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EXCEL - IDEA: XBRL DOCUMENT - WESTERN LIBERTY BANCORP | Financial_Report.xls |
EX-31.2 - EX-31.2 - WESTERN LIBERTY BANCORP | y91555exv31w2.htm |
EX-31.1 - EX-31.1 - WESTERN LIBERTY BANCORP | y91555exv31w1.htm |
EX-32.1 - EX-32.1 - WESTERN LIBERTY BANCORP | y91555exv32w1.htm |
EX-10.16 - EX-10.16 - WESTERN LIBERTY BANCORP | y91555exv10w16.htm |
EX-32.2 - EX-32.2 - WESTERN LIBERTY BANCORP | y91555exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-33803
WESTERN LIBERTY BANCORP
(Exact name of registrant as specified in its charter)
Delaware | 26-0469120 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
8363 W. Sunset Road, Suite 350, Las Vegas, Nevada 89113
(702) 966-7400
(702) 966-7400
(Address, including zip code, and telephone number, including area code, of registrants
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Smaller reporting company þ | Non-accelerated filer o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
As
of August 4, 2011, the registrant had 15,088,023 shares of its common stock, par value
$0.0001 per share, outstanding.
WESTERN LIBERTY BANCORP
TABLE OF CONTENTS
TABLE OF CONTENTS
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37 | ||||||||
Exhibit 31.1 |
38 | |||||||
Exhibit 31.2 |
39 | |||||||
Exhibit 32.1 |
40 | |||||||
Exhibit 32.2 |
41 | |||||||
EX-10.16 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTERN LIBERTY BANCORP
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
($ in 000s)
($ in 000s)
June 30, 2011 | December 31, 2010 | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 7,163 | $ | 11,675 | ||||
Money market funds |
51,308 | 52,206 | ||||||
Interest-bearing deposits in banks |
44,955 | 39,346 | ||||||
Cash and cash equivalents |
103,426 | 103,227 | ||||||
Certificates of deposits |
4,195 | 26,889 | ||||||
Securities, available for sale |
824 | 1,819 | ||||||
Securities, held to maturity (fair value of $3,706 and $5,287, respectively) |
3,692 | 5,314 | ||||||
Loans, net of allowance ($4,404 and $36, respectively) |
97,129 | 106,223 | ||||||
Premises and equipment, net |
1,013 | 1,228 | ||||||
Other real estate owned, net |
4,440 | 3,406 | ||||||
Goodwill |
5,633 | 5,633 | ||||||
Other intangibles, net |
719 | 768 | ||||||
Accrued interest receivable and other assets |
2,272 | 3,039 | ||||||
Total assets |
$ | 223,343 | $ | 257,546 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Non-interest bearing demand |
$ | 54,576 | $ | 67,087 | ||||
Interest bearing: |
77,009 | 93,199 | ||||||
Total deposits |
131,585 | 160,286 | ||||||
Contingent consideration |
1,816 | 1,816 | ||||||
Accrued interest payable and other liabilities |
843 | 1,615 | ||||||
Total liabilities |
134,244 | 163,717 | ||||||
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 outstanding |
1 | 1 | ||||||
Additional paid-in capital |
117,597 | 117,317 | ||||||
Accumulated deficit |
(28,494 | ) | (23,489 | ) | ||||
Accumulated other comprehensive loss, net |
(5 | ) | | |||||
Total stockholders equity |
89,099 | 93,829 | ||||||
Total liabilities and stockholders equity |
$ | 223,343 | $ | 257,546 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.
3
Table of Contents
WESTERN LIBERTY BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
($ in 000s except per share data)
($ in 000s except per share data)
Service1st | ||||||||||||||||||||
Bank | ||||||||||||||||||||
Predecessor | ||||||||||||||||||||
For the Six | ||||||||||||||||||||
Months | ||||||||||||||||||||
For the Three Months Ended | For the Six Months Ended | Ended | ||||||||||||||||||
June 30, 2011 | June 30, 2010 | June 30, 2011 | June 30, 2010 | June 30, 2010 | ||||||||||||||||
Interest and dividend income: |
||||||||||||||||||||
Loans, including fees |
$ | 2,018 | $ | | $ | 5,800 | $ | | $ | 3,713 | ||||||||||
Securities, taxable and other |
68 | 1 | 134 | 4 | 494 | |||||||||||||||
Total interest and dividend income |
2,086 | 1 | 5,934 | 4 | 4,207 | |||||||||||||||
Interest expense: |
||||||||||||||||||||
Deposits |
127 | | 239 | | 797 | |||||||||||||||
Total interest expense |
127 | | 239 | | 797 | |||||||||||||||
Net interest income |
1,959 | 1 | 5,695 | 4 | 3,410 | |||||||||||||||
Provision for loan losses |
4,348 | | 5,712 | | 3,231 | |||||||||||||||
Net interest income after provision for loan losses |
(2,389 | ) | 1 | (17 | ) | 4 | 179 | |||||||||||||
Non-interest income: |
||||||||||||||||||||
Service charges |
78 | | 156 | | 241 | |||||||||||||||
Other |
114 | | 157 | | 65 | |||||||||||||||
Total non-interest income |
192 | | 313 | | 306 | |||||||||||||||
Non-interest expense |
||||||||||||||||||||
Salaries and employee benefits |
765 | 63 | 1,558 | 138 | 1,932 | |||||||||||||||
Occupancy, equipment and depreciation |
374 | | 748 | | 844 | |||||||||||||||
Computer service charges |
74 | | 151 | | 145 | |||||||||||||||
Federal deposit insurance |
129 | | 281 | | 248 | |||||||||||||||
Legal and professional fees |
520 | 871 | 1,455 | 1,726 | 993 | |||||||||||||||
Advertising and business development |
48 | | 68 | | 47 | |||||||||||||||
Insurance |
67 | 75 | 138 | 149 | 43 | |||||||||||||||
Telephone |
17 | | 43 | | 51 | |||||||||||||||
Printing and supplies |
87 | 25 | 229 | 130 | 15 | |||||||||||||||
Director Fees |
49 | | 98 | | ||||||||||||||||
Stock-based compensation |
138 | 631 | 280 | 1,262 | 206 | |||||||||||||||
Provision for unfunded commitments |
(203 | ) | | (336 | ) | | (355 | ) | ||||||||||||
Other |
334 | 11 | 588 | 27 | 305 | |||||||||||||||
Total non-interest expense |
2,399 | 1,676 | 5,301 | 3,432 | 4,474 | |||||||||||||||
Net loss |
$ | (4,596 | ) | $ | (1,675 | ) | $ | (5,005 | ) | $ | (3,428 | ) | $ | (3,989 | ) | |||||
Comprehensive loss |
$ | (4,598 | ) | $ | (1,675 | ) | $ | (5,010 | ) | $ | (3,428 | ) | $ | (3,959 | ) | |||||
Basic loss per common share |
$ | (0.30 | ) | $ | (0.15 | ) | $ | (0.33 | ) | $ | (0.31 | ) | $ | (80.08 | ) | |||||
Diluted loss per common share |
$ | (0.30 | ) | $ | (0.15 | ) | $ | (0.33 | ) | $ | (0.31 | ) | $ | (80.08 | ) | |||||
Weighted average common shares outstanding basic |
15,088,023 | 10,959,169 | 15,088,023 | 10,959,169 | 49,811 | |||||||||||||||
Weighted average common shares outstanding -
diluted |
15,088,023 | 10,959,169 | 15,088,023 | 10,959,169 | 49,811 | |||||||||||||||
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Table of Contents
WESTERN LIBERTY BANCORP CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ in 000s)
($ in 000s)
Service1st Bank | ||||||||||||
Predecessor For the | ||||||||||||
Six Months | ||||||||||||
For the Six Months Ended | Ended | |||||||||||
June 30, 2011 | June 30, 2010 | June 30, 2010 | ||||||||||
Cash flow from operating activities |
||||||||||||
Net loss |
$ | (5,005 | ) | $ | (3,428 | ) | $ | (3,989 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities |
||||||||||||
Stock-based compensation |
280 | 1,262 | 206 | |||||||||
Accretion of loan discount, net |
(2,800 | ) | | | ||||||||
Amortization of core deposit intangible |
49 | | | |||||||||
Provision for loan losses |
5,712 | | 3,231 | |||||||||
Depreciation of premises and equipment |
215 | | 262 | |||||||||
Amortization of securities premiums/discounts, net |
123 | | 14 | |||||||||
Gain on disposition of other real estate owned |
(33 | ) | | | ||||||||
Changes in
operating assets and liabilities: |
||||||||||||
Decrease (increase) in prepaid expenses and other assets |
767 | (76 | ) | 40 | ||||||||
(Decrease) increase in accrued interest payable and other liabilities |
(772 | ) | (250 | ) | (450 | ) | ||||||
Net cash used in operating activities |
(1,464 | ) | (2,492 | ) | (686 | ) | ||||||
Cash flow from investing activities |
||||||||||||
Purchases of certificates of deposit |
| | (36,216 | ) | ||||||||
Proceeds from maturities of certificates of deposit |
22,694 | | 7,601 | |||||||||
Purchases of securities available for sale |
| | (1,000 | ) | ||||||||
Proceeds from maturities of securities available for sale |
| | 4,506 | |||||||||
Proceeds from principal paydowns of securities available for sale |
961 | | | |||||||||
Proceeds from maturities of securities held to maturity |
1,500 | | 2,043 | |||||||||
Proceeds from principal payments of securities held to maturity |
28 | | | |||||||||
Proceeds from disposition of other real estate owned |
1,037 | | | |||||||||
Purchase of premises and equipment |
| | (72 | ) | ||||||||
Net decrease in loans |
4,144 | | 7,630 | |||||||||
Net cash provided by (used in) investing activities |
30,364 | | (15,508 | ) | ||||||||
Cash flow from financing activities |
||||||||||||
Net increase (decrease) in deposits |
(28,701 | ) | | 23,968 | ||||||||
Net cash provided by (used in) financing activities |
(28,701 | ) | | 23,968 | ||||||||
Net increase/(decrease) in cash and cash equivalents |
199 | (2,492 | ) | 7,774 | ||||||||
Cash and cash equivalents, beginning of period |
103,227 | 87,969 | 49,633 | |||||||||
Cash and cash equivalents, end of period |
$ | 103,426 | $ | 85,477 | $ | 57,407 | ||||||
Supplemental disclosures of cash flow information: |
||||||||||||
Interest paid on deposits and other borrowed funds |
$ | 227 | $ | | $ | 718 | ||||||
Supplemental disclosure of noncash investing and financing activities: |
$ | 2,038 | $ | | $ | 3,019 | ||||||
Transfers of loans to other real estate owned |
The accompany notes are an integral part of these unaudited condensed consolidated financial
statements.
5
Table of Contents
Western Liberty Bancorp
Notes to Unaudited Condensed Consolidated 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., a special purpose acquisition company formed under the laws
of Delaware on June 28, 2007, to consummate an acquisition, capital stock exchange, acquisition,
stock purchase, reorganization or similar business combination with one or more businesses. Our
stockholders approved certain amendments to our Amended and Restated Certificate of Incorporation
removing certain provisions specific to special purpose acquisition companies, changing our name to
Western Liberty Bancorp and authorizing the distribution and termination of our trust account.
