Attached files

file filename
EX-23.1 - EX-23.1 - WESTERN LIBERTY BANCORPy87961a3exv23w1.htm
EX-23.3 - EX-23.3 - WESTERN LIBERTY BANCORPy87961a3exv23w3.htm
EX-23.2 - EX-23.2 - WESTERN LIBERTY BANCORPy87961a3exv23w2.htm
Table of Contents

As filed with the Securities and Exchange Commission on April 20, 2011
Registration No. 333-170862
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Amendment No. 3
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
WESTERN LIBERTY BANCORP
(Exact name of registrant as specified in its charter)
 
         
Delaware
  6022   26-0469120
(State or other jurisdiction
of incorporation)
  (Primary Standard Industrial
Classification Code Number
)
  (I.R.S. Employer
Identification Number
)
 
 
8363 W. Sunset Road, Suite 350
Las Vegas, Nevada 89113
(702) 966-7400
(Address, including zip code, and telephone number, including area code, of registrant’s 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):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ
(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.
 


Table of Contents

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.
 
 
SUBJECT TO COMPLETION, DATED APRIL 20, 2011
 
(WESTERN LIBERTY BANCORP LOGO)
 
PROSPECTUS FOR
UP TO 1,264,848 SHARES OF COMMON STOCK
 
This prospectus relates to the resale of up to 1,264,848 shares of Western Liberty Bancorp’s (“WLBC,” the “Company,” “we,” “us,” or “our”) common stock, par value $0.0001 per share (“Common Stock”) by certain selling security holders.
 
  •  368,306 shares of Common Stock issued in a private placement concurrent with our initial public offering (the “Private Shares”).
 
  •  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.
 
  •  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.
 
  •  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.
 
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 FACTORSBEGINNING ON PAGE 3.
 
Our Common Stock is listed on the Nasdaq Global Market (“Nasdaq”) under the symbol “WLBC.” 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 on 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.
 
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.


 

 
TABLE OF CONTENTS
 
         
    Page
 
    1  
    3  
    16  
    18  
    24  
    24  
    26  
    29  
    37  
    47  
    59  
    61  
    89  
    91  
    122  
    135  
    138  
    142  
    145  
    145  
    145  
    F-1  
 EX-23.1
 EX-23.2
 EX-23.3


Table of Contents

 
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 145.
 
Western Liberty Bancorp
 
WLBC became a bank holding company on October 28, 2010 with consummation of the Acquisition. Although WLBC’s 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. WLBC’s 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 WLBC’s 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 dissenter’s 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 Service1st’s 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


1


Table of Contents

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 holder’s 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 WLBC’s 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.
 
  •  368,306 Private Shares.
 
  •  503,708 shares of Common Stock issued upon exercise of all of our outstanding Private Warrants in accordance with the Amended Warrant Agreement.
 
  •  150,000 shares of Common Stock issued by us to certain current and former members of our Board in connection with the Acquisition.
 
  •  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.
 
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.”


2


Table of Contents

 
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 property’s 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


3


Table of Contents

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 borrower’s 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 bank’s 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 bank’s 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


4


Table of Contents

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 bank’s 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 bank’s 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 FDIC’s Deposit Insurance Fund, the FDIC could impose additional assessments on the banking industry.
 
If there was a depletion of the Federal Deposit Insurance Corporation’s (“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.


5


Table of Contents

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 Service1st’s results and operations.
 
The Federal Government has intervened in an unprecedented manner to stimulate economic growth. Some of these activities have included the following:
 
  •  Target fed funds rates which have remained close to zero percent;
 
  •  Mortgage rates that have remained at historical lows in part due to the Federal Reserve Bank of New York’s $1.25 trillion mortgage-backed securities purchase program;
 
  •  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
 
  •  Housing demand that has been stimulated by homebuyer tax credits.
 
The expiration of rescission of any of those programs may have an adverse impact on Service1st’s 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


6


Table of Contents

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 Service1st’s systems may have a significant effect on Service1st’s 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.
 
Service1st’s 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 Service1st’s 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


Table of Contents

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 WLBC’s 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 bank’s 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 Service1st’s loan portfolio and increase the amount of its performing loans so that the combination of Service1st’s net interest income and non-interest income, after deduction of its provision for loan losses, exceeds Service1st’s non-interest expense. The source of the majority of Service1st’s loan losses can be traced primarily to real estate loans that were reliant on


8


Table of Contents

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. Service1st’s 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 Service1st’s 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 “Management’s 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 management’s estimate of losses inherent in Service1st’s 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 management’s projections regarding both future economic conditions and the ability of Service1st’s 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 Company’s business, financial condition, results of operations and cash flows. In addition, the FDIC periodically evaluates the adequacy of Service1st’s 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


Table of Contents

 
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 Service1st’s 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 Service1st’s 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 Service1st’s loan portfolio consists of loans secured by real estate. As of December 31, 2010, approximately 66.04% of Service1st’s loans were secured by real estate. We rely upon independent appraisers to estimate the value of the real estate which secures Service1st’s 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 Service1st’s part must be the result of organic growth in the bank’s 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


Table of Contents

 
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 bank’s 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 bank’s market or the bank’s 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 FDIC’s 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 FDIC’s 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


Table of Contents

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, Service1st’s Tier I leverage ratio was at 18.1%) and a total risk-based capital ratio at or above 12% (as of December 31, 2010, Service1st’s 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 Service1st’s 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 Service1st’s 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 FDIC’s 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 Service1st’s 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:
 
  •  changes in our perceived ability to increase our assets and deposits;
 
  •  changes in financial estimates by analysts;
 
  •  announcements by us or our competitors of significant contracts, productions, acquisitions or capital commitments;
 
  •  fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
 
  •  general economic conditions;
 
  •  changes in market valuations of similar companies;
 
  •  terrorist acts;
 
  •  changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
 
  •  future sales of our Common Stock;
 
  •  regulatory developments in the United States, foreign countries or both;
 
  •  litigation involving us, our subsidiaries or our general industry; and
 
  •  additions or departures of key personnel.


12


Table of Contents

 
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 Service1st’s 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


Table of Contents

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 FHLB’s 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


Table of Contents

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.
 
Service1st’s 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 area’s larger and more established businesses. Through our previous experience and relationships with a number of the region’s 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


Table of Contents

 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Certain statements made in this prospectus, including in the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Service1st Bank of Nevada”, “Management’s 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 management’s 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:
 
  •  revenues may be lower than expected;
 
  •  deposit attrition, operating costs and customer loss may be greater than expected;
 
  •  local, regional, national and international economic conditions and the impact they may have on us and our customers and our assessment of that impact;
 
  •  changes in interest rates, spreads on earning assets and interest-bearing liabilities, and interest rate sensitivity;
 
  •  prepayment speeds, loan originations and credit losses;
 
  •  sources of liquidity;
 
  •  our common shares outstanding and Common Stock price volatility;
 
  •  fair value of and number of stock-based compensation awards to be issued in future periods;
 
  •  legislation affecting the financial services industry as a whole;
 
  •  regulatory supervision and oversight, including required capital levels;
 
  •  increasing price and product/service competition by competitors, including new entrants;
 
  •  rapid technological developments and changes;
 
  •  ability to continue to introduce competitive new products and services on a timely, cost-effective basis;
 
  •  ability to contain costs and expenses;
 
  •  governmental and public policy changes;
 
  •  protection and validity of intellectual property rights;
 
  •  reliance on large customers;
 
  •  technological, implementation and cost/financial risks in large, multi-year contracts;


16


Table of Contents

 
  •  the outcome of any pending and future litigation and governmental proceedings;
 
  •  continued availability of financing; and
 
  •  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


Table of Contents

 
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.
 
