UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-33803

WESTERN LIBERTY BANCORP

(Exact name of registrant as specified in its charter)

Delaware

26-0469120

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of August 10, 2012, the registrant had 13,466,536 shares of its common stock, par value $0.0001 per share, outstanding.

WESTERN LIBERTY BANCORP

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 (unaudited)			3
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and 2011 (unaudited)			4
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2012 and 2011 (unaudited)			5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)			6
Notes to Condensed Consolidated Financial Statements (unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3. Quantitative and Qualitative Disclosures About Market Risk			39
Item 4. Controls and Procedures			39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			39
Item 1A. Risk Factors			39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			40
Item 3. Defaults Upon Senior Securities			40
Item 4. Mine Safety Disclosures			40
Item 5. Other Information			40
Item 6. Exhibits			41
Signatures			42
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WESTERN LIBERTY BANCORP

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

($ in 000’s except per share data)


	June 30, 2012			December 31, 2011
ASSETS
Cash and due from banks	$	8,799		$	11,227
Money market funds		100			100
Interest-bearing deposits in banks		76,193			78,026

Cash and cash equivalents		85,092			89,353
Certificates of Deposit		1,988			—
Securities, available for sale		250			472
Securities, held to maturity (fair value of $472 and $2,035, respectively)		463			2,031
Loans, net of allowance ($2,645 and $2,919 respectively)		102,192			98,942
Premises and equipment, net		584			818
Other real estate owned, net		5,820			4,008
Other intangibles, net		624			670
Accrued interest receivable and other assets		1,699			1,996

Total assets	$	198,712		$	198,290

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing demand	$	59,801		$	50,488
Interest bearing		64,449			70,738

Total deposits		124,250			121,226
Accrued interest payable and other liabilities		750			1,023

Total liabilities		125,000			122,249
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; 15,088,024 issued and 13,466,536 outstanding.		1			1
Additional paid-in capital		118,068			117,846
Accumulated deficit		(40,263	)		(37,717	)
Treasury stock, at cost, 1,621,488 shares		(4,094	)		(4,094	)
Accumulated other comprehensive income net		—			5

Total stockholders’ equity		73,712			76,041

Total liabilities and stockholders’ equity	$	198,712		$	198,290

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

WESTERN LIBERTY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME / (LOSS) (UNAUDITED)

For the Three and Six Months Ended June 30, 2012 and 2011

($ in 000’s except per share data)


	For the Three Months Ended						For the Six Months Ended
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011
Interest and dividend income:
Loans, including fees	$	1,285		$	2,018		$	2,928		$	5,800
Securities, taxable and other		60			68			122			134

Total interest and dividend income		1,345			2,086			3,050			5,934

Interest expense:
Deposits		100			127			215			239

Total interest expense		100			127			215			239

Net interest income		1,245			1,959			2,835			5,695
Provision for loan losses:		319			4,348			319			5,712

Net interest income after provision for loan losses		926			(2,389	)		2,516			(17	)

Non-interest income:
Service charges		69			78			139			156
Other		51			114			200			157

Total non-interest income		120			192			339			313

Non-interest expense:
Salaries and employee benefits		789			765			1,633			1,558
Occupancy, equipment and depreciation		431			374			763			748
Computer service charges		77			74			155			151
Federal deposit insurance		136			129			270			281
Legal and professional fees		402			520			1,152			1,455
Advertising and business development		16			48			45			68
Insurance		74			67			146			138
Telephone		17			17			35			43
Printing and supplies		50			87			77			229
Director fees		57			49			113			98
Stock-based compensation		108			138			222			280
Provision for unfunded commitments		3			(203	)		3			(336	)
OREO Property Impairment		83			—			200			—
Other		288			334			587			588

Total non-interest expense		2,531			2,399			5,401			5,301

Net income/(loss)	$	(1,485	)	$	(4,596	)	$	(2,546	)	$	(5,005	)

Earnings/Loss Per Share
Basic earnings/(loss) per common share	$	(0.11	)	$	(0.30	)	$	(0.19	)	$	(0.33	)

Diluted earnings/(loss) per common share	$	(0.11	)	$	(0.30	)	$	(0.19	)	$	(0.33	)

Weighted average common shares outstanding - basic		13,466,536			15,088,024			13,466,536			15,088,024

Weighted average common shares outstanding - diluted		13,466,536			15,088,024			13,466,536			15,088,024

Other comprehensive income:
Unrealized gains/losses on securities:
Unrealized holding gain/(loss) arising during the period	$	4		$	(2	)	$	5		$	(5	)
Total other comprehensive income / (loss)		4			(2	)		5			(5	)

Comprehensive income / (loss)		(1,481	)		(4,598	)		(2,541	)		(5,010	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

WESTERN LIBERTY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

For the Six Months Ended June 30, 2012

($ in 000’s)


	Comprehensive Loss			Common Stock issued				Additional Paid-in- Capital		Accumulated Deficit			Accumulated Other Comprehensive Income			Treasury Stock			Total
	Comprehensive Loss			Shares Amounts				Additional Paid-in- Capital		Accumulated Deficit			Accumulated Other Comprehensive Income			Treasury Stock			Total
Balance, December 31, 2011					13,466,536	$	1	$	117,846	$	(37,717	)	$	5		$	(4,094	)	$	76,041
Stock-based compensation					—		—		222		—			—			—			222
Net loss	$	(2,546	)		—		—		—		(2,546	)		—			—			(2,551	)
Unrealized gain/loss on securities available for sale		—			—		—		—		—			(5	)		—			—

Balance, June 30, 2012	$	(2,546	)		13,466,536	$	1	$	118,068	$	(40,263	)	$	—		$	(4,094	)	$	73,712

WESTERN LIBERTY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For the Six Months Ended June 30, 2012 and 2011

($ in 000’s)


	For the Six Months Ended
	June 30, 2012			June 30, 2011
Cash flow from operating activities:
Net loss	$	(2,546	)	$	(5,005	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		222			280
Accretion of loan discount, net		(622	)		(2,800	)
Amortization of core deposit intangible		46			49
Provision for loan losses		319			5,712
Depreciation of premises and equipment		237			215
Amortization of securities premiums/discounts, net		21			123
Amortization of lease liability		(34	)		—
Oreo property impairment		200			—
Decrease (increase) in OREO		—			—
Gain on disposition of other real estate owned		(32	)		(33	)
Changes in operating assets and liabilities:
Decrease (increase) in prepaid expenses and other assets		322			767
(Decrease) increase in accrued interest payable and other liabilities		(239	)		(772	)

Net cash used in operating activities		(2,106	)		(1,464	)

Cash flow from investing activities:
Purchases of certificates of deposit		(1,988	)		—
Proceeds from maturities of certificates of deposit		—			22,694
Proceeds from principal paydowns of securities available for sale		217			961
Proceeds from maturities of securities held to maturity		1,500			1,500
Proceeds from principal paydowns of securities held to maturity		21			28
Purchase of premises and equipment		(3	)		—
Proceeds from disposition of other real estate owned		435			1,037
Net (increase) decrease in loans		(5,361	)		4,144

Net cash provided by (used in) investing activities		(5,361	)		30,364

Cash flow from financing activities:
Net increase (decrease) in deposits		3,024			(28,701	)

Net cash provided by (used in) financing activities		3,024			(28,701	)

Net (decrease) in cash and cash equivalents		(4,261	)		199
Cash and cash equivalents, beginning of period		89,353			103,227

Cash and cash equivalents, end of period	$	85,092		$	103,426

Supplemental disclosures of cash flow information:
Interest paid on deposits and other borrowed funds	$	234		$	227

Supplemental disclosure of noncash investing and financing activities:
Transfers of loans to other real estate owned	$	2,415		$	2,038

The accompany notes are an integral part of these unaudited condensed consolidated financial statements.

Western Liberty Bancorp

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. NATURE OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

Western Liberty Bancorp (WLBC) became a bank holding company on October 28, 2010 with consummation of the acquisition of Service1st Bank of Nevada. WLBC owns two subsidiaries, Service1st Bank of Nevada and Las Vegas Sunset Properties, and currently conducts no business activities other than acting as the holding company of Service1st and Las Vegas Sunset Properties.

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 deposit, lending and other banking services to locally owned businesses, professional firms, individuals and other customers from its headquarters and two retail banking facilities located in the greater Las Vegas area. Services provided include basic commercial and consumer depository services, commercial working capital and equipment loans, commercial real estate loans and other traditional commercial banking services. 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. Most of Service1st’s 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.

Las Vegas Sunset Properties was established in 2011 for the purpose of owning and managing certain nonperforming and subperforming assets. As of June 30, 2012, certain OREO assets (originally owned by Service 1st) with a carrying value of $5.8 million have been acquired by this subsidiary. By using funds contributed to it from Western Liberty Bancorp, Las Vegas Sunset Properties currently holds interests in a total of 16 classified loan assets, with a carrying value of approximately $18.8 million. The holding company believes that assembling OREO and classified loans in a separate, nonbank subsidiary will promote efficient and cost-effective management and ultimate resolution of the assets.

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 examination cycle and be subject to enhanced supervision for compliance examinations and Community Reinvestment Act evaluations.

Since mid-2009, Service1st has been required (i) under section 32 of the Federal Deposit Insurance Act 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) by the FDIC’s golden parachute rules at 12 C.F.R. Part 359 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 Federal Reserve notified Western Liberty by letter dated December 15, 2011 that Western Liberty must obtain advance approval for the appointment of new directors or senior executives and that Western Liberty is subject to the golden parachute compensation limitations of 12 C.F.R. Part 359.

On October 20, 2011 Service1st entered into an informal understanding with the FDIC and with the State of Nevada Financial Institutions Division, agreeing among other things to maintain the Tier 1 leverage ratio at a minimum of 8.5% and to implement a plan to achieve profitability and to reduce classified assets. At the end of March of 2012 WLBC entered into an informal understanding with the Federal Reserve Bank of San Francisco, which among other things provides that WLBC may not pay dividends, incur debt, or purchase or redeem any of its securities unless WLBC first obtains approval of the Federal Reserve Bank.