Effective October 7, 2009, the Company began its business operations and exited its development
stage. Our sole subsidiary is Service1st Bank of Nevada. We currently conduct no business
activities other than acting as the holding company of Service1st Bank.
Service1st Bank of Nevada (Service1st) is a community bank which commenced operations as a
financial institution on January 16, 2007. Service1st provides a full range of banking and related
services to locally owned businesses, professional firms, real estate developers and investors,
local non-profit organizations, high net worth individuals, and other customers in and around the
greater Las Vegas area. Banking services provided include basic commercial and consumer depository
services, commercial working capital and equipment loans, commercial real estate (both owner
occupied and non-owner occupied) loans, construction loans, and unsecured personal and business
loans. Service1st relies primarily on locally generated deposits to fund its lending activities.
Service1st has two branches located in Las Vegas, Nevada, which accept deposits and grant loans to
customers. Substantially all of our business is generated in the Nevada market. Service1st is under
the supervision of and subject to regulation and examination by the Nevada FID and the FDIC.
Basis of presentation
The accounting and reporting policies of the Company conform to generally accepted accounting
principles in the United States of America. All significant intercompany balances and transactions
have been eliminated in consolidation. Our financial statements reflect all adjustments that are,
in the opinion of management, necessary for a fair presentation of the financial position and
results of operations for the periods presented. We have evaluated all subsequent events through
the date the financial statements were issued.
Certain information and note disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles in the United
States of America have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The interim operating results are not necessarily indicative,
of operating results for the year. For further information, refer to the consolidated financial
statements and notes included in the Companys annual report on Form 10-K for the year ended
December 31, 2010.
Predecessors
Since the Companys operations prior to the acquisition of Service1st were insignificant
relative to that of Service1st, management believes that Service1st is the Companys predecessor.
Management has determined this based on an evaluation of the various facts and circumstances,
including, but not limited to the life of Service1st, the operations of Service1st, the purchase
price paid, and the fact that the operations on a prospective basis will be most similar to
Service1st. Accordingly, the historical statement of operations for the six months ended June 30,
2010 and statement of cash flows for the six months ended June 30, 2010 of Service1st Bank have
been presented.
6
Table of Contents
Use of estimates in the preparation of financial statements
To prepare financial statements in conformity with U.S. generally accepted accounting
principles, management makes estimates and assumptions based on available information. These
estimates and assumptions affect the amounts reported in the financial statements and the
disclosures provided, and actual results could differ. The purchase accounting adjustments,
allowance for loan loss, fair value of financial instruments, and deferred tax assets are
particularly subject to change.
Reclassifications
Certain amounts in the financial statements and related disclosures as of December 31, 2010
have been reclassified to conform to the current condensed presentation. These reclassification
adjustments have no effect on net loss or stockholders equity as previously reported.
Loans
Loans are stated at the amount of unpaid principal, reduced or increased by unearned net loan
fees or deferred costs, 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.
For the period ended June 30, 2011, Service1st has implemented a new program to assist in
determining estimated credit losses. During the later part of 2010, management began researching for ALLL models that would provide a better estimate for the
ALLL but was consistent with all accounting and regulatory guidance. By the end of 2010 a new ALLL model
was purchased, data was loaded and initial tests were made comparing the results
to the existing methodology. The old and new models were run in
parallel at March 31, 2011.
It was determined the existing model would be used at March 31, 2011 due to verification and
documentation of certain data assumptions. Both models were also run for the period ended June 30, 2011.
The new program utilizes a dual factor approach. The ALLL methodology incorporates both a payment default
rate (PD) and a loss given default (LGD) rate
in lieu of evaluating loss primarily based on charge-offs to total loans. Service1st uses a
historical look-back period of three years to compute the payment default rate and loss given
default rate. When not statistically meaningful, Service1st will utilize peer institution data to
determine an appropriate PD and LGD by that specific loan type. Pursuant to the Joint Policy
Statement issued in 2006, the model provides for a variety of qualitative factors to adjust for
specific conditions associated with the institution.
The new method did not produce materially different results from the previous ALLL model.
The allowance consists of general and specific components. The general component covers
non-impaired loans and is based on the methodology described above. The specific component relates
to loans that are classified as impaired. For such loans, an allowance is established when the
discounted cash flows (or collateral value or observable market price) of the impaired loan is
lower than the carrying value of that loan.
A loan is impaired when, based on current information and events, it is probable that the
Company will be unable to collect all amounts due according to the contractual terms of the loan
agreement. Loans for which the terms have been modified resulting in a concession, and for which
the borrower is experiencing financial difficulties, are considered troubled debt restructurings
and classified as impaired.
Factors considered by management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and interest payments when due. Loans
that experience insignificant payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and payment shortfalls on
case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the borrowers prior
payment record, and the amount of the shortfall in relation to the principal and interest owed.
7
Table of Contents
Commercial and commercial real estate loans that are graded substandard are individually
evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that
the loan is reported, net, at the present value of estimated future cash flows using the loans
existing rate or at the fair value of collateral if repayment is expected solely from the
collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential
real estate loans, are collectively evaluated for impairment, and accordingly, they are not
separately identified for impairment disclosures. 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 Company determines the
amount of reserve in accordance with the accounting policy for the allowance for loan losses.
Risk factors impacting loans in each of the portfolio segments include broad deterioration of
property values, reduced consumer and business spending as a result of continued high unemployment
in our market and a lack of confidence in a sustainable recovery. The Las Vegas market has begun to
see an increase in visitor traffic and slight upticks in gaming. However, the oversupply of real
estate will continue to suppress pricing power for the foreseeable future. Consequently we believe
real estate appraisals will continue to reduce these asset valuations and further stress
individuals and businesses that rely on real estate to generate cash flows. The general component
covers non-impaired loans and is based on methodology described above. 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. The dual factors of payment default rate and a
loss given default rate are supplemented with other economic factors based on the risks present for
each portfolio segment. These factors include consideration of the following: levels of and trends
in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in
volume and terms of loans; effects of any changes in risk selection and underwriting standards;
other changes in lending policies, procedures, and practices; experience, ability, and depth of
lending management and other relevant staff; national and local economic trends and conditions;
industry conditions; and effects of changes in credit concentrations. The following portfolio
segments have been identified:
1. | Loans secured by real estate construction, land development and other land loans | ||
2. | Commercial real estate | ||
3. | Residential real estate | ||
4. | Commercial and industrial | ||
5. | Consumer |
These are generally the segments identified in regulatory reporting. Service 1st Bank
primarily focuses on the small business market and, therefore, generates most of its loans in the
area of commercial real estate and commercial and industrial loans. By segmenting into these
categories, the bank is able to monitor the exposure to the related risks and observe compliance
with regulatory guidance and limitations.
The Company, as a result of its purchase of Service1st Bank of Nevada on October 28, 2010,
acquired a portfolio of loans, some of which have shown evidence of credit deterioration since
origination. These purchased loans are recorded at fair value and there is no carryover of the
sellers allowance for loan losses. After acquisition, losses will be recognized by an increase in
the allowance for loan losses. It is important that consideration to loss experience be blended
with the significant discounts to properly reflect the carrying value of the legacy loan portfolio.
In the current process, a general component of the allowance for loan losses is being recorded for
new loan originations that were determined based on historical experience and managements
judgment.
Purchased loans with credit impairment are accounted for
individually. The Company estimates the amount and timing of expected cash flows for each purchased
loan, and the expected cash flows in excess of amount paid is recorded as interest income
over the remaining life of the loan (accretable yield). The excess of the loans
contractual principal and interest over expected cash flows is not recorded (nonaccretable
difference).
8
Table of Contents
Over the life of the loan, 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
respectively as interest income.
Interest and fees on loans
Interest on loans is recognized over the terms of the loans and is calculated using the
effective interest method. The accrual of interest on impaired loans is discontinued when, in
managements opinion, the borrower may be unable to make payments as they become due.
The Company determines a loan to be delinquent when payments have not been made according to
contractual terms, typically evidenced by nonpayment of a monthly installment by the due date. The
accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the
credit is well secured and in the process of collection.
All interest accrued but not collected for loans that are placed on nonaccrual status or
charged off is reversed against interest income. The interest on these loans is accounted for on
the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned
to accrual status when all the principal and interest amounts contractually due are brought current
and future payments are reasonably assured.
Loan origination fees, fair value adjustments on purchased non-impaired loans, commitment fees
and certain direct loan origination costs are deferred and the net amount amortized as an
adjustment to the related loans yield. The Company is generally amortizing these amounts over the
contractual life of the loan. Commitment fees, based upon a percentage of a customers unused line
of credit, and fees related to standby letters of credit are recognized over the commitment period.
Other real estate acquired through foreclosure
Assets acquired through or in-lieu-of foreclosures 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.
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 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. Intangible assets with definite useful lives are amortized over
their estimated useful lives to their estimated residual values. Goodwill is the only intangible
asset with an indefinite life on our balance sheet. WLBC acquired Service1st Bank of Nevada on
October 28, 2010 which resulted in goodwill of $5.6 million being recorded.
Other intangible assets consist of a core deposit intangible which is amortized on an
accelerated method over the estimated useful life of 10 years.
Stock compensation plans
The Company has the Service1st Bank of Nevada 2007 Stock Option Plan. 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.
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
9
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there exists limited or no observable market data and, therefore, are based primarily upon
estimates, are often calculated based on the economic and competitive environment, the
characteristics of the asset or liability and other factors. Therefore, the results cannot be
determined with precision and may not be realized in an actual sale or immediate settlement of the
asset or liability. Additionally, there may be inherent weaknesses in any calculation technique,
and changes in the underlying assumptions used, including discount rates and estimates of future
cash flows, could significantly affect the results of current or future values. The Company
utilizes fair value measurements to determine fair value disclosures and certain assets recorded at
fair value on a recurring and nonrecurring basis. See note 3.
Fair values of financial instruments
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
June 30, 2011. The estimated fair value amounts as of June 30, 2011 have been measured as of that
date and have been updated for purposes of these financial statements. As such, the estimated fair
values of these financial statements subsequent to the reporting date may be different than the
amounts reported as of June 30, 2011.
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 59% of the loan portfolio as of June 30, 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.
Accrued interest receivable and payable
The carrying amounts reported in the balance sheet for accrued interest receivable and payable
approximate their fair value.
Restricted stock
The Company is a member of the FHLB system and maintains an investment in capital stock of the
FHLB of San Francisco in an amount pursuant to the agreement with the FHLB. This investment is
carried at cost since no ready market exists, and there is no quoted market value.
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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.
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. As of June
30, 2011, approximately 490,000 stock based instruments were issued and outstanding. For further
information, refer to the consolidated financial statements and notes included in the Companys
annual report on Form 10-K for the year ended December 31, 2010.
Recent accounting pronouncements
In January 2010, the FASB issued ASU 2010-06, Improving Disclosure about Fair Value
Measurements. This standard requires new disclosures on the amount and reason for transfers in and
out of Level 1 and Level 2 recurring fair value measurements. The standard also requires disclosure
of activities (i.e., on a gross basis), including purchases, sales, issuances, and settlements, in
the reconciliation of Level 3 fair value recurring measurements. The standard regarding Level 1 and
Level 2 fair value measurements and clarification of existing disclosures are effective for periods
beginning after December 15, 2009. The disclosures about the reconciliation of information in Level
3 recurring fair value measurements are required for periods beginning after December 15, 2010.