 
                                 
    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  
 
Jennifer Albrecht
    10,000       10,000              
Banyan Tree Capital Limited(4)
    30,000       30,000              
Mira Cho
    2,500       2,500              
Laura Conover-Ferchak(5)
    15,000       15,000              
Robert Foresman(6)
    25,000       25,000              
Gabelli Group Capital Partners, Inc.(7)
    7,173       7,173              
Cari and David Grodner
    7,886       7,886              
Cari Grodner
    47       47              
Cari Lehman
    7,446       7,446              
Carl H. Hahn(6)
    25,000       25,000              
Jonathan Hamel
    5,000       5,000              
Samir Jain
    10,000       10,000              
Ingrid Kvam
    4,000       4,000              


18


Table of Contents

                                 
    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  
 
Scott LaPorta(8)
    61,327       61,327              
Philip Marineau(6)
    25,000       25,000              
Andrew Nelson(9)
    50,165       50,165              
Christa Short
    25,000       25,000              
Marc Soloway(6)
    50,023       50,023              
Evan Wax
    20,289       20,289              
Steven Westly(6)
    25,000       25,000              
David Witkin
    25,000       25,000              
Jason N. Ader(10)
    450,372       450,372              
Atlas Master Fund, Ltd.(11)
    20,012       20,012              
Tim Collins
    312       312              
Doha Partners I, LP(10)
    306,960       306,960              
FM Multi-Strategy Investment Fund LP(12)
    942       942              
HC Institutional Partners LP(10)
    652       652              
HC Overseas Partners Ltd.(10)
    18,215       18,215              
HC Turbo Fund Ltd.(10)
    4,596       4,596              
MZ Capital LLC(13)
    950       950              
PI Multi-Strategy Fund II LDC(14)
    10,117       10,117              
Pictet & Cie(15)
    326       326              
Unidentified Shareholders(16)
    500       500              
Michael Frankel(17)
    50,000       50,000              
Richard Coles(17)
    50,195       50,195              
Mark Schulhof(17)
    50,000       50,000              
Daniel B. Silvers(18)
    100,000       100,000              
Michael Tew(19)
    20,000       20,000              
Curtis Anderson(20)
    33,032       3,046       29,986       **  
Joseph Brown
    14,945       3,046       11,899       **  
Mark Brown(21)
    12,565       3,046       9,519       **  
John Dedolph(21)
    22,085       3,046       19,039       **  
Madison Graves
    50,643       3,046       47,597       **  
Steven Hill(22)
    38,744       3,046       35,698       **  
Carl Krepper(21)
    17,325       3,046       14,279       **  
Monte Miller(21)
    143,077       3,046       140,031       **  
Heather Murren
    50,643       3,046       47,597       **  
Patricia Ochal(23)
    13,802       3,141       10,661       **  
Stuart Olson
    8,329       3,141       5,188       **  
George Randall(21)
    14,945       3,046       11,899       **  
Blake Sartini(24)
    230,276       3,046       227,230       1.51 %
Terrence Wright(25)
    65,403       3,046       62,357       **  
Sophia Adeline Ader 2005 Trust(10)
    50       50              

19


Table of Contents

                                 
    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  
 
JMM Investment Partners, LP(26)
    263       263              
HF Investments, LP(26)
    200       200              
Ezra Sultan
    261       261              
Jack Richard Ader Trust(10)
    36       36              
Daniel M. Groff & Lesley K. Groff
    33       33              
Pamela Ader
    2,141       2,141              
Sasson 2006 GRAT(27)
    964       964              
Steven Starker
    217       217              
Julie Ader(10)
    94       94              
Sylvia and Robert Kirschner
    42       42              
MNF Partners, L.P.(26) 
    447       447              
Harold Reiff
    61       61              
Amber Williams as Trustee under Indenture of Michael Coles dated September 26, 1997(28)
    160       160              
Laura Conover-Ferchak & William Ferchak
    7       7              
Marc Soloway & Rene Soloway
    5       5              
Chelsea Capital Corporation(29)
    280       280              
Herb S. & Rachelle Soloway Family Trust dated April 9, 1996(30)
    36       36              
Robert & Andrea Fortunoff
    229       229              
Jeffrey DeGreick
    299       299              
BABS REIFF Retirement Plan(31)
    84       84              
Craig Colby
    336       336              
HSBC Private Bank (Suisse) SA(32)
    326       326              
HSBCSSL A/C HSBC France A/C LMH(33)
    2,908       2,908              
SSCSIL A/C HSBC Global Strategy Hedge Investments Limited(34)
    412       412              
SSCSIL A/C HSBC Wealth Accumulation Investments Limited(34)
    163       163              
SSCSIL A/C HSBC Republic US Advantedge Investments Limited(34)
    790       790              
PFPC Trust Company F/B/O — Blackrock Equity Long/Short LP(35)
    460       460              
PFPC Trust Company F/B/O — Blackrock Equity Long/Short Ltd(35)
    1,326       1,326              
PFPC Trust Company F/B/O — Blackrock Dynamic Opportunities Fund Ltd.(35) 
    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

20


Table of Contents

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.
 
(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) Prince Michael of Liechtenstein and Noelle Fueter-Stahel are the natural persons who have or share voting and dispositive powers over the securities owned by Banyan Tree Capital Limited.
 
(5) 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.
 
(6) Messrs. Hahn, Marineau, Westly, Foresman and Soloway are each former members of the Board.
 
(7) Mario J. Gabelli is the natural person who has or shares voting and dispositive powers over the securities owned by Gabelli Group Capital Partners, Inc.
 
(8) Mr. LaPorta is our former Chief Executive Officer and President and a former member of the Board.
 
(9) 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.
 
(10) 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. Ader’s 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.


21


Table of Contents

 
(11) Dmitry Balyasny is the natural person who has or shares voting and dispositive powers over the securities owned by Atlas Master Fund, Ltd.
 
(12) Seymour Zises and Andrea Tessler are the natural persons who have or share voting and dispositive powers over the securities owned by FM Multi-Strategy Investment Fund LP.
 
(13) Scott Zelnick and Patrick McBrien are the natural persons who have or share voting and dispositive powers over the securities owned by MZ Capital LLC.
 
(14) George J. Fox is the natural person who has or shares voting and dispositive powers over the securities owned by PI Multi-Strategy Fund II LDC.
 
(15) Philippe Bertherat, Rémy Best, Renaud de Planta, Jacques de Saussure, Bertrand Demole, Jean-Francois Demole, Marc Pictet and Nicolas Pictet are the natural persons who have or share voting and dispositive powers over the securities owned by Pictet & Cie.
 
(16) The Company was unable to identify the natural person or persons who have or share voting and dispositive powers over the securities owned by these shareholders. If the securities are to be registered in the future, the Company will identify the natural person or persons who have or share voting and dispositive powers over the securities in a post-effective amendment.
 
(17) 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.
 
(18) 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 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.
 
(19) 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.
 
(20) 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.
 
(21) 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.
 
(22) 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.
 
(23) 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.
 
(24) 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.


22


Table of Contents

 
(25) 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.
 
(26) Peter Marks is the natural person who has or shares voting and dispositive powers over the securities owned by JMM Investment Partners, LP, HF Investments, LP, and MNF Partners, L.P.
 
(27) Andrew Sasson is the natural person who has or shares voting and dispositive powers over the securities owned by Sasson 2006 GRAT.
 
(28) Michael Coles is the natural person who has or shares voting and dispositive powers over the securities owned by Amber Williams as Trustee under Indenture of Michael Coles dated September 26, 1997.
 
(29) Robert Fortunoff is the natural person who has or shares voting and dispositive powers over the securities owned by Chelsea Capital Corporation.
 
(30) Herb S. Soloway and Rachelle Soloway are the natural persons who have or share voting and dispositive powers over the securities owned by Herb S. & Rachelle Soloway Family Trust dated April 9, 1996.
 
(31) Babs Reiff and Hal Reiff are the natural persons who have or share voting and dispositive powers over the securities owned by BABS REIFF Retirement Plan.
 
(32) Elodie Jeanmonod and Gregory Scalet are the natural persons who have or share voting and dispositive powers over the securities owned by HSBC Private Bank (Suisse) SA.
 
(33) Bernard Galdin and Anthony Baillin are the natural persons who have or share voting and dispositive powers over the securities owned by HSBCSSL A/C HSBC France A/C LMH.
 
(34) Tim Gascoigne is the natural person who has or shares voting and dispositive powers over the securities owned by SSCSIL A/C HSBC Global Strategy Hedge Investments Limited, SSCSIL A/C HSBC Wealth Accumulation Investments Limited, and SSCSIL A/C HSBC Republic US Advantedge Investments Limited
 
(35) BlackRock Investment Management, LLC is the investment manager of PFPC Trust Company F/B/O — BlackRock Equity Long/Short LP, PFPC Trust Company F/B/O — BlackRock Equity Long/Short Ltd., and PFPC Trust Company F/B/O — BlackRock Dynamic Opportunities Fund Ltd. BlackRock Investment Management, LLC is a wholly-owned subsidiary of Black Rock, Inc., a publicly-listed company. No natural person has voting or dispositive power over the securities controlled by BlackRock, Inc.


23


Table of Contents

 
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 on 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.


24


Table of Contents

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.
 


25


Table of Contents

 
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 Service1st’s 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


26


Table of Contents

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 holder’s 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 WLBC’s 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. Martin’s and Rosenbaum’s 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 holder’s 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, WLBC’s 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


27


Table of Contents

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 Service1st’s 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 Service1st’s 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.