During the application process for the acquisition of Service1st by WLBC, the Company made a number of commitments to the FDIC. The Company agreed to maintain the Tier 1 leverage capital ratio of Service1st at 10% or greater until October 28, 2013. 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. 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.

The consolidated financial statements include WLBC and its wholly owned subsidiaries, Service1st and Las Vegas Sunset Properties (collectively, “the Company”). All operations are managed and financial performance is evaluated on a company wide basis. Accordingly, all of the operations are considered by management to be aggregated in one reportable operating segment. Intercompany transactions and balances are eliminated in consolidation. 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. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations and comprehensive income/(loss), changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustment and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2011, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC, under the Securities and Exchange Act of 1934, (the “Exchange Act”). A summary of the significant accounting policies used by the Company are as follows:

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. Material estimates relate to the determination of the allowance for loan losses, deferred tax assets, and the value of other real estate owned and can particularly be susceptible to significant change in the near term.

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.

At June 30, 2012, 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 $5.5 million.

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-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 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 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 collectability 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 collectability 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 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 a 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.

All loans that are graded substandard are individually evaluated for impairment. If a loan is impaired, the loan is adjusted to the lower of net present value or collateral value if real estate secured. This adjustment is allocated as a portion of the allowance. 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 at the fair 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 three 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; national and local economic trends and conditions. The following portfolio segments have been identified:

1. Loans secured by real estate construction, land development and other land loans

2. Commercial real estate

3. Residential real estate

4. Commercial and industrial

5. Consumer

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 had shown evidence of credit deterioration since origination. These purchased loans were recorded at fair value at acquisition and there was no carryover of the seller’s allowance for loan losses.

Purchased loans with credit impairment are accounted for individually or aggregated into pools of loans based on common risk characteristics such as, 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 all classes of 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 all classes of 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. 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 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

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

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 June 30, 2012, the Company has prepaid approximately $271,000 or approximately 1 year, 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 June 30, 2012, the Company’s investment in the FHLB was $547,000 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, 2011 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 8. 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.

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 2.

Fair values of financial instruments

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.

Fair value instruments are defined in Note 2.

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.

Recently Issued Accounting Standards

Adoption of New Accounting Standards:

Effective January 2012, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements (ASU 2011-03). ASU 2011-03 is intended to improve financial reporting of repurchase agreements and refocus the assessment of effective control on a transferor’s contractual rights and obligations rather than practical ability to perform those rights and obligations.

The guidance in ASU 2011-03 was effective for the first interim or annual period beginning on or after December 15, 2011. The adoption of this update did not have a material impact on the consolidated financial statements.

Effective January 2012, the Company adopted ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 represents the converged guidance of the FASB and the International Accounting Standards Board (IASB) on fair value measurement. A variety of measures are included in the update intended to either clarify existing fair value measurement requirements, change particular principles requirements for measuring fair value or for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend to change the application of existing requirements under Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements. ASU 2011-04 was effective for interim and annual periods beginning after December 15, 2011. The adoption of this update did not have a material impact on the consolidated financial statements.

Effective January 2012, the Company adopted ASU No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 is intended to increase the prominence of items reported in other comprehensive income and to facilitate convergence of accounting guidance in this area with that of the IASB. The amendments require that all non-owner changes in stockholders’ equity be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12). ASU 2011-12 defers the provisions of ASU 2011-05 that require the presentation of reclassification adjustments on the face of both the statement of income and statement of other comprehensive income. Amendments under ASU 2011-05 that were not deferred under ASU 2011-12 will be applied retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this update did not have a material impact on the consolidated financial statements.

Newly Issued But Not Yet Effective Accounting Standards:

In December 2011, the FASB issued an accounting standards update to increase the disclosure requirements surrounding derivative instruments that are offset within the balance sheet pursuant to the provisions of current GAAP. The objective of the update is to provide greater comparability between issuers reporting under U.S. GAAP versus IFRS and provide users the ability to evaluate the effect of netting arrangements on a company’s financial statements. The provisions of the update are effective for annual and interim periods beginning on or after January 1, 2013 and are not expected to add to the Company’s current level of disclosures.

Note 2. 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.

The Company used the following methods and significant assumptions to estimate fair value:

Investment Securities

The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Impaired Loans

At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned

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. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received by the bank, commercial appraisals over $500,000 are sent to, a third party certified appraiser for review of the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics in the original appraisal. Appraised and reported values may be discounted based on the reviewer’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the property. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

Fair value on a recurring basis

Financial assets measured at fair value on a recurring basis include the following:

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 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 June 30, 2012
($ in 000’s) Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Securities Available for Sale
U.S. Agencies	$	250	$	—	$	250	$	—

	$	250	$	—	$	250	$	—

There were no transfers between levels during 2012.


	Fair Value Measurements at December 31, 2011
($ in 000’s) Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Securities Available for Sale
U.S. Agencies	$	253	$	—	$	253	$	—
Collateralized Mortgage Obligation Securities-commercial	$	219	$	—	$	219	$	—

	$	472	$	—	$	472	$	—

There were no transfers between levels during 2011.

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 June 30, 2012
($ in 000’s) Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans
Construction, land development and other land	$	1,736	$	—	$	—	$	1,736
Commercial real estate		17,940		—		—		17,940
Residential real estate		3,594		—		—		3,594
Commercial and Industrial		5,266		—		—		5,266
Other Real Estate Owned
Construction, land development and other land		1,669		—		—		1,669
Commercial real estate		4,150		—		—		4,150

	$	34,355	$	—	$	—	$	34,355


	Fair Value Measurements at December 31, 2011
($ in 000’s) Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans
Construction, land development and other land	$	2,113	$	—	$	—	$	2,113
Commercial real estate		18,221		—		—		18,221
Residential real estate		3,698		—		—		3,698
Commercial and Industrial		2,312		—		—		2,312
Other Real Estate Owned
Construction, land development and other land		2,230		—		—		2,230
Commercial real estate		1,778		—		—		1,778

	$	30,352	$	—	$	—	$	30,352

Impaired loans that are measured for impairment using the fair value of the collateral for collateral-dependent loans had a principal balance of $28.5 million, with no valuation allowance at June 30, 2012, resulting in additional provision of zero for loan losses for the three and six months ended June 30, 2012. At December 31, 2011, impaired loans had a principal balance of $27.8 million with a valuation allowance of $335,000. For the three and six months ended June 30, 2011 there was $1.4 and $3.3 million respectively in additional provision for loans.

Other real estate owned measured at fair value less costs to sell had a net carrying amount of $5.8 million which is made up of the outstanding balance of $5.8 million, net of a valuation allowance of $200,000 for the six months ended June 30, 2012, including in an expense of $83,000 and $200,000 for the three and six months ended June 30, 2012. At December 31, 2011, other real estate owned had a net carrying amount of $4.0 million, and net of a valuation allowance of zero. For the three and six months ended June 30, 2011 there was no additional valuation allowances for these properties.


	Fair Value		Valuation Techniques	Unobservable Input(s)	Range (Weighted Average)
Impaired loans
Construction, land development and other land	$	1,736	Sales comparison approach	Adjustment by management determined to reflect current conditions	0%
Commercial real estate	$	17,940	Sales comparison approach	Adjustment by management determined to reflect current conditions	-6% to 13% (4%)
Residential real estate	$	3,594	Sales comparison approach	Adjustment by management determined to reflect current conditions	0%
Commercial and Industrial	$	5,266	Sales comparison approach	Adjustment by management determined to reflect current conditions	0%
Other Real Estate Loans
Other real estate owned - Construction and Land Development	$	1,669	Sales comparison approach	Adjustment by management determined to reflect current conditions	0%
Other real estate owned - residential and commercial	$	4,150	Sales comparison approach	Adjustment by management determined to reflect current conditions	-4% to 9% (3%)

Other real estate owned is valued at the time the loan is foreclosed upon and the asset is transferred to other real estate owned. The value is based primarily on third party appraisals, less costs to sell. The appraisals are sometimes further discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s and result in a Level 3 classification of the inputs for determining fair value. Other real estate owned is reviewed and evaluated on the least an annual basis for additional impairment and adjusted accordingly, based on the same factors identified above.

The carrying amounts and estimated fair values of financial instruments, at June, 2012 and December 31, 2011 are as follows:


	Fair Value Measurements for the six months ended June 30, 2012
(Dollars in thousands)	Carrying Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash, due from banks, federal funds sold and money market investments	$	85,092	$	8,799	$	76,293	$	—	$	85,092
Certificates of Deposit		1,988		—		1,988		—		1,988
Securities available-for-sale		250		—		250		—		250
Securities held-to-maturity		463		—		472		—		472
Federal Home Loan Bank stock		520		—		—		—		N/A
Loans, net		102,192		—		—		101,887		101,887
Accrued interest receivable		243		15		228		—		243
Financial liabilities
Deposits		124,250		101,939		22,284		—		124,223
Accrued interest payable		22		3		19		—		22


	December 31, 2011
(Dollars in thousands)	Carrying Amount		Fair Value
Financial assets
Cash, due from banks, federal funds sold and money market investments	$	89,353	$	89,353
Securities available-for-sale		472		472
Securities held-to-maturity		2,031		2,035
Federal Home Loan Bank stock		574		N/A
Loans, net		98,942		97,857
Accrued interest receivable		243		243
Financial liabilities
Deposits		121,226		121,226
Accrued interest payable		41		41

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

(a) Cash and Cash Equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2.

(b) FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

(c) Loans

Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

(e) Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in either a Level 1 or Level 2 classification (Level 2). The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in either a Level 1 or Level 2 classification (Level 2). Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(h) Accrued Interest Receivable/Payable

The carrying amount of accrued interest approximates fair value. The level classification is consistent with the associated asset/liability.

