
|
250,000(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
450,000
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Deglman;
|
|
|
2010
|
|
|
$
|
219,792(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
219,792
|
|
Chief Credit Officer
of
Service1st
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel B. Silvers;
|
|
|
2010
|
|
|
|
|
|
|
$
|
450,000(8
|
)
|
|
$
|
644,000(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,094,000
|
|
Former
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
Andrew Nelson;
|
|
|
2010
|
|
|
|
|
|
|
$
|
50,000(10
|
)
|
|
$
|
161,000(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
211,000
|
|
Former Chief
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Financial
|
|
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|
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|
Officer
|
|
|
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|
(1) |
|
The amounts shown reflect the aggregate grant date fair value of
stock awards and stock options computed in accordance with FASB
ASC Topic 718, and are not necessarily indicative of the
compensation actually received by the named executive officers.
The fair value of each option grant is estimated based on the
fair market value on the date of grant. |
|
(2) |
|
Reflects a one time bonus paid to Mr. Ader on
October 28, 2010 in consideration of his substantial
service to and support of WLBC during the period in which we
sought the requisite regulatory approval to become a bank
holding company in connection with the Acquisition. |
|
(3) |
|
Reflects a one-time grant of 50,000 Restricted Stock Units to
Mr. Ader on October 28, 2010 in consideration of his
substantial service to and support of WLBC during the period in
which we sought the |
42
|
|
|
|
|
requisite regulatory approval to become a bank holding company
in connection with the Acquisition. Each Restricted Stock Unit
was immediately and fully vested and shall be settled for one
share of Common Stock of WLBC on the earlier to occur of
(i) a change of control and (ii) the Settlement Date,
and no additional consideration shall be paid by Mr. Ader
in connection with such settlement. |
|
(4) |
|
Reflects base salary of $183,333 paid to Mr. Martin by
Service1st
from January 1, 2010 to October 31, 2010 for duties
performed for
Service1st
before the Acquisition, and base salary of $54,166 paid to
Mr. Martin by WLBC from November 1, 2010 to
December 31, 2010, for duties performed for WLBC after the
Acquisition. |
|
(5) |
|
Reflects a one time grant of 155,279 shares of Restricted
Stock to Mr. Martin in accordance with his Employment
Agreement. The shares of Restricted Stock will vest 20% on each
of the first, second, third, fourth and fifth anniversaries of
the consummation of the Acquisition, which occurred on
October 28, 2010, subject to Mr. Martins
continuous employment through each vesting date. Fifty percent
of the shares of Restricted Stock that vest in accordance with
the prior sentence will remain Restricted Stock that will vest
upon a termination of the holders employment for any other
reason than (i) by WLBC for cause, or (ii) by the
holder without good reason prior to October 28, 2015. Such
Restricted Stock will also vest upon a third party acquiring of
50% of more of the then outstanding voting securities of WLBC or
the power to cause the election of a majority of the members of
the Board. Such Restricted Stock shall be subject to
restrictions on transfer for a period of one year following each
vesting date. |
|
(6) |
|
Reflects a one time grant of 38,819 shares of Restricted
Stock to Mr. Rosenbaum in accordance with his Employment
Agreement. The shares of Restricted Stock are subject to the
same terms and conditions with regard to vesting and forfeiture
set forth in footnote 5 above with respect to Mr. Martin. |
|
(7) |
|
Reflects base salary of $178,125 paid to Mr. Deglman by
Service1st
from January 1, 2010 to October 31, 2010 for duties
performed for
Service1st
before the Acquisition, and base salary of $41,667 paid to
Mr. Deglman by WLBC from November 1, 2010 to
December 31, 2010, for duties performed for WLBC after the
Acquisition. |
|
(8) |
|
Reflects a one time bonus paid to Mr. Silvers on
October 28, 2010 in consideration of his substantial
service to and support of WLBC during the period in which we
sought the requisite regulatory approval to become a bank
holding company in connection with the Acquisition. |
|
(9) |
|
Reflects a one-time grant of 100,000 Restricted Stock Units to
Mr. Silvers on October 28, 2010 in consideration of
his substantial service to and support of WLBC during the period
in which we sought the requisite regulatory approval to become a
bank holding company in connection with the Acquisition. Each
Restricted Stock Unit was immediately and fully vested and shall
be settled for one share of Common Stock of WLBC on the earlier
to occur of (i) a change of control and (ii) the
Settlement Date, and no additional consideration shall be paid
by Mr. Silvers in connection with such settlement. |
|
(10) |
|
Reflects a one time bonus paid to Mr. Nelson on
October 28, 2010 in consideration of his substantial
service to and support of WLBC during the period in which we
sought the requisite regulatory approval to become a bank
holding company in connection with the Acquisition. |
|
(11) |
|
Reflects a one-time grant of 25,000 Restricted Stock Units to
Mr. Nelson on October 28, 2010 in consideration of his
substantial service to and support of WLBC during the period in
which we sought the requisite regulatory approval to become a
bank holding company in connection with the Acquisition. Each
Restricted Stock Unit was immediately and fully vested and shall
be settled for one share of Common Stock of WLBC on the earlier
to occur of (i) a change of control and (ii) the
Settlement Date, and no additional consideration shall be paid
by Mr. Nelson in connection with such settlement. |
43
Outstanding
Equity Awards at Fiscal Year End
The following table summarizes unexercised stock options and
shares of restricted stock that have not vested and related
information for each of our named executive officers as of
December 31, 2010. The market value of restricted stock
awards is based on the closing price of WLBs Common Stock
on December 31, 2010 of $5.35.
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
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|
|
Equity
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Incentive
|
|
|
|
|
|
|
Equity
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Plan
|
|
|
|
|
|
|
Incentive
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
|
Awards:
|
|
|
|
|
|
|
Plan
|
|
|
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Market or
|
|
|
|
Number of
|
|
|
Awards:
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
Number
|
|
|
Market
|
|
|
Number of
|
|
|
Payout Value
|
|
|
|
Securities
|
|
|
Number
|
|
|
Number
|
|
|
|
|
|
|
|
|
of
|
|
|
Value of
|
|
|
Unearned
|
|
|
of Unearned
|
|
|
|
Underlying
|
|
|
of
|
|
|
of
|
|
|
|
|
|
|
|
|
Shares or
|
|
|
Shares or
|
|
|
Shares, Units
|
|
|
Shares, Units
|
|
|
|
Unexercised
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Units of
|
|
|
Units of
|
|
|
or Other
|
|
|
or Other
|
|
|
|
Options
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Option
|
|
|
|
|
|
Stock That
|
|
|
Stock That
|
|
|
Rights That
|
|
|
Rights That
|
|
|
|
(#)
|
|
|
Unexercised
|
|
|
Unearned
|
|
|
Exercise
|
|
|
Option
|
|
|
Have Not
|
|
|
Have Not
|
|
|
Have Not
|
|
|
Have Not
|
|
|
|
Exercisable
|
|
|
Options
|
|
|
Options
|
|
|
Price
|
|
|
Expiration
|
|
|
Vested
|
|
|
Vested
|
|
|
Vested
|
|
|
Vested
|
|
Name
|
|
(1)
|
|
|
(#)(1)
|
|
|
(#)
|
|
|
($)
|
|
|
Date
|
|
|
(#)(2)
|
|
|
($)
|
|
|
(#)
|
|
|
($)
|
|
|
Jason Ader; Former
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William E. Martin;
|
|
|
|
|
|
|
23,798
|
(3)
|
|
|
|
|
|
|
21.01
|
|
|
|
12/20/17
|
|
|
|
155,279
|
|
|
|
830,743
|
|
|
|
|
|
|
|
|
|
Chief Executive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George A. Rosenbaum Jr.;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,819
|
|
|
|
207,682
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Deglman;
|
|
|
14,281
|
|
|
|
21,417(5
|
)
|
|
|
|
|
|
|
21.01
|
|
|
|
8/11/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Credit Officer of
Service1st
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel B. Silvers;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew Nelson;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects options granted to Messrs. Martin and Deglman by
Service1st
that were converted to options to purchase WLB Common Stock. The
number of shares of WLB Common Stock subject to a converted
option was determined by multiplying the number of shares of
Service1st
Bank common stock subject to the option (500 shares in the
case of Mr. Martin and 750 shares in the case of
Mr. Deglman) by 47.5975. |
|
|
|
(2) |
|
Each share of restricted stock granted to Messrs. Martin
and Rosenbaum represents one share of WLBs Common Stock
that is subject to forfeiture if the applicable vesting
requirements are not met. The shares of Restricted Stock will
vest 20% on each of the first, second, third, fourth and fifth
anniversaries of the consummation of the Acquisition, which
occurred on October 28, 2010, subject to
Mr. Martins continuous employment through each
vesting date. Fifty percent of the shares of Restricted Stock
that vest in accordance with the prior sentence will remain
Restricted Stock that will vest upon a termination of the
holders employment for any other reason than (i) by
WLBC for cause, or (ii) by the holder without good reason
prior to October 28, 2015. Such Restricted Stock will also
vest upon a third party acquiring of 50% of more of the then
outstanding voting securities of WLBC or the power to cause the
election of a majority of the members of the Board. Such
Restricted Stock shall be subject to restrictions on transfer
for a period of one year following each vesting date. |
|
|
|
(3) |
|
Mr. Martins options will vest and become exercisable
on December 31, 2012 if
Service1sts
total deposits are equal to or greater than $750 million as
of that date. If the foregoing target is not achieved, then all
of Mr. Martins options will be forfeited as of that
date. |
44
|
|
|
(4) |
|
Reflects the expiration date if Mr. Martins options
vest as set forth in footnote 3. |
|
(5) |
|
Mr. Deglmans unvested options will vest in equal
installments on August 11 of 2011, 2012 and 2013. |
Director
Compensation Table
The following table sets forth all compensation received during
the last fiscal year by WLBCs non-employee directors for
services in all capacities to the Company in 2010. Information
with respect to the compensation of Jason N. Ader, a director
and WLBCs former Chief Executive Officer, William E.
Martin, a director and WLBCs Chief Executive Officer, and
Andrew P. Nelson, a former director and WLBCs former Chief
Financial Officer, are set forth in the Summary
Compensation Table above. The table includes compensation
information for Mark Schulhof and Blake L. Sartini and who are
no longer members of WLBCs Board, but served in such
capacity until October 28, 2010 and February 14, 2011,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
or Paid in
|
|
|
Stock
|
|
|
Option
|
|
|
All other
|
|
|
|
|
|
|
Cash
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Total
|
|
Name
|
|
($)(1)
|
|
|
($)(2)
|
|
|
($)(2)
|
|
|
($)
|
|
|
($)
|
|
|
Michael B. Frankel, Chairman
|
|
|
5,890
|
|
|
$
|
322,000
|
|
|
|
|
|
|
|
50,000
|
(3)
|
|
|
377,890
|
|
Terrence L. Wright, Vice Chairman
|
|
|
2,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,945
|
|
Richard A.C. Coles
|
|
|
2,945
|
|
|
$
|
322,000
|
|
|
|
|
|
|
|
|
|
|
|
324,945
|
|
Robert G. Goldstein
|
|
|
2,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,356
|
|
Curtis W. Anderson, CPA
|
|
|
4,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,123
|
|
Steven D. Hill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark Schulhof
|
|
|
|
|
|
$
|
322,000
|
|
|
|
|
|
|
|
|
|
|
|
322,000
|
|
Blake L. Sartini
|
|
|
2,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,356
|
|
|
|
|
(1) |
|
Consists of annual Board fees, Board Chairman, committee
chairman, and committee fees. |
|
(2) |
|
Reflects a one time grant of 50,000 Private Shares to each of
Mssrs. Frankel, Coles and Schulhof on October 28, 2010 in
consideration of his substantial service to and support of WLBC
during the period in which we sought the requisite regulatory
approval to become a bank holding company in connection with the
Acquisition. The amounts shown reflect the aggregate grant date
fair value of stock awards and stock options computed in
accordance with FASB ASC Topic 718, and are not necessarily
indicative of the compensation actually received by the
non-employee directors. The fair value of each option grant is
estimated based on the fair market value on the date of grant. |
|
(3) |
|
Reflects a one time payment paid to Mr. Frankel on
October 28, 2010 in consideration of his substantial
service to and support of WLBC during the period in which we
sought the requisite regulatory approval to become a bank
holding company in connection with the Acquisition. |
45
THE
BUSINESS OF WESTERN LIBERTY BANCORP
Western
Liberty Bancorp
WLBC became a bank holding company on October 28, 2010 with
consummation of the Acquisition. Although WLBCs goal in
2007, when it was established as a special purpose acquisition
company, was to identify for acquisition domestic and
international operating companies engaged in the consumer
products and services business, by the spring of 2009, we
determined that the banking industry had become an attractive
investment opportunity, particularly the community banking
industry in Nevada. In October of 2009, we changed our name to
Western Liberty Bancorp and eliminated the special purpose
acquisition company features of our governing documents. In
October 2009, we also began in earnest the process that
concluded on October 28, 2010 with the acquisition of
Service1st.
Our sole subsidiary is
Service1st,
and we currently conduct no business activities other than
acting as the holding company of
Service1st.
The financial presentations included herein represent one year
of activity for the Company and consolidated results with
Service1st for
two months.
Service1st
Bank of Nevada
Established on January 16, 2007,
Service1st
is a community bank, providing a full range of banking and
related services to locally owned businesses, professional
firms, real estate developers and investors, local non-profit
organizations, high net worth individuals, and other customers
in the greater Las Vegas area. Banking services provided include
basic commercial and consumer depository services, commercial
working capital and equipment loans, commercial real estate
(both owner and non-owner occupied) loans, construction loans,
and unsecured personal and business loans.
Service1st relies
primarily on locally generated deposits to fund its lending
activities. Substantially all of our business is generated in
the Nevada market.
The
Acquisition
On October 28, 2010, WLBC consummated the Acquisition.
Pursuant to the Amended Merger Agreement, Acquisition Sub merged
with and into
Service1st,
with
Service1st being
the surviving entity and becoming WLBCs wholly-owned
subsidiary. WLBC previously received the requisite approvals of
certain bank regulatory authorities to complete the Acquisition
to become a bank holding company.
The former stockholders of
Service1st received
approximately 2,282,668 shares of Common Stock (net of the
exercise of dissenters rights with respect to
88,054 shares) as Base Acquisition Consideration. In
addition, the holders of
Service1sts
outstanding options and warrants now hold options and warrants
of similar tenor to purchase up to 289,781 shares of Common
Stock at an exercise price of $21.01.
In addition to the Base Acquisition Consideration, each of the
former stockholders of
Service1st may
be entitled to receive Contingent Acquisition Consideration, if
at any time within the first two years after the consummation of
the Acquisition, the closing price per share of the Common Stock
exceeds $12.75 for 30 consecutive days. The Contingent
Acquisition Consideration is equal to 20% of the tangible book
value of
Service1st at
August 31, 2010 (or approximately $4.4 million). The
total number of shares of our common stock issuable to the
former
Service1st stockholders
would be determined by dividing the Contingent Acquisition
Consideration by the average of the daily closing price of the
Common Stock on the first 30 trading days on which the closing
price of the Common Stock exceeded $12.75.
At the close of business on October 28, 2010, WLBC became a
new Nevada bank holding company by consummating the Acquisition
and conducts its operations through
Service1st.
In conjunction with the Acquisition, WLBC infused
$25 million of capital onto the balance sheet of
Service1st.
On October 29, 2010, the Common Stock began trading on the
Nasdaq, under the ticker symbol WLBC.
During the application process for the Acquisition, we made a
number of commitments to the FDIC. First, we agreed to maintain
the Tier 1 leverage capital ratio of
Service1st at
10% or greater until October 28, 2013 or, if later, when
the September 1, 2010 Consent Order agreed to by
Service1st with
the FDIC and the Nevada Financial Institutions Division
terminates. We also agreed that for that same time period we
will make
46
no change in the directors or executive management of
Service1st unless
we first receive the FDICs non-objection to the proposed
change. We assured the FDIC in writing during the application
process that we will not seek to expand by acquisition until
Service1st is
restored to a satisfactory condition, which at a minimum means
that the September 1, 2010 Consent Order must first be
terminated. Until that occurs, any growth on
Service1sts
part must be the result of organic growth in the banks
existing business. We also agreed to seek advance approval both
from the FDIC and the Nevada Financial Institutions Division for
any major deviation from the business plan that we submitted
during the acquisition application process.
As a condition to obtaining Federal Reserve approval of the
Acquisition, Director Jason N. Ader made a number of commitments
to the Federal Reserve on behalf of Hayground Cove. Unless
written approval of the Federal Reserve is obtained by Hayground
Cove in advance, Hayground Cove committed, among other things,
that it will not, directly or indirectly, (i) exercise or
attempt to exercise a controlling influence over the management
or policies of WLBC or
Service1st,
(ii) have or seek to have more than one representative on
the board of directors of WLBC or
Service1st,
(iii) have an interest of 4.9% or more in the voting
securities of WLBC, including for purposes of calculating the
4.9% threshold, the WLBC voting securities held by Jason N.
Ader or by other officers and directors of Hayground Cove,
(iv) no Hayground Cove representative may serve as an
officer or employee of WLBC or
Service1st,
and (v) no director representative of Hayground Cove may
serve as chairman of the board of directors of WLBC or
Service1st.
The Federal Reserve likewise requested passivity commitments
from certain other holders of WLBCs voting stock. In the
case of entities, investment funds, or other nonindividual
investors holding a substantial percentage of the voting stock
of a bank or bank holding company, it is common for these
investors to make passivity commitments as an alternative to
registering as and becoming subject to regulation and
supervision as bank holding companies under the Bank Holding
Company Act of 1956 and Regulation Y of the Federal
Reserve. See Supervision and Regulation.
The Acquisition was recorded as an acquisition under current
accounting rules and as a result the balance sheet of
Service1st was
revalued to fair value as of the acquisition date. Any purchase
price in excess of the fair value of net assets acquired is
recorded as goodwill. The Acquisition resulted in
$5.6 million of goodwill. This process is heavily reliant
on measuring and estimating the fair values of all the assets
and liabilities of the acquired entity. The Company elected to
obtain professional assistance in this activity. The Company
hired a third-party vendor to assist management in determining
the fair value of the loan portfolio, the time deposits, and the
contingent consideration discussed above. Additionally, the firm
was asked to estimate the value of the intangible asset
associated with the deposit base, commonly referred to as the
Core Deposit Intangible (CDI).
The most significant fair value adjustment resulting from the
application of purchase accounting adjustments for the
Acquisition were made to loans. As of the Acquisition date, the
gross loan portfolio at
Service1st
was approximately $125.4 million with a related Allowance
for Loan and Lease Losses (ALLL) of
approximately $9.4 million. The valuation resulted in a
discount of approximately $15.8 million at October 28,
2010. While we believe we currently have the best estimate of
fair value, the purchase accounting adjustments are not final
and we are currently still evaluating all available information
to ensure we have an accurate assessment of fair value. In fact,
there have been some loan charge-offs and payoffs which impacted
the valuation and as a result of reviewing this information,
management reduced the discount from the original estimated
discount of $15.8 million to approximately
$15.1 million. This discount consists of two components:
credit discount and yield discount. Loans purchased with credit
impairments are loans with credit deterioration since
origination and it is probable that not all contractually
required principal and interest payments would be collected. The
performing loan portfolio was approximately $89.9 million
and was discounted by $49,000 for yield and $3.6 million
for credit discounts. The remaining $35.6 million of loans
were identified as loans with purchased credit impairment (PCI)
and those loans had a discount of $576,000 for yield and
$10.9 million for credit discounts. The discounts on
performing loans are recognized by a level yield
method over the remaining life of the loans or loan pools. The
loans identified as containing purchase credit impairment are
treated somewhat differently. The discount associated with yield
is accreted as yield discount and the credit discount is not
accreted but is left on the books to reduce the current carrying
value of the applicable loans. The application of this process
requires that the aggregate discount is first netted against the
ALLL. Consequently, the first day after the Acquisition the loan
portfolio was approximately $110 million with no ALLL. In
addition, current accounting methodology only allows for the
establishment of an ALLL to occur as
47
the entity records new loans on the books or identifies
subsequent credit deterioration on the original loans marked to
fair value at acquisition date.
Service1st
operates in the Las Vegas market place which has seen
significant economic declines in all types of real estate and
overall business trends. Since inception,
Service1st has
charged off approximately $17.8 million of loans through
October 28, 2010. The remaining $125 million loan
portfolio was further reduced by approximately $15 million
in the fair value process as of the acquisition date. As
discussed above, approximately $35.6 million of loans with
purchased credit impairment were reduced to fair value by the
$11.5 million discounts. This translates to a 32% reduction
in the carrying value of those loans.
The contractual values of time deposits were also marked to fair
value. This resulted in
Service1st recording
a premium of $46,000. This premium will be amortized over the
estimated remaining life of the time deposit portfolio of one
year.
The CDI is the result of a valuation study which attempts to
associate a value for the customers deposit relationships
based on the profitability of the deposits and how long they are
expected to produce revenue to the entity. This intangible asset
was valued at $784,000 for
Service1st at
October 28, 2010. The intangible asset is amortized on an
accelerated basis using an estimated ten year life.
The Contingent Acquisition Consideration estimated to be
$4.4 million was also fair valued. A decision tree model
was used to calculate the probability that the Companys
stock price will reach the threshold. Based on the results the
fair value was determined to be approximately $1.8 million.
Periodically over the two year period the reasonableness of the
estimate will be reviewed and adjusted if deemed necessary.
These estimates along with several other estimates were used to
complete the fair value process for the balance sheet of
Service1st
and also to evaluate the fair value of future commitments and
off-balance sheet items. Upon completion of these activities the
adjustments are posted to the records of the new subsidiary and
the difference between the fair value of the consideration given
versus the net asset values obtained, an unidentified intangible
asset (goodwill) was created in the amount of approximately
$5.6 million.
Market
Area and Competition
The United States economy entered into a recession in late 2007,
which has been deeply felt in the greater Las Vegas area and in
its critical tourism and gaming industries. High unemployment
rates, declining real property values, declining home sales, low
consumer and business confidence levels, and increasing vacancy
and foreclosure rates for commercial and residential property
have had a dramatically adverse impact on the Las Vegas economy.
Further deterioration in the performance of the economy or real
estate values in
Service1sts
primary market areas could have an adverse impact on
collectibility and an adverse effect on profitability.
Service1sts
target market primarily consists of small business banking
opportunities, private banking clientele, commercial lending,
and commercial real estate opportunities. The banking and
financial services industries in our market area remain highly
competitive despite the recent economic downturn. Many of our
competitors are much larger in total assets and capitalization,
have greater access to capital markets, and offer a broader
range of financial services than we can offer. This increasingly
competitive environment is primarily a result of changes in
regulation that made mergers and geographic expansion easier;
changes in technology and product delivery systems, such as ATM
networks and web-based tools; the accelerating pace of
consolidation among financial services providers; and the flight
of deposit customers to perceived increased safety. The
competitive environment is also significantly impacted by
federal and state legislation that makes it easier for non-bank
financial institutions to compete with us. We compete for loans,
deposits and customers with other commercial banks, local
community banks, savings and loan associations, securities and
brokerage companies, mortgage companies, insurance companies,
finance companies, money market funds, credit unions, and other
non-bank financial services providers. Competition for deposit
and loan products remains strong from both banking and
non-banking firms, and this competition directly affects the
rates of those products and the terms on which they are offered
to consumers. Consumers in our market areas continue to have
numerous choices to serve their financial needs. Competition for
deposits has increased markedly, with many bank
48
customers turning to deposit accounts at the largest, most-well
capitalized financial institutions. These large institutions
have greater access to capital markets and offer a broader range
of financial services than we will be able to offer.
Technological innovation continues to contribute to greater
competition in domestic and international financial services
markets. Many customers now expect a choice of several delivery
systems and channels, including telephone, mail, home computer
and ATMs. Mergers between financial institutions have placed
additional pressure on banks to consolidate their operations,
reduce expenses and increase revenues to remain competitive. In
addition, competition has intensified because federal and state
interstate banking laws permit banking organizations to expand
geographically with fewer restrictions than in the past. These
laws allow banks to merge with other banks across state lines,
enabling banks to establish or expand banking operations in our
market.
Lending
Activities
Service1st provides
a variety of financial services, including commercial real
estate loans, commercial and industrial loans, construction and
land development loans and, to a lesser extent, consumer loans.
The banks loan portfolio has a concentration of loans
secured by real estate. As of December 31, 2010, loans
secured by real estate comprised 66.04% of total gross loans.
Substantially all of these loans are secured by first liens.
Approximately 30.2% of these real-estate-secured loans are
owner-occupied properties. A property is considered owner
occupied for this purpose if the borrower occupies at least 50%
of the collateral property securing the loan.
Service1sts
policy is to obtain collateral whenever it is available or
desirable, depending upon the degree of risk
Service1st is
willing to accept. Repayment of loans is expected from the
borrowers cash flows or the sale proceeds of the
collateral.
Service1sts
principal lending categories are:
Commercial real estate loans The
majority of
Service1sts
lending activity consists of loans to finance the purchase of
commercial real estate and loans to finance inventory and
working capital that are additionally secured by commercial real
estate.
Service1st
has a commercial real estate portfolio comprised of loans on
professional offices, industrial facilities, retail centers and
other commercial properties.
Construction, land development, and other land
loans Construction loans include loans for
the construction of owner-occupied buildings, investment
properties (including residential development construction),
residences, commercial development, and other properties.
Service1st analyzes
each construction project in the loan underwriting process to
determine whether the type of property, location, construction
costs, and contingency funds are appropriate and adequate.
Commercial and industrial loans
Service1st focuses
its commercial lending on small- to medium-size businesses
located in or serving the Las Vegas community.
Service1st considers
small businesses to include commercial, professional
and retail businesses.
Service1sts
commercial and industrial loan products include:
|
|
|
|
|
working capital loans and lines of credit,
|
|
|
|
|
|
business term loans, and
|
|
|
|
|
|
inventory and accounts receivable financing.
|
Residential real estate loans Although
residential mortgage lending is not a significant part of
Service1sts
lending business, it has made some loans secured by 1-4
single-family residential properties.
Consumer loans
Service1st also
originates consumer loans from time to time, such as home equity
loans and lines of credit, to satisfy customer demand and to
respond to community needs. Consumer loans are not a significant
part of
Service1sts
loan portfolio.
49
The following table shows the composition of the loan portfolio
in dollar amounts and in percentages, along with a
reconciliation to loans receivable, net.
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
December 31, 2010
|
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
5,923
|
|
|
|
5.58
|
%
|
Commercial real estate
|
|
|
54,975
|
|
|
|
51.75
|
%
|
Residential
|
|
|
9,247
|
|
|
|
8.71
|
%
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
70,145
|
|
|
|
66.04
|
%
|
Commercial and industrial
|
|
|
35,946
|
|
|
|
33.84
|
%
|
Consumer
|
|
|
131
|
|
|
|
0.12
|
%
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
106,222
|
|
|
|
100.00
|
%
|
Net deferred loan costs
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans, net of deferred costs
|
|
|
106,259
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
106,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The preceding table and the tables to follow should be read in
conjunction with the notes to the consolidated financial
statements included elsewhere in this prospectus, including the
explanation of the Acquisition and the explanation of
acquisition accounting generally. On October 28, 2010, we
acquired by merger 100% of
Service1st
for consideration consisting of stock valued at
$15.3 million in the aggregate, based upon our common
stocks market price per share. As explained in the notes
to the consolidated financial statements, we have recorded the
assets acquired and the liabilities assumed in the Acquisition
at their fair values as of the acquisition date, consistent with
accounting guidance applicable to acquisitions, particularly
ASC 805, Business Combinations (formerly
SFAS 141(R)), with the related acquisition and
restructuring costs expensed in the current period. We recorded
goodwill of $5.6 million of goodwill associated with the
acquisition, which represents the amount by which the purchase
price exceeds the fair values of the identifiable net assets
acquired.
Applicable accounting guidance, ASC 805, allows for a
measurement period beyond the acquisition date, which means we
may take into account new information that existed as of the
acquisition date but that was not known to us when the
Acquisition occurred. We anticipate that measurement period
adjustments could arise from adjustments to the fair values of
assets and liabilities recognized at the acquisition date as
additional information is obtained, such as appraisals of
collateral securing loans and fixed assets, contracts, legal
documentation and selected key borrower data. If a measurement
period adjustment is identified, we will recognize the
adjustment as part of the acquisition accounting, which could
result in an adjustment to goodwill recorded. These subsequent
adjustments, if any, will be retrospectively recorded in future
filings.
Please refer to the notes to consolidated financial statements
located elsewhere in this prospectus for additional information
concerning the Acquisition.
50
The following table presents maturity information for the loan
portfolio at December 31, 2010. The table does not include
prepayments or scheduled principal repayments. All loans are
shown as maturing based on contractual maturities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
|
|
Due Within
|
|
|
Due 1-5
|
|
|
Due Over
|
|
|
|
|
|
|
One Year
|
|
|
Years
|
|
|
Five Years
|
|
|
Total
|
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
4,428
|
|
|
$
|
1,495
|
|
|
$
|
|
|
|
$
|
5,923
|
|
Commercial real estate
|
|
|
2,544
|
|
|
|
29,327
|
|
|
|
23,104
|
|
|
|
54,975
|
|
Residential real estate (1 to 4 family)
|
|
|
6,885
|
|
|
|
2,222
|
|
|
|
140
|
|
|
|
9,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-secured loans
|
|
$
|
13,857
|
|
|
$
|
33,044
|
|
|
$
|
23,244
|
|
|
$
|
70,145
|
|
Loans not secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
18,975
|
|
|
|
9,297
|
|
|
|
7,674
|
|
|
|
35,946
|
|
Consumer
|
|
|
95
|
|
|
|
35
|
|
|
|
1
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Gross
|
|
$
|
32,927
|
|
|
$
|
42,376
|
|
|
$
|
30,919
|
|
|
$
|
106,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
$
|
7,429
|
|
|
$
|
33,867
|
|
|
$
|
5,713
|
|
|
$
|
47,009
|
|
Variable
|
|
|
25,498
|
|
|
|
8,509
|
|
|
|
25,206
|
|
|
|
59,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Gross
|
|
$
|
32,927
|
|
|
$
|
42,376
|
|
|
$
|
30,919
|
|
|
$
|
106,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
Policies and Administration
Loan and credit administration policies adopted by
Service1sts
board of directors establish underwriting criteria,
concentration limits, and loan authorization limits, as well as
the procedures to administer loans, monitor credit risk, and
subject loans to appropriate grading and evaluation for
impairment. Loan originations are subject to a process that
includes the credit evaluation of borrowers, established lending
limits, analysis of collateral and procedures for continual
monitoring and identification of credit deterioration. Loan
officers are required to monitor their individual credit
relationships in order to report suspected risks and potential
downgrades as early as possible.
For real-estate secured loans, appraisals are ordered from
outside appraisers at a loans inception or renewal, or for
commercial real estate loans upon the occurrence of any event
causing a criticized or classified grade
to be assigned to the credit. The frequency for obtaining
updated appraisals for these adversely graded credits is
increased when declining market conditions exist. Appraisals may
reflect the collaterals as-is,
as-stabilized, or as-developed values,
depending upon the loan type and collateral. Raw land generally
is appraised at its as-is value. Income producing
property may be appraised at its as-stabilized
value, which takes into account the anticipated cash flow of the
property based upon expected occupancy rates and other factors.
The collateral securing construction loans may be appraised at
its as-if developed value, which approximates the
post-construction value of the collateralized property assuming
that such property is developed. As-developed values
on construction loans often exceed the immediate sales value and
may include anticipated zoning changes and successful
development by the purchaser. If a loan goes into default before
development of a project, the market value of the property may
be substantially less than the as-developed
appraised value. As a result, there may be less security than
anticipated at the time the loan was originally made. If there
is less security and a default occurs,
Service1st may
not recover the outstanding balance of the loan.
Service1sts
loan approval procedures are executed through a tiered loan
limit authorization process. Each loan officers individual
lending limit and those of the Senior Loan Committee are set by
Service1sts
board of directors. All debt due from the borrower (including
unfunded commitments and guaranties) and the borrowers
related entities is aggregated when determining whether a
proposed new loan is within the authority
51
of an individual lender or of the Senior Loan Committee. Each
senior vice president team leader may unilaterally approve
real-estate secured loans of up to $750,000, other secured loans
of up to $500,000, and unsecured loans of up to $375,000. Credit
applications exceeding a senior vice president team
leaders authority are submitted for approval by
Service1sts
Chief Executive Officer, or Chief Credit Officer, each of whom
may unilaterally approve real estate-secured loans of up to
$1,500,000, other secured loans of up to $1,250,000, and
unsecured loans of up to $1,000,000, with higher limits for
joint approvals by more than one of the executive officers or
senior vice presidents. As an alternative approval process,
credits may be submitted to the Senior Loan Committee. The
Senior Loan Committee consists of
Service1sts
Chief Executive Officer and Chief Credit Officer, and the
banks senior vice president team leaders. A quorum
consists of at least the Chief Executive Officer or Chief Credit
Officer plus two other members. The Senior Loan Committee has
the authority to approve loan applications, but loans exceeding
$5,000,000 also require the approval of the Chief Executive
Officer.
Service1sts
board of directors also has a loan and investment committee that
is responsible for establishing and providing supervision and
oversight over
Service1sts
credit and investment policies and administration. Credits
granted as an exception to loan policy are required to be
justified and duly noted in the loan presentation or file memo,
as appropriate, and approved or ratified by the necessary
approval authority level. Exceptions to loan policies are
disclosed to the boards loan and investment committee.
All insider loans must be approved in advance by a majority of
the board without the vote of the interested director. It is the
policy of
Service1st that
directors not be present when their loan is presented at a board
meeting for discussion and approval.
Service1st believes
that all of its insider loans were made on terms substantially
similar to those offered to unaffiliated individuals. As of
December 31, 2010, the aggregate amount of all loans
outstanding to
Service1sts
executive officers, directors, and greater than 10% stockholders
and their respective affiliates was approximately
$2.4 million, which represented 2.2% of the banks
total gross loans.
Allowance
for Loan Losses
Under applicable accounting guidance, assets generally are
recorded by a company on its balance sheet at the companys
cost. In the case of a bank, loans originated by the bank are
stated at their principal amount outstanding, net of unearned
income, charge-offs, and unamortized deferred fees and costs.
But, rather than recording the assets and liabilities of
Service1st
at their historical cost to
Service1st
because of the Acquisition, the assets and liabilities of
Service1st
are, instead, recorded at their fair value as of the acquisition
date. Because the fair value of loans takes into account the
probability of loan losses, the allowance for loan losses
accumulated by an acquired bank is not carried over and
maintained thereafter by the acquiring company. Calculating the
fair value of acquired loans entails estimating the amount and
timing of both principal and interest cash flows expected to be
collected and then discounting those cash flows at market
interest rates.
The allowance is required to cover probable incurred losses in
new loans generated since October 28, 2010 and for any
subsequent deterioration of loans beyond the fair value
determined on October 28, 2010. Management will closely
monitor the loans existing at October 28, 2010 and
establish applicable allowance levels for new loans.
The allowance for loan losses reflects
Service1sts
evaluation of the probable losses in its loan portfolio. The
allowance for loan losses is maintained at a level that
represents
Service1st managements
best estimate of losses in the loan portfolio at the balance
sheet date, losses that are both probable and reasonably
estimable. The evaluation is inherently subjective and depends
on estimates and projections of factors that will have a
material impact but that are subject to significant changes,
including estimates and projections of the amount and timing of
future cash flows expected to be received on impaired loans. The
allowance for loan losses is reviewed by
Service1sts
management and adjusted monthly. Factors that influence
managements determination concerning the adequacy of the
allowance for loan losses include:
|
|
|
|
|
general economic and business conditions affecting key lending
areas,
|
|
|
|
|
|
credit quality trends, including trends in nonperforming loans
expected to result from existing conditions,
|
52
|
|
|
|
|
loan volumes and concentrations,
|
|
|
|
|
|
age of the loan portfolio,
|
|
|
|
|
|
specific industry conditions within portfolio segments,
|
|
|
|
|
|
the allowance for loan losses at peer institutions, and
|
|
|
|
|
|
duration of the current business cycle.
|
To measure asset quality,
Service1st grades
each loan on a scale of 1 to 10, the designation representing
the highest quality loans with the least risk. Loans graded 1
through 6 are considered satisfactory. Consistent with the
grading systems used by Federal banking regulators, the other
four grades are 7 (special mention), 8 (substandard), 9
(doubtful), and 10 (loss). All loans are assigned a credit risk
grade at the time they are made, and each originating loan
officer reviews the credit with his or her immediate supervisor
quarterly to determine whether a change in the credit risk grade
is warranted. The management loan committee also has the
responsibility to assign grades. In addition, the grading of
Service1sts
loan portfolio is reviewed at least annually by an external,
independent loan review firm. As previously discussed, PCI loans
were discounted approximately 32% on October 28, 2010.
Generally, loans graded as substandard or doubtful, as well as
non-performing loans are included as PCI loans.
The size of the allowance for loan losses is significantly
influenced by the results of loan reviews performed both by bank
personnel and by third parties engaged by the bank to supplement
the banks internal loan review process. The loan review
process is integral to identifying loans with credit quality
that has weakened over time and to evaluating the risk
characteristics of the entire loan portfolio. The loan grading
system used by
Service1st also
plays a role in setting the level of the allowance because each
grade tier has a fixed percentage allocation assigned to it.
Service1sts
loan loss methodology also provides that management will take
into account updated collateral appraisals, especially for loans
such as construction and land loans. Because there are factors
that cannot be practically assigned to individual loan
categories, such as the current volatility of the national and
global economy, the assessment also includes an unallocated
component. Finally, the FDIC and the Nevada Financial
Institutions Division (the Nevada FID)
perform regular examinations of Nevada-chartered nonmember banks
such as
Service1st.
In the examination process, the FDIC and the Nevada FID consider
the adequacy of a banks loan loss allowance and frequently
use their authority to insist upon an increase in a banks
allowance for loan losses.
Service1st maintains
the allowance through provisions for loan losses that it charges
to income. As previously discussed, the ALLL was adjusted to
zero in conjunction with the fair value accounting process.
Therefore, the current ALLL at December 31, 2010 only
relates to those loans generated after the Acquisition. No new
credit deterioration was recorded during the last two months of
2010.
Service1st charges
losses on loans against the allowance for loan losses when it
believes the collection of loan principal is unlikely. The Chief
Executive Officer and Chief Credit Officer must approve all
charge-offs. Loans deemed uncollectible generally are proposed
monthly for charge-off or write-down to collectible levels.
Recoveries on loans charged-off are restored to the allowance
for loan losses. Allocation of the allowance may be made for
specific loans, but the entire allowance is available for any
loan that, in managements judgment, is deemed to be
uncollectible. Additions to the allowance for loan losses may be
made when
Service1sts
management has identified significant adverse conditions or
circumstances related to a specific loan.
As of December 31, 2010,
Service1sts
allowance for loan losses was $36,000 representing 0.03% of
total loans. We give no assurance that the allowance for loan
losses is adequate to cover all losses that may be realized in
the future and we give no assurance that additional provisions
for loan losses will not be required.
Non-performing
Assets
As a result of the continuing weakness in the Las Vegas economy
and real estate markets,
Service1st experienced
deterioration in the quality of its loan portfolio in 2008,
2009, and 2010. Non-performing assets were 5.4% of total assets
at year-end 2010.
Service1st generally
stops accruing income on loans when interest or
53
principal payments are in arrears for 90 days, or earlier
if management deems appropriate.
Service1st designates
loans on which it stops accruing income as nonaccrual loans and
reverses previously accrued interest income on such loans.
Nonaccrual loans are returned to accrual status when factors
indicating doubtful collection no longer exist and the loan is
brought current.
If a borrower fails to make a scheduled payment on a loan,
Service1st attempts
to remedy the deficiency by contacting the borrower and seeking
payment.
Service1sts
Problem Loan Committee, consisting of its Chief Executive
Officer, and the Chief Credit Officer, is responsible for
monitoring activity that may indicate increased risk rating,
such as past-dues, overdrafts and loan agreement covenant
defaults.
The following table summarizes nonperforming assets by category
including PCI loans with no contractual interest being reported.
These figures represent loan values after fair value process
completed at October 28, 2010, adjusted for any
amortization or accretion for the two months, if applicable.
|
|
|
|
|
($s in thousands)
|
|
At December 31, 2010
|
|
|
Nonaccrual loans:
|
|
|
|
|
Loans secured by real estate construction, land development and
other land loans
|
|
$
|
2,632
|
|
Commercial real estate
|
|
|
1,224
|
|
Residential real estate (1-4 family)
|
|
|
2,900
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
6,756
|
|
Commercial and industrial
|
|
|
3,670
|
|
Consumer
|
|
|
0
|
|
|
|
|
|
|
Total non-accrual loans
|
|
|
10,426
|
|
Past due (>90 days) loans and accruing interest:
|
|
|
|
|
Loans secured by real estate construction, land development and
other land loans
|
|
$
|
0
|
|
Commercial real estate
|
|
|
0
|
|
Residential real estate (1-4 family)
|
|
|
0
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
|
|
|
Total past due loans accruing interest
|
|
|
0
|
|
Restructure loans (still on accrual)(1)
|
|
|
0
|
|
|
|
|
|
|
Total non-performing loans
|
|
$
|
10,426
|
|
Other real estate owned (OREO)
|
|
|
3,406
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
13,832
|
|
|
|
|
|
|
Non-performing loans as a percentage of total portfolio loans
|
|
|
9.81
|
%
|
Non-performing loans as a percentage of total assets
|
|
|
4.05
|
%
|
Non-performing assets as a percentage of total assets
|
|
|
5.37
|
%
|
Allowance for loan losses as a percentage of non-performing loans
|
|
|
0.35
|
%
|
|
|
|
(1) |
|
For the year ended December 31, 2010, WLBC had
approximately $5.9 million in loans classified as
restructured loans. All of such loans were on nonaccrual. As of
December 31, 2010 there were no originations from
October 28, 2010 through December 31, 2010 that were
considered non-performing. |
54
Investment
Activities
Service1sts
investment policy dictates that investment decisions be made
based on the safety of the investment, liquidity requirements,
potential returns, cash flow targets, and consistency with
Service1sts
interest rate risk management policies.
Service1sts
Chief Financial Officer is responsible for making security
portfolio decisions in accordance with established policies. The
Chief Financial Officer has the authority to purchase and sell
securities within specified guidelines established by the
investment policy.
Service1sts
investment policy allows for investment in:
|
|
|
|
|
cash and cash equivalents, which consists of cash and amounts
due from banks, federal funds sold and certificates of deposits
with original maturities of three months or less,
|
|
|
|
|
|
longer term investment securities issued by companies rated
A or better,
|
|
|
|
|
|
securities backed by the full faith and credit of the
U.S. government, including U.S. government agency
securities,
|
|
|
|
|
|
direct obligations of Ginnie Mae,
|
|
|
|
|
|
mortgage-backed securities or collateralized mortgage
obligations issued by a government-sponsored enterprise such as
Fannie Mae, Freddie Mac, or Ginnie Mae, and
|
|
|
|
|
|
mandatory purchases of equity securities from the Federal Home
Loan Bank.
|
The carrying value of the investment securities portfolio of
Service1st Bank
as of the end of 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
Securities Available for Sale
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Collateralized Mortgage Obligation Securities-Commercial
|
|
$
|
1,819
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,819
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
|
|
Securities Held to Maturity
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Corporate Debt Securities
|
|
$
|
4,663
|
|
|
$
|
0
|
|
|
$
|
(27
|
)
|
|
$
|
4,636
|
|
SBA Loans Pools
|
|
|
651
|
|
|
|
0
|
|
|
|
0
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,314
|
|
|
$
|
0
|
|
|
$
|
(27
|
)
|
|
$
|
5,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service1st does
not plan to purchase collateralized debt obligations, adjustable
rate preferred securities, or private label collateralized
mortgage obligations. The banks policies also govern the
use of derivatives, allowing
Service1st to
prudently use derivatives as a risk management tool to reduce
its overall exposure to interest rate risk, and not for
speculative purposes.
Service1sts
investment securities are classified as
available-for-sale
or
held-to-maturity.
Available-for-sale
securities are reported at fair value in accordance with
generally accepted accounting principles, with unrealized gains
and losses excluded from earnings and instead reported as a
separate component of stockholders equity.
Held-to-maturity
securities are those securities that
Service1st has
both the intent and the ability to hold to maturity. These
securities are carried at cost, adjusted for amortization of
premiums and accretion of discounts.
As of December 31, 2010
Service1st
also held $658,400 of Federal Home Loan Bank of
San Francisco stock, which is a restricted security.
Federal Home Loan Bank (FHLB) stock represents an
equity interest in the FHLB of San Francisco, but the stock
does not have a readily determinable market value. The stock can
55
be sold at its par value only and solely to the FHLB or to
another member institution. Member institutions are required to
maintain a minimum stock investment in the FHLB, based on total
assets, total mortgages, and total mortgage-backed securities.
Service1sts
minimum investment in FHLB stock at December 31, 2010 was
approximately $658,000.
Deposits
Products and Other Banking Services
Service1st offers
a variety of traditional demand, savings and time deposit
accounts to individuals, professionals and businesses within the
Nevada region, including checking accounts, interest-bearing
checking accounts, traditional savings accounts, money market
accounts, and time deposits, including Certificates of Deposit
over/under $100,000 and our Freedom CD, a flexible, liquid
certificate of deposit product that permits customers to deposit
or withdraw funds, subject to certain restrictions, without
penalty before the end of the CD term.
Service1sts
deposit base is generated from the Nevada area. Competition for
these deposits in
Service1sts
market is strong.
Service1st seeks
to structure its deposit products to be competitive with the
rates, fees, and features offered by other local institutions,
but with an emphasis on customer service and relationship-based
pricing. As of December 31, 2010, total deposits were
$160.3 million. The weighted average cost of
Service1sts
interest-bearing deposits was 0.75% for the year ended
December 31, 2010.
In addition to traditional commercial banking activities,
Service1st
provides other financial and related services to its customers,
including online banking, direct deposits, direct debit and
electronic bill payment, wire transfers, lock box services,
merchant-related services such as point of sale payment
processing, courier service, safe deposit boxes, cash management
services such as account reconciliation, collections, and sweep
accounts, corporate and consumer credit cards, night depository,
cashiers checks, and notary services.
The balances on deposits for the year ended December 31,
2010 are presented below.
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
($s in thousands)
|
|
Amount
|
|
|
% of total
|
|
|
Non-interest bearing deposits
|
|
$
|
67,087
|
|
|
|
41.85
|
%
|
Interest bearing deposits
|
|
|
31,837
|
|
|
|
19.86
|
%
|
Money markets
|
|
|
24,672
|
|
|
|
15.39
|
%
|
Savings
|
|
|
1,273
|
|
|
|
0.79
|
%
|
Time deposits under $100,000
|
|
|
4,919
|
|
|
|
3.07
|
%
|
Time deposits $100,000 and over
|
|
|
30,498
|
|
|
|
19.03
|
%
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
160,286
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
The following table shows the amount of time deposits of
$100,000 or more as of December 31, 2010, including
certificates of deposit, by time remaining until maturity.
Certificates
of Deposit Maturities >$100 thousand
|
|
|
|
|
($s in thousands)
|
|
December 31, 2010
|
|
|
Three months or less
|
|
$
|
1,671
|
|
Over three months to six months
|
|
|
3,504
|
|
Over six months to twelve months
|
|
|
25,323
|
|
Over 12 months
|
|
|
0
|
|
|
|
|
|
|
Total
|
|
$
|
30,498
|
|
|
|
|
|
|
Employees
We have approximately 40 full-time equivalent, non-union
employees at December 31, 2010.
56
Properties
We currently conduct our operations from three leased locations.
We maintain our principal executive offices at our headquarters
located at 8363 West Sunset Road, Suite 350, in Las
Vegas, Nevada 89113. We also have two branch locations located
at 8349 W. Sunset Road Suite B, Las Vegas, Nevada
89113, and 8965 South Eastern Avenue Suite 190, Las Vegas
Nevada 89123.
Periodic
Reporting and Audited Financial Statements
We have registered our securities under the Exchange Act and
have reporting obligations, including the requirement to file
annual and quarterly reports with the SEC. In accordance with
the requirements of the Exchange Act, our annual reports contain
financial statements audited and reported on by our independent
accountants. We have filed with the SEC our Annual Reports on
Form 10-K
covering the fiscal years ended December 31, 2010, 2009,
2008 and 2007 and our Quarterly Reports on
Form 10-Q
covering the quarters ended September 30, 2007,
March 31, 2008, June 30, 2008, September 30,
2008, March 31, 2009, June 30, 2009,
September 30, 2009, March 31, 2010, June 30, 2010
and September 30, 2010.
Legal
Proceedings
There are no legal proceedings pending against us.
57
SELECTED
HISTORICAL FINANCIAL INFORMATION WESTERN LIBERTY
BANCORP
Our balance sheet data as of December 31, 2010, 2009 and
2008 and related statements of operations, changes in
stockholders equity and cash flows for the years ended
December 31, 2010, 2009, 2008 and 2007 (including related
notes and schedules, if any) are derived from our audited
financial statements which are included elsewhere in this
prospectus.
Information for December 31, 2010 includes the two months
of operations of
Service1st
and the related balances.
This information should be read together with WLBCs
audited financial information and related notes,
Managements Discussion and Analysis of Financial
Condition and Results of Operations Western Liberty
Bancorp and other financial information included
elsewhere in this prospectus. The historical results included
below and elsewhere in this prospectus are not indicative of the
future performance of WLBC.
58
WESTERN
LIBERTY BANCORP
SELECTED
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010(6)
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands except per share data)
|
|
|
Selected Results of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
1,530
|
|
|
$
|
139
|
|
|
$
|
5,691
|
|
Interest expense
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
1,415
|
|
|
|
139
|
|
|
|
5,691
|
|
Provision for loan losses
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income after provision for loan losses
|
|
|
1,379
|
|
|
|
139
|
|
|
|
5,691
|
|
Non-interest income
|
|
|
108
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
9,137
|
|
|
|
15,037
|
|
|
|
7,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(7,650
|
)
|
|
$
|
(14,898
|
)
|
|
$
|
(1,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
$
|
(0.65
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.05
|
)
|
Book Value(1)
|
|
$
|
6.22
|
|
|
$
|
8.02
|
|
|
$
|
5.34
|
|
Selected Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
257,546
|
|
|
$
|
88,520
|
|
|
$
|
318,395
|
|
Cash and cash equivalents
|
|
|
103,227
|
|
|
|
87,969
|
|
|
|
1,446
|
|
Certificates of deposit(2)
|
|
|
26,889
|
|
|
|
|
|
|
|
|
|
Securities, available for sale
|
|
|
1,819
|
|
|
|
|
|
|
|
|
|
Securities, held to maturity
|
|
|
5,314
|
|
|
|
|
|
|
|
|
|
Gross loans, including net deferred loan fees
|
|
|
106,259
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
36
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
160,286
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
93,829
|
|
|
|
87,891
|
|
|
|
213,145
|
|
Value of common stock which may be redeemed for cash
|
|
|
|
|
|
|
|
|
|
|
94,984
|
|
Performance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin(3)
|
|
|
3.33
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Efficiency ratio(4)
|
|
|
599.93
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Return on average assets
|
|
|
(2.60
|
)%
|
|
|
N/A
|
|
|
|
N/A
|
|
Return on average equity
|
|
|
(5.89
|
)%
|
|
|
N/A
|
|
|
|
N/A
|
|
Asset Quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans(5)
|
|
$
|
10,426
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Allowance for loan losses as a percentage of nonperforming
loans(5)
|
|
|
0.35
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Allowance for loan losses as a percentage of portfolio loans
|
|
|
0.03
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Nonperforming loans as a percentage of total portfolio loans(5)
|
|
|
9.81
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Nonperforming loans as a percentage of total assets(5)
|
|
|
4.05
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Net charge-offs to average portfolio loans
|
|
|
0.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average equity to average assets
|
|
|
44.11
|
%
|
|
|
68.73
|
%
|
|
|
67.11
|
%
|
Tier 1 equity to average assets
|
|
|
30.5
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 Risk-Based Capital ratio
|
|
|
68.4
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Total Risk-Based Capital ratio
|
|
|
68.8
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
(1) |
|
Book value is calculated by dividing total stockholders
equity at December 31 by the number of shares outstanding as of
December 31. |
|
|
|
(2) |
|
Certificates of deposit issued by other banks with original
maturities greater than three months. |
|
|
|
(3) |
|
Net interest margin represents net interest income as a
percentage of average interest-earning assets. |
|
|
|
(4) |
|
Efficiency ratio represents non-interest expenses as a
percentage of the total of net interest income plus non-interest
income. |
|
|
|
(5) |
|
Nonperforming loans includes PCI loans for which no contractual
interest is being recorded. |
|
|
|
(6) |
|
Service1st
was acquired in a 100% stock exchange on October 28, 2010.
Thus, the 2010 data represents a full year for WLBC and a
partial year (two months) for
Service1st. |
59
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
WESTERN LIBERTY BANCORP
The following discussion and analysis should be read in
conjunction with our financial statements and notes to the
financial statements included in this prospectus. This
discussion and analysis contains forward-looking statements that
involve risk, uncertainties and assumptions. Certain risks,
uncertainties and other factors, including but not limited to
those set forth under the section entitled Cautionary
Note Regarding Forward-Looking Statements may cause
actual results to differ materially from those projected in the
forward-looking statements.
Overview
Business
of WLBC
WLBC became a bank holding company on October 28, 2010 with
consummation of the Acquisition. Although its goal in 2007, when
it was established as a special purpose acquisition company, was
to identify for acquisition domestic and international operating
companies engaged in the consumer products and services
business, by the spring of 2009, WLBC determined that the
banking industry had become an attractive investment
opportunity, particularly the community banking industry in
Nevada. In October of 2009, WLBC changed its name to Western
Liberty Bancorp and eliminated the special purpose acquisition
company features of its governing documents. In October 2009,
WLBC also began in earnest the process that concluded on
October 28, 2010 with the Acquisition. WLBCs sole
subsidiary is
Service1st,
and it currently conducts no business activities other than
acting as the holding company of
Service1st.
As bank holding company, operating from its headquarters and two
retail banking locations in the greater Las Vegas area, WLBC
provides a variety of loans to its customers, including
commercial real estate loans, construction and land development
loans, commercial and industrial loans, Small Business
Administration (SBA) loans, and to a lesser
extent consumer loans. As of December 31, 2010, loans
secured by real estate constituted 66.04% of WLBCs loan
portfolio. This ratio is calculated by adding together loans
secured by real estate at December 31, 2010 (construction,
land development and other land loans of $5.9 million,
commercial real estate loans of $55.0 million and
residential real estate loans of $9.2 million, which total
$70.1 million of loans secured by real estate) and dividing
this balance by Gross Loans of $106.3 million at
December 31, 2010. WLBC relies on locally-generated
deposits to provide WLBC with funds for making loans. The
majority of its business is generated in the Nevada market.
WLBC generates substantially all of its revenue from interest on
loans and investment securities and service fees and other
charges on customer accounts. This revenue is offset by interest
expense paid on deposits and other borrowings and non-interest
expense such as administrative and occupancy expenses. Net
interest income is the difference between interest income on
interest-earning assets, such as loans and securities, and
interest expense on interest-bearing liabilities, such as
customer deposits and other borrowings used to fund those
assets. Interest rate fluctuations, as well as changes in the
amount and type of earning assets and liabilities and the level
of nonperforming assets combine to affect net interest income.
WLBC receives fees from its deposit customers in the form of
service fees, checking fees and other fees. Other services such
as safe deposit and wire transfers provide additional fee
income. WLBC may also generate income from time to time from the
sale of investment securities. The fees collected by WLBC are
found under Non-interest Income in the statements of
operations contained within WLBCs audited financial
statements for the year ended December 31, 2010 (which are
included elsewhere in this prospectus). Offsetting these
earnings are operating expenses referred to as
Non-Interest Expense in the statements of
operations. Because banking is a very people intensive industry,
the largest operating expense is employee compensation and
related expenses.
Local
Economic Conditions
According to the National Bureau of Economic Research,
the United States economy entered into the longest and most
severe recession in the post-war year beginning in December of
2007. The recession and
60
continued economic downturn have been deeply felt in the
greater Las Vegas area. Beginning in 2008, job losses, declining
real property values, low consumer and business confidence
levels and increasing vacancy and foreclosure rates for
commercial and residential property dramatically affected the
Las Vegas economy. According to a monthly report produced by The
Center for Business & Economic Research at the
University of Nevada Las Vegas (the CBER
Report), the local unemployment rate in Las Vegas
rose from 5.6% as of December 31, 2007, to 9.1% as of
December 31, 2008, to 13.1% at December 31, 2009 and
to 14.9% at December 31, 2010. In addition, new home sales
decreased 53.4% from December 2007 to December 2008, falling a
further 25.7% from December 2008 to December 2009 and down 27.3%
from December 2009 to December 2010. During the same year,
median new home prices decreased 21.7% from December 2007 to
December 2008, decreased 11.2% from December 2008 to December
2009 and decreased 0.3% from December 2009 to December 2010.
Although new home sales decreased by 27.3% for the year ended
December 31, 2010 compared to the same year in 2009, median
new home prices continued to decrease by 0.3% for the year ended
December 31, 2010 compared to the same year in 2009. The
national recession also adversely affected tourism and Las
Vegas critical gaming industry. According to the CBER
Report, Las Vegas area gaming revenues decreased 18.4% from
December 2007 to December 2008, decreased 2.4% from December
2008 to December 2009, and decreased 4.7% for the year ended
December 31, 2010 compared to same year for 2009. Data
derived from The Applied Analysis, Las Vegas Market Reports
(2nd quarter 2010) shows that Las Vegas vacancy
rates for office, industrial and retail space rose from
December 31, 2007 to December 31, 2008 to
December 31, 2009 to December 31, 2010:
office from 13.6%, to 17.3%, to 23.0%, to 24.2%;
industrial from 6.6%, to 8.9%, to 13.7%, to 16.9%;
and retail from 4.0%, to 7.4%, to 10.0%, to 10.2%.
Summary
of Results of Operations and Financial Condition
Since formation at the beginning of 2007,
Service1st
has not been profitable. To some extent, the lack of
profitability is attributable to the
start-up
nature of its business: time is required to build assets
sufficient to generate enough interest income to cover operating
expenses. However, in addition to the customary challenges of
building profitability for a
start-up
bank,
Service1st
has experienced deterioration in the quality of its loan
portfolio, largely as a result of the challenging economic
conditions in the Las Vegas market.
For the year ended December 31, 2010, WLBC recorded a net
loss of $7.7 million or $0.65 per common share, as compared
with a net loss of $14.9 million or $0.45 per common share
in 2009 and a loss of $1.6 million or $0.05 per common
share in 2008. The $7.2 million decrease in net loss for
the year ended December 31, 2010, when compared to the year
ended December 31, 2009, was the result of a
$5.9 million decrease in noninterest expense coupled with
the acquisition of
Service1st which
resulted in $1.3 million in additional net interest income
after provision for loan loss. Professional fees totaled
$12.6 million for the year ended December 31, 2009
compared to $3.9 million for the year ended
December 31, 2010, a reduction of $8.7 million. In
2009, WLBC pursued more than one potential target for
acquisition, including
Service1st,
while in 2010, that focus narrowed to the acquisition of
Service1st and
resulted in reduced professional fees. WLBC successfully
acquired
Service1st
on October 28, 2010 and resulted in $258.2 million in
interest bearing assets which contributed the majority of the
$1.5 million in interest income and $93.4 million in
interest bearing liabilities that resulted in $115,000 in
interest expense for the last two months of 2010, resulting in
$1.4 million in net interest income before provision for
loan losses.
Critical
Accounting Policies and Estimates
WLBCs significant accounting policies are described in
Note 1 of its audited financial statements (which are
included elsewhere in this prospectus), including information
regarding recently issued accounting pronouncements, WLBCs
adoption of such policies and the related impact of their
adoption. Certain of these policies, along with various
estimates that WLBC is required to make in recording its
financial transactions, are important to have a complete
understanding of WLBCs financial position. In addition,
these estimates require WLBC to make complex and subjective
judgments, many of which include matters with a high degree of
uncertainty. The following is a summary of these critical
accounting policies and significant estimates.
61
As previously discussed, the Acquisition was accounted for as a
business combination which resulted in application of fair value
accounting to the subsidiarys balance sheet. The total
discount to the loan portfolio was approximately
$15.1 million. The loan portfolio was segregated into
performing loans and non-performing loans or purchased loans
with credit impairment.
The performing loans totaled approximately $89.9 million
and were marked with a credit discount of $3.6 million and
approximately $49,000 of yield discount. In accordance with
current accounting pronouncements, the discounts on performing
loans are being recognized on a method that approximates a level
yield over the expected life of the loan.
The loans identified as purchased with credit impairments were
approximately $35.6 million as of the acquisition date. A
credit discount of approximately $10.9 million was recorded
and an additional $576,000 of yield discount was also recorded.
The yield discount will be accreted into income using the same
method described above for the performing loans. WLBC does not
expect to accrete the discount into income until such time as
the loan is removed from the bank. The only exception would be
on a
case-by-case
basis when a material event that significantly improves the
quality of the loan and reduces the risk to the bank such that
management believes it would be prudent to start recognizing
some of the discount is documented. The credit discount
represents approximately 30% of the transaction date value of
the credit impaired loans. Throughout this document,
presentations for non-performing loans, or potential problem
loans have generally been subjected to the credit discount
discussed above.
Allowance
for Loan Losses
As previously discussed, the ALLL was adjusted to zero in
conjunction with the fair value accounting process. Therefore,
the current ALLL at December 31, 2010 only relates to those
loans generated after the October 28, 2010 acquisition
date. No new credit deterioration was recorded during the last
two months of 2010.
The allowance for loan losses is an estimate of the credit risk
in WLBCs loan portfolio and appears on the balance sheet
as a contra asset which reduces gross loans. The
allowance is established (or once established, increased) by
recording provision expense. Loans charged off on WLBCs
books reduce the allowance. Subsequent recoveries of charged off
loans, if any, increase the allowance.
The allowance is an amount that WLBCs management believes
will be adequate to absorb probable incurred losses on existing
loans that may become uncollectible, based on evaluation of the
collectability of loans and prior credit loss experience. This
evaluation also takes into consideration such factors as changes
in the nature and volume of the loan portfolio, overall
portfolio quality, specific problem credits, peer bank
information, and current economic conditions that may affect the
borrowers ability to pay. Due to the credit concentration
of WLBCs loan portfolio in real estate-secured loans,
future adjustments to the allowance may be necessary if there
are significant changes in economic or other conditions. In
addition, the FDIC and state banking regulatory agencies, as an
integral part of their examination process, review WLBCs
allowance for loan losses, and may require WLBC to make
additions to the allowance based on their judgment about
information available to them at the time of their examinations.
The allowance consists of specific and general components. The
specific component relates to loans that are classified as
impaired. For such loans, an allowance is established when the
discounted cash flows (or collateral value or observable market
price) of the impaired loan is lower than the carrying value of
that loan. The general component covers non-impaired loans and
is based on historical loss experience adjusted for qualitative
and environmental factors.
A loan is impaired when it is probable WLBC will be unable to
collect all contractual principal and interest payments due in
accordance with the original terms of the loan agreement.
Impaired loans are measured based on the present value of
expected future cash flows discounted at the loans
effective interest rate or, as a practical expedient, at the
loans observable market price or the fair value of the
collateral if the loan is collateral dependent. The amount of
impairment, if any, and any subsequent changes are included in
the allowance for loan losses.
62
Investment
Securities Portfolio
Securities classified as available for sale are equity
securities and those debt securities WLBC intends to hold for an
indefinite year of time, but not necessarily to maturity. Any
decision to sell a security classified as available for sale
would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of
WLBCs assets and liabilities, liquidity needs, regulatory
capital considerations and other similar considerations.
Securities available for sale are reported at fair value with
unrealized gains or losses reported as other comprehensive
income (loss), net of related deferred tax effect. Realized
gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
Securities classified as held to maturity are those debt
securities WLBC has both the intent and ability to hold to
maturity regardless of changes in market conditions, liquidity
needs, or general economic conditions. These securities are
carried at amortized cost, adjusted for amortization of premium
and accretion of discount computed by the interest method over
the contractual lives. The sale of a security within three
months of its maturity date or after at least 85% of the
principal outstanding has been collected is considered a
maturity for purposes of classification and disclosure. Purchase
premiums and discounts are generally recognized in interest
income using the effective-yield method over the term of the
securities.
WLBCs management evaluates securities for
other-than-temporary
impairment (OTTI) at least on a quarterly basis, and
more frequently when economic or market conditions warrant such
evaluation. Consideration is given to (1) the length of
time and the extent to which the fair value has been less than
cost, (2) the financial condition and near term prospects
of the issuer, including an evaluation of credit ratings,
(3) the impact of changes in market interest rates,
(4) the intent of WLBC to sell a security and
(5) whether it is more likely than not WLBC will have to
sell the security before recovery of its cost basis.
Stock-Based
Compensation
WLBC awarded Common Stock, Restricted Stock, Restricted Stock
Units and assumed the
Service1st stock
options outstanding at October 28, 2010. This described
more fully in Note 12 to WLBCs audited financial
statements for the year ended December 31, 2010, which are
included elsewhere in this prospectus. WLBC records the fair
value of stock compensation granted to employees and directors
as expense over the vesting year(s). The cost of the award is
based on the grant-date fair value. The compensation expenses
recognized was approximately $1.8 million for the year
ended December 31, 2010, $869,000 in 2009 and
$4.6 million in 2008.
Income
Taxes
Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible
temporary differences and tax credit carry-forwards 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
bases. 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 effect of changes in tax laws and rates on the date of
enactment. As a result of the Acquisition which was finalized at
the close of business on October 28, 2010, WLBCs net
operating loss utilization will be subject to an annual
limitation on the net operating loss against future taxable
income. Internal Revenue Code section 382 places a
limitation on the amount of taxable income that can be offset by
net operating loss carry forwards after a change in control
(generally greater than 50% change in ownership) of a loss
corporation.
Acquisition
of
Service1st
Bank of Nevada
On October 28, 2010, WLBC consummated the Acquisition.
Pursuant to the Amended Merger Agreement, Acquisition Sub merged
with and into
Service1st,
with
Service1st being
the surviving entity and becoming WLBCs wholly-owned
subsidiary. WLBC previously received the requisite approvals of
certain bank regulatory authorities to complete the Acquisition
to become a bank holding company.
63
The former stockholders of
Service1st received
approximately 2,282,668 shares of Common Stock (net of
dissenters rights exercised with respect to
88,054 shares) as Base Acquisition Consideration. In
addition, the holders of
Service1sts
outstanding options and warrants now hold options and warrants
of similar tenor to purchase up to 289,781 shares of Common
Stock at an exercise price of $21.01.
In addition to the Base Acquisition Consideration, each of the
former stockholders of
Service1st may
be entitled to receive Contingent Acquisition Consideration,
payable in Common Stock, if at any time within the first two
years after the consummation of the Acquisition, the closing
price per share of the Common Stock exceeds $12.75 for 30
consecutive days. The Contingent Acquisition Consideration would
be equal to 20% of the tangible book value of
Service1st at
the close of business on the last day of the calendar month
immediately before the calendar month in which the final
regulatory approval necessary for the completion of the
Acquisition was obtained. The total number of shares of our
common stock issuable to the former
Service1st stockholders
would be determined by dividing the Contingent Acquisition
Consideration by the average of the daily closing price of the
Common Stock on the first 30 trading days on which the closing
price of the Common Stock exceeded $12.75.
At the close of business on October 28, 2010, WLBC was a
new Nevada bank holding company by consummating the Acquisition
and conducts its operations through
Service1st.
In conjunction with the transaction, WLBC infused
$25 million of capital onto the balance sheet of
Service1st.
On October 29, 2010, the common shares of WLBC began
trading on Nasdaq, under the ticker symbol WLBC.
The Acquisition was recorded as an acquisition under the current
accounting rules and as a result the balance sheet of
Service1st was
revalued to fair value as of the acquisition date. This process
is heavily reliant on measuring and estimating the fair values
of all the assets and liabilities of the acquired entity. WLBC
elected to obtain professional assistance in this activity. The
Company hired a third-party vendor to assist Management in
determining the fair value of the loan portfolio, the time
deposits, and the contingent consideration discussed above.