28


Table of Contents

 
CORPORATE GOVERNANCE
 
Board of Directors
 
             
Name
  Age  
Position
 
Michael B. Frankel
    74     Chairman of the Board
Terrence L. Wright
    61     Vice Chairman of the Board
Jason N. Ader
    43     Director
Richard A. C. Coles
    43     Director
Robert G. Goldstein
    55     Director
Curtis W. Anderson, CPA
    61     Director
Steven D. Hill
    51     Director
William E. Martin
    69     Chief Executive Officer, Director
 
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 Service1st’s 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 President’s 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


29


Table of Contents

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


30


Table of Contents

Affairs Division of the Associated General Contractors, the Government Affairs Division of the Associated Builders and Contractors, the Governor’s 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 agency’s national problem bank group, was a Deputy Comptroller in charge of the OCC’s 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 company’s board of directors, would interfere with the director’s 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.


31


Table of Contents

 
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 Committee’s duties, which are specified in our Audit Committee Charter, include, but are not limited to:
 
  •  serving as an independent and objective party to monitor our financial reporting process, audits of our financial statements and internal control system;
 
  •  reviewing and appraising the audit efforts and independence of our independent registered public accounting firm and internal finance department;
 
  •  reviewing and discussing with our internal auditors and the independent registered public accounting firm their audit scope and plan;
 
  •  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;
 
  •  obtaining and reviewing written reports from the independent registered public accounting firm regarding the firm’s internal quality control procedures;
 
  •  establishing procedures for the receipt, retention and treatment of complaints on accounting, internal accounting controls or auditing matters;
 
  •  establishing policies for hiring employees or former employees of our independent registered public accounting firm;
 
  •  reviewing and approving all related party transactions as required by Nasdaq;
 
  •  reviewing with our independent registered public accounting firm our accounting practices and policies; and
 
  •  providing an open avenue of communications among our independent registered public accounting firm, financial and senior management, our internal finance department, and the Board.
 
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 company’s 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 individual’s 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 SEC’s 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.


32


Table of Contents

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 Committee’s duties, which are specified in our Compensation Committee Charter, include, but are not limited to:
 
  •  overseeing succession planning for senior management;
 
  •  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;
 
  •  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;
 
  •  reviewing the goals and objectives relating to compensation of our Chief Executive Officer and evaluating the Chief Executive’s Officer’s performance in light of those goals and objectives, and making recommendations for improving performance;
 
  •  reviewing and approving compensation for all other officers and evaluating the responsibilities and performance of those officers and making recommendations for improving performance
 
  •  administering officer compensation programs and equity-based plans, and making recommendations to our Board with respect to incentive compensation plans and equity-based plans;
 
  •  evaluating and making recommendations for compensation of members of the Board in their capacities as such;
 
  •  approving, monitoring, amending and terminating ERISA-governed employee benefit plans; and
 
  •  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.
 
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


33


Table of Contents

Nominating Committee’s duties, which are specified in our Governance and Nominating Charter, include, but are not limited to:
 
  •  monitoring the independence (under Nasdaq requirements) of the Board and the overall Board composition;
 
  •  reviewing the performance of the Board as a whole
 
  •  identifying and recommending to our Board qualified candidates for Board membership;
 
  •  considering and recommending to the Board nominees to stand for election at the annual meeting, including recommendations from our stockholders;
 
  •  recommending to the Board nominees to fill Board vacancies as they arise;
 
  •  selecting, evaluating and recommending to our Board membership on Board committees;
 
  •  determining Board committee membership standards and overseeing the annual committee self-evaluations;
 
  •  developing and overseeing governance principles of the Board and a code of conduct applicable to members of the Board; and
 
  •  evaluating and approving recommendations of the Compensation Committee for compensation of members of the Board in their capacities as such.
 
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 person’s 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


34


Table of Contents

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.


35


Table of Contents

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:
 
  •  forwarded to the addressees or distributed at the next scheduled Board meeting;
 
  •  if they relate to financial or accounting matters, forwarded to the Audit Committee or distributed at the next scheduled Audit Committee meeting;
 
  •  if they relate to executive officer compensation matters, forwarded to the Compensation Committee or discussed at the next scheduled Compensation Committee meeting;
 
  •  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
 
  •  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.
 


36


Table of Contents

 
EXECUTIVE OFFICER AND DIRECTOR COMPENSATION
 
             
Name
 
Age
 
Position
 
Michael B. Frankel
    74     Chairman of the Board
Terrence L. Wright
    61     Vice Chairman of the Board
Jason N. Ader
    43     Director
Richard A. C. Coles
    43     Director
Robert G. Goldstein
    55     Director
Curtis W. Anderson, CPA
    61     Director
Steven D. Hill
    51     Director
William E. Martin
    69     Director and Chief Executive Officer
George A. Rosenbaum Jr. 
    54     Chief Financial Officer
Patricia A. Ochal
    46     Vice President
 
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 Service1st’s 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 Service1st’s 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.


37


Table of Contents

Executive Officers and Directors of Service1st
 
The board of directors and executive officers of our wholly-owned subsidiary Service1st are as follows:
 
             
Name
 
Age
 
Position
 
Jason N. Ader
    43     Director
Terrence L. Wright
    61     Director
Monte L. Miller
    64     Director
Curtis W. Anderson, CPA
    61     Director
Steven D. Hill
    51     Chairman of the Board
Frances E. Moore
    63     Director
Jenna M. Morton
    44     Director
William E. Martin
    69     Vice Chairman and Chief Executive Officer
George A. Rosenbaum, Jr. 
    54     Chief Operating Officer
Richard Deglman
    67     Chief Credit Officer
Patricia A. Ochal
    46     Chief Financial Officer
 
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 (KeyState’s clients), which include special purpose entities and other subsidiaries of public companies created to hold and manage a company’s 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 Governor’s 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 Women’s 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


38


Table of Contents

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 world’s 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 Women’s Philanthropy and has served on the boards of Summerlin Children’s 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. Mary’s 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.


39


Table of Contents

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 officer’s 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.


40


Table of Contents

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. Martin’s and Rosenbaum’s 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 holder’s 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, WLBC’s 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


41


Table of Contents

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 WLBC’s 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 WLBC’s 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. Martin’s 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 year’s 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. Martin’s 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. Rosenbaum’s currently serves as our Chief Financial Officer and as Executive Vice President of Service1st.
 
Pursuant to the terms of his employment agreement, Mr. Rosenbaum’s 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.


42


Table of Contents

Pursuant to the terms of his employment agreement, Mr. Deglman’s 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 year’s 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. Deglman’s 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”.
 
                                                                         
                                  Non-Equity
    Nonqualified
             
Name and
                    Stock
    Option
    Incentive
    Deferred
    All
       
Principal
                    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
                                                                       
Executive
                                                                       
Officer
                                                                       
William E. Martin;
    2010     $ 237,500(4 )         $ 1,000,000(5 )                           $ 1,237,500  
Chief Executive Officer
                                                                       
George A. Rosenbaum Jr.;
    2010     $ 200,000           $ 250,000(6 )                           $ 450,000  
Chief Financial Officer
                                                                       
Richard Deglman;
    2010     $ 219,792(7 )                                       $ 219,792  
Chief Credit Officer
of Service1st
                                                                       
Daniel B. Silvers;
    2010           $ 450,000(8 )   $ 644,000(9 )                           $ 1,094,000  
Former
                                                                       
President
                                                                       
Andrew Nelson;
    2010           $ 50,000(10 )   $ 161,000(11 )                           $ 211,000  
Former Chief
                                                                       
Financial
                                                                       
Officer
                                                                       
 
 
(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


43


Table of Contents

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. Martin’s 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 holder’s 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.


44


Table of Contents

 
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 WLB’s Common Stock on December 31, 2010 of $5.35.
 
                                                                         
    Option Awards     Stock Awards  
                                                    Equity
 
                                              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 WLB’s 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. Martin’s 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 holder’s 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. Martin’s options will vest and become exercisable on December 31, 2012 if Service1st’s 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. Martin’s options will be forfeited as of that date.


45


Table of Contents

 
(4) Reflects the expiration date if Mr. Martin’s options vest as set forth in footnote 3.
 
(5) Mr. Deglman’s 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 WLBC’s 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 WLBC’s former Chief Executive Officer, William E. Martin, a director and WLBC’s Chief Executive Officer, and Andrew P. Nelson, a former director and WLBC’s 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 WLBC’s 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.


46


Table of Contents

 
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 WLBC’s 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 WLBC’s 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 dissenter’s rights with respect to 88,054 shares) as Base Acquisition Consideration. In addition, the holders of Service1st’s 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


47


Table of Contents

no change in the directors or executive management of Service1st unless we first receive the FDIC’s 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 Service1st’s part must be the result of organic growth in the bank’s 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 WLBC’s 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


48


Table of Contents

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 customer’s 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 Company’s 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 Service1st’s primary market areas could have an adverse impact on collectibility and an adverse effect on profitability.
 
