UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
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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: 0-21231
UNITED WESTERN BANCORP, INC.
(Exact name of registrant as specified in its charter)
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Colorado
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84-1233716 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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700 17th Street, Suite 2100, Denver, Colorado
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80202 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (303) 595-9898
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of each exchange on which Registered |
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Common Stock, par value $.0001 per share
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The NASDAQ Global Stock Market |
Preferred Share Purchase Rights |
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
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 (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such
files). Yes o
No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of common stock held by non-affiliates of the registrant, based
on the closing sales price of such stock on the NASDAQ Stock Market on June 30, 2009, the
close of the registrants most recently completed second quarter, was $69,380,000. For
purposes of this computation, all executive officers, directors and 10% beneficial owners of
the registrant are deemed to be affiliates. Such determination should not be deemed an
admission that such executive officers, directors and 10% beneficial owners are affiliates.
As of March 11, 2010, 29,358,580 shares of the registrants common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Companys definitive proxy statement for the Annual Meeting of
Shareholders to be held May 13, 2010 are incorporated by reference into Part III of this
Form 10-K.
PART I
The disclosures set forth in this item are qualified by Item 1A. Risk Factors and Item 7.
Managements Discussion and Analysis Forward Looking Statements and other cautionary statements
set forth elsewhere in this report.
United Western Bancorp, Inc.
General. United Western Bancorp, Inc., headquartered in Denver, Colorado, is a unitary thrift
holding company. The words United Western Bancorp, us, we, or the Company refer to United
Western Bancorp, Inc. and its wholly owned subsidiaries, unless we indicate otherwise. Through our
principal subsidiary, United Western Bank®, (United Western Bank or the Bank) we are focused on
expanding our community-based banking network across Colorados Front Range market and selected
mountain communities by strategically positioning banking offices in those locations. The Colorado
Front Range area spans the eastern slope of Colorados Rocky Mountains, from Pueblo to Fort
Collins, and includes the metropolitan Denver marketplace, as well as certain mountain communities.
As of December 31, 2009, we had eight full service banking locations in the Colorado Front Range
marketplace (downtown Denver, Cherry Creek, Hampden, Centennial, Boulder, Loveland, Fort Collins
and Longmont), and a loan production office servicing the Aspen and Roaring Fork Valley market
areas. We plan to continue to grow the United Western Bank network in a more cost effective
manner, including potentially through branch acquisitions. In addition to the community-based
banking operations of United Western Bank, we also offer cost effective deposits and deposit
services on a national basis to a variety of customers, including those involved in the processing
services industries (e.g., securities settlement, mortgage banking, custodial), as well as escrow
and paying agent and trust account management services through our wholly owned subsidiary, UW
Trust Company.
United Western Bancorp, Inc. was incorporated in Colorado in June 1993. Until September 9,
2006, we were known as Matrix Bancorp, Inc. The trading symbol for our common stock on the NASDAQ
Global Market is UWBK.
Community Bank Business Strategy
We have completed the fourth year of our community bank business strategy. This strategy has
included the development of a branch network within the Colorado Front Range and selected mountain
community markets and building a balance sheet that includes community bank loan and deposit
products. We are developing a service-focused business that serves the community in which our
management team and employees work and live. As we view the landscape of todays deposit
marketplace we believe the competition for community banking deposits, both retail and business,
will be substantial and will continue to increase as the dominant national banks increase their
branch presence further, and as retail and business customers migrate away from bank branches to
other platforms. In this regard, we have continued to capitalize on our longstanding core deposit
base through the development of processing and trust deposit relationships (which includes
securities clearing and settlement, custodial, trust and escrow) that provide a stable, long-lived
and inexpensive alternative to the traditional branch banking concept. We anticipate that our
management will evaluate various additional sources to this deposit gathering strategy, and in the
future, we may consider acquiring deposits from processing businesses that have significant deposit
generating capacity that is incidental to their primary purpose.
In addition, we believe that opportunities in the community bank sector for increased growth
of quality assets may become more restricted due to the protracted nature of the current United
States economic downturn. As a consequence, we are considering additional growth in our Small
Business Administration (SBA) Division loan origination business. The SBA Division is a
participant in the national preferred lenders program (PLP) of the United States Small Business
Administration. With national PLP status, the Bank is able to participate in the PLP nationwide,
which encompasses 68 districts spanning all 50 states. We anticipate targeted growth of quality
commercial and industrial loans given our outlook for the state economy and our current market
share. Additionally, we may consider adding to our origination, holding and servicing of single
family residential loans.
Our objective is to increase franchise value by: (i) expanding our community banking and
lending activities through the recruitment of experienced community bankers who are knowledgeable
about and well-known in the Colorado Front Range and mountain community markets; (ii) developing a
branch network within such markets; (iii) building a balance sheet consisting of originated loan
products; (iv) leveraging our management experience in developing and managing processing
businesses deposits and (v) maintaining a strong credit oversight with respect to our lending
products.
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We believe the banking industry will significantly consolidate in the United States and in
Colorado in the future. While we have capitalized on an organic growth plan to date since starting
our community banking business plan, we may consider the strategic acquisition of like-minded
banking organizations, or acquisitions of community bank deposits, in our targeted markets as part
of our business plan going forward.
Regulatory Issues
Effective December 10, 2009, the Company and the Bank, each entered into separate informal
Memorandums of Understanding (Informal Agreements) with the Office of Thrift Supervision (the
OTS). The Informal Agreement between the Bank and the OTS provides, among other things, that the
Banks Board of Directors will (i) adopt a written Capital Plan for the Bank for the OTS Regional
Directors review and comment, and such plan shall address how the Bank will achieve and maintain
by June 30, 2010 a Tier 1 core capital ratio of 8% and a total risk-based capital ratio of 12% (as
of December 31, 2009, the Banks Tier 1 core capital and total risk-based capital ratios were 7.7%
and 10.1%, respectively); and; (ii) approve a written Liquidity Contingency Plan to ensure the Bank
maintains adequate short-term and long-term liquidity, with such plan to specifically address
deposit concentrations and plans to reduce or manage such concentrations. The Informal Agreement
also requires the Bank to reduce certain concentrations in construction and land lending and
non-agency mortgage backed securities. In addition, the Informal Agreement places restrictions on
the level of brokered deposits maintained by the Bank including deposits obtained by our regional
banking teams from our community banking customer base offered through the Promontory
Interfinancial Network, LLC, known as Certificate of Deposit Account Registry Service® (CDARS).
See additional discussion at Item 1. Business Regulation and Supervision Regulatory Informal
Agreement Memorandum of Understanding.
The OTS and the FDIC conducted a joint field visit at the Company and the Bank, which
commenced January 10, 2010. Subsequently, the OTS has provided additional supervisory limitations
on the Bank. These limitations include: (i) the Bank may not increase its total assets during any
quarter in excess of an amount equal to net interest credited on deposit liabilities without prior
written notice of non-objection from the OTS; and (ii) the OTS has directed the Bank not to
rollover or renew exiting brokered deposits, or accept new brokered deposits without the prior
written non-objection from the OTS.
As a result of the Informal Agreements and the additional supervisory limitations, the Company
is looking to further increase its capital position by focusing on expense reductions, optimizing
the balance sheet for both loans and deposits and risk weighting of assts, as well as evaluating
opportunities for margin improvement and improving the overall earnings power of the Company. This
may not be sufficient to meet the requirements of the Informal Agreements, so the Company is also
looking at various strategic alternatives for the Company to accelerate its compliance with terms
of the Informal Agreement.
While management believes that they are instituting the appropriate plans to meet the
requirements of the Informal Agreements, as well as the additional supervisory limitations, there
is no certainty that the Company can successfully execute on all of the above and meet the capital
requirements of the OTS by June 30, 2010. If the Company is unable to comply with the Informal
Agreements or additional supervisory limitations the OTS could take additional actions, including
issuing an enforcement action.
As we move forward, we may augment our community banking business plan strategy with various
alternatives designed to enhance our overall liquidity position and to achieve profitability.
These plans may include, but are not limited to, the acquisition or development of processing and
other businesses that provide direct or indirect access to consumer and business deposits. We
believe this strategy will compliment our deposit growth strategy inherent in our branch network.
We are also evaluating alternatives related to single family mortgage loan origination that may
assist the Bank in maintaining its asset levels under the qualified thrift lender test (See Item 1.
Business Regulation and Supervision as well as provide additional community banking
opportunities for the Company. We expect to continue to explore these and other alternatives on
a regular basis, although there is no certainty that any proposed business augmentation will be
executed and we cannot determine with any degree of certainty if and when we might engage in any
acquisition or development of any processing or other business or expanded asset class. Given the
current conditions surrounding our informal agreement with the OTS, we expect that any and all such
plans and initiatives will require the non-objection or concurrence of the OTS and, perhaps, the
FDIC, which has retained regulatory powers over our Bank.
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The Subsidiaries
Our core business operations are conducted through operating subsidiaries as described below.
United Western Bank®. United Western Bank, wholly-owned by the Company, is a federal savings
bank that originates commercial real estate, multifamily, single tenant, commercial and industrial,
residential and commercial construction and development, and consumer loans. Within certain of
these loan types, the Bank also originates Small Business Administration loans under section 7(a)
of the Small Business Act (7(a) loans) and section 504 of the Small Business Investment Act (504
loans) and loans through the utilization of New Markets Tax Credits. United Western Bank also
offers personal and business depository banking, as well as treasury services.
At December 31, 2009, the Bank had total assets of $2.5 billion, deposits including custodial
escrow balances of $2.0 billion, loans of $1.4 billion, and capital of $188.4 million. The Banks
deposit base includes $464.9 million of community bank deposits. Additionally, the Banks deposit
base includes interest-bearing negotiable order of Withdrawal (NOW) and money market accounts
administered by UW Trust Company, the deposits resulting from transactions in which the Bank acts
as the clearing bank for clients of a former joint venture partner, Matrix Financial Solutions,
Inc., and noninterest-bearing custodial escrow deposits related to the residential mortgage loan
portfolio serviced by Matrix Financial Services Corporation. These additional deposits, as well as
other processing and trust deposits, comprise $1.3 billion of the total deposits at the Bank. We
anticipate our mix of deposits will change over the course of 2010 as we comply with regulatory
requirements. See additional discussion at Item 1. Business Regulation and Supervision
Regulatory Informal Agreement Memorandum of Understanding and Item 1A. Risk Factors
Regulatory Risk.
UW Trust Company and Discontinued Operations. UW Trust Company (UW Trust), formerly known as
Sterling Trust Company, wholly-owned by the Company and headquartered in Waco, Texas, is a Texas
non-bank trust company. On June 27, 2009, UW Trust consummated the sale of certain of its assets.
These assets were associated with UW Trusts self-directed individual retirement account and
qualified employee benefit plan administration business. In addition to the assumption of certain
UW Trust liabilities, the purchase price for these assets was $61.4 million, of which UW Trust
received approximately $15.3 million in cash from the buyers at the closing of the transaction.
The remaining portion of the purchase price was financed pursuant to a loan agreement. In
connection with the sale, we recorded a pretax gain on the sale of $56.0 million, or approximately
$36.1 million net of tax. The operating results of UW Trust Company, which are included in the
Companys custodial and advisory services segment, and which was attributed to the custodial IRA
and qualified employee benefit plan businesses sold by UW Trust are presented as discontinued
operations. UW Trust has retained and will continue to operate its custodial escrow, paying agent
and trust administration lines of business, which management deems a core operation, and thus, UW
Trust will continue to be included in segment reporting.
Matrix Financial Services Corporation. Since 2004, Matrix Financial Services Corporation
(Matrix Financial Services), a wholly-owned subsidiary of the Bank, services, through a third
party subservicer, acquired mortgage servicing rights on a nationwide basis through purchases in
the secondary market and retention of originated mortgage servicing rights. As of December 31,
2009, Matrix Financial Services was responsible for servicing approximately 13,000 borrower
accounts representing $766 million in principal balances. As a servicer of mortgage loans, Matrix
Financial Services generally is required to establish custodial escrow accounts for the deposit of
borrowers payments. These custodial accounts are maintained at the Bank. At December 31, 2009, the
custodial escrow account balances related to our servicing portfolio maintained at the Bank were
$11.8 million.
UW Investment Services, Inc. UW Investment Services, Inc. (UWIS), formerly known as First
Matrix Services Corp., a wholly-owned subsidiary of the Company, is registered with the Financial
Industry Regulatory Authority (FINRA) as a fully disclosed broker-dealer, with its headquarters
in Denver, Colorado. Previously, UWIS brokered the sale of fixed income securities to processing
and trust clients and focused on the acquisition, brokering, securitization and sale of SBA loans
and loan pools and interest only strips associated with the SBA loans and loan pools. SBA loans
were acquired by United Western Bank through the brokerage activities of UWIS. UWIS exited the
business of brokering fixed income securities after its entire Memphis, Tennessee staff was hired
by another firm entering the SBA pooling and securitization business in 2006. In the future, UWIS
will provide services that complement our overall community banking business plan, which services
may include securities brokerage services, retirement account management and other services.
Other Subsidiaries. The Company has formed certain single purpose subsidiaries that have
issued trust preferred securities, which are discussed in Note 11 to the consolidated financial
statements. The Company also has subsidiaries that are involved in the New Markets Tax Credits
program as discussed below in Community Bank Lending
- New Markets Tax Credits Lending. The Company also has various other subsidiaries that are
not significant to the consolidated entity at this time.
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Please see Note 21 to the consolidated financial statements for further financial information
about our operating segments.
Lending Activities
General. United Western Banks lending activities are principally comprised of originated
community bank loans in the Rocky Mountain region, national lending in conjunction with our
Preferred Lender Program (PLP) status with the SBA and the administration of previously purchased
loans. Community bank loans principally consist of commercial real estate, residential and
commercial construction and development (C&D), commercial and industrial (C&I) and consumer
loans. Commercial real estate loans are also originated by the Banks SBA division, which
originates conventional 504 loans and 7(a) loans. In addition, the Bank has three operating
subsidiaries, Community Development Funding I, LLC (CDF I), Charter Facilities Funding IV, LLC,
(CFF IV) and Charter Facilities Funding 5, LLC (CFF 5). CDF I and CFF IV have originated loans
under the New Markets Tax Credits program discussed below in Community Bank Lending New Markets
Tax Credits Lending. We intend to originate additional loans in 2010 within CFF 5 under the New
Markets Tax Credits program. Purchased loans consist primarily of single-family residential loans,
which the Company has not purchased since September 2005, and purchased guaranteed portions of SBA
7(a) loans, which it has not purchased since March 2006.
The majority of the loans and loan balances the Bank originates are variable rate and
generally fluctuate with the prime rate as published in the Wall Street Journal or with LIBOR. In
the current declining interest rate environment, the Bank also endeavors to price loans with a
floor rate with the objective of enhancing our net interest income and margin. The Bank does make
some fixed rate loans, on a selective basis, but also endeavors to structure the fixed pricing on
these facilities not to exceed five to seven years. Variations from this fixed price alternative
usually are related to the government guaranteed SBA loan products and New Markets Tax Credits
lending. The pricing of the Banks loan products is impacted by the competitive environment in
which the Bank operates and as such it is the objective of United Western Bank to price all loan
obligations in conjunction with cross selling opportunities and relationship deposits.
The Bank manages the risks of its community bank lending in a number of ways. First, loan
approvals are subject to approval guidelines and the dollar amount is stepped by size to Executive
and Director Loan Committees and ultimately to the full board of directors of the Bank. Business
development and underwriting are separate business functions and loan policies set exposure and
concentration limits by borrower, loan and product type, in addition to geographic location of
aggregate collateral and portfolio concentrations. The Banks loan policies and portfolio
monitoring guidelines give specific direction on the underwriting of all loan types, portfolio
concentrations and regulatory requirements. See additional discussion of risk management related to
lending activities at Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations Loan Portfolio, Asset Quality and Allowance for Credit Losses in this
report.
Community Bank Lending
Commercial Real Estate Lending. United Western Bank originates commercial real estate loans
(CRE) that are generally secured by one or more of the following kinds of properties: multifamily
residential property, owner and non-owner occupied commercial, retail and industrial income
property, and single tenant property. The owner occupied component of these loans also includes SBA
504 loans and 7(a) loans. The Banks CRE loans are generally made at variable rates that change
daily or quarterly based on changes in the prime rate or LIBOR, although some are made at fixed
rates. Terms of up to 25 years are offered primarily on SBA loans, but most loans are structured
with a balloon payment at the end of approximately five years or amortized over a period of up to
ten years. In deciding whether to make a commercial real estate loan, the Bank considers, among
other things, the experience and qualifications of the borrower as well as the value and
anticipated cash flow of the underlying property due from its tenant mix. Among the additional
underwriting factors considered are net operating income of the property before debt service and
depreciation, the debt service coverage ratio (the ratio of the propertys free cash flow to debt
service requirements), the ratio of the loan amount to the appraised value and cost, and the
recourse to the overall creditworthiness of the prospective borrower and guarantor. The Banks
commercial real estate loans typically range in size from $100,000 to $15 million, with an average
balance of $919,000. The Banks legal lending limit is approximately $28 million. Loans greater
than $15 million, are not often granted and require full Bank board of director approval. See
additional discussion at Item 1. Business Regulation and Supervision Regulatory Informal
Agreement Memorandum of Understanding.
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Commercial real estate lending typically involves higher principal amounts than the other
types of loans we make. Moreover, the repayment of the loans generally is dependent, in large part,
from the cash flow generated from the successful operations of the property collateralizing the
loan or the business conducted on the owner occupied property collateralizing the obligation.
Secondary sources of repayment are usually the sale or refinance of the subject property with
credit enhancement also required in the form of personal guarantees from the majority owners of the
subject collateral. As a result, these loans may be more susceptible and adversely affected by
conditions in the real estate markets or in the economy in general. For example, if the cash flow
from a borrowers project is reduced due to leases not being obtained or renewed, the borrowers
ability to repay the loan may be impaired. In addition, because many commercial real estate loans
have balloon payments due at maturity instead of being fully amortized over the term of a loan, a
borrowers ability to repay may depend on being able either to refinance the loan or sell the
underlying property. We monitor the level of commercial real estate loans in the Banks loan
portfolio individually and in the aggregate. Our internal guideline is to maintain CRE loans at
250% or less of the Banks Tier 1 capital plus the allowance for credit losses. At December 31,
2009, CRE loans represented 224% of the Banks Tier 1 capital plus the allowance for credit losses.
Residential and Commercial Construction and Development Lending. United Western Bank provides
construction and development loans (C&D) for the development of land and vertical construction of
one-to-four family, multifamily and condominium residences. Loans are also provided for the
development of land and vertical construction for retail, office, and other commercial purposes.
Underwriting guidelines for C&D facilities generally require presale or preleasing requirements in
addition to personal guarantees of the projects owners or development partners. Land development
and construction loans share many of the same risks as discussed above with commercial real estate
loans with respect to sale or refinance repayment alternatives. In addition, C&D lending also
involves construction related risks because funds are advanced incrementally based on a preapproved
construction budget or a percent complete calculation. The loan is secured by the to be completed
project, which is of uncertain value prior to its completion. Because of the uncertainties inherent
in estimating construction costs, the market value of the completed project and the effects of
governmental regulation of real property, it can be difficult to evaluate accurately the total
funds required to complete a project and the related loan-to-value and loan-to-cost ratios. If the
appraisal of the value of the completed project proves to be overstated, the Bank may have
inadequate security for the repayment of the loan upon completion of construction of the project
and may require collateral re-margin requirement to protect against a potential loss. Accordingly,
the Bank generally requires a personal guaranty on all residential and commercial construction and
development lending. We monitor the level of C&D loans in the portfolio individually and in the
aggregate. Our internal guideline is to maintain C&D loans at 150% or less of the Banks Tier 1
capital plus the allowance for credit losses. At December 31, 2009, C&D loans represented 102% of
the Banks Tier 1 capital plus the allowance for credit losses. See additional discussion at Item
1. Business Regulation and Supervision Regulatory Informal Agreement Memorandum of
Understanding.
Commercial and Industrial Lending. United Western Bank makes commercial and industrial loans
(C&I) to small and middle market businesses. C&I borrowers tend to be privately owned operating
companies and are generally service providers, distributors, and manufacturers. The loan products
offered are primarily working capital and term loans (secured with real estate facilities and
equipment) and lines of credit that help customers finance trading assets including accounts
receivable and inventory. These loans are typically guaranteed by the owners of the business and
subject to underwriting guidelines that include borrowing base parameters and compliance with
financial covenants. The collateral securing C&I loans may depreciate over time, may be difficult
to appraise, and may fluctuate in value based on the success of the business and the volatility of
the underlying cash flow. In addition, in the case of loans secured by accounts receivable, the
availability of funds for the repayment of these loans may be substantially dependent upon the
ability of the borrower to collect the amounts due from its customers. Accordingly, the Bank makes
commercial loans primarily based on the identified cash flow and capital adequacy of the borrower
and secondarily on the underlying collateral provided by the borrower. Commercial loans are made at
variable rates that fluctuate with the prime rate. In the future, the Bank anticipates making C&I
loans to small to mid sized energy companies, including coal, oil, gas, and green oriented
businesses like solar and wind power.
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Small Business Administration Lending. The Banks SBA division is a participant in the
national preferred lenders program (PLP) of the United States Small Business Administration. With
national PLP status, the Bank is able to participate in the PLP nation wide, which encompasses 68
districts spanning all 50 states. The Bank originates SBA 504 loans and 7(a) loans. Under the SBA
504 program, the Bank provides, in conjunction with a Certified Development Company (CDC), a
conventional loan collateralized by a first lien on commercial real estate or equipment. The SBA
504 program provides for an SBA guarantee of debentures issued for up to a maximum of 40% of the
eligible project costs and is subordinated to the primary mortgage originated by the Bank. Pursuant
to the American Recovery and
Reinvestment Act of 2009 (ARRA), which became effective February 17, 2009, additional
funding of $730 million, was provided for SBA-backed loans. Of this additional funding, $375
million was directed to temporarily eliminating fees on SBA-backed loans and raising SBAs
guarantee percentage on SBAs 7(a) Program loans originated after the effective date to 90% with a
maximum guarantee of $1.5 million. This funding was exhausted on February 19, 2010, and thus the
SBA guarantee on loans approved after February 19, 2010, under the 7(a) Program for loans of this
size reverts to 75%. Management believes that additional funding is likely and that the program
will be extended through the end of the governments fiscal year ending in 2010; however, this is
subject to approvals by Congress and the President. Generally, this guarantee may become invalid
only if the loan does not meet the SBA underwriting, documentation, and servicing guidelines. SBA
7(a) loans, collateralized by real estate, have terms of up to 25 years, while loans collateralized
by equipment and working capital have terms of up to ten years and seven years, respectively. A
minimum down payment of 10% is required on most 504 loans, but a larger down payment may be
required when financing a start up business and the real estate collateral consists of a special
purpose or single use property, such as a motel or service station.
New Markets Tax Credits Lending. New Markets Tax Credits (NMTC) are awarded under a program
administered by the Community Development Financial Institutions Fund, a division of the United
States Department of Treasury. The NMTC program permits taxpayers/investors to claim a credit
against federal income taxes for each qualified equity investment (QEI) made to a designated
community development entity. The investor receives a 39% tax credit over a seven year period, in
the amount of 5% in years one through three, and 6% in years four through seven. In 2004, the Bank
acquired $4.9 million tax credits through a $12.6 million qualifying equity investment it made to
its 99.99% owned subsidiary, Community Development Funding I, LLC (CDF I). CDF I used the
investment proceeds to originate loans eligible under the NMTC program through the Bank. In 2005,
the Bank invested $11.0 million in Charter Facilities Funding IV, LLC, another 99.99% owned
subsidiary of the Bank (CFF IV) and received tax credits of $4.3 million. CFF IV used the
investment proceeds to originate loans eligible under the NMTC program through the Bank. In 2006,
the Bank made an additional investment of $10 million to CFF IV, making the Bank eligible for an
additional $3.9 million of tax credits. The additional investment proceeds are being used by CFF IV
to make eligible NMTC loans through the Bank. In May 2009, a wholly owned subsidiary of the
Company was awarded an allocation of $20 million of New Markets Tax Credits authorized by the U.S.
Treasury through its Community Development Financial Institutions Fund. These tax credits were
acquired by the Bank, and the Bank invested $20 million in its newly created 99.99% owned
subsidiary, Charter Facilities Funding 5, LLC, (CFF 5.) Tax credits of $7.8 million are expected
to be realized over the seven year period ending in 2015.
At December 31, 2009, the Bank has $30.6 million of NMTC loans outstanding. NMTC loans are
generally commercial real estate loans in designated community development areas (low-income areas
or economic enterprise zones) made in accordance with the Banks and community development
entities lending policies and in accordance with the rules of the NMTC program. Generally these
loans are fixed rate and there is a concession in the rate as compared to the remainder of the
Banks community bank loan portfolio. The loans also have longer terms, often 25 to 27 years, with
an initial seven years of interest only payments followed by amortization to maturity. These loans
are included with commercial real estate loans in our tables and financial statements and the
underlying collateral is commercial property.
Consumer Lending. The Banks consumer lending portfolio is primarily focused on individual
wealth management and private bank investment and lending products as opposed to blanket
underwriting and funding objectives to compete with the mass retail marketplace. The Bank offers
home equity lines of credit and to a limited extent, home equity term loans, auto, and unsecured
consumer loans. Home equity lines of credit may be extended up to 90% of the appraised value of the
property, less existing liens, generally at variable interest rates based on prime, the Federal
Reserve Board Target Rate for overnight borrowings, or LIBOR. In addition, most consumer loans are
structured with floor pricing and incorporate underwriting guidelines that include minimum credit
score requirements and aggregate liquidity and debt service guidelines. The Bank uses the same
underwriting standards for home equity lines of credit as it uses for residential real estate
loans. Consumer loans typically have shorter terms and lower balances with higher yields as
compared to residential real estate loans, but generally carry higher risks of default. Consumer
loan collections are dependent on the borrowers continuing financial stability, and thus, are more
likely to be affected by adverse personal circumstances. Furthermore, the application of various
federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be
recovered on these loans.
Other Lending
Single-family Residence Lending. At December 31, 2009, United Western Bank owns approximately
$278.6 million of single-family residential whole loans. While the overwhelming majority of these
loans were purchased by the Bank in the secondary market, a portion were originated by Matrix
Financial Services prior to February 2003, and approximately five percent of these loans represent
loans purchased from Matrix Financial Services servicing portfolio.
- 7 -
Prior to our change in business strategy, the Bank regularly reviewed residential loan
portfolios for prospective acquisition; however, the Bank has not purchased any such loan
portfolios since September 2005. These portfolios were typically first lien priority loans secured
primarily by 1-to-4 family residential properties. Most were adjustable rate loans. The Bank would
purchase packages of residential loans from various sellers who had either originated the loans or
acquired the loans from others in bulk purchases. The Bank would consider several factors prior to
a purchase, including the product type, the current loan balance, the current interest rate
environment, the seasoning of the mortgage loans, payment histories, geographic location of the
underlying collateral, price, yield, the current liquidity of the Bank and the product mix in its
existing residential loan portfolio. In addition, the various sellers were evaluated for their
ability to perform under the representations and warranties that would be provided to the Bank at
the time of purchase.
The Bank performed due diligence on each residential loan portfolio that it desired to
purchase. These underwriting procedures consisted of analyzing all or, in some instances, a
representative sample of the loans in the portfolio and were typically performed by Bank employees,
but occasionally were outsourced to third party contractors. The underwriter took into account many
factors and statistics in analyzing the loans in the subject portfolio, including: the general
economic conditions in the geographic area or areas in which the underlying residential properties
were located; the credit score of the borrower; the loan-to-value ratios and quality of the
valuations on the underlying loan collateral; and the payment histories of the borrowers, as well
as their income and debt to income levels. In addition, the underwriter attempted to verify that
each sample loan conformed to the standards for loan documentation set by the secondary market for
investment grade mortgages. In cases where a significant portion of the sample loans contained
nonconforming documentation, the Bank assessed the additional risk involved in purchasing those
loans. This process helped the Bank determine whether the mortgage loan portfolio met its
investment criteria and, if it did, the range of pricing that was appropriate.
Purchased SBA Guaranteed Loans. At December 31, 2009, United Western Bank owns approximately
$71 million of guaranteed portions of SBA 7(a) loans that it acquired in the secondary market.
These loans are adjustable rate and generally reset quarterly with changes in the prime rate. The
Bank purchased these guaranteed portions of SBA loans from various sellers, typically the
originator of the loan who retained the unguaranteed portion and continues to service the loan.
Other Activities Related to Lending
Sales of Loans. In the normal course of business, the Bank sells certain of the SBA loans it
originates in the secondary market. The Bank has sold residential loans outright and has sold
securities backed by residential loans after securitization with a governmental sponsored agency.
During 2009, the Bank sold approximately $33.0 million of originated SBA loans. The Bank may sell
SBA loans from time to time to manage industry exposures, interest rate risk and for current
income. The sale of loans may generate a gain or loss for the Bank. Gains or losses result
primarily from two factors. First, the Bank may make a loan to a borrower at an interest rate that
is higher or lower than the prevailing or the expected rate in the market resulting in a price
difference when the loan is sold in the secondary market. These price differences occur primarily
as a result of competitive pricing conditions in the market place. Second, gains or losses may
result from changes in interest rates that consequently change the market value of loans originated
for sale.
Deposits
Deposits. The Bank offers a variety of deposit accounts with a range of interest rates and
terms. The Banks core deposits consist of retail, business, processing and trust checking
accounts, NOW accounts, money market accounts, savings accounts and certificates of deposit. These
deposits, along with short-term and long-term borrowings, and to a lesser extent brokered deposits,
are used to support our asset base. Community bank deposits are obtained predominantly from the
geographic trade areas surrounding our community banking office locations. Processing and trust
deposits are obtained nationally. Processing and trust deposits comprise approximately 77% and 89%
of total deposits at December 31, 2009 and 2008, respectively. Given the fact that, historically,
the Banks processing and trust deposit base has been less expensive than community bank deposits,
the Bank will continue to utilize its expertise to expand upon and to continue to diversify our
processing and trust deposit base, while also increasing its traditional community bank deposit
base over time, With the maturation of the Banks branch distribution system and operations now
being conducted out of eight open locations, the Bank will continue to use its critical mass and
growing reputation as a Colorado banking leader to launch future deposit campaigns. See additional
discussion in Note 8 of the financial statements included in this report, Item 1A. Risk Factors,
and Item 7. Managements Discussion and Analysis Liquidity Bank Liquidity and Item 7.
Managements Discussion and Analysis of Financial Condition Deposits for further discussion.
- 8 -
Total deposits, including custodial escrow balances, increased $271.0 million between December
31, 2009 and December 31, 2008. This increase was caused by growth of $272.9 million of community
bank deposits from our eight
open banking offices. This growth includes $214.9 million obtained through the certificate
accounts offered through the CDARS program. The CDARS program provides full Federal Deposit
Insurance Corporation (FDIC) coverage on deposit balances greater than posted FDIC limits by
exchanging larger depository relationships with other CDARS members. Depositors funds are broken
into amounts below FDIC insurance limits and placed with other banks that are members of the CDARS
network. Each member bank issues certificate accounts in denominations below the FDIC insured
limit, resulting in full FDIC insurance for the entire deposit. CDARS accounts are considered by
regulation to be brokered deposits. The OTS has directed the Bank not to rollover or renew existing
brokered deposits, or accept new brokered deposits without prior written non-objection of the OTS.
Accordingly, prospectively the existing CDARS deposits, which totaled $246.5 million at December
31, 2009, will at maturity be transferred to other accounts at the Bank or withdrawn. CDARS
deposits mature through December 22, 2011. See additional discussion at Item 1. Business
Regulation and Supervision Regulatory Informal Agreement Memorandum of Understanding.
Community bank deposits represent deposits attracted by our regional banking teams. In
addition to the methods described above, the Bank has a wide variety of deposit products designed
to attract business clients. Our Treasury Advisory Services team offers business clients remote
deposit capture, lockbox, sweep products, and ACH and wire services. The Bank is also participating
in the FDICs Temporary Liquidity Guarantee Program (TLGP). The FDIC has created TLGP to
strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued
senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full
coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount through
June 30, 2010.
Custodial Escrow, Paying Agent and Trust Administration Services
Self-Directed Trust and Custody Services. The Companys custodial escrow, paying agent and
trust administration lines of business are provided through UW Trust. These services are marketed
on a nationwide basis to intermediaries such as law firms, tax professionals, broker-dealers and
others as well as on a direct basis to consumers of these services. UW Trust will compete with
numerous other independent third parties in the provision of these services.
Brokerage Services
UW Investment Services, Inc. UWIS is registered with FINRA as a fully disclosed broker-dealer,
headquartered in Denver, Colorado. UWIS previously provided brokerage services through SBA pooling
and structured finance transactions. UWIS, as agent for United Western Bank, purchased the
guaranteed portion of SBA 7(a) loans from bank and non-bank lenders around the country. These loans
were assembled and later pooled into SBA securities that were sold into the secondary market to
processing and trust companies and sophisticated investors. In addition, UWIS brokered the sale of
fixed income securities to processing and trust clients. Prospectively, UWIS will provide services
that complement our overall community banking business plan, which services may include securities
brokerage services and retirement account management and other services. At this time, UWIS is not
active in providing any services to any third party clients.
Mortgage Servicing Activities
Residential Mortgage Loan Servicing. Historically, we conducted our residential mortgage loan
servicing activities through Matrix Financial Services, including the residential mortgage loan
servicing that Matrix Financial Services provided as subservicer for United Western Banks
servicing portfolio. In 2004, Matrix Financial Services transferred all of its servicing functions
to a third party subservicer. The servicing transfer was done in an effort to lower the overall
cost of servicing by eliminating many of the fixed costs of servicing the loans in-house. Matrix
Financial Services now pays the subservicer a fixed fee per loan that varies based on whether the
loan is a fixed rate or adjustable rate, or if the loan is delinquent. As part of the agreement,
the custodial deposits are maintained at United Western Bank. We have retained a small staff of six
people at Matrix Financial Services primarily to monitor the servicing activities of the
subservicer. At December 31, 2009, including loans owned by Matrix Financial Services and United
Western Bank, Matrix Financial Services serviced approximately $766 million of mortgage loans
through the subservicer.
- 9 -
Servicing mortgage loans involves a contractual right to receive a fee for collecting,
processing and administering mortgage loan payments. This processing involves collecting monthly
mortgage payments on behalf of investors and remitting collected payments to investors on a
periodic basis, reporting information to those investors on a monthly basis and maintaining
custodial escrow accounts for the payment of principal and interest to investors and property taxes
and insurance premiums on behalf of borrowers. These payments are held in custodial escrow accounts
at United Western Bank.
As compensation for its mortgage servicing activities, Matrix Financial Services receives
servicing fees, plus any late charges collected from delinquent borrowers and other fees incidental
to the services provided. In the event of default by the borrower, Matrix Financial Services
receives no servicing fees until the default is cured. At December 31, 2009, Matrix Financial
Services annual weighted-average servicing fee was 0.413% of the unpaid principal balance
outstanding on each mortgage.
Servicing is provided on mortgage loans on a recourse or nonrecourse basis. Matrix Financial
Services policy was to accept only a limited number of servicing assets on a recourse basis. As of
December 31, 2009, on the basis of outstanding principal balances, approximately 0.69% of its owned
mortgage servicing contracts involved recourse servicing with credit risk exposure in the event of
underlying mortgagor default to Matrix Financial Services. Additionally, many of its nonrecourse
mortgage servicing contracts require Matrix Financial Services to advance all or part of the
scheduled payments to the owner of the mortgage loan in the event of a default by the borrower.
Many owners of mortgage loans also require the servicer to advance insurance premiums and tax
payments on schedule even though sufficient escrow funds may not be available. Therefore, Matrix
Financial Services must bear the funding costs associated with making such advances. If the
delinquent loan does not become current, these advances are typically recovered at the time of the
foreclosure sale. Foreclosure expenses, which may include legal fees or property maintenance
expenses, are generally not fully reimbursable by Fannie Mae, Freddie Mac or Ginnie Mae, for which
agencies Matrix Financial Services provides significant amounts of mortgage loan servicing. As of
December 31, 2009, Matrix Financial Services had advanced approximately $5.6 million in funds on
behalf of third party investors. Matrix Financial Services may incur normal curtailments of certain
advances on loans serviced for Ginnie Mae and Fannie Mae. Generally advances on behalf of private
investors are fully collectible. For the Veteran Affairs (VA) loans sold and serviced for Ginnie
Mae, which are sold on a nonrecourse basis, the VA loan guarantees may not cover the entire
principal balance and, in that case, Matrix Financial Services is responsible for the losses that
exceed the VAs guarantee. Estimated losses related to foreclosure and other servicer advances are
estimated and reserved for, and are included in the consolidated financial statements as a
reduction of the amount of other receivables.
Competition
United Western Bank faces substantial competition from a variety of competitors in all phases
of its operations, including loan and deposit account originations. There is significant
competition among commercial banks in the Banks market area. As a result of the deregulation of
the financial services industry (see Regulation and Supervision Gramm-Leach-Bliley below), the
Bank also competes with other providers of financial services, such as credit unions, consumer
finance companies, securities firms, insurance companies, insurance agencies, commercial finance
and leasing companies, full service brokerage firms and discount brokerage firms. Some of the
Banks competitors have greater resources and, as such, may have higher lending limits and may
offer other services that are not provided by the Bank. The Bank generally competes on the basis of
customer service and responsiveness to customer needs, available loan and deposit products, the
rates of interest charged on loans, and the rates of interest paid for deposits and other funds.
The Bank does not compete by lessening its credit quality standards.
UW Trust Company faces considerable competition in all of the services and products that it
offers. UW Trusts services are marketed on a nationwide basis to intermediaries such as law firms,
tax professionals, broker-dealers and others as well as on a direct basis to consumers of these
services. UW Trust will compete with numerous other independent third parties in the provision of
these services.
To the extent that UWIS re-enters the brokerage services and other business lines normally
associated with securities brokerage (e.g., retirement account management, wealth management, and
other services), it will face substantial competition from larger and better capitalized market
participants. The Company believes that UWIS will be able to compete effectively because of the
trusted relationships developed with clients of UW Trust and United Western Bank, but there can be
no assurance that UWIS will be able to effectively compete in the provision of traditional
brokerage services.
- 10 -
Employees
At December 31, 2009, the Company had 224 employees. We believe that relations with our
employees are good. The Company is not party to any collective bargaining agreement. The number of
employees will vary as the Company continues to implement its community banking strategy but also
as the company looks for additional operating efficiencies.
Regulation and Supervision
Set forth below is a brief description of various laws, regulatory authorities and associated
regulations affecting our operations. The description of laws and regulations contained in this
document does not purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations. Also, such statutes, regulations and policies are continually
under review by Congress and state legislatures and federal and state regulatory agencies. A
change in statutes, regulations or regulatory policies applicable to United Western Bancorp and its
subsidiaries could have a material effect on the business of the Company.
Emergency Economic Stabilization Act of 2008. The Emergency Economic Stabilization Act of 2008
(the EESA) was enacted on October 3, 2008. The EESA provided the United States Department of the
Treasury (Treasury) authority to take certain actions to restore liquidity and stability to the
U.S. banking markets. Based upon its authority in the EESA, a number of programs to implement EESA
have been announced by the Treasury. Those programs include the following:
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Capital Purchase Program (CPP). Pursuant to this program, Treasury on behalf of
the US Government, purchased preferred stock along with warrants to purchase common
stock, from certain financial institutions, including bank holding companies, savings
and loan holding companies and banks or savings associations not controlled by a
holding company. The investment has a dividend rate of 5% per year, until the fifth
anniversary of the Treasurys investment and a dividend of 9% thereafter. |
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On November 7, 2008, the Company submitted an application to Treasury to participate in
the Treasurys CPP Program. During the fourth quarter of 2009, after reviewing the
terms and conditions of the governing documents pertaining to the CPP and observing the
manner in which the CPP is administered by the Treasury, the Company determined that it
was in its best interests to withdraw its CPP application. On December 10, 2009, the
Company requested to withdraw from consideration for participation in the CPP. This will
provide the Company with the opportunity to participate in the extended tax-loss carry
back provisions made available to corporations in 2009 under recent revisions to the
Internal Revenue Code of 1986, as amended. |
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Temporary Liquidity Guarantee Program (TLGP). This program contained both (i) a
debt guarantee component (Debt Guarantee Program), whereby the FDIC will guarantee
until June 30, 2012, the senior unsecured debt issued by eligible financial
institutions between October 14, 2008 and October 31, 2009; and (ii) a transaction
account guarantee (TAG) component (TAG Program), whereby the FDIC will insure 100%
of noninterest bearing deposit transaction accounts held at eligible financial
institutions, such as payment processing accounts, payroll accounts and working capital
accounts through December 31, 2009. |
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United Western Bank elected to participate in both parts of the TLGP. The FDIC will only
guarantee a participants newly issued unsecured debt in a total amount not to exceed
125% of the par or face value of such participants senior unsecured debt outstanding as
of September 30, 2008 and scheduled to mature on June 30, 2009. If there was no
unsecured senior debt outstanding at September 30, 2008, the amount available under the
program is limited to two percent of total liabilities as of September 30, 2008. As the
Company did not have any unsecured senior debt outstanding as of September 30, 2008, the
conclusion of the Debt Guarantee Program on October 31, 2009 had no impact on the Bank
or Company. |
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On August 26, 2009, the FDIC approved the final rule extending the TAG Program for six
months until June 30, 2010, and increased the applicable TAG assessment fees during that
six month period. The Company did not opt out of the TAG program extension, which is
expected to increase future FDIC insurance costs. |
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Temporary increase in deposit insurance coverage. Pursuant to the EESA, the FDIC
temporarily increased the amount of deposit coverage for deposits at banks, thrifts and
credit unions for deposits that are subject to deposit insurance provided by the FDIC
from $100,000 to $250,000 per applicable depositor. The EESA provided that the basic
deposit insurance limit will return to $100,000 after December 31, 2009. The temporary
increase in the basic limit on federal deposit insurance coverage from $100,000 to
$250,000 per depositor has been extended through December 31, 2013, but is permanent
for certain retirement accounts (including IRAs). |
- 11 -
Federal Securities Laws. As a publicly held company, various aspects of our public disclosure,
corporate governance principles and internal control environment are subject to the Securities
Exchange Act of 1934, the Sarbanes-
Oxley Act of 2002 and related regulations and rules of the SEC and the Nasdaq Stock Market.
Any change in applicable laws, regulations or regulatory policies may have a material effect on our
business, operations and prospects.
Office of Thrift Supervision. We are a unitary savings and loan holding company within the
meaning of the Home Owners Loan Act of 1933, as amended. As such, we are subject to the OTS
regulation, examination, supervision and reporting requirements. In addition, the OTS has
enforcement authority over us and our savings bank and non-savings bank subsidiaries. Among other
things, this authority permits the OTS to restrict or prohibit activities that are determined to be
a serious risk to the financial safety, soundness or stability of our subsidiary savings
institution, United Western Bank. In addition, United Western Bank must notify the OTS at least 30
days before declaring any capital distribution (e.g., dividends or other) to us.
As a unitary savings and loan holding company that has been in existence prior to May 4, 1999,
we generally are not restricted under existing laws as to the types of business activities in which
we may engage, provided that the Bank continues to be a qualified thrift lender under the Home
Owners Loan Act. To maintain its status as a qualified thrift lender, the Bank must maintain a
minimum percentage of its assets in qualified thrift investments unless the OTS grants an exception
to this requirement. In general, qualified thrift investments include certain types of residential
mortgage loans, mortgage backed securities and certain loans to small businesses. If we acquire
control of another savings association as a separate subsidiary, we would become a multiple, rather
than a unitary, savings and loan holding company. Multiple savings and loan holding companies may
only engage in those activities permissible for a financial holding company under the Bank Holding
Company Act (BHC Act). Generally, financial holding companies may only engage in activities such
as banking, insurance and securities activities, as well as merchant banking activities under
certain circumstances. In addition, if the Bank fails to maintain its status as a qualified thrift
lender, within one year of its failure, we would be required to convert the Bank to a commercial
bank and to register as a bank holding company under the BHC Act, as amended.
Under certain circumstances, which include among other factors our current Informal
Agreements, the FDIC may participate actively with the OTS in providing regulatory supervision of
the Bank. This includes direct participation by the FDIC in on-site and off-site supervision,
direct influence in various ratings and in the overall supervision of the Bank. See additional
information in Item 1. Business Regulation and Supervision Insurance of Accounts and
Regulation by the Federal Deposit Insurance Corporation.
See also our discussion below under Item 1. Business Regulation and Supervision
Regulatory Informal Agreement Memorandum of Understanding.
Change in Bank Control Act. The Change in Bank Control Act of 1978, as amended, provides that
no person, acting directly or indirectly or through or in concert with one or more other persons,
may acquire control of a savings association unless the OTS has been given 60 days prior written
notice. The Home Owners Loan Act provides that no company may acquire control of a savings
association without the prior approval of the OTS. Any company that acquires such control becomes a
savings and loan holding company subject to registration, examination and regulation by the OTS.
Pursuant to federal regulations, control of a savings association (which includes its holding
company) is conclusively deemed to have been acquired by, among other things, the acquisition of
more than 25% of any class of voting stock of the association or the ability to control the
election of a majority of the directors of the association. Moreover, control is presumed to have
been acquired, subject to rebuttal, upon the acquisition of more than 10% of any class of voting
stock, but less than 25% of any class of stock of a savings association, where certain enumerated
control factors are also present in the acquisition. The OTS may prohibit an acquisition of control
if it would result in a monopoly or substantially lessen competition, the financial condition of
the acquiring person might jeopardize the financial stability of the association, or the
competence, experience or integrity of the acquiring person indicates that it would not be in the
interest of the depositors or the public to permit the acquisition of control by such person.
Gramm-Leach-Bliley. The Gramm-Leach-Bliley Act of 1999, as amended (also known as the
Financial Services Modernization Act) (Gramm-Leach-Bliley) eliminated many federal and state law
barriers to affiliations among banks, securities firms, insurance companies and other financial
service providers. The law revised and expanded the BHC Act to permit a bank holding company to
engage in a full range of financial activities by electing to be treated by the Federal Reserve
Board as a Financial Holding Company. Financial activities is broadly defined to include not
only banking, insurance and securities activities, but also merchant banking and additional
activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury,
determined to be financial in nature, incidental to such financial activities, or complementary
activities that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.
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Gramm-Leach-Bliley prohibits unitary savings and loan holding companies formed after May 4,
1999 from engaging in non-financial activities. Since we are a grandfathered unitary savings and
loan holding company, Gramm-Leach-Bliley has not had a material adverse effect on our operations.
However, because banking law permits banks, securities firms and insurance companies to affiliate
with one another there is a continuing trend in the financial services industry toward
consolidation. As a result, Gramm-Leach-Bliley could lead to an increasing amount of competition
from larger institutions and other types of companies offering financial products, many of which
may have substantially more financial resources.
Anti-Money Laundering and USA Patriot Act. A major focus of governmental policy on financial
institutions in recent years has been aimed at combating money laundering and terrorist financing.
The USA PATRIOT Act of 2001, as amended (the Patriot Act), substantially broadened the scope of
United States anti-money laundering laws and regulations by imposing significant new compliance and
due diligence obligations, creating new crimes and penalties and expanding the extra-territorial
jurisdiction of the United States. Treasury has issued and, in some cases, proposed a number of
regulations that apply various requirements of the Patriot Act to financial institutions such as
United Western Bank and its subsidiaries. These regulations impose obligations on financial
institutions to maintain appropriate policies, procedures and controls to detect, prevent and
report money laundering and terrorist financing and to verify the identity of their customers.
Certain of those regulations impose specific due diligence requirements on financial institutions
that maintain correspondent or private banking relationships with non-U.S. financial institutions
or persons. Failure of a financial institution to maintain and implement adequate programs to
combat money laundering and terrorist financing, or to comply with all of the relevant laws or
regulations, could have serious adverse consequences for the institution.
Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions
that affect transactions with designated foreign countries, nationals and others. These are
sometimes referred to as the OFAC rules based on their administration by the Treasurys Office of
Foreign Assets Control (OFAC). The OFAC-administered sanctions take many different forms.
Generally, however, they contain one or more of the following elements: (i) restrictions on trade
with or investment in a sanctioned country, including prohibitions against direct or indirect
imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in
financial transactions relating to making investments in, or providing investment-related advice or
assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or
specially designated nationals of the sanctioned country have an interest, by prohibiting transfers
of property subject to U.S. jurisdiction (including property in the possession or control of U.S.
persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off
or transferred in any manner without a license from OFAC. Failure to comply with these sanctions
could have serious legal and reputational consequences.
Transactions with Affiliates. Sections 23A and 23B of the Federal Reserve Act of 1913, as
amended, and its implementing regulations govern transactions between depository institutions and
their affiliates. These provisions are made applicable to savings associations, such as United
Western Bank, by the Home Owners Loan Act. Section 23A limits the extent to which the savings
association or its subsidiaries may engage in certain transactions with its affiliates. These
transactions include, among other things, the making of loans or other extensions of credit to an
affiliate and the purchase of assets from an affiliate. Generally, such transactions between a
savings association and any one affiliate cannot exceed 10% of the savings associations capital
stock and surplus, and such transactions between the savings institution and all of its affiliates
cannot, in the aggregate, exceed 20% of the savings institutions capital stock and surplus.
Section 23A also establishes specific collateral requirements for loans or extensions of credit to
an affiliate, and for guarantees or acceptances on letters of credit issued on behalf of an
affiliate. Applicable regulations prohibit a savings association from lending to any affiliate
engaged in activities not permissible for a bank holding company or for the purpose of acquiring
the securities of most affiliates. Section 23B requires that transactions covered by Section 23A
and a broad list of other specified transactions be on terms and under circumstances substantially
the same, or no less favorable to the savings association or its subsidiary, as similar
transactions with non-affiliates. In addition to the restrictions on transactions with affiliates
that Sections 23A and 23B of the Federal Reserve Act impose on depository institutions, the
regulations of the OTS also generally prohibit a savings association from purchasing or investing
in securities issued by an affiliate. Whenever United Western Bank engages in transactions with its
affiliates, the transactions are structured with the intent of complying with these regulations.
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Federal Savings Bank Operations. United Western Bank is subject to extensive regulation,
examination and supervision by the OTS, as its primary federal regulator, and potentially by the
FDIC, which insures its deposits up to applicable limits. Such regulation and supervision:
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establishes a comprehensive framework of activities in which United Western Bank can
engage; |
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limits the types and amounts of investments permissible for United Western Bank; |
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limits the ability of United Western Bank to extend credit to any given borrower; |
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significantly limits the transactions in which United Western Bank may engage with its
affiliates; |
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requires United Western Bank to meet a qualified thrift lender test that requires United
Western Bank to invest in qualified thrift investments, which include primarily residential
mortgage loans and related investments; |
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places limitations on capital distributions by savings associations, such as United
Western Bank, including cash dividends; |
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imposes assessments to the OTS to fund their operations; |
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establishes a continuing and affirmative obligation, consistent with United Western
Banks safe and sound operation, to help meet the credit needs of its community, including
low and moderate income neighborhoods; |
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requires United Western Bank to maintain certain reserves against its transaction
accounts; |
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establishes various capital categories resulting in various levels of regulatory
scrutiny applied to the institutions in a particular category; and |
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establishes standards for safety and soundness. |
The Bank must submit annual financial reports audited by independent auditors to federal
regulators. The auditors must receive examination reports, supervisory agreements and reports of
enforcement actions. In addition, an attestation by the auditor regarding the statements of
management relating to the internal controls must be submitted to the OTS. The Banks audit
committee must include members with experience in banking or financial management, must have access
to outside counsel and must not include representatives of large customers. Any change in these
regulations, whether by the OTS, the FDIC or Congress, could have a material impact on United
Western Bank and its operations.
United Western Banks Capital Requirements. Federal law requires, among other things, that
federal bank regulatory authorities take prompt corrective action with respect to savings
institutions that do not meet minimum capital requirements. For these purposes, the law establishes
five categories: well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. The OTS has adopted regulations to implement the
prompt corrective action legislation. An institution is deemed to be:
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well capitalized if it has a total risk-based capital ratio of 10% or greater and a
core capital ratio of 5% or greater; |
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adequately capitalized if it has a total risk-based capital ratio of 8% or greater, a
Tier 1 risk-based capital ratio of 4% or greater and generally a core capital ratio of 4%
or greater; |
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undercapitalized if it has a total risk-based capital ratio of less than 8%, a Tier 1
risk-based capital ratio of less than 4%, or generally a core capital ratio of less than
4%; |
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significantly undercapitalized if it has a total risk-based capital ratio of less than
6%, a Tier 1 risk-based capital ratio of less than 3%, or a core capital ratio of less than
3%; and |
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critically undercapitalized if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%. |
As of December 31, 2009, United Western Bank was a well capitalized institution.
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The following table indicates United Western Banks regulatory capital ratios:
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As of December 31, 2009 |
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Core |
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Risk-Based |
|
|
|
Capital |
|
|
Capital |
|
|
|
(Dollars in thousands) |
|
Shareholders equity/GAAP capital |
|
$ |
188,356 |
|
|
$ |
188,356 |
|
Disallowed assets |
|
|
(64 |
) |
|
|
(64 |
) |
Unrealized loss on available for sale securities |
|
|
4,547 |
|
|
|
4,547 |
|
Additional capital items: |
|
|
|
|
|
|
|
|
General valuation allowances |
|
|
|
|
|
|
20,236 |
|
Low-level recourse and residual interests |
|
|
|
|
|
|
(51,406 |
) |
|
|
|
|
|
|
|
Regulatory capital as reported to the OTS |
|
|
192,839 |
|
|
|
161,669 |
|
Minimum capital requirement as reported to the OTS |
|
|
100,400 |
|
|
|
128,382 |
|
|
|
|
|
|
|
|
Regulatory capitalexcess |
|
$ |
92,439 |
|
|
$ |
33,287 |
|
|
|
|
|
|
|
|
Capital ratios |
|
|
7.68 |
% |
|
|
10.07 |
% |
Well capitalized requirement |
|
|
5.00 |
% |
|
|
10.00 |
% |
Minimum capital requirements reported to the OTS |
|
|
4.00 |
% |
|
|
8.00 |
% |
Regulatory Informal Agreement Memorandum of Understanding. Effective as of December 10,
2009, the Company and the Bank, each entered into separate informal Memorandums of Understanding
(Informal Agreements) with the Office of Thrift Supervision (the OTS). The Informal Agreements
are not written agreements for purposes of Section 8 of the Federal Deposit Insurance Act, as
amended.
The Informal Agreement between the Company and the OTS provides, among other things, that the
Company, acting through its Board of Directors, will (i) support the Banks compliance with the
Informal Agreement it entered into with the OTS; (ii) not declare or pay dividends or any other
capital distribution or redeem any capital stock of the Company, or take dividends representing a
reduction in the capital from the Bank, without the prior written non-objection of the Regional
Director of the OTS; and (iii) not incur, issue, renew, repurchase, make payments on or rollover
any debt, increase any current lines of credit, or guarantee the debt of any entity without
receiving the prior written approval of the OTS Regional Director. Pursuant to the terms of the
Companys Credit Agreement with JPMorgan Chase Bank, N.A. (JPMorgan), entering into
the Informal Agreements was considered an event of default; however, JPMorgan and the Company
entered into an Amendment and Forbearance Agreement dated December 14, 2009 wherein JPMorgan agreed
to forbear from declaring the amounts owing under the Credit Agreement immediately due and payable
as a result of the Company and the Bank executing the Informal Agreements and any events of default
resulting therefrom. Since the effective date of the Informal Agreements, the Company has
requested and received the non-objection of the OTS to make certain payments due on its outstanding
debt. We will be required to make additional requests for non-objection from the OTS with respect
to future payments on our outstanding debt. However, the Company is continually evaluating its
cash flow resources available to satisfy such debt repayments, and all such repayments are subject
to continued non-objection from the OTS; accordingly, the Company may be required to suspend
certain debt payments.
The Informal Agreement between the Bank and the OTS provides, among other things, that the
Banks Board of Directors will (i) adopt a written Capital Plan for the Bank for the OTS Regional
Directors review and comment, and such plan shall address how the Bank will achieve and maintain
by June 30, 2010 a Tier 1 core capital ratio of 8% and a total risk-based capital ratio of 12% (as
of December 31, 2009, the Banks Tier 1 core capital and total risk-based capital ratios were 7.7%
and 10.1%, respectively, as shown above); and; (ii) approve a written Liquidity Contingency Plan to
ensure the Bank maintains adequate short-term and long-term liquidity, with such plan to
specifically address deposit concentrations and plans to reduce or manage such concentrations. The
Informal Agreement also requires the Bank to reduce certain concentrations in construction and land
lending and non-agency mortgage backed securities. In addition, the Informal Agreement places
restrictions on the level of brokered deposits maintained by the Bank including deposits obtained
by our regional banking teams from our community banking customer base offered through CDARS.
The Company believes that it has satisfied a number of the conditions of the Informal Agreement and
has commenced the steps necessary to resolve any and all remaining matters presented therein.
The Informal Agreements remain effective until modified, suspended or terminated by the OTS
Regional Director.
- 15 -
The OTS and the FDIC conducted a joint field visit at the Company and the Bank, which
commenced January 10, 2010. Subsequently, the OTS has provided additional supervisory limitations
on the Bank. These limitations include: (i) the Bank may not increase its total assets during any
quarter in excess of an amount equal to net interest credited on deposit liabilities without prior
written notice of non-objection from the OTS; and (ii) the OTS has directed the Bank not to
rollover or renew exiting brokered deposits, or accept new brokered deposits without the prior
written non-objection from the OTS.
As a result of the Informal Agreements and the additional supervisory limitations, the Company
is looking to further increase its capital position by focusing on expense reductions, optimizing
the balance sheet for both loans and deposits and risk weighting of assts, as well as evaluating
opportunities for margin improvement and improving the overall earnings power of the Company. This
may not be sufficient to meet the requirements of the Informal Agreements, so the Company is also
looking at various strategic alternatives for the Company to accelerate its compliance with terms
of the Informal Agreement.
While management believes that they are instituting the appropriate plans to meet the
requirements of the Informal Agreements, as well as the additional supervisory limitations, there
is no certainty that the Company can successfully execute on all of the above and meet the capital
requirements of the OTS by June 30, 2010. If the Company is unable to comply with the Informal
Agreements or additional supervisory limitations the OTS could take additional actions, including
issuing an enforcement action.
Insurance of Accounts and Regulation by the Federal Deposit Insurance Corporation. The
deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund, which is
administered by the FDIC, and backed by the full faith and credit of the U.S. Government. As
insurer, the FDIC is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious threat to the FDIC. The FDIC
also has the authority to initiate enforcement actions against savings associations, after giving
the OTS an opportunity to take such action.
The FDIC amended its risk-based assessment system for 2007 to implement authority granted by
the Federal Deposit Insurance Reform Act of 2005, as amended (the Reform Act). Under the revised
system, insured institutions are assigned to one of four risk categories based on supervisory
evaluations, regulatory capital levels and certain other factors. An institutions assessment rate
depends upon the category to which it is assigned. Risk Category I is the lowest risk category
while Risk Category IV is the highest risk category. For 2007 and 2008, the Bank qualified for Risk
Category I. Risk Category I generally includes banks that are well capitalized and that receive a
composite CAMELS rating of 2 or higher. For banks under $10 billion in total assets in Risk
Category I, the 2007 and 2008 deposit assessment ranged from five to seven basis points of total
qualified deposits. The actual assessment is dependent upon certain risk measures as defined in the
final rule. In 2009, the Bank had its risk category change as a result of its regularly scheduled
regulatory examination.
The Reform Act also provided for a one-time credit for eligible institutions based on their
assessment base as of December 31, 1996. The Banks one-time credit was $177,000, which was
recognized in 2007.
In addition to the assessment for deposit insurance, institutions are required to make
payments on bonds that were issued in the late 1980s by the Financing Corporation to recapitalize a
predecessor deposit insurance fund. The current annualized assessment rate is 1.06 basis points, or
approximately 0.265 basis points per quarter. These assessments will continue until the Financing
Corporation bonds mature in 2019.
In an effort to restore capitalization levels and to ensure the Deposit Insurance Fund will
adequately cover projected losses from future bank failures, the FDIC adopted a revised risk-based
deposit insurance assessment schedule on February 27, 2009, which raised deposit insurance
premiums. Changes in the risk-based assessment system included increasing premiums for
institutions that rely on excessive amounts of brokered deposits, including CDARS, increasing
premiums for excessive use of secured liabilities, including Federal Home Loan Bank advances, and
lowering premiums for smaller institutions with very high capital levels. For the first quarter of
2009 only, the FDIC increased all FDIC assessments by seven basis points. These rates ranged from
12 to 14 basis points for Risk Category I institutions to 50 basis points for Risk Category IV
institutions. Beginning April 1, 2009 the new initial base assessment rates were 12 to 16 basis
points for Risk Category I institutions, to 45 basis points for Risk Category IV institutions.
After applying all possible adjustments, the bases assessment rates range from 7 to 77.5 basis
points. On May 22, 2009, the FDIC adopted a final rule imposing a five basis point special
assessment of each insured depository institutions assets minus Tier 1 capital as of June 30,
2009, but no more than 10 basis points times the institutions assessment base for the second
quarter of 2009. This special assessment was collected on September 30, 2009. Additional special
assessments may be imposed by the FDIC for future periods.
- 16 -
On November 12, 2009, the FDIC adopted a final rule requiring insured institutions to prepay
approximately three years of estimated insurance assessments. The pre-payment allowed the FDIC to
strengthen the capital level of the Deposit Insurance Fund immediately without impacting earnings
of the industry. Payment of the prepaid assessment, along with the payment of institutions
regular third quarter assessment was due on December 30, 2009. The Bank received an exemption from
prepaying its FDIC insurance premiums.
FDIC insurance expense, inclusive of assessments for the Financing Corporation bonds, totaled
$4.9 million in 2009, $1.0 million in 2008, and $818,000 in 2007.
Insurance of an institutions deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule, order or condition
imposed by the FDIC or the OTS.
Under certain circumstances, which include among other factors the existence of an Informal
Agreement, the FDIC may participate actively with the OTS in providing regulatory supervision of
the Bank. This includes direct participation by the FDIC in on-site and off-site supervision,
direct influence in various ratings and in the overall supervision of the Bank. The FDIC may impose
additional or independent actions upon management, the Board of Directors and the Bank. The FDIC
is currently participating in our regulatory supervision with the OTS.
FHLBank System. United Western Bank is a member of the Federal Home Loan Bank (FHLBank)
system, which consists of twelve regional FHLBanks. The FHLBank provides a central credit facility
primarily for member associations and administers the home financing credit function of savings
associations. FHLBank borrowings must be secured by specified types of collateral. The FHLBank
funds its operations primarily from proceeds derived from the sale of consolidated obligations of
the FHLBank system. United Western Bank, as a member of the FHLBank system, must acquire and hold
shares of capital stock in its regional FHLBank in an amount equal to the greater of 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the
beginning of each year, 0.2% of total assets, or 5% of its borrowings from the FHLBank. Prior to
relocating its domicile, United Western Bank was a member of the FHLBank of Dallas. Effective March
25, 2002, United Western Bank became a member of the FHLBank of Topeka. At December 31, 2009,
United Western Bank was in compliance with the FHLBank system capital stock requirement based on
its combined investment in FHLBank of Dallas and FHLBank of Topeka stock totaling $9.4 million.
Brokered Deposits. Under the FDIC regulations governing brokered deposits, well capitalized
associations, such as United Western Bank, are not subject to brokered deposit limitations, while
adequately capitalized associations are subject to certain brokered deposit limitations and
undercapitalized associations may not accept brokered deposits. At December 31, 2009, United
Western Bank had $575.7 million of brokered deposits. Included in this total were $246.5 million of
CDARS deposits acquired through our community banking customer base by our regional banking teams;
$104.6 million of traditional brokered deposits obtained through a national brokerage firm; and
$224.6 million of other deposits that are deemed to be brokered deposits by regulatory definition.
Subsequent to year end, the OTS directed the Bank not to rollover or renew existing brokered
deposits, or accept new brokered deposits without prior written non-objection of the OTS.
Accordingly, the CDARS brokered deposits on deposit at the Bank may be transferred to certificate
accounts or other deposit accounts or withdrawn at maturity. The CDARS maturity dates run through
December 22, 2011, traditional brokered deposits mature $50 million on June 30, 2010 and $50
million on July 1, 2010, and other deposits deemed to be brokered deposits by regulatory definition
of $224.6 million will be withdrawn prior to March 31, 2010. Since December 31, 2009, the Bank has
accumulated cash on its balance sheet of over $1 billion, and thus has the liquidity necessary to
fund these brokered deposit withdrawals. In the event United Western Bank is not permitted to
accept brokered deposits in the future, it would have to find replacement sources of funding. It is
possible that such alternatives may not be available, or if available, would result in a higher
cost of funds.
Federal Reserve System. The Federal Reserve Board regulations require all depository
institutions to maintain reserves at specified levels against their transaction accounts (primarily
NOW and regular checking accounts). At December 31, 2009, United Western Bank was in compliance
with the Federal Reserve Boards reserve requirements. Savings associations, such as United Western
Bank, are authorized to borrow from the Federal Reserve Banks discount window. The Bank is
deemed by the Federal Reserve to be generally sound and thus is eligible to obtain primary credit
from its Federal Reserve Bank. Generally, primary credit is extended on a very short-term basis to
meet the liquidity needs of the institution. Loans must be secured by acceptable collateral and
carry a rate of interest of 50 basis points above the Federal Open Market Committees federal funds
target rate. As a tertiary source of liquidity, (see Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations Liquidity Bank Liquidity) at
December 31, 2009, the Bank had pledged approximately $22.9 million of the guaranteed portions of
purchased SBA loans to the Federal Reserve Bank of Kansas City, as collateral for potential
borrowings from the discount window.
- 17 -
Mortgage Banking Operations. Our mortgage banking operations are conducted through Matrix
Financial Services. The rules and regulations applicable to our mortgage banking operations
establish underwriting guidelines that, among other things, include anti-discrimination provisions,
require provisions for inspections, appraisals and credit reports on prospective borrowers and fix
maximum loan amounts. Moreover, we are required annually to submit audited financial statements to
the U.S. Department of Housing and Urban Development (HUD), Fannie Mae, Freddie Mac and Ginnie
Mae, and each regulatory entity maintains its own financial guidelines for determining net worth
and eligibility requirements. Matrix Financial Services operations are also subject to examination
by HUD, Fannie Mae, Freddie Mac and Ginnie Mae at any time to assure compliance with the applicable
regulations, policies and procedures. Mortgage loan origination activities are subject to, among
other laws, the Equal Credit Opportunity Act, the Federal Truth-in-Lending Act and the Real Estate
Settlement Procedures Act of 1974, and the regulations promulgated under these laws that prohibit
discrimination and require the disclosure of certain basic information to mortgagors concerning
credit terms and settlement costs. Moreover, the OTS, as primary regulatory authority over the Bank
(the parent of Matrix Financial Services), also examines the Matrix Financial Services mortgage
banking operations as well.
Regulation of UW Trust Company. UW Trust Company provides custodial escrow, paying agent and
trust administration services. UW Trust Company is chartered under the laws of the State of Texas,
and as a Texas trust
company is subject to supervision, regulation and examination by the Texas Department of
Banking. Under applicable law, a Texas trust company, such as UW Trust, is subject to virtually all
provisions of the Texas Banking Act as if the trust company were a state chartered bank. The
activities of a Texas trust company are limited by law to acting as a trustee, executor,
administrator, guardian or agent for the performance of any lawful act, and to lend and accumulate
money when authorized under applicable law. In addition, a Texas trust company with capital of $1.0
million or more, such as UW Trust, has the power to:
|
|
|
purchase, sell, discount and negotiate notes, drafts, checks and other evidences
of indebtedness; |
|
|
|
purchase and sell securities; |
|
|
|
issue subordinated debentures and promissory notes; and |
|
|
|
exercise powers incidental to the enumerated powers of Texas trust companies as
set forth in the Texas Banking Act. |
A Texas trust company, such as UW Trust, is generally prohibited from accepting demand or time
deposits if not insured by the FDIC.
Limitation on Capital Distributions. The Texas Finance Code prohibits a Texas trust company
from reducing its outstanding capital and certified surplus through redemption or other capital
distribution without the prior written approval of the Texas Banking Commissioner. During the year
ended December 31, 2009, UW Trust paid the Company a dividend of $38.3 million.
Investments. A Texas trust company is generally obligated to maintain an amount equal to 40%
of its capital and surplus in investments that are readily marketable and that can be converted
into cash within four business days. So long as it complies with those requirements, a Texas trust
company generally is permitted to invest its corporate assets in any investment otherwise permitted
by law. Generally, a Texas trust company cannot invest an amount in excess of 15% of its capital
and certified surplus in the securities of a single issuer.
Branching. The Texas Finance Code permits a Texas trust company to establish and maintain
branch offices at any location within the state if it first obtains written approval of the Texas
Banking Commissioner.
Transactions with Related Parties. The Texas Finance Code prohibits the sale or lease of an
asset of a Texas trust company, or the purchase or lease of an asset by a Texas trust company,
where the transaction involves an officer, director, principal shareholder or affiliate, unless the
transaction is approved by a disinterested majority of the board of directors or the written
approval of the Texas Banking Commissioner is first obtained. In no event, however, may a Texas
trust company lease real property in a transaction involving an officer, director, principal
shareholder or affiliate without the prior approval of the Texas Banking Commissioner.
