Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 2010
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 No. 0-14555
VIST FINANCIAL CORP.
(Exact name of
Registrant as specified in its charter)
PENNSYLVANIA
|
|
23-2354007
|
(State or other
jurisdiction of
|
|
(I.R.S. Employer
|
Incorporation or
organization)
|
|
Identification
No.)
|
1240
Broadcasting Road
Wyomissing,
Pennsylvania 19610
(Address of
principal executive offices)
(610)
208-0966
(Registrants
telephone number, including area code)
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 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
x
No
o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
o
No
o
Indicate by check mark
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
|
|
|
|
Non-accelerated
filer
o
|
|
Smaller
reporting company
x
|
(Do not check if a smaller reporting company)
|
|
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
x
State the number of
shares outstanding of each of the issuers classes of common stock, as of the
latest practicable date.
|
|
Number
of Common Shares Outstanding
|
|
|
|
as of May 17, 2010
|
|
COMMON
STOCK ($5.00 Par Value)
|
|
5,860,258
|
|
(Title of Class)
|
|
(Outstanding Shares)
|
|
Table of Contents
VIST
FINANCIAL CORP.
Quarterly
Report on Form 10-Q for the Quarterly Period Ended March 31, 2010
Table
of C
ontents
2
Table
of Contents
Item 1.
Financial Statements
VIST FINANCIAL
CORP. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in
thousands, except per share data)
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
20,293
|
|
$
|
18,487
|
|
Federal funds sold
|
|
35,575
|
|
8,475
|
|
Interest-bearing
deposits in banks
|
|
432
|
|
410
|
|
|
|
|
|
|
|
Total cash and cash
equivalents
|
|
56,300
|
|
27,372
|
|
|
|
|
|
|
|
Mortgage loans held for
sale
|
|
2,229
|
|
1,962
|
|
Securities available
for sale
|
|
274,190
|
|
268,030
|
|
Securities held to
maturity, fair value 2010 - $2,038; 2009 - $1,857
|
|
2,089
|
|
3,035
|
|
Federal Home Loan Bank
stock
|
|
5,715
|
|
5,715
|
|
Loans, net of allowance
for loan losses 2010 - $12,770; 2009 - $11,449
|
|
891,992
|
|
899,515
|
|
Premises and equipment,
net
|
|
6,225
|
|
6,114
|
|
Other real estate owned
|
|
7,441
|
|
5,221
|
|
Identifiable intangible
assets
|
|
4,052
|
|
4,186
|
|
Goodwill
|
|
39,982
|
|
39,982
|
|
Bank owned life
insurance
|
|
19,028
|
|
18,950
|
|
FDIC prepaid deposit
insurance
|
|
5,294
|
|
5,712
|
|
Other assets
|
|
24,243
|
|
22,925
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,338,780
|
|
$
|
1,308,719
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
106,800
|
|
$
|
102,302
|
|
Interest bearing
|
|
954,824
|
|
918,596
|
|
|
|
|
|
|
|
Total
deposits
|
|
1,061,624
|
|
1,020,898
|
|
|
|
|
|
|
|
Securities sold under
agreements to repurchase
|
|
113,985
|
|
115,196
|
|
Long-term debt
|
|
10,000
|
|
20,000
|
|
Junior subordinated
debt, at fair value
|
|
19,715
|
|
19,658
|
|
Other liabilities
|
|
7,728
|
|
7,539
|
|
|
|
|
|
|
|
Total
liabilities
|
|
1,213,052
|
|
1,183,291
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
Preferred stock: $0.01
par value; authorized 1,000,000 shares; $1,000 liquidation preference per
share; 25,000 shares of Series A 5% (increasing to 9% in 2014)
cumulative preferred stock issued and outstanding; Less: discount of $1,801
at March 31, 2010 and $1,908 at December 31, 2009
|
|
23,199
|
|
23,092
|
|
Common stock, $5.00 par
value; authorized 20,000,000 shares; issued: 5,866,460 shares at
March 31, 2010 and 5,819,174 shares at December 31, 2009
|
|
29,333
|
|
29,096
|
|
Stock warrant
|
|
2,307
|
|
2,307
|
|
Surplus
|
|
63,800
|
|
63,744
|
|
Retained earnings
|
|
11,893
|
|
11,892
|
|
Accumulated other
comprehensive loss
|
|
(4,613
|
)
|
(4,512
|
)
|
Treasury stock; 10,484
shares at March 31, 2010 and December 31, 2009, at cost
|
|
(191
|
)
|
(191
|
)
|
|
|
|
|
|
|
Total
shareholders equity
|
|
125,728
|
|
125,428
|
|
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
$
|
1,338,780
|
|
$
|
1,308,719
|
|
See
Notes to Unaudited Consolidated Financial Statements.
3
Table
of Contents
VIST FINANCIAL
CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in
thousands, except per share data)
|
|
Three Months Ended
|
|
|
|
March 31,
2010
|
|
March 31,
2009
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
Interest
and fees on loans
|
|
$
|
12,443
|
|
$
|
12,342
|
|
Interest
on securities:
|
|
|
|
|
|
Taxable
|
|
2,947
|
|
2,870
|
|
Tax-exempt
|
|
396
|
|
286
|
|
Dividend
income
|
|
10
|
|
34
|
|
Other
interest income
|
|
8
|
|
4
|
|
|
|
|
|
|
|
Total interest income
|
|
15,804
|
|
15,536
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
Interest
on deposits
|
|
4,502
|
|
5,154
|
|
Interest
on short-term borrowings
|
|
|
|
17
|
|
Interest
on securities sold under agreements to repurchase
|
|
1,182
|
|
1,063
|
|
Interest
on long-term debt
|
|
98
|
|
505
|
|
Interest
on junior subordinated debt
|
|
345
|
|
315
|
|
|
|
|
|
|
|
Total interest expense
|
|
6,127
|
|
7,054
|
|
|
|
|
|
|
|
Net Interest Income
|
|
9,677
|
|
8,482
|
|
Provision
for loan losses
|
|
2,600
|
|
825
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
7,077
|
|
7,657
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
Customer
service fees
|
|
583
|
|
658
|
|
Mortgage
banking activities
|
|
134
|
|
267
|
|
Commissions
and fees from insurance sales
|
|
3,076
|
|
2,958
|
|
Brokerage
and investment advisory commissions and fees
|
|
135
|
|
330
|
|
Earnings
on bank owned life insurance
|
|
78
|
|
76
|
|
Other
commissions and fees
|
|
504
|
|
473
|
|
Other
income
|
|
43
|
|
484
|
|
Net
realized gains on sales of securities
|
|
92
|
|
159
|
|
Total
other-than-temporary impairment losses:
|
|
|
|
|
|
Total
other-than-temporary impairment losses on investments
|
|
(940
|
)
|
|
|
Portion
of non-credit impairment loss recognized in other comprehensive loss
|
|
844
|
|
|
|
Net
credit impairment loss recognized in earnings
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
Total other income
|
|
4,549
|
|
5,405
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
Salaries
and employee benefits
|
|
5,419
|
|
5,688
|
|
Occupancy
expense
|
|
1,148
|
|
1,069
|
|
Furniture
and equipment expense
|
|
624
|
|
606
|
|
Marketing
and advertising expense
|
|
246
|
|
270
|
|
Amortization
of identifiable intangible assets
|
|
133
|
|
171
|
|
Professional
services
|
|
609
|
|
892
|
|
Outside
processing services
|
|
1,031
|
|
951
|
|
FDIC
deposit and other insurance expense
|
|
532
|
|
444
|
|
Other
real estate owned expense
|
|
497
|
|
326
|
|
Other
expense
|
|
852
|
|
862
|
|
|
|
|
|
|
|
Total other expense
|
|
11,091
|
|
11,279
|
|
|
|
|
|
|
|
Income before income taxes
|
|
535
|
|
1,783
|
|
Income
tax (benefit) expense
|
|
(178
|
)
|
252
|
|
|
|
|
|
|
|
Net income
|
|
713
|
|
1,531
|
|
Preferred stock dividends and discount accretion
|
|
(420
|
)
|
(412
|
)
|
Net income available to common shareholders
|
|
$
|
293
|
|
$
|
1,119
|
|
See
Notes to Unaudited Consolidated Financial Statements.
4
Table of
Contents
VIST FINANCIAL
CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in
thousands, except per share data)
|
|
Three Months Ended
|
|
|
|
March 31,
2010
|
|
March 31,
2009
|
|
|
|
|
|
|
|
EARNINGS PER SHARE DATA
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding for basic earnings per common share
|
|
5,844,949
|
|
5,735,968
|
|
Basic
earnings per common share
|
|
$
|
0.05
|
|
$
|
0.20
|
|
Average
shares outstanding for diluted earnings per common share
|
|
5,882,071
|
|
5,735,968
|
|
Diluted
earnings per common share
|
|
$
|
0.05
|
|
$
|
0.20
|
|
Cash
dividends declared per actual common shares outstanding
|
|
$
|
0.05
|
|
$
|
0.10
|
|
See
Notes to Unaudited Consolidated Financial Statements.
5
Table of Contents
VIST FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Three Months Ended March 31, 2010 and 2009
(Dollar amounts in thousands, except per share data)
|
|
Preferred
Stock
|
|
Common
Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Number
of
|
|
|
|
Number
of
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
Shares
|
|
Liquidation
|
|
Shares
|
|
Par
|
|
Stock
|
|
|
|
Retained
|
|
Comprehensive
|
|
Treasury
|
|
|
|
|
|
Issued
|
|
Value
|
|
Issued
|
|
Value
|
|
Warrant
|
|
Surplus
|
|
Earnings
|
|
Loss
|
|
Stock
|
|
Total
|
|
Balance, January 1, 2010
|
|
25,000
|
|
$
|
23,092
|
|
5,819,174
|
|
$
|
29,096
|
|
$
|
2,307
|
|
$
|
63,744
|
|
$
|
11,892
|
|
$
|
(4,512
|
)
|
$
|
(191
|
)
|
$
|
125,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
713
|
|
|
|
|
|
713
|
|
Change in net unrealized gains on securities
available for sale, net of tax effect and reclassification adjustments for
restated losses and impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
466
|
|
|
|
466
|
|
Change in net unrealized losses on securities held
to maturity, net of tax effect and reclassification adjustments for restated
losses and impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(567
|
)
|
|
|
(567
|
)
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock discount accretion
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
|
|
Stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107
|
)
|
|
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with directors
compensation
|
|
|
|
|
|
44,718
|
|
223
|
|
|
|
11
|
|
|
|
|
|
|
|
234
|
|
Common stock issued in connection with director and
employee stock purchase plans
|
|
|
|
|
|
2,568
|
|
14
|
|
|
|
8
|
|
|
|
|
|
|
|
22
|
|
Compensation expense related to stock options
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock cash dividends paid ($0.05 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(292
|
)
|
|
|
|
|
(292
|
)
|
Preferred stock cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(313
|
)
|
|
|
|
|
(313
|
)
|
Balance, March 31, 2010
|
|
25,000
|
|
$
|
23,199
|
|
5,866,460
|
|
$
|
29,333
|
|
$
|
2,307
|
|
$
|
63,800
|
|
$
|
11,893
|
|
$
|
(4,613
|
)
|
$
|
(191
|
)
|
$
|
125,728
|
|
See
Notes to Unaudited Consolidated Financial Statements.
6
Table of Contents
VIST FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Three Months Ended March 31, 2010 and 2009
(Continued)
(Dollar amounts in thousands, except per share data)
|
|
Preferred
Stock
|
|
Common
Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Number
of
|
|
|
|
Number
of
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
Shares
|
|
Liquidation
|
|
Shares
|
|
Par
|
|
Stock
|
|
|
|
Retained
|
|
Comprehensive
|
|
Treasury
|
|
|
|
|
|
Issued
|
|
Value
|
|
Issued
|
|
Value
|
|
Warrants
|
|
Surplus
|
|
Earnings
|
|
Loss
|
|
Stock
|
|
Total
|
|
Balance, January 1, 2009
|
|
25,000
|
|
$
|
22,693
|
|
5,768,429
|
|
$
|
28,842
|
|
$
|
2,307
|
|
$
|
64,349
|
|
$
|
14,757
|
|
$
|
(7,834
|
)
|
$
|
(1,485
|
)
|
$
|
123,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,531
|
|
|
|
|
|
1,531
|
|
Change in net unrealized gains (losses) on securities
available for sale, net of tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
(55
|
)
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock discount
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
|
|
Stock Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99
|
)
|
|
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reissuance of 57,870 shares of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
(870
|
)
|
|
|
|
|
1,294
|
|
424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with directors
compensation
|
|
|
|
|
|
28,243
|
|
141
|
|
|
|
78
|
|
|
|
|
|
|
|
219
|
|
Common stock issued in connection with director and
employee stock purchase plans
|
|
|
|
|
|
4,257
|
|
22
|
|
|
|
11
|
|
(4
|
)
|
|
|
|
|
29
|
|
Compensation expense related to stock options
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock cash dividends paid ($0.10 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(573
|
)
|
|
|
|
|
(573
|
)
|
Preferred stock cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(403
|
)
|
|
|
|
|
(403
|
)
|
Balance, March 31, 2009
|
|
25,000
|
|
$
|
22,792
|
|
5,800,929
|
|
$
|
29,005
|
|
$
|
2,307
|
|
$
|
63,588
|
|
$
|
15,209
|
|
$
|
(7,889
|
)
|
$
|
(191
|
)
|
$
|
124,821
|
|
See
Notes to Unaudited Consolidated Financial Statements.
7
Table of Contents
VIST FINANCIAL CORP. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Dollar amounts In
thousands)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
2010
|
|
2009
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
Net
income
|
|
$
|
713
|
|
$
|
1,531
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Provision
for loan losses
|
|
2,600
|
|
825
|
|
Provision
for depreciation and amortization of premises and equipment
|
|
322
|
|
343
|
|
Amortization
of identifiable intangible assets
|
|
134
|
|
171
|
|
Deferred
income taxes
|
|
(126
|
)
|
(42
|
)
|
Director
stock compensation
|
|
234
|
|
219
|
|
Net
amortization of securities premiums and discounts
|
|
158
|
|
86
|
|
Amortization
of mortgage servicing rights
|
|
21
|
|
|
|
Decrease
in mortgage servicing rights
|
|
|
|
53
|
|
Net
realized losses on sales of other real estate owned (included in other
expense)
|
|
16
|
|
|
|
Impairment
charge on investment securities recognized in earnings
|
|
96
|
|
|
|
Net
realized gains on sales of securities
|
|
(92
|
)
|
(159
|
)
|
Proceeds
from sales of loans held for sale
|
|
2,787
|
|
16,833
|
|
Net
gains on sales of loans held for sale (included in mortgage banking
activities)
|
|
(115
|
)
|
(261
|
)
|
Loans
originated for sale
|
|
(2,939
|
)
|
(17,130
|
)
|
Increase
in bank owned life insurance
|
|
(78
|
)
|
(76
|
)
|
Compensation
expense related to stock options
|
|
37
|
|
20
|
|
Net
change in fair value of junior subordinated debt
|
|
57
|
|
790
|
|
Net
change in fair value of interest rate swaps
|
|
(47
|
)
|
(672
|
)
|
Increase
in accrued interest receivable and other assets
|
|
(742
|
)
|
(338
|
)
|
Increase
(decrease) in accrued interest payable and other liabilities
|
|
236
|
|
(1,276
|
)
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
3,272
|
|
917
|
|
|
|
|
|
|
|
Cash Flow From Investing Activities
|
|
|
|
|
|
Investment
securities:
|
|
|
|
|
|
Purchases
- available for sale
|
|
(41,337
|
)
|
(48,927
|
)
|
Principal
repayments, maturities and calls - available for sale
|
|
23,895
|
|
18,011
|
|
Proceeds
from sales - available for sale
|
|
11,912
|
|
19,156
|
|
Net
decrease (increase) in loans receivable
|
|
2,034
|
|
(7,467
|
)
|
Sales
of other real estate owned
|
|
653
|
|
|
|
Purchases
of premises and equipment
|
|
(450
|
)
|
(473
|
)
|
Disposals
of premises and equipment
|
|
17
|
|
36
|
|
Net Cash Used In Investing Activities
|
|
(3,276
|
)
|
(19,664
|
)
|
|
|
|
|
|
|
|
|
See
Notes to Unaudited Consolidated Financial Statements.
8
Table of Contents
VIST FINANCIAL CORP. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CASH FLOWS (Continued)
(Dollar amounts In
thousands)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
2010
|
|
2009
|
|
Cash Flow From Financing Activities
|
|
|
|
|
|
Net
increase in deposits
|
|
40,726
|
|
80,062
|
|
Net
decrease in federal funds purchased
|
|
|
|
(53,424
|
)
|
Net
(decrease) increase in short-term securities sold under agreements to
repurchase
|
|
(1,211
|
)
|
7,156
|
|
Repayments
of long-term debt
|
|
(10,000
|
)
|
|
|
Reissuance
of treasury stock
|
|
|
|
424
|
|
Proceeds
from the exercise of stock options and stock purchase plans
|
|
22
|
|
29
|
|
Cash
dividends paid on preferred and common stock
|
|
(605
|
)
|
(767
|
)
|
Net Cash Provided By Financing Activities
|
|
28,932
|
|
33,480
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
28,928
|
|
14,733
|
|
Cash and Cash Equivalents:
|
|
|
|
|
|
January 1
|
|
27,372
|
|
19,284
|
|
March 31
|
|
$
|
56,300
|
|
$
|
34,017
|
|
|
|
|
|
|
|
Cash Payments For:
|
|
|
|
|
|
Interest
|
|
$
|
6,550
|
|
$
|
7,471
|
|
Taxes
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Non-cash Investing and Financing
Activities
|
|
|
|
|
|
Transfer
of loans receivable to real estate owned
|
|
$
|
2,889
|
|
$
|
6,398
|
|
See Notes to Unaudited Consolidated
Financial Statements.
9
Table of Contents
VIST FINANCIAL
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying
unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the Consolidated Financial Statements and Footnotes included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2009. All
significant inter-company accounts and transactions have been eliminated. In
the opinion of management, all adjustments (including normal recurring
adjustments) considered necessary for a fair presentation of the results for
the interim periods have been included. Certain items in the 2009 consolidated
financial statements have been reclassified to conform to the presentation in
the 2010 consolidated financial statements. Such reclassifications did not have
a material impact on the presentation of the overall financial statements.
The results of operations
for the three month periods ended March 31, 2010 are not necessarily
indicative of the results to be expected for the full year. For purpose of
reporting cash flows, cash and cash equivalents include cash and due from
banks, federal funds sold and interest bearing deposits in other banks.
Subsequent Events
Effective April 1,
2009, the Company adopted Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic 855, Subsequent Events. FASB
ASC 855 establishes general standards for accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued. FASB ASC 855 sets forth the period after the balance sheet date
during which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition in the financial statements,
identifies the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial
statements, and the disclosures that should be made about events or
transactions that occur after the balance sheet date. In preparing the
originally issued financial statements, the Company evaluated the events and
transactions that occurred after March 31, 2010 through the date these
financial statements were issued.
Events
or transactions that provided evidence about conditions that did not exist at March 31,
2010, but arose before the financial statements were available to be issued
have not been recognized in the financial statements as of and for the period
ended March 31, 2010, but are discussed below. Events or transactions that
were deemed to be of a material nature and provide evidence about conditions
that did exist at March 31, 2010 have been recognized in these
consolidated financial statements.
Sale of 25%
ownership in First HSA, LLC
On
April 19, 2010, the Company sold its 25% ownership in First HSA, LLC to
HealthEquity, Inc. and will recognize a pre-tax gain of approximately $1.9
million in the second quarter of 2010. The Company became a 25% owner in First
HSA, LLC in 2005. VIST Bank, a subsidiary of the Company, is the custodian of
the health savings accounts (HSA) and over time will transfer the custodial
relationship and processing of approximately $84 million in HSA deposits held
by VIST Bank as of March 31, 2010 to HealthEquity, Inc. As part of
the transaction, VIST Bank established an $80 million interest-bearing deposit
relationship with a correspondent bank to facilitate the transfer of funds to
HealthEquity, Inc. as the HSA deposit accounts are transferred to
HealthEquity, Inc.s operating system. The transfer of all HSA accounts
will be completed by June 30, 2010.
Capital raise of
$5.2 million
On
April 21, 2010, the Company entered into purchase agreements which will
raise $5.2 million in new capital through the issuance of 644,000 shares of
common stock to two institutional investors who specialize in the banking
sector, at a price of $8.00 a share. The two investors are Emerald Advisers and
Battlefield Capital Management both well respected bank investors. Battlefield,
managed by James Weaver, formerly with Dearden Maguire Weaver &
Barrett is affiliated with Griffin Financial who served as the placement agent
for VIST Financial. The investment by Emerald Advisers, Inc. is
conditioned on the filing and effectiveness of a Form S-3 registration
statement covering the 322,000 shares placed with Emerald. The investment by
Battlefield is conditioned on the Emerald closing.
Note 2. Recently Issued Accounting Standards
In February 2010, the FASB issued Accounting
Standards Update (ASU) 2010-09 Subsequent Events (Topic 855). This update
addresses both the interaction of the requirements of Topic 855, Subsequent
Events, with the SECs reporting requirements and the intended breadth of the
reissuance disclosures provision related to subsequent events in paragraph
855-10-50-4. The amendments in this update have the potential to change
reporting by both private and public entities, however, the nature of the
change may vary depending on facts and circumstances. The amendments in this
update are effective upon issuance of the final update, except for the use of
the issued
10
Table of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
date for conduit debt obligors. That amendment is
effective for interim or annual periods ending after June 15, 2010. No
significant impact to amounts reported in the consolidated financial position
or results of operations are expected from the adoption of ASU 2010-09.
In February 2010, the FASB issued (ASU) 2010-10
Consolidation (Topic 810). The objective of this Update is to defer the
effective date of the amendments to the consolidation requirements made by FASB
Statement 167 to a reporting entitys interest in certain types of entities and
clarify other aspects of the Statement 167 amendments. As a result of the
deferral, a reporting entity will not be required to apply the Statement 167
amendments to the Subtopic 810-10 consolidation requirements to its interest in
an entity that meets the criteria to qualify for the deferral. This Update also
clarifies how a related partys interests in an entity should be considered
when evaluating the criteria for determining whether a decision maker or
service provider fee represents a variable interest. In addition, the Update
also clarifies that a quantitative calculation should not be the sole basis for
evaluating whether a decision makers or service providers fee is a variable
interest. The amendments in this Update are effective as of the beginning of a
reporting entitys first annual period that begins after November 15,
2009, and for interim periods within that first annual reporting period. Early
application is not permitted. No significant impact to amounts reported in the
consolidated financial position or results of operations are expected from the
adoption of ASU 2010-10.
In March 2010, the FASB issued (ASU) 2010-11
Derivatives and Hedging (Topic 815). This Update clarifies the type of embedded
credit derivative that is exempt from embedded derivative bifurcation
requirements. Only one form of embedded credit derivative qualifies for the
exemptionone that is related only to the subordination of one financial
instrument to another. As a result, entities that have contracts containing an
embedded credit derivative feature in a form other than such subordination may
need to separately account for the embedded credit derivative feature. The
amendments in this Update are effective for each reporting entity at the
beginning of its first fiscal quarter beginning after June 15, 2010. Early
adoption is permitted at the beginning of each entitys first fiscal quarter
beginning after issuance of this Update. No significant impact to amounts
reported in the consolidated financial position or results of operations are
expected from the adoption of ASU 2010-11.