Additionally, the firm was asked to assist in the determination
of the value of the intangible asset associated with the CDI.
As of the acquisition date, the gross loan portfolio at
Service1st Bank
was approximately $125.4 million with a related ALLL of
approximately $9.4 million. The valuation resulted in a
discount of approximately $15.8 million at October 28,
2010. While we believe we currently have the best estimate of
fair value, the purchase accounting adjustments are not final
and we are currently still evaluating all available information
to ensure we have an accurate assessment of fair value. In fact,
there have been some loan charge-offs and payoffs which impacted
the valuation and as a result of reviewing this information,
management reduced the discount from the original
$15.8 million to approximately $15.1 million. This
discount consists of two components: credit discount and yield
discount. The performing portfolio was approximately
$89.9 million and was discounted by $49,000 for yield and
$3.6 million for credit discounts. The remaining
$35.6 million of loans were identified as loans with
purchased credit impairment and those loans had a discount of
$576,000 for yield and $10.9 million for credit discounts.
The discounts on performing loans are recognized by a
level yield method over the remaining life of the
loans or loan pools. The loans identified as containing purchase
credit impairment are treated somewhat differently. The discount
associated with yield is accreted as yield discount and the
credit discount is not accreted but is left on the books to
reduce the current carrying value of the applicable loans. The
application of this process requires that the aggregate discount
is first netted against the ALLL, reducing the ALLL to zero.
Consequently, the first day after the transaction the loan
portfolio was approximately $110 million with no ALLL. In
addition, current accounting methodology only allows for the
establishment of an ALLL to occur as the entity records new
loans on the books or identifies subsequent credit deterioration
on the original loans marked to fair value at acquisition date.
Service1st
operates in the Las Vegas market place which has seen
significant economic declines in all types of real estate and
overall business trends. Since inception,
Service1st has
charged off approximately $17.8 million of loans through
October 28, 2010. The remaining $125 million loan
portfolio was further reduced by approximately $15 million
in the fair value process as of the acquisition date. As this
document presents the balances of loans that represent problem
loans or potential problem loans, it is important to remember
that these loans are as of the October 28, 2010 fair values.
64
The contractual values of time deposits were also marked to fair
value. This resulted in
Service1st
recording a premium of $46,000. This premium will be amortized
over the estimated remaining life of the time deposit portfolio
of one year.
The CDI is the result of a valuation study which attempts to
associate a value for the customers deposit relationships
based on the profitability of the deposits and how long they are
expected to produce revenue to the entity. This intangible asset
was valued at $784,000 for
Service1st at
October 28, 2010. The intangible asset is amortized on an
accelerated basis using an estimated ten year life.
The Contingent Acquisition Consideration estimated to be
$4.4 million was also fair valued. The valuation firm used
a decision tree model to calculate the probability that
WLBCs stock price will reach the threshold. Based on the
results the fair value was determined to be approximately
$1.8 million. Periodically over the two year period in
which the contingent consideration could become payable the
reasonableness of the estimate will be reviewed and adjusted if
deemed necessary.
These estimates along with several other estimates were used to
complete the fair value process for the balance sheet of
Service1st
and also to evaluate the fair value of future commitments and
off-balance sheet items. Upon completion of these activities the
adjustments are posted to the records of the new subsidiary. The
difference between the fair value of the consideration given
versus the net asset values obtained is an unidentified
intangible asset (goodwill) created in the amount of
approximately $5.6 million.
Results
of Operations
The results of WLBC includes the operations of
Service1st for
the last two months of the year. This substantially impacts
interest income, interest expense, provision for loan losses and
various non interest income and expense items which were not
applicable to WLBC prior to the Acquisition. The interest income
line is also impacted by the accretion of discount on the loan
portfolio which approximated $436,000.
WLBCs results of operations depend substantially on its
ability to generate net interest income, which is the difference
between the interest income on its interest-earning assets
(primarily loans and investment securities) minus interest
expense on its interest-bearing liabilities (primarily
deposits). Revenue is also generated by non-interest income,
consisting principally of account and other service fees. These
sources of revenue are burdened by two categories of expense:
first, the provision for loan losses, which consists of a charge
against earnings in an amount that WLBCs management judges
necessary to maintain WLBCs allowance for loan losses at a
level deemed adequate to absorb probable incurred loan losses
inherent in the loan portfolio; and second, non-interest
expense, which consists primarily of operating expenses, such as
compensation to employees.
The management of interest income and interest expense is
fundamental to the performance of WLBC. Net interest income and
interest expense on interest-bearing liabilities, such as
deposits and other borrowings, is the largest component of
WLBCs net revenue. Net interest income depends upon the
volume of interest-earning assets and interest-bearing
liabilities and the rates earned or paid on them. WLBCs
management closely monitors both total net interest income and
the net interest margin (net interest income divided by average
earning assets).
Net interest income and net interest margin are affected by
several factors including (1) the level of, and the
relationship between the dollar amount of interest earning
assets and interest-bearing liabilities; and (2) the
relationship between re-pricing or maturity of WLBCs
variable-rate and fixed-rate loans, securities, deposits and
borrowings.
Variable rate loans constitute approximately 55.74% of
WLBCs portfolio for the year end December 31, 2010,
and approximately 51.21% of WLBCs variable rate loans are
indexed to the national prime rate. However, a majority of these
prime-rate based loans are subject to floors,
ranging from 5.5% to 8.5%. Currently the prime rate is under the
applicable floor rate for substantially all of WLBCs
prime-rate based loans.
Movements in the national prime rate that increase the
applicable loan rates above applicable floors have a direct
impact on WLBCs loan yield and interest income. The
national prime rate remained at 3.25%
65
throughout 2009 and 2010, as the Federal Reserve maintained the
targeted federal funds rate steady. Based on economic forecasts
generally available to the banking industry, WLBC currently
believes it is reasonably possible that the targeted federal
funds rate and the national prime rate will remain flat in the
foreseeable future and increase in the long term; however, there
can be no assurance to that effect or as to the timing or the
magnitude of any increase should an increase occur, as changes
in market interest rates are dependent upon a variety of factors
that are beyond WLBCs control.
WLBC, through its asset and liability policies and practices,
seeks to maximize net interest income without exposing WLBC to
an excessive level of interest rate risk. Interest rate risk is
managed by monitoring the pricing, maturity and re-pricing
options of all classes of interest-bearing assets and
liabilities. See Managements Discussion and
Analysis of Financial Condition and Results of Operations of
WLBC Quantitative and Qualitative Disclosures
About Market Risk in this section for more information.
The following table sets forth WLBCs average balance
sheet, average yields on earning assets, average rates paid on
interest-bearing liabilities, net interest margins and net
interest income/spread for the years ended December 31,
2010, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2010(4)
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
($ in thousands)
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
26,889
|
|
|
$
|
56
|
|
|
|
1.27
|
%
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
0.00
|
%
|
Money Market funds
|
|
|
76,804
|
|
|
|
8
|
|
|
|
0.06
|
%
|
|
|
237,577
|
|
|
|
139
|
|
|
|
0.06
|
%
|
|
|
315,590
|
|
|
|
5,691
|
|
|
|
1.80
|
%
|
Interest Bearing deposits
|
|
|
39,308
|
|
|
|
16
|
|
|
|
0.25
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Investment securities
|
|
|
7,898
|
|
|
|
47
|
|
|
|
3.62
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Portfolio loans(1)
|
|
|
107,275
|
|
|
|
1,403
|
|
|
|
7.96
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earnings assets/interest income
|
|
|
258,174
|
|
|
|
1,530
|
|
|
|
3.61
|
%
|
|
|
237,577
|
|
|
|
139
|
|
|
|
0.06
|
%
|
|
|
315,590
|
|
|
|
5,691
|
|
|
|
1.80
|
%
|
Noninterest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
12,035
|
|
|
|
|
|
|
|
|
|
|
|
22,294
|
|
|
|
|
|
|
|
|
|
|
|
2,060
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
13,243
|
|
|
|
|
|
|
|
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
283,434
|
|
|
|
|
|
|
|
|
|
|
$
|
260,089
|
|
|
|
|
|
|
|
|
|
|
$
|
317,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
31,275
|
|
|
|
43
|
|
|
|
0.84
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Money markets
|
|
|
26,048
|
|
|
|
25
|
|
|
|
0.58
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Savings
|
|
|
1,272
|
|
|
|
1
|
|
|
|
0.48
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Time deposits under $100,000
|
|
|
4,910
|
|
|
|
7
|
|
|
|
0.87
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Time deposits $100,00 and over
|
|
|
29,943
|
|
|
|
39
|
|
|
|
0.79
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Repurchase Agreements
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities/interest expense
|
|
|
93,448
|
|
|
|
115
|
|
|
|
0.75
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2010(4)
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
($ in thousands)
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Noninterest Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand deposits
|
|
|
68,493
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Accrued interest on deposits and other liabilities
|
|
|
2,221
|
|
|
|
|
|
|
|
|
|
|
|
81,320
|
|
|
|
|
|
|
|
|
|
|
|
104,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
164,162
|
|
|
|
|
|
|
|
|
|
|
|
81,320
|
|
|
|
|
|
|
|
|
|
|
|
104,527
|
|
|
|
|
|
|
|
|
|
Stockholders equity(5)
|
|
|
87,704
|
|
|
|
|
|
|
|
|
|
|
|
178,769
|
|
|
|
|
|
|
|
|
|
|
|
213,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity(6)
|
|
$
|
251,866
|
|
|
|
|
|
|
|
|
|
|
$
|
260,089
|
|
|
|
|
|
|
|
|
|
|
$
|
317,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and Interest rate spread(2)
|
|
|
|
|
|
$
|
1,415
|
|
|
|
2.86
|
%
|
|
|
|
|
|
$
|
139
|
|
|
|
0.06
|
%
|
|
|
|
|
|
$
|
5,691
|
|
|
|
1.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin(3)
|
|
|
|
|
|
|
|
|
|
|
3.33
|
%
|
|
|
|
|
|
|
|
|
|
|
0.06
|
%
|
|
|
|
|
|
|
|
|
|
|
1.80
|
%
|
Ratio of Average Interest-Earning Assets to Interest-Bearing
Liabilities
|
|
|
276
|
%
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average balances include nonaccrual loans of approximately
$10,426, $0, and $0 for the years ended December 31, 2010,
2009 and 2008, respectively. Net loan (fees) or costs of
$37,000, $0 and $0 are included in the yield computation for the
years ended December 31, 2010, 2009 and 2008, respectively. |
|
|
|
(2) |
|
Net interest spread represents the average yield earned on
interest earning assets less the average rate paid on interest
bearing liabilities. |
|
|
|
(3) |
|
Net interest margin represents net interest income as a
percentage of average interest earning assets. |
|
|
|
(4) |
|
Service1st
was acquired by WLBC on October 28, 2010, thus the 2010
data represents a full year for WLBC; and a partial year for
Service1st,
October 28, 2010 through December 31, 2010. Average
balances are computed by taking the balance at each quarter end
for WLBC, adding the four quarters together and dividing by
four. Average balances for
Service1st
are computed by taking November and December 2010s month
end balance, adding them together and dividing by two. Interest
income for 2010 represents a full year for WLBC and two months
of income for
Service1st. |
|
|
|
(5) |
|
Stockholders equity was computed by taking WLBCs balance
for each quarter end, adding the four quarters together and
dividing by four, to compute a yearly average. No balance for
Service1st
is included in the 2010 stockholders equity balance as the
calculation combines four quarters of WLBCs balances to
compute an average, but is skewed when only the last two
months of
Service1sts
2010 balances can be utilized, due to date of acquisition. Thus,
the elimination of investment in subsidiary, which needs to
occur in consolidation accounting, impacts the consolidated
numbers. |
|
|
|
(6) |
|
As a result of the assumption noted in note (5) above,
Total Assets will not equal Total Liabilities plus
Stockholders Equity for 2010. |
67
The following Volume and Rate Variances table sets forth the
dollar difference in interest earned and paid for each major
category of interest-earning assets and interest-bearing
liabilities for the noted years, and the amount of such change
attributable to changes in average balances (volume) or changes
in average interest rates. Volume variances are equal to the
increase or decrease in the average balance times the prior year
rate and rate variances are equal to the increase or decrease in
the average rate times the prior year average balance. Variances
attributable to both rate and volume changes are equal to the
change in rate times the change in average balance and are
allocated proportionately to the changes due to volume and
changes due to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010 compared to Year Ended December 31, 2009
|
|
|
|
Increase (Decrease)
|
|
|
|
Due to Changes in:
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Average
|
|
|
Average
|
|
|
Increase
|
|
($s in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
56
|
|
|
$
|
0
|
|
|
$
|
56
|
|
Interest bearing deposits
|
|
|
(121
|
)
|
|
|
6
|
|
|
|
(115
|
)
|
Federal funds sold
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Investment securities
|
|
|
47
|
|
|
|
0
|
|
|
|
47
|
|
Portfolio loans
|
|
|
1,403
|
|
|
|
0
|
|
|
|
1,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest income
|
|
|
1,385
|
|
|
|
6
|
|
|
|
1,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking
|
|
$
|
43
|
|
|
$
|
0
|
|
|
$
|
43
|
|
Money markets
|
|
|
25
|
|
|
|
0
|
|
|
|
25
|
|
Savings
|
|
|
1
|
|
|
|
0
|
|
|
|
1
|
|
Time deposits under $100,000
|
|
|
7
|
|
|
|
0
|
|
|
|
7
|
|
Time deposits $100,000 and over
|
|
|
39
|
|
|
|
0
|
|
|
|
39
|
|
Repurchase Agreements
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Short-term borrowings
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest expense
|
|
|
115
|
|
|
|
0
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net interest income
|
|
$
|
1,270
|
|
|
$
|
6
|
|
|
$
|
1,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009 Compared to 2008
|
|
|
|
Increase (Decrease)
|
|
|
|
Due to Changes in:
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Average
|
|
|
Average
|
|
|
Increase
|
|
($s In thousands)
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Interest bearing deposits
|
|
|
(46
|
)
|
|
|
(5,506
|
)
|
|
|
(5,552
|
)
|
Federal funds sold
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Investment securities
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Portfolio loans
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest income
|
|
|
(46
|
)
|
|
|
(5,506
|
)
|
|
|
(5,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Money markets
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Savings
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Time deposits under $100,000
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Time deposits $100,000 and over
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Repurchase Agreements
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Short-term borrowings
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest expense
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net interest income
|
|
$
|
(46
|
)
|
|
$
|
(5,506
|
)
|
|
$
|
(5,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of 2010 with 2009
For the year ended December 31, 2010, average
interest-earning assets were $258.2 million and average
interest-bearing liabilities were $93.4 million, generating
net interest income of $1.4 million which includes $436,000
of accretion of discount on loans for two months. For the year
ended December 31, 2009, average interest-earning assets
were $237.6 million and average interest-bearing
liabilities were $0, generating net interest income of $139,000.
Average balances of interest earning assets increased by an
average of $20.6 million, or 8.67% from $237.8 million
for the year ended December 31, 2009 to $258.2 million
for the year ended December 31, 2010, due to the
Acquisition partially being offset by the return of
approximately $235.6 million in investors funds when
Global Consumer Acquisition Corporation eliminated the special
purpose acquisition features from the companys governing
documents in October 2009 and changed the companys name to
Western Liberty Bancorp. The increase in WLBCs average
interest earning balances was partially offset by the addition
of Money Market funds which decreased $160.8 million, from
$237.6 million as of December 31, 2009 to
$76.8 million as of December 31, 2010. Average loan
balances increased to $107.3 million from $0 at
December 31, 2009, interest bearing deposits increased to
$39.3 million at December 31, 2010 from $0 at
December 31, 2009, certificates of deposit increased to
$26.9 million from $0 at December 31, 2009, while
securities increased to $7.9 million at December 31,
2010, from $0 million at December 31, 2009. WLBC
noninterest earning assets at December 31, 2010 consisted
of $12.0 million in cash and due from banks, a decrease of
$10.3 million from $22.3 million as of
December 31, 2009. In addition, WLBCs other assets
increased $13.0 million, from $218,000 as of
December 31, 2009 to $13.2 million as of
December 31, 2010.
Interest income was positively impacted by the increase in
interest earning assets. Interest income grew from $139,000 at
December 31, 2009, to $1.5 million, or a 979.14% at
December 31, 2010. The $139,000 reflects 12 months of
earnings by WLBC prior to the Acquisition, while the
$1.5 million earned in 2010, reflects a year of WLBC and
two months of earnings from
Service1st as
the acquisition of
Service1st occurred
69
on October 28, 2010. Interest income from loans
contributed $1.4 million to total interest income, or
91.70%. On average, loans yielded 7.96% for the year ended
December 31, 2010. The interest income on loans was
positively impacted by the purchase accounting adjustments. The
discount accretion for loans approximated $436,000 for two month
period, as a result of the short term nature of the loans,
refinancing and prepayments.
For the year ended December 31, 2010, average
interest-bearing liabilities were $93.4 million, generating
interest expense of $115,000 in 2010, compared with $0 in
average interest-bearing liabilities for the year ended
December 31, 2009, which generated no expense. WLBCs
average interest bearing liabilities at December 31, 2010
are as follows: interest checking accounts average
$31.3 million, money market accounts average
$26.0 million, savings average $1.3 million, time
deposits under $100,000 average $4.9 million and time
deposits $100,000 and over average $29.9 million. In
addition, WLBC also purchased an average of $68.5 million
in non-interest bearing checking accounts and an average of
$2.2 million in other assets.
Interest expense was slightly impacted by the average increase
of $93.4 million in interest bearing liabilities. Interest
expense grew from $0 at December 31, 2009, to $115,000 for
the two months ended December 31, 2010. Interest expense on
time deposits over and under $100,000 contributed $46,000 to
total interest expense, or 40.00% while interest bearing demand
deposit checking accounts contributed $43,000 or 37.39% followed
by money markets which contributed $25,000 or 21.74% of total
interest expense. On average, interest earning deposits yielded
0.75% for the period ended December 31, 2010.
As a result WLBCs net interest rate spread (yield earned
on average interest-earning assets less the average rate paid on
interest-bearing liabilities) was 2.86% and its net interest
margin was 3.33%, yielding a net interest margin of
$1.4 million for the year ended December 31, 2010.
Comparison
of 2009 with 2008
For the year ended December 31, 2009, average
interest-earning assets were $237.6 million and average
interest-bearing liabilities was $0, generating net interest
income of $139,000. For the year ended December 31, 2008,
average interest-earning assets were $315.6 million and
average interest-bearing liabilities were $0, generating net
interest income of $5.7 million. Average balances of
interest earning assets decreased by $78.0 million, or
24.71%, while average balances of interest-bearing liabilities
remained flat year over year.
During 2009, WLBC had a net loss of $14.9 million. Since
there was only $5.7 million in interest income, from funds
held in a trust account, the remaining funds came from a
reduction in the trust account funds. In addition, WLBC incurred
$211.8 million for the payment of redemption of common
shares as well as $4.0 million for the payment of
underwriters discount and offering costs for the year
ended December 31, 2009.
Provision
for Loan Losses
The provision for loan losses in each year is reflected as a
charge against earnings in that year. The provision is equal to
the amount required to maintain the allowance for loan losses at
a level that, in WLBCs judgment, is adequate to absorb
probable loan losses inherent in the loan portfolio. The amount
of the provision for loan losses in any year is affected by
reductions to the allowance in the year resulting from
charge-offs and increases to the allowance in the year as a
result of recoveries from charged-off loans. In addition,
changes in the size of the loan portfolio and the recognition of
changes in current risk factors affect the amount of the
provision.
During 2010, WLBC continued to experience significant
competitive pressures and challenging economic conditions in the
markets in which it operates. The Las Vegas economy, as well as
the national economy, has continued to show signs of significant
weakness. Weakness in the residential market has expanded into
the commercial real estate market, as builders and related
industries downsize. These economic trends have adversely
affected WLBCs asset quality and increased charge-offs.
WLBC has responded by increasing provision expense to replenish
and build the allowance for loan losses allocable to adversely
affected segments of WLBCs loan portfolio in
particular, construction and land development loans and
commercial and industrial loans. Continuation of these economic
and real estate factors is likely to continue to affect
WLBCs asset quality and overall performance during the
coming year.
70
Comparison
of 2010 with 2009
WLBCs provision for loan losses of $36,000 provided for
new loan growth for the year ended December 31, 2010,
compared with $0 for the year ended December 31, 2009. The
provision for loan losses from 2009 to 2010 is primarily
attributable new loan growth of $995,000; $363,000 in November
2010 and $632,000 in December 2010 as a result of WLBCs
acquisition of
Service1st on
October 28, 2010, as there was no additional deterioration
in loans acquired at October 28, 2010.
Each quarter, management determines an estimate of the amount of
allowance for loan and lease losses adequate to provide for
losses inherent in the Banks loan portfolios. The
provision for loan losses is determined by the net change in the
allowance for loan and lease losses. The purchase accounting
used for the acquisition had a substantial impact on provision
for loan losses.
The accounting guidance requiring the Company to record all
assets and liabilities at their fair value eliminated the ALLL
for all loans as of the acquisition date because fair values
estimated for the loans included an estimate of the contractual
cash flows which were not expected to be collected, for which
the ALLL was provided. In other words, if an estimate of
uncollectible amounts is already considered in setting the fair
value, a valuation allowance to adjust the carrying amount of
the loans for an estimate of uncollectible cash flows is not
needed. Consequently, provision expense would be necessary only
for any credit deterioration occurring between the acquisition
date and December 31, 2010 and for newly originated loans.
Second, there is additional accounting guidance within purchase
accounting that relates to loans that evidenced credit
deterioration at the time they were acquired. These loans are
termed Purchase Credit-Impaired loans or (PCI
loans). There are different accounting methods used both
for recognizing interest income and for recognizing credit
deterioration subsequent to the acquisition for PCI loans than
are used for loans that were not credit impaired when acquired
or are specifically excluded from the PCI classification.
For loans that are credit-impaired when acquired, in addition to
determining their fair value, the Company must differentiate
between contractual cash flows that are expected to be received
and those that are not expected to be received. The cash flows
expected to be received is the fair value of the loan, and the
discount amount is the accretable yield that will be recognized
through accretion as interest income over the term of the loan.
The difference between the total contractual payments and the
undiscounted amount of the expected cash flows is termed the
nonaccretable difference. This amount is not
recognized as an allowance for credit loss because it was
already considered in determining the fair value of the loan. If
the borrower pays as expected, or pays more than expected, then
no allowance is needed for a PCI loan and there would be no
provision expense. If the borrower pays less than expected, then
it is assumed that further credit deterioration has occurred
subsequent to the acquisition and an allowance must be provided
through a charge to provision expense as well as a reduction in
the amount of the accretable yield that will be recognized in
subsequent periods.
The accounting guidance for PCI loans permits the acquirer to
aggregate loans with similar risk characteristics into pools.
These pools are accounted for as a single unit of account in
that only if, as an aggregate, actual cash flows are
significantly less than the estimated cash flows, will an
allowance, and therefore provision expense, be necessary. Once a
pool of PCI loans is established, the integrity of the pool is
maintained. No new loans are added to the pools and loans are
not removed unless they are paid in full, charged-off,
foreclosed-on, or sold. Cash flows received in excess of
expected amounts for one pool may not be used to offset
deficient payments in another pool.
There was no provision for loan losses related to PCI loans for
the two month period ended December 31, 2010 because cash
flows from the pools were not significantly different than
expected.
Comparison
of 2009 with 2008
WLBCs provision for loan losses was $0 for the year ended
December 31, 2009, compared with $0 for the year ended
December 31, 2008. The lack of provision expense for both
year ends is due to WLBC not owning a financial institution
during these time periods.
71
Non-Interest
Income
Non-interest income primarily consists of loan documentation and
late fees, service charges on deposits and other fees such as
wire and ATM fees.
Comparison
of 2010 with 2009
Non-interest income totalled $108,000 for the year ended
December 31, 2010 and $0 for the year ended
December 31, 2009. The $108,000 increase in non-interest
income is the result of WLBCs acquisition of
Service1st on
October 28, 2010. Thus, non-interest income reflects income
generated on
Service1sts
books for the period of October 28, 2010 through
December 31, 2010.
Comparison
of 2009 with 2008
Non-interest income was $0 for the year ended December 31,
2009 and $0 for the year ended December 31, 2008.
Non-Interest
Expense
The following table sets for the principal elements of
non-interest expenses for 2010, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
($ In thousands)
|
|
2010(1)
|
|
|
2009
|
|
|
2008
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
1,461
|
|
|
$
|
72
|
|
|
$
|
83
|
|
Occupancy, equipment and depreciation
|
|
|
269
|
|
|
|
0
|
|
|
|
0
|
|
Computer service charges
|
|
|
51
|
|
|
|
0
|
|
|
|
0
|
|
Federal deposit insurance
|
|
|
90
|
|
|
|
0
|
|
|
|
0
|
|
Professional fees
|
|
|
3,851
|
|
|
|
12,612
|
|
|
|
0
|
|
Advertising and business development
|
|
|
7
|
|
|
|
1
|
|
|
|
1,670
|
|
Insurance
|
|
|
825
|
|
|
|
301
|
|
|
|
301
|
|
Telephone
|
|
|
19
|
|
|
|
0
|
|
|
|
0
|
|
Printing and supplies
|
|
|
314
|
|
|
|
748
|
|
|
|
6
|
|
Stock based compensation
|
|
|
1,770
|
|
|
|
869
|
|
|
|
4,625
|
|
Other
|
|
|
480
|
|
|
|
434
|
|
|
|
559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
$
|
9,137
|
|
|
$
|
15,037
|
|
|
$
|
7,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the year January 1, 2010 through December 31, 2010
for WLBC and for the two months ended 2010 for
Service1st. |
Comparison
of 2010 with 2009
Non-interest expense was $9.1 million for the year ended
December 31, 2010, compared with $15.0 million for
2009. Salaries and employee benefits total $1.5 million,
compared with $72,000 for 2009. The $1.4 million increase
in salaries and employee benefits expense is the result of WLBC
acquiring
Service1st
which employed 40 full time employees. Professional fees
decreased $8.7 million, from $12.6 million in 2009 to
$3.9 million for the year ended December 31, 2010. The
$8.7 million decrease is largely due to the majority of
legal, audit and consulting fees being incurred in 2009 by WLBC
in connection with its acquisition of
Service1st as
well as WLBCs attempt to acquire other entities. For the
year ended December 31, 2010, WLBC recorded
$1.8 million in stock-based compensation expense compared
to $869,000 in 2009 due to WLBCs issuance of stock in 2010.
72
Comparison
of 2009 with 2008
Non-interest expense was $15.0 million for 2009, compared
with $7.2 million for 2008, an increase of
$7.8 million, year over year. Professional fees increased
$12.6 million due to additional legal, audit and consulting
fees incurred by WLBC in connection with its pending acquisition
of
Service1st as
well its attempt to acquire other entities.
Income
Taxes
Due to WLBC incurring operating losses from inception, no
provision for income taxes has been recorded since the inception
of WLBC.
Financial
Condition
Assets
Total assets stood at $257.5 million for the year ended
December 31, 2010, an increase of $169.0 million, or
190.96% from $88.5 million as of December 31, 2009.
The growth in total assets was principally attributable to WLBC
acquiring
Service1st which
resulted new assets such as $106.3 million in gross loans
including net deferred loan fees of $37,000, $26.9 million
in certificates of deposits, $7.1 million in investment
securities, $5.6 million in goodwill, $3.0 million in
accrued interest receivable, while cash and cash equivalents
(consisting of cash and due from banks, federal funds sold and
certificates of deposits with original maturities of three
months or less) increased $15.3 million.
Cash
and Cash Equivalents
Cash and cash equivalents consist of cash and due from banks,
federal funds sold and certificates of deposits with original
maturities of three months or less. Cash and cash equivalents
totalled $103.2 million for the year ended
December 31, 2010 and $88.0 million at
December 31, 2009. Cash and cash equivalents are managed
based upon liquidity needs. The decrease reflected WLBCs
efforts to reduce its liquidity in reaction to the reductions in
loan portfolio balances and growth. See
Liquidity and Asset/Liability Management
in this section below for more information.
Investment
Securities and Certificates of Deposits held at other
Banks
WLBC invests in investment grade securities and certificates of
deposits at other banks with original maturities exceeding three
months for the following reasons: (i) such investments can
be readily reduced in size to provide liquidity for loan balance
increases or deposit balance decreases; (ii) they provide a
source of assets to pledge to secure lines of credit (and,
potentially, deposits from governmental entities), as may be
required by law or by specific agreement with a depositor or
lender; (iii) they can be used as an interest rate risk
management tool, since they provide a large base of assets, the
maturity and interest rate characteristics of which can be
changed more readily than the loan portfolio to better match
changes in the deposit base and other funding sources of WLBC;
and (iv) they represent an alternative interest-earning use
of funds when loan demand is weak or when deposits grow more
rapidly than loans. Further, if and when WLBC becomes
profitable, tax free investment securities can be a source of
partially tax-exempt income.
WLBC uses two portfolio classifications for its investment
securities: Held to Maturity, and Available
for Sale. The Held to Maturity portfolio consists only of
securities that WLBC has both the intent and ability to hold
until maturity, to be sold only in the event of concerns with an
issuers credit worthiness, a change in tax law that
eliminates their tax exempt status, or other infrequent
situations as permitted by generally accepted accounting
principles. Accounting guidance requires Available for Sale
securities to be marked to estimated fair value with an offset,
net of taxes, to accumulated other comprehensive income, a
component of stockholders equity.
WLBCs investment portfolio is currently composed primarily
of: (i) U.S. Government Agency securities;
(ii) investment grade corporate debt securities; and
(iii) collateralized mortgage obligations. For the year
ended
73
December 31, 2010, investment securities and certificates
of deposit totalled $34.0 million, compared with $0 at
December 31, 2009.
WLBC has not used interest rate swaps or other derivative
instruments to hedge fixed rate loans or to otherwise mitigate
interest rate risk.
The tables below summarize WLBCs investment portfolio for
the year ended December 31, 2010. Securities are identified
as
available-for-sale
or held to maturity. Unrealized gains or losses on
available-for-sale
securities are recorded as accumulated other comprehensive
income in stockholders equity.
Held-to-maturity
securities are carried at cost, adjusted for amortization of
premiums or accretion of discounts. Amortization of premiums or
accretion of discounts on mortgage-backed securities is adjusted
for estimated prepayments. Securities measured at fair value are
reported at fair value, with unrealized gains and losses
included in current earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
U.S. Government Agency Securities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Collateralized Mortgage Obligations-Commercial
|
|
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,819
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Investments-Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
4,663
|
|
|
$
|
0
|
|
|
$
|
(27
|
)
|
|
$
|
4,636
|
|
SBA Loan Pools
|
|
|
651
|
|
|
|
0
|
|
|
|
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,314
|
|
|
$
|
0
|
|
|
$
|
(27
|
)
|
|
$
|
5,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes the maturity dates and investment
yields on WLBCs investment portfolio for the year ended
December 31, 2010 for securities identified as available
for sale or held to maturity. These securities were acquired
with the October 28, 2010 acquisition, and no such
securities were owned prior to that date by the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
|
|
Due Under
|
|
|
Due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
1-5 Years
|
|
|
Due 5-10 Years
|
|
|
Due Over 10 Years
|
|
|
Total
|
|
|
|
Amount/Yield
|
|
|
Amount/Yield
|
|
|
Amount/Yield
|
|
|
Amount/Yield
|
|
|
Amount/Yield
|
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
Corporate Debt Securities
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Collateralized Mortgage Obligations-Commercial
|
|
|
1,417
|
|
|
|
2.55
|
%
|
|
|
402
|
|
|
|
2.69
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
1,819
|
|
|
|
2.58
|
%
|
Small Business Administration Loan Pools
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
1,417
|
|
|
|
2.55
|
%
|
|
$
|
402
|
|
|
|
2.69
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
1,819
|
|
|
|
2.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
Corporate Debt Securities
|
|
|
3,075
|
|
|
|
7.17
|
%
|
|
|
1,561
|
|
|
|
7.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
4,636
|
|
|
|
7.11
|
%
|
Collateralized Mortgage Obligations-Commercial
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Small Business Administration Loan Pools
|
|
|
5
|
|
|
|
3.00
|
%
|
|
|
14
|
|
|
|
4.33
|
%
|
|
|
99
|
|
|
|
2.57
|
%
|
|
|
534
|
|
|
|
2.76
|
%
|
|
|
651
|
|
|
|
2.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
3,080
|
|
|
|
7.16
|
%
|
|
$
|
1,575
|
|
|
|
6.98
|
%
|
|
$
|
99
|
|
|
|
2.57
|
%
|
|
$
|
534
|
|
|
|
2.76
|
%
|
|
$
|
5,287
|
|
|
|
6.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
Loans
For the year ended December 31, 2010, substantially all of
WLBCs loan customers were located in Nevada.
The following table shows the composition of the loan portfolio
in dollar amounts and in percentages, along with a
reconciliation to loans receivable, net.
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
December 31, 2010
|
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
5,923
|
|
|
|
5.58
|
%
|
Commercial real estate
|
|
|
54,975
|
|
|
|
51.75
|
%
|
Residential
|
|
|
9,247
|
|
|
|
8.71
|
%
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
70,145
|
|
|
|
66.04
|
%
|
Commercial and industrial
|
|
|
35,946
|
|
|
|
33.84
|
%
|
Consumer
|
|
|
131
|
|
|
|
0.12
|
%
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
106,222
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
Net deferred loan costs
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans, net of deferred costs
|
|
|
106,259
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
106,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross loans were $106.3 million for the year ended
December 31, 2010, compared to $0 at December 31, 2009
and 2008, as a result of WLBCs acquisition of
Service1st on
October 28, 2010. Gross loans, net of deferred fees and the
allowance for loan losses totaled $106.3 million for the
year ended December 31, 2010, as a result of a $36,000
increase in the allowance for loan losses.
Commercial real estate loan balances were $55.0 million, or
51.75% of total loans for the year ended December 31, 2010,
commercial and industrial loans totaled $35.9 million, or
33.84% of total loans, residential real estate loans were
$9.2 million, or 8.71% of total loans while construction,
land development and other land loans totaled $5.9 million,
or 5.58% of total loans.
75
The following table presents maturity information for the loan
portfolio at December 31, 2010. The table does not include
prepayments or scheduled principal repayments. All loans are
shown as maturing based on contractual maturities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
|
|
Due Within
|
|
|
Due 1-5
|
|
|
Due Over
|
|
|
|
|
|
|
One Year
|
|
|
Years
|
|
|
Five Years
|
|
|
Total
|
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
4,428
|
|
|
$
|
1,495
|
|
|
$
|
|
|
|
$
|
5,923
|
|
Commercial real estate
|
|
|
2,544
|
|
|
|
29,327
|
|
|
|
23,104
|
|
|
|
54,975
|
|
Residential real estate (1 to 4 family)
|
|
|
6,885
|
|
|
|
2,222
|
|
|
|
140
|
|
|
|
9,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-secured loans
|
|
$
|
13,857
|
|
|
$
|
33,044
|
|
|
$
|
23,244
|
|
|
$
|
70,145
|
|
Loans not secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
18,975
|
|
|
|
9,297
|
|
|
|
7,674
|
|
|
|
35,946
|
|
Consumer
|
|
|
95
|
|
|
|
35
|
|
|
|
1
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Gross
|
|
$
|
32,927
|
|
|
$
|
42,376
|
|
|
$
|
30,919
|
|
|
$
|
106,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
$
|
7,429
|
|
|
$
|
33,867
|
|
|
$
|
5,713
|
|
|
$
|
47,009
|
|
Variable
|
|
|
25,498
|
|
|
|
8,509
|
|
|
|
25,206
|
|
|
|
59,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Gross
|
|
$
|
32,927
|
|
|
$
|
42,376
|
|
|
$
|
30,919
|
|
|
$
|
106,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrations
WLBCs loan portfolio has a concentration of loans secured
by real estate. For the year ended December 31, 2010, loans
secured by real estate comprised 66.04% of total gross loans.
Substantially all of these loans are secured by first liens.
Approximately 30.2% of these real estate-secured loans are owner
occupied for the year ended December 31, 2010. A loan is
considered owner occupied if the borrower occupies at least
fifty one percent of the collateral securing such loan.
WLBCs policy is to obtain collateral whenever it is
available, depending upon the degree of risk WLBC is willing to
accept. Repayment of loans is expected from the borrowers
cash flows or the sale proceeds of the collateral. Deterioration
in the performance of the economy and real estate values in
WLBCs primary market areas has had, and is expected to
continue to have, an adverse impact on collectibility of
outstanding loans.
Interest
Reserves
Interest reserves are generally established at the time of the
loan origination as an expense item in the budget for a
construction and land development loan. WLBCs practice is
to monitor the construction, sales
and/or
leasing progress to determine the feasibility of ongoing
construction and development projects. If at any time during the
life of the loan the project is determined not to be viable,
WLBC generally has the ability to discontinue the use of the
interest reserve and take appropriate action to protect its
collateral position via negotiation
and/or legal
action as deemed appropriate. For the year ended
December 31, 2010, WLBC had no loans with an interest
reserve.
Nonperforming
Assets
Nonperforming assets consist of:
(i) nonaccrual loans. In general, loans are placed on
nonaccrual status when WLBC determines timely recognition of
interest to be in doubt due to the borrowers financial
condition and collection efforts. WLBC generally discontinues
accrual of interest when a loan is 90 days delinquent
unless the loan is well secured and in the process of collection;
76
(ii) loans past due 90 days or more and still accruing
interest. Loans past due 90 days or more and still accruing
interest consist primarily of loans 90 days or more past
their maturity date but not their interest due date;
(iii) restructured loans. Restructured loans have modified
terms to reduce either principal or interest due to
deterioration in the borrowers financial
condition; and
(iv) other real estate owned, or OREO. If a bank takes
title to the borrowers real property that serves as
collateral for a defaulted loan, such property is referred to as
other real estate owned (OREO).
The following table summarizes nonperforming assets by category
including PCI loans with no contractual interest being reported.
These figures represent loan values after the fair value process
was completed at October 28, 2010, adjusted for any
amortization or accretion for the two months, if applicable.
|
|
|
|
|
|
|
For the Year Ended
|
|
($s in thousands)
|
|
December 31, 2010
|
|
|
Nonaccrual loans:
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
2,632
|
|
Commercial real estate
|
|
|
1,224
|
|
Residential real estate (1-4 family)
|
|
|
2,900
|
|
Total loans secured by real estate
|
|
|
6,756
|
|
Commercial and industrial
|
|
|
3,670
|
|
Consumer
|
|
|
0
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
|
10,426
|
|
Past due (>90days) loans and accruing interest:
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
0
|
|
Commercial real estate
|
|
|
0
|
|
Residential real estate (1-4 family)
|
|
|
0
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
|
|
|
Total past due loans accruing interest
|
|
|
0
|
|
Restructured loans (still on accrual)(1)
|
|
|
0
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
10,426
|
|
Other real estate owned (OREO)
|
|
|
3,406
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
13,832
|
|
|
|
|
|
|
Non-Performing Loans as a percentage of total portfolio loans
|
|
|
9.81
|
%
|
Non-Performing assets as a percentage of total assets
|
|
|
4.05
|
%
|
Non-Performing assets as a percentage of total assets
|
|
|
5.37
|
%
|
Allowance for loan losses as a percentage of nonperforming loans
|
|
|
0.35
|
%
|
|
|
|
(1) |
|
For the year ended December 31, 2010, WLBC had
approximately $5.9 million in loans classified as
restructured loans. All of such loans were on nonaccrual. As of
December 31, 2010 there were no originations from
October 28, 2010 through December 31, 2010 that were
considered non-performing. |
For the year ended December 31, 2010, nonperforming loans
totaled $10.4 million, or 9.81%, of total portfolio loans
due to the Acquisition. Total nonperforming assets for the year
ended December 31, 2010 were $13.8 million which is
reflective of the adverse economic conditions in the Nevada
market.
77
The largest category of nonperforming assets is commercial and
industrial loans of $3.7 million followed by residential
real estate loans of $2.9 million, construction, land
development and other land loans of $2.6 million and
commercial real estate loans of $1.2 million. These
balances are reflective of the adverse economic conditions in
the Nevada market. With many real estate projects requiring an
extended time to market, many of WLBCs borrowers have
exhausted their liquidity and stopped making payments, thereby
requiring WLBC to place the loans on nonaccrual. Given the
current economic conditions in Nevada, WLBC has effectively
stopped making commercial real estate loans and construction,
land development and other land loans (except for contractually
required disbursements under existing facilities) unless
borrowers can provide strong financial support outside the
project under development.
Potential
Problem Loans
WLBC classifies its loans consistent with federal banking
regulations using a ten category grading system. The loans
discussed in the following table have been recorded at fair
value as discussed in Note 5 of WLBCs financial
statements and presents information regarding potential problem
loans, which are graded but still performing as of the dates
indicated. These graded loans are referred to in applicable
banking regulations as Other Loans Especially
Mentioned, Substandard, Doubtful,
and Loss. These loan grades are described in further
detail in the section entitled Information Related to
WLBC Potential Problem Loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
|
|
# of
|
|
|
Loan
|
|
|
|
|
|
Percent of
|
|
|
|
Loans
|
|
|
Balance
|
|
|
%
|
|
|
Total Loans
|
|
|
Construction, land development and other land loans
|
|
|
3
|
|
|
$
|
1,997
|
|
|
|
16.12
|
%
|
|
|
1.88
|
%
|
Commercial real estate
|
|
|
5
|
|
|
|
6,042
|
|
|
|
48.78
|
%
|
|
|
5.69
|
%
|
Residential real estate (1-4 family)
|
|
|
1
|
|
|
|
2,357
|
|
|
|
19.03
|
%
|
|
|
2.22
|
%
|
Commercial and industrial
|
|
|
15
|
|
|
|
1,990
|
|
|
|
16.07
|
%
|
|
|
1.87
|
%
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
24
|
|
|
$
|
12,386
|
|
|
|
100
|
%
|
|
|
11.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WLBCs potential problem loans consisted of 24 loans and
totaled approximately $12.4 million for the year ended
December 31, 2010. The problem loans presented above are
the result of a difficult economic environment in the markets
WLBC operates. Commercial real estate comprises approximately
48.78% of the total aggregate balance of potential problem loans
for the year ended December 31, 2010. Construction, land
development and other land loans comprise approximately 16.12%
of the total balance of potential problem loans for the year
ended December 31, 2010. Commercial and industrial loans
comprise approximately 16.07% of the total aggregate balance of
potential problem loans for the year ended December 31,
2010. Residential real estate loans comprise approximately
19.03% of the total balance of potential problem loans for the
year ended December 31, 2010.
Impaired
Loans
A loan is impaired when it is probable that WLBC will be unable
to collect all contractual principal and interest payments due
in accordance with the terms of the loan agreement. Impaired
loans have been recorded at fair value as discussed in
Note 5 of WLBCs financial statements and are measured
based on the present value of expected future cash flows
discounted at the loans effective interest rate or, as a
practical expedient, at the loans observable market price
or the fair value of the collateral if the loan is collateral
dependent. The amount of impairment, if any, and any subsequent
changes are either included in the allowance for loan losses or
charged off WLBCs books, if deemed necessary.
The categories of nonaccrual loans and impaired loans overlap,
although they are not coextensive. WLBC considers all
circumstances regarding the loan and borrower on an individual
basis when determining whether a loan is impaired such as the
collateral value, reasons for the delay, payment record, the
amount past due, and number of days past due.
78
At December 31, 2010, the aggregate total amount of loans
classified as impaired, was $11.4 million. The total
specific allowance for loan losses related to these loans was $0
for the year ended December 31, 2010. The increase in total
impaired loans reflects the overall decline in economic
conditions in Nevada.
At December 31, 2010, WLBC had approximately
$5.4 million in loans classified as restructured loans.
Five of the seven loans were on accrual status as of
December 31, 2010. The following is a summary of these
loans, even though they are fair valued at October 28, 2010:
A $550,000 unsecured line of credit to an individual for
business investment purposes and classified as a commercial and
industrial loan was restructured in May 2010. A restructured
loan was approved and put in place which included a reduced
monthly payment. The borrower has been cooperative and is making
payments as agreed. At December 31, 2010 the balance on the
unsecured line of credit was $125,000.
A $2.3 million commercial real estate loan, which was
secured by a tavern/bar, was restructured in July 2010. The
restructure deferred past due interest payments to the end of
the note term and reduced principal and interest payments
beginning in April 2011 for the next twelve months. At
December 31, 2010, the outstanding balance on this
restructured loan was $1.2 million.
A $4.1 million land loan which is secured by
12.0 acres of vacant land was restructured. The borrower
was an investment limited liability company (LLC) supported
by a guarantor. The guarantor indicated that the LLC was unable
to sell the property or continue to service the debt. WLBC
agreed to a restructure of this loan. At December 31, 2010,
the outstanding balance on this restructured loan was
$1.1 million and the borrower is paying as agreed.
Four related loans to the same borrower were restructured in
June 2010. The loans consist of two commercial and industrial
loans totaling $650,000 that were related to the borrowers
medical practice and two real estate-secured loans totaling
$5.4 million, consisting of a $3.2 million loan on the
property in which the borrowers medical office is located
and a $2.2 million loan for the purchase of a medical
office building for lease. The borrower had already defaulted on
several single family residential properties, demonstrating to
WLBC his financial weakness and inability to service all of his
obligations. Given the borrowers financial deterioration,
WLBC agreed to a reduction in monthly payments of the combined
credits. At December 31, 2010, the outstanding balance was
$3.0 million.
The breakdown of total impaired loans, which have been recorded
at fair value as discussed in Note 5 of WLBCs
financial statements, and the related specific reserves for the
year ended December 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
|
|
Impaired
|
|
|
|
|
|
Percent of
|
|
|
Reserve
|
|
|
|
|
|
Percent of Total
|
|
($ in thousands)
|
|
Balance
|
|
|
%
|
|
|
Total Loans
|
|
|
Balance
|
|
|
%
|
|
|
Allowance
|
|
|
Construction, land development and other land loans
|
|
$
|
3,220
|
|
|
|
28.15
|
%
|
|
|
3.03
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Commercial real estate
|
|
|
1,648
|
|
|
|
14.41
|
%
|
|
|
1.55
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Residential real estate (1-4 family)
|
|
|
2,900
|
|
|
|
25.35
|
%
|
|
|
2.73
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Commercial and industrial
|
|
|
3,670
|
|
|
|
32.09
|
%
|
|
|
3.46
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Consumer
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
11,438
|
|
|
|
100.00
|
%
|
|
|
10.77
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of interest income recognized on impaired loans for
the two months ended December 31, 2010 was approximately
$39,000.
79
Allowance
for Loan Losses
The following table presents the activity in WLBCs
allowance for loan losses for 2010.
Analysis
of Loss Experience by Loan Type
|
|
|
|
|
|
|
For the Year Ended
|
|
($s in thousands)
|
|
December 31, 2010
|
|
|
Allowance for Loan and Lease Loss:
|
|
|
|
|
Balance at the beginning of the year
|
|
$
|
0
|
|
Provisions charged to operating expenses
|
|
|
36
|
|
Recoveries of loans previously charged off:
|
|
|
|
|
Construction, land development and other land loans
|
|
|
0
|
|
Commercial real estate
|
|
|
0
|
|
Residential real estate (1-4 family)
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
|
|
|
Total recoveries
|
|
|
0
|
|
|
|
|
|
|
Loans charged-off:
|
|
|
|
|
Construction, land development and other
|
|
|
0
|
|
Commercial
|
|
|
0
|
|
Residential (including multi-family)
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
|
|
|
Total charged-off
|
|
|
0
|
|
|
|
|
|
|
Net charge-offs
|
|
|
0
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
36
|
|
|
|
|
|
|
Net Charge-offs to average loans outstanding
|
|
|
0.00
|
%
|
Allowance for Loan Loss to outstanding loans
|
|
|
0.03
|
%
|
The accounting principles used by WLBC in maintaining the
allowance for loan losses are discussed in the section entitled
Critical Accounting Policies Allowance for
Loan Losses. The allowance is maintained at a level
management believes to be adequate to absorb estimated future
credit losses inherent in WLBCs loan portfolio, based on
evaluation of the collectibility of the loans, prior credit loss
experience, credit loss experience of other banks and other
factors deemed relevant.
In accordance with current accounting standards, the allowance
for loan losses was eliminated as part of the purchase
accounting. The allowance is required to cover probable losses
in new loans generated since October 28, 2010 and for any
subsequent deterioration of loans beyond the fair value
determined on October 28, 2010. Management will closely
monitor the loans existing at October 28, 2010 and
establish applicable allowance levels for new loans.
The allowance for loan losses is established through a provision
for loan losses charged to operations and is increased by the
collection of monies on loans previously charged off
(recoveries) and reduced by loans that are charged off.
Service1sts
board of directors reviews the adequacy of the allowance for
loan losses on a monthly basis. The allowance of $36,000
discussed in the table above is required based on loan growth in
November and December 2010. All loans at date of acquisition
were recorded at fair value as discussed in Note 5 of
WLBCs financial statements. Thus, for the year ended
December 31, 2010, WLBC had established an allowance of
$36,000, after increasing the allowance by $36,000 in provisions
and recording no recoveries or charge-offs. The allowance for
loan loss to outstanding loans is 0.03% for the year ended
December 31,
80
2010, reflecting a very minimal deterioration in the loan
portfolio after it was marked to market due to the acquisition
of
Service1st by
WLBC.
WLBCs methodology for the allowance for loan losses
incorporates several quantitative and qualitative risk factors
used to establish the appropriate allowance for loan loss at
each reporting date. Quantitative factors include delinquency
and charge-off trends, collateral values, the composition,
volume and overall quality of the loan portfolio (including
outstanding loan commitments), changes in nonperforming loans,
concentrations and information about individual loans.
Historical loss experience is an important quantitative factor
for many banks, but thus far less so for WLBC, because it has
been in operation for just over three years. Qualitative factors
include the economic condition of WLBCs operating markets.
Specific changes in the risk factors are based on perceived risk
of similar groups of loans classified by collateral type and
purpose. Statistics on local trends and peers are also
incorporated into the allowance. While WLBC management uses the
best information available to make its evaluation, future
adjustments to the allowance may be necessary, if there are
significant changes in economic or other conditions. In
addition, the FDIC and the Nevada FID, as an integral part of
their examination processes, review WLBCs allowances for
loan losses, and may require additions to WLBCs allowance
based on their judgment about information available to them at
the time of their examinations. WLBC reviews the assumptions and
formula used in determining the allowance and makes adjustments,
if required to reflect the current risk profile of the portfolio.
When WLBC determines that it is unable to collect all
contractual principal and interest payments due in accordance
with the terms of the loan agreement, the loan becomes impaired.
Impaired loans are measured based on the present value of
expected future cash flows discounted at the loans
effective interest rate or, as a practical expedient, at the
loans observable market price or the fair value of the
collateral, if the loan is collateral dependent. The amount of
impairment, if any, and any subsequent changes are included in
the allowance for loan losses or charged off WLBCs books,
if deemed necessary.
WLBCs loan portfolio has a concentration of loans in
commercial real-estate related loans and includes significant
credit exposure to the commercial real estate industry. The
specific reserves for collateral dependent impaired loans are
based on the fair value of the collateral less estimated selling
costs (including brokerage fees) and other miscellaneous costs
that may be incurred to make the collateral more marketable
(such as
clean-up
costs) and to cure past due amounts (such as delinquent property
taxes). The fair value of collateral is determined based on
third-party appraisals. See Information Related to WLBC
Bank of Nevada Allowance for Loan Losses for
more information. In some cases, adjustments are made to the
appraised values due to known changes in market conditions or
known changes in the collateral.
WLBCs management believes that the allowance for the year
ended December 31, 2010 and the methodology utilized in
deriving that level are adequate to absorb known and inherent
risks in the loan portfolio. However, credit quality is affected
by many factors beyond WLBCs control, including local and
national economies, and facts may exist which are not currently
known to WLBC that adversely affect the likelihood of repayment
of various loans in the loan portfolio and realization of
collateral upon default. Accordingly, no assurance can be given
that WLBC will not sustain loan losses materially in excess of
the allowance for loan losses. In addition, the FDIC, as a major
part of its examination process, reviews the allowance for loan
losses and could require additional provisions to be made. The
allowance is based on estimates, and actual losses may vary from
the estimates. However, as the volume of the loan portfolio
grows, additional provisions will be required to maintain the
allowance at adequate levels. No assurance can be given that
continuing adverse economic conditions or unforeseen events will
not lead to increases in delinquent loans, the provision for
loan losses
and/or
charge-offs.
81
The following table presents the allocation of WLBCs
allowance for loan losses by loan category and percentage of
loans in each category to total loans as of the dates indicated.
Allocation of the allowance and percentage of allowance by loan
type. The allowance of $36,000 discussed in the table below is
required based on loan growth in November and December 2010. All
loans at date of acquisition were recorded at fair value as
discussed in Note 5 of WLBCs financial statements.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
($s in thousands)
|
|
Amount
|
|
|
% of loans
|
|
|
Allowance for Loan and Lease Loss:
|
|
|
|
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
0
|
|
|
|
5.58
|
%
|
Commercial real estate
|
|
|
0
|
|
|
|
51.75
|
%
|
Residential real estate (1-4 family)
|
|
|
0
|
|
|
|
8.71
|
%
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
0
|
|
|
|
66.04
|
%
|
Commercial and industrial
|
|
|
36
|
|
|
|
33.84
|
%
|
Consumer
|
|
|
0
|
|
|
|
0.12
|
%
|
|
|
|
|
|
|
|
|
|
Total allowance for loan loss
|
|
|
36
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
The commercial and industrial loan category had provision
expense of $36,000 for the year ended December 31, 2010.
There were no charge-offs or recoveries noted in 2010.
Deferred
Tax Asset
For the year ended December 31, 2010 and year ended
December 31, 2009, a valuation allowance for the entire net
deferred tax asset was considered necessary as WLBC determined
it was not more likely than not that the deferred tax asset
would be realized. Federal operating loss carry forwards begin
to expire in 2027.
Internal Revenue Code Section 382 places a limitation on
the amount of taxable income that can be offset by net operating
loss carry forwards after a change in control (generally greater
than 50% change in ownership) of a loss corporation.
Accordingly, utilization of net operating loss carry forwards
may be subject to an annual limitation regarding their
utilization against future taxable income upon a change in
control.
Deposits
WLBCs activities are primarily based in Nevada and its
deposit base is also primarily generated from this geographic
region. Deposits have historically been the primary source for
funding WLBCs asset growth.
During the last two months of 2010, WLBC sought to decrease the
rates on its deposit base in order to increase its net interest
income, interest rate spread and net interest margin. Deposits
totaled $160.3 million at December 31, 2010, up from
$0 as of December 31, 2009 due to the acquisition of
Service1st.
Time deposits increased $35.4 million from
December 31, 2009 to December 31, 2010 while money
market accounts increased $24.7 million from
December 31, 2009 to December 31, 2010. Overall rates
on interest-bearing deposit accounts were 3.00%, for the year
ended December 31, 2010, however, the calculation of this
rates takes into consideration only two months of expense, due
to the acquisition of
Service1st
on October 28, 2010, while the average balance for this
same period of time is divided by four quarters when only one
quarter of the year, quarter ended December 31, 2010
contained a balance. Interest expense totaled $115,000 for the
year ended December 31, 2010.
82
The following table reflects the summary of deposit categories
by dollar and percentage for the year ended December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
($s in thousands)
|
|
Amount
|
|
|
% of Total
|
|
|
Non-interest-bearing deposits
|
|
$
|
67,087
|
|
|
|
41.85
|
%
|
Interest-bearing deposits
|
|
|
31,837
|
|
|
|
19.86
|
%
|
Money Markets
|
|
|
24,672
|
|
|
|
15.39
|
%
|
Savings
|
|
|
1,273
|
|
|
|
0.79
|
%
|
Time deposits under $100,000
|
|
|
4,919
|
|
|
|
3.07
|
%
|
Time deposits $100,000 and over
|
|
|
30,498
|
|
|
|
19.03
|
%
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
160,286
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
Certificates of deposits of $100,000 or more for the year ended
December 31, 2010 and December 31, 2009 totaled
$30.5 million and $0, respectively. These deposits are
generally more rate sensitive than other deposits and are more
likely to be withdrawn to obtain higher yields elsewhere, if
available. Scheduled maturities of certificates of deposits in
amounts of $100,000 or more at December 31, 2010 were as
follows:
Certificates
of Deposit Maturities > $100,000
|
|
|
|
|
($s in thousands)
|
|
Amount
|
|
|
Three months or less
|
|
$
|
1,671
|
|
Over three months to six months
|
|
|
3,504
|
|
Over six months to twelve months
|
|
|
25,323
|
|
Over 12 months
|
|
|
0
|
|
|
|
|
|
|
Total
|
|
$
|
30,498
|
|
|
|
|
|
|
Capital
Resources
The current and projected capital position of WLBC and the
impact of capital plans on long term strategies are reviewed
regularly by management. WLBCs capital position represents
the level of capital available to support continuing operations
and expansion.
WLBC is subject to certain regulatory capital requirements
mandated by the FDIC and generally applicable to all banks in
the United States. For more information, see the section
entitled Supervision and Regulation. Failure to meet
minimum capital requirements can result in restrictions on
activities (including restrictions on the rates paid on
deposits), and otherwise may cause federal or state bank
regulators to initiate enforcement
and/or other
action against WLBC. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, banks must
meet specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain off-balance
sheet item as calculated under regulatory accounting practices.
WLBCs capital amounts and classifications are also subject
to qualitative judgments by the FDIC about components, risk
weightings and other factors. In accordance with
Service1sts
consent order dated September 1, 2010, WLBC must maintain
its Tier 1 capital in such an amount to ensure that its
leverage ratio equals or exceeds 8.5%.
On September 1, 2010,
Service1st,
without admitting or denying any possible charges relating to
the conduct of its banking operations, agreed with the FDIC and
the Nevada FID to the issuance of a Consent Order. The Consent
Order supersedes the MOU. Under the Consent Order,
Service1st has
agreed, among other things, to: (i) assess the
qualification of, and have retained qualified, senior management
commensurate with the size and risk profile of
Service1st;
(ii) maintain a Tier I leverage ratio at or above 8.5%
(as of December 31, 2010,
Service1sts
Tier I leverage ratio was at 18.1%) and a total risk- based
capital ratio at or above 12% (as of December 31, 2010,
Service1sts
total risk-based capital ratio was at 31.0%);
(iii) continue to maintain an
83
adequate allowance for loan and lease losses; (iv) not pay
any dividends without prior bank regulatory approval;
(v) formulate and implement a plan to reduce
Service1sts
risk exposure to adversely classified assets; (vi) not
extend additional credit to any borrower whose loan has been
charged-off or classified loss; (vii) not
extend any additional credit to any borrower whose loan has been
classified as substandard or doubtful
without prior approval from Service1sts board of directors
or loan committee; (viii) formulate and implement a plan to
reduce risk exposure to its concentration in commercial real
estate loans in conformance with Appendix A of
Part 365 of the FDICs Rules and Regulations;
(ix) formulate and implement a plan to address
profitability; and (x) not accept brokered deposits (which
includes deposits paying interest rates significantly higher
than prevailing rates in Service1sts market area) and
reduce its reliance on existing brokered deposits, if any.
WLBC became a bank holding company on October 28, 2010 with
the consummation of the acquisition of
Service1st.
As of December 31, 2010, WLBCs capital was
$93.8 million, which WLBC deems adequate to support
continuing operations and growth. As a de novo bank,
Service1st is
required to maintain a Tier 1 capital leverage ratio of not
less than 8.0% during
Service1sts
first seven years of operations. WLBCs capital ratios at
December 31, 2010, relative to the ratios require of
well-capitalized banks under the prompt corrective
action regime put in place by federal banking regulations, are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
Capitalized
|
|
|
|
|
|
|
Under
|
|
|
|
|
|
|
Regulatory
|
Capital Ratios:
|
|
WLBC
|
|
Service1st
|
|
Agreement
|
|
Tier 1 equity to average assets
|
|
|
30.5
|
%
|
|
|
18.1
|
%
|
|
|
10.0
|
%
|
Tier 1 risk-based capital ratio
|
|
|
68.4
|
%
|
|
|
30.6
|
%
|
|
|
6.0
|
%
|
Total risk-based capital ratio
|
|
|
68.8
|
%
|
|
|
31.0
|
%
|
|
|
12.0
|
%
|
The acquisition of
Service1st by
WLBC was consummated at close of business on October 28,
2010. Per the Merger Agreement, WLBC injected an additional
$25 million of capital into
Service1st.
As a commitment made to the FDIC during acquisition application
processing, we also agreed to maintain the Tier 1 leverage
capital ratio of
Service1st at
10% or greater until October 28, 2013 or, if later, when
the September 1, 2010 Consent Order agreed to by
Service1st with
the FDIC and the Nevada Financial Institutions Division
terminates.
Liquidity
and Asset/Liability Management
Liquidity management refers to WLBCs ability to provide
funds on an ongoing basis to meet fluctuations in deposit levels
as well as the credit needs and requirements of its clients.
Both assets and liabilities contribute to WLBCs liquidity
position. Lines of credit with the regional Federal Reserve Bank
and FHLB, as well as short term investments, increases in
deposits and loan repayments all contribute to liquidity while
loan funding, investing and deposit withdrawals decrease
liquidity. WLBC assesses the likelihood of projected funding
requirements by reviewing current and forecasted economic
conditions and individual client funding needs.
WLBCs sources of liquidity consists of cash and due from
correspondent banks, overnight funds sold to correspondents and
the Federal Reserve Bank, certificates of deposits at other
financial institution (non-brokered), unpledged security
investments and lines of credit with the Federal Reserve Bank of
San Francisco and FHLB of San Francisco. For the year
ended December 31, 2010, WLBC had approximately
$103.2 million in cash and cash equivalents, approximately
$26.9 million in certificates of deposits at other
financial institutions, with maturities of one year or less. In
addition, WLBC had $2.5 million in unpledged security
investments, of which $1.8 million is classified as
available for sale, while the remaining $652,000 is classified
as held to maturity. WLBC also has a $4.0 million
collateralized line of credit with the Federal Reserve Bank of
San Francisco and a $18.0 million collateralized line
of credit with the Federal Home Loan Bank of San Francisco.
Both the $4.0 million line of credit with the Federal
Reserve of San Francisco and the $18.0 million line of
credit with the Federal Home Loan Bank have a zero balance.
84
Liquidity is also affected by portfolio maturities and the
effect of interest rate fluctuations on the marketability of
both assets and liabilities. WLBC can sell any of its unpledged
securities held in the available for sale category to meet
liquidity needs. These securities are also available to pledge
as collateral for borrowings, if the need should arise.
WLBCs management believes the level of liquid assets and
available credit facilities are sufficient to meet current and
anticipated funding needs during the next twelve months. In
addition,
Service1st Banks
Asset/Liability Management Committee oversees
Service1sts
liquidity position by reviewing a monthly liquidity report.
While management recognizes that
Service1st may
use some of its existing liquidity to issue loans during the
next twelve months, it is not aware of any trends, demands,
commitments, events or uncertainties that are reasonably likely
to impair WLBCs liquidity.
Off-Balance
Sheet Arrangements
In the normal course of business, WLBC is a party to financial
instruments with off-balance-sheet risk. These financial
instruments include commitments to extend credit and letters of
credit. To varying degrees, these instruments involve elements
of credit and interest rate risk in excess of the amount
recognized in the statement of financial position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
($ in thousands)
|
|
Commitments to extend credit
|
|
$
|
18,504
|
|
|
|
0
|
|
|
|
0
|
|
Standby commercial letters of credit
|
|
|
590
|
|
|
|
0
|
|
|
|
0
|
|
WLBC maintains an allowance for unfunded commitments, based on
the level and quality of WLBCs undisbursed loan funds,
which comprises the majority of WLBCs off-balance sheet
risk. For the year ended December 31, 2010 and
December 31, 2009, the allowance for unfunded commitments
was approximately $372,000 and $0, respectively.
Management is not aware of any other material off-balance sheet
arrangements or commitments outside of the ordinary course of
WLBCs business.
Contractual
Obligations
The following table is a summary of WLBCs contractual
obligations as of December 31, 2010, by contractual
maturity date for the next five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year
|
|
($s in thousands)
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
After
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
|
|
|
Long Term Borrowed Funds
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
Capital Lease Obligations
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
Operating Lease Obligations
|
|
|
2,096
|
|
|
|
910
|
|
|
|
1,186
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
Purchase Obligations
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
Other Long Term Liabilities
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,096
|
|
|
$
|
910
|
|
|
$
|
1,186
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative
and Qualitative Disclosures About Market Risk
Market risk is a broad term for the risk of economic loss due to
adverse changes in the fair value of a financial instrument.
These changes may be the result of various factors, including
interest rates, foreign exchange rates, commodity prices
and/or
equity prices. As a financial institution, WLBCs primary
component of market risk is interest rate volatility. Net
interest income is the primary component of WLBCs net
income, and fluctuations in interest rates will ultimately
affect the level of both income and expense recorded on a large
portion of WLBCs assets and liabilities. In addition to
directly impacting net interest income, changes
85
in the level of interest rates can also affect (i) the
amount of loans originated and sold by WLBC, (ii) the
ability of borrowers to repay adjustable or variable rate loans,
(iii) the average maturity of loans, (iv) the rate of
amortization of premiums paid on securities, (v) the fair
value of WLBCs saleable assets, (vi) the amount of
unrealized gains and losses on securities available for sale,
the volume of interest bearing non-maturity deposits and
(vii) the early withdrawal likelihood of customer
originated certificates of deposit.
Interest rate risk occurs when assets and liabilities re-price
at different times as interest rates change. In general, the
interest that WLBC earns on its assets and pays on its
liabilities is established contractually for a specified period
of time. Market interest rates change over time and if a
financial institution cannot quickly adapt to changes in
interest rates, it may be exposed to volatility in earnings. For
instance, if WLBC were to fund long-term fixed rate assets with
short-term variable rate deposits, and interest rates were to
rise over the term of the assets, the short-term variable
deposits would rise in cost, adversely affecting net interest
income. Similar risks exist when rate sensitive assets (for
example, prime rate based loans) are funded by longer-term fixed
rate liabilities in a falling interest rate environment.
WLBC manages its mix of assets and liabilities with the goals of
limiting its exposure to interest rate risk, ensuring adequate
liquidity, and coordinating its sources and uses of funds while
maintaining an acceptable level of net interest income given the
current interest rate environment. WLBCs primary source of
funds has been retail deposits, consisting primarily of
interest-bearing checking accounts and time deposits.
WLBCs management believes retail deposits, unlike brokered
deposits, reduce the effects of interest rate fluctuations
because they generally represent a more stable source of funds.
WLBC has no brokered deposits. WLBC also maintains availability
of lines of credit from the FHLB of San Francisco and the
Federal Reserve Bank of San Francisco as additional sources
of funds, but has not drawn on them. Borrowings under these
lines generally have a long-term to maturity than retail
deposits.
WLBC also uses interest rate floors, ranging from
5.5% to 8.5%, on a majority of its prime-rate based loans to
protect against a loss of net interest income that would result
from a decline in interest rates. At December 31, 2010,
approximately 43% of WLBCs loans are indexed to the
national prime rate. Currently the prime rate is under the
applicable floor rate for substantially all of WLBCs
prime-rate based loans. WLBCs net interest income may be
adversely impacted, if the prime rate were to increase but
remain below the applicable floor rate since any such increase
may result in an increase in WLBCs interest expenses
without an increase in WLBCs interest income derived from
such prime-rate based loans until the prime rate exceeds the
applicable floor rate.
WLBC has an interest rate risk management system that captures
material sources of interest rate risk and generates reports for
senior management and the board of directors. WLBC board
establishes interest rate risk management policies that govern
the measurement and control of interest rate risk. The
asset/liability management committee provides oversight of
WLBCs interest rate risk management. The Chief Financial
Officer is responsible for
day-to-day
management of WLBCs interest rate sensitivity position and
examines the potential impact of differing interest rate
scenarios. Key measurements include, but are not limited to,
traditional gap ratios, earnings at risk, economic value of
equity, net interest margin trends relative to peer banks and
performance relative to market interest rate cycles.