Adoption of the applicable portions of this standard on January 1, 2011 did not have a significant
impact on our quarterly disclosures.
Newly
Issued But Not Yet Effective Accounting Standards:
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 will be 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 are not expected to have a material impact on
the Companys financial position, results or operations or cash flows.
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
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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 or operations or cash flows.
In June 2011, the FASB issued an accounting standards update to increase the prominence of
items included in Other Comprehensive Income and facilitate the convergence of US GAAP with IFRS.
The update prohibits continued presentation of Other Comprehensive Income in the statement of
Shareholders Equity. The update requires that all non-owner changes in shareholders equity be
presented in either a single continuous statement of comprehensive income or in two separate but
continuous statements. 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 only expected to
change the manner in which our other comprehensive income is disclosed.
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.
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. Based on a purchase price
of $17.1 million and the $16.4 million fair value of net assets acquired, the transaction resulted
in $5.6 million of goodwill.
The most significant fair value adjustment resulting from the application of purchase
accounting adjustment for this acquisition was made to loans. As of the acquisition date, the gross
loan portfolio at Service1st Bank was approximately $125.4 million with a related Allowance for
Loan and Lease Losses (ALLL) of approximately $9.4 million. The valuation of the loan portfolio
resulted in a discount of approximately $15.8 million at October 28, 2010 which was subsequently
adjusted to approximately $15.1 million based on additional information after the measurement date,
but before the adjustments were considered final. This discount consists of two components; credit
discount and yield discount. Loans purchased with credit impairments are loans with credit
deterioration since origination and it is probable that not all contractually required principal
and interest payments would be collected. The performing loan portfolio was approximately $89.9
million and was discounted by $49,000 for yield and $3.6 million for credit discounts. The
remaining $35.6 million of loans were identified as loans with purchased credit impairment (PCI)
and those loans had a discount of $576,000 for yield and $10.9 million for credit discounts. The
discounts on performing loans are recognized by a level yield method over the remaining life of
the loans or loan pools. The loans identified as containing purchase credit impairment are treated
somewhat differently. The discount associated with yield is accreted as yield discount and the
credit discount is not accreted but is left on the books to reduce the current carrying value of
the applicable loans.
In order to assist WLBC in gaining the requisite approval of certain bank regulatory
authorities in connection with the Acquisition, on September 23, 2010, WLBC entered into a Letter
Agreement (the Warrant Restructuring Letter Agreement) with certain warrant holders who
represented to WLBC that they collectively hold at least a majority of its outstanding warrants
(the Consenting Warrant Holders) confirming the basis and terms upon which the parties have
agreed to amend the Amended and Restated Warrant Agreement, dated as of July 20, 2009, as amended
by the Amendment No. 1, dated as of October 9, 2009, each between WLBC and Continental Stock
Transfer & Trust Company, as warrant agent (the Warrant Agent) (as amended, the Warrant
Agreement), previously filed with the SEC. The Warrant Restructuring Letter Agreement served as
the consent and approval of each of the Consenting Warrant Holders to amend and restate the Warrant
Agreement. Pursuant to the Warrant Restructuring Letter Agreement, the Warrant Agreement amended
where applicable to provide for the automatic exercise of all of the outstanding warrants of WLBC
(the Warrants) into one thirty-second (1/32) of one share of WLBCs common stock, par value
$0.0001 (Common Stock), which shall occur concurrently with the consummation of the Acquisition
(the Automatic Exercise Date). Any Warrants that would entitle a holder of such Warrants to a
fractional share of Common Stock after taking into account the automatic exercise of the remainder
of such holders Warrants into full shares of Common Stock were cancelled on the Automatic Exercise
Date. As of September 23, 2010, there were 48,067,758 Warrants outstanding, each exercisable for
one share of Common Stock, which were converted into approximately 1,502,088 shares of Common Stock
on the Automatic Exercise Date. As a result of the foregoing, there were no
12
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Warrants outstanding after the Automatic Exercise Date. WLBC also paid a consent fee to the
holders of Warrants in an amount equal to $0.06 per Warrant on the Automatic Exercise Date,
regardless of whether such holders were party to the Warrant
Restructuring Letter Agreement for an
aggregate payment of $2.9 million.
On October 28, 2010, the 900 Bank Stock Warrants were converted to 42,834 WLBC stock warrants
with an exercise price of $21.01 per stock warrant and all were exercisable at that time. The
exercise price was determined in accordance with the Merger Agreement, dated November 6, 2009. The
exercise price is calculated by the common stock exchange ratio of 47.5975. Each Service1st stock
warrant had an exercise price of $1,000.00. The $1,000.00 is divided by the exchange ratio to
create the equivalent exercise price for the Companys stock warrant ($1,000.00 divided by 47.5975
equals $21.01). As of June 30, 2011, the aggregate intrinsic value of outstanding and vested stock
warrants is $0.
Note 3. FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a
liability (exit price) in the principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the measurement date. The Company uses a fair
value hierarchy that prioritizes inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level
3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities;
Level 2 Quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, or model-based valuation
techniques where all significant assumptions are observable, either directly or indirectly, in
the market;
Level 3 Valuation is generated from model-based techniques where all significant
assumptions are not observable, either directly or indirectly, in the market. These unobservable
assumptions reflect our own estimates of assumptions that market participants would use in
pricing the asset or liability. Valuation techniques may include use of matrix pricing,
discounted cash flow models and similar techniques.
Fair value on a recurring basis
Financial assets measured at fair value on a recurring basis include the following:
Securities available for sale
Securities reported as available for sale are reported at fair value utilizing Level 2 inputs.
For these securities the Company obtains fair value measurements from an independent pricing
service. The fair value measurements consider observable data that may include dealer quotes,
market spreads, cash flows, the 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 June 30, 2011 | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Significant | ||||||||||||||
($ in 000s) | Identical Assets | Observable Inputs | Unobservable Inputs | |||||||||||||
Description | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Securities available for sale |
||||||||||||||||
Collateralized Mortgage Obligation Securities-commercial |
$ | 824 | $ | | $ | 824 | $ | | ||||||||
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There were no transfers between Levels during 2011.
Fair Value Measurements at December 31, 2010 | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Significant | ||||||||||||||
($ in 000s) | Identical Assets | Observable Inputs | Unobservable Inputs | |||||||||||||
Description | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Securities available for sale |
||||||||||||||||
Collateralized Mortgage Obligation Securities-commercial |
$ | 1,819 | $ | | $ | 1,819 | $ | | ||||||||
Fair value on a nonrecurring basis
Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments
are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in
certain circumstances (for example, when there is evidence of impairment). The following table
presents such assets carried on the balance sheet by caption and by level within the fair value
hierarchy.
Fair Value Measurements at June 30, 2011 | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Significant | ||||||||||||||
($ in 000s) | Identical Assets | Observable Inputs | Unobservable Inputs | |||||||||||||
Description | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Impaired loans |
||||||||||||||||
Construction, land development and other land |
$ | 747 | $ | | $ | | $ | 747 | ||||||||
Commercial real estate |
4,152 | | | 4,152 | ||||||||||||
Other real estate owned |
4,440 | | | 4,440 | ||||||||||||
$ | 9,339 | $ | | $ | | $ | 9,339 | |||||||||
Fair Value Measurements at December 31, 2010 | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Significant | ||||||||||||||
($ in 000s) | Identical Assets | Observable Inputs | Unobservable Inputs | |||||||||||||
Description | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Impaired loans |
||||||||||||||||
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 |
3,406 | | | 3,406 | ||||||||||||
$ | 14,844 | $ | | $ | | $ | 14,844 | |||||||||
Impaired loans
The specific reserves for collateral dependent impaired loans are based on the fair value of
the collateral less estimated costs to sell. The fair value of collateral is determined based on
third-party appraisals. In some cases, adjustments are made to the appraised values due to various
factors, including age of the appraisal, age of comparables included in the appraisal, and known
changes in the market and in the collateral. Accordingly, the resulting fair value measurement has
been categorized as a Level 3 measurement. Impaired loans measured for impairment using the fair
value of collateral, had a carrying amount of $4.9 million at June 30, 2011 (after netting $2.7
million specific valuation allowance included in the allowance for loan losses). The $4.9 million
of impaired loans carried at fair value were the result of certain credit and yield discounts and
the aforementioned specific valuation allowance. There have been discounts applied in the amount of
$1.1 million on these impaired loans carried at fair value.
Other real estate owned
Other real estate owned consists of properties acquired as a result of, or in-lieu-of,
foreclosure. Properties classified as other real estate owned are initially reported at the fair
value determined by independent appraisals using appraised value, less cost to sell. Such
properties are generally re-appraised every six months. There is
risk for subsequent volatility. Costs relating to the development or improvement of the assets
are capitalized and costs relating to holding the assets are charged to expense. When significant
adjustments
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were based on unobservable inputs, such as when a current appraised value is not
available or management determines the fair value of the collateral is further impaired below
appraised value and there is no observable market price, the resulting fair value measurement has
been categorized as a Level 3 measurement. As of June 30, 2011, there was no valuation allowance
for the above reported assets.
Fair value of financial instruments
The fair value of a financial instrument is the current amount that would be exchanged between
willing parties, other than in a forced liquidation. Fair value is best determined based upon
quoted market prices. However, in many instances, there are no quoted market prices for the
Companys various financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument.
The estimated fair values, and related carrying amounts, of the Companys financial
instruments are as follows:
June 30, 2011 | December 31, 2010 | |||||||||||||||
($ in 000s) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Financial Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 103,426 | $ | 103,426 | $ | 103,227 | $ | 103,227 | ||||||||
Certificates of deposits |
4,195 | 4,195 | 26,889 | 26,889 | ||||||||||||
Securities available for sale |
824 | 824 | 1,819 | 1,819 | ||||||||||||
Securities held to maturity |
3,692 | 3,706 | 5,314 | 5,287 | ||||||||||||
Loans, net |
97,129 | 96,503 | 106,223 | 106,223 | ||||||||||||
Accrued interest receivable |
326 | 326 | 447 | 447 | ||||||||||||
Financial Liabilities: |
||||||||||||||||
Deposits |
$ | 131,585 | $ | 131,585 | $ | 160,286 | $ | 160,286 | ||||||||
Accrued interest payable |
47 | 47 | 35 | 35 |
Loan Commitments
The estimated fair value of the standby letters of credit at June 30, 2011 and December 31,
2010 is insignificant. Loan commitments on which the committed interest rate is less than the
current market rate are also insignificant at June 30, 2011 and December 31, 2010.