In April 2010, the FASB issued (ASU) 2010-13
Compensation - Stock Compensation (Topic 718). This Update addresses the
classification of a share-based payment award with an exercise price
denominated in the currency of a market in which the underlying equity security
trades. Topic 718 is amended to clarify that a share-based payment award with
an exercise price denominated in the currency of a market in which a
substantial portion of the entitys equity securities trades shall not be
considered to contain a market, performance, or service condition. Therefore,
such an award is not to be classified as a liability if it otherwise qualifies
as equity classification. The amendments in this Update are effective for
fiscal years, and interim periods within those fiscal years, beginning on or after
December 15, 2010. The amendments in this Update should be applied by
recording a cumulative-effect adjustment to the opening balance of retained
earnings. The cumulative-effect adjustment should be calculated for all awards
outstanding as of the beginning of the fiscal year in which the amendments are
initially applied, as if the amendments had been applied consistently since the
inception of the award. The cumulative-effect adjustment should be presented
separately. Earlier application is permitted. No significant impact to amounts
reported in the consolidated financial position or results of operations are
expected from the adoption of ASU 2010-13.
In April 2010, the FASB issued (ASU) 2010-15
Financial Services Insurance (Topic 944). This Update clarifies that an
insurance entity should not consider any separate account interests held for
the benefit of policy holders in an investment to be the insurers interests
and should not combine those interests with its general account interest in the
same investment when assessing the investment for consolidation, unless the
separate account interests are held for the benefit of a related party policy
holder as defined in the Variable Interest Entities Subsections of Subtopic
810-10 and those Subsections require the consideration of related parties. This
Update also amends Subtopic 944-80 to clarify that for the purpose of
evaluating whether the retention of specialized accounting for investments in
consolidation is appropriate, a separate account arrangement should be
considered a subsidiary. The amendments do not require an insurer to
consolidate an investment in which a separate account holds a controlling
financial interest if the investment is not or would not be consolidated in the
standalone financial statements of the separate account. The amendments also
provide guidance on how an insurer should consolidate an investment fund in
situations in which the insurer concludes that consolidation is required. The
amendments in this Update are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2010. Early
adoption is permitted. The amendments in this Update should be applied
retrospectively to all prior periods upon the date of adoption. No significant
impact to amounts reported in the consolidated financial position or results of
operations are expected from the adoption of ASU 2010-15.
Note 3. Earnings Per Common Share
Basic
earnings per common share is calculated by dividing net income, less Series A
Preferred Stock dividends and discount accretion, by the weighted average
number of shares of common stock outstanding. Diluted earnings per common share
is calculated by adjusting the weighted average number of shares of common
stock outstanding to include the effect of stock options, if dilutive, using
the treasury stock method.
Earnings
per common share for the respective periods indicated have been computed based
upon the following:
11
Table of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
Net income
|
|
$
|
713
|
|
$
|
1,531
|
|
Less: preferred stock
dividends
|
|
(313
|
)
|
(313
|
)
|
Less: preferred stock
discount accretion
|
|
(107
|
)
|
(99
|
)
|
|
|
|
|
|
|
Net income available to
common shareholders
|
|
$
|
293
|
|
$
|
1,119
|
|
|
|
|
|
|
|
Average common shares
outstanding
|
|
5,844,949
|
|
5,735,968
|
|
Effect of dilutive
stock options
|
|
37,122
|
|
|
|
|
|
|
|
|
|
Average number of
common shares used to calculate diluted earnings per common share
|
|
5,882,071
|
|
5,735,968
|
|
Common
stock equivalents, in the table above, exclude common stock options with
exercise prices that exceed the average market price of the Companys common
stock during the periods presented. Inclusion of these common stock options
would be anti-dilutive to the diluted earnings per common share calculation.
For the three months ended March 31, 2010, weighted anti-dilutive common
stock options totaled 599,395. For the three ended March 31, 2009,
weighted anti-dilutive common stock options totaled 671,694.
Note 4. Stock-Based Incentive Plans
The
Company has an Employee Stock Incentive Plan (ESIP) that covers all officers
and key employees of the Company and its subsidiaries and is administered by a
committee of the Board of Directors. The total number of shares of common stock
that may be issued pursuant to the ESIP is 486,781. The option price for
options issued under the ESIP must be at least equal to 100% of the fair market
value of the common stock on the date of grant and shall not be less than the
stocks par value. Options granted under the ESIP have various vesting periods
ranging from immediate up to 5 years, 20% exercisable not less than one year
after the date of grant, but no later than ten years after the date of grant in
accordance with the vesting. Vested options expire on the earlier of ten years
after the date of grant, three months from the participants termination of
employment or one year from the date of the participants death or disability.
As of March 31, 2010, a total of 148,072 shares had been issued under the
ESIP. The ESIP expired on November 10, 2008.
The
Company has an Independent Directors Stock Option Plan (IDSOP). The total
number of shares of common stock that may be issued pursuant to the IDSOP is
121,695. The IDSOP covers all directors of the Company who are not employees
and former directors who continue to be employed by the Company. The option
price for options issued under the IDSOP will be equal to the fair market value
of the Companys common stock on the date of grant. Options are exercisable
from the date of grant and expire on the earlier of ten years after the date of
grant, three months from the date the participant ceases to be a director of
the Company or the cessation of the participants employment, or twelve months
from the date of the participants death or disability. As of March 31,
2010, a total of 21,166 shares had been issued under the IDSOP. The IDSOP
expired on November 10, 2008.
The
Company has an Equity Incentive Plan (EIP). The total number of shares which
may be granted under the EIP is equal to 12.5% of the outstanding shares of the
Companys common stock on the date of approval of the EIP and is subject to
automatic annual increases by an amount equal to 12.5% of any increase in the
number of the Companys outstanding shares of common stock during the preceding
year or such lesser number as determined by the Companys board of directors.
The total number of shares of common stock that may be issued pursuant to the
EIP is 676,572. The EIP covers all employees and non-employee directors of the
Company and its subsidiaries. Incentive stock options, nonqualified stock
options and restricted stock grants are authorized for issuance under the EIP.
The exercise price for stock options granted under the EIP must equal the fair
market value of the Companys common stock on the date of grant. Vesting of
awards under the EIP is determined by the Human Resources Committee of the
board of directors, but must be at least one year. The Committee may also
subject an award to one or more performance criteria. Stock options and restricted
stock awards generally expire upon termination of employment. In certain
instances after an optionee terminates employment or service, the Committee may
extend the exercise period for a vested nonqualified stock option up to the
remaining term of the option. A vested incentive stock option must be exercised
within three months following termination of employment if such termination is
for reasons other than cause. Performance goals generally cannot be accelerated
or waived except in the event of a change in control or upon death, disability
or retirement. As of March 31, 2010, no shares have been issued under the
EIP. The EIP will expire on April 17, 2017.
12
Table of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
The
Companys total stock-based compensation expense for the three months ended March 31,
2010 and 2009 was approximately $37,000 and $20,000, respectively. Total
stock-based compensation expense, net of related tax effects, was approximately
$24,000 and $13,000 for the three months ended March, 2010 and 2009,
respectively. There were no cash flows from financing activities included in
cash inflows from excess tax benefits related to stock compensation for the
three months ended March 31, 2010 and 2009. Total unrecognized
compensation costs related to non-vested stock options at March 31, 2010
and 2009 were approximately $227,000 and $326,000, respectively.
Stock
option transactions under the Plans for the three months ended March 31,
2010 were as follows:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Aggregate
|
|
Remaining
|
|
|
|
|
|
Exercise
|
|
Intrinsic
|
|
Term
|
|
|
|
Options
|
|
Price
|
|
Value
|
|
(in years)
|
|
Outstanding at the
beginning of the year
|
|
780,529
|
|
$
|
14.77
|
|
|
|
|
|
Granted
|
|
15,950
|
|
5.24
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Expired
|
|
(2,205
|
)
|
21.25
|
|
|
|
|
|
Forfeited
|
|
(8,578
|
)
|
10.12
|
|
|
|
|
|
Outstanding as of
March 31, 2010
|
|
785,696
|
|
$
|
14.61
|
|
$
|
750,614
|
|
7.1
|
|
Exercisable as of
March 31, 2010
|
|
493,869
|
|
$
|
18.72
|
|
$
|
9,003
|
|
5.8
|
|
The aggregate intrinsic
value of a stock option represents the total pre-tax intrinsic value (the
amount by which the current market value of the underlying stock exceeds the
exercise price of the option) that would have been received by the option
holder had all option holders exercised their options on March 31, 2010.
The aggregate intrinsic value of a stock option will change based on
fluctuations in the market value of the Companys stock.
The
fair value of options granted for the three month period ended March 31,
2010 were estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions:
|
|
Quarter Ended
|
|
Year Ended
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Dividend yield
|
|
5.13
|
%
|
5.32
|
%
|
Expected life
|
|
7 years
|
|
7 years
|
|
Expected volatility
|
|
24.86
|
%
|
24.92
|
%
|
Risk-free interest rate
|
|
3.36
|
%
|
3.00
|
%
|
Weighted average fair
value of options granted
|
|
$
|
0.78
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
The expected volatility
is based on historic volatility. The risk-free interest rates for periods
within the contractual life of the awards are based on the U.S. Treasury yield
curve in effect at the time of the grant. The expected life is based on
historical exercise experience. The dividend yield assumption is based on the
Companys history and expectation of dividend payouts.
Note 5. Comprehensive Income
Accounting
principles generally require that recognized revenue, expense, gains and losses
be included in net income. Although certain changes in assets and liabilities,
such as unrealized gains and losses on available for sale securities (including
the non-credit portion of any other-than-temporary impairment charges relating
to available for sale securities) are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.
13
Table of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
The
following table shows changes in each component of comprehensive income for the
three months ended March 31, 2010 and 2009:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
713
|
|
$
|
1,531
|
|
|
|
|
|
|
|
Other comprehensive
loss:
|
|
|
|
|
|
Change in unrealized
holding gains on available for sale securities
|
|
780
|
|
76
|
|
Change in non-credit
impairment losses on available for sale securities
|
|
3
|
|
|
|
Reclassification
adjustment for credit related impairment on available for sale securities
realized in income
|
|
15
|
|
|
|
Change in non-credit
impairment losses on held to maturity securities
|
|
(940
|
)
|
|
|
Reclassification
adjustment for credit related impairment on held to maturity securities
realized in income
|
|
81
|
|
|
|
Reclassification
adjustment for investment gains realized in income
|
|
(92
|
)
|
(159
|
)
|
Net unrealized losses
|
|
(153
|
)
|
(83
|
)
|
Income tax effect
|
|
52
|
|
28
|
|
Other comprehensive
loss
|
|
(101
|
)
|
(55
|
)
|
Total
comprehensive income
|
|
$
|
612
|
|
$
|
1,476
|
|
Note 6. Investment in Limited Partnership
In
2003, the Bank entered into a limited partner subscription agreement with
Midland Corporate Tax Credit XVI Limited Partnership (partnership), where the
Bank will receive special tax credits and other tax benefits. The Bank
subscribed to a 6.2% interest in the partnership, which is subject to an
adjustment depending on the final size of the partnership at a purchase price
of $5 million. This investment is included in other assets and is not
guaranteed. It is accounted for in accordance with FASB ASC 970, Real Estate -
General, using the equity method. This agreement was accompanied by a payment
of $1.7 million. The associated non-interest bearing promissory note payable
included in other liabilities was zero at March 31, 2010. Installments
were paid as requested. The net carrying value of the Midland Corporate Tax
Credit XVI Limited Partnership for the period ended March 31, 2010 and
2009 was $3.2 million and $3.5 million, respectively. Included in other
expenses for the three months ended March 31, 2010 was the Banks portion
of the partnerships net operating loss of $83,000. Included in other expenses
for the three months ended March 31, 2009 was the Banks portion of the
partnerships net operating loss of $78,000. For 2010, the Bank expects to
receive a federal tax credit of approximately $495,000. For 2009, the Bank
received a federal tax credit of approximately $550,000.
Note 7. Segment Information
Under
the standards set for public business enterprises regarding a companys
reportable operating segments in FASB ASC 280, Segment Reporting, the Company
has four reportable segments; traditional full service community banking,
insurance operations, investment operations and mortgage banking operations.
The latter three segments are managed separately from the traditional banking
and related financial services that the Company also offers. The community bank
is made up of 17 full service branches and performs commercial and consumer
loan, deposit and other banking services. The mortgage banking operation offers
residential lending products and generates revenue primarily through gains
recognized on loan sales. Bank lending and mortgage operations are funded
primarily through the retail and commercial deposits and other borrowing
provided by the community banking segment. The insurance operation utilizes
insurance companies and acts as an agent or brokers to provide coverage for
commercial, individual, surety bond, and group and personal benefit plans. The
investment operation provides services for individual financial planning,
retirement and estate planning, investments, corporate and small business
pension and retirement planning. All inter-segment transactions are recorded at
cost and eliminated as part of the consolidation process. Each of these
segments perform specific business activities in order to generate revenues and
expenses, which in turn, are evaluated by the Companys senior management for
the purpose of making resource allocation and performance evaluation decisions.
14
Table of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
The
following table shows the Companys reportable business segments for the three
months ended March 31, 2010 and 2009:
|
|
Banking
and
Financial
Services
|
|
Mortgage
Banking
|
|
Insurance
Services
|
|
Investment
Services
|
|
Total
|
|
|
|
(Dollar
amounts in thousands)
|
|
Three
months ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and
other income from external sources
|
|
$
|
10,314
|
|
$
|
680
|
|
$
|
3,077
|
|
$
|
155
|
|
$
|
14,226
|
|
(Loss) income before
income taxes
|
|
(372
|
)
|
405
|
|
567
|
|
(65
|
)
|
535
|
|
Total Assets
|
|
1,241,199
|
|
78,780
|
|
17,516
|
|
1,285
|
|
1,338,780
|
|
Purchases of premises
and equipment
|
|
182
|
|
6
|
|
235
|
|
27
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and
other income from external sources
|
|
$
|
9,155
|
|
$
|
866
|
|
$
|
3,520
|
|
$
|
346
|
|
$
|
13,887
|
|
Income before income
taxes
|
|
533
|
|
495
|
|
698
|
|
57
|
|
1,783
|
|
Total Assets
|
|
1,164,206
|
|
77,129
|
|
17,590
|
|
1,240
|
|
1,260,165
|
|
Purchases of premises
and equipment
|
|
472
|
|
|
|
1
|
|
|
|
473
|
|
Note 8. Fair Value Measurements and Fair Value of
Financial Instruments
Fair
Value Measurements
The
Company uses fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value disclosures.
Investment securities classified as available for sale, junior subordinated
debentures, and derivatives are recorded at fair value on a recurring basis.
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 herein are not necessarily indicative of the amount the Company
would realize in a sale transaction on the dates indicated. The estimated fair
values of these financial instruments subsequent to the respective reporting
dates may be different than the amounts reported at each period end.
FASB
ASC 820 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction to sell the
asset or transfer the liability occurs in the principal market for the asset or
liability or, in the absence of a principal market, the most advantageous
market for the asset or liability. The price in the principal (or most
advantageous) market used to measure the fair value of the asset or liability
shall not be adjusted for transaction costs. An orderly transaction is a
transaction that assumes exposure to the market for a period prior to the
measurement date to allow for marketing activities that are usual and customary
for transactions involving such assets and liabilities; it is not a forced
transaction. Market participants are buyers and sellers in the principal market
that are (i) independent, (ii) knowledgeable, (iii) able to
transact and (iv) willing to transact.
FASB
ASC 820 requires that the use of valuation techniques by the Company are
consistent with the market approach, the income approach and/or the cost
approach. The market approach uses prices and other relevant information
generated by market transactions involving identical or comparable assets and
liabilities. The income approach uses valuation techniques to convert future
amounts, such as cash flows or earnings, to a single present amount on a
discounted basis. The cost approach is based on the amount that currently would
be required to replace the service capacity of an asset (replacement costs).
Valuation techniques are consistently applied and inputs to valuation
techniques refer to the assumptions that market participants would use in
pricing the asset or liability. Inputs may be observable, meaning those that
reflect the assumptions market participants would use in pricing the asset or
liability developed based on market data obtained from independent sources, or
unobservable, meaning those that reflect the reporting entitys own assumptions
about the assumptions market participants would use in pricing the asset or
liability developed based on the best information available in the
circumstances. In that regard, FASB ASC 820 establishes a fair value hierarchy
for valuation inputs that gives the highest priority to quoted prices in active
markets for identical assets or liabilities and the lowest priority to values
determined using unobservable inputs.
15
Table of Contents
VIST
FINANCIAL CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The
three levels defined by FASB ASC 820 hierarchy are as follows:
Level 1:
Quoted prices are available in active markets for
identical assets or liabilities as of the reported date.
Level 2:
Pricing inputs
are other than quoted prices in active markets, which are either directly or
indirectly observable as of the reported date. The nature of these assets and
liabilities include items for which quoted prices are available but traded less
frequently, and items whose fair value is calculated using observable data from
other financial instruments.
Level 3:
Assets and
liabilities that have little to no pricing observability as of the reported
date. These items do not have two-way markets and are measured using managements
best estimate of fair value, where the inputs into the determination of fair
value require significant management judgment or estimation.
The
following tables present the assets and liabilities that are measured at fair
value on a recurring basis by level within the fair value hierarchy as reported
on the consolidated statements of financial condition at March 31, 2010
and December 31, 2009. As required by FASB ASC 820, financial assets and
liabilities are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement.
16
Table
of Contents
VIST
FINANCIAL CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
|
|
As of March 31, 2010
|
|
|
|
Quoted Prices
in Active
Markets for
|
|
Significant
Other
Observable
|
|
Significant
Unobservable
|
|
|
|
|
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
|
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
|
|
|
(
Dollar amounts in thousands)
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
Securities
Available For Sale
|
|
|
|
|
|
|
|
|
|
U.S. Government agency
securities
|
|
$
|
|
|
$
|
15,772
|
|
$
|
|
|
$
|
15,772
|
|
Agency residential
mortgage-backed debt securities
|
|
|
|
201,608
|
|
|
|
201,608
|
|
Non-Agency
collateralized mortgage obligations
|
|
|
|
14,936
|
|
|
|
14,936
|
|
Obligations of states
and political subdivisions
|
|
|
|
37,367
|
|
|
|
37,367
|
|
Trust preferred
securities - single issuer
|
|
|
|
449
|
|
|
|
449
|
|
Trust preferred
securities - pooled
|
|
|
|
435
|
|
|
|
435
|
|
Corporate and other
debt securities
|
|
|
|
1,056
|
|
|
|
1,056
|
|
Equity securities
|
|
1,572
|
|
995
|
|
|
|
2,567
|
|
|
|
$
|
1,572
|
|
$
|
272,618
|
|
$
|
|
|
$
|
274,190
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Junior subordinated
debt
|
|
$
|
|
|
$
|
|
|
$
|
19,715
|
|
$
|
19,715
|
|
Interest rate swaps
(included in other liabilities)
|
|
|
|
|
|
64
|
|
64
|
|
|
|
$
|
|
|
$
|
|
|
$
|
19,779
|
|
$
|
19,779
|
|
|
|
As of December 31, 2009
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
|
|
|
(Dollar
amounts in thousands)
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
Securities
Available For Sale
|
|
|
|
|
|
|
|
|
|
U.S. Government agency
securities
|
|
$
|
|
|
$
|
22,897
|
|
$
|
|
|
$
|
22,897
|
|
Agency residential
mortgage-backed debt securities
|
|
|
|
187,903
|
|
|
|
187,903
|
|
Non-Agency
collateralized mortgage obligations
|
|
|
|
17,830
|
|
|
|
17,830
|
|
Obligations of states
and political subdivisions
|
|
|
|
33,640
|
|
|
|
33,640
|
|
Trust preferred
securities - single issuer
|
|
|
|
420
|
|
|
|
420
|
|
Trust preferred
securities - pooled
|
|
|
|
496
|
|
|
|
496
|
|
Corporate and other
debt securities
|
|
|
|
2,338
|
|
|
|
2,338
|
|
Equity securities
|
|
1,513
|
|
993
|
|
|
|
2,506
|
|
|
|
$
|
1,513
|
|
$
|
266,517
|
|
$
|
|
|
$
|
268,030
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Junior subordinated
debt
|
|
$
|
|
|
$
|
|
|
$
|
19,658
|
|
$
|
19,658
|
|
Interest rate swaps
(included in other liabilities)
|
|
|
|
|
|
111
|
|
111
|
|
|
|
$
|
|
|
$
|
|
|
$
|
19,769
|
|
$
|
19,769
|
|
The
following tables present the assets and liabilities that are measured at fair
value on a non-recurring basis by level within the fair value hierarchy as
reported on the consolidated statements of financial condition at March 31,
2010 and December 31, 2009. As required by FASB ASC 820, financial assets
and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement.
17
Table
of Contents
VIST
FINANCIAL CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
|
|
As of March 31, 2010
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
|
|
|
(Dollar
amounts in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
|
|
$
|
|
|
$
|
12,762
|
|
$
|
12,762
|
|
OREO
|
|
|
|
|
|
7,441
|
|
7,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
|
|
|
(Dollar amounts in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
|
|
$
|
|
|
$
|
15,107
|
|
$
|
15,107
|
|
OREO
|
|
|
|
|
|
5,221
|
|
5,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
changes in Level 3 liabilities measured at fair value on a recurring basis are
summarized as follows:
|
|
Three months ended March 31, 2010
|
|
|
|
|
|
Total realized and
|
|
|
|
|
|
|
|
|
|
Unrealized Gains (Losses)
|
|
|
|
|
|
|
|
Fair Value at
December 31,
2009
|
|
Recorded in
Revenue
|
|
Recorded in
Other
Comprehensive
Income
|
|
Transfers Into
and/or Out of
Level 3
|
|
Fair Value at
March 31,
2010
|
|
|
|
(Dollar
amounts in thousands)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated
debt
|
|
$
|
19,658
|
|
$
|
(57
|
)
|
$
|
|
|
$
|
|
|
$
|
19,715
|
|
Interest rate swaps
|
|
111
|
|
47
|
|
|
|
|
|
64
|
|
|
|
$
|
19,769
|
|
$
|
(10
|
)
|
$
|
|
|
$
|
|
|
$
|
19,779
|
|
Certain
assets, including goodwill, loan servicing rights, core deposits, other
intangible assets, certain impaired loans and other long-lived assets, such as
other real estate owned, are to be written down to their fair value on a
nonrecurring basis through recognition of an impairment charge to the
consolidated statements of operations. There were no other material impairment
charges incurred for financial instruments carried at fair value on a
nonrecurring basis during the three months ended March 31, 2010 and 2009.
Fair
Value of Financial Instruments
The
following information should not be interpreted as an estimate of the fair
value of the entire Company since a fair value calculation is only provided for
a limited portion of the Companys assets and liabilities. Due to a wide range
of valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Companys disclosures and those of other companies
may not be meaningful.
18
Table
of Contents
VIST
FINANCIAL CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The
degree of judgment utilized in measuring the fair value of assets and
liabilities generally correlates to the level of observable pricing. Pricing
observability is impacted by a number of factors, including the type of
liability, whether the asset and liability has an established market and the
characteristics specific to the transaction. Assets and Liabilities with
readily available active quoted prices or for which fair value can be measured
from actively quoted prices generally will have a higher degree of pricing
observability and a lesser degree of judgment utilized in measuring fair value.