Risk tolerance limits are set based on net profit impact of
instantaneous and sustained interest rate shocks of +/-
100 basis points, with quarterly measures of shocks up
300 basis points and down 200 basis points. The effect
of interest rate shocks on WLBCs economic value of equity
will also be considered. WLBCs interest rate risk model is
back-tested to ensure integrity of key assumptions and to
compare actual results after significant rate changes to
predicted results. Applicable measurements are reviewed for
consistency with WLBCs target aggregates and for
indication of actual or potential adverse trends. Interest rate
risk management reports are prepared quarterly and back-tested
as market conditions warrant.
The computation of prospective effects of hypothetical interest
rate changes are based on numerous assumptions, including
relative levels of market interest rates, asset prepayments and
deposit decay, and should not be relied upon as indicative of
actual results. Further, the computations do not contemplate any
actions WLBC may undertake in response to changes in interest
rates. Actual amounts may differ from the projections set forth
below should market conditions vary from underlying assumptions.
86
December 31,
2010
Sensitivity of Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Adjusted Net
|
|
|
Change
|
|
Interest Rate Scenario
|
|
Interest Income
|
|
|
from Base
|
|
|
|
(Dollars in thousands)
|
|
|
Up 300 basis points
|
|
$
|
10,749
|
|
|
|
5.25
|
%
|
Up 200 basis points
|
|
|
10,559
|
|
|
|
3.39
|
%
|
Up 100 basis points
|
|
|
10,374
|
|
|
|
1.58
|
%
|
BASE
|
|
|
10,213
|
|
|
|
0.00
|
%
|
Down 100 basis points
|
|
|
10,069
|
|
|
|
−1.41
|
%
|
Down 200 basis points
|
|
|
9,637
|
|
|
|
−5.63
|
%
|
87
SELECTED
HISTORICAL FINANCIAL INFORMATION
SERVICE1ST
BANK OF NEVADA
Service1sts
balance sheet data for the period ended October 28, 2010,
and years ended December 31, 2009 and December 31,
2008 and related statements of operations, changes in
shareholders equity and cash flows for the period ended
October 28, 2010 and each of the years ended
December 31, 2009 and December 31, 2008, are derived
from
Service1sts
audited financial statements, which are included elsewhere in
this Prospectus.
This information should be read together with
Service1sts
audited financial statements and related notes,
Managements Discussion and Analysis of Financial
Condition and Results of
Operations-Service1st
Bank of Nevada and other financial information
included elsewhere in this prospectus. The historical results
included below and elsewhere in this prospectus are not
indicative of the future performance of
Service1st.
Set forth below are selected financial data of
Service1st
for the period ended October 28, 2010 and years ended
December 31, 2009 and 2008. You should read this
information in conjunction with
Service1sts
audited financial statements and notes to the financial
statements included elsewhere in this prospectus.
88
SERVICE1st
BANK OF NEVADA
SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended October 28, 2010 and Years Ended 2009 and
2008
|
|
|
|
2010(3)
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands except per share data)
|
|
|
Selected Results of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
6,620
|
|
|
$
|
9,043
|
|
|
$
|
8,497
|
|
Interest expense
|
|
|
1,147
|
|
|
|
2,676
|
|
|
|
2,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
5,473
|
|
|
|
6,367
|
|
|
|
6,475
|
|
Provision for loan losses
|
|
|
6,329
|
|
|
|
15,666
|
|
|
|
3,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income after provision for loan losses
|
|
|
(856
|
)
|
|
|
(9,299
|
)
|
|
|
2,805
|
|
Non-interest income
|
|
|
507
|
|
|
|
514
|
|
|
|
341
|
|
Non-interest expense
|
|
|
8,368
|
|
|
|
8,593
|
|
|
|
8,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(8,717
|
)
|
|
$
|
(17,378
|
)
|
|
$
|
(5,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
$
|
(175.00
|
)
|
|
$
|
(342.86
|
)
|
|
$
|
(100.70
|
)
|
Book Value
|
|
$
|
330.01
|
|
|
$
|
492.24
|
|
|
$
|
832.80
|
|
Selected Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
179,956
|
|
|
$
|
211,760
|
|
|
$
|
159,494
|
|
Cash and cash equivalents
|
|
|
15,091
|
|
|
|
49,633
|
|
|
|
9,987
|
|
Certificates of deposit(4)
|
|
|
31,928
|
|
|
|
9,313
|
|
|
|
0
|
|
Investment securities
|
|
|
10,432
|
|
|
|
17,635
|
|
|
|
11,740
|
|
Gross loans, including net deferred loan fees
|
|
|
125,404
|
|
|
|
136,967
|
|
|
|
137,216
|
|
Allowance for loan losses
|
|
|
9,418
|
|
|
|
6,404
|
|
|
|
2,883
|
|
Deposits
|
|
|
162,066
|
|
|
|
185,320
|
|
|
|
109,891
|
|
Stockholders equity
|
|
|
16,438
|
|
|
|
24,519
|
|
|
|
42,316
|
|
Performance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin(1)
|
|
|
3.24
|
%
|
|
|
3.22
|
%
|
|
|
4.59
|
%
|
Efficiency ratio(2)
|
|
|
139.93
|
%
|
|
|
124.88
|
%
|
|
|
121.25
|
%
|
Return on average assets
|
|
|
(4.98
|
)%
|
|
|
(8.48
|
)%
|
|
|
(3.52
|
)%
|
Return on average equity
|
|
|
(46.72
|
)%
|
|
|
(43.24
|
)%
|
|
|
(11.12
|
)%
|
Asset Quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans
|
|
$
|
20,326
|
|
|
$
|
7,799
|
|
|
$
|
3,434
|
|
Allowance for loan losses as a percentage of nonperforming loans
|
|
|
46.34
|
%
|
|
|
82.11
|
%
|
|
|
83.95
|
%
|
Allowance for loan losses as a percentage of portfolio loans
|
|
|
7.51
|
%
|
|
|
4.68
|
%
|
|
|
2.10
|
%
|
Nonperforming loans as a percentage of total portfolio loans
|
|
|
16.21
|
%
|
|
|
5.69
|
%
|
|
|
2.50
|
%
|
Nonperforming loans as a percentage of total assets
|
|
|
12.63
|
%
|
|
|
3.68
|
%
|
|
|
2.15
|
%
|
Net charge-offs to average portfolio loans
|
|
|
2.54
|
%
|
|
|
8.43
|
%
|
|
|
1.44
|
%
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average equity to average assets
|
|
|
10.66
|
%
|
|
|
19.60
|
%
|
|
|
31.62
|
%
|
Tier 1 equity to average assets
|
|
|
8.70
|
%
|
|
|
10.95
|
%
|
|
|
25.78
|
%
|
Tier 1 Risk-Based Capital ratio
|
|
|
12.80
|
%
|
|
|
16.28
|
%
|
|
|
28.21
|
%
|
Total Risk-Based Capital ratio
|
|
|
14.10
|
%
|
|
|
17.57
|
%
|
|
|
29.48
|
%
|
|
|
|
(1) |
|
Net interest margin represents net interest income as a
percentage of average interest-earning assets. |
|
|
|
(2) |
|
Efficiency ratio represents non-interest expenses as a
percentage of the total of net interest income plus non-interest
income. |
|
|
|
(3) |
|
Service1st
was acquired in 100% stock exchange on October 28, 2010.
Thus, the 2010 data represents a partial year. |
|
|
|
(4) |
|
Certificates of deposit issued by other banks with original
maturities greater than three months. |
89
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SERVICE1st
BANK OF NEVADA
The following discussion and analysis should be read in
conjunction with
Service1sts
audited financial statements and notes to the financial
statements included elsewhere in this prospectus. This
discussion and analysis contains forward-looking statements that
involve risk, uncertainties and assumptions. Certain risks,
uncertainties and other factors, including but not limited to
those set forth under Cautionary Note Regarding
Forward-Looking Statements may cause actual results to
differ materially from those projected in the forward-looking
statements.
Overview
Business
of
Service1st
Service1st was
formed on November 3, 2006 and commenced operations as a
commercial bank on January 16, 2007 under a state charter
from the Nevada FID and with federal deposit insurance from the
FDIC.
Service1st was
initially capitalized with $50 million raised in a private
placement. At October 28, 2010,
Service1st
had total assets of $180.0 million, total gross loans of
$125.4 million and total deposits of $162.1 million.
As a traditional community bank, operating from its headquarters
and two retail banking locations in the greater Las Vegas area,
Service1st provides
a variety of loans to its customers, including commercial real
estate loans, construction and land development loans,
commercial and industrial loans, Small Business Administration
(SBA) loans, and to a lesser extent consumer
loans. As of October 28, 2010, loans secured by real estate
constituted 65.77% of
Service1sts
loan portfolio.
Service1st relies
on locally-generated deposits to provide
Service1st with
funds for making loans. The overwhelming majority of its
business is generated in the Nevada market.
Service1st generates
substantially all of its revenue from interest on loans and
investment securities and service fees and other charges on
customer accounts. This revenue is offset by interest expense
paid on deposits and other borrowings and non-interest expense
such as administrative and occupancy expenses. Net interest
income is the difference between interest income on
interest-earning assets, such as loans and securities, and
interest expense on interest-bearing liabilities, such as
customer deposits and other borrowings used to fund those
assets. Interest rate fluctuations, as well as changes in the
amount and type of earning assets and liabilities and the level
of nonperforming assets combine to affect net interest income.
Service1st receives
fees from its deposit customers in the form of service fees,
checking fees and other fees. Other services such as safe
deposit and wire transfers provide additional fee income.
Service1st
may also generate income from time to time from the sale of
investment securities. The fees collected by
Service1st are
found under Non-interest Income in the statements of
operations contained within
Service1sts
audited financial statements for the period ended
October 28, 2010 (which are included elsewhere in this
prospectus). Offsetting these earnings are operating expenses
referred to as Non-Interest Expense in the
statements of operations. Because banking is a very people
intensive industry, the largest operating expense is employee
compensation and related expenses.
Local
Economic Conditions
According to the National Bureau of Economic Research,
the United States economy entered into the longest and most
severe recession in the post-war year beginning in December of
2007. The recession and continued economic downturn have been
deeply felt in the greater Las Vegas area. Beginning in 2008,
job losses, declining real property values, low consumer and
business confidence levels and increasing vacancy and
foreclosure rates for commercial and residential property
dramatically affected the Las Vegas economy. According to a
monthly report produced by The Center for Business &
Economic Research at the University of Nevada Las Vegas (the
CBER Report), the local unemployment rate in Las
Vegas rose from 5.6% as of December 31, 2007, to 9.1% as of
December 31, 2008, to 13.1% at December 31, 2009 and
to 14.9% at December 31, 2010. In addition, new home sales
decreased 53.4% from December 2007 to December 2008,
90
falling a further 25.7% from December 2008 to December 2009 and
down 27.3% from December 2009 to December 2010. During the same
year, median new home prices decreased 21.7% from December 2007
to December 2008, decreased 11.2% from December 2008 to December
2009 and decreased 0.3% from December 2009 to December 2010.
Although new home sales decreased by 27.3% for the year ended
December 31, 2010 compared to the same year in 2009, median
new home prices continued to decrease by 0.3% for the year ended
December 31, 2010 compared to the same year in 2009. The
national recession also adversely affected tourism and Las
Vegas critical gaming industry. According to the CBER
Report, Las Vegas area gaming revenues decreased 18.4% from
December 2007 to December 2008, decreased 2.4% from December
2008 to December 2009, and decreased 4.7% for the year ended
December 31, 2010 compared to same year for 2009. Data
derived from The Applied Analysis, Las Vegas Market Reports
(2nd quarter 2010) shows that Las Vegas vacancy
rates for office, industrial and retail space rose from
December 31, 2007 to December 31, 2008 to
December 31, 2009 to December 31, 2010:
office from 13.6%, to 17.3%, to 23.0%, to 24.2%;
industrial from 6.6%, to 8.9%, to 13.7%, to 16.9%;
and retail from 4.0%, to 7.4%, to 10.0%, to 10.2%.
Summary
of Results of Operations and Financial Condition
Since formation at the beginning of 2007,
Service1st has
not been profitable. To some extent, the lack of profitability
is attributable to the
start-up
nature of its business: time is required to build assets
sufficient to generate enough interest income to cover operating
expenses. However, in addition to the customary challenges of
building profitability for a
start-up
bank,
Service1st has
experienced deterioration in the quality of its loan portfolio,
largely as a result of the challenging economic conditions in
the Las Vegas market.
For the period ended October 28, 2010,
Service1st recorded
a net loss of $8.7 million or $175.00 per common share, as
compared with a net loss of $17.4 million or $342.86 per
common share in 2009 and a loss of $5.1 million or $100.70
per common share in 2008. The $8.7 million decrease in net
loss for the period ended October 28, 2010, when compared
to the period ended December 31, 2009, was the result of a
$9.3 million decrease in the provision for loan losses. The
provision expense was $6.3 million for the period end
October 28, 2010, compared to $15.7 million in 2009,
and $3.7 million in 2008. The $9.3 million decrease in
provision for loan losses for the period ended October 28,
2010 versus the twelve months ended December 31, 2009 is
the result of $8.2 million in fewer loan charges offs in
Service1sts
loan portfolio. The total amount of loans charged off was
$3.9 million for the period end October 28, 2010,
compared to $12.2 million in 2009, and $1.7 million in
2008. These numbers indicate a substantial turn around in the
deterioration of the loan portfolio which can be seen in the
progression of the percentage of net charge-offs to average
loans outstanding, which was 2.54% for the period ended
October 28, 2010, 8.43% at December 31, 2009, compared
with 1.44% at December 31, 2008.
Net interest income was adversely impacted in 2010, and to a
lesser extent in 2009 and 2008, by the increase in nonaccrual
loans. With many real estate projects requiring an extended time
to market, some borrowers have exhausted their liquidity and
ceased making payments on their loans, which has required
Service1st to
place their loans on nonaccrual status.
Service1sts
nonaccrual loans increased to 16.21% total portfolio loans for
the period ended October 28, 2010 as compared to 5.69% at
year end 2009, and were 2.50% at year end.
The allowance for loan and lease losses has grown steadily since
inception of the bank, as a result of the increasing numbers and
percentages of problem loans in
Service1sts
loan portfolio. The allowance stood at $9.4 million, or
7.51% of loans for the period ended October 28, 2010,
compared to $6.4 million at year end 2009, or 4.68% of
loans, and $2.9 million at year end 2008, or 2.10% of
loans. The increase in 2010 was primarily attributable to a
provision for loan losses of $6.3 million and recoveries of
$615,000, mostly offset by charge-offs of $3.9 million. The
increase in 2009 was primarily attributable to a provision for
loan losses of $15.7 million, mostly offset by charge-offs
of $12.2 million. The increase in 2008 was primarily
attributable to a provision for loan losses of
$3.7 million, partially offset by $1.7 million in
charge-offs.
As
Service1st commenced
operations with $50.0 million of capital, it has sufficient
capital to absorb the losses it has experienced during its years
of operations. With total stockholders equity of
$16.4 million at
91
October 28, 2010,
Service1st had
a leverage ratio (the ratio of Tier 1 equity to average
assets) of 8.7% of total assets, well above the 5.0% regulatory
requirements for well-capitalized banks and just above the 8.5%
requirement for
Service1st due
to its consent order. At October 28, 2010, Tier 1
risk-based capital stood at 12.8%, and total risk-based capital
at 14.10%, well above the requirement of 12.0% due to its
consent order, both of which exceed the risk-based capital
guidelines for well capitalized banks of 6.0% and
10.0%, respectively.
Critical
Accounting Policies and Estimates
Service1sts
significant accounting policies are described in Note 1 of
its audited financial statements (which are included elsewhere
in this prospectus), including information regarding recently
issued accounting pronouncements,
Service1sts
adoption of such policies and the related impact of their
adoption. Certain of these policies, along with various
estimates that
Service1st is
required to make in recording its financial transactions, are
important to have a complete understanding of
Service1sts
financial position. In addition, these estimates require
Service1st to
make complex and subjective judgments, many of which include
matters with a high degree of uncertainty. The following is a
summary of these critical accounting policies and significant
estimates.
Allowance
for Loan Losses
The allowance for loan losses is an estimate of the credit risk
in
Service1sts
loan portfolio and appears on the balance sheet as a
contra asset which reduces gross loans. The
allowance is established (or once established, increased) by
recording provision expense. Loans charged off on
Service1sts
books reduce the allowance. Subsequent recoveries of charged off
loans, if any, increase the allowance.
The allowance is an amount that
Service1sts
management believes will be adequate to absorb probable losses
on existing loans that may become uncollectible, based on
evaluation of the collectability of loans and prior credit loss
experience. This evaluation also takes into consideration such
factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, specific problem credits,
peer bank information, and current economic conditions that may
affect the borrowers ability to pay. Due to the credit
concentration of
Service1sts
loan portfolio in real estate-secured loans, future adjustments
to the allowance may be necessary if there are significant
changes in economic or other conditions. In addition, the FDIC
and state banking regulatory agencies, as an integral part of
their examination process, periodically review
Service1sts
allowance for loan losses, and may require
Service1st to
make additions to the allowance based on their judgment about
information available to them at the time of their examinations.
The allowance consists of specific and general components. The
specific component relates to loans that are classified as
impaired. For such loans, an allowance is established when the
discounted cash flows (or collateral value or observable market
price) of the impaired loan is lower than the carrying value of
that loan. The general component covers non-impaired loans and
is based on historical loss experience adjusted for qualitative
and environmental factors.
A loan is impaired when it is probable
Service1st
will be unable to collect all contractual principal and interest
payments due in accordance with the original terms of the loan
agreement. Impaired loans are measured based on the present
value of expected future cash flows discounted at the
loans effective interest rate or, as a practical
expedient, at the loans observable market price or the
fair value of the collateral if the loan is collateral
dependent. The amount of impairment, if any, and any subsequent
changes are included in the allowance for loan losses.
Investment
Securities Portfolio
Securities classified as available for sale are equity
securities and those debt securities
Service1st intends
to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as
available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity
mix of
Service1sts
assets and liabilities, liquidity needs, regulatory capital
considerations and other similar considerations. Securities
available for sale are reported at fair value with
92
unrealized gains or losses reported as other comprehensive
income (loss), net of related deferred tax effect. Realized
gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
Securities classified as held to maturity are those debt
securities
Service1st has
both the intent and ability to hold to maturity regardless of
changes in market conditions, liquidity needs, or general
economic conditions. These securities are carried at amortized
cost, adjusted for amortization of premium and accretion of
discount computed by the interest method over the contractual
lives. The sale of a security within three months of its
maturity date or after at least 85% of the principal outstanding
has been collected is considered a maturity for purposes of
classification and disclosure. Purchase premiums and discounts
are generally recognized in interest income using the
effective-yield method over the term of the securities.
Service1sts
management evaluates securities for
other-than-temporary
impairment at least on a quarterly basis, and more frequently
when economic or market conditions warrant such evaluation.
Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost,
(2) the financial condition and near term prospects of the
issuer, including an evaluation of credit ratings, (3) the
impact of changes in market interest rates, (4) the intent
of
Service1st to
sell a security and (5) whether it is more likely than not
Service1st will
have to sell the security before recovery of its cost basis.
Stock-Based
Compensation
Service1sts
2007 Stock Option Plan is described more fully in Note 9 to
Service1sts
audited financial statements for the period ended
October 28, 2010, which are included elsewhere in this
prospectus.
Service1st records
the fair value of stock compensation granted to employees and
directors as expense over the vesting period. The cost of the
award is based on the grant-date fair value. The compensation
expenses recognized related to stock options granted under
Service1sts
2007 Stock Option Plan was approximately $633,000 for the period
ended October 28, 2010, $379,000 in 2009 and $423,000 in
2008.
Income
Taxes
Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible
temporary differences and tax credit carry-forwards 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
bases. 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 effect of changes in tax laws and rates on the date of
enactment. As a result of the Acquisition, which was finalized
at the close of business on October 28, 2010,
Service1sts
net operating loss utilization will be subject to an annual
limitation on the net operating loss against future taxable
income. Internal Revenue Code section 382 places a
limitation on the amount of taxable income that can be offset by
net operating loss carry forwards after a change in control
(generally greater than 50% change in ownership) of a loss
corporation.
Results
of Operations
Service1sts
results of operations depend substantially on its ability to
generate net interest income, which is the difference between
the interest income on its interest-earning assets (primarily
loans and investment securities) minus interest expense on its
interest-bearing liabilities (primarily deposits). Revenue is
also generated by non- interest income, consisting principally
of account and other service fees. These sources of revenue are
burdened by two categories of expense: first, the provision for
loan losses, which consists of a charge against earnings in an
amount that
Service1sts
management judges necessary to maintain
Service1sts
allowance for loan losses at a level deemed adequate to absorb
probable loan losses inherent in the loan portfolio; and second,
non-interest expense, which consists primarily of operating
expenses, such as compensation to employees.
The management of interest income and interest expense is
fundamental to the performance of
Service1st.
Net interest income and interest expense on interest-bearing
liabilities, such as deposits and other borrowings,
93
is the largest component of
Service1sts
net revenue. Net interest income depends upon the volume of
interest-earning assets and interest-bearing liabilities and the
rates earned or paid on them.
Service1sts
management closely monitors both total net interest income and
the net interest margin (net interest income divided by average
earning assets).
Net interest income and net interest margin are affected by
several factors including (1) the level of, and the
relationship between the dollar amount of interest earning
assets and interest-bearing liabilities; and (2) the
relationship between re-pricing or maturity of
Service1sts
variable-rate and fixed-rate loans, securities, deposits and
borrowings.
Variable rate loans constitute 58.21% of
Service1sts
portfolio for the period end October 28, 2010, and
approximately 51.21% of
Service1sts
variable rate loans are indexed to the national prime rate.
However, a majority of these prime-rate based loans are subject
to floors, ranging from 5.5% to 8.5%. Currently the
prime rate is under the applicable floor rate for substantially
all of
Service1sts
prime-rate based loans.
Movements in the national prime rate that increase the
applicable loan rates above applicable floors have a direct
impact on
Service1sts
loan yield and interest income. The national prime rate remained
at 3.25% throughout 2009 and the first nine months of 2010, as
the Federal Reserve maintained the targeted federal funds rate
steady. Based on economic forecasts generally available to the
banking industry,
Service1st currently
believes it is reasonably possible that the targeted federal
funds rate and the national prime rate will remain flat in the
foreseeable future and increase in the long term; however, there
can be no assurance to that effect or as to the timing or the
magnitude of any increase should an increase occur, as changes
in market interest rates are dependent upon a variety of factors
that are beyond
Service1sts
control.
Service1st,
through its asset and liability policies and practices, seeks to
maximize net interest income without exposing
Service1st to
an excessive level of interest rate risk. Interest rate risk is
managed by monitoring the pricing, maturity and repricing
options of all classes of interest-bearing assets and
liabilities. See Managements Discussion and
Analysis of Financial Condition and Results of Operations of
Service1st
Bank of Nevada Quantitative and Qualitative
Disclosures About Market Risk in this section for more
information.
94
The following table sets forth
Service1sts
average balance sheet, average yields on earning assets, average
rates paid on interest-bearing liabilities, net interest margins
and net interest income/spread for the period ended
October 28, 2010 and the years ended December 31, 2009
and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended October 28,
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2010(4)
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
($ in thousands)
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
INTEREST-EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
28,913
|
|
|
$
|
287
|
|
|
|
1.19
|
%
|
|
$
|
9,562
|
|
|
$
|
125
|
|
|
|
1.31
|
%
|
|
$
|
845
|
|
|
$
|
37
|
|
|
|
4.38
|
%
|
Interest-bearing deposits
|
|
|
28,880
|
|
|
|
60
|
|
|
|
0.25
|
%
|
|
|
24,585
|
|
|
|
62
|
|
|
|
0.25
|
%
|
|
|
5,024
|
|
|
|
115
|
|
|
|
2.29
|
%
|
Federal funds sold
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
3,522
|
|
|
|
8
|
|
|
|
0.23
|
%
|
|
|
7,958
|
|
|
|
152
|
|
|
|
1.91
|
%
|
Investment securities
|
|
|
14,483
|
|
|
|
472
|
|
|
|
3.91
|
%
|
|
|
15,856
|
|
|
|
646
|
|
|
|
4.07
|
%
|
|
|
8,598
|
|
|
|
357
|
|
|
|
4.15
|
%
|
Portfolio loans(1)
|
|
|
130,401
|
|
|
|
5,801
|
|
|
|
5.34
|
%
|
|
|
143,984
|
|
|
|
8,202
|
|
|
|
5.70
|
%
|
|
|
118,536
|
|
|
|
7,837
|
|
|
|
6.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earnings assets/interest income
|
|
|
202,677
|
|
|
|
6,620
|
|
|
|
3.92
|
%
|
|
|
197,509
|
|
|
|
9,043
|
|
|
|
4.58
|
%
|
|
|
140,961
|
|
|
|
8,498
|
|
|
|
6.03
|
%
|
NONINTEREST EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
9,285
|
|
|
|
|
|
|
|
|
|
|
|
8,329
|
|
|
|
|
|
|
|
|
|
|
|
2,603
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(7,628
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,274
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,468
|
)
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
5,751
|
|
|
|
|
|
|
|
|
|
|
|
3,421
|
|
|
|
|
|
|
|
|
|
|
|
3,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
210,085
|
|
|
|
|
|
|
|
|
|
|
$
|
204,985
|
|
|
|
|
|
|
|
|
|
|
$
|
145,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
31,710
|
|
|
$
|
349
|
|
|
|
1.32
|
%
|
|
$
|
19,609
|
|
|
$
|
388
|
|
|
|
1.98
|
%
|
|
$
|
10,246
|
|
|
$
|
158
|
|
|
|
1.54
|
%
|
Money markets
|
|
|
41,118
|
|
|
|
211
|
|
|
|
0.62
|
%
|
|
|
41,271
|
|
|
|
627
|
|
|
|
1.52
|
%
|
|
|
52,649
|
|
|
|
1,344
|
|
|
|
2.55
|
%
|
Savings
|
|
|
1,529
|
|
|
|
7
|
|
|
|
0.55
|
%
|
|
|
850
|
|
|
|
12
|
|
|
|
1.41
|
%
|
|
|
336
|
|
|
|
6
|
|
|
|
1.79
|
%
|
Time deposits under $100,000
|
|
|
5,780
|
|
|
|
65
|
|
|
|
1.35
|
%
|
|
|
5,887
|
|
|
|
156
|
|
|
|
2.65
|
%
|
|
|
2,088
|
|
|
|
69
|
|
|
|
3.30
|
%
|
Time deposits $100,00 and over
|
|
|
42,900
|
|
|
|
515
|
|
|
|
1.44
|
%
|
|
|
51,175
|
|
|
|
1,480
|
|
|
|
2.89
|
%
|
|
|
10,910
|
|
|
|
386
|
|
|
|
3.54
|
%
|
Repurchase Agreements
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
1,538
|
|
|
|
13
|
|
|
|
0.85
|
%
|
|
|
3,303
|
|
|
|
59
|
|
|
|
1.79
|
%
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
3
|
|
|
|
|
|
|
|
1.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities/interest expense
|
|
|
123,037
|
|
|
|
1,147
|
|
|
|
1.12
|
%
|
|
|
120,330
|
|
|
|
2,676
|
|
|
|
2.22
|
%
|
|
|
79,535
|
|
|
|
2,022
|
|
|
|
2.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand deposits
|
|
|
63,154
|
|
|
|
|
|
|
|
|
|
|
|
42,916
|
|
|
|
|
|
|
|
|
|
|
|
18,927
|
|
|
|
|
|
|
|
|
|
Accrued interest on deposits and other liabilities
|
|
|
1,490
|
|
|
|
|
|
|
|
|
|
|
|
1,555
|
|
|
|
|
|
|
|
|
|
|
|
1,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
187,681
|
|
|
|
|
|
|
|
|
|
|
|
164,801
|
|
|
|
|
|
|
|
|
|
|
|
99,484
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
22,404
|
|
|
|
|
|
|
|
|
|
|
|
40,184
|
|
|
|
|
|
|
|
|
|
|
|
46,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
210,085
|
|
|
|
|
|
|
|
|
|
|
$
|
204,985
|
|
|
|
|
|
|
|
|
|
|
$
|
145,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and interest rate spread(2)
|
|
|
|
|
|
$
|
5,473
|
|
|
|
2.81
|
%
|
|
|
|
|
|
$
|
6,367
|
|
|
|
2.36
|
%
|
|
|
|
|
|
$
|
6,475
|
|
|
|
3.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin(3)
|
|
|
|
|
|
|
|
|
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
3.22
|
%
|
|
|
|
|
|
|
|
|
|
|
4.59
|
%
|
Ratio of Average Interest-Earning Assets to Interest-Bearing
Liabilities
|
|
|
165
|
%
|
|
|
|
|
|
|
|
|
|
|
164
|
%
|
|
|
|
|
|
|
|
|
|
|
177
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average balances include nonaccrual loans of approximately
$15,066,000, $9,470,000 and $1,335,000 for the period ended
October 28, 2010 and years ended, 2009 and 2008,
respectively. Net loan fees or (costs) of $(180,000), $(122,000)
and $11,000 are included in the yield computation for the period
ended October 28, 2010 and years ended 2009 and 2008,
respectively. |
|
|
|
(2) |
|
Net interest spread represents the average yield earned on
interest earning assets less the average rate paid on interest
bearing liabilities. |
|
|
|
(3) |
|
Net interest margin represents net interest income as a
percentage of average interest-earning assets. |
95
|
|
|
(4) |
|
Service1st
was acquired by WLBC on October 28, 2010, thus the 2010
data represents a partial year; January 1, 2010 to
October 28, 2010. |
The Volume and Rate Variances table below sets forth the dollar
difference in interest earned and paid for each major category
of interest-earning assets and interest-bearing liabilities for
the noted periods, and the amount of such change attributable to
changes in average balances (volume) or changes in average
interest rates. Volume variances are equal to the increase or
decrease in the average balance times the prior period rate and
rate variances are equal to the increase or decrease in the
average rate times the prior period average balance. Variances
attributable to both rate and volume changes are equal to the
change in rate times the change in average balance and are
allocated proportionately to the changes due to volume and
changes due to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended October 28,
|
|
|
|
2010 compared to Year Ended December 31, 2009
|
|
|
|
Increase (Decrease)
|
|
|
|
Due to Changes in:
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Average
|
|
|
Average
|
|
|
Increase
|
|
($s in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
192
|
|
|
$
|
(30
|
)
|
|
$
|
162
|
|
Interest-bearing deposits
|
|
|
9
|
|
|
|
(11
|
)
|
|
|
(2
|
)
|
Federal funds sold
|
|
|
0
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Investment securities
|
|
|
(45
|
)
|
|
|
(129
|
)
|
|
|
(174
|
)
|
Portfolio loans
|
|
|
(604
|
)
|
|
|
(1,797
|
)
|
|
|
(2,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest income
|
|
|
(448
|
)
|
|
|
(1,975
|
)
|
|
|
(2,423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking
|
|
$
|
133
|
|
|
$
|
(172
|
)
|
|
$
|
(39
|
)
|
Money markets
|
|
|
(1
|
)
|
|
|
(415
|
)
|
|
|
(416
|
)
|
Savings
|
|
|
3
|
|
|
|
(8
|
)
|
|
|
(5
|
)
|
Time deposits under $100,000
|
|
|
(1
|
)
|
|
|
(90
|
)
|
|
|
(91
|
)
|
Time deposits $100,000 and over
|
|
|
(99
|
)
|
|
|
(866
|
)
|
|
|
(965
|
)
|
Repurchase Agreements
|
|
|
0
|
|
|
|
(13
|
)
|
|
|
(13
|
)
|
Short-term borrowings
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest expense
|
|
|
35
|
|
|
|
(1,564
|
)
|
|
|
(1,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net interest income
|
|
$
|
(483
|
)
|
|
$
|
(411
|
)
|
|
$
|
(894
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009 Compared to 2008
|
|
|
|
Increase (Decrease)
|
|
|
|
Due to Changes in:
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Average
|
|
|
Average
|
|
|
Increase
|
|
($s in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
114
|
|
|
$
|
(26
|
)
|
|
$
|
88
|
|
Interest bearing deposits
|
|
|
49
|
|
|
|
(102
|
)
|
|
|
(54
|
)
|
Federal funds sold
|
|
|
(10
|
)
|
|
|
(134
|
)
|
|
|
(144
|
)
|
Investment securities
|
|
|
296
|
|
|
|
(7
|
)
|
|
|
289
|
|
Portfolio loans
|
|
|
1,451
|
|
|
|
(1,085
|
)
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest income
|
|
|
1,900
|
|
|
|
(1,354
|
)
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking
|
|
$
|
185
|
|
|
$
|
45
|
|
|
$
|
230
|
|
Money markets
|
|
|
(173
|
)
|
|
|
(544
|
)
|
|
|
(717
|
)
|
Savings
|
|
|
7
|
|
|
|
(1
|
)
|
|
|
6
|
|
Time deposits under $100,000
|
|
|
101
|
|
|
|
(14
|
)
|
|
|
87
|
|
Time deposits $100,000 and over
|
|
|
1,164
|
|
|
|
(70
|
)
|
|
|
1,094
|
|
Repurchase Agreements
|
|
|
(15
|
)
|
|
|
(31
|
)
|
|
|
(46
|
)
|
Short-term borrowings
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest expense
|
|
|
1,269
|
|
|
|
(615
|
)
|
|
|
654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net interest income
|
|
$
|
631
|
|
|
$
|
(739
|
)
|
|
$
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of 2010 with 2009
For the year period ended October 28, 2010, average
interest-earning assets were $202.7 million and average
interest-bearing liabilities were $123.0 million,
generating net interest income of $5.5 million. For the
year ended December 31, 2009, average interest-earning
assets were $197.5 million and average interest-bearing
liabilities were $120.3 million, generating net interest
income of $6.4 million. Average balances of interest
earning assets increased by $5.2 million, or 2.62%, while
average balances of interest-bearing liabilities increased by
$2.7 million, or 2.25%.
During 2010,
Service1st sought
to decrease its core deposit base in order to reduce the
banks excess liquidity due to a shrinking loan portfolio
which was caused by stagnant loan growth, loan paydowns/payoffs
and charged off loans. The average balance of its loan portfolio
decreased by $13.6 million, from $144.0 million for
the year ended December 31, 2009 to $130.4 million for
the period ended October 28, 2010. Since loan growth never
fully materialized, average assets grew primarily through
increases in average balances of lower yielding assets, such as
certificates of deposit in other banks and interest-bearing
deposits. Certificates of deposits in other banks grew
$19.3 million, or a growth of 201.04%, from
$9.6 million as of December 31, 2009 to
$28.9 million for the period ended October 28, 2010.
Interest-bearing deposits in other banks grew $4.3 million,
or a growth of 17.47%%, from $24.6 million as of
December 31, 2009 to $28.9 million for the period
ended October 28, 2010. This additional liquidity had a
negative impact on the average yield on
Service1sts
interest-earning assets.
Average balances of investment securities decreased by
$1.4 million during the year, or 8.7%, from
$15.9 million at December 31, 2009 to
$14.5 million for the period ended October 28, 2010.
As interest rates on the investment portfolio slightly
decreased, from 4.07% in 2009 to 3.91% in 2010, interest income
was negatively impacted by the reduction in earnings.
97
Interest income was also adversely impacted by the increase in
nonaccrual loans, which inhibited the growth of interest-earning
assets. With many real estate projects requiring an extended
time to market, some borrowers have exhausted their liquidity,
which has required
Service1st to
place their loans on nonaccrual status. Non-performing loans
grew from $3.4 million, or 2.50% of total loans at
December 31, 2008, to $7.8 million, or 5.69%, of total
loans at December 31, 2009, to $20.3 million, or
16.21%, of total portfolio loans for the period ended
October 28, 2010. During 2010, quarter end balances of
nonaccrual loans steadily increased as the year progressed, with
$10.0 million at March 31, 2010, $18.1 million at
June 30, 2010 and $20.5 million for the period ended
October 28, 2010. For the period ended October 28,
2010, nonaccrual loans totaled $20.3 million. Add to that
an additional $2.4 million in other real estate owned
(OREO), the result is $20.3 million in nonperforming loans
for the period ended October 28, 2010. The high balances of
nonperforming loans during 2010 adversely impacted interest
income growth.
As a result of all of these factors, the average yield on
interest-earning assets decreased from 6.03% for 2008 to 4.58%
for 2009, to 3.92% for the period ended October 28, 2010.
As a result, despite the slight increase in interest earning
assets, total interest income decreased, from $9.0 million
for 2009 to $6.6 million for the period ended
October 28, 2010, or $7.9 million on an annualized
basis.
The increase in interest-earning assets was funded largely by an
increase of $23.0 million in average balances of deposit
liabilities, from $163.2 million at December 31, 2009
to $186.2 million for the period ended October 28,
2010. The increase was primarily attributable to a
$20.2 million, or 47.16% increase in average balances of
noninterest bearing deposits and $12.1 million, or 61.67%
increase in average balances of interest-bearing checking.
The decrease in interest expense in 2010 of $1.5 million is
primarily the result of growth in volume of noninterest-bearing
deposits coupled with the impact of lower rates paid on interest
bearing deposits.
As a result of both modest decreases in interest rates and large
increases in low-yielding liquid assets,
Service1sts
net interest rate spread (yield earned on average
interest-earning assets less the average rate paid on
interest-bearing liabilities) increased to 2.81% in 2010
compared with 2.36% in 2009, and its net interest margin also
increased from 3.22% in 2009 to 3.24% in 2010.
Comparison
of 2009 with 2008
For the year ended December 31, 2009, average
interest-earning assets were $197.5 million and average
interest-bearing liabilities were $120.3 million,
generating net interest income of $6.4 million. For the
year ended December 31, 2008, average interest-earning
assets were $141.0 million and average interest-bearing
liabilities were $79.5 million, generating net interest
income of $6.5 million. Average balances of
interest-earning assets increased by $56.5 million, or
40.1%, while average balances of interest-bearing liabilities
increased by $40.8 million, or 51.3%.
During 2009,
Service1st sought
to expand its core deposit base in order to increase its
liquidity in anticipation of loan growth. However, while the
average balance of its portfolio loans increased by
$25.5 million, from $118.5 million for the year ended
December 31, 2008 to $144.0 million for the year ended
December 31, 2009, anticipated loan growth did not fully
materialize, and instead assets grew primarily through increases
of average balances of lower yielding assets (consisting of
certificates of deposit in other banks, interest-bearing
deposits and federal funds sold) of $23.9 million, or a
growth of 173.2%, from $13.8 million as of
December 31, 2008 to $37.7 million as of
December 31, 2009. This additional liquidity had a negative
impact on the average yield on
Service1sts
interest- earning assets.
Average balances of investment securities also grew by
$7.3 million during the year, or 84.9%, from
$8.6 million at December 31, 2008 to
$15.9 million at December 31, 2009. As interest rates
on the investment portfolio slightly decreased, from 4.15% in
2008 to 4.07% in 2009, the increase in investment securities
contributed to interest income.
The modest increase in the average balances of portfolio loans
of $25.5 million was partially offset by a decrease in
their yield from 6.61% to 5.70%, resulting in a net addition to
net interest income of only $365,000. Yields on many of the
prime-rate based loans were protected by interest-rate floors.
98
Interest income was also adversely impacted by the increase in
nonaccrual loans, which inhibited the growth of interest-earning
assets. With many real estate projects requiring an extended
time to market, some borrowers have exhausted their liquidity,
which has required
Service1st to
place their loans on nonaccrual status. Non-performing loans
grew from $3.4 million, or 2.50% of total loans at
December 31, 2008, to $7.8 million, or 5.69%, of total
portfolio loans at December 31, 2009. However, during 2009,
quarter end balances of nonperforming loans were significantly
higher than this range, with $3.4 million at March 31,
2009, $8.7 million at June 30, 2009 and
$17.9 million for the period ended September 30, 2009.
In the fourth quarter of 2009,
Service1st charged
off $10.3 million in loans, including many nonperforming
loans, such that at December 31, 2009, the total of
nonperforming loans fell to $7.8 million. The high balances
of nonperforming loans during 2009 adversely impacted interest
income growth.
As a result of all of these factors, the average yield on
interest-earning assets decreased from 6.03% for 2008 to 4.58%
for 2009. As a result, despite the increase in interest-earning
assets, total interest income increased only modestly, from
$8.5 million for 2008 to $9.0 million for 2009.
The increase in interest-earning assets was funded largely by an
increase of $64.7 million in average balances of deposit
liabilities, from $98.5 million at December 31, 2008
to $163.2 million at December 31, 2009. The increase
was primarily attributable to increases in average balances of
time deposits over $100,000 of $40.3 million and
non-interest-bearing demand deposits of $24.0 million.
The increase in interest expense in 2009 of $654,000 is
primarily the result of the growth in the volume in
interest-bearing deposits and, in particular, time deposits over
$100,000, which was only partially offset by decreases in rates.
As a result of both modest decreases in interest rates and large
increases in low-yielding liquid assets,
Service1sts
net interest rate spread (yield earned on average
interest-earning assets less the average rate paid on
interest-bearing liabilities) decreased to 2.36% in 2009
compared with 3.49% in 2008, and its net interest margin also
decreased from 4.59% in 2008 to 3.22% in 2009.
Provision
for Loan Losses
The provision for loan losses in each period is reflected as a
charge against earnings in that period. The provision is equal
to the amount required to maintain the allowance for loan losses
at a level that, in
Service1sts
judgment, is adequate to absorb probable loan losses inherent in
the loan portfolio. The amount of the provision for loan losses
in any period is affected by reductions to the allowance in the
period resulting from charge-offs and increases to the allowance
in the period as a result of recoveries from charged-off loans.
In addition, changes in the size of the loan portfolio and the
recognition of changes in current risk factors affect the amount
of the provision.
During 2010,
Service1st continued
to experience significant competitive pressures and challenging
economic conditions in the markets in which it operates. The Las
Vegas economy, as well as the national economy, has continued to
show signs of significant weakness. Weakness in the residential
market has expanded into the commercial real estate market, as
builders and related industries downsize. These economic trends
have adversely affected
Service1sts
asset quality and increased charge-offs.
Service1st has
responded by increasing provision expense to replenish and build
the allowance for loan losses allocable to adversely affected
segments of
Service1sts
loan portfolio in particular, construction and land
development loans and commercial and industrial loans.
Continuation of these economic and real estate factors is likely
to continue to affect
Service1sts
asset quality and overall performance during the coming year.
Comparison
of 2010 with 2009
Service1sts
provision for loan losses was $6.3 million for the period
ended October 28, 2010, compared with $15.7 million
for the year ended December 31, 2009. The significant
decrease in the provision for loan losses from 2009 to 2010 is
primarily attributable to $3.9 million of charge-offs taken
in 2010, of which $1.2 million was in
Service1sts
construction and land development portfolio (compared with
$7.7 million in 2009), and of which $1.7 million was
in the commercial and industrial loan portfolio (compared with
99
$4.4 million in charge-offs in 2009). As a result, net
charge-offs to average loans outstanding decreased from 8.43% in
2009 to 2.54% in 2010.
Comparison
of 2009 with 2008
Service1sts
provision for loan losses was $15.7 million for the year
ended December 31, 2009, compared with $3.7 million
for the year ended December 31, 2008. The significant
increase in the provision for loan losses from 2008 to 2009 is
primarily attributable to $12.2 million of charge-offs
taken in 2009, of which $7.7 million was in
Service1sts
construction and land development portfolio (compared with
$1.7 million in 2008), and of which $4.4 million was
in the commercial and industrial loan portfolio (compared with
no charge-offs in 2008). As a result, net charge-offs to average
loans outstanding increased from 1.44% in 2008 to 8.43% in 2009.
The increase is also attributable to the continuing weak
economic conditions in the markets served by
Service1st,
which resulted in an overall increase in nonperforming loans
from $3.4 million, or 2.50%, of total portfolio loans at
December 31, 2008, to $7.8 million, or 5.69%, of total
portfolio loans at December 31, 2009. Average balances of
nonperforming loans were well above this range for most of 2009,
having been reduced by charge-offs of $10.3 million taken
in the fourth quarter of 2009, all of which were nonperforming
loans. In addition,
Service1sts
potential problem loans (loans classified, special mention,
substandard, doubtful or loss) totaled approximately
$36.2 million at December 31, 2009 compared with
$19.5 million at December 31, 2008.
Non-Interest
Income
Non-interest income primarily consists of loan documentation and
late fees, service charges on deposits and other fees such as
wire and ATM fees.
Comparison
of 2010 with 2009
Non-interest income totaled $514,000 for full year 2009 and
$507,000 for the period of January 1, 2010 through
October 28, 2010, or $608,000 on an annualized basis. This
trend is the continued resolve of
Service1sts
management to adhere to fee income policies, including limiting
waivers of such fees. This effort began in mid-2008 and
continued throughout 2010.
Comparison
of 2009 with 2008
Non-interest income increased from $340,000 for 2008 to $514,000
for 2009. The increase of $174,000 is primarily the result of a
continuing effort by
Service1sts
management to adhere to fee income policies, including limiting
waivers of such fees. This effort began in mid-2008 and carried
throughout 2009.
100
Non-Interest
Expense
The following table sets for the principal elements of
non-interest expenses for 2010, 2009, and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended October 28, 2010 And Years Ended
December 31,
|
|
($ in thousands)
|
|
2010(1)
|
|
|
2009
|
|
|
2008
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
3,536
|
|
|
$
|
3,875
|
|
|
$
|
5,029
|
|
Occupancy, equipment and depreciation
|
|
|
1,360
|
|
|
|
1,673
|
|
|
|
1,664
|
|
Computer service charges
|
|
|
243
|
|
|
|
328
|
|
|
|
313
|
|
Professional fees
|
|
|
1,605
|
|
|
|
1,026
|
|
|
|
256
|
|
Advertising and business development
|
|
|
79
|
|
|
|
88
|
|
|
|
157
|
|
Insurance
|
|
|
705
|
|
|
|
500
|
|
|
|
145
|
|
Telephone
|
|
|
87
|
|
|
|
101
|
|
|
|
104
|
|
Stationary and supplies
|
|
|
26
|
|
|
|
32
|
|
|
|
45
|
|
Director fees
|
|
|
34
|
|
|
|
44
|
|
|
|
23
|
|
Loss on disposition of equipment s
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
Other real estate owned
|
|
|
654
|
|
|
|
0
|
|
|
|
0
|
|
Provision for unfunded commitments
|
|
|
(471
|
)
|
|
|
498
|
|
|
|
140
|
|
Other
|
|
|
510
|
|
|
|
425
|
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
$
|
8,368
|
|
|
$
|
8,593
|
|
|
$
|
8,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the period January 1, 2010 through October 28,
2010. |
Comparison
of 2010 with 2009
Non-interest expense was $8.4 million for the period ended
October 28, 2010, or on an annualized basis would have
totaled $10.0 million compared with $8.6 million for
2009. Salaries and employee benefits total $3.5 million, or
on an annualized basis would have totaled $4.2 million
compared with $3.9 million for 2009. The $300,000 increase
in salaries and employee benefits expense is the result of
$310,000 in stock option expense being recorded in 2010 upon the
retirement of an executive officer. The officers stock
options vested immediately upon his retirement. Professional
fees increased $600,000, from $1.0 million in 2009 to
$1.6 million for the period ended October 28, 2010.
The $600,000 increase is largely due to additional legal, audit
and consulting fees incurred by
Service1st in
connection with the Acquisition. For the period ended
October 28, 2010,
Service1st recorded
$654,000 in other real estate owned (OREO) expense since the
inception of the bank. In addition, FDIC insurance premiums
increased $205,000, primarily due to growth in deposits for the
first eight months of the year. The decrease in provision for
unfunded commitments was primarily a result of a decrease to the
reserve amount for unfunded lines of credit. These lines of
credit are commitments that
Service1st has
underwritten for its borrowers, but have yet to be funded by the
bank.
Comparison
of 2009 with 2008
Non-interest expense was primarily flat, year over year:
$8.6 million for 2009, compared with $8.3 for 2008.
Salaries and employee benefits decreased $1.2 million in
2009 from $5.0 million in 2008 to $3.9 million in
2009. The $1.2 million decrease was due to staff
reductions, as well as a reduction in salaries and benefits for
the remaining employees. These cost-savings were partially
offset by a $770,000 increase in professional fees during the
same period, of which $741,000 was due to additional legal,
audit and consulting fees incurred by
Service1st in
connection with the Acquisition. In addition, FDIC insurance
premiums increased $355,000, primarily due to growth in deposits
of $75.4 million. The increase in other expense was
primarily a result of an additional $498,000 to the reserve
amount for unfunded lines of credit. These lines of credit are
commitments that
Service1st has
underwritten for its borrowers, but have yet to be funded by the
bank.
101
Income
Taxes
Due to
Service1st incurring
operating losses from inception, no provision for income taxes
has been recorded since the inception of
Service1st.
Financial
Condition
Assets
Total assets stood at $180.0 million for the period ended
October 28, 2010, a decrease of $31.8 million, or
15.01% from $211.8 million as of December 31, 2009.
The shrinkage in total assets was principally attributable to a
net decrease of $11.9 million in cash and cash equivalents
(consisting of cash and due from banks, federal funds sold and
certificates of deposits with original maturities of three
months or less) and certificate of deposits held at other banks.
In addition, gross loans, including net deferred loan fees
decreased $11.6 million while investment securities
decreased $7.2 million. Cash and cash equivalents at
October 28, 2010 were $15.1 million, down from
$49.6 million at December 31. 2009. Certificates of
deposits at October 28, 2010 were $31.9 million, up
from $9.3 million at December 31. 2009. Gross loans at
October 28, 2010 were $125.4 million compared to
$137.0 million at December 31, 2009. Investment
securities at October 28, 2010 were $10.4 million
compared to $17.6 million at December 31, 2009.
Cash
and Cash Equivalents
Cash and cash equivalents consist of cash and due from banks,
federal funds sold and certificates of deposits with original
maturities of three months or less. Cash and cash equivalents
totalled $15.1 million at October 28, 2010,
$49.6 million at December 31, 2009 and
$10.0 million at December 31, 2008. Cash and cash
equivalents are managed based upon liquidity needs. The decrease
reflected
Service1sts
efforts to shrink its liquidity in due to the reductions in loan
portfolio balances and growth. See Liquidity and
Asset/Liability Management in this section below for
more information.
Investment
Securities and Certificates of Deposits held at other
Banks
Service1st invests
in investment grade securities and certificates of deposits at
other banks with original maturities exceeding three months for
the following reasons: (i) such investments can be readily
reduced in size to provide liquidity for loan balance increases
or deposit balance decreases; (ii) they provide a source of
assets to pledge to secure lines of credit (and, potentially,
deposits from governmental entities), as may be required by law
or by specific agreement with a depositor or lender;
(iii) they can be used as an interest rate risk management
tool, since they provide a large base of assets, the maturity
and interest rate characteristics of which can be changed more
readily than the loan portfolio to better match changes in the
deposit base and other funding sources of
Service1st;
and (iv) they represent an alternative interest-earning use
of funds when loan demand is weak or when deposits grow more
rapidly than loans. Further, if and when
Service1st
becomes profitable, tax free investment securities can be a
source of partially tax-exempt income.
Service1st uses
two portfolio classifications for its investment securities:
Held to Maturity, and Available for
Sale. The Held to Maturity portfolio consists only of
securities that
Service1st has
both the intent and ability to hold until maturity, to be sold
only in the event of concerns with an issuers credit
worthiness, a change in tax law that eliminates their tax exempt
status, or other infrequent situations as permitted by generally
accepted accounting principles. Accounting guidance requires
Available for Sale securities to be marked to estimated fair
value with an offset, net of taxes, to accumulated other
comprehensive income, a component of stockholders equity.
Service1sts
investment portfolio is currently composed primarily of:
(i) U.S. Government Agency securities;
(ii) investment grade corporate debt securities; and
(iii) collateralized mortgage obligations. For the period
ended October 28, 2010, investment securities and
certificates of deposit totaled $42.4 million, an increase
of 57.62% or $15.5 million, compared with
$26.9 million at December 31, 2009.
Service1st has
not used interest rate swaps or other derivative instruments to
hedge fixed rate loans or to otherwise mitigate interest rate
risk.
102
The tables below summarize
Service1sts
investment portfolio for the period ended October 28, 2010
and year ended December 31, 2009. Securities are identified
as
available-for-sale
or held to maturity. Unrealized gains or losses on
available-for-sale
securities are recorded as accumulated other comprehensive
income in stockholders equity.
Held-to-maturity
securities are carried at cost, adjusted for amortization of
premiums or accretion of discounts. Amortization of premiums or
accretion of discounts on mortgage-backed securities is
periodically adjusted for estimated prepayments. Securities
measured at fair value are reported at fair value, with
unrealized gains and losses included in current earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended October 28, 2010
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Investments Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
1,002
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,002
|
|
Collateralized Mortgage Obligations-commercial
|
|
|
1,868
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
1,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,870
|
|
|
$
|
|
|
|
$
|
(20
|
)
|
|
$
|
2,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended October 28, 2010
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Investments-Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
6,924
|
|
|
$
|
256
|
|
|
$
|
|
|
|
$
|
7,180
|
|
SBA Loan Pools
|
|
|
658
|
|
|
|
4
|
|
|
|
|
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,582
|
|
|
$
|
260
|
|
|
$
|
|
|
|
$
|
7,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Investments Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
5,248
|
|
|
$
|
|
|
|
$
|
(19
|
)
|
|
$
|
5,229
|
|
Collateralized Mortgage Obligations-commercial
|
|
|
2,209
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,457
|
|
|
$
|
|
|
|
$
|
(23
|
)
|
|
$
|
7,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Investments-Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
997
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
1,000
|
|
Corporate debt securities
|
|
|
8,390
|
|
|
|
477
|
|
|
|
|
|
|
|
8,867
|
|
SBA Loan Pools
|
|
|
814
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,201
|
|
|
$
|
480
|
|
|
$
|
(5
|
)
|
|
$
|
10,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
The table below summarizes the maturity dates and investment
yields on
Service1sts
investment portfolio for the period ended October 28, 2010
and December 31, 2009 for securities identified as
available for sale or held to maturity.
For the period ended October 28, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due Under 1 Year Amount/Yield
|
|
|
Due 1-5 Years Amount/Yield
|
|
|
Due 5-10 Years Amount/Yield
|
|
|
Due Over 10 Years Amount/Yield
|
|
|
Total Amount/Yield
|
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
1,002
|
|
|
|
1.50
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
1,002
|
|
|
|
1.50
|
%
|
Corporate Debt Securities
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Collateralized Mortgage Obligations-commercial
|
|
|
978
|
|
|
|
6.28
|
%
|
|
|
870
|
|
|
|
5.82
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
1,848
|
|
|
|
6.06
|
%
|
Small Business Administration Loan Pools
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
978
|
|
|
|
6.28
|
%
|
|
$
|
1,872
|
|
|
|
3.51
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
2,850
|
|
|
|
4.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
Corporate Debt Securities
|
|
|
4,027
|
|
|
|
5.36
|
%
|
|
|
3,153
|
|
|
|
5.19
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
7,180
|
|
|
|
5.29
|
%
|
Collateralized Mortgage Obligations-commercial
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Small Business Administration Loan Pools
|
|
|
7
|
|
|
|
3.12
|
%
|
|
|
15
|
|
|
|
5.13
|
%
|
|
|
100
|
|
|
|
2.91
|
%
|
|
|
540
|
|
|
|
3.27
|
%
|
|
|
662
|
|
|
|
3.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
4,034
|
|
|
|
5.36
|
%
|
|
$
|
3,168
|
|
|
|
5.19
|
%
|
|
$
|
100
|
|
|
|
2.91
|
%
|
|
$
|
540
|
|
|
|
3.27
|
%
|
|
$
|
7,842
|
|
|
|
5.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Due Under 1 Year Amount/Yield
|
|
|
Due 1-5 Years Amount/Yield
|
|
|
Due 5-10 Years Amount/Yield
|
|
|
Due Over 10 Years Amount/Yield
|
|
|
Amount/Yield
|
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
5,229
|
|
|
|
1.48
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
5,229
|
|
|
|
1.48
|
%
|
Corporate Debt Securities
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Collateralized Mortgage Obligations-commercial
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
2,204
|
|
|
|
2.65
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
2,204
|
|
|
|
2.65
|
%
|
Small Business Administration Loan Pools
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
7,433
|
|
|
|
1.83
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
7,433
|
|
|
|
1.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
997
|
|
|
|
1.55
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
997
|
|
|
|
1.55
|
%
|
Corporate Debt Securities
|
|
|
4,011
|
|
|
|
3.74
|
%
|
|
|
4,379
|
|
|
|
7.11
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
8,390
|
|
|
|
5.50
|
%
|
Collateralized Mortgage Obligations-commercial
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Small Business Administration Loan Pools
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
38
|
|
|
|
3.41
|
%
|
|
|
136
|
|
|
|
2.94
|
%
|
|
|
641
|
|
|
|
2.72
|
%
|
|
|
814
|
|
|
|
2.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
4,011
|
|
|
|
3.74
|
%
|
|
$
|
5,414
|
|
|
|
6.06
|
%
|
|
$
|
136
|
|
|
|
2.94
|
%
|
|
$
|
641
|
|
|
|
2.72
|
%
|
|
$
|
10,201
|
|
|
|
4.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
As of October 28, 2010, substantially all of
Service1sts
loan customers were located in Nevada.
104
The following table summarizes the composition of
Service1sts
loan portfolio by type and percentage of the loan portfolio for
the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended October 28, 2010
|
|
|
|
and Years Ended December 31, 2009 and 2008
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
9,225
|
|
|
|
7.35
|
%
|
|
$
|
20,279
|
|
|
|
14.80
|
%
|
|
$
|
38,608
|
|
|
|
28.12
|
%
|
Commercial real estate
|
|
|
62,963
|
|
|
|
50.22
|
%
|
|
|
68,523
|
|
|
|
50.02
|
%
|
|
|
41,114
|
|
|
|
29.95
|
%
|
Residential (1 to 4 family)
|
|
|
10,282
|
|
|
|
8.20
|
%
|
|
|
1,367
|
|
|
|
1.00
|
%
|
|
|
483
|
|
|
|
0.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-secured loans
|
|
|
82,470
|
|
|
|
65.77
|
%
|
|
|
90,169
|
|
|
|
65.83
|
%
|
|
|
80,205
|
|
|
|
58.42
|
%
|
Loans not secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
42,778
|
|
|
|
34.12
|
%
|
|
|
46,470
|
|
|
|
33.92
|
%
|
|
|
56,556
|
|
|
|
41.20
|
%
|
Consumer
|
|
|
136
|
|
|
|
0.11
|
%
|
|
|
342
|
|
|
|
0.25
|
%
|
|
|
522
|
|
|
|
0.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Gross
|
|
|
125,384
|
|
|
|
100.00
|
%
|
|
|
136,981
|
|
|
|
100.00
|
%
|
|
|
137,283
|
|
|
|
100.00
|
%
|
Net deferred loan fees
|
|
|
20
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan, Gross, net of deferred fees
|
|
|
125,404
|
|
|
|
|
|
|
|
136,966
|
|
|
|
|
|
|
|
137,216
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(9,418
|
)
|
|
|
|
|
|
|
(6,404
|
)
|
|
|
|
|
|
|
(2,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Net
|
|
$
|
115,986
|
|
|
|
|
|
|
$
|
130,562
|
|
|
|
|
|
|
$
|
134,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross loans decreased by $11.6 million to
$125.4 million for the period ended October 28, 2010,
from $137.0 million as of December 31, 2009, as a
result of $8.1 million in new loans and $56.9 million
in principal advances being offset by $4.2 million in loan
payoffs and $65.2 million in principal reductions,
$3.9 million in charged off loans, $2.4 million in
loans being reclassified to other real estate owned (OREO), and
deferred fees of $20,000. Gross loans, net of deferred fees and
the allowance for loan losses, decreased $14.6 million from
year end 2009 to the period ended October 28, 2010, as a
result of a $3.0 million increase in the allowance for loan
losses.
Construction, land development and other land loans decreased
$11.1 million from 14.80% to 7.35% of the loan portfolio,
which reflects $2.9 million in paydowns/payoffs,
$1.2 million of loan charge-offs, a $7.4 million
reclassification of loan balances to residential real estate as
the construction related to this property was complete, plus
$350,000 in commercial and industrial loans were reclassified to
construction, land development and other land loans due to
Service1st taking
land as collateral. Commercial real estate loan balances
decreased $5.6 million, but increased in percentage of
total loans, from 50.02% to 50.22% and reflects
$1.7 million in new loans, $3.8 million in loan
paydowns/payoffs and $922,000 in loan charge offs and
$2.4 million in loan balances being classified to other
real estate owned. Commercial and industrial loans also
decreased over the same period, by $3.7 million, from
33.92% to 34.12% of the loan portfolio by reason of the
depressed business climate, reduced loan demand plus
$1.7 million of loan charge-offs and another $625,000 in
loan balances being classified to other real estate owned. Over
the same period, residential real estate loans increased by
$8.9 million, from 1.00% to 8.20% of the portfolio, during
second quarter 2010,
Service1st accepted
a residential property as collateral on a $3.0 million
loan. Since this $3.0 million loan was classified as
commercial and industrial during the first quarter 2010, it was
reclassified from commercial and industrial to residential real
estate in the second quarter 2010, which caused the residential
real estate balance to increase. In addition, a term loan with a
draw down period was also collateralized by multiple residential
real estate properties and as a result, the borrower advanced
additional funds of $1.5 million, which resulted in
residential real estate increasing an additional
$1.5 million. In addition, two loans totaling
$4.6 million were reclassified out of the category of
construction, land development and other land loans into
residential real estate loans during third quarter 2010 as the
construction for each residential property was completed.
105
The table below reflects the maturity distribution for
Service1sts
loans, by category of loans, and the amount of fixed versus
variable rate interest loans, for the period ended
October 28, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended October 28, 2010
|
|
|
|
Due Within
|
|
|
|
|
|
Due Over
|
|
|
|
|
|
|
One Year
|
|
|
Due 1-5 Years
|
|
|
Five Years
|
|
|
Total
|
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
6,429
|
|
|
$
|
2,796
|
|
|
$
|
|
|
|
$
|
9,225
|
|
Commercial real estate
|
|
|
350
|
|
|
|
24,852
|
|
|
|
37,761
|
|
|
|
62,963
|
|
Residential real estate (1 to 4 family)
|
|
|
7,708
|
|
|
|
2,409
|
|
|
|
165
|
|
|
|
10,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured loans
|
|
$
|
14,487
|
|
|
$
|
30,056
|
|
|
$
|
37,926
|
|
|
$
|
82,470
|
|
Loans not secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
20,405
|
|
|
|
13,920
|
|
|
|
8,453
|
|
|
|
42,778
|
|
Consumer
|
|
|
80
|
|
|
|
56
|
|
|
|
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Gross
|
|
$
|
34,973
|
|
|
$
|
44,033
|
|
|
$
|
46,378
|
|
|
$
|
125,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
$
|
8,691
|
|
|
$
|
35,190
|
|
|
$
|
8,568
|
|
|
$
|
52,449
|
|
Variable
|
|
|
26,281
|
|
|
|
8,842
|
|
|
|
37,811
|
|
|
|
72,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
$
|
34,973
|
|
|
$
|
44,033
|
|
|
$
|
46,378
|
|
|
$
|
125,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrations
Service1sts
loan portfolio has a concentration of loans secured by real
estate. For the period ended October 28, 2010 and
December 31, 2009, loans secured by real estate comprised
65.77% and 65.82% of total gross loans, respectively.
Substantially all of these loans are secured by first liens.
Approximately 38.09% and 27.56% of these real estate-secured
loans are owner occupied for the period ended October 28,
2010 and December 31, 2009, respectively. A loan is
considered owner occupied if the borrower occupies at least
fifty one percent of the collateral securing such loan.
Service1sts
policy is to obtain collateral whenever it is available,
depending upon the degree of risk
Service1st is
willing to accept. Repayment of loans is expected from the
borrowers cash flows or the sale proceeds of the
collateral. Deterioration in the performance of the economy and
real estate values in
Service1sts
primary market areas has had, and is expected to continue to
have, an adverse impact on collectability of outstanding loans.
Interest
Reserves
Interest reserves are generally established at the time of the
loan origination as an expense item in the budget for a
construction and land development loan.
Service1sts
practice is to monitor the construction, sales
and/or
leasing progress to determine the feasibility of ongoing
construction and development projects. If at any time during the
life of the loan the project is determined not to be viable,
Service1st generally
has the ability to discontinue the use of the interest reserve
and take appropriate action to protect its collateral position
via negotiation
and/or legal
action as deemed appropriate. For the period ended
October 28, 2010,
Service1st had
no loans with an interest reserve. At December 31, 2009,
Service1st had
five loans with an outstanding balance of $8.8 million
where available interest reserves amount to $532,000.
Nonperforming
Assets
Nonperforming assets consists of:
(i) nonaccrual loans. In general, loans
are placed on nonaccrual status when
Service1st determines
timely recognition of interest to be in doubt due to the
borrowers financial condition and collection
106
efforts.
Service1st generally
discontinues accrual of interest when a loan is 90 days
delinquent unless the loan is well secured and in the process of
collection;
(ii) loans past due 90 days or more and still
accruing interest. Loans past due 90 days or more and
still accruing interest consist primarily of loans 90 days
or more past their maturity date but not their interest due date.
(iii) restructured loans. Restructured loans have
modified terms to reduce either principal or interest due to
deterioration in the borrowers financial
condition; and
(iv) other real estate owned, or OREO. If a bank
takes title to the borrowers real property that serves as
collateral for a defaulted loan, such property is referred to as
other real estate owned (OREO). As of
December 31, 2009,
Service1st had
no OREO.
The following table sets forth nonperforming assets at the dates
indicated by category of asset.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended October 28, 2010
|
|
|
|
and Years Ended December 31, 2009 and 2008
|
|
($s in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
5,977
|
|
|
$
|
6,524
|
|
|
$
|
3,434
|
|
Commercial real estate
|
|
|
8,611
|
|
|
|
0
|
|
|
|
0
|
|
Residential real estate (1-4 family)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
14,588
|
|
|
|
6,524
|
|
|
|
3,434
|
|
Commercial and industrial
|
|
|
5,739
|
|
|
|
1,275
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
|
20,327
|
|
|
|
7,799
|
|
|
|
3,434
|
|
Past due (>90days) loans and accruing interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial real estate
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential real estate (1-4 family)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total past due loans accruing interest
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Restructured loans (still on accrual)(1)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
20,327
|
|
|
|
7,799
|
|
|
$
|
3,434
|
|
Other real estate owned (OREO)
|
|
|
2,403
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
22,730
|
|
|
$
|
7,799
|
|
|
$
|
3,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Loans as a percentage of total portfolio loans
|
|
|
16.21
|
%
|
|
|
5.69
|
%
|
|
|
2.50
|
%
|
Non-Performing Loans as a percentage of total assets
|
|
|
11.30
|
%
|
|
|
3.68
|
%
|
|
|
2.15
|
%
|
Non-Performing assets as a percentage of total assets
|
|
|
12.63
|
%
|
|
|
3.68
|
%
|
|
|
2.15
|
%
|
Allowance for loan losses as a percentage of nonperforming loans
|
|
|
46.34
|
%
|
|
|
82.11
|
%
|
|
|
83.95
|
%
|
|
|
|
(1) |
|
For the period ended October 28, 2010 and years ended
December 31, 2009 and 2008,
Service1st
had approximately $11.0 million, $526,000, and
$3.4 million, respectively, in loans classified as
restructured loans. All of such loans were on nonaccrual. |
107
For the period ended October 28, 2010, nonperforming loans
totaled $20.3 million, or 16.21%, of total portfolio loans,
an increase of $12.5 million, or 160.26%, from
December 31, 2009. Total nonperforming assets for the
period ended October 28, 2010 were $22.7 million
compared to $7.8 million as of December 31, 2009, a
growth of $14.9 million or 191.26%. Nonperforming loans
increased $12.5 million while nonperforming assets
increased $14.9 million due to continued adverse economic
conditions in the Nevada market. During 2009, nonperforming
assets totaled $3.4 million at March 31, 2009,
$8.7 million for the period ended October 28, 2009 and
$17.9 million for the period ended October 28, 2009.
