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
June 30, 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)
Securities registered under Section 12(g) of
the Exchange Act:
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 August 06, 2010
|
COMMON STOCK ($5.00 Par
Value)
|
|
6,506,640
|
(Title of Class)
|
|
(Outstanding Shares)
|
Table of Contents
VIST FINANCIAL CORP.
Quarterly Report on Form 10-Q for
the Quarterly Period Ended June 30, 2010
Table of Contents
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)
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
25,357
|
|
$
|
18,487
|
|
Federal funds sold
|
|
7,385
|
|
8,475
|
|
Interest-bearing deposits
in banks
|
|
286
|
|
410
|
|
|
|
|
|
|
|
Total cash and cash
equivalents
|
|
33,028
|
|
27,372
|
|
|
|
|
|
|
|
Mortgage loans held for
sale
|
|
3,109
|
|
1,962
|
|
Securities available for
sale
|
|
261,292
|
|
268,030
|
|
Securities held to
maturity, fair value 2010 - $1,950; 2009 - $1,857
|
|
2,086
|
|
3,035
|
|
Federal Home Loan Bank
stock
|
|
5,715
|
|
5,715
|
|
Loans, net of allowance
for loan losses 2010 - $12,825; 2009 - $11,449
|
|
882,759
|
|
899,515
|
|
Premises and equipment,
net
|
|
5,976
|
|
6,114
|
|
Other real estate owned
|
|
5,148
|
|
5,221
|
|
Identifiable intangible
assets
|
|
4,411
|
|
4,186
|
|
Goodwill
|
|
39,999
|
|
39,982
|
|
Bank owned life insurance
|
|
19,141
|
|
18,950
|
|
FDIC prepaid deposit
insurance
|
|
4,902
|
|
5,712
|
|
Other assets
|
|
21,038
|
|
22,925
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,288,604
|
|
$
|
1,308,719
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
114,362
|
|
$
|
102,302
|
|
Interest bearing
|
|
891,210
|
|
918,596
|
|
|
|
|
|
|
|
Total
deposits
|
|
1,005,572
|
|
1,020,898
|
|
|
|
|
|
|
|
Securities sold under
agreements to repurchase
|
|
110,384
|
|
115,196
|
|
Long-term debt
|
|
10,000
|
|
20,000
|
|
Junior subordinated debt,
at fair value
|
|
19,308
|
|
19,658
|
|
Other liabilities
|
|
8,650
|
|
7,539
|
|
|
|
|
|
|
|
Total liabilities
|
|
1,153,914
|
|
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 $1,694 at June 30, 2010
and $1,908 at December 31, 2009
|
|
23,306
|
|
23,092
|
|
Common stock, $5.00 par
value; authorized 20,000,000 shares; issued:
6,517,124 shares at June 30, 2010 and 5,819,174 shares at December 31,
2009
|
|
32,586
|
|
29,096
|
|
Stock warrant
|
|
2,307
|
|
2,307
|
|
Surplus
|
|
65,466
|
|
63,744
|
|
Retained earnings
|
|
13,706
|
|
11,892
|
|
Accumulated other
comprehensive loss
|
|
(2,490
|
)
|
(4,512
|
)
|
Treasury stock: 10,484
shares at cost
|
|
(191
|
)
|
(191
|
)
|
|
|
|
|
|
|
Total
shareholders equity
|
|
134,690
|
|
125,428
|
|
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
$
|
1,288,604
|
|
$
|
1,308,719
|
|
See Notes to Unaudited
Consolidated Financial Statements.
3
Table of Contents
VIST FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share
data)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30, 2010
|
|
June 30, 2009
|
|
June 30, 2010
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
12,415
|
|
$
|
12,261
|
|
$
|
24,858
|
|
$
|
24,603
|
|
Interest on securities:
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
2,894
|
|
2,709
|
|
5,841
|
|
5,579
|
|
Tax-exempt
|
|
450
|
|
305
|
|
846
|
|
591
|
|
Dividend income
|
|
8
|
|
33
|
|
18
|
|
67
|
|
Other interest income
|
|
266
|
|
5
|
|
274
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income
|
|
16,033
|
|
15,313
|
|
31,837
|
|
30,849
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
4,238
|
|
5,172
|
|
8,740
|
|
10,326
|
|
Interest on short-term
borrowings
|
|
18
|
|
|
|
18
|
|
17
|
|
Interest on securities
sold under agreements to repurchase
|
|
1,198
|
|
1,100
|
|
2,380
|
|
2,163
|
|
Interest on long-term debt
|
|
89
|
|
412
|
|
187
|
|
917
|
|
Interest on junior
subordinated debt
|
|
344
|
|
362
|
|
689
|
|
677
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest expense
|
|
5,887
|
|
7,046
|
|
12,014
|
|
14,100
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
10,146
|
|
8,267
|
|
19,823
|
|
16,749
|
|
Provision for loan losses
|
|
2,010
|
|
4,300
|
|
4,610
|
|
5,125
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for loan losses
|
|
8,136
|
|
3,967
|
|
15,213
|
|
11,624
|
|
|
|
|
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
Customer service fees
|
|
549
|
|
596
|
|
1,132
|
|
1,254
|
|
Mortgage banking
activities
|
|
231
|
|
408
|
|
365
|
|
675
|
|
Commissions and fees from
insurance sales
|
|
3,092
|
|
3,036
|
|
6,168
|
|
5,994
|
|
Brokerage and investment
advisory commissions and fees
|
|
151
|
|
152
|
|
286
|
|
482
|
|
Earnings on bank owned
life insurance
|
|
113
|
|
108
|
|
191
|
|
184
|
|
Other commissions and fees
|
|
558
|
|
498
|
|
1,062
|
|
971
|
|
Gain on sale of equity
interest
|
|
1,875
|
|
|
|
1,875
|
|
|
|
Other income
|
|
198
|
|
169
|
|
241
|
|
653
|
|
Net realized gains on
sales of securities
|
|
194
|
|
126
|
|
286
|
|
285
|
|
Total other-than-temporary
impairment losses:
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary
impairment losses on investments
|
|
(6
|
)
|
(973
|
)
|
(946
|
)
|
(973
|
)
|
Portion of non-credit
impairment loss recognized in other comprehensive loss
|
|
(47
|
)
|
651
|
|
797
|
|
651
|
|
Net credit impairment loss
recognized in earnings
|
|
(53
|
)
|
(322
|
)
|
(149
|
)
|
(322
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
other income
|
|
6,908
|
|
4,771
|
|
11,457
|
|
10,176
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense:
|
|
|
|
|
|
|
|
|
|
Salaries and employee
benefits
|
|
5,419
|
|
5,754
|
|
10,838
|
|
11,442
|
|
Occupancy expense
|
|
1,069
|
|
881
|
|
2,217
|
|
1,950
|
|
Furniture and equipment
expense
|
|
662
|
|
634
|
|
1,286
|
|
1,240
|
|
Marketing and advertising
expense
|
|
261
|
|
335
|
|
507
|
|
605
|
|
Amortization of
identifiable intangible assets
|
|
138
|
|
171
|
|
271
|
|
342
|
|
Professional services
|
|
745
|
|
482
|
|
1,354
|
|
1,374
|
|
Outside processing
services
|
|
854
|
|
1,086
|
|
1,885
|
|
2,037
|
|
FDIC deposit and other
insurance expense
|
|
524
|
|
984
|
|
1,056
|
|
1,428
|
|
Other real estate owned
expense
|
|
1,195
|
|
292
|
|
1,692
|
|
618
|
|
Other expense
|
|
997
|
|
948
|
|
1,849
|
|
1,810
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expense
|
|
11,864
|
|
11,567
|
|
22,955
|
|
22,846
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
3,180
|
|
(2,829
|
)
|
3,715
|
|
(1,046
|
)
|
Income tax (benefit)
expense
|
|
654
|
|
(1,321
|
)
|
476
|
|
(1,069
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
2,526
|
|
(1,508
|
)
|
3,239
|
|
23
|
|
Preferred
stock dividends and discount accretion
|
|
(419
|
)
|
(413
|
)
|
(839
|
)
|
(825
|
)
|
Net
income (loss) available to common shareholders
|
|
$
|
2,107
|
|
$
|
(1,921
|
)
|
$
|
2,400
|
|
$
|
(802
|
)
|
See Notes to Unaudited Consolidated
Financial Statements.
4
Table of Contents
VIST FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share
data)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30, 2010
|
|
June 30, 2009
|
|
June 30, 2010
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding
for basic earnings per common share
|
|
6,213,284
|
|
5,791,023
|
|
6,030,134
|
|
5,763,648
|
|
Basic earnings (loss) per
common share
|
|
$
|
0.34
|
|
$
|
(0.33
|
)
|
$
|
0.40
|
|
$
|
(0.14
|
)
|
Average shares outstanding
for diluted earnings per common share
|
|
6,268,026
|
|
5,791,023
|
|
6,076,656
|
|
5,763,648
|
|
Diluted earnings (loss)
per common share
|
|
$
|
0.34
|
|
$
|
(0.33
|
)
|
$
|
0.40
|
|
$
|
(0.14
|
)
|
Cash dividends declared
per actual common shares outstanding
|
|
$
|
0.05
|
|
$
|
0.10
|
|
$
|
0.10
|
|
$
|
0.20
|
|
See Notes to Unaudited
Consolidated Financial Statements.