Conversely, assets and liabilities rarely traded or not quoted will generally
have less, or no, pricing observability and a higher degree of judgment utilized
in measuring fair value.
Generally
accepted accounting principles require disclosure of fair value information
about financial instruments, whether or not recognized on the balance sheet,
for which it is practical to estimate that value. 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. This disclosure does not and is not intended to represent
the fair value of the Company.
The
following methods and assumptions were used to estimate the fair value of the
companys financial assets and financial liabilities:
Cash and
cash equivalents:
The
carrying amounts reported in the balance sheet for cash and short-term
instruments approximate those assets fair values.
Investment
securities available for sale:
Certain
common equity securities are reported at fair value utilizing Level 1 inputs
(exchange quoted prices). All other securities classified 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
with which the Company has historically transacted both purchases and sales of
investment securities. Prices obtained from these sources include prices
derived from market quotations and matrix pricing. 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 prepayments speeds, credit information and the bonds
terms and conditions.
Investment
securities held to maturity:
Fair
values for securities classified as held to maturity are obtained from an
independent pricing service with which the Company has historically transacted
both purchases and sales of investment securities. Prices obtained from these
sources include prices derived from market quotations and matrix pricing. 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 prepayments speeds,
credit information and the bonds terms and conditions.
Federal Home Loan Bank stock:
Federal law requires a
member institution of the Federal Home Loan Bank to hold stock of its district
FHLB according to a predetermined formula. The redeemable carrying amount of
Federal Home Loan Bank stock with limited marketability is carried at cost.
Mortgage
loans held for sale:
The
fair value of mortgage loans held for sale is determined, when possible, using
Level 2 quoted secondary-market prices. If no such quoted price exists, the
fair value of a loan is determined based on expected proceeds based on sales
contracts and commitments.
Loans
(other than impaired loans):
Fair
values are estimated by discounting the projected future cash flows using
market discount rates that reflect the credit and interest-rate risk inherent
in the loan. Projected future cash flows are calculated based upon contractual
maturity or call dates, projected repayments and prepayments of principal.
Mortgage
servicing rights:
Fair
value is based on market prices for comparable mortgage servicing contracts,
when available, or alternatively, is based on a valuation model that calculates
the present value of estimated future net servicing income.
19
Table
of Contents
VIST
FINANCIAL CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Impaired
loans:
The
Company generally values impaired loans that are accounted for under FASB ASC
310, Accounting by Creditors for Impairment of a Loan (FASB ASC 310), based
on the fair value of the loans collateral. Loans are determined to be impaired
when management has utilized current information and economic events and judged
that it is probable that not all of the principal and interest due under the
contractual terms of the loan agreement will be collected. Impaired loans are
initially evaluated and revalued at the time the loan is identified as
impaired. Impaired loans are loans where the current discounted appraisal of
the underlying collateral is less than the principal balance of the loan and
the loan is a non-accruing loan. Fair value is measured based on the value of
the collateral securing these loans and is classified at a Level 3 in the fair
value hierarchy or based on the present value of estimated future cash flows if
repayment is not collateral dependent. Collateral may be real estate and/or
business assets including equipment, inventory and/or accounts receivable and
is determined based on appraisals by qualified licensed appraisers hired by the
Company. For the purposes of determining the fair value of impaired loans that
are collateral dependent, the company defines a current appraisal and
evaluation as those completed within 12 months and performed by an independent
third party. Appraised and reported values may be discounted based on
managements historical knowledge, changes in market conditions from the time
of valuation, and/or managements expertise and knowledge of the client and
clients business.
The
recorded investment in impaired loans requiring an allowance for loan losses
was $16.6 million at March 31, 2010 compared to $18.9 million at December 31,
2009. At March 31, 2010 and at December 31, 2009, the related
allowance for loan losses associated with those loans remained the same at $3.8
million. The $2.3 million decrease in non-performing loans from December 31,
2009 to March 31, 2010 is primarily due to several non-performing
commercial credits being transferred to other real estate owned. As of March 31,
2010, 97.1% of all impaired loans had current third party appraisals or
evaluations of their collateral to measure impairment. For these impaired
loans, the bank takes immediate action to determine the current value of
collateral securing its troubled loans. The remaining 2.9% of impaired loans
were in process of being evaluated at March 31, 2010. During the ongoing
supervision of a troubled loan, the Company performs a cash flow evaluation,
obtains an appraisal update or obtains a new appraisal. The Company reviews all
impaired loans on a quarterly basis to ensure that the market values are
reasonable and that no further deterioration has occurred. If the evaluation
indicates that the market value has deteriorated below the carrying value of
the loan, either the entire loan or the partial difference between the market
value and principal balance is charged-off unless there are material mitigating
factors to the contrary. If a loan is not charged down, reserves are allocated
to reflect the estimated collateral shortfall. Loans that have been partially
charged-off are classified as non-performing loans for which none of the
current loan terms have been modified. During 2010, there were $610,000 in
partial loan charge-offs. In order for an impaired loan not to have a specific
valuation allowance it must be determined by the Company through a current
evaluation that there is sufficient underlying collateral after appropriate
discounts have been applied, that is in excess of the carrying value.
Cash surrender value of life
insurance policies:
Cash surrender value of
life insurance policies (BOLI) are carried at their cash surrender value. The
Company recognizes tax-free income from the periodic increases in the cash
surrender value of these policies and from death benefits.
Other
real estate owned:
Foreclosed
properties are adjusted to fair value less estimated selling costs at the time
of foreclosure in preparation for transfer from portfolio loans to other real
estate owned (OREO), establishing a new accounting basis. The Company
subsequently adjusts the fair value on the OREO utilizing Level 3 on a
non-recurring basis to reflect partial write-downs based on the observable
market price, current appraised value of the asset or other estimates of fair
value.
Deposit
liabilities:
The
fair values disclosed for demand deposits (e.g., interest and non-interest
checking, savings and certain types of money market accounts) are considered to
be equal to the amount payable on demand at the reporting date (i.e., their
carrying amounts). Fair values for fixed-rate time deposits are estimated using
a discounted cash flow calculation that applies interest rates currently being offered
on time deposits to a schedule of aggregated expected monthly maturities on
time deposits.
Federal
funds sold and securities sold under agreements to repurchase:
The
fair value of federal funds sold and securities sold under agreements to
repurchase is based on the discounted value of contractual cash flows using
estimated rates currently offered for alternative funding sources of similar
remaining maturities.
20
Table
of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
Long-term
debt:
The
fair value of long-term debt is calculated based on the discounted value of
contractual cash flows, using rates currently available for borrowings with
similar features and maturities.
Junior
subordinated debt:
The
Company records the fair value of its junior subordinated debt utilizing Level
3 inputs, with unrealized gains and losses reflected in other income in the
consolidated statements of operations. The fair value is estimated utilizing
the income approach whereby the expected cash flows over the remaining
estimated life of the debentures are discounted using the Companys credit
spread over the current fully indexed yield based on an expectation of future
interest rates derived from observed market interest rate curves and
volatilities. The Companys credit spread was calculated based on similar trust
preferred securities issued within the last twelve months.
Interest
rate swap agreements:
The
Company records the fair value of its interest rate swaps utilizing Level 3
inputs, with unrealized gains and losses reflected in other income in the
consolidated statements of operations. The fair value measurement of the
interest rate swaps is determined by netting the discounted future fixed or
variable cash payments and the discounted expected fixed or variable cash
receipts based on an expectation of future interest rates derived from observed
market interest rate curves and volatilities.
Accrued
interest receivable and payable:
The
carrying amount of accrued interest receivable and accrued interest payable
approximates its fair value.
Off-balance
sheet credit related instruments:
Fair
values for off-balance sheet, credit related financial instruments are based on
fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the counterparties credit standing.
The
carrying amount of accrued interest receivable and accrued interest payable
approximates its fair value.
A
summary of the carrying amounts and estimated fair values of financial
instruments is as follows:
21
Table
of Contents
VIST
FINANCIAL CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
|
|
As of March 31,
|
|
As of December 31,
|
|
|
|
2010
|
|
2010
|
|
2009
|
|
2009
|
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
|
|
(Dollar
amounts in thousands)
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
56,300
|
|
$
|
56,300
|
|
$
|
27,372
|
|
$
|
27,372
|
|
Mortgage loans held for
sale
|
|
2,229
|
|
2,229
|
|
1,962
|
|
1,962
|
|
Securities available
for sale
|
|
274,190
|
|
274,190
|
|
268,030
|
|
268,030
|
|
Securities held to
maturity
|
|
2,089
|
|
2,038
|
|
3,035
|
|
1,857
|
|
Federal Home Loan Bank
stock
|
|
5,715
|
|
5,715
|
|
5,715
|
|
5,715
|
|
Loans, net
|
|
891,992
|
|
896,606
|
|
899,515
|
|
903,868
|
|
Mortgage servicing rights
|
|
124
|
|
124
|
|
145
|
|
145
|
|
Cash surrender value of
life insurance policies
|
|
19,028
|
|
19,028
|
|
18,950
|
|
18,950
|
|
Accrued interest
receivable
|
|
5,573
|
|
5,573
|
|
5,004
|
|
5,004
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
1,061,624
|
|
1,067,024
|
|
1,020,898
|
|
1,021,298
|
|
Securities sold under
agreements to repurchase
|
|
113,985
|
|
114,530
|
|
115,196
|
|
113,638
|
|
Long-term debt
|
|
10,000
|
|
10,216
|
|
20,000
|
|
20,300
|
|
Junior subordinated
debt
|
|
19,715
|
|
19,715
|
|
19,658
|
|
19,658
|
|
Interest rate swap
|
|
64
|
|
64
|
|
111
|
|
111
|
|
Accrued interest
payable
|
|
2,319
|
|
2,319
|
|
2,742
|
|
2,742
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance
Sheet Financial Instruments:
|
|
|
|
|
|
|
|
|
|
Commitments to extend
credit
|
|
|
|
|
|
|
|
|
|
Standby letters of
credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9. Securities Available For Sale and Securities
Held to Maturity
The
amortized cost and estimated fair values of securities available for sale and
securities held to maturity were as follows at March 31, 2010 and December 31,
2009:
|
|
March 31,
2010
|
|
December 31,
2009
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Securities Available For Sale
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency
securities
|
|
$
|
15,586
|
|
$
|
263
|
|
$
|
(77
|
)
|
$
|
15,772
|
|
$
|
23,087
|
|
$
|
160
|
|
$
|
(350
|
)
|
$
|
22,897
|
|
Agency residential
mortgage-backed debt securities
|
|
196,775
|
|
5,408
|
|
(575
|
)
|
201,608
|
|
183,104
|
|
5,518
|
|
(719
|
)
|
187,903
|
|
Non-Agency
collateralized mortgage obligations
|
|
19,677
|
|
26
|
|
(4,767
|
)
|
14,936
|
|
22,970
|
|
115
|
|
(5,255
|
)
|
17,830
|
|
Obligations of states
and political subdivisions
|
|
37,338
|
|
413
|
|
(384
|
)
|
37,367
|
|
33,436
|
|
450
|
|
(246
|
)
|
33,640
|
|
Trust preferred
securities - single issuer
|
|
500
|
|
|
|
(51
|
)
|
449
|
|
500
|
|
|
|
(80
|
)
|
420
|
|
Trust preferred
securities - pooled
|
|
5,943
|
|
14
|
|
(5,522
|
)
|
435
|
|
5,957
|
|
13
|
|
(5,474
|
)
|
496
|
|
Corporate and other debt
securities
|
|
1,157
|
|
|
|
(101
|
)
|
1,056
|
|
2,444
|
|
1
|
|
(107
|
)
|
2,338
|
|
Equity securities
|
|
3,345
|
|
20
|
|
(798
|
)
|
2,567
|
|
3,368
|
|
13
|
|
(875
|
)
|
2,506
|
|
Total investment
securities available for sale
|
|
$
|
280,321
|
|
$
|
6,144
|
|
$
|
(12,275
|
)
|
$
|
274,190
|
|
$
|
274,866
|
|
$
|
6,270
|
|
$
|
(13,106
|
)
|
$
|
268,030
|
|
22
Table
of Contents
VIST
FINANCIAL CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Securities
Held To Maturity
|
|
March 31, 2010
|
|
|
|
Amortized
Cost
|
|
Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Loss
|
|
Carrying
Value
|
|
Gross
Unrealized
Holding
Gains
|
|
Gross
Unrealized
Holding
Losses
|
|
Fair
Value
|
|
|
|
(Dollar
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred
securities - single issuer
|
|
$
|
2,010
|
|
$
|
|
|
$
|
2,010
|
|
$
|
8
|
|
$
|
(59
|
)
|
$
|
1,959
|
|
Trust preferred
securities - pooled
|
|
938
|
|
(859
|
)
|
79
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment
securities held to maturity
|
|
$
|
2,948
|
|
$
|
(859
|
)
|
$
|
2,089
|
|
$
|
8
|
|
$
|
(59
|
)
|
$
|
2,038
|
|
|
|
December 31, 2009
|
|
|
|
Amortized
Cost
|
|
Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Loss
|
|
Carrying
Value
|
|
Gross
Unrealized
Holding
Gains
|
|
Gross
Unrealized
Holding
Losses
|
|
Fair
Value
|
|
|
|
(Dollar
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred
securities - single issuer
|
|
$
|
2,012
|
|
$
|
|
|
$
|
2,012
|
|
$
|
5
|
|
$
|
(257
|
)
|
$
|
1,760
|
|
Trust preferred
securities - pooled
|
|
1,023
|
|
|
|
1,023
|
|
|
|
(926
|
)
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment
securities held to maturity
|
|
$
|
3,035
|
|
$
|
|
|
$
|
3,035
|
|
$
|
5
|
|
$
|
(1,183
|
)
|
$
|
1,857
|
|
The
age of unrealized losses and fair value of related investment securities
available for sale and investment securities held to maturity at March 31,
2010 and December 31, 2009 were as follows:
23
Table of Contents
VIST
FINANCIAL CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Securities Available for Sale
|
|
March 31,
2010
|
|
|
|
Less
than Twelve Months
|
|
More
than Twelve Months
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Number
of
|
|
Fair
|
|
Unrealized
|
|
Number
of
|
|
Fair
|
|
Unrealized
|
|
Number
of
|
|
|
|
Value
|
|
Losses
|
|
Securities
|
|
Value
|
|
Losses
|
|
Securities
|
|
Value
|
|
Losses
|
|
Securities
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency
securities
|
|
$
|
8,046
|
|
$
|
(77
|
)
|
4
|
|
$
|
|
|
$
|
|
|
|
|
$
|
8,046
|
|
$
|
(77
|
)
|
4
|
|
Agency residential
mortgage-backed debt securities
|
|
44,514
|
|
(547
|
)
|
14
|
|
2,051
|
|
(28
|
)
|
1
|
|
46,565
|
|
(575
|
)
|
15
|
|
Non-Agency
collateralized mortgage obligations
|
|
2,268
|
|
(81
|
)
|
1
|
|
8,301
|
|
(4,686
|
)
|
8
|
|
10,569
|
|
(4,767
|
)
|
9
|
|
Obligations of states
and political subdivisions
|
|
14,336
|
|
(336
|
)
|
18
|
|
672
|
|
(48
|
)
|
1
|
|
15,008
|
|
(384
|
)
|
19
|
|
Trust preferred
securities - single issuer
|
|
|
|
|
|
|
|
449
|
|
(51
|
)
|
1
|
|
449
|
|
(51
|
)
|
1
|
|
Trust preferred securities
- pooled
|
|
|
|
|
|
|
|
421
|
|
(5,522
|
)
|
8
|
|
421
|
|
(5,522
|
)
|
8
|
|
Corporate and other debt
securities
|
|
128
|
|
(29
|
)
|
1
|
|
927
|
|
(72
|
)
|
1
|
|
1,055
|
|
(101
|
)
|
2
|
|
Equity securities
|
|
1,211
|
|
(79
|
)
|
2
|
|
797
|
|
(719
|
)
|
22
|
|
2,008
|
|
(798
|
)
|
24
|
|
Total investment
securities available for sale
|
|
$
|
70,503
|
|
$
|
(1,149
|
)
|
40
|
|
$
|
13,618
|
|
$
|
(11,126
|
)
|
42
|
|
$
|
84,121
|
|
$
|
(12,275
|
)
|
82
|
|
Securities Held To Maturity
|
|
March
31, 2010
|
|
|
|
Less
than Twelve Months
|
|
More
than Twelve Months
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Number
of
|
|
Fair
|
|
Unrealized
|
|
Number
of
|
|
Fair
|
|
Unrealized
|
|
Number
of
|
|
|
|
Value
|
|
Losses
|
|
Securities
|
|
Value
|
|
Losses
|
|
Securities
|
|
Value
|
|
Losses
|
|
Securities
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred
securities - single issuer
|
|
$
|
|
|
$
|
|
|
|
|
$
|
918
|
|
$
|
(59
|
)
|
1
|
|
$
|
918
|
|
$
|
(59
|
)
|
1
|
|
Trust preferred
securities - pooled
|
|
|
|
|
|
|
|
79
|
|
|
|
1
|
|
79
|
|
|
|
1
|
|
Total investment
securities held to maturity
|
|
$
|
|
|
$
|
|
|
|
|
$
|
997
|
|
$
|
(59
|
)
|
2
|
|
$
|
997
|
|
$
|
(59
|
)
|
2
|
|
Securities Available for Sale
|
|
December
31, 2009
|
|
|
|
Less
than Twelve Months
|
|
More
than Twelve Months
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Number
of
|
|
Fair
|
|
Unrealized
|
|
Number
of
|
|
Fair
|
|
Unrealized
|
|
Number
of
|
|
|
|
Value
|
|
Losses
|
|
Securities
|
|
Value
|
|
Losses
|
|
Securities
|
|
Value
|
|
Losses
|
|
Securities
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency
securities
|
|
$
|
16,115
|
|
$
|
(350
|
)
|
9
|
|
$
|
|
|
$
|
|
|
|
|
$
|
16,115
|
|
$
|
(350
|
)
|
9
|
|
Agency residential
mortgage-backed debt securities
|
|
32,690
|
|
(719
|
)
|
12
|
|
|
|
|
|
|
|
32,690
|
|
(719
|
)
|
12
|
|
Non-Agency
collateralized mortgage obligations
|
|
3,468
|
|
(368
|
)
|
2
|
|
8,524
|
|
(4,887
|
)
|
8
|
|
11,992
|
|
(5,255
|
)
|
10
|
|
Obligations of states
and political subdivisions
|
|
11,907
|
|
(246
|
)
|
16
|
|
|
|
|
|
|
|
11,907
|
|
(246
|
)
|
16
|
|
Trust preferred
securities - single issue
|
|
|
|
|
|
|
|
420
|
|
(80
|
)
|
1
|
|
420
|
|
(80
|
)
|
1
|
|
Trust preferred
securities - pooled
|
|
|
|
|
|
|
|
482
|
|
(5,474
|
)
|
8
|
|
482
|
|
(5,474
|
)
|
8
|
|
Corporate and other debt
securities
|
|
138
|
|
(31
|
)
|
1
|
|
924
|
|
(76
|
)
|
1
|
|
1,062
|
|
(107
|
)
|
2
|
|
Equity securities
|
|
1,041
|
|
(24
|
)
|
2
|
|
687
|
|
(851
|
)
|
22
|
|
1,728
|
|
(875
|
)
|
24
|
|
Total investment securities
available for sale
|
|
$
|
65,359
|
|
$
|
(1,738
|
)
|
42
|
|
$
|
11,037
|
|
$
|
(11,368
|
)
|
40
|
|
$
|
76,396
|
|
$
|
(13,106
|
)
|
82
|
|
Securities Held To Maturity
|
|
December
31, 2009
|
|
|
|
Less
than Twelve Months
|
|
More
than Twelve Months
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Number
of
|
|
Fair
|
|
Unrealized
|
|
Number
of
|
|
Fair
|
|
Unrealized
|
|
Number
of
|
|
|
|
Value
|
|
Losses
|
|
Securities
|
|
Value
|
|
Losses
|
|
Securities
|
|
Value
|
|
Losses
|
|
Securities
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred
securities - single issue
|
|
$
|
|
|
$
|
|
|
|
|
$
|
720
|
|
$
|
(257
|
)
|
1
|
|
$
|
720
|
|
$
|
(257
|
)
|
1
|
|
Trust preferred
securities - pooled
|
|
|
|
|
|
|
|
97
|
|
(926
|
)
|
1
|
|
97
|
|
(926
|
)
|
1
|
|
Total investment
securities held to maturity
|
|
$
|
|
|
$
|
|
|
|
|
$
|
817
|
|
$
|
(1,183
|
)
|
2
|
|
$
|
817
|
|
$
|
(1,183
|
)
|
2
|
|
At
March 31, 2010, there were 40 securities with unrealized losses in the
less than twelve month category and 44 securities with unrealized losses in the
twelve month or more category
Management
evaluates investment securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Factors that may be indicative of impairment include, but are
not limited to, the following:
·
Fair value below cost and the length of time
·
Adverse condition specific to a particular investment
·
Rating agency activities (
e.g.
,
downgrade)
24
Table
of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
·
Financial condition of an issuer
·
Dividend activities
·
Suspension of trading
·
Management intent
·
Changes in tax laws or other policies
·
Subsequent market value changes
·
Economic or industry forecasts
Other-than-temporary
impairment means management believes the securitys impairment is due to
factors that could include its inability to pay interest or dividends, its
potential for default, and/or other factors. When a held to maturity or
available for sale debt security is assessed for other-than-temporary
impairment, management has to first consider (a) whether the Company
intends to sell the security, and (b) whether it is more likely than not
that the Company will be required to sell the security prior to recovery of its
amortized cost basis. If one of these circumstances applies to a security, an
other-than-temporary impairment loss is recognized in the statement of
operations equal to the full amount of the decline in fair value below
amortized cost. If neither of these circumstances applies to a security, but
the Company does not expect to recover the entire amortized cost basis, an
other-than-temporary impairment loss has occurred that must be separated into
two categories: (a) the amount related to credit loss, and (b) the
amount related to other factors. In assessing the level of other-than-temporary
impairment attributable to credit loss, management compares the present value
of cash flows expected to be collected with the amortized cost basis of the
security. The portion of the total other-than-temporary impairment related to
credit loss is recognized in earnings (as the difference between the fair value
and the present value of the estimated cash flows), while the amount related to
other factors is recognized in other comprehensive income. The total
other-than-temporary impairment loss is presented in the statement of
operations, less the portion recognized in other comprehensive income. When a
debt security becomes other-than-temporarily impaired, its amortized cost basis
is reduced to reflect the portion of the total impairment related to credit
loss.
If
a decline in market value of a security is determined to be other than
temporary, under generally accepted accounting principles, we are required to
write these securities down to their estimated fair value. As of March 31,
2010, we owned single issuer and pooled trust preferred securities of other
financial institutions, private label collateralized mortgage obligations and
equity securities whose aggregate historical cost basis is greater than their
estimated fair value (see above). We reviewed all investment securities and
have identified those securities that are other-than-temporarily impaired. The
losses associated with these other-than-temporarily impaired securities have
been bifurcated into the portion of non-credit impairment losses recognized in
other comprehensive loss and into the portion of credit impairment losses
recorded in earnings (see Note 5 of the consolidated financial statements). We
perform an ongoing analysis of all investment securities utilizing both readily
available market data and third party analytical models. Future changes in
interest rates or the credit quality and strength of the underlying issuers may
reduce the market value of these and other securities. If such decline is
determined to be other than temporary, we will write them down through a charge
to earnings to their then current fair value.
