Table
of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q/A
Amendment No. 1
x
Quarterly Report pursuant to Section 13
or 15(d)of the Securities Exchange Act of 1934
for the Quarterly Period Ended June 30,
2009,
or
o
Transition report pursuant to Section 13
or 15(d) Of the Exchange Act
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(b) of the Exchange Act:
Common
Stock, $5.00 Par Value
|
|
The
NASDAQ Stock Market LLC
|
(Title of each class)
|
|
(Name of each exchange on which registered)
|
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
x
|
|
|
|
Non-accelerated
filer
o
|
|
Smaller
reporting company
o
|
(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 March 26, 2010
|
COMMON
STOCK ($5.00 Par Value)
|
|
5,855,976
|
(Title of Class)
|
|
(Outstanding
Shares)
|
Table
of Contents
EXPLANATORY
NOTE
This Amendment on Form 10-Q/A
amends our Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2009, filed with the Securities and Exchange Commission (SEC) on August 10,
2009 (Amendment No. 1). We are
filing this Amendment No. 1 to the consolidated financial statements of
VIST Financial Corp. and its subsidiaries (the Company) for the quarterly
period ended June 30, 2009
to correct the following accounting errors
and the related effects of those errors: (i) correcting the calculation of
fair value on junior subordinated debentures and interest rate swaps, (ii) correcting
the accounting for changes in fair value of cash flow hedges and the junior
subordinated debentures which was incorrectly recorded through accumulated
other comprehensive income (loss) and should have been reflected through
operations, and (iii) correcting the misapplication of cash flow hedge
accounting to the junior subordinated debentures which were and continue to be
accounted for at fair value.. The
Companys previously issued financial statements for this period should no
longer be relied upon.
The
Company concluded that it would revise its financial statements to properly
account for interest rate swaps that were incorrectly designated as cash flow
hedging relationships under FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133). Changes in fair value of the interest rate
swaps, previously recognized as unrealized gains (losses) in accumulated other
comprehensive income, should have been recognized in earnings. In addition, the Company measures the fair
value of its interest rate swaps 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 Company concluded that an incorrect forward yield curve was applied
to the fair value of its interest rate swaps.
The Company has adjusted the forward yield curve used in its
determination of the fair value of the interest rate swaps which is reflected
in these restated financial statements.
The Company has elected to report its junior
subordinated debt at fair value with changes in fair value reflected in other
income in the consolidated statements of operations. In addition, the Company measures the fair
value of its junior subordinated debt 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 Company concluded that an incorrect credit spread was applied to the
fair value of its junior subordinated debt.
The Company has adjusted the credit spread used in its determination of
the fair value of its junior subordinated debt which is reflected in these
restated financial statements.
The Company is not required
to and has not updated any forward-looking statements previously included in
the initial Form 10-Q filed on August 10, 2009. The errors discussed above do not affect
periods prior to the three month period ended September 30, 2008. Accordingly, the Company has amended our
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2008, our Annual Report on Form 10-K for the year ended December 31,
2008 and our Quarterly Reports on Form 10-Q for the quarterly periods
ended March 31, 2009 and June 30, 2009. The Company has not amended, and does not
intend to amend, any of its other reports filed prior to the Form 10-Q for
the quarterly period ended September 30, 2008.
This Amendment No. 1
includes changes in Part I, Item 4 - Controls and Procedures and
reflects Managements restated assessment of our disclosure controls and
procedures (as defined in Rules 13a-15(e) under the Exchange Act) as
of June 30, 2009. This restatement
of Managements assessment regarding disclosure controls and procedures results
from 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 as of June 30,
2009.
The material weakness existed at September 30, 2008, December 31,
2008, March 31, 2009 and June 30, 2009 and was not identified until November 2009. To remediate this material weakness, 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 relates only to the applicable accounting treatment to these complex
financial instruments. Although
management has implemented these additional control procedures to remediate the
material weakness, we believe that additional time and testing are necessary
before concluding that the material weakness has been remediated.
3
Table of Contents
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 2009
that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting.
For additional discussion,
see Note 2 included in Part I, Item 1 Financial Statements of this
report.
FORWARD LOOKING STATEMENTS
VIST
Financial Corp. (the Company), may from time to time make written or oral forward-looking
statements, including statements contained in the Companys filings with the
Securities and Exchange Commission (including this Quarterly Report on Form 10-Q
and the exhibits hereto and thereto), in its reports to shareholders and in
other communications by the Company, which are made in good faith by the
Company pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
These
forward-looking statements include statements with respect to the Companys
beliefs, plans, objectives, goals, expectations, anticipations, estimates and
intentions, that are subject to significant risks and uncertainties, and are
subject to change based on various factors (some of which are beyond the
Companys control). The words may, could,
should, would, believe, anticipate, estimate, expect, intend, plan
and similar expressions are intended to identify forward-looking
statements. The following factors, among
others, could cause the Companys financial performance to differ materially
from the plans, objectives, expectations, estimates and intentions expressed in
such forward-looking statements: the strength of the United States economy in
general and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System; inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors products and services; the willingness of users to substitute
competitors products and services for the Companys products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in laws and regulations
applicable to financial institutions (including laws concerning taxes, banking,
securities and insurance); technological changes; 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; 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.
4
Table
of Contents
PART I
FINANCIAL INFORMATION
Item
1 Financial Statements
VIST FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per
share data)
|
|
June 30,
2009
(As Restated)
|
|
December 31,
2008
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
20,685
|
|
$
|
18,964
|
|
Federal funds sold
|
|
19,950
|
|
|
|
Interest-bearing deposits in banks
|
|
342
|
|
320
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
40,977
|
|
19,284
|
|
|
|
|
|
|
|
Mortgage loans held for sale
|
|
5,888
|
|
2,283
|
|
Securities available for sale
|
|
229,107
|
|
226,665
|
|
Securities held to maturity, fair value
2009 - $1,741; 2008 - $1,926
|
|
3,048
|
|
3,060
|
|
Federal Home Loan Bank stock, at cost
|
|
5,715
|
|
5,715
|
|
Loans, net of allowance for loan losses
2009 - $12,029; 2008 - $8,124
|
|
875,207
|
|
878,181
|
|
Premises and equipment, net
|
|
6,408
|
|
6,591
|
|
Identifiable intangible assets
|
|
4,491
|
|
4,833
|
|
Goodwill
|
|
39,732
|
|
39,732
|
|
Bank owned life insurance
|
|
18,736
|
|
18,552
|
|
Other assets
|
|
28,084
|
|
21,174
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,257,393
|
|
$
|
1,226,070
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
111,231
|
|
$
|
108,645
|
|
Interest bearing
|
|
836,683
|
|
741,955
|
|
|
|
|
|
|
|
Total deposits
|
|
947,914
|
|
850,600
|
|
|
|
|
|
|
|
Securities sold under agreements to
repurchase
|
|
124,875
|
|
120,086
|
|
Federal funds purchased
|
|
|
|
53,424
|
|
Long-term debt
|
|
35,000
|
|
50,000
|
|
Junior subordinated debt, at fair value
|
|
18,856
|
|
18,260
|
|
Other liabilities
|
|
9,093
|
|
10,071
|
|
|
|
|
|
|
|
Total liabilities
|
|
1,135,738
|
|
1,102,441
|
|
|
|
|
|
|
|
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% cumulative preferred stock issued and outstanding;
Less: discount of $2,108 at June 30, 2009 and $2,307 at
December 31, 2008
|
|
22,892
|
|
22,693
|
|
Common stock, $5.00 par value;
authorized 20,000,000 shares; issued: 5,804,684 shares at June 30, 2009 and
5,768,429 shares at December 31, 2008
|
|
29,024
|
|
28,842
|
|
Stock warrant
|
|
2,307
|
|
2,307
|
|
Surplus
|
|
63,654
|
|
64,349
|
|
Retained earnings
|
|
12,714
|
|
14,757
|
|
Accumulated other comprehensive loss
|
|
(8,745
|
)
|
(7,834
|
)
|
Treasury stock; 10,484 shares at June 30,
2009 and 68,354 shares at December 31, 2008, at cost
|
|
(191
|
)
|
(1,485
|
)
|
|
|
|
|
|
|
Total shareholders
equity
|
|
121,655
|
|
123,629
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
1,257,393
|
|
$
|
1,226,070
|
|
See Notes to Consolidated
Financial Statements.
5
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, 2009
|
|
June 30, 2008
|
|
June 30, 2009
|
|
June 30, 2008
|
|
|
|
(As Restated)
|
|
|
|
(As Restated)
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
12,261
|
|
$
|
13,515
|
|
$
|
24,603
|
|
$
|
27,625
|
|
Interest on securities:
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
2,709
|
|
2,432
|
|
5,579
|
|
4,686
|
|
Tax-exempt
|
|
305
|
|
218
|
|
591
|
|
431
|
|
Dividend income
|
|
33
|
|
145
|
|
67
|
|
288
|
|
Interest on federal funds sold
|
|
5
|
|
|
|
8
|
|
|
|
Other interest income
|
|
|
|
5
|
|
1
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
15,313
|
|
16,315
|
|
30,849
|
|
33,039
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
5,172
|
|
5,014
|
|
10,326
|
|
10,517
|
|
Interest on short-term borrowings
|
|
|
|
429
|
|
17
|
|
1,150
|
|
Interest on securities sold under
agreements to repurchase
|
|
1,100
|
|
895
|
|
2,163
|
|
1,849
|
|
Interest on long-term debt
|
|
412
|
|
604
|
|
917
|
|
1,203
|
|
Interest on junior subordinated debt
|
|
362
|
|
346
|
|
677
|
|
751
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
7,046
|
|
7,288
|
|
14,100
|
|
15,470
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
8,267
|
|
9,027
|
|
16,749
|
|
17,569
|
|
Provision for loan losses
|
|
4,300
|
|
1,650
|
|
5,125
|
|
2,060
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
after provision for loan losses
|
|
3,967
|
|
7,377
|
|
11,624
|
|
15,509
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
Customer service fees
|
|
596
|
|
676
|
|
1,254
|
|
1,296
|
|
Mortgage banking activities
|
|
408
|
|
342
|
|
675
|
|
665
|
|
Commissions and fees from insurance
sales
|
|
3,036
|
|
2,787
|
|
5,994
|
|
5,471
|
|
Brokerage and investment advisory
commissions and fees
|
|
152
|
|
227
|
|
482
|
|
464
|
|
Earnings on bank owned life insurance
|
|
108
|
|
164
|
|
184
|
|
332
|
|
Gain on sale of loans
|
|
|
|
24
|
|
|
|
47
|
|
Other income
|
|
667
|
|
487
|
|
1,624
|
|
984
|
|
Net realized gains on sales of
securities
|
|
126
|
|
61
|
|
285
|
|
202
|
|
Total other-than-temporary impairment
losses on investments
|
|
(973
|
)
|
|
|
(973
|
)
|
|
|
Portion of non-credit impairment loss
recognized in other comprehensive loss
|
|
651
|
|
|
|
651
|
|
|
|
Net credit impairment loss recognized in
earnings
|
|
(322
|
)
|
|
|
(322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
4,771
|
|
4,768
|
|
10,176
|
|
9,461
|
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
5,754
|
|
5,398
|
|
11,442
|
|
11,128
|
|
Occupancy expense
|
|
881
|
|
1,069
|
|
1,950
|
|
2,198
|
|
Furniture and equipment expense
|
|
634
|
|
673
|
|
1,240
|
|
1,345
|
|
Marketing and advertising expense
|
|
335
|
|
479
|
|
605
|
|
1,136
|
|
Amortization of identifiable intangible
assets
|
|
171
|
|
150
|
|
342
|
|
300
|
|
Professional services
|
|
482
|
|
543
|
|
1,374
|
|
1,078
|
|
Outside processing
|
|
1,086
|
|
812
|
|
2,037
|
|
1,632
|
|
FDIC deposit insurance
|
|
984
|
|
274
|
|
1,428
|
|
545
|
|
Other expense
|
|
1,240
|
|
1,115
|
|
2,428
|
|
2,238
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
11,567
|
|
10,513
|
|
22,846
|
|
21,600
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before
income taxes
|
|
(2,829
|
)
|
1,632
|
|
(1,046
|
)
|
3,370
|
|
Income tax (benefit) expense
|
|
(1,321
|
)
|
164
|
|
(1,069
|
)
|
343
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
(1,508
|
)
|
1,468
|
|
23
|
|
3,027
|
|
Preferred stock
dividends and discount accretion
|
|
(413
|
)
|
|
|
(825
|
)
|
|
|
Net (loss) income
available to common shareholders
|
|
$
|
(1,921
|
)
|
$
|
1,468
|
|
$
|
(802
|
)
|
$
|
3,027
|
|
See Notes to Consolidated
Financial Statements.
6
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, 2009
|
|
June 30, 2008
|
|
June 30, 2009
|
|
June 30, 2008
|
|
|
|
(As Restated)
|
|
|
|
(As Restated)
|
|
|
|
EARNINGS PER SHARE DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding for basic
earnings per common share
|
|
5,791,023
|
|
5,692,377
|
|
5,763,648
|
|
5,682,890
|
|
Basic (loss) earnings per common share
|
|
$
|
(0.33
|
)
|
$
|
0.26
|
|
$
|
(0.14
|
)
|
$
|
0.53
|
|
Average shares outstanding for diluted
earnings per common share
|
|
5,791,023
|
|
5,705,042
|
|
5,763,648
|
|
5,696,650
|
|
Diluted (loss) earnings per common share
|
|
$
|
(0.33
|
)
|
$
|
0.26
|
|
$
|
(0.14
|
)
|
$
|
0.53
|
|
Cash dividends declared per actual
common shares outstanding
|
|
$
|
0.10
|
|
$
|
0.20
|
|
$
|
0.20
|
|
$
|
0.40
|
|
See Notes to Consolidated
Financial Statements.
7
Table
of Contents
VIST
FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Six
Months Ended June 30, 2009 and 2008
(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, 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 (as restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
23
|
|
Change in net unrealized gains (losses)
on securities available for sale, net of tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(911
|
)
|
|
|
(911
|
)
|
Total comprehensive loss (as restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock discount accretion
|
|
|
|
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 (as restated)
|
|
25,000
|
|
$
|
22,892
|
|
5,804,684
|
|
$
|
29,024
|
|
$
|
2,307
|
|
$
|
63,654
|
|
$
|
12,714
|
|
$
|
(8,745
|
)
|
$
|
(191
|
)
|
$
|
121,655
|
|
|
|
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, 2008
|
|
|
|
$
|
|
|
5,746,998
|
|
$
|
28,735
|
|
$
|
|
|
$
|
63,940
|
|
$
|
17,039
|
|
$
|
(1,116
|
)
|
$
|
(2,006
|
)
|
$
|
106,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,027
|
|
|
|
|
|
3,027
|
|
Change in net unrealized gains (losses)
on securities available for sale, net of tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,503
|
)
|
|
|
(4,503
|
)
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional consideration in connection
with acquisitions (21,499 shares)
|
|
|
|
|
|
|
|
|
|
|
|
(138
|
)
|
|
|
|
|
521
|
|
383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with
directors compensation
|
|
|
|
|
|
10,808
|
|
54
|
|
|
|
139
|
|
|
|
|
|
|
|
193
|
|
Common stock issued in connection with
director and employee stock purchase plans
|
|
|
|
|
|
4,574
|
|
23
|
|
|
|
54
|
|
|
|
|
|
|
|
77
|
|
Tax benefits from employee stock
transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense related to stock
options
|
|
|
|
|
|
|
|
|
|
|
|
172
|
|
|
|
|
|
|
|
172
|
|
Common stock cash dividends declared
($0.40 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,277
|
)
|
|
|
|
|
(2,277
|
)
|
Balance, June 30,
2008
|
|
$
|
|
|
$
|
|
|
$
|
5,762,380
|
|
$
|
28,812
|
|
$
|
|
|
$
|
64,167
|
|
$
|
17,789
|
|
$
|
(5,619
|
)
|
$
|
(1,485
|
)
|
$
|
103,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated
Financial Statements.
