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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-K/A

Amendment No. 1

 

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934 FOR THE

FISCAL YEAR ENDED DECEMBER 31, 2008

 

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 if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

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.

 

Large accelerated filer o

 

Accelerated filer x

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

As of June 30, 2008, the aggregate market value of the voting and non-voting common stock of the registrant held by non-affiliates computed by reference to the price at which common stock was last sold was approximately $70.0 million.

 

Number of Shares of Common Stock Outstanding at March 26, 2010:  5,855,976

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive Proxy Statement prepared in connection with its Annual Meeting of Stockholders to be held on April 21, 2009 are incorporated in Part III hereof.

 

 

 



Table of Contents

 

INDEX

 

 

 

 

 

PAGE

 

 

 

 

 

PART I

 

FORWARD LOOKING STATEMENTS

 

1

Item 1.

 

Business

 

2

Item 1A.

 

Risk Factors

 

10

Item 1B.

 

Unresolved Staff Comments

 

14

Item 2.

 

Properties

 

15

Item 3.

 

Legal Proceedings

 

16

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

17

Item 4A.

 

Executive Officers of the Registrant

 

17

 

 

 

 

 

PART II

 

 

 

19

Item 5.

 

Market for Common Equity and Related Shareholder Matters

 

19

Item 6.

 

Selected Financial Data

 

22

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

 

52

Item 8.

 

Financial Statements and Supplementary Data

 

53

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

106

Item 9A.

 

Controls and Procedures

 

106

Item 9B

 

Other Information

 

109

 

 

 

 

 

PART III

 

 

 

110

Item 10.

 

Directors and Executive Officers of the Registrant

 

110

Item 11.

 

Executive Compensation

 

110

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

 

110

Item 13.

 

Certain relationships and Related Transactions

 

110

Item 14.

 

Principal Accounting Fees and Services

 

110

 

 

 

 

 

PART IV

 

 

 

111

Item 15.

 

Exhibits and Financial Statement Schedules

 

111

SIGNATURES

 

113

 



Table of Contents

 

PART I

 

EXPLANATORY NOTE

 

This Amendment on Form 10-K/A amends our Annual Report on Form 10-K for the annual period ended December 31, 2008, filed with the Securities and Exchange Commission (SEC) on March 6, 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 annual period ended December 31, 2008 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 Company’s 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 Company’s 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-K filed on March 6, 2009.  The errors discussed above do not affect periods prior to the three month period ended September 30, 2008.  Accordingly, 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 “Item 9A - Controls and Procedures” and reflects Management’s restated assessment of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) as of December 31, 2008.  This restatement of Management’s assessment regarding disclosure controls and procedures results from management’s 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 September 30, 2008 and December 31, 2008.

 

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.

 

Except as described in the preceding paragraph to remediate the material weakness described, there have been no changes in the Company’s internal control over financial reporting during the fourth quarter of 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

For additional discussion, see “Item 8 — Financial Statements and Supplementary Data” 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 Company’s filings with the Securities and Exchange Commission (including this Annual Report on Form 10-K 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.

 

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These forward-looking statements include statements with respect to the Company’s 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 Company’s 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 Company’s 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 Company’s products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services’ laws and regulations (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 Plan 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 management’s 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.

 

Item 1.            Business

 

The Company is a Pennsylvania business corporation headquartered at 1240 Broadcasting Road, Wyomissing, Pennsylvania 19610.  The Company was organized as a bank holding company on January 1, 1986.  The Company’s election with the Board of Governors of the Federal Reserve System to become a financial holding company became effective on February 7, 2002.  The Company offers a wide array of financial services through its various subsidiaries.  The Company’s executive offices are located at 1240 Broadcasting Road, Wyomissing, Pennsylvania 19610.

 

The Company’s common stock is traded on the NASDAQ Global Market system under the symbol “VIST.”

 

At December 31, 2008, the Company had total assets of $1.2 billion, total shareholders’ equity of $123.6 million, and total deposits of $850.6 million.

 

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 Company’s common stock, par value $5.00 per share, for an aggregate purchase price of $25.0 million in cash (see note 16 of the consolidated financial statements).  The issuance of the Series A Preferred Stock also carries certain restrictions with regards to the Company’s declaration and payment of cash dividends on common stock and the redemption, purchase or acquisition any shares of Common Stock or other capital stock or other equity securities of any kind of the Company, or any junior subordinate debt (trust preferred securities) issued by the Company or any affiliate of the Company.

 

Subsidiary Activities

 

The Bank

 

The Company’s wholly-owned banking subsidiary is VIST Bank (“VIST Bank” or the “Bank”), a Pennsylvania chartered commercial bank.  During the year ended December 31, 2000, the charters of The First National Bank of Leesport, incorporated under the laws of the United States of America as a national bank in 1909, and Merchants Bank of Pennsylvania, both wholly-owned banking subsidiaries of the Company at that time, were merged into a single charter.  VIST Bank operates in Berks, Schuylkill, Philadelphia, Delaware and Montgomery counties in Pennsylvania.

 

On October 1, 2004, the Company acquired 100% of the outstanding voting shares of Madison Bancshares Group, Ltd., the holding company for Madison Bank (“Madison”), a Pennsylvania state-chartered commercial bank and its mortgage banking division, Philadelphia Financial Mortgage Company, now known as VIST Mortgage.  Madison and VIST Mortgage are both now divisions of VIST Bank.  The transaction enhances the Bank’s strong presence in Pennsylvania, particularly in the high growth counties of Berks, Philadelphia, Montgomery and Delaware.