Note 4. SECURITIES
Carrying amounts and fair values of investment securities at June 30, 2011 and December 31,
2010 are summarized as follows:
June 30, 2011 | ||||||||||||||||
Gross | Gross | |||||||||||||||
($ in 000s) | Amortized | Unrealized | Unrealized | Fair | ||||||||||||
Securities Available for Sale | Cost | Gains | Losses | Value | ||||||||||||
Collateralized Mortgage Obligation Securities-commercial |
$ | 829 | $ | | $ | (5 | ) | $ | 824 | |||||||
$ | 829 | $ | | $ | (5 | ) | $ | 824 | ||||||||
Gross | Gross | |||||||||||||||
($ in 000s) | Amortized | Unrecognized | Unrecognized | Fair | ||||||||||||
Securities Held to Maturity | Cost | Gains | Losses | Value | ||||||||||||
Corporate Debt Securities |
$ | 3,071 | $ | 9 | $ | | $ | 3,080 | ||||||||
Small Business Administration Loan Pools |
621 | 5 | | 626 | ||||||||||||
$ | 3,692 | $ | 14 | $ | | $ | 3,706 | |||||||||
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December 31, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
($ in 000s) | Amortized | Unrealized | Unrealized | Fair | ||||||||||||
Securities Available for Sale | Cost | Gains | Losses | Value | ||||||||||||
Collateralized Mortgage Obligation Securities-commercial |
$ | 1,819 | $ | | $ | | $ | 1,819 | ||||||||
$ | 1,819 | $ | | $ | | $ | 1,819 | |||||||||
Gross | Gross | |||||||||||||||
($ in 000s) | Amortized | Unrecognized | Unrecognized | Fair | ||||||||||||
Securities Held to Maturity | Cost | Gains | Losses | 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 June 30, 2011 and December 31, 2010, securities of $3.1 and $4.7 million, respectively
were pledged for various purposes as required or permitted by law.
Information pertaining to securities with gross losses at June 30, 2011 and December 31, 2010,
aggregated by investment category and length of time that individual securities have been in
continuous loss position follows:
June 30, 2011 | ||||||||||||||||
Less Than Twelve Months | Over Twelve Months | |||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Fair | Unrealized | Fair | |||||||||||||
($ in 000s) | (Losses) | Value | (Losses) | Value | ||||||||||||
Securities Available for Sale |
||||||||||||||||
Collateralized Mortgage Obligation |
$ | | $ | | $ | | $ | | ||||||||
Securities commercial |
(5 | ) | 824 | | | |||||||||||
$ | (5 | ) | $ | 824 | $ | | $ | | ||||||||
($ in 000s) |
||||||||||||||||
Securities Held to Maturity |
||||||||||||||||
Corporate Debt Securities |
$ | | $ | | $ | | $ | | ||||||||
Small Business Administration Loan Pools |
| | | | ||||||||||||
$ | | $ | | $ | | $ | | |||||||||
December 31, 2010 | ||||||||||||||||
Less Than Twelve Months | Over Twelve Months | |||||||||||||||
Gross | Gross | |||||||||||||||
($ in 000s) | Unrealized | Fair | Unrealized | Fair | ||||||||||||
Securities Available for Sale | (Losses) | Value | (Losses) | Value | ||||||||||||
Collateralized Mortgage Obligation |
||||||||||||||||
Securities commercial |
$ | | $ | | $ | | $ | | ||||||||
$ | | $ | | $ | | $ | | |||||||||
($ in 000s) |
||||||||||||||||
Securities Held to Maturity |
||||||||||||||||
Corporate Debt Securities |
$ | (27 | ) | $ | 4,636 | $ | | $ | | |||||||
Small Business Administration Loan Pools |
| | | | ||||||||||||
$ | (27 | ) | $ | 4,636 | $ | | $ | | ||||||||
As of June 30, 2011 and December 31, 2010, six and three debt securities, respectively, have
unrealized losses with aggregate degradation less than one percent for both periods from the
Companys carrying value. These unrealized losses, totaling $5,000 and $27,000, respectively,
relate primarily to fluctuations in the current interest rate environment and other factors, but do
not presently represent realized losses. As of June 30, 2011 and December 31, 2010 there are no
securities that have been determined to be other-than-temporarily-impaired (OTTI).
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The amortized cost and fair value of securities as of June 30, 2011 by contractual maturities
are shown below. The maturities of small business administration loan pools differ from their
contractual maturities because the loans underlying the securities may be repaid without penalties;
therefore, these securities are listed separately in the maturity summary.
($ in 000s) | Amortized Cost | Fair Value | ||||||
Securities available for sale |
||||||||
Due in one year or less |
$ | 829 | $ | 824 | ||||
$ | 829 | $ | 824 | |||||
($ in 000s) | Amortized Cost | Fair Value | ||||||
Securities held to maturity |
||||||||
Due in one year or less |
$ | 3,071 | $ | 3,080 | ||||
Small Business Administration loan pools |
621 | 626 | ||||||
$ | 3,692 | $ | 3706 | |||||
Note 5. LOANS
Loans at June 30, 2011 and December 31, 2010 were as follows:
June 30, | December 31, | |||||||
($ in 000s) | 2011 | 2010 | ||||||
Construction, land development and other land |
$ | 4,107 | $ | 5,923 | ||||
Commercial real estate |
54,306 | 54,975 | ||||||
Residential real estate |
4,704 | 9,247 | ||||||
Commercial and industrial |
38,279 | 35,946 | ||||||
Consumer |
102 | 131 | ||||||
Plus: net deferred loan costs |
35 | 37 | ||||||
101,533 | 106,259 | |||||||
Less: allowance for loan losses |
(4,404 | ) | (36 | ) | ||||
$ | 97,129 | $ | 106,223 | |||||
Activity in the allowance for loan losses was as follows:
Construction, Land |
||||||||||||||||||||||||
Commercial | Residential | Development, | ||||||||||||||||||||||
($ in 000s) | Commercial | Real Estate | Real Estate | Consumer | Other Land | Total | ||||||||||||||||||
Three months ended |
||||||||||||||||||||||||
Beginning balance, March 31, 2011 |
$ | 548 | $ | 425 | $ | 136 | $ | 1 | $ | 180 | $ | 1,290 | ||||||||||||
Provision for loan losses |
2,103 | 2,079 | (133 | ) | | 295 | 4,344 | |||||||||||||||||
Recoveries |
1 | | 4 | | | 5 | ||||||||||||||||||
Loan charge-offs |
(1,235 | ) | | | | | (1,235 | ) | ||||||||||||||||
Balance, June 30, 2011 |
$ | 1,417 | $ | 2,504 | $ | 7 | $ | 1 | $ | 475 | $ | 4,404 | ||||||||||||
Construction, Land |
||||||||||||||||||||||||
Commercial | Residential | Development, | ||||||||||||||||||||||
($ in 000s) | Commercial | Real Estate | Real Estate | Consumer | Other Land | Total | ||||||||||||||||||
Six months ended |
||||||||||||||||||||||||
Beginning balance, December 31, 2010 |
$ | 36 | $ | | $ | | $ | | $ | | $ | 36 | ||||||||||||
Provision for loan losses |
2,615 | 2,504 | 3 | 1 | 589 | 5,712 | ||||||||||||||||||
Recoveries |
1 | | 4 | | | 5 | ||||||||||||||||||
Loan charge-offs |
(1,235 | ) | | | | (114 | ) | (1,349 | ) | |||||||||||||||
Balance, June 30, 2011 |
$ | 1,417 | $ | 2,504 | $ | 7 | $ | 1 | $ | 475 | $ | 4,404 | ||||||||||||
17
Table of Contents
The following tables present the balance in the allowance for loan losses and the recorded
investment in loans by portfolio segment and based on impairment method as of June 30, 2011 and
December 31, 2010:
Construction, | ||||||||||||||||||||||||
Land | ||||||||||||||||||||||||
Commercial | Residential | Development, | ||||||||||||||||||||||
($ in 000s) | Commercial | Real Estate | Real Estate | Consumer | Other Land | Total | ||||||||||||||||||
June 30, 2011 |
||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||
Ending allowance balance attributed to loans: |
||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 3 | $ | 2,217 | $ | | $ | | $ | | $ | 2,220 | ||||||||||||
Collectively evaluated for impairment |
789 | 165 | 7 | 1 | 121 | 1,083 | ||||||||||||||||||
Acquired with deteriorated credit quality |
625 | 122 | | | 354 | 1,101 | ||||||||||||||||||
Total ending allowance balance |
$ | 1,417 | $ | 2,504 | $ | 7 | $ | 1 | $ | 475 | $ | 4,404 | ||||||||||||
Loans: |
||||||||||||||||||||||||
Loans individually evaluated for impairment |
$ | 41 | $ | 7,645 | $ | 2,979 | $ | | $ | 850 | $ | 11,515 | ||||||||||||
Loans collectively evaluated for impairment |
34,744 | 42,250 | 1,724 | 104 | 1,313 | 80,135 | ||||||||||||||||||
Loans acquired with deteriorated credit quality |
3,551 | 4,376 | | | 1,956 | 9,883 | ||||||||||||||||||
Total ending loans balance |
$ | 38,336 | $ | 54,271 | $ | 4,703 | $ | 104 | $ | 4,119 | $ | 101,533 | ||||||||||||
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 June 30, 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.
18
Table of Contents
Impaired loan details as of June 30, 2011 and December 31, 2010 are as follows:
June 30, 2011 | ||||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Impaired | Total | Reserve | Total | |||||||||||||||||||||
($ in 000s) | Balance | % | Loans | Balance | % | Allowance | ||||||||||||||||||
Construction, land development and other land loans |
$ | 2,806 | 13.11 | % | 2.76 | % | $ | 354 | 10.66 | % | 8.04 | % | ||||||||||||
Commercial real estate |
12,021 | 56.18 | % | 11.84 | % | 2,339 | 70.43 | % | 53.11 | % | ||||||||||||||
Residential real estate (1-4 family) |
2,979 | 13.92 | % | 2.93 | % | | | | ||||||||||||||||
Commercial and industrial |
3,592 | 16.79 | % | 3.54 | % | 628 | 18.91 | % | 14.26 | % | ||||||||||||||
Consumer |
| 0.00 | % | 0.00 | % | | | | ||||||||||||||||
Total impaired loans |
$ | 21,398 | 100.00 | % | 21.07 | % | $ | 3,321 | 100.00 | % | 75.41 | % | ||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Impaired | Total | Reserve | Total | |||||||||||||||||||||
($ in 000s) | Balance | % | Loans | Balance | % | Allowance | ||||||||||||||||||
Construction, land development and other land loans |
$ | 3,220 | 28.15 | % | 3.03 | % | $ | | | | ||||||||||||||
Commercial real estate |
1,648 | 14.41 | % | 1.55 | % | | | | ||||||||||||||||
Residential real estate (1-4 family) |
2,900 | 25.35 | % | 2.73 | % | | | | ||||||||||||||||
Commercial and industrial |
3,670 | 32.09 | % | 3.46 | % | | | | ||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
Total impaired loans |
$ | 11,438 | 100.00 | % | 10.77 | % | $ | | | | ||||||||||||||
The following table is a summary of interest recognized and cash-basis interest earned on
impaired loans:
Three Months Ended | ||||||||||||||||
June 30, | Six Months Ended June 30, | |||||||||||||||
($ in 000s) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Average of individually impaired loans
during period |
$ | 12,055 | $ | | $ | 5,023 | $ | | ||||||||
Interest income recognized during impairment |
172 | | 82 | | ||||||||||||
Cash-basis interest income recognized |
| | | |
The gross year-to-date interest income that would have been recorded in the current
period had the nonaccrual loans had been current in accordance with their original terms was
$221,000 for the six months ending June 30, 2011 and $0 for the six months ending June 30, 2010.