8
Table
of Contents
VIST FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Dollar amounts in thousands)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
(As Restated)
|
|
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
Net income
|
|
$
|
23
|
|
$
|
3,027
|
|
Adjustments to
reconcile net income to net cash (used) provided by operating activities:
|
|
|
|
|
|
Provision for
loan losses
|
|
5,125
|
|
2,060
|
|
Provision for
depreciation and amortization of premises and equipment
|
|
677
|
|
768
|
|
Amortization of
identifiable intangible assets
|
|
342
|
|
300
|
|
Deferred income
taxes
|
|
(1,337
|
)
|
(363
|
)
|
Director stock
compensation
|
|
219
|
|
193
|
|
Net amortization
of securities premiums and discounts
|
|
437
|
|
11
|
|
Decrease in
mortgage servicing rights
|
|
106
|
|
86
|
|
Net realized
losses on sales of foreclosed real estate
|
|
9
|
|
92
|
|
Impairment
charge on investment securities
|
|
322
|
|
|
|
Net realized (gains)
on sales of securities
|
|
(285
|
)
|
(202
|
)
|
Proceeds from
sales of loans held for sale
|
|
38,459
|
|
20,589
|
|
Net gains on
sale of loans
|
|
(646
|
)
|
(621
|
)
|
Loans originated
for sale
|
|
(41,418
|
)
|
(17,630
|
)
|
Increase in
investment in life insurance
|
|
(184
|
)
|
(332
|
)
|
Compensation
expense related to stock options
|
|
77
|
|
172
|
|
Net change in
fair value of liabilities
|
|
596
|
|
(73
|
)
|
(Increase)
decrease in accrued interest receivable and other assets
|
|
(2,323
|
)
|
5,195
|
|
Decrease in
accrued interest payable and other liabilities
|
|
(2,096
|
)
|
(3,043
|
)
|
|
|
|
|
|
|
Net
Cash (Used) Provided by Operating Activities
|
|
(1,897
|
)
|
10,229
|
|
|
|
|
|
|
|
Cash
Flow From Investing Activities
|
|
|
|
|
|
Investment
securities:
|
|
|
|
|
|
Purchases -
available for sale
|
|
(87,215
|
)
|
(59,036
|
)
|
Principal
repayments, maturities and calls - available for sale
|
|
41,847
|
|
19,439
|
|
Principal
repayments, maturities and calls - held to maturity
|
|
|
|
10
|
|
Proceeds from
sales - available for sale
|
|
41,073
|
|
17,738
|
|
Net increase in
loans receivable
|
|
(4,126
|
)
|
(48,863
|
)
|
Proceeds from
sale of loans
|
|
|
|
740
|
|
Net increase in
Federal Home Loan Bank Stock
|
|
|
|
(992
|
)
|
Net increase in
foreclosed real estate
|
|
|
|
(173
|
)
|
Purchases of
premises and equipment
|
|
(763
|
)
|
(654
|
)
|
Disposals of
premises and equipment
|
|
269
|
|
10
|
|
Net
Cash Used In Investing Activities
|
|
(8,915
|
)
|
(71,781
|
)
|
|
|
|
|
|
|
|
|
See Notes to Consolidated
Financial Statements.
9
Table
of Contents
VIST FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH
FLOWS (Continued)
(Dollar amounts in thousands)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
(As Restated)
|
|
|
|
Cash
Flow From Financing Activities
|
|
|
|
|
|
Net increase in
deposits
|
|
97,314
|
|
66,795
|
|
Net decrease in
federal funds purchased
|
|
(53,424
|
)
|
(35,464
|
)
|
Net increase in
securities sold under agreements to repurchase
|
|
4,789
|
|
19,734
|
|
Proceeds from
long-term debt
|
|
|
|
15,000
|
|
Repayments of
long-term debt
|
|
(15,000
|
)
|
|
|
Reissuance of
treasury stock
|
|
424
|
|
|
|
Proceeds from
the exercise of stock options and stock purchase plans
|
|
61
|
|
77
|
|
Cash dividends
paid on preferred and common stock
|
|
(1,659
|
)
|
(2,270
|
)
|
Net
Cash Provided By Financing Activities
|
|
32,505
|
|
63,872
|
|
|
|
|
|
|
|
Increase in cash
and cash equivalents
|
|
21,693
|
|
2,320
|
|
Cash
and Cash Equivalents:
|
|
|
|
|
|
January 1
|
|
19,284
|
|
25,789
|
|
June 30
|
|
$
|
40,977
|
|
$
|
28,109
|
|
|
|
|
|
|
|
Cash
Payments For:
|
|
|
|
|
|
Interest
|
|
$
|
14,512
|
|
$
|
15,153
|
|
Taxes
|
|
$
|
|
|
$
|
400
|
|
|
|
|
|
|
|
Supplemental
Schedule of Non-cash Investing and Financing Activities
|
|
|
|
|
|
Transfer of
loans receivable to real estate owned
|
|
$
|
1,975
|
|
$
|
81
|
|
See Notes to Consolidated
Financial Statements.
10
Table
of Contents
VIST FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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. All
significant inter-company accounts and transactions have been eliminated. In the opinion of management, all adjustments
(including normal recurring adjustments) considered necessary for a fair
presentation of the results for the interim periods have been included. Certain prior period amounts have been
reclassified to conform to the current presentation.
The
balance sheet at December 31, 2008 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The
results of operations for the three and six month periods ended June 30,
2009 are not necessarily indicative of the results to be expected for the
entire fiscal year. For purpose of
reporting cash flows, cash and cash equivalents include cash and due from
banks, and interest bearing deposits in other banks. For further information, refer to the
Consolidated Financial Statements and Footnotes included in the Companys
Annual Report on Form 10-K/A, Amendment No. 1, for the year ended December 31, 2008.
Effective
April 1, 2009, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 165, Subsequent Events. SFAS No. 165
establishes general standards for accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are
issued. SFAS No. 165 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 these financial
statements, the Company has evaluated subsequent events and transactions for
potential recognition and/or disclosure between June 30, 2009 and August 10,
2009, the date the consolidated financial statements included in the Companys
Quarterly Report on Form 10-Q were originally issued, and between June 30,
2009 and March 26, 2010, the date the consolidated financial statements
included in the Companys Quarterly Report on Form 10-Q/A were reissued.
2.
Restatement of Consolidated
Financial Statements
The
Company concluded that it would revise its financial statements to properly
account for interest rate swaps that were incorrectly designated in cash flow
hedging relationships under FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133). Changes in fair value of the interest rate
swaps, previously recognized as unrealized gains (losses) in accumulated other
comprehensive income, should have been recognized in earnings. In addition, the Company measures the fair
value of its interest rate swaps 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 Company concluded that an incorrect forward yield curve was applied
to the fair value of its interest rate swaps.
The Company has adjusted the forward yield curve used in its
determination of the fair value of the interest rate swaps which is reflected
in these restated financial statements.
The Company has elected to report its junior
subordinated debt at fair value with changes in fair value reflected in other
income in the consolidated statements of operations. In addition, the Company measures the fair value
of its junior subordinated debt 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 Company concluded that an incorrect credit spread was applied to the
fair value of its junior subordinated debt.
The Company has adjusted the credit
11
Table of Contents
spread used in its
determination of the fair value of its junior subordinated debt which is is
reflected in these restated financial statements.
The following tables set
forth the unaudited consolidated restated financial statements for the quarter
ended June 30, 2009 previously filed in the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 2009.
The following is a summary
of the adjustments to our previously issued unaudited consolidated balance
sheet as of June 30, 2009:
12
Table
of Contents
VIST FINANCIAL
CORP. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Dollar amounts in
thousands, except per share data)
|
|
June 30,
|
|
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
|
|
|
2009
|
|
|
|
As Reported
|
|
Adjustments
|
|
Reclassifications
|
|
As Restated
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due
from banks
|
|
$
|
20,685
|
|
|
|
|
|
$
|
20,685
|
|
Federal funds
sold
|
|
19,950
|
|
|
|
|
|
19,950
|
|
Interest-bearing
deposits in banks
|
|
342
|
|
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and
cash equivalents
|
|
40,977
|
|
|
|
|
|
40,977
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
held for sale
|
|
5,888
|
|
|
|
|
|
5,888
|
|
Securities
available for sale (a)
|
|
234,822
|
|
|
|
(5,715
|
)
|
229,107
|
|
Securities held
to maturity, fair value 2009 - $1,741; 2008 - $1,926
|
|
3,048
|
|
|
|
|
|
3,048
|
|
Federal Home
Loan Bank stock (a)
|
|
|
|
|
|
5,715
|
|
5,715
|
|
Loans, net of
allowance for loan losses 2009 - $12,029; 2008 - $8,124
|
|
875,207
|
|
|
|
|
|
875,207
|
|
Premises and
equipment, net
|
|
6,408
|
|
|
|
|
|
6,408
|
|
Identifiable
intangible assets
|
|
4,491
|
|
|
|
|
|
4,491
|
|
Goodwill
|
|
39,732
|
|
|
|
|
|
39,732
|
|
Bank owned life
insurance
|
|
18,736
|
|
|
|
|
|
18,736
|
|
Other assets
(b)
|
|
27,434
|
|
650
|
|
|
|
28,084
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,256,743
|
|
$
|
650
|
|
|
|
$
|
1,257,393
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
$
|
111,231
|
|
|
|
|
|
$
|
111,231
|
|
Interest bearing
|
|
836,683
|
|
|
|
|
|
836,683
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
947,914
|
|
|
|
|
|
947,914
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold
under agreements to repurchase
|
|
124,875
|
|
|
|
|
|
124,875
|
|
Federal funds
purchased
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
35,000
|
|
|
|
|
|
35,000
|
|
Junior
subordinated debt, at fair value (c)
|
|
19,989
|
|
(1,133
|
)
|
|
|
18,856
|
|
Other
liabilities (b)
|
|
8,171
|
|
922
|
|
|
|
9,093
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
1,135,949
|
|
(211
|
)
|
|
|
1,135,738
|
|
|
|
|
|
|
|
|
|
|
|
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% cumulative preferred stock
issued and outstanding; Less: discount of $2,108 at June 30, 2009 and a
discount of $2,307 at December 31, 2008
|
|
22,892
|
|
|
|
|
|
22,892
|
|
Common stock,
$5.00 par value; authorized 20,000,000 shares; issued: 5,804,684 shares at
June 30, 2009 and 5,768,429 shares at December 31, 2008
|
|
29,024
|
|
|
|
|
|
29,024
|
|
Stock Warrants
|
|
2,307
|
|
|
|
|
|
2,307
|
|
Surplus
|
|
63,654
|
|
|
|
|
|
63,654
|
|
Retained
earnings (d)
|
|
12,341
|
|
373
|
|
|
|
12,714
|
|
Accumulated
other comprehensive loss (e)
|
|
(9,233
|
)
|
488
|
|
|
|
(8,745
|
)
|
Treasury stock;
10,484 shares at June 30, 2009 and 68,354 shares at December 31,
2008, at cost
|
|
(191
|
)
|
|
|
|
|
(191
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders equity
|
|
120,794
|
|
861
|
|
|
|
121,655
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
$
|
1,256,743
|
|
$
|
650
|
|
|
|
$
|
1,257,393
|
|
(a) Reclassification of Federal Home Loan Bank
and American Central Bankers Bank stock from Securities Available for Sale to
Federal Home Loan Bank stock.
(b) Adjustment to properly record the interest
rate swaps at fair value. The Company adjusted the forward yield curve used in
its determination of the fair value of the interest rate swaps to reflect a
more appropriate fair value in the restated financial statements.
(c) Adjustment to properly record the junior
subordinated debentures at fair value. 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. The Company has adjusted the credit spreads used in its
determination of the fair value of its junior subordinated debt to reflect a
more appropriate fair value in the restated financial statements.
(d) Adjustment related to the change in net
income as a result of the correction of the errors related to the measurement
accounting for the fair value of certain junior subordinated debentures and the
accounting and measurement of interest rate swaps that were improperly designated
as cash flow hedges.
(e) Adjustment to reverse the effects of improper
accounting treatment for interest rate swaps that were improperly accounted for
as cash flow hedges. The change in fair value of the interest rate swaps is
included as a component of other income in the restated consolidated statements
of income.
13
Table
of Contents
The
following is a summary of the adjustments to our previously issued unaudited
consolidated statements of income for the three and six months ended June 30,
2009:
VIST FINANCIAL
CORP. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF INCOME
For the Periods
Ended June 30, 2009
(Amounts in
thousands, except per share data)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30, 2009
|
|
|
|
|
|
June 30, 2009
|
|
June 30, 2009
|
|
|
|
|
|
June 30, 2009
|
|
|
|
As Reported
|
|
Adjustments
|
|
Reclassifications
|
|
As Restated
|
|
As Reported
|
|
Adjustments
|
|
Reclassifications
|
|
As Restated
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
12,261
|
|
|
|
|
|
$
|
12,261
|
|
$
|
24,603
|
|
|
|
|
|
$
|
24,603
|
|
Interest on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
2,709
|
|
|
|
|
|
2,709
|
|
5,579
|
|
|
|
|
|
5,579
|
|
Tax-exempt
|
|
305
|
|
|
|
|
|
305
|
|
591
|
|
|
|
|
|
591
|
|
Dividend income (f)
|
|
33
|
|
|
|
|
|
33
|
|
72
|
|
|
|
(5
|
)
|
67
|
|
Interest on federal funds sold
|
|
5
|
|
|
|
|
|
5
|
|
8
|
|
|
|
|
|
8
|
|
Other interest income
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
15,313
|
|
|
|
|
|
15,313
|
|
30,854
|
|
|
|
(5
|
)
|
30,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
5,172
|
|
|
|
|
|
5,172
|
|
10,326
|
|
|
|
|
|
10,326
|
|
Interest on short-term borrowings
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
17
|
|
Interest on securities sold under agreements
to repurchase
|
|
1,100
|
|
|
|
|
|
1,100
|
|
2,163
|
|
|
|
|
|
2,163
|
|
Interest on long-term debt
|
|
412
|
|
|
|
|
|
412
|
|
917
|
|
|
|
|
|
917
|
|
Interest on junior subordinated debt
|
|
362
|
|
|
|
|
|
362
|
|
677
|
|
|
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
7,046
|
|
|
|
|
|
7,046
|
|
14,100
|
|
|
|
|
|
14,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
8,267
|
|
|
|
|
|
8,267
|
|
16,754
|
|
|
|
(5
|
)
|
16,749
|
|
Provision for loan losses
|
|
4,300
|
|
|
|
|
|
4,300
|
|
5,125
|
|
|
|
|
|
5,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
after provision for loan losses
|
|
3,967
|
|
|
|
|
|
3,967
|
|
11,629
|
|
|
|
(5
|
)
|
11,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer service fees
|
|
596
|
|
|
|
|
|
596
|
|
1,254
|
|
|
|
|
|
1,254
|
|
Mortgage banking activities
|
|
408
|
|
|
|
|
|
408
|
|
675
|
|
|
|
|
|
675
|
|
Commissions and fees from insurance
sales
|
|
3,036
|
|
|
|
|
|
3,036
|
|
5,994
|
|
|
|
|
|
5,994
|
|
Brokerage and investment advisory
commissions and fees
|
|
152
|
|
|
|
|
|
152
|
|
482
|
|
|
|
|
|
482
|
|
Earnings on investment in life insurance
|
|
108
|
|
|
|
|
|
108
|
|
184
|
|
|
|
|
|
184
|
|
Gains on sale of loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (f), (g)
|
|
550
|
|
117
|
|
|
|
667
|
|
1,620
|
|
(1
|
)
|
5
|
|
1,624
|
|
Net realized gains (losses) on sales of
securities
|
|
126
|
|
|
|
|
|
126
|
|
285
|
|
|
|
|
|
285
|
|
Total other-than-temporary impairment
losses on investments
|
|
(973
|
)
|
|
|
|
|
(973
|
)
|
(973
|
)
|
|
|
|
|
(973
|
)
|
Portion of non-credit impairment loss
recognized in other comprehensive loss
|
|
651
|
|
|
|
|
|
651
|
|
651
|
|
|
|
|
|
651
|
|
Net credit impairment loss recognized in
earnings
|
|
(322
|
)
|
|
|
|
|
(322
|
)
|
(322
|
)
|
|
|
|
|
(322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
4,654
|
|
117
|
|
|
|
4,771
|
|
10,172
|
|
(1
|
)
|
5
|
|
10,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
5,754
|
|
|
|
|
|
5,754
|
|
11,442
|
|
|
|
|
|
11,442
|
|
Occupancy expense
|
|
881
|
|
|
|
|
|
881
|
|
1,950
|
|
|
|
|
|
1,950
|
|
Furniture and equipment expense
|
|
634
|
|
|
|
|
|
634
|
|
1,240
|
|
|
|
|
|
1,240
|
|
Marketing and advertising expense
|
|
335
|
|
|
|
|
|
335
|
|
605
|
|
|
|
|
|
605
|
|
Amortization of identifiable intangible
assets
|
|
171
|
|
|
|
|
|
171
|
|
342
|
|
|
|
|
|
342
|
|
Professional services
|
|
482
|
|
|
|
|
|
482
|
|
1,374
|
|
|
|
|
|
1,374
|
|
Outside processing
|
|
1,086
|
|
|
|
|
|
1,086
|
|
2,037
|
|
|
|
|
|
2,037
|
|
Insurance expense
|
|
984
|
|
|
|
|
|
984
|
|
1,428
|
|
|
|
|
|
1,428
|
|
Other expense
|
|
1,240
|
|
|
|
|
|
1,240
|
|
2,428
|
|
|
|
|
|
2,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
11,567
|
|
|
|
|
|
11,567
|
|
22,846
|
|
|
|
|
|
22,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
(2,946
|
)
|
117
|
|
|
|
(2,829
|
)
|
(1,045
|
)
|
(1
|
)
|
|
|
(1,046
|
)
|
Income taxes (h)
|
|
(1,361
|
)
|
40
|
|
|
|
(1,321
|
)
|
(1,069
|
)
|
|
|
|
|
(1,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
(1,585
|
)
|
77
|
|
|
|
(1,508
|
)
|
24
|
|
(1
|
)
|
|
|
23
|
|
Preferred stock
dividends and discount accretion
|
|
(413
|
)
|
|
|
|
|
(413
|
)
|
(825
|
)
|
|
|
|
|
(825
|
)
|
Net income available to
common shareholders
|
|
$
|
(1,998
|
)
|
$
|
77
|
|
|
|
$
|
(1,921
|
)
|
$
|
(801
|
)
|
$
|
(1
|
)
|
|
|
$
|
(802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding
|
|
5,791,023
|
|
|
|
|
|
5,791,023
|
|
5,763,648
|
|
|
|
|
|
5,763,648
|
|
Basic earnings per share
|
|
$
|
(0.35
|
)
|
$
|
0.02
|
|
|
|
$
|
(0.33
|
)
|
$
|
(0.14
|
)
|
$
|
|
|
|
|
$
|
(0.14
|
)
|
Average shares outstanding for diluted
earnings per share
|
|
5,791,023
|
|
|
|
|
|
5,791,023
|
|
5,763,648
|
|
|
|
|
|
5,763,648
|
|
Diluted earnings per share
|
|
$
|
(0.35
|
)
|
$
|
0.02
|
|
|
|
$
|
(0.33
|
)
|
$
|
(0.14
|
)
|
$
|
|
|
|
|
$
|
(0.14
|
)
|
Cash dividends declared per share
|
|
$
|
0.10
|
|
|
|
|
|
$
|
0.10
|
|
$
|
0.20
|
|
|
|
|
|
$
|
0.20
|
|
(f) Reclassification
of reclassify dividend income on Federal Home Loan Bank stock from interest
income to other income.