 

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VIST Bank had two wholly-owned subsidiaries as of December 31, 2008; VIST Mortgage Holdings, LLC and VIST Realty Solutions, LLC.

 

VIST Mortgage Holdings, LLC, a Pennsylvania limited liability company, provides mortgage brokerage services, including, without limitation, any activity in which a mortgage broker may engage.  It is operated as a permissible “affiliated business arrangement” within the meaning of the Real Estate Settlement Procedures Act of 1974.  VIST Mortgage Holdings, LLC is currently inactive.

 

VIST Realty Solutions, LLC, a Pennsylvania limited liability company, provides title insurance and other real estate related services to the Company’s customers through limited partnership arrangements with unaffiliated third parties involved in the real estate services industry.  The capital contributions of VIST Realty Solutions, LLC in connection with the formation of each of the limited partnerships were not material.  None of the limited partnership arrangements involves the use of a special purposes entity for financial accounting purposes or any off-balance sheet financing technique.  On October 29, 2008, VIST Realty Solutions, LLC dissolved its operations by selling its partnership interest to the remaining limited partnerships for an amount which approximated its initial capital contribution.  Neither the Company nor any other affiliate of the Company nor VIST Realty Solutions, LLC has any continuing contractual financial commitment to the limited partnerships.

 

Commercial and Retail Banking

 

VIST Bank provides services to its customers through seventeen full service financial centers, which operate under VIST Bank’s name in Leesport, Blandon, Bern Township, Wyomissing, Breezy Corner, Hamburg, Birdsboro, Northeast Reading, Exeter Township, and Sinking Spring all of which are in Berks County, Pennsylvania.  VIST Bank also operates a financial center in Schuylkill Haven, which is located in Schuylkill County, Pennsylvania.  VIST Bank also operates financial centers in Blue Bell, Conshohocken, Oaks and Centre Square all of which are in Montgomery County, Pennsylvania.  The Bank closed its Horsham financial center in 2008.  The Bank also operates a financial center in Fox Chase (northeast Philadelphia) in Philadelphia County, Pennsylvania and Strafford in Delaware County, Pennsylvania.  The Bank also operates a limited service facility in Wernersville, Berks County, Pennsylvania.  All full service financial centers provide automated teller machine services.  Each financial center, except the Wernersville and Breezy Corner locations, provides drive-in facilities.

 

VIST Bank engages in full service commercial and consumer banking business, including such services as accepting deposits in the form of time, demand and savings accounts. Such time deposits include certificates of deposit, individual retirement accounts and Roth IRAs.  The Bank’s savings accounts include money market accounts, health savings accounts, club accounts, NOW accounts and traditional regular savings accounts.  In addition to accepting deposits, the Bank makes both secured and unsecured commercial and consumer loans, finances commercial transactions, provides equipment lease and accounts receivable financing and makes construction and mortgage loans, including home equity loans.  The Bank also provides small business loans and other services including rents for safe deposit facilities.

 

At December 31, 2008, the Company and VIST Bank had the equivalent of 293 and 194 full-time employees, respectively.

 

Mortgage Banking

 

VIST Bank provides mortgage banking services to its customers through VIST Mortgage.  VIST Mortgage operates offices in Reading and Blue Bell, which are located in Berks County, Pennsylvania, Schuylkill County, Pennsylvania and Montgomery County, Pennsylvania, respectively.  In 2008, VIST Mortgage closed its Camp Hill office which was located in Cumberland County, Pennsylvania.

 

Insurance

 

VIST Insurance, LLC (“VIST Insurance”), a full service insurance agency, offers a full line of personal and commercial property and casualty insurance as well as group insurance for businesses, employee and group benefit plans, and life insurance.  VIST Insurance is headquartered in Reading, Pennsylvania with sales offices at 108 South Fifth Street, Reading, Pennsylvania; 460 Norristown Road, Blue Bell, Pennsylvania; and 1240 Broadcasting Road, Wyomissing, Pennsylvania.  VIST Insurance had 64 full-time employees at December 31, 2008.

 

Wealth Management

 

VIST Capital Management LLC, (“VIST Capital”), a full service investment advisory and brokerage services company, offers a full line of products and services for individual financial planning, retirement and estate planning, investments, corporate and small business pension and retirement planning.  VIST Capital is headquartered at 1240 Broadcasting Road, Wyomissing, Pennsylvania and had 7 full-time employees at December 31, 2008.

 

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Equity Investments

 

Health Savings Accounts - In July 2005, the Company purchased a 25% equity position in First HSA, LLC a national health savings account (“HSA”) administrator.  The investment formalized a relationship that existed since 2001.  This relationship has allowed the Company to be a custodian for HSA customers throughout the country.  At December 31, 2008, the Company has more than 29,908 accounts with approximately $56.4 million in deposits.  The HSA relationship has given the Company a strong presence in the HSA business and will continue to benefit the Company by raising deposits in 2009.