- 18 -
Enforcement. Under applicable provisions of the Texas Finance Code, the Texas Banking
Commissioner has the power to issue enforcement actions against a Texas trust company or any
officer, employee or director of a Texas trust company. In addition, in certain circumstances, the
Texas Banking Commissioner may remove a present or former officer, director or employee of a Texas
trust company from office or employment, and may prohibit a shareholder or other persons
participating in the affairs of a Texas trust company from such participation. The Texas Banking
Commissioner has the authority to assess civil penalties of up to $500 per day against a Texas
trust company (penalties against individuals may be higher) for violations of a cease and desist,
removal or prohibition order. The Texas Banking Commissioner may also refer violations of a cease
and desist order to the attorney general for enforcement by injunction.
The Texas Banking Commissioner may pursue an order of supervision or conservatorship if:
|
|
|
the Texas Banking Commissioner determines that the Texas trust company is in a
hazardous condition and that the continuation of business would be hazardous to the
public or to the shareholders or creditors of the Texas trust company; |
|
|
|
the Texas Banking Commissioner determines that the Texas trust company has exceeded
its powers; |
|
|
|
the Texas trust company has violated the law; or |
|
|
|
the Texas trust company gives written consent to supervision or conservatorship. |
The Texas Banking Commissioner also has the authority to pursue the appointment of an independent
receiver for a Texas trust company.
Capital Requirements. UW Trust is required by the Texas Banking Commissioner to maintain
minimum restricted capital of at least $2 million. In addition, a Texas trust company may not have
at anytime outstanding liabilities in an amount that exceeds five times its capital stock and
surplus, except that with the approval of the Texas Banking
Commissioner, a Texas trust company may have outstanding liabilities in an amount that does
not exceed ten times its capital stock and surplus. The Texas Banking Commissioner may require
additional capital of a Texas trust company if the Texas Banking Commissioner determines it
necessary to protect the safety and soundness of such company. If the Texas Banking Commissioner
were to do so, or in the event UW Trust fails to maintain capital of at least $2 million, there is
no assurance that UW Trust would be able to restore its capital or meet such additional
requirements. In either case, the Texas Banking Commissioner could pursue various enforcement
actions for inadequacy of capital, such as appointing either a conservator or a receiver. As of
December 31, 2009, UW Trust is in compliance with all capital requirements under Texas law.
Regulation of UW Investment Services Inc. UWIS is a securities broker-dealer that is subject
to the Securities and Exchange Commissions net capital rule, Rule 15c3-1, promulgated under the
Securities Exchange Act of 1934. The net capital rule is designed to measure the general financial
condition and liquidity of a broker-dealer. Net capital generally is the net worth of a broker or
dealer (assets minus liabilities), less deductions for certain types of assets. If a firm fails to
maintain the required net capital, it may be subject to suspension or revocation of registration by
the Securities and Exchange Commission and suspension or expulsion by FINRA, and could ultimately
lead to the firms liquidation. The net capital rule also limits the ability of broker-dealers to
transfer large amounts of capital to parent companies and other affiliates. At December 31, 2009,
UWIS was in compliance with these requirements with net capital of $244,000, which was
approximately $239,000 in excess of its required net capital of $5,000.
Available Information
Under the Securities Exchange Act of 1934, the Company is required to file annual, quarterly,
and current reports, proxy statements and other information with the Securities and Exchange
Commission (SEC). You may read and copy any document the Company files with the SEC at the SECs
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may call the SEC at
1-800-732-0330 for further information about the Public Reference Room. The SEC maintains a website
at www.sec.gov which contains reports, proxy and information statements, and other information
regarding the Company that we file electronically with the SEC.
The Company maintains a website at www.uwbancorp.com. On our website, investors and
other interested persons may access free of charge, among other things, any of the reports that we
file with or furnish to the SEC, including this annual report on Form 10-K, quarterly reports on
Form 10-Q, and current reports on Form 8-K as soon as reasonably practicable after such reports are
filed with or furnished to the SEC. The Companys website also includes the charters of our Audit,
Compensation, Nomination and Governance Committees and other corporate governance documents.
- 19 -
Ownership of the common stock or other securities including debt and debt securities of the
Company involves certain risks. Holders of the Companys securities and prospective investors in
those securities should carefully consider the following risk factors and uncertainties described
below together with all of the other information included and incorporated by reference in this
report, in evaluating an investment in the Companys securities. If any of the risks and
uncertainties discussed below actually occur, our business, financial condition and results of
operations could be materially adversely affected. In addition, other risks and uncertainties of
which we are not currently aware, including those relating to the banking and financial services
industries in general, regulatory supervision and actions, or which we do not now believe are
material, may cause earnings to be lower, or impair our future financial condition or results of
operations. The value or market price of our common stock could decline due to any of these
identified or other risks, and you could lose all or part of your investment.
Risks Related to Our Business
Our business has been and may continue to be adversely affected by conditions in the financial
markets and economic conditions generally. During 2008 and 2009, the financial services industry
and the securities markets generally have been materially and adversely affected by significant
declines in the economy and values of nearly all asset classes and by a serious lack of liquidity
and a lack of financing for many investors. Unemployment has also increased significantly.
Market conditions have also led to the failure or merger of a number of prominent insured
depository institutions. In addition, many financial institutions, including us, have experienced
declines in the performance of their loans and non-agency mortgage-backed securities. Increases in
defaults on mortgages including residential loans, construction and land loans, and commercial real
estate loans coupled with declining asset values and the lack of market
and investor confidence, as well as other factors, have all combined to negatively impact
financial services participants such as us.
As a result, there is a potential for new federal or state laws and regulations regarding
lending and funding practices and liquidity standards, and bank regulatory agencies have been and
are expected to continue to be aggressive in their supervision of banks and in responding to
matters identified in examinations, including the issuance of informal or formal enforcement
actions or orders. The impact of the legislation in response to these developments may negatively
impact our operations by restricting our business operations, including our ability to originate or
sell loans, and adversely impact our financial performance or our stock price.
Further, additional negative market developments may affect consumer confidence levels which
could cause changes in payment performance, leading to increases in delinquencies and default rates
that could impact our charge-offs and provision for credit losses. A worsening of these conditions
would likely extend the impact of these difficult market conditions on us and others in the
financial services industry.
Our financial performance generally, and in particular the ability of our borrowers to pay
interest on and repay principal of outstanding loans and the value of collateral securing those
loans, is highly dependent upon the business environment in the markets where we operate in the
State of Colorado and in the United States as a whole. Continued deterioration in the business
environments could adversely affect the credit quality of the Banks loans, the value of our
companys investment securities, and our overall results of operations and financial condition.
Regulatory Risks
We are subject to informal agreements and other determinations by the OTS that restricts
certain of our actions. Effective as of December 10, 2009, the Company and the Bank each entered
into separate informal Memorandums of Understanding (Informal Agreements) with the Office of
Thrift Supervision (the OTS). The Informal Agreements are not written agreements for purposes
of Section 8 of the Federal Deposit Insurance Act, as amended.
The Informal Agreement between the Company and the OTS provides, among other things, that the
Company, acting through its Board of Directors, will (i) support the Banks compliance with the
Informal Agreement it entered into with the OTS; (ii) not declare or pay dividends or any other
capital distribution or redeem any capital stock of the Company, or take dividends representing a
reduction in the capital from the Bank, without the prior written non-objection of the Regional
Director of the OTS; and (iii) not incur, issue, renew, repurchase, make payments on or rollover
any debt, increase any current lines of credit, or guarantee the debt of any entity without
receiving the prior written approval of the OTS Regional Director. Pursuant to the terms of the
Companys Credit Agreement with JPMorgan, entering into the Informal Agreements was considered an
event of default; however, JPMorgan and the Company entered into an Amendment and Forbearance
Agreement dated December 14, 2009 wherein JPMorgan agreed to forbear from declaring the amounts
owing under the Credit Agreement immediately due and payable as a result of the Company and the
Bank executing the Informal Agreements and any events of default resulting therefrom.
- 20 -
The Informal Agreement between the Bank and the OTS provides, among other things, that the
Banks Board of Directors will (i) adopt a written Capital Plan for the Bank for the OTS Regional
Directors review and comment, and such plan shall address how the Bank will achieve and maintain
by June 30, 2010 a Tier 1 core capital ratio of 8% and a total risk-based capital ratio of 12% (as
of December 31, 2009, the Banks Tier 1 core capital and total risk-based capital ratios were 7.7%
and 10.1%, respectively); and (ii) approve a written Liquidity Contingency Plan to ensure the Bank
maintains adequate short-term and long-term liquidity, with such plan to specifically address
deposit concentrations and plans to reduce or manage such concentrations. The Informal Agreements
remain effective until modified, suspended or terminated by the OTS Regional Director. There can
be no assurance that the terms and conditions of the Informal Agreement will be met or that the
impact or effect of such terms and conditions will not have a material adverse effect with respect
to our financial condition, results of operations and future prospects.
If as a result of its review or examination of the Bank, the OTS or the FDIC should determine
that the financial condition, capital resources, asset quality, liquidity, earnings ability, or
other aspects of its operations have worsened or that it or its management is violating or has
violated the Informal Agreement or any law or regulation, various additional remedies are available
to the OTS and the FDIC. Such remedies include the power to enjoin unsafe or unsound practices,
to require affirmative action to correct any conditions resulting from any violation or practice,
to issue an administrative order that can be judicially enforced, to direct an increase in capital,
to restrict our growth, to assess civil monetary penalties, to remove officers and directors, and
ultimately to terminate our deposit insurance, which would result in the seizure of the Bank by its
regulators.
We may elect or be compelled to seek additional capital, but that capital may not be available
or it may be dilutive. We are required by the Informal Agreement with the OTS, to achieve and
maintain a Tier 1 core capital ratio of 8% and a total risk-based capital ratio of 12% by June 30,
2010. These capital level requirements are above our current capital levels and our current
earnings are not expected to be sufficient to allow us to achieve these required rates by the dates
specified. Prospectively we will look to further strengthen our capital position via multiple
avenues, including focused expense reductions, optimizing our balance sheet for loans and deposits
and increasing net interest income and ultimately improving the overall earnings of the Company.
We are also considering certain strategic alternatives for the Company to accelerate our compliance
with terms of the Informal Agreement. We raised $81.7 million of capital, net of offering expenses,
in the second half of 2009 and a number of financial institutions have recently raised considerable
amounts of capital as a result of deterioration in their results of operations and financial
condition arising from the negative impact of the mortgage loan market, non-agency mortgage-backed
security market, and deteriorating economic conditions, which may diminish our ability to raise
additional capital.
Our ability to raise capital will depend on conditions in the capital markets, which are
outside our control, and on our financial performance. Accordingly, we cannot be assured of our
ability to raise capital when needed, on favorable terms or at all. If we cannot raise additional
capital when needed, we will be subject to increased regulatory supervision and the imposition of
restrictions on our growth and business. These outcomes could negatively impact our ability to
operate or further expand our operations through acquisitions or the establishment of additional
branches and may result in increases in operating expenses and reductions in revenues that could
have a material adverse effect on our financial condition and results of operations. In addition,
in order to raise additional capital, we may need to issue shares of our common stock that would
dilute the book value of our common stock and reduce our shareholders percentage ownership
interest to the extent they do not participate in future offerings. Also, if we are unable to raise
additional capital, we may be required to take alterative actions which may include the sale of
income-producing assets to meet our capital requirements, which could have an adverse impact on our
operations and ability to generate income.
As a regulated entity, the Bank must maintain certain required levels of regulatory capital
that may limit our operations and potential growth. The Bank is subject to various regulatory
capital requirements administered by the OTS. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Banks and our Companys consolidated
financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Banks assets, liabilities and certain off-balance sheet commitments as calculated
under these regulations.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and defined ratios of total and Tier 1 capital to risk-weighted assets and
of Tier 1 capital to total assets. For the Bank, Tier 1 capital consists of shareholders equity
excluding unrealized gains and losses on certain securities, less a portion of the Banks mortgage
servicing asset that is disallowed for capital. For the Bank, total capital consists of Tier 1
capital plus the allowance for credit losses less a deduction for low level recourse obligations.
In the capital calculation for the Bank, the allowance for credit losses is limited to 1.25% of
risk-weighted assets and, accordingly, the Bank does not receive a capital benefit for $14.1
million, which is disallowed in its capital calculation.
- 21 -
At December 31, 2009, the Bank was required to establish a deferred tax valuation allowance of
$14.5 million. In assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets will not be
realized. Assessing the need for, or the sufficiency of, a valuation allowance requires management
to evaluate all available evidence, both negative and positive. Positive evidence necessary to
overcome the negative evidence includes whether future taxable income in sufficient amounts and
character within the carryback and carryforward periods is available under the tax law. When
negative evidence (e.g., cumulative losses in recent years) exists, more positive evidence than
negative evidence will be necessary. If the positive evidence is not sufficient to exceed the
negative evidence, a valuation allowance for deferred tax assets is established. The deferred tax
valuation allowance reduced the Banks preliminary deferred tax asset of $27.9 million by 52% to
$13.5 million. The establishment of this deferred tax valuation allowance had a negative impact to
the Banks financial condition, results of operations and capital ratios. The incurrence of
additional losses or reduction of positive evidence related to the portion of the deferred tax
asset that remains could result in additional valuation allowance of the balance of the deferred
tax balances.
Many factors may affect the Banks capital and its ability to maintain required capital
ratios. For example, loan grading decisions, loan impairments, recognized loan losses, declines in
the ratings of certain non-agency mortgage backed securities or other factors leading to
impairments of these securities, increased operating expenses and other factors, may combine to
decrease the Banks capital and require us to contribute additional capital to the Bank.
Conversely, positive operational results, such as the sale of assets at value in excess of our
amortized cost, expense savings programs and other factors may increase the Banks capital, thereby
improving its regulatory capital ratios under OTS guidelines.
As of December 31, 2009, the Bank was well capitalized under applicable capital
requirements, including a total risk-based capital ratio of 10.1%. See Item 1 Business
Regulation and Supervision United Western Banks Capital Requirements. If our total risk-based
capital ratio drops below 10.00% at any quarter, we would be classified as adequately
capitalized, and could be subject to increased regulatory supervision and requirements, which
could have a material adverse effect on our financial condition and results of operation, including
resulting in an event of default under the Companys senior credit agreement.
Liquidity Risks
Liquidity risk could impact our operations and our results of operations. If the Bank or
Company were unable to borrow funds through access to the marketplace, we may not be able to meet
the cash flow requirements of our depositors, creditors, and borrowers, or the operating cash
needed to fund corporate expansion and other corporate activities. Liquidity is the ability to meet
cash flow needs on a timely basis at a reasonable cost. Liquidity is essential to our business.
United Western Bank relies on processing and trust deposits, which, if one or more processing
and trust relationship was terminated, such termination could negatively impact our liquidity,
profitability and results of operations. A significant portion of the total deposits of our
principal subsidiary, United Western Bank, are funds deposited as a result of unaffiliated
processing and trust relationships maintained by the Bank. At December 31, 2009, four unaffiliated
processing and trust relationships accounted for $1.04 billion, or 51.6%, of our total deposits,
which includes custodial escrow deposits. Included in these four unaffiliated processing and trust
relationships is one processing and trust relationship with a balance of $934 million at December
31, 2009, which accounts for 46.1% of the Banks total deposits at December 31, 2009. The Banks
future success in retaining and attracting processing and trust depositors depends, in part, on its
ability to offer competitive rates and services. With the unprecedented events in the financial
markets in the United States over the past two years, deposit concentrations are an increasing risk
to all depository institutions and to our company. Although our processing and trust deposit
relationships are evidenced by an agreement between the Bank and the institution, some of the
agreements may be terminated by the institution at any time, upon prior notice, for any reason.
Further, an institution may elect not to renew the agreement or to terminate the deposit
relationship for various reasons, including, but not limited to, if there is a serious impairment
to the Banks financial condition or if the Bank fails to be well capitalized, adequately
capitalized, or other covenants, including regulatory directives or agreements. If the Bank loses
one or more of these processing and trust relationships, our liquidity, profitability and results
of operations may be significantly and adversely affected.
- 22 -
Pursuant to an asset purchase agreement dated April 7, 2009, Equity Trust Company and Sterling
Administrative Services, LLC (the Buyers) purchased from us the assets of UW Trust associated
with its self-directed individual retirement account and qualified employee benefit plan
administration business. The Buyers, and their affiliate, Equity Administrative Services, Inc.,
have agreed to maintain all of their custodial deposits with the Bank for a three-year period.
These deposits are included in the amounts set forth in the paragraph above. Notwithstanding the
terms of the asset purchase agreement, if the Buyers transfer these deposits to another depository
institution, our liquidity, profitability, and results of operations may be significantly and
adversely affected.
Effective January 15, 2010, the Company amended its credit agreement with its senior credit
facility provider. The terms of the amendment provide, among other things: (i) for the extension of
the maturity date from December 31, 2009 to June 30, 2010 (the note had a balance of $20 million at
December 31, 2009); (ii) that the Company make a principal reduction payment on the note of $2.5
million upon execution of the amendment, which payment the Company has made, and another principal
reduction payment on the note of $1.25 million on or before March 31, 2010. Additionally, the
lender agrees to continue to forbear from declaring all outstanding amounts on the note to be
immediately due and payable as a result of the Company and, United Western Bank each executing
Informal Agreements with the OTS. The Company and one of its nonbank subsidiaries pledged certain
non-agency mortgage-backed securities as additional collateral to the lender. Unless we further
amend, or obtain a waiver under the senior credit facility, we will need to receive the written
non-objection from the OTS to make the principal payment due at maturity. The Company intends to
renew and extend the maturity of this debt, which will require the non-objection from the OTS and
approval from its senior credit facility provider; however, there can be no assurance that we will
be successful in securing the required non-objection and approval.
In the event we fail to make such payments, or to comply with other restrictive debt covenants
under our senior credit facility, we may not be able to obtain the necessary amendments or waivers,
and our lender could accelerate the payment of all outstanding amounts due under that arrangement.
In addition to the risk of non-payment described above, our ability to meet the nonperforming
assets plus real estate owned ratio, or NPA Plus REO Ratio, contained in our senior credit facility
and otherwise comply with our covenants may be affected by various events, including those that may
be beyond our control. In addition to the financial covenants pertaining to the Bank maintaining
its categorization as well capitalized as described in the OTS regulations, our financial
covenants require that the Bank, at all times, maintain an NPA Plus REO Ratio of not greater than
6.50%, which the Bank complied with at December 31, 2009 (as the ratio was 5.73%). The NPA Plus REO
Ratio means the ratio of the sum of nonperforming assets (less nonperforming assets guaranteed as
to principal repayment by the U.S. government or one of its agencies) plus real estate owned, to
the sum of total loans and repossessed assets plus real estate owned. Prospectively, we may not be
able to continue to meet these and other ratios, tests and covenants. If we were to breach any of
these covenants, ratios, tests or restrictions, as applicable, in the future, it could result in an
event of default, which would allow our lender to declare all amounts outstanding to be immediately
due and payable. If the lender accelerates the payment of our indebtedness, we may not be able to
repay in full the amounts then outstanding. Further, as a result of any breach and during any cure
period or negotiations to resolve a breach or expected breach, our lenders may refuse to make
further loans to us, which could affect our liquidity and results of operations. Even if we are
successful in obtaining waivers or entering into any such amendments, we could incur substantial
costs in doing so, our borrowing costs could increase, and we may be subject to more restrictive
covenants than the covenants under our existing facility. Any of the foregoing events could have a
material adverse impact on our business and results of operations, and there can be no assurance
that we would be able to obtain the necessary waivers or amendments on commercially reasonable
terms, or at all.
United Western Bank relies on wholesale funding sources for secondary and contingent liquidity
sources. The Bank utilizes borrowings from the Federal Home Loan Bank, or FHLBank, system, brokered
certificates of deposits and repurchase agreements for secondary and contingent sources of
liquidity. The Bank also has capacity to borrow from the Federal Reserve Discount Window. Also,
from time to time, the Bank utilizes these sources to capitalize on market opportunities to fund
investment and loan initiatives. To the extent such wholesale sources depend upon collateralized
borrowings, declines in asset quality or the fair value of the underlying instruments could reduce
our wholesale borrowing capacity. If the Bank were unable to obtain or maintain our access to
funding or if adequate funding is not available to accommodate future growth at acceptable interest
rates, it would have to find alternative sources of liquidity, which, if available, would probably
be at a higher cost and on terms that do not match the structure of our liabilities as well as the
existing wholesale funding sources. In addition, our Company relies on wholesale bank funding for
parent company funds. If such funds were not available from the banking sector, securing
alternative funding could cause disruption to our business. Factors that could detrimentally impact
our access to liquidity sources include a decrease in the level of our business activity as a
result of a downturn in the markets in which our loans are concentrated or adverse regulatory
action against us. Our ability to borrow could also be impaired by factors that are not specific to
us, such as a disruption in the financial markets or negative views and expectations about the
prospects for the financial services industry in light of the recent turmoil faced by banking
organizations and the continued deterioration in credit markets.
- 23 -
At December 31, 2009, we had outstanding indebtedness to FHLBank Topeka in the amount of
$180 million. FHLBank Topeka currently limits our ability to pledge non-agency mortgage-backed
securities as collateral against our borrowings from them to securities rated AA by at least one
NRSRO. If the rating agencies were to downgrade any of the eligible securities that we have pledged
to FHLBank Topeka to an unacceptable rating, our borrowing capacity would be reduced by
$53.2 million as of December 31, 2009. If FHLBank Topeka reduced our borrowing capacity, and we
were not able to replace the financing on similar terms, our liquidity could be materially and
adversely affected. It may be difficult to secure replacement financing in the current credit
markets.
We are significantly dependent upon brokered deposits as a source of liquidity, and are
currently under significant restrictions in our ability to use them in the future. At December 31,
2009, we had outstanding brokered deposit balances in the amount of $575.6 million. Our Informal
Agreement with the OTS prohibits us from increasing brokered deposits. Subsequent to year end, the
OTS provided additional supervisory limitations on the Bank. These limitations restrict us from
rolling over, renewing or entering into any new brokered deposits without the prior non-objection
of the OTS. Based on factors such as our financial performance, the capital markets generally, and
the increased regulatory supervision to which we are subject, we can offer no assurance that we
will be successful in obtaining these alternative sources of liquidity in a timely manner, if
required. At December 31, 2009, the Bank had cash on hand of $586 million and since year end this
has grown to over $1 billion, and thus the withdrawal of these balances will not have a material
adverse impact on the Bank. If the OTS or FDIC were to impose further limitations on brokered
deposits or classify other deposits as brokered, this could materially impact our liquidity.
Our ability to service our debt and pay dividends is subject to our ability to receive
dividends from our subsidiaries. We are a separate legal entity from our subsidiaries and do not
have significant operations of our own. We currently depend on our cash, mortgage-backed
securities, credit facilities and liquidity as well as dividends from our subsidiaries to pay our
operating expenses and service our debt. There is no assurance that our subsidiaries will continue
to have the capacity to pay us the necessary dividends to satisfy our obligations. In particular,
the availability of dividends from the Bank is limited by various statutes and regulations.
Currently, our Informal Agreement with the OTS prohibits the payment of dividends from the Bank to
the Company. Depending upon the financial condition of the Bank and other factors, it is possible
that the OTS could assert that the payment of dividends or other payments by the Bank are an unsafe
or unsound practice. There can be no assurance of whether or when we will be able to cause the
Bank to pay a dividend to the Company in the future.
If the Bank or our other subsidiaries continue to be unable to pay dividends sufficient to
satisfy our obligations, or if we are unable to access the marketplace to refinance our outstanding
senior debt facility we may not be able to service our debt, pay our obligations as they become due
or pay dividends on our common stock.
Risks Associated with Non-Agency Mortgage Backed Securities
Continued deterioration in the underlying performance of our investment securities backed by
mortgage loans could create losses in our investment portfolio. Although we sold mortgage-backed
securities on June 30, 2009 that represented 100% of our exposure to mortgage-backed securities
collateralized by option-adjustable-rate mortgage loans, a majority of the Banks investment
portfolio is comprised of securities where mortgages are the underlying collateral. These
securities include agency-guaranteed mortgage-backed securities and non-agency mortgage-backed
securities and collateralized mortgage obligations. With the national downturn in residential real
estate markets and the rising mortgage delinquency and foreclosure rates, investors are
increasingly concerned about these types of securities, which have negatively impacted the prices
of such securities in the marketplace.
Continued negative trends in the loans underlying the mortgage-backed securities, as well as
negative trends in home prices in the markets in which the collateral for these loans are located,
negative trends in unemployment, and other macroeconomic factors, could all lead to additional
material other-than-temporary impairment charges in the future.
The determination of other-than-temporary impairment is a significant estimate and is
susceptible to change prospectively. If credit losses on those loans were to exceed the
subordinated tranches designed to credit-enhance our securities, we would not receive the full
stated interest due on the securities or our full principal balance, or both. Our Company and the
Bank own both senior and subordinated tranches of these securities. If we were to conclude there
were unrealized losses which were other-than-temporary which we evaluate, by among other factors,
considering estimates of recoverability, as well as the duration and severity of the unrealized
loss we would be required under GAAP to reduce the carrying amount of the securities to fair
value and record a corresponding charge to earnings for the portion determined to be due solely to
credit, and reduce the remainder of the securities to fair value via a corresponding charge to
other comprehensive income. The portion of the charge due to credit losses would also reduce our
regulatory capital and negatively impact the Banks capital ratios. These negative impacts could
significantly impair the Banks ability to borrow funds under credit arrangements, as well as
negatively impact our material processing and trust depository arrangements and relationships. In
addition, if the Bank determined it was more likely than not that it would sell a security or that
it was more likely than not that it would be required to sell a security, such impairments would be
realized through earnings as other-than-temporary impairments.
- 24 -
Temporary impairments on available for sale securities and the portion of impairments on held
to maturity securities in which we have identified as other-than-temporary impairment that is not
directly related to credit factors also reduce our book value per share as the changes in the value
reduce shareholders equity. Although OTS regulations do not prescribe capital ratio levels for the
Company per se, additional impairments could reduce capital levels further and below levels our
management deems prudent.
Many of the loans underlying the non-agency mortgage-backed securities we own have one or more
characteristics increasing the risk of default by the borrowers. These characteristics include,
among others, declining real estate values that have reduced the prices of many one-to-four family
residences below the amount of the outstanding mortgage debt, limited underwriting documentation at
mortgage origination which may have permitted borrowers to become mortgagors of obligations beyond
their economic means, declining employment in the United States, and other factors.
Declines in the credit and residential housing markets could result in further losses on our
mortgage-backed securities. Credit markets in many sectors have experienced dramatic reductions in
liquidity and increases in required returns by investors in credit-sensitive assets. These
conditions began in 2007 in the sub-prime mortgage market, but
expanded in 2008 to include virtually all non-agency mortgage-backed securities and many other
asset-backed markets. At December 31, 2009, approximately 13.7% of our assets were mortgage-backed
securities and approximately 89.9% of those securities were non-agency securities. Recent
transactions by distressed sellers, and expectations of further distressed sales, have exacerbated
market discounts for mortgage-backed securities and generally removed the majority of typical
participants from transactions in non-agency securities. As a result, it is difficult to determine
fair values for those securities and would likely be difficult to sell securities in the current
market at all. We estimate the fair value of the non-agency securities we own was below amortized
cost, after giving effect to other-than-temporary impairment charges for the year ended December
31, 2009, by approximately $65.4 million, or 21%, at December 31, 2009. Though the Company does not
intend to sell and it is not more likely than not that the Company would be required to sell the
securities if it became necessary for us to sell non-agency securities, any sales would almost
certainly be at a significant discount to par value which would have a negative effect on our
operating results and capital position. Due to current market conditions, we may be unable to sell
our non-agency mortgage-backed securities when or if required to meet capital demands.
If any additional of the Banks subordinate-tranche, non-agency, mortgage-backed securities
were to be downgraded below investment grade by one or more of the nationally recognized securities
rating organizations, or NRSROs, which rate the securities, we could be required to maintain
additional capital. We hold a number of subordinate-tranche, non-agency, mortgage-backed securities
which were rated AAA by one or more NRSROs when the Bank acquired them. If any of these securities
were to be downgraded two or more grades below investment grade by any one NRSRO, as described
below, we will be required to maintain additional risk-based capital in support of such securities
if the Bank elects to continue to hold such securities. The additional amount of risk-based capital
required may be as great as the outstanding principal amount of the security. If this were to
occur, and the Bank did not have enough risk-based capital to meet its required risk-based capital
ratios, the Bank may have to raise additional capital or sell assets in order to maintain its
required risk-based capital ratios. If additional capital was not available to the Bank when
needed, the Bank would have to consider other alternatives for downgraded subordinate-tranche
securities or implement other capital planning strategies to maintain its required capital ratios.
These alternatives or other strategies could negatively affect our results of operations, cash
flows and financial position. With the distress in the United States mortgage market ensuing since
Spring 2008, many of our subordinate-tranche, non-agency, mortgage-backed securities, formerly
rated investment grade, have been downgraded to two or more grades below investment grade by one or
more NRSROs.
As of December 31, 2009, we held subordinate-tranche, non-agency, mortgage-backed securities
with an amortized cost of $116.9 million, of which $42.8 million in amortized cost to us were rated
investment grade or one grade below investment grade. With regard to the $42.8 million in amortized
cost of subordinate-tranche, non-agency, mortgage-backed securities, we were required to maintain
regulatory risk-based capital of $3.1 million to hold such securities at December 31, 2009. The
remainder of our subordinate-tranche, non-agency, mortgage-backed securities, $74.1 million in
amortized cost, were rated two or more grades below investment grade at December 31, 2009, and the
Bank was required to maintain $65.8 million of regulatory risk-based capital in order to hold such
securities and maintain a total risk-based capital ratio of at least 10%.
- 25 -
Subsequent to December 31, 2009, approximately $1.4 million of the $42.8 million of
subordinate-tranche, non-agency mortgage-backed securities were downgraded to two or more grades
below investment grade by at least one NRSRO. Assuming no other changes prior to December 31, 2009,
this downgrade would have required the Bank to allocate an estimated $720,000 of additional capital
to these securities in order to maintain a total risk-based capital ratio of 10% at December 31,
2009.
We are unable to predict with any degree of accuracy when or if any of our remaining
subordinate-tranche, non-agency, mortgage-backed securities with an amortized cost of $42.8 million
may be downgraded to two or more grades below investment grade by any NRSRO. Any additional
downgrades by the NRSROs to two or more grades below investment grade could cause us to fall below
well capitalized status under applicable regulations, and have other material adverse effect on
our financial condition.
Risks Related to Lending
Our allowance for credit losses may be insufficient. We maintain an allowance for credit
losses, which is a reserve established through a provision for credit losses charged to expense,
that represents the Companys best estimate of probable inherent losses within the existing
portfolio of loans. The allowance, in the judgment of our Company, is necessary to reserve for
estimated credit losses and risks inherent in our loan portfolio. The level of the allowance
reflects the Companys continuing evaluation of industry concentrations, specific credit risks,
loan loss experience, current loan portfolio quality, present economic, political and regulatory
conditions and unidentified losses inherent in the current
loan portfolio, and has been increasing as the economy worsens. The determination of the
appropriate level of the allowance for credit losses inherently involves a high degree of
subjectivity and requires the Company to make significant estimates of current credit risks and
inherent and as-yet-unidentified losses in the portfolio, all of which may undergo material
changes. In addition, the OTS periodically reviews our allowance for credit losses and may require
an increase in the provision for credit losses or the recognition of further loan charge-offs,
based on judgments different than those of the Company. In light of the current economic
environment, significant additional provisions for credit losses may be necessary to supplement the
allowance for credit losses in the future. If charge-offs in future periods exceed the allowance
for credit losses, we will need additional provisions to increase the allowance for credit losses.
We cannot assure you that we will not increase the allowance for credit losses further or that the
OTS will not require the Bank to increase its allowance, either of which could adversely affect our
Company. Any increases in the allowance for credit losses will result in a decrease in net income
and, possibly, capital, and may have a material adverse effect on our financial condition and
results of operations and hinder our ability to make payments on the outstanding obligations of our
Company.
A significant portion of our loan portfolio is secured by real estate, and a continued
downturn in the economy within the markets we serve could significantly hurt our business and
prospects for growth. Real estate lending (including commercial, construction, land development,
and residential) remains a large portion of the Banks loan portfolio. These categories constituted
$1.3 billion, or approximately 89% of the Banks total loan portfolio as of December 31, 2009. Real
estate values are generally affected by changes in economic conditions, fluctuations in interest
rates and the availability of loans to potential purchasers, changes in tax and other laws and acts
of nature. A downturn in the real estate markets in which the Bank originates, purchases and
services mortgage and other loans could hurt our business because these loans are secured by real
estate. In addition, even though the Banks real property collateral is currently located
throughout the United States, we believe that the amount of such collateral in Colorado, which at
December 31, 2009 was $798 million, or 55% of our total loan portfolio, is likely to increase as a
result of our community banking strategy. A continuation of the downturn in the real estate markets
where the Bank has loans could have a material adverse effect on our business, financial condition
and results of operations.
Current market conditions include an over-supply of land, lots, and finished homes in many
markets including those where we do business. At December 31, 2009, approximately 11.0% of our
assets were single-family mortgage loans. We had approximately $3.9 million of nonperforming,
single-family mortgage loans in our held for investment portfolio and $9.8 million of nonperforming
single-family mortgage loans in our held for sale portfolio at December 31, 2009. If housing
markets in our market areas continue to deteriorate, we may experience a further increase in
nonperforming loans, provisions for credit losses, charges to reduce the carrying value of loans
held for sale to the lower of cost or fair value, and charge-offs. While it is difficult to predict
how long these conditions will exist and which markets, products or other segments of our loan and
securities portfolio might ultimately be affected, these factors could adversely affect our ability
to grow our earning assets or affect our results of operations.
- 26 -
The residential and commercial real estate sectors of the U.S. economy experienced an economic
slowdown that has continued in 2009. Specifically, the values of residential and commercial real
estate located in our market areas have declined, and these declines may continue in the future. If
the loans that are collateralized by real estate become troubled during a time when market
conditions are declining or have declined, then we may not be able to realize the full value of the
collateral that we anticipated at the time of originating the loan, which could require us to
increase our provision for credit losses and adversely affect our financial condition and results
of operations.
We are subject to risk related to our concentration of construction and land development and
commercial real estate loans. As of December 31, 2009, we had $251 million of construction loans
and $92 million of land development loans, of which $295 million, or 86% of the aggregate of such
loans, are for projects located in Colorado. Construction loans are subject to risks during the
construction phase that are not present in standard residential real estate and commercial real
estate loans. These risks include:
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the viability of the contractor; |
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the value of the project being subject to successful completion; |
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the contractors ability to complete the project, to meet deadlines and time
schedules and to stay within cost estimates; and |
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concentrations of such loans with a single contractor and its affiliates. |
Real estate construction loans may involve the disbursement of substantial funds with
repayment dependent, in part, on the success of the ultimate project rather than the ability of a
borrower or guarantor to repay the loan and also
present risks of default in the event of declines in property values or volatility in the real
estate market during the construction phase. Our practice, in the majority of instances, is to
secure the personal guaranty of individuals in support of our real estate construction loans which
provides us with an additional source of repayment. At December 31, 2009, we had ten nonperforming
construction and development loans that totaled $21.7 million and another $11.7 million of assets
that have been foreclosed. If one or more of our larger borrowers were to default on their
construction and development loans, and we did not have alternative sources of repayment through
personal guarantees or other sources, or if any of the aforementioned risks were to occur, we could
incur significant losses.
At December 31, 2009, we had $519.6 million of commercial real estate loans. Bank regulatory
authorities have issued guidance regarding high concentrations of commercial real estate loans
within bank loan portfolios to remind banks that their risk the Company practices and capital
levels should be commensurate with the level and nature of their commercial real estate
concentration risk. Banks with higher levels of commercial real estate loans are expected to
implement improved underwriting, internal controls, risk management policies and portfolio stress
testing, as well as higher levels of allowances for credit losses and capital levels as a result of
commercial real estate lending growth and exposures. If there is deterioration in our commercial
real estate portfolio or if the OTS concludes that we have not implemented appropriate risk
management policies and practices, it could adversely affect our business and result in a
requirement of increased capital levels, and such capital may not be available at that time.
The mortgage loans that the Bank holds are subject to risks of delinquency, foreclosure and
loss, which could result in losses to us. The residential and commercial mortgage loans held in the
Banks loan portfolio are secured by residential and commercial properties and are subject to risks
of delinquency, foreclosure and loss of principal and interest. The ability of a borrower to repay
a loan secured by residential property typically is dependent primarily upon the income or assets
of the borrower. In addition, other factors that affect the risk of our mortgage loan portfolio
include:
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property location and condition; |
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competition and demand for comparable properties; |
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changes in zoning laws for the property or its surrounding area; |
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environmental contamination at the property; |
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the occurrence of any uninsured casualty at the property; |
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changes in national, regional or local economic conditions; |
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declines in regional or local real estate values; |
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increases in interest rates and/or real estate tax rates; |
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changes in governmental rules, regulations and fiscal policies, including
environmental legislation and tax laws; and |
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other events such as acts of God, natural disasters, war, terrorism, social unrest
and civil disturbances. |
- 27 -
In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower
will be deemed to be secured only to the extent of the value of the underlying collateral at the
time of bankruptcy, as determined by the bankruptcy court. The lien securing the mortgage loan will
be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent
the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and
lengthy process that can have a substantial negative effect on our originally anticipated return on
the foreclosed mortgage loan. Prospectively, it is possible there will be changes in bankruptcy
laws, as well as other rules and regulations that impact delinquent mortgage loan borrowers that
could negatively impact the total recovery we realize on mortgage loans.
The Bank has invested in loan portfolios, pooled securities and mortgage-backed obligations,
which may lead to volatility in cash flow and market risk. The Banks asset portfolio contains
large portfolios of single-family residential loans acquired through bulk purchases and purchased
SBA loans and pools. Our investment portfolio largely consists of mortgage-backed securities
primarily secured by pools of mortgages on single-family residences. When the Bank acquires such
mortgage-backed securities and loans, we anticipate that the underlying notes will prepay at a
projected rate, thereby generating an expected yield. Prepayment rates generally increase as
interest rates fall and decrease when interest rates rise, but changes in prepayment rates are
difficult to predict. Some of the Banks mortgage-backed securities and many of our bulk
single-family loan purchases and purchased SBA loans and pools were acquired at a premium purchase
price. In accordance with applicable accounting rules, we will write-off such premiums when
necessary due to loan prepayments with respect to our held for sale loan portfolio and
amortize such premiums over the expected lives of our mortgage-backed securities and loans held for
investment. If the underlying assets that the Bank acquired or that secure our mortgage-backed
securities prepays more rapidly than anticipated, we would have to write-off or amortize the
premium on an accelerated basis, which would adversely affect our profitability.
We must effectively manage our credit risk. There are risks inherent in making any loan,
including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting
from uncertainties as to the future value of collateral and risks resulting from changes in
economic and industry conditions. The Bank attempts to minimize its credit risk with prudent loan
application approval procedures, including an analysis of the credit risk, a valuation of the
underlying collateral, monitoring of loan concentration within specific industries and geographic
locations and periodic independent reviews of outstanding loans by our loan review and audit
departments. Nevertheless, we are exposed to significant credit risks, including possible errors in
the Banks credit analysis, the uncertainty of the borrowers ability to repay the loans, the
uncertainty of future economic conditions and the possibility of loan defaults.
Other Risks Related to our Business
Our FDIC deposit insurance premiums have increased and could increase further, which could
have a material adverse impact on earnings in the future. The FDIC insures deposits at FDIC insured
financial institutions, including the Bank. The FDIC charges insured financial institutions
premiums to maintain the Deposit Insurance Fund at a certain level. Recent insured depository
institution failures, as well as deterioration in banking and economic conditions, have
significantly increased the loss provisions of the FDIC, resulting in a decline in the designated
reserve ratio of the FDIC to historical lows. The FDIC expects a higher rate of insured depository
institution failures in the next few years compared to recent years; thus, the reserve ratio may
continue to decline. In addition, the deposit insurance limit on FDIC deposit insurance coverage
generally has increased to $250,000 through December 31, 2013. These developments will cause the
premiums assessed on us by the FDIC to increase and materially increase our noninterest expense.
Our FDIC insurance related costs were $4.9 million for the year ended December 31, 2009
compared to $1.0 million and $818,000 for the years ended December 31, 2008 and 2007, respectively.
We are unable to predict the impact in future periods, including whether and when additional
special assessments will occur, in the event the economic crisis continues.
We also participate in the FDICs Temporary Liquidity Guarantee Program, or TLGP, for
noninterest-bearing transaction deposit accounts. Banks that participate in the TLGPs
noninterest-bearing transaction account guarantee will pay the FDIC an annual assessment of
10 basis points on the amounts in such accounts above the amounts covered by FDIC deposit
insurance. To the extent that these TLGP assessments are insufficient to cover any loss or expenses
arising from the TLGP program, the FDIC is authorized to impose an emergency special assessment on
all FDIC-insured depository institutions. The FDIC has authority to impose charges for the TLGP
program upon depository institution holding companies as well. These actions could significantly
increase our noninterest expense for the foreseeable future.
- 28 -
Our business is subject to interest rate risk. Our Companys earnings and cash flows are
largely dependent upon our net interest income. Net interest income is the difference between
interest income earned on interest-earning assets such as loans and securities and interest expense
paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly
sensitive to many factors that are beyond our control, including general economic conditions and
policies of various governmental and regulatory agencies and, in particular, the Board of Governors
of the Federal Reserve System. Changes in monetary policy, including changes in interest rates,
could influence not only the interest we receive on loans and securities and the amount of interest
we pay on deposits and borrowings, but such changes could also affect:
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our Companys ability to originate loans and obtain deposits; |
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|
the fair value of our Companys financial assets and liabilities; |
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|
the average duration of our Companys mortgage-backed securities portfolio; and |
|
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|
other mortgage and servicing assets |
If the interest rates paid on deposits and other borrowings increase at a faster rate than the
interest rates received on loans and other investments, our net interest income, and therefore
earnings, could be adversely affected. Our earnings could also be adversely affected if the
interest rates received on loans and other investments fall more quickly than the interest rates
paid on deposits and other borrowings. Although our management believes it has implemented
effective asset and liability management strategies to reduce the potential effects of changes in
interest rates on our Companys
results of operations, any substantial, unexpected, prolonged change in market interest rates
could have a material adverse effect on our Companys financial condition and results of
operations.
Continued declines in interest rates would likely hurt our earnings. The decline in market
interest rates that occurred in 2008 and in particular in the fourth quarter of 2008 that continued
into 2009 negatively impacted our net interest income. While we believe that the continued
implementation of our community bank business plan, and its expected change in asset and liability
mix, will partially mitigate the impact of lower market rates, any additional declines in interest
rates are expected to have a negative impact on net interest income, net interest spread, net
interest margin, and overall results of operations.
As a savings bank, pursuant to the Home Owners Loan Act, or HOLA, the Bank is required to
maintain a certain percentage of its total assets in HOLA-qualifying loans and investments, which
limits our asset mix and could significantly restrict our ability to sell certain assets to obtain
liquidity. A savings bank or thrift differs from a commercial bank in that it is required to
maintain at least 65% of its total assets in HOLA-qualifying loans and investments, such as loans
for the purchase, refinance, construction, improvement, or repair of residential real estate, home
equity loans, educational loans and small business loans. To maintain our thrift charter we have to
pass the Qualified Thrift Lender test, or QTL test, in 9 out of 12 of the immediately preceding
months. The QTL test limits the extent to which we can grow our commercial loan portfolio. However,
a loan that does not exceed $2 million (including a group of loans to one borrower) and is for
commercial, corporate, business, or agricultural purposes is not so limited. We may be limited in
our ability to change our asset mix and increase the yield on our earning assets by growing our
commercial loan portfolio. At December 31, 2009, the Bank complied with the QTL test.
In addition, if we continue to grow our commercial loan portfolio and our single-family loan
portfolio declines, it is possible that in order to maintain our QTL status, we could be forced to
buy mortgage-backed securities or other HOLA-qualifying assets at times when the terms might not be
attractive. Alternatively, we could find it necessary to pursue different structures, including
converting the Banks thrift charter to a commercial bank charter.
Our quarterly results may fluctuate. Our financial results are subject to significant
quarterly fluctuations as a result of, among other things, our loan production, opening of new
branch locations, development of new products and services, premium amortization caused by
prepayments of certain assets, such as our single-family mortgage loans, guaranteed SBA loans and
pooled securities and changes in interest rates. Our operating results will fluctuate significantly
in the future as a result of a variety of factors, some of which are outside of our control,
including general economic conditions, economic conditions in the financial industry, the effects
of governmental regulations and regulatory changes, capital expenditures and other costs relating
to the expansion of operations, the introduction of new services by us or our competitors and the
mix of services sold. In response to a changing competitive environment, we may elect from
time-to-time to make certain pricing, service, or marketing decisions or enter into strategic
alliances or make investments that could have a material adverse effect on our business, results of
operations, financial condition and cash flow. Accordingly, our results of operations for any
particular quarter are not necessarily indicative of the results that may be achieved for any
succeeding quarter or for the full fiscal year.
- 29 -
If we sell mortgage loans or mortgage servicing rights and the underlying loan defaults, we
may be liable to the purchaser for unpaid principal and interest on the loan. In the ordinary
course of selling mortgage loans or mortgage servicing rights and in accordance with industry
standards, we make certain representations and warranties to purchasers. If a loan defaults and
there has been a breach of representations or warranties and we have no recourse against a third
party, we may become liable for the unpaid principal and interest on the defaulted loan. In such a
case, we may be required to repurchase the mortgage loan and bear any subsequent loss on the loan.
When we purchased mortgage servicing rights or mortgage loans, we also may have been exposed to
liability to the extent that an originator or other seller of the servicing rights is unable to
honor its representations and warranties to us. Our Company has established a reserve for
repurchases that may be required in connection with loans we originated and sold in connection with
the sale of our production platform in 2003.
Curtailment of government guaranteed loan programs could affect our SBA business. The Banks
small business department relies on originating, purchasing, pooling and selling government
guaranteed loans, in particular those guaranteed by the SBA. From time to time, the government
agencies that guarantee these loans reach their internal limits and cease to guarantee loans for a
period of time. In addition, these agencies may change their rules for loans or legislation may
discontinue or change the programs. If changes occur, the volumes of loans that qualify for
government guarantees could decline, which could in turn reduce the profitability of the Banks
small business department.
We are exposed to risk of environmental liabilities. If we foreclose and take title to real
estate, we could be subject to environmental liabilities with respect to these properties. We may
be held liable to a governmental entity or to
third parties for property damage, personal injury, investigation and clean-up costs incurred
by these parties in connection with environmental contamination, or we may be required to
investigate or clean up hazardous or toxic substances. In addition, if we are the owner or former
owner of a contaminated site, we may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination emanating from the property.
Failure in our automated systems and controls could subject us to increased operating or other
liabilities. We depend heavily upon our automated systems and controls for our business and
operations. These systems and controls support the evaluation, acquisition, monitoring, collection
and administration of our loan and servicing portfolios, depository, general accounting and other
management functions. The failure of the automated systems, including a failure of data integrity
or accuracy, could have a material adverse effect on our business and financial condition.
In addition, our operations are dependent upon our ability to protect the computer systems and
network infrastructure utilized by us against damage from physical break-ins, security breaches and
other disruptive problems caused by the Internet or other users. Such computer break-ins and other
disruptions would jeopardize the security of information stored in and transmitted through our
computer systems and network infrastructure, which may result in significant liability to us and
deter potential customers. Although we, with the help of third-party service providers, intend to
continue to implement security technology and establish operational procedures to prevent such
damage, there can be no assurance that these security measures will be successful. A failure of
such security measures could have an adverse effect on our financial condition and results of
operations.
Breaches of our computer and network security systems may result in customer information being
compromised and/or identity theft. We maintain personal and financial information about our
current, past and potential customers on our computer systems and network infrastructure, such as
customer names, addresses, social security numbers, tax identification numbers, bank account
numbers, information on loan applications and other sensitive personal and financial information.
In addition, our customers may use the Internet to connect to the Banks website to retrieve
information about their accounts and to conduct online transactions, such as online bill payments.
If the security of our encrypted computer systems and network infrastructure responsible for
storing our customers personal and financial data and information or the security of our online
banking Internet services is breached, then customer information could be stolen and misused. Such
misuse could include the loss of privacy resulting from the disclosure of the information to third
parties, credit fraud or other consequences of identity theft to the customer.
While we believe that our current encrypted systems meet or exceed all commercial standards
for network security, new criminal schemes or capabilities could compromise or breach our systems
and network infrastructure. If our security measures fail to protect our customers information,
our existing and future customer base may be adversely affected, we may become subject to customer
claims or lawsuits, our public image may be diminished, and our results of operations and financial
condition could be adversely affected.
- 30 -
We may be adversely affected by changes in laws and regulations and the regulatory
environment. In June 2009, the U.S. Department of the Treasury, or Treasury, issued a white paper
containing several federal legislative proposals that, if enacted into law, would make substantial
changes to the present U.S. financial services regulatory framework. One legislative proposal would
eliminate the OTS and the federal savings bank or thrift charter, subject to reasonable
transition arrangements. One of these transition arrangements might involve conversion of the
federal thrift charter into a national bank charter, which would result in the Office of the
Comptroller of the Currency (or successor thereto) having principal regulatory and supervisory
authority over former thrift institutions. The Bank conducts its business pursuant to a federal
thrift charter.
In response to the U.S. Treasury Departments proposal, various bills were introduced by the
Financial Services Committee of the U.S. House of Representatives, which were ultimately
consolidated into the Wall Street Reform and Consumer Protection Act of 2009, passed by the U.S.
House of Representatives in December 2009. Among other things, this legislation establishes a new
Consumer Financial Protection Agency to regulate products like home mortgages, car loans and credit
cards, and consolidates the OTS into the Office of the Comptroller of the Currency. As with the
U.S. Treasury Departments proposal, under the House legislation savings institution holding
companies would be subject to supervision and regulation by the Federal Reserve Board.
In November 2009, Senate Banking Chairman Christopher Dodd introduced a financial regulatory
reform bill entitled the Restoring American Financial Stability Act of 2009 which further builds on
the Treasury proposal. That legislation, if enacted, would remove bank and bank holding company
regulatory powers from the Board of Governors of the Federal Reserve System, eliminate both the
Office of Thrift Supervision and the Office of the Comptroller of the Currency, and establish a
single bank and bank holding company regulator known as the Financial Institutions Regulatory
Administration. Under this proposal, savings and loan holding companies that were regulated by the
Office of Thrift
Supervision would become subject to supervision and regulation by this new regulator. The
Senate bill would also establish an independent Consumer Financial Protection Agency, under which
consumer protection responsibilities currently handled by the bank and credit union regulators and
the Federal Trade Commission would be consolidated.
Although it is impossible to predict which of these proposals, if any, may be adopted by the
full Congress and signed into law, these pending proposals may significantly affect the Company and
the Bank. If the reforms contained in the U.S. Treasury Department or House Financial Service
Committee proposals are fully enacted, the Company would become a bank holding company subject to
supervision by the Board of Governors of the Federal Reserve System as opposed to the Office of
Thrift Supervision, and we expect we would become subject to the Federal Reserves regulations,
including holding company capital requirements, that the Company is not subject to as a savings and
loan holding company. Holding company capital requirements could reduce capital available for
dividends and share repurchases. In addition, under the reforms contained in the Senate proposal,
the Company would become subject to supervision and regulation by the Financial Institutions
Regulatory Administration, a new federal regulatory agency. Compliance with new regulations and
being supervised by one or more new regulatory agencies could increase our expenses and affect the
conduct of our business. In addition, the proposals could lead to heightened restrictions being
placed upon institutions and activities that increase systemic risk. Such restrictions would likely
relate to liquidity, capital, and leverage requirements.
Any change in the laws or regulations applicable to us, or in supervisory policies or
examination procedures of banking regulators, whether by the OTS, the FDIC, the Treasury, the
FHLBank System, the United States Congress, the Texas Department of Banking, or other federal or
state regulators, could have a material adverse effect on our business, financial condition,
results of operations and cash flows. In addition, bank regulatory authorities have extensive
discretion in the exercise of their supervisory and enforcement powers. They may, among other
things, impose restrictions on the operation of a banking institution, the classification of assets
by such institution and such institutions allowance for credit losses, require changes in other
significant accounting estimates including the determination of the fair value of assets and
other-than-temporary impairment. Additionally, bank regulatory authorities have the authority to
bring enforcement actions against banks and their holding companies for unsafe or unsound practices
in the conduct of their businesses or for violations of any law, rule or regulation, any condition
imposed in writing by the appropriate bank regulatory agency or any written agreement with the
agency. Possible enforcement actions against us could include the issuance of a cease-and-desist
order that could be judicially enforced, the imposition of civil monetary penalties, the issuance
of directives to increase capital or enter into a strategic transaction, whether by merger or
otherwise, with a third party, the appointment of a conservator or receiver, the termination of
insurance of deposits, the issuance of removal and prohibition orders against
institution-affiliated parties, and the enforcement of such actions through injunctions or
restraining orders.
- 31 -
Regulatory and law enforcement authorities also have wide discretion and extensive enforcement
powers under various consumer protection and civil rights laws, including the Truth-in-Lending Act,
the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act,
the Home Mortgage Disclosure Act, the Truth-in-Saving Act, the Federal Trade Commission Act and
Colorados deceptive trade practices act. These laws also permit private individual and class
action lawsuits and provide for the recovery of attorneys fees in certain instances.
We are subject to examinations and challenges by tax authorities. We are subject to federal
and state income tax regulations. Income tax regulations are often complex and require
interpretation. Changes in income tax regulations could negatively impact our results of
operations. In the normal course of business, we are subject to examinations and challenges from
federal and state tax authorities regarding the amount of taxes due in connection with investments
we have made and the businesses in which we have engaged. Recently, federal and state taxing
authorities have become increasingly aggressive in challenging tax positions taken by financial
institutions. These tax positions may relate to tax compliance, sales and use, gross receipts,
property and income tax issues, including tax base, apportionment and tax credit planning. The
challenges made by tax authorities may result in adjustments to the timing or amount of taxable
income or deductions or the allocation of income among tax jurisdictions. If any such challenges
are made and are not resolved in our favor, they could have a material adverse effect on our
financial condition and results of operations.
Restriction on use of tax attributes from tax law ownership change. As of December 31,
2009, we had approximately $80 million of net unrealized built in losses (NUBIL), which for tax
purposes represent the amount by which the adjusted tax basis of our assets exceeds their fair
market value. Section 382 of the Internal Revenue Code imposes limitations on a corporations ability to use its
NUBIL and other tax attributes, such as net operating loss and tax
credit carryforwards, when it undergoes a 50% ownership
change over a designated testing period (not to exceed three
years). We regularly monitor ownership changes (as calculated for purposes of Section 382) based on
available information and, as of December 31, 2009, our analysis indicated that we were below the
50% ownership change threshold that would limit our ability to utilize our NUBIL and other tax
attributes. However, taking into account
the common stock offerings in 2009, we expect we are close to the 50% ownership change level. As a
result, any future transaction or transactions and the timing of such transaction or transactions
could trigger an ownership change under Section 382. Such transactions may include, but are not
limited to, additional repurchases or issuances of common stock, or acquisitions or sales of shares
of our stock by certain holders of our shares, including persons who have held, currently hold or
may accumulate in the future 5% or more of our outstanding common stock (5% Holders) for their
own account.
If an ownership change were to occur for purposes of Section 382, we would be required to
calculate an annual limitation on the amount of our taxable income that may be offset by losses
arising from the recognition of NUBIL or other tax attributes which existed at the time of such ownership change. That
limitation would apply to built in losses recognized during a
five-year period after the date of the ownership change. The annual limitation would be calculated
based upon the fair market value of our equity at the time of such ownership change, multiplied by
a federal long-term tax exempt rate (currently 4.03%), and the annual restriction could eliminate
our ability to use a substantial portion of our NUBIL or other tax
attributes to offset future taxable income.
UW Trust Company is subject to regulation as a trust company and could be the subject of third
party actions. As a Texas chartered trust company, UW Trust is subject to supervision, regulation
and examination by the Texas Department of Banking. UW Trusts activities are limited by applicable
law generally to acting as a trustee, executor, administrator, guardian or agent for the
performance of any lawful act, and to accumulate money when authorized under applicable law.
UW Trust has been in the past, and may be in the future, subject to claims by third parties
regarding breach of contract, breach of fiduciary duty, or similar claims alleging violation of
duty or law. While we believe applicable law supports our view of UW Trusts duties, or lack
thereof, in that regard, there can be no assurances that we will prevail in any litigation or other
proceeding challenging the matter.
Significant legal actions could subject our Company to substantial liabilities. We are from
time to time subject to various legal claims related to our operations. These claims and legal
actions, including potential supervisory actions by our Companys regulators, could involve large
monetary claims and significant defense costs. As a result, we may be exposed to substantial
liabilities, which could adversely affect our results of operations and financial condition.
Risks Related to our Business Strategy
We may be unable to fully implement our community banking business strategy. We are 48 months
into our community bank transition, and in order to complete the execution of this strategy we
must, among other things:
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attract sufficient commercial business and community bank deposits; |
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attract and maintain business banking relationships with businesses in the markets
in which we serve; |
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attract and retain experienced and successful commercial and community bankers; |
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identify and pursue suitable opportunities for opening new branches in the Colorado
Front Range and selected mountain community markets; |
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maintain adequate regulatory capital and comply with applicable federal and state
regulations; and |
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originate community bank loans and maintain adequate asset quality. |
- 32 -
Failure to achieve these strategic goals could adversely affect our ability to fully implement
our community banking business strategies as well as our overall financial condition and results of
operations.
We may not be able to effectively manage our proposed growth. Our business strategy
contemplates, in part, an increase in our franchise value by expanding into additional communities
in the Colorado Front Range and selected mountain communities through a branch network for the
Bank. To the extent that we undertake additional branch openings, we are likely to experience the
effects of higher operating expenses relative to operating income from our expansion efforts for a
period of time. We may acquire or lease other sites for future expansion. While we are committed to
this strategy, our expansion could significantly burden our infrastructure or we may be unable to
manage this growth. In addition, we may enter new lines of business or pursue other strategies
intended to complement our community banking business plan implementation. To the extent we
undertake such actions, we may experience higher operating costs and these new activities may not
be successful.
We may not be able to attract and retain key personnel. Our business strategy requires us to
attract and to retain management experienced in community banking and financial services that live
in the communities we serve. Our ability to retain our existing executive officers, regional
presidents, and community banking staff is important to the successful implementation of our
strategy. The unexpected loss of key personnel or the inability to recruit and retain qualified
personnel in the future could have a material adverse effect on our business.
Adverse economic conditions in the Colorado Front Range and our mountain community markets
could impair the execution of our business strategy. The success of our business strategy depends
primarily on the general economic conditions in our markets because local economic conditions will
materially affect commercial real estate, including construction and land development, and
residential loans originated, the ability of the borrowers to repay these loans and the value of
the collateral securing these loans.
Risks Relating to Ownership of Our Common Stock
The trading volume of our stock is low. The low trading volume in our common shares on the
NASDAQ Global Market means that our shares may have less liquidity than other publicly traded
companies. We cannot ensure that the volume of trading in our common shares will increase in the
future. Furthermore, to the extent shares are concentrated in a relatively small group of holders,
a seller could be subject to significant adverse price volatility and price fluctuation. At
December 31, 2009, based on filings made by third parties with the Securities and Exchange
Commission, we believe that eleven holders owned 47.3% of our outstanding common stock. This
includes shares held by our Chairman of the Board, Guy A. Gibson, who owns 1,335,305 shares, or
4.55% of our outstanding common stock.
We may issue additional shares of common or preferred stock, which may cause dilution and
other risks. Our board of directors may authorize the issuance of additional common or preferred
stock in connection with future equity offerings, acquisitions of securities or assets of other
companies or to be used as compensation for our executive officers. Furthermore, there are
significant implementation risks associated with the acquisition and integration of another entity
into our Company that could adversely impact our financial condition and results of operations. Our
board may also classify or reclassify any unissued preferred stock and set the preferences, rights
and other terms of the classified or reclassified shares, including the issuance of preferred stock
with preference rights over the common stock with respect to dividends, liquidation, voting and
other matters. In any event, the issuance of additional shares of our common stock could be
dilutive to shareholders who do not invest in future offerings. Moreover, to the extent that we
issue options, warrants or similar instruments to purchase our common stock in the future and those
options, warrants or similar instruments are exercised or we issue restricted stock which
subsequently vests, our shareholders may experience future dilution.
- 33 -
The market price of our common stock may fluctuate significantly. The market price and
liquidity of the market for shares of our common stock may be significantly affected by numerous
factors, including some that are beyond our control and that may not be directly related to our
operating performance. These factors include the following:
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changes in earnings estimates or recommendations by analysts who cover our common
stock; |
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variations in our quarterly operating results or the quarterly financial results of
companies perceived to be competitors or similar to us; |
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changes in our capital structure, such as future issuances of securities, sales of
large blocks of common stock by our shareholders or the incurrence of additional
debt; and |
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changes in general economic and market conditions. |
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Item 1B. |
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Unresolved Staff Comments |
None.
We believe that all of our present facilities are adequate for our current needs and that
additional space is available for future expansion on acceptable terms. The following table sets
forth certain information concerning the real estate that we own or lease:
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Monthly Rent or |
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Mortgage |
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Location |
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Owned/Leased |
|
Occupant |
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Payment |
|
Denver, CO |
|
Leased through October 31, 2016 (1) |
|
United Western Bancorp and various of its subsidiaries |
|
$ |
142,646 |
|
Highlands Ranch, CO |
|
Leased month to month |
|
United Western Bancorp |
|
$ |
2,400 |
|
Dallas, TX |
|
Leased month to month |
|
United Western Bancorp |
|
$ |
875 |
|
Aspen, CO |
|
Leased |
|
United Western Bank Aspen office |
|
$ |
8,112 |
|
Boulder, CO |
|
Leased (land lease) |
|
United Western Bank Boulder Branch |
|
$ |
1,356 |
|
Denver, CO |
|
Leased (land lease) |
|
United Western Bank Cherry Creek Branch |
|
$ |
8,974 |
|
Fort Collins, CO |
|
Owned |
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United Western Bank Fort Collins Branch |
|
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N/A |
|
Loveland, CO |
|
Owned |
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United Western Bank Loveland Branch |
|
|
N/A |
|
Longmont, CO |
|
Owned |
|
United Western Bank Longmont Branch |
|
|
N/A |
|
Denver, CO |
|
Leased (land lease) |
|
United Western Bank Hampden Branch |
|
$ |
13,240 |
|
Centennial CO |
|
Owned |
|
United Western Bank DTC Branch |
|
|
N/A |
|
Thornton, CO |
|
Leased through April 2010 |
|
United Western Bancorp |
|
$ |
3,000 |
|
Waco, TX |
|
Leased month to month |
|
UW Trust Company |
|
$ |
3,754 |
|
Phoenix, AZ |
|
Leased through September 30, 2015 |
|
Matrix Financial Services |
|
$ |
8,885 |
|
St. Louis, MO |
|
Leased through June 30, 2012 |
|
Equi-Mor Holdings, Inc. |
|
$ |
14,125 |
|
Ft. Lupton, CO |
|
Owned |
|
Matrix Funding Corp. |
|
|
N/A |
|
|
|
|
(1) |
|
The Company guarantees an additional 23,171 square feet of office
space at the Denver location (700 17th Street, Denver, CO 80202) pursuant to the sale and
leaseback of the building, which closed on September 29, 2006. See Note 17 to the consolidated
financial statements in this report. |
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Item 3. |
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Legal Proceedings |
General. We are from time to time party to various litigation matters, in most cases involving
ordinary and routine claims incidental to our business. We accrue for contingent liabilities with
respect to litigation matters in accordance with the requirements of generally accepted accounting
principles (GAAP), which generally requires the Company to accrue a loss for a litigation matter
involving a contingent liability if the loss is probable and the amount of the loss is reasonably
estimable. In order to determine whether the two conditions necessary for accrual are met,
management necessarily makes a number of judgments and assumptions. Because the outcome of most
litigation matters is inherently uncertain, the Company will generally only accrue a loss for a
pending litigation matter if, for example, the parties to the matter have entered into definitive
settlement agreements or a final judgment adverse to the Company has been entered.
- 34 -
In many cases, these settlements or final judgments are not material to the consolidated
financial position, results of operations or cash flows of the Company. Nevertheless, an adverse
decision in certain matters, as described below, may have a material, adverse impact on our
consolidated financial position, results of operations or cash flows.
United Western Bancorp, Inc. United Heritage Financial Group, Inc. and United Heritage Life
Insurance Company v. First Matrix Investment Services Corporation et al. On October 27, 2006, a
complaint was filed against the Company and First Matrix, along with two former employees of First
Matrix, Messrs. Curd and Snodgrass, in Idaho State District Court alleging violations of state
securities laws, the Idaho Consumer Protection Act and fraud arising from the sale of an
approximately $1.70 million mortgage backed bond from First Matrix to one of the plaintiffs. The
case, which was subsequently removed to the U.S. District Court in Idaho on December 12, 2006, is
based on the plaintiffs claims that First Matrix should have made certain disclosures regarding
the risk of the withdrawal of a USDA government guarantee of the bond, which withdrawal
subsequently occurred and the bond went into default. On September 30, 2009, the Court granted in
part the Companys, First Matrixs and Messrs. Curds and Snodgrass Motion for Summary Judgment.
In granting partial summary judgment for the defendants, the court agreed to dismiss (i)
plaintiffs Idaho Consumer Protection Act claim; (ii) the claims by United Heritage Financial Group
(UHFG), the parent of United Heritage Life Insurance Company (UHLIC) against the defendants
since UHLIC sold all but a $425,000 interest in the subject bond to UHFG, thereby reducing UHLICs
claim from $1.70 million to $425,000; in addition, UHLICs claim was further reduced to $212,500
since UHLIC and UHFG sold their entire interest in the bond to a third party for fifty cents on the
dollar and (iii) Messrs. Curd and Snodgrass from the matter. On December 15, 2009, the parties
entered into
a settlement and release agreement to fully settle the litigation. Under the terms of the
settlement and release agreement, First Matrix agreed to pay $100,000 to the plaintiffs (of which
85% was covered by insurance) and the plaintiffs agreed to dismiss the lawsuit with prejudice.
United Western Bancorp, Inc. and UW Trust Company. William R. and Carolyn Richoz, et al. v.
United Western Trust Company f/k/a Sterling Trust and United Western Bancorp, Inc. In October of
2009, plaintiffs filed an amended class action complaint in the United States District Court for
the Northern District of Illinois, Eastern Division, against United Western Trust Company f/k/a
Sterling Trust and United Western Bancorp, Inc. The plaintiffs allege that they were damaged when
they invested proceeds from their self-directed individual retirement accounts with
InvestForClosures and other related entities using UW Trust Company as custodian for such
investments. Plaintiffs claim UW Trust Company breached its fiduciary duties owed to plaintiffs as
custodian of individual retirement accounts set up through UW Trust Company by plaintiffs.
Plaintiffs also allege that UW Trust Company knew that these investment were part of a Ponzi scheme
to defraud investors, that UW Trust Companys actions violated the Texas Securities Act, Illinois
securities laws and the Illinois Consumer Fraud Act and that UW Trust was unjustly enriched in
excess of $5 million, should pay compensatory damages of $5 million and exemplary damages in the
amount of $20 million. On December 28, 2009, the parties filed a stipulation with the court
voluntarily dismissing the action without prejudice.
United Western Bank. Ward Enterprises, LLC v. Daniel E. McCabe et al. including United
Western Bank. In February 2008, the plaintiff filed a complaint in Colorado District Court for the
City and County of Denver seeking damages from the holders of a processing and trust account at the
Bank, the Bank, and a former employee of the Bank, for breach of fiduciary duties due to the
plaintiff and aiding and abetting the conversion of approximately $1.84 million of plaintiffs
funds by the holder of the processing and trust account maintained at the Bank. On December 28,
2009, the Court agreed to dismiss the action with prejudice.
- 35 -
United Western Bank. Anita Hunter et. al. v. Citibank, N.A. et al. including United Western
Bank. The Bank received this class action complaint in July of 2009 brought by seven named
plaintiffs on behalf of a class of approximately 330 similarly situated people residing throughout
the United States, each of whom lost substantial sums of money (Exchange Funds) entrusted to
seven qualified intermediaries (QIs) to facilitate their respective Internal Revenue Code Section
1031 Exchanges. According to the complaint, the QIs were controlled by an individual named Edward
Okun and certain other individuals who would gain access to the Exchange Funds and convert the
Exchange Funds for their own use for personal gain. The plaintiffs seek class certification for
all similarly situated plaintiffs who lost Exchange Funds when they placed such funds using the
QIs. One of the QIs maintained accounts at the Bank for the purpose of holding Exchange
Funds. With respect to plaintiffs claims against the Bank, plaintiffs alleged, among other
things, that the Bank knowingly aided and abetted breaches of fiduciary duties by Mr. Okun by
facilitating wire transfers of Exchange Funds from accounts at the QI at the Bank to accounts
controlled by Mr. Okun and his related entities at other financial institutions. On October 2,
2009, the Bank filed a Motion to Dismiss with the court requesting the court to dismiss all
plaintiffs claims against the Bank since the Bank successfully initiated the QIs wire
transfers, and therefore, the Bank cannot be held liable under U.C.C. Article 4-A. On February 3,
2010, the court granted the Banks Motion to Dismiss agreeing with the Bank that the Bank cannot be
held liable under U.C.C. Article 4-A; and furthermore, that all common law claims against the Bank
are preempted by U.C.C Article 4-A. While the court dismissed the Bank from the action, it granted
the plaintiffs with leave to amend the complaint. On March 3, 2010, the plaintiffs filed a second
amended complaint with the court against the Bank and other defendants, making the following
allegations specifically against the Bank: (i) aiding and abetting a breach of fiduciary duty by
means of non-electronic transfers; (ii) aiding and abetting fraud by means of non-electronic
transfers; (iii) aiding and abetting fraud; (iv) conversion and aiding and abetting conversion by
means of non-electronic transfers; (v) conversion; (vi) aiding and abetting a conversion;
(vii) contractual interference; (viii) negligence and (ix) violations of U.C.C. Article 4-A. While
the Banks liability, if any, to the plaintiffs claims in this case is uncertain at this time, the
Company believes that the Bank has meritorious defenses to the plaintiffs claims.