The following tables present the recorded investment in nonaccrual and loans past due over 90
days still on accrual by class of loans as of June 30, 2011 and December 31, 2010, respectively:
June 30, 2011 | ||||||||
Over 90 days | ||||||||
($ in 000s) | Nonaccrual | and accruing | ||||||
Construction, land development and other land |
$ | 508 | $ | | ||||
Commercial real estate |
7,172 | | ||||||
Residential real estate |
| | ||||||
Commercial and industrial |
1,970 | | ||||||
Consumer |
| | ||||||
Total |
$ | 9,650 | $ | | ||||
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Table of Contents
December 31, 2010 | ||||||||
Over 90 days | ||||||||
($ in 000s) | Nonaccrual | 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 | $ | | ||||
The following tables present the aging of the recorded investment in past due loans as of June
30, 2011 and December 31, 2010, respectively:
June 30, 2011 | ||||||||||||
($ in 000s) | 30 to 89 days | Over 90 days | Total Past Due | |||||||||
Construction, land development and other land |
$ | 850 | $ | | $ | 850 | ||||||
Commercial real estate |
1,150 | 466 | 1,616 | |||||||||
Residential real estate |
| | | |||||||||
Commercial and industrial |
1,152 | | 1,152 | |||||||||
Consumer |
| | | |||||||||
Total |
$ | 3,152 | $ | 466 | $ | 3,618 | ||||||
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.
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.
Loss
An asset classified loss is considered uncollectable and of such little value that continuance
as bankable assets is not warranted.
20
Table of Contents
Loans not meeting the criteria above that are analyzed individually as part of the above
described process are considered to be pass-rated loans.
As of June 30, 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:
June 30, 2011 | ||||||||||||||||||||||||
Special | ||||||||||||||||||||||||
($ in 000s) | Pass | Mention | Substandard | Doubtful | Loss | Total | ||||||||||||||||||
Construction, land development and other land |
$ | 1,576 | $ | | $ | 2,543 | $ | | $ | | $ | 4,119 | ||||||||||||
Commercial real estate |
36,575 | 5,676 | 11,801 | 219 | | 54,271 | ||||||||||||||||||
Residential real estate |
1,724 | | 2,979 | | | 4,703 | ||||||||||||||||||
Commercial and industrial |
31,109 | 3,635 | 1,814 | 1,239 | 539 | 38,336 | ||||||||||||||||||
Consumer |
104 | | | | | 104 | ||||||||||||||||||
Total |
$ | 71,088 | $ | 9,311 | $ | 19,137 | $ | 1,458 | $ | 539 | $ | 101,533 | ||||||||||||
December 31, 2010 | ||||||||||||||||||||
($ in 000s) | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
Construction, land development and other land |
$ | 1,006 | $ | | $ | 4,630 | $ | | $ | 5,636 | ||||||||||
Commercial real estate |
47,643 | 2,806 | 4,296 | 162 | 54,907 | |||||||||||||||
Residential real estate |
3,988 | | 5,257 | | 9,245 | |||||||||||||||
Commercial and industrial |
30,677 | 240 | 4,483 | 938 | 36,338 | |||||||||||||||
Consumer |
133 | | | | 133 | |||||||||||||||
Total |
$ | 83,447 | $ | 3,046 | $ | 18,666 | $ | 1,100 | $ | 106,259 | ||||||||||
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) | June 30, 2011 | December 31, 2010 | ||||||
Construction, land development and other land |
$ | 1,956 | $ | 4,630 | ||||
Commercial real estate |
4,376 | 4,458 | ||||||
Residential real estate |
| 5,257 | ||||||
Commercial and industrial |
3,551 | 5,421 | ||||||
Total |
$ | 9,883 | $ | 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.
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 half of 2011
approximately $1.0 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 $576,000 of yield discount was also recorded. The yield discount is being
recognized on a method that approximates a level yield over the expected life of the loan. The
Company does not accrete the credit discount into income until such time as the loan is removed
from the bank. The only exception would be on a case-by-case basis when a material event that
significantly improves the quality of the loan and reduces the risk to the bank such that
management believes it would be prudent to start recognizing some of the discount is documented.
The credit discount represents
21
Table of Contents
approximately 30% of the transaction date value of the credit impaired loans. During the
first half of 2011, as a result of various loan payoffs, and loan activities, a portion of the
credit discount was recognized in earnings.
The following table reflects the discount changes in the purchased credit impaired loan
portfolio for the period indicated:
($ in 000s) | Yield Discount | Credit Discount | ||||||
Balance, December 31, 2010 |
$ | 539 | $ | 9,317 | ||||
Accreted to income |
(171 | ) | (1,552 | ) | ||||
Loans renegotiated and charge-offs |
| (667 | ) | |||||
Other changes, net |
| (91 | ) | |||||
Balance, June 30, 2011 |
$ | 368 | $ | 7,007 | ||||
Management does not establish general reserves against purchased credit impaired loans. In the
event that deterioration in the credit is identified subsequent to the date of the discount,
additional specific reserves will be created. As of June 30, 2011, reserves in the amount of $1.1
million were added relating to the October 28, 2010 purchased credit impaired loan portfolio.
Note 6. GOODWILL AND INTANGIBLES
The excess of the cost of an acquisition over the fair value of the net assets acquired
consists of goodwill, and core deposit intangibles. Under ASC Topic 350, goodwill is subject to at
least annual assessments for impairment by applying a fair value-based test. The Company reviews
goodwill and other intangible assets to determine potential impairment annually, or more frequently
if events and circumstances indicate that the asset might be impaired, by comparing the carrying
value of the asset with the anticipated future cash flows.
The Company has established October 31 as the date it will use for the annual assessment. The
first annual testing for goodwill impairment will occur at October 31, 2011. The carrying value of
goodwill at June 30, 2011 is $5,633. No impairment losses were recognized as of June 30, 2011.
The Company has other intangible assets which consist of a core deposit intangible that had,
as of June 30, 2011, a remaining average amortization period of approximately nine years.
The following table presents the changes in the carrying amount of the core deposit
intangible, gross carrying amount, accumulated amortization, and net book value as of June 30,
2011:
($ in 000s) | June 30, 2011 | |||
Balance at beginning of period |
$ | 768 | ||
Amortization expense |
(49 | ) | ||
Balance at end of period |
$ | 719 | ||
Gross carrying amount |
$ | 784 | ||
Accumulated amortization |
(65 | ) | ||
Net book value |
$ | 719 | ||
Note 7. OTHER REAL ESTATE ACQUIRED THROUGH FORECLOSURE
The following table presents the changes in other real estate acquired through foreclosure:
Six Months Ended | ||||
($ in 000s) | June 30, 2011 | |||
Balance, beginning of period |
$ | 3,406 | ||
Additions |
2,038 | |||
Dispositions |
(1,004 | ) | ||
Valuation adjustments in the period |
| |||
Balance, end of period |
$ | 4,440 | ||
22
Table of Contents
During the period, Service1st Bank transferred two properties into other real estate owned and
sold one property for a $33,000 gain on the sale of the property. As of June 30, 2011, Service1st
Bank had four parcels of property in other real estate acquired through foreclosure.
Note 8. DEPOSITS
The composition of deposits is as follows:
June 30, | December 31, | |||||||
($ in 000s) | 2011 | 2010 | ||||||
Demand deposits, non-interest bearing |
$ | 54,576 | $ | 67,087 | ||||
NOW and money market accounts |
34,056 | 56,509 | ||||||
Savings deposits |
925 | 1,273 | ||||||
Time certificates, $100 or more |
35,059 | 30,498 | ||||||
Other time certificates |
6,969 | 4,919 | ||||||
Total |
$ | 131,585 | $ | 160,286 | ||||
Note 9. STOCK-BASED COMPENSATION
The Company has two share-based compensation programs. A restricted stock program granted to
the Companys Chief Executive Officer and Chief Financial Officer and the related stock options
associated with Service1st Banks 2007 Stock Option Plan have been fully discussed in the Companys
2010 Form 10-K. No grants were made during the first half of 2011. Total compensation cost that has
been charged against income for those programs was approximately $280,000 for the period ended June
30, 2011. There has been no income tax benefit recorded because of the offset in the deferred tax
asset valuation allowance. As of June 30, 2011 the aggregate intrinsic value of outstanding and
vested stock options is $0.
Note 10. REGULATORY MATTERS
Banks and bank holding companies are subject to regulatory capital requirements administered
by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt
corrective action regulations, involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators. Failure to meet capital
requirements can initiate regulatory action. Management believes as of June 30, 2011, the Company
and Bank met all capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide five classifications: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized, although these terms are not used to represent overall financial condition. If
the Bank is only adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion,
and capital restoration plans are required. At June 30, 2011, the most recent regulatory
notifications categorized the Bank as adequately capitalized under the regulatory framework for
prompt corrective action. This determination is mandated when an institution becomes party to a
formal regulatory action. The Bank cannot be considered well capitalized until the Consent Order is
removed. There are no conditions or events since that notification that management believes have
changed the institutions category.
23
Table of Contents
Actual capital levels and minimum required levels from June 30, 2011 and December 31, 2010
were as follows:
June 30, 2010 | ||||||||||||||||||||||||||||||||
To Be Well Capitalized | ||||||||||||||||||||||||||||||||
Minimum Required for | Under Prompt Corrective | Minimum Required Under | ||||||||||||||||||||||||||||||
Actual | Capital Adequacy Purposes | Action Regulations | Regulatory Agreements | |||||||||||||||||||||||||||||
($ in millions) | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||
Total capital (to risk-weighted assets) |
||||||||||||||||||||||||||||||||
Consolidated |
$ | 84.1 | 71.3 | % | $ | 9.4 | 8.0 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Service1st Bank |
$ | 34.4 | 32.0 | % | $ | 8.6 | 8.0 | % | $ | 10.8 | 10.0 | % | $ | 12.9 | 12.0 | % | ||||||||||||||||
Tier 1 capital (to risk-weighted assets) |
||||||||||||||||||||||||||||||||
Consolidated |
$ | 82.8 | 70.1 | % | $ | 4.7 | 4.0 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Service1st Bank |
$ | 33.0 | 30.7 | % | $ | 4.3 | 4.0 | % | $ | 6.5 | 6.0 | % | N/A | N/A | ||||||||||||||||||
Tier 1 capital (to average assets) |
||||||||||||||||||||||||||||||||
Consolidated |
$ | 82.8 | 31.4 | % | $ | 10.5 | 4.0 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Service1st Bank |
$ | 33.0 | 19.4 | % | $ | 6.8 | 4.0 | % | $ | 5.4 | 5.0 | % | $ | 17.0 | 10.0 | % |
December 31, 2010 | ||||||||||||||||||||||||||||||||
To Be Well Capitalized | ||||||||||||||||||||||||||||||||
Minimum Required for | Under Prompt Corrective | Minimum Required Under | ||||||||||||||||||||||||||||||
Actual | Capital Adequacy Purposes | Action Regulations | 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 a Memorandum of Understanding entered into by
Service1st with the FDIC and Nevada FID in May of 2009. Under the Consent Order, Service1st has
agreed, among other things, to: (i) assess the qualification of, and have retained qualified,
senior management commensurate with the size and risk profile of Service1st; (ii) maintain a Tier I
leverage ratio at or above 8.5% and a total risk-based capital ratio at or above 12%; (iii)
continue to maintain an adequate allowance for loan and lease losses; (iv) not pay any dividends
without prior bank regulatory approval; (v) formulate and implement a plan to reduce Service1sts
risk exposure to adversely classified assets; (vi) not extend any additional credit to any borrower
whose loan has been classified as 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 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.