5
Table of Contents
VIST FINANCIAL CORP. AND
SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Six Months Ended June 30, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,239
|
|
|
|
|
|
3,239
|
|
Change in net unrealized
gains on
securities available for sale, net of tax
effect and
reclassification
adjustments for losses
and
impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,583
|
|
|
|
2,583
|
|
Change in net unrealized
losses on
securities held to maturity, net of tax
effect and
reclassification
adjustments for losses
and
impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(561
|
)
|
|
|
(561
|
)
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
644,000
|
|
3,220
|
|
|
|
1,611
|
|
|
|
|
|
|
|
4,831
|
|
Preferred stock discount
accretion
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214
|
|
Stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(214
|
)
|
|
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock issued in
connection with
employee
compensation
|
|
|
|
|
|
1,000
|
|
5
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
Common stock issued in
connection with
directors
compensation
|
|
|
|
|
|
48,141
|
|
241
|
|
|
|
24
|
|
|
|
|
|
|
|
265
|
|
Common stock issued in
connection with
director
and employee stock purchase plans
|
|
|
|
|
|
4,809
|
|
24
|
|
|
|
16
|
|
|
|
|
|
|
|
40
|
|
Compensation expense
related to stock options
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock cash
dividends paid ($0.10 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(586
|
)
|
|
|
|
|
(586
|
)
|
Preferred stock cash
dividends paid or declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(625
|
)
|
|
|
|
|
(625
|
)
|
Balance,
June 30, 2010
|
|
25,000
|
|
$
|
23,306
|
|
6,517,124
|
|
$
|
32,586
|
|
$
|
2,307
|
|
$
|
65,466
|
|
$
|
13,706
|
|
$
|
(2,490
|
)
|
$
|
(191
|
)
|
$
|
134,690
|
|
6
Table of Contents
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
23
|
|
Change in net unrealized
gains (losses) on
securities
available for sale, net of tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(911
|
)
|
|
|
(911
|
)
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock discount
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
199
|
|
Stock Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(199
|
)
|
|
|
|
|
(199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
8,012
|
|
41
|
|
|
|
20
|
|
|
|
|
|
|
|
61
|
|
Compensation expense
related to stock options
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock cash
dividends paid ($0.20 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,151
|
)
|
|
|
|
|
(1,151
|
)
|
Preferred stock cash
dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(716
|
)
|
|
|
|
|
(716
|
)
|
Balance,
June 30, 2009
|
|
25,000
|
|
$
|
22,892
|
|
5,804,684
|
|
$
|
29,024
|
|
$
|
2,307
|
|
$
|
63,654
|
|
$
|
12,714
|
|
$
|
(8,745
|
)
|
$
|
(191
|
)
|
$
|
121,655
|
|
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)
|
|
Six Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2010
|
|
2009
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
Net income
|
|
$
|
3,239
|
|
$
|
23
|
|
Adjustments to reconcile
net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
Provision for loan losses
|
|
4,610
|
|
5,125
|
|
Provision for depreciation
and amortization of premises and equipment
|
|
654
|
|
677
|
|
Amortization of
identifiable intangible assets
|
|
271
|
|
342
|
|
Deferred income taxes
(benefit)
|
|
523
|
|
(1,337
|
)
|
Director stock
compensation
|
|
265
|
|
219
|
|
Net amortization of
securities premiums and discounts
|
|
315
|
|
437
|
|
Amortization of mortgage
servicing rights
|
|
47
|
|
|
|
Decrease in mortgage
servicing rights
|
|
|
|
106
|
|
Net realized losses on
sales of other real estate owned (included in other expense)
|
|
594
|
|
9
|
|
Impairment charge on
investment securities recognized in earnings
|
|
149
|
|
322
|
|
Net realized gains on
sales of securities
|
|
(286
|
)
|
(285
|
)
|
Proceeds from sales of
loans held for sale
|
|
12,401
|
|
38,459
|
|
Net gains on sales of
loans held for sale (included in mortgage banking activities)
|
|
(319
|
)
|
(646
|
)
|
Gain on sale of equity
interest
|
|
(1,875
|
)
|
|
|
Loans originated for sale
|
|
(13,229
|
)
|
(41,418
|
)
|
Earnings on bank owned
life insurance
|
|
(191
|
)
|
(184
|
)
|
Compensation expense
related to stock options
|
|
76
|
|
77
|
|
Net change in fair value
of junior subordinated debt
|
|
(350
|
)
|
596
|
|
Net change in fair value
of interest rate swaps
|
|
154
|
|
(278
|
)
|
Decrease (increase) in
accrued interest receivable and other assets
|
|
2,447
|
|
(2,045
|
)
|
Increase (decrease) in
accrued interest payable and other liabilities
|
|
959
|
|
(2,096
|
)
|
|
|
|
|
|
|
Net Cash
Provided by (Used In) Operating Activities
|
|
10,454
|
|
(1,897
|
)
|
|
|
|
|
|
|
Cash Flow
From Investing Activities
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
Purchases - available for
sale
|
|
(63,491
|
)
|
(87,215
|
)
|
Principal repayments,
maturities and calls - available for sale
|
|
39,626
|
|
41,847
|
|
Proceeds from sales -
available for sale
|
|
34,436
|
|
41,073
|
|
Net decrease (increase) in
loans receivable
|
|
8,328
|
|
(4,126
|
)
|
Sales of other real estate
owned
|
|
3,297
|
|
|
|
Purchases of premises and
equipment
|
|
(573
|
)
|
(763
|
)
|
Disposals of premises and
equipment
|
|
57
|
|
269
|
|
Net Cash
Provided by (Used In) Investing Activities
|
|
21,680
|
|
(8,915
|
)
|
|
|
|
|
|
|
|
|
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)
|
|
Six Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2010
|
|
2009
|
|
Cash Flow
From Financing Activities
|
|
|
|
|
|
Net (decrease) increase in
deposits
|
|
(15,326
|
)
|
97,314
|
|
Net decrease in federal
funds purchased
|
|
|
|
(53,424
|
)
|
Net (decrease) increase in
short-term securities sold under agreements to repurchase
|
|
(4,812
|
)
|
4,789
|
|
Repayments of long-term
debt
|
|
(10,000
|
)
|
(15,000
|
)
|
Issuance of common stock
|
|
4,831
|
|
|
|
Reissuance of treasury
stock
|
|
|
|
424
|
|
Proceeds from the exercise
of stock options and stock purchase plans
|
|
40
|
|
61
|
|
Cash dividends paid on
preferred and common stock
|
|
(1,211
|
)
|
(1,659
|
)
|
Net Cash
(Used In) Provided By Financing Activities
|
|
(26,478
|
)
|
32,505
|
|
|
|
|
|
|
|
Increase in cash and cash
equivalents
|
|
5,656
|
|
21,693
|
|
Cash and
Cash Equivalents:
|
|
|
|
|
|
January 1
|
|
27,372
|
|
19,284
|
|
June 30
|
|
$
|
33,028
|
|
$
|
40,977
|
|
|
|
|
|
|
|
Cash
Payments For:
|
|
|
|
|
|
Interest
|
|
$
|
12,304
|
|
$
|
14,512
|
|
Taxes
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Supplemental
Schedule of Non-cash Investing and Financing Activities
|
|
|
|
|
|
Transfer of loans
receivable to real estate owned
|
|
$
|
3,818
|
|
$
|
1,975
|
|
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.
The results of operations for the three and six month
periods ended June 30, 2010 are not necessarily indicative of the results to be
expected for the full year. For the
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 June 30, 2010 through the date these financial statements were
issued.
Events or transactions that
were deemed to be of a material nature and provide evidence about conditions
that did exist at June 30, 2010 have been recognized in these consolidated
financial statements. As of June 30,
2010, there were no subsequent events or conditions to disclose that occurred
between the date of the financial statements and the date that they were
issued.
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
date for conduit debt obligors. That amendment became effective for the quarter
ending after June 15, 2010 so no significant impact to amounts reported in the
consolidated financial position or results of operations resulted 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.
10
Table of Contents
VIST
FINANCIAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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.
In July 2010, the FASB
issued (ASU) 2010-20 Receivables (Topic 310) covering disclosures about the
credit quality of financing receivables and the allowance for credit losses.
This Update is intended to provide additional information and greater
transparency to assist financial statement users in assessing an entitys credit
risk exposures and evaluating the adequacy of its allowance for credit losses.
The Update requires increased disclosures on the nature of the credit risk
inherent in the entitys portfolio of financing receivables, how that risk is
analyzed and assessed in arriving at the allowance for credit losses and the
changes and reasons for those changes in the allowance for credit losses.
Entities will need to provide a rollforward schedule of the allowance for
credit losses for the reporting period with ending balances further
disaggregated on the basis of impairment methods, the related recorded
investments in financing receivables, the nonaccrual status of financing
receivables by class and the impaired financing receivables by class. The
Update will also require additional disclosures on credit quality indicators of
financing receivables, the aging of past due financing receivables by class,
the nature and extent of troubled debt restructurings by class with their
effect on the allowance for credit losses, the nature and extent of financing
receivables modified as trouble debt restructurings by class for the past 12
months that defaulted during the reporting period and significant purchases and
sales of financing receivables during the reporting period.
The amendments in this Update are effective for public entities for
interim and annual reporting periods ending on or after December 15, 2010. The
amendments in this Update encourage, but do not require, comparative
disclosures for earlier reporting periods that ended before initial
adoption. No significant impact to
amounts reported in the consolidated financial position or results of
operations are expected from the adoption of ASU 2010-20.
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
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in thousands)
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,526
|
|
$
|
(1,508
|
)
|
$
|
3,239
|
|
$
|
23
|
|
Less: preferred stock
dividends
|
|
(313
|
)
|
(313
|
)
|
(625
|
)
|
(626
|
)
|
Less: preferred stock
discount accretion
|
|
(106
|
)
|
(100
|
)
|
(214
|
)
|
(199
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
available to common shareholders
|
|
$
|
2,107
|
|
$
|
(1,921
|
)
|
$
|
2,400
|
|
$
|
(802
|
)
|
|
|
|
|
|
|
|
|
|
|
Average common shares
outstanding
|
|
6,213,284
|
|
5,791,023
|
|
6,030,134
|
|
5,763,648
|
|
Effect of dilutive stock
options
|
|
54,742
|
|
|
|
46,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common
shares used to calculate
diluted
earnings per common share
|
|
6,268,026
|
|
5,791,023
|
|
6,076,656
|
|
5,763,648
|
|
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 and six
months ended June 30, 2010, weighted anti-dilutive common stock options totaled
589,520 and 594,933 respectively. For
the three and six months ended June 30, 2009, weighted anti-dilutive common
stock options totaled 661,188 and 666,412 respectively.
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 June 30, 2010 and
December 31, 2009, 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 June 30, 2010 and December 31, 2009, 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 June 30, 2010 and December 31, 2009, 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 six months ended June 30, 2010 and
2009 was approximately $76,000 and $77,000, respectively. Total stock-based compensation expense, net
of related tax effects, was approximately $50,000 and $51,000 for the six
months ended June, 2010 and 2009, respectively.
The Companys total stock-based compensation expense for the three months
ended June 30, 2010 and 2009 was approximately $39,000 and $56,000,
respectively. Total stock-based
compensation expense, net of related tax effects, was approximately $26,000 and
$37,000 for the three months ended June 30, 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 and six months ended June 30, 2010 and 2009. Total unrecognized compensation costs related
to non-vested stock options at June 30, 2010 and 2009 were approximately
$197,000 and $235,000, respectively.
Stock option transactions
under the Plans for the six months ended June 30, 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
|
|
16,950
|
|
5.48
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Expired
|
|
(10,717
|
)
|
15.07
|
|
|
|
|
|
Forfeited
|
|
(8,578
|
)
|
10.12
|
|
|
|
|
|
Outstanding as of June 30,
2010
|
|
778,184
|
|
$
|
14.60
|
|
$
|
491,794
|
|
7.0
|
|
Exercisable as of June 30,
2010
|
|
490,586
|
|
$
|
18.81
|
|
$
|
|
|
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 June 30, 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 six month period ended June 30, 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
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Dividend yield
|
|
4.61
|
%
|
5.32
|
%
|
Expected life
|
|
7 years
|
|
7 years
|
|
Expected volatility
|
|
25.01
|
%
|
24.92
|
%
|
Risk-free interest rate
|
|
3.35
|
%
|
3.00
|
%
|
Weighted average fair
value of options granted
|
|
$
|
0.94
|
|
$
|
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 and six months
ended June 30, 2010 and 2009:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
2,526
|
|
$
|
(1,508
|
)
|
$
|
3,239
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(loss):
|
|
|
|
|
|
|
|
|
|
Change in unrealized
holding gains on
available
for sale securities
|
|
3,367
|
|
(1,493
|
)
|
4,146
|
|
(1,417
|
)
|
Change in non-credit
impairment losses on
available
for sale securities
|
|
(7
|
)
|
|
|
(4
|
)
|
|
|
Reclassification
adjustment for credit related impairment
on available for sale securities realized in income
|
|
43
|
|
322
|
|
58
|
|
322
|
|
Change in non-credit
impairment losses on
held
to maturity securities
|
|
(2
|
)
|
|
|
(942
|
)
|
|
|
Reclassification
adjustment for credit related impairment
on held to maturity securities realized in income
|
|
10
|
|
|
|
91
|
|
|
|
Reclassification
adjustment for investment gains realized in income
|
|
(194
|
)
|
(126
|
)
|
(286
|
)
|
(285
|
)
|
Net unrealized gains
(losses)
|
|
3,217
|
|
(1,297
|
)
|
3,063
|
|
(1,380
|
)
|
Income tax effect
|
|
(1,094
|
)
|
441
|
|
(1,041
|
)
|
469
|
|
Other comprehensive income
(losses)
|
|
2,123
|
|
(856
|
)
|
2,022
|
|
(911
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income (loss)
|
|
$
|
4,649
|
|
$
|
(2,364
|
)
|
$
|
5,261
|
|
$
|
(888
|
)
|
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 June 30, 2010. Installments were paid as requested. The net carrying value of the Midland
Corporate Tax Credit XVI Limited Partnership for the period ended June 30, 2010
and 2009 was $3.1 million and $3.4 million, respectively. Included in other expenses for the three and
six months ended June 30, 2010 was the Banks portion of the partnerships net
operating loss of $83,000 and $165,000, respectively. Included in other expenses for the three and
six months ended June 30, 2009 was the Banks portion of the partnerships net
operating loss of $83,000 and $161,000, respectively. 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-
14
Table of Contents
VIST
FINANCIAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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.