In the fourth quarter of 2009,
Service1st charged
off $10.3 million in loans, including many nonperforming
loans, such that at December 31, 2009, the total of
nonperforming assets fell to $7.8 million.
The largest category of nonperforming assets is commercial real
estate loans and represents one of the loan categories in which
Service1st has
been most severely impacted by adverse economic conditions in
Nevada. The other category in which
Service1st has
been significantly impacted by adverse economic conditions is
construction, land development and other land loans. With many
real estate projects requiring an extended time to market, many
of
Service1sts
borrowers have exhausted their liquidity and stopped making
payments, thereby requiring
Service1st to
place the loans on nonaccrual. As a result,
Service1sts
portfolio of nonperforming commercial real estate loans, which
had a zero balance at December 31, 2009, increased to
$8.6 million for the period ended October 28, 2010.
This $8.6 million balance is derived by adding
$8.6 million in commercial real estate nonaccrual loans to
commercial real estate loans which are greater than 90 days
past due. For the period ended October 28, 2010,
nonperforming construction, land development and other land
loans totaled $6.0 million, an 7.69% reduction from the
$6.5 million balance at December 31, 2009, primarily
as a result of loan payoffs and paydowns of approximately
$134,000 and loan charge-offs of $1.6 million of
nonperforming loans during the first ten months of 2010, coupled
with additions of $1.4 million in nonperforming
construction, land development and other land loans which were
added during the first ten months of 2010. Given the current
economic conditions in Nevada,
Service1st has
effectively stopped making commercial real estate loans and
construction, land development and other land loans (except for
contractually required disbursements under existing facilities)
unless borrowers can provide strong financial support outside
the project under development.
The other loan category with nonperforming assets is commercial
and industrial loans which increased $4.4 million from
$1.3 million at December 31, 2009 to $5.7 million
for the period ended October 28, 2010.
Service1st had
a net $5.7 million in commercial and industrial loans
placed on non-accrual status during the first ten months of 2010
as a result of adverse economic conditions. In addition,
charge-offs totaled $1.7 million, of which
$1.4 million nonperforming commercial and industrial loans
in the first ten months of 2010.
Potential
Problem Loans
Service1st classifies
its loans consistent with federal banking regulations using a
ten category grading system. The following table presents
information regarding potential problem loans, which are graded
but still performing as of the dates indicated. These graded
loans are referred to in applicable banking regulations as
108
Other Loans Especially Mentioned,
Substandard, Doubtful, and
Loss. These loan grades are described in further
detail in the section entitled Information Related to
Service1st Potential Problem Loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended October 28, 2010
|
|
|
At December 31, 2009
|
|
|
|
# of
|
|
|
Loan
|
|
|
|
|
|
Percent of
|
|
|
# of
|
|
|
Loan
|
|
|
|
|
|
Percent of
|
|
|
|
Loans
|
|
|
Balance
|
|
|
%
|
|
|
Total Loans
|
|
|
Loans
|
|
|
Balance
|
|
|
%
|
|
|
Total Loans
|
|
|
Construction, land development and other land loans
|
|
|
1
|
|
|
$
|
856
|
|
|
|
5.75
|
%
|
|
|
0.68
|
%
|
|
|
4
|
|
|
$
|
8,578
|
|
|
|
23.71
|
%
|
|
|
6.26
|
%
|
Commercial real estate
|
|
|
4
|
|
|
|
4,319
|
|
|
|
28.97
|
%
|
|
|
3.44
|
%
|
|
|
6
|
|
|
|
12,320
|
|
|
|
34.06
|
%
|
|
|
9.00
|
%
|
Residential real estate (1-4 family)
|
|
|
1
|
|
|
|
2,909
|
|
|
|
19.51
|
%
|
|
|
2.32
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Commercial and industrial
|
|
|
16
|
|
|
|
6,824
|
|
|
|
45.77
|
%
|
|
|
5.44
|
%
|
|
|
22
|
|
|
|
14,790
|
|
|
|
40.89
|
%
|
|
|
10.80
|
%
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
3
|
|
|
|
483
|
|
|
|
1.34
|
%
|
|
|
0.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
22
|
|
|
$
|
14,908
|
|
|
|
100
|
%
|
|
|
11.88
|
%
|
|
|
35
|
|
|
$
|
36,171
|
|
|
|
100
|
%
|
|
|
26.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service1sts
potential problem loans consisted of 22 loans and totaled
approximately $14.9 million for the period ended
October 28, 2010 and consisted of 35 loans which totaled
$36.2 million at December 31, 2009. This
$21.3 million decrease is due primarily to
$10.9 million in loan payoffs and paydowns,
$7.9 million being moved to a non-accrual status,
$1.9 million moved to OREO, $3.4 million in loans
being charged off, $2.8 million being moved to an impaired
loan status, $377,000 being removed from the problem loan status
due to the loans being upgraded slightly offset by
$3.8 million in additional loans being classified as
potential problem loan in 2010 and $416,000 of advances on
potential problem loans. The problem loans presented above are
the result of a difficult economic environment in the markets
Service1st operates.
Commercial and industrial loans comprise approximately 45.77% of
the total aggregate balance of potential problem loans for the
period ended October 28, 2010 compared to approximately
40.89% at December 31, 2009. Commercial real estate
comprises approximately 28.97% of the total aggregate balance of
potential problem loans for the period ended October 28,
2010 compared to approximately 34.06% at December 31, 2009.
Construction, land development and other land loans comprise
approximately 5.75% of the total balance of potential problem
loans for the period ended October 28, 2010, compared to
23.71% at December 31, 2009. Residential real estate loans
comprise approximately 19.51% of the total balance of potential
problem loans for the period ended October 28, 2010,
compared to 0% at December 31, 2009. All problem loan
categories, with the exception of residential real estate,
experienced a decrease in balances since December 31, 2009.
Service1sts
potential problem loans consisted of 35 loans and totaled
approximately $36.2 million at December 31, 2009 and
consisted of 9 loans and totaled $19.5 million at
December 31, 2008. This increase is due primarily to an
increased deterioration in the commercial real estate and
commercial and industrial loan portfolios of $12.0 million
and $7.6 million, respectively. These increases in problem
loans are the result of a difficult economic environment in the
markets
Service1st operates.
Construction and land loans comprise approximately 23.71% of the
total aggregate balance of potential problem loans at
December 31, 2009 compared to approximately 61.12% at
December 31, 2008. This decrease is the result of
$7.8 million of charge-offs taken in 2009 for construction,
land development and other land loans. The majority of
Service1sts
potential problem loans are secured by real estate.
Impaired
Loans
A loan is impaired when it is probable that
Service1st will
be unable to collect all contractual principal and interest
payments due in accordance with the terms of the loan agreement.
Impaired loans are measured based on the present value of
expected future cash flows discounted at the loans
effective interest rate or, as a practical expedient, at the
loans observable market price or the fair value of the
collateral if the loan is collateral dependent. The amount of
impairment, if any, and any subsequent changes are either
included in the allowance for loan losses or charged off
Service1sts
books, if deemed necessary.
The categories of nonaccrual loans and impaired loans overlap,
although they are not coextensive.
Service1st considers
all circumstances regarding the loan and borrower on an
individual basis when
109
determining whether a loan is impaired such as the collateral
value, reasons for the delay, payment record, the amount past
due, and number of days past due.
For the period ended October 28, 2010 and December 31,
2009, the aggregate total amount of loans classified as
impaired, was $26.9 million and $9.4 million,
respectively. The total specific allowance for loan losses
related to these loans was $5.4 million for the period
ended October 28, 2010 and $841,000 at December 31,
2009. The increase in total impaired loans reflects the overall
decline in economic conditions in Nevada.
For the period ended October 28, 2010 and December 31,
2009,
Service1st had
approximately $11.0 million and $526,000, respectively, in
loans classified as restructured loans. All such loans were on
nonaccrual. The $526,000 restructured loan is present in both
the October 28, 2010 and December 31, 2009 balances
and originally consisted of two construction and land
development loans on adjacent properties, which were originated
in 2007 to a single borrower. These loans exhibited signs of
distress in 2008 and were restructured in 2008, resulting in an
outstanding balance of $3.4 million as of December 31,
2008. Updated appraisals were ordered for these two properties
in 2009; however, both appraisals reflected continued
deterioration in value. As a result,
Service1st charged
off $2.9 million of the outstanding balance, which resulted
in a remaining outstanding balance of $526,000 as of
December 31, 2009 and for the period ended October 28,
2010. This loan is secured by 30 improved lots.
A $550,000 unsecured line of credit to an individual for
business investment purposes and classified as a commercial and
industrial loan was restructured in May 2010. After reviewing
the December 2009 personal and business financial
statements, it was determined that the borrower was unable to
meet the terms of the credit agreement. A restructured loan was
approved and put in place which included a reduced monthly
payment. The borrower has been cooperative and is making
payments as agreed. For the period ended October 28, 2010,
the balance on the unsecured line of credit was $479,000.
A $3.3 million construction and land development loan,
which was secured by 13.38 acres of vacant land, was
restructured in May 2010. The borrower had delayed development
of a planned industrial project due to the depressed economic
environment. The borrower tried to sell the property without
success for the past two years and had been paying monthly
interest out of pocket. At the end of 2009, the borrower became
delinquent on monthly interest payments and sought relief. Prior
to restructuring the loan, the bank had already recognized a
charge-off of $891,000 once the loan had become impaired.
Service1st agreed
to a restructured loan provided the borrower brought all past
due payments current at time of restructure. For the period
ended October 28, 2010, the outstanding balance on this
restructured loan was $2.4 million and was past due for the
June, 2010 payment. As a result, notice of default was filed in
October 2010.
A $4.0 million land loan which is secured by
12.0 acres of vacant land was restructured in March 2010.
The borrower was an investment limited liability company
(LLC) supported by a guarantor. The guarantor indicated
that the LLC was unable to sell the property or continue to
service the debt. This same guarantor was a principal in a
related transaction in which the bank collected just over
$1.0 million dollars and charged off the remaining $2.0
million. In exchange for partial repayment of the related
transaction, the bank agreed to a restructure of this
$4.0 million loan, of which $2.0 million was charged
off. For the period ended October 28, 2010, the outstanding
balance on this restructured loan was $1.9 million and the
borrower is paying as agreed.
Four related loans to the same borrower were restructured in
June 2010. The loans consist of two commercial and industrial
loans totaling $650,000 that were related to the borrowers
medical practice and two real estate-secured loans totaling
$5.4 million, consisting of a $3.2 million loan on the
property in which the borrowers medical office is located
and a $2.2 million loan for the purchase of a medical
office building for lease. The borrower had already defaulted on
several single family residential properties, demonstrating to
the bank his financial weakness and inability to service all of
his obligations. Given the borrowers financial
deterioration, the bank agreed to a reduction in monthly
payments of the combined credits. For the period ended
October 28, 2010, the outstanding balance was
$5.7 million.
110
The breakdown of total impaired loans and the related specific
reserves for the period ended October 28, 2010 and
December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Period Ended October 28, 2010
|
|
|
|
Impaired
|
|
|
|
|
|
Percent of
|
|
|
Reserve
|
|
|
|
|
|
Percent of
|
|
($ in thousands)
|
|
Balance
|
|
|
%
|
|
|
Total Loans
|
|
|
Balance
|
|
|
%
|
|
|
Total Allowance
|
|
|
Construction, land development and other land loans
|
|
$
|
6,834
|
|
|
|
25.40
|
%
|
|
|
5.45
|
%
|
|
$
|
149
|
|
|
|
2.74
|
%
|
|
|
1.58
|
%
|
Commercial real estate
|
|
|
9,325
|
|
|
|
34.67
|
%
|
|
|
7.44
|
%
|
|
|
1,395
|
|
|
|
25.66
|
%
|
|
|
14.81
|
%
|
Residential real estate (1-4 family)
|
|
|
2,909
|
|
|
|
10.81
|
%
|
|
|
2.32
|
%
|
|
|
145
|
|
|
|
2.67
|
%
|
|
|
1.54
|
%
|
Commercial and industrial
|
|
|
7,833
|
|
|
|
29.12
|
%
|
|
|
6.25
|
%
|
|
|
3,748
|
|
|
|
68.93
|
%
|
|
|
39.80
|
%
|
Consumer
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
26,901
|
|
|
|
100.00
|
%
|
|
|
21.46
|
%
|
|
$
|
5,437
|
|
|
|
100.00
|
%
|
|
|
57.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009
|
|
|
|
Impaired
|
|
|
|
|
|
Percent of
|
|
|
Reserve
|
|
|
|
|
|
Percent of
|
|
($ in thousands)
|
|
Balance
|
|
|
%
|
|
|
Total Loans
|
|
|
Balance
|
|
|
%
|
|
|
Total Allowance
|
|
|
Construction, land development and other land loans
|
|
$
|
8,081
|
|
|
|
86.37
|
%
|
|
|
5.91
|
%
|
|
$
|
453
|
|
|
|
53.91
|
%
|
|
|
7.08
|
%
|
Commercial real estate
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Residential real estate (1-4 family)
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Commercial and industrial
|
|
|
1,275
|
|
|
|
13.63
|
%
|
|
|
0.93
|
%
|
|
|
388
|
|
|
|
46.09
|
%
|
|
|
6.05
|
%
|
Consumer
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
9,356
|
|
|
|
100.00
|
%
|
|
|
6.84
|
%
|
|
$
|
841
|
|
|
|
100.00
|
%
|
|
|
13.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of interest income recognized on impaired loans for
the period ended October 28, 2010 is approximately $147,000
and $103,000 for the year ended December 31, 2009. No
interest income was recognized on impaired loans for the year
ended December 31, 2008.
111
Allowance
for Loan Losses
The following table presents the activity in
Service1sts
allowance for loan losses for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended October 28, 2010
|
|
Analysis of Loss Experience by Loan Type
|
|
and Years Ended December 31, 2009, 2008
|
|
($s in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Allowance for Loan and Lease Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the period
|
|
$
|
6,404
|
|
|
$
|
2,883
|
|
|
$
|
922
|
|
Provisions charged to operating expenses
|
|
|
6,329
|
|
|
|
15,666
|
|
|
|
3,670
|
|
Recoveries of loans previously charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
|
293
|
|
|
|
0
|
|
|
|
0
|
|
Commercial real estate
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential real estate (1-4 family)
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
321
|
|
|
|
9
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
615
|
|
|
|
9
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other
|
|
|
1,151
|
|
|
|
7,745
|
|
|
|
1,712
|
|
Commercial
|
|
|
922
|
|
|
|
0
|
|
|
|
0
|
|
Residential (including multi-family)
|
|
|
202
|
|
|
|
0
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
1,655
|
|
|
|
4,409
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total charged-off
|
|
|
3,930
|
|
|
|
12,154
|
|
|
|
1,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
3,315
|
|
|
|
12,145
|
|
|
|
1,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
9,418
|
|
|
$
|
6,404
|
|
|
$
|
2,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Charge-offs to average loans outstanding
|
|
|
2.54
|
%
|
|
|
8.43
|
%
|
|
|
1.44
|
%
|
Allowance for Loan Loss to outstanding loans
|
|
|
7.51
|
%
|
|
|
4.68
|
%
|
|
|
2.10
|
%
|
The accounting principles used by
Service1st in
maintaining the allowance for loan losses are discussed in the
section entitled Critical Accounting
Policies Allowance for Loan Losses. The
allowance is maintained at a level management believes to be
adequate to absorb estimated future credit losses inherent in
Service1sts
loan portfolio, based on evaluation of the collectability of the
loans, prior credit loss experience, credit loss experience of
other banks and other factors deemed relevant.
The allowance for loan losses is established through a provision
for loan losses charged to operations and is increased by the
collection of monies on loans previously charged off
(recoveries) and reduced by loans that are charged off.
Service1sts
board of directors reviews the adequacy of the allowance for
loan losses on a monthly basis. For the period ended
October 28, 2010,
Service1st had
established an allowance of $9.4 million, after increasing
the allowance by $6.3 million in provisions, recording an
additional $615,000 in recoveries, and recording charge-offs of
$3.9 million. The allowance for loan loss to outstanding
loans has increased from 4.68% of outstanding loans at
December 31, 2009 to 7.51% for the period ended
October 28, 2010, reflecting the increase in nonperforming
loans and further deterioration in economic conditions.
Service1sts
methodology for the allowance for loan losses incorporates
several quantitative and qualitative risk factors used to
establish the appropriate allowance for loan loss at each
reporting date. Quantitative factors include delinquency and
charge-off trends, collateral values, the composition, volume
and overall quality of the loan portfolio (including outstanding
loan commitments), changes in nonperforming loans,
concentrations and information about individual loans.
Historical loss experience is an important quantitative factor
for many banks, but thus far less so for
Service1st,
because it has been in operation for just over four years.
Qualitative
112
factors include the economic condition of
Service1sts
operating markets. Specific changes in the risk factors are
based on perceived risk of similar groups of loans classified by
collateral type and purpose. Statistics on local trends and
peers are also incorporated into the allowance. While
Service1st management
uses the best information available to make its evaluation,
future adjustments to the allowance may be necessary, if there
are significant changes in economic or other conditions. In
addition, the FDIC and the Nevada FID, as an integral part of
their examination processes, periodically review
Service1sts
allowances for loan losses, and may require additions to
Service1sts
allowance based on their judgment about information available to
them at the time of their examinations.
Service1st periodically
reviews the assumptions and formula used in determining the
allowance and makes adjustments if required to reflect the
current risk profile of the portfolio.
When
Service1st determines
that it is unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan
agreement, the loan becomes impaired. Impaired loans are
measured based on the present value of expected future cash
flows discounted at the loans effective interest rate or,
as a practical expedient, at the loans observable market
price or the fair value of the collateral, if the loan is
collateral dependent. The amount of impairment, if any, and any
subsequent changes are included in the allowance for loan losses
or charged off
Service1sts
books if deemed necessary.
Service1sts
loan portfolio has a concentration of loans in commercial
real-estate related loans and includes significant credit
exposure to the commercial real estate industry. The specific
reserves for collateral dependent impaired loans are based on
the fair value of the collateral less estimated selling costs
(including brokerage fees) and other miscellaneous costs that
may be incurred to make the collateral more marketable (such as
clean-up
costs) and to cure past due amounts (such as delinquent property
taxes). The fair value of collateral is determined based on
third-party appraisals. See Information Related to
Service1st Bank of Nevada Allowance for Loan
Losses for more information. In some cases,
adjustments are made to the appraised values due to known
changes in market conditions or known changes in the collateral.
Service1sts
management believes that the allowance for the period ended
October 28, 2010 and the methodology utilized in deriving
that level were adequate to absorb known and inherent risks in
the loan portfolio. However, credit quality is affected by many
factors beyond
Service1sts
control, including local and national economies, and facts may
exist which are not currently known to
Service1st that
adversely affect the likelihood of repayment of various loans in
the loan portfolio and realization of collateral upon default.
Accordingly, no assurance can be given that
Service1st will
not sustain loan losses materially in excess of the allowance
for loan losses. In addition, the FDIC, as a major part of its
examination process, periodically reviews the allowance for loan
losses and could require additional provisions to be made. The
allowance is based on estimates, and actual losses may vary from
the estimates. However, as the volume of the loan portfolio
grows, additional provisions will be required to maintain the
allowance at adequate levels. No assurance can be given that
continuing adverse economic conditions or unforeseen events will
not lead to increases in delinquent loans, the provision for
loan losses
and/or
charge-offs.
113
The following table presents the allocation of
Service1sts
allowance for loan losses by loan category and percentage of
loans in each category to total loans as of the dates indicated.
Allocation of the Allowance and percentage of allowance by loan
type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
October 28, 2010
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
($s in thousands)
|
|
Amount
|
|
|
% of loans
|
|
|
Amount
|
|
|
% of loans
|
|
|
Amount
|
|
|
% of loans
|
|
|
Allowance for Loan and Lease Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
318
|
|
|
|
7.36
|
%
|
|
$
|
1,322
|
|
|
|
14.80
|
%
|
|
$
|
1,083
|
|
|
|
28.12
|
%
|
Commercial real estate
|
|
|
3,019
|
|
|
|
50.22
|
%
|
|
|
1,890
|
|
|
|
50.02
|
%
|
|
|
484
|
|
|
|
29.95
|
%
|
Residential real estate (1-4 family)
|
|
|
737
|
|
|
|
8.20
|
%
|
|
|
54
|
|
|
|
1.00
|
%
|
|
|
6
|
|
|
|
0.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
4,074
|
|
|
|
65.77
|
%
|
|
|
3,266
|
|
|
|
65.82
|
%
|
|
|
1,573
|
|
|
|
58.42
|
%
|
Commercial and industrial
|
|
|
5,339
|
|
|
|
34.12
|
%
|
|
|
3,135
|
|
|
|
33.92
|
%
|
|
|
1,177
|
|
|
|
41.20
|
%
|
Consumer
|
|
|
5
|
|
|
|
0.11
|
%
|
|
|
3
|
|
|
|
0.26
|
%
|
|
|
133
|
|
|
|
0.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan loss
|
|
$
|
9,418
|
|
|
|
100
|
%
|
|
$
|
6,404
|
|
|
|
100
|
%
|
|
$
|
2,883
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loan category with the largest level of historical net
charge-offs is attributed to
Service1sts
commercial and industrial loans. This category had charge-offs
of $1.7 million and recoveries of $321,000 for the period
ended October 28, 2010. In 2009, commercial and industrial
loans had $4.4 million in charges-offs and $9,000 in
recoveries, while in 2008, commercial and industrial loans had
no charges-offs or recoveries.
Service1sts
loan balance in this category is $42.8 million for the
period ended October 28, 2010 with $5.7 million of
that balance being classified as nonaccrual and a loan balance
of $46.5 million as of December 31, 2009 with
$1.3 million of these loans on nonaccrual. Accordingly, the
allowance for loan losses of $5.3 million was allocated to
this category for the period ended October 28, 2010 while
$3.1 million was allocated to this category as of
December 31, 2009.
Service1sts
construction, land development and other land loans category had
charge-offs of $1.2 million and recoveries of $293,000 for
the period ended October 28, 2010. In 2009, construction,
land development and other land loans had $7.7 million in
charge-offs and no recoveries, while in 2008, construction, land
development and other land loans category had $1.7 million
in charge-offs and no recoveries.
Service1sts
loan balance in this category is $9.2 million for the
period ended October 28, 2010 with $6.0 million of
that balance being classified as nonaccrual and a loan balance
of $20.3 million as of December 31, 2009 with
$6.5 million of these loans on nonaccrual. Accordingly, the
allowance for loan losses of $318,000 was allocated to this
category for the period ended October 28, 2010 while
$1.3 million was allocated to this category as of
December 31, 2009.
Service1sts
commercial real estate loan category had charge-offs of $922,000
and no recoveries for the period ended October 28, 2010. In
2009 and 2008, there were no charge-offs or recoveries for
commercial real estate loans.
Service1sts
loan balance in this category is $63.0 million for the
period ended October 28, 2010 with $8.6 million of
that balance being classified as nonaccrual and a loan balance
of $68.5 million as of December 31, 2009 with none of
this loan balance on nonaccrual. Accordingly, the allowance for
loan losses of $3.0 million was allocated to this category
for the period ended October 28, 2010 while
$1.9 million was allocated to this category as of
December 31, 2009.
Service1sts
residential real estate loan category had charge-offs of
$202,000 and $1,000 in recoveries for the period ended
October 28, 2010. In 2009 and 2008, there were no
charge-offs or recoveries for residential real estate loans.
Service1sts
loan balance in this category is $10.3 million for the
period ended October 28, 2010 with none of that loan
balance being classified as nonaccrual and a loan balance of
$1.4 million as of December 31, 2009 with none of this
loan balance on nonaccrual. Accordingly, the allowance for loan
losses
114
of $737,000 was allocated to this category for the period ended
October 28, 2010 while $54,000 was allocated to this
category as of December 31, 2009.
Deferred
Tax Asset
For the period ended October 28, 2010 and year ended
December 31, 2009, a valuation allowance for the entire net
deferred tax asset was considered necessary as
Service1st determined
it was not more likely than not that the deferred tax asset
would be realized. Federal operating loss carry forwards begin
to expire in 2027.
Internal Revenue Code Section 382 places a limitation on
the amount of taxable income that can be offset by net operating
loss carry forwards after a change in control (generally greater
than 50% change in ownership) of a loss corporation.
Accordingly, utilization of net operating loss carry forwards
may be subject to an annual limitation regarding their
utilization against future taxable income upon a change in
control.
Deposits
Service1sts
activities are primarily based in Nevada and its deposit base is
also primarily generated from this geographic region. Deposits
have historically been the primary source for funding
Service1sts
asset growth.
During the first ten months of 2010 and full year 2009,
Service1st sought
to decrease the rates on its deposit base in order to increase
its net interest income, interest rate spread and net interest
margin. Deposits decreased $23.2 million or 12.52% for the
period ended October 28, 2010 from $185.3 million as
of December 31, 2009 to $162.1 million for the period
ended October 28, 2010. Time deposits decreased
$25.5 million or 42.08% from $60.6 million as of
December 31, 2009 to $35.1 million for the period
ended October 28, 2010 as a result of the deposit rate
reduction strategy. In addition, money market accounts decreased
$13.5 million or 32.30% from $41.8 million as of
December 31, 2009 to $28.3 million for the period
ended October 28, 2010. Approximately $10.0 million of
the $13.3 million decrease in money market accounts was due
to a transfer of funds out of money market accounts and into
noninterest bearing deposits due to the announcement of
Service1sts
consent order, the remaining $3.3 million in money market
funds left
Service1st altogether.
Overall rates on interest-bearing deposit accounts decreased
49.55%, from a blended rate of 2.22% as of December 31,
2009 to 1.12% for the period ended October 28, 2010. This
resulted in interest expense decreasing $1.5 million from
December 31, 2009 to October 28, 2010. The overall
decrease in total deposits of 12.52% is reflective of
Service1st effectively
managing down deposit rates in order to lower
Service1sts
cost of funds.
The following table reflects the summary of deposit categories
by dollar and percentage for the period ended October 28,
2010, and year ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended
|
|
|
|
|
|
|
October 28, 2010
|
|
|
December 31, 2009
|
|
($s in thousands)
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
|
Non-interest-bearing deposits
|
|
$
|
68,575
|
|
|
|
42.31
|
%
|
|
$
|
56,463
|
|
|
|
30.47
|
%
|
Interest-bearing deposits
|
|
|
29,018
|
|
|
|
17.91
|
%
|
|
|
25,094
|
|
|
|
13.54
|
%
|
Money Markets
|
|
|
28,316
|
|
|
|
17.47
|
%
|
|
|
41,774
|
|
|
|
22.54
|
%
|
Savings
|
|
|
1,065
|
|
|
|
0.66
|
%
|
|
|
1,435
|
|
|
|
0.77
|
%
|
Time deposits under $100,000
|
|
|
4,888
|
|
|
|
3.02
|
%
|
|
|
6,238
|
|
|
|
3.37
|
%
|
Time deposits $100,000 and over
|
|
|
30,204
|
|
|
|
18.64
|
%
|
|
|
54,316
|
|
|
|
29.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
162,066
|
|
|
|
100.00
|
%
|
|
$
|
185,320
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposits of $100,000 or more for the period
ended October 28, 2010 and December 31, 2009 totaled
$30.2 million and $54.3 million, respectively. These
deposits are generally more rate sensitive than other deposits
and are more likely to be withdrawn to obtain higher yields
elsewhere, if available.
115
Scheduled maturities of certificates of deposits in amounts of
$100,000 or more for the period ended October 28, 2010 were
as follows:
Certificates
of Deposit Maturities > $100,000
|
|
|
|
|
($s in thousands)
|
|
Amount
|
|
|
Three months or less
|
|
$
|
10,503
|
|
Over three months to six months
|
|
|
4,075
|
|
Over six months to twelve months
|
|
|
15,626
|
|
Over 12 months
|
|
|
0
|
|
|
|
|
|
|
Total
|
|
$
|
30,204
|
|
|
|
|
|
|
Capital
Resources
The current and projected capital position of
Service1st and
the impact of capital plans on long term strategies are reviewed
regularly by management.
Service1sts
capital position represents the level of capital available to
support continuing operations and expansion.
Service1st is
subject to certain regulatory capital requirements mandated by
the FDIC and generally applicable to all banks in the United
States. For more information, see the section entitled
Supervision and Regulation. Failure to meet
minimum capital requirements can result in restrictions on
activities (including restrictions on the rates paid on
deposits), and otherwise may cause federal or state bank
regulators to initiate enforcement
and/or other
action against
Service1st.
Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, banks must meet specific capital
guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance sheet item as calculated
under regulatory accounting practices.
Service1sts
capital amounts and classifications are also subject to
qualitative judgments by the FDIC about components, risk
weightings and other factors. In accordance with
Service1sts
consent order dated September 1, 2010,
Service1st must
maintain its Tier 1 capital in such an amount to ensure
that its leverage ratio equals or exceeds 8.50%. In addition,
Service1st shall
also maintain its total risk-based capital ratio in such an
amount as to equal or exceed 12.00%.
On September 1, 2010,
Service1st,
without admitting or denying any possible charges relating to
the conduct of its banking operations, agreed with the FDIC and
the Nevada FID to the issuance of a Consent Order. The Consent
Order supersedes a Memorandum of Understanding entered into by
Service1st with
the FDIC and Nevada FID in May of 2009. Under the Consent Order,
Service1st has
agreed, among other things, to: (i) assess the
qualification of, and have retained qualified, senior management
commensurate with the size and risk profile of
Service1st;
(ii) maintain a Tier I leverage ratio at or above 8.5%
(as of October 28, 2010,
Service1sts
Tier I leverage ratio was at 8.70%) and a total risk- based
capital ratio at or above 12% (as of October 28, 2010,
Service1sts
total risk-based capital ratio was at 14.10%);
(iii) continue to maintain an adequate allowance for loan
and lease losses; (iv) not pay any dividends without prior
bank regulatory approval; (v) formulate and implement a
plan to reduce
Service1sts
risk exposure to adversely classified assets; (vi) not
extend additional credit to any borrower whose loan has been
charged-off or classified loss; (vii) not
extend any additional credit to any borrower whose loan has been
classified as substandard or doubtful
without prior approval from
Service1sts
board of directors or loan committee; (viii) formulate and
implement a plan to reduce risk exposure to its concentration in
commercial real estate loans in conformance with Appendix A
of Part 365 of the FDICs Rules and Regulations;
(ix) formulate and implement a plan to address
profitability; and (x) not accept brokered deposits (which
includes deposits paying interest rates significantly higher
than prevailing rates in
Service1sts
market area) and reduce its reliance on existing brokered
deposits, if any.
Service1st was
initially capitalized at formation at the beginning of 2007 with
$50 million. Due to operating losses and provisions to the
allowance for loan losses during
Service1sts
first three years of operations,
Service1sts
capital for the period ended October 28, 2010 was
$16.4 million, which
Service1st deems
adequate to support continuing operations and growth. As a de
novo bank,
Service1st is
required
116
to maintain a Tier 1 capital leverage ratio of not less
than 8.5% during its first seven years of operations.
Service1sts
capital ratios for the period ended October 28, 2010,
relative to the ratios require of well capitalized
banks under the prompt corrective action regime put in place by
federal banking regulations, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
Capitalized Under
|
|
|
|
|
Regulatory
|
Capital Ratios:
|
|
Service1st
|
|
Agreement
|
|
Tier 1 equity to average assets
|
|
|
8.70
|
%
|
|
|
8.50
|
%
|
Tier 1 risk-based capital ratio
|
|
|
12.80
|
%
|
|
|
6.00
|
%
|
Total risk-based capital ratio
|
|
|
14.10
|
%
|
|
|
12.00
|
%
|
The acquisition of
Service1st
by Western Liberty Bancorp was consummated at close of business
on October 28, 2010. Per the Merger Agreement, Western
Liberty Bancorp injected an additional $25 million of
capital into
Service1st.
Liquidity
and Asset/Liability Management
Liquidity management refers to
Service1sts
ability to provide funds on an ongoing basis to meet
fluctuations in deposit levels as well as the credit needs and
requirements of its clients. Both assets and liabilities
contribute to
Service1sts
liquidity position. Lines of credit with the regional Federal
Reserve Bank of San Francisco and FHLB, as well as short
term investments, increases in deposits and loan repayments all
contribute to liquidity while loan funding, investing and
deposit withdrawals decrease liquidity.
Service1st assesses
the likelihood of projected funding requirements by reviewing
current and forecasted economic conditions and individual client
funding needs.
Service1sts
sources of liquidity consists of cash and due from correspondent
banks, overnight funds sold to correspondents and the Federal
Reserve Bank, certificates of deposits at other financial
institution (non-brokered), unpledged security investments and
lines of credit with the Federal Reserve Bank of
San Francisco and Federal Home Loan Bank of
San Francisco. For the period ended October 28, 2010,
Service1st had
approximately $15.1 million in cash and cash equivalents,
approximately $31.9 million in certificates of deposits at
other financial institutions, with maturities of one year or
less. In addition,
Service1st had
$3.5 million in unpledged security investments, of which
$2.8 million is classified as available for sale, while the
remaining $662,000 is classified as held to maturity.
Service1st also
has a $4.4 million collateralized line of credit with the
Federal Reserve Bank of San Francisco and an
$18.1 million collateralized line of credit with the FHLB
of San Francisco. Both the $4.4 million line of credit
with the Federal Reserve of San Francisco and the
$18.1 million line of credit with the FHLB have a zero
balance.
Liquidity is also affected by portfolio maturities and the
effect of interest rate fluctuations on the marketability of
both assets and liabilities.
Service1st can
sell any of its unpledged securities held in the available for
sale category to meet liquidity needs. These securities are also
available to pledge as collateral for borrowings if the need
should arise.
Service1sts
management believes the level of liquid assets and available
credit facilities are sufficient to meet current and anticipated
funding needs during the next twelve months. In addition,
Service1sts
Asset/Liability Management Committee oversees
Service1sts
liquidity position by reviewing a monthly liquidity report.
While management recognizes that
Service1st may
use some of its existing liquidity to issue loans during the
next twelve months, it is not aware of any trends, demands,
commitments, events or uncertainties that are reasonably likely
to impair
Service1sts
liquidity.
Off-Balance
Sheet Arrangements
In the normal course of business,
Service1st is
a party to financial instruments with off-balance-sheet risk.
These financial instruments include commitments to extend credit
and letters of credit. To varying degrees,
117
these instruments involve elements of credit and interest rate
risk in excess of the amount recognized in the statement of
financial position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
Ended
|
|
|
|
|
October 28,
|
|
At December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
($ in thousands)
|
|
Commitments to extend credit
|
|
|
15,965
|
|
|
|
25,035
|
|
|
|
32,000
|
|
Commitments to extend credit to directors and officers
(undisbursed amount)
|
|
|
2,392
|
|
|
|
1,392
|
|
|
|
441
|
|
Standby/commercial letters of credit
|
|
|
695
|
|
|
|
1,408
|
|
|
|
152
|
|
Service1st maintains
an allowance for unfunded commitments, based on the level and
quality of
Service1sts
undisbursed loan funds, which comprises the majority of
Service1sts
off-balance sheet risk. For the period ended October 28,
2010 and December 31, 2009, the allowance for unfunded
commitments was approximately $348,000 and $819,000,
respectively.
Management is not aware of any other material off-balance sheet
arrangements or commitments outside of the ordinary course of
Service1sts
business.
Contractual
Obligations
The following table is a summary of
Service1sts
contractual obligations as of December 31, 2009, by
contractual maturity date for the next five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
($s in thousands)
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
After
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Long Term Borrowed Funds
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Capital Lease Obligations
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Operating Lease Obligations
|
|
|
3,104
|
|
|
|
889
|
|
|
|
2,215
|
|
|
|
0
|
|
|
|
0
|
|
Purchase Obligations
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Other Long Term Liabilities
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,104
|
|
|
$
|
889
|
|
|
$
|
2,215
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative
and Qualitative Disclosures About Market Risk
Market risk is a broad term for the risk of economic loss due to
adverse changes in the fair value of a financial instrument.
These changes may be the result of various factors, including
interest rates, foreign exchange rates, commodity prices
and/or
equity prices. As a financial institution,
Service1sts
primary component of market risk is interest rate volatility.
Net interest income is the primary component of
Service1sts
net income, and fluctuations in interest rates will ultimately
affect the level of both income and expense recorded on a large
portion of
Service1sts
assets and liabilities. In addition to directly impacting net
interest income, changes in the level of interest rates can also
affect (i) the amount of loans originated and sold by
Service1st,
(ii) the ability of borrowers to repay adjustable or
variable rate loans, (iii) the average maturity of loans,
(iv) the rate of amortization of premiums paid on
securities, (v) the fair value of
Service1sts
saleable assets, (vi) the amount of unrealized gains and
losses on securities available for sale, the volume of interest
bearing non-maturity deposits and (vii) the early
withdrawal likelihood of customer originated certificates of
deposit.
Interest rate risk occurs when assets and liabilities re-price
at different times as interest rates change. In general, the
interest that
Service1st
earns on its assets and pays on its liabilities is established
contractually for specified period of time. Market interest
rates change over time and if a financial institution cannot
quickly adapt to changes in interest rates, it may be exposed to
volatility in earnings. For instance, if
Service1st were
to fund long-term fixed rate assets with short-term variable
rate deposits, and interest rates were to rise over
118
the term of the assets, the short-term variable deposits would
rise in cost, adversely affecting net interest income. Similar
risks exist when rate sensitive assets (for example, prime
rate-based loans) are funded by longer-term fixed rate
liabilities in a falling interest rate environment.
Service1st manages
its mix of assets and liabilities with the goals of limiting its
exposure to interest rate risk, ensuring adequate liquidity, and
coordinating its sources and uses of funds while maintaining an
acceptable level of net interest income given the current
interest rate environment.
Service1sts
primary source of funds has been retail deposits, consisting
primarily of interest-bearing checking accounts and time
deposits.
Service1sts
management believes retail deposits, unlike brokered deposits,
reduce the effects of interest rate fluctuations because they
generally represent a more stable source of funds.
Service1sts
has no brokered deposits.
Service1st also
maintains availability of lines of credit from the FHLB of
San Francisco and the Federal Reserve Bank of
San Francisco as additional sources of funds, but has not
drawn on them. Borrowings under these lines generally have a
long-term to maturity than retail deposits.
Service1st also
uses interest rate floors, ranging from 5.5% to
8.5%, on a majority of its prime-rate based loans to protect
against a loss of net interest income that would result from a
decline in interest rates. At December 31, 2009,
approximately 43% of
Service1sts
loans are indexed to the national prime rate. Currently the
prime rate is under the applicable floor rate for substantially
all of
Service1sts
prime-rate based loans.
Service1sts
net interest income may be adversely impacted if the prime rate
were to increase but remain below the applicable floor rate
since any such increase may result in an increase in
Service1sts
interest expenses without an increase in
Service1sts
interest income derived from such prime-rate based loans until
the prime rate exceeds the applicable floor rate.
Service1st has
an interest rate risk management system that captures material
sources of interest rate risk and generates reports for senior
management and the board of directors.
Service1st board
establishes interest rate risk management policies that govern
the measurement and control of interest rate risk. The
asset/liability management committee provides oversight of
Service1sts
interest rate risk management. The Chief Financial Officer is
responsible for
day-to-day
management of
Service1sts
interest rate sensitivity position and examines the potential
impact of differing interest rate scenarios. Key measurements
include, but are not limited to, traditional gap ratios,
earnings at risk, economic value of equity, net interest margin
trends relative to peer banks and performance relative to market
interest rate cycles.
Risk tolerance limits are set based on net profit impact of
instantaneous and sustained interest rate shocks of +/-
100 basis points, with quarterly measures of shocks up
+300 basis points and down -200 basis points. The
effect of interest rate shocks on
Service1sts
economic value of equity will also be considered.
Service1sts
interest rate risk model is back-tested to ensure integrity of
key assumptions and to compare actual results after significant
rate changes to predicted results. Applicable measurements are
reviewed for consistency with
Service1sts
target aggregates and for indication of actual or potential
adverse trends. Interest rate risk management reports are
prepared quarterly and back-tested as market conditions warrant.
The computation of prospective effects of hypothetical interest
rate changes are based on numerous assumptions, including
relative levels of market interest rates, asset prepayments and
deposit decay, and should not be relied upon as indicative of
actual results. Further, the computations do not contemplate any
actions
Service1st may
undertake in response to changes in interest rates. Actual
amounts may differ from the projections set forth below should
market conditions vary from underlying assumptions.
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Service1st Bank
prepares quarterly interest rate risk reports. Below is the most
recent available year end report, as of December 31, 2009,
that coincides with the financial presentations of
October 28, 2010.
December 31,
2009
Sensitivity of Net Interest Income
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Percentage
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Adjusted Net
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Change
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Interest Rate Scenario
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Interest Income
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from Base
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(Dollars in thousands)
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Up 300 basis points
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$
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7,699
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22.13
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%
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Up 200 basis points
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7,244
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14.91
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%
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Up 100 basis points
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6,784
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7.61
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%
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BASE
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6,304
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0.00
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%
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Down 100 basis points
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6,371
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1.06
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%
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Down 200 basis points
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6,551
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3.92
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%
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SUPERVISION
AND REGULATION
Supervision
and Regulation
The following summary of Federal and state laws governing the
supervision and regulation of bank holding companies and banks
is not comprehensive. The summary is qualified in its entirety
by reference to applicable statutes and regulations.
Holding
companies
We have sought and received approval of the Federal Reserve
Board (the Federal Reserve) to become a bank holding
company under the Bank Holding Company Act of 1956. Bank holding
companies are subject to extensive regulation, supervision, and
examination by the Federal Reserve, acting principally through
its local Federal Reserve Bank.
A bank holding company must serve as a source of financial and
managerial strength for its subsidiary banks and must not
conduct its operations in an unsafe or unsound manner. The
Federal Reserve requires bank holding companies to maintain
capital at or above certain prescribed levels. It is the Federal
Reserves policy that a bank holding company should provide
capital to its subsidiary banks during periods of financial
stress or adversity and maintain the financial flexibility and
capital-raising capacity to obtain additional resources for
assisting subsidiary banks. Bank holding companies may also be
required to give written notice to and receive approval from the
Federal Reserve before purchasing or redeeming common stock or
other equity securities.
Under Bank Holding Company Act section 5(e), the Federal
Reserve may require a bank holding company to terminate any
activity or relinquish control of a nonbank subsidiary if the
Federal Reserve determines that the activity or control
constitutes a serious risk to the financial safety, soundness,
or stability of a subsidiary bank. Pursuant to the Federal
Deposit Insurance Corporation Improvement Act of 1991 addition
of the prompt corrective action provisions to the Federal
Deposit Insurance Act, section 38(f)(2)(I) of the Federal
Deposit Insurance Act now provides that a federal bank
regulatory authority may require a bank holding company to
divest itself of an undercapitalized bank subsidiary if the
agency determines that divestiture will improve the banks
financial condition and prospects.
A bank holding company must obtain Federal Reserve approval to:
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acquire ownership or control of any voting shares of another
bank or bank holding company, if after the acquisition the
acquiring company would own or control more than 5% of the
shares of the other bank or bank holding company (unless the
acquiring company already owns or controls a majority of the
shares),
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acquire all or substantially all of the assets of another
bank, or
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merge or consolidate with another bank holding company.
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The Federal Reserve will not approve an acquisition, merger, or
consolidation that would have a substantially anticompetitive
result unless the anticompetitive effects of the proposed
transaction are clearly outweighed by a greater public interest
in satisfying the convenience and needs of the community to be
served. The Federal Reserve also considers capital adequacy and
other financial and managerial factors in its review of
acquisitions and mergers, as well as the parties
performance under the Community Reinvestment Act of 1977.
With certain exceptions, the Bank Holding Company Act prohibits
a bank holding company from acquiring or retaining ownership or
control of more than 5% of the outstanding voting shares of any
company that is not a bank or bank holding company or from
engaging in activities other than banking, managing or
controlling banks, or providing services for holding company
subsidiaries. The principal exceptions to these prohibitions
involve non-bank activities identified by statute, by Federal
Reserve regulation, or by Federal Reserve order as activities so
closely related to the business of banking or of managing or
controlling banks as to be a proper incident thereto, including
securities brokerage services, investment advisory services,
fiduciary services, and management advisory and data processing
services, among others. A bank holding company that
121
also qualifies as and elects to become a financial
holding company may engage in a broader range of
activities that are financial in nature (and complementary to
such activities), specifically non-bank activities identified by
the Gramm-Leach-Bliley Act of 1999 or by Federal Reserve and
Treasury regulation as financial in nature or incidental to a
financial activity. Activities that are defined as financial in
nature include securities underwriting, dealing, and market
making, sponsoring mutual funds and investment companies,
engaging in insurance underwriting and agency activities, and
making merchant banking investments in non- financial companies.
To become and remain a financial holding company, a bank holding
company and its subsidiary banks must be well capitalized, well
managed, and, except in limited circumstances, have at least a
satisfactory rating under the Community Reinvestment Act. If,
after becoming a financial holding company and undertaking
activities not permissible for a bank holding company, the
company fails to satisfy the standards for financial holding
company status, the company must enter into an agreement with
the Federal Reserve to comply with all applicable capital and
management requirements. If the company does not return to
compliance within 180 days, the Federal Reserve may order
the company to divest its subsidiary bank or banks or the
company may discontinue the activities that are permissible
solely for a financial holding company.
The Bank Holding Company Act, the Change in Bank Control Act of
1978, and the Federal Reserves Regulation Y require
that advance notice be given to the Federal Reserve or that
affirmative approval of the Federal Reserve be obtained to
acquire control of a bank or bank holding company, with limited
exceptions. The Federal Reserve may act during the advance
notice period to prevent the acquisition of control. Subject to
guidance issued by the Federal Reserve in September 2008,
control is conclusively presumed to exist if a person or entity
acquires 25% or more of any class of voting stock of a bank
holding company or insured depository institution. Control is
rebuttably presumed to exist if a person or entity acquires 10%
or more but less than 25% of the voting stock and either the
issuer has a class of securities registered under
section 12 of the Exchange Act, as we do, or no other
person or entity will own, control, or hold the power to vote a
greater percentage of voting stock immediately after the
transaction. In its September 2008 guidance, the Federal Reserve
stated that generally it will be able to conclude that an
investor does not have a controlling influence over a bank or
bank holding company if the investor does not own more than 15%
of the voting power and 33% of the total equity of the bank or
bank holding company, including nonvoting equity securities. The
investor may, however, be required to make passivity commitments
to the Federal Reserve, promising to refrain from taking various
actions that might constitute exercise of a controlling
influence. Under prior Federal Reserve guidance, a board seat
was generally not permitted for an investment of 10% or more of
the equity or voting power. But under the September 2008
guidance, the Federal Reserve may permit a non-controlling
investor to have a board seat.
We are also subject to examination by and may be required to
file reports with the Nevada FID under sections 666.065
et seq. of the Nevada Revised Statutes. We would have to
obtain the approval of the Nevada Commissioner of Financial
Institutions to acquire another bank, and any transfer of
control of a Nevada bank holding company would have to be
approved in advance by the Nevada Commissioner.
Banks
Service1st is
chartered by the State of Nevada and is therefore subject to
regulation, supervision, and examination not only by the FDIC
but also by the Nevada FID. Federal and state statutes governing
the business of banking and insurance of bank deposits as well
as implementing regulations promulgated by the Federal and state
banking regulatory agencies cover most aspects of bank
operations, including capital requirements, reserve requirements
against deposits, reserves for possible loan losses and other
contingencies, dividends and other distributions to
stockholders, customers interests in deposit accounts,
payment of interest on certain deposits, permissible activities
and investments, securities that a bank may issue and borrowings
that a bank may incur, rate of growth, number and location of
branch offices, and acquisition and merger activity with other
financial institutions. In addition to minimum capital
requirements, Federal law imposes other safety and soundness
standards having to do with such things as internal controls,
information systems, internal audit systems, loan documentation,
credit underwriting, interest rate risk exposure, asset growth,
asset quality, earnings, and compensation and benefits.
122
If, as a result of examination the FDIC determines that a
banks financial condition, capital resources, asset
quality, earnings prospects, management, liquidity or other
aspects of the banks operations are unsatisfactory, or
that the bank or its management is in violation of any law or
regulation, the FDIC may take a number of remedial actions.
Federal bank regulatory agencies make regular use of their
authority to bring enforcement actions against banks and bank
holding companies for unsafe or unsound practices in the conduct
of their businesses and for violations of any law, rule or
regulation, any condition imposed in writing by the appropriate
federal banking regulatory authority or any written agreement
with the authority. Possible enforcement actions include
appointment of a conservator or receiver, issuance of a
cease-and-desist
order that could be judicially enforced, termination of a
banks deposit insurance, imposition of civil money
penalties, issuance of directives to increase capital, issuance
of formal and informal agreements, including memoranda of
understanding, issuance of removal and prohibition orders
against institution-affiliated parties, and enforcement of such
actions through injunctions or restraining orders. In addition,
a bank holding companys inability to serve as a source of
strength for its subsidiary banks could serve as an additional
basis for a regulatory action against the bank holding company.
Under Nevada Revised Statutes section 661.085, if the
stockholders equity of a Nevada-chartered bank becomes
impaired, the Nevada Commissioner must require the bank to make
the impairment good within three months. If the impairment is
not made good, the Nevada Commissioner may take possession of
the bank and liquidate it.
Capital:
Regulatory Capital Guidelines
A banks capital hedges its risk exposure, absorbing losses
that can be predicted as well as losses that cannot be
predicted. According to the Federal Financial Institutions
Examination Councils explanation of the capital component
of the Uniform Financial Institutions Rating System, commonly
known as the CAMELS rating system, a rating system
employed by the Federal bank regulatory agencies, a financial
institution must maintain capital commensurate with the
nature and extent of risks to the institution and the ability of
management to identify, measure, monitor, and control these
risks. The effect of credit, market, and other risks on the
institutions financial condition should be considered when
evaluating the adequacy of capital. The minimum ratio of
total capital to risk-weighted assets is 8.0%, of which at least
4.0% must consist of so-called Tier 1 capital. The minimum
Tier 1 leverage ratio Tier 1 capital to
average assets is 3.0% for the highest rated
institutions and at least 4.0% for all others. These ratios are
absolute minimums. In practice, banks are expected to operate
with more than the absolute minimum capital. As of
December 31, 2010,
Service1sts
total risk-based capital ratio was 31.0%, its Tier 1
risk-based capital ratio was 30.6%, and its Tier 1 equity
to average assets ratio was 18.1%. The FDIC may establish
greater minimum capital requirements for specific institutions,
as discussed below. A bank that does not achieve and maintain
the required capital levels may be issued a capital directive by
the FDIC to ensure the maintenance of required capital levels.
The Federal Reserve imposes substantially similar capital
requirements on bank holding companies as well.
Tier 1 capital consists of common stock, retained earnings,
non-cumulative perpetual preferred stock, trust preferred
securities up to a certain limit, and minority interests in
certain subsidiaries, less most other intangible assets.
Tier 2 capital consists of preferred stock not qualifying
as Tier 1 capital, limited amounts of subordinated debt,
other qualifying term debt, a limited amount of the allowance
for loan and lease losses, and certain other instruments that
have some characteristics of equity. To determine risk-weighted
assets, the nominal dollar amounts of assets on the balance
sheet and credit-equivalent amounts of off-balance-sheet items
are multiplied by one of several risk adjustment percentages
ranging from 0.0% for assets considered to have low credit risk,
such as cash and certain U.S. government securities, to
100.0% for assets with relatively higher credit risk, such as
business loans, and a 200% risk-weight for selected investments
that are rated below investment grade or, if not rated, that are
equivalent to investments rated below investment grade. A
banking organizations risk-based capital ratios are
obtained by dividing its Tier 1 capital and total
qualifying capital (Tier 1 capital and a limited amount of
Tier 2 capital) by its total risk-adjusted assets.
During the application process for the Acquisition we made a
written commitment to the FDIC that we will maintain the
Tier 1 leverage capital ratio of
Service1st at
10% or greater. This commitment will expire three years after
the October 28, 2010 completion of the Acquisition or, if
later, when the September 1, 2010 Consent Order agreed to
by
Service1st with
the FDIC and the Nevada FID terminates.
123
Prompt
Corrective Action
To resolve the problems of undercapitalized institutions and to
prevent a recurrence of the banking crisis of the late 1980s and
early 1990s, the Federal Deposit Insurance Corporation
Improvement Act of 1991 established a system known as
prompt corrective action. Under the prompt
corrective action provisions and implementing regulations, every
institution is classified into one of five categories, depending
on its total risk-based capital ratio, its Tier 1
risk-based capital ratio, its leverage ratio, and subjective
factors. The categories are well capitalized,
adequately capitalized,
undercapitalized, significantly
undercapitalized and critically
undercapitalized. To be considered well capitalized for
purposes of the prompt corrective action rules, a bank must
maintain total risk-based capital of 10.0% or greater,
Tier 1 risk-based capital of 6.0% or greater, and leverage
capital of 5.0% or greater. An institution with a capital level
that might qualify for well-capitalized or adequately
capitalized status may nevertheless be treated as though it were
in the next lower capital category if its primary federal
banking supervisory authority determines that an unsafe or
unsound condition or practice warrants that treatment.
Notwithstanding that
Service1sts
capital ratios make the bank eligible to be considered
well capitalized on the basis of capital ratios, the
FDIC by letter dated July 29, 2010, advised
Service1st that
imposition of the Consent Order effective September 1,
2010, would result in the institution being considered
adequately capitalized for prompt corrective action
purposes.
A financial institutions operations can be significantly
affected by its capital classification under the prompt
corrective action rules. For example, an institution that is not
well capitalized generally is prohibited from accepting brokered
deposits and offering interest rates on deposits higher than the
prevailing rate in its market without advance regulatory
approval, which can have an adverse effect on the banks
liquidity. At each successively lower capital category, an
insured depository institution is subject to additional
restrictions. Undercapitalized institutions are required to take
specified actions to increase their capital or otherwise
decrease the risks to the federal deposit insurance funds. A
bank holding company must guarantee that a subsidiary bank that
adopts a capital restoration plan will satisfy its plan
obligations. Any capital loans made by a bank holding company to
a subsidiary bank are subordinated to the claims of depositors
in the bank and to certain other indebtedness of the subsidiary
bank. If bankruptcy of a bank holding company occurs, any
commitment by the bank holding company to a Federal banking
regulatory agency to maintain the capital of a subsidiary bank
would be assumed by the bankruptcy trustee and would be entitled
to priority of payment. Bank regulatory agencies generally are
required to appoint a receiver or conservator shortly after an
institution becomes critically undercapitalized.
Deposit
Insurance
Bank deposits are insured by the FDIC to applicable limits
through the Deposit Insurance Fund. Insured banks must pay
deposit insurance premiums assessed semiannually and paid
quarterly. The insurance premium amount is based upon a risk
classification system established by the FDIC. Banks with higher
levels of capital and a low degree of supervisory concern are
assessed premiums at a lower rate than banks with lower levels
of capital or a higher degree of supervisory concern. Effective
January 1, 2009, the FDIC increased assessment rates
uniformly for all risk categories by 7 cents for the first
quarter 2009 assessment period. In 2009, the FDIC adopted a rule
that imposed a special assessment on banks, which was payable in
September 2009, and that allowed the FDIC to impose additional
special assessments to replenish the Deposit Insurance Fund,
which was badly depleted by bank failures. As an alternative to
imposing additional special assessments on insured depository
institutions or borrowing from the U.S. Treasury, on
November 12, 2009, the FDIC adopted a proposal to increase
deposit insurance assessments effective on January 1, 2011
and to require all insured depository institutions to prepay by
the end of 2009 their deposit insurance assessments for the
fourth quarter of 2009 and for the entirety of 2010 through
2012. Institutions recorded the prepaid FDIC insurance
assessments as an asset as of December 31, 2009, later
charging the assessments to expense in the periods to which the
assessments apply. We anticipate that assessment rates will
continue to increase for the foreseeable future because of the
significant cost of bank failures, because of the relatively
large number of troubled banks, and because of the requirement
of the recently enacted Dodd-Frank Wall Street Reform and
Consumer Protection Act that the FDIC increase its insurance
fund reserves to no less than $1.35 for each $100 of insured
deposits (as of September 30, 2010, the reserve fund was
negative $0.15 for each $100 of insured
124
deposits). Effective as of April 1, 2011, the FDIC changed
its assessment base from total domestic deposits to average
total assets minus average tangible equity, as required in the
Dodd-Frank Wall Street Reform and Consumer Protection Act. The
FDIC intends to raise the same expected revenue under the new
base as under the current assessment base.
During a December 14, 2010 meeting of the FDIC board, the
FDIC voted on a final rule to set the deposit insurance
funds designated reserve ratio at 2% of estimated insured
deposits effective January 1, 2011. The FDIC said a
historical analysis of losses to the insurance fund showed that
a long-term, minimum goal of at least 2% is necessary to
maintain a positive fund balance and stable assessment rates.
The Federal Deposit Insurance Act requires the FDIC board to set
the designated reserve ratio annually based on the risk of loss
to the insurance fund and the economic conditions affecting the
banking industry, and with the aim of preventing sharp swings in
assessment rates.
The $100,000 basic deposit insurance limit in place for many
years was increased temporarily to $250,000 by the Emergency
Economic Stabilization Act of 2008, which became law on
October 3, 2008. On July 21, 2010, section 335 of
the Dodd-Frank Act made the $250,000 insurance limit permanent.
Dividends
and Distributions
We have never declared or paid cash dividends on our capital
stock. We currently intend to retain any future earnings for
future growth and do not anticipate paying any cash dividends
for the foreseeable future. Any determination in the future to
pay dividends will be at the discretion of our board of
directors and will depend on our earnings, financial condition,
results of operations, business prospects, capital requirements,
regulatory restrictions, contractual restrictions and other
factors that the board of directors may deem relevant.
A bank holding companys ability to pay dividends is
subject to Federal Reserve supervisory authority, taking into
account the bank holding companys capital position, its
ability to satisfy its financial obligations as they come due,
and its capacity to act as a source of financial strength to its
subsidiaries. In addition, Federal Reserve policy discourages
the payment of dividends by a bank holding company if the
dividends are not supported by current operating earnings.
Federal Reserve and FDIC policy statements provide that banks
should generally pay dividends solely out of current operating
earnings. A bank may not pay a dividend if the bank is
undercapitalized or if payment would cause the bank to become
undercapitalized.
A bank holding company may not purchase or redeem its equity
securities without advance written approval of the Federal
Reserve under Federal Reserve Rule 225.4(b) if the purchase
or redemption combined with all other purchases and redemptions
by the bank holding company during the preceding 12 months
equals or exceeds 10% of the bank holding companys
consolidated net worth. However, advance approval is not
necessary if the bank holding company is well managed, not the
subject of any unresolved supervisory issues, and both before
and immediately after the purchase or redemption is well
capitalized.
Under sections 661.235 and 661.240 of the Nevada Revised
Statutes, a Nevada-chartered bank, such as
Service1st,
whose deposits are insured by the FDIC may not make
distributions (including dividends) to or for the benefit of its
stockholders if the distributions would reduce the banks
stockholders equity below the banks initial
stockholders equity. Pursuant to Nevada Revised Statutes
section 78.288(2), which applies to Nevada corporations
generally, including
Service1st,
a corporation may not make distributions (including dividends)
to or for the benefit of its stockholders if, after giving
effect to the distribution, the corporation would be unable to
pay its debts as they become due in the usual course of
business, or the corporations total assets would be less
than the sum of its total liabilities plus the amount that would
be needed to satisfy the preferential rights (if any) upon
dissolution of stockholders whose preferential rights are
superior to those receiving the distribution (unless the
corporations articles of incorporation override this
latter limitation, which
Service1sts
articles do not). Relying on 12 U.S.C. 1818(b), the FDIC
may restrict a banks ability to pay a dividend if the FDIC
has reasonable cause to believe that the dividend would
constitute an unsafe and unsound practice. A banks ability
to pay dividends may be affected also by the FDICs capital
maintenance requirements and prompt corrective action rules.
125
Transactions
with Affiliates
Transactions by a bank with an affiliate, including a holding
company, are subject to restrictions imposed by Federal Reserve
Act sections 23A and 23B and implementing regulations,
which are intended to protect banks from abuse in financial
transactions with affiliates, preventing federally insured
deposits from being diverted to support the activities of
unregulated entities engaged in nonbanking businesses.
Affiliate-transaction limits could impair our ability to obtain
funds from our bank subsidiary for our cash needs, including
funds for payment of dividends, interest, and operational
expenses. Affiliate transactions include but are not limited to
extensions of credit to affiliates, investments in securities
issued by affiliates, the use of affiliates securities as
collateral for loans to any borrower, and purchase of affiliate
assets. Generally, section 23A and section 23B of the
Federal Reserve Act:
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limit the extent to which a bank or its subsidiaries may lend to
or engage in various other kinds of transactions with any one
affiliate to an amount equal to 10% of the institutions
capital and surplus, limiting the aggregate of covered
transactions with all affiliates to 20% of capital and surplus,
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impose strict collateral requirements on loans or extensions of
credit by a bank to an affiliate,
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impose restrictions on investments by a subsidiary bank in the
stock or securities of its holding company,
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impose restrictions on the use of a holding companys stock
as collateral for loans by the subsidiary bank, and
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require that affiliate transactions be on terms substantially
the same as those provided to a non-affiliate.
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Loans to
Insiders
Service1sts
authority to extend credit to insiders meaning
executive officers, directors and greater than 10%
stockholders or to entities those persons control,
is subject to section 22(g) and section 22(h) of the
Federal Reserve Act and Regulation O of the Federal
Reserve. Among other things, these laws require insider loans to
be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amount of loans a
bank may make to insiders based in part on the banks
capital position, and require that specified approval procedures
be adhered to by the bank. Loans to an individual insider may
not exceed the Federal legal limit on loans to any one borrower,
which in general terms is 15% of capital but can be higher in
some circumstances. The aggregate of all loans to all insiders
may not exceed the banks unimpaired capital and surplus.
Insider loans exceeding the greater of 5% of capital or $25,000
must be approved in advance by a majority of the board, with any
interested director not participating in such voting by the
board. Executive officers may borrow in unlimited amounts to
finance their childrens education or to finance the
purchase or improvement of their residence, but they may borrow
no more than $100,000 for most other purposes. Loans to
executive officers exceeding $100,000 may be allowed if the loan
is fully secured by government securities or a segregated
deposit account. A violation of these restrictions could result
in the assessment of substantial civil monetary penalties, the
imposition of a
cease-and-desist
order or other regulatory sanctions.
Loans to
One Borrower
Under section 662.145 of the Nevada Revised Statutes, a
Nevada-chartered banks outstanding loans to one person
generally may not exceed 25% of the banks Tier 1
capital plus allowance for loan losses. Loans by a bank to
parties that have certain relationships with a particular
borrower and certain investments by a bank in the securities of
a particular borrower may be aggregated with the banks
loans to that borrower for purposes of applying this 25% limit.
Guidance
Concerning Commercial Real Estate Lending
In December 2006, the FDIC and other Federal banking agencies
issued final guidance on sound risk management practices for
concentrations in commercial real estate lending, including
acquisition and development lending, construction lending, and
other land loans, which recent experience in Nevada and
elsewhere
126
has shown can be particularly high-risk lending. According to a
2009 FDIC publication, a majority of the community banks that
became problem banks or failed in 2008 had similar risk
profiles: the banks often had extremely high concentrations,
relative to their capital, in residential acquisition,
development, and construction lending, loan underwriting and
credit administration functions at these institutions typically
were criticized by examiners, and many of the institutions had
exhibited rapid asset growth funded with brokered deposits.
The guidance does not establish rigid limits on commercial real
estate lending but does create a much sharper supervisory focus
on the risk management practices of banks with concentrations in
commercial real estate lending. According to the guidance, an
institution that has experienced rapid growth in commercial real
estate lending, has notable exposure to a specific type of
commercial real estate, or is approaching or exceeds the
following supervisory criteria may be identified for further
supervisory analysis of the level and nature of its commercial
real estate concentration risk:
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total reported loans for construction, land development, and
other land represent 100% or more of the institutions
total capital, or
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total commercial real estate loans represent 300% or more of the
institutions total capital and the outstanding balance of
the institutions commercial real estate loan portfolio has
increased by 50% or more during the prior 36 months.
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These measures are intended merely to enable the banking
agencies to identify institutions that could have an excessive
commercial real estate lending concentration, potentially
requiring close supervision to ensure that the institutions have
sound risk management practices in place.
Guidance
Concerning Subprime Lending
In 2007 the FDIC and other Federal banking agencies issued final
guidance on subprime mortgage lending to address issues relating
to certain subprime mortgages, especially adjustable-rate
mortgage products that can cause payment shock. The subprime
guidance identified prudent safety and soundness and consumer
protection standards that the regulators expect banks and
financial institutions to follow to ensure borrowers obtain
loans they can afford to repay.
Guidance
Concerning Newly Organized Banks
The FDIC issued supervisory guidance on August 28, 2009
extending from three years to seven the period in which newly
organized institutions are subject to enhanced supervision. The
FDIC extended the period of enhanced supervision beyond three
years because banks in their first seven years of operation were
over-represented among banks that failed in 2008 and 2009.
Service1st commenced
operations in January, 2007. The expansion of the supervisory
period includes subjecting young banks to higher capital
requirements and more frequent examinations over seven years. A
bank subject to the expanded supervisory period is not permitted
to deviate materially from the banks approved business
plan without first obtaining the FDICs approval. As a
condition to obtaining FDIC approval of the Acquisition, we
agreed to give the FDIC notice at least 60 days in advance
for any major deviation from the business plan that we submitted
to the FDIC during the acquisition application process and not
to deviate from the business plan unless we receive written
non-objection from the FDIC. We also assured the FDIC in writing
during the application process that we will not seek to expand
by acquisition until
Service1st
is restored to a satisfactory condition, which at a minimum
means that the September 1, 2010 Consent Order must first
be terminated. Until that occurs, any growth on
Service1sts
part must be the result of organic growth in the banks
existing business. This commitment will expire three years after
the Acquisition of
Service1st
or, if later, when the September 1, 2010 Consent Order
agreed to by
Service1st with
the FDIC and the Nevada Financial Institution Division
terminates.
Interstate
Banking and Branching
Section 613 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act enacted in July 2010 amends the
interstate branching provisions of the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994. These expanded
de novo branching authority amendments will authorize a
state or national bank to
127
open a de novo branch in another state if the law of the
state where the branch is to be located would permit a state
bank chartered by that state to open the branch. Under prior
law, an
out-of-state
bank could open a de novo branch in another state only if
the particular state permitted
out-of-state
banks to establish a de novo branch. In section 607,
the Dodd-Frank Act also increases the approval threshold for
interstate bank acquisitions, requiring that a bank holding
company be well capitalized and well managed as a condition to
approval of an interstate bank acquisition, rather than being
merely adequately capitalized and adequately managed, and that
an acquiring bank be and remain well capitalized and well
managed as a condition to approval of an interstate bank merger.
Consumer
Protection Laws and Regulations
Service1st is
subject to regular examination by the FDIC to ensure compliance
with statutes and regulations applicable to the banks
business, including consumer protection statutes and
implementing regulations, some of which are discussed below.
Violations of any of these laws may result in fines,
reimbursements, and other related penalties.
Community
Reinvestment Act
The Community Reinvestment Act of 1977 is intended to encourage
insured depository institutions to satisfy the credit needs of
their communities, within the limits of safe and sound lending.
The Community Reinvestment Act does not establish specific
lending requirements or programs for financial institutions, nor
does the Community Reinvestment Act limit an institutions
discretion to develop the types of products and services
management believes are best suited to the banks
particular community. The Act requires that bank regulatory
agencies conduct regular Community Reinvestment Act examinations
and provide written evaluations of institutions Community
Reinvestment Act performance. The Act also requires that an
institutions Community Reinvestment Act performance rating
be made public. Community Reinvestment Act performance
evaluations are based on a four-tiered rating system:
Outstanding, Satisfactory, Needs to Improve and Substantial
Noncompliance. Community Reinvestment Act performance
evaluations are used principally in the evaluation of regulatory
applications submitted by an institution. Performance
evaluations are considered in evaluating applications for such
things as mergers, acquisitions, and applications to open
branches. According to its CRA Performance Evaluation dated
March 18, 2009,
Service1st was
rated Satisfactory.