24
Table of Contents
Note 11. LEGAL CONTINGENCIES
In the ordinary course of our business, we are party to various legal actions, which we
believe are incidental to the operation of our business. Although the ultimate outcome and amount
of liability, if any, with respect to these legal actions to which we are currently a party, cannot
presently be ascertained with certainty, in the opinion of management, based upon information
currently available to use, any resulting liability is not likely to have a material adverse effect
on the Companys consolidated financial position, results of operations or cash flows.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with unaudited condensed
consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q and our
combined and consolidated financial statements and related notes thereto included in or
incorporated into Part II, Item 8 of our Annual Report on Form 10-K and the Risk Factors included
in Part I, Item 1A of our Annual Report on Form 10-K , as well as other cautionary statements and
risks described elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K
.
References to us, we, our or WLBC refer to Western Liberty Bancorp. The following
discussion and analysis of WLBCs financial condition and results of operations should be read in
conjunction with the condensed financial statements and the notes thereto contained elsewhere in
this report. Certain information contained in the discussion and analysis set forth below includes
forward-looking statements that involve risks and uncertainties.
Forward-Looking Statements
All statements other than statements of historical fact included in this Quarterly Report on
Form 10-Q including, without limitation, statements under Managements Discussion and Analysis of
Financial Condition and Results of Operations regarding our financial position, business strategy
and the plans and objectives of management for future operations, are forward-looking statements.
When used in this Quarterly Report on Form 10-Q, words such as anticipate, believe, estimate,
expect, intend and similar expressions, as they relate to us or our management, identify
forward-looking statements. Such forward-looking statements are based on the beliefs of management,
as well as assumptions made by, and information currently available to, our management. Actual
results could differ materially from those contemplated by the forward-looking statements as a
result of certain factors detailed in our filings with the Securities and Exchange Commission. We
wish to caution you not to place undue reliance on these forward-looking statements, which speak
only as of the date made. All subsequent written or oral forward-looking statements attributable to
us or persons acting on our behalf are qualified in their entirety by this paragraph.
Overview
Business of WLBC: WLBC became a bank holding company on October 28, 2010 with consummation of
the acquisition of Service1st Bank. Our sole subsidiary is Service1st. We currently conduct no
business activities other than acting as the holding company of Service1st.
As a bank holding company, operating from its headquarters and two retail banking locations in
the greater Las Vegas area, WLBC provides a variety of loans to its customers, including commercial
real estate loans, construction and land development loans, commercial and industrial loans, Small
Business Administration (SBA) loans, and to a lesser extent consumer loans. As of June 30, 2011,
loans secured by real estate constituted 62.19% of WLBCs loan portfolio. This ratio is calculated
by adding together loans secured by real estate at June 30, 2011 (construction, land development
and other land loans of $4.1 million, commercial real estate loans of $54.3 million and residential
real estate loans of $4.7 million, which total $63.1 million of loans secured by real estate) and
dividing this balance by gross loans of $101.5 million at June 30, 2011. WLBC relies on
locally-generated deposits to provide WLBC with funds for making loans. The majority of its
business is generated in the Nevada market.
WLBC generates substantially all of its revenue from interest on loans and investment
securities and service fees and other charges on customer accounts. This revenue is offset by
interest expense paid on deposits and other borrowings and non-interest expense such as
professional, administrative, and occupancy expenses. Net interest income is the difference between
interest income on interest-earning assets, such as loans and securities, and interest expense on
interest-bearing liabilities, such as customer deposits and other borrowings used to fund those
assets. Interest rate fluctuations, as well as changes in the amount and type of earning assets and
liabilities and the level of nonperforming assets combine to affect net interest income.
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WLBC receives fees from its deposit customers in the form of service fees, checking fees and
other fees. Other services such as safe deposit and wire transfers provide additional fee income.
WLBC may also generate income from time to time from the sale of investment securities. The fees
collected by WLBC are found in non-interest income.
Summary of Results of Operations and Financial Condition
This section of Managements Discussion and Analysis does not contain a comparative format for
the respective reporting periods of 2011 and 2010. As discussed in Note 1 in the Notes to
Unaudited Condensed Consolidated Financial Statements, herein the Company deemed its prior
operations as insignificant relative to those of Service 1st. Therefore, we believe such
information is not meaningful by way of comparison, and as such it is omitted.
Results of Operations for the Three Months Ended June 30, 2011
For the three months ended June 30, 2011, we had a net loss of $4.6 million or $(0.30) per
common share. Our revenue was derived from interest income of $2.1 million and non-interest income
of $192,000. Our expenses for the three months ended June 30, 2011 are comprised of $2.4 million in
non-interest expense, $4.3 million of loan loss provision expense and $127,000 of interest expense.
Non-interest expense is primarily comprised of $765,000 in salaries and employee benefits $520,000
in legal and accounting fees, and $374,000 in occupancy expense as the companys locations are
leased. Provision expense totaled $4.3 million for the quarter due to deterioration of the loan
portfolio. Interest expense of $127,000 is attributed to interest paid to customers on
interest-bearing deposits.
Results of Operations for the Six Months Ended June 30, 2011
For the six months ended June 30, 2011, we had a net loss of $5.0 million or $(0.33) per
common share. Our revenue was derived from interest income of $5.9 million and non-interest income
of $313,000. Our expenses for the six months ended June 30, 2011 are comprised of $5.3 million in
non-interest expense, $5.7 million of loan loss provision expense and $239,000 of interest expense.
Non-interest expense is primarily comprised of $1.5 million in legal and accounting fees
significantly impacted by SEC filings during the period, $1.6 million in salaries and employee
benefits, and $748,000 in occupancy expense as the companys locations are leased. Provision
expense totaled $5.7 million for the first half of the year due to further deterioration of the
loan portfolio, mostly reported during the second quarter. Interest expense of $239,000 is
primarily attributed to interest paid to customers on interest-bearing deposits.
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Net
Interest Income
The following tables set forth WLBCs average balance sheet, average yields on earning assets,
average rates paid on interest-bearing liabilities, net interest margins and net interest
income/spread for the periods ended June 30, 2011.
For the Three Months | For the Six Months | |||||||||||||||||||||||
Ended June 30, 2011 | Ended June 30, 2011 | |||||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||||
Income/ | Income/ | |||||||||||||||||||||||
($ in 000s) | Average Balance | Expense | Yield | Average Balance | Expense | Yield | ||||||||||||||||||
INTEREST EARNING ASSETS: |
||||||||||||||||||||||||
Certificates of Deposits |
$ | 12,083 | $ | 27 | .87 | % | $ | 16,442 | $ | 91 | 1.12 | % | ||||||||||||
Money Market fund |
47,378 | 1 | 0.01 | % | 49,792 | 2 | .01 | % | ||||||||||||||||
Interest bearing deposits |
34,921 | 21 | 0.24 | % | 27,134 | 31 | .23 | % | ||||||||||||||||
Securities, taxable and other |
4,921 | 19 | 1.57 | % | 5,296 | 10 | .38 | % | ||||||||||||||||
Portfolio loans(1) |
104,155 | 2,018 | 7.86 | % | 104,882 | 5,800 | 11.21 | % | ||||||||||||||||
Total interest-earnings assets/interest income |
203,458 | 2,086 | 4.16 | % | 203,546 | 5,934 | 5.91 | % | ||||||||||||||||
NON-INTEREST EARNING ASSETS: |
||||||||||||||||||||||||
Cash and due from banks |
6,537 | | | 7,900 | | | ||||||||||||||||||
Allowance for loan losses |
(1,278 | ) | | | (683 | ) | | | ||||||||||||||||
Other assets |
15,225 | | | 14,764 | | | ||||||||||||||||||
Total assets |
$ | 223,942 | $ | | $ | | $ | 5,527 | $ | | $ | | ||||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY
INTEREST-BEARING LIABILITIES: |
||||||||||||||||||||||||
Interest checking |
$ | 8,856 | $ | 7 | .32 | % | $ | 9,494 | $ | 14 | .30 | % | ||||||||||||
Money Markets |
26,667 | 37 | .56 | % | 25,751 | 70 | .55 | % | ||||||||||||||||
Savings |
959 | 2 | .85 | % | 1,068 | 3 | .57 | % | ||||||||||||||||
Time deposits under $100,000 |
6,778 | 2 | .12 | % | 6,033 | 4 | .13 | % | ||||||||||||||||
Time deposits $100,00 and over |
35,796 | 79 | .90 | % | 33,685 | 145 | .87 | % | ||||||||||||||||
Short-term borrowings |
| | | 1,823 | 3 | .33 | % | |||||||||||||||||
Total interest-bearing liabilities/interest
expense |
79,056 | 127 | .65 | % | 77,854 | 239 | .62 | % | ||||||||||||||||
NON-INTEREST-BEARING
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||||||
Non-interest-bearing demand deposits |
53,113 | | | 53,634 | | | ||||||||||||||||||
Accrued interest on deposits and other liabilities |
1,070 | | | 1,153 | | | ||||||||||||||||||
Total liabilities |
133,239 | | | 132,641 | | | ||||||||||||||||||
Stockholders equity |
90,703 | | | 92,886 | | | ||||||||||||||||||
Total liabilities and stockholders equity |
$ | 223,942 | $ | | | $ | 225,527 | $ | | | ||||||||||||||
Net interest income and interest rate spread(2) |
| $ | 1,959 | 3.46 | % | | $ | 5,695 | 5.29 | % | ||||||||||||||
Net interest margin(3) |
| | 3.90 | % | | | 5.67 | % | ||||||||||||||||
Ratio of Average Interest-Earning Assets to
Interest-Bearing Liabilities |
257 | % | | | 261 | % | | |
(1) | Average balance includes average nonaccrual loans of approximately $8.3 million for three months ended and $6.7 million for the six months ended 2011. Net loan fees of $16,000 are included in the yield computation for the three months ended, while $35,000 in net loan fees are included for the six months ended for 2011. | |
(2) | Net interest spread represents the average yield earned on interest earning assets less the average rate paid on interest bearing liabilities. | |
(3) | Net interest margin represents net interest income annualized and then divided by average interest-earning assets. |
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For the Three Months Ended
Net interest income was $2.0 million which included approximately $552,000 of loan discount
accretion. The interest rate spread was 3.46% and net interest margin was 3.90% in the second
quarter of 2011. During the second quarter of 2011, WLBC sought to closely manage the rates on its
deposit base in order to grow deposit balances. Average deposit balances increased $2.5 million as
of June 30, 2011 from $76.6 million as of March 31, 2011 to $79.1 million as of June 30, 2011.
Overall rates on interest bearing deposit accounts approximated 0.65% for the three months ended
June 30, 2011 which resulted in interest expense totaling $127,000. WLBC decreased cash and cash
equivalents during the second quarter of 2011 by $1.9 million and certificates of deposit held at
other banks by $10.0 million and investment securities portfolio decreased by $2.1 million. (Cash
and cash equivalents consist of cash and amounts due from banks, federal funds sold and
certificates of deposits with original maturities of three months or less.)
