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
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For the fiscal year ended
December 31,
2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number:
001-33803
WESTERN LIBERTY
BANCORP
(Exact name of registrant as
specified in its charter)
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Delaware
(State of
incorporation)
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26-0469120
(I.R.S. Employer
Identification No.)
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8363 W. Sunset Road, Suite 350
Las Vegas, Nevada
(Address of principal
executive offices)
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89113
(Zip
code)
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Registrants telephone number, including area code:
(702) 966-7400
Securities registered pursuant to section 12(b) of the
Act:
Common Stock, $0.0001 Par Value Per Share
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
(§ 223.405 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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive
proxy. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company þ
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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
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to
the price at which the common equity was last sold, or average
bid and asked price of such common equity, as of the last
business day of the registrants most recently completed
second fiscal quarter: $32,172,566 aggregate market value based
on the closing price of $7.55 on June 30, 2010. Shares held
as of June 30, 2010 by directors, executive officers, and
owners of 10% or more of the registrants common equity are
excluded from the calculation of aggregate market value of
common equity held by non-affiliates, but the exclusion of their
shares is not and shall not be deemed to be an admission that
these holders are or were affiliates.
As of March 30, 2011, there were 15,088,023 shares of
common stock outstanding of the registrant.
WESTERN
LIBERTY BANCORP
FORM 10-K
TABLE OF CONTENTS
2
PART I
Western
Liberty Bancorp
Western Liberty Bancorp (WLBC, the
Company, us, we or
our) became a bank holding company on
October 28, 2010 with consummation of its acquisition of
Service1st Bank of Nevada a Nevada-chartered non-member
bank (Service1st Bank or
Service1st). Although WLBCs goal in 2007, when
it was established as a special purpose acquisition company, was
to identify for acquisition domestic and international operating
companies engaged in the consumer products and services
business, by the spring of 2009, we determined that the banking
industry had become an attractive investment opportunity,
particularly the community banking industry in Nevada. In
October of 2009, we changed our name to Western Liberty Bancorp
and eliminated the special purpose acquisition company features
of our governing documents. In October 2009, we also began in
earnest the process that concluded on October 28, 2010 with
the acquisition of Service1st. Our sole subsidiary is
Service1st, and we currently conduct no business activities
other than acting as the holding company of Service1st. The
financial presentations included herein represent one year of
activity for the Company and consolidated results with
Service1st for two months.
Service1st
Bank of Nevada
Established on January 16, 2007, Service1st is a community
bank, providing a full range of banking and related services to
locally owned businesses, professional firms, real estate
developers and investors, local non-profit organizations, high
net worth individuals, and other customers in the greater Las
Vegas area. Banking services provided include basic commercial
and consumer depository services, commercial working capital and
equipment loans, commercial real estate (both owner and
non-owner occupied) loans, construction loans, and unsecured
personal and business loans. Service1st relies primarily on
locally generated deposits to fund its lending activities.
Substantially all of our business is generated in the Nevada
market.
The
Acquisition
On October 28, 2010, WLBC consummated its acquisition (the
Acquisition) of Service1st, pursuant to a Merger
Agreement (the Merger Agreement), dated as of
November 6, 2009, as amended by a First Amendment to the
Merger Agreement, dated as of June 21, 2010
(Amendment No. 1 and, together with the Merger
Agreement, the Amended Merger Agreement), each among
WL-S1 Interim Bank, a Nevada corporation and wholly-owned
subsidiary of WLBC (Acquisition Sub),
Service1st and Curtis W. Anderson, as representative of the
former stockholders of Service1st. Pursuant to the Amended
Merger Agreement, Acquisition Sub merged with and into
Service1st, with Service1st being the surviving entity and
becoming WLBCs wholly-owned subsidiary. WLBC previously
received the requisite approvals of certain bank regulatory
authorities to complete the Acquisition to become a bank holding
company.
The former stockholders of Service1st received
approximately 2,282,668 shares of common stock, par value
$0.0001 of WLBC (Common Stock) (net of the exercise
of dissenters rights with respect to 88,054 shares)
in exchange for all of the outstanding capital stock of
Service1st (the Base Acquisition Consideration). In
addition, the holders of Service1sts outstanding options
and warrants now hold options and warrants of similar tenor to
purchase up to 289,781 shares of Common Stock.
In addition to the Base Acquisition Consideration, each of the
former stockholders of Service1st may be entitled to
receive additional consideration (the Contingent
Acquisition Consideration), payable in Common Stock, if at
any time within the first two years after the consummation of
the Acquisition, the closing price per share of the Common Stock
exceeds $12.75 for 30 consecutive days. The Contingent
Acquisition Consideration is equal to 20% of the tangible book
value of Service1st at August 31, 2010 (or
approximately $4.4 million). The total number of shares of
our common stock issuable to the former
Service1st stockholders would be determined by dividing the
Contingent Acquisition Consideration by the average of the daily
closing
3
price of the Common Stock on the first 30 trading days on which
the closing price of the Common Stock exceeded $12.75.
At the close of business on October 28, 2010, WLBC became a
new Nevada bank holding company by consummating the acquisition
of Service1st and conducting operations through Service1st.
In conjunction with the Acquisition, WLBC infused
$25 million of capital onto the balance sheet of
Service1st. On October 29, 2010, the Common Stock began
trading on the Nasdaq Global Market, under the ticker symbol
WLBC.
The Acquisition was recorded as an acquisition under current
accounting rules and as a result the balance sheet of
Service1st was revalued to fair value as of the acquisition
date. Any purchase price in excess of the fair value of net
assets acquired is recorded as goodwill. The Acquisition
resulted in $5.6 million of goodwill. This process is
heavily reliant on measuring and estimating the fair values of
all the assets and liabilities of the acquired entity. The
Company elected to obtain professional assistance in this
activity. The Company hired a third-party vendor to assist
management in determining the fair value of the loan portfolio,
the time deposits, and the contingent consideration discussed
above. Additionally, the firm was asked to estimate the value of
the intangible asset associated with the deposit base, commonly
referred to as the Core Deposit Intangible (CDI).
The most significant fair value adjustment resulting from the
application of purchase accounting adjustments for this
acquisition were made to loans. As of the Acquisition date, the
gross loan portfolio at Service1st was approximately
$125.4 million with a related Allowance for Loan and Lease
Losses (ALLL) of approximately $9.4 million.
The valuation resulted in a discount of approximately
$15.8 million at October 28, 2010. While we believe we
currently have the best estimate of fair value, the purchase
accounting adjustments are not final and we are currently still
evaluating all available information to ensure we have an
accurate assessment of fair value. In fact, there have been some
loan charge-offs and payoffs which impacted the valuation and as
a result of reviewing this information, management reduced the
discount from the original estimated discount of
$15.8 million to approximately $15.1 million. This
discount consists of two components: credit discount and yield
discount. Loans purchased with credit impairments are loans with
credit deterioration since origination and it is probable that
not all contractually required principal and interest payments
would be collected. The performing loan portfolio was
approximately $89.9 million and was discounted by $49,000
for yield and $3.6 million for credit discounts. The
remaining $35.6 million of loans were identified as loans
with purchased credit impairment (PCI) and those loans had a
discount of $576,000 for yield and $10.9 million for credit
discounts. The discounts on performing loans are recognized by a
level yield method over the remaining life of the
loans or loan pools. The loans identified as containing purchase
credit impairment are treated somewhat differently. The discount
associated with yield is accreted as yield discount and the
credit discount is not accreted but is left on the books to
reduce the current carrying value of the applicable loans. The
application of this process requires that the aggregate discount
is first netted against the ALLL. Consequently, the first day
after the transaction the loan portfolio was approximately
$110 million with no ALLL. In addition, current accounting
methodology only allows for the establishment of an ALLL to
occur as the entity records new loans on the books or identifies
subsequent credit deterioration on the original loans marked to
fair value at acquisition date.
Service1st operates in the Las Vegas market place which has seen
significant economic declines in all types of real estate and
overall business trends. Since inception, Service1st has
charged off approximately $17.8 million of loans through
October 28, 2010. The remaining $125 million loan
portfolio was further reduced by approximately $15 million
in the fair value process as of the acquisition date. As
discussed above, approximately $35.6 million of loans with
purchased credit impairment were reduced to fair value by the
$11.5 million discounts. This translates to a 32% reduction
in the carrying value of those loans.
The contractual values of time deposits were also marked to fair
value. This resulted in Service1st recording a premium of
$46,000. This premium will be amortized over the estimated
remaining life of the time deposit portfolio of one year.
The CDI is the result of a valuation study which attempts to
associate a value for the customers deposit relationships
based on the profitability of the deposits and how long they are
4
expected to produce revenue to the entity. This intangible asset
was valued at $784,000 for Service1st at October 28,
2010. The intangible asset is amortized on an accelerated basis
using an estimated ten year life.
The Contingent Acquisition Consideration estimated to be
$4.4 million was also fair valued. A decision tree model
was used to calculate the probability that the Companys
stock price will reach the threshold. Based on the results the
fair value was determined to be approximately $1.8 million.
Periodically over the two year period the reasonableness of the
estimate will be reviewed and adjusted if deemed necessary.
These estimates along with several other estimates were used to
complete the fair value process for the balance sheet of
Service1st and also to evaluate the fair value of future
commitments and off-balance sheet items. Upon completion of
these activities the adjustments are posted to the records of
the new subsidiary and the difference between the fair value of
the consideration given versus the net asset values obtained, an
unidentified intangible asset (goodwill) was created in the
amount of approximately $5.6 million.
In order to assist WLBC in gaining the requisite approval of
certain bank regulatory authorities in connection with the
Acquisition, on September 23, 2010, WLBC entered into a
Letter Agreement (the Warrant Restructuring Letter
Agreement) with certain warrant holders who represented to
WLBC that they collectively hold at least a majority of its
outstanding warrants (the Consenting Warrant
Holders) confirming the basis and terms upon which the
parties have agreed to amend the Amended and Restated Warrant
Agreement, dated as of July 20, 2009, as amended by the
Amendment No. 1, dated as of October 9, 2009, each
between WLBC and Continental Stock Transfer &
Trust Company, as warrant agent (the Warrant
Agent) (as amended, the Warrant Agreement),
previously filed with the SEC. The Warrant Restructuring Letter
Agreement serves as the consent and approval of each of the
Consenting Warrant Holders to amend and restate the Warrant
Agreement.
Pursuant to the Warrant Restructuring Letter Agreement, the
Warrant Agreement amended where applicable to provide for the
automatic exercise of all of the outstanding warrants of WLBC
(the Warrants) into one thirty-second (1/32) of one
share of WLBCs common stock, par value $0.0001
(Common Stock), which occurred concurrently with the
consummation of the Acquisition (the Automatic Exercise
Date). Any Warrants that would entitle a holder of such
Warrants to a fractional share of Common Stock after taking into
account the automatic exercise of the remainder of such
holders Warrants into full shares of Common Stock were
cancelled on the Automatic Exercise Date. As of
September 23, 2010, there were 48,067,758 Warrants
outstanding, each exercisable for one share of Common Stock,
which will automatically be converted into approximately
1,502,117 shares of Common Stock on the Automatic Exercise
Date. As a result of the foregoing, there were no Warrants
outstanding after the Automatic Exercise Date. WLBC also paid a
consent fee to the holders of Warrants in an amount equal to
$0.06 per Warrant on the Automatic Exercise Date, regardless of
whether such holders were party to the Warrant Restructuring
Letter Agreement.
Presentation
Since the Companys operations prior to the acquisition of
Service1st were insignificant relative to that of
Service1st, management believes that Service1st is the
Companys predecessor. Management has determined this based
on an evaluation of the various facts and circumstances
including, but not limited to, the life of Service1st, the
operations of Service1st, the purchase price paid, and the fact
that the operations on a prospective basis will be most similar
to Service1st. Accordingly, separate financial statements of
Service1st as of October 28, 2010 and
December 31, 2009 and for the period January 1, 2010
through October 28, 2010 and the years ended
December 31, 2009 and 2008 have been included as an exhibit
to the
Form 10-K
and a separate Management Discussion and Analysis has been
included. These items should be read in conjunction with the
financial statements of the Company for the periods ended
December 31, 2010, 2009 and 2008. The predecessor
financials should be read noting that they are not comparable
because, at acquisition dates, the assets and liabilities were
fair valued and thus a new accounting bases was determined
different than their historical costs bases. In general, this
change in bases impacts interest income and expense as a result
of the amortization of premiums and discounts to arrive at
contractual amounts due.
5
Market
Area and Competition
The United States economy entered into a recession in late 2007,
which has been deeply felt in the greater Las Vegas area and in
its critical tourism and gaming industries. High unemployment
rates, declining real property values, declining home sales, low
consumer and business confidence levels, and increasing vacancy
and foreclosure rates for commercial and residential property
have had a dramatically adverse impact on the Las Vegas economy.
Further deterioration in the performance of the economy or real
estate values in Service1sts primary market areas could
have an adverse impact on collectibility and an adverse effect
on profitability.
Service1sts target market primarily consists of small
business banking opportunities, private banking clientele,
commercial lending, and commercial real estate opportunities.
The banking and financial services industries in our market area
remain highly competitive despite the recent economic downturn.
Many of our competitors are much larger in total assets and
capitalization, have greater access to capital markets, and
offer a broader range of financial services than we can offer.
This increasingly competitive environment is primarily a result
of changes in regulation that made mergers and geographic
expansion easier; changes in technology and product delivery
systems, such as ATM networks and web-based tools; the
accelerating pace of consolidation among financial services
providers; and the flight of deposit customers to perceived
increased safety. The competitive environment is also
significantly impacted by federal and state legislation that
makes it easier for non-bank financial institutions to compete
with us. We compete for loans, deposits and customers with other
commercial banks, local community banks, savings and loan
associations, securities and brokerage companies, mortgage
companies, insurance companies, finance companies, money market
funds, credit unions, and other non-bank financial services
providers. Competition for deposit and loan products remains
strong from both banking and non-banking firms, and this
competition directly affects the rates of those products and the
terms on which they are offered to consumers. Consumers in our
market areas continue to have numerous choices to serve their
financial needs. Competition for deposits has increased
markedly, with many bank customers turning to deposit accounts
at the largest, most-well capitalized financial institutions.
These large institutions have greater access to capital markets
and offer a broader range of financial services than we will be
able to offer. Technological innovation continues to contribute
to greater competition in domestic and international financial
services markets. Many customers now expect a choice of several
delivery systems and channels, including telephone, mail, home
computer and ATMs. Mergers between financial institutions have
placed additional pressure on banks to consolidate their
operations, reduce expenses and increase revenues to remain
competitive. In addition, competition has intensified because
federal and state interstate banking laws permit banking
organizations to expand geographically with fewer restrictions
than in the past. These laws allow banks to merge with other
banks across state lines, enabling banks to establish or expand
banking operations in our market.
Lending
Activities
Service1st provides a variety of financial services,
including commercial real estate loans, commercial and
industrial loans, construction and land development loans and,
to a lesser extent, consumer loans. The banks loan
portfolio has a concentration of loans secured by real estate.
As of December 31, 2010, loans secured by real estate
comprised 66.04% of total gross loans. Substantially all of
these loans are secured by first liens. Approximately 30.2% of
these real-estate-secured loans are owner-occupied properties. A
property is considered owner occupied for this purpose if the
borrower occupies at least 50% of the collateral property
securing the loan. Service1sts policy is to obtain
collateral whenever it is available or desirable, depending upon
the degree of risk Service1st is willing to accept.
Repayment of loans is expected from the borrowers cash
flows or the sale proceeds of the collateral. Service1sts
principal lending categories are:
Commercial real estate loans The
majority of Service1sts lending activity consists of loans
to finance the purchase of commercial real estate and loans to
finance inventory and working capital that are additionally
secured by commercial real estate. Service1st has a commercial
real estate portfolio comprised of loans on professional
offices, industrial facilities, retail centers and other
commercial properties.
6
Construction, land development, and other land
loans Construction loans include loans for
the construction of owner-occupied buildings, investment
properties (including residential development construction),
residences, commercial development, and other properties.
Service1st analyzes each construction project in the loan
underwriting process to determine whether the type of property,
location, construction costs, and contingency funds are
appropriate and adequate.
Commercial and industrial loans
Service1st focuses its commercial lending on small- to
medium-size businesses located in or serving the Las Vegas
community. Service1st considers small
businesses to include commercial, professional and retail
businesses. Service1sts commercial and industrial loan
products include:
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working capital loans and lines of credit,
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business term loans, and
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inventory and accounts receivable financing.
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Residential real estate loans Although
residential mortgage lending is not a significant part of
Service1sts lending business, it has made some loans
secured by 1-4 single-family residential properties.
Consumer loans Service1st also
originates consumer loans from time to time, such as home equity
loans and lines of credit, to satisfy customer demand and to
respond to community needs. Consumer loans are not a significant
part of Service1sts loan portfolio.
The following table shows the composition of the loan portfolio
in dollar amounts and in percentages, along with a
reconciliation to loans receivable, net.
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($ in thousands)
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December 31, 2010
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Loans secured by real estate:
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Construction, land development and other land loans
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$
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5,923
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5.58
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%
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Commercial real estate
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54,975
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51.75
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%
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Residential
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9,247
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8.71
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%
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Total loans secured by real estate
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70,145
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66.04
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%
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Commercial and industrial
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35,946
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33.84
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%
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Consumer
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131
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0.12
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%
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Gross loans
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106,222
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100.00
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%
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Net deferred loan costs
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37
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Gross loans, net of deferred costs
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106,259
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Less: Allowance for loan losses
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(36
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)
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Net loans
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$
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106,223
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The preceding table and the tables to follow should be read in
conjunction with the notes to the consolidated financial
statements included in or incorporated by reference in this
report, including the explanation of the Acquisition and the
explanation of acquisition accounting generally. On
October 28, 2010, we acquired by merger 100% of Service1st
for consideration consisting of stock valued at
$15.3 million in the aggregate, based upon our common
stocks market price per share. As explained in the notes
to the consolidated financial statements filed with or
incorporated by reference in this report, we have recorded the
assets acquired and the liabilities assumed in the Acquisition
at their fair values as of the acquisition date, consistent with
accounting guidance applicable to acquisitions, particularly
ASC 805, Business Combinations (formerly
SFAS 141(R)), with the related acquisition and
restructuring costs expensed in the current period. We recorded
goodwill of $5.6 million of goodwill associated with the
acquisition, which represents the amount by which the purchase
price exceeds the fair values of the identifiable net assets
acquired.
7
Applicable accounting guidance, ASC 805, allows for a
measurement period beyond the acquisition date, which means we
may take into account new information that existed as of the
acquisition date but that was not known to us when the
Acquisition occurred. We anticipate that measurement period
adjustments could arise from adjustments to the fair values of
assets and liabilities recognized at the acquisition date as
additional information is obtained, such as appraisals of
collateral securing loans and fixed assets, contracts, legal
documentation and selected key borrower data. If a measurement
period adjustment is identified, we will recognize the
adjustment as part of the acquisition accounting, which could
result in an adjustment to goodwill recorded. These subsequent
adjustments, if any, will be retrospectively recorded in future
filings.
Please refer to the notes to consolidated financial statements
filed with or incorporated by reference in this report for
additional information concerning the Acquisition.
The following table presents maturity information for the loan
portfolio at December 31, 2010. The table does not include
prepayments or scheduled principal repayments. All loans are
shown as maturing based on contractual maturities.
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For the Year Ended December 31, 2010
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Due Within
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Due 1-5
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Due Over
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One Year
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Years
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Five Years
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Total
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Loans secured by real estate:
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Construction, land development and other land loans
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$
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4,428
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$
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1,495
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$
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$
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5,923
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Commercial real estate
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2,544
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29,327
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23,104
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54,975
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Residential real estate (1 to 4 family)
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6,885
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2,222
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140
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9,247
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Total real estate-secured loans
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$
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13,857
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$
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33,044
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$
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23,244
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$
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70,145
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Loans not secured by real estate:
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Commercial and industrial
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18,975
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9,297
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7,674
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35,946
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Consumer
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95
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35
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1
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131
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Loans, Gross
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$
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32,927
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$
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42,376
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$
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30,919
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$
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106,222
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|
|
Interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
$
|
7,429
|
|
|
$
|
33,867
|
|
|
$
|
5,713
|
|
|
$
|
47,009
|
|
Variable
|
|
|
25,498
|
|
|
|
8,509
|
|
|
|
25,206
|
|
|
|
59,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Gross
|
|
$
|
32,927
|
|
|
$
|
42,376
|
|
|
$
|
30,919
|
|
|
$
|
106,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
Policies and Administration
Loan and credit administration policies adopted by
Service1sts board of directors establish underwriting
criteria, concentration limits, and loan authorization limits,
as well as the procedures to administer loans, monitor credit
risk, and subject loans to appropriate grading and evaluation
for impairment. Loan originations are subject to a process that
includes the credit evaluation of borrowers, established lending
limits, analysis of collateral and procedures for continual
monitoring and identification of credit deterioration. Loan
officers are required to monitor their individual credit
relationships in order to report suspected risks and potential
downgrades as early as possible.
For real-estate secured loans, appraisals are ordered from
outside appraisers at a loans inception or renewal, or for
commercial real estate loans upon the occurrence of any event
causing a criticized or classified grade
to be assigned to the credit. The frequency for obtaining
updated appraisals for these adversely graded credits is
increased when declining market conditions exist. Appraisals may
reflect the collaterals as-is,
as-stabilized, or as-developed values,
depending upon the loan type and collateral. Raw land generally
is appraised at its as-is value. Income producing
property may be appraised at its as-
8
stabilized value, which takes into account the anticipated
cash flow of the property based upon expected occupancy rates
and other factors. The collateral securing construction loans
may be appraised at its as-if developed value, which
approximates the post-construction value of the collateralized
property assuming that such property is developed.
As-developed values on construction loans often
exceed the immediate sales value and may include anticipated
zoning changes and successful development by the purchaser. If a
loan goes into default before development of a project, the
market value of the property may be substantially less than the
as-developed appraised value. As a result, there may
be less security than anticipated at the time the loan was
originally made. If there is less security and a default occurs,
Service1st may not recover the outstanding balance of the
loan.
Service1sts loan approval procedures are executed through
a tiered loan limit authorization process. Each loan
officers individual lending limit and those of the Senior
Loan Committee are set by Service1sts board of directors.
All debt due from the borrower (including unfunded commitments
and guaranties) and the borrowers related entities is
aggregated when determining whether a proposed new loan is
within the authority of an individual lender or of the Senior
Loan Committee. Each senior vice president team leader may
unilaterally approve real-estate secured loans of up to
$750,000, other secured loans of up to $500,000, and unsecured
loans of up to $375,000. Credit applications exceeding a senior
vice president team leaders authority are submitted for
approval by Service1sts Chief Executive Officer, or Chief
Credit Officer, each of whom may unilaterally approve real
estate-secured loans of up to $1,500,000, other secured loans of
up to $1,250,000, and unsecured loans of up to $1,000,000, with
higher limits for joint approvals by more than one of the
executive officers or senior vice presidents. As an alternative
approval process, credits may be submitted to the Senior Loan
Committee. The Senior Loan Committee consists of
Service1sts Chief Executive Officer and Chief Credit
Officer, and the banks senior vice president team leaders.
A quorum consists of at least the Chief Executive Officer or
Chief Credit Officer plus two other members. The Senior Loan
Committee has the authority to approve loan applications, but
loans exceeding $5,000,000 also require the approval of the
Chief Executive Officer. Service1sts board of directors
also has a loan and investment committee that is responsible for
establishing and providing supervision and oversight over
Service1sts credit and investment policies and
administration. Credits granted as an exception to loan policy
are required to be justified and duly noted in the loan
presentation or file memo, as appropriate, and approved or
ratified by the necessary approval authority level. Exceptions
to loan policies are disclosed to the boards loan and
investment committee.
All insider loans must be approved in advance by a majority of
the board without the vote of the interested director. It is the
policy of Service1st that directors not be present when
their loan is presented at a board meeting for discussion and
approval. Service1st believes that all of its insider loans
were made on terms substantially similar to those offered to
unaffiliated individuals. As of December 31, 2010, the
aggregate amount of all loans outstanding to Service1sts
executive officers, directors, and greater than 10% stockholders
and their respective affiliates was approximately
$2.4 million, which represented 2.2% of the banks
total gross loans.
Allowance
for Loan Losses
Under applicable accounting guidance, assets generally are
recorded by a company on its balance sheet at the companys
cost. In the case of a bank, loans originated by the bank are
stated at their principal amount outstanding, net of unearned
income, charge-offs, and unamortized deferred fees and costs.
But, rather than recording the assets and liabilities of
Service1st at their historical cost to Service1st because of the
October 28, 2010 acquisition, the assets and liabilities of
Service1st are, instead, recorded at their fair value as of the
acquisition date. Because the fair value of loans takes into
account the probability of loan losses, the allowance for loan
losses accumulated by an acquired bank is not carried over and
maintained thereafter by the acquiring company. Calculating the
fair value of acquired loans entails estimating the amount and
timing of both principal and interest cash flows expected to be
collected and then discounting those cash flows at market
interest rates.
The allowance is required to cover probable incurred losses in
new loans generated since October 28, 2010 and for any
subsequent deterioration of loans beyond the fair value
determined on October 28, 2010.
9
Management will closely monitor the loans existing at
October 28, 2010 and establish applicable allowance levels
for new loans.
The allowance for loan losses reflects Service1sts
evaluation of the probable losses in its loan portfolio. The
allowance for loan losses is maintained at a level that
represents Service1st managements best estimate of
losses in the loan portfolio at the balance sheet date, losses
that are both probable and reasonably estimable. The evaluation
is inherently subjective and depends on estimates and
projections of factors that will have a material impact but that
are subject to significant changes, including estimates and
projections of the amount and timing of future cash flows
expected to be received on impaired loans. The allowance for
loan losses is reviewed by Service1sts management and
adjusted monthly. Factors that influence managements
determination concerning the adequacy of the allowance for loan
losses include:
|
|
|
|
|
general economic and business conditions affecting key lending
areas,
|
|
|
|
credit quality trends, including trends in nonperforming loans
expected to result from existing conditions,
|
|
|
|
collateral values,
|
|
|
|
loan volumes and concentrations,
|
|
|
|
age of the loan portfolio,
|
|
|
|
specific industry conditions within portfolio segments,
|
|
|
|
the allowance for loan losses at peer institutions, and
|
|
|
|
duration of the current business cycle.
|
To measure asset quality, Service1st grades each loan on a
scale of 1 to 10, the designation representing the highest
quality loans with the least risk. Loans graded 1 through 6 are
considered satisfactory. Consistent with the grading systems
used by Federal banking regulators, the other four grades are 7
(special mention), 8 (substandard), 9 (doubtful), and 10 (loss).
All loans are assigned a credit risk grade at the time they are
made, and each originating loan officer reviews the credit with
his or her immediate supervisor quarterly to determine whether a
change in the credit risk grade is warranted. The management
loan committee also has the responsibility to assign grades. In
addition, the grading of Service1sts loan portfolio is
reviewed at least annually by an external, independent loan
review firm. As previously discussed, PCI loans were discounted
approximately 32% on October 28, 2010. Generally, loans
graded as substandard or doubtful, as well as non-performing
loans are included as PCI loans.
The size of the allowance for loan losses is significantly
influenced by the results of loan reviews performed both by bank
personnel and by third parties engaged by the bank to supplement
the banks internal loan review process. The loan review
process is integral to identifying loans with credit quality
that has weakened over time and to evaluating the risk
characteristics of the entire loan portfolio. The loan grading
system used by Service1st also plays a role in setting the
level of the allowance because each grade tier has a fixed
percentage allocation assigned to it. Service1sts loan
loss methodology also provides that management will take into
account updated collateral appraisals, especially for loans such
as construction and land loans. Because there are factors that
cannot be practically assigned to individual loan categories,
such as the current volatility of the national and global
economy, the assessment also includes an unallocated component.
Finally, the Federal Deposit Insurance Corporation (the
FDIC) and the Nevada Financial Institutions Division
(the Nevada FID) perform regular examinations of
Nevada-chartered nonmember banks such as Service1st. In the
examination process, the FDIC and the Nevada FID consider the
adequacy of a banks loan loss allowance and frequently use
their authority to insist upon an increase in a banks
allowance for loan losses.
Service1st maintains the allowance through provisions for
loan losses that it charges to income. As previously discussed,
the ALLL was adjusted to zero in conjunction with the fair value
accounting process. Therefore, the current ALLL at
December 31, 2010 only relates to those loans generated
after the Acquisition. No new credit deterioration was recorded
during the last two months of 2010. Service1st charges
losses on loans against the allowance for loan losses when it
believes the collection of loan principal is unlikely. The
10
Chief Executive Officer and Chief Credit Officer must approve
all charge-offs. Loans deemed uncollectible generally are
proposed monthly for charge-off or write-down to collectible
levels. Recoveries on loans charged-off are restored to the
allowance for loan losses. Allocation of the allowance may be
made for specific loans, but the entire allowance is available
for any loan that, in managements judgment, is deemed to
be uncollectible. Additions to the allowance for loan losses may
be made when Service1sts management has identified
significant adverse conditions or circumstances related to a
specific loan.
As of December 31, 2010, Service1sts allowance for
loan losses was $36,000 representing 0.03% of total loans. We
give no assurance that the allowance for loan losses is adequate
to cover all losses that may be realized in the future and we
give no assurance that additional provisions for loan losses
will not be required.
Non-performing
Assets
As a result of the continuing weakness in the Las Vegas economy
and real estate markets, Service1st experienced
deterioration in the quality of its loan portfolio in 2008,
2009, and 2010. Non-performing assets were 5.4% of total assets
at year-end 2010. Service1st generally stops accruing
income on loans when interest or principal payments are in
arrears for 90 days, or earlier if management deems
appropriate. Service1st designates loans on which it stops
accruing income as nonaccrual loans and reverses previously
accrued interest income on such loans. Nonaccrual loans are
returned to accrual status when factors indicating doubtful
collection no longer exist and the loan is brought current.
If a borrower fails to make a scheduled payment on a loan,
Service1st attempts to remedy the deficiency by contacting
the borrower and seeking payment. Service1sts Problem Loan
Committee, consisting of its Chief Executive Officer, and the
Chief Credit Officer, is responsible for monitoring activity
that may indicate increased risk rating, such as past-dues,
overdrafts and loan agreement covenant defaults.
11
The following table summarizes nonperforming assets by category
including PCI loans with no contractual interest being reported.
These figures represent loan values after fair value process
completed at October 28, 2010, adjusted for any
amortization or accretion for the two months, if applicable.
|
|
|
|
|
($s in thousands)
|
|
At December 31, 2010
|
|
|
Nonaccrual loans:
|
|
|
|
|
Loans secured by real estate construction, land development and
other land loans
|
|
$
|
2,632
|
|
Commercial real estate
|
|
|
1,224
|
|
Residential real estate (1-4 family)
|
|
|
2,900
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
6,756
|
|
Commercial and industrial
|
|
|
3,670
|
|
Consumer
|
|
|
0
|
|
|
|
|
|
|
Total non-accrual loans
|
|
|
10,426
|
|
Past due (>90 days) loans and accruing interest:
|
|
|
|
|
Loans secured by real estate construction, land development and
other land loans
|
|
$
|
0
|
|
Commercial real estate
|
|
|
0
|
|
Residential real estate (1-4 family)
|
|
|
0
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
|
|
|
Total past due loans accruing interest
|
|
|
0
|
|
Restructure loans (still on accrual)
|
|
|
0
|
|
|
|
|
|
|
Total non-performing loans
|
|
$
|
10,426
|
|
Other real estate owned (OREO)
|
|
|
3,406
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
13,832
|
|
|
|
|
|
|
Non-performing loans as a percentage of total portfolio loans
|
|
|
9.81
|
%
|
Non-performing loans as a percentage of total assets
|
|
|
4.05
|
%
|
Non-performing assets as a percentage of total assets
|
|
|
5.37
|
%
|
Allowance for loan losses as a percentage of non-performing loans
|
|
|
0.35
|
%
|
|
|
|
(1) |
|
As of December 31, 2010 there were no originations from
October 28, 2010 through December 31, 2010 that were
considered non-performing. |
Investment
Activities
Service1sts investment policy dictates that investment
decisions be made based on the safety of the investment,
liquidity requirements, potential returns, cash flow targets,
and consistency with Service1sts interest rate risk
management policies. Service1sts Chief Financial Officer
is responsible for making security portfolio decisions in
accordance with established policies. The Chief Financial
Officer has the authority to purchase and sell securities within
specified guidelines established by the investment policy.
Service1sts investment policy allows for investment in:
|
|
|
|
|
cash and cash equivalents, which consists of cash and amounts
due from banks, federal funds sold and certificates of deposits
with original maturities of three months or less,
|
|
|
|
longer term investment securities issued by companies rated
A or better,
|
12
|
|
|
|
|
securities backed by the full faith and credit of the
U.S. government, including U.S. government agency
securities,
|
|
|
|
direct obligations of Ginnie Mae,
|
|
|
|
mortgage-backed securities or collateralized mortgage
obligations issued by a government-sponsored enterprise such as
Fannie Mae, Freddie Mac, or Ginnie Mae, and
|
|
|
|
mandatory purchases of equity securities from the Federal Home
Loan Bank.
|
The carrying value of the investment securities portfolio of
Service1st Bank as of the end of 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
Securities Available for Sale
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Collateralized Mortgage Obligation Securities-Commercial
|
|
$
|
1,819
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,819
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
|
|
Securities Held to Maturity
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Corporate Debt Securities
|
|
$
|
4,663
|
|
|
$
|
0
|
|
|
$
|
(27
|
)
|
|
$
|
4,636
|
|
SBA Loans Pools
|
|
|
651
|
|
|
|
0
|
|
|
|
0
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,314
|
|
|
$
|
0
|
|
|
$
|
(27
|
)
|
|
$
|
5,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service1st does not plan to purchase collateralized debt
obligations, adjustable rate preferred securities, or private
label collateralized mortgage obligations. The banks
policies also govern the use of derivatives, allowing
Service1st to prudently use derivatives as a risk
management tool to reduce its overall exposure to interest rate
risk, and not for speculative purposes.
Service1sts investment securities are classified as
available-for-sale
or
held-to-maturity.
Available-for-sale
securities are reported at fair value in accordance with
generally accepted accounting principles, with unrealized gains
and losses excluded from earnings and instead reported as a
separate component of stockholders equity.
Held-to-maturity
securities are those securities that Service1st has both
the intent and the ability to hold to maturity. These securities
are carried at cost, adjusted for amortization of premiums and
accretion of discounts.
As of December 31, 2010 Service1st also held $658,400 of
Federal Home Loan Bank of San Francisco stock, which is a
restricted security. Federal Home Loan Bank (FHLB)
stock represents an equity interest in the FHLB of
San Francisco, but the stock does not have a readily
determinable market value. The stock can be sold at its par
value only and solely to the FHLB or to another member
institution. Member institutions are required to maintain a
minimum stock investment in the FHLB, based on total assets,
total mortgages, and total mortgage-backed securities.
Service1sts minimum investment in FHLB stock at
December 31, 2010 was approximately $658,000.
Deposits
products and other banking services
Service1st offers a variety of traditional demand, savings
and time deposit accounts to individuals, professionals and
businesses within the Nevada region, including checking
accounts, interest-bearing checking accounts, traditional
savings accounts, money market accounts, and time deposits,
including Certificates of Deposit over/under $100,000 and our
Freedom CD, a flexible, liquid certificate of deposit product
that permits customers to deposit or withdraw funds, subject to
certain restrictions, without penalty before the end of the CD
term. Service1sts deposit base is generated from the
Nevada area. Competition for these deposits in
13
Service1sts market is strong. Service1st seeks to
structure its deposit products to be competitive with the rates,
fees, and features offered by other local institutions, but with
an emphasis on customer service and relationship-based pricing.
As of December 31, 2010, total deposits were
$160.3 million. The weighted average cost of
Service1sts interest-bearing deposits was 0.75% for the
year ended December 31, 2010.
In addition to traditional commercial banking activities,
Service1st provides other financial and related services to its
customers, including online banking, direct deposits, direct
debit and electronic bill payment, wire transfers, lock box
services, merchant-related services such as point of sale
payment processing, courier service, safe deposit boxes, cash
management services such as account reconciliation, collections,
and sweep accounts, corporate and consumer credit cards, night
depository, cashiers checks, and notary services.
The balances on deposits for the year ended December 31,
2010 are presented below.
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
($s in thousands)
|
|
Amount
|
|
|
% of total
|
|
|
Non-interest bearing deposits
|
|
$
|
67,087
|
|
|
|
41.85
|
%
|
Interest bearing deposits
|
|
|
31,837
|
|
|
|
19.86
|
%
|
Money markets
|
|
|
24,672
|
|
|
|
15.39
|
%
|
Savings
|
|
|
1,273
|
|
|
|
0.79
|
%
|
Time deposits under $100,000
|
|
|
4,919
|
|
|
|
3.07
|
%
|
Time deposits $100,000 and over
|
|
|
30,498
|
|
|
|
19.03
|
%
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
160,286
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
The following table shows the amount of time deposits of
$100,000 or more as of December 31, 2010, including
certificates of deposit, by time remaining until maturity.
Certificates
of Deposit Maturities >$100 thousand
|
|
|
|
|
($s in thousands)
|
|
December 31, 2010
|
|
|
Three months or less
|
|
$
|
1,671
|
|
Over three months to six months
|
|
|
3,504
|
|
Over six months to twelve months
|
|
|
25,323
|
|
Over 12 months
|
|
|
0
|
|
|
|
|
|
|
Total
|
|
$
|
30,498
|
|
|
|
|
|
|
Employees
We have approximately 40 full-time equivalent, non-union
employees at December 31, 2010.
Supervision
and Regulation
The following summary of Federal and state laws governing the
supervision and regulation of bank holding companies and banks
is not comprehensive. The summary is qualified in its entirety
by reference to applicable statutes and regulations.
Holding
companies
We have sought and received approval of the Federal Reserve
Board (the Federal Reserve) to become a bank holding
company under the Bank Holding Company Act of 1956. Bank holding
companies are subject to extensive regulation, supervision, and
examination by the Federal Reserve, acting principally through
its local Federal Reserve Bank.
A bank holding company must serve as a source of financial and
managerial strength for its subsidiary banks and must not
conduct its operations in an unsafe or unsound manner. The
Federal Reserve requires bank
14
holding companies to maintain capital at or above certain
prescribed levels. It is the Federal Reserves policy that
a bank holding company should provide capital to its subsidiary
banks during periods of financial stress or adversity and
maintain the financial flexibility and capital-raising capacity
to obtain additional resources for assisting subsidiary banks.
Bank holding companies may also be required to give written
notice to and receive approval from the Federal Reserve before
purchasing or redeeming common stock or other equity securities.
Under Bank Holding Company Act section 5(e), the Federal
Reserve may require a bank holding company to terminate any
activity or relinquish control of a nonbank subsidiary if the
Federal Reserve determines that the activity or control
constitutes a serious risk to the financial safety, soundness,
or stability of a subsidiary bank. Pursuant to the Federal
Deposit Insurance Corporation Improvement Act of 1991 addition
of the prompt corrective action provisions to the Federal
Deposit Insurance Act, section 38(f)(2)(I) of the Federal
Deposit Insurance Act now provides that a federal bank
regulatory authority may require a bank holding company to
divest itself of an undercapitalized bank subsidiary if the
agency determines that divestiture will improve the banks
financial condition and prospects.
A bank holding company must obtain Federal Reserve approval to:
|
|
|
|
|
acquire ownership or control of any voting shares of another
bank or bank holding company, if after the acquisition the
acquiring company would own or control more than 5% of the
shares of the other bank or bank holding company (unless the
acquiring company already owns or controls a majority of the
shares),
|
|
|
|
acquire all or substantially all of the assets of another
bank, or
|
|
|
|
merge or consolidate with another bank holding company.
|
The Federal Reserve will not approve an acquisition, merger, or
consolidation that would have a substantially anticompetitive
result unless the anticompetitive effects of the proposed
transaction are clearly outweighed by a greater public interest
in satisfying the convenience and needs of the community to be
served. The Federal Reserve also considers capital adequacy and
other financial and managerial factors in its review of
acquisitions and mergers, as well as the parties
performance under the Community Reinvestment Act of 1977.
With certain exceptions, the Bank Holding Company Act prohibits
a bank holding company from acquiring or retaining ownership or
control of more than 5% of the outstanding voting shares of any
company that is not a bank or bank holding company or from
engaging in activities other than banking, managing or
controlling banks, or providing services for holding company
subsidiaries. The principal exceptions to these prohibitions
involve non-bank activities identified by statute, by Federal
Reserve regulation, or by Federal Reserve order as activities so
closely related to the business of banking or of managing or
controlling banks as to be a proper incident thereto, including
securities brokerage services, investment advisory services,
fiduciary services, and management advisory and data processing
services, among others. A bank holding company that also
qualifies as and elects to become a financial holding
company may engage in a broader range of activities that
are financial in nature (and complementary to such activities),
specifically non-bank activities identified by the
Gramm-Leach-Bliley Act of 1999 or by Federal Reserve and
Treasury regulation as financial in nature or incidental to a
financial activity. Activities that are defined as financial in
nature include securities underwriting, dealing, and market
making, sponsoring mutual funds and investment companies,
engaging in insurance underwriting and agency activities, and
making merchant banking investments in non- financial companies.
To become and remain a financial holding company, a bank holding
company and its subsidiary banks must be well capitalized, well
managed, and, except in limited circumstances, have at least a
satisfactory rating under the Community Reinvestment Act. If,
after becoming a financial holding company and undertaking
activities not permissible for a bank holding company, the
company fails to satisfy the standards for financial holding
company status, the company must enter into an agreement with
the Federal Reserve to comply with all applicable capital and
management requirements. If the company does not return to
compliance within 180 days, the Federal Reserve may order
the company to divest its subsidiary bank or banks or the
company may discontinue the activities that are permissible
solely for a financial holding company.
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The Bank Holding Company Act, the Change in Bank Control Act of
1978, and the Federal Reserves Regulation Y require
that advance notice be given to the Federal Reserve or that
affirmative approval of the Federal Reserve be obtained to
acquire control of a bank or bank holding company, with limited
exceptions. The Federal Reserve may act during the advance
notice period to prevent the acquisition of control. Subject to
guidance issued by the Federal Reserve in September 2008,
control is conclusively presumed to exist if a person or entity
acquires 25% or more of any class of voting stock of a bank
holding company or insured depository institution. Control is
rebuttably presumed to exist if a person or entity acquires 10%
or more but less than 25% of the voting stock and either the
issuer has a class of securities registered under
section 12 of the Securities Exchange Act of 1934 (the
Exchange Act), as we do, or no other person or
entity will own, control, or hold the power to vote a greater
percentage of voting stock immediately after the transaction. In
its September 2008 guidance, the Federal Reserve stated that
generally it will be able to conclude that an investor does not
have a controlling influence over a bank or bank holding company
if the investor does not own more than 15% of the voting power
and 33% of the total equity of the bank or bank holding company,
including nonvoting equity securities. The investor may,
however, be required to make passivity commitments to the
Federal Reserve, promising to refrain from taking various
actions that might constitute exercise of a controlling
influence. Under prior Federal Reserve guidance, a board seat
was generally not permitted for an investment of 10% or more of
the equity or voting power. But under the September 2008
guidance, the Federal Reserve may permit a non-controlling
investor to have a board seat.
We are also subject to examination by and may be required to
file reports with the Nevada FID under sections 666.065
et seq. of the Nevada Revised Statutes. We would have to
obtain the approval of the Nevada Commissioner of Financial
Institutions to acquire another bank, and any transfer of
control of a Nevada bank holding company would have to be
approved in advance by the Nevada Commissioner.
Banks
Service1st is chartered by the State of Nevada and is
therefore subject to regulation, supervision, and examination
not only by the FDIC but also by the Nevada FID. Federal and
state statutes governing the business of banking and insurance
of bank deposits as well as implementing regulations promulgated
by the Federal and state banking regulatory agencies cover most
aspects of bank operations, including capital requirements,
reserve requirements against deposits, reserves for possible
loan losses and other contingencies, dividends and other
distributions to stockholders, customers interests in
deposit accounts, payment of interest on certain deposits,
permissible activities and investments, securities that a bank
may issue and borrowings that a bank may incur, rate of growth,
number and location of branch offices, and acquisition and
merger activity with other financial institutions. In addition
to minimum capital requirements, Federal law imposes other
safety and soundness standards having to do with such things as
internal controls, information systems, internal audit systems,
loan documentation, credit underwriting, interest rate risk
exposure, asset growth, asset quality, earnings, and
compensation and benefits.
If, as a result of examination the FDIC determines that a
banks financial condition, capital resources, asset
quality, earnings prospects, management, liquidity or other
aspects of the banks operations are unsatisfactory, or
that the bank or its management is in violation of any law or
regulation, the FDIC may take a number of remedial actions.
Federal bank regulatory agencies make regular use of their
authority to bring enforcement actions against banks and bank
holding companies for unsafe or unsound practices in the conduct
of their businesses and for violations of any law, rule or
regulation, any condition imposed in writing by the appropriate
federal banking regulatory authority or any written agreement
with the authority. Possible enforcement actions include
appointment of a conservator or receiver, issuance of a
cease-and-desist
order that could be judicially enforced, termination of a
banks deposit insurance, imposition of civil money
penalties, issuance of directives to increase capital, issuance
of formal and informal agreements, including memoranda of
understanding, issuance of removal and prohibition orders
against institution-affiliated parties, and enforcement of such
actions through injunctions or restraining orders. In addition,
a bank holding companys inability to serve as a source of
strength for its subsidiary banks could serve as an additional
basis for a regulatory action against the bank holding company.
Under Nevada Revised Statutes section 661.085, if the
stockholders equity of a Nevada-chartered bank becomes
impaired, the Nevada Commissioner must require the bank to make
the
16
impairment good within three months. If the impairment is not
made good, the Nevada Commissioner may take possession of the
bank and liquidate it.
Capital:
Regulatory capital guidelines
A banks capital hedges its risk exposure, absorbing losses
that can be predicted as well as losses that cannot be
predicted. According to the Federal Financial Institutions
Examination Councils explanation of the capital component
of the Uniform Financial Institutions Rating System, commonly
known as the CAMELS rating system, a rating system
employed by the Federal bank regulatory agencies, a financial
institution must maintain capital commensurate with the
nature and extent of risks to the institution and the ability of
management to identify, measure, monitor, and control these
risks. The effect of credit, market, and other risks on the
institutions financial condition should be considered when
evaluating the adequacy of capital. The minimum ratio of
total capital to risk-weighted assets is 8.0%, of which at least
4.0% must consist of so-called Tier 1 capital. The minimum
Tier 1 leverage ratio Tier 1 capital to
average assets is 3.0% for the highest rated
institutions and at least 4.0% for all others. These ratios are
absolute minimums. In practice, banks are expected to operate
with more than the absolute minimum capital. As of
December 31, 2010, Service1sts total risk-based
capital ratio was 31.0%, its Tier 1 risk-based capital
ratio was 30.6%, and its Tier 1 equity to average assets
ratio was 18.1%. The FDIC may establish greater minimum capital
requirements for specific institutions, as discussed below. A
bank that does not achieve and maintain the required capital
levels may be issued a capital directive by the FDIC to ensure
the maintenance of required capital levels. The Federal Reserve
imposes substantially similar capital requirements on bank
holding companies as well.
Tier 1 capital consists of common stock, retained earnings,
non-cumulative perpetual preferred stock, trust preferred
securities up to a certain limit, and minority interests in
certain subsidiaries, less most other intangible assets.
Tier 2 capital consists of preferred stock not qualifying
as Tier 1 capital, limited amounts of subordinated debt,
other qualifying term debt, a limited amount of the allowance
for loan and lease losses, and certain other instruments that
have some characteristics of equity. To determine risk-weighted
assets, the nominal dollar amounts of assets on the balance
sheet and credit-equivalent amounts of off-balance-sheet items
are multiplied by one of several risk adjustment percentages
ranging from 0.0% for assets considered to have low credit risk,
such as cash and certain U.S. government securities, to
100.0% for assets with relatively higher credit risk, such as
business loans, and a 200% risk-weight for selected investments
that are rated below investment grade or, if not rated, that are
equivalent to investments rated below investment grade. A
banking organizations risk-based capital ratios are
obtained by dividing its Tier 1 capital and total
qualifying capital (Tier 1 capital and a limited amount of
Tier 2 capital) by its total risk-adjusted assets.
During the application process for the Acquisition we made a
written commitment to the FDIC that we will maintain the
Tier 1 leverage capital ratio of Service1st at 10% or
greater. This commitment will expire three years after the
October 28, 2010 completion of the Acquisition or, if
later, when the September 1, 2010 Consent Order agreed to
by Service1st with the FDIC and the Nevada FID terminates.
Prompt
corrective action
To resolve the problems of undercapitalized institutions and to
prevent a recurrence of the banking crisis of the late 1980s and
early 1990s, the Federal Deposit Insurance Corporation
Improvement Act of 1991 established a system known as
prompt corrective action. Under the prompt
corrective action provisions and implementing regulations, every
institution is classified into one of five categories, depending
on its total risk-based capital ratio, its Tier 1
risk-based capital ratio, its leverage ratio, and subjective
factors. The categories are well capitalized,
adequately capitalized,
undercapitalized, significantly
undercapitalized and critically
undercapitalized. To be considered well capitalized for
purposes of the prompt corrective action rules, a bank must
maintain total risk-based capital of 10.0% or greater,
Tier 1 risk-based capital of 6.0% or greater, and leverage
capital of 5.0% or greater. An institution with a capital level
that might qualify for well-capitalized or adequately
capitalized status may nevertheless be treated as though it were
in the next lower capital category if its primary federal
banking supervisory authority determines that an unsafe or
unsound condition or practice warrants that treatment.
Notwithstanding that Service1sts capital ratios make the
bank
17
eligible to be considered well capitalized on the
basis of capital ratios, the FDIC by letter dated July 29,
2010, advised Service1st that imposition of the Consent
Order effective September 1, 2010, would result in the
institution being considered adequately capitalized
for prompt corrective action purposes.
A financial institutions operations can be significantly
affected by its capital classification under the prompt
corrective action rules. For example, an institution that is not
well capitalized generally is prohibited from accepting brokered
deposits and offering interest rates on deposits higher than the
prevailing rate in its market without advance regulatory
approval, which can have an adverse effect on the banks
liquidity. At each successively lower capital category, an
insured depository institution is subject to additional
restrictions. Undercapitalized institutions are required to take
specified actions to increase their capital or otherwise
decrease the risks to the federal deposit insurance funds. A
bank holding company must guarantee that a subsidiary bank that
adopts a capital restoration plan will satisfy its plan
obligations. Any capital loans made by a bank holding company to
a subsidiary bank are subordinated to the claims of depositors
in the bank and to certain other indebtedness of the subsidiary
bank. If bankruptcy of a bank holding company occurs, any
commitment by the bank holding company to a Federal banking
regulatory agency to maintain the capital of a subsidiary bank
would be assumed by the bankruptcy trustee and would be entitled
to priority of payment. Bank regulatory agencies generally are
required to appoint a receiver or conservator shortly after an
institution becomes critically undercapitalized.
Deposit
insurance
Bank deposits are insured by the FDIC to applicable limits
through the Deposit Insurance Fund. Insured banks must pay
deposit insurance premiums assessed semiannually and paid
quarterly. The insurance premium amount is based upon a risk
classification system established by the FDIC. Banks with higher
levels of capital and a low degree of supervisory concern are
assessed premiums at a lower rate than banks with lower levels
of capital or a higher degree of supervisory concern. Effective
January 1, 2009, the FDIC increased assessment rates
uniformly for all risk categories by 7 cents for the first
quarter 2009 assessment period. In 2009, the FDIC adopted a rule
that imposed a special assessment on banks, which was payable in
September 2009, and that allowed the FDIC to impose additional
special assessments to replenish the Deposit Insurance Fund,
which was badly depleted by bank failures. As an alternative to
imposing additional special assessments on insured depository
institutions or borrowing from the U.S. Treasury, on
November 12, 2009, the FDIC adopted a proposal to increase
deposit insurance assessments effective on January 1, 2011
and to require all insured depository institutions to prepay by
the end of 2009 their deposit insurance assessments for the
fourth quarter of 2009 and for the entirety of 2010 through
2012. Institutions recorded the prepaid FDIC insurance
assessments as an asset as of December 31, 2009, later
charging the assessments to expense in the periods to which the
assessments apply. We anticipate that assessment rates will
continue to increase for the foreseeable future because of the
significant cost of bank failures, because of the relatively
large number of troubled banks, and because of the requirement
of the recently enacted Dodd-Frank Wall Street Reform and
Consumer Protection Act that the FDIC increase its insurance
fund reserves to no less than $1.35 for each $100 of insured
deposits (as of September 30, 2010, the reserve fund was
negative $0.15 for each $100 of insured deposits). Effective as
of April 1, 2011, the FDIC changed its assessment base from
total domestic deposits to average total assets minus average
tangible equity, as required in the Dodd-Frank Wall Street
Reform and Consumer Protection Act. The FDIC intends to raise
the same expected revenue under the new base as under the
current assessment base.
During a December 14, 2010 meeting of the FDIC board, the
FDIC voted on a final rule to set the deposit insurance
funds designated reserve ratio at 2% of estimated insured
deposits effective January 1, 2011. The FDIC said a
historical analysis of losses to the insurance fund showed that
a long-term, minimum goal of at least 2% is necessary to
maintain a positive fund balance and stable assessment rates.
The Federal Deposit Insurance Act requires the FDIC board to set
the designated reserve ratio annually based on the risk of loss
to the insurance fund and the economic conditions affecting the
banking industry, and with the aim of preventing sharp swings in
assessment rates.
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The $100,000 basic deposit insurance limit in place for many
years was increased temporarily to $250,000 by the Emergency
Economic Stabilization Act of 2008, which became law on
October 3, 2008. On July 21, 2010, section 335 of
the Dodd-Frank Act made the $250,000 insurance limit permanent.
Dividends
and distributions
We have never declared or paid cash dividends on our capital
stock. We currently intend to retain any future earnings for
future growth and do not anticipate paying any cash dividends
for the foreseeable future. Any determination in the future to
pay dividends will be at the discretion of our board of
directors and will depend on our earnings, financial condition,
results of operations, business prospects, capital requirements,
regulatory restrictions, contractual restrictions and other
factors that the board of directors may deem relevant.
A bank holding companys ability to pay dividends is
subject to Federal Reserve supervisory authority, taking into
account the bank holding companys capital position, its
ability to satisfy its financial obligations as they come due,
and its capacity to act as a source of financial strength to its
subsidiaries. In addition, Federal Reserve policy discourages
the payment of dividends by a bank holding company if the
dividends are not supported by current operating earnings.
Federal Reserve and FDIC policy statements provide that banks
should generally pay dividends solely out of current operating
earnings. A bank may not pay a dividend if the bank is
undercapitalized or if payment would cause the bank to become
undercapitalized.
A bank holding company may not purchase or redeem its equity
securities without advance written approval of the Federal
Reserve under Federal Reserve Rule 225.4(b) if the purchase
or redemption combined with all other purchases and redemptions
by the bank holding company during the preceding 12 months
equals or exceeds 10% of the bank holding companys
consolidated net worth. However, advance approval is not
necessary if the bank holding company is well managed, not the
subject of any unresolved supervisory issues, and both before
and immediately after the purchase or redemption is well
capitalized.
Under sections 661.235 and 661.240 of the Nevada Revised
Statutes, a Nevada-chartered bank, such as Service1st, whose
deposits are insured by the FDIC may not make distributions
(including dividends) to or for the benefit of its stockholders
if the distributions would reduce the banks
stockholders equity below the banks initial
stockholders equity. Pursuant to Nevada Revised Statutes
section 78.288(2), which applies to Nevada corporations
generally, including Service1st, a corporation may not make
distributions (including dividends) to or for the benefit of its
stockholders if, after giving effect to the distribution, the
corporation would be unable to pay its debts as they become due
in the usual course of business, or the corporations total
assets would be less than the sum of its total liabilities plus
the amount that would be needed to satisfy the preferential
rights (if any) upon dissolution of stockholders whose
preferential rights are superior to those receiving the
distribution (unless the corporations articles of
incorporation override this latter limitation, which
Service1sts articles do not). Relying on 12 U.S.C.
1818(b), the FDIC may restrict a banks ability to pay a
dividend if the FDIC has reasonable cause to believe that the
dividend would constitute an unsafe and unsound practice. A
banks ability to pay dividends may be affected also by the
FDICs capital maintenance requirements and prompt
corrective action rules.
Transactions
with affiliates
Transactions by a bank with an affiliate, including a holding
company, are subject to restrictions imposed by Federal Reserve
Act sections 23A and 23B and implementing regulations,
which are intended to protect banks from abuse in financial
transactions with affiliates, preventing federally insured
deposits from being diverted to support the activities of
unregulated entities engaged in nonbanking businesses.
Affiliate-transaction limits could impair our ability to obtain
funds from our bank subsidiary for our cash needs, including
funds for payment of dividends, interest, and operational
expenses. Affiliate transactions include but are not limited to
extensions of credit to affiliates, investments in securities
issued by affiliates, the use of affiliates securities
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as collateral for loans to any borrower, and purchase of
affiliate assets. Generally, section 23A and
section 23B of the Federal Reserve Act:
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limit the extent to which a bank or its subsidiaries may lend to
or engage in various other kinds of transactions with any one
affiliate to an amount equal to 10% of the institutions
capital and surplus, limiting the aggregate of covered
transactions with all affiliates to 20% of capital and surplus,
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impose strict collateral requirements on loans or extensions of
credit by a bank to an affiliate,
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impose restrictions on investments by a subsidiary bank in the
stock or securities of its holding company,
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impose restrictions on the use of a holding companys stock
as collateral for loans by the subsidiary bank, and
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require that affiliate transactions be on terms substantially
the same as those provided to a non-affiliate.
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Loans
to insiders
Service1sts authority to extend credit to
insiders meaning executive officers, directors and
greater than 10% stockholders or to entities those
persons control, is subject to section 22(g) and
section 22(h) of the Federal Reserve Act and
Regulation O of the Federal Reserve. Among other things,
these laws require insider loans to be made on terms
substantially similar to those offered to unaffiliated
individuals, place limits on the amount of loans a bank may make
to insiders based in part on the banks capital position,
and require that specified approval procedures be adhered to by
the bank. Loans to an individual insider may not exceed the
Federal legal limit on loans to any one borrower, which in
general terms is 15% of capital but can be higher in some
circumstances. The aggregate of all loans to all insiders may
not exceed the banks unimpaired capital and surplus.
Insider loans exceeding the greater of 5% of capital or $25,000
must be approved in advance by a majority of the board, with any
interested director not participating in such voting by the
board. Executive officers may borrow in unlimited amounts to
finance their childrens education or to finance the
purchase or improvement of their residence, but they may borrow
no more than $100,000 for most other purposes. Loans to
executive officers exceeding $100,000 may be allowed if the loan
is fully secured by government securities or a segregated
deposit account. A violation of these restrictions could result
in the assessment of substantial civil monetary penalties, the
imposition of a
cease-and-desist
order or other regulatory sanctions.
Loans
to one borrower
Under section 662.145 of the Nevada Revised Statutes, a
Nevada-chartered banks outstanding loans to one person
generally may not exceed 25% of the banks Tier 1
capital plus allowance for loan losses. Loans by a bank to
parties that have certain relationships with a particular
borrower and certain investments by a bank in the securities of
a particular borrower may be aggregated with the banks
loans to that borrower for purposes of applying this 25% limit.
Guidance
concerning commercial real estate lending
In December 2006, the FDIC and other Federal banking agencies
issued final guidance on sound risk management practices for
concentrations in commercial real estate lending, including
acquisition and development lending, construction lending, and
other land loans, which recent experience in Nevada and
elsewhere has shown can be particularly high-risk lending.
According to a 2009 FDIC publication, a majority of the
community banks that became problem banks or failed in 2008 had
similar risk profiles: the banks often had extremely high
concentrations, relative to their capital, in residential
acquisition, development, and construction lending, loan
underwriting and credit administration functions at these
institutions typically were criticized by examiners, and many of
the institutions had exhibited rapid asset growth funded with
brokered deposits.
The guidance does not establish rigid limits on commercial real
estate lending but does create a much sharper supervisory focus
on the risk management practices of banks with concentrations in
commercial real estate lending. According to the guidance, an
institution that has experienced rapid growth in commercial real
20
estate lending, has notable exposure to a specific type of
commercial real estate, or is approaching or exceeds the
following supervisory criteria may be identified for further
supervisory analysis of the level and nature of its commercial
real estate concentration risk:
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total reported loans for construction, land development, and
other land represent 100% or more of the institutions
total capital, or
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total commercial real estate loans represent 300% or more of the
institutions total capital and the outstanding balance of
the institutions commercial real estate loan portfolio has
increased by 50% or more during the prior 36 months.
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These measures are intended merely to enable the banking
agencies to identify institutions that could have an excessive
commercial real estate lending concentration, potentially
requiring close supervision to ensure that the institutions have
sound risk management practices in place.
Guidance
concerning subprime lending
In 2007 the FDIC and other Federal banking agencies issued final
guidance on subprime mortgage lending to address issues relating
to certain subprime mortgages, especially adjustable-rate
mortgage products that can cause payment shock. The subprime
guidance identified prudent safety and soundness and consumer
protection standards that the regulators expect banks and
financial institutions to follow to ensure borrowers obtain
loans they can afford to repay.
Guidance
concerning newly organized banks
The FDIC issued supervisory guidance on August 28, 2009
extending from three years to seven the period in which newly
organized institutions are subject to enhanced supervision. The
FDIC extended the period of enhanced supervision beyond three
years because banks in their first seven years of operation were
over-represented among banks that failed in 2008 and 2009.
Service1st commenced operations in January, 2007. The
expansion of the supervisory period includes subjecting young
banks to higher capital requirements and more frequent
examinations over seven years. A bank subject to the expanded
supervisory period is not permitted to deviate materially from
the banks approved business plan without first obtaining
the FDICs approval. As a condition to obtaining FDIC
approval of the Acquisition, we agreed to give the FDIC notice
at least 60 days in advance for any major deviation from
the business plan that we submitted to the FDIC during the
acquisition application process and not to deviate from the
business plan unless we receive written non-objection from the
FDIC. We also assured the FDIC in writing during the application
process that we will not seek to expand by acquisition until
Service1st is restored to a satisfactory condition, which at a
minimum means that the September 1, 2010 Consent Order must
first be terminated. Until that occurs, any growth on
Service1sts part must be the result of organic growth in
the banks existing business. This commitment will expire
three years after the Acquisition of Service1st or, if later,
when the September 1, 2010 Consent Order agreed to by
Service1st with the FDIC and the Nevada Financial
Institution Division terminates.
Interstate
banking and branching
Section 613 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act enacted in July 2010 amends the
interstate branching provisions of the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994. These expanded
de novo branching authority amendments will authorize a
state or national bank to open a de novo branch in
another state if the law of the state where the branch is to be
located would permit a state bank chartered by that state to
open the branch. Under prior law, an
out-of-state
bank could open a de novo branch in another state only if
the particular state permitted
out-of-state
banks to establish a de novo branch. In section 607,
the Dodd-Frank Act also increases the approval threshold for
interstate bank acquisitions, requiring that a bank holding
company be well capitalized and well managed as a condition to
approval of an interstate bank acquisition, rather than being
merely adequately capitalized and adequately managed, and that
an acquiring bank be and remain well capitalized and well
managed as a condition to approval of an interstate bank merger.
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Consumer
protection laws and regulations
Service1st is subject to regular examination by the FDIC to
ensure compliance with statutes and regulations applicable to
the banks business, including consumer protection statutes
and implementing regulations, some of which are discussed below.
Violations of any of these laws may result in fines,
reimbursements, and other related penalties.
Community
Reinvestment Act
The Community Reinvestment Act of 1977 is intended to encourage
insured depository institutions to satisfy the credit needs of
their communities, within the limits of safe and sound lending.
The Community Reinvestment Act does not establish specific
lending requirements or programs for financial institutions, nor
does the Community Reinvestment Act limit an institutions
discretion to develop the types of products and services
management believes are best suited to the banks
particular community. The Act requires that bank regulatory
agencies conduct regular Community Reinvestment Act examinations
and provide written evaluations of institutions Community
Reinvestment Act performance. The Act also requires that an
institutions Community Reinvestment Act performance rating
be made public. Community Reinvestment Act performance
evaluations are based on a four-tiered rating system:
Outstanding, Satisfactory, Needs to Improve and Substantial
Noncompliance. Community Reinvestment Act performance
evaluations are used principally in the evaluation of regulatory
applications submitted by an institution. Performance
evaluations are considered in evaluating applications for such
things as mergers, acquisitions, and applications to open
branches. According to its CRA Performance Evaluation dated
March 18, 2009, Service1st was rated Satisfactory.
Equal
Credit Opportunity Act
The Equal Credit Opportunity Act generally prohibits
discrimination in any credit transaction, whether for consumer
or business purposes, on the basis of race, color, religion,
national origin, sex, marital status, age (except in limited
circumstances), receipt of income from public assistance
programs, or good faith exercise of any rights under the
Consumer Credit Protection Act.
Truth
in Lending Act
The Truth in Lending Act is designed to ensure that credit terms
are disclosed in a meaningful way so that consumers may compare
credit terms more readily and knowledgeably. As a result of the
Truth in Lending Act, all creditors must use the same credit
terminology to express rates and payments, including the annual
percentage rate, the finance charge, the amount financed, the
total of payments and the payment schedule, among other things.
Fair
Housing Act
The Fair Housing Act makes it unlawful for any lender to
discriminate in its housing-related lending activities against
any person because of race, color, religion, national origin,
sex, handicap, or familial status. A number of lending practices
have been held by the courts to be illegal under the Fair
Housing Act, including some practices that are not specifically
mentioned in the Federal Housing Act.
Home
Mortgage Disclosure Act
The Home Mortgage Disclosure Act arose out of public concern
over credit shortages in certain urban neighborhoods. The Home
Mortgage Disclosure Act requires financial institutions to
collect data that enable regulatory agencies to determine
whether the financial institutions are serving the housing
credit needs of the neighborhoods and communities in which they
are located. The Home Mortgage Disclosure Act also requires the
collection and disclosure of data about applicant and borrower
characteristics as a way to identify possible discriminatory
lending patterns. The vast amount of information that financial
institutions collect and disclose concerning applicants and
borrowers receives attention not only from state and Federal
banking supervisory authorities but also from community-oriented
organizations and the general public.
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Real
Estate Settlement Procedures Act
The Real Estate Settlement Procedures Act requires that lenders
provide borrowers with disclosures regarding the nature and cost
of real estate settlements. The Real Estate Settlement
Procedures Act also prohibits abusive practices that increase
borrowers costs, such as kickbacks and fee-splitting
without providing settlement services.
Privacy
Under the Gramm-Leach-Bliley Act, all financial institutions are
required to establish policies and procedures to restrict the
sharing of non-public customer data with non-affiliated parties
and to protect customer data from unauthorized access. In
addition, the Fair Credit Reporting Act of 1971 includes many
provisions concerning national credit reporting standards and
permits consumers to opt out of information-sharing for
marketing purposes among affiliated companies.
Predatory
lending
What is commonly referred to as predatory typically involves one
or more of the following elements :
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making unaffordable loans based on a borrowers assets
rather than the consumers ability to repay an obligation,
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inducing a consumer to refinance a loan repeatedly in order to
charge high points and fees each time the loan is refinanced, or
loan flipping, and
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engaging in fraud or deception to conceal the true nature of the
loan obligation from an unsuspecting or unsophisticated consumer.