United Western Bank. Highpoint Vista, LLC et al. v. United Western Bank et al. In July 2009,
the plaintiffs, who are borrowers and/or guarantors on a $20.5 million loan secured by real estate,
filed a complaint in the Colorado District Court for the City and County of Denver against the Bank
and an officer of the Bank, seeking damages in excess of $10 million dollars against the Bank for
breach of contract, breach of the covenant of good faith and fair dealing, breach of fiduciary
duties and negligent misrepresentation. The plaintiffs allege that the Bank entered into an
agreement with the borrowers whereby the Bank would issue a letter of credit to a third party,
extend the maturity date on the real estate loan and approve the recording of a second deed of
trust on the real estate securing the Banks loan and that the Bank failed to execute such letter
of credit, extend the maturity date and approve the recording of a second deed of trust on the real
estate, thereby causing damages to plaintiffs. On September 15, 2009, the plaintiffs agreed to
dismiss the
Banks loan officer from the matter. On January 4, 2010, the parties to the action agreed to
stipulate to dismissing the action without prejudice.
- 36 -
PART II
|
|
|
Item 5. |
|
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Common Stock Market Prices and Dividends
Our common stock, $0.0001 par value, is traded on the NASDAQ Global Market under the symbol
UWBK. The following table sets forth the quarterly market price for our common stock and cash
dividends paid per share of our common stock for 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Price |
|
|
|
|
|
|
High |
|
|
Low |
|
|
Dividends Paid |
|
Quarter Ended: |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
$ |
4.29 |
|
|
$ |
2.17 |
|
|
$ |
|
|
September 30, 2009 |
|
|
10.17 |
|
|
|
3.71 |
|
|
|
0.01 |
|
June 30, 2009 |
|
|
10.85 |
|
|
|
4.44 |
|
|
|
0.06 |
|
March 31, 2009 |
|
|
9.98 |
|
|
|
4.40 |
|
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
$ |
12.15 |
|
|
$ |
6.98 |
|
|
$ |
0.06 |
|
September 30, 2008 |
|
|
13.68 |
|
|
|
9.92 |
|
|
|
0.06 |
|
June 30, 2008 |
|
|
18.08 |
|
|
|
12.42 |
|
|
|
0.06 |
|
March 31, 2008 |
|
|
20.09 |
|
|
|
15.60 |
|
|
|
0.06 |
|
At March 11, 2010, there were 29,358,580 shares of the Companys common stock outstanding held
by 149 holders of record, which excludes beneficial owners who hold their shares through nominees
or in street name. The closing price per share of common stock on December 31, 2009, the last
trading day of the Companys fiscal year, was $2.76.
Dividends
Given current economic conditions the board of directors reduced the dividend to $.01 in the
third quarter of 2009. Given the continuation of the difficult economic conditions as well as our
results of operations, the Company and the board of directors have decided to suspend our quarterly
cash dividends. Additionally, in accordance with the Informal Agreement between the Company and
the OTS, the Company is required to obtain the prior written non-objection of the OTS prior to the
declaration of a dividend or other capital distribution or redemption of any common stock. There
can be no assurance as to future dividends because they are dependent on the Companys future
earnings, capital requirements and financial conditions. Further, if the scheduled payments on our
junior subordinated debentures and trust preferred securities have not been made the Company would
be prohibited from the payment of dividends. See Item 7. Managements Discussion and Analysis of
Financial Conditions and Results of Operations Liquidity and Capital in this report and Notes 13
and 14 to the financial statements. The ability of UW Trust, UWIS and United Western Bank to pay
dividends to United Western Bancorp may be restricted due to certain regulatory requirements. See
Item 1. Business Regulation and Supervision in this report.
- 37 -
Issuer Purchases of Equity Securities
The following table provides information with respect to purchases made by the Company of the
Companys common stock during 2008 and 2007. There were no purchases made by the Company of the
Companys common stock during 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
|
of Shares that may |
|
|
|
Total Number of |
|
|
Average Price |
|
|
as part of Publicly |
|
|
yet be purchased |
|
|
|
Shares Purchased |
|
|
Paid per Share |
|
|
Announced Plan |
|
|
under the Plan |
|
January 1 through February 28, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
March 1 through March 31, 2008 |
|
|
13,900 |
|
|
|
16.25 |
|
|
|
13,900 |
|
|
|
365,018 |
|
April 1 through May 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 1 through June 30, 2008 |
|
|
100,000 |
|
|
|
13.79 |
|
|
|
100,000 |
|
|
|
265,018 |
|
July 1 through December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
113,900 |
|
|
$ |
14.09 |
|
|
|
113,900 |
|
|
|
265,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
|
of Shares that may |
|
|
|
Total Number of |
|
|
Average Price |
|
|
as part of Publicly |
|
|
yet be purchased |
|
|
|
Shares Purchased |
|
|
Paid per Share |
|
|
Announced Plan |
|
|
under the Plan |
|
January 1 through July 31, 2007 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
August 1 through August 31, 2007 |
|
|
25,000 |
|
|
|
21.54 |
|
|
|
25,000 |
|
|
|
414,118 |
|
September 1 through November 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1 through December 31, 2007 |
|
|
35,200 |
|
|
|
20.23 |
|
|
|
35,200 |
|
|
|
378,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
60,200 |
|
|
$ |
20.78 |
|
|
|
60,200 |
|
|
|
378,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In November 2006, the Companys Board of Directors authorized the repurchase of up to five
percent of the Companys outstanding common stock. On August 2, 2007, the Companys Board of
Directors authorized the repurchase of up to an additional five percent of the outstanding shares
of the Companys common stock. The repurchases of the Companys common stock was made pursuant to
those authorizations. Although there were 265,018 remaining available shares that were authorized
for repurchase, the Company did not repurchase any shares during 2009. As shown in the table
above, the Company discontinued the repurchase of its common shares by June 2008, and the Company
has no further plans to repurchase additional shares of its common stock, which would require the
non-objection of the OTS.
- 38 -
Performance Graph
The performance graph below compares the cumulative total shareholder return on United Western
Bancorp, Inc. common stock with the cumulative total return on the equity securities of companies
included in the SNL $1 billion to $5 billion Thrift Index and the Russell 2000 Index. The graph
assumes an investment of $100 on December 31, 2004 and reinvestment of dividends on the date of
payment without commissions. The performance graph represents past performance and should not be
considered to be an indication of future performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index |
|
12/31/2004 |
|
|
12/31/2005 |
|
|
12/31/2006 |
|
|
12/31/2007 |
|
|
12/31/2008 |
|
|
12/31/2009 |
|
United Western Bancorp,
Inc. |
|
$ |
100.00 |
|
|
$ |
150.36 |
|
|
$ |
159.79 |
|
|
$ |
161.57 |
|
|
$ |
76.99 |
|
|
$ |
23.18 |
|
SNL $1B-$5B Thrift index |
|
|
100.00 |
|
|
|
99.12 |
|
|
|
114.01 |
|
|
|
88.94 |
|
|
|
75.87 |
|
|
|
63.69 |
|
Russell 2000 |
|
|
100.00 |
|
|
|
104.55 |
|
|
|
123.76 |
|
|
|
121.82 |
|
|
|
80.66 |
|
|
|
102.58 |
|
- 39 -
|
|
|
Item 6. |
|
Selected Financial Data |
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
The following selected consolidated financial data and operating information of United Western
Bancorp, Inc. and subsidiaries should be read in conjunction with the consolidated financial
statements and notes thereto and Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations, each of which is included elsewhere in this report.
Information presented in this table is from continuing operations. This information excludes,
for all periods presented, the results associated with the assets of UW Trust associated with
custodial IRA and qualified employee benefit plan businesses, which we sold on June 27, 2009, the
results of Matrix Bancorp Trading, Inc., a former brokerage subsidiary, which we sold certain
assets and the operations of effective March 31, 2006, and ABS School Services, LLC, our former
school services subsidiary, which we sold to former executive officers of the Company on May 5,
2006. We concluded that substantial benefit could be received by the Company by executing a sale of
the UW Trust custodial IRA and qualified employee benefit plan businesses. The dispositions of
Matrix Bancorp Trading, Inc. and ABS School Services, LLC, were part of our strategy to divest
certain non-core operations of the Company. All three divestitures are reported as discontinued
operations. The results from continuing operations as reflected herein are not necessarily
reflective of the financial results that might have occurred had the dispositions referred to above
actually been completed on the indicated date, and are not indicative of any future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands, except per share data) |
|
Statement of Operations Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income |
|
$ |
101,507 |
|
|
$ |
115,017 |
|
|
$ |
121,559 |
|
|
$ |
115,300 |
|
|
$ |
87,096 |
|
Interest expense |
|
|
31,193 |
|
|
|
33,032 |
|
|
|
52,717 |
|
|
|
59,783 |
|
|
|
42,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before provision
for credit losses |
|
|
70,314 |
|
|
|
81,985 |
|
|
|
68,842 |
|
|
|
55,517 |
|
|
|
44,630 |
|
Provision for credit losses |
|
|
35,032 |
|
|
|
8,599 |
|
|
|
2,312 |
|
|
|
2,019 |
|
|
|
891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for
credit losses |
|
|
35,282 |
|
|
|
73,386 |
|
|
|
66,530 |
|
|
|
53,498 |
|
|
|
43,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Custodial, administrative and escrow
services |
|
|
491 |
|
|
|
864 |
|
|
|
606 |
|
|
|
302 |
|
|
|
1,319 |
|
Loan administration |
|
|
4,290 |
|
|
|
4,914 |
|
|
|
6,311 |
|
|
|
7,749 |
|
|
|
10,103 |
|
Gain on sale of loans held for sale |
|
|
2,248 |
|
|
|
764 |
|
|
|
2,124 |
|
|
|
640 |
|
|
|
1,511 |
|
(Loss) gain on trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(229 |
) |
|
|
613 |
|
(Loss) gain on sale of available for
sale investment securities |
|
|
(46,980 |
) |
|
|
|
|
|
|
98 |
|
|
|
274 |
|
|
|
(122 |
) |
Total other-than-temporary impairment
losses |
|
|
(42,790 |
) |
|
|
(4,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Portion of loss recognized in other
comprehensive income (before taxes) |
|
|
6,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in
earnings |
|
|
(36,593 |
) |
|
|
(4,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of investment in Matrix
Financial Solutions, Inc. |
|
|
3,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,100 |
|
|
|
300 |
|
Litigation settlements |
|
|
|
|
|
|
|
|
|
|
155 |
|
|
|
2,550 |
|
|
|
764 |
|
Other |
|
|
2,450 |
|
|
|
3,072 |
|
|
|
3,729 |
|
|
|
8,265 |
|
|
|
8,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest (loss) income |
|
|
(70,527 |
) |
|
|
5,504 |
|
|
|
13,023 |
|
|
|
22,651 |
|
|
|
22,691 |
|
Noninterest expense |
|
|
76,892 |
|
|
|
66,130 |
|
|
|
66,085 |
|
|
|
61,885 |
|
|
|
65,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations before income taxes |
|
|
(112,137 |
) |
|
|
12,760 |
|
|
|
13,468 |
|
|
|
14,264 |
|
|
|
1,294 |
|
Income tax (benefit) expense |
|
|
(32,567 |
) |
|
|
2,635 |
|
|
|
3,315 |
|
|
|
3,885 |
|
|
|
(318 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
$ |
(79,570 |
) |
|
$ |
10,125 |
|
|
$ |
10,153 |
|
|
$ |
10,379 |
|
|
$ |
1,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations per share basic |
|
$ |
(6.06 |
) |
|
$ |
1.39 |
|
|
$ |
1.39 |
|
|
$ |
1.33 |
|
|
$ |
0.23 |
|
(Loss) income from continuing
operations per share assuming
dilution (1) |
|
$ |
(6.06 |
) |
|
$ |
1.39 |
|
|
$ |
1.39 |
|
|
$ |
1.33 |
|
|
$ |
0.23 |
|
Weighted average common shares basic |
|
|
13,139,070 |
|
|
|
7,164,250 |
|
|
|
7,247,636 |
|
|
|
7,791,516 |
|
|
|
6,943,480 |
|
Weighted average common shares
assuming dilution |
|
|
13,139,070 |
|
|
|
7,164,598 |
|
|
|
7,256,484 |
|
|
|
7,791,516 |
|
|
|
7,035,948 |
|
- 40 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,526,172 |
|
|
$ |
2,259,429 |
|
|
$ |
2,096,559 |
|
|
$ |
2,156,548 |
|
|
$ |
2,079,388 |
|
Cash and due from banks |
|
|
586,380 |
|
|
|
22,880 |
|
|
|
40,806 |
|
|
|
23,754 |
|
|
|
34,232 |
|
Investment securities |
|
|
390,199 |
|
|
|
558,037 |
|
|
|
661,781 |
|
|
|
838,979 |
|
|
|
540,194 |
|
Loans held for investment, net |
|
|
1,150,105 |
|
|
|
1,233,301 |
|
|
|
885,710 |
|
|
|
711,601 |
|
|
|
425,943 |
|
Loans held for sale at lower of cost or fair value |
|
|
260,757 |
|
|
|
291,620 |
|
|
|
369,071 |
|
|
|
444,120 |
|
|
|
927,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights, net |
|
|
7,344 |
|
|
|
9,496 |
|
|
|
11,971 |
|
|
|
15,399 |
|
|
|
20,708 |
|
Deposits(2) |
|
|
1,993,513 |
|
|
|
1,724,672 |
|
|
|
1,385,481 |
|
|
|
1,345,681 |
|
|
|
1,124,044 |
|
Custodial escrow balances |
|
|
31,905 |
|
|
|
29,697 |
|
|
|
34,172 |
|
|
|
40,017 |
|
|
|
49,385 |
|
FHLBank borrowings |
|
|
180,607 |
|
|
|
226,721 |
|
|
|
406,129 |
|
|
|
519,431 |
|
|
|
615,028 |
|
Junior subordinated debentures owed to unconsolidated
subsidiary trusts |
|
|
30,442 |
|
|
|
30,442 |
|
|
|
30,442 |
|
|
|
56,216 |
|
|
|
61,372 |
|
United Western Bank repurchase agreements |
|
|
78,635 |
|
|
|
81,265 |
|
|
|
76,428 |
|
|
|
50,000 |
|
|
|
|
|
Other borrowings |
|
|
30,000 |
|
|
|
38,000 |
|
|
|
21,000 |
|
|
|
10,000 |
|
|
|
29,581 |
|
Total shareholders equity(3) |
|
|
159,651 |
|
|
|
101,949 |
|
|
|
113,421 |
|
|
|
107,753 |
|
|
|
180,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Ratios and Other Selected Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average equity to average total assets(4) |
|
|
5.62 |
% |
|
|
5.01 |
% |
|
|
5.42 |
% |
|
|
5.12 |
% |
|
|
5.00 |
% |
Yield on assets |
|
|
4.31 |
|
|
|
5.54 |
|
|
|
6.09 |
|
|
|
5.63 |
|
|
|
4.75 |
|
Cost of liabilities |
|
|
1.45 |
|
|
|
1.80 |
|
|
|
3.06 |
|
|
|
3.26 |
|
|
|
2.56 |
|
Net interest margin(4)(5) |
|
|
3.00 |
|
|
|
3.96 |
|
|
|
3.46 |
|
|
|
2.74 |
|
|
|
2.44 |
|
Return from continuing operations on average total assets(4) |
|
NMF |
|
|
|
0.46 |
|
|
|
0.48 |
|
|
|
0.48 |
|
|
|
0.08 |
|
Return from continuing operations on average equity(4) |
|
NMF |
|
|
|
9.21 |
|
|
|
8.92 |
|
|
|
9.34 |
|
|
|
1.61 |
|
Operating efficiency ratio(4) and (6) |
|
NMF |
|
|
|
72.57 |
|
|
|
76.46 |
|
|
|
72.09 |
|
|
|
86.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios of Earnings to Fixed Charges(7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including interest on deposits |
|
NMF |
|
|
|
1.38 |
X |
|
|
1.25 |
X |
|
|
1.24 |
X |
|
|
1.03 |
X |
Excluding interest on deposits |
|
NMF |
|
|
|
1.60 |
|
|
|
1.51 |
|
|
|
1.38 |
|
|
|
1.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loan Performance Ratios and Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans(8) |
|
$ |
54,290 |
|
|
$ |
21,899 |
|
|
$ |
10,475 |
|
|
$ |
8,398 |
|
|
$ |
16,894 |
|
Nonperforming loans/total loans(8) |
|
|
3.76 |
% |
|
|
1.42 |
% |
|
|
0.83 |
% |
|
|
0.72 |
% |
|
|
1.24 |
% |
Nonperforming assets/total assets(8) |
|
|
2.80 |
|
|
|
1.17 |
|
|
|
0.65 |
|
|
|
0.64 |
|
|
|
1.03 |
|
Net loan charge-offs/average loans(4) |
|
|
1.33 |
|
|
|
0.04 |
|
|
|
0.07 |
|
|
|
0.11 |
|
|
|
0.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for Investment Performance Ratios and Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
$ |
34,669 |
|
|
$ |
16,183 |
|
|
$ |
8,000 |
|
|
$ |
6,231 |
|
|
$ |
4,808 |
|
Nonperforming loans held for investment(8) |
|
|
60,833 |
|
|
|
13,064 |
|
|
|
4,251 |
|
|
|
3,675 |
|
|
|
9,601 |
|
Nonperforming loans held for investment /total loans held
for investment(8) |
|
|
5.13 |
% |
|
|
1.05 |
% |
|
|
0.48 |
% |
|
|
0.51 |
% |
|
|
2.23 |
% |
Allowance for credit losses/total loans held for investment |
|
|
2.93 |
|
|
|
1.30 |
|
|
|
0.90 |
|
|
|
0.87 |
|
|
|
1.12 |
|
Allowance for credit losses/nonperforming loans held for
investment |
|
|
56.99 |
|
|
|
123.87 |
|
|
|
188.19 |
|
|
|
169.55 |
|
|
|
50.08 |
|
|
|
|
(1) |
|
Net (loss) income per common share assuming dilution is based on the weighted
average number of common shares outstanding during each period and the dilutive effect, if any, of
stock options and restricted stock outstanding. There are no other dilutive securities. |
|
(2) |
|
At December 31, 2009, 2008, 2007, 2006 and 2005, the total balance of brokered deposits
was $575.7 million, $229.4 million, $13.0 million, $25.7 million, and $42.5 million, respectively. |
- 41 -
|
|
|
(3) |
|
Total Shareholders Equity at December 31, 2009 included approximately $81.7 million in
net proceeds from the September 2009 public offering. See Note 23 to the financial statements.
Total Shareholders Equity at December 31, 2005 included approximately $87.0 million in proceeds
from the private offering completed in December 2005. The Company used approximately $79.5 million
of the proceeds in January 2006 to complete the issuer tender offer and purchase shares of the
Companys common stock. This use of proceeds reduced total shareholders equity in January 2006. |
|
(4) |
|
Calculations are based on average daily balances where available and monthly averages
otherwise. In some instances, the results are reported as NMF meaning not a meaningful figure
since the reported results would otherwise have reflected a negative number due to the operating
loss realized in the period. |
|
(5) |
|
Net interest margin has been calculated by dividing net interest income from continuing
operations before provision for credit losses by average interest-earning assets. |
|
(6) |
|
The operating efficiency ratio has been calculated by dividing noninterest expense from
continuing operations, excluding amortization of mortgage servicing rights, by operating income
from continuing operations. Operating income from continuing operations is equal to net interest
income before provision for credit losses plus noninterest income. |
|
(7) |
|
For purposes of calculating the ratio of earnings to fixed charges, earnings consist of
income from continuing operations before taxes plus interest and rent expense. Fixed charges
consist of interest and rent expense. |
|
(8) |
|
See Managements Discussion and Analysis of Financial Condition and Results of
OperationsAsset Quality for a discussion of the level of nonperforming loans. |
Fourth Quarter Results
Loss from continuing operations for the fourth quarter of 2009 was $40.6 million or $(1.40)
per diluted share compared to loss from continuing operations of $8.7 million for the third quarter
of 2009 or $(0.95) per diluted share. The Company reported income from continuing operations of
$2.4 million or $0.33 per diluted share in the fourth quarter of 2008. The results of the fourth
quarter of 2009 were significantly impacted by the current economic environment.
Comparing the fourth quarter to the third quarter of 2009, net interest income declined
$809,000, as a result of the change in asset mix caused principally by excess liquidity we have
maintained on our balance sheet. Total interest income for the fourth quarter of 2009 declined by
$1.1 million, to $24.2 million as compared to $25.2 million for the third quarter of 2009.
Interest income on community bank loans decreased $584,000 due to the $41.6 million decrease in
average community bank loans between the periods. Interest income from other loans and securities
declined $726,000 between the third and fourth quarter of 2009. This decline was the result of (i)
higher levels of premium amortization on purchased SBA loans and securities of $166,000, and (ii)
overall lower average other loans and securities in the fourth quarter of 2009, of $44.9 million
which was principally due to payoffs. Interest income from other earning assets increased $246,000
between the third and fourth quarter of 2009, on an average increase of $327.9 million of the
principal balance of such assets. We maintained this additional liquidity on our balance sheet
based on our decision to assess fourth quarter provision for credit loss levels and potential for
other-than-temporary impairment charges prior to reducing this balance. Overall these items
impacted the fourth quarter of 2009 yield on interest-earning assets which was 3.66% compared to
4.2% for the third quarter of 2009. Interest expense declined $255,000 in the fourth quarter which
was principally the result of a decline in the rates paid on certificate of deposits accounts. In
the fourth quarter the cost of funds was 1.31% compared to 1.48% for the third quarter of 2009.
Net interest income was $16.2 million for the fourth quarter of 2009 compared to $20.8 million
for the fourth quarter of 2008. The yield on interest-earning assets was 3.66% for the fourth
quarter of 2009 compared to 5.35% for the fourth quarter of 2008. The cost of interest bearing
liabilities was 1.31% for the fourth quarter of 2009 compared to 1.64% for the fourth quarter of
2008. Between the periods, interest rates declined due to the economic environment that was
prevalent in 2009, which resulted in declines in the yield on assets and liabilities. Runoff of
other loans and securities from repayment resulted in declines in interest income from those
assets. Interest expense declined principally as a result of the declining interest rate
environment.
Net interest income before provision for credit losses totaled $16.2 million for the quarter
ended December 31, 2009, compared to $17 million for the quarter ended September 30, 2009. Our net
interest margin was 2.47% for the fourth quarter of 2009 compared to 2.84% for the third quarter of
2009. The 37 basis point decline in net interest margin between the third and fourth quarters of
2009 was due to the factors discussed above. For the quarter ended December 31, 2008 net interest
margin was 3.88%; the 141 basis point decrease in the net interest margin from the fourth quarter
of 2008 and 2009 was principally due to higher levels of liquidity maintained on the balance sheet
and an 81 basis points decrease in the average prime rate.
- 42 -
Provision for credit losses expense increased $4.4 million between the third and fourth
quarters of 2009. The provision for credit losses expense of $14.5 million for the fourth quarter
of 2009 was principally related to an increase in nonperforming loans in the period. Provision for
credit losses was $2.4 million in the fourth quarter of 2008 as a result of $64 million of growth,
net of repayments in the community bank loan portfolio, an increase in specific impairments of
$189,000 for one commercial loan, and approximately $1.7 million related to other existing
loans that demonstrated signs of weakness for which the loan grade was reduced as well as a
continued decline in general economic conditions.
Noninterest (loss) income was ($30.9) million for the quarter ended December 31, 2009,
compared to $41,000 for the quarter ended September 30, 2009. The Company incurred $33.2 million of
other-than-temporary impairment (OTTI) charges on 13 of its non-agency residential
mortgage-backed securities in the fourth quarter of 2009 due to continued deterioration in the
underlying performance of the mortgage collateral of these securities. The OTTI charges were
predominately in older vintage securities with approximately 80% from 2005 and earlier-date issued
securities. In addition, the OTTI is largely in securities that are support securities, or
securities that are not the most senior securities in a structure. The non-agency residential
mortgage-backed securities market continues to be substantially illiquid, and therefore the
evaluation for impairment and the determination of fair value remains highly complex and is
dependent upon the assumptions applied. As part of the evaluation, the Company completes an
analysis of estimated cash flows for these securities, which incorporates, but is not limited to,
an estimate of the level of voluntary repayments, both known and projected defaults on the
underlying mortgage collateral, and an estimate of loss severity. Based on the continued
deterioration of the underlying collateral performance during the fourth quarter of 2009 and into
the first quarter of 2010, including substantial downgrades in the first quarter of 2010, as well
as the protracted nature of the current financial crises in the U.S. in general and the U.S.
housing market in particular, for the fourth quarter of 2009 management changed its estimate of
future cash flows, by applying a more conservative estimate of future defaults than in previous
quarters. Noninterest income was $2.0 million for the quarter ended December 31, 2008 in which
period there were no OTTI charges.
Noninterest expense was $20.9 million for the quarter ended December 31, 2009 compared with
$21 million for the quarter ended September 30, 2009. In comparing the fourth quarter and the
third quarter 2009, noninterest expense was relatively unchanged as management reduced controllable
expenses including compensation, professional fees, public relations and marketing compared to the
earlier quarter. Noninterest expense was $17.3 million for the quarter ended December 31, 2008.
Between the fourth quarters of 2009 and 2008, the principal factor contributing to the $3.6 million
increase in noninterest expense was a $2.8 million increase in subaccounting fees. Subsequent to
the sale of certain assets of UW Trust at the end of June 2009, the Company has incurred
subaccounting fees on the custodial deposits transferred to the buyer. The remaining increase is a
result of increases in deposit insurance expense, loan collection expenses, and real estate owned
expenses.
Income tax (benefit) expense from continuing operations was ($9.4) million for the quarter
ended December 31, 2009, compared to ($5.4) million for the quarter ended September 30, 2009. Our
tax rate was (18.8%) and (38.2%) for those same periods, respectively. The effective income tax
rate for the fourth quarter of 2009 was impacted by the establishment of a $10.2 million deferred
tax valuation allowance. Due to the loss incurred in the fourth quarter of 2009 and for the year
then ended, the Company was unable to conclude that it is more likely than not that we will
generate sufficient taxable income in the foreseeable future to realize all of our deferred tax
assets. In evaluating the level of valuation allowance needed the Company considered the amount of
net operating loss carryback potential, which approximated $12.2 million, after consideration of
the impact on the utilization of various tax credits in those periods. In addition, management
evaluated various tax planning strategies which could be utilized to support a portion of the
deferred tax asset. Some of the tax planning strategies considered, which would not substantially
impact the business, were sale-leaseback of facilities, redemption of life insurance, and the sale
of certain lines of business or assets. Based on the carryback potential and tax planning
strategies, management determined that a valuation allowance of $10.2 million was appropriate. At
December 31, 2009, the net deferred tax asset was $14.2 million. Income tax expense from continuing
operations in the quarter ended December 31, 2008 was $766,000 and our tax rate was 24.4%.
|
|
|
Item 7. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion is managements analysis to assist in the understanding and
evaluation of our financial position and results of operations of the Company. It should be read
in conjunction with the information set forth under Item 1A. Risk Factors, and our consolidated
financial statements and notes thereto included in Item 8 in this report.
- 43 -
Overview
The Companys primary sources of revenue, through the Bank, are net interest income
(predominately from loans and deposits, and also from investment securities and other funding
sources), and noninterest income, including loan administration income, gains on sale of originated
SBA loans, and other noninterest income. Volumes of loan originations and pricing decisions are key
determinants in revenue potential, and these tend to be impacted by overall
economic factors, including market interest rates, overall business levels, economic growth,
consumer confidence, and competitive conditions.
The Company experienced significant challenges during 2009 as the deteriorating economic and
credit environments negatively affected the Companys results. In June 2009, the Bank sold 100% of
its available-for-sale mortgage-backed securities collateralized by option adjustable rate
residential loans with an unpaid principal balance of $47.3 million. We realized a loss of $47
million, or $29.2 million, net of tax from the sale. Each of the five securities was rated AA by
nationally recognized rating agencies at acquisition. However, in the period from April 2008
through June 2009, the securities were progressively downgraded until they were graded
significantly below investment grade. As a result of the downgrades of the securities, and because
the securities were lower tranche securities in relation to other securities issued in the same
security structure, the Bank was required to assign large amounts of capital for the purposes of
determining the Banks regulatory risk-based capital ratio. Consequently the Bank elected to sell
the securities, which provided regulatory capital relief to the Bank in spite of the loss incurred.
This loss from operations was substantially offset by a gain on sale, which was reported as
discontinued operations in the statement of operations, from the sale of UW Trust assets. We
realized a gain of $36.1 million, net of tax from that transaction. In addition to the two items
referenced above, we also were impacted by increased levels of OTTI and provisions for credit
losses. During 2009, the Company recognized OTTI charges of $36.6 million on its non-agency
mortgage backed securities portfolio due to continued declines in the performance of the underlying
residential loans that collateralize such securities. In addition, the Company made provisions for
credit losses of $35 million in 2009 to maintain the allowance at a level we felt was appropriate
based on the economic challenges facing our borrowers.
Since mid-2007 the banking industry and the securities markets have been materially and
adversely affected by significant declines in the fair value of nearly all asset classes and by a
lack of liquidity. In addition, the U.S. economy has been in a recession. The Companys financial
performance generally, and in particular the ability of borrowers to pay interest on and repay
principal of outstanding loans and the fair value of collateral securing those loans, is highly
dependent on the economy in our markets. The current market conditions continue to present
difficult asset quality issues for the banking industry (including the ongoing effect of current
economic conditions and lower residential and commercial real estate values) and for the Company
(including higher net charge offs and higher levels of nonperforming assets as compared to our
historical experience). In the current real estate market, the value of the collateral securing
the loans has become one of the most important factors in determining the appropriate amount of
allowance for credit losses to record at the balance sheet date. Additionally, the performance and
value of the loans that collateralize our non-agency mortgage-backed securities and our outlook on
market conditions has significantly impacted the determination of OTTI. Based on these factors, and
others, during the third and fourth quarter of 2009 the Company raised net proceeds of
approximately $81.7 million by issuing 22 million shares of common stock through a public stock
offering.
During 2009, we focused on asset quality issues and the corresponding decline in the Companys
credit quality metrics of both loans and non-agency mortgage backed securities. During 2009, the
Company hired a new loan review executive, enhanced many of its lending policies and procedures.
These enhancements included reducing the advance rates on many real estate related loan types and
including increasing loss factors for various loan types based on actual credit losses realized and
impairments on other loans as such impairments were incurred. Overall the increase in the
allowance for credit losses was based on and consistent with the deterioration in performance of 10
construction and land development loan relationships, and 10 commercial real estate loan
relationships. A record level of provision for credit losses and charge offs resulted for 2009.
Management expects 2010 provision for credit losses and charge off amounts will also be elevated
compared to historical levels.
During the fourth quarter of 2009, the Company recognized an OTTI charge in earnings of $33.2
million across 13 securities. For the securities subject to OTTI in the fourth quarter of 2009,
the collateral coverage ratio (the amount of support tranches underlying the Companys position in
the security relative to loans 60 days or more past due) declined between 14% and 100%, and on a
weighted average basis the decline was 28%. The average credit support (the amount of support
tranches underlying the Companys position in the security relative to less senior tranches) for
these 13 securities declined from 5.3% at September 30, 2009 to 3.5% at December 31, 2009, due to
losses incurred by support tranches. The cumulative level of delinquencies in these securities
continued to increase in the fourth quarter of 2009 despite the losses incurred by support tranches
thus the pipeline of problem loans has not declined with the losses incurred. At December 31, 2009
the collateral coverage ratio for the 13 securities subject to OTTI during the fourth quarter
ranged from zero to 0.77%, with an average below one-half percent. In addition, on February 22,
2010, Standard & Poors (S&P) ratings services cut the ratings on 2,861 classes underlying 354
residential mortgage-backed securities transactions. S&P said that because of higher
delinquencies, credit enhancements for the classes in question will likely not be enough to cover
projected losses. Included in the S&P February ratings declines were 22 securities owned by the
Company. In total approximately 47.5% of the Companys portfolio was downgraded, watch listed, or
in a few cases the rating was affirmed subsequent to January 31, 2010.
- 44 -
The continued economic downturn and the poor economic indicators including continued declines
in home prices, continued high unemployment, and continued erosion of mortgage equity that occurred
in the fourth quarter of 2009 and the early first quarter of 2010 concerned us, especially in
connection with the downgrades in securities. Over the past year it had appeared that the rating
agencies were being more conservative and reacting more timely, but these downgrades showed the
rating agencies were still lagging. During the off-cycle field visit by our regulators beginning
in January 2010, we discussed with the OTS and FDIC our assumptions regarding the determination of
OTTI and the fair value of securities, our observations of the performance of the loans underlying
our non-agency mortgage backed securities, and the macroeconomic factors discussed above, as well
as our regulators views of how these securities have been performing for other industry
participants. Though ongoing discussions were being held throughout January and February 2010, the
Company was required by law to file the Thrift Financial Report on January 30, 2010, which we did.
Based on an extensive review of all of the information available, we determined that we should
re-evaluate the default assumptions used to determine the expected cash flows to be received from
the securities for the period ended December 31, 2009.
One of the inputs that management uses for estimating cash flows on our mortgage backed
securities is an estimated default rate on the underlying loan portfolio. Through September 30,
2009, and for the prior four quarters we had utilized an estimate for defaults from our third party
provider that projected the estimated lifetime cumulative defaults based on loan level actual
historical default performance for the specific pool. This analysis was supported by observed
behavior that weaker loans go bad earlier and older paying loans have superior credit performance
to more recently originated loans with similar underwriting criteria and show fewer weaknesses.
Our own historical mortgage origination business resulted in weaker loans becoming delinquent early
in the life of the instrument and the overall performance of the loans generally improved over time
with additional seasoning. We expected this would also be the case with the mortgage-backed
securities portfolio. This assumption was true with respect to the mortgage origination business,
and still appeared to be true through the third quarter of 2009, as the residential home market was
improving. The results of the fourth quarter of 2009 and the early first quarter of 2010 show that
the length and severity of the recession, as well as home price depreciation is continuing, and as
such, even these older loans have more risk. As a result, we determined that a cash flow estimate
based on loan level default performance alone was no longer producing results that match the
expectations that management believes are applicable to the underlying performance of the
securities owned by the Company as of December 31, 2009. The change in the default assumption used
in our cash flow estimate impacted both the amount of OTTI and the timing of OTTI recognition.
Accordingly, the Company has concluded its former default assumption was no longer indicative
of the Companys best estimate of cash flows. The Company worked with our third party provider to
select an alternative default assumption based on an enhanced trend analysis in order to estimate
cash flows that we believe better reflect the continued deterioration of the underlying collateral
performance discussed previously and the protracted nature of the current financial crisis in the
U.S. in general and the U.S. housing market in particular.
The new default assumptions contain two factors, first, an earlier forecast of when a loan
will default, and secondly, an absolute increase in default levels. The earlier time-period
forecast of default results in earlier recognition by the Company of OTTI through earnings. The
accounting recognition can and does occur well before a loss (sometimes referred to as a principal
break) is realized by actual security owned by the Company. Since such events are forecast up to
30 years in the future significant forecast error can occur. U.S. economic and financial factors
that impact housing, as well as public policy and government actions, can and will impact such
long-range forecasts.
For the year ended December 31, 2009, loss from continuing operations was $79.6 million or
$(6.06) per diluted share compared to income from continuing operations of $10.1 million or $1.39
per diluted share for the year ended December 31, 2008. The loss for 2009 was attributed to four
principal factors, (i) $47.0 million loss on the sale of available-for-sale mortgage-backed
securities collateralized by payment option adjustable rate mortgage loans, or $29.2 million net of
tax; (ii) $35.0 million of provision for credit losses, or $24.9 million net of tax, (iii) a net
other-than-temporary impairment charge on non-agency mortgage backed securities of $36.6 million,
or $26.0 million net of tax and (iv) during 2009 the Company held approximately $320 million of
short term liquidity on its balance sheet, which negatively impacted net interest income and net
interest margin for the period.
- 45 -
On June 29, 2009, the Company completed the sale of certain assets of UW Trust Company
(formerly known as Sterling Trust Company) to Equity Trust Company and its affiliate, Sterling
Administrative Services, LLC (together, the Buyers), for a purchase price of $61.4 million,
subject to adjustment as provided for in the definitive purchase agreement governing the
transaction. The assets sold were associated with the custodial IRA and qualified employee benefit
plan businesses of UW Trust. Under the terms of the sale, UW Trust received 25% of the purchase
price in cash, $15.3 million, and financed the remaining 75% through a purchase money note, $46.0
million. The purchase money note
is secured by all the assets of the Buyers as well as an assignment of the subaccounting
agreement inclusive of all contract rights and fees relating to them. The note provides for level
principal payments over the seven year term and may be prepaid without penalty at any time. The
rate of interest is the prime rate, currently 3.25%, with a floor and a cap of 2.25% and 4.25%,
respectively. Management engaged a third party to assess the value of the purchase money note
received from the sale and concluded that a discount of 4.2% was required to reflect the fair value
of the note. Accordingly, the gain on sale was reduced by $1.9 million, which will be amortized
into income as a yield adjustment on the note over its term.
As a result of the sale, the Company recorded an after tax gain of approximately $36.1 million
for the year ended December 31, 2009, which is included in discontinued operations for the period.
The operating results associated with the sale of UW Trust assets have been retrospectively
presented as discontinued operations beginning January 1, 2007.
Total assets at December 31, 2009 were $2.53 billion, which represented an increase of $267
million from December 31, 2008. Loan and security repayments together with deposit growth were
principally invested in cash and due from banks.
Between 2008 and 2009, net interest income before provision for credit losses decreased
by $11.7 million and our net interest margin decreased 96 basis points from 3.96% for 2008 to 3.00%
for 2009. Increasing net interest income from an appropriate mix of growth in loans and management
of our processing and trust deposit base represents the Companys best opportunity for 2010
earnings growth. However, this is subject to various risks, such as competitive pricing pressures
for the types of loan products we will seek, overall decreased loan demand, higher levels of
nonperforming loans, disciplined pricing, and challenges to our processing and trust deposit base
as discussed further below. Specifically, we expect net interest margin to improve prospectively
from the following actions: (i) future reductions in our processing and trust deposit base in order
to reduce excess liquidity; (ii) continued disciplined loan pricing; and (iii) a 200 basis point
reduction in the effective interest rate paid on $180 million of borrowings from FHLBank of Topeka.
Total loans declined $95.6 million, or 6.2%, between December 31, 2009 and 2008, including a
$26.6 million decline in construction loans and a $31.1 million decline in land loans. We
continued to execute our planned reduction of exposure to this loan class, which is consistent with
the Informal Agreement we entered into in December 2009. Additionally, we modestly reduced
commercial real estate loans during 2009.
Total deposits grew $271 million, or 15.5% between the end of 2009 and 2008. All of this
growth can be attributed to the success of our community banking teams as community bank deposits
increased by 142% to $465 million. The growth in community bank deposits was principally in
certificate accounts offered through the CDARS network; however, we also grew community bank
noninterest bearing deposits and money market and now accounts. In total, community bank deposit
accounts increased by over 1,000 and reached 2,353 at December 31, 2009. Managing our processing
and trust deposit base is a key factor to improving our net interest income and net interest margin
prospectively. We elected to maintain additional liquidity on our balance sheet based on our
decision to assess year end 2009 provision for credit loss levels and potential for
other-than-temporary impairment charges prior to reducing this balance. We anticipate it will be
the second quarter of 2010 before we can fully reduce selected processing and trust deposit
balances to correspond to our anticipated liquidity requirements and goals for the year.
- 46 -
Results of Operations
Loss from continuing operations for 2009 was $79.6 million, or $(6.06) per diluted share
compared to income from continuing operations of $10.1 million, or $1.39, per diluted share, for
2008 and $10.2 million or $1.39 per diluted share for 2007. Details of the changes of the various
components of income from continuing operations are further discussed below.
Net Interest Income
The following table sets forth for the periods and as of the dates indicated, information
regarding our average balances of assets and liabilities, as well as the dollar amounts of interest
income from interest-earning assets and of interest expense on interest-bearing liabilities and the
resultant yields or costs. Ratio, yield and rate information are based on average daily balances
where available; otherwise, average monthly balances have been used. Nonaccrual loans are included
in the calculation of average balances for loans for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community bank loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
$ |
401,454 |
|
|
|
23,445 |
|
|
|
5.84 |
% |
|
$ |
312,299 |
|
|
|
20,082 |
|
|
|
6.43 |
% |
|
$ |
172,716 |
|
|
|
12,750 |
|
|
|
7.38 |
% |
Construction and development |
|
|
363,943 |
|
|
|
17,376 |
|
|
|
4.77 |
|
|
|
321,410 |
|
|
|
19,080 |
|
|
|
5.94 |
|
|
|
157,796 |
|
|
|
14,394 |
|
|
|
9.12 |
|
Originated SBA loans |
|
|
151,543 |
|
|
|
8,482 |
|
|
|
5.60 |
|
|
|
113,430 |
|
|
|
8,340 |
|
|
|
7.35 |
|
|
|
96,848 |
|
|
|
9,136 |
|
|
|
9.43 |
|
Multifamily |
|
|
44,931 |
|
|
|
2,288 |
|
|
|
5.09 |
|
|
|
48,906 |
|
|
|
2,927 |
|
|
|
5.98 |
|
|
|
55,464 |
|
|
|
3,615 |
|
|
|
6.52 |
|
Commercial |
|
|
124,207 |
|
|
|
6,931 |
|
|
|
5.58 |
|
|
|
112,239 |
|
|
|
7,122 |
|
|
|
6.35 |
|
|
|
54,765 |
|
|
|
4,707 |
|
|
|
8.59 |
|
Consumer and other loans |
|
|
52,028 |
|
|
|
2,594 |
|
|
|
4.99 |
|
|
|
13,154 |
|
|
|
482 |
|
|
|
3.66 |
|
|
|
4,419 |
|
|
|
287 |
|
|
|
6.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total community bank loans |
|
|
1,138,106 |
|
|
|
61,116 |
|
|
|
5.37 |
|
|
|
921,438 |
|
|
|
58,033 |
|
|
|
6.30 |
|
|
|
542,008 |
|
|
|
44,889 |
|
|
|
8.28 |
|
Other loans and securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans |
|
|
305,507 |
|
|
|
14,036 |
|
|
|
4.59 |
|
|
|
385,908 |
|
|
|
20,503 |
|
|
|
5.31 |
|
|
|
517,720 |
|
|
|
27,882 |
|
|
|
5.39 |
|
Purchased SBA loans and securities |
|
|
127,079 |
|
|
|
2,056 |
|
|
|
1.62 |
|
|
|
157,928 |
|
|
|
5,109 |
|
|
|
3.24 |
|
|
|
213,311 |
|
|
|
10,393 |
|
|
|
4.87 |
|
Mortgage-backed securities |
|
|
445,439 |
|
|
|
23,281 |
|
|
|
5.23 |
|
|
|
560,039 |
|
|
|
29,894 |
|
|
|
5.34 |
|
|
|
663,379 |
|
|
|
35,233 |
|
|
|
5.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other loans and securities |
|
|
878,025 |
|
|
|
39,373 |
|
|
|
4.48 |
|
|
|
1,103,875 |
|
|
|
55,506 |
|
|
|
5.03 |
|
|
|
1,394,410 |
|
|
|
73,508 |
|
|
|
5.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits |
|
|
319,592 |
|
|
|
678 |
|
|
|
0.21 |
|
|
|
18,454 |
|
|
|
345 |
|
|
|
1.84 |
|
|
|
20,382 |
|
|
|
1,012 |
|
|
|
4.90 |
|
FHLBank Stock |
|
|
20,224 |
|
|
|
340 |
|
|
|
1.68 |
|
|
|
34,298 |
|
|
|
1,133 |
|
|
|
3.30 |
|
|
|
39,297 |
|
|
|
2,150 |
|
|
|
5.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
2,355,947 |
|
|
|
101,507 |
|
|
|
4.31 |
% |
|
|
2,078,065 |
|
|
|
115,017 |
|
|
|
5.54 |
% |
|
|
1,996,097 |
|
|
|
121,559 |
|
|
|
6.09 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
62,601 |
|
|
|
|
|
|
|
|
|
|
$ |
19,239 |
|
|
|
|
|
|
|
|
|
|
$ |
18,720 |
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
|
(26,234 |
) |
|
|
|
|
|
|
|
|
|
|
(13,500 |
) |
|
|
|
|
|
|
|
|
|
|
(9,238 |
) |
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
25,646 |
|
|
|
|
|
|
|
|
|
|
|
21,662 |
|
|
|
|
|
|
|
|
|
|
|
11,321 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
90,455 |
|
|
|
|
|
|
|
|
|
|
|
87,333 |
|
|
|
|
|
|
|
|
|
|
|
82,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest bearing assets |
|
|
152,468 |
|
|
|
|
|
|
|
|
|
|
|
114,734 |
|
|
|
|
|
|
|
|
|
|
|
103,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,508,415 |
|
|
|
|
|
|
|
|
|
|
$ |
2,192,799 |
|
|
|
|
|
|
|
|
|
|
$ |
2,099,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts |
|
$ |
344 |
|
|
|
1 |
|
|
|
0.29 |
% |
|
$ |
256 |
|
|
|
2 |
|
|
|
0.76 |
% |
|
$ |
165 |
|
|
|
2 |
|
|
|
1.26 |
% |
Money market and NOW accounts |
|
|
1,484,182 |
|
|
|
7,525 |
|
|
|
0.51 |
|
|
|
1,238,869 |
|
|
|
10,376 |
|
|
|
0.84 |
|
|
|
1,198,094 |
|
|
|
25,759 |
|
|
|
2.15 |
|
Certificates of deposit |
|
|
285,863 |
|
|
|
7,040 |
|
|
|
2.46 |
|
|
|
59,718 |
|
|
|
2,284 |
|
|
|
3.82 |
|
|
|
32,369 |
|
|
|
1,381 |
|
|
|
4.27 |
|
FHLBank borrowings |
|
|
214,881 |
|
|
|
9,339 |
|
|
|
4.29 |
|
|
|
383,543 |
|
|
|
13,769 |
|
|
|
3.53 |
|
|
|
351,231 |
|
|
|
17,086 |
|
|
|
4.80 |
|
Repurchase agreements |
|
|
79,195 |
|
|
|
3,666 |
|
|
|
4.57 |
|
|
|
78,934 |
|
|
|
2,975 |
|
|
|
3.71 |
|
|
|
72,354 |
|
|
|
3,494 |
|
|
|
4.83 |
|
Borrowed money and junior subordinated debentures |
|
|
68,149 |
|
|
|
3,622 |
|
|
|
5.24 |
|
|
|
53,702 |
|
|
|
3,626 |
|
|
|
6.64 |
|
|
|
59,742 |
|
|
|
4,995 |
|
|
|
8.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
2,132,614 |
|
|
|
31,193 |
|
|
|
1.45 |
% |
|
|
1,815,022 |
|
|
|
33,032 |
|
|
|
1.80 |
% |
|
|
1,713,955 |
|
|
|
52,717 |
|
|
|
3.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits (including custodial escrow balances) |
|
|
215,824 |
|
|
|
|
|
|
|
|
|
|
|
246,064 |
|
|
|
|
|
|
|
|
|
|
|
249,356 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
19,096 |
|
|
|
|
|
|
|
|
|
|
|
21,831 |
|
|
|
|
|
|
|
|
|
|
|
22,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest bearing liabilities |
|
|
234,920 |
|
|
|
|
|
|
|
|
|
|
|
267,895 |
|
|
|
|
|
|
|
|
|
|
|
271,683 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
140,881 |
|
|
|
|
|
|
|
|
|
|
|
109,882 |
|
|
|
|
|
|
|
|
|
|
|
113,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,508,415 |
|
|
|
|
|
|
|
|
|
|
$ |
2,192,799 |
|
|
|
|
|
|
|
|
|
|
$ |
2,099,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before provision for credit losses |
|
|
|
|
|
$ |
70,314 |
|
|
|
|
|
|
|
|
|
|
$ |
81,985 |
|
|
|
|
|
|
|
|
|
|
$ |
68,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
2.86 |
% |
|
|
|
|
|
|
|
|
|
|
3.74 |
% |
|
|
|
|
|
|
|
|
|
|
3.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
3.00 |
% |
|
|
|
|
|
|
|
|
|
|
3.96 |
% |
|
|
|
|
|
|
|
|
|
|
3.46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to average
interest bearing liabilities |
|
|
|
|
|
|
|
|
|
|
110.47 |
% |
|
|
|
|
|
|
|
|
|
|
114.49 |
% |
|
|
|
|
|
|
|
|
|
|
116.46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 47 -
Volume and Rate Analysis of Net Interest Income
The following table presents the extent to which changes in volume and interest rates of
interest earning assets and interest bearing liabilities have affected our interest income and
interest expense during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior
period rate), (ii) changes attributable to changes in rates (changes in rates multiplied by prior
period volume) and (iii) changes attributable to a combination of changes in rate and volume
(change in rates multiplied by the changes in volume). Changes attributable to the combined impact
of volume and rate have been allocated proportionately to the changes due to volume and the changes
due to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended 2009 versus 2008 |
|
|
Year ended 2008 versus 2007 |
|
|
|
Increase (Decrease) Due to Change in |
|
|
Increase (Decrease) Due to Change in |
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community bank loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans |
|
$ |
5,334 |
|
|
$ |
(1,971 |
) |
|
$ |
3,363 |
|
|
$ |
9,155 |
|
|
$ |
(1,823 |
) |
|
$ |
7,332 |
|
Construction and development
loans |
|
|
2,337 |
|
|
|
(4,041 |
) |
|
|
(1,704 |
) |
|
|
11,017 |
|
|
|
(6,331 |
) |
|
|
4,686 |
|
Originated SBA loans |
|
|
2,407 |
|
|
|
(2,265 |
) |
|
|
142 |
|
|
|
1,413 |
|
|
|
(2,209 |
) |
|
|
(796 |
) |
Multifamily loans |
|
|
(225 |
) |
|
|
(414 |
) |
|
|
(639 |
) |
|
|
(405 |
) |
|
|
(283 |
) |
|
|
(688 |
) |
Commercial Loans |
|
|
719 |
|
|
|
(910 |
) |
|
|
(191 |
) |
|
|
3,900 |
|
|
|
(1,485 |
) |
|
|
2,415 |
|
Consumer and other loans |
|
|
1,881 |
|
|
|
231 |
|
|
|
2,112 |
|
|
|
365 |
|
|
|
(170 |
) |
|
|
195 |
|
Other loans and securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential loans |
|
|
(3,917 |
) |
|
|
(2,550 |
) |
|
|
(6,467 |
) |
|
|
(6,973 |
) |
|
|
(406 |
) |
|
|
(7,379 |
) |
Purchased SBA loans and
securities |
|
|
(858 |
) |
|
|
(2,195 |
) |
|
|
(3,053 |
) |
|
|
(2,308 |
) |
|
|
(2,976 |
) |
|
|
(5,284 |
) |
Mortgage-backed securities |
|
|
(6,008 |
) |
|
|
(605 |
) |
|
|
(6,613 |
) |
|
|
(5,536 |
) |
|
|
197 |
|
|
|
(5,339 |
) |
Interest-earning deposits |
|
|
887 |
|
|
|
(554 |
) |
|
|
333 |
|
|
|
(87 |
) |
|
|
(580 |
) |
|
|
(667 |
) |
FHLBank stock |
|
|
(361 |
) |
|
|
(432 |
) |
|
|
(793 |
) |
|
|
(247 |
) |
|
|
(770 |
) |
|
|
(1,017 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
2,196 |
|
|
|
(15,706 |
) |
|
|
(13,510 |
) |
|
|
10,294 |
|
|
|
(16,836 |
) |
|
|
(6,542 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts |
|
|
1 |
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
Money market and NOW accounts |
|
|
1,785 |
|
|
|
(4,636 |
) |
|
|
(2,851 |
) |
|
|
847 |
|
|
|
(16,230 |
) |
|
|
(15,383 |
) |
Certificates of deposit |
|
|
5,832 |
|
|
|
(1,076 |
) |
|
|
4,756 |
|
|
|
1,062 |
|
|
|
(159 |
) |
|
|
903 |
|
FHLBank borrowings |
|
|
(6,888 |
) |
|
|
2,458 |
|
|
|
(4,430 |
) |
|
|
1,446 |
|
|
|
(4,763 |
) |
|
|
(3,317 |
) |
Repurchase agreements |
|
|
10 |
|
|
|
681 |
|
|
|
691 |
|
|
|
310 |
|
|
|
(829 |
) |
|
|
(519 |
) |
Borrowed money |
|
|
841 |
|
|
|
(845 |
) |
|
|
(4 |
) |
|
|
(467 |
) |
|
|
(902 |
) |
|
|
(1,369 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,581 |
|
|
|
(3,420 |
) |
|
|
(1,839 |
) |
|
|
3,199 |
|
|
|
(22,884 |
) |
|
|
(19,685 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
|
$ |
615 |
|
|
$ |
(12,286 |
) |
|
$ |
(11,671 |
) |
|
$ |
7,095 |
|
|
$ |
6,048 |
|
|
$ |
13,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income. Net interest income before provision for credit losses decreased $11.7
million, or 14.2%, to $70.3 million for the year ended December 31, 2009, as compared to $82.0
million for 2008. Our net interest margin decreased 96 basis points, to 3.00% for 2009 from 3.96%
for 2008. Interest income declined $13.5 million to $101.5 million for 2009 compared to $115
million for 2008.
Interest income on community bank loans increased $3.1 million on a $216.7 million increase in
average volume partially offset by a 93 basis point decline in the average rate. The increase in
average volume of $216.7 million resulted in additional interest income of $12.5 million. For 2009,
the yield on community bank loans was 5.37% compared to 6.30% for 2008. This 93 basis point
decrease in yield contributed to an offsetting reduction of $9.4 million in interest income. The
increase in volume was due principally to loans originated in the second half of 2008 that were
outstanding for all of 2009. A significant portion of our community bank loans are variable rate
and during 2009, the 93 basis point decline in the yield of these loans was attributed to the
decline in the average prime rate of interest which averaged 5.08% for 2008 compared to 3.25% for
2009. Although the average prime rate declined by 183 basis points and the Company experienced an
increase in its level of nonperforming loans during the year ended December 31, 2009, we were able
to offset approximately one-half of the anticipated decline in interest income attributed to a
change in rate due to disciplined pricing of our loan products.
- 48 -
Interest income on other loans and securities interest-bearing balances declined by $16.1
million based on a $225.9 million decline in average volume and a 55 basis point decrease in the
yield on such assets. The decline in average other loans and securities interest bearing balances
was consistent with our plans to allow these assets to decline through repayment over time as we
add additional traditional community bank assets. The yield on residential loans and
mortgage-backed securities declined to 4.48% for 2009 as compared to 5.03% for 2008. The decrease
in the yield on these assets was due principally to the decreases in market interest rates. The
majority of the other loans and securities are also variable rate including the purchased
guaranteed portions of SBA 7(a) loans, which are tied to prime, and the residential mortgage loans
for which the significant majority have reached their initial reset date and now fluctuate at least
annually.
Interest expense decreased $1.8 million to $31.2 million for 2009 as compared to $33.0 million
for 2008. This decrease was caused by a decline in the average rate paid on interest-bearing
liabilities of 35 basis points to 1.45% for 2009 compared to 1.80% for 2008 due to changes in
market rates, change in product mix, and management actions. Additionally, the decline in both
LIBOR and Federal Funds rates that occurred from the start of 2008 through the end of 2009
contributed to the overall decline in rates paid. The decline in rates contributed $3.4 million to
the decline in interest expense for 2009. Average interest-bearing liabilities increased $318
million between 2009 and 2008 and this increase in average balance offset the decline in rate by
$1.6 million.
Net interest income before provision for credit losses increased $13.1 million, or 19.1%, to
$82.0 million for the year ended December 31, 2008, as compared to $68.8 million for 2007. Our net
interest margin increased 50 basis points, to 3.96% for 2008 from 3.46% for 2007.
The increase in net interest margin for 2008 was due to a 126 basis point decrease in the
average rate paid on our interest bearing liabilities, which decreased to 1.80% for 2008 compared
to 3.06% for 2007. The average rate paid for our interest bearing liabilities declined due to
changes in market rates and management actions. The decline in rates contributed $22.9 million to
the decline in interest expense for 2008. Average interest-bearing liabilities increased $101.1
million between 2008 and 2007 and this increase in average balance offset the decline in rate by
$3.2 million.
Interest income on community bank loans in 2008 increased $13.1 million on a $379.4 million
increase in volume partially offset by a 1.98% decline in the average rate. The increase in volume
was due to the continued execution of our business plan, the decline in rates was due to market
factors. A significant portion of our community bank loans are variable rate and during 2008, the
prime rate of interest declined 4.00% from 7.25% at December 31, 2007 to 3.25% at December 31,
2008.
Interest income on other assets and securities interest-bearing balances in 2008 declined by
$18.0 million based on a $290.5 million decline in volume and a 24 basis points decrease in the
yield on such assets. The decline in these assets was consistent with our plans to allow these
assets to decline through repayment. The decrease in the yield on these assets was due principally
to the decreases in market interest rates. The majority of the other assets and securities are also
variable rate including the purchased guaranteed portions of SBA 7(a) loans, which are tied to
prime, and the residential mortgage loans for which the significant majority have reached their
initial reset date and now fluctuate at least annually.
Provision for Credit Losses. The provision for credit losses is determined by the Company as
the amount to be added to the allowance for credit losses after net charge-offs have been deducted
to bring the allowance to a level that is the Companys best estimate of probable incurred credit
losses inherent in the held for investment loan portfolio. The provision for credit losses totaled
$35.0 million in 2009 compared to $8.6 million in 2008 and $2.3 million in 2007. The provision for
2009 was in part due to an increase in nonperforming loans, higher levels of net charge-offs, which
were 1.33%, and the weak economic conditions that have resulted in declining collateral values on
several real estate related projects that are considered classified loans. These collective
factors also caused us to increase the loss factors that we apply in our allowance for credit loss
model, in particular to construction and development loans, commercial real estate loans, and
certain residential loans to reflect the higher risk associated with those loans. The
provision for 2008 was the result of the $413 million of net new community bank loans added to the
portfolio, an increase in specific impairments associated with loans that became nonperforming
during the year, other loans that demonstrated signs of weakness for which the loan grade was
reduced and a decline in the general economic conditions. The provision for 2007 was principally
due to the growth of the community bank loan portfolio that occurred. See the section captioned
Allowance for Credit Losses elsewhere in this discussion for further analysis of the provision
for credit losses.
- 49 -
Noninterest Income. An analysis of the components of noninterest income is presented in the
table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
$ Change |
|
|
% Change |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2009-2008 |
|
|
2008-2007 |
|
|
2009-2008 |
|
|
2008-2007 |
|
|
|
(Dollars in thousands) |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Custodial, administrative and escrow services |
|
$ |
491 |
|
|
$ |
864 |
|
|
$ |
606 |
|
|
$ |
(373 |
) |
|
$ |
258 |
|
|
|
(43 |
)% |
|
|
43 |
% |
Loan administration |
|
|
4,290 |
|
|
|
4,914 |
|
|
|
6,311 |
|
|
|
(624 |
) |
|
|
(1,397 |
) |
|
|
(13 |
) |
|
|
(22 |
) |
Gain on sale of loans held for sale |
|
|
2,248 |
|
|
|
764 |
|
|
|
2,124 |
|
|
|
1,484 |
|
|
|
(1,360 |
) |
|
|
194 |
|
|
|
(64 |
) |
(Loss) gain on sale of available for sale
investment securities |
|
|
(46,980 |
) |
|
|
|
|
|
|
98 |
|
|
|
(46,980 |
) |
|
|
(98 |
) |
|
|
100 |
|
|
|
(100 |
) |
Total other-than-temporary impairment losses |
|
|
(42,790 |
) |
|
|
(4,110 |
) |
|
|
|
|
|
|
(38,680 |
) |
|
|
(4,110 |
) |
|
|
941 |
|
|
|
100 |
|
Portion of loss recognized in other
comprehensive income (before taxes) |
|
|
6,197 |
|
|
|
|
|
|
|
|
|
|
|
6,197 |
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings |
|
|
(36,593 |
) |
|
|
(4,110 |
) |
|
|
|
|
|
|
(32,483 |
) |
|
|
(4,110 |
) |
|
|
790 |
|
|
|
|
|
Gain on sale of investment in Matrix
Financial Solutions, Inc. |
|
|
3,567 |
|
|
|
|
|
|
|
|
|
|
|
3,567 |
|
|
|
|
|
|
|
100 |
|
|
|
|
|
Litigation settlements |
|
|
|
|
|
|
|
|
|
|
155 |
|
|
|
|
|
|
|
(155 |
) |
|
|
|
|
|
|
(100 |
) |
Other income |
|
|
2,450 |
|
|
|
3,072 |
|
|
|
3,729 |
|
|
|
(622 |
) |
|
|
(657 |
) |
|
|
(20 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest (loss) income |
|
$ |
(70,527 |
) |
|
$ |
5,504 |
|
|
$ |
13,023 |
|
|
$ |
(76,031 |
) |
|
$ |
(7,519 |
) |
|
|
(1,381 |
)% |
|
|
(58 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Custodial and Administration Services. Service fees for custodial and administration
services fees decreased $373,000 or 43%, to $491,000 for the year ended December 31, 2009, as
compared to $864,000 for the year ended December 31, 2008.
Service fees for custodial and administration services fees increased $258,000 or 43%, to
$864,000 for the year ended December 31, 2008, as compared to $606,000 for the year ended December
31, 2007. The increase was due to increases in the volume of administrative activity as well as
increases in all fees associated with these services.
In the fourth quarter of 2007, the Company elected to restructure our relationship with one
life settlement agent for special asset acquisitions and administration and terminate certain
elements of business with respect to this large life settlement agent account. As a result of this
decision, there has been a corresponding decline in revenues relating to the escrow administration
business. On June 27, 2009, UW Trust transferred substantially all of its contractual relationships
for custodial and administrative services pertaining to individual retirement accounts and other
tax qualified retirement plans in an exchange for value to Equity Trust Company pursuant to a
purchase and sale agreement (the PSA). The PSA provided that, until June 27, 2014, UW Trust may
not, with certain exceptions: (i) serve as a custodian or trustee for self-directed individual
retirement accounts in which customers have the ability to invest through such accounts in certain
alternative investments; or (ii) act as a custodian or administrator for certain tax qualified
retirement plans. UW Trust is in the process of implementing its revised business plan in light of
these restrictions and intends to focus the majority of its business on providing administrative
and escrow services prospectively.
- 50 -
Loan Administration. Loan administration income represents service fees earned from servicing
loans for various investors, which are based on a contractual percentage of the outstanding
principal balance plus late fees and other ancillary charges. Loan administration fees decreased
$624,000, or 13%, to $4.3 million in 2009 as compared to $4.9 million in 2008. Our mortgage loan
servicing portfolio decreased to an average balance of $831 million for 2009 as compared to an
average balance of $975 million for 2008, resulting in the overall decline in loan administration
income. The average service fee (including all ancillary income) was 0.46% in 2009 versus 0.47% in
2008, which is a function of the loans that remain in the servicing portfolio and level of
delinquencies. As we move forward we may augment our community banking business plan strategy with
various alternatives that would be designed to enhance our overall liquidity position and to
achieve profitability. These plans may include, in conjunction with a strategic partner, the
acquisition of a relatively modest level of mortgage servicing assets that would generate
additional noninterest income for the Company. We continue to explore these and other alternatives
on a regular basis, although there is no certainty that any will be executed.
Loan administration fees decreased $1.4 million, or 22%, to $4.9 million in 2008 as compared
to $6.3 million in 2007. Our mortgage loan servicing portfolio had decreased to an average balance
of $975 million for 2008 as compared to an average balance of $1.2 billion for 2007. The average
service fee (including all ancillary income) was 0.47% in 2008 versus 0.50% in 2007, which is a
function of the loans that remain in the servicing portfolio and level of delinquencies.
Gain on Sale of Loans Held for Sale. Gain on sale of loans held for sale increased $1.5
million, or 194%, to $2.3 million for the year ended December 31, 2009 compared to $764,000 for
2008. The gain reported for 2009 was from the sale of originated SBA loans with an unpaid principal
balance of $33 million, compared to $23.2 million of loan sales in 2008. These loan sales were
part of our management of industry concentrations, interest rate risk, and regular sales of the
guaranteed portion of SBA-originated loans. The increase in gain on sale of loans held for sale
between 2008 and 2009 was related to improved market conditions for government guaranteed assets
and the resultant higher premiums offered by purchasers. Gains on sale of loans held for sale are
part of our ongoing business plan. We expect such gains will fluctuate from period to period based
on a variety of factors, such as the current interest rate environment, the supply and mix of loans
available in the market, the particular loans we elect to sell, overall volume of securitization
activity for these loan types, and other market conditions.
Gain on sale of loans held for sale declined $1.4 million, or 64%, to $764,000 for the year
ended December 31, 2008 compared to $2.1 million for 2007. The decline in gain on sale of loans
held for sale between 2008 and 2007 was related to market conditions, including market participants
lower levels of liquidity, and resultant lower premiums offered by purchasers.
(Loss) Gain on Sale of Available for Sale Investment Securities. In 2009, we realized a $47.0
million loss from the sale of 100% of our available-for-sale mortgage-backed securities
collateralized by option adjustable rate residential loans with an unpaid principal balance of
$47.3 million. Each of the five securities sold was rated AA by nationally recognized rating
agencies at acquisition. However, in the period from April 2008 through June 2009, the securities
were progressively downgraded until they were graded significantly below investment grade. As a
result of the downgrades of the securities, and because the securities were lower tranche
securities in relation to other securities issued in the same security structure, the Bank was
required to assign large amounts of capital for the purposes of determining the Banks regulatory
risk-based capital ratio. Consequently, the Bank elected to sell the securities, which provided
regulatory capital relief to the Bank in spite of the loss incurred. We did not sell any
available-for-sale investment securities in 2008. In 2007 we sold three available-for-sale
investment securities and realized a gain of $98,000.
Other-than-temporary Impairment (OTTI). The Company incurred $36.6 million of OTTI charges
on 13 of its non-agency mortgage-backed securities in 2009 due to continued deterioration in the
underlying performance of the mortgage collateral of these securities, as well as negative trends
in general economic conditions. The non-agency residential mortgage-backed securities continue to
be substantially illiquid, and their evaluation for impairment and the determination of fair value
remains highly complex and is dependent upon the assumptions applied. As part of the evaluation,
the Company completes an analysis of estimated cash flows for these securities, which incorporates,
but is not limited to, an estimate of the level of voluntary repayments, both known and projected
defaults on the underlying mortgage collateral, and an estimate of loss severity. Based on the
continued deterioration of the underlying collateral performance, and the protracted nature of the
current financial crisis in the U.S. in general and the U.S. housing market in particular, the
Company revised its default assumptions used in our cash flow estimate, which is a more
conservative estimate of future defaults than were previously used. See additional discussion at
Item 7. Managements Discussion and Analysis Balance Sheet Investment Securities. The Company
believes that in the current economic conditions, that it is reasonably possible the Company will
incur future OTTI charges on its non-agency mortgage backed securities.
For 2008 OTTI of $4.1 million was incurred on two non-agency collateralized mortgage
obligations issued in 2005 and 2006 with total amortized cost of $9.4 million prior to the
impairment write-down. Since the end of 2008 we have received principal repayments on these
securities of $1.1 million and all scheduled interest payments. Included in the OTTI charges for
2009 was $2.0 million related to these two securities. Beginning in the third quarter of 2009 one
of these securities has incurred a principal loss, and the other security incurred its first
principal loss in December 2009.
- 51 -
Gain on Sale of Investment. During 2009, the Company completed the sale of 269,792 shares of
Matrix Financial Solutions, Inc. for $16.00 per share resulting in aggregate proceeds of $4.3
million. The transaction was negotiated between the Company and the purchaser and the Company
believes the exchange value per share represented the fair market value of such shares as of the
sale date. The Companys basis in the shares was $750,000, resulting in a gain on the sale of $3.6
million. Matrix Financial Solutions, Inc. is the successor to the Companys former joint venture
interest in Matrix Settlement and Clearance Services. The Company and Matrix Financial Solutions,
Inc. have ongoing business relationships pursuant to which certain cash accounts under the control
of Matrix Financial Solutions, Inc. are placed on deposit at the Bank. We did not sell any
cost-method investments in 2008 or 2007.
Other Income. Other income for 2009 was $2.5 million, a $622,000, or 20% decline from 2008.
Other income in 2009 principally includes settlement of a representation and warranty claim the
Bank made against a large nationally recognized loan originator, from which the Company realized
revenue of $370,000, income earned on bank-owned life insurance of $949,000, prepayment penalties
on loans and other loan fees not recognized as part of yield on loans of $111,000, rental income of
$200,000 on a property owned by a non-core subsidiary that was sold in June 2009, and other
miscellaneous items. The decrease from 2008 to 2009 was a result of 2008 other income including
non-recurring dividends from cost-method investments, a full year of rental income related to the
property that was sold in June 2009, and reduction in other loan fees received from other
institutions based on declining lending activity resulting from current market conditions
Other income for 2008 was $3.1 million, a $657,000, or 18%, decline from 2007. Other income in
2008 included income earned on bank owned life insurance of $954,000, dividends from cost-method
investments of $540,000, prepayment penalties on loans and other loan fees not recognized as part
of yield on loans of $405,000, rental
income from a parcel of property that was sold in June 2009 of $415,000 and other
miscellaneous items that totaled $758,000.