The following table shows
the Companys reportable business segments for the three and six months ended
June 30, 2010 and 2009:
|
|
Banking and
Financial
Services
|
|
Mortgage
Banking
|
|
Insurance
Services
|
|
Investment
Services
|
|
Total
|
|
|
|
(Dollar amounts in thousands)
|
|
Three
months ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and
other income
from
external sources
|
|
$
|
13,007
|
|
$
|
829
|
|
$
|
3,052
|
|
$
|
166
|
|
$
|
17,054
|
|
Income (Loss) before income
taxes
|
|
2,134
|
|
607
|
|
510
|
|
(71
|
)
|
3,180
|
|
Total Assets
|
|
1,187,813
|
|
81,248
|
|
18,205
|
|
1,338
|
|
1,288,604
|
|
Purchases of premises and
equipment
|
|
121
|
|
|
|
2
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and
other income
from
external sources
|
|
$
|
8,858
|
|
$
|
994
|
|
$
|
3,015
|
|
$
|
171
|
|
$
|
13,038
|
|
(Loss) income before
income taxes
|
|
(3,851
|
)
|
601
|
|
464
|
|
(43
|
)
|
(2,829
|
)
|
Total Assets
|
|
1,159,210
|
|
79,455
|
|
17,589
|
|
1,139
|
|
1,257,393
|
|
Purchases of premises and
equipment
|
|
136
|
|
|
|
140
|
|
14
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and
other income
from
external sources
|
|
$
|
23,321
|
|
$
|
1,509
|
|
$
|
6,129
|
|
$
|
321
|
|
$
|
31,280
|
|
Income (Loss) before
income taxes
|
|
1,762
|
|
1,012
|
|
1,077
|
|
(136
|
)
|
3,715
|
|
Total Assets
|
|
1,187,813
|
|
81,248
|
|
18,205
|
|
1,338
|
|
1,288,604
|
|
Purchases of premises and
equipment
|
|
303
|
|
6
|
|
237
|
|
27
|
|
573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and
other income
from
external sources
|
|
$
|
18,013
|
|
$
|
1,860
|
|
$
|
6,535
|
|
$
|
517
|
|
$
|
26,925
|
|
(Loss) income before
income taxes
|
|
(3,318
|
)
|
1,096
|
|
1,162
|
|
14
|
|
(1,046
|
)
|
Total Assets
|
|
1,159,210
|
|
79,455
|
|
17,589
|
|
1,139
|
|
1,257,393
|
|
Purchases of premises and
equipment
|
|
608
|
|
|
|
141
|
|
14
|
|
763
|
|
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.
15
Table of Contents
VIST
FINANCIAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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 is 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.
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 June 30, 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 June 30, 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:
|
|
|
|
|
|
|
|
|
|
Securities
Available For Sale
|
|
|
|
|
|
|
|
|
|
U.S. Government agency
securities
|
|
$
|
|
|
$
|
16,192
|
|
$
|
|
|
$
|
16,192
|
|
Agency residential
mortgage-backed debt securities
|
|
|
|
190,159
|
|
|
|
190,159
|
|
Non-Agency collateralized
mortgage obligations
|
|
|
|
10,978
|
|
|
|
10,978
|
|
Obligations of states and
political subdivisions
|
|
|
|
40,419
|
|
|
|
40,419
|
|
Trust preferred securities
- single issuer
|
|
|
|
461
|
|
|
|
461
|
|
Trust preferred securities
- pooled
|
|
|
|
427
|
|
|
|
427
|
|
Corporate and other debt
securities
|
|
|
|
121
|
|
|
|
121
|
|
Equity securities
|
|
1,527
|
|
1,008
|
|
|
|
2,535
|
|
|
|
$
|
1,527
|
|
$
|
259,765
|
|
$
|
|
|
$
|
261,292
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Junior subordinated debt
|
|
$
|
|
|
$
|
|
|
$
|
19,308
|
|
$
|
19,308
|
|
Interest rate swaps
(included in other liabilities)
|
|
|
|
|
|
265
|
|
265
|
|
|
|
$
|
|
|
$
|
|
|
$
|
19,573
|
|
$
|
19,573
|
|
|
|
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 June 30, 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 June 30, 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
|
|
$
|
|
|
$
|
|
|
$
|
12,537
|
|
$
|
12,537
|
|
OREO
|
|
|
|
|
|
5,148
|
|
5,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
Six months ended June 30, 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
|
|
$
|
350
|
|
$
|
|
|
$
|
|
|
$
|
19,308
|
|
Interest rate swaps
|
|
111
|
|
(154
|
)
|
|
|
|
|
265
|
|
|
|
$
|
19,769
|
|
$
|
196
|
|
$
|
|
|
$
|
|
|
$
|
19,573
|
|
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 or six months ended June 30, 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.
19
Table of Contents
VIST
FINANCIAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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.
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 $16.4 million at June
30, 2010 compared to $18.9 million at December 31, 2009. At June 30, 2010 and at December 31, 2009,
the related allowance for loan losses associated with those loans was $3.9
million and $3.8 million respectively. The $2.9 million decrease in
non-performing loans from December 31, 2009 to June 30, 2010 is primarily due
to pay-downs and charge-offs of non-performing commercial real estate
loans. As of June 30, 2010, 68.0% 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 32.0% of impaired loans were in
process of being evaluated at June 30, 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 $725,000 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.
Bank owned life insurance:
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 June 30,
|
|
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
|
|
$
|
33,028
|
|
$
|
33,028
|
|
$
|
27,372
|
|
$
|
27,372
|
|
Mortgage loans held for
sale
|
|
3,109
|
|
3,109
|
|
1,962
|
|
1,962
|
|
Securities available for
sale
|
|
261,292
|
|
261,292
|
|
268,030
|
|
268,030
|
|
Securities held to
maturity
|
|
2,086
|
|
1,950
|
|
3,035
|
|
1,857
|
|
Federal Home Loan Bank
stock
|
|
5,715
|
|
5,715
|
|
5,715
|
|
5,715
|
|
Loans, net
|
|
882,759
|
|
898,014
|
|
899,515
|
|
903,868
|
|
Mortgage servicing rights
|
|
98
|
|
98
|
|
145
|
|
145
|
|
Cash surrender value of
life insurance policies
|
|
19,141
|
|
19,141
|
|
18,950
|
|
18,950
|
|
Accrued interest
receivable
|
|
4,741
|
|
4,741
|
|
5,004
|
|
5,004
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
1,005,572
|
|
1,012,700
|
|
1,020,898
|
|
1,021,298
|
|
Securities sold under
agreements to repurchase
|
|
110,384
|
|
115,539
|
|
115,196
|
|
113,638
|
|
Federal funds purchased
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
10,000
|
|
10,149
|
|
20,000
|
|
20,300
|
|
Junior subordinated debt
|
|
19,308
|
|
19,308
|
|
19,658
|
|
19,658
|
|
Interest rate swap
|
|
265
|
|
265
|
|
111
|
|
111
|
|
Accrued interest payable
|
|
2,452
|
|
2,452
|
|
2,742
|
|
2,742
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance Sheet
Financial Instruments:
|
|
|
|
|
|
|
|
|
|
Commitments to extend
credit
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2010 and December 31, 2009:
|
|
June 30, 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
|
|
$
|
15,704
|
|
$
|
501
|
|
$
|
(13
|
)
|
$
|
16,192
|
|
$
|
23,087
|
|
$
|
160
|
|
$
|
(350
|
)
|
$
|
22,897
|
|
Agency residential mortgage-backed debt securities
|
|
182,843
|
|
7,546
|
|
(230
|
)
|
190,159
|
|
183,104
|
|
5,518
|
|
(719
|
)
|
187,903
|
|
Non-Agency collateralized mortgage obligations
|
|
15,240
|
|
1
|
|
(4,263
|
)
|
10,978
|
|
22,970
|
|
115
|
|
(5,255
|
)
|
17,830
|
|
Obligations of states and political subdivisions
|
|
40,544
|
|
310
|
|
(435
|
)
|
40,419
|
|
33,436
|
|
450
|
|
(246
|
)
|
33,640
|
|
Trust preferred securities - single issuer
|
|
500
|
|
|
|
(39
|
)
|
461
|
|
500
|
|
|
|
(80
|
)
|
420
|
|
Trust preferred securities - pooled
|
|
5,895
|
|
13
|
|
(5,481
|
)
|
427
|
|
5,957
|
|
13
|
|
(5,474
|
)
|
496
|
|
Corporate and other debt securities
|
|
143
|
|
|
|
(22
|
)
|
121
|
|
2,444
|
|
1
|
|
(107
|
)
|
2,338
|
|
Equity securities
|
|
3,345
|
|
31
|
|
(841
|
)
|
2,535
|
|
3,368
|
|
13
|
|
(875
|
)
|
2,506
|
|
Total investment securities
available for sale
|
|
$
|
264,214
|
|
$
|
8,402
|
|
$
|
(11,324
|
)
|
$
|
261,292
|
|
$
|
274,866
|
|
$
|
6,270
|
|
$
|
(13,106
|
)
|
$
|
268,030
|
|
22
Table of Contents
VIST
FINANCIAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
|
|
June 30, 2010
|
|
Securities Held To Maturity
|
|
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
|
|
$
|
2,008
|
|
$
|
|
|
$
|
2,008
|
|
$
|
3
|
|
$
|
(139
|
)
|
$
|
1,872
|
|
Trust preferred securities
- pooled
|
|
929
|
|
(851
|
)
|
78
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment
securities held to maturity
|
|
$
|
2,937
|
|
$
|
(851
|
)
|
$
|
2,086
|
|
$
|
3
|
|
$
|
(139
|
)
|
$
|
1,950
|
|
|
|
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 June 30, 2010 and December 31, 2009
were as follows:
23
Table of Contents
VIST
FINANCIAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
|
|
June 30, 2010
|
|
|
|
Less than Twelve Months
|
|
More than Twelve Months
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Number of
|
|
Fair
|
|
Unrealized
|
|
Number of
|
|
Fair
|
|
Unrealized
|
|
Number of
|
|
Securities Available for Sale
|
|
Value
|
|
Losses
|
|
Securities
|
|
Value
|
|
Losses
|
|
Securities
|
|
Value
|
|
Losses
|
|
Securities
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency securities
|
|
$
|
4,484
|
|
$
|
(13
|
)
|
2
|
|
$
|
|
|
$
|
|
|
|
|
$
|
4,484
|
|
$
|
(13
|
)
|
2
|
|
Agency residential mortgage-backed debt securities
|
|
14,551
|
|
(197
|
)
|
5
|
|
2,608
|
|
(33
|
)
|
2
|
|
17,159
|
|
(230
|
)
|
7
|
|
Non-Agency collateralized mortgage obligations
|
|
|
|
|
|
|
|
8,258
|
|
(4,263
|
)
|
8
|
|
8,258
|
|
(4,263
|
)
|
8
|
|
Obligations of states and political subdivisions
|
|
20,769
|
|
(396
|
)
|
25
|
|
681
|
|
(39
|
)
|
1
|
|
21,450
|
|
(435
|
)
|
26
|
|
Trust preferred securities - single issuer
|
|
|
|
|
|
|
|
461
|
|
(39
|
)
|
1
|
|
461
|
|
(39
|
)
|
1
|
|
Trust preferred securities - pooled
|
|
|
|
|
|
|
|
414
|
|
(5,481
|
)
|
8
|
|
414
|
|
(5,481
|
)
|
8
|
|
Corporate and other debt securities
|
|
|
|
|
|
|
|
121
|
|
(22
|
)
|
1
|
|
121
|
|
(22
|
)
|
1
|
|
Equity securities
|
|
225
|
|
(64
|
)
|
2
|
|
739
|
|
(777
|
)
|
21
|
|
964
|
|
(841
|
)
|
23
|
|
Total investment securities
available for sale
|
|
$
|
40,029
|
|
$
|
(670
|
)
|
34
|
|
$
|
13,282
|
|
$
|
(10,654
|
)
|
42
|
|
$
|
53,311
|
|
$
|
(11,324
|
)
|
76
|
|
|
|
June 30, 2010
|
|
|
|
Less than Twelve Months
|
|
More than Twelve Months
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Number of
|
|
Fair
|
|
Unrealized
|
|
Number of
|
|
Fair
|
|
Unrealized
|
|
Number of
|
|
Securities Held To Maturity
|
|
Value
|
|
Losses
|
|
Securities
|
|
Value
|
|
Losses
|
|
Securities
|
|
Value
|
|
Losses
|
|
Securities
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities - single issuer
|
|
$
|
|
|
$
|
|
|
|
|
$
|
893
|
|
$
|
(139
|
)
|
1
|
|
$
|
893
|
|
$
|
(139
|
)
|
1
|
|
Trust preferred securities - pooled
|
|
|
|
|
|
|
|
78
|
|
|
|
1
|
|
78
|
|
|
|
1
|
|
Total investment securities
held to maturity
|
|
$
|
|
|
$
|
|
|
|
|
$
|
971
|
|
$
|
(139
|
)
|
2
|
|
$
|
971
|
|
$
|
(139
|
)
|
2
|
|
|
|
December 31, 2009
|
|
|
|
Less than Twelve Months
|
|
More than Twelve Months
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Number of
|
|
Fair
|
|
Unrealized
|
|
Number of
|
|
Fair
|
|
Unrealized
|
|
Number of
|
|
Securities Available for Sale
|
|
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
|
|
|
|
December 31, 2009
|
|
|
|
Less than Twelve Months
|
|
More than Twelve Months
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Number of
|
|
Fair
|
|
Unrealized
|
|
Number of
|
|
Fair
|
|
Unrealized
|
|
Number of
|
|
Securities Held To Maturity
|
|
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 June 30, 2010, there were
34 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
June 30, 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 December
31, 2009 audited 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 June 30, 2010, the fair
value of the U. S. Government agencies and corporations bonds represented 6.2%
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 June 30, 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 June 30, 2010, federal agency residential mortgage-backed securities
and collateralized mortgage obligations represented 72.8% of the total fair
value of available for sale securities held in the investment securities
portfolio and corporate (non-agency) collateralized mortgage obligations represented
4.2% 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 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
June 30, 2010. Future evaluations of the
above mentioned factors could result in the Company recognizing an impairment
charge.