(i) Off-balance Sheet Instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

Note 3. SECURITIES

Carrying amounts and fair values of investment securities at June 30, 2012 and December 31, 2011 are summarized as follows:


	June 30, 2012
($ in 000’s) Securities Available for Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
US Agencies	$	250	$	—	$	—		$	250

	$	250	$	—	$	—		$	250


($ in 000’s) Securities Held to Maturity	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
Small Business Administration Loan Pools		463		9	$	—			472

	$	463	$	9	$	—		$	472


	December 31, 2011
($ in 000’s) Securities Available for Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Agencies	$	250	$	3	$	—		$	253
Collateralized Mortgage Obligation Securities-commercial		217		2		—			219

	$	467	$	5	$	—		$	472


($ in 000’s) Securities Held to Maturity	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
Corporate Debt Securities	$	1,520	$	—	$	(1	)	$	1,519
Small Business Administration Loan Pools		511		5		—			516

	$	2,031	$	5	$	(1	)	$	2,035

There have been no sales of securities or gross realized gains or losses in any of the periods presented.

As of June 30, 2012 and December 31, 2011, none and $1.5 million, respectively, were pledged for various purposes as required or permitted by law.

Information pertaining to securities with gross losses at December 31, 2011, aggregated by investment category and length of time that individual securities have been in continuous loss position, follows:


	December 31, 2011
	Less Than Twelve Months					Over Twelve Months
($ in 000’s)	Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)		Fair Value
	Less Than Twelve Months					Over Twelve Months
Securities Held to Maturity
Corporate Debt Securities	$	(1	)	$	1,519	$	—	$	—

As of December 31, 2011, one debt security had unrealized losses with aggregate degradation of 0.07% relating primarily to fluctuations in the current interest rate environment and other factors, but did represent realized losses. As of June 30, 2012 and December 31, 2011 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 June 30, 2012 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.


($ in 000’s)	Amortized Cost		Fair Value
Securities available for sale
Due in one year or less	$	—	$	—
Due in one to five years		250		250

	$	250	$	250


($ in 000’s)	Amortized Cost		Fair Value
Securities held to maturity
Due in one year or less	$	3	$	3
Small Business Administration loan pools		460		469

	$	463	$	472

Note 4. LOANS

Loans at June 30, 2012 and December 31, 2011 were as follows:


($ in 000’s)	June 30, 2012			December 31, 2011
Construction, land development and other land	$	2,742		$	3,417
Commercial real estate		58,960			58,252
Residential real estate		10,488			4,704
Commercial and industrial		32,585			35,417
Consumer		16			30
Plus: net deferred loan costs		46			41

		104,837			101,861
Less: allowance for loan losses		(2,645	)		(2,919	)

	$	102,192		$	98,942

Activity in the allowance for loan losses in the three and six months ended June 30, 2012 were as follows:


Three months ended ($ in 000’s)	Commercial			Commercial Real Estate			Residential Real Estate		Consumer		Construction, Land Development, Other Land			Total
Beginning balance, March 31, 2012	$	2,232		$	219		$	19	$	—	$	217		$	2,687
Provision for loan losses		(637	)		925			133		—		(102	)		319
Recoveries		121			—			—		—		—			121
Loan charge-offs		(482	)		—			—		—		—			(482	)

Balance, June 30, 2012	$	1,234		$	1,144		$	152	$	—	$	115		$	2,645


Six months ended ($ in 000’s)	Commercial			Commercial Real Estate			Residential Real Estate		Consumer		Construction, Land Development, Other Land			Total
Beginning balance, December 31, 2011	$	2,270		$	422		$	19	$	—	$	208		$	2,919
Provision for loan losses		(637	)		925			133		—		(102	)		319
Recoveries		126			—			—		—		9			135
Loan charge-offs		(525	)		(203	)		—		—		—			(728

Balance, June 30, 2012	$	1,234		$	1,144		$	152	$	—	$	115		$	2,645

Activity in the allowance for loan losses in the three and six months ended June 30, 2011 were as follows:


Three months ended ($ in 000’s)	Commercial			Commercial Real Estate		Residential Real Estate			Consumer		Construction, Land Development, Other Land			Total
Beginning balance, March 31, 2011	$	548		$	425	$	136		$	1	$	180		$	1,290
Provision for loan losses		2,103			2,079		(133	)		—		295			4,344
Recoveries		1			—		4			—		—			5
Loan charge-offs		(1,235	)		—		—			—		—			(1,235	)

Balance, June 30, 2011	$	1,417		$	2,504	$	7		$	1	$	475		$	4,404


Six months ended ($ in 000’s)	Commercial			Commercial Real Estate		Residential Real Estate			Consumer		Construction, Land Development, Other Land			Total
Beginning balance, December 31, 2010	$	36		$	—	$	—		$	—	$	—		$	36
Provision for loan losses		2,615			2,504		3			1		589			5,712
Recoveries		1			—		4			—		—			5
Loan charge-offs		(1,235	)		—		—			—		(114	)		(1,349	)

Balance, June 30, 2011	$	1,417		$	2,504	$	7		$	1	$	475		$	4,044

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2012 and December 31, 2011:


($ in 000’s)	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Construction, Land Development, Other Land		Total
June 30, 2012
Allowance for loan losses:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		1,260		1,118		152		—		115		2,645
Acquired with deteriorated credit quality		—		—		—		—		—		—

Total ending allowance balance	$	1,260	$	1,118	$	152	$	—	$	115	$	2,645

Loans:
Loans individually evaluated for impairment	$	3,948	$	14,520	$	3,594	$	1	$	656	$	22,719
Loans collectively evaluated for impairment		27,372		41,010		6,884		16		1,020		76,302
Loans acquired with deteriorated credit quality		1,318		3,418		—		—		1,080		5,816

Total ending loans balance	$	32,658	$	58,948	$	10,478	$	17	$	2,756	$	104,837

December 31, 2011
Allowance for loan losses:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	335	$	—	$	—	$	—	$	—	$	335
Collectively evaluated for impairment		1,935		422		19		—		208		2,584
Acquired with deteriorated credit quality		—		—		—		—		—		—

Total ending allowance balance	$	2,270	$	422	$	19	$	—	$	208		2,919

Loans:
Loans individually evaluated for impairment	$	1,820	$	16,480	$	3,700	$	1	$	710	$	22,711
Loans collectively evaluated for impairment		32,053		38,188		1,011		22		1,304		72,578
Loans acquired with deteriorated credit quality		1,599		3,561		—		—		1,412		6,572

Total ending loans balance	$	35,472	$	58,229	$	4,711	$	23	$	3,426	$	101,861

June 30, 2011
Allowance for loan losses:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	3	$	2,217	$	—	$	—	$	—	$	2,220
Collectively evaluated for impairment		789		165		7		1		121		1,083
Acquired with deteriorated credit quality		625		122		—		—		354		1,101

Total ending allowance balance	$	1,417	$	2,504	$	7	$	1	$	475	$	4,404

Loans:
Loans individually evaluated for impairment	$	41	$	7,645	$	2,979	$	—	$	850	$	11,515
Loans collectively evaluated for impairment		34,744		42,250		1,724		104		1,313		80,135
Loans acquired with deteriorated credit quality		3,551		4,376		—		—		1,956		9,883

Total ending loans balance	$	38,336	$	54,271	$	4,703	$	104	$	4,119	$	101,533

The impaired balance is the recorded investment, which represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. As nearly all of our impaired loans at June 30, 2012 and December 31, 2011 are on nonaccrual status, recorded investment excludes any insignificant amount of accrued interest receivable on loans 90 days or more past due and still accruing.

Impaired loan details as of June 30, 2012 and December 31, 2011 are as follows:


	June 30, 2012
($ in 000’s)	Unpaid Principal Balance		Recorded Investment		%			Percent of Total Loans			Reserve Balance		%			Percent of Total Allowance
Construction, land development and other loans	$	2,439	$	1,736		6.08	%		1.66	%	$	—		0.00	%		0.00	%
Commercial real estate		20,758		17,939		62.87	%		17.12	%		—		0.00	%		0.00	%
Residential real estate (1-4 family)		3,639		3,594		12.59	%		3.43	%		—		0.00	%		0.00	%
Commercial and industrial		5,871		5,266		18.54	%		5.03	%		—		0.00	%		0.00	%
Consumer		—		—		0.00	%		0.00	%		—		0.00	%		0.00	%

Total impaired loans	$	32,707	$	28,535		100.00	%		27.23	%	$	—		0.00	%		0.00	%


	December 31, 2011
($ in 000’s)	Unpaid Principal Balance		Recorded Investment		%			Percent of Total Loans			Reserve Balance		%			Percent of Total Allowance
Construction, land development and other land loans	$	3,587	$	2,122		7.25	%		2.08	%	$	—		0.00	%		0.00	%
Commercial real estate		24,102		20,041		68.44	%		19.67	%		—		0.00	%		0.00	%
Residential real estate (1-4 family)		3,786		3,700		12.64	%		3.63	%		—		0.00	%		0.00	%
Commercial and industrial		4,677		3,419		11.68	%		3.36	%		335		100.00	%		11.48	%
Consumer		—		—		0.00	%		0.00	%		—		0.00	%		0.00	%

Total	$	36,152	$	29,283		100.00	%		28.75	%	$	335		100.00	%		11.48	%


	June 30, 2011
($ in 000’s)	Unpaid Principal Balance		Recorded Investment		%			Percent of Total Loans			Reserve Balance		%			Percent of Total Allowance
Construction, land development and other loans	$	4,279	$	2,806		13.11	%		2.76	%	$	354		10.66	%		8.04	%
Commercial real estate		15,664		12,021		56.18	%		11.84	%		2,339		70.43	%		53.11	%
Residential real estate (1-4 family)		3,068		2,979		13.92	%		2.93	%		—		0.00	%		0.00	%
Commercial and industrial		5,660		3,592		16.79	%		3.54	%		628		18.91	%		14.26	%
Consumer		—		—		0.00	%		0.00	%		—		0.00	%		0.00	%

Total impaired loans	$	28,671	$	21,398		100.00	%		21.07	%	$	3,321		0.00	%		75.41	%

The following table depicts the average impaired loan balances, and the interest income recognized during impairment:


	Six Months Ended June 30, 2012				Six Months Ended June 30, 2011				Three Months Ended June 30, 2012				Three Months Ended June 30, 2011
($ in 000’s)	Average		Interest		Average		Interest		Average		Interest		Average		Interest
Construction, land development and other land	$	2,154	$	31	$	3,363	$	44	$	2,039	$	66	$	3,298	$	34
Commercial real estate		19,783		36		8,437		110		20,355		51		11,833		77
Residential real estate		3,639		8		2,941		43		3,610		8		2,961		43
Commercial and industrial		1,626		2		3,958		92		4,810		4		4,042		54
Consumer		—		—		—		—		—		—		—		—

Total	$	27,202	$	77	$	18,690	$	289	$	30,814	$	129		22,134	$	208

There was no cash-basis interest income recognized during the periods presented above. The gross year-to-date interest income that would have been recorded in the current period had the nonaccrual loans been current in accordance with their original terms was $90,000 for the six months ending June 30, 2012 and $289,480 for the six months ending June 30, 2011.

