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, 2011
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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
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26-0469120
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(State of incorporation)
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(I.R.S. Employer
Identification No.)
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8363 W. Sunset Road, Suite 350
Las Vegas, Nevada
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89113
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(Address of principal executive offices)
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(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
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No
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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
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No
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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
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No
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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
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No
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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.
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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
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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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
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No
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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: $7,243,258 aggregate market value based on the closing
price of $3.02 on June 30, 2011. Shares held as of June 30, 2011 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 February 29, 2012, there were 13,466,536 shares of common stock outstanding of the registrant.
WESTERN LIBERTY BANCORP
FORM 10-K
TABLE OF CONTENTS
PART I
Item 1
Business
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). Western Liberty Bancorp owns two subsidiaries: Service1st Bank of Nevada and Las Vegas Sunset Properties, and we currently conduct no business activities
other than acting as the holding company of Service1st and Las Vegas Sunset Properties.
Service1st Bank of Nevada
Established on January 16, 2007, Service1st operates as a community bank and provides a full range of deposit, lending and other
banking services to locally owned business, professional firms, individuals and other customers from its headquarters and two retail banking facilities located in the greater Las Vegas area. Services provided include basic commercial and consumer
depository services, commercial working capital and equipment loans, commercial real estate loans and other traditional commercial banking services. Service1st relies primarily on locally generated deposits to fund its lending activities.
Substantially all of our business is generated in the Nevada market.
Las Vegas Sunset Properties
Las Vegas Sunset Properties was established in 2011 for the purpose of owning and managing nonperforming and sub performing assets of
Service1st Bank. Foreclosed real estate (OREO) was transferred from Service1st to Las Vegas Sunset Properties on December 28, 2011. Loan asset transfers were completed on January 11, 2012. Transferring OREO and problem assets
out of the bank and to a separate subsidiary is of immediate benefit to the bank, but we believe that it also promotes efficient and cost-effective management of problem assets and the ultimate resolution of those assets.
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 collectability 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
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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 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. Service1sts principal lending categories are:
Commercial real estate loans
The majority of Service1sts lending activity consists of loans for
the acquisition or refinance of commercial real estate. Service1st has a commercial real estate portfolio comprised of loans on professional offices, industrial facilities, retail centers and other commercial properties.
Construction, land development, and other land loans
Construction loans include loans for the
construction of owner-occupied buildings, investment properties (including residential development construction), 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.
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.
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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 every six months exist. Appraisals may reflect the collaterals as-is, as-stabilized, or as-developed values, depending upon the loan type and collateral. Raw land generally
is appraised at its as-is value. Income producing property may be appraised at its as-stabilized value, which takes into account the anticipated cash flow of the property based upon expected occupancy rates and other factors.
The collateral securing construction loans may be appraised at its as-completed value, which approximates the post-construction value of the collateralized property assuming that such property is developed. as-completed
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-completed 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 is set by 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. Each senior vice president/senior lender 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/senior lender 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. All credit
relationships of $5 million or more are approved by Service1sts Board of Directors Loan and Investment Committee. The Loan and Investment Committee 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 real estate lending policies are disclosed to Service1sts Board of Directors Loan and Investment Committee on a quarterly basis.
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 its entire insider loans were made on terms substantially similar to those offered to unaffiliated individuals. As of December 31, 2011, the aggregate
amount of all loans committed to Service1sts executive officers, directors, and greater than 10% stockholders and their respective affiliates was approximately $1.1 million. Based on commitments these loans represent 1.5% of the Banks
total gross loans
The allowance for loan losses reflects Service1sts evaluation of the probable
losses in its loan portfolio. Service1st implemented use of the Allowance for Loan and Lease Losses Quantifier
(ALLL
Q
) model prepared by PCBB Capital Markets, LLC for
calculating the allowance for loan losses. 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 quarterly. Factors that influence managements determination concerning the
adequacy of the allowance for loan losses include:
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general economic and business conditions affecting key lending areas,
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credit quality trends, including trends in nonperforming loans expected to result from existing conditions,
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loan volumes and concentrations,
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age of the loan portfolio,
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specific industry conditions within portfolio segments,
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the allowance for loan losses at peer institutions, and
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duration of the current business cycle.
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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 Credit Committee also has the responsibility of reviewing loan grades. In
addition, the grading of Service1sts loan portfolio is reviewed at least annually by an external, independent loan review firm.
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. Service1sts management will also take into account updated collateral appraisals. 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.
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
primarily generated from the Nevada area. Competition for these deposits in Service1sts market is strong. Service1st seeks to structure its deposit products to be competitive with the rates, fees, and features offered by other local
institutions, but with an emphasis on customer service and relationship-based pricing. The weighted average cost of Service1sts interest-bearing deposits was 0.64%, and 0.75% for the year ended December 31, 2011 and 2010, respectively.
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.
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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:
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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,
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longer term investment securities issued by companies rated A or better,
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securities backed by the full faith and credit of the U.S. government, including U.S. government agency securities,
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direct obligations of Ginnie Mae,
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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.
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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.
As of December 31, 2011 Service1st also held $574,400 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, 2011 was approximately $574,400 and $658,400 for December 31, 2010.
Employees
We have approximately 43 full-time equivalent,
non-union employees at December 31, 2011.
Supervision and Regulation [Client and Attorney to Update this Section]
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
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 Board (the Federal Reserve) requires bank holding companies to maintain capital at or above certain prescribed levels. It is the Federal Reserves policy that a bank holding company should provide capital to its
subsidiary banks during periods of financial stress or adversity and
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maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting subsidiary banks. Bank holding companies may also be required to give written notice
to and receive approval from the Federal Reserve before purchasing or redeeming common stock or other equity securities.
Under Bank Holding Company Act section 5(e), the Federal Reserve may require a bank holding company to terminate any activity or
relinquish control of a nonbank subsidiary if the Federal Reserve determines that the activity or control constitutes a serious risk to the financial safety, soundness, or stability of a subsidiary bank. Pursuant to the Federal Deposit Insurance
Corporation Improvement Act of 1991 addition of the prompt corrective action provisions to the Federal Deposit Insurance Act, section 38(f)(2)(I) of the Federal Deposit Insurance Act now provides that a federal bank regulatory authority may
require a bank holding company to divest itself of an undercapitalized bank subsidiary if the agency determines that divestiture will improve the banks financial condition and prospects.
A bank holding company must obtain Federal Reserve approval to:
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acquire ownership or control of any voting shares of another bank or bank holding company, if after the acquisition the acquiring company would own or
control more than 5% of the shares of the other bank or bank holding company (unless the acquiring company already owns or controls a majority of the shares),
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acquire all or substantially all of the assets of another bank, or
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merge or consolidate with another bank holding company.
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The Federal Reserve will not approve an acquisition, merger, or consolidation that would have a substantially anticompetitive result unless the anticompetitive effects of the proposed transaction are
clearly outweighed by a greater public interest in satisfying the convenience and needs of the community to be served. The Federal Reserve also considers capital adequacy and other financial and managerial factors in its review of acquisitions and
mergers, as well as the parties performance under the Community Reinvestment Act of 1977.
With certain exceptions, the
Bank Holding Company Act prohibits a bank holding company from acquiring or retaining ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company or from engaging in activities
other than banking, managing or controlling banks, or providing services for holding company subsidiaries. The principal exceptions to these prohibitions involve non-bank activities identified by statute, by Federal Reserve regulation, or by Federal
Reserve order as activities so closely related to the business of banking or of managing or controlling banks as to be a proper incident thereto, including securities brokerage services, investment advisory services, fiduciary services, and
management advisory and data processing services, among others. A bank holding company that 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 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
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impaired, the Nevada Commissioner must require the bank to make the impairment good within three months. If the impairment is not made good, the Nevada Commissioner may take possession of the
bank and liquidate it.
Capital: Regulatory capital guidelines
A banks capital hedges its risk exposure, absorbing losses that can be predicted as well as losses that cannot be predicted.
According to the Federal Financial Institutions Examination Councils explanation of the capital component of the Uniform Financial Institutions Rating System, commonly known as the CAMELS rating system, a rating system employed by
the Federal bank regulatory agencies, a financial institution must maintain capital commensurate with the nature and extent of risks to the institution and the ability of management to identify, measure, monitor, and control these risks. The
effect of credit, market, and other risks on the institutions financial condition should be considered when evaluating the adequacy of capital. The minimum ratio of total capital to risk-weighted assets is 8.0%, of which at least 4.0%
must consist of so-called Tier 1 capital. The minimum Tier 1 leverage ratioTier 1 capital to average assetsis 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, 2011, Service1sts total risk-based capital ratio was 29.7%, its Tier 1 risk-based capital ratio was 28.4%, and its Tier 1
equity to average assets ratio was 14.4%. 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 not expire before October of 2013.
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.
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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. 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. 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 $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
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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. We repurchased shares in the third and fourth quarters of 2011, under a 5% stock repurchase program announced on August 18, 2011 and a 7%
stock repurchase program announced on December 6, 2011. Although we would remain well capitalized after additional stock repurchases, written approval of the Federal Reserve under Rule 225.4(b) would be necessary in order for us to initiate an
additional stock repurchase program.
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 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 insidersmeaning executive officers, directors and greater than 10%
stockholdersor 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
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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 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.
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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. Until that occurs, any growth on Service1sts part must be the result of
organic growth in the banks existing business. This commitment will not expire before October of 2013.
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.
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
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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.
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
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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 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,
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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.
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 not expire before October of 2013.
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
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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. Section 331provides that the assessment base is
the difference between total assets and tangible equity. In other words the assessment base now takes 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.
Item 1A
Risk Factors[Management and Attorney to update this section]
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 continued throughout 2011. The financial markets and the financial services industry in particular suffered unprecedented disruption, causing many financial
institutions to fail or require government intervention to avoid failure. These conditions were largely the result of the erosion of the U.S. and global credit markets, including a significant and rapid deterioration of the mortgage lending and
related real estate markets. We give you no assurance that economic conditions that have adversely affected the financial services industry and the capital, credit, and real estate markets generally, will improve in the near term.
Our business and earnings are sensitive to general business, economic and market conditions in the United States. These conditions
include changes in short-term and long-term interest rates, inflation, deflation, fluctuation in the real estate and debt capital markets, developments in national and regional economies and changes in government policies and regulations.
Our business and earnings are particularly sensitive to economic and market conditions affecting the real estate industry
because a large portion of our loan portfolio consists of commercial real estate and construction loans. Real estate values have been declining in Nevada, steeply in some cases, which has affected collateral values and has resulted in increased
provisions for loan losses for Nevada banks.
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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 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
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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.
Depletion of the FDICs Deposit Insurance Fund could lead the FDIC to impose additional assessments on the banking industry.
Depletion of the FDICs Deposit Insurance Fund could lead the FDIC to 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 RegulationDeposit
Insurance.
The financial services industry is heavily regulated by federal and state agencies.
Federal and state regulation is to protect depositors, federal deposit insurance funds and the banking system as a
whole, not security holders. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or
implementation of statutes, regulations or policies, could affect the business going forward in substantial and unpredictable ways including limiting the types of financial services and products we may offer and/or increasing the ability of nonbanks
to offer competing financial services and products. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies and damage to our reputation. For further discussion of applicable regulations, please see the
section entitled
Supervision and Regulation.
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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.
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 or 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
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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 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 WLBC to acquire
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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 WLBCs application to acquire Service1st Bank of Nevada. See the Risk Factor disclosure captioned
Bank regulatory restrictions with the FDIC and the Nevada Financial Institutions Division are likely to limit
growth and inhibit development of banking products that were not in the business plan approved by bank regulators at the time WLBC was approved to acquire Service1st Bank of Nevada.
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 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.
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.
Service1st suffers from a deterioration in
the quality of its loan portfolio. The depressed economic conditions in Nevada which contributed to this deterioration are expected to continue in 2012. As of December 31, 2011, performing loans that are classified as potential problem loans
were $10 million, or approximately 9.84% of total loans. See the discussion captioned Potential Problem Loansin
Managements Discussion & Analysis of Financial Condition and Results of Operations.
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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, 2011, approximately 26.00% 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, 2011, approximately 65.19% of Service1sts loans were secured by real estate. We rely upon independent appraisers to estimate the value of the real estate which secures Service1sts loans. Appraisals may reflect the
estimated value of the collateral on an as-is basis, an as-stabilized basis or an as-if-developed basis, depending upon the loan type and collateral. Raw land generally is appraised at its as-is value.
Income producing property may be appraised at its as-stabilized value, which takes into account the anticipated cash flow of the property based upon expected occupancy rates and other factors. The collateral securing construction loans
may be appraised at its as-if-developed value, which approximates the post-construction value of the collateralized property assuming that such property is developed. As-if-developed values on construction loans often exceed
the immediate sales value and may include anticipated zoning changes, and successful development by the purchaser.
Appraisals
are only estimates of value and the independent appraisers may make mistakes of fact or judgment which adversely affect the reliability of their appraisal. In addition, events occurring after the initial appraisal may cause the value of the real
estate to decrease. With respect to appraisals conducted on an as-if-developed basis, if a loan goes into default prior to development of a project, the market value of the property may be substantially less than the
as-if-developed appraised value. As a result of any of these factors, there may be less security than anticipated at the time the loan was originally made. If there is less security and a default occurs, we may not recover the
outstanding balance of the loan.
We currently are not permitted to expand by acquisition
During the application process for the acquisition of Service1st by WLBC, we made a number of commitments to the FDIC. We assured the
FDIC in writing during the application process that we will not seek to expand by acquisition until Service1st is restored to a satisfactory condition. 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.
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Bank regulatory restrictions with the FDIC and the Nevada Financial Institutions
Division are likely to limit growth and inhibit development of banking products 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. 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 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. 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. Since the October 28, 2010
acquisition of Service1st occurred WLBC has also become subject to the requirement to obtain non-objection from the Federal Reserve in advance in order to add a director to the board of WLBC or to make a change in executive management. Neither WLBC
nor Service1st Bank may make changes in the board of directors or senior executives without first providing notice to its Federal bank regulatory agencythe Federal Reserve in the case of WLBC and the FDIC in the case of Service1stand
receiving written notice from those agencies that they do not object. Neither WLBC nor Service1st Bank may pay or agree to pay a severance benefit under an employment or severance agreement without first obtaining regulatory approval. These
regulatory requirements could make it more difficult for us to retain and hire qualified senior management. The regulatory restrictions will remain in effect until modified or terminated by the regulators. The requirement for providing advance
notice of and obtaining non-objection to changes in the board of directors or executive management of Service1st Bank will not terminate before October 28, 2013.
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We are subject to supervisory restrictions.
Under the terms of a September 2010 Consent Order of the FDIC and the Nevada FID Service1st agreed: (i) to assess the
qualification of, and have retained qualified, senior management commensurate with the size and risk profile of Service1st; (ii) to maintain a Tier I leverage ratio at or above 8.5% and a total risk-based capital ratio at or above 12%;
(iii) to continue to maintain an adequate allowance for loan and lease losses; (iv) not to 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 to extend additional credit to any borrower whose loan has been charged-off or classified loss; (vii) not to 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) to 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) to formulate and implement a plan to address profitability; and (x) not to 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. Although the FDIC and the Nevada FID terminated the Consent Order effective October 31,
2011, as we disclosed in a Form 8-K Current Report filed with the SEC on November 10, 2011, as a condition to termination of the Consent Order Service1st entered into an informal understanding with the FDIC and the Nevada FID that Service1st
will, among other things, maintain its Tier 1 leverage ratio at no less than 8.5% and update the banks business plan to address goals for achieving profitability and reduction of total adversely classified assets.
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, 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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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.
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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 43 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. Accordingly, no assurance can be given that we will be able to attract and retain key customers, management or employees, which could result in disruption to our business and negatively impact our
operations and financial condition.
We are exposed to risk of environmental liabilities with respect to properties to
which we take title.
In the course of our business we may foreclose and take title to real estate, potentially
becoming subject to environmental liabilities associated with the properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs or we may be required to
investigate or clean up hazardous or toxic substances or chemical releases at a property. Costs associated with investigation or remediation activities can be substantial. If we are the owner or former owner of a contaminated site, we may be subject
to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. These costs and claims could adversely affect our business and prospects.
Compliance with governmental regulations and changes in laws and regulations and risks from investigations and legal proceedings
could be costly and could adversely affect operating results.
Our operations could be impacted by changes in the legal
and business environments in which we operate as well as the outcome of ongoing government and internal investigations and legal proceedings. Also, as a result of new laws and regulations or other factors, we could be required to curtail or cease
certain operations. Changes that could impact the legal environment include new legislation, new regulation, new policies, investigations and legal proceedings and new interpretations of the existing legal rules and regulations. Changes that impact
the business environment include changes in accounting standards, changes in environmental laws, changes in tax laws or tax rates, the resolution of audits by various tax authorities, and the ability to fully utilize any tax loss carry forwards and
tax credits. 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,
27
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 million as of December 31, 2011. 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.
Item 2
Properties
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
[Management and Attorney to Update]
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 WLBC or Service1st Bank, either individually or in the aggregate.
Item 4
Mine Safety Disclosures
Not applicable.
28
PART II
Item 5
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities[Management to Update]
Market information
Our 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, 2011 and 2010 the high and low sales price
of our common stock.
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
High
|
|
|
Low
|
|
2011
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
6.44
|
|
|
|
3.52
|
|
Second quarter
|
|
|
5.00
|
|
|
|
2.50
|
|
Third quarter
|
|
|
3.30
|
|
|
|
2.43
|
|
Fourth quarter
|
|
|
2.95
|
|
|
|
2.18
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
High
|
|
|
Low
|
|
2010
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
8.04
|
|
|
|
6.18
|
|
Second quarter
|
|
|
9.00
|
|
|
|
5.75
|
|
Third quarter
|
|
|
7.80
|
|
|
|
4.80
|
|
Fourth quarter
|
|
|
7.80
|
|
|
|
4.80
|
|
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 December 31, 2011 there were approximately 83 holders of record of our common stock. That figure does not include beneficial owners.
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 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, because
of an informal understanding that Service1st Bank has with the FDIC and with the Nevada FID, Service1st Bank cannot pay cash dividends unless it first obtains the written consent of the FDIC and the Commissioner of the Nevada FID.
29
Issuer purchases of equity securities in the fourth quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
(a) Total Number
of Shares
Purchased
|
|
|
Average Price
Paid per Share
|
|
|
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or
Programs
|
|
|
Maximum Number (or
Approximate Dollar
Value) of Shares
that
May Yet Be Purchased
Under the Plans or
Programs
|
|
October 131, 2011
|
|
|
112,271
|
|
|
|
2.47
|
|
|
|
112,271
|
|
|
$
|
277,141
|
|
November 130, 2011
|
|
|
2,716
|
|
|
|
2.71
|
|
|
|
2,716
|
|
|
$
|
7,364
|
|
December 131, 2011
|
|
|
820,000
|
|
|
|
2.50
|
|
|
|
820,000
|
|
|
$
|
2,074,600
|
|
In satisfaction of WLBCs tax withholding obligation relating to restricted stock awards that vested
in the fourth quarter, WLBC withheld a total of 13,432 shares. Of an award of 155,279 shares of restricted stock made to CEO William E. Martin, 31,056 shares became vested on October 28, 2011. After withholding of 10,870 shares, 20,186 vested
shares were issued to Mr. Martin. Of an award of 38,819 shares of restricted stock made to former CFO George A. Rosenbaum Jr., 7,764 shares became vested on October 28, 2011. The remaining 31,055 shares were forfeited because of
Mr. Rosenbaums December 23, 2011 employment termination. After withholding of 2,562 shares from the 7,764 shares that vested, and after forfeiture of 2,601vested shares because of Mr. Rosenbaums December 23, 2011
termination, the net vested shares issued to Mr. Rosenbaum were 2,601 shares.
30
Item 6
Selected Financial Data
SELECTED HISTORICAL FINANCIAL INFORMATIONWESTERN LIBERTY BANCORP (WLBC)
WLBCs balance sheet data as of December 31, 2011 and 2010 and related statements of operations, changes in shareholders
equity and cash flows for the years ended December 31 2011 and 2010 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 OperationsWLBC
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.
WESTERN LIBERTY BANCORP
SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2011
|
|
|
2010(3)
|
|
|
|
($ in thousands except per share data)
|
|
Selected Results of Operations Data:
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
9,513
|
|
|
$
|
1,530
|
|
Interest expense
|
|
|
484
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
9,029
|
|
|
|
1,415
|
|
Provision for loan losses
|
|
|
8,717
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
312
|
|
|
|
1,379
|
|
Non-interest income
|
|
|
2,407
|
|
|
|
108
|
|
Non-interest expense
|
|
|
16,947
|
|
|
|
9,137
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(14,228
|
)
|
|
$
|
(7,650
|
)
|
|
|
|
|
|
|
|
|
|
Per Share data:
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
$
|
(0.96
|
)
|
|
$
|
(0.65
|
)
|
Book Value(5)
|
|
$
|
5.65
|
|
|
$
|
6.22
|
|
Selected Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
198,290
|
|
|
$
|
257,546
|
|
Cash and cash equivalents
|
|
|
89,353
|
|
|
|
103,227
|
|
Certificates of deposit(4)
|
|
|
|
|
|
|
26,889
|
|
Securities, available for sale
|
|
|
472
|
|
|
|
|
|
Securities, held to maturity
|
|
|
2,031
|
|
|
|
7,133
|
|
Gross loans, including net deferred loan fees
|
|
|
101,861
|
|
|
|
106,259
|
|
Allowance for loan losses
|
|
|
2,919
|
|
|
|
36
|
|
Deposits
|
|
|
121,226
|
|
|
|
160,286
|
|
Stockholders equity
|
|
|
76,041
|
|
|
|
93,829
|
|
Performance Ratios:
|
|
|
|
|
|
|
|
|
Net interest margin(1)
|
|
|
4.55
|
%
|
|
|
3.33
|
%
|
Efficiency ratio(2)
|
|
|
148.19
|
%
|
|
|
599.93
|
%
|
Return on average assets
|
|
|
(6.54
|
)%
|
|
|
(2.60
|
)%
|
Return on average equity
|
|
|
(16.19
|
)%
|
|
|
(5.89
|
)%
|
31
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2011
|
|
|
2010(3)
|
|
|
|
($ in thousands except per share data)
|
|
Asset Quality:
|
|
|
|
|
|
|
|
|
Nonperforming loans(6)
|
|
$
|
24,054
|
|
|
$
|
10,426
|
|
Allowance for loan losses as a percentage of nonperforming loans(6)
|
|
|
12.14
|
%
|
|
|
0.35
|
%
|
Allowance for loan losses as a percentage of portfolio loans
|
|
|
2.87
|
%
|
|
|
0.03
|
%
|
Nonperforming loans as a percentage of total portfolio loans(6)
|
|
|
23.61
|
%
|
|
|
9.81
|
%
|
Nonperforming loans as a percentage of total assets(6)
|
|
|
12.13
|
%
|
|
|
4.05
|
%
|
Net charge-offs to average portfolio loans
|
|
|
5.66
|
%
|
|
|
0.00
|
%
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
Average equity to average assets
|
|
|
40.42
|
%
|
|
|
44.11
|
%
|
Tier 1 equity to average assets
|
|
|
25.70
|
%
|
|
|
30.50
|
%
|
Tier 1 Risk-Based Capital ratio
|
|
|
70.37
|
%
|
|
|
68.40
|
%
|
Total Risk-Based Capital ratio
|
|
|
71.59
|
%
|
|
|
68.80
|
%
|
(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 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.
|
32
Item 7
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSWESTERN 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
Predecessor Company
. Because WLBCs operations before the acquisition of Service1st were insignificant relative to
those of Service1st, management believes that Service1st is WLBCs 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 for the
period January 1, 2010 through October 28, 2010 are included in this Form 10-K, along with a separate Management Discussion and Analysis. These items should be read in conjunction with the financial statements of the Company for the
periods ended December 31, 2011 and 2010. The predecessor financials are not comparable because at acquisition on October 28, 2010 the assets and liabilities were fair valued and a new accounting basis was determined, different from the
historical cost basis. In general, this change in basis affects interest income and expense because of the amortization of premiums and discounts to arrive at contractual amounts due.
Local economic conditions
.
The recession that began in late 2007 has had a very severe impact on the Las Vegas
economy. Stagnant or declining property values, persistently high unemployment levels, low consumer and business confidence levels, and increasing vacancy and foreclosure rates for commercial and residential property have adversely affected the Las
Vegas economy. We are optimistic that the rapid deterioration in most or all of the Las Vegas-area economic indicators since late 2007 has stopped and that it will eventually be reversed, but we believe that the recovery in the local economy will be
very gradual. 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.