 

Junior Subordinated Debt

 

The Company owns First Leesport Capital Trust I (the “Trust”), a Delaware statutory business trust formed on March 9, 2000, in which the Company owns all of the common equity.  The Trust has outstanding $5 million of 10.875% fixed rate mandatory redeemable capital securities.  These securities must be redeemed in March 2030, but may be redeemed on or after March 9, 2010 or earlier in the event that the interest expense becomes non-deductible for federal income tax purposes or if these securities no longer qualify as Tier 1 capital for the Company.  In October, 2002 the Company entered into an interest rate swap agreement that effectively converts the securities to a floating interest rate of six month LIBOR plus 5.25%.  In June 2003, the Company purchased a six month LIBOR cap to create protection against rising interest rates for the interest rate swap.

 

On September 26, 2002, the Company established Leesport Capital Trust II, a Delaware statutory business trust, in which the Company owns all of the common equity.  Leesport Capital Trust II issued $10 million of mandatory redeemable capital securities carrying a floating interest rate of three month LIBOR plus 3.45%.  These securities must be redeemed in September 2032, but may be redeemed on or after November 7, 2007 or earlier in the event that the interest expense becomes non-deductible for federal income tax purposes or if these securities no longer qualify as Tier 1 capital for the Company.  The Company opted not to redeem these capital securities in 2008 due to unfavorable economic conditions and interest rates.  The Company will continue to evaluate the feasibility of redeeming these capital securities.  In September 2008, the Company entered into an interest rate swap agreement that effectively converts the $10 million of adjustable-rate capital securities to a fixed interest rate of 7.25%.  Interest began accruing on the Leesport Capital Trust II swap in February 2009.

 

On June 26, 2003, Madison established Madison Statutory Trust I, a Connecticut statutory business trust.  Pursuant to the purchase of Madison on October 1, 2004, the Company assumed Madison Statutory Trust I in which the Company owns all of the common equity.  Madison Statutory Trust I issued $5 million of mandatory redeemable capital securities carrying a floating interest rate of three month LIBOR plus 3.10%.  These securities must be redeemed in June 2033, but may be redeemed on or after September 26, 2008 or earlier in the event that the interest expense becomes non-deductible for federal income tax purposes or if the treatment of these securities is no longer qualified as Tier 1 capital for the Company. The Company opted not to redeem these capital securities in 2008 due to unfavorable economic conditions and interest rates.  The Company will continue to evaluate the feasibility of redeeming these capital securities.  In September 2008, the Company entered into an interest rate swap agreement that effectively converts the $5 million of adjustable-rate capital securities to a fixed interest rate of 6.90%.  Interest began accruing on the Madison Statutory Trust I swap in March 2009.

 

Prior to the earlier of the third anniversary date of the issuance of the Series A Preferred Stock issued to Treasury (December 19, 2011) or the date on which the Series A Preferred Stock has been redeemed in whole or the Treasury has transferred all of the Series A Preferred Stock to third parties which are not affiliates of the Treasury, neither the Company nor any of its subsidiaries are permitted to redeem, purchase or acquire any trust preferred securities issued by the Company or any affiliate of the Company without the consent of the Treasury.

 

Competition

 

The Company faces substantial competition in originating loans, in attracting deposits, and generating fee-based income.  This competition comes principally from other banks, savings institutions, credit unions, mortgage banking companies and, with respect to deposits, institutions offering investment alternatives, including money market funds.  Competition also comes from other insurance agencies and direct writing insurance companies.  Due to the passage of landmark banking legislation in November 1999, competition may increasingly come from insurance companies, large securities firms and other financial services institutions.  As a result of consolidation in the banking industry, some of the Company’s competitors and their respective affiliates may enjoy advantages such as greater financial resources, a wider geographic presence, a wider array of services, or more favorable pricing alternatives and lower origination and operating costs.

 

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Supervision and Regulation

 

General

 

The Company is registered as a bank holding company, which has elected to be treated as a financial holding company, and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System under the Bank Holding Act of 1956, as amended.  As a bank holding company, the Company’s activities and those of its bank subsidiary are limited to the business of banking and activities closely related or incidental to banking.  Bank holding companies are required to file periodic reports with and are subject to examination by the Federal Reserve Board.  The Federal Reserve Board has issued regulations under the Bank Holding Company Act that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks.  As a result, the Federal Reserve Board, pursuant to such regulations, may require the Company to stand ready to use its resources to provide adequate capital funds to its bank subsidiary during periods of financial stress or adversity.

 

The Bank Holding Company Act prohibits the Company from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock, or substantially all of the assets of any bank, or from merging or consolidating with another bank holding company, without prior approval of the Federal Reserve Board.  Additionally, the Bank Holding Company Act prohibits the Company from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a non-banking business, unless such business is determined by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto.  The types of businesses that are permissible for bank holding companies to own were expanded by the Gramm-Leach-Bliley Act in 1999.

 

As a Pennsylvania bank holding company for purposes of the Pennsylvania Banking Code, the Company is also subject to regulation and examination by the Pennsylvania Department of Banking.

 

The Company is under the jurisdiction of the Securities and Exchange Commission and of state securities commissions for matters relating to the offering and sale of its securities.  In addition, the Company is subject to the Securities and Exchange Commission’s rules and regulations relating to periodic reporting, proxy solicitation, and insider trading.