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2012 and December 31, 2011, respectively:


	June 30, 2012
($ in 000’s)	Nonaccrual		Over 90 days and accruing
Construction, land development and other land	$	610	$	—
Commercial real estate		16,009		—
Residential real estate		781		—
Commercial and industrial		3,273		—
Consumer		—		—

Total	$	20,673	$	—


	December 31, 2011
($ in 000’s)	Nonaccrual		Over 90 days and accruing
Construction, land development and other land	$	612	$	—
Commercial real estate		17,483		—
Residential real estate		3,698		—
Commercial and industrial		2,261		—
Consumer		—		—

Total	$	24,054	$	—

The following tables present the aging of the recorded investment in past due loans as of June 30, 2012 and December 31, 2011, respectively:


($ in 000’s)	June 30, 2012
($ in 000’s)	30 to 89 days		Over 90 days		Total Past Due
Construction, land development and other land	$	—	$	610	$	610
Commercial real estate		—		—		—
Residential real estate		—		—		—
Commercial and industrial		2,026		—		2,026
Consumer		—		—		—

Total	$	2,026	$	610	$	2,636


($ in 000’s)	December 31, 2011
($ in 000’s)	30 to 89 days		Over 90 days		Total Past Due
Construction, land development and other land	$	—	$	—	$	—
Commercial real estate		—		—		—
Residential real estate		—		—		—
Commercial and industrial		1,241		97		1,338
Consumer		—		—		—

Total	$	1,241	$	97	$	1,338

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. Generally, performing loans are not subjected to grade reviews unless the loan matures or some event or information occurs that causes the servicing loan officer to re-evaluate the loan grade. Loans that are adversely classified are considered for grade changes in conjunction with preparation of the monthly problem loan reports. 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.

As of June 30, 2012 and December 31, 2011, respectively, the risk category, which relate to credit quality indicators, of loans by class of loans, including accrual and non-accrual loans, (net of deferred fees and costs) is as follows:


	June 30, 2012
($ in 000’s)	Pass		Special Mention		Substandard		Doubtful		Total
Construction, land development and other land	$	1,221	$	—	$	1,535	$	—	$	2,756
Commercial real estate		34,808		6,607		17,530		—		58,945
Residential real estate		6,884		—		3,594		—		10,478
Commercial and industrial		26,925		522		5,143		48		32,638
Consumer		19		—		1		—		20

Total	$	69,857	$	7,129	$	27,803	$	48	$	104,837


	December 31, 2011
($ in 000’s)	Pass		Special Mention		Substandard		Doubtful		Total
Construction, land development and other land	$	1,556	$	—	$	1,870	$	—	$	3,426
Commercial real estate		32,207		6,596		18,219		—		57,022
Residential real estate		2,218		—		3,700		—		5,918
Commercial and industrial		31,994		123		3,169		187		35,472
Consumer		22		—		1		—		23

Total	$	67,997	$	6,718	$	26,959	$	187	$	101,861

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 (including the SBA-guaranteed portions) is as follows:


($ in 000’s)	June 30, 2012		December 31, 2011
Construction, land development and other land	$	1,080	$	1,412
Commercial real estate		3,418		3,561
Commercial and industrial		1,318		1,599

Total	$	5,816	$	6,572

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 subsidiary’s 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. During the first six months of 2012, approximately $622,000 of yield and credit discount was accreted on these loans.

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. During the first six months of 2012, as a result of various loan payoffs, and loan activities, a portion of the credit discount was recognized in earnings.

The following table reflects the discount changes in the purchased credit impaired loan portfolio for the period indicated:


($ in 000’s)	Yield Discount			Credit Discount
Balance, December 31, 2011	$	321		$	6,165
Accreted to income		(227	)		(395	)
Loans renegotiated and charge-offs		—			—
Other changes, net		(3	)		(2,009	)

Balance, June 30, 2012	$	91		$	3,761

Management does not establish general reserves against purchased credit-impaired 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 June 30, 2012, no related reserves were added relating to the October 28, 2010 purchased credit-impaired loan portfolio.

Troubled Debt Restructurings:

The Company has allocated zero and $335,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2012 and December 31, 2011, respectively. At June 30, 2012, and December 31, 2011, the aggregate amounts of troubled debt restructurings were $18.7 million and $23 million, respectively. The Company has not committed to lend additional amounts as of June 30, 2012 to customers with outstanding loans that are classified as troubled debt restructurings.

During the first three months ended March 31, 2012, there were no troubled debt restructurings.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended June 30, 2012.


	Three months ended June 30, 2012
($ in 000’s)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Construction, land development and other land	$	—	$	—	$	—
Commercial real estate		—		—		—
Residential real estate		—		—		—
Total loans secured by real estate		—		—		—

Commercial and industrial		2		1,026		849
Consumer		—		—		—

Total Troubled Debt Restructurings	$	2	$	1,026	$	849

The troubled debt restructurings described above increased the provision for loan losses by 176,330 and resulted in charge-offs of $176,330 for the six months ended June 30, 2012. There were no troubled debt restructurings during the first three months of 2012.

There were no loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the six months ended June 30, 2012.

For impaired loans, management manually calculates specific reserves. That reserve balance is then compared against the purchase credit impairment balance, and the final specific reserve is then the greater of the two balances. Therefore, doubtful loans may not have a specific reserve where the purchase credit impairment balance is adequate.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default or any of its debt in the foreseeable future without the modification. This evaluation is performed under the company’s internal underwriting policy.

A delay in payment is considered to be insignificant if it is less than 3 months.

Note 5. 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. All the goodwill is assigned to one of the operating subsidiaries, Service1st Bank. The Company established October 31 for annual impairment testing of goodwill, or if an event occurs or circumstances change that would more likely than not reduce the fair value of reporting unit. We determine the fair value of our reporting unit and compare it to its carrying amount. If the carrying amount of the reporting unit exceeds its fair value, we are required to perform as second step to the impairment test to measure the extent of the impairment.

During the third quarter of 2011, management determined that there was an adverse change in the business climate. This was directly related to the adverse local economy persisting which is continuing to have a meaningful impact on the Bank’s operations, and although the acquisition of the Bank was consummated less than twenty four months ago, it was more likely than not that the fair value of the reporting unit had fallen below its carrying amount. The primary indicator for this decision was the ongoing deterioration of borrowers who can no longer perform under the original terms of the loan agreements. The restructured loans typically require significant reserves or charge-offs based on appraised collateral values that may have declined 50-80% since the inception of the loan resulting in over $8.7 million in provisions for loan losses during 2011. The Company elected to obtain professional assistance in determining the fair value of the reporting unit and if necessary to assist in determining the fair values of all assets and liabilities, any core deposit intangibles and the fair value of the contingent consideration. We determined the fair value of our reporting unit and compared it to its carrying amount and determined that step two of the impairment test should be performed during the third quarter. The method for estimating the value of the reporting unit included a weighted average of the discounted cash flows method as well as the guideline change of control transactions method and public company method. The second step of the goodwill impairment test is performed to determine the amount of the goodwill impairment, if any. Step two required us to compute the implied fair value of the reporting unit goodwill and compare it against the actual carrying amount of the reporting unit goodwill. The implied fair value of the reporting unit goodwill was determined in the same manner that goodwill recognized in a business combination is determined. That is, the fair value of the reporting unit was allocated to all of the individual assets and liabilities of the reporting unit, including any unrecognized identifiable intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit determined in the first step was the price paid to acquire the reporting unit. The allocation process is only performed for purposes of testing goodwill for impairment, as the other assets and liabilities are not written up or down, nor is any additional unrecognized identifiable asset recorded as part of this process.

After this analysis, it was determined the implied fair value of the goodwill assigned to the reporting unit was less than the carrying value on the Company’s balance sheet, and the Company reduced the carrying value of goodwill to zero through an impairment charge to earnings. Such charge had no effect on the Company’s cash balances or liquidity. In addition, because goodwill is not included in the calculation of regulatory capital, the Company’s regulatory ratios were not affected by this non-cash expense.