Stock
repurchase program
. We repurchased a total of 1,574,400 shares in the third and fourth quarters of 2011, under a 5% stock repurchase program announced on August 18, 2011 and a 7% stock repurchase program announced on December 6,
2011. 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. Although we would remain well capitalized after additional stock repurchases, written approval of the Federal
Reserve under Rule 225.4(b) would be necessary in order for us to initiate an additional stock repurchase program.
Formation of asset resolution subsidiary
. Las Vegas Sunset Properties was established in 2011 for the purpose of owning and
managing nonperforming and subperforming assets of Service1st Bank. OREO properties were transferred from Service1st to Las Vegas Sunset Properties on December 28, 2011. Loan asset transfers were completed on January 11, 2012. Funded with
cash contributions from WLBC, Las Vegas Sunset Properties paid fair value to Service1st for the assets. The purchase price was approximately $15.5 million, including
33
approximately $4.0 million for the OREO properties and $11.5 million for the loan assets. The assets were written down to fair value by Service1st and for that reason there was no resulting
transaction gain or loss on the sale of the assets by Service1st to Las Vegas Sunset Properties.
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.
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 $14.2 million or $0.96 per common share in 2011. The $6.5 million increase in net loss for the year ended December 31, 2011, when compared to the year ended December 31,
2010, was the result of having twelve months of consolidated operations in 2011 compared to two months of consolidated operations in 2010 as well as a $5.6 million goodwill impairment charge taken in the 3
rd
quarter of 2011, partially offset by the fair value adjustment of
$1.8 million on the contingent consideration.
Critical Accounting Policies and Estimates Generally
. 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 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.
Critical Accounting Policies and Estimates: Allowance for Loan Losses
. The ALLL was adjusted to zero in conjunction with the fair value accounting process. Therefore, the ALLL of $36,000 at
December 31, 2010 only relates to those loans generated after the October 28, 2010 acquisition date. As of December 31, 2011, our allowance for loan and lease losses was $2.9 million. This allowance relates to new loan acquisitions
since the acquisition date and additional credit deterioration in the portfolio acquired. Of the total loan portfolio, $26.5 million in loans have been made after the acquisition date of October 28, 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.
34
A loan is impaired when it is probable WLBC will be unable to collect all contractual
principal and interest payments due in accordance with the original terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loans effective interest rate or, as a
practical expedient, at the loans observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.
Critical Accounting Policies and Estimates: 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.
Critical Accounting Policies and Estimates: Stock-Based
Compensation
. WLBC awarded common stock, restricted stock, restricted stock units and assumed the Service1st stock options outstanding at October 28, 2010. This is described in Note 13 to WLBCs audited financial
statements for the year ended December 31, 2011, 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 expense recognized was approximately $529,000 for the year ended December 31, 2011 and $1.8 million for the year ended December 31, 2010.
Critical Accounting Policies and Estimates: 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 October 28, 2010 acquisition of Service1st Bank, 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.
Critical Account Policies and
Estimates:
Acquisition of Service1st Bank of Nevada
. The acquisition of Service1st Bank was recorded as a business combination under the current accounting rules and as a result the
35
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 potentially payable to the stockholders of Service1st Bank.
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 $15.1 million at October 28, 2010. This discount
consists of two components: credit discount and yield discount. The performing portfolio was approximately $89.9 million and was discounted by $49,000 for yield and $3.6 million for credit discounts. The remaining $35.6 million of
loans were identified as loans with purchased credit impairment and those loans had a discount of $576,000 for yield and $10.9 million for credit discounts. The discounts on performing loans are recognized by a level yield method
over the remaining life of the loans or loan pools. The loans identified as containing purchase credit impairment are treated somewhat differently. The discount associated with yield is accreted as yield discount and the credit discount is not
accreted but is left on the books to reduce the current carrying value of the applicable loans. The application of this process requires that the aggregate discount is first netted against the ALLL, reducing the ALLL to zero. Consequently, the first
day after the transaction the loan portfolio was approximately $110 million with no ALLL. In addition, current accounting methodology only allows for the establishment of an ALLL to occur as the entity records new loans on the books or
identifies subsequent credit deterioration on the original loans marked to fair value at acquisition date.
Since inception,
Service1st had 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.
The third-party vendor that assisted with the determination of the loan portfolios fair value also
assisted with the valuation of the intangible asset known as the core deposit intangible, of CDI. 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.
When we acquired Service1st we provided for a potential future benefit
for the original Service1st stockholders, which was carried at fair value on our balance sheet as a contingent liability. Because of numerous negative factors in the local economy, our overall performance and our stock trading significantly below
book value, we determined in the third quarter of 2011 that it was unlikely that our stock price will recover enough to trigger this benefit. Consequently, the fair value of this liability for contingent consideration was reversed to zero. We will
continue to evaluate this liability until it expires in October of 2012, recording the appropriate fair value adjustment if necessary. This reduction on the liability side of the balance sheet generated a non-cash benefit of $1.8 million in
non-interest income in the third quarter.
Critical Accounting Policies and Estimates: Goodwill Impairment
.
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 paid for Service1st Bank versus the net asset values acquired is an unidentified intangible asset (goodwill) of
approximately $5.6 million.
During the third quarter of 2011, management determined that there was an adverse change in
the business climate. This was directly related to the adverse local economy persisting which is continuing to have a meaningful impact on the Banks operations, and although the acquisition of the Bank had been consummated
36
less than one year previously, management determined that it was more likely than not that the fair value of the reporting unit had fallen below its carrying amount. The primary indicator for
this decision was the ongoing deterioration of borrowers who can no longer perform under the original terms of the loan agreements. These loans have typically required significant reserves or charge-offs based on appraised collateral values that may
have declined 50-80% and since the inception of the loan. As a result a majority of the $8.7 million provision during the year related to these loans. The Company elected to obtain professional assistance in determining the fair value of the
reporting unit and if necessary to assist in determining the fair values of all assets and liabilities, any core deposit intangibles and the fair value of the contingent consideration. We determined the fair value of our reporting unit and compared
it to its carrying amount and determined that step two of the impairment test should be performed during the third quarter. The method for estimating the value of the reporting unit included a weighted average of the discounted cash flows method as
well as the guideline change of control transactions method and public company method. The second step of the goodwill impairment test is performed to determine the amount of the goodwill impairment, if any. Step two required us to compute the
implied fair value of the reporting unit goodwill and compare it against the actual carrying amount of the reporting unit goodwill. The implied fair value of the reporting unit goodwill was determined in the same manner that goodwill recognized in a
business combination is determined. That is, the fair value of the reporting unit was allocated to all of the individual assets and liabilities of the reporting unit, including any unrecognized identifiable intangible assets, as if the reporting
unit had been acquired in a business combination and the fair value of the reporting unit determined in the first step was the price paid to acquire the reporting unit. The allocation process is only performed for purposes of testing goodwill for
impairment, as the other assets and liabilities are not written up or down, nor is any additional unrecognized identifiable asset recorded as part of this process.
After this analysis, it was determined the implied fair value of the goodwill assigned to the reporting unit was less than the carrying value on the Companys balance sheet, and the Company reduced
the carrying value of goodwill to zero through an impairment charge to earnings. Such charge had no effect on the Companys cash balances or liquidity. In addition, because goodwill is not included in the calculation of regulatory capital, the
Companys regulatory ratios were not affected by this non-cash expense.
Critical Accounting Policies and Estimates: OREO
Other real estate owned or other foreclosed assets acquired through loan foreclosure are initially recorded at fair
value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the asset is
acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, the valuation allowance is adjusted through a charge
to noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and recognized in
noninterest expense.
Results of Operations
The results of WLBC include twelve months of operations for 2011 and only two months of operations in 2010 for Service1st. 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 for 2010
and $3.6 million for 2011.
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
37
against earnings in an amount that WLBCs management judges necessary to maintain WLBCs allowance for loan losses at a level deemed adequate to absorb probable incurred loan losses
inherent in the loan portfolio; and second, non-interest expense, which consists primarily of operating expenses, such as compensation to employees.
The management of interest income and interest expense is fundamental to the performance of WLBC. Net interest income and interest expense on interest-bearing liabilities, such as deposits and other
borrowings, is the largest component of WLBCs net revenue. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the rates earned or paid on them. WLBCs management closely monitors
both total net interest income and the net interest margin (net interest income divided by average earning assets).
Net
interest income and net interest margin are affected by several factors including (1) the level of, and the relationship between the dollar amount of interest earning assets and interest-bearing liabilities; and (2) the relationship
between re-pricing or maturity of WLBCs variable-rate and fixed-rate loans, securities, deposits and borrowings.
Variable rate loans constitute approximately 50.00% of WLBCs portfolio for the year end December 31, 2011, which 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 2010 and 2011, 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
Quantitative and Qualitative Disclosures About Market
Risk
in this section for more information.
38
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, 2011, and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2011
|
|
|
Year Ended
December 31,
2010(4)
|
|
($ in thousands)
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Yield
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Yield
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
8,396
|
|
|
$
|
87
|
|
|
|
1.04
|
%
|
|
|
26,889
|
|
|
$
|
56
|
|
|
|
1.27
|
%
|
Money Market funds
|
|
|
30,196
|
|
|
|
2
|
|
|
|
0.01
|
%
|
|
|
76,804
|
|
|
|
8
|
|
|
|
0.06
|
%
|
Interest Bearing deposits
|
|
|
52,262
|
|
|
|
130
|
|
|
|
0.25
|
%
|
|
|
39,308
|
|
|
|
16
|
|
|
|
0.25
|
%
|
Investment securities
|
|
|
4,639
|
|
|
|
41
|
|
|
|
0.88
|
%
|
|
|
7,898
|
|
|
|
47
|
|
|
|
3.62
|
%
|
Portfolio loans(1)
|
|
|
103,077
|
|
|
|
9,253
|
|
|
|
8.98
|
%
|
|
|
107,275
|
|
|
|
1,403
|
|
|
|
7.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earnings assets/interest income
|
|
|
198,570
|
|
|
|
9,513
|
|
|
|
4.79
|
%
|
|
|
258,174
|
|
|
|
1,530
|
|
|
|
3.61
|
%
|
Noninterest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
7,918
|
|
|
|
|
|
|
|
|
|
|
|
12,035
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(1,955
|
)
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
12,916
|
|
|
|
|
|
|
|
|
|
|
|
13,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
217,449
|
|
|
|
|
|
|
|
|
|
|
$
|
283,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
8,016
|
|
|
|
24
|
|
|
|
0.30
|
%
|
|
|
31,275
|
|
|
|
43
|
|
|
|
0.84
|
%
|
Money markets
|
|
|
26,914
|
|
|
|
152
|
|
|
|
0.56
|
%
|
|
|
26,048
|
|
|
|
25
|
|
|
|
0.58
|
%
|
Savings
|
|
|
897
|
|
|
|
4
|
|
|
|
0.45
|
%
|
|
|
1,272
|
|
|
|
1
|
|
|
|
0.48
|
%
|
Time deposits under $100,000
|
|
|
6,497
|
|
|
|
56
|
|
|
|
0.86
|
%
|
|
|
4,910
|
|
|
|
7
|
|
|
|
0.87
|
%
|
Time deposits $100,00 and over
|
|
|
32,828
|
|
|
|
245
|
|
|
|
0.75
|
%
|
|
|
29,943
|
|
|
|
39
|
|
|
|
0.79
|
%
|
Short-term borrowings
|
|
|
904
|
|
|
|
3
|
|
|
|
0.33
|
%
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities/interest expense
|
|
|
76,056
|
|
|
|
484
|
|
|
|
0.64
|
%
|
|
|
93,448
|
|
|
|
115
|
|
|
|
0.75
|
%
|
Noninterest Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand deposits
|
|
|
51,679
|
|
|
|
|
|
|
|
|
|
|
|
68,493
|
|
|
|
|
|
|
|
|
|
Accrued interest on deposits and other liabilities
|
|
|
1,818
|
|
|
|
|
|
|
|
|
|
|
|
2,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
129,553
|
|
|
|
|
|
|
|
|
|
|
|
164,162
|
|
|
|
|
|
|
|
|
|
Stockholders equity(5)
|
|
|
87,896
|
|
|
|
|
|
|
|
|
|
|
|
87,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity(6)
|
|
|
217,449
|
|
|
|
|
|
|
|
|
|
|
$
|
251,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and Interest rate spread(2)
|
|
|
|
|
|
$
|
9,029
|
|
|
|
4.15
|
%
|
|
|
|
|
|
$
|
1,415
|
|
|
|
2.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin(3)
|
|
|
|
|
|
|
|
|
|
|
4.55
|
%
|
|
|
|
|
|
|
|
|
|
|
3.33
|
%
|
Ratio of Average Interest-Earning Assets to Interest-Bearing Liabilities
|
|
|
261
|
%
|
|
|
|
|
|
|
|
|
|
|
276
|
%
|
|
|
|
|
|
|
|
|
(1)
|
Average balances include nonaccrual loans of approximately $24.1 million and $10.4 million, for the years ended December 31, 2011 and 2010, respectively. Net loan
(fees) or costs of $41,000 and $37,000, are included in the yield computation for the years ended December 31, 2011 and 2010, 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
|
39
|
quarters together and dividing by four. Average balances for Service1st are computed by taking November and December 2010s month end balance, adding them together and dividing by two.
Interest income for 2010 represents a full year for WLBC and two months of income for Service1st.
|
(5)
|
Stockholders equity was computed by taking WLBCs balance for each quarter end, adding the four quarters together and dividing by four, to compute a yearly
average. No balance for Service1st is included in the 2010 stockholders equity balance as the calculation combines four quarters of WLBCs balances to compute an average, but is skewed when only the last two months of
Service1sts 2010 balances can be utilized, due to date of acquisition. Thus, the elimination of investment in subsidiary, which needs to occur in consolidation accounting, impacts the consolidated numbers.
|
(6)
|
As a result of the assumption noted in note (5) above, Total Assets will not equal Total Liabilities plus Stockholders Equity for 2010.
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
2011
Compared to 2010
Increase (Decrease)
Due to Changes in:
|
|
($s In thousands)
|
|
Average
Volume
|
|
|
Average
Rate
|
|
|
Net
Increase
(Decrease)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
(192
|
)
|
|
$
|
223
|
|
|
$
|
31
|
|
Money Market funds
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(6
|
)
|
Interest bearing deposits
|
|
|
32
|
|
|
|
82
|
|
|
|
114
|
|
Investment securities
|
|
|
(29
|
)
|
|
|
23
|
|
|
|
(6
|
)
|
Portfolio loans
|
|
|
(377
|
)
|
|
|
8,227
|
|
|
|
7,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest income
|
|
|
(569
|
)
|
|
|
8,552
|
|
|
|
7,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking
|
|
$
|
(70
|
)
|
|
$
|
51
|
|
|
$
|
(19
|
)
|
Money markets
|
|
|
5
|
|
|
|
122
|
|
|
|
127
|
|
Savings
|
|
|
(2
|
)
|
|
|
5
|
|
|
|
3
|
|
Time deposits under $100,000
|
|
|
14
|
|
|
|
35
|
|
|
|
49
|
|
Time deposits $100,000 and over
|
|
|
22
|
|
|
|
184
|
|
|
|
206
|
|
Short-term borrowings
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest expense
|
|
|
(28
|
)
|
|
|
397
|
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net interest income
|
|
$
|
(541
|
)
|
|
$
|
8,155
|
|
|
$
|
7,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of 2011 with 2010
For the year ended December 31, 2011, average interest-earning assets were $198.6 million and average interest-bearing liabilities were $76.1 million, generating net interest income of
$9.0 million which includes $3.6 million of accretion of discount on loans. 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. Average balances of interest earning assets decreased by an average of $59.6 million, or 23.09%
40
from $258.2 million for the year ended December 31, 2010 to $198.6 million for the year ended December 31, 2011, due to average money market funds decreased $46.6 million from
$76.8 million for the year ended December 31, 2010 to $30.2 million for the year ended December 31, 2011, when WLBC transferred their funds from money market accounts earning 1 basis point to a non-interest bearing account with Service1st
Bank where it would receive FDIC insurance coverage on 100% of its balance, plus the bank could invest those funds in an over-night account with the Federal Reserve Bank and earn 25 basis points on those monies. Average certificates of deposits
decreased $18.5 million from $26.9 million for the year ended December 31, 2010 to $8.4 million for the year ended December 31, 2011, as the company made a decision to liquidate these investments. Average loan balances decreased $4.2
million from $107.3 million for the year ended December 31, 2010 to $103.1 million for the year ended December 31, 2011 due to loan paydowns, payoffs and charge-offs exceeding new loan originations.
Average securities decreased $3.3 million, from $7.9 million for the year ended December 31, 2010 to $4.6 million for the year ended
December 31, 2011, as a result of securities maturing during the year with the expectation that these funds would be reinvested in new loan originations.
Interest income was positively impacted by the twelve months of operations in 2011 compared to only two months of operations in 2010. Interest income grew from $1.5 million for those two months ended
December 31, 2010 to $9.5 million for the twelve months ended December 31, 2011. On average, loans yielded 8.98% for the year ended December 31, 2011.
The interest income on loans was positively impacted by the purchase accounting adjustments. The discount accretion for loans approximated $3.6 million for the year ended December 31, 2011 and
$436,000 for the two month period in 2010, as a result of the short term nature of the loans, refinancing and prepayments.
For the year ended December 31, 2011, average interest-bearing liabilities were $76.1 million, generating interest expense of
$484,000 in 2011, compared with $93.4 million in average interest-bearing liabilities generating interest expense for the two months ended December 31, 2010 of $115,000. WLBCs average interest bearing liabilities at December 31, 2011
are as follows: interest checking accounts average $8.0 million, money market accounts average $26.9 million, savings average $897,000, time deposits under $100,000 average $6.5 million and time deposits $100,000 and over average
$32.8 million.
Interest expense grew from $115,000 for the two months ended December 31, 2010 to $484,000 for the
year ended December 31, 2011. Interest expense on time deposits over and under $100,000 contributed $301,000 to total interest expense, or 62.19% while money markets contributed $152,000 or 31.41% followed by interest bearing demand deposit
checking accounts which contributed $24,000 or 4.96% of total interest expense. On average, interest earning deposits yielded 0.64% for the period ended December 31, 2011.
As a result WLBCs interest rate spread (yield earned on average interest-earning assets less the average rate paid on
interest-bearing liabilities) was 4.15% and its net interest margin was 4.55%, yielding a net interest income of $9.0 million for the year ended December 31, 2011.
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 incurred loan losses
inherent in the loan portfolio. The amount of the provision for loan losses in any year is affected by reductions to the allowance in the year resulting from charged-off loans and increases to the allowance in the year as a result of recoveries from
charged-off loans. In addition, changes in the size of the loan portfolio and the recognition of changes in current risk factors affect the amount of the provision.
41
During 2011, 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 charged-off loans. WLBC has responded by increasing provision expense to replenish and build the allowance for
loan losses allocable to adversely affected segments of WLBCs loan portfolioin particular, commercial real estate loans and commercial and industrial loans. Continuation of these economic and real estate factors is likely to affect
WLBCs asset quality and overall performance during the coming year.
WLBCs provision for loan losses of $8.7
million in 2011 was the result of further deterioration in the loan portfolios credit quality for the year ended December 31, 2011, compared with $36,000 for the year ended December 31, 2010. The provision for loan losses for 2010 is
primarily attributable to new loan growth of $995,000.
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 excel of cash flows expected to be received compared to the fair value of the loan, 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.
Non-Interest Income
Non-interest income totaled $2.4 million for the year ended December 31, 2011 and $108,000 for the year ended December 31, 2010. The $2.3 million increase in non-interest income is primarily the
result of a $1.8 million change in fair value of the contingent consideration liability being reversed which resulted in non-interest income. On October 28, 2010, WLBC recorded a liability to compensate Service 1
st
Bank shareholders additional
42
common shares equal to twenty percent of Service 1
st
Banks tangible capital at August 31, 2010, if the price of the Companys common stock exceeds $12.75 for a set number of days. Since WLBCs stock price has decreased, the potential
for that future benefit to the original shareholders of Service1st Bank has greatly diminished. During the evaluation of the fair value of the contingent consideration, management determined the probability of achieving the triggering event was zero
and reversed all of the contingent consideration liability.
Non-Interest Expense
The following table sets for the principal elements of non-interest expenses for 2011, 2010.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
($ In thousands)
|
|
2011
|
|
|
2010(1)
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
3,242
|
|
|
$
|
1,461
|
|
Occupancy, equipment and depreciation
|
|
|
1,490
|
|
|
|
269
|
|
Computer service charges
|
|
|
294
|
|
|
|
51
|
|
Federal deposit insurance
|
|
|
524
|
|
|
|
90
|
|
Professional fees
|
|
|
2,634
|
|
|
|
3,851
|
|
Advertising and business development
|
|
|
97
|
|
|
|
7
|
|
Insurance
|
|
|
284
|
|
|
|
825
|
|
Telephone
|
|
|
81
|
|
|
|
19
|
|
Printing and supplies
|
|
|
283
|
|
|
|
314
|
|
Director fees
|
|
|
225
|
|
|
|
25
|
|
Stock based compensation
|
|
|
529
|
|
|
|
1,770
|
|
Provision for unfunded commitments
|
|
|
(257
|
)
|
|
|
|
|
Oreo property impairment
|
|
|
797
|
|
|
|
|
|
Goodwill Impairment
|
|
|
5,633
|
|
|
|
|
|
Other
|
|
|
1,091
|
|
|
|
455
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
$
|
16,947
|
|
|
$
|
9,137
|
|
|
|
|
|
|
|
|
|
|
(1)
|
For the year January 1, 2010 through December 31, 2010 for WLBC and for the two months ended 2010 for Service1st.
|
During the third quarter of 2011, WLBC wrote-off $5.6 million in Goodwill. 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 acquired company, 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, or such time as an event occurs or circumstances change that would likely reduce the fair value of the reporting unit, as was the case during this quarter. 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. See Note 7,
Goodwill and Intangibles
.
Non-interest expense was $16.9 million for the year ended December 31, 2011, compared with $9.1 million for 2010. Salaries and employee benefits total $3.2 million, compared with $1.5
million for 2010. The $1.8 million increase in salaries and employee benefits expense is the result of WLBC acquiring Service1st on October 28, 2010 which employed 43 full time employees. Thus, 2011 reflects twelve months of salaries and
benefits expense, where 2010 only reflects two months. Professional fees decreased $1.3 million, from
43
$3.9 million for the year ended December 31, 2010 to $2.6 million for the year ended December 31, 2011. The $1.3 million decrease is largely due to the company managing
down its costs associated with legal, audit and consulting fees in 2011. Occupancy expense increased $1.2 million from $269,000 for the two months ended December 31, 2010 to $1.5 million for the year ended December 31, 2011. The primary
reason for this increase is due to 2010 only having two months of expense, while 2011 reflects a full year of expense. Provision for unfunded commitments decreased $257,000 in 2011. This decrease is the result of the company changing from a manual
Allowance for loan and lease loss (ALLL) in first quarter 2011 to the Pacific Coast Bankers Bank (PCBB) model. As a result of this change, the provision for unfunded commitments was determined to be over reserved, which resulted in the reversal of
$257,000 in expense in 2011.
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 $198.3 million for the year ended December 31, 2011, a decrease of $59.2 million, or 23.01% from
$257.5 million as of December 31, 2010. The decrease in total assets was principally attributable to a $39.1 million decrease in total deposits. Total deposits decreased from $160.3 million as of December 31, 2010 to $121.2 million as
of December 31, 2011. Of the $39.1 million decrease, $25.0 million was attributed the bank closing an interest bearing account which contained deposits for Individual Retirement Account monies that the FDIC deemed to be brokered in fourth
quarter 2010. As a result, the bank closed this account January 4, 2011. The remaining $14.1 is related to reductions in customers deposit balances. Non-interest bearing balances have decreased $16.6 million, from $67.1 million as of
December 31, 2010 to $50.5 million as of December 31, 2011.
The company has bridged the $39.1 million decrease in
total deposits by not re-investing any of the $26.9 million laddered maturities of Certificates of Deposit investments that have matured during 2011. As of December 31, 2010 the company had $26.9 million in certificates of deposits invested
with only FDIC insured institutions. No single investment principal and interest exceeded $250,000 per financial institution. As of December 31, 2011 certificates of deposits invested at other FDIC insured institutions was zero. 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, decreased $13.8 million from $103.2 million as of December 31, 2010 to $89.4 million as of
December 31, 2011.
Further decreases were noted in securities available for sale which decreased $1.3 million from $1.8
million as of December 31, 2010 to $472,000 as of December 31, 2011. Securities held to maturity decreased $3.3 million from $5.3 million as of December 31, 2010 to $2.0 million as of December 31, 2011. Gross loans, including net
deferred loan fees decreased $4.4 million, from $106.3 million as of December 31, 2011 to $101.9 million as of December 31, 2011.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash
and due from banks, federal funds sold and certificates of deposits with original maturities of three months or less. Cash and cash equivalents totaled $89.4 million for the year ended December 31, 2011 and $103.2 million at
December 31, 2010. 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.