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The Home Ownership and Equity Protection Act of 1994 and
implementing regulations adopted by the Federal Reserve require
specified disclosures and extend additional protection to
consumers in closed-end consumer credit transactions, such as
home repairs or renovation, that are secured by a mortgage on
the borrowers primary residence. The disclosures and
protections are applicable to high cost transactions
with any of the following features -
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interest rates for first lien mortgage loans more than eight
percentage points above the yield on U.S. Treasury
securities having a comparable maturity,
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interest rates for subordinate lien mortgage loans more than
10 percentage points above the yield on U.S. Treasury
securities having a comparable maturity, or
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total points and fees paid in the credit transaction exceed the
greater of either 8% of the loan amount or a specified dollar
amount that is inflation-adjusted each year.
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The Home Ownership and Equity Protection Act prohibits or
restricts numerous credit practices, including loan flipping by
the same lender or loan servicer within a year of the
residential mortgage loan being refinanced. Lenders are presumed
to have violated the law unless they document that the borrower
has the ability to repay. Lenders that violate the rules face
cancellation of loans and penalties equal to the finance charges
paid. The Home Ownership and Equity Protection Act also governs
so-called reverse mortgages. In January 2008, the
Federal Reserve issued final rules under the Home Ownership and
Equity Protection Act to address practices in the subprime
mortgage market before the onset of the Great Recession. The
rules require disclosures and additional protections or
prohibitions on certain practices connected with
higher-priced mortgages, which the rules define as
closed-end mortgage loans that are secured by a consumers
principal dwelling and that have an annual percentage rate that
exceeds the average prime offer rates for a comparable
transaction published by the Federal Reserve Board by at least
1.5 percentage points for first-lien loans, or
3.5 percentage points for subordinate-lien loans. The
Federal Reserve derives average prime offer rates from the
Freddie Mac Primary Mortgage Market
Survey®.
For higher-priced mortgage loans, the final rules:
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Prohibit creditors from extending credit without regard to a
consumers ability to repay from sources other than the
collateral itself,
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Require creditors to verify income and assets relied upon to
determine repayment ability,
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Prohibit prepayment penalties except under certain
conditions, and
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Require creditors to establish escrow accounts for taxes and
insurance in the case of first-lien higher-priced mortgage
loans, but permit creditors to allow borrowers to cancel escrows
12 months after loan consummation.
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Corporate
governance and accounting legislation
The Sarbanes-Oxley Act of 2002 was adopted to enhance corporate
responsibility, increase penalties for accounting and auditing
improprieties at publicly traded companies, and protect
investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws. The Sarbanes-Oxley
Act of 2002 applies generally to all companies that file or are
required to file periodic reports with the Securities and
Exchange Commission (the SEC) under the Exchange
Act, including WLBC. Under the Sarbanes-Oxley Act, the SEC and
securities exchanges adopted extensive additional disclosure,
corporate governance and other related rules. Among its many
provisions, the Sarbanes-Oxley Act subjects bonuses issued to
top executives to disgorgement if a subsequent restatement of a
companys financial statements was due to corporate
misconduct, prohibits an officer or director from misleading or
coercing an auditor, prohibits insider trades during pension
fund blackout periods, imposes new criminal
penalties for fraud and other wrongful acts, and extends the
period during which securities fraud lawsuits can be brought
against a company or its officers.
Anti-money
laundering and anti-terrorism legislation
The Bank Secrecy Act of 1970 requires financial institutions to
maintain records and report transactions to prevent the
financial institutions from being used to hide money derived
from criminal activity and tax evasion. The Bank Secrecy Act
establishes (a) record keeping requirements to assist
government enforcement agencies with tracing financial
transactions and flow of funds, (b) reporting requirements
for Suspicious Activity Reports and Currency Transaction Reports
to assist government enforcement agencies with detecting
patterns of criminal activity, (c) enforcement provisions
authorizing criminal and civil penalties for illegal activities
and violations of the Bank Secrecy Act and its implementing
regulations, and (d) safe harbor provisions that protect
financial institutions from civil liability for their
cooperative efforts.
Title III of the USA PATRIOT Act of 2001 added
anti-terrorist financing provisions to the requirements of the
Bank Secrecy Act and its implementing regulations. Among other
things, the USA PATRIOT Act requires all financial institutions,
including subsidiary banks and non-banking affiliates, to
institute and maintain a risk-based anti-money laundering
compliance program that includes a customer identification
program, provides for information sharing with law enforcement
and between certain financial institutions by means of an
exemption from the privacy provisions of the Gramm-Leach-Bliley
Act, prohibits U.S. banks and broker-dealers from
maintaining accounts with foreign shell banks,
establishes due diligence and enhanced due diligence
requirements for certain foreign correspondent banking and
foreign private banking accounts, and imposes additional record
keeping requirements for certain correspondent banking
arrangements. The USA PATRIOT Act also grants broad authority to
the Secretary of the Treasury to take actions to combat money
laundering. Federal bank regulators are required to evaluate the
effectiveness of a financial institutions efforts to
combat money laundering when evaluating an application submitted
by the financial institution.
The Treasurys Office of Foreign Asset Control administers
and enforces economic and trade sanctions against targeted
foreign countries, entities, and individuals based on
U.S. foreign policy and national security goals. As a
result, financial institutions must scrutinize transactions to
ensure that they do not represent obligations of or ownership
interests in entities owned or controlled by sanctioned targets.
Monetary
policy
The earnings of financial institutions are affected by the
policies of regulatory authorities, including monetary policy of
the Federal Reserve. An important function of the Federal
Reserve is regulation of
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aggregate national credit and money supply. The Federal Reserve
accomplishes these goals with measures such as open market
transactions in securities, establishment of the discount rate
on bank borrowings, and changes in reserve requirements against
bank deposits. These methods are used in varying combinations to
influence overall growth and distribution of financial
institutions loans, investments and deposits, and they
also affect interest rates charged on loans or paid on deposits.
Monetary policy is influenced by many factors, including
inflation, unemployment, short-term and long-term changes in the
international trade balance, and fiscal policies of the United
States government. Federal Reserve monetary policy has had and
will continue to have a significant effect on the operating
results of financial institutions.
Developments
affecting management and corporate governance
In June of 2010, the Federal banking agencies jointly published
their final Guidance on Sound Incentive Compensation Policies.
The goal is to enable financial organizations to manage the
safety and soundness risks of incentive compensation
arrangements and to assist banks and bank holding companies with
identification of improperly-structured compensation
arrangements. To ensure that incentive compensation arrangements
do not encourage employees to take excessive risks that
undermine safety and soundness, the incentive compensation
guidance sets forth these key principles:
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incentive compensation arrangements should provide employees
incentives that appropriately balance risk and financial results
in a manner that does not encourage employees to expose the
organization to imprudent risk,
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these arrangements should be compatible with effective controls
and risk management, and
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these arrangements should be supported by strong corporate
governance, including active and effective oversight by the
board of directors.
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To implement the interagency guidance, a financial organization
must regularly review incentive compensation arrangements for
all executive and non-executive employees who, either
individually or as part of a group, have the ability to expose
the organization to material amounts of risk, as well as to
review the risk-management, control, and corporate governance
processes related to these arrangements. The organization must
immediately address any identified deficiencies in compensation
arrangements or processes that are inconsistent with safety and
soundness and must ensure that incentive compensation
arrangements are consistent with the principles discussed in the
guidance.
In addition to numerous provisions that affect the business of
banks and bank holding companies, the recently enacted
Dodd-Frank Wall Street Reform and Consumer Protection Act
includes in Title IX a number of provisions affecting
corporate governance and executive compensation, for example the
requirements that stockholders be given the opportunity to
consider and vote upon executive compensation disclosed in a
companys annual meeting proxy statement, that a
companys compensation committee be comprised entirely of
independent directors and that the committee have stated minimum
authorities, that annual meeting proxy statements disclose the
ratio of CEO compensation to the median compensation of all
other employees, that company policy provide for recovery of
excess incentive compensation after an accounting restatement,
and that stockholders have the ability to designate director
nominees for inclusion in a companys annual meeting proxy
statement. Section 956 also provides for adoption of
incentive compensation guidelines jointly by the Federal banking
agencies and the SEC, the National Credit Union Administration,
and the Federal Housing Finance Agency. Due for adoption by the
end of April 2011, the guidelines could be different from the
Guidance on Sound Incentive Compensation Policies adopted by the
Federal bank regulators in June of 2010. The new guidelines
adopted under Dodd-Frank Act section 956 could impose
additional compliance burdens beyond those already imposed by
the Federal bank regulatory agency guidelines adopted in June of
2010.
Finally, during the application process for the acquisition of
Service1st, we made a written commitment to the FDIC that we
will make no change in the directors or executive management of
Service1st unless we first receive the FDICs
non-objection to the proposed change. This commitment will
expire three years after the October 28, 2010 completion of
the acquisition of Service1st or, if later, when the
September 1, 2010 Consent Order agreed to by
Service1st with the FDIC and the Nevada FID terminates.
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Recent
initiatives
Enacted on October 3, 2008, the Emergency Economic
Stabilization Act of 2008 created the Troubled Asset Relief
Program (TARP), giving the U.S. Treasury
Department authority to purchase and insure certain types of
troubled assets. One component of TARP is a generally available
capital access program known as the Capital Purchase Program
under which a financial institution may issue preferred shares
and warrants to purchase shares of its common stock to the
Treasury. The goal of the Capital Purchase Program was to help
stabilize the financial system as a whole and ensure the
availability of credit necessary for the countrys economic
recovery. Service1st is not a participant in the Capital
Purchase Program. Enacted on February 17, 2009, the
American Recovery and Reinvestment Act of 2009 includes numerous
economic stimulus provisions and makes more restrictive the
executive compensation limits applicable to Capital Purchase
Program participants.
On July 21, 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act became law. The Dodd-Frank Act is a
landmark financial reform bill, changing the current bank
regulatory structure and affecting the lending, investment,
trading, and operating activities of financial institutions and
holding companies. Implementation of the Dodd-Frank Act will
require new mandatory and discretionary rulemakings by numerous
Federal regulatory agencies. The Dodd-Frank Act includes the
following provisions:
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section 111 establishes a new Financial Stability Oversight
Counsel to monitor systemic financial risks. The Board of
Governors of the Federal Reserve is given extensive new
authorities to impose strict controls on large bank holding
companies with total consolidated assets equal to or in excess
of $50 billion and systemically significant non-bank
financial companies to limit the risk they might pose for the
economy and to other large interconnected companies. The
Dodd-Frank Act also grants to the Treasury Department, FDIC and
the FRB broad new powers to seize, close and wind-down too
big to fail financial institutions (including non-bank
institutions) in an orderly fashion.
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Title X establishes a new independent Federal regulatory
body within the Federal Reserve System that is dedicated
exclusively to consumer protection. Known as the Bureau of
Consumer Financial Protection, this new regulatory body will
assume responsibility for most consumer protection laws, with
rulemaking, supervisory, examination, and enforcement authority.
It will also be in charge of setting appropriate consumer
banking fees and caps. According to Dodd-Frank Act
section 1025, the new regulatory body has examination and
enforcement authority over banks with more than $10 billion
in assets, but section 1026 makes clear that banks with
assets of $10 billion or less will continue to be examined
by their bank regulators for consumer law compliance. In
addition, the Dodd-Frank Act permits states to adopt consumer
protection laws and regulations that are stricter than those
regulations promulgated by the Consumer Financial Protection
Bureau. Although our bank does not currently offer many of these
consumer products or services, compliance with any such new
regulations would increase our cost of operations and, as a
result, could limit our ability to expand into these products
and services,
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section 171 restricts the amount of trust preferred
securities that may be considered Tier 1 capital. For
depository institution holding companies with total assets of
less than $15 billion, trust preferred securities issued
before May 19, 2010 may continue to be included in
Tier 1 capital, but future issuances of trust preferred
securities will no longer be eligible for treatment as
Tier 1 capital, and
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under section 334 the FDICs minimum reserve ratio is
to be increased from 1.15% to 1.35%, with the goal of attaining
that 1.35% level by September 30, 2020; however, financial
institutions with assets of less than $10 billion,
including Service1st, are to be exempt from the cost of the
increase. FDIC insurance coverage of up to $250,000 for deposit
accounts is made permanent by section 335, section 343
extends until January 1, 2013 unlimited FDIC insurance for
non-interest-bearing demand deposit accounts, more commonly
known as checking accounts, and section 627 repeals the
longstanding prohibition against financial institutions paying
interest on checking accounts.
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Section 331 changes the way deposit insurance premiums are
calculated by the FDIC as well. That is, deposit insurance
premiums are calculated based upon an institutions
so-called assessment base. Until
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the Dodd-Frank Act became law, the assessment base consisted of
an institutions deposit liabilities. Section 331,
however, makes clear that the assessment base shall now be the
difference between total assets and tangible equity, so in other
words the assessment base will take account of all liabilities,
not merely deposit liabilities. This change is likely to have a
greater impact on large banks, which tend to rely on a variety
of funding sources, than on smaller community banks, which tend
to rely primarily on deposit funding:
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the Office of the Comptroller of the Currencys ability to
preempt state consumer protection laws is constrained by
section 1044, and because of section 1042 state
attorneys general have greater authority to enforce state
consumer protection laws against national banks and their
operating subsidiaries,
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section 619 embodies the so-called Volcker
rule, prohibiting a banking entity from engaging in
proprietary trading or from sponsoring or investing in a hedge
fund or private equity fund, and
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imposing a 5% risk retention requirement on securitizers of
asset-backed securities, section 941 could have an impact
on financial institutions that originate mortgages for sale into
the secondary market. Like other provisions of the Dodd-Frank
Act, the scope and impact of section 941 will be determined
by future rulemaking.
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We are evaluating the potential impact of the Dodd-Frank Act on
our business, financial condition, results of operations, and
prospects. The Dodd-Frank Act could affect the profitability of
community banking, require changes in the business practices of
community banking organizations, lead to more stringent capital
and liquidity requirements, and otherwise adversely affect the
community banking business. However, because much of the
Dodd-Frank Act will be phased in over time and will not become
effective until Federal agency rulemaking initiatives are
completed, we cannot predict with confidence precisely how the
Dodd-Frank Act will affect community banking organizations. We
are confident, however, that short- and long-term compliance
costs for all financial organizations, both large and small,
will be greater because of the Dodd-Frank Act.
As a
newly formed public bank holding company, we will incur
significant legal, accounting, compliance and other
expenses.
As a newly formed public bank holding company, we will incur
significant legal, accounting and other expenses. For example,
we are required to prepare and file quarterly, annual and
current reports with the SEC, as well as comply with a myriad of
rules applicable to public companies, such as the proxy rules,
beneficial ownership reporting requirements and other
obligations. In addition, the Sarbanes-Oxley Act of 2002 and the
rules implemented by the SEC in response to that legislation
have required significant changes in corporate governance
practices of public companies. While we have had to comply with
such rules and regulations in the past, we expect these rules
and regulations to significantly affect legal and financial
compliance, and to make some activities more time-consuming and
costly.
Additionally, as a newly formed bank holding company, we are
required to prepare supplemental qualitative disclosure
regarding our assets and operations as set forth in
Article 9 of
Regulation S-X
and Industry Guide No. 3, which includes information such
as portfolio loan composition, yield, costs, loan terms,
maturities, re-pricing characteristics, credit ratings and risk
elements such as non-accrual and past due items, which will add
to our legal and compliance costs going forward.
As the
provider of financial services, our business and earnings are
significantly affected by general business and economic
conditions, particularly in the real estate industry, and
accordingly, our business and earnings could be further harmed
in the event of a continuation or deepening of the current
U.S. recession or further market deterioration or
disruption.
The global and U.S. economies and the local economies in
the Nevada market, where substantially all of our loan portfolio
was originated, experienced a steep decline beginning in 2007,
which has continued throughout 2010. The financial markets and
the financial services industry in particular suffered
unprecedented disruption, causing many financial institutions to
fail or require government intervention to avoid failure.
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These conditions were largely the result of the erosion of the
U.S. and global credit markets, including a significant and
rapid deterioration of the mortgage lending and related real
estate markets. We give you no assurance that economic
conditions that have adversely affected the financial services
industry and the capital, credit, and real estate markets
generally, will improve in the near term.
Our business and earnings are sensitive to general business,
economic and market conditions in the United States. These
conditions include changes in short-term and long-term interest
rates, inflation, deflation, fluctuation in the real estate and
debt capital markets, developments in national and regional
economies and changes in government policies and regulations.
Our business and earnings are particularly sensitive to economic
and market conditions affecting the real estate industry because
a large portion of our loan portfolio consists of commercial
real estate and construction loans. Real estate values have been
declining in Nevada, steeply in some cases, which has affected
collateral values and has resulted in increased provisions for
loan losses for Nevada banks.
While generally containing lower risk than unsecured loans,
commercial real estate and construction loans generally involve
a high degree of credit risk. Such loans also generally involve
larger individual loan balances. In addition, real estate
construction loans may be affected to a greater extent than
residential loans by adverse conditions in real estate markets
or the economy because many real estate construction
borrowers ability to repay their loans is dependent on
successful development of their properties, as well as the
factors affecting residential real estate borrowers. Risk of
loss on a construction loan depends largely upon whether the
initial estimate of the propertys value at completion of
construction equals or exceeds the cost of property construction
(including interest), the ability of the borrowers to stabilize
leasing or rental income to qualify for permanent financing and
the availability of permanent take-out financing, itself a
market we believe that is largely non-existent at present.
During the construction phase, a number of factors can result in
delays and cost overruns. Construction and commercial real
estate loans also involve greater risk because they may not be
fully amortizing over the loan period, but have a balloon
payment due at maturity. A borrowers ability to make a
balloon payment may depend on the borrower being able to
refinance the loan, timely sell the underlying property or
liquidate other assets.
The current U.S. recession has resulted in a reduction in
the value of many of the real estate assets securing a large
portion of our loans. Any increase in the number of
delinquencies or defaults would result in higher levels of
nonperforming assets, net charge-offs and provisions for loan
losses, adversely affecting our results of operations and
financial condition.
Our
geographic concentration is tied to business, economic and
regulatory conditions in Nevada.
Unfavorable business, economic or regulatory conditions in
Nevada, where we conduct the substantial majority of our
business, could have a significant adverse impact on our
business, financial condition and results of operations. In
addition, because our business is concentrated in Nevada, and
substantially all our loan portfolio originated from Nevada, we
could also be adversely affected by any material change in
Nevada law or regulation and may be exposed to economic and
regulatory risks that are greater than the risks we would face
if the business were spread more evenly by geographic region.
Furthermore, the recent decline in Nevada in the value of real
estate assets and local business revenues, particularly in the
gaming and hospitality industries, could continue and will
likely have a significant adverse impact on business, financial
conditions and results of operations. There can be no assurance
that the real estate market or local industry revenues will not
continue to decline. Further erosion in asset values in Nevada
could impact our existing loans and could make it difficult for
us to find attractive alternatives to deploy our capital,
impeding our ability to grow our business.
The
Las Vegas market is substantially dependent on gaming and
tourism revenue, and the downturn in the gaming and tourism
industries has indirectly had an adverse impact on Nevada
banks.
The economy of the Las Vegas area is unique in the United States
for its level of dependence on services and industries related
to gaming and tourism. Regardless of whether a Nevada bank has
substantial customer
28
relationships in the gaming and tourism industries, a downturn
in the Nevada economy adversely affects the banks
customers, resulting in an increase in loan delinquencies and
foreclosures, a reduction in the demand for products and
services, and a reduction of the value of collateral for loans,
with an associated adverse impact on the banks business,
financial condition, results of operations, and prospects.
An event or state of affairs that adversely affects the gaming
or tourism industry adversely impacts the Las Vegas economy
generally. Gaming and tourism revenue is particularly vulnerable
to fluctuations in the economy. Virtually any development or
event that dissuades travel or spending related to gaming and
tourism adversely affects the Las Vegas economy. The Las Vegas
economy is more susceptible than the economies of many other
cities to such issues as higher gasoline and other fuel prices,
increased airfares, unemployment levels, recession, rising
interest rates, and other economic conditions, whether domestic
or foreign. Gaming and tourism are also susceptible to political
conditions or events, such as military hostilities and acts of
terrorism, whether domestic or foreign. In addition, Las Vegas
competes with other areas of the country and other parts of the
world for gaming revenue, and it is possible that the expansion
of gaming operations in other states, such as California, and
other countries would significantly reduce gaming revenue in the
Las Vegas area.
The
soundness of other financial institutions with which we do
business could adversely affect us.
The financial services industry and the securities markets have
been materially adversely affected by significant declines in
values of almost all asset classes and by extreme lack of
liquidity in the capital and credit markets. Financial
institutions specifically have been subject to increased
volatility and an overall loss in investor confidence. Financial
institutions are interrelated as a result of trading, clearing,
counterparty, investment, or other relationships, including loan
participations, derivatives, and hedging transactions and
investments in securities or loans originated or issued by
financial institutions or supported by the loans they originate.
Many of these transactions expose a financial institution to
credit or investment risk arising out of default by the
counterparty. In addition, a banks credit risk may be
exacerbated if the collateral the bank holds cannot be realized
or is liquidated at prices not sufficient to recover the full
amount of the loan or other exposure. These circumstances could
lead to impairments or write-downs in a banks securities
portfolio and periodic gains or losses on other investments
under
mark-to-market
accounting treatment. We could incur additional losses to our
securities portfolio in the future as a result of these issues.
These types of losses could have a material adverse effect on
our business, financial condition or results of operation.
Furthermore, if we are unable to ascertain the credit quality of
certain potential counterparties, we may not pursue otherwise
attractive opportunities and we may be unable to effectively
grow our business.
Our
earnings may be significantly affected by the fiscal and
monetary policies of the federal government and its
agencies.
The Federal Reserve regulates the supply of money and credit in
the United States. Federal Reserve policies determine in large
part cost of funds for lending and investing and the return
earned on those loans and investments, both of which impact net
interest margin, and can materially affect the value of
financial instruments, such as debt securities. Its policies can
also affect borrowers, potentially increasing the risk that they
may fail to repay their loans. Changes in Federal Reserve
policies will be beyond our control and difficult to predict or
anticipate. To the extent that changes in Federal Reserve
policies have a disproportionate effect on our cost of funding
or on the health of our borrowers, such changes could materially
affect our operating results.
If
there was a depletion of the FDICs Deposit Insurance Fund,
the FDIC could impose additional assessments on the banking
industry.
If there was a depletion of the FDICs Deposit Insurance
Fund, we believe that the FDIC would impose additional
assessments on the banking industry. In such case, our
profitability would be reduced by any special assessments from
the FDIC to replenish the Deposit Insurance Fund. Please see the
discussion in the section entitled Supervision and
Regulation Deposit Insurance.
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The
financial services industry is heavily regulated by federal and
state agencies.
Federal and state regulation is to protect depositors, federal
deposit insurance funds and the banking system as a whole, not
security holders. Congress and federal regulatory agencies
continually review banking laws, regulations and policies for
possible changes. Changes to statutes, regulations or regulatory
policies, including changes in interpretation or implementation
of statutes, regulations or policies, could affect the business
going forward in substantial and unpredictable ways including
limiting the types of financial services and products we may
offer and/or
increasing the ability of nonbanks to offer competing financial
services and products. Failure to comply with laws, regulations
or policies could result in sanctions by regulatory agencies and
damage to our reputation. For further discussion of applicable
regulations, please see the section entitled
Supervision and Regulation.
We
operate in a highly regulated environment and changes in the
laws and regulations that govern our operations, changes in the
accounting principles that are applicable to us, and our failure
to comply with the foregoing, may adversely affect
us.
We are subject to extensive regulation, supervision, and
legislation that governs almost all aspects of our operations.
See the section entitled Supervision and
Regulation. The laws and regulations applicable to the
banking industry could change at any time and are primarily
intended for the protection of customers, depositors, and the
deposit insurance funds, not stockholders. Changes in these laws
or in applicable accounting principles could make it more
difficult and expensive for us to comply with laws, regulations,
or accounting principles and could affect the way we conduct
business.
Moreover, the United States, state, and foreign governments have
taken extraordinary actions to deal with the worldwide financial
crisis and the severe decline in the global economy. Many of
these actions have been in effect for only a limited time and
have produced limited or no relief to the capital, credit, and
real estate markets. We cannot assure you that these actions or
other actions under consideration will ultimately be successful.
Although we cannot reliably predict what effect any presently
contemplated or future changes in the laws or regulations or
their interpretations would have on us, these changes could be
materially adverse to our investors and stockholders. Compliance
with the initiatives may increase our costs and limit our
ability to pursue business opportunities.
Any
current or future litigation, regulatory investigations,
proceedings, inquiries or changes could have a significant
impact on the financial services industry.
The financial services industry has experienced unprecedented
market value declines caused primarily by the current
U.S. recession and real estate market deterioration. As a
result of the current market perceptions of stockholder advocacy
groups as well as the current U.S. Administration in
Washington, D.C., litigation, proceedings, inquiries or
regulatory changes are all distinct possibilities for financial
institutions. Such actions or changes could result in
significant costs. Because we are a relatively new financial
institution, any costs
and/or
burdens imposed by such actions or changes could affect us
disproportionately from how they affect our competitors.
The
removal or reduction in stimulus activities sponsored by the
Federal Government and its agents may have a negative impact on
Service1sts results and operations.
The Federal Government has intervened in an unprecedented manner
to stimulate economic growth. Some of these activities have
included the following:
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Target fed funds rates which have remained close to zero percent;
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Mortgage rates that have remained at historical lows in part due
to the Federal Reserve Bank of New Yorks $1.25 trillion
mortgage-backed securities purchase program;
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Bank funding that has remained stable through an increase in
FDIC deposit insurance to a covered limit of $250,000 per
account from the previous coverage limit of $100,000; and
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Housing demand that has been stimulated by homebuyer tax credits.
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The expiration or rescission of any of these programs may have
an adverse impact on Service1sts operating results by
increasing interest rates, increasing the cost of funding, and
reducing the demand for loan products, including mortgage loans.
Current
market volatility and industry developments may adversely affect
business and financial results.
The volatility in the capital and credit markets along with the
housing declines during the last few years has resulted in
significant pressure on the financial services industry. If
current volatility and market conditions continue or worsen,
there can be no assurance that the financial services industry,
results of operations or the business will not continue to be
significantly adversely impacted. We may have further increases
in loan losses, deterioration of capital or limitations on their
access to funding or capital, if needed.
Further, if other financial institutions fail to be adequately
capitalized or funded, it may negatively impact business and
financial results. In the past, we have routinely interacted
with numerous financial institutions in the ordinary course of
business and have therefore been exposed to operational and
credit risk to those institutions. Failures of such institutions
may significantly adversely impact our operations going forward.
Strategies
to manage interest rate risk may yield results other than those
anticipated.
Changes in the interest rate environment are difficult to
predict. Net interest margins can expand or contract, and this
can significantly impact overall earnings. Changes in interest
rates can also adversely affect the application of critical
management estimates, their projected returns on investments, as
well as the determination of fair values of certain assets. We
have certain assets and liabilities with fixed interest rates.
Unexpected and dramatic changes in interest rates may materially
impact our operating results.
Negative
public opinion could damage our reputation and adversely impact
our business and revenues.
Financial institutions earnings and capital are subject to
risks associated with negative public opinion. Negative public
opinion could result from actual, alleged or perceived conduct
in any number of activities, including lending practices, the
failure of any product or service to meet customers
expectations or applicable regulatory requirements, corporate
governance, acquisitions, as a defendant in litigation, or from
actions taken by government regulators or community
organizations. Negative public opinion could adversely affect
our ability to attract
and/or
retain customers and can expose us to litigation or regulatory
action. We are highly dependent on our customer relationships.
Any negative perception of us which impacted our customer
relationships could materially affect our business prospects by
reducing our deposit base.
Material
breaches in security of Service1sts systems may have a
significant effect on Service1sts business.
Service1st collects, processes and stores sensitive
consumer data by utilizing computer systems and
telecommunications networks operated by both Service1st and
third party service providers. Service1st has security,
backup and recovery systems in place, as well as a business
continuity plan to ensure the system will not be inoperable.
Service1st also has security to prevent unauthorized access
to the system. In addition, Service1st requires its third party
service providers to maintain similar controls. However,
Service1st cannot be certain that the measure will be
successful. A security breach in the system and loss of
confidential information could result in losing the
customers confidence and thus the loss of their business
as well as additional significant costs for privacy monitoring
activities.
Service1sts necessary dependence upon automated systems to
record and process its transaction volume poses the risk that
technical system flaws or employee errors, tampering or
manipulation of those systems will result in losses and may be
difficult to detect. Service1st may also be subject to
disruptions of its operating systems arising from events that
are beyond its control (for example, computer viruses or
electrical or
31
telecommunications outages). Service1st is further exposed
to the risk that its third party service providers may be unable
to fulfill their contractual obligations (or will be subject to
the same risk of fraud or operational errors as Service1st).
These disruptions may interfere with service to
Service1sts customers and result in a financial loss or
liability.
Changes
in interest rates could adversely affect our profitability,
business and prospects.
Most of the assets and liabilities of a bank holding company are
monetary in nature, exposed to significant risks from changes in
interest rates that can affect net income and the valuation of
assets and liabilities. Increases or decreases in prevailing
interest rates could have an adverse effect on our business,
asset quality, and prospects. Our operating income and net
income will depend to a great extent on our net interest margin,
the difference between the interest yields we receive on loans,
securities, and other interest-earning assets and the interest
rates we pay on interest-bearing deposits, borrowings, and other
liabilities. These rates are highly sensitive to many factors
beyond our control, including competition, general economic
conditions, and monetary and fiscal policies of various
governmental and regulatory authorities, including the Federal
Reserve. If the rate of interest we pay on interest-bearing
deposits, borrowings, and other liabilities increases more than
the rate of interest we receive on loans, securities, and other
interest-earning assets, our net interest income and therefore
our earnings could be adversely affected. Our earnings could
also be adversely affected if the rates on our loans and other
investments fall more quickly than those on our deposits and
other liabilities.
In addition, loan volumes are affected by market interest rates
on loans. Rising interest rates generally are associated with a
lower volume of loan originations while lower interest rates are
usually associated with increased loan originations. Conversely,
in rising interest rate environments, loan repayment rates
decline and in a falling interest rate environment loan
repayment rates increase. We cannot assure you that we will be
able to minimize our risk exposure to changing interest rates.
In addition, an increase in the general level of interest rates
may adversely affect the ability of certain borrowers to pay the
interest on and principal of their obligations.
Interest rates also affect how much money we can lend. When
rates rise, the cost of borrowing increases. Accordingly,
changes in market interest rates could materially and adversely
affect our net interest spread, asset quality, loan origination
volume, business, financial condition, results of operations,
and cash flows.
Increasing
our existing market share may depend on market acceptance and
regulatory approval of new products and services.
Our ability to increase our market share will depend, in part,
on our ability to create and adapt products and services to
evolving industry standards. There is increasing pressure on
financial services companies to provide products and services at
lower prices. This can reduce net interest margin and revenues
from fee-based products and services. In addition, the
widespread adoption of new technologies, including
internet-based services, could require us to make substantial
expenditures to modify or adapt our existing products and
services. We may not successfully introduce new products and
services, achieve market acceptance of products and services
and/or be
able to develop and maintain loyal customers. As a condition to
obtaining FDIC approval for Western Liberty Bancorp to acquire
Service1st Bank of Nevada, Western Liberty agreed during
the first three years of operation that Service1st Bank
would not make any major deviation or material change to the
business plan submitted as part of Western Liberty
Bancorps application to acquire Service1st Bank of Nevada.
Until such time as the FDIC terminates the September 1,
2010 Consent Order, we believe the FDIC will be reluctant to
permit the bank to make a major deviation or material change in
the FDIC-approved business plan unless the proposed change to
the FDIC-approved business plan would lower the risk profile of
the bank. The application approval condition prohibiting a
material change to the FDIC-approved business plan may limit the
banks ability to introduce new products or services until
the FDIC terminates the Consent Order. See the Risk Factor
disclosure captioned Bank regulatory restrictions with
the FDIC and the Nevada Financial Institutions Division are
likely to limit growth and new product development that were not
in the business plan approved by bank regulators at the time
Western Liberty Bancorp was approved to acquire
Service1st Bank of Nevada.
32
The
historical financial information included in this
Form 10-K
is not necessarily indicative of our future
performance.
The historical financial information included in this
Form 10-K
is not necessarily indicative of future financial position,
results of operations and cash flows. The results of future
periods may be different as a result of, among other things, the
additional costs associated with being a public bank holding
company and the pace of growth of our business in the future,
which is likely to differ from the historical growth reflected
in the financial information presented herein.
Service1st
has experienced significant losses since it began operations in
January of 2007. There is no assurance that it will become
profitable.
Service1st commenced operations as a commercial bank on
January 16, 2007, with initial capital of
$50.0 million. Since inception, Service1st has not
been profitable. To some extent, the lack of profitability is
attributable to the
start-up
nature of its business; time is required to build assets
sufficient to generate enough interest income to cover operating
expenses. However, in addition to the customary challenges of
building profitability for a
start-up
bank, Service1st has experienced deterioration in the
quality of its loan portfolio, largely as a result of the
challenging economic conditions in the Nevada market during the
last two years. As a result, Service1st experienced losses
of $4.2 million in 2007, $5.1 million in 2008,
$17.4 million in 2009 and $8.7 million through
October 28, 2010.
We have incurred certain transitional expenses that are
relatively large in proportion to the scale of our operations.
In addition, we have no earnings history and there is no
guarantee that we will ever be profitable or be able to
successfully implement an effective business model. In order for
Service1st to become profitable, we believe that we will
need to attract a larger amount of deposits and a larger
portfolio of loans than Service1st currently has. We must
avoid further deterioration in Service1sts loan portfolio
and increase the amount of its performing loans so that the
combination of Service1sts net interest income and
non-interest income, after deduction of its provision for loan
losses, exceeds Service1sts non-interest expense. The
source of the majority of Service1sts loan losses can be
traced primarily to real estate loans that were reliant on
continuation of a growing and prosperous economic environment.
Beginning in early to mid-2008, increased emphasis on
underwriting standards and risk selection was introduced, which
effectively discontinued the making of construction, land
development, other land loans and any other loans in which the
primary source of repayment was subject to greater risk than our
current standards would require (such as repayment from proceeds
from sales, rentals, leases or refinancing, including permanent
take out financing) or based upon projections, unless such loans
were accompanied by additional financial support from the
borrowers or guarantors. Service1sts future profitability
may also be dependent on numerous other factors, including the
success of the Nevada economy and favorable government
regulation. The Nevada economy has experienced a significant
decline in recent years due to the current economic climate.
This economy, in which substantially all of Service1sts
loans have been made, continues to exhibit weakness, and there
can be no assurance that further material losses will not be
experienced in the portfolio. Continued deterioration of the
national
and/or local
economies, adverse government regulation or our inability to
grow our business could affect our ability to become profitable.
If this happens, there continues to be a risk that we will not
operate on a profitable basis in the near or long term, and
Service1st may never become profitable.
Further
deterioration in the quality of our loan portfolio may result in
additional charge-offs which will adversely affect our operating
results.
During the last two years, Service1st suffered from a
deterioration in the quality of its loan portfolio. The
depressed economic conditions in Nevada which contributed
significantly to this deterioration are expected to continue
throughout 2011. As of December 31, 2010, performing loans
that are classified as potential problem loans constituted
approximately 11.7% of total loans. See the section entitled
Managements Discussion & Analysis of
Service1st
Bank of Nevada Financial Condition.
A significant source of risk arises from the possibility that
the Company could sustain losses because borrowers, guarantors,
and related parties may fail to perform in accordance with the
terms of their loans. This
33
risk is normally addressed by means of an allowance for loan
losses in the amount of managements estimate of losses
inherent in Service1sts loan portfolio. As explained in
Note 1. Nature of Business and Summary of Significant
Accounting Policies to the Consolidated Financial
Statements, the Company was required under generally accepted
accounting principles to estimate the fair value of its loan
portfolio after the close of business on October 28, 2010
(the Transaction Date) and write the loan portfolio
down to that fair value estimate. For most loans, this meant
computing the net present value of estimated cash flows to be
received from borrowers. The allowance for loan and lease losses
that had been maintained as an estimate of losses inherent in
the loan portfolio was eliminated in this accounting. A new
allowance for loan and lease losses will be established for
loans made subsequent to the Transaction Date and for any
subsequent lowering of the estimate of cash flows to be received
from the loans held by Service1st that had shown evidence
of credit deterioration since origination.
The estimate of fair value as of the Transaction Date was based
on economic conditions at the time and on managements
projections regarding both future economic conditions and the
ability of Service1sts borrowers to continue to repay
their loans. However, the estimate of fair value may prove to be
overly optimistic and Service1st may suffer losses in
excess of those estimated as of that date. The allowance for
loan and lease losses established for new loans or for revised
estimates may prove to be inadequate to cover actual losses,
especially if economic conditions worsen.
While management believes that both the estimate of fair value
and the allowance for loan and lease losses are adequate to
cover current losses, no underwriting and credit monitoring
policies and procedures that Service1st could adopt to address
credit risk could provide complete assurance that there will not
be unexpected losses. These losses could have a material adverse
effect on the Companys business, financial condition,
results of operations and cash flows. In addition, the FDIC
periodically evaluates the adequacy of Service1sts
allowance for loan losses and may require Service1st to
increase its provision for loan losses or recognize further loan
charge-offs based on judgments different from those of
management.
A
substantial portion of our loan portfolio consists of loans
maturing within one year, and there is no guarantee that these
loans will be replaced upon maturity or renewed on the same
terms or at all.
As of December 31, 2010, approximately 31.00% of
Service1sts loan portfolio consists of loans maturing
within one year. As a result, we will either need to renew or
replace these loans during the course of the year. There is no
guarantee that these loans will be originated or renewed by
borrowers on the same terms or at all, as demand for such loans
may decrease. Furthermore, there is no guarantee that borrowers
will qualify for new loans or that existing loans will be
renewed by us on the same terms or at all, as collateral values
may be insufficient or the borrowers cash flow maybe
materially less than when the loan originated. This could result
in a significant decline in the performance of our loan
portfolio.
We
rely upon independent appraisals to determine the value of the
real estate which secures a significant portion of
Service1sts loans, and the values indicated by such
appraisals may not be realizable if we are forced to foreclose
upon such loans.
A significant portion of Service1sts loan portfolio
consists of loans secured by real estate. As of
December 31, 2010, approximately 66.04% of
Service1sts loans were secured by real estate. We rely
upon independent appraisers to estimate the value of the real
estate which secures Service1sts loans. Appraisals may
reflect the estimated value of the collateral on an
as-is basis, an as-stabilized basis or
an as-if-developed basis, depending upon the loan
type and collateral. Raw land generally is appraised at its
as-is value. Income producing property may be
appraised at its as-stabilized value, which takes
into account the anticipated cash flow of the property based
upon expected occupancy rates and other factors. The collateral
securing construction loans may be appraised at its
as-if-developed value, which approximates the
post-construction value of the collateralized property assuming
that such property is developed. As-if-developed
values on construction loans often exceed the immediate sales
value and may include anticipated zoning changes, and successful
development by the purchaser.
34
Appraisals are only estimates of value and the independent
appraisers may make mistakes of fact or judgment which adversely
affect the reliability of their appraisal. In addition, events
occurring after the initial appraisal may cause the value of the
real estate to decrease. With respect to appraisals conducted on
an as-if-developed basis, if a loan goes into
default prior to development of a project, the market value of
the property may be substantially less than the
as-if-developed appraised value. As a result of any
of these factors, there may be less security than anticipated at
the time the loan was originally made. If there is less security
and a default occurs, we may not recover the outstanding balance
of the loan.
We
currently are not permitted to expand by
acquisition
During the application process for the acquisition of
Service1st by WLBC, we made a number of commitments to the
FDIC. We assured the FDIC in writing during the application
process that we will not seek to expand by acquisition until
Service1st is restored to a satisfactory condition, which at a
minimum means that the September 1, 2010 Consent Order
between the FDIC and the bank must first be terminated. Until
that occurs, any growth on Service1sts part must be the
result of organic growth in the banks existing business.
Prior to the acquisition of Service1st, Western Liberty had
announced an intended business strategy of using
Service1st as the platform to grow through acquisition of
failed banks. By committing to the FDIC that Western Liberty
would only acquire Service1st with the immediate and near-term
plans to restore Service1st to a safe and sound, and
profitable, institution, growth through acquisition of failed
banks was excluded from the application terms that the FDIC
approved. Although these growth restrictions limit our
opportunities currently, such restrictions typically would not
survive a future acquisition, assuming the acquirer is a
well-established banking organization considered by Federal and
state bank regulatory agencies to be well capitalized and well
managed.
Bank
regulatory restrictions with the FDIC and the Nevada Financial
Institutions Division are likely to limit growth and new product
development that were not in the business plan approved by bank
regulators at the time Western Liberty Bancorp was approved to
acquire Service1st Bank of Nevada.
As a condition to securing bank regulatory approval from the
FDIC and the Nevada Financial Institutions Division to acquire
Service1st Bank, we also agreed to seek advance approval
both from the FDIC and the Nevada Financial Institutions
Division for any major deviation from the Service1st Bank three
year business plan that we submitted during the acquisition
application process.
The Service1st Bank three year business plan approved by
the FDIC and the Nevada Financial Institutions Division provides
for modest loan growth funded by core deposits and Federal Home
Loan Bank borrowing. Any growth in Service1st that occurs
is expected to be the result of organic growth within the
banks existing market and its existing business profile,
without reliance on strategies such as acquisitions, branch
additions, brokered deposits, above-market-rate deposit pricing,
or significant expansion of the banks market or the
banks product and service offerings. Service1st is
and will remain primarily a business bank, with a target market
of professionals and small and medium-sized businesses in
southern Nevada principally and potentially elsewhere as well.
Service1st has and will continue to have a significant
concentration in commercial real estate lending, with
significant construction and land development lending and
commercial and industrial lending as well and, to a much lesser
degree, consumer lending. To manage the risks of commercial real
estate lending, we anticipate that an increasing percentage of
Service1st commercial real estate lending concentration
will come to be represented by owner-occupied properties and
less so by non-owner-occupied commercial real estate investment
properties. Until the FDICs September 1, 2010 Consent
Order is terminated, we believe the FDIC and the Nevada
Financial Institutions Division are unlikely to agree to a major
deviation or material change in our approved business plan
unless the major deviation would reduce the risk profile o f the
bank. As a result, we may not be able to implement new business
initiatives, and our ability to grow may be inhibited.
In addition to the application approval condition that we would
not make any material change in the approved three year business
plan, Service1st Bank is subject to special supervisory
conditions applicable to newly chartered (so called, de
novo) banks for a probationary period of seven years.
During such probationary period, we are required to operate
within the parameters of a business plan submitted to the FDIC
(an amended version of which was most recently submitted during
application processing for the acquisition
35
of Service1st), and to provide the FDIC 60 days
advance notice of any proposed material change or material
deviation from the business plan, before making any such change
or deviation. During the seven-year de novo period, we
will remain on a
12-month
risk management examination cycle. Consequently, we will be
under a high degree of regulatory scrutiny, at least through
January, 2014, and proposed new business initiatives not
included in the business plan submitted to the FDIC will require
prior FDIC approval.
As a commitment made to the FDIC during acquisition application
processing, we also agreed to maintain the Tier 1 leverage
capital ratio of Service1st at 10% or greater until
October 28, 2013 or, if later, when the September 1,
2010 Consent Order agreed to by Service1st with the FDIC
and the Nevada Financial Institutions Division terminates. We
also agreed that for that same time period we will make no
change in the directors or executive management of
Service1st unless we first receive the FDICs
non-objection to the proposed change.
Service1st
is subject to regulatory restrictions, including a Consent
Order, that restricts its operations, affect its ability to
obtain regulatory approval for future initiatives requiring such
approval and to hire and retain qualified senior
management.
In May of 2009, Service1st entered into a Memorandum of
Understanding (MOU) with the FDIC and the
Nevada FID. Pursuant to the MOU, Service1st agreed, among
other initiatives, to develop and submit a comprehensive
strategic plan covering at least a three-year operating period;
to reduce the level of adversely classified assets and review
loan grading criteria and procedures to ensure accurate risk
ratings; to develop a plan to strengthen credit administration
of construction and land loans (including the reduction of
concentration limits in land, construction and development loans
and the improvement of stress testing of commercial real estate
loan concentrations); to review its methodology for determining
the adequacy of the allowance for loan and lease losses; and to
correct apparent violations listed in its most recent report of
examination.
In addition, since mid-2009, Service1st has been required
(i) to provide the FDIC with at least 30 days
prior notice before appointing any new director or senior
executive officer or changing the responsibilities of any senior
executive officer; and (ii) to obtain FDIC approval before
making (or agreeing to make) any severance payments (except
pursuant to a qualified pension or retirement plan and certain
other employee benefit plans). The FDIC is likely to use the
prior notice requirement in practice as a means of objecting to
the appointment of new directors or senior executives (or
changes in the responsibilities of senior executives) it deems
not qualified for the positions sought (or to changes in the
responsibilities of senior executives it deems not qualified for
the new responsibilities proposed). These regulatory
requirements could make it more difficult for us to retain and
hire qualified senior management. These regulatory restrictions
will remain in effect until modified or terminated by the
regulators.
On September 1, 2010, Service1st, without admitting or
denying any possible charges relating to the conduct of its
banking operations, agreed with the FDIC and the Nevada FID to
the issuance of a Consent Order. The Consent Order supersedes
the MOU. Under the Consent Order, Service1st has agreed,
among other things, to: (i) assess the qualification of,
and have retained qualified, senior management commensurate with
the size and risk profile of Service1st; (ii) maintain a
Tier I leverage ratio at or above 8.5% (as of
December 31, 2010, Service1sts Tier I leverage
ratio was at 18.1%) and a total risk-based capital ratio at or
above 12% (as of December 31, 2010, Service1sts total
risk-based capital ratio was at 31.0%); (iii) continue to
maintain an adequate allowance for loan and lease losses;
(iv) not pay any dividends without prior bank regulatory
approval; (v) formulate and implement a plan to reduce
Service1sts risk exposure to adversely classified assets;
(vi) not extend additional credit to any borrower whose
loan has been charged-off or classified loss;
(vii) not extend any additional credit to any borrower
whose loan has been classified as substandard or
doubtful without prior approval from
Service1sts board of directors or loan committee;
(viii) formulate and implement a plan to reduce risk
exposure to its concentration in commercial real estate loans in
conformance with Appendix A of Part 365 of the
FDICs Rules and Regulations; (ix) formulate and
implement a plan to address profitability; and (x) not
accept brokered deposits (which includes deposits paying
interest rates significantly higher than prevailing rates in
Service1sts market area) and reduce its reliance on
existing brokered deposits, if any.
36
Our
stock price could fluctuate and could cause you to lose a
significant part of your investment.
The market price of our securities may be influenced by many
factors, some of which are beyond our control, including those
described above and the following:
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changes in our perceived ability to increase our assets and
deposits;
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changes in financial estimates by analysts;
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announcements by us or our competitors of significant contracts,
productions, acquisitions or capital commitments;
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fluctuations in our quarterly financial results or the quarterly
financial results of companies perceived to be similar to us;
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general economic conditions;
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changes in market valuations of similar companies;
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terrorist acts;
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changes in our capital structure, such as future issuances of
securities or the incurrence of additional debt;
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future sales of our Common Stock;
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regulatory developments in the United States, foreign countries
or both;
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litigation involving us, our subsidiaries or our general
industry; and
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additions or departures of key personnel.
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The
trading volume of the Companys common stock is
limited.
The Companys common stock trades on Nasdaq under the
symbol WLBC and trading volume is modest. The
limited trading market for the common stock may lead to
exaggerated fluctuations in market prices and possible market
inefficiencies, as compared to a more actively traded stock. It
may also make it more difficult to dispose of the common stock
at expected prices, especially for holders seeking to dispose of
a large number of such stock.
If we
are unable to effectively maintain a system of internal control
over financial reporting, we may not be able to accurately or
timely report financial results, which could materially
adversely affect our business.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that
a public company evaluate the effectiveness of its internal
control over financial reporting as of the end of each fiscal
year, and to include a management report assessing the
effectiveness of its internal control over financial reporting
in its annual report on
Form 10-K
for that fiscal year. Our ability to comply with the annual
internal control report requirements of Section 404 depends
on the effectiveness of our financial reporting and data systems
and controls across our operations. We expect the implementation
of these systems and controls to involve significant
expenditures, and our systems and controls will become
increasingly complex. To effectively implement these systems and
manage this complexity, we will likely need to continue to
improve our operational, financial and management controls and
our reporting systems and procedures.
Our
allowance for loan losses may not be adequate to cover actual
loan losses, which may require us to take a charge to our
earnings and adversely impact our financial condition and
results of operations.
We maintain an allowance for estimated loan losses that we
believe is adequate for absorbing the inherent losses in
Service1sts loan portfolio. As of December 31, 2010,
our allowance for loan and lease losses was $36,000. This
allowance relates to new loan originations of $995,000 since
acquisition date as there has been
37
no additional credit deterioration in the portfolio acquired
that has not been reflected in the fair value estimate as of the
date of acquisition.
Pursuant to the acquisition method of accounting for business
combinations, the allowance for loan losses from acquired
entities does not transfer to the acquiring entity. In addition,
the acquiring bank should establish loan loss allowances for the
acquired
held-for-investment
loans in periods after the acquisition, but only for losses
incurred on these loans due to credit deterioration after
acquisition. Therefore, management will determine the provision
for loan losses based upon an analysis of general market
conditions, credit quality of the loan portfolios, and
performance of customers relative to their financial
obligations. The amount of future losses is susceptible to
changes in economic, operating, and other conditions, including
changes in interest rates that may be beyond our control and
such losses may exceed the allowance for estimated loan losses.
Although we expect that the allowance for estimated loan losses
will be adequate to absorb any inherent losses on existing loans
that may become uncollectible, there can be no assurance that
the allowance will prove sufficient to cover actual loan losses
in the future. Significant increases to the provision for loan
losses may be necessary if material adverse changes in general
economic conditions occur or the performance of the loan
portfolio deteriorates. Additionally, banking regulators, as an
integral part of their supervisory function, periodically review
the allowance for estimated loan losses. If these regulatory
agencies require us to increase the allowance for estimated loan
losses, it could have a negative effect on our results of
operations and financial condition.
If we
are unable to recruit and retain experienced management
personnel and recruit and retain additional qualified personnel,
our business and prospects could be adversely
affected.
Our success depends in significant part on our ability to retain
senior executives and other key personnel in technical,
marketing and staff positions. There can be no assurance that we
will be able to successfully attract and retain highly qualified
key personnel, either in existing markets and market segments or
in new areas that we may enter. If we are unable to recruit and
retain an experienced management team or recruit and retain
additional qualified personnel, our business, and consequently
our sales and results of operations, may be materially adversely
affected.
We have approximately 40 full-time equivalent, non-union
employees. We seek to employ adequate staffing commensurate with
levels of banking activities and customer service requirements
for a community bank.
Our success depends in part on our ability to retain key
customers, and to hire and retain management and employees and
successfully manage the broader organization. Competition for
qualified individuals may be intense and key individuals may
depart because of issues relating to the uncertainty and
difficulty of integration or a general desire not to remain with
us. Furthermore, we will face challenges inherent in efficiently
managing an increased number of employees. Accordingly, no
assurance can be given that we will be able to attract and
retain key customers, management or employees, which could
result in disruption to our business and negatively impact our
operations and financial condition.
We are
exposed to risk of environmental liabilities with respect to
properties to which we take title.
In the course of our business we may foreclose and take title to
real estate, potentially becoming subject to environmental
liabilities associated with the properties. We may be held
liable to a governmental entity or to third parties for property
damage, personal injury, investigation and
clean-up
costs or we may be required to investigate or clean up hazardous
or toxic substances or chemical releases at a property. Costs
associated with investigation or remediation activities can be
substantial. If we are the owner or former owner of a
contaminated site, we may be subject to common law claims by
third parties based on damages and costs resulting from
environmental contamination emanating from the property. These
costs and claims could adversely affect our business and
prospects.
38
Compliance
with governmental regulations and changes in laws and
regulations and risks from investigations and legal proceedings
could be costly and could adversely affect operating
results.
Our operations could be impacted by changes in the legal and
business environments in which we operate, as well as the
outcome of ongoing government and internal investigations and
legal proceedings. Also, as a result of new laws and regulations
or other factors, we could be required to curtail or cease
certain operations. Changes that could impact the legal
environment include new legislation, new regulation, new
policies, investigations and legal proceedings and new
interpretations of the existing legal rules and regulations.
Changes that impact the business environment include changes in
accounting standards, changes in environmental laws, changes in
tax laws or tax rates, the resolution of audits by various tax
authorities, and the ability to fully utilize any tax loss carry
forwards and tax credits. These changes could have a significant
financial impact on our future operations and the way we
conduct, or if we conduct, business in the affected countries.
The
value of the Federal Home Loan Bank stock that we own could be
adversely affected by weakness in the FHLB system.
Service1st is a member of the FHLB of San Francisco,
which is one of the twelve regional banks comprising the FHLB
System. The FHLB provides credit for member financial
institutions. The 12 FHLBs obtain their funding primarily
through issuance of consolidated obligations of the FHLB System.
The U.S. government does not guarantee these obligations,
and each of the 12 FHLBs is jointly and severally liable for
repayment of the debt of the other FHLBs. Therefore, our
investment in the equity stock of the FHLB of San Francisco
could be adversely affected by the operations of the other
FHLBs. Certain FHLBs, including the FHLB of San Francisco,
have experienced lower earnings from time to time and have paid
out lower dividends to their members. If an FHLBs capital
drops below 4% of its assets, restrictions on the redemption or
repurchase of member banks FHLB stock are imposed by law.
If FHLBs are restricted from redeeming or repurchasing member
banks FHLB stock due to adverse financial conditions
affecting either individual FHLBs or the FHLB system as a whole,
member banks may be required to recognize an impairment charge
on their FHLB equity stock investments. Future problems at the
FHLBs could have an impact on the collateral necessary to secure
borrowings and limit the borrowings extended to member banks, as
well as require additional capital contributions by member
banks. If this occurs, our short-term liquidity needs could be
adversely affected. If we are restricted from using FHLB
advances due to weakness in the FHLB System or weakness at the
FHLB of San Francisco, we may be forced to find alternative
funding sources. These alternative funding sources may include
seeking lines of credit with third party banks or the Federal
Reserve Bank of San Francisco, borrowing under repurchase
agreement lines, increasing deposit rates to attract additional
funds, accessing brokered deposits, or selling certain
investment securities categorized as
available-for-sale
in order to maintain adequate levels of liquidity.
Our
legal lending limit could be a competitive
disadvantage.
Service1sts legal lending limit is approximately
$8.9 million as of December 31, 2010. Accordingly, the
size of the loans which we can offer to potential clients is
less than the size of loans our competitors with larger lending
limits can offer. Our legal lending limit affects our ability to
seek relationships with the areas larger and more
established businesses. Through our previous experience and
relationships with a number of the regions other financial
institutions, we are generally able to accommodate loan amounts
greater than our legal lending limit by selling participations
in those loans to other banks, although we tend to retain a
significant portion of the loans we originate. However, we
cannot assure you of any success in attracting or retaining
clients seeking larger loans or (taking into account the
economic downturn and its effects on other financial
institutions) that we can engage in participation transactions
for those loans on terms favorable to us.
|
|
Item 1B
|
Unresolved
Staff Comments
|
Not applicable.
39
We operate from three leased locations. We maintain our
principal executive offices at 8363 West Sunset Road,
Suite 350, in Las Vegas, Nevada 89113. We also have two
banking offices, one located at 8349 West Sunset Road
Suite B, Las Vegas, Nevada 89113, and the other at 8965
South Eastern Avenue Suite 190, Las Vegas Nevada 89123.
|
|
Item 3
|
Legal
Proceedings
|
From time to time Service1st Bank is involved in legal
proceedings that are incidental to its business. In the opinion
of management, no current legal proceedings are material to the
business or financial condition of Western Liberty Bancorp or
Service1st Bank, either individually or in the aggregate.
PART II
|
|
Item 5
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market information The Common
Stock is listed on the Nasdaq Global Market
(Nasdaq), trading under the symbol WLBC.
Our outstanding securities listed on Nasdaq consist solely of
shares of common stock. The following table sets forth for each
quarter in the years ended December 31, 2010 and 2009 the
high and low sales price of our units, Common Stock and warrants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
Common stock
|
|
Warrants
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
9.55
|
|
|
$
|
9.15
|
|
|
$
|
9.48
|
|
|
$
|
9.14
|
|
|
$
|
0.17
|
|
|
$
|
0.08
|
|
Second quarter
|
|
|
9.76
|
|
|
|
9.48
|
|
|
|
9.69
|
|
|
|
9.44
|
|
|
|
0.23
|
|
|
|
0.09
|
|
Third quarter
|
|
|
10.70
|
|
|
|
9.90
|
|
|
|
9.89
|
|
|
|
9.65
|
|
|
|
1.20
|
|
|
|
0.20
|
|
Fourth quarter
|
|
|
10.30
|
|
|
|
7.75
|
|
|
|
9.83
|
|
|
|
6.42
|
|
|
|
1.20
|
|
|
|
0.55
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
8.60
|
|
|
|
7.95
|
|
|
|
8.04
|
|
|
|
6.18
|
|
|
|
0.80
|
|
|
|
0.35
|
|
Second quarter
|
|
|
7.50
|
|
|
|
7.00
|
|
|
|
9.00
|
|
|
|
5.75
|
|
|
|
0.45
|
|
|
|
0.22
|
|
Third quarter
|
|
|
7.50
|
|
|
|
7.50
|
|
|
|
7.80
|
|
|
|
4.80
|
|
|
|
0.30
|
|
|
|
0.18
|
|
Fourth quarter
|
|
|
7.50
|
|
|
|
7.50
|
|
|
|
7.80
|
|
|
|
4.80
|
|
|
|
0.30
|
|
|
|
0.18
|
|
Trading under the symbol WLBC, our Common Stock has
been listed on the Nasdaq since October 29, 2010, trading
immediately prior to that on the
Over-the-Counter
(OTC) Bulletin Board, an electronic stock listing service
provided by the Nasdaq Stock Market, Inc. Our Common Stock was
listed on the New York Stock Exchange AMEX until approximately
February 25, 2010. The figures in the table above are the
high and low prices as reported on Nasdaq, the OTC
Bulletin Board, or the New York Stock Exchange Amex during
the applicable time periods. As a result of Acquisition, our
only publicly traded security is our Common Stock.
Holders
of Common Equity
On March 29, 2011, there were approximately
197 holders of record of our public common stock. Such
numbers do not include beneficial owners holding shares, or
holders of our private shares. On March 29, 2011, there
were approximately 71 holders of record private shares.
Dividends
We have never paid cash dividends on our Common Stock and we do
not intend to pay cash dividends for the foreseeable future. The
payment of dividends will depend on our revenues and earnings,
if any, capital
40
requirements, and general financial condition. The payment of
dividends will be within the discretion of our board of
directors. The board currently intends to retain any earnings
for use in our business operations. Service1st Banks
ability to pay dividends to us is subject to bank regulatory
restrictions. In addition, by the terms of the September 1,
2010 Consent Order, Service1st Bank cannot pay cash
dividends unless it first obtains the written consent of the
FDIC and the Commissioner of the Nevada FID.
Recent
sales of unregistered securities
On July 16, 2007, we issued 8,575,000 shares of Common
Stock in private placement transactions for the purchase price
of $0.001 per share. On August 1, 2007, we issued
25,000 shares in private placement transactions for the
purchase price of $0.001 per share. On September 28, 2007,
we issued 25,000 shares in private placement transactions
for the purchase price of $0.001 per share. In total, prior to
our initial public offering, we issued 8,625,000 shares in
private placement transactions for an aggregate amount of $8,625
in cash. Of those shares, 637,786 were redeemed because the
underwriters did not fully exercise their over-allotment option,
resulting in a total of 7,987,214 shares issued in private
placements and remaining outstanding after the redemption.
On August 1, 2007, our former Chief Executive Officer
agreed to purchase 1,000,000 warrants to acquire our common
stock, completing the purchase of the warrants immediately prior
to the consummation of our initial public offering on
November 27, 2007. On October 19, 2007, Hayground Cove
Asset Management LLC, our former sponsor (Hayground
Cove), agreed to purchase 7,500,000 warrants to acquire
our Common Stock, completing the purchase of the warrants
immediately prior to the consummation of our initial public
offering on November 27, 2007. On July 20, 2009, we
entered into a Private Shares Restructuring Agreement with
Hayground Cove. Under the terms of the Private
Shares Restructuring Agreement, 7,618,908 of the
7,987,214 shares issued in private placements (and
remaining outstanding after the redemption of
637,786 shares), constituting more than 95% of those
shares, were cancelled and exchanged for warrants to acquire our
Common Stock. After the cancellation and exchange provided by
the terms of the Private Shares Restructuring Agreement,
there were outstanding a total of 16,118,908 warrants to acquire
Common Stock and 368,306 shares issued in private
placements.
On September 27, 2010, we entered into an Amended Warrant
Agreement with our warrant agent, Continental Stock
Transfer & Trust Company. By the terms of the
Amended Warrant Agreement, all outstanding warrants were
exercised for one thirty-second (1/32) of one share of our
common stock concurrently with completion of the Acquisition. As
a result, we issued 1,502,088 shares of Common Stock and
paid each warrant holder $0.06 for each warrant exercised. The
Common Stock issuable upon exercise of the warrants was
previously registered under the Exchange Act during WLBCs
initial public offering, and such shares were freely tradable
immediately upon issuance.
Concurrently with completion of the Acquisition, we issued
restricted stock to William E. Martin, who became a member of
our board of directors and serves as our Chief Executive Officer
and as Chief Executive Officer of Service1st, and George A.
Rosenbaum, Jr., our Chief Financial Officer and the
Executive Vice President of Service1st. Mr. Martin received
155,279 shares of restricted stock, equal to
$1.0 million divided by the $6.44 closing price of the
common stock on October 28, 2010, in consideration for his
future services in accordance with the terms of his employment
agreement. Mr. Rosenbaum received 38,819 shares of
restricted stock, equal to $250,000 divided by the $6.44 closing
price of the common stock on October 28, 2010, in
consideration for his future services in accordance with the
terms of his employment agreement. The shares of restricted
stock granted to each of Messrs. Martin and Rosenbaum will
vest 20% on each of the first, second, third, fourth, and fifth
anniversaries of the October 28, 2010 acquisition
completion date, subject to Messrs. Martins and
Rosenbaums respective and continuous employment through
each vesting date. Fifty percent of the shares of restricted
stock that vest in accordance with the prior sentence will
remain restricted stock that will vest upon a termination of the
holders employment for any other reason than (x) by
us for cause, or (y) by the holder without good reason
before October 28, 2015. The restricted stock is subject to
restrictions on transfer for one year after each vesting date.
In consideration of their substantial service to and support of
Western Liberty Bancorp during the period in which we sought the
requisite regulatory approval to become a bank holding company
and to acquire Service1st Bank, on October 28, 2010 each of
Jason N. Ader, our former Chairman and Chief Executive
41
Officer and a current member of our board of directors, Daniel
B. Silvers, our former President, Andrew P. Nelson, our former
Chief Financial Officer and a former member of our board,
Michael Tew, an outside consultant, and
Laura Conover-Ferchak, an outside consultant, entered into
Letter Agreements providing for a grant of restricted stock
units, as follows: Mr. Ader, 50,000 restricted stock units;
Mr. Silvers, 100,000 restricted stock units;
Mr. Nelson, 25,000 restricted stock units; Mr. Tew,
20,000 restricted stock units; and Mrs. Conover-Ferchak,
5,000 restricted stock units. Each restricted stock unit is
immediately and fully vested and will be settled for one share
of our common stock on the earlier to occur of (x) a
change of control and (y) October 28, 2013. Finally,
in consideration of their substantial service to and support
during the period in which we sought regulatory approval to
become a bank holding company and to acquire Service1st Bank, on
October 28, 2010 we made a one-time grant of
50,000 shares of Common Stock to each of Michael Frankel,
the current Chairman of the board, Richard A.C. Coles, a current
member of our board of directors, and Mark Schulhof, a former
member of the board of directors.
The foregoing sales of securities were deemed to be exempt from
the registration under the Securities Act of 1933 in reliance on
section 3(a)(9) or section 4(2) of the Securities Act,
as applicable. In addition, the future issuance of Common Stock
underlying the restricted stock units will be similarly exempt.
The purchasers of the securities issued in private placements
represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were
affixed to the instruments representing the securities issued in
the transactions.
Issuer
purchases of equity securities in the fourth
quarter
There were no repurchases of any of our securities in the fourth
quarter of 2010.
|
|
Item 6
|
Selected
Financial Data
|
SELECTED
HISTORICAL FINANCIAL INFORMATION WESTERN LIBERTY
BANCORP (WLBC)
WLBCs balance sheet data for the years ended
December 31, 2010, 2009 and 2008 and related statements of
operations, changes in shareholders equity and cash flows
for the years ended December 31, 2010, 2009 and 2008, are
derived from WLBCs audited financial statements, which are
included elsewhere in this
Form 10-K.
Information for December 31, 2010 includes the two months
of operations of Service1st and the related balances.
This information should be read together with WLBCs
audited financial statements and related notes,
Managements Discussion and Analysis of Financial
Condition and Results of Operations WLBC
and other financial information included elsewhere in this
Form 10-K.
The historical results included below and elsewhere in this
Form 10-K
are not indicative of the future performance of WLBC.
Selected
Financial Data of WLBC
Set forth below are selected financial data of WLBC for the
years ended December 31, 2010, 2009 and 2008. You should
read this information in conjunction with WLBCs audited
financial statements and notes to the financial statements
included elsewhere in this
Form 10-K.