As of June 30, 2010, the
Company owned 7 corporate (non-agency) collateralized mortgage obligations in
super senior or senior tranches whose aggregate historical cost basis is
greater than estimated fair value. At
June 30, 2010, 1 non-agency CMO with
25
Table of Contents
VIST
FINANCIAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
an amortized cost basis of
$1.5 million was collateralized by commercial real estate and 6 non-agency
CMOs with an amortized cost basis of $13.7 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 June 30, 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 June 30, 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 June 30, 2010, state
and municipal obligation bonds represented 15.5% 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 June 30, 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 June 30, 2010, was 1 asset-backed security
representing 0.1% 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 96.0% 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 4.0% 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
June 30, 2010.
As of June 30, 2010, the
Company owned 2 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 $2.3 million and (b)
amortized cost of $6.8 million of pooled TRUPS of other financial institutions
with a fair value of $505,000. 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
June 30, 2010. For the three and six
months ended June 30, 2010, the Company recognized a subsequent net credit
impairment charge to earnings of $43,000 on 2 available for sale pooled TRUPS
and a subsequent net credit impairment charge to earnings of $10,000 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 and six months ended June 30,
2009, the Company recognized an initial net credit impairment charge to
earnings of $322,000 on 1 available for sale pooled 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 liabilities. Conceptually, this premise is supported by the
notion that cash generated by the collateral flows through the CDO structure
26
Table of Contents
VIST
FINANCIAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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.
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
27
Table of Contents
VIST
FINANCIAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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:
|
|
June 30, 2010
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Fair
|
|
Unrealized
|
|
Number of
|
|
|
|
Cost
|
|
Value
|
|
Gain/Losses
|
|
Securities
|
|
|
|
(Dollar amounts in thousands)
|
|
Investment grades:
|
|
|
|
|
|
|
|
|
|
BBB Rated
|
|
977
|
|
980
|
|
3
|
|
1
|
|
Not rated
|
|
1,531
|
|
1,353
|
|
(178
|
)
|
2
|
|
Total
|
|
$
|
2,508
|
|
$
|
2,333
|
|
$
|
(175
|
)
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no interest
deferrals or defaults in any of the single issuer trust preferred securities in
our investment portfolio as of June 30, 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)
June 30, 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
|
|
$
|
|
|
$
|
13
|
|
$
|
13
|
|
Ca
(Moodys)
|
|
45
|
|
$
|
208,951
|
|
$
|
21,000
|
|
$
|
628,879
|
|
$
|
65,532
|
|
33.2
|
%
|
5.0
|
%
|
0.0
|
%
|
Holding #2
|
|
Class
B-2
|
|
727
|
|
34
|
|
(693
|
)
|
CC
(Fitch)
|
|
21
|
|
106,250
|
|
|
|
247,750
|
|
33,000
|
|
42.9
|
%
|
0.0
|
%
|
0.0
|
%
|
Holding #3
|
|
Class
B
|
|
725
|
|
21
|
|
(704
|
)
|
CC
(Fitch)
|
|
21
|
|
137,100
|
|
|
|
345,500
|
|
62,650
|
|
39.7
|
%
|
0.0
|
%
|
0.0
|
%
|
Holding #4
|
|
Class
B-2
|
|
1,125
|
|
32
|
|
(1,093
|
)
|
Ca
(Moodys)
|
|
23
|
|
109,750
|
|
9,000
|
|
288,000
|
|
38,500
|
|
38.1
|
%
|
5.0
|
%
|
0.0
|
%
|
Holding #5
|
|
Class
B-3
|
|
442
|
|
15
|
|
(427
|
)
|
Ca
(Moodys)
|
|
50
|
|
146,780
|
|
5,000
|
|
601,775
|
|
53,600
|
|
24.4
|
%
|
1.1
|
%
|
0.0
|
%
|
|
|
Total
|
|
$
|
3,019
|
|
$
|
115
|
|
$
|
(2,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pooled trust preferred held to
maturity securities for which an other-than-temporary inpairment charge has
been recognized:
|
Holding #9
|
|
Mezzanine
|
|
929
|
|
78
|
|
(851
|
)
|
CC
(Fitch)
|
|
27
|
|
69,100
|
|
15,000
|
|
277,500
|
|
20,289
|
|
24.9
|
%
|
7.2
|
%
|
0.0
|
%
|
|
|
Total
|
|
$
|
929
|
|
$
|
78
|
|
$
|
(851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
162
|
|
(1,138
|
)
|
B+
(S&P)
|
|
16
|
|
$
|
17,500
|
|
$
|
15,000
|
|
$
|
193,500
|
|
$
|
108,700
|
|
9.0
|
%
|
8.5
|
%
|
18.8
|
%
|
Holding #7
|
|
Class
C
|
|
1,003
|
|
100
|
|
(903
|
)
|
CCC
(Fitch)
|
|
31
|
|
13,000
|
|
10,000
|
|
311,750
|
|
31,550
|
|
4.2
|
%
|
3.3
|
%
|
18.3
|
%
|
Holding #8
|
|
Senior
Subordinate
|
|
573
|
|
50
|
|
(523
|
)
|
Baa2
(Moodys)
|
|
6
|
|
34,000
|
|
|
|
126,000
|
|
81,000
|
|
27.0
|
%
|
0.0
|
%
|
10.7
|
%
|
|
|
Total
|
|
$
|
2,876
|
|
$
|
312
|
|
$
|
(2,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2010, were equity investments in 25 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 24 equity securities have an
average amortized cost of approximately $85,000 and an average fair value of
approximately $54,000. Testing for
other-than-temporary-impairment for equity securities is governed by FASB ASC
320-10 issued in April 2009. While
$739,000 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 six months ended June 30, 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. The Company does not consider its
equity securities to be other-than-temporarily-impaired as June 30, 2010.
As of June 30, 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 $234.7 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 June 30, 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
|
|
2,823
|
|
2,834
|
|
|
|
|
|
Due after ten years
|
|
59,963
|
|
54,786
|
|
2,937
|
|
1,950
|
|
Agency residential
mortgage-backed debt securities
|
|
182,843
|
|
190,159
|
|
|
|
|
|
Non-Agency collateralized
mortgage obligations
|
|
15,240
|
|
10,978
|
|
|
|
|
|
Equity securities
|
|
3,345
|
|
2,535
|
|
|
|
|
|
|
|
$
|
264,214
|
|
$
|
261,292
|
|
$
|
2,937
|
|
$
|
1,950
|
|
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
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
$
|
202
|
|
$
|
175
|
|
$
|
300
|
|
$
|
363
|
|
Gross losses
|
|
(8
|
)
|
(49
|
)
|
(14
|
)
|
(78
|
)
|
Net realized gains on
sales of securities
|
|
$
|
194
|
|
$
|
126
|
|
$
|
286
|
|
$
|
285
|
|
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 June 30, 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
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of
period
|
|
$
|
2,564
|
|
$
|
|
|
$
|
2,468
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
Initial credit impairments
|
|
|
|
322
|
|
81
|
|
322
|
|
Subsequent credit
impairments
|
|
53
|
|
|
|
68
|
|
|
|
Balance, end of period
|
|
$
|
2,617
|
|
$
|
322
|
|
$
|
2,617
|
|
$
|
322
|
|
Note 10. Loans
The components of loans were as follows:
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in
thousands)
|
|
Residential real estate -
1 to 4 family
|
|
$
|
162,101
|
|
$
|
169,009
|
|
Residential real estate -
multi family
|
|
45,843
|
|
38,994
|
|
Commercial
|
|
150,977
|
|
150,823
|
|
Commercial, secured by
real estate
|
|
356,645
|
|
362,376
|
|
Construction
|
|
93,800
|
|
100,713
|
|
Consumer
|
|
2,856
|
|
3,108
|
|
Home equity lines of
credit
|
|
84,347
|
|
86,916
|
|
Loans
|
|
896,569
|
|
911,939
|
|
|
|
|
|
|
|
Net deferred loan fees
|
|
(985
|
)
|
(975
|
)
|
Allowance for loan losses
|
|
(12,825
|
)
|
(11,449
|
)
|
Loans, net of allowance
for loan losses
|
|
$
|
882,759
|
|
$
|
899,515
|
|
Changes in the
allowance for loan losses were as follows:
|
|
Six Months Ended
|
|
Year Ended
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in thousands)
|
|
Balance, beginning
|
|
$
|
11,449
|
|
$
|
8,124
|
|
Provision for loan losses
|
|
4,610
|
|
8,572
|
|
Loans charged off
|
|
(3,321
|
)
|
(5,477
|
)
|
Recoveries
|
|
87
|
|
230
|
|
Balance, ending
|
|
$
|
12,825
|
|
$
|
11,449
|
|
The gross recorded investment in impaired loans not
requiring an allowance for loan losses was $5.8 million at June 30, 2010 and
$6.3 million at December 31, 2009. The
gross recorded investment in impaired loans requiring an allowance for loan
losses was $16.4 million and $18.9 million at June 30, 2010 and December 31,
2009, respectively. At June 30, 2010 and
December 31, 2009, the related allowance for loan losses associated with those
loans was $3.9 million and $3.8 million, respectively. For the six months ended June 30, 2010 and
year ended December 31, 2009, the average recorded investment in impaired loans
was $23.9 million and $18.6 million, respectively. Interest income of $37,000
was recognized on impaired loans for the six months ended June 30, 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 and six month periods ended June 30, 2010 and 2009, respectively.