Net interest income continued to be positively impacted in the second quarter of 2011 by
accretion of the purchase accounting marks. In addition, WLBC continues to maintain a ratio of
average non-interest bearing deposit levels to total deposits of 40%; as of June 30, 2011 the ratio
of average non-interest bearing to total deposits was 40.19%.
For the Six Months Ended
Net interest income was $5.7 million which included approximately $2.8 million of loan
discount accretion. The interest rate spread was 5.29% and net
interest margin was 5.67% during
the first six months of 2011. During the first six months of 2011, WLBC sought to closely manage
the rates on its deposit base in order to increase its average outstanding deposits. Average
deposits decreased $30.4 million as of June 30, 2011 from $161.9 million as of March 31, 2010 to
$131.5 million as of June 30, 2011. Overall rates on interest bearing deposit accounts approximated
0.62% for the six months ended June 30, 2011 which resulted in interest expense totaling $239,000.
WLBC decreased average cash and cash equivalents during the first six months of 2011 by $4.1
million and certificates of deposit held at other banks by $10.5 million and investment securities
portfolio decreased by $2.6 million. (Cash and cash equivalents consist of cash and amounts due
from banks, federal funds sold and certificates of deposits with original maturities of three
months or less.)
Net interest income continued to be positively impacted in the first six months of 2011. Interest
bearing transactional deposits decreased by $12.2 million from the $39.3 million as of December 31,
2010 to $27.1 million as of June 30, 2011 primarily due to $23.5 million of interest bearing
deposits that the FDIC deemed to be brokered deposits were eliminated on January 4, 2011. The
overall yield on interest bearing deposits was 0.62% as of June 30, 2011. In addition, WLBC
continues to maintain a ratio of non-interest bearing deposit levels to total deposits of 40%; as
of June 30, 2011 the ratio of average non-interest bearing to total deposits was 40.79%.
Provision for Loan Losses
The provision for loan losses was $4.3 million for the quarter ending June 30, 2011, and $5.7
million for the first six months of 2011. During the second quarter, two previously performing
loans became impaired which resulted in a provision of $1.9 million. Two relationships previously
identified as impaired required additional reserves in the amount of $800,000. Three loans were
charged off requiring additional reserves of approximately $1.2 million. The balance of the
provision primarily relates to new loans and certain performing loans that were downgraded.
Non-Interest Income
Non-interest income primarily consists of loan documentation and late fees, service charges on
deposits, other fees such as wire, ATM fees, and gains on loans.
Three Months Ended | Six Months Ended | |||||||
($ in 000s) | June 30, 2011 | June 30, 2011 | ||||||
Service charge income |
$ | 78 | $ | 156 | ||||
Other non-interest income |
116 | 157 | ||||||
$ | 192 | $ | 313 | |||||
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Three Months Ended
Non-interest income increased to $192,000 for the three months ended June 30, 2011. This
revenue is primarily attributable to $78,000 in service charge income due to a continuing effort by
WLBCs management to adhere to fee income policies, including limiting waivers of such fees.
Other non-interest income of $106,000 consisted of $40,000 in income from an OREO property, and
$33,000 from the sale of an OREO property.
Six Months Ended
Non-interest income was $313,000 for the first six months of 2011. Service charge revenue was
$156,000 due to a continuing effort by WLBCs management to adhere to fee income policies,
including limiting waiver of fees. Other non interest income was $141,000 for the first six months
of 2011 which included $40,000 from income on OREO property, $33,000 from gain on sale of OREO
property, plus a $16,000 gain on recovery of purchased loans (which are payments on loans that were
charged-off prior to WLBC acquiring Service1st).
Non-Interest Expense
The
following table sets forth the principal elements of non-interest
expenses for the periods ending June 30, 2011 and 2010.
Three Months Ended | Six Months Ended | |||||||||||||||
($ in 000s) | June 30, 2011 | June 30, 2010 | June 30, 2011 | June 30, 2010 | ||||||||||||
Salaries and employee benefits |
$ | 765 | $ | 53 | $ | 1,558 | $ | 138 | ||||||||
Occupancy, equipment and depreciation |
374 | | 748 | | ||||||||||||
Computer service charges |
74 | | 151 | | ||||||||||||
Federal deposit insurance |
129 | | 281 | | ||||||||||||
Professional fees |
520 | 871 | 1,455 | 1,726 | ||||||||||||
Advertising and business development |
48 | | 68 | | ||||||||||||
Insurance |
67 | 75 | 138 | 149 | ||||||||||||
Telephone |
17 | | 43 | | ||||||||||||
Printing and supplies |
87 | 26 | 229 | 130 | ||||||||||||
Stock-based compensation |
138 | 631 | 280 | 1,262 | ||||||||||||
Other |
180 | 20 | 350 | 27 | ||||||||||||
$ | 2,399 | $ | 1,676 | $ | 5,301 | $ | 3,432 | |||||||||
Three Months Ended
Non-interest expense totaled $2.4 million for the three months ended June 30, 2011 compared to
$1.7 million for the three months ended June 30, 2010. Salaries and employee benefits grew from
$63,000 for the three months ended June 30, 2010, to $765,000 for the three months ended June 30,
2011. In comparing the three months ended June 30, 2011 to June 30, 2010 occupancy grew $374,000,
other expenses increased $160,000 primarily from a $109,000 in OREO property expenses, FDIC
insurance expense grew $129,000 while computer service charges increased $74,000. These increases
were all attributed to WLBCs acquisition of Service1st. Professional fees decreased $351,000 from
$871,000 for the three months ended June 30, 2010 to $520,000 for the three months ended June 30,
2011. This decrease is attributed to WLBCs management attempting to reduce legal, accounting and
consulting expenses as acquisition activity subsides in 2011. In addition, stock based
compensation expense decreased $493,000 between the periods. In 2010, the Company was accruing for
the previously approved stock grant awards.
Six Months Ended
Non-interest expense totaled $5.3 million for the six months ended June 30, 2011 compared to $3.4
million for the six months ended June 30, 2010. Salaries and
employee benefits grew from $138,000
for the six months ended June 30, 2010, to $1.6 million for the six months ended June 30, 2011. In
comparing the six months ended June 30, 2011 to June 30, 2010 occupancy grew $748,000, other
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expense increased $323,000 primarily from $111,000 in OREO property expense, FDIC Insurance grew
$281,000, and computer charges increased $151,000 while telephone expense grew $43,000. These
increases were all attributed to WLBCs acquisition of Service1st. Professional fees decreased
$271,000 from $1.7 million for the six months ended June 30, 2010 to $1.5 million for six months
ended June 30, 2011. This decrease is attributed to WLBCs management attempting to reduce legal,
accounting and
consulting expenses. In addition, stock based compensation expense decreased $982,000 from the six
month period in 2010. As previously reported, the company was accruing $1,850,000 of stock
compensation expense over an estimated vesting period of 266 days.
Income Taxes
Due to WLBC incurring operating losses from inception, no provision for income taxes has been
recorded since the inception of WLBC.
Supplemental Results of Operation Information for Predecessors
The following information represents a discussion and analysis of the results of operations of
the Companys predecessor for the six months ended June 30, 2010.
Service1st Bank of Nevada
Results of Operations
For the six months ended June 30, 2010 Service1st reported a net loss was $4.0 million.
Net interest income was $3.4 million for the six months ended June 30, 2010. This resulted in
a net interest margin of 3.4%.
For the six months ended June 30, 2010, Service1st recorded $3.2 million provision for loan
losses.
For the six months ended June 30, 2010, non-interest income was $306,000. Service charges on
deposit accounts represented 79% of total non-interest income.
For the six months ended June 30, 2010, non-interest expenses were $4.5 million. Salaries and
employee benefits were $1.9 million. Other overhead costs during the first half of 2010 included
professional fees of $993,000, occupancy expense of $844,000, data processing expenses of $145,000,
FDIC insurance expense of $248,000, and other expenses of $305,000.
No income tax expense was recorded for six months ended June 30, 2010.
Financial Condition
Assets
Total assets were at $223.3 million as of June 30, 2011, a decrease of $34.2 million, from
$257.5 million as of December 31, 2010. The decrease was principally attributable to a $28.7
million decrease in deposits. WLBC eliminated $23.5 million in deposits on January 4, 2011 so that
the Company would be in compliance with its September 1, 2010 Consent Order in which the FDIC
deemed a certain deposit to be brokered. As a result of deposits dropping $23.5 million, 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 slightly while certificate of
deposits held at other banks decreased $22.7 million as the Company decided to allow maturing
certificates of deposits held at other institutions for investment purposes, not to be reinvested.
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 $103.4 million at June 30, 2011 and $103.2 million at December 31, 2010. Cash
and cash equivalents are managed based upon liquidity needs, investment opportunities and risk
adjusted
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returns on any investments. The current low yield on investment securities coupled with
the market risk warrants keeping funds in the most secure opportunities in managements view.
Immediate liquidity allows funding of high quality loans when available.
Investment Securities and Certificates of Deposits held at other Banks
WLBC invests in investment grade securities and certificates of deposits at other banks with
original maturities exceeding three months for the following reasons: (i) such investments can be
readily reduced in size to provide liquidity for loan fundings or deposit withdrawals; (ii)
investment securities provide a source of assets to pledge to secure lines of credit (and,
potentially, deposits from governmental entities), as may be required by law or by specific
agreement with a depositor or lender; (iii) they can be used as an interest rate risk management
tool, since they provide a large base of assets, the maturity and interest rate characteristics of
which can be changed more readily than the loan portfolio to better match changes in the deposit
base and other funding sources of WLBC; and (iv) they represent an alternative interest-earning use
of funds when loan demand is weak or when deposits grow more rapidly than loans.
Certificates of deposits consist of investments of $250,000 or less, in bank CDs throughout
the United States of America. Certificates of deposit totaled $4.2 million at June 30, 2011 and
$26.9 million at December 31, 2010. Certificates of deposits are managed based on liquidity needs.
The $22.7 million decrease in certificates of deposits since year end is directly related to the
$23.5 million in interest-bearing checking which was wired out of the bank on January 4, 2011 so
that the Company would be in compliance with its September 1, 2010 Consent Order in which the FDIC
deemed a certain depository account relationship to be brokered. As a result of the $23.5 million
leaving, bank management decided not to reinvest these funds.
WLBC uses two portfolio classifications for its investment securities: Held to Maturity, and
Available for Sale. The Held to Maturity portfolio consists only of securities that WLBC has both
the intent and ability to hold until maturity, to be sold only in the event of concerns with an
issuers credit worthiness, a change in tax law that eliminates their tax exempt status, or other
infrequent situations as permitted by generally accepted accounting principles. Accounting guidance
requires Available for Sale securities to be marked to estimated fair value with an offset, net of
taxes, to accumulated other comprehensive income, a component of stockholders equity.
WLBCs investment portfolio is currently composed primarily of: (i) U.S. Government Agency
securities; (ii) investment grade corporate debt securities; and (iii) collateralized mortgage
obligations. At June 30, 2011, investment securities totaled $4.5 million, a decrease of 36.69% or
$2.6 million, compared with $7.1 million 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.
Loans
Gross loans, net of deferred fees and the allowance for loan losses, decreased $9.1 million
from $106.2 million as of December 31, 2010 to $97.1 million as of June 30, 2011, primarily as a
result of $8.3 million in new loans less $9.7 million in payoffs and paydowns, $1.3 million in
charged off loans, $2.0 million in loans being reclassified to other real estate owned (OREO), and
an increase in the allowance for loan losses of $4.4 million.