The Company has other intangible assets which consist of a core deposit intangible that had, as of June 30, 2012, a remaining amortization period of approximately eight and a half 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 June 30, 2012:


($ in 000’s)	Six Months Ended June 30, 2012
Balance at beginning of period	$	670
Amortization expense		(46	)

Balance at end of period		624

Gross carrying amount		784
Accumulated amortization		(160	)

Net book value	$	624

Note 6. OTHER REAL ESTATE ACQUIRED THROUGH FORECLOSURE

The following table presents the changes in other real estate acquired through foreclosure:


($ in 000’s)	Six Months Ended June 30, 2012
Balance, beginning of period	$	4,008
Additions		2,415
Dispositions		(403	)
Valuation adjustments in the period		(200	)

Balance, end of period	$	5,820

Note 7. DEPOSITS

The composition of deposits is as follows:


($ in 000’s)	June 30, 2012		December 31, 2011
Demand deposits, non-interest bearing	$	59,801	$	50,488
NOW and money market accounts		40,767		37,306
Savings deposits		1,397		735
Time certificates, $100 or more		19,211		26,479
Other time certificates		3,074		6,218

Total	$	124,250	$	121,226

Note 8. STOCK-BASED COMPENSATION

Restricted stock granted to the Company’s Chief Executive Officer and former Chief Financial Officer, restricted stock unit awards made to selected individuals, stock awards made to selected directors and a former director, and the restricted stock options associated with Service1st Bank’s 2007 Stock Option Plan have been fully discussed in the Company’s 2011 Form 10-K. No additional equity awards were made during the first six months of 2012. Total compensation cost that has been charged against income for those programs was approximately $222,000 for the period ended June 30, 2012. There has been no income tax benefit recorded because of the offset in the deferred tax asset valuation allowance. As of June 30, 2012 the aggregate intrinsic value of outstanding and vested stock options is $0.

Note 9. REGULATORY 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 June 30, 2012, the Company and 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 June 30, 2012, Service1st was considered well capitalized under the regulatory framework for prompt corrective action.

Actual capital levels and minimum required levels from June 30, 2012 and December 31, 2011 were as follows:


	June 30, 2012
	Actual					Minimum Required for Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Regulations					Minimum Required Under Regulatory Agreements
($ in millions)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)
Consolidated	$	74,145		69.04	%	$	8,591		8.0	%	$	10,739		10.0	%	$	—		NA
Service1st Bank	$	29,800		35.98	%	$	6,626		8.0	%	$	8,282		10.0	%	$	9,939		12.0	%
Tier 1 capital (to risk-weighted assets)
Consolidated	$	73,089		68.06	%	$	4,296		4.0	%	$	6,444		6.0	%	$	—		NA
Service1st Bank	$	28,743		34.70	%	$	3,313		4.0	%	$	4,969		6.0	%	$	—		NA
Tier 1 capital (to average assets)
Consolidated	$	73,089		36.56	%	$	7,998		4.0	%	$	9,997		5.0	%	$	—		NA
Service1st Bank	$	28,743		16.33	%	$	7,041		4.0	%	$	8,802		5.0	%	$	17,603		10.0	%


	December 31, 2011
	Actual					Minimum Required for Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Regulations					Minimum Required Under Regulatory Agreements
($ in millions)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)
Consolidated	$	76,676		71.58	%	$	8,569		8.0	%	$	10,712		10.0	%	$	—		NA
Service1st Bank	$	30,570		29.67	%	$	8,244		8.0	%	$	10,305		10.0	%	$	12,366		12.0	%
Tier 1 capital (to risk-weighted assets)
Consolidated	$	75,366		70.36	%	$	4,285		4.0	%	$	6,427		6.0	%	$	—		NA
Service1st Bank	$	29,260		28.39	%	$	4.122		4.0	%	$	6,183		6.0	%	$	—		NA
Tier 1 capital (to average assets)
Consolidated	$	75,366		34.77	%	$	8,671		4.0	%	$	10,839		5.0	%	$	—		NA
Service1st Bank	$	29,260		14.42	%	$	8,119		4.0	%	$	10,149		5.0	%	$	20,297		10.0	%

During the application process for 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. The Consent Order that Service1st Bank agreed to in September of 2012, was terminated effective October 31, 2011 and Service1st now has an informal understanding with the FDIC that Service1st must maintain leverage capital of at least 8.5%.

Note 10. LEGAL CONTINGENCIES

In the ordinary course of our business, we are party to various legal actions, which we believe are incidental to the operation of our business. Although the ultimate outcome and amount of liability, if any, with respect to these legal actions to which we are currently a party, cannot presently be ascertained with certainty, in the opinion of management, based upon information currently available to use, any resulting liability is not likely to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Note 11. SUBSEQUENT EVENTS

The bank is seeking approval from the Commissioner of the Nevada Division of Financial Institutions for closing of the bank’s only branch office, at 8965 South Eastern Avenue in Las Vegas. Assuming the Commissioner approves the branch closing, closing is currently expected to occur on or before September 30, 2012. After the branch closing the bank’s only office will be its main office, at 8349 West Sunset Road in Las Vegas. The bank currently does not expect to incur any material expenses related to the branch closing.

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

You should read the following discussion and analysis in conjunction with unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q and our combined and consolidated financial statements and related notes thereto included in or incorporated into Part II, Item 8 of our Annual Report on Form 10-K and the Risk Factors included in Part I, Item 1A of our Annual Report on Form 10-K, as well as other cautionary statements and risks described elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K .

References to “us”, “we”, “our” or “WLBC” refer to Western Liberty Bancorp. The following discussion and analysis of WLBC’s financial condition and results of operations should be read in conjunction with the condensed financial statements and the notes thereto contained elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.

Forward-looking statements

All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q including, without limitation, statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Quarterly Report on Form 10-Q, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions, as they relate to us or our management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed in our filings with the Securities and Exchange Commission. We wish to caution you not to place undue reliance on these forward-looking statements, which speak only as of the date made. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph.

Overview

Business of WLBC: WLBC became a bank holding company on October 28, 2010 with consummation of the acquisition of Service1st Bank. WLBC currently owns two subsidiaries: Service1st Bank of Nevada (Service1st) and Las Vegas Sunset Properties. WLBC conducts no business activities other than acting as the holding company of Service1st and Las Vegas Sunset Properties.

Service1st is a commercial bank that commenced operations as a financial institution on January 16, 2007. Service1st provides a full range of deposit, lending and other banking services to locally owned businesses, professional firms, individuals and other customers from its headquarters and two retail banking facilities located in the greater Las Vegas area. Services provided include basic commercial and consumer depository services, commercial working capital and equipment loans, commercial real estate loans and other traditional commercial banking services. 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. Most of Service1st’s business is generated in the Nevada market. Service1st is under the supervision of and subject to regulation and examination by the State of Nevada Financial Institutions Division and the FDIC.

Las Vegas Sunset Properties was established in 2011 for the purpose of owning and managing certain nonperforming and subperforming assets. As of June 30, 2012, certain OREO assets (originally owned by Service1st) with an estimated carrying basis of $5.8 million have been acquired by this subsidiary. By using funds contributed to it from Western Liberty Bancorp, Las Vegas Sunset Properties currently interests in a total of 16 classified loan assets, at fair value of approximately $18.8 million. The holding company believes that assembling OREO and classified loans in a separate, nonbank subsidiary will promote efficient and cost-effective management and ultimate resolution of the assets.

As of June 30, 2012, loans secured by real estate constituted 68.89% of WLBC’s loan portfolio. This ratio is calculated by adding together loans secured by real estate at June 30, 2012 (construction, land development and other land loans of $2.7 million, commercial real estate loans of $59.0 million and residential real estate loans of $10.5 million, which total $72.2 million of loans secured by real estate) and dividing this balance by gross loans of $104.8 million at June 30, 2012. 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 professional, 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 in non-interest income.

The bank is seeking approval from the Commissioner of the Nevada Division of Financial Institutions for closing of the bank’s only branch office, at 8965 South Eastern Avenue in Las Vegas. Opened in October 2007, the branch had deposits of approximately $36 million as of June 30, 2011, compared to $96 million at the main office, which also opened in 2007. Approximately nine miles from the bank’s main office, the branch is a leased facility, with the current lease term set to expire at the end of September 2012. After the branch closing the bank’s only office will be its main office, at 8349 West Sunset Road in Las Vegas. The bank decided to close the branch because the benefits originally anticipated from having more than one banking office have not been realized, because advances in banking technology make community banks less dependent than in the past on having multiple branch locations, and because the bank anticipates significant savings from the branch closing, without a significant loss of customer affinity. We currently do not expect to incur any material expenses related to the branch closing.

Summary of results of operations and financial condition

This section of Management’s Discussion and Analysis contains a comparative format for the respective reporting periods of 2012 and 2011.

Results of operations for the three months ended June 30, 2012 and 2011

For the three months ended June 30, 2012, we had a net loss of $1.5 million or ($0.11) per common share compared to the three months ended June 30, 2011, a net loss of $4.6 million or ($0.30) per common share. The decrease in net loss was primarily due to a $4.0 million reduction in provision for loan loss expense. Provision for loan loss expense decreased from $4.3 million for the three months ended June 30, 2011 to $319,000 for the three months ended June 30, 2012. The Company’s revenue was derived from interest income of $1.3 million and non-interest income of $120,000 for the three months ended June 30, 2012, compared to interest income of $2.1 million and non-interest income of $192,000 for the three months ended June 30, 2011. Our primary source of revenue is interest income from loans. Loan interest income comprised 95.67% of the $1.3 million for the three months ended June 30, 2012, compared to 96.74% of the $2.1 million the three months ended June 30, 2011. The $700,000 decrease in loan interest income is the result of a margin compression and discount accretion as rates on loans have decreased quarter over quarter from 7.86% for the three months ended June 30, 2011 to 4.82% for the three months ended June 30, 2012 and a decline in the accretion of loan interest income. The Company’s expenses for the three months ended June 30, 2012 were comprised of $2.5 million in non-interest expense, $319,000 in loan loss provision expense, and $100,000 in interest expense on deposits, compared to the three months ended June 30, 2011 which stated $2.4 million in non-interest expense, $4.3 million in loan loss provision expense, and $127,000 in interest expense on deposits. For the three months ended June 30, 2012, non-interest expense is primarily comprised of $789,000 in salaries and employee benefits due to financial institutions being people intensive business, $402,000 in legal and professional fees primarily related to SEC filings and problem loans, $431,000 in occupancy expense as the company’s locations are leased, $136,000 in Federal Deposit Insurance as deposits are federally insured, and $108,000 in stock-based compensation due to previously issued stock awards compared to $765,000 in salaries and employee benefits, $520,000 in legal and professional fees, $374,000 in occupancy expense, $129,000 in Federal Deposit Insurance, and $138,000 in stock-based compensation.