44
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 accumulate
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 December 31, 2011, investment securities totaled
$2.5 million, compared with $7.1 at December 31, 2010.
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, 2011. 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, 2011
|
|
(Dollars in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Investments-Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
250
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
253
|
|
Collateralized Mortgage Obligations-Commercial
|
|
|
217
|
|
|
|
2
|
|
|
|
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
467
|
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2011
|
|
(Dollars in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrecognized
Gains
|
|
|
Gross
Unrecognized
Losses
|
|
|
Fair
Value
|
|
Investments-Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
1,520
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
1,519
|
|
SBA Loan Pools
|
|
|
511
|
|
|
|
5
|
|
|
|
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,031
|
|
|
$
|
5
|
|
|
$
|
(1
|
)
|
|
$
|
2,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
(Dollars in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Investments-Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
(Dollars in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrecognized
Gains
|
|
|
Gross
Unrecognized
Losses
|
|
|
Fair
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, 2011 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, 2011
|
|
|
|
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
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
253
|
|
|
|
2.05
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
253
|
|
|
|
2.05
|
%
|
Corporate Debt Securities
|
|
$
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Collateralized Mortgage Obligations-Commercial
|
|
|
219
|
|
|
|
5.03
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
219
|
|
|
|
5.03
|
%
|
Small Business Administration Loan Pools
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
219
|
|
|
|
5.03
|
%
|
|
$
|
253
|
|
|
|
2.05
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
472
|
|
|
|
3.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
Corporate Debt Securities
|
|
|
1,520
|
|
|
|
1.33
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
1,520
|
|
|
|
1.33
|
%
|
Collateralized Mortgage Obligations-Commercial
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Small Business Administration Loan Pools
|
|
|
7
|
|
|
|
4.67
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
142
|
|
|
|
2.31
|
%
|
|
|
362
|
|
|
|
2.39
|
%
|
|
|
511
|
|
|
|
2.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
1,527
|
|
|
|
1.35
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
142
|
|
|
|
2.31
|
%
|
|
$
|
362
|
|
|
|
2.39
|
%
|
|
$
|
2,031
|
|
|
|
1.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
|
|
Due Under
1 Year
Amount/Yield
|
|
|
Due
1-5 Years
Amount/Yield
|
|
|
Due
5- 10 Years
Amount/Yield
|
|
|
Due Over
10 Years
Amount/Yield
|
|
|
Total
Amount/Yield
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
Corporate Debt Securities
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Collateralized Mortgage Obligations-Commercial
|
|
|
1,417
|
|
|
|
2.55
|
%
|
|
|
402
|
|
|
|
2.69
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
1,819
|
|
|
|
2.58
|
%
|
Small Business Administration Loan Pools
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
1,417
|
|
|
|
2.55
|
%
|
|
$
|
402
|
|
|
|
2.69
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
1,819
|
|
|
|
2.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
Corporate Debt Securities
|
|
|
3,075
|
|
|
|
7.17
|
%
|
|
|
1,561
|
|
|
|
7.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
4,636
|
|
|
|
7.11
|
%
|
Collateralized Mortgage Obligations-Commercial
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
For the year ended December 31, 2011, 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 reconciliation to loans receivable, net.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
3,417
|
|
|
|
3.36
|
%
|
|
$
|
5,923
|
|
|
|
5.58
|
%
|
Commercial real estate
|
|
|
58,252
|
|
|
|
57.21
|
%
|
|
|
54,975
|
|
|
|
51.75
|
%
|
Residential
|
|
|
4,704
|
|
|
|
4.62
|
%
|
|
|
9,247
|
|
|
|
8.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
$
|
66,373
|
|
|
|
65.19
|
%
|
|
|
70,145
|
|
|
|
66.04
|
%
|
Commercial and industrial
|
|
|
35,417
|
|
|
|
34.78
|
%
|
|
|
35,946
|
|
|
|
33.84
|
%
|
Consumer
|
|
|
30
|
|
|
|
0.03
|
%
|
|
|
131
|
|
|
|
0.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
101,820
|
|
|
|
100.00
|
%
|
|
|
106,222
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan fees and costs
|
|
|
41
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans, net of deferred fees and costs
|
|
|
101,861
|
|
|
|
|
|
|
|
106,259
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(2,919
|
)
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
98,942
|
|
|
|
|
|
|
$
|
106,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross loans, were $101.8 million for the year ended December 31, 2011, compared to $106.2
at December 31, 2010. Gross loans, net of deferred fees and costs the allowance for loan losses totaled $98.9 million for the year ended December 31, 2011, as a result of a $2.9 million increase in the allowance for loan losses.
47
Commercial real estate loans balances were $58.3 million, or 57.21% of total loans for
the year ended December 31, 2011, commercial and industrial loans totaled $35.4 million, or 34.78% of total loans, residential real estate loans were $4.7 million, or 4.62% of total loans while construction, land development and other
land loans totaled $3.4 million, or 3.36% of total loans.
The following table presents maturity information for the loan
portfolio at December 31, 2011. 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, 2011
|
|
|
|
Due Within
One Year
|
|
|
Due 1-5
Years
|
|
|
Due Over
Five
Years
|
|
|
Total
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
2,624
|
|
|
$
|
793
|
|
|
$
|
|
|
|
$
|
3,417
|
|
Commercial real estate
|
|
|
2,784
|
|
|
|
27,760
|
|
|
|
27,708
|
|
|
|
58,252
|
|
Residential real estate (1 to 4 family)
|
|
|
1,005
|
|
|
|
3,566
|
|
|
|
133
|
|
|
|
4,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-secured loans
|
|
$
|
6,413
|
|
|
$
|
32,119
|
|
|
$
|
27,841
|
|
|
$
|
66,373
|
|
Loans not secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
20,155
|
|
|
|
9,409
|
|
|
|
5,853
|
|
|
|
35,417
|
|
Consumer
|
|
|
10
|
|
|
|
20
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Gross
|
|
|
26,578
|
|
|
|
41,548
|
|
|
|
33,694
|
|
|
|
101,820
|
|
Interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
$
|
10,361
|
|
|
$
|
32,578
|
|
|
$
|
7,905
|
|
|
$
|
50,844
|
|
Variable
|
|
|
16,217
|
|
|
|
8,970
|
|
|
|
25,789
|
|
|
|
50,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Gross
|
|
$
|
26,578
|
|
|
$
|
41,548
|
|
|
$
|
33,694
|
|
|
$
|
101,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrations
WLBCs loan portfolio has a concentration of loans secured by real estate. For the year ended December 31, 2011, loans secured by real estate comprised 65.19% of total gross loans. Substantially
all of these loans are secured by first liens. Approximately 28.37% of these real estate-secured loans are owner occupied for the year ended December 31, 2011. 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 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. 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, 2011, WLBC had no loans with an interest
reserve.
48
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;
(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.
|
|
|
|
|
|
|
|
|
($s in thousands)
|
|
For the Year
Ended
December 31,
|
|
|
For the Year
Ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
612
|
|
|
$
|
2,632
|
|
Commercial real estate
|
|
|
17,483
|
|
|
|
1,224
|
|
Residential real estate (1-4 family)
|
|
|
3,698
|
|
|
|
2,900
|
|
Total loans secured by real estate
|
|
|
21,793
|
|
|
|
6,756
|
|
Commercial and industrial
|
|
|
2,261
|
|
|
|
3,670
|
|
Consumer
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
$
|
24,054
|
|
|
|
10,426
|
|
Past due (>90days) loans and accruing interest:
|
|
|
|
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
|
|
|
$
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Residential real estate (1-4 family)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total past due loans accruing interest
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
24,054
|
|
|
$
|
10,426
|
|
Other real estate owned (OREO)
|
|
|
4,008
|
|
|
|
3,406
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
28,062
|
|
|
$
|
13,832
|
|
|
|
|
|
|
|
|
|
|
Restructured loans (still on accrual)(1)
|
|
$
|
1,944
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets and restructured loans (still on accrual)
|
|
$
|
30,006
|
|
|
$
|
13,832
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Loans as a percentage of total portfolio loans
|
|
|
23.61
|
%
|
|
|
9.81
|
%
|
Non-Performing loans as a percentage of total assets
|
|
|
12.13
|
%
|
|
|
4.05
|
%
|
Non-Performing assets as a percentage of total assets
|
|
|
14.15
|
%
|
|
|
5.37
|
%
|
Allowance for loan losses as a percentage of nonperforming loans
|
|
|
12.14
|
%
|
|
|
0.35
|
%
|
(1)
|
For the year ended December 31, 2011, WLBC had approximately $1.9 million in loans classified as restructured loans still on accrual.
|
49
For the year ended December 31, 2011, nonperforming loans totaled $24.1 million,
or 23.61%, of total portfolio loans. Total nonperforming assets for the year ended December 31, 2011 were $28.1 million.
The largest category of nonperforming is commercial real estate loans of $17.5 million followed by residential real estate loans of $3.7 million, commercial and industrial loans of
$2.3 million and construction, land development and other land loans of $612,000. 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 may selectively make commercial real estate loans and construction, land development and other land loans (except for contractually
required disbursements under existing facilities) to borrowers with strong outside financial support.
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 the lower of cost or fair value as discussed in Note 5 of WLBCs financial statements. The 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 Other Loans Especially Mentioned, Substandard, Doubtful, and Loss.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2011
|
|
|
|
# of
Loans
|
|
|
Loan
Balance
|
|
|
%
|
|
|
Percent of
Total
Loans
|
|
Construction, land development and other land loans
|
|
|
5
|
|
|
$
|
1,502
|
|
|
|
14.99
|
%
|
|
|
1.47
|
%
|
Commercial real estate
|
|
|
5
|
|
|
|
7,350
|
|
|
|
73.35
|
%
|
|
|
7.22
|
%
|
Residential real estate (1-4 family)
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Commercial and industrial
|
|
|
11
|
|
|
|
1,168
|
|
|
|
11.66
|
%
|
|
|
1.15
|
%
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
21
|
|
|
$
|
10,020
|
|
|
|
100.00
|
%
|
|
|
9.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WLBCs potential problem loans which are not considered nonperforming consisted of 21 loans and
totaled approximately $10.0 million for the year ended December 31, 2011. Commercial real estate comprises approximately 73.35% of the total aggregate balance of potential problem loans for the year ended December 31, 2011.
Construction, land development and other land loans comprise approximately 14.99% of the total balance of potential problem loans for the year ended December 31, 2011. Commercial and industrial loans comprise approximately 11.66% of the total
aggregate balance of potential problem loans for the year ended December 31, 2011. Residential real estate loans comprise approximately 0.00% of the total balance of potential problem loans for the year ended December 31, 2011.
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 the lower of cost or 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.
50
At December 31, 2011, the aggregate total amount of loans classified as impaired, was
$29.2 million. The total specific allowance for loan losses related to these loans was $335,000 for the year ended December 31, 2011. The increase in total impaired loans reflects the overall decline in economic conditions in Nevada.
At December 31, 2011, WLBC had approximately $23 million in loans classified as restructured loans. Six of the
twenty-six loans were on accrual status as of December 31, 2011. The following is a summary of these loans:
|
|
|
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, 2011, the book balance on this restructured loan was $1.1 million.
|
|
|
|
The same principal/borrower on two related commercial real estate loans requested payment relief. The two loans were restructured in December 2011. The
loans are secured by leased office buildings. The borrowing entities experienced diminished cash flows due to the loss of tenants and rent concession. In addition, the principals outside personal cash flow and liquidity had deteriorated. The
restructures lowered the interest rates and reduced the principal and interest payments based upon a 30-year fully amortizing schedule. Both notes mature in three years. At December 31, 2011, the combined book balance was $3.9 million.
|
|
|
|
A commercial real estate loan secured by an office building was restructured July 2011. Due to a lack of cash flow from the property, the borrower
requested payment relief. The loan was restructured into two notes, reducing the rate and the principal and interest payments on a 25 year amortization, maturing in three years. Additional collateral was also taken to support one of the notes. At
December 31, 2011, the book balance was $1.3 million.
|
|
|
|
A commercial real estate loan, which is secured by an office building, was restructured July 2011. The borrower requested payment relief due to
reductions in rental income resulting from vacancy and rent reductions to two tenants. In additional, the borrowers business suffered a significant fiscal year loss which further impacted support for the loan. The loan was restructured with
reduced interest rates, maturing in three years. The borrower pledged the cash value of a life insurance policy as additional collateral. At December 31, 2011, the book balance was $2.2 million.
|
|
|
|
Two related loans with the same principal/borrower were restructured in August and September 2011. The loans consist of two residential real estate
loans secured by multiple rented single family residences. The borrower requested payment relief following the loss of tenants and rent reductions in other properties which adversely impacted the borrowers overall cash flow. The restructured
loans reduced the interest rate, and amortized the principal and interest payments over 30 and 25 years, respectively, maturing in three years. At December 31, 2011, the combined book balance was $3.0 million.
|
|
|
|
Two related loans with the same principal/borrower matured in October 2011, and the borrower requested a restructure as a result of deterioration of
the borrowers core business cash flow. Both loans are commercial and industrial loans consisting of one unsecured loan and one loan secured by business assets. After lengthy negotiations, the borrower agreed to pledge a free and clear single
family residence along with second trust deed on a commercial office building securing a related commercial real estate loan. In exchange for the additional collateral another restructure was committed. It is expected that the restructured loans
will be consummated in early January, 2012. At December 31, 2011, the combined book balance was $1.2 million.
|
|
|
|
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
|
51
|
office building for lease. The borrower had already defaulted on several single family residential properties, which demonstrated weakness and inability to service all of his obligations. Given
the borrowers financial deterioration, the loans, were restructured resulting in reduced interest rate and 30 year amortization of the two real estate loans all of which reduced the monthly payment. At December 31, 2011, the outstanding
balance was $2.2 million.
|
|
|
|
The remaining $7.1 million in loans classified as restructured loans consist of 13 loans with book balances ranging from $60,000 to $838,000. These
loans were restructured between March 2010 and December 2011 due to the borrower deterioration and continued weak economic conditions in the marketplace.
|
The breakdown of total impaired loans, which have been recorded at fair value as discussed in Note 5 of WLBCs financial statements, and the related specific reserves for the years ended
December 31, 2011 and 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2011
|
|
($ in thousands)
|
|
Impaired
Balance
|
|
|
%
|
|
|
Percent of
Total
Loans
|
|
|
Reserve
Balance
|
|
|
%
|
|
|
Percent
of
Total
Allowance
|
|
Construction, land development and other land loans
|
|
$
|
2,122
|
|
|
|
7.25
|
%
|
|
|
2.07
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Commercial real estate
|
|
|
20,041
|
|
|
|
68.43
|
%
|
|
|
19.67
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Residential real estate (1-4 family)
|
|
|
3,700
|
|
|
|
12.64
|
%
|
|
|
3.63
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Commercial and industrial
|
|
|
3,419
|
|
|
|
11.68
|
%
|
|
|
3.36
|
%
|
|
|
335
|
|
|
|
100.00
|
%
|
|
|
11.48
|
%
|
Consumer
|
|
|
1
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
29,283
|
|
|
|
100.00
|
%
|
|
|
28.75
|
%
|
|
$
|
335
|
|
|
|
100.00
|
%
|
|
|
11.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2010
|
|
($ in thousands)
|
|
Impaired
Balance
|
|
|
%
|
|
|
Percent of
Total
Loans
|
|
|
Reserve
Balance
|
|
|
%
|
|
|
Percent of
Total
Allowance
|
|
Construction, land development and other land loans
|
|
$
|
3,220
|
|
|
|
28.15
|
%
|
|
|
3.03
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Commercial real estate
|
|
|
1,648
|
|
|
|
14.41
|
%
|
|
|
1.55
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Residential real estate (1-4 family)
|
|
|
2,900
|
|
|
|
25.35
|
%
|
|
|
2.73
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Commercial and industrial
|
|
|
3,670
|
|
|
|
32.09
|
%
|
|
|
3.46
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Consumer
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
11,438
|
|
|
|
100.00
|
%
|
|
|
10.77
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of interest income recognized on impaired loans was $ 1.5 million for 2011 and
approximately $39,000 for the two months ended December 31, 2010.
52
Allowance for Loan Losses
The following table presents the activity in WLBCs allowance for loan losses for 2011 and 2010.
Analysis of loss experience by loan type
|
|
|
|
|
|
|
|
|
($s in thousands)
|
|
For the Year
Ended
December 31, 2011
|
|
|
For the Year
Ended
December 31, 2010
|
|
Allowance for Loan and Lease Loss:
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year
|
|
$
|
36
|
|
|
$
|
0
|
|
Provisions charged to operating expenses
|
|
|
8,717
|
|
|
|
36
|
|
Recoveries of loans previously charged off:
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
|
300
|
|
|
|
0
|
|
Commercial real estate
|
|
|
2
|
|
|
|
0
|
|
Residential real estate (1-4 family)
|
|
|
4
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
268
|
|
|
|
0
|
|
Consumer
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
574
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
|
600
|
|
|
|
0
|
|
Commercial real estate
|
|
|
3,873
|
|
|
|
0
|
|
Residential (including multi-family)
|
|
|
0
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
1,935
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Total charged-off
|
|
|
6,408
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
5,834
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
2,919
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
Net Charge-offs to average loans outstanding
|
|
|
5.66
|
%
|
|
|
0.00
|
%
|
Allowance for Loan Loss to outstanding loans
|
|
|
2.87
|
%
|
|
|
0.03
|
%
|
The accounting principles used by WLBC in maintaining the allowance for loan losses are discussed in the
section entitled Critical Accounting PoliciesAllowance 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 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. The allowance of $2.9 million discussed in the table above is required based on continued deterioration in
the loan portfolio credit quality. 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, 2011, WLBC had established an allowance of
$2.9 million, after increasing the allowance by $8.7 million in provisions and recording $574,000 in recoveries and $6.4 million in charge-offs. The allowance for loan loss to outstanding loans is 2.87% for the year ended December 31, 2011.
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. Service1st implemented use of the Allowance for Loan and Lease Losses Quantifier
(ALLL
Q
) model prepared by PCBB Capital Markets, LLC for
calculating the allowance for loan losses. Quantitative factors include delinquency and
53
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 fora limited time. 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. In some cases, adjustments are
made to the lendable values which may be less than 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, 2011 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.
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.
54
Allocation of the allowance and percentage of allowance by loan type. The allowance of $2.9
million discussed in the table below is required based on continued deterioration in the credit quality of the loan portfolio. All loans at date of acquisition were recorded at fair value as discussed in Note 5 of WLBCs financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
2011
|
|
|
For the Year
Ended
December 31, 2010
|
|
($s in thousands)
|
|
Amount
|
|
|
% of
loans
|
|
|
Amount
|
|
|
% of
loans
|
|
Allowance for Loan and Lease Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
208
|
|
|
|
3.36
|
%
|
|
$
|
0
|
|
|
|
5.58
|
%
|
Commercial real estate
|
|
|
422
|
|
|
|
57.21
|
%
|
|
|
0
|
|
|
|
51.75
|
%
|
Residential real estate (1-4 family)
|
|
|
19
|
|
|
|
4.62
|
%
|
|
|
0
|
|
|
|
8.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
1,019
|
|
|
|
65.19
|
%
|
|
|
0
|
|
|
|
66.04
|
%
|
Commercial and industrial
|
|
|
2,270
|
|
|
|
34.78
|
%
|
|
|
36
|
|
|
|
33.84
|
%
|
Consumer
|
|
|
|
|
|
|
0.03
|
%
|
|
|
0
|
|
|
|
0.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan loss
|
|
$
|
2,919
|
|
|
|
100.00
|
%
|
|
$
|
36
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Asset
For the year ended December 31, 2011 and year ended December 31, 2010, 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.
Deposits totaled $121.2 million
at December 31, 2011, down from $160.3 million as of December 31, 2010 due to the acquisition of Service1st. The decrease in total assets was principally attributable to a $39.1 million decrease in total deposits. Of the $39.1 million
decrease, $25.0 million was attributed the bank closing an interest bearing account which contained deposits for Individual Retirement Account monies that the FDIC deemed to be brokered in fourth quarter 2010. As a result, the bank closed this
account January 4, 2011. The remaining $14.1 is related to reductions in customers deposit balances. Non-interest bearing balances have decreased $16.6 million, from $67.1 million as of December 31, 2010 to $50.5 million as of
December 31, 2011.
The company has bridged the $39.1 million decrease in total deposits by not re-investing any of the
$26.9 million laddered maturities of Certificates of Deposit investments that have matured during 2011. As of December 31, 2010 the company had $26.9 million in certificates of deposits invested with only FDIC insured institutions. No single
investment principal and interest exceeded $250,000 per financial institution. As of December 31, 2011 certificates of deposits invested at other FDIC insured institutions was zero. In addition case and cash equivalents consisting of case and
due from banks, federal funds sold and certificates of deposits with original maturities of three months or less, decreased $13,9 million from $103.2 million as of December 31, 2010 to $89.4 million as of December 31, 2011.
55
Overall rates on interest-bearing deposit accounts were 0.64%, for the year ended
December 31, 2011 however; the calculation for 2010 is 0.75%. This rates takes into consideration only two months of expense, due to the acquisition of Service1st on October 28, 2010. Interest expense totaled $484,000 for the year ended
December 31, 2011.
At December 31, 2011, all time deposits are scheduled to mature in 2012 as the maximum term
offered for time certificates is twelve months.
WLBC and Las Vegas Sunset Properties have deposits of $29.2 and $12.9
million, respectively on deposit with Service1st Bank of Nevada. These deposits are not included in the deposit schedule above as they are eliminated in consolidation.
The following table reflects the summary of deposit categories by dollar and percentage for the year ended December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
($s in thousands)
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
Non-interest-bearing deposits
|
|
$
|
50,488
|
|
|
|
41.65
|
%
|
|
$
|
67,087
|
|
|
|
41.85
|
%
|
Interest-bearing deposits
|
|
|
5,977
|
|
|
|
4.93
|
%
|
|
|
31,837
|
|
|
|
19.86
|
%
|
Money Markets
|
|
|
31,329
|
|
|
|
25.84
|
%
|
|
|
24,672
|
|
|
|
15.39
|
%
|
Savings
|
|
|
735
|
|
|
|
0.61
|
%
|
|
|
1,273
|
|
|
|
0.79
|
%
|
Time deposits under $100,000
|
|
|
6,218
|
|
|
|
5.13
|
%
|
|
|
4,919
|
|
|
|
3.07
|
%
|
Time deposits $100,000 and over
|
|
|
26,479
|
|
|
|
21.84
|
%
|
|
|
30,498
|
|
|
|
19.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
121,226
|
|
|
|
100.00
|
%
|
|
$
|
160,286
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposits of $100,000 or more for the year ended December 31, 2011 and
December 31, 2010 totaled $26.5 million and $30.5 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. Scheduled
maturities of certificates of deposits in amounts of $100,000 or more at December 31, 2011 were as follows:
Certificates of Deposit Maturities > $100,000
|
|
|
|
|
($s in thousands)
|
|
Amount
|
|
Three months or less
|
|
$
|
6,797
|
|
Over three months to six months
|
|
|
7,065
|
|
Over six months to twelve months
|
|
|
12,617
|
|
Over 12 months
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,479
|
|
|
|
|
|
|
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.
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. Under capital adequacy guidelines and the regulatory framework
for prompt
56
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. Service1st has an informal understanding with the FDIC and with
the Nevada FID that Service1st will maintain its Tier 1 capital in such an amount to ensure that its leverage ratio equals or exceeds 8.5%.
WLBCs and Service1sts capital ratios at December 31, 2011, relative to the ratios required of well-capitalized banks under the prompt corrective action regime put in place by
federal banking regulations, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
Capital Ratios (December 31, 2011):
|
|
WLBC
|
|
|
Service1st
|
|
|
To Be
Well
Capitalized
Under
Regulatory
Agreement
|
|
Tier 1 equity to average assets (leverage ratio)
|
|
|
25.70
|
%
|
|
|
14.4
|
%
|
|
|
5.00
|
%
|
Tier 1 risk-based capital ratio
|
|
|
70.37
|
%
|
|
|
28.4
|
%
|
|
|
6.00
|
%
|
Total risk-based capital ratio
|
|
|
71.59
|
%
|
|
|
29.7
|
%
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
Capital Ratios (December 31, 2010):
|
|
WLBC
|
|
|
Service1st
|
|
|
To Be
Well
Capitalized
Under
Regulatory
Agreement
|
|
Tier 1 equity to average assets (leverage ratio)
|
|
|
30.50
|
%
|
|
|
18.1
|
%
|
|
|
10.0
|
%
|
Tier 1 risk-based capital ratio
|
|
|
68.40
|
%
|
|
|
30.6
|
%
|
|
|
6.0
|
%
|
Total risk-based capital ratio
|
|
|
68.80
|
%
|
|
|
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 more. This commitment will not expire before October 28, 2013.