 

Regulation of VIST Bank

 

VIST Bank is a Pennsylvania chartered commercial bank, and its deposits are insured (up to applicable limits) by the Federal Deposit Insurance Corporation (the “FDIC”).  The Bank is subject to regulation and examination by the Pennsylvania Department of Banking and by the FDIC.  The Community Reinvestment Act requires VIST Bank to help meet the credit needs of the entire community where VIST Bank operates, including low and moderate income neighborhoods. VIST Bank’s rating under the Community Reinvestment Act, assigned by the FDIC pursuant to an examination of VIST Bank, is important in determining whether the Bank may receive approval for, or utilize certain streamlined procedures in, applications to engage in new activities.

 

VIST Bank is also subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered.  Various consumer laws and regulations also affect the operations of VIST Bank.  In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.

 

Capital Adequacy Guidelines

 

Bank holding companies are required to comply with the Federal Reserve Board’s risk-based capital guidelines.  The required minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%.  At least half of the total capital is required to be “Tier 1 capital,” consisting principally of common shareholders’ equity, less certain intangible assets.  The remainder (“Tier 2 capital”) may consist of certain preferred stock, a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, and a limited amount of the general loan loss allowance.  The risk-based capital guidelines are required to take adequate account of interest rate risk, concentration of credit risk, and risks of nontraditional activities.

 

In addition to the risk-based capital guidelines, the Federal Reserve Board requires a bank holding company to maintain a leverage ratio of a minimum level of Tier 1 capital (as determined under the risk-based capital guidelines) equal to 3% of average total consolidated assets for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion.  All other bank holding companies are required to maintain a ratio of at least 1% to 2% above the stated minimum.  The Pennsylvania Department of Banking requires state chartered banks to maintain a 6% leverage capital level and 10% risk based capital, defined substantially the same as the federal regulations.  The Bank is subject to almost identical capital requirements adopted by the FDIC.

 

Prompt Corrective Action Rules

 

The federal banking agencies have regulations defining the levels at which an insured institution would be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.”  The applicable federal bank regulator for a depository institution could, under certain circumstances, reclassify a “well-capitalized” institution as “adequately capitalized” or require an “adequately capitalized” or “undercapitalized” institution to comply with

 

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supervisory actions as if it were in the next lower category.  Such a reclassification could be made if the regulatory agency determines that the institution is in an unsafe or unsound condition (which could include unsatisfactory examination ratings).  The Company and the Bank each satisfy the criteria to be classified as “well capitalized” within the meaning of applicable regulations.

 

Regulatory Restrictions on Dividends

 

Dividend payments made by VIST Bank to the Company are subject to the Pennsylvania Banking Code, the Federal Deposit Insurance Act, and the regulations of the FDIC.  Under the Banking Code, no dividends may be paid except from “accumulated net earnings” (generally, retained earnings).  The Federal Reserve Board and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions.  The Prompt Corrective Action Rules, described above, further limit the ability of banks to pay dividends if they are not classified as well capitalized or adequately capitalized.

 

Under these policies and subject to the restrictions applicable to the Bank, the Bank had approximately $10.0 million available for payment of dividends to the Company at December 31, 2008, without prior regulatory approval.

 

FDIC Insurance Assessments

 

In February 2006, deposit insurance modernization legislation was enacted.  Effective March 31, 2006, the law merged the BIF Fund and the SAIF Fund into a single Deposit Insurance Fund, increased deposit insurance coverage for IRAs to $250,000, provided for the future increase of deposit insurance on all accounts by authorizing the FDIC to index the coverage to the rate of inflation, authorized the FDIC to set the reserve ratio of the combined Deposit Insurance Fund at a level between 1.15% and 1.50%, and permitted the FDIC to establish assessments to be paid by insured banks.  On October 3, 2008, in response to the ongoing economic crisis affecting the financial services industry, the Emergency Economic Stabilization Act of 2008 was enacted which raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor.  This legislation provides that the basic deposit insurance limit will return to $100,000 after December 31, 2009.

 

The FDIC has implemented a risk-related premium schedule for all insured depository institutions that results in the assessment of premiums based on capital adequacy and supervisory measures as well as certain financial ratios.  Deposit insurance assessment rates are billed quarterly and in arrears.  The current assessment rate calculation is valid only for Risk Category I or well-capitalized institutions with minimum composite CAMELS ratings as of the end of the quarterly assessment period.  Only institutions with a total capital to risk-adjusted assets ratio of 10% or greater, a Tier 1 capital to risk-based assets ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater, are assigned to the well-capitalized group.  As of December 31, 2008, the Bank was well capitalized for purposes of calculating FDIC insurance assessments.

 

The FDIC’s Board of Directors has adopted minimum and maximum assessment rates for Risk Category I institutions of 5.0 basis points and 7.0 basis points, respectively, beginning in 2007.  Based on the FDIC assessment rate calculation at December 31, 2008, the Bank’s FDIC assessment rate is 6.59 basis points.  On December 16, 2008, the FDIC Board of Directors approved the final rule on deposit insurance assessment rates for the first quarter of 2009.  The rule raises assessment rates uniformly by 7 basis points (annual rate) for the first quarter of 2009 only.  Annual rates applicable to the first quarter 2009 assessments, which would be collected at the end of June 2009, are as follows:

 

Risk Category I: 12 - 14 basis points;

Risk Category II: 17 basis points;

Risk Category III: 35 basis points; and

Risk Category IV: 50 basis points.