Equal
Credit Opportunity Act
The Equal Credit Opportunity Act generally prohibits
discrimination in any credit transaction, whether for consumer
or business purposes, on the basis of race, color, religion,
national origin, sex, marital status, age (except in limited
circumstances), receipt of income from public assistance
programs, or good faith exercise of any rights under the
Consumer Credit Protection Act.
Truth in
Lending Act
The Truth in Lending Act is designed to ensure that credit terms
are disclosed in a meaningful way so that consumers may compare
credit terms more readily and knowledgeably. As a result of the
Truth in Lending Act, all creditors must use the same credit
terminology to express rates and payments, including the annual
percentage rate, the finance charge, the amount financed, the
total of payments and the payment schedule, among other things.
Fair
Housing Act
The Fair Housing Act makes it unlawful for any lender to
discriminate in its housing-related lending activities against
any person because of race, color, religion, national origin,
sex, handicap, or familial status. A number of lending practices
have been held by the courts to be illegal under the Fair
Housing Act, including some practices that are not specifically
mentioned in the Federal Housing Act.
128
Home
Mortgage Disclosure Act
The Home Mortgage Disclosure Act arose out of public concern
over credit shortages in certain urban neighborhoods. The Home
Mortgage Disclosure Act requires financial institutions to
collect data that enable regulatory agencies to determine
whether the financial institutions are serving the housing
credit needs of the neighborhoods and communities in which they
are located. The Home Mortgage Disclosure Act also requires the
collection and disclosure of data about applicant and borrower
characteristics as a way to identify possible discriminatory
lending patterns. The vast amount of information that financial
institutions collect and disclose concerning applicants and
borrowers receives attention not only from state and Federal
banking supervisory authorities but also from community-oriented
organizations and the general public.
Real
Estate Settlement Procedures Act
The Real Estate Settlement Procedures Act requires that lenders
provide borrowers with disclosures regarding the nature and cost
of real estate settlements. The Real Estate Settlement
Procedures Act also prohibits abusive practices that increase
borrowers costs, such as kickbacks and fee-splitting
without providing settlement services.
Privacy
Under the Gramm-Leach-Bliley Act, all financial institutions are
required to establish policies and procedures to restrict the
sharing of non-public customer data with non-affiliated parties
and to protect customer data from unauthorized access. In
addition, the Fair Credit Reporting Act of 1971 includes many
provisions concerning national credit reporting standards and
permits consumers to opt out of information-sharing for
marketing purposes among affiliated companies.
Predatory
Lending
What is commonly referred to as predatory typically involves one
or more of the following elements :
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making unaffordable loans based on a borrowers assets
rather than the consumers ability to repay an obligation,
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inducing a consumer to refinance a loan repeatedly in order to
charge high points and fees each time the loan is refinanced, or
loan flipping, and
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engaging in fraud or deception to conceal the true nature of the
loan obligation from an unsuspecting or unsophisticated consumer.
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The Home Ownership and Equity Protection Act of 1994 and
implementing regulations adopted by the Federal Reserve require
specified disclosures and extend additional protection to
consumers in closed-end consumer credit transactions, such as
home repairs or renovation, that are secured by a mortgage on
the borrowers primary residence. The disclosures and
protections are applicable to high cost transactions
with any of the following features -
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interest rates for first lien mortgage loans more than eight
percentage points above the yield on U.S. Treasury
securities having a comparable maturity,
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interest rates for subordinate lien mortgage loans more than
10 percentage points above the yield on U.S. Treasury
securities having a comparable maturity, or
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total points and fees paid in the credit transaction exceed the
greater of either 8% of the loan amount or a specified dollar
amount that is inflation-adjusted each year.
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The Home Ownership and Equity Protection Act prohibits or
restricts numerous credit practices, including loan flipping by
the same lender or loan servicer within a year of the
residential mortgage loan being refinanced. Lenders are presumed
to have violated the law unless they document that the borrower
has the ability to repay. Lenders that violate the rules face
cancellation of loans and penalties equal to the finance charges
paid. The Home Ownership and Equity Protection Act also governs
so-called reverse mortgages. In
129
January 2008, the Federal Reserve issued final rules under the
Home Ownership and Equity Protection Act to address practices in
the subprime mortgage market before the onset of the Great
Recession. The rules require disclosures and additional
protections or prohibitions on certain practices connected with
higher-priced mortgages, which the rules define as
closed-end mortgage loans that are secured by a consumers
principal dwelling and that have an annual percentage rate that
exceeds the average prime offer rates for a comparable
transaction published by the Federal Reserve Board by at least
1.5 percentage points for first-lien loans, or
3.5 percentage points for subordinate-lien loans. The
Federal Reserve derives average prime offer rates from the
Freddie Mac Primary Mortgage Market
Survey®.
For higher-priced mortgage loans, the final rules:
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Prohibit creditors from extending credit without regard to a
consumers ability to repay from sources other than the
collateral itself,
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Require creditors to verify income and assets relied upon to
determine repayment ability,
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Prohibit prepayment penalties except under certain
conditions, and
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Require creditors to establish escrow accounts for taxes and
insurance in the case of first-lien higher-priced mortgage
loans, but permit creditors to allow borrowers to cancel escrows
12 months after loan consummation.
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Corporate
Governance and Accounting Legislation
The Sarbanes-Oxley Act of 2002 was adopted to enhance corporate
responsibility, increase penalties for accounting and auditing
improprieties at publicly traded companies, and protect
investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws. The Sarbanes-Oxley
Act of 2002 applies generally to all companies that file or are
required to file periodic reports with the Securities and
Exchange Commission (the SEC) under the Exchange
Act, including WLBC. Under the Sarbanes-Oxley Act, the SEC and
securities exchanges adopted extensive additional disclosure,
corporate governance and other related rules. Among its many
provisions, the Sarbanes-Oxley Act subjects bonuses issued to
top executives to disgorgement if a subsequent restatement of a
companys financial statements was due to corporate
misconduct, prohibits an officer or director from misleading or
coercing an auditor, prohibits insider trades during pension
fund blackout periods, imposes new criminal
penalties for fraud and other wrongful acts, and extends the
period during which securities fraud lawsuits can be brought
against a company or its officers.
Anti-Money
Laundering and Anti-Terrorism Legislation
The Bank Secrecy Act of 1970 requires financial institutions to
maintain records and report transactions to prevent the
financial institutions from being used to hide money derived
from criminal activity and tax evasion. The Bank Secrecy Act
establishes (a) record keeping requirements to assist
government enforcement agencies with tracing financial
transactions and flow of funds, (b) reporting requirements
for Suspicious Activity Reports and Currency Transaction Reports
to assist government enforcement agencies with detecting
patterns of criminal activity, (c) enforcement provisions
authorizing criminal and civil penalties for illegal activities
and violations of the Bank Secrecy Act and its implementing
regulations, and (d) safe harbor provisions that protect
financial institutions from civil liability for their
cooperative efforts.
Title III of the USA PATRIOT Act of 2001 added
anti-terrorist financing provisions to the requirements of the
Bank Secrecy Act and its implementing regulations. Among other
things, the USA PATRIOT Act requires all financial institutions,
including subsidiary banks and non-banking affiliates, to
institute and maintain a risk-based anti-money laundering
compliance program that includes a customer identification
program, provides for information sharing with law enforcement
and between certain financial institutions by means of an
exemption from the privacy provisions of the Gramm-Leach-Bliley
Act, prohibits U.S. banks and broker-dealers from
maintaining accounts with foreign shell banks,
establishes due diligence and enhanced due diligence
requirements for certain foreign correspondent banking and
foreign private banking accounts, and imposes additional record
keeping requirements for certain correspondent banking
arrangements. The USA PATRIOT Act also grants broad authority to
the Secretary of the Treasury to take actions to combat money
130
laundering. Federal bank regulators are required to evaluate
the effectiveness of a financial institutions efforts to
combat money laundering when evaluating an application submitted
by the financial institution.
The Treasurys Office of Foreign Asset Control administers
and enforces economic and trade sanctions against targeted
foreign countries, entities, and individuals based on
U.S. foreign policy and national security goals. As a
result, financial institutions must scrutinize transactions to
ensure that they do not represent obligations of or ownership
interests in entities owned or controlled by sanctioned targets.
Monetary
Policy
The earnings of financial institutions are affected by the
policies of regulatory authorities, including monetary policy of
the Federal Reserve. An important function of the Federal
Reserve is regulation of aggregate national credit and money
supply. The Federal Reserve accomplishes these goals with
measures such as open market transactions in securities,
establishment of the discount rate on bank borrowings, and
changes in reserve requirements against bank deposits. These
methods are used in varying combinations to influence overall
growth and distribution of financial institutions loans,
investments and deposits, and they also affect interest rates
charged on loans or paid on deposits. Monetary policy is
influenced by many factors, including inflation, unemployment,
short-term and long-term changes in the international trade
balance, and fiscal policies of the United States government.
Federal Reserve monetary policy has had and will continue to
have a significant effect on the operating results of financial
institutions.
Developments
Affecting Management and Corporate Governance
In June of 2010, the Federal banking agencies jointly published
their final Guidance on Sound Incentive Compensation Policies.
The goal is to enable financial organizations to manage the
safety and soundness risks of incentive compensation
arrangements and to assist banks and bank holding companies with
identification of improperly-structured compensation
arrangements. To ensure that incentive compensation arrangements
do not encourage employees to take excessive risks that
undermine safety and soundness, the incentive compensation
guidance sets forth these key principles:
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incentive compensation arrangements should provide employees
incentives that appropriately balance risk and financial results
in a manner that does not encourage employees to expose the
organization to imprudent risk,
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these arrangements should be compatible with effective controls
and risk management, and
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these arrangements should be supported by strong corporate
governance, including active and effective oversight by the
board of directors.
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To implement the interagency guidance, a financial organization
must regularly review incentive compensation arrangements for
all executive and non-executive employees who, either
individually or as part of a group, have the ability to expose
the organization to material amounts of risk, as well as to
review the risk-management, control, and corporate governance
processes related to these arrangements. The organization must
immediately address any identified deficiencies in compensation
arrangements or processes that are inconsistent with safety and
soundness and must ensure that incentive compensation
arrangements are consistent with the principles discussed in the
guidance.
In addition to numerous provisions that affect the business of
banks and bank holding companies, the recently enacted
Dodd-Frank Wall Street Reform and Consumer Protection Act
includes in Title IX a number of provisions affecting
corporate governance and executive compensation, for example the
requirements that stockholders be given the opportunity to
consider and vote upon executive compensation disclosed in a
companys annual meeting proxy statement, that a
companys compensation committee be comprised entirely of
independent directors and that the committee have stated minimum
authorities, that annual meeting proxy statements disclose the
ratio of CEO compensation to the median compensation of all
other employees, that company policy provide for recovery of
excess incentive compensation after an accounting restatement,
and that stockholders have the ability to designate director
nominees for inclusion in a companys annual meeting proxy
statement. Section 956 also provides for adoption of
incentive compensation guidelines jointly by the
131
Federal banking agencies and the SEC, the National Credit Union
Administration, and the Federal Housing Finance Agency. Due for
adoption by the end of April 2011, the guidelines could be
different from the Guidance on Sound Incentive Compensation
Policies adopted by the Federal bank regulators in June of 2010.
The new guidelines adopted under Dodd-Frank Act section 956
could impose additional compliance burdens beyond those already
imposed by the Federal bank regulatory agency guidelines adopted
in June of 2010.
Finally, during the application process for the acquisition of
Service1st,
we made a written commitment to the FDIC that we will make no
change in the directors or executive management of
Service1st unless
we first receive the FDICs non-objection to the proposed
change. This commitment will expire three years after the
October 28, 2010 completion of the acquisition of
Service1st or,
if later, when the September 1, 2010 Consent Order agreed
to by
Service1st with
the FDIC and the Nevada FID terminates.
Recent
Initiatives
Enacted on October 3, 2008, the Emergency Economic
Stabilization Act of 2008 created the Troubled Asset Relief
Program (TARP), giving the U.S. Treasury
Department authority to purchase and insure certain types of
troubled assets. One component of TARP is a generally available
capital access program known as the Capital Purchase Program
under which a financial institution may issue preferred shares
and warrants to purchase shares of its common stock to the
Treasury. The goal of the Capital Purchase Program was to help
stabilize the financial system as a whole and ensure the
availability of credit necessary for the countrys economic
recovery.
Service1st is
not a participant in the Capital Purchase Program. Enacted on
February 17, 2009, the American Recovery and Reinvestment
Act of 2009 includes numerous economic stimulus provisions and
makes more restrictive the executive compensation limits
applicable to Capital Purchase Program participants.
On July 21, 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act became law. The Dodd-Frank Act is a
landmark financial reform bill, changing the current bank
regulatory structure and affecting the lending, investment,
trading, and operating activities of financial institutions and
holding companies. Implementation of the Dodd-Frank Act will
require new mandatory and discretionary rulemakings by numerous
Federal regulatory agencies. The Dodd-Frank Act includes the
following provisions:
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section 111 establishes a new Financial Stability Oversight
Counsel to monitor systemic financial risks. The Board of
Governors of the Federal Reserve is given extensive new
authorities to impose strict controls on large bank holding
companies with total consolidated assets equal to or in excess
of $50 billion and systemically significant non-bank
financial companies to limit the risk they might pose for the
economy and to other large interconnected companies. The
Dodd-Frank Act also grants to the Treasury Department, FDIC and
the FRB broad new powers to seize, close and wind-down too
big to fail financial institutions (including non-bank
institutions) in an orderly fashion.
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Title X establishes a new independent Federal regulatory
body within the Federal Reserve System that is dedicated
exclusively to consumer protection. Known as the Bureau of
Consumer Financial Protection, this new regulatory body will
assume responsibility for most consumer protection laws, with
rulemaking, supervisory, examination, and enforcement authority.
It will also be in charge of setting appropriate consumer
banking fees and caps. According to Dodd-Frank Act
section 1025, the new regulatory body has examination and
enforcement authority over banks with more than $10 billion
in assets, but section 1026 makes clear that banks with
assets of $10 billion or less will continue to be examined
by their bank regulators for consumer law compliance. In
addition, the Dodd-Frank Act permits states to adopt consumer
protection laws and regulations that are stricter than those
regulations promulgated by the Consumer Financial Protection
Bureau. Although our bank does not currently offer many of these
consumer products or services, compliance with any such new
regulations would increase our cost of operations and, as a
result, could limit our ability to expand into these products
and services,
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section 171 restricts the amount of trust preferred
securities that may be considered Tier 1 capital. For
depository institution holding companies with total assets of
less than $15 billion, trust preferred
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132
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securities issued before May 19, 2010 may continue to
be included in Tier 1 capital, but future issuances of
trust preferred securities will no longer be eligible for
treatment as Tier 1 capital, and
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under section 334 the FDICs minimum reserve ratio is
to be increased from 1.15% to 1.35%, with the goal of attaining
that 1.35% level by September 30, 2020; however, financial
institutions with assets of less than $10 billion,
including
Service1st,
are to be exempt from the cost of the increase. FDIC insurance
coverage of up to $250,000 for deposit accounts is made
permanent by section 335, section 343 extends until
January 1, 2013 unlimited FDIC insurance for
non-interest-bearing demand deposit accounts, more commonly
known as checking accounts, and section 627 repeals the
longstanding prohibition against financial institutions paying
interest on checking accounts.
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Section 331 changes the way deposit insurance premiums are
calculated by the FDIC as well. That is, deposit insurance
premiums are calculated based upon an institutions
so-called assessment base. Until the Dodd-Frank Act became law,
the assessment base consisted of an institutions deposit
liabilities. Section 331, however, makes clear that the
assessment base shall now be the difference between total assets
and tangible equity, so in other words the assessment base will
take account of all liabilities, not merely deposit liabilities.
This change is likely to have a greater impact on large banks,
which tend to rely on a variety of funding sources, than on
smaller community banks, which tend to rely primarily on deposit
funding:
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the Office of the Comptroller of the Currencys ability to
preempt state consumer protection laws is constrained by
section 1044, and because of section 1042 state
attorneys general have greater authority to enforce state
consumer protection laws against national banks and their
operating subsidiaries,
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section 619 embodies the so-called Volcker
rule, prohibiting a banking entity from engaging in
proprietary trading or from sponsoring or investing in a hedge
fund or private equity fund, and
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imposing a 5% risk retention requirement on securitizers of
asset-backed securities, section 941 could have an impact
on financial institutions that originate mortgages for sale into
the secondary market. Like other provisions of the Dodd-Frank
Act, the scope and impact of section 941 will be determined
by future rulemaking.
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We are evaluating the potential impact of the Dodd-Frank Act on
our business, financial condition, results of operations, and
prospects. The Dodd-Frank Act could affect the profitability of
community banking, require changes in the business practices of
community banking organizations, lead to more stringent capital
and liquidity requirements, and otherwise adversely affect the
community banking business. However, because much of the
Dodd-Frank Act will be phased in over time and will not become
effective until Federal agency rulemaking initiatives are
completed, we cannot predict with confidence precisely how the
Dodd-Frank Act will affect community banking organizations. We
are confident, however, that short- and long-term compliance
costs for all financial organizations, both large and small,
will be greater because of the Dodd-Frank Act.
133
OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the
beneficial ownership of Common Stock as of March 30, 2011
by:
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each person known by us to be the beneficial owner of more than
5% of the shares of Common Stock;
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each of our current executive officers and directors;
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all of our executive officers and directors as a group.
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Beneficial ownership is determined under the rules and
regulations of the Securities and Exchange Commission, which
provide that a person is deemed to beneficially own all shares
of Common Stock that such person has the right to acquire within
60 days. Although shares that a person has the right to
acquire within 60 days are counted for the purposes of
determining that individuals beneficial ownership, such
shares generally are not deemed to be outstanding for the
purpose of computing the beneficial ownership of any other
person.
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Amount and
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Nature of
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Beneficial
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Percent of
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Name of Beneficial Owner of Common Stock
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Ownership(1)
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Class(2)
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Trafelet Capital Management, L.P.(2)
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906,545
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6.01
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%
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Weiss Multi-Strategy Advisers LLC(3)
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1,222,278
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8.10
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%
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Fidelity Management and Research Company(4)
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3,750,000
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24.85
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%
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Wells Fargo, et al.(5)
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1,213,928
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8.05
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%
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Mendon Capital Advisors Corp.(6)
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1,881,854
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12.47
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%
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KBW Asset Management, Inc.(7)
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761,866
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5.05
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%
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Jason N. Ader(8)
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400,372
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2.65
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%
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Richard A.C. Coles(9)
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50,195
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*
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Michael B. Frankel(10)
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50,000
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*
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George A. Rosenbaum, Jr.(11)
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38,819
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*
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Terrence L. Wright(12)
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69,161
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|
*
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Curtis W. Anderson(13)
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36,790
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*
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Robert G. Goldstein
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Steven D. Hill(14)
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41,742
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|
*
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William E. Martin(15)
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174,365
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1.16
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%
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Patricia A. Ochal(16)
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31,555
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*
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Richard Deglman(17)
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14,281
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|
*
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Daniel B. Silvers(18)
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Andrew P. Nelson(19)
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25,165
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*
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Blake L. Sartini(20)
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233,274
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1.55
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%
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Mark Schulhof(21)
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50,000
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*
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All current and former directors and officers as a group (15
individuals)
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1,215,721
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8.03
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%
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All current directors and officers as a group (11 individuals)
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907,282
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5.99
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%
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* |
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Less than 1%. |
|
(1) |
|
The percentage ownership of each individual is based on the
assumption that there are 15,088,023 shares of Common
Stock, including shares of Restricted Stock, issued and
outstanding. |
|
(2) |
|
Beneficial ownership is based on information contained in a
Schedule 13G/A filed by Trafelet Capital Management, L.P.,
Trafelet & Company, LLC, and Remy Trafelet with the
SEC on February 14, 2011. The business address of Trafelet
Capital Management, L.P. is 590 Madison Avenue 37th Floor New
York, New York 10022. |
134
|
|
|
(3) |
|
Beneficial ownership is based on information contained in a
Schedule 13G/A filed by Weiss Multi-Strategy Advisers LLC,
George A Weiss and Frederick E. Doucette with the SEC on
February 11, 2011. The business address of Weiss
Multi-Strategy Advisers LLC is One State Street, 20th Floor,
Hartford, Connecticut 06109. |
|
(4) |
|
Beneficial ownership is based on information contained in a Form
13G/A filed by FMR LLC and dated as of January 10, 2011.
FMR LLC acts as investment advisor to affiliated investment
funds and has voting or investment power over the WLBC shares
held by the funds. The business address of FMR LLC is 82
Devonshire Street, Boston, Massachusetts 02109. |
|
(5) |
|
Beneficial ownership is based on information contained in a
Schedule 13G/A filed by Wells Fargo and Company, Wells
Capital Management Inc., and Wells Fargo Funds Management, LLC
with the SEC on January 20, 2011. The business address of
Wells Fargo and Company is 420 Montgomery Street,
San Francisco, California 94104. The business address of
Wells Capital Management Inc. and Wells Fargo
Fund Management, LLC is 525 Market Street, 10th Floor,
San Francisco, California 94105. |
|
(6) |
|
Beneficial ownership is based on information contained in a
Schedule 13G/A filed by Mendon Capital Advisors Corp.
Burnham Financial Industries Fund, Burnham Asset Management
Corp. and Anton V. Schutz with the SEC on February 14,
2011. Mendham Capital Advisors Corp. acts as investment advisor
to Burnham Financial Industries Fund, which is a registered
investment company. Anton V. Schutz is the sole shareholder and
President of Mendon Capital Advisors Corp. Burnham Asset
Management Corp., in its capacity as an investment adviser, has
authority to vote and dispose of certain shares of the
Issuers common stock and has delegated such authority to
Mendon Capital Advisors Corp. The business address of Mendon
Capital Advisors Corp. and Anton V. Schutz is 150 Allens Creek
Road, Rochester, New York 14618. The business address of Burnham
Financial Industries Fund is 1325 Avenue of the Americas, 26th
Floor, New York, New York 10019. |
|
(7) |
|
Beneficial ownership is based on information contained in a
Schedule 13G filed by KBW Asset Management, Inc. with the
SEC on February 11, 2001. The business address of KBW Asset
Management is 787 Seventh Ave.,
6th
Floor, New York, NY 10019. |
|
(8) |
|
The securities attributable to Jason N. Ader include 69,764
shares held in his individual capacity, 330,428 shares of
Common Stock held by Hayground Cove, of which Mr. Ader is
the sole member, through Doha Partners I, LP,
HC Institutional Partners LP, HC Overseas Partners
Ltd. and HC Turbo Fund Ltd. and 180 shares held for
the account of his immediate family. Hayground Cove is
controlled by Jason N. Ader and he and his father are investors
in Hayground Cove. Beneficial ownership does not include 50,000
Restricted Stock Units that shall be settled for one share of
Common Stock per Restricted Stock Unit on the earlier to occur
of (i) a change of control of WLBC and (ii) the
Settlement Date. |
|
(9) |
|
Richard A.C. Coles beneficial ownership consists of
50,195 shares of Common Stock. |
|
(10) |
|
Michael B. Frankels beneficial ownership consists of
50,000 shares of Common Stock. |
|
(11) |
|
George A. Rosenbaum, Jr.s beneficial ownership includes
38,819 shares of Restricted Stock which will vest 20% on
each of the first, second, third, fourth and fifth anniversaries
of the closing date of the Acquisition, which occurred on
October 28, 2010, subject to Mr. Rosenbaums
continuous employment through each vesting date. |
|
|
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(12) |
|
Terrence L. Wrights beneficial ownership consists of
62,357 shares of Common Stock,
Service1st
Warrants exercisable into 3,046 shares of Common Stock,
vested options immediately exercisable into 2,948 shares of
Common Stock and options exercisable into 810 shares of
Common Stock that will vest on April 17, 2011.
Mr. Wrights beneficial ownership does not include
options exercisable into 572 shares of Common Stock that
will vest on August 11, 2011. |
|
|
|
(13) |
|
Curtis W. Andersons beneficial ownership consists of
29,986 shares of Common Stock,
Service1st
Warrants exercisable into 3,046 shares of Common Stock,
vested options immediately exercisable into 2,948 shares of
Common Stock and options exercisable into 810 shares of
Common Stock that will vest on April 17, 2011.
Mr. Andersons beneficial ownership does not include
options exercisable into 572 shares of Common Stock that
will vest on August 11, 2011. |
135
|
|
|
(14) |
|
Steven D. Hills beneficial ownership consists of
35,698 shares of Common Stock,
Service1st
Warrants exercisable into 3,046 shares of Common
Stock, vested options immediately exercisable into
2,316 shares of Common Stock and options exercisable into
682 shares of Common Stock that will vest on April 17,
2011. Mr. Hills beneficial ownership does not include
options exercisable into 475 shares of Common Stock that
will vest on August 11, 2011. |
|
(15) |
|
William E. Martins beneficial ownership includes
19,086 shares of Common Stock and 155,279 shares of
Restricted Stock which will vest 20% on each of the first,
second, third, fourth and fifth anniversaries of the closing
date of the Acquisition, which occurred on October 28,
2010, subject to Mr. Martins continuous employment
through each vesting date. Mr. Martins beneficial
ownership does not include options exercisable into
23,798 shares of Common Stock that will vest on
December 31, 2012 if
Service1sts
total deposits are equal to or greater than $750 million as
of that date. |
|
(16) |
|
Patricia A. Ochals beneficial ownership consists of
10,661 shares of Common Stock,
Service1st
Warrants exercisable into 3,141 shares of Common Stock and
vested options immediately exercisable into 17,753 shares
of Common Stock. Ms. Ochals beneficial ownership does
not include options exercisable into 7,235 shares of Common
Stock that will vest in two installments on June 12, 2011
and 2012 and options exercisable into 10,709 shares of
Common Stock that will vest in three installments on
August 11, 2011, 2012 and 2013. |
|
(17) |
|
Richard Deglmans beneficial ownership consists of vested
options immediately exercisable into 14,281 shares of
Common Stock. Mr. Deglmans beneficial ownership does
not include options exercisable into 21,417 shares of
Common Stock that will vest in three installments on
August 11, 2011, 2012 and 2013. |
|
(18) |
|
Daniel B. Silvers is our former President.
Mr. Silvers beneficial ownership does not include
100,000 Restricted Stock Units that shall be settled for one
share of Common Stock per Restricted Stock Unit on the earlier
to occur of (i) a change of control of WLBC and
(ii) the Settlement Date. |
|
(19) |
|
Andrew P. Nelson is our former Chief Financial Officer and
Assistant Secretary, and a former member of the Board.
Mr. Nelsons beneficial ownership includes
25,165 shares of Common Stock. Mr. Nelsons
beneficial ownership does not include 100,000 Restricted Stock
Units that shall be settled for one share of Common Stock per
Restricted Stock Unit on the earlier to occur of (i) a
change of control of WLBC and (ii) the Settlement Date. |
|
|
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(20) |
|
Blake L. Sartini is a former member of the Board.
Mr. Sartinis beneficial ownership consists of
227,230 shares of Common Stock,
Service1st
Warrants exercisable into 3,046 shares of Common Stock,
vested options immediately exercisable into 2,316 shares of
Common Stock and options exercisable into 682 shares of
Common Stock that will vest on April 17, 2011.
Mr. Sartinis beneficial ownership does not include
options exercisable into 475 shares of Common Stock that
will vest on August 11, 2011. |
|
|
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(21) |
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Mark Schulhof is a former member of the Board.
Mr. Schulhofs beneficial ownership consists of
50,000 shares of Common Stock. |
136
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Code of
Ethics and Related Person Policy
We have adopted a code of conduct and ethics applicable to our
directors, officers and employees in accordance with applicable
federal securities laws and the rules of Nasdaq.
In order to prepare our prospectus each member of the Board and
the board of directors of
Service1st and
each executive officer was required to complete an extensive
questionnaire. The purpose of the questionnaire is to obtain
information from directors and executive officers to verify
disclosures required to be made in these documents. This process
is to facilitate disclosure of any related party transactions
entered into between themselves (or family members or entities
in which they hold an interest) and WLBC that in the aggregate
exceeds $120,000, that is currently proposed or that occurred
during the preceding year. When completing the questionnaire,
each director and executive officer is required to report any
such transaction.
These procedures are intended to determine whether any such
related party transaction impairs the independence of a director
or presents a conflict of interest on the part of a director,
employee or officer.
Related
Party Transactions
Purchases
of Private Shares by Hayground Cove, Our Executive Officers and
Directors
On July 16, 2007, we issued 8,625,000 Private Shares (of
which 637,786 were redeemed because the underwriters did not
fully exercise their over-allotment option, resulting in a total
of 7,987,214 shares outstanding after redemption), to
certain of our affiliates for an aggregate amount of $8,625 in
cash, at a purchase price of $0.001 per share.
In connection with our formation, Hayground Cove, and the funds
and accounts it manages, purchased 8,348,500 Private Shares.
Andrew Nelson, our former Chief Financial Officer, and our
current Assistant Secretary and director purchased 25,000
Private Shares, Scott LaPorta, our former Chief Executive
Officer, as well as our former directors Robert Foresman, Carl
H. Hahn, Philip A. Marineau and Steven Westly, each purchased
25,000 Private Shares, and our former director Marc Soloway
purchased 50,000 Private Shares. Jason Ader, a current member of
the Board and our former Chairman and Chief Executive Officer,
did not directly purchase any Private Shares; however, he is the
sole member of Hayground Cove.
All of the Private Shares were issued in connection with our
organization pursuant to the exemption from registration
contained in Section 4(2) of the Securities Act. The
Private Shares were sold for an aggregate offering price of
$8,625 at a purchase price of $0.001 per share. No underwriting
commissions were paid, nor was there any general solicitation,
with respect to such sales.
On July 20, 2009, we entered into a Private
Shares Restructuring Agreement with Hayground Cove,
pursuant to which 7,618,908, or over 95%, of the Private Shares,
were cancelled and exchanged for Private Warrants, resulting in
368,306 Private Shares and 16,118,908 Private Warrants.
Private
Warrants
On November 27, 2007, Hayground Cove and our former Chief
Executive Officer, Scott LaPorta, purchased in a private
placement transaction pursuant to Section 4(2) under the
Securities Act a total of 8,500,000 Private Warrants (7,500,000
by Hayground Cove and 1,000,000 by our former Chief Executive
Officer) from us at a price of $1.00 per warrant. The $8,500,000
purchase price of the Private Warrants was added to the proceeds
of our initial public offering to be held in our trust account
pending our completion of one or more business combinations.
In connection with the Acquisition, on September 27, 2010,
WLBC and Continental Stock Transfer &
Trust Company, as warrant agent, entered into the Amended
Warrant Agreement, pursuant to which all of our outstanding
Warrants, including the Private Warrants, were exercised into
one thirty-second (1/32) of one share of Common Stock
concurrently with the consummation of the Acquisition. Any
Warrants that would have entitled a holder of such Warrants to a
fractional share of Common Stock after taking into account the
exercise
137
of the remainder of such holders Warrants into full shares
of Common Stock were cancelled. As a result of the foregoing,
WLBC issued 1,502,088 shares of Common Stock and paid each
Warrant holder $0.06 per Warrant exercised. The Common Stock
issuable upon exercise of the Public Warrants was previously
registered under the Exchange Act during WLBCs initial
public offering, and such shares were freely tradable
immediately upon issuance.
Settlement
Agreement
Our former Chief Executive Officer, Scott LaPorta, had an option
to purchase 495,000 shares of our Common Stock at an
exercise price of $0.001 per share. On December 23, 2008,
we entered into a settlement agreement with Mr. LaPorta in
connection with his termination as our Chief Executive Officer
and his resignation from the Board. The settlement agreement
provided that his employment terminated without cause effective
as of December 23, 2008. He received a severance payment
from us in the sum of $247,917, less applicable withholding
taxes. The settlement agreement also provided that: (i) he
retained his option to purchase 495,000 shares of our
Common Stock from Hayground Cove at an exercise price of $0.001
per share under the terms of his employment agreement and his
termination under the terms of the settlement agreement did not
forfeit his option; (ii) he was fully vested in the option,
but was not entitled to exercise all or any portion of the
option until on or after the date that is six months after the
closing date of a Business Combination; (iii) he retained
the 25,000 Private Shares he received in connection with his
service on the Board under his employment agreement and we
relinquished any and all rights to redeem or repurchase those
shares; (iv) he retained the 1,000,000 Private Warrants he
purchased and we relinquished any and all rights to redeem or
repurchase those warrants; (v) we maintain directors and
officers liability insurance that names him as an insured
for a period of six years following the effective date of the
settlement agreement at a level commensurate with that which is
then applicable to our most senior executives and directors;
(vi) he acknowledged that his non-solicitation obligations
under his employment agreement survive the termination thereof,
and he therefore may not, until December 24, 2010, solicit
our employees, personnel, consultants, advisers or contractors
or encourage in any manner our customers or clients to reduce
their relationship with us; and (vii) he acknowledged that
his option, the shares of our stock he may acquire upon exercise
of his option, the shares he received as a member of the Board
and his warrants are all subject to the terms of a
lock-up
agreement, dated October 3, 2007, between Hayground Cove
and us. The settlement agreement also provides for a mutual
general release of claims he has or may have against us or our
officers, directors and affiliates or we have or may have
against him. The consummation of the Acquisition did not
constitute a Business Combination as defined in the
Settlement Agreement, and we believe that consummation of a
Business Combination under such definition is unlikely to occur
in the future.
Lending
Relationship with Prior Director
When
Service1st
commenced business on January 16, 2007, the bank sought
ways to deploy in the form of loans and investments the
significant amount of capital that was raised in the
establishment of the bank. In the first quarter of 2007,
Service1st
purchased a $5 million portion of an existing term loan to
Golden Gaming, Inc., of which Blake L. Sartini, a former member
of the Board and a former member of the Board of Directors of
Service1st,
is now and was then Chairman, Chief Executive Officer, and
principal stockholder. Mr. Sartini resigned as a director
of
Service1st
on or about December 1, 2010. Mr. Sartini resigned as
a director of Western Liberty Bancorp effective
February 14, 2011.
Service1sts
$5 million loan interest constituted less than 5% of the
entire loan amount.
Service1st
sold its interest in the Golden Gaming loan on or about
February 24, 2011 to a private investment fund for
approximately $3.0 million. At the time of sale, the
principal balance of the
Service1sts
loan interest was approximately $3.8 million. Secured by a
First Deed of Trust on a casino facility and maturing in
November of 2011, the loan began to experience weakness in 2009
in tandem with increasing distress in the Clark County economy.
The loan became nonperforming in 2010. At the time of sale the
loan was on nonaccrual status, with a majority of the loan
classified as substandard and the remainder doubtful.
138
Payment
for Due Diligence Services
In October 2009, WLBC made a one-time payment of $2,600,000 to
Hayground Cove Asset Management LLC for due diligence and other
services related to various acquisition opportunities and other
activities since WLBCs inception. Proceeds from the
payment were disbursed by Hayground Cove Asset Management LLC to
certain of its employees, affiliates and consultants (some of
whom also served at the time as WLBCs officers
and/or
directors) that provided support to WLBC in connection with its
efforts in finding and pursuing potential transactions.
Sponsor
Support Agreement
Pursuant to a Second Amended and Restated Sponsor Support
Agreement, dated as of August 13, 2009, between us and
Hayground Cove (the Sponsor Support
Agreement), we have agreed that neither we nor
Hayground Cove (or any affiliates of Hayground Cove) will enter
into any private negotiations to purchase any of our securities,
or solicit tenders of any of our securities. We have agreed to
indemnify Hayground and its affiliates for any liabilities
arising from the Sponsor Support Agreement or otherwise.
Employment
Agreement with George A. Rosenbaum Jr.
On December 18, 2009, we entered into a second amended and
restated employment agreement with George A. Rosenbaum Jr.
Mr. Rosenbaums currently serves as our Chief
Financial Officer and as Executive Vice President of
Service1st.
Pursuant to the terms of his employment agreement,
Mr. Rosenbaums employment commenced as of
January 1, 2010 and will continue for an initial term of
three years with one or more additional automatic one-year
renewal periods unless either party elects not to renew the
term. Mr. Rosenbaum is entitled to a base salary of
$200,000. In addition, Mr. Rosenbaum received
38,819 shares of Restricted Stock on the closing date of
the Acquisition, which occurred on October 28, 2010 as
described below under the Section entitled Restricted
Stock Grants and Restricted Stock Unit Grants.
Mr. Rosenbaum was also entitled to a transaction bonus
equal to a pro rata amount of his base salary for the period
from the signing of his original employment agreement on
July 28, 2009. Mr. Rosenbaum received $85,484, which
represents payment in full of his transaction bonus.
Mr. Rosenbaum is also eligible to receive an annual
discretionary incentive payment, upon the attainment of one or
more pre-established performance goals established by the
Compensation Committee. Mr. Rosenbaum is entitled to
employee benefits in accordance with any employee benefits
programs and policies adopted by us. In addition, the employment
agreement contains customary representations, covenants and
termination provisions.
Employment
Agreement with William E. Martin
On February 8, 2010, in connection with the Acquisition, we
entered into an amended and restated employment agreement with
William E. Martin. Mr. Martin currently serves as our Chief
Executive Officer and as a member of the Board, and as Chief
Executive Officer and a member of the board of directors of
Service1st.
Pursuant to the terms of his employment agreement,
Mr. Martins employment commenced as of
October 28, 2010, the closing date of the Acquisition, and
shall continue for an initial term of three years with one or
more additional automatic one year renewal periods thereafter
unless either party elects not to renew the term.
Mr. Martin is entitled to a base salary of $325,000. In
addition Mr. Martin received 155,279 shares of
Restricted Stock as described below under the Section entitled
Restricted Stock Grants and Restricted Stock Unit
Grants in consideration for his future services in
accordance with the terms of his employment agreement.
Mr. Martin is also eligible to receive additional equity
and long-term incentive awards under any equity-based incentive
compensation plans adopted by us for which our senior executives
are generally eligible, and an annual discretionary incentive
payment upon the attainment of one or more pre-established
performance goals established by the Compensation Committee of
the Board. Mr. Martin is entitled to employee benefits in
accordance with our employee benefits programs. In addition,
Mr. Martin is entitled to receive a one-time payment equal
to his prior years salary in the event there is a change
in control at
139
Service1st and
Mr. Martin remains the Chief Executive Officer of such
through the closing of the change in control.
Mr. Martins employment agreement contains customary
representations, covenants and termination provisions.
Restricted
Stock Grants and Restricted Stock Unit Grants
On October 28, 2010, in connection with the consummation of
the Acquisition, we issued Restricted Stock to William E.
Martin, who became a member of the Board and serves as our Chief
Executive Officer and as Chief Executive Officer of
Service1st,
and George A. Rosenbaum, Jr., our current Chief Financial
Officer and the Executive Vice President of
Service1st.
Mr. Martin received 155,279 shares of Restricted
Stock, which was equal to $1.0 million divided by the $6.44
closing price of the Common Stock on the closing date of the
Acquisition, in consideration for his future services in
accordance with the terms of his employment agreement with WLBC.
Mr. Rosenbaum received 38,819 shares of Restricted
Stock, which was equal to $250,000 divided by the closing price
of the Common Stock on the closing date of the Acquisition, in
consideration for his future services in accordance with the
terms of his employment agreement with WLBC. The shares of
Restricted Stock granted to each of Messrs. Martin and
Rosenbaum will vest 20% on each of the first, second, third,
fourth and fifth anniversaries of the consummation of the
Acquisition, which occurred on October 28, 2010, subject to
Messrs. Martins and Rosenbaums respective and
continuous employment through each vesting date. Fifty percent
of the shares of Restricted Stock that vest in accordance with
the prior sentence will remain Restricted Stock that will vest
upon a termination of the holders employment for any other
reason than (i) by WLBC for cause, or (ii) by the
holder without good reason prior to October 28, 2015. Such
Restricted Stock shall be subject to restrictions on transfer
for a period of one year following each vesting date. See the
sections entitled Employment Agreement with George A.
Rosenbaum, Jr. and Employment Agreement
with William E. Martin below, and the section entitled
Executive Officer and Director Compensation
Employment Agreements.
On October 28, 2010, in consideration of their substantial
service to and support of WLBC during the period in which we
sought the requisite regulatory approval to become a bank
holding company in connection with the Acquisition, WLBC and
each of Jason N. Ader, our former Chairman and Chief Executive
Officer and a current member of the Board, Daniel B. Silvers,
our former President, Andrew P. Nelson, our former Chief
Financial Officer and a former member of the Board, Michael Tew,
an outside consultant, and Laura Conover-Ferchak, an outside
consultant, entered into the Letter Agreements, pursuant to
which each of the foregoing individuals received a grant of
Restricted Stock Units. Mr. Ader, a current director and
the former Chairman and Chief Executive Officer of WLBC,
received 50,000 Restricted Stock Units; Mr. Silvers,
WLBCs former President, received 100,000 Restricted Stock
Units; Mr. Nelson, a former director of WLBC, received
25,000 Restricted Stock Units; Mr. Tew, an outside
consultant to WLBC, received 20,000 Restricted Stock Units; and
Mrs. Conover-Ferchak, an outside consultant to WLBC,
received 5,000 Restricted Stock Units. Each Restricted Stock
Unit is immediately and fully vested and shall be settled for
one share of Common Stock, of WLBC on the earlier to occur of
(i) a change of control and (ii) the Settlement Date.
Furthermore, on October 28, 2010, in consideration of their
substantial service to and support of WLBC during the period in
which we sought the requisite regulatory approval to become a
bank holding company in connection with the Acquisition, WLBC
made a one-time grant of 50,000 shares of Common Stock to
each of Michael Frankel, the current Chairman of the Board,
Richard A.C. Coles, a current member of the Board and Mark
Schulhof, a former member of the Board.
In addition, on October 28, 2010, in consideration of their
substantial service to and support of WLBC during the period in
which WLBC sought the requisite regulatory approval to become a
bank holding company in connection with the Acquisition, WLBC
made a one-time payment of $200,000, $450,000, $50,000 and
$50,000 to each of Jason N. Ader, Daniel B. Silvers, Michael B.
Frankel and Andrew Nelson, respectively.
140
PRICE
RANGE OF WESTERN LIBERTY BANCORP SECURITIES AND
DIVIDENDS
Our equity securities trade on the Nasdaq under the symbol WLBC.
The following table sets forth, for the fourth quarter of the
year ended December 31, 2007 and each quarter in the years
ended December 31, 2010, 2009 and 2008, the high and low
sales price of our units, Common Stock and Warrants as reported
on the Nasdaq, the New York Stock Exchange Amex (the
NYSE Amex) or the
Over-the-Counter
(OTC)
Bulletin Board®,
an electronic stock listing service provided by the Nasdaq Stock
Market, Inc. (the OTCBB), as the case may be.
Prior to listing on Nasdaq, our securities were listed on each
of the NYSE Amex and the OTCBB. Prior to November 27, 2007,
there was no established public trading market for our
securities.
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Units
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Common Stock
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Warrants
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Quarter Ended
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High
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Low
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High
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Low
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High
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Low
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2007
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Fourth Quarter (from November 27, 2007)
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$
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10.10
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$
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9.75
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$
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9.05
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$
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9.05
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$
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0.90
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$
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0.90
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2008
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First Quarter
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10.00
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9.66
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9.20
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9.00
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0.92
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0.71
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Second Quarter
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10.53
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9.67
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9.30
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9.03
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1.04
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0.57
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Third Quarter
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10.00
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9.30
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9.49
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9.22
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0.90
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0.25
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Fourth Quarter
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9.24
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8.49
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9.18
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8.40
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0.30
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0.05
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2009
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First Quarter
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9.55
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9.15
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9.48
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9.14
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0.17
|
|
|
|
0.08
|
|
Second Quarter
|
|
|
9.76
|
|
|
|
9.48
|
|
|
|
9.69
|
|
|
|
9.44
|
|
|
|
0.23
|
|
|
|
0.09
|
|
Third Quarter
|
|
|
10.70
|
|
|
|
9.90
|
|
|
|
9.89
|
|
|
|
9.65
|
|
|
|
1.20
|
|
|
|
0.20
|
|
Fourth Quarter
|
|
|
10.30
|
|
|
|
7.75
|
|
|
|
9.83
|
|
|
|
6.42
|
|
|
|
1.20
|
|
|
|
0.55
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
8.60
|
|
|
|
7.95
|
|
|
|
8.04
|
|
|
|
6.18
|
|
|
|
0.80
|
|
|
|
0.35
|
|
Second Quarter
|
|
|
7.50
|
|
|
|
7.00
|
|
|
|
9.00
|
|
|
|
5.75
|
|
|
|
0.45
|
|
|
|
0.22
|
|
Third Quarter
|
|
|
7.50
|
|
|
|
7.50
|
|
|
|
7.80
|
|
|
|
4.80
|
|
|
|
0.30
|
|
|
|
0.18
|
|
Fourth Quarter
|
|
|
7.50
|
|
|
|
7.50
|
|
|
|
7.80
|
|
|
|
4.80
|
|
|
|
0.30
|
|
|
|
0.18
|
|
141
Holders
of Common Equity
On April 12, 2011, there were approximately 197 holders of
record of our public Common Stock. Such numbers do not include
beneficial owners holding shares, or holders of our Private
Shares. On April 12, 2011, there were approximately
71 holders of record of our Private Shares.
Dividends
We have not paid any dividends on our Common Stock to date and
we do not intend to pay cash dividends at this time. The payment
of dividends will depend on our revenues and earnings, if any,
capital requirements and general financial condition. The
payment of dividends will be within the discretion of our
then-Board. Our Board currently intends to retain any earnings
for use in our business operations and, accordingly, we do not
anticipate the board declaring any dividends prior to a business
combination. In addition, by the terms of the September 1,
2010 Consent Order,
Service1st
cannot pay cash dividends unless it first obtains the written
consent of the FDIC and the Commissioner of the Nevada FID.
Recent
Sales of Unregistered Securities
On July 16, 2007, we issued an aggregate amount of
8,575,000 Private Shares, at a purchase price of $0.001 per
share, in private placement transactions. On August 1,
2007, we issued 25,000 Private Shares, at a purchase price of
$0.001 per share, in a private placement. On September 28,
2007, we issued 25,000 Private Shares, at a purchase price of
$0.001 per share, in a private placement. In total, prior to our
initial public offering we issued 8,625,000 Private Shares
for an aggregate amount of $8,625 in cash. Of those shares,
637,786 were redeemed because the underwriters did not fully
exercise their over-allotment option, resulting in a total of
7,987,214 shares outstanding after the redemption.
On August 1, 2007, our former Chief Executive Officer
agreed to purchase 1,000,000 Private Warrants. Our former Chief
Executive Officer purchased such Private Warrants from us
immediately prior to the consummation of our initial public
offering on November 27, 2007.
On October 19, 2007, Hayground Cove agreed to purchase
7,500,000 of our Private Warrants. Hayground Cove purchased such
Private Warrants from us immediately prior to the consummation
of our initial public offering on November 27, 2007.
On July 20, 2009, we entered into a Private
Shares Restructuring Agreement with Hayground Cove,
pursuant to which 7,618,908, or over 95%, of the Private Shares,
were cancelled and exchanged for Private Warrants, resulting in
368,306 Private Shares and 16,118,908 Private Warrants.
In connection with the Acquisition, on September 27, 2010,
WLBC and Continental Stock Transfer &
Trust Company, as warrant agent, entered into the Amended
Warrant Agreement, pursuant to which all of our outstanding
Warrants, including the Private Warrants, were exercised into
one thirty-second (1/32) of one share of Common Stock
concurrently with the consummation of the Acquisition. Any
Warrants that would have entitled a holder of such Warrants to a
fractional share of Common Stock after taking into account the
exercise of the remainder of such holders Warrants into
full shares of Common Stock were cancelled. As a result of the
foregoing, WLBC issued 1,502,088 shares of Common Stock and
paid each Warrant holder $0.06 per Warrant exercised. The Common
Stock issuable upon exercise of the Public Warrants was
previously registered under the Exchange Act during WLBCs
initial public offering, and such shares were freely tradable
immediately upon issuance
On October 28, 2010, in connection with the consummation of
the Acquisition, we issued Restricted Stock to William E.
Martin, who became a member of the Board and serves as our Chief
Executive Officer and as Chief Executive Officer of
Service1st,
and George A. Rosenbaum, Jr., our current Chief Financial
Officer and the Executive Vice President of
Service1st.
Mr. Martin received 155,279 shares of Restricted
Stock, which was equal to $1.0 million divided by the $6.44
closing price of the Common Stock on the closing date of the
Acquisition, in consideration for his future services in
accordance with the terms of his employment agreement with WLBC.
Mr. Rosenbaum received 38,819 shares of Restricted
Stock, which was equal to $250,000 divided by the closing price
of the Common Stock on the closing date of the Acquisition, in
142
consideration for his future services in accordance with the
terms of his employment agreement with WLBC. The shares of
Restricted Stock granted to each of Messrs. Martin and
Rosenbaum will vest 20% on each of the first, second, third,
fourth and fifth anniversaries of the consummation of the
Acquisition, which occurred on October 28, 2010, subject to
Messrs. Martins and Rosenbaums respective and
continuous employment through each vesting date. Fifty percent
of the shares of Restricted Stock that vest in accordance with
the prior sentence will remain Restricted Stock that will vest
upon a termination of the holders employment for any other
reason than (i) by WLBC for cause, or (ii) by the
holder without good reason prior to October 28, 2015. Such
Restricted Stock shall be subject to restrictions on transfer
for a period of one year following each vesting date. See the
section entitled Executive Officer and Director
Compensation Employment Agreements.
On October 28, 2010, in consideration of their substantial
service to and support of WLBC during the period in which we
sought the requisite regulatory approval to become a bank
holding company in connection with the Acquisition, WLBC and
each of Jason N. Ader, our former Chairman and Chief Executive
Officer and a current member of the Board, Daniel B. Silvers,
our former President, Andrew P. Nelson, our former Chief
Financial Officer and a former member of the Board, Michael Tew,
an outside consultant, and Laura Conover-Ferchak, an outside
consultant, entered into the Letter Agreements, pursuant to
which each of the foregoing individuals received a grant of
Restricted Stock Units. Mr. Ader, a current director and
the former Chairman and Chief Executive Officer of WLBC,
received 50,000 Restricted Stock Units; Mr. Silvers,
WLBCs former President, received 100,000 Restricted Stock
Units; Mr. Nelson, a former director of WLBC, received
25,000 Restricted Stock Units; Mr. Tew, an outside
consultant to WLBC, received 20,000 Restricted Stock Units; and
Mrs. Conover-Ferchak, an outside consultant to WLBC,
received 5,000 Restricted Stock Units. Each Restricted Stock
Unit is immediately and fully vested and shall be settled for
one share of Common Stock, of WLBC on the earlier to occur of
(i) a change of control and (ii) the Settlement Date.
Furthermore, on October 28, 2010, in consideration of their
substantial service to and support of WLBC during the period in
which we sought the requisite regulatory approval to become a
bank holding company in connection with the Acquisition, WLBC
made a one-time grant of 50,000 shares of Common Stock to
each of Michael Frankel, the current Chairman of the Board,
Richard A.C. Coles, a current member of the Board and Mark
Schulhof, a former member of the Board.
The sales of the above securities were deemed to be exempt from
the registration under the Securities Act of 1933 in reliance on
Section 3(a)(9) or Section 4(2) of the Securities Act,
as applicable. In addition, the future issuance of Common Stock
underlying the Restricted Stock Units and the
Service1st
Warrants will be similarly exempt. In any such transaction
pursuant to Section 4(2) of the Securities Act, such entity
represented its intention to acquire the securities for
investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were
affixed to the instruments representing such securities issued
in such transactions.
143
LEGAL
MATTERS
Proskauer Rose LLP, Eleven Times Square, New York, New York
10036, has acted as counsel for WLBC. Grady &
Associates, 20950 Center Ridge Road, Suite 100, Rocky
River, Ohio, 44116, has acted as special regulatory counsel for
WLBC.
EXPERTS
The financial statements of WLBC as of December 31, 2010
and 2009 and for the years then ended included in this
prospectus have been so included in reliance on the report of
Crowe Horwath LLP, independent registered public accounting
firm, given on the authority of said firm as experts in auditing
and accounting.
The financial statements of WLBC as of December 31, 2008
and for the year then ended and for the period from
June 28, 2007 (inception) to December 31, 2007
included in this prospectus have been so included in reliance on
the report of Hays & Company LLP, independent
registered public accounting firm, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Service1st as of October 28,
2010 and for the period then ended included in this prospectus
have been so included in reliance on the report of Crowe Horwath
LLP, independent registered public accounting firm, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of
Service1st as
of December 31, 2009 and for the years ended
December 31, 2009, and 2008, included in this prospectus
have been so included in reliance upon the report of Grant
Thornton LLP, independent registered public accountants, as set
forth in their report appearing elsewhere herein, given on the
authority of said firm as experts in auditing and accounting in
giving said report.
WHERE YOU
CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the
SEC as required by the Exchange Act. You may read and copy
reports, proxy statements and other information filed by us with
the SEC at the SEC Public Reference Room located at
100 F Street, N.E., Washington, D.C. 20549. You
may obtain information on the operation of the Public Reference
Room by calling the SEC at
1-800-SEC-0330.
You may also obtain copies of the materials described above at
prescribed rates by writing to the SEC, Public Reference
Section, 100 F Street, N.E., Washington, D.C.
20549. You may access information on us at the SEC web site
containing reports, proxy statements and other information at:
http://www.sec.gov.
Information and statements contained in this prospectus are
qualified in all respects by reference to the copy of the
relevant contract or other document included as an annex to this
prospectus.
If you would like additional copies of this prospectus or any of
our reports and proxy statements filed with the SEC as required
under the Exchange Act free of charge, you should contact our
Assistant Secretary via telephone or in writing:
George A. Rosenbaum, Jr.
Chief Financial Officer
Western Liberty Bancorp
8363 W. Sunset Road, Suite 350
Las Vegas, Nevada 89113
(702) 966-7400
144
Report of
Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Western Liberty Bancorp
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of
Western Liberty Bancorp (formally known as Global Consumer
Acquisition Corp.) as of December 31, 2010 and 2009, and
the related consolidated statements of operations,
stockholders equity and comprehensive income (loss), and
cash flows for the years then ended. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis of designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Western Liberty Bancorp as of December 31, 2010 and
2009, and the results of its operations and its cash flows for
the years then ended, in conformity with U.S. generally
accepted accounting principles.
Sherman Oaks, California
March 31, 2011
F-2
To the Board of Directors and Stockholders of
Western Liberty Bancorp
Report of
Independent Registered Public Accounting Firm
We have audited the accompanying statements of operations,
stockholders equity and comprehensive income (loss) and
cash flows for the year ended December 31, 2008 of Western
Liberty Bancorp (formerly known as Global Consumer Acquisition
Corp.) These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. Our audit included consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects results of Western
Liberty Bancorps operations and its cash flows for year
ended December 31, 2008 in conformity with accounting
principles generally accepted in the United States of America.
New York, New York
March 16, 2009
F-3
WESTERN
LIBERTY BANCORP
CONSOLIDATED
BALANCE SHEETS
($000S EXCEPT PER SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
11,675
|
|
|
$
|
971
|
|
Money market funds
|
|
|
52,206
|
|
|
|
86,998
|
|
Interest-bearing deposits in banks
|
|
|
39,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
103,227
|
|
|
|
87,969
|
|
Certificates of deposits
|
|
|
26,889
|
|
|
|
|
|
Securities, available for sale
|
|
|
1,819
|
|
|
|
|
|
Securities, held to maturity (estimated fair value
2010 $5,287)
|
|
|
5,314
|
|
|
|
|
|
Loans, net of allowance of $36
|
|
|
106,223
|
|
|
|
|
|
Premises and equipment, net
|
|
|
1,228
|
|
|
|
|
|
Other real estate owned, net
|
|
|
3,406
|
|
|
|
|
|
Goodwill, net
|
|
|
5,633
|
|
|
|
|
|
Other intangibles, net
|
|
|
768
|
|
|
|
|
|
Accrued interest receivable and other assets
|
|
|
3,039
|
|
|
|
551
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
257,546
|
|
|
$
|
88,520
|
|
|
|
|
|
|
|
|
|
|
Liabilities And Stockholders Equity
|
|
|
|
|
|
|
|
|
Deposits:
|
|
$
|
67,087
|
|
|
$
|
|
|
Non-interest bearing demand
|
|
|
|
|
|
|
|
|
Interest bearing:
|
|
|
93,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
160,286
|
|
|
|
|
|
Accrued interest payable and other liabilities
|
|
|
3,431
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
163,717
|
|
|
|
628
|
|
Commitments and contingencies (Note 15)
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.0001 par value; 1,000,000 shares
authorized; None issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, $.0001 par value; 100,000,000 shares
authorized; 15,088,023 and 10,959,169 issued and outstanding,
respectively
|
|
|
1
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
117,317
|
|
|
|
103,730
|
|
Accumulated deficit
|
|
|
(23,489
|
)
|
|
|
(15,839
|
)
|
Accumulated other comprehensive loss, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
93,829
|
|
|
|
87,892
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
257,546
|
|
|
$
|
88,520
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
WESTERN
LIBERTY BANCORP
CONSOLIDATED
STATEMENTS OF OPERATIONS
($000 EXCEPT PER SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
1,403
|
|
|
$
|
|
|
|
$
|
|
|
Securities, taxable
|
|
|
47
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other
|
|
|
80
|
|
|
|
139
|
|
|
|
5,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
1,530
|
|
|
|
139
|
|
|
|
5,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
1,415
|
|
|
|
139
|
|
|
|
5,691
|
|
Provision for loan losses
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
1,379
|
|
|
|
139
|
|
|
|
5,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges
|
|
|
57
|
|
|
|
|
|
|
|
|
|
Loan and late fees
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
1,461
|
|
|
|
72
|
|
|
|
83
|
|
Occupancy, equipment and depreciation
|
|
|
269
|
|
|
|
|
|
|
|
|
|
Computer service charges
|
|
|
51
|
|
|
|
|
|
|
|
|
|
Federal deposit insurance
|
|
|
90
|
|
|
|
|
|
|
|
|
|
Legal and professional fees
|
|
|
3,851
|
|
|
|
12,612
|
|
|
|
1,670
|
|
Advertising and business development
|
|
|
7
|
|
|
|
1
|
|
|
|
|
|
Insurance
|
|
|
825
|
|
|
|
301
|
|
|
|
301
|
|
Telephone
|
|
|
19
|
|
|
|
|
|
|
|
|
|
Printing and supplies
|
|
|
314
|
|
|
|
748
|
|
|
|
6
|
|
Stock based compensation
|
|
|
1,770
|
|
|
|
869
|
|
|
|
4,625
|
|
Other
|
|
|
480
|
|
|
|
434
|
|
|
|
559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,137
|
|
|
|
15,037
|
|
|
|
7,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,650
|
)
|
|
$
|
(14,898
|
)
|
|
$
|
(1,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
$
|
(0.65
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share
|
|
$
|
(0.65
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
WESTERN
LIBERTY BANCORP
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
(LOSS)
YEARS ENDED DECEMBER 31, 2010, 2009, AND
2008
($000S EXCEPT SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Comprehensive
|
|
|
Common Stock Issued
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
|
|
|
|
Loss
|
|
|
Shares
|
|
|
Amounts
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Loss
|
|
|
Total
|
|
|
Balance, December 31, 2007
|
|
$
|
|
|
|
|
39,936,064
|
|
|
$
|
3
|
|
|
$
|
209,903
|
|
|
$
|
611
|
|
|
$
|
|
|
|
$
|
210,517
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,625
|
|
|
|
|
|
|
|
|
|
|
|
4,625
|
|
Deferred interest on investment held in trust relating to common
shares subject to possible conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(446
|
)
|
|
|
|
|
|
|
|
|
|
|
(446
|
)
|
Net loss
|
|
$
|
(1,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,552
|
)
|
|
|
|
|
|
|
(1,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
|
|
|
|
39,936,064
|
|
|
|
3
|
|
|
|
214,082
|
|
|
|
(941
|
)
|
|
|
|
|
|
|
213,144
|
|
Exchange of common shares at $0.001 per share
|
|
|
|
|
|
|
(7,618,908
|
)
|
|
|
(1
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
Redemption of common shares at $9.915 per share, net of
$94,983,921 reserved for
|
|
|
|
|
|
|
(21,357,987
|
)
|
|
|
(1
|
)
|
|
|
(116,779
|
)
|
|
|
|
|
|
|
|
|
|
|
(116,780
|
)
|
Settlement of deferred underwriters commission in
connection with offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,564
|
|
|
|
|
|
|
|
|
|
|
|
5,564
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
869
|
|
|
|
|
|
|
|
|
|
|
|
869
|
|
Net loss
|
|
$
|
(14,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,898
|
)
|
|
|
|
|
|
|
(14,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
|
|
|
|
10,959,169
|
|
|
|
1
|
|
|
|
103,730
|
|
|
|
(15,839
|
)
|
|
|
|
|
|
|
87,892
|
|
Stock-based compensation reversal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(587
|
)
|
|
|
|
|
|
|
|
|
|
|
(587
|
)
|
Issue common shares in conjunction with acquisition of
Service1st Bank of Nevada
|
|
|
|
|
|
|
2,370,722
|
|
|
|
|
|
|
|
15,267
|
|
|
|
|
|
|
|
|
|
|
|
15,267
|
|
Exercise Warrants
|
|
|
|
|
|
|
1,502,088
|
|
|
|
|
|
|
|
(2,884
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,884
|
)
|
Issuance of 194,098 shares of common stock for restricted
stock award
|
|
|
|
|
|
|
194,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 150,000 shares of common stock for restricted
stock award
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
966
|
|
|
|
|
|
|
|
|
|
|
|
966
|
|
Purchase of dissenters shares
|
|
|
|
|
|
|
(88,054
|
)
|
|
|
|
|
|
|
(567
|
)
|
|
|
|
|
|
|
|
|
|
|
(567
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,392
|
|
|
|
|
|
|
|
|
|
|
|
1,392
|
|
Net loss
|
|
|
(7,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,650
|
)
|
|
|
|
|
|
|
(7,650
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(7,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
|
|
|
|
15,088,023
|
|
|
$
|
1
|
|
|
$
|
117,317
|
|
|
$
|
(23,489
|
)
|
|
|
|
|
|
$
|
93,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-6
WESTERN
LIBERTY BANCORP
YEARS ENDED DECEMBER 31, 2010,
2009 AND 2008
($000S)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flow from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(7,650
|
)
|
|
$
|
(14,898
|
)
|
|
$
|
(1,552
|
)
|
Adjustments to reconcile net (loss) income to net cash used
in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
1,771
|
|
|
|
869
|
|
|
|
4,625
|
|
Interest earned on cash held in trust
|
|
|
|
|
|
|
(86
|
)
|
|
|
(5,664
|
)
|
Accretion of loan discount, net
|
|
|
(436
|
)
|
|
|
|
|
|
|
|
|
Amortization of core deposit intangible
|
|
|
16
|
|
|
|
|
|
|
|
|
|
Amortization of lease liability
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
Amortization of time deposit premium
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
Provision of loan losses
|
|
|
36
|
|
|
|
|
|
|
|
|
|
Depreciation of premises and equipment
|
|
|
72
|
|
|
|
|
|
|
|
|
|
Amortization of securities premiums/discounts, net
|
|
|
28
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
343
|
|
|
|
(294
|
)
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
(708
|
)
|
|
|
(54
|
)
|
|
|
355
|
|
Accrued offering costs
|
|
|
|
|
|
|
|
|
|
|
(499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) operating activities
|
|
|
(6,564
|
)
|
|
|
(14,463
|
)
|
|
|
(2,735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash withdrawn from trust account for working capital
|
|
|
|
|
|
|
316,778
|
|
|
|
4,100
|
|
Proceeds from certificates of deposit
|
|
|
5,039
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities of securities available for sale
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
Proceeds from principal paydowns of securities available for sale
|
|
|
23
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities of securities held to maturity
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
Proceeds from principal payments of securities held to maturity
|
|
|
10
|
|
|
|
|
|
|
|
|
|
Cash acquired from acquisition
|
|
|
15,090
|
|
|
|
|
|
|
|
|
|
Purchase of premises and equipment
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
Net decrease in loans
|
|
|
3,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
27,099
|
|
|
|
316,778
|
|
|
|
4,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in deposits
|
|
|
(1,826
|
)
|
|
|
|
|
|
|
|
|
Cash payments for warrants
|
|
|
(2,884
|
)
|
|
|
|
|
|
|
|
|
Cash payments for dissenter common shares
|
|
|
(567
|
)
|
|
|
|
|
|
|
|
|
Payment of redemption of common shares
|
|
|
|
|
|
|
(211,765
|
)
|
|
|
|
|
Payment of underwriters discount and offering costs
|
|
|
|
|
|
|
(4,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities
|
|
|
(5,277
|
)
|
|
|
(215,792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and equivalents
|
|
|
15,258
|
|
|
|
86,523
|
|
|
|
1,365
|
|
Cash and cash equivalents, beginning of period
|
|
|
87,969
|
|
|
|
1,446
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
103,227
|
|
|
$
|
87,969
|
|
|
$
|
1,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid to depositors
|
|
$
|
124
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred interest on investments held in trust relating to
common shares subject to possible conversion
|
|
|
|
|
|
|
96
|
|
|
|
446
|
|
Supplemental schedule of non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans transferred to other real estate owned
|
|
|
1,003
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing activities from
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposits
|
|
|
31,928
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
|
2,850
|
|
|
|
|
|
|
|
|
|
Investment securities held to maturity
|
|
|
7,842
|
|
|
|
|
|
|
|
|
|
Loans, net of discount
|
|
|
110,278
|
|
|
|
|
|
|
|
|
|
Other real estate owned, net of discount
|
|
|
2,403
|
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
1,284
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
5,633
|
|
|
|
|
|
|
|
|
|
Other intangibles
|
|
|
784
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
2,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-cash assets acquired:
|
|
$
|
165,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
162,112
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
1,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed:
|
|
$
|
163,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net non-cash assets acquired (liabilities assumed):
|
|
$
|
2,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash and cash equivalents (paid) acquired
|
|
$
|
15,090
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-7
WESTERN
LIBERTY BANCORP
|
|
NOTE 1.
|
NATURE OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Nature
of business
Western Liberty Bancorp (WLBC) became a bank holding company on
October 28, 2010 with consummation of the acquisition of
Service1st Bank of Nevada. We were formerly known as
Global Consumer Acquisition Corp. and were a special
purpose acquisition company, formed under the laws of Delaware
on June 28, 2007, to consummate an acquisition, capital
stock exchange, acquisition, stock purchase, reorganization or
similar business combination with one or more businesses. The
registration statement for WLBCs initial public offering
(the Offering) was declared effective on
November 20, 2007. WLBC consummated the Offering on
November 21, 2007 and received net proceeds of $305,658,960
therefrom and $8,500,000 from the private placement sale of
Founders Warrants. Substantially all of the net proceeds of the
Offering were intended to be generally applied toward
consummating a business combination. WLBCs management had
complete discretion in identifying and selecting the target
business. Although WLBCs goal in 2007, when it was
established as a special purpose acquisition company, was to
identify for acquisition domestic and international operating
companies engaged in the consumer products and services
business, by the spring of 2009, WLBC determined that the
banking industry had become an attractive investment
opportunity, particularly the community banking industry in
Nevada. There was no assurance that WLBC would be able to
successfully effect a business combination. On October 7,
2009, the stockholders of WLBC approved all the matters voted on
at a special meeting of WLBCs stockholders. As a result,
21,600,468 shares elected to convert into a pro rata
portion of the Trust Account, resulting in
10,959,169 shares outstanding following conversion and
$105,014,050 remaining from the Trust Account. Our
stockholders approved certain amendments to our Amended and
Restated Certificate of Incorporation removing certain
provisions specific to special purpose acquisition companies,
changing our name to Western Liberty Bancorp and
authorizing the distribution and termination of our trust
account. Effective October 7, 2009, the Company began its
business operations and exited its development stage. Our sole
subsidiary is Service1st Bank of Nevada. We currently
conduct no business activities other than acting as the holding
company of Service1st Bank.