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 $89.4 million in cash and cash equivalents, $983,000 in unpledged security investments, of which $472,000 million is
classified as available for sale, while the remaining $511,000 is classified as held to maturity. WLBC also has a $1.4 million collateralized line of credit with the Federal Reserve Bank of San Francisco and a $16.2 million
collateralized line of credit with the Federal Home Loan Bank of San Francisco and a $5 million uncollateralized line of credit with Pacific Coast Bankers Bank. Both the $1.4 million line of credit with the Federal Reserve of
San Francisco and the $16.2 million line of credit with the Federal Home Loan Bank have a zero balance.
57
Liquidity is also affected by portfolio maturities and the effect of interest rate
fluctuations on the marketability of both assets and liabilities. WLBC can sell any of its unpledged securities held in the available for sale category to meet liquidity needs. These securities are also available to pledge as collateral for
borrowings, if the need should arise.
WLBCs management believes the level of liquid assets and available credit
facilities are sufficient to meet current and anticipated funding needs during the next twelve months. In addition, Service1st Banks Asset/Liability Management Committee oversees Service1st Banks liquidity position by reviewing
a monthly liquidity report. While management recognizes that Service1st may use some of its existing liquidity to issue loans during the next twelve months, it is not aware of any trends, demands, commitments, events or uncertainties that are
reasonably likely to impair WLBCs liquidity.
Off-Balance Sheet Arrangements
In the normal course of business, WLBC is a party to financial instruments with off-balance-sheet risk. These financial instruments
include commitments to extend credit and letters of credit. To varying degrees, these instruments involve elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position.
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
($ in thousands)
|
|
Commitments to extend credit
|
|
$
|
19,069
|
|
|
$
|
18,504
|
|
Standby commercial letters of credit
|
|
|
644
|
|
|
|
590
|
|
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, 2011 and December 31, 2010, the allowance for unfunded commitments was approximately $115,000 and $372,000,
respectively.
Management is not aware of any other material off-balance sheet arrangements or commitments outside of the
ordinary course of WLBCs business.
Contractual Obligations
The following table is a summary of WLBCs contractual obligations as of December 31, 2011, by contractual maturity date for the
next five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year
|
|
($s in thousands)
Contractual Obligations
|
|
Total
|
|
|
Less Than
1
Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
After
5 Years
|
|
Long Term Borrowed Funds
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Capital Lease Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations
|
|
|
1,322
|
|
|
|
816
|
|
|
|
506
|
|
|
|
|
|
|
|
|
|
Purchase Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Deposits
|
|
|
|
|
|
|
32,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long Term Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,322
|
|
|
$
|
33,513
|
|
|
$
|
506
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
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 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 non-interest bearing deposits, money market accounts and certificates of
deposit. 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, 2011, approximately 50% 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
59
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.
December 31, 2011
Sensitivity of Net Interest Income
|
|
|
|
|
|
|
|
|
Interest Rate Scenario
|
|
Adjusted Net
Interest
Income
|
|
|
Percentage
Change
from Base
|
|
|
|
(Dollars in thousands)
|
|
Up 300 basis points
|
|
$
|
7,690
|
|
|
|
7.46
|
%
|
Up 200 basis points
|
|
|
7,501
|
|
|
|
4.82
|
%
|
Up 100 basis points
|
|
|
7,318
|
|
|
|
2.26
|
%
|
BASE
|
|
|
7,157
|
|
|
|
0.00
|
%
|
Down 100 basis points
|
|
|
6,971
|
|
|
|
-2.59
|
%
|
Down 200 basis points
|
|
|
6,589
|
|
|
|
-7.93
|
%
|
December 31, 2010
Sensitivity of Net Interest Income
|
|
|
|
|
|
|
|
|
Interest Rate Scenario
|
|
Adjusted Net
Interest
Income
|
|
|
Percentage
Change
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
|
%
|
60
SELECTED HISTORICAL FINANCIAL INFORMATIONSERVICE1ST BANK OF NEVADA
Service1sts balance sheet data for the period ended October 28, 2010 and related statements of operations, changes in
shareholders equity and cash flows for the period ended October 28, 2010 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-Service1
st
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. As noted elsewhere in this Form 10-K, Service1sts results of operations are included in WLBC since October 28, 2010. Accordingly, under smaller
reporting company reporting requirements, financial information is generally only provided for 2 fiscal years (2011 and 2010). As such, the Service1st Bank financial information included is as of and for the period ended October 28, 2010 and
there is no prior financial information provided herein for Service1st. As a result, the Management Discussion and Analysis of Financial Condition and Results of Operations for Service1st does not contain any comparison or analysis to 2009, rather
provides a summary of the 2010 information for informational purposes.
SERVICE1ST BANK OF NEVADA
SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
Period Ended October 28, 2010
2010(3)
|
|
|
|
($ in thousands except per share
data)
|
|
Selected Results of Operations Data:
|
|
|
|
|
Interest income
|
|
$
|
6,620
|
|
Interest expense
|
|
|
1,147
|
|
|
|
|
|
|
Net interest income
|
|
|
5,473
|
|
Provision for loan losses
|
|
|
6,329
|
|
|
|
|
|
|
Net interest (loss) income after provision for loan losses
|
|
|
(856
|
)
|
Non-interest income
|
|
|
507
|
|
Non-interest expense
|
|
|
8,368
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(8,717
|
)
|
|
|
|
|
|
Per Share data:
|
|
|
|
|
Net loss per common share
|
|
$
|
(175.00
|
)
|
Book Value
|
|
|
330.01
|
|
Selected Balance Sheet Data:
|
|
|
|
|
Total Assets
|
|
$
|
179,956
|
|
Cash and cash equivalents
|
|
|
15,091
|
|
Certificates of deposit(4)
|
|
|
31,928
|
|
Investment securities
|
|
|
10,432
|
|
Gross loans, including net deferred loan fees
|
|
|
125,404
|
|
Allowance for loan losses
|
|
|
9,418
|
|
Deposits
|
|
|
162,066
|
|
Stockholders equity
|
|
|
16,438
|
|
Performance Ratios:
|
|
|
|
|
Net interest margin(1)
|
|
|
3.24
|
%
|
Efficiency ratio(2)
|
|
|
139.93
|
%
|
Return on average assets
|
|
|
(4.98
|
)%
|
Return on average equity
|
|
|
(46.72
|
)%
|
61
|
|
|
|
|
|
|
Period Ended October 28, 2010
2010(3)
|
|
|
|
($ in thousands except per share
data)
|
|
Asset Quality:
|
|
|
|
|
Nonperforming loans
|
|
$
|
20,326
|
|
Allowance for loan losses as a percentage of nonperforming loans
|
|
|
46.34
|
%
|
Allowance for loan losses as a percentage of portfolio loans
|
|
|
7.51
|
%
|
Nonperforming loans as a percentage of total portfolio loans
|
|
|
16.21
|
%
|
Nonperforming loans as a percentage of total assets
|
|
|
12.63
|
%
|
Net charge-offs to average portfolio loans
|
|
|
2.54
|
%
|
Capital Ratios:
|
|
|
|
|
Average equity to average assets
|
|
|
10.66
|
%
|
Tier 1 equity to average assets
|
|
|
8.70
|
%
|
Tier 1 Risk-Based Capital ratio
|
|
|
12.80
|
%
|
Total Risk-Based Capital ratio
|
|
|
14.10
|
%
|
(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 OPERATIONSSERVICE1ST 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.
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
62
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.
With total stockholders equity of $16.4 million at
October 28, 2010, Service1st had a leverage ratio (the ratio of Tier 1 equity to average assets) of 8.7% of total assets. At October 28, 2010, Tier 1 risk-based capital stood at 12.8%, and total risk-based capital at 14.10%.
Results of Operations
Variable rate loans constitute 58.21% of Service1sts portfolio for the period end October 28, 2010, and approximately 51.21% of Service1sts variable rate loans are indexed to the national
prime rate. However, a majority of these prime-rate based loans are subject to floors, ranging from 5.5% to 8.5%.
63
The following table sets forth Service1sts average balance sheet, average yields on
earning assets, average rates paid on interest-bearing liabilities, net interest margins and net interest income/spread for the period ended October 28, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended
October 28,
2010(4)
|
|
($ in thousands)
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Yield
|
|
INTEREST-EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
28,913
|
|
|
$
|
287
|
|
|
|
1.19
|
%
|
Interest-bearing deposits
|
|
|
28,880
|
|
|
|
60
|
|
|
|
0.25
|
%
|
Investment securities
|
|
|
14,483
|
|
|
|
472
|
|
|
|
3.91
|
%
|
Portfolio loans(1)
|
|
|
130,401
|
|
|
|
5,801
|
|
|
|
5.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earnings assets/interest income
|
|
|
202,677
|
|
|
|
6,620
|
|
|
|
3.92
|
%
|
NONINTEREST EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
9,285
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(7,628
|
)
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
5,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
210,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
31,710
|
|
|
$
|
349
|
|
|
|
1.32
|
%
|
Money markets
|
|
|
41,118
|
|
|
|
211
|
|
|
|
0.62
|
%
|
Savings
|
|
|
1,529
|
|
|
|
7
|
|
|
|
0.55
|
%
|
Time deposits under $100,000
|
|
|
5,780
|
|
|
|
65
|
|
|
|
1.35
|
%
|
Time deposits $100,00 and over
|
|
|
42,900
|
|
|
|
515
|
|
|
|
1.44
|
%
|
Total interest-bearing
|
|
|
123,037
|
|
|
|
1,147
|
|
|
|
1.12
|
%
|
liabilities/interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand deposits
|
|
|
63,154
|
|
|
|
|
|
|
|
|
|
Accrued interest on deposits and other liabilities
|
|
|
1,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
187,681
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
22,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
210,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and Interest rate spread(2)
|
|
|
|
|
|
$
|
5,473
|
|
|
|
2.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin(3)
|
|
|
|
|
|
|
|
|
|
|
3.24
|
%
|
Ratio of Average Interest-Earning Assets to Interest-Bearing Liabilities
|
|
|
165
|
%
|
|
|
|
|
|
|
|
|
(1)
|
Average balances include nonaccrual loans of approximately $15,066,000, for the period ended October 28, 2010 . Net loan fees or (costs) of $(180,000) are included
in the yield computation for the period ended October 28, 2010.
|
(2)
|
Net interest spread represents the average yield earned on interest earning assets less the average rate paid on interest bearing liabilities.
|
(3)
|
Net interest margin represents net interest income as a percentage of average interest-earning assets.
|
(4)
|
Service1st was acquired by Western Liberty Bancorp on October 28, 2010, thus the 2010 data represents a partial year; January 1, 2010 to October 28,
2010.
|
64
Non-Interest Income
Non-interest income primarily consists of loan documentation and late fees, service charges on deposits and other fees such as wire and ATM fees.
Non-Interest Expense
The following table sets for the principal elements
of non-interest expenses for 2010.
|
|
|
|
|
($ in thousands)
|
|
Period Ended
2010(1)
|
|
Non-interest expenses:
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
3,536
|
|
Occupancy, equipment and depreciation
|
|
|
1,360
|
|
Computer service charges
|
|
|
243
|
|
Professional fees
|
|
|
1,605
|
|
Advertising and business development
|
|
|
79
|
|
Insurance
|
|
|
705
|
|
Telephone
|
|
|
87
|
|
Stationary and supplies
|
|
|
26
|
|
Director fees
|
|
|
34
|
|
Loss on disposition of equipments
|
|
|
0
|
|
Other real estate owned
|
|
|
654
|
|
Provision for unfunded commitments
|
|
|
(471
|
)
|
Other
|
|
|
510
|
|
|
|
|
|
|
Total non-interest expenses
|
|
$
|
8,368
|
|
|
|
|
|
|
(1)
|
For the period January 1, 2010 through October 28, 2010.
|
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
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and due from banks, federal funds sold and certificates of deposits with original maturities of
three months or less. Cash and cash equivalents totaled $15.1 million at October 28, 2010.
65
Investment Securities and Certificates of Deposits held at other Banks
The tables below summarize Service1sts investment portfolio for the period ended October 28, 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 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
|
|
(Dollars in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
InvestmentsAvailable 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
|
|
(Dollars in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrecognized
Gains
|
|
|
Gross
Unrecognized
Losses
|
|
|
Fair
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes the maturity dates and investment yields on Service1sts investment
portfolio for the period ended October 28, 2010 for securities identified as available for sale or held to maturity.
For
the period ended October 28, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due Under
1 Year
Amount/Yield
|
|
|
Due 1-5 Years
Amount/Yield
|
|
|
Due 5-10 Years
Amount/Yield
|
|
|
Due Over
10 Years
Amount/Yield
|
|
|
Total
Amount/Yield
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
1,002
|
|
|
|
1.50
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
1,002
|
|
|
|
1.50
|
%
|
Corporate Debt Securities
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Collateralized Mortgage Obligations-commercial
|
|
|
978
|
|
|
|
6.28
|
%
|
|
|
870
|
|
|
|
5.82
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
1,848
|
|
|
|
6.06
|
%
|
Small Business Administration Loan Pools
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
978
|
|
|
|
6.28
|
%
|
|
$
|
1,872
|
|
|
|
3.51
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
2,850
|
|
|
|
4.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency Securities
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
Corporate Debt Securities
|
|
|
4,027
|
|
|
|
5.36
|
%
|
|
|
3,153
|
|
|
|
5.19
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
7,180
|
|
|
|
5.29
|
%
|
Collateralized Mortgage Obligations-commercial
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Small Business Administration Loan Pools
|
|
|
7
|
|
|
|
3.12
|
%
|
|
|
15
|
|
|
|
5.13
|
%
|
|
|
100
|
|
|
|
2.91
|
%
|
|
|
540
|
|
|
|
3.27
|
%
|
|
|
662
|
|
|
|
3.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
4,034
|
|
|
|
5.36
|
%
|
|
$
|
3,168
|
|
|
|
5.19
|
%
|
|
$
|
100
|
|
|
|
2.91
|
%
|
|
$
|
540
|
|
|
|
3.27
|
%
|
|
$
|
7,842
|
|
|
|
5.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
Loans
As of October 28, 2010, substantially all of Service1sts loan customers were located in Nevada.
The following table summarizes the composition of Service1sts loan portfolio by type and percentage of the loan portfolio for the date indicated.
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
For the Period Ended
October 28, 2010
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
9,225
|
|
|
|
7.35
|
%
|
Commercial real estate
|
|
|
62,963
|
|
|
|
50.22
|
%
|
Residential (1 to 4 family)
|
|
|
10,282
|
|
|
|
8.20
|
%
|
|
|
|
|
|
|
|
|
|
Total real estate-secured loans
|
|
|
82,470
|
|
|
|
65.77
|
%
|
Loans not secured by real estate:
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
42,778
|
|
|
|
34.12
|
%
|
Consumer
|
|
|
136
|
|
|
|
0.11
|
%
|
|
|
|
|
|
|
|
|
|
Loans, Gross
|
|
|
125,384
|
|
|
|
100.00
|
%
|
Net deferred loan fees
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan, Gross, net of deferred fees
|
|
|
125,404
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(9,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Net
|
|
$
|
115,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
One Year
|
|
|
Due 1-5 Years
|
|
|
Due Over
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
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.
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 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).
68
The following table sets forth nonperforming assets at the date indicated by
category of asset.
|
|
|
|
|
($s in thousands)
|
|
For the Period Ended
October 28, 2010
|
|
Nonaccrual loans:
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
5,977
|
|
Commercial real estate
|
|
|
8,611
|
|
Residential real estate (1-4 family)
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
14,588
|
|
Commercial and industrial
|
|
|
5,739
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
|
20,327
|
|
Past due (>90days) loans and accruing interest:
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
Construction, land development and other land loans
|
|
|
|
|
Commercial real estate
|
|
|
|
|
Residential real estate (1-4 family)
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
Total past due loans accruing interest
|
|
|
|
|
Restructured loans (still on accrual)(1)
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
20,327
|
|
Other real estate owned (OREO)
|
|
|
2,403
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
22,730
|
|
|
|
|
|
|
Non-Performing Loans as a percentage of total portfolio loans
|
|
|
16.21
|
%
|
Non-Performing Loans as a percentage of total assets
|
|
|
11.30
|
%
|
Non-Performing assets as a percentage of total assets
|
|
|
12.63
|
%
|
Allowance for loan losses as a percentage of nonperforming loans
|
|
|
46.34
|
%
|
(1)
|
For the period ended October 28, 2010 Service1st had approximately $11.0 million, in loans classified as restructured loans. All of such loans were on
nonaccrual.
|
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. 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.
69
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 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
|
|
|
|
# of
Loans
|
|
|
Loan
Balance
|
|
|
%
|
|
|
Percent of
Total
Loans
|
|
Construction, land development and other land loans
|
|
|
1
|
|
|
$
|
856
|
|
|
|
5.75
|
%
|
|
|
0.68
|
%
|
Commercial real estate
|
|
|
4
|
|
|
|
4,319
|
|
|
|
28.97
|
%
|
|
|
3.44
|
%
|
Residential real estate (1-4 family)
|
|
|
1
|
|
|
|
2,909
|
|
|
|
19.51
|
%
|
|
|
2.32
|
%
|
Commercial and industrial
|
|
|
16
|
|
|
|
6,824
|
|
|
|
45.77
|
%
|
|
|
5.44
|
%
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
22
|
|
|
$
|
14,908
|
|
|
|
100
|
%
|
|
|
11.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service1sts potential problem loans consisted of 22 loans and totaled approximately
$14.9 million for the period ended October 28, 2010.
Impaired Loans
For the period ended October 28, 2010 the aggregate total amount of loans classified as impaired, was $26.9 million. The total
specific allowance for loan losses related to these loans was $5.4 million for the period ended October 28, 2010. The increase in total impaired loans reflects the overall decline in economic conditions in Nevada.
For the period ended October 28, 2010 Service1st had approximately $11.0 million in loans classified as restructured
loans.
The breakdown of total impaired loans and the related specific reserves for the period ended October 28, 2010 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At October 28, 2010
|
|
($ in thousands)
|
|
Impaired
Balance
|
|
|
%
|
|
|
Percent of
Total
Loans
|
|
|
Reserve
Balance
|
|
|
%
|
|
|
Percent
of
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of interest income recognized on impaired loans for the period ended October 28, 2010 is
approximately $147,000.
70
Allowance for Loan Losses
The following table presents the activity in Service1sts allowance for loan losses for the period indicated.
|
|
|
|
|
Analysis of Loss Experience by Loan Type
($s in thousands)
|
|
For the Period Ended
October 28, 2010
|
|
Allowance for Loan and Lease Loss:
|
|
|
|
|
Balance at the beginning of the period
|
|
$
|
6,404
|
|
Provisions charged to operating expenses
|
|
|
6,329
|
|
Recoveries of loans previously charged off:
|
|
|
|
|
Construction, land development and other land loans
|
|
|
293
|
|
Commercial real estate
|
|
|
0
|
|
Residential real estate (1-4 family)
|
|
|
1
|
|
Commercial and industrial
|
|
|
321
|
|
Consumer
|
|
|
0
|
|
|
|
|
|
|
Total recoveries
|
|
|
615
|
|
|
|
|
|
|
Loans charged-off:
|
|
|
|
|
Construction, land development and other
|
|
|
1,151
|
|
Commercial
|
|
|
922
|
|
Residential (including multi-family)
|
|
|
202
|
|
Commercial and industrial
|
|
|
1,655
|
|
Consumer
|
|
|
0
|
|
Total charged-off
|
|
|
3,930
|
|
|
|
|
|
|
Net charge-offs
|
|
|
3,315
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
9,418
|
|
|
|
|
|
|
Net Charge-offs to average loans outstanding
|
|
|
2.54
|
%
|
Allowance for Loan Loss to outstanding loans
|
|
|
7.51
|
%
|
The accounting principles used by Service1st in maintaining the allowance for loan losses are
discussed in the section entitled
Critical Accounting PoliciesAllowance 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 $3.9 million.
The following table presents the allocation of Service1sts allowance for loan losses by loan category and percentage of loans in
each category to total loans as of the dates indicated.
71
Allocation of the Allowance and percentage of allowance by loan type:
|
|
|
|
|
|
|
|
|
|
|
For the Period
Ended
October 28, 2010
|
|
($s in thousands)
|
|
Amount
|
|
|
% of loans
|
|
Allowance for Loan and Lease Loss:
|
|
|
|
|
|
|
|
|
Loans Secured by Real Estate
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans
|
|
$
|
318
|
|
|
|
7.36
|
%
|
Commercial real estate
|
|
|
3,019
|
|
|
|
50.22
|
%
|
Residential real estate (1-4 family)
|
|
|
737
|
|
|
|
8.20
|
%
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
4,074
|
|
|
|
65.77
|
%
|
Commercial and industrial
|
|
|
5,339
|
|
|
|
34.12
|
%
|
Consumer
|
|
|
5
|
|
|
|
0.11
|
%
|
|
|
|
|
|
|
|
|
|
Total allowance for loan loss
|
|
$
|
9,418
|
|
|
|
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. 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 . Accordingly, the allowance for loan losses of $5.3 million was allocated to this category for the period ended October 28, 2010.
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. 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. Accordingly,
the allowance for loan losses of $318,000 was allocated to this category for the period ended October 28, 2010 .
Service1sts commercial real estate loan category had charge-offs of $922,000 and no recoveries for the period ended
October 28, 2010. 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. Accordingly, the allowance for loan losses
of $3.0 million was allocated to this category for the period ended October 28, 2010.
Service1sts residential
real estate loan category had charge-offs of $202,000 and $1,000 in recoveries for the period ended October 28, 2010. 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. Accordingly, the allowance for loan losses of $737,000 was allocated to this category for the period ended October 28, 2010.
Deposits
The following table reflects the summary of deposit categories by
dollar and percentage for the period ended October 28, 2010.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
($s in thousands)
|
|
Amount
|
|
|
% of Total
|
|
Non-interest-bearing deposits
|
|
$
|
68,575
|
|
|
|
42.31
|
%
|
Interest-bearing deposits
|
|
|
29,018
|
|
|
|
17.91
|
%
|
Money Markets
|
|
|
28,316
|
|
|
|
17.47
|
%
|
Savings
|
|
|
1,065
|
|
|
|
0.66
|
%
|
Time deposits under $100,000
|
|
|
4,888
|
|
|
|
3.02
|
%
|
Time deposits $100,000 and over
|
|
|
30,204
|
|
|
|
18.64
|
%
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
162,066
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
72
Certificates of deposits of $100,000 or more for the period ended October 28, 2010
totaled $30.2 million. 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 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
|
|
|
|
|
|
|
Liquidity and Asset/Liability Management
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
$18.1 million line of credit with the FHLB have a zero balance.
Off-Balance Sheet Arrangements
In the normal course of business, Service1st is a party to financial instruments with off-balance-sheet risk. These financial
instruments include commitments to extend credit and letters of credit. To varying degrees, these instruments involve elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position.
|
|
|
|
|
|
|
For the Period
Ended
October 28,
|
|
|
|
2010
|
|
|
|
($ in thousands)
|
|
Commitments to extend credit
|
|
|
15,965
|
|
Commitments to extend credit to directors and officers (undisbursed amount)
|
|
|
2,392
|
|
Standby/commercial letters of credit
|
|
|
695
|
|
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 the allowance for unfunded commitments was approximately $348,000.
Management is not aware of any other material off-balance sheet arrangements or commitments outside of the ordinary course of
Service1sts business.
73
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 27.
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[Management to update]
(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, 2011. 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, 2011, 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
During the quarter ended December 31, 2011, there have not been significant changes in our internal controls that would materially
affect, or are reasonably likely to affect, our internal control over financial reporting.
(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.
74
Management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2011, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal ControlIntegrated Framework.
Based on that assessment, management concluded that, as of
December 31, 2011, our internal control over financial reporting is effective based on those criteria established in
Internal ControlIntegrated 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.
The annual report on Form 10-K does not include an attestation report of our registered public accounting firm
regarding internal control over final reporting pursuant to rules of the SEC applicable to nonaccelerated filers.
Item 9B
Other Information
None
75
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 2012 annual meeting
of stockholders. The proxy statement is incorporated by reference.
Executive Officers of the Registrant
The names, ages, and positions of the executive officers as of February 28, 2012 are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
William E. Martin
|
|
|
69
|
|
|
Chief Executive Officer
|
Patricia A. Ochal
|
|
|
46
|
|
|
Chief Financial Officer
|
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.
Patricia A. Ochal
currently has served as
our Chief Financial Officer since late December of 2011. 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.