 

On February 27, 2009, the FDIC Board of Directors took further action to strengthen the Deposit Insurance Fund (“DIF”) by adopting an interim rule imposing a special assessment on insured institutions of 20 basis points on June 30, 2009, with the option of imposing an emergency special assessment after June 30, 2009 of up to 10 basis points, adopting a final rule implementing changes to the risk-based assessment system, and setting assessment rates beginning with the second quarter of 2009.  The ultimate goal of these FDIC actions is to restore the DIF reserve ratio to 1.15% within the next seven years.  The FDIC increased the DIF reserve ratio restoration period from five to seven years due to recent economic pressures impacting banks and the financial system.  Based on our most recent FDIC deposit insurance assessment base, the special assessment on insured institutions of 20 basis points, if implemented, would increase our FDIC deposit insurance premiums by approximately $1.6 million in 2009.

 

Assessment rates beginning April 1, 2009 will increase.  Banks in the top tier risk category currently pay any where from 12 cents per $100 of deposits to 14 cents per $100 of deposits for FDIC insurance.  FDIC insurance assessment rates for these banks will increase and will now include an initial base rate of between 12 cents per $100 of deposits to 16 cents per $100 of deposits with higher assessment rates for those institutions that rely significantly on secured borrowings and brokered deposits.  The FDIC will reduce assessment rates for smaller banks, banks with high levels of tier 1 capital and banks that hold long-term unsecured debt.

 

In 2008, the Bank paid $493,600 in FDIC deposit insurance premiums, however, it is subject to assessments to pay the interest on Financing Corporation (“FICO”) bonds.  The Financing Corporation was created by Congress to issue bonds to finance the

 

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resolution of failed thrift institutions.  Prior to 1997, only thrift institutions were subject to assessments to raise funds to pay the FICO bonds.  Beginning in 2000, commercial banks and thrifts are subject to the same assessment for FICO bonds.  The FDIC sets the Financing Corporation assessment rate every quarter.  The current FICO bond assessment for the Bank is $.0114, annualized, for each $100 of deposits.  The deposit insurance modernization legislation does not affect the authority of the Financing Corporation to collect these assessments.

 

FDIC Temporary Liquidity Guarantee Program

 

On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program (TLG Program) to strengthen confidence and encourage liquidity in the banking system.  The TLG Program consists of two components: a temporary guarantee of newly issued senior unsecured debt (the Debt Guarantee Program) and a temporary unlimited guarantee of funds in noninterest-bearing transaction accounts at FDIC-insured institutions (the Transaction Account Guarantee Program).

 

The TLG Program became effective on October 14, 2008.  All eligible entities were covered under the TLG Program for the first 30 days of the TLG Program.  No later than December 5, 2008, each eligible entity mandatory informed the FDIC of its desired to opt out of the Debt Guarantee Program or the Transaction Account Guarantee Program, or both.  The decision to opt out is irrevocable.  Failure to opt out of either component by December 5, 2008, constituted an irrevocable decision to continue participation in that component.  For each component, a U.S. Bank Holding Company and all of its affiliates that are eligible entities must have made the same election regarding participation.  Similarly, for each component, a U.S. Savings and Loan Holding Company and all of its affiliates that are eligible entities must have made the same election regarding participation.  For example, if one member of a holding company group opted out with respect to the Debt Guarantee Program, then all eligible entities within the same group are also deemed to have opted out.  Entities that opted out were subject to certain disclosure requirements, as specified in Part 370 of the FDIC’s regulations.

 

No entity was charged for the first 30 days of the TLG Program.  Any eligible entity that opted out of the Program on or before December 5, 2008, did not pay any assessment under the Program.  Any eligible entity that did not opt out on or before December 5, 2008, was required to pay assessments retroactive to November 13, 2008.  The assessments associated with the TLG Program, as outlined in the Final Rule, are as follows:

 

All new issued senior unsecured debt as defined in the regulation was charged an annualized assessment of up to 100 basis points (depending on debt term) multiplied by the amount of debt issued, and calculated through the date of that debt or June 30, 2012, whichever is earlier.

 

Holding companies and other non-insured depository institutions in a holding company structure may be assessed an additional 10 basis points under certain circumstances, as described in the Final Rule.

 

Amounts exceeding the existing deposit insurance limit of $250,000 in any noninterest-bearing transaction accounts as defined in the regulation will be assessed an annualized 10 basis points collected quarterly for coverage through December 31, 2009.

 

Any eligible entity that did not opt out of the Debt Guarantee Program notified the FDIC of the amount of outstanding senior unsecured debt as of September 30, 2008 that is scheduled to mature on or before June 30, 2009, for purposes of determining the maximum guaranteed amount under this component.

 

The Company and the Bank are participating in the Debt Guarantee Program and the Transaction Account Guarantee Program.  For both the Company and the Bank, the total amount of outstanding senior unsecured debt as defined in the regulation as of September 30, 2008, that is scheduled to mature on or before June 30, 2009, was $0.

 

If a participating entity wanted to have the option of issuing certain non-guaranteed senior unsecured debt before issuing the maximum amount of guaranteed debt, it could have elected to do so.  Election of this option requires a participating entity to pay an upfront nonrefundable fee in exchange for which it will be able to issue, at any time and without regard to the cap, non-guaranteed senior unsecured debt with a maturity date after June 30, 2012.  The nonrefundable fee would be equal to 37.5 basis points of the par or face value of senior unsecured debt, excluding debt extended to affiliates or institution affiliated parties, outstanding as of September 30, 2008, that is scheduled to mature on or before June 30, 2009.  An entity electing the nonrefundable fee option will be billed as it issues guaranteed debt under the Debt Guarantee Program, and the amounts paid as a nonrefundable fee will offset these bills until the nonrefundable fee is exhausted.  Thereafter, the institution must pay an additional assessment for guaranteed debt as it issues the debt.  Both the Company and the Bank declined the option of issuing certain non-guaranteed senior unsecured debt before issuing the maximum amount of guaranteed debt.