Service1st’s 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


49


Table of Contents

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 bank’s 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. Service1st’s 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 borrower’s cash flows or the sale proceeds of the collateral. Service1st’s principal lending categories are:
 
Commercial real estate loans — The majority of Service1st’s 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. Service1st’s 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 Service1st’s 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 Service1st’s loan portfolio.


50


Table of Contents

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 stock’s 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.


51


Table of Contents

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 Service1st’s 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 loan’s 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 collateral’s “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.
 
Service1st’s loan approval procedures are executed through a tiered loan limit authorization process. Each loan officer’s individual lending limit and those of the Senior Loan Committee are set by Service1st’s board of directors. All debt due from the borrower (including unfunded commitments and guaranties) and the borrower’s related entities is aggregated when determining whether a proposed new loan is within the authority


52


Table of Contents

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 leader’s authority are submitted for approval by Service1st’s 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 Service1st’s Chief Executive Officer and Chief Credit Officer, and the bank’s 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. Service1st’s board of directors also has a loan and investment committee that is responsible for establishing and providing supervision and oversight over Service1st’s 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 board’s 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 Service1st’s executive officers, directors, and greater than 10% stockholders and their respective affiliates was approximately $2.4 million, which represented 2.2% of the bank’s total gross loans.
 
Allowance for Loan Losses
 
Under applicable accounting guidance, assets generally are recorded by a company on its balance sheet at the company’s 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 Service1st’s evaluation of the probable losses in its loan portfolio. The allowance for loan losses is maintained at a level that represents Service1st management’s 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 Service1st’s management and adjusted monthly. Factors that influence management’s 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,


53


Table of Contents

 
  •  collateral values,
 
  •  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 Service1st’s 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 bank’s 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. Service1st’s 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 bank’s loan loss allowance and frequently use their authority to insist upon an increase in a bank’s 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 management’s judgment, is deemed to be uncollectible. Additions to the allowance for loan losses may be made when Service1st’s management has identified significant adverse conditions or circumstances related to a specific loan.
 
As of December 31, 2010, Service1st’s 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


54


Table of Contents

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. Service1st’s 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.


55


Table of Contents

 
Investment Activities
 
Service1st’s 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 Service1st’s interest rate risk management policies. Service1st’s 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.
 
Service1st’s 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 bank’s 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.
 
Service1st’s 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


56


Table of Contents

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. Service1st’s 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. Service1st’s deposit base is generated from the Nevada area. Competition for these deposits in Service1st’s 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 Service1st’s 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, cashier’s 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.


57


Table of Contents

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.


58


Table of Contents

 
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 WLBC’s audited financial information and related notes, “Management’s 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.


59


Table of Contents

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 stockholder’s 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.


60


Table of Contents

 
MANAGEMENT’S 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. WLBC’s 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 WLBC’s 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 WLBC’s 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


61


Table of Contents

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
 
WLBC’s 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, WLBC’s 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 WLBC’s 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.


62


Table of Contents

As previously discussed, the Acquisition was accounted for as a business combination which resulted in application of fair value accounting to the subsidiary’s 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 WLBC’s 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 WLBC’s books reduce the allowance. Subsequent recoveries of charged off loans, if any, increase the allowance.
 
The allowance is an amount that WLBC’s 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 borrower’s ability to pay. Due to the credit concentration of WLBC’s 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 WLBC’s 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 loan’s effective interest rate or, as a practical expedient, at the loan’s 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.


63


Table of Contents

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 WLBC’s 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.
 
WLBC’s 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 WLBC’s 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, WLBC’s 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 WLBC’s wholly-owned subsidiary. WLBC previously received the requisite approvals of certain bank regulatory authorities to complete the Acquisition to become a bank holding company.


64


Table of Contents

The former stockholders of Service1st received approximately 2,282,668 shares of Common Stock (net of dissenter’s rights exercised with respect to 88,054 shares) as Base Acquisition Consideration. In addition, the holders of Service1st’s 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.


65


Table of Contents

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 customer’s 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 WLBC’s 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.
 
WLBC’s 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 WLBC’s management judges necessary to maintain WLBC’s 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 WLBC’s 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. WLBC’s 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 WLBC’s variable-rate and fixed-rate loans, securities, deposits and borrowings.
 
Variable rate loans constitute approximately 55.74% of WLBC’s portfolio for the year end December 31, 2010, and approximately 51.21% of WLBC’s 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 WLBC’s prime-rate based loans.
 
Movements in the national prime rate that increase the applicable loan rates above applicable floors have a direct impact on WLBC’s loan yield and interest income. The national prime rate remained at 3.25%


66


Table of Contents

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 WLBC’s 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 “Management’s 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 WLBC’s 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 %


67


Table of Contents

                                                                         
    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 2010’s 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 WLBC’s 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 stockholder’s equity balance as the calculation combines four quarters of WLBC’s balances to compute an average, but is skewed when only the last two month’s of Service1st’s 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 Stockholder’s Equity for 2010.

68


Table of Contents

 
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  
                         
 


69


Table of Contents

                         
    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 investor’s funds when Global Consumer Acquisition Corporation eliminated the special purpose acquisition features from the company’s governing documents in October 2009 and changed the company’s name to Western Liberty Bancorp. The increase in WLBC’s 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, WLBC’s 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

70


Table of Contents

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. WLBC’s 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 WLBC’s 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 underwriter’s 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 WLBC’s 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 WLBC’s 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 WLBC’s 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 WLBC’s asset quality and overall performance during the coming year.


71


Table of Contents

Comparison of 2010 with 2009
 
WLBC’s 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 WLBC’s 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 Bank’s 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
 
WLBC’s 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.


72


Table of Contents

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 WLBC’s acquisition of Service1st on October 28, 2010. Thus, non-interest income reflects income generated on Service1st’s 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 WLBC’s 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 WLBC’s issuance of stock in 2010.


73


Table of Contents

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 WLBC’s 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 issuer’s 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.
 
WLBC’s 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


74


Table of Contents

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 WLBC’s 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 WLBC’s 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 %
                                                                                 


75


Table of Contents

Loans
 
For the year ended December 31, 2010, substantially all of WLBC’s 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 WLBC’s 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.


76


Table of Contents

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
 
WLBC’s 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. WLBC’s 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 borrower’s cash flows or the sale proceeds of the collateral. Deterioration in the performance of the economy and real estate values in WLBC’s 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. WLBC’s 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 borrower’s 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;


77


Table of Contents

(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 borrower’s financial condition; and
 
(iv) other real estate owned, or OREO. If a bank takes title to the borrower’s 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.


78


Table of Contents

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 WLBC’s 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 WLBC’s 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 %
                                 
 
WLBC’s 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 WLBC’s financial statements and are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s 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 WLBC’s 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.


79


Table of Contents

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 borrower’s 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 borrower’s 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 borrower’s 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 WLBC’s 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.


80


Table of Contents

Allowance for Loan Losses
 
The following table presents the activity in WLBC’s 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 WLBC’s 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. Service1st’s 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 WLBC’s 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,


81


Table of Contents

2010, reflecting a very minimal deterioration in the loan portfolio after it was marked to market due to the acquisition of Service1st by WLBC.
 
WLBC’s 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 WLBC’s 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 WLBC’s allowances for loan losses, and may require additions to WLBC’s 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 loan’s effective interest rate or, as a practical expedient, at the loan’s 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 WLBC’s books, if deemed necessary.
 
WLBC’s 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.
 
WLBC’s 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 WLBC’s 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.


82


Table of Contents

The following table presents the allocation of WLBC’s 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 WLBC’s 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
 
WLBC’s 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 WLBC’s 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.


83


Table of Contents

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. WLBC’s 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. WLBC’s capital amounts and classifications are also subject to qualitative judgments by the FDIC about components, risk weightings and other factors. In accordance with Service1st’s 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, Service1st’s Tier I leverage ratio was at 18.1%) and a total risk- based capital ratio at or above 12% (as of December 31, 2010, Service1st’s total risk-based capital ratio was at 31.0%); (iii) continue to maintain an


84


Table of Contents

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 Service1st’s 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 Service1st’s 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 FDIC’s 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 Service1st’s 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, WLBC’s 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 Service1st’s first seven years of operations. WLBC’s 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 WLBC’s 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 WLBC’s 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.
 
WLBC’s 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.


85


Table of Contents

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.
 
WLBC’s 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 Bank’s Asset/Liability Management Committee oversees Service1st’s 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 WLBC’s 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 WLBC’s undisbursed loan funds, which comprises the majority of WLBC’s 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 WLBC’s business.
 