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 TeamleaderEmerging 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
76
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 DirectorsJump Start, and
ProspectorsReno.
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 2012 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 to be
issued upon
exercise
of
outstanding
options, warrants,
and rights
|
|
|
Weighted-average
exercise price of
outstanding
options, warrants,
and rights
|
|
|
Number of
securities
remaining available
for future issuance
under equity
compensation
plans
(excluding
securities
reflected in column
(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 to acquire common stock, adjusted for the exchange ratio applicable to the Acquisition. 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
|
77
|
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 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 2012 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 2012 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 2012 annual meeting of stockholders. The proxy statement is incorporated by reference.
78
PART IV
Item 15
Exhibits and Financial Statement Schedules
(a) (1)
Financial statements filed as part of this Form 10-K.
79
Table of Contents
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
80
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Western
Liberty Bancorp
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Western Liberty Bancorp as of December 31, 2011 and 2010, 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 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 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, 2011 and 2010, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Crowe Horwath LLP
Sherman Oaks, California
March 14, 2012
81
WESTERN LIBERTY BANCORP
CONSOLIDATED BALANCE SHEETS
($000S EXCEPT PER SHARE DATE)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
11,227
|
|
|
$
|
11,675
|
|
Money market funds
|
|
|
100
|
|
|
|
52,206
|
|
Interest-bearing deposits in banks
|
|
|
78,026
|
|
|
|
39,346
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
89,353
|
|
|
|
103,227
|
|
Certificates of deposits
|
|
|
|
|
|
|
26,889
|
|
Securities, available for sale
|
|
|
472
|
|
|
|
1,819
|
|
Securities, held to maturity (estimated fair value of $2,035 and $5,287 at December 31, 2011 and 2010,
respectively)
|
|
|
2,031
|
|
|
|
5,314
|
|
Loans, net of allowance of $2,919 and $36 at December 31, 2011 and 2010 respectively.
|
|
|
98,942
|
|
|
|
106,223
|
|
Premises and equipment, net
|
|
|
818
|
|
|
|
1,228
|
|
Other real estate owned, net
|
|
|
4,008
|
|
|
|
3,406
|
|
Goodwill, net
|
|
|
|
|
|
|
5,633
|
|
Other intangibles, net
|
|
|
670
|
|
|
|
768
|
|
Accrued interest receivable and other assets
|
|
|
1,996
|
|
|
|
3,039
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
198,290
|
|
|
$
|
257,546
|
|
|
|
|
|
|
|
|
|
|
Liabilities And Stockholders Equity
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
|
50,488
|
|
|
$
|
67,087
|
|
Interest bearing:
|
|
|
70,738
|
|
|
|
93,199
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
121,226
|
|
|
|
160,286
|
|
Accrued interest payable and other liabilities
|
|
|
1,023
|
|
|
|
3,431
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
122,249
|
|
|
|
163,717
|
|
Commitments and contingencies (Note 16)
|
|
|
|
|
|
|
|
|
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 issued and 13,466,535 outstanding at
December 31, 2011 and 15,088,023 issued and outstanding at December 31, 2010
|
|
|
1
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
117,846
|
|
|
|
117,317
|
|
Treasury stock 1,621,488 shares, at cost
|
|
|
(4,094
|
)
|
|
|
|
|
Accumulated deficit
|
|
|
(37,717
|
)
|
|
|
(23,489
|
)
|
Accumulated other comprehensive income, net
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
76,041
|
|
|
|
93,829
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
198,290
|
|
|
$
|
257,546
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
82
WESTERN LIBERTY BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
($000 EXCEPT PER SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
9,253
|
|
|
$
|
1,403
|
|
Securities, taxable
|
|
|
260
|
|
|
|
47
|
|
Federal funds sold and other
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
$
|
9,513
|
|
|
$
|
1,530
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
484
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
484
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
9,029
|
|
|
|
1,415
|
|
Provision for loan losses
|
|
|
8,717
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
312
|
|
|
|
1,379
|
|
|
|
|
|
|
|
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
Service charges
|
|
|
302
|
|
|
|
57
|
|
Change in fair value of contingent consideration
|
|
|
1,816
|
|
|
|
|
|
Other
|
|
|
289
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,407
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
3,242
|
|
|
|
1,461
|
|
Occupancy, equipment and depreciation
|
|
|
1,490
|
|
|
|
269
|
|
Computer service charges
|
|
|
294
|
|
|
|
51
|
|
Federal deposit insurance
|
|
|
524
|
|
|
|
90
|
|
Legal and professional fees
|
|
|
2,634
|
|
|
|
3,851
|
|
Advertising and business development
|
|
|
97
|
|
|
|
7
|
|
Insurance
|
|
|
284
|
|
|
|
825
|
|
Printing and supplies
|
|
|
283
|
|
|
|
314
|
|
Director Fees
|
|
|
225
|
|
|
|
25
|
|
Stockbased compensation
|
|
|
529
|
|
|
|
1,771
|
|
Provision for unfunded commitments
|
|
|
(257
|
)
|
|
|
|
|
OREO Property Impairment
|
|
|
797
|
|
|
|
|
|
Goodwill Impairment
|
|
|
5,633
|
|
|
|
|
|
Other
|
|
|
1,172
|
|
|
|
473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,947
|
|
|
|
9,137
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,228
|
)
|
|
$
|
(7,650
|
)
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
$
|
(0.96
|
)
|
|
$
|
(0.65
|
)
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share
|
|
$
|
(0.96
|
)
|
|
$
|
(0.65
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
83
WESTERN LIBERTY BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2011, and 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Loss
|
|
|
Common Stock Issued
and Outstanding
|
|
|
Additional
Paid-in-
Capital
|
|
|
Earnings
(Deficit)
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Treasury
Stock
|
|
|
Total
|
|
|
|
|
Shares
|
|
|
Amounts
|
|
|
|
|
|
|
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 Service 1
st
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
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
529
|
|
Net loss
|
|
|
(14,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,228
|
)
|
|
|
|
|
|
|
|
|
|
|
(14,228
|
)
|
Other comprehensive income
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
Treasury Stock Purchases, including forfeited restricted shares
|
|
|
|
|
|
|
(1,621,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,094
|
)
|
|
|
(4,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(14,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
|
|
|
|
13,466,535
|
|
|
$
|
1
|
|
|
$
|
17,846
|
|
|
$
|
(37,717
|
)
|
|
$
|
5
|
|
|
$
|
(4,094
|
)
|
|
$
|
76,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
84
WESTERN LIBERTY BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2011 and 2010
($000S EXCEPT PER SHARE)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,228
|
)
|
|
$
|
(7,650
|
)
|
Adjustments to reconcile net loss to net cash used in Operating activities:
|
|
|
|
|
|
|
|
|
Accretion of loan discount, net
|
|
|
(3,637
|
)
|
|
|
(436
|
)
|
Amortization of core deposit intangible
|
|
|
98
|
|
|
|
16
|
|
Oreo property impairment
|
|
|
797
|
|
|
|
|
|
Goodwill Impairment
|
|
|
5,633
|
|
|
|
|
|
Contingent liability (change in fair value)
|
|
|
(1,816
|
)
|
|
|
|
|
Amortization of lease liability
|
|
|
(93
|
)
|
|
|
(31
|
)
|
Amortization of time deposit premium
|
|
|
(41
|
)
|
|
|
(5
|
)
|
Depreciation of premises and equipment
|
|
|
433
|
|
|
|
72
|
|
Amortization of securities premiums/discounts, net
|
|
|
185
|
|
|
|
28
|
|
Gain on disposition of other real estate owned
|
|
|
(34
|
)
|
|
|
|
|
Provision for loan losses
|
|
|
8,717
|
|
|
|
36
|
|
Stock compensation expense
|
|
|
529
|
|
|
|
1,771
|
|
Prepaid expenses and other assets
|
|
|
1,047
|
|
|
|
343
|
|
Accrued interest payable and other liabilities
|
|
|
(499
|
)
|
|
|
(708
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,909
|
)
|
|
|
(6,564
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from certificates of deposit
|
|
$
|
26,889
|
|
|
$
|
5,039
|
|
Purchases of securities available for sale
|
|
|
(250
|
)
|
|
|
|
|
Proceeds from maturities of securities available for sale
|
|
|
198
|
|
|
|
1,000
|
|
Proceeds from principal paydowns of securities available for sale
|
|
|
1,370
|
|
|
|
23
|
|
Proceeds from maturities of securities held to maturity
|
|
|
3,000
|
|
|
|
2,500
|
|
Proceeds from principal paydowns of securities held to maturity
|
|
|
128
|
|
|
|
10
|
|
Purchase of premises and equipment
|
|
|
(23
|
)
|
|
|
(16
|
)
|
Cash acquired from acquisition
|
|
|
|
|
|
|
15,090
|
|
Proceeds from disposition of other real estate owned
|
|
|
1,075
|
|
|
|
|
|
Net decrease (increase) in loans
|
|
|
(239
|
)
|
|
|
3,453
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
32,148
|
|
|
|
27,099
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net (decrease) in deposits
|
|
|
(39,019
|
)
|
|
|
(1,826
|
)
|
Cash payments for warrants
|
|
|
|
|
|
|
(2,884
|
)
|
Cash payments for dissenter common shares
|
|
|
|
|
|
|
(567
|
)
|
Payments to purchase treasury stock
|
|
|
(4,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(43,113
|
)
|
|
|
(5,277
|
)
|
(Decrease) increase in cash and cash equivalents
|
|
|
(13,874
|
)
|
|
|
15,258
|
|
Cash and cash equivalents, beginning
|
|
|
103,227
|
|
|
|
87,969
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, ending
|
|
$
|
89,353
|
|
|
$
|
103,227
|
|
|
|
|
|
|
|
|
|
|
Supplementary cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid on deposits and other borrowed funds
|
|
$
|
478
|
|
|
$
|
124
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash operating and investing activities:
|
|
|
|
|
|
|
|
|
Transfers of loans to other real estate owned
|
|
$
|
2,440
|
|
|
$
|
1,003
|
|
Principal paydowns on SBA loan pool securities reclassified to other assets
|
|
$
|
4
|
|
|
$
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
163,806
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed:
|
|
$
|
|
|
|
$
|
2,022
|
|
|
|
|
|
|
|
|
|
|
Net non-cash assets acquired (liabilities assumed):
|
|
$
|
|
|
|
$
|
15,090
|
|
|
|
|
|
|
|
|
|
|
Net cash and cash equivalents (paid) acquired
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
85
WESTERN LIBERTY BANCORP
NOTES TO FINANCIAL STATEMENTS
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, stock purchase, reorganization or similar business
combination with one or more businesses. WLBC consummated on November 27, 2007 and received net proceeds of $305,658,960 therefrom and $8,500,000 from concurrent private placement of warrants to WLBCs founders. Substantially all of the
net proceeds of the Offering were placed in a trust account and 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. On October 7, 2009, stockholders approved certain amendments to its Amended and Restated
Certificate of Incorporation removing certain provisions specific to special purpose acquisition companies, changing its name to Western Liberty Bancorp and authorizing the distribution and termination of the trust account. Effective
October 7, 2009, WLBC began its business operations and exited its development stage. WLBC owns two subsidiaries; Service1st Bank of Nevada and Las Vegas Sunset Properties, and currently conducts no business activities other than acting as the
holding company of Service1st and Las Vegas Sunset Properties.
Service1st Bank of Nevada (Service1st), is a community
bank which commenced operations as a financial institution on January 16, 2007. Service1st provides a full range of deposit, lending and other banking services to locally owned businesses, professional firms, individuals and other customer
from its headquarters and two retail banking facilities located in the greater Las Vegas area. Services provided include basic commercial and consumer depository services, commercial working capital and equipment loans, commercial real estate loans
and other traditional commercial banking services. Service1st relies primarily on locally generated deposits to fund its lending activities. Service1st has two branches located in Las Vegas, Nevada, which accept deposits and grant loans to
customers. 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.
Las Vegas Sunset Properties was established in 2011 for the purpose of owning and managing certain nonperforming and subperforming
assets. As a result, certain OREO assets with an estimated carrying basis of $4 million were acquired by this subsidiary from Service1st on December 28 2011. These assets are accounted for on a lower of cost or fair value basis and the assets
were transferred on a consistent basis with no resulting transaction gain or loss.
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
86
revised business plan to the FDIC in the fourth quarter of 2009. The FDIC also advised all
de novo
banks that during the remainder of the seven-year
de novo
period, banks will
remain on a 12-month risk management examination cycle and be subject to enhanced supervision for compliance examinations and Community Reinvestment Act evaluations.
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 an informal 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, 2011, Service1sts Tier 1 leverage ratio was 14.4% and total risk-based capital was 29.7%); (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.
On October 20, 2011 the companys consent order was terminated and replaced with an informal understanding with the
FDIC and the Nevada that encompasses some requirements such as the Bank shall retain
87
management qualified to restore the Bank to satisfactory condition and the Board will revise the three-year business plan. The Bank must also meet certain criteria such as updating its written
plan for reducing total adverse classifications and exposure for each classified asset, correct apparent violations listed in the ROE and implement procedures to prevent future violations, the Bank shall furnish written progress reports to the
Regional Director and Commissioner detailing actions taken to comply with this informal agreement.
The Federal Reserve
notified Western Liberty by letter dated December 15, 2011 that Western Liberty must obtain advance approval for the appointment of new directors or senior executives and Western Liberty is subject to the golden parachute compensation
limitations of 12 C.F.R. Part 359.
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.
The consolidated financial statements include WLBC and its wholly owned subsidiaries, Service1st and Las Vegas Sunset Properties
collectively, the Company for the year ended December 31, 2011. Intercompany transactions and balances are eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally
accepted in the United States of America and general practice in the banking industry. A summary of the significant accounting policies used by the Company are as follows:
Use of estimates in the preparation of financial statements
To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. Material estimates relate to the determination of the
allowance for loan losses, deferred tax assets, and the value of other real estate owned and can particularly be susceptible to significant change in the near term.
Cash and cash equivalents
For purposes of reporting cash
flows, cash and cash equivalents include cash on hand, amounts due from banks (including cash items in process of clearing), and interest-bearing deposits in banks with original maturities of 90 days or less. Cash flows from loans originated by
the Company, deposits, and certificates of deposit, are reported net.
At December 31, 2011, 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 $8.1 million.
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-
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
88
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 collectability of the principal is unlikely.
Subsequent recoveries, if any, are credited to the allowance.
The allowance is an amount that management believes will be
adequate to absorb probable incurred losses on existing loans that may become uncollectible, based on evaluation of the collectability of loans and prior credit loss experience of the Company and peer bank historical loss experience. This evaluation
also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, specific problem credits, peer bank information, and current economic conditions that may affect the 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 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.
89
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 which the terms have been modified resulting in a concession, and which the borrower is experiencing financial difficulties, are
considered troubled debt restructurings and classified as impaired.
Factors considered by management in determining
impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
All loans that are graded substandard are individually evaluated for impairment. If a loan is impaired, the loan is adjusted to the lower of net present value or collateral value if real estate secured.
This adjustment is allocated as a portion of the allowance. 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 at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of
reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers non-impaired
loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent three years.
This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans;
levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; national and local economic trends and conditions. The following portfolio segments have been identified:
1. Loans secured real estate construction, land development and other land loans
2. Commercial real estate
3. Residential real estate
4. Commercial and industrial
5. Consumer
These are generally the segments identified in regulatory reporting. Service1st Bank primarily focuses on the small business market
and, therefore, generates most of its loans in the area of commercial real estate and commercial and industrial loans. By segmenting into these categories, the bank is able to monitor the exposure to the related risks and observe compliance with
regulatory guidance and limitations.
The Company, as a result of its purchase of Service1st Bank of Nevada on
October 28, 2010, acquired a portfolio of loans, some of which have shown evidence of credit deterioration since origination. These purchased loans are recorded at fair value and there was 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 had been made between October 28, 2010
and December 31, 2010 because no additional deterioration of the loan portfolio had been identified. After acquisition, losses have been recognized by an increase in the allowance for loan losses for additional credit deterioration in this
portfolio.
Purchased loans with credit impairment are accounted for individually or aggregated into pools of loans based on
common risk characteristics such as, loan type, and date of origination. The Company estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flows in excess
90
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 all classes of loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection.
All interest accrued but not collected for loans that are placed on nonaccrual status or charged off is reversed against interest income. The interest on all classes of loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loan origination fees, a mark to market of the credit and yield components of the loan, commitment fees and certain direct
loan origination costs are deferred and the net amount amortized as an adjustment to the related loans yield. The Company is generally amortizing these amounts over the contractual life of the loan. Fees related to standby letters of credit
are recognized over the commitment period.
Transfers of financial assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred
assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. The 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.
Advertising costs
Advertising costs are expensed as incurred.
91
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the assets. Improvements to leased property are amortized over the lesser of the term of the lease or life of the improvements. Depreciation and amortization is computed using the following
estimated lives:
|
|
|
|
|
Years
|
Furniture and fixtures
|
|
7 10
|
Equipment and vehicles
|
|
3 5
|
Leasehold improvements
|
|
5 10
|
Goodwill and other intangible assets
Goodwill resulting from a business combination after January 1, 2009, is generally determined as the excess of the fair value of the
consideration transferred, plus the fair value of any non-controlling interests in the acquire, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase
business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected October 31st as the date to perform the annual impairment test, unless there are
events which require an analysis to be completed at an earlier date. 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. See Footnote 7
Goodwill Intangibles
for further discussion of the
goodwill impairment charge taken during 2011.
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, 2011, the Company has prepaid approximately $535,000 or approximately 1 year, of its FDIC insurance premiums which will be amortized through 2012.
The Company, as a member of the FHLB system, is required to maintain an investment in capital stock of the FHLB of an amount pursuant to
the agreement with the FHLB. These investments are recorded at cost since no ready market exists for them, and they have no quoted market value. As of December 31, 2011, the Companys investment in the FHLB was $574,000 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, 2011 and the Company does not believe that its investment in the FHLB is impaired as of this date. However,
this estimate could change in the near term as a result of any of the following events: (1) significant OTTI losses are incurred on the mortgage-backed securities (MBS) portfolio of the FHLB of San Francisco, causing a significant decline
in regulatory capital ratios; (2) the economic losses resulting from credit deterioration on the MBS increases significantly; and (3) capital preservation strategies being utilized by the FHLB become ineffective.
92
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 13. 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.
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
93
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
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, 2011. The estimated fair value amounts as of December 31, 2011 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 December 31, 2011
and 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 50% of the loan portfolio as of December 31, 2011. 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.
94
Accrued interest receivable and payable
The carrying amounts reported in the balance sheets 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.
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.
Contingent Consideration
Contingent consideration is measured at its estimated fair value on a quarterly basis by management and material fair value adjustments are recorded in the period they occur. The fair value of the
contingent consideration is determined based on various models, which take into account the expected value of the Companys stock, taking into account current and projected values, volatility, and other factors. During the third quarter of 2011
it was determined based on the continued decline in stock price, the volatility of the stock and current market conditions, the performance of the company, the goodwill impairment and the remaining time that the contingency is in place, that the
probability of reaching the prescribed targets was nominal. As a result, management reversed all of the contingent consideration liability. The company will continue to reevaluate this determination on a quarterly basis.
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.
95
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, 2011 have been reclassified to conform to the
current presentation, with no impact in previously reported stockholders equity or net loss.
Recent accounting
pronouncements
In April 2011, the FASB issued an accounting standard updated to amend previous guidance with respect
to troubled debt restructurings. This updated guidance is designed to assist creditors with determining whether or not a restructuring constitutes a troubled debt restructuring. In particular, additional guidance has been added to help creditors
determine whether a concession has been granted and whether a debtor is experiencing financial difficulties. Both of these conditions are required to be met for a restructuring to constitute a troubled debt restructuring. The amendments in the
update are effective for the first interim period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Also of note is that the update deferred the additional required
disclosures surrounding trouble debt restructurings to interim and annual periods beginning after June 15, 2011. The additional trouble debt restructuring disclosures which are required in the third quarter 2011 include the amount and type of
trouble debt restructurings which occurred during the period in addition to the amount and type of defaults of troubled debt restructurings that had been restructured in the preceding 12 months. The provisions of this update did not have a material
impact on the Companys financial position, results or operations or cash flows.
Newly issued but not yet
effective accounting standards
In May 2011, the FASB issued an accounting standards update to improve the
comparability between US GAAP fair value accounting and reporting requirements and International Financial Reporting Standards (IFRS) fair value accounting and reporting requirements. Additional disclosures required by the update include:
(i) Disclosure of quantitative information regarding the unobservable inputs used in any fair value measurement classified as Level 3 in the fair value hierarchy in addition to an explanation of the valuation techniques used in valuing Level 3
items and information regarding the sensitivity in the valuation of Level 3 items to changes in the values assigned to unobservable inputs. (ii) Categorization by level within the fair value hierarchy of items not recognized on the Statement of
Financial Position at fair value but for which fair values are required to be disclosed. (iii) Instances where the fair values disclosed for non-financial assets were based on a highest and best use assumption when in fact the assets are not
being utilized in that capacity. The amendments in the update are effective for interim and annual periods beginning on or after December 15, 2011. The provisions of this update are not expected to have a material impact on the Companys
financial position, results of operations or cash flows.
FASB ASU 2011-05, Presentation of Comprehensive Income (Topic
220)This ASU is intended to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in
other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders equity, among
other amendments in this Update. These amendments apply to all entities that report items of other comprehensive income, in any period presented. Under the amendments to Topic 220, an entity has the option to present the total of comprehensive
income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but
96
consecutive statements. The FASB issued FASB ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other
Comprehensive Income in Accounting Standards Update No. 2011-05 that defers the effective date of ASU 2011-05. The deferral is temporary until the FASB reconsiders the operational concerns and needs of financial statement users. The FASB
has not yet established a timetable for its reconsideration.
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 loan fair value 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.
97
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
|
|
|
|
|
|
|
98
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 $102.9 million on the date of
acquisition.
Purchased loans for which it was probable, at acquisition, that all contractually required payments would not be
collected are as follows:
|
|
|
|
|
($ 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
|
|
|
|
|
|
|
The following table presents
pro forma
information as if the acquisition had occurred at the
beginning of 2010. 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
|
|
Net interest income
|
|
$
|
7,098
|
|
Net (loss) income
|
|
$
|
(14,753
|
)
|
Basic earnings per share
|
|
$
|
(0.98
|
)
|
Diluted earnings per share
|
|
$
|
(0.98
|
)
|
99
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 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, 2011
|
|
($ in 000s)
Description
|
|
Total
|
|
|
Quoted Prices in
Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agencies
|
|
$
|
253
|
|
|
$
|
|
|
|
$
|
253
|
|
|
$
|
|
|
Collateralized Mortgage Obligation Securities-commercial
|
|
$
|
219
|
|
|
|
|
|
|
|
219
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
472
|
|
|
$
|
|
|
|
$
|
472
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2010
|
|
($ in 000s)
Description
|
|
Total
|
|
|
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized Mortgage Obligation Securities-commercial
|
|
$
|
1,819
|
|
|
$
|
|
|
|
$
|
1,819
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between Level 1 and Level 2 during 2010.
100
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, 2011
|
|
($ in 000s)
Description
|
|
Total
|
|
|
Quoted Prices in
Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Impaired loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land
|
|
$
|
2,113
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,113
|
|
Commercial real estate
|
|
|
18,221
|
|
|
|
|
|
|
|
|
|
|
|
18,221
|
|
Residential real estate
|
|
|
3,698
|
|
|
|
|
|
|
|
|
|
|
|
3,698
|
|
Commercial and industrial
|
|
|
2,312
|
|
|
|
|
|
|
|
|
|
|
|
2,312
|
|
Other real estate owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction , land development and other land
|
|
|
2,230
|
|
|
|
|
|
|
|
|
|
|
|
2,230
|
|
Commercial and industrial
|
|
|
1,778
|
|
|
|
|
|
|
|
|
|
|
|
1,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,352
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
30,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2010
|
|
($ in 000s)
Description
|
|
Total
|
|
|
Quoted Prices in
Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Impaired loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land
|
|
$
|
3,220
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,220
|
|
Commercial real estate
|
|
|
1,648
|
|
|
|
|
|
|
|
|
|
|
|
1,648
|
|
Residential real estate
|
|
|
2,900
|
|
|
|
|
|
|
|
|
|
|
|
2,900
|
|
Commercial and industrial
|
|
|
3,670
|
|
|
|
|
|
|
|
|
|
|
|
3,670
|
|
Other real estate owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land
|
|
|
625
|
|
|
|
|
|
|
|
|
|
|
|
625
|
|
Commercial real estate
|
|
|
2,781
|
|
|
|
|
|
|
|
|
|
|
|
2,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,844
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is
measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable and is
determined based on appraisals performed by qualified licensed appraisers hired by the Company. Appraised and reported values may be discounted based on managements historical knowledge, changes in market conditions from the time of valuation,
and/or managements expertise and knowledge of the client and clients business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. Impaired loans are reviewed and
evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.