42
WESTERN
LIBERTY BANCORP
SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010(3)
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands except per share data)
|
|
|
Selected Results of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
1,530
|
|
|
$
|
139
|
|
|
$
|
5,691
|
|
Interest expense
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
1,415
|
|
|
|
139
|
|
|
|
5,691
|
|
Provision for loan losses
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income after provision for loan losses
|
|
|
1,379
|
|
|
|
139
|
|
|
|
5,691
|
|
Non-interest income
|
|
|
108
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
9,137
|
|
|
|
15,037
|
|
|
|
7,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(7,650
|
)
|
|
$
|
(14,898
|
)
|
|
$
|
(1,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
$
|
(0.65
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.05
|
)
|
Book Value(5)
|
|
$
|
6.22
|
|
|
$
|
8.02
|
|
|
$
|
5.34
|
|
Selected Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
257,546
|
|
|
$
|
88,520
|
|
|
$
|
318,395
|
|
Cash and cash equivalents
|
|
|
103,227
|
|
|
|
87,969
|
|
|
|
1,446
|
|
Certificates of deposit(4)
|
|
|
26,889
|
|
|
|
|
|
|
|
|
|
Securities, available for sale
|
|
|
1,819
|
|
|
|
|
|
|
|
|
|
Securities, held to maturity
|
|
|
5,314
|
|
|
|
|
|
|
|
|
|
Gross loans, including net deferred loan fees
|
|
|
106,259
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
36
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
160,286
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
93,829
|
|
|
|
87,891
|
|
|
|
213,145
|
|
Value of common stock which may be redeemed for cash
|
|
|
|
|
|
|
|
|
|
|
94,984
|
|
Performance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin(1)
|
|
|
3.33
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Efficiency ratio(2)
|
|
|
599.93
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Return on average assets
|
|
|
(2.60
|
)%
|
|
|
N/A
|
|
|
|
N/A
|
|
Return on average equity
|
|
|
(5.89
|
)%
|
|
|
N/A
|
|
|
|
N/A
|
|
Asset Quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans(6)
|
|
$
|
10,426
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Allowance for loan losses as a percentage of nonperforming
loans(6)
|
|
|
0.35
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Allowance for loan losses as a percentage of portfolio loans
|
|
|
0.03
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Nonperforming loans as a percentage of total portfolio loans(6)
|
|
|
9.81
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Nonperforming loans as a percentage of total assets(6)
|
|
|
4.05
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Net charge-offs to average portfolio loans
|
|
|
0.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average equity to average assets
|
|
|
44.11
|
%
|
|
|
68.73
|
%
|
|
|
67.11
|
%
|
Tier 1 equity to average assets
|
|
|
30.5
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 Risk-Based Capital ratio
|
|
|
68.4
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Total Risk-Based Capital ratio
|
|
|
68.8
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
(1) |
|
Net interest margin represents net interest income as a
percentage of average interest-earning assets. |
|
(2) |
|
Efficiency ratio represents non-interest expenses as a
percentage of the total of net interest income plus non-interest
income. |
43
|
|
|
(3) |
|
Service1st was acquired in 100% stock exchange on
October 28, 2010. Thus, the 2010 data represents a full
year for WLBC and a partial year (two months) for Service1st. |
|
(4) |
|
Certificates of deposit issued by other banks with original
maturities greater than three months. |
|
(5) |
|
Book value is calculated by dividing total stockholders
equity at December 31 by the number of shares outstanding as of
December 31. |
|
(6) |
|
Nonperforming loans includes PCI loans for which no contractual
interest is being recorded. |
Item 7
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS WESTERN LIBERTY
BANCORP
The following discussion and analysis should be read in
conjunction with WLBCs audited financial statements and
notes to the financial statements included elsewhere in this
Form 10-K.
This discussion and analysis contains forward-looking statements
that involve risk, uncertainties and assumptions. Certain risks,
uncertainties and other factors, including but not limited to
those set forth under Cautionary Note Regarding
Forward-Looking Statements may cause actual results to
differ materially from those projected in the forward-looking
statements.
Overview
Business of WLBC: WLBC became a bank holding
company on October 28, 2010 with consummation of the
Acquisition. Although our goal in 2007, when it was established
as a special purpose acquisition company, was to identify for
acquisition domestic and international operating companies
engaged in the consumer products and services business, by the
spring of 2009, we determined that the banking industry had
become an attractive investment opportunity, particularly the
community banking industry in Nevada. In October of 2009, we
changed our name to Western Liberty Bancorp and eliminated the
special purpose acquisition company features of our governing
documents. In October 2009, we also began in earnest the process
that concluded on October 28, 2010 with the acquisition of
Service1st. Our sole subsidiary is Service1st. We currently
conduct no business activities other than acting as the holding
company of Service1st.
As bank holding company, operating from its headquarters and two
retail banking locations in the greater Las Vegas area, WLBC
provides a variety of loans to its customers, including
commercial real estate loans, construction and land development
loans, commercial and industrial loans, Small Business
Administration (SBA) loans, and to a lesser
extent consumer loans. As of December 31, 2010, loans
secured by real estate constituted 66.04% of WLBCs loan
portfolio. This ratio is calculated by adding together loans
secured by real estate at December 31, 2010 (construction,
land development and other land loans of $5.9 million,
commercial real estate loans of $55.0 million and
residential real estate loans of $9.2 million, which total
$70.1 million of loans secured by real estate) and dividing
this balance by Gross Loans of $106.3 million at
December 31, 2010. WLBC relies on locally-generated
deposits to provide WLBC with funds for making loans. The
majority of its business is generated in the Nevada market.
WLBC generates substantially all of its revenue from interest on
loans and investment securities and service fees and other
charges on customer accounts. This revenue is offset by interest
expense paid on deposits and other borrowings and non-interest
expense such as administrative and occupancy expenses. Net
interest income is the difference between interest income on
interest-earning assets, such as loans and securities, and
interest expense on interest-bearing liabilities, such as
customer deposits and other borrowings used to fund those
assets. Interest rate fluctuations, as well as changes in the
amount and type of earning assets and liabilities and the level
of nonperforming assets combine to affect net interest income.
WLBC receives fees from its deposit customers in the form of
service fees, checking fees and other fees. Other services such
as safe deposit and wire transfers provide additional fee
income. WLBC may also generate income from time to time from the
sale of investment securities. The fees collected by WLBC are
found under
44
Non-interest Income in the statements of operations
contained within WLBCs audited financial statements for
the year ended December 31, 2010 (which are included
elsewhere in this
Form 10-K).
Offsetting these earnings are operating expenses referred to as
Non-Interest Expense in the statements of
operations. Because banking is a very people intensive industry,
the largest operating expense is employee compensation and
related expenses.
Local Economic Conditions. According to the
National Bureau of Economic Research, the United States
economy entered into the longest and most severe recession in
the post-war year beginning in December of 2007. The recession
and continued economic downturn have been deeply felt in the
greater Las Vegas area. Beginning in 2008, job losses, declining
real property values, low consumer and business confidence
levels and increasing vacancy and foreclosure rates for
commercial and residential property dramatically affected the
Las Vegas economy. According to a monthly report produced by The
Center for Business & Economic Research at the
University of Nevada Las Vegas (the CBER
Report), the local unemployment rate in Las Vegas
rose from 5.6% as of December 31, 2007, to 9.1% as of
December 31, 2008, to 13.1% at December 31, 2009 and
to 14.9% at December 31, 2010. In addition, new home sales
decreased 53.4% from December 2007 to December 2008, falling a
further 25.7% from December 2008 to December 2009 and down 27.3%
from December 2009 to December 2010. During the same year,
median new home prices decreased 21.7% from December 2007 to
December 2008, decreased 11.2% from December 2008 to December
2009 and decreased 0.3% from December 2009 to December 2010.
Although new home sales decreased by 27.3% for the year ended
December 31, 2010 compared to the same year in 2009, median
new home prices continued to decrease by 0.3% for the year ended
December 31, 2010 compared to the same year in 2009. The
national recession also adversely affected tourism and Las
Vegas critical gaming industry. According to the CBER
Report, Las Vegas area gaming revenues decreased 18.4% from
December 2007 to December 2008, decreased 2.4% from December
2008 to December 2009, and decreased 4.7% for the year ended
December 31, 2010 compared to same year for 2009. Data
derived from The Applied Analysis, Las Vegas Market Reports
(2nd quarter 2010) shows that Las Vegas vacancy
rates for office, industrial and retail space rose from
December 31, 2007 to December 31, 2008 to
December 31, 2009 to December 31, 2010:
office from 13.6%, to 17.3%, to 23.0%, to 24.2%;
industrial from 6.6%, to 8.9%, to 13.7%, to 16.9%;
and retail from 4.0%, to 7.4%, to 10.0%, to 10.2%.
Summary
of Results of Operations and Financial Condition
Since formation at the beginning of 2007, Service1st has not
been profitable. To some extent, the lack of profitability is
attributable to the
start-up
nature of its business: time is required to build assets
sufficient to generate enough interest income to cover operating
expenses. However, in addition to the customary challenges of
building profitability for a
start-up
bank, Service1st has experienced deterioration in the quality of
its loan portfolio, largely as a result of the challenging
economic conditions in the Las Vegas market.
For the year ended December 31, 2010, WLBC recorded a net
loss of $7.7 million or $0.65 per common share, as compared
with a net loss of $14.9 million or $0.45 per common share
in 2009 and a loss of $1.6 million or $0.05 per common
share in 2008. The $7.2 million decrease in net loss for
the year ended December 31, 2010, when compared to the year
ended December 31, 2009, was the result of a
$5.9 million decrease in noninterest expense coupled with
the acquisition of Service1st which resulted in
$1.3 million in additional net interest income after
provision for loan loss. Professional fees totaled
$12.6 million for the year ended December 31, 2009
compared to $3.9 million for the year ended
December 31, 2010, a reduction of $8.7 million. In
2009, WLBC pursued more than one potential target for
acquisition, including Service1st, while in 2010, that focus
narrowed to the acquisition of Service1st and resulted in
reduced professional fees. WLBC successfully acquired Service1st
on October 28, 2010 and resulted in $258.2 million in
interest bearing assets which contributed the majority of the
$1.5 million in interest income and $93.4 million in
interest bearing liabilities that resulted in $115,000 in
interest expense for the last two months of 2010, resulting in
$1.4 million in net interest income before provision for
loan losses.
Critical
Accounting Policies and Estimates
WLBCs significant accounting policies are described in
Note 1 of its audited financial statements (which are
included elsewhere in this
Form 10-K),
including information regarding recently issued accounting
pronouncements, WLBCs adoption of such policies and the
related impact of their adoption. Certain of these
45
policies, along with various estimates that WLBC is required to
make in recording its financial transactions, are important to
have a complete understanding of WLBCs financial position.
In addition, these estimates require WLBC to make complex and
subjective judgments, many of which include matters with a high
degree of uncertainty. The following is a summary of these
critical accounting policies and significant estimates.
As previously discussed, the Acquisition was accounted for as a
business combination which resulted in application of fair value
accounting to the subsidiarys balance sheet. The total
discount to the loan portfolio was approximately
$15.1 million. The loan portfolio was segregated into
performing loans and non-performing loans or purchased loans
with credit impairment.
The performing loans totaled approximately $89.9 million
and were marked with a credit discount of $3.6 million and
approximately $49,000 of yield discount. In accordance with
current accounting pronouncements, the discounts on performing
loans are being recognized on a method that approximates a level
yield over the expected life of the loan.
The loans identified as purchased with credit impairments were
approximately $35.6 million as of the acquisition date. A
credit discount of approximately $10.9 million was recorded
and an additional $576,000 of yield discount was also recorded.
The yield discount will be accreted into income using the same
method described above for the performing loans. WLBC does not
expect to accrete the discount into income until such time as
the loan is removed from the bank. The only exception would be
on a
case-by-case
basis when a material event that significantly improves the
quality of the loan and reduces the risk to the bank such that
management believes it would be prudent to start recognizing
some of the discount is documented. The credit discount
represents approximately 30% of the transaction date value of
the credit impaired loans. Throughout this document,
presentations for non-performing loans, or potential problem
loans have generally been subjected to the credit discount
discussed above.
Allowance
for Loan Losses
As previously discussed, the ALLL was adjusted to zero in
conjunction with the fair value accounting process. Therefore,
the current ALLL at December 31, 2010 only relates to those
loans generated after the October 28, 2010 acquisition
date. No new credit deterioration was recorded during the last
two months of 2010.
The allowance for loan losses is an estimate of the credit risk
in WLBCs loan portfolio and appears on the balance sheet
as a contra asset which reduces gross loans. The
allowance is established (or once established, increased) by
recording provision expense. Loans charged off on WLBCs
books reduce the allowance. Subsequent recoveries of charged off
loans, if any, increase the allowance.
The allowance is an amount that WLBCs management believes
will be adequate to absorb probable incurred losses on existing
loans that may become uncollectible, based on evaluation of the
collectability of loans and prior credit loss experience. This
evaluation also takes into consideration such factors as changes
in the nature and volume of the loan portfolio, overall
portfolio quality, specific problem credits, peer bank
information, and current economic conditions that may affect the
borrowers ability to pay. Due to the credit concentration
of WLBCs loan portfolio in real estate-secured loans,
future adjustments to the allowance may be necessary if there
are significant changes in economic or other conditions. In
addition, the FDIC and state banking regulatory agencies, as an
integral part of their examination process, review WLBCs
allowance for loan losses, and may require WLBC to make
additions to the allowance based on their judgment about
information available to them at the time of their examinations.
The allowance consists of specific and general components. The
specific component relates to loans that are classified as
impaired. For such loans, an allowance is established when the
discounted cash flows (or collateral value or observable market
price) of the impaired loan is lower than the carrying value of
that loan. The general component covers non-impaired loans and
is based on historical loss experience adjusted for qualitative
and environmental factors.
A loan is impaired when it is probable WLBC will be unable to
collect all contractual principal and interest payments due in
accordance with the original terms of the loan agreement.
Impaired loans are measured based on the present value of
expected future cash flows discounted at the loans
effective interest
46
rate or, as a practical expedient, at the loans observable
market price or the fair value of the collateral if the loan is
collateral dependent. The amount of impairment, if any, and any
subsequent changes are included in the allowance for loan losses.
Investment
Securities Portfolio
Securities classified as available for sale are equity
securities and those debt securities WLBC intends to hold for an
indefinite year of time, but not necessarily to maturity. Any
decision to sell a security classified as available for sale
would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of
WLBCs assets and liabilities, liquidity needs, regulatory
capital considerations and other similar considerations.
Securities available for sale are reported at fair value with
unrealized gains or losses reported as other comprehensive
income (loss), net of related deferred tax effect. Realized
gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
Securities classified as held to maturity are those debt
securities WLBC has both the intent and ability to hold to
maturity regardless of changes in market conditions, liquidity
needs, or general economic conditions. These securities are
carried at amortized cost, adjusted for amortization of premium
and accretion of discount computed by the interest method over
the contractual lives. The sale of a security within three
months of its maturity date or after at least 85% of the
principal outstanding has been collected is considered a
maturity for purposes of classification and disclosure. Purchase
premiums and discounts are generally recognized in interest
income using the effective-yield method over the term of the
securities.
WLBCs management evaluates securities for
other-than-temporary
impairment (OTTI) at least on a quarterly basis, and
more frequently when economic or market conditions warrant such
evaluation. Consideration is given to (1) the length of
time and the extent to which the fair value has been less than
cost, (2) the financial condition and near term prospects
of the issuer, including an evaluation of credit ratings,
(3) the impact of changes in market interest rates,
(4) the intent of WLBC to sell a security and
(5) whether it is more likely than not WLBC will have to
sell the security before recovery of its cost basis.
Stock-Based
Compensation
WLBC awarded common stock, restricted stock, restricted stock
units and assumed the Service1st stock options outstanding
at October 28, 2010. This described more fully in
Note 12 to WLBCs audited financial statements for the
year ended December 31, 2010, which are included elsewhere
in this
Form 10-K.
WLBC records the fair value of stock compensation granted to
employees and directors as expense over the vesting year(s). The
cost of the award is based on the grant-date fair value. The
compensation expenses recognized was approximately
$1.8 million for the year ended December 31, 2010,
$869,000 in 2009 and $4.6 million in 2008.
Income
Taxes
Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible
temporary differences and tax credit carry-forwards and deferred
tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for
the effect of changes in tax laws and rates on the date of
enactment. As a result of the Acquisition which was finalized at
the close of business on October 28, 2010, WLBCs net
operating loss utilization will be subject to an annual
limitation on the net operating loss against future taxable
income. Internal Revenue Code section 382 places a
limitation on the amount of taxable income that can be offset by
net operating loss carry forwards after a change in control
(generally greater than 50% change in ownership) of a loss
corporation.
47
Acquisition
of Service1st Bank of Nevada
On October 28, 2010, WLBC consummated the Acquisition of
Service1st pursuant to the Amended Merger Agreement. Pursuant to
the Amended Merger Agreement, Acquisition Sub merged with and
into Service1st, with Service1st being the surviving entity
and becoming WLBCs wholly-owned subsidiary. WLBC
previously received the requisite approvals of certain bank
regulatory authorities to complete the Acquisition to become a
bank holding company.
The former stockholders of Service1st received
approximately 2,282,668 shares of Common Stock (net of
dissenters rights exercised with respect to
88,054 shares) in exchange for all of the outstanding
shares of capital stock of Service1st as Base Acquisition
Consideration. In addition, the holders of Service1sts
outstanding options and warrants now hold options and warrants
of similar tenor to purchase up to 289,781 shares of Common
Stock at an exercise price of $21.01.
In addition to the Base Acquisition Consideration, each of the
former stockholders of Service1st may be entitled to
receive Contingent Acquisition Consideration, payable in Common
Stock, if at any time within the first two years after the
consummation of the Acquisition, the closing price per share of
the Common Stock exceeds $12.75 for 30 consecutive days. The
Contingent Acquisition Consideration would be equal to 20% of
the tangible book value of Service1st at the close of
business on the last day of the calendar month immediately
before the calendar month in which the final regulatory approval
necessary for the completion of the Acquisition was obtained.
The total number of shares of our common stock issuable to the
former Service1st stockholders would be determined by
dividing the Contingent Acquisition Consideration by the average
of the daily closing price of the Common Stock on the first 30
trading days on which the closing price of the Common Stock
exceeded $12.75.
At the close of business on October 28, 2010, WLBC was a
new Nevada bank holding company by consummating the acquisition
of Service1st and conducting operations through Service1st.
In conjunction with the transaction, WLBC infused
$25 million of capital onto the balance sheet of
Service1st. On October 29, 2010, the common shares of WLBC
began trading on Nasdaq, under the ticker symbol WLBC.
The transaction was recorded as a business combination under the
current accounting rules and as a result the balance sheet of
Service1st was revalued to fair value as of the transaction
date. This process is heavily reliant on measuring and
estimating the fair values of all the assets and liabilities of
the acquired entity. WLBC elected to obtain professional
assistance in this activity. The Company hired a third-party
vendor to assist Management in determining the fair value of the
loan portfolio, the time deposits, and the contingent
consideration discussed above. Additionally, the firm was asked
to assist in the determination of the value of the intangible
asset associated with the CDI.
As of the acquisition date, the gross loan portfolio at
Service1st Bank was approximately $125.4 million with
a related ALLL of approximately $9.4 million. The valuation
resulted in a discount of approximately $15.8 million at
October 28, 2010. While we believe we currently have the
best estimate of fair value, the purchase accounting adjustments
are not final and we are currently still evaluating all
available information to ensure we have an accurate assessment
of fair value. In fact, there have been some loan charge-offs
and payoffs which impacted the valuation and as a result of
reviewing this information, management reduced the discount from
the original $15.8 million to approximately
$15.1 million. This discount consists of two components:
credit discount and yield discount. The performing portfolio was
approximately $89.9 million and was discounted by $49,000
for yield and $3.6 million for credit discounts. The
remaining $35.6 million of loans were identified as loans
with purchased credit impairment and those loans had a discount
of $576,000 for yield and $10.9 million for credit
discounts. The discounts on performing loans are recognized by a
level yield method over the remaining life of the
loans or loan pools. The loans identified as containing purchase
credit impairment are treated somewhat differently. The discount
associated with yield is accreted as yield discount and the
credit discount is not accreted but is left on the books to
reduce the current carrying value of the applicable loans. The
application of this process requires that the aggregate discount
is first netted against the ALLL, reducing the ALLL to zero.
Consequently, the first day after the transaction the loan
portfolio was approximately $110 million with no ALLL. In
addition, current accounting methodology only allows for the
48
establishment of an ALLL to occur as the entity records new
loans on the books or identifies subsequent credit deterioration
on the original loans marked to fair value at acquisition date.
Service1st operates in the Las Vegas market place which has seen
significant economic declines in all types of real estate and
overall business trends. Since inception, Service1st has
charged off approximately $17.8 million of loans through
October 28, 2010. The remaining $125 million loan
portfolio was further reduced by approximately $15 million
in the fair value process as of the acquisition date. As this
document presents the balances of loans that represent problem
loans or potential problem loans, it is important to remember
that these loans are as of the October 28, 2010 fair values.
The contractual values of time deposits were also marked to fair
value. This resulted in Service1st recording a premium of
$46,000. This premium will be amortized over the estimated
remaining life of the time deposit portfolio of one year.
The CDI is the result of a valuation study which attempts to
associate a value for the customers deposit relationships
based on the profitability of the deposits and how long they are
expected to produce revenue to the entity. This intangible asset
was valued at $784,000 for Service1st at October 28,
2010. The intangible asset is amortized on an accelerated basis
using an estimated ten year life.
The Contingent Acquisition Consideration estimated to be
$4.4 million was also fair valued. The valuation firm used
a decision tree model to calculate the probability that
WLBCs stock price will reach the threshold. Based on the
results the fair value was determined to be approximately
$1.8 million. Periodically over the two year period in
which the contingent consideration could become payable the
reasonableness of the estimate will be reviewed and adjusted if
deemed necessary.
These estimates along with several other estimates were used to
complete the fair value process for the balance sheet of
Service1st and also to evaluate the fair value of future
commitments and off-balance sheet items. Upon completion of
these activities the adjustments are posted to the records of
the new subsidiary. The difference between the fair value of the
consideration given versus the net asset values obtained is an
unidentified intangible asset (goodwill) created in the amount
of approximately $5.6 million.
Results
of Operations
The results of WLBC includes the operations of
Service1st for the last two months of the year. This
substantially impacts interest income, interest expense,
provision for loan losses and various non interest income and
expense items which were not applicable to WLBC prior to the
Acquisition. The interest income line is also impacted by the
accretion of discount on the loan portfolio which approximated
$436,000.
WLBCs results of operations depend substantially on its
ability to generate net interest income, which is the difference
between the interest income on its interest-earning assets
(primarily loans and investment securities) minus interest
expense on its interest-bearing liabilities (primarily
deposits). Revenue is also generated by non-interest income,
consisting principally of account and other service fees. These
sources of revenue are burdened by two categories of expense:
first, the provision for loan losses, which consists of a charge
against earnings in an amount that WLBCs management judges
necessary to maintain WLBCs allowance for loan losses at a
level deemed adequate to absorb probable incurred loan losses
inherent in the loan portfolio; and second, non-interest
expense, which consists primarily of operating expenses, such as
compensation to employees.
The management of interest income and interest expense is
fundamental to the performance of WLBC. Net interest income and
interest expense on interest-bearing liabilities, such as
deposits and other borrowings, is the largest component of
WLBCs net revenue. Net interest income depends upon the
volume of interest-earning assets and interest-bearing
liabilities and the rates earned or paid on them. WLBCs
management closely monitors both total net interest income and
the net interest margin (net interest income divided by average
earning assets).
Net interest income and net interest margin are affected by
several factors including (1) the level of, and the
relationship between the dollar amount of interest earning
assets and interest-bearing liabilities; and (2) the
49
relationship between re-pricing or maturity of WLBCs
variable-rate and fixed-rate loans, securities, deposits and
borrowings.
Variable rate loans constitute approximately 55.74% of
WLBCs portfolio for the year end December 31, 2010,
and approximately 51.21% of WLBCs variable rate loans are
indexed to the national prime rate. However, a majority of these
prime-rate based loans are subject to floors,
ranging from 5.5% to 8.5%. Currently the prime rate is under the
applicable floor rate for substantially all of WLBCs
prime-rate based loans.
Movements in the national prime rate that increase the
applicable loan rates above applicable floors have a direct
impact on WLBCs loan yield and interest income. The
national prime rate remained at 3.25% throughout 2009 and 2010,
as the Federal Reserve maintained the targeted federal funds
rate steady. Based on economic forecasts generally available to
the banking industry, WLBC currently believes it is reasonably
possible that the targeted federal funds rate and the national
prime rate will remain flat in the foreseeable future and
increase in the long term; however, there can be no assurance to
that effect or as to the timing or the magnitude of any increase
should an increase occur, as changes in market interest rates
are dependent upon a variety of factors that are beyond
WLBCs control.
WLBC, through its asset and liability policies and practices,
seeks to maximize net interest income without exposing WLBC to
an excessive level of interest rate risk. Interest rate risk is
managed by monitoring the pricing, maturity and re-pricing
options of all classes of interest-bearing assets and
liabilities. See Managements Discussion and
Analysis of Financial Condition and Results of Operations of
WLBC Quantitative and Qualitative Disclosures About
Market Risk in this section for more information.
The following table sets forth WLBCs average balance
sheet, average yields on earning assets, average rates paid on
interest-bearing liabilities, net interest margins and net
interest income/spread for the years ended December 31,
2010, 2009 and 2008.
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2010(4)
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
($ in thousands)
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Interest Earning Assets:
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|
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|
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Certificates of deposit
|
|
|
26,889
|
|
|
$
|
56
|
|
|
|
1.27
|
%
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
0.00
|
%
|
Money Market funds
|
|
|
76,804
|
|
|
|
8
|
|
|
|
0.06
|
%
|
|
|
237,577
|
|
|
|
139
|
|
|
|
0.06
|
%
|
|
|
315,590
|
|
|
|
5,691
|
|
|
|
1.80
|
%
|
Interest Bearing deposits
|
|
|
39,308
|
|
|
|
16
|
|
|
|
0.25
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Investment securities
|
|
|
7,898
|
|
|
|
47
|
|
|
|
3.62
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Portfolio loans(1)
|
|
|
107,275
|
|
|
|
1,403
|
|
|
|
7.96
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earnings assets/interest income
|
|
|
258,174
|
|
|
|
1,530
|
|
|
|
3.61
|
%
|
|
|
237,577
|
|
|
|
139
|
|
|
|
0.06
|
%
|
|
|
315,590
|
|
|
|
5,691
|
|
|
|
1.80
|
%
|
Noninterest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
12,035
|
|
|
|
|
|
|
|
|
|
|
|
22,294
|
|
|
|
|
|
|
|
|
|
|
|
2,060
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
13,243
|
|
|
|
|
|
|
|
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
283,434
|
|
|
|
|
|
|
|
|
|
|
$
|
260,089
|
|
|
|
|
|
|
|
|
|
|
$
|
317,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2010(4)
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
($ in thousands)
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
31,275
|
|
|
|
43
|
|
|
|
0.84
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Money markets
|
|
|
26,048
|
|
|
|
25
|
|
|
|
0.58
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Savings
|
|
|
1,272
|
|
|
|
1
|
|
|
|
0.48
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Time deposits under $100,000
|
|
|
4,910
|
|
|
|
7
|
|
|
|
0.87
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Time deposits $100,00 and over
|
|
|
29,943
|
|
|
|
39
|
|
|
|
0.79
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Repurchase Agreements
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities/interest expense
|
|
|
93,448
|
|
|
|
115
|
|
|
|
0.75
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Noninterest Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand deposits
|
|
|
68,493
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Accrued interest on deposits and other liabilities
|
|
|
2,221
|
|
|
|
|
|
|
|
|
|
|
|
81,320
|
|
|
|
|
|
|
|
|
|
|
|
104,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
164,162
|
|
|
|
|
|
|
|
|
|
|
|
81,320
|
|
|
|
|
|
|
|
|
|
|
|
104,527
|
|
|
|
|
|
|
|
|
|
Stockholders equity(5)
|
|
|
87,704
|
|
|
|
|
|
|
|
|
|
|
|
178,769
|
|
|
|
|
|
|
|
|
|
|
|
213,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity(6)
|
|
$
|
251,866
|
|
|
|
|
|
|
|
|
|
|
$
|
260,089
|
|
|
|
|
|
|
|
|
|
|
$
|
317,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and Interest rate spread(2)
|
|
|
|
|
|
$
|
1,415
|
|
|
|
2.86
|
%
|
|
|
|
|
|
$
|
139
|
|
|
|
0.06
|
%
|
|
|
|
|
|
$
|
5,691
|
|
|
|
1.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin(3)
|
|
|
|
|
|
|
|
|
|
|
3.33
|
%
|
|
|
|
|
|
|
|
|
|
|
0.06
|
%
|
|
|
|
|
|
|
|
|
|
|
1.80
|
%
|
Ratio of Average Interest-Earning Assets to Interest-Bearing
Liabilities
|
|
|
276
|
%
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average balances include nonaccrual loans of approximately
$10,426, $0, and $0 for the years ended December 31, 2010,
2009 and 2008, respectively. Net loan (fees) or costs of
$37,000, $0 and $0 are included in the yield computation for the
years ended December 31, 2010, 2009 and 2008, respectively. |
|
(2) |
|
Net interest spread represents the average yield earned on
interest earning assets less the average rate paid on interest
bearing liabilities. |
|
(3) |
|
Net interest margin represents net interest income as a
percentage of average interest earning assets. |
|
(4) |
|
Service1st was acquired by Western Liberty Bancorp on
October 28, 2010, thus the 2010 data represents a full year
for WLBC; and a partial year for Service1st, October 28,
2010 through December 31, 2010. Average balances are
computed by taking the balance at each quarter end for WLBC,
adding the four quarters together and dividing by four. Average
balances for Service1st are computed by taking November and
December 2010s month end balance, adding them together and
dividing by two. Interest income for 2010 represents a full year
for WLBC and two months of income for Service1st. |
|
(5) |
|
Stockholders equity was computed by taking WLBCs balance
for each quarter end, adding the four quarters together and
dividing by four, to compute a yearly average. No balance for
Service1st is included in the 2010 stockholders equity
balance as the calculation combines four quarters of WLBCs
balances to compute an average, but is skewed when only the last
two months of Service1sts 2010 balances can be |
51
|
|
|
|
|
utilized, due to date of acquisition. Thus, the elimination of
investment in subsidiary, which needs to occur in consolidation
accounting, impacts the consolidated numbers. |
|
(6) |
|
As a result of the assumption noted in note (5) above,
Total Assets will not equal Total Liabilities plus
Stockholders Equity for 2010. |
The following Volume and Rate Variances table sets forth the
dollar difference in interest earned and paid for each major
category of interest-earning assets and interest-bearing
liabilities for the noted years, and the amount of such change
attributable to changes in average balances (volume) or changes
in average interest rates. Volume variances are equal to the
increase or decrease in the average balance times the prior year
rate and rate variances are equal to the increase or decrease in
the average rate times the prior year average balance. Variances
attributable to both rate and volume changes are equal to the
change in rate times the change in average balance and are
allocated proportionately to the changes due to volume and
changes due to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010 compared to Year Ended December 31, 2009
|
|
|
|
Increase (Decrease)
|
|
|
|
Due to Changes in:
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Average
|
|
|
Average
|
|
|
Increase
|
|
($s in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
56
|
|
|
$
|
0
|
|
|
$
|
56
|
|
Interest bearing deposits
|
|
|
(121
|
)
|
|
|
6
|
|
|
|
(115
|
)
|
Federal funds sold
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Investment securities
|
|
|
47
|
|
|
|
0
|
|
|
|
47
|
|
Portfolio loans
|
|
|
1,403
|
|
|
|
0
|
|
|
|
1,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest income
|
|
|
1,385
|
|
|
|
6
|
|
|
|
1,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking
|
|
$
|
43
|
|
|
$
|
0
|
|
|
$
|
43
|
|
Money markets
|
|
|
25
|
|
|
|
0
|
|
|
|
25
|
|
Savings
|
|
|
1
|
|
|
|
0
|
|
|
|
1
|
|
Time deposits under $100,000
|
|
|
7
|
|
|
|
0
|
|
|
|
7
|
|
Time deposits $100,000 and over
|
|
|
39
|
|
|
|
0
|
|
|
|
39
|
|
Repurchase Agreements
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Short-term borrowings
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest expense
|
|
|
115
|
|
|
|
0
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net interest income
|
|
$
|
1,270
|
|
|
$
|
6
|
|
|
$
|
1,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009 Compared to 2008
|
|
|
|
Increase (Decrease)
|
|
|
|
Due to Changes in:
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Average
|
|
|
Average
|
|
|
Increase
|
|
($s In thousands)
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Interest bearing deposits
|
|
|
(46
|
)
|
|
|
(5,506
|
)
|
|
|
(5,552
|
)
|
Federal funds sold
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Investment securities
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Portfolio loans
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest income
|
|
|
(46
|
)
|
|
|
(5,506
|
)
|
|
|
(5,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Money markets
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Savings
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Time deposits under $100,000
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Time deposits $100,000 and over
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Repurchase Agreements
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Short-term borrowings
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest expense
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net interest income
|
|
$
|
(46
|
)
|
|
$
|
(5,506
|
)
|
|
$
|
(5,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of 2010 with 2009
For the year ended December 31, 2010, average
interest-earning assets were $258.2 million and average
interest-bearing liabilities were $93.4 million, generating
net interest income of $1.4 million which includes $436,000
of accretion of discount on loans for two months. For the year
ended December 31, 2009, average interest-earning assets
were $237.6 million and average interest-bearing
liabilities were $0, generating net interest income of $139,000.
Average balances of interest earning assets increased by an
average of $20.6 million, or 8.67% from $237.8 million
for the year ended December 31, 2009 to $258.2 million
for the year ended December 31, 2010, due to the
Acquisition partially being offset by the return of
approximately $235.6 million in investors funds when
Global Consumer Acquisition Corporation eliminated the special
purpose acquisition features from the companys governing
documents in October 2009 and changed the companys name to
Western Liberty Bancorp. The increase in WLBCs average
interest earning balances was partially offset by the addition
of Money Market funds which decreased $160.8 million, from
$237.6 million as of December 31, 2009 to
$76.8 million as of December 31, 2010. Average loan
balances increased to $107.3 million from $0 at
December 31, 2009, interest bearing deposits increased to
$39.3 million at December 31, 2010 from $0 at
December 31, 2009, certificates of deposit increased to
$26.9 million from $0 at December 31, 2009, while
securities increased to $7.9 million at December 31,
2010, from $0 million at December 31, 2009. WLBC
noninterest earning assets at December 31, 2010 consisted
of $12.0 million in cash and due from banks, a decrease of
$10.3 million from $22.3 million as of
December 31, 2009. In addition, WLBCs other assets
increased $13.0 million, from $218,000 as of
December 31, 2009 to $13.2 million as of
December 31, 2010.
Interest income was positively impacted by the increase in
interest earning assets. Interest income grew from $139,000 at
December 31, 2009, to $1.5 million, or a 979.14% at
December 31, 2010. The $139,000 reflects 12 months of
earnings by WLBC prior to the Acquisition, while the
$1.5 million earned in 2010, reflects a year of WLBC and
two months of earnings from Service1st as the acquisition
of Service1st occurred
53
on October 28, 2010. Interest income from loans contributed
$1.4 million to total interest income, or 91.70%. On
average, loans yielded 7.96% for the year ended
December 31, 2010. The interest income on loans was
positively impacted by the purchase accounting adjustments. The
discount accretion for loans approximated $436,000 for two month
period, as a result of the short term nature of the loans,
refinancing and prepayments.
For the year ended December 31, 2010, average
interest-bearing liabilities were $93.4 million, generating
interest expense of $115,000 in 2010, compared with $0 in
average interest-bearing liabilities for the year ended
December 31, 2009, which generated no expense. WLBCs
average interest bearing liabilities at December 31, 2010
are as follows: interest checking accounts average
$31.3 million, money market accounts average
$26.0 million, savings average $1.3 million, time
deposits under $100,000 average $4.9 million and time
deposits $100,000 and over average $29.9 million. In
addition, WLBC also purchased an average of $68.5 million
in non-interest bearing checking accounts and an average of
$2.2 million in other assets.
Interest expense was slightly impacted by the average increase
of $93.4 million in interest bearing liabilities. Interest
expense grew from $0 at December 31, 2009, to $115,000 for
the two months ended December 31, 2010. Interest expense on
time deposits over and under $100,000 contributed $46,000 to
total interest expense, or 40.00% while interest bearing demand
deposit checking accounts contributed $43,000 or 37.39% followed
by money markets which contributed $25,000 or 21.74% of total
interest expense. On average, interest earning deposits yielded
0.75% for the period ended December 31, 2010.
As a result WLBCs net interest rate spread (yield earned
on average interest-earning assets less the average rate paid on
interest-bearing liabilities) was 2.86% and its net interest
margin was 3.33%, yielding a net interest margin of
$1.4 million for the year ended December 31, 2010.
Comparison
of 2009 with 2008
For the year ended December 31, 2009, average
interest-earning assets were $237.6 million and average
interest-bearing liabilities was $0, generating net interest
income of $139,000. For the year ended December 31, 2008,
average interest-earning assets were $315.6 million and
average interest-bearing liabilities were $0, generating net
interest income of $5.7 million. Average balances of
interest earning assets decreased by $78.0 million, or
24.71%, while average balances of interest-bearing liabilities
remained flat year over year.
During 2009, WLBC had a net loss of $14.9 million. Since
there was only $5.7 million in interest income, from funds
held in a trust account, the remaining funds came from a
reduction in the trust account funds. In addition, WLBC incurred
$211.8 million for the payment of redemption of common
shares as well as $4.0 million for the payment of
underwriters discount and offering costs for the year
ended December 31, 2009.
Provision
for Loan Losses
The provision for loan losses in each year is reflected as a
charge against earnings in that year. The provision is equal to
the amount required to maintain the allowance for loan losses at
a level that, in WLBCs judgment, is adequate to absorb
probable loan losses inherent in the loan portfolio. The amount
of the provision for loan losses in any year is affected by
reductions to the allowance in the year resulting from
charge-offs and increases to the allowance in the year as a
result of recoveries from charged-off loans. In addition,
changes in the size of the loan portfolio and the recognition of
changes in current risk factors affect the amount of the
provision.
During 2010, WLBC continued to experience significant
competitive pressures and challenging economic conditions in the
markets in which it operates. The Las Vegas economy, as well as
the national economy, has continued to show signs of significant
weakness. Weakness in the residential market has expanded into
the commercial real estate market, as builders and related
industries downsize. These economic trends have adversely
affected WLBCs asset quality and increased charge-offs.
WLBC has responded by increasing provision expense to replenish
and build the allowance for loan losses allocable to adversely
affected segments of WLBCs loan portfolio in
particular, construction and land development loans and
commercial and industrial loans. Continuation of these economic
and real estate factors is likely to continue to affect
WLBCs asset quality and overall performance during the
coming year.
54
Comparison
of 2010 with 2009
WLBCs provision for loan losses of $36,000 provided for
new loan growth for the year ended December 31, 2010,
compared with $0 for the year ended December 31, 2009. The
provision for loan losses from 2009 to 2010 is primarily
attributable new loan growth of $995,000; $363,000 in November
2010 and $632,000 in December 2010 as a result of WLBCs
acquisition of Service1st on October 28, 2010, as
there was no additional deterioration in loans acquired at
October 28, 2010.
Each quarter, management determines an estimate of the amount of
allowance for loan and lease losses adequate to provide for
losses inherent in the Banks loan portfolios. The
provision for loan losses is determined by the net change in the
allowance for loan and lease losses. The purchase accounting
used for the acquisition had a substantial impact on provision
for loan losses.
The accounting guidance requiring the Company to record all
assets and liabilities at their fair value eliminated the ALLL
for all loans as of the acquisition date because fair values
estimated for the loans included an estimate of the contractual
cash flows which were not expected to be collected, for which
the ALLL was provided. In other words, if an estimate of
uncollectible amounts is already considered in setting the fair
value, a valuation allowance to adjust the carrying amount of
the loans for an estimate of uncollectible cash flows is not
needed. Consequently, provision expense would be necessary only
for any credit deterioration occurring between the acquisition
date and December 31, 2010 and for newly originated loans.
Second, there is additional accounting guidance within purchase
accounting that relates to loans that evidenced credit
deterioration at the time they were acquired. These loans are
termed Purchase Credit-Impaired loans or (PCI
loans). There are different accounting methods used both
for recognizing interest income and for recognizing credit
deterioration subsequent to the acquisition for PCI loans than
are used for loans that were not credit impaired when acquired
or are specifically excluded from the PCI classification.
For loans that are credit-impaired when acquired, in addition to
determining their fair value, the Company must differentiate
between contractual cash flows that are expected to be received
and those that are not expected to be received. The cash flows
expected to be received is the fair value of the loan, and the
discount amount is the accretable yield that will be recognized
through accretion as interest income over the term of the loan.
The difference between the total contractual payments and the
undiscounted amount of the expected cash flows is termed the
nonaccretable difference. This amount is not
recognized as an allowance for credit loss because it was
already considered in determining the fair value of the loan. If
the borrower pays as expected, or pays more than expected, then
no allowance is needed for a PCI loan and there would be no
provision expense. If the borrower pays less than expected, then
it is assumed that further credit deterioration has occurred
subsequent to the acquisition and an allowance must be provided
through a charge to provision expense as well as a reduction in
the amount of the accretable yield that will be recognized in
subsequent periods.
The accounting guidance for PCI loans permits the acquirer to
aggregate loans with similar risk characteristics into pools.
These pools are accounted for as a single unit of account in
that only if, as an aggregate, actual cash flows are
significantly less than the estimated cash flows, will an
allowance, and therefore provision expense, be necessary. Once a
pool of PCI loans is established, the integrity of the pool is
maintained. No new loans are added to the pools and loans are
not removed unless they are paid in full, charged-off,
foreclosed-on, or sold. Cash flows received in excess of
expected amounts for one pool may not be used to offset
deficient payments in another pool.
There was no provision for loan losses related to PCI loans for
the two month period ended December 31, 2010 because cash
flows from the pools were not significantly different than
expected.
Comparison
of 2009 with 2008
WLBCs provision for loan losses was $0 for the year ended
December 31, 2009, compared with $0 for the year ended
December 31, 2008. The lack of provision expense for both
year ends is due to WLBC not owning a financial institution
during these time periods.
55
Non-Interest
Income
Non-interest income primarily consists of loan documentation and
late fees, service charges on deposits and other fees such as
wire and ATM fees.
Comparison
of 2010 with 2009
Non-interest income totalled $108,000 for the year ended
December 31, 2010 and $0 for the year ended
December 31, 2009. The $108,000 increase in non-interest
income is the result of WLBCs acquisition of
Service1st on October 28, 2010. Thus, non-interest
income reflects income generated on Service1sts books for
the period of October 28, 2010 through December 31,
2010.
Comparison
of 2009 with 2008
Non-interest income was $0 for the year ended December 31,
2009 and $0 for the year ended December 31, 2008.
Non-Interest
Expense
The following table sets for the principal elements of
non-interest expenses for 2010, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
($ In thousands)
|
|
2010(1)
|
|
|
2009
|
|
|
2008
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
1,461
|
|
|
$
|
72
|
|
|
$
|
83
|
|
Occupancy, equipment and depreciation
|
|
|
269
|
|
|
|
0
|
|
|
|
0
|
|
Computer service charges
|
|
|
51
|
|
|
|
0
|
|
|
|
0
|
|
Federal deposit insurance
|
|
|
90
|
|
|
|
0
|
|
|
|
0
|
|
Professional fees
|
|
|
3,851
|
|
|
|
12,612
|
|
|
|
0
|
|
Advertising and business development
|
|
|
7
|
|
|
|
1
|
|
|
|
1,670
|
|
Insurance
|
|
|
825
|
|
|
|
301
|
|
|
|
301
|
|
Telephone
|
|
|
19
|
|
|
|
0
|
|
|
|
0
|
|
Printing and supplies
|
|
|
314
|
|
|
|
748
|
|
|
|
6
|
|
Stock based compensation
|
|
|
1,770
|
|
|
|
869
|
|
|
|
4,625
|
|
Other
|
|
|
480
|
|
|
|
434
|
|
|
|
559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
$
|
9,137
|
|
|
$
|
15,037
|
|
|
$
|
7,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the year January 1, 2010 through December 31, 2010
for WLBC and for the two months ended 2010 for Service1st. |
Comparison
of 2010 with 2009
Non-interest expense was $9.1 million for the year ended
December 31, 2010, compared with $15.0 million for
2009. Salaries and employee benefits total $1.5 million,
compared with $72,000 for 2009. The $1.4 million increase
in salaries and employee benefits expense is the result of WLBC
acquiring Service1st which employed 40 full time employees.
Professional fees decreased $8.7 million, from
$12.6 million in 2009 to $3.9 million for the year
ended December 31, 2010. The $8.7 million decrease is
largely due to the majority of legal, audit and consulting fees
being incurred in 2009 by WLBC in connection with its
acquisition of Service1st as well as WLBCs attempt to
acquire other entities. For the year ended December 31,
2010, WLBC recorded $1.8 million in stock-based
compensation expense compared to $869,000 in 2009 due to
WLBCs issuance of stock in 2010.
56
Comparison
of 2009 with 2008
Non-interest expense was $15.0 million for 2009, compared
with $7.2 million for 2008, an increase of
$7.8 million, year over year. Professional fees increased
$12.6 million due to additional legal, audit and consulting
fees incurred by WLBC in connection with its pending acquisition
of Service1st as well its attempt to acquire other entities.
Income
Taxes
Due to WLBC incurring operating losses from inception, no
provision for income taxes has been recorded since the inception
of WLBC.
Financial
Condition
Assets
Total assets stood at $257.5 million for the year ended
December 31, 2010, an increase of $169.0 million, or
190.96% from $88.5 million as of December 31, 2009.
The growth in total assets was principally attributable to WLBC
acquiring Service1st which resulted new assets such as
$106.3 million in gross loans including net deferred loan
fees of $37,000, $26.9 million in certificates of deposits,
$7.1 million in investment securities, $5.6 million in
goodwill, $3.0 million in accrued interest receivable,
while cash and cash equivalents (consisting of cash and due from
banks, federal funds sold and certificates of deposits with
original maturities of three months or less) increased
$15.3 million.
Cash
and Cash Equivalents
Cash and cash equivalents consist of cash and due from banks,
federal funds sold and certificates of deposits with original
maturities of three months or less. Cash and cash equivalents
totalled $103.2 million for the year ended
December 31, 2010 and $88.0 million at
December 31, 2009. Cash and cash equivalents are managed
based upon liquidity needs. The decrease reflected WLBCs
efforts to reduce its liquidity in reaction to the reductions in
loan portfolio balances and growth. See
Liquidity and Asset/Liability Management
in this section below for more information.
Investment
Securities and Certificates of Deposits held at other
Banks
WLBC invests in investment grade securities and certificates of
deposits at other banks with original maturities exceeding three
months for the following reasons: (i) such investments can
be readily reduced in size to provide liquidity for loan balance
increases or deposit balance decreases; (ii) they provide a
source of assets to pledge to secure lines of credit (and,
potentially, deposits from governmental entities), as may be
required by law or by specific agreement with a depositor or
lender; (iii) they can be used as an interest rate risk
management tool, since they provide a large base of assets, the
maturity and interest rate characteristics of which can be
changed more readily than the loan portfolio to better match
changes in the deposit base and other funding sources of WLBC;
and (iv) they represent an alternative interest-earning use
of funds when loan demand is weak or when deposits grow more
rapidly than loans. Further, if and when WLBC becomes
profitable, tax free investment securities can be a source of
partially tax-exempt income.
WLBC uses two portfolio classifications for its investment
securities: Held to Maturity, and Available
for Sale. The Held to Maturity portfolio consists only of
securities that WLBC has both the intent and ability to hold
until maturity, to be sold only in the event of concerns with an
issuers credit worthiness, a change in tax law that
eliminates their tax exempt status, or other infrequent
situations as permitted by generally accepted accounting
principles. Accounting guidance requires Available for Sale
securities to be marked to estimated fair value with an offset,
net of taxes, to accumulated other comprehensive income, a
component of stockholders equity.
WLBCs investment portfolio is currently composed primarily
of: (i) U.S. Government Agency securities;
(ii) investment grade corporate debt securities; and
(iii) collateralized mortgage obligations. For the year
ended
57
December 31, 2010, investment securities and certificates
of deposit totalled $34.0 million, compared with $0 at
December 31, 2009.
WLBC has not used interest rate swaps or other derivative
instruments to hedge fixed rate loans or to otherwise mitigate
interest rate risk.
The tables below summarize WLBCs investment portfolio for
the year ended December 31, 2010. Securities are identified
as
available-for-sale
or held to maturity. Unrealized gains or losses on
available-for-sale
securities are recorded as accumulated other comprehensive
income in stockholders equity.
Held-to-maturity
securities are carried at cost, adjusted for amortization of
premiums or accretion of discounts. Amortization of premiums or
accretion of discounts on mortgage-backed securities is adjusted
for estimated prepayments. Securities measured at fair value are
reported at fair value, with unrealized gains and losses
included in current earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
U.S. Government Agency Securities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Collateralized Mortgage Obligations-Commercial
|
|
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,819
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Investments-Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
4,663
|
|
|
$
|
0
|
|
|
$
|
(27
|
)
|
|
$
|
4,636
|
|
SBA Loan Pools
|
|
|
651
|
|
|
|
0
|
|
|
|
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,314
|
|
|
$
|
0
|
|
|
$
|
(27
|
)
|
|
$
|
5,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes the maturity dates and investment
yields on WLBCs investment portfolio for the year ended
December 31, 2010 for securities identified as available
for sale or held to maturity. These securities were acquired
with the October 28, 2010 acquisition, and no such
securities were owned prior to that date by the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
|
|
Due Under
|
|
|
Due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
1-5 Years
|
|
|
Due 5-10 Years
|
|
|
Due Over 10 Years
|
|
|
Total
|
|
|
|
Amount/Yield
|
|
|
Amount/Yield
|
|
|
Amount/Yield
|
|
|
Amount/Yield
|
|
|
Amount/Yield
|
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
Corporate Debt Securities
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Collateralized Mortgage Obligations-Commercial
|
|
|
1,417
|
|
|
|
2.55
|
%
|
|
|
402
|
|
|
|
2.69
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
1,819
|
|
|
|
2.58
|
%
|
Small Business Administration Loan Pools
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
1,417
|
|
|
|
2.55
|
%
|
|
$
|
402
|
|
|
|
2.69
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
1,819
|
|
|
|
2.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
Corporate Debt Securities
|
|
|
3,075
|
|
|
|
7.17
|
%
|
|
|
1,561
|
|
|
|
7.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
4,636
|
|
|
|
7.11
|
%
|
Collateralized Mortgage Obligations-Commercial
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Small Business Administration Loan Pools
|
|
|
5
|
|
|
|
3.00
|
%
|
|
|
14
|
|
|
|
4.33
|
%
|
|
|
99
|
|
|
|
2.57
|
%
|
|
|
534
|
|
|
|
2.76
|
%
|
|
|
651
|
|
|
|
2.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
3,080
|
|
|
|
7.16
|
%
|
|
$
|
1,575
|
|
|
|
6.98
|
%
|
|
$
|
99
|
|
|
|
2.57
|
%
|
|
$
|
534
|
|
|
|
2.76
|
%
|
|
$
|
5,287
|
|
|
|
6.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
Loans
For the year ended December 31, 2010, substantially all of
WLBCs loan customers were located in Nevada.
The following table shows the composition of the loan portfolio
in dollar amounts and in percentages, along with a
reconciliation to loans receivable, net.
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
December 31, 2010
|
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
5,923
|
|
|
|
5.58
|
%
|
Commercial real estate
|
|
|
54,975
|
|
|
|
51.75
|
%
|
Residential
|
|
|
9,247
|
|
|
|
8.71
|
%
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
70,145
|
|
|
|
66.04
|
%
|
Commercial and industrial
|
|
|
35,946
|
|
|
|
33.84
|
%
|
Consumer
|
|
|
131
|
|
|
|
0.12
|
%
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
106,222
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
Net deferred loan costs
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans, net of deferred costs
|
|
|
106,259
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
106,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross loans were $106.3 million for the year ended
December 31, 2010, compared to $0 at December 31, 2009
and 2008, as a result of WLBCs acquisition of
Service1st on October 28, 2010. Gross loans, net of
deferred fees and the allowance for loan losses totaled
$106.3 million for the year ended December 31, 2010,
as a result of a $36,000 increase in the allowance for loan
losses.
Commercial real estate loans balances were $55.0 million,
or 51.75% of total loans for the year ended December 31,
2010, commercial and industrial loans totaled
$35.9 million, or 33.84% of total loans, residential real
estate loans were $9.2 million, or 8.71% of total loans
while construction, land development and other land loans
totaled $5.9 million, or 5.58% of total loans.
59
The following table presents maturity information for the loan
portfolio at December 31, 2010. The table does not include
prepayments or scheduled principal repayments. All loans are
shown as maturing based on contractual maturities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
|
|
Due Within
|
|
|
Due 1-5
|
|
|
Due Over
|
|
|
|
|
|
|
One Year
|
|
|
Years
|
|
|
Five Years
|
|
|
Total
|
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
4,428
|
|
|
$
|
1,495
|
|
|
$
|
|
|
|
$
|
5,923
|
|
Commercial real estate
|
|
|
2,544
|
|
|
|
29,327
|
|
|
|
23,104
|
|
|
|
54,975
|
|
Residential real estate (1 to 4 family)
|
|
|
6,885
|
|
|
|
2,222
|
|
|
|
140
|
|
|
|
9,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-secured loans
|
|
$
|
13,857
|
|
|
$
|
33,044
|
|
|
$
|
23,244
|
|
|
$
|
70,145
|
|
Loans not secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
18,975
|
|
|
|
9,297
|
|
|
|
7,674
|
|
|
|
35,946
|
|
Consumer
|
|
|
95
|
|
|
|
35
|
|
|
|
1
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Gross
|
|
$
|
32,927
|
|
|
$
|
42,376
|
|
|
$
|
30,919
|
|
|
$
|
106,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
$
|
7,429
|
|
|
$
|
33,867
|
|
|
$
|
5,713
|
|
|
$
|
47,009
|
|
Variable
|
|
|
25,498
|
|
|
|
8,509
|
|
|
|
25,206
|
|
|
|
59,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Gross
|
|
$
|
32,927
|
|
|
$
|
42,376
|
|
|
$
|
30,919
|
|
|
$
|
106,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrations
WLBCs loan portfolio has a concentration of loans secured
by real estate. For the year ended December 31, 2010, loans
secured by real estate comprised 66.04% of total gross loans.
Substantially all of these loans are secured by first liens.
Approximately 30.2% of these real estate-secured loans are owner
occupied for the year ended December 31, 2010. A loan is
considered owner occupied if the borrower occupies at least
fifty one percent of the collateral securing such loan.
WLBCs policy is to obtain collateral whenever it is
available, depending upon the degree of risk WLBC is willing to
accept. Repayment of loans is expected from the borrowers
cash flows or the sale proceeds of the collateral. Deterioration
in the performance of the economy and real estate values in
WLBCs primary market areas has had, and is expected to
continue to have, an adverse impact on collectibility of
outstanding loans.
Interest
Reserves
Interest reserves are generally established at the time of the
loan origination as an expense item in the budget for a
construction and land development loan. WLBCs practice is
to monitor the construction, sales
and/or
leasing progress to determine the feasibility of ongoing
construction and development projects. If at any time during the
life of the loan the project is determined not to be viable,
WLBC generally has the ability to discontinue the use of the
interest reserve and take appropriate action to protect its
collateral position via negotiation
and/or legal
action as deemed appropriate. For the year ended
December 31, 2010, WLBC had no loans with an interest
reserve.
Nonperforming
Assets
Nonperforming assets consist of:
(i) nonaccrual loans. In general, loans are placed on
nonaccrual status when WLBC determines timely recognition of
interest to be in doubt due to the borrowers financial
condition and collection efforts. WLBC generally discontinues
accrual of interest when a loan is 90 days delinquent
unless the loan is well secured and in the process of collection;
60
(ii) loans past due 90 days or more and still accruing
interest. Loans past due 90 days or more and still accruing
interest consist primarily of loans 90 days or more past
their maturity date but not their interest due date;
(iii) restructured loans. Restructured loans have modified
terms to reduce either principal or interest due to
deterioration in the borrowers financial
condition; and
(iv) other real estate owned, or OREO. If a bank takes
title to the borrowers real property that serves as
collateral for a defaulted loan, such property is referred to as
other real estate owned (OREO).
The following table summarizes nonperforming assets by category
including PCI loans with no contractual interest being reported.
These figures represent loan values after the fair value process
was completed at October 28, 2010, adjusted for any
amortization or accretion for the two months, if applicable.
|
|
|
|
|
|
|
For the Year Ended
|
|
($s in thousands)
|
|
December 31, 2010
|
|
|
Nonaccrual loans:
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
2,632
|
|
Commercial real estate
|
|
|
1,224
|
|
Residential real estate (1-4 family)
|
|
|
2,900
|
|
Total loans secured by real estate
|
|
|
6,756
|
|
Commercial and industrial
|
|
|
3,670
|
|
Consumer
|
|
|
0
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
|
10,426
|
|
Past due (>90days) loans and accruing interest:
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
0
|
|
Commercial real estate
|
|
|
0
|
|
Residential real estate (1-4 family)
|
|
|
0
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
|
|
|
Total past due loans accruing interest
|
|
|
0
|
|
Restructured loans (still on accrual)(1)
|
|
|
0
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
10,426
|
|
Other real estate owned (OREO)
|
|
|
3,406
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
13,832
|
|
|
|
|
|
|
Non-Performing Loans as a percentage of total portfolio loans
|
|
|
9.81
|
%
|
Non-Performing assets as a percentage of total assets
|
|
|
4.05
|
%
|
Non-Performing assets as a percentage of total assets
|
|
|
5.37
|
%
|
Allowance for loan losses as a percentage of nonperforming loans
|
|
|
0.35
|
%
|
|
|
|
(1) |
|
For the year ended December 31, 2010, WLBC had
approximately $5.9 million in loans classified as
restructured loans. All of such loans were on nonaccrual. |
For the year ended December 31, 2010, nonperforming loans
totaled $10.4 million, or 9.81%, of total portfolio loans
due to the Acquisition. Total nonperforming assets for the year
ended December 31, 2010 were $13.8 million which is
reflective of the adverse economic conditions in the Nevada
market.
61
The largest category of nonperforming assets is commercial and
industrial loans of $3.7 million followed by residential
real estate loans of $2.9 million, construction, land
development and other land loans of $2.6 million and
commercial real estate loans of $1.2 million. These
balances are reflective of the adverse economic conditions in
the Nevada market. With many real estate projects requiring an
extended time to market, many of WLBCs borrowers have
exhausted their liquidity and stopped making payments, thereby
requiring WLBC to place the loans on nonaccrual. Given the
current economic conditions in Nevada, WLBC has effectively
stopped making commercial real estate loans and construction,
land development and other land loans (except for contractually
required disbursements under existing facilities) unless
borrowers can provide strong financial support outside the
project under development.
Potential
Problem Loans
WLBC classifies its loans consistent with federal banking
regulations using a ten category grading system. The loans
discussed in the following table have been recorded at fair
value as discussed in Note 5 of WLBCs financial
statements and presents information regarding potential problem
loans, which are graded but still performing as of the dates
indicated. These graded loans are referred to in applicable
banking regulations as Other Loans Especially
Mentioned, Substandard, Doubtful,
and Loss. These loan grades are described in further
detail in the section entitled Information Related to
WLBC Potential Problem Loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
|
|
# of
|
|
|
Loan
|
|
|
|
|
|
Percent of
|
|
|
|
Loans
|
|
|
Balance
|
|
|
%
|
|
|
Total Loans
|
|
|
Construction, land development and other land loans
|
|
|
3
|
|
|
$
|
1,997
|
|
|
|
16.12
|
%
|
|
|
1.88
|
%
|
Commercial real estate
|
|
|
5
|
|
|
|
6,042
|
|
|
|
48.78
|
%
|
|
|
5.69
|
%
|
Residential real estate (1-4 family)
|
|
|
1
|
|
|
|
2,357
|
|
|
|
19.03
|
%
|
|
|
2.22
|
%
|
Commercial and industrial
|
|
|
15
|
|
|
|
1,990
|
|
|
|
16.07
|
%
|
|
|
1.87
|
%
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
24
|
|
|
$
|
12,386
|
|
|
|
100
|
%
|
|
|
11.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WLBCs potential problem loans consisted of 24 loans and
totaled approximately $12.4 million for the year ended
December 31, 2010. The problem loans presented above are
the result of a difficult economic environment in the markets
WLBC operates. Commercial real estate comprises approximately
48.78% of the total aggregate balance of potential problem loans
for the year ended December 31, 2010. Construction, land
development and other land loans comprise approximately 16.12%
of the total balance of potential problem loans for the year
ended December 31, 2010. Commercial and industrial loans
comprise approximately 16.07% of the total aggregate balance of
potential problem loans for the year ended December 31,
2010. Residential real estate loans comprise approximately
19.03% of the total balance of potential problem loans for the
year ended December 31, 2010.
Impaired
Loans
A loan is impaired when it is probable that WLBC will be unable
to collect all contractual principal and interest payments due
in accordance with the terms of the loan agreement. Impaired
loans have been recorded at fair value as discussed in
Note 5 of WLBCs financial statements and are measured
based on the present value of expected future cash flows
discounted at the loans effective interest rate or, as a
practical expedient, at the loans observable market price
or the fair value of the collateral if the loan is collateral
dependent. The amount of impairment, if any, and any subsequent
changes are either included in the allowance for loan losses or
charged off WLBCs books, if deemed necessary.
The categories of nonaccrual loans and impaired loans overlap,
although they are not coextensive. WLBC considers all
circumstances regarding the loan and borrower on an individual
basis when determining whether a loan is impaired such as the
collateral value, reasons for the delay, payment record, the
amount past due, and number of days past due.
62
At December 31, 2010, the aggregate total amount of loans
classified as impaired, was $11.4 million. The total
specific allowance for loan losses related to these loans was $0
for the year ended December 31, 2010. The increase in total
impaired loans reflects the overall decline in economic
conditions in Nevada.
At December 31, 2010, WLBC had approximately
$5.4 million in loans classified as restructured loans.
Five of the seven loans were on accrual status as of
December 31, 2010. The following is a summary of these
loans, even though they are fair valued at October 28, 2010:
A $550,000 unsecured line of credit to an individual for
business investment purposes and classified as a commercial and
industrial loan was restructured in May 2010. A restructured
loan was approved and put in place which included a reduced
monthly payment. The borrower has been cooperative and is making
payments as agreed. At December 31, 2010 the balance on the
unsecured line of credit was $125,000.
A $2.3 million commercial real estate loan, which was
secured by a tavern/bar, was restructured in July 2010. The
restructure deferred past due interest payments to the end of
the note term and reduced principal and interest payments
beginning in April 2011 for the next twelve months. At
December 31, 2010, the outstanding balance on this
restructured loan was $1.2 million.
A $4.1 million land loan which is secured by
12.0 acres of vacant land was restructured. The borrower
was an investment limited liability company (LLC) supported
by a guarantor. The guarantor indicated that the LLC was unable
to sell the property or continue to service the debt. WLBC
agreed to a restructure of this loan. At December 31, 2010,
the outstanding balance on this restructured loan was
$1.1 million and the borrower is paying as agreed.
Four related loans to the same borrower were restructured in
June 2010. The loans consist of two commercial and industrial
loans totaling $650,000 that were related to the borrowers
medical practice and two real estate-secured loans totaling
$5.4 million, consisting of a $3.2 million loan on the
property in which the borrowers medical office is located
and a $2.2 million loan for the purchase of a medical
office building for lease. The borrower had already defaulted on
several single family residential properties, demonstrating to
WLBC his financial weakness and inability to service all of his
obligations. Given the borrowers financial deterioration,
WLBC agreed to a reduction in monthly payments of the combined
credits. At December 31, 2010, the outstanding balance was
$3.0 million.
The breakdown of total impaired loans, which have been recorded
at fair value as discussed in Note 5 of WLBCs
financial statements, and the related specific reserves for the
year ended December 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
|
|
Impaired
|
|
|
|
|
|
Percent of
|
|
|
Reserve
|
|
|
|
|
|
Percent of Total
|
|
($ in thousands)
|
|
Balance
|
|
|
%
|
|
|
Total Loans
|
|
|
Balance
|
|
|
%
|
|
|
Allowance
|
|
|
Construction, land development and other land loans
|
|
$
|
3,220
|
|
|
|
28.15
|
%
|
|
|
3.03
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Commercial real estate
|
|
|
1,648
|
|
|
|
14.41
|
%
|
|
|
1.55
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Residential real estate (1-4 family)
|
|
|
2,900
|
|
|
|
25.35
|
%
|
|
|
2.73
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Commercial and industrial
|
|
|
3,670
|
|
|
|
32.09
|
%
|
|
|
3.46
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Consumer
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
11,438
|
|
|
|
100.00
|
%
|
|
|
10.77
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of interest income recognized on impaired loans for
the two months ended December 31, 2010 was approximately
$39,000.
63
Allowance
for Loan Losses
The following table presents the activity in WLBCs
allowance for loan losses for 2010.
Analysis
of loss experience by loan type
|
|
|
|
|
|
|
For the Year Ended
|
|
($s in thousands)
|
|
December 31, 2010
|
|
|
Allowance for Loan and Lease Loss:
|
|
|
|
|
Balance at the beginning of the year
|
|
$
|
0
|
|
Provisions charged to operating expenses
|
|
|
36
|
|
Recoveries of loans previously charged off:
|
|
|
|
|
Construction, land development and other land loans
|
|
|
0
|
|
Commercial real estate
|
|
|
0
|
|
Residential real estate (1-4 family)
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
|
|
|
Total recoveries
|
|
|
0
|
|
|
|
|
|
|
Loans charged-off:
|
|
|
|
|
Construction, land development and other
|
|
|
0
|
|
Commercial
|
|
|
0
|
|
Residential (including multi-family)
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
|
|
|
Total charged-off
|
|
|
0
|
|
|
|
|
|
|
Net charge-offs
|
|
|
0
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
36
|
|
|
|
|
|
|
Net Charge-offs to average loans outstanding
|
|
|
0.00
|
%
|
Allowance for Loan Loss to outstanding loans
|
|
|
0.03
|
%
|
The accounting principles used by WLBC in maintaining the
allowance for loan losses are discussed in the section entitled
Critical Accounting Policies Allowance for
Loan Losses. The allowance is maintained at a level
management believes to be adequate to absorb estimated future
credit losses inherent in WLBCs loan portfolio, based on
evaluation of the collectibility of the loans, prior credit loss
experience, credit loss experience of other banks and other
factors deemed relevant.
In accordance with current accounting standards, the allowance
for loan losses was eliminated as part of the purchase
accounting. The allowance is required to cover probable losses
in new loans generated since October 28, 2010 and for any
subsequent deterioration of loans beyond the fair value
determined on October 28, 2010. Management will closely
monitor the loans existing at October 28, 2010 and
establish applicable allowance levels for new loans.
The allowance for loan losses is established through a provision
for loan losses charged to operations and is increased by the
collection of monies on loans previously charged off
(recoveries) and reduced by loans that are charged off.
Service1sts board of directors reviews the adequacy of the
allowance for loan losses on a monthly basis. The allowance of
$36,000 discussed in the table above is required based on loan
growth in November and December 2010. All loans at date of
acquisition were recorded at fair value as discussed in
Note 5 of WLBCs financial statements. Thus, for the
year ended December 31, 2010, WLBC had established an
allowance of $36,000, after increasing the allowance by $36,000
in provisions and recording no recoveries or charge-offs. The
allowance for loan loss to outstanding loans is 0.03% for the
year ended December 31,
64
2010, reflecting a very minimal deterioration in the loan
portfolio after it was marked to market due to the acquisition
of Service1st by WLBC.
WLBCs methodology for the allowance for loan losses
incorporates several quantitative and qualitative risk factors
used to establish the appropriate allowance for loan loss at
each reporting date. Quantitative factors include delinquency
and charge-off trends, collateral values, the composition,
volume and overall quality of the loan portfolio (including
outstanding loan commitments), changes in nonperforming loans,
concentrations and information about individual loans.
Historical loss experience is an important quantitative factor
for many banks, but thus far less so for WLBC, because it has
been in operation for just over three years. Qualitative factors
include the economic condition of WLBCs operating markets.
Specific changes in the risk factors are based on perceived risk
of similar groups of loans classified by collateral type and
purpose. Statistics on local trends and peers are also
incorporated into the allowance. While WLBC management uses the
best information available to make its evaluation, future
adjustments to the allowance may be necessary, if there are
significant changes in economic or other conditions. In
addition, the FDIC and the Nevada FID, as an integral part of
their examination processes, review WLBCs allowances for
loan losses, and may require additions to WLBCs allowance
based on their judgment about information available to them at
the time of their examinations. WLBC reviews the assumptions and
formula used in determining the allowance and makes adjustments,
if required to reflect the current risk profile of the portfolio.