Service1st Bank of Nevada (Service1st), is a community bank
which commenced operations as a financial institution on
January 16, 2007. Service1st provides a full range of
banking and related services to locally owned businesses,
professional firms, real estate developers and investors, local
non-profit organizations, high net worth individuals, and other
customers in and around the greater Las Vegas area. Banking
services provided include basic commercial and consumer
depository services, commercial working capital and equipment
loans, commercial real estate (both owner occupied and non-owner
occupied) loans, construction loans, and unsecured personal and
business loans. Service1st relies primarily on locally generated
deposits to fund its lending activities. Service1st has two
branches located in Las Vegas, Nevada, which accept deposits and
grant loans to customers. Substantially all of our business is
generated in the Nevada market. Service1st is under the
supervision of and subject to regulation and examination by the
Nevada FID and the FDIC.
In connection with the FDICs approval of deposit
insurance, the FDIC subjected Service1st to customary
conditions applicable to de novo banks for a period of
three years, including the requirement that during such
three-year period, Service1st maintain a Tier 1
capital leverage ratio of not less than 8.0%. In addition,
during the three-year period, Service1st was required to
operate within the parameters of the business plan submitted as
part of Service1sts application for deposit insurance, and
to provide the FDIC 60 days advance notice of any
proposed material change or material deviation from the business
plan, before making any such change or deviation.
In September of 2009, the FDIC extended the special supervision
period for all de novo banks from three years to seven
years, thus extending the period during which the foregoing
restrictions apply to Service1st from January 2010 to
January 2014. In connection with the extension, at the
FDICs request, Service1st submitted a revised
business plan to the FDIC in the fourth quarter of 2009. The
FDIC also advised all de novo banks that during the
remainder of the seven-year de novo period, banks will
remain on a
12-month
risk management
F-8
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
examination cycle and be subject to enhanced supervision for
compliance examinations and Community Reinvestment Act
evaluations.
In May of 2009, Service1st entered into the MOU with the
FDIC and the Nevada FID. Pursuant to the MOU,
Service1st agreed, among other initiatives, to develop and
submit a comprehensive strategic plan covering at least a
three-year operating period; to reduce the level of adversely
classified assets and review loan grading criteria and
procedures to ensure accurate risk ratings; to develop a plan to
strengthen credit administration of construction and land loans
(including the reduction of concentration limits in land,
construction and development loans and the improvement of
stress-testing of commercial real estate loan concentrations);
to review its methodology for determining the adequacy of the
allowance for loan and lease losses; and to correct apparent
violations listed in its most recent report of examination.
Since mid-2009, Service1st has been required (i) to
provide the FDIC with at least 30 days prior notice
before appointing any new director or senior executive officer
or changing the responsibilities of any senior executive
officer; and (ii) to obtain FDIC approval before making (or
agreeing to make) any severance payments (except pursuant to a
qualified pension or retirement plan and certain other employee
benefit plans).
On September 1, 2010, Service1st, without admitting or
denying any possible charges relating to the conduct of its
banking operations, agreed with the FDIC and the Nevada FID to
the issuance of a Consent Order. The Consent Order supersedes a
Memorandum of Understanding entered into by Service1st with
the FDIC and Nevada FID in May of 2009. Under the Consent Order,
Service1st has agreed, among other things, to:
(i) assess the qualifications of, and have retained
qualified, senior management commensurate with the size and risk
profile of Service1st; (ii) maintain a Tier I leverage
ratio at or above 8.5% and its total risk-based capital must
equal or exceed 12.0% (as of December 31, 2010,
Service1sts Tier 1 leverage ratio was 18.1% and total
risk-based capital was 31.0%); (iii) continue to maintain
an adequate allowance for loan and lease losses; (iv) not
pay any dividends without prior bank regulatory approval;
(v) formulate and implement a plan to reduce
Service1sts risk exposure to adversely classified assets;
(vi) not extend additional credit to any borrower whose
loan has been charged-off or classified loss;
(vii) not extend any additional credit to any borrower
whose loan has been classified as substandard or
doubtful without prior approval from
Service1sts board of directors or loan committee;
(viii) formulate and implement a plan to reduce risk
exposure to its concentration in commercial real estate loans in
conformance with Appendix A of Part 365 of the
FDICs Rules and Regulations; (ix) formulate and
implement a plan to address profitability; and (x) not
accept brokered deposits (which includes deposits paying
interest rates significantly higher than prevailing rates in
Service1sts market area) and reduce its reliance on
existing brokered deposits, if any.
During the application process for the acquisition of
Service1st by WLBC, the Company made a number of
commitments to the FDIC. First, the Company agreed to maintain
the Tier 1 leverage capital ratio of Service1st at 10%
or greater until October 28, 2013 or, if later, when the
September 1, 2010 Consent Order agreed to by
Service1st with the FDIC and the Nevada FID terminates. The
Company also agreed that for the same time period the Company
will make no change in the directors or executive management of
Service1st unless the Company first receives the
FDICs non-objection to the proposed change. The Company
assured the FDIC in writing during the application process that
the Company will not seek to expand by acquisition until
Service1st is restored to a satisfactory condition, which
at a minimum means that the September 1, 2010 Consent Order
must first be terminated. Until that occurs, any growth on
Service1sts part must be the result of organic growth in
the banks existing business. The Company also agreed to
seek advance approval both from the FDIC and the Nevada FID for
any major deviation from the business plan that we submitted
during the acquisition application process.
While the chief decision makers monitor the revenue streams of
various products and services, operations are managed and
financial performance is evaluated on a Company-wide basis.
Accordingly all the financial service operations are considered
by management to be aggregated in one reportable segment.
F-9
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
The consolidated financial statements include WLBC and its
wholly owned subsidiary, Service1st, together referred to as
the Company for the year ended December 31,
2010. Intercompany transactions and balances are eliminated in
consolidation. The financial statements of the Company for the
years ended December 31, 2009 and 2008 include the
operations of WLBC only, as Service1st was not acquired until
October 28, 2010. The accounting and reporting policies of
the Company conform to accounting principles generally accepted
in the United States of America and general practice in the
banking industry. A summary of the significant accounting
policies used by the Company are as follows:
Predecessors
Since the Companys operations prior to the acquisition of
Service1st were insignificant relative to that of
Service1st, management believes that Service1st is the
Companys predecessor. Management has determined this based
on an evaluation of the various facts and circumstances,
including, but not limited to the life of Service1st, the
operations of Service1st, the purchase price paid, and the fact
that the operations on a prospective basis will be most similar
to Service1st. Accordingly, these statements should be read in
conjunction with the financial statements of Service1st for
the period ended October 28, 2010 and December 31,
2009 and 2008.
Use
of estimates in the preparation of financial
statements
To prepare financial statements in conformity with U.S.
generally accepted accounting principles, management makes
estimates and assumptions based on available information. These
estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and actual
results could differ. The purchase accounting adjustments,
allowance for loan loss, fair value of financial instruments,
deferred tax assets and goodwill impairment are particularly
subject to change.
Cash
and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks (including cash
items in process of clearing), and interest-bearing deposits in
banks with original maturities of 90 days or less. Cash
flows from loans originated by the Company, deposits, and
certificates of deposit, are reported net.
As of December 31, 2010, approximately $52,206,000 of the
Companys cash and cash equivalents were invested in the
Federated U.S. Treasury Cash Reserve Fund (UTIXX) and the
Goldman Sachs Financial Square Funds-Treasury Instruments Fund
(FTIXX). Both funds, under normal circumstances, invest their
assets exclusively in obligations of the U.S. Treasury,
including Treasury bills, bonds and notes and other obligations
issued or guaranteed by the U.S. Treasury.
At December 31, 2010, the Company is required to maintain
balances in cash or on deposit with the Federal Reserve Bank.
The total of those reserve balances was approximately $5,270,000.
Certificates
of deposit
The company invests in institutional certificates of deposits in
addition to selling overnight federal funds. The Companys
certificates of deposit do not exceed the FDIC insured limit at
any one institution. The terms of the companys
certificates of deposit do not exceed one year.
Securities
Interest income includes amortization of purchase premium or
discount. Premiums and discounts on securities are amortized on
the level-yield method without anticipating prepayments, except
for mortgage-
F-10
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
backed securities where prepayments are anticipated. Gains and
losses on sales are recorded on the trade date and determined
using the specific identification method.
Securities classified as available for sale are debt securities
the Company intends to hold for an indefinite period of time,
but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various
factors, including significant movements in interest rates,
changes in the maturity mix of the Companys assets and
liabilities, liquidity needs, regulatory capital considerations
and other similar factors. Securities available for sale are
reported at fair value with unrealized gains or losses reported
as other comprehensive income (loss). Realized gains or losses,
determined on the basis of the cost of specific securities sold,
are included in earnings.
Securities classified as held to maturity are those debt
securities the Company has both the positive intent and ability
to hold to maturity regardless of changes in market conditions,
liquidity needs, or general economic conditions.
These securities are carried at amortized cost, adjusted for
amortization of premium and accretion of discount computed by
the interest method over the contractual lives. The sale of a
security within three months of its maturity date or after at
least 85% of the principal outstanding has been collected is
considered a maturity for purposes of classification and
disclosure. Purchase premiums and discounts are generally
recognized in interest income using the effective yield method
over the term of the securities.
Management evaluates securities for
other-than-temporary
impairment (OTTI) at least on a quarterly basis, and more
frequently when economic or market conditions warrant such an
evaluation. Consideration is given to (1) the length of
time and the extent to which the fair value has been less than
cost, (2) the financial condition and near term prospects
of the issuer including an evaluation of credit ratings,
(3) the impact of changes in market interest rates,
(4) the intent of the Company to sell a security, and
(5) whether it is more likely than not the Company will
have to sell the security before recovery of its cost basis.
If the Company intends to sell an impaired security, the Company
records
another-than-temporary
loss in an amount equal to the entire difference between fair
value and amortized cost. If a security is determined to be
other-than-temporarily
impaired, but the Company does not intend to sell the security,
only the credit portion of the estimated loss is recognized in
earnings, with the other portion of the loss recognized in other
comprehensive income. The credit loss is defined as the
difference between the present value of the cash flows expected
to be collected and the amortized cost basis.
Loans
Loans are stated at the amount of unpaid principal, reduced by
unearned net loan fees, a credit and yield mark, and allowance
for loan losses. The allowance for loan losses is established
through a provision for loan losses charged to expense. Loans
are charged against the allowance for loan losses when
management believes that collectibility of the principal is
unlikely. Subsequent recoveries, if any, are credited to the
allowance.
The allowance is an amount that management believes will be
adequate to absorb probable incurred losses on existing loans
that may become uncollectible, based on evaluation of the
collectibility of loans and prior credit loss experience of the
Company and peer bank historical loss experience. This
evaluation also takes into consideration such factors as changes
in the nature and volume of the loan portfolio, overall
portfolio quality, specific problem credits, peer bank
information, and current economic conditions that may affect the
borrowers ability to pay. Due to the credit concentration
of the Companys loan portfolio in real estate-secured
loans, the value of collateral is heavily dependent on real
estate values in Southern Nevada. This evaluation is inherently
subjective and future adjustments to the allowance may be
necessary if there are significant changes in economic or other
conditions. In addition, the FDIC and state banking regulatory
agencies, as an integral part of their examination processes,
periodically review the Companys allowance for
F-11
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
loan losses, and may require the Company to make additions to
the allowance based on their judgment about information
available to them at the time of their examinations.
The allowance consists of general and specific components. The
general component covers non-impaired loans and is based on
historical loss experience of the Company and peer bank
historical loss experience, adjusted for qualitative and
environmental factors. The specific component relates to loans
that are classified as impaired. For such loans, an allowance is
established when the discounted cash flows (or collateral value
or observable market price) of the impaired loan is lower than
the carrying value of that loan.
A loan is impaired when, based on current information and
events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of
the loan agreement. Loans for which the terms have been modified
resulting in a concession, and for which the borrower is
experiencing financial difficulties, are considered troubled
debt restructurings and classified as impaired.
Factors considered by management in determining impairment
include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment
shortfalls on
case-by-case
basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrowers prior
payment record, and the amount of the shortfall in relation to
the principal and interest owed.
Commercial and commercial real estate loans that are graded
substandard are individually evaluated for impairment. If a loan
is impaired, a portion of the allowance is allocated so that the
loan is reported, net, at the present value of estimated future
cash flows using the loans existing rate or at the fair
value of collateral if repayment is expected solely from the
collateral. Large groups of smaller balance homogeneous loans,
such as consumer and residential real estate loans, are
collectively evaluated for impairment, and accordingly, they are
not separately identified for impairment disclosures. Trouble
debt restructurings are separately identified for impairment
disclosures and are measured at the present value of estimated
future cash flows using the loans effective rate at
inception. If a troubled debt restructuring is considered to be
a collateral dependent loan, the loan is reported, net, at the
air value of the collateral. For troubled debt restructurings
that subsequently default, the Company determines the amount of
reserve in accordance with the accounting policy for the
allowance for loan losses.
The general component covers non-impaired loans and is based on
historical loss experience adjusted for current factors. The
historical loss experience is determined by portfolio segment
and is based on the actual loss history experienced by the
Company over the most recent four years. This actual loss
experience is supplemented with other economic factors based on
the risks present for each portfolio segment. These economic
factors include consideration of the following: levels of and
trends in delinquencies and impaired loans; levels of and trends
in charge-offs and recoveries; trends in volume and terms of
loans; effects of any changes in risk selection and underwriting
standards; other changes in lending policies, procedures, and
practices; experience, ability, and depth of lending management
and other relevant staff; national and local economic trends and
conditions; industry conditions; and effects of changes in
credit concentrations. The following portfolio segments have
been identified:
1. Loans secured real estate construction, land development
and other land loans
2. Commercial real estate
3. Residential real estate
4. Commercial and industrial
5. Consumer
F-12
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
These are generally the segments identified in regulatory
reporting. Service1st Bank primarily focuses on the small
business market and, therefore, generates most of its loans in
the area of commercial real estate and commercial and industrial
loans. By segmenting into these categories, the bank is able to
monitor the exposure to the related risks and observe compliance
with regulatory guidance and limitations.
The Company, as a result of its purchase of Service1st Bank
of Nevada on October 28, 2010, acquired a portfolio of
loans, some of which have shown evidence of credit deterioration
since origination. These purchased loans are recorded at fair
value and there is no carryover of the sellers allowance
for loan losses. As a result of the transaction, the allowance
for loan losses at December 31, 2010 only related to a
general component for new loans generated since the transaction.
No specific allocations have been made between October 28,
2010 and December 31, 2010 because no additional
deterioration of the loan portfolio has been identified. After
acquisition, losses will be recognized by an increase in the
allowance for loan losses. It is important that consideration to
loss experience be blended with the significant discounts to
properly reflect the carrying value of the legacy loan
portfolio. In the current process, a general component of the
allowance for loan losses is being recorded for new loan
originations that were determined based on historical experience
and managements judgment.
Purchased loans with credit impairment are accounted for
individually or aggregated into pools of loans based on common
risk characteristics such as, credit score, loan type, and date
of origination. The Company estimates the amount and timing of
expected cash flows for each purchased loan or pool, and the
expected cash flows in excess of amount paid is recorded as
interest income over the remaining life of the loan or pool
(accretable yield). The excess of the loans or pools
contractual principal and interest over expected cash flows is
not recorded (nonaccretable difference).
Over the life of the loan or pool, expected future cash flows
continue to be estimated. If the present value of expected cash
flows is less than the carrying amount, a loss is recorded. If
the present value of expected cash flows is greater than the
carrying amount, it is recognized prospectively as interest
income.
Interest
and fees on loans
Interest on loans is recognized over the terms of the loans and
is calculated using the effective interest method. The accrual
of interest on impaired loans is discontinued when, in
managements opinion, the borrower may be unable to make
payments as they become due.
The Company determines a loan to be delinquent when payments
have not been made according to contractual terms, typically
evidenced by nonpayment of a monthly installment by the due
date. The accrual of interest on loans is discontinued at the
time the loan is 90 days delinquent unless the credit is
well secured and in the process of collection.
All interest accrued but not collected for loans that are placed
on nonaccrual status or charged off is reversed against interest
income. The interest on these loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return
to accrual. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
Loan origination fees, a mark to market of the credit and yield
components of the loan, commitment fees and certain direct loan
origination costs are deferred and the net amount amortized as
an adjustment to the related loans yield. The Company is
generally amortizing these amounts over the contractual life of
the loan. Commitment fees, based upon a percentage of a
customers unused line of credit, and fees related to
standby letters of credit are recognized over the commitment
period.
F-13
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
Transfers
of financial assets
Transfers of financial assets are accounted for as sales, when
control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the
assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain
it from taking advantage of that right) to pledge or exchange
the transferred assets, and (3) the Company does not
maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity. The
Companys transfers of financial assets consist solely of
loan participations.
Foreclosed
assets
Assets acquired through or instead of loan foreclosure are
initially recorded at fair value less costs to sell when
acquired, establishing a new cost basis. These assets are
subsequently accounted for at lower of cost or fair value less
estimated costs to sell. If fair value declines subsequent to
foreclosure, a valuation allowance is recorded through expense.
Operating costs after acquisition are expensed. On
October 28, 2010, the Company acquired two properties in
conjunction with the acquisition of Service1st Bank. In
December another property was added. As of December 31,
2010, there are no valuation reserves associated with these
properties.
Advertising
costs
Advertising costs are expensed as incurred.
Premises
and equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed
principally by the straight-line method over the estimated
useful lives of the assets. Improvements to leased property are
amortized over the lesser of the term of the lease or life of
the improvements. Depreciation and amortization is computed
using the following estimated lives:
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Years
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Furniture and fixtures
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7 - 10
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Equipment and vehicles
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3 - 5
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Leasehold improvements
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5 - 10
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Goodwill
and other intangible assets
Goodwill resulting from a business combination after
January 1, 2009, is generally determined as the excess of
the fair value of the consideration transferred, plus the fair
value of any non-controlling interests in the acquire, over the
fair value of the net assets acquired and liabilities assumed as
of the acquisition date. Goodwill and intangible assets acquired
in a purchase business combination and determined to have an
indefinite useful life are not amortized, but tested for
impairment at least annually. The Company has selected
October 31st as the date to perform the annual
impairment test. Intangible assets with definite useful lives
are amortized over their estimated useful lives to their
estimated residual values. Goodwill is the only intangible asset
with an indefinite life on our balance sheet. WLBC acquired
Service1st Bank of Nevada on October 28, 2010 which
resulted in goodwill of $5.6 million being recorded.
Other intangible assets consist of a core deposit intangible and
are amortized on an accelerated method over the estimated useful
life of 10 years.
Accrued
interest receivable and other assets
Accrued interest receivable and other assets include prepaid
expenses. Prepaid assets are amortized over the terms of the
agreements. As of December 31, 2010, the Company has
prepaid approximately $1,045,000,
F-14
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
or approximately 2 years, of its FDIC insurance premiums
which will be amortized through 2012. The Company, as a member
of the FHLB system, is required to maintain an investment in
capital stock of the FHLB of an amount pursuant to the agreement
with the FHLB. These investments are recorded at cost since no
ready market exists for them, and they have no quoted market
value. As of December 31, 2010, the Companys
investment in the FHLB was $658,000 which is included in other
assets.
The Company views its investment in the FHLB stock as a
long-term investment. Accordingly, when evaluating FHLB stock
for impairment, the value is determined based on the ultimate
recovery of the par value rather than recognizing temporary
declines in values. The determination of whether a decline
affects the ultimate recovery is influenced by criteria such as:
(1) the significance of the decline in net assets of the
FHLBs as compared to the capital stock amount and length of time
a decline has persisted; (2) impact of legislative and
regulatory changes on the FHLB; and (3) the liquidity
position of the FHLB. The FHLB of San Franciscos
capital ratios exceeded the required ratios as of
December 31, 2010 and the Company does not believe that its
investment in the FHLB is impaired as of this date. However,
this estimate could change in the near term as a result of any
of the following events: (1) significant OTTI losses are
incurred on the mortgage-backed securities (MBS) portfolio of
the FHLB of San Francisco, causing a significant decline in
regulatory capital ratios; (2) the economic losses
resulting from credit deterioration on the MBS increases
significantly; and (3) capital preservation strategies
being utilized by the FHLB become ineffective.
Income
taxes
Income tax expense is the total of the current year income tax
due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the
expected future tax amounts for the temporary differences
between carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount
expected to be realized.
A tax position is recognized as a benefit only if it is
more likely than not that the tax position would be
sustained in a tax examination, with a tax examination being
presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized
on examination. For tax positions not meeting the more
likely than not test, no tax benefit is recorded. The
Company recognizes interest
and/or
penalties related to income tax matters in income tax expense.
Preferred
stock
WLBC is authorized to issue 1,000,000 shares of blank check
stock with such designations, voting and other rights and
preferences as may be determined from time to time by the Board
of Directors.
Stock
compensation plans
The Company has the 2007 Stock Option Plan, which is described
more fully in Note 12. Compensation cost is recognized for
stock options and restricted stock awards issued to employees,
based on the fair value of these awards at the date of grant. A
Black-Scholes model is utilized to estimate the fair value of
stock options, while the market price of the Companys
common stock at the date of grant is used for restricted stock
awards. Compensation cost is recognized over the required
service period, generally defined as the vesting period. For
awards with graded vesting, compensation cost is recognized on a
straight-line basis over the requisite service period for the
entire award. The Company records the fair value of stock
compensation granted to employees and directors as expense over
the vesting period. The cost of the award is based on the
grant-date fair value.
F-15
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
Loan
commitments and related financial instruments
Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and commercial
letters of credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss,
before considering customer collateral or ability to repay. Such
financial instruments are recorded when they are funded.
Comprehensive
loss
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized
gains and losses on available for sale securities, are reported
as a separate component of the equity section of the balance
sheet, such items, along with net loss, are components of
comprehensive loss. Gains and losses on available for sale
securities are reclassified to net loss as the gains or losses
are realized upon sale of the securities. OTTI impairment
charges are reclassified to net income at the time of the charge.
Fair
value measurement
For assets and liabilities recorded at fair value, it is the
Companys policy to maximize the use of observable inputs
and minimize the use of unobservable inputs when developing fair
value measurements. Fair value measurements for assets and
liabilities, where there exists limited or no observable market
data and, therefore, are based primarily upon estimates, are
often calculated based on the economic and competitive
environment, the characteristics of the asset or liability and
other factors. Therefore, the results cannot be determined with
precision and may not be realized in an actual sale or immediate
settlement of the asset or liability. Additionally, there may be
inherent weaknesses in any calculation technique, and changes in
the underlying assumptions used, including discount rates and
estimates of future cash flows, could significantly affect the
results of current or future values. The Company utilizes fair
value measurements to determine fair value disclosures and
certain assets recorded at fair value on a recurring and
nonrecurring basis. See note 3.
Fair
values of financial instruments
On October 28, 2010, as part of the purchase accounting
process, the balance sheet of Service1st Bank was recorded
at fair value. The fair value of all the assets and liabilities
become the new carrying basis of the acquired entity. The
Company utilized a third-party valuation firm to assist
management in valuing the more complex components of the assets
and liabilities. Valuation of the loan portfolio is one of the
most significant areas of this process. Loans are first split
between performing and non-performing. The non-performing loans
are subject to treatment in accordance with
ASC 310-30-50.
The valuation process identifies credit discount and yield
discount. Generally, the yield discount is recognized on a
level-yield method over the life of the loan. However, the
discount of loans purchased with credit impairment can be
recorded and not accreted over the life of the loan. This method
assumes the discount will remain with the loan until such time
as the loan is completely removed from the bank. Only in the
event of a material event that substantially improves the credit
characteristics of the loan would consideration be made to
reduce the discount and accrete the amount into interest income.
The Company discloses fair value information about financial
instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value.
Management uses its best judgment in estimating the fair value
of the Companys financial instruments. However, there are
inherent weaknesses in any estimation technique. Therefore, for
substantially all financial instruments, the fair value
estimates presented herein are not necessarily indicative of the
amounts the Company could have realized in a sales transaction
as of December 31, 2010. The estimated fair value amounts
as of December 31, 2010 have been measured as of that date
and have not been reevaluated or updated for purposes of these
financial statements subsequent to that date. As such, the
estimated fair values
F-16
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
of these financial statements subsequent to the reporting date
may be different than the amounts reported as of
December 31, 2010.
The information in Note 3 should not be interpreted as an
estimate of the fair value of the entire Company since a fair
value calculation is only required for a limited portion of the
Companys assets. Due to the wide range of valuation
techniques and the degree of subjectivity used in making the
estimate, comparisons between the Companys disclosures and
those of other companies or banks may not be meaningful.
Certificates
of deposit
The carrying amounts reported in the balance sheet for
certificates of deposit approximate their fair value as the
terms on the certificates of deposits do not exceed one year.
Securities
Fair values for securities are based on quoted market prices
where available or on quoted market prices for similar
securities in the absence of quoted prices on the specific
security.
Loans
For variable rate loans that re-price frequently and that have
experienced no significant change in credit risk, fair values
are based on carrying values. Variable rate loans comprise
approximately 55.7% of the loan portfolio as of
December 31, 2010. Fair value for all other loans is
estimated based on discounted cash flows using interest rates
currently being offered for loans with similar terms to
borrowers with similar credit quality. Prepayments prior to the
re-pricing date are not expected to be significant. Loans are
expected to be held to maturity and any unrealized gains or
losses are not expected to be realized.
Impaired
loans
The fair value of an impaired loan is estimated using one of
several methods, including collateral value, market value of
similar debt, enterprise value, liquidation value, and
discounted cash flows. Those impaired loans not requiring an
allowance for probable losses represent loans for which the fair
value of the expected repayments or collateral exceeds the
recorded investment in such loans.
Accrued
interest receivable and payable
The carrying amounts reported in the balance sheet for accrued
interest receivable and payable approximate their fair value.
Restricted
stock
The Company is a member of the FHLB system and maintains an
investment in capital stock of the FHLB of San Francisco in
an amount pursuant to the agreement with the FHLB. This
investment is carried at cost since no ready market exists, and
there is no quoted market value.
Deposit
liabilities
The fair value disclosed for demand and savings deposits is by
definition equal to the amount payable on demand at their
reporting date (carrying amount). The carrying amount for
variable-rate deposit accounts approximates their fair value.
Due to the short-term maturities of fixed-rate certificates of
deposit, their carrying amount approximates their fair value.
Early withdrawals of fixed-rate certificates of deposit are not
expected to be significant.
F-17
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
Off-balance
sheet instruments
Fair values for the Companys off-balance sheet
instruments, lending commitments and standby letters of credit,
are based on quoted fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements and the counterparties credit standing.
Loss
per share
Diluted earnings per share is based on the weighted average
outstanding common shares (excluding treasury shares, if any)
during each year, including common stock equivalents. Basic
earnings per share is based on the weighted average outstanding
common shares during the year.
Due to the Companys historical net losses, all of the
Companys stock based awards are considered anti-dilutive,
and accordingly, basic and diluted loss per share is the same.
Loss
Contingencies
Loss contingencies, including claims and legal actions arising
in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range
of loss can be reasonably estimated. Management does not believe
there now are such matters that will have a material effect on
the financial statements.
Dividend
Restriction
Banking regulations require maintaining certain capital levels
and may limit the dividends paid by the bank to the holding
company or by the holding company to shareholders.
Reclassifications
Certain amounts in the financial statements and related
disclosures as of December 31, 2010 have been reclassified
to conform to the current presentation. Certain gross loan
amounts have been reclassified in Note 5 to meet the
banking regulatory classification guidance. In addition, certain
gross deferred tax items in Note 10 as of December
31, 2010 have been reclassified. These reclassification
adjustments have no effect on net loss or stockholders
equity as previously reported.
Recent
accounting pronouncements
In June 2009, the Financial Accounting Standards Board (FASB)
issued revised guidance for accounting for the transfers of
financial assets. The guidance removes the concept of a
qualifying special-purpose entity (QSPE). This guidance also
clarifies the requirements for isolation and limitations on
portions of financial assets eligible for sale accounting. This
guidance is effective for fiscal years beginning after
November 15, 2009. The Company adopted this guidance on
January 1, 2010. The adoption of this guidance did not have
a material impact on the Companys financial position,
results of operations, or cash flows.
In August 2009, the FASB issued guidance clarifying the
measurement of liabilities at fair value in the absence of
observable market information. This guidance was effective for
the Company beginning January 1, 2010. The guidance did not
have a material impact on the Companys financial position,
results of operations, or cash flows.
In December 2007, the FASB issued guidance establishing
principles and requirements for how an acquirer in a business
combination: (a) recognizes and measures in its financial
statements identifiable assets acquired, liabilities assumed,
and any non-controlling interest in the acquiree;
(b) recognizes and measures goodwill acquired in a business
combination or a gain from a bargain purchase; and
(c) determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial
effects of a business
F-18
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
combination. This guidance is effective for business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008; therefore this guidance has been
applied for the business combination disclosed in Note 2.
The Company has evaluated the provisions of this guidance and
the impact on its financial position, results of operations, or
cash flows.
New authoritative accounting guidance relating to investments in
debt and equity securities (i) changes existing guidance
for determining whether an impairment is other than temporary to
debt securities and (ii) replaces the existing requirement
that an entitys management asserts it has both the intent
and ability to hold an impaired security until recovery with a
requirement that management asserts (a) it does not have
the intent to sell the security, and (b) it is more likely
than not it will not have to sell the security before recovery
of its cost basis. Under this guidance, declines in the fair
value of
held-to-maturity
and
available-for-sale
securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses to the
extent the impairment is related to credit losses. The amount of
the impairment related to other factors is recognized in other
comprehensive income. The Company adopted this guidance in 2009.
The adoption did not have a material impact on the
Companys financial statements, results of operations, or
cash flows.
In July 2010, FASB issued
No. 2010-20,
Receivables (Topic 310): Disclosures about the Credit Quality
of Financing Receivables and the Allowance for Credit Losses.
The ASU amends FASB Accounting Standards
Codificationtm
Topic 310, Receivables, to improve the disclosures that an
entity provides about the credit quality of its financing
receivables and the related allowance for credit losses. As a
result of these amendments, an entity is required to
disaggregate, by portfolio segment or class of financing
receivable, certain existing disclosures and provide certain new
disclosures about its financing receivables and related
allowance for credit losses. For public entities, the
disclosures as of the end of a reporting period are effective
for interim and annual reporting periods ending on or after
December 15, 2010 and have been added to Note 4. The
disclosures about activity that occurs during a reporting period
are effective for interim and annual reporting periods beginning
on or after December 15, 1010.
Newly
issued not yet effective standards
The FASB has issued ASU
2010-29,
Business Combination (Topic 8905): Disclosure of
Supplementary Pro Forma Information for Business Combinations.
This ASU reflects the decision reached in EITF Issue
No. 10-G.
The amendments in this ASU affect any public entity as defined
by Topic 805, Business Combinations that enter into
business combinations that are material on an individual or
aggregate basis. The amendments in this ASU specify that if a
public entity presents comparative financial statements, the
entity should disclose revenue and earnings of the combined
entity as though the business combination(s) that occurred
during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. The amendments
also expand the supplemental pro forma disclosures to
include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the
business combination included in the reported pro forma
revenue and earnings. The amendments are effective
prospectively for business combinations for which the
acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 12,
2010. Early adoption is permitted.
In January 2010, the FASB issued ASU
2010-06,
Improving Disclosure about Fair Value Measurements. This
standard requires new disclosures on the amount and reason for
transfers in and out of Level 1 and Level 2 recurring
fair value measurements. The standard also requires disclosure
of activities (i.e., on a gross basis), including
purchases, sales, issuances, and settlements, in the
reconciliation of Level 3 fair value recurring
measurements. The standard regarding Level 1 and
Level 2 fair value measurements and clarification of
existing disclosures are effective for periods beginning after
December 15, 2009. The disclosures about the reconciliation
of information in Level 3 recurring fair value measurements
are required for periods beginning after December 15, 2010.
Adoption of the applicable portions of this standard on
January 1, 2010 did not have a significant impact on our
quarterly disclosures. For those additional disclosures required
for fiscal years beginning after December 15, 2010, we
anticipate first including those disclosures in our
Form 10-Q
for the quarter ending March 31, 2011.
F-19
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
The FASB has issued ASU
No. 2010-28,
Intangibles Goodwill and Other (Topic 350): When
to Perform Step 2 of the Goodwill Impairment Test for Reporting
Units with Zero and Negative Carrying Amounts. This ASU
reflects the decision reached in EITF Issue
No. 10-A.
The amendments in this ASU modify Step 1 of the goodwill
impairment test for reporting units with zero or negative
carrying amounts. For those reporting units, an entity is
required to perform Step 2 of the goodwill impairment test if it
is more likely than not that a goodwill impairment exists. In
determining whether it is more likely than not that goodwill
impairment exists, an entity should consider whether there are
any adverse qualitative factors indicating that impairment may
exist. The qualitative factors are consistent with the existing
guidance and examples, which require that goodwill of a
reporting unit be tested for impairment between annual tests if
an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its
carrying amount. For public entities, the amendments in this ASU
are effective for fiscal years, and interim periods within those
years, beginning after December 14, 2010. Early adoption is
not permitted.
|
|
NOTE 2.
|
BUSINESS
COMBINATION
|
On October 28, 2010, the Company acquired 100% of the
outstanding common shares of Service1st Bank of Nevada in
exchange for approximately 2.4 million shares of common
stock. Under the terms of the acquisition, Service1st Bank
common shareholders received 47.5975 shares of the
Companys common stock in exchange for each share of
Service1st Bank common stock. In addition, the Service1st
Bank shareholders are eligible to receive additional common
shares equal to twenty percent of Service1st Banks
tangible capital at August 31, 2010, if the price of the
Companys common stock exceeds $12.75 per share for
30 days during the subsequent two year period. The Company
also injected $25 million of cash into its subsidiary bank.
With the acquisition, the Company became a bank holding company
with its sole operating bank located in southern Nevada.
Service1st Bank results of operations were included in the
Companys results beginning November 1, 2010 (first
business day after the acquisition). Acquisition-related costs
are included in the Companys income statement for the year
ended December 31, 2010 and approximated $6 million.
The fair value of the common shares issued as the consideration
paid for Service1st Bank was determined in the basis of the
closing price of the Companys common shares on the
acquisition date.
The transaction was recorded as an acquisition under the current
accounting rules and as a result the balance sheet of
Service1st was revalued to fair value as of the acquisition
date. Any purchase price in excess of net assets acquired is
recorded as goodwill. The transaction resulted in
$5.6 million of goodwill.
The most significant fair value adjustment resulting from the
application of purchase accounting adjustments for this
acquisition were made to loans. As of the acquisition date, the
gross loan portfolio at Service1st Bank was approximately
$125.4 million with a related Allowance for Loan and Lease
Losses (ALLL) of approximately $9.4 million.
The valuation by the third-party resulted in a discount of
approximately $15.8 million at October 28, 2010. While
we believe we currently have the best estimate of fair value,
the purchase accounting adjustments are not final and we are
currently still evaluating all available information to ensure
we have an accurate assessment of fair value. In fact, there
have been some loan charge-offs and payoffs which impacted the
valuation and as a result of reviewing this information,
management reduced the discount from the original estimated
discount of $15.8 million to approximately
$15.1 million. This discount consists of two components;
credit discount and yield discount. Loans purchased with credit
impairments are loans with credit deterioration since
origination and it is probable that not all contractually
required principal and interest payments would be collected. The
performing loan portfolio was approximately $89.9 million
and was discounted by $49,000 for yield and $3.6 million
for credit discounts. The remaining $35.6 million of loans
were identified as loans with purchased credit impairment (PCI)
and those loans had a discount of $576,000 for yield and
$10.9 million for credit discounts. The discounts on
performing loans are recognized by a level yield
method over the remaining life of the loans or loan pools. The
loans identified as containing purchase credit impairment are
treated somewhat differently. The discount associated with yield
F-20
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
is accreted as yield discount and the credit discount is not
accreted but is left on the books to reduce the current carrying
value of the applicable loans.
Goodwill of approximately $5.6 million was recorded in
conjunction with the transaction. The goodwill arising from the
acquisition is largely the result of the benefit to the Company
of acquiring Service1st Bank, thereby creating a platform for
future operations and completing its transition to an operating
bank holding company. The offset to this primarily relates to
the
mark-to-market
process for the loan portfolio. None of this amount is expected
to be deductible for income taxes purposes. In completing the
allocation of purchase price, the tax effect of such adjustments
was not considered as the Company has been operating at a loss
and as such, any net deferred tax asset would result in a
corresponding valuation allowance. The following table
summarizes the fair value of consideration paid for
Service1st Bank and the amounts of the assets acquired and
liabilities assumed recognized at the acquisition date:
|
|
|
|
|
Consideration ($ in 000s)
|
|
|
|
|
Cash (fractional shares and additional dissenter payments)
|
|
$
|
29
|
|
Equity instruments
|
|
|
15,267
|
|
Contingent consideration
|
|
|
1,816
|
|
|
|
|
|
|
Fair value of total consideration transferred
|
|
|
17,112
|
|
Book value of net assets acquired
|
|
|
16,438
|
|
|
|
|
|
|
Excess purchase price over book value of net assets acquired
|
|
$
|
674
|
|
|
|
|
|
|
Allocation of Excess Purchase Price:
|
|
|
|
|
Core deposit intangible
|
|
$
|
784
|
|
Fair Value Adjustments:
|
|
|
|
|
Loans
|
|
|
(5,715
|
)
|
Time deposits
|
|
|
(46
|
)
|
Securities Held to Maturity
|
|
|
260
|
|
Leases
|
|
|
(242
|
)
|
Goodwill
|
|
|
5,633
|
|
|
|
|
|
|
Total
|
|
$
|
674
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,090
|
|
Certificates of deposit
|
|
|
31,928
|
|
Securities, available for sale
|
|
|
2,850
|
|
Securities, held to maturity
|
|
|
7,842
|
|
Loans
|
|
|
110,278
|
|
Premises and equipment, net
|
|
|
1,284
|
|
Other Real Estate Owned
|
|
|
2,403
|
|
Core deposit intangible
|
|
|
784
|
|
Goodwill
|
|
|
5,633
|
|
Other
|
|
|
2,826
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
180,918
|
|
|
|
|
|
|
Fair value of liabilities assumed
|
|
|
|
|
Deposits
|
|
|
162,112
|
|
Other
|
|
|
1,694
|
|
|
|
|
|
|
Fair value of liabilities assumed
|
|
|
163,806
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
17,112
|
|
|
|
|
|
|
F-21
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
The fair value of net assets acquired includes fair value
adjustments to certain receivables that were not considered
impaired as of the acquisition date. The fair value adjustments
were determined using discounted contractual cash flows.
However, the Company believes that all contractual cash flows
related to these financial instruments will be collected. As
such, these receivables were not considered impaired at the
acquisition date and were not subject to the guidance relating
to purchased loans which have shown evidence of credit
deterioration since origination. Receivables acquired that were
not subject to these requirements include non-impaired loans
with a fair value, principal at purchase and gross contractual
amounts receivable of $86.3 million, $89.9 million and
$102.9 million on the date of acquisition.
The following table presents pro forma information as if
the acquisition had occurred at the beginning of 2010 and 2009.
The pro forma information includes adjustments for
interest income on loans and securities acquired, amortization
of intangibles arising from the transaction, and interest
expense on deposits acquired. The pro forma financial
information is not necessarily indicative of the results of
operations that would have occurred had the transactions been
effected on the assumed dates.
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Net interest income
|
|
$
|
7,098
|
|
|
$
|
6,590
|
|
Net (loss) income
|
|
$
|
(14,753
|
)
|
|
$
|
(32,191
|
)
|
Basic earnings per share
|
|
$
|
(0.98
|
)
|
|
$
|
(2.13
|
)
|
Diluted earnings per share
|
|
$
|
(0.98
|
)
|
|
$
|
(2.13
|
)
|
Fair value is the exchange price that would be received for an
asset or paid to transfer a liability (exit price) in the
principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the
measurement date. The Company uses a fair value hierarchy that
prioritizes inputs to valuation techniques used to measure fair
value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or
liabilities (level 1 measurements) and the lowest priority
to unobservable inputs (level 3 measurements). The three
levels of the fair value hierarchy are described below:
Level 1 Unadjusted quoted prices in
active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
Level 2 Quoted prices for similar
instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active, or
model-based valuation techniques where all significant
assumptions are observable, either directly or indirectly, in
the market;
Level 3 Valuation is generated from
model-based techniques where all significant assumptions are not
observable, either directly or indirectly, in the market. These
unobservable assumptions reflect our own estimates of
assumptions that market participants would use in pricing the
asset or liability. Valuation techniques may include use of
matrix pricing, discounted cash flow models and similar
techniques.
Fair
value on a recurring basis
Financial assets measured at fair value on a recurring basis
include the following:
Securities
available for sale
Securities reported as available for sale are reported at fair
value utilizing Level 2 inputs. For these securities the
Company obtains fair value measurements from an independent
pricing service. The fair value measurements consider observable
data that may include dealer quotes, market spreads, cash flows,
the
F-22
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2010
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
($ in 000s)
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized Mortgage Obligation Securities-commercial
|
|
$
|
1,819
|
|
|
$
|
|
|
|
$
|
1,819
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between Level 1 and Level 2
during 2010.
Fair
value on a nonrecurring basis
Certain assets are measured at fair value on a nonrecurring
basis; that is, the instruments are not measured at fair value
on an ongoing basis, but are subject to fair value adjustments
in certain circumstances (for example, when there is evidence of
impairment). The following table presents such assets carried on
the balance sheet by caption and by level within the fair value
hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2010
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
($ in 000s)
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Impaired loans
|
|
$
|
11,438
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,438
|
|
Other real estate owned
|
|
|
3,406
|
|
|
|
|
|
|
|
|
|
|
|
3,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,844
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
The specific reserves for collateral dependent impaired loans
are based on the fair value of the collateral less estimated
costs to sell. The fair value of collateral is determined based
on third-party appraisals. In some cases, adjustments are made
to the appraised values due to various factors, including age of
the appraisal, age of comparables included in the appraisal, and
known changes in the market and in the collateral. Accordingly,
the resulting fair value measurement has been categorized as a
Level 3 measurement. As of December 31, 2010, there
were no specific valuation allowances for the above reported
collateral dependent loans based upon the fair market
adjustments made in conjunction with the October 28, 2010
transaction.
Other
real estate owned
Other real estate owned consists of properties acquired as a
result of, or in-lieu-of, foreclosure. Properties classified as
other real estate owned are initially reported at the fair value
determined by independent appraisals using appraised value, less
cost to sell. Such properties are generally re-appraised every
six months. There is risk for subsequent volatility. Costs
relating to the development or improvement of the assets are
capitalized and costs relating to holding the assets are charged
to expense. When significant adjustments were based on
unobservable inputs, such as when a current appraised value is
not available or management determines the fair value of the
collateral is further impaired below appraised value and there
is no observable market price, the resulting fair value
measurement has been categorized as a Level 3 measurement.
As of December 31, 2010, there were no valuation allowances
for the above reported assets based upon the fair market
adjustments made in conjunction with the October 28, 2010
transaction.
F-23
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
As of December 31, 2010 and 2009, the carrying values of
the Companys financial instruments approximate fair value
due to the October 28, 2010
mark-to-market
process associated with the purchase accounting undertaken on
the Companys subsidiary bank. A valuation of the
banks loan portfolio and deposit base was undertaken and
the resulting marks were used to fair value the carrying amounts
of all material components of the balance sheet that were not
cash or cash equivalents as of the transaction date. The
subsidiary bank did not generate significant amounts of new
financial instruments between October 28, 2010 and
December 31, 2010 and for those new items they were made on
market terms and were not deemed to have any significant
impairment as of the reporting period. The investment
securities, reported as
held-to-maturity,
have the fair value reported on the face of the balance sheet.
The Companys other principal asset is cash and cash
equivalents and at December 31, 2010 and 2009 the carrying
value is the fair value. Based on these facts, management
believes the carrying values on the balance sheet are materially
the same as the fair value with the exception of held
-to-maturity investment securities, which have the fair value
notation on the face of the statement.
The estimated fair value of the Banks financial statements
as of December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
($ in 000s)
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
103,227
|
|
|
$
|
103,227
|
|
|
$
|
87,969
|
|
|
$
|
87,969
|
|
Certificates of deposits
|
|
|
26,889
|
|
|
|
26,889
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
1,819
|
|
|
|
1,819
|
|
|
|
|
|
|
|
|
|
Securities held to maturity
|
|
|
5,314
|
|
|
|
5,287
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
106,223
|
|
|
|
106,223
|
|
|
|
|
|
|
|
|
|
Accrued interest receivables
|
|
|
447
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
160,286
|
|
|
|
160,286
|
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
|
35
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
Loan
Commitments
The estimated fair value of the standby letters of credit at
December 31, 2010 is insignificant. Loan commitments on
which the committed interest rate is less than the current
market rate are also insignificant at December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
Securities Available for Sale
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
Collateralized Mortgage Obligation Securities-commercial
|
|
$
|
1,819
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,819
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
|
|
Securities Held to Maturity
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Corporate Debt Securities
|
|
$
|
4,663
|
|
|
$
|
|
|
|
$
|
(27
|
)
|
|
$
|
4,636
|
|
Small Business Administration Loan Pools
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,314
|
|
|
$
|
|
|
|
$
|
(27
|
)
|
|
$
|
5,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no investment securities prior to the
acquisition of Service1st Bank of Nevada. There have been
no sales of securities or gross realized gains or losses in any
of the periods presented.
As of December 31, 2010, securities of $4.7 million
were pledged for various purposes as required or permitted by
law.
Information pertaining to securities with gross losses at
December 31, 2010, aggregated by investment category and
length of time that individual securities have been in
continuous loss position follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
Less Than Twelve Months
|
|
|
Over Twelve Months
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
(Losses)
|
|
|
Fair Value
|
|
|
(Losses)
|
|
|
Fair Value
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized Mortgage Obligation Securities-commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Debt Securities
|
|
$
|
(27
|
)
|
|
$
|
4,636
|
|
|
|
|
|
|
|
|
|
Small Business Administration Loan Pools
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(27
|
)
|
|
$
|
4,636
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, three debt securities have
unrealized losses with aggregate degradation of approximately
0.05% from the Companys carrying value. These unrealized
losses, totaling $27,000, relate primarily to fluctuations in
the current interest rate environment and other factors, but do
not presently represent realized losses. As of December 31,
2010 there are no securities that have been determined to be
other-than-temporarily-impaired
(OTTI).
The amortized cost and fair value of securities as of
December 31, 2010 by contractual maturities are shown
below. The maturities of small business administration loan
pools differ from their contractual maturities because the loans
underlying the securities may be repaid without penalties;
therefore, these securities are listed separately in the
maturity summary.
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
1,417
|
|
|
$
|
1,417
|
|
Due after one year through five years
|
|
|
402
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,819
|
|
|
$
|
1,819
|
|
|
|
|
|
|
|
|
|
|
F-25
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Securities held to maturity
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
3,093
|
|
|
$
|
3,075
|
|
Due after one year through five years
|
|
|
1,570
|
|
|
|
1,561
|
|
Small Business Administration loan pools
|
|
|
651
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,314
|
|
|
$
|
5,287
|
|
|
|
|
|
|
|
|
|
|
Loans at year end were as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
Construction, land development and other land
|
|
$
|
5,923
|
|
Commercial real estate
|
|
|
54,975
|
|
Residential real estate
|
|
|
9,247
|
|
Commercial and industrial
|
|
|
35,946
|
|
Consumer
|
|
|
131
|
|
Plus: net deferred loan costs
|
|
|
37
|
|
|
|
|
|
|
|
|
|
106,259
|
|
Less: allowance for loan losses
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
$
|
106,223
|
|
|
|
|
|
|
Activity in the allowance for loan losses was as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
Beginning balance
|
|
|
|
|
Provision for loan losses
|
|
$
|
36
|
|
Loans charged-off
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
36
|
|
|
|
|
|
|
As of December 31, 2010, none of the allowance for loan
losses was based on impairment method as no loans from either
the purchased loan portfolio at October 28, 2010 had
experienced subsequent deterioration nor had any of the new
loans originated since that date required an impairment
allowance.
The following table presents the recorded investment in
nonaccrual loans (including PCI loans with no contractual
interest being reported) and loans past due over 90 days
still on accrual by class of loans as of December 31, 2010:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
Nonaccrual
|
|
|
Over 90 Days and Accruing
|
|
|
Construction, land development and other land
|
|
$
|
2,632
|
|
|
$
|
|
|
Commercial real estate
|
|
|
1,224
|
|
|
|
|
|
Residential real estate
|
|
|
2,900
|
|
|
|
|
|
Commercial and industrial
|
|
|
3,670
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,426
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
F-26
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
The following table presents the aging of the recorded
investment in past due loans as of December 31, 2010 by
class of loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than
|
|
|
|
|
($ in 000s)
|
|
30-90 Days
|
|
|
90 Days
|
|
|
Total Past Due
|
|
|
Construction, land development and other land
|
|
$
|
|
|
|
$
|
2,518
|
|
|
$
|
2,518
|
|
Commercial real estate
|
|
|
|
|
|
|
1,003
|
|
|
|
1,003
|
|
Residential real estate
|
|
|
|
|
|
|
2,900
|
|
|
|
2,900
|
|
Commercial and industrial
|
|
|
3,108
|
|
|
|
38
|
|
|
|
3,146
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,108
|
|
|
$
|
6,459
|
|
|
$
|
9,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company categorizes loans into risk categories based on
relevant information about the ability of borrowers to service
their debt, such as: current financial information, historical
payment experience, credit documentation, public information,
and current economic trends, among other factors. The Company
analyzes loans individually by classifying the loans as to
credit risk. The Company uses the following definitions for risk
ratings:
Special
Mention
Loans in this classification exhibit trends or have weaknesses
or potential weaknesses that deserve more than normal management
attention. If left uncorrected, these weaknesses may result in
the deterioration of the repayment prospects for the asset or in
Service1sts credit position at some future date. Special
Mention assets pose an elevated level of concern, but their
weakness does not yet justify a Substandard classification.
Loans in this category are usually performing as agreed,
although there may be minor non-compliance with financial or
technical covenants.
Substandard
Loans classified as substandard are inadequately protected by
the current net worth and paying capacity of the obligor or of
the collateral pledged, if any. Loans so classified have a
well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. They are characterized by the distinct
possibility that the institution will sustain some loss if the
deficiencies are not corrected.
Doubtful
Loans classified as doubtful have all the weaknesses inherent in
those classified as substandard, with the added characteristic
that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions, and values,
highly questionable and improbable.
Loans not meeting the criteria above that are analyzed
individually as part of the above described process are
considered to be pass-rated loans.
F-27
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
As of December 31, 2010, the risk category of loans by
class of loans, including accrual and non-accrual loans, (net of
deferred fees and costs) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
Pass
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
Construction, land development and other land
|
|
$
|
996
|
|
|
$
|
|
|
|
$
|
4,630
|
|
|
$
|
|
|
|
$
|
5,626
|
|
Commercial real estate
|
|
|
47,711
|
|
|
|
2,806
|
|
|
|
4,296
|
|
|
|
162
|
|
|
|
54,975
|
|
Residential real estate
|
|
|
3,990
|
|
|
|
|
|
|
|
5,257
|
|
|
|
|
|
|
|
9,247
|
|
Commercial and industrial
|
|
|
30,582
|
|
|
|
240
|
|
|
|
4,483
|
|
|
|
938
|
|
|
|
36,243
|
|
Consumer
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
83,410
|
|
|
$
|
3,046
|
|
|
$
|
18,666
|
|
|
$
|
1,100
|
|
|
$
|
106,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
Loans
The Company has purchased loans, for which there was, at
acquisition, evidence of credit quality deterioration since
origination and it was probable, at acquisition, that all
contractually required payments would not be collected. The
carrying amount of those loans is as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
Construction, land development and other land
|
|
$
|
4,630
|
|
Commercial real estate
|
|
|
4,458
|
|
Residential real estate
|
|
|
5,257
|
|
Commercial and industrial
|
|
|
5,421
|
|
|
|
|
|
|
Balance December 31, 2010
|
|
$
|
19,766
|
|
|
|
|
|
|
No allowance is associated with these balances.
As previously discussed, the October 28, 2010 transaction
to acquire Service1st Bank was accounted for as a business
combination which resulted in application of fair value
accounting to the subsidiaries balance sheet. The total discount
to the loan portfolio was approximately $15.1 million at
the acquisition date. The loan portfolio was segregated into
performing loans and non-performing loans or purchased loans
with credit impairment.
The performing loans totaled approximately $89.9 million
and were marked with a credit discount of $3.6 million and
approximately $49,000 of yield discount. In accordance with
current accounting pronouncements, the discounts on performing
loans are being recognized on a method that approximates a level
yield over the expected life of the loan.
The loans identified as purchased with credit impairments were
approximately $35.6 million as of the acquisition date. A
credit discount of approximately $10.9 million was recorded
and an additional $576,000 of yield discount was also recorded.
The yield discount is being recognized on a method that
approximates a level yield over the expected life of the loan.
The Company does not accrete the credit discount into income
until such time as the loan is removed from the bank. The only
exception would be on a
case-by-case
basis when a material event that significantly improves the
quality of the loan and reduces the risk to the bank such that
management believes it would be prudent to start recognizing
some of the discount is documented. The credit discount
represents approximately 30% of the transaction date value of
the credit impaired loans.
F-28
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
Accretable yield, or income expected to be collected, is as
follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
Related to new loans purchased
|
|
$
|
576
|
|
Accretion of income
|
|
|
(37
|
)
|
|
|
|
|
|
Balance December 31, 2010
|
|
$
|
539
|
|
|
|
|
|
|
Management does not establish general reserves against these
loans. In the event that deterioration in the credit is
identified subsequent to the date of the discount, additional
specific reserves will be created. As of December 31, 2010,
no such additional reserves were required relating to the
October 28, 2010 loan portfolio. During the last two months
of 2010, approximately $436,000 of net discount accretion was
recognized as interest income. This included the $37,000 for
yield discount and $399,000 for credit discount.
Purchased loans for which it was probably, at acquisition, that
all contractually required payments would not be collected are
as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
Contractually required payments receivable of loans purchased
during the year:
|
|
|
|
|
Construction, land development and other land
|
|
$
|
7,685
|
|
Commercial real estate
|
|
|
9,675
|
|
Residential real estate
|
|
|
5,909
|
|
Commercial and industrial
|
|
|
12,321
|
|
|
|
|
|
|
|
|
$
|
35,590
|
|
|
|
|
|
|
Cash flows expected to be collected at acquisition:
|
|
|
|
|
Construction, land development and other land
|
|
$
|
5,743
|
|
Commercial real estate
|
|
|
5,563
|
|
Residential real estate
|
|
|
5,327
|
|
Commercial and industrial
|
|
|
8,083
|
|
|
|
|
|
|
|
|
$
|
24,716
|
|
|
|
|
|
|
Fair Value of acquired loans at acquisition:
|
|
|
|
|
Construction, land development and other land
|
|
$
|
5,696
|
|
Commercial real estate
|
|
|
5,524
|
|
Residential real estate
|
|
|
5,244
|
|
Commercial and industrial
|
|
|
7,676
|
|
|
|
|
|
|
|
|
$
|
24,140
|
|
|
|
|
|
|
F-29
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 6.
|
PREMISES
AND EQUIPMENT
|
Year-end premises and equipment were as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
Leasehold improvements
|
|
$
|
835
|
|
Equipment
|
|
|
138
|
|
Furniture and fixtures
|
|
|
309
|
|
Vehicles
|
|
|
18
|
|
|
|
|
|
|
|
|
|
1,300
|
|
Less: accumulated depreciation and amortization
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
$
|
1,228
|
|
|
|
|
|
|
Depreciation expense was approximately $72,000 for the last two
months of calendar year 2010 (from the acquisition date of
Service1st Bank). Currently the Company operates from the
bank administration facility.
|
|
NOTE 7.
|
GOODWILL
AND INTANGIBLES
|
The excess of the cost of an acquisition over the fair value of
the net assets acquired consists of goodwill, and core deposit
intangibles. Under ASC Topic 350, goodwill is subject to at
least annual assessments for impairment by applying a fair
value-based test. The Company reviews goodwill and other
intangible assets to determine potential impairment annually, or
more frequently if events and circumstances indicate that the
asset might be impaired, by comparing the carrying value of the
asset with the anticipated future cash flows.
The Company has established October 31 as the date it will use
for the annual assessment. The first annual testing for goodwill
impairment will occur at October 31, 2011. No impairment
losses were recognized as of December 31, 2010.
The following table presents the carrying amount of goodwill:
|
|
|
|
|
($ in 000s)
|
|
December 31, 2010
|
|
|
Balance at beginning of period
|
|
$
|
|
|
Goodwill from business combination
|
|
|
5,633
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
5,633
|
|
|
|
|
|
|
The Company has other intangible assets which consist of a core
deposit intangible that had, as of December 31, 2010, a
remaining average amortization period of approximately ten years.
The following table presents the changes in the carrying amount
of the core deposit intangible, gross carrying amount,
accumulated amortization, and net book value as of
December 31, 2010 and 2009:
|
|
|
|
|
($ in 000s)
|
|
December 31, 2010
|
|
|
Balance at beginning of period
|
|
$
|
|
|
Core deposit intangible from business combinations
|
|
|
784
|
|
Amortization expense
|
|
|
(16
|
)
|
|
|
|
|
|
Balance at end of period
|
|
$
|
768
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
784
|
|
Accumulated amortization
|
|
|
(16
|
)
|
|
|
|
|
|
Net book value
|
|
$
|
768
|
|
|
|
|
|
|
F-30
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
The following presents the estimated amortization expense of
other intangible assets:
|
|
|
|
|
Years ending December 31,
|
|
|
|
($ in 000s)
|
|
Amount
|
|
|
2011
|
|
$
|
97
|
|
2012
|
|
|
92
|
|
2013
|
|
|
87
|
|
2014
|
|
|
83
|
|
2015
|
|
|
79
|
|
Thereafter
|
|
|
330
|
|
|
|
|
|
|
|
|
$
|
768
|
|
|
|
|
|
|
The composition of deposits is as follows:
|
|
|
|
|
($ in 000s)
|
|
December 31, 2010
|
|
|
Demand deposits, noninterest bearing
|
|
$
|
67,087
|
|
NOW and money market accounts
|
|
|
56,509
|
|
Savings deposits
|
|
|
1,273
|
|
Time certificates, $100 or more
|
|
|
30,498
|
|
Other time certificates
|
|
|
4,919
|
|
|
|
|
|
|
Total
|
|
$
|
160,286
|
|
|
|
|
|
|
At December 31, 2010, all time deposits are scheduled to
mature in 2011 as the maximum term offered for time certificates
is twelve months.
None of the time certificates are brokered deposits as of
December 31, 2010. However, in October 2010,
Service1st Bank was notified by the FDIC and Nevada FID
that a legal determination was made that a NOW account owned by
a trust company customer was deemed to be a brokered deposit.
Consistent with the September 1, 2010 Consent Order which
restricts the banks use of brokered deposits, the bank was
given a date of December 31, 2010 to divest of these funds.
Working in concert with the customer and bank regulators, the
subject account was changed from a NOW account to a noninterest
bearing account on January 1, 2011 and on January 4,
2011 the account in the amount of approximately
$23.5 million was wired to another financial institution.
Both regulatory agencies were notified of the planned
disposition of the account and neither agency objected to the
plan to divest the account.
|
|
NOTE 9.
|
EMPLOYEE
BENEFIT PLAN
|
Service1st Bank has a qualified 401(k) employee benefit plan for
all eligible employees. Participants under 50 years of age
are able to defer up to $16,500 of their annual compensation,
while participants 50 years of age and over are able to
defer up to $22,000 of their annual compensation. Under the
terms of the plan, the Bank may not make matching contributions.
Stock-based compensation arrangements are fully discussed in
Note 12.
|
|
NOTE 10.
|
INCOME
TAX MATTERS
|
The Company files income tax returns in the U.S. federal
jurisdiction. ASC 740, Income taxes, was amended to
clarify the accounting and disclosure for uncertain tax
positions as defined. The Company is
F-31
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
subject to the provisions in all of the federal and state
jurisdictions where it is required to file income tax returns,
as well as all open tax years in these jurisdictions. The
company identifies its federal tax return as major
tax jurisdictions, as defined. The periods subject to
examination for the Companys federal tax return are 2007,
2008, and 2009. The Company believes that its income tax filing
positions for deductions will be sustained on audit and does not
anticipate any adjustments that will result in a material change
to its financial position. Therefore, no reserves for uncertain
income tax positions have been recorded pursuant to applicable
guidance. In addition, the Company did not record a cumulative
effect adjustment related to the adoption of this amended
guidance.
The Company may, from time to time, be assessed interest or
penalties by tax jurisdictions, although the Company has had no
such assessments historically. The Companys policy is to
include interest and penalties related to income taxes as a
component of income tax expense.
The cumulative tax effects of the primary temporary difference
as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
5,889
|
|
|
$
|
4,550
|
|
Organization costs and start up costs
|
|
|
5,576
|
|
|
|
175
|
|
Allowance for loan losses, unfunded commitments and loan
discounts
|
|
|
4,250
|
|
|
|
|
|
Stock warrants and stock options
|
|
|
2,331
|
|
|
|
490
|
|
Accrued expenses
|
|
|
769
|
|
|
|
|
|
Premises and equipment
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,891
|
|
|
|
5,215
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Cored Deposit Intangible
|
|
|
(261
|
)
|
|
|
|
|
Prepaid expenses
|
|
|
(122
|
)
|
|
|
|
|
Deferred loan costs
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
18,399
|
|
|
|
5,215
|
|
Valuation allowance
|
|
|
(18,399
|
)
|
|
|
(5,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, and 2009, a valuation allowance
for the entire net deferred tax asset is considered necessary as
the Company has determined that it is not more likely than not
that the deferred tax assets will be realized. Due to the
Company incurring operating losses, no provision for income
taxes has been recorded for the periods ended December 31,
2010, and 2009. Federal operating loss carry forwards total
approximately $17,321,000 and begin to expire in 2027.
F-32
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
For the years ended December 31, 2010, 2009, and 2008, the
components of income tax benefit consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(682
|
)
|
|
|
(2,685
|
)
|
|
|
(2,314
|
)
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
682
|
|
|
|
2,685
|
|
|
|
2,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reasons for the differences between the statutory federal
income tax rate of 34% and the effective tax rates are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Computed expected tax (benefit)
|
|
$
|
(2,601
|
)
|
|
$
|
(5,065
|
)
|
|
$
|
(528
|
)
|
Nondeductible expenses
|
|
|
904
|
|
|
|
771
|
|
|
|
|
|
Other
|
|
|
1,015
|
|
|
|
1,609
|
|
|
|
(1,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset valuation allowance
|
|
$
|
682
|
|
|
$
|
2,685
|
|
|
$
|
2,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal Revenue Code Section 382 places a limitation on
the amount of taxable income that can be offset by net operating
loss carryforwards after a change in control (generally, a
greater than 50% change in ownership) of a loss corporation.
Accordingly, utilization of net operating loss carryforwards may
be subject to an annual limitation regarding their utilization
against future taxable income upon change in control.
On October 28, 2010, a Business Combination between WLBC
and Service1st Bank resulted in a section 382
limitation against the separate company net operating loss
carryforwards acquired from Service1st Bank. As a result of
this section 382 limitation, the Company reduced the
deferred tax asset related to the NOL carry forward and the
valuation allowance by $7,700,000.
|
|
NOTE 11.
|
TRANSACTIONS
WITH RELATED PARTIES
|
Loans
Principal stockholders of the Company and officers and
directors, including their families and companies of which they
are principal owners, are considered to be related parties.
These related parties were loan customers of, and had other
transactions with, the Company in the ordinary course of
business. In managements opinion, these loans and
transactions are on the same terms as those for comparable loans
and transactions with unrelated parties. The aggregate activity
in such loans for the years ended December 31 is as follows:
|
|
|
|
|
($s in 000)
|
|
2010
|
|
|
Balance assumed at merger
|
|
$
|
2,480
|
|
New loans
|
|
|
25
|
|
Repayments
|
|
|
(69
|
)
|
|
|
|
|
|
Ending balances
|
|
$
|
2,436
|
|
|
|
|
|
|
F-33
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
The Company has one related party loan that was on non-accrual
status as of the acquisition date. In the first quarter of 2007,
Service1st purchased a $5 million portion of an existing
term loan to a business owned by a Company director and former
Service1st director. The director resigned from the
Company. On or about February 24, 2011,
Service1st entered into a sales agreement to sell the
remaining loan balance of $3.8 million for approximately
$3.0 million. At the date of the sales agreement, the loan
remains on nonaccrual and classified. Service1st received
proceeds from the sale on March 23, 2011.
Total loan commitments outstanding with related parties total
approximately $1.4 million as of December 31, 2010.
Services
Agreement
WLBC agreed to pay Hayground Cove Asset Management LLC, $10,000
per month, plus
out-of-pocket
expenses not to exceed $10,000 per month, for office space and
services related to the administration of WLBCs
day-to-day
activities. This agreement was effective upon the consummation
of the Offering and terminated on August 31, 2009.
WLBC incurred expense of $120,000 for the year ended
December 31, 2008 and $80,000 for the year ended
December 31, 2009.
Payment
for Due Diligence Services
In October 2009, WLBC made a one-time payment of
$2.6 million to Hayground Cove Asset Management LLC for due
diligence and other services related to various acquisition
opportunities and other activities since WLBCs inception.
Proceeds from the payment were disbursed by Hayground Cove Asset
Management LLC to certain of its employees, affiliates and
consultants (some of whom also serve as WLBCs officers
and/or
directors) that provided support to WLBC in connection with its
efforts in finding and pursuing potential transactions.
|
|
NOTE 12.
|
STOCK-BASED
COMPENSATION
|
The Company has a number of share-based compensation programs.
Total compensation cost that has been charged against income for
those programs was approximately $1.8 million, $900,000 and
$4.6 million for 2010, 2009 and 2008. There has been no
income tax benefit recorded because of the offset in the
deferred tax asset valuation allowance.
Restricted
Stock Programs
Pursuant to Letter Agreements dated December 23, 2008
between WLBC and three of its independent directors, and a
Letter Agreement dated as of April 28, 2009 between WLBC
and WLBCs former President, WLBC granted each independent
director and then President, 50,000 restricted stock units with
respect to shares of WLBCs common stock, subject to
certain terms and conditions.
WLBC incurred compensation expense equal to the grant date fair
value of the restricted stock units. Based upon the market price
of WLBC common shares at grant date, WLBC determined that the
grant date fair value of the restricted stock units was $9.25
per unit, $1,850,000 in the aggregate. WLBC recorded
compensation expense of $1,850,000 over the estimated vesting
period of 266 days, which occurred during 2009 and 2010.
WLBC estimated the vesting period as the number of days from the
grant date to the estimated closing date of the business
combination. On completion of the acquisition of Service1st, the
requirements of the aforementioned letter agreements were not
satisfied, so that the restricted stock units did not, and now
cannot vest according to their terms. Management made this
determination on September 30, 2010 upon receipt of the
final approval from the applicable regulatory agencies. As a
result of this
F-34
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
determination, WLBC reversed the stock compensation expense
($1,850,000) previously recorded for the 200,000 restricted
stock units described above, during the third quarter of 2010.
WLBC also provided a one-time grant of restricted stock equal to
$250,000 divided by the closing price of WLBCs common
stock on the closing date of the acquisition to WLBCs
Chief Financial Officer, for his future services. In addition,
WLBC shall also issued restricted stock with respect to shares
of our common stock to the proposed Chief Executive Officer and
Chief Executive Officer of Service1st. The CEO was issued
restricted shares of WLBC common stock in an amount equal to
$1.0 million divided by the closing price of our common
stock on the closing date of the acquisition in consideration
for his future services. The grant date fair value of each share
of restricted stock was $6.44. The CFO and CEO were granted
38,819 and 155,819 shares of restricted stock,
respectively, on October 28, 2010, vesting over a five year
term. Annual expense associated with these grants is estimated
to be approximately $250,000 per year, for the five year term,
or approximately $42,000 for the year ended December 31,
2010.