On April 30, 2010, VIST Insurance purchased a client
list from KDN/Lanchester Corp for contingent payments estimated to be $513,000. Included in the purchase price was $17,000
and $496,000 of goodwill and intangible assets, respectively. The agreement between VIST Insurance and
KDN/Lanchester Corp contains a purchase price consisting of a percentage of
revenue for a three year period, after which all revenues generated from the
use of the list will revert to VIST Insurance.
As a result of this purchase, VIST Insurance expects to expand its
retail and commercial presence in southeastern Pennsylvania.
Goodwill and Other Intangible Assets
The Company has goodwill and other intangible assets
of $44.4 million at June 30, 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 six months ended
June 30, 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.
32
Table of Contents
VIST
FINANCIAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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 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
33
Table
of Contents
VIST
FINANCIAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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.
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
|
|
Additions to goodwill
during the year 2010
|
|
|
|
17
|
|
|
|
|
|
Contingent payments during
the year 2010
|
|
|
|
|
|
|
|
|
|
Balance as of June 30,
2010
|
|
$
|
27,768
|
|
$
|
11,210
|
|
$
|
1,021
|
|
$
|
39,999
|
|
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)
|
|
June 30, 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) (1)
|
|
$
|
5,301
|
|
$
|
1,356
|
|
$
|
4,805
|
|
$
|
1,232
|
|
Employment contracts (7
year weighted average useful life)
|
|
1,135
|
|
1,112
|
|
1,135
|
|
1,102
|
|
Assets under management
(20 year weighted average useful life)
|
|
184
|
|
72
|
|
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
|
|
1,521
|
|
1,852
|
|
1,388
|
|
Total
|
|
$
|
8,668
|
|
$
|
4,257
|
|
$
|
8,172
|
|
$
|
3,986
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
Amortization Expense:
|
|
|
|
|
|
|
|
|
|
For the six months ended
June 30, 2010
|
|
$
|
271
|
|
|
|
|
|
|
|
For the six months ended
June 30, 2009
|
|
$
|
343
|
|
|
|
|
|
|
|
(1)
Included in the gross carrying amount for the period ended June 30, 2010
was $496,000 related to the purchase of KDN/Lanchester Corp.
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 June 30, 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% (3.80% at June 30, 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 June 30, 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% (3.80% at June 30, 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
35
Table
of Contents
VIST
FINANCIAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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.
Note 13. Sale of Equity Interest
During the second quarter of
2010 a gain of $1,875,000 was recognized on the sale of a 25% equity interest
in First HSA, LLC related to the transfer of approximately $89,000,000 of
Health Savings Account (HSA) deposits.
Note 14. 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 June 30, 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 June 30, 2010, that the Company and the Bank meet all minimum capital
adequacy requirements to which they are subject.
As of June 30, 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:
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Leverage ratio
|
|
8.45
|
%
|
8.36
|
%
|
Tier I risk-based capital
ratio
|
|
11.72
|
%
|
10.65
|
%
|
Total risk-based capital
ratio
|
|
12.97
|
%
|
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
36
Table
of Contents
VIST
FINANCIAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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.
On April 21, 2010, the Company
entered into separate stock purchase agreements with two institutional
investors relating to the sale of an aggregate of 644,000 shares of the
Companys authorized but unissued common stock, par value $5.00 per share
(Common Stock), at a purchase price of $8.00 per share. The Company completed the issuance of $4.8
million of common stock, net of related offering costs, on May 12, 2010.
As a result of the sale of
the 644,000 shares of the Companys common stock on May 12, 2010 at a greater
than 10% discount to the market price on the last trading day preceding the
date of the agreement to sell such shares, the Warrant issued to Treasury
adjusted automatically by its terms so that the Warrant now has an exercise
price of $10.19 and the number of shares of common stock into which the Warrant
is exercisable is 367,982.
Federal and state banking
regulations place certain restrictions on dividends paid and loans or advances
made by the Bank to the Company. At June
30, 2010, the Bank had approximately $2.6 million available for payment of
dividends to the Company. 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 June 30, 2010 and at December
31, 2009, the Bank had a $1.3 million loan outstanding to VIST Insurance.
As of April 27, 2010, the
Company had declared a $0.05 per share cash dividend for common shareholders of
record on May 3, 2010, payable May 14, 2010.
For the six months ended
June 30, 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 $839,000.
Note 15. 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:
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in
thousands)
|
|
Commitments to extend
credit:
|
|
|
|
|
|
Loan origination
commitments
|
|
$
|
60,128
|
|
$
|
32,846
|
|
Unused home equity lines
of credit
|
|
38,808
|
|
44,091
|
|
Unused business lines of
credit
|
|
160,294
|
|
149,032
|
|
Total commitments to
extend credit
|
|
$
|
259,230
|
|
$
|
225,969
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
$
|
11,073
|
|
$
|
11,998
|
|
37
Table of
Contents
VIST
FINANCIAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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 June 30, 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 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 June 30, 2010 and
December 31, 2009, the estimated fair value of the junior subordinated debt was
$19.308 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 June 30, 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 June 30,
2010 and December 31, 2009, the estimated fair value of the interest rate swap
agreements was $265,000 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
38
Table
of Contents
VIST
FINANCIAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
was $102,000 and, at June 30, 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
|
|
|
|
June 30, 2010
|
|
December 31, 2009
|
|
Derivatives Not Designated as
Hedging
Instruments under FASB ASC 815:
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
|
|
(Dollar amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
contracts
|
|
Other liabilities
|
|
$
|
265
|
|
Other liabilities
|
|
$
|
111
|
|
Interest rate cap (matured
March 2010)
|
|
Other liabilities
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
265
|
|
|
|
$
|
111
|
|
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 Six Months Ended
|
|
Derivatives Not Designated as
Hedging
Instruments under FASB ASC 815:
|
|
Recognized in Income on
Derivative
|
|
June 30,
2010
|
|
June 30,
2009
|
|
June 30,
2010
|
|
June 30,
2009
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
contracts
|
|
Other income
|
|
$
|
(201
|
)
|
$
|
(77
|
)
|
$
|
(154
|
)
|
$
|
(595
|
)
|
Interest rate cap
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
(201
|
)
|
$
|
(77
|
)
|
$
|
(154
|
)
|
$
|
(595
|
)
|
During the six month periods ended June 30, 2010 and 2009,
the Company had interest receivable under the interest rate swap agreements of
$28,000 and $17,000, respectively, which was recorded as a decrease of interest
expense on the trust preferred securities.
39
Table of Contents
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 June 30, 2010, the Company had
consolidated total assets of $1.3 billion, consolidated total deposits of $1.0
billion, consolidated total shareholders equity of $134.7 million, and
employed 289 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 six 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 and the potential effects of the recently enacted Dodd-Frank
Wall Street Reform and Consumer Protection Act;
·
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 of
Contents
·
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 June
30, 2010 was $2.5 million as compared to a net loss of $1.5 million for the
same period in 2009. Basic and diluted
net income available to common shareholders per common share for the second quarter
of 2010 were $.34 and $.34, respectively, compared to basic and diluted net
loss to common shareholders per common share of $.33 and $.33, respectively,
for the same period of 2009. Net income
for the Company for the six months ended June 30, 2010 was $3.2 million as
compared to net income of $23,000 for the same period in 2009. Basic and diluted net income available to
common shareholders per common share for the six months ended June 30, 2010
were $.40 and $.40, respectively, compared to basic and diluted net loss
available to common shareholders per common share of $.14 and $.14,
respectively, for the same period of 2009.
Included in earnings for the three months ended June 30, 2010 were
pretax other-than-temporary impairment charges on available for sale and held
to maturity investment securities of $53,000. Included in earnings for the six
months ended June 30, 2010 were pretax other-than-temporary impairment charges
on available for sale and held to maturity investment securities of $149,000.
The following are the key ratios for the Company as of
or for the:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
(annualized)
|
|
0.74
|
%
|
-0.48
|
%
|
0.49
|
%
|
0.00
|
%
|
Return on average
shareholders equity (annualized)
|
|
7.77
|
%
|
-4.81
|
%
|
5.10
|
%
|
0.04
|
%
|
Common dividend payout
ratio
|
|
14.75
|
%
|
-29.01
|
%
|
25.13
|
%
|
-143.91
|
%
|
Average shareholders
equity to average assets
|
|
9.56
|
%
|
9.99
|
%
|
9.52
|
%
|
10.30
|
%
|
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
June 30, 2010 was $10.7 million, an increase of $2.0 million, or 22.5%,
compared to the $8.7 million reported for the same period in 2009. FTE net interest income for the six months
ended June 30, 2010 was $20.8 million, an increase of $3.2 million, or 18.3%,
compared to the $17.6 million reported for the same period in 2009. The FTE net interest margin increased to
3.43% for the second quarter of 2010 from 3.05% for the same period in
2009. The FTE net interest margin
increased to 3.42% for the first six months of 2010 from 3.12% for the same
period in 2009.
The following summarizes net interest margin
information:
42
Table of Contents
|
|
Three months ended June 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
%
Rate
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
%
Rate
|
|
|
|
(Dollar amounts in
thousands)
|
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: (1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
716,289
|
|
$
|
10,400
|
|
5.74
|
|
$
|
699,919
|
|
$
|
9,946
|
|
5.62
|
|
Mortgage
|
|
51,301
|
|
661
|
|
5.15
|
|
49,622
|
|
685
|
|
5.52
|
|
Consumer
|
|
126,218
|
|
1,625
|
|
5.17
|
|
141,335
|
|
1,884
|
|
5.35
|
|
Investments (2)
|
|
273,600
|
|
3,586
|
|
5.24
|
|
239,876
|
|
3,219
|
|
5.37
|
|
Federal funds sold
|
|
6,772
|
|
2
|
|
0.14
|
|
13,298
|
|
5
|
|
0.17
|
|
Other short-term
investments
|
|
70,347
|
|
264
|
|
1.50
|
|
363
|
|
|
|
0.15
|
|
Total interest-earning
assets
|
|
$
|
1,244,527
|
|
$
|
16,538
|
|
5.26
|
|
$
|
1,144,413
|
|
$
|
15,739
|
|
5.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction accounts
|
|
$
|
535,200
|
|
$
|
1,531
|
|
1.15
|
|
$
|
351,272
|
|
$
|
1,302
|
|
1.49
|
|
Certificates of deposit
|
|
425,298
|
|
2,707
|
|
2.56
|
|
479,449
|
|
3,869
|
|
3.23
|
|
Securities sold under
agreement to repurchase
|
|
110,137
|
|
1,198
|
|
4.30
|
|
125,003
|
|
1,100
|
|
3.48
|
|
Short-term borrowings
|
|
14,620
|
|
18
|
|
0.50
|
|
253
|
|
|
|
0.00
|
|
Long-term borrowings
|
|
10,000
|
|
89
|
|
3.53
|
|
41,925
|
|
413
|
|
3.90
|
|
Junior subordinated debt
|
|
19,710
|
|
344
|
|
6.99
|
|
18,953
|
|
362
|
|
7.66
|
|
Total interest-bearing
liabilities
|
|
1,114,965
|
|
5,887
|
|
2.12
|
|
1,016,855
|
|
7,046
|
|
2.78
|
|
Noninterest-bearing
deposits
|
|
110,944
|
|
|
|
|
|
106,362
|
|
|
|
|
|
Total cost of funds
|
|
$
|
1,225,909
|
|
5,887
|
|
1.93
|
|
$
|
1,123,217
|
|
7,046
|
|
2.52
|
|
Net interest margin (fully
taxable equivalent)
|
|
|
|
$
|
10,651
|
|
3.43
|
|
|
|
$
|
8,693
|
|
3.05
|
|
(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%.