When WLBC determines that it is unable to collect all
contractual principal and interest payments due in accordance
with the terms of the loan agreement, the loan becomes impaired.
Impaired loans are measured based on the present value of
expected future cash flows discounted at the loans
effective interest rate or, as a practical expedient, at the
loans observable market price or the fair value of the
collateral, if the loan is collateral dependent. The amount of
impairment, if any, and any subsequent changes are included in
the allowance for loan losses or charged off WLBCs books,
if deemed necessary.
WLBCs loan portfolio has a concentration of loans in
commercial real-estate related loans and includes significant
credit exposure to the commercial real estate industry. The
specific reserves for collateral dependent impaired loans are
based on the fair value of the collateral less estimated selling
costs (including brokerage fees) and other miscellaneous costs
that may be incurred to make the collateral more marketable
(such as
clean-up
costs) and to cure past due amounts (such as delinquent property
taxes). The fair value of collateral is determined based on
third-party appraisals. See Information Related to WLBC
Bank of Nevada Allowance for Loan Losses for
more information. In some cases, adjustments are made to the
appraised values due to known changes in market conditions or
known changes in the collateral.
WLBCs management believes that the allowance for the year
ended December 31, 2010 and the methodology utilized in
deriving that level are adequate to absorb known and inherent
risks in the loan portfolio. However, credit quality is affected
by many factors beyond WLBCs control, including local and
national economies, and facts may exist which are not currently
known to WLBC that adversely affect the likelihood of repayment
of various loans in the loan portfolio and realization of
collateral upon default. Accordingly, no assurance can be given
that WLBC will not sustain loan losses materially in excess of
the allowance for loan losses. In addition, the FDIC, as a major
part of its examination process, reviews the allowance for loan
losses and could require additional provisions to be made. The
allowance is based on estimates, and actual losses may vary from
the estimates. However, as the volume of the loan portfolio
grows, additional provisions will be required to maintain the
allowance at adequate levels. No assurance can be given that
continuing adverse economic conditions or unforeseen events will
not lead to increases in delinquent loans, the provision for
loan losses
and/or
charge-offs.
65
The following table presents the allocation of WLBCs
allowance for loan losses by loan category and percentage of
loans in each category to total loans as of the dates indicated.
Allocation of the allowance and percentage of allowance by loan
type. The allowance of $36,000 discussed in the table below is
required based on loan growth in November and December 2010. All
loans at date of acquisition were recorded at fair value as
discussed in Note 5 of WLBCs financial statements.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
($s in thousands)
|
|
Amount
|
|
|
% of loans
|
|
|
Allowance for Loan and Lease Loss:
|
|
|
|
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
0
|
|
|
|
5.58
|
%
|
Commercial real estate
|
|
|
0
|
|
|
|
51.75
|
%
|
Residential real estate (1-4 family)
|
|
|
0
|
|
|
|
8.71
|
%
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
0
|
|
|
|
66.04
|
%
|
Commercial and industrial
|
|
|
36
|
|
|
|
33.84
|
%
|
Consumer
|
|
|
0
|
|
|
|
0.12
|
%
|
|
|
|
|
|
|
|
|
|
Total allowance for loan loss
|
|
|
36
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
The commercial and industrial loan category had provision
expense of $36,000 for the year ended December 31, 2010.
There were no charge-offs or recoveries noted in 2010.
Deferred
Tax Asset
For the year ended December 31, 2010 and year ended
December 31, 2009, a valuation allowance for the entire net
deferred tax asset was considered necessary as WLBC determined
it was not more likely than not that the deferred tax asset
would be realized. Federal operating loss carry forwards begin
to expire in 2027.
Internal Revenue Code Section 382 places a limitation on
the amount of taxable income that can be offset by net operating
loss carry forwards after a change in control (generally greater
than 50% change in ownership) of a loss corporation.
Accordingly, utilization of net operating loss carry forwards
may be subject to an annual limitation regarding their
utilization against future taxable income upon a change in
control.
Deposits
WLBCs activities are primarily based in Nevada and its
deposit base is also primarily generated from this geographic
region. Deposits have historically been the primary source for
funding WLBCs asset growth.
During the last two months of 2010, WLBC sought to decrease the
rates on its deposit base in order to increase its net interest
income, interest rate spread and net interest margin. Deposits
totaled $160.3 million at December 31, 2010, up from
$0 as of December 31, 2009 due to the acquisition of
Service1st. Time deposits increased $35.4 million from
December 31, 2009 to December 31, 2010 while money
market accounts increased $24.7 million from
December 31, 2009 to December 31, 2010. Overall rates
on interest-bearing deposit accounts were 3.00%, for the year
ended December 31, 2010, however, the calculation of this
rates takes into consideration only two months of expense, due
to the acquisition of Service1st on October 28, 2010, while
the average balance for this same period of time is divided by
four quarters when only one quarter of the year, quarter ended
December 31, 2010 contained a balance. Interest expense
totaled $115,000 for the year ended December 31, 2010. The
overall increase in total deposits of 100.00% is reflective of
WLBC acquiring Service1st on October 28, 2010.
66
The following table reflects the summary of deposit categories
by dollar and percentage for the year ended December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
($s in thousands)
|
|
Amount
|
|
|
% of Total
|
|
|
Non-interest-bearing deposits
|
|
$
|
67,087
|
|
|
|
41.85
|
%
|
Interest-bearing deposits
|
|
|
31,837
|
|
|
|
19.86
|
%
|
Money Markets
|
|
|
24,672
|
|
|
|
15.39
|
%
|
Savings
|
|
|
1,273
|
|
|
|
0.79
|
%
|
Time deposits under $100,000
|
|
|
4,919
|
|
|
|
3.07
|
%
|
Time deposits $100,000 and over
|
|
|
30,498
|
|
|
|
19.03
|
%
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
160,286
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
Certificates of deposits of $100,000 or more for the year ended
December 31, 2010 and December 31, 2009 totaled
$30.5 million and $0, respectively. These deposits are
generally more rate sensitive than other deposits and are more
likely to be withdrawn to obtain higher yields elsewhere, if
available. Scheduled maturities of certificates of deposits in
amounts of $100,000 or more at December 31, 2010 were as
follows:
Certificates
of Deposit Maturities > $100,000
|
|
|
|
|
($s in thousands)
|
|
Amount
|
|
|
Three months or less
|
|
$
|
1,671
|
|
Over three months to six months
|
|
|
3,504
|
|
Over six months to twelve months
|
|
|
25,323
|
|
Over 12 months
|
|
|
0
|
|
|
|
|
|
|
Total
|
|
$
|
30,498
|
|
|
|
|
|
|
Capital
Resources
The current and projected capital position of WLBC and the
impact of capital plans on long term strategies are reviewed
regularly by management. WLBCs capital position represents
the level of capital available to support continuing operations
and expansion.
WLBC is subject to certain regulatory capital requirements
mandated by the FDIC and generally applicable to all banks in
the United States. For more information, see the section
entitled Supervision and Regulation. Failure to meet
minimum capital requirements can result in restrictions on
activities (including restrictions on the rates paid on
deposits), and otherwise may cause federal or state bank
regulators to initiate enforcement
and/or other
action against WLBC. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, banks must
meet specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain off-balance
sheet item as calculated under regulatory accounting practices.
WLBCs capital amounts and classifications are also subject
to qualitative judgments by the FDIC about components, risk
weightings and other factors. In accordance with
Service1sts consent order dated September 1, 2010,
WLBC must maintain its Tier 1 capital in such an amount to
ensure that its leverage ratio equals or exceeds 8.5%.
On September 1, 2010, Service1st, without admitting or
denying any possible charges relating to the conduct of its
banking operations, agreed with the FDIC and the Nevada FID to
the issuance of a Consent Order. The Consent Order supersedes a
Memorandum of Understanding entered into by Service1st with
the FDIC and Nevada FID in May of 2009. Under the Consent Order,
Service1st has agreed, among other things, to:
(i) assess the qualification of, and have retained
qualified, senior management commensurate with the size and risk
profile of Service1st; (ii) maintain a Tier I leverage
ratio at or above 8.5% (as of December 31, 2010,
Service1sts Tier I leverage ratio was at 18.1%) and a
total risk- based capital ratio at or above 12% (as of
67
December 31, 2010, Service1sts total risk-based
capital ratio was at 31.0%); (iii) continue to maintain an
adequate allowance for loan and lease losses; (iv) not pay
any dividends without prior bank regulatory approval;
(v) formulate and implement a plan to reduce
Service1sts risk exposure to adversely classified assets;
(vi) not extend additional credit to any borrower whose
loan has been charged-off or classified loss;
(vii) not extend any additional credit to any borrower
whose loan has been classified as substandard or
doubtful without prior approval from
Service1sts board of directors or loan committee;
(viii) formulate and implement a plan to reduce risk
exposure to its concentration in commercial real estate loans in
conformance with Appendix A of Part 365 of the
FDICs Rules and Regulations; (ix) formulate and
implement a plan to address profitability; and (x) not
accept brokered deposits (which includes deposits paying
interest rates significantly higher than prevailing rates in
Service1sts market area) and reduce its reliance on
existing brokered deposits, if any.
WLBC became a bank holding company on October 28, 2010 with
the consummation of the acquisition of Service1st. As of
December 31, 2010, WLBCs capital was
$93.8 million, which WLBC deems adequate to support
continuing operations and growth. As a de novo bank,
Service1st is required to maintain a Tier 1 capital
leverage ratio of not less than 8.0% during Service1sts
first seven years of operations. WLBCs capital ratios at
December 31, 2010, relative to the ratios require of
well-capitalized banks under the prompt corrective
action regime put in place by federal banking regulations, are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
Capitalized
|
|
|
|
|
|
|
Under
|
|
|
|
|
|
|
Regulatory
|
Capital Ratios:
|
|
WLBC
|
|
Service1st
|
|
Agreement
|
|
Tier 1 equity to average assets
|
|
|
30.5
|
%
|
|
|
18.1
|
%
|
|
|
10.0
|
%
|
Tier 1 risk-based capital ratio
|
|
|
68.4
|
%
|
|
|
30.6
|
%
|
|
|
6.0
|
%
|
Total risk-based capital ratio
|
|
|
68.8
|
%
|
|
|
31.0
|
%
|
|
|
12.0
|
%
|
The acquisition of Service1st by WLBC was consummated at
close of business on October 28, 2010. Per the Merger
Agreement, WLBC injected an additional $25 million of
capital into Service1st. As a commitment made to the FDIC during
acquisition application processing, we also agreed to maintain
the Tier 1 leverage capital ratio of Service1st at 10%
or greater until October 28, 2013 or, if later, when the
September 1, 2010 Consent Order agreed to by
Service1st with the FDIC and the Nevada Financial
Institutions Division terminates.
Liquidity
and Asset/Liability Management
Liquidity management refers to WLBCs ability to provide
funds on an ongoing basis to meet fluctuations in deposit levels
as well as the credit needs and requirements of its clients.
Both assets and liabilities contribute to WLBCs liquidity
position. Lines of credit with the regional Federal Reserve Bank
and FHLB, as well as short term investments, increases in
deposits and loan repayments all contribute to liquidity while
loan funding, investing and deposit withdrawals decrease
liquidity. WLBC assesses the likelihood of projected funding
requirements by reviewing current and forecasted economic
conditions and individual client funding needs.
WLBCs sources of liquidity consists of cash and due from
correspondent banks, overnight funds sold to correspondents and
the Federal Reserve Bank, certificates of deposits at other
financial institution (non-brokered), unpledged security
investments and lines of credit with the Federal Reserve Bank of
San Francisco and FHLB of San Francisco. For the year
ended December 31, 2010, WLBC had approximately
$103.2 million in cash and cash equivalents, approximately
$26.9 million in certificates of deposits at other
financial institutions, with maturities of one year or less. In
addition, WLBC had $2.5 million in unpledged security
investments, of which $1.8 million is classified as
available for sale, while the remaining $652,000 is classified
as held to maturity. WLBC also has a $4.0 million
collateralized line of credit with the Federal Reserve Bank of
San Francisco and a $18.0 million collateralized line
of credit with the Federal Home Loan Bank of San Francisco.
Both the $4.0 million line of credit with the Federal
Reserve of San Francisco and the $18.0 million line of
credit with the Federal Home Loan Bank have a zero balance.
68
Liquidity is also affected by portfolio maturities and the
effect of interest rate fluctuations on the marketability of
both assets and liabilities. WLBC can sell any of its unpledged
securities held in the available for sale category to meet
liquidity needs. These securities are also available to pledge
as collateral for borrowings, if the need should arise.
WLBCs management believes the level of liquid assets and
available credit facilities are sufficient to meet current and
anticipated funding needs during the next twelve months. In
addition, Service1st Banks Asset/Liability Management
Committee oversees Service1st Banks liquidity
position by reviewing a monthly liquidity report. While
management recognizes that Service1st may use some of its
existing liquidity to issue loans during the next twelve months,
it is not aware of any trends, demands, commitments, events or
uncertainties that are reasonably likely to impair WLBCs
liquidity.
Off-Balance
Sheet Arrangements
In the normal course of business, WLBC is a party to financial
instruments with off-balance-sheet risk. These financial
instruments include commitments to extend credit and letters of
credit. To varying degrees, these instruments involve elements
of credit and interest rate risk in excess of the amount
recognized in the statement of financial position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
($ in thousands)
|
|
Commitments to extend credit
|
|
$
|
18,504
|
|
|
|
0
|
|
|
|
0
|
|
Standby commercial letters of credit
|
|
|
590
|
|
|
|
0
|
|
|
|
0
|
|
WLBC maintains an allowance for unfunded commitments, based on
the level and quality of WLBCs undisbursed loan funds,
which comprises the majority of WLBCs off-balance sheet
risk. For the year ended December 31, 2010 and
December 31, 2009, the allowance for unfunded commitments
was approximately $372,000 and $0, respectively.
Management is not aware of any other material off-balance sheet
arrangements or commitments outside of the ordinary course of
WLBCs business.
Contractual
Obligations
The following table is a summary of WLBCs contractual
obligations as of December 31, 2010, by contractual
maturity date for the next five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year
|
|
($s in thousands)
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
After
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
|
|
|
Long Term Borrowed Funds
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
Capital Lease Obligations
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
Operating Lease Obligations
|
|
|
2,096
|
|
|
|
910
|
|
|
|
1,186
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
Purchase Obligations
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
Other Long Term Liabilities
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,096
|
|
|
$
|
910
|
|
|
$
|
1,186
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative
and Qualitative Disclosures About Market Risk
Market risk is a broad term for the risk of economic loss due to
adverse changes in the fair value of a financial instrument.
These changes may be the result of various factors, including
interest rates, foreign exchange rates, commodity prices
and/or
equity prices. As a financial institution, WLBCs primary
component of market risk is interest rate volatility. Net
interest income is the primary component of WLBCs net
income, and fluctuations in interest rates will ultimately
affect the level of both income and expense recorded on a large
portion of WLBCs assets and liabilities. In addition to
directly impacting net interest income, changes
69
in the level of interest rates can also affect (i) the
amount of loans originated and sold by WLBC, (ii) the
ability of borrowers to repay adjustable or variable rate loans,
(iii) the average maturity of loans, (iv) the rate of
amortization of premiums paid on securities, (v) the fair
value of WLBCs saleable assets, (vi) the amount of
unrealized gains and losses on securities available for sale,
the volume of interest bearing non-maturity deposits and
(vii) the early withdrawal likelihood of customer
originated certificates of deposit.
Interest rate risk occurs when assets and liabilities re-price
at different times as interest rates change. In general, the
interest that WLBC earns on its assets and pays on its
liabilities is established contractually for a specified period
of time. Market interest rates change over time and if a
financial institution cannot quickly adapt to changes in
interest rates, it may be exposed to volatility in earnings. For
instance, if WLBC were to fund long-term fixed rate assets with
short-term variable rate deposits, and interest rates were to
rise over the term of the assets, the short-term variable
deposits would rise in cost, adversely affecting net interest
income. Similar risks exist when rate sensitive assets (for
example, prime rate based loans) are funded by longer-term fixed
rate liabilities in a falling interest rate environment.
WLBC manages its mix of assets and liabilities with the goals of
limiting its exposure to interest rate risk, ensuring adequate
liquidity, and coordinating its sources and uses of funds while
maintaining an acceptable level of net interest income given the
current interest rate environment. WLBCs primary source of
funds has been retail deposits, consisting primarily of
interest-bearing checking accounts and time deposits.
WLBCs management believes retail deposits, unlike brokered
deposits, reduce the effects of interest rate fluctuations
because they generally represent a more stable source of funds.
WLBC has no brokered deposits. WLBC also maintains availability
of lines of credit from the FHLB of San Francisco and the
Federal Reserve Bank of San Francisco as additional sources
of funds, but has not drawn on them. Borrowings under these
lines generally have a long-term to maturity than retail
deposits.
WLBC also uses interest rate floors, ranging from
5.5% to 8.5%, on a majority of its prime-rate based loans to
protect against a loss of net interest income that would result
from a decline in interest rates. At December 31, 2010,
approximately 43% of WLBCs loans are indexed to the
national prime rate. Currently the prime rate is under the
applicable floor rate for substantially all of WLBCs
prime-rate based loans. WLBCs net interest income may be
adversely impacted, if the prime rate were to increase but
remain below the applicable floor rate since any such increase
may result in an increase in WLBCs interest expenses
without an increase in WLBCs interest income derived from
such prime-rate based loans until the prime rate exceeds the
applicable floor rate.
WLBC has an interest rate risk management system that captures
material sources of interest rate risk and generates reports for
senior management and the board of directors. WLBC board
establishes interest rate risk management policies that govern
the measurement and control of interest rate risk. The
asset/liability management committee provides oversight of
WLBCs interest rate risk management. The Chief Financial
Officer is responsible for
day-to-day
management of WLBCs interest rate sensitivity position and
examines the potential impact of differing interest rate
scenarios. Key measurements include, but are not limited to,
traditional gap ratios, earnings at risk, economic value of
equity, net interest margin trends relative to peer banks and
performance relative to market interest rate cycles.
Risk tolerance limits are set based on net profit impact of
instantaneous and sustained interest rate shocks of +/-
100 basis points, with quarterly measures of shocks up
300 basis points and down 200 basis points. The effect
of interest rate shocks on WLBCs economic value of equity
will also be considered. WLBCs interest rate risk model is
back-tested to ensure integrity of key assumptions and to
compare actual results after significant rate changes to
predicted results. Applicable measurements are reviewed for
consistency with WLBCs target aggregates and for
indication of actual or potential adverse trends. Interest rate
risk management reports are prepared quarterly and back-tested
as market conditions warrant.
The computation of prospective effects of hypothetical interest
rate changes are based on numerous assumptions, including
relative levels of market interest rates, asset prepayments and
deposit decay, and should not be relied upon as indicative of
actual results. Further, the computations do not contemplate any
actions WLBC may undertake in response to changes in interest
rates. Actual amounts may differ from the projections set forth
below should market conditions vary from underlying assumptions.
70
December 31,
2010
Sensitivity of Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Adjusted Net
|
|
|
Change
|
|
Interest Rate Scenario
|
|
Interest Income
|
|
|
from Base
|
|
|
|
(Dollars in thousands)
|
|
|
Up 300 basis points
|
|
$
|
10,749
|
|
|
|
5.25
|
%
|
Up 200 basis points
|
|
|
10,559
|
|
|
|
3.39
|
%
|
Up 100 basis points
|
|
|
10,374
|
|
|
|
1.58
|
%
|
BASE
|
|
|
10,213
|
|
|
|
0.00
|
%
|
Down 100 basis points
|
|
|
10,069
|
|
|
|
−1.41
|
%
|
Down 200 basis points
|
|
|
9,637
|
|
|
|
−5.63
|
%
|
SELECTED
HISTORICAL FINANCIAL INFORMATION SERVICE1ST BANK OF
NEVADA
Service1sts balance sheet data for the period ended
October 28, 2010, and years ended December 31, 2009
and December 31, 2008 and related statements of operations,
changes in shareholders equity and cash flows for the
period ended October 28, 2010 and each of the years ended
December 31, 2009 and December 31, 2008, are derived
from Service1sts audited financial statements, which are
included elsewhere in this
Form 10-K.
This information should be read together with Service1sts
audited financial statements and related notes,
Managements Discussion and Analysis of Financial
Condition and Results of
Operations-Service1st
Bank of Nevada and other financial information
included elsewhere in this
Form 10-K.
The historical results included below and elsewhere in this
Form 10-K
are not indicative of the future performance of Service1st.
Selected
Financial Data of Service1st
Set forth below are selected financial data of Service1st for
the period ended October 28, 2010 and years ended
December 31, 2009 and 2008. You should read this
information in conjunction with Service1sts audited
financial statements and notes to the financial statements
included elsewhere in this
Form 10-K.
SERVICE1ST
BANK OF NEVADA
SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended October 28, 2010 and Years Ended 2009 and
2008
|
|
|
|
2010(3)
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands except per share data)
|
|
|
Selected Results of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
6,620
|
|
|
$
|
9,043
|
|
|
$
|
8,497
|
|
Interest expense
|
|
|
1,147
|
|
|
|
2,676
|
|
|
|
2,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
5,473
|
|
|
|
6,367
|
|
|
|
6,475
|
|
Provision for loan losses
|
|
|
6,329
|
|
|
|
15,666
|
|
|
|
3,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income after provision for loan losses
|
|
|
(856
|
)
|
|
|
(9,299
|
)
|
|
|
2,805
|
|
Non-interest income
|
|
|
507
|
|
|
|
514
|
|
|
|
341
|
|
Non-interest expense
|
|
|
8,368
|
|
|
|
8,593
|
|
|
|
8,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(8,717
|
)
|
|
$
|
(17,378
|
)
|
|
$
|
(5,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
$
|
(175.00
|
)
|
|
$
|
(342.86
|
)
|
|
$
|
(100.70
|
)
|
Book Value
|
|
$
|
330.01
|
|
|
$
|
492.24
|
|
|
$
|
832.80
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended October 28, 2010 and Years Ended 2009 and
2008
|
|
|
|
2010(3)
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands except per share data)
|
|
|
Selected Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
179,956
|
|
|
$
|
211,760
|
|
|
$
|
159,494
|
|
Cash and cash equivalents
|
|
|
15,091
|
|
|
|
49,633
|
|
|
|
9,987
|
|
Certificates of deposit(4)
|
|
|
31,928
|
|
|
|
9,313
|
|
|
|
0
|
|
Investment securities
|
|
|
10,432
|
|
|
|
17,635
|
|
|
|
11,740
|
|
Gross loans, including net deferred loan fees
|
|
|
125,404
|
|
|
|
136,967
|
|
|
|
137,216
|
|
Allowance for loan losses
|
|
|
9,418
|
|
|
|
6,404
|
|
|
|
2,883
|
|
Deposits
|
|
|
162,066
|
|
|
|
185,320
|
|
|
|
109,891
|
|
Stockholders equity
|
|
|
16,438
|
|
|
|
24,519
|
|
|
|
42,316
|
|
Performance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin(1)
|
|
|
3.24
|
%
|
|
|
3.22
|
%
|
|
|
4.59
|
%
|
Efficiency ratio(2)
|
|
|
139.93
|
%
|
|
|
124.88
|
%
|
|
|
121.25
|
%
|
Return on average assets
|
|
|
(4.98
|
)%
|
|
|
(8.48
|
)%
|
|
|
(3.52
|
)%
|
Return on average equity
|
|
|
(46.72
|
)%
|
|
|
(43.24
|
)%
|
|
|
(11.12
|
)%
|
Asset Quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans
|
|
$
|
20,326
|
|
|
$
|
7,799
|
|
|
$
|
3,434
|
|
Allowance for loan losses as a percentage of nonperforming loans
|
|
|
46.34
|
%
|
|
|
82.11
|
%
|
|
|
83.95
|
%
|
Allowance for loan losses as a percentage of portfolio loans
|
|
|
7.51
|
%
|
|
|
4.68
|
%
|
|
|
2.10
|
%
|
Nonperforming loans as a percentage of total portfolio loans
|
|
|
16.21
|
%
|
|
|
5.69
|
%
|
|
|
2.50
|
%
|
Nonperforming loans as a percentage of total assets
|
|
|
12.63
|
%
|
|
|
3.68
|
%
|
|
|
2.15
|
%
|
Net charge-offs to average portfolio loans
|
|
|
2.54
|
%
|
|
|
8.43
|
%
|
|
|
1.44
|
%
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average equity to average assets
|
|
|
10.66
|
%
|
|
|
19.60
|
%
|
|
|
31.62
|
%
|
Tier 1 equity to average assets
|
|
|
8.70
|
%
|
|
|
10.95
|
%
|
|
|
25.78
|
%
|
Tier 1 Risk-Based Capital ratio
|
|
|
12.80
|
%
|
|
|
16.28
|
%
|
|
|
28.21
|
%
|
Total Risk-Based Capital ratio
|
|
|
14.10
|
%
|
|
|
17.57
|
%
|
|
|
29.48
|
%
|
|
|
|
(1) |
|
Net interest margin represents net interest income as a
percentage of average interest-earning assets. |
|
(2) |
|
Efficiency ratio represents non-interest expenses as a
percentage of the total of net interest income plus non-interest
income. |
|
(3) |
|
Service1st was acquired in 100% stock exchange on
October 28, 2010. Thus, the 2010 data represents a partial
year. |
|
(4) |
|
Certificates of deposit issued by other banks with original
maturities greater than three months. |
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SERVICE1ST BANK OF NEVADA
The following discussion and analysis should be read in
conjunction with Service1sts audited financial statements
and notes to the financial statements included elsewhere in this
Form 10-K.
This discussion and analysis contains forward-looking statements
that involve risk, uncertainties and assumptions. Certain risks,
uncertainties and other factors, including but not limited to
those set forth under Cautionary Note Regarding
Forward-Looking Statements may cause actual results to
differ materially from those projected in the forward-looking
statements.
72
Overview
Business
of Service1st
Service1st was formed on November 3, 2006 and
commenced operations as a commercial bank on January 16,
2007 under a state charter from the Nevada FID and with federal
deposit insurance from the FDIC. Service1st was initially
capitalized with $50 million raised in a private placement.
At October 28, 2010, Service1st had total assets of
$180.0 million, total gross loans of $125.4 million
and total deposits of $162.1 million.
As a traditional community bank, operating from its headquarters
and two retail banking locations in the greater Las Vegas area,
Service1st provides a variety of loans to its customers,
including commercial real estate loans, construction and land
development loans, commercial and industrial loans, Small
Business Administration (SBA) loans, and to a
lesser extent consumer loans. As of October 28, 2010, loans
secured by real estate constituted 65.77% of Service1sts
loan portfolio. Service1st relies on locally-generated
deposits to provide Service1st with funds for making loans.
The overwhelming majority of its business is generated in the
Nevada market.
Service1st generates substantially all of its revenue from
interest on loans and investment securities and service fees and
other charges on customer accounts. This revenue is offset by
interest expense paid on deposits and other borrowings and
non-interest expense such as administrative and occupancy
expenses. Net interest income is the difference between interest
income on interest-earning assets, such as loans and securities,
and interest expense on interest-bearing liabilities, such as
customer deposits and other borrowings used to fund those
assets. Interest rate fluctuations, as well as changes in the
amount and type of earning assets and liabilities and the level
of nonperforming assets combine to affect net interest income.
Service1st receives fees from its deposit customers in the
form of service fees, checking fees and other fees. Other
services such as safe deposit and wire transfers provide
additional fee income. Service1st may also generate income from
time to time from the sale of investment securities. The fees
collected by Service1st are found under Non-interest
Income in the statements of operations contained within
Service1sts audited financial statements for the period
ended October 28, 2010 (which are included elsewhere in
this
Form 10-K).
Offsetting these earnings are operating expenses referred to as
Non-Interest Expense in the statements of
operations. Because banking is a very people intensive industry,
the largest operating expense is employee compensation and
related expenses.
Local
Economic Conditions
According to the National Bureau of Economic Research,
the United States economy entered into the longest and most
severe recession in the post-war year beginning in December of
2007. The recession and continued economic downturn have been
deeply felt in the greater Las Vegas area. Beginning in 2008,
job losses, declining real property values, low consumer and
business confidence levels and increasing vacancy and
foreclosure rates for commercial and residential property
dramatically affected the Las Vegas economy. According to a
monthly report produced by The Center for Business &
Economic Research at the University of Nevada Las Vegas (the
CBER Report), the local unemployment rate in
Las Vegas rose from 5.6% as of December 31, 2007, to 9.1%
as of December 31, 2008, to 13.1% at December 31, 2009
and to 14.9% at December 31, 2010. In addition, new home
sales decreased 53.4% from December 2007 to December 2008,
falling a further 25.7% from December 2008 to December 2009 and
down 27.3% from December 2009 to December 2010. During the same
year, median new home prices decreased 21.7% from December 2007
to December 2008, decreased 11.2% from December 2008 to December
2009 and decreased 0.3% from December 2009 to December 2010.
Although new home sales decreased by 27.3% for the year ended
December 31, 2010 compared to the same year in 2009, median
new home prices continued to decrease by 0.3% for the year ended
December 31, 2010 compared to the same year in 2009. The
national recession also adversely affected tourism and Las
Vegas critical gaming industry. According to the CBER
Report, Las Vegas area gaming revenues decreased 18.4% from
December 2007 to December 2008, decreased 2.4% from December
2008 to December 2009, and decreased 4.7% for the year ended
December 31, 2010 compared to same year for 2009. Data
derived from The Applied Analysis, Las Vegas Market Reports
(2nd quarter
73
2010) shows that Las Vegas vacancy rates for office,
industrial and retail space rose from December 31, 2007 to
December 31, 2008 to December 31, 2009 to
December 31, 2010: office from 13.6%, to 17.3%,
to 23.0%, to 24.2%; industrial from 6.6%, to 8.9%,
to 13.7%, to 16.9%; and retail from 4.0%, to 7.4%,
to 10.0%, to 10.2%.
Summary
of Results of Operations and Financial Condition
Since formation at the beginning of 2007, Service1st has
not been profitable. To some extent, the lack of profitability
is attributable to the
start-up
nature of its business: time is required to build assets
sufficient to generate enough interest income to cover operating
expenses. However, in addition to the customary challenges of
building profitability for a
start-up
bank, Service1st has experienced deterioration in the
quality of its loan portfolio, largely as a result of the
challenging economic conditions in the Las Vegas market.
For the period ended October 28, 2010,
Service1st recorded a net loss of $8.7 million or
$175.00 per common share, as compared with a net loss of
$17.4 million or $342.86 per common share in 2009 and a
loss of $5.1 million or $100.70 per common share in 2008.
The $8.7 million decrease in net loss for the period ended
October 28, 2010, when compared to the period ended
December 31, 2009, was the result of a $9.3 million
decrease in the provision for loan losses. The provision expense
was $6.3 million for the period end October 28, 2010,
compared to $15.7 million in 2009, and $3.7 million in
2008. The $9.3 million decrease in provision for loan
losses for the period ended October 28, 2010 versus the
twelve months ended December 31, 2009 is the result of
$8.2 million in fewer loan charges offs in
Service1sts loan portfolio. The total amount of loans
charged off was $3.9 million for the period end
October 28, 2010, compared to $12.2 million in 2009,
and $1.7 million in 2008. These numbers indicate a
substantial turn around in the deterioration of the loan
portfolio which can be seen in the progression of the percentage
of net charge-offs to average loans outstanding, which was 2.54%
for the period ended October 28, 2010, 8.43% at
December 31, 2009, compared with 1.44% at December 31,
2008.
Net interest income was adversely impacted in 2010, and to a
lesser extent in 2009 and 2008, by the increase in nonaccrual
loans. With many real estate projects requiring an extended time
to market, some borrowers have exhausted their liquidity and
ceased making payments on their loans, which has required
Service1st to place their loans on nonaccrual status.
Service1sts nonaccrual loans increased to 16.21% total
portfolio loans for the period ended October 28, 2010 as
compared to 5.69% at year end 2009, and were 2.50% at year end.
The allowance for loan and lease losses has grown steadily since
inception of the bank, as a result of the increasing numbers and
percentages of problem loans in Service1sts loan
portfolio. The allowance stood at $9.4 million, or 7.51% of
loans for the period ended October 28, 2010, compared to
$6.4 million at year end 2009, or 4.68% of loans, and
$2.9 million at year end 2008, or 2.10% of loans. The
increase in 2010 was primarily attributable to a provision for
loan losses of $6.3 million and recoveries of $615,000,
mostly offset by charge-offs of $3.9 million. The increase
in 2009 was primarily attributable to a provision for loan
losses of $15.7 million, mostly offset by charge-offs of
$12.2 million. The increase in 2008 was primarily
attributable to a provision for loan losses of
$3.7 million, partially offset by $1.7 million in
charge-offs.
As Service1st commenced operations with $50.0 million
of capital, it has sufficient capital to absorb the losses it
has experienced during its years of operations. With total
stockholders equity of $16.4 million at
October 28, 2010, Service1st had a leverage ratio (the
ratio of Tier 1 equity to average assets) of 8.7% of total
assets, well above the 5.0% regulatory requirements for
well-capitalized banks and just above the 8.5% requirement for
Service1st due to its consent order. At October 28,
2010, Tier 1 risk-based capital stood at 12.8%, and total
risk-based capital at 14.10%, well above the requirement of
12.0% due to its consent order, both of which exceed the
risk-based capital guidelines for well capitalized
banks of 6.0% and 10.0%, respectively.
Critical
Accounting Policies and Estimates
Service1sts significant accounting policies are described
in Note 1 of its audited financial statements (which are
included elsewhere in this
Form 10-K),
including information regarding recently issued accounting
74
pronouncements, Service1sts adoption of such policies and
the related impact of their adoption. Certain of these policies,
along with various estimates that Service1st is required to
make in recording its financial transactions, are important to
have a complete understanding of Service1sts financial
position. In addition, these estimates require
Service1st to make complex and subjective judgments, many
of which include matters with a high degree of uncertainty. The
following is a summary of these critical accounting policies and
significant estimates.
Allowance
for Loan Losses
The allowance for loan losses is an estimate of the credit risk
in Service1sts loan portfolio and appears on the balance
sheet as a contra asset which reduces gross loans.
The allowance is established (or once established, increased) by
recording provision expense. Loans charged off on
Service1sts books reduce the allowance. Subsequent
recoveries of charged off loans, if any, increase the allowance.
The allowance is an amount that Service1sts management
believes will be adequate to absorb probable losses on existing
loans that may become uncollectible, based on evaluation of the
collectability of loans and prior credit loss experience. This
evaluation also takes into consideration such factors as changes
in the nature and volume of the loan portfolio, overall
portfolio quality, specific problem credits, peer bank
information, and current economic conditions that may affect the
borrowers ability to pay. Due to the credit concentration
of Service1sts loan portfolio in real estate-secured
loans, future adjustments to the allowance may be necessary if
there are significant changes in economic or other conditions.
In addition, the FDIC and state banking regulatory agencies, as
an integral part of their examination process, periodically
review Service1sts allowance for loan losses, and may
require Service1st to make additions to the allowance based
on their judgment about information available to them at the
time of their examinations.
The allowance consists of specific and general components. The
specific component relates to loans that are classified as
impaired. For such loans, an allowance is established when the
discounted cash flows (or collateral value or observable market
price) of the impaired loan is lower than the carrying value of
that loan. The general component covers non-impaired loans and
is based on historical loss experience adjusted for qualitative
and environmental factors.
A loan is impaired when it is probable Service1st will be unable
to collect all contractual principal and interest payments due
in accordance with the original terms of the loan agreement.
Impaired loans are measured based on the present value of
expected future cash flows discounted at the loans
effective interest rate or, as a practical expedient, at the
loans observable market price or the fair value of the
collateral if the loan is collateral dependent. The amount of
impairment, if any, and any subsequent changes are included in
the allowance for loan losses.
Investment
Securities Portfolio
Securities classified as available for sale are equity
securities and those debt securities Service1st intends to
hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as
available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity
mix of Service1sts assets and liabilities, liquidity
needs, regulatory capital considerations and other similar
considerations. Securities available for sale are reported at
fair value with unrealized gains or losses reported as other
comprehensive income (loss), net of related deferred tax effect.
Realized gains or losses, determined on the basis of the cost of
specific securities sold, are included in earnings.
Securities classified as held to maturity are those debt
securities Service1st has both the intent and ability to
hold to maturity regardless of changes in market conditions,
liquidity needs, or general economic conditions. These
securities are carried at amortized cost, adjusted for
amortization of premium and accretion of discount computed by
the interest method over the contractual lives. The sale of a
security within three months of its maturity date or after at
least 85% of the principal outstanding has been collected is
considered a maturity for purposes of classification and
disclosure. Purchase premiums and discounts are generally
recognized in interest income using the effective-yield method
over the term of the securities.
75
Service1sts management evaluates securities for
other-than-temporary
impairment at least on a quarterly basis, and more frequently
when economic or market conditions warrant such evaluation.
Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost,
(2) the financial condition and near term prospects of the
issuer, including an evaluation of credit ratings, (3) the
impact of changes in market interest rates, (4) the intent
of Service1st to sell a security and (5) whether it is
more likely than not Service1st will have to sell the
security before recovery of its cost basis.
Stock-Based
Compensation
Service1sts 2007 Stock Option Plan is described more fully
in Note 9 to Service1sts audited financial statements
for the period ended October 28, 2010, which are included
elsewhere in this
Form 10-K.
Service1st records the fair value of stock compensation
granted to employees and directors as expense over the vesting
period. The cost of the award is based on the grant-date fair
value. The compensation expenses recognized related to stock
options granted under Service1sts 2007 Stock Option Plan
was approximately $633,000 for the period ended October 28,
2010, $379,000 in 2009 and $423,000 in 2008.
Income
Taxes
Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible
temporary differences and tax credit carry-forwards and deferred
tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for
the effect of changes in tax laws and rates on the date of
enactment. As a result of the Acquisition, which was finalized
at the close of business on October 28, 2010,
Service1sts net operating loss utilization will be subject
to an annual limitation on the net operating loss against future
taxable income. Internal Revenue Code section 382 places a
limitation on the amount of taxable income that can be offset by
net operating loss carry forwards after a change in control
(generally greater than 50% change in ownership) of a loss
corporation.
Results
of Operations
Service1sts results of operations depend substantially on
its ability to generate net interest income, which is the
difference between the interest income on its interest-earning
assets (primarily loans and investment securities) minus
interest expense on its interest-bearing liabilities (primarily
deposits). Revenue is also generated by non- interest income,
consisting principally of account and other service fees. These
sources of revenue are burdened by two categories of expense:
first, the provision for loan losses, which consists of a charge
against earnings in an amount that Service1sts management
judges necessary to maintain Service1sts allowance for
loan losses at a level deemed adequate to absorb probable loan
losses inherent in the loan portfolio; and second, non-interest
expense, which consists primarily of operating expenses, such as
compensation to employees.
The management of interest income and interest expense is
fundamental to the performance of Service1st. Net interest
income and interest expense on interest-bearing liabilities,
such as deposits and other borrowings, is the largest component
of Service1sts net revenue. Net interest income depends
upon the volume of interest-earning assets and interest-bearing
liabilities and the rates earned or paid on them.
Service1sts management closely monitors both total net
interest income and the net interest margin (net interest income
divided by average earning assets).
Net interest income and net interest margin are affected by
several factors including (1) the level of, and the
relationship between the dollar amount of interest earning
assets and interest-bearing liabilities; and (2) the
relationship between re-pricing or maturity of Service1sts
variable-rate and fixed-rate loans, securities, deposits and
borrowings.
Variable rate loans constitute 58.21% of Service1sts
portfolio for the period end October 28, 2010, and
approximately 51.21% of Service1sts variable rate loans
are indexed to the national prime rate. However, a
76
majority of these prime-rate based loans are subject to
floors, ranging from 5.5% to 8.5%. Currently the
prime rate is under the applicable floor rate for substantially
all of Service1sts prime-rate based loans.
Movements in the national prime rate that increase the
applicable loan rates above applicable floors have a direct
impact on Service1sts loan yield and interest income. The
national prime rate remained at 3.25% throughout 2009 and the
first nine months of 2010, as the Federal Reserve maintained the
targeted federal funds rate steady. Based on economic forecasts
generally available to the banking industry,
Service1st currently believes it is reasonably possible
that the targeted federal funds rate and the national prime rate
will remain flat in the foreseeable future and increase in the
long term; however, there can be no assurance to that effect or
as to the timing or the magnitude of any increase should an
increase occur, as changes in market interest rates are
dependent upon a variety of factors that are beyond
Service1sts control.
Service1st, through its asset and liability policies and
practices, seeks to maximize net interest income without
exposing Service1st to an excessive level of interest rate
risk. Interest rate risk is managed by monitoring the pricing,
maturity and repricing options of all classes of
interest-bearing assets and liabilities. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations of
Service1st
Bank of Nevada Quantitative and Qualitative
Disclosures About Market Risk in this section for more
information.
77
The following table sets forth Service1sts average balance
sheet, average yields on earning assets, average rates paid on
interest-bearing liabilities, net interest margins and net
interest income/spread for the period ended October 28,
2010 and the years ended December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended October 28,
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2010(4)
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
|
|
($ in thousands)
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
INTEREST-EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
28,913
|
|
|
$
|
287
|
|
|
|
1.19
|
%
|
|
$
|
9,562
|
|
|
$
|
125
|
|
|
|
1.31
|
%
|
|
$
|
845
|
|
|
$
|
37
|
|
|
|
4.38
|
%
|
Interest-bearing deposits
|
|
|
28,880
|
|
|
|
60
|
|
|
|
0.25
|
%
|
|
|
24,585
|
|
|
|
62
|
|
|
|
0.25
|
%
|
|
|
5,024
|
|
|
|
115
|
|
|
|
2.29
|
%
|
Federal funds sold
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
3,522
|
|
|
|
8
|
|
|
|
0.23
|
%
|
|
|
7,958
|
|
|
|
152
|
|
|
|
1.91
|
%
|
Investment securities
|
|
|
14,483
|
|
|
|
472
|
|
|
|
3.91
|
%
|
|
|
15,856
|
|
|
|
646
|
|
|
|
4.07
|
%
|
|
|
8,598
|
|
|
|
357
|
|
|
|
4.15
|
%
|
Portfolio loans(1)
|
|
|
130,401
|
|
|
|
5,801
|
|
|
|
5.34
|
%
|
|
|
143,984
|
|
|
|
8,202
|
|
|
|
5.70
|
%
|
|
|
118,536
|
|
|
|
7,837
|
|
|
|
6.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earnings assets/interest income
|
|
|
202,677
|
|
|
|
6,620
|
|
|
|
3.92
|
%
|
|
|
197,509
|
|
|
|
9,043
|
|
|
|
4.58
|
%
|
|
|
140,961
|
|
|
|
8,498
|
|
|
|
6.03
|
%
|
NONINTEREST EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
9,285
|
|
|
|
|
|
|
|
|
|
|
|
8,329
|
|
|
|
|
|
|
|
|
|
|
|
2,603
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(7,628
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,274
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,468
|
)
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
5,751
|
|
|
|
|
|
|
|
|
|
|
|
3,421
|
|
|
|
|
|
|
|
|
|
|
|
3,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
210,085
|
|
|
|
|
|
|
|
|
|
|
$
|
204,985
|
|
|
|
|
|
|
|
|
|
|
$
|
145,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
31,710
|
|
|
$
|
349
|
|
|
|
1.32
|
%
|
|
$
|
19,609
|
|
|
$
|
388
|
|
|
|
1.98
|
%
|
|
$
|
10,246
|
|
|
$
|
158
|
|
|
|
1.54
|
%
|
Money markets
|
|
|
41,118
|
|
|
|
211
|
|
|
|
0.62
|
%
|
|
|
41,271
|
|
|
|
627
|
|
|
|
1.52
|
%
|
|
|
52,649
|
|
|
|
1,344
|
|
|
|
2.55
|
%
|
Savings
|
|
|
1,529
|
|
|
|
7
|
|
|
|
0.55
|
%
|
|
|
850
|
|
|
|
12
|
|
|
|
1.41
|
%
|
|
|
336
|
|
|
|
6
|
|
|
|
1.79
|
%
|
Time deposits under $100,000
|
|
|
5,780
|
|
|
|
65
|
|
|
|
1.35
|
%
|
|
|
5,887
|
|
|
|
156
|
|
|
|
2.65
|
%
|
|
|
2,088
|
|
|
|
69
|
|
|
|
3.30
|
%
|
Time deposits $100,00 and over
|
|
|
42,900
|
|
|
|
515
|
|
|
|
1.44
|
%
|
|
|
51,175
|
|
|
|
1,480
|
|
|
|
2.89
|
%
|
|
|
10,910
|
|
|
|
386
|
|
|
|
3.54
|
%
|
Repurchase Agreements
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
1,538
|
|
|
|
13
|
|
|
|
0.85
|
%
|
|
|
3,303
|
|
|
|
59
|
|
|
|
1.79
|
%
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
3
|
|
|
|
|
|
|
|
1.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
|
|
|
123,037
|
|
|
|
1,147
|
|
|
|
1.12
|
%
|
|
|
120,330
|
|
|
|
2,676
|
|
|
|
2.22
|
%
|
|
|
79,535
|
|
|
|
2,022
|
|
|
|
2.54
|
%
|
liabilities/interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand deposits
|
|
|
63,154
|
|
|
|
|
|
|
|
|
|
|
|
42,916
|
|
|
|
|
|
|
|
|
|
|
|
18,927
|
|
|
|
|
|
|
|
|
|
Accrued interest on deposits and other liabilities
|
|
|
1,490
|
|
|
|
|
|
|
|
|
|
|
|
1,555
|
|
|
|
|
|
|
|
|
|
|
|
1,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
187,681
|
|
|
|
|
|
|
|
|
|
|
|
164,801
|
|
|
|
|
|
|
|
|
|
|
|
99,484
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
22,404
|
|
|
|
|
|
|
|
|
|
|
|
40,184
|
|
|
|
|
|
|
|
|
|
|
|
46,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
210,085
|
|
|
|
|
|
|
|
|
|
|
$
|
204,985
|
|
|
|
|
|
|
|
|
|
|
$
|
145,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and Interest rate spread(2)
|
|
|
|
|
|
$
|
5,473
|
|
|
|
2.81
|
%
|
|
|
|
|
|
$
|
6,367
|
|
|
|
2.36
|
%
|
|
|
|
|
|
$
|
6,475
|
|
|
|
3.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin(3)
|
|
|
|
|
|
|
|
|
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
3.22
|
%
|
|
|
|
|
|
|
|
|
|
|
4.59
|
%
|
Ratio of Average Interest-Earning Assets to Interest-Bearing
Liabilities
|
|
|
165
|
%
|
|
|
|
|
|
|
|
|
|
|
164
|
%
|
|
|
|
|
|
|
|
|
|
|
177
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average balances include nonaccrual loans of approximately
$15,066,000, $9,470,000 and $1,335,000 for the period ended
October 28, 2010 and years ended, 2009 and 2008,
respectively. Net loan fees or (costs) of $(180,000), $(122,000)
and $11,000 are included in the yield computation for the period
ended October 28, 2010 and years ended 2009 and 2008,
respectively. |
|
(2) |
|
Net interest spread represents the average yield earned on
interest earning assets less the average rate paid on interest
bearing liabilities. |
|
(3) |
|
Net interest margin represents net interest income as a
percentage of average interest-earning assets. |
78
|
|
|
(4) |
|
Service1st was acquired by Western Liberty Bancorp on
October 28, 2010, thus the 2010 data represents a partial
year; January 1, 2010 to October 28, 2010. |
The Volume and Rate Variances table below sets forth the dollar
difference in interest earned and paid for each major category
of interest-earning assets and interest-bearing liabilities for
the noted periods, and the amount of such change attributable to
changes in average balances (volume) or changes in average
interest rates. Volume variances are equal to the increase or
decrease in the average balance times the prior period rate and
rate variances are equal to the increase or decrease in the
average rate times the prior period average balance. Variances
attributable to both rate and volume changes are equal to the
change in rate times the change in average balance and are
allocated proportionately to the changes due to volume and
changes due to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended October 28,
|
|
|
|
2010 compared to Year Ended December 31, 2009
|
|
|
|
Increase (Decrease)
|
|
|
|
Due to Changes in:
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Average
|
|
|
Average
|
|
|
Increase
|
|
($s in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
192
|
|
|
$
|
(30
|
)
|
|
$
|
162
|
|
Interest-bearing deposits
|
|
|
9
|
|
|
|
(11
|
)
|
|
|
(2
|
)
|
Federal funds sold
|
|
|
0
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Investment securities
|
|
|
(45
|
)
|
|
|
(129
|
)
|
|
|
(174
|
)
|
Portfolio loans
|
|
|
(604
|
)
|
|
|
(1,797
|
)
|
|
|
(2,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest income
|
|
|
(448
|
)
|
|
|
(1,975
|
)
|
|
|
(2,423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking
|
|
$
|
133
|
|
|
$
|
(172
|
)
|
|
$
|
(39
|
)
|
Money markets
|
|
|
(1
|
)
|
|
|
(415
|
)
|
|
|
(416
|
)
|
Savings
|
|
|
3
|
|
|
|
(8
|
)
|
|
|
(5
|
)
|
Time deposits under $100,000
|
|
|
(1
|
)
|
|
|
(90
|
)
|
|
|
(91
|
)
|
Time deposits $100,000 and over
|
|
|
(99
|
)
|
|
|
(866
|
)
|
|
|
(965
|
)
|
Repurchase Agreements
|
|
|
0
|
|
|
|
(13
|
)
|
|
|
(13
|
)
|
Short-term borrowings
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest expense
|
|
|
35
|
|
|
|
(1,564
|
)
|
|
|
(1,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net interest income
|
|
$
|
(483
|
)
|
|
$
|
(411
|
)
|
|
$
|
(894
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009 Compared to 2008
|
|
|
|
Increase (Decrease)
|
|
|
|
Due to Changes in:
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Average
|
|
|
Average
|
|
|
Increase
|
|
($s in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
114
|
|
|
$
|
(26
|
)
|
|
$
|
88
|
|
Interest bearing deposits
|
|
|
49
|
|
|
|
(102
|
)
|
|
|
(54
|
)
|
Federal funds sold
|
|
|
(10
|
)
|
|
|
(134
|
)
|
|
|
(144
|
)
|
Investment securities
|
|
|
296
|
|
|
|
(7
|
)
|
|
|
289
|
|
Portfolio loans
|
|
|
1,451
|
|
|
|
(1,085
|
)
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest income
|
|
|
1,900
|
|
|
|
(1,354
|
)
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking
|
|
$
|
185
|
|
|
$
|
45
|
|
|
$
|
230
|
|
Money markets
|
|
|
(173
|
)
|
|
|
(544
|
)
|
|
|
(717
|
)
|
Savings
|
|
|
7
|
|
|
|
(1
|
)
|
|
|
6
|
|
Time deposits under $100,000
|
|
|
101
|
|
|
|
(14
|
)
|
|
|
87
|
|
Time deposits $100,000 and over
|
|
|
1,164
|
|
|
|
(70
|
)
|
|
|
1,094
|
|
Repurchase Agreements
|
|
|
(15
|
)
|
|
|
(31
|
)
|
|
|
(46
|
)
|
Short-term borrowings
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest expense
|
|
|
1,269
|
|
|
|
(615
|
)
|
|
|
654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net interest income
|
|
$
|
631
|
|
|
$
|
(739
|
)
|
|
$
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of 2010 with 2009
For the year period ended October 28, 2010, average
interest-earning assets were $202.7 million and average
interest-bearing liabilities were $123.0 million,
generating net interest income of $5.5 million. For the
year ended December 31, 2009, average interest-earning
assets were $197.5 million and average interest-bearing
liabilities were $120.3 million, generating net interest
income of $6.4 million. Average balances of interest
earning assets increased by $5.2 million, or 2.62%, while
average balances of interest-bearing liabilities increased by
$2.7 million, or 2.25%.
During 2010, Service1st sought to decrease its core deposit
base in order to reduce the banks excess liquidity due to
a shrinking loan portfolio which was caused by stagnant loan
growth, loan paydowns/payoffs and charged off loans. The average
balance of its loan portfolio decreased by $13.6 million,
from $144.0 million for the year ended December 31,
2009 to $130.4 million for the period ended
October 28, 2010. Since loan growth never fully
materialized, average assets grew primarily through increases in
average balances of lower yielding assets, such as certificates
of deposit in other banks and interest-bearing deposits.
Certificates of deposits in other banks grew $19.3 million,
or a growth of 201.04%, from $9.6 million as of
December 31, 2009 to $28.9 million for the period
ended October 28, 2010. Interest-bearing deposits in other
banks grew $4.3 million, or a growth of 17.47%%, from
$24.6 million as of December 31, 2009 to
$28.9 million for the period ended October 28, 2010.
This additional liquidity had a negative impact on the average
yield on Service1sts interest-earning assets.
Average balances of investment securities decreased by
$1.4 million during the year, or 8.7%, from
$15.9 million at December 31, 2009 to
$14.5 million for the period ended October 28, 2010.
As interest rates on the investment portfolio slightly
decreased, from 4.07% in 2009 to 3.91% in 2010, interest income
was negatively impacted by the reduction in earnings.
80
Interest income was also adversely impacted by the increase in
nonaccrual loans, which inhibited the growth of interest-earning
assets. With many real estate projects requiring an extended
time to market, some borrowers have exhausted their liquidity,
which has required Service1st to place their loans on
nonaccrual status. Non-performing loans grew from
$3.4 million, or 2.50% of total loans at December 31,
2008, to $7.8 million, or 5.69%, of total loans at
December 31, 2009, to $20.3 million, or 16.21%, of
total portfolio loans for the period ended October 28,
2010. During 2010, quarter end balances of nonaccrual loans
steadily increased as the year progressed, with
$10.0 million at March 31, 2010, $18.1 million at
June 30, 2010 and $20.5 million for the period ended
October 28, 2010. For the period ended October 28,
2010, nonaccrual loans totaled $20.3 million. Add to that
an additional $2.4 million in other real estate owned
(OREO), the result is $20.3 million in nonperforming loans
for the period ended October 28, 2010. The high balances of
nonperforming loans during 2010 adversely impacted interest
income growth.
As a result of all of these factors, the average yield on
interest-earning assets decreased from 6.03% for 2008 to 4.58%
for 2009, to 3.92% for the period ended October 28, 2010.
As a result, despite the slight increase in interest earning
assets, total interest income decreased, from $9.0 million
for 2009 to $6.6 million for the period ended
October 28, 2010, or $7.9 million on an annualized
basis.
The increase in interest-earning assets was funded largely by an
increase of $23.0 million in average balances of deposit
liabilities, from $163.2 million at December 31, 2009
to $186.2 million for the period ended October 28,
2010. The increase was primarily attributable to a
$20.2 million, or 47.16% increase in average balances of
noninterest bearing deposits and $12.1 million, or 61.67%
increase in average balances of interest-bearing checking.
The decrease in interest expense in 2010 of $1.5 million is
primarily the result of growth in volume of noninterest-bearing
deposits coupled with the impact of lower rates paid on interest
bearing deposits.
As a result of both modest decreases in interest rates and large
increases in low-yielding liquid assets, Service1sts net
interest rate spread (yield earned on average interest-earning
assets less the average rate paid on interest-bearing
liabilities) increased to 2.81% in 2010 compared with 2.36% in
2009, and its net interest margin also increased from 3.22% in
2009 to 3.24% in 2010.
Comparison
of 2009 with 2008
For the year ended December 31, 2009, average
interest-earning assets were $197.5 million and average
interest-bearing liabilities were $120.3 million,
generating net interest income of $6.4 million. For the
year ended December 31, 2008, average interest-earning
assets were $141.0 million and average interest-bearing
liabilities were $79.5 million, generating net interest
income of $6.5 million. Average balances of
interest-earning assets increased by $56.5 million, or
40.1%, while average balances of interest-bearing liabilities
increased by $40.8 million, or 51.3%.
During 2009, Service1st sought to expand its core deposit
base in order to increase its liquidity in anticipation of loan
growth. However, while the average balance of its portfolio
loans increased by $25.5 million, from $118.5 million
for the year ended December 31, 2008 to $144.0 million
for the year ended December 31, 2009, anticipated loan
growth did not fully materialize, and instead assets grew
primarily through increases of average balances of lower
yielding assets (consisting of certificates of deposit in other
banks, interest-bearing deposits and federal funds sold) of
$23.9 million, or a growth of 173.2%, from
$13.8 million as of December 31, 2008 to
$37.7 million as of December 31, 2009. This additional
liquidity had a negative impact on the average yield on
Service1sts interest- earning assets.
Average balances of investment securities also grew by
$7.3 million during the year, or 84.9%, from
$8.6 million at December 31, 2008 to
$15.9 million at December 31, 2009. As interest rates
on the investment portfolio slightly decreased, from 4.15% in
2008 to 4.07% in 2009, the increase in investment securities
contributed to interest income.
The modest increase in the average balances of portfolio loans
of $25.5 million was partially offset by a decrease in
their yield from 6.61% to 5.70%, resulting in a net addition to
net interest income of only $365,000. Yields on many of the
prime-rate based loans were protected by interest-rate floors.
81
Interest income was also adversely impacted by the increase in
nonaccrual loans, which inhibited the growth of interest-earning
assets. With many real estate projects requiring an extended
time to market, some borrowers have exhausted their liquidity,
which has required Service1st to place their loans on
nonaccrual status. Non-performing loans grew from
$3.4 million, or 2.50% of total loans at December 31,
2008, to $7.8 million, or 5.69%, of total portfolio loans
at December 31, 2009. However, during 2009, quarter end
balances of nonperforming loans were significantly higher than
this range, with $3.4 million at March 31, 2009,
$8.7 million at June 30, 2009 and $17.9 million
for the period ended October 28, 2010. In the fourth
quarter of 2009, Service1st charged off $10.3 million
in loans, including many nonperforming loans, such that at
December 31, 2009, the total of nonperforming loans fell to
$7.8 million. The high balances of nonperforming loans
during 2009 adversely impacted interest income growth.
As a result of all of these factors, the average yield on
interest-earning assets decreased from 6.03% for 2008 to 4.58%
for 2009. As a result, despite the increase in interest-earning
assets, total interest income increased only modestly, from
$8.5 million for 2008 to $9.0 million for 2009.
The increase in interest-earning assets was funded largely by an
increase of $64.7 million in average balances of deposit
liabilities, from $98.5 million at December 31, 2008
to $163.2 million at December 31, 2009. The increase
was primarily attributable to increases in average balances of
time deposits over $100,000 of $40.3 million and
non-interest-bearing demand deposits of $24.0 million.
The increase in interest expense in 2009 of $654,000 is
primarily the result of the growth in the volume in
interest-bearing deposits and, in particular, time deposits over
$100,000, which was only partially offset by decreases in rates.
As a result of both modest decreases in interest rates and large
increases in low-yielding liquid assets, Service1sts net
interest rate spread (yield earned on average interest-earning
assets less the average rate paid on interest-bearing
liabilities) decreased to 2.36% in 2009 compared with 3.49% in
2008, and its net interest margin also decreased from 4.59% in
2008 to 3.22% in 2009.
Provision
for Loan Losses
The provision for loan losses in each period is reflected as a
charge against earnings in that period. The provision is equal
to the amount required to maintain the allowance for loan losses
at a level that, in Service1sts judgment, is adequate to
absorb probable loan losses inherent in the loan portfolio. The
amount of the provision for loan losses in any period is
affected by reductions to the allowance in the period resulting
from charge-offs and increases to the allowance in the period as
a result of recoveries from charged-off loans. In addition,
changes in the size of the loan portfolio and the recognition of
changes in current risk factors affect the amount of the
provision.
During 2010, Service1st continued to experience significant
competitive pressures and challenging economic conditions in the
markets in which it operates. The Las Vegas economy, as well as
the national economy, has continued to show signs of significant
weakness. Weakness in the residential market has expanded into
the commercial real estate market, as builders and related
industries downsize. These economic trends have adversely
affected Service1sts asset quality and increased
charge-offs. Service1st has responded by increasing
provision expense to replenish and build the allowance for loan
losses allocable to adversely affected segments of
Service1sts loan portfolio in particular,
construction and land development loans and commercial and
industrial loans. Continuation of these economic and real estate
factors is likely to continue to affect Service1sts asset
quality and overall performance during the coming year.
Comparison
of 2010 with 2009
Service1sts provision for loan losses was
$6.3 million for the period ended October 28, 2010,
compared with $15.7 million for the year ended
December 31, 2009. The significant decrease in the
provision for loan losses from 2009 to 2010 is primarily
attributable to $3.9 million of charge-offs taken in 2010,
of which $1.2 million was in Service1sts construction
and land development portfolio (compared with $7.7 million
in 2009), and of which $1.7 million was in the commercial
and industrial loan portfolio (compared with
82
$4.4 million in charge-offs in 2009). As a result, net
charge-offs to average loans outstanding decreased from 8.43% in
2009 to 2.54% in 2010.
Comparison
of 2009 with 2008
Service1sts provision for loan losses was
$15.7 million for the year ended December 31, 2009,
compared with $3.7 million for the year ended
December 31, 2008. The significant increase in the
provision for loan losses from 2008 to 2009 is primarily
attributable to $12.2 million of charge-offs taken in 2009,
of which $7.7 million was in Service1sts construction
and land development portfolio (compared with $1.7 million
in 2008), and of which $4.4 million was in the commercial
and industrial loan portfolio (compared with no charge-offs in
2008). As a result, net charge-offs to average loans outstanding
increased from 1.44% in 2008 to 8.43% in 2009. The increase is
also attributable to the continuing weak economic conditions in
the markets served by Service1st, which resulted in an overall
increase in nonperforming loans from $3.4 million, or
2.50%, of total portfolio loans at December 31, 2008, to
$7.8 million, or 5.69%, of total portfolio loans at
December 31, 2009. Average balances of nonperforming loans
were well above this range for most of 2009, having been reduced
by charge-offs of $10.3 million taken in the fourth quarter
of 2009, all of which were nonperforming loans. In addition,
Service1sts potential problem loans (loans classified,
special mention, substandard, doubtful or loss) totaled
approximately $36.2 million at December 31, 2009
compared with $19.5 million at December 31, 2008.
Non-Interest
Income
Non-interest income primarily consists of loan documentation and
late fees, service charges on deposits and other fees such as
wire and ATM fees.
Comparison
of 2010 with 2009
Non-interest income totaled $514,000 for full year 2009 and
$507,000 for the period of January 1, 2010 through
October 28, 2010, or $608,000 on an annualized basis. This
trend is the continued resolve of Service1sts management
to adhere to fee income policies, including limiting waivers of
such fees. This effort began in mid-2008 and continued
throughout 2010.
Comparison
of 2009 with 2008
Non-interest income increased from $340,000 for 2008 to $514,000
for 2009. The increase of $174,000 is primarily the result of a
continuing effort by Service1sts management to adhere to
fee income policies, including limiting waivers of such fees.
This effort began in mid-2008 and carried throughout 2009.
83
Non-Interest
Expense
The following table sets for the principal elements of
non-interest expenses for 2010, 2009, and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended October 28, 2010 And Years Ended
December 31,
|
|
($ in thousands)
|
|
2010(1)
|
|
|
2009
|
|
|
2008
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
3,536
|
|
|
$
|
3,875
|
|
|
$
|
5,029
|
|
Occupancy, equipment and depreciation
|
|
|
1,360
|
|
|
|
1,673
|
|
|
|
1,664
|
|
Computer service charges
|
|
|
243
|
|
|
|
328
|
|
|
|
313
|
|
Professional fees
|
|
|
1,605
|
|
|
|
1,026
|
|
|
|
256
|
|
Advertising and business development
|
|
|
79
|
|
|
|
88
|
|
|
|
157
|
|
Insurance
|
|
|
705
|
|
|
|
500
|
|
|
|
145
|
|
Telephone
|
|
|
87
|
|
|
|
101
|
|
|
|
104
|
|
Stationary and supplies
|
|
|
26
|
|
|
|
32
|
|
|
|
45
|
|
Director fees
|
|
|
34
|
|
|
|
44
|
|
|
|
23
|
|
Loss on disposition of equipment s
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
Other real estate owned
|
|
|
654
|
|
|
|
0
|
|
|
|
0
|
|
Provision for unfunded commitments
|
|
|
(471
|
)
|
|
|
498
|
|
|
|
140
|
|
Other
|
|
|
510
|
|
|
|
425
|
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
$
|
8,368
|
|
|
$
|
8,593
|
|
|
$
|
8,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the period January 1, 2010 through October 28,
2010. |
Comparison
of 2010 with 2009
Non-interest expense was $8.4 million for the period ended
October 28, 2010, or on an annualized basis would have
totaled $10.0 million compared with $8.6 million for
2009. Salaries and employee benefits total $3.5 million, or
on an annualized basis would have totaled $4.2 million
compared with $3.9 million for 2009. The $300,000 increase
in salaries and employee benefits expense is the result of
$310,000 in stock option expense being recorded in 2010 upon the
retirement of an executive officer. The officers stock
options vested immediately upon his retirement. Professional
fees increased $600,000, from $1.0 million in 2009 to
$1.6 million for the period ended October 28, 2010.
The $600,000 increase is largely due to additional legal, audit
and consulting fees incurred by Service1st in connection
with the Acquisition. For the period ended October 28,
2010, Service1st recorded $654,000 in other real estate
owned (OREO) expense since the inception of the bank. In
addition, FDIC insurance premiums increased $205,000, primarily
due to growth in deposits for the first eight months of the
year. The decrease in provision for unfunded commitments was
primarily a result of a decrease to the reserve amount for
unfunded lines of credit. These lines of credit are commitments
that Service1st has underwritten for its borrowers, but
have yet to be funded by the bank.
Comparison
of 2009 with 2008
Non-interest expense was primarily flat, year over year:
$8.6 million for 2009, compared with $8.3 for 2008.
Salaries and employee benefits decreased $1.2 million in
2009 from $5.0 million in 2008 to $3.9 million in
2009. The $1.2 million decrease was due to staff
reductions, as well as a reduction in salaries and benefits for
the remaining employees. These cost-savings were partially
offset by a $770,000 increase in professional fees during the
same period, of which $741,000 was due to additional legal,
audit and consulting fees incurred by Service1st in
connection with the Acquisition. In addition, FDIC insurance
premiums increased $355,000, primarily due to growth in deposits
of $75.4 million. The increase in other expense was
primarily a result of an additional $498,000 to the reserve
amount for unfunded lines of credit. These lines of credit are
commitments that Service1st has underwritten for its
borrowers, but have yet to be funded by the bank.
84
Income
Taxes
Due to Service1st incurring operating losses from
inception, no provision for income taxes has been recorded since
the inception of Service1st.
Financial
Condition
Assets
Total assets stood at $180.0 million for the period ended
October 28, 2010, a decrease of $31.8 million, or
15.01% from $211.8 million as of December 31, 2009.
The shrinkage in total assets was principally attributable to a
net decrease of $11.9 million in cash and cash equivalents
(consisting of cash and due from banks, federal funds sold and
certificates of deposits with original maturities of three
months or less) and certificate of deposits held at other banks.
In addition, gross loans, including net deferred loan fees
decreased $11.6 million while investment securities
decreased $7.2 million. Cash and cash equivalents at
October 28, 2010 were $15.1 million, down from
$49.6 million at December 31. 2009. Certificates of
deposits at October 28, 2010 were $31.9 million, up
from $9.3 million at December 31. 2009. Gross loans at
October 28, 2010 were $125.4 million compared to
$137.0 million at December 31, 2009. Investment
securities at October 28, 2010 were $10.4 million
compared to $17.6 million at December 31, 2009.