On October 28, 2010, WLBC and each of five officers and
consultants entered into letter agreements (the Letter
Agreements), pursuant to which each of the foregoing
individuals received a grant of restricted stock units of WLBC
(the Restricted Stock Units) for past services. The
former Chairman and Chief Executive Officer of WLBC, and a
current director, received 50,000 Restricted Stock Units;
WLBCs former President, received 100,000 Restricted Stock
Units; a former director of WLBC, received 25,000 Restricted
Stock Units; an outside consultant to WLBC, received 20,000
Restricted Stock Units; and another outside consultant to WLBC,
received 5,000 Restricted Stock Units. Each Restricted Stock
Unit is immediately and fully vested and shall be settled for
one share of common stock, par value $0.0001, of WLBC on the
earlier to occur of (i) a Change of Control Event (as such
term is defined in the Letter Agreement) and
(ii) October 28, 2013 (the Settlement
Date). Any cash dividends paid with respect to the shares
of Common Stock covered by the Restricted Stock Units prior to
the Settlement Date shall be credited to a dividend book entry
account as if the shares of Common Stock had been issued,
provided that such cash dividends shall not be deemed to
reinvested in shares of Common Stock and will be held uninvested
and without interest and shall be paid in cash on the Settlement
Date. Any stock dividends paid with respect to the shares of
Common Stock covered by the Restricted Stock Units prior to the
Settlement Date shall be credited to a dividend book entry
account as if shares of Common Stock had been issued, provided
that such dividends shall be paid on the Settlement Date. These
grants were recorded as of October 28, 2010 and resulted in
recording expenses of approximately $1,288,000, based upon a
grant date fair value of $6.44 per restricted stock unit.
Furthermore, WLBC made a one-time grant of 50,000 shares of
Common Stock to each of the current Chairman of the Board of
Directors of WLBC, a current member of the Board of Directors
and a former member of the Board of Directors for past services.
The issuances of Restricted Stock units and Common Stock were
made in reliance upon an available exemption from registration
under the Securities Act. These grants were recorded as of
October 28, 2010 and resulted in recording expenses of
approximately $966,000, based upon a grant date fair value of
$6.44 per restricted stock unit.
Stock
Option Program
Pursuant to the Agreement and Plan of Merger between the Company
and Service1st Bank, the Company agreed to assume the
Service1st Bank 2007 Stock Option Plan and exchange each
outstanding Bank Stock Option into options to acquire shares of
WLBC Common Stock on substantially the same terms and conditions
as were applicable under such Bank Stock Options immediately
prior to the transaction under these terms; (i) each Bank
Stock Option will be exercisable for a number of WLBC Common
Stock equal to the product of the number of shares of Bank
Common Stock that would be issuable upon exercise of such Bank
Stock Option outstanding immediately prior to the transaction
multiplied by the Exchange Ratio, rounded down to the nearest
whole number of shares of WLBC Common Stock, and (ii) the
per share exercise price for the WLBC Common Stock issuable upon
exercise of such assumed Bank Stock Option will be equal to the
quotient
F-35
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
determined by dividing the per share exercise price for such
Bank Stock Option outstanding immediately prior to the
transaction date by the Exchange Ratio, rounded up to the
nearest whole cent. Any restrictions on the exercisability of
such Bank Stock Option in effect as of the date hereof will
continue in full force and effect, and the term, exercisability,
and vesting schedule of such Bank Stock Option as in effect of
the date hereof will remain unchanged. Stock awards available to
grant, subject to the necessary approvals, were approximately
229,000 at December 31, 2010.
Generally, Bank Stock Options granted had vesting periods of 3
to 5 years. The fair value of shares at the date of grant
was determined by the Banks Board of Directors. The fair
value of each stock award was estimated on the date of grant
using the Black-Scholes Option Valuation Model.
A summary of Bank Stock Option activity as of December 31,
2010 and changes during the period (October 28,
2010 December 31, 2010) then ended is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Shares
|
|
Exercise Price
|
|
WLBC Stock Options Converted from Bank Stock Options at
October 28, 2010
|
|
|
246,947
|
|
|
$
|
21.01
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2010
|
|
|
246,947
|
|
|
$
|
21.01
|
|
Exercisable, end of period
|
|
|
146,728
|
|
|
$
|
21.01
|
|
The exercise price was determined in accordance with the Merger
Agreement, dated November 6, 2009. The exercise price is
calculated by the common stock exchange ratio of 47.5975. Each
Service1st stock option had an exercise price of $1,000.00.
The $1,000.00 is divided by the exchange ratio to create the
equivalent exercise price for the Companys stock option
($1,000.00 divided by 47.5975 equals $21.01).
As of December 31, 2010, there was $767,000 of total
unrecognized compensation cost related to the above listed
non-vested stock options assumed under the Merger Agreement. The
cost is expected to be recognized over a weighted-average period
of 1.8 years. As of December 31, 2010, the aggregate
intrinsic value of the outstanding and vested stock options is
$0.
On November 27, 2007, WLBC sold 31,948,850 Units, including
1,948,850 Units from the partial exercise of the
underwriters over-allotment option, at an Offering price
of $10.00 per Unit. Each Unit consisted of one share of
WLBCs common stock, $.0001 par value, and one
Redeemable Common Stock Purchase Warrant (Warrant).
Each Warrant entitled the holder to purchase from WLBC one share
of common stock at an exercise price of $7.50 per share
commencing the later of the completion of a Business Combination
per share for any 20 trading days within a 30 trading day period
ending three business days prior to the date on which the notice
of redemption is given. The terms of the warrants were amended
on July 20, 2009, as more fully described below.
On November 27, 2007, certain of the initial stockholders
purchased an aggregate of 8,500,000 warrants (the Private
Warrants) from WLBC in a private placement pursuant to the
exemption from registration contained in Section 4(2) of
the Securities Act of 1933, as amended. The warrants were sold
for a total purchase price of $8,500,000, or $1.00 per warrant.
The private placement took place simultaneously with the
consummation of the Offering. Each warrant was exercisable to
one share of common stock. The exercise price on the warrants
was $7.50. The Private Warrants were also subject to a
lock-up
agreement with WLBCs underwriters and would not be
transferable before the consummation of a Business Combination.
The holders
F-36
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
of the Private Warrants were also entitled, at any time and from
time to time, to exercise the Private Warrants on a cashless
basis at the discretion of the holder. The proceeds from the
sale of the Private Warrants were deposited into the trust
account, subject to a trust agreement. The terms of the warrants
were amended on July 20, 2009. Based upon observable market
prices, WLBC determined that the grant date fair value of the
Private Warrants was $1.10 per warrant, $9,350,000 in the
aggregate. The valuation was based on all comparable initial
public offerings by blank check companies in 2007. WLBC recorded
compensation expense of $850,000 over a 24 month service
period in connection with the Private Warrants, which is the
amount equal to the grant date fair value of the warrants minus
the purchase price. WLBC estimated the service period as the
estimated time to complete a Business Combination.
Warrants
and Private Shares Restructuring
On July 20, 2009, WLBC entered into a Letter Agreement (the
Warrant Restructuring Letter Agreement) with
warrantholders who have represented to WLBC that they
collectively hold at least a majority of its outstanding
warrants (the Consenting Warrantholders) confirming
the basis and terms upon which the parties agreed to amend the
Warrant Agreement, dated as of November 27, 2007 (the
Original Warrant Agreement), between WLBC and
Continental Stock Transfer & Trust Company, as
warrant agent (the Warrant Agent), previously filed
with the SEC on November 13, 2007. The terms of the Amended
and Restated Warrant Agreement include (i) a new strike
price of $12.50 per share of our common stock, par value
$0.0001, (ii) an expiration occurring on the earlier of
(x) seven years from the consummation of the Acquisition or
another business combination or (y) the date fixed for
redemption of the warrants set forth in the original warrant
agreement, (iii) a redemption price of $0.01 per warrant,
provided that (x) all of the warrants are redeemed,
(y) the last sales price of the common stock has been equal
to or greater than $21.00 per share on each of 20 trading days
within any
30-day
trading period ending on the third business day prior to the
date on which notice of redemption is given and (z) there
is an effective registration statement in place with respect to
the common stock underlying the warrants, (iv) mandatory
downward adjustment of the strike price for each warrant to
reflect any cash dividends paid with respect to the outstanding
common stock, until such date as our publicly traded common
stock trades at $18.00 or more per share on each of 20 trading
days within any 30-trading-day period; and (v) in the event
an effective registration statement is not in place on the date
the warrants are set to expire, the warrants will remain
outstanding until 90 days after an effective registration
statement is filed. If we have not filed an effective
registration statement within 90 days after the expiration
date, the warrants shall become exercisable for cash
consideration.
On July 20, 2009, WLBC also entered into a Private
Shares Restructuring Agreement with its former sponsor,
Hayground Cove Asset Management LLC (Hayground
Cove), pursuant to which Hayground Cove, on behalf of
itself and the funds and accounts it manages and Private Shares
that Hayground Cove or its affiliates control, agreed to cancel
at least 90.0% of the outstanding Private Shares in exchange for
one warrant per Private Share cancelled, each warrant identical
in terms and conditions to WLBCs restructured outstanding
warrants (except as set forth in the Amended and Restated
Warrant Agreement defined below). The cancelled Private Shares
included all such Private Shares currently held by Hayground
Cove and its affiliates.
In connection with the foregoing, on July 20, 2009, WLBC
and the Warrant Agent entered into an Amended and Restated
Warrant Agreement (the Amended and Restated Warrant
Agreement) to effect the amendments to the Original
Warrant Agreement as agreed between WLBC and the Consenting
Warrantholders pursuant to the Warrant Restructuring Letter
Agreement. In addition, WLBC has received approval for listing
of the amended warrants by the New York Stock Exchange and
certifications from the applicable registered holders of such
warrants certifying the number of warrants held by the
consenting warrantholders. WLBC also filed and distributed a
Schedule 14C Information Statement in connection with the
warrant restructuring on September 17, 2009. The warrant
restructuring and Private Shares restructuring became effective
on October 7, 2009 after the receipt of stockholder
approval of the acquisition of 1st Commerce Bank and the
Amended and Restated Certificate of Incorporation
(COI).
F-37
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
On August 13, 2009, WLBC entered into a Letter Agreement
with Hayground Cove, whereby Hayground Cove agreed that it and
its affiliates may only transfer any WLBC warrants they hold to
an unaffiliated third party transferee if: (i) the transfer
is part of a widespread public distribution of such warrants;
(ii) the transferee controls more than 50.0% of WLBCs
voting securities without any transfer from Hayground Cove or
any of its affiliates or(iii) the warrants transferred to a
transferee (or group of associated transferees) would not
constitute more than 2.0% of any class of WLBCs voting
securities.
On October 7, 2009, WLBC and the Warrant Agent entered into
an Amendment No. 1 (the Warrant Agreement
Amendment) to the Amended and Restated Warrant Agreement.
The Warrant Agreement Amendment (i) amends the definition
of Business Combination as set forth in the Warrant
Agreement to allow for the exercise of WLBCs warrants
immediately upon consummation of an initial business
combination, subject to certain requirements as set forth in the
Amended and Restated Warrant Agreement, and (ii) makes
certain technical amendments to the Insider Letters in
conformance with the COI Amendments and the Trust Agreement
Amendment.
In order to assist WLBC in gaining the requisite approval of
certain bank regulatory authorities in connection with the
Acquisition, on September 23, 2010, WLBC entered into a
Letter Agreement (the Warrant Restructuring Letter
Agreement) with certain warrant holders who represented to
WLBC that they collectively hold at least a majority of its
outstanding warrants (the Consenting Warrant
Holders) confirming the basis and terms upon which the
parties have agreed to amend the Amended and Restated Warrant
Agreement, dated as of July 20, 2009, as amended by the
Amendment No. 1, dated as of October 9, 2009, each
between WLBC and Continental Stock Transfer &
Trust Company, as warrant agent (the Warrant
Agent) (as amended, the Warrant Agreement),
previously filed with the SEC. The Warrant Restructuring Letter
Agreement serves as the consent and approval of each of the
Consenting Warrant Holders to amend and restate the Warrant
Agreement.
Pursuant to the Warrant Restructuring Letter Agreement, the
Warrant Agreement amended where applicable to provide for the
automatic exercise of all of the outstanding warrants of WLBC
(the Warrants) into one thirty-second (1/32) of one
share of WLBCs common stock, par value $0.0001
(Common Stock), which shall occur concurrently with
the consummation of the Acquisition (the Automatic
Exercise Date). Any Warrants that would entitle a holder
of such Warrants to a fractional share of Common Stock after
taking into account the automatic exercise of the remainder of
such holders Warrants into full shares of Common Stock
shall be cancelled on the Automatic Exercise Date. As of
September 23, 2010, there were 48,067,758 Warrants
outstanding, each exercisable for one share of Common Stock,
which will automatically be converted into approximately
1,502,088 shares of Common Stock on the Automatic Exercise
Date. As a result of the foregoing, there were no Warrants
outstanding after the Automatic Exercise Date. WLBC also paid a
consent fee to the holders of Warrants in an amount equal to
$0.06 per Warrant on the Automatic Exercise Date, regardless of
whether such holders were party to the Warrant Restructuring
Letter Agreement or an aggregate payment of $2.9 million.
WLBC has agreed to file a registration statement with the SEC
for the registration under the Securities Exchange Act of 1933,
as amended, of the shares of Common Stock issuable upon exercise
of the Warrants. If such registration statement is not filed
within 30 days of the Automatic Exercise Date, WLBC shall
make a payment to each holder of Common Stock issued upon
exercise of the Warrants in an amount equal to $0.12 per share
of Common Stock issuable upon exercise of the Warrants held by
such holder. WLBC further agreed to make an additional payment
in an amount equal to $0.18 per share of Common Stock issuable
upon exercise of the Warrants held by such holder if the
registration statement has not been declared effective by the
SEC within 180 days of the Automatic Exercise Date.
In connection with the foregoing, on September 27, 2010,
WLBC and the Warrant Agent entered into a Second Amended and
Restated Warrant Agreement (the Second Amended and
Restated Warrant Agreement) to effect the amendments to
the Warrant Agreement as agreed between WLBC and the Consenting
Warrant
F-38
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
Holders pursuant to the Warrant Restructuring Letter Agreement.
The Second Amended and Restated Warrant Agreement became
effective upon execution by WLBC and the Warrant Agent, but the
amendments to the Warrant Agreement were subject to
(i) receipt by the Warrant Agent and WLBC of (x) the
consent of the registered holder of each Consenting Warrant
Holders public warrants to the amendments to the Warrant
Agreement and (y) certification to the Warrant Agent and
WLBC from such registered holder(s) as to the positions held by
each of the Consenting Warrant Holders, (ii) receipt by
WLBC and Service1st of final regulatory approval of the
Acquisition, which must occur no later than October 12,
2010, and (iii) the consummation of the Acquisition, which
must occur no later than November 12, 2010 (the
Expiration Date), unless such date is extended by
the mutual agreement of WLBC and Service1st, in which case the
Expiration Date shall be correspondingly extended. None of the
terms of the Second Amended and Restated Warrant Agreement will
supersede, amend or replace in any manner whatsoever any term of
the Warrant Agreement until such time as these conditions are
met.
WLBC filed a Schedule 14C Information Statement on
October 7, 2010, in connection with the warrant
restructuring. The activities necessary to complete the Warrant
Restructuring were commenced by WLBC in conjunction with the
closing of the merger transaction on October 28, 2010, and
all warrants were converted as described above.
Bank
Warrant Exchange
Pursuant to the Agreement and Plan of Merger between the Company
and Service1st Bank, the Company agreed to exchange each
outstanding Bank Stock Warrant into warrants to acquire shares
of WLBC Common Stock on substantially the same terms and
conditions as were applicable under such Bank Stock Warrants
immediately prior to the transaction under these terms;
(i) each Bank Stock Warrant will be exercisable for a
number of WLBC Common Stock shares equal to the product of the
number of shares of Bank Common Stock that would be issuable
upon exercise of such Bank Stock Warrant outstanding immediately
prior to the transaction multiplied by the Exchange Ratio
(47.5975), rounded down to the nearest whole number of shares of
WLBC Common Stock, and (ii) the per share exercise price for the
WLBC Common Stock issuable upon exercise of such assumed Bank
Stock Warrant will be equal to the quotient determined by
dividing the per share exercise price for such Bank Stock
Warrant outstanding immediately prior to the transaction date by
the Exchange Ratio, rounded up to the nearest whole cent. Any
restrictions on the exercisability of such Bank Stock Warrant in
effect as of the date hereof will continue in full force and
effect, and the term, and exercisability schedule of such Bank
Stock Warrant as in effect of the date hereof will remain
unchanged.
On October 28, 2010, the 900 Bank Stock Warrants were
converted to 42,834 WLBC stock warrants with an exercise price
of $21.01 per stock warrant and all were exercisable at that
time. The exercise price was determined in accordance with the
Merger Agreement, dated November 6, 2009. The exercise
price is calculated by the common stock exchange ratio of
47.5975. Each Service1st stock warrant on had an exercise
price of $1,000.00. The $1,000.00 is divided by the exchange
ratio to create the equivalent exercise price for the
Companys stock warrant ($1,000.00 divided by 47.5975
equals $21.01). As of December 31, 2010 the remaining
contractual term of the outstanding stock warrants was
approximately one year. As of December 31, 2010 the
aggregate intrinsic value of outstanding and vested stock
warrants is $0.
|
|
NOTE 14.
|
REGULATORY
CAPITAL MATTERS
|
Banks and bank holding companies are subject to regulatory
capital requirements administered by federal banking agencies.
Capital adequacy guidelines and, additionally for banks, prompt
corrective action regulations, involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items
calculated under regulatory accounting practices. Capital
amounts and classifications are also subject to qualitative
judgments by regulators. Failure to meet capital requirements
can initiate regulatory action. Management believes as of
F-39
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
December 31, 2010, the Company and Service1st Bank met all
capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide five
classifications: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized, although these terms are not used to represent
overall financial condition. If the Bank is only adequately
capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are
limited, as is asset growth and expansion, and capital
restoration plans are required. At year-end 2010, the most
recent regulatory notifications categorized the Bank as
adequately capitalized under the regulatory framework for prompt
corrective action. This determination is mandated when an
institution becomes party to a formal regulatory action. There
are no conditions or events since that notification that
management believes have changed the institutions category.
Actual capital levels and minimum required levels were as
follows at year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
|
|
Minimum Required
|
|
Capitalized Under
|
|
Minimum Required
|
|
|
|
|
for Capital Adequacy
|
|
Prompt Corrective
|
|
Under Regulatory
|
|
|
Actual
|
|
Purposes
|
|
Action Regulations
|
|
Agreements
|
($ in 000s)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
87.8
|
|
|
|
68.8
|
%
|
|
$
|
10.2
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Service1st Bank
|
|
$
|
36.3
|
|
|
|
31.0
|
%
|
|
$
|
9.4
|
|
|
|
8.0
|
%
|
|
$
|
11.7
|
|
|
|
10.0
|
%
|
|
$
|
14.1
|
|
|
|
12.0
|
%
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
87.4
|
|
|
|
68.4
|
%
|
|
$
|
5.1
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Service1st Bank
|
|
$
|
35.9
|
|
|
|
30.6
|
%
|
|
$
|
4.7
|
|
|
|
4.0
|
%
|
|
$
|
7.0
|
|
|
|
6.0
|
%
|
|
$
|
|
|
|
|
N/A
|
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
87.4
|
|
|
|
30.5
|
%
|
|
$
|
11.5
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Service1st Bank
|
|
$
|
35.9
|
|
|
|
18.1
|
%
|
|
$
|
7.9
|
|
|
|
4.0
|
%
|
|
$
|
9.9
|
|
|
|
5.0
|
%
|
|
$
|
19.8
|
|
|
|
10.0
|
%
|
The Company did not have a bank subsidiary prior to
October 28, 2010 and was not subject to any regulatory
capital requirements. Accordingly, no presentation is being made
for year-end 2009.
On September 1, 2010, Service1st, without admitting or
denying any possible charges relating to the conduct of its
banking operations, agreed with the FDIC and the Nevada FID to
the issuance of a Consent Order. The Consent Order supersedes a
Memorandum of Understanding entered into by Service1st with
the FDIC and Nevada FID in May of 2009. Under the Consent Order,
Service1st has agreed, among other things, to:
(i) assess the qualification of, and have retained
qualified, senior management commensurate with the size and risk
profile of Service1st; (ii) maintain a Tier I leverage
ratio at or above 8.5% and a total risk-based capital ratio at
or above 12%; (iii) continue to maintain an adequate
allowance for loan and lease losses; (iv) not pay any
dividends without prior bank regulatory approval;
(v) formulate and implement a plan to reduce
Service1sts risk exposure to adversely classified assets;
(vi) not extend additional credit to any borrower whose
loan has been charged-off or classified loss;
(vii) not extend any additional credit to any borrower
whose loan has been classified as substandard or
doubtful without prior approval from
Service1sts board of directors or loan committee;
(viii) formulate and implement a plan to reduce risk
exposure to its concentration in commercial real estate loans in
conformance with Appendix A of Part 365 of the
FDICs Rules and Regulations; (ix) formulate and
implement a plan to address profitability; and (x) not
accept brokered deposits (which includes deposits paying
interest rates significantly higher than prevailing rates in
Service1sts market area) and reduce its reliance on
existing brokered deposits, if any.
F-40
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
During the application process for the acquisition of
Service1st by WLBC, we made a commitment to the FDIC to
maintain the Tier 1 leverage capital ratio of
Service1st at 10% or greater until October 28, 2013
or, if later, when the September 1, 2010 Consent Order
agreed to by Service1st with the FDIC and the Nevada FID
terminates.
|
|
NOTE 15.
|
COMMITMENTS
AND CONTINGENCIES
|
Contingencies
In the normal course of business, the Company and its subsidiary
bank are involved in various legal proceedings. In the opinion
of management, any liability resulting from such proceedings
would not have a material adverse effect on the financial
statements.
The Initial Stockholders have waived their right to receive
distributions with respect to their Private Shares upon
WLBCs liquidation.
Pursuant to an employment agreement effective August 1,
2007 between WLBC and its former CEO, WLBCs former CEO
obtained an option to purchase 475,000 shares of Private
Shares at the purchase price of $0.001 per share from
WLBCs sponsor and its affiliates, which option will vest
on the date (the Trigger Date) that is one year
after the closing of a qualifying Business Combination, but the
vesting will occur only if the appreciation of the per share
price of WLBCs common stock is either (i) greater
than 1x the Russell 2000 hurdle rate on the Trigger Date or
(ii) exceeds the Russell 2000 hurdle rate for 20
consecutive trading days after the Trigger Date. The Russell
hurdle rate means the Russell 2000 Index performance over the
period between the completion of the Offering and the Trigger
Date. The amount of the option was increased by the amount of
shares equal to 10,000 shares for each $10,000,000 of gross
proceeds from the exercise of the underwriters
over-allotment option. As a result the option was increased to
495,000 shares due to the exercise of 1,948,850 Units of
the underwriters over-allotment option.
WLBC determined that the fair value of the options on the date
of grant, November 27, 2007 was $4,573,597. The fair value
of the option is based on a Black-Scholes model using an
expected life of three years, stock price of $9.25 per share,
volatility of 33.7% and a risk-free interest rate of 4.98%.
However, because shares of WLBCs common stock did not have
a trading history, the volatility assumption is based on
information that was available to WLBC. WLBC believes that the
volatility estimate is a reasonable benchmark to use in
estimating the expected volatility of shares of WLBCs
common stock. In addition, WLBC believes a stock price of $9.25
per share is a fare assumption based on WLBCs observation
of market prices for comparable shares of common stock. This
assumption is based on all comparable initial public offerings
by blank check companies in 2007. The stock-based compensation
expense will be recognized over the service period of
24 months. WLBC estimated the service period as the
estimated time to complete a business combination. However,
pursuant to a Settlement Agreement dated December 23, 2008,
the options were deemed to be fully vested as of the effective
date of the Settlement Agreement. As a result, the entire
remaining compensation expense was recognized by WLBC on
December 23, 2008. WLBC recognized $237,973 in stock-based
compensation expense related to the options for the period from
June 28, 2007 (inception) to December 31, 2007
$4,155,368 for the year ended December 31, 2008 and $0 for
the year ended December 31, 2009. The Company also, as
required under the terms of the Settlement Agreement, paid
$247,917 in compensation expenses related to a severance payment
to the former CEO during January, 2009.
Indemnifications
WLBC has entered into agreements with its directors to provide
contractual indemnification in addition to the indemnification
provided in its amended and restated certificate of
incorporation. WLBC believes that these provisions and
agreements are necessary to attract qualified directors.
WLBCs bylaws also will permit it to secure insurance on
behalf of any officer, director or employee for any liability
arising out of his or her actions, regardless
F-41
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
of whether Delaware law would permit indemnification. WLBC has
purchased a policy of directors and officers
liability insurance that insures WLBCs directors and
officers against the cost of defense, settlement or payment of a
judgment in some circumstances and insures us against our
obligations to indemnify the directors and officers.
Financial
instruments with off-balance sheet risk
Some financial instruments, such as loan commitments, credit
lines, letters of credit, and overdraft protection, are issued
to meet customer financing needs. These are agreements to
provide credit or to support the credit of others, as long as
conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used.
Off-balance sheet risk to credit loss exists up to the face
amount of these instruments, although material losses are not
anticipated. The same credit policies are used to make such
commitments as are used for loans, including obtaining
collateral at exercise of the commitment.
The contractual amounts of financial instruments with
off-balance-sheet risk at year end were as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
Unused lines of credit
|
|
$
|
18,504
|
|
Standby letters of credit
|
|
$
|
590
|
|
Unused lines of credit are agreements to lend to a customer as
long as there is no violation of any condition established in
the contract. The lines 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 total commitment amounts do not
necessarily represent future cash requirements. Service1st Bank
evaluates each customers creditworthiness on a
case-by-case
basis. The amount of collateral obtained, if deemed necessary by
Service1st Bank upon extension of credit, is based on
managements credit evaluation of the party. Collateral
held varies, but may include accounts receivable, inventory,
property and equipment, residential real estate, undeveloped and
developed land, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by
Service1st Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support
public and private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
Collateral held varies as specified above and is required as the
Bank deems necessary. Generally, letters of credit issued have
expiration dates within one year.
At year-end 2010, the majority of the unused lines of credit
were at variable rates tied to various established indices, most
lines contain floors that are currently in excess of the
contractual rates.
The total liability for financial instruments with off-balance
sheet risk as of December 31, 2010 is approximately $372,000
Lease
commitments
The Companys subsidiary bank leases premises and equipment
under non-cancelable operating leases expiring through 2013.
Generally, these leases contain
5-year
renewal options. The following is a schedule of future minimum
rental payments under these leases as of December 31, 2010:
|
|
|
|
|
($ in 000s)
|
|
|
|
2011
|
|
$
|
910
|
|
2012
|
|
|
742
|
|
2013
|
|
|
444
|
|
|
|
|
|
|
|
|
$
|
2,096
|
|
|
|
|
|
|
F-42
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
Rent expense of approximately $114,000 included in occupancy
expense for the year ended December 31, 2010.
Concentrations
The Company grants commercial, construction, real estate, and
consumer loans to customers. The Companys business is
concentrated in Nevada, and the loan portfolio includes
significant credit exposure to the commercial real estate
industry of this area. As of December 31, 2010, commercial
real estate loans represent 51.8% of total loans. Owner-occupied
commercial real estate loans represent 38% of commercial real
estate loans. As of December 31, 2010, real estate-related
loans accounted for approximately 66% of total loans.
The Companys policy for requiring collateral is to obtain
collateral whenever it is available or desirable, depending upon
the degree of risk Service1st Bank is willing to take.
Lines
of credit
The Company has lines of credit available from the FHLB and the
FRB. Borrowing capacity is determined based on collateral
pledged, generally consisting of securities and loans, at the
time of the borrowing. As of December 31, 2010, the Company
had available credit with the FHLB and FRB of approximately
$18.1 million and $4.4 million, respectively. As of
December 31, 2010, the Company has no outstanding
borrowings under these agreements.
|
|
NOTE 16.
|
PARENT
COMPANY ONLY CONDENSED FINANCIAL INFORMATION
|
Condensed financial information of Western Liberty Bancorp
follows:
CONDENSED
BALANCE SHEETS
December 31
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in 000s)
|
|
|
ASSETS
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
53,476
|
|
|
$
|
87,969
|
|
Investment in banking subsidiaries
|
|
|
42,299
|
|
|
|
|
|
Other assets
|
|
|
162
|
|
|
|
551
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
95,937
|
|
|
$
|
88,520
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Accrued expenses and other liabilities
|
|
$
|
292
|
|
|
$
|
628
|
|
Contingent consideration
|
|
|
1,816
|
|
|
|
|
|
Shareholders equity
|
|
|
93,829
|
|
|
|
87,892
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
95,937
|
|
|
$
|
88,520
|
|
|
|
|
|
|
|
|
|
|
F-43
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
CONDENSED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Interest and other income
|
|
$
|
8
|
|
|
$
|
139
|
|
|
$
|
5,691
|
|
Interest and other expense
|
|
|
7,844
|
|
|
|
15,037
|
|
|
|
7,244
|
|
Income (loss) before income tax and undistributed subsidiary
income
|
|
|
(7,836
|
)
|
|
|
(14,898
|
)
|
|
|
(1,553
|
)
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed subsidiary income
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(7,650
|
)
|
|
$
|
(14,898
|
)
|
|
$
|
1,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
CONDENSED
STATEMENTS OF CASH FLOWS
Years ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(7,650
|
)
|
|
$
|
(14,898
|
)
|
|
$
|
(1,552
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed subsidiary income
|
|
|
(186
|
)
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
1,771
|
|
|
|
869
|
|
|
|
4,625
|
|
Interest earned on cash held in trust
|
|
|
|
|
|
|
(86
|
)
|
|
|
(5,664
|
)
|
Change in other assets
|
|
|
389
|
|
|
|
(294
|
)
|
|
|
|
|
Change in other liabilities
|
|
|
(365
|
)
|
|
|
(54
|
)
|
|
|
355
|
|
Accrued offering costs
|
|
|
|
|
|
|
|
|
|
|
499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
(6,041
|
)
|
|
|
(14,463
|
)
|
|
|
2,735
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash withdrawn from trust account for working capital
|
|
|
|
|
|
|
316,778
|
|
|
|
4,100
|
|
Investments in subsidiaries
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from investing activities
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of redemption of common shares
|
|
|
|
|
|
|
(211,765
|
)
|
|
|
|
|
Payment of underwriters discount and offering costs
|
|
|
|
|
|
|
(4,027
|
)
|
|
|
|
|
Cash payment for warrant exchange
|
|
|
(2,884
|
)
|
|
|
|
|
|
|
|
|
Redemption of dissenters shares
|
|
|
(567
|
)
|
|
|
|
|
|
|
|
|
Cash payment for fractional shares
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities
|
|
|
(3,452
|
)
|
|
|
(215,792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(34,493
|
)
|
|
|
86,523
|
|
|
|
1,365
|
|
Beginning cash and cash equivalents
|
|
|
87,969
|
|
|
|
1,446
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
$
|
53,476
|
|
|
$
|
87,969
|
|
|
$
|
1,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-45
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 17.
|
EARNINGS
PER SHARE
|
Basic earnings per common share (Basic EPS) is
computed by dividing the net income available to common
stockholders by the weighted-average number of shares
outstanding. Diluted earnings per common share (Diluted
EPS) are computed by dividing the net income available to
common stockholders by the weighted average number of common
shares and dilutive common share equivalents then outstanding.
The 7,987,214 shares of common stock issued to WLBCs
initial stockholders were issued for $0.001 per share, which is
considerably less than the Offering per share price. Such shares
have been assumed to be retroactively outstanding since
July 27, 2007, inception. As of July 20, 2009,
7,618,908 of those shares were restructured into warrants and
368,305 of those shares remain outstanding.
For the years ended December 31, 2010 2009 and 2008,
potentially dilutive securities are excluded from the
computation of fully diluted earnings per share as their effects
are anti-dilutive.
The following table sets forth the computation of basic and
diluted per share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
($s in 000s, except per share)
|
|
December 31, 2010
|
|
December 31, 2009
|
|
December 31, 2008
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders
|
|
$
|
(7,650
|
)
|
|
$
|
(14,994
|
)
|
|
$
|
(1,998
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
11,680,609
|
|
|
|
33,169,481
|
|
|
|
39,936,064
|
|
Dilutive effect of Restricted Stock Units, Warrants and Stock
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, assuming dilution
|
|
|
11,680,609
|
|
|
|
33,169,481
|
|
|
|
39,936,064
|
|
Net (loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.65
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.05
|
)
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, the Company had 200,000 Restricted
Stock Units, 194,098 shares of restricted stock, and
246,947 stock options outstanding. For the years ending
December 31, 2010, 2009 and 2008, 42,834, 48,067,758 and
31,948,850 stock warrants were outstanding. Due to the net
losses for the years ended December 31, 2010, 2009 and
2008, all of the dilutive stock based awards are considered
anti-dilutive and not included in the computation of diluted
earnings (loss) per share.
F-46
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 18.
|
SUMMARIZED
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
|
WLBCs unaudited condensed quarterly financial information
is as follows for the year ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in 000s, except per share)
|
|
Quarter Ended
|
Year Ended December 31, 2010
|
|
December 31, 2010
|
|
Sept. 30, 2010
|
|
June 30, 2010
|
|
March 31, 2010
|
|
Net interest income
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Operating expenses
|
|
|
5,025
|
|
|
|
(613
|
) (A)
|
|
|
1,676
|
|
|
|
1,756
|
|
Equity in undistributed earnings of subsidiary
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(4,836
|
)
|
|
|
614
|
|
|
$
|
(1,674
|
)
|
|
$
|
(1,754
|
)
|
Net (loss) income per common share, basic
|
|
$
|
(0.35
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.16
|
)
|
Net (loss) income per common share, diluted
|
|
$
|
(0.35
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.16
|
)
|
|
|
|
(A) |
|
For the quarter ended September 30, 2010, the Company
reversed $1,850,000 of stock compensation expense (as more fully
discussed in the September 30, 2010,
Form 10-Q,
Note 4) which offset the recorded other expenses of
approximately $1,237,000. As a result of this reversal the
Company reported a net profit of $614,000. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
December 31, 2009
|
|
September 30, 2009
|
|
June 30, 2009
|
|
March 31, 2009
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
$
|
(6,489
|
)
|
|
$
|
(5,064
|
)
|
|
$
|
(2,563
|
)
|
|
$
|
(922
|
)
|
Interest income
|
|
|
52
|
|
|
|
6
|
|
|
|
11
|
|
|
|
71
|
|
Net (loss) income for the period
|
|
$
|
(6,437
|
)
|
|
$
|
(5,058
|
)
|
|
$
|
(2,552
|
)
|
|
$
|
(851
|
)
|
Weighted average number of common shares outstanding not subject
to possible redemption, basic
|
|
|
33,169,481
|
|
|
|
39,936,064
|
|
|
|
39,936,064
|
|
|
|
39,936,064
|
|
Weighted average number of common shares outstanding not subject
to possible redemption, diluted
|
|
|
33,169,481
|
|
|
|
39,936,064
|
|
|
|
39,936,064
|
|
|
|
39,936,064
|
|
Net (loss) income per common share not subject to possible
redemption, basic
|
|
$
|
(0.19
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.02
|
)
|
Net income per common share not subject to possible redemption,
diluted
|
|
$
|
(0.19
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.02
|
)
|
F-47
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Service1st Bank of Nevada
We have audited the accompanying balance sheet of
Service1st Bank of Nevada (the Company) as of
October 28, 2010 and the related statements of operations,
stockholders equity and comprehensive loss and cash flows
for period January 1, 2010 through October 28, 2010.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of the Company as of October 28, 2010 and the results of
its operations and its cash flows for period January 1,
2010 through October 28, 2010, in conformity with
U.S. generally accepted accounting principles.
As described in Note 16, on October 28, 2010, the
Company was acquired by Western Liberty Bancorp. These financial
statements do not contain any fair value or other adjustments
related to this acquisition.
/s/ Crowe Horwath LLP
Sherman Oaks, California
March 31, 2011
F-48
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Service1st Bank of Nevada
We have audited the accompanying balance sheet of
Service1st Bank of Nevada (a Nevada corporation) as of
December 31, 2009, and the related statements of
operations, stockholders equity and comprehensive loss,
and cash flows for the years ended December 31, 2009, and
December 31, 2008. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Service1st Bank of Nevada as of December 31, 2009, and
the results of its operations and its cash flows for the years
ended December 31, 2009, and December 31, 2008 in
conformity with accounting principles generally accepted in the
United States of America.
/s/ Grant Thornton LLP
Albuquerque, New Mexico
February 8, 2010
F-49
SERVICE1ST
BANK OF NEVADA
|
|
|
|
|
|
|
|
|
(In thousands, except for per share amounts)
|
|
October 28, 2010
|
|
|
December 31, 2009
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
10,164
|
|
|
$
|
13,686
|
|
Interest-bearing deposits in banks
|
|
|
4,927
|
|
|
|
35,947
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
15,091
|
|
|
|
49,633
|
|
Certificates of deposits
|
|
|
31,928
|
|
|
|
9,313
|
|
Securities, available for sale
|
|
|
2,850
|
|
|
|
7,434
|
|
Securities, held to maturity (fair value 2010: $7,842
|
|
|
|
|
|
|
|
|
and 2009: $10,677 )
|
|
|
7,582
|
|
|
|
10,201
|
|
Loans, net of allowance for loan losses 2010: $9,418 and
|
|
|
|
|
|
|
|
|
2009: $6,404
|
|
|
115,986
|
|
|
|
130,563
|
|
Premises and equipment, net
|
|
|
1,284
|
|
|
|
1,634
|
|
Accrued interest receivable
|
|
|
605
|
|
|
|
529
|
|
Other real estate owned
|
|
|
2,403
|
|
|
|
|
|
Other assets
|
|
|
2,227
|
|
|
|
2,453
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
179,956
|
|
|
$
|
211,760
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
68,575
|
|
|
$
|
56,463
|
|
Interest bearing:
|
|
|
|
|
|
|
|
|
Demand
|
|
|
29,018
|
|
|
|
25,094
|
|
Savings and money market
|
|
|
29,381
|
|
|
|
43,209
|
|
Time, $100 or more
|
|
|
30,204
|
|
|
|
54,316
|
|
Other time
|
|
|
4,888
|
|
|
|
6,238
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
162,066
|
|
|
|
185,320
|
|
Accrued interest payable and other liabilities
|
|
|
1,452
|
|
|
|
1,921
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
163,518
|
|
|
|
187,241
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, par value: $.01; shares authorized: 25,000,000;
shares issued: 50,811; and shares outstanding October 28,
2010 and
December 31, 2009: 50,811 less 1,000 shares held in
treasury
|
|
|
1
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
52,642
|
|
|
|
52,009
|
|
Accumulated deficit
|
|
|
(35,410
|
)
|
|
|
(26,693
|
)
|
Accumulated other comprehensive loss, net
|
|
|
(20
|
)
|
|
|
(23
|
)
|
Less cost of treasury stock, 1,000 shares
|
|
|
(775
|
)
|
|
|
(775
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
16,438
|
|
|
|
24,519
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
179,956
|
|
|
$
|
211,760
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-50
SERVICE1ST
BANK OF NEVADA
STATEMENTS OF OPERATIONS
FOR THE PERIOD JANUARY 1, 2010
THROUGH OCTOBER 28, 2010,
AND YEARS ENDED 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except for per share amounts)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
5,801
|
|
|
$
|
8,202
|
|
|
$
|
7,837
|
|
Securities, taxable
|
|
|
472
|
|
|
|
646
|
|
|
|
355
|
|
Federal funds sold and other
|
|
|
347
|
|
|
|
195
|
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
6,620
|
|
|
|
9,043
|
|
|
|
8,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,147
|
|
|
|
2,663
|
|
|
|
1,963
|
|
Repurchase sweep agreements
|
|
|
|
|
|
|
13
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
1,147
|
|
|
|
2,676
|
|
|
|
2,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
5,473
|
|
|
|
6,367
|
|
|
|
6,475
|
|
Provision for loan losses
|
|
|
6,329
|
|
|
|
15,666
|
|
|
|
3,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income after provision for loan losses
|
|
|
(856
|
)
|
|
|
(9,299
|
)
|
|
|
2,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges
|
|
|
382
|
|
|
|
328
|
|
|
|
196
|
|
Loan and late fees
|
|
|
17
|
|
|
|
98
|
|
|
|
99
|
|
Gain on sale of securities
|
|
|
13
|
|
|
|
17
|
|
|
|
|
|
Other
|
|
|
95
|
|
|
|
71
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
507
|
|
|
|
514
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
3,536
|
|
|
|
3,875
|
|
|
|
5,029
|
|
Occupancy, equipment and depreciation
|
|
|
1,360
|
|
|
|
1,673
|
|
|
|
1,664
|
|
Computer service charges
|
|
|
243
|
|
|
|
328
|
|
|
|
313
|
|
Professional fees
|
|
|
1,605
|
|
|
|
1,026
|
|
|
|
256
|
|
Advertising and business development
|
|
|
79
|
|
|
|
88
|
|
|
|
157
|
|
Insurance
|
|
|
705
|
|
|
|
500
|
|
|
|
145
|
|
Telephone
|
|
|
87
|
|
|
|
101
|
|
|
|
104
|
|
Stationery and supplies
|
|
|
26
|
|
|
|
32
|
|
|
|
45
|
|
Director fees
|
|
|
34
|
|
|
|
44
|
|
|
|
23
|
|
Loss on disposition of equipment
|
|
|
|
|
|
|
3
|
|
|
|
|
|
Other real estate owned
|
|
|
654
|
|
|
|
|
|
|
|
|
|
Provision for unfunded commitments
|
|
|
(471
|
)
|
|
|
498
|
|
|
|
140
|
|
Other
|
|
|
510
|
|
|
|
425
|
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,368
|
|
|
|
8,593
|
|
|
|
8,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,717
|
)
|
|
$
|
(17,378
|
)
|
|
$
|
(5,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(175.00
|
)
|
|
$
|
(342.86
|
)
|
|
$
|
(100.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-51
SERVICE1ST
BANK OF NEVADA
STATEMENTS
OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
FOR THE PERIOD JANUARY 1, 2010
THROUGH OCTOBER 28, 2010,
AND YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
Common Stock (Issued)
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Treasury Stock
|
|
|
|
|
(In thousands, except for per share amount)
|
|
Loss
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Shares
|
|
|
Amount
|
|
|
Total
|
|
|
Balance, January 1, 2008
|
|
|
|
|
|
|
50,811
|
|
|
$
|
1
|
|
|
$
|
51,207
|
|
|
$
|
(4,198
|
)
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
47,010
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
423
|
|
Net loss
|
|
$
|
(5,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
(5,117
|
)
|
|
|
50,811
|
|
|
|
1
|
|
|
|
51,630
|
|
|
|
(9,315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
379
|
|
Treasury stock transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
(775
|
)
|
|
|
(775
|
)
|
Net loss
|
|
|
(17,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,378
|
)
|
Unrealized Loss on securities available for sale, net of taxes
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
(17,401
|
)
|
|
|
50,811
|
|
|
|
1
|
|
|
|
52,009
|
|
|
|
(26,693
|
)
|
|
|
(23
|
)
|
|
|
1,000
|
|
|
|
(775
|
)
|
|
|
24,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
633
|
|
Net loss
|
|
|
(8,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,717
|
)
|
Unrealized Loss on securities available for sale, net of taxes
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 28, 2010
|
|
$
|
(8,714
|
)
|
|
|
50,811
|
|
|
$
|
1
|
|
|
$
|
52,642
|
|
|
$
|
(35,410
|
)
|
|
$
|
(20
|
)
|
|
|
1,000
|
|
|
$
|
(775
|
)
|
|
$
|
16,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-52
SERVICE1ST
BANK OF NEVADA
STATEMENTS
OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 2010
THROUGH OCTOBER 28, 2010,
AND YEARS ENDED 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except for per share amount)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,717
|
)
|
|
$
|
(17,378
|
)
|
|
$
|
(5,117
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of premises and equipment
|
|
|
422
|
|
|
|
633
|
|
|
|
598
|
|
Amortization of securities premiums/discounts, net
|
|
|
48
|
|
|
|
27
|
|
|
|
7
|
|
Provision for loan losses
|
|
|
6,329
|
|
|
|
15,666
|
|
|
|
3,670
|
|
Stock warrants and stock option expense
|
|
|
633
|
|
|
|
379
|
|
|
|
423
|
|
Loss on disposition of equipment
|
|
|
|
|
|
|
3
|
|
|
|
|
|
Gain on sale securities
|
|
|
(13
|
)
|
|
|
(17
|
)
|
|
|
|
|
Increase in accrued interest receivable
|
|
|
(76
|
)
|
|
|
(98
|
)
|
|
|
(48
|
)
|
Decrease (increase) in other assets
|
|
|
231
|
|
|
|
(1,708
|
)
|
|
|
(392
|
)
|
(Decrease) increase in accrued interest payable and other
liabilities
|
|
|
(469
|
)
|
|
|
567
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,612
|
)
|
|
|
(1,926
|
)
|
|
|
(873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of certificates of deposit
|
|
|
(39,921
|
)
|
|
|
(31,106
|
)
|
|
|
|
|
Proceeds from certificates of deposit
|
|
|
17,306
|
|
|
|
21,793
|
|
|
|
|
|
Purchases of securities available for sale
|
|
|
(6,000
|
)
|
|
|
(14,693
|
)
|
|
|
|
|
Proceeds from sales of securities available for sale
|
|
|
4,000
|
|
|
|
6,994
|
|
|
|
|
|
Proceeds from maturities of securities available for sale
|
|
|
6,245
|
|
|
|
|
|
|
|
|
|
Proceeds from principal paydowns of securities available for sale
|
|
|
279
|
|
|
|
204
|
|
|
|
|
|
Purchase of securities held to maturity
|
|
|
|
|
|
|
(6,035
|
)
|
|
|
(10,810
|
)
|
Proceeds from maturities of securities held to maturity
|
|
|
2,497
|
|
|
|
7,098
|
|
|
|
6,171
|
|
Proceeds from sales of securities held to maturity
|
|
|
|
|
|
|
499
|
|
|
|
|
|
Proceeds from principal paydowns of securities held to maturity
|
|
|
145
|
|
|
|
|
|
|
|
|
|
Purchase of premises and equipment
|
|
|
(72
|
)
|
|
|
(8
|
)
|
|
|
(141
|
)
|
Net decrease (increase) in loans
|
|
|
5,845
|
|
|
|
(12,670
|
)
|
|
|
(49,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(9,676
|
)
|
|
|
(27,924
|
)
|
|
|
(54,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits
|
|
|
(23,254
|
)
|
|
|
75,429
|
|
|
|
28,554
|
|
Net (repayments) proceeds from repurchase sweep agreements
|
|
|
|
|
|
|
(5,933
|
)
|
|
|
4,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
(23,254
|
)
|
|
|
69,496
|
|
|
|
32,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(34,542
|
)
|
|
|
39,646
|
|
|
|
(22,190
|
)
|
Cash and cash equivalents, beginning
|
|
$
|
49,633
|
|
|
$
|
9,987
|
|
|
$
|
32,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, ending
|
|
$
|
15,091
|
|
|
$
|
49,633
|
|
|
$
|
9,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on deposits and repurchase sweep agreements
|
|
$
|
1,242
|
|
|
$
|
2,662
|
|
|
$
|
1,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash operating and investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal paydowns on SBA loan pool securities reclassified to
other assets
|
|
$
|
3
|
|
|
$
|
6
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases to premises and equipment funded by tenant allowances
|
|
$
|
|
|
|
$
|
|
|
|
$
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock received in settlement of an impaired loan
|
|
$
|
|
|
|
$
|
775
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers of loans to other real estate owned
|
|
$
|
2,403
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-53
SERVICE1ST
BANK OF NEVADA
|
|
NOTE 1.
|
NATURE OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Nature
of business
Service1st Bank of Nevada (the Bank) was formed on
November 3, 2006 and commenced operations as a financial
institution on January 16, 2007 when a state charter was
received from the Nevada Financial Institutions Division (NFID)
and federal deposit insurance was granted by the Federal Deposit
Insurance Corporation (FDIC). The Bank is under the supervision
of and subject to regulation and examination by the NFID and the
FDIC.
The Bank has two branches located in Las Vegas, Nevada, which
accept deposits and grant loans to customers. The Banks
loan portfolio contains primarily commercial and real estate
loans concentrated in Nevada. Segment information is not
presented since all of the Banks results are attributed to
Service1st Bank of Nevada.
On October 28, 2010, Western Liberty Bancorp (WLBC)
consummated its acquisition (the Acquisition) of the
Bank, a Nevada-chartered non-member bank pursuant to a Merger
Agreement (the Merger Agreement), dated as of
November 6, 2009, as amended by a First Amendment to the
Merger Agreement, dated as of June 21, 2010
(Amendment No. 1 and, together with the Merger
Agreement, the Amended Merger Agreement), each among
WL-S1 Interim Bank, a Nevada corporation and wholly-owned
subsidiary of WLBC (Acquisition Sub), the Bank and
Curtis W. Anderson, as representative of the former stockholders
of the Bank. Pursuant to the Amended Merger Agreement,
Acquisition Sub merged with and into the Bank, with the Bank
being the surviving entity and becoming WLBCs wholly-owned
subsidiary. WLBC previously received the requisite approvals of
certain bank regulatory authorities to complete the Acquisition
to become a bank holding company.
The accounting and reporting policies of the Bank conform to
accounting principles generally accepted in the United States of
America and general practice in the banking industry. A summary
of the significant accounting policies used by the Bank is as
follows:
Use
of estimates in the preparation of financial
statements
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results may differ from those estimates. Material
estimates that are particularly susceptible to significant
change in the near term relates to the determination of the
allowance for loan losses, deferred tax assets, and the value of
other real estate owned.
Cash
and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks (including cash
items in process of clearing), federal funds sold, and
interest-bearing deposits in banks with original maturities of
90 days or less. Cash flows from loans originated by the
Bank and deposits are reported net.
The Bank is required to maintain balances in cash or on deposit
with the Federal Reserve Bank. The total of those reserve
balances was approximately $5.3 million and
$3.0 million as of October 28, 2010 and
December 31, 2009, respectively.
F-54
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
Certificates
of deposit
The Bank invests in institutional certificates of deposits in
addition to selling overnight federal funds. The Banks
certificates of deposit do not exceed the FDIC insured limit at
any one institution. The terms of the Banks certificates
of deposit do not exceed one year.
Securities
Securities classified as available for sale are debt securities
the Bank intends to hold for an indefinite period of time, but
not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various
factors, including significant movements in interest rates,
changes in the maturity mix of the Banks assets and
liabilities, liquidity needs, regulatory capital considerations
and other similar factors. Securities available for sale are
reported at fair value with unrealized gains or losses reported
as other comprehensive income (loss). Realized gains or losses,
determined on the basis of the cost of specific securities sold,
are included in earnings.
Securities classified as held to maturity are those debt
securities the Bank has both the intent and ability to hold to
maturity regardless of changes in market conditions, liquidity
needs, or general economic conditions. These securities are
carried at amortized cost, adjusted for amortization of premium
and accretion of discount computed by the interest method over
the contractual lives. The sale of a security within three
months of its maturity date or after at least 85% of the
principal outstanding has been collected is considered a
maturity for purposes of classification and disclosure. Purchase
premiums and discounts are generally recognized in interest
income using the effective yield method over the term of the
securities.
Management evaluates securities for
other-than-temporary
impairment (OTTI) at least on a quarterly basis, and more
frequently when economic or market conditions warrant such
evaluation. Consideration is given to (1) the length of
time and the extent to which the fair value has been less than
cost, (2) the financial condition and near term prospects
of the issuer including an evaluation of credit ratings,
(3) the impact of changes in market interest rates,
4) the intent of the Bank to sell a security, and
5) whether it is more likely than not the Bank will have to
sell the security before recovery of its cost basis.
If the Bank intends to sell an impaired security, the Bank
records an
other-than-temporary
loss in an amount equal to the entire difference between fair
value and amortized cost. If a security is determined to be
other-than-temporarily
impaired, but the Bank does not intend to sell the security,
only the credit portion of the estimated loss is recognized in
earnings, with the other portion of the loss recognized in other
comprehensive income.
Loans
Loans are stated at the amount of unpaid principal, reduced by
unearned net loan fees and allowance for loan losses.
The allowance for loan losses is established through a provision
for loan losses charged to expense. Loans are charged against
the allowance for loan losses when management believes that
collectibility of the principal is unlikely. Subsequent
recoveries, if any, are credited to the allowance.
The allowance is an amount that management believes will be
adequate to absorb probable losses on existing loans that may
become uncollectible, based on evaluation of the collectability
of loans and prior credit loss experience of the Bank and peer
bank historical loss experience. This evaluation also takes into
consideration such factors as changes in the nature and volume
of the loan portfolio, overall portfolio quality, specific
problem credits, peer bank information, and current economic
conditions that may affect the borrowers ability to pay.
Due to the credit concentration of the Banks loan
portfolio in real estate-secured loans, the value of collateral
is heavily dependent on real estate values in Southern Nevada.
This evaluation is
F-55
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
inherently subjective and future adjustments to the allowance
may be necessary if there are significant changes in economic or
other conditions. In addition, the FDIC and state banking
regulatory agencies, as an integral part of their examination
processes, periodically review the Banks allowance for
loan losses, and may require the Bank to make additions to the
allowance based on their judgment about information available to
them at the time of their examinations.
The allowance consists of specific and general components. The
specific component relates to loans that are classified as
impaired. For such loans, an allowance is established when the
discounted cash flows (or collateral value or observable market
price) of the impaired loan is lower than the carrying value of
that loan. The general component covers non-impaired loans and
is based on historical loss experience of the Bank and peer bank
historical loss experience, adjusted for qualitative and
environmental factors.
A loan is impaired when, based on current information and
events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of
the loan agreement. Loans for which the terms have been modified
resulting in a concession, and for which the borrower is
experiencing financial difficulties, are considered troubled
debt restructurings and classified as impaired.
Factors considered by management in determining impairment
include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment
shortfalls on
case-by-case
basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrowers prior
payment record, and the amount of the shortfall in relation to
the principal and interest owed.
Commercial and commercial real estate loans that are over
$250,000 are individually evaluated for impairment. If a loan is
impaired, a portion of the allowance is allocated so that the
loan is reported, net, at the present value of estimated future
cash flows using the loans existing rate or at the fair
value of collateral if repayment is expected solely from the
collateral. Large groups of smaller balance homogeneous loans,
such as consumer and residential real estate loans, are
collectively evaluated for impairment, and accordingly, they are
not separately identified for impairment disclosures. Troubled
debt restructurings are separately identified for impairment
disclosures and are measured at the present value of estimated
future cash flows using the loans effective rate at
inception. If a troubled debt restructuring is considered to be
a collateral dependent loan, the loan is reported, net, at the
fair value of the collateral. For troubled debt restructurings
that subsequently default, the Bank determines the amount of
reserve in accordance with the accounting policy for the
allowance for loan losses.
Interest
and fees on loans
Interest on loans is recognized over the terms of the loans and
is calculated using the effective interest method. The accrual
of interest on impaired loans is discontinued when, in
managements opinion, the borrower may be unable to make
payments as they become due.
The Bank determines a loan to be delinquent when payments have
not been made according to contractual terms, typically
evidenced by nonpayment of a monthly installment by the due
date. The accrual of interest on loans is discontinued at the
time the loan is 90 days delinquent unless the credit is
well secured and in the process of collection.
All interest accrued but not collected for loans that are placed
on nonaccrual status or charged off is reversed against interest
income. The interest on these loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return
to accrual. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
F-56
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
Loan origination and commitment fees and certain direct loan
origination costs are deferred and the net amount amortized as
an adjustment to the related loans yield. The Bank is
generally amortizing these amounts over the contractual life of
the loan. Commitment fees, based upon a percentage of a
customers unused line of credit, and fees related to
standby letters of credit are recognized over the commitment
period.
Transfers
of financial assets
Transfers of financial assets are accounted for as sales, when
control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the
assets have been isolated from the Bank, (2) the transferee
obtains the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the
transferred assets, and (3) the Bank does not maintain
effective control over the transferred assets through an
agreement to repurchase them before their maturity. The
Banks transfers of financial assets consist solely of loan
participations.
Advertising
costs
Advertising costs are expensed as incurred.
Foreclosed
assets
Assets acquired through or instead of loan foreclosure are
initially recorded at fair value less costs to sell when
acquired, establishing a new cost basis. These assets are
subsequently accounted for at lower of cost or fair value less
estimated costs to sell. If fair value declines subsequent to
foreclosure, a valuation allowance is recorded through expense.
Operating costs after acquisition are expensed.
Premises
and equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed
principally by the straight-line method over the estimated
useful lives of the assets. Improvements to leased property are
amortized over the lesser of the term of the lease or life of
the improvements. Depreciation and amortization is computed
using the following estimated lives:
|
|
|
|
|
Years
|
|
Furniture and fixtures
|
|
7 - 10
|
Equipment and vehicles
|
|
3 - 5
|
Leasehold improvements
|
|
5 - 10
|
Other
assets
Other assets are comprised primarily of Federal Home Loan Bank
(FHLB) stock and prepaid expenses.
Prepaid expenses are amortized over the terms of the agreements.
The Bank had approximately $1.1 million and
$1.4 million of prepayments relating to three years of FDIC
assessments as of October 28, 2010, and December 31,
2009 that were prepaid on December 31, 2009.
The Bank, as a member of the FHLB system, is required to
maintain an investment in capital stock of the FHLB of an amount
pursuant to the agreement with the FHLB. These investments are
recorded at cost since no ready market exists for them, and they
have no quoted market value. As of October 28, 2010 and
December 31, 2009, the Banks investment in the FHLB
was $658,000 and $487,000, respectively, and is included in
other assets.
The Bank views its investment in the FHLB stock as a long-term
investment. Accordingly, when evaluating FHLB stock for
impairment, the value is determined based on the ultimate
recovery of the par value
F-57
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
rather than recognizing temporary declines in values. The
determination of whether a decline affects the ultimate recovery
is influenced by criteria such as: (1) the significance of
the decline in net assets of the FHLBs as compared to the
capital stock amount and length of time a decline has persisted;
(2) impact of legislative and regulatory changes on the
FHLB; and (3) the liquidity position of the FHLB. The FHLB
of San Franciscos capital ratios exceeded the
required ratios as of September 30, 2010 and the Bank does
not believe that its investment in the FHLB is impaired as of
this date. However, this estimate could change in the near term
as a result of any of the following events: (1) significant
OTTI losses are incurred on the mortgage-backed securities (MBS)
portfolio of the FHLB of San Francisco causing a
significant decline in the FHLBs regulatory capital
ratios; (2) the economic losses resulting from credit
deterioration on the MBS increases significantly; and
(3) capital preservation strategies being utilized by the
FHLB become ineffective.
Income
taxes
Income tax expense is the total of the current year income tax
due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the
expected future tax amounts for the temporary differences
between carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount
expected to be realized.
Stock
compensation plans
Compensation cost is recognized for stock options and restricted
stock awards issued to employees and directors based on the fair
value of these awards at the date of grant. A Black-Scholes
model is utilized to estimate the fair value of stock options,
while the market price of the Banks common stock at the
date of grant is used for restricted stock awards.
Compensation cost is recognized over the required service
period, generally defined as the vesting period. For awards with
graded vesting, compensation cost is recognized on a
straight-line basis over the requisite service period for the
entire award.
Off-balance
sheet instruments
In the ordinary course of business, the Bank has entered into
off-balance sheet financing instruments consisting of
commitments to extend credit and standby letters of credit. Such
financial instruments are recorded in the financial statements
when they are funded.
Comprehensive
loss
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized
gains and losses on available for sale securities, are reported
as a separate component of the equity section of the balance
sheet, such items, along with net loss, are components of
comprehensive loss. Gains and losses on available for sale
securities are reclassified to net loss as the gains or losses
are realized upon sale of the securities. OTTI impairment
charges are reclassified to net income at the time of the charge.
Fair
value measurement
For assets and liabilities recorded at fair value, it is the
Banks policy to maximize the use of observable inputs and
minimize the use of unobservable inputs when developing fair
value measurements. Fair value measurements for assets and
liabilities, where there exists limited or no observable market
data and, therefore, are based primarily upon estimates, are
often calculated based on the economic and competitive
environment, the characteristics of the asset or liability and
other factors. Therefore, the results cannot be determined with
F-58
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
precision and may not be realized in an actual sale or immediate
settlement of the asset or liability. Additionally, there may be
inherent weaknesses in any calculation technique, and changes in
the underlying assumptions used, including discount rates and
estimates of future cash flows, could significantly affect the
results of current or future values. The Bank utilizes fair
value measurements to determine fair value disclosures and
certain assets recorded at fair value on a recurring and
nonrecurring basis. See Notes 2 and 14.
Fair
values of financial instruments
The Bank discloses fair value information about financial
instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value.
Management uses its best judgment in estimating the fair value
of the Banks financial instruments. However, there are
inherent weaknesses in any estimation technique. Therefore, for
substantially all financial instruments, the fair value
estimates presented herein are not necessarily indicative of the
amounts the Bank could have realized in a sales transaction as
of October 28, 2010 and December 31, 2009. The
estimated fair value amounts as of October 28, 2010 and
December 31, 2009 have been measured as of that date and
have not been reevaluated or updated for purposes of these
financial statements subsequent to that date. As such, the
estimated fair values of these financial statements subsequent
to the reporting date may be different than the amounts reported
as of October 28, 2010 and December 31, 2009.
The information in Note 14 should not be interpreted as an
estimate of the fair value of the entire Bank since a fair value
calculation is only required for a limited portion of the
Banks assets. Due to the wide range of valuation
techniques and the degree of subjectivity used in making the
estimate, comparisons between the Banks disclosures and
those of other companies or banks may not be meaningful.
Certificates
of deposit
The carrying amounts reported in the balance sheet for
certificates of deposit approximate their fair value as the
terms on the certificates of deposits do not exceed one year.
Securities
Fair values for securities are based on quoted market prices
where available or on quoted market prices for similar
securities in the absence of quoted prices on the specific
security.
Loans
For variable rate loans that reprice frequently and that have
experienced no significant change in credit risk, fair values
are based on carrying values. Variable rate loans comprise
approximately 58% and 73% of the loan portfolio as of
October 28, 2010 and December 31, 2009, respectively.
Fair value for all other loans is estimated based on discounted
cash flows using interest rates currently being offered for
loans with similar terms to borrowers with similar credit
quality. Prepayments prior to the repricing date are not
expected to be significant. Loans are expected to be held to
maturity and any unrealized gains or losses are not expected to
be realized.
Impaired
loans
The fair value of an impaired loan is estimated using one of
several methods, including collateral value, market value of
similar debt, enterprise value, liquidation value, and
discounted cash flows. Those impaired loans not requiring an
allowance for probable losses represent loans for which the fair
value of the expected repayments or collateral exceeds the
recorded investment in such loans.
F-59
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
Accrued
interest receivable and payable
The carrying amounts reported in the balance sheet for accrued
interest receivable and payable approximate their fair value.
Restricted
stock
The Bank is a member of the FHLB system and maintains an
investment in capital stock of the FHLB of an amount pursuant to
the agreement with the FHLB. This investment is carried at cost
since no ready market exists, and there is no quoted market
value.
Deposit
liabilities
The fair value disclosed for demand and savings deposits is by
definition equal to the amount payable on demand at their
reporting date (carrying amount). The carrying amount for
variable-rate deposit accounts approximates their fair value.
Fair value of fixed-rate certificates of deposit is estimated
based on current market rates offered in the local market as
well as the Banks current rates for certificates of
deposit with similar terms.
Off-balance
sheet instruments
Fair values for the Banks off-balance sheet instruments,
lending commitments and standby letters of credit, are based on
quoted fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and
the counterparties credit standing.
Loss
per share
Diluted earnings per share is based on the weighted average
outstanding common shares (excluding treasury shares, if any)
during each year, including common stock equivalents. Basic
earnings per share is based on the weighted average outstanding
common shares during the year.
Basic and diluted loss per share, based on the weighted average
outstanding shares, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
January 1, 2010
|
|
|
|
|
|
|
through October
|
|
|
|
|
|
|
28, 2010
|
|
|
Year Ended December 31,
|
|
($ in 000s, except for per share amounts)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stock
|
|
$
|
(8,717
|
)
|
|
$
|
(17,378
|
)
|
|
$
|
(5,117
|
)
|
Weighted average common shares outstanding
|
|
|
49,811
|
|
|
|
50,683
|
|
|
|
50,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
$
|
(175.00
|
)
|
|
$
|
(342.86
|
)
|
|
$
|
(100.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to the Banks historical net losses, all of the
Banks stock based awards are considered anti-dilutive, and
accordingly, basic and diluted loss per share is the same.
Reclassifications
Certain amounts in the financial statements and related
disclosures as of December 31, 2009 and 2008 and for the
years ended December 31, 2009 and 2008 have been
reclassified to conform to the current presentation.
F-60
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
Recent
accounting pronouncements
New authoritative accounting guidance concerning fair value
measurements and disclosures, amends prior accounting guidance
to amend and expand disclosure requirements about transfers in
and out of Levels 1 and 2, clarified existing fair value
disclosure requirements about the appropriate level of
disaggregation, and clarified that a description of valuation
techniques and inputs used to measure fair value was required
for recurring and nonrecurring Level 2 and 3 fair value
measurements. The new authoritative accounting guidance became
effective for the Bank on January 1, 2010, except for the
disclosures about purchases, sales, issuances, and settlements
in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods
within those fiscal years. The new required disclosures are
included in Note 2 Fair Value Accounting.
New authoritative accounting guidance concerning transfers and
servicing, amends prior accounting guidance to enhance reporting
about transfers of financial assets, including securitizations,
and where companies have continuing exposure to the risks
related to transferred financial assets. The new authoritative
accounting guidance eliminates the concept of a qualifying
special-purpose entity and changes the requirements for
derecognizing financial assets. The new authoritative accounting
guidance also requires additional disclosures about all
continuing involvements with transferred financial assets
including information about gains and losses resulting from
transfers during the period. The new authoritative accounting
guidance became effective January 1, 2010, and did not have
a significant impact on the Banks financial statements.
New authoritative accounting guidance concerning receivables,
amended prior guidance to provide a greater level of
disaggregated information about the credit quality of loans and
leases and the Allowance for Loan and Lease Losses (Allowance).
The new authoritative guidance also requires additional
disclosures related to credit quality indicators, past due
information, and information related to loans modified in
troubled debt restructuring. The provisions of the new
authoritative guidance will be effective in the reporting period
ending December 31, 2010. The new authoritative guidance
amends only the disclosure requirements for loans and leases and
the Allowance; the adoption will have no impact on the
Banks statements of income and condition.
|
|
NOTE 2.
|
FAIR
VALUE ACCOUNTING
|
The Bank uses a fair value hierarchy that prioritizes inputs to
valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (level 1
measurements) and the lowest priority to unobservable inputs
(level 3 measurements). The three levels of the fair value
hierarchy are described below:
Level 1 Unadjusted quoted prices in
active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
Level 2 Quoted prices for similar
instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active, or
model-based valuation techniques where all significant
assumptions are observable, either directly or indirectly, in
the market;
Level 3 Valuation is generated from
model-based techniques where all significant assumptions are not
observable, either directly or indirectly, in the market. These
unobservable assumptions reflect our own estimates of
assumptions that market participants would use in pricing the
asset or liability. Valuation techniques may include use of
matrix pricing, discounted cash flow models and similar
techniques.