(g) Adjustment to record the change in the fair
market value of the interest rate swaps, the junior subordinated debentures and
to reverse the effect of the treatment of the interest rate swaps as cash flow
hedges.
(h) Adjustment to record the income tax effect of
the change in the fair value of the cash flow hedge and junior subordinated
debentures.
3.
Earnings Per
Common Share
Basic
(loss) earnings per common share is calculated by dividing net income (loss),
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
14
Table
of Contents
outstanding to include the
effect of stock options, if dilutive, using the treasury stock method. For 2008, there were no dividends or discount
accretion on the Series A Preferred Stock.
There was no dilution to common shares for 2009 due to the Company being
in a loss position.
Earnings
per common share for the respective periods indicated have been computed based
upon the following:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2009
(As Restated)
|
|
June 30,
2008
|
|
2009
(As Restated)
|
|
June 30,
2008
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,508
|
)
|
$
|
1,468
|
|
$
|
23
|
|
$
|
3,027
|
|
Less: preferred stock dividends
|
|
(313
|
)
|
|
|
(626
|
)
|
|
|
Less: preferred stock discount accretion
|
|
(100
|
)
|
|
|
(199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common
shareholders
|
|
$
|
(1,921
|
)
|
$
|
1,468
|
|
$
|
(802
|
)
|
$
|
3,027
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
|
5,791,023
|
|
5,692,377
|
|
5,763,648
|
|
5,682,890
|
|
Effect of dilutive stock options
|
|
|
|
12,665
|
|
|
|
13,760
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares used to
calculate diluted earnings per common share
|
|
5,791,023
|
|
5,705,042
|
|
5,763,648
|
|
5,696,650
|
|
4.
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 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. The components of
other comprehensive income and related tax effects were as follows:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2008
(As Restated)
|
|
June 30,
2008
|
|
2009
(As Restated)
|
|
June 30,
2008
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,508
|
)
|
$
|
1,468
|
|
$
|
23
|
|
$
|
3,027
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on available
for sale securities
|
|
(1,493
|
)
|
(6,972
|
)
|
(1,417
|
)
|
(6,621
|
)
|
Reclassification adjustment for credit
related impairment on investment security realized in income
|
|
322
|
|
|
|
322
|
|
|
|
Reclassification adjustment for
investment gains realized in income
|
|
(126
|
)
|
(61
|
)
|
(285
|
)
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses
|
|
(1,297
|
)
|
(7,033
|
)
|
(1,380
|
)
|
(6,823
|
)
|
Income tax effect
|
|
441
|
|
2,391
|
|
469
|
|
2,320
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
(856
|
)
|
(4,642
|
)
|
(911
|
)
|
(4,503
|
)
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$
|
(2,364
|
)
|
$
|
(3,174
|
)
|
$
|
(888
|
)
|
$
|
(1,476
|
)
|
5.
Guarantees
Outstanding letters of credit
written are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party.
The Companys exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for standby letters of credit is
represented by the contractual amount of those instruments. The Company had $12.7 million and $14.5
million of financial and performance standby letters of credit as of June 30,
2009 and December 31, 2008, respectively.
The Bank uses the same credit policies in making conditional obligations
as it does for on-balance sheet instruments.
15
Table
of Contents
The
majority of these standby letters of credit expire within the next 24
months. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
other loan commitments. The Company
requires collateral and personal guarantees supporting these letters of credit
as deemed necessary. Management believes
that the proceeds obtained through a liquidation of such collateral and the
enforcement of personal guarantees 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, 2009 and December 31, 2008 for guarantees
under standby letters of credit is not material.
6.
Segment
Information
The
Companys
insurance
operations, investment operations and mortgage banking operations are managed
separately from the traditional banking and related financial services that the
Company also offers. The mortgage
banking operation offers residential lending products and generates revenue
primarily through gains recognized on loan sales. 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.
|
|
Banking
and
Financial
Services
|
|
Mortgage
Banking
|
|
Insurance
Services
|
|
Investment
Services
|
|
Total
|
|
|
|
(Dollar amounts in
thousands)
|
|
Three months ended
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and other income from
external sources (as restated)
|
|
$
|
8,858
|
|
$
|
994
|
|
$
|
3,015
|
|
$
|
171
|
|
$
|
13,038
|
|
(Loss) income before income taxes (as
restated)
|
|
(3,851
|
)
|
601
|
|
464
|
|
(43
|
)
|
(2,829
|
)
|
Total Assets (as restated)
|
|
1,159,210
|
|
79,455
|
|
17,589
|
|
1,139
|
|
1,257,393
|
|
Purchases of premises and equipment
|
|
136
|
|
|
|
140
|
|
14
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and other income from
external sources
|
|
$
|
9,849
|
|
$
|
913
|
|
$
|
2,785
|
|
$
|
248
|
|
$
|
13,795
|
|
Income (loss) before income taxes
|
|
697
|
|
506
|
|
433
|
|
(4
|
)
|
1,632
|
|
Total Assets
|
|
1,107,864
|
|
62,908
|
|
17,066
|
|
1,260
|
|
1,189,098
|
|
Purchases of premises and equipment
|
|
237
|
|
1
|
|
30
|
|
1
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and other income from
external sources (as restated)
|
|
$
|
18,013
|
|
$
|
1,860
|
|
$
|
6,535
|
|
$
|
517
|
|
$
|
26,925
|
|
(Loss) income before income taxes (as
restated)
|
|
(3,318
|
)
|
1,096
|
|
1,162
|
|
14
|
|
(1,046
|
)
|
Total Assets (as restated)
|
|
1,159,210
|
|
79,455
|
|
17,589
|
|
1,139
|
|
1,257,393
|
|
Purchases of premises and equipment
|
|
608
|
|
|
|
141
|
|
14
|
|
763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and other income from
external sources
|
|
$
|
19,298
|
|
$
|
1,751
|
|
$
|
5,474
|
|
$
|
507
|
|
$
|
27,030
|
|
Income (loss) before income taxes
|
|
1,781
|
|
805
|
|
803
|
|
(19
|
)
|
3,370
|
|
Total Assets
|
|
1,107,864
|
|
62,908
|
|
17,066
|
|
1,260
|
|
1,189,098
|
|
Purchases of premises and equipment
|
|
617
|
|
1
|
|
35
|
|
1
|
|
654
|
|
7.
Stock 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
16
Table
of Contents
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,
2009, a total of 148,072 shares have 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, 2009, a total of 21,166 shares have been issued
under the IDSOP. The IDSOP expired on November 10, 2008.
On
April 17, 2007, shareholders approved the VIST Financial Corp. 2007 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,
2009, no shares have been issued under the EIP.
The EIP will expire on April 17, 2017.
The
Companys total stock-based compensation expense for the six months ended June 30,
2009 and 2008 was approximately $77,000 and $172,000, respectively. Total
stock-based compensation expense, net of related tax effects, was approximately
$51,000 and $114,000 for the six months ended June, 2009 and 2008,
respectively. The Companys total
stock-based compensation expense for the three months ended June 30, 2009
and 2008 was approximately $56,000 and $95,000, respectively. Total stock-based
compensation expense, net of related tax effects, was approximately $37,000 and
$63,000 for the three months ended June, 2009 and 2008, respectively. Cash
flows from financing activities included in cash inflows from excess tax
benefits related to stock compensation were approximately $0 for the three and
six months ended June 30, 2009 and 2008.
Total unrecognized compensation costs related to non-vested stock
options at June 30, 2009 and 2008 were approximately $235,000 and $480,000,
respectively.
Stock
option transactions under the Plans for the six months ended June 30, 2009
were as follows:
17
Table
of Contents
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Aggregate
|
|
Remaining
|
|
|
|
|
|
Exercise
|
|
Intrinsic
|
|
Term
|
|
|
|
Options
|
|
Price
|
|
Value
|
|
(in
years)
|
|
Outstanding at the beginning of the year
|
|
708,889
|
|
$
|
17.23
|
|
|
|
|
|
Granted
|
|
13,000
|
|
8.50
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Expired
|
|
(7,350
|
)
|
22.93
|
|
|
|
|
|
Forfeited
|
|
(95,331
|
)
|
13.52
|
|
|
|
|
|
Outstanding as of June 30, 2009
|
|
619,208
|
|
$
|
17.55
|
|
$
|
|
|
6.8
|
|
Exercisable as of June 30, 2009
|
|
397,035
|
|
$
|
19.65
|
|
$
|
|
|
5.8
|
|
The
fair value of options granted for the six month period ended June 30, 2009
were estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions:
|
|
As
of and for the year ended
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Dividend yield
|
|
7.76
|
%
|
6.09
|
%
|
Expected life
|
|
7 years
|
|
7 years
|
|
Expected volatility
|
|
25.71
|
%
|
21.52
|
%
|
Risk-free interest rate
|
|
1.96
|
%
|
2.54
|
%
|
Weighted average fair value of options
granted
|
|
$
|
0.68
|
|
$
|
1.29
|
|
|
|
|
|
|
|
|
|
8.
Investment in
Limited Partnership
On December 29, 2003, the Bank entered into a limited partner
subscription agreement with Midland Corporate Tax Credit XVI Limited
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
Statement of Position (SOP) 78-9, Accounting for Investments in Real Estate
Ventures, 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, 2009. Installments
were paid as requested.
9.
Recently Issued Accounting
Standards
In January 2009, the FASB issued FSP EITF 99-20-1, Amendments to
the Impairment of Guidance of EITF Issue No. 99-20 (FSP EITF
99-20-1). FSP EITF 99-20-1 amends the
impairment guidance in EITF Issue No. 99-20, Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests That Continue to Be Held by a Transferor in Securitized Financial
Assets, to achieve more consistent determination of whether an
other-than-temporary impairment has occurred.
FSP EITF 99-20-1 also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure requirements
in SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and other related guidance. FSP EITF 99-20-1 is effective for
interim and annual reporting periods ending after December 15, 2008, and
shall be applied prospectively.
Retrospective application to a prior interim or annual reporting period
is not permitted. The implementation of
this standard did not have a material impact on the Companys consolidated
financial position and results of operations.
In
April 2009, the Financial Accounting Standards Board (FASB) issued
FASB Staff Position (FSP) No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (FSP FAS
157-4). FASB Statement 157, Fair Value
Measurements, defines fair value as the price that would be received to sell
the asset or transfer the liability in an orderly transaction (that is, not a
forced liquidation or distressed sale) between market participants at the
measurement date under current market conditions.
18
Table
of Contents
FSP
FAS 157-4 provides additional guidance on determining when the volume and level
of activity for the asset or liability has significantly decreased. The FSP also includes guidance on identifying
circumstances when a transaction may not be considered orderly.
FSP
FAS 157-4 provides a list of factors that a reporting entity should evaluate to
determine whether there has been a significant decrease in the volume and level
of activity for the asset or liability in relation to normal market activity
for the asset or liability. When the
reporting entity concludes there has been a significant decrease in the volume
and level of activity for the asset or liability, further analysis of the
information from that market is needed and significant adjustments to the
related prices may be necessary to estimate fair value in accordance with
Statement 157.
This
FSP clarifies that when there has been a significant decrease in the volume and
level of activity for the asset or liability, some transactions may not be
orderly. In those situations, the entity
must evaluate the weight of the evidence to determine whether the transaction
is orderly. The FSP provides a list of
circumstances that may indicate that a transaction is not orderly. A
transaction price that is not associated with an orderly transaction is given
little, if any, weight when estimating fair value.
This
FSP is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. An entity early adopting FSP FAS
157-4 must also early adopt FSP FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments. The implementation of this standard did not
have a material impact on the Companys consolidated financial position and
results of operations.
In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2
and FAS 124-2). FSP FAS 115-2 and FAS
124-2 clarifies the interaction of the factors that should be considered when
determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess
whether (a) it has the intent to sell the security and (b) it is more
likely than not that it will be required to sell the security prior to its
anticipated recovery. These steps are
done before assessing whether the entity will recover the cost basis of the
investment. Previously, this assessment required management to assert it has
both the intent and the ability to hold a security for a period of time
sufficient to allow for an anticipated recovery in fair value to avoid
recognizing an other-than-temporary impairment.
This change does not affect the need to forecast recovery of the value
of the security through either cash flows or market price.
In
instances when a determination is made that an other-than-temporary impairment
exists but the investor does not intend to sell the debt security and it is not
more likely than not that it will be required to sell the debt security prior
to its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the
presentation and amount of the other-than-temporary impairment recognized in
the income statement. The
other-than-temporary impairment is separated into (a) the amount of the
total other-than-temporary impairment related to a decrease in cash flows
expected to be collected from the debt security (the credit loss) and (b) the
amount of the total other-than-temporary impairment related to all other
factors. The amount of the total
other-than-temporary impairment related to the credit loss is recognized in
earnings. The amount of the total
other-than-temporary impairment related to all other factors is recognized in
other comprehensive income.
This
FSP is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. An entity early adopting FSP FAS
115-2 and FAS 124-2 must also early adopt FSP FAS 157-4, Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly. The implementation of this standard did not
have a material impact on the Companys consolidated financial position and
results of operations.
In
June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140. This statement prescribes the information
that a reporting entity must provide in its financial reports about a transfer
of financial assets; the effects of a transfer on its financial position,
financial performance and cash flows; and a transferors continuing involvement
in transferred financial assets.