Cash and
Cash Equivalents
Cash and cash equivalents consist of cash and due from banks,
federal funds sold and certificates of deposits with original
maturities of three months or less. Cash and cash equivalents
totalled $15.1 million at October 28, 2010,
$49.6 million at December 31, 2009 and
$10.0 million at December 31, 2008. Cash and cash
equivalents are managed based upon liquidity needs. The decrease
reflected Service1sts efforts to shrink its liquidity in
due to the reductions in loan portfolio balances and growth. See
Liquidity and Asset/Liability
Management in this section below for more information.
Investment
Securities and Certificates of Deposits held at other
Banks
Service1st invests in investment grade securities and
certificates of deposits at other banks with original maturities
exceeding three months for the following reasons: (i) such
investments can be readily reduced in size to provide liquidity
for loan balance increases or deposit balance decreases;
(ii) they provide a source of assets to pledge to secure
lines of credit (and, potentially, deposits from governmental
entities), as may be required by law or by specific agreement
with a depositor or lender; (iii) they can be used as an
interest rate risk management tool, since they provide a large
base of assets, the maturity and interest rate characteristics
of which can be changed more readily than the loan portfolio to
better match changes in the deposit base and other funding
sources of Service1st; and (iv) they represent an
alternative interest-earning use of funds when loan demand is
weak or when deposits grow more rapidly than loans. Further, if
and when Service1st becomes profitable, tax free investment
securities can be a source of partially tax-exempt income.
Service1st uses two portfolio classifications for its
investment securities: Held to Maturity, and
Available for Sale. The Held to Maturity portfolio
consists only of securities that Service1st has both the
intent and ability to hold until maturity, to be sold only in
the event of concerns with an issuers credit worthiness, a
change in tax law that eliminates their tax exempt status, or
other infrequent situations as permitted by generally accepted
accounting principles. Accounting guidance requires Available
for Sale securities to be marked to estimated fair value with an
offset, net of taxes, to accumulated other comprehensive income,
a component of stockholders equity.
Service1sts investment portfolio is currently composed
primarily of: (i) U.S. Government Agency securities;
(ii) investment grade corporate debt securities; and
(iii) collateralized mortgage obligations. For the period
ended October 28, 2010, investment securities and
certificates of deposit totaled $42.4 million, an increase
of 57.62% or $15.5 million, compared with
$26.9 million at December 31, 2009.
Service1st has not used interest rate swaps or other
derivative instruments to hedge fixed rate loans or to otherwise
mitigate interest rate risk.
85
The tables below summarize Service1sts investment
portfolio for the period ended October 28, 2010 and year
ended December 31, 2009. Securities are identified as
available-for-sale
or held to maturity. Unrealized gains or losses on
available-for-sale
securities are recorded as accumulated other comprehensive
income in stockholders equity.
Held-to-maturity
securities are carried at cost, adjusted for amortization of
premiums or accretion of discounts. Amortization of premiums or
accretion of discounts on mortgage-backed securities is
periodically adjusted for estimated prepayments. Securities
measured at fair value are reported at fair value, with
unrealized gains and losses included in current earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended October 28, 2010
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Investments Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
1,002
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,002
|
|
Collateralized Mortgage Obligations-commercial
|
|
|
1,868
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
1,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,870
|
|
|
$
|
|
|
|
$
|
(20
|
)
|
|
$
|
2,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended October 28, 2010
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Investments-Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
6,924
|
|
|
$
|
256
|
|
|
$
|
|
|
|
$
|
7,180
|
|
SBA Loan Pools
|
|
|
658
|
|
|
|
4
|
|
|
|
|
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,582
|
|
|
$
|
260
|
|
|
$
|
|
|
|
$
|
7,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Investments Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
5,248
|
|
|
$
|
|
|
|
$
|
(19
|
)
|
|
$
|
5,229
|
|
Collateralized Mortgage Obligations-commercial
|
|
|
2,209
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,457
|
|
|
$
|
|
|
|
$
|
(23
|
)
|
|
$
|
7,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Investments-Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
997
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
1,000
|
|
Corporate debt securities
|
|
|
8,390
|
|
|
|
477
|
|
|
|
|
|
|
|
8,867
|
|
SBA Loan Pools
|
|
|
814
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,201
|
|
|
$
|
480
|
|
|
$
|
(5
|
)
|
|
$
|
10,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes the maturity dates and investment
yields on Service1sts investment portfolio for the period
ended October 28, 2010 and December 31, 2009 for
securities identified as available for sale or held to maturity.
For the period ended October 28, 2010
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due Under 1 Year Amount/Yield
|
|
|
Due 1-5 Years Amount/Yield
|
|
|
Due 5-10 Years Amount/Yield
|
|
|
Due Over 10 Years Amount/Yield
|
|
|
Total Amount/Yield
|
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
1,002
|
|
|
|
1.50
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
1,002
|
|
|
|
1.50
|
%
|
Corporate Debt Securities
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Collateralized Mortgage Obligations-commercial
|
|
|
978
|
|
|
|
6.28
|
%
|
|
|
870
|
|
|
|
5.82
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
1,848
|
|
|
|
6.06
|
%
|
Small Business Administration Loan Pools
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
978
|
|
|
|
6.28
|
%
|
|
$
|
1,872
|
|
|
|
3.51
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
2,850
|
|
|
|
4.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
Corporate Debt Securities
|
|
|
4,027
|
|
|
|
5.36
|
%
|
|
|
3,153
|
|
|
|
5.19
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
7,180
|
|
|
|
5.29
|
%
|
Collateralized Mortgage Obligations-commercial
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Small Business Administration Loan Pools
|
|
|
7
|
|
|
|
3.12
|
%
|
|
|
15
|
|
|
|
5.13
|
%
|
|
|
100
|
|
|
|
2.91
|
%
|
|
|
540
|
|
|
|
3.27
|
%
|
|
|
662
|
|
|
|
3.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
4,034
|
|
|
|
5.36
|
%
|
|
$
|
3,168
|
|
|
|
5.19
|
%
|
|
$
|
100
|
|
|
|
2.91
|
%
|
|
$
|
540
|
|
|
|
3.27
|
%
|
|
$
|
7,842
|
|
|
|
5.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Due Under 1 Year Amount/Yield
|
|
|
Due 1-5 Years Amount/Yield
|
|
|
Due 5-10 Years Amount/Yield
|
|
|
Due Over 10 Years Amount/Yield
|
|
|
Amount/Yield
|
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
5,229
|
|
|
|
1.48
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
5,229
|
|
|
|
1.48
|
%
|
Corporate Debt Securities
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Collateralized Mortgage Obligations-commercial
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
2,204
|
|
|
|
2.65
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
2,204
|
|
|
|
2.65
|
%
|
Small Business Administration Loan Pools
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
7,433
|
|
|
|
1.83
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
7,433
|
|
|
|
1.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
997
|
|
|
|
1.55
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
997
|
|
|
|
1.55
|
%
|
Corporate Debt Securities
|
|
|
4,011
|
|
|
|
3.74
|
%
|
|
|
4,379
|
|
|
|
7.11
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
8,390
|
|
|
|
5.50
|
%
|
Collateralized Mortgage Obligations-commercial
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Small Business Administration Loan Pools
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
38
|
|
|
|
3.41
|
%
|
|
|
136
|
|
|
|
2.94
|
%
|
|
|
641
|
|
|
|
2.72
|
%
|
|
|
814
|
|
|
|
2.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
4,011
|
|
|
|
3.74
|
%
|
|
$
|
5,414
|
|
|
|
6.06
|
%
|
|
$
|
136
|
|
|
|
2.94
|
%
|
|
$
|
641
|
|
|
|
2.72
|
%
|
|
$
|
10,201
|
|
|
|
4.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
As of October 28, 2010, substantially all of
Service1sts loan customers were located in Nevada.
87
The following table summarizes the composition of
Service1sts loan portfolio by type and percentage of the
loan portfolio for the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended October 28, 2010
|
|
|
|
and Years Ended December 31, 2009 and 2008
|
|
($ in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
9,225
|
|
|
|
7.35
|
%
|
|
$
|
20,279
|
|
|
|
14.80
|
%
|
|
$
|
38,608
|
|
|
|
28.12
|
%
|
Commercial real estate
|
|
|
62,963
|
|
|
|
50.22
|
%
|
|
|
68,523
|
|
|
|
50.02
|
%
|
|
|
41,114
|
|
|
|
29.95
|
%
|
Residential (1 to 4 family)
|
|
|
10,282
|
|
|
|
8.20
|
%
|
|
|
1,367
|
|
|
|
1.00
|
%
|
|
|
483
|
|
|
|
0.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-secured loans
|
|
|
82,470
|
|
|
|
65.77
|
%
|
|
|
90,169
|
|
|
|
65.83
|
%
|
|
|
80,205
|
|
|
|
58.42
|
%
|
Loans not secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
42,778
|
|
|
|
34.12
|
%
|
|
|
46,470
|
|
|
|
33.92
|
%
|
|
|
56,556
|
|
|
|
41.20
|
%
|
Consumer
|
|
|
136
|
|
|
|
0.11
|
%
|
|
|
342
|
|
|
|
0.25
|
%
|
|
|
522
|
|
|
|
0.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Gross
|
|
|
125,384
|
|
|
|
100.00
|
%
|
|
|
136,981
|
|
|
|
100.00
|
%
|
|
|
137,283
|
|
|
|
100.00
|
%
|
Net deferred loan fees
|
|
|
20
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan, Gross, net of deferred fees
|
|
|
125,404
|
|
|
|
|
|
|
|
136,966
|
|
|
|
|
|
|
|
137,216
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(9,418
|
)
|
|
|
|
|
|
|
(6,404
|
)
|
|
|
|
|
|
|
(2,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Net
|
|
$
|
115,986
|
|
|
|
|
|
|
$
|
130,562
|
|
|
|
|
|
|
$
|
134,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross loans decreased by $11.6 million to
$125.4 million for the period ended October 28, 2010,
from $137.0 million as of December 31, 2009, as a
result of $8.1 million in new loans and $56.9 million
in principal advances being offset by $4.2 million in loan
payoffs and $65.2 million in principal reductions,
$3.9 million in charged off loans, $2.4 million in
loans being reclassified to other real estate owned (OREO), and
deferred fees of $20,000. Gross loans, net of deferred fees and
the allowance for loan losses, decreased $14.6 million from
year end 2009 to the period ended October 28, 2010, as a
result of a $3.0 million increase in the allowance for loan
losses.
Construction, land development and other land loans decreased
$11.1 million from 14.80% to 7.35% of the loan portfolio,
which reflects $2.9 million in paydowns/payoffs,
$1.2 million of loan charge-offs, a $7.4 million
reclassification of loan balances to residential real estate as
the construction related to this property was complete, plus
$350,000 in commercial and industrial loans were reclassified to
construction, land development and other land loans due to
Service1st taking land as collateral. Commercial real
estate loan balances decreased $5.6 million, but increased
in percentage of total loans, from 50.02% to 50.22% and reflects
$1.7 million in new loans, $3.8 million in loan
paydowns/payoffs and $922,000 in loan charge offs and
$2.4 million in loan balances being classified to other
real estate owned. Commercial and industrial loans also
decreased over the same period, by $3.7 million, from
33.92% to 34.12% of the loan portfolio by reason of the
depressed business climate, reduced loan demand plus
$1.7 million of loan charge-offs and another $625,000 in
loan balances being classified to other real estate owned. Over
the same period, residential real estate loans increased by
$8.9 million, from 1.00% to 8.20% of the portfolio, during
second quarter 2010, Service1st accepted a residential
property as collateral on a $3.0 million loan. Since this
$3.0 million loan was classified as commercial and
industrial during the first quarter 2010, it was reclassified
from commercial and industrial to residential real estate in the
second quarter 2010, which caused the residential real estate
balance to increase. In addition, a term loan with a draw down
period was also collateralized by multiple residential real
estate properties and as a result, the borrower advanced
additional funds of $1.5 million, which resulted in
residential real estate increasing an additional
$1.5 million. In addition, two loans totaling
$4.6 million were reclassified out of the category of
construction, land development and other land loans into
residential real estate loans during third quarter 2010 as the
construction for each residential property was completed.
88
The table below reflects the maturity distribution for
Service1sts loans, by category of loans, and the amount of
fixed versus variable rate interest loans, for the period ended
October 28, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended October 28, 2010
|
|
|
|
Due Within
|
|
|
|
|
|
Due Over
|
|
|
|
|
|
|
One Year
|
|
|
Due 1-5 Years
|
|
|
Five Years
|
|
|
Total
|
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
6,429
|
|
|
$
|
2,796
|
|
|
$
|
|
|
|
$
|
9,225
|
|
Commercial real estate
|
|
|
350
|
|
|
|
24,852
|
|
|
|
37,761
|
|
|
|
62,963
|
|
Residential real estate (1 to 4 family)
|
|
|
7,708
|
|
|
|
2,409
|
|
|
|
165
|
|
|
|
10,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate secured loans
|
|
$
|
14,487
|
|
|
$
|
30,056
|
|
|
$
|
37,926
|
|
|
$
|
82,470
|
|
Loans not secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
20,405
|
|
|
|
13,920
|
|
|
|
8,453
|
|
|
|
42,778
|
|
Consumer
|
|
|
80
|
|
|
|
56
|
|
|
|
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Gross
|
|
$
|
34,973
|
|
|
$
|
44,033
|
|
|
$
|
46,378
|
|
|
$
|
125,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
$
|
8,691
|
|
|
$
|
35,190
|
|
|
$
|
8,568
|
|
|
$
|
52,449
|
|
Variable
|
|
|
26,281
|
|
|
|
8,842
|
|
|
|
37,811
|
|
|
|
72,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
$
|
34,973
|
|
|
$
|
44,033
|
|
|
$
|
46,378
|
|
|
$
|
125,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrations
Service1sts loan portfolio has a concentration of loans
secured by real estate. For the period ended October 28,
2010 and December 31, 2009, loans secured by real estate
comprised 65.77% and 65.82% of total gross loans, respectively.
Substantially all of these loans are secured by first liens.
Approximately 38.09% and 27.56% of these real estate-secured
loans are owner occupied for the period ended October 28,
2010 and December 31, 2009, respectively. A loan is
considered owner occupied if the borrower occupies at least
fifty one percent of the collateral securing such loan.
Service1sts policy is to obtain collateral whenever it is
available, depending upon the degree of risk Service1st is
willing to accept. Repayment of loans is expected from the
borrowers cash flows or the sale proceeds of the
collateral. Deterioration in the performance of the economy and
real estate values in Service1sts primary market areas has
had, and is expected to continue to have, an adverse impact on
collectability of outstanding loans.
Interest
Reserves
Interest reserves are generally established at the time of the
loan origination as an expense item in the budget for a
construction and land development loan. Service1sts
practice is to monitor the construction, sales
and/or
leasing progress to determine the feasibility of ongoing
construction and development projects. If at any time during the
life of the loan the project is determined not to be viable,
Service1st generally has the ability to discontinue the use
of the interest reserve and take appropriate action to protect
its collateral position via negotiation
and/or legal
action as deemed appropriate. For the period ended
October 28, 2010, Service1st had no loans with an
interest reserve. At December 31, 2009, Service1st had
five loans with an outstanding balance of $8.8 million
where available interest reserves amount to $532,000.
Nonperforming
Assets
Nonperforming assets consists of:
(i) nonaccrual loans. In general, loans
are placed on nonaccrual status when Service1st determines
timely recognition of interest to be in doubt due to the
borrowers financial condition and collection
89
efforts. Service1st generally discontinues accrual of
interest when a loan is 90 days delinquent unless the loan
is well secured and in the process of collection;
(ii) loans past due 90 days or more and still
accruing interest. Loans past due 90 days or more and
still accruing interest consist primarily of loans 90 days
or more past their maturity date but not their interest due date.
(iii) restructured loans. Restructured loans have
modified terms to reduce either principal or interest due to
deterioration in the borrowers financial
condition; and
(iv) other real estate owned, or OREO. If a bank
takes title to the borrowers real property that serves as
collateral for a defaulted loan, such property is referred to as
other real estate owned (OREO). As of
December 31, 2009, Service1st had no OREO.
The following table sets forth nonperforming assets at the dates
indicated by category of asset.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended October 28, 2010
|
|
|
|
and Years Ended December 31, 2009 and 2008
|
|
($s in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
5,977
|
|
|
$
|
6,524
|
|
|
$
|
3,434
|
|
Commercial real estate
|
|
|
8,611
|
|
|
|
0
|
|
|
|
0
|
|
Residential real estate (1-4 family)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
14,588
|
|
|
|
6,524
|
|
|
|
3,434
|
|
Commercial and industrial
|
|
|
5,739
|
|
|
|
1,275
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
|
20,327
|
|
|
|
7,799
|
|
|
|
3,434
|
|
Past due (>90days) loans and accruing interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial real estate
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential real estate (1-4 family)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total past due loans accruing interest
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Restructured loans (still on accrual)(1)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
20,327
|
|
|
|
7,799
|
|
|
$
|
3,434
|
|
Other real estate owned (OREO)
|
|
|
2,403
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
22,730
|
|
|
$
|
7,799
|
|
|
$
|
3,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Loans as a percentage of total portfolio loans
|
|
|
16.21
|
%
|
|
|
5.69
|
%
|
|
|
2.50
|
%
|
Non-Performing Loans as a percentage of total assets
|
|
|
11.30
|
%
|
|
|
3.68
|
%
|
|
|
2.15
|
%
|
Non-Performing assets as a percentage of total assets
|
|
|
12.63
|
%
|
|
|
3.68
|
%
|
|
|
2.15
|
%
|
Allowance for loan losses as a percentage of nonperforming loans
|
|
|
46.34
|
%
|
|
|
82.11
|
%
|
|
|
83.95
|
%
|
|
|
|
(1) |
|
For the period ended October 28, 2010 and years ended
December 31, 2009 and 2008, Service1st had approximately
$11.0 million, $526,000, and $3.4 million,
respectively, in loans classified as restructured loans. All of
such loans were on nonaccrual. |
90
For the period ended October 28, 2010, nonperforming loans
totaled $20.3 million, or 16.21%, of total portfolio loans,
an increase of $12.5 million, or 160.26%, from
December 31, 2009. Total nonperforming assets for the
period ended October 28, 2010 were $22.7 million
compared to $7.8 million as of December 31, 2009, a
growth of $14.9 million or 191.26%. Nonperforming loans
increased $12.5 million while nonperforming assets
increased $14.9 million due to continued adverse economic
conditions in the Nevada market. During 2009, nonperforming
assets totaled $3.4 million at March 31, 2009,
$8.7 million for the period ended October 28, 2009 and
$17.9 million for the period ended October 28, 2009.
In the fourth quarter of 2009, Service1st charged off
$10.3 million in loans, including many nonperforming loans,
such that at December 31, 2009, the total of nonperforming
assets fell to $7.8 million.
The largest category of nonperforming assets is commercial real
estate loans and represents one of the loan categories in which
Service1st has been most severely impacted by adverse
economic conditions in Nevada. The other category in which
Service1st has been significantly impacted by adverse
economic conditions is construction, land development and other
land loans. With many real estate projects requiring an extended
time to market, many of Service1sts borrowers have
exhausted their liquidity and stopped making payments, thereby
requiring Service1st to place the loans on nonaccrual. As a
result, Service1sts portfolio of nonperforming commercial
real estate loans, which had a zero balance at December 31,
2009, increased to $8.6 million for the period ended
October 28, 2010. This $8.6 million balance is derived
by adding $8.6 million in commercial real estate nonaccrual
loans to commercial real estate loans which are greater than
90 days past due. For the period ended October 28,
2010, nonperforming construction, land development and other
land loans totaled $6.0 million, an 7.69% reduction from
the $6.5 million balance at December 31, 2009,
primarily as a result of loan payoffs and paydowns of
approximately $134,000 and loan charge-offs of $1.6 million
of nonperforming loans during the first ten months of 2010,
coupled with additions of $1.4 million in nonperforming
construction, land development and other land loans which were
added during the first ten months of 2010. Given the current
economic conditions in Nevada, Service1st has effectively
stopped making commercial real estate loans and construction,
land development and other land loans (except for contractually
required disbursements under existing facilities) unless
borrowers can provide strong financial support outside the
project under development.
The other loan category with nonperforming assets is commercial
and industrial loans which increased $4.4 million from
$1.3 million at December 31, 2009 to $5.7 million
for the period ended October 28, 2010. Service1st had
a net $5.7 million in commercial and industrial loans
placed on non-accrual status during the first ten months of 2010
as a result of adverse economic conditions. In addition,
charge-offs totaled $1.7 million, of which
$1.4 million nonperforming commercial and industrial loans
in the first ten months of 2010.
Potential
Problem Loans
Service1st classifies its loans consistent with federal
banking regulations using a ten category grading system. The
following table presents information regarding potential problem
loans, which are graded but still performing as of the dates
indicated. These graded loans are referred to in applicable
banking regulations as
91
Other Loans Especially Mentioned,
Substandard, Doubtful, and
Loss. These loan grades are described in further
detail in the section entitled Information Related to
Service1st Potential Problem Loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended October 28, 2010
|
|
|
At December 31, 2009
|
|
|
|
# of
|
|
|
Loan
|
|
|
|
|
|
Percent of
|
|
|
# of
|
|
|
Loan
|
|
|
|
|
|
Percent of
|
|
|
|
Loans
|
|
|
Balance
|
|
|
%
|
|
|
Total Loans
|
|
|
Loans
|
|
|
Balance
|
|
|
%
|
|
|
Total Loans
|
|
|
Construction, land development and other land loans
|
|
|
1
|
|
|
$
|
856
|
|
|
|
5.75
|
%
|
|
|
0.68
|
%
|
|
|
4
|
|
|
$
|
8,578
|
|
|
|
23.71
|
%
|
|
|
6.26
|
%
|
Commercial real estate
|
|
|
4
|
|
|
|
4,319
|
|
|
|
28.97
|
%
|
|
|
3.44
|
%
|
|
|
6
|
|
|
|
12,320
|
|
|
|
34.06
|
%
|
|
|
9.00
|
%
|
Residential real estate (1-4 family)
|
|
|
1
|
|
|
|
2,909
|
|
|
|
19.51
|
%
|
|
|
2.32
|
%
|
|
|
0
|
|
|
|
0
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Commercial and industrial
|
|
|
16
|
|
|
|
6,824
|
|
|
|
45.77
|
%
|
|
|
5.44
|
%
|
|
|
22
|
|
|
|
14,790
|
|
|
|
40.89
|
%
|
|
|
10.80
|
%
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
3
|
|
|
|
483
|
|
|
|
1.34
|
%
|
|
|
0.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
22
|
|
|
$
|
14,908
|
|
|
|
100
|
%
|
|
|
11.88
|
%
|
|
|
35
|
|
|
$
|
36,171
|
|
|
|
100
|
%
|
|
|
26.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service1sts potential problem loans consisted of 22 loans
and totaled approximately $14.9 million for the period
ended October 28, 2010 and consisted of 35 loans which
totaled $36.2 million at December 31, 2009. This
$21.3 million decrease is due primarily to
$10.9 million in loan payoffs and paydowns,
$7.9 million being moved to a non-accrual status,
$1.9 million moved to OREO, $3.4 million in loans
being charged off, $2.8 million being moved to an impaired
loan status, $377,000 being removed from the problem loan status
due to the loans being upgraded slightly offset by
$3.8 million in additional loans being classified as
potential problem loan in 2010 and $416,000 of advances on
potential problem loans. The problem loans presented above are
the result of a difficult economic environment in the markets
Service1st operates. Commercial and industrial loans
comprise approximately 45.77% of the total aggregate balance of
potential problem loans for the period ended October 28,
2010 compared to approximately 40.89% at December 31, 2009.
Commercial real estate comprises approximately 28.97% of the
total aggregate balance of potential problem loans for the
period ended October 28, 2010 compared to approximately
34.06% at December 31, 2009. Construction, land development
and other land loans comprise approximately 5.75% of the total
balance of potential problem loans for the period ended
October 28, 2010, compared to 23.71% at December 31,
2009. Residential real estate loans comprise approximately
19.51% of the total balance of potential problem loans for the
period ended October 28, 2010, compared to 0% at
December 31, 2009. All problem loan categories, with the
exception of residential real estate, experienced a decrease in
balances since December 31, 2009.
Service1sts potential problem loans consisted of 35 loans
and totaled approximately $36.2 million at
December 31, 2009 and consisted of 9 loans and totaled
$19.5 million at December 31, 2008. This increase is
due primarily to an increased deterioration in the commercial
real estate and commercial and industrial loan portfolios of
$12.0 million and $7.6 million, respectively. These
increases in problem loans are the result of a difficult
economic environment in the markets Service1st operates.
Construction and land loans comprise approximately 23.71% of the
total aggregate balance of potential problem loans at
December 31, 2009 compared to approximately 61.12% at
December 31, 2008. This decrease is the result of
$7.8 million of charge-offs taken in 2009 for construction,
land development and other land loans. The majority of
Service1sts potential problem loans are secured by real
estate.
Impaired
Loans
A loan is impaired when it is probable that Service1st will
be unable to collect all contractual principal and interest
payments due in accordance with the terms of the loan agreement.
Impaired loans are measured based on the present value of
expected future cash flows discounted at the loans
effective interest rate or, as a practical expedient, at the
loans observable market price or the fair value of the
collateral if the loan is collateral dependent. The amount of
impairment, if any, and any subsequent changes are either
included in the allowance for loan losses or charged off
Service1sts books, if deemed necessary.
The categories of nonaccrual loans and impaired loans overlap,
although they are not coextensive. Service1st considers all
circumstances regarding the loan and borrower on an individual
basis when
92
determining whether a loan is impaired such as the collateral
value, reasons for the delay, payment record, the amount past
due, and number of days past due.
For the period ended October 28, 2010 and December 31,
2009, the aggregate total amount of loans classified as
impaired, was $26.9 million and $9.4 million,
respectively. The total specific allowance for loan losses
related to these loans was $5.4 million for the period
ended October 28, 2010 and $841,000 at December 31,
2009. The increase in total impaired loans reflects the overall
decline in economic conditions in Nevada.
For the period ended October 28, 2010 and December 31,
2009, Service1st had approximately $11.0 million and
$526,000, respectively, in loans classified as restructured
loans. All such loans were on nonaccrual. The $526,000
restructured loan is present in both the October 28, 2010
and December 31, 2009 balances and originally consisted of
two construction and land development loans on adjacent
properties, which were originated in 2007 to a single borrower.
These loans exhibited signs of distress in 2008 and were
restructured in 2008, resulting in an outstanding balance of
$3.4 million as of December 31, 2008. Updated
appraisals were ordered for these two properties in 2009;
however, both appraisals reflected continued deterioration in
value. As a result, Service1st charged off
$2.9 million of the outstanding balance, which resulted in
a remaining outstanding balance of $526,000 as of
December 31, 2009 and for the period ended October 28,
2010. This loan is secured by 30 improved lots.
A $550,000 unsecured line of credit to an individual for
business investment purposes and classified as a commercial and
industrial loan was restructured in May 2010. After reviewing
the December 2009 personal and business financial
statements, it was determined that the borrower was unable to
meet the terms of the credit agreement. A restructured loan was
approved and put in place which included a reduced monthly
payment. The borrower has been cooperative and is making
payments as agreed. For the period ended October 28, 2010,
the balance on the unsecured line of credit was $479,000.
A $3.3 million construction and land development loan,
which was secured by 13.38 acres of vacant land, was
restructured in May 2010. The borrower had delayed development
of a planned industrial project due to the depressed economic
environment. The borrower tried to sell the property without
success for the past two years and had been paying monthly
interest out of pocket. At the end of 2009, the borrower became
delinquent on monthly interest payments and sought relief. Prior
to restructuring the loan, the bank had already recognized a
charge-off of $891,000 once the loan had become impaired.
Service1st agreed to a restructured loan provided the
borrower brought all past due payments current at time of
restructure. For the period ended October 28, 2010, the
outstanding balance on this restructured loan was
$2.4 million and was past due for the June, 2010 payment.
As a result, notice of default was filed in October 2010.
A $4.0 million land loan which is secured by
12.0 acres of vacant land was restructured in March 2010.
The borrower was an investment limited liability company
(LLC) supported by a guarantor. The guarantor indicated
that the LLC was unable to sell the property or continue to
service the debt. This same guarantor was a principal in a
related transaction in which the bank collected just over
$1.0 million dollars and charged off the remaining $2.0
million. In exchange for partial repayment of the related
transaction, the bank agreed to a restructure of this
$4.0 million loan, of which $2.0 million was charged
off. For the period ended October 28, 2010, the outstanding
balance on this restructured loan was $1.9 million and the
borrower is paying as agreed.
Four related loans to the same borrower were restructured in
June 2010. The loans consist of two commercial and industrial
loans totaling $650,000 that were related to the borrowers
medical practice and two real estate-secured loans totaling
$5.4 million, consisting of a $3.2 million loan on the
property in which the borrowers medical office is located
and a $2.2 million loan for the purchase of a medical
office building for lease. The borrower had already defaulted on
several single family residential properties, demonstrating to
the bank his financial weakness and inability to service all of
his obligations. Given the borrowers financial
deterioration, the bank agreed to a reduction in monthly
payments of the combined credits. For the period ended
October 28, 2010, the outstanding balance was
$5.7 million.
93
The breakdown of total impaired loans and the related specific
reserves for the period ended October 28, 2010 and
December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Period Ended October 28, 2010
|
|
|
|
Impaired
|
|
|
|
|
|
Percent of
|
|
|
Reserve
|
|
|
|
|
|
Percent of
|
|
($ in thousands)
|
|
Balance
|
|
|
%
|
|
|
Total Loans
|
|
|
Balance
|
|
|
%
|
|
|
Total Allowance
|
|
|
Construction, land development and other land loans
|
|
$
|
6,834
|
|
|
|
25.40
|
%
|
|
|
5.45
|
%
|
|
$
|
149
|
|
|
|
2.74
|
%
|
|
|
1.58
|
%
|
Commercial real estate
|
|
|
9,325
|
|
|
|
34.67
|
%
|
|
|
7.44
|
%
|
|
|
1,395
|
|
|
|
25.66
|
%
|
|
|
14.81
|
%
|
Residential real estate (1-4 family)
|
|
|
2,909
|
|
|
|
10.81
|
%
|
|
|
2.32
|
%
|
|
|
145
|
|
|
|
2.67
|
%
|
|
|
1.54
|
%
|
Commercial and industrial
|
|
|
7,833
|
|
|
|
29.12
|
%
|
|
|
6.25
|
%
|
|
|
3,748
|
|
|
|
68.93
|
%
|
|
|
39.80
|
%
|
Consumer
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
26,901
|
|
|
|
100.00
|
%
|
|
|
21.46
|
%
|
|
$
|
5,437
|
|
|
|
100.00
|
%
|
|
|
57.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009
|
|
|
|
Impaired
|
|
|
|
|
|
Percent of
|
|
|
Reserve
|
|
|
|
|
|
Percent of
|
|
($ in thousands)
|
|
Balance
|
|
|
%
|
|
|
Total Loans
|
|
|
Balance
|
|
|
%
|
|
|
Total Allowance
|
|
|
Construction, land development and other land loans
|
|
$
|
8,081
|
|
|
|
86.37
|
%
|
|
|
5.91
|
%
|
|
$
|
453
|
|
|
|
53.91
|
%
|
|
|
7.08
|
%
|
Commercial real estate
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Residential real estate (1-4 family)
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Commercial and industrial
|
|
|
1,275
|
|
|
|
13.63
|
%
|
|
|
0.93
|
%
|
|
|
388
|
|
|
|
46.09
|
%
|
|
|
6.05
|
%
|
Consumer
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
9,356
|
|
|
|
100.00
|
%
|
|
|
6.84
|
%
|
|
$
|
841
|
|
|
|
100.00
|
%
|
|
|
13.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of interest income recognized on impaired loans for
the period ended October 28, 2010 is approximately $147,000
and $103,000 for the year ended December 31, 2009. No
interest income was recognized on impaired loans for the year
ended December 31, 2008.
94
Allowance
for Loan Losses
The following table presents the activity in Service1sts
allowance for loan losses for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended October 28, 2010
|
|
Analysis of Loss Experience by Loan Type
|
|
and Years Ended December 31, 2009, 2008
|
|
($s in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Allowance for Loan and Lease Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the period
|
|
$
|
6,404
|
|
|
$
|
2,883
|
|
|
$
|
922
|
|
Provisions charged to operating expenses
|
|
|
6,329
|
|
|
|
15,666
|
|
|
|
3,670
|
|
Recoveries of loans previously charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
|
293
|
|
|
|
0
|
|
|
|
0
|
|
Commercial real estate
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential real estate (1-4 family)
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
321
|
|
|
|
9
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
615
|
|
|
|
9
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other
|
|
|
1,151
|
|
|
|
7,745
|
|
|
|
1,712
|
|
Commercial
|
|
|
922
|
|
|
|
0
|
|
|
|
0
|
|
Residential (including multi-family)
|
|
|
202
|
|
|
|
0
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
1,655
|
|
|
|
4,409
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total charged-off
|
|
|
3,930
|
|
|
|
12,154
|
|
|
|
1,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
3,315
|
|
|
|
12,145
|
|
|
|
1,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
9,418
|
|
|
$
|
6,404
|
|
|
$
|
2,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Charge-offs to average loans outstanding
|
|
|
2.54
|
%
|
|
|
8.43
|
%
|
|
|
1.44
|
%
|
Allowance for Loan Loss to outstanding loans
|
|
|
7.51
|
%
|
|
|
4.68
|
%
|
|
|
2.10
|
%
|
The accounting principles used by Service1st in maintaining
the allowance for loan losses are discussed in the section
entitled Critical Accounting Policies
Allowance for Loan Losses. The allowance is maintained
at a level management believes to be adequate to absorb
estimated future credit losses inherent in Service1sts
loan portfolio, based on evaluation of the collectability of the
loans, prior credit loss experience, credit loss experience of
other banks and other factors deemed relevant.
The allowance for loan losses is established through a provision
for loan losses charged to operations and is increased by the
collection of monies on loans previously charged off
(recoveries) and reduced by loans that are charged off.
Service1sts board of directors reviews the adequacy of the
allowance for loan losses on a monthly basis. For the period
ended October 28, 2010, Service1st had established an
allowance of $9.4 million, after increasing the allowance
by $6.3 million in provisions, recording an additional
$615,000 in recoveries, and recording charge-offs of
$3.9 million. The allowance for loan loss to outstanding
loans has increased from 4.68% of outstanding loans at
December 31, 2009 to 7.51% for the period ended
October 28, 2010, reflecting the increase in nonperforming
loans and further deterioration in economic conditions.
Service1sts methodology for the allowance for loan losses
incorporates several quantitative and qualitative risk factors
used to establish the appropriate allowance for loan loss at
each reporting date. Quantitative factors include delinquency
and charge-off trends, collateral values, the composition,
volume and overall quality of the loan portfolio (including
outstanding loan commitments), changes in nonperforming loans,
concentrations and information about individual loans.
Historical loss experience is an important quantitative factor
for many banks, but thus far less so for Service1st, because it
has been in operation for just over four
95
years. Qualitative factors include the economic condition of
Service1sts operating markets. Specific changes in the
risk factors are based on perceived risk of similar groups of
loans classified by collateral type and purpose. Statistics on
local trends and peers are also incorporated into the allowance.
While Service1st management uses the best information
available to make its evaluation, future adjustments to the
allowance may be necessary, if there are significant changes in
economic or other conditions. In addition, the FDIC and the
Nevada FID, as an integral part of their examination processes,
periodically review Service1sts allowances for loan
losses, and may require additions to Service1sts allowance
based on their judgment about information available to them at
the time of their examinations. Service1st periodically
reviews the assumptions and formula used in determining the
allowance and makes adjustments if required to reflect the
current risk profile of the portfolio.
When Service1st determines that it is unable to collect all
contractual principal and interest payments due in accordance
with the terms of the loan agreement, the loan becomes impaired.
Impaired loans are measured based on the present value of
expected future cash flows discounted at the loans
effective interest rate or, as a practical expedient, at the
loans observable market price or the fair value of the
collateral, if the loan is collateral dependent. The amount of
impairment, if any, and any subsequent changes are included in
the allowance for loan losses or charged off Service1sts
books if deemed necessary.
Service1sts loan portfolio has a concentration of loans in
commercial real-estate related loans and includes significant
credit exposure to the commercial real estate industry. The
specific reserves for collateral dependent impaired loans are
based on the fair value of the collateral less estimated selling
costs (including brokerage fees) and other miscellaneous costs
that may be incurred to make the collateral more marketable
(such as
clean-up
costs) and to cure past due amounts (such as delinquent property
taxes). The fair value of collateral is determined based on
third-party appraisals. See Information Related to
Service1st Bank of Nevada Allowance for Loan
Losses for more information. In some cases,
adjustments are made to the appraised values due to known
changes in market conditions or known changes in the collateral.
Service1sts management believes that the allowance for the
period ended October 28, 2010 and the methodology utilized
in deriving that level were adequate to absorb known and
inherent risks in the loan portfolio. However, credit quality is
affected by many factors beyond Service1sts control,
including local and national economies, and facts may exist
which are not currently known to Service1st that adversely
affect the likelihood of repayment of various loans in the loan
portfolio and realization of collateral upon default.
Accordingly, no assurance can be given that Service1st will
not sustain loan losses materially in excess of the allowance
for loan losses. In addition, the FDIC, as a major part of its
examination process, periodically reviews the allowance for loan
losses and could require additional provisions to be made. The
allowance is based on estimates, and actual losses may vary from
the estimates. However, as the volume of the loan portfolio
grows, additional provisions will be required to maintain the
allowance at adequate levels. No assurance can be given that
continuing adverse economic conditions or unforeseen events will
not lead to increases in delinquent loans, the provision for
loan losses
and/or
charge-offs.
96
The following table presents the allocation of Service1sts
allowance for loan losses by loan category and percentage of
loans in each category to total loans as of the dates indicated.
Allocation of the Allowance and percentage of allowance by loan
type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
October 28, 2010
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
($s in thousands)
|
|
Amount
|
|
|
% of loans
|
|
|
Amount
|
|
|
% of loans
|
|
|
Amount
|
|
|
% of loans
|
|
|
Allowance for Loan and Lease Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
318
|
|
|
|
7.36
|
%
|
|
$
|
1,322
|
|
|
|
14.80
|
%
|
|
$
|
1,083
|
|
|
|
28.12
|
%
|
Commercial real estate
|
|
|
3,019
|
|
|
|
50.22
|
%
|
|
|
1,890
|
|
|
|
50.02
|
%
|
|
|
484
|
|
|
|
29.95
|
%
|
Residential real estate (1-4 family)
|
|
|
737
|
|
|
|
8.20
|
%
|
|
|
54
|
|
|
|
1.00
|
%
|
|
|
6
|
|
|
|
0.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
4,074
|
|
|
|
65.77
|
%
|
|
|
3,266
|
|
|
|
65.82
|
%
|
|
|
1,573
|
|
|
|
58.42
|
%
|
Commercial and industrial
|
|
|
5,339
|
|
|
|
34.12
|
%
|
|
|
3,135
|
|
|
|
33.92
|
%
|
|
|
1,177
|
|
|
|
41.20
|
%
|
Consumer
|
|
|
5
|
|
|
|
0.11
|
%
|
|
|
3
|
|
|
|
0.26
|
%
|
|
|
133
|
|
|
|
0.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan loss
|
|
$
|
9,418
|
|
|
|
100
|
%
|
|
$
|
6,404
|
|
|
|
100
|
%
|
|
$
|
2,883
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loan category with the largest level of historical net
charge-offs is attributed to Service1sts commercial and
industrial loans. This category had charge-offs of
$1.7 million and recoveries of $321,000 for the period
ended October 28, 2010. In 2009, commercial and industrial
loans had $4.4 million in charges-offs and $9,000 in
recoveries, while in 2008, commercial and industrial loans had
no charges-offs or recoveries. Service1sts loan balance in
this category is $42.8 million for the period ended
October 28, 2010 with $5.7 million of that balance
being classified as nonaccrual and a loan balance of
$46.5 million as of December 31, 2009 with
$1.3 million of these loans on nonaccrual. Accordingly, the
allowance for loan losses of $5.3 million was allocated to
this category for the period ended October 28, 2010 while
$3.1 million was allocated to this category as of
December 31, 2009.
Service1sts construction, land development and other land
loans category had charge-offs of $1.2 million and
recoveries of $293,000 for the period ended October 28,
2010. In 2009, construction, land development and other land
loans had $7.7 million in charge-offs and no recoveries,
while in 2008, construction, land development and other land
loans category had $1.7 million in charge-offs and no
recoveries. Service1sts loan balance in this category is
$9.2 million for the period ended October 28, 2010
with $6.0 million of that balance being classified as
nonaccrual and a loan balance of $20.3 million as of
December 31, 2009 with $6.5 million of these loans on
nonaccrual. Accordingly, the allowance for loan losses of
$318,000 was allocated to this category for the period ended
October 28, 2010 while $1.3 million was allocated to
this category as of December 31, 2009.
Service1sts commercial real estate loan category had
charge-offs of $922,000 and no recoveries for the period ended
October 28, 2010. In 2009 and 2008, there were no
charge-offs or recoveries for commercial real estate loans.
Service1sts loan balance in this category is
$63.0 million for the period ended October 28, 2010
with $8.6 million of that balance being classified as
nonaccrual and a loan balance of $68.5 million as of
December 31, 2009 with none of this loan balance on
nonaccrual. Accordingly, the allowance for loan losses of
$3.0 million was allocated to this category for the period
ended October 28, 2010 while $1.9 million was
allocated to this category as of December 31, 2009.
Service1sts residential real estate loan category had
charge-offs of $202,000 and $1,000 in recoveries for the period
ended October 28, 2010. In 2009 and 2008, there were no
charge-offs or recoveries for residential real estate loans.
Service1sts loan balance in this category is
$10.3 million for the period ended October 28, 2010
with none of that loan balance being classified as nonaccrual
and a loan balance of $1.4 million as of December 31,
2009 with none of this loan balance on nonaccrual. Accordingly,
the allowance for loan losses
97
of $737,000 was allocated to this category for the period ended
October 28, 2010 while $54,000 was allocated to this
category as of December 31, 2009.
Deferred
Tax Asset
For the period ended October 28, 2010 and year ended
December 31, 2009, a valuation allowance for the entire net
deferred tax asset was considered necessary as
Service1st determined it was not more likely than not that
the deferred tax asset would be realized. Federal operating loss
carry forwards begin to expire in 2027.
Internal Revenue Code Section 382 places a limitation on
the amount of taxable income that can be offset by net operating
loss carry forwards after a change in control (generally greater
than 50% change in ownership) of a loss corporation.
Accordingly, utilization of net operating loss carry forwards
may be subject to an annual limitation regarding their
utilization against future taxable income upon a change in
control.
Deposits
Service1sts activities are primarily based in Nevada and
its deposit base is also primarily generated from this
geographic region. Deposits have historically been the primary
source for funding Service1sts asset growth.
During the first ten months of 2010 and full year 2009,
Service1st sought to decrease the rates on its deposit base
in order to increase its net interest income, interest rate
spread and net interest margin. Deposits decreased
$23.2 million or 12.52% for the period ended
October 28, 2010 from $185.3 million as of
December 31, 2009 to $162.1 million for the period
ended October 28, 2010. Time deposits decreased
$25.5 million or 42.08% from $60.6 million as of
December 31, 2009 to $35.1 million for the period
ended October 28, 2010 as a result of the deposit rate
reduction strategy. In addition, money market accounts decreased
$13.5 million or 32.30% from $41.8 million as of
December 31, 2009 to $28.3 million for the period
ended October 28, 2010. Approximately $10.0 million of
the $13.3 million decrease in money market accounts was due
to a transfer of funds out of money market accounts and into
noninterest bearing deposits due to the announcement of
Service1sts consent order, the remaining $3.3 million
in money market funds left Service1st altogether. Overall
rates on interest-bearing deposit accounts decreased 49.55%,
from a blended rate of 2.22% as of December 31, 2009 to
1.12% for the period ended October 28, 2010. This resulted
in interest expense decreasing $1.5 million from
December 31, 2009 to October 28, 2010. The overall
decrease in total deposits of 12.52% is reflective of
Service1st effectively managing down deposit rates in order
to lower Service1sts cost of funds.
The following table reflects the summary of deposit categories
by dollar and percentage for the period ended October 28,
2010, and year ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended
|
|
|
|
|
|
|
October 28, 2010
|
|
|
December 31, 2009
|
|
($s in thousands)
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
|
Non-interest-bearing deposits
|
|
$
|
68,575
|
|
|
|
42.31
|
%
|
|
$
|
56,463
|
|
|
|
30.47
|
%
|
Interest-bearing deposits
|
|
|
29,018
|
|
|
|
17.91
|
%
|
|
|
25,094
|
|
|
|
13.54
|
%
|
Money Markets
|
|
|
28,316
|
|
|
|
17.47
|
%
|
|
|
41,774
|
|
|
|
22.54
|
%
|
Savings
|
|
|
1,065
|
|
|
|
0.66
|
%
|
|
|
1,435
|
|
|
|
0.77
|
%
|
Time deposits under $100,000
|
|
|
4,888
|
|
|
|
3.02
|
%
|
|
|
6,238
|
|
|
|
3.37
|
%
|
Time deposits $100,000 and over
|
|
|
30,204
|
|
|
|
18.64
|
%
|
|
|
54,316
|
|
|
|
29.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
162,066
|
|
|
|
100.00
|
%
|
|
$
|
185,320
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposits of $100,000 or more for the period
ended October 28, 2010 and December 31, 2009 totaled
$30.2 million and $54.3 million, respectively. These
deposits are generally more rate sensitive than other deposits
and are more likely to be withdrawn to obtain higher yields
elsewhere, if available.
98
Scheduled maturities of certificates of deposits in amounts of
$100,000 or more for the period ended October 28, 2010 were
as follows:
Certificates
of Deposit Maturities > $100,000
|
|
|
|
|
($s in thousands)
|
|
Amount
|
|
|
Three months or less
|
|
$
|
10,503
|
|
Over three months to six months
|
|
|
4,075
|
|
Over six months to twelve months
|
|
|
15,626
|
|
Over 12 months
|
|
|
0
|
|
|
|
|
|
|
Total
|
|
$
|
30,204
|
|
|
|
|
|
|
Capital
Resources
The current and projected capital position of
Service1st and the impact of capital plans on long term
strategies are reviewed regularly by management.
Service1sts capital position represents the level of
capital available to support continuing operations and expansion.
Service1st is subject to certain regulatory capital
requirements mandated by the FDIC and generally applicable to
all banks in the United States. For more information, see the
section entitled Supervision and Regulation.
Failure to meet minimum capital requirements can result in
restrictions on activities (including restrictions on the rates
paid on deposits), and otherwise may cause federal or state bank
regulators to initiate enforcement
and/or other
action against Service1st. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, banks
must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain off-balance
sheet item as calculated under regulatory accounting practices.
Service1sts capital amounts and classifications are also
subject to qualitative judgments by the FDIC about components,
risk weightings and other factors. In accordance with
Service1sts consent order dated September 1, 2010,
Service1st must maintain its Tier 1 capital in such an
amount to ensure that its leverage ratio equals or exceeds
8.50%. In addition, Service1st shall also maintain its
total risk-based capital ratio in such an amount as to equal or
exceed 12.00%.
On September 1, 2010, Service1st, without admitting or
denying any possible charges relating to the conduct of its
banking operations, agreed with the FDIC and the Nevada FID to
the issuance of a Consent Order. The Consent Order supersedes a
Memorandum of Understanding entered into by Service1st with
the FDIC and Nevada FID in May of 2009. Under the Consent Order,
Service1st has agreed, among other things, to:
(i) assess the qualification of, and have retained
qualified, senior management commensurate with the size and risk
profile of Service1st; (ii) maintain a Tier I leverage
ratio at or above 8.5% (as of October 28, 2010,
Service1sts Tier I leverage ratio was at 8.70%) and a
total risk- based capital ratio at or above 12% (as of
October 28, 2010, Service1sts total risk-based
capital ratio was at 14.10%); (iii) continue to maintain an
adequate allowance for loan and lease losses; (iv) not pay
any dividends without prior bank regulatory approval;
(v) formulate and implement a plan to reduce
Service1sts risk exposure to adversely classified assets;
(vi) not extend additional credit to any borrower whose
loan has been charged-off or classified loss;
(vii) not extend any additional credit to any borrower
whose loan has been classified as substandard or
doubtful without prior approval from
Service1sts board of directors or loan committee;
(viii) formulate and implement a plan to reduce risk
exposure to its concentration in commercial real estate loans in
conformance with Appendix A of Part 365 of the
FDICs Rules and Regulations; (ix) formulate and
implement a plan to address profitability; and (x) not
accept brokered deposits (which includes deposits paying
interest rates significantly higher than prevailing rates in
Service1sts market area) and reduce its reliance on
existing brokered deposits, if any.
Service1st was initially capitalized at formation at the
beginning of 2007 with $50 million. Due to operating losses
and provisions to the allowance for loan losses during
Service1sts first three years of operations,
Service1sts capital for the period ended October 28,
2010 was $16.4 million, which Service1st deems
adequate to support continuing operations and growth. As a de
novo bank, Service1st is required
99
to maintain a Tier 1 capital leverage ratio of not less
than 8.5% during its first seven years of operations.
Service1sts capital ratios for the period ended
October 28, 2010, relative to the ratios require of
well capitalized banks under the prompt corrective
action regime put in place by federal banking regulations, are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
Capitalized Under
|
|
|
|
|
Regulatory
|
Capital Ratios:
|
|
Service1st
|
|
Agreement
|
|
Tier 1 equity to average assets
|
|
|
8.70
|
%
|
|
|
8.50
|
%
|
Tier 1 risk-based capital ratio
|
|
|
12.80
|
%
|
|
|
6.00
|
%
|
Total risk-based capital ratio
|
|
|
14.10
|
%
|
|
|
12.00
|
%
|
The acquisition of Service1st by Western Liberty Bancorp was
consummated at close of business on October 28, 2010. Per
the Merger Agreement, Western Liberty Bancorp injected an
additional $25 million of capital into Service1st.
Liquidity
and Asset/Liability Management
Liquidity management refers to Service1sts ability to
provide funds on an ongoing basis to meet fluctuations in
deposit levels as well as the credit needs and requirements of
its clients. Both assets and liabilities contribute to
Service1sts liquidity position. Lines of credit with the
regional Federal Reserve Bank of San Francisco and FHLB, as
well as short term investments, increases in deposits and loan
repayments all contribute to liquidity while loan funding,
investing and deposit withdrawals decrease liquidity.
Service1st assesses the likelihood of projected funding
requirements by reviewing current and forecasted economic
conditions and individual client funding needs.
Service1sts sources of liquidity consists of cash and due
from correspondent banks, overnight funds sold to correspondents
and the Federal Reserve Bank, certificates of deposits at other
financial institution (non-brokered), unpledged security
investments and lines of credit with the Federal Reserve Bank of
San Francisco and Federal Home Loan Bank of
San Francisco. For the period ended October 28, 2010,
Service1st had approximately $15.1 million in cash and
cash equivalents, approximately $31.9 million in
certificates of deposits at other financial institutions, with
maturities of one year or less. In addition, Service1st had
$3.5 million in unpledged security investments, of which
$2.8 million is classified as available for sale, while the
remaining $662,000 is classified as held to maturity.
Service1st also has a $4.4 million collateralized line
of credit with the Federal Reserve Bank of San Francisco
and an $18.1 million collateralized line of credit with the
FHLB of San Francisco. Both the $4.4 million line of
credit with the Federal Reserve of San Francisco and the
$18.1 million line of credit with the FHLB have a zero
balance.
Liquidity is also affected by portfolio maturities and the
effect of interest rate fluctuations on the marketability of
both assets and liabilities. Service1st can sell any of its
unpledged securities held in the available for sale category to
meet liquidity needs. These securities are also available to
pledge as collateral for borrowings if the need should arise.
Service1sts management believes the level of liquid assets
and available credit facilities are sufficient to meet current
and anticipated funding needs during the next twelve months. In
addition, Service1sts Asset/Liability Management Committee
oversees Service1sts liquidity position by reviewing a
monthly liquidity report. While management recognizes that
Service1st may use some of its existing liquidity to issue
loans during the next twelve months, it is not aware of any
trends, demands, commitments, events or uncertainties that are
reasonably likely to impair Service1sts liquidity.
Off-Balance
Sheet Arrangements
In the normal course of business, Service1st is a party to
financial instruments with off-balance-sheet risk. These
financial instruments include commitments to extend credit and
letters of credit. To varying degrees,
100
these instruments involve elements of credit and interest rate
risk in excess of the amount recognized in the statement of
financial position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
Ended
|
|
|
|
|
October 28,
|
|
At December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
($ in thousands)
|
|
Commitments to extend credit
|
|
|
15,965
|
|
|
|
25,035
|
|
|
|
32,000
|
|
Commitments to extend credit to directors and officers
(undisbursed amount)
|
|
|
2,392
|
|
|
|
1,392
|
|
|
|
441
|
|
Standby/commercial letters of credit
|
|
|
695
|
|
|
|
1,408
|
|
|
|
152
|
|
Service1st maintains an allowance for unfunded commitments,
based on the level and quality of Service1sts undisbursed
loan funds, which comprises the majority of Service1sts
off-balance sheet risk. For the period ended October 28,
2010 and December 31, 2009, the allowance for unfunded
commitments was approximately $348,000 and $819,000,
respectively.
Management is not aware of any other material off-balance sheet
arrangements or commitments outside of the ordinary course of
Service1sts business.
Contractual
Obligations
The following table is a summary of Service1sts
contractual obligations as of December 31, 2009, by
contractual maturity date for the next five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
($s in thousands)
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
After
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Long Term Borrowed Funds
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Capital Lease Obligations
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Operating Lease Obligations
|
|
|
3,104
|
|
|
|
889
|
|
|
|
2,215
|
|
|
|
0
|
|
|
|
0
|
|
Purchase Obligations
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Other Long Term Liabilities
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,104
|
|
|
$
|
889
|
|
|
$
|
2,215
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative
and Qualitative Disclosures About Market Risk
Market risk is a broad term for the risk of economic loss due to
adverse changes in the fair value of a financial instrument.
These changes may be the result of various factors, including
interest rates, foreign exchange rates, commodity prices
and/or
equity prices. As a financial institution, Service1sts
primary component of market risk is interest rate volatility.
Net interest income is the primary component of
Service1sts net income, and fluctuations in interest rates
will ultimately affect the level of both income and expense
recorded on a large portion of Service1sts assets and
liabilities. In addition to directly impacting net interest
income, changes in the level of interest rates can also affect
(i) the amount of loans originated and sold by Service1st,
(ii) the ability of borrowers to repay adjustable or
variable rate loans, (iii) the average maturity of loans,
(iv) the rate of amortization of premiums paid on
securities, (v) the fair value of Service1sts
saleable assets, (vi) the amount of unrealized gains and
losses on securities available for sale, the volume of interest
bearing non-maturity deposits and (vii) the early
withdrawal likelihood of customer originated certificates of
deposit.
Interest rate risk occurs when assets and liabilities re-price
at different times as interest rates change. In general, the
interest that Service1st earns on its assets and pays on its
liabilities is established contractually for specified period of
time. Market interest rates change over time and if a financial
institution cannot quickly adapt to changes in interest rates,
it may be exposed to volatility in earnings. For instance, if
Service1st were to fund long-term fixed rate assets with
short-term variable rate deposits, and interest rates were to
rise over
101
the term of the assets, the short-term variable deposits would
rise in cost, adversely affecting net interest income. Similar
risks exist when rate sensitive assets (for example, prime
rate-based loans) are funded by longer-term fixed rate
liabilities in a falling interest rate environment.
Service1st manages its mix of assets and liabilities with
the goals of limiting its exposure to interest rate risk,
ensuring adequate liquidity, and coordinating its sources and
uses of funds while maintaining an acceptable level of net
interest income given the current interest rate environment.
Service1sts primary source of funds has been retail
deposits, consisting primarily of interest-bearing checking
accounts and time deposits. Service1sts management
believes retail deposits, unlike brokered deposits, reduce the
effects of interest rate fluctuations because they generally
represent a more stable source of funds. Service1sts has
no brokered deposits. Service1st also maintains
availability of lines of credit from the FHLB of
San Francisco and the Federal Reserve Bank of
San Francisco as additional sources of funds, but has not
drawn on them. Borrowings under these lines generally have a
long-term to maturity than retail deposits.
Service1st also uses interest rate floors,
ranging from 5.5% to 8.5%, on a majority of its prime-rate based
loans to protect against a loss of net interest income that
would result from a decline in interest rates. At
December 31, 2009, approximately 43% of Service1sts
loans are indexed to the national prime rate. Currently the
prime rate is under the applicable floor rate for substantially
all of Service1sts prime-rate based loans.
Service1sts net interest income may be adversely impacted
if the prime rate were to increase but remain below the
applicable floor rate since any such increase may result in an
increase in Service1sts interest expenses without an
increase in Service1sts interest income derived from such
prime-rate based loans until the prime rate exceeds the
applicable floor rate.
Service1st has an interest rate risk management system that
captures material sources of interest rate risk and generates
reports for senior management and the board of directors.
Service1st board establishes interest rate risk management
policies that govern the measurement and control of interest
rate risk. The asset/liability management committee provides
oversight of Service1sts interest rate risk management.
The Chief Financial Officer is responsible for
day-to-day
management of Service1sts interest rate sensitivity
position and examines the potential impact of differing interest
rate scenarios. Key measurements include, but are not limited
to, traditional gap ratios, earnings at risk, economic value of
equity, net interest margin trends relative to peer banks and
performance relative to market interest rate cycles.
Risk tolerance limits are set based on net profit impact of
instantaneous and sustained interest rate shocks of +/-
100 basis points, with quarterly measures of shocks up
+300 basis points and down -200 basis points. The
effect of interest rate shocks on Service1sts economic
value of equity will also be considered. Service1sts
interest rate risk model is back-tested to ensure integrity of
key assumptions and to compare actual results after significant
rate changes to predicted results. Applicable measurements are
reviewed for consistency with Service1sts target
aggregates and for indication of actual or potential adverse
trends. Interest rate risk management reports are prepared
quarterly and back-tested as market conditions warrant.
The computation of prospective effects of hypothetical interest
rate changes are based on numerous assumptions, including
relative levels of market interest rates, asset prepayments and
deposit decay, and should not be relied upon as indicative of
actual results. Further, the computations do not contemplate any
actions Service1st may undertake in response to changes in
interest rates. Actual amounts may differ from the projections
set forth below should market conditions vary from underlying
assumptions.
Service1st Bank prepares quarterly interest rate risk
reports. Below is the most recent available year end report, as
of December 31, 2009, that coincides with the financial
presentations of October 28, 2010. The December 31,
2010 presentation is located in the Western Liberty Bancorp
section of this
Form 10-K.
102
December 31,
2009
Sensitivity of Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Adjusted Net
|
|
Change
|
Interest Rate Scenario
|
|
Interest Income
|
|
from Base
|
|
|
(Dollars in thousands)
|
|
Up 300 basis points
|
|
$
|
7,699
|
|
|
|
22.13
|
%
|
Up 200 basis points
|
|
|
7,244
|
|
|
|
14.91
|
%
|
Up 100 basis points
|
|
|
6,784
|
|
|
|
7.61
|
%
|
BASE
|
|
|
6,304
|
|
|
|
0.00
|
%
|
Down 100 basis points
|
|
|
6,371
|
|
|
|
1.06
|
%
|
Down 200 basis points
|
|
|
6,551
|
|
|
|
3.92
|
%
|
|
|
Item 7A
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Information concerning market risks is included in the
Managements Discussion and Analysis of Financial Condition
and Results of Operations at pages 69 through 71.
|
|
Item 8
|
Financial
Statements and Supplementary Data
|
Registrants financial statements and schedules are
included in Part IV, Item 15.
|
|
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.
Under the supervision of and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures, as defined in
Rules 13a-15(e)
and
15d-15(e) of
the Exchange Act, as of December 31, 2010. In designing and
evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, as ours are designed
to do, and management necessarily was required to apply its
judgment in evaluating whether the benefits of the controls and
procedures that the Company adopts outweigh their costs. Our
management, including our Chief Executive Officer and Chief
Financial Officer, after evaluating the effectiveness of our
disclosure controls and procedures, has concluded that, as of
December 31, 2010, our disclosure controls and procedures
were effective to ensure that information required to be
disclosed by us in the reports that we file under the Exchange
Act is recorded, processed, summarized and reported within time
periods specified in the SECs rules and forms.
(b) Changes
in Internal Control over Financial Reporting
In conjunction with the Acquisition and our becoming a bank
holding company, our main office was relocated from New York, NY
to Las Vegas, NV. We currently operate from the executive
offices of Service1st. At the same time, we appointed a new
Chief Executive Officer, William E. Martin, and a new Vice
President, Patricia A. Ochal. Mr. Martin and
Ms. Ochal, along with Chief Financial Officer George A.
Rosenbaum, Jr., make up the management team of the Company.
Internal controls were evaluated at that time and processes and
procedures were established to ensure complete, accurate
financial reporting and that records are maintained in
sufficient detail to support all transactions. We also
determined that our controls would provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition or disposition of our assets that could have a
material effect on the financial statements. Management
continues to work with our board of directors to ensure
communication is thorough and complete regarding all required
103
disclosures of our actions pursuant to all requirements. There
have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of their evaluation or material
weaknesses in such internal controls requiring corrective
actions.
(c) Managements
Annual Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting.
Our 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. Our 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 our
assets; (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 our receipts
and expenditures 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 our assets that could have a material effect on
the financial statements.
On October 28, 2010, we completed the Acquisition. As
permitted by the SEC, management elected to exclude
Service1st from managements assessment of the
effectiveness of our internal control over financial reporting.
This was done due to the limited time available after the
closing to December 31, 2010.
Management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2010, 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,
2010, our internal control over financial reporting is effective
based on those criteria established in Internal
Control Integrated Framework.
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.
|
|
Item 9B
|
Other
Information
|
None
PART III
|
|
Item 10
|
Directors,
Executive Officers and Corporate Governance
|
Information concerning directors and corporate governance will
be included in our definitive proxy statement for the 2011
annual meeting of stockholders. The proxy statement is
incorporated by reference.
104
Executive
Officers of the Registrant
The names, ages, and positions of the executive officers as of
March 1, 2011 are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
|
William E. Martin
|
|
|
69
|
|
|
Chief Executive Officer
|
George A. Rosenbaum, Jr.
|
|
|
54
|
|
|
Chief Financial Officer
|
Patricia A. Ochal
|
|
|
46
|
|
|
Vice President
|
Richard Deglman
|
|
|
67
|
|
|
Chief Credit Officer of Service1st Bank
|
William E. Martin has been a member of the Board and our
Chief Executive Officer since October 2010. Mr. Martin has
been the Chief Executive Officer and Vice Chairman of the Board
of Service1st Bank of Nevada since December 2007.
Mr. Martin graduated from the University of North Texas and
joined the Office of the Comptroller of the Currency, where he
spent fifteen years as a national bank examiner in California
and Nevada. In 1978 he was placed in charge of that
agencys national problem bank group, was a Deputy
Comptroller in charge of the OCCs UBPR, later adopted by
the FFIEC for all banking regulatory agencies, and finally, was
Deputy Comptroller for Multinational Banking with responsibility
for primary oversight of the eleven largest national banks. He
was one of three U.S. representatives appointed to the
Basel Committee. In 1983, he left the OCC and became President
and Chief Executive Officer of Nevada National Bank, a
$700 million asset statewide bank, and its parent company,
Nevada National Bancorporation, which was acquired by Security
Pacific National Bank in 1989. Later that year, he joined
Pioneer Citizens Bank of Nevada as President and Chief Executive
Officer. The bank grew from $110 million in assets to over
$1.1 billion by 1999, at which time parent company Pioneer
Bancorporation was acquired by Zions Bancorporation and Pioneer
Citizens Bank merged into Nevada State Bank. For the following
seven years, he was Chairman, President and Chief Executive
Officer of Nevada State Bank, a $4 billion institution with
70 branch offices statewide. He left Nevada State Bank in
late 2007 and joined Service1st Bank of Nevada, where he
serves as Vice Chairman and Chief Executive Officer.
Mr. Martin has been involved at a board or active
participation level in over 30 civic efforts in his
27 years in Nevada, including chairmanships of the Nevada
State College Foundation, Las Vegas Chamber of Commerce,
Opportunity Village for Intellectually Handicapped Citizens,
Nevada Development Capital Corporation, and Water Conservation
Coalition.
George A. Rosenbaum, Jr. currently serves as our
Chief Financial Officer and as Executive Vice President of
Service1st. From May 2007 to December 2009, Mr. Rosenbaum
served as Consultant for various financial entities, including
two groups starting de novo banks. From August 2003 to
February 2007, Mr. Rosenbaum, served as Executive Vice
President, Chief Financial Officer, and Secretary of the board
of directors of First Federal Banc of Southwest, Inc. From May
2002 to August 2003, Mr. Rosenbaum served as Chief
Financial Officer of Illini Corporation, a publicly traded
$280 million bank holding company. From July 2000 to May
2002, Mr. Rosenbaum worked as Senior Audit Manager at
McGladrey & Pullen LLP, working primarily on
accounting and audit matters relating to financial institutions.
Mr. Rosenbaum holds a Bachelor of Science in Accounting
from the National College of Business.
Patricia A. Ochal currently serves as our Vice President
and as Chief Financial Officer of Service1st. Ms. Ochal
manages Service1sts Accounting and Finance, Information
Technology, facilities, leases, insurance and bank-wide risk
assessment. At Service1sts inception, Ms. Ochal was
in charge of Human Resources, Bank Operations and Marketing.
Bank Operations involved Compliance (BSA/AML/OFAC), on-line
banking, remote capture, ACH, wires, ATMs, establishing new
branch locations and tenant improvements. Ms. Ochal also
coordinated Service1sts marketing effort and website
development/management. Ms. Ochal began organizing
Service1st in May 2006. Prior to organizing Service1st,
Ms. Ochal was Senior Vice President and Chief Financial
Officer of Nevada First Bank from 2004 through 2006.
Ms. Ochal received her Bachelor of Science in Accounting
from the University of Nevada, Las Vegas and is a Certified
Public Accountant in the State of Nevada. Ms. Ochal is an
alumnus of KPMG Peat Marwick and currently holds affiliations
with the American Institute of Certified Public Accountants
(AICPA) and the Nevada Society of Certified Public Accountants.
105
Richard Deglman has been an Executive Vice President and
Chief Credit Officer of Service1st Bank of Nevada since
June 2008. For ten years before his employment with
Service1st Mr. Deglman served as Executive Vice
President and Statewide Commercial Real Estate Manager of Nevada
State Bank. Prior to that, he was the Teamleader
Emerging Technology Group for Silicon Valley Bank from 1994 to
1998. Before joining Silicon Valley Bank, Mr. Deglman was
with Security Pacific Bank for over 20 years in various
roles, ending as First Vice President/Regional Manager of
commercial real estate before the bank was acquired by Bank of
America in 1992. After the acquisition, he served as Credit
Administrator until 1994. Mr. Deglman earned his Bachelors
in Business Administration from San Francisco State
University and his MBA from St. Marys College. His
outside roles and association memberships have included the
Nevada Builders Association, Associated General Contractors,
State of Nevada Block Grant Commissioner, Board of
Directors Jump Start, and Prospectors
Reno.