In 2007, other income from these same items was $937,000 earned on bank owned life insurance.
Dividend income from cost-method investments was $405,000 in 2007; the increase for 2008 was
related to the improved performance of the companys results and the resulting dividends declared
by their management. Prepayment penalties and loan fees not recognized as part of yield on loans
was $1.1 million in 2007; the decline that occurred in 2008 was related to a reduction in other
loan fees received from other institutions based on declining lending activity resulting from
current market conditions. Income on the rental property that was sold in June 2009 was $414,000
relatively unchanged between the periods. Other miscellaneous items of other income for 2007 were
approximately $870,000 versus $758,000 for 2008.
Noninterest Expense. Noninterest expense increased $10.8 million to $76.9 million for the year
ended December 31, 2009 from $66.1 million for 2008. Noninterest expense was $66.1 million for the
year ended December 31, 2007. The following table details the major components of noninterest
expense for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
$ Change |
|
|
% Change |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2009-2008 |
|
|
2008-2007 |
|
|
2009-2008 |
|
|
2008-2007 |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits |
|
$ |
25,417 |
|
|
$ |
24,868 |
|
|
$ |
21,892 |
|
|
$ |
549 |
|
|
$ |
2,976 |
|
|
|
2 |
% |
|
|
14 |
% |
Subaccounting fees |
|
|
20,442 |
|
|
|
17,914 |
|
|
|
22,851 |
|
|
|
2,528 |
|
|
|
(4,937 |
) |
|
|
14 |
|
|
|
(22 |
) |
Amortization of mortgage servicing rights |
|
|
2,507 |
|
|
|
2,635 |
|
|
|
3,489 |
|
|
|
(128 |
) |
|
|
(854 |
) |
|
|
(5 |
) |
|
|
(24 |
) |
Lower of cost or fair value adjustment on loans held for sale |
|
|
586 |
|
|
|
2,793 |
|
|
|
722 |
|
|
|
(2,207 |
) |
|
|
2,071 |
|
|
|
(79 |
) |
|
|
287 |
|
Occupancy and equipment |
|
|
3,368 |
|
|
|
2,708 |
|
|
|
2,346 |
|
|
|
660 |
|
|
|
362 |
|
|
|
24 |
|
|
|
15 |
|
Deposit insurance |
|
|
4,920 |
|
|
|
1,027 |
|
|
|
818 |
|
|
|
3,893 |
|
|
|
209 |
|
|
|
379 |
|
|
|
26 |
|
Postage and communication |
|
|
937 |
|
|
|
910 |
|
|
|
770 |
|
|
|
27 |
|
|
|
140 |
|
|
|
3 |
|
|
|
18 |
|
Professional fees |
|
|
4,043 |
|
|
|
3,333 |
|
|
|
2,082 |
|
|
|
710 |
|
|
|
1,251 |
|
|
|
21 |
|
|
|
60 |
|
Mortgage servicing rights subservicing fees |
|
|
1,369 |
|
|
|
1,690 |
|
|
|
1,931 |
|
|
|
(321 |
) |
|
|
(241 |
) |
|
|
(19 |
) |
|
|
(12 |
) |
Redemption of junior subordinated debentures |
|
|
|
|
|
|
|
|
|
|
1,487 |
|
|
|
|
|
|
|
(1,487 |
) |
|
|
|
|
|
|
(100 |
) |
Other general and administrative |
|
|
13,303 |
|
|
|
8,252 |
|
|
|
7,697 |
|
|
|
5,051 |
|
|
|
555 |
|
|
|
61 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
76,892 |
|
|
$ |
66,130 |
|
|
$ |
66,085 |
|
|
$ |
10,762 |
|
|
$ |
45 |
|
|
|
16 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 52 -
Compensation and employee benefits increased $549,000 million, or 2%, to $25.4 million
for the year ended December 31, 2009 compared to $24.9 million for the year ended December 31,
2008. The head count was down slightly, with 224 employees at December 31, 2009 compared to 230
employees at December 31, 2008. The principal cause of the increase in compensation expense
between the periods was higher medical insurance costs and an increase in compensation related to
the deferred direct loan origination costs. Between 2008 and 2009, loan growth declined and, as
such, there was less compensation deferred as part of the cost to originate loans. Equity based
compensation was $1.5 million for 2009 and 2008. Please see Note 14 to the consolidated financial
statements for further information about the impact of stock based compensation to our results from
operations.
Compensation and employee benefits increased $3.0 million, or 14%, to $24.9 million for the
year ended December 31, 2008 compared to $21.9 million for the year ended December 31, 2007. This
increase was primarily the result of the increase in full-time equivalent employees at United
Western Bank as we continued to implement our community bank business plan as well as normal
compensation increases for job performance. In 2008 we added a total of 30 employees and total
employees were 230 at December 31, 2008 compared to 200 at December 31, 2007. This increase
included 27 additional employees at the Bank principally for positions added to complete the
regional banking teams for the Longmont and Hampden Avenue branches that we opened in 2008, staff
the leasing, energy banking, and community bank lending teams, and additional personnel in SBA
lending and credit administration. The increase for 2008 also includes an increase of $475,000 of
equity based compensation, which was $1.5 million for 2008 versus $1.0 million in 2007. The
increase is attributable to the increase in the number of eligible employees who participate in the
equity based compensation plans.
Subaccounting fees increased $2.5 million or 14%, to $20.4 million in 2009 compared to $17.9
million in 2008. Subaccounting fees for 2008 declined $4.9 million, or 22%, from $22.9 million in
2007. Subaccounting fees represent fees paid to third parties to service depository accounts on our
behalf and are incurred at United Western Bank for custodial and processing and trust deposits. The
increase in subaccounting fees for 2009 was a result of the sale of certain assets of UW Trust at
the end of June 2009. The Company incurred subaccounting fees on the custodial deposits
transferred to the buyer, which accounted for substantially all the increase between 2009 and 2008
and offset the decrease related to the decline in the underlying index upon which the subaccounting
fees are tied. The decrease in subaccounting fees for 2008 was due to a decrease in the interest
rates to which the subaccounting fees are related, partially offset by a $17 million increase in
the average balance of deposits for which subaccounting fees are incurred. The average rate was
0.16%, 2.09%, and 5.05% in 2009, 2008, and 2007. The average balance of custodial and processing
and trust deposits that are subject to subaccounting fees were $1.1 billion for 2009, 2008, and
2007.
Amortization of mortgage servicing rights decreased $128,000, or 5%, to $2.5 million for the
year ended December 31, 2009 compared to $2.6 million for 2008. We have not added significantly to
our mortgage servicing portfolio since we exited the mortgage production business at Matrix
Financial Services in February 2003. Our amortization of mortgage servicing rights fluctuates
principally based on the prepayment rates experienced with respect to the underlying mortgage loan
portfolio. For the year ended December 31, 2009, our mortgage servicing rights portfolio
experienced average prepayment speeds of 16.2% compared to 16.8% for the year ended December 31,
2008. The average mortgage servicing rights portfolio in 2009 declined to $831 million compared to
$975 million for 2008.
Amortization of mortgage servicing rights decreased $854,000, or 24%, to $2.6 million for the
year ended December 31, 2008 compared to $3.5 million for 2007. For the year ended December 31,
2008, our mortgage servicing rights portfolio experienced average prepayment speeds of 16.8%
compared to 19.3% for the year ended December 31, 2007. The average mortgage servicing rights
portfolio in 2008 declined to $975 million compared to $1.2 billion for 2007.
Lower of cost or fair value adjustments were $586,000, $2.8 million, and $722,000 for the
years ended December 31, 2009, 2008 and 2007, respectively. These non-cash charges represent a
valuation allowance charged to earnings to record our held-for-sale loan portfolios at the lower of
cost or fair value (LOCOFV). The held-for-sale portfolios are comprised of residential mortgage
loans, multifamily loans and originated SBA loans. The $2.2 million decrease in the LOCOFV charge
for 2009 was a result of a stabilization of interest rates which reduced the required levels of
charges to reduce the loans held for sale to LOCOFV. In addition, an increase in the value of
certain assets and approximately $21.7 million of payoffs of the residential held for sale
portfolio between 2009 and 2008 that eliminated the valuation associated with such loans.
The $2.1 million increase in the LOCOFV charge for 2008 was a result of the market environment
and lack of liquidity available for held for sale assets which resulted in a decline in fair value
of loans held-for-sale. In addition, two multifamily loans held for sale became nonperforming in
2008 requiring additional LOCOFV write down. The charges incurred for 2007 were based primarily on
the residential mortgage loan portfolio.
- 53 -
Occupancy and equipment expense was $3.4 million for 2009, which represents an increase of
$660,000, or 24%, as compared to the $2.7 million of occupancy and equipment expense for 2008.
Occupancy and equipment expense was $2.3 million for 2007. We recognized $1.1 million of
amortization of deferred gain as a reduction of occupancy expense for each of 2009, 2008, and 2007.
This amount represents a reduction in our occupancy expense for the period from the recognition of
the deferred gain resulting from the sale-leaseback of the United Western Financial Center, which
is being amortized into income over the ten-year term of the lease. The increase in occupancy
expense from 2008 to 2009 was related to the opening of the Centennial branch location between the
periods and having a full year of occupancy expense in 2009 for the Longmont and Hampden branch
locations that opened during the fourth quarter of 2008. The increase from 2007 to 2008 was
related to the opening of the Longmont and Hampden branch locations between the periods and having
a full year of occupancy expense in 2008 for the Loveland branch location and Aspen loan production
office that opened during the last four months of 2007.
Deposit insurance increased $3.9 million, or 379%, to $4.9 million for the year ended December
31, 2009 compared to $1.0 million for 2008. The increase in deposit insurance expense was due to
increases in the fee assessment rates during 2009 and a special assessment applied to all insured
institutions as of June 30, 2009, which for the Company was $1.1 million. See Item 1. Business
Regulation and Supervision Insurance of Accounts and Regulation by the Federal Deposit Insurance
Corporation for additional information as to the changes of and the composition of the deposit
insurance incurred by United Western Bank. The Company cannot provide any assurance as to the
ultimate amount or timing of any such emergency special assessments, should such special
assessments occur, as such special assessments are dependent upon a variety of factors which are
beyond the Companys control.
Deposit insurance increased $209,000 million to $1.1 million for 2008 compared to $818,000 for
2007 due to higher deposit balances and an increase in the assessment rate.
The remainder of noninterest expense, which includes postage and communication expense,
professional fees, mortgage servicing rights subservicing fees, and other general and
administrative expenses increased $5.5 million, or 39% to $19.7 million for 2009, as compared to
$14.2 million 2008. An increase of $710,000 in professional fees was related to an $844,000
increase in legal fees and a $69,000 increase in other professional fees, which were partially
offset by a $203,000 decrease in audit fees. The increase in legal fees was the result of various
strategic alternatives the Company evaluated during the year as well as for litigation and loan
collection costs. The increase in other general and administrative expenses was principally due to
the following: a $1.8 million loss on the disposition of assets owned by a non-core subsidiary, a
$672,000 loss at the UWBK Colorado Fund incurred on a loan related to a loan that paid off in full
at the Bank, an increase of $1.3 million in real estate owned expenses, and an increase of
$1.3 million in loan collection expenses. These increases were offset by a decrease in charges for
asset servicing issues at Matrix Financial. During 2008, $1 million of charges were incurred to
reduce loan servicing advances at the Bank and Matrix Financial Services to their realizable value
and a charge to increase the recourse servicing allowance at Matrix Financial Services.
The remainder of noninterest expense, which includes postage and communication expense,
professional fees, mortgage servicing rights subservicing fees, and other general and
administrative expenses increased $218,000, or 2% to $14.2 million for 2008, as compared to $14.0
million for 2007. Absent the $1.5 million expense related to the redemption of the junior
subordinated debentures during 2007, the increase from 2007 to 2008 was $1.7 million, which was
primarily due to the following items: a $1.2 million increase in professional fees to
$3.3 million for 2008 as a result of our decision to change independent public accountants in
the fourth quarter of 2008 and increased legal expenses associated with routine legal matters and
loan collection issues; $1.0 million of charges were incurred to reduce loan servicing advances at
the Bank and Matrix Financial Services to their realizable value and a charge to increase the
recourse servicing allowance at Matrix Financial Services.
- 54 -
Income Taxes. The following table presents our income tax (benefit) expense for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(17,014 |
) |
|
$ |
6,696 |
|
|
$ |
3,947 |
|
State |
|
|
|
|
|
|
1,249 |
|
|
|
828 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(23,793 |
) |
|
|
(4,900 |
) |
|
|
(1,336 |
) |
State |
|
|
(1,989 |
) |
|
|
(410 |
) |
|
|
(124 |
) |
Deferred Tax Valuation Allowance |
|
|
10,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) provision from continuing operations |
|
$ |
(32,567 |
) |
|
$ |
2,635 |
|
|
$ |
3,315 |
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit) related to discontinued operations |
|
$ |
20,620 |
|
|
$ |
(99 |
) |
|
$ |
(7 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) provision from continuing operations was ($32.6) million for 2009, $2.6
million for 2008, and $3.3 million for 2007. Our effective tax rate from continuing operations was
(29.0%) for 2009, 20.7% for 2008, and 24.6% for 2007. Our effective tax rate varies from our
expected tax rate of approximately 37.93% (35% federal and 2.93% state, net of federal benefit) due
to several factors. For the year ended December 31, 2009, our effective tax rate varied from our
expected tax rate principally due to the loss incurred from continuing operations, New Markets Tax
Credits of $3.0 million, and tax exempt income. For the year ended December 31, 2008, our
effective tax rate varied from our expected tax rate principally due to $986,000 of tax exempt
income, income tax credits from the utilization of New Markets Tax Credits of $1.9 million, and the
resolution of uncertain tax positions, which directly reduced income tax expense by $454,000. For
2007, our effective tax rate was lower than the expected tax rate due to $968,000 of tax exempt
income, utilization of New Markets Tax Credits of $1.8 million, and the resolution of an uncertain
tax position, which directly reduced income tax expense by $474,000.
Balance Sheet
Total assets increased $267 million, or 11.8%, to $2.53 billion at December 31, 2009 from
$2.26 billion at December 31, 2008. Loan and security repayments together with deposit growth were
principally invested in cash and due from banks.
Total liabilities increased by $209 million, or 9.7%, to $2.37 billion at December 31, 2009
from $2.16 billion at December 31, 2008. The change in liabilities was the result of an increase in
deposits of $269 million, which was partially offset by decreases in borrowed money of $10.6
million and FHLBank borrowings of $46 million. Total deposits including custodial escrow balances,
grew by $271 million, or 15.5%, to $2.03 billion during 2009. This increase was the result of the
continued concerted Bank wide deposit gathering effort. During 2009, community bank deposits
increased $273 million, or 142%, to $465 million.
- 55 -
Investment Securities. The following table sets forth information regarding contractual
maturities and the weighted average yields of our investment securities available for sale and held
to maturity at December 31, 2009, 2008 and 2007.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
|
Due After Five |
|
|
|
|
|
|
|
|
|
|
Due After Five |
|
|
|
|
|
|
|
|
|
|
Due After Five |
|
|
|
|
|
|
Years through Ten Years |
|
|
Due after Ten Years |
|
|
Years through Ten Years |
|
|
Due after Ten Years |
|
|
Years through Ten Years |
|
|
Due after Ten Years |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Balance |
|
|
Yield |
|
|
Balance |
|
|
Yield |
|
|
Balance |
|
|
Yield |
|
|
Balance |
|
|
Yield |
|
|
Balance |
|
|
Yield |
|
|
Balance |
|
|
Yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities agency |
|
$ |
740 |
|
|
|
3.46 |
% |
|
$ |
11,474 |
|
|
|
3.11 |
% |
|
$ |
971 |
|
|
|
4.86 |
% |
|
$ |
14,657 |
|
|
|
4.39 |
% |
|
|
|
|
|
|
|
% |
|
$ |
3,250 |
|
|
|
6.39 |
% |
Mortgage-backed securities private |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,934 |
|
|
|
1.40 |
|
|
|
|
|
|
|
|
|
|
|
43,253 |
|
|
|
5.27 |
|
Collateralized Mortgage Obligations
private |
|
|
|
|
|
|
|
|
|
|
20,797 |
|
|
|
5.75 |
|
|
|
|
|
|
|
|
|
|
|
27,788 |
|
|
|
5.79 |
|
|
|
|
|
|
|
|
|
|
|
40,732 |
|
|
|
5.81 |
|
SBA securities |
|
|
|
|
|
|
|
|
|
|
120 |
|
|
|
0.79 |
|
|
|
|
|
|
|
|
|
|
|
223 |
|
|
|
2.11 |
|
|
|
|
|
|
|
|
|
|
|
441 |
|
|
|
5.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
|
740 |
|
|
|
3.46 |
|
|
|
32,391 |
|
|
|
4.86 |
|
|
|
971 |
|
|
|
4.86 |
|
|
|
58,602 |
|
|
|
3.36 |
|
|
|
|
|
|
|
|
|
|
|
87,676 |
|
|
|
5.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities private |
|
|
|
|
|
|
|
|
|
|
150,073 |
|
|
|
6.14 |
|
|
|
|
|
|
|
|
|
|
|
166,733 |
|
|
|
5.70 |
|
|
|
|
|
|
|
|
|
|
|
187,922 |
|
|
|
5.46 |
|
Collateralized Mortgage Obligations
private |
|
|
|
|
|
|
|
|
|
|
207,675 |
|
|
|
5.58 |
|
|
|
|
|
|
|
|
|
|
|
278,633 |
|
|
|
5.26 |
|
|
|
|
|
|
|
|
|
|
|
323,316 |
|
|
|
5.25 |
|
SBA securities |
|
|
24,581 |
|
|
|
3.68 |
|
|
|
18,315 |
|
|
|
3.05 |
|
|
|
30,869 |
|
|
|
5.42 |
|
|
|
21,749 |
|
|
|
4.76 |
|
|
|
6,387 |
|
|
|
8.35 |
|
|
|
56,480 |
|
|
|
7.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity |
|
|
24,581 |
|
|
|
3.68 |
|
|
|
376,063 |
|
|
|
5.65 |
|
|
|
30,869 |
|
|
|
5.42 |
|
|
|
467,115 |
|
|
|
5.39 |
|
|
|
6,387 |
|
|
|
8.35 |
|
|
|
567,718 |
|
|
|
5.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS and HTM Securities |
|
$ |
25,321 |
|
|
|
3.67 |
% |
|
$ |
408,454 |
|
|
|
5.58 |
% |
|
$ |
31,840 |
|
|
|
5.40 |
% |
|
$ |
525,717 |
|
|
|
5.26 |
% |
|
$ |
6,387 |
|
|
|
8.35 |
% |
|
$ |
655,394 |
|
|
|
5.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The contractual maturities of the Companys investment securities portfolio is
considerably longer than the expected lives due to repayments anticipated from the mortgagors that
represent the underlying collateral of the securities.
At December 31, 2009, the Companys mortgage-backed investment security portfolio had an
amortized cost of $346.7 million and consisted of three classes of securities: agency securities,
prime collateralized mortgage obligations (CMO), and Alt-A CMOs. The Companys available for sale
mortgage-backed investment security portfolio was comprised of instruments with an estimated fair
value of $33.1 million and the held to maturity portfolio was comprised of securities with an
amortized cost of $311.9 million, both as shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on lowest rating assigned by credit rating agency at December 31, 2009 |
|
Available for sale |
|
Total |
|
|
Agency/AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
<BBB |
|
|
|
(Dollars in thousands) |
|
Agency mortgage-pass through |
|
$ |
12,212 |
|
|
$ |
12,212 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
CMO Prime |
|
|
18,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,875 |
|
CMO Alt A |
|
|
1,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33,010 |
|
|
$ |
12,212 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
20,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on lowest rating assigned by credit rating agency at December 31, 2009 |
|
Held to maturity |
|
Total |
|
|
Agency/AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
<BBB |
|
|
|
(Dollars in thousands) |
|
Agency mortgage-pass through |
|
$ |
19,455 |
|
|
$ |
19,455 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Mortgage pass through |
|
|
3,290 |
|
|
|
|
|
|
|
|
|
|
|
3,290 |
|
|
|
|
|
|
|
|
|
CMO Prime |
|
|
250,398 |
|
|
|
38,906 |
|
|
|
|
|
|
|
33,046 |
|
|
|
24,798 |
|
|
|
153,648 |
|
CMO Alt A |
|
|
38,750 |
|
|
|
1,352 |
|
|
|
|
|
|
|
|
|
|
|
3,129 |
|
|
|
34,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
311,893 |
|
|
$ |
59,898 |
|
|
$ |
|
|
|
$ |
36,336 |
|
|
$ |
27,927 |
|
|
$ |
187,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 56 -
Based on the highest rating assigned, approximately 46% of the portfolio is investment grade
at December 31, 2009.
Available for sale agency mortgage pass through is comprised of substantially all securities
issued through Federal national Mortgage Association (Fannie Mae) and includes a mix of both
variable rate and fixed rate securities that were acquired principally to collateralize public
deposits and certain sweep accounts.
Available for sale CMO-Prime is comprised of securities with underlying hybrid adjustable rate
mortgages, which initially reset in mid-2010. These securities have 8.5% weighted-average credit
support at December 31, 2009. Current credit support was greater than two times foreclosure levels
at December 31, 2009. On a weighted average basis, for tranches subordinated to those owned by the
Company, cumulative losses were 1.85%.
Available for sale CMO Alt A is comprised of one fixed rate security with 3.1% credit
support at December 31, 2009. This security has paid down 90%, and is expected to pay down
completely before delinquencies exceed its credit support, due to its position as the first in a
sequential issue. The underlying loan collateral had a
weighted average loan to value of 71%. This security is the most senior tranche in the issue,
and there were no cumulative losses in the security to date.
Held to maturity agency mortgage pass through is comprised of securities issued through
Federal Home Loan Mortgage Corp (Freddie Mac) and Fannie Mae and are all fixed rate securities
acquired to assist the Bank in fulfilling its Community Reinvestment Act responsibilities.
Held to maturity mortgage pass through is comprised of four securities issued through the
Colorado Housing and Finance Authority, are fixed rate securities acquired to assist the Bank in
fulfilling its Community Reinvestment Act responsibilities.
Held to maturity CMO Prime is comprised of securities with 7.2% weighted-average credit
support at December 31, 2009 and moderate levels of delinquencies in total. Credit support levels
remain more than several times in excess of cumulative losses recognized to date, and are expected
to increase as subordinate tranches of these securities pay off. Three of the securities in this
population were subject to other-than-temporary impairment charge in 2009 due to the extent and
duration of the decline in market value below amortized cost, given consideration to current
illiquidity in the marketplace and uncertainty of a recovery of expected future cash flows.
Held to maturity CMO Alt-A is comprised of securities with 5.8% weighted-average credit
support at December 31, 2009 and moderate and stable levels of delinquencies. We expect delinquency
statistics in all classes of these securities to moderate over time, and roll rates from
delinquency to foreclosure to REO to be reduced by private industry loan restructuring programs, as
well as the Homeowner Affordability and Stability Plan recently signed into federal law.
The held to maturity portfolio is comprised of the securities shown above and, based on the
lowest rating assigned, 19% of this portfolio continues to be rated AA or higher and 40% investment
grade or higher. Based on internal analyses and analyses performed by independent third parties, we
believe the decline in fair value on the remaining securities is a temporary impairment due to
inactive markets.
Management reviews the estimated cash flows of each security at least quarterly. In addition,
management receives pricing from two widely known pricing services. Management has engaged an
independent consultant that provides estimated cash flows for securities identified by management
as requiring additional analysis in order to ascertain fair value in accordance the accounting
literature. Management obtains the fair value indications from the pricing service in the ordinary
course of business. Management reviews the fair value indications for reasonableness given the
ratings, decline in fair value as indicated by the general pricing services, and other credit
factors.
For the period ended December 31, 2009, for purposes of assessing OTTI management requested
its independent consultant to provide cash flow estimates based on the following parameters, all
securities with at least one rating below investment grade, or a collateral coverage ratio of less
than or equal to 1.00. The collateral coverage ratio is calculated as the current credit support
divided by 40% of the sum of loans that are 60 days delinquent times 60%, plus loans 90 days
delinquent times 70% plus foreclosures and REO. These two populations substantially overlapped.
The cash flow estimates received from our independent consultant are reviewed by the Banks
asset/liability committee and at Bank investment committee meetings, board of director meetings,
and regular portfolio monitoring meetings. The review includes an analysis of all securities owned
by the Company and various metrics for each security, including original and current ratings,
collateral characteristics, repayment rates, cumulative loss rates and other factors.
- 57 -
The continued economic downturn and the poor economic indicators including continued declines
in home prices, continued high unemployment, and continued erosion of mortgage equity that occurred
in the fourth quarter of 2009 and the early first quarter of 2010 concerned us, especially in
connection with the downgrades in securities. Over the past year it had appeared that the rating
agencies were being more conservative and reacting more timely, but these downgrades showed the
rating agencies were still lagging. During the off-cycle field visit by our regulators beginning
in January, we discussed with the OTS and FDIC our assumptions regarding default rates, our
observations of the performance of the loans underlying our non-agency mortgage back securities,
and the macroeconomic factors discussed above, as well as our regulators views of how these
securities have been performing for other industry participants. Based on an extensive review of
all of the information available, we determined that we should re-evaluate the assumptions used to
determine the expected cash flows to be received from the securities for the period ended December
31, 2009.
One of the inputs that management uses for estimating cash flows on our mortgage backed
securities is an estimated default rate on the underlying loan portfolio. Through September 30,
2009, and for the prior four quarters we had utilized an estimate for defaults from our third party
provider that projected the estimated lifetime cumulative defaults based on loan level actual
historical default performance for the specific pool. This analysis was supported by observed
behavior that weaker loans go bad earlier and older paying loans have superior credit performance
to more
recently originated loans with similar underwriting criteria and show fewer weaknesses. Our
own historical mortgage origination business resulted in weaker loans becoming delinquent early in
the life of the instrument and the overall performance of the loans generally improved over time
with additional seasoning. We expected this would also be the case with the mortgage-backed
securities portfolio. This assumption was true with respect to the mortgage origination business,
and still appeared to be true through the third quarter of 2009, as the residential home market was
improving. The results of the fourth quarter of 2009 and the early first quarter of 2010 show that
the length and severity of the recession, as well as home price depreciation, are continuing, and as
such, even these older loans have more risk and we determined that this cash flow estimate is no
longer producing results that match the expectations that the Company believes are applicable to
the underlying performance of the securities owned by the Company as of December 31, 2009.
Accordingly, the Company has concluded its former default assumption was no longer indicative
of the Companys best estimate of cash flows. The Company worked with our third party service provider to select an alternative default assumption based on enhanced trend analysis in order to estimate cash
flows that we believe better reflect the continued deterioration of the underlying collateral
performance discussed previously and the protracted nature of the current financial crises in the
U.S. in general and the U.S. housing market in particular.
In the event securities demonstrate additional deterioration through an increase in defaults
or loss severity that indicate the Company will not recover its anticipated cash flows or if the
duration of relatively significant impairments in these securities does not reverse, the Company
will incur other-than-temporary impairments, which may result in material charges to earnings in
future periods. In addition, if current economic conditions, including unemployment, housing
prices and homeowner equity, deteriorate, we may again re-evaluate our estimates of future cash
flows, which could also result in additional OTTI.
Loan Portfolio. Our major interest-earning asset is our loan portfolio. A significant part of
our asset and liability management involves monitoring the composition of our loan portfolio,
including the corresponding maturities. Community bank loans include commercial real estate loans,
construction and development loans, commercial loans, multifamily loans and consumer loans. Other
loans include legacy purchased residential loans and purchased guaranteed portions of SBA 7(a)
loans.
- 58 -
The table below presents the break down of the components of community bank loans and other
loans between loans held for investment and loans held for sale as we view and manage these assets
between community bank assets and other assets, which generally were assets purchased in the
secondary marketplace.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands) |
|
Community Bank Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
$ |
466,784 |
|
|
$ |
434,399 |
|
|
$ |
243,111 |
|
|
$ |
219,392 |
|
|
$ |
123,430 |
|
Construction |
|
|
250,975 |
|
|
|
277,614 |
|
|
|
162,711 |
|
|
|
59,878 |
|
|
|
32,285 |
|
Land |
|
|
92,248 |
|
|
|
123,395 |
|
|
|
110,846 |
|
|
|
33,521 |
|
|
|
11,405 |
|
Commercial and industrial |
|
|
151,928 |
|
|
|
134,435 |
|
|
|
87,199 |
|
|
|
24,028 |
|
|
|
12,305 |
|
Multifamily |
|
|
19,283 |
|
|
|
20,381 |
|
|
|
8,822 |
|
|
|
1,986 |
|
|
|
2,161 |
|
Consumer |
|
|
46,568 |
|
|
|
49,440 |
|
|
|
3,822 |
|
|
|
2,845 |
|
|
|
244 |
|
Premium |
|
|
180 |
|
|
|
216 |
|
|
|
225 |
|
|
|
|
|
|
|
|
|
Unearned fees |
|
|
(4,580 |
) |
|
|
(3,565 |
) |
|
|
(2,527 |
) |
|
|
(1,149 |
) |
|
|
(1,029 |
) |
Loans held for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
55,299 |
|
|
|
49,031 |
|
|
|
45,465 |
|
|
|
|
|
|
|
|
|
Multifamily |
|
|
17,382 |
|
|
|
29,074 |
|
|
|
39,559 |
|
|
|
52,478 |
|
|
|
67,237 |
|
SBA originated, guaranteed portions |
|
|
4,379 |
|
|
|
5,370 |
|
|
|
5,602 |
|
|
|
7,171 |
|
|
|
11,045 |
|
LOCOFV valuation |
|
|
(881 |
) |
|
|
(1,848 |
) |
|
|
(1,282 |
) |
|
|
(1,084 |
) |
|
|
(712 |
) |
Premiums |
|
|
87 |
|
|
|
177 |
|
|
|
285 |
|
|
|
391 |
|
|
|
634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Community Bank Loans |
|
$ |
1,099,652 |
|
|
$ |
1,118,119 |
|
|
$ |
703,838 |
|
|
$ |
399,457 |
|
|
$ |
259,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
$ |
90,405 |
|
|
$ |
125,630 |
|
|
$ |
163,419 |
|
|
$ |
223,189 |
|
|
$ |
250,793 |
|
SBA purchased |
|
|
64,820 |
|
|
|
80,110 |
|
|
|
106,721 |
|
|
|
142,252 |
|
|
|
|
|
SBA purchased, premium |
|
|
5,864 |
|
|
|
7,084 |
|
|
|
9,364 |
|
|
|
12,697 |
|
|
|
|
|
Premium |
|
|
299 |
|
|
|
345 |
|
|
|
(3 |
) |
|
|
(807 |
) |
|
|
(843 |
) |
Loans held for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
186,591 |
|
|
|
212,083 |
|
|
|
278,534 |
|
|
|
381,503 |
|
|
|
631,773 |
|
SBA purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,365 |
|
|
|
177,328 |
|
School financing and other loans |
|
|
|
|
|
|
|
|
|
|
927 |
|
|
|
869 |
|
|
|
25,272 |
|
LOCOFV valuation |
|
|
(3,404 |
) |
|
|
(3,619 |
) |
|
|
(1,739 |
) |
|
|
(1,447 |
) |
|
|
(4,478 |
) |
Unearned fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,233 |
) |
Premiums |
|
|
1,304 |
|
|
|
1,352 |
|
|
|
1,720 |
|
|
|
2,874 |
|
|
|
20,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Loans |
|
$ |
345,879 |
|
|
$ |
422,985 |
|
|
$ |
558,943 |
|
|
$ |
762,495 |
|
|
$ |
1,099,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 59 -
The following table sets forth the composition of our loan portfolio by loan type as of
the dates indicated. The amounts in the table below are shown net of premiums, discounts, other
deferred costs and fees and the valuation allowance to reduce loans held for sale to the lower of
cost or fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
|
(Dollars in thousands) |
|
Community bank loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
$ |
519,562 |
|
|
|
47.2 |
% |
|
$ |
481,053 |
|
|
|
43.0 |
% |
|
$ |
286,728 |
|
|
|
40.8 |
% |
|
$ |
218,569 |
|
|
|
54.7 |
% |
|
$ |
122,745 |
|
|
|
47.3 |
% |
Construction |
|
|
250,727 |
|
|
|
22.8 |
|
|
|
276,718 |
|
|
|
24.7 |
|
|
|
161,890 |
|
|
|
23.0 |
|
|
|
59,638 |
|
|
|
14.9 |
|
|
|
32,037 |
|
|
|
12.4 |
|
Land |
|
|
92,226 |
|
|
|
8.4 |
|
|
|
123,395 |
|
|
|
11.0 |
|
|
|
110,846 |
|
|
|
15.7 |
|
|
|
33,521 |
|
|
|
8.4 |
|
|
|
11,405 |
|
|
|
4.4 |
|
Commercial and industrial |
|
|
149,739 |
|
|
|
13.6 |
|
|
|
133,930 |
|
|
|
12.0 |
|
|
|
87,061 |
|
|
|
12.4 |
|
|
|
23,984 |
|
|
|
6.0 |
|
|
|
12,231 |
|
|
|
4.7 |
|
Multifamily |
|
|
36,434 |
|
|
|
3.3 |
|
|
|
48,253 |
|
|
|
4.3 |
|
|
|
47,888 |
|
|
|
6.8 |
|
|
|
53,729 |
|
|
|
13.5 |
|
|
|
69,299 |
|
|
|
26.8 |
|
SBA originated guaranteed portions |
|
|
4,379 |
|
|
|
0.4 |
|
|
|
5,370 |
|
|
|
0.5 |
|
|
|
5,602 |
|
|
|
0.8 |
|
|
|
7,171 |
|
|
|
1.8 |
|
|
|
11,045 |
|
|
|
4.3 |
|
Consumer |
|
|
46,585 |
|
|
|
4.2 |
|
|
|
49,400 |
|
|
|
4.4 |
|
|
|
3,823 |
|
|
|
0.5 |
|
|
|
2,845 |
|
|
|
0.7 |
|
|
|
243 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total community bank loans |
|
|
1,099,652 |
|
|
|
100 |
% |
|
|
1,118,119 |
|
|
|
100 |
% |
|
|
703,838 |
|
|
|
100 |
% |
|
|
399,457 |
|
|
|
100 |
% |
|
|
259,005 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less allowance for credit losses |
|
|
(33,642 |
) |
|
|
|
|
|
|
(15,232 |
) |
|
|
|
|
|
|
(7,231 |
) |
|
|
|
|
|
|
(5,372 |
) |
|
|
|
|
|
|
(4,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total community bank loans, net |
|
|
1,066,010 |
|
|
|
|
|
|
|
1,102,887 |
|
|
|
|
|
|
|
696,607 |
|
|
|
|
|
|
|
394,085 |
|
|
|
|
|
|
|
254,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
275,195 |
|
|
|
79.6 |
% |
|
|
335,791 |
|
|
|
79.4 |
% |
|
|
441,932 |
|
|
|
79.0 |
% |
|
|
605,201 |
|
|
|
79.4 |
% |
|
|
883,153 |
|
|
|
80.4 |
% |
SBA purchased guaranteed portions |
|
|
70,684 |
|
|
|
20.4 |
|
|
|
87,194 |
|
|
|
20.6 |
|
|
|
116,084 |
|
|
|
20.8 |
|
|
|
156,425 |
|
|
|
20.5 |
|
|
|
193,788 |
|
|
|
17.6 |
|
School financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
927 |
|
|
|
0.2 |
|
|
|
869 |
|
|
|
0.1 |
|
|
|
22,247 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other loans |
|
|
345,879 |
|
|
|
100 |
% |
|
|
422,985 |
|
|
|
100 |
% |
|
|
558,943 |
|
|
|
100 |
% |
|
|
762,495 |
|
|
|
100 |
% |
|
|
1,099,188 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less allowance for credit losses |
|
|
(1,027 |
) |
|
|
|
|
|
|
(951 |
) |
|
|
|
|
|
|
(769 |
) |
|
|
|
|
|
|
(859 |
) |
|
|
|
|
|
|
(790 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other loans, net |
|
|
344,852 |
|
|
|
|
|
|
|
422,034 |
|
|
|
|
|
|
|
558,174 |
|
|
|
|
|
|
|
761,636 |
|
|
|
|
|
|
|
1,098,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net |
|
$ |
1,410,862 |
|
|
|
|
|
|
$ |
1,524,921 |
|
|
|
|
|
|
$ |
1,254,781 |
|
|
|
|
|
|
$ |
1,155,721 |
|
|
|
|
|
|
$ |
1,353,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans decreased $95.6 million in 2009, which was comprised of a decrease of $18.5 million
in community bank loans, and a decrease of $77.1 million of other loans. The decrease for 2009 in
community bank loans was consistent with our balance sheet management plan implemented in 2008.
Based on the current economic environment, we expect a smaller increase in the community bank
portfolio in 2010 than in prior years. We also anticipate a continued change in the loan mix
prospectively with a potential increase in commercial and industrial loans and consumer loans
including residential mortgage loans and continued run off through repayment of certain other
loans. The decrease for 2009 in other loans was a result of repayments of mortgage and SBA loans,
as well as sales of SBA originated guaranteed portions loans. We note that repayments of mortgage
loans for 2009 were lower than our historical experience at 18.0%, and believe a lower level of
repayments is reasonable to expect prospectively.
The following table presents the details of the construction and development (C&D) portfolio
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
Construction type breakdown |
|
|
|
|
|
|
|
|
Construction 1-4 family |
|
$ |
87,595 |
|
|
$ |
89,434 |
|
Construction commercial |
|
|
109,572 |
|
|
|
100,402 |
|
Construction multifamily |
|
|
44,541 |
|
|
|
63,693 |
|
Construction 1-4 family (consumer) |
|
|
9,267 |
|
|
|
24,085 |
|
|
|
|
|
|
|
|
Total construction |
|
|
250,975 |
|
|
|
277,614 |
|
|
|
|
|
|
|
|
Land type breakdown: |
|
|
|
|
|
|
|
|
Land development |
|
|
79,185 |
|
|
|
100,823 |
|
Undeveloped land |
|
|
12,239 |
|
|
|
21,480 |
|
Undeveloped land (consumer) |
|
|
824 |
|
|
|
1,092 |
|
|
|
|
|
|
|
|
Total development |
|
|
92,248 |
|
|
|
123,395 |
|
|
|
|
|
|
|
|
Total construction and development |
|
$ |
343,223 |
|
|
$ |
401,009 |
|
|
|
|
|
|
|
|
- 60 -
The C&D portfolio decreased $57.8 million in 2009 to $343.2 million at December 31, 2009, and
represents 29.0% of our total held for investment loan portfolio and 31.2% of our community bank
portfolio. As shown in the table above, construction loans were $251.0 million at December 31,
2009, or 22.8% of our community bank portfolio and land loans were $92.2 million or 8.4% of our
community bank portfolio. Within the construction portfolio the loan breakdown is approximately 34%
1-4 family, 44% commercial, 18% multifamily and 4% consumer. With few exceptions, the land loans
that have been underwritten are based on marketability of the lots or were made in anticipation of
vertical construction. Land loans have an identified source of repayment other than the resale of
raw land. The Bank
has been very selective in the origination of loans in this asset class, and has no community
bank land loans without personal recourse as a part of its underwriting.
There are additional risks associated with C&D lending as compared to our other lending as
discussed above in Item 1. Business Community Banking Lending Residential and Commercial
Construction and Development Lending. To address and mitigate these risks, we regularly review the
C&D portfolio. The C&D portfolio is monitored for total overall concentration levels for which our
goal is to reduce C&D loans to 25% of the held for investment portfolio and maintain C&D loans
below 150% of the Tier 1 capital plus the allowance for credit losses at the Bank. We also monitor
geographic breakdown, and the overall C&D portfolio speculative to pre-sale ratios as well as the
factors that are relevant to all loans.
At December 31, 2009, we have defined nine geographic regions for our C&D portfolio, eight in
Colorado and one region for loans outside Colorado. Within Colorado, four of the defined geographic
regions account for $239 million, or 70% of the C&D portfolio, as shown in the table below. Our
speculative to pre-sale ratio is approximately 67% to 33% at December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Outstanding |
|
|
Percent |
|
|
Outstanding |
|
|
Percent |
|
|
|
(Dollars in thousands) |
|
Area |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denver Metro |
|
$ |
108,706 |
|
|
|
31.8 |
% |
|
$ |
181,505 |
|
|
|
45.2 |
% |
Northeastern Colorado Fort Collins |
|
|
40,092 |
|
|
|
11.7 |
% |
|
|
52,062 |
|
|
|
13.0 |
% |
Mountain Communities Aspen, Roaring
Fork Valley |
|
|
72,149 |
|
|
|
21.0 |
% |
|
|
62,726 |
|
|
|
15.6 |
% |
North Central Colorado Steamboat Springs |
|
|
18,018 |
|
|
|
5.2 |
% |
|
|
25,159 |
|
|
|
6.3 |
% |
Other Colorado Areas |
|
|
56,038 |
|
|
|
16.3 |
% |
|
|
44,043 |
|
|
|
11.0 |
% |
Outside Colorado |
|
|
48,220 |
|
|
|
14.0 |
% |
|
|
35,514 |
|
|
|
8.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
343,223 |
|
|
|
100.0 |
% |
|
$ |
401,009 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans, including multifamily loans increased to $556.0 million at
December 31, 2009 as compared to $529.3 million at December 31, 2008. As we reduced our lending on
construction and development loans we initially increased emphasized commercial real estate lending
based on our expertise, relative market conditions, and other factors. The commercial real estate
portfolio is geographically located as follows: Denver metropolitan area 40%; I-70 corridor and
mountain communities 9%; Fort Collins, 11%; other Colorado areas 4%; and outside Colorado 36%.
There is a higher percentage of the commercial real estate portfolio located outside of Colorado
due to our national SBA lending footprint, and from older multifamily and single tenant loans that
were originated prior to 2006.
Residential loans declined $60.6 million during 2009 and declined $106.1 million during 2008.
The residential loan portfolio represents loans that primarily were purchased in the secondary
market prior to September 2005, at which time we stopped purchasing such assets. SBA purchased
guaranteed portions represent the guaranteed portions of SBA 7(a) loans we acquired prior to March
2006. SBA purchased loans declined $16.5 million during 2009 and $28.9 million during 2008 due to
repayment and loan sales. We believe it is possible that the balance of residential loans may
increase prospectively given our management experience in this business line, the requirement to
maintain our Qualified Thrift Lender ratio, and based on our outlook for the economy. We
anticipate the balance of SBA purchased loans to decline prospectively through repayment.
- 61 -
The following table presents the aggregate maturities of loans in each major category of our
loan portfolio as of December 31, 2009, excluding the allowance for credit losses. Actual
maturities may differ from the maturities shown below as a result of renewals and prepayments or
the timing of loan sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
Less than |
|
|
One to Five |
|
|
Over Five |
|
|
|
|
|
|
One Year |
|
|
Years |
|
|
Years |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held for Investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community bank loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
$ |
141,457 |
|
|
$ |
199,324 |
|
|
$ |
124,035 |
|
|
$ |
464,816 |
|
Construction and development |
|
|
304,523 |
|
|
|
35,663 |
|
|
|
2,767 |
|
|
|
342,953 |
|
Commercial |
|
|
69,321 |
|
|
|
35,441 |
|
|
|
44,977 |
|
|
|
149,739 |
|
Multifamily |
|
|
7,514 |
|
|
|
5,202 |
|
|
|
6,577 |
|
|
|
19,293 |
|
Consumer |
|
|
19,174 |
|
|
|
4,281 |
|
|
|
23,130 |
|
|
|
46,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community bank loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
10,101 |
|
|
|
|
|
|
|
44,645 |
|
|
|
54,746 |
|
Multifamily |
|
|
|
|
|
|
5,858 |
|
|
|
11,283 |
|
|
|
17,141 |
|
Originated SBA, guaranteed portions |
|
|
|
|
|
|
|
|
|
|
4,379 |
|
|
|
4,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held for Investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
147 |
|
|
|
3,844 |
|
|
|
86,713 |
|
|
|
90,704 |
|
Purchased SBA |
|
|
|
|
|
|
1,508 |
|
|
|
69,176 |
|
|
|
70,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
129 |
|
|
|
2,680 |
|
|
|
181,682 |
|
|
|
184,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
552,366 |
|
|
$ |
293,801 |
|
|
$ |
599,364 |
|
|
$ |
1,445,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, excluding the allowance for credit losses, which are contractually due in one or
more years, are split between fixed and adjustable rates as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
Less than |
|
|
One to Five |
|
|
Over Five |
|
|
|
|
|
|
One Year |
|
|
Years |
|
|
Years |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed |
|
$ |
80,562 |
|
|
$ |
140,692 |
|
|
$ |
91,011 |
|
|
$ |
312,265 |
|
Adjustable |
|
|
471,804 |
|
|
|
153,109 |
|
|
|
508,353 |
|
|
|
1,133,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
552,366 |
|
|
$ |
293,801 |
|
|
$ |
599,364 |
|
|
$ |
1,445,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 62 -
Asset Quality. As part of our asset quality function, we monitor all nonperforming assets
on a regular basis. Loans are placed on nonaccrual when full payment of principal or interest is in
doubt or, except for government guaranteed sponsored loans, when they are past due 90 days as to
either principal or interest. During the ordinary course of business, management may become aware
of borrowers that may not be able to meet the contractual requirements of loan agreements. These
loans are placed under close supervision with consideration given to placing the loan on
non-accrual status, increasing the allowance for credit losses and (if appropriate) partial or full
charge-off. Non-accrual loans are further classified as impaired when underlying collateral is not
sufficient to cover the loan balance and it is probable that we will not fully collect all
principal and interest. After a loan is placed on non-accrual status, any interest previously
accrued but not yet collected is reversed against current income. If interest payments are received
on non-accrual loans, these payments will be applied to principal and not taken into income. Loans
will not be placed back on accrual status unless back interest and principal payments are made. For
certain government-sponsored loans such as FHA insured and VA guaranteed loans, we continue to
accrue interest when the loan is past due 90 or more days, if and to the extent that the interest
on these loans is insured by the federal government. The aggregate unpaid principal balance of
government-sponsored accruing loans that were past due 90 or more days was $9.9 million, $6.5
million, and $5.4 million at December 31, 2009, 2008 and 2007, respectively. The growth between
2008 and 2009 is the result of additional purchases of government insured loans out of our
servicing portfolio. These accruing loans are not included in the balances of nonperforming loans.
Foreclosed real estate represents properties acquired through foreclosure or other proceedings
and are initially recorded at fair value, less estimated selling costs when acquired, establishing
a new cost basis. Foreclosed real estate is evaluated regularly to ensure that the recorded amount
is supported by its current fair value. Direct charges to the basis of the asset that reduce the
carrying amount to fair value less estimated costs of disposal are recorded as necessary. Revenues
and expenses from the operations of real estate owned and charges for necessary write downs are
included in other income and other expenses on the statement of operations.
Given current economic conditions, we anticipate that unless there is an increase in overall
economic activity in the State of Colorado and nationally, nonperforming loans may continue to
increase prospectively over current levels. In
such a case, additional allowance for credit losses would be required, which would in turn
negatively impact our results of operations.
At December 31, 2009, the Company owned $262,000 of mortgages that met the regulatory
definition of subprime at the date of purchase or origination, of which one loan totaling $28,000
was nonperforming. In prior years, the Company originated subprime mortgages through its mortgage
banking subsidiary, and occasionally the Bank also purchased subprime mortgages. These activities
ceased several years ago, and the Companys current holdings represent the remainder of such
activities. The Company is not now active in the subprime market and has no intention of becoming
involved in the future.
The following table sets forth our nonperforming assets held for investment as of the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands) |
|
Commercial real estate |
|
$ |
15,411 |
|
|
$ |
1,311 |
|
|
$ |
1,152 |
|
|
$ |
140 |
|
|
$ |
3,045 |
|
Construction and development |
|
|
21,778 |
|
|
|
2,900 |
|
|
|
|
|
|
|
645 |
|
|
|
120 |
|
Commercial and industrial |
|
|
3,329 |
|
|
|
283 |
|
|
|
|
|
|
|
159 |
|
|
|
373 |
|
SBA originated, guaranteed portions |
|
|
49 |
|
|
|
124 |
|
|
|
557 |
|
|
|
1,017 |
|
|
|
4,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total community bank |
|
|
40,567 |
|
|
|
4,618 |
|
|
|
1,709 |
|
|
|
1,961 |
|
|
|
7,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
3,916 |
|
|
|
3,238 |
|
|
|
1,649 |
|
|
|
1,136 |
|
|
|
1,857 |
|
SBA purchased, guaranteed portions |
|
|
|
|
|
|
791 |
|
|
|
893 |
|
|
|
578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other |
|
|
3,916 |
|
|
|
4,029 |
|
|
|
2,542 |
|
|
|
1,714 |
|
|
|
1,857 |
|
REO |
|
|
16,350 |
|
|
|
4,417 |
|
|
|
3,109 |
|
|
|
5,403 |
|
|
|
4,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets held for investment |
|
$ |
60,833 |
|
|
$ |
13,064 |
|
|
$ |
7,360 |
|
|
$ |
9,078 |
|
|
$ |
14,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans held for investment to loans held for investment |
|
|
3.75 |
% |
|
|
0.69 |
% |
|
|
0.48 |
% |
|
|
0.51 |
% |
|
|
2.23 |
% |
Nonperforming held for investment assets of $60.8 million at December 31, 2009 reflected
an increase of $47.8 million from the $13.1 million level that existed at December 31, 2008. REO
increased to $16.4 million at December 31, 2009 compared to $4.4 million at December 31, 2008. The
increase for 2009 was principally related to foreclosures from the construction and development
portfolio. At December 31, 2009 REO was comprised of $11.7 million from the C&D portfolio, $1.4
million from the multifamily portfolio, $1 million from the commercial real estate portfolio and
the remainder of $1.9 million from the residential portfolio. The increase in REO is consistent
with the current economic conditions primarily in Colorado. In total, nonperforming held for
investment community bank loans represent 3.96% of the community bank portfolio at December 31,
2009, compared to 0.45% at December 31, 2008. Management analyzes and reviews nonperforming loans
by loan type. Nonperforming community bank loans totaled $40.6 million and $4.6 million at December
31, 2009 and December 31, 2008, respectively. Nonperforming community bank loans increased in 2009
due to the current economic conditions. At December 31, 2009, there were 10 commercial real estate
relationships greater than $100,000 that accounted for $15.3 million of the nonperforming
commercial real estate loans. Of this population, eight relationships totaling $12.5 million were
loans originated by our SBA division. Included in nonperforming construction and development loans
were 10 relationships greater than $100,000 that totaled $21.7 million of the nonperforming
construction and development loans.
- 63 -
The Companys current lending standards for commercial real estate and construction and
development lending are determined by property type and specifically address many factors
including: maximum loan amounts, maximum loan-to-value (LTV) debt service coverage ratios,
requirements for pre-leasing or presales, minimum borrower cash equity, and maximum loan to cost.
Currently, the maximum guideline for LTV is 80%, for a presold residential construction loan with
lower limits established for all other real estate loan types. The Companys LTV guidelines are
generally more conservative than regulatory supervisory limits. In most cases, for construction
and development loans, the loan amounts used to determine LTV include interest reserves, which are
built into the loans in a sufficient amount to see the project through construction and lease up or
sell out.
Residential nonperforming loans represent assets acquired through purchase prior to 2006. The
balance of nonperforming residential loans increased $678,000 at December 31, 2009, compared to
December 31, 2008. Overall, nonperforming residential loans totaled $3.9 million and $3.2 million
at December 31, 2009 and December 31, 2008, respectively. This represents 4.33% and 2.58% of the
residential portfolio for those respective periods. The increase in nonperforming residential loans
as a percentage of the residential portfolio is due to the current economy and continued repayments
of the remaining performing portion of the portfolio. The Companys level of nonperforming
residential loans is generally consistent with the national marketplace based on information
published by the Mortgage Bankers Association. The Companys wholesale residential portfolio is
geographically dispersed. The average loan size of the residential loan portfolio is approximately
$131,000 and consists of loans that on average are approximately 8.6 years
seasoned at December 31, 2009, were underwritten to Bank policy requirements at the time of
acquisition, and bore average FICO scores over 700 with reasonable loan-to-value and debt-to-income
ratios. We believe the risk of loss associated with this portfolio is considerably lower than
losses associated with other types of lending, which is evidenced by our historical loss experience
from the residential portfolio. We expect future levels of nonperforming loans in the residential
portfolio to be generally consistent within the national and regional economic markets in which the
loans are located.
The following table sets forth our nonperforming loans held for sale as of the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
$ |
9,807 |
|
|
$ |
6,493 |
|
|
$ |
6,224 |
|
|
$ |
4,723 |
|
|
$ |
7,046 |
|
School financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other |
|
|
9,807 |
|
|
|
6,493 |
|
|
|
6,224 |
|
|
|
4,723 |
|
|
|
7,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily |
|
|
|
|
|
|
6,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total community bank |
|
|
|
|
|
|
6,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans held for sale |
|
$ |
9,807 |
|
|
$ |
13,252 |
|
|
$ |
6,224 |
|
|
$ |
4,723 |
|
|
$ |
7,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans held for sale decreased by $3.4 million during 2009. Nonperforming
residential loans increased $3.3 million reflecting the general economic conditions for residential
mortgage loans nationally. These loans share the characteristics discussed above for residential
loans held for investment. Multifamily nonperforming loans held for sale decreased by $6.8 million
as the Bank accepted short sale payoffs for both loans that comprised the balance at December
2008.
Allowance for Credit Losses. The Company believes the allowance for credit losses is critical
to the understanding of our financial condition and results of operations. Selection and
application of this critical accounting policy involves judgments, estimates, and uncertainties
that are susceptible to change. In the event that different assumptions or conditions were to
occur, and depending upon the severity of such changes, materially different financial condition or
results of operations is a reasonable possibility.
- 64 -
We maintain our allowance for credit losses at a level that the Company believes is adequate
to absorb probable losses inherent in the existing loan portfolio based on an evaluation of the
collectibility of loans, underlying collateral, geographic and other concentrations, and prior loss
experience. We use a risk rating system to evaluate the adequacy of the allowance for credit
losses. With this system, each loan, with the exception of those included in large groups of
smaller-balance homogeneous loans, is risk rated between one and ten, by the originating loan
officer, credit administration, loan review or loan committee, with one being the best case and ten
being a loss or the worst case. Estimated loan default factors are multiplied against loan balances
and then multiplied by a historical loss given default rate by loan type to determine an
appropriate level for the allowance for credit losses. A specific reserve may be needed on a loan
by loan basis. Loans with risk ratings between six and nine are monitored more closely by the loan
officer, credit administration, and the asset quality committee, and may result in specific
valuation allowances. The allowance for credit losses also includes an element for estimated
probable but undetected losses and for imprecision in the loan loss models discussed above.
The following table sets forth information regarding changes in our allowance for credit
losses for the periods indicated. The table includes the allowance for both other loans and
community bank loans held for investment (HFI).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses, beginning of year |
|
$ |
16,183 |
|
|
$ |
8,000 |
|
|
$ |
6,231 |
|
|
$ |
4,808 |
|
|
$ |
5,974 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
(200 |
) |
|
|
(194 |
) |
|
|
(435 |
) |
|
|
(9 |
) |
|
|
(1,225 |
) |
Commercial real estate |
|
|
(3,178 |
) |
|
|
(79 |
) |
|
|
(25 |
) |
|
|
(128 |
) |
|
|
(292 |
) |
Construction and development |
|
|
(12,142 |
) |
|
|
|
|
|
|
(222 |
) |
|
|
(500 |
) |
|
|
(244 |
) |
Commercial |
|
|
(1,063 |
) |
|
|
(143 |
) |
|
|
(67 |
) |
|
|
(115 |
) |
|
|
(223 |
) |
Multifamily |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200 |
) |
Consumer |
|
|
(10 |
) |
|
|
(2 |
) |
|
|
(34 |
) |
|
|
(3 |
) |
|
|
(65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
(16,593 |
) |
|
|
(418 |
) |
|
|
(783 |
) |
|
|
(755 |
) |
|
|
(2,249 |
) |
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
90 |
|
Commercial real estate |
|
|
41 |
|
|
|
|
|
|
|
20 |
|
|
|
79 |
|
|
|
35 |
|
Construction and development |
|
|
|
|
|
|
|
|
|
|
177 |
|
|
|
50 |
|
|
|
|
|
Commercial |
|
|
6 |
|
|
|
2 |
|
|
|
43 |
|
|
|
14 |
|
|
|
58 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
47 |
|
|
|
2 |
|
|
|
240 |
|
|
|
159 |
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(16,546 |
) |
|
|
(416 |
) |
|
|
(543 |
) |
|
|
(596 |
) |
|
|
(2,057 |
) |
Provision for credit losses charged to operations |
|
|
35,032 |
|
|
|
8,599 |
|
|
|
2,312 |
|
|
|
2,019 |
|
|
|
891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
34,669 |
|
|
$ |
16,183 |
|
|
$ |
8,000 |
|
|
$ |
6,231 |
|
|
$ |
4,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs to average loans |
|
|
1.33 |
% |
|
|
0.04 |
% |
|
|
0.07 |
% |
|
|
0.11 |
% |
|
|
0.46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans outstanding during the year |
|
$ |
1,240,299 |
|
|
$ |
1,099,044 |
|
|
$ |
820,755 |
|
|
$ |
545,343 |
|
|
$ |
446,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs to average residential loans HFI |
|
|
0.19 |
% |
|
|
0.30 |
% |
|
|
0.30 |
% |
|
|
0.40 |
% |
|
|
0.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs to average community bank loans HFI |
|
|
1.44 |
|
|
|
0.04 |
|
|
|
0.09 |
|
|
|
0.30 |
|
|
|
1.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance as a percentage of loans HFI |
|
|
2.93 |
|
|
|
1.30 |
|
|
|
0.90 |
|
|
|
0.87 |
|
|
|
1.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance as a percentage of nonperforming loans HFI |
|
|
77.94 |
|
|
|
187.15 |
|
|
|
188.19 |
|
|
|
169.55 |
|
|
|
50.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs were $16.5 million for 2009, an increase of $16.1 million from the
$416,000 of net charge-offs incurred in the year ended December 31, 2008. Charge-offs in the
commercial real estate portfolio were principally related to four loans and these charge-offs
totaled $3.0 million; two of these four loans were SBA originated loans with charge-offs of $1.3
million. In the C&D portfolio there were seven relationships that accounted for $11.3 million of
the $12.1 million of C&D charge-offs; two of the relationships charged-off related to shared
national credit loans and totaled $4.3 million. The majority of the commercial charge-offs was
related to one lease transaction in which the borrower was forced into involuntary bankruptcy. All
of the real estate related charge-offs were the result of deteriorating economic conditions and
declining collateral values. Loans charged-off are subject to continuous review, and our credit
administration team takes specific actions to achieve maximum recovery of principal, accrued
interest and related expenses.
- 65 -
Net charge-offs were $416,000 for 2008, a decline of $127,000 from the $543,000 of net
charge-offs incurred in the year ended December 31, 2007. Of the $416,000 in net charge-offs for
2008, $194,000 were related to residential loans.
The provision for credit losses was $35.0 million for 2009 compared to $8.6 million for 2008
and $2.3 million for 2007. The provision is based on the results of our quarterly analyses of the
loan portfolios and change in the mix of the loan portfolios. The provision for 2009 was in part
due to higher levels of net charge-offs on loans, which in turn increases the loss factors that we
apply to the remaining loans in our portfolio. Other factors included the weak economic conditions
that resulted in collateral performance and declining collateral values on several real estate
related projects that are considered classified loans. The provision for 2008 was due to loan
growth of $356 million in the held for investment loan portfolio primarily related to commercial
real estate, construction and development and commercial loans which have a higher inherent risk,
asset quality issues and the current economic conditions. The provision for credit losses in 2007
was comprised of held for investment loan portfolio growth of $176 million and to a lesser extent
asset quality issues associated with a handful of loans. The provision made in 2006 was due to
community bank loan growth and our reevaluation of loss factors related to loan loss reserve levels
associated with our loan portfolio. During the first quarter 2006, our credit risk management team
revised the estimated loss factors that are applied to certain loans to reflect our experience with
inherent losses in these types of loans. The provision for 2005 was related to the other loan
assets and asset quality issues in those periods.
The following table shows information regarding the components of our allowance for credit losses
as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
|
Loans in each |
|
|
|
|
|
|
Loans in each |
|
|
|
|
|
|
Loans in each |
|
|
|
|
|
|
Loans in each |
|
|
|
|
|
|
Loans in each |
|
|
|
|
|
|
|
Category to |
|
|
|
|
|
|
Category to |
|
|
|
|
|
|
Category to |
|
|
|
|
|
|
Category to |
|
|
|
|
|
|
Category to |
|
|
|
Amount |
|
|
Total Loans |
|
|
Amount |
|
|
Total Loans |
|
|
Amount |
|
|
Total Loans |
|
|
Amount |
|
|
Total Loans |
|
|
Amount |
|
|
Total Loans |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
$ |
992 |
|
|
|
19.03 |
% |
|
$ |
909 |
|
|
|
21.79 |
% |
|
$ |
713 |
|
|
|
34.98 |
% |
|
$ |
783 |
|
|
|
52.09 |
% |
|
$ |
790 |
|
|
|
65.02 |
% |
SBA guaranteed purchased premium |
|
|
35 |
|
|
|
4.89 |
|
|
|
42 |
|
|
|
5.66 |
|
|
|
56 |
|
|
|
9.19 |
|
|
|
76 |
|
|
|
13.45 |
|
|
|
|
|
|
|
14.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal other allowance |
|
|
1,027 |
|
|
|
|
|
|
|
951 |
|
|
|
|
|
|
|
769 |
|
|
|
|
|
|
|
859 |
|
|
|
|
|
|
|
790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
9,401 |
|
|
|
36.25 |
|
|
|
4,821 |
|
|
|
31.56 |
|
|
|
2,387 |
|
|
|
23.16 |
|
|
|
3,210 |
|
|
|
19.43 |
|
|
|
2,898 |
|
|
|
11.49 |
|
Construction and development |
|
|
19,398 |
|
|
|
23.73 |
|
|
|
7,820 |
|
|
|
25.96 |
|
|
|
2,978 |
|
|
|
21.6 |
|
|
|
1,110 |
|
|
|
8.02 |
|
|
|
398 |
|
|
|
3.20 |
|
Commercial |
|
|
2,973 |
|
|
|
10.36 |
|
|
|
1,394 |
|
|
|
8.69 |
|
|
|
1,030 |
|
|
|
6.98 |
|
|
|
429 |
|
|
|
2.14 |
|
|
|
245 |
|
|
|
0.90 |
|
Multifamily |
|
|
633 |
|
|
|
2.52 |
|
|
|
195 |
|
|
|
3.13 |
|
|
|
97 |
|
|
|
3.79 |
|
|
|
20 |
|
|
|
4.63 |
|
|
|
16 |
|
|
|
5.10 |
|
Consumer |
|
|
437 |
|
|
|
3.22 |
|
|
|
202 |
|
|
|
3.21 |
|
|
|
39 |
|
|
|
0.30 |
|
|
|
53 |
|
|
|
0.24 |
|
|
|
11 |
|
|
|
0.02 |
|
Unallocated |
|
|
800 |
|
|
|
|
|
|
|
800 |
|
|
|
|
|
|
|
700 |
|
|
|
|
|
|
|
550 |
|
|
|
|
|
|
|
450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal community bank allowance |
|
|
33,642 |
|
|
|
|
|
|
|
15,232 |
|
|
|
|
|
|
|
7,231 |
|
|
|
|
|
|
|
5,372 |
|
|
|
|
|
|
|
4,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
34,669 |
|
|
|
100 |
% |
|
$ |
16,183 |
|
|
|
100 |
% |
|
$ |
8,000 |
|
|
|
100 |
% |
|
$ |
6,231 |
|
|
|
100 |
% |
|
$ |
4,808 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in the allocations of the allowance for loan losses to the Commercial real
estate, Construction and Development and Commercial portfolios was primarily a result of the
charge-offs taken in these categories during 2009. This impacted the historical loss factors used
in the migration analysis, as well as there was an overall increase in the subjective factors, thus
more of the allowance was allocated to these components.
The ratio of the allowance for credit losses to total loans held for investment was 2.93% at
December 31, 2009, 1.30% at December 31, 2008, 0.90% at December 31, 2007, 0.87% at December 31,
2006, and 1.12% at December 31,
2005. The balance of the allowance for credit losses increased in 2009 based on our analysis
of the allowance required to maintain the allowance at an adequate level given current economic
conditions and probable losses inherent in the portfolio. Generally, residential loans are becoming
a smaller portion of the held for investment loan portfolio as such loans are repaying, and being
replaced by community bank loans which have a higher inherent risk.
The allowance for credit losses on residential loans held for investment was 1.10%, 0.72%, and
0.44% at December 31, 2009, 2008 and 2007, respectively. The increase in the allowance for credit
losses for residential loans is reflective of the increasing trend over the past three years in
nonperforming residential loans and declining property values. The reserve in prior years was
impacted by the activities at Matrix Financial Services.
- 66 -
The ratio of the allowance for credit losses for community bank loans to total community bank
loans held for investment was 3.29%, 1.47%, and 1.18%, at December 31, 2009, 2008 and 2007,
respectively. The increase in the ratio of the allowance between 2008 and 2009 is principally due
to an increase in nonperforming and classified community bank loans.
During 2009 the overall increase in the allowance for loan losses was primarily a result of an
increase in the overall loss migration factors associated with the homogenous pools of Residential
loans and Commercial loans, as a result of the charge-offs incurred during the year, as well as an
increase in subjective factors, based on the increase in nonperforming loans and declining trends
in the portfolio. At December 31, 2009, the amount allocated to these components combined
approximated $32.6 million as compared to $13.7 million at December 31, 2008. The amount of the
allowance allocated to impaired loans decreased from $1.7 million at December 31, 2008 to $1.2
million at December 31, 2009. This decrease was a result of partial charge-offs taken on the
impaired credits of $2.5 million. The unallocated portion of the allowance for credit losses
remained unchanged at $800,000 at December 31, 2009 and December 31, 2008, as we have increased the
subjective factors in the loss migration analysis and as such the amount allocated to these
components takes into account some of the imprecision included in this component. This component
has been maintained though as a result of the volume of commercial real estate, construction and
development, and commercial loans, which have a higher inherent risk in the portfolio, for
uncertainties in the fair value of the underlying collateral, as well as the overall real estate
concentration in the portfolio both nationally and in Colorado.
As of December 31, 2009, we believe that the allowance, when taken as a whole, is adequate to
absorb probable incurred losses inherent in the loan portfolio. Our results from operations could
be affected if managements estimate of the allowance for credit losses is subsequently materially
different, requiring additional or less provision for credit losses to be recorded. Management
carefully considers many quantitative and qualitative factors in arriving at the allowance for
credit losses. While management uses currently available information to recognize losses on loans,
further adjustments to the allowance for credit losses may be necessary based on updated
appraisals, financial statements, deterioration of cash flows, and changes in economic conditions
that affect our customers. Additionally, larger credit relationships (defined by management as
over $9 million) do not inherently create more risk, but can create wider fluctuations in net
charge offs and asset quality measures compared to the Companys historical trends. As an integral
part of their examination process, regulatory agencies, principally the OTS, also review the
allowance for credit losses. These regulatory agencies may require that certain loan balances be
classified differently or charged off when their credit evaluations differ from those of
management, based on their judgments about information available to them at the time of their
examination.
Mortgage Servicing Rights. The following table sets forth certain information regarding the
composition of our mortgage servicing portfolio, excluding loans subserviced for others, as of the
dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
FHA insured/VA guaranteed residential |
|
$ |
296,448 |
|
|
$ |
349,723 |
|
|
$ |
408,191 |
|
Conventional loans |
|
|
451,486 |
|
|
|
530,210 |
|
|
|
628,139 |
|
Other loans |
|
|
18,221 |
|
|
|
21,817 |
|
|
|
24,788 |
|
|
|
|
|
|
|
|
|
|
|
Total mortgage servicing portfolio |
|
$ |
766,155 |
|
|
$ |
901,750 |
|
|
$ |
1,061,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate loans |
|
$ |
580,567 |
|
|
$ |
692,665 |
|
|
$ |
815,122 |
|
Adjustable rate loans |
|
|
185,588 |
|
|
|
209,085 |
|
|
|
245,996 |
|
|
|
|
|
|
|
|
|
|
|
Total mortgage servicing portfolio |
|
$ |
766,155 |
|
|
$ |
901,750 |
|
|
$ |
1,061,118 |
|
|
|
|
|
|
|
|
|
|
|
The balances of our mortgage servicing portfolio declined $136 million, or 15.1%, to $766
million at December 31, 2009, compared to $902 million at December 31, 2008, and $1.1 billion at
December 31, 2007. The decrease is due to prepayments of the underlying loans. In 2003, we sold the
production platform at Matrix Financial Services and at that time significantly reduced additions
to the mortgage servicing portfolio.
- 67 -
The following table shows the delinquency statistics for the mortgage loans serviced through
Matrix Financial Services, excluding loans subserviced for others, as of the dates presented.