Contractual Obligations
 
The following table is a summary of WLBC’s 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, WLBC’s primary component of market risk is interest rate volatility. Net interest income is the primary component of WLBC’s net income, and fluctuations in interest rates will ultimately affect the level of both income and expense recorded on a large portion of WLBC’s assets and liabilities. In addition to directly impacting net interest income, changes


86


Table of Contents

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 WLBC’s 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. WLBC’s primary source of funds has been retail deposits, consisting primarily of interest-bearing checking accounts and time deposits. WLBC’s 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 WLBC’s loans are indexed to the national prime rate. Currently the prime rate is under the applicable floor rate for substantially all of WLBC’s prime-rate based loans. WLBC’s 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 WLBC’s interest expenses without an increase in WLBC’s 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 WLBC’s interest rate risk management. The Chief Financial Officer is responsible for day-to-day management of WLBC’s 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 WLBC’s economic value of equity will also be considered. WLBC’s 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 WLBC’s 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.


87


Table of Contents

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 %


88


Table of Contents

 
SELECTED HISTORICAL FINANCIAL INFORMATION — SERVICE1ST BANK OF NEVADA
 
Service1st’s 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 Service1st’s audited financial statements, which are included elsewhere in this Prospectus.
 
This information should be read together with Service1st’s audited financial statements and related notes, “Management’s 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 Service1st’s audited financial statements and notes to the financial statements included elsewhere in this prospectus.


89


Table of Contents

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.


90


Table of Contents

 
MANAGEMENT’S 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 Service1st’s 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 Service1st’s 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 Service1st’s 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,


91


Table of Contents

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 Service1st’s 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. Service1st’s 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 Service1st’s 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 stockholder’s equity of $16.4 million at


92


Table of Contents

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
 
Service1st’s 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, Service1st’s 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 Service1st’s 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 Service1st’s 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 Service1st’s books reduce the allowance. Subsequent recoveries of charged off loans, if any, increase the allowance.
 
The allowance is an amount that Service1st’s 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 borrower’s ability to pay. Due to the credit concentration of Service1st’s 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 Service1st’s 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 loan’s effective interest rate or, as a practical expedient, at the loan’s 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 Service1st’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar considerations. Securities available for sale are reported at fair value with


93


Table of Contents

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.
 
Service1st’s 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
 
Service1st’s 2007 Stock Option Plan is described more fully in Note 9 to Service1st’s 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 Service1st’s 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, Service1st’s 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
 
Service1st’s 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 Service1st’s management judges necessary to maintain Service1st’s 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,


94


Table of Contents

is the largest component of Service1st’s 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. Service1st’s 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 Service1st’s variable-rate and fixed-rate loans, securities, deposits and borrowings.
 
Variable rate loans constitute 58.21% of Service1st’s portfolio for the period end October 28, 2010, and approximately 51.21% of Service1st’s 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 Service1st’s prime-rate based loans.
 
Movements in the national prime rate that increase the applicable loan rates above applicable floors have a direct impact on Service1st’s 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 Service1st’s 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 “Management’s 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.


95


Table of Contents

The following table sets forth Service1st’s 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.


96


Table of Contents

 
(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 )
                         
 


97


Table of Contents

                         
    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 bank’s 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 Service1st’s 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.

98


Table of Contents

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, Service1st’s 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 Service1st’s 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.


99


Table of Contents

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, Service1st’s 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 Service1st’s 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 Service1st’s 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 Service1st’s 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 Service1st’s asset quality and overall performance during the coming year.
 
Comparison of 2010 with 2009
 
Service1st’s 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 Service1st’s 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


100


Table of Contents

$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
 
Service1st’s 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 Service1st’s 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, Service1st’s 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 Service1st’s 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 Service1st’s management to adhere to fee income policies, including limiting waivers of such fees. This effort began in mid-2008 and carried throughout 2009.


101


Table of Contents

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 officer’s 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.


102


Table of Contents

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 Service1st’s 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 issuer’s 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.
 
Service1st’s 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.


103


Table of Contents

The tables below summarize Service1st’s 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  
                                 


104


Table of Contents

The table below summarizes the maturity dates and investment yields on Service1st’s 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 Service1st’s loan customers were located in Nevada.


105


Table of Contents

The following table summarizes the composition of Service1st’s 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.


106


Table of Contents

The table below reflects the maturity distribution for Service1st’s 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
 
Service1st’s 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. Service1st’s 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 borrower’s cash flows or the sale proceeds of the collateral. Deterioration in the performance of the economy and real estate values in Service1st’s 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. Service1st’s 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 borrower’s financial condition and collection


107


Table of Contents

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 borrower’s financial condition; and
 
(iv) other real estate owned, or OREO. If a bank takes title to the borrower’s 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.


108


Table of Contents

 
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 Service1st’s borrowers have exhausted their liquidity and stopped making payments, thereby requiring Service1st to place the loans on nonaccrual. As a result, Service1st’s 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


109


Table of Contents

‘‘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 %
                                                                 
 
Service1st’s 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.
 
Service1st’s 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 Service1st’s 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 loan’s effective interest rate or, as a practical expedient, at the loan’s 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 Service1st’s 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


110


Table of Contents

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 borrower’s 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 borrower’s 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 borrower’s 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.


111


Table of Contents

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.


112


Table of Contents

Allowance for Loan Losses
 
The following table presents the activity in Service1st’s 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 Service1st’s 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. Service1st’s 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.
 
Service1st’s 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


113


Table of Contents

factors include the economic condition of Service1st’s 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 Service1st’s allowances for loan losses, and may require additions to Service1st’s 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 loan’s effective interest rate or, as a practical expedient, at the loan’s 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 Service1st’s books if deemed necessary.
 
Service1st’s 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.
 
Service1st’s 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 Service1st’s 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.


114


Table of Contents

The following table presents the allocation of Service1st’s 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 Service1st’s 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. Service1st’s 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.
 
Service1st’s 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. Service1st’s 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.
 
Service1st’s 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. Service1st’s 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.
 
Service1st’s 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. Service1st’s 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


115


Table of Contents

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
 
Service1st’s 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 Service1st’s 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 Service1st’s 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 Service1st’s 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.


116


Table of Contents

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. Service1st’s 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. Service1st’s capital amounts and classifications are also subject to qualitative judgments by the FDIC about components, risk weightings and other factors. In accordance with Service1st’s 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, Service1st’s Tier I leverage ratio was at 8.70%) and a total risk- based capital ratio at or above 12% (as of October 28, 2010, Service1st’s 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 Service1st’s 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 Service1st’s 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 FDIC’s 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 Service1st’s 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 Service1st’s first three years of operations, Service1st’s 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


117


Table of Contents

to maintain a Tier 1 capital leverage ratio of not less than 8.5% during its first seven years of operations. Service1st’s 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 Service1st’s 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 Service1st’s 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.
 
Service1st’s 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.
 
Service1st’s 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’s Asset/Liability Management Committee oversees Service1st’s 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 Service1st’s 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,


118


Table of Contents

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 Service1st’s undisbursed loan funds, which comprises the majority of Service1st’s 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 Service1st’s business.
 
Contractual Obligations
 
The following table is a summary of Service1st’s 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, Service1st’s primary component of market risk is interest rate volatility. Net interest income is the primary component of Service1st’s net income, and fluctuations in interest rates will ultimately affect the level of both income and expense recorded on a large portion of Service1st’s 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 Service1st’s 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


119


Table of Contents

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. Service1st’s primary source of funds has been retail deposits, consisting primarily of interest-bearing checking accounts and time deposits. Service1st’s management believes retail deposits, unlike brokered deposits, reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds. Service1st’s 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 Service1st’s loans are indexed to the national prime rate. Currently the prime rate is under the applicable floor rate for substantially all of Service1st’s prime-rate based loans. Service1st’s 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 Service1st’s interest expenses without an increase in Service1st’s 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 Service1st’s interest rate risk management. The Chief Financial Officer is responsible for day-to-day management of Service1st’s 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 Service1st’s economic value of equity will also be considered. Service1st’s 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 Service1st’s 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.


120


Table of Contents

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
 
                 
        Percentage
    Adjusted Net
  Change
Interest Rate Scenario
  Interest Income   from Base
    (Dollars in thousands)
 
Up 300 basis points
  $ 7,699       22.13 %
Up 200 basis points
    7,244       14.91 %
Up 100 basis points
    6,784       7.61 %
BASE
    6,304       0.00 %
Down 100 basis points
    6,371       1.06 %
Down 200 basis points
    6,551       3.92 %


121


Table of Contents

 
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 Reserve’s 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 bank’s financial condition and prospects.
 