 

Federal Home Loan Bank System

 

The Bank is a member of the Federal Home Loan Bank of Pittsburgh (the “FHLB”), which is one of 12 regional Federal Home Loan Banks.  Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region.  It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal

 

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Home Loan Bank System.  It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank.  At December 31, 2008, the Bank had $53.4 million in short-term FHLB advances outstanding and $50.0 million in longer-term FHLB advances outstanding.

 

As a member, the Bank is required to purchase and maintain stock in the FHLB in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of its outstanding advances from the FHLB.  At December 31, 2008, the Bank had $5.7 million in stock of the FHLB which was in compliance with this requirement.

 

Emergency Economic Stabilization Act of 2008

 

The Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted on October 3, 2008.  EESA enables the federal government, under terms and conditions to be developed by the Secretary of the Treasury, to insure troubled assets, including mortgage-backed securities, and collect premiums from participating financial institutions.  EESA includes, among other provisions: (a) the $700 billion Troubled Assets Relief Program (“TARP”), under which the Secretary of the Treasury is authorized to purchase, insure, hold, and sell a wide variety of financial instruments, particularly those that are based on or related to residential or commercial mortgages originated or issued on or before March 14, 2008; and (b) an increase in the amount of deposit insurance provided by the FDIC.

 

Under the TARP, the United States Department of Treasury authorized a voluntary Capital Purchase Program to purchase up to $250 billion of senior preferred shares of qualifying financial institutions that elected to participate by November 14, 2008.  As previously disclosed, on December 19, 2008, the Company issued to Treasury, 25,000 shares of Series A Preferred Stock and a warrant to purchase 364,078 shares of the Company’s common stock for an aggregate purchase price of $25.0 million under the TARP Capital Purchase Program (see note 16 to notes to consolidated financial statements).  Companies participating in the TARP Capital Purchase Program were required to adopt certain standards relating to executive compensation.  The terms of the TARP Capital Purchase Program also limit certain uses of capital by the issuer, including with respect to repurchases of securities and increases in dividends.

 

Financial Stability Plan

 

On February 10, 2009, the Financial Stability Plan (“FSP”) was announced by the U.S. Treasury Department.  The FSP is a comprehensive set of measures intended to bolster the financial system.  The core elements of the FSP  include making bank capital injections, creating a public-private investment fund to buy troubled assets, establishing guidelines for loan modification programs and expanding the Federal Reserve lending program.  Treasury has indicated more details regarding the FSP are to be announced on a newly created government website, FinancialStability.gov, in the next several weeks.

 

American Recovery and Reinvestment Act of 2009

 

On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted.  ARRA is intended to provide a stimulus to the U.S. economy in the wake of the economic downturn brought about by the subprime mortgage crisis and the resulting credit crunch.  The bill includes federal tax cuts, expansion of unemployment benefits and other social welfare provisions, and domestic spending in education, healthcare, and infrastructure, including the energy structure.  The new law also includes certain noneconomic recovery related items, including a limitation on executive compensation in federally aided financial institutions, including institutions, such as the Company, that had previously received an investment by Treasury under the TARP Capital Purchase Program.

 

Under ARRA, an institution that either will receive funds or which had previously received funds under TARP, will be subject to certain restrictions and standards throughout the period in which any obligation arising under TARP remains outstanding (except for the time during which the federal government holds only warrants to purchase common stock of the issuer).  The following summarizes the significant requirements of ARRA, which are to be included in standards to be established by Treasury:

 

·  limits on compensation incentives for risks by senior executive officers;

·  a requirement for recovery of any compensation paid based on inaccurate financial information;

·      a prohibition on “golden parachute payments” to specified officers or employees, which term is generally defined as any payment for departure from a company for any reason;

·      a prohibition on compensation plans that would encourage manipulation of reported earnings to enhance the compensation of employees;

·      a prohibition on bonus, retention award, or incentive compensation to designated employees, except in the form of long-term restricted stock;

·  a requirement that the board of directors adopt a luxury expenditures policy;

·  a requirement that shareholders be permitted a separate nonbinding vote on executive compensation;

·      a requirement that the chief executive officer and the chief financial officer provide a written certification of compliance with the standards, when established, to the SEC.

 

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Under ARRA, subject to consultation with the appropriate federal banking agency, Treasury is required to permit a recipient of TARP funds to repay any amounts previously provided to or invested in the recipient by Treasury without regard to whether the institution has replaced the funds from any other source or to any waiting period.  These provisions of ARRA relating to repayment of an investment by Treasury are different from the terms originally adopted under Treasury’s Capital Purchase Program and reflected in the transaction documents executed by the Company on December 19, 2008.  Treasury has confirmed that recipients of funds under the Capital Purchase Program may repay them irrespective of funding dates notwithstanding the terms of the original transaction documents.

