Las Vegas bank owner Western Liberty Bancorp last week posted a hefty third-quarter loss because of the continued inability of many borrowers to make their loan payments.
The company, owner of the two-branch Service1st Bank of Nevada, said continued loan losses at Service1st during the recession caused it to write off its entire $5.633 million investment in the goodwill of Service1st.
Goodwill is an accounting term measuring the intangible value of an asset. Western Liberty said that in this case, Goodwill measures the amount it paid for Service1st in excess of Service1st’s fair market value on the date of the purchase in October 2010.
“The primary indicator for this decision was the ongoing deterioration of borrowers who can no longer perform under the original terms of the loan agreements. The restructured loans typically require significant reserves or charge-offs based on appraised collateral values that may have declined 50-80 percent since the inception of the loan, resulting in over $7 million in provisions for loan losses during 2011,” Western Liberty said in its third-quarter financial report.
The $5.633 million non-cash write off — an expense on the profit/loss statement — and $1.7 million in loan losses in the quarter contributed to Western Liberty losing $6.861 million, or 46 cents per share, in the quarter.
This loss is large in comparison to the size of the bank, which generated just $1.5 million in net interest income during the quarter and has loans and other assets of $206 million.
Western Liberty also said that on Nov. 7, it received a joint letter from regulators the Federal Deposit Insurance Corp. and the Nevada Financial Institutions Division terminating a consent order from September 2010 requiring Service1st Bank of Nevada to improve its financial condition.
The consent order was replaced with a “Memorandum of Understanding,” which Western Liberty said is an “informal supervisory action.”
The memorandum requires the bank to maintain specified capital levels, that no cash dividends be paid without advance regulatory approval and “that the bank’s business plan be revised to address goals for achieving profitability, and that the bank update its plan to reduce total adversely classified assets (loans and bank-owned properties),” Western Liberty said.
“Despite the accounting requirements that generated significant non-cash entries on our income statement, our balance sheet and capital levels are exceptionally strong,” CEO William Martin said in a statement.
During the quarter and through November, the company completed a program to repurchase 754,400 of its shares at an average cost of $2.63 per share.
“We believe share repurchases are an excellent use of capital at this time,” Martin said.