Specifically, among other aspects, SFAS 166 amends Statement of
Financial Standard No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, or SFAS 140, by removing
the concept of a qualifying special-purpose entity from SFAS 140 and removes
the exception from applying FIN 46(R) to variable interest entities that
are qualifying special-purpose entities.
It also modifies the financial-components approach used in SFAS 140.
SFAS 166 is effective for fiscal years beginning after November 15,
2009. We have not determined the effect
that the adoption of SFAS 166 will have on our financial position or results of
operations.
19
Table
of Contents
In
June 2009, the FASB issued SFAS No. 167, Amendments to FASB
Interpretation No. 46(R). This
statement amends FASB Interpretation No. 46, Consolidation of Variable
Interest Entities (revised December 2003) an interpretation of ARB No. 51,
or FIN 46(R), to require an enterprise to determine whether its variable
interest or interests give it a controlling financial interest in a variable
interest entity. The primary beneficiary
of a variable interest entity is the enterprise that has both (1) the
power to direct the activities of a variable interest entity that most
significantly impact the entitys economic performance and (2) the
obligation to absorb losses of the entity that could potentially be significant
to the variable interest entity or the right to receive benefits from the entity
that could potentially be significant to the variable interest entity. SFAS 167 also amends FIN 46(R) to
require ongoing reassessments of whether an enterprise is the primary
beneficiary of a variable interest entity.
SFAS 167 is effective for fiscal years beginning after November 15,
2009. We have not determined the effect
that the adoption of SFAS 167 will have on our financial position or results of
operations.
In
June 2009, the FASB issued SFAS No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, a replacement of FASB Statement No. 162. SFAS 168 replaces SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles, to establish the FASB
Accounting Standards Codification as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
preparation of financial statements in conformity with generally accepted
accounting principles in the United States.
SFAS 168 is effective for interim and annual periods ending after September 15,
2009. We do not expect the adoption of this standard to have an impact on our
financial position or results of operations.
10.
Fair Value Measurements and
Fair Value of Financial Instruments
Fair
Value Measurements
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 could have realized in a sale transaction
on the dates indicated. The estimated
fair value amounts have been measured as of their respective year ends and have
not been re-evaluated or updated for purposes of these consolidated financial
statements subsequent to those respective dates. As such, the estimated fair values of these
financial instruments subsequent to the respective reporting dates may be
different than the amounts reported at each year end.
The
following methods and assumptions were used to estimate the fair values of the
Companys financial instruments at June 30, 2009 and December 31,
2008:
SFAS
157 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.
SFAS
157 requires the use of valuation techniques that are consistent with the
market approach, the income approach and/or the cost approach. The market approach uses prices and other
relevant information generated by market transactions involving identical or
comparable assets and liabilities. The
income approach uses valuation techniques to convert future amounts, such as
cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that
currently would be required to replace the service capacity of an asset (replacement
costs). Valuation techniques should be
consistently applied. 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, SFAS 157 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 unobservable inputs.
20
Table of Contents
The
three levels defined by SFAS 157 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 that are fair valued using
other financial instruments, the parameters of which can be directly observed.
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 table presents the assets and liabilities measured on a recurring
basis reported on the consolidated statements of financial condition at their
fair value by level within the fair value hierarchy.
|
|
As
of June 30, 2009
|
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
|
|
|
(In thousands)
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
Securities Available
For Sale*
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government agencies
and corporations
|
|
$
|
|
|
$
|
7,715
|
|
$
|
|
|
$
|
7,715
|
|
Mortgage-backed debt securities
|
|
|
|
188,825
|
|
|
|
188,825
|
|
State and municipal obligations
|
|
|
|
26,913
|
|
|
|
26,913
|
|
Other securities
|
|
1,320
|
|
4,334
|
|
|
|
5,654
|
|
|
|
$
|
1,320
|
|
$
|
227,787
|
|
$
|
|
|
$
|
229,107
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES (as restated):
|
|
|
|
|
|
|
|
|
|
Junior subordinated debt
|
|
$
|
|
|
$
|
|
|
$
|
18,856
|
|
$
|
18,856
|
|
Interest rate swaps
|
|
|
|
|
|
730
|
|
730
|
|
|
|
As
of December 31, 2008
|
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
|
|
|
(In thousands)
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
Securities Available
For Sale
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government agencies
and corporations
|
|
$
|
|
|
$
|
9,331
|
|
$
|
|
|
$
|
9,331
|
|
Mortgage-backed debt securities
|
|
|
|
185,177
|
|
|
|
185,177
|
|
State and municipal obligations
|
|
|
|
25,033
|
|
|
|
25,033
|
|
Other securities
|
|
1,675
|
|
5,449
|
|
|
|
7,124
|
|
|
|
$
|
1,675
|
|
$
|
224,990
|
|
$
|
|
|
$
|
226,665
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Junior subordinated debt
|
|
$
|
|
|
$
|
|
|
$
|
18,260
|
|
$
|
18,260
|
|
Interest rate swaps
|
|
|
|
|
|
1,325
|
|
1,325
|
|
*This
table has been adjusted to reflect the Companys reclassification of Federal
Home Loan Bank stock from securities available for sale to Federal Home Loan
Bank stock. See Note 2, Restatement of
Consolidated Financial Statements to the consolidated financial statements
included in this Form 10-Q.
21
Table of Contents
The
following table presents the assets and liabilities measured on a non-recurring
basis reported on the consolidated statements of financial condition at their
fair value by level within the fair value hierarchy.
|
|
As
of June 30, 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:
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
|
|
$
|
5,888
|
|
$
|
|
|
$
|
5,888
|
|
Impaired loans
|
|
|
|
|
|
6,724
|
|
6,724
|
|
OREO
|
|
|
|
|
|
2,238
|
|
2,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2008
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
|
|
$
|
2,283
|
|
$
|
|
|
$
|
2,283
|
|
Impaired loans
|
|
|
|
|
|
5,270
|
|
5,270
|
|
OREO
|
|
|
|
|
|
263
|
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in Level 3 liabilities measured at fair
value on a recurring basis are summarized as follows:
22
Table of Contents
|
|
Three
months ended June 30, 2009
|
|
|
|
|
|
Total
realized and
|
|
|
|
|
|
|
|
|
|
Unrealized
Gains (Losses)
|
|
|
|
|
|
|
|
Fair
Value at
March 31,
2009
|
|
Recorded
in
Revenue
|
|
Recorded
in
Other
Comprehensive
Income
|
|
Transfers
Into
and/or Out of
Level 3
|
|
Fair
Value at
June 30,
2009
|
|
|
|
(Dollar amounts in
thousands)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated debt
|
|
$
|
19,050
|
|
$
|
194
|
|
$
|
|
|
$
|
|
|
$
|
18,856
|
|
Interest rate swaps
|
|
653
|
|
(77
|
)
|
|
|
|
|
730
|
|
|
|
$
|
19,703
|
|
$
|
117
|
|
$
|
|
|
$
|
|
|
$
|
19,586
|
|
|
|
Six
months ended June 30, 2009
|
|
|
|
|
|
Total
realized and
|
|
|
|
|
|
|
|
|
|
Unrealized
Gains (Losses)
|
|
|
|
|
|
|
|
Fair
Value at
December 31,
2008
|
|
Recorded
in
Revenue
|
|
Recorded
in
Other
Comprehensive
Income
|
|
Transfers
Into
and/or Out of
Level 3
|
|
Fair
Value at
June 30,
2009
|
|
|
|
(Dollar amounts in
thousands)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated debt
|
|
$
|
18,260
|
|
$
|
(596
|
)
|
$
|
|
|
$
|
|
|
$
|
18,856
|
|
Interest rate swaps
|
|
1,325
|
|
595
|
|
|
|
|
|
730
|
|
|
|
$
|
19,585
|
|
$
|
(1
|
)
|
$
|
|
|
$
|
|
|
$
|
19,586
|
|
As
a result of the change in fair value of the junior subordinated debt and
interest rate swaps, included in other non-interest income for the first three
and six months of 2009 are net pre-tax gains (losses) of approximately $117,000
and ($1,000), respectively. As a result
of the change in fair value of the junior subordinated debt and interest rate
swaps for the first three and six months of 2008, respectively, there were no
net pre-tax gains (losses) included in other non-interest income.
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, 2009 and 2008.
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.
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
23
Table
of Contents
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.
A
summary of the carrying amounts and estimated fair values of financial
instruments is as follows:
|
|
As
of June 30, 2009
|
|
As
of December 31, 2008
|
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
|
|
Amount
|
|
Fair
Value
|
|
Amount
|
|
Fair
Value
|
|
|
|
(In
thousands)
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
40,977
|
|
$
|
40,977
|
|
$
|
19,284
|
|
$
|
19,284
|
|
Securities available for sale
|
|
229,107
|
|
229,107
|
|
226,665
|
|
226,665
|
|
Securities held to maturity
|
|
3,048
|
|
1,740
|
|
3,060
|
|
1,926
|
|
Federal Home Loan Bank stock
|
|
5,715
|
|
5,715
|
|
5,715
|
|
5,715
|
|
Mortgage loans held for sale
|
|
5,888
|
|
5,888
|
|
2,283
|
|
2,283
|
|
Loans, net
|
|
875,207
|
|
881,054
|
|
878,181
|
|
897,930
|
|
Cash surrender value of life insurance
policies
|
|
18,736
|
|
18,736
|
|
18,552
|
|
18,552
|
|
Accrued interest receivable
|
|
4,639
|
|
4,639
|
|
4,734
|
|
4,734
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
947,914
|
|
955,943
|
|
850,600
|
|
858,744
|
|
Federal funds purchased and agreements
to repurchase
|
|
124,875
|
|
116,757
|
|
173,510
|
|
174,996
|
|
Junior subordinated debt (as restated)
|
|
18,856
|
|
18,856
|
|
18,260
|
|
18,260
|
|
Interest rate swap (as restated)
|
|
730
|
|
730
|
|
1,325
|
|
1,325
|
|
Long-term debt
|
|
35,000
|
|
35,682
|
|
50,000
|
|
50,975
|
|
Accrued interest payable
|
|
3,001
|
|
3,001
|
|
3,413
|
|
3,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This table has been adjusted to reflect the Companys
reclassification of Federal Home Loan Bank stock from securities available for
sale to Federal Home Loan Bank stock.
See Note 2, Restatement of Consolidated Financial Statements to the
consolidated financial statements included in this Form 10-K.
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:
Securities
classified as available for sale are reported at fair value utilizing Level 1,
Level 2 and Level 3 inputs. For these
securities, the Company obtains fair value measurements from an independent
pricing service. The fair value
measurements consider observable data that may include dealer quotes, market
spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade
execution data, market consensus prepayments speeds, credit information and the
bonds terms and conditions, among other things.
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
Held for Sale:
The
fair value of 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.
24
Table
of Contents
Impaired
Loans:
The
Company generally values impaired loans that are accounted for under SFAS 114, Accounting
by creditors for impairment of a loan an amendment of FASB Statements No. 5 &
15, 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.
As
of June 30, 2009, 96.0% 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 4.0% of impaired
loans were in process of being evaluated at June 30, 2009. 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 the first six months of 2009, there were no 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.
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.
Mortgage
servicing rights:
The
fair value of mortgage servicing rights is based on observable market prices
when available or the present value of expected future cash flows when not
available.
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.
Securities
sold under agreements to repurchase and federal funds purchased:
The
carrying amounts of these borrowings approximate their fair values.
25
Table
of Contents
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 maturities.
Junior
Subordinated Debt:
The
Company has elected to record its junior subordinated debt at fair value. The Company recorded 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 has recorded 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 instruments:
Fair
values for the off-balance sheet 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.
11.
Investment Securities
The amortized cost, gross unrealized gains and
losses and fair value of investment securities available for sale and investment
securities held to maturity at June 30, 2009 and December 31, 2008
were as follows:
26
Table of Contents
Securities Available For
Sale
|
|
June 30,
2009
|
|
December 31,
2008
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency securities
|
|
$
|
7,487
|
|
$
|
228
|
|
$
|
|
|
$
|
7,715
|
|
$
|
9,438
|
|
$
|
110
|
|
$
|
(217
|
)
|
$
|
9,331
|
|
Agency Mortgage-backed debt securities
|
|
162,143
|
|
3,040
|
|
(1,525
|
)
|
163,658
|
|
151,782
|
|
3,176
|
|
(159
|
)
|
154,799
|
|
Non-Agency Mortgage-backed debt
securities
|
|
30,073
|
|
229
|
|
(5,135
|
)
|
25,167
|
|
34,163
|
|
39
|
|
(3,824
|
)
|
30,378
|
|
Obligations of states and political
subdivisions
|
|
28,048
|
|
100
|
|
(1,235
|
)
|
26,913
|
|
26,582
|
|
42
|
|
(1,591
|
)
|
25,033
|
|
Trust preferred securities - single
issuer
|
|
500
|
|
|
|
(110
|
)
|
390
|
|
500
|
|
|
|
(96
|
)
|
404
|
|
Trust preferred securities - pooled
|
|
8,069
|
|
|
|
(7,355
|
)
|
714
|
|
8,408
|
|
|
|
(7,682
|
)
|
726
|
|
Corporate and other debt securities
|
|
2,453
|
|
|
|
(307
|
)
|
2,146
|
|
4,264
|
|
|
|
(904
|
)
|
3,360
|
|
Equity securities
|
|
3,583
|
|
37
|
|
(1,216
|
)
|
2,404
|
|
3,398
|
|
34
|
|
(798
|
)
|
2,634
|
|
Total investment securities available
for sale
|
|
$
|
242,356
|
|
$
|
3,634
|
|
$
|
(16,883
|
)
|
$
|
229,107
|
|
$
|
238,535
|
|
$
|
3,401
|
|
$
|
(15,271
|
)
|
$
|
226,665
|
|
Securities Held To Maturity
|
|
June 30,
2009
|
|
December 31,
2008
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities - single
issuer
|
|
$
|
2,016
|
|
$
|
5
|
|
$
|
(339
|
)
|
$
|
1,682
|
|
$
|
2,019
|
|
$
|
2
|
|
$
|
(153
|
)
|
$
|
1,868
|
|
Trust preferred securities - pooled
|
|
1,032
|
|
|
|
(973
|
)
|
59
|
|
1,041
|
|
|
|
(983
|
)
|
58
|
|
Total investment securities held to
maturity
|
|
$
|
3,048
|
|
$
|
5
|
|
$
|
(1,312
|
)
|
$
|
1,741
|
|
$
|
3,060
|
|
$
|
2
|
|
$
|
(1,136
|
)
|
$
|
1,926
|
|
This table has been adjusted to reflect the Companys
reclassification of Federal Home Loan Bank stock from securities available for
sale to Federal Home Loan Bank stock.
See Note 2, Restatement of Consolidated Financial Statements to the consolidated
financial statements included in this Form 10-K.
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
27
Table
of Contents
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.
As of June 30, 2009, the Company had
approximately $3.0 million and $229.1 million in held to maturity and available
for sale investment securities, respectively.
The Company may record impairment charges on its investment securities
if they suffer a decline in value that is considered other-than-temporary. Numerous factors, including those set forth
above as well as adverse changes in business climate, adverse actions by
regulators, or unanticipated changes in the competitive environment could have
a negative effect on the Companys investment portfolio and may result in
other-than-temporary impairment on certain investment securities in future
periods. The Companys investment
portfolios include private label mortgage-backed securities, trust preferred
securities principally issued by bank holding companies (bank issuers)
(including nine pooled securities), perpetual preferred securities issued by
banks, equity securities, and bank issued corporate bonds. These investments may pose a higher risk of
future impairment charges by the Company as a result of the current downturn in
the U.S. economy and its potential negative effect on the future performance of
these bank issuers and/or the underlying mortgage loan collateral. Based on recent stress tests and potential
recommendations by the U.S. Government and the banking regulators, some bank
trust preferred issuers may elect to defer future payments of interest on such
securities. Such elections by issuers of
securities within the Companys investment portfolio could adversely affect
securities valuations and result in future impairment charges. Approximately $30.1 million of the
residential mortgage-backed securities classified as available for sale
securities were non-agency mortgage-backed securities at June 30, 2009,
while the remainder of the residential mortgage-backed securities portfolio ($162.1
million) was issued by U.S. government sponsored agencies. The non-agency mortgage-backed securities
classified as available for sale securities had net unrealized losses of $4.9
million at June 30, 2009.