A.
Obligations of
U. S. Government Agencies and Corporations. The unrealized losses on the
Companys investments in obligations of U.S. Government agencies were caused by
changing credit spreads in the market as a result of the ongoing economic
recession. At March 31, 2010, the fair value of the U. S. Government
agencies and corporations bonds represented 5.8% of the total fair value of the
available for sale securities held in the investment securities portfolio. The
contractual cash flows are guaranteed by an agency of the U.S. Government.
Because the Company has no intention to sell these securities, nor is it more
likely than not that the Company will be required to sell these securities, the
Company does not consider these investments to be other-than-temporarily
impaired at March 31, 2010. Future evaluations of the above mentioned
factors could result in the Company recognizing an impairment charge.
B.
Mortgage-Backed
Debt Securities. The unrealized losses on the Companys investments in federal
agency residential mortgage-backed securities and corporate (non-agency)
collateralized mortgage obligations (CMO) were primarily caused by changing
credit and pricing spreads in the market as a result of the ongoing economic
recession. At March 31, 2010, federal agency residential mortgage-backed
securities and collateralized mortgage obligations represented 73.5% of the
total fair value of available for sale securities held in the investment
securities portfolio and corporate (non-agency) collateralized mortgage
obligations represented 5.5% of the total fair value of available for sale
securities held in the investment securities portfolio. The Company purchased
those securities at a price relative to the market at the time of the purchase.
The contractual cash flows of the federal agency residential mortgage-backed
securities are guaranteed by the U.S. Government. Because the decline in the
market value of agency residential mortgage-backed debt securities is primarily
attributable to changes in market pricing since the time of purchase and not
credit quality, and because the Company has no intention to sell these
securities, nor is it more likely than not that the Company will be required to
sell these securities, the Company does not consider those investments to be
other-than-temporarily impaired at March 31, 2010. Future evaluations of
the above mentioned factors could result in the Company recognizing an
impairment charge.
25
Table
of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
As
of March 31, 2010, the Company owned 8 corporate (non-agency)
collateralized mortgage obligations in super senior or senior tranches whose
aggregate historical cost basis is greater than estimated fair value. At March 31,
2010, 1 non-agency CMO with an amortized cost basis of $1.6 million was
collateralized by commercial real estate and 7 non-agency CMOs with an
amortized cost basis of $18.1 million were collateralized by residential real
estate. The Company uses a two step modeling approach to analyze each
non-agency CMO issue to determine whether or not the current unrealized losses
are due to credit impairment and therefore other-than-temporarily impaired.
Step one in the modeling process applies default and severity vectors to each
security based on current credit data detailing delinquency, bankruptcy,
foreclosure and real estate owned (REO) performance. The results of the vector
analysis are compared to the securitys current credit support coverage to
determine if the security has adequate collateral support. If the securitys
current credit support coverage falls below certain predetermined levels, step
two is utilized. In step two, the Company uses a third party to assist in
calculating the present value of current estimated cash flows to ensure there
are no adverse changes in cash flows during the quarter leading to an
other-than-temporary-impairment. Managements assumptions used in step two
include default and severity vectors and prepayment assumptions along with
various other criteria including: percent decline in fair value; credit rating
downgrades; probability of repayment of amounts due and changes in average
life. At March 31, 2010, no CMO qualified for the step two modeling
approach. Because of the results of the modeling process and because the
Company has no intention to sell these securities, nor is it more likely than
not that the Company will be required to sell these securities, the Company
does not consider these CMO investments to be other-than-temporarily impaired
at March 31, 2010. Future evaluations of the above mentioned factors could
result in the Company recognizing an impairment charge.
C.
State and
Municipal Obligations. The unrealized losses on the Companys investments in
state and municipal obligations were primarily caused by changing credit
spreads in the market as a result of the ongoing economic recession and the
deterioration of the creditworthiness of certain mono-line bond insurers. At March 31,
2010, state and municipal obligation bonds represented 13.6% of the total fair
value of available for sale securities held in the investment securities
portfolio. The Company purchased those obligations at a price relative to the
market at the time of the purchase, and the tax advantaged benefit of the
interest earned on these investments reduces the Companys federal tax
liability. Because the Company has no intention to sell these securities, nor
is it more likely than not that the Company will be required to sell these
securities, the Company does not consider those investments to be
other-than-temporarily impaired at March 31, 2010. Future evaluations of
the above mentioned factors could result in the Company recognizing an
impairment charge.
D.
Other Debt
Securities and Trust Preferred Securities. Included in other debt securities
available for sale at March 31, 2010, was 1 asset-backed security and 1
corporate debt issue representing 0.4% of the total fair value of available for
sale securities. Included in trust preferred securities were single issuer,
trust preferred securities (TRUPS or CDO) representing 0.2% and 96.1% of
the total fair value of available for sale securities and the total held to
maturity securities, respectively, and pooled TRUPS representing 0.2% and 3.9%
of the total fair value of available for sale securities and the total held to
maturity securities, respectively.
The
unrealized losses on other debt securities relate primarily to changing pricing
due to the economic recession affecting these markets and not necessarily the
expected cash flows of the individual securities. Due to market conditions, it
is unlikely that the Company would be able to recover its investment in these
securities if the Company sold the securities at this time. Because the Company
has analyzed the credit risk and cash flow characteristics of these securities
and the Company has no intention to sell these securities, nor is it more
likely than not that the Company will be required to sell these securities, the
Company does not consider these investments to be other-than-temporarily
impaired at March 31, 2010.
As
of March 31, 2010, the Company owned 3 single issuer TRUPS and 8 pooled
TRUPS of other financial institutions whose aggregate historical cost basis is
greater than their estimated fair value. Investments in trust preferred
securities included (a) amortized cost of $2.5 million of single issuer
TRUPS of other financial institutions with a fair value of $2.4 million and (b) amortized
cost of $6.9 million of pooled TRUPS of other financial institutions with a
fair value of $514,000. The issuers in these securities are primarily banks,
but some of the pools do include a limited number of insurance companies. The
Company has evaluated these securities and determined that the decreases in
estimated fair value are temporary with the exception of six pooled TRUPS which
were other than temporarily impaired at March 31, 2010. For the three
months ended March 31, 2010, the Company recognized a subsequent net
credit impairment charge to earnings of $15,000 on 1 available for sale pooled
TRUPS and an initial net credit impairment charge to earnings of $81,000 on 1
held to maturity pooled TRUPS as the Companys estimate of projected cash flows
it expected to receive was less than the securitys carrying value. For the
three months ended March 31, 2009, no credit impairment charge to earnings
was recognized on any TRUPS as the Companys estimate of projected cash flows
it expected to receive was greater than the securitys carrying value. The
Company performs an ongoing analysis of these securities utilizing both readily
available market data and third party analytical models. Future changes in
interest rates or the credit quality and strength of the underlying issuers may
reduce the market value of these and other securities. If such decline is
determined to be other than temporary, the Company will record the necessary
charge to earnings and/or AOCI to reduce the securities to their then current
fair value.
For
pooled TRUPS, on a quarterly basis, the Company uses a third party model (model)
to assist in calculating the present value of current estimated cash flows to
the previous estimate to ensure there are no adverse changes in cash flows. The
models valuation methodology is based on the premise that the fair value of a
CDOs collateral should approximate the fair value of its
26
Table
of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
liabilities.
Conceptually, this premise is supported by the notion that cash generated by
the collateral flows through the CDO structure to bond and equity holders, and
that the CDO structure neither enhances nor diminishes its value. This approach
was designed to value structured assets like TRUPS that currently do not have
an active trading market, but are secured by collateral that can be benchmarked
to comparable, publicly traded securities. The following describes the models
assumptions, cash flow projections, and the valuation approach developed using
the market value equivalence approach:
Defaults and
Expected Deferrals
The
model takes into account individual defaults that have already occurred by any
participating entity within the pool of entities that make up the securities
underlying collateral. The analyses show the individual names of each entity
which are currently in default or have deferred their dividend payment. In
light of the severity of current economic and credit market conditions, the model
makes the conservative assumption that all deferring issuers will default. The
model assesses incremental, near-term default risk by performing a ratio
analysis designed to generate an estimate of the CAMELS rating that regulators
use to assess the financial health of banks and thrifts which is updated
quarterly. These shadow ratios reflect the key metrics that define the acronym
CAMELS, specifically capital adequacy, asset quality, management, earnings,
liquidity, and sensitivity to interest rates. The model calculates these ratios
for each individual issuer in the TRUPS pool using publicly available data for
the most recent quarter, and weighs the results. Capital adequacy and liquidity
measures are emphasized relative to benchmark weights to account for the
current stress on the banking system. The model assigned a numerical score to
each issuer based on their CAMELS ratios, with scores ranging from 1 for the
strongest institutions, to 4 and 5 for banks believed to be experiencing above
average stress in the current credit cycle. Similar to the default assumption
regarding deferring issuers, the model assumes that all shadow CAMEL ratings of
4 and 5 will also default. The models assumptions incorporate the belief that
the severity of the stress on the banking system has introduced the potential
for a sudden and dramatic decline in the operating performance of banks.
Although difficult to identify, the model uses an estimated pool-wide default
probability of .36% annually for the duration of each deal. This default rate
is consistent with Moodys idealized default probability for applicable
corporate credits, and represents the base case default scenario used to model
each deal.
Prepayments
Generally,
TRUPS are callable within five to ten years of issuance. Due to current market
conditions and the limited, eight year history of TRUPS, prepayments are
difficult to predict. The model assumes that prepayments will be limited to
those issuers that are acquired by large banks with low financing costs. In deference
to the conventional view that the banking industry will undergo significant
consolidation over the next several years, the model conservatively estimates
that 10% of TRUPs pools will be acquired and recapitalized over the next 3 to
4 years. Thereafter, the model assumes no further prepayments.
Auction Calls
Auction
calls are a structural feature designed to create a 10-year expected life for
secured by 30-year TRUPS collateral. Auction call provisions mandate that at
the end of the tenth year of a deal, the Trustee submit the collateral to
auction at a minimum price sufficient to retire the deals liabilities at par.
If the initial auction is unsuccessful, turbo payments take effect that divert
cash flows from equity holders to pay down senior bond principal, and auctions
are repeated quarterly until successful. During the period that the TRUPS
market was active, it was generally assumed that auction calls would succeed
because they offered a source of collateral that dealers could recycle into new
TRUPS. However, given the uncertain future of the TRUPS market, negative
collateral credit migration, and the decline in market value of TRUPS, the
model assumes that a successful auction call is highly unlikely. Therefore,
model expects that the TRUPS will extend through their full 30-year maturity.
Cash Flow
Projections
The
model projects deal cash flows using a proprietary model that incorporates the
priority of payments defined in each TRUPS offering memorandum, and specific
structural features such as over collateralization and interest coverage tests.
The model estimates gross collateral cash flows based on the default, recovery,
prepayment, and auction call assumptions described above, a forward LIBOR
curve, and the specific terms of each issue, including collateral coupon
spreads, payment dates, first call dates, and maturity dates. To derive a
measure of each securitys net revenue, the model adjusts projected gross cash
flows by an estimate of net hedge payments based on the terms of the deals swap
agreements, and subtracted the administrative expenses disclosed in each TRUPS
offering memorandum. To project cash flows to bond and equity holders, the
model analyzes net revenue projections through a vector of each TRUPS priority
of payments. The model captures coupon payments to each tranche, the priority
of principal distributions, and diversions of cash flows from each securitys
lower tranches to the senior tranche in the event of over-collateralization or
interest coverage test failures.
27
Table
of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
Valuation
The
fair value of an asset is determined by the markets required rate of return
for its cash flows. Identifying the markets required rate of return for the
Notes is challenging, given that, over the last year, trading in TRUPS has
virtually ceased, and the few secondary market transactions that have occurred
have been limited to distressed sales that do not accurately represent a
measure of fair value. This task of obtaining a reasonable fair value is
further complicated by the fact that TRUPS do not have a benchmark index, such
as the ABX, and are not readily comparable to other CDO asset classes. The
models solution to this problem was to rely on market value equivalence to
derive the fair value of the Notes based on the models assessment of the fair
value of the underlying collateral. At this stage of the analysis, it is
important to note that the model accounts for the negative credit migration of
TRUPS pools by incorporating projected defaults and recoveries into the models
cash flow projections. Therefore, so as not to double-count incremental default
risk when discounting these cash flows to fair value, the model produces a
purchased yield discount rate for the each pool that reflects the pools credit
rating at origination.
Under
market value equivalence, the decline in market value of the TRUPS liabilities
should correspond to the decline in the market value of the collateral. Since
there is no observable spread curve for TRUPS on which to base the allocation
of this loss, the model allocates the loss pro rata across tranches. This
assumption approximates a parallel shift in the credit curve, which is broadly
consistent with the general movement of spreads during the credit crisis. The
model then calculates internal rates of return for each tranche based on their
loss-adjusted values and scheduled interest and principal income. These rates
serve as the basis for the models estimate of the markets required rate of
return for each tranche, as originally rated.
At
this stage of the valuation, the model addressed the decline in the credit
quality of the collateral. TRUPS are designed so that credit losses are
absorbed sequentially within the capital structure, beginning with the equity
tranche and ending with the senior notes. The par amount of the capital
structure that is junior to a particular bond is called subordination, which is
a measure of the collateral losses that can be sustained prior to that bond
suffering a loss. As defaults occur, the bonds subordination is reduced or
eliminated, increasing its default risk and reducing its market value. To
account for this increased risk, the model reduces the subordination of each
tranche by incremental defaults that projected to occur over the next two
years, and then re-calibrates the market discount rate for each tranche based
on the remaining subordination.
The
final step in our valuation was to discount the cash flows that the model
projects for each tranche by their respective market required rates of return.
To confirm that the models valuation results were reliable, the model noted
that under market equivalence constraints, the fair values of the TRUPS assets
and liabilities should vary proportionately.
The
following table provides additional information related to our single issuer
trust preferred securities:
|
|
March 31, 2010
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Fair
|
|
Unrealized
|
|
Number of
|
|
|
|
Cost
|
|
Value
|
|
Gain/Losses
|
|
Securities
|
|
|
|
(Dollar
amounts in thousands)
|
|
Investment grades:
|
|
|
|
|
|
|
|
|
|
BBB Rated
|
|
977
|
|
918
|
|
(59
|
)
|
1
|
|
Not rated
|
|
1,533
|
|
1,490
|
|
(43
|
)
|
2
|
|
Total
|
|
$
|
2,510
|
|
$
|
2,408
|
|
$
|
(102
|
)
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There
were no interest deferrals or defaults in any of the single issuer trust
preferred securities in our investment portfolio as of March 31, 2010.
The
following table provides additional information related to our pooled trust
preferred securities as of:
28
Table
of Contents
VIST
FINANCIAL CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
March 31,
2010
Deal
|
|
Class
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Unrealzied
Gain/Loss
|
|
Lowest
Credit
Rating
|
|
# of
Performing
Issuers
|
|
Actual
Deferral
|
|
Expected
Deferral
|
|
Current
Outstanding
Collateral
Balance
|
|
Current
Tranche
Subordination
|
|
Actual
Defaults/
Deferrals as
a % of
Outstanding
Collateral
|
|
Expected
Deferrals/
Defaults
as a % of
Remaining
Collateral
|
|
Excess
Subordination
as a % of
Current
Performing
Collateral
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pooled
trust preferred available for sale securities for which an
other-than-temporary inpairment charge has been recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding #1
|
|
Class D-1
|
|
$
|
|
|
$
|
14
|
|
$
|
14
|
|
Ca (Moodys)
|
|
46
|
|
$
|
208,951
|
|
$
|
21,000
|
|
$
|
628,879
|
|
$
|
65,532
|
|
33.2
|
%
|
5.0
|
%
|
0.0
|
%
|
Holding #2
|
|
Class B-2
|
|
727
|
|
35
|
|
(692
|
)
|
CC (Fitch)
|
|
21
|
|
106,250
|
|
|
|
247,750
|
|
33,000
|
|
42.9
|
%
|
0.0
|
%
|
0.0
|
%
|
Holding #3
|
|
Class B
|
|
740
|
|
23
|
|
(717
|
)
|
CC (Fitch)
|
|
24
|
|
122,600
|
|
18,000
|
|
345,500
|
|
62,650
|
|
35.5
|
%
|
8.1
|
%
|
0.0
|
%
|
Holding #4
|
|
Class B-2
|
|
1,125
|
|
34
|
|
(1,091
|
)
|
Ca (Moodys)
|
|
23
|
|
94,750
|
|
9,000
|
|
303,000
|
|
38,500
|
|
31.3
|
%
|
4.3
|
%
|
0.0
|
%
|
Holding #5
|
|
Class B-3
|
|
470
|
|
15
|
|
(455
|
)
|
Ca (Moodys)
|
|
50
|
|
154,780
|
|
|
|
601,775
|
|
53,600
|
|
25.7
|
%
|
0.0
|
%
|
0.0
|
%
|
|
|
Total
|
|
$
|
3,062
|
|
$
|
121
|
|
$
|
(2,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pooled
trust preferred held to maturity securities for which an other-than-temporary
inpairment charge has been recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding #9
|
|
Mezzanine
|
|
938
|
|
79
|
|
(859
|
)
|
CC (Fitch)
|
|
27
|
|
69,000
|
|
15,000
|
|
277,500
|
|
20,289
|
|
24.9
|
%
|
7.2
|
%
|
0.0
|
%
|
|
|
Total
|
|
$
|
938
|
|
$
|
79
|
|
$
|
(859
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pooled
trust preferred available for sale securities for which an
other-than-temporary inpairment charge has not been recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding #6
|
|
Class B-1
|
|
1,300
|
|
163
|
|
(1,137
|
)
|
B+ (S&P)
|
|
16
|
|
$
|
17,500
|
|
$
|
15,000
|
|
$
|
193,500
|
|
$
|
108,700
|
|
9.0
|
%
|
8.5
|
%
|
17.8
|
%
|
Holding #7
|
|
Class C
|
|
1,003
|
|
100
|
|
(903
|
)
|
CCC (Fitch)
|
|
31
|
|
13,000
|
|
10,000
|
|
312,300
|
|
31,550
|
|
4.2
|
%
|
3.3
|
%
|
15.8
|
%
|
Holding #8
|
|
Senior Subordinate
|
|
578
|
|
51
|
|
(527
|
)
|
Baa2 (Moodys)
|
|
6
|
|
34,000
|
|
|
|
121,445
|
|
81,000
|
|
28.0
|
%
|
0.0
|
%
|
10.9
|
%
|
|
|
Total
|
|
$
|
2,881
|
|
$
|
314
|
|
$
|
(2,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
addition to the above factors, our evaluation of impairment also includes a
stress test analysis which provides an estimate of excess subordination for
each tranche. We stress the cash flows of each pool by increasing current
default assumptions to the level of defaults which results in an adverse change
in estimated cash flows. This stressed breakpoint is then used to calculate
excess subordination levels for each pooled trust preferred security.
Future
evaluations of the above mentioned factors could result in the Company
recognizing additional impairment charges on its TRUPS portfolio.
E.
Equity
Securities. Included in equity securities available for sale at March 31,
2010, were equity investments in 27 financial services companies. The Company
owns 1 qualifying Community Reinvestment Act (CRA) equity investment with an
amortized cost and fair value of approximately $1.0 million, respectively. The
remaining 26 equity securities have an average amortized cost of approximately
$90,000 and an average fair value of approximately $60,000. Testing for
other-than-temporary-impairment for equity securities is governed by FASB ASC
320-10 issued in April 2009. While $719,000 in fair value of the equity
securities has been below amortized cost for a period of more than twelve
months, the Company believes the decline in market value of the equity
investment in financial services companies is primarily attributable to changes
in market pricing and not fundamental changes in the earning potential of the
individual companies. For the three months ended March 31, 2010 and 2009,
respectively, the Company did not recognize any net credit impairment charges
to earnings. The Company has the intent and ability to retain its investment in
its equity securities for a period of time sufficient to allow for any
anticipated recovery in market value. Other than one equity security related to
a 2009 publicly announced agreement of sale, the Company does not consider the
remaining equity securities to be other-than-temporarily-impaired as March 31,
2010.
As
of March 31, 2010, the fair value of all securities available for sale
that were pledged to secure public deposits, repurchase agreements, and for
other purposes required by law, was $243.1 million.
The
contractual maturities of investment securities available for sale are set
forth in the following table. Maturities may differ from contractual maturities
in mortgage-backed securities because the mortgages underlying the securities
may be prepaid without any penalties. Therefore, mortgage-backed securities are
not included in the maturity categories in the following summary.
29
Table of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
|
|
At March 31, 2010
|
|
|
|
Securities Available for
Sale
|
|
Securities Held to Maturity
|
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
|
|
(Dollar
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Due after one year
through five years
|
|
|
|
|
|
|
|
|
|
Due after five years
through ten years
|
|
3,707
|
|
3,603
|
|
|
|
|
|
Due after ten years
|
|
56,817
|
|
51,476
|
|
2,948
|
|
2,038
|
|
Agency residential
mortgage-backed debt securities
|
|
196,775
|
|
201,608
|
|
|
|
|
|
Non-Agency
collateralized mortgage obligations
|
|
19,677
|
|
14,936
|
|
|
|
|
|
Equity securities
|
|
3,345
|
|
2,567
|
|
|
|
|
|
|
|
$
|
280,321
|
|
$
|
274,190
|
|
$
|
2,948
|
|
$
|
2,038
|
|
Actual
maturities of debt securities may differ from those presented above since
certain obligations provide the issuer the right to call or prepay the
obligation prior to the scheduled maturity without penalty.
The
following gross gains (losses) were realized on sales of investment securities
available for sale included in earnings for the periods indicated:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar
amounts in thousands)
|
|
|
|
|
|
|
|
Gross gains
|
|
$
|
98
|
|
$
|
188
|
|
Gross losses
|
|
(6
|
)
|
(29
|
)
|
Net realized gains on
sales of securities
|
|
$
|
92
|
|
$
|
159
|
|
The
specific identification method was used to determine the cost basis for all
investment security available for sale transactions. There are no securities
classified as trading, therefore, there were no gains or losses included in
earnings that were a result of transfers of securities from the
available-for-sale category into a trading category. There were no sales or
transfers from securities classified as held-to-maturity. See Note 5
to the consolidated financial statements for unrealized holding losses on
available-for-sale securities for the periods reported.
Other-than-temporary
impairment recognized in earnings for the year ended March 31, 2010, for
credit impaired debt securities is presented as additions in two components
based upon whether the current period is the first time the debt security was
credit impaired (initial credit impairment) or is not the first time the debt
security was credit impaired (subsequent credit impairments). The credit loss
component is reduced if the Company sells, intends to sell or believes it will
be required to sell previously credit impaired debt securities. Additionally,
the credit loss component is reduced if (i) the Company receives the cash
flows in excess of what it expected to receive over the remaining life of the
credit impaired debt security, (ii) the security matures or (iii) the
security is fully written down.
Changes
in the credit loss component of credit impaired debt and equity securities
were:
30
Table
of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
|
March 31, 2010
|
|
March 31, 2009
|
|
|
|
(Dollar
amounts in thousands)
|
|
|
|
|
|
|
|
Balance, beginning of
period
|
|
$
|
2,468
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
Initial credit
impairments
|
|
81
|
|
|
|
Subsequent credit
impairments
|
|
15
|
|
|
|
Balance, end of period
|
|
$
|
2,564
|
|
$
|
|
|
Note 10.