43
Table of Contents
|
|
Six months ended June 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
%
Rate
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
%
Rate
|
|
|
|
(Dollar amounts in
thousands)
|
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: (1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
724,631
|
|
$
|
20,758
|
|
5.70
|
|
$
|
699,717
|
|
$
|
19,885
|
|
5.66
|
|
Mortgage
|
|
50,044
|
|
1,324
|
|
5.29
|
|
50,160
|
|
1,448
|
|
5.77
|
|
Consumer
|
|
128,422
|
|
3,307
|
|
5.20
|
|
140,421
|
|
3,766
|
|
5.41
|
|
Investments (2)
|
|
271,088
|
|
7,146
|
|
5.27
|
|
234,178
|
|
6,574
|
|
5.61
|
|
Federal funds sold
|
|
17,825
|
|
11
|
|
0.13
|
|
9,981
|
|
9
|
|
0.17
|
|
Other short-term
investments
|
|
35,613
|
|
263
|
|
1.49
|
|
355
|
|
1
|
|
0.39
|
|
Total interest-earning
assets
|
|
$
|
1,227,623
|
|
$
|
32,809
|
|
5.32
|
|
$
|
1,134,812
|
|
$
|
31,683
|
|
5.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction accounts
|
|
$
|
516,099
|
|
$
|
3,068
|
|
1.20
|
|
$
|
335,782
|
|
$
|
2,411
|
|
1.45
|
|
Certificates of deposit
|
|
436,993
|
|
5,672
|
|
2.62
|
|
474,261
|
|
7,914
|
|
3.37
|
|
Securities sold under
agreement to repurchase
|
|
112,966
|
|
2,380
|
|
4.19
|
|
122,268
|
|
2,164
|
|
3.52
|
|
Short-term borrowings
|
|
7,351
|
|
18
|
|
0.50
|
|
5,057
|
|
17
|
|
0.66
|
|
Long-term borrowings
|
|
10,552
|
|
187
|
|
3.53
|
|
50,498
|
|
917
|
|
3.61
|
|
Junior subordinated debt
|
|
19,684
|
|
689
|
|
7.06
|
|
18,565
|
|
677
|
|
7.35
|
|
Total interest-bearing
liabilities
|
|
1,103,645
|
|
12,014
|
|
2.20
|
|
1,006,431
|
|
14,100
|
|
2.83
|
|
Noninterest-bearing
deposits
|
|
106,673
|
|
|
|
|
|
105,905
|
|
|
|
|
|
Total cost of funds
|
|
$
|
1,210,318
|
|
12,014
|
|
2.00
|
|
$
|
1,112,336
|
|
14,100
|
|
2.56
|
|
Net interest margin (fully
taxable equivalent)
|
|
|
|
$
|
20,795
|
|
3.42
|
|
|
|
$
|
17,583
|
|
3.12
|
|
(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 June 30, 2010 were $1.24 billion, an $100.1 million, or 8.8%, increase
over average interest-earning assets of $1.14 billion for the same period in
2009. The FTE yield on average
interest-earning assets decreased by 18 basis points to 5.26% for the second
quarter of 2010, compared to 5.44% for the same period in 2009. Average interest-earning
assets for the six months ended June 30, 2010 were $1.23 billion, a $92.8
million, or 8.2%, 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 23 basis points to
5.32% for the first six months of 2010, compared to 5.55% for the same period
in 2009.
Average interest-bearing liabilities for the three
months ended June 30, 2010 were $1.11 billion, a $98.1 million, or 9.7%,
increase over average interest-bearing liabilities of $1.02 billion for the
same period in 2009. In addition,
average noninterest-bearing deposits increased to $110.9 million for the three
months ended June 30, 2010, from $106.4 million for the same time period of
2009. The interest rate on total
interest-bearing liabilities decreased by 66 basis points to 2.12% for the
three months ended June 30, 2010, compared to 2.78% for the same period in
2009. Average interest-bearing liabilities for the six months ended June 30,
2010 were $1.10 billion, a $97.2 million, or 9.7%, increase over average
interest-bearing liabilities of $1.01 billion for the same period in 2009. In addition, average noninterest-bearing
deposits increased to $106.7 million for the six months ended June 30, 2010,
from $105.9 million for the same time period of 2009. The interest rate on total interest-bearing
liabilities decreased by 63 basis points to 2.20% for the six months ended June
30, 2010, compared to 2.83% for the same period in 2009.
For the six months ended June 30, 2010, FTE total
interest income increased to $32.8 million compared to $31.7 million for the
same period in 2009. The increase in
total FTE interest income for the six months ended June 30, 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
and lower yields on investments. Average
outstanding commercial loan balances increased by $24.9 million, or 3.6% from
June 30, 2009 to June 30,
44
Table
of Contents
2010. Average
outstanding federal funds sold balances increased by $7.8 million, or 78.6%
from June 30, 2009 to June 30, 2010.
Additionally, average outstanding total investment securities increased
by $36.9 million or 15.8% from June 30, 2009 to June 30, 2010. FTE earning asset yields on average
outstanding investment securities decreased from 5.6% at June 30, 2009 to 5.3%
at June 30, 2010.
For the six months ended June 30, 2010, total interest
expense decreased 14.8% to $12.0 million compared to $14.1 million for the same
period in 2009. The decrease in total
interest expense for the six months ended June 30, 2010 was primarily the
result of a decrease in the interest rates on average time deposits compared to
the same period in 2009. The average interest
rate paid on total outstanding interest-bearing liabilities decreased from
2.83% for the six months ended June 30, 2009 to 2.20% for the six months ended
June 30, 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 $97.2 million or 9.7% from June 30, 2009 to
June 30, 2010 due primarily to growth in interest-bearing checking and savings
accounts. The average interest rate paid
on short-term borrowings and securities sold under agreements to repurchase
increased from 3.41% for the six months ended June 30, 2009 to 3.97% for the
six months ended June 30, 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 $7.0 million or 5.5% from June 30, 2009 to June 30, 2010 due
primarily to the growth in total average interest-bearing deposits. Total cost of funds decreased to 2.00% in
2010 from 2.56% in 2009.
Provision for Loan Losses
The provision for loan losses for the three months
ended June 30, 2010 was $2.0 million compared to $4.3 million for the same
period of 2009. The provision for loan
losses for the six months ended June 30, 2010 was $4.6 million compared to $5.1
million for the same period of 2009. Net
charge-offs to average loans was 0.72% annualized for the six months ended June
30, 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 June 30, 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 June
30, 2010 and December 31, 2009 was 1.43% 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
June 30, 2010 totaled $6.9 million, an increase of $2.1 million, or 44.8%, from
income of $4.8 million for the same period in 2009. Total non-interest income
for the six months ended June 30, 2010 totaled $11.5 million, an increase of
$1.3 million, or 12.6%, from income of $10.2 million for the same period in
2009.
The following table details non-interest income (loss)
as follows:
45
Table of
Contents
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollars amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Customer service fees
|
|
$
|
549
|
|
$
|
596
|
|
$
|
1,132
|
|
$
|
1,254
|
|
Mortgage banking
activities, net
|
|
231
|
|
408
|
|
365
|
|
675
|
|
Commissions and fees from
insurance sales
|
|
3,092
|
|
3,036
|
|
6,168
|
|
5,994
|
|
Broker and investment
advisory commissions and fees
|
|
151
|
|
152
|
|
286
|
|
482
|
|
Other commissions and fees
|
|
558
|
|
498
|
|
1,062
|
|
971
|
|
Earnings on investment in
life insurance
|
|
113
|
|
108
|
|
191
|
|
184
|
|
Gain on sale of equity
interest
|
|
1,875
|
|
|
|
1,875
|
|
|
|
Other income
|
|
198
|
|
169
|
|
241
|
|
653
|
|
Total other non-interest
income before investments
|
|
6,767
|
|
4,967
|
|
11,320
|
|
10,213
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains on
sales of securities
|
|
194
|
|
126
|
|
286
|
|
285
|
|
Losses from
other-than-temporary impairment
|
|
(6
|
)
|
(973
|
)
|
(946
|
)
|
(973
|
)
|
Losses not related to
credit
|
|
(47
|
)
|
651
|
|
797
|
|
651
|
|
Net credit impairment
losses on securities recognized in earnings
|
|
(53
|
)
|
(322
|
)
|
(149
|
)
|
(322
|
)
|
Net losses related to
investment securities
|
|
141
|
|
(196
|
)
|
137
|
|
(37
|
)
|
Total other non-interest
income
|
|
$
|
6,908
|
|
$
|
4,771
|
|
$
|
11,457
|
|
$
|
10,176
|
|
Revenue from customer service fees decreased 7.9% to
$549,000 for the second quarter of 2010 as compared to $596,000 for the same
period in 2009. Revenue from customer service fees decreased 9.7% to $1.1
million for the six months ending June 30, 2010 as compared to $1.3
million for the same period in 2009. The decrease in customer service fees for
the comparative three and six month periods is primarily due to a decrease in
commercial account analysis fees, uncollected funds charges and non-sufficient
funds charges.
Revenue from mortgage
banking activities decreased 43.4% to $231,000 for the second quarter of 2010
as compared to $408,000 for the same period in 2009. Revenue from mortgage banking activities
decreased 45.9% to $365,000 for the first six months of 2010 as compared to $675,000
for the same period in 2009. The decrease
in mortgage banking activities for the comparative three and six 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 1.8% to $3.1 million for the second quarter of 2010 as compared to
$3.0 million for the same period in 2009.
Revenue from commissions and fees from insurance sales increased 2.9% to
$6.2 million for the first six months of 2010 as compared to $6.0 million for
the same period in 2009. The increase
for the comparative three and six 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 0.7% to $151,000 in the second quarter of 2010
as compared to $152,000 for the same period in 2009. Revenue from brokerage and investment
advisory commissions and fees decreased 40.7% to $286,000 in the first six
months of 2010 as compared to $482,000 for the same period in 2009. The fluctuations for the comparative three
and six month periods are due primarily to the 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 4.6% to $113,000 in the second quarter of 2010 as compared to
$108,000 for the same period in 2009.
Revenue from earnings on investment in life insurance increased 3.8% to
$191,000 in the first six months of 2010 as compared to $184,000 for the same
period in 2009. The increase in earnings
on investment in life insurance for the comparative three and six 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 12.0% to $558,000
for the second quarter of 2010 as compared to $498,000 for the same period in
2009. Other commissions and fees
increased 9.4% to $1.1 million for the first six months of 2010 as compared to
$1.0 million for the same period in 2009.
The increase for the comparative three and six month periods is due
primarily to an increase in customer debit card activity through the debit card
network interchange.
46
Table of
Contents
Gain on sale of equity interest for the three and six
months ended June 30, 2010 was $1.9 million. The gain on sale of equity interest is due to
the Companys sale of its 25% ownership in First HSA, LLC to HealthEquity, Inc.
during the second quarter of 2010. The
Company became a 25% owner in First HSA, LLC in 2005. VIST Bank, a subsidiary of the Company, was
the custodian of the health savings accounts (HSA) generated as a result of
the relationship with First HSA and by the end of the second quarter of 2010,
transferred the custodial relationship and processing of approximately $89
million in HSA deposits held by VIST bank to HealthEquity, Inc. at the
time of the sale. As a part of this transaction,
VIST Bank established an $89 million interest-bearing deposit relationship with
a correspondent bank to facilitate the transfer of funds to HealthEquity, Inc.
as the HSA deposit accounts were transferred to HealthEquity, Inc.s
operating system. There was no gain on
sale of equity interest recognized for the three and six months ended June 30,
2009.