The age of unrealized losses and fair value of
related investment securities available for sale and investment securities held
to maturity at June 30, 2009 and December 31, 2008 were as follows:
28
Table
of Contents
Securities Available for Sale
|
|
June 30,
2009
|
|
|
|
Less
than Twelve Months
|
|
More
than Twelve Months
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency securities
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Agency Mortgage-backed debt securities
|
|
47,458
|
|
(1,525
|
)
|
|
|
|
|
47,458
|
|
(1,525
|
)
|
Non-Agency Mortgage-backed debt
securities
|
|
4,596
|
|
(121
|
)
|
12,412
|
|
(5,014
|
)
|
17,008
|
|
(5,135
|
)
|
Obligations of states and political
subdivisions
|
|
19,391
|
|
(869
|
)
|
4,108
|
|
(366
|
)
|
23,499
|
|
(1,235
|
)
|
Trust preferred securities - single
issuer
|
|
|
|
|
|
390
|
|
(110
|
)
|
390
|
|
(110
|
)
|
Trust preferred securities - pooled
|
|
|
|
|
|
714
|
|
(7,355
|
)
|
714
|
|
(7,355
|
)
|
Corporate and other debt securities
|
|
1,384
|
|
(81
|
)
|
774
|
|
(226
|
)
|
2,158
|
|
(307
|
)
|
Equity securities
|
|
126
|
|
(168
|
)
|
1,637
|
|
(1,048
|
)
|
1,763
|
|
(1,216
|
)
|
Total investment securities available
for sale
|
|
$
|
72,955
|
|
$
|
(2,764
|
)
|
$
|
20,035
|
|
$
|
(14,119
|
)
|
$
|
92,990
|
|
$
|
(16,883
|
)
|
Securities Held To Maturity
|
|
June 30,
2009
|
|
|
|
Less
than Twelve Months
|
|
More
than Twelve Months
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities - single
issuer
|
|
$
|
|
|
$
|
|
|
$
|
637
|
|
$
|
(339
|
)
|
$
|
637
|
|
$
|
(339
|
)
|
Trust preferred securities - pooled
|
|
|
|
|
|
59
|
|
(973
|
)
|
59
|
|
(973
|
)
|
Total investment securities held to
maturity
|
|
$
|
|
|
$
|
|
|
$
|
696
|
|
$
|
(1,312
|
)
|
$
|
696
|
|
$
|
(1,312
|
)
|
Securities Available for Sale
|
|
December 31,
2008
|
|
|
|
Less
than Twelve Months
|
|
More
than Twelve Months
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency securities
|
|
$
|
5,707
|
|
$
|
(217
|
)
|
$
|
|
|
$
|
|
|
$
|
5,707
|
|
$
|
(217
|
)
|
Agency Mortgage-backed debt securities
|
|
9,470
|
|
(94
|
)
|
1,389
|
|
(65
|
)
|
10,859
|
|
(159
|
)
|
Non-Agency Mortgage-backed debt
securities
|
|
18,614
|
|
(2,460
|
)
|
3,134
|
|
(1,364
|
)
|
21,748
|
|
(3,824
|
)
|
Obligations of states and political
subdivisions
|
|
22,740
|
|
(1,591
|
)
|
|
|
|
|
22,740
|
|
(1,591
|
)
|
Trust preferred securities - single
issuer
|
|
|
|
|
|
404
|
|
(96
|
)
|
404
|
|
(96
|
)
|
Trust preferred securities - pooled
|
|
|
|
|
|
726
|
|
(7,682
|
)
|
726
|
|
(7,682
|
)
|
Corporate and other debt securities
|
|
1,065
|
|
(157
|
)
|
2,295
|
|
(747
|
)
|
3,360
|
|
(904
|
)
|
Equity securities
|
|
162
|
|
(53
|
)
|
1,778
|
|
(745
|
)
|
1,940
|
|
(798
|
)
|
Total investment securities available
for sale
|
|
$
|
57,758
|
|
$
|
(4,572
|
)
|
$
|
9,726
|
|
$
|
(10,699
|
)
|
$
|
67,484
|
|
$
|
(15,271
|
)
|
Securities Held To Maturity
|
|
December 31,
2008
|
|
|
|
Less
than Twelve Months
|
|
More
than Twelve Months
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities - single
issuer
|
|
$
|
823
|
|
$
|
(153
|
)
|
$
|
|
|
$
|
|
|
$
|
823
|
|
$
|
(153
|
)
|
Trust preferred securities - pooled
|
|
58
|
|
(983
|
)
|
|
|
|
|
58
|
|
(983
|
)
|
Total investment securities held to
maturity
|
|
$
|
881
|
|
$
|
(1,136
|
)
|
$
|
|
|
$
|
|
|
$
|
881
|
|
$
|
(1,136
|
)
|
29
Table of Contents
At June 30, 2009, there were 57 securities with
unrealized losses in the less than twelve month category and 56 securities with
unrealized losses in the twelve month or more categories.
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 credit crisis.
At June 30, 2009, the fair value of the U. S. Government agencies
and corporations bonds represented 3.4% 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, 2009. 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 mortgage-backed securities and
corporate (non-agency) collateralized mortgage obligations were primarily
caused by changing credit and pricing spreads in the market as a result of the
ongoing credit crisis. At June 30,
2009, federal agency mortgage-backed securities and collateralized mortgage
obligations represented 71.4% of the total fair value of available for sale
securities held in the investment securities portfolio and corporate
(non-agency) collateralized mortgage obligations represented 11.0% of the total
fair value of available for sale securities held in the investment securities
portfolio. The Company purchased those
securities at a price relative to the market at the time of the purchase. The contractual cash flows of those federal
agency mortgage-backed securities are guaranteed by 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, 2009.
As of June 30, 2009, the Company owned 11
corporate (non-agency) collateralized mortgage obligations (CMO) whose
aggregate historical cost basis is greater than estimated fair value. The Company uses a two step modeling approach
to analyze each 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, 2009, 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
investments to be other-than-temporarily impaired at June 30, 2009. Future evaluations of the above mentioned
factors could result in the Company recognizing an impairment charge.
Because the decline in the market value of agency
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,
2009. 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 credit crisis and the deterioration of the
creditworthiness of certain mono-line bond insurers. At June 30, 2009, state and municipal
obligation bonds represented 11.8% 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, 2009. Future
evaluations of the above mentioned factors could result in the Company
recognizing an impairment charge.
30
Table of Contents
D.
Other Debt Securities and Trust Preferred Securities. Included in other debt securities available
for sale at June 30, 2009, was 1 asset-backed security and 2 corporate
debt issues representing 0.9% of the total fair value of available for sale
securities. Included in trust preferred
securities were single issue, trust preferred securities (TRUPS or CDO)
representing 0.2% and 96.6% of the total fair value of available for sale
securities and the total held to maturity securities, respectively, and pooled
TRUPS representing 0.3% and 3.4% 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 financial crisis 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,
2009.
As of June 30, 2009, the Company owned 3 single
issuer TRUPS and 8 pooled TRUPS of other financial institutions whose aggregate
historical cost basis is greater than their estimated fair value. Investments in trust preferred securities
included (a) amortized cost of $2.5 million of single issuer TRUPS of
other financial institutions with a fair value of $2.1 million and (b) amortized
cost of $9.1 million of pooled TRUPS of other financial institutions with a
fair value of $0.8 million. 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 one
pooled TRUPS which was other than temporarily impaired at June 30, 2009
and resulted in a net credit impairment charge to earnings of $322,000 for the
three and six months ended June 30, 2009 as the Companys estimate of
projected cash flows it expected to receive was less 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, 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 during the quarter. 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 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, 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
31
Table
of Contents
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 collateral secured by 30-year TRUPS. 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 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 market discount rate for 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
32
Table
of Contents
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 are 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 as of:
|
|
June 30,
2009
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Fair
|
|
Unrealized
|
|
Number
of
|
|
|
|
Cost
|
|
Value
|
|
Gain/Losses
|
|
Securities
|
|
|
|
(Dollar amounts in thousands)
|
|
Investment grades:
|
|
|
|
|
|
|
|
|
|
BBB Rated
|
|
$
|
976
|
|
$
|
637
|
|
$
|
(339
|
)
|
1
|
|
Not rated
|
|
1,540
|
|
1,435
|
|
(105
|
)
|
2
|
|
Totals
|
|
$
|
2,516
|
|
$
|
2,072
|
|
$
|
(444
|
)
|
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, 2009.
The following table provides additional information
related to our pooled trust preferred securities as of:
33
Table
of Contents
June 30,
2009
|
|
Deal
|
|
Class
|
|
Book Value
|
|
Fair Value
|
|
Unrealized
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
securities for which an other-than-temporary impairment charge has been
recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding #1
|
|
Class D-1
|
|
$
|
700
|
|
$
|
49
|
|
$
|
(651
|
)
|
Ca (Moodys)
|
|
55
|
|
$
|
94,300
|
|
$
|
7,651
|
|
$
|
643,379
|
|
$
|
65,300
|
|
14.7
|
%
|
1.4
|
%
|
0.0
|
%
|
|
|
Total
|
|
$
|
700
|
|
$
|
49
|
|
$
|
(651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pooled trust preferred
securities for which an other-than-temporary impairment charge has not been
recognized:
|
|
|
|
Holding #2
|
|
Class B-1
|
|
1,300
|
|
174
|
|
(1,126
|
)
|
A- (S&P)
|
|
16
|
|
35,000
|
|
|
|
211,000
|
|
$
|
108,700
|
|
9.0
|
%
|
0.0
|
%
|
14.1
|
%
|
Holding #3
|
|
Class C
|
|
1,003
|
|
92
|
|
(911
|
)
|
Caa1 (Moodys)
|
|
32
|
|
13,000
|
|
|
|
315,000
|
|
31,648
|
|
4.1
|
%
|
0.0
|
%
|
17.6
|
%
|
Holding #4
|
|
Senior Subordinate
|
|
583
|
|
62
|
|
(521
|
)
|
Baa2 (Moodys)
|
|
50
|
|
28,000
|
|
|
|
129,000
|
|
81,000
|
|
4.0
|
%
|
0.0
|
%
|
16.2
|
%
|
Holding #5
|
|
Class B-2
|
|
1,489
|
|
73
|
|
(1,416
|
)
|
Caa3 (Moodys)
|
|
30
|
|
41,250
|
|
|
|
247,750
|
|
33,000
|
|
16.6
|
%
|
0.0
|
%
|
1.7
|
%
|
Holding #6
|
|
Mezzanine Notes
|
|
1,032
|
|
59
|
|
(973
|
)
|
Caa1 (Moodys)
|
|
29
|
|
44,000
|
|
8,000
|
|
277,500
|
|
20,289
|
|
15.9
|
%
|
3.4
|
%
|
3.3
|
%
|
Holding #7
|
|
Class B-3
|
|
494
|
|
46
|
|
(448
|
)
|
Ca (Moodys)
|
|
64
|
|
61,750
|
|
19,000
|
|
601,775
|
|
53,600
|
|
10.3
|
%
|
3.5
|
%
|
11.2
|
%
|
Holding #8
|
|
Class B
|
|
1,000
|
|
107
|
|
(893
|
)
|
Caa3 (Moodys)
|
|
50
|
|
57,000
|
|
4,000
|
|
345,900
|
|
62,650
|
|
16.5
|
%
|
1.4
|
%
|
3.8
|
%
|
Holding #9
|
|
Class B-2
|
|
1,500
|
|
111
|
|
(1,389
|
)
|
Ca (Moodys)
|
|
36
|
|
39,250
|
|
|
|
303,000
|
|
38,500
|
|
13.0
|
%
|
0.0
|
%
|
7.7
|
%
|
|
|
Total
|
|
$
|
8,401
|
|
$
|
724
|
|
$
|
(7,677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2009, were equity
investments in 29 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 30 equity
securities have an average amortized cost of approximately $81,000 and an
average fair value of approximately $46,000.
While $1.6 million 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. The Company has the intent and ability to
retain its investment in these 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, 2009.
As of June 30, 2009, 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 $211.4
million.
The contractual maturities of investment securities
available for sale at June 30, 2009, 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.
34
Table of Contents
|
|
Securities
Available for
Sale
|
|
Securities
Held to Maturity
|
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
1,275
|
|
$
|
1,236
|
|
$
|
|
|
$
|
|
|
Due after one year through five years
|
|
|
|
|
|
|
|
|
|
Due after five years through ten years
|
|
1,421
|
|
1,194
|
|
|
|
|
|
Due after ten years
|
|
43,861
|
|
35,448
|
|
3,048
|
|
1,741
|
|
Mortgage-backed securities
|
|
192,216
|
|
188,825
|
|
|
|
|
|
Equity securities
|
|
3,583
|
|
2,404
|
|
|
|
|
|
|
|
$
|
242,356
|
|
$
|
229,107
|
|
$
|
3,048
|
|
$
|
1,741
|
|
This table
excludes Federal Home Loan Bank stock
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
three and nine months ended June 30, 2009 and 2008:
|
|
Three
Months Ended
June 30,
|
|
Six
Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(in thousands
)
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
$
|
175
|
|
$
|
100
|
|
$
|
363
|
|
$
|
252
|
|
Gross losses
|
|
(49
|
)
|
(39
|
)
|
(78
|
)
|
(50
|
)
|
Net realized gains on sales of
securities
|
|
$
|
126
|
|
$
|
61
|
|
$
|
285
|
|
$
|
202
|
|
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 4 for unrealized holding losses on
available-for-sale securities for the periods reported.
Other-than-temporary impairment recognized in
earnings in the three and nine month periods ended June 30, 2009, 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 securities were:
35
Table of Contents
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
2009
|
|
June 30,
2009
|
|
|
|
(in thousands
)
|
|
Balance, beginning of period
|
|
$
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
Initial credit impairments
|
|
322
|
|
322
|
|
Balance, end of period
|
|
$
|
322
|
|
$
|
322
|
|
12.
Derivative
Instruments
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 mandatory redeemable capital
debentures 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. 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, and the Company receives a fixed rate equal
to the interest that the Company is obligated to pay on the related trust
preferred securities. Both the interest
rate swap and the related debt are recorded on the balance sheet at fair value
through adjustments to operations.
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. Entering
into interest rate derivatives exposes the Company to the risk of
counterparties failure to fulfill their legal obligations including, but not
limited to, amounts due under each derivative contract. Notional principal amounts are often used to
express the magnitude of these transactions, but the amounts due or payable 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.
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
following table details the fair values of the derivative instruments included
in the consolidated balance sheet for the period ended:
|
|
Liability
Derivatives
|
|
|
|
June 30,
2009
|
|
|
|
(Dollar amounts in
thousands)
|
|
Derivatives Not Designated as Hedging
Instruments under FASB 133:
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
Other liabilities
|
|
$
|
730
|
|
Interest rate cap
|
|
Other liabilities
|
|
|
|
Total derivatives
|
|
|
|
$
|
730
|
|
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 three and six month periods ended:
36
Table of Contents
|
|
|
|
Amount
of Gain or (Loss)
Recognized in Income on
Derivative
|
|
Derivatives Not
Designated as Hedging
Instruments under FASB 133:
|
|
Location
of Gain or
(Loss) Recognized in
Income on Derivative
|
|
For
the Three
Months Ended
June 30,
2009
|
|
For
the Six
Months Ended
June 30,
2009
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
Other income
|
|
$
|
(77
|
)
|
$
|
595
|
|
Interest rate cap
|
|
Other income
|
|
|
|
|
|
Total
|
|
|
|
$
|
(77
|
)
|
$
|
595
|
|
13.
Loans
Total
loans, net of allowance for loan losses, decreased to $875.2 million, or 0.7%
annualized, at June 30, 2009 from $878.2 million at December 31,
2008.
The
components of loans were as follows:
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Dollar amounts in
thousands
)
|
|
Residential real estate - 1 to 4 family
|
|
$
|
173,674
|
|
$
|
185,866
|
|
Residential real estate - multi family
|
|
35,953
|
|
34,869
|
|
Commercial
|
|
166,952
|
|
174,219
|
|
Commercial, secured by real estate
|
|
319,256
|
|
326,442
|
|
Construction
|
|
99,683
|
|
89,556
|
|
Consumer
|
|
4,641
|
|
3,995
|
|
Home equity lines of credit
|
|
87,911
|
|
72,137
|
|
Loans
|
|
888,070
|
|
887,084
|
|
|
|
|
|
|
|
Net deferred loan fees
|
|
(834
|
)
|
(779
|
)
|
Allowance for loan losses
|
|
(12,029
|
)
|
(8,124
|
)
|
Loans, net of allowance for loan losses
|
|
$
|
875,207
|
|
$
|
878,181
|
|
Loans
secured by real estate (not including home equity lending products) decreased
$18.3 million, or 6.7% annualized, to $528.9 million at June 30, 2009 from
$547.2 million at December 31, 2008.