 

Homeowner Affordability and Stability Plan

 

On February 18, 2009, the Homeowner Affordability and Stability Plan (“HASP”) was announced by the President.  HASP is intended to support a recovery in the housing market and ensure that workers can continue to pay off their mortgages by providing access to low-cost refinancing for responsible homeowners suffering from falling home prices, implementing a $75 billion homeowner stability initiative to prevent foreclosure and help responsible families stay in their homes, and supporting low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac.  More details regarding HASP are expected to be announced on March 4, 2009.  We continue to monitor these developments and assess their potential impact on the business of the Company and the Bank.

 

Other Legislation

 

The Gramm-Leach-Bliley Act, passed in 1999, dramatically changed certain banking laws.  One of the most significant changes was that the separation between banking and the securities businesses mandated by the Glass-Steagall Act has now been removed, and the provisions of any state law that prohibits affiliation between banking and insurance entities have been preempted.  Accordingly, the legislation now permits firms engaged in underwriting and dealing in securities, and insurance companies, to own banking entities, and permits bank holding companies (and in some cases, banks) to own securities firms and insurance companies.  The provisions of federal law that preclude banking entities from engaging in non-financially related activities, such as manufacturing, have not been changed.  For example, a manufacturing company cannot own a bank and become a bank holding company, and a bank holding company cannot own a subsidiary that is not engaged in financial activities, as defined by the regulators.

 

The legislation creates a new category of bank holding company called a “financial holding company.”  In order to avail itself of the expanded financial activities permitted under the law, a bank holding company must notify the Federal Reserve Board (“Federal Reserve”) that it elects to be a financial holding company.  A bank holding company can make this election if it, and all its bank subsidiaries, are well capitalized, well managed, and have at least a satisfactory Community Reinvestment Act rating, each in accordance with the definitions prescribed by the Federal Reserve and the regulators of the subsidiary banks.  Once a bank holding company makes such an election, and provided that the Federal Reserve does not object to such election by such bank holding company, the financial holding company may engage in financial activities (i.e., securities underwriting, insurance underwriting, and certain other activities that are financial in nature as to be determined by the Federal Reserve) by simply giving a notice to the Federal Reserve within thirty days after beginning such business or acquiring a company engaged in such business.  This makes the regulatory approval process to engage in financial activities much more streamlined than under prior law.  On February 7, 2002, the Company’s election with the Board of Governors of the Federal Reserve System to become a financial holding company became effective.

 

The Sarbanes-Oxley Act of 2002 was enacted to enhance penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures under the federal securities laws.  The Sarbanes-Oxley Act generally applies to all companies, including the Company, that file or are required to file periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934, or the Exchange Act.  The legislation includes provisions, among other things, governing the services that can be provided by a public company’s independent auditors and the procedures for approving such services, requiring the chief executive officer and chief financial officer to certify certain matters relating to the company’s periodic filings under the Exchange Act, requiring expedited filings of reports by insiders of their securities transactions and containing other provisions relating to insider conflicts of interest, increasing disclosure requirements relating to critical financial accounting policies and their application, increasing penalties for securities law violations, and creating a new Public Company Accounting Oversight Board (“PCAOB”), a regulatory body subject to SEC jurisdiction with broad powers to set auditing, quality control and ethics standards for accounting firms.  In connection with this legislation, the national securities exchanges and Nasdaq have adopted rules relating to certain matters, including the independence of members of a company’s audit committee, as a condition to listing or continued listing.  The Company does not believe that the application of these rules to the Company will have a material effect on its business, financial condition or results of operations.

 

The USA PATRIOT Act, enacted in direct response to the terrorist attacks on September 11, 2001, strengthens the anti-money laundering provisions of the Bank Secrecy Act.  Many of the new provisions added by the Act apply to accounts at or held by foreign banks, or accounts of or transactions with foreign entities.  While the Bank does not have a significant foreign business, the new requirements of the Bank Secrecy Act still require the Bank to use proper procedures to identify its customers.  The Act also requires the banking regulators to consider a bank’s record of compliance under the Bank Secrecy Act in acting on any application filed by a bank.  As the Bank is subject to the provisions of the Bank Secrecy Act (i.e., reporting of cash transactions in excess of $10,000), the Bank’s record of compliance in this area will be an additional factor in any applications filed by it in the future.  To the Bank’s knowledge, its record of compliance in this area is satisfactory.

 

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The Fair and Accurate Credit Transaction Act was adopted in 2003.  It extends and expands upon provisions in the Fair Credit Reporting Act, affecting the reporting of delinquent payments by customers and denials of credit applications.  The revised act imposes additional record keeping, reporting, and customer disclosure requirements on all financial institutions, including the Bank.  Also in late 2003, the Check 21 Act was adopted.  This Act affects the way checks can be processed in the banking system, allowing payments to be converted to electronic transfers rather than processed as traditional paper checks.

 

Congress is often considering some financial industry legislation, and the federal banking agencies routinely propose new regulations.  The Company cannot predict how any new legislation, or new rules adopted by the federal banking agencies, may affect its business in the future.

 

VIST Insurance and VIST Capital are subject to additional regulatory requirements.  VIST Insurance is subject to Pennsylvania insurance laws and the regulations of the Pennsylvania Department of Insurance.  The securities brokerage activities of VIST Capital are subject to regulation by the SEC and the NASD/SIPC, and VIST Capital is a registered investment advisor subject to regulation by the SEC.