Delinquencies and foreclosures for the mortgage loans serviced by us generally exceed the national
average due to high rates of delinquencies and foreclosures on certain bulk loan and bulk servicing
portfolios. The higher levels of delinquencies result in a higher cost of servicing; however, a
portion of the higher cost is offset by the collection of late fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
Percentage |
|
|
|
Number of |
|
|
of Servicing |
|
|
Number of |
|
|
of Servicing |
|
|
Number of |
|
|
of Servicing |
|
|
|
Loans |
|
|
Portfolio |
|
|
Loans |
|
|
Portfolio |
|
|
Loans |
|
|
Portfolio |
|
Loans delinquent for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 days |
|
|
791 |
|
|
|
6.08 |
% |
|
|
869 |
|
|
|
5.58 |
% |
|
|
970 |
|
|
|
5.14 |
% |
60-89 days |
|
|
259 |
|
|
|
1.99 |
|
|
|
250 |
|
|
|
1.60 |
|
|
|
276 |
|
|
|
1.46 |
|
90 days and over |
|
|
830 |
|
|
|
6.38 |
|
|
|
795 |
|
|
|
5.10 |
|
|
|
741 |
|
|
|
3.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquencies |
|
|
1,880 |
|
|
|
14.45 |
% |
|
|
1,914 |
|
|
|
12.28 |
% |
|
|
1,987 |
|
|
|
10.53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosures |
|
|
313 |
|
|
|
2.41 |
% |
|
|
289 |
|
|
|
1.85 |
% |
|
|
279 |
|
|
|
1.48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth certain information regarding the number and aggregate
principal balance of the mortgage loans serviced through Matrix Financial Services, including both
fixed and adjustable rate loans, excluding loans subserviced for others, at various interest
rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
|
Aggregate |
|
|
Aggregate |
|
|
|
|
|
|
Aggregate |
|
|
Aggregate |
|
|
|
|
|
|
Aggregate |
|
|
Aggregate |
|
|
|
Number of |
|
|
Principal |
|
|
Principal |
|
|
Number of |
|
|
Principal |
|
|
Principal |
|
|
Number of |
|
|
Principal |
|
|
Principal |
|
Rate |
|
Loans |
|
|
Balance |
|
|
Balance |
|
|
Loans |
|
|
Balance |
|
|
Balance |
|
|
Loans |
|
|
Balance |
|
|
Balance |
|
|
|
(Dollars in thousands) |
|
Less than 7.00% |
|
|
6,229 |
|
|
$ |
457,010 |
|
|
|
59.65 |
% |
|
|
6,949 |
|
|
$ |
528,344 |
|
|
|
58.59 |
% |
|
|
6,024 |
|
|
$ |
514,393 |
|
|
|
48.48 |
% |
7.00% 7.99% |
|
|
2,555 |
|
|
|
162,821 |
|
|
|
21.25 |
|
|
|
3,079 |
|
|
|
197,382 |
|
|
|
21.89 |
|
|
|
5,255 |
|
|
|
316,658 |
|
|
|
29.84 |
|
8.00% 8.99% |
|
|
1,375 |
|
|
|
65,271 |
|
|
|
8.52 |
|
|
|
1,739 |
|
|
|
77,826 |
|
|
|
8.63 |
|
|
|
2,541 |
|
|
|
107,873 |
|
|
|
10.17 |
|
9.00% 9.99% |
|
|
864 |
|
|
|
31,593 |
|
|
|
4.12 |
|
|
|
1,212 |
|
|
|
36,563 |
|
|
|
4.05 |
|
|
|
1,873 |
|
|
|
44,915 |
|
|
|
4.23 |
|
10.00% and over |
|
|
1,982 |
|
|
|
49,460 |
|
|
|
6.46 |
|
|
|
2,602 |
|
|
|
61,635 |
|
|
|
6.84 |
|
|
|
3,183 |
|
|
|
77,279 |
|
|
|
7.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
13,005 |
|
|
$ |
766,155 |
|
|
|
100.00 |
% |
|
|
15,581 |
|
|
$ |
901,750 |
|
|
|
100.00 |
% |
|
|
18,876 |
|
|
$ |
1,061,118 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan administration fees decrease as the principal balance on the outstanding loan
decreases and as the remaining time to maturity of the loan shortens. The following table sets
forth certain information regarding the remaining contractual maturity of the mortgage loans
serviced through Matrix Financial Services, excluding loans subserviced for others, as of the dates
shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
|
Percentage |
|
|
Unpaid |
|
|
Unpaid |
|
|
|
|
|
|
Percentage |
|
|
Unpaid |
|
|
Unpaid |
|
|
|
|
|
|
Percentage |
|
|
Unpaid |
|
|
Unpaid |
|
|
|
Number of |
|
|
of Number |
|
|
Principal |
|
|
Principal |
|
|
Number of |
|
|
of Number |
|
|
Principal |
|
|
Principal |
|
|
Number of |
|
|
of Number |
|
|
Principal |
|
|
Principal |
|
Maturity |
|
Loans |
|
|
of Loans |
|
|
Amount |
|
|
Amount |
|
|
Loans |
|
|
of Loans |
|
|
Amount |
|
|
Amount |
|
|
Loans |
|
|
of Loans |
|
|
Amount |
|
|
Amount |
|
|
|
(Dollars in thousands) |
|
1 5 years |
|
|
1,713 |
|
|
|
13.17 |
% |
|
$ |
22,400 |
|
|
|
2.92 |
% |
|
|
2,250 |
|
|
|
14.44 |
% |
|
$ |
18,744 |
|
|
|
2.08 |
% |
|
|
3,666 |
|
|
|
19.41 |
% |
|
$ |
28,943 |
|
|
|
2.73 |
% |
6 10 years |
|
|
2,818 |
|
|
|
21.67 |
|
|
|
99,749 |
|
|
|
13.02 |
|
|
|
3,356 |
|
|
|
21.54 |
|
|
|
116,543 |
|
|
|
12.92 |
|
|
|
3,342 |
|
|
|
17.71 |
|
|
|
120,663 |
|
|
|
11.37 |
|
11 15 years |
|
|
1,853 |
|
|
|
14.25 |
|
|
|
93,372 |
|
|
|
12.19 |
|
|
|
1,848 |
|
|
|
11.86 |
|
|
|
94,605 |
|
|
|
10.49 |
|
|
|
2,321 |
|
|
|
12.30 |
|
|
|
114,538 |
|
|
|
10.79 |
|
16 20 years |
|
|
1,842 |
|
|
|
14.16 |
|
|
|
112,332 |
|
|
|
14.66 |
|
|
|
1,969 |
|
|
|
12.64 |
|
|
|
121,697 |
|
|
|
13.50 |
|
|
|
2,127 |
|
|
|
11.27 |
|
|
|
135,904 |
|
|
|
12.81 |
|
21 25 years |
|
|
4,500 |
|
|
|
34.60 |
|
|
|
379,047 |
|
|
|
49.48 |
|
|
|
5,876 |
|
|
|
37.71 |
|
|
|
489,868 |
|
|
|
54.32 |
|
|
|
6,252 |
|
|
|
33.12 |
|
|
|
504,702 |
|
|
|
47.56 |
|
More than 25 years |
|
|
279 |
|
|
|
2.15 |
|
|
|
59,255 |
|
|
|
7.73 |
|
|
|
282 |
|
|
|
1.81 |
|
|
|
60,293 |
|
|
|
6.69 |
|
|
|
1,168 |
|
|
|
6.19 |
|
|
|
156,368 |
|
|
|
14.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
13,005 |
|
|
|
100.00 |
% |
|
$ |
766,155 |
|
|
|
100.00 |
% |
|
|
15,581 |
|
|
|
100.00 |
% |
|
$ |
901,750 |
|
|
|
100.00 |
% |
|
|
18,876 |
|
|
|
100.00 |
% |
|
$ |
1,061,118 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys servicing activity is diversified throughout 50 states with concentrations
at December 31, 2009, in Missouri, Texas, New Mexico, Illinois and California of approximately 15%,
13%, 13%, 12%, and 8%, respectively, based on aggregate outstanding unpaid principal balances of
the mortgage loans serviced at December 31, 2009.
- 68 -
A significant risk of owning mortgage servicing rights is that the underlying loans prepay at
a rate faster than predicted at acquisition. During periods of declining interest rates,
prepayments of mortgage loans usually increase as homeowners seek to refinance at lower interest
rates, resulting in a decrease in the value of the servicing portfolio. Mortgage loans with higher
interest rates and/or higher principal balances are more likely to result in prepayments because
the cost savings to the borrower from refinancing can be significant. Although prepayments may
increase with the decline in the interest rates that has occurred and other government actions, the
Companys portfolio is comprised of loans with an average age of 11.5 years, average balance of
$58,900 and average rate of 7.02%. Thus actual prepayment speeds have tended to be lower than
national averages for several years.
The following table shows the annualized prepayment rate for each quarter and the annual
average prepayment rate experience on the mortgage loans serviced by Matrix Financial Services,
excluding loans subserviced by and for others:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Quarter ended: |
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
15.9 |
% |
|
|
13.1 |
% |
|
|
16.5 |
% |
September 30 |
|
|
14.8 |
|
|
|
21.4 |
|
|
|
19.3 |
|
June 30 |
|
|
17.9 |
|
|
|
16.2 |
|
|
|
20.8 |
|
March 31 |
|
|
16.4 |
|
|
|
16.4 |
|
|
|
20.7 |
|
|
|
|
|
|
|
|
|
|
|
Annual average |
|
|
16.3 |
% |
|
|
16.8 |
% |
|
|
19.3 |
% |
|
|
|
|
|
|
|
|
|
|
Valuation of Servicing Rights. Our servicing portfolio is accounted for in accordance with
GAAP using the amortization method. Under the amortization method, we are required to record our
investment in mortgage servicing rights (MSRs) at the lower of cost or fair value. The estimated
fair value of MSRs is determined by reference to the discounted future servicing income, as
stratified in accordance with one or more predominant risk characteristics of the underlying loans.
The Company stratifies its MSRs by product type, interest rate and investor to reflect the
predominant risk characteristics. To determine the estimated fair value of MSRs, the Company uses a
valuation model that calculates the present value of discounted future cash flows. In using this
valuation model, the Company incorporates assumptions that market participants would use in
estimating future net servicing income, which includes estimates of the cost of servicing per loan,
including incremental interest cost of servicer advances, foreclosure expenses and losses, the
discount rate, float value, an inflation rate, ancillary income per loan, prepayment speeds and
default rates. For purposes of performing an impairment analysis on MSRs, the Company estimates
fair value using the following primary assumptions: average prepayment speeds of 17.04 CPR,
(Constant Prepayment Rate, a prepayment speed measurement) ranging from 1.9 CPR to 38.35 CPR; an
average discount rate of 11.48%; with discount rates ranging from 11.00% to 18.82%; and average
delinquency of 9.30%, with default rates ranging from 0% to 100%. At December 31, 2009, the
Companys residential servicing portfolio consists of seasoned loans with an approximate 11.5 year
average age, an average balance of $58,900 and a weighted average note rate of 7.02%
During the years ended December 31, 2009 and December 31, 2008, we did not record any
permanent impairment. During the year ended December 31, 2007, we recorded a permanent impairment
of $1.1 million. Our impairment reserve as of December 31, 2009 was $860,000. Further decreases in
interest rates, or other factors that result in an increase in anticipated future prepayment
speeds, may cause additional impairment charges in future periods. It is possible to hedge the risk
associated with declines in the value of MSRs with derivatives; however, based on the underlying
characteristics of our portfolio, and our decision not to increase our investment in mortgage
servicing, we do not currently anticipate that we will enter into any future hedge specific to our
current investment in MSRs.
Risk Management Activities for MSRs. Ownership of MSRs exposes the Company to impairment of
the value of MSRs in certain interest rate environments. The incidence of prepayment of a mortgage
loan generally increases during periods of declining interest rates as the homeowner seeks to
refinance the loan to a lower interest rate. If the level of prepayment on segments of the
Companys mortgage servicing portfolio achieves a level higher than projected by the Company for an
extended period of time, then impairment in the associated basis in the MSRs may occur.
- 69 -
Sources of Funds. Deposits, short-term and long-term borrowings, including junior subordinated
notes owed to unconsolidated subsidiaries, loan and investment security repayments and proceeds
from the sale of securities, and cash flows generated from operations are the primary sources of
our funds for lending, investing, and other general purposes. Loan repayments are a relatively
predictable source of funds except during periods of significant interest rate declines, while
deposit flows tend to fluctuate with prevailing interests rates, money markets conditions, general
economic conditions and competition.
Deposits. United Western Bank offers a variety of deposit accounts with a range of interest
rates and terms. The Banks core deposits consist of community bank and processing and trust
checking accounts, NOW accounts, money market accounts, and community bank savings accounts and
certificates of deposit. These deposits, along with brokered deposits, and short-term and long-term
borrowings, are used to support our asset base. Community bank deposits are obtained predominantly
from the geographic trade areas surrounding our regional office locations. Processing and trust
deposits are obtained nationally. The Bank relies primarily on customer service and relationships
with customers to attract and retain community bank deposits; however, market interest rates and
rates offered by competing financial institutions significantly affect our ability to attract and
retain deposits.
United Western Bank will focus on generating traditional deposits from its expansion of
community banking services through the opening of branch locations along the Colorado Front Range
and selected mountain communities.
Over time these deposits are anticipated to fund a significant portion of our liquidity needs
for our community banking strategy.
The following table sets forth the balances for each major category of the Companys deposit
accounts and the weighted-average interest rates paid for interest-bearing deposits for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Amount |
|
|
Average Rate |
|
|
Amount |
|
|
Average Rate |
|
|
Amount |
|
|
Average Rate |
|
|
|
(Dollars in thousands) |
|
Savings accounts |
|
$ |
360 |
|
|
|
0.25 |
% |
|
$ |
299 |
|
|
|
0.25 |
% |
|
$ |
148 |
|
|
|
1.04 |
% |
NOW and DDA accounts |
|
|
583,976 |
|
|
|
0.10 |
|
|
|
624,064 |
|
|
|
0.17 |
|
|
|
686,867 |
|
|
|
0.47 |
|
Money market accounts |
|
|
937,082 |
|
|
|
0.39 |
|
|
|
958,837 |
|
|
|
0.79 |
|
|
|
668,483 |
|
|
|
2.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
1,521,418 |
|
|
|
0.28 |
|
|
|
1,583,200 |
|
|
|
0.55 |
|
|
|
1,355,498 |
|
|
|
1.32 |
|
Certificate accounts |
|
|
472,095 |
|
|
|
1.58 |
|
|
|
141,472 |
|
|
|
3.53 |
|
|
|
29,983 |
|
|
|
4.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits |
|
$ |
1,993,513 |
|
|
|
0.59 |
% |
|
$ |
1,724,672 |
|
|
|
0.79 |
% |
|
$ |
1,385,481 |
|
|
|
1.05 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits increased $269 million between December 31, 2009 and 2008. This increase
was caused by growth of $273 million of community bank deposits from our eight open banking
offices. This growth includes $215 million obtained through the certificate accounts offered
through the Certificate of Deposit Account Registry Service® (CDARS) program. The CDARS program
provides full FDIC insurance on deposit balances greater than posted FDIC limits by exchanging
larger depository relationships with other CDARS members. Depositors funds are broken into amounts
below FDIC insurance limits and placed with other banks that are members of the CDARS network. Each
member bank issues certificate accounts in denominations below the FDIC insured limit, resulting in
full FDIC insurance for the entire deposit. For regulatory reporting purposes, CDARS are considered
brokered deposits. The Bank has been notified by the OTS that it may not rollover or renew any
existing brokered deposits or accept new brokered deposits without prior written non-objection of
the OTS, Accordingly, the Company anticipates that such deposits will be transferred into other
account types at the Bank or withdrawn as such deposits mature which will occur through December
22, 2011.
- 70 -
The following table sets forth the balances for categories of deposits and custodial escrow
balances of the Company by source for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
|
(Dollars in thousands) |
|
Community bank deposits |
|
$ |
218,405 |
|
|
$ |
160,444 |
|
|
$ |
89,338 |
|
CDARS deposits |
|
|
246,463 |
|
|
|
31,522 |
|
|
|
|
|
Brokered deposits |
|
|
329,184 |
|
|
|
197,867 |
|
|
|
13,025 |
|
UW Trust Company |
|
|
4,425 |
|
|
|
31,915 |
|
|
|
110,978 |
|
Matrix Financial Services Corp. |
|
|
11,755 |
|
|
|
14,083 |
|
|
|
18,256 |
|
Matrix Financial Solutions, Inc. |
|
|
155,156 |
|
|
|
203,329 |
|
|
|
236,436 |
|
Legent Clearing, LLC |
|
|
|
|
|
|
120,178 |
|
|
|
163,527 |
|
Deposit concentrations |
|
|
1,044,706 |
|
|
|
967,993 |
|
|
|
772,212 |
|
Other deposits |
|
|
15,324 |
|
|
|
27,038 |
|
|
|
15,881 |
|
|
|
|
|
|
|
|
|
|
|
Deposits and custodial escrow
balances |
|
$ |
2,025,418 |
|
|
$ |
1,754,369 |
|
|
$ |
1,419,653 |
|
|
|
|
|
|
|
|
|
|
|
Community bank deposits represent deposits attracted by our regional banking teams. The
growth in the past three years is consistent with expectations and a part of our community banking
strategy.
Brokered deposits are comprised of $105 million of traditional brokered deposits which mature
July 1, 2010, $225 million of other deposits deemed brokered by regulation, which will be withdrawn
by March 31, 2010. At December 31, 2009, the Bank had cash on hand of $586 million and since year
end this has grown to over $1 billion, and thus the withdrawal of these balances will not have a
material adverse impact on the Bank.
UW Trust and Matrix Financial Services are our wholly owned subsidiaries. Due to the UW Trust
asset sale, discussed in Note 25 Discontinued Operations Sale of UW Trust Assets, the
custodial rights sold are presented retrospectively. Accordingly, the decline of deposits from UW
Trust is related to an account for one life settlement agent for special asset acquisitions and
administration with a balance of $732,000, $30,404,000, and $103,830,000, at December 31, 2009,
December 31, 2008, and December 31, 2007, respectively. In the fourth quarter of 2007, management
elected to restructure this relationship and terminate certain elements of business with respect to
this life settlement agent account. The restructured relationship will now allow the Company to
pursue business in the same industry on a non-exclusive basis subject to prior approval by the
Texas Department of Banking, UW Trusts principal regulator. If UW Trust cannot replace this
business with deposits from other clients, the aggregate deposits directed to the Bank by UW Trust
will decline further in 2010.
Matrix Financial Solutions, Inc. (MFSI) are deposits that represent customer assets under
administration by MFSI. During the first quarter of 2009, the Company completed the sale of 269,792
shares of MFSI. As part of the sale agreement, deposits will continue to be maintained by MFSI at
the Bank. This agreement was renewed in 2007 and matures on July 5, 2010. The balance
of these deposits over the three years is associated with the overall growth in business
experienced by MFSI as well as current economic conditions.
Legent Clearing, LLC deposits are deposits that represent processing and trust deposits
received through Legent Clearing, LLC, that are in NOW and money market accounts. The Companys
Chairman of the Board holds an indirect minority interest in Legent Clearing, LLC. Deposit
concentrations are deposits that represent deposit funds from four, six and three processing and
trust relationships maintained by United Western Bank as of December 31, 2009, 2008 and 2007,
respectively. Due to the UW Trust asset sale, discussed in Note 25 Discontinued Operations -
Sale of UW Trust Assets, the custodial rights sold are presented retrospectively.
Included in deposit concentrations is one processing and trust relationship with balances of
$933.9 million, $822.8 million, and $749.5 million at December 31, 2009, 2008 and 2007,
respectively. This relationship is contractual and matured June 30, 2009. This contract was
renewed in 2009. As part of the UW Trust asset sale, (discussed in Note 25 Discontinued
Operations Sale of UW Trust Assets) Equity Trust Company and Sterling Administrative Services,
LLC, the Buyers, and Equity Administrative Services Inc. (an affiliate of the Buyers), agreed that
the Bank shall be the sole depository of custodial deposits for a period of three years;
thereafter, the Buyers agreed, for the remaining term of the agreement (which is the later of five
years from the date of the subaccounting agreement or until the seller note is repaid in full) to
maintain an amount of custodial deposits at the Bank in a minimum amount equal to the amount of
custodial deposits transferred to the Buyer at the closing of this transaction. See Item 1A. Risk
Factors Risk Related to Our Business in this report and Note 8 Deposits to the financial
statements.
- 71 -
The following table sets forth the amount of United Western Banks certificates of deposit
that are greater than $100,000 by time remaining until maturity as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Amount |
|
|
Rate Paid |
|
|
|
(Dollars in thousands) |
|
Three months or less |
|
$ |
3,323 |
|
|
|
1.35 |
% |
Over three months through six months |
|
|
4,230 |
|
|
|
1.94 |
|
Over six months through twelve months |
|
|
58,108 |
|
|
|
2.13 |
|
Over twelve months |
|
|
13,007 |
|
|
|
3.61 |
|
|
|
|
|
|
|
|
Total |
|
$ |
78,668 |
|
|
|
2.33 |
% |
|
|
|
|
|
|
|
Borrowings. We have access to a variety of funding sources and use various instruments both
short-term and long-term to support our asset base. Borrowings include securities sold under
agreements to repurchase, FHLBank borrowings, Federal Reserve Discount Window borrowings and a line
of credit with a third party financial institution. At December 31, 2009, short-term borrowings
consisted of $23.6 million of borrowings with a maturity during 2010, which includes a $20 million
line of credit with a third party financial institution and $3.6 million of customer repurchase
agreements. On January 15, 2010, United Western Bank exchanged $180 million of outstanding FHLBank
of Topeka advances for $180 million in new advances. Specifically, the Bank exchanged 14 separate
advances, totaling $180 million, with yields ranging from 2.77% to 4.80%, with a weighted average
yield of 4.15% and an average remaining term of 29 months, and with final maturities scheduled 16
to 52 months into the future. The exchange required the
payment of a prepayment fee to the FHLBank in the amount of $12.4 million, this amount
together with the face rate of the new instruments will result in an effective interest rate of
2.15% for the first twelve months.
The following table sets forth a summary of our borrowings during 2009, 2008 and 2007 and as
of the end of each such period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Maximum |
|
|
Average |
|
|
Weighted |
|
|
|
Amount |
|
|
Outstanding |
|
|
Outstanding |
|
|
Interest Rate |
|
|
Average |
|
|
|
Outstanding |
|
|
During the |
|
|
at any |
|
|
During the |
|
|
Interest Rate |
|
|
|
at Year-End |
|
|
Year (1) |
|
|
Month-End |
|
|
Year |
|
|
at Year-End |
|
|
|
(Dollars in thousands) |
|
At or for the year ended December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLBank borrowings(2) |
|
$ |
180,607 |
|
|
|
214,881 |
|
|
|
226,712 |
|
|
|
4.29 |
% |
|
|
4.16 |
% |
Repurchase Agreements |
|
|
78,635 |
|
|
|
79,195 |
|
|
|
80,384 |
|
|
|
4.57 |
|
|
|
4.79 |
|
Revolving lines of credit |
|
|
20,000 |
|
|
|
27,417 |
|
|
|
30,000 |
|
|
|
3.19 |
|
|
|
5.23 |
|
Subordinated debt |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
3.44 |
|
|
|
3.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at December 31, 2009 |
|
$ |
289,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the year ended December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLBank borrowings(3) |
|
$ |
226,721 |
|
|
|
383,543 |
|
|
|
458,794 |
|
|
|
3.53 |
% |
|
|
4.25 |
% |
Repurchase Agreements |
|
|
81,265 |
|
|
|
78,934 |
|
|
|
81,442 |
|
|
|
3.71 |
|
|
|
4.46 |
|
Revolving lines of credit |
|
|
28,000 |
|
|
|
10,292 |
|
|
|
28,000 |
|
|
|
4.22 |
|
|
|
2.58 |
|
Advancing line |
|
|
|
|
|
|
2,967 |
|
|
|
6,000 |
|
|
|
4.22 |
|
|
|
2.58 |
|
Subordinated debt |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
5.94 |
|
|
|
4.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at December 31, 2008 |
|
$ |
345,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the year ended December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLBank borrowings(4) |
|
$ |
406,129 |
|
|
|
351,231 |
|
|
|
454,423 |
|
|
|
4.80 |
% |
|
|
4.46 |
% |
Repurchase Agreements |
|
|
76,428 |
|
|
|
72,354 |
|
|
|
77,460 |
|
|
|
4.83 |
|
|
|
4.63 |
|
Revolving lines of credit |
|
|
5,000 |
|
|
|
2,205 |
|
|
|
5,000 |
|
|
|
6.38 |
|
|
|
6.27 |
|
Advancing line |
|
|
6,000 |
|
|
|
2,647 |
|
|
|
6,000 |
|
|
|
6.38 |
|
|
|
6.27 |
|
Subordinated debt |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
8.05 |
|
|
|
7.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at December 31, 2007 |
|
$ |
503,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Calculations are based on daily averages where available and monthly averages otherwise. |
|
(2) |
|
A total of $180 million of the FHLBank borrowings outstanding at December 31, 2009 were
borrowed under short option advance agreements with the FHLBank. The interest rates on the
short option advance borrowings ranged from 2.77% to 4.80% at December 31, 2009 and their
possible call dates varied from January 2010 to April 2010. Additionally, $607,000 of the
FHLBank borrowings outstanding at December 31, 2009 are fixed-term/rate advances, which were
to offset specific loans originated by United Western Bank. The principal amount of these
fixed-term/rate advances adjusts monthly based on an amortization schedule. The interest rate
on the fixed-term/rate advances was 5.84%, and their maturity date is June 2014. |
- 72 -
|
|
|
(3) |
|
A total of $206.0 million of the FHLBank borrowings outstanding at December 31, 2008 were
borrowed under short option advance agreements with the FHLBank. The interest rates on the
short option advance borrowings ranged from 2.77% to 5.63% at December 31, 2008 and their
possible call dates varied from January 2009 to September 2009. Of these advances, $26 million
will reach final maturity, $19 million in November and $7 million December 2009, with a rate
of 5.40% and 5.63%, respectively. A total of $20.0 million of the FHLBank borrowings
outstanding at December 31, 2008 were borrowed under fixed rate advance agreements. The
interest rates on these advances ranged are 2.71% and 4.30% at December 31, 2008 and their
maturity dates were February 2009 and November 2009, respectively. Additionally, $721,000 of
the FHLBank borrowings outstanding at December 31, 2008 are fixed-term/rate advances, which
were to offset specific loans originated by United Western Bank. The principal amount of these
fixed-term/rate advances adjusts monthly based on an amortization schedule. The interest rate
on the fixed-term/rate advances was 5.84%, and their maturity date is June 2014. |
|
(4) |
|
A total of $206.0 million of the FHLBank borrowings outstanding at December 31, 2007 were
borrowed under short option advance agreements with the FHLBank. The interest rates on the
short option advance borrowings ranged from 3.27% to 5.63% at December 31, 2008 and their
possible call dates varied from January 2008 to September 2009. A total of $20.0 million of
the FHLBank borrowings outstanding at December 31, 2007 were borrowed under fixed rate advance
agreements. The interest rates on the advances ranged from 3.92% to 4.30% at December 31, 2007
and their maturity dates were May 2008 and November 2009. Additionally, $829,000 of the
FHLBank borrowings outstanding at December 31, 2007 are fixed-term/rate advances, which were
to offset specific loans originated by United Western Bank. The principal amount of these
fixed-term/rate advances adjusts monthly based on an amortization schedule. The interest rate
on the fixed-term/rate advances was 5.84%, and their maturity date is June 2014. |
Borrowings were $289.2 million at December 31, 2009 compared to $346.0 million at
December 31, 2008 and $503.6 million at December 31, 2007. The decrease in borrowings between 2009
and 2008 and 2008 and 2007 was primarily due the $269 million and $339 million increases in
deposits during those years.
Junior Subordinated Debentures. Junior subordinated debentures owed to unconsolidated
subsidiary trusts include debentures we sold to Matrix Bancorp Capital Trusts II, VI and VIII in
connection with the issuance of their preferred securities in 2001, 2004 and 2005, respectively. As
of December 31, 2009 and December 31, 2008, our junior subordinated debentures owed to
unconsolidated subsidiary trusts were $30.4 million. See Liquidity Company Liquidity below and
Note 11 to the consolidated financial statements for further analysis.
Capital
Capital. See Item 1. Business-Regulation and SupervisionUnited Western Banks Capital
Ratios for a discussion about the capital ratios and required capital ratios of United Western
Bank. United Western Bank and UW
Trust are restricted in certain instances from paying dividends to United Western Bancorp due
to certain regulatory requirements. See Item 1. BusinessRegulation and Supervision.
At December 31, 2009, shareholders equity was $159.7 million compared to $101.9 million at
December 31, 2008. The increase was principally the result of our September 2009 capital raise of
$81.7 million, net of direct offering expenses, and a $17.0 million decrease in accumulated other
comprehensive loss. Offsetting the increases were $42.0 million of net loss and dividends of
$943,000. The Company paid quarterly dividends of $.06 per common share during the first and
second quarter of 2009, $.01 during the third quarter of 2009, and $0 during the fourth quarter of
2009.
The Companys stock repurchase plan, as authorized by the Companys board of directors, is
discussed in Note 14 to the financial statements. All purchases of common stock were made pursuant
to the Companys announced open market stock repurchase plan. On November 13, 2006, the Companys
Board of Directors authorized the repurchase of up to five percent of the Companys outstanding
common stock. There were 7,556,573 shares outstanding at the time the repurchase was approved,
which resulted in 377,829 shares available for repurchase. There were 300,000 shares of this
authorization utilized in 2006. On August 2, 2007, the Companys Board of Directors authorized the
repurchase of up to 5% of the outstanding shares of the Companys common stock, which represented a
total of 361,289 additional shares. Although there are 265,018 remaining available shares that were
authorized for repurchase, the Company has no further plans to repurchase additional shares of its
common stock.
During the fourth quarter of 2002, the Company executed a Shareholder Rights Plan at which
time the Board of Directors of the Company declared a dividend of one preferred stock purchase
right (Rights) for each outstanding share of the Companys common stock. Each of these Rights,
which are not immediately exercisable, entitles the holder to purchase one one-thousandth of a
share of the Companys newly designated Series A Junior Participating Preferred Stock at an
exercise price of $40.00. The Rights are not exercisable until certain events occur, are not
detachable from the Companys common stock and do not have any immediate value to shareholders. The
Rights distribution was made on November 15, 2002, payable to shareholders of record on that date.
The Rights will expire on November 5, 2012.
- 73 -
Liquidity
Liquidity measures the ability to meet current and future cash flow needs as they become due.
The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate
possible outflows in deposits and to take advantage of interest rate market opportunities. The
ability of a financial institution to meet its current financial obligations is a function of its
balance sheet structure, its ability to liquidate assets, and its access to alternative sources of
funds. The Company seeks to ensure its funding needs are met by maintaining a level of liquid funds
through asset/liability management.
Bank Liquidity. Liquidity management is monitored by an Asset/Liability Management Committee
(ALCO), consisting of members of management and the board of directors of United Western Bank,
which reviews historical funding requirements, current liquidity position, sources and stability of
funding, marketability of assets, options for attracting additional funds, and anticipated future
funding needs, including the level of unfunded commitments.
Our primary sources of funds are community bank, commercial and processing and trust deposits,
advances from FHLBank and other borrowings and funds generated from operations. Funds from
operations include principal and interest payments received on loans and securities. While
maturities and scheduled amortization of loans and securities provide an indication of the timing
of the receipt of funds, changes in interest rates, economic conditions and competition strongly
influence mortgage prepayment rates and deposit flows, reducing the predictability of the timing on
sources of funds.
United Western Bank has an internal policy that requires certain liquidity ratios to be met.
Our current policy requires that we maintain a set amount of liquidity on the balance sheet at all
times and that we have off balance sheet liquidity readily available to the Bank to meet the
day-to-day liquidity requirements of the Bank and its customers. The Bank is a member of the
FHLBank of Topeka and has the ability to borrow up to 40% of the assets of the Bank. At December
31, 2009, the Bank had unused borrowing capacity at FHLBank borrowings of approximately $222.8
million. Also, at December 31, 2009, the Bank had unused borrowing capacity at the Federal Reserve
Bank of Kansas City of approximately $22.9 million.
At December 31, 2009, the Bank had outstanding letters of credit, loan origination commitments
and unused commercial and community bank lines of credit of approximately $103 million. We
anticipate that the Bank will have sufficient funds available to meet current origination and other
lending commitments. Certificates of deposit that are scheduled to mature within one year totaled
$443 million at December 31, 2009 including brokered deposits. Although
no assurance can be given, we expect that the Bank will retain a substantial majority of
community bank certificates of deposits and that the Bank has adequate liquidity to fund brokered
deposits as they mature.
Company Liquidity. Our main sources of liquidity at the holding company level are existing
cash and notes receivable, cash flows from $6.1 million of book value of non-agency mortgage-backed
securities, dividends and tax payments from our subsidiaries. Company cash on deposit at the Bank
at December 31, 2009, was $9.6 million and there was approximately $2.7 million of available cash
for dividend to the Company from unregulated subsidiaries.
The Company is reliant on dividend and tax payments from its subsidiaries in order to fund
operations, meet debt and tax obligations and grow new or developing lines of business. A long-term
inability of a subsidiary to make dividend payments could significantly impact the Companys
liquidity. Historically, United Western Bank has made the majority of the dividend payments
received by the Company. For the year ended December 31, 2007, the Company received dividends from
Matrix Bancorp Trading of $1.4 million, UW Asset Corp. of $1.2 million and United Western Bank of
$7.4 million. For the year ended December 31, 2008 the Company received dividends of $8.6 million,
of which $6.8 million was from the Bank, $509,000 was from UW Trust and the balance, $1.3 million,
was from non-core subsidiaries. For the year ended December 31, 2009 the Company received a
dividend of $38.3 million from UW Trust. The Informal Agreement the Company entered into with the
OTS on December 10, 2009, requires the Company to obtain written non-objection of the Regional
Director of the OTS prior to receiving a dividend from the Bank, we currently anticipate the Bank;
therefore, will not pay dividends to the Company during 2010. For 2010 the Company anticipates
dividends from UW Trust and dividends from non-core subsidiaries of approximately $3.0 million to
$4.0 million, and the principal source of these dividends will be cash flows from non-agency
mortgage-backed securities owned by a non-core subsidiary.
- 74 -
Effective January 15, 2010, the Company entered into an Amendment to Credit Agreement, Note
Modification and Forbearance Agreement (the Amendment) to that certain Credit Agreement dated as
of June 29, 2007, as amended by that certain Amendment to Credit Agreement dated June 30, 2007,
that certain Amendment to Credit Agreement dated June 29, 2009, that certain Amendment to Credit
Agreement dated September 30, 2009, and that certain Amendment and Forbearance Agreement dated
December 14, 2009 (collectively, the Credit Agreement) with JPMorgan. The terms of the Amendment
provide, among other things: (i) for the extension of the maturity date on the $25 million line of
credit note dated September 30, 2009 (the Note) from December 31, 2009 to June 30, 2010 (the Note
had a current principal balance of $20 million); (ii) that the Company make a principal reduction
payment on the Note of $2.5 million upon execution of the Amendment (which payment the Company
made), and another principal reduction payment on the Note of $1.25 million on or before March 31,
2010; (iii) that JPMorgan agrees to continue to forbear from declaring all outstanding amounts on
the Note to be immediately due and payable as a result of the Company and the Bank each executing
Informal Agreements with the OTS effective on December 10, 2009; and (iv) that the Company and one
of its nonbank subsidiaries pledge certain securities as additional collateral to JPMorgan.
The Company has sponsored three trusts with remaining balances outstanding at December 31,
2009 Matrix Bancorp Capital Trusts II, VI and VIII (the Trusts). The Company owns 100% of the
common equity of each of the Trusts. The Trusts were formed for the purpose of issuing
corporation-obligated mandatorily redeemable capital securities (the capital securities) to
third-party investors and investing the proceeds from the sale of such capital securities solely in
junior subordinated debt securities of the Company. The debentures held by each Trust are the sole
assets of that Trust. Distributions on the capital securities issued by each Trust are payable
either quarterly or semiannually at a rate per annum equal to the interest rate being earned by the
Trust on the debentures held by that Trust. The capital securities of the Trusts are subject to
mandatory redemption, in whole or in part, upon repayment of the debentures. The Company has
entered into agreements which, taken collectively, fully and unconditionally guarantee the capital
securities subject to the term of each of the guarantees. See Note 11 to the financial statements.
Statement of Cash Flows
Operating Activities. Cash flows from operating activities primarily include income from
continuing operations for the year, adjustments for items in net income that did not impact cash
and activities related to loans held for sale. Net cash from operating activities decreased by
$16.9 million to $60.5 million for the year ended December 31, 2009 compared to $77 million for
2008 and a $93 million for 2007. The decrease in 2009 versus 2008 was due to lower repayments on
loans held for sale. The decrease in 2008 versus 2007 was due to an increase in the deferred income
tax asset.
Investing Activities. Cash flows from investing activities reflect the impact of loans and
investments acquired for the Companys interest-earning asset portfolios, as well as cash flows
from asset purchases and dispositions and security purchases and sales. Net cash from investing
activities increased $484 million to $215 million for 2009, as compared to uses of cash of $269
million for 2008 and $5 million for 2007. The increase in cash from investing activities
in 2009 versus 2008 was due to a $445 million decrease in the amount of loans originated and
purchased for investment and a $28 million increase in proceeds from held to maturity securities.
In 2008, we originated community bank loans and incurred draws on existing commitments that totaled
$867 million, an increase of $162 million as compared to 2007. Other factors contributing to the
decline in cash from investing activities for 2008 included an absence of a sale of securities
during 2008 as compared to 2007 and lower repayments of held to maturity and available for sale
securities due to current economic conditions.
Financing Activities. Cash flows from financing activities include transactions and events
whereby cash is obtained from depositors, creditors or investors. Net cash from financing
activities increased $121 million to $295 million as compared to $174 million for 2008 and a use of
cash of $70 million for 2007. The increase in 2009 versus 2008 was due to our capital raise and a
$133 million decrease in FHLBank borrowing repayments, which were partially offset by a $70 million
decrease in deposit inflows. The increase in 2008 versus 2007 was due to an increase in cash flows
deposits of $299 million in 2008 compared to 2007. Deposit inflows of $339 million allowed the
Company to reduce FHLBank borrowings by $179 million. The decline in cash from financing activities
between 2006 and 2007 in the period was due to lower increases in processing and trust deposits and
net declines in FHLBank borrowings due to the overall decline in the size of our balance sheet.
- 75 -
Off-Balance Sheet Arrangements, Contractual Obligations, Commitments, and Contingent Liabilities.
The following table presents, as of December 31, 2009, the Companys significant fixed and
determinable contractual obligations by payment date. The payment amounts represent those amounts
contractually due to the recipient and do not include any unamortized premiums or discounts, other
similar carrying value adjustments or interest. Further discussion of the nature of each obligation
is included in the financial statements in the footnote identified in the Note Reference column
of the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
Note |
|
|
1 Year or |
|
|
1 to 3 |
|
|
3 to 5 |
|
|
Over 5 |
|
|
|
|
|
|
Reference |
|
|
Less |
|
|
Years |
|
|
Years |
|
|
Years |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Contractual Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (savings, NOW and money market) |
|
|
8 |
|
|
$ |
1,521,418 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,521,418 |
|
Certificate accounts |
|
|
8 |
|
|
|
443,227 |
|
|
|
23,671 |
|
|
|
5,197 |
|
|
|
|
|
|
|
472,095 |
|
FHLBank borrowings |
|
|
10 |
|
|
|
|
|
|
|
150,000 |
|
|
|
30,607 |
|
|
|
|
|
|
|
180,607 |
|
Borrowed money |
|
|
9 |
|
|
|
23,635 |
|
|
|
75,000 |
|
|
|
|
|
|
|
10,000 |
|
|
|
108,635 |
|
Junior subordinated debentures owed to
unconsolidated subsidiary trusts |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,442 |
|
|
|
30,442 |
|
Sale leaseback commitment |
|
|
17 |
|
|
|
1,314 |
|
|
|
2,756 |
|
|
|
2,926 |
|
|
|
2,697 |
|
|
|
9,693 |
|
Other operating leases |
|
|
17 |
|
|
|
631 |
|
|
|
1,064 |
|
|
|
851 |
|
|
|
1,273 |
|
|
|
3,819 |
|
The following table presents, for the periods shown, the Companys schedule of
significant commitments. Loan commitments and standby letters of credit are presented at
contractual amounts; however, since many of these commitments are expected to expire unused or only
partially used, the total amount of these commitments do not necessarily reflect future cash
requirements.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
Commitments |
|
|
|
|
|
|
|
|
Commitments to extend credit: |
|
|
|
|
|
|
|
|
Loans secured by mortgages |
|
$ |
31,516 |
|
|
$ |
110,249 |
|
Construction and development loans |
|
|
23,605 |
|
|
|
151,195 |
|
Commercial loans and lines of credit |
|
|
47,154 |
|
|
|
65,362 |
|
Consumer loans |
|
|
705 |
|
|
|
340 |
|
|
|
|
|
|
|
|
Total commitments to extend credit |
|
$ |
102,980 |
|
|
$ |
327,146 |
|
Standby letters of credit |
|
|
8,471 |
|
|
|
12,077 |
|
|
|
|
|
|
|
|
Total |
|
$ |
111,451 |
|
|
$ |
339,223 |
|
|
|
|
|
|
|
|
Financial Instruments with Off-Balance-Sheet Risk. In the normal course of business, the
Company enters into various transactions, which in accordance with generally accepted accounting
principles in the United States, are not included in its consolidated balance sheets. The Company
enters into these transactions to meet the financing needs of its
customers. These transactions include commitments to extend credit and standby letters of
credit, which involve elements of credit risk and interest rate risk in excess of the amounts
recognized in the consolidated balance sheets. The Company minimizes its exposure to loss under
these commitments by subjecting them to credit approval and monitoring procedures. The Company also
holds certain assets that are not included in its consolidated balance sheets including the
custodial assets held by UW Trust on behalf of its customers.
Commitments to Extend Credit. The Company enters into contractual commitments to extend
credit, generally with fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Substantially all of the Companys commitments to extend credit are contingent
upon customers maintaining specific credit standards, which are determined at the time the Company
enters into the commitment. The $224.1 million decrease in commitments to extend credit is a result
of a $127.6 decrease in construction and development commitments and a $78.7 million decrease in
loans secured by mortgages commitments. The decrease in these real estate collateralized loan
commitments is in response to our decision to reduce our exposure to real estate lending in the
current economic environment. Such commitments are not necessarily an indication of future growth
of such lending, since these loans have shorter life spans and generally turn over more rapidly
than other forms of lending.
Standby Letters of Credit. Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. Standby letters of credit generally are
contingent upon the failure of the customer to perform according to the terms of the underlying
contract with the third party.
- 76 -
Commitments and Contingent Liabilities. The Company may also have liabilities under certain
contractual agreements contingent upon the occurrence of certain events. A discussion of the
significant contractual arrangements under which the Company may be held contingently liable,
including guarantee arrangements, is included in Note 17 of the consolidated financial statements.
The Company maintains a liability for estimated recourse obligations for certain loans in
connection with the 2006 sale of ABS School Services, LLC. Pursuant to the sales agreement, the
Company guaranteed, for a five year period, the repayment of the loans sold to the purchaser. At
December 31, 2009, and 2008, the liability for estimated recourse obligations was $192,000 and
$445,000, respectively, and was included in other liabilities on the consolidated balance sheet.
During the year ended December 31, 2009, the Company paid $253,000 of claims against its recourse
obligation. Assets that continue to be indemnified total $14.5 million. Based on the analysis the
Company prepares, we believe the remaining liability is adequate for the inherent losses that may
be incurred on our recourse obligation. However, an increase in claims under our obligation could
result in an additional charge up to the aggregate amount of our guarantee.
The Company maintains a liability for estimated losses on loans expected to be repurchased or
on which indemnification is expected to be provided and regularly evaluates the adequacy of this
repurchase liability based on trends in repurchase and indemnification requests, actual loss
experience, and other relevant factors including economic conditions. Total loans repurchased
during the years ended December 31, 2009, 2008 and 2007 were $196,000, $1,301,000, and $1,037,000,
respectively. Loans indemnified that remain outstanding at December 31, 2009 totaled $5,320,000, of
which loans totaling $2,089,000 are guaranteed as to principal by FHA. Losses charged against the
liability for estimated losses on repurchase and indemnification were $292,000, $606,000, and
$97,000, for 2009, 2008, and 2007, respectively. At December 31, 2009 and 2008, the liability for
estimated losses on repurchase and indemnification was $891,000 and $1,195,000, respectively, and
was included in other liabilities on the consolidated balance sheets.
Impact of Inflation and Changing Prices
The Companys financial statements included herein have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP). GAAP presently
requires the Company to measure financial position and operating results primarily in terms of
historic dollars. Changes in the relative value of money due to inflation or recession are
generally not considered. The primary effect of inflation on the operations of the Company is
reflected in increased operating costs. In the Companys opinion, our financial condition is
affected much more by changes in interest rates than by changes in the inflation rate. While
interest rates are certainly influenced by inflation rates, interest rates do not necessarily
change at the same rate or in the same proportion as the inflation rate. Interest rates are highly
sensitive to many factors beyond the control of the Company, including changes in the expected rate
of inflation, influence of general and local economic conditions and the monetary and fiscal
policies of the United States government, and various other governmental regulatory authorities,
among other things. See Item 1. Business Regulation and Supervision in this report.
Critical Accounting Policies
The Company and its subsidiaries have established various accounting policies which govern the
application of accounting principles generally accepted in the United States of America in the
preparation and presentation of the Companys consolidated financial statements. The significant
accounting policies of the Company are described in Note 2 of the financial statements and along
with the disclosures presented in the other financial statement notes, provide information on how
significant assets and liabilities are valued in the financial statements and how those values are
determined. Certain accounting policies involve significant judgments, assumptions and estimates by
management that have a material impact on the carrying value of certain assets and liabilities,
which management considers to be critical accounting policies. The judgments, assumptions and
estimates used by management are based on historical experience, knowledge of the accounts and
other factors, which are believed to be reasonable under the circumstances. Because of the nature
of the judgments and assumptions made by management, actual results could differ from these
judgments and estimates, which could have a material impact on the carrying values of assets and
liabilities and the results of operations of the Company.
Allowance for Credit Losses. The Company currently views the determination of the allowance
for credit losses as a critical accounting policy that requires significant judgments, assumptions
and estimates used in preparation of its consolidated financial statements. The allowance for
credit losses is managements estimate of probable incurred credit losses that are inherent in the
loan portfolios. Management takes into consideration various factors, such as the fair value of the
underlying collateral and the amount and timing of expected future cash flows on impaired loans,
estimated losses on pools of homogeneous loans based on historical loss experience, the collective
experience of our credit risk management team and consideration of current economic trends and
conditions.
- 77 -
The allowance for credit losses consists of four components: (1) pools of homogeneous
single-family loans with similar risk characteristics; (2) pools of homogenous community bank loans
with similar risk characteristics (i.e., multifamily, residential and commercial construction and
development, commercial real estate and commercial); (3) individually significant loans that are
measured for impairment; and (4) a component representing an estimate of inherent, but probable
undetected losses, which also contemplates the imprecision in the various credit risk models
utilized to calculate the other components of the allowance as well as the uncertainty of
underlying collateral fair values.
Pools of homogeneous single-family loans with similar risk characteristics are assessed for
probable losses based on loss migration analysis where loss factors are updated regularly based on
actual experience. The loss migration analysis examines historical loss experience and the related
internal gradings of loans charged off. The analysis also considers inherent but undetected losses
within the portfolio.
Pools of homogeneous community bank loans with similar risk characteristics (i.e.,
multifamily, residential and commercial construction and development, commercial real estate and
commercial) are likewise assessed for probable losses based on loss migration analysis, where loss
factors are updated regularly based on our own loss experience as well as the collective experience
of our credit risk management team, loss rates at selected peer community banks and industry data.
The analysis for community bank loans also incorporates the related internal gradings of loans
charged off and other factors including our asset quality trends and national and local economic
conditions.
The portion of the allowance established for loans measured for impairment reflects expected
losses resulting from analyses developed through specific allocations for individual loans. We
consider a loan impaired when, based on current information and events, it is probable that we will
be unable to collect all amounts due according to the contractual terms of the loan. Estimated fair
value is typically measured using the fair value of collateral, as such loans are usually
collateral dependent, but may be measured using either the present value of expected future cash
flows discounted using the loan rate, or the market price of the loan. All loans considered
impaired are included in nonperforming loans. We generally evaluate our residential loans
collectively due to their homogeneous nature. The last component of the allowance for credit losses
is a portion which represents the estimated inherent but undetected probable losses, and the
imprecision in the credit risk models utilized to calculate the allowance. This component of the
allowance is primarily associated with community bank loans and is reflective of the uncertainty
related to the recent growth in the community bank loan portfolio, general economic conditions and
ongoing uncertainty with respect to a small number of individually large loans.
Loan losses are charged against the allowance when the loan is considered uncollectible.
There are many factors affecting the allowance for credit losses; some are quantitative
while others require qualitative judgment. Although management believes its process for determining
the allowance adequately considers all of the potential factors that could potentially result in
credit losses, the process includes subjective elements and may be
susceptible to significant change. To the extent actual outcomes differ from management
estimates, additional provision for credit losses could be required that could adversely affect
earnings or our financial position in future periods.
Valuation Loans Held for Sale. The Company also considers its lower-of-cost-or-market
(LOCOM) valuations which apply to loans held for sale to be a critical accounting policy that
requires use of judgments, assumptions and estimates. The Company classified $260.8 million of loan
assets as held for sale at December 31, 2009. The majority of these loans consist of single-family
residential loans of approximately $187.9 million, commercial real estate of $55.3 million, SBA
originated loans of $4.4 million, and multifamily loans of $17.4 million. Loans held for sale are
carried at the lower of cost or market in accordance with ASC Subtopic 948-35-1, Loans Held for
Sale. Many of the loans owned by the Company either do not trade in an active market or trade in
inefficient markets. As such, the market value of loans without available market prices is
estimated by loan type using interest rates for reasonably comparable assets found in the secondary
marketplace. Other factors including delinquency, existence of government guarantees, and other
economic factors are considered in estimating the fair value of loans held for sale. Management has
compared its fair value estimates and assumptions to observable market data where available and to
recent market activity and based on that comparison believes the fair values and related
assumptions are comparable to those used by other market participants. A rising interest rate
environment may possibly result in declines in the market value of the loans held for sale, which
may adversely affect earnings or our financial position in future periods. The Company mitigates
risk associated with declines in the estimated fair value of its loans held for sale by
predominately holding loans with variable interest rates that tend to be less market sensitive to
interest rate fluctuations than long-term fixed rate loans. See Note 18 to the financial
statements.
- 78 -
Temporary vs. Other-Than-Temporary Impairment. The Company views the determination of whether
an investment security is temporarily or other-than-temporarily impaired as a critical accounting
policy, as the estimate is susceptible to significant change from period to period because it
requires management to make significant judgments, assumptions and estimates in the preparation of
its consolidated financial statements. We assess individual securities in our investment securities
portfolio for impairment at least on a quarterly basis, and more frequently when economic or market
conditions warrant. An investment is impaired if the fair value of the security is less than its
carrying value at the financial statement date. When a security is impaired, we then determine
whether this impairment is temporary or other-than-temporary. Management also evaluates all of its
investment securities with one rating below investment grade from a Nationally Recognized
Securities Ratings Organization (NRSRO) for other-than-temporary impairment (OTTI) at least on
a quarterly basis as well as securities with a collateral coverage ratio of less than or equal to
1.0 (these populations are substantially the same). In estimating other-than-temporary impairment
losses, management assesses whether it intends to sell, or it is more likely than not that it will
be required to sell, a security in an unrealized loss position before recovery of its amortized
cost basis. If either of these criteria is met, the entire difference between amortized cost and
fair value is recognized in earnings. For securities that do not meet the aforementioned criteria,
the amount of impairment recognized in earnings is limited to the amount related to credit losses,
while impairment related to other factors is recognized in other comprehensive income. Management
utilizes cash flow models to segregate impairments principally on selected non-agency mortgage
backed securities to distinguish between impairment related to credit losses and impairment related
to other factors. To assess for OTTI, management considers, among other things, (i) the severity
and duration of the impairment; (ii) the ratings of the security; (iii) the overall transaction
structure (e.g., the Companys position within the structure, the aggregate, near term financial
performance of the underlying collateral, delinquencies, defaults, loss severities, recoveries,
prepayments, cumulative loss projections, and discounted cash flows); and (iv) the timing and
magnitude of a break in modeled cash flows.
The material effect, if any, on the consolidated financial statements related to these
critical accounting areas is also discussed below.
Income Taxes. The assessment of tax assets and liabilities involves the use of estimates,
assumptions, interpretations, and judgment concerning certain accounting pronouncements and federal
and state tax codes. There can be no assurance that future events, such as court decisions or
positions of federal and state taxing authorities, will not differ from managements current
assessment, the impact of which could be significant to the consolidated results of operations and
reported earnings. For financial reporting purposes, a valuation allowance has been recognized at
December 31, 2009, to offset deferred tax assets related to the Companys credit carryforwards,
state net operating loss carryforwards of certain subsidiaries and the remaining balance of the
deferred tax asset for which management determined it was not more likely than not that the
deferred tax asset could be realized. The Company believes the tax assets and liabilities are
properly recorded in the consolidated financial statements. However, there is no guarantee that the
tax benefits associated with the remaining deferred tax assets will be fully realized. We have
concluded that it is more likely than not that the tax benefits associated with the remaining
deferred tax assets will be realized. See Note 1,
Summary of Significant Accounting Policies, and Note 12, Income Taxes, of the notes to
consolidated financial statements.
Real Estate Owned. Real estate owned or other foreclosed assets acquired through loan
foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a
new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for
credit losses. Due to the subjective nature of establishing the fair value when the asset is
acquired, the actual fair value of the real estate owned or foreclosed asset could differ from the
original estimate. If it is determined that fair value declines subsequent to foreclosure, a
direct charge is recorded through noninterest expense to further reduce the cost basis of the
asset. Operating costs associated with the assets after acquisition are also recorded as
noninterest expense. Gains and losses on the disposition of real estate owned and foreclosed
assets are netted and included in other noninterest expense.
Recent Accounting Pronouncements
Note 22 to the financial statements discusses new accounting policies adopted by the Company
during 2009 and the expected impact of accounting policies recently issued or proposed but not yet
required to be adopted. To the extent the adoption of new accounting standards materially affects
financial condition, results of operations, or liquidity, the impacts thereof are discussed in the
applicable section(s) of this discussion and the notes to the consolidated financial statements.
- 79 -
Forward-Looking Statements
Certain statements included in this report contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that are subject to significant
risks and uncertainties. Forward-looking statements include information concerning our future
results, interest rates, loan and deposit growth, operations, community bank implementation and
business strategy. These statements often included terminology such as may, will, expect,
anticipate, predict, believe, plan, estimate or continue or the negative thereof or
other variations thereon or comparable terminology. As you consider forward-looking statements, you
should understand that these statements are not guarantees of performance or results. They involve
risks, uncertainties and assumptions that could cause actual results to differ materially from
those in the forward-looking statements. These factors include but are not limited to: the
successful implementation of our community banking strategies, the timing of regulatory approvals
or consents for new branches or other contemplated actions; the availability of suitable and
desirable locations for additional branches; the continuing strength of our existing business,
which may be affected by various factors, including but not limited to interest rate fluctuations,
level of delinquencies, defaults and prepayments, general economic conditions, competition, legal
and regulatory developments and the risks and uncertainties discussed herein or elsewhere and/or
set forth from time to time in our other periodic reports filings and public statements.
Any forward-looking statements made by the Company speak only as of the date on which the
statements are made. New risks and uncertainties come up from time to time, and it is impossible
for us to predict these events or how they may affect us. We have no duty to, and do not intend to,
update or revise the forward-looking statements after the date on which they are made. In light of
these risks and uncertainties, any forward-looking statement made in this document or elsewhere may
not reflect actual results. Our risk factors are discussed in greater detail in Item 1A. Risk
Factors in this report.
|
|
|
Item 7A. |
|
Quantitative and Qualitative Disclosures about Market Risk |
Market Risk. Market risk refers to the risk of loss arising from adverse changes in interest
rates and other relevant market rates and prices. The risk of loss can be assessed from the
perspective of adverse changes in fair values, cash flows, and future earnings. Due to the nature
of its operations, the Company is exposed to both interest rate risk and, liquidity risk.
Interest Rate Risk. Interest rate risk on the Companys balance sheet consists of reprice,
option, and basis risks. Reprice risk results from differences in the maturity, or repricing of
asset and liability portfolios. Option risk arises from embedded options present in many financial
instruments such as loan prepayment options, deposit early withdrawal options, interest rate
options, and options we embed in various instruments such as FHLBank borrowings and repurchase
agreements. These options allow customers or the holders opportunities to benefit when market
interest rates change, which typically results in higher costs or lower revenue for the Company.
Basis risk refers to the potential for changes in the underlying relationship between market rates
and indices, which subsequently result in a narrowing of the profit spread on an earning asset or
liability. Basis risk principally impacts the Company through certain liabilities that are tied to
LIBOR, while the majority of the community bank loans are tied to prime.
Asset Liability Management. United Western Bank has established an Asset Liability Committee
(ALCO). Through ALCO, the Company seeks to avoid excessive fluctuations in its net interest
margin and to maximize its net interest income before provision for credit losses within acceptable
levels of risk through periods of changing interest rates. Accordingly, the Companys interest rate
sensitivity and liquidity are monitored on an ongoing basis by ALCO, which oversees the risk
management and establishes risk measures, limits and policy guidelines for managing the amount of
interest rate risk and its effect on net interest income and capital.
The Company utilizes an earnings simulation model as the primary quantitative tool in
measuring the amount of interest rate risk associated with changing market rates. The model
quantifies the effect of various interest rate alternatives on projected net interest income and
net income over the next 12 months. The model measures the impact on net interest income relative
to a base case alternative of hypothetical fluctuations in interest rates over the next 12 months.
These simulations incorporate assumptions regarding balance sheet growth, continued community bank
conversion, changes in liability mix, and pricing. The impact of interest rate derivatives, such as
embedded options contained in certain liabilities is also included in the model. Other interest
rate-related risk such as prepayment, basis and option risk are also considered.
ALCO regularly monitors and manages the balance between interest rate-sensitive assets and
liabilities. The objective is to manage the impact of fluctuating market rates on net interest
income within acceptable levels. In order to meet this objective, management may lengthen or
shorten the duration of assets or liabilities or enter into derivative contracts, either directly
or embedded in other financial instruments, to mitigate potential market risk.
- 80 -
Based on simulation modeling, which assumes immediate parallel changes in interest rates at
December 31, 2009, we believe that our net interest income and net income would change over a
one-year period due to changes in interest rates as follows:
|
|
|
|
|
|
|
|
|
|
|
Immediate Shifts |
|
|
|
|
Changes in Levels of |
|
|
Change in Net Interest Income |
|
Interest Rates |
|
|
Dollar Change |
|
|
Percentage Change |
|
(in basis points) |
|
|
(dollars in thousands) |
|
|
|
|
|
200 |
|
|
$ |
14,336 |
|
|
|
21.67 |
% |
|
100 |
|
|
|
4,668 |
|
|
|
7.06 |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
(100 |
) |
|
|
(1,939 |
) |
|
|
(2.93 |
) |
Based on simulation modeling, which assumes immediate parallel changes in interest rates
at December 31, 2008, we believe that our net interest income and net income would change over a
one-year period due to changes in interest rates as follows:
|
|
|
|
|
|
|
|
|
|
|
Immediate Shifts |
|
|
|
|
Changes in Levels of |
|
|
Change in Net Interest Income |
|
Interest Rates |
|
|
Dollar Change |
|
|
Percentage Change |
|
(in basis points) |
|
|
(dollars in thousands) |
|
|
|
|
|
200 |
|
|
$ |
4,307 |
|
|
|
5.69 |
% |
|
100 |
|
|
|
1,607 |
|
|
|
2.12 |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
(100 |
) |
|
|
(1,483 |
) |
|
|
(1.96 |
) |
At December 31, 2009, management believes the Companys interest rate risk position is
modestly asset sensitive. This means the results of the Companys net interest income and net
income would be expected to improve modestly if interest rates increased from current levels.
Management also believes that continued interest rate declines from the Federal Open Market
Committee would have a negative impact on the results of operations. The continued execution of our
business plan is expected to mitigate the impact of the current interest rate environment if rates
remain stable or decline further.
The assumptions used in all of our interest rate sensitivity simulations discussed above are
inherently uncertain. As a result, the simulations cannot precisely measure net interest income or
net income or precisely predict the impact of changes in interest rates on net interest income and
net income. Actual results will differ from simulated results due to timing, magnitude and
frequency of interest rate changes as well as changes in market conditions and management
strategies.
See Item 1A Risk Factors, and Item 7. Managements Discussion and Analysis of Financial
Condition.
|
|
|
Item 8. |
|
Financial Statements and Supplementary Data |
See Index to Financial Statements on page F-1.
|
|
|
Item 9. |
|
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure |
None
|
|
|
Item 9A. |
|
Controls and Procedures |
|
(a) |
|
Evaluation of Disclosure Controls and Procedures |
We have established disclosure controls and procedures (Disclosure Controls) to
ensure that information required to be disclosed in the Companys reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported
within the time periods specified in the U.S. Securities Exchange Commissions rules and
forms. Disclosure Controls are also designed to ensure that such information is accumulated
and communicated to management, including the Chief Executive Officer (CEO), Chief
Financial Officer (CFO) and Chief Accounting Officer (CAO), as appropriate to allow
timely decisions regarding required disclosure. Our Disclosure Controls were designed to
provide reasonable assurance that the controls and procedures would meet their objectives.
Our management including the CEO, CFO and CAO, does not expect that our Disclosure Controls
will prevent all error and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable assurance of achieving the designed control objectives
and management is required to apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more people or
by management override of the control. Because of the inherent limitations in a
cost-effective, maturing control system, misstatements due to error of fraud may occur and
not be detected.
- 81 -
As of the end of the period covered by this Form 10-K, we evaluated the effectiveness
of the design and operations of our Disclosure Controls. The controls evaluation was done
under the supervision and with the participation of management, including our CEO, CFO and
CAO. Based on this evaluation, our CEO, CFO and CAO have concluded our Disclosure Controls
were effective as of the end of the period covered by this Annual Report on Form 10-K.
|
(b) |
|
Managements Annual Report on Internal Control over Financial Reporting |
Management is responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the
supervision and with the participation of management, including our CEO, CFO and CAO, we
conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) as of December 31,
2009.
Based on our assessment, management concluded that, as of December 31, 2009, the
Companys internal control over financial reporting was effective based on the criteria set
forth by COSO.
The Companys external auditors, Crowe Horwath, LLP, an independent registered public
accounting firm, have issued an audit report on the effectiveness of the Companys internal
control over financial reporting, which is included on page F-2 of this report.
|
(c) |
|
Changes in Internal Control over Financial Reporting |
During the quarter ended December 31, 2009, there were no changes that materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
|
|
|
Item 9B. |
|
Other Information |
None.
PART III
|
|
|
Item 10. |
|
Directors, Executive Officers and Corporate Governance |
|
|
|
Item 11. |
|
Executive Compensation |
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
|
|
|
Item 13. |
|
Certain Relationships and Related Transactions, and Director Independence |
|
|
|
Item 14. |
|
Principal Accountant Fees and Services |
Information required by these Items is incorporated herein by reference to the Companys Proxy
Statement (Schedule 14A) for its 2010 Annual Meeting of Shareholders, which will be filed with the
Commission on or before March 31, 2010.
PART IV
|
|
|
Item 15. |
|
Exhibits and Financial Statement Schedules |
|
(a) |
|
(1) and (a) (2) Financial statements and financial statement schedules |
See Index to Financial Statements on page F-1.
See Exhibit Index on page 84.
|
(c) |
|
Financial Statement Schedules |
None.
- 82 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on the 15th day of March, 2010.
|
|
|
|
|
|
UNITED WESTERN BANCORP, INC.
|
|
Dated: March 15, 2010 |
/s/ Scot T. Wetzel |
|
|
Scot T. Wetzel |
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
Dated: March 15, 2010 |
/s/ William D. Snider |
|
|
William D. Snider |
|
|
Chief Financial Officer
(Principal Financial Officer) |
|
|
|
|
Dated: March 15, 2010 |
/s/ Benjamin C. Hirsh |
|
|
Benjamin C. Hirsh |
|
|
Chief Accounting Officer
(Principal Accounting Officer) |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
Signatures |
|
Title |
|
Date |
|
|
|
|
|
/s/ Scot T. Wetzel
Scot T. Wetzel
|
|
President, Chief Executive
Officer and
a Director
(Principal Executive Officer)
|
|
March 15, 2010 |
|
|
|
|
|
/s/ Guy A. Gibson
Guy A. Gibson
|
|
Chairman of the Board
|
|
March 15, 2010 |
|
|
|
|
|
/s/ William D. Snider
William D. Snider
|
|
Vice Chairman, Chief Financial
Officer and
a Director
(Principal Financial Officer)
|
|
March 15, 2010 |
|
|
|
|
|
/s/ Michael J. McCloskey
Michael J. McCloskey
|
|
Executive Vice President,
Chief Operating
Officer
and a Director
|
|
March 15, 2010 |
|
|
|
|
|
/s/ Robert T. Slezak
Robert T. Slezak
|
|
Director
|
|
March 15, 2010 |
|
|
|
|
|
/s/ Lester Ravitz
Lester Ravitz
|
|
Director
|
|
March 15, 2010 |
|
|
|
|
|
/s/ Dr. James Bullock
Dr. James Bullock
|
|
Director
|
|
March 15, 2010 |
|
|
|
|
|
/s/ Jeffrey R. Leeds
Jeffrey R. Leeds
|
|
Director
|
|
March 15, 2010 |
|
|
|
|
|
/s/ Bernard C. Darré
Bernard C. Darré
|
|
Director
|
|
March 15, 2010 |
- 83 -
INDEX TO EXHIBITS
|
|
|
|
|
|
3.1 |
|
|
Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 to Registrants annual report on Form
10-K for the fiscal year ended December 31, 2002 filed by the
Registrant with the Commission on March 14, 2003. |
|
3.1 |
(a) |
|
Articles of Amendment to the Articles of Incorporation,
incorporated by reference to Exhibit 3.2 to Registrants annual
report on Form 10-K for the fiscal year ended December 31, 2006
filed by the Registrant with the Commission on March 16, 2007. |
|
3.2 |
|
|
Bylaws, as amended, of the Registrant, incorporated by
reference to Exhibit 3.2 to the Registrants report on Form 8-K
filed by the Registrant with the Commission on December 27,
2007. |
|
4.1 |
|
|
Specimen Certificate for Common Stock of the Registrant,
incorporated by reference to Exhibit 4.1 to Registrants
registration statement on Form S-1 (No. 333-10223), filed by
the Registrant with the Commission on August 15, 1996, as
amended by Form S-1/A, filed by the Registrant with the
Commission on September 27, 1996. |
|
4.2 |
|
|
1996 Amended and Restated Employee Stock Option Plan,
incorporated by reference to Appendix III of the Proxy
Statement filed by the Registrant with the Commission on April
28, 2006, for the annual meeting of shareholders held on June
15, 2006 and Exhibit 4.1 to Registrants Form S-8 registration
statement filed with the Commission on June 30, 2006. |
|
4.3 |
|
|
Form of Non-Qualified Stock Option Agreement, incorporated by
reference to Exhibit 99.1 to Registrants report on Form 8-K
filed by the Registrant with the Commission on February 16,
2005. |
|
4.4 |
|
|
Form of Director Non-Qualified Stock Option Agreement,
incorporated by reference to Exhibit 99.2 to Registrants
report on Form 8-K filed by the Registrant with the Commission
on February 16, 2005. |
|
4.5 |
|
|
1996 Employee Stock Purchase Plan, incorporated by reference to
Appendix II of the Proxy Statement filed by the Registrant with
the Commission on April 28, 2006, for the annual meeting of
shareholders held on June 15, 2006 and Exhibit 4.2 to
Registrants Form S-8 registration statement on June 30, 2006. |
|
4.6 |
|
|
2006 Employee Stock Option Plan, incorporated by reference to
Appendix IV of the Proxy Statement filed by the Registrant with
the Commission on April 28, 2006, for the annual meeting of
shareholders held on June 15, 2006 and Exhibit 4.1 to
Registrants Form S-8 registration statement filed with the
Commission on June 30, 2006. |
|
4.7 |
|
|
2007 Equity Incentive Plan, incorporated by reference to
Exhibit 1 of the Proxy Statement filed by the Registrant with
the Commission on March 27, 2007, for the annual meeting of
shareholders held on May 17, 2007 and Exhibit 4.1 to
Registrants Form S-8 registration statement filed with the
Commission on May 18, 2007. |
|
4.8 |
|
|
Amended 2007 Equity Incentive Plan, incorporated by reference
to Exhibit 10.20 of the Form 10-K filed by the Registrant with
the Commission on March 3, 2009. |
|
4.9 |
|
|
Form of Restricted Stock Agreement, incorporated by reference
to Exhibit 99.3 to Registrants report on Form 8-K filed by the
Registrant with the Commission on May 21, 2007. |
|
4.10 |
|
|
Indenture between the Registrant and Wilmington Trust Company,
as debenture trustee, dated as of March 28, 2001, relating to
the 10.18% junior subordinated deferrable interest debentures
due June 8, 2031, incorporated by reference to Exhibit 10.5 to
Registrants quarterly report on Form 10-Q for the quarter
ended March 31, 2001, filed by the Registrant with the
Commission on May 15, 2001. |
|
4.11 |
|
|
Amended and Restated Declaration of Trust of Matrix Bancorp
Capital Trust II, dated as of March 28, 2001, incorporated by
reference to Exhibit 10.6 to Registrants quarterly report on
Form 10-Q for the quarter ended March 31, 2001, filed by the
Registrant with the Commission on May 15, 2001. |
|
4.12 |
|
|
Common Securities Guarantee Agreement of the Registrant, dated
as of March 28, 2001, incorporated by reference to Exhibit 10.7
to Registrants quarterly report on Form 10-Q for the quarter
ended March 31, 2001, filed by the Registrant with the
Commission on May 15, 2001. |
|
4.13 |
|
|
Capital Securities Guarantee Agreement of the Registrant, dated
as of March 28, 2001, incorporated by reference to Exhibit 10.8
to Registrants quarterly report on Form 10-Q for the quarter
ended March 31, 2001, filed by the Registrant with the
Commission on May 15, 2001. |
- 84 -
|
|
|
|
|
|
4.14 |
|
|
Amended and Restated Trust Agreement of Matrix Bancorp Capital
Trust VI, dated as of August 30, 2004, incorporated by
reference to Exhibit 10.1 to Registrants quarterly report on
Form 10-Q for the quarter ended September 30, 2004, filed by
the Registrant with the Commission on November 4, 2004. |
|
4.15 |
|
|
Guarantee Agreement of Matrix Bancorp Capital Trust VI, dated
as of August 30, 2004, incorporated by reference to Exhibit
10.2 to Registrants quarterly report on Form 10-Q for the
quarter ended September 30, 2004, filed by the Registrant with
the Commission on November 4, 2004. |
|
4.16 |
|
|
Junior Indenture between the Registrant and Deutsche Bank Trust
Company Americas, dated as of August 30, 2004, relating to
Junior Subordinated Debt Securities, due October 18, 2034,
incorporated by reference to Exhibit 10.3 to Registrants
quarterly report on Form 10-Q for the quarter ended September
30, 2004, filed by the Registrant with the Commission on
November 4, 2004. |
|
4.17 |
|
|
Indenture between the Registrant and Wells Fargo Bank, National
Association, as debenture trustee, dated as of June 30, 2005,
incorporated by reference to Exhibit 10.1 to Registrants
quarterly report on Form 10-Q for the quarter ended June 30,
2005, filed by the Registrant with the Commission on August 3,
2005. |
|
4.18 |
|
|
Amended and Restated Declaration of Trust Agreement of Matrix
Bancorp Capital Trust VIII, dated as of June 30, 2005,
incorporated by reference to Exhibit 10.2 to Registrants
quarterly report on Form 10-Q for the quarter ended June 30,
2005, filed by the Registrant with the Commission on August 3,
2005. |
|
4.19 |
|
|
Guarantee Agreement of Matrix Bancorp Capital Trust VIII, dated
as of June 30, 2005, incorporated by reference to Exhibit 10.3
to Registrants quarterly report on Form 10-Q for the quarter
ended June 30, 2005, filed by the Registrant with the
Commission on August 3, 2005. |
|
4.20 |
|
|
Rights Agreement, dated as of November 4, 2002, between Matrix
Bancorp, Inc. and Computershare Trust Company, which includes
the form of Articles of Amendment to State Terms of Series A
Junior Participating Preferred Stock, $0.01 par value, the form
of Right Certificate and the Summary of Rights, incorporated by
reference to Exhibit 4.1 to Registrants report on Form 8-K
filed by the Registrant with the Commission on November 6,
2002. |
|
4.21 |
|
|
Indenture, dated February 13, 2004, between Registrant and
Wells Fargo Bank, as Trustee, relating to Floating Rate
Subordinated Debt Security due 2014, incorporated by reference
to Exhibit 4.32 to Registrants annual report on Form 10-K for
the fiscal year ended December 31, 2003, filed by the
Registrant with the Commission on March 12, 2004. |
|
10.1 |
|
|
Assignment and Assumption Agreement, dated as of June 28, 1996,
by and among Mariano C. DeCola, William M. Howdon, R. James
Nicholson and Matrix Funding Corp., incorporated by reference
to Exhibit 10.30 to Registrants registration statement on Form
S-1 (No. 333-10223), filed by the Registrant with the
Commission on August 15, 1996 |
|
10.2 |
|
|
Amendment to Assignment and Assumption Agreement, dated as of
August 13, 2002, by and among Mariano C. DeCola, William M.