Loans
The components of loans
were as follows:
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar
amounts in thousands
)
|
|
Residential real estate
- 1 to 4 family
|
|
$
|
163,580
|
|
$
|
169,009
|
|
Residential real estate
- multi family
|
|
41,969
|
|
38,994
|
|
Commercial
|
|
155,060
|
|
150,823
|
|
Commercial, secured by
real estate
|
|
357,057
|
|
362,376
|
|
Construction
|
|
99,193
|
|
100,713
|
|
Consumer
|
|
2,949
|
|
3,108
|
|
Home equity lines of
credit
|
|
85,927
|
|
86,916
|
|
Loans
|
|
905,735
|
|
911,939
|
|
|
|
|
|
|
|
Net deferred loan fees
|
|
(973
|
)
|
(975
|
)
|
Allowance for loan
losses
|
|
(12,770
|
)
|
(11,449
|
)
|
Loans, net of allowance
for loan losses
|
|
$
|
891,992
|
|
$
|
899,515
|
|
Changes
in the allowance for loan losses were as follows:
|
|
Quarter Ended
|
|
Year Ended
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Balance, beginning
|
|
$
|
11,449
|
|
$
|
8,124
|
|
Provision for loan
losses
|
|
2,600
|
|
8,572
|
|
Loans charged off
|
|
(1,293
|
)
|
(5,477
|
)
|
Recoveries
|
|
14
|
|
230
|
|
Balance, ending
|
|
$
|
12,770
|
|
$
|
11,449
|
|
The gross recorded
investment in impaired loans not requiring an allowance for loan losses was
$7.0 million at March 31, 2010 and $6.3 million at December 31, 2009.
The gross recorded investment in impaired loans requiring an allowance for loan
losses was $16.6 million and $18.9 million at March 31, 2010 and December 31,
2009, respectively. At March 31, 2010 and December 31, 2009, the
related allowance for loan losses associated with those loans was $3.8 million
and $3.8 million, respectively. For the periods ended March 31, 2010 and December 31,
2009, the average recorded investment in impaired loans was $24.8 million and
$18.6 million, respectively. Interest income of $23,000 was recognized on
impaired loans for the year ended March 31, 2010 and interest income of
$42,000 was recognized on impaired loans for the year ended December 31,
2009.
31
Table
of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
Note 11. Acquisitions Including Goodwill and Other
Intangible Assets
Acquisitions
On September 1,
2008, the Company paid cash of $1.8 million for Fisher Benefits Consulting, an
insurance agency specializing in Group Employee Benefits, located in Pottstown,
Pennsylvania. Fisher Benefits Consulting has become a part of VIST Insurance.
As a result of the acquisition, VIST Insurance continues to expand its retail
and commercial insurance presence in southeastern Pennsylvania counties. The
results of Fisher Benefits Consulting operations have been included in the
Companys consolidated financial statements since September 2, 2008.
Included in the $1.8
million purchase price for Fisher Benefits Consulting was goodwill of $0.2
million and identifiable intangible assets of $1.6 million. Contingent payments
totaling $750,000, or $250,000 for each of the first three years following the
acquisition, will be paid if certain predetermined revenue target ranges are
met. These payments are expected to be added to goodwill when paid. The
contingent payments could be higher or lower depending upon whether actual
revenue earned in each of the three years following the acquisition is less
than or exceeds the predetermined revenue goals. No contingent payments were
made for the three month periods ended March 31, 2010 and 2009,
respectively.
Goodwill and Other Intangible
Assets
The Company has goodwill
and other intangible assets of $44.0 million at March 31, 2010 related to
the acquisition of its banking, insurance and wealth management companies. The
Company utilizes a third party valuation service to perform its goodwill
impairment test both on an interim and annual basis. A fair value is determined
for the banking and financial services, insurance services and investment
services reporting units. If the fair value of the reporting business unit
exceeds the book value, no write down of goodwill is necessary (a Step One
evaluation). If the fair value is less than the book value, an additional test
(a Step Two evaluation) is necessary to assess goodwill for potential
impairment. As a result of the goodwill impairment valuation analysis, the
Company determined that no goodwill impairment write-off for any of its reporting
units was necessary for the three months ended March 31, 2010, however a
Step Two goodwill impairment evaluation test was required for the banking and
financial services reporting unit.
Reporting unit valuation
is inherently subjective, with a number of factors based on assumption and
management judgments. Among these are future growth rates, discount rates and
earnings capitalization rates. Changes in assumptions and results due to
economic conditions, industry factors and reporting business unit performance
could result in different assessments of the fair value and could result in
impairment charges in the future.
Framework for Interim Impairment
Analysis
The Company utilizes the
following framework from FASB ASC 350 Intangibles-Goodwill & Other (ASC
350) to evaluate whether an interim goodwill impairment test is required,
given the occurrence of events or if circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount. Examples of such events or circumstances include:
·
a significant adverse change
in legal factors or in the business climate;
·
an adverse action or
assessment by a regulator;
·
unanticipated competition;
·
a loss of key personnel;
·
a more-likely-than-not
expectation that a reporting unit or a significant portion of a reporting unit
will be sold or otherwise disposed of;
·
the testing for
recoverability under FASB ASC 860,
Accounting for Transfers of Financial Assets and
Repurchase Financing Transactions, of
a significant asset group within a reporting unit; and
·
recognition of a goodwill
impairment loss in the financial statements of a subsidiary that is a component
of a reporting unit.
When applying the
framework above, management additionally considers that a decline in the
Companys market capitalization could reflect an event or change in
circumstances that would more likely than not reduce the fair value of
reporting business unit below its carrying value. However, in considering
potential impairment of our goodwill, management does not consider the fact
that our market capitalization is less than the carrying value of our Company
to be determinative that impairment exists. This is because there are factors,
such as our small size and small market capitalization, which do not take into
account important factors in evaluating the value of our Company and each
reporting business unit, such as the benefits of control or synergies.
Consequently, managements annual process for evaluating potential impairment
of our goodwill (and evaluating subsequent interim period
32
Table
of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
indicators of impairment)
involves a detailed level analysis and incorporates a more granular view of
each reporting business unit than aggregate market capitalization, as well as
significant valuation inputs.
Interim Impairment Tests and
Results
Management estimates fair
value annually utilizing multiple methodologies which include discounted cash
flows, comparable companies and comparable transactions. Each valuation
technique requires management to make judgments about inputs and assumptions
which form the basis for financial projections of future operating performance
and the corresponding estimated cash flows. The analyses performed require the
use of objective and subjective inputs which include market-price of non-distressed
financial institutions, similar transaction multiples, and required rates of
return. Management works closely in this process with third party valuation
professionals, who assist in obtaining comparable market data and performing
certain of the calculations, based on information provided by management and
assumptions developed with management.
ASC Topic 820 Fair Value
Measurements and Disclosures defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. A fair value
measurement assumes that the transaction to sell or transfer the asset or
transfer the liability occurs in the principal market for the asset or
liability, or in the absence of a principal market, the most advantageous
market for the asset or liability. ASC Topic 820 further defines market
participants as buyers and sellers in the principal market that are (i) independent,
(ii) knowledgeable, (iii) able to transact and (iv) willing to
transact.
ASC Topic 820 establishes
a fair value hierarchy to prioritize the inputs used in valuation techniques:
1.
Level 1 inputs are observable inputs that reflect
quoted prices for identical assets or liabilities in active markets.
2.
Level 2 inputs are inputs other than quoted prices
included in level 1 that are observable for the asset or liability through
corroboration with observable market data
3.
Level 3 inputs are unobservable inputs, such as a
companys own data
The Company will continue
to monitor the interim indicators noted in ASC 350 to evaluate whether an
interim goodwill impairment test is required, given the occurrence of events or
if circumstances change that would more likely than not reduce the fair value
of a reporting unit below its carrying amount, absent those events, the Company
will perform its annual goodwill impairment evaluation during the fourth
quarter of 2010.
Consideration of Market
Capitalization in Light of the Results of Our Annual and Interim Goodwill
Assessments
The Companys stock
price, like the stock prices of many other financial services companies, is
trading below both book value as well as tangible book value. We believe that
the Companys current market value does not represent the fair value of the
Company when taken as a whole and in consideration of other relevant factors.
Because the Company is viewed by investors predominantly as a community bank,
we believe our market capitalization is based on net tangible book value,
reduced by nonperforming assets in excess of the allowance for loan and lease
losses. We believe that the market place ascribes effectively no value to the
Companys fee-based reporting units, the assets of which are composed
principally of goodwill and intangibles. Management believes that as a
stand-alone business each of these reporting units has value which is not being
incorporated in the markets valuation of VIST reflected in its share price.
Management also believes that if these reporting units were carved out of the
Company and sold, they would command a sales price reflective of their current
performance. Management further believes that if these reporting units were
sold, the results of the sale would increase both the tangible book value
(resulting from, among other things, the reduction in associated goodwill) and
therefore market capitalization, given the markets current valuation approach
described above.
Insurance services and investment
services reporting units:
In performing Step One of
the interim goodwill impairment tests, it was necessary to determine the fair
value of the insurance services and investment services reporting units. The
fair value of these reporting units was estimated using a weighted average of
both an income approach and a market approach. The income approach utilizes
level 3 inputs and uses a dividend discount analysis, which calculates the
present value of all excess cash flows plus the present value of a terminal
value. This approach calculates cash flows based on financial results after a
change of control transaction. The Market Approach utilizes level 2 inputs and
is used to calculate the fair value of a company by examining pricing multiples
in recent acquisitions of companies similar in size and performance to the
company being valued. Based on the results of the interim goodwill impairment
analysis, no goodwill impairment was indicated.
33
Table
of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
Banking and financial services
unit:
In performing Step One of
the interim goodwill impairment test, it was necessary to determine the fair
value of the banking and financial services reporting unit. The fair value of
this reporting unit was estimated using a weighted average of a discounted
dividend approach, a market (selected transactions) approach, a change in
control premium to parent market price approach, and a change in control
premium to peer market price approach. Based on the results of the interim
goodwill impairment analysis, the fair value of the recorded goodwill of this
reporting unit was less than its carrying amount and, therefore, a Step Two goodwill
impairment evaluation test was performed to assess the proper carrying value of
goodwill.
In accordance with ASC
Topic 350-20-35-8, an interim Step Two goodwill impairment evaluation test was
undertaken for our banking and financial services reporting unit. The Step Two
test follows the purchase price allocation method which, in determining the
implied fair value of goodwill, the fair value of net assets (fair value of all
assets other than goodwill, minus fair value of liabilities) is subtracted from
the fair value of the reporting unit. We made fair value estimates for all
material balance sheet accounts to reflect the estimated fair value of the
Companys unrecorded adjustments to assets and liabilities including: loans,
investment securities, building, core deposit intangible, certificates of
deposit and borrowings. The Step Two analysis involves the determination of the
fair value of the banking and financial services reporting units assets and
liabilities. The supplemental Step Two fair value estimates for Loans and Core
Deposit Intangibles are based on the third party valuation used in the most
recent annual goodwill impairment valuation for the year ended December 31,
2009 prepared with an as of date of October 31, 2009. Management believes
these valuations continue to indicate the Fair Value since there has been no
activity in the market or economic environment that would significantly change
these valuations.
Based on the results of
the Step Two interim goodwill impairment analysis, the fair value of the
banking and financial services reporting units goodwill was more than its
carrying amount, therefore no goodwill impairment charge was indicated.
The
changes in the carrying amount of goodwill as allocated to our reporting units
for the periods indicated were:
|
|
Banking and
|
|
|
|
Brokerage and
|
|
|
|
|
|
Financial
|
|
|
|
Investment
|
|
|
|
|
|
Services
|
|
Insurance
|
|
Services
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2008
|
|
$
|
27,768
|
|
$
|
10,943
|
|
$
|
1,021
|
|
$
|
39,732
|
|
Contingent payments
during the year 2009
|
|
|
|
250
|
|
|
|
250
|
|
Balance as of
December 31, 2009
|
|
$
|
27,768
|
|
$
|
11,193
|
|
$
|
1,021
|
|
$
|
39,982
|
|
Balance as of
March 31, 2010
|
|
$
|
27,768
|
|
$
|
11,193
|
|
$
|
1,021
|
|
$
|
39,982
|
|
Other Intangible Assets
In
accordance with the provisions of FASB ASC 350, the Company amortizes other
intangible assets over the estimated remaining life of each respective asset.
Amortizable intangible assets were composed of the following:
34
Table
of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
Accumulated
|
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
|
|
|
(In thousands)
|
|
Amortizable
intangible assets:
|
|
|
|
|
|
|
|
|
|
Purchase of client
accounts (20 year weighted average useful life)
|
|
$
|
4,805
|
|
$
|
1,292
|
|
$
|
4,805
|
|
$
|
1,232
|
|
Employment contracts (7
year weighted average useful life)
|
|
1,135
|
|
1,107
|
|
1,135
|
|
1,102
|
|
Assets under management
(20 year weighted average useful life)
|
|
184
|
|
70
|
|
184
|
|
68
|
|
Trade name (20 year
weighted average useful life)
|
|
196
|
|
196
|
|
196
|
|
196
|
|
Core deposit intangible
(7 year weighted average useful life)
|
|
1,852
|
|
1,455
|
|
1,852
|
|
1,388
|
|
Total
|
|
$
|
8,172
|
|
$
|
4,120
|
|
$
|
8,172
|
|
$
|
3,986
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
Amortization Expense:
|
|
|
|
|
|
|
|
|
|
For the three months
ended March 31, 2010
|
|
$
|
134
|
|
|
|
|
|
|
|
For the three months
ended March 31, 2009
|
|
$
|
171
|
|
|
|
|
|
|
|
Note 12. Junior Subordinated Debt
First
Leesport Capital Trust I, a Delaware statutory business trust, was formed on March 9,
2000 and is a wholly-owned subsidiary of the Company. The Trust issued $5
million of 10.875% fixed rate capital trust pass-through securities to
investors. First Leesport Capital Trust I purchased $5 million of fixed rate
junior subordinated deferrable interest debentures from VIST Financial Corp.
The debentures are the sole asset of the Trust. The terms of the junior
subordinated debentures are the same as the terms of the capital securities.
The obligations under the debentures constitute a full and unconditional
guarantee by VIST Financial Corp. of the obligations of the Trust under the
capital securities. The capital securities are redeemable by VIST Financial
Corp. on or after March 9, 2010, at stated premiums, or earlier if the
deduction of related interest for federal income taxes is prohibited,
classification as Tier 1 Capital is no longer allowed, or certain other
contingencies arise. The capital securities must be redeemed upon final
maturity of the subordinated debentures on March 9, 2030. In October 2002,
the Company entered into an interest rate swap agreement with a notional amount
of $5 million that effectively converts the securities to a floating interest
rate of six month LIBOR plus 5.25% (5.63% at March 31, 2010). In June,
2003, the Company purchased a six month LIBOR cap with a rate of 5.75% to
create protection against rising interest rates for the above mentioned $5
million interest rate swap. Interest rate caps are generally used to limit the
exposure from the repricing and maturity of liabilities and to limit the
exposure created by other interest rate swaps.
On
September 26, 2002, the Company established Leesport Capital Trust II, a
Delaware statutory business trust, in which the Company owns all of the common
equity. Leesport Capital Trust II issued $10 million of mandatory redeemable
capital securities carrying a floating interest rate of three month LIBOR plus
3.45% (3.70% at March 31, 2010). These debentures are the sole assets of
the Trust. The terms of the junior subordinated debentures are the same as the
terms of the capital securities. The obligations under the debentures
constitute a full and unconditional guarantee by VIST Financial Corp. of the
obligations of the Trust under the capital securities. These securities must be
redeemed in September 2032, but may be redeemed on or after November 7,
2007 or earlier in the event that the interest expense becomes non-deductible
for federal income tax purposes or if the treatment of these securities is no
longer qualified as Tier 1 capital for the Company. As of March 31, 2010,
the Company has not exercised the call option on these debentures. In September 2008,
the Company entered into an interest rate swap agreement that effectively
converts the $10 million of adjustable-rate capital securities to a fixed
interest rate of 7.25%.
Interest
began accruing on the Leesport Capital Trust II swap in February 2009.
On
June 26, 2003, Madison established Madison Statutory Trust I, a
Connecticut statutory business trust. Pursuant to the purchase of Madison on October 1,
2004, the Company assumed Madison Statutory Trust I in which the Company owns
all of the common equity. Madison Statutory Trust I issued $5 million of
mandatory redeemable capital securities carrying a floating interest rate of
three month LIBOR plus 3.10% (3.38% at March 31, 2010). These debentures
are the sole assets of the Trusts. The terms of the junior subordinated
debentures are the same as the terms of the capital securities. The obligations
under the debentures constitute a full and unconditional guarantee by VIST
Financial Corp. of the obligations of the Trust under the capital securities.
These securities must be redeemed in June 2033, but may be redeemed on or
after September 26, 2008 or earlier in the event that the interest expense
becomes non-deductible for federal income tax purposes or if the treatment of
these securities is no longer qualified as Tier 1 capital for the Company. In September 2008,
the Company entered into an interest rate swap agreement that effectively
converts the $5 million of adjustable-rate capital securities to a fixed
interest rate of 6.90%.
Interest
began accruing on the Madison Statutory
Trust I swap in March 2009.
35
Table
of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
Note 13.
Regulatory Matters and Capital
Adequacy
The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on their financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of its assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk-weightings and other factors.
Federal bank regulatory
agencies have established certain capital-related criteria that must be met by
banks and bank holding companies. The measurements which incorporate the
varying degrees of risk contained within the balance sheet and exposure to
off-balance sheet commitments were established to provide a framework for
comparing different institutions. Regulatory guidelines require that Tier 1
capital and total risk-based capital to risk-adjusted assets must be at least
4.0% and 8.0%, respectively. In order for the Company to be considered well
capitalized under the guidelines of the banking regulators, the Company must
have Tier 1 capital and total risk-based capital to risk-adjusted assets of at
least 6.0% and 10.0%, respectively. As of March 31, 2010, the Company has
met the criteria to be considered a well capitalized institution.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets, and of Tier 1
capital to average assets. Management believes, as of March 31, 2010, that
the Company and the Bank meet all minimum capital adequacy requirements to
which they are subject.
As
of March 31, 2010, the most recent notification from the Banks primary
regulator categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed its category.
The
Companys regulatory capital ratios are presented below for the periods
indicated:
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Leverage ratio
|
|
8.21
|
%
|
8.36
|
%
|
Tier I risk-based
capital ratio
|
|
10.80
|
%
|
10.65
|
%
|
Total risk-based
capital ratio
|
|
12.05
|
%
|
11.82
|
%
|
On
December 19, 2008, the Company issued to the United States Department of
the Treasury (Treasury) 25,000 shares of Series A, Fixed Rate,
Cumulative Perpetual Preferred Stock (Series A Preferred Stock), with a
par value of $0.01 per share and a liquidation preference of $1,000 per share,
and a warrant (Warrant) to purchase 364,078 shares of the Companys common
stock, par value $5.00 per share, for an aggregate purchase price of $25,000,000
in cash.
The
Series A Preferred Stock qualifies as Tier 1 capital and will pay
cumulative dividends at a rate of 5% per annum for the first five years, and 9%
per annum thereafter. Under ARRA, the Series A Preferred Stock may be
redeemed at any time following consultation by the Companys primary bank
regulator and Treasury, not withstanding the terms of the original transaction
documents. Under FAQs issued recently by Treasury, participants in the Capital
Purchase Program desiring to repay part of an investment by Treasury must repay
a minimum of 25% of the issue price of the preferred stock.
Prior
to the earlier of the third anniversary date of the issuance of the Series A
Preferred Stock (December 19, 2011) or the date on which the Series A
Preferred Stock have been redeemed in whole or the Treasury has transferred all
of the Series A Preferred Stock to third parties which are not affiliates
of the Treasury, the Company can not increase its common stock dividend from
the last quarterly cash dividend per share ($0.10) declared on the common stock
prior to October 14, 2008 without the consent of the Treasury,
The
Warrant has a 10-year term and is immediately exercisable upon its issuance,
with an exercise price, subject to anti-dilution adjustments, equal to $10.30
per share of common stock. In the event that the Company redeems the
Series A Preferred Stock, the Company can repurchase the warrant at fair
value as defined in the investment agreement with Treasury.
Federal
and state banking regulations place certain restrictions on dividends paid and
loans or advances made by the Bank to the Company. At March 31, 2010, the
Bank had approximately $1.2 million available for payment of dividends to the
Company.
36
Table
of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
Dividends
paid by the Bank to the Company would be prohibited if the effect thereof would
cause the Banks capital to be reduced below applicable minimum capital
requirements.
Loans
or advances are limited to 10 percent of the Banks capital stock and surplus
on a secured basis. At March 31, 2010 and at December 31, 2009, the
Bank had a $1.3 million loan outstanding to VIST Insurance.
As
of February 1, 2010, the Company had declared a $0.05 per share cash
dividend for common shareholders of record on February 11, 2010, payable February 22,
2010.
For
the three month ended March 31, 2010, preferred stock dividends and
accretion included in income available for common shareholders or basic and
diluted earnings per common share on the Series A Preferred Stock were
$420,000.
Note 14.
Financial Instruments with Off-Balance
Sheet Risk
Commitments
to Extend Credit and Letters of Credit:
The Bank is party to
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and letters of credit. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheets.
The Banks exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet investments.
A summary of the Banks
financial instrument commitments is as follows:
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar
amounts in thousands
)
|
|
Commitments to extend
credit:
|
|
|
|
|
|
Loan origination
commitments
|
|
$
|
56,485
|
|
$
|
32,846
|
|
Unused home equity
lines of credit
|
|
39,727
|
|
44,091
|
|
Unused business lines
of credit
|
|
123,423
|
|
149,032
|
|
Total commitments to
extend credit
|
|
$
|
219,635
|
|
$
|
225,969
|
|
|
|
|
|
|
|
Standby letters of
credit
|
|
$
|
9,882
|
|
$
|
11,998
|
|
Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of
a fee. The Bank evaluates each customers credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on managements credit evaluation. Collateral
held varies but may include personal or commercial real estate, accounts
receivable, inventory and equipment.
Standby letters of credit
written are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. The majority of these standby
letters of credit expire within the next twelve months. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending other loan commitments. The Bank requires collateral supporting
these letters of credit as deemed necessary. Management believes that the
proceeds obtained through a liquidation of such collateral would be sufficient
to cover the maximum potential amount of future payments required under the
corresponding guarantees. The current amount of the liability as of March 31,
2010 and 2009 for guarantees under standby letters of credit issued is not
material.
Junior
Subordinated Debt:
The Company has elected
to record its junior subordinated debt at fair value with changes in fair value
reflected in other income in the consolidated statements of operations. The
fair value is estimated utilizing the income approach whereby the expected
37
Table
of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
cash flows over the
remaining estimated life of the debentures are discounted using the Companys
estimated credit spread over the current fully indexed yield based on an
expectation of future interest rates derived from observed market interest rate
curves and volatilities. At March 31, 2010 and December 31, 2009, the
estimated fair value of the junior subordinated debt was $19.715 million and
$19.658 million, respectively, and was offset by changes in the fair value of
the related interest rate swaps.
During October 2002,
the Company entered into an interest rate swap agreement with a notional amount
of $5 million to manage its exposure to interest rate risk. This derivative
financial instrument effectively converted fixed interest rate obligations of
outstanding mandatory redeemable capital debentures to variable interest rate
obligations, decreasing the asset sensitivity of its balance sheet by more
closely matching the repricing of the Companys variable rate assets with
variable rate liabilities. The Company considers the credit risk inherent in
the contracts to be negligible. This swap has a notional amount equal to the
outstanding principal amount of the related trust preferred securities,
together with the same payment dates, maturity date and call provisions as the
related trust preferred securities.