A bank holding company must obtain Federal Reserve approval to:
 
  •  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),
 
  •  acquire all or substantially all of the assets of another bank, or
 
  •  merge or consolidate with another bank holding company.
 
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


122


Table of Contents

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 Reserve’s 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.


123


Table of Contents

If, as a result of examination the FDIC determines that a bank’s financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the bank’s 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 bank’s 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 company’s 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 bank’s 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 Council’s 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 institution’s 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, Service1st’s 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 organization’s 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.


124


Table of Contents

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 Service1st’s 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 institution’s 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 bank’s 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


125


Table of Contents

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 fund’s 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 company’s ability to pay dividends is subject to Federal Reserve supervisory authority, taking into account the bank holding company’s 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 company’s 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 bank’s stockholders’ equity below the bank’s 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 corporation’s 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 corporation’s articles of incorporation override this latter limitation, which Service1st’s articles do not). Relying on 12 U.S.C. 1818(b), the FDIC may restrict a bank’s ability to pay a dividend if the FDIC has reasonable cause to believe that the dividend would constitute an unsafe and unsound practice. A bank’s ability to pay dividends may be affected also by the FDIC’s capital maintenance requirements and prompt corrective action rules.


126


Table of Contents

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:
 
  •  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 institution’s capital and surplus, limiting the aggregate of covered transactions with all affiliates to 20% of capital and surplus,
 
  •  impose strict collateral requirements on loans or extensions of credit by a bank to an affiliate,
 
  •  impose restrictions on investments by a subsidiary bank in the stock or securities of its holding company,
 
  •  impose restrictions on the use of a holding company’s stock as collateral for loans by the subsidiary bank, and
 
  •  require that affiliate transactions be on terms substantially the same as those provided to a non-affiliate.
 
Loans to Insiders
 
Service1st’s 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 bank’s 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 bank’s 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 children’s 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 bank’s outstanding loans to one person generally may not exceed 25% of the bank’s 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 bank’s 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


127


Table of Contents

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:
 
  •  total reported loans for construction, land development, and other land represent 100% or more of the institution’s total capital, or
 
  •  total commercial real estate loans represent 300% or more of the institution’s total capital and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more during the prior 36 months.
 
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 bank’s approved business plan without first obtaining the FDIC’s 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 Service1st’s part must be the result of organic growth in the bank’s 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


128


Table of Contents

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 bank’s 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 institution’s discretion to develop the types of products and services management believes are best suited to the bank’s 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 institution’s 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.


129


Table of Contents

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 :
 
  •  making unaffordable loans based on a borrower’s assets rather than the consumer’s ability to repay an obligation,
 
  •  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
 
  •  engaging in fraud or deception to conceal the true nature of the loan obligation from an unsuspecting or unsophisticated consumer.
 
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 borrower’s primary residence. The disclosures and protections are applicable to “high cost” transactions with any of the following features -
 
  •  interest rates for first lien mortgage loans more than eight percentage points above the yield on U.S. Treasury securities having a comparable maturity,
 
  •  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
 
  •  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.
 
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


130


Table of Contents

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 consumer’s 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:
 
  •  Prohibit creditors from extending credit without regard to a consumer’s ability to repay from sources other than the collateral itself,
 
  •  Require creditors to verify income and assets relied upon to determine repayment ability,
 
  •  Prohibit prepayment penalties except under certain conditions, and
 
  •  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.
 
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 company’s 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


131


Table of Contents

laundering. Federal bank regulators are required to evaluate the effectiveness of a financial institution’s efforts to combat money laundering when evaluating an application submitted by the financial institution.
 
The Treasury’s 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:
 
  •  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,
 
  •  these arrangements should be compatible with effective controls and risk management, and
 
  •  these arrangements should be supported by strong corporate governance, including active and effective oversight by the board of directors.
 
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 company’s annual meeting proxy statement, that a company’s 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 company’s annual meeting proxy statement. Section 956 also provides for adoption of incentive compensation guidelines jointly by the


132


Table of Contents

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 FDIC’s 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 country’s 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:
 
  •  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.
 
  •  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,
 
  •  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


133


Table of Contents

  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
 
  •  under section 334 the FDIC’s 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.
 
  •  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 institution’s so-called assessment base. Until the Dodd-Frank Act became law, the assessment base consisted of an institution’s 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:
 
  •  the Office of the Comptroller of the Currency’s 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,
 
  •  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
 
  •  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.
 
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.


134


Table of Contents

 
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:
 
  •  each person known by us to be the beneficial owner of more than 5% of the shares of Common Stock;
 
  •  each of our current executive officers and directors;
 
  •  all of our executive officers and directors as a group.
 
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 individual’s beneficial ownership, such shares generally are not deemed to be outstanding for the purpose of computing the beneficial ownership of any other person.
 
                 
    Amount and
   
    Nature of
   
    Beneficial
  Percent of
Name of Beneficial Owner of Common Stock
  Ownership(1)   Class(2)
 
Trafelet Capital Management, L.P.(2)
    906,545       6.01 %
Weiss Multi-Strategy Advisers LLC(3)
    1,222,278       8.10 %
Fidelity Management and Research Company(4)
    3,750,000       24.85 %
Wells Fargo, et al.(5)
    1,213,928       8.05 %
Mendon Capital Advisors Corp.(6)
    1,881,854       12.47 %
KBW Asset Management, Inc.(7)
    761,866       5.05 %
Jason N. Ader(8)
    400,372       2.65 %
Richard A.C. Coles(9)
    50,195       *  
Michael B. Frankel(10)
    50,000       *  
George A. Rosenbaum, Jr.(11)
    38,819       *  
Terrence L. Wright(12)
    69,161       *  
Curtis W. Anderson(13)
    36,790       *  
Robert G. Goldstein
           
Steven D. Hill(14)
    41,742       *  
William E. Martin(15)
    174,365       1.16 %
Patricia A. Ochal(16)
    31,555       *  
Richard Deglman(17)
    14,281       *  
Daniel B. Silvers(18)
           
Andrew P. Nelson(19)
    25,165       *  
Blake L. Sartini(20)
    233,274       1.55 %
Mark Schulhof(21)
    50,000       *  
All current and former directors and officers as a group (15 individuals)
    1,215,721       8.03 %
All current directors and officers as a group (11 individuals)
    907,282       5.99 %
 
 
* 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.


135


Table of Contents

 
(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 Issuer’s 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. Frankel’s 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. Rosenbaum’s continuous employment through each vesting date.
 
(12) Terrence L. Wright’s 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. Wright’s beneficial ownership does not include options exercisable into 572 shares of Common Stock that will vest on August 11, 2011.
 
(13) Curtis W. Anderson’s 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. Anderson’s beneficial ownership does not include options exercisable into 572 shares of Common Stock that will vest on August 11, 2011.


136


Table of Contents

(14) Steven D. Hill’s 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. Hill’s beneficial ownership does not include options exercisable into 475 shares of Common Stock that will vest on August 11, 2011.
 
(15) William E. Martin’s 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. Martin’s continuous employment through each vesting date. Mr. Martin’s beneficial ownership does not include options exercisable into 23,798 shares of Common Stock that will vest on December 31, 2012 if Service1st’s total deposits are equal to or greater than $750 million as of that date.
 
(16) Patricia A. Ochal’s 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. Ochal’s 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 Deglman’s beneficial ownership consists of vested options immediately exercisable into 14,281 shares of Common Stock. Mr. Deglman’s 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. Nelson’s beneficial ownership includes 25,165 shares of Common Stock. Mr. Nelson’s 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.
 
(20) Blake L. Sartini is a former member of the Board. Mr. Sartini’s 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. Sartini’s beneficial ownership does not include options exercisable into 475 shares of Common Stock that will vest on August 11, 2011.
 
(21) Mark Schulhof is a former member of the Board. Mr. Schulhof’s beneficial ownership consists of 50,000 shares of Common Stock.


137


Table of Contents

 
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


138


Table of Contents

of the remainder of such holder’s 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 WLBC’s 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. Service1st’s $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 Service1st’s 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.


139


Table of Contents

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 WLBC’s 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 WLBC’s 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. Rosenbaum’s currently serves as our Chief Financial Officer and as Executive Vice President of Service1st.
 
Pursuant to the terms of his employment agreement, Mr. Rosenbaum’s 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. Martin’s 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 year’s salary in the event there is a change in control at


140


Table of Contents

Service1st and Mr. Martin remains the Chief Executive Officer of such through the closing of the change in control. Mr. Martin’s 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. Martin’s and Rosenbaum’s 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 holder’s 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, WLBC’s 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.
 


141


Table of Contents

 
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.
 