Financial
Experts on Audit Committee
The Audit Committee of our board of directors currently is and
will at all times be composed exclusively of directors who are
independent, within the meaning of Nasdaq Rule 5605(a)(2)
and
Rule 10A-3
of the Exchange Act, and who are financially literate, meaning
they are able to read and understand fundamental financial
statements, including a companys balance sheet, income
statement, and cash flow statement. In addition, the Audit
Committee has, and will continue to have, at least one member
who has past employment experience in finance or accounting,
requisite professional certification in accounting, or other
comparable experience or background that results in the
individuals financial sophistication. The board of
directors has determined that Directors Curtis W. Anderson and
Richard A.C. Coles satisfy the definition of financial
sophistication and also qualify as audit committee financial
experts, as defined under the SECs rules and regulations.
|
|
Item 11
|
Executive
Compensation
|
Information regarding executive compensation will be included in
our definitive proxy statement for the 2011 annual meeting of
stockholders. The proxy statement is incorporated by reference.
|
|
Item 12
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Securities
authorized for issuance under equity compensation
plans
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
column (a)
|
|
|
column (b)
|
|
|
column (c)
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
|
|
|
|
|
|
|
remaining available
|
|
|
|
Number of
|
|
|
|
|
|
for future issuance
|
|
|
|
securities to be
|
|
|
|
|
|
under equity
|
|
|
|
issued upon
|
|
|
Weighted-average
|
|
|
compensation plans
|
|
|
|
exercise of
|
|
|
exercise price of
|
|
|
(excluding
|
|
|
|
outstanding
|
|
|
outstanding
|
|
|
securities
|
|
|
|
options, warrants,
|
|
|
options, warrants,
|
|
|
reflected in column
|
|
|
|
and rights
|
|
|
and rights
|
|
|
(a))
|
|
|
Equity compensation plans approved by security holders
|
|
|
0
|
|
|
|
not applicable
|
|
|
|
0
|
|
Equity compensation plans not approved by security holders(1)(2)
|
|
|
246,952
|
|
|
$
|
21.01
|
|
|
|
229,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
246,952
|
|
|
$
|
21.01
|
|
|
|
229,023
|
|
|
|
|
(1) |
|
In connection with the Acquisition, outstanding options to
acquire Service1st Bank common stock granted under the 2007
Stock Option Plan of Service1st (the Stock Option
Plan) and outstanding warrants to acquire Service1st
common stock became options and warrants of similar tenor to
acquire Common Stock, |
106
|
|
|
|
|
adjusted for the exchange ratio applicable to the Acquisition.
We assumed the Stock Option Plan, which was approved by
Service1st stockholders prior to the Acquisition, in connection
with the Acquisition, and WLBC may issue additional awards under
the Stock Option Plan. The table does not include the
aforementioned warrants granted by Service1st Bank. In
recognition of organizational funds contributed and economic
risks borne during the banks organizational phase, those
warrants were granted by Service1st Bank to the individuals who
participated in Service1st Banks organization, rather than
being issued as part of a compensation plan. |
|
(2) |
|
In addition to the Stock Option Plan, prior to the Acquisition
WLBCs board of directors granted to its Compensation
Committee the right to award up to 1.5 million shares of
restricted stock to members of management and to consultants.
The board of directors granted to the Compensation Committee the
right to determine after completion of the acquisition to whom
awards, if any, shall be granted and what the terms of those
awards shall be. The Compensation Committee awards will not be
submitted for approval by stockholders in advance. When the
Acquisition occurred WLBC also granted 50,000 shares of
common stock to each of Michael B. Frankel, the current Chairman
of the board of directors, Richard A.C. Coles, a current member
of the board of directors, and Mark Schulhof, a former member of
the board of directors. |
|
|
|
Restricted stock units that will be settled for a total of
200,000 shares of our stock were granted to five
individuals when the acquisition was completed: Jason N. Ader,
WLBCs former Chairman and Chief Executive Officer and a
current member of the board (50,000 restricted stock units),
Daniel B. Silvers, WLBCs former President (100,000
restricted stock units), Andrew P. Nelson, our former Chief
Financial Officer and a former member of the board (25,000
restricted stock units), Michael Tew, an outside consultant
(20,000 restricted stock units), and Laura Conover-Ferchak, an
outside consultant (5,000 restricted stock units). Each
restricted stock unit is immediately and fully vested and will
be settled for one share of our common stock on October 28,
2013, or if sooner when a change of control occurs, without
payment of any additional consideration for the shares. The
restricted stock units and the shares of Common Stock that will
be issued upon their settlement are not included in the table
above. |
Security
ownership of certain beneficial owners and
management
Information regarding security ownership of directors, executive
officers, and any person or entity known to us to be the
beneficial owner of more than 5% of our common stock will be
included in our definitive proxy statement for the 2011 annual
meeting of stockholders. The proxy statement is incorporated by
reference.
|
|
Item 13
|
Certain
Relationships and Related Transactions and Director
Independence
|
Information regarding this item will be included in the
registrants definitive proxy statement for the 2011 annual
meeting of stockholders. The proxy statement is incorporated by
reference.
|
|
Item 14
|
Principal
Accountant Fees and Services
|
Information concerning principal accountant fees and services
will be included in our definitive proxy statement for the 2011
annual meeting of stockholders. The proxy statement is
incorporated by reference.
PART IV
|
|
Item 15
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Financial statements filed as part of this
Form 10-K.
107
Table
of Contents
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Index
to Financial Statements
|
|
|
|
|
Western Liberty Bancorp
|
|
|
|
|
|
|
|
109
|
|
|
|
|
111
|
|
|
|
|
112
|
|
|
|
|
113
|
|
|
|
|
114
|
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
155
|
|
|
|
|
157
|
|
|
|
|
158
|
|
|
|
|
159
|
|
|
|
|
160
|
|
|
|
|
161
|
|
108
Report of
Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Western Liberty Bancorp
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of
Western Liberty Bancorp (formally known as Global Consumer
Acquisition Corp.) as of December 31, 2010 and 2009, and
the related consolidated statements of operations,
stockholders equity and comprehensive income (loss), and
cash flows for the years then ended. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis of designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Western Liberty Bancorp as of December 31, 2010 and
2009, and the results of its operations and its cash flows for
the years then ended, in conformity with U.S. generally
accepted accounting principles.
Sherman Oaks, California
March 31, 2011
109
To the Board of Directors and Stockholders of
Western Liberty Bancorp
Report of
Independent Registered Public Accounting Firm
We have audited the accompanying statements of operations,
stockholders equity and comprehensive income (loss) and
cash flows for the year ended December 31, 2008 of Western
Liberty Bancorp (formerly known as Global Consumer Acquisition
Corp.) These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. Our audit included consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects results of Western
Liberty Bancorps operations and its cash flows for year
ended December 31, 2008 in conformity with accounting
principles generally accepted in the United States of America.
New York, New York
March 16, 2009
110
WESTERN
LIBERTY BANCORP
CONSOLIDATED
BALANCE SHEETS
($000S EXCEPT PER SHARE DATE)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
11,675
|
|
|
$
|
971
|
|
Money market funds
|
|
|
52,206
|
|
|
|
86,998
|
|
Interest-bearing deposits in banks
|
|
|
39,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
103,227
|
|
|
|
87,969
|
|
Certificates of deposits
|
|
|
26,889
|
|
|
|
|
|
Securities, available for sale
|
|
|
1,819
|
|
|
|
|
|
Securities, held to maturity (estimated fair value
2010 $5,287)
|
|
|
5,314
|
|
|
|
|
|
Loans, net of allowance of $36
|
|
|
106,223
|
|
|
|
|
|
Premises and equipment, net
|
|
|
1,228
|
|
|
|
|
|
Other real estate owned, net
|
|
|
3,406
|
|
|
|
|
|
Goodwill, net
|
|
|
5,633
|
|
|
|
|
|
Other intangibles, net
|
|
|
768
|
|
|
|
|
|
Accrued interest receivable and other assets
|
|
|
3,039
|
|
|
|
551
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
257,546
|
|
|
$
|
88,520
|
|
|
|
|
|
|
|
|
|
|
Liabilities And Stockholders Equity
|
|
|
|
|
|
|
|
|
Deposits:
|
|
$
|
67,087
|
|
|
$
|
|
|
Non-interest bearing demand
|
|
|
|
|
|
|
|
|
Interest bearing:
|
|
|
93,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
160,286
|
|
|
|
|
|
Accrued interest payable and other liabilities
|
|
|
3,431
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
163,717
|
|
|
|
628
|
|
Commitments and contingencies (Note 15)
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.0001 par value; 1,000,000 shares
authorized; None issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, $.0001 par value; 100,000,000 shares
authorized; 15,088,023 and 10,959,169 issued and outstanding,
respectively
|
|
|
1
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
117,317
|
|
|
|
103,730
|
|
Accumulated deficit
|
|
|
(23,489
|
)
|
|
|
(15,839
|
)
|
Accumulated other comprehensive loss, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
93,829
|
|
|
|
87,892
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
257,546
|
|
|
$
|
88,520
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
111
WESTERN
LIBERTY BANCORP
CONSOLIDATED
STATEMENTS OF OPERATIONS
($000 EXCEPT PER SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
1,403
|
|
|
$
|
|
|
|
$
|
|
|
Securities, taxable
|
|
|
47
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other
|
|
|
80
|
|
|
|
139
|
|
|
|
5,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
1,530
|
|
|
|
139
|
|
|
|
5,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
1,415
|
|
|
|
139
|
|
|
|
5,691
|
|
Provision for loan losses
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
1,379
|
|
|
|
139
|
|
|
|
5,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges
|
|
|
57
|
|
|
|
|
|
|
|
|
|
Loan and late fees
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
1,461
|
|
|
|
72
|
|
|
|
83
|
|
Occupancy, equipment and depreciation
|
|
|
269
|
|
|
|
|
|
|
|
|
|
Computer service charges
|
|
|
51
|
|
|
|
|
|
|
|
|
|
Federal deposit insurance
|
|
|
90
|
|
|
|
|
|
|
|
|
|
Legal and professional fees
|
|
|
3,851
|
|
|
|
12,612
|
|
|
|
1,670
|
|
Advertising and business development
|
|
|
7
|
|
|
|
1
|
|
|
|
|
|
Insurance
|
|
|
825
|
|
|
|
301
|
|
|
|
301
|
|
Telephone
|
|
|
19
|
|
|
|
|
|
|
|
|
|
Printing and supplies
|
|
|
314
|
|
|
|
748
|
|
|
|
6
|
|
Stock based compensation
|
|
|
1,770
|
|
|
|
869
|
|
|
|
4,625
|
|
Other
|
|
|
480
|
|
|
|
434
|
|
|
|
559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,137
|
|
|
|
15,037
|
|
|
|
7,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,650
|
)
|
|
$
|
(14,898
|
)
|
|
$
|
(1,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
$
|
(0.65
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share
|
|
$
|
(0.65
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
112
WESTERN
LIBERTY BANCORP
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
(LOSS)
YEARS ENDED DECEMBER 31, 2010, 2009, AND
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Comprehensive
|
|
|
Common Stock Issued
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
|
|
|
|
Loss
|
|
|
Shares
|
|
|
Amounts
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Loss
|
|
|
Total
|
|
|
Balance, December 31, 2007
|
|
$
|
|
|
|
|
39,936,064
|
|
|
$
|
3
|
|
|
$
|
209,903
|
|
|
$
|
611
|
|
|
$
|
|
|
|
$
|
210,517
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,625
|
|
|
|
|
|
|
|
|
|
|
|
4,625
|
|
Deferred interest on investment held in trust relating to common
shares subject to possible conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(446
|
)
|
|
|
|
|
|
|
|
|
|
|
(446
|
)
|
Net loss
|
|
$
|
(1,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,552
|
)
|
|
|
|
|
|
|
(1,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
|
|
|
|
39,936,064
|
|
|
|
3
|
|
|
|
214,082
|
|
|
|
(941
|
)
|
|
|
|
|
|
|
213,144
|
|
Exchange of common shares at $0.001 per share
|
|
|
|
|
|
|
(7,618,908
|
)
|
|
|
(1
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
Redemption of common shares at $9.915 per share, net of
$94,983,921 reserved for
|
|
|
|
|
|
|
(21,357,987
|
)
|
|
|
(1
|
)
|
|
|
(116,779
|
)
|
|
|
|
|
|
|
|
|
|
|
(116,780
|
)
|
Settlement of deferred underwriters commission in
connection with offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,564
|
|
|
|
|
|
|
|
|
|
|
|
5,564
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
869
|
|
|
|
|
|
|
|
|
|
|
|
869
|
|
Net loss
|
|
$
|
(14,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,898
|
)
|
|
|
|
|
|
|
(14,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
|
|
|
|
10,959,169
|
|
|
|
1
|
|
|
|
103,730
|
|
|
|
(15,839
|
)
|
|
|
|
|
|
|
87,892
|
|
Stock-based compensation reversal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(587
|
)
|
|
|
|
|
|
|
|
|
|
|
(587
|
)
|
Issue common shares in conjunction with acquisition of
Service1st Bank of Nevada
|
|
|
|
|
|
|
2,370,722
|
|
|
|
|
|
|
|
15,267
|
|
|
|
|
|
|
|
|
|
|
|
15,267
|
|
Exercise Warrants
|
|
|
|
|
|
|
1,502,088
|
|
|
|
|
|
|
|
(2,884
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,884
|
)
|
Issuance of 194,098 shares of common stock for restricted
stock award
|
|
|
|
|
|
|
194,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 150,000 shares of common stock for restricted
stock award
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
966
|
|
|
|
|
|
|
|
|
|
|
|
966
|
|
Purchase of dissenters shares
|
|
|
|
|
|
|
(88,054
|
)
|
|
|
|
|
|
|
(567
|
)
|
|
|
|
|
|
|
|
|
|
|
(567
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,392
|
|
|
|
|
|
|
|
|
|
|
|
1,392
|
|
Net loss
|
|
|
(7,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,650
|
)
|
|
|
|
|
|
|
(7,650
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(7,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
|
|
|
|
15,088,023
|
|
|
$
|
1
|
|
|
$
|
117,317
|
|
|
$
|
(23,489
|
)
|
|
|
|
|
|
$
|
93,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113
WESTERN
LIBERTY BANCORP
YEARS ENDED DECEMBER 31, 2010,
2009 AND 2008
($000S EXCEPT PER SHARE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flow from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(7,650
|
)
|
|
$
|
(14,898
|
)
|
|
$
|
(1,552
|
)
|
Adjustments to reconcile net (loss) income to net cash used
in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
1,771
|
|
|
|
869
|
|
|
|
4,625
|
|
Interest earned on cash held in trust
|
|
|
|
|
|
|
(86
|
)
|
|
|
(5,664
|
)
|
Accretion of loan discount, net
|
|
|
(436
|
)
|
|
|
|
|
|
|
|
|
Amortization of core deposit intangible
|
|
|
16
|
|
|
|
|
|
|
|
|
|
Amortization of lease liability
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
Amortization of time deposit premium
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
Provision of loan losses
|
|
|
36
|
|
|
|
|
|
|
|
|
|
Depreciation of premises and equipment
|
|
|
72
|
|
|
|
|
|
|
|
|
|
Amortization of securities premiums/discounts, net
|
|
|
28
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
343
|
|
|
|
(294
|
)
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
(708
|
)
|
|
|
(54
|
)
|
|
|
355
|
|
Accrued offering costs
|
|
|
|
|
|
|
|
|
|
|
(499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) operating activities
|
|
|
(6,564
|
)
|
|
|
(14,463
|
)
|
|
|
(2,735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash withdrawn from trust account for working capital
|
|
|
|
|
|
|
316,778
|
|
|
|
4,100
|
|
Proceeds from certificates of deposit
|
|
|
5,039
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities of securities available for sale
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
Proceeds from principal paydowns of securities available for sale
|
|
|
23
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities of securities held to maturity
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
Proceeds from principal payments of securities held to maturity
|
|
|
10
|
|
|
|
|
|
|
|
|
|
Cash acquired from acquisition
|
|
|
15,090
|
|
|
|
|
|
|
|
|
|
Purchase of premises and equipment
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
Net decrease in loans
|
|
|
3,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
27,099
|
|
|
|
316,778
|
|
|
|
4,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in deposits
|
|
|
(1,826
|
)
|
|
|
|
|
|
|
|
|
Cash payments for warrants
|
|
|
(2,884
|
)
|
|
|
|
|
|
|
|
|
Cash payments for dissenter common shares
|
|
|
(567
|
)
|
|
|
|
|
|
|
|
|
Payment of redemption of common shares
|
|
|
|
|
|
|
(211,765
|
)
|
|
|
|
|
Payment of underwriters discount and offering costs
|
|
|
|
|
|
|
(4,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities
|
|
|
(5,277
|
)
|
|
|
(215,792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and equivalents
|
|
|
15,258
|
|
|
|
86,523
|
|
|
|
1,365
|
|
Cash and cash equivalents, beginning of period
|
|
|
87,969
|
|
|
|
1,446
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
103,227
|
|
|
$
|
87,969
|
|
|
$
|
1,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid to depositors
|
|
$
|
124
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred interest on investments held in trust relating to
common shares subject to possible conversion
|
|
|
|
|
|
|
96
|
|
|
|
446
|
|
Supplemental schedule of non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans transferred to other real estate owned
|
|
|
1,003
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing activities from
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposits
|
|
|
31,928
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
|
2,850
|
|
|
|
|
|
|
|
|
|
Investment securities held to maturity
|
|
|
7,842
|
|
|
|
|
|
|
|
|
|
Loans, net of discount
|
|
|
110,278
|
|
|
|
|
|
|
|
|
|
Other real estate owned, net of discount
|
|
|
2,403
|
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
1,284
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
5,633
|
|
|
|
|
|
|
|
|
|
Other intangibles
|
|
|
784
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
2,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-cash assets acquired:
|
|
$
|
165,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
162,112
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
1,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed:
|
|
$
|
163,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net non-cash assets acquired (liabilities assumed):
|
|
$
|
2,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash and cash equivalents (paid) acquired
|
|
$
|
15,090
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
114
WESTERN
LIBERTY BANCORP
|
|
NOTE 1.
|
NATURE OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Nature
of business
Western Liberty Bancorp (WLBC) became a bank holding company on
October 28, 2010 with consummation of the acquisition of
Service1st Bank of Nevada. We were formerly known as
Global Consumer Acquisition Corp. and were a special
purpose acquisition company, formed under the laws of Delaware
on June 28, 2007, to consummate an acquisition, capital
stock exchange, acquisition, stock purchase, reorganization or
similar business combination with one or more businesses. The
registration statement for WLBCs initial public offering
(the Offering) was declared effective on
November 20, 2007. WLBC consummated the Offering on
November 21, 2007 and received net proceeds of $305,658,960
therefrom and $8,500,000 from the private placement sale of
Founders Warrants. Substantially all of the net proceeds of the
Offering were intended to be generally applied toward
consummating a business combination. WLBCs management had
complete discretion in identifying and selecting the target
business. Although WLBCs goal in 2007, when it was
established as a special purpose acquisition company, was to
identify for acquisition domestic and international operating
companies engaged in the consumer products and services
business, by the spring of 2009, WLBC determined that the
banking industry had become an attractive investment
opportunity, particularly the community banking industry in
Nevada. There was no assurance that WLBC would be able to
successfully effect a business combination. On October 7,
2009, the stockholders of WLBC approved all the matters voted on
at a special meeting of WLBCs stockholders. As a result,
21,600,468 shares elected to convert into a pro rata
portion of the Trust Account, resulting in
10,959,169 shares outstanding following conversion and
$105,014,050 remaining from the Trust Account. Our
stockholders approved certain amendments to our Amended and
Restated Certificate of Incorporation removing certain
provisions specific to special purpose acquisition companies,
changing our name to Western Liberty Bancorp and
authorizing the distribution and termination of our trust
account. Effective October 7, 2009, the Company began its
business operations and exited its development stage. Our sole
subsidiary is Service1st Bank of Nevada. We currently
conduct no business activities other than acting as the holding
company of Service1st Bank.
Service1st Bank of Nevada (Service1st), is a community bank
which commenced operations as a financial institution on
January 16, 2007. Service1st provides a full range of
banking and related services to locally owned businesses,
professional firms, real estate developers and investors, local
non-profit organizations, high net worth individuals, and other
customers in and around the greater Las Vegas area. Banking
services provided include basic commercial and consumer
depository services, commercial working capital and equipment
loans, commercial real estate (both owner occupied and non-owner
occupied) loans, construction loans, and unsecured personal and
business loans. Service1st relies primarily on locally generated
deposits to fund its lending activities. Service1st has two
branches located in Las Vegas, Nevada, which accept deposits and
grant loans to customers. Substantially all of our business is
generated in the Nevada market. Service1st is under the
supervision of and subject to regulation and examination by the
Nevada FID and the FDIC.
In connection with the FDICs approval of deposit
insurance, the FDIC subjected Service1st to customary
conditions applicable to de novo banks for a period of
three years, including the requirement that during such
three-year period, Service1st maintain a Tier 1
capital leverage ratio of not less than 8.0%. In addition,
during the three-year period, Service1st was required to
operate within the parameters of the business plan submitted as
part of Service1sts application for deposit insurance, and
to provide the FDIC 60 days advance notice of any
proposed material change or material deviation from the business
plan, before making any such change or deviation.
In September of 2009, the FDIC extended the special supervision
period for all de novo banks from three years to seven
years, thus extending the period during which the foregoing
restrictions apply to Service1st from January 2010 to
January 2014. In connection with the extension, at the
FDICs request, Service1st submitted a revised
business plan to the FDIC in the fourth quarter of 2009. The
FDIC also advised all de novo banks that during the
remainder of the seven-year de novo period, banks will
remain on a
12-month
risk
115
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
management examination cycle and be subject to enhanced
supervision for compliance examinations and Community
Reinvestment Act evaluations.
In May of 2009, Service1st entered into the MOU with the
FDIC and the Nevada FID. Pursuant to the MOU,
Service1st agreed, among other initiatives, to develop and
submit a comprehensive strategic plan covering at least a
three-year operating period; to reduce the level of adversely
classified assets and review loan grading criteria and
procedures to ensure accurate risk ratings; to develop a plan to
strengthen credit administration of construction and land loans
(including the reduction of concentration limits in land,
construction and development loans and the improvement of
stress-testing of commercial real estate loan concentrations);
to review its methodology for determining the adequacy of the
allowance for loan and lease losses; and to correct apparent
violations listed in its most recent report of examination.
Since mid-2009, Service1st has been required (i) to
provide the FDIC with at least 30 days prior notice
before appointing any new director or senior executive officer
or changing the responsibilities of any senior executive
officer; and (ii) to obtain FDIC approval before making (or
agreeing to make) any severance payments (except pursuant to a
qualified pension or retirement plan and certain other employee
benefit plans).
On September 1, 2010, Service1st, without admitting or
denying any possible charges relating to the conduct of its
banking operations, agreed with the FDIC and the Nevada FID to
the issuance of a Consent Order. The Consent Order supersedes a
Memorandum of Understanding entered into by Service1st with
the FDIC and Nevada FID in May of 2009. Under the Consent Order,
Service1st has agreed, among other things, to:
(i) assess the qualifications of, and have retained
qualified, senior management commensurate with the size and risk
profile of Service1st; (ii) maintain a Tier I leverage
ratio at or above 8.5% and its total risk-based capital must
equal or exceed 12.0% (as of December 31, 2010,
Service1sts Tier 1 leverage ratio was 18.1% and total
risk-based capital was 31.0%); (iii) continue to maintain
an adequate allowance for loan and lease losses; (iv) not
pay any dividends without prior bank regulatory approval;
(v) formulate and implement a plan to reduce
Service1sts risk exposure to adversely classified assets;
(vi) not extend additional credit to any borrower whose
loan has been charged-off or classified loss;
(vii) not extend any additional credit to any borrower
whose loan has been classified as substandard or
doubtful without prior approval from
Service1sts board of directors or loan committee;
(viii) formulate and implement a plan to reduce risk
exposure to its concentration in commercial real estate loans in
conformance with Appendix A of Part 365 of the
FDICs Rules and Regulations; (ix) formulate and
implement a plan to address profitability; and (x) not
accept brokered deposits (which includes deposits paying
interest rates significantly higher than prevailing rates in
Service1sts market area) and reduce its reliance on
existing brokered deposits, if any.
During the application process for the acquisition of
Service1st by WLBC, the Company made a number of
commitments to the FDIC. First, the Company agreed to maintain
the Tier 1 leverage capital ratio of Service1st at 10%
or greater until October 28, 2013 or, if later, when the
September 1, 2010 Consent Order agreed to by
Service1st with the FDIC and the Nevada FID terminates. The
Company also agreed that for the same time period the Company
will make no change in the directors or executive management of
Service1st unless the Company first receives the
FDICs non-objection to the proposed change. The Company
assured the FDIC in writing during the application process that
the Company will not seek to expand by acquisition until
Service1st is restored to a satisfactory condition, which
at a minimum means that the September 1, 2010 Consent Order
must first be terminated. Until that occurs, any growth on
Service1sts part must be the result of organic growth in
the banks existing business. The Company also agreed to
seek advance approval both from the FDIC and the Nevada FID for
any major deviation from the business plan that we submitted
during the acquisition application process.
While the chief decision makers monitor the revenue streams of
various products and services, operations are managed and
financial performance is evaluated on a Company-wide basis.
Accordingly all the financial service operations are considered
by management to be aggregated in one reportable segment.
116
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LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
The consolidated financial statements include WLBC and its
wholly owned subsidiary, Service1st, together referred to as
the Company for the year ended December 31,
2010. Intercompany transactions and balances are eliminated in
consolidation. The financial statements of the Company for the
years ended December 31, 2009 and 2008 include the
operations of WLBC only, as Service1st was not acquired until
October 28, 2010. The accounting and reporting policies of
the Company conform to accounting principles generally accepted
in the United States of America and general practice in the
banking industry. A summary of the significant accounting
policies used by the Company are as follows:
Predecessors
Since the Companys operations prior to the acquisition of
Service1st were insignificant relative to that of
Service1st, management believes that Service1st is the
Companys predecessor. Management has determined this based
on an evaluation of the various facts and circumstances,
including, but not limited to the life of Service1st, the
operations of Service1st, the purchase price paid, and the fact
that the operations on a prospective basis will be most similar
to Service1st. Accordingly, these statements should be read in
conjunction with the financial statements of Service1st for
the period ended October 28, 2010 and December 31,
2009 and 2008.
Use
of estimates in the preparation of financial
statements
To prepare financial statements in conformity with U.S.
generally accepted accounting principles, management makes
estimates and assumptions based on available information. These
estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and actual
results could differ. The purchase accounting adjustments,
allowance for loan loss, fair value of financial instruments,
deferred tax assets and goodwill impairment are particularly
subject to change.
Cash
and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks (including cash
items in process of clearing), and interest-bearing deposits in
banks with original maturities of 90 days or less. Cash
flows from loans originated by the Company, deposits, and
certificates of deposit, are reported net.
As of December 31, 2010, approximately $52,206,000 of the
Companys cash and cash equivalents were invested in the
Federated U.S. Treasury Cash Reserve Fund (UTIXX) and the
Goldman Sachs Financial Square Funds-Treasury Instruments Fund
(FTIXX). Both funds, under normal circumstances, invest their
assets exclusively in obligations of the U.S. Treasury,
including Treasury bills, bonds and notes and other obligations
issued or guaranteed by the U.S. Treasury.
At December 31, 2010, the Company is required to maintain
balances in cash or on deposit with the Federal Reserve Bank.
The total of those reserve balances was approximately $5,270,000.
Certificates
of deposit
The company invests in institutional certificates of deposits in
addition to selling overnight federal funds. The Companys
certificates of deposit do not exceed the FDIC insured limit at
any one institution. The terms of the companys
certificates of deposit do not exceed one year.
Securities
Interest income includes amortization of purchase premium or
discount. Premiums and discounts on securities are amortized on
the level-yield method without anticipating prepayments, except
for mortgage-
117
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
backed securities where prepayments are anticipated. Gains and
losses on sales are recorded on the trade date and determined
using the specific identification method.
Securities classified as available for sale are debt securities
the Company intends to hold for an indefinite period of time,
but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various
factors, including significant movements in interest rates,
changes in the maturity mix of the Companys assets and
liabilities, liquidity needs, regulatory capital considerations
and other similar factors. Securities available for sale are
reported at fair value with unrealized gains or losses reported
as other comprehensive income (loss). Realized gains or losses,
determined on the basis of the cost of specific securities sold,
are included in earnings.
Securities classified as held to maturity are those debt
securities the Company has both the positive intent and ability
to hold to maturity regardless of changes in market conditions,
liquidity needs, or general economic conditions.
These securities are carried at amortized cost, adjusted for
amortization of premium and accretion of discount computed by
the interest method over the contractual lives. The sale of a
security within three months of its maturity date or after at
least 85% of the principal outstanding has been collected is
considered a maturity for purposes of classification and
disclosure. Purchase premiums and discounts are generally
recognized in interest income using the effective yield method
over the term of the securities.
Management evaluates securities for
other-than-temporary
impairment (OTTI) at least on a quarterly basis, and more
frequently when economic or market conditions warrant such an
evaluation. Consideration is given to (1) the length of
time and the extent to which the fair value has been less than
cost, (2) the financial condition and near term prospects
of the issuer including an evaluation of credit ratings,
(3) the impact of changes in market interest rates,
(4) the intent of the Company to sell a security, and
(5) whether it is more likely than not the Company will
have to sell the security before recovery of its cost basis.
If the Company intends to sell an impaired security, the Company
records
another-than-temporary
loss in an amount equal to the entire difference between fair
value and amortized cost. If a security is determined to be
other-than-temporarily
impaired, but the Company does not intend to sell the security,
only the credit portion of the estimated loss is recognized in
earnings, with the other portion of the loss recognized in other
comprehensive income. The credit loss is defined as the
difference between the present value of the cash flows expected
to be collected and the amortized cost basis.
Loans
Loans are stated at the amount of unpaid principal, reduced by
unearned net loan fees, a credit and yield mark, and allowance
for loan losses. The allowance for loan losses is established
through a provision for loan losses charged to expense. Loans
are charged against the allowance for loan losses when
management believes that collectibility of the principal is
unlikely. Subsequent recoveries, if any, are credited to the
allowance.
The allowance is an amount that management believes will be
adequate to absorb probable incurred losses on existing loans
that may become uncollectible, based on evaluation of the
collectibility of loans and prior credit loss experience of the
Company and peer bank historical loss experience. This
evaluation also takes into consideration such factors as changes
in the nature and volume of the loan portfolio, overall
portfolio quality, specific problem credits, peer bank
information, and current economic conditions that may affect the
borrowers ability to pay. Due to the credit concentration
of the Companys loan portfolio in real estate-secured
loans, the value of collateral is heavily dependent on real
estate values in Southern Nevada. This evaluation is inherently
subjective and future adjustments to the allowance may be
necessary if there are significant changes in economic or other
conditions. In addition, the FDIC and state banking regulatory
agencies, as an integral part of their examination processes,
periodically review the Companys allowance for
118
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
loan losses, and may require the Company to make additions to
the allowance based on their judgment about information
available to them at the time of their examinations.
The allowance consists of general and specific components. The
general component covers non-impaired loans and is based on
historical loss experience of the Company and peer bank
historical loss experience, adjusted for qualitative and
environmental factors. The specific component relates to loans
that are classified as impaired. For such loans, an allowance is
established when the discounted cash flows (or collateral value
or observable market price) of the impaired loan is lower than
the carrying value of that loan.
A loan is impaired when, based on current information and
events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of
the loan agreement. Loans for which the terms have been modified
resulting in a concession, and for which the borrower is
experiencing financial difficulties, are considered troubled
debt restructurings and classified as impaired.
Factors considered by management in determining impairment
include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment
shortfalls on
case-by-case
basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrowers prior
payment record, and the amount of the shortfall in relation to
the principal and interest owed.
Commercial and commercial real estate loans that are graded
substandard are individually evaluated for impairment. If a loan
is impaired, a portion of the allowance is allocated so that the
loan is reported, net, at the present value of estimated future
cash flows using the loans existing rate or at the fair
value of collateral if repayment is expected solely from the
collateral. Large groups of smaller balance homogeneous loans,
such as consumer and residential real estate loans, are
collectively evaluated for impairment, and accordingly, they are
not separately identified for impairment disclosures. Trouble
debt restructurings are separately identified for impairment
disclosures and are measured at the present value of estimated
future cash flows using the loans effective rate at
inception. If a troubled debt restructuring is considered to be
a collateral dependent loan, the loan is reported, net, at the
air value of the collateral. For troubled debt restructurings
that subsequently default, the Company determines the amount of
reserve in accordance with the accounting policy for the
allowance for loan losses.
The general component covers non-impaired loans and is based on
historical loss experience adjusted for current factors. The
historical loss experience is determined by portfolio segment
and is based on the actual loss history experienced by the
Company over the most recent four years. This actual loss
experience is supplemented with other economic factors based on
the risks present for each portfolio segment. These economic
factors include consideration of the following: levels of and
trends in delinquencies and impaired loans; levels of and trends
in charge-offs and recoveries; trends in volume and terms of
loans; effects of any changes in risk selection and underwriting
standards; other changes in lending policies, procedures, and
practices; experience, ability, and depth of lending management
and other relevant staff; national and local economic trends and
conditions; industry conditions; and effects of changes in
credit concentrations. The following portfolio segments have
been identified:
1. Loans secured real estate construction, land development
and other land loans
2. Commercial real estate
3. Residential real estate
4. Commercial and industrial
5. Consumer
119
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
These are generally the segments identified in regulatory
reporting. Service1st Bank primarily focuses on the small
business market and, therefore, generates most of its loans in
the area of commercial real estate and commercial and industrial
loans. By segmenting into these categories, the bank is able to
monitor the exposure to the related risks and observe compliance
with regulatory guidance and limitations.
The Company, as a result of its purchase of Service1st Bank
of Nevada on October 28, 2010, acquired a portfolio of
loans, some of which have shown evidence of credit deterioration
since origination. These purchased loans are recorded at fair
value and there is no carryover of the sellers allowance
for loan losses. As a result of the transaction, the allowance
for loan losses at December 31, 2010 only related to a
general component for new loans generated since the transaction.
No specific allocations have been made between October 28,
2010 and December 31, 2010 because no additional
deterioration of the loan portfolio has been identified. After
acquisition, losses will be recognized by an increase in the
allowance for loan losses. It is important that consideration to
loss experience be blended with the significant discounts to
properly reflect the carrying value of the legacy loan
portfolio. In the current process, a general component of the
allowance for loan losses is being recorded for new loan
originations that were determined based on historical experience
and managements judgment.
Purchased loans with credit impairment are accounted for
individually or aggregated into pools of loans based on common
risk characteristics such as, credit score, loan type, and date
of origination. The Company estimates the amount and timing of
expected cash flows for each purchased loan or pool, and the
expected cash flows in excess of amount paid is recorded as
interest income over the remaining life of the loan or pool
(accretable yield). The excess of the loans or pools
contractual principal and interest over expected cash flows is
not recorded (nonaccretable difference).
Over the life of the loan or pool, expected future cash flows
continue to be estimated. If the present value of expected cash
flows is less than the carrying amount, a loss is recorded. If
the present value of expected cash flows is greater than the
carrying amount, it is recognized prospectively as interest
income.
Interest
and fees on loans
Interest on loans is recognized over the terms of the loans and
is calculated using the effective interest method. The accrual
of interest on impaired loans is discontinued when, in
managements opinion, the borrower may be unable to make
payments as they become due.
The Company determines a loan to be delinquent when payments
have not been made according to contractual terms, typically
evidenced by nonpayment of a monthly installment by the due
date. The accrual of interest on loans is discontinued at the
time the loan is 90 days delinquent unless the credit is
well secured and in the process of collection.
All interest accrued but not collected for loans that are placed
on nonaccrual status or charged off is reversed against interest
income. The interest on these loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return
to accrual. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
Loan origination fees, a mark to market of the credit and yield
components of the loan, commitment fees and certain direct loan
origination costs are deferred and the net amount amortized as
an adjustment to the related loans yield. The Company is
generally amortizing these amounts over the contractual life of
the loan. Commitment fees, based upon a percentage of a
customers unused line of credit, and fees related to
standby letters of credit are recognized over the commitment
period.
120
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
Transfers
of financial assets
Transfers of financial assets are accounted for as sales, when
control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the
assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain
it from taking advantage of that right) to pledge or exchange
the transferred assets, and (3) the Company does not
maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity. The
Companys transfers of financial assets consist solely of
loan participations.
Foreclosed
assets
Assets acquired through or instead of loan foreclosure are
initially recorded at fair value less costs to sell when
acquired, establishing a new cost basis. These assets are
subsequently accounted for at lower of cost or fair value less
estimated costs to sell. If fair value declines subsequent to
foreclosure, a valuation allowance is recorded through expense.
Operating costs after acquisition are expensed. On
October 28, 2010, the Company acquired two properties in
conjunction with the acquisition of Service1st Bank. In
December another property was added. As of December 31,
2010, there are no valuation reserves associated with these
properties.
Advertising
costs
Advertising costs are expensed as incurred.
Premises
and equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed
principally by the straight-line method over the estimated
useful lives of the assets. Improvements to leased property are
amortized over the lesser of the term of the lease or life of
the improvements. Depreciation and amortization is computed
using the following estimated lives:
|
|
|
|
|
|
|
Years
|
|
|
Furniture and fixtures
|
|
|
7 - 10
|
|
Equipment and vehicles
|
|
|
3 - 5
|
|
Leasehold improvements
|
|
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5 - 10
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Goodwill
and other intangible assets
Goodwill resulting from a business combination after
January 1, 2009, is generally determined as the excess of
the fair value of the consideration transferred, plus the fair
value of any non-controlling interests in the acquire, over the
fair value of the net assets acquired and liabilities assumed as
of the acquisition date. Goodwill and intangible assets acquired
in a purchase business combination and determined to have an
indefinite useful life are not amortized, but tested for
impairment at least annually. The Company has selected
October 31st as the date to perform the annual
impairment test. Intangible assets with definite useful lives
are amortized over their estimated useful lives to their
estimated residual values. Goodwill is the only intangible asset
with an indefinite life on our balance sheet. WLBC acquired
Service1st Bank of Nevada on October 28, 2010 which
resulted in goodwill of $5.6 million being recorded.
Other intangible assets consist of a core deposit intangible and
are amortized on an accelerated method over the estimated useful
life of 10 years.
Accrued
interest receivable and other assets
Accrued interest receivable and other assets include prepaid
expenses. Prepaid assets are amortized over the terms of the
agreements. As of December 31, 2010, the Company has
prepaid approximately $1,045,000,
121
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
or approximately 2 years, of its FDIC insurance premiums
which will be amortized through 2012. The Company, as a member
of the FHLB system, is required to maintain an investment in
capital stock of the FHLB of an amount pursuant to the agreement
with the FHLB. These investments are recorded at cost since no
ready market exists for them, and they have no quoted market
value. As of December 31, 2010, the Companys
investment in the FHLB was $658,000 which is included in other
assets.
The Company views its investment in the FHLB stock as a
long-term investment. Accordingly, when evaluating FHLB stock
for impairment, the value is determined based on the ultimate
recovery of the par value rather than recognizing temporary
declines in values. The determination of whether a decline
affects the ultimate recovery is influenced by criteria such as:
(1) the significance of the decline in net assets of the
FHLBs as compared to the capital stock amount and length of time
a decline has persisted; (2) impact of legislative and
regulatory changes on the FHLB; and (3) the liquidity
position of the FHLB. The FHLB of San Franciscos
capital ratios exceeded the required ratios as of
December 31, 2010 and the Company does not believe that its
investment in the FHLB is impaired as of this date. However,
this estimate could change in the near term as a result of any
of the following events: (1) significant OTTI losses are
incurred on the mortgage-backed securities (MBS) portfolio of
the FHLB of San Francisco, causing a significant decline in
regulatory capital ratios; (2) the economic losses
resulting from credit deterioration on the MBS increases
significantly; and (3) capital preservation strategies
being utilized by the FHLB become ineffective.
Income
taxes
Income tax expense is the total of the current year income tax
due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the
expected future tax amounts for the temporary differences
between carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount
expected to be realized.
A tax position is recognized as a benefit only if it is
more likely than not that the tax position would be
sustained in a tax examination, with a tax examination being
presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized
on examination. For tax positions not meeting the more
likely than not test, no tax benefit is recorded. The
Company recognizes interest
and/or
penalties related to income tax matters in income tax expense.
Preferred
stock
WLBC is authorized to issue 1,000,000 shares of blank check
stock with such designations, voting and other rights and
preferences as may be determined from time to time by the Board
of Directors.
Stock
compensation plans
The Company has the 2007 Stock Option Plan, which is described
more fully in Note 12. Compensation cost is recognized for
stock options and restricted stock awards issued to employees,
based on the fair value of these awards at the date of grant. A
Black-Scholes model is utilized to estimate the fair value of
stock options, while the market price of the Companys
common stock at the date of grant is used for restricted stock
awards. Compensation cost is recognized over the required
service period, generally defined as the vesting period. For
awards with graded vesting, compensation cost is recognized on a
straight-line basis over the requisite service period for the
entire award. The Company records the fair value of stock
compensation granted to employees and directors as expense over
the vesting period. The cost of the award is based on the
grant-date fair value.
122
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LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
Loan
commitments and related financial instruments
Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and commercial
letters of credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss,
before considering customer collateral or ability to repay. Such
financial instruments are recorded when they are funded.
Comprehensive
loss
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized
gains and losses on available for sale securities, are reported
as a separate component of the equity section of the balance
sheet, such items, along with net loss, are components of
comprehensive loss. Gains and losses on available for sale
securities are reclassified to net loss as the gains or losses
are realized upon sale of the securities. OTTI impairment
charges are reclassified to net income at the time of the charge.
Fair
value measurement
For assets and liabilities recorded at fair value, it is the
Companys policy to maximize the use of observable inputs
and minimize the use of unobservable inputs when developing fair
value measurements. Fair value measurements for assets and
liabilities, where there exists limited or no observable market
data and, therefore, are based primarily upon estimates, are
often calculated based on the economic and competitive
environment, the characteristics of the asset or liability and
other factors. Therefore, the results cannot be determined with
precision and may not be realized in an actual sale or immediate
settlement of the asset or liability. Additionally, there may be
inherent weaknesses in any calculation technique, and changes in
the underlying assumptions used, including discount rates and
estimates of future cash flows, could significantly affect the
results of current or future values. The Company utilizes fair
value measurements to determine fair value disclosures and
certain assets recorded at fair value on a recurring and
nonrecurring basis. See note 3.
Fair
values of financial instruments
On October 28, 2010, as part of the purchase accounting
process, the balance sheet of Service1st Bank was recorded
at fair value. The fair value of all the assets and liabilities
become the new carrying basis of the acquired entity. The
Company utilized a third-party valuation firm to assist
management in valuing the more complex components of the assets
and liabilities. Valuation of the loan portfolio is one of the
most significant areas of this process. Loans are first split
between performing and non-performing. The non-performing loans
are subject to treatment in accordance with
ASC 310-30-50.
The valuation process identifies credit discount and yield
discount. Generally, the yield discount is recognized on a
level-yield method over the life of the loan. However, the
discount of loans purchased with credit impairment can be
recorded and not accreted over the life of the loan. This method
assumes the discount will remain with the loan until such time
as the loan is completely removed from the bank. Only in the
event of a material event that substantially improves the credit
characteristics of the loan would consideration be made to
reduce the discount and accrete the amount into interest income.
The Company discloses fair value information about financial
instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value.
Management uses its best judgment in estimating the fair value
of the Companys financial instruments. However, there are
inherent weaknesses in any estimation technique. Therefore, for
substantially all financial instruments, the fair value
estimates presented herein are not necessarily indicative of the
amounts the Company could have realized in a sales transaction
as of December 31, 2010. The estimated fair value amounts
as of December 31, 2010 have been measured as of that date
and have not been reevaluated or updated for purposes of these
financial statements subsequent to that date. As such, the
estimated fair values
123
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
of these financial statements subsequent to the reporting date
may be different than the amounts reported as of
December 31, 2010.
The information in Note 3 should not be interpreted as an
estimate of the fair value of the entire Company since a fair
value calculation is only required for a limited portion of the
Companys assets. Due to the wide range of valuation
techniques and the degree of subjectivity used in making the
estimate, comparisons between the Companys disclosures and
those of other companies or banks may not be meaningful.
Certificates
of deposit
The carrying amounts reported in the balance sheet for
certificates of deposit approximate their fair value as the
terms on the certificates of deposits do not exceed one year.
Securities
Fair values for securities are based on quoted market prices
where available or on quoted market prices for similar
securities in the absence of quoted prices on the specific
security.
Loans
For variable rate loans that re-price frequently and that have
experienced no significant change in credit risk, fair values
are based on carrying values. Variable rate loans comprise
approximately 55.7% of the loan portfolio as of
December 31, 2010. Fair value for all other loans is
estimated based on discounted cash flows using interest rates
currently being offered for loans with similar terms to
borrowers with similar credit quality. Prepayments prior to the
re-pricing date are not expected to be significant. Loans are
expected to be held to maturity and any unrealized gains or
losses are not expected to be realized.
Impaired
loans
The fair value of an impaired loan is estimated using one of
several methods, including collateral value, market value of
similar debt, enterprise value, liquidation value, and
discounted cash flows. Those impaired loans not requiring an
allowance for probable losses represent loans for which the fair
value of the expected repayments or collateral exceeds the
recorded investment in such loans.
Accrued
interest receivable and payable
The carrying amounts reported in the balance sheet for accrued
interest receivable and payable approximate their fair value.
Restricted
stock
The Company is a member of the FHLB system and maintains an
investment in capital stock of the FHLB of San Francisco in
an amount pursuant to the agreement with the FHLB. This
investment is carried at cost since no ready market exists, and
there is no quoted market value.
Deposit
liabilities
The fair value disclosed for demand and savings deposits is by
definition equal to the amount payable on demand at their
reporting date (carrying amount). The carrying amount for
variable-rate deposit accounts approximates their fair value.
Due to the short-term maturities of fixed-rate certificates of
deposit, their carrying amount approximates their fair value.
Early withdrawals of fixed-rate certificates of deposit are not
expected to be significant.
124
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
Off-balance
sheet instruments
Fair values for the Companys off-balance sheet
instruments, lending commitments and standby letters of credit,
are based on quoted fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements and the counterparties credit standing.
Loss
per share
Diluted earnings per share is based on the weighted average
outstanding common shares (excluding treasury shares, if any)
during each year, including common stock equivalents. Basic
earnings per share is based on the weighted average outstanding
common shares during the year.
Due to the Companys historical net losses, all of the
Companys stock based awards are considered anti-dilutive,
and accordingly, basic and diluted loss per share is the same.
Loss
Contingencies
Loss contingencies, including claims and legal actions arising
in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range
of loss can be reasonably estimated. Management does not believe
there now are such matters that will have a material effect on
the financial statements.
Dividend
Restriction
Banking regulations require maintaining certain capital levels
and may limit the dividends paid by the bank to the holding
company or by the holding company to shareholders.
Reclassifications
Certain amounts in the financial statements and related
disclosures as of December 31, 2010 have been reclassified
to conform to the current presentation. Certain gross loan
amounts have been reclassified in Note 5 to meet the
banking regulatory classification guidance. In addition, certain
gross deferred tax items in Note 10 as of December
31, 2010 have been reclassified. These reclassification
adjustments have no effect on net loss or stockholders
equity as previously reported.
Recent
accounting pronouncements
In June 2009, the Financial Accounting Standards Board (FASB)
issued revised guidance for accounting for the transfers of
financial assets. The guidance removes the concept of a
qualifying special-purpose entity (QSPE). This guidance also
clarifies the requirements for isolation and limitations on
portions of financial assets eligible for sale accounting. This
guidance is effective for fiscal years beginning after
November 15, 2009. The Company adopted this guidance on
January 1, 2010. The adoption of this guidance did not have
a material impact on the Companys financial position,
results of operations, or cash flows.
In August 2009, the FASB issued guidance clarifying the
measurement of liabilities at fair value in the absence of
observable market information. This guidance was effective for
the Company beginning January 1, 2010. The guidance did not
have a material impact on the Companys financial position,
results of operations, or cash flows.
In December 2007, the FASB issued guidance establishing
principles and requirements for how an acquirer in a business
combination: (a) recognizes and measures in its financial
statements identifiable assets acquired, liabilities assumed,
and any non-controlling interest in the acquiree;
(b) recognizes and measures goodwill acquired in a business
combination or a gain from a bargain purchase; and
(c) determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial
effects of a business
125
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
combination. This guidance is effective for business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008; therefore this guidance has been
applied for the business combination disclosed in Note 2.
The Company has evaluated the provisions of this guidance and
the impact on its financial position, results of operations, or
cash flows.
New authoritative accounting guidance relating to investments in
debt and equity securities (i) changes existing guidance
for determining whether an impairment is other than temporary to
debt securities and (ii) replaces the existing requirement
that an entitys management asserts it has both the intent
and ability to hold an impaired security until recovery with a
requirement that management asserts (a) it does not have
the intent to sell the security, and (b) it is more likely
than not it will not have to sell the security before recovery
of its cost basis. Under this guidance, declines in the fair
value of
held-to-maturity
and
available-for-sale
securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses to the
extent the impairment is related to credit losses. The amount of
the impairment related to other factors is recognized in other
comprehensive income. The Company adopted this guidance in 2009.
The adoption did not have a material impact on the
Companys financial statements, results of operations, or
cash flows.
In July 2010, FASB issued
No. 2010-20,
Receivables (Topic 310): Disclosures about the Credit Quality
of Financing Receivables and the Allowance for Credit Losses.
The ASU amends FASB Accounting Standards
Codificationtm
Topic 310, Receivables, to improve the disclosures that an
entity provides about the credit quality of its financing
receivables and the related allowance for credit losses. As a
result of these amendments, an entity is required to
disaggregate, by portfolio segment or class of financing
receivable, certain existing disclosures and provide certain new
disclosures about its financing receivables and related
allowance for credit losses. For public entities, the
disclosures as of the end of a reporting period are effective
for interim and annual reporting periods ending on or after
December 15, 2010 and have been added to Note 4. The
disclosures about activity that occurs during a reporting period
are effective for interim and annual reporting periods beginning
on or after December 15, 1010.
Newly
issued not yet effective standards
The FASB has issued ASU
2010-29,
Business Combination (Topic 8905): Disclosure of
Supplementary Pro Forma Information for Business Combinations.
This ASU reflects the decision reached in EITF Issue
No. 10-G.
The amendments in this ASU affect any public entity as defined
by Topic 805, Business Combinations that enter into
business combinations that are material on an individual or
aggregate basis. The amendments in this ASU specify that if a
public entity presents comparative financial statements, the
entity should disclose revenue and earnings of the combined
entity as though the business combination(s) that occurred
during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. The amendments
also expand the supplemental pro forma disclosures to
include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the
business combination included in the reported pro forma
revenue and earnings. The amendments are effective
prospectively for business combinations for which the
acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 12,
2010. Early adoption is permitted.
In January 2010, the FASB issued ASU
2010-06,
Improving Disclosure about Fair Value Measurements. This
standard requires new disclosures on the amount and reason for
transfers in and out of Level 1 and Level 2 recurring
fair value measurements. The standard also requires disclosure
of activities (i.e., on a gross basis), including
purchases, sales, issuances, and settlements, in the
reconciliation of Level 3 fair value recurring
measurements. The standard regarding Level 1 and
Level 2 fair value measurements and clarification of
existing disclosures are effective for periods beginning after
December 15, 2009. The disclosures about the reconciliation
of information in Level 3 recurring fair value measurements
are required for periods beginning after December 15, 2010.
Adoption of the applicable portions of this standard on
January 1, 2010 did not have a significant impact on our
quarterly disclosures. For those additional disclosures required
for fiscal years beginning after December 15, 2010, we
anticipate first including those disclosures in our
Form 10-Q
for the quarter ending March 31, 2011.
126
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
The FASB has issued ASU
No. 2010-28,
Intangibles Goodwill and Other (Topic 350): When
to Perform Step 2 of the Goodwill Impairment Test for Reporting
Units with Zero and Negative Carrying Amounts. This ASU
reflects the decision reached in EITF Issue
No. 10-A.
The amendments in this ASU modify Step 1 of the goodwill
impairment test for reporting units with zero or negative
carrying amounts. For those reporting units, an entity is
required to perform Step 2 of the goodwill impairment test if it
is more likely than not that a goodwill impairment exists. In
determining whether it is more likely than not that goodwill
impairment exists, an entity should consider whether there are
any adverse qualitative factors indicating that impairment may
exist. The qualitative factors are consistent with the existing
guidance and examples, which require that goodwill of a
reporting unit be tested for impairment between annual tests if
an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its
carrying amount. For public entities, the amendments in this ASU
are effective for fiscal years, and interim periods within those
years, beginning after December 14, 2010. Early adoption is
not permitted.
|
|
NOTE 2.
|
BUSINESS
COMBINATION
|
On October 28, 2010, the Company acquired 100% of the
outstanding common shares of Service1st Bank of Nevada in
exchange for approximately 2.4 million shares of common
stock. Under the terms of the acquisition, Service1st Bank
common shareholders received 47.5975 shares of the
Companys common stock in exchange for each share of
Service1st Bank common stock. In addition, the Service1st
Bank shareholders are eligible to receive additional common
shares equal to twenty percent of Service1st Banks
tangible capital at August 31, 2010, if the price of the
Companys common stock exceeds $12.75 per share for
30 days during the subsequent two year period. The Company
also injected $25 million of cash into its subsidiary bank.
With the acquisition, the Company became a bank holding company
with its sole operating bank located in southern Nevada.
Service1st Bank results of operations were included in the
Companys results beginning November 1, 2010 (first
business day after the acquisition). Acquisition-related costs
are included in the Companys income statement for the year
ended December 31, 2010 and approximated $6 million.
The fair value of the common shares issued as the consideration
paid for Service1st Bank was determined in the basis of the
closing price of the Companys common shares on the
acquisition date.
The transaction was recorded as an acquisition under the current
accounting rules and as a result the balance sheet of
Service1st was revalued to fair value as of the acquisition
date. Any purchase price in excess of net assets acquired is
recorded as goodwill. The transaction resulted in
$5.6 million of goodwill.
The most significant fair value adjustment resulting from the
application of purchase accounting adjustments for this
acquisition were made to loans. As of the acquisition date, the
gross loan portfolio at Service1st Bank was approximately
$125.4 million with a related Allowance for Loan and Lease
Losses (ALLL) of approximately $9.4 million.
The valuation by the third-party resulted in a discount of
approximately $15.8 million at October 28, 2010. While
we believe we currently have the best estimate of fair value,
the purchase accounting adjustments are not final and we are
currently still evaluating all available information to ensure
we have an accurate assessment of fair value. In fact, there
have been some loan charge-offs and payoffs which impacted the
valuation and as a result of reviewing this information,
management reduced the discount from the original estimated
discount of $15.8 million to approximately
$15.1 million. This discount consists of two components;
credit discount and yield discount. Loans purchased with credit
impairments are loans with credit deterioration since
origination and it is probable that not all contractually
required principal and interest payments would be collected. The
performing loan portfolio was approximately $89.9 million
and was discounted by $49,000 for yield and $3.6 million
for credit discounts. The remaining $35.6 million of loans
were identified as loans with purchased credit impairment (PCI)
and those loans had a discount of $576,000 for yield and
$10.9 million for credit discounts. The discounts on
performing loans are recognized by a level yield
method over the remaining life of the loans or loan pools. The
loans identified as containing purchase credit impairment are
treated somewhat differently. The discount associated with yield
127
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
is accreted as yield discount and the credit discount is not
accreted but is left on the books to reduce the current carrying
value of the applicable loans.
Goodwill of approximately $5.6 million was recorded in
conjunction with the transaction. The goodwill arising from the
acquisition is largely the result of the benefit to the Company
of acquiring Service1st Bank, thereby creating a platform for
future operations and completing its transition to an operating
bank holding company. The offset to this primarily relates to
the
mark-to-market
process for the loan portfolio. None of this amount is expected
to be deductible for income taxes purposes. In completing the
allocation of purchase price, the tax effect of such adjustments
was not considered as the Company has been operating at a loss
and as such, any net deferred tax asset would result in a
corresponding valuation allowance. The following table
summarizes the fair value of consideration paid for
Service1st Bank and the amounts of the assets acquired and
liabilities assumed recognized at the acquisition date:
|
|
|
|
|
Consideration ($ in 000s)
|
|
|
|
|
Cash (fractional shares and additional dissenter payments)
|
|
$
|
29
|
|
Equity instruments
|
|
|
15,267
|
|
Contingent consideration
|
|
|
1,816
|
|
|
|
|
|
|
Fair value of total consideration transferred
|
|
|
17,112
|
|
Book value of net assets acquired
|
|
|
16,438
|
|
|
|
|
|
|
Excess purchase price over book value of net assets acquired
|
|
$
|
674
|
|
|
|
|
|
|
Allocation of Excess Purchase Price:
|
|
|
|
|
Core deposit intangible
|
|
$
|
784
|
|
Fair Value Adjustments:
|
|
|
|
|
Loans
|
|
|
(5,715
|
)
|
Time deposits
|
|
|
(46
|
)
|
Securities Held to Maturity
|
|
|
260
|
|
Leases
|
|
|
(242
|
)
|
Goodwill
|
|
|
5,633
|
|
|
|
|
|
|
Total
|
|
$
|
674
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,090
|
|
Certificates of deposit
|
|
|
31,928
|
|
Securities, available for sale
|
|
|
2,850
|
|
Securities, held to maturity
|
|
|
7,842
|
|
Loans
|
|
|
110,278
|
|
Premises and equipment, net
|
|
|
1,284
|
|
Other Real Estate Owned
|
|
|
2,403
|
|
Core deposit intangible
|
|
|
784
|
|
Goodwill
|
|
|
5,633
|
|
Other
|
|
|
2,826
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
180,918
|
|
|
|
|
|
|
Fair value of liabilities assumed
|
|
|
|
|
Deposits
|
|
|
162,112
|
|
Other
|
|
|
1,694
|
|
|
|
|
|
|
Fair value of liabilities assumed
|
|
|
163,806
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
17,112
|
|
|
|
|
|
|
128
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
The fair value of net assets acquired includes fair value
adjustments to certain receivables that were not considered
impaired as of the acquisition date. The fair value adjustments
were determined using discounted contractual cash flows.
However, the Company believes that all contractual cash flows
related to these financial instruments will be collected. As
such, these receivables were not considered impaired at the
acquisition date and were not subject to the guidance relating
to purchased loans which have shown evidence of credit
deterioration since origination. Receivables acquired that were
not subject to these requirements include non-impaired loans
with a fair value, principal at purchase and gross contractual
amounts receivable of $86.3 million, $89.9 million and
$102.9 million on the date of acquisition.
The following table presents pro forma information as if
the acquisition had occurred at the beginning of 2010 and 2009.
The pro forma information includes adjustments for
interest income on loans and securities acquired, amortization
of intangibles arising from the transaction, and interest
expense on deposits acquired. The pro forma financial
information is not necessarily indicative of the results of
operations that would have occurred had the transactions been
effected on the assumed dates.
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Net interest income
|
|
$
|
7,098
|
|
|
$
|
6,590
|
|
Net (loss) income
|
|
$
|
(14,753
|
)
|
|
$
|
(32,191
|
)
|
Basic earnings per share
|
|
$
|
(0.98
|
)
|
|
$
|
(2.13
|
)
|
Diluted earnings per share
|
|
$
|
(0.98
|
)
|
|
$
|
(2.13
|
)
|
Fair value is the exchange price that would be received for an
asset or paid to transfer a liability (exit price) in the
principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the
measurement date. The Company uses a fair value hierarchy that
prioritizes inputs to valuation techniques used to measure fair
value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or
liabilities (level 1 measurements) and the lowest priority
to unobservable inputs (level 3 measurements). The three
levels of the fair value hierarchy are described below:
Level 1 Unadjusted quoted prices in
active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
Level 2 Quoted prices for similar
instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active, or
model-based valuation techniques where all significant
assumptions are observable, either directly or indirectly, in
the market;
Level 3 Valuation is generated from
model-based techniques where all significant assumptions are not
observable, either directly or indirectly, in the market. These
unobservable assumptions reflect our own estimates of
assumptions that market participants would use in pricing the
asset or liability. Valuation techniques may include use of
matrix pricing, discounted cash flow models and similar
techniques.
Fair
value on a recurring basis
Financial assets measured at fair value on a recurring basis
include the following:
Securities
available for sale
Securities reported as available for sale are reported at fair
value utilizing Level 2 inputs. For these securities the
Company obtains fair value measurements from an independent
pricing service. The fair value measurements consider observable
data that may include dealer quotes, market spreads, cash flows,
the
129
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
U.S. Treasury yield curve, live trading levels, trade
execution data, market consensus prepayment speeds, credit
information, and the bonds terms and conditions, among
other things.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2010
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
($ in 000s)
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized Mortgage Obligation Securities-commercial
|
|
$
|
1,819
|
|
|
$
|
|
|
|
$
|
1,819
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between Level 1 and Level 2
during 2010.
Fair
value on a nonrecurring basis
Certain assets are measured at fair value on a nonrecurring
basis; that is, the instruments are not measured at fair value
on an ongoing basis, but are subject to fair value adjustments
in certain circumstances (for example, when there is evidence of
impairment). The following table presents such assets carried on
the balance sheet by caption and by level within the fair value
hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2010
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
($ in 000s)
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Impaired loans
|
|
$
|
11,438
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,438
|
|
Other real estate owned
|
|
|
3,406
|
|
|
|
|
|
|
|
|
|
|
|
3,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,844
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
The specific reserves for collateral dependent impaired loans
are based on the fair value of the collateral less estimated
costs to sell. The fair value of collateral is determined based
on third-party appraisals. In some cases, adjustments are made
to the appraised values due to various factors, including age of
the appraisal, age of comparables included in the appraisal, and
known changes in the market and in the collateral. Accordingly,
the resulting fair value measurement has been categorized as a
Level 3 measurement. As of December 31, 2010, there
were no specific valuation allowances for the above reported
collateral dependent loans based upon the fair market
adjustments made in conjunction with the October 28, 2010
transaction.
Other
real estate owned
Other real estate owned consists of properties acquired as a
result of, or in-lieu-of, foreclosure. Properties classified as
other real estate owned are initially reported at the fair value
determined by independent appraisals using appraised value, less
cost to sell. Such properties are generally re-appraised every
six months. There is risk for subsequent volatility. Costs
relating to the development or improvement of the assets are
capitalized and costs relating to holding the assets are charged
to expense. When significant adjustments were based on
unobservable inputs, such as when a current appraised value is
not available or management determines the fair value of the
collateral is further impaired below appraised value and there
is no observable market price, the resulting fair value
measurement has been categorized as a Level 3 measurement.
As of December 31, 2010, there were no valuation allowances
for the above reported assets based upon the fair market
adjustments made in conjunction with the October 28, 2010
transaction.
130
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
As of December 31, 2010 and 2009, the carrying values of
the Companys financial instruments approximate fair value
due to the October 28, 2010
mark-to-market
process associated with the purchase accounting undertaken on
the Companys subsidiary bank. A valuation of the
banks loan portfolio and deposit base was undertaken and
the resulting marks were used to fair value the carrying amounts
of all material components of the balance sheet that were not
cash or cash equivalents as of the transaction date. The
subsidiary bank did not generate significant amounts of new
financial instruments between October 28, 2010 and
December 31, 2010 and for those new items they were made on
market terms and were not deemed to have any significant
impairment as of the reporting period. The investment
securities, reported as
held-to-maturity,
have the fair value reported on the face of the balance sheet.
The Companys other principal asset is cash and cash
equivalents and at December 31, 2010 and 2009 the carrying
value is the fair value. Based on these facts, management
believes the carrying values on the balance sheet are materially
the same as the fair value with the exception of held
-to-maturity investment securities, which have the fair value
notation on the face of the statement.
The estimated fair value of the Banks financial statements
as of December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
($ in 000s)
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
103,227
|
|
|
$
|
103,227
|
|
|
$
|
87,969
|
|
|
$
|
87,969
|
|
Certificates of deposits
|
|
|
26,889
|
|
|
|
26,889
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
1,819
|
|
|
|
1,819
|
|
|
|
|
|
|
|
|
|
Securities held to maturity
|
|
|
5,314
|
|
|
|
5,287
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
106,223
|
|
|
|
106,223
|
|
|
|
|
|
|
|
|
|
Accrued interest receivables
|
|
|
447
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
160,286
|
|
|
|
160,286
|
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
|
35
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
Loan
Commitments
The estimated fair value of the standby letters of credit at
December 31, 2010 is insignificant. Loan commitments on
which the committed interest rate is less than the current
market rate are also insignificant at December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
Securities Available for Sale
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
Collateralized Mortgage Obligation Securities-commercial
|
|
$
|
1,819
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,819
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
|
|
Securities Held to Maturity
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Corporate Debt Securities
|
|
$
|
4,663
|
|
|
$
|
|
|
|
$
|
(27
|
)
|
|
$
|
4,636
|
|
Small Business Administration Loan Pools
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,314
|
|
|
$
|
|
|
|
$
|
(27
|
)
|
|
$
|
5,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no investment securities prior to the
acquisition of Service1st Bank of Nevada. There have been
no sales of securities or gross realized gains or losses in any
of the periods presented.
As of December 31, 2010, securities of $4.7 million
were pledged for various purposes as required or permitted by
law.
Information pertaining to securities with gross losses at
December 31, 2010, aggregated by investment category and
length of time that individual securities have been in
continuous loss position follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
Less Than Twelve Months
|
|
|
Over Twelve Months
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
(Losses)
|
|
|
Fair Value
|
|
|
(Losses)
|
|
|
Fair Value
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized Mortgage Obligation Securities-commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Debt Securities
|
|
$
|
(27
|
)
|
|
$
|
4,636
|
|
|
|
|
|
|
|
|
|
Small Business Administration Loan Pools
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(27
|
)
|
|
$
|
4,636
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, three debt securities have
unrealized losses with aggregate degradation of approximately
0.05% from the Companys carrying value. These unrealized
losses, totaling $27,000, relate primarily to fluctuations in
the current interest rate environment and other factors, but do
not presently represent realized losses. As of December 31,
2010 there are no securities that have been determined to be
other-than-temporarily-impaired
(OTTI).
The amortized cost and fair value of securities as of
December 31, 2010 by contractual maturities are shown
below. The maturities of small business administration loan
pools differ from their contractual maturities because the loans
underlying the securities may be repaid without penalties;
therefore, these securities are listed separately in the
maturity summary.