101
Impaired loans, which are usually measured for impairment using the fair value of
collateral, had a carrying amount of $29.2 million at December 31, 2011, after a partial charge-off of $1.4 million. In addition, these loans have a specific valuation allowance of $335,000 at December 31, 2011. Impaired loans in 2010 had
a carrying amount of $11.4 million after partial charge-offs of $0.
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, 2011, there was a valuation allowance of $797,000 charged against two of the above listed properties which resulted in a total of $797,000 expensed for the year ended 2011. As of December 31, 2010, there was no valuation
allowance for the above reported assets based on the fair value adjustments made in conjunction with the October 29, 2010 transaction.
The investment securities, reported as held-to-maturity, have the fair value reported on the face of the balance sheet. The Companys other principal asset is cash and cash equivalents and at
December 31, 2011 and 2010 the carrying value is the fair value. Based on these facts, management believes the carrying values on the balance sheet are materially the same as the fair value with the exception of held-to-maturity investment
securities, which have the fair value notation on the face of the statement.
The estimated fair value of Service1sts
financial statements as of December 31, 2011 and is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
($ in 000s)
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
89,353
|
|
|
$
|
89,353
|
|
|
$
|
103,227
|
|
|
$
|
103,227
|
|
Certificates of deposits
|
|
|
|
|
|
|
|
|
|
|
26,889
|
|
|
|
26,889
|
|
Securities available for sale
|
|
|
472
|
|
|
|
472
|
|
|
|
1,819
|
|
|
|
1,819
|
|
Securities held to maturity
|
|
|
2,031
|
|
|
|
2,035
|
|
|
|
5,314
|
|
|
|
5,287
|
|
Loans, net
|
|
|
98,942
|
|
|
|
97,857
|
|
|
|
106,223
|
|
|
|
106,223
|
|
Accrued interest receivables
|
|
|
243
|
|
|
|
243
|
|
|
|
447
|
|
|
|
447
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
121,226
|
|
|
|
121,226
|
|
|
|
160,286
|
|
|
|
160,286
|
|
Accrued interest payable
|
|
|
41
|
|
|
|
41
|
|
|
|
35
|
|
|
|
35
|
|
Loan Commitments
The estimated fair value of the standby letters of credit at December 31, 2011 and 2010 is insignificant. Loan commitments on which
the committed interest rate is less than the current market rate are also insignificant at December 31, 2011 and 2010.
102
Carrying amounts and fair values of securities at December 31 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
Securities Available for Sale
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
US Agencies
|
|
$
|
250
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
253
|
|
Collateralized Mortgage Obligation Securities-commercial
|
|
|
217
|
|
|
|
2
|
|
|
|
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
467
|
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held to Maturity
|
|
Amortized
Cost
|
|
|
Gross
Unrecognized
Gains
|
|
|
Gross
Unrecognized
Losses
|
|
|
Fair
Value
|
|
Corporate Debt Securities
|
|
$
|
1,520
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
1,519
|
|
Small Business Administration Loan Pools
|
|
|
511
|
|
|
|
5
|
|
|
|
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,031
|
|
|
$
|
5
|
|
|
$
|
(1
|
)
|
|
$
|
2,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
Securities Available for Sale
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Collateralized Mortgage Obligation Securities-commercial
|
|
$
|
1,819
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,819
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held to Maturity
|
|
Amortized
Cost
|
|
|
Gross
Unrecognized
Gains
|
|
|
Gross
Unrecognized
Losses
|
|
|
Fair
Value
|
|
Corporate Debt Securities
|
|
$
|
4,663
|
|
|
$
|
|
|
|
$
|
(27
|
)
|
|
$
|
4,636
|
|
Small Business Administration Loan Pools
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,314
|
|
|
$
|
|
|
|
$
|
(27
|
)
|
|
$
|
5,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There have been no sales of securities or gross realized gains or losses in any of the periods presented.
As of December 31, 2011, securities of $1.5 and $4.7 million were pledged for various purposes as required or
permitted by law.
Information pertaining to securities with gross losses at December 31, 2011 and December 31,
2010, aggregated by investment category and length of time that individual securities have been in continuous loss position follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
Less Than Twelve Months
|
|
|
Over Twelve Months
|
|
|
|
Gross
Unrealized
(Losses)
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
(Losses)
|
|
|
Fair
Value
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Debt Securities
|
|
$
|
(1
|
)
|
|
$
|
1,519
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
Less Than Twelve Months
|
|
|
Over Twelve Months
|
|
|
|
Gross
Unrealized
(Losses)
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
(Losses)
|
|
|
Fair
Value
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Debt Securities
|
|
$
|
(27
|
)
|
|
$
|
4,636
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011 and December 31, 2010, one and three debt securities, respectively,
have unrealized losses with aggregate degradation of approximately 0.07% and 0.05%, respectively, from the Companys carrying value. These unrealized losses, totaling $1,000 and $27,000, respectively, relate primarily to fluctuations in the
current interest rate environment and other factors, but do not presently represent realized losses. As of December 31, 2011 and 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, 2011 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
|
|
$
|
217
|
|
|
$
|
219
|
|
Due after one year through five years
|
|
|
250
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
467
|
|
|
$
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Securities held to maturity
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
1,520
|
|
|
$
|
1,519
|
|
Small Business Administration loan pools
|
|
|
511
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,031
|
|
|
$
|
2,035
|
|
|
|
|
|
|
|
|
|
|
Loans at December 31, 2011 and December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2011
|
|
|
2010
|
|
Construction, land development and other land
|
|
$
|
3,417
|
|
|
$
|
5,923
|
|
Commercial real estate
|
|
|
58,252
|
|
|
|
54,975
|
|
Residential real estate
|
|
|
4,704
|
|
|
|
9,247
|
|
Commercial and industrial
|
|
|
35,417
|
|
|
|
35,946
|
|
Consumer
|
|
|
30
|
|
|
|
131
|
|
Plus: net deferred loan costs
|
|
|
41
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101,861
|
|
|
$
|
106,259
|
|
Less: allowance for loan losses
|
|
|
(2,919
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
98,942
|
|
|
$
|
106,223
|
|
|
|
|
|
|
|
|
|
|
104
Activity in the allowance for loan losses was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Construction,
Land
Development,
Other Land
|
|
|
Total
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance December 31, 2010
|
|
$
|
36
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
36
|
|
Provision for loan losses
|
|
|
3,901
|
|
|
|
4,293
|
|
|
|
15
|
|
|
|
|
|
|
|
508
|
|
|
|
8,717
|
|
Recoveries
|
|
|
268
|
|
|
|
2
|
|
|
|
4
|
|
|
|
|
|
|
|
300
|
|
|
|
574
|
|
Loan charge-offs
|
|
|
(1,935
|
)
|
|
|
(3,873
|
)
|
|
|
|
|
|
|
|
|
|
|
(600
|
)
|
|
|
(6,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance December 31, 2011
|
|
$
|
2,270
|
|
|
$
|
422
|
|
|
$
|
19
|
|
|
$
|
|
|
|
$
|
208
|
|
|
$
|
2,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Construction,
Land
Development,
Other Land
|
|
|
Total
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, October 28, 2010
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Provision for loan losses
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance December 31, 2010
|
|
$
|
36
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present the balance in the allowance for loan losses and the recorded investment in
loans by portfolio segment and based on impairment method as of December 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real
Estate
|
|
|
Consumer
|
|
|
Construction,
Land
Development,
Other Land
|
|
|
Total
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributed to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
335
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
335
|
|
Collectively evaluated for impairment
|
|
|
1,935
|
|
|
|
422
|
|
|
|
19
|
|
|
|
|
|
|
|
208
|
|
|
|
2,584
|
|
Acquired with deteriorated credit quality
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending allowance balance
|
|
$
|
2,270
|
|
|
$
|
422
|
|
|
$
|
19
|
|
|
$
|
|
|
|
$
|
208
|
|
|
$
|
2,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
1,820
|
|
|
|
16,480
|
|
|
$
|
3,700
|
|
|
$
|
1
|
|
|
$
|
710
|
|
|
$
|
22,711
|
|
Loans collectively evaluated for impairment
|
|
|
32,053
|
|
|
|
38,188
|
|
|
|
1,011
|
|
|
|
22
|
|
|
|
1,304
|
|
|
|
72,578
|
|
Loans acquired with deteriorated credit quality
|
|
|
1,599
|
|
|
|
3,561
|
|
|
|
|
|
|
|
|
|
|
|
1,412
|
|
|
|
6,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending loans balance
|
|
$
|
35,472
|
|
|
$
|
58,229
|
|
|
$
|
4,711
|
|
|
$
|
23
|
|
|
$
|
3,426
|
|
|
$
|
101,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real
Estate
|
|
|
Consumer
|
|
|
Construction,
Land
Development,
Other Land
|
|
|
Total
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributed to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Collectively evaluated for impairment
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
Acquired with deteriorated credit quality
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending allowance balance
|
|
$
|
36
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Loans collectively evaluated for impairment
|
|
|
30,917
|
|
|
|
50,449
|
|
|
|
3,988
|
|
|
|
133
|
|
|
|
1,006
|
|
|
|
86,493
|
|
Loans acquired with deteriorated credit quality
|
|
|
5,421
|
|
|
|
4,458
|
|
|
|
5,257
|
|
|
|
|
|
|
|
4,630
|
|
|
|
19,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending loans balance
|
|
$
|
36,338
|
|
|
$
|
54,907
|
|
|
$
|
9,245
|
|
|
$
|
133
|
|
|
$
|
5,636
|
|
|
$
|
106,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The impaired balance is the recorded investment, which represents customer balances net of any partial
charge-offs recognized on the loans, net of any deferred fees and costs. As nearly all of our impaired loans at December 31, 2011 and December 31, 2010 are on nonaccrual status, recorded investment excludes any insignificant amount of
accrued interest receivable on loans 90 days or more past due and still accruing.
Impaired loan details as of
December 31, 2011 and December 31, 2010 are as follows:
Impaired loans with no related allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
($ in 000s)
|
|
Impaired
Balance
|
|
|
Percent of
Total
Loans
|
|
|
Reserve
Balance
|
|
|
Percent of
Total
Allowance
|
|
Construction, land development and other land loans
|
|
$
|
2,122
|
|
|
|
2.08
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
Commercial real estate
|
|
|
20,041
|
|
|
|
19.67
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Residential real estate (1-4 family)
|
|
|
3,700
|
|
|
|
3.63
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Commercial and industrial
|
|
|
1,766
|
|
|
|
1.73
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Consumer
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,630
|
|
|
|
27.13
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
Impaired loans with related allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
($ in 000s)
|
|
Impaired
Balance
|
|
|
Percent of
Total
Loans
|
|
|
Reserve
Balance
|
|
|
Percent of
Total
Allowance
|
|
Construction, land development and other land loans
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
Commercial real estate
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Residential real estate (1-4 family)
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Commercial and industrial
|
|
|
1,653
|
|
|
|
1.62
|
%
|
|
|
335
|
|
|
|
11.48
|
%
|
Consumer
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
1,653
|
|
|
|
1.62
|
%
|
|
$
|
335
|
|
|
|
11.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
($ in 000s)
|
|
Impaired
Balance
|
|
|
Percent of
Total
Loans
|
|
|
Reserve
Balance
|
|
|
Percent of
Total
Allowance
|
|
Construction, land development and other land loans
|
|
$
|
2,122
|
|
|
|
2.08
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
Commercial real estate
|
|
|
20,041
|
|
|
|
19.67
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Residential real estate (1-4 family)
|
|
|
3,700
|
|
|
|
3.63
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Commercial and industrial
|
|
|
3,419
|
|
|
|
3.36
|
%
|
|
|
335
|
|
|
|
11.48
|
%
|
Consumer
|
|
|
1
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,283
|
|
|
|
28.75
|
%
|
|
$
|
335
|
|
|
|
11.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with no related allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
($ in 000s)
|
|
Impaired
Balance
|
|
|
Percent of
Total
Loans
|
|
|
Reserve
Balance
|
|
|
Percent of
Total
Allowance
|
|
Construction, land development and other land loans
|
|
$
|
3,220
|
|
|
|
3.03
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
Commercial real estate
|
|
|
1,648
|
|
|
|
1.55
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Residential real estate (1-4 family)
|
|
|
2,900
|
|
|
|
2.73
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Commercial and industrial
|
|
|
3,670
|
|
|
|
3.46
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,438
|
|
|
|
10.77
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with a related allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
($ in 000s)
|
|
Impaired
Balance
|
|
|
Percent of
Total
Loans
|
|
|
Reserve
Balance
|
|
|
Percent of
Total
Allowance
|
|
Construction, land development and other land loans
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate (1-4 family)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
Total impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
($ in 000s)
|
|
Impaired
Balance
|
|
|
Percent of
Total
Loans
|
|
|
Reserve
Balance
|
|
|
Percent of
Total
Allowance
|
|
Construction, land development and other land loans
|
|
$
|
3,220
|
|
|
|
3.03
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
Commercial real estate
|
|
|
1,648
|
|
|
|
1.55
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Residential real estate (1-4 family)
|
|
|
2,900
|
|
|
|
2.73
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Commercial and industrial
|
|
|
3,670
|
|
|
|
3.46
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,438
|
|
|
|
10.77
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table depicts the average impaired loan balances, and the interest income recognized during
impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011,
|
|
|
December 31, 2010
|
|
($ in 000s)
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
|
Interest
|
|
Construction, land development and other land
|
|
$
|
2,621
|
|
|
$
|
123
|
|
|
$
|
3,250
|
|
|
$
|
10
|
|
Commercial real estate
|
|
|
21,475
|
|
|
|
1,109
|
|
|
|
1,657
|
|
|
|
26
|
|
Residential real estate
|
|
|
3,749
|
|
|
|
135
|
|
|
|
2,664
|
|
|
|
|
|
Commercial and industrial
|
|
|
3,279
|
|
|
|
142
|
|
|
|
1,918
|
|
|
|
36
|
|
Consumer
|
|
|
23
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,147
|
|
|
$
|
1,511
|
|
|
$
|
9,489
|
|
|
$
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no cash-basis interest income recognized during the periods presented above. The gross
year-to-date interest income that would have been recorded in the current period had the nonaccrual loans been current in accordance with their original terms was $477,000 for the year ending December 31, 2011 and $0 for the year ending
December 31, 2010.
The following tables present the recorded investment in nonaccrual and loans past due over
90 days still on accrual by class of loans as of December 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
($ in 000s)
|
|
Nonaccrual
|
|
|
Over 90 days
and
accruing
|
|
Construction, land development and other land
|
|
$
|
612
|
|
|
$
|
|
|
Commercial real estate
|
|
|
17,483
|
|
|
|
|
|
Residential real estate
|
|
|
3,698
|
|
|
|
|
|
Commercial and industrial
|
|
|
2,261
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,054
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
108
The following tables present the aging of the recorded investment in past due loans as of
December 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
($ in 000s)
|
|
30 to 89 days
|
|
|
Over 90 days
|
|
|
Total Past Due
|
|
Construction, land development and other land
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1,241
|
|
|
|
97
|
|
|
|
1,338
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,241
|
|
|
$
|
97
|
|
|
$
|
1,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
($ in 000s)
|
|
30 to 89 days
|
|
|
Over 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. Generally, performing loans are not subjected to grade reviews unless the loan matures or some event or information occurs that causes the servicing loan officer to re-evaluate the loan grade. Loans that are
adversely classified are considered for grade changes in conjunction with preparation of the monthly problem loan reports. The Company uses the following definitions for risk ratings:
Special mention
Loans in this classification exhibit trends or have weaknesses or potential weaknesses that deserve more than normal management attention. If left uncorrected, these weaknesses may result in the
deterioration of the repayment prospects for the asset or in 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.
109
Doubtful
Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.
As of December 31, 2011 and December 31, 2010, respectively, the risk category, which relate to credit quality indicators, of
loans by class of loans, including accrual and non-accrual loans, (net of deferred fees and costs) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
($ in 000s)
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Construction, land development and other land
|
|
$
|
1,556
|
|
|
$
|
|
|
|
$
|
1,870
|
|
|
$
|
|
|
|
$
|
3,426
|
|
Commercial real estate
|
|
|
32,207
|
|
|
|
6,596
|
|
|
|
18,219
|
|
|
|
|
|
|
|
57,022
|
|
Residential real estate
|
|
|
2,218
|
|
|
|
|
|
|
|
3,700
|
|
|
|
|
|
|
|
5,918
|
|
Commercial and industrial
|
|
|
31,994
|
|
|
|
123
|
|
|
|
3,169
|
|
|
|
187
|
|
|
|
35,472
|
|
Consumer
|
|
|
22
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
67,997
|
|
|
$
|
6,718
|
|
|
$
|
26,959
|
|
|
$
|
187
|
|
|
$
|
101,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
($ in 000s)
|
|
Pass
|
|
|
Special
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 (including the SBA guaranteed portions) is as follows:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
Construction, land development and other land
|
|
$
|
1,412
|
|
|
$
|
4,630
|
|
Commercial real estate
|
|
|
3,561
|
|
|
|
4,458
|
|
Residential real estate
|
|
|
|
|
|
|
5,257
|
|
Commercial and industrial
|
|
|
1,599
|
|
|
|
5,421
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,572
|
|
|
$
|
19,766
|
|
|
|
|
|
|
|
|
|
|
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 subsidiarys 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.
110
The performing loans totaled approximately $89.9 million and were marked with a credit
discount of $3.6 million and approximately $49,000 of yield discount. In accordance with current accounting pronouncements, the discounts on performing loans are being recognized on a method that approximates a level yield over the expected
life of the loan. During the first full year ended 2011, approximately $1.6 million of discount was accreted on these loans.
The loans identified as purchased with credit impairments were approximately $35.6 million as of the acquisition date. A credit
discount of approximately $10.9 million was recorded and an additional $576,000 of yield discount was also recorded. The yield discount is being recognized on a method that approximates a level yield over the expected life of the loan. The
Company does not accrete the credit discount into income until such time as the loan is removed from the bank. The only exception would be on a case-by-case basis when a material event that significantly improves the quality of the loan and reduces
the risk to the bank such that management believes it would be prudent to start recognizing some of the discount is documented. The credit discount represents approximately 30% of the transaction date value of the credit impaired loans. During the
year ended 2011, as a result of various loan payoffs, and loan activities, a portion of the credit discount was recognized in earnings.
The following table reflects the discount changes in the purchased credit impaired loan portfolio for the period indicated:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
Yield Discount
|
|
|
Credit Discount
|
|
Balance, December 31, 2010
|
|
$
|
539
|
|
|
$
|
9,317
|
|
Accreted to income
|
|
|
(197
|
)
|
|
|
(1,552
|
)
|
Loans renegotiated and charge-offs
|
|
|
(21
|
)
|
|
|
(1,509
|
)
|
Other changes, net
|
|
|
|
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
$
|
321
|
|
|
$
|
6,165
|
|
|
|
|
|
|
|
|
|
|
Management does not establish general reserves against purchased credit impaired loans. In the event that
deterioration in the credit is identified subsequent to the date of the discount, additional specific reserves will be created. As of December 31, 2011, no reserves were added relating to the October 28, 2010 purchased credit impaired loan
portfolio. Credit discount $1,552 was accreted to income as a result of $3.2 million in payoffs.
Troubled Debt
Restructurings:
The Company has allocated $335,000 and $0 of specific reserves to customers whose loan terms have been
modified in troubled debt restructurings as of December 31, 2011 and December 31, 2010, respectively. At December 31, 2011, and December 31, 2010, the aggregate amounts of troubled debt restructurings were $23 million and
$11.9 million, respectively. The Company has not committed to lend additional amounts as of December 31, 2011 to customers with outstanding loans that are classified as troubled debt restructurings.
During the period ending December 31, 2011, the terms of certain loans were modified as troubled debt restructurings. The
modification of the terms of such loans included one or a combination of the following; a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new
debt with similar risk; or a permanent reduction of the recorded investment in the loan.
Modifications involving a reduction
of the stated interest rate of the loan were for periods ranging from 18 months to 7 years. Modifications involving an extension of the maturity date were for periods ranging from 2 months to 1 year.
111
The following table presents loans by class modified as troubled debt restructurings that
occurred during the period ending December, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011
|
|
($ in 000s)
|
|
Number
of
Contracts
|
|
|
Pre-
Modification
Outstanding
Recorded
Investment
|
|
|
Post-
Modification
Outstanding
Recorded
Investment
|
|
Troubled Debt Restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land
|
|
|
3
|
|
|
$
|
1,664
|
|
|
$
|
1,374
|
|
Commercial real estate
|
|
|
9
|
|
|
|
15,457
|
|
|
|
11,234
|
|
Residential real estate
|
|
|
2
|
|
|
|
2,979
|
|
|
|
2,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
14
|
|
|
|
20,100
|
|
|
|
15,587
|
|
Commercial and industrial
|
|
|
12
|
|
|
|
3,299
|
|
|
|
2,187
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Troubled Debt Restructurings
|
|
|
26
|
|
|
|
23,399
|
|
|
|
17,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The troubled debt restructurings described above increased the provision for loan losses by $9.4 million
and resulted in charge-offs of $4.4 million during the year ended December 31, 2011.
The following table presents loans
by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011
|
|
($ in 000s)
|
|
Number of
Contracts
|
|
|
Recorded
Investment
|
|
Troubled Debt Restructurings:
|
|
|
|
|
|
|
|
|
Construction, land development and other land
|
|
|
|
|
|
$
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans secured by real estate
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Troubled Debt Restructurings
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The terms of certain other loans were modified during the period ending December 31, 2011 that did
not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of December 31, 2011 of $16.6 million. The modification of these loans involved either a modification of the terms of a loan to borrowers
who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.
In order to
determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default or any of its debt in the foreseeable future without the modification. This evaluation is
performed under the companys internal underwriting policy.
A delay in payment is considered to be insignificant if it
is less than 3 months.
112
NOTE
|
6. PREMISES AND EQUIPMENT
|
The major classes of premises and equipment and the total accumulated depreciation and amortization as of
December 31 are as follows:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2011
|
|
|
2010
|
|
Leasehold improvements
|
|
$
|
835
|
|
|
$
|
835
|
|
Equipment
|
|
|
159
|
|
|
|
138
|
|
Furniture and fixtures
|
|
|
312
|
|
|
|
309
|
|
Vehicles
|
|
|
18
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,324
|
|
|
|
1,300
|
|
Less: accumulated depreciation and amortization
|
|
|
(506
|
)
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
818
|
|
|
$
|
1,228
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the period ended December 31, 2011 was approximately $433,000. Depreciation
expense was approximately $72,000 for the last two months of calendar year 2010 (from the acquisition date of Service1st Bank.)
NOTE
|
7. GOODWILL, INTANGIBLES
|
The excess of the cost of an acquisition over the fair value of the net assets acquired consists of goodwill, and core
deposit intangibles. Under ASC Topic 350, goodwill is subject to at least annual assessments for impairment by applying a fair value-based test. All the goodwill is assigned to the bank subsidiary, Service1st Bank. The Company established
October 31 for annual impairment testing of goodwill, or if an event occurs or circumstances change that would more likely than not reduce the fair value of reporting unit. We determine the fair value of our reporting unit and compare it to its
carrying amount. If the carrying amount of the reporting unit exceeds its fair value, we are required to perform as second step to the impairment test to measure the extent of the impairment.
During the third quarter of 2011, management determined that there was an adverse change in the business climate. This was directly
related to the adverse local economy persisting which is continuing to have a meaningful impact on Service1sts operations, and although the acquisition of Service1st was consummated less than one year ago, it was more likely than not that the
fair value of the reporting unit had fallen below its carrying amount. The primary indicator for this decision was the ongoing deterioration of borrowers who can no longer perform under the original terms of the loan agreements. The restructured
loans typically require significant reserves or charge-offs based on appraised collateral values that may have declined 50-80% since the inception of the loan resulting in $8.7 million in provisions for loan losses during 2011. The Company
elected to obtain professional assistance in determining the fair value of the reporting unit and if necessary to assist in determining the fair values of all assets and liabilities, any core deposit intangibles and the fair value of the contingent
consideration. We determined the fair value of our reporting unit and compared it to its carrying amount and determined that step two of the impairment test should be performed during the third quarter. The method for estimating the value of the
reporting unit included a weighted average of the discounted cash flows method as well as the guideline change of control transactions method and public company method. The second step of the goodwill impairment test is performed to determine the
amount of the goodwill impairment, if any. Step two required us to compute the implied fair value of the reporting unit goodwill and compare it against the actual carrying amount of the reporting unit goodwill. The implied fair value of the
reporting unit goodwill was determined in the same manner that goodwill recognized in a business combination is determined. That is, the fair value of the reporting unit was allocated to all of the individual assets and liabilities of the reporting
unit, including any unrecognized identifiable intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit determined in the first step was the price paid to acquire the reporting
unit. The allocation process is only performed for purposes of testing goodwill for impairment, as the other assets and liabilities are not written up or down, nor is any additional unrecognized identifiable asset recorded as part of this process.