Under the swap, the
Company pays interest at a variable rate equal to six month LIBOR plus 5.25%,
adjusted semiannually (5.63% at March 31,
2010), and the Company receives a fixed rate equal to the interest that
the Company is obligated to pay on the related trust preferred securities
(10.875%).
In September 2008,
the Company entered into two interest rate swaps to manage its exposure to
interest rate risk. The interest rate swap transactions involved the exchange
of the Companys floating rate interest rate payment on its $15 million in
floating rate junior subordinated debt for a fixed rate interest payment
without the exchange of the underlying principal amount. The first interest
rate swap agreement effectively converts the $10 million of adjustable-rate
capital securities to a fixed interest rate of 7.25%. Interest began accruing
on this swap in February 2009. The second interest rate swap agreement
effectively converts the $5 million of adjustable-rate capital securities to a
fixed interest rate of 6.90%. Interest began accruing on this swap in March 2009.
Entering into interest rate derivatives potentially exposes the Company to the
risk of counterparties failure to fulfill their legal obligations including,
but not limited to, potential amounts due or payable under each derivative
contract. Notional principal amounts are often used to express the volume of
these transactions, but the amounts potentially subject to credit risk are much
smaller. These interest rate swaps are recorded on the balance sheet at fair
value through adjustments to other income in the consolidated results of
operations. The fair value measurement of the interest rate swaps is determined
by netting the discounted future fixed or variable cash payments and the
discounted expected fixed or variable cash receipts based on an expectation of
future interest rates derived from observed market interest rate curves and
volatilities.
The estimated fair values
of the interest rate swap agreements represent the amount the Company would
have expected to receive to terminate such contract. At March 31, 2010 and
December 31, 2009, the estimated fair value of the interest rate swap
agreements was $64,000 and $111,000, respectively, and was offset by changes in
the fair value of the related trust preferred debt. The swap agreements expose
the Company to market and credit risk if the counterparty fails to perform.
Credit risk is equal to the extent of a fair value gain on the swaps. The
Company manages this risk by entering into these transactions with high quality
counterparties.
Interest rate caps are
generally used to limit the exposure from the repricing and maturity of
liabilities and to limit the exposure created by other interest rate swaps. In June 2003,
the Company purchased a six month LIBOR cap to create protection against rising
interest rates for the above mentioned $5 million interest rate swap. The
initial premium related to this interest rate cap was $102,000 and, at March 31,
2010 and December 31, 2009, the premiums carrying and market values were
approximately $0 and $0, respectively. The interest rate cap matured in March 2010.
The following table
details the fair values of the derivative instruments included in the
consolidated balance sheet for the year ended:
|
|
Liability Derivatives
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
|
Balance
|
|
|
|
Balance
|
|
|
|
Derivatives
Not Designated as Hedging
|
|
Sheet
|
|
Fair
|
|
Sheet
|
|
Fair
|
|
Instruments
under FASB ASC 815:
|
|
Location
|
|
Value
|
|
Location
|
|
Value
|
|
|
|
(Dollar
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
contracts
|
|
Other liabilities
|
|
$
|
64
|
|
Other liabilities
|
|
$
|
111
|
|
Interest rate cap
|
|
Other liabilities
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
64
|
|
|
|
$
|
111
|
|
38
Table
of Contents
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(UNAUDITED)
The following table
details the effect of the change in fair values of the derivative instruments
included in the consolidated statement of operations for the year ended:
|
|
|
|
Amount of Gain or (Loss)
Recognized in Income on
Derivative
|
|
|
|
Location of Gain or (Loss)
|
|
For the Three
Months Ended
|
|
For the Three
Months Ended
|
|
Derivatives
Not Designated as Hedging
|
|
Recognized in Income on
|
|
March 31,
|
|
March 31,
|
|
Instruments
under FASB ASC 815:
|
|
Derivative
|
|
2010
|
|
2009
|
|
|
|
|
|
(Dollar
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
Interest rate swap
contracts
|
|
Other income
|
|
$
|
47
|
|
$
|
672
|
|
Interest rate cap
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
47
|
|
$
|
672
|
|
During the three month
periods ended March 31, 2010 and 2009, the Company recognized interest
paid or payable under the interest rate swap agreements of $26,000 and $36,000,
respectively, which was recorded as an increase of interest expense on the
trust preferred securities.
39
Table
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MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
Item 2.
Managements Discussion
and Analysis of Financial
Condition and Results of Operations
GENERAL
VIST Financial Corp. (the
Company) is a Pennsylvania business corporation headquartered in Wyomissing,
Pennsylvania. The Company offers a wide array of financial services through its
banking, insurance and wealth management subsidiaries. Unless otherwise
indicated, all references in this Managements Discussion and Analysis to VIST,
we, us, our, or similar terms refer to VIST Financial Corp. and its
subsidiaries on a consolidated basis. The Companys banking subsidiary, VIST
Bank, is referred to as the Bank. At March 31, 2010, the Company had
consolidated total assets of $1.3 billion, consolidated total deposits of $1.1
billion, consolidated total shareholders equity of $125.7 million, and
employed 287 full time equivalent employees.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Note 1 to the Companys
consolidated financial statements (included in Item 8 of the Form 10-K for
the year ended December 31, 2009) lists significant accounting policies
used in the development and presentation of its financial statements. This
discussion and analysis, the significant accounting policies, and other
financial statement disclosures identify and address key variables and other
qualitative and quantitative factors that are necessary for an understanding
and evaluation of the Company and its results of operations.
The Company prepares the
consolidated financial statements in accordance with United States generally
accepted accounting principles, which are referred to as GAAP, and which
require management to make judgments in the application of its accounting
policies that involve significant estimates and assumptions about the effect of
matters that are inherently uncertain. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for loan
losses, revenue recognition for insurance activities, stock based compensation,
derivative financial instruments, goodwill and intangible assets, fair value measurements
including other than temporary impairment losses on available for sale
securities, the valuation of junior subordinated debt and related hedges, the
valuation of deferred tax assets and the effects of any business combinations.
Additional information about these accounting policies is included in the Critical
Accounting Policies section of Managements Discussion and Analysis in the
Companys 2009 Form 10-K. Although no significant changes to the Companys
critical accounting policies were made during the first three months of 2010,
the Company has provided updated information with respect to its accounting for
the fair value of financial instruments in Note 8 Fair Value Measurements and
Fair Value of Financial Instruments.
FORWARD LOOKING STATEMENTS
The Company may from time
to time make written or oral forward-looking statements, including statements
contained in the Companys filings with the Securities and Exchange Commission
(including this Quarterly Report on Form 10-Q and the exhibits hereto and
thereto), in its reports to shareholders and in other communications by the
Company, which are made in good faith by the Company pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking
statements include statements with respect to the Companys beliefs, plans,
objectives, goals, expectations, anticipations, estimates and intentions, that
are subject to significant risks and uncertainties, and are subject to change
based on various factors (some of which are beyond the Companys control). The
words may, could, should, would, believe, anticipate, estimate, expect,
intend, plan and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause
the Companys financial performance to differ materially from the plans,
objectives, expectations, estimates and intentions expressed in such
forward-looking statements:
·
the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations;
·
the effects of, and changes in, trade, monetary and
fiscal policies and laws, including interest rate policies of the Board of
Governors of the Federal Reserve System;
·
inflation, interest rate, market and monetary
fluctuations;
·
the timely development of and acceptance of new
products and services of the Company and the perceived overall value of these
products and services by users, including the features, pricing and quality
compared to competitors products and services;
·
the willingness of users to substitute competitors
products and services for the Companys products and services;
·
the success of the Company in gaining regulatory
approval of its products and services, when required; the impact of changes in
laws and regulations applicable to financial institutions (including laws
concerning taxes, banking, securities and insurance);
·
the ability to control operating risks, information
technology systems risks and outsourcing risks, the possibility of errors in
the quantitative models used to manage Company business and the possibility
that key controls will fail or be circumvented;
40
Table
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·
the ability to pursue acquisitions, strategic
alliances, finance future business acquisitions and obtain regulatory approvals
and consents for acquisitions;
·
changes in consumer spending and saving habits; the
nature, extent, and timing of governmental actions and reforms, including the rules of
participation for the Trouble Asset Relief Program voluntary Capital Purchase
Program under the Emergency Economic Stabilization Act of 2008, which may be
changed unilaterally and retroactively by legislative or regulatory actions;
·
changes in accounting standards and practices;
·
changes in tax legislation and in the interpretation
of existing tax laws by U.S. tax authorities that impact the amount of taxes
due;
·
and the success of the Company at managing the risks
involved in the foregoing.
The Company cautions that
the foregoing list of important factors is not exclusive. Readers are also
cautioned not to place undue reliance on these forward-looking statements,
which reflect managements analysis only as of the date of this report, even if
subsequently made available by the Company on its website or otherwise. The
Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company to reflect events or circumstances occurring after the date of this
report.
41
Table of Contents
OVERVIEW OF FINANCIAL RESULTS
Financial Highlights
Net income for the
Company for the quarter ended March 31, 2010 was $713,000 as compared to
net income of $1.5 million for the same period in 2009. Basic and diluted net
income available to common shareholders per common share for the first quarter
of 2010 were $.05 and $.05, respectively, compared to basic and diluted net
income available to common shareholders per common share of $.20 and $.20,
respectively, for the same period of 2009. Included in earnings for the three
months ended March 31, 2010 were pretax other-than-temporary impairment
charges on available for sale and held to maturity investment securities of
$96,000.
The following are the key ratios for the Company as of
or for the:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Return on average
assets (annualized)
|
|
0.22
|
%
|
0.50
|
%
|
Return on average
shareholders equity (annualized)
|
|
2.30
|
%
|
4.99
|
%
|
Common dividend payout
ratio
|
|
99.74
|
%
|
47.62
|
%
|
Average shareholders
equity to average assets
|
|
9.47
|
%
|
10.06
|
%
|
Net Interest Income
Net interest income is a
primary source of revenue for the Company. Net interest income results from the
difference between the interest and fees earned on loans and investments and
the interest paid on deposits to customers and other non-deposit sources of
funds, such as repurchase agreements and short and long-term borrowed funds.
Interest-earning assets, which consist of investment securities, loans and
leases and other liquid assets, are financed primarily by customer deposits and
wholesale borrowings. Net interest margin represents the relationship between
annualized net interest revenue (tax-effected) and average interest-earning
assets for the period. All discussion of net interest income and net interest
margin is on a fully taxable equivalent basis (FTE).
FTE net interest income
for the three months ended March 31, 2010 was $10.1 million, an increase
of $1.2 million, or 14.1%, compared to the $8.9 million reported for the same
period in 2009. The FTE net interest margin increased to 3.40% for the first
quarter of 2010 from 3.20% for the same period in 2009.
The following summarizes net interest margin
information:
42
Table of Contents
|
|
Three months ended March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
%
Rate
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
%
Rate
|
|
|
|
(Dollar amounts in thousands, except percentages)
|
|
Interest-Earning
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: (1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
733,065
|
|
$
|
10,356
|
|
5.65
|
|
$
|
699,514
|
|
$
|
9,938
|
|
5.68
|
|
Mortgage
|
|
48,774
|
|
663
|
|
5.44
|
|
50,411
|
|
763
|
|
6.06
|
|
Consumer
|
|
130,650
|
|
1,683
|
|
5.22
|
|
139,792
|
|
1,883
|
|
5.46
|
|
Investments (2) .
|
|
268,549
|
|
3,560
|
|
5.30
|
|
228,417
|
|
3,355
|
|
5.87
|
|
Federal funds sold
|
|
29,001
|
|
8
|
|
0.12
|
|
6,626
|
|
3
|
|
0
|
|
Other short-term
investments
|
|
493
|
|
|
|
|
|
346
|
|
1
|
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning
assets
|
|
$
|
1,210,532
|
|
$
|
16,270
|
|
5.38
|
|
$
|
1,125,106
|
|
$
|
15,943
|
|
5.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction accounts
|
|
$
|
496,785
|
|
$
|
1,538
|
|
1.26
|
|
$
|
320,118
|
|
$
|
1,110
|
|
1.40
|
|
Certificates of deposit
|
|
448,819
|
|
2,964
|
|
2.68
|
|
469,016
|
|
4,044
|
|
3.49
|
|
Securities sold under
agreement to repurchase
|
|
115,827
|
|
1,182
|
|
4.08
|
|
119,503
|
|
1,065
|
|
3.56
|
|
Short-term borrowings
|
|
|
|
|
|
0.00
|
|
9,914
|
|
17
|
|
0.67
|
|
Long-term borrowings
|
|
11,111
|
|
98
|
|
3.52
|
|
59,167
|
|
504
|
|
3.41
|
|
Junior subordinated
debt
|
|
19,658
|
|
345
|
|
7.13
|
|
18,173
|
|
314
|
|
7.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
liabilities
|
|
1,092,200
|
|
6,127
|
|
2.28
|
|
995,891
|
|
7,054
|
|
2.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
102,355
|
|
|
|
|
|
105,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of funds
|
|
$
|
1,194,555
|
|
6,127
|
|
2.08
|
|
$
|
1,101,335
|
|
7,054
|
|
2.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
(fully taxable equivalent)
|
|
|
|
$
|
10,143
|
|
3.40
|
|
|
|
$
|
8,889
|
|
3.20
|
|
(1)
Loan fees have been included in the
interest income totals presented. Nonaccrual loans have been included in
average loan balances.
(2) Interest
income on loans and investments is presented on a taxable equivalent basis
using an effective tax rate of 34%.
Average interest-earning
assets for the three months ended March 31, 2010 were $1.21 billion, a
$85.4 million, or 7.6%, increase over average interest-earning assets of $1.13
billion for the same period in 2009. The FTE yield on average interest-earning
assets decreased by 29 basis points to 5.38% for the first quarter of 2010,
compared to 5.67% for the same period in 2009.
Average interest-bearing
liabilities for the three months ended March 31, 2010 were $1.09 billion,
a $96.3 million, or 9.7%, increase over average interest-bearing liabilities of
$995.9 million for the same period in 2009. In addition, average
noninterest-bearing deposits decreased to $102.4 million for the three months
ended March 31, 2010, from $105.4 million for the same time period of
2009. The interest rate on total interest-bearing liabilities decreased by 59
basis points to 2.28% for the three months ended March 31, 2010, compared
to 2.87% for the same period in 2009.
For the three months
ended March 31, 2010, FTE total interest income increased to $16.3 million
compared to $15.9 million for the same period in 2009. The increase in total
FTE interest income for the three months ended March 31, 2010 was
primarily the result of an increase in average investments and average
outstanding commercial loans compared to the same period in 2009. FTE earning
asset yields on average outstanding loans decreased due primarily to lower
rates on new loan originations. Average outstanding commercial loan balances
increased by $33.6 million, or 4.8% from March 31, 2009 to March 31,
2010. Average outstanding federal funds sold balances increased by $22.4
million, or 337.7% from March 31, 2009 to March 31, 2010.
Additionally, average outstanding total investment securities increased by
$40.1 million or 17.6% from March 31, 2009 to March 31, 2010. FTE
earning asset yields on average outstanding investment securities decreased
from 5.9% at March 31, 2009 to 5.3% at March 31, 2010.
For the three months
ended March 31, 2010, total interest expense decreased 13.1% to $6.1
million compared to $7.1 million for the same period in 2009. The decrease in
total interest expense for the three months ended March 31, 2010 was
primarily the result of a decrease in the interest rates on average interest
bearing liabilities compared to the same period in 2009. The average
43
Table
of Contents
interest rate paid on total outstanding
interest-bearing liabilities decreased from 2.87% for the three months ended March 31,
2009 to 2.28% for the three months ended March 31, 2010. The decrease in
the average interest rate paid on total interest-bearing deposits was the
result of managements disciplined approach to deposit pricing in response to
the decrease in average core deposit interest rates in our competitive
footprint. Total average interest-bearing deposits increased $156.4 million or
19.8% from March 31, 2009 to March 31, 2010 due primarily to growth
in time deposits and interest-bearing checking accounts. The average interest
rate paid on short-term borrowings and securities sold under agreements to
repurchase increased from 3.34% for the three months ended March 31, 2009
to 4.08% for the three months ended March 31, 2010. The increase in the
average interest rate paid on short-term borrowings and securities sold under
agreements to repurchase was the result of increases in average interest rates
paid on longer-term, wholesale securities sold under repurchase agreements.
Average short-term borrowings and securities sold under agreements to
repurchase balances decreased $13.6 million or 10.5% from March 31, 2009
to March 31, 2010 due primarily to the growth in total average
interest-bearing deposits. Total cost of funds decreased to 2.08% in 2010 from
2.59% in 2009.
Provision for Loan Losses
The provision for loan
losses for the three months ended March 31, 2010 was $2.6 million compared
to $825,000 for the same period of 2009. Net charge-offs to average loans was
0.55% annualized for the three months ended March 31, 2010 compared to
0.58% for the year ended December 31, 2009. The provision reflects the
amount deemed appropriate by management to provide a best estimate of probable
losses given the present risk characteristics of the loan portfolio. Management
continues to evaluate and classify the credit quality of the loan portfolio
utilizing a qualitative and quantitative internal loan review process and,
based on the results of the analysis at March 31, 2010, management has
determined that the current allowance for loan losses is adequate as of such
date. The ratio of the allowance for loan losses to loans outstanding at March 31,
2010 and December 31, 2009 was 1.41% and 1.26%, respectively. Please see
further discussion under the caption Allowance for Loan Losses.
Non-Interest Income
Total non-interest income
for the three months ended March 31, 2010 totaled $4.5 million, a decrease
of $0.9 million, or 15.8%, from income of $5.4 million for the same period in
2009.
The following table
details non-interest income (loss) as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollars
amounts in thousands)
|
|
|
|
|
|
|
|
Customer service fees
|
|
$
|
583
|
|
$
|
658
|
|
Mortgage banking
activities, net
|
|
134
|
|
267
|
|
Commissions and fees
from insurance sales
|
|
3,076
|
|
2,958
|
|
Broker and investment
advisory commissions and fees
|
|
135
|
|
330
|
|
Other commissions and
fees
|
|
504
|
|
473
|
|
Earnings on investment
in life insurance
|
|
78
|
|
76
|
|
Gain on sale of loans
|
|
|
|
|
|
Other income
|
|
43
|
|
484
|
|
Total other
non-interest income before investments
|
|
4,553
|
|
5,246
|
|
|
|
|
|
|
|
Net realized gains on
sales of securities
|
|
92
|
|
159
|
|
|
|
|
|
|
|
Losses from
other-than-temporary impairment
|
|
(940
|
)
|
|
|
Losses not related to
credit
|
|
844
|
|
|
|
Net credit impairment
losses on securities recognized in earnings
|
|
(96
|
)
|
|
|
Net losses related to
investment securities
|
|
(4
|
)
|
159
|
|
Total other
non-interest income
|
|
$
|
4,549
|
|
$
|
5,405
|
|
Revenue from customer
service fees decreased 11.4% to $583,000 for the first quarter of 2010 as
compared to $658,000 for the same period in 2009. The decrease in customer
service fees for the comparative three month periods is primarily due to a
decrease in commercial uncollected funds fees and non-sufficient funds charges.
44
Table of Contents
Revenue
from mortgage banking activities decreased 49.8% to $134,000 for the first
quarter of 2010 as compared to $267,000 for the same period in 2009. The
decrease in mortgage banking activities for the comparative three month periods
is primarily due to a decrease in the volume of loans sold into the secondary
mortgage market. The Company operates its mortgage banking activities through
VIST Mortgage, a division of VIST Bank.
Revenue from commissions
and fees from insurance sales increased 4.0% to $3.1 million for the first
quarter of 2010 as compared to $3.0 million for the same period in 2009. The
increase for the comparative three month periods is mainly attributed to an
increase in commission income on group insurance products offered through VIST
Insurance, LLC is a wholly owned subsidiary of the Company.
Revenue from brokerage
and investment advisory commissions and fees decreased 59.1% to $135,000 in the
first quarter of 2010 as compared to $330,000 for the same period in 2009. The
decrease for the comparative three month periods are due primarily to the
decrease in volume of investment advisory services offered through VIST Capital
Management, LLC, a wholly owned subsidiary of the Company.
Revenue from earnings on
investment in life insurance increased 2.6% to $78,000 in the first quarter of
2010 as compared to $76,000 for the same period in 2009. The increase in
earnings on investment in life insurance for the comparative three month
periods is due primarily to increased earnings credited on the Companys
separate investment account, bank owned life insurance (BOLI).
Other commissions and
fees increased 6.6% to $504,000 for the first quarter of 2010 as compared to
$473,000 for the same period in 2009. The increase for the comparative three
month periods is due primarily to an increase in debit card network interchange
income.
Other income, including
gain on sale of loans, decreased 91.1% to $43,000 for the first quarter of 2010
as compared to $484,000 for the same period in 2009. The decrease in other
income for the comparative three month period is due primarily to a settlement
of a previously accrued contingent payment in 2009.
Net realized gains on
sales of available for sale securities were $92,000 for the three months ended March 31,
2010 compared to net realized gains on sales of available for sale securities
of $159,000 for the same period in 2009. Net realized gains on sales of
available for sale securities for the three month period in 2009 and 2008 were
primarily due to planned sales of existing available for sale investment
securities.
For the three month
period ended March 31, 2010, net credit impairment losses recognized in
earnings resulting from OTTI losses on available for sale investment securities
were $96,000. The net credit impairment losses include OTTI charges for
estimated credit losses on two pooled trust preferred securities. For the three
month period ended March 31, 2009, there were no net credit impairment
losses recognized in earnings resulting from OTTI losses on available for sale
investment securities.
Management regularly
reviews the investment securities portfolio to determine whether to record
other-than-temporary impairment. These impairment losses, which reflected the
entire difference between the fair value and amortized cost basis of each
individual security, were recorded in the consolidated results of operations.
Additional information
about investment securities, the gross gains and losses that compose the net
sale gains and losses and the process to review the portfolio for
other-than-temporary impairment, is provided in Note 9 to the consolidated
financial statements included in this Form 10-Q.
Non-Interest Expense
Total
non-interest expense for the three months ended March 31, 2010 totaled
$11.1 million, a decrease of $188,000, or 1.7%, over total other expense of
$11.3 million for the same period in 2009.
The following table
details non-interest expense as follows:
45
Table
of Contents
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollars amounts in thousands)
|
|
Salaries
and employee benefits
|
|
$
|
5,419
|
|
$
|
5,688
|
|
Occupancy
expense
|
|
1,148
|
|
1,069
|
|
Furniture
and equipment expense
|
|
624
|
|
606
|
|
Marketing
and advertising expense
|
|
246
|
|
270
|
|
Amortization
of identifiable intangible assets
|
|
133
|
|
171
|
|
Professional
services
|
|
609
|
|
892
|
|
Outside
processing
|
|
1,031
|
|
951
|
|
FDIC
deposit insurance
|
|
532
|
|
444
|
|
Other
real estate owned expense
|
|
497
|
|
326
|
|
Other
expense
|
|
852
|
|
862
|
|
|
|
|
|
|
|
|
|
Total
other non-interest expense
|
|
$
|
11,091
|
|
$
|
11,279
|
|
Salaries and benefits
decreased 4.7% to $5.4 million for the three months ended March 31, 2010
from $5.7 million for the same period in 2009. Included in salaries and
benefits for the three months ended March 31, 2010 and March 31, 2009
were pre-tax stock-based compensation costs of $37,000 and $20,000,
respectively. Also included in salaries and benefits for the three months ended
March 31, 2010 were total commissions paid of $228,000 on mortgage
origination activity through VIST Mortgage, insurance sales activity through
VIST Insurance, and investment advisory sales through VIST Capital Management
compared to commissions paid of $384,000 for the same period in 2009. The
decrease for the comparative three month periods is due primarily to a decrease
in the number of full-time equivalent employees and a decrease in employer 401(k) contribution
expense. Full-time equivalent (FTE) employees decreased to 287 at March 31,
2010 from 300 at March 31, 2009.