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
1,417
|
|
|
$
|
1,417
|
|
Due after one year through five years
|
|
|
402
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,819
|
|
|
$
|
1,819
|
|
|
|
|
|
|
|
|
|
|
132
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Securities held to maturity
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
3,093
|
|
|
$
|
3,075
|
|
Due after one year through five years
|
|
|
1,570
|
|
|
|
1,561
|
|
Small Business Administration loan pools
|
|
|
651
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,314
|
|
|
$
|
5,287
|
|
|
|
|
|
|
|
|
|
|
Loans at year end were as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
Construction, land development and other land
|
|
$
|
5,923
|
|
Commercial real estate
|
|
|
54,975
|
|
Residential real estate
|
|
|
9,247
|
|
Commercial and industrial
|
|
|
35,946
|
|
Consumer
|
|
|
131
|
|
Plus: net deferred loan costs
|
|
|
37
|
|
|
|
|
|
|
|
|
|
106,259
|
|
Less: allowance for loan losses
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
$
|
106,223
|
|
|
|
|
|
|
Activity in the allowance for loan losses was as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
Beginning balance
|
|
|
|
|
Provision for loan losses
|
|
$
|
36
|
|
Loans charged-off
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
36
|
|
|
|
|
|
|
As of December 31, 2010, none of the allowance for loan
losses was based on impairment method as no loans from either
the purchased loan portfolio at October 28, 2010 had
experienced subsequent deterioration nor had any of the new
loans originated since that date required an impairment
allowance.
The following table presents the recorded investment in
nonaccrual loans (including PCI loans with no contractual
interest being reported) and loans past due over 90 days
still on accrual by class of loans as of December 31, 2010:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
Nonaccrual
|
|
|
Over 90 Days and Accruing
|
|
|
Construction, land development and other land
|
|
$
|
2,632
|
|
|
$
|
|
|
Commercial real estate
|
|
|
1,224
|
|
|
|
|
|
Residential real estate
|
|
|
2,900
|
|
|
|
|
|
Commercial and industrial
|
|
|
3,670
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,426
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
133
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
The following table presents the aging of the recorded
investment in past due loans as of December 31, 2010 by
class of loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than
|
|
|
|
|
($ in 000s)
|
|
30-90 Days
|
|
|
90 Days
|
|
|
Total Past Due
|
|
|
Construction, land development and other land
|
|
$
|
|
|
|
$
|
2,518
|
|
|
$
|
2,518
|
|
Commercial real estate
|
|
|
|
|
|
|
1,003
|
|
|
|
1,003
|
|
Residential real estate
|
|
|
|
|
|
|
2,900
|
|
|
|
2,900
|
|
Commercial and industrial
|
|
|
3,108
|
|
|
|
38
|
|
|
|
3,146
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,108
|
|
|
$
|
6,459
|
|
|
$
|
9,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company categorizes loans into risk categories based on
relevant information about the ability of borrowers to service
their debt, such as: current financial information, historical
payment experience, credit documentation, public information,
and current economic trends, among other factors. The Company
analyzes loans individually by classifying the loans as to
credit risk. The Company uses the following definitions for risk
ratings:
Special
Mention
Loans in this classification exhibit trends or have weaknesses
or potential weaknesses that deserve more than normal management
attention. If left uncorrected, these weaknesses may result in
the deterioration of the repayment prospects for the asset or in
Service1sts credit position at some future date. Special
Mention assets pose an elevated level of concern, but their
weakness does not yet justify a Substandard classification.
Loans in this category are usually performing as agreed,
although there may be minor non-compliance with financial or
technical covenants.
Substandard
Loans classified as substandard are inadequately protected by
the current net worth and paying capacity of the obligor or of
the collateral pledged, if any. Loans so classified have a
well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. They are characterized by the distinct
possibility that the institution will sustain some loss if the
deficiencies are not corrected.
Doubtful
Loans classified as doubtful have all the weaknesses inherent in
those classified as substandard, with the added characteristic
that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions, and values,
highly questionable and improbable.
Loans not meeting the criteria above that are analyzed
individually as part of the above described process are
considered to be pass-rated loans.
134
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
As of December 31, 2010, the risk category of loans by
class of loans, including accrual and non-accrual loans, (net of
deferred fees and costs) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
Pass
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
Construction, land development and other land
|
|
$
|
996
|
|
|
$
|
|
|
|
$
|
4,630
|
|
|
$
|
|
|
|
$
|
5,626
|
|
Commercial real estate
|
|
|
47,711
|
|
|
|
2,806
|
|
|
|
4,296
|
|
|
|
162
|
|
|
|
54,975
|
|
Residential real estate
|
|
|
3,990
|
|
|
|
|
|
|
|
5,257
|
|
|
|
|
|
|
|
9,247
|
|
Commercial and industrial
|
|
|
30,582
|
|
|
|
240
|
|
|
|
4,483
|
|
|
|
938
|
|
|
|
36,243
|
|
Consumer
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
83,410
|
|
|
$
|
3,046
|
|
|
$
|
18,666
|
|
|
$
|
1,100
|
|
|
$
|
106,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
Loans
The Company has purchased loans, for which there was, at
acquisition, evidence of credit quality deterioration since
origination and it was probable, at acquisition, that all
contractually required payments would not be collected. The
carrying amount of those loans is as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
Construction, land development and other land
|
|
$
|
4,630
|
|
Commercial real estate
|
|
|
4,458
|
|
Residential real estate
|
|
|
5,257
|
|
Commercial and industrial
|
|
|
5,421
|
|
|
|
|
|
|
Balance December 31, 2010
|
|
$
|
19,766
|
|
|
|
|
|
|
No allowance is associated with these balances.
As previously discussed, the October 28, 2010 transaction
to acquire Service1st Bank was accounted for as a business
combination which resulted in application of fair value
accounting to the subsidiaries balance sheet. The total discount
to the loan portfolio was approximately $15.1 million at
the acquisition date. The loan portfolio was segregated into
performing loans and non-performing loans or purchased loans
with credit impairment.
The performing loans totaled approximately $89.9 million
and were marked with a credit discount of $3.6 million and
approximately $49,000 of yield discount. In accordance with
current accounting pronouncements, the discounts on performing
loans are being recognized on a method that approximates a level
yield over the expected life of the loan.
The loans identified as purchased with credit impairments were
approximately $35.6 million as of the acquisition date. A
credit discount of approximately $10.9 million was recorded
and an additional $576,000 of yield discount was also recorded.
The yield discount is being recognized on a method that
approximates a level yield over the expected life of the loan.
The Company does not accrete the credit discount into income
until such time as the loan is removed from the bank. The only
exception would be on a
case-by-case
basis when a material event that significantly improves the
quality of the loan and reduces the risk to the bank such that
management believes it would be prudent to start recognizing
some of the discount is documented. The credit discount
represents approximately 30% of the transaction date value of
the credit impaired loans.
135
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
Accretable yield, or income expected to be collected, is as
follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
Related to new loans purchased
|
|
$
|
576
|
|
Accretion of income
|
|
|
(37
|
)
|
|
|
|
|
|
Balance December 31, 2010
|
|
$
|
539
|
|
|
|
|
|
|
Management does not establish general reserves against these
loans. In the event that deterioration in the credit is
identified subsequent to the date of the discount, additional
specific reserves will be created. As of December 31, 2010,
no such additional reserves were required relating to the
October 28, 2010 loan portfolio. During the last two months
of 2010, approximately $436,000 of net discount accretion was
recognized as interest income. This included the $37,000 for
yield discount and $399,000 for credit discount.
Purchased loans for which it was probably, at acquisition, that
all contractually required payments would not be collected are
as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
Contractually required payments receivable of loans purchased
during the year:
|
|
|
|
|
Construction, land development and other land
|
|
$
|
7,685
|
|
Commercial real estate
|
|
|
9,675
|
|
Residential real estate
|
|
|
5,909
|
|
Commercial and industrial
|
|
|
12,321
|
|
|
|
|
|
|
|
|
$
|
35,590
|
|
|
|
|
|
|
Cash flows expected to be collected at acquisition:
|
|
|
|
|
Construction, land development and other land
|
|
$
|
5,743
|
|
Commercial real estate
|
|
|
5,563
|
|
Residential real estate
|
|
|
5,327
|
|
Commercial and industrial
|
|
|
8,083
|
|
|
|
|
|
|
|
|
$
|
24,716
|
|
|
|
|
|
|
Fair Value of acquired loans at acquisition:
|
|
|
|
|
Construction, land development and other land
|
|
$
|
5,696
|
|
Commercial real estate
|
|
|
5,524
|
|
Residential real estate
|
|
|
5,244
|
|
Commercial and industrial
|
|
|
7,676
|
|
|
|
|
|
|
|
|
$
|
24,140
|
|
|
|
|
|
|
136
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 6.
|
PREMISES
AND EQUIPMENT
|
Year-end premises and equipment were as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
Leasehold improvements
|
|
$
|
835
|
|
Equipment
|
|
|
138
|
|
Furniture and fixtures
|
|
|
309
|
|
Vehicles
|
|
|
18
|
|
|
|
|
|
|
|
|
|
1,300
|
|
Less: accumulated depreciation and amortization
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
$
|
1,228
|
|
|
|
|
|
|
Depreciation expense was approximately $72,000 for the last two
months of calendar year 2010 (from the acquisition date of
Service1st Bank). Currently the Company operates from the
bank administration facility.
|
|
NOTE 7.
|
GOODWILL
AND INTANGIBLES
|
The excess of the cost of an acquisition over the fair value of
the net assets acquired consists of goodwill, and core deposit
intangibles. Under ASC Topic 350, goodwill is subject to at
least annual assessments for impairment by applying a fair
value-based test. The Company reviews goodwill and other
intangible assets to determine potential impairment annually, or
more frequently if events and circumstances indicate that the
asset might be impaired, by comparing the carrying value of the
asset with the anticipated future cash flows.
The Company has established October 31 as the date it will use
for the annual assessment. The first annual testing for goodwill
impairment will occur at October 31, 2011. No impairment
losses were recognized as of December 31, 2010.
The following table presents the carrying amount of goodwill:
|
|
|
|
|
($ in 000s)
|
|
December 31, 2010
|
|
|
Balance at beginning of period
|
|
$
|
|
|
Goodwill from business combination
|
|
|
5,633
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
5,633
|
|
|
|
|
|
|
The Company has other intangible assets which consist of a core
deposit intangible that had, as of December 31, 2010, a
remaining average amortization period of approximately ten years.
The following table presents the changes in the carrying amount
of the core deposit intangible, gross carrying amount,
accumulated amortization, and net book value as of
December 31, 2010 and 2009:
|
|
|
|
|
($ in 000s)
|
|
December 31, 2010
|
|
|
Balance at beginning of period
|
|
$
|
|
|
Core deposit intangible from business combinations
|
|
|
784
|
|
Amortization expense
|
|
|
(16
|
)
|
|
|
|
|
|
Balance at end of period
|
|
$
|
768
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
784
|
|
Accumulated amortization
|
|
|
(16
|
)
|
|
|
|
|
|
Net book value
|
|
$
|
768
|
|
|
|
|
|
|
137
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
The following presents the estimated amortization expense of
other intangible assets:
|
|
|
|
|
Years ending December 31,
|
|
|
|
($ in 000s)
|
|
Amount
|
|
|
2011
|
|
$
|
97
|
|
2012
|
|
|
92
|
|
2013
|
|
|
87
|
|
2014
|
|
|
83
|
|
2015
|
|
|
79
|
|
Thereafter
|
|
|
330
|
|
|
|
|
|
|
|
|
$
|
768
|
|
|
|
|
|
|
The composition of deposits is as follows:
|
|
|
|
|
($ in 000s)
|
|
December 31, 2010
|
|
|
Demand deposits, noninterest bearing
|
|
$
|
67,087
|
|
NOW and money market accounts
|
|
|
56,509
|
|
Savings deposits
|
|
|
1,273
|
|
Time certificates, $100 or more
|
|
|
30,498
|
|
Other time certificates
|
|
|
4,919
|
|
|
|
|
|
|
Total
|
|
$
|
160,286
|
|
|
|
|
|
|
At December 31, 2010, all time deposits are scheduled to
mature in 2011 as the maximum term offered for time certificates
is twelve months.
None of the time certificates are brokered deposits as of
December 31, 2010. However, in October 2010,
Service1st Bank was notified by the FDIC and Nevada FID
that a legal determination was made that a NOW account owned by
a trust company customer was deemed to be a brokered deposit.
Consistent with the September 1, 2010 Consent Order which
restricts the banks use of brokered deposits, the bank was
given a date of December 31, 2010 to divest of these funds.
Working in concert with the customer and bank regulators, the
subject account was changed from a NOW account to a noninterest
bearing account on January 1, 2011 and on January 4,
2011 the account in the amount of approximately
$23.5 million was wired to another financial institution.
Both regulatory agencies were notified of the planned
disposition of the account and neither agency objected to the
plan to divest the account.
|
|
NOTE 9.
|
EMPLOYEE
BENEFIT PLAN
|
Service1st Bank has a qualified 401(k) employee benefit plan for
all eligible employees. Participants under 50 years of age
are able to defer up to $16,500 of their annual compensation,
while participants 50 years of age and over are able to
defer up to $22,000 of their annual compensation. Under the
terms of the plan, the Bank may not make matching contributions.
Stock-based compensation arrangements are fully discussed in
Note 12.
|
|
NOTE 10.
|
INCOME
TAX MATTERS
|
The Company files income tax returns in the U.S. federal
jurisdiction. ASC 740, Income taxes, was amended to
clarify the accounting and disclosure for uncertain tax
positions as defined. The Company is
138
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
subject to the provisions in all of the federal and state
jurisdictions where it is required to file income tax returns,
as well as all open tax years in these jurisdictions. The
company identifies its federal tax return as major
tax jurisdictions, as defined. The periods subject to
examination for the Companys federal tax return are 2007,
2008, and 2009. The Company believes that its income tax filing
positions for deductions will be sustained on audit and does not
anticipate any adjustments that will result in a material change
to its financial position. Therefore, no reserves for uncertain
income tax positions have been recorded pursuant to applicable
guidance. In addition, the Company did not record a cumulative
effect adjustment related to the adoption of this amended
guidance.
The Company may, from time to time, be assessed interest or
penalties by tax jurisdictions, although the Company has had no
such assessments historically. The Companys policy is to
include interest and penalties related to income taxes as a
component of income tax expense.
The cumulative tax effects of the primary temporary difference
as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
5,889
|
|
|
$
|
4,550
|
|
Organization costs and start up costs
|
|
|
5,576
|
|
|
|
175
|
|
Allowance for loan losses, unfunded commitments and loan
discounts
|
|
|
4,250
|
|
|
|
|
|
Stock warrants and stock options
|
|
|
2,331
|
|
|
|
490
|
|
Accrued expenses
|
|
|
769
|
|
|
|
|
|
Premises and equipment
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,891
|
|
|
|
5,215
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Cored Deposit Intangible
|
|
|
(261
|
)
|
|
|
|
|
Prepaid expenses
|
|
|
(122
|
)
|
|
|
|
|
Deferred loan costs
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
18,399
|
|
|
|
5,215
|
|
Valuation allowance
|
|
|
(18,399
|
)
|
|
|
(5,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, and 2009, a valuation allowance
for the entire net deferred tax asset is considered necessary as
the Company has determined that it is not more likely than not
that the deferred tax assets will be realized. Due to the
Company incurring operating losses, no provision for income
taxes has been recorded for the periods ended December 31,
2010, and 2009. Federal operating loss carry forwards total
approximately $17,321,000 and begin to expire in 2027.
139
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
For the years ended December 31, 2010, 2009, and 2008, the
components of income tax benefit consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(682
|
)
|
|
|
(2,685
|
)
|
|
|
(2,314
|
)
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
682
|
|
|
|
2,685
|
|
|
|
2,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reasons for the differences between the statutory federal
income tax rate of 34% and the effective tax rates are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Computed expected tax (benefit)
|
|
$
|
(2,601
|
)
|
|
$
|
(5,065
|
)
|
|
$
|
(528
|
)
|
Nondeductible expenses
|
|
|
904
|
|
|
|
771
|
|
|
|
|
|
Other
|
|
|
1,015
|
|
|
|
1,609
|
|
|
|
(1,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset valuation allowance
|
|
$
|
682
|
|
|
$
|
2,685
|
|
|
$
|
2,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal Revenue Code Section 382 places a limitation on
the amount of taxable income that can be offset by net operating
loss carryforwards after a change in control (generally, a
greater than 50% change in ownership) of a loss corporation.
Accordingly, utilization of net operating loss carryforwards may
be subject to an annual limitation regarding their utilization
against future taxable income upon change in control.
On October 28, 2010, a Business Combination between WLBC
and Service1st Bank resulted in a section 382
limitation against the separate company net operating loss
carryforwards acquired from Service1st Bank. As a result of
this section 382 limitation, the Company reduced the
deferred tax asset related to the NOL carry forward and the
valuation allowance by $7,700,000.
|
|
NOTE 11.
|
TRANSACTIONS
WITH RELATED PARTIES
|
Loans
Principal stockholders of the Company and officers and
directors, including their families and companies of which they
are principal owners, are considered to be related parties.
These related parties were loan customers of, and had other
transactions with, the Company in the ordinary course of
business. In managements opinion, these loans and
transactions are on the same terms as those for comparable loans
and transactions with unrelated parties. The aggregate activity
in such loans for the years ended December 31 is as follows:
|
|
|
|
|
($s in 000)
|
|
2010
|
|
|
Balance assumed at merger
|
|
$
|
2,480
|
|
New loans
|
|
|
25
|
|
Repayments
|
|
|
(69
|
)
|
|
|
|
|
|
Ending balances
|
|
$
|
2,436
|
|
|
|
|
|
|
140
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
The Company has one related party loan that was on non-accrual
status as of the acquisition date. In the first quarter of 2007,
Service1st purchased a $5 million portion of an existing
term loan to a business owned by a Company director and former
Service1st director. The director resigned from the
Company. On or about February 24, 2011,
Service1st entered into a sales agreement to sell the
remaining loan balance of $3.8 million for approximately
$3.0 million. At the date of the sales agreement, the loan
remains on nonaccrual and classified. Service1st received
proceeds from the sale on March 23, 2011.
Total loan commitments outstanding with related parties total
approximately $1.4 million as of December 31, 2010.
Services
Agreement
WLBC agreed to pay Hayground Cove Asset Management LLC, $10,000
per month, plus
out-of-pocket
expenses not to exceed $10,000 per month, for office space and
services related to the administration of WLBCs
day-to-day
activities. This agreement was effective upon the consummation
of the Offering and terminated on August 31, 2009.
WLBC incurred expense of $120,000 for the year ended
December 31, 2008 and $80,000 for the year ended
December 31, 2009.
Payment
for Due Diligence Services
In October 2009, WLBC made a one-time payment of
$2.6 million to Hayground Cove Asset Management LLC for due
diligence and other services related to various acquisition
opportunities and other activities since WLBCs inception.
Proceeds from the payment were disbursed by Hayground Cove Asset
Management LLC to certain of its employees, affiliates and
consultants (some of whom also serve as WLBCs officers
and/or
directors) that provided support to WLBC in connection with its
efforts in finding and pursuing potential transactions.
|
|
NOTE 12.
|
STOCK-BASED
COMPENSATION
|
The Company has a number of share-based compensation programs.
Total compensation cost that has been charged against income for
those programs was approximately $1.8 million, $900,000 and
$4.6 million for 2010, 2009 and 2008. There has been no
income tax benefit recorded because of the offset in the
deferred tax asset valuation allowance.
Restricted
Stock Programs
Pursuant to Letter Agreements dated December 23, 2008
between WLBC and three of its independent directors, and a
Letter Agreement dated as of April 28, 2009 between WLBC
and WLBCs former President, WLBC granted each independent
director and then President, 50,000 restricted stock units with
respect to shares of WLBCs common stock, subject to
certain terms and conditions.
WLBC incurred compensation expense equal to the grant date fair
value of the restricted stock units. Based upon the market price
of WLBC common shares at grant date, WLBC determined that the
grant date fair value of the restricted stock units was $9.25
per unit, $1,850,000 in the aggregate. WLBC recorded
compensation expense of $1,850,000 over the estimated vesting
period of 266 days, which occurred during 2009 and 2010.
WLBC estimated the vesting period as the number of days from the
grant date to the estimated closing date of the business
combination. On completion of the acquisition of Service1st, the
requirements of the aforementioned letter agreements were not
satisfied, so that the restricted stock units did not, and now
cannot vest according to their terms. Management made this
determination on September 30, 2010 upon receipt of the
final approval from the applicable regulatory agencies. As a
result of this
141
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
determination, WLBC reversed the stock compensation expense
($1,850,000) previously recorded for the 200,000 restricted
stock units described above, during the third quarter of 2010.
WLBC also provided a one-time grant of restricted stock equal to
$250,000 divided by the closing price of WLBCs common
stock on the closing date of the acquisition to WLBCs
Chief Financial Officer, for his future services. In addition,
WLBC shall also issued restricted stock with respect to shares
of our common stock to the proposed Chief Executive Officer and
Chief Executive Officer of Service1st. The CEO was issued
restricted shares of WLBC common stock in an amount equal to
$1.0 million divided by the closing price of our common
stock on the closing date of the acquisition in consideration
for his future services. The grant date fair value of each share
of restricted stock was $6.44. The CFO and CEO were granted
38,819 and 155,819 shares of restricted stock,
respectively, on October 28, 2010, vesting over a five year
term. Annual expense associated with these grants is estimated
to be approximately $250,000 per year, for the five year term,
or approximately $42,000 for the year ended December 31,
2010.
On October 28, 2010, WLBC and each of five officers and
consultants entered into letter agreements (the Letter
Agreements), pursuant to which each of the foregoing
individuals received a grant of restricted stock units of WLBC
(the Restricted Stock Units) for past services. The
former Chairman and Chief Executive Officer of WLBC, and a
current director, received 50,000 Restricted Stock Units;
WLBCs former President, received 100,000 Restricted Stock
Units; a former director of WLBC, received 25,000 Restricted
Stock Units; an outside consultant to WLBC, received 20,000
Restricted Stock Units; and another outside consultant to WLBC,
received 5,000 Restricted Stock Units. Each Restricted Stock
Unit is immediately and fully vested and shall be settled for
one share of common stock, par value $0.0001, of WLBC on the
earlier to occur of (i) a Change of Control Event (as such
term is defined in the Letter Agreement) and
(ii) October 28, 2013 (the Settlement
Date). Any cash dividends paid with respect to the shares
of Common Stock covered by the Restricted Stock Units prior to
the Settlement Date shall be credited to a dividend book entry
account as if the shares of Common Stock had been issued,
provided that such cash dividends shall not be deemed to
reinvested in shares of Common Stock and will be held uninvested
and without interest and shall be paid in cash on the Settlement
Date. Any stock dividends paid with respect to the shares of
Common Stock covered by the Restricted Stock Units prior to the
Settlement Date shall be credited to a dividend book entry
account as if shares of Common Stock had been issued, provided
that such dividends shall be paid on the Settlement Date. These
grants were recorded as of October 28, 2010 and resulted in
recording expenses of approximately $1,288,000, based upon a
grant date fair value of $6.44 per restricted stock unit.
Furthermore, WLBC made a one-time grant of 50,000 shares of
Common Stock to each of the current Chairman of the Board of
Directors of WLBC, a current member of the Board of Directors
and a former member of the Board of Directors for past services.
The issuances of Restricted Stock units and Common Stock were
made in reliance upon an available exemption from registration
under the Securities Act. These grants were recorded as of
October 28, 2010 and resulted in recording expenses of
approximately $966,000, based upon a grant date fair value of
$6.44 per restricted stock unit.
Stock
Option Program
Pursuant to the Agreement and Plan of Merger between the Company
and Service1st Bank, the Company agreed to assume the
Service1st Bank 2007 Stock Option Plan and exchange each
outstanding Bank Stock Option into options to acquire shares of
WLBC Common Stock on substantially the same terms and conditions
as were applicable under such Bank Stock Options immediately
prior to the transaction under these terms; (i) each Bank
Stock Option will be exercisable for a number of WLBC Common
Stock equal to the product of the number of shares of Bank
Common Stock that would be issuable upon exercise of such Bank
Stock Option outstanding immediately prior to the transaction
multiplied by the Exchange Ratio, rounded down to the nearest
whole number of shares of WLBC Common Stock, and (ii) the
per share exercise price for the WLBC Common Stock issuable upon
exercise of such assumed Bank Stock Option will be equal to the
quotient
142
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
determined by dividing the per share exercise price for such
Bank Stock Option outstanding immediately prior to the
transaction date by the Exchange Ratio, rounded up to the
nearest whole cent. Any restrictions on the exercisability of
such Bank Stock Option in effect as of the date hereof will
continue in full force and effect, and the term, exercisability,
and vesting schedule of such Bank Stock Option as in effect of
the date hereof will remain unchanged. Stock awards available to
grant, subject to the necessary approvals, were approximately
229,000 at December 31, 2010.
Generally, Bank Stock Options granted had vesting periods of 3
to 5 years. The fair value of shares at the date of grant
was determined by the Banks Board of Directors. The fair
value of each stock award was estimated on the date of grant
using the Black-Scholes Option Valuation Model.
A summary of Bank Stock Option activity as of December 31,
2010 and changes during the period (October 28,
2010 December 31, 2010) then ended is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Shares
|
|
Exercise Price
|
|
WLBC Stock Options Converted from Bank Stock Options at
October 28, 2010
|
|
|
246,947
|
|
|
$
|
21.01
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2010
|
|
|
246,947
|
|
|
$
|
21.01
|
|
Exercisable, end of period
|
|
|
146,728
|
|
|
$
|
21.01
|
|
The exercise price was determined in accordance with the Merger
Agreement, dated November 6, 2009. The exercise price is
calculated by the common stock exchange ratio of 47.5975. Each
Service1st stock option had an exercise price of $1,000.00.
The $1,000.00 is divided by the exchange ratio to create the
equivalent exercise price for the Companys stock option
($1,000.00 divided by 47.5975 equals $21.01).
As of December 31, 2010, there was $767,000 of total
unrecognized compensation cost related to the above listed
non-vested stock options assumed under the Merger Agreement. The
cost is expected to be recognized over a weighted-average period
of 1.8 years. As of December 31, 2010, the aggregate
intrinsic value of the outstanding and vested stock options is
$0.
On November 27, 2007, WLBC sold 31,948,850 Units, including
1,948,850 Units from the partial exercise of the
underwriters over-allotment option, at an Offering price
of $10.00 per Unit. Each Unit consisted of one share of
WLBCs common stock, $.0001 par value, and one
Redeemable Common Stock Purchase Warrant (Warrant).
Each Warrant entitled the holder to purchase from WLBC one share
of common stock at an exercise price of $7.50 per share
commencing the later of the completion of a Business Combination
per share for any 20 trading days within a 30 trading day period
ending three business days prior to the date on which the notice
of redemption is given. The terms of the warrants were amended
on July 20, 2009, as more fully described below.
On November 27, 2007, certain of the initial stockholders
purchased an aggregate of 8,500,000 warrants (the Private
Warrants) from WLBC in a private placement pursuant to the
exemption from registration contained in Section 4(2) of
the Securities Act of 1933, as amended. The warrants were sold
for a total purchase price of $8,500,000, or $1.00 per warrant.
The private placement took place simultaneously with the
consummation of the Offering. Each warrant was exercisable to
one share of common stock. The exercise price on the warrants
was $7.50. The Private Warrants were also subject to a
lock-up
agreement with WLBCs underwriters and would not be
transferable before the consummation of a Business Combination.
The holders
143
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
of the Private Warrants were also entitled, at any time and from
time to time, to exercise the Private Warrants on a cashless
basis at the discretion of the holder. The proceeds from the
sale of the Private Warrants were deposited into the trust
account, subject to a trust agreement. The terms of the warrants
were amended on July 20, 2009. Based upon observable market
prices, WLBC determined that the grant date fair value of the
Private Warrants was $1.10 per warrant, $9,350,000 in the
aggregate. The valuation was based on all comparable initial
public offerings by blank check companies in 2007. WLBC recorded
compensation expense of $850,000 over a 24 month service
period in connection with the Private Warrants, which is the
amount equal to the grant date fair value of the warrants minus
the purchase price. WLBC estimated the service period as the
estimated time to complete a Business Combination.
Warrants
and Private Shares Restructuring
On July 20, 2009, WLBC entered into a Letter Agreement (the
Warrant Restructuring Letter Agreement) with
warrantholders who have represented to WLBC that they
collectively hold at least a majority of its outstanding
warrants (the Consenting Warrantholders) confirming
the basis and terms upon which the parties agreed to amend the
Warrant Agreement, dated as of November 27, 2007 (the
Original Warrant Agreement), between WLBC and
Continental Stock Transfer & Trust Company, as
warrant agent (the Warrant Agent), previously filed
with the SEC on November 13, 2007. The terms of the Amended
and Restated Warrant Agreement include (i) a new strike
price of $12.50 per share of our common stock, par value
$0.0001, (ii) an expiration occurring on the earlier of
(x) seven years from the consummation of the Acquisition or
another business combination or (y) the date fixed for
redemption of the warrants set forth in the original warrant
agreement, (iii) a redemption price of $0.01 per warrant,
provided that (x) all of the warrants are redeemed,
(y) the last sales price of the common stock has been equal
to or greater than $21.00 per share on each of 20 trading days
within any
30-day
trading period ending on the third business day prior to the
date on which notice of redemption is given and (z) there
is an effective registration statement in place with respect to
the common stock underlying the warrants, (iv) mandatory
downward adjustment of the strike price for each warrant to
reflect any cash dividends paid with respect to the outstanding
common stock, until such date as our publicly traded common
stock trades at $18.00 or more per share on each of 20 trading
days within any 30-trading-day period; and (v) in the event
an effective registration statement is not in place on the date
the warrants are set to expire, the warrants will remain
outstanding until 90 days after an effective registration
statement is filed. If we have not filed an effective
registration statement within 90 days after the expiration
date, the warrants shall become exercisable for cash
consideration.
On July 20, 2009, WLBC also entered into a Private
Shares Restructuring Agreement with its former sponsor,
Hayground Cove Asset Management LLC (Hayground
Cove), pursuant to which Hayground Cove, on behalf of
itself and the funds and accounts it manages and Private Shares
that Hayground Cove or its affiliates control, agreed to cancel
at least 90.0% of the outstanding Private Shares in exchange for
one warrant per Private Share cancelled, each warrant identical
in terms and conditions to WLBCs restructured outstanding
warrants (except as set forth in the Amended and Restated
Warrant Agreement defined below). The cancelled Private Shares
included all such Private Shares currently held by Hayground
Cove and its affiliates.
In connection with the foregoing, on July 20, 2009, WLBC
and the Warrant Agent entered into an Amended and Restated
Warrant Agreement (the Amended and Restated Warrant
Agreement) to effect the amendments to the Original
Warrant Agreement as agreed between WLBC and the Consenting
Warrantholders pursuant to the Warrant Restructuring Letter
Agreement. In addition, WLBC has received approval for listing
of the amended warrants by the New York Stock Exchange and
certifications from the applicable registered holders of such
warrants certifying the number of warrants held by the
consenting warrantholders. WLBC also filed and distributed a
Schedule 14C Information Statement in connection with the
warrant restructuring on September 17, 2009. The warrant
restructuring and Private Shares restructuring became effective
on October 7, 2009 after the receipt of stockholder
approval of the acquisition of 1st Commerce Bank and the
Amended and Restated Certificate of Incorporation
(COI).
144
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
On August 13, 2009, WLBC entered into a Letter Agreement
with Hayground Cove, whereby Hayground Cove agreed that it and
its affiliates may only transfer any WLBC warrants they hold to
an unaffiliated third party transferee if: (i) the transfer
is part of a widespread public distribution of such warrants;
(ii) the transferee controls more than 50.0% of WLBCs
voting securities without any transfer from Hayground Cove or
any of its affiliates or(iii) the warrants transferred to a
transferee (or group of associated transferees) would not
constitute more than 2.0% of any class of WLBCs voting
securities.
On October 7, 2009, WLBC and the Warrant Agent entered into
an Amendment No. 1 (the Warrant Agreement
Amendment) to the Amended and Restated Warrant Agreement.
The Warrant Agreement Amendment (i) amends the definition
of Business Combination as set forth in the Warrant
Agreement to allow for the exercise of WLBCs warrants
immediately upon consummation of an initial business
combination, subject to certain requirements as set forth in the
Amended and Restated Warrant Agreement, and (ii) makes
certain technical amendments to the Insider Letters in
conformance with the COI Amendments and the Trust Agreement
Amendment.
In order to assist WLBC in gaining the requisite approval of
certain bank regulatory authorities in connection with the
Acquisition, on September 23, 2010, WLBC entered into a
Letter Agreement (the Warrant Restructuring Letter
Agreement) with certain warrant holders who represented to
WLBC that they collectively hold at least a majority of its
outstanding warrants (the Consenting Warrant
Holders) confirming the basis and terms upon which the
parties have agreed to amend the Amended and Restated Warrant
Agreement, dated as of July 20, 2009, as amended by the
Amendment No. 1, dated as of October 9, 2009, each
between WLBC and Continental Stock Transfer &
Trust Company, as warrant agent (the Warrant
Agent) (as amended, the Warrant Agreement),
previously filed with the SEC. The Warrant Restructuring Letter
Agreement serves as the consent and approval of each of the
Consenting Warrant Holders to amend and restate the Warrant
Agreement.
Pursuant to the Warrant Restructuring Letter Agreement, the
Warrant Agreement amended where applicable to provide for the
automatic exercise of all of the outstanding warrants of WLBC
(the Warrants) into one thirty-second (1/32) of one
share of WLBCs common stock, par value $0.0001
(Common Stock), which shall occur concurrently with
the consummation of the Acquisition (the Automatic
Exercise Date). Any Warrants that would entitle a holder
of such Warrants to a fractional share of Common Stock after
taking into account the automatic exercise of the remainder of
such holders Warrants into full shares of Common Stock
shall be cancelled on the Automatic Exercise Date. As of
September 23, 2010, there were 48,067,758 Warrants
outstanding, each exercisable for one share of Common Stock,
which will automatically be converted into approximately
1,502,088 shares of Common Stock on the Automatic Exercise
Date. As a result of the foregoing, there were no Warrants
outstanding after the Automatic Exercise Date. WLBC also paid a
consent fee to the holders of Warrants in an amount equal to
$0.06 per Warrant on the Automatic Exercise Date, regardless of
whether such holders were party to the Warrant Restructuring
Letter Agreement or an aggregate payment of $2.9 million.
WLBC has agreed to file a registration statement with the SEC
for the registration under the Securities Exchange Act of 1933,
as amended, of the shares of Common Stock issuable upon exercise
of the Warrants. If such registration statement is not filed
within 30 days of the Automatic Exercise Date, WLBC shall
make a payment to each holder of Common Stock issued upon
exercise of the Warrants in an amount equal to $0.12 per share
of Common Stock issuable upon exercise of the Warrants held by
such holder. WLBC further agreed to make an additional payment
in an amount equal to $0.18 per share of Common Stock issuable
upon exercise of the Warrants held by such holder if the
registration statement has not been declared effective by the
SEC within 180 days of the Automatic Exercise Date.
In connection with the foregoing, on September 27, 2010,
WLBC and the Warrant Agent entered into a Second Amended and
Restated Warrant Agreement (the Second Amended and
Restated Warrant Agreement) to effect the amendments to
the Warrant Agreement as agreed between WLBC and the Consenting
Warrant
145
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
Holders pursuant to the Warrant Restructuring Letter Agreement.
The Second Amended and Restated Warrant Agreement became
effective upon execution by WLBC and the Warrant Agent, but the
amendments to the Warrant Agreement were subject to
(i) receipt by the Warrant Agent and WLBC of (x) the
consent of the registered holder of each Consenting Warrant
Holders public warrants to the amendments to the Warrant
Agreement and (y) certification to the Warrant Agent and
WLBC from such registered holder(s) as to the positions held by
each of the Consenting Warrant Holders, (ii) receipt by
WLBC and Service1st of final regulatory approval of the
Acquisition, which must occur no later than October 12,
2010, and (iii) the consummation of the Acquisition, which
must occur no later than November 12, 2010 (the
Expiration Date), unless such date is extended by
the mutual agreement of WLBC and Service1st, in which case the
Expiration Date shall be correspondingly extended. None of the
terms of the Second Amended and Restated Warrant Agreement will
supersede, amend or replace in any manner whatsoever any term of
the Warrant Agreement until such time as these conditions are
met.
WLBC filed a Schedule 14C Information Statement on
October 7, 2010, in connection with the warrant
restructuring. The activities necessary to complete the Warrant
Restructuring were commenced by WLBC in conjunction with the
closing of the merger transaction on October 28, 2010, and
all warrants were converted as described above.
Bank
Warrant Exchange
Pursuant to the Agreement and Plan of Merger between the Company
and Service1st Bank, the Company agreed to exchange each
outstanding Bank Stock Warrant into warrants to acquire shares
of WLBC Common Stock on substantially the same terms and
conditions as were applicable under such Bank Stock Warrants
immediately prior to the transaction under these terms;
(i) each Bank Stock Warrant will be exercisable for a
number of WLBC Common Stock shares equal to the product of the
number of shares of Bank Common Stock that would be issuable
upon exercise of such Bank Stock Warrant outstanding immediately
prior to the transaction multiplied by the Exchange Ratio
(47.5975), rounded down to the nearest whole number of shares of
WLBC Common Stock, and (ii) the per share exercise price for the
WLBC Common Stock issuable upon exercise of such assumed Bank
Stock Warrant will be equal to the quotient determined by
dividing the per share exercise price for such Bank Stock
Warrant outstanding immediately prior to the transaction date by
the Exchange Ratio, rounded up to the nearest whole cent. Any
restrictions on the exercisability of such Bank Stock Warrant in
effect as of the date hereof will continue in full force and
effect, and the term, and exercisability schedule of such Bank
Stock Warrant as in effect of the date hereof will remain
unchanged.
On October 28, 2010, the 900 Bank Stock Warrants were
converted to 42,834 WLBC stock warrants with an exercise price
of $21.01 per stock warrant and all were exercisable at that
time. The exercise price was determined in accordance with the
Merger Agreement, dated November 6, 2009. The exercise
price is calculated by the common stock exchange ratio of
47.5975. Each Service1st stock warrant on had an exercise
price of $1,000.00. The $1,000.00 is divided by the exchange
ratio to create the equivalent exercise price for the
Companys stock warrant ($1,000.00 divided by 47.5975
equals $21.01). As of December 31, 2010 the remaining
contractual term of the outstanding stock warrants was
approximately one year. As of December 31, 2010 the
aggregate intrinsic value of outstanding and vested stock
warrants is $0.
|
|
NOTE 14.
|
REGULATORY
CAPITAL MATTERS
|
Banks and bank holding companies are subject to regulatory
capital requirements administered by federal banking agencies.
Capital adequacy guidelines and, additionally for banks, prompt
corrective action regulations, involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items
calculated under regulatory accounting practices. Capital
amounts and classifications are also subject to qualitative
judgments by regulators. Failure to meet capital requirements
can initiate regulatory action. Management believes as of
146
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
December 31, 2010, the Company and Service1st Bank met all
capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide five
classifications: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized, although these terms are not used to represent
overall financial condition. If the Bank is only adequately
capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are
limited, as is asset growth and expansion, and capital
restoration plans are required. At year-end 2010, the most
recent regulatory notifications categorized the Bank as
adequately capitalized under the regulatory framework for prompt
corrective action. This determination is mandated when an
institution becomes party to a formal regulatory action. There
are no conditions or events since that notification that
management believes have changed the institutions category.
Actual capital levels and minimum required levels were as
follows at year-end:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
|
|
Minimum Required
|
|
Capitalized Under
|
|
Minimum Required
|
|
|
|
|
for Capital Adequacy
|
|
Prompt Corrective
|
|
Under Regulatory
|
|
|
Actual
|
|
Purposes
|
|
Action Regulations
|
|
Agreements
|
($ in 000s)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
Consolidated
|
|
$
|
87.8
|
|
|
|
68.8
|
%
|
|
$
|
10.2
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
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|
Service1st Bank
|
|
$
|
36.3
|
|
|
|
31.0
|
%
|
|
$
|
9.4
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|
|
|
8.0
|
%
|
|
$
|
11.7
|
|
|
|
10.0
|
%
|
|
$
|
14.1
|
|
|
|
12.0
|
%
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
87.4
|
|
|
|
68.4
|
%
|
|
$
|
5.1
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Service1st Bank
|
|
$
|
35.9
|
|
|
|
30.6
|
%
|
|
$
|
4.7
|
|
|
|
4.0
|
%
|
|
$
|
7.0
|
|
|
|
6.0
|
%
|
|
$
|
|
|
|
|
N/A
|
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
87.4
|
|
|
|
30.5
|
%
|
|
$
|
11.5
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Service1st Bank
|
|
$
|
35.9
|
|
|
|
18.1
|
%
|
|
$
|
7.9
|
|
|
|
4.0
|
%
|
|
$
|
9.9
|
|
|
|
5.0
|
%
|
|
$
|
19.8
|
|
|
|
10.0
|
%
|
The Company did not have a bank subsidiary prior to
October 28, 2010 and was not subject to any regulatory
capital requirements. Accordingly, no presentation is being made
for year-end 2009.
On September 1, 2010, Service1st, without admitting or
denying any possible charges relating to the conduct of its
banking operations, agreed with the FDIC and the Nevada FID to
the issuance of a Consent Order. The Consent Order supersedes a
Memorandum of Understanding entered into by Service1st with
the FDIC and Nevada FID in May of 2009. Under the Consent Order,
Service1st has agreed, among other things, to:
(i) assess the qualification of, and have retained
qualified, senior management commensurate with the size and risk
profile of Service1st; (ii) maintain a Tier I leverage
ratio at or above 8.5% and a total risk-based capital ratio at
or above 12%; (iii) continue to maintain an adequate
allowance for loan and lease losses; (iv) not pay any risk
exposure to adversely classified assets; (vi) not extend
any additional credit to any borrower whose loan has been
classified as substandard or doubtful
without prior approval from Service1sts board of directors
or loan committee; (vii) formulate and implement a plan to
address profitability; and (x) not accept brokered deposits
(which include deposits paying interest rates significantly
higher than prevailing rates in Service1sts market area)
and reduce its reliance on existing brokered deposits, if any.
During the application process for the acquisition of
Service1st by WLBC, we made a commitment to the FDIC to
maintain the Tier 1 leverage capital ratio of
Service1st at 10% or greater until October 28, 2013
or, if later, when the September 1, 2010 Consent Order
agreed to by Service1st with the FDIC and the Nevada FID
terminates.
147
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 15.
|
COMMITMENTS
AND CONTINGENCIES
|
Contingencies
In the normal course of business, the Company and its subsidiary
bank are involved in various legal proceedings. In the opinion
of management, any liability resulting from such proceedings
would not have a material adverse effect on the financial
statements.
The Initial Stockholders have waived their right to receive
distributions with respect to their Private Shares upon
WLBCs liquidation.
Pursuant to an employment agreement effective August 1,
2007 between WLBC and its former CEO, WLBCs former CEO
obtained an option to purchase 475,000 shares of Private
Shares at the purchase price of $0.001 per share from
WLBCs sponsor and its affiliates, which option will vest
on the date (the Trigger Date) that is one year
after the closing of a qualifying Business Combination, but the
vesting will occur only if the appreciation of the per share
price of WLBCs common stock is either (i) greater
than 1x the Russell 2000 hurdle rate on the Trigger Date or
(ii) exceeds the Russell 2000 hurdle rate for 20
consecutive trading days after the Trigger Date. The Russell
hurdle rate means the Russell 2000 Index performance over the
period between the completion of the Offering and the Trigger
Date. The amount of the option was increased by the amount of
shares equal to 10,000 shares for each $10,000,000 of gross
proceeds from the exercise of the underwriters
over-allotment option. As a result the option was increased to
495,000 shares due to the exercise of 1,948,850 Units of
the underwriters over-allotment option.
WLBC determined that the fair value of the options on the date
of grant, November 27, 2007 was $4,573,597. The fair value
of the option is based on a Black-Scholes model using an
expected life of three years, stock price of $9.25 per share,
volatility of 33.7% and a risk-free interest rate of 4.98%.
However, because shares of WLBCs common stock did not have
a trading history, the volatility assumption is based on
information that was available to WLBC. WLBC believes that the
volatility estimate is a reasonable benchmark to use in
estimating the expected volatility of shares of WLBCs
common stock. In addition, WLBC believes a stock price of $9.25
per share is a fare assumption based on WLBCs observation
of market prices for comparable shares of common stock. This
assumption is based on all comparable initial public offerings
by blank check companies in 2007. The stock-based compensation
expense will be recognized over the service period of
24 months. WLBC estimated the service period as the
estimated time to complete a business combination. However,
pursuant to a Settlement Agreement dated December 23, 2008,
the options were deemed to be fully vested as of the effective
date of the Settlement Agreement. As a result, the entire
remaining compensation expense was recognized by WLBC on
December 23, 2008. WLBC recognized $237,973 in stock-based
compensation expense related to the options for the period from
June 28, 2007 (inception) to December 31, 2007
$4,155,368 for the year ended December 31, 2008 and $0 for
the year ended December 31, 2009. The Company also, as
required under the terms of the Settlement Agreement, paid
$247,917 in compensation expenses related to a severance payment
to the former CEO during January, 2009.
Indemnifications
WLBC has entered into agreements with its directors to provide
contractual indemnification in addition to the indemnification
provided in its amended and restated certificate of
incorporation. WLBC believes that these provisions and
agreements are necessary to attract qualified directors.
WLBCs bylaws also will permit it to secure insurance on
behalf of any officer, director or employee for any liability
arising out of his or her actions, regardless of whether
Delaware law would permit indemnification. WLBC has purchased a
policy of directors and officers liability insurance
that insures WLBCs directors and officers against the cost
of defense, settlement or payment of a judgment in some
circumstances and insures us against our obligations to
indemnify the directors and officers.
148
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
Financial
instruments with off-balance sheet risk
Some financial instruments, such as loan commitments, credit
lines, letters of credit, and overdraft protection, are issued
to meet customer financing needs. These are agreements to
provide credit or to support the credit of others, as long as
conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used.
Off-balance sheet risk to credit loss exists up to the face
amount of these instruments, although material losses are not
anticipated. The same credit policies are used to make such
commitments as are used for loans, including obtaining
collateral at exercise of the commitment.
The contractual amounts of financial instruments with
off-balance-sheet risk at year end were as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
Unused lines of credit
|
|
$
|
18,504
|
|
Standby letters of credit
|
|
$
|
590
|
|
Unused lines of credit are agreements to lend to a customer as
long as there is no violation of any condition established in
the contract. The lines generally have fixed expiration dates or
other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Service1st Bank
evaluates each customers creditworthiness on a
case-by-case
basis. The amount of collateral obtained, if deemed necessary by
Service1st Bank upon extension of credit, is based on
managements credit evaluation of the party. Collateral
held varies, but may include accounts receivable, inventory,
property and equipment, residential real estate, undeveloped and
developed land, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by
Service1st Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support
public and private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
Collateral held varies as specified above and is required as the
Bank deems necessary. Generally, letters of credit issued have
expiration dates within one year.
At year-end 2010, the majority of the unused lines of credit
were at variable rates tied to various established indices, most
lines contain floors that are currently in excess of the
contractual rates.
The total liability for financial instruments with off-balance
sheet risk as of December 31, 2010 is approximately $372,000
Lease
commitments
The Companys subsidiary bank leases premises and equipment
under non-cancelable operating leases expiring through 2013.
Generally, these leases contain
5-year
renewal options. The following is a schedule of future minimum
rental payments under these leases as of December 31, 2010:
|
|
|
|
|
($ in 000s)
|
|
|
|
2011
|
|
$
|
910
|
|
2012
|
|
|
742
|
|
2013
|
|
|
444
|
|
|
|
|
|
|
|
|
$
|
2,096
|
|
|
|
|
|
|
Rent expense of approximately $114,000 included in occupancy
expense for the year ended December 31, 2010.
149
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
Concentrations
The Company grants commercial, construction, real estate, and
consumer loans to customers. The Companys business is
concentrated in Nevada, and the loan portfolio includes
significant credit exposure to the commercial real estate
industry of this area. As of December 31, 2010, commercial
real estate loans represent 51.8% of total loans. Owner-occupied
commercial real estate loans represent 38% of commercial real
estate loans. As of December 31, 2010, real estate-related
loans accounted for approximately 66% of total loans.
The Companys policy for requiring collateral is to obtain
collateral whenever it is available or desirable, depending upon
the degree of risk Service1st Bank is willing to take.
Lines
of credit
The Company has lines of credit available from the FHLB and the
FRB. Borrowing capacity is determined based on collateral
pledged, generally consisting of securities and loans, at the
time of the borrowing. As of December 31, 2010, the Company
had available credit with the FHLB and FRB of approximately
$18.1 million and $4.4 million, respectively. As of
December 31, 2010, the Company has no outstanding
borrowings under these agreements.
|
|
NOTE 16.
|
PARENT
COMPANY ONLY CONDENSED FINANCIAL INFORMATION
|
Condensed financial information of Western Liberty Bancorp
follows:
CONDENSED
BALANCE SHEETS
December 31
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in 000s)
|
|
|
ASSETS
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
53,476
|
|
|
$
|
87,969
|
|
Investment in banking subsidiaries
|
|
|
42,299
|
|
|
|
|
|
Other assets
|
|
|
162
|
|
|
|
551
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
95,937
|
|
|
$
|
88,520
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Accrued expenses and other liabilities
|
|
$
|
292
|
|
|
$
|
628
|
|
Contingent consideration
|
|
|
1,816
|
|
|
|
|
|
Shareholders equity
|
|
|
93,829
|
|
|
|
87,892
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
95,937
|
|
|
$
|
88,520
|
|
|
|
|
|
|
|
|
|
|
150
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
CONDENSED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Interest and other income
|
|
$
|
8
|
|
|
$
|
139
|
|
|
$
|
5,691
|
|
Interest and other expense
|
|
|
7,844
|
|
|
|
15,037
|
|
|
|
7,244
|
|
Income (loss) before income tax and undistributed subsidiary
income
|
|
|
(7,836
|
)
|
|
|
(14,898
|
)
|
|
|
(1,553
|
)
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed subsidiary income
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(7,650
|
)
|
|
$
|
(14,898
|
)
|
|
$
|
1,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
CONDENSED
STATEMENTS OF CASH FLOWS
Years ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(7,650
|
)
|
|
$
|
(14,898
|
)
|
|
$
|
(1,552
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed subsidiary income
|
|
|
(186
|
)
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
1,771
|
|
|
|
869
|
|
|
|
4,625
|
|
Interest earned on cash held in trust
|
|
|
|
|
|
|
(86
|
)
|
|
|
(5,664
|
)
|
Change in other assets
|
|
|
389
|
|
|
|
(294
|
)
|
|
|
|
|
Change in other liabilities
|
|
|
(365
|
)
|
|
|
(54
|
)
|
|
|
355
|
|
Accrued offering costs
|
|
|
|
|
|
|
|
|
|
|
499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
(6,041
|
)
|
|
|
(14,463
|
)
|
|
|
2,735
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash withdrawn from trust account for working capital
|
|
|
|
|
|
|
316,778
|
|
|
|
4,100
|
|
Investments in subsidiaries
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from investing activities
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of redemption of common shares
|
|
|
|
|
|
|
(211,765
|
)
|
|
|
|
|
Payment of underwriters discount and offering costs
|
|
|
|
|
|
|
(4,027
|
)
|
|
|
|
|
Cash payment for warrant exchange
|
|
|
(2,884
|
)
|
|
|
|
|
|
|
|
|
Redemption of dissenters shares
|
|
|
(567
|
)
|
|
|
|
|
|
|
|
|
Cash payment for fractional shares
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities
|
|
|
(3,452
|
)
|
|
|
(215,792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(34,493
|
)
|
|
|
86,523
|
|
|
|
1,365
|
|
Beginning cash and cash equivalents
|
|
|
87,969
|
|
|
|
1,446
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
$
|
53,476
|
|
|
$
|
87,969
|
|
|
$
|
1,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 17.
|
EARNINGS
PER SHARE
|
Basic earnings per common share (Basic EPS) is
computed by dividing the net income available to common
stockholders by the weighted-average number of shares
outstanding. Diluted earnings per common share (Diluted
EPS) are computed by dividing the net income available to
common stockholders by the weighted average number of common
shares and dilutive common share equivalents then outstanding.
The 7,987,214 shares of common stock issued to WLBCs
initial stockholders were issued for $0.001 per share, which is
considerably less than the Offering per share price. Such shares
have been assumed to be retroactively outstanding since
July 27, 2007, inception. As of July 20, 2009,
7,618,908 of those shares were restructured into warrants and
368,305 of those shares remain outstanding.
For the years ended December 31, 2010 2009 and 2008,
potentially dilutive securities are excluded from the
computation of fully diluted earnings per share as their effects
are anti-dilutive.
The following table sets forth the computation of basic and
diluted per share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
($s in 000s, except per share)
|
|
December 31, 2010
|
|
December 31, 2009
|
|
December 31, 2008
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders
|
|
$
|
(7,650
|
)
|
|
$
|
(14,994
|
)
|
|
$
|
(1,998
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
11,680,609
|
|
|
|
33,169,481
|
|
|
|
39,936,064
|
|
Dilutive effect of Restricted Stock Units, Warrants and Stock
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, assuming dilution
|
|
|
11,680,609
|
|
|
|
33,169,481
|
|
|
|
39,936,064
|
|
Net (loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.65
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.05
|
)
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, the Company had 200,000 Restricted
Stock Units, 194,098 shares of restricted stock, and
246,947 stock options outstanding. For the years ending
December 31, 2010, 2009 and 2008, 42,834, 48,067,758 and
31,948,850 stock warrants were outstanding. Due to the net
losses for the years ended December 31, 2010, 2009 and
2008, all of the dilutive stock based awards are considered
anti-dilutive and not included in the computation of diluted
earnings (loss) per share.
153
WESTERN
LIBERTY BANCORP
NOTES TO FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 18.
|
SUMMARIZED
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
|
WLBCs unaudited condensed quarterly financial information
is as follows for the year ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in 000s, except per share)
|
|
Quarter Ended
|
Year Ended December 31, 2010
|
|
December 31, 2010
|
|
Sept. 30, 2010
|
|
June 30, 2010
|
|
March 31, 2010
|
|
Net interest income
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Operating expenses
|
|
|
5,025
|
|
|
|
(613
|
) (A)
|
|
|
1,676
|
|
|
|
1,756
|
|
Equity in undistributed earnings of subsidiary
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(4,836
|
)
|
|
|
614
|
|
|
$
|
(1,674
|
)
|
|
$
|
(1,754
|
)
|
Net (loss) income per common share, basic
|
|
$
|
(0.35
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.16
|
)
|
Net (loss) income per common share, diluted
|
|
$
|
(0.35
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.16
|
)
|
|
|
|
(A) |
|
For the quarter ended September 30, 2010, the Company
reversed $1,850,000 of stock compensation expense (as more fully
discussed in the September 30, 2010,
Form 10-Q,
Note 4) which offset the recorded other expenses of
approximately $1,237,000. As a result of this reversal the
Company reported a net profit of $614,000. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
December 31, 2009
|
|
September 30, 2009
|
|
June 30, 2009
|
|
March 31, 2009
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
$
|
(6,489
|
)
|
|
$
|
(5,064
|
)
|
|
$
|
2,563
|
)
|
|
$
|
(922
|
)
|
Interest income
|
|
|
52
|
|
|
|
6
|
|
|
|
11
|
|
|
|
71
|
|
Net (loss) income for the period
|
|
$
|
(6,437
|
)
|
|
$
|
(5,058
|
)
|
|
$
|
(2,552
|
)
|
|
$
|
(851
|
)
|
Weighted average number of common shares outstanding not subject
to possible redemption, basic
|
|
|
33,169,481
|
|
|
|
39,936,064
|
|
|
|
39,936,064
|
|
|
|
39,936,064
|
|
Weighted average number of common shares outstanding not subject
to possible redemption, diluted
|
|
|
33,169,481
|
|
|
|
39,936,064
|
|
|
|
39,936,064
|
|
|
|
39,936,064
|
|
Net (loss) income per common share not subject to possible
redemption, basic
|
|
$
|
(0.19
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.02
|
)
|
Net income per common share not subject to possible redemption,
diluted
|
|
$
|
(0.19
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.02
|
)
|
154
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Service1st Bank of Nevada
We have audited the accompanying balance sheet of
Service1st Bank of Nevada (the Company) as of
October 28, 2010 and the related statements of operations,
stockholders equity and comprehensive loss and cash flows
for period January 1, 2010 through October 28, 2010.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of the Company as of October 28, 2010 and the results of
its operations and its cash flows for period January 1,
2010 through October 28, 2010, in conformity with
U.S. generally accepted accounting principles.
As described in Note 16, on October 28, 2010, the
Company was acquired by Western Liberty Bancorp. These financial
statements do not contain any fair value or other adjustments
related to this acquisition.
/s/ Crowe Horwath LLP
Sherman Oaks, California
March 31, 2011
155
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Service1st Bank of Nevada
We have audited the accompanying balance sheet of
Service1st Bank of Nevada (a Nevada corporation) as of
December 31, 2009, and the related statements of
operations, stockholders equity and comprehensive loss,
and cash flows for the years ended December 31, 2009, and
December 31, 2008. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Service1st Bank of Nevada as of December 31, 2009, and
the results of its operations and its cash flows for the years
ended December 31, 2009, and December 31, 2008 in
conformity with accounting principles generally accepted in the
United States of America.
/s/ Grant Thornton LLP
Albuquerque, New Mexico
February 8, 2010
156
SERVICE1ST
BANK OF NEVADA
|
|
|
|
|
|
|
|
|
(In thousands, except for per share amounts)
|
|
October 28, 2010
|
|
|
December 31, 2009
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
10,164
|
|
|
$
|
13,686
|
|
Interest-bearing deposits in banks
|
|
|
4,927
|
|
|
|
35,947
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
15,091
|
|
|
|
49,633
|
|
Certificates of deposits
|
|
|
31,928
|
|
|
|
9,313
|
|
Securities, available for sale
|
|
|
2,850
|
|
|
|
7,434
|
|
Securities, held to maturity (fair value 2010: $7,842
|
|
|
|
|
|
|
|
|
and 2009: $10,677 )
|
|
|
7,582
|
|
|
|
10,201
|
|
Loans, net of allowance for loan losses 2010: $9,418 and
|
|
|
|
|
|
|
|
|
2009: $6,404
|
|
|
115,986
|
|
|
|
130,563
|
|
Premises and equipment, net
|
|
|
1,284
|
|
|
|
1,634
|
|
Accrued interest receivable
|
|
|
605
|
|
|
|
529
|
|
Other real estate owned
|
|
|
2,403
|
|
|
|
|
|
Other assets
|
|
|
2,227
|
|
|
|
2,453
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
179,956
|
|
|
$
|
211,760
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
68,575
|
|
|
$
|
56,463
|
|
Interest bearing:
|
|
|
|
|
|
|
|
|
Demand
|
|
|
29,018
|
|
|
|
25,094
|
|
Savings and money market
|
|
|
29,381
|
|
|
|
43,209
|
|
Time, $100 or more
|
|
|
30,204
|
|
|
|
54,316
|
|
Other time
|
|
|
4,888
|
|
|
|
6,238
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
162,066
|
|
|
|
185,320
|
|
Accrued interest payable and other liabilities
|
|
|
1,452
|
|
|
|
1,921
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
163,518
|
|
|
|
187,241
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, par value: $.01; shares authorized: 25,000,000;
shares issued: 50,811; and shares outstanding October 28,
2010 and
December 31, 2009: 50,811 less 1,000 shares held in
treasury
|
|
|
1
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
52,642
|
|
|
|
52,009
|
|
Accumulated deficit
|
|
|
(35,410
|
)
|
|
|
(26,693
|
)
|
Accumulated other comprehensive loss, net
|
|
|
(20
|
)
|
|
|
(23
|
)
|
Less cost of treasury stock, 1,000 shares
|
|
|
(775
|
)
|
|
|
(775
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
16,438
|
|
|
|
24,519
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
179,956
|
|
|
$
|
211,760
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
157
SERVICE1ST
BANK OF NEVADA
STATEMENTS OF OPERATIONS
FOR THE PERIOD JANUARY 1, 2010
THROUGH OCTOBER 28, 2010,
AND YEARS ENDED 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except for per share amounts)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
5,801
|
|
|
$
|
8,202
|
|
|
$
|
7,837
|
|
Securities, taxable
|
|
|
472
|
|
|
|
646
|
|
|
|
355
|
|
Federal funds sold and other
|
|
|
347
|
|
|
|
195
|
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
6,620
|
|
|
|
9,043
|
|
|
|
8,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,147
|
|
|
|
2,663
|
|
|
|
1,963
|
|
Repurchase sweep agreements
|
|
|
|
|
|
|
13
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
1,147
|
|
|
|
2,676
|
|
|
|
2,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
5,473
|
|
|
|
6,367
|
|
|
|
6,475
|
|
Provision for loan losses
|
|
|
6,329
|
|
|
|
15,666
|
|
|
|
3,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income after provision for loan losses
|
|
|
(856
|
)
|
|
|
(9,299
|
)
|
|
|
2,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges
|
|
|
382
|
|
|
|
328
|
|
|
|
196
|
|
Loan and late fees
|
|
|
17
|
|
|
|
98
|
|
|
|
99
|
|
Gain on sale of securities
|
|
|
13
|
|
|
|
17
|
|
|
|
|
|
Other
|
|
|
95
|
|
|
|
71
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
507
|
|
|
|
514
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
3,536
|
|
|
|
3,875
|
|
|
|
5,029
|
|
Occupancy, equipment and depreciation
|
|
|
1,360
|
|
|
|
1,673
|
|
|
|
1,664
|
|
Computer service charges
|
|
|
243
|
|
|
|
328
|
|
|
|
313
|
|
Professional fees
|
|
|
1,605
|
|
|
|
1,026
|
|
|
|
256
|
|
Advertising and business development
|
|
|
79
|
|
|
|
88
|
|
|
|
157
|
|
Insurance
|
|
|
705
|
|
|
|
500
|
|
|
|
145
|
|
Telephone
|
|
|
87
|
|
|
|
101
|
|
|
|
104
|
|
Stationery and supplies
|
|
|
26
|
|
|
|
32
|
|
|
|
45
|
|
Director fees
|
|
|
34
|
|
|
|
44
|
|
|
|
23
|
|
Loss on disposition of equipment
|
|
|
|
|
|
|
3
|
|
|
|
|
|
Other real estate owned
|
|
|
654
|
|
|
|
|
|
|
|
|
|
Provision for unfunded commitments
|
|
|
(471
|
)
|
|
|
498
|
|
|
|
140
|
|
Other
|
|
|
510
|
|
|
|
425
|
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,368
|
|
|
|
8,593
|
|
|
|
8,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,717
|
)
|
|
$
|
(17,378
|
)
|
|
$
|
(5,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(175.00
|
)
|
|
$
|
(342.86
|
)
|
|
$
|
(100.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
158
SERVICE1ST
BANK OF NEVADA
STATEMENTS
OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
FOR THE PERIOD JANUARY 1, 2010
THROUGH OCTOBER 28, 2010,
AND YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
Common Stock (Issued)
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Treasury Stock
|
|
|
|
|
(In thousands, except for per share amount)
|
|
Loss
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Shares
|
|
|
Amount
|
|
|
Total
|
|
|
Balance, January 1, 2008
|
|
|
|
|
|
|
50,811
|
|
|
$
|
1
|
|
|
$
|
51,207
|
|
|
$
|
(4,198
|
)
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
47,010
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
423
|
|
Net loss
|
|
$
|
(5,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
(5,117
|
)
|
|
|
50,811
|
|
|
|
1
|
|
|
|
51,630
|
|
|
|
(9,315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
379
|
|
Treasury stock transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
(775
|
)
|
|
|
(775
|
)
|
Net loss
|
|
|
(17,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,378
|
)
|
Unrealized Loss on securities available for sale, net of taxes
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
(17,401
|
)
|
|
|
50,811
|
|
|
|
1
|
|
|
|
52,009
|
|
|
|
(26,693
|
)
|
|
|
(23
|
)
|
|
|
1,000
|
|
|
|
(775
|
)
|
|
|
24,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
633
|
|
Net loss
|
|
|
(8,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,717
|
)
|
Unrealized Loss on securities available for sale, net of taxes
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 28, 2010
|
|
$
|
(8,714
|
)
|
|
|
50,811
|
|
|
$
|
1
|
|
|
$
|
52,642
|
|
|
$
|
(35,410
|
)
|
|
$
|
(20
|
)
|
|
|
1,000
|
|
|
$
|
(775
|
)
|
|
$
|
16,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
159
SERVICE1ST
BANK OF NEVADA
STATEMENTS
OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 2010
THROUGH OCTOBER 28, 2010,
AND YEARS ENDED 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except for per share amount)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,717
|
)
|
|
$
|
(17,378
|
)
|
|
$
|
(5,117
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of premises and equipment
|
|
|
422
|
|
|
|
633
|
|
|
|
598
|
|
Amortization of securities premiums/discounts, net
|
|
|
48
|
|
|
|
27
|
|
|
|
7
|
|
Provision for loan losses
|
|
|
6,329
|
|
|
|
15,666
|
|
|
|
3,670
|
|
Stock warrants and stock option expense
|
|
|
633
|
|
|
|
379
|
|
|
|
423
|
|
Loss on disposition of equipment
|
|
|
|
|
|
|
3
|
|
|
|
|
|
Gain on sale securities
|
|
|
(13
|
)
|
|
|
(17
|
)
|
|
|
|
|
Increase in accrued interest receivable
|
|
|
(76
|
)
|
|
|
(98
|
)
|
|
|
(48
|
)
|
Decrease (increase) in other assets
|
|
|
231
|
|
|
|
(1,708
|
)
|
|
|
(392
|
)
|
(Decrease) increase in accrued interest payable and other
liabilities
|
|
|
(469
|
)
|
|
|
567
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,612
|
)
|
|
|
(1,926
|
)
|
|
|
(873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of certificates of deposit
|
|
|
(39,921
|
)
|
|
|
(31,106
|
)
|
|
|
|
|
Proceeds from certificates of deposit
|
|
|
17,306
|
|
|
|
21,793
|
|
|
|
|
|
Purchases of securities available for sale
|
|
|
(6,000
|
)
|
|
|
(14,693
|
)
|
|
|
|
|
Proceeds from sales of securities available for sale
|
|
|
4,000
|
|
|
|
6,994
|
|
|
|
|
|
Proceeds from maturities of securities available for sale
|
|
|
6,245
|
|
|
|
|
|
|
|
|
|
Proceeds from principal paydowns of securities available for sale
|
|
|
279
|
|
|
|
204
|
|
|
|
|
|
Purchase of securities held to maturity
|
|
|
|
|
|
|
(6,035
|
)
|
|
|
(10,810
|
)
|
Proceeds from maturities of securities held to maturity
|
|
|
2,497
|
|
|
|
7,098
|
|
|
|
6,171
|
|
Proceeds from sales of securities held to maturity
|
|
|
|
|
|
|
499
|
|
|
|
|
|
Proceeds from principal paydowns of securities held to maturity
|
|
|
145
|
|
|
|
|
|
|
|
|
|
Purchase of premises and equipment
|
|
|
(72
|
)
|
|
|
(8
|
)
|
|
|
(141
|
)
|
Net decrease (increase) in loans
|
|
|
5,845
|
|
|
|
(12,670
|
)
|
|
|
(49,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(9,676
|
)
|
|
|
(27,924
|
)
|
|
|
(54,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits
|
|
|
(23,254
|
)
|
|
|
75,429
|
|
|
|
28,554
|
|
Net (repayments) proceeds from repurchase sweep agreements
|
|
|
|
|
|
|
(5,933
|
)
|
|
|
4,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
(23,254
|
)
|
|
|
69,496
|
|
|
|
32,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(34,542
|
)
|
|
|
39,646
|
|
|
|
(22,190
|
)
|
Cash and cash equivalents, beginning
|
|
$
|
49,633
|
|
|
$
|
9,987
|
|
|
$
|
32,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, ending
|
|
$
|
15,091
|
|
|
$
|
49,633
|
|
|
$
|
9,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on deposits and repurchase sweep agreements
|
|
$
|
1,242
|
|
|
$
|
2,662
|
|
|
$
|
1,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash operating and investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal paydowns on SBA loan pool securities reclassified to
other assets
|
|
$
|
3
|
|
|
$
|
6
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases to premises and equipment funded by tenant allowances
|
|
$
|
|
|
|
$
|
|
|
|
$
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock received in settlement of an impaired loan
|
|
$
|
|
|
|
$
|
775
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers of loans to other real estate owned
|
|
$
|
2,403
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
160
SERVICE1ST
BANK OF NEVADA
|
|
NOTE 1.
|
NATURE OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Nature
of business
Service1st Bank of Nevada (the Bank) was formed on
November 3, 2006 and commenced operations as a financial
institution on January 16, 2007 when a state charter was
received from the Nevada Financial Institutions Division (NFID)
and federal deposit insurance was granted by the Federal Deposit
Insurance Corporation (FDIC). The Bank is under the supervision
of and subject to regulation and examination by the NFID and the
FDIC.