Results of operations for the six months ended June 30, 2012 and 2011

For the six months ended June 30, 2012, we had a net loss of $2.5 million or ($0.19) per common share compared to the six months ended June 30, 2011, a net loss of $5.0 million or ($0.33) per common share. This decrease in net loss was primarily due to a $5.4 million reduction in provision for loan loss expense. Provision expense decreased from $5.7 million for the six months ended June 30, 2011 to $319,000 for the six months ended June 30, 2012. The Company’s revenue was derived from interest income of $3.1 million and non-interest income of $339,000 for the six months ended June 30, 2012, compared to interest income of $5.9 million and non-interest income of $313,000 for the six months ended June 30, 2011. The company’s primary source of revenue is interest income from loans. Loan interest income comprised 96.00% of the $3.1 million for the six months ended June 30, 2012, compared to 97.74% of the $5.9 million the six months ended June 30, 2011. The $2.9 million decrease in loan interest income is the result of a fewer dollars being accreted into income from loan yield and credit discount accretion in during 2012 compared to 2011, $622,000 for the six months ended June 30, 2012 compared to $1.7 million for the six months ended June 30, 2011, combined with margin compression as rates on loans have decreased quarter over quarter, from 11.21% for the three months ended June 30, 2011 to 5.52% for the three months ended June 30, 2012. This decrease is due to three loans with substantial marks paying off during the first quarter of 2011. This activity was not repeated during the first six months of 2012. The Company’s expenses for the six months ended June 30, 2012 were comprised of $5.4 million in non-interest expense, $319,000 in loan loss provision expense, and $215,000 in interest expense on deposits, compared to $5.3 million in non-interest expense, $5.7 million in loan loss provision expense, and $239,000 in interest expense on deposits. For the six months ended June 30, 2012, non-interest expense is primarily comprised of $1.6 million in salaries and employee benefits due to financial institutions being people intensive business, $1.2 million in legal and professional fees primarily related to SEC filings and problem loans, $763,000 in occupancy expense as the company’s locations are leased, $270,000 in Federal Deposit Insurance as deposits are federally insured, and $222,000 in stock-based compensation due to previously issued stock awards compared to the six months ended June 30, 2011 which stated $1.6 million in salaries and employee benefits, $1.5 million in legal and professional fees, $748,000 in occupancy expense, $281,000 in Federal Deposit Insurance, and $279,000 in stock-based compensation due to previously issued stock awards.

Net interest income

The following table set 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 three and six month periods ended June, 2012.


	For the Three Months Ended June 30, 2012								For the Six Months Ended June 30, 2012								For the Three Months Ended June 30, 2011								For the Six Months Ended June 30, 2011
($ in 000’s)	Average Balance			Interest Income/ Expense		Percent Average Balance			Average Balance			Interest Income/ Expense		Percent Average Balance			Average Balance			Interest Income/ Expense		Percent Average Balance			Average Balance			Interest Income/ Expense		Percent Average Balance
INTEREST EARNING ASSETS:
Certificates of deposit	$	907		$	1		0.57	%	$	453		$	1		0.57	%	$	12,083		$	27		0.87	%	$	16,442		$	91		1.12	%
Money Market funds		—			—		0.00	%		—			—		0.00	%		47,378			1		0.01	%		49,792			2		0.01	%
Interest bearing deposits		77,118			48		0.25	%		77,889			98		0.25	%		34,921			21		0.24	%		27,134			31		0.23	%
Securities, taxable and other		1,998			10		2.00	%		2,214			23		2.08	%		4,921			19		1.57	%		5,296			10		0.38
Portfolio loans(1)		106,883			1,285		4.82	%		106,452			2,928		5.52	%		104,155			2,018		7.86	%		104,882			5,800		11.21	%

Total interest-earnings assets/interest income		186,906			1,345		2.89	%		187,008			3,050		3.27	%		203,458			2,086		4.16	%		203,546			5,934		5.91	%

NON-INTEREST EARNING ASSETS:
Cash and due from banks	$	8,863		$	—		0.00	%	$	9,344			—		0.00	%	$	6,537		$	—		0.00	%	$	7,900		$	—		0.00	%
Allowance for loan losses		(2,605	)		—		0.00	%		(2,761	)		—		0.00	%		(1,278	)		—		0.00	%		(683	)		—		0.00	%
Other assets		7,399			—		0.00	%		7,291			—		0.00	%		15,225			—		0.00	%		14,764			—		0.00	%

Total assets	$	200,563			—		0.00	%	$	200,882		$	—		0.00	%	$	223,942			—		0.00	%	$	225,527			—		0.00	%

LIABILITIES AND STOCKHOLDERS’ EQUITY INTEREST-BEARING LIABILITIES:
Interest checking	$	6,016		$	4		0.28	%	$	6,217		$	9		0.30	%	$	8,856		$	7		0.32	%	$	9,494		$	14		0.30	%
Money Markets		32,636			50		0.61	%		31,640			96		0.61	%		26,667			37		0.56	%		25,751			70		0.55	%
Savings		1,274			1		0.46	%		1,018			2		0.49	%		959			2		0.85	%		1,068			3		0.57	%
Time deposits under $100,000		3,529			8		0.85	%		4,502			19		0.82	%		6,778			2		0.12	%		6,033			4		0.13	%
Time deposits $100,00 and over		19,698			37		0.75	%		22,249			89		0.80	%		35,796			79		0.90	%		33,685			145		0.87	%
Short-term borrowings		—			—		0.00	%		—			—		0.00	%		—			—		0.00	%		1,823			3		0.33	%

Total interest-bearing liabilities/interest expense	$	63,153		$	100		0.63	%	$	65,626		$	215		0.66	%	$	79,056		$	127		0.65	%	$	77,854		$	239		0.62	%

NON-INTEREST BEARING LIABILITIES AND STOCKHOLDERS EQUITY:
Non-interest-bearing demand deposits	$	62,115		$	—		0.00	%	$	59,483		$	—		0.00	%	$	53,113		$	—		0.00	%	$	53,634		$	—		0.00	%
Accrued interest on deposits and other liabilities		959			—		0.00	%		827			—		0.00	%		1,070			—		0.00	%		1,153			—		0.00	%

Total liabilities		126,227			—		0.00	%		125,936			—		0.00	%		133,239			—		0.00	%		132,641			—		0.00	%
Stockholders’ equity		74,336			—		0.00	%		74,946			—		0.00	%		90,703			—		0.00	%		92,886			—		0.00	%

Total liabilities and stockholders’ equity	$	200,563			—		0.00	%	$	200,882			—		0.00	%	$	223,942		$	—		0.00	%	$	225,527		$	—		0.00	%

Net interest income and interest rate spread(2)				$	1,245		2.25	%				$	2,835		2.61	%				$	1,959		3.46	%				$	5,695		5.29	%
Net interest margin(3)							2.67	%							3.04	%							3.90	%							5.67	%
Ratio of Average Interest-Earning Assets to Interest-Bearing Liabilities		296	%							285	%							257	%							261	%

(1)	Average balance includes average nonaccrual loans of approximately $20.7 and $9.7 million for 2012, and 2011, 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 annualized and then divided by average interest-earning assets.

Three months ended June 30, 2012 and 2011

Net interest income for the three months ended June 30, 2012 was $1.3 million and included approximately $153,000 of loan yield and credit discount accretion compared to $2.0 million for the three months ended June 30, 2011 which included approximately $27,000 of loan yield and credit discount accretion. The interest rate spread and net interest margin were 2.25% and 2.67%, respectively, for the three months ended June 30, 2012 compared to 3.46% and 3.90%, respectively for the three months ended June 30, 2011. In comparing the first three months of 2012 to 2011, there is evidence of margin compression produced by a decrease in rates. Overall, rates on interest bearing assets have decreased from 4.16% for the three months ended June 30, 2011 to 2.89% for the three months ended June 30, 2012 which primarily impacted by loan yield and credit discount accretion.

Deposits decreased $6.9 million from $132.2 million as of June 30, 2011 to $125.3 million as of June 30, 2012. Time deposits showed the largest decrease of $19.3 million, interest bearing now accounts decreased $2.8 million while Money Market and Noninterest Bearing deposits increased $6.0 million and $9.0 million, respectively. Overall rates on deposit accounts approximated 0.63% for the three months ended June 30, 2012, a decrease of 0.02% from 0.65% for the three months ended June 30, 2011. As a result, interest expense decreased $27,000, from $127,000 for the three months ended June 30, 2011 to $100,000 for the three months ended June 30, 2012. In addition, average balances for interest bearing liabilities decreased $15.9 million from $79.1 million as of June 30, 2011 to $63.2 million as of as of June 30, 2012. WLBC increased cash and cash equivalents during the second three months of 2012 by $2.3 million while the investment securities portfolio decreased by $2.9 million. (Cash and cash equivalents which consist of cash and amounts due from banks, federal funds sold and certificates of deposits with original maturities of three months or less.)

Net interest income was negatively impacted as a result of margin compression as rates on loans have decreased quarter over quarter from 7.86% for the three months ended June 30, 2011 to 4.82% for the three months ended June 30, 2012.

Six months ended June 30, 2012

Net interest income for the six months ended June 30, 2012 was $2.8 million and included approximately $622,000 of loan yield and credit discount accretion compared to $5.7 million for the six months ended June 30, 2011 which included approximately $1.7 million of loan yield and credit discount accretion. The interest rate spread and net interest margin were 2.61% and 3.04%, respectively, for the six months ended June 30, 2012 compared to 5.29% and 5.67%, respectively for the six months ended June 30, 2011. In comparing the first six months of 2012 to 2011, there is evidence of margin compression produced by a decrease in rates. Overall, rates on interest bearing assets have decreased from 5.91% for the six months ended June 30, 2011 to 3.27% for the six months ended June 30, 2012 which primarily impacted by loan yield and credit discount accretion.