Other income increased 17.2% to $198,000 for the
second quarter of 2010 as compared to $169,000 for the same period in
2009. Other income decreased 63.1% to
$241,000 for the first six months of 2010 as compared to $653,000 for the same
period in 2009. The decrease in other
income for the comparative six month periods is due primarily to a settlement
of a previously accrued contingent payment of $575,000, which was partially
offset by an adjustment for related expenses of $232,000 in 2009.
Net realized gains on sales of available for sale
securities were $194,000 for the three months ended June 30, 2010 compared
to net realized gains on sales of available for sale securities of $126,000 for
the same period in 2009. Net realized
gains on sales of available for sale securities were $286,000 for the six
months ended June 30, 2010 compared to net realized gains on sales of
available for sale securities of $285,000 for the same period in 2009. Net realized gains on sales of available for
sale securities for the three and six month periods in 2010 and 2009 were
primarily due to planned sales of existing available for sale investment
securities.
For the three month period ended June 30, 2010,
net credit impairment losses recognized in earnings resulting from OTTI losses
on investment securities were $53,000.
For the three month period ended June 30, 2009, there were $322,000
net credit impairment losses recognized in earnings resulting from OTTI losses
on investment securities. For the six month period ended June 30, 2010,
net credit impairment losses recognized in earnings resulting from OTTI losses
on investment securities were $149,000.
For the six month period ended June 30, 2009, there were $322,000
net credit impairment losses recognized in earnings resulting from OTTI losses
on investment securities. The net credit impairment losses relate to OTTI
charges for estimated credit losses on available for sale and held to maturity
pooled trust preferred 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 June 30, 2010 totaled $11.9 million, an
increase of $297,000, or 2.6%, over total other expense of $11.6 million for
the same period in 2009. Total
non-interest expense for the six months ended June 30, 2010 totaled $23.0
million, an increase of $109,000, or 0.5%, over total other expense of $22.8
million for the same period in 2009.
The following table details non-interest expense as
follows:
47
Table of
Contents
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollars amounts in thousands)
|
|
Salaries and employee
benefits
|
|
$
|
5,419
|
|
$
|
5,754
|
|
$
|
10,838
|
|
$
|
11,442
|
|
Occupancy expense
|
|
1,069
|
|
881
|
|
2,217
|
|
1,950
|
|
Furniture and equipment
expense
|
|
662
|
|
634
|
|
1,286
|
|
1,240
|
|
Marketing and advertising
expense
|
|
261
|
|
335
|
|
507
|
|
605
|
|
Amortization of
identifiable intangible assets
|
|
138
|
|
171
|
|
271
|
|
342
|
|
Professional services
|
|
745
|
|
482
|
|
1,354
|
|
1,374
|
|
Outside processing
|
|
854
|
|
1,086
|
|
1,885
|
|
2,037
|
|
FDIC deposit insurance
|
|
524
|
|
984
|
|
1,056
|
|
1,428
|
|
Other real estate owned
expense
|
|
1,195
|
|
292
|
|
1,692
|
|
618
|
|
Other expense
|
|
997
|
|
948
|
|
1,849
|
|
1,810
|
|
Total other non-interest
expense
|
|
$
|
11,864
|
|
$
|
11,567
|
|
$
|
22,955
|
|
$
|
22,846
|
|
Salaries and benefits decreased 5.8% to $5.4 million
for the three months ended June 30, 2010 from $5.8 million for the same
period in 2009. Salaries and benefits
decreased 5.3% to $10.8 million for the six months ended June 30, 2010
from $11.4 million for the same period in 2009.
Included in salaries and benefits for the three months ended June 30,
2010 and June 30, 2009 were pre-tax stock-based compensation costs of
$39,000 and $56,000, respectively.
Included in salaries and benefits for the six months ended June 30,
2010 and June 30, 2009 were pre-tax stock-based compensation costs of
$76,000 and $77,000, respectively. Also
included in salaries and benefits for the three months ended June 30, 2010
were total commissions paid of $268,000 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 $353,000 for the same period in 2009. Included in salaries and benefits for the six
months ended June 30, 2010 were total commissions paid of $496,000 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 $736,000 for the same period in
2009. The decrease for the comparative
three and six month periods is due primarily to a decrease in the number of
full-time equivalent employees and a decrease in employer 401(k) matching
contributions and commissions paid.
Full-time equivalent (FTE) employees decreased to 289 at June 30,
2010 from 301 at June 30, 2009
Occupancy expense and furniture and equipment expense
increased 14.3% to $1.7 million for the first three months of 2010 as compared to
$1.5 million at the same period in 2009.
Occupancy expense and furniture and equipment expense increased 9.8% to
$3.5 million for the first six months of 2010 as compared to $3.2 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 22.1% to
$261,000 for the second quarter of 2010 as compared to $335,000 for the same
period in 2009. Marketing and
advertising expense decreased 16.2% to $507,000 for the first six months of
2010 as compared to $605,000 for the same period in 2009. The decrease in marketing and advertising
expense for the comparative three and six month periods is due primarily to a
reduction in marketing costs associated with market research, media space,
media production and special events.
Professional services expense increased 54.6% to
$745,000 for the second quarter of 2010 as compared to $482,000 for the same
period in 2009. Professional services expense remained similar at $1.4 million
for the first six months of 2010 as compared to the same period in 2009. The
increase for the comparative three month periods is due primarily to an
increase in fees for accounting and accounting related services and consulting
fees associated with various corporate projects.
Outside processing expense decreased 21.4% to $854,000
for the second quarter of 2010 as compared to $1.1 million for the same period
in 2009. Outside processing expense decreased 7.5% to $1.9 million for the
first six months of 2010 as compared to $2.0 million for the same period in
2009. The decrease in outside processing expense for the comparative three and
six month periods are due primarily to a decrease in costs incurred for
computer related services and network fees.
FDIC insurance expense decreased 46.7% to $524,000 for
the second quarter of 2010 as compared to $984,000 for the same period in
2009. FDIC insurance expense decreased
26.1% to $1.1 million for the first six months of 2010 as compared to $1.4
million for the same period in 2009. The
decrease in insurance expense for the comparative three and six month periods
is due primarily to a $580,000 special industry-side FDIC deposit insurance
premium assessed in 2009.
48
Table of Contents
Other real estate owned expense increased 309.2% to
$1.2 million for the second quarter of 2010 as compared to $292,000 for the
same period in 2009. Other real estate
owned expense increased 173.8% to $1.7 million for the first six months of 2010
as compared to $618,000 for the same period in 2009. The increase in other real estate expense for
the comparative three and six month periods is due primarily to an increase in
costs associated with adjusting foreclosed properties to fair value after these
assets have been classified as OREO, as well as other costs to operate and
maintain OREO property during the holding period. The Company set up an entity
specifically for the handling and allocation of interim and participated
expenses associated with certain participated ORE properties until the time of
their sale.
Income Taxes
There was income tax expense of $654,000 for the
second quarter of 2010 as compared to an income tax benefit of $1.3 million for
the same period in 2009. There was
income tax expense of $476,000 for the first six months of 2010 as compared to
an income tax benefit of $1.1 million for the same period in 2009. The effective income tax rate for the Company
for the second quarter ended June 30, 2010 was 20.6% compared to (46.7%)
for the same period of 2009. The
effective income tax rate for the Company for the six months ended June 30,
2010 was 12.8% compared to (102.2%) for the same period of 2009. The effective income tax rate for the
comparative three and six month periods of both 2010 and 2009 fluctuated
primarily due to fluctuations in tax exempt income and net income before income
taxes. Included in the income tax
expense or benefit for the comparative three month periods ended June 30,
2010 and 2009, is a federal tax benefit of approximately $98,000 and $137,500,
respectively, from a $5,000,000 investment in an affordable housing, corporate
tax credit limited partnership. Included in the income tax expense or benefit
for the comparative six month periods ended June 30, 2010 and 2009, is a
federal tax benefit of approximately $162,000 and $275,000, respectively, from
a $5,000,000 investment in an affordable housing, corporate tax credit limited
partnership.
FINANCIAL CONDITION
The total assets of the Company at June 30, 2010
were $1.29 billion, a decrease of approximately $20.1 million, or 3.1%
annualized, from $1.31 billion at December 31, 2009.
Cash and Cash Equivalents:
Cash and cash equivalents increased $5.7 million, or
41.3% annualized, to $33.0 million at June 30, 2010 from $27.4 million at December 31,
2009. This increase is primarily related
to an increase in cash.
Mortgage Loans Held for Sale
Mortgage loans held for sale increased $1.1 million,
or 116.9% annualized, to $3.1 million at June 30, 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 decreased
$6.7 million, or 5.0% annualized, to $261.3 million at June 30, 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 decrease in
investment securities available for sale was due primarily to the sales 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 $2.9 million and $6.8 million at June 30,
2010 and December 31, 2009, respectively.
In addition, net unrealized losses of $990,000 and $1.2 million were
present in the held to maturity securities at June 30, 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.
49
Table of Contents
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
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 $882.8 million, or 3.7% annualized, at June 30, 2010 from
$899.5 million at December 31, 2009.
The components of loans were as follows:
50
Table of
Contents
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in thousands)
|
|
Residential real estate -
1 to 4 family
|
|
$
|
162,101
|
|
$
|
169,009
|
|
Residential real estate -
multi family
|
|
45,843
|
|
38,994
|
|
Commercial
|
|
150,977
|
|
150,823
|
|
Commercial, secured by
real estate
|
|
356,645
|
|
362,376
|
|
Construction
|
|
93,800
|
|
100,713
|
|
Consumer
|
|
2,856
|
|
3,108
|
|
Home equity lines of
credit
|
|
84,347
|
|
86,916
|
|
Loans
|
|
896,569
|
|
911,939
|
|
|
|
|
|
|
|
Net deferred loan fees
|
|
(985
|
)
|
(975
|
)
|
Allowance for loan losses
|
|
(12,825
|
)
|
(11,449
|
)
|
Loans, net of allowance
for loan losses
|
|
$
|
882,759
|
|
$
|
899,515
|
|
Loans secured by real estate (not including home
equity lending products) decreased $5.8 million, or 2.0% annualized, to $564.6
million at June 30, 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 $507.6 million at June 30,
2010 from $513.2 million at December 31, 2009, a decrease of $5.6 million,
or 2.2% 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
$87.2 million at June 30, 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 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
51
Table of Contents
at June 30, 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 June 30, 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.
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
|
|
75
|
%
|
|
|
Stock value should be greater than $10.
|
|
|
|
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.
52
Table of
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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 $22.5 million at June 30, 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 2.51% at June 30, 2010 and 2.96% at December 31,
2009. The allowance for loan losses
represents 57.0% of non-performing loans at June 30, 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, net of required specific reserves,
totaled $12.5 million at June 30, 2010, compared to $15.1 million at December 31,
2009. The $2.6 million decrease in
non-performing loans from December 31, 2009 to June 30, 2010 is
primarily due primarily to pay-downs and charge-offs of non-performing
commercial real estate loans. As of June 30,
2010, 68.0% 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 32.0% of
impaired loans were in process of being evaluated at June 30, 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 $725,000 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 $5.8 million at June 30, 2010
and $6.3 million at December 31, 2009.
The gross recorded investment in impaired loans requiring an allowance
for loan losses was $16.4 million and $18.9 million at June 30, 2010 and December 31,
2009, respectively. At June 30,
2010 and December 31, 2009, the related allowance for loan losses
associated with those loans was $3.9 million and $3.8 million,
respectively. For the periods ended June 30,
2010 and December 31, 2009, the average recorded investment in impaired
loans was $23.9 million and $18.6 million, respectively. Interest income of
$37,000 was recognized on impaired loans for the year ended June 30, 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 $22.2 million and $25.1 million at June 30, 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 $294,000
and $1.8 million at June 30, 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.