Howdon, R. James Nicholson and Matrix Funding Corp.
incorporated by reference to Exhibit 10.2 to Registrants
annual report on Form 10-K for the fiscal year ended December
31, 2002, filed by the Registrant with the Commission on March
14, 2003. |
|
10.3 |
|
|
Development Management Agreement, dated as of June 28, 1996, by
and among Matrix Funding Corp. and Nicholson Enterprises, Inc.,
incorporated by reference to Exhibit 10.31 to Registrants
registration statement on Form S-1 (No. 333-10223), filed by
the Registrant with the Commission on August 15, 1996. |
|
10.4 |
|
|
Coyote Creek Planned Unit Development Agreement, dated as of
July 1, 1998, by and among Fort Lupton, L.L.C. and Matrix
Funding Corp., incorporated by reference to Exhibit 10.12 to
Registrants annual report on Form 10-K for the fiscal year
ended December 31, 1998, filed by the Registrant with the
Commission on March 26, 1999. |
|
10.5 |
|
|
Fort Lupton Golf Course Residential and Planned Unit
Development Agreement, dated as of November 28, 1995,
incorporated by reference to Exhibit 10.36 to Registrants
registration statement on Form S-1 (No. 333-10223), filed by
the Registrant with the Commission on August 15, 1996. |
|
10.6 |
|
|
Contribution Agreement, dated as of December 1, 2004 by
and among Bluff Point Associates Corp., McInerney/Gabriele
Family Limited Partnership, R. Clifton DAmato, John H. Moody,
MSCS Ventures, Inc., Matrix Bancorp, Inc., Matrix Capital Bank,
Optech Systems, Inc., Let Lee and MG Colorado Holdings, Inc.,
incorporated by reference to Exhibit 10.1 to Registrants
report on Form 8-K filed by the Registrant with the Commission
on December 6, 2004. |
- 85 -
|
|
|
|
|
|
10.7 |
|
|
Amendment No. 1 to Contribution and Sale Agreement, dated
as of March 23, 2005 by and among Bluff Point Associates Corp.,
McInerney/Gabriele Family Limited Partnership, R. Clifton
DAmato, John H. Moody, MSCS Ventures, Inc., Matrix Bancorp,
Inc., Matrix Capital Bank, Optech Systems, Inc., Let Lee and MG
Colorado Holdings, Inc., incorporated by reference to Exhibit
10.1 to Registrants report on Form 8-K filed by the Registrant
with the Commission on March 28, 2005. |
|
10.8 |
|
|
The Registration Rights Agreement, dated as of December 9,
2005, by and between Matrix Bancorp, Inc., Friedman, Billings,
Ramsey & Co., Inc. and the other parties thereto, incorporated
by reference to Exhibit 4.1 to Registrants report on Form 8-K
filed by the Registrant with the Commission on December 13,
2005. |
|
10.9 |
|
|
Asset Purchase Agreement, dated as of March 31, 2006, between
Matrix Bancorp Trading, Inc., SN Capital Markets, LLC, Security
National Holding Company, LLC, and Security National Master
Holding Company, LLC, incorporated by reference to Exhibit 2.1
to Registrants report on Form 8-K filed by the Registrant with
the Commission on April 6, 2006. |
|
10.10 |
|
|
Purchase Agreement, dated as of May 5, 2006, between SKS
Ventures, LLC and Equi-Mor Holdings, Inc., incorporated by
reference to Exhibit 10.1 to Registrants report on Form 8-K
filed by the Registrant with the Commission on May 10, 2006. |
|
10.11 |
|
|
Agreement for Purchase and Sale, dated as of August 11, 2006
between Matrix Tower Holdings, LLC and Grant Management, A.S.,
incorporated by reference to Exhibit 10.1 to Registrants
report on Form 8-K filed by the Registrant with the Commission
on August 25, 2006. |
|
10.12 |
|
|
License Agreement, dated as of September 29, 2006, between
Legent Clearing, LLC and United Western Bancorp, Inc.,
incorporated by reference to Exhibit 10.1 to Registrants
report on Form 8-K filed by the Registrant with the Commission
on October 5, 2006. |
|
10.13 |
|
|
First Amendment to License Agreement, dated as of June 6, 2007,
between Legent Clearing, LLC and United Western Bancorp, Inc.,
incorporated by reference to Exhibit 10.14 to Registrants
report on Form 10-K filed by the Registrant with the Commission
on March 3, 2009. |
|
10.14 |
|
|
Revolving Loan Agreement, dated as of September 29, 2006,
between Legent Group, LLC and United Western Bank, in the
amount of $5,000,000, incorporated by reference to Exhibit 10.2
to Registrants report on Form 8-K filed by the Registrant with
the Commission on October 5, 2006. |
|
10.15 |
|
|
Second Modification of Loan Agreement, effective as of October
1, 2008, by and between Legent Group, LLC and United Western
Bank, in the amount of $5,000,000, incorporated by reference to
Exhibit 10.16 to Registrants report on Form 10-K filed by the
Registrant with the Commission on March 3, 2009. |
|
10.16 |
|
|
Form of Office Lease, dated as of October 1, 2006, between 700
17th Street Operating, LLC and United Western Bank,
incorporated by reference to Exhibit 10.3 to Registrants
report on Form 8-K filed by the Registrant with the Commission
on October 5, 2006. |
|
10.17 |
|
|
Credit Agreement, dated as of June 29, 2007 between United
Western Bancorp, Inc. and JPMorgan Chase Bank, N.A.,
incorporated by reference to Exhibit 10.1 to Registrants
report on Form 8-K filed by the Registrant with the Commission
on July 2, 2007. |
|
10.18 |
|
|
Employment Agreement, dated December 31, 2008, and effective as
of October 15, 2008, by and between United Western Bancorp,
Inc. and Scot T. Wetzel, incorporated by reference to Exhibit
10.1 to Registrants report on Form 8-K filed by the Registrant
with the Commission on January 7, 2009. |
|
10.19 |
|
|
Stock Purchase Agreement, dated March 23, 2009, between
MSCS Ventures, Inc. and Bluff Point Associates, Corp.,
incorporated by reference to Exhibit 10.1 to Registrants
report on Form 8-K filed by the Registrant with the Commission
on March 27, 2009. |
|
10.20 |
|
|
Asset Purchase Agreement, dated April 7, 2009, by and
among the Registrant, Sterling Trust Company, Equity Trust
Company, and Sterling Administrative Services, LLC incorporated
by reference to Exhibit 10.1 to Registrants report on Form 8-K
filed by the Registrant with the Commission on April 8, 2009. |
|
10.21 |
|
|
Line of Credit Note, dated June 29, 2009, in the amount
of $30,000,000 by and between United Western Bancorp, Inc. and
JPMorgan Chase Bank, NA incorporated by reference to Exhibit
10.1 to Registrants report on Form 8-K filed by the Registrant
with the Commission on June 26, 2009. |
|
10.22 |
|
|
Amendment to Credit Agreement, dated June 29, 2009, by
and between United Western Bancorp, Inc. and JPMorgan Chase
Bank, NA incorporated by reference to Exhibit 10.2 to
Registrants report on Form 8-K filed by the Registrant with
the Commission on June 26, 2009. |
|
10.23 |
|
|
Loan and Security Agreement, dated June 27, 2009, by and
among Sterling Trust Company, Equity Trust Company, Equity
Administrative Services, Inc., and Sterling Administrative
Services, LLC, incorporated by reference to Exhibit 10.1 to
Registrants report on Form 8-K filed by the Registrant with
the Commission on June 29, 2009. |
- 86 -
|
|
|
|
|
|
10.24 |
|
|
Amended and Restated Subaccounting Agreement, dated June
27, 2009, by and among United Western Bank, Equity Trust
Company, Equity Administrative Services, Inc., and Sterling
Administrative Services, LLC, incorporated by reference to
Exhibit 10.2 to Registrants report on Form 8-K filed by the
Registrant with the Commission on June 29, 2009. |
|
10.25 |
|
|
Line of Credit Note, dated September 30, 2009, in the
amount of $25,000,000 by and between United Western Bancorp,
Inc. and JPMorgan Chase Bank, NA incorporated by reference to
Exhibit 10.1 to Registrants report on Form 8-K filed by the
Registrant with the Commission on October 6, 2009. |
|
10.26 |
|
|
Amendment to Credit Agreement, dated September 30, 2009,
by and between United Western Bancorp, Inc. and JPMorgan Chase
Bank, NA incorporated by reference to Exhibit 10.2 to
Registrants report on Form 8-K filed by the Registrant with
the Commission on October 6, 2009. |
|
10.27 |
|
|
Amendment and Forbearance Agreement, dated December 14,
2009, by and between United Western Bancorp, Inc. and JPMorgan
Chase Bank, NA incorporated by reference to Exhibit 10.1 to
Registrants report on Form 8-K filed by the Registrant with
the Commission on December 16, 2009. |
|
10.28 |
|
|
Amendment to Credit Agreement, Note Modification and
Forbearance Agreement, dated January 15, 2010, by and between
United Western Bancorp, Inc. and JPMorgan Chase Bank, NA
incorporated by reference to Exhibit 10.1 to Registrants
report on Form 8-K filed by the Registrant with the Commission
on January 22, 2010. |
|
10.29 |
|
|
First Amendment to Amended and Restated Subaccounting
Agreement entered into as of February 24, 2010 between United
Western Bank®, Equity Trust Company, Equity Administrative
Services, Inc., and Sterling Administrative Services, LLC,
incorporated by reference to Exhibit 10.1 to Registrants
report on Form 8-K filed by the Registrant with the Commission
on March 4, 2010. |
|
21 |
* |
|
Subsidiaries of the Registrant. |
|
23.1 |
* |
|
Consent of McGladrey & Pullen, LLP. |
|
23.2 |
* |
|
Consent of Crowe Horwath LLP. |
|
31.1 |
* |
|
Certification by Scot T. Wetzel pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
31.2 |
* |
|
Certification by William D. Snider pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
31.3 |
* |
|
Certification by Benjamin C. Hirsh pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
32.1 |
* |
|
Certification by D. Scot T. Wetzel pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
32.2 |
* |
|
Certification by William D. Snider pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
32.3 |
* |
|
Certification by Benjamin C. Hirsh pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
Compensation Agreement |
|
* |
|
Filed herewith |
- 87 -
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of United Western Bancorp, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
F-6 |
|
|
|
|
|
|
|
|
|
F-7 |
|
|
|
|
|
|
|
|
|
F-9 |
|
|
|
|
|
|
|
|
|
F-10 |
|
|
|
|
|
|
|
|
|
F-12 |
|
|
|
|
|
|
F-1
Report on Managements Assessment of Internal Control over Financial Reporting
The management of United Western Bancorp, Inc. and subsidiaries (the Company) is
responsible for establishing and maintaining adequate internal control over financial reporting.
The Companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America. The Companys internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting principles generally
accepted in the United States of America, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. All internal control systems, no matter how well designed, have inherent
limitations, including the possibility of human error and the circumvention of overriding controls.
Accordingly, even effective internal control over financial reporting can provide only reasonable
assurance with respect to financial statement preparation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management assessed the effectiveness of the Companys internal control over financial
reporting as of December 31, 2009, based on the framework set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on
that assessment, management concluded that, as of December 31, 2009, the Companys internal control
over financial reporting is effective based on the criteria established in Internal
Control-Integrated Framework.
The effectiveness of the Companys internal control over financial reporting as of December
31, 2009, has been audited by Crowe Horwath LLP, an independent registered public accounting firm,
as stated in their attestation report, which expresses an unqualified opinion on the effectiveness
of the Companys internal control over financial reporting as of December 31, 2009. See Report of
Independent Registered Public Accounting Firm.
F-2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
United Western Bancorp, Inc.
We
have audited the accompanying consolidated balance sheets of United Western Bancorp, Inc. and
subsidiaries as of December 31, 2009 and 2008 and the related consolidated statements of
operations, shareholders equity and comprehensive income /(loss) and cash flows for the two years
then ended. We also have audited United Western Bancorp Inc. and subsidiaries internal control over
financial reporting as of December 31, 2009, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). United Western Bancorp Inc.s management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying
Managements Report on Internal Controls Over Financial Reporting. Our responsibility is to express
an opinion on these financial statements and an opinion on the effectiveness of the companys
internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audit of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
F-3
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of United Western Bancorp, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the results of its operations and its cash flows for the two years
then ended in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, United Western Bancorp, Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
As discussed in Note 2 to the consolidated financial statements United Western Bancorp
retrospectively adopted new accounting literature under ASC Topic 260, Earnings Per Share. All
previously reported earnings per common share data has been adjusted to conform to the new
computation methodology. As discussed in Note 25 Discontinued Operations Sale of UW Trust
Assets, the Company retrospectively applied accounting guidance related to discontinued operations,
and accordingly reclassified the operating results associated with the sale of UW Trust assets as
discontinued operations for all periods presented.
Sherman Oaks, California
March 15, 2010
F-4
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
United Western Bancorp, Inc.
We have audited the accompanying consolidated statements of operations, shareholders equity
and comprehensive income, and cash flows for the year ended December 31, 2007 of United
Western Bancorp, Inc. and subsidiaries. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of United Western Bancorp,
Inc. and subsidiaries for the year ended December 31, 2007, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, United Western Bancorp and
subsidiaries retrospectively adopted new authoritative accounting guidance related to
earnings per share. As discussed in Note 25, the consolidated financial statements have been
revised to reflect certain retrospective adjustments related to discontinued operations.
/s/ McGladrey & Pullen, LLP
Denver, Colorado
March 6, 2008 (August 7, 2009 as to Notes 2, 3 and 25)
F-5
United Western Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share information)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
61,424 |
|
|
$ |
22,332 |
|
Interest-earning deposits |
|
|
524,956 |
|
|
|
548 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
586,380 |
|
|
|
22,880 |
|
Investment securities available for sale, at fair value |
|
|
33,131 |
|
|
|
59,573 |
|
Investment securities held to maturity (fair value December 31, 2009
$292,474, December 31, 2008 $429,526) |
|
|
357,068 |
|
|
|
498,464 |
|
Loans held for sale at lower of cost or fair value |
|
|
260,757 |
|
|
|
291,620 |
|
Loans held for investment |
|
|
1,184,774 |
|
|
|
1,249,484 |
|
Allowance for credit losses |
|
|
(34,669 |
) |
|
|
(16,183 |
) |
|
|
|
|
|
|
|
Loans held for investment, net |
|
|
1,150,105 |
|
|
|
1,233,301 |
|
FHLBank stock, at cost |
|
|
9,388 |
|
|
|
29,046 |
|
Mortgage servicing rights, net |
|
|
7,344 |
|
|
|
9,496 |
|
Accrued interest receivable |
|
|
7,023 |
|
|
|
8,973 |
|
Other receivables |
|
|
14,940 |
|
|
|
15,123 |
|
Premises and equipment, net |
|
|
24,061 |
|
|
|
23,364 |
|
Bank owned life insurance |
|
|
26,182 |
|
|
|
25,233 |
|
Other assets, net |
|
|
7,291 |
|
|
|
13,839 |
|
Income tax receivable |
|
|
11,965 |
|
|
|
|
|
Deferred income taxes |
|
|
14,187 |
|
|
|
24,100 |
|
Foreclosed real estate, net |
|
|
16,350 |
|
|
|
4,417 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,526,172 |
|
|
$ |
2,259,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Deposits |
|
$ |
1,993,513 |
|
|
$ |
1,724,672 |
|
Custodial escrow balances |
|
|
31,905 |
|
|
|
29,697 |
|
FHLBank borrowings |
|
|
180,607 |
|
|
|
226,721 |
|
Borrowed money |
|
|
108,635 |
|
|
|
119,265 |
|
Junior subordinated debentures owed to unconsolidated subsidiary trusts |
|
|
30,442 |
|
|
|
30,442 |
|
Income tax payable |
|
|
|
|
|
|
1,140 |
|
Other liabilities |
|
|
21,419 |
|
|
|
25,543 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,366,521 |
|
|
|
2,157,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 16) |
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, par value $0.0001; 5,000,000 shares authorized;
no shares outstanding |
|
|
|
|
|
|
|
|
Common stock, par value $0.0001; 50,000,000 shares authorized;
29,345,522 shares at December 31, 2009 and
7,253,391 shares at December 31, 2008 outstanding, respectively |
|
|
3 |
|
|
|
1 |
|
Additional paid-in capital |
|
|
107,161 |
|
|
|
23,856 |
|
Retained earnings |
|
|
57,747 |
|
|
|
100,348 |
|
Accumulated other comprehensive loss |
|
|
(5,260 |
) |
|
|
(22,256 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
159,651 |
|
|
|
101,949 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,526,172 |
|
|
$ |
2,259,429 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
United Western Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Interest and dividend income: |
|
|
|
|
|
|
|
|
|
|
|
|
Community bank loans |
|
$ |
61,116 |
|
|
$ |
58,033 |
|
|
$ |
44,889 |
|
Residential loans |
|
|
14,036 |
|
|
|
20,503 |
|
|
|
27,882 |
|
Other loans |
|
|
1,044 |
|
|
|
2,834 |
|
|
|
6,779 |
|
Investment securities |
|
|
24,293 |
|
|
|
32,169 |
|
|
|
38,847 |
|
Deposits and dividends |
|
|
1,018 |
|
|
|
1,478 |
|
|
|
3,162 |
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income |
|
|
101,507 |
|
|
|
115,017 |
|
|
|
121,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
14,566 |
|
|
|
12,662 |
|
|
|
27,142 |
|
FHLBank borrowings |
|
|
9,339 |
|
|
|
13,769 |
|
|
|
17,086 |
|
Other borrowed money |
|
|
7,288 |
|
|
|
6,601 |
|
|
|
8,489 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
31,193 |
|
|
|
33,032 |
|
|
|
52,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before provision for credit losses |
|
|
70,314 |
|
|
|
81,985 |
|
|
|
68,842 |
|
Provision for credit losses |
|
|
35,032 |
|
|
|
8,599 |
|
|
|
2,312 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for credit losses |
|
|
35,282 |
|
|
|
73,386 |
|
|
|
66,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Custodial, administrative and escrow services |
|
|
491 |
|
|
|
864 |
|
|
|
606 |
|
Loan administration |
|
|
4,290 |
|
|
|
4,914 |
|
|
|
6,311 |
|
Gain on sale of loans held for sale |
|
|
2,248 |
|
|
|
764 |
|
|
|
2,124 |
|
(Loss) gain on sale of available for sale investment securities |
|
|
(46,980 |
) |
|
|
|
|
|
|
98 |
|
Other-than-temporary impairment |
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment losses |
|
|
(42,790 |
) |
|
|
(4,110 |
) |
|
|
|
|
Portion of loss recognized in other comprehensive income (before taxes) |
|
|
6,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings |
|
|
(36,593 |
) |
|
|
(4,110 |
) |
|
|
|
|
Gain on sale of investment in Matrix Financial Solutions, Inc. |
|
|
3,567 |
|
|
|
|
|
|
|
|
|
Litigation settlements |
|
|
|
|
|
|
|
|
|
|
155 |
|
Other |
|
|
2,450 |
|
|
|
3,072 |
|
|
|
3,729 |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest (loss) income |
|
|
(70,527 |
) |
|
|
5,504 |
|
|
|
13,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits |
|
|
25,417 |
|
|
|
24,868 |
|
|
|
21,892 |
|
Subaccounting fees |
|
|
20,442 |
|
|
|
17,914 |
|
|
|
22,851 |
|
Amortization of mortgage servicing rights |
|
|
2,507 |
|
|
|
2,635 |
|
|
|
3,489 |
|
Lower of cost or fair value adjustment on loans held for sale |
|
|
586 |
|
|
|
2,793 |
|
|
|
722 |
|
Occupancy and equipment |
|
|
3,368 |
|
|
|
2,708 |
|
|
|
2,346 |
|
Postage and communication |
|
|
937 |
|
|
|
910 |
|
|
|
770 |
|
Professional fees |
|
|
4,043 |
|
|
|
3,333 |
|
|
|
2,082 |
|
Mortgage servicing rights subservicing fees |
|
|
1,369 |
|
|
|
1,690 |
|
|
|
1,931 |
|
Redemption of junior subordinated debentures |
|
|
|
|
|
|
|
|
|
|
1,487 |
|
Other general and administrative |
|
|
18,223 |
|
|
|
9,279 |
|
|
|
8,515 |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
76,892 |
|
|
|
66,130 |
|
|
|
66,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes |
|
|
(112,137 |
) |
|
|
12,760 |
|
|
|
13,468 |
|
Income tax (benefit) provision |
|
|
(32,567 |
) |
|
|
2,635 |
|
|
|
3,315 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
(79,570 |
) |
|
|
10,125 |
|
|
|
10,153 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of tax |
|
|
37,525 |
|
|
|
(173 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income |
|
$ |
(42,045 |
) |
|
$ |
9,952 |
|
|
$ |
10,141 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
United Western Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations (continued)
(Dollars in thousands, except share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
(Loss) income from continuing operations per share basic |
|
$ |
(6.06 |
) |
|
$ |
1.39 |
|
|
$ |
1.39 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations per share assuming dilution |
|
$ |
(6.06 |
) |
|
$ |
1.39 |
|
|
$ |
1.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations per share basic |
|
$ |
2.86 |
|
|
$ |
(0.02 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations per share assuming dilution |
|
$ |
2.86 |
|
|
$ |
(0.02 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share basic |
|
$ |
(3.20 |
) |
|
$ |
1.37 |
|
|
$ |
1.39 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income assuming dilution |
|
$ |
(3.20 |
) |
|
$ |
1.37 |
|
|
$ |
1.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic |
|
|
13,139,070 |
|
|
|
7,164,250 |
|
|
|
7,247,636 |
|
Weighted average shares assuming dilution |
|
|
13,139,070 |
|
|
|
7,164,598 |
|
|
|
7,256,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share |
|
$ |
0.13 |
|
|
$ |
0.24 |
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-8
United Western Bancorp, Inc. and Subsidiaries
Consolidated Statements of Shareholders Equity and Comprehensive Income/(Loss)
(Dollars in thousands, except share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
Comprehensive |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income (loss) |
|
|
Total |
|
|
Income/(loss) |
|
Balance at January 1, 2007 |
|
|
7,256,573 |
|
|
$ |
1 |
|
|
$ |
23,616 |
|
|
$ |
83,970 |
|
|
$ |
166 |
|
|
$ |
107,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid ($0.24 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,747 |
) |
|
|
|
|
|
|
(1,747 |
) |
|
|
|
|
Stock option exercise |
|
|
500 |
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
Stock repurchase |
|
|
(60,200 |
) |
|
|
|
|
|
|
(1,251 |
) |
|
|
|
|
|
|
|
|
|
|
(1,251 |
) |
|
|
|
|
Issuance of stock to directors |
|
|
2,711 |
|
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
62 |
|
|
|
|
|
Issuance of stock to employee stock
purchase plan |
|
|
18,308 |
|
|
|
|
|
|
|
399 |
|
|
|
|
|
|
|
|
|
|
|
399 |
|
|
|
|
|
Restricted stock grants |
|
|
46,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
886 |
|
|
|
|
|
|
|
|
|
|
|
886 |
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,141 |
|
|
|
|
|
|
|
10,141 |
|
|
$ |
10,141 |
|
Net unrealized holding losses, net
of income tax (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,834 |
) |
|
|
(2,834 |
) |
|
|
(2,834 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
7,264,224 |
|
|
$ |
1 |
|
|
$ |
23,724 |
|
|
$ |
92,364 |
|
|
$ |
(2,668 |
) |
|
$ |
113,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative adjustment to apply ASC 715-60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(226 |
) |
|
|
|
|
|
|
(226 |
) |
|
|
|
|
Dividends paid ($0.24 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,742 |
) |
|
|
|
|
|
|
(1,742 |
) |
|
|
|
|
Stock repurchase |
|
|
(113,900 |
) |
|
|
|
|
|
|
(1,605 |
) |
|
|
|
|
|
|
|
|
|
|
(1,605 |
) |
|
|
|
|
Issuance of stock to directors |
|
|
9,428 |
|
|
|
|
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
139 |
|
|
|
|
|
Issuance of stock to employee stock
purchase plan |
|
|
26,634 |
|
|
|
|
|
|
|
337 |
|
|
|
|
|
|
|
|
|
|
|
337 |
|
|
|
|
|
Restricted stock grants |
|
|
67,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
1,261 |
|
|
|
|
|
|
|
|
|
|
|
1,261 |
|
|
|
|
|
Comprehensive income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,952 |
|
|
|
|
|
|
|
9,952 |
|
|
$ |
9,952 |
|
Net unrealized holding losses, net
of income tax (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,588 |
) |
|
|
(19,588 |
) |
|
|
(19,588 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(9,636 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
7,253,391 |
|
|
$ |
1 |
|
|
$ |
23,856 |
|
|
$ |
100,348 |
|
|
$ |
(22,256 |
) |
|
$ |
101,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in
accounting principle, adoption of ASC
320-10 (net of tax) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
387 |
|
|
|
(387 |
) |
|
|
|
|
|
|
|
|
Dividends paid ($0.13 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(943 |
) |
|
|
|
|
|
|
(943 |
) |
|
|
|
|
Issuance of stock to directors |
|
|
25,606 |
|
|
|
|
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
179 |
|
|
|
|
|
Issuance of stock to employee stock
purchase plan |
|
|
29,157 |
|
|
|
|
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
92 |
|
|
|
|
|
Issuance of stock related to public
offering (net of offering costs of
$6,099) |
|
|
21,961,325 |
|
|
|
2 |
|
|
|
81,744 |
|
|
|
|
|
|
|
|
|
|
|
81,746 |
|
|
|
|
|
Restricted stock grants |
|
|
76,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
1,290 |
|
|
|
|
|
|
|
|
|
|
|
1,290 |
|
|
|
|
|
Comprehensive income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,045 |
) |
|
|
|
|
|
|
(42,045 |
) |
|
$ |
(42,045 |
) |
Net unrealized gains on
available-for-sale securities and
other-than temporary impairment on
held-to-maturity securities, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,383 |
|
|
|
17,383 |
|
|
|
17,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(24,662 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
29,345,522 |
|
|
$ |
3 |
|
|
$ |
107,161 |
|
|
$ |
57,747 |
|
|
$ |
(5,260 |
) |
|
$ |
159,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of income tax (benefit) provision of ($1,460), ($12,228) and $11,702 for 2007,
2008, and 2009 respectively. |
See accompanying notes to consolidated financial statements.
F-9
United Western Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash flows from continuing operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) income |
|
$ |
(42,045 |
) |
|
$ |
9,952 |
|
|
$ |
10,141 |
|
(Income) loss from discontinued operations, net of income tax
(benefit)/provision |
|
|
(37,525 |
) |
|
|
173 |
|
|
|
12 |
|
Adjustments to reconcile income to net cash from continuing operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
1,475 |
|
|
|
1,487 |
|
|
|
1,012 |
|
Depreciation and amortization |
|
|
1,911 |
|
|
|
1,508 |
|
|
|
1,202 |
|
Provision for credit losses |
|
|
35,032 |
|
|
|
8,599 |
|
|
|
2,312 |
|
Write-down on other-than-temporary impairment of securities |
|
|
36,593 |
|
|
|
4,110 |
|
|
|
|
|
Amortization of mortgage servicing rights |
|
|
2,507 |
|
|
|
2,635 |
|
|
|
3,489 |
|
Lower of cost or fair value adjustment on loans held for sale |
|
|
586 |
|
|
|
2,793 |
|
|
|
722 |
|
Gain on sale of loans held for sale |
|
|
(2,248 |
) |
|
|
(764 |
) |
|
|
(2,124 |
) |
Loss (gain) on sale of securities available for sale |
|
|
46,980 |
|
|
|
|
|
|
|
(98 |
) |
Gain on sale of investment in Matrix Financial Solutions, Inc. |
|
|
(3,567 |
) |
|
|
|
|
|
|
|
|
Net loss on sale of assets, equipment and foreclosed real estate |
|
|
1,205 |
|
|
|
1,316 |
|
|
|
1 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans originated and purchased for sale |
|
|
(35,668 |
) |
|
|
(34,161 |
) |
|
|
(34,635 |
) |
Principal payments on, and proceeds from sale of, loans held for sale |
|
|
64,193 |
|
|
|
89,315 |
|
|
|
109,754 |
|
(Increase) decrease in other receivables, other assets, and deferred
income taxes |
|
|
(4,077 |
) |
|
|
(5,471 |
) |
|
|
419 |
|
(Decrease) increase in other liabilities and income tax payable |
|
|
(4,834 |
) |
|
|
(4,039 |
) |
|
|
595 |
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing operating activities |
|
|
60,518 |
|
|
|
77,453 |
|
|
|
92,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from continuing investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Loans originated and purchased for investment |
|
|
(422,226 |
) |
|
|
(867,438 |
) |
|
|
(705,303 |
) |
Principal repayments on loans held for investment |
|
|
498,723 |
|
|
|
506,606 |
|
|
|
505,323 |
|
Proceeds from sale of available for sale securities |
|
|
373 |
|
|
|
|
|
|
|
25,600 |
|
Proceeds from sale of cost method investment |
|
|
4,317 |
|
|
|
|
|
|
|
|
|
Proceeds from maturity and prepayment of available for sale securities |
|
|
13,055 |
|
|
|
14,343 |
|
|
|
24,822 |
|
Purchase of held to maturity securities |
|
|
(5,451 |
) |
|
|
(5,018 |
) |
|
|
(4,940 |
) |
Proceeds from the maturity and prepayment of held to maturity securities |
|
|
104,184 |
|
|
|
75,925 |
|
|
|
125,707 |
|
Proceeds from sales of loans transferred to loans held for sale |
|
|
|
|
|
|
|
|
|
|
21,430 |
|
Proceeds from redemption of FHLBank stock |
|
|
19,998 |
|
|
|
12,000 |
|
|
|
5,000 |
|
Purchases of premises and equipment |
|
|
(2,570 |
) |
|
|
(9,554 |
) |
|
|
(8,624 |
) |
Proceeds from sale of foreclosed real estate |
|
|
4,984 |
|
|
|
4,283 |
|
|
|
5,784 |
|
Proceeds from sale of building, equipment and other assets |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing investing activities |
|
|
215,387 |
|
|
|
(268,853 |
) |
|
|
(5,196 |
) |
|
|
|
|
|
|
|
|
|
|
Continued
F-10
United Western Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash flows from continuing financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits |
|
$ |
268,841 |
|
|
$ |
339,191 |
|
|
$ |
39,800 |
|
Net increase (decrease) in custodial escrow balances |
|
|
2,208 |
|
|
|
(4,475 |
) |
|
|
(5,845 |
) |
Net decrease in FHLBank borrowings |
|
|
(46,114 |
) |
|
|
(179,408 |
) |
|
|
(113,302 |
) |
Borrowed money (repayments of ) proceeds from repurchase agreements |
|
|
(2,630 |
) |
|
|
4,837 |
|
|
|
26,428 |
|
Borrowed money (repayements of) advances on revolving line, net |
|
|
(8,000 |
) |
|
|
17,000 |
|
|
|
5,000 |
|
Borrowed money advances on term line |
|
|
|
|
|
|
|
|
|
|
6,000 |
|
Redemption of capital securities of subsidiary trust |
|
|
|
|
|
|
|
|
|
|
(25,774 |
) |
Repurchase of common stock |
|
|
|
|
|
|
(1,605 |
) |
|
|
(1,251 |
) |
Dividends paid |
|
|
(943 |
) |
|
|
(1,742 |
) |
|
|
(1,747 |
) |
Stock option exercise |
|
|
|
|
|
|
|
|
|
|
12 |
|
Proceeds from issuance of common stock, net |
|
|
81,814 |
|
|
|
212 |
|
|
|
311 |
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing financing activities |
|
|
295,176 |
|
|
|
174,010 |
|
|
|
(70,368 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows |
|
|
(7,934 |
) |
|
|
704 |
|
|
|
918 |
|
Investing cash flows |
|
|
353 |
|
|
|
(1,240 |
) |
|
|
(1,104 |
) |
Financing cash flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from discontinued operations |
|
|
(7,581 |
) |
|
|
(536 |
) |
|
|
(186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
563,500 |
|
|
|
(17,926 |
) |
|
|
17,052 |
|
Cash and cash equivalents at beginning of the period |
|
|
22,880 |
|
|
|
40,806 |
|
|
|
23,754 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period |
|
$ |
586,380 |
|
|
$ |
22,880 |
|
|
$ |
40,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash activity |
|
|
|
|
|
|
|
|
|
|
|
|
Loans transferred to foreclosed real estate and other assets |
|
$ |
21,717 |
|
|
$ |
6,907 |
|
|
$ |
4,651 |
|
|
|
|
|
|
|
|
|
|
|
Loans securitized and transferred to securities available for sale |
|
$ |
|
|
|
$ |
18,003 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for investment transferred to loans held for sale |
|
$ |
|
|
|
$ |
|
|
|
$ |
21,430 |
|
|
|
|
|
|
|
|
|
|
|
Note receivable received in sale of assets of discontinued operations |
|
$ |
46,050 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to directors |
|
$ |
179 |
|
|
$ |
139 |
|
|
$ |
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
30,853 |
|
|
$ |
33,148 |
|
|
$ |
53,376 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
1,256 |
|
|
$ |
7,529 |
|
|
$ |
4,589 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-11
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization
United Western Bancorp, Inc. (the Company), is a unitary thrift holding company and, through its
subsidiaries, a diversified financial services company headquartered in Denver, Colorado. The
Companys operations are conducted primarily through United Western Bank (United Western Bank or
the Bank), UW Trust Company, formerly Sterling Trust Company (UW Trust), Matrix Financial
Services Corporation (Matrix Financial), UWBK Fund Management, Inc., (Fund Management), and UW
Investment Services Inc. (UWIS), all of which are wholly-owned subsidiaries of the Company.
Subsidiaries
United Western Bank is a federally chartered savings bank that originates commercial real estate,
commercial, residential and commercial construction and development, multifamily, leasing, energy
and consumer loans. Within certain of these loan types the Bank also originates Small Business
Administration (SBA) loans under the 504 and 7(a) programs and loans through the utilization of
New Markets Tax Credits. The Bank also offers personal and business depository banking, treasury
management, item processing and trust services. At December 31, 2009, the Bank has eight branches
in the Colorado Front Range marketplace (downtown Denver, Boulder, Cherry Creek, Loveland, Fort
Collins, Longmont, and two in South Denver) and a loan production office serving Aspen and the
Roaring Fork Valley.
UW Trust is a non-bank trust company that operates custodial escrow, paying agent and trust
administration lines of business.
The Companys mortgage banking business is primarily conducted through Matrix Financial, and was
established with the primary objective of originating, acquiring and servicing residential mortgage
loans. Matrix Financial has not originated loans since 2003. All servicing functions previously
performed by Matrix Financial have been performed by a third party sub-servicer since December
2004.
2. Significant Accounting Policies
Accounting Standards Codification. The Financial Accounting Standards Boards (FASB) Accounting
Standards Codification (ASC) became effective on July 1, 2009. At that date, the ASC became
FASBs officially recognized source of authoritative U.S. generally accepted accounting principles
(GAAP) applicable to all public and non-public non-governmental entities, superseding existing
FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force (EITF) and
related literature. Rules and interpretive releases of the SEC under the authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting
literature is considered non-authoritative. The switch to the ASC affects the way companies refer
to U.S. GAAP in financial statements and accounting policies. Existing GAAP prior to the effective
date of the ASC was not altered in compilation of the ASC. Citing particular content in the ASC
involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and
Paragraph structure.
Basis of Presentation. The consolidated financial statements include the accounts of the Company
and all other entities in which the Company has a controlling financial interest. All significant
intercompany balances and transactions have been eliminated in consolidation. The accounting and
reporting policies of the Company and its subsidiaries conform, in all material respects, to
accounting principles generally accepted in the United States of America.
F-12
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Ownership interests of 20% or more in non-controlled affiliates are accounted for by the equity
method. Other investments are recorded at cost. The Company follows the accounting guidance in ASC
Topic 810, Consolidation for accounting for the Companys three variable interest
entities (VIEs), in the form of its wholly-owned subsidiary trusts that issued capital securities
to third-party investors and to certain direct and indirect interests in investment partnerships,
commonly referred to as trust preferred securities, discussed more fully in Note 11. As the Company
is not the primary beneficiary of these VIEs, the accounts of these entities are not included in
the Companys consolidated financial statements.
Use of Estimates. The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions at the date of the consolidated financial statements that affect the
amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the
reported amounts of revenue and expenses during the reporting period. Actual results could differ
from these estimates. The Company believes that the allowance for credit losses, the fair values
of financial instruments, lower of cost or market adjustment on loans held for sale, foreclosed
assets, deferred tax assets and liabilities and the determination of temporary vs.
other-than-temporary impairments are particularly subject to change.
Reclassifications. Certain reclassifications have been made to prior years consolidated financial
statements and related notes to conform to the current year presentation including the effects of
discontinued operations. See Note 25 Discontinued Operations Sale of UW Trust Assets for a
discussion of the impact of the sale of UW Trust assets.
Included in the reclassifications made to prior years consolidated financial statements was a
retrospective change in the presentation of the valuation allowance to reduce loans held for sale
to the lower of cost or fair value in two components, one an allowance for credit losses that
separately considered credit loss exposure and one valuation allowance that separately considered
market risk factors. Management has reclassified prior period financial statements to reflect the
valuation allowance to reduce loans held for sale at the lower of cost or fair value as one
valuation allowance balance. This revision to our presentation, reduced provision for credit losses
for the year ended December 31, 2007 to $2,312,000 from the previous presentation of provision for
credit losses of $2,451,000 for 2007. Offsetting the reduction in provision for credit losses, was
an increase in other expense lower of cost or fair value adjustment. The lower of cost or fair
value adjustment for the year ended December 31, 2007 was $583,000 and is now presented as $722,000
for the same period. This reclassification and other reclassifications made to these financial
statements had no impact on total assets, shareholders equity, or net income for any period.
Cash Flow Reporting. Cash equivalents, for purposes of the consolidated statements of cash flows,
consist of cash, federal funds sold and interest-earning deposits with banks with original
maturities, when purchased, of three months or less. Net cash flows are reported for deposit,
including custodial escrow balance transactions, FHLBank borrowings and borrowed money revolving
lines of credit.
Concentrations and Restrictions on Cash and Cash Equivalents. The Company maintains deposits with
other financial institutions in amounts that exceed federal deposit insurance coverage.
Furthermore, federal funds sold are essentially uncollateralized loans to other financial
institutions. Management regularly evaluates the credit risk associated with the counterparties to
these transactions and believes that the Company is not exposed to any significant credit risks on
cash and cash equivalents.
The Bank was required to maintain $2,337,000 and $3,186,000 of vault cash or balances with the
Federal Reserve Bank of Kansas City to meet regulatory reserve and clearing requirements at
December 31, 2009 and 2008, respectively. These deposits with the Federal Reserve Bank do not earn
interest.
F-13
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Dividend Restriction. The regulations under which our significant subsidiaries operate require
maintaining certain capital levels. Accordingly, such regulations may limit the amount of dividends
paid by the Bank or by UW Trust to the Company or by the Company to shareholders. Effective as of
December 10, 2009, the Company entered into an informal Memorandum of Understanding (Informal
Agreements) with the Office of Thrift Supervision (the OTS). The Informal Agreement between the
Company and the OTS provides, among other things, that the Company not declare or pay dividends or
any other capital distribution or redeem any capital stock of the Company, or take dividends
representing a reduction in the capital from the Bank, without the prior written non-objection of
the Regional Director of the OTS. See Note 13 for additional details related to the Informal
Agreements.
Investment Securities. Securities available for sale include mortgage backed securities and a
nominal amount of Small Business Administration guaranteed pooled securities (SBA securities).
Securities are classified as available for sale when management has the intent and ability to hold
such securities for an indefinite period of time, but not necessarily to maturity. Any decision to
sell investment securities available for sale would be based on various factors, including, but not
limited to, asset/liability management strategies, changes in interest rates or prepayment risks,
liquidity needs, or regulatory capital considerations. Securities available for sale are carried at
fair value with the change in unrealized gains and losses reported in other comprehensive
income/(loss), net of tax, which is included as a separate component in shareholders equity.
Realized gains and losses on the sale of available for sale securities are recognized on trade date
and are determined using the specific identification method.
Securities held to maturity include mortgage backed securities and SBA securities. Securities are
classified as held to maturity when management has the positive intent and ability to hold the
securities to maturity. Securities held to maturity are carried at amortized cost.
Interest income includes amortization of purchase premiums and discounts. Premiums and discounts on
securities are amortized on the level-yield method without anticipating prepayments, except for
mortgage-backed securities where prepayments are anticipated.
Temporary vs. Other-Than-Temporary Impairment
The Company views the determination of whether an investment security is temporarily or
other-than-temporarily impaired as a critical accounting policy, as the estimate is susceptible to
significant change from period to period because it requires management to make significant
judgments, assumptions and estimates in the preparation of its consolidated financial statements.
We assess individual securities in our investment securities portfolio for impairment at least on a
quarterly basis, and more frequently when economic or market conditions warrant. An investment is
impaired if the fair value of the security is less than its carrying value at the financial
statement date. When a security is impaired, we then determine whether this impairment is temporary
or other-than-temporary. In estimating other-than-temporary impairment (OTTI) losses for debt
securities management assesses whether it intends to sell, or it is more likely than not that it
will be required to sell a security in an unrealized loss position before recovery of its amortized
cost basis. If either of these criteria is met, the entire difference between amortized cost and
fair value is recognized in earnings. For securities that do not meet the aforementioned criteria,
the amount of impairment recognized in earnings is limited to the amount related to credit losses,
while impairment related to other factors is recognized in other comprehensive income. Management
utilizes cash flow models to segregate impairments principally on selected non-agency mortgage
backed securities to distinguish between impairment
related to credit losses and impairment related to other factors. To assess for OTTI, management
considers, among other things, (i) the severity and duration of the impairment; (ii) the ratings of
the security; (iii) the overall transaction structure (e.g., the Companys position within the
structure, the aggregate, near term financial performance of the underlying collateral,
delinquencies, defaults, loss severities, recoveries, prepayments, cumulative loss projections, and
discounted cash flows); and (iv) the timing and magnitude of a potential break in modeled cash
flows.
F-14
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Loans Held for Investment. Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are classified as loans held for investment. These
loans are reported at the principal balance outstanding net of unearned discounts and purchase
premiums. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of
certain direct origination costs and purchase premiums, are deferred and recognized in interest
income using level-yield method without anticipating prepayments and includes amortization of
deferred loan fees, purchase premiums and costs over the loan term. Net loan commitment fees or
costs for commitments are deferred and amortized into fee income or other expense on a
straight-line basis over the commitment period.
The accrual of interest on loans is discontinued when, in managements opinion, the borrower may be
unable to meet payment obligations as they become due, as well as when required by regulatory
provisions and Company policy. After a loan is placed on non-accrual status, any interest
previously accrued, but not yet collected, is reversed against current income. Generally, all
subsequent payments are applied to reduce the principal balance. Loans will not be placed back on
accrual status unless back interest and principal payments are made, and future payments are
reasonably assured.
Loans are considered impaired when, based on current information and events, it is probable the
Company will be unable to collect all amounts due in accordance with the original contractual terms
of the loan agreement, including scheduled principal and interest payments. Loans, for which the
terms have been modified, and for which the borrower is experiencing financial difficulties, are
considered troubled debt restructurings and classified as impaired. Impairment is evaluated in
total for smaller-balance loans of a similar nature and on an individual loan basis for other
loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that
the loan is reported net, at the fair value of collateral if repayment is expected solely from the
collateral, or the present value of estimated future cash flows using the loans existing rate.
Interest payments on impaired loans are typically applied to principal unless collectibility of the
principal amount is reasonably assured, in which case interest is recognized on a cash basis.
Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Loans Held for Sale. Loans originated or purchased without the intent to hold for the foreseeable
future or until maturity are carried at the lower of net cost or fair value on an aggregate
portfolio basis. The amount, by which cost exceeds fair value, if any, is accounted for as a loss
through a valuation allowance. Changes in the valuation allowance are included in the determination
of income in the period in which those changes occur and are reported in the Consolidated
Statements of Operations Noninterest expense as lower of cost or fair value adjustment.
The accrual of interest on loans held for sale is discontinued when, in managements opinion, the
borrower may be unable to meet payment obligations as they become due, as well as when required by
regulatory provisions and Company policy. After a loan is placed on non-accrual status, any
interest previously accrued, but not yet collected, is reversed against current income. Generally,
all subsequent payments are applied to reduce the principal balance. Loans will not be placed back
on accrual status unless back interest and principal payments are made, and future payments are
reasonably assured.
F-15
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Loans are considered sold when the Company surrenders control over the transferred assets to the
purchaser, with standard representations and warranties, and when the risks and rewards inherent in
owning the loans have been transferred to the buyer. At such time, the loan is removed from the
general ledger and a gain or loss is recorded on the sale. Gains and losses on loan sales are
determined based on the difference between the allocated cost basis of the assets sold and the
proceeds, which includes the fair value of any assets or liabilities that are newly created as a
result of the transaction. Losses related to recourse provisions are accrued as a liability at the
time such additional losses are determined, and recorded as part of noninterest expense. Losses
related to asset quality are recorded against the allowance for credit losses when the loan is
considered uncollectible.
Community Bank Loans. Community bank loans include commercial real estate loans, construction and
development loans, commercial loans, multifamily loans and consumer loans. Within this population
are loans originated by the Banks SBA division. The majority of community bank loans are
originated as assets held for investment and are further discussed in Note 5. Loans Loans held
for Investment. We intend to hold for the foreseeable future or to maturity all community bank
loans except SBA 504 loans and the guaranteed portion of SBA 7a loans. We generally sell selected
SBA 504 loans and the guaranteed portion of SBA 7a loans on a routine basis. Certain
broker-originated multifamily loans that are considered community bank loans continue to be
classified as loans held for sale. At December 31, 2009 and 2008 community bank loans included
multifamily and SBA originated loans totaling $77,147,000 and $83,652,000, respectively that were
classified as held for sale.
Other Loans. Other loans include purchased residential loans and purchased guaranteed
portions of SBA 7a loans. We did not acquire any other loans in 2009 or 2008 other than loans we
are required to repurchase from our Government National Mortgage Association (Ginnie Mae)
mortgage servicing portfolio. Such loans are government guaranteed as to principal and interest. At
December 31, 2009 and 2008, other loans included residential loans totaling $187,895,000 and
$212,083,000, respectively that were classified as loans held for sale. See Note 5: Loans for a
break out of all other loans.
Allowance for Credit Losses. The allowance for credit losses is a reserve established through a
provision for credit losses charged to expense, which represents managements best estimate of
probable incurred credit losses inherent in the loan held for investment portfolio (loan
portfolio). The allowance, in the judgment of management, is necessary to reserve for estimated
losses inherent in the loan portfolios. The allowance for credit losses includes allowance
allocations calculated in accordance with ASC Subtopic 450-20, Loss Contingencies, and ASC
Subtopic 310-35-2, Loan Impairment. The level of the allowance reflects managements continuing
evaluation of loan loss experience, specific credit risks, current loan portfolio quality, industry
and loan type concentrations, economic and regulatory conditions and unidentified losses inherent
in the loan portfolios, as well as trends in the foregoing.
The allowance for credit losses consists of four components: pools of homogeneous residential loans
with similar risk characteristics, commercial loans with similar risk characteristics (e.g.,
multifamily, construction and development, commercial real estate and commercial), individual loans
that are measured for impairment, and a component representing an estimate of inherent, probable
incurred but undetected losses, which also contemplates the imprecision in the credit risk models
utilized to calculate the allowance.
Pools of homogeneous residential loans with similar risk characteristics are assessed for probable
incurred losses based on loss migration analysis where loss factors are updated regularly based on
actual charge offs and impairments incurred. The analysis examines historical loss experience,
impairments, and the related internal
gradings of loans charged off. The loss migration analysis also considers inherent but undetected
losses within the portfolio.
F-16
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Commercial loans with similar risk characteristics (e.g., multifamily, construction and
development, commercial real estate and commercial) are assessed for probable losses based on loss
migration analysis where loss factors are updated regularly based on our own loss experience, the
collective experience of our credit risk management team, and industry data. The analysis also
incorporates the related internal gradings of loans charged off, impairments, and other factors,
including our asset quality trends and national and local economic conditions.
The portion of the allowance established for loans measured for impairment reflects expected losses
resulting from analyses developed through specific allocations for individual loans. The Company
considers a loan impaired when, based on current information and events, it is probable that it
will be unable to collect all amounts due according to the contractual terms of the loan. Loss on
impaired loans is typically measured using the fair value of collateral, as such loans are usually
collateral dependent, but may be measured using either the present value of expected future cash
flows discounted using loan rate, or the market price of the loan. All loans considered impaired
are included in nonperforming loans. The Company generally evaluates its residential loans
collectively due to their homogeneous nature; however, individual residential loans may be
considered for impairment based on the facts and circumstances of the loan. Accordingly,
potentially impaired loans of the Company may include residential loans, commercial loans, real
estate construction loans, commercial real estate mortgage loans and multifamily loans classified
as nonperforming loans.
The last component of the allowance for credit losses is a portion which represents the estimated
inherent but undetected probable losses and the imprecision in the credit risk models utilized to
calculate the allowance. This component of the allowance is primarily associated with commercial
loans (i.e., multifamily, construction and development, commercial real estate and commercial). The
unallocated portion of the allowance for credit losses reflects the Colorado concentration in
commercial real estate, construction and development loans, national multifamily and certain
commercial real estate loans for which the migration analysis does not yet reflect a complete
credit cycle due to the overall seasoning of such loans and ongoing uncertainty with respect to
other loans in our community bank and other lending portfolios.
Portions of the allowance may be allocated for specific credits; however, the entire allowance is
available for any credit that, in managements judgment should be charged off. Loan losses are
charged against the allowance when management considers the loan uncollectible. While management
uses its professional judgment and the information available, the ultimate adequacy of the
allowance is dependent upon a variety of factors beyond the Companys control, including the
performance of the Companys loan portfolios, national and Colorado economic conditions, changes in
interest rates and other factors.
FHLBank Stock. As a member of the Federal Home Loan Bank system (FHLBank), United Western Bank
is required to own FHLBank stock. The Company carries FHLBank stock at cost, which is equal to its
redemption value. FHLBank stock is classified as a restricted security, and periodically evaluated
for impairment based on ultimate recovery of par value. Dividends are credited to interest and
dividend income when declared by the FHLBank.
Mortgage Servicing Rights. The Company recognizes mortgage servicing rights (MSRs) as an asset
separate from the underlying originated mortgage loan at the time of sale. Upon sale of a loan, the
Company measures retained MSRs at their estimated fair values. Purchased MSRs were initially
recorded at cost. MSRs are carried at the lower
of cost (allocated cost for originated MSRs), less accumulated amortization, or estimated fair
value. MSRs are amortized in proportion to and over the period of the estimated future net
servicing income.
F-17
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The estimated fair value of MSRs is determined by reference to the discounted future servicing
income, as stratified in accordance with one or more predominant risk characteristics of the
underlying loans. The Company stratifies its MSRs by product type, interest rate and investor to
reflect the predominant risk characteristics. To determine the estimated fair value of MSRs, the
Company relies on a third party that uses a valuation model that calculates the present value of
discounted future cash flows. In using this valuation model, the Company incorporates assumptions
that market participants would use in estimating future net servicing income, which includes
estimates of the cost of servicing per loan, including incremental interest cost of servicer
advances, foreclosure expenses and losses, the discount rate, float value, an inflation rate,
ancillary income per loan, prepayment speeds and default rates. For purposes of performing an
impairment analysis on MSRs, the Company estimates fair value using the following primary
assumptions at December 31, 2009: average prepayment speeds of 17.04 CPR, (Constant Prepayment
Rate, a prepayment speed measurement) ranging from 1.9 CPR to 38.35 CPR; an average discount rate
of 11.48%, with discount rates ranging from 11.00% to 18.82%; and average delinquency of 9.30%,
with default rates ranging from 0% to 100%. At December 31, 2008, the estimate of fair value was
determined using the following assumptions: average prepayment speeds of 13.6 CPR, which ranged
from 1.3 CPR to 43.3 CPR; an average discount rate of 11.56%; with discount rates ranging from
11.00% to 47.12%; and average delinquency of 8.09%, with default rates ranging from 0% to 100%. At
December 31, 2009, the Companys residential servicing portfolio consisted of seasoned loans with
an approximate 11.5 year average age, an average balance of $58,900 and a weighted average note
rate of 7.02%. At December 31, 2008 the Companys residential servicing portfolio consisted of
seasoned loans with an approximate 10.6 years average age, an average balance of $58,000 and a
weighted averaged note rate of 7.23%.
MSRs are evaluated for impairment based on the factors discussed in the paragraph above. If
temporary impairment exists within a risk stratification tranche, a valuation allowance is
established through a charge to income equal to the amount by which the carrying value exceeds the
fair value. If it is later determined that all or a portion of the temporary impairment no longer
exists for a particular tranche, the valuation allowance is reduced through a credit to noninterest
expense.
MSRs are also reviewed for other-than-temporary impairment. Other-than-temporary impairment exists
when the recoverability of a recorded valuation allowance is determined to be remote, taking into
consideration historical and projected interest rates and loan pay-off activity. When this
situation occurs, the unrecoverable portion of the valuation allowance is applied as a direct
write-down to the carrying value of the MSRs. Unlike a valuation allowance, a direct write-down
permanently reduces the carrying value of the MSRs and the valuation allowance, preventing
subsequent recoveries.
As of December 31, 2009 and 2008, a valuation allowance of $860,000 was established, and the fair
value of the aggregate MSRs was approximately $7,344,000 and $9,496,000, respectively.
Gain on sale of MSRs is recorded when title to MSRs and the risks and rewards inherent in owning
the MSRs have been transferred to the buyer.
Premises and Equipment. Land is carried at cost. Buildings, leasehold improvements, office
furniture and equipment are carried at cost less accumulated depreciation and amortization.
Depreciation and amortization is computed by the straight-line method over the estimated useful
lives of the assets. Useful lives range from two to five
years for software, office furniture and equipment, and five to 40 years for buildings and building
improvements. Leasehold improvements are amortized over the term of the related lease or the
estimated useful lives of the improvements, whichever is shorter. Maintenance and repairs are
charged to expense as incurred, while major improvements are capitalized and amortized to operating
expense over their identified useful lives.
F-18
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Foreclosed Real Estate. Residential or commercial assets acquired through loan foreclosure or deed
in lieu of loan foreclosure are held for sale and are initially recorded fair value, less estimated
selling costs when acquired, establishing a new cost basis. Costs after acquisition are generally
expensed. If the fair value of the asset declines, a write-down is recorded through expense.
Bank Owned Life Insurance. The Bank has purchased life insurance policies to insure the lives of
certain officers and directors of the Bank. Life insurance is recorded at the amount that can be
realized under the insurance contract at the balance sheet date, which is the cash surrender value
adjusted for other charges or other amounts due that are probable at settlement. Earnings are
credited to the balance and recorded as part of other income in the consolidated statements of
income.
Impairment or Disposal of Long-Lived Assets. The Company reviews long-lived assets to be held and
used for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets exceeds the fair
value of the assets.
Repurchase Agreements. The Company has sold certain securities under agreements to repurchase. The
agreements are treated as collateralized financing transactions and the obligations to repurchase
securities sold are reflected as a liability in the accompanying consolidated balance sheets.
Custodial and Administration Services Income. Custodial and administration services income
represents fees earned related to services provided for custodial escrow, paying agent and trust
administration accounts. Revenue is recognized over the contract period in proportion to when the
services are performed.
Loan Administration Income. Loan administration income represents service fees and other income
earned from servicing loans for various investors. Loan administration income includes service fees
that are based on a contractual percentage of the outstanding principal balance plus late fees and
other ancillary charges. Service fees on loans and all other income are recognized when the related
payments are received.
New Markets Tax Credits. Monetization of New Markets Tax Credits (NMTC) is included in other
income. Utilization of New Markets Tax Credits by the Company reduces our income tax expense. NMTC
are awarded under a program administered by the Community Development Financial Institutions Fund,
a division of the United States Department of Treasury. NMTC projects promote economic development
and contribute to the enhancement of the communities served by the projects. The NMTC Program
permits the Company to claim a credit against federal income taxes for each qualified equity
investment made to a designated community development entity. The Company receives a 39% tax credit
over a seven year period. In 2009, the Bank made a $20 million qualifying equity investment in a
99.99% owned subsidiary, Charter Facilities Funding 5, LLC (CFF 5). In 2005 and 2006, the Bank
made $11 million and $10 million, respectively, qualifying equity investments in a 99.99% owned
subsidiary, Charter Facilities Funding IV, LLC (CFF IV). In 2004, the Bank made a $12.6 million
qualifying equity investment in a 99.99% owned subsidiary, Community Development Funding I, LLC
(CDF I). The financial position and results of operations of CDF I, CFF IV and CFF 5 are included
in the Companys consolidated financial
statements. In connection with the qualified equity investments, the Company claimed net federal
income tax credits of $2.0 million, $1.2 million, and $1.1 million, for the years ended December
31, 2009, 2008, and 2007, respectively, which are included as a reduction to the income tax
provision in the consolidated income statements.
F-19
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
NMTC may also be monetized via sale to third parties. The Company has established subsidiary LLC
entities that serve as single purpose vehicles to facilitate the funding of NMTC eligible loans to
qualified entities. The Company created Charter Facilities Funding I, LLC, Charter Facilities
Funding II, LLC and Charter Facilities Funding V, LLC, (CFF I, II and V) of which the Company is
the 0.01% owner and managing member and an unrelated party is the 99.99% owner and non-managing
member. The Company accounts for CFF I, II and V under the equity method of accounting as CFF I, II
and V do not meet the criteria under ASC Topic 810, Consolidation. CFF I, II and V are
accounted for under the equity method because the non-managing member has approved the selection
and compensation of the managing member, and has certain termination rights. The non-managing
member has the authority to not only approve operating and capital decisions, the non-managing
member has identified and continues to service the sole investment made by the entity. Any and all
future investments require approval from the non-managing member. Finally, profits and losses are
allocated to the members in accordance with their respective percentage ownerships and the managing
member does not have the unlimited liability that a general partner in a limited partnership would
incur.
The Company received a structuring fee in connection with the monetization of the NMTC and also
receives ongoing management fees in equal installments over the seven year tax credit period. The
Company recognized ongoing management fees of $126,000, $126,000, and $94,000, for the years ended
December 31, 2009, 2008, and 2007, respectively. These fees were included in other noninterest
income. The Company recognizes the structuring fee as received as the NMTC transferred to the
purchaser has value to the buyer on a standalone basis and there is objective and reliable evidence
of the fair value of the remaining ongoing services to be performed. After the structuring of the
transaction, the ongoing obligation of the Company is to prepare and file tax returns, obtain an
annual audit, maintain the tax qualification of the entity, and prepare regulatory filings.
Stock-Based Compensation. Compensation cost is recognized for stock options and restricted stock
grants issued to directors, executive officers and employees, based on the fair value of these
awards at the date of grant. A trinomial lattice-based model is utilized to estimate the fair value
of stock options, while the market price of the Companys common stock at the date of grant is used
for restricted stock grants. 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.
Subaccounting Fees. Subaccounting fees represent fees paid to a third party to service depository
accounts on behalf of the Bank. Such fees are paid to third parties that provide processing and
trust deposits to the Bank.
Income from Discontinued Operations, net of Income Taxes. Income from discontinued operations, net
of income taxes for 2009, 2008 and 2007 includes the results of UW Trust Company, which is
discussed in Note 25 Discontinued Operations Sale of UW Trust Company Assets.
Income Taxes. Income tax (benefit) expense is the total of the current year income tax due or
refundable and the change in deferred tax assets and liabilities (excluding deferred tax assets and
liabilities related to components of other comprehensive income). Deferred income taxes are
provided using the liability method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not that some portion
or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent upon the ability to
carryback losses to prior taxable years, the generation of future taxable income and tax planning
strategies which will create taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and as necessary, tax planning strategies in making this
assessment. At December 31, 2009 and December 31, 2008, management established a deferred tax
asset valuation allowance of $10.2 million and $0, respectively, based on its assessment of the
amount of net deferred tax assets that are more likely than not to be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
F-20
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company and its subsidiaries file consolidated federal and state income tax returns. The
subsidiaries are charged for the taxes applicable to their profits calculated on the basis of
filing separate income tax returns. The Bank qualifies as a savings and loan association for income
tax purposes. The consolidated effective tax rate is affected by the resolution of uncertain tax
positions identified under ASC Topic 740, Income Taxes, the level of utilization of New Markets
Tax Credits and the level of tax-exempt interest income in proportion to the level of net income.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon
examination by the taxing authorities, while others are subject to uncertainty about the merits of
the position taken or the amount of the position that would ultimately be sustained. The benefit of
a tax position is recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation processes, if any.
The evaluation of a tax position taken is considered by itself and not offset or aggregated with
other positions. Tax positions that meet the more-likely-than-not recognition threshold are
measured as the largest amount of tax benefit that is more than 50 percent likely of being realized
upon settlement with the applicable taxing authority. The portion of the benefits associated with
tax positions taken that exceeds the amount measured as described above is reflected as a liability
for unrecognized tax benefits in the accompanying balance sheet along with any associated interest
and penalties that would be payable to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits are classified as income tax
expense in the consolidated statement of income and accrued in other liabilities.
Segments of an Enterprise and Related Information. The Company operates as three segments
banking, custodial and administrative services, and mortgage banking. The chief decision-makers for
these subsidiary entities monitor the revenue streams of the various products and services, monitor
operations and financial performance and report to the Companys executive management team and
board of directors. Discrete financial information for branches is not available other than on a
bank wide basis.
Income Per Common Share. Effective January 1, 2009, the Company adopted new authoritative
accounting guidance under ASC Topic 260, Earnings Per Share, which provides that unvested
share-based payment awards that contain non-forfeitable rights to dividend equivalents, whether
paid or unpaid, are participating securities and shall be included in the computation of earnings
per share pursuant to the two-class method. The two-class method is an earnings allocation
methodology that determines earnings per share separately for each class of stock and participating
security. Participants in our equity compensation plan who are granted restricted stock are
allowed to retain cash dividends paid on nonvested shares, and therefore, the Companys nonvested
restructured stock awards qualify as participating securities under ASC Topic 260. All previously
reported earnings per common share data has been retrospectively adjusted to conform to the new
computation methodology.
F-21
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Comprehensive Income/(Loss). Comprehensive income/(loss) includes all changes in
shareholders equity during a period, except those resulting from transactions with shareholders.
Besides net income (loss), other components of the Companys comprehensive income includes after
tax effect of change in net unrealized gains and losses on securities available-for-sale and the
amount of OTTI not related to credit, for securities held to maturity. Comprehensive income/(loss)
is reported as a separate component of shareholders equity on the consolidated balance sheet and
in the statements of changes in shareholders equity.
Derivative Financial Instruments. The Companys hedging policies permit the use of various
derivative financial instruments to manage interest rate risk or to hedge specified assets and
liabilities. At December 31, 2009 and 2008, there were no stand alone derivative financial
instruments and no instruments that required bifurcation from the underlying host contract, which
would have required reporting such instruments at fair value on the Companys balance sheet. The
Company may be required to recognize certain contracts and commitments as derivatives when the
characteristics of those contracts and commitments meet the definition of a derivative.
Fair Value Measurements. In general, fair value of financial instruments is based upon quoted
market prices, where available. If such quoted market prices are not available, fair value is based
upon third party models that use, as inputs, to the extent available, observable market-based
parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at
fair value. These adjustments may include amounts to reflect unobservable parameters, among other
things. Any such valuation adjustments are applied consistently over time. Fair value estimates
involve uncertainties and matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the estimates.
3. Net (Loss) Income Per Share
(Loss) earnings per common share is computed using the two-class method. Basic (loss) earnings per
share is computed by dividing net (loss) earnings allocated to common stock by the weighted-average
number of common shares outstanding during the applicable period, excluding outstanding
participating securities. Participating securities include nonvested stock awards. Nonvested
stock awards are considered participating securities because holders of these securities receive
non-forfeitable dividends at the same rate as holders of the Companys common stock. All previously
reported earnings per share data has been retrospectively adjusted to conform to the net
computation method. The application of the two-class method did not have a material impact on the
results for the periods shown below.
F-22
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following table sets forth the calculation of (loss) earnings per share. Earnings allocable to
participating securities were included with (loss) income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
$ |
(79,570 |
) |
|
$ |
10,125 |
|
|
$ |
10,153 |
|
Income (loss) from discontinued operations |
|
|
37,525 |
|
|
|
(173 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
Net (Loss) income |
|
$ |
(42,045 |
) |
|
$ |
9,952 |
|
|
$ |
10,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings allocable to participating securities |
|
|
|
|
|
|
(147 |
) |
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
Net (loss) income for earnings per share |
|
$ |
(42,045 |
) |
|
$ |
9,805 |
|
|
$ |
10,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic |
|
|
13,139,070 |
|
|
|
7,164,250 |
|
|
|
7,247,636 |
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock options |
|
|
|
|
|
|
348 |
|
|
|
8,848 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares assuming dilution |
|
|
13,139,070 |
|
|
|
7,164,598 |
|
|
|
7,256,484 |
|
|
|
|
|
|
|
|
|
|
|
Stock options for 1,072,422, 1,034,187, and 880,332 shares of common stock were not considered in
computing diluted earnings per common share for 2009, 2008, and 2007, respectively, because they
were antidilutive.