113
After this analysis, it was determined the implied fair value of the goodwill assigned to
the reporting unit was less than the carrying value on the Companys balance sheet, and the Company reduced the carrying value of goodwill to zero through an impairment charge to earnings. Such charge had no effect on the Companys cash
balances or liquidity. In addition, because goodwill is not included in the calculation of regulatory capital, the Companys regulatory ratios were not affected by this non-cash expense.
The following table presents the carrying amount of goodwill as of December 31:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2011
|
|
|
2010
|
|
Balance at beginning of period
|
|
$
|
5,633
|
|
|
$
|
|
|
Goodwill from business combination
|
|
|
|
|
|
|
5,633
|
|
Impairment
|
|
|
(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, 2011, a remaining average amortization period of approximately nine 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:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2011
|
|
|
2010
|
|
Balance at beginning of period
|
|
$
|
768
|
|
|
$
|
|
|
Core deposit intangibles
|
|
|
|
|
|
|
784
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
|
(98
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
670
|
|
|
$
|
768
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
784
|
|
|
$
|
784
|
|
Accumulated amortization
|
|
|
(114
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
670
|
|
|
$
|
768
|
|
|
|
|
|
|
|
|
|
|
The following presents the estimated amortization expense of other intangible assets:
|
|
|
|
|
Years ending December 31,
($ in 000s)
|
|
Amount
|
|
2012
|
|
$
|
92
|
|
2013
|
|
|
87
|
|
2014
|
|
|
83
|
|
2015
|
|
|
79
|
|
2016
|
|
|
75
|
|
Thereafter
|
|
|
254
|
|
|
|
|
|
|
|
|
$
|
670
|
|
|
|
|
|
|
114
NOTE 8. OTHER
|
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
|
The following table presents the changes in other assets acquired through foreclosure for the periods ended
December 31, 2011.
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2011
|
|
|
2010
|
|
Balance at beginning of period
|
|
$
|
3,406
|
|
|
$
|
|
|
Purchased OREO
|
|
|
|
|
|
|
2,403
|
|
Additions
|
|
|
2,440
|
|
|
|
1,003
|
|
Dispositions
|
|
|
(1,041
|
)
|
|
|
|
|
Valuation adjustments in the period
|
|
|
(797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
4,008
|
|
|
$
|
3,406
|
|
|
|
|
|
|
|
|
|
|
Purchased OREO consists of OREO property that was acquired by WLBC in the acquisition
of Service1st Bank of Nevada on October 28
th
, 2010.
During the period ended December 31, 2011 Service1st Bank sold two properties for a $34,000 gain on the sale of the
property.
On December 28
th
, 2011 Service1st Bank of Nevada sold all of its OREO properties at estimated fair market value to Las Vegas Sunset
Properties, which is a wholly owned subsidiary of WLBC. Total consideration paid was approximately $4.0 million. This was an intercompany transaction and eliminated in consolidation.
The composition of deposits is as follows as of December 31:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2011
|
|
|
2010
|
|
Demand deposits, noninterest bearing
|
|
$
|
50,488
|
|
|
$
|
67,087
|
|
NOW and money market accounts
|
|
|
37,306
|
|
|
|
56,509
|
|
Savings deposits
|
|
|
735
|
|
|
|
1,273
|
|
Time certificates, $100 or more
|
|
|
26,479
|
|
|
|
30,498
|
|
Other time certificates
|
|
|
6,218
|
|
|
|
4,919
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
121,226
|
|
|
$
|
160,286
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2011, all time deposits are scheduled to mature in 2011 as the maximum term offered
for time certificates is twelve months.
The Company did no have any brokered deposits as of December 31, 2011.
NOTE 10. 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, Service1st may not make
matching contributions.
Stock-based compensation arrangements are fully discussed in Note 13.
115
NOTE 11. 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 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 2008, 2009, and 2010. 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.
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:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
9,685
|
|
|
$
|
5,889
|
|
Organization costs and start up costs
|
|
|
5,680
|
|
|
|
5,576
|
|
Allowance for loan losses, unfunded commitments and loan discounts
|
|
|
2,540
|
|
|
|
4,250
|
|
Stock warrants and stock options
|
|
|
760
|
|
|
|
2,231
|
|
Accrued expenses
|
|
|
865
|
|
|
|
769
|
|
Premises and equipment
|
|
|
114
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,644
|
|
|
|
18,891
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Cored deposit Intangible
|
|
|
(228
|
)
|
|
|
(261
|
)
|
Prepaid expenses
|
|
|
(102
|
)
|
|
|
(122
|
)
|
Deferred loan costs
|
|
|
(118
|
)
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
19,196
|
|
|
|
18,399
|
|
Valuation allowance
|
|
|
(19,196
|
)
|
|
|
(18,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011, and 2010, 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, 2011, and 2010. Federal operating loss carry forwards total approximately $28,485,600 and begin to expire in 2027.
116
For the years ended December 31, 2010 and 2009, the components of income tax benefit
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(797
|
)
|
|
|
(682
|
)
|
|
$
|
(2,685
|
)
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
797
|
|
|
|
682
|
|
|
|
2,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Computed expected tax (benefit)
|
|
$
|
(4,837
|
)
|
|
$
|
(2,601
|
)
|
|
$
|
(5,065
|
)
|
Nondeductible expenses
|
|
|
6
|
|
|
|
904
|
|
|
|
771
|
|
Goodwill impairment/contingency liability
|
|
$
|
1,298
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-off of deferred tax assets
|
|
$
|
2,763
|
|
|
|
2,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(27
|
)
|
|
|
(1,603
|
)
|
|
|
1,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in deferred tax asset valuation allowance
|
|
$
|
797
|
|
|
$
|
682
|
|
|
|
2,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
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 carryforward and the valuation allowance by $10,360,000.
117
NOTE 12. TRANSACTIONS
|
WITH RELATED PARTIES
|
Loans
Principal stockholders of the Company and officers and directors, including their families and companies of which they are principal owners, are considered to be related parties. These related parties
were loan customers of, and had other transactions with, the Company in the ordinary course of business. In managements opinion, these loans and transactions are on the same terms as those for comparable loans and transactions with unrelated
parties. The aggregate activity in such loans for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
($s in 000)
|
|
2011
|
|
|
2010
|
|
Beginning Balance
|
|
$
|
2,436
|
|
|
$
|
|
|
Balance assumed at merger
|
|
|
|
|
|
|
2,480
|
|
New loans
|
|
|
732
|
|
|
|
25
|
|
Repayments
|
|
|
(168
|
)
|
|
|
(69
|
)
|
Change in related party
|
|
|
(2,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balances
|
|
$
|
717
|
|
|
$
|
2,436
|
|
|
|
|
|
|
|
|
|
|
Total loan commitments outstanding with related parties total approximately $357,000 and $1.4 million as
of December 31, 2011 and 2010 respectively.
NOTE 13. 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 $530,000 and $1.8 million for 2011 and 2010. There has been no income tax benefit recorded because of the offset in the deferred tax asset valuation allowance.
Restricted Stock
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 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 former 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 Chief Executive Officer 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
118
grant date fair value of each share of restricted stock was $6.44. The Chief Financial Officer and Chief Executive Officer were granted 38,819 and 155,279 shares of restricted stock,
respectively, on October 28, 2010, vesting over a five year term. However, on December 2011, the Chief Financial Officer resigned from WLBC. At the time of the Chief Financial Officers resignation he had 7,764 shares vested of the 38,819
shares of restricted stock originally granted. Of the 7,764 shares, 2,562 were held to cover taxes and a fifty percent reduction of 3,882 was applied due to the employment contract. For the year ended December 31, 2011, 10,870 shares of the
Chief Financial Officer Chief Executive Officers vested shares were forfeited to cover taxes. Annual expense associated with these grants is estimated to be approximately $200,000 per year, for the remaining four years.
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.
Restricted Stock Roll
Forward
A summary of the status of the Companys non-vested shares of restricted stock as of
December 31, 2011 and changes during the year then ended is presented below:
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Balance at January 1, 2011
|
|
|
194,098
|
|
Granted
|
|
|
|
|
Vested
|
|
|
(38,820
|
)
|
Forfeited
|
|
|
(31,055
|
)
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
124,223
|
|
|
|
|
|
|
Stock Option Program
Pursuant to the Agreement and Plan of Merger between the Company and Service1st Bank, the Company assumed to assume the Service1st
Bank 2007 Stock Option Plan (the Service1st Plan)and exchanged each outstanding option issued under the Service1st Plan (each a Bank Stock Option into an option to acquire shares
119
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 is exercisable for a number of WLBC common stock equal to the product of the number of shares of Bank common stock that would have been 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 is equal to the
quotient 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 at the time of the Service1st acquisition, continue in full force and effect, and the term, exercisability, and vesting schedule of such Bank Stock Option as in effect at the time of the Service1st acquisition of the date
hereof will remain unchanged. Stock awards available to grant, subject to the necessary approvals, were approximately 229,000 at December 31, 2011.
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, 2011 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted Average
Exercise
Price
|
|
Outstanding Stock Options at December 31, 2010
|
|
|
246,947
|
|
|
|
21.01
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
20,460
|
|
|
|
21.01
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2011
|
|
|
226,487
|
|
|
|
21.01
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
164,673
|
|
|
|
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, 2011, there was $288,000 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 4 years. As of December 31, 2011, 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. Each unit consisted of one share of WLBCs common stock warrant that entitled the holder to purchase from WLBC one share of common stock. In addition, certain of WLBCs initial stockholders
purchased an aggregate of 8,500,000 warrants in a private placement simultaneously with the consummation of the Offering. Each warrant was exercisable to one share of common stock.
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
120
held at least a majority of its outstanding warrants (the Consenting Warrant Holders) confirming the basis and terms upon which the parties agreed to amend the agreement governing the
warrants to provide for the automatic exercise of all of the outstanding warrants into one thirty-second (1/32) of one share of WLBCs common stock concurrently with the consummation of the Acquisition. Any warrants that entitled a holder
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. As of September 23, 2010, there were 48,067,758 warrants
outstanding which were automatically converted into approximately 1,502.088 shares of common stock upon the consummation of the Acquisition. WLBC also paid a consent fee to the holders of warrants in an amount equal to $0.06 per warrant for an
aggregate payment of $2.9 million.
Bank Warrant Exchange
In connection with the Acquisition, WLBC agreed to exchange each outstanding warrant of Service1st (the Bank Stock Warrants)
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 was
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 acquisition multiplied by the
exchange ratio of 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 each Bank Stock Warrant was 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. As a result, 900 Bank Stock Warrants were converted to
42,834 WLBC stock warrants with an exercise price of $21,01 per stock warrant. As of December 31, 2011 the remaining contractual term of the outstanding stock warrants was approximately one month the aggregate intrinsic value of outstanding and
vested stock warrants was $0, and the number of stock warrants that expired were 3.046.
NOTE 15. 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 December 31, 2011, 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 Service1st 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 2011, the
most recent regulatory notifications categorized Service1st 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.
121
Actual capital levels and minimum required levels were as follows at year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
Actual
|
|
|
Minimum Required
for
Capital Adequacy
Purposes
|
|
|
To Be
Well
Capitalized Under
Prompt
Corrective
Action Regulations
|
|
|
Minimum
Required
Under Regulatory
Agreements
|
|
($ in millions)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
76.7
|
|
|
|
71.6
|
%
|
|
$
|
8.6
|
|
|
|
8.0
|
%
|
|
$
|
10.7
|
|
|
|
10.0
|
%
|
|
$
|
|
|
|
|
NA
|
|
Service1st Bank
|
|
|
30.6
|
|
|
|
29.7
|
%
|
|
|
8.2
|
|
|
|
8.0
|
%
|
|
|
10.3
|
|
|
|
10.0
|
%
|
|
|
12.3
|
|
|
|
12.0
|
%
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
75.4
|
|
|
|
70.4
|
%
|
|
|
4.3
|
|
|
|
4.0
|
%
|
|
|
6.4
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
NA
|
|
Service1st Bank
|
|
|
29.3
|
|
|
|
28.4
|
%
|
|
|
4.1
|
|
|
|
4.0
|
%
|
|
|
6.2
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
NA
|
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
74.4
|
|
|
|
25.7
|
%
|
|
|
11.8
|
|
|
|
4.0
|
%
|
|
|
14.7
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
NA
|
|
Service1st Bank
|
|
|
29.3
|
|
|
|
14.4
|
%
|
|
|
8.1
|
|
|
|
4.0
|
%
|
|
|
10.1
|
|
|
|
5.0
|
%
|
|
|
20.3
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Actual
|
|
|
Minimum Required
for
Capital Adequacy
Purposes
|
|
|
To Be
Well
Capitalized Under
Prompt
Corrective
Action Regulations
|
|
|
Minimum
Required
Under Regulatory
Agreements
|
|
($ in millions)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
87.8
|
|
|
|
68.8
|
%
|
|
$
|
10.2
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Service1st Bank
|
|
|
36.3
|
|
|
|
31.0
|
%
|
|
|
9.4
|
|
|
|
8.0
|
%
|
|
$
|
11.7
|
|
|
|
10.0
|
%
|
|
$
|
14.1
|
|
|
|
12.0
|
%
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
87.4
|
|
|
|
68.4
|
%
|
|
$
|
5.1
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Service1st Bank
|
|
$
|
35.9
|
|
|
|
30.6
|
%
|
|
|
4.7
|
|
|
|
4.0
|
%
|
|
$
|
7.0
|
|
|
|
6.0
|
%
|
|
$
|
|
|
|
|
N/A
|
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
87.4
|
|
|
|
30.5
|
%
|
|
$
|
11.5
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Service1st Bank
|
|
$
|
35.9
|
|
|
|
18.1
|
%
|
|
$
|
7.9
|
|
|
|
4.0
|
%
|
|
$
|
9.9
|
|
|
|
5.0
|
%
|
|
$
|
19.8
|
|
|
|
10.0
|
%
|
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 an informal 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. The Consent Order was terminated effective October 31, 2011 and Service1st now has an informal understanding with the FDIC that Service1st must maintain leverage capital of at least 8.5%.
122
NOTE 16. 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.
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 $247,917 in compensation expenses related to a severance payment to the former CEO during January, 2009.
Indemnifications
WLBC has entered into agreements with its
directors to provide contractual indemnification in addition to the indemnification provided in its amended and restated certificate of incorporation. WLBC believes that these provisions and agreements are necessary to attract qualified directors.
WLBCs bylaws also will permit it to secure insurance on behalf of any officer, director or employee for any liability arising out of his or her actions, regardless of whether Delaware law would permit indemnification. WLBC has purchased a
policy of directors and officers liability insurance that insures WLBCs directors and officers against the cost of defense, settlement or payment of a judgment in some circumstances and insures us against our obligations to
indemnify the directors and officers.
Financial instruments with off-balance sheet risk
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet
customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates.
123
Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit
policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amounts of financial instruments with off-balance-sheet risk at year end were as follows:
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
2011
|
|
|
2010
|
|
Unused lines of credit
|
|
$
|
19,069
|
|
|
$
|
18,504
|
|
Standby letters of credit
|
|
|
644
|
|
|
$
|
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 Service1st deems necessary. Generally, letters of credit issued have expiration dates within one year.
At year-end 2011, 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, 2011 is approximately $115,000 and $372,000.
Lease commitments
The Companys subsidiary bank leases premises and equipment under non-cancelable operating leases expiring
through 2013. Generally, these leases contain 5-year renewal options. The following is a schedule of future minimum rental payments under these leases as of December 31, 2011:
|
|
|
|
|
($ in 000s)
|
|
|
|
2012
|
|
$
|
816
|
|
2013
|
|
|
506
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,322
|
|
|
|
|
|
|
Rent expense of approximately $669,000 included in occupancy expense for the year ended December 31,
2011.
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, 2011, commercial real estate loans represent
124
57.21% of total loans. Owner-occupied commercial real estate loans represent 28.37% of commercial real estate loans. As of December 31, 2011, real estate-related loans accounted for
approximately 65.19% 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, FRB and PCBB. Borrowing capacity is determined based on
collateral pledged, generally consisting of securities and loans, at the time of the borrowing. As of December 31, 2011, the Company had available credit with the FHLB, FRB and Pacific Coast Bankers Bank of approximately $16.2 million, and
$1.4 million, and $5 million, respectively. As of December 31, 2011, the Company has no outstanding borrowings under these agreements.
NOTE 17. PARENT
|
COMPANY ONLY CONDENSED FINANCIAL INFORMATION
|
Condensed financial information of Western Liberty Bancorp follows:
CONDENSED BALANCE SHEETS
December 31,
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
($ in 000s)
|
|
ASSETS
|
|
Cash and cash equivalents
|
|
$
|
29,324
|
|
|
$
|
53,476
|
|
Investment in banking subsidiariesService1st Bank
|
|
|
29,935
|
|
|
|
42,299
|
|
Investment in banking subsidiariesLas Vegas Sunset Properties
|
|
|
16,900
|
|
|
|
|
|
Other assets
|
|
|
206
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
76,365
|
|
|
$
|
95,937
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
$
|
324
|
|
|
$
|
292
|
|
Contingent consideration
|
|
|
|
|
|
|
1,816
|
|
Shareholders equity
|
|
|
76,041
|
|
|
|
93,829
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
76,365
|
|
|
$
|
95,937
|
|
|
|
|
|
|
|
|
|
|
125
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
Interest and other income
|
|
$
|
1,819
|
|
|
$
|
8
|
|
Interest and other expense
|
|
|
3,578
|
|
|
|
7,844
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax and undistributed subsidiary income
|
|
|
(1,759
|
)
|
|
|
(7,836
|
)
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
Equity in undistributed subsidiary income
|
|
|
(12,469
|
)
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(14,228
|
)
|
|
$
|
(7,650
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
$
|
5
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(14,228
|
)
|
|
$
|
(7,650
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
Equity in undistributed subsidiary income
|
|
|
12,469
|
|
|
|
(186
|
)
|
Stock-based compensation expense
|
|
|
529
|
|
|
|
1,771
|
|
Contingent liability impairment
|
|
|
(1,816
|
)
|
|
|
|
|
Change in other assets
|
|
|
(44
|
)
|
|
|
389
|
|
Change in other liabilities
|
|
|
32
|
|
|
|
(365
|
)
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
(3,058
|
)
|
|
|
(6,041
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Investments in subsidiaries
|
|
|
(17,000
|
)
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash from investing activities
|
|
|
(17,000
|
)
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Share repurchases
|
|
|
(4,094
|
)
|
|
|
|
|
Cash payment for warrant exchange
|
|
|
|
|
|
|
(2,884
|
)
|
Redemption of dissenters shares
|
|
|
|
|
|
|
(567
|
)
|
Cash payment for fractional shares
|
|
|
|
|
|
|
(1
|
)
|
Net cash from financing activities
|
|
|
(4,094
|
)
|
|
|
(3,452
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(24,152
|
)
|
|
|
(34,493
|
)
|
Beginning cash and cash equivalents
|
|
|
53,476
|
|
|
|
87,969
|
|
|
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
$
|
29,324
|
|
|
$
|
53,476
|
|
|
|
|
|
|
|
|
|
|
126
NOTE 18. 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.
For the years ended December 31, 2011 and 2010, 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, 2011
|
|
|
December 31, 2010
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders
|
|
$
|
(14,228
|
)
|
|
$
|
(7,650
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
14,840,249
|
|
|
|
11,680,609
|
|
Dilutive effect of Restricted Stock Units, Warrants and Stock Options
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, assuming dilution
|
|
|
14,840,249
|
|
|
|
11,680,609
|
|
Net (loss) income per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.96
|
)
|
|
$
|
(0.65
|
)
|
Diluted
|
|
$
|
(0.96
|
)
|
|
|
|
|
At December 31, 2011, the Company had 200,000 Restricted Stock Units, 124,655 shares of
restricted stock, and 226,487 stock options outstanding. 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 year ending December 31,
2011 and 2010, 39,788 and 42,834 stock warrants were outstanding, respectively. Due to the net losses for the years ended December 31, 2011, and 2010, all of the dilutive stock based awards are considered anti-dilutive and not included in the
computation of diluted earnings (loss) per share.
127
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
128
SERVICE1ST BANK OF NEVADA
BALANCE SHEET
|
|
|
|
|
(In thousands, except for per share amounts)
|
|
October 28,
2010
|
|
Assets
|
|
|
|
|
Cash and due from banks
|
|
$
|
10,164
|
|
Interest-bearing deposits in banks
|
|
|
4,927
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
15,091
|
|
Certificates of deposits
|
|
|
31,928
|
|
Securities, available for sale
|
|
|
2,850
|
|
Securities, held to maturity (fair value 2010: $7,842)
|
|
|
7,582
|
|
Loans, net of allowance for loan losses $9,418
|
|
|
115,986
|
|
Premises and equipment, net
|
|
|
1,284
|
|
Accrued interest receivable
|
|
|
605
|
|
Other real estate owned
|
|
|
2,403
|
|
Other assets
|
|
|
2,227
|
|
|
|
|
|
|
Total assets
|
|
$
|
179,956
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
Deposits:
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
68,575
|
|
Interest bearing:
|
|
|
|
|
Demand
|
|
|
29,018
|
|
Savings and money market
|
|
|
29,381
|
|
Time, $100 or more
|
|
|
30,204
|
|
Other time
|
|
|
4,888
|
|
|
|
|
|
|
Total deposits
|
|
|
162,066
|
|
Accrued interest payable and other liabilities
|
|
|
1,452
|
|
|
|
|
|
|
Total liabilities
|
|
|
163,518
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
Common stock, par value: $.01; shares authorized: 25,000,000; shares issued: 50,811; and shares outstanding 1,000 shares
held in treasury
|
|
|
1
|
|
Additional paid-in capital
|
|
|
52,642
|
|
Accumulated deficit
|
|
|
(35,410
|
)
|
Accumulated other comprehensive loss, net
|
|
|
(20
|
)
|
Less cost of treasury stock, 1,000 shares
|
|
|
(775
|
)
|
|
|
|
|
|
Total stockholders equity
|
|
|
16,438
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
179,956
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
129
SERVICE1ST BANK OF NEVADA
STATEMENT OF OPERATIONS
FOR THE PERIOD JANUARY 1, 2010 THROUGH OCTOBER 28, 2010
|
|
|
|
|
(In thousands, except for per share amounts)
|
|
2010
|
|
Interest and dividend income:
|
|
|
|
|
Loans, including fees
|
|
$
|
5,801
|
|
Securities, taxable
|
|
|
472
|
|
Federal funds sold and other
|
|
|
347
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
6,620
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
Deposits
|
|
|
1,147
|
|
Repurchase sweep agreements
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
1,147
|
|
|
|
|
|
|
Net interest income
|
|
|
5,473
|
|
Provision for loan losses
|
|
|
6,329
|
|
|
|
|
|
|
Net interest (loss) income after provision for loan losses
|
|
|
(856
|
)
|
|
|
|
|
|
Non-interest income:
|
|
|
|
|
Service charges
|
|
|
382
|
|
Loan and late fees
|
|
|
17
|
|
Gain on sale of securities
|
|
|
13
|
|
Other
|
|
|
95
|
|
|
|
|
|
|
|
|
|
507
|
|
|
|
|
|
|
Non-interest expense:
|
|
|
|
|
Salaries and employee benefits
|
|
|
3,536
|
|
Occupancy, equipment and depreciation
|
|
|
1,360
|
|
Computer service charges
|
|
|
243
|
|
Professional fees
|
|
|
1,605
|
|
Advertising and business development
|
|
|
79
|
|
Insurance
|
|
|
705
|
|
Telephone
|
|
|
87
|
|
Stationery and supplies
|
|
|
26
|
|
Director fees
|
|
|
34
|
|
Other real estate owned
|
|
|
654
|
|
Provision for unfunded commitments
|
|
|
(471
|
)
|
Other
|
|
|
510
|
|
|
|
|
|
|
|
|
|
8,368
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,717
|
)
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
Basic and diluted
|
|
$
|
(175.00
|
)
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
130
SERVICE1ST BANK OF NEVADA
STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
FOR THE PERIOD JANUARY 1, 2010 THROUGH OCTOBER 28, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
|
|
|
|
|
(In thousands, except
for per share
amount)
|
|
Comprehensive
Loss
|
|
|
(Issued)
|
|
|
Paid-In
|
|
|
Accumulated
Deficit
|
|
|
|
Treasury Stock
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Balance, December 31, 2009
|
|
$
|
(8,717
|
)
|
|
|
50,811
|
|
|
$
|
1
|
|
|
$
|
52,009
|
|
|
$
|
(26,693
|
)
|
|
$
|
(23
|
)
|
|
|
1,000
|
|
|
$
|
(775
|
)
|
|
$
|
24,519
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
633
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
131
SERVICE1ST BANK OF NEVADA
STATEMENT OF CASH FLOWS
FOR PERIOD JANUARY 1, 2010 THROUGH OCTOBER 28, 2010
|
|
|
|
|
(In thousands, except for per share amount)
|
|
2010
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
Net loss
|
|
$
|
(8,717
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
Depreciation of premises and equipment
|
|
|
422
|
|
Amortization of securities premiums/discounts, net
|
|
|
48
|
|
Provision for loan losses
|
|
|
6,329
|
|
Stock warrants and stock option expense
|
|
|
633
|
|
Loss on disposition of equipment
|
|
|
|
|
Gain on sale securities
|
|
|
(13
|
)
|
Increase in accrued interest receivable
|
|
|
(76
|
)
|
Decrease (increase) in other assets
|
|
|
231
|
|
(Decrease) increase in accrued interest payable and other liabilities
|
|
|
(469
|
)
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,612
|
)
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
Purchases of certificates of deposit
|
|
|
(39,921
|
)
|
Proceeds from certificates of deposit
|
|
|
17,306
|
|
Purchases of securities available for sale
|
|
|
(6,000
|
)
|
Proceeds from sales of securities available for sale
|
|
|
4,000
|
|
Proceeds from maturities of securities available for sale
|
|
|
6,245
|
|
Proceeds from principal paydowns of securities available for sale
|
|
|
279
|
|
Proceeds from maturities of securities held to maturity
|
|
|
2,497
|
|
Proceeds from principal paydowns of securities held to maturity
|
|
|
145
|
|
Purchase of premises and equipment
|
|
|
(72
|
)
|
Net decrease (increase) in loans
|
|
|
5,845
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(9,676
|
)
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
Net (decrease) increase in deposits
|
|
|
(23,254
|
)
|
Net (repayments) proceeds from repurchase sweep agreements
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
(23,254
|
)
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(34,542
|
)
|
Cash and cash equivalents, beginning
|
|
$
|
49,633
|
|
|
|
|
|
|
Cash and cash equivalents, ending
|
|
$
|
15,091
|
|
|
|
|
|
|
Supplementary cash flow information:
|
|
|
|
|
Interest paid on deposits and repurchase sweep agreements
|
|
$
|
1,242
|
|
|
|
|
|
|
Supplemental disclosure of noncash operating and investing activities:
|
|
|
|
|
Principal paydowns on SBA loan pool securities reclassified to other assets
|
|
$
|
3
|
|
|
|
|
|
|
Transfers of loans to other real estate owned
|
|
$
|
2,403
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
132
SERVICE1ST BANK OF NEVADA
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE
|
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of business
Service1st Bank of Nevada (Service1st) 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, pursuant
to which the Bank became WLBCs wholly-owned subsidiary.