                                                 
    Units   Common Stock   Warrants
Quarter Ended
  High   Low   High   Low   High   Low
 
2007
                                               
Fourth Quarter (from November 27, 2007)
  $ 10.10     $ 9.75     $ 9.05     $ 9.05     $ 0.90     $ 0.90  
2008
                                               
First Quarter
    10.00       9.66       9.20       9.00       0.92       0.71  
Second Quarter
    10.53       9.67       9.30       9.03       1.04       0.57  
Third Quarter
    10.00       9.30       9.49       9.22       0.90       0.25  
Fourth Quarter
    9.24       8.49       9.18       8.40       0.30       0.05  
2009
                                               
First Quarter
    9.55       9.15       9.48       9.14       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  


142


Table of Contents

Holders of Common Equity
 
On April 20, 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 20, 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 holder’s 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 WLBC’s 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


143


Table of Contents

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. Martin’s and Rosenbaum’s 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 holder’s 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, WLBC’s 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.


144


Table of Contents

 
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


145


Table of Contents

 
INDEX TO FINANCIAL STATEMENTS
 
         
Western Liberty Bancorp
       
    F-2  
    F-4  
    F-5  
    F-6  
    F-7  
    F-8  
Service 1st Bank of Nevada
       
    F-48  
    F-50  
    F-51  
    F-52  
    F-53  
    F-54  


F-1


Table of Contents

 
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 Company’s 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 Company’s 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.
 
/s/  Crowe Horwath LLP
 
Sherman Oaks, California
March 31, 2011


F-2


Table of Contents

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 Company’s 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 Bancorp’s operations and its cash flows for year ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
 
/s/  Hays & Company LLP
 
New York, New York
March 16, 2009


F-3


Table of Contents

WESTERN LIBERTY BANCORP
 
 
CONSOLIDATED BALANCE SHEETS
($000’S 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


Table of Contents

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


Table of Contents

WESTERN LIBERTY BANCORP
 
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
($000’S 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 underwriter’s 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 dissenter’s 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


Table of Contents

WESTERN LIBERTY BANCORP
 
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
($000’S)
 
                         
    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 underwriter’s 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


Table of Contents

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 WLBC’s 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. WLBC’s management had complete discretion in identifying and selecting the target business. Although WLBC’s 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 WLBC’s 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 FDIC’s 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 Service1st’s 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 FDIC’s 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


Table of Contents

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, Service1st’s 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 Service1st’s 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 Service1st’s 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 FDIC’s 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 Service1st’s 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 FDIC’s 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 Service1st’s part must be the result of organic growth in the bank’s 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


Table of Contents

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 Company’s operations prior to the acquisition of Service1st were insignificant relative to that of Service1st, management believes that Service1st is the Company’s 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 Company’s 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 Company’s certificates of deposit do not exceed the FDIC insured limit at any one institution. The terms of the company’s 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


Table of Contents

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 Company’s 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 borrower’s ability to pay. Due to the credit concentration of the Company’s 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 Company’s allowance for


F-11


Table of Contents

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 borrower’s 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 loan’s 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 loan’s 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


Table of Contents

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 seller’s 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 management’s 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 loan’s or pool’s 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 management’s 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 loan’s yield. The Company is generally amortizing these amounts over the contractual life of the loan. Commitment fees, based upon a percentage of a customer’s unused line of credit, and fees related to standby letters of credit are recognized over the commitment period.


F-13


Table of Contents

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 Company’s 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:
 
         
    Years  
 
Furniture and fixtures
    7 - 10  
Equipment and vehicles
    3 - 5  
Leasehold improvements
    5 - 10  
 
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


Table of Contents

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 Company’s 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 Francisco’s 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 Company’s 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


Table of Contents

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 Company’s 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 Company’s 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


Table of Contents

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 Company’s assets. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s 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


Table of Contents

WESTERN LIBERTY BANCORP
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
Off-balance sheet instruments
 
Fair values for the Company’s 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 Company’s historical net losses, all of the Company’s 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 Company’s 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 Company’s 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


Table of Contents

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 entity’s 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 Company’s 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


Table of Contents

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 Company’s 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 Bank’s tangible capital at August 31, 2010, if the price of the Company’s 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 Company’s results beginning November 1, 2010 (first business day after the acquisition). Acquisition-related costs are included in the Company’s 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 Company’s 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


Table of Contents

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 000’s)
       
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


Table of Contents

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 )
 
NOTE 3.   FAIR VALUE
 
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


Table of Contents

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 bond’s terms and conditions, among other things.
 
                                 
          Fair Value Measurements at December 31, 2010  
          Quoted Prices in
             
          Active Markets for
    Significant Other
    Significant
 
($ in 000’s)
        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 000’s)
        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


Table of Contents

WESTERN LIBERTY BANCORP
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
As of December 31, 2010 and 2009, the carrying values of the Company’s financial instruments approximate fair value due to the October 28, 2010 mark-to-market process associated with the purchase accounting undertaken on the Company’s subsidiary bank. A valuation of the bank’s 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 Company’s 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 Bank’s financial statements as of December 31 is as follows:
 
                                 
    2010   2009
    Carrying
      Carrying
   
($ in 000’s)
  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.
 
NOTE 4.   SECURITIES
 
                                 
        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


Table of Contents

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 Company’s 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


Table of Contents

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  
                 
 
NOTE 5.   LOANS
 
Loans at year end were as follows:
 
         
($ in 000’s)
  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 000’s)
  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 000’s)
  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


Table of Contents

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 000’s)
  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 Service1st’s 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


Table of Contents

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 000’s)
  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 000’s)
  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


Table of Contents

WESTERN LIBERTY BANCORP
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
Accretable yield, or income expected to be collected, is as follows:
 
         
($ in 000’s)
  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 000’s)
  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


Table of Contents

WESTERN LIBERTY BANCORP
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
NOTE 6.   PREMISES AND EQUIPMENT
 
Year-end premises and equipment were as follows:
 
         
($ in 000’s)
  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 000’s)
  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 000’s)
  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


Table of Contents

WESTERN LIBERTY BANCORP
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
The following presents the estimated amortization expense of other intangible assets:
 
         
Years ending December 31,
     
($ in 000’s)
  Amount  
 
2011
  $ 97  
2012
    92  
2013
    87  
2014
    83  
2015
    79  
Thereafter
    330  
         
    $ 768  
         
 
NOTE 8.   DEPOSITS
 
The composition of deposits is as follows:
 
         
($ in 000’s)
  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 bank’s 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


Table of Contents

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 Company’s 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 Company’s 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


Table of Contents

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 management’s 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


Table of Contents

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 WLBC’s 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 WLBC’s 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 WLBC’s 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 WLBC’s former President, WLBC granted each independent director and then President, 50,000 restricted stock units with respect to shares of WLBC’s 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


Table of Contents

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 WLBC’s common stock on the closing date of the acquisition to WLBC’s 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; WLBC’s 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


Table of Contents

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 Bank’s 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 Company’s 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.
 
NOTE 13.   WARRANTS
 
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 WLBC’s 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 WLBC’s underwriters and would not be transferable before the consummation of a Business Combination. The holders


F-36


Table of Contents

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 WLBC’s 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


Table of Contents

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 WLBC’s 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 WLBC’s 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 WLBC’s 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 WLBC’s 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 holder’s 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


Table of Contents

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 Holder’s 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 Company’s 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


Table of Contents

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 institution’s 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 000’s)
  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 Service1st’s 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 Service1st’s 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 FDIC’s 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 Service1st’s market area) and reduce its reliance on existing brokered deposits, if any.


F-40


Table of Contents

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 WLBC’s liquidation.
 