4. Investment Securities
Investment securities available for sale were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
(Dollars in thousands) |
|
Mortgage-backed securities
agency/residential |
|
$ |
11,984 |
|
|
$ |
233 |
|
|
$ |
(4 |
) |
|
$ |
12,213 |
|
|
$ |
15,804 |
|
|
$ |
47 |
|
|
$ |
(223 |
) |
|
$ |
15,628 |
|
Mortgage-backed securities
private/residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,386 |
|
|
|
|
|
|
|
(31,452 |
) |
|
|
15,934 |
|
Collateralized mortgage
obligations-private/residential |
|
|
22,853 |
|
|
|
|
|
|
|
(2,056 |
) |
|
|
20,797 |
|
|
|
32,017 |
|
|
|
|
|
|
|
(4,229 |
) |
|
|
27,788 |
|
SBA securities |
|
|
122 |
|
|
|
|
|
|
|
(1 |
) |
|
|
121 |
|
|
|
226 |
|
|
|
|
|
|
|
(3 |
) |
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
34,959 |
|
|
$ |
233 |
|
|
$ |
(2,061 |
) |
|
$ |
33,131 |
|
|
$ |
95,433 |
|
|
$ |
47 |
|
|
$ |
(35,907 |
) |
|
$ |
59,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains were $0, $0, and $98,000 for the years ended December 31, 2009, 2008 and 2007,
respectively. Gross losses were $46,980,000, $0, and $0 for the years ended December 31, 2009, 2008
and 2007, respectively. During 2009, the Company sold 100% of its available-for-sale
mortgage-backed securities collateralized by option adjustable rate residential loans
(Mortgage-backed securities private/residential in the above table), which securities were
considered direct credit substitute securities for regulatory capital purposes. Proceeds were
$373,000 which resulted in the substantial loss on sale. The tax (benefit) provision related to the
realized gains and losses was $(17,780,000), $0 and $24,000, respectively.
F-23
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Investment securities held to maturity were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
(Dollars in thousands) |
|
Mortgage-backed securities
agency/residential |
|
$ |
22,745 |
|
|
$ |
798 |
|
|
$ |
(130 |
) |
|
$ |
23,413 |
|
|
$ |
21,218 |
|
|
$ |
872 |
|
|
$ |
|
|
|
$ |
22,090 |
|
Mortgage-backed securities
private/residential |
|
|
101,634 |
|
|
|
|
|
|
|
(31,782 |
) |
|
|
69,852 |
|
|
|
145,515 |
|
|
|
1,663 |
|
|
|
(30,664 |
) |
|
|
116,514 |
|
Collateralized mortgage
obligations-private/residential |
|
|
187,514 |
|
|
|
|
|
|
|
(31,601 |
) |
|
|
155,913 |
|
|
|
278,633 |
|
|
|
|
|
|
|
(38,252 |
) |
|
|
240,381 |
|
SBA securities |
|
|
45,175 |
|
|
|
|
|
|
|
(1,879 |
) |
|
|
43,296 |
|
|
|
53,098 |
|
|
|
|
|
|
|
(2,557 |
) |
|
|
50,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
357,068 |
|
|
$ |
798 |
|
|
$ |
(65,392 |
) |
|
$ |
292,474 |
|
|
$ |
498,464 |
|
|
$ |
2,535 |
|
|
$ |
(71,473 |
) |
|
$ |
429,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of investment securities by contractual maturity at
December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale |
|
|
Held to Maturity |
|
|
|
|
|
|
|
Estimated Fair |
|
|
|
|
|
|
Estimated Fair |
|
|
|
Amortized Cost |
|
|
Value |
|
|
Amortized Cost |
|
|
Value |
|
|
|
(Dollars in thousands) |
|
SBA securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Over 1 year through 5 years |
|
|
|
|
|
|
|
|
|
|
2,280 |
|
|
|
2,168 |
|
After 5 years through 10
years |
|
|
|
|
|
|
|
|
|
|
24,581 |
|
|
|
23,571 |
|
Over 10 years |
|
|
122 |
|
|
|
121 |
|
|
|
18,314 |
|
|
|
17,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
122 |
|
|
|
121 |
|
|
|
45,175 |
|
|
|
43,296 |
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 years through 10
years |
|
|
723 |
|
|
|
739 |
|
|
|
|
|
|
|
|
|
Over 10 years |
|
|
34,114 |
|
|
|
32,271 |
|
|
|
311,893 |
|
|
|
249,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
34,837 |
|
|
|
33,010 |
|
|
|
311,893 |
|
|
|
249,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
34,959 |
|
|
$ |
33,131 |
|
|
$ |
357,068 |
|
|
$ |
292,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities not due at a single maturity date, primarily mortgage-backed securities and SBA
securities are shown separately.
At December 31, 2009, the Company owned mortgage-backed securities from 16 issuers, excluding U.S.
Treasury and federal agency debentures and other U.S. Government sponsored agency securities.
There were eight of these 16 issuers in which the Company owned eight securities with an unpaid
principal balance in excess of 10% of its equity capital. Due to consolidation of several large
financial institutions during 2008, at December 31, 2009, the Company owned securities in which the
parent company of the issuer is Bank of America or JP Morgan Chase with an unpaid principal balance
of $96 million and $38.8 million, respectively.
At December 31, 2009 and 2008, mortgage-backed securities with a carrying value of $2,908,000 and
$8,871,000, respectively, were pledged to secure public deposits and for other purposes required or
permitted by law.
F-24
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following table presents information pertaining to securities available for sale and held to
maturity with gross unrealized losses aggregated by investment category and length of time that
individual securities have been in continuous loss position as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Less than 12 months |
|
|
12 months or more |
|
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(Dollars in thousands) |
|
Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
agency |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,565 |
|
|
$ |
(4 |
) |
|
$ |
9,826 |
|
|
$ |
(146 |
) |
|
$ |
2,543 |
|
|
$ |
(77 |
) |
Mortgage-backed
securities
private |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,934 |
|
|
|
(31,452 |
) |
Collateralized
mortgage
obligations-private |
|
|
|
|
|
|
|
|
|
|
20,797 |
|
|
|
(2,056 |
) |
|
|
23,018 |
|
|
|
(3,497 |
) |
|
|
4,769 |
|
|
|
(732 |
) |
SBA securities |
|
|
91 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
147 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
Held to Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
agency |
|
|
5,450 |
|
|
|
(130 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
private |
|
|
|
|
|
|
|
|
|
|
54,586 |
|
|
|
(31,782 |
) |
|
|
54,236 |
|
|
|
(11,104 |
) |
|
|
55,793 |
|
|
|
(19,560 |
) |
Collateralized
mortgage
obligations-private |
|
|
|
|
|
|
|
|
|
|
132,397 |
|
|
|
(31,601 |
) |
|
|
71,450 |
|
|
|
(21,519 |
) |
|
|
169,069 |
|
|
|
(16,733 |
) |
SBA securities |
|
|
|
|
|
|
|
|
|
|
43,296 |
|
|
|
(1,879 |
) |
|
|
|
|
|
|
|
|
|
|
50,541 |
|
|
|
(2,557 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,541 |
|
|
$ |
(131 |
) |
|
$ |
252,641 |
|
|
$ |
(67,322 |
) |
|
$ |
158,677 |
|
|
$ |
(36,269 |
) |
|
$ |
298,649 |
|
|
$ |
(71,111 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management evaluates all of the investment securities with one rating below investment grade from a
Nationally Recognized Securities Ratings Organization (NRSRO) for other-than-temporary impairment
(OTTI) at least on a quarterly basis. As part of its evaluation of securities for OTTI we
consider our intent to sell each security and whether it is more likely than not that we will be
required to sell the security before its anticipated recovery. If either of these conditions is
met, we recognize an OTTI charge to earnings equal to the entire difference between the securitys
amortized cost basis and its fair value at the balance sheet date. For securities with a rating
below investment grade from an NRSRO we perform analyses to determine if any of these securities
are other-than-temporarily impaired. See further discussion at Note 2. Significant Accounting
Policies Temporary vs. Other-than-Temporary Impairment.
Management has the intent and ability to hold the securities classified as held to maturity until
they mature, at which time the Company expects to receive full value for the securities.
Furthermore, at December 31, 2009, management also had the intent and ability to hold the
securities classified as available for sale for a period of time sufficient for a recovery of cost.
Mortgage-backed Securities Non-agency
The Companys mortgage-backed securities portfolio includes 74 non-agency securities, of which 58
were in an unrealized loss position, with a fair value of $208 million which had gross unrealized
losses of approximately $65 million. At December 31, 2009, based on the carrying value and the
lowest rating assigned, the securities portfolio consisted of 24% securities rated A or higher, 9%
BBB rated securities and 67% securities rated below investment grade. Based on the highest rating
assigned, approximately 40% of the portfolio was investment grade. At December 31, 2008, based on
the carrying value and the lowest rating assigned, the securities portfolio consisted of 74%
securities rated A or higher, 8% BBB rated securities and 18% securities rated below investment
grade. Based on the highest rating assigned, approximately 95% of the portfolio was investment
grade. At December 31, 2009,
management expects full recovery as the securities approach their maturity date or
repricing date or if market yield for such investments decline.
F-25
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
During 2009 the Company incurred OTTI on 13 private-label held to maturity collateralized mortgage
obligations. Of these 13 securities, two of the securities had been subject to OTTI charges in
2008 by the Company. These 13 securities had an unpaid principal balance of $84.2 million at
December 31, 2009, were written down to the estimated fair value of $39.0 million, representing a
cumulative OTTI of $45.3 million, of which $36.6 million was a charge to operations during 2009.
Two of these securities, which had fair values of $123,000 and $936,000 and bases of 5.4% and
20.2%, respectively, at December 31, 2009, incurred principal curtailments during 2009. Our
estimates of the future cash flows to be received from these two securities indicate the carrying
values are reasonable. The other securities subject to OTTI were current with respect to principal
and interest payments in accordance with the terms of those securities as of December 31, 2009.
These securities were deemed to be other-than-temporarily impaired based on the estimate of future
cash flows expected to be received at December 31, 2009.
During 2008, the Company incurred an other-than-temporary impairment write-down on two, private,
held-to-maturity, collateralized mortgage obligations, which had an amortized cost of $9.4 million.
The securities were written down to the estimated fair value of $5.3 million, representing an
other-than-temporary impairment charge of $4.1 million. All principal and interest payments have
been made to date in accordance with the terms of each security. Although the securities have
continued to perform in accordance with their terms, the securities were other-than-temporarily
impaired based on the extent and duration of the decline in fair value below amortized cost given
consideration to liquidity in the marketplace at the time and uncertainty of a recovery of expected
future cash flows. The charge is included in the statements of income in noninterest income. At the
time of the impairment, these securities were unlike other securities in our securities portfolio.
In reviewing and analyzing the cash flow model reports we received from the third party that
prepares fair value estimates, in comparison to all other securities owned by the Company that have
been subject to our analysis, no other securities had on a percentage basis a magnitude of
potential loss of principal and interest that is equal to the amounts forecasted for these
securities. In addition, the timing and the probability of the potential losses was nearer in time
and higher when compared to other securities. The combination of factors taken as a whole, caused
management to conclude the securities were other-than-temporarily impaired. At December 31, 2008
based on managements review of the analysis performed by our independent third party, these
securities did not indicate further impairment. The other securities that were analyzed as of
December 31, 2008 by the independent third party indicated the probability of principal loss was
remote and thus management concluded that there is no other-than-temporary impairment on the
remaining securities.
As discussed more fully in Note 18. Fair Value Estimates, management has engaged an independent
third party to prepare cash flow projections that are used to estimate fair value and to assist
management in the evaluation of OTTI. As part of the evaluation, the Company completes an analysis
of estimated cash flows for these securities, which incorporates, but is not limited to, an
estimate of the level of voluntary repayments, both known and projected defaults on the underlying
mortgage collateral, and an estimate of loss severity. Based on the continued deterioration of the
underlying collateral performance during the fourth quarter and into 2010 and the protracted nature
of the current financial crises in the U.S. in general and the U.S. housing market in particular,
management utilized a more conservative estimate of future defaults in the fourth quarter of 2009
than in previous quarters. An additional value estimate was also provided by this third party and
analyzed by management in order to determine the portion of impairment due to credit which should
be recognized in the statement of operations, and the portion to be recognized through other
comprehensive income.
F-26
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Included in mortgage-backed securities private, held to maturity, were securities that are
collateralized primarily by prime hybrid mortgages at December 31, 2009, these securities have a
total amortized cost of $101.6 million, of which $98.8 million, or 97%, have received one or more
ratings declines by the ratings agency since acquisition. This category includes five securities
collateralized by Alt-A mortgages totaling $13 million, while the bulk of the underlying collateral
($89 million) consists of prime mortgages. Payments continue to be made for all of these securities
with the exception of two prime securities in which the Company has recorded OTTI beginning in
2008. In addition to these securities previously designated as OTTI, the Company designated an
additional seven securities as OTTI in the fourth quarter of 2009, based on our analysis and review
of independent analyses performed by an independent third party. The total OTTI recognized on nine
securities in this category for 2009 was approximately $19.6 million. Based on our analysis and our
review of the independent analyses performed by a third party on these securities and other
securities in our portfolio, the Company believes the decline in fair value of securities deemed
temporarily impaired is mainly due to current temporary conditions in the marketplace. While $65.3
million of these securities has had a fair value price estimate below amortized cost for twelve
months or more, current credit support levels have increased from 5.5% at origination to 7.1% at
December 31, 2009. Such support tranches are expected to continue to increase as subordinate
tranches to these securities pay off and cash flows are allocated within the CMO structure.
Included in collateralized mortgage obligations private, held to maturity were securities that
are collateralized by prime CMO securities at December 31, 2009, these securities have an amortized
cost of $161.7 million of prime securities and $26 million of Alt-A securities, of which $150.8
million, or 90%, has received one or more ratings declines by rating agencies since acquisition.
The remainder of this category remains AAA rated by at least one agency. Payments continue to be
made for each of these securities. Four of these securities were designated other-than-temporarily
impaired at December 31, 2009 and a fair value impairment of approximately $20 million was
recognized on these securities during 2009. For the remainder of the securities in this category,
based on our analysis and our review of the independent analyses performed by a third party on
these securities and other securities in our portfolio, the Company believes the decline in fair
value of securities is due to current temporary conditions in the marketplace. For the $143 million
of securities in this category with fair value price estimates below amortized cost for twelve
months or more, 1.35% cumulative losses have been realized to date. Credit support for these
securities has increased from 4.94% at origination to 5.8% at December 31, 2009. The vast majority
of this category consists of prime loans, with a weighted average loan-to-value of 68.7% at
origination. Overall delinquencies for this subcategory increased during the quarter ended
December 31, 2009, which is reflective of the overall U.S. mortgage market. Management expects
these delinquency levels to level off prospectively based on their performance to date, and on the
expected effects of loan restructuring programs underway. At December 31, 2009, management expected
full recovery as the securities approach their maturity date or repricing date or if market yield
for such investments decline.
Other Securities
The Companys SBA pooled securities consist of 16 securities each of which was in an unrealized
loss position. Such securities are guaranteed as to principal by the SBA. Because the decline in
fair value is attributable to changes in interest rates and illiquidity, and not credit quality,
and because the Company does not have the intent to sell these SBA pooled securities and it is
likely that it will not be required to sell the securities before their anticipated recovery, the
Company does not consider these securities to be other-than-temporarily impaired at December 31,
2009.
F-27
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The table below presents a roll forward of the credit losses recognized in earnings for debt
securities held and not intended to be sold:
|
|
|
|
|
|
|
Other-than-temporary |
|
|
|
Loss Recognized as |
|
|
|
Credit Loss in |
|
|
|
Earnings |
|
|
|
(Dollars in thousands) |
|
Beginning balance of credit losses at April 1, 2009 |
|
$ |
3,300 |
|
Credit losses on newly identified impairment |
|
|
33,979 |
|
Additional credit losses on securities previously identified for impairment |
|
|
2,614 |
|
Adjustment for change in cash flows |
|
|
(1,141 |
) |
|
|
|
|
Ending balance of credit losses at December 31, 2009 |
|
$ |
38,752 |
|
|
|
|
|
In the event securities demonstrate additional deterioration through an increase in defaults or
loss severity that indicate the Company will not recover its anticipated cash flows or if the
duration of relatively significant impairments in these securities does not reverse, the Company
will incur other-than-temporary impairments, which may result in material charges to earnings in
future periods.
5. Loans
Loans Held for Sale
Loans held for sale consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
(Dollars in thousands) |
|
Community bank loans: |
|
|
|
|
|
|
|
|
Commercial real estate |
|
$ |
55,299 |
|
|
$ |
49,031 |
|
Multifamily |
|
|
17,382 |
|
|
|
29,074 |
|
SBA originated, guaranteed portions |
|
|
4,379 |
|
|
|
5,370 |
|
Purchase premiums, net |
|
|
87 |
|
|
|
177 |
|
Other loans: |
|
|
|
|
|
|
|
|
Residential |
|
|
186,591 |
|
|
|
212,083 |
|
Purchase premiums, net |
|
|
1,304 |
|
|
|
1,352 |
|
|
|
|
|
|
|
|
|
|
|
265,042 |
|
|
|
297,087 |
|
Less valuation allowance to reduce loans
held for sale to the lower of cost or fair
value |
|
|
4,285 |
|
|
|
5,467 |
|
|
|
|
|
|
|
|
Loans held for sale, net |
|
$ |
260,757 |
|
|
$ |
291,620 |
|
|
|
|
|
|
|
|
F-28
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Activity in the valuation allowance to carry loans held for sale at the lower of cost or fair value
is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Balance at beginning of year |
|
$ |
5,467 |
|
|
$ |
3,021 |
|
|
$ |
2,531 |
|
Provision to reduce the carrying
value of loans held for sale to the
lower of cost or fair value |
|
|
586 |
|
|
|
2,793 |
|
|
|
722 |
|
Charge-offs |
|
|
(1,836 |
) |
|
|
(512 |
) |
|
|
(238 |
) |
Recoveries |
|
|
68 |
|
|
|
165 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
4,285 |
|
|
$ |
5,467 |
|
|
$ |
3,021 |
|
|
|
|
|
|
|
|
|
|
|
Loans Held for Investment
Loans held for investment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
(Dollars in thousands) |
|
Community bank loans: |
|
|
|
|
|
|
|
|
Commercial real estate |
|
$ |
466,784 |
|
|
$ |
434,399 |
|
Construction |
|
|
250,975 |
|
|
|
277,614 |
|
Land |
|
|
92,248 |
|
|
|
123,395 |
|
Commercial |
|
|
151,928 |
|
|
|
134,435 |
|
Multifamily |
|
|
19,283 |
|
|
|
20,381 |
|
Consumer and mortgage loans |
|
|
46,568 |
|
|
|
49,440 |
|
Premium, net |
|
|
180 |
|
|
|
216 |
|
Unearned fees, net |
|
|
(4,580 |
) |
|
|
(3,565 |
) |
Other loans: |
|
|
|
|
|
|
|
|
Residential |
|
|
90,405 |
|
|
|
125,630 |
|
SBA purchased, guaranteed portions |
|
|
64,820 |
|
|
|
80,110 |
|
Premium on SBA purchased, guaranteed portions |
|
|
5,864 |
|
|
|
7,084 |
|
Premium, net |
|
|
299 |
|
|
|
345 |
|
|
|
|
|
|
|
|
|
|
|
1,184,774 |
|
|
|
1,249,484 |
|
Less allowance for credit losses |
|
|
34,669 |
|
|
|
16,183 |
|
|
|
|
|
|
|
|
Loans held for investment, net |
|
$ |
1,150,105 |
|
|
$ |
1,233,301 |
|
|
|
|
|
|
|
|
Activity in the allowance for credit losses on loans held for investment is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Balance at beginning of period |
|
$ |
16,183 |
|
|
$ |
8,000 |
|
|
$ |
6,231 |
|
Provision for credit losses |
|
|
35,032 |
|
|
|
8,599 |
|
|
|
2,312 |
|
Charge-offs |
|
|
(16,593 |
) |
|
|
(418 |
) |
|
|
(783 |
) |
Recoveries |
|
|
47 |
|
|
|
2 |
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
34,669 |
|
|
$ |
16,183 |
|
|
$ |
8,000 |
|
|
|
|
|
|
|
|
|
|
|
F-29
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following lists information related to non-accrual loans:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
(Dollars in thousands) |
|
Loans on nonaccrual status held for investment |
|
$ |
44,483 |
|
|
$ |
8,647 |
|
Loans on nonaccrual status held for sale |
|
|
9,807 |
|
|
|
13,252 |
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
$ |
54,290 |
|
|
$ |
21,899 |
|
|
|
|
|
|
|
|
The Company places loans on nonaccrual status when payments are past due 90 or more days or there
is doubt as to the collection of principal and interest in accordance with the contractual terms of
the note, unless there is a government guarantee as to the principal and accrued interest. The
aggregate unpaid principal balance of government-sponsored accruing loans that were past due 90 or
more days was $8.0 million and $6.5 million at December 31, 2009 and December 31, 2008,
respectively. These accruing loans are not included in the balances of nonperforming loans above.
Impaired loans are loans in which management has concluded that 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. In addition, loans in which the Company has granted the
borrower a concession, such as a lower than market rate of interest are also identified as
impaired. Such loans totaled $27,888,000 and $3,344,000 at December 31, 2009 and December 31,
2008, respectively. The allowance allocated to impaired loans was $2,838,000 and $1,686,000 at
December 31, 2009 and December 31, 2008, respectively. Of the $27,888,000 at December 31, 2009,
$7,157,000 of this balance has been reduced via partial charge-off during 2009 of $2,477,000.
Other impaired loans at December 31, 2009 that were on nonaccrual totaled $9,519,000. There was no
interest income recognized during the periods on loans while they were considered impaired. Also
included in impaired loans at December 31, 2009, was one loan totaling $11,212,000 which was
identified as impaired due to a concessionary rate granted to the borrowing. This loan is
performing under its revised terms and remains on accrual. For the years ended December 31, 2009,
2008 and 2007 the average of individually impaired loans during the year excluding troubled debt
restructurings was $13,552,000, $2,358,000, and $19,000, respectively.
Concentrations of Credit. The Banks residential loans are located throughout 47 states with
concentrations above 5.0% at December 31, 2009 in California, Georgia, Illinois, Florida, and Texas
of approximately 37%, 8%, 7%, 5% and 5%, respectively, based on aggregate outstanding unpaid
principal balances of the loans. Loans in which real estate is the primary source of collateral
total $1.253 billion, or 86%, of the total loan portfolio. Most of the Companys ongoing lending
activity occurs within the State of Colorado, including principally the Colorado Front Range and
selected mountain communities. At December 31, 2009, loans originated with Colorado collateral
totaled approximately $798 million, or 55%, of the total loan portfolio. At December 31, 2009 and
2008, there were no concentrations of loans related to any single industry in excess of 10% of
total loans.
F-30
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Mortgage Servicing Rights
The activity in the mortgage servicing rights (MSRs) is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
10,356 |
|
|
$ |
12,831 |
|
|
$ |
17,349 |
|
Originations |
|
|
355 |
|
|
|
160 |
|
|
|
61 |
|
Amortization |
|
|
(2,507 |
) |
|
|
(2,635 |
) |
|
|
(3,489 |
) |
Application of valuation allowance to write
down permanently impaired MSRs |
|
|
|
|
|
|
|
|
|
|
(1,090 |
) |
|
|
|
|
|
|
|
|
|
|
Balance before valuation allowance at end of year |
|
|
8,204 |
|
|
|
10,356 |
|
|
|
12,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for impairment of mortgage
servicing rights |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(860 |
) |
|
|
(860 |
) |
|
|
(1,950 |
) |
Application of valuation allowance to write
down permanently impaired MSRs |
|
|
|
|
|
|
|
|
|
|
1,090 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
(860 |
) |
|
|
(860 |
) |
|
|
(860 |
) |
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights, net |
|
$ |
7,344 |
|
|
$ |
9,496 |
|
|
$ |
11,971 |
|
|
|
|
|
|
|
|
|
|
|
The estimated aggregate amortization of the Companys MSRs for each of the next five years ending
December 31, 2010, 2011, 2012, 2013, and 2014 is $2,267,000, $1,575,000, $1,265,000, $1,022,000,
and $833,000 respectively. The estimated amortization is based on several assumptions as of
December 31, 2009 with the most significant being the anticipated prepayment speeds of the
underlying mortgages. The actual prepayment speeds of the underlying mortgage loans may differ
materially from the estimated prepayment speed, so that the actual amortization may be
significantly different than the amounts estimated.
The Companys servicing portfolio (excluding subserviced loans) is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Principal |
|
|
|
|
|
|
Principal |
|
|
|
Number |
|
|
Balance |
|
|
Number |
|
|
Balance |
|
|
|
of Loans |
|
|
Outstanding |
|
|
of Loans |
|
|
Outstanding |
|
|
|
(Dollars in thousands) |
|
Freddie Mac |
|
|
1,339 |
|
|
$ |
52,036 |
|
|
|
1,666 |
|
|
$ |
63,205 |
|
Fannie Mae |
|
|
4,839 |
|
|
|
255,964 |
|
|
|
5,842 |
|
|
|
308,019 |
|
Ginnie Mae |
|
|
3,719 |
|
|
|
205,384 |
|
|
|
4,747 |
|
|
|
251,435 |
|
VA, FHA, conventional
and other loans |
|
|
3,108 |
|
|
|
252,771 |
|
|
|
3,550 |
|
|
|
279,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing portfolio |
|
|
13,005 |
|
|
$ |
766,155 |
|
|
|
15,805 |
|
|
$ |
901,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys servicing activity is diversified throughout 50 states with concentrations at
December 31, 2009, in Missouri, Texas, New Mexico, Illinois, and California of approximately 15%,
13%, 13%, 12%, and 8% respectively, based on aggregate outstanding unpaid principal balances of the
mortgage loans serviced. As of December 31, 2009, and 2008, the Company subserviced loans for
others of approximately $3,876,000 and $5,015,000, respectively.
The Companys custodial escrow balances shown in the accompanying consolidated balance sheets at
December 31, 2009 and 2008 pertain to payments held in escrow in respect of taxes and insurance and
the float on principal and interest payments on loans serviced and owned by the Company. The
custodial accounts are maintained at the Bank in noninterest-bearing accounts. The balance of the
custodial accounts fluctuates from month to month based on the
pass-through of the principal and interest payments to the ultimate investors and the timing of
taxes and insurance payments.
F-31
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Premises and Equipment
Premises and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
Land |
|
$ |
4,909 |
|
|
$ |
4,909 |
|
Buildings |
|
|
16,371 |
|
|
|
14,081 |
|
Leasehold improvements |
|
|
1,082 |
|
|
|
1,063 |
|
Office furniture and equipment |
|
|
10,389 |
|
|
|
10,395 |
|
|
|
|
|
|
|
|
|
|
|
32,751 |
|
|
|
30,448 |
|
Less accumulated depreciation |
|
|
8,690 |
|
|
|
7,084 |
|
|
|
|
|
|
|
|
Premises and equipment, net |
|
$ |
24,061 |
|
|
$ |
23,364 |
|
|
|
|
|
|
|
|
Included in occupancy and equipment expense is depreciation expense of premises and equipment of
approximately $1,873,000, $1,508,000, and $1,202,000 for the years ended December 31, 2009, 2008,
and 2007, respectively.
8. Deposits
Deposit account balances are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Amount |
|
|
Percent |
|
|
Rate |
|
|
Amount |
|
|
Percent |
|
|
Rate |
|
|
|
(Dollars in thousands) |
|
Savings accounts |
|
$ |
360 |
|
|
|
0.02 |
% |
|
|
0.25 |
% |
|
$ |
299 |
|
|
|
0.02 |
% |
|
|
0.25 |
% |
NOW and DDA accounts |
|
|
583,976 |
|
|
|
29.29 |
|
|
|
0.10 |
|
|
|
624,064 |
|
|
|
36.18 |
|
|
|
0.17 |
|
Money market accounts |
|
|
937,082 |
|
|
|
47.01 |
|
|
|
0.39 |
|
|
|
958,837 |
|
|
|
55.60 |
|
|
|
0.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotals |
|
|
1,521,418 |
|
|
|
76.32 |
|
|
|
0.28 |
|
|
|
1,583,200 |
|
|
|
91.80 |
|
|
|
0.55 |
|
Certificate accounts |
|
|
472,095 |
|
|
|
23.68 |
|
|
|
1.58 |
|
|
|
141,472 |
|
|
|
8.20 |
|
|
|
3.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
1,993,513 |
|
|
|
100.00 |
% |
|
|
0.59 |
% |
|
$ |
1,724,672 |
|
|
|
100.00 |
% |
|
|
0.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Negotiable Order of Withdrawal (NOW) and Demand Deposit (DDA) accounts are
noninterest-bearing DDA accounts of $192,482,000 and $177,941,000 at December 31, 2009 and 2008,
respectively.
Included in deposits are approximately $575,647,000 and $229,389,000 of brokered deposits as of
December 31, 2009 and December 31, 2008, respectively. See additional discussion related to our
brokered deposits limitation in Note 13 Regulatory.
F-32
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Contractual maturities of certificate accounts as of December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 12 months |
|
|
12 to 36 months |
|
|
36 to 60 months |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
0.00-0.99% |
|
$ |
91,812 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
91,812 |
|
1.00-1.99% |
|
|
216,715 |
|
|
|
1,520 |
|
|
|
|
|
|
|
218,235 |
|
2.00-2.99% |
|
|
130,637 |
|
|
|
11,033 |
|
|
|
1,739 |
|
|
|
143,409 |
|
3.00-3.99% |
|
|
3,051 |
|
|
|
3,965 |
|
|
|
3,458 |
|
|
|
10,474 |
|
4.00-4.99% |
|
|
303 |
|
|
|
7,153 |
|
|
|
|
|
|
|
7,456 |
|
5.00-5.99% |
|
|
709 |
|
|
|
|
|
|
|
|
|
|
|
709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
443,227 |
|
|
$ |
23,671 |
|
|
$ |
5,197 |
|
|
$ |
472,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents concentrations of deposits at the Bank for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
(Dollars in thousands) |
|
UW Trust Company |
|
$ |
4,425 |
|
|
$ |
31,915 |
|
Matrix Financial Solutions, Inc. |
|
|
155,156 |
|
|
|
203,329 |
|
Legent Clearing, LLC |
|
|
|
|
|
|
120,178 |
|
Other Deposit Concentrations |
|
|
1,044,706 |
|
|
|
967,993 |
|
UW Trust Company represents fiduciary assets under administration by UW Trust, a wholly owned
subsidiary of the Company, that are in NOW, demand and money market accounts. As a result of the
sale of UW Trust assets, which is discussed in Note 25 Discontinued Operations Sale of UW
Trust Company Assets, the amounts included in the table above represent retrospective disclosure
of the amount of deposits at the Bank from UW Trust. Included in this balance at UW Trust is a
series of accounts for one life settlement agent for special asset acquisitions and administration
with a balance of $732,000 and $30,404,000 at December 31, 2009 and December 31, 2008,
respectively.
Matrix Financial Solutions, Inc. (MFSI) represents customer assets under administration by MFSI
that are in NOW and money market accounts. The Company sold its approximate 7% interest in MFSI,
during the first quarter of 2009.
Legent Clearing, LLC represents processing and trust deposits received through Legent Clearing,
LLC, that are in NOW and money market accounts. Certain officers of the Company hold an indirect
minority interest in Legent Clearing, LLC.
Other Deposit Concentrations represents deposit funds from four and six processing and trust
relationships maintained by the Bank as of December 31, 2009 and 2008, respectively. Included in
other deposit concentrations are processing and trust balances from Equity Trust, with balances of
$933.9 million and $822.8 million at December 31, 2009 and 2008, respectively. The balances from
Equity Trust are subject to the subaccounting agreement that requires Equity Trust to maintain all
of their custodial deposits with the Bank for a three-year period ending June 27, 2012. For the
following two years, Equity Trust is required to maintain approximately $323 million to the later
of June 27, 2014 or the date the seller financed note to Equity Trust is paid in full. The balances
from Equity Trust include the custodial deposits associated with the UW Trust asset sale, which is
discussed in Note 25 -
Discontinued Operations Sale of UW Trust Assets.
F-33
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Interest expense on deposits is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Savings accounts |
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
2 |
|
NOW accounts |
|
|
946 |
|
|
|
1,869 |
|
|
|
4,621 |
|
Money market accounts |
|
|
6,579 |
|
|
|
8,507 |
|
|
|
21,138 |
|
Certificate accounts |
|
|
7,040 |
|
|
|
2,284 |
|
|
|
1,381 |
|
|
|
|
|
|
|
|
|
|
|
Interest expense on deposits |
|
$ |
14,566 |
|
|
$ |
12,662 |
|
|
$ |
27,142 |
|
|
|
|
|
|
|
|
|
|
|
The aggregate amount of certificate accounts with a balance greater than $100,000 (excluding
brokered deposits) was approximately $78,668,000 and $40,127,000 at December 31, 2009 and 2008,
respectively.
9. Borrowed Money
Borrowed money is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
Borrowed Money |
|
|
|
|
|
|
|
|
Revolving line of credit to a third-party
financial institution, through June 30,
2010, collateralized by the common stock
of the Bank and certain nonagency
mortgage-backed securities of a non-bank
subsidiary; interest at 30-day LIBOR plus
5%; (5.23% at December 31, 2009), $0
available at December 31, 2009 |
|
$ |
20,000 |
|
|
$ |
28,000 |
|
Subordinated debt securities, interest
payments due quarterly at three-month
LIBOR plus 2.75% (3.00% at December 31,
2009), maturing February 13, 2014 |
|
|
10,000 |
|
|
|
10,000 |
|
Assets sold under agreements to repurchase: |
|
|
|
|
|
|
|
|
Company structured repurchase agreements |
|
|
75,000 |
|
|
|
75,000 |
|
Customer repurchase agreements |
|
|
3,635 |
|
|
|
6,265 |
|
|
|
|
|
|
|
|
Total |
|
$ |
108,635 |
|
|
$ |
119,265 |
|
|
|
|
|
|
|
|
The revolving line of credit facility is with JP Morgan and is collateralized by all of the
outstanding stock of the Bank and certain nonagency mortgage-backed securities of the Company and a
non-core subsidiary. The Company must comply with certain financial and other covenants related to
the foregoing credit agreement including, among other things, the maintenance by the Bank of
specific asset quality ratios, and well capitalized regulatory capital ratios. Also, the credit
agreement limits the Companys ability to incur additional debt above specified levels. At December
31, 2009, the Company was in compliance with all such covenants. Effective January 15, 2010, the
Company entered into an amendment to this credit facility. The terms of the amendment provide,
among other things: (i) for the extension of the maturity date from December 31, 2009 to June 30,
2010; (ii) that the Company make a principal reduction payment on the credit facility of $2.5
million upon execution of the amendment, which payment the Company has made, and another principal
reduction payment on the credit facility of $1.25 million on or before March 31, 2010; (iii) that
JPMorgan agrees to continue to forbear from declaring all outstanding amounts on the credit
facility to be immediately due and payable as a result of the Company and United Western Bank each
executing Informal Agreements with the Office of Thrift Supervision effective on December 10, 2009;
and (iv) that the Company and one of its nonbank subsidiaries pledge certain nonagency
mortgage-backed securities with a book value of $23.7 million as of December 31, 2009, as
additional collateral.
F-34
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Assets sold under agreements to repurchase are agreements in which the Company acquires funds by
selling securities to another party under a simultaneous agreement to repurchase the same
securities at a specified price and date. The Companys structured repurchase agreements each
contain an option that is held by the counterparty to terminate the agreement on the call date or
quarterly thereafter. The Company enters into repurchase agreements and also offers a demand
deposit account product to customers that sweeps their balances in excess of an agreed upon target
amount into overnight repurchase agreements.
The Company structured repurchase agreements at December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JP Morgan |
|
|
JP Morgan |
|
|
Citigroup |
|
Counterparty |
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance |
|
$ |
25,000,000 |
|
|
$ |
25,000,000 |
|
|
$ |
25,000,000 |
|
Base interest rate |
|
|
4.97 |
% |
|
|
4.91 |
% |
|
|
4.49 |
% |
Stated maturity date |
|
|
9/28/2011 |
|
|
|
11/21/2011 |
|
|
|
2/21/2012 |
|
Call date |
|
|
3/28/2010 |
|
|
|
2/21/2010 |
|
|
|
2/21/2010 |
|
At December 31, 2009 the base interest rate shown is the rate that will accrue under these
agreements until maturity. At December 31, 2009, CMO securities held to maturity with a current
balance of $48.4 million were pledged to collateralize these repurchase agreements. None of these
repurchase agreements have been called as of the date the financial statements were issued.
As of December 31, 2009, the maturities of borrowed money are as follows:
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2010 |
|
$ |
23,635 |
|
2011 |
|
|
50,000 |
|
2012 |
|
|
25,000 |
|
2014 |
|
|
10,000 |
|
|
|
|
|
|
|
$ |
108,635 |
|
|
|
|
|
10. FHLBank Borrowings
United Western Bank obtains FHLBank borrowings from FHLBank of Topeka, which is the FHLBank that
serves Denver, Colorado, and utilizes FHLBank of Topeka as its primary correspondent bank. Prior to
the Banks change of domicile in 2002, borrowings were obtained from FHLBank of Dallas. Certain
long-term borrowings that existed at that time with FHLBank of Dallas are still outstanding under
their original terms.
F-35
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The balances of FHLBank borrowings are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
FHLBank of Topeka borrowings |
|
$ |
180,000 |
|
|
$ |
200,000 |
|
FHLBank of Dallas borrowings |
|
|
607 |
|
|
|
26,721 |
|
|
|
|
|
|
|
|
|
|
$ |
180,607 |
|
|
$ |
226,721 |
|
|
|
|
|
|
|
|
At December 31, 2009 and 2008, borrowings of $180,000,000 were borrowed under Convertible Advance
(CA) and Short Option Advance (SOA) agreements with the FHLBank. Borrowings of $0 and
$20,000,000 at December 31, 2009 and 2008 were under fixed rate agreements. The CA and SOA
borrowings require the payment of interest monthly and principal at maturity. The CA and SOA
borrowings have interest rates that range from 2.77% to 4.80% at December 31, 2009 and 2.77% to
5.63% at December 31, 2008. These CA and SOA borrowings are callable quarterly at the option of the
FHLBank beginning after a six month to three year lockout period depending on the particular CA and
SOA borrowing. If FHLBank of Topeka exercises its call option on a CA or SOA borrowing, they are
required to offer replacement funding to United Western Bank at a market rate of interest for the
remaining term of the CA or SOA borrowing. If FHLBank of Dallas exercises its call option, the
borrowing would have to be repaid. At December 31, 2009, the possible call dates varied from
January 26, 2010 to April 22, 2010. At December 31, 2009 and 2008, community investment advances of
$607,000 and $721,000, respectively, were borrowed under a fixed term and rate and mature June 2,
2014. All advances are secured by first lien mortgage loans, pledged mortgage backed and SBA pooled
securities, the FHLBank stock owned by United Western Bank and any funds on deposit with the
FHLBank.
As of December 31, 2009, the stated maturities of FHLBank borrowings are as follows:
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2010 |
|
$ |
|
|
2011 |
|
|
50,000 |
|
2012 |
|
|
100,000 |
|
2013 |
|
|
20,000 |
|
2014 |
|
|
10,607 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
$ |
180,607 |
|
|
|
|
|
The Bank is on blanket collateral status at FHLBank of Topeka, which requires the Bank to identify
yet maintain in its possession loan collateral pledged at FHLBank of Topeka. As of December 31,
2009, first lien residential mortgages of $216,325,000 were pledged to FHLBank of Topeka.
Mortgage-backed and SBA pooled securities in the custody of FHLBank of Topeka with a current
balance of $180,383,000 were also pledged for borrowings. Total FHLBank of Topeka borrowings at
December 31, 2009 were $180,000,000 and the Bank had available unused borrowing capacity from
FHLBank of Topeka of approximately $222,818,000. The Bank is on full custody status at FHLBank of
Dallas, which requires the Bank to place loan collateral at the FHLBank of Dallas. As of December
31, 2009, first lien residential mortgages of $13,702,000 were pledged for $607,000 outstanding
FHLBank of Dallas borrowings.
F-36
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
On January 15, 2010, United Western Bank exchanged $180 million of outstanding FHLBank of
Topeka (FHLB) advances for $180 million in new advances. The Bank exchanged 14 separate advances,
totaling $180 million, with yields ranging from 2.77% to 4.80%, with a weighted average yield of
4.15% and an average remaining term of 29 months, and with final maturities scheduled 16
months to 52 months into the future. These advances were exchanged for four new advances totaling
$180 million of five-year convertible advances with a coupon rate fixed for at least the first 12
months. The FHLBank has the option after the first year to convert the fixed coupon rate to the
FHLBank one-month advance rate, which may reset monthly, and the Bank has the option to prepay the
advance if the FHLBank exercises its option to convert the coupon rate to the FHLBank one-month
advance rate. For the first twelve months from the date of the exchange, the Bank will incur an
all-in rate of approximately 2.15%. The Bank recorded a $12.4 million charge related to the
exchange, which charge will be recognized over the five-year term of the new advances. The
amortization of the deferred charge is considered in the all-in prospective rate of 2.15%. Should
an advance be extinguished prior to its scheduled maturity, any remaining unamortized exchange
charge would be accelerated and recognized in the period the debt is extinguished.
11. Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts and
Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trusts Holding Solely
Debentures of the Company
At December 31, 2009 the Company has three trusts, which hold debentures of the Company including,
Matrix Bancorp Capital Trust II, Matrix Bancorp Capital Trust VI and Matrix Bancorp Capital Trust
VIII, of which 100% of the common equity is owned by the Company. The trusts were formed for the
purpose of issuing corporation-obligated mandatorily redeemable capital securities (the capital
securities) to third-party investors and investing the proceeds from the sale of such capital
securities solely in junior subordinated debt securities of the Company (the debentures). The
debentures held by each trust are the sole assets of that trust. Distributions on the capital
securities issued by each trust are payable semiannually or quarterly at a rate per annum equal to
the interest rate being earned by the trust on the debentures held by that trust. The capital
securities are subject to mandatory redemption, in whole or in part, upon repayment of the
debentures. The Company has the option to defer interest payments on the debentures from time to
time for a period not to exceed five consecutive years. The Company has entered into agreements
which, taken collectively, fully and unconditionally guarantee the capital securities subject to
the terms of each of the guarantees. The debentures held by the trusts are redeemable as noted
below. Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts and
Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trusts Holding Solely
Debentures of the Company are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
|
Junior Subordinated Debentures
Owed to Unconsolidated Subsidiary
Trusts |
|
|
|
|
|
|
|
|
Junior subordinated debentures owed to
Matrix Bancorp Capital Trust II,
10.18% junior subordinated debentures
payable semi-annually, unsecured and
maturing June 8, 2031 |
|
$ |
12,400 |
|
|
$ |
12,400 |
|
Junior subordinated debentures owed to
Matrix Bancorp Capital Trust VI,
interest at three-month LIBOR plus
2.50% (2.75% at December 2009), junior
subordinated debentures payable
quarterly, unsecured and maturing
October 18, 2034 |
|
|
10,310 |
|
|
|
10,310 |
|
Junior subordinated debentures owed to
Matrix Bancorp Capital Trust VIII,
interest fixed at 5.86% through July
2010, then three-month LIBOR plus
1.69%, junior subordinated debentures
payable quarterly, unsecured and
maturing July 7, 2035 |
|
|
7,732 |
|
|
|
7,732 |
|
|
|
|
|
|
|
|
Total |
|
$ |
30,442 |
|
|
$ |
30,442 |
|
|
|
|
|
|
|
|
F-37
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
On March 28, 2001, Matrix Bancorp Capital Trust II (Trust II), a Delaware business trust formed
by the Company, completed the sale of $12,000,000 of 10.18% preferred securities. Trust II also
issued common securities to the Company and used the net proceeds from the offering to purchase
$12,400,000 in principal amount of 10.18% junior subordinated debentures of the Company due June 8,
2031. The preferred securities accrue and pay distributions semi-annually at an annual rate of
10.18% of the stated liquidation amount of $1,000 per preferred security. The Company has fully and
unconditionally guaranteed all of the obligations of Trust II under the preferred securities. The
guarantee covers the semi-annual distributions and payments on liquidation or redemption of the
preferred securities, but only to the extent of funds held by Trust II. The preferred securities
are mandatorily redeemable upon the maturity of the junior subordinated debentures or upon earlier
redemption as provided in the indenture. The Company has the right to redeem the junior
subordinated debentures, in whole or in part, on or after June 8, 2011, at a redemption price
specified in the indenture plus any accrued but unpaid interest to the redemption date.
On August 30, 2004, Matrix Bancorp Capital Trust VI (Trust VI), a Delaware business trust formed
by the Company, completed the sale of $10,000,000 of preferred securities bearing a fixed rate
(6.425%) until the interest payment date in October 2009, and then a floating rate (three-month
LIBOR plus 2.50%.) Trust VI also issued common securities to the Company and used the net proceeds
from the offering to purchase $10,310,000 in principal amount junior subordinated debentures
bearing a fixed rate (6.425%) through the interest payment date in October 2009 and then a floating
rate (three-month LIBOR plus 2.50%), junior subordinated debentures of the Company due October 18,
2034. The preferred securities accrue and pay distributions quarterly at the rate as described
above of the stated liquidation amount of $1,000 per preferred security. The Company has fully and
unconditionally guaranteed all of the obligations of Trust VI under the preferred securities. The
guarantee covers the quarterly distributions and payments on liquidation or redemption of the
preferred securities, but only to the extent of funds held by Trust VI. The preferred securities
are mandatorily redeemable upon the maturity of the junior subordinated debentures or upon earlier
redemption as provided in the indenture.
On June 30, 2005, Matrix Bancorp Capital Trust VIII (Trust VIII), a Delaware business trust
formed by the Company, completed the sale of $7,500,000 of preferred securities bearing a fixed
rate (5.86%) through the interest payment date in July 2010, and then a floating rate (three-month
LIBOR plus 1.69%). Trust VIII also issued common securities to the Company and used the net
proceeds from the offering to purchase $7,732,000 in principal amount of fixed rate (5.86%) through
the interest payment date in July 2010, then a floating rate (three-month LIBOR plus 1.69%) junior
subordinated debentures of the Company due July 7, 2035. The preferred securities accrue and pay
distributions quarterly at the rate as described above of the stated liquidation amount of $1,000
per preferred security. The Company has fully and unconditionally guaranteed all of the obligations
of Trust VIII under the preferred securities. The guarantee covers the quarterly distributions and
payments on liquidation or redemption of the preferred securities, but only to the extent of funds
held by Trust VIII. The preferred securities are mandatorily redeemable upon the maturity of the
junior subordinated debentures or upon earlier redemption as provided in the indenture. The Company
has the right to redeem the junior subordinated debentures, in whole or in part, on or after July
7, 2010, at a redemption price specified in the indenture plus any accrued but unpaid interest to
the redemption date.
All of the junior subordinated debentures owed to unconsolidated subsidiary trusts mature in
periods greater than five years from December 31, 2009.
F-38
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Income Taxes
The income tax (benefit) provision consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(17,014 |
) |
|
$ |
6,696 |
|
|
$ |
3,947 |
|
State |
|
|
|
|
|
|
1,249 |
|
|
|
828 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(23,793 |
) |
|
|
(4,900 |
) |
|
|
(1,336 |
) |
State |
|
|
(1,989 |
) |
|
|
(410 |
) |
|
|
(124 |
) |
Deferred Tax Valuation Allowance |
|
|
10,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit) provision from continuing operations |
|
$ |
(32,567 |
) |
|
$ |
2,635 |
|
|
$ |
3,315 |
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) related to discontinued operations |
|
$ |
20,620 |
|
|
$ |
(99 |
) |
|
$ |
(7 |
) |
A reconciliation of the (benefit) provision for income taxes with the expected income taxes based
on income from continuing operations and the statutory federal income tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Expected income tax (benefit) provision |
|
$ |
(39,248 |
) |
|
$ |
4,466 |
|
|
$ |
4,714 |
|
State income tax (benefit) provision, net of federal benefit |
|
|
(1,822 |
) |
|
|
356 |
|
|
|
458 |
|
Tax-exempt interest income |
|
|
(341 |
) |
|
|
(328 |
) |
|
|
(339 |
) |
New Markets Tax Credits |
|
|
(1,960 |
) |
|
|
(1,186 |
) |
|
|
(1,117 |
) |
Change in valuation allowance |
|
|
10,229 |
|
|
|
|
|
|
|
|
|
Addition / (Resolution) of uncertain tax position |
|
|
454 |
|
|
|
(454 |
) |
|
|
(474 |
) |
Other |
|
|
121 |
|
|
|
(219 |
) |
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for income taxes |
|
$ |
(32,567 |
) |
|
$ |
2,635 |
|
|
$ |
3,315 |
|
|
|
|
|
|
|
|
|
|
|
The actual tax (benefit) provision differs from the expected tax (benefit) expense (computed by
applying the applicable United States Federal corporate tax rate of 35% and the composite state tax
rates, which range from 4.5% to 8.0%) to the (loss) income before taxes for the years ended
December 31, 2009, 2008 and 2007. The difference from the expected tax (benefit) expense is
principally due to the recognition of tax credits under the New Markets Tax Credits Program,
tax-exempt interest income earned on bank owned life insurance and other tax-exempt instruments,
deferred tax valuation allowance, and resolution of uncertain tax positions. Partially offsetting
these reductions are items that are not deductible for tax purposes, including portions of
donations and certain meals and entertainment expenses.
During 2004, the Company acquired $12,600,000 of New Markets Tax Credits allocation. Under the
program, the Company funded qualifying loans and the Company receives Federal income tax credits
that will be recognized over seven years, with 2004 being the first year for this allocation. In
2004, the Company received an additional $50,000,000 allocation of New Markets Tax Credits. In the
fourth quarter of 2005, the Company utilized $11,000,000 of this allocation. In the fourth quarter
of 2006, the Company utilized approximately $10 million of this allocation. The remaining
$29,000,000 of the allocation was monetized through unaffiliated third party investors. In May
2009, a wholly owned subsidiary of the Company was awarded an allocation of $20 million of New
Markets Tax Credits. These tax credits were acquired by the Bank, and the Bank invested $20 million
in a newly created 99.99% owned subsidiary. Tax credits of $7.8 million are expected to be realized
over the seven year period ending in 2015. The tax credit recognized under the allocations was
$1,960,000, $1,186,000, and $1,117,000 for the years ended December 31, 2009, 2008, and 2007,
respectively.
F-39
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Deferred tax assets and liabilities result from the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes shown below.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for loan and valuation losses |
|
$ |
16,086 |
|
|
$ |
9,119 |
|
Other-than-temporary impairment losses |
|
|
14,768 |
|
|
|
1,526 |
|
Deferred fees |
|
|
1,989 |
|
|
|
2,457 |
|
State operating loss carryforward |
|
|
1,060 |
|
|
|
|
|
Tax credit carryforwards |
|
|
4,238 |
|
|
|
|
|
Gain on sale of building |
|
|
3,063 |
|
|
|
3,503 |
|
Stock based compensation |
|
|
1,438 |
|
|
|
873 |
|
Unrealized loss on available for sale securities |
|
|
3,215 |
|
|
|
13,601 |
|
Other |
|
|
45 |
|
|
|
252 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
45,902 |
|
|
|
31,331 |
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
(10,229 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
35,673 |
|
|
|
31,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Mortgage servicing rights |
|
|
(1,993 |
) |
|
|
(2,125 |
) |
New Markets Tax Credits |
|
|
(3,411 |
) |
|
|
(2,537 |
) |
Installment gain on sale of interest in
subsidiary |
|
|
(15,080 |
) |
|
|
(82 |
) |
FHLB dividends |
|
|
(861 |
) |
|
|
(2,416 |
) |
Other |
|
|
(141 |
) |
|
|
(71 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(21,486 |
) |
|
|
(7,231 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
14,187 |
|
|
$ |
24,100 |
|
|
|
|
|
|
|
|
A valuation allowance for deferred tax assets is recorded when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income and tax planning
strategies which will create taxable income during the periods in which those temporary differences
become deductible. Management considered the scheduled reversal of deferred tax liabilities,
projected future taxable income, NOL carryback potential and as necessary, tax planning strategies
in making this assessment. Some of the tax planning strategies considered, which would not
substantially impact the business, were sale-leaseback of facilities, and the sale of certain lines
of business or assets. At December 31, 2009 and December 31, 2008, management established a
deferred tax asset valuation allowance of $10.2 million and $0 based on its assessment of the
amount of net deferred tax assets that are more likely than not to be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and rates on the date of
enactment. At December 31, 2009, the Company had state net operating loss carryforwards expiring in
2029.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction,
and various states and local jurisdictions. The material income tax returns the Company files are
the U.S. federal income tax return which has a three year statute of limitations, and the Colorado
state income tax return, which has a four year statute of limitations. Accordingly, the U.S.
federal return for tax years ended on or after December 31, 2006 and the Colorado return for tax
years ended on or after December 31, 2005 are subject to examination by the relevant taxing
authority.
F-40
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
During 2008, the Company identified uncertain tax positions under ASC Topic 740, Income Taxes,
which resulted in unrecognized tax benefits of $1.2 million that were previously included in
deferred income tax liabilities being reclassified to other liabilities in the balance sheet.
The Company has three positions that give rise to unrecognized tax benefits. One of the items
relates to a position where only the timing of a deduction is in question and the only effect on
the Companys statement of operations relates to interest accrued on this matter. The second item
relates to various fees paid to third parties which management is uncertain as to the deductibility
of such fees. The third item relates to the difference in book and tax basis of an asset that was
sold in 2004 for which management believes the tax basis was greater than reflected in the tax
records of the Company. A reconciliation of the beginning and ending amount of unrecognized tax
benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Balance at January 1, |
|
$ |
348 |
|
|
$ |
726 |
|
|
$ |
1,200 |
|
Additions based on tax positions related to the current year |
|
|
|
|
|
|
|
|
|
|
|
|
Additions for tax positions of prior years |
|
|
454 |
|
|
|
76 |
|
|
|
|
|
Reductions due to the statute of limitations |
|
|
|
|
|
|
(454 |
) |
|
|
(474 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, |
|
$ |
802 |
|
|
$ |
348 |
|
|
$ |
726 |
|
|
|
|
|
|
|
|
|
|
|
During 2009, 2008, and 2007, the Company realized $0, $454,000, and $474,000, respectively, of
unrecognized tax benefits as a result of the lapse of the applicable statute of limitations, which
was related to portions of the items discussed above that, arose in 2004, 2003 and 2002,
respectively.
Due to the net operating loss carry-back to 2004, which re-opens the 2004 tax return for the above
mentioned second and third items, the Company re-instated these two positions during the fourth
quarter of 2009.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in other
expense. At December 31, 2009 and 2008, the Company had an accrued liability for unrecognized
benefits of approximately $245,000 and $245,000, respectively, which is included in other
liabilities on the consolidated balance sheet.
13. Regulatory
The Company. The Company is a unitary thrift holding company and, as such, is subject to the
regulation, examination and supervision of the Office of Thrift Supervision (OTS).
United Western Bank. The Bank is subject to various regulatory capital requirements administered by
the OTS. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators that, if undertaken, could have a direct material
effect on the Banks and the Companys consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Banks assets, liabilities and certain
off-balance sheet commitments as calculated under regulatory accounting practices. The Banks
capital amounts and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
F-41
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Quantitative measures established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined in the regulations), and of
Tier 1 capital (as defined in the regulations) to total assets (as defined in the regulations).
Management believes, as of December 31, 2009 and 2008, the Bank met all applicable capital adequacy
requirements required at this time, but the Bank did not meet the prospective June 30, 2010
requirements of the Memorandums of Understanding, discussed more fully below.
As of December 31, 2009, the most recent notification from the OTS categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action provisions. To be
categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table. Management believes that there have been no
conditions or events since the OTS notification that have changed this categorization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well Capitalized |
|
|
|
|
|
|
|
|
|
|
|
For Capital Adequacy |
|
|
Under Prompt Corrective |
|
|
|
Actual |
|
|
Purposes |
|
|
Action Provisions |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
|
(Dollars in thousands) |
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets) |
|
$ |
161,669 |
|
|
|
10.1 |
% |
|
$ |
128,382 |
|
|
|
8.0 |
% |
|
$ |
160,476 |
|
|
|
10.0 |
% |
Core Capital (to Adjusted Tangible Assets) |
|
|
192,839 |
|
|
|
7.7 |
|
|
|
100,400 |
|
|
|
4.0 |
|
|
|
125,499 |
|
|
|
5.0 |
|
Tier 1 Capital (to Risk Weighted Assets) |
|
|
192,839 |
|
|
|
8.8 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
96,285 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets) |
|
$ |
189,536 |
|
|
|
10.6 |
% |
|
$ |
143,719 |
|
|
|
8.0 |
% |
|
$ |
179,648 |
|
|
|
10.0 |
% |
Core Capital (to Adjusted Tangible Assets) |
|
|
174,034 |
|
|
|
7.7 |
|
|
|
91,049 |
|
|
|
4.0 |
|
|
|
113,812 |
|
|
|
5.0 |
|
Tier 1 Capital (to Risk Weighted Assets) |
|
|
174,034 |
|
|
|
9.7 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
107,811 |
|
|
|
6.0 |
|
The various federal banking statutes to which the Bank is subject include limitations regarding
the nature of the transactions in which it can engage or assets it may hold or liabilities it may
incur.
Matrix Financial. As a wholly-owned subsidiary of the Bank, Matrix Financial is also subject to OTS
regulation. In addition, Matrix Financial is also subject to examination by various regulatory
agencies involved in the mortgage banking industry. Each regulatory agency requires the maintenance
of a certain amount of net worth, the most restrictive of which required Matrix Financial to
maintain a net worth of $771,000 at December 31, 2009 and $863,000 at December 31, 2008. At
December 31, 2009 and 2008, Matrix Financial was in compliance with these regulatory requirements.
UW Investment Services. UW Investment Services, headquartered in Denver, Colorado, a wholly-owned
subsidiary of the Company, is a broker-dealer registered with the SEC under Securities Exchange Act
Rule 15c3-3(k)(2)(ii). UW Investment Services is subject to the SECs Net Capital Rule that
requires the maintenance of minimum net capital and requires that the ratio of aggregate
indebtedness to net capital, both as defined by the regulations, shall not exceed 15 to 1. At
December 31, 2009, UW Investment Services had net capital of $244,000, which was $239,000 in excess
of its required net capital of $5,000. UW Investment Services aggregate indebtedness to net
capital ratio was 0.08 to 1.
UW Trust Company. As a Texas trust company, UW Trust is required by the Texas Banking Commissioner
to maintain minimum restricted capital of at least $2,000,000, and may be required to maintain
additional capital if the Texas Banking Commissioner determines that it is necessary to protect the
safety and soundness of UW Trust. At December 31, 2009, UW Trust was in compliance with capital
requirements under Texas law. See discussion of the sale of UW Trust assets, which is discussed in
Note 25 Discontinued Operations Sale of UW Trust Company Assets.
F-42
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Memorandums of Understanding with the Office of Thrift Supervision. Effective as of December
10, 2009, the Company and the Bank, each entered into separate informal Memorandums of
Understanding (Informal Agreements) with the Office of Thrift Supervision (the OTS). The
Informal Agreements are not written agreements for purposes of Section 8 of the Federal Deposit
Insurance Act, as amended.
The Informal Agreement between the Company and the OTS provides, among other things, that the
Company, acting through its Board of Directors, will (i) support the Banks compliance with the
Informal Agreement it entered into with the OTS; (ii) not declare or pay dividends or any other
capital distribution or redeem any capital stock of the Company, or take dividends representing a
reduction in the capital from the Bank, without the prior written non-objection of the Regional
Director of the OTS; and (iii) not incur, issue, renew, repurchase, make payments on or rollover
any debt, increase any current lines of credit, or guarantee the debt of any entity without
receiving the prior written approval of the OTS Regional Director. Pursuant to the terms of the
Credit Agreement with JPMorgan, entering into the Informal Agreements is considered an event of
default; however, JPMorgan and the Company entered into an Amendment and Forbearance Agreement
dated December 14, 2009 wherein JPMorgan agreed to forbear from declaring the amounts owing under
the Credit Agreement immediately due and payable as a result of the Company and the Bank executing
the Informal Agreements and any events of default resulting therefrom.
The Informal Agreement between the Bank and the OTS provides, among other things, that the Banks
Board of Directors will (i) adopt a written Capital Plan for the Bank for the OTS Regional
Directors review and comment, and such plan shall address how the Bank will achieve and maintain
by June 30, 2010 a Tier 1 core capital ratio of 8% and a total risk-based capital ratio of 12% (as
of December 31, 2009, the Banks Tier 1 core capital and total risk-based capital ratios were 7.7%
and 10.1%, respectively); and (ii) approve a written Liquidity Contingency Plan to ensure the Bank
maintains adequate short-term and long-term liquidity, with such plan to specifically address
deposit concentrations and plans to reduce or manage such concentrations.
The Informal Agreements remain effective until modified, suspended or terminated by the OTS
Regional Director.
Subsequent to December 31, 2009, the OTS has provided additional supervisory limitations on the
Bank. These limitations include: (i) the Bank may not increase its total assets during any quarter
in excess of an amount equal to net interest credited on deposit liabilities without prior written
notice of non-objection from the OTS; and (ii) the OTS has directed the Bank not to rollover or
renew exiting brokered deposits, or accept new brokered deposits without the prior written
non-objection from the OTS.
As a result of the Informal Agreements and the additional supervisory limitations, the Company is
looking to further increase its capital position by focusing on expense reductions, optimizing the
balance sheet for both loans and deposits and risk weighting of assets, as well as evaluating
opportunities for margin improvement and improving the overall earnings power of the Company. This
may not be sufficient to meet the requirements of the Informal Agreements, so the Company is also
looking at various strategic alternatives for the Company to accelerate its compliance with terms
of the Informal Agreement.
While management believes that they are instituting the appropriate plans to meet the requirements
of the Informal Agreements, as well as the additional supervisory limitations, there is no
certainty that the Company can successfully execute on all of the above and meet the capital
requirements of the OTS by June 30, 2010. If the Company is unable to comply with the Informal
Agreements or additional supervisory limitations the OTS could take additional actions, including
issuing an enforcement action.
F-43
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Shareholders Equity
Stock Option Plans
The Company has three equity incentive plans, the 2007 Equity Incentive Plan (the 2007 Plan), the
2006 Special Stock Option Plan (2006 Plan) and the 1996 Amended and Restated Stock Option Plan
(1996 Stock Option Plan), which are administered by the compensation committee of the board of
directors (the Compensation Committee). The 2007 Plan provides a variety of long-term equity
based incentives to officers, directors, employees and other persons providing services to the
Company. While the 1996 Stock Option Plan provides only for granting of stock options, the 2007
Plan authorizes the Compensation Committee to grant other forms of equity based incentive
compensation, such as restricted stock awards, stock appreciation rights, performance units and
supplemental cash payments, in addition to stock option grants. In light of the approval of the
2007 Plan by the Companys shareholders on May 17, 2007, the Company does not intend to grant any
additional stock options under the Companys 1996 Stock Option Plan. During 2009, grants of 37,887
options, 76,043 restricted shares and 25,606 shares to outside directors have been issued under the
2007 Plan, net of forfeitures. Thus the Company considers there are 499,181 shares available for
future grants.
The 2006 Plan was adopted by the board of directors and approved by the shareholders in order to
grant stock options to two members of executive management in amounts greater than the 100,000
maximum amount of shares which could be granted to any one person in a year under the Companys
1996 Stock Option Plan. Under the 2006 Plan, 107,143 stock options were granted, which have
substantially similar terms as those options granted under the Companys 1996 Stock Option Plan.
There are no further shares reserved for issuance under the 2006 Plan.
The options granted under the 1996 Stock Option Plan and the 2006 Plan provide that, in most
instances, an option must be exercised by the optionee within 30 days after the termination of
employment, if and to the extent such option was exercisable on the date of such termination. Under
the 2007 Plan, in most instances, an option must be exercised by the optionee no later than the
date of termination of employment, if and to the extent such option was exercisable on the date of
such termination.
All options governed by the Companys equity incentive plans that are outstanding as of December
31, 2009 and 2008, are nonqualified options that vest ratably over a five year term and have a
10-year life. Each award from all plans is evidenced by an award agreement that specifies the
option price, the duration of the option, the number of shares to which each the option pertains,
and such other provisions as the Compensation Committee determines. The option price for each grant
is at least equal to the fair market value of a share of United Western Bancorp, Inc. common stock
on the date of grant. Upon a change in control of the Company, as defined in the plans, the
Compensation Committee is authorized to accelerate vesting or modify other terms of exercise that
in its sole discretion it deems equitably warranted.
The Company has granted 76,043 restricted stock awards, net of forfeitures at December 31, 2009.
These awards vest 20% annually on the anniversary date of the grant over a five year period.
F-44
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
A summary of the Companys stock option activity and related information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested Restricted Stock Awards |
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Stock Options Outstanding |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Shares Available |
|
|
|
|
|
|
Grant Date of |
|
|
|
|
|
|
Weighted Average |
|
|
|
for Grant |
|
|
Number of Shares |
|
|
Fair Value |
|
|
Number of Shares |
|
|
Exercise Price |
|
Outstanding at January 1, 2009 |
|
|
1,027,307 |
|
|
|
104,248 |
|
|
$ |
19.84 |
|
|
|
1,034,535 |
|
|
$ |
19.37 |
|
Granted |
|
|
(170,178 |
) |
|
|
86,348 |
|
|
|
9.44 |
|
|
|
83,830 |
|
|
|
6.18 |
|
Director shares |
|
|
(25,606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or cancelled |
|
|
56,088 |
|
|
|
(10,305 |
) |
|
|
19.06 |
|
|
|
(45,943 |
) |
|
|
18.64 |
|
Vested stock awards |
|
|
|
|
|
|
(21,726 |
) |
|
|
20.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
887,611 |
|
|
|
158,565 |
|
|
$ |
14.19 |
|
|
|
1,072,422 |
|
|
$ |
18.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully vested and shares expected to vest total approximately 1,010,000 at December 31, 2009
and the related intrinsic value of such shares was approximately $1,600.
Other information regarding options outstanding at December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Contractual Life in |
|
|
|
|
|
|
Weighted Average |
|
|
|
Number of Shares |
|
|
Exercise Price |
|
|
years |
|
|
Number of Shares |
|
|
Exercise Price |
|
Exercise Price Range: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.00 8.89 |
|
|
41,300 |
|
|
$ |
2.91 |
|
|
|
9.94 |
|
|
|
|
|
|
$ |
|
|
8.90 13.00 |
|
|
94,740 |
|
|
|
10.61 |
|
|
|
8.99 |
|
|
|
10,440 |
|
|
|
11.64 |
|
13.01 18.00 |
|
|
74,444 |
|
|
|
16.72 |
|
|
|
8.37 |
|
|
|
14,888 |
|
|
|
16.72 |
|
18.01 20.00 |
|
|
515,585 |
|
|
|
19.01 |
|
|
|
6.14 |
|
|
|
301,814 |
|
|
|
19.02 |
|
20.01 21.00 |
|
|
128,780 |
|
|
|
20.25 |
|
|
|
7.22 |
|
|
|
62,099 |
|
|
|
20.24 |
|
21.01 22.00 |
|
|
48,764 |
|
|
|
21.30 |
|
|
|
7.77 |
|
|
|
19,505 |
|
|
|
21.30 |
|
22.01 23.00 |
|
|
110,676 |
|
|
|
22.83 |
|
|
|
6.41 |
|
|
|
67,404 |
|
|
|
22.84 |
|
23.01 24.01 |
|
|
58,133 |
|
|
|
23.31 |
|
|
|
6.43 |
|
|
|
32,599 |
|
|
|
23.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,072,422 |
|
|
$ |
18.37 |
|
|
|
6.94 |
|
|
|
508,749 |
|
|
$ |
19.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock option exercises totaled $0 in 2009 and 2008, and $12,000 in 2007. Shares
issued were from available authorized shares. There were 508,749 options exercisable at December
31, 2009, including those granted to the Companys board of directors and consultants. The total
intrinsic value of outstanding in-the-money stock options and outstanding in-the-money exercisable
stock options were $1,600 and $0, respectively, at December 31, 2009.
F-45
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Stock-Based Compensation Expense
Stock-based compensation expense from continuing operations totaled $1,475,000 in 2009, $1,487,000
in 2008, and $1,012,000 in 2007. Stock-based compensation expense is recognized ratably over the
requisite service period for all awards. Stock-based compensation expense for 2009 was incurred as
follows: $776,000 for stock options, $496,000 for non-vested stock awards, and $179,000 for shares
issued to the independent members of our board of directors, and $24,000 in connection with the
Companys Employee Stock Purchase Plan. Stock-based compensation expense for 2008 was incurred as
follows: $790,000 for stock options, $433,000 for non-vested stock awards, $139,000 for shares
issued to the independent members of our board of directors, and $125,000 in connection with the
Companys Employee Stock Purchase Plan. Stock-based compensation expense for 2007 was incurred as
follows: $760,000 for stock options, $102,000 for non-vested stock awards, $62,000 for shares
issued to the independent members of our board of directors, and $88,000 in connection with the
Companys Employee Stock Purchase Plan. Unrecognized stock-based compensation related to stock
options totaled $1.5 million at December 31, 2009. At such date, the weighted-average period over
which this unrecognized expense was expected to be recognized was 2.3 years. Unrecognized
stock-based compensation expense related to non-vested stock awards was $1.8 million at December
31, 2009. At such date, the weighted-average period over which this unrecognized expense was
expected to be recognized was 3.4 years.