This decrease is primarily due to a decrease in commercial real estate
loan originations.
Total
commercial loans decreased to $486.2 million at June 30, 2009 from $500.7
million at December 31, 2008, a decrease of $14.5 million, or 5.8%
annualized. The decrease is due
primarily to a decrease in commercial real estate loans outstanding. There were no SBA loans sold during the period.
Changes
in the allowance for loan losses were as follows:
37
Table
of Contents
|
|
As
of and For The Period Ended
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
Balance, beginning
|
|
$
|
8,124
|
|
$
|
7,264
|
|
Provision for loan losses
|
|
5,125
|
|
4,835
|
|
Loans charged-off
|
|
(1,255
|
)
|
(4,073
|
)
|
Recoveries
|
|
35
|
|
98
|
|
Balance, ending
|
|
$
|
12,029
|
|
$
|
8,124
|
|
The
gross recorded investment in impaired loans not requiring an allowance for loan
losses was $10.6 million at June 30, 2009 and $3.2 million at December 31,
2008. The gross recorded investment in
impaired loans requiring an allowance for loan losses was $11.9 million at June 30,
2009 and $7.5 million at December 31, 2008. At June 30, 2009 and December 31,
2008, the related allowance for loan losses associated with those loans was
$5.2 million and 2.3 million, respectively.
For the periods ended June 30, 2009 and December 31, 2008, the
average recorded investment in impaired loans was $12.8 million and $8.8
million, respectively. No interest
income was recognized on impaired loans for the period ended June 30, 2009
and interest income of $33,000 was recognized on impaired loans for the year
ended December 31, 2008.
14.
Goodwill and
Other Intangible Assets
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
|
|
|
|
(Dollar amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
27,768
|
|
$
|
10,400
|
|
$
|
1,021
|
|
$
|
39,189
|
|
Goodwill acquired during the year 2008
|
|
|
|
223
|
|
|
|
223
|
|
Contingent payments during the year 2008
|
|
|
|
320
|
|
|
|
320
|
|
Balance as of December 31, 2008
|
|
27,768
|
|
10,943
|
|
1,021
|
|
39,732
|
|
Balance as of June 30, 2009
|
|
$
|
27,768
|
|
$
|
10,943
|
|
$
|
1,021
|
|
$
|
39,732
|
|
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.
In
accordance with the provisions of SFAS No. 142 Goodwill and Other
Intangible Assets, the Company amortizes other intangible assets over the
estimated remaining life of each respective asset. Amortizable intangible assets were composed
of the following:
38
Table of Contents
|
|
June 30,
2009
|
|
December 31,
2008
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
Accumulated
|
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
|
|
|
(Dollar amounts in
thousands)
|
|
Amortizable intangible
assets:
|
|
|
|
|
|
|
|
|
|
Purchase of client accounts (20 year
weighted average useful life)
|
|
$
|
4,805
|
|
$
|
1,112
|
|
$
|
4,805
|
|
$
|
992
|
|
Employment contracts (7 year weighted
average useful life)
|
|
1,135
|
|
1,054
|
|
1,135
|
|
968
|
|
Assets under management (20 year
weighted average useful life)
|
|
184
|
|
63
|
|
184
|
|
58
|
|
Trade name (20 year weighted average
useful life)
|
|
196
|
|
196
|
|
196
|
|
196
|
|
Core deposit intangible (7 year weighted
average useful life)
|
|
1,852
|
|
1,256
|
|
1,852
|
|
1,125
|
|
Total
|
|
$
|
8,172
|
|
$
|
3,681
|
|
$
|
8,172
|
|
$
|
3,339
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Amortization
Expense:
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30,
2009
|
|
$
|
342
|
|
|
|
|
|
|
|
For the year ended December 31,
2008
|
|
$
|
629
|
|
|
|
|
|
|
|
The
Company performs an annual goodwill impairment test in the fourth quarter each
year. The Company utilizes the following
framework 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 SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assetsof 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.
The
Company acknowledges that a decline in market capitalization may represent an
event or change in circumstances that would more likely than not reduce the
fair value of reporting unit below its carrying value. However, management does not place primary
emphasis on the Companys market capitalization for a number of reasons, not
the least of which is lack of liquidity of its common shares due to a lack of
consistent trading volume. This view
also considers that substantial value may result from the ability to leverage
certain synergies or control. Therefore,
managements valuation methodology for assessing annual (and evaluating
subsequent indicators of) impairment is performed at a detailed level as it
incorporates a more granular view of each reporting unit and the significant
valuation inputs.
Management
estimates fair value 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.
Given
that the level at which management performs its impairment testing for each
reporting unit is more granular than simply market capitalization, management
evaluates the underlying data and assumptions that comprise the most recent
goodwill impairment test for evidence of deterioration at a level which may
indicate the fair value of the reporting segment has meaningfully
declined. While the Companys stock
price continues to be influenced by the financial services sector as well as
our relative small size, management does not believe that there has been a
substantial change in the business climate relative to our valuation
analysis. To the contrary, the Company
believes the economy shows signs of stabilization.
Given
the timing of the completion of managements annual impairment test (January 2009
as of October 31, 2008) and the evaluation of the relevant inputs that
form the basis for managements estimate for the fair value of each reporting
unit, management concluded that there has not been significant deterioration in
the underlying inputs and assumptions which would lead it to conclude an
interim goodwill impairment test was required.
39
Table of Contents
As
of the time of the annual goodwill impairment test, the Fair Value of all
units was in excess of the carrying amounts. Therefore, a second step test was
not required. The Companys stock, like
the stock of many other financial services companies, is trading below both
book value as well as tangible book value.
The Company believes that the current market value does not represent
the fair value of the Company when taken as a whole and in consideration of other
relevant factors.
40
Table of Contents
Item 2 -
Managements
Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting
Policies
Note
1 to the Companys consolidated financial statements (included in Item 8 of the
Form 10-K/A, Amendment No. 1, for the year ended December 31,
2008) 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
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual
results 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, other than
temporary impairment losses on available for sale securities and the valuation
of deferred tax assets. In estimating
other-than temporary impairment losses, management considers (1) the
length of time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair value.
Restatement of
Consolidated Financial Statements
As indicated in Note 2 to
the Notes to Consolidated Financial Statements, the Company has restated its
financial statements for the quarter ended June 30, 2009. The discussion in this Item 2, Managements
Discussion and Analysis of Financial Condition and Results of Operations,
gives effect to the restatement of the Companys financial statements.
Results of Operations
OVERVIEW
Net
loss for the Company for the quarter ended June 30, 2009 was $1.5 million,
a decrease of 202.7%, as compared to income of $1.5 million for the same period
in 2008. Basic and diluted loss per
common share for the second quarter of 2009 were $.33 and $.33, respectively,
compared to basic and diluted earnings per common share of $.26 and $.26,
respectively, for the same period of 2008. Net income for the Company for the
first six months ended June 30, 2009 was $23,000, a decrease of 99.2%, as
compared to $3.0 million for the same period in 2008. Basic and diluted loss
per common share for the first six months ended June 30, 2009 was $.14 and
$.14, respectively, compared to basic and diluted earnings per common share of
$.53 and $.53, respectively, for the same period of 2008.
The
following are the key ratios for the Company as of or for the:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2009
(As Restated)
|
|
June 30,
2008
|
|
2009
(As Restated)
|
|
June 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets (annualized)
|
|
-0.48
|
%
|
0.51
|
%
|
0.00
|
%
|
0.53
|
%
|
Return
on average shareholders equity (annualized)
|
|
-4.81
|
%
|
5.46
|
%
|
0.04
|
%
|
5.63
|
%
|
Common
dividend payout ratio
|
|
-29.01
|
%
|
76.92
|
%
|
-143.91
|
%
|
75.47
|
%
|
Average
shareholders equity to average assets
|
|
9.99
|
%
|
9.29
|
%
|
10.30
|
%
|
9.43
|
%
|
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
41
Table
of Contents
and other non-deposit
sources of funds, such as repurchase agreements and short and long-term
borrowed funds. Net interest margin is
the difference between the gross (tax-effected) yield on earning assets and the
cost of interest bearing funds as a percentage of earning assets. All discussion of net interest income and net
interest margin is on a fully taxable equivalent basis (FTE).
FTE
net interest income before the provision for loan losses for the three months
ended June 30, 2009 was $8.7 million, a decrease of $0.7 million, or 7.6%,
compared to the $9.4 million reported for the same period in 2008. FTE net interest income before the provision
for loan loss for the six months ended June 30, 2009 was $17.6 million, a
decrease of $0.7 million, or 4.0%, compared to the $18.3 million reported for
the same period in 2008. The FTE net
interest margin decreased to 3.05% for the second quarter of 2009 from 3.59%
for the same period in 2008. The FTE net
interest margin decreased to 3.12% for the first six months of 2009 from 3.55%
for the same period in 2008.
The
following tables summarize net interest margin information:
|
|
Three
months ended June 30,
|
|
|
|
2009
(As Restated)
|
|
2008
|
|
|
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
%
Rate
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
%
Rate
|
|
|
|
(Dollar
amounts in thousands)
|
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: (1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
699,919
|
|
$
|
9,946
|
|
5.62
|
|
$
|
674,994
|
|
$
|
10,923
|
|
6.40
|
|
Mortgage
|
|
49,622
|
|
685
|
|
5.52
|
|
46,907
|
|
765
|
|
6.52
|
|
Consumer
|
|
141,335
|
|
1,884
|
|
5.35
|
|
127,208
|
|
2,029
|
|
6.42
|
|
Investments (2) (3)
|
|
239,876
|
|
3,219
|
|
5.37
|
|
204,942
|
|
2,970
|
|
5.80
|
|
Federal funds sold
|
|
13,298
|
|
5
|
|
0.17
|
|
|
|
|
|
|
|
Other short-term investments
|
|
363
|
|
|
|
0.15
|
|
351
|
|
5
|
|
5.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
1,144,413
|
|
$
|
15,739
|
|
5.44
|
|
$
|
1,054,402
|
|
$
|
16,692
|
|
6.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction accounts
|
|
$
|
351,272
|
|
$
|
1,302
|
|
1.49
|
|
$
|
327,056
|
|
$
|
1,453
|
|
1.79
|
|
Certificates of deposit
|
|
479,449
|
|
3,869
|
|
3.23
|
|
333,455
|
|
3,561
|
|
4.30
|
|
Securities sold under agreement to
repurchase
|
|
125,003
|
|
1,100
|
|
3.48
|
|
123,911
|
|
895
|
|
2.86
|
|
Short-term borrowings
|
|
253
|
|
|
|
0.00
|
|
73,757
|
|
429
|
|
3.98
|
|
Long-term borrowings
|
|
41,925
|
|
413
|
|
3.90
|
|
60,000
|
|
604
|
|
3.98
|
|
Junior subordinated debt
|
|
18,953
|
|
362
|
|
7.66
|
|
20,037
|
|
346
|
|
6.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
1,016,855
|
|
7,046
|
|
2.78
|
|
938,216
|
|
7,288
|
|
3.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
106,362
|
|
|
|
|
|
106,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of funds
|
|
$
|
1,123,217
|
|
7,046
|
|
2.52
|
|
$
|
1,044,951
|
|
7,288
|
|
2.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (fully taxable
equivalent)
|
|
|
|
$
|
8,693
|
|
3.05
|
|
|
|
$
|
9,404
|
|
3.59
|
|
(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%.
(3)
This table has been adjusted to reflect
the Companys reclassification of Federal Home Loan Bank stock from securities
available for sale to Federal Home Loan Bank stock. See Note 2, Restatement of Consolidated
Financial Statements to the consolidated financial statements included in this
Form 10-Q.
42
Table
of Contents
|
|
Six
Months Ended June 30,
|
|
|
|
2009
(As Restated)
|
|
2008
|
|
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
%
Rate
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
%
Rate
|
|
|
|
(Dollar
amounts in thousands)
|
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: (1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
699,717
|
|
$
|
19,885
|
|
5.66
|
|
$
|
665,669
|
|
$
|
22,239
|
|
6.61
|
|
Mortgage
|
|
50,160
|
|
1,448
|
|
5.77
|
|
46,715
|
|
1,521
|
|
6.51
|
|
Consumer
|
|
140,421
|
|
3,766
|
|
5.41
|
|
127,065
|
|
4,257
|
|
6.74
|
|
Investments (2) (3)
|
|
234,178
|
|
6,574
|
|
5.61
|
|
198,323
|
|
5,761
|
|
5.81
|
|
Federal funds sold
|
|
9,981
|
|
9
|
|
0.17
|
|
|
|
|
|
0.00
|
|
Other short-term investments
|
|
355
|
|
1
|
|
0.39
|
|
435
|
|
9
|
|
3.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
1,134,812
|
|
$
|
31,683
|
|
5.55
|
|
$
|
1,038,207
|
|
$
|
33,787
|
|
6.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction accounts
|
|
$
|
335,782
|
|
$
|
2,411
|
|
1.45
|
|
$
|
321,601
|
|
$
|
3,332
|
|
2.08
|
|
Certificates of deposit
|
|
474,261
|
|
7,914
|
|
3.37
|
|
325,115
|
|
7,185
|
|
4.44
|
|
Securities sold under agreement to
repurchase
|
|
122,268
|
|
2,164
|
|
3.52
|
|
117,530
|
|
1,849
|
|
3.11
|
|
Short-term borrowings
|
|
5,057
|
|
17
|
|
0.66
|
|
79,037
|
|
1,150
|
|
2.88
|
|
Long-term borrowings
|
|
50,498
|
|
917
|
|
3.61
|
|
59,698
|
|
1,203
|
|
3.99
|
|
Junior subordinated debt
|
|
18,565
|
|
677
|
|
7.35
|
|
20,133
|
|
751
|
|
7.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
1,006,431
|
|
14,100
|
|
2.83
|
|
923,114
|
|
15,470
|
|
3.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
105,905
|
|
|
|
|
|
105,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of funds
|
|
$
|
1,112,336
|
|
14,100
|
|
2.56
|
|
$
|
1,028,131
|
|
15,470
|
|
3.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (fully taxable
equivalent)
|
|
|
|
$
|
17,583
|
|
3.12
|
|
|
|
$
|
18,317
|
|
3.55
|
|
(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%.
(3)
This table has been adjusted to reflect
the Companys reclassification of Federal Home Loan Bank stock from securities
available for sale to Federal Home Loan Bank stock. See Note 2, Restatement of Consolidated
Financial Statements to the consolidated financial statements included in this
Form 10-Q.
Average
interest-earning assets for the three months ended June 30, 2009 were
$1.14 billion, an $90.0 million, or 8.5%, increase over average
interest-earning assets of $1.05 billion for the same period in 2008. Average interest-earning assets for the six
months ended June 30, 2009 were $1.13 billion, a $96.6 million, or 9.3%,
increase over average interest-earning assets of $1.04 billion for the same
period in 2008. The yield on average
interest-earning assets decreased by 82 basis points to 5.44% for the second
quarter of 2009, compared to 6.26% for the same period in 2008. The yield on average interest-earning assets
decreased by 89 basis points to 5.55% for the first six months of 2009,
compared to 6.44% for the same period in 2008.
Average
interest-bearing liabilities for the three months ended June 30, 2009 were
$1.02 billion, a $78.6 million, or 8.4%, increase over average interest-bearing
liabilities of $938.2 million for the same period in 2008. Average interest-bearing liabilities for the
six months ended June 30, 2009 were $1.01 billion, an $83.3 million, or
9.0%, increase over average interest-bearing liabilities of $923.1 million for
the same period in 2008. In addition,
average noninterest-bearing deposits decreased to $106.4 million for the three
months ended June 30, 2009, from $106.7 million for the same time period
of 2008. Average noninterest-bearing
deposits increased to $105.9 million for the six months ended June 30,
2009, from $105.0 million for the same time period of 2008. The interest rate on total interest-bearing
liabilities decreased by 34 basis points to 2.78% for the three months ended June 30,
2009, compared to 3.12% for the same period in 2008. The
43
Table
of Contents
average interest rate paid
on total interest-bearing liabilities decreased by 54 basis points to 2.83% for
the six months ended June 30, 2009, compared to 3.37% for the same period
in 2008.