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 as of October 28, 2010.
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
133
SERVICE1ST BANK OF NEVADA
NOTES TO FINANCIAL STATEMENTS(Continued)
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 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
134
SERVICE1ST BANK OF NEVADA
NOTES TO FINANCIAL STATEMENTS(Continued)
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.
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.
135
SERVICE1ST BANK OF NEVADA
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 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 of prepayments relating to
three years of FDIC assessments as of October 28, 2010, 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 the Banks investment in the FHLB was $658,000 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 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
136
SERVICE1ST BANK OF NEVADA
NOTES TO FINANCIAL STATEMENTS(Continued)
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
137
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. The estimated fair value amounts as of October 28, 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 of these financial statements subsequent to the reporting date may be different than the amounts reported as of October 28, 2010.
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% of the loan portfolio as of October 28, 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 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.
138
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:
|
|
|
|
|
($ in 000s, except for per share amounts)
|
|
For the Period
January 1, 2010
through October
28, 2010
|
|
Basic and diluted:
|
|
|
|
|
Net loss applicable to common stock
|
|
$
|
(8,717
|
)
|
Weighted average common shares outstanding
|
|
|
49,811
|
|
|
|
|
|
|
Loss per share
|
|
$
|
(175.00
|
)
|
|
|
|
|
|
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.
139
SERVICE1ST BANK OF NEVADA
NOTES TO FINANCIAL STATEMENTS(Continued)
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.
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.
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 October 28, 2010:
|
|
($ in 000s)
|
|
Total
|
|
|
Quoted Prices
in
Active
Markets
for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Agency SecuritiesGSE
|
|
$
|
1,002
|
|
|
$
|
|
|
|
$
|
1,002
|
|
|
$
|
|
|
Collateralized Mortgage Obligation Securities
|
|
|
1,848
|
|
|
|
|
|
|
|
1,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,850
|
|
|
$
|
|
|
|
$
|
2,850
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
SERVICE1ST BANK OF NEVADA
NOTES TO FINANCIAL STATEMENTS(Continued)
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 October 28, 2010
|
|
($ in 000s)
|
|
Total
|
|
|
Quoted Prices
in
Active
Markets
for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Impaired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development, and other land 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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 $617,000 for the period January 1, 2010 through October 28, 2010.
Carrying amounts and fair values of investment securities as of October 28, 2010 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
Amortized Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. AgenciesGSE
|
|
$
|
1,002
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,002
|
|
Collateralized Mortgage Obligation Securities
|
|
|
1,868
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
1,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,870
|
|
|
$
|
|
|
|
$
|
(20
|
)
|
|
$
|
2,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141
SERVICE1ST BANK OF NEVADA
NOTES TO FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
Amortized Cost
|
|
|
Gross
Unrecognized
Gains
|
|
|
Gross
Unrecognized
Losses
|
|
|
Fair
Value
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. AgenciesGSE
|
|
$
|
6,924
|
|
|
$
|
256
|
|
|
$
|
|
|
|
$
|
7,180
|
|
Corporate Debt Securities
|
|
|
658
|
|
|
|
4
|
|
|
|
|
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small Business Administration Loan Pools
|
|
$
|
7,582
|
|
|
$
|
260
|
|
|
$
|
|
|
|
$
|
7,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 28, 2010 proceeds from sales of available-for-sale securities were $4.0 million.
Gross realized gains from sales for the period January 1, 2010 through October 28, 2010 were $13,000. There were no gross realized losses on available-for-sale securities for the period January 1, 2010 through October 28, 2010.
Securities with carrying amounts of approximately $6.9 million as of October 28, 2010, respectively, were pledged
for various purposes as required or permitted by law.
Information pertaining to securities with gross losses at
October 28, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
Less than Twelve Months
|
|
|
Over Twelve Months
|
|
($ in 000s)
|
|
Gross
Unrealized
(Losses)
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
(Losses)
|
|
|
Fair
Value
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S AgenciesGSE
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Collateralized Mortgage Obligations Securities
|
|
|
(20
|
)
|
|
|
1,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(20
|
)
|
|
$
|
1,848
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S AgenciesGSE
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Corporate Debt Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small Business Administration Loan Pools
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $20,000 relate primarily to fluctuations in the current interest rate environment and other factors, but do not presently represent realized
losses. As of October 28, 2010 there are no securities that have been determined to be OTTI.
142
SERVICE1ST BANK OF NEVADA
NOTES TO FINANCIAL STATEMENTS(Continued)
The amortized cost and fair value of securities as of October 28, 2010 by
contractual maturities are shown below. The maturities of small business administration loan pools may differ from their contractual maturities because the loans underlying the securities may be repaid without any penalties; therefore, these
securities are listed separately in the maturity summary.
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
Amortized
Cost
|
|
|
Fair
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in 000s)
|
|
Amortized
Cost
|
|
|
Fair
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 are as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
Construction, land development, and other land loans
|
|
$
|
9,225
|
|
Commercial real estate
|
|
|
62,963
|
|
Residential real estate
|
|
|
10,282
|
|
Commercial and industrial
|
|
|
42,778
|
|
Consumer
|
|
|
136
|
|
Less: net deferred loan fees
|
|
|
20
|
|
|
|
|
|
|
|
|
|
125,404
|
|
Less: allowance for loan losses
|
|
|
(9,418
|
)
|
|
|
|
|
|
|
|
$
|
115,986
|
|
|
|
|
|
|
Information about impaired and non-accrual loans as of and for the periods ended October 28 is as
follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
Impaired loans without a valuation allowance
|
|
$
|
9,269
|
|
Impaired loans with a valuation allowance
|
|
$
|
17,631
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
26,900
|
|
|
|
|
|
|
Related allowance for loan losses on impaired loans
|
|
$
|
5,493
|
|
|
|
|
|
|
Total non-accrual loans
|
|
$
|
20,327
|
|
|
|
|
|
|
Loans past due 90 days or more and still accruing
|
|
$
|
|
|
|
|
|
|
|
143
SERVICE1ST BANK OF NEVADA
NOTES TO FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
Average balance during the year on impaired loans
|
|
$
|
28,943
|
|
|
|
|
|
|
Interest income recognized on impaired loans
|
|
$
|
147
|
|
|
|
|
|
|
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 $1.3 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of October 28, 2010.
At October 28, 2010, the Bank was not committed to lend additional funds on these impaired loans or loans that have been classified
as troubled debt restructurings.
Changes in the allowance for loan losses for the periods ended October 28 are as
follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
Balance, beginning
|
|
$
|
6,404
|
|
Provisions charged to operating expense
|
|
|
6,329
|
|
Recoveries of amounts charged off
|
|
|
615
|
|
Less amounts charged off
|
|
|
(3,930
|
)
|
|
|
|
|
|
Balance, ending
|
|
$
|
9,418
|
|
|
|
|
|
|
NOTE 5. PREMISES
|
AND EQUIPMENT
|
The major classes of premises and equipment and the total accumulated depreciation and amortization as of
October 28 are as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
Leasehold improvements
|
|
$
|
1,733
|
|
Equipment
|
|
|
885
|
|
Furniture and fixtures
|
|
|
612
|
|
Vehicles
|
|
|
56
|
|
|
|
|
|
|
|
|
|
3,286
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,002
|
)
|
|
|
|
|
|
|
|
$
|
1,284
|
|
|
|
|
|
|
Depreciation expense for the period January 1, 2010 through October 28, 2010, was approximately
$422,000.
NOTE 6. INCOME
|
TAX MATTERS
|
The Bank files income tax returns in the U.S. federal jurisdiction. ASC 740,
Income taxes
, was amended
to clarify the accounting and disclosure for uncertain tax positions as defined. The Bank is subject to the provisions
144
SERVICE1ST BANK OF NEVADA
NOTES TO FINANCIAL STATEMENTS(Continued)
of this updated guidance effective as of January 1, 2009, and has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as
well as all open tax years in these jurisdictions. The Bank identified its federal tax return as major tax jurisdictions, as defined. The periods subject to examination for the Banks federal tax return are 2007, 2008, and 2009. The
Bank believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain income tax
positions have been recorded pursuant to applicable guidance. In addition, the Bank did not record a cumulative effect adjustment related to the adoption of this amended guidance.
The Bank may from time to time be assessed interest or penalties by tax jurisdictions, although the Bank has had no such assessments
historically. The Banks policy is to include interest and penalties related to income taxes as a component of income tax expense.
The cumulative tax effects of the primary temporary differences as of October 28 are as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
7,287
|
|
Organization costs
|
|
|
313
|
|
Allowance for loan losses and unfunded commitments
|
|
|
2,393
|
|
Stock warrants and stock options
|
|
|
333
|
|
Accrued expenses
|
|
|
646
|
|
Other
|
|
|
74
|
|
|
|
|
|
|
|
|
|
11,046
|
|
Deferred tax liabilities:
|
|
|
|
|
Prepaid loan fees
|
|
|
(96
|
)
|
Deferred loan costs
|
|
|
(114
|
)
|
|
|
|
|
|
Net deferred tax asset
|
|
|
10,836
|
|
Valuation allowance
|
|
|
(10,836
|
)
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
As of October 28, 2010 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. Federal operating loss carryforwards totals approximately $21.4 million and begin to expire in 2027.
145
SERVICE1ST BANK OF NEVADA
NOTES TO FINANCIAL STATEMENTS(Continued)
For the period January 1, 2010 through October 28, the components of income
tax benefit consist of the following:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
Current:
|
|
|
|
|
Federal
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
Federal
|
|
|
1,960
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
1,960
|
|
Less valuation allowance
|
|
|
(1,960
|
)
|
|
|
|
|
|
Income tax benefit
|
|
$
|
|
|
|
|
|
|
|
The reasons for the differences between the statutory federal income tax rate of 34% and the effective
tax rates are summarized as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
Computed expected tax (benefit)
|
|
$
|
(2,964
|
)
|
Nondeductible expenses
|
|
|
588
|
|
Other
|
|
|
416
|
|
Deferred tax asset valuation allowance
|
|
|
1,960
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
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, 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 $23.5 million was wired to another financial
institution. Both regulatory agencies were notified of the planned disposition of the account and neither agency objected to the plan to divest the account.
146
SERVICE1ST BANK OF NEVADA
NOTES TO FINANCIAL STATEMENTS(Continued)
NOTE 8. COMMITMENTS
|
AND CONTINGENCIES
|
Contingencies
In the normal course of business, the Bank is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on
the financial statements.
Financial instruments with off-balance sheet risk
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of amounts recognized in the balance sheet.
The Banks exposure to credit loss in the event of nonperformance by the other parties to the financial instrument for these
commitments is represented by the contractual amounts of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
A summary of the contract amount of the Banks exposure to off-balance sheet risk as of October 28 is as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
Unfunded commitments under lines of credit
|
|
$
|
15,965
|
|
Standby letters of credit
|
|
|
695
|
|
|
|
|
|
|
|
|
$
|
16,660
|
|
|
|
|
|
|
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 is approximately $348,000.
147
SERVICE1ST BANK OF NEVADA
NOTES TO FINANCIAL STATEMENTS(Continued)
Lease commitments
The Bank leases premises and equipment under non-cancelable operating leases expiring through 2013. Generally, these leases contain 5-year
renewal options. The following is a schedule of future minimum rental payments under these leases as of October 28, 2010:
|
|
|
|
|
($ in 000s)
|
|
|
|
2010
|
|
$
|
149
|
|
2011
|
|
|
910
|
|
2012
|
|
|
742
|
|
2013
|
|
|
444
|
|
|
|
|
|
|
|
|
$
|
2,245
|
|
|
|
|
|
|
Rent expense of approximately $653,000 is included in occupancy expense for the period January 1,
2010 through October 28, 2010.
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, real estate-related loans accounted for approximately 66%, of total loans.
The Banks policy for requiring collateral is to obtain collateral whenever it is available or desirable, depending upon the degree of risk the Bank is willing to take.
Lines of credit
The Bank has lines of credit available from the FHLB and the FRB. Borrowing capacity is determined based on collateral pledged, generally consisting of securities and loans, at the time of the borrowing.
As of October 28, 2010, the Bank had available credit with the FHLB and FRB of approximately $18.1 million and $4.4 million, respectively. As of October 28, 2010, 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.
148
SERVICE1ST BANK OF NEVADA
NOTES TO FINANCIAL STATEMENTS(Continued)
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
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted
Average
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 28, 2010, the weighted average remaining contractual terms of outstanding stock
warrants are approximately 1.2. The weighted average contractual terms of vested stock warrants are 1.2. As of October 28, 2010, the aggregate intrinsic value of outstanding and vested stock warrants is $0.
As of October 28, 2010, the weighted average remaining contractual terms of outstanding stock options are 6.7. The weighted average
contractual terms of vested stock options are 3.9. As of October 28, 2010, the aggregate intrinsic value of outstanding and vested stock options is $0.
For stock options granted under the Plan as of October 28, 2010, there is approximately $860,000, 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.
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
for the period January 1, 2010 through October 28, 2010.
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 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.
149
SERVICE1ST BANK OF NEVADA
NOTES TO FINANCIAL STATEMENTS(Continued)
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 an informal 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
|
|
|
|
Actual
|
|
|
For Capital
Adequacy
Purposes
|
|
|
To Be Well
Capitalized
|
|
|
Required Under
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
|
%
|
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 of the Banks stockholders equity is restricted as of October 28, 2010.
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 $22,000 of their annual compensation. Under the terms of the plan, the Bank may not make matching
contributions.
150
SERVICE1ST BANK OF NEVADA
NOTES TO FINANCIAL STATEMENTS(Continued)
NOTE 12. TRANSACTIONS WITH RELATED PARTIES
Principal stockholders of the Bank and officers and directors, including their families and companies of which they are
principal owners, are considered to be related parties. These related parties were loan customers of, and had other transactions with, the Bank in the ordinary course of business. In managements opinion, these loans and transactions are on the
same terms as those for comparable loans and transactions with unrelated parties. The aggregate activity in such loans for the period January 1, 2010 through October 28 2010 is as follows:
|
|
|
|
|
($ in 000s)
|
|
2010
|
|
Balance, beginning
|
|
$
|
6,626
|
|
New loans
|
|
|
455
|
|
Repayments
|
|
|
(862
|
)
|
Other Changes
|
|
|
|
|
|
|
|
|
|
Balance, ending
|
|
$
|
6,219
|
|
|
|
|
|
|
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 as of October 28, 2010.
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 ($0.01).
NOTE 14. FAIR
|
VALUE OF FINANCIAL INSTRUMENTS
|
The estimated fair value of the Banks financial statements as of October 28, is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
($ in 000s)
|
|
Fair Value
|
|
|
Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
10,164
|
|
|
$
|
10,164
|
|
Interest-bearing deposits in banks
|
|
|
4,927
|
|
|
|
4,927
|
|
Certificates of deposits
|
|
|
31,928
|
|
|
|
31,928
|
|
Restricted Stock
|
|
|
658
|
|
|
|
658
|
|
Securities available for sale
|
|
|
2,850
|
|
|
|
2,850
|
|
Securities held to maturity
|
|
|
7,852
|
|
|
|
7,842
|
|
Loans, net
|
|
|
115,986
|
|
|
|
109,589
|
|
Accrued interest receivable
|
|
|
605
|
|
|
|
605
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
162,066
|
|
|
|
162,112
|
|
Accrued interest payable
|
|
|
44
|
|
|
|
44
|
|
151
SERVICE1ST BANK OF NEVADA
NOTES TO FINANCIAL STATEMENTS(Continued)
Fair Value of Commitments
The estimated fair value of the standby letters of credit at October 28, 2010 is insignificant. Loan commitments on which the
committed interest rate is less than the current market rate are also insignificant at October 28, 2010.
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.
NOTE 15. 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.
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.
152
(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)
|
|
|
10.1*
|
|
Form of Indemnification Agreement between WLBC and each of the directors and officers of WLBC (incorporated by reference to Exhibit 10.10 to Amendment No. 1 to the
Form S-1, File No. 333-144799, filed by WLBC with the Securities and Exchange Commission on September 6, 2007)
|
|
|
10.2*
|
|
Settlement Agreement and General Release, dated December 23, 2008, between WLBC and Scott LaPorta (incorporated by reference to Exhibit 10.13 to Current Report on
Form 8-K, File No. 001-33803, filed by WLBC with the Securities and Exchange Commission on December 29, 2008)
|
|
|
10.3
|
|
Director Resignation Agreement, dated December 23, 2008, between WLBC, Robert M. Foresman, Carl H. Hahn, Philip A. Marineau and Steven Westly (incorporated by reference to
Exhibit 10.14 to Current Report on Form 8-K, File No. 001-33803, filed by WLBC with the Securities and Exchange Commission on December 29, 2008)
|
|
|
10.4
|
|
Second Amended and Restated Sponsor Support Agreement, dated as of August 13, 2009, by and between Global Consumer Acquisition Corp. and Hayground Cove Asset Management LLC
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, File No. 001-33803, filed by WLBC with the Securities and Exchange Commission on August 14,
2009)
|
153
|
|
|
Exhibit
Numbers
|
|
|
|
|
10.5*
|
|
Employment Agreement, dated as of November 6, 2009, by and between Western Liberty Bancorp and Richard Deglman (incorporated by reference to Exhibit 10.4 to the Current
Report on Form 8-K, File No. 001-33803, filed by WLBC with the Securities and Exchange Commission on November 9, 2009)
|
|
|
10.6*
|
|
Second Amended and Restated Employment Agreement, dated as of December 18, 2009, by and between Western Liberty Bancorp and George A. Rosenbaum, Jr. (incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K, File No. 001-33803, filed by WLBC with the Securities and Exchange Commission on December 24, 2009)
|
|
|
10.7*
|
|
Letter Agreement, dated as of October 28, 2010, between Western Liberty Bancorp and Jason N. Ader (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K, File No. 001-33803, filed by WLBC with the Securities and Exchange Commission on November 3, 2010)
|
|
|
10.8*
|
|
Letter Agreement, dated as of October 28, 2010, between Western Liberty Bancorp and Daniel B. Silvers (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K, File No. 001-33803, filed by WLBC with the Securities and Exchange Commission on November 3, 2010)
|
|
|
10.9*
|
|
Letter Agreement, dated as of October 28, 2010, between Western Liberty Bancorp and Andrew P. Nelson (incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K, File No. 001-33803, filed by WLBC with the Securities and Exchange Commission on November 3, 2010)
|
|
|
10.10*
|
|
Letter Agreement, dated as of October 28, 2010, between Western Liberty Bancorp and Michael Tew (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K, File No. 001-33803, filed by WLBC with the Securities and Exchange Commission on November 3, 2010)
|
|
|
10.11*
|
|
Letter Agreement, dated as of October 28, 2010, between Western Liberty Bancorp and Laura Conover-Ferchak (incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K, File No. 001-33803, filed by WLBC with the Securities and Exchange Commission on November 3, 2010)
|
|
|
10.12
|
|
Expense Sharing Agreement, dated as of October 29, 2010, between Western Liberty Bancorp and Service1st Bank of Nevada (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K, File No. 001-33803, filed by WLBC with the Securities and Exchange Commission on November 3, 2010)
|
|
|
10.13
|
|
Tax Allocation Agreement, dated as of October 29, 2010, between Western Liberty Bancorp and Service1st Bank of Nevada (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K, File No. 001-33803, filed by WLBC with the Securities and Exchange Commission on November 3, 2010)
|
|
|
10.14*
|
|
Amended and Restated 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)
|
|
|
10.15* **
|
|
Restricted Stock Agreement with William E. Martin
|
|
|
14.1
|
|
Code of Conduct and Ethics**
|
|
|
21
|
|
Subsidiaries of the registrant: Service1st Bank of Nevada, a Nevada corporation located in Las Vegas, Nevada, and Las Vegas Sunset Properties, also of Las Vegas, Nevada, are
the sole subsidiaries of Western Liberty Bancorp**
|
154
|
|
|
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
|
|
|
99.1.1
|
|
Consent Order of Federal Deposit Insurance Corporation and the Nevada Financial Institutions Division, dated as of September 1, 2010, In the Matter of Service1
st
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)
|
|
|
99.1.2**
|
|
Order Terminating Consent Order, dated October 31, 2011
|
*
|
Management contract or compensatory plan or arrangement
|
155
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
WESTERN LIBERTY BANCORP
|
|
|
By:
|
|
/s/ W
ILLIAM
E.
M
ARTIN
|
|
|
William E. Martin
|
|
|
Chief Executive Officer and
|
|
|
Director
|
|
Date: March 14, 2012
|
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/ M
ICHAEL
B.
F
RANKEL
Michael B. Frankel
|
|
Chairman
|
|
March 14, 2012
|
|
|
|
/s/ T
ERRENCE
L.
W
RIGHT
Terrence L. Wright
|
|
Vice Chairman
|
|
March 14, 2012
|
|
|
|
/s/ J
ASON
N.
A
DER
Jason N. Ader
|
|
Director
|
|
March 14, 2012
|
|
|
|
/s/ R
ICHARD
A.C.
C
OLES
Richard A.C. Coles
|
|
Director
|
|
March 14, 2012
|
|
|
|
/s/ C
URTIS
W. A
NDERSON
,
CPA
Curtis W. Anderson, CPA
|
|
Director
|
|
March 14, 2012
|
|
|
|
/s/ W
ILLIAM
E.
M
ARTIN
William E. Martin
|
|
Director and Chief Executive Officer (Principal Executive Officer)
|
|
March 14, 2012
|
|
|
|
/s/ P
ATRICIA
A.
O
CHAL
Patricia A. Ochal
|
|
Chief Financial Officer (Principal
Accounting and Financial Officer)
|
|
March 14, 2012
|
156
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