The Bank has two branches located in Las Vegas, Nevada, which
accept deposits and grant loans to customers. The Banks
loan portfolio contains primarily commercial and real estate
loans concentrated in Nevada. Segment information is not
presented since all of the Banks results are attributed to
Service1st Bank of Nevada.
On October 28, 2010, Western Liberty Bancorp (WLBC)
consummated its acquisition (the Acquisition) of the
Bank, a Nevada-chartered non-member bank pursuant to a Merger
Agreement (the Merger Agreement), dated as of
November 6, 2009, as amended by a First Amendment to the
Merger Agreement, dated as of June 21, 2010
(Amendment No. 1 and, together with the Merger
Agreement, the Amended Merger Agreement), each among
WL-S1 Interim Bank, a Nevada corporation and wholly-owned
subsidiary of WLBC (Acquisition Sub), the Bank and
Curtis W. Anderson, as representative of the former stockholders
of the Bank. Pursuant to the Amended Merger Agreement,
Acquisition Sub merged with and into the Bank, with the Bank
being the surviving entity and becoming WLBCs wholly-owned
subsidiary. WLBC previously received the requisite approvals of
certain bank regulatory authorities to complete the Acquisition
to become a bank holding company.
The accounting and reporting policies of the Bank conform to
accounting principles generally accepted in the United States of
America and general practice in the banking industry. A summary
of the significant accounting policies used by the Bank is as
follows:
Use
of estimates in the preparation of financial
statements
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results may differ from those estimates. Material
estimates that are particularly susceptible to significant
change in the near term relates to the determination of the
allowance for loan losses, deferred tax assets, and the value of
other real estate owned.
Cash
and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks (including cash
items in process of clearing), federal funds sold, and
interest-bearing deposits in banks with original maturities of
90 days or less. Cash flows from loans originated by the
Bank and deposits are reported net.
The Bank is required to maintain balances in cash or on deposit
with the Federal Reserve Bank. The total of those reserve
balances was approximately $5.3 million and
$3.0 million as of October 28, 2010 and
December 31, 2009, respectively.
161
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
Certificates
of deposit
The Bank invests in institutional certificates of deposits in
addition to selling overnight federal funds. The Banks
certificates of deposit do not exceed the FDIC insured limit at
any one institution. The terms of the Banks certificates
of deposit do not exceed one year.
Securities
Securities classified as available for sale are debt securities
the Bank intends to hold for an indefinite period of time, but
not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various
factors, including significant movements in interest rates,
changes in the maturity mix of the Banks assets and
liabilities, liquidity needs, regulatory capital considerations
and other similar factors. Securities available for sale are
reported at fair value with unrealized gains or losses reported
as other comprehensive income (loss). Realized gains or losses,
determined on the basis of the cost of specific securities sold,
are included in earnings.
Securities classified as held to maturity are those debt
securities the Bank has both the intent and ability to hold to
maturity regardless of changes in market conditions, liquidity
needs, or general economic conditions. These securities are
carried at amortized cost, adjusted for amortization of premium
and accretion of discount computed by the interest method over
the contractual lives. The sale of a security within three
months of its maturity date or after at least 85% of the
principal outstanding has been collected is considered a
maturity for purposes of classification and disclosure. Purchase
premiums and discounts are generally recognized in interest
income using the effective yield method over the term of the
securities.
Management evaluates securities for
other-than-temporary
impairment (OTTI) at least on a quarterly basis, and more
frequently when economic or market conditions warrant such
evaluation. Consideration is given to (1) the length of
time and the extent to which the fair value has been less than
cost, (2) the financial condition and near term prospects
of the issuer including an evaluation of credit ratings,
(3) the impact of changes in market interest rates,
4) the intent of the Bank to sell a security, and
5) whether it is more likely than not the Bank will have to
sell the security before recovery of its cost basis.
If the Bank intends to sell an impaired security, the Bank
records an
other-than-temporary
loss in an amount equal to the entire difference between fair
value and amortized cost. If a security is determined to be
other-than-temporarily
impaired, but the Bank does not intend to sell the security,
only the credit portion of the estimated loss is recognized in
earnings, with the other portion of the loss recognized in other
comprehensive income.
Loans
Loans are stated at the amount of unpaid principal, reduced by
unearned net loan fees and allowance for loan losses.
The allowance for loan losses is established through a provision
for loan losses charged to expense. Loans are charged against
the allowance for loan losses when management believes that
collectibility of the principal is unlikely. Subsequent
recoveries, if any, are credited to the allowance.
The allowance is an amount that management believes will be
adequate to absorb probable losses on existing loans that may
become uncollectible, based on evaluation of the collectability
of loans and prior credit loss experience of the Bank and peer
bank historical loss experience. This evaluation also takes into
consideration such factors as changes in the nature and volume
of the loan portfolio, overall portfolio quality, specific
problem credits, peer bank information, and current economic
conditions that may affect the borrowers ability to pay.
Due to the credit concentration of the Banks loan
portfolio in real estate-secured loans, the value of collateral
is heavily dependent on real estate values in Southern Nevada.
This evaluation is
162
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
inherently subjective and future adjustments to the allowance
may be necessary if there are significant changes in economic or
other conditions. In addition, the FDIC and state banking
regulatory agencies, as an integral part of their examination
processes, periodically review the Banks allowance for
loan losses, and may require the Bank to make additions to the
allowance based on their judgment about information available to
them at the time of their examinations.
The allowance consists of specific and general components. The
specific component relates to loans that are classified as
impaired. For such loans, an allowance is established when the
discounted cash flows (or collateral value or observable market
price) of the impaired loan is lower than the carrying value of
that loan. The general component covers non-impaired loans and
is based on historical loss experience of the Bank and peer bank
historical loss experience, adjusted for qualitative and
environmental factors.
A loan is impaired when, based on current information and
events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of
the loan agreement. Loans for which the terms have been modified
resulting in a concession, and for which the borrower is
experiencing financial difficulties, are considered troubled
debt restructurings and classified as impaired.
Factors considered by management in determining impairment
include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment
shortfalls on
case-by-case
basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrowers prior
payment record, and the amount of the shortfall in relation to
the principal and interest owed.
Commercial and commercial real estate loans that are over
$250,000 are individually evaluated for impairment. If a loan is
impaired, a portion of the allowance is allocated so that the
loan is reported, net, at the present value of estimated future
cash flows using the loans existing rate or at the fair
value of collateral if repayment is expected solely from the
collateral. Large groups of smaller balance homogeneous loans,
such as consumer and residential real estate loans, are
collectively evaluated for impairment, and accordingly, they are
not separately identified for impairment disclosures. Troubled
debt restructurings are separately identified for impairment
disclosures and are measured at the present value of estimated
future cash flows using the loans effective rate at
inception. If a troubled debt restructuring is considered to be
a collateral dependent loan, the loan is reported, net, at the
fair value of the collateral. For troubled debt restructurings
that subsequently default, the Bank determines the amount of
reserve in accordance with the accounting policy for the
allowance for loan losses.
Interest
and fees on loans
Interest on loans is recognized over the terms of the loans and
is calculated using the effective interest method. The accrual
of interest on impaired loans is discontinued when, in
managements opinion, the borrower may be unable to make
payments as they become due.
The Bank determines a loan to be delinquent when payments have
not been made according to contractual terms, typically
evidenced by nonpayment of a monthly installment by the due
date. The accrual of interest on loans is discontinued at the
time the loan is 90 days delinquent unless the credit is
well secured and in the process of collection.
All interest accrued but not collected for loans that are placed
on nonaccrual status or charged off is reversed against interest
income. The interest on these loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return
to accrual. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
163
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
Loan origination and commitment fees and certain direct loan
origination costs are deferred and the net amount amortized as
an adjustment to the related loans yield. The Bank is
generally amortizing these amounts over the contractual life of
the loan. Commitment fees, based upon a percentage of a
customers unused line of credit, and fees related to
standby letters of credit are recognized over the commitment
period.
Transfers
of financial assets
Transfers of financial assets are accounted for as sales, when
control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the
assets have been isolated from the Bank, (2) the transferee
obtains the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the
transferred assets, and (3) the Bank does not maintain
effective control over the transferred assets through an
agreement to repurchase them before their maturity. The
Banks transfers of financial assets consist solely of loan
participations.
Advertising
costs
Advertising costs are expensed as incurred.
Foreclosed
assets
Assets acquired through or instead of loan foreclosure are
initially recorded at fair value less costs to sell when
acquired, establishing a new cost basis. These assets are
subsequently accounted for at lower of cost or fair value less
estimated costs to sell. If fair value declines subsequent to
foreclosure, a valuation allowance is recorded through expense.
Operating costs after acquisition are expensed.
Premises
and equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed
principally by the straight-line method over the estimated
useful lives of the assets. Improvements to leased property are
amortized over the lesser of the term of the lease or life of
the improvements. Depreciation and amortization is computed
using the following estimated lives:
|
|
|
|
|
Years
|
|
Furniture and fixtures
|
|
7 - 10
|
Equipment and vehicles
|
|
3 - 5
|
Leasehold improvements
|
|
5 - 10
|
Other
assets
Other assets are comprised primarily of Federal Home Loan Bank
(FHLB) stock and prepaid expenses.
Prepaid expenses are amortized over the terms of the agreements.
The Bank had approximately $1.1 million and
$1.4 million of prepayments relating to three years of FDIC
assessments as of October 28, 2010, and December 31,
2009 that were prepaid on December 31, 2009.
The Bank, as a member of the FHLB system, is required to
maintain an investment in capital stock of the FHLB of an amount
pursuant to the agreement with the FHLB. These investments are
recorded at cost since no ready market exists for them, and they
have no quoted market value. As of October 28, 2010 and
December 31, 2009, the Banks investment in the FHLB
was $658,000 and $487,000, respectively, and is included in
other assets.
The Bank views its investment in the FHLB stock as a long-term
investment. Accordingly, when evaluating FHLB stock for
impairment, the value is determined based on the ultimate
recovery of the par value
164
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
rather than recognizing temporary declines in values. The
determination of whether a decline affects the ultimate recovery
is influenced by criteria such as: (1) the significance of
the decline in net assets of the FHLBs as compared to the
capital stock amount and length of time a decline has persisted;
(2) impact of legislative and regulatory changes on the
FHLB; and (3) the liquidity position of the FHLB. The FHLB
of San Franciscos capital ratios exceeded the
required ratios as of September 30, 2010 and the Bank does
not believe that its investment in the FHLB is impaired as of
this date. However, this estimate could change in the near term
as a result of any of the following events: (1) significant
OTTI losses are incurred on the mortgage-backed securities (MBS)
portfolio of the FHLB of San Francisco causing a
significant decline in the FHLBs regulatory capital
ratios; (2) the economic losses resulting from credit
deterioration on the MBS increases significantly; and
(3) capital preservation strategies being utilized by the
FHLB become ineffective.
Income
taxes
Income tax expense is the total of the current year income tax
due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the
expected future tax amounts for the temporary differences
between carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount
expected to be realized.
Stock
compensation plans
Compensation cost is recognized for stock options and restricted
stock awards issued to employees and directors based on the fair
value of these awards at the date of grant. A Black-Scholes
model is utilized to estimate the fair value of stock options,
while the market price of the Banks common stock at the
date of grant is used for restricted stock awards.
Compensation cost is recognized over the required service
period, generally defined as the vesting period. For awards with
graded vesting, compensation cost is recognized on a
straight-line basis over the requisite service period for the
entire award.
Off-balance
sheet instruments
In the ordinary course of business, the Bank has entered into
off-balance sheet financing instruments consisting of
commitments to extend credit and standby letters of credit. Such
financial instruments are recorded in the financial statements
when they are funded.
Comprehensive
loss
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized
gains and losses on available for sale securities, are reported
as a separate component of the equity section of the balance
sheet, such items, along with net loss, are components of
comprehensive loss. Gains and losses on available for sale
securities are reclassified to net loss as the gains or losses
are realized upon sale of the securities. OTTI impairment
charges are reclassified to net income at the time of the charge.
Fair
value measurement
For assets and liabilities recorded at fair value, it is the
Banks policy to maximize the use of observable inputs and
minimize the use of unobservable inputs when developing fair
value measurements. Fair value measurements for assets and
liabilities, where there exists limited or no observable market
data and, therefore, are based primarily upon estimates, are
often calculated based on the economic and competitive
environment, the characteristics of the asset or liability and
other factors. Therefore, the results cannot be determined with
165
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
precision and may not be realized in an actual sale or immediate
settlement of the asset or liability. Additionally, there may be
inherent weaknesses in any calculation technique, and changes in
the underlying assumptions used, including discount rates and
estimates of future cash flows, could significantly affect the
results of current or future values. The Bank utilizes fair
value measurements to determine fair value disclosures and
certain assets recorded at fair value on a recurring and
nonrecurring basis. See Notes 2 and 14.
Fair
values of financial instruments
The Bank discloses fair value information about financial
instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value.
Management uses its best judgment in estimating the fair value
of the Banks financial instruments. However, there are
inherent weaknesses in any estimation technique. Therefore, for
substantially all financial instruments, the fair value
estimates presented herein are not necessarily indicative of the
amounts the Bank could have realized in a sales transaction as
of October 28, 2010 and December 31, 2009. The
estimated fair value amounts as of October 28, 2010 and
December 31, 2009 have been measured as of that date and
have not been reevaluated or updated for purposes of these
financial statements subsequent to that date. As such, the
estimated fair values of these financial statements subsequent
to the reporting date may be different than the amounts reported
as of October 28, 2010 and December 31, 2009.
The information in Note 14 should not be interpreted as an
estimate of the fair value of the entire Bank since a fair value
calculation is only required for a limited portion of the
Banks assets. Due to the wide range of valuation
techniques and the degree of subjectivity used in making the
estimate, comparisons between the Banks disclosures and
those of other companies or banks may not be meaningful.
Certificates
of deposit
The carrying amounts reported in the balance sheet for
certificates of deposit approximate their fair value as the
terms on the certificates of deposits do not exceed one year.
Securities
Fair values for securities are based on quoted market prices
where available or on quoted market prices for similar
securities in the absence of quoted prices on the specific
security.
Loans
For variable rate loans that reprice frequently and that have
experienced no significant change in credit risk, fair values
are based on carrying values. Variable rate loans comprise
approximately 58% and 73% of the loan portfolio as of
October 28, 2010 and December 31, 2009, respectively.
Fair value for all other loans is estimated based on discounted
cash flows using interest rates currently being offered for
loans with similar terms to borrowers with similar credit
quality. Prepayments prior to the repricing date are not
expected to be significant. Loans are expected to be held to
maturity and any unrealized gains or losses are not expected to
be realized.
Impaired
loans
The fair value of an impaired loan is estimated using one of
several methods, including collateral value, market value of
similar debt, enterprise value, liquidation value, and
discounted cash flows. Those impaired loans not requiring an
allowance for probable losses represent loans for which the fair
value of the expected repayments or collateral exceeds the
recorded investment in such loans.
166
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
Accrued
interest receivable and payable
The carrying amounts reported in the balance sheet for accrued
interest receivable and payable approximate their fair value.
Restricted
stock
The Bank is a member of the FHLB system and maintains an
investment in capital stock of the FHLB of an amount pursuant to
the agreement with the FHLB. This investment is carried at cost
since no ready market exists, and there is no quoted market
value.
Deposit
liabilities
The fair value disclosed for demand and savings deposits is by
definition equal to the amount payable on demand at their
reporting date (carrying amount). The carrying amount for
variable-rate deposit accounts approximates their fair value.
Fair value of fixed-rate certificates of deposit is estimated
based on current market rates offered in the local market as
well as the Banks current rates for certificates of
deposit with similar terms.
Off-balance
sheet instruments
Fair values for the Banks off-balance sheet instruments,
lending commitments and standby letters of credit, are based on
quoted fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and
the counterparties credit standing.
Loss
per share
Diluted earnings per share is based on the weighted average
outstanding common shares (excluding treasury shares, if any)
during each year, including common stock equivalents. Basic
earnings per share is based on the weighted average outstanding
common shares during the year.
Basic and diluted loss per share, based on the weighted average
outstanding shares, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
January 1, 2010
|
|
|
|
|
|
|
through October
|
|
|
|
|
|
|
28, 2010
|
|
|
Year Ended December 31,
|
|
($ in 000s, except for per share amounts)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stock
|
|
$
|
(8,717
|
)
|
|
$
|
(17,378
|
)
|
|
$
|
(5,117
|
)
|
Weighted average common shares outstanding
|
|
|
49,811
|
|
|
|
50,683
|
|
|
|
50,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
$
|
(175.00
|
)
|
|
$
|
(342.86
|
)
|
|
$
|
(100.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to the Banks historical net losses, all of the
Banks stock based awards are considered anti-dilutive, and
accordingly, basic and diluted loss per share is the same.
Reclassifications
Certain amounts in the financial statements and related
disclosures as of December 31, 2009 and 2008 and for the
years ended December 31, 2009 and 2008 have been
reclassified to conform to the current presentation.
167
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
Recent
accounting pronouncements
New authoritative accounting guidance concerning fair value
measurements and disclosures, amends prior accounting guidance
to amend and expand disclosure requirements about transfers in
and out of Levels 1 and 2, clarified existing fair value
disclosure requirements about the appropriate level of
disaggregation, and clarified that a description of valuation
techniques and inputs used to measure fair value was required
for recurring and nonrecurring Level 2 and 3 fair value
measurements. The new authoritative accounting guidance became
effective for the Bank on January 1, 2010, except for the
disclosures about purchases, sales, issuances, and settlements
in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods
within those fiscal years. The new required disclosures are
included in Note 2 Fair Value Accounting.
New authoritative accounting guidance concerning transfers and
servicing, amends prior accounting guidance to enhance reporting
about transfers of financial assets, including securitizations,
and where companies have continuing exposure to the risks
related to transferred financial assets. The new authoritative
accounting guidance eliminates the concept of a qualifying
special-purpose entity and changes the requirements for
derecognizing financial assets. The new authoritative accounting
guidance also requires additional disclosures about all
continuing involvements with transferred financial assets
including information about gains and losses resulting from
transfers during the period. The new authoritative accounting
guidance became effective January 1, 2010, and did not have
a significant impact on the Banks financial statements.
New authoritative accounting guidance concerning receivables,
amended prior guidance to provide a greater level of
disaggregated information about the credit quality of loans and
leases and the Allowance for Loan and Lease Losses (Allowance).
The new authoritative guidance also requires additional
disclosures related to credit quality indicators, past due
information, and information related to loans modified in
troubled debt restructuring. The provisions of the new
authoritative guidance will be effective in the reporting period
ending December 31, 2010. The new authoritative guidance
amends only the disclosure requirements for loans and leases and
the Allowance; the adoption will have no impact on the
Banks statements of income and condition.
|
|
NOTE 2.
|
FAIR
VALUE ACCOUNTING
|
The Bank uses a fair value hierarchy that prioritizes inputs to
valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (level 1
measurements) and the lowest priority to unobservable inputs
(level 3 measurements). The three levels of the fair value
hierarchy are described below:
Level 1 Unadjusted quoted prices in
active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
Level 2 Quoted prices for similar
instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active, or
model-based valuation techniques where all significant
assumptions are observable, either directly or indirectly, in
the market;
Level 3 Valuation is generated from
model-based techniques where all significant assumptions are not
observable, either directly or indirectly, in the market. These
unobservable assumptions reflect our own estimates of
assumptions that market participants would use in pricing the
asset or liability. Valuation techniques may include use of
matrix pricing, discounted cash flow models and similar
techniques.
168
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
Fair
value on a recurring basis
Financial assets measured at fair value on a recurring basis
include the following:
Securities available for sale. Securities
reported as available for sale are reported at fair value
utilizing Level 2 inputs. For these securities the Bank
obtains fair value measurements from an independent pricing
service. The fair value measurements consider observable data
that may include dealer quotes, market spreads, cash flows, the
U.S. Treasury yield curve, live trading levels, trade
execution data, market consensus prepayment speeds, credit
information, and the bonds terms and conditions, among
other things.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at October 28, 2010:
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
($ in 000s)
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Agency Securities GSE
|
|
$
|
1,002
|
|
|
$
|
|
|
|
$
|
1,002
|
|
|
$
|
|
|
Collateralized Mortgage Obligation Securities
|
|
|
1,848
|
|
|
|
|
|
|
|
1,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,850
|
|
|
$
|
|
|
|
$
|
2,850
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no significant transfers between Level 1 and
Level 2 during the period January 1, 2010 through
October 28, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009:
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
($ in 000s)
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Agency Securities GSE
|
|
$
|
5,229
|
|
|
$
|
|
|
|
$
|
5,229
|
|
|
$
|
|
|
Collateralized Mortgage Obligation Securities
|
|
|
2,205
|
|
|
|
|
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,434
|
|
|
$
|
|
|
|
$
|
7,434
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value on a nonrecurring basis
Certain assets are measured at fair value on a nonrecurring
basis; that is, the instruments are not measured at fair value
on an ongoing basis, but are subject to fair value adjustments
in certain circumstances (for
169
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
example, when there is evidence of impairment). The following
table presents such assets carried on the balance sheet by
caption and by level within the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at October 28, 2010
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
($ in 000s)
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Impaired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development, and other land loans
|
|
$
|
3,958
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,958
|
|
Commercial real estate
|
|
|
4,844
|
|
|
|
|
|
|
|
|
|
|
|
4,844
|
|
Residential real estate
|
|
|
2,764
|
|
|
|
|
|
|
|
|
|
|
|
2,764
|
|
Other real estate owned
|
|
|
1,778
|
|
|
|
|
|
|
|
|
|
|
|
1,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,344
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
($ in 000s)
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Impaired loans
|
|
$
|
6,959
|
|
|
|
|
|
|
|
|
|
|
$
|
6,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans. The specific reserves for
collateral dependent impaired loans are based on the fair value
of the collateral less estimated costs to sell. The fair value
of collateral is determined based on third-party appraisals. In
some cases, adjustments are made to the appraised values due to
various factors, including age of the appraisal, age of
comparables included in the appraisal, and known changes in the
market and in the collateral. Accordingly, the resulting fair
value measurement has been categorized as a Level 3
measurement.
Impaired loans that are measured for impairment using the fair
value of the collateral for collateral dependent loans, had a
principal balance of $13.3 million, with a valuation
allowance of $1.7 million at October 28, 2010,
resulting in an additional provision for loan losses of $820,000
for the period January 1, 2010 through October 28,
2010. At December 31, 2009, impaired loans had a principal
balance of $7.8 million, with a valuation allowance of
$841,000 resulting in an additional provision for loan losses of
$841,000 for the year ended December 31, 2009.
Other real estate owned measured at fair value less costs to
sell, had a net carrying amount of $1.8 million, which is
made up of the outstanding balance of $1.8 million, net of
a valuation allowance of $0 at October 28, 2010. The Bank
took an impairment charge of $617,000 for the period
January 1, 2010 through October 28, 2010. At
December 31, 2009 the Bank had no other real estate owned.
170
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
Carrying amounts and fair values of investment securities as of
October 28, 2010 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
($ in 000s)
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agencies GSE
|
|
$
|
1,002
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,002
|
|
Collateralized Mortgage Obligation Securities
|
|
|
1,868
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
1,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,870
|
|
|
$
|
|
|
|
$
|
(20
|
)
|
|
$
|
2,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
|
|
($ in 000s)
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Debt Securities
|
|
$
|
6,924
|
|
|
$
|
256
|
|
|
$
|
|
|
|
$
|
7,180
|
|
Small Business Administration Loan Pools
|
|
|
658
|
|
|
|
4
|
|
|
|
|
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,582
|
|
|
$
|
260
|
|
|
$
|
|
|
|
$
|
7,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amounts and fair values of investment securities as of
December 31, 2009 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
($ in 000s)
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agencies GSE
|
|
$
|
5,248
|
|
|
$
|
|
|
|
$
|
(19
|
)
|
|
$
|
5,229
|
|
Collateralized Mortgage Obligation Securities
|
|
|
2,209
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,457
|
|
|
$
|
|
|
|
$
|
(23
|
)
|
|
$
|
7,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
|
|
($ in 000s)
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agencies GSE
|
|
$
|
997
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
1,000
|
|
Corporate Debt Securities
|
|
|
8,390
|
|
|
|
477
|
|
|
|
|
|
|
|
8,867
|
|
Small Business Administration Loan Pools
|
|
|
814
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,201
|
|
|
$
|
480
|
|
|
$
|
(4
|
)
|
|
$
|
10,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 28, 2010 and the year ended December 31,
2009, proceeds from sales of
available-for-sale
securities were $4.0 million and $7.0 million,
respectively. Gross realized gains from sales for the period
January 1, 2010 through October 28, 2010 and the years
ended December 31, 2009 and 2008, were $13,000, $3,000, and
$0, respectively. There were no gross realized losses on
available-for-sale
securities for the period January 1, 2010 through
October 28, 2010 and the years ended December 31, 2009
and 2008.
171
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
During the year ended December 31, 2009, the Bank had net
realized gains on the sale of securities of approximately
$17,000. Of this gain, $14,000 related to a sale of a security
with a carrying value of approximately $479,000 that was
classified as
held-to-maturity
(HTM). Management sold this HTM security as a result of a
decline in the issuers creditworthiness. Specifically, the
issuers credit rating declined to below investment grade.
There were no realized losses on
held-to-maturity
securities in 2010, 2009, and 2008.
Securities with carrying amounts of approximately
$6.9 million and $9.4 million as of October 28,
2010 and December 31, 2009, respectively, were pledged for
various purposes as required or permitted by law.
Information pertaining to securities with gross losses at
October 28, 2010 and December 31, 2009, aggregated by
investment category and length of time that individual
securities have been in a continuous loss position follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
Less than Twelve Months
|
|
|
Over Twelve Months
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
($ in 000s)
|
|
(Losses)
|
|
|
Fair Value
|
|
|
(Losses)
|
|
|
Fair Value
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S Agencies GSE
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Collateralized Mortgage Obligations Securities
|
|
|
(20
|
)
|
|
|
1,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(20
|
)
|
|
$
|
1,848
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Debt Securities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Small Business Administration Loan Pools
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
Less than Twelve Months
|
|
|
Over Twelve Months
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
($ in 000s)
|
|
(Losses)
|
|
|
Fair Value
|
|
|
(Losses)
|
|
|
Fair Value
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S Agencies GSE
|
|
$
|
(19
|
)
|
|
$
|
5,229
|
|
|
$
|
|
|
|
$
|
|
|
Collateralized Mortgage Obligations Securities
|
|
|
(4
|
)
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(23
|
)
|
|
$
|
7,434
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S Agencies GSE
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Corporate Debt Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small Business Administration Loan Pools
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(4
|
)
|
|
$
|
765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 28, 2010, five debt securities have
unrealized losses with aggregate degradation of approximately 1%
from the Banks amortized costs basis. These unrealized
losses totaling approximately $20,000 relate primarily to
fluctuations in the current interest rate environment and other
factors, but do not presently represent realized losses. As of
October 28, 2010 there are no securities that have been
determined to be OTTI.
172
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
The amortized cost and fair value of securities as of
October 28, 2010 by contractual maturities are shown below.
The maturities of small business administration loan pools may
differ from their contractual maturities because the loans
underlying the securities may be repaid without any penalties;
therefore, these securities are listed separately in the
maturity summary.
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
($ in 000s)
|
|
Cost
|
|
|
Value
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
993
|
|
|
$
|
978
|
|
Due after one year through five years
|
|
|
1,877
|
|
|
|
1,872
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,870
|
|
|
$
|
2,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
($ in 000s)
|
|
Cost
|
|
|
Value
|
|
|
Securities held to maturity
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
3,998
|
|
|
$
|
4,027
|
|
Due after one year through five years
|
|
|
2,926
|
|
|
|
3,153
|
|
Small Business Administration Loan Pools
|
|
|
658
|
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,582
|
|
|
$
|
7,842
|
|
|
|
|
|
|
|
|
|
|
The components of the Banks loan portfolio as of October
28 and December 31 are as follows:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
Construction, land development, and other land loans
|
|
$
|
9,225
|
|
|
$
|
20,279
|
|
Commercial real estate
|
|
|
62,963
|
|
|
|
68,523
|
|
Residential real estate
|
|
|
10,282
|
|
|
|
1,367
|
|
Commercial and industrial
|
|
|
42,778
|
|
|
|
46,470
|
|
Consumer
|
|
|
136
|
|
|
|
342
|
|
Less: net deferred loan fees
|
|
|
20
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
125,404
|
|
|
|
136,967
|
|
Less: allowance for loan losses
|
|
|
(9,418
|
)
|
|
|
(6,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
115,986
|
|
|
$
|
130,563
|
|
|
|
|
|
|
|
|
|
|
173
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
Information about impaired and non-accrual loans as of and for
the periods ended October 28 and December 31 is as follows:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
Impaired loans without a valuation allowance
|
|
$
|
9,269
|
|
|
$
|
6,528
|
|
Impaired loans with a valuation allowance
|
|
$
|
17,631
|
|
|
$
|
2,828
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
26,900
|
|
|
$
|
9,356
|
|
|
|
|
|
|
|
|
|
|
Related allowance for loan losses on impaired loans
|
|
$
|
5,493
|
|
|
$
|
841
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
$
|
20,327
|
|
|
$
|
7,799
|
|
|
|
|
|
|
|
|
|
|
Loans past due 90 days or more and still accruing
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Average balance during the year on impaired loans
|
|
$
|
28,943
|
|
|
$
|
14,939
|
|
|
$
|
2,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized on impaired loans
|
|
$
|
147
|
|
|
$
|
103
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized on cash basis
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 28, 2010, approximately 71% of the
Banks impaired loans are real estate-secured loans. As of
October 28, 2010, approximately $9.3 million of the
Banks impaired loans do not have any specific valuation
allowance. However, impaired loans as of October 28, 2010
are net of partial charge-offs of approximately
$7.3 million. The Bank experienced significant declines in
current valuations for real estate supporting its loan
collateral in 2010. If real estate values continue to decline
and as updated appraisals are received, the Bank may have to
increase its allowance for loan losses appropriately. The Bank
has allocated $1.3 million and $0 of specific reserves to
customers whose loan terms have been modified in troubled debt
restructurings as of October 28, 2010 and December 31,
2009, respectively.
At October 28, 2010 and December 31, 2009, the Bank
was not committed to lend additional funds on these impaired
loans or loans that have been classified as troubled debt
restructurings.
Changes in the allowance for loan losses for the periods ended
October 28 and December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Balance, beginning
|
|
$
|
6,404
|
|
|
$
|
2,883
|
|
|
$
|
922
|
|
Provisions charged to operating expense
|
|
|
6,329
|
|
|
|
15,666
|
|
|
|
3,670
|
|
Recoveries of amounts charged off
|
|
|
615
|
|
|
|
9
|
|
|
|
3
|
|
Less amounts charged off
|
|
|
(3,930
|
)
|
|
|
(12,154
|
)
|
|
|
(1,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, ending
|
|
$
|
9,418
|
|
|
$
|
6,404
|
|
|
$
|
2,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
NOTE 5.
|
PREMISES
AND EQUIPMENT
|
The major classes of premises and equipment and the total
accumulated depreciation and amortization as of October 28 and
December 31 are as follows:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
Leasehold improvements
|
|
$
|
1,733
|
|
|
$
|
1,733
|
|
Equipment
|
|
|
885
|
|
|
|
813
|
|
Furniture and fixtures
|
|
|
612
|
|
|
|
612
|
|
Vehicles
|
|
|
56
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,286
|
|
|
|
3,214
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,002
|
)
|
|
|
(1,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,284
|
|
|
$
|
1,634
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the period January 1, 2010 through
October 28, 2010, and the periods ended December 31,
2009, and 2008 was approximately $422,000, $633,000, and
$598,000, respectively.
|
|
NOTE 6.
|
INCOME
TAX MATTERS
|
The Bank files income tax returns in the U.S. federal
jurisdiction. ASC 740, Income taxes, was amended to
clarify the accounting and disclosure for uncertain tax
positions as defined. The Bank is subject to the provisions of
this updated guidance effective as of January 1, 2009, and
has analyzed filing positions in all of the federal and state
jurisdictions where it is required to file income tax returns,
as well as all open tax years in these jurisdictions. The Bank
identified its federal tax return as major tax
jurisdictions, as defined. The periods subject to examination
for the Banks federal tax return are 2007, 2008, and 2009.
The Bank believes that its income tax filing positions and
deductions will be sustained on audit and does not anticipate
any adjustments that will result in a material change to its
financial position. Therefore, no reserves for uncertain income
tax positions have been recorded pursuant to applicable
guidance. In addition, the Bank did not record a cumulative
effect adjustment related to the adoption of this amended
guidance.
The Bank may from time to time be assessed interest or penalties
by tax jurisdictions, although the Bank has had no such
assessments historically. The Banks policy is to include
interest and penalties related to income taxes as a component of
income tax expense.
175
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
The cumulative tax effects of the primary temporary differences
as of October 28 and December 31 are as follows:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
7,287
|
|
|
$
|
7,453
|
|
Organization costs
|
|
|
313
|
|
|
|
337
|
|
Allowance for loan losses and unfunded commitments
|
|
|
2,393
|
|
|
|
675
|
|
Stock warrants and stock options
|
|
|
333
|
|
|
|
242
|
|
Accrued expenses
|
|
|
646
|
|
|
|
303
|
|
Other
|
|
|
74
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,046
|
|
|
|
9,099
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid loan fees
|
|
|
(96
|
)
|
|
|
(109
|
)
|
Deferred loan costs
|
|
|
(114
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
10,836
|
|
|
|
8,876
|
|
Valuation allowance
|
|
|
(10,836
|
)
|
|
|
(8,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of October 28, 2010 and December 31, 2009, a
valuation allowance for the entire net deferred tax asset is
considered necessary as the Bank has determined that it is not
more likely than not that the deferred tax assets will be
realized. Due to the Bank incurring operating losses, no
provision for income taxes has been recorded for the period
January 1, 2010 through October 28, 2010 and the
periods ended December 31, 2009 and 2008. Federal operating
loss carryforwards totals approximately $21.4 million and
begin to expire in 2027.
For the period January 1, 2010 through October 28,
2010 and the years ended December 31, 2009 and 2008, the
components of income tax benefit consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,960
|
|
|
|
5,821
|
|
|
|
1,656
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,960
|
|
|
|
5,821
|
|
|
|
1,656
|
|
Less valuation allowance
|
|
|
(1,960
|
)
|
|
|
(5,821
|
)
|
|
|
(1,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
The reasons for the differences between the statutory federal
income tax rate of 34% and the effective tax rates are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Computed expected tax (benefit)
|
|
$
|
(2,964
|
)
|
|
$
|
(6,082
|
)
|
|
$
|
(1,790
|
)
|
Nondeductible expenses
|
|
|
588
|
|
|
|
100
|
|
|
|
111
|
|
Other
|
|
|
416
|
|
|
|
161
|
|
|
|
23
|
|
Deferred tax asset valuation allowance
|
|
|
1,960
|
|
|
|
5,821
|
|
|
|
1,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal Revenue Code section 382 places a limitation on
the amount of taxable income that can be offset by net operating
loss carry forwards after a change in control (generally greater
than 50% change in ownership) of a loss corporation.
Accordingly, utilization of net operating loss carry forwards
may be subject to an annual limitation regarding their
utilization against future taxable income upon change in control.
As of October 28, 2010 and December 31, 2009, all time
deposits are scheduled to mature within one year.
As of October 28, 2010, the Bank had two deposit customers
with demand deposits equal to 21% of total deposits. One of the
deposit customers is a trust company with $24.9 million in
demand deposits as of October 28,2010 and the second
depositor had demand deposits totaling $8.5 million at the
same date.
None of the time certificates are brokered deposits as of
December 31, 2010. However, in October 2010,
Service1st Bank was notified by the FDIC and Nevada
Financial Institutions Division that a legal determination was
made that a NOW account owned by a trust company customer with
$24.9 million in demand deposits as of October 28,
2010 was deemed to be a brokered deposit. Consistent with the
September 1, 2010 Consent Order which restricts the
banks use of brokered deposits, the bank was given a date
of December 31, 2010 to divest of these funds. Working in
concert with the customer and bank regulators, the subject
account was changed from a NOW account to a noninterest bearing
account on January 1, 2011 and on January 4, 2011 the
account in the amount of approximately $23.5 million was
wired to another financial institution. Both regulatory agencies
were notified of the planned disposition of the account and
neither agency objected to the plan to divest the account.
|
|
NOTE 8.
|
COMMITMENTS
AND CONTINGENCIES
|
Contingencies
In the normal course of business, the Bank is involved in
various legal proceedings. In the opinion of management, any
liability resulting from such proceedings would not have a
material adverse effect on the financial statements.
Financial
instruments with off-balance sheet risk
The Bank is party to financial instruments with off-balance
sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of
credit. They involve, to varying degrees, elements of credit
risk in excess of amounts recognized in the balance sheet.
The Banks exposure to credit loss in the event of
nonperformance by the other parties to the financial instrument
for these commitments is represented by the contractual amounts
of those instruments. The Bank
177
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet
instruments.
A summary of the contract amount of the Banks exposure to
off-balance sheet risk as of October 28 and December 31 is as
follows:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
Unfunded commitments under lines of credit
|
|
$
|
15,965
|
|
|
$
|
25,035
|
|
Standby letters of credit
|
|
|
695
|
|
|
|
1,408
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,660
|
|
|
$
|
26,443
|
|
|
|
|
|
|
|
|
|
|
Unfunded commitments under commercial and commercial real estate
lines-of-credit,
revolving credit lines and overdraft protection agreements are
commitments for possible future extensions of credit to existing
customers. These
lines-of-credit
may or may not contain a specified maturity date and ultimately
may not be drawn upon to the total extent to which the Bank is
committed.
Standby letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public
and private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral
held varies as specified above and is required as the Bank deems
necessary. Essentially all letters of credit issued have
expiration dates within one year.
The total liability for financial instruments with off-balance
sheet risk as of October 28, 2010 and December 31,
2009 is approximately $348,000 and $819,000, respectively.
Lease
commitments
The Bank leases premises and equipment under non-cancelable
operating leases expiring through 2013. Generally, these leases
contain
5-year
renewal options. The following is a schedule of future minimum
rental payments under these leases as of October 28, 2010:
|
|
|
|
|
($ in 000s)
|
|
|
|
|
2010
|
|
$
|
149
|
|
2011
|
|
|
910
|
|
2012
|
|
|
742
|
|
2013
|
|
|
444
|
|
|
|
|
|
|
|
|
$
|
2,245
|
|
|
|
|
|
|
Rent expense of approximately $653,000, $740,000, and $720,000
is included in occupancy expense for the period January 1,
2010 through October 28, 2010, and the periods ended
December 31, 2009, and 2008, respectively.
Concentrations
The Bank grants commercial, construction, real estate, and
consumer loans to customers. The Banks business is
concentrated in Nevada, and the loan portfolio includes
significant credit exposure to the commercial real estate
industry of this area. As of October 28, 2010, commercial
real estate loans represent 50% of total loans. Owner-occupied
commercial real estate loans represent 38% of commercial real
estate loans. As of October 28, 2010 and December 31,
2009, real estate-related loans accounted for approximately 66%
and 66%, respectively, of total loans.
178
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
The Banks policy for requiring collateral is to obtain
collateral whenever it is available or desirable, depending upon
the degree of risk the Bank is willing to take.
Lines
of credit
The Bank has lines of credit available from the FHLB and the
FRB. Borrowing capacity is determined based on collateral
pledged, generally consisting of securities and loans, at the
time of the borrowing. As of October 28, 2010, the Bank had
available credit with the FHLB and FRB of approximately
$18.1 million and $4.4 million, respectively. As of
October 28, 2010 and December 31, 2009, the Bank has
no outstanding borrowings under these agreements.
During April 2007, the stockholders of the Bank approved the
2007 Stock Option Plan (the Plan). The Plan gives the Board of
Directors the authority to grant up to 10,000 stock options.
Stock awards available to grant as of October 28, 2010 are
4,811. The maximum contractual term for options granted under
the Plan is 10 years. Generally, stock options granted have
vesting period of 3 to 5 years. The fair value of shares at
the date of grant is determined by the Board of Directors. The
fair value of each stock award is estimated on the date of grant
using the Black-Scholes Option Valuation Model that uses the
assumptions noted in the following table. The expected
volatility is based on the historical volatility of the stock of
a similar bank that has traded at least as long as the expected
life of the Banks stock-based awards. The Bank estimates
the life of the awards by calculating the average of the vesting
period and the contractual life. The risk-free rate for periods
within the contractual life of the awards is based on the
U.S. Treasury yield for debt instruments with maturities
similar to the expected life of the awards. The dividends rate
assumption of zero is based on managements inability to
pay dividends for the foreseeable future.
A summary of the assumptions used in calculating the fair value
of awards during the years ended December 31, 2009 and 2008
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 14,
|
|
April 17,
|
|
August 11,
|
|
|
2009 Stock
|
|
2008 Stock
|
|
2008 Stock
|
|
|
Option Grants
|
|
Option Grants
|
|
Option Grants
|
|
Expected life in years
|
|
|
7.5
|
|
|
|
7.5
|
|
|
|
7.5
|
|
Risk-free interest rate
|
|
|
1.72
|
%
|
|
|
3.27
|
%
|
|
|
3.57
|
%
|
Dividends rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Volatility
|
|
|
80.20
|
%
|
|
|
35.54
|
%
|
|
|
44.21
|
%
|
Fair value per award
|
|
$
|
745.03
|
|
|
$
|
450.61
|
|
|
$
|
523.04
|
|
A summary of stock award activity as of October 28, 2010
and changes during the period January 1, 2010 through
October 28, 2010 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Warrants
|
|
|
Stock Options
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding, January 1, 2010
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
6,034
|
|
|
$
|
1,000
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
(845
|
)
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, October 28, 2010
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
5,189
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
3,101
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
A summary of stock award activity as of December 31, 2009
and changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Warrants
|
|
|
Stock Options
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding, January 1, 2009
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
6,381
|
|
|
$
|
1,000
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
1,000
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
(423
|
)
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2009
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
6,034
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
1,634
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of stock award activity as of December 31, 2008
and changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Warrants
|
|
|
Stock Options
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding, January 1, 2008
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
3,710
|
|
|
$
|
1,000
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
3,842
|
|
|
|
1,000
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
(1,171
|
)
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2008
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
6,381
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
900
|
|
|
$
|
1,000
|
|
|
|
576
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 28, 2010 and December 31, 2009, the
weighted average remaining contractual terms of outstanding
stock warrants are approximately 1.2 and 2.0 years,
respectively. The weighted average contractual terms of vested
stock warrants are 1.2 and 2.0, respectively. As of
October 28, 2010 and December 31, 2009, the aggregate
intrinsic value of outstanding and vested stock warrants is $0
and $0, respectively.
As of October 28, 2010 and 2008, the weighted average
remaining contractual terms of outstanding stock options are 6.7
and 7.5 years, respectively. The weighted average
contractual terms of vested stock options are 3.9 and
7.2 years, respectively. As of October 28, 2010 and
December 31, 2009, the aggregate intrinsic value of
outstanding and vested stock options is $0 and $0, respectively.
For stock options granted under the Plan as of October 28,
2010 and December 31, 2009, there is approximately $860,000
and $1.7 million, respectively, of total unrecognized
compensation cost related to non-vested stock award
compensation. That cost is expected to be recognized over a
weighted average period of 2.0 and 2.8 years, respectively.
Stock-based compensation expense is based on awards that are
ultimately expected to vest and therefore has been reduced for
estimated forfeitures. The Bank estimates forfeitures using
historical data based upon the groups identified by management.
Stock-based compensation expense was approximately $633,000,
$379,000, and $423,000 for the period January 1, 2010
through October 28, 2010, and the periods ended
December 31, 2009, and 2008, respectively.
180
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
NOTE 10.
|
REGULATORY
CAPITAL
|
The Bank is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the
Banks financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that
involve qualitative measures of the Banks assets,
liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts
and ratios (set forth in the following table) of total and
Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital to
average assets (as defined). Management believes, as of
October 28, 2010 and December 31, 2009, that the Bank
meets all capital adequacy requirements to which it is subject.
As of October 28, 2010, the most recent notification from
the Federal Deposit Insurance Corporation categorized the Bank
as adequately capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events
since the notification that management believes have changed the
Banks category. The Bank cannot be considered well
capitalized for prompt corrective action while under the Consent
Order.
On September 1, 2010, the Bank, without admitting or
denying any possible charges relating to the conduct of its
banking operations, agreed with the FDIC and the Nevada FID to
the issuance of a Consent Order. The Consent Order supersedes a
Memorandum of Understanding entered into by the Bank with the
FDIC and Nevada, FID in May of 2009. Under the Consent Order,
the Bank has agreed, among other things, to: (i) assess the
qualification of, and have retained qualified, senior management
commensurate with the size and risk profile of the Bank;
(ii) maintain a Tier I leverage ratio at or above 8.5%
and a total risk-based capital ratio at or above 12%;
(iii) continue to maintain an adequate allowance for loan
and lease losses; (iv) not pay any risk exposure to
adversely classified assets; (vi) not extend any additional
credit to any borrower whose loan has been classified as
substandard or doubtful without prior
approval from the Banks board of directors or loan
committee; (vii) formulate and implement a plan to address
profitability; and (x) not accept brokered deposits (which
include deposits paying interest rates significantly higher than
prevailing rates in the Banks market area) and reduce its
reliance on existing brokered deposits, if any.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2010
|
|
|
|
|
For Capital
|
|
|
|
Required Under
|
|
|
Actual
|
|
Adequacy Purposes
|
|
To Be Well Capitalized
|
|
Regulatory Agreements
|
($ in 000s)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Total Capital (to Risk-Weighted Assets)
|
|
$
|
18,164
|
|
|
|
14.1
|
%
|
|
$
|
10,319
|
|
|
|
8.0
|
%
|
|
$
|
12,899
|
|
|
|
10.0
|
%
|
|
$
|
15,479
|
|
|
|
12.0
|
%
|
Tier 1 Capital (to Risk- Weighted Assets)
|
|
|
16,451
|
|
|
|
12.8
|
%
|
|
|
5,160
|
|
|
|
4.0
|
%
|
|
|
7,739
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
N/A
|
|
Tier 1 Capital (to Average Assets)
|
|
|
16,451
|
|
|
|
8.7
|
%
|
|
|
7,548
|
|
|
|
4.0
|
%
|
|
|
9,435
|
|
|
|
5.0
|
%
|
|
|
16,040
|
|
|
|
8.5
|
%
|
181
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
For Capital
|
|
|
|
Required Under
|
|
|
Actual
|
|
Adequacy Purposes
|
|
To Be Well Capitalized
|
|
Regulatory Agreements
|
($ in 000s)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Total Capital (to Risk-Weighted Assets)
|
|
$
|
26,493
|
|
|
|
17.6
|
%
|
|
$
|
12,061
|
|
|
|
8.0
|
%
|
|
$
|
15,077
|
|
|
|
10.0
|
%
|
|
$
|
|
|
|
|
N/A
|
|
Tier 1 Capital (to Risk- Weighted Assets)
|
|
|
24,542
|
|
|
|
16.3
|
%
|
|
|
6,031
|
|
|
|
4.0
|
%
|
|
|
9,046
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
N/A
|
|
Tier 1 Capital (to Average Assets)
|
|
|
24,542
|
|
|
|
11.0
|
%
|
|
|
8,961
|
|
|
|
4.0
|
%
|
|
|
11,202
|
|
|
|
5.0
|
%
|
|
|
17,923
|
|
|
|
8.0
|
%
|
Additionally, State of Nevada banking regulations restrict
distribution of the net assets of the Bank because such
regulations require the sum of the Banks
stockholders equity and reserve for loan losses to be at
least 6% of the average total daily deposit liabilities for the
preceding 60 days. As a result of these regulations,
approximately $10.2 million and $11.2 million of the
Banks stockholders equity is restricted as of
October 28, 2010 and December 31, 2009, respectively.
|
|
NOTE 11.
|
EMPLOYEE
BENEFIT PLAN
|
The Bank has a qualified 401(k) employee benefit plan for all
eligible employees. Participants under 50 years of age are
able to defer up to $16,500 of their annual compensation, while
participants 50 years of age and over are able to defer up
to $22,000 of their annual compensation. Under the terms of the
plan, the Bank may not make matching contributions.
|
|
NOTE 12.
|
TRANSACTIONS
WITH RELATED PARTIES
|
Principal stockholders of the Bank and officers and directors,
including their families and companies of which they are
principal owners, are considered to be related parties. These
related parties were loan customers of, and had other
transactions with, the Bank in the ordinary course of business.
In managements opinion, these loans and transactions are
on the same terms as those for comparable loans and transactions
with unrelated parties. The aggregate activity in such loans for
the period January 1, 2010 through October 28 2010, and the
period ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
|
2009
|
|
|
Balance, beginning
|
|
$
|
6,626
|
|
|
$
|
14,788
|
|
New loans
|
|
|
455
|
|
|
|
770
|
|
Repayments
|
|
|
(862
|
)
|
|
|
(2,468
|
)
|
Other Changes
|
|
|
|
|
|
|
(6,464
|
)
|
|
|
|
|
|
|
|
|
|
Balance, ending
|
|
$
|
6,219
|
|
|
$
|
6,626
|
|
|
|
|
|
|
|
|
|
|
The Bank had approximately $6.5 million in outstanding
balances with a related party as of December 31, 2008. The
related party resigned from director service with the Bank
during 2009. As a result, this credit has been removed from the
outstanding balance and is reflected in Other
Changes in the above related party table.
The Bank had one related party credit that was placed on a
non-accrual status in March of 2010. The outstanding balance on
the credit was approximately $3.8 million with an
impairment reserve of approximately $1.5 million as of
October 28, 2010.
Total loan commitments outstanding with related parties total
approximately $2.6 million and $1.4 million as of
October 28, 2010 and December 31, 2009, respectively.
182
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
NOTE 13.
|
STOCKHOLDERS
EQUITY
|
The Bank is authorized to issue only one class of stock, which
is designated as Common Stock. The total number of shares the
Bank is authorized to issue is 25 million, and the par
value of each share is one penny ($0.01).
Treasury
Stock
In September 2009, the Bank received 1,000 shares of the
Banks own stock in settlement of an impaired loan. The
outstanding loan balance at the time of receipt of the stock was
approximately $988,000 of which approximately $213,000 was
charged to the allowance for loan and lease loss and the balance
was satisfied with receipt of the stock. The stock was recorded
at $775,000 based on the Banks estimated fair value of the
Banks common stock at that time.
|
|
NOTE 14.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
The estimated fair value of the Banks financial statements
as of October 28, and December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
($ in 000s)
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
10,164
|
|
|
$
|
10,164
|
|
|
$
|
13,686
|
|
|
$
|
13,686
|
|
Interest-bearing deposits in banks
|
|
|
4,927
|
|
|
|
4,927
|
|
|
|
35,947
|
|
|
|
35,947
|
|
Certificates of deposits
|
|
|
31,928
|
|
|
|
31,928
|
|
|
|
9,313
|
|
|
|
9,313
|
|
Restricted Stock
|
|
|
658
|
|
|
|
N/A
|
|
|
|
487
|
|
|
|
487
|
|
Securities available for sale
|
|
|
2,850
|
|
|
|
2,850
|
|
|
|
7,434
|
|
|
|
7,434
|
|
Securities held to maturity
|
|
|
7,582
|
|
|
|
7,842
|
|
|
|
10,201
|
|
|
|
10,677
|
|
Loans, net
|
|
|
115,986
|
|
|
|
109,589
|
|
|
|
130,563
|
|
|
|
127,148
|
|
Accrued interest receivable
|
|
|
605
|
|
|
|
605
|
|
|
|
529
|
|
|
|
529
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
162,066
|
|
|
|
162,112
|
|
|
|
185,320
|
|
|
|
185,320
|
|
Accrued interest payable
|
|
|
44
|
|
|
|
44
|
|
|
|
139
|
|
|
|
139
|
|
Fair
Value of Commitments
The estimated fair value of the standby letters of credit at
October 28, 2010 and December 31, 2009 is
insignificant. Loan commitments on which the committed interest
rate is less than the current market rate are also insignificant
at October 28, 2010 and December 31, 2009.
Interest
Rate Risk
The Bank assumes interest rate risk (the risk to the Banks
earnings and capital from changes in interest rate levels) as a
result of its normal operations. As a result, the fair values of
the Banks financial instruments as well as its future net
interest income will change when interest rate levels change and
that change may be either favorable or unfavorable to the Bank.
183
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
NOTE 15.
|
QUARTERLY
DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
Period Ended October 28
|
|
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
($ in 000s, except for per share amounts)
|
|
October
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Interest and dividend income
|
|
$
|
603
|
|
|
$
|
1,862
|
|
|
$
|
1,947
|
|
|
$
|
2,207
|
|
Interest expense
|
|
|
64
|
|
|
|
286
|
|
|
|
380
|
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
539
|
|
|
|
1,576
|
|
|
|
1,567
|
|
|
|
1,790
|
|
Provision for loan loss
|
|
|
991
|
|
|
|
707
|
|
|
|
1,713
|
|
|
|
1,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
(452
|
)
|
|
|
869
|
|
|
|
(146
|
)
|
|
|
272
|
|
Noninterest income
|
|
|
41
|
|
|
|
160
|
|
|
|
156
|
|
|
|
150
|
|
Noninterest expenses
|
|
|
1,447
|
|
|
|
2,445
|
|
|
|
2,236
|
|
|
|
2,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,858
|
)
|
|
$
|
(1,416
|
)
|
|
$
|
(2,226
|
)
|
|
$
|
(1,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(37.30
|
)
|
|
$
|
(28.43
|
)
|
|
$
|
(44.69
|
)
|
|
$
|
(36.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
Year Ended December 31
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
($ in 000s, except for per share amounts)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Interest and dividend income
|
|
$
|
2,200
|
|
|
$
|
2,237
|
|
|
$
|
2,296
|
|
|
$
|
2,310
|
|
Interest expense
|
|
|
558
|
|
|
|
752
|
|
|
|
738
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
1,642
|
|
|
|
1,485
|
|
|
|
1,558
|
|
|
|
1,682
|
|
Provision for loan loss
|
|
|
11,274
|
|
|
|
3,428
|
|
|
|
365
|
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
(9,632
|
)
|
|
|
(1,943
|
)
|
|
|
1,193
|
|
|
|
1,084
|
|
Noninterest income
|
|
|
222
|
|
|
|
127
|
|
|
|
86
|
|
|
|
79
|
|
Noninterest expenses
|
|
|
2,943
|
|
|
|
1,990
|
|
|
|
1,826
|
|
|
|
1,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(12,353
|
)
|
|
$
|
(3,806
|
)
|
|
$
|
(547
|
)
|
|
$
|
(671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(243.74
|
)
|
|
$
|
(75.09
|
)
|
|
$
|
(10.79
|
)
|
|
$
|
(13.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 16
|
SUBSEQUENT
EVENTS
|
On October 28, 2010, Western Liberty Bancorp (WLBC)
consummated its acquisition (the Acquisition) of the
Bank, a Nevada-chartered non-member bank pursuant to a Merger
Agreement (the Merger Agreement), dated as of
November 6, 2009, as amended by a First Amendment to the
Merger Agreement, dated as of June 21, 2010
(Amendment No. 1 and, together with the Merger
Agreement, the Amended Merger Agreement), each among
WL-S1 Interim Bank, a Nevada corporation and wholly-owned
subsidiary of WLBC (Acquisition Sub), the Bank and
Curtis W. Anderson, as representative of the former stockholders
of the Bank. Pursuant to the Amended Merger Agreement,
Acquisition Sub merged with and into the Bank, with the Bank
being the surviving entity and becoming WLBCs wholly-owned
subsidiary. WLBC previously received the requisite approvals of
certain bank regulatory authorities to complete the Acquisition
to become a bank holding company.
184
SERVICE1ST
BANK OF NEVADA
NOTES TO
FINANCIAL STATEMENTS (Continued)
The former stockholders of the Bank received approximately
2,370,878 shares of Common Stock in exchange for all of the
outstanding shares of capital stock of the Bank (the Base
Acquisition Consideration). In addition, the holders of
the Banks outstanding options and warrants now hold
options and warrants of similar tenor to purchase up to
289,808 shares of Common Stock.
In addition to the Base Acquisition Consideration, each of the
former stockholders of the Bank may be entitled to receive
additional consideration (the Contingent Acquisition
Consideration), payable in Common Stock, if at any time
within the first two years after the consummation of the
Acquisition, the closing price per share of the Common Stock
exceeds $12.75 for 30 consecutive days. The Contingent
Acquisition Consideration would be equal to 20% of the tangible
book value of the Bank at the close of business on the last day
of the calendar month immediately before the calendar month in
which the final regulatory approval necessary for the completion
of the Acquisition was obtained. The total number of shares of
our common stock issuable to the former the Bank stockholders
would be determined by dividing the Contingent Acquisition
Consideration by the average of the daily closing price of the
Common Stock on the first 30 trading days on which the closing
price of the Common Stock exceeded $12.75.
At the close of business on October 28, 2010, WLBC was a
new Nevada financial institution bank holding company by
consummating the acquisition of the Bank and conducting
operations through the Bank. In conjunction with the
transaction, WLBC infused $25.0 million of capital onto the
balance sheet of the Bank. On October 29, 2010, the common
shares of WLBC began trading on the Nasdaq Global Market, under
the ticker symbol WLBC.
185
a)(2) Financial statement schedules filed as part of this
Form 10-K. Financial
Statement Schedules are omitted because they are not applicable
or the required information is shown elsewhere in the Financial
Statements or Notes thereto or in Managements Discussion
and Analysis of Financial Condition and Results of Operations,
included in the portions of the 2010 Annual Report to
Stockholders that are incorporated herein by reference.
(b) Exhibits. We hereby file as part of
this Annual Report on
Form 10-K
the Exhibits listed in the following Exhibit Index.
Exhibits incorporated herein by reference can be inspected and
copied at the public reference facilities maintained by the SEC,
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Copies of such material can also be
obtained from the Public Reference Section of the SEC,
100 F Street, N.E., Washington, D.C. 20549, at
prescribed rates.
|
|
|
|
|
Exhibit
|
|
|
Numbers
|
|
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger, dated as of November 6, 2009,
by and among Western Liberty Bancorp., WL-S1 Interim Bank,
Service1st Bank of Nevada and Curtis W. Anderson, as Former
Stockholders Representative (incorporated by reference to
Exhibit 2.1 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 9, 2009)
|
|
2
|
.2
|
|
First Amendment to the Agreement and Plan of Merger, dated as of
June 21, 2010, by and among Western Liberty Bancorp., WL-S1
Interim Bank, Service1st Bank of Nevada and Curtis W. Anderson,
as Former Stockholders Representative (incorporated by
reference to Exhibit 2.1 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
June 24, 2010)
|
|
3
|
.1
|
|
Second Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.2 to the Current
Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
October 9, 2009)
|
|
3
|
.2
|
|
Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 3, 2010)
|
|
4
|
.1
|
|
Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.7 to the
Form S-3,
filed by WLBC with the Securities and Exchange Commission on
November 16, 2009)
|
|
4
|
.2
|
|
Founders Shares Restructuring Agreement, dated as of
July 20, 2009, between Global Consumer Acquisition Corp.
and Hayground Cove Asset Management LLC (incorporated by
reference to Exhibit 4.2 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
July 22, 2009)
|
|
4
|
.4
|
|
Letter Agreement, dated as of September 23, 2010, between
Western Liberty Bancorp and the signatories thereto
(incorporated by reference to Exhibit 4.1 the Current
Report on
Form 8-K,
File No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
September 23, 2010)
|
|
4
|
.5
|
|
Second Amended and Restated Warrant Agreement, dated as of
September 27, 2010, between Western Liberty Bancorp and
Continental Stock Transfer &Trust Company
(incorporated by reference to Exhibit 4.1 the Current
Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
September 28, 2010)
|
|
10
|
.1*
|
|
Form of Indemnification Agreement between WLBC and each of the
directors and officers of WLBC (incorporated by reference to
Exhibit 10.10 to Amendment No. 1 to the
Form S-1,
File No. 333-144799,
filed by WLBC with the Securities and Exchange Commission on
September 6, 2007)
|
|
10
|
.2*
|
|
Settlement Agreement and General Release, dated
December 23, 2008, between WLBC and Scott LaPorta
(incorporated by reference to Exhibit 10.13 to Current
Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
December 29, 2008)
|
186
|
|
|
|
|
Exhibit
|
|
|
Numbers
|
|
|
|
|
10
|
.3
|
|
Director Resignation Agreement, dated December 23, 2008,
between WLBC, Robert M. Foresman, Carl H. Hahn, Philip A.
Marineau and Steven Westly (incorporated by reference to
Exhibit 10.14 to Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
December 29, 2008)
|
|
10
|
.4
|
|
Second Amended and Restated Sponsor Support Agreement, dated as
of August 13, 2009, by and between Global Consumer
Acquisition Corp. and Hayground Cove Asset Management LLC
(incorporated by reference to Exhibit 10.1 to the Current
Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
August 14, 2009)
|
|
10
|
.5*
|
|
Employment Agreement, dated as of November 6, 2009, by and
between Western Liberty Bancorp and Richard Deglman
(incorporated by reference to Exhibit 10.4 to the Current
Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 9, 2009)
|
|
10
|
.6*
|
|
Second Amended and Restated Employment Agreement, dated as of
December 18, 2009, by and between Western Liberty Bancorp
and George A. Rosenbaum, Jr. (incorporated by reference to
Exhibit 10.1 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
December 24, 2009)
|
|
10
|
.7*
|
|
Letter Agreement, dated as of October 28, 2010, between
Western Liberty Bancorp and Jason N. Ader (incorporated by
reference to Exhibit 10.1 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 3, 2010)
|
|
10
|
.8*
|
|
Letter Agreement, dated as of October 28, 2010, between
Western Liberty Bancorp and Daniel B. Silvers (incorporated by
reference to Exhibit 10.1 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 3, 2010)
|
|
10
|
.9*
|
|
Letter Agreement, dated as of October 28, 2010, between
Western Liberty Bancorp and Andrew P. Nelson
(incorporated by reference to Exhibit 10.1 to the Current
Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 3, 2010)
|
|
10
|
.10*
|
|
Letter Agreement, dated as of October 28, 2010, between
Western Liberty Bancorp and Michael Tew (incorporated by
reference to Exhibit 10.1 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 3, 2010)
|
|
10
|
.11*
|
|
Letter Agreement, dated as of October 28, 2010, between
Western Liberty Bancorp and Laura Conover-Ferchak
(incorporated by reference to Exhibit 10.1 to the Current
Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 3, 2010)
|
|
10
|
.12
|
|
Expense Sharing Agreement, dated as of October 29, 2010,
between Western Liberty Bancorp and Service1st Bank of Nevada
(incorporated by reference to Exhibit 10.1 to the Current
Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 3, 2010)
|
|
10
|
.13
|
|
Tax Allocation Agreement, dated as of October 29, 2010,
between Western Liberty Bancorp and Service1st Bank of Nevada
(incorporated by reference to Exhibit 10.1 to the Current
Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
November 3, 2010)
|
|
10
|
.15*
|
|
Amended and Restated Employment Agreement, dated as of
February 8, 2010, by and between Western Liberty Bancorp
and William E. Martin (incorporated by reference to
Exhibit 10.1 to the Current Report on
Form 8-K,
File
No. 001-33803,
filed by WLBC with the Securities and Exchange Commission on
February 8, 2010)
|
|
14
|
.1
|
|
Code of Conduct and Ethics**
|
|
21
|
|
|
Subsidiaries of the registrant: Service1st Bank of Nevada, a
Nevada corporation located in Las Vegas, Nevada, is the
sole subsidiary of Western Liberty Bancorp**
|
187
|
|
|
|
|
Exhibit
|
|
|
Numbers
|
|
|
|
|
31
|
.1**
|
|
Certification of Periodic Report by the Chief Executive Officer
pursuant to
Rule 13(a)-14(a)
of the Securities Exchange Act of 1934
|
|
31
|
.2**
|
|
Certification of Periodic Report by the Chief Financial Officer
pursuant to
Rule 13(a)-14(a)
of the Securities Exchange Act of 1934
|
|
32
|
.1**
|
|
Certification of Periodic Report by the Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2**
|
|
Certification of Periodic Report by the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
99
|
.1
|
|
Consent Order of Federal Deposit Insurance Corporation and the
Nevada Financial Institutions Division, dated as of
September 1, 2010, In the Matter of
Service1st
Bank of Nevada,
FDIC-10-512b
(incorporated by reference to Exhibit 99.1 to the
Form S-1,
Amendment No. 1, File No. 333-170862, filed by WLBC with
the Securities and Exchange Commission on March 30, 2011)
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement |
|
** |
|
filed herewith |
188
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.
WESTERN LIBERTY BANCORP
|
|
|
|
By:
|
/s/ William
E. Martin
|
William E. Martin
Chief Executive Officer and
Director
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.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Michael
B. Frankel
Michael
B. Frankel
|
|
Chairman
|
|
March 30, 2011
|
|
|
|
|
|
/s/ Terrence
L. Wright
Terrence
L. Wright
|
|
Vice Chairman
|
|
March 30, 2011
|
|
|
|
|
|
/s/ Jason
N. Ader
Jason
N. Ader
|
|
Director
|
|
March 30, 2011
|
|
|
|
|
|
/s/ Richard
A.C. Coles
Richard
A.C. Coles
|
|
Director
|
|
March 30, 2011
|
|
|
|
|
|
/s/ Robert
G. Goldstein
Robert
G. Goldstein
|
|
Director
|
|
March 30, 2011
|
|
|
|
|
|
/s/ Curtis
W. Anderson, CPA
Curtis
W. Anderson, CPA
|
|
Director
|
|
March 30, 2011
|
|
|
|
|
|
/s/ Steven
D. Hill
Steven
D. Hill
|
|
Director
|
|
March 30, 2011
|
|
|
|
|
|
/s/ William
E. Martin
William
E. Martin
|
|
Director and Chief Executive Officer (Principal Executive
Officer)
|
|
March 30, 2011
|
|
|
|
|
|
/s/ George
A. Rosenbaum, Jr.
George
A. Rosenbaum, Jr.
|
|
Chief Financial Officer (Principal Accounting and Financial
Officer)
|
|
March 30, 2011
|
189