For
the six months ended June 30, 2009, FTE total interest income decreased
6.2% to $31.7 million compared to $33.8 million for the same period in
2008. The decrease in total interest
income for the six months ended June 30, 2009 was primarily the result of
a decrease in the interest rates on average investments and average outstanding
commercial, mortgage and consumer loans compared to the same period in
2008. Earning asset yields on average
outstanding loans decreased due mainly to a decrease in the targeted short-term
interest rate, as established by the Federal Reserve Bank (FRB), which
resulted in a decrease in the prime rate from 5.00% at June 30, 2008 to
3.25% at June 30, 2009. Average
outstanding commercial loan balances increased by $34 million, or 5.1% from June 30,
2008 to June 30, 2009.
Additionally, average outstanding total investment securities increased
by $35.8 million or 18.1% from June 30, 2008 to June 30, 2009. Earning asset yields on average outstanding
investment securities decreased from 5.8% at June 30, 2008 to 5.6% at June 30,
2009.
For
the six months ended June 30, 2009, total interest expense decreased 8.9%
to $14.1 million compared to $15.5 million for the same period in 2008. The decrease in total interest expense for
the six months ended June 30, 2009 resulted primarily from a decrease in
average rates paid on average outstanding interest-bearing deposits and
short-term borrowings compared to the same period in 2008. The average rate paid on total average
outstanding interest-bearing liabilities decreased from 3.37% at June 30,
2008 to 2.83% at June 30, 2009.
Total cost of funds decreased to 2.56% in 2009 from 3.03% in 2008. The decrease in total average
interest-bearing deposit rates was the result of managements disciplined
approach to deposit pricing in response to the decrease in short-term interest
rates. Total average interest-bearing
deposits increased $163.3 million or 25.3% from June 30, 2008 to June 30,
2009 due primarily to growth in time deposits and interest checking. The average rate paid on short-term
borrowings and securities sold under agreements to repurchase increased from
3.02% at June 30, 2008 to 3.40% at June 30, 2009. The increase in short-term borrowings and
securities sold under agreements to repurchase rates was the result of
increases in targeted short term interest rates, as established by the
FRB. Average short-term borrowings and
securities sold under agreements to repurchase decreased $69.2 million or 35.2%
from June 30, 2008 to June 30, 2009 due primarily to the growth in
total average interest-bearing deposits.
Provision for Loan Losses
The
provision for loan losses for the three months ended June 30, 2009 was
$4.3 million compared to $1.7 million for the same period of 2008. The provision for loan losses for the six
months ended June 30, 2009 was $5.1 million compared to $2.1 million for
the same period of 2008. Net charge-offs
to average loans was 0.27% annualized for the six months ended June 30,
2009 compared to 0.46% for the year ended December 31, 2008. The provision reflects the amount deemed
appropriate by management to provide an adequate reserve to meet 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, 2009,
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, 2009 and December 31,
2008 was 1.36% and .92%, respectively.
Please see further discussion under the caption Allowance for Loan
Losses.
Other Non-Interest Income
Total
other income for the three months ended June 30, 2009 totaled $4.8
million, remaining similar to income of $4.8 million for the same period in
2008. Total other income for the six
months ended June 30, 2009 totaled $10.2 million, an increase of $0.7
million, or 7.6%, from other income of $9.5 million for the same period in
2008.
Revenue
from customer service fees decreased 11.8% to $596,000 for the second quarter
of 2009 as compared to $676,000 for the same period in 2008. Revenue from
customer service fees remained similar at $1.3 million for the first six months
of 2009 and the same period in 2008. The
decrease in customer service fees for the comparative three month periods is primarily
due to a decrease in commercial account analysis fees and non-sufficient funds
charges.
Revenue from mortgage banking activities increased
19.3% to $408,000 for the second quarter of 2009 as compared to $342,000 for
the same period in 2008. Revenue from
mortgage banking activities increased 1.5% to $675,000 for the first six months
of 2009 as compared to $665,000 for the same period in 2008. The increase in mortgage banking activities
for the comparative three and six month periods is primarily due to an increase
in the volume of loans
44
Table
of Contents
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 8.9% to $3.0 million
for the second quarter of 2009 as compared to $2.8 million for the same period
in 2008. Revenue from commissions and
fees from insurance sales increased 9.6% to $6.0 million for the first six
months of 2009 as compared to $5.5 million for the same period in 2008. The increase for the comparative three and
six month periods is mainly attributed to an increase in commission income on
group insurance products due to the acquisition of Fisher Benefits Consulting
in September 2008. VIST Insurance,
LLC is a wholly owned subsidiary of the Company.
Revenue
from brokerage and investment advisory commissions and fees decreased 33.0% to
$152,000 in the second quarter of 2009 as compared to $227,000 for the same
period in 2008. Revenue from brokerage
and investment advisory commissions and fees increased 3.9% to $482,000 in the
first six months of 2009 as compared to $464,000 for the same period in
2008. 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 decreased 34.1% to $108,000 in
the second quarter of 2009 as compared to $164,000 for the same period in
2008. Revenue from earnings on
investment in life insurance decreased 44.6% to $184,000 in the first six
months of 2009 as compared to $332,000 for the same period in 2008. The decrease in earnings on investment in
life insurance for the comparative three and six month periods is due primarily
to decreased earnings credited on the Companys separate investment account,
bank owned life insurance (BOLI).
Other
income, including gain on sale of loans, increased 30.5% to $667,000 for the
second quarter of 2009 as compared to $511,000 for the same period in
2008. Other income, including gain on
sale of loans, increased 57.5% to $1.6 million for the first six months of 2009
as compared to $1.0 million for the same period in 2008. The increase in other income for the
comparative three and 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, and an increase in network
interchange income.
Net
securities gains were $126,000 for the three months ended June 30, 2009
compared to net securities gains of $61,000 for the same period in 2008. Net securities gains were $285,000 for the
six months ended June 30, 2009 compared to net securities gains of
$202,000 for the same period in 2008.
Net securities gains for the comparative three and six month periods are
due primarily to sales of available for sale investment securities. For the three and six month periods ended June 30,
2009, an impairment charge of $322,000 was recorded on one of the Companys
available for sale trust preferred investment securities.
Other Non-Interest Expense
Total other expense for the three months ended June 30,
2009 totaled $11.6 million, an increase of $1.1 million, or 10.0%, over total
other expense of $10.5 million for the same period in 2008. Total other expense
for the six months ended June 30, 2009 totaled $22.8 million, an increase
of $1.2 million, or 5.8%, over total other expense of $21.6 million for the
same period in 2008.
Salaries
and benefits increased 6.6% to $5.8 million for the three months ended June 30,
2009 over the $5.4 million for the three months ended June 30, 2008. Salaries and benefits increased 2.8% to $11.4
million for the six months ended June 30, 2009 over the $11.1 million for
the six months ended June 30, 2008.
Included in salaries and benefits for the three months ended June 30,
2009 and June 30, 2008 were pre-tax stock-based compensation costs of
$56,000 and $95,000, respectively.
Included in salaries and benefits for the six months ended June 30,
2009 and June 30, 2008 were pre-tax stock-based compensation costs of
$77,000 and $172,000, respectively. Also included in salaries and benefits for
the three months ended June 30, 2009 were total commissions paid of
$353,000 on mortgage origination activity through VIST Mortgage, insurance
sales activity through VIST Insurance and investment advisory sales through
VIST Capital Management compared to $511,000 for the same period in 2008. Also included in salaries and benefits for
the six months ended June 30, 2009 were total commissions paid of $736,000
on mortgage origination activity through VIST Mortgage, insurance sales
activity through VIST Insurance and investment advisory sales through VIST
Capital Management compared to $900,000 for the same period in 2008. Included in salaries and benefits expense for
the six months ended June 30, 2009 are severance costs of approximately
$133,000 relating to corporate-wide cost reduction initiatives. Full-time equivalent (FTE) employees
decreased to 301 at June 30, 2009 from 304 at June 30, 2008.
45
Table
of Contents
Occupancy
expense and furniture and equipment expense decreased 13.0% to $1.5 million for
the second quarter of 2009 as compared to $1.7 million for the same period in
2008. Occupancy expense and furniture
and equipment expense decreased 10.0% to $3.2 million for the first six months
of 2009 as compared to $3.5 million for the same period in 2008. The decrease in occupancy expense and
furniture and equipment expense for the comparative three and six month periods
is due primarily to a decrease in building lease expense and equipment
depreciation expense.
Marketing
and advertising expense decreased 30.1% to $335,000 for the second quarter of
2009 as compared to $479,000 for the same period in 2008. Marketing and advertising expense decreased
46.7% to $0.6 million for the first six months of 2009 as compared to $1.1
million for the same period in 2008. 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 decreased 11.2% to $482,000 for the second quarter of 2009 as
compared to $543,000 for the same period in 2008. Professional services expense
increased 27.5% to $1.4 million for the first six months of 2009 as compared to
$1.1 million for the same period in 2008.
The increase for the comparative six month periods is due primarily to
an increase in legal fees associated with a litigation settlement related to a
previously accrued contingent payment, outsourcing of the Companys internal
audit function and other general Company business.
Outside
processing expense increased 33.7% to $1.1 million for the second quarter of
2009 as compared to $0.8 million for the same period in 2008. Outside
processing expense increased 24.8% to $2.0 million for the first six months of
2009 as compared to $1.6 million for the same period in 2008. The increase in outside processing expense
for the comparative three and six month periods are due primarily to costs
incurred for computer services and network fees.
Insurance
expense increased 259.1% to $984,000 for the second quarter of 2009 as compared
to $274,000 for the same period in 2008.
Insurance expense increased 162.0% to $1.4 million for the first six
months of 2009 as compared to $0.5 million for the same period in 2008. The increase in insurance expense for the
comparative three and six month periods is due primarily to higher FDIC deposit
insurance premiums resulting from the implementation of the new FDIC
risk-related premium assessment. Additionally, the increase in insurance
expense for the comparative three and six month periods is due primarily to a
special industry-wide FDIC deposit insurance premium assessment to the Company
of $580,000.
Other
expense increased 11.2% to $1.2 million for the second quarter of 2009 as
compared to $1.1 million for the same period in 2008. Other expense increased 8.5% to $2.4 million
for the first six months of 2009 as compared to $2.2 million for the same
period in 2008. The increase in other
expense for the comparative three and six month periods is primarily due to an
increase in foreclosure and other real estate expense.
Income Taxes
There
was an income tax benefit of $1.3 million for the second quarter of 2009 as
compared to income tax expense of $0.2 million for the same period in
2008. There was an income tax benefit of
$1.1 million for the first six months of 2009 as compared to income tax expense
of $0.3 million for the same period in 2008.
The effective income tax rate for the Company for the second quarter
ended June 30, 2009 was 46.7% compared to 10.0% for the same period of
2008. The effective income tax rate for
the Company for the first six months ended June 30, 2009 was 102.2%
compared to 10.2% for the same period of 2008.
The effective income tax rate for the comparative three and six month
periods fluctuated primarily due to variations in state tax, tax exempt income
and net income before income taxes.
Included in income tax expense for the comparative three and six month
periods ended June 30, 2009 and 2008 is a federal tax benefit 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, 2009 were $1.26 billion, an
increase of approximately $31.3 million, or 5.1% annualized, from $1.23 billion
at December 31, 2008.
Cash and Cash Equivalents:
Cash
and cash equivalents increased $21.7 million, or 225.0% annualized, to $41.0
million at June 30 2009 from $19.3 million at December 31, 2008. This increase is primarily related to an
increase in federal funds sold.
46
Table
of Contents
Mortgage Loans Held for
Sale
Mortgage
loans held for sale increased $3.6 million, or 315.8% annualized, to $5.9
million at June 30, 2009 from $2.3 million at December 31, 2008. 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
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.
Investment
securities available for sale increased $2.4 million, or 1.1% annualized, to
$229.1 million at June 30, 2009 from $226.7 million at December 31,
2008. Investment securities are used to
supplement loan growth as necessary, to generate interest and dividend income,
to manage interest rate risk, and to provide liquidity. The increase in investment securities
available for sale was due to the purchases of mortgage-backed securities used
as collateral for the Companys public funds and structured borrowings.
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 $875.2 million, or 0.7%
annualized, at June 30, 2009 from $878.2 million at December 31,
2008.
The
components of loans were as follows:
47
Table
of Contents
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Dollar amounts in
thousands
)
|
|
Residential real estate - 1 to 4 family
|
|
$
|
173,674
|
|
$
|
185,866
|
|
Residential real estate - multi family
|
|
35,953
|
|
34,869
|
|
Commercial
|
|
166,952
|
|
174,219
|
|
Commercial, secured by real estate
|
|
319,256
|
|
326,442
|
|
Construction
|
|
99,683
|
|
89,556
|
|
Consumer
|
|
4,641
|
|
3,995
|
|
Home equity lines of credit
|
|
87,911
|
|
72,137
|
|
Loans
|
|
888,070
|
|
887,084
|
|
|
|
|
|
|
|
Net deferred loan fees
|
|
(834
|
)
|
(779
|
)
|
Allowance for loan losses
|
|
(12,029
|
)
|
(8,124
|
)
|
Loans, net of allowance for loan losses
|
|
$
|
875,207
|
|
$
|
878,181
|
|
Loans
secured by real estate (not including home equity lending products) decreased
$18.3 million, or 6.7% annualized, to $528.9 million at June 30, 2009 from
$547.2 million at December 31, 2008.
This decrease is primarily due to a decrease in commercial and
residential real estate loan originations.
Total
commercial loans decreased to $486.2 million at June 30, 2009 from $500.7
million at December 31, 2008, a decrease of $14.5 million, or 5.8%
annualized. The decrease is due
primarily to a decrease in commercial real estate loans outstanding. There were no SBA loans sold during the
period.
The
gross recorded investment in impaired loans not requiring an allowance for loan
losses was $10.6 million at June 30, 2009 and $3.2 million at December 31,
2008. The gross recorded investment in
impaired loans requiring an allowance for loan losses was $11.9 million at June 30,
2009 and $7.5 million at December 31, 2008. At June 30, 2009 and December 31,
2008, the related allowance for loan losses associated with those loans was
$5.2 million and 2.3 million, respectively.
For the periods ended June 30, 2009 and December 31, 2008, the
average recorded investment in impaired loans was $12.8 million and $8.8
million, respectively. No interest
income was recognized on impaired loans for the period ended June 30, 2009
and interest income of $33,000 was recognized on impaired loans for the year
ended December 31, 2008.
Allowance for Loan Losses
The
allowance for loan losses at June 30, 2009 was $12.0 million compared to
$8.1 million at December 31, 2008.
The allowance at June 30, 2009 was 1.36% of outstanding loans
compared to 0.92% of outstanding loans at December 31, 2008. The provision for loan losses for the six
months ended June 30, 2009 was $5.1 million compared to $2.1 million for
the same period in 2008. The increase in
the provision is due primarily to economic conditions and an increase in
nonperforming loans and the result of managements evaluation and
classification of the credit quality of the loan portfolio utilizing a
qualitative and quantitative internal loan review process. At June 30, 2009, total non-performing
loans were $22.5 million or 2.5% of total loans compared to $10.8 million or
1.2% of total loans at December 31, 2008.
The $11.7 million increase in non-performing loans from December 31,
2008 to June 30, 2009, was due primarily to two commercial construction
and development credits totaling approximately $10.9 million transferred to non
accrual as well as by net additions to non-performing loans of approximately
$0.8 million. At June 30, 2009,
$2.2 million in commercial properties were transferred to other real estate
owned. This is net of $4.4 million which
was transferred out of other real estate owned from March 31, 2009. For the six months ended June 30, 2009,
net charge-offs to average loans was 0.27% annualized as compared to 0.46% for
the year ended December 31, 2008.
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.