Valuation of Stock-Based Compensation
The fair value of the Companys stock options granted is estimated on the measurement date, which,
for the Company, is the date of grant. The Company estimates the fair value of stock options
granted using the Hull-White model, an enhanced trinomial lattice-based valuation model which takes
into account certain dynamic assumptions about interest rates, expected volatility, expected
dividends, employee exercise patterns, forfeitures and other factors. Accordingly, management
believes the Hull White model provides a better fair value estimate than other models available.
The weighted-average fair value of stock options granted during 2009, 2008 and 2007, estimated
using a trinomial lattice-based valuation model was $1.91, $2.98, and $4.48, respectively. The
assumptions used to determine the fair value of options granted during 2009, 2008 and 2007 are
detailed in the table below:
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
Expected Volatility |
|
55.30% 71.50% |
|
25.20% 51.00% |
|
25.70% 27.40% |
Expected dividend yield |
|
2.54% 4.78% |
|
1.27% 2.70% |
|
0.93% 1.19% |
Risk-free interest rate |
|
2.90% 3.72% |
|
2.67% 3.99% |
|
4.12% 4.77% |
Expected term (in years) |
|
6.19 6.58 |
|
6.18 6.91 |
|
5.50 7.00 |
WA grant date Fair Value |
|
$.69 $3.10 |
|
$2.21 $3.57 |
|
$3.13 $5.51 |
Options granted |
|
83,830 |
|
170,880 |
|
186,052 |
Options forfeited |
|
(45,943) |
|
(35,928) |
|
(16,643) |
Expected volatility is based primarily on historical volatility (estimated using a rolling
five-year weekly average) of the closing price of the Companys common stock, and other factors. In
estimating the expected dividend yield, the Company used the dividends declared in the calculation
of the fair value stock option awards. Prospectively, the Company will revise the estimate of
dividends that are included in stock option awards to conform to the level of dividends declared by
the Board of Directors, if any. The risk-free interest rate is based on the U.S. Treasury yield
curve in effect at the date of grant with term equal to the life of the option. In estimating the
fair value of stock options under the trinomial lattice-based valuation model, separate groups of
employees that have similar historical exercise behavior are considered separately. The expected
term of options granted is derived using the lattice model and represents the period of time that
options granted are expected to be outstanding. The range of expected term and estimated
forfeitures (employee exit rate) results from certain groups of employees exhibiting different
behavior. Options forfeited impact the amount of compensation expense recognized in the
consolidated income statements. Share-based compensation expense is based on awards that are
ultimately expected to vest; accordingly, share-based compensation expense may be impacted if
actual forfeitures differ from estimated forfeitures.
F-46
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Employee Stock Purchase Plan
In 1996, the board of directors adopted and the shareholders approved an Employee Stock Purchase
Plan (Purchase Plan) and authorized, as amended, 400,000 shares of common stock (ESPP Shares)
for issuance thereunder. The price at which ESPP Shares are sold under the Purchase Plan is 85% of
the lower of the fair market value per share of common stock on the enrollment date or the purchase
date. During the year ended December 31, 2009, the Company issued 29,157 ESPP Shares to
participants in the Purchase Plan compared to 26,634 shares for 2008, and 18,308 shares for 2007.
Included in stock-based compensation, the Company incurred $24,000 of expense in 2009, $125,000 in
2008, and $88,000 in 2007 associated with the Purchase Plan. As of December 31, 2009, there were
115,848 ESPP Shares available for future issuance.
Stock Repurchase Plan
During 2009, the Company did not repurchase any of its common shares. During 2008, the Company
repurchased 113,900 of its common shares for $1.61 million. During 2007, the Company repurchased
60,200 of its common shares for $1.25 million. The Company does not anticipate the repurchase of
additional common shares. In accordance with Colorado law all shares were retired.
15. Defined Contribution Plan
The Company has a 401(k) defined contribution plan (Plan) covering all employees twenty-one years
of age and older who have elected to participate in the Plan. Each participant may make pretax
contributions to the Plan up to the lesser of the amount allowed by the Internal Revenue Code or
100% of such participants earnings. The Company matches 50% of participant contributions on the
first 6% of compensation deferred, not to exceed 3% of the participants compensation. The Plan was
amended in 2007 to provide for vesting of matching contributions over a three year period; 20%
after one year, 40% after two years and 100% after three years. In prior years the Plan provided
for vesting of matching contributions ratably over a five year period. The Company contributed
approximately $361,000, $375,000, and $252,000 during the years ended December 31, 2009, 2008 and
2007, respectively, which were recorded in compensation and employee benefits expense in the
consolidated statements of operations.
F-47
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Total Comprehensive Income
The following table presents the components of other comprehensive income (loss) and total
comprehensive income (loss) for the years ended December 31, 2009, 2008, and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Net (loss) income |
|
$ |
(42,045 |
) |
|
$ |
9,952 |
|
|
$ |
10,141 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized losses |
|
|
(49,370 |
) |
|
|
(35,668 |
) |
|
|
(4,468 |
) |
Non-credit-related impairment losses on held to maturity securities |
|
|
(6,197 |
) |
|
|
|
|
|
|
|
|
Add: Reclassification adjustments for losses (gains) included in net (loss) income |
|
|
83,573 |
|
|
|
4,110 |
|
|
|
(98 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains (losses) |
|
|
28,006 |
|
|
|
(31,558 |
) |
|
|
(4,566 |
) |
Income tax expense (benefit) |
|
|
10,623 |
|
|
|
(11,970 |
) |
|
|
(1,732 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
17,383 |
|
|
|
(19,588 |
) |
|
|
(2,834 |
) |
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income |
|
$ |
(24,662 |
) |
|
$ |
(9,636 |
) |
|
$ |
7,307 |
|
|
|
|
|
|
|
|
|
|
|
17. Commitments, Contingencies, Off-Balance-Sheet Arrangements and Related Party Transactions
Sale-leaseback of United Western Financial Center
On September 29, 2006, the Company sold the United Western Financial Center, a high rise office
tower located in downtown Denver, Colorado. The Company sold the building for $27.3 million and
received net proceeds of $26.5 million net of commissions and costs. The Companys basis in the
building was $14.8 million, resulting in a gross deferred economic gain of $12.1 million. In
connection with the sale, the Company and the Bank agreed to lease back approximately 62,487 square
feet of office space in the building for a term of 10 years. In addition, the Company guaranteed
certain third-party lease obligations on approximately 23,171 square feet of office space for
10 years (such third parties being former subsidiaries of the Company). Management estimated and
accrued an obligation of $840,000 for the third party space based on the existing lease terms and
other factors related to those leases and the Companys guarantee. This guarantee was recorded
pursuant to the provisions of ASC Topic 460, Guarantees, which requires proceeds from the sale of
assets to be allocated between the guarantee and proceeds from the sale, thus impacting the gain on
the transaction. Changes in the guarantee will be recognized currently in
F-48
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
earnings as changes in
the value of the guarantee occur. After its guarantee obligation, the Company has a net deferred
economic gain of approximately $11.2 million. Due to the requirements of ASC Topic 840, Leases,
which provides accounting guidance for sale leaseback transactions, the Company is recognizing the
gain at a rate of approximately $1.1 million annually, pre-tax, as a reduction in lease expense
over the 10-year term of the lease. In the years ended December 31, 2009, 2008, and 2007 the
Company recognized $1.1 million, $1.1 million, and $1.1 million, respectively, as a reduction in
lease expense, which is included in occupancy and equipment expense on the statements of income.
The table below provides information regarding the lease as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
Accrual |
|
|
Deferred |
|
|
Deferred |
|
|
Net Rent |
|
|
|
Rent (1) |
|
|
Rent (2) |
|
|
Rent (3) |
|
|
Gain (4) |
|
|
Expense (5) |
|
|
|
(Dollars in thousands) |
|
2010 |
|
$ |
1,314 |
|
|
$ |
1,367 |
|
|
$ |
53 |
|
|
$ |
1,123 |
|
|
$ |
244 |
|
2011 |
|
|
1,357 |
|
|
|
1,367 |
|
|
|
10 |
|
|
|
1,123 |
|
|
|
244 |
|
2012 |
|
|
1,399 |
|
|
|
1,367 |
|
|
|
(32 |
) |
|
|
1,123 |
|
|
|
244 |
|
2013 |
|
|
1,442 |
|
|
|
1,367 |
|
|
|
(75 |
) |
|
|
1,123 |
|
|
|
244 |
|
2014 |
|
|
1,484 |
|
|
|
1,367 |
|
|
|
(117 |
) |
|
|
1,123 |
|
|
|
244 |
|
Thereafter |
|
|
2,697 |
|
|
|
2,394 |
|
|
|
(303 |
) |
|
|
1,962 |
|
|
|
432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,693 |
|
|
$ |
9,229 |
|
|
$ |
(464 |
) |
|
$ |
7,577 |
|
|
$ |
1,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The cash rent reflects the future minimum lease payments required to be paid under the
terms of the lease. |
|
(2) |
|
GAAP requires when a lease has an escalation clause the rent must be accrued on a
straight line basis over the lease term or expected life of the lease. |
|
(3) |
|
The deferred rent represents the difference between columns (1) and (2). Deferred rent
accumulates in the first half of the lease and then reverses over the later part of the
lease. |
|
(4) |
|
The deferred gain represents the recognition of the remaining $7.6 million economic
gain over the life of the lease. |
|
(5) |
|
The prospective effect of the reduction in the Companys net rent expense from
realization of the annual deferred gain amortization will be substantially offset by the
rental income that was previously earned by Matrix Tower Holdings, LLC. |
Leases
The Company leases other office space and certain equipment under noncancelable operating leases.
Annual amounts due under the office and equipment leases as of December 31, 2009 are approximately
as follows:
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2010 |
|
$ |
631 |
|
2011 |
|
|
569 |
|
2012 |
|
|
495 |
|
2013 |
|
|
419 |
|
2014 |
|
|
432 |
|
Thereafter |
|
|
1,273 |
|
|
|
|
|
|
|
$ |
3,819 |
|
|
|
|
|
Total rent expense aggregated approximately $1,120,000, $917,000, and $920,000 for the years ended
December 31, 2009, 2008 and 2007, respectively, and is recorded in occupancy and equipment expense.
Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business the Company enters into various transactions which are not
included in its consolidated balance sheets. The Company enters into these transactions to meet the
financing needs of its customers. These transactions include commitments to extend credit and
standby letters of credit, which involve elements of credit risk and interest rate risk in excess
of the amounts recognized in the consolidated financial statements. The Company minimizes its
exposure to loss under these commitments by subjecting them to credit approval and monitoring
procedures.
F-49
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Commitments to extend credit are agreements to lend to, or provide a credit guarantee for, a
customer as long as there is no violation of any condition established in the contract. The Company
enters into contractual commitments to extend credit, generally with fixed expiration dates or
termination clauses, at specified rates and for specific purposes. These commitments generally
require the payment of a fee. Because many of these instruments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. Commitments to extend credit totaled $103 million and $327 million at December 31,
2009 and 2008, respectively.
Standby letters of credit are conditional commitments issued to guarantee the performance of a
customer to a third party. Standby letters of credit generally are contingent upon the failure of
the customer to perform according to the terms of the underlying contract with the third party.
Standby letters of credit totaled $8.5 and $12.1 million at December 31, 2009 and 2008,
respectively.
Contingencies Liabilities and Guarantees
In the period between 2000 and 2003, Matrix Financial originated and sold approximately $8.9
billion of residential mortgage loans. Since that time the Bank has periodically sold residential
mortgage loans. These loans were and are sold to investors in the normal course of business. These
agreements usually require certain representations and warranties concerning credit information,
loan documentation, collateral, and insurability. On occasion, investors have requested the Bank or
Matrix Financial to repurchase loans or to indemnify them against losses on certain loans which the
investors believe do not comply with applicable representations. Upon completion of its own
investigation regarding the investor claims, the Bank and Matrix Financial generally repurchase or
provide indemnification on certain loans, as appropriate.
The Company maintains a liability for estimated losses on loans expected to be repurchased or on
which indemnification is expected to be provided and regularly evaluates the adequacy of this
repurchase liability based on trends in repurchase and indemnification requests, actual loss
experience, and other relevant factors including economic conditions. Total loans repurchased
during the years ended December 31, 2009, 2008 and 2007 were $196,000, $1,301,000, and $1,037,000,
respectively. Loans indemnified that remain outstanding at December 31, 2009 totaled $5,320,000, of
which $2,089,000 are guaranteed as to principal by FHA. Losses charged against the liability for
estimated losses on repurchase and indemnification were $292,000, $606,000, and $97,000, for 2009,
2008, and 2007, respectively. At December 31, 2009 and 2008, the liability for estimated losses on
repurchase and indemnification was $891,000 and $1,195,000, respectively, and was included in other
liabilities on the consolidated balance sheets.
In connection with the sale of ABS School Services, LLC, on May 6, 2006, the Companys recourse
obligation for certain loans, which was $5,400,000 at March 31, 2006, was transferred to the
purchaser. Pursuant to the sales agreement, the Company guarantees, for a five year period, the
repayment of the loans sold to the purchaser up to an aggregate amount of $1,650,000, which created
a new recourse obligation for the Company. Included in other general and administrative expenses
for the year ended December 31, 2006 was a charge of $950,000 to reflect in the Companys
consolidated financial statements the estimated liability related to this recourse obligation. This
charge was included in other noninterest expense. At December 31, 2009, and 2008, the liability for
estimated recourse obligations was $192,000 and $445,000, respectively, and was included in other
liabilities on the consolidated balance sheet. During the year ended December 31, 2009 the Company
paid $253,000 of claims against its recourse obligation. Assets that continue to be indemnified
were $14.5 million and $17.8 million at December 31, 2009 and 2008, respectively.
F-50
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Contingencies Legal
The Company and its subsidiaries are from time to time party to various litigation matters, in most
cases involving ordinary and routine claims incidental to its business. The Company accrues
liabilities when it is probable that the future costs will be incurred and such costs can be
reasonably estimated. Such accruals are based upon developments to date, the Companys estimates of
the outcome of these matters and its experience in contesting, litigating and settling other
matters. Because the outcome of most litigation matters is inherently uncertain, the Company will
generally only accrue a loss for a pending litigation matter if, for example, the parties to the
matter have entered into definitive settlement agreements or a final judgment adverse to the
Company has been entered. Based on evaluation of the Companys litigation matters and discussions
with internal and external legal counsel, management believes than an adverse outcome on one or
more of the matters set forth below, against which no accrual for loss has been made at December
31, 2009 unless otherwise noted, is reasonably possible but not probable.
United Western Bancorp, Inc. United Heritage Financial Group, Inc. and United Heritage Life
Insurance Company v. First Matrix Investment Services Corporation et al. On October 27, 2006, a
complaint was filed against the Company and First Matrix, along with two former employees of First
Matrix Messrs. Curd and Snodgrass, in Idaho State District Court alleging violations of state
securities laws, the Idaho Consumer Protection Act and fraud arising from the sale of an
approximately $1.70 million mortgage backed bond from First Matrix to one of the plaintiffs. The
case, which was subsequently removed to the U.S. District Court in Idaho on December 12, 2006, is
based on the plaintiffs claims that First Matrix should have made certain disclosures regarding
the risk of the withdrawal of a USDA government guarantee of the bond, which withdrawal
subsequently occurred and the bond went into default. On September 30, 2009, the Court granted in
part the Companys, First Matrixs and Messrs. Curds and Snodgrass Motion for Summary Judgment.
In granting partial summary judgment for the defendants, the court agreed to dismiss (i)
plaintiffs Idaho Consumer Protection Act claim; (ii) the claims by United Heritage Financial Group
(UHFG), the parent of United Heritage Life Insurance Company (UHLIC) against the defendants
since UHLIC sold all but a $425,000 interest in the subject bond to UHFG, thereby reducing UHLICs
claim from $1.70 million to $425,000; in addition, UHLICs claim was further reduced to $212,500
since UHLIC and UHFG sold their entire interest in the bond to a third party for fifty cents on the
dollar and (iii) Messrs. Curd and Snodgrass from the matter. On December 15, 2009, the parties
entered into a settlement and release agreement to fully settle the litigation. Under the terms of
the settlement and release agreement, First Matrix agreed to pay $100,000 to the plaintiffs (of
which 85% was covered by insurance) and the plaintiffs agreed to dismiss the lawsuit with
prejudice.
United Western Bancorp, Inc. and UW Trust Company. William R. and Carolyn Richoz, et al. v.
United Western Trust Company f/k/a Sterling Trust and United Western Bancorp, Inc. In October of
2009, plaintiffs filed an amended class action complaint in the United States District Court for
the Northern District of Illinois, Eastern Division, against United Western Trust Company f/k/a
Sterling Trust and United Western Bancorp, Inc. The plaintiffs allege that they were damaged when
they invested proceeds from their self-directed individual retirement accounts with
InvestForClosures and other related entities using UW Trust Company as custodian for such
investments. Plaintiffs claim UW Trust Company breached its fiduciary duties owed to plaintiffs as
custodian of individual retirement accounts set up through UW Trust Company by plaintiffs.
Plaintiffs also allege that UW Trust Company knew that these investment were part of a Ponzi scheme
to defraud investors, that UW Trust Companys actions violated the Texas Securities Act, Illinois
securities laws and the Illinois Consumer Fraud Act and that UW Trust was unjustly enriched in
excess of $5 million, should pay compensatory damages of $5 million and exemplary damages in the
amount of $20 million. On December 28, 2009, the parties filed a stipulation with the court
voluntarily dismissing the action without prejudice.
F-51
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
United Western Bank. Ward Enterprises, LLC v. Daniel E. McCabe et al. including United
Western Bank. In February 2008, the plaintiff filed a complaint in Colorado District Court for the
City and County of Denver
seeking damages from the holders of an processing and trust account at the Bank, the Bank, and
a former employee of the Bank, for breach of fiduciary duties due to the plaintiff and aiding and
abetting the conversion of approximately $1.84 million of plaintiffs funds by the holder of the
processing and trust account maintained at the Bank. On December 28, 2009, the Court agreed to
dismiss the action with prejudice.
United Western Bank. Anita Hunter et. al. v. Citibank, N.A. et al. including United Western
Bank. The Bank received this class action complaint in July of 2009 brought by seven named
plaintiffs on behalf of a class of approximately 330 similarly situated people residing throughout
the United States, each of whom lost substantial sums of money (Exchange Funds) entrusted to
seven qualified intermediaries (QIs) to facilitate their respective Internal Revenue Code Section
1031 Exchanges. According to the complaint, the QIs were controlled by an individual named Edward
Okun and certain other individuals who would gain access to the Exchange Funds and convert the
Exchange Funds for their own use for personal gain. The plaintiffs seek class certification for
all similarly situated plaintiffs who lost Exchange Funds when they placed such funds using the
QIs. One of the QIs maintained accounts at the Bank for the purpose of holding Exchange
Funds. With respect to plaintiffs claims against the Bank, plaintiffs alleged, among other
things, that the Bank knowingly aided and abetted breaches of fiduciary duties by Mr. Okun by
facilitating wire transfers of Exchange Funds from accounts at the QI at the Bank to accounts
controlled by Mr. Okun and his related entities at other financial institutions. On October 2,
2009, the Bank filed a Motion to Dismiss with the court requesting the court to dismiss all
plaintiffs claims against the Bank since the Bank successfully initiated the QIs wire
transfers, and therefore, the Bank cannot be held liable under U.C.C. Article 4-A. On February 3,
2010, the court granted the Banks Motion to Dismiss agreeing with the Bank that the Bank cannot be
held liable under U.C.C. Article 4-A; and furthermore, that all common law claims against the Bank
are preempted by U.C.C Article 4-A. While the court dismissed the Bank from the action, it granted
the plaintiffs with leave to amend the complaint. On March 3, 2010, the plaintiffs filed a second
amended complaint with the court against the Bank and other defendants, making the following
allegations specifically against the Bank: (i) aiding and abetting a breach of fiduciary duty by
means of non-electronic transfers; (ii) aiding and abetting fraud by means of non-electronic
transfers; (iii) aiding and abetting fraud; (iv) conversion and aiding and abetting conversion by
means of non-electronic transfers; (v) conversion; (vi) aiding and abetting a conversion;
(vii) contractual interference; (viii) negligence and (ix) violations of U.C.C. Article 4-A. While
the Banks liability, if any, to the plaintiffs claims in this case is uncertain at this time, the
Company believes that the Bank has meritorious defenses to the plaintiffs claims.
United Western Bank. Highpoint Vista, LLC et al. v. United Western Bank et al. In July 2009,
the plaintiffs, who are borrowers and/or guarantors on a $20.5 million loan secured by real estate,
filed a complaint in the Colorado District Court for the City and County of Denver against the Bank
and an officer of the Bank, seeking damages in excess of $10 million dollars against the Bank for
breach of contract, breach of the covenant of good faith and fair dealing, breach of fiduciary
duties and negligent misrepresentation. The plaintiffs allege that the Bank entered into an
agreement with the borrowers whereby the Bank would issue a letter of credit to a third party,
extend the maturity date on the real estate loan and approve the recording of a second deed of
trust on the real estate securing the Banks loan and that the Bank failed to execute such letter
of credit, extend the maturity date and approve the recording of a second deed of trust on the real
estate, thereby causing damages to plaintiffs. On September 15, 2009, the plaintiffs agreed to
dismiss the Banks loan officer from the matter. On January 4, 2010, the parties to the action
agreed to stipulate to dismissing the action without prejudice.
F-52
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Related Party Transactions
On September 29, 2006, the Company entered into a co-location license agreement (the Agreement)
with Legent Clearing, LLC (LC) to share office space with LC located in Thornton, Colorado. The
company uses the office as a business continuity site. The Agreement was renewed in 2007 and
currently matures April 30, 2010 at $3,000 per
month. The Bank also extended a $5 million line of credit (the Loan) to Legent Group, LLC (LG).
LC is a wholly-owned subsidiary of LG. Because Guy A. Gibson, the Companys Chairman of the Board
and largest shareholder, founded LC in 2001, is currently an indirect 7% shareholder of LG and
serves on LGs Board of Directors, the Companys Audit Committee (which is responsible for
reviewing and approving all related party transactions) reviewed both the Agreement and the Loan.
The Audit Committee determined that the monthly payments to LC pursuant to the Agreement were at
market rates for the space to be used and, accordingly, that the terms of the Agreement are as fair
as would have been obtained from an unaffiliated third party. The Audit Committee also determined
that the Loan was fair and equitable and in the best interest of the Company. Based on these
determinations, the Committee approved both transactions and waived any potential violations of the
provisions of the Companys Business Conduct and Ethics.
18. Fair Value Measurements
In the Companys financial statements fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous
market for the asset in an orderly transaction between market participants at the measurement date.
The price in the principal (or most advantageous) market used to measure the fair value of the
asset or liability shall not be adjusted for transaction costs. An orderly transaction is a
transaction that assumes exposure to the market for a period prior to the measurement date to allow
for marketing activities that are usual and customary for transactions involving such assets and
liabilities; it is not a forced transaction. Market participants are buyers and sellers in the
principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv)
willing to transact.
To determine fair value often requires the use of valuation techniques that are consistent with the
market approach, the income approach, and/or the cost approach. The market approach uses prices and
other relevant information generated by market transactions involving identical or comparable
assets and liabilities. The income approach uses valuation techniques to convert future amounts,
such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach
is based on the amount that currently would be required to replace the service capacity of an asset
(replacement cost). Valuation techniques should be consistently applied. Inputs to valuation
techniques refer to the assumptions that market participants would use in pricing the asset or
liability. Inputs may be observable, meaning those that reflect the assumptions that market
participants would use in pricing the asset or liability developed based on market data obtained
from independent sources, or unobservable, meaning those that reflect the reporting entitys own
assumptions about the assumptions market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances. In that regard the
accounting literature has established a fair value hierarchy that gives the highest priority to
quoted prices in active markets for assets or liabilities and the lowest priority to unobservable
inputs. The fair value hierarchy is as follows:
|
Level 1: |
|
Inputs to the valuation methodology are quoted prices, unadjusted, for
identical assets or liabilities in active markets. A quoted price in an active market
provides the most reliable evidence of fair value and shall be used to measure fair
value whenever available. |
|
Level 2: |
|
Inputs to the valuation methodology include quoted prices for similar
assets or liabilities in active markets; inputs to the valuation methodology include
quoted prices for identical or similar assets or liabilities in markets that are not
active; or inputs to the valuation methodology that are derived principally from or can
be corroborated by observable market data by correlation or other means. |
F-53
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
|
Level 3: |
|
Inputs to the valuation methodology are unobservable and significant to the
fair value measurement. Level 3 assets and liabilities include financial instruments
whose value is
determined using discounted cash flow methodologies, as well as instruments
for which the determination of fair value requires significant management
judgment or estimation. |
A description of the valuation methodologies used for instruments measured at fair value, as well
as the general classification of such instruments pursuant to the valuation hierarchy, is set forth
below. These valuation methodologies were applied to all of the Companys financial assets carried
at fair value or the lower of cost or fair value.
In general, fair value is based upon quoted market prices, where available. If such quoted market
prices are not available, fair value is based upon internally developed models or obtained from
third parties that primarily use, as inputs, observable market-based parameters. Valuation
adjustments may be made to ensure that financial instruments are recorded at fair value, or the
lower of cost or fair value. These adjustments may include unobservable parameters. Any such
valuation adjustments have been applied consistently over time. The Companys valuation
methodologies may produce a fair value calculation that may not be indicative of net realizable
value or reflective of future fair values. While management believes the Companys valuation
methodologies are appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could
result in a different estimate of fair value at the reporting date. Furthermore, the reported fair
value amounts have not been comprehensively revalued since the presentation dates, and therefore,
estimates of fair value after the balance sheet date may differ significantly from the amounts
presented herein.
Financial asset and financial liabilities measured at fair value on a recurring basis include the
following:
Available for sale securities. Securities available for sale are comprised of agency securities and
nonagency securities (private label) collateralized by mortgage obligations.
|
|
|
Agency securities are reported at fair value using Level 1 inputs. Management believes
Level 1 is appropriate for agency securities due to the relative availability of pricing
transparency for such securities in the marketplace. |
|
|
|
Nonagency securities (private label) collateralized by mortgage obligations are reported
at fair value using Level 2 inputs. Management believes Level 2 is appropriate for these
securities because the Company obtains fair value measurements from three primary sources.
Two are widely known pricing services including an independent pricing service that is
utilized by the FHLBank of Topeka. The other is an independent third party that provides
management with fair market valuations for securities identified by management as requiring
additional analysis in order to ascertain fair value in accordance with ASC Topic 820,
Fair Value Measurements and Disclosures. Management has direct observable data for these
securities based on this pricing service and based on other market data that is available.
This data that is available includes market research of various well known firms and
includes information on yield, duration, repayment, defaults, delinquency and other
factors. Management is comfortable with the data utilized by the pricing service based on
our review of documentation and discussion with personnel from these entities. |
F-54
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
|
|
|
Generally, if a security has received one rating from a Nationally Recognized Securities
Ratings Organization (NRSRO) that is below investment grade or the security has a
collateral coverage ratio of less than or equal to 1.0 (these populations are substantially
the same) we obtain a fair market value estimate from the independent consultant. The
independent consultant provides estimated cash flows from which fair value and OTTI are
determined. These cash flow estimates are most significantly impacted by assumptions about
voluntary repayments, the level of defaults, and loss severity. |
|
|
|
At December 31, 2008 the Company owned nonagency securities collateralized by
payment-option-adjustable-rate mortgages, which were reported at fair value using Level 3
inputs. The fair value of payment-option-adjustable-rate mortgages were determined through
an independent third party using cash flow models and assumptions as to the future
performance of the underlying loan pools. Management concluded that this value was based on
unobservable market data because the fair value was determined through proprietary cash
flow models. While management believes the assumptions used by the third party were
reasonable, since the cash flow models were based on assumptions about future events and
future performance of the underlying collateral, they were based on unobservable market
data. Further, management believes the valuation of payment-option-adjustable-rate mortgage
backed securities was less certain due to the age of the securities as these were a 2006
vintage origination and the behavior of these instruments was comparatively unknown as
compared to other mortgage-backed securities that did not have performance history in
stressed markets. These securities were sold during 2009. |
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring
basis. These instruments are not measured at fair value on an ongoing basis but are subject to fair
value adjustments in circumstances (for example, when there is evidence of impairment). Financial
assets and liabilities measured at fair value on a non-recurring basis include the following:
Loans held for sale. Loans held for sale include residential, multifamily and SBA originated loans,
which are reported in the aggregate at the lower of cost or fair value using Level 3 inputs. For
these loans, the Company obtains fair value using a cash flow model. The fair value measurements
consider observable data that may include loan type, spreads for other similar whole loans and
mortgage-backed securities, prepayment speeds, servicing values, index values, and when applicable,
outstanding investor commitments. Management makes certain adjustments to the data inputs that it
believes other market participants would consider in estimating the fair value of the Companys
residential held for sale portfolio including: delinquency, existence of government guarantees,
seasoning, loan to value ratios, FICO scores, foreclosure levels, loss severities, among other
factors. During 2009, interest rates and spreads on residential loans held for sale contracted,
which favorably impacted valuations of residential loans held for sale; however, an increase in
delinquencies substantially offset the impact of interest rates and spreads. In 2009, the Company
recorded a charge of $586,000 to its previously established valuation allowance, compared to $2.8
million in 2008. The remaining change in value from December 31, 2008, when the balance was
$212,083,000, was due to repayments of $21.7 million and $3.8 million transferred to real estate
owned.
Mortgage servicing rights. Mortgage servicing rights are reported at the lower of cost or fair
value using Level 3 inputs. Management engages an independent third party to perform a valuation of
its mortgage servicing rights periodically. Mortgage servicing rights are valued using discounted
cash flow modeling techniques that require management to make estimates regarding future net
servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates,
discount rates, servicing costs, and other economic factors. Certain adjustments to inputs are made
to reflect the specific characteristics of the Companys portfolio. During 2009, the change in
value of the asset versus December 31, 2008, was substantially all due to amortization.
F-55
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Impaired securities. Held to Maturity securities deemed other-than-temporarily impaired are
reported at the estimated fair value of the security using Level 3 inputs. Level 3 is appropriate
for these securities as there is very little trading volume of such securities and, as a result,
the Company relies upon a valuation of these securities using a cash flow forecast model that
incorporates elements of market participants prepared by an independent third party. The
methodology used to determine estimated fair value is identical to the methodology discussed above
in Available for sale securities and that is subject to the same levels of review.
Impaired loans. Certain impaired loans are reported at the fair value of the underlying collateral
if management concludes repayment is expected solely from the collateral. Collateral values are
estimated using Level 2 inputs based on observable market data or Level 3 inputs based on
customized discounting criteria. During the year ended December 31, 2009, impaired loans were
remeasured and reported at fair value through a specific valuation allowance allocation of the
allowance for credit losses based upon the fair value of the underlying collateral. Impaired loans
with a carrying value of $27.9 million had been previously reduced by a partial charge off of $2.5
million and were further reduced by allowance for credit loss allocations totaling $2.8 million to
a total reported fair value of $25.1 million utilizing Level 3 valuation inputs. Provision for
credit losses of $6.3 million was made during 2009 for impaired loans.
The following represents assets measured at fair value on a recurring basis as of December 31, 2009
and December 31, 2008. The valuation methodology used to measure the fair value of these
securities is described earlier in this Note (There are no liabilities measured at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant |
|
|
Significant |
|
|
|
|
|
|
Active Markets for |
|
|
Other Observable |
|
|
Other Unobservable |
|
|
Total |
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Fair |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Value |
|
|
|
(Dollars in thousands) |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities-agency/residential |
|
$ |
12,213 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
12,213 |
|
SBA securities |
|
|
|
|
|
|
121 |
|
|
|
|
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations private |
|
|
|
|
|
|
20,797 |
|
|
|
|
|
|
|
20,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available-for-sale |
|
$ |
12,213 |
|
|
$ |
20,918 |
|
|
$ |
|
|
|
$ |
33,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities-agency/residential |
|
$ |
15,628 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
15,628 |
|
SBA securities |
|
|
|
|
|
|
223 |
|
|
|
|
|
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
|
|
|
|
|
27,788 |
|
|
|
|
|
|
|
27,788 |
|
Mortgage-backed securities collateralized by option arm mortgage loans |
|
|
|
|
|
|
|
|
|
|
15,934 |
|
|
|
15,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available-for-sale |
|
$ |
15,628 |
|
|
$ |
28,011 |
|
|
$ |
15,934 |
|
|
$ |
59,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-56
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The table below presents a reconciliation of the securities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for 2009.
|
|
|
|
|
|
|
Investment securities |
|
|
|
available-for sale |
|
|
|
(Dollars in thousands) |
|
Balance January 1, 2009 |
|
$ |
15,934 |
|
Loss realized in earnings |
|
|
(46,980 |
) |
Included in other comprehensive income |
|
|
31,452 |
|
Settlements |
|
|
(406 |
) |
Transfers in and/or out of Level 3 |
|
|
|
|
|
|
|
|
Balance December 31, 2009 |
|
$ |
|
|
|
|
|
|
The following table represents financial assets measured at fair value on a nonrecurring basis as
of December 31, 2009 and December 31, 2008. The valuation methodology used to measure the fair
value of these assets is described earlier in the Note.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
in Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
Total |
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Fair |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Value |
|
|
|
(Dollars in thousands) |
|
Assets at December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale |
|
|
|
|
|
|
|
|
|
$ |
260,757 |
|
|
$ |
260,757 |
|
Impaired loans |
|
|
|
|
|
|
|
|
|
|
25,050 |
|
|
|
25,050 |
|
Mortgage Servicing Rights |
|
|
|
|
|
|
|
|
|
|
7,344 |
|
|
|
7,344 |
|
Other-than-temporarily impaired securities |
|
|
|
|
|
|
|
|
|
|
38,966 |
|
|
|
38,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale |
|
|
|
|
|
|
|
|
|
$ |
291,620 |
|
|
$ |
291,620 |
|
Impaired loans |
|
|
|
|
|
|
|
|
|
|
1,658 |
|
|
|
1,658 |
|
Mortgage Servicing Rights |
|
|
|
|
|
|
|
|
|
|
9,496 |
|
|
|
9,496 |
|
Other-than-temporarily impaired securities |
|
|
|
|
|
|
|
|
|
|
6,581 |
|
|
|
6,581 |
|
F-57
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Nonfinancial assets measured on a nonrecurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
in Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
Total |
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Fair |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Value |
|
|
|
(Dollars in thousands) |
|
Assets at December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed real estate, net |
|
|
|
|
|
|
|
|
|
$ |
16,350 |
|
|
$ |
16,350 |
|
Foreclosed real estate consists of residential or commercial assets acquired through loan
foreclosure or deed in lieu of loan foreclosure. When assets are transferred to foreclosed real
estate such assets are held for sale and are initially recorded at fair value, less estimated
selling costs when acquired, establishing a new cost basis. Fair value is generally determined via
appraisal. Costs after acquisition are generally expensed. If the fair value of the asset
declines, a write-down is recorded through expense. During 2009, the Company incurred charges of
$5.0 million to reduce real estate owned to fair value.
During 2009 there were no transfers out of Level 3 financial assets.
The Company is required to disclose the fair value of financial assets and financial liabilities,
including those financial assets and financial liabilities that are not measured and reported at
fair value on a recurring basis or non-recurring basis. The carrying amounts and estimated fair
value of financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Carrying |
|
|
Estimated |
|
|
Carrying |
|
|
Estimated |
|
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
|
|
(Dollars in thousands) |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
586,380 |
|
|
$ |
586,380 |
|
|
$ |
22,880 |
|
|
$ |
22,880 |
|
Investment securities available for sale |
|
|
33,131 |
|
|
|
33,131 |
|
|
|
59,573 |
|
|
|
59,573 |
|
Investment securities held to maturity |
|
|
357,068 |
|
|
|
292,474 |
|
|
|
498,464 |
|
|
|
429,526 |
|
Loans held for sale, net |
|
|
260,757 |
|
|
|
260,757 |
|
|
|
291,620 |
|
|
|
291,620 |
|
Loans held for investment, net |
|
|
1,150,105 |
|
|
|
1,129,007 |
|
|
|
1,233,301 |
|
|
|
1,239,399 |
|
FHLBank stock |
|
|
9,388 |
|
|
|
N/A |
|
|
|
29,046 |
|
|
|
N/A |
|
Accrued interest receivable |
|
|
7,023 |
|
|
|
7,023 |
|
|
|
8,973 |
|
|
|
8,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
1,993,513 |
|
|
$ |
1,994,066 |
|
|
$ |
1,724,672 |
|
|
$ |
1,727,182 |
|
Custodial escrow balances |
|
|
31,905 |
|
|
|
31,905 |
|
|
|
29,697 |
|
|
|
29,697 |
|
FHLBank borrowings |
|
|
180,607 |
|
|
|
190,792 |
|
|
|
226,721 |
|
|
|
242,620 |
|
Borrowed money |
|
|
108,635 |
|
|
|
111,158 |
|
|
|
119,265 |
|
|
|
124,630 |
|
Junior subordinated debentures |
|
|
30,442 |
|
|
|
16,726 |
|
|
|
30,442 |
|
|
|
29,759 |
|
Accrued interest payable |
|
|
2,218 |
|
|
|
2,218 |
|
|
|
1,902 |
|
|
|
1,902 |
|
F-58
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following methods and assumptions were used by the Company in estimating the fair value of
the financial instruments:
The estimated fair value approximates carrying value for cash and cash equivalents and accrued
interest.
It was not practicable to determine the fair value of FHLBank stock due to restrictions placed on
its transferability.
The estimated fair value approximates carrying value for variable-rate loans that reprice
frequently and with no significant change in credit risk. The fair value of fixed-rate loans and
variable-rate loans which reprice on an infrequent basis is estimated by discounting future cash
flows using the current interest rates at which similar loans with similar terms would be made to
borrowers of similar credit quality. An overall valuation adjustment is made for specific credit
risks as well as general portfolio credit risk.
The estimated fair value approximates carrying value for demand deposits (e.g., interest and
noninterest checking, savings and money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amounts). The estimated fair values
for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a schedule of aggregated expected
periodic maturities on time deposits.
The fair value disclosed for FHLBank borrowings and borrowed money and junior subordinated
debentures is estimated using a discounted cash flow calculation that applies interest rates
currently being offered on FHLBank borrowings and borrowed money and junior subordinated
debentures.
The Companys lending commitments are predominately variable-rate and have clauses that if the
customers credit quality deteriorates, we are not obligated to fund the commitment. Accordingly,
the fair values of these items are not material and are not included in the table above.
F-59
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
19. Parent Company Condensed Financial Information
Condensed financial information of United Western Bancorp, Inc. (Parent) is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
Condensed Balance Sheets |
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
9,610 |
|
|
$ |
9,023 |
|
Investment securities held to maturity |
|
|
6,120 |
|
|
|
|
|
Loans held for investment |
|
|
4,026 |
|
|
|
|
|
Other receivables |
|
|
33 |
|
|
|
49 |
|
Premises and equipment, net |
|
|
391 |
|
|
|
410 |
|
Other assets |
|
|
2,157 |
|
|
|
1,889 |
|
Investment in and advances to subsidiaries |
|
|
220,514 |
|
|
|
165,900 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
242,851 |
|
|
$ |
177,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity: |
|
|
|
|
|
|
|
|
Total debt (a) |
|
$ |
60,442 |
|
|
$ |
68,442 |
|
Other liabilities (b) |
|
|
22,758 |
|
|
|
6,880 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
83,200 |
|
|
|
75,322 |
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common stock |
|
|
3 |
|
|
|
1 |
|
Additional paid-in capital |
|
|
107,161 |
|
|
|
23,856 |
|
Retained earnings |
|
|
57,747 |
|
|
|
100,348 |
|
Accumulated other comprehensive loss |
|
|
(5,260 |
) |
|
|
(22,256 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
159,651 |
|
|
|
101,949 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
242,851 |
|
|
$ |
177,271 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
See Note 9 and Note 11 for additional information regarding debt. |
|
(b) |
|
Other liabilities includes $2.1 million of deferred revenue, $2.1 million of accounts
payables and accrued liabilities, $4.8 million of deferred tax liabilities, and $13.8
million of taxes owed to subsidiaries, substantially all of which will be repaid upon
receipt of the Companys tax refund from its NOL carryback. |
F-60
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Condensed Statements of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
734 |
|
|
$ |
14 |
|
|
$ |
29 |
|
Other-than-temporary impairment on securities, net |
|
|
(12,697 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
320 |
|
|
|
65 |
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
Total (loss) income |
|
|
(11,643 |
) |
|
|
79 |
|
|
|
117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits |
|
|
5,132 |
|
|
|
5,109 |
|
|
|
4,941 |
|
Interest on borrowed money |
|
|
3,601 |
|
|
|
3,583 |
|
|
|
4,953 |
|
Occupancy and equipment |
|
|
571 |
|
|
|
684 |
|
|
|
667 |
|
Professional fees |
|
|
1,433 |
|
|
|
1,234 |
|
|
|
543 |
|
Redemption of junior subordinated debentures |
|
|
|
|
|
|
|
|
|
|
1,487 |
|
Other general and administrative |
|
|
(560 |
) |
|
|
(667 |
) |
|
|
(368 |
) |
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
10,177 |
|
|
|
9,943 |
|
|
|
12,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and equity income of subsidiaries |
|
|
(21,820 |
) |
|
|
(9,864 |
) |
|
|
(12,106 |
) |
Income taxes (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before equity income of subsidiaries |
|
|
(21,820 |
) |
|
|
(9,864 |
) |
|
|
(12,106 |
) |
Equity (loss) income of subsidiaries |
|
|
(20,225 |
) |
|
|
19,816 |
|
|
|
22,247 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(42,045 |
) |
|
$ |
9,952 |
|
|
$ |
10,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Companys tax sharing agreement requires each entity to calculate its income taxes
on a stand alone basis. Generally subsidiaries pay the Parent an amount equal to its individual
current income tax provision calculated on the basis of the subsidiary filing a separate return.
The Parent, as it carries debt for the benefit of all subsidiaries incurs net operating losses. |
F-61
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Condensed Statements of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) income |
|
$ |
(42,045 |
) |
|
$ |
9,952 |
|
|
$ |
10,141 |
|
Adjustments to reconcile net income to net cash from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity loss (income) of subsidiaries |
|
|
20,225 |
|
|
|
(19,816 |
) |
|
|
(22,247 |
) |
Dividends from subsidiaries |
|
|
14,535 |
|
|
|
8,612 |
|
|
|
9,966 |
|
Share based compensation expense |
|
|
1,475 |
|
|
|
1,487 |
|
|
|
1,012 |
|
Write-down on other-than-temporary impairment of securities |
|
|
12,697 |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
232 |
|
|
|
232 |
|
|
|
827 |
|
Unrealized loss on securities available for sale |
|
|
|
|
|
|
|
|
|
|
(2,834 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in other liabilities |
|
|
15,878 |
|
|
|
1,712 |
|
|
|
(705 |
) |
Decrease (increase) in other receivables and other assets |
|
|
(260 |
) |
|
|
3,860 |
|
|
|
(2,371 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
22,737 |
|
|
|
6,039 |
|
|
|
(6,211 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of premises and equipment |
|
|
(204 |
) |
|
|
(257 |
) |
|
|
(199 |
) |
Return of investment in and advances to subsidiaries, net |
|
|
(95,865 |
) |
|
|
(12,156 |
) |
|
|
8,722 |
|
Proceeds from the prepayment of held to maturity securities |
|
|
792 |
|
|
|
|
|
|
|
|
|
Principal repayments on loans held for investment |
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from investing activities |
|
|
(95,021 |
) |
|
|
(12,413 |
) |
|
|
8,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net change in borrowed money revolving lines of credit |
|
|
|
|
|
|
23,000 |
|
|
|
5,000 |
|
Borrowed money (repayment) advance on term line |
|
|
(8,000 |
) |
|
|
(6,000 |
) |
|
|
6,000 |
|
Redemption of capital securities of subsidiary trust |
|
|
|
|
|
|
|
|
|
|
(25,774 |
) |
Proceeds from issuance of common stock, net |
|
|
81,814 |
|
|
|
212 |
|
|
|
311 |
|
Stock option exercise |
|
|
|
|
|
|
|
|
|
|
12 |
|
Repurchase of common stock |
|
|
|
|
|
|
(1,605 |
) |
|
|
(1,251 |
) |
Dividends paid |
|
|
(943 |
) |
|
|
(1,742 |
) |
|
|
(1,747 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities |
|
|
72,871 |
|
|
|
13,865 |
|
|
|
(17,449 |
) |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
587 |
|
|
|
7,491 |
|
|
|
(15,137 |
) |
Cash at beginning of year |
|
|
9,023 |
|
|
|
1,532 |
|
|
|
16,669 |
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year |
|
$ |
9,610 |
|
|
$ |
9,023 |
|
|
$ |
1,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash activity |
|
|
|
|
|
|
|
|
|
|
|
|
Loan transferred to a subsidiary of the parent in exchange for
held-to-maturity securities |
|
$ |
20,012 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
20. Quarterly Financial Data (Unaudited)
Net interest income during 2009 was impacted by increased liquidity maintained on the balance
sheet. Provision expense in the third quarter and fourth quarter of 2009 was greater than the
previous quarters due to increases in nonperforming loans and deterioration of collateral values
due to the economic conditions. The Company incurred $33.2 million of OTTI charges on 13 of its
non-agency residential mortgage-backed securities in the fourth quarter of 2009 due to continued
deterioration in the underlying performance of the mortgage collateral of these securities. In the
second quarter of 2009 the Company realized a $47 million loss from the sale of 100% of our
available-for-sale mortgage-backed securities collateralized by option adjustable rate residential
loans with an unpaid principal balance of $47.3 million. Each of the five securities sold was
rated AA by nationally recognized rating agencies at acquisition. However, in the period from
April 2008 through June 2009, the securities were progressively downgraded until they were graded
significantly below investment grade. As a result of the downgrades of the securities, and because
the securities were lower tranche securities in relation to other securities issued in the same
security structure, the Bank was required to assign large amounts of capital for the purposes of
determining the Banks regulatory risk-based capital ratio. Consequently, the Bank elected to sell
the securities, which provided regulatory capital relief to the Bank in spite of the loss incurred.
Also in the second quarter of 2009, the Company completed the sale of certain assets of UW Trust
Company to Equity Trust Company and its affiliate, Sterling Administrative Services, LLC for a
purchase price of $61.4 million, and the Company recorded an after tax gain on the sale of
approximately $36.1 million, which is included in discontinued operations.
F-62
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
During the third quarter of 2008 the Company recognized a $4.1 million other-than-temporary
impairment charge on two investment securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
First |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
|
(Dollars in thousands, except share data) |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before provision for credit losses |
|
$ |
16,225 |
|
|
$ |
17,034 |
|
|
$ |
18,380 |
|
|
$ |
18,675 |
|
Provision for credit losses |
|
|
14,467 |
|
|
|
10,106 |
|
|
|
6,278 |
|
|
|
4,181 |
|
Noninterest (loss) income |
|
|
(30,865 |
) |
|
|
41 |
|
|
|
(45,401 |
) |
|
|
5,698 |
|
Noninterest expense |
|
|
20,916 |
|
|
|
21,026 |
|
|
|
19,799 |
|
|
|
15,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes |
|
|
(50,023 |
) |
|
|
(14,057 |
) |
|
|
(53,098 |
) |
|
|
5,041 |
|
Income tax (benefit) provision |
|
|
(9,398 |
) |
|
|
(5,363 |
) |
|
|
(19,360 |
) |
|
|
1,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
$ |
(40,625 |
) |
|
$ |
(8,694 |
) |
|
$ |
(33,738 |
) |
|
$ |
3,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of income
taxes |
|
|
|
|
|
|
|
|
|
|
37,736 |
|
|
|
(211 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(40,625 |
) |
|
$ |
(8,694 |
) |
|
$ |
3,998 |
|
|
$ |
3,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(1.40 |
) |
|
$ |
(0.95 |
) |
|
$ |
0.55 |
|
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(1.40 |
) |
|
$ |
(0.95 |
) |
|
$ |
0.55 |
|
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before provision for credit losses |
|
$ |
20,847 |
|
|
$ |
21,042 |
|
|
$ |
19,886 |
|
|
$ |
20,210 |
|
Provision for credit losses |
|
|
2,373 |
|
|
|
2,203 |
|
|
|
2,132 |
|
|
|
1,891 |
|
Noninterest income |
|
|
1,973 |
|
|
|
(1,228 |
) |
|
|
2,222 |
|
|
|
2,537 |
|
Noninterest expense |
|
|
17,315 |
|
|
|
16,929 |
|
|
|
15,700 |
|
|
|
16,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
3,132 |
|
|
|
682 |
|
|
|
4,276 |
|
|
|
4,670 |
|
Income tax provision (benefit) |
|
|
766 |
|
|
|
(807 |
) |
|
|
1,281 |
|
|
|
1,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
2,366 |
|
|
$ |
1,489 |
|
|
$ |
2,995 |
|
|
$ |
3,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations, net of income
taxes |
|
|
(334 |
) |
|
|
2 |
|
|
|
70 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,032 |
|
|
$ |
1,491 |
|
|
$ |
3,065 |
|
|
$ |
3,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.28 |
|
|
$ |
0.21 |
|
|
$ |
0.42 |
|
|
$ |
0.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.28 |
|
|
$ |
0.21 |
|
|
$ |
0.42 |
|
|
$ |
0.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-63
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
21. Segments of the Company and Related Information
The Company has three reportable segments under ASC Topic 280, Segment Reporting: a thrift
subsidiary, a custodial and administrative services subsidiary, and a mortgage banking subsidiary.
The thrift is the Bank, our community banking subsidiary that provides lending and deposit services
to its customers. On June 27, 2009, the Company completed the sale of certain assets of UW Trust as
more fully discussed in Note 25 Discontinued Operations Sale of UW Trust Assets. The assets
sold were associated with the custodial IRA and qualified employee benefit plan business lines of
UW Trust. Accordingly, only the custodial escrow, paying agent and trust administration lines of
business remain for UW Trust, which management deems a core operation and thus UW Trust will
continue to be included in segment reporting. The mortgage banking subsidiary, Matrix Financial,
owns residential MSRs and services the mortgage loans underlying those MSRs. The remaining
subsidiaries are included in the all other category for purposes of ASC Topic 280 disclosures and
consists primarily of the parent company operations.
F-64
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company evaluates performance and allocates resources based on operating profit or loss before
income taxes. Accordingly, the information presented in this table is from continuing operations,
which excludes the operations of UW Trust related to certain assets they sold, as discussed in Note
25. The accounting policies of the reportable segments are the same as those described in the
summary of significant accounting policies. For the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Custodial and |
|
|
|
|
|
|
|
|
|
|
|
|
Community |
|
|
Advisory |
|
|
Mortgage |
|
|
All |
|
|
|
|
|
|
Banking |
|
|
Services |
|
|
Banking |
|
|
Others |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
99,147 |
|
|
$ |
|
|
|
$ |
922 |
|
|
$ |
1,438 |
|
|
$ |
101,507 |
|
Total interest expense |
|
|
27,592 |
|
|
|
|
|
|
|
21 |
|
|
|
3,580 |
|
|
|
31,193 |
|
Net interest income |
|
|
71,555 |
|
|
|
|
|
|
|
901 |
|
|
|
(2,142 |
) |
|
|
70,314 |
|
Provision for credit losses |
|
|
35,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,032 |
|
Net interest income after provision for credit losses |
|
|
36,523 |
|
|
|
|
|
|
|
901 |
|
|
|
(2,142 |
) |
|
|
35,282 |
|
Total noninterest income |
|
|
(64,814 |
) |
|
|
428 |
|
|
|
3,648 |
|
|
|
(9,789 |
) |
|
|
(70,527 |
) |
Total noninterest expense |
|
|
61,592 |
|
|
|
1,118 |
|
|
|
5,401 |
|
|
|
8,781 |
|
|
|
76,892 |
|
Income (loss) from continuing operations before
income taxes |
|
|
(89,883 |
) |
|
|
(690 |
) |
|
|
(852 |
) |
|
|
(20,712 |
) |
|
|
(112,137 |
) |
Income tax (benefit) provision |
|
|
(26,105 |
) |
|
|
(227 |
) |
|
|
(247 |
) |
|
|
(5,988 |
) |
|
|
(32,567 |
) |
Income (loss) from continuing operations |
|
|
(63,778 |
) |
|
|
(463 |
) |
|
|
(605 |
) |
|
|
(14,724 |
) |
|
|
(79,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
|
2,447,456 |
|
|
|
2,303 |
|
|
|
30,923 |
|
|
|
45,490 |
|
|
|
2,526,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
113,413 |
|
|
$ |
|
|
|
$ |
1,354 |
|
|
$ |
250 |
|
|
$ |
115,017 |
|
Total interest expense |
|
|
29,425 |
|
|
|
|
|
|
|
42 |
|
|
|
3,565 |
|
|
|
33,032 |
|
Net interest income |
|
|
83,988 |
|
|
|
|
|
|
|
1,312 |
|
|
|
(3,315 |
) |
|
|
81,985 |
|
Provision for credit losses |
|
|
8,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,599 |
|
Net interest income after provision for credit losses |
|
|
75,389 |
|
|
|
|
|
|
|
1,312 |
|
|
|
(3,315 |
) |
|
|
73,386 |
|
Total noninterest income |
|
|
(1,182 |
) |
|
|
1,164 |
|
|
|
4,289 |
|
|
|
1,233 |
|
|
|
5,504 |
|
Total noninterest expense |
|
|
52,589 |
|
|
|
814 |
|
|
|
5,815 |
|
|
|
6,912 |
|
|
|
66,130 |
|
Income (loss) from continuing operations before
income taxes |
|
|
21,618 |
|
|
|
350 |
|
|
|
(214 |
) |
|
|
(8,994 |
) |
|
|
12,760 |
|
Income tax (benefit) provision |
|
|
4,475 |
|
|
|
72 |
|
|
|
(44 |
) |
|
|
(1,868 |
) |
|
|
2,635 |
|
Income (loss) from continuing operations |
|
|
17,143 |
|
|
|
278 |
|
|
|
(170 |
) |
|
|
(7,126 |
) |
|
|
10,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
|
2,271,592 |
|
|
|
2,467 |
|
|
|
6,143 |
|
|
|
133,051 |
|
|
|
2,413,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
119,608 |
|
|
$ |
|
|
|
$ |
1,574 |
|
|
$ |
377 |
|
|
$ |
121,559 |
|
Total interest expense |
|
|
47,723 |
|
|
|
|
|
|
|
86 |
|
|
|
4,908 |
|
|
|
52,717 |
|
Net interest income |
|
|
71,885 |
|
|
|
|
|
|
|
1,488 |
|
|
|
(4,531 |
) |
|
|
68,842 |
|
Provision for credit losses |
|
|
2,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,312 |
|
Net interest income after provision for credit losses |
|
|
69,573 |
|
|
|
|
|
|
|
1,488 |
|
|
|
(4,531 |
) |
|
|
66,530 |
|
Total noninterest income |
|
|
5,107 |
|
|
|
647 |
|
|
|
5,943 |
|
|
|
1,326 |
|
|
|
13,023 |
|
Total noninterest expense |
|
|
50,419 |
|
|
|
826 |
|
|
|
7,422 |
|
|
|
7,418 |
|
|
|
66,085 |
|
Income (loss) from continuing operations before
income taxes |
|
|
24,261 |
|
|
|
(179 |
) |
|
|
9 |
|
|
|
(10,623 |
) |
|
|
13,468 |
|
Income tax (benefit) provision |
|
|
5,968 |
|
|
|
(44 |
) |
|
|
2 |
|
|
|
(2,611 |
) |
|
|
3,315 |
|
Income (loss) from continuing operations |
|
|
18,293 |
|
|
|
(135 |
) |
|
|
7 |
|
|
|
(8,012 |
) |
|
|
10,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
|
2,119,178 |
|
|
|
3,946 |
|
|
|
46,355 |
|
|
|
126,311 |
|
|
|
2,295,790 |
|
F-65
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
22. New Accounting Standards
Recently Issued Accounting Standards
As discussed in Note 1 Basis of Presentation and Significant Accounting Policies, on July 1,
2009, the Accounting Standards Codification became FASBs officially recognized source of
authoritative U.S. generally accepted accounting principles applicable to all public and non-public
non-governmental entities, superseding existing FASB, AICPA, EITF and related literature. Rules
and interpretive releases of the SEC under the authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. All other accounting literature is considered
non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial
statements and accounting policies. Citing particular content in the ASC involves specifying the
unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structures.
ASC Topic 320, Investments Debt and Equity Securities. New authoritative accounting guidance
under ASC Topic 320, Investments Debt and Equity Securities, (i) changes existing guidance for
determining whether an impairment is other than temporary to debt securities and (ii) replaces the
existing requirement that the entitys management assert it has both the intent and ability to hold
an impaired security until recovery with a requirement that management assert: (a) it does not have
the intent to sell the security; and (b) it is more likely than not it will not have to sell the
security before recovery of its cost basis. Under ASC Topic 320, declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are deemed to be other
than temporary are reflected in earnings as realized losses to the extent the impairment is related
to credit losses. The amount of the impairment related to other factors is recognized in other
comprehensive income. The Company adopted the provisions of the new authoritative accounting
guidance under ASC Topic 320 during the second quarter of 2009. Through the period ended March 31,
2009, the Company recognized cumulative other-than-temporary impairment (OTTI) charges of $4.1
million for two securities. The Company adopted the new literature effective April 1, 2009 and
reversed $624,000 for the non-credit portion of the cumulative OTTI charge. The adoption was
recognized as a cumulative effect adjustment that increased retained earnings and decreased
accumulated other comprehensive income $387,000, net of tax of $237,000, as of April 1, 2009. As a
result of implementing the new standard, the amount of OTTI recognized in earnings for the second
quarter of 2009 was $603,000. See Note 3 Investment Securities to the consolidated financial
statements for additional information.
ASC Topic 805, Business Combinations. On January 1, 2009, new authoritative accounting guidance
under ASC Topic 805, Business Combinations, became applicable to the Companys accounting for
business combinations closing on or after January 1, 2009. ASC Topic 805 applies to all
transactions and other events in which one entity obtains control over one or more other
businesses. ASC Topic 805 requires an acquirer, upon initially obtaining control of another entity,
to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value
as of the acquisition date. Contingent consideration is required to be recognized and measured at
fair value on the date of acquisition rather than at a later date when the amount of that
consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the
cost-allocation process required under previous accounting guidance whereby the cost of an
acquisition was allocated to the individual assets acquired and liabilities assumed based on their
estimated fair value. ASC Topic 805 requires acquirers to expense acquisition-related costs as
incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was
previously the case under prior accounting guidance. Assets acquired and liabilities assumed in a
business
combination that arise from contingencies are to be recognized at fair value if fair value can be
reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated,
the asset or liability would generally be recognized in accordance with ASC Topic 450,
Contingencies. Under ASC Topic 805, the requirements of ASC Topic 420, Exit or Disposal Cost
Obligations, would have to be met in order to accrue for a restructuring plan in purchase
accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a
non-contractual contingency that is not likely to materialize, in which case, nothing should be
recognized in purchase accounting and, instead, that contingency would be subject to the probable
and estimable recognition criteria of ASC Topic 450, Contingencies. The new authoritative
accounting guidance did not have a significant impact on the Companys financial statements.
F-66
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
ASC Topic 810, Consolidation. New authoritative accounting guidance under ASC Topic 810,
Consolidation, amended prior guidance to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Under ASC
Topic 810, a non-controlling interest in a subsidiary, which is sometimes referred to as minority
interest, is an ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements. Among other requirements, ASC Topic
810 requires consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. It also requires disclosure, on
the face of the consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest. The new authoritative accounting
guidance under ASC Topic 810 became effective for the Company on January 1, 2009 and did not have a
significant impact on the Companys financial statements.
Further new authoritative accounting guidance under ASC Topic 810 amends prior guidance to change
how a company determines when an entity that is insufficiently capitalized or is not controlled
through voting (or similar rights) should be consolidated. The determination of whether a company
is required to consolidate an entity is based on, among other things, an entitys purpose and
design and a companys ability to direct the activities of the entity that most significantly
impact the entitys economic performance. The new authoritative accounting guidance requires
additional disclosures about the reporting entitys involvement with variable-interest entities and
any significant changes in risk exposure due to that involvement as well as its affect on the
entitys financial statements. The new authoritative accounting guidance under ASC Topic 810 will
be effective January 1, 2010 and is not expected to have a significant impact on the Companys
financial statements.
ASC Topic 820, Fair Value Measurements and Disclosures. New authoritative accounting guidance
under ASC Topic 820,Fair Value Measurements and Disclosures, affirms that the objective of fair
value when the market for an asset is not active is the price that would be received to sell the
asset in an orderly transaction, and clarifies and includes additional factors for determining
whether there has been a significant decrease in market activity for an asset when the market for
that asset is not active. ASC Topic 820 requires an entity to base its conclusion about whether a
transaction was not orderly on the weight of the evidence. The new accounting guidance amended
prior guidance to expand certain disclosure requirements. The Company adopted the new authoritative
accounting guidance under ASC Topic 820 during the first quarter of 2009. See Note 18 Fair Value
Measurements for additional information.
Further new authoritative accounting guidance (Accounting Standards Update No. 2009-5) under ASC
Topic 820 provides guidance for measuring the fair value of a liability in circumstances in which a
quoted price in an active market for the identical liability is not available. In such instances, a
reporting entity is required to measure fair value utilizing a valuation technique that uses
(i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for
similar liabilities or similar liabilities when traded as assets, or (iii) another valuation
technique that is consistent with the existing principles of ASC Topic 820, such as an income
approach or market approach. The new authoritative accounting guidance also clarifies that when
estimating the fair value of a liability, a reporting entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction that prevents the
transfer of the liability. The forgoing new authoritative accounting guidance under ASC Topic 820
became effective for the Companys financial statements beginning October 1, 2009 and did not have
a significant impact on the Companys financial statements.
F-67
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Additional new authoritative accounting guidance (Accounting Standards Update 2010-06) under
ASC Topic 820 provides guidance for disclosures about significant transfers into and out of Levels
1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to
Level 3 measurements. It also clarifies existing fair value disclosures about the level of
disaggregation requiring entities to provide such disclosures for each class of assets and
liabilities and about inputs and valuation techniques used to measure fair value. The guidance is
effective for the first reporting period (including interim periods) beginning after December 15,
2009, except for the requirement to provide Level 3 activity on a gross basis, which will be
effective for fiscal years beginning after December 15, 2010 (including interim periods). In the
period of initial adoption, entities will not be required to provide the amended disclosures for
any previous periods presented for comparative purposes. The adoption of this new accounting
guidance is not expected to have a material impact on the Companys financial statements.
ASC Topic 825 Financial Instruments. New authoritative accounting guidance under ASC Topic
825,Financial Instruments, permits entities to choose to measure eligible financial instruments
at fair value at specified election dates. The fair value measurement option (i) may be applied
instrument by instrument, with certain exceptions; (ii) is generally irrevocable; and (iii) is
applied only to entire instruments and not to portions of instruments. Unrealized gains and losses
on items for which the fair value measurement option has been elected must be reported in earnings
at each subsequent reporting date. The forgoing provisions of ASC Topic 825 became effective for
the Company on January 1, 2008. See Note 18 Fair Value Measurements.
ASC Topic 860, Transfers and Servicing. New authoritative accounting guidance under ASC Topic
860, Transfers and Servicing, amends prior accounting guidance as follows: (i) eliminates the
concept of a qualified special purpose entity (QSPE); (ii) requires a transferor to consider all
arrangements made contemporaneously with or in anticipation of a transfer when determining whether
derecognition is appropriate; (iii) clarifies the requirement that a transferred financial asset be
legally isolated from the transferor and any of its consolidated affiliates; (iv) introduces the
concept of a participating interest which is applied to transfers of portions of financial assets
to determine derecognition eligibility; (v) modifies the conditions required for a transfer of
financial assets to qualify as a sale; (vi) changes the initial measurement guidance for asset
transfers that qualify as sales: and (vii) stipulates that guaranteed mortgage securitizations
(GMS) that fail to meet the conditions for sale accounting will result in the continued
classification of the securitized mortgage loans as loans and will not enable a transferor to
recognize a servicing asset or liability. The new authoritative accounting guidance under ASC Topic
860 will be effective January 1, 2010 and is not expected to have a significant impact on the
Companys financial statements.
23. Public Offering of Common Stock
On September 22, 2009, the Company completed a public offering of 20,000,000 shares of common
stock, $0.0001 par value per share. The common stock was sold at $4.00 per share. In the public
offering, the Company raised an aggregate of $80.0 million; less offering expenses charged against
the proceeds which totaled $5.6 million. The net funds raised of $74.4 million were deployed as
follows: $62.1 million was contributed as capital to United Western Bank, which increased the
Banks capital ratios, $5 million was used on October 1, 2009 to reduce the outstanding balance on
the Companys revolving line of credit with another institution and $7.3 million was retained by
the Company for general corporate purposes. On October 14, 2009, the underwriter exercised a
portion of their over-allotment option for 1,961,325 shares of common stock. The Company raised
$7.9 million, less offering expenses of $500,000. These funds were retained by the Company for
general corporate purposes.
F-68
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
24. Sale of Interest in Matrix Settlement and Clearances Services, LLC
In 2004, the Company, through certain of its subsidiaries, entered into definitive agreements to
sell its former 45% membership interest in Matrix Settlement & Clearance Services, LLC, (MSCS),
as well as all of the assets of the trust operations of the Bank, to Matrix Financial Solutions,
Inc. (MFSI), which is an entity controlled by the principals of Optech Systems, Inc., one of the
original co-owners of MSCS along with the Company.
In consideration of the sale of the 45% membership interest in MSCS, and the sale of the assets of
the trust operations of the Bank, the Company received approximately 7% of the outstanding common
stock of MFSI. During the first quarter of 2009, the Company completed the sale of 269,792 shares
of Matrix Financial Solutions, Inc. for $16.00 per share resulting in aggregate proceeds of $4.317
million. The transaction was negotiated between the Company and the purchaser and the Company
believes the exchange value per share represented the fair market value of such shares as of the
sale date. The Companys basis in the shares was $750,000, resulting in a gain on the sale of
$3.567 million. For the years ended December 31, 2009, 2008, and 2007, the Company
received dividends of $0, $540,000, and $405,000, respectively, from its investment in MFSI. These
dividends were included in other noninterest income in the statements of income.
As part of the sale agreement, deposits continued to be maintained by MFSI at the Bank. At December
31, 2009, deposits maintained by MFSI at the Bank totaled approximately $155.2 million. This
agreement was renewed in 2007 and matures on July 5, 2010.
25. Discontinued Operations Sale of UW Trust Assets
On June 27, 2009, the Company completed the sale of certain assets of UW Trust Company to Equity
Trust Company and its affiliate, Sterling Administrative Services, LLC (together, the Buyers),
for a purchase price of $61.4 million, subject to adjustment as provided for in the definitive
purchase agreement governing the transaction. The assets sold were associated with the custodial
IRA and qualified employee benefit plan businesses of UW Trust. Under the terms of the sale, UW
Trust received 25% of the purchase price in cash, $15.3 million, and financed the remaining 75%
through a purchase money note, $46.0 million. The purchase money note is collateralized by all the
assets acquired by the Buyers as well as a pledge of the subaccounting agreement inclusive of all
contract rights and fees relating to them. The note provides for level principal payments over the
seven year term and may be prepaid without penalty at any time. The rate of interest is the prime
rate, currently 3.25%, with a floor and a cap of 2.25% and 4.25%, respectively. Management engaged
a third party to assess the value of the purchase money note received from the sale and concluded
that a discount of 4.2% was required to reflect the fair value of the note. Accordingly, the gain
on sale was reduced by $1.9 million, which will be amortized into income as a yield adjustment on
the note over its term. In connection with the sale, Sterling Trust, has changed its name to UW
Trust Company, and will retain and continue to operate its custodial escrow and paying agent lines
of business.
F-69
United Western Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
As a result of the sale, the Company recorded an after tax gain on the sale of approximately $36.1
million, which is included in discontinued operations. The operating results associated with the
sale of UW Trust assets have been retrospectively presented as discontinued operations beginning
January 1, 2007. The operating results of UW Trust previously included in the Companys custodial
and advisory services segment, and now included in income from discontinued operations, net of
income taxes are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands, except share information) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for credit losses |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Noninterest income |
|
|
7,410 |
|
|
|
9,357 |
|
|
|
7,960 |
|
Noninterest expense |
|
|
5,256 |
|
|
|
9,629 |
|
|
|
7,979 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) before taxes from discontinued operations |
|
|
2,154 |
|
|
|
(272 |
) |
|
|
(19 |
) |
Income tax provision (benefit) |
|
|
768 |
|
|
|
(99 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) from discontinued operations |
|
|
1,386 |
|
|
|
(173 |
) |
|
|
(12 |
) |
Gain on sale of certain assets and operations of UW Trust net of income tax
provision of $19,852, $0, and $0, respectively |
|
|
36,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of income taxes |
|
$ |
37,525 |
|
|
$ |
(173 |
) |
|
$ |
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations of UW Trust, per share basic |
|
$ |
2.86 |
|
|
$ |
(0.02 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations of UW Trust, per share assuming dilution |
|
$ |
2.86 |
|
|
$ |
(0.02 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment with a book value of $2,596,000, and $1,659,000 at December 31, 2008
and December 31, 2007, respectively, were included in other assets and carried at the lower of cost
or fair value. These assets were sold to the Buyers in connection with the sale of UW Trust
assets.
F-70