Residential real estate decreased $4.5 million, from $9.2 million as of December 31, 2010 to
$4.7 million as of June 30, 2011 primarily due to the payoff of two large residential real estate
loans, the first loan for $2.3 million, the second for $2.9 million.
Commercial real estate decreased $669,000, from $55.0 million as of December 31, 2010 to $54.3
million as of June 30, 2011 primarily due to the paydowns being mostly offset by new loan
originations.
Construction, land development and other land loans decreased $1.8 million, from $5.9 million
as of December 31, 2010 to $4.1 million as of June 30, 2011 primarily due to $2.0 million in loans
being reclassified to OREO and $114,000 loan balance being charged off.
Commercial and industrial loans increased $2.4 million primarily due to the origination of
forty-one new loans totaling $6.4 million in the first quarter 2011 less charge-offs of $1.2 million
and payoffs and paydowns of $2.8 million.
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The following table summarizes nonperforming assets by category including loans purchased with
credit impairment with no contractual interest being reported.
June 30, | December 31, | |||||||
($ in 000s) | 2011 | 2010 | ||||||
Nonaccrual loans: |
||||||||
Loans Secured by Real Estate: |
||||||||
Construction, land development and other land loans |
$ | 508 | $ | 2,632 | ||||
Commercial real estate |
7,172 | 1,224 | ||||||
Residential real estate (1-4 family) |
| 2,900 | ||||||
Total loans secured by real estate |
7,680 | 6,756 | ||||||
Commercial and industrial |
1,970 | 3,670 | ||||||
Consumer |
| | ||||||
Total nonaccrual loans |
9,650 | 10,426 | ||||||
Past due (90 days) loans and accruing interest: |
||||||||
Loans Secured by Real Estate: |
| | ||||||
Construction, land development and other land loans |
| | ||||||
Commercial real estate |
| | ||||||
Residential real estate (1-4 family) |
| | ||||||
Total loans secured by real estate |
| | ||||||
Commercial and industrial |
| | ||||||
Consumer |
| | ||||||
Total past due loans accruing interest |
| | ||||||
Total nonperforming loans(1) |
9,650 | 10,426 | ||||||
Other real estate owned (OREO) |
4,440 | 3,406 | ||||||
Total nonperforming assets |
$ | 14,090 | $ | 13,832 | ||||
Non-Performing loans as a percentage of total portfolio loans |
9.50 | % | 9.81 | % | ||||
Non-Performing assets as a percentage of total assets |
6.31 | % | 5.37 | % | ||||
Allowance for loan losses as a percentage of nonperforming loans |
45.64 | % | 0.35 | % |
(1) | There are no nonperforming restructured loans that have not already been presented in nonaccrual. Certain loans that have demonstrated compliance with the restructured loan terms for more than six months have been returned to performing status as a result of the sustained performance. |
Other Real Estate Owned
Other real estate owned (OREO) increased $1.0 million from $3.4 million as of December 31,
2010 to $4.4 million as of June 30, 2011 when a $2.0 million construction, land and other land loan
was moved to the classification of OREO as of February 28, 2011. The sale of one parcel of property
for $1.0 million was completed during the second quarter of 2011. This sale resulted in a $33,000
gain being recorded.
Deposits
WLBCs deposit activities are based in Nevada and primarily generated from this local area.
Deposits have historically been the primary source for funding asset growth. As of June 30, 2011
the company has no brokered deposits.
During the first quarter of 2011 the company sought to manage rates on its deposit base in
order to increase its net interest income, interest rate spread and net interest margin. Deposits
decreased $28.7 million or 17.91% as of June 30, 2011 from $160.3 million as of December 31, 2010
to $131.6 million as of June 30, 2011.
Interest-bearing transactional deposits decreased $22.8 million from $57.8 million as of
December 31, 2010 to $35.0 million as of June 30, 2011 primarily as a result of the company
eliminating $23.5 million on January 4, 2011 in order for WLBC to remain in compliance with the
Consent Order issued September 1, 2010 which deemed a certain depository account as a brokered
deposit.
Non-interest bearing checking accounts decreased $12.5 million or 18.63% from $67.1 million as
of December 31, 2010 to $54.6 million as of June 30, 2011 primarily due to escrowed funds being
utilized for major construction projects during the early months of 2011.
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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. Failure to meet minimum capital
requirements can result in restrictions on activities (including restrictions on the rates paid on
deposits), and otherwise may cause federal or state bank regulators to initiate enforcement and/or
other action against WLBC or the subsidiary bank. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, banks must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices.
Service1sts capital amounts and classifications
are also subject to qualitative judgments by the FDIC about components, risk weightings and other
factors. In accordance with Service1sts Consent Order dated September 1, 2010, Service1st must
maintain its Tier 1 capital in such an amount to ensure that its leverage ratio equals or exceeds
8.5%.
As of June 30, 2011, WLBCs capital was $89.1 million, which WLBC deems adequate to support
continuing operations and growth. As a de novo bank, Service1st is required to maintain a Tier 1
capital leverage ratio of not less than 8.0% during Service1sts first seven years of operations.
As a commitment made to the FDIC during acquisition application processing, we also agreed to
maintain the Tier 1 leverage capital ratio of Service1st at 10% or greater until October 28, 2013
or, if later, when the September 1, 2010 Consent Order agreed to by Service1st with the FDIC and
the Nevada Financial Institutions Division terminates.
WLBCs capital ratios at June 30, 2011 and December 31, 2010 respectively, relative to the
ratios required of banks under the prompt corrective action regime or other requirements put in
place by federal banking regulations, are as follows:
To Be Adequately | ||||||||||||
Capitalized Under | ||||||||||||
Regulatory | ||||||||||||
Capital Ratios: | WLBC | Service1st | Agreement | |||||||||
June 30, 2011 |
||||||||||||
Tier 1 equity to average assets |
31.4 | % | 19.4 | % | 10.00 | % | ||||||
Tier 1 risk-based capital ratio |
70.1 | % | 30.7 | % | 6.00 | % | ||||||
Total risk-based capital ratio |
71.3 | % | 32.0 | % | 12.00 | % | ||||||
December 31, 2010 |
||||||||||||
Tier 1 equity to average assets |
30.5 | % | 18.1 | % | 10.0 | % | ||||||
Tier 1 risk-based capital ratio |
68.4 | % | 30.6 | % | 6.0 | % | ||||||
Total risk-based capital ratio |
68.8 | % | 31.0 | % | 12.0 | % |
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 consist 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 Pacific
Coast Bankers Bank, Federal Reserve Bank of San Francisco and FHLB of San Francisco. For the
period ended June 30, 2011, WLBC had approximately $103.4 million in cash and cash equivalents,
approximately $4.2 million in certificates of deposits at other financial institutions, with
maturities of one year or less. In addition, WLBC had $1.4 million in unpledged security
investments, of which $824,000 is classified as available for sale, while the remaining $620,000 is
classified as held to maturity. WLBC also has a $2.6 million collateralized line of credit with the
Federal Reserve Bank of San Francisco and a $16.5 million collateralized line of credit with the
Federal Home Loan Bank of San Francisco. In addition, an unsecured Fed Funds facility with
Pacific Coast Bankers Bank in the amount of $5.0 million was established in March 2011. As of June
30, 2011, all of the lines have a zero balance.
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Liquidity is also affected by portfolio maturities and the effect of interest rate
fluctuations on the marketability of both assets and liabilities. WLBC can sell any of its
unpledged securities held in the available for sale category to meet liquidity needs. These
securities are also available to pledge as collateral for borrowings, if the need should arise.
WLBCs management believes the level of liquid assets and available credit facilities are
sufficient to meet current and anticipated funding needs during the next twelve months. In
addition, Service1st Banks Asset/Liability Management Committee oversees Service1st Banks
liquidity position by reviewing a monthly liquidity report. While management recognizes that
Service1st may use some of its existing liquidity to issue loans during the next twelve months, it
is not aware of any trends, demands, commitments, events or uncertainties that are reasonably
likely to impair WLBCs liquidity.
Commitments and Contingencies
The Company is a party to credit-related financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit, and letters of credit. To varying degrees, these
instruments involve elements of credit and interest rate risk in excess of the amount recognized in
the statement of financial position.
June 30, | December 31, | |||||||
($ in 000s) | 2011 | 2010 | ||||||
Commitments to extend credit |
$ | 16,741 | $ | 18,504 | ||||
Standby commercial letters of credit |
$ | 743 | $ | 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
periods ended June 30, 2011 and December 31 2010, respectively, the allowance for unfunded
commitments was approximately $35,000, and $372,000 respectively.
Application of Critical Accounting Policies and Estimates
Managements Discussion and Analysis of Financial Condition and Results of Operations
discusses the Companys condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The
preparation of these condensed consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities as of the date
of the financial statements, the disclosure of contingent assets and liabilities in the financial
statements and the accompanying notes, and the reported amounts of revenue and expenses during the
periods presented. On an on-going basis, management evaluates its estimates and judgments,
including those related to allowances for loan losses, bad debts, investments, financing
operations, contingencies and litigation. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be reasonable under the
circumstances, the results of which have formed the basis for making such judgments about the
carrying value of assets and liabilities that are not readily apparent from other sources. Actual
amounts and results could differ from the recorded estimates under different assumptions or
conditions. A summary of critical accounting policies and estimates are listed in the Managements
Discussion and Analysis of Financial Condition and Results of Operations section of the Companys
2010 Annual Report Form 10-K for the fiscal year ended December 31, 2010. There have been no
significant changes to the critical accounting policies listed in the Companys 2010 Annual Report
Form 10-K during 2011.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is a broad term for the risk of economic loss due to adverse changes in the fair
value of a financial instrument. There have been no material changes in market risk as of June 30,
2011 to the disclosures included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2010.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of our management
(including our Chief Executive Officer and Chief Financial Officer), our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and procedures as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act), were effective as of the end of the period covered by this Quarterly Report on
Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer
have concluded that our disclosure controls and procedures are effective to ensure that information
we are required to disclose in reports that we file or submit under the Exchange Act is (i)
recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commission rules and forms, and (ii) accumulated and communicated to management,
including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred
during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or
are reasonably likely to materially effect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
As of August 1, 2011, there have been no material changes to the risk factors disclosed in our
Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC, except we may
disclose changes to such risk factors or disclose additional risk factors from time to time in our
future filings with the SEC.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly
Report on Form 10-Q.
Exhibit | ||
Number | Description | |
10.16*+
|
Form of Director Indemnification Agreement entered into by Directors Anderson, Goldstein, Hill, Martin, and Wright | |
31.1
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Management contract or compensatory plan or arrangement | |
+ | filled herewith |
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WESTERN LIBERTY BANCORP |
||||
/s/ William E. Martin | ||||
Name: | William E. Martin | |||
Date: August 5, 2011 | Title: | Chief Executive Officer (Principal Executive Officer) |
||
WESTERN LIBERTY BANCORP |
||||
/s/ George A. Rosenbaum Jr. | ||||
Name: | George A. Rosenbaum Jr. | |||
Date: August 5, 2011 | Title: | Chief Financial Officer (Principal Accounting and Financial Officer) |
||
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