Loans deemed to be uncollectible are charged against the allowance for
loan losses, and subsequent recoveries, if any, are credited to the
allowance. Management regularly assesses
the adequacy of the allowance by performing both quantitative and qualitative
evaluations of the loan portfolio, including such factors as charge-off
history, the level of delinquent loans, the current financial condition of
specific borrowers, the value of any underlying collateral, risk
characteristics in the loan portfolio, local and national economic conditions,
and other relevant factors. Significant
loans are individually analyzed, while other smaller balance loans are
evaluated by loan category. This
evaluation is inherently subjective as it requires material
48
Table
of Contents
estimates that may be
susceptible to change. Based upon the
results of such reviews, management believes that the allowance for loan losses
at June 30, 2009 was adequate to absorb probable credit losses inherent in
the portfolio at that date.
The
following table shows the activity in the Companys allowance for loan losses:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(Dollar amounts in
thousands
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance of allowance for loan losses,
beginning of period
|
|
$
|
8,165
|
|
$
|
7,181
|
|
$
|
8,124
|
|
$
|
7,264
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
(359
|
)
|
(981
|
)
|
(894
|
)
|
(1,448
|
)
|
Real estate mortgage
|
|
(11
|
)
|
|
|
(222
|
)
|
|
|
Consumer
|
|
(76
|
)
|
(30
|
)
|
(139
|
)
|
(64
|
)
|
Total loans charged-off
|
|
(446
|
)
|
(1,011
|
)
|
(1,255
|
)
|
(1,512
|
)
|
Recoveries of loans previously
charged-off:
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
8
|
|
38
|
|
19
|
|
40
|
|
Real estate mortgage
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
2
|
|
4
|
|
16
|
|
10
|
|
Total recoveries
|
|
10
|
|
42
|
|
35
|
|
50
|
|
Net loans (charged-off) recoveries
|
|
(436
|
)
|
(969
|
)
|
(1,220
|
)
|
(1,462
|
)
|
Provision for loan losses
|
|
4,300
|
|
1,650
|
|
5,125
|
|
2,060
|
|
Balance, end of period
|
|
$
|
12,029
|
|
$
|
7,862
|
|
$
|
12,029
|
|
$
|
7,862
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans
(annualized)
|
|
0.20
|
%
|
0.46
|
%
|
0.27
|
%
|
0.35
|
%
|
Allowance for loan losses to loans
outstanding
|
|
1.36
|
%
|
0.91
|
%
|
1.36
|
%
|
0.91
|
%
|
Loans outstanding at end of period (net
of unearned income)
|
|
$
|
887,236
|
|
$
|
867,659
|
|
$
|
887,236
|
|
$
|
867,659
|
|
Average balance of loans outstanding
during the period
|
|
$
|
885,233
|
|
$
|
847,357
|
|
$
|
885,852
|
|
$
|
837,544
|
|
The
following table summarizes the Companys non-performing assets:
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Dollar amounts in
thousands
)
|
|
Non-accrual loans:
|
|
|
|
|
|
Real estate
|
|
$
|
21,647
|
|
$
|
2,947
|
|
Consumer
|
|
5
|
|
459
|
|
Commercial, financial and agricultural
|
|
776
|
|
7,298
|
|
Total
|
|
22,428
|
|
10,704
|
|
|
|
|
|
|
|
Loans past due 90 days or more and still
accruing:
|
|
|
|
|
|
Real estate
|
|
108
|
|
28
|
|
Consumer
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
|
|
112
|
|
Total
|
|
108
|
|
140
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
22,536
|
|
10,844
|
|
Other real estate owned
|
|
2,238
|
|
263
|
|
Total non-performing assets
|
|
$
|
24,774
|
|
$
|
11,107
|
|
|
|
|
|
|
|
Troubled debt restructurings
|
|
$
|
2,592
|
|
$
|
285
|
|
|
|
|
|
|
|
Non-performing
loans to loans outstanding at end of period (net of unearned income)
|
|
2.54
|
%
|
1.22
|
%
|
Non-performing
assets to loans outstanding at end of period (net of unearned income) plus
OREO
|
|
2.79
|
%
|
1.25
|
%
|
49
Table of Contents
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.
The
Banks Relationship Managers have a combined lending authority up to
$1,000,000. Loans over $1,000,000 and up
to $2,000,000 require the additional approval of the Chief Lending Officer,
Chief Credit Officer and/or the Bank President. Loans in excess of $2,000,000
are presented to the Banks Credit Committee, comprised of the Chief Lending
Officer, Chief Credit Officer, Chief Credit 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
$14,460,000. The Executive Loan
Committee is composed of the Bank President, the Chief Lending Officer, the
Chief Credit Officer, the Chief Financial Officer, the Chief Credit Officer
(non-voting member) and selected Board members.
The Bank has established an in-house lending limit of 80% of its legal
lending limit and, at June 30, 2009, the Bank has no loan relationships in
excess of its in-house limit.
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.
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 independent members from the Board of Directors
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.
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.
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.
50
Table
of Contents
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
exchange Stock value should be greater than $10.
|
|
75%
|
b) Bonds, Bills, Notes
|
|
|
c) US Govt obligations (fully guaranteed)
|
|
95%
|
d) State, county, & municipal general
obligations rated BBB or higher
|
|
varies: 65 - 80%
|
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 equivalents
|
|
100%
|
Exception
reporting is presented to the audit committee on a quarterly basis to ensure
that the Bank remains in compliance with the FDIC limits on exceeding
supervisory loan to value guidelines established for real estate secured
transactions.
Generally,
when evaluating a commercial loan request, the Bank will require 3 years of
financial information on the borrower and any guarantor. The Bank has established underwriting
standards that are expected to be maintained by all lending personnel. These requirements include loans being
evaluated and underwritten at fully indexed rates. Larger loan exposures are typically analyzed
by credit personnel that are independent from the sales personnel.
The
Bank has not underwritten any hybrid loans or sub-prime loans. Loans that are generally considered to be
sub-prime are loans where the borrower has a FICO score below 640 and shows
data on their credit reports associated with higher default rates, limited debt
experience, excessive debt, a history of missed payments, failures to pay
debts, and recorded bankruptcies.
All
loan closings, loan funding and appraisal ordering and review involve personnel
that are independent from the sales function to ensure that bank standards and
requirements are met prior to disbursement.
Premises and Equipment
Components
of premises and equipment were as follows:
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(In thousands
)
|
|
|
|
|
|
|
|
Land and land improvements
|
|
$
|
263
|
|
$
|
263
|
|
Buildings
|
|
523
|
|
873
|
|
Leasehold improvements
|
|
4,393
|
|
3,910
|
|
Furniture and equipment
|
|
11,457
|
|
11,567
|
|
|
|
16,636
|
|
16,613
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
10,228
|
|
10,022
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
$
|
6,408
|
|
$
|
6,591
|
|
51
Table of Contents
Deposits
Total
deposits at June 30, 2009 were $947.9 million compared to $850.6 million
at December 31, 2008, an increase of $97.3 million, or 22.9% annualized.
The
components of deposits were as follows:
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(In thousands
)
|
|
|
|
|
|
|
|
Demand, non-interest bearing
|
|
$
|
111,231
|
|
$
|
108,645
|
|
Demand, interest bearing
|
|
304,579
|
|
231,504
|
|
Savings
|
|
70,539
|
|
75,706
|
|
Time, $100,000 and over
|
|
223,927
|
|
195,812
|
|
Time, other
|
|
237,638
|
|
238,933
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
947,914
|
|
$
|
850,600
|
|
The increase in interest bearing deposits is due primarily to an
increase in time deposits with the majority of these deposits maturing in one
year or less and an increase in interest bearing demand deposits. 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 commercial and retail marketing programs and customer service.
Borrowings
Total
debt decreased by $63.0 million, or 52.1% annualized, to $178.7 million at June 30,
2009 from $241.8 million at December 31, 2008. The decrease in total debt and borrowings was
primarily due to an increase in organic growth in total deposits of $97.3
million to $947.9 million at June 30, 2009 from $850.6 million at December 31,
2008.
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,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Dollar amounts in
thousands
)
|
|
Commitments to extend credit:
|
|
|
|
|
|
Loan origination committments
|
|
$
|
59,526
|
|
$
|
59,093
|
|
Unused home equity lines of credit
|
|
43,567
|
|
48,919
|
|
Unused business lines of credit
|
|
141,727
|
|
138,181
|
|
Total commitments to extend credit
|
|
$
|
244,820
|
|
$
|
246,193
|
|
Standby letters of credit
|
|
$
|
12,749
|
|
$
|
14,479
|
|
52
Table
of Contents
Capital
Total
shareholders equity decreased $2.0 million, or 3.2% annualized, to $121.7
million at June 30, 2009 from $123.6 million at December 31,
2008. The decrease is the net result of
net income for the period of $23,000 less common stock dividends declared of
$1.15 million, preferred stock dividends declared of $716,000, proceeds of
$280,000 from the issuance of shares of common stock under the Companys
employee benefit and director compensation plans, a net decrease in the
unrealized loss on securities available for sale, net of tax, of $911,000, the
reissuance of treasury stock of $424,000 primarily in connection with earn-outs
of contingent consideration to principals resulting from the Companys
acquisition of VIST Insurance, and stock-based compensation costs of $77,000.
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.
Other
than Tier 1 capital restrictions on the Companys junior subordinated debt
discussed later, the Company is not aware of any pending recommendations by
regulatory authorities that would have a material impact on the Companys
capital, resources, or liquidity if they were implemented, nor is the Company
under any agreements with any regulatory authorities.
The
adequacy of the Companys capital is reviewed on an ongoing basis with regard
to size, composition and quality of the Companys resources. An adequate
capital base is important for continued growth and expansion in addition to
providing an added protection against unexpected losses.
An
important indicator in the banking industry is the leverage ratio, defined as
the ratio of common shareholders equity less intangible assets (Tier 1
risk-based capital), to average quarterly assets less intangible assets. The leverage ratio at June 30, 2009 was
8.60% compared to 9.07% at December 31, 2008. This decrease is primarily the result of an
increase in average total assets. For
the six months ended June 30, 2009, 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.
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 provides a
five-year transition period, ending June 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, 2009, 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,
2009 and December 31, 2008, the Companys capital ratios were above
minimum regulatory guidelines.
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 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.
53
Table of Contents
The
following table sets forth the Companys risk-based capital amounts and ratios.
|
|
June 30,
|
|
|
|
|
|
2009
|
|
December 31,
|
|
|
|
(As
Restated)
|
|
2008
|
|
|
|
(Dollar amounts in
thousands
)
|
|
|
|
|
|
|
|
Tier I
|
|
|
|
|
|
Common shareholders equity excluding
unrealized gains (losses) on securities
|
|
$
|
121,655
|
|
$
|
123,629
|
|
Disallowed intangible assets
|
|
(44,039
|
)
|
(44,347
|
)
|
Junior subordinated debt
|
|
18,706
|
|
18,110
|
|
Tier II
|
|
|
|
|
|
Allowable portion of allowance for loan
losses
|
|
12,029
|
|
8,124
|
|
Unrealized losses on available for sale
equity securities
|
|
7,965
|
|
7,330
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
$
|
116,316
|
|
$
|
112,846
|
|
|
|
|
|
|
|
Risk adjusted assets (including off-balance
sheet exposures)
|
|
$
|
977,446
|
|
$
|
883,949
|
|
|
|
|
|
|
|
Leverage ratio
|
|
8.60
|
%
|
9.07
|
%
|
Tier I risk-based capital ratio
|
|
10.67
|
%
|
11.85
|
%
|
Total risk-based capital ratio
|
|
11.90
|
%
|
12.77
|
%
|
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.
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.
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 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
54
Table
of Contents
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.
Liquidity and 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
management.
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 maturities and cash flows, and maturing loans and loan payments. The Bank can also package and sell
residential mortgage loans into the secondary market. Other sources of liquidity are term
borrowings from the Federal Home Loan Bank, and the discount window of the
Federal Reserve Bank. In view of all
factors involved, the Banks management believes that liquidity is being
maintained at an adequate level.
At
June 30, 2009, the Company had a total of $178.7 million, or 14.2% of
total assets, in borrowed funds. These
borrowings included $124.9 million of repurchase agreements, $35 million of
term borrowings with the Federal Home Loan Bank, and $18.9 million in junior
subordinated debt. The FHLB borrowings
have final maturities ranging from November 2009 through January 2011
at interest rates ranging from 3.45% to 4.27%.
At June 30, 2009, the Company had a maximum borrowing capacity with
the Federal Home Loan Bank of approximately $186.7 million. 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 repurchase agreements to reduce the overnight
borrowings to maintain a more neutral gap position.
Asset/liability
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 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. The Company considers
the credit risk inherent in the contracts to be negligible. The interest rate swap is recorded on the
balance sheet at fair value through adjustments to other income in the
consolidated results of operations (see note 12 of the consolidated financial
statements).
During
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. These interest rate swaps are
recorded on the balance sheet at fair value through adjustments to other income
in the consolidated results of operations (see note 12 of the consolidated
financial statements).
55
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/A,
Amendment No. 1, for the year ended December 31, 2008 filed with the
SEC.
Item
4 - Controls and Procedures
The
Companys management 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, 2009. 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 that it will amend its Annual
Report on Form 10-K for the fiscal year ended December 31, 2008 and
Forms 10-Q for the quarters ended September 30, 2008, March 31, 2009 and June 30, 2009,
to properly account for interest rate swaps that were incorrectly designated in
cash flow hedging relationships under FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities (SFAS 133). Changes in fair value of the interest rate
swaps, previously recognized as unrealized gains (losses) in accumulated other
comprehensive income, should have been recognized in earnings. In addition, the Company applied an incorrect
forward yield curve used in its determination of the fair value of the interest
rate swaps. The Company has adjusted the
forward yield curve used in its determination of the fair value of the interest
rate swaps which is reflected in these restated financial statements. The Company has elected to report its junior
subordinated debt at fair value with changes in fair value reflected in other
income in the consolidated statements of operations. The Company concluded that an incorrect
credit spread was applied to the fair value of its junior subordinated
debt. The Company has adjusted the
credit spread used in its determination of the fair value of its junior
subordinated debt which is is reflected in these restated financial statements.
This
accounting error and the corresponding restatements have resulted in managements
determination that a material weakness existed with respect to the internal
controls over financial reporting related to accounting for the fair value of
junior subordinated debt and related interest rate swaps at June 30,
2009. The material weakness also existed
at September 30, 2008, December 31, 2008 and March 31, 2009 and
was not identified until November 2009.
To remediate this material weakness, 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 2009 that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
56
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/A,
Amendment No. 1, for the year ended December 31, 2008. 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, 2009. 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
Submission of
Matters to Vote of Security Holders
At
the annual meeting of shareholders, held on April 21, 2009, shareholders
of the Company approved the following matters:
1.
Election of five Class III
directors to hold office for three years from the date of election and until
their respective successors shall have been elected and qualified.
Nominee
|
|
For
|
|
Withheld
|
|
James H. Burton
|
|
4,152,737
|
|
361,147
|
|
Robert D. Carl, III
|
|
4,248,263
|
|
265,621
|
|
Philip E. Hughes, Jr.
|
|
3,728,348
|
|
785,536
|
|
Frank C. Milewski
|
|
4,250,738
|
|
263,146
|
|
Harry J. ONeill, III
|
|
4,277,584
|
|
236,300
|
|
2.
Approval of the VIST
Financial Corp. 2010 Non-Employee Director Compensation Plan.
The
votes cast in this matter were as follows:
For
|
|
Against
|
|
Abstain
|
|
Broker Non Vote
|
|
3,071,271
|
|
373,374
|
|
53,874
|
|
1,015,365
|
|
3.
Approval of the advisory
(non-binding) vote on executive compensation.
The
votes cast in this matter were as follows:
For
|
|
Against
|
|
Abstain
|
|
Broker Non Vote
|
|
3,105,896
|
|
342,675
|
|
49,948
|
|
1,015,365
|
|
4.
Ratification of the
appointment of Beard Miller Company LLP as the Companys auditors for
2009.
The
votes cast in this matter were as follows:
For
|
|
Against
|
|
Abstain
|
|
4,406,577
|
|
66,583
|
|
40,722
|
|
57
Table of Contents
Item 6 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: March 26, 2010
|
|
By
|
/s/Robert D. Davis
|
|
|
|
|
|
|
|
Robert D. Davis
|
|
|
|
President and Chief
|
|
|
|
Executive Officer
|
|
|
|
|
Dated: March 26, 2010
|
|
By
|
/s/Edward C. Barrett
|
|
|
|
|
|
|
|
Edward C. Barrett
|
|
|
|
Executive Vice President and
|
|
|
|
Chief Financial Officer
|
59
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