53
Table of
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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.
|
|
Non-Performing Loans
|
|
|
|
As Of and For The Period
Ended
|
|
|
|
Three Months
|
|
|
|
|
|
June 30,
|
|
Twelve Months
|
|
|
|
2010
|
|
December 31,
|
|
|
|
(unaudited)
|
|
2009
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
Non-accrual loans:
|
|
|
|
|
|
Real estate
|
|
$
|
20,860
|
|
$
|
24,420
|
|
Consumer
|
|
5
|
|
4
|
|
Commercial, financial and
agricultural
|
|
1,339
|
|
716
|
|
Total
|
|
22,204
|
|
25,140
|
|
|
|
|
|
|
|
Loans past due 90 days or
more and still accruing:
|
|
|
|
|
|
Real estate
|
|
199
|
|
1,664
|
|
Consumer
|
|
|
|
|
|
Commercial, financial and
agricultural
|
|
95
|
|
147
|
|
Total
|
|
294
|
|
1,811
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
22,498
|
|
26,951
|
|
Other real estate owned
|
|
5,148
|
|
5,221
|
|
Total non-performing
assets
|
|
$
|
27,646
|
|
$
|
32,172
|
|
|
|
|
|
|
|
Troubled debt
restructurings
|
|
$
|
6,333
|
|
$
|
6,245
|
|
|
|
|
|
|
|
Non-performing loans to
loans outstanding at end of period (net of unearned income)
|
|
2.51
|
%
|
2.96
|
%
|
Non-performing assets to
loans outstanding at end of period (net of unearned income) plus OREO
|
|
3.07
|
%
|
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 six
months ended June 30, 2010 was $4.6 million compared to $5.1 million for
the same period in 2009. The decrease in
the provision is due primarily to a slight improvement in economic conditions
and a decrease 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 June 30, 2010 was $12.8 million compared to $11.4 million at December 31,
2009. The allowance for loan losses at June 30,
2010 was 1.43% 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
54
Table of Contents
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 June 30, 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 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
|
|
|
|
Six Months
|
|
|
|
|
|
June 30,
|
|
Twelve Months
|
|
|
|
2010
|
|
December 31,
|
|
|
|
(unaudited)
|
|
2009
|
|
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
|
|
Total
|
|
|
|
Total
|
|
|
|
Amount
|
|
Loans
|
|
Amount
|
|
Loans
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
8,320
|
|
64.9
|
%
|
$
|
4,745
|
|
56.2
|
%
|
Residential Real Estate
|
|
4,199
|
|
32.8
|
|
6,170
|
|
43.4
|
|
Consumer
|
|
297
|
|
2.3
|
|
527
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
Total Allocated
|
|
12,816
|
|
100.0
|
|
11,442
|
|
100.0
|
|
Unallocated
|
|
9
|
|
|
|
7
|
|
|
|
Total
|
|
$
|
12,825
|
|
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:
55
Table of
Contents
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance of allowance for
loan losses, beginning of period
|
|
$
|
12,770
|
|
$
|
8,165
|
|
$
|
11,449
|
|
$
|
8,124
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
|
Commercial, financial and
agricultural
|
|
(701
|
)
|
(359
|
)
|
(1,359
|
)
|
(894
|
)
|
Real estate mortgage
|
|
(1,319
|
)
|
(11
|
)
|
(1,936
|
)
|
(222
|
)
|
Consumer
|
|
(8
|
)
|
(76
|
)
|
(26
|
)
|
(139
|
)
|
Total loans charged-off
|
|
(2,028
|
)
|
(446
|
)
|
(3,321
|
)
|
(1,255
|
)
|
Recoveries of loans
previously charged-off:
|
|
|
|
|
|
|
|
|
|
Commercial, financial and
agricultural
|
|
15
|
|
8
|
|
22
|
|
19
|
|
Real estate mortgage
|
|
46
|
|
|
|
51
|
|
|
|
Consumer
|
|
12
|
|
2
|
|
14
|
|
16
|
|
Total recoveries
|
|
73
|
|
10
|
|
87
|
|
35
|
|
Net loan charged-offs
|
|
(1,955
|
)
|
(436
|
)
|
(3,234
|
)
|
(1,220
|
)
|
Provision for loan losses
|
|
2,010
|
|
4,300
|
|
4,610
|
|
5,125
|
|
Balance, end of period
|
|
$
|
12,825
|
|
$
|
12,029
|
|
$
|
12,825
|
|
$
|
12,029
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average
loans (annualized)
|
|
0.88
|
%
|
0.20
|
%
|
0.72
|
%
|
0.27
|
%
|
Allowance for loan losses
to loans outstanding
|
|
1.43
|
%
|
1.36
|
%
|
1.43
|
%
|
1.36
|
%
|
Loans outstanding at end
of period (net of unearned income)
|
|
$
|
895,584
|
|
$
|
887,236
|
|
$
|
895,584
|
|
$
|
887,236
|
|
Average balance of loans outstanding
during the period (1)
|
|
$
|
891,744
|
|
$
|
885,233
|
|
$
|
901,582
|
|
$
|
885,852
|
|
(1) Excludes loans held for sale
Deposits
Total deposits at June 30, 2010 were $1.01
billion compared to $1.02 billion at December 31, 2009, a slight decrease
of $15.3 million, or 3.0% annualized.
The components of deposits were as follows:
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
Demand, non-interest
bearing
|
|
$
|
114,362
|
|
$
|
102,302
|
|
Demand, interest bearing
|
|
351,774
|
|
375,668
|
|
Savings
|
|
111,462
|
|
83,319
|
|
Time, $100,000 and over
|
|
241,018
|
|
248,695
|
|
Time, other
|
|
186,956
|
|
210,914
|
|
Total deposits
|
|
$
|
1,005,572
|
|
$
|
1,020,898
|
|
Non-interest bearing deposits increased to $114.4
million at June 30, 2010, from $102.3 million at December 31, 2009,
an increase of $12.1 million or 23.6% 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
decreased by $27.4 million or 6.0% annualized, from $918.6 million at December 31,
2009 to $891.2 million at June 30, 2010.
The decrease in interest bearing deposits is due primarily to the
transfer of approximately $88.6 million in HSA deposits as part of the sale of
the Companys 25% equity investment in First HSA, LLC offset by a $61.2 million
increase in interest bearing core deposits including MMDA and time deposit
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.
56
Table of Contents
Borrowings
Total borrowings at June 30, 2010 were $139.7
million compared to $154.9 million at December 31, 2009, a decrease of
$15.2 million, or 19.6% annualized.
Borrowed funds from various sources are generally used to supplement
deposit growth. Securities sold under
agreements to repurchase were $110.4 million at June 30, 2010 and $115.2
million at December 31, 2009, respectively. Commercial loan demand and purchases of
investment securities were funded primarily by interest-bearing deposits. At June 30, 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:
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in thousands)
|
|
Commitments to extend
credit:
|
|
|
|
|
|
Loan origination
commitments
|
|
$
|
60,128
|
|
$
|
32,846
|
|
Unused home equity lines
of credit
|
|
38,808
|
|
44,091
|
|
Unused business lines of
credit
|
|
160,294
|
|
149,032
|
|
Total commitments to
extend credit
|
|
$
|
259,230
|
|
$
|
225,969
|
|
Standby letters of credit
|
|
$
|
11,073
|
|
$
|
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 June 30, 2010 the amount of commitments to
extend credit was $259.2 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 June 30, 2010 for guarantees under standby
letters of credit issued was $11.1 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
57
Table of Contents
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 $9.3 million, or
14.8% annualized, to $134.7 million at June 30, 2010 from $125.4 million
at December 31, 2009. The increase
is the net result of net income for the period of $3.24 million less common
stock dividends declared of $586,000 and preferred stock dividends declared of
$625,000, proceeds of $305,000 from the issuance of shares of common stock
under the Companys employee benefit and director compensation plans, proceeds
of $4.83 million from the issuance of common stock, a decrease in the
unrealized loss on securities, net of tax, of $2.0 million and stock-based
compensation costs of $76,000.
As of June 30, 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.
On April 21, 2010, the
Company entered into separate stock purchase agreements with two institutional
investors relating to the sale of an aggregate of 644,000 shares of the Companys
authorized but unissued common stock, par value $5.00 per share (Common Stock),
at a purchase price of $8.00 per share.
The Company completed the issuance of $4.8 million of common stock, net
of related offering costs, on May 12, 2010.
As a result of the sale of
the 644,000 shares of the Companys common stock on May 12, 2010 at a
greater than 10% discount to the market price on the last trading day preceding
the date of the agreement to sell such shares, the Warrant issued to Treasury
adjusted automatically by its terms so that the Warrant now has an exercise
price of $10.19 and the number of shares of common stock into which the Warrant
is exercisable is 367,982.
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 June 30, 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.
58
Table of
Contents
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
June 30, 2010 was 8.45% compared to 8.36% at December 31, 2009. This increase is primarily the result of an
increase in total equity. At June 30,
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 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. Any portion of the allowance for
loan losses that exceeds the 1.25% limit of risk-weighted assets is disallowed
for Tier 2 risk-based capital but is used to adjust the overall risk weighted
asset calculation. 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 June 30,
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 June 30, 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:
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in thousands)
|
|
Tier 1 Capital
|
|
|
|
|
|
Common shareholders
equity excluding unrealized gains (losses)
on securities
|
|
$
|
134,690
|
|
$
|
125,428
|
|
Disallowed goodwill and
intangible assets
|
|
(44,307
|
)
|
(44,024
|
)
|
Junior subordinated debt
|
|
19,158
|
|
19,508
|
|
Unrealized losses on
available for sale debt securities
|
|
1,956
|
|
3,942
|
|
Total Tier 1 Capital
|
|
111,497
|
|
104,854
|
|
|
|
|
|
|
|
Tier 2 Capital
|
|
|
|
|
|
Allowable portion of
allowance for loan losses
|
|
11,901
|
|
11,449
|
|
Total Tier 2 Capital
|
|
11,901
|
|
11,449
|
|
Total risk-based capital
|
|
$
|
123,398
|
|
$
|
116,303
|
|
Risk adjusted assets
(including off-balance sheet exposures)
|
|
$
|
951,163
|
|
$
|
984,296
|
|
|
|
|
|
|
|
Leverage ratio
|
|
8.45
|
%
|
8.36
|
%
|
Tier I risk-based capital
ratio
|
|
11.72
|
%
|
10.65
|
%
|
Total risk-based capital
ratio
|
|
12.97
|
%
|
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
59
Table of Contents
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 June 30, 2010, the Company had a total of
$139.7 million, or 10.8% of total assets, in borrowed funds. These borrowings included $110.4 million of
repurchase agreements, $10 million of term borrowings with the Federal Home
Loan Bank, and $19.3 million in junior subordinated debt. The FHLB borrowing has a final maturity of January 2011
at an interest rate of 3.53%. At June 30,
2010, the Company had a total of $7.4 million in federal funds sold. At June 30, 2010, the Company had a
maximum borrowing capacity with the Federal Home Loan Bank of approximately
$307.0 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.
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.
60
Table of
Contents
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 June 30,
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 would 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 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 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 second quarter
of 2010 that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
61
Table
of Contents
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 June 30,
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]
62
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: August 06, 2010
|
By
|
/s/Robert
D. Davis
|
|
|
|
|
|
Robert
D. Davis
|
|
|
President
and Chief
|
|
|
Executive
Officer
|
|
|
|
Dated: August 06, 2010
|
By
|
/s/Edward
C. Barrett
|
|
|
|
|
|
Edward
C. Barrett
|
|
|
Executive
Vice President and
|
|
|
Chief
Financial Officer
|
63
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