Occupancy expense and
furniture and equipment expense increased 5.8% to $1.8 million for the first
three months of 2010 as compared to $1.7 million at the same period in 2009.
The increase in occupancy expense and furniture and equipment expense for the
comparative three month period is due primarily to an increase in building
lease expense and equipment repairs expense and software maintenance expense.
Marketing and advertising
expense decreased 8.9% to $246,000 for the first quarter of 2010 as compared to
$270,000 for the same period in 2009. The decrease in marketing and advertising
expense for the comparative three month periods is due primarily to a reduction
in marketing costs associated with direct mailings and special events.
Professional services
expense decreased 31.7% to $609,000 for the first quarter of 2010 as compared
to $892,000 for the same period in 2009. The decrease for the comparative three
month periods is due primarily to legal fees associated with a 2009 litigation
settlement related to a previously accrued contingent payment.
Outside processing
expense increased 8.4% to $1.0 million for the first quarter of 2010 as
compared to $951,000 for the same period in 2009. The increase in outside
processing expense for the comparative three month periods are due primarily to
costs incurred for computer related services.
FDIC insurance expense
increased 19.8% to $532,000 for the first quarter of 2010 as compared to
$444,000 for the same period in 2009. The increase in insurance expense for the
comparative three month periods is due primarily to higher FDIC deposit
insurance premiums.
Other real estate owned
expense increased 52.5% to $497,000 for the first quarter of 2010 as compared
to $326,000 for the same period in 2009. The increase in other real estate
expense for the comparative three month periods is due primarily to an increase
in other real estate owned balances as a result of continued stressed economic
conditions in our lending region.
Income
Taxes
There was an income tax
benefit of $178,000 for the first quarter of 2010 as compared to income tax
expense of $252,000 for the same period in 2009. The effective income tax rate
for the Company for the first quarter ended March 31, 2010 was (33.3%)
compared to 14.1% for the same period of 2009. The effective income tax rate
for the comparative three month periods of both 2010 and 2009 fluctuated
primarily due to fluctuations in tax exempt income and net income before income
taxes. Included in income tax
46
Table
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expense for the comparative three month periods ended March 31,
2010 is a federal tax benefit of approximately $64,000 from a $5,000,000
investment in an affordable housing, corporate tax credit limited partnership.
FINANCIAL CONDITION
The total assets of the
Company at March 31, 2010 were $1.34 billion, an increase of approximately
$30.1 million, or 9.2% annualized, from $1.31 billion at December 31,
2009.
Cash and Cash Equivalents:
Cash and cash equivalents
increased $28.9 million, or 422.7% annualized, to $56.3 million at March 31,
2010 from $27.4 million at December 31, 2009. This increase is primarily
related to an increase in federal funds sold.
Mortgage Loans Held for Sale
Mortgage loans held for
sale increased $267,000, or 54.4% annualized, to $2.2 million at March 31,
2010 from $2.0 million at December 31, 2009. This increase is primarily
related to an increase in loans originated for sale into the secondary
residential real estate loan market through VIST Mortgage.
Securities
Available for Sale
Investment securities
available for sale increased $6.2 million, or 9.2% annualized, to $274.2
million at March 31, 2010 from $268.0 million at December 31, 2009.
Investment securities are used to supplement loan growth as necessary, to
generate interest and dividend income, to manage interest rate risk, and to
provide liquidity. The increase in investment securities available for sale was
due primarily to the purchases of mortgage-backed securities used as collateral
for the Companys public funds and structured wholesale borrowings.
The securities portfolio
included a net unrealized loss on available for sale securities of $6.1 million
and $6.8 million at March 31, 2010 and December 31, 2009,
respectively. In addition, net unrealized losses of $51,000 and $1.2 million
were present in the held to maturity securities at March 31, 2010 and December 31,
2009, respectively. Changes in longer-termed treasury interest rates,
underlying collateral and credit concerns and dislocation and illiquidity in
the current market continue to contribute to the decrease in the fair market
value of certain securities.
Debt securities that
management has no intention to sell or
it is more likely than not that the Company will not be required to sell these
securities are classified as held-to-maturity and recorded at amortized
cost. Securities classified as available for sale are those securities that the
Company has no intention to sell or is
it more likely than not that the Company will be required to sell these
securities. Any decision to sell a security classified as available for
sale would be based on various factors, including significant movement in
interest rates, changes in maturity mix of the Companys assets and
liabilities, liquidity needs, regulatory capital considerations and other similar
factors. Securities available for sale are carried at fair value. Unrealized
gains and losses are reported in other comprehensive income or loss, net of the
related deferred tax effect. Realized gains or losses, determined on the basis
of the cost of the specific securities sold, are included in earnings.
Purchased premiums and discounts are recognized in interest income using a
method which approximates the interest method over the terms of the securities.
Other-Than-Temporary
Impairment
Management
evaluates investment securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Factors that may be indicative of impairment include, but are
not limited to, the following:
·
Fair value below cost and the length of time
·
Adverse condition specific to a particular investment
·
Rating agency activities (
e.g.
,
downgrade)
·
Financial condition of an issuer
·
Dividend activities
·
Suspension of trading
·
Management intent
·
Changes in tax laws or other policies
·
Subsequent market value changes
·
Economic or industry forecasts
47
Table
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Other-than-temporary
impairment means management believes the securitys impairment is due to
factors that could include its inability to pay interest or dividends, its
potential for default, and/or other factors. When a held to maturity or
available for sale debt security is assessed for other-than-temporary
impairment, management has to first consider (a) whether the Company
intends to sell the security, and (b) whether it is more likely than not
that the Company will be required to sell the security prior to recovery of its
amortized cost basis. If one of these circumstances applies to a security, an
other-than-temporary impairment loss is recognized in the statement of
operations equal to the full amount of the decline in fair value below
amortized cost. If neither of these circumstances applies to a security, but
the Company does not expect to recover the entire amortized cost basis, an
other-than-temporary impairment loss has occurred that must be separated into
two categories: (a) the amount related to credit loss, and (b) the
amount related to other factors. In assessing the level of other-than-temporary
impairment attributable to credit loss, management compares the present value
of cash flows expected to be collected with the amortized cost basis of the
security. The portion of the total other-than-temporary impairment related to
credit loss is recognized in earnings (as the difference between the fair value
and the present value of the estimated cash flows), while the amount related to
other factors is recognized in other comprehensive income. The total
other-than-temporary impairment loss is presented in the statement of
operations, less the portion recognized in other comprehensive income. When a
debt security becomes other-than-temporarily impaired, its amortized cost basis
is reduced to reflect the portion of the total impairment related to credit
loss.
Federal Home Loan Bank Stock
Federal law requires a
member institution of the Federal Home Loan Bank to hold stock of its district
FHLB according to a predetermined formula. The Federal Home Loan Bank stock is
carried at cost.
Loans
Total loans, net of
allowance for loan losses, decreased to $892.0 million, or 3.3% annualized, at March 31,
2010 from $899.5 million at December 31, 2009.
The components of loans were as follows:
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in thousands)
|
|
Residential real estate
- 1 to 4 family
|
|
$
|
163,580
|
|
$
|
169,009
|
|
Residential real estate
- multi family
|
|
41,969
|
|
38,994
|
|
Commercial
|
|
155,060
|
|
150,823
|
|
Commercial, secured by
real estate
|
|
357,057
|
|
362,376
|
|
Construction
|
|
99,193
|
|
100,713
|
|
Consumer
|
|
2,949
|
|
3,108
|
|
Home equity lines of
credit
|
|
85,927
|
|
86,916
|
|
Loans
|
|
905,735
|
|
911,939
|
|
|
|
|
|
|
|
Net deferred loan fees
|
|
(973
|
)
|
(975
|
)
|
Allowance for loan
losses
|
|
(12,770
|
)
|
(11,449
|
)
|
Loans, net of allowance
for loan losses
|
|
$
|
891,992
|
|
$
|
899,515
|
|
Loans secured by real
estate (not including home equity lending products) decreased $7.8 million, or
5.5% annualized, to $562.6 million at March 31, 2010 from $570.4 million
at December 31, 2009. This decrease is primarily due to a decrease in
commercial real estate loan originations.
Total commercial loans
decreased to $511.9 million at March 31, 2010 from $513.2 million at December 31,
2009, a decrease of $1.3 million, or 1.0% annualized. The decrease is due
primarily to a decrease in commercial real estate loans outstanding. There were
no SBA loans sold during the period.
Consumer and home equity
lending products decreased to $88.9 million at March 31, 2010, from $90.0
million as of December 31, 2009. Consumer demand for these types of loans
decreased slightly in 2010. Although the Companys focus primarily centered on
the commercial customer, management remained disciplined in its pricing of
consumer loans. Despite the numerous economic challenges faced in 2010, the
Company was able to maintain most of its outstanding balances through the
successful
48
Table
of Contents
marketing of its Equilock consumer loan product which
carries both a fixed and variable component allowing the consumer to lock and
unlock the loan at the prevailing interest rate.
Loan Policy and Procedure
The Banks loan policies
and procedures have been approved by the Board of Directors, based on the
recommendation of the Banks President, Chief Lending Officer, Chief Credit
Officer, and the Risk Management Officer, who collectively establish and
monitor credit policy issues. Application of the loan policy is the direct
responsibility of those who participate either directly or administratively in
the lending function.
The Banks Relationship
Managers originate loan requests through a variety of sources which include the
Banks existing customer base, referrals from directors and various networking
sources (accountants, attorneys, and realtors), and market presence. Over the
past several years, the Banks Relationship Managers have been significantly
increased through (1) the hiring of experienced commercial lenders in the
Banks geographic markets, (2) the Banks continued participation in
community and civic events, (3) strong networking efforts, (4) local
decision making, and (5) consolidation and other changes which are
occurring with respect to other local financial institutions.
A credit loan committee
comprised of senior management approves commercial and consumer loans with
total loan exposures in excess of $2 million. The executive loan committee
comprised of senior management and 5 members from the Board of Directors
(including the President of the Company) approves commercial and consumer loans
with total exposures in excess of $4.5 million up to the Banks legal lending
limit. One of the affirmative votes on both the credit and/or executive loan
committee must be either the Chief Credit Officer or the Chief Lending Officer
in order to ensure that proper standards are maintained.
Lending authorities are
granted to individuals based on position and experience. All commercial loan
approvals require dual signatures. Loans over $1,000,000 and up to $2,000,000
require the additional approval of the Chief Lending Officer (CLO), Chief
Credit Officer (CCO), Senior Credit Officer and/or the Bank Chief Executive
Officer (CEO). Loans in excess of $2,000,000 are presented to the Banks
Credit Committee, comprised of the Chief Lending Officer, Chief Credit Officer,
Senior Credit Officer, Chief Risk Officer (non-voting), and selected
market Executives. The Credit Committee can approve loans up to $4,500,000 and
recommend loans to the Executive Loan Committee for approval up to the Banks
legal lending limit of approximately $15.2 million at March 31, 2010. The
Executive Loan Committee is composed of the Bank CEO, the Chief Lending
Officer, the Chief Credit Officer, the Chief Financial Officer, Senior Credit
Officer, the Chief Risk Officer (non-voting member) and selected Board members.
At least one affirmative vote in both the Credit Committee and the Executive
Loan Committee must come from the CCO or the CLO. Individual joint lending
authority is granted based on the level of experience of the individual for
commercial loan exposures under $2 million. Higher risk credits (as determined
by internal loan ratings) and unsecured facilities (in excess of $100,000)
require the signature of an officer with more credit experience.
The Bank has established
an in-house lending limit of 80% of its legal lending limit and, at March 31,
2010, the Bank had no loan relationships in excess of its in-house limit.
Although Bank policy does not prohibit going over the 80% limit but these
credits need to be of high quality.
Through the Chief Credit
Officer and the Credit Committee, the Bank has successfully implemented
individual, joint, and committee level approval procedures which have monitored
and solidified credit quality as well as provided lenders with a process that
is responsive to customer needs.
The Bank manages credit
risk in the loan portfolio through adherence to consistent standards,
guidelines, and limitations established by the credit policy. The Banks credit
department, along with the Relationship Managers, analyzes the financial
statements of the borrower, collateral values, loan structure, and economic
conditions, to then make a recommendation to the appropriate approval
authority. Commercial loans generally consist of real estate secured loans,
lines of credit, term, and equipment loans. The Banks underwriting policies
impose strict collateral requirements and normally will require the guaranty of
the principals. For requests that qualify, the Bank will use Small Business
Administration guarantees to improve the credit quality and support local small
business.
The Banks written loan
policies are continually evaluated and updated as necessary to reflect changes
in the marketplace. Annually, credit loan policies are approved by the Banks
Board of Directors thus providing Board oversight. These policies require
specified underwriting, loan documentation and credit analysis standards to be
met prior to funding.
One of the key components
of the Banks commercial loan policy is loan to value. The following guidelines
serve as the maximum loan to value ratios which the Bank would normally
consider for new loan requests. Generally, the Bank will use the lower of cost
or market when determining a loan to value ratio (except for investment
securities). The values are not appropriate in all cases, and Bank lending
personnel, pursuant to their responsibility to protect the Banks interest,
seek as much collateral as practical.
49
Table
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Commercial
Real Estate
|
|
|
|
a)
|
|
Unapproved land (raw
land)
|
|
50
|
%
|
b)
|
|
Approved but Unimproved
land
|
|
65
|
%
|
c)
|
|
Approved and Improved
land
|
|
75
|
%
|
d)
|
|
Improved Real Estate
|
|
80
|
%
|
|
|
|
|
|
|
Investments
|
|
|
|
a)
|
|
Stocks listed on a
nationally recognized exchanged Stock value should be greater than $10.
|
|
75
|
%
|
b)
|
|
Bonds, Bills and Notes:
|
|
|
|
c)
|
|
US Govt obligations
(fully guaranteed)
|
|
95
|
%
|
d)
|
|
State,
county & municipal general obligations rated BBB or higher
|
|
varies: 65-85
|
%
|
|
|
Corporate obligations
rated BBB or higher
|
|
varies: 65-80
|
%
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
a)
|
|
Accounts Receivable
(eligible)
|
|
80
|
%
|
b)
|
|
Inventory (raw material
and finished goods)
|
|
50
|
%
|
c)
|
|
Equipment (new)
|
|
80
|
%
|
d)
|
|
Equipment (purchase
money used)
|
|
70
|
%
|
e)
|
|
Cash or cash equivalent
|
|
100
|
%
|
Exception reporting is
presented to the audit committee on a quarterly basis to ensure that the Bank
remains in compliance with the FDIC limits on exceeding supervisory loan to
value guidelines established for real estate secured transactions.
Generally, when
evaluating a commercial loan request, the Bank will require 3 years of
financial information on the borrower and any guarantor. The Bank has
established underwriting standards that are expected to be maintained by all
lending personnel. These requirements include loans being evaluated and
underwritten at fully indexed rates. Larger loan exposures are typically
analyzed by credit personnel that are independent from the sales personnel.
The Bank has not
underwritten any hybrid loans or sub-prime loans. Loans that are generally
considered to be sub-prime are loans where the borrower has a FICO score below
640 and shows data on their credit reports associated with higher default
rates, limited debt experience, excessive debt, a history of missed payments,
failures to pay debts, and recorded bankruptcies.
All loan closings, loan
funding and appraisal ordering and review involve personnel that are
independent from the sales function to ensure that bank standards and
requirements are met prior to disbursement.
Impaired Loans
Non-performing loans,
consisting of loans on non-accrual status and loans past due 90 days or more
and still accruing interest were $23.8 million at March 31, 2010, a
decrease from $27.0 million at December 31, 2009. Generally, loans that
are more than 90 days past due are placed on non-accrual status. As a
percentage of total loans, non-performing loans represented 2.63% at March 31,
2010 and 2.96% at December 31, 2009. The allowance for loan losses
represents 53.6% of non-performing loans at March 31, 2010, compared to
42.5% at December 31, 2009.
The
Company generally values impaired loans that are accounted for under FASB ASC
310, Accounting by Creditors for Impairment of a Loan (FASB ASC 310), based
on the fair value of the loans collateral. Loans are determined to be impaired
when management has utilized current information and economic events and judged
that it is probable that not all of the principal and interest due under the
contractual terms of the loan agreement will be collected. Impaired loans are
initially evaluated and revalued at the time the loan is identified as
impaired. Impaired loans are loans where the current appraisal of the
underlying collateral is less than the principal balance of the loan and the
loan is a non-accruing loan. Fair value is measured based on the value of the
collateral securing these loans and is classified at a Level 3 in the fair
value hierarchy or based on the present value of estimated future cash flows if
repayment is not collateral dependent. Collateral may be real estate and/or
business assets including equipment, inventory and/or accounts receivable and
is determined based on appraisals by qualified licensed appraisers hired by the
Company. For the purposes of determining the fair value of impaired loans that
are collateral dependent, the company defines a current appraisal and
evaluation as those completed within 12 months and performed by an independent
third party. Appraised and reported values may be discounted based on
managements historical knowledge, changes in market conditions from the time
of valuation, and/or managements expertise and knowledge of the client and
clients business.
Impaired loans, which
required specific reserves, totaled $12.8 million at March 31, 2010 after
valuation, compared to $15.1 million at December 31, 2009. The $2.3
million decrease in non-performing loans from December 31, 2009 to March 31,
2010 is
50
Table
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primarily due primarily
to several non-performing commercial credits transferred to other real estate
owned. As of March 31, 2010, 97.1% of all impaired loans had current third
party appraisals or evaluations of their collateral to measure impairment. For
these impaired loans, the bank takes immediate action to determine the current
value of collateral securing its troubled loans. The remaining 2.9% of impaired
loans were in process of being evaluated at March 31, 2010. During the
ongoing supervision of a troubled loan, the Company performs a cash flow
evaluation, obtains an appraisal update or obtains a new appraisal. The Company
reviews all impaired loans on a quarterly basis to ensure that the market
values are reasonable and that no further deterioration has occurred. If the
evaluation indicates that the market value has deteriorated below the carrying
value of the loan, either the entire loan or the partial difference between the
market value and principal balance is charged-off unless there are material
mitigating factors to the contrary. If a loan is not charged down, reserves are
allocated to reflect the estimated collateral shortfall. Loans that have been
partially charged-off are classified as non-performing loans for which none of
the current loan terms have been modified. During 2010, there were $610,000 in
partial loan charge-offs. In order for an impaired loan not to have a specific
valuation allowance it must be determined by the Company through a current
evaluation that there is sufficient underlying collateral after appropriate
discounts have been applied, that is in excess of the carrying value.
The gross recorded
investment in impaired loans not requiring an allowance for loan losses was
$7.0 million at March 31, 2010 and $6.3 million at December 31, 2009.
The gross recorded investment in impaired loans requiring an allowance for loan
losses was $16.6 million and $18.9 million at March 31, 2010 and December 31,
2009, respectively. At March 31, 2010 and December 31, 2009, the
related allowance for loan losses associated with those loans was $3.8 million
and $3.8 million, respectively. For the periods ended March 31, 2010 and December 31,
2009, the average recorded investment in impaired loans was $24.8 million and
$18.6 million, respectively. Interest income of $23,000 was recognized on
impaired loans for the year ended March 31, 2010 and interest income of
$42,000 was recognized on impaired loans for the year ended December 31,
2009.
Loans on which the
accrual of interest has been discontinued amounted to $23.6 million and $25.1
million at March 31, 2010 and December 31, 2009, respectively. Loan
balances past due 90 days or more and still accruing interest but which management
expects will eventually be paid in full, amounted to $204,000 and $1.8 million
at March 31, 2010 and December 31, 2009, respectively. Loan balances
past due 90 days or more and still accruing interest that are brought current
will reduce the balance of outstanding loans in this category and loans that
are not brought current will also reduce the balance of outstanding loans in
this category but will be reported as non-accrual loans after all collection
efforts had been exhausted.
The Company continues to
emphasize credit quality and believes that pre-funding analysis and diligent
intervention at the first signs of delinquency will help to manage these
levels.
The following table is a
summary of non-performing loans and renegotiated loans for the periods
presented.
51
Table
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|
|
Three Months
|
|
|
|
|
|
March 31,
|
|
Twelve Months
|
|
|
|
2010
|
|
December 31,
|
|
|
|
(unaudited)
|
|
2009
|
|
|
|
(Dollar
amounts in thousands,
|
|
|
|
except
percentage data)
|
|
Non-accrual loans:
|
|
|
|
|
|
Real estate
|
|
$
|
22,254
|
|
$
|
24,420
|
|
Consumer
|
|
|
|
4
|
|
Commercial, financial
and agricultural
|
|
1,381
|
|
716
|
|
Total
|
|
23,635
|
|
25,140
|
|
|
|
|
|
|
|
Loans past due 90 days
or more and still accruing:
|
|
|
|
|
|
Real estate
|
|
204
|
|
1,664
|
|
Consumer
|
|
|
|
|
|
Commercial, financial
and agricultural
|
|
|
|
147
|
|
Total
|
|
204
|
|
1,811
|
|
|
|
|
|
|
|
Total non-performing
loans
|
|
23,839
|
|
26,951
|
|
|
|
|
|
|
|
Other real estate owned
|
|
7,441
|
|
5,221
|
|
|
|
|
|
|
|
Total non-performing
assets
|
|
$
|
31,280
|
|
$
|
32,172
|
|
|
|
|
|
|
|
Troubled debt
restructurings
|
|
$
|
6,150
|
|
$
|
6,245
|
|
|
|
|
|
|
|
Non-performing
loans to loans outstanding at end of period (net of unearned income)
|
|
2.63
|
%
|
2.96
|
%
|
Non-performing
assets to loans outstanding at end of period (net of unearned income) plus
OREO
|
|
3.43
|
%
|
3.51
|
%
|
Provision and Allowance for Loan Losses
The provision for loan
losses reflects the amount deemed appropriate by management to provide a best
estimate of probable losses given the present risk characteristics of the loan
portfolio. The provision for loan losses for the three months ended March 31,
2010 was $2.6 million compared to $825,000 for the same period in 2009. The
increase in the provision is due primarily to economic conditions and an
increase in nonperforming loans and the result of managements best estimate of
probable losses and classification of the credit quality of the loan portfolio
utilizing a qualitative and quantitative internal loan review process. The
allowance for loan losses at March 31, 2010 was $12.8 million compared to
$11.4 million at December 31, 2009. The allowance for loan losses at March 31,
2010 was 1.41% of outstanding loans compared to 1.26% of outstanding loans at December 31,
2009. Management continues to evaluate and classify the credit quality of the
loan portfolio utilizing a qualitative and quantitative internal loan review
process.
The allowance for loan
losses has been established based on certain impaired loans where it is
recognized that the cash flows are discounted or where the fair value of the
collateral is lower than the carrying value of the loan. The Company has also
established an allowance on classified loans which are not impaired but are
included in categories such as doubtful, substandard and special mention.