Deposits decreased $4.6 million from $129.7 million as of June 30, 2011 to $125.1 million as of June 30, 2012. Time deposits showed the largest decrease of $13.0 million, interest bearing now accounts decreased $3.3 million while Money Market and Noninterest Bearing deposits increased $5.9 million and $5.8 million, respectively. Overall rates on deposit accounts approximated 0.66% for the six months ended June 30, 2012, an increase of 0.04% from 0.62% for the six months ended June 30, 2011. Despite rates on interest bearing liabilities increasing slightly, interest expense decreased $24,000, from $239,000 for the six months ended June 30, 2011 to $215,000 for the six months ended June 30, 2012, due to average balances on interest bearing liabilities decreasing $12.2 million from $77.9 million as of June 30, 2011 to $65.6 million as of as of June 30, 2012. WLBC increased cash and cash equivalents during the first six months of 2012 by $1.4 million while the investment securities portfolio decreased by $3.1 million. (Cash and cash equivalents which consist of cash and amounts due from banks, federal funds sold and certificates of deposits with original maturities of six months or less.)

Net interest income was negatively impacted in the six months ended June 30, 2012 by a reduction in loan discount accretion. A total of $1.7 million in loan discount was accreted into interest income during the six months ended June 30, 2011, while only $622,000 of loan yield and credit discount was accreted into interest income during the six months ended June 30, 2012.

Provision for loan losses

The provision for loan losses is reflected as a charge against earnings. 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 incurred 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 charged-off loans 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.

There was $319,000 provision for loan losses for the three months ended June 30, 2012 compared to $4.3 million for the three months ended June 30, 2011 primarily due to stabilization of the loan portfolio. Gross loans increased $3.3 million, from $101.5 million as of June 30, 2011 to $104.8 million as of June 30, 2012. During the three months ended June 30, 2012, the loan portfolio showed continued evidence of stabilization. The qualitative factors used in allowance for loan and lease (ALLL) model to determine the amount of provision expense needed were reflective of this fact as well as local and western region economic trends. Contrast this with the three months ended June 30, 2011, where the loan portfolio showed evidence of deterioration which was the result of continued erosion of appraised values which led to approximately $3.3 million in specific reserves

There was $319,000 provision for loan losses for the six months ended June 30, 2012 compared to $5.7 million for the six months ended June 30, 2011 primarily due to stabilization of the loan portfolio. Gross loans increased $3.3 million, from $101.5 million as of June 30, 2011 to $104.8 million as of June 30, 2012. During the six months ended June 30, 2012, the loan portfolio showed continued evidence of stabilization which was supported by the fact that there were no significant write downs of classified assets. The qualitative factors used in allowance for loan and lease (ALLL) model to determine the amount of provision expense needed were reflective of this fact as well as local and western region economic trends. Contrast this with the six months ended June 30, 2011, where the loan portfolio showed evidence of deterioration which was the result of continued erosion of appraised values which led to approximately $3.3 million in specific reserves

Non-interest income

Non-interest income primarily consists of loan documentation and late fees, service charges on deposits, other fees such as wire, and ATM fees.


	Three Months Ended				Six Months Ended
($ in 000’s)	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
Service charge income	$	69	$	78	$	139	$	156
Loan and Late fees		9		7		16		16
Other non-interest income		42		108	$	184		141

	$	120	$	193	$	339	$	313

Three months ended June 30, 2012

Non-interest income decreased by $73,000 for the three months ended June 30, 2012, from $193,000 for the three months ended June 30, 2011 compared to $120,000 for the three months ended June 30, 2012. In June 2011 the company recognized a $33,000 gain on the sale of an OREO property.

Six months ended June 30, 2011

Non-interest income increased by $26,000 for the six months ended June 30, 2012, from $313,000 for the six months ended June 30, 2011 compared to $339,000 for the six months ended June 30, 2012. In May 2012 the company recognized a $32,000 gain on the sale of an OREO property.

Non-interest expense

The following table sets forth the principal elements of non-interest expenses for periods ending June 30, 2012 and 2011.


	Three Months Ended					Six Months Ended
($ in 000’s)	June 30, 2012		June 30, 2011			June 30, 2012		June 30, 2011
Salaries and employee benefits	$	789	$	765		$	1,633	$	1,558
Occupancy, equipment and depreciation		431		374			763		748
Computer service charges		77		74			155		151
Federal deposit insurance		136		129			270		281
Legal and professional fees		402		520			1,152		1,456
Advertising and business development		16		48			45		68
Insurance		74		67			146		138
Telephone		17		17			35		43
Printing and supplies		50		87			77		229
Directors fees		57		49			113		98
Stock-based compensation		108		138			222		279
Provision for unfunded commitments		3		(203	)		3		(336	)
OREO property impairment		83		—			200		—
Other		288		334			587		588

Total	$	2,531	$	2,399		$	5,401	$	5,301

Three months ended June 30, 2012

Non-interest expense increased $132,000 to $2.5 million for the three months ended June 30, 2012 from $2.4 million for the three months ended June 30, 2011. Provision for unfunded commitments increased $206,000 to a positive balance of $3,000 for the

three months ended June 30, 2012 from a negative balance of $203,000 for the three months ended June 30, 2011, due to the reversal of unfunded commitment expense in 2011 as the provision for unfunded commitments was determined to be over reserved. Unfunded commitments are for lines of credit, committed to, by the bank for various borrowers which are not fully funded. Unfunded commitments are monies set aside to cover potential loss from those unfunded balances on the lines of credit. Occupancy expense increased $57,000 to $431,000 for the three months ended June 30, 2012 from $374,000 for the three months ended June 30, 2011 primarily due to the acceleration of leasehold expenses so that they will be fully amortized when their associated lease expires. OREO property impairment increased $83,000 for the three months ended June 30, 2012 compared to no impairment for the three months ended June 30, 2011 as the result of updated impairment analysis on three individual OREO properties. For the three months ended June 30, 2012 compared to the three months ended June 30, 2011 decreases for non-interest expense were noted in legal and professional fees of $118,000, to $402,000 for the three months ended June 30, 2012 from $520,000 for the three months ended June 30, 2011, printing and supplies expense decreased $37,000 to $50,000 for the three months ended June 30, 2012 from $87,000 for the three months ended June 30, 2011 while advertising and business development expense decreased $32,000, to $16,000 for the three months ended June 30, 2012 from $48,000 for the three months ended June 30, 2011 due to a concerted effort by management to reduce costs.

Stock-based compensation expense, which includes expenses associated with the issuance of restricted stock and stock options, decreased $30,000 to $108,000 for the three months ended June 30, 2012 from $138,000 for the three months ended June 30, 2011 due to the forfeiture of restricted stock by the company’s former Chief Financial Officer.

Six months ended June 30, 2011

Non-interest expense increased $100,000 to $5.4 million for the six months ended June 30, 2012 from $5.3 million for the six months ended June 30, 2011. Provision for unfunded commitments increased $339,000 from a positive balance of $3,000 for the six months ended June 30, 2012 to a negative balance of $336,000 for the six months ended June 30, 2011, due to the reversal of unfunded commitment expense in 2011 as the provision for unfunded commitments was determined to be over reserved. Unfunded commitments are for lines of credit, committed to, by the bank for various borrowers which are not fully funded. Unfunded commitments are monies set aside to cover potential loss from those unfunded balances on the lines of credit. OREO property impairment increased $200,000 for the six months ended June 30, 2012 compared to no impairment for the six months ended June 30, 2011 as the result of updated impairment analysis on four individual OREO properties. Salaries and employee benefits expense increased $75,000 to $1.6 million for the six months ended June 30, 2012 from $1.6 million for the six months ended June 30, 2011 primarily due to company salary adjustments. For the six months ended June 30, 2012 compared to the six months ended June 30, 2011 decreases for non-interest expense were noted in legal and professional fees of $304,000, from $1.2 million for the six months ended June 30, 2012 compared to $1.5 million for the six months ended June 30, 2011, printing and supplies expense decreased $152,000 to $77,000 for the six months ended June 30, 2012 from $229,000 for the six months ended June 30, 2011 due to a concerted effort by management to reduce costs.

Stock-based compensation expense, which includes expenses associated with the issuance of restricted stock and stock options, decreased $57,000 to $222,000 for the six months ended June 30, 2012 from $279,000 for the six months ended June 30, 2011 due to the forfeiture of restricted stock by the company’s former Chief Financial Officer.

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 were at $198.7 million as of June 30, 2012, an increase of $422,000, from $198.3 million as of December 31, 2011. The increase was principally attributable to three categories of assets. Loans increased $3.0 million, OREO increased $1.8 million while cash and cash equivalents decreased $4.3 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 totaled $85.1 million at June 30, 2012 and $89.4 million at December 31, 2011. Cash and cash equivalents are managed based upon liquidity needs, investment opportunities and risk-adjusted returns on any investments. The current low yield on investment securities coupled with market risk warrants keeping funds in a secure environment in management’s view. Immediate liquidity allows funding of high quality loans when available.

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 fundings or deposit withdrawals; (ii) investment securities 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.

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 and (ii) small business administration loan pools. At June 30, 2012, investment securities totaled $713,000, a decrease of $1.8 million, compared with $2.5 million at December 31, 2011.

WLBC has not used interest rate swaps or other derivative instruments to hedge fixed rate loans or to otherwise mitigate interest rate risk.

Loans

Gross loans, net of deferred fees and the allowance for loan losses, increased $3.3 million from $98.9 million as of December 31, 2011 to $102.2 million as of June 30, 2012, primarily as a result of $12.9 million in new loans less $6.5 million in payoffs and paydowns and $700,000 in charged-off loans plus an addition $2.4 million in loan balances that moved to OREO.

Residential real estate increased $5.8 million, from $4.7 million as of December 31, 2011 to $10.5 million as of June 30, 2012 primarily due to the two new loans; the first loan for $4.9 million, the second for $900,000.

Commercial real estate increased $800,000; from $58.2 million as of December 31, 2011 to $59.0 million as of June 30, 2012 primarily due to a $600,000 loan being reclassified as a commercial real estate loan plus seven new loans that totaled $3.4 million of which $2.4 million was moved to OREO and $600,000 in payoffs and paydowns and $200,000 in charged-off loans.