Pursuant to an employment agreement effective August 1, 2007 between WLBC and its former CEO, WLBC’s former CEO obtained an option to purchase 475,000 shares of Private Shares at the purchase price of $0.001 per share from WLBC’s 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 WLBC’s 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 underwriter’s 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 underwriter’s 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 WLBC’s 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 WLBC’s common stock. In addition, WLBC believes a stock price of $9.25 per share is a fare assumption based on WLBC’s 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. WLBC’s 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


Table of Contents

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 WLBC’s 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 000’s)
  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 customer’s 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 management’s 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 Company’s 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 000’s)
   
 
2011
  $ 910  
2012
    742  
2013
    444  
         
    $ 2,096  
         


F-42


Table of Contents

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 Company’s 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 Company’s 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 000’s)  
 
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


Table of Contents

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


Table of Contents

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 underwriter’s 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


Table of Contents

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 WLBC’s 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


Table of Contents

WESTERN LIBERTY BANCORP
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
NOTE 18.   SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
WLBC’s unaudited condensed quarterly financial information is as follows for the year ended December 31, 2010 and 2009:
 
                                 
($ in 000’s, 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


Table of Contents

 
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 Company’s 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 Company’s 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


Table of Contents

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 Company’s 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 Company’s 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


Table of Contents

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


Table of Contents

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


Table of Contents

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


Table of Contents

 
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


Table of Contents

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 Bank’s loan portfolio contains primarily commercial and real estate loans concentrated in Nevada. Segment information is not presented since all of the Bank’s 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 WLBC’s 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


Table of Contents

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 Bank’s certificates of deposit do not exceed the FDIC insured limit at any one institution. The terms of the Bank’s 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 Bank’s 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 borrower’s ability to pay. Due to the credit concentration of the Bank’s 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


Table of Contents

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 Bank’s 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 borrower’s 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 loan’s 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 loan’s 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 management’s 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


Table of Contents

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 loan’s yield. The Bank is generally amortizing these amounts over the contractual life of the loan. Commitment fees, based upon a percentage of a customer’s 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 Bank’s 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 Bank’s 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


Table of Contents

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 Francisco’s 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 FHLB’s 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 Bank’s 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 Bank’s 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


Table of Contents

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 Bank’s 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 Bank’s assets. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Bank’s 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


Table of Contents

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 Bank’s current rates for certificates of deposit with similar terms.
 
Off-balance sheet instruments
 
Fair values for the Bank’s 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 000’s, 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 Bank’s historical net losses, all of the Bank’s 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


Table of Contents

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 Bank’s 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 Bank’s 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


Table of Contents

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 bond’s 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 000’s)
  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 000’s)
  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


Table of Contents

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 000’s)
  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 000’s)
  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


Table of Contents

SERVICE1ST BANK OF NEVADA
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
NOTE 3.   SECURITIES
 
Carrying amounts and fair values of investment securities as of October 28, 2010 are summarized as follows:
 
                                 
          Gross
    Gross
       
          Unrealized
    Unrealized
       
($ in 000’s)
  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 000’s)
  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 000’s)
  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 000’s)
  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


Table of Contents

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 issuer’s creditworthiness. Specifically, the issuer’s 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 000’s)
  (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 000’s)
  (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 Bank’s 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


Table of Contents

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 000’s)
  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 000’s)
  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  
                 
 
NOTE 4.   LOANS
 
The components of the Bank’s loan portfolio as of October 28 and December 31 are as follows:
 
                 
($ in 000’s)
  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 000’s)
  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


Table of Contents

SERVICE1ST BANK OF NEVADA
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
                         
($ in 000’s)
  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 Bank’s impaired loans are real estate-secured loans. As of October 28, 2010, approximately $9.3 million of the Bank’s 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 000’s)
  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 000’s)
  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


Table of Contents

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 Bank’s 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 Bank’s 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 000’s)
  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


Table of Contents

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 000’s)
  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 000’s)
  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.
 
NOTE 7.   DEPOSITS
 
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 bank’s 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


Table of Contents

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 Bank’s 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 Bank’s exposure to off-balance sheet risk as of October 28 and December 31 is as follows:
 
                 
($ in 000’s)
  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


Table of Contents

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 000’s)
     
 
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 Bank’s 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 Bank’s 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.
 
NOTE 9.   STOCK AWARDS
 
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 Bank’s 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


Table of Contents

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 management’s 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


Table of Contents

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 Bank’s 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 Bank’s 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


Table of Contents

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 Bank’s 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 Service1st’s 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 Service1st’s 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 FDIC’s 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 Service1st’s 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 000’s)
  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 000’s)
  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 Bank’s 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


Table of Contents

SERVICE1ST BANK OF NEVADA
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
regulations, approximately $10.2 million and $11.2 million of the Bank’s 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 management’s 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 000’s)
  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 Bank’s 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 Bank’s estimated fair value of the Bank’s common stock at that time.


F-75


Table of Contents

SERVICE1ST BANK OF NEVADA
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
NOTE 14.   FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The estimated fair value of the Bank’s financial statements as of October 28, and December 31 is as follows:
 
                                 
    2010   2009
    Carrying
      Carrying
   
($ in 000’s)
  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 Bank’s earnings and capital from changes in interest rate levels) as a result of its normal operations. As a result, the fair values of the Bank’s 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


Table of Contents

SERVICE1ST BANK OF NEVADA
 
NOTES TO FINANCIAL STATEMENTS — (Continued)
 
NOTE 15.   QUARTERLY DATA (UNAUDITED)
 
                                 
    2010  
Period Ended October 28
        Third
    Second
    First
 
($ in 000’s, 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 000’s, 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 WLBC’s 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


Table of Contents

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 Bank’s 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


Table of Contents

 
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  
 
 
* Not presently known
 
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 person’s 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 person’s 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


Table of Contents

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 person’s 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 person’s 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


Table of Contents

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 corporation’s 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 WLBC’s 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 director’s 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 WLBC’s 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


Table of Contents

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 WLBC’s 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.”
 
WLBC’s 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.
 
Item 15.   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 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 holder’s 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


Table of Contents

under the Exchange Act during WLBC’s 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. Martin’s and Rosenbaum’s 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, WLBC’s 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


Table of Contents

Item 16.   Exhibits and Financial Statement Schedules
 
         
   
Description
 
  2 .1   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)
  2 .2   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)
  3 .1   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)
  3 .2   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)
  4 .1   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)
  4 .2   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)
  4 .4   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)
  4 .5   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)
  5 .1   Opinion of Proskauer Rose LLP as to the validity of the shares being registered**
  10 .1   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)
  10 .2   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)
  10 .3   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)
  10 .4   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)
  10 .5   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)


II-6


Table of Contents

         
   
Description
 
  10 .6   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)
  10 .7   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)
  10 .8   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)
  10 .9   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)
  10 .10   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)
  10 .11   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)
  10 .12   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)
  10 .13   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)
  10 .14   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)
  10 .15   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)
  14 .1   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)
  21 .1   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)
  23 .1   Consent of Crowe Horwath LLP*
  23 .2   Consent of Hays & Company LLP*
  23 .3   Consent of Grant Thornton LLP*
  23 .4   Consent of Proskauer Rose LLP (included in Exhibit 5.1)
  99 .1   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**
 
 
* Filed herewith
 
** Previously filed as an Exhibit to this Registration Statement on Form S-1

II-7


Table of Contents

 
Item 17.   Undertakings.
 
(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


Table of Contents

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


Table of Contents

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
 
  By: 
/s/  William E. Martin
Name:     William E. Martin
  Title:  Chief Executive Officer and Director
(Principal Executive Officer)
 
             
Signature
 
Title
 
Date
 
         
/s/  Michael B. Frankel

Michael B. Frankel
  Chairman   April 20, 2011
         
/s/  Terrence L. Wright

Terrence L. Wright
  Vice Chairman   April 20, 2011
         
/s/  Jason N. Ader

Jason N. Ader
  Director   April 20, 2011
         
/s/  Richard A.C. Coles

Richard A.C. Coles
  Director   April 20, 2011
         
/s/  Curtis W. Anderson, CPA

Curtis W. Anderson, CPA
  Director   April 20, 2011
         
/s/  William E. Martin

William E. Martin
  Director and Chief Executive Officer
(Principal Executive Officer)
  April 20, 2011
         
/s/  George A. Rosenbaum, Jr.

George A. Rosenbaum, Jr.
  Chief Financial Officer
(Principal Accounting
and Financial Officer)
  April 20, 2011


II-10


Table of Contents

         
Exhibit No.
 
Description
 
  2 .1   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)
  2 .2   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)
  3 .1   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)
  3 .2   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)
  4 .1   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)
  4 .2   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)
  4 .4   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)
  4 .5   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)
  5 .1   Opinion of Proskauer Rose LLP as to the validity of the shares being registered**
  10 .1   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)
  10 .2   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)
  10 .3   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)
  10 .4   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)


Table of Contents

         
Exhibit No.
 
Description
 
  10 .5   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)
  10 .6   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)
  10 .7   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)
  10 .8   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)
  10 .9   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)
  10 .10   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)
  10 .11   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)
  10 .12   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)
  10 .13   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)
  10 .14   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)
  10 .15   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)
  14 .1   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)
  21 .1   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)


Table of Contents

         
Exhibit No.
 
Description
 
  23 .1   Consent of Crowe Horwath LLP*
  23 .2   Consent of Hays & Company LLP*
  23 .3   Consent of Grant Thornton LLP*
  23 .4   Consent of Proskauer Rose LLP (included in Exhibit 5.1)
  99 .1   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**
 
 
* Filed herewith
 
** Previously filed as an Exhibit to this Registration Statement on Form S-1