Though being classified to one of these categories does not necessarily mean
that the loan is impaired, it does indicate that the loan has identified
weaknesses that increase its credit risk of loss. The Company has also
established a general allowance on non-classified and non-impaired loans to
recognize the probable losses that are associated with lending in general,
though not due to a specific problem loan. The allowance for loan losses is an
amount that management believes to be adequate to absorb probable losses in the
loan portfolio. Additions to the allowance are charged through the provision
for loan losses. Management regularly assesses the adequacy of the allowance by
performing an ongoing evaluation of the loan portfolio, including such factors
as charge-off history, the level of delinquent loans, the current financial
condition of specific borrowers, value of any collateral, risk characteristics
in the loan portfolio, and local and national economic conditions. All
criticized and classified loans are analyzed individually while pass rated
loans are evaluated by loan category based on historical performance. Based
upon the results of such reviews, management believes that the allowance for
loan losses at March 31, 2010 was adequate to absorb probable credit
losses inherent in the portfolio as of that date.
The following table
presents a comparative allocation of the allowance for loan losses. Amounts
were allocated to specific loan categories based upon managements
classification of loans under the Companys internal loan grading system and
assessment of near-term charge-offs and losses existing in specific larger
balance loans that are reviewed in detail by the Companys internal loan
52
Table
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review department and pools of other loans that are
not individually analyzed. The allocation is made for analytical purposes and
is not necessarily indicative of the categories in which future credit losses
may occur.
|
|
Allocation of Allowance for Loan Losses
|
|
|
|
As Of and For The Period Ended
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
March 31,
|
|
Twelve Months
|
|
|
|
2010
|
|
December 31,
|
|
|
|
(unaudited)
|
|
2009
|
|
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
|
|
Total
|
|
|
|
Total
|
|
|
|
Amount
|
|
Loans
|
|
Amount
|
|
Loans
|
|
|
|
(Dollar
amounts in thousands,
|
|
|
|
except
percentage data)
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
5,343
|
|
41.9
|
%
|
$
|
4,745
|
|
56.2
|
%
|
Residential Real Estate
|
|
7,369
|
|
57.7
|
|
6,170
|
|
43.4
|
|
Consumer
|
|
46
|
|
0.4
|
|
527
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
Total Allocated
|
|
12,758
|
|
100.0
|
|
11,442
|
|
100.0
|
|
Unallocated
|
|
12
|
|
|
|
7
|
|
|
|
Total
|
|
$
|
12,770
|
|
100.0
|
%
|
$
|
11,449
|
|
100.0
|
%
|
The unallocated portion
of the allowance is intended to provide for possible losses that are not
otherwise accounted for and to compensate for the imprecise nature of
estimating future loan losses. Management believes the allowance is adequate to
cover the inherent risks associated with the Companys loan portfolio. While
allocations have been established for particular loan categories, management
considers the entire allowance to be available to absorb probable losses in any
category.
The following table shows
the activity in the Companys allowance for loan losses:
53
Table
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|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar
amounts in thousands,
|
|
|
|
except percentage data)
|
|
|
|
|
|
|
|
Balance of allowance
for loan losses, beginning of period
|
|
$
|
11,449
|
|
$
|
8,124
|
|
Loans charged-off:
|
|
|
|
|
|
Commercial, financial
and agricultural
|
|
(658
|
)
|
(739
|
)
|
Real estate mortgage
|
|
(617
|
)
|
|
|
Consumer
|
|
(18
|
)
|
(70
|
)
|
Total loans charged-off
|
|
(1,293
|
)
|
(809
|
)
|
Recoveries of loans
previously charged-off:
|
|
|
|
|
|
Commercial, financial
and agricultural
|
|
7
|
|
11
|
|
Real estate mortgage
|
|
5
|
|
|
|
Consumer
|
|
2
|
|
14
|
|
Total recoveries
|
|
14
|
|
25
|
|
Net loan charged-offs
|
|
(1,279
|
)
|
(784
|
)
|
Provision for loan
losses
|
|
2,600
|
|
825
|
|
Balance, end of period
|
|
$
|
12,770
|
|
$
|
8,165
|
|
|
|
|
|
|
|
Net charge-offs to
average loans (annualized)
|
|
0.56
|
%
|
0.36
|
%
|
Allowance for loan
losses to loans outstanding
|
|
1.41
|
%
|
0.92
|
%
|
Loans outstanding at
end of period (net of unearned income)
|
|
$
|
904,762
|
|
$
|
886,590
|
|
Average balance of
loans outstanding during the period (1)
|
|
$
|
911,529
|
|
$
|
886,482
|
|
(1) Excludes loans
held for sale
Deposits
Total deposits at March 31,
2010 were $1.1 billion compared to $1.0 billion at December 31, 2009, an
increase of $40.7 million, or 16.0% annualized.
The components of
deposits were as follows:
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar
amounts in thousands)
|
|
|
|
|
|
|
|
Demand, non-interest
bearing
|
|
$
|
106,800
|
|
$
|
102,302
|
|
Demand, interest
bearing
|
|
414,614
|
|
375,668
|
|
Savings
|
|
98,241
|
|
83,319
|
|
Time, $100,000 and over
|
|
246,124
|
|
248,695
|
|
Time, other
|
|
195,845
|
|
210,914
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
1,061,624
|
|
$
|
1,020,898
|
|
Non-interest bearing
deposits increased to $106.8 million at March 31, 2010, from $102.3
million at December 31, 2009, an increase of $4.5 million or 17.6% annualized.
The increase in non-interest bearing deposits is primarily due to an increase
in non-interest bearing commercial accounts. Management continues its efforts
to promote growth in these types of deposits, such as offering a free checking
product, as a method to help reduce the Companys overall cost of funds.
Interest bearing deposits increased by $36.2 million or 15.8% annualized, from
$918.6 million at December 31, 2009 to $954.8 million at March 31,
2010. The increase in interest bearing deposits is due primarily to an increase
in interest bearing core deposits including MMDA and savings accounts.
Management continues to promote these types of deposits through a disciplined
pricing strategy as a means of managing the Companys overall cost of funds, as
well as, managements continuing emphasis on increasing market share through
commercial and retail marketing programs and customer service.
54
Table
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Borrowings
Total borrowings at March 31,
2010 were $143.7 million compared to $154.9 million at December 31, 2009,
a decrease of $11.2 million, or 28.8% annualized. Borrowed funds from various
sources are generally used to supplement deposit growth. Securities sold under
agreements to repurchase were $114.0 million at March 31, 2010 and $115.2
million at December 31, 2009, respectively. Increases in commercial loan
demand and investment securities were funded primarily by interest-bearing
deposits. At March 31, 2010 and December 31, 2009, long-term
borrowings consisting of advances from the FHLB were $10.0 million and $20.0
million, respectively.
Off Balance Sheet Commitments
The Bank is party to
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and letters of credit. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet.
The Banks exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments.
A summary of the
contractual amount of the Companys financial instrument commitments is as
follows:
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in thousands
)
|
|
Commitments to extend
credit:
|
|
|
|
|
|
Loan origination
commitments
|
|
$
|
56,485
|
|
$
|
32,846
|
|
Unused home equity
lines of credit
|
|
39,727
|
|
44,091
|
|
Unused business lines
of credit
|
|
123,423
|
|
149,032
|
|
Total commitments to
extend credit
|
|
$
|
219,635
|
|
$
|
225,969
|
|
|
|
|
|
|
|
Standby letters of
credit
|
|
$
|
9,882
|
|
$
|
11,998
|
|
Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of
a fee. The Bank evaluates each customers credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on managements credit evaluation. Collateral
held varies but may include personal or commercial real estate, accounts
receivable, inventory and equipment. At March 31, 2010 the amount of
commitments to extend credit was $219.6 million as compared to $226.0 million
at December 31, 2009.
Standby letters of credit
written are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. The majority of these standby
letters of credit expire within the next twenty-four months. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending other loan commitments. The Bank requires collateral supporting
these letters of credit as deemed necessary. Management believes that the
proceeds obtained through a liquidation of such collateral would be sufficient
to cover the maximum potential amount of future payments required under the
corresponding guarantees. The current amount of the liability as of March 31,
2010 for guarantees under standby letters of credit issued was $9.9 million as
compared to $12.0 million at December 31, 2009.
Junior Subordinated Debt
On March 9, 2000 and
September 26, 2002, the Company established First Leesport Capital Trust I
and Leesport Capital Trust II, respectively, in which the Company owns all of
the common equity. First Leesport Capital Trust I issued $5 million of
mandatory redeemable capital securities carrying an interest rate of 10.875%,
and Leesport Capital Trust II issued $10 million of mandatory redeemable
capital securities carrying a floating interest rate of three month LIBOR plus
3.45%. These debentures are the sole assets of the Trusts. These securities
must be redeemed in March 2030 and September 2032, respectively, but
may be redeemed on or after March 2010 and November 2007,
respectively, or earlier in the event that the interest expense becomes
non-deductible for
55
Table
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federal income tax purposes or if the treatment of
these securities no longer qualifies as Tier I capital for the Company. In October 2002,
the Company entered into an interest rate swap agreement that effectively
converts the First Leesport Capital Trust I $5 million of fixed-rate capital
securities to a floating interest rate of six month LIBOR plus 5.25%. In September 2008,
the Company entered into an interest rate swap agreement that effectively
converts the Leesport Capital Trust II $10 million of adjustable-rate capital
securities to a fixed interest rate of 7.25%. Interest began accruing on the
Leesport Capital Trust II swap in February 2009.
On June 26, 2003,
Madison established Madison Statutory Trust I in which the Company owns all of
the common equity. Madison Statutory Trust I issued $5 million of mandatory
redeemable capital securities carrying a floating interest rate of three month
LIBOR plus 3.10%. These debentures are the sole assets of the Trusts. These
securities must be redeemed in June 2033, but may be redeemed on or after September 26,
2008 or earlier in the event that the interest expense becomes non-deductible
for federal income tax purposes or if the treatment of these securities no
longer qualifies as Tier I capital for the Company. In September 2008, the
Company entered into an interest rate swap agreement that effectively converts
the Madison Statutory Trust I $5 million of adjustable-rate capital securities
to a fixed interest rate of 6.90%. Interest began accruing on the Madison
Statutory Trust I swap in March 2009.
Capital
Shareholders Equity
Total shareholders
equity increased $300,000, or 1.0% annualized, to $125.7 million at March 31,
2010 from $125.4 million at December 31, 2009. The increase is the net
result of net income for the period of $713,000 less common stock dividends
declared of $292,000 and preferred stock dividends declared of $313,000,
proceeds of $256,000 from the issuance of shares of common stock under the
Companys employee benefit and director compensation plans, an increase in the
unrealized loss on securities, net of tax, of $101,000 and stock-based
compensation costs of $37,000.
As of March 31,
2010, the Company continues to carry 25,000 shares of Series A, Fixed
Rate, Cumulative Perpetual Preferred Stock (Series A Preferred Stock),
with a par value of $0.01 per share and a liquidation preference of $1,000 per
share, and a warrant (Warrant) to purchase 364,078 shares of the Companys
common stock, par value $5.00 per share, for an aggregate purchase price of
$25,000,000 in cash issued to the United States Department of the Treasury (Treasury).
The Warrant has a 10-year term and is immediately exercisable upon its issuance,
with an exercise price, subject to anti-dilution adjustments, equal to $10.30
per share of common stock. The Series A Preferred Stock qualifies as Tier
1 capital and will pay cumulative dividends at a rate of 5% per annum for the
first five years, and 9% per annum thereafter. The Series A Preferred
Stock may be redeemed at any time following consultation by the Companys
primary bank regulator and Treasury. Participants in the Capital Purchase
Program desiring to redeem part of an investment by Treasury must redeem a
minimum of 25% of the issue price of the preferred stock from the proceeds of a
qualifying equity offering.
Regulatory Capital
Federal bank regulatory
agencies have established certain capital-related criteria that must be met by
banks and bank holding companies. The measurements which incorporate the
varying degrees of risk contained within the balance sheet and exposure to
off-balance sheet commitments were established to provide a framework for
comparing different institutions. Regulatory guidelines require that Tier 1
capital and total risk-based capital to risk-adjusted assets must be at least
4.0% and 8.0%, respectively. In order for the Company to be considered well
capitalized under the guidelines of the banking regulators, the Company must
have Tier 1 capital and total risk-based capital to risk-adjusted assets of at
least 6.0% and 10.0%, respectively. As of March 31, 2010, the Company has
met the criteria to be considered a well capitalized institution.
Other than Tier 1 capital
restrictions on the Companys junior subordinated debt discussed later, the
Company is not aware of any pending recommendations by regulatory authorities
that would have a material impact on the Companys capital, resources, or
liquidity if they were implemented, nor is the Company under any agreements
with any regulatory authorities.
The adequacy of the
Companys capital is reviewed on an ongoing basis with regard to size,
composition and quality of the Companys resources. An adequate capital base is
important for continued growth and expansion in addition to providing an added
protection against unexpected losses.
An important indicator in
the banking industry is the leverage ratio, defined as the ratio of common
shareholders equity less intangible assets (Tier 1 risk-based capital), to
average quarterly assets less intangible assets. The leverage ratio at March 31,
2010 was 8.21% compared to 8.36% at December 31, 2009. This increase is
primarily the result of an increase in total equity. At March 31, 2010,
the capital ratios were above minimum regulatory guidelines.
As required by the
federal banking regulatory authorities, guidelines have been adopted to measure
capital adequacy. Under the guidelines, certain minimum ratios are required for
core capital and total capital as a percentage of risk-weighted assets and
other off-balance sheet instruments. For the Company, Tier 1 risk-based capital
consists of common shareholders equity less intangible
56
Table
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assets plus the junior subordinated debt, and Tier 2
risk-based capital includes the allowable portion of the allowance for loan
losses, currently limited to 1.25% of risk-weighted assets. By regulatory
guidelines, the separate component of equity for unrealized appreciation or
depreciation on available for sale securities is excluded from Tier 1
risk-based capital. In addition, federal banking regulatory authorities have
issued a final rule restricting the Companys junior subordinated debt to
25% of Tier 1 risk-based capital. Amounts of junior subordinated debt in excess
of the 25% limit generally may be included in Tier 2 risk-based capital. The
final rule provided a five-year transition period, ending September 30,
2009. Recently, the Federal Reserve extended this transition period to March 31,
2011. This will allow bank holding companies more flexibility in managing their
compliance with these new limits in light of the current conditions of the
capital markets. At March 31, 2010, the entire amount of these securities
was allowable to be included as Tier 1 risk-based capital for the Company. For
the periods ended March 31, 2010 and December 31, 2009, the Companys
capital ratios were above minimum regulatory guidelines.
The following table sets
forth the Companys risk-based capital amounts and ratios as of:
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar
amounts in thousands,
except percentage data)
|
|
Tier 1 Capital
|
|
|
|
|
|
Common shareholders
equity excluding unrealized gains (losses) on securities
|
|
$
|
125,728
|
|
$
|
125,428
|
|
Disallowed goodwill and
intangible assets
|
|
(43,911
|
)
|
(44,024
|
)
|
Junior subordinated
debt
|
|
19,564
|
|
19,508
|
|
Unrealized losses on
available for sale debt securities
|
|
4,100
|
|
3,942
|
|
Total Tier 1 Capital
|
|
105,481
|
|
104,854
|
|
|
|
|
|
|
|
Tier 2 Capital
|
|
|
|
|
|
Allowable portion of
allowance for loan losses
|
|
12,214
|
|
11,449
|
|
Total Tier 2 Capital
|
|
12,214
|
|
11,449
|
|
Total risk-based
capital
|
|
$
|
117,695
|
|
$
|
116,303
|
|
|
|
|
|
|
|
|
|
Risk adjusted assets
(including off-balance sheet exposures)
|
|
$
|
976,531
|
|
$
|
984,296
|
|
|
|
|
|
|
|
Leverage ratio
|
|
8.21
|
%
|
8.36
|
%
|
Tier I risk-based
capital ratio
|
|
10.80
|
%
|
10.65
|
%
|
Total risk-based
capital ratio
|
|
12.05
|
%
|
11.82
|
%
|
Liquidity
Adequate liquidity means
the ability to obtain sufficient cash to meet all current and projected needs
promptly and at a reasonable cost. These needs include deposit withdrawal,
liability runoff, and increased loan demand. The principal sources of liquidity
are deposit generation, overnight federal funds transactions with other
financial institutions, investment securities portfolio scheduled cash flows,
prepayments and maturities, and maturing loans and loan payments. The Bank can
also package and sell residential mortgage loans into the secondary market.
Other sources of liquidity are term borrowings from the Federal Home Loan Bank,
and the discount window of the Federal Reserve Bank. In view of all factors
involved, management believes that liquidity is being maintained at an adequate
level.
At March 31, 2010,
the Company had a total of $143.7 million, or 10.7% of total assets, in
borrowed funds. These borrowings included $114.0 million of repurchase
agreements, $10 million of term borrowings with the Federal Home Loan Bank, and
$19.7 million in junior subordinated debt. The FHLB borrowing has a final
maturity of January 2011 at an interest rate of 3.53%. At March 31,
2010, the Company had a total of $35.6 million in federal funds sold. At March 31,
2010, the Company had a maximum borrowing capacity with the Federal Home Loan
Bank of approximately $365.3 million. In the event that additional short-term
liquidity is needed, the Bank has established relationships with several
correspondent banks to provide short-term borrowings in the form of federal
funds purchased.
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Table
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Interest Rate Sensitivity
The banking industry has been
required to adapt to an environment in which interest rates may be volatile and
in which deposit deregulation has provided customers with the opportunity to
invest in liquid, interest rate-sensitive deposits. The banking industry has
adapted to this environment by using a process known as asset/liability (ALM)
management.
The Company remains
slightly asset sensitive and will continue its strategy to originate adjustable
rate commercial and installment loans and use investment security cash flows
and non-interest bearing and core deposits and customer repurchase agreements
to reduce the wholesale borrowings to maintain a more neutral gap position.
ALM management is
intended to provide for adequate liquidity and interest rate sensitivity by
matching interest rate-sensitive assets and liabilities and coordinating
maturities on assets and liabilities. With the exception of the majority of
residential mortgage loans, loans generally are written having terms that
provide for a readjustment of the interest rate at specified times during the
term of the loan. In addition, interest rates offered for all types of deposit
instruments are reviewed weekly and are established on a basis consistent with
funding needs and maintaining a desirable spread between cost and return.
During October 2002,
the Company entered into an interest rate swap agreement with a notional amount
of $5 million. This derivative financial instrument effectively converted fixed
interest rate obligations of outstanding junior subordinated debt instruments
to variable interest rate obligations, decreasing the asset sensitivity of its
balance sheet by more closely matching the Companys variable rate assets with
variable rate liabilities.
During 2008, the Company
entered into two interest rate swap agreements with a combined notional amount
of $15 million. These derivative financial instruments effectively converted
floating rate interest rate obligations of outstanding junior subordinated debt
instruments to fixed interest rate obligations, decreasing the asset
sensitivity of its balance sheet by more closely matching the Companys fixed
rate assets with fixed rate liabilities.
58
Table
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Item 3. Quantitative and Qualitative Disclosures
About Market Risk
There have been no
material changes in the Companys assessment of its sensitivity to market risk
since its presentation in the Annual Report on Form 10-K for the year
ended December 31, 2009 filed with the SEC.
Item 4. Controls and Procedures
The Companys management,
with the participation of the Chief Executive Officer and the Chief Financial
Officer, has evaluated the effectiveness of the design and operation of the
Companys disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated
under the Securities Exchange Act of 1934, as amended, as of March 31,
2010. Based on that evaluation, the Companys Chief Executive Officer and Chief
Financial Officer concluded, as a result of the material weakness described in
the following paragraph, that the Companys disclosure controls and procedures
were not effective as of such date.
On November 9, 2009,
the Company concluded, as a result of discussions with the staff of the
Securities and Exchange Commission, that it will amend its Annual Report on Form 10-K
for the fiscal year ended December 31, 2008 and Forms 10-Q for the
quarters ended March 31, 2009 and June 30, 2009 to revise its accounting
for certain junior subordinated debentures and the related hedges. The Company
has determined that the accounting treatment under FASB ASC 815 previously used
to report the fair value of junior subordinated debt, the fair value of the
cash flow hedges and the resultant change in value in accumulated other
comprehensive income was incorrect. The accounting treatment should have been
in accordance with FASB ASC 825 and the changes in value reported in
operations. (The Company had elected accounting treatment under FASB ASC 825
for the junior subordinated debt and therefore it was required to use the same
accounting treatment for the related cash flow hedges and did not have the
option to utilize the accounting treatment prescribed by FASB ASC 815.) This
accounting error and the corresponding restatements have resulted in managements
determination that a material weakness existed with respect to the internal
controls over financial reporting related to accounting for the fair value of
junior subordinated debt and related interest rate swaps at December 31,
2008. The material weakness was not identified until November 2009, and
continued to exist at March 31, 2009 and June 30, 2009. To remediate
this material weakness, in addition to current procedures the Company has added
a review specifically for disclosures and accounting treatment for all complex
financial instruments acquired or disposed of during each reporting period. The
material weakness described relates only to the applicable accounting treatment
to these complex financial instruments.
Except as described in
the preceding paragraph to remediate the material weakness described, there
have been no changes in the Companys internal control over financial reporting
during the first quarter of 2010 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.
59
Table
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PART II - OTHER INFORMATION
Item 1 Legal Proceedings None
Item 1A Risk Factors
There are no material
changes to the risk factors set forth in Part I, Item 1A, Risk Factors,
of the Companys Annual Report on Form 10-K for the year ended December 31,
2009. Please refer to that section for disclosures regarding the risks and
uncertainties related to the companys business.
Item 2 Unregistered Sales of Equity Securities and
Use of Proceeds
No shares of the Companys
common stock were repurchased by the Company during the three month period
ended March 31, 2010. The maximum number of common shares that may yet be
purchased under the Companys current stock repurchase program is 115,000
shares.
Item 3 Defaults Upon Senior Securities None
Item 4 [Removed and Reserved]
60
Table
of Contents
Item
5 Exhibits
Exhibit No.
|
|
Title
|
|
|
|
3.1
|
|
Articles
of Incorporation of VIST Financial Corp. (incorporated by reference to
Exhibit 3.1 to Registrants Current Report on Form 8-K filed on
March 7, 2008).
|
|
|
|
3.2
|
|
Bylaws
of VIST Financial Corp. (incorporated by reference to Exhibit 3.2 to
Registrants Current Report on Form 8-K filed on March 7, 2008).
|
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification
of Chief Executive Officer
|
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification
of Chief Financial Officer
|
|
|
|
32.1
|
|
Rule 1350
Certification of Chief Executive Officer and Chief Financial Officer
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
VIST
FINANCIAL CORP.
|
|
|
|
(Registrant)
|
|
|
|
|
|
Dated:
May 17, 2010
|
|
By
|
/s/Robert
D. Davis
|
|
|
|
|
|
|
|
|
|
Robert
D. Davis
|
|
|
|
|
President
and Chief
|
|
|
|
|
Executive
Officer
|
|
|
|
|
|
Dated:
May 17, 2010
|
|
By
|
/s/Edward
C. Barrett
|
|
|
|
|
|
|
|
|
|
Edward
C. Barrett
|
|
|
|
|
Executive
Vice President and
|
|
|
|
|
Chief
Financial Officer
|
61
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