Construction, land development and other land loans decreased $700,000, from $3.4 million as of December 31, 2011 to $2.7 million as of June 30, 2012 primarily due to a $1.0 million loan being reclassified as commercial and industrial, two new loans totaling with outstanding balances of $700,000 and pay downs of $400,000.

Commercial and industrial loans decreased $2.4 million primarily due to a $600,000 loan being reclassified as commercial real estate, and payoffs and pay downs of $4.3 million, charged-off loans of $500,000 and new loan advances of $3.0 million.

The following table summarizes nonperforming assets by category including loans purchased with credit impairment with no contractual interest being reported.


($ in 000’s)	June 30, 2012			December 31, 2011
Nonaccrual loans:
Loans Secured by Real Estate:
Construction, land development and other land loans	$	610		$	612
Commercial real estate		16,009			17,483
Residential real estate (1-4 family)		781			3,698

Total loans secured by real estate		17,400			21,793
Commercial and industrial		3,273			2,261
Consumer		—			—

Total nonaccrual loans	$	20,673		$	24,054
Past due (›90 days) loans and accruing interest:
Loans Secured by Real Estate
Construction, land development and other land loans	$	—		$	—
Commercial real estate		—			—
Residential real estate (1-4 family)		—			—
Total loans secured by real estate		—			—
Commercial and industrial		—			—
Consumer		—			—
Total past due loans accruing interest		—			—

Total nonperforming loans(1)	$	20,673		$	24,054
Other real estate owned (OREO)		5,820			4,008

Total nonperforming assets		26,493		$	28,062

Restructured loans (still on accrual)(1)	$	7,897		$	1,944

Non-Performing loans as a percentage of total portfolio loans		19.72	%		23.61	%
Non-Performing loans as a percentage of total assets		10.40	%		12.13	%
Allowance for loan losses as a percentage of nonperforming loans		12.79	%		12.14	%

(1)	There are no nonperforming restructured loans that have not already been presented in nonaccrual. Certain loans that have demonstrated compliance with the restructured loan terms for more than six months have been returned to performing status as a result of the sustained performance.

Other real estate owned

Other real estate owned (OREO) increased $1.8 million from $4.0 million as of December 31, 2011 to $5.8 million as of June 30, 2012. During the first six months of 2012, OREO had $2.4 million in new additions, $403,000 in sales, and $200,000 in write-downs which resulted in a net increase of $1.8 million. The new additions of $2.4 million were the result of three loans being paid off in which the company received two deeds in lieu of foreclosure. One commercial property sold which resulted in a net decrease of $403,000 in OREO while updated impairment analysis resulted in $200,000 in additional write downs in value for four separate properties.

Deposits

WLBC’s deposit activities are based in Nevada and primarily generated from this local area. Deposits have historically been the primary source for funding asset growth. As of June 30, 2012 the company has no brokered deposits.

Deposits increased by $3.1 million from $121.2 million as of December 31, 2011 to $124.3 million as of June 30, 2012 due to a continued effort to bring in customer deposits. Noninterest-bearing deposits increased of $9.3 million, interest-bearing deposits (now and money market accounts) increased $3.5 million, savings deposits increased $700,000 while time deposits decreased $10.4 million. Overall rates on deposit accounts approximated 0.63% and 0.66% for the three and six months ended June 30, 2012 which resulted in interest expense of $100,000 and $215,000, respectively.

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.

Service1st is subject to certain regulatory capital requirements mandated by the FDIC and generally applicable to all banks in the United States. 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. 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. Service1st has an informal understanding with the FDIC and with the Nevada FID that Service1st will maintain its Tier 1 capital in such an amount to ensure that its leverage ratio equals or exceeds 8.5%. In addition, during the application process for WLBC’s acquisition of Service1st, WLBC committed to the FDIC that until October 28, 2013 WLBC will maintain Tier 1 leverage capital of at least 10% at Service1st Bank. We also assured the FDIC that Service1st would not seek to grow by acquisition until Service1st is restored to a satisfactory condition, and that Service1st would not deviate materially from its business plan without advance approval of the FDIC and to the State of Nevada Financial Institutions Division.

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, FHLB, and Pacific Coast Bankers Bank, 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 consist of cash and due from correspondent banks, overnight funds sold to correspondents and the Federal Reserve Bank, unpledged security investments and lines of credit with the Pacific Coast Bankers’ Bank, Federal Reserve Bank of San Francisco and FHLB of San Francisco. For the period ended June 30, 2012, WLBC had approximately $85.1 million in cash and cash equivalents. In addition, WLBC had $713,000 in unpledged security investments, of which $250,000 is classified as available for sale, while the remaining $463,000 is classified as held to maturity. WLBC also has a $20.5 million collateralized line of credit with the Federal Home Loan Bank of San Francisco. In addition, an unsecured “Fed Funds” facility with Pacific Coast Bankers’ Bank in the amount of $5.0 million was established in June 2012. As of June 30, 2012, all of the lines 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. 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 Bank’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.

Commitments and contingencies

The Company is a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, and letters of credit. 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.


($ in 000’s)	June 30, 2012		December 31, 2011
Commitments to extend credit	$	22,896	$	19,069
Standby commercial letters of credit	$	44	$	644

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 periods ended June 30, 2012 and December 31 2011, respectively, the allowance for unfunded commitments was approximately $118,000, and $115,000, respectively.

Application of critical accounting policies and estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the disclosure of contingent assets and liabilities in the financial statements and the accompanying notes, and the reported amounts of revenue and expenses during the periods presented. On an on-going basis, management evaluates its estimates and judgments, including those related to allowances for loan losses, bad debts, and investments, financing operations, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which have formed the basis for making such judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual amounts and results could differ from the recorded estimates under different assumptions or conditions. A summary of critical accounting policies and estimates are listed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s 2011 Annual Report Form 10-K for the fiscal year ended December 31, 2011. There have been no significant changes to the critical accounting policies listed in the Company’s 2011 Annual Report Form 10-K during 2012.

ITEM 3. 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. There have been no material changes in market risk as of June 30, 2012 to the disclosures included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Based on an evaluation under the supervision and with the participation of our management (including our Chief Executive Officer and Chief Financial Officer), our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), were effective as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and (ii) accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially effect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Other than as set forth below, as of June 30, 2012, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC, except we may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.

In addition to the risk factors noted in the 2011 10-K, we have identified additional risk factors as follows federal bank regulatory agencies recently issued joint proposed rules that would increase minimum capital ratios, add a new minimum common equity ratio, add a new capital conservation buffer, and would change the risk-weightings of certain assets. The proposed changes, if implemented, would be phased in from 2013 through 2019. Management is currently assessing the effect of the proposed rules on the Company and the Bank’s capital position. Community bank associations are currently discussing their concerns with the regulatory agencies regarding the additional regulatory burdens the proposals would place on community banks.

Recent Nevada legislation creates uncertainty about lenders’ ability to dispose of distressed real-estate secured loan assets.

After a sale of foreclosed property, Nevada law generally allows a creditor or a beneficiary of a deed of trust to obtain a deficiency judgment if sale proceeds are less than the balance remaining due under the loan. For an obligation secured by a mortgage or deed of trust on or after October 1, 2009, a court may not award a deficiency judgment (1) if the creditor or beneficiary is a financial institution, (2) if the real property is a single-family dwelling and the debtor was the owner of the property, (3) if the debtor used the loan to purchase the property, (4) if the debtor occupied the property continuously after obtaining the loan, and (5) if the debtor did not refinance the loan. For real-estate secured loans, a Nevada law enacted in June of 2011 potentially prevents recovery of the balance remaining due on a loan if the creditor seeking to recover the amount owing is not the original lender but is instead a purchaser of the loan in the secondary market. The permissible recovery for a creditor who purchased the real-estate secured loan on the secondary market is limited to the amount paid for the loan by the secondary market loan purchaser. Because distressed loans are ordinarily purchased at a significant discount relative to the balance remaining due, this new statute could impair the secondary market for distressed real-estate secured loans, preventing lenders from selling distressed loan assets. The new statute is currently being challenged in litigation. We cannot predict with confidence what the outcome of the litigation will be or when the litigation will finally be resolved.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


Period	(a) Total Numbers of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publically Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
October 1-31, 2011		112,271		2.47		112,271	$	277,141
November 1-30, 2011		2,716		2.71		2,716	$	7,364
December 1-31, 2011		820,000		2.5		820,000	$	2,074,600
March 31 , 2012		0		0		0		0
April 1, 2012 – June 30, 2012		0		0		0		0

In satisfaction of WLBC’s tax withholding obligation relating to restricted stock awards that vested in the fourth quarter, WLBC withheld a total of 13,432 shares. Of an award of 155,279 shares of restricted stock made to CEO William E. Martin, 31,056 shares became vested on October 28, 2011. After withholding of 10,870 shares, 20,186 vested shares were issued to Mr. Martin. Of an award of 38,819 shares of restricted stock made to former CFO George A. Rosenbaum Jr., 7,764 shares became vested on October 28, 2011. The remaining 31,055 shares were forfeited because of Mr. Rosenbaum’s December 23, 2011 employment termination. After withholding of 2,562 shares from the 7,764 shares that vested, and after forfeiture of 2,601 vested shares because of Mr. Rosenbaum’s December 23, 2011 termination, the net vested shares issued to Mr. Rosenbaum were 2,601 shares.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.


Exhibit Number		Description

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Management contract or compensatory plan or arrangement

SIGNATURES

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


WESTERN LIBERTY BANCORP

/s/ WILLIAM E. MARTIN
Name:		William E. Martin
Title:		Chief Executive Officer
		(Principal Executive Officer)

Date: August 14, 2012


WESTERN LIBERTY BANCORP

/s/ PATRICIA OCHAL
Name:		Patricia Ochal
Title:		Chief Financial Officer
		(Principal Financial Officer)

Date: August 14, 2012

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

WESTERN LIBERTY BANCORP 10-Q