F-61
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
Fair
value on a recurring basis
Financial assets measured at fair value on a recurring basis
include the following:
Securities available for sale. Securities
reported as available for sale are reported at fair value
utilizing Level 2 inputs. For these securities the Bank
obtains fair value measurements from an independent pricing
service. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at October 28, 2010:
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
($ in 000s)
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Agency Securities GSE
|
|
$
|
1,002
|
|
|
$
|
|
|
|
$
|
1,002
|
|
|
$
|
|
|
Collateralized Mortgage Obligation Securities
|
|
|
1,848
|
|
|
|
|
|
|
|
1,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,850
|
|
|
$
|
|
|
|
$
|
2,850
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no significant transfers between Level 1 and
Level 2 during the period January 1, 2010 through
October 28, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009:
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
($ in 000s)
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Agency Securities GSE
|
|
$
|
5,229
|
|
|
$
|
|
|
|
$
|
5,229
|
|
|
$
|
|
|
Collateralized Mortgage Obligation Securities
|
|
|
2,205
|
|
|
|
|
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,434
|
|
|
$
|
|
|
|
$
|
7,434
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value on a nonrecurring basis
Certain assets are measured at fair value on a nonrecurring
basis; that is, the instruments are not measured at fair value
on an ongoing basis, but are subject to fair value adjustments
in certain circumstances (for
F-62
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
example, when there is evidence of impairment). The following
table presents such assets carried on the balance sheet by
caption and by level within the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at October 28, 2010
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
($ in 000s)
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Impaired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development, and other land loans
|
|
$
|
3,958
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,958
|
|
Commercial real estate
|
|
|
4,844
|
|
|
|
|
|
|
|
|
|
|
|
4,844
|
|
Residential real estate
|
|
|
2,764
|
|
|
|
|
|
|
|
|
|
|
|
2,764
|
|
Other real estate owned
|
|
|
1,778
|
|
|
|
|
|
|
|
|
|
|
|
1,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,344
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
($ in 000s)
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Impaired loans
|
|
$
|
6,959
|
|
|
|
|
|
|
|
|
|
|
$
|
6,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans. The specific reserves for
collateral dependent impaired loans are based on the fair value
of the collateral less estimated costs to sell. The fair value
of collateral is determined based on third-party appraisals. In
some cases, adjustments are made to the appraised values due to
various factors, including age of the appraisal, age of
comparables included in the appraisal, and known changes in the
market and in the collateral. Accordingly, the resulting fair
value measurement has been categorized as a Level 3
measurement.
Impaired loans that are measured for impairment using the fair
value of the collateral for collateral dependent loans, had a
principal balance of $13.3 million, with a valuation
allowance of $1.7 million at October 28, 2010,
resulting in an additional provision for loan losses of $820,000
for the period January 1, 2010 through October 28,
2010. At December 31, 2009, impaired loans had a principal
balance of $7.8 million, with a valuation allowance of
$841,000 resulting in an additional provision for loan losses of
$841,000 for the year ended December 31, 2009.
Other real estate owned measured at fair value less costs to
sell, had a net carrying amount of $1.8 million, which is
made up of the outstanding balance of $1.8 million, net of
a valuation allowance of $0 at October 28, 2010. The Bank
took an impairment charge of $617,000 for the period
January 1, 2010 through October 28, 2010. At
December 31, 2009 the Bank had no other real estate owned.
F-63
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
Carrying amounts and fair values of investment securities as of
October 28, 2010 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
($ in 000s)
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agencies GSE
|
|
$
|
1,002
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,002
|
|
Collateralized Mortgage Obligation Securities
|
|
|
1,868
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
1,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,870
|
|
|
$
|
|
|
|
$
|
(20
|
)
|
|
$
|
2,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
|
|
($ in 000s)
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Debt Securities
|
|
$
|
6,924
|
|
|
$
|
256
|
|
|
$
|
|
|
|
$
|
7,180
|
|
Small Business Administration Loan Pools
|
|
|
658
|
|
|
|
4
|
|
|
|
|
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,582
|
|
|
$
|
260
|
|
|
$
|
|
|
|
$
|
7,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amounts and fair values of investment securities as of
December 31, 2009 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
($ in 000s)
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agencies GSE
|
|
$
|
5,248
|
|
|
$
|
|
|
|
$
|
(19
|
)
|
|
$
|
5,229
|
|
Collateralized Mortgage Obligation Securities
|
|
|
2,209
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,457
|
|
|
$
|
|
|
|
$
|
(23
|
)
|
|
$
|
7,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
|
|
($ in 000s)
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agencies GSE
|
|
$
|
997
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
1,000
|
|
Corporate Debt Securities
|
|
|
8,390
|
|
|
|
477
|
|
|
|
|
|
|
|
8,867
|
|
Small Business Administration Loan Pools
|
|
|
814
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,201
|
|
|
$
|
480
|
|
|
$
|
(4
|
)
|
|
$
|
10,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 28, 2010 and the year ended December 31,
2009, proceeds from sales of
available-for-sale
securities were $4.0 million and $7.0 million,
respectively. Gross realized gains from sales for the period
January 1, 2010 through October 28, 2010 and the years
ended December 31, 2009 and 2008, were $13,000, $3,000, and
$0, respectively. There were no gross realized losses on
available-for-sale
securities for the period January 1, 2010 through
October 28, 2010 and the years ended December 31, 2009
and 2008.
F-64
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
During the year ended December 31, 2009, the Bank had net
realized gains on the sale of securities of approximately
$17,000. Of this gain, $14,000 related to a sale of a security
with a carrying value of approximately $479,000 that was
classified as
held-to-maturity
(HTM). Management sold this HTM security as a result of a
decline in the issuers creditworthiness. Specifically, the
issuers credit rating declined to below investment grade.
There were no realized losses on
held-to-maturity
securities in 2010, 2009, and 2008.
Securities with carrying amounts of approximately
$6.9 million and $9.4 million as of October 28,
2010 and December 31, 2009, respectively, were pledged for
various purposes as required or permitted by law.
Information pertaining to securities with gross losses at
October 28, 2010 and December 31, 2009, aggregated by
investment category and length of time that individual
securities have been in a continuous loss position follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
Less than Twelve Months
|
|
|
Over Twelve Months
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
($ in 000s)
|
|
(Losses)
|
|
|
Fair Value
|
|
|
(Losses)
|
|
|
Fair Value
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S Agencies GSE
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Collateralized Mortgage Obligations Securities
|
|
|
(20
|
)
|
|
|
1,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(20
|
)
|
|
$
|
1,848
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Debt Securities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Small Business Administration Loan Pools
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
Less than Twelve Months
|
|
|
Over Twelve Months
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
($ in 000s)
|
|
(Losses)
|
|
|
Fair Value
|
|
|
(Losses)
|
|
|
Fair Value
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S Agencies GSE
|
|
$
|
(19
|
)
|
|
$
|
5,229
|
|
|
$
|
|
|
|
$
|
|
|
Collateralized Mortgage Obligations Securities
|
|
|
(4
|
)
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(23
|
)
|
|
$
|
7,434
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S Agencies GSE
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Corporate Debt Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small Business Administration Loan Pools
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(4
|
)
|
|
$
|
765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 28, 2010, five debt securities have
unrealized losses with aggregate degradation of approximately 1%
from the Banks amortized costs basis. These unrealized
losses totaling approximately $20,000 relate primarily to
fluctuations in the current interest rate environment and other
factors, but do not presently represent realized losses. As of
October 28, 2010 there are no securities that have been
determined to be OTTI.
F-65
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
The amortized cost and fair value of securities as of
October 28, 2010 by contractual maturities are shown below.
The maturities of small business administration loan pools may
differ from their contractual maturities because the loans
underlying the securities may be repaid without any penalties;
therefore, these securities are listed separately in the
maturity summary.
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
($ in 000s)
|
|
Cost
|
|
|
Value
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
993
|
|
|
$
|
978
|
|
Due after one year through five years
|
|
|
1,877
|
|
|
|
1,872
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,870
|
|
|
$
|
2,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
($ in 000s)
|
|
Cost
|
|
|
Value
|
|
|
Securities held to maturity
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
3,998
|
|
|
$
|
4,027
|
|
Due after one year through five years
|
|
|
2,926
|
|
|
|
3,153
|
|
Small Business Administration Loan Pools
|
|
|
658
|
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,582
|
|
|
$
|
7,842
|
|
|
|
|
|
|
|
|
|
|
The components of the Banks loan portfolio as of October
28 and December 31 are as follows:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
Construction, land development, and other land loans
|
|
$
|
9,225
|
|
|
$
|
20,279
|
|
Commercial real estate
|
|
|
62,963
|
|
|
|
68,523
|
|
Residential real estate
|
|
|
10,282
|
|
|
|
1,367
|
|
Commercial and industrial
|
|
|
42,778
|
|
|
|
46,470
|
|
Consumer
|
|
|
136
|
|
|
|
342
|
|
Less: net deferred loan fees
|
|
|
20
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
125,404
|
|
|
|
136,967
|
|
Less: allowance for loan losses
|
|
|
(9,418
|
)
|
|
|
(6,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
115,986
|
|
|
$
|
130,563
|
|
|
|
|
|
|
|
|
|
|
Information about impaired and non-accrual loans as of and for
the periods ended October 28 and December 31 is as follows:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
Impaired loans without a valuation allowance
|
|
$
|
9,269
|
|
|
$
|
6,528
|
|
Impaired loans with a valuation allowance
|
|
$
|
17,631
|
|
|
$
|
2,828
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
26,900
|
|
|
$
|
9,356
|
|
|
|
|
|
|
|
|
|
|
Related allowance for loan losses on impaired loans
|
|
$
|
5,493
|
|
|
$
|
841
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
$
|
20,327
|
|
|
$
|
7,799
|
|
|
|
|
|
|
|
|
|
|
Loans past due 90 days or more and still accruing
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
F-66
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Average balance during the year on impaired loans
|
|
$
|
28,943
|
|
|
$
|
14,939
|
|
|
$
|
2,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized on impaired loans
|
|
$
|
147
|
|
|
$
|
103
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized on cash basis
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 28, 2010, approximately 71% of the
Banks impaired loans are real estate-secured loans. As of
October 28, 2010, approximately $9.3 million of the
Banks impaired loans do not have any specific valuation
allowance. However, impaired loans as of October 28, 2010
are net of partial charge-offs of approximately
$7.3 million. The Bank experienced significant declines in
current valuations for real estate supporting its loan
collateral in 2010. If real estate values continue to decline
and as updated appraisals are received, the Bank may have to
increase its allowance for loan losses appropriately. The Bank
has allocated $1.3 million and $0 of specific reserves to
customers whose loan terms have been modified in troubled debt
restructurings as of October 28, 2010 and December 31,
2009, respectively.
At October 28, 2010 and December 31, 2009, the Bank
was not committed to lend additional funds on these impaired
loans or loans that have been classified as troubled debt
restructurings.
Changes in the allowance for loan losses for the periods ended
October 28 and December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Balance, beginning
|
|
$
|
6,404
|
|
|
$
|
2,883
|
|
|
$
|
922
|
|
Provisions charged to operating expense
|
|
|
6,329
|
|
|
|
15,666
|
|
|
|
3,670
|
|
Recoveries of amounts charged off
|
|
|
615
|
|
|
|
9
|
|
|
|
3
|
|
Less amounts charged off
|
|
|
(3,930
|
)
|
|
|
(12,154
|
)
|
|
|
(1,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, ending
|
|
$
|
9,418
|
|
|
$
|
6,404
|
|
|
$
|
2,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5.
|
PREMISES
AND EQUIPMENT
|
The major classes of premises and equipment and the total
accumulated depreciation and amortization as of October 28 and
December 31 are as follows:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
Leasehold improvements
|
|
$
|
1,733
|
|
|
$
|
1,733
|
|
Equipment
|
|
|
885
|
|
|
|
813
|
|
Furniture and fixtures
|
|
|
612
|
|
|
|
612
|
|
Vehicles
|
|
|
56
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,286
|
|
|
|
3,214
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,002
|
)
|
|
|
(1,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,284
|
|
|
$
|
1,634
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the period January 1, 2010 through
October 28, 2010, and the periods ended December 31,
2009, and 2008 was approximately $422,000, $633,000, and
$598,000, respectively.
F-67
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
NOTE 6.
|
INCOME
TAX MATTERS
|
The Bank files income tax returns in the U.S. federal
jurisdiction. ASC 740, Income taxes, was amended to
clarify the accounting and disclosure for uncertain tax
positions as defined. The Bank is subject to the provisions of
this updated guidance effective as of January 1, 2009, and
has analyzed filing positions in all of the federal and state
jurisdictions where it is required to file income tax returns,
as well as all open tax years in these jurisdictions. The Bank
identified its federal tax return as major tax
jurisdictions, as defined. The periods subject to examination
for the Banks federal tax return are 2007, 2008, and 2009.
The Bank believes that its income tax filing positions and
deductions will be sustained on audit and does not anticipate
any adjustments that will result in a material change to its
financial position. Therefore, no reserves for uncertain income
tax positions have been recorded pursuant to applicable
guidance. In addition, the Bank did not record a cumulative
effect adjustment related to the adoption of this amended
guidance.
The Bank may from time to time be assessed interest or penalties
by tax jurisdictions, although the Bank has had no such
assessments historically. The Banks policy is to include
interest and penalties related to income taxes as a component of
income tax expense.
The cumulative tax effects of the primary temporary differences
as of October 28 and December 31 are as follows:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
7,287
|
|
|
$
|
7,453
|
|
Organization costs
|
|
|
313
|
|
|
|
337
|
|
Allowance for loan losses and unfunded commitments
|
|
|
2,393
|
|
|
|
675
|
|
Stock warrants and stock options
|
|
|
333
|
|
|
|
242
|
|
Accrued expenses
|
|
|
646
|
|
|
|
303
|
|
Other
|
|
|
74
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,046
|
|
|
|
9,099
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid loan fees
|
|
|
(96
|
)
|
|
|
(109
|
)
|
Deferred loan costs
|
|
|
(114
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
10,836
|
|
|
|
8,876
|
|
Valuation allowance
|
|
|
(10,836
|
)
|
|
|
(8,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of October 28, 2010 and December 31, 2009, a
valuation allowance for the entire net deferred tax asset is
considered necessary as the Bank has determined that it is not
more likely than not that the deferred tax assets will be
realized. Due to the Bank incurring operating losses, no
provision for income taxes has been recorded for the period
January 1, 2010 through October 28, 2010 and the
periods ended December 31, 2009 and 2008. Federal operating
loss carryforwards totals approximately $21.4 million and
begin to expire in 2027.
F-68
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
For the period January 1, 2010 through October 28,
2010 and the years ended December 31, 2009 and 2008, the
components of income tax benefit consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,960
|
|
|
|
5,821
|
|
|
|
1,656
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,960
|
|
|
|
5,821
|
|
|
|
1,656
|
|
Less valuation allowance
|
|
|
(1,960
|
)
|
|
|
(5,821
|
)
|
|
|
(1,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reasons for the differences between the statutory federal
income tax rate of 34% and the effective tax rates are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Computed expected tax (benefit)
|
|
$
|
(2,964
|
)
|
|
$
|
(6,082
|
)
|
|
$
|
(1,790
|
)
|
Nondeductible expenses
|
|
|
588
|
|
|
|
100
|
|
|
|
111
|
|
Other
|
|
|
416
|
|
|
|
161
|
|
|
|
23
|
|
Deferred tax asset valuation allowance
|
|
|
1,960
|
|
|
|
5,821
|
|
|
|
1,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal Revenue Code section 382 places a limitation on
the amount of taxable income that can be offset by net operating
loss carry forwards after a change in control (generally greater
than 50% change in ownership) of a loss corporation.
Accordingly, utilization of net operating loss carry forwards
may be subject to an annual limitation regarding their
utilization against future taxable income upon change in control.
As of October 28, 2010 and December 31, 2009, all time
deposits are scheduled to mature within one year.
As of October 28, 2010, the Bank had two deposit customers
with demand deposits equal to 21% of total deposits. One of the
deposit customers is a trust company with $24.9 million in
demand deposits as of October 28,2010 and the second
depositor had demand deposits totaling $8.5 million at the
same date.
None of the time certificates are brokered deposits as of
December 31, 2010. However, in October 2010,
Service1st Bank was notified by the FDIC and Nevada
Financial Institutions Division that a legal determination was
made that a NOW account owned by a trust company customer with
$24.9 million in demand deposits as of October 28,
2010 was deemed to be a brokered deposit. Consistent with the
September 1, 2010 Consent Order which restricts the
banks use of brokered deposits, the bank was given a date
of December 31, 2010 to divest of these funds. Working in
concert with the customer and bank regulators, the subject
account was changed from a NOW account to a noninterest bearing
account on January 1, 2011 and on January 4, 2011 the
account in the amount of approximately $23.5 million was
wired to another financial institution. Both regulatory agencies
were notified of the planned disposition of the account and
neither agency objected to the plan to divest the account.
F-69
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
NOTE 8.
|
COMMITMENTS
AND CONTINGENCIES
|
Contingencies
In the normal course of business, the Bank is involved in
various legal proceedings. In the opinion of management, any
liability resulting from such proceedings would not have a
material adverse effect on the financial statements.
Financial
instruments with off-balance sheet risk
The Bank is party to financial instruments with off-balance
sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of
credit. They involve, to varying degrees, elements of credit
risk in excess of amounts recognized in the balance sheet.
The Banks exposure to credit loss in the event of
nonperformance by the other parties to the financial instrument
for these commitments is represented by the contractual amounts
of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance sheet instruments.
A summary of the contract amount of the Banks exposure to
off-balance sheet risk as of October 28 and December 31 is as
follows:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
Unfunded commitments under lines of credit
|
|
$
|
15,965
|
|
|
$
|
25,035
|
|
Standby letters of credit
|
|
|
695
|
|
|
|
1,408
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,660
|
|
|
$
|
26,443
|
|
|
|
|
|
|
|
|
|
|
Unfunded commitments under commercial and commercial real estate
lines-of-credit,
revolving credit lines and overdraft protection agreements are
commitments for possible future extensions of credit to existing
customers. These
lines-of-credit
may or may not contain a specified maturity date and ultimately
may not be drawn upon to the total extent to which the Bank is
committed.
Standby letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public
and private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral
held varies as specified above and is required as the Bank deems
necessary. Essentially all letters of credit issued have
expiration dates within one year.
The total liability for financial instruments with off-balance
sheet risk as of October 28, 2010 and December 31,
2009 is approximately $348,000 and $819,000, respectively.
F-70
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
Lease
commitments
The Bank leases premises and equipment under non-cancelable
operating leases expiring through 2013. Generally, these leases
contain
5-year
renewal options. The following is a schedule of future minimum
rental payments under these leases as of October 28, 2010:
|
|
|
|
|
($ in 000s)
|
|
|
|
|
2010
|
|
$
|
149
|
|
2011
|
|
|
910
|
|
2012
|
|
|
742
|
|
2013
|
|
|
444
|
|
|
|
|
|
|
|
|
$
|
2,245
|
|
|
|
|
|
|
Rent expense of approximately $653,000, $740,000, and $720,000
is included in occupancy expense for the period January 1,
2010 through October 28, 2010, and the periods ended
December 31, 2009, and 2008, respectively.
Concentrations
The Bank grants commercial, construction, real estate, and
consumer loans to customers. The Banks business is
concentrated in Nevada, and the loan portfolio includes
significant credit exposure to the commercial real estate
industry of this area. As of October 28, 2010, commercial
real estate loans represent 50% of total loans. Owner-occupied
commercial real estate loans represent 38% of commercial real
estate loans. As of October 28, 2010 and December 31,
2009, real estate-related loans accounted for approximately 66%
and 66%, respectively, of total loans.
The Banks policy for requiring collateral is to obtain
collateral whenever it is available or desirable, depending upon
the degree of risk the Bank is willing to take.
Lines
of credit
The Bank has lines of credit available from the FHLB and the
FRB. Borrowing capacity is determined based on collateral
pledged, generally consisting of securities and loans, at the
time of the borrowing. As of October 28, 2010, the Bank had
available credit with the FHLB and FRB of approximately
$18.1 million and $4.4 million, respectively. As of
October 28, 2010 and December 31, 2009, the Bank has
no outstanding borrowings under these agreements.
During April 2007, the stockholders of the Bank approved the
2007 Stock Option Plan (the Plan). The Plan gives the Board of
Directors the authority to grant up to 10,000 stock options.
Stock awards available to grant as of October 28, 2010 are
4,811. The maximum contractual term for options granted under
the Plan is 10 years. Generally, stock options granted have
vesting period of 3 to 5 years. The fair value of shares at
the date of grant is determined by the Board of Directors. The
fair value of each stock award is estimated on the date of grant
using the Black-Scholes Option Valuation Model that uses the
assumptions noted in the following table. The expected
volatility is based on the historical volatility of the stock of
a similar bank that has traded at least as long as the expected
life of the Banks stock-based awards. The Bank estimates
the life of the awards by calculating the average of the vesting
period and the contractual life. The risk-free rate for periods
within the contractual life of the awards is based on the
U.S. Treasury yield for debt instruments with
F-71
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
maturities similar to the expected life of the awards. The
dividends rate assumption of zero is based on managements
inability to pay dividends for the foreseeable future.
A summary of the assumptions used in calculating the fair value
of awards during the years ended December 31, 2009 and 2008
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 14,
|
|
April 17,
|
|
August 11,
|
|
|
2009 Stock
|
|
2008 Stock
|
|
2008 Stock
|
|
|
Option Grants
|
|
Option Grants
|
|
Option Grants
|
|
Expected life in years
|
|
|
7.5
|
|
|
|
7.5
|
|
|
|
7.5
|
|
Risk-free interest rate
|
|
|
1.72
|
%
|
|
|
3.27
|
%
|
|
|
3.57
|
%
|
Dividends rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Volatility
|
|
|
80.20
|
%
|
|
|
35.54
|
%
|
|
|
44.21
|
%
|
Fair value per award
|
|
$
|
745.03
|
|
|
$
|
450.61
|
|
|
$
|
523.04
|
|
A summary of stock award activity as of October 28, 2010
and changes during the period January 1, 2010 through
October 28, 2010 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Warrants
|
|
|
Stock Options
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding, January 1, 2010
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
6,034
|
|
|
$
|
1,000
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
(845
|
)
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, October 28, 2010
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
5,189
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
3,101
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of stock award activity as of December 31, 2009
and changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Warrants
|
|
|
Stock Options
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding, January 1, 2009
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
6,381
|
|
|
$
|
1,000
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
1,000
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
(423
|
)
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2009
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
6,034
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
1,634
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-72
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
A summary of stock award activity as of December 31, 2008
and changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Warrants
|
|
|
Stock Options
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding, January 1, 2008
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
3,710
|
|
|
$
|
1,000
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
3,842
|
|
|
|
1,000
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
(1,171
|
)
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2008
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
6,381
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
576
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 28, 2010 and December 31, 2009, the
weighted average remaining contractual terms of outstanding
stock warrants are approximately 1.2 and 2.0 years,
respectively. The weighted average contractual terms of vested
stock warrants are 1.2 and 2.0, respectively. As of
October 28, 2010 and December 31, 2009, the aggregate
intrinsic value of outstanding and vested stock warrants is $0
and $0, respectively.
As of October 28, 2010 and 2008, the weighted average
remaining contractual terms of outstanding stock options are 6.7
and 7.5 years, respectively. The weighted average
contractual terms of vested stock options are 3.9 and
7.2 years, respectively. As of October 28, 2010 and
December 31, 2009, the aggregate intrinsic value of
outstanding and vested stock options is $0 and $0, respectively.
For stock options granted under the Plan as of October 28,
2010 and December 31, 2009, there is approximately $860,000
and $1.7 million, respectively, of total unrecognized
compensation cost related to non-vested stock award
compensation. That cost is expected to be recognized over a
weighted average period of 2.0 and 2.8 years, respectively.
Stock-based compensation expense is based on awards that are
ultimately expected to vest and therefore has been reduced for
estimated forfeitures. The Bank estimates forfeitures using
historical data based upon the groups identified by management.
Stock-based compensation expense was approximately $633,000,
$379,000, and $423,000 for the period January 1, 2010
through October 28, 2010, and the periods ended
December 31, 2009, and 2008, respectively.
|
|
NOTE 10.
|
REGULATORY
CAPITAL
|
The Bank is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the
Banks financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that
involve qualitative measures of the Banks assets,
liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts
and ratios (set forth in the following table) of total and
Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital to
average assets (as defined).
F-73
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
Management believes, as of October 28, 2010 and
December 31, 2009, that the Bank meets all capital adequacy
requirements to which it is subject.
As of October 28, 2010, the most recent notification from
the Federal Deposit Insurance Corporation categorized the Bank
as adequately capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events
since the notification that management believes have changed the
Banks category. The Bank cannot be considered well
capitalized for prompt corrective action while under the Consent
Order.
On September 1, 2010, the Bank, without admitting or
denying any possible charges relating to the conduct of its
banking operations, agreed with the FDIC and the Nevada FID to
the issuance of a Consent Order. The Consent Order supersedes a
Memorandum of Understanding entered into by the Bank with the
FDIC and Nevada, FID in May of 2009. Under the Consent Order,
the Bank has agreed, among other things, to: (i) assess the
qualification of, and have retained qualified, senior management
commensurate with the size and risk profile of the Bank;
(ii) maintain a Tier I leverage ratio at or above 8.5%
and a total risk-based capital ratio at or above 12%;
(iii) continue to maintain an adequate allowance for loan
and lease losses; (iv) not pay any dividends without prior
bank regulatory approval; (v) formulate and implement a
plan to reduce Service1sts risk exposure to adversely
classified assets; (vi) not extend additional credit to any
borrower whose loan has been charged-off or classified
loss; (vii) not extend any additional credit to
any borrower whose loan has been classified as
substandard or doubtful without prior
approval from Service1sts board of directors or loan
committee; (viii) formulate and implement a plan to reduce
risk exposure to its concentration in commercial real estate
loans in conformance with Appendix A of Part 365 of
the FDICs Rules and Regulations; (ix) formulate and
implement a plan to address profitability; and (x) not
accept brokered deposits (which includes deposits paying
interest rates significantly higher than prevailing rates in
Service1sts market area) and reduce its reliance on
existing brokered deposits, if any.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2010
|
|
|
|
|
For Capital
|
|
|
|
Required Under
|
|
|
Actual
|
|
Adequacy Purposes
|
|
To Be Well Capitalized
|
|
Regulatory Agreements
|
($ in 000s)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Total Capital (to Risk-Weighted Assets)
|
|
$
|
18,164
|
|
|
|
14.1
|
%
|
|
$
|
10,319
|
|
|
|
8.0
|
%
|
|
$
|
12,899
|
|
|
|
10.0
|
%
|
|
$
|
15,479
|
|
|
|
12.0
|
%
|
Tier 1 Capital (to Risk- Weighted Assets)
|
|
|
16,451
|
|
|
|
12.8
|
%
|
|
|
5,160
|
|
|
|
4.0
|
%
|
|
|
7,739
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
N/A
|
|
Tier 1 Capital (to Average Assets)
|
|
|
16,451
|
|
|
|
8.7
|
%
|
|
|
7,548
|
|
|
|
4.0
|
%
|
|
|
9,435
|
|
|
|
5.0
|
%
|
|
|
16,040
|
|
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
For Capital
|
|
|
|
Required Under
|
|
|
Actual
|
|
Adequacy Purposes
|
|
To Be Well Capitalized
|
|
Regulatory Agreements
|
($ in 000s)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Total Capital (to Risk-Weighted Assets)
|
|
$
|
26,493
|
|
|
|
17.6
|
%
|
|
$
|
12,061
|
|
|
|
8.0
|
%
|
|
$
|
15,077
|
|
|
|
10.0
|
%
|
|
$
|
|
|
|
|
N/A
|
|
Tier 1 Capital (to Risk- Weighted Assets)
|
|
|
24,542
|
|
|
|
16.3
|
%
|
|
|
6,031
|
|
|
|
4.0
|
%
|
|
|
9,046
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
N/A
|
|
Tier 1 Capital (to Average Assets)
|
|
|
24,542
|
|
|
|
11.0
|
%
|
|
|
8,961
|
|
|
|
4.0
|
%
|
|
|
11,202
|
|
|
|
5.0
|
%
|
|
|
17,923
|
|
|
|
8.0
|
%
|
Additionally, State of Nevada banking regulations restrict
distribution of the net assets of the Bank because such
regulations require the sum of the Banks
stockholders equity and reserve for loan losses to be at
least 6% of the average total daily deposit liabilities for the
preceding 60 days. As a result of these
F-74
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
regulations, approximately $10.2 million and
$11.2 million of the Banks stockholders equity
is restricted as of October 28, 2010 and December 31,
2009, respectively.
|
|
NOTE 11.
|
EMPLOYEE
BENEFIT PLAN
|
The Bank has a qualified 401(k) employee benefit plan for all
eligible employees. Participants under 50 years of age are
able to defer up to $16,500 of their annual compensation, while
participants 50 years of age and over are able to defer up
to $22,000 of their annual compensation. Under the terms of the
plan, the Bank may not make matching contributions.
|
|
NOTE 12.
|
TRANSACTIONS
WITH RELATED PARTIES
|
Principal stockholders of the Bank and officers and directors,
including their families and companies of which they are
principal owners, are considered to be related parties. These
related parties were loan customers of, and had other
transactions with, the Bank in the ordinary course of business.
In managements opinion, these loans and transactions are
on the same terms as those for comparable loans and transactions
with unrelated parties. The aggregate activity in such loans for
the period January 1, 2010 through October 28 2010, and the
period ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
Balance, beginning
|
|
$
|
6,626
|
|
|
$
|
14,788
|
|
New loans
|
|
|
455
|
|
|
|
770
|
|
Repayments
|
|
|
(862
|
)
|
|
|
(2,468
|
)
|
Other Changes
|
|
|
|
|
|
|
(6,464
|
)
|
|
|
|
|
|
|
|
|
|
Balance, ending
|
|
$
|
6,219
|
|
|
$
|
6,626
|
|
|
|
|
|
|
|
|
|
|
The Bank had approximately $6.5 million in outstanding
balances with a related party as of December 31, 2008. The
related party resigned from director service with the Bank
during 2009. As a result, this credit has been removed from the
outstanding balance and is reflected in Other
Changes in the above related party table.
The Bank had one related party credit that was placed on a
non-accrual status in March of 2010. The outstanding balance on
the credit was approximately $3.8 million with an
impairment reserve of approximately $1.5 million as of
October 28, 2010.
Total loan commitments outstanding with related parties total
approximately $2.6 million and $1.4 million as of
October 28, 2010 and December 31, 2009, respectively.
|
|
NOTE 13.
|
STOCKHOLDERS
EQUITY
|
The Bank is authorized to issue only one class of stock, which
is designated as Common Stock. The total number of shares the
Bank is authorized to issue is 25 million, and the par
value of each share is one penny ($0.01).
Treasury
Stock
In September 2009, the Bank received 1,000 shares of the
Banks own stock in settlement of an impaired loan. The
outstanding loan balance at the time of receipt of the stock was
approximately $988,000 of which approximately $213,000 was
charged to the allowance for loan and lease loss and the balance
was satisfied with receipt of the stock. The stock was recorded
at $775,000 based on the Banks estimated fair value of the
Banks common stock at that time.
F-75
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
NOTE 14.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
The estimated fair value of the Banks financial statements
as of October 28, and December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
($ in 000s)
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
10,164
|
|
|
$
|
10,164
|
|
|
$
|
13,686
|
|
|
$
|
13,686
|
|
Interest-bearing deposits in banks
|
|
|
4,927
|
|
|
|
4,927
|
|
|
|
35,947
|
|
|
|
35,947
|
|
Certificates of deposits
|
|
|
31,928
|
|
|
|
31,928
|
|
|
|
9,313
|
|
|
|
9,313
|
|
Restricted Stock
|
|
|
658
|
|
|
|
N/A
|
|
|
|
487
|
|
|
|
487
|
|
Securities available for sale
|
|
|
2,850
|
|
|
|
2,850
|
|
|
|
7,434
|
|
|
|
7,434
|
|
Securities held to maturity
|
|
|
7,582
|
|
|
|
7,842
|
|
|
|
10,201
|
|
|
|
10,677
|
|
Loans, net
|
|
|
115,986
|
|
|
|
109,589
|
|
|
|
130,563
|
|
|
|
127,148
|
|
Accrued interest receivable
|
|
|
605
|
|
|
|
605
|
|
|
|
529
|
|
|
|
529
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
162,066
|
|
|
|
162,112
|
|
|
|
185,320
|
|
|
|
185,320
|
|
Accrued interest payable
|
|
|
44
|
|
|
|
44
|
|
|
|
139
|
|
|
|
139
|
|
Fair
Value of Commitments
The estimated fair value of the standby letters of credit at
October 28, 2010 and December 31, 2009 is
insignificant. Loan commitments on which the committed interest
rate is less than the current market rate are also insignificant
at October 28, 2010 and December 31, 2009.
Interest
Rate Risk
The Bank assumes interest rate risk (the risk to the Banks
earnings and capital from changes in interest rate levels) as a
result of its normal operations. As a result, the fair values of
the Banks financial instruments as well as its future net
interest income will change when interest rate levels change and
that change may be either favorable or unfavorable to the Bank.
F-76
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
NOTE 15.
|
QUARTERLY
DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
Period Ended October 28
|
|
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
($ in 000s, except for per share amounts)
|
|
October
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Interest and dividend income
|
|
$
|
603
|
|
|
$
|
1,862
|
|
|
$
|
1,947
|
|
|
$
|
2,207
|
|
Interest expense
|
|
|
64
|
|
|
|
286
|
|
|
|
380
|
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
539
|
|
|
|
1,576
|
|
|
|
1,567
|
|
|
|
1,790
|
|
Provision for loan loss
|
|
|
991
|
|
|
|
707
|
|
|
|
1,713
|
|
|
|
1,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
(452
|
)
|
|
|
869
|
|
|
|
(146
|
)
|
|
|
272
|
|
Noninterest income
|
|
|
41
|
|
|
|
160
|
|
|
|
156
|
|
|
|
150
|
|
Noninterest expenses
|
|
|
1,447
|
|
|
|
2,445
|
|
|
|
2,236
|
|
|
|
2,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,858
|
)
|
|
$
|
(1,416
|
)
|
|
$
|
(2,226
|
)
|
|
$
|
(1,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(37.30
|
)
|
|
$
|
(28.43
|
)
|
|
$
|
(44.69
|
)
|
|
$
|
(36.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
Year Ended December 31
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
($ in 000s, except for per share amounts)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Interest and dividend income
|
|
$
|
2,200
|
|
|
$
|
2,237
|
|
|
$
|
2,296
|
|
|
$
|
2,310
|
|
Interest expense
|
|
|
558
|
|
|
|
752
|
|
|
|
738
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
1,642
|
|
|
|
1,485
|
|
|
|
1,558
|
|
|
|
1,682
|
|
Provision for loan loss
|
|
|
11,274
|
|
|
|
3,428
|
|
|
|
365
|
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
(9,632
|
)
|
|
|
(1,943
|
)
|
|
|
1,193
|
|
|
|
1,084
|
|
Noninterest income
|
|
|
222
|
|
|
|
127
|
|
|
|
86
|
|
|
|
79
|
|
Noninterest expenses
|
|
|
2,943
|
|
|
|
1,990
|
|
|
|
1,826
|
|
|
|
1,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(12,353
|
)
|
|
$
|
(3,806
|
)
|
|
$
|
(547
|
)
|
|
$
|
(671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(243.74
|
)
|
|
$
|
(75.09
|
)
|
|
$
|
(10.79
|
)
|
|
$
|
(13.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 16
|
SUBSEQUENT
EVENTS
|
On October 28, 2010, Western Liberty Bancorp (WLBC)
consummated its acquisition (the Acquisition) of the
Bank, a Nevada-chartered non-member bank pursuant to a Merger
Agreement (the Merger Agreement), dated as of
November 6, 2009, as amended by a First Amendment to the
Merger Agreement, dated as of June 21, 2010
(Amendment No. 1 and, together with the Merger
Agreement, the Amended Merger Agreement), each among
WL-S1 Interim Bank, a Nevada corporation and wholly-owned
subsidiary of WLBC (Acquisition Sub), the Bank and
Curtis W. Anderson, as representative of the former stockholders
of the Bank. Pursuant to the Amended Merger Agreement,
Acquisition Sub merged with and into the Bank, with the Bank
being the surviving entity and becoming WLBCs wholly-owned
subsidiary. WLBC previously received the requisite approvals of
certain bank regulatory authorities to complete the Acquisition
to become a bank holding company.
F-77
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
The former stockholders of the Bank received approximately
2,370,878 shares of Common Stock in exchange for all of the
outstanding shares of capital stock of the Bank (the Base
Acquisition Consideration). In addition, the holders of
the Banks outstanding options and warrants now hold
options and warrants of similar tenor to purchase up to
289,808 shares of Common Stock.
In addition to the Base Acquisition Consideration, each of the
former stockholders of the Bank may be entitled to receive
additional consideration (the Contingent Acquisition
Consideration), payable in Common Stock, if at any time
within the first two years after the consummation of the
Acquisition, the closing price per share of the Common Stock
exceeds $12.75 for 30 consecutive days. The Contingent
Acquisition Consideration would be equal to 20% of the tangible
book value of the Bank at the close of business on the last day
of the calendar month immediately before the calendar month in
which the final regulatory approval necessary for the completion
of the Acquisition was obtained. The total number of shares of
our common stock issuable to the former the Bank stockholders
would be determined by dividing the Contingent Acquisition
Consideration by the average of the daily closing price of the
Common Stock on the first 30 trading days on which the closing
price of the Common Stock exceeded $12.75.
At the close of business on October 28, 2010, WLBC was a
new Nevada financial institution bank holding company by
consummating the acquisition of the Bank and conducting
operations through the Bank. In conjunction with the
transaction, WLBC infused $25.0 million of capital onto the
balance sheet of the Bank. On October 29, 2010, the common
shares of WLBC began trading on the Nasdaq Global Market, under
the ticker symbol WLBC.
F-78
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution
|
The following table sets forth the costs and expenses to be
borne by WLBC in connection with the offerings described in this
Registration Statement. None of these expenses shall be borne by
any of the selling security holders.
|
|
|
|
|
Registration fee
|
|
$
|
663.57
|
|
Transfer agent and trustee fees and expenses
|
|
|
|
|
Printing
|
|
|
90,000.00
|
|
Accounting fees and expenses
|
|
|
25,000.00
|
|
Legal fees and expenses
|
|
|
108,000.00
|
|
Miscellaneous
|
|
|
20,000.00
|
|
Total
|
|
$
|
243,663.57
|
|
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
The Second Amended and Restated Certificate of Incorporation of
WLBC provides that all directors, officers, employees and agents
of the registrant shall be entitled to be indemnified by WLBC to
the fullest extent permitted by Section 145 of the Delaware
General Corporation Law. The Second Amended and Restated
Certificate of Incorporation also provides that expenses
incurred by an officer or director in defending any civil,
criminal, administrative, or investigative action, suit or
proceeding for which such officer or directly may be entitled to
indemnification shall be paid by the registrant in advance of
the final disposition of such action, suit or proceeding upon
receipt by the registrant of an undertaking by or on behalf of
such officer or director to repay such amount if it shall
ultimately be determined that he or she is not entitled to be
indemnified by the registrant under the Second Amended and
Restated Certificate of Incorporation.
Section 145 of the Delaware General Corporation Law
concerning indemnification of and advancement of expenses to
officers, directors, employees and agents is set forth below.
Section 145. Indemnification of officers, directors,
employees and agents; insurance.
(a) A corporation shall have power to indemnify any person
who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) by reason
of the fact that the person is or was a director, officer,
employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including
attorneys fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in
connection with such action, suit or proceeding if the person
acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the persons
conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith
and in a manner which the person reasonably believed to be in or
not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had reasonable
cause to believe that the persons conduct was unlawful.
(b) A corporation shall have power to indemnify any person
who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the
right of the corporation to procure a judgment in its favor by
reason of the fact that the person is or was a director,
officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses
(including
II-1
attorneys fees) actually and reasonably incurred by the
person in connection with the defense or settlement of such
action or suit if the person acted in good faith and in a manner
the person reasonably believed to be in or not opposed to the
best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
(c) To the extent that a present or former director or
officer of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred
to in subsections (a) and (b) of this section, or in
defense of any claim, issue or matter therein, such person shall
be indemnified against expenses (including attorneys fees)
actually and reasonably incurred by such person in connection
therewith.
(d) Any indemnification under subsections (a) and
(b) of this section (unless ordered by a court) shall be
made by the corporation only as authorized in the specific case
upon a determination that indemnification of the present or
former director, officer, employee or agent is proper in the
circumstances because the person has met the applicable standard
of conduct set forth in subsections (a) and (b) of
this section. Such determination shall be made, with respect to
a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who
are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) by a committee of such directors
designated by majority vote of such directors, even though less
than a quorum, or (3) if there are no such directors, or if
such directors so direct, by independent legal counsel in a
written opinion, or (4) by the stockholders.
(e) Expenses (including attorneys fees) incurred by
an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may
be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the corporation as
authorized in this section. Such expenses (including
attorneys fees) incurred by former directors and officers
or other employees and agents of the corporation or by persons
serving at the request of the corporation as directors,
officers, employees or agents of another corporation,
partnership, joint venture, trust or other enterprise may be so
paid upon such terms and conditions, if any, as the corporation
deems appropriate.
(f) The indemnification and advancement of expenses
provided by, or granted pursuant to, the other subsections of
this section shall not be deemed exclusive of any other rights
to which those seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to
action in such persons official capacity and as to action
in another capacity while holding such office. A right to
indemnification or to advancement of expenses arising under a
provision of the certificate of incorporation or a bylaw shall
not be eliminated or impaired by an amendment to such provision
after the occurrence of the act or omission that is the subject
of the civil, criminal, administrative or investigative action,
suit or proceeding for which indemnification or advancement of
expenses is sought, unless the provision in effect at the time
of such act or omission explicitly authorizes such elimination
or impairment after such action or omission has occurred.
(g) A corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person in any
such capacity, or arising out of such persons status as
such, whether or not the corporation would have the power to
indemnify such person against such liability under this section.
(h) For purposes of this section, references to the
corporation shall include, in addition to the resulting
corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors,
officers, and employees or agents, so that any person who is or
was a director, officer, employee or
II-2
agent of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the
same position under this section with respect to the resulting
or surviving corporation as such person would have with respect
to such constituent corporation if its separate existence had
continued.
(i) For purposes of this section, references to other
enterprises shall include employee benefit plans;
references to fines shall include any excise taxes
assessed on a person with respect to any employee benefit plan;
and references to serving at the request of the
corporation shall include any service as a director,
officer, employee or agent of the corporation which imposes
duties on, or involves services by, such director, officer,
employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good
faith and in a manner such person reasonably believed to be in
the interest of the participants and beneficiaries of an
employee benefit plan shall be deemed to have acted in a manner
not opposed to the best interests of the corporation
as referred to in this section.
(j) The indemnification and advancement of expenses
provided by, or granted pursuant to, this section shall, unless
otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive
jurisdiction to hear and determine all actions for advancement
of expenses or indemnification brought under this section or
under any bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise. The Court of Chancery may
summarily determine a corporations obligation to advance
expenses (including attorneys fees).
Our bylaws also generally provide that we will indemnify our
current and former directors and officers and persons who, while
serving as a director or officer of WLBC, act or acted at our
request as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust,
employment benefit plan or other enterprise, against all
liability and loss suffered and expenses (including
attorneys fees) actually and reasonably incurred, to the
fullest extent permitted by the Delaware General Corporation
Law. Likewise, our bylaws provide that we will pay the expenses
(including attorneys fees) incurred by any such person in
defending any proceeding in advance of its final disposition,
provided that such payment will be made only upon the receipt of
an undertaking by such person to repay all amounts if it is
ultimately determined that such person is not entitled to
indemnification. Our bylaws further permit us to secure
insurance on behalf of any officer, director or employee for any
liability arising out of his or her actions, regardless of
whether Delaware law would permit indemnification. We have
purchased a policy of directors and officers
liability insurance that insures our directors and officers
against the cost of defense, settlement or payment of a judgment
in some circumstances and insures us against our obligations to
indemnify the directors and officers.
We are also party to agreements with our directors and officers
to provide contractual indemnification in addition to the
indemnification provided in WLBCs Second Amended and
Restated Certificate of Incorporation. We believe that these
provisions and agreements were necessary to attract qualified
directors and officers.
In addition, WLBC is a corporation organized under the laws of
the State of Delaware, and Section 102(b)(7) of the
Delaware General Corporation Law permits a corporation to
provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability
(i) for any breach of the directors duty of loyalty
to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases,
redemptions or other distributions or (iv) for any
transaction from which the director derived an improper personal
benefit. Our Second Amended and Restated Certificate of
Incorporation provides that our directors shall not be liable to
us or our stockholders, except to the extent such exemption from
liability or limitation thereof is not permitted under the
Delaware General Corporation Law.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to WLBCs directors,
officers, and controlling persons pursuant to the foregoing
provisions, or otherwise, WLBC has been advised that, in the
opinion of the SEC, such indemnification is against public
policy as expressed in the
II-3
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment of expenses incurred or paid by a director,
officer or controlling person in a successful defense of any
action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, WLBC will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to the court of appropriate jurisdiction the question
whether such indemnification by WLBC is against public policy as
expressed in the Securities Act and will be governed by the
final adjudication of such issue.
Paragraph B of Article Eighth of WLBCs Second
Amended and Restated Certificate of Incorporation provides:
The Corporation, to the full extent permitted by
Section 145 of the DGCL, as amended from time to time,
shall indemnify all persons whom it may indemnify pursuant
thereto. Expenses (including attorneys fees) incurred by
an officer or director in defending any civil, criminal,
administrative, or investigative action, suit or proceeding for
which such officer or director may be entitled to
indemnification hereunder shall be paid by the Corporation in
advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of
such director or officer to repay such amount if it shall
ultimately be determined that he is not entitled to be
indemnified by the Corporation as authorized hereby.
WLBCs bylaws further provide that any indemnification
shall be made by WLBC to the fullest extent permitted by law
only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent
is proper in the circumstances because he has met the applicable
standard of conduct set forth in such section. Such
determination shall be made: (i) by the board of directors
by a majority vote of a quorum consisting of directors who were
not parties to such action, suit or proceeding; (ii) if
such quorum is not obtainable, or, even if obtainable a quorum
of disinterested directors so directs, by independent legal
counsel in a written opinion, or (iii) by stockholders.
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Item 15.
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Recent
Sales of Unregistered Securities
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On July 16, 2007, we issued an aggregate amount of
8,575,000 Private Shares, at a purchase price of $0.001 per
share, in private placement transactions. On August 1,
2007, we issued 25,000 Private Shares, at a purchase price of
$0.001 per share, in a private placement. On September 28,
2007, we issued 25,000 Private Shares, at a purchase price of
$0.001 per share, in a private placement. In total, prior to our
initial public offering we issued 8,625 Private Shares for an
aggregate amount of $8,625 in cash. Of those shares, 637,786
were redeemed because the underwriters did not fully exercise
their over-allotment option, resulting in a total of
7,987,214 shares outstanding after the redemption.
On August 1, 2007, our former Chief Executive Officer Scott
LaPorta, agreed to purchase 1,000,000 Private Warrants.
Mr. LaPorta purchased such Private Warrants from us
immediately prior to the consummation of our initial public
offering on November 27, 2007.
On October 19, 2007, Hayground Cove agreed to purchase
7,500,000 of our Private Warrants. Hayground Cove purchased such
Private Warrants from us immediately prior to the consummation
of our initial public offering on November 27, 2007.
On July 20, 2009, we entered into a Private
Shares Restructuring Agreement with Hayground Cove,
pursuant to which 7,618,908, or over 95%, of the Private Shares,
were cancelled and exchanged for Private Warrants, resulting in
368,306 Private Shares and 16,118,908 Private Warrants.
In connection with the Acquisition, on September 27, 2010,
WLBC and Continental Stock Transfer &
Trust Company, as warrant agent, entered into the Amended
Warrant Agreement, pursuant to which all of our outstanding
Warrants, including the Private Warrants, were exercised into
one thirty-second (1/32) of one share of Common Stock
concurrently with the consummation of the Acquisition. Any
Warrants that would have entitled a holder of such Warrants to a
fractional share of Common Stock after taking into account the
exercise of the remainder of such holders Warrants into
full shares of Common Stock were cancelled. As a result of the
foregoing, WLBC issued 1,502,088 shares of Common Stock and
paid each Warrant holder $0.06 per Warrant exercised. The Common
Stock issuable upon exercise of the Public Warrants was
previously registered
II-4
under the Exchange Act during WLBCs initial public
offering, and such shares were freely tradable immediately upon
issuance
On October 28, 2010, in connection with the consummation of
the Acquisition, we issued Restricted Stock to William E.
Martin, who became a member of the Board and serves as our Chief
Executive Officer and as Chief Executive Officer of
Service1st,
and George A. Rosenbaum, Jr., our current Chief Financial
Officer and the Executive Vice President of Service1 st.
Mr. Martin received 155,279 shares of Restricted
Stock, which was equal to $1.0 million divided by the $6.44
closing price of the Common Stock on the closing date of the
Acquisition, in consideration for his future services in
accordance with the terms of his employment agreement with WLBC.
Mr. Rosenbaum received 38,819 shares of Restricted
Stock, which was equal to $250,000 divided by the closing price
of the Common Stock on the closing date of the Acquisition, in
consideration for his future services in accordance with the
terms of his employment agreement with WLBC. The shares of
Restricted Stock granted to each of Messrs. Martin and
Rosenbaum will vest 20% on each of the first, second, third,
fourth and fifth anniversaries of the consummation of the
Acquisition, which occurred on October 28, 2010, subject to
Messrs. Martins and Rosenbaums respective and
continuous employment through each vesting date. Such Restricted
Stock shall be subject to restrictions on transfer for a period
of one year following each vesting date. See the section
entitled See the section entitled Executive Officer and
Director Compensation Employment
Agreements.
On October 28, 2010, in consideration of their substantial
service to and support of WLBC during the period in which we
sought the requisite regulatory approval to become a bank
holding company in connection with the Acquisition, WLBC and
each of Jason N. Ader, our former Chairman and Chief Executive
Officer and a current member of the Board, Daniel B. Silvers,
our former President, Andrew P. Nelson, our former Chief
Financial Officer and a former member of the Board, Michael Tew,
an outside consultant, and Laura Conover-Ferchak, an
outside consultant, entered into the Letter Agreements, pursuant
to which each of the foregoing individuals received a grant of
Restricted Stock Units. Mr. Ader, a current director and
the former Chairman and Chief Executive Officer of WLBC,
received 50,000 Restricted Stock Units; Mr. Silvers,
WLBCs former President, received 100,000 Restricted Stock
Units; Mr. Nelson, a former director of WLBC, received
25,000 Restricted Stock Units; Mr. Tew, an outside
consultant to WLBC, received 20,000 Restricted Stock Units; and
Mrs. Conover-Ferchak, an outside consultant to WLBC,
received 5,000 Restricted Stock Units. Each Restricted Stock
Unit is immediately and fully vested and shall be settled for
one share of Common Stock, of WLBC on the earlier to occur of
(i) a change of control and (ii) the Settlement Date.
Any cash dividends paid with respect to the shares of Common
Stock covered by the Restricted Stock Units prior to the
Settlement Date shall be credited to a dividend book entry
account as if the shares of Common Stock had been issued,
provided that such cash dividends shall not be deemed to be
reinvested in shares of Common Stock and will be held uninvested
and without interest and shall be paid in cash on the Settlement
Date. Any stock dividends paid with respect to the shares of
Common Stock covered by the Restricted Stock Units prior to the
Settlement Date shall be credited to a dividend book entry
account as if shares of Common Stock had been issued, provided
that such dividends shall be paid on the Settlement Date.
Furthermore, on October 28, 2010, in consideration of their
substantial service to and support of WLBC during the period in
which we sought the requisite regulatory approval to become a
bank holding company in connection with the Acquisition, WLBC
made a one-time grant of 50,000 shares of Common Stock to
each of Michael Frankel, the current Chairman of the Board,
Richard A.C. Coles, a current member of the Board and Mark
Schulhof, a former member of the Board.
The sales of the above securities were deemed to be exempt from
the registration under the Securities Act of 1933 in reliance on
Section 3(a)(9) or Section 4(2) of the Securities Act,
as applicable. In addition, the future issuance of Common Stock
underlying the Restricted Stock Units and the
Service1st
Warrants will be similarly exempt. In any such transaction
pursuant to Section 4(2) of the Securities Act, such entity
represented its intention to acquire the securities for
investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were
affixed to the instruments representing such securities issued
in such transactions.
II-5
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Item 16.
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Exhibits
and Financial Statement Schedules
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Description
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2
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.1
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Agreement and Plan of Merger, dated as of November 6, 2009, by
and among Western Liberty Bancorp., WL-S1 Interim Bank,
Service1st
Bank of Nevada and Curtis W. Anderson, as Former
Stockholders Representative (incorporated by reference to
Exhibit 2.1 to the Current Report on
Form 8-K,
File No. 001-33803, filed by WLBC with the Securities and
Exchange Commission on November 9, 2009)
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2
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.2
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First Amendment to the Agreement and Plan of Merger, dated as of
June 21, 2010, by and among Western Liberty Bancorp., WL-S1
Interim Bank,
Service1st
Bank of Nevada and Curtis W. Anderson, as Former
Stockholders Representative (incorporated by reference to
Exhibit 2.1 to the Current Report on Form 8-K, File No.
001-33803, filed by WLBC with the Securities and Exchange
Commission on June 24, 2010)
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3
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.1
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Second Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.2 to the Current Report
on Form 8-K, File No. 001-33803, filed by WLBC with the
Securities and Exchange Commission on October 9, 2009)
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3
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.2
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Amended and Restated By-laws (incorporated by reference to
Exhibit 3.2 to the Current Report on Form 8-K, File No.
001-33803, filed by WLBC with the Securities and Exchange
Commission on November 3, 2010)
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4
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.1
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Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.7 to the Form S-3, filed by WLBC with the Securities
and Exchange Commission on November 16, 2009)
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4
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.2
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Founders Shares Restructuring Agreement, dated as of July 20,
2009, between Global Consumer Acquisition Corp. and Hayground
Cove Asset Management LLC (incorporated by reference to
Exhibit 4.2 the Current Report on Form 8-K, File No.
001-33803, filed by WLBC with the Securities and Exchange
Commission on July 22, 2009)
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4
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.4
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Letter Agreement, dated as of September 23, 2010, between
Western Liberty Bancorp and the signatories thereto
(incorporated by reference to Exhibit 4.1 the Current Report on
Form 8-K,
File No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
September 23, 2010)
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4
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.5
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Second Amended and Restated Warrant Agreement, dated as of
September 27, 2010, between Western Liberty Bancorp and
Continental Stock Transfer &Trust Company (incorporated by
reference to Exhibit 4.1 the Current Report on Form 8-K, File
No. 001-33803, filed by WLBC with the Securities and Exchange
Commission on September 28, 2010)
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5
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.1
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Opinion of Proskauer Rose LLP as to the validity of the shares
being registered**
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10
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.1
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Form of Indemnification Agreement between WLBC and each of the
directors and officers of WLBC (incorporated by reference to
Exhibit 10.10 to Amendment No. 1 to the Form S-1, File No.
333-144799, filed by WLBC with the Securities and Exchange
Commission on September 6, 2007)
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10
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.2
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Settlement Agreement and General Release, dated December 23,
2008, between WLBC and Scott LaPorta (incorporated by reference
to Exhibit 10.13 to Current Report on Form 8-K, File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
December 29, 2008)
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10
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.3
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Director Resignation Agreement, dated December 23, 2008, between
WLBC, Robert M. Foresman, Carl H. Hahn, Philip A. Marineau and
Steven Westly (incorporated by reference to Exhibit 10.14 to
Current Report on Form 8-K, File No. 001-33803, filed by WLBC
with the Securities and Exchange Commission on December 29, 2008)
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10
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.4
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Second Amended and Restated Sponsor Support Agreement, dated as
of August 13, 2009, by and between Global Consumer Acquisition
Corp. and Hayground Cove Asset Management LLC (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K,
File No. 001-33803, filed by WLBC with the Securities and
Exchange Commission on August 14, 2009)
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10
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.5
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Employment Agreement, dated as of November 6, 2009, by and
between Western Liberty Bancorp and Richard Deglman
(incorporated by reference to Exhibit 10.4 to the Current Report
on Form 8-K, File No. 001-33803, filed by WLBC with the
Securities and Exchange Commission on November 9, 2009)
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II-6
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Description
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10
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.6
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Second Amended and Restated Employment Agreement, dated as of
December 18, 2009, by and between Western Liberty Bancorp and
George A. Rosenbaum, Jr. (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K, File No.
001-33803, filed by WLBC with the Securities and Exchange
Commission on December 24, 2009)
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10
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.7
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Letter Agreement, dated as of October 28, 2010, between Western
Liberty Bancorp and Jason N. Ader (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K, File No.
001-33803, filed by WLBC with the Securities and Exchange
Commission on November 3, 2010)
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10
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.8
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Letter Agreement, dated as of October 28, 2010, between Western
Liberty Bancorp and Daniel B. Silvers (incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K, File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 3, 2010)
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10
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.9
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Letter Agreement, dated as of October 28, 2010, between Western
Liberty Bancorp and Andrew P. Nelson (incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K, File No.
001-33803, filed by WLBC with the Securities and Exchange
Commission on November 3, 2010)
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10
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.10
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Letter Agreement, dated as of October 28, 2010, between Western
Liberty Bancorp and Michael Tew (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K, File No.
001-33803, filed by WLBC with the Securities and Exchange
Commission on November 3, 2010)
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10
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.11
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Letter Agreement, dated as of October 28, 2010, between Western
Liberty Bancorp and Laura Conover-Ferchak (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K,
File No. 001-33803, filed by WLBC with the Securities and
Exchange Commission on November 3, 2010)
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10
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.12
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Expense Sharing Agreement, dated as of October 29, 2010, between
Western Liberty Bancorp and
Service1st
Bank of Nevada (incorporated by reference to Exhibit 10.1 to the
Current Report on
Form 8-K,
File No. 001-33803, filed by WLBC with the Securities and
Exchange Commission on November 3, 2010)
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10
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.13
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Tax Allocation Agreement, dated as of October 29, 2010, between
Western Liberty Bancorp and
Service1st
Bank of Nevada (incorporated by reference to Exhibit 10.1 to the
Current Report on
Form 8-K,
File No. 001-33803, filed by WLBC with the Securities and
Exchange Commission on November 3, 2010)
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10
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.14
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Amended and Restated Voting Agreement, dated as of January 28,
2010, by and among Western Liberty Bancorp and the Stockholders
Party Thereto (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K, File No. 001-33803, filed by WLBC
with the Securities and Exchange Commission on January 29, 2010)
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10
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.15
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Amended and Restated Employment Agreement, dated as of February
8, 2010, by and between Western Liberty Bancorp and William E.
Martin (incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K, File No. 001-33803, filed by WLBC with the
Securities and Exchange Commission on February 8, 2010)
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14
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.1
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Code of Conduct and Ethics (incorporated by reference to Exhibit
14.1 to the Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 2010, File No. 001-33803, filed by WLBC
with the Securities and Exchange Commission on March 31,
2011)
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21
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.1
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List of Subsidiaries (incorporated by reference to
Exhibit 21 to the Annual Report on
Form 10-K
for the Fiscal Year Ended December 31, 2010, File No.
001-33803, filed by WLBC with the Securities and Exchange
Commission on March 31, 2011)
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23
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.1
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Consent of Crowe Horwath LLP*
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23
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.2
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Consent of Hays & Company LLP*
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23
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.3
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Consent of Grant Thornton LLP*
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23
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.4
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Consent of Proskauer Rose LLP (included in Exhibit 5.1)
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99
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.1
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Consent Order of Federal Deposit Insurance Corporation and the
Nevada Financial Institutions Division, dated as of
September 1, 2010, In the Matter of
Service1st
Bank of Nevada,
FDIC-10-512b**
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** |
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Previously filed as an Exhibit to this Registration Statement on
Form S-1 |
II-7
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made of securities registered hereby, a post-effective
amendment to this registration statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange Commission
pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the
Calculation of Registration Fee table in the
effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under
the Securities Act of 1933 to any purchaser:
(A) Each prospectus filed by the registrant pursuant to
Rule 424(b)(3) shall be deemed to be part of the
registration statement as of the date the filed prospectus was
deemed part of and included in the registration
statement; and
(B) Each prospectus required to be filed pursuant to
Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration
statement in reliance on Rule 430B relating to an offering
made pursuant to Rule 415(a)(1)(î), (vii), or
(x) for the purpose of providing the information required
by Section 10(a) of the Securities Act of 1933 shall be
deemed to be part of and included in the registration statement
as of the earlier of the date such form of prospectus is first
used after effectiveness or the date of the first contract of
sale of securities in the offering described in the prospectus.
As provided in Rule 430B, for liability purposes of the
issuer and any person that is at that date an underwriter, such
date shall be deemed to be a new effective date of the
registration statement relating to the securities in the
registration statement to which that prospectus relates, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof; provided,
however, that no statement made in a registration
statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or
prospectus that is part of the registration statement will, as
to a purchaser with a time of contract of sale prior to such
effective date, supersede or modify any statement that was made
in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately
prior to such effective date.
(5) That, for the purpose of determining liability of the
registrant under the Securities Act of 1933 to any purchaser in
the initial distribution of the securities: The undersigned
registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration
statement,
II-8
regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or
sold to such purchaser by means of any of the following
communications, the undersigned registrant will be a seller to
the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
(iv) any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
(b) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
WESTERN LIBERTY BANCORP
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By:
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/s/ William
E. Martin
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Name: William E. Martin
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Title:
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Chief Executive Officer and Director
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(Principal Executive Officer)
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Signature
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Title
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Date
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/s/ Michael
B. Frankel
Michael
B. Frankel
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Chairman
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April 13, 2011
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/s/ Terrence
L. Wright
Terrence
L. Wright
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Vice Chairman
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April 13, 2011
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/s/ Jason
N. Ader
Jason
N. Ader
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Director
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April 13, 2011
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/s/ Richard
A.C. Coles
Richard
A.C. Coles
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Director
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April 13, 2011
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/s/ Steven
D. Hill
Steven
D. Hill
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Director
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April 13, 2011
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/s/ Curtis
W. Anderson, CPA
Curtis
W. Anderson, CPA
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Director
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April 13, 2011
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/s/ William
E. Martin
William
E. Martin
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Director and Chief Executive Officer
(Principal Executive Officer)
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April 13, 2011
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/s/ George
A. Rosenbaum, Jr.
George
A. Rosenbaum, Jr.
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Chief Financial Officer
(Principal Accounting
and Financial Officer)
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April 13, 2011
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II-10
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Exhibit No.
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Description
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2
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.1
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Agreement and Plan of Merger, dated as of November 6, 2009,
by and among Western Liberty Bancorp., WL-S1 Interim Bank,
Service1st
Bank of Nevada and Curtis W. Anderson, as Former
Stockholders Representative (incorporated by reference to
Exhibit 2.1 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 9, 2009)
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2
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.2
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First Amendment to the Agreement and Plan of Merger, dated as of
June 21, 2010, by and among Western Liberty Bancorp., WL-S1
Interim Bank,
Service1st
Bank of Nevada and Curtis W. Anderson, as Former
Stockholders Representative (incorporated by reference to
Exhibit 2.1 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
June 24, 2010)
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3
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.1
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Second Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.2 to the Current
Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
October 9, 2009)
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3
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.2
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Amended and Restated By-laws (incorporated by reference to
Exhibit 3.2 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 3, 2010)
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4
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.1
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Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.7 to the
Form S-3,
filed by WLBC with the Securities and Exchange Commission on
November 16, 2009)
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4
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.2
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Founders Shares Restructuring Agreement, dated as of
July 20, 2009, between Global Consumer Acquisition Corp.
and Hayground Cove Asset Management LLC (incorporated by
reference to Exhibit 4.2 the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
July 22, 2009)
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4
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.4
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Letter Agreement, dated as of September 23, 2010, between
Western Liberty Bancorp and the signatories thereto
(incorporated by reference to Exhibit 4.1 the Current
Report on
Form 8-K,
File No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
September 23, 2010)
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4
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.5
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Second Amended and Restated Warrant Agreement, dated as of
September 27, 2010, between Western Liberty Bancorp and
Continental Stock Transfer &Trust Company
(incorporated by reference to Exhibit 4.1 the Current
Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
September 28, 2010)
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5
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.1
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Opinion of Proskauer Rose LLP as to the validity of the shares
being registered**
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10
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.1
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Form of Indemnification Agreement between WLBC and each of the
directors and officers of WLBC (incorporated by reference to
Exhibit 10.10 to Amendment No. 1 to the
Form S-1,
File No. 333-144799,
filed by WLBC with the Securities and Exchange Commission on
September 6, 2007)
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10
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.2
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Settlement Agreement and General Release, dated
December 23, 2008, between WLBC and Scott LaPorta
(incorporated by reference to Exhibit 10.13 to Current
Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
December 29, 2008)
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10
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.3
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Director Resignation Agreement, dated December 23, 2008,
between WLBC, Robert M. Foresman, Carl H. Hahn, Philip A.
Marineau and Steven Westly (incorporated by reference to
Exhibit 10.14 to Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
December 29, 2008)
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10
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.4
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Second Amended and Restated Sponsor Support Agreement, dated as
of August 13, 2009, by and between Global Consumer
Acquisition Corp. and Hayground Cove Asset Management LLC
(incorporated by reference to Exhibit 10.1 to the Current
Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
August 14, 2009)
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Exhibit No.
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Description
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10
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.5
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Employment Agreement, dated as of November 6, 2009, by and
between Western Liberty Bancorp and Richard Deglman
(incorporated by reference to Exhibit 10.4 to the Current
Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 9, 2009)
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10
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.6
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Second Amended and Restated Employment Agreement, dated as of
December 18, 2009, by and between Western Liberty Bancorp
and George A. Rosenbaum, Jr. (incorporated by reference to
Exhibit 10.1 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
December 24, 2009)
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10
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.7
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Letter Agreement, dated as of October 28, 2010, between
Western Liberty Bancorp and Jason N. Ader (incorporated by
reference to Exhibit 10.1 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 3, 2010)
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10
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.8
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Letter Agreement, dated as of October 28, 2010, between
Western Liberty Bancorp and Daniel B. Silvers (incorporated by
reference to Exhibit 10.1 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 3, 2010)
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10
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.9
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Letter Agreement, dated as of October 28, 2010, between
Western Liberty Bancorp and Andrew P. Nelson (incorporated by
reference to Exhibit 10.1 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 3, 2010)
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10
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.10
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Letter Agreement, dated as of October 28, 2010, between
Western Liberty Bancorp and Michael Tew (incorporated by
reference to Exhibit 10.1 to the Current Report on
Form 8-K,
File No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 3, 2010)
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10
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.11
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Letter Agreement, dated as of October 28, 2010, between
Western Liberty Bancorp and Laura Conover-Ferchak (incorporated
by reference to Exhibit 10.1 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 3, 2010)
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10
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.12
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Expense Sharing Agreement, dated as of October 29, 2010,
between Western Liberty Bancorp and
Service1st
Bank of Nevada (incorporated by reference to Exhibit 10.1
to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 3, 2010)
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10
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.13
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Tax Allocation Agreement, dated as of October 29, 2010,
between Western Liberty Bancorp and
Service1st
Bank of Nevada (incorporated by reference to Exhibit 10.1
to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 3, 2010)
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10
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.14
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Amended and Restated Voting Agreement, dated as of
January 28, 2010, by and among Western Liberty Bancorp and
the Stockholders Party Thereto (incorporated by reference to
Exhibit 10.1 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
January 29, 2010)
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10
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.15
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Amended and Restated Employment Agreement, dated as of
February 8, 2010, by and between Western Liberty Bancorp
and William E. Martin (incorporated by reference to
Exhibit 10.1 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
February 8, 2010)
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14
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.1
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Code of Conduct and Ethics (incorporated by reference to Exhibit
14.1 to the Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 2010, File No. 001-33803, filed by WLBC with
the Securities and Exchange Commission on March 31, 2011)
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21
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.1
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List of Subsidiaries (incorporated by reference to
Exhibit 21 to the Annual Report on
Form 10-K
for the Fiscal Year Ended December 31, 2010, File No.
001-33803, filed by WLBC with the Securities and Exchange
Commission on March 31, 2011)
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Exhibit No.
|
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Description
|
|
|
23
|
.1
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Consent of Crowe Horwath LLP*
|
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23
|
.2
|
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Consent of Hays & Company LLP*
|
|
23
|
.3
|
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Consent of Grant Thornton LLP*
|
|
23
|
.4
|
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Consent of Proskauer Rose LLP (included in Exhibit 5.1)
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99
|
.1
|
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Consent Order of Federal Deposit Insurance Corporation and the
Nevada Financial Institutions Division, dated as of
September 1, 2010, In the Matter of
Service1st
Bank of Nevada,
FDIC-10-512b**
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** |
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Previously filed as an Exhibit to this Registration Statement on
Form S-1 |