 

Item 1A.         Risk Factors

 

Recent legislative and regulatory initiatives to address difficult market and economic conditions may not stabilize the U.S. banking system.

 

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the “EESA”) which, among other measures, authorizes Treasury to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies, under a troubled asset relief program, or “TARP.”  The purpose of TARP is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other.  Under the TARP Capital Purchase Program, Treasury is purchasing equity securities from participating institutions.  EESA also increased federal deposit insurance on most deposit accounts from $100,000 to $250,000. This increase is in place until the end of 2009 and is not covered by deposit insurance premiums paid by the banking industry.

 

EESA followed, and has been followed by, numerous actions by the Board of Governors of the Federal Reserve System, the U.S. Congress, Treasury, the FDIC, the SEC and others to address the current liquidity and credit crisis that has followed the sub-prime meltdown that commenced in 2007.  These measures include homeowner relief that encourage loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; emergency action against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; and coordinated international efforts to address illiquidity and other weaknesses in the banking sector.

 

On October 14, 2008, the FDIC announced the establishment of a temporary liquidity guarantee program to provide full deposit insurance for all non-interest bearing transaction accounts and guarantees of certain newly issued senior unsecured debt issued by FDIC-insured institutions and their holding companies.  Insured institutions were automatically covered by this program from October 14, 2008 until December 5, 2008, unless they opted out prior to that date.  Under the program, the FDIC will guarantee timely payment of newly issued senior unsecured debt issued on or before June 30, 2009.  The debt includes all newly issued unsecured senor debt including promissory notes, commercial paper and inter-bank funding.  The aggregate coverage for an institution may not exceed 125% of its debt outstanding on September 30, 2008 that was scheduled to mature before June 30, 2009, or, for certain insured institutions, 2% of liabilities as of September 30, 2008.  The guarantee will extend to June 30, 2012 even if the maturity of the debt is after that date.

 

The purpose of these legislative and regulatory actions is to stabilize the U.S. banking system.  EESA and the other regulatory initiatives described above may not have their desired effects.  If the volatility in the markets continues and economic conditions fail to improve or worsen, our business, financial condition, results of operations and cash flows could be materially and adversely affected.

 

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Difficult market conditions and economic trends have adversely affected our industry and our business.

 

We are particularly exposed to downturns in the U. S. housing market.  Dramatic declines in the housing market over the past year, with decreasing home prices and increasing delinquencies and foreclosures, may have a negative impact on the credit performance of mortgage, consumer, commercial and construction loan portfolios resulting in significant write-downs of assets by many financial institutions.  In addition, the values of real estate collateral supporting many loans have declined and may continue to decline. General downward economic trends, reduced availability of commercial credit and increasing unemployment may negatively impact the credit performance of commercial and consumer credit, resulting in additional write-downs.  Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other.  This market turmoil and tightening of credit has led to increased commercial and consumer deficiencies, lack of customer confidence, increased market volatility and widespread reduction in general business activity.  Competition among depository institutions for deposits has increased significantly.  Financial institutions have experienced decreased access to deposits or borrowings.  The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets may adversely affect our business, financial condition, results of operations and stock price.  We do not expect that the difficult market conditions will improve in the near future.  A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the industry.  In particular, we may face the following risks in connection with these events:

 

·                  We expect to face increased regulation of our industry.  Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.

 

·                  Our ability to assess the creditworthiness of customers and to estimate the losses inherent in our credit exposure is made more complex by these difficult market and economic conditions.

 

·                  We also may be required to pay even higher Federal Deposit Insurance Corporation premiums than the recently increased level, because financial institution failures resulting from the depressed market conditions have depleted and may continue to deplete the deposit insurance fund and reduce its ratio of reserves to insured deposits.

 

·                  Our ability to borrow from other financial institutions or the Federal Home Loan Bank on favorable terms or at all could be adversely affected by further disruptions in the capital markets or other events.

 

·                  We may experience a prolonged decrease in dividend income from our investment in Federal Home Loan Bank stock.

 

·                  We may experience increases in foreclosures, delinquencies and customer bankruptcies, as well as more restricted access to funds.

 

Current levels of market volatility are unprecedented.

 

The capital and credit markets have been experiencing volatility and disruption for more than a year.  In recent months, the volatility and disruption has reached unprecedented levels.  In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength.  If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition, results of operations and cash flows.

 

The market value of our securities portfolio may continue to be impacted by the level of interest rates and the credit quality and strength of the underlying issuers.

 

If a decline in market value of a security is determined to be other than temporary, under generally accepted accounting principles, we are required to write these securities down to their estimated fair value.  As of December 31, 2008, we owned single issue and pooled trust preferred securities and private label collateralized mortgage obligations whose aggregate historical cost basis is greater than their estimated fair value (see note 5 of the consolidated financial statements).  We have reviewed these securities and determined that the decreases in estimated fair value are temporary.  We perform 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, we will write them down through a charge to earnings to their then current fair value.

 

The Company’s banking subsidiary, VIST Bank, is a member of the FHLB and is required to purchase and maintain stock in the FHLB in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of its outstanding advances from the FHLB.  At December 31, 2008, the Bank had $5.7 million in stock of the FHLB which was in compliance with this requirement.  These equity securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par.  Therefore, they are less liquid than other tradable equity securities, their fair value is equal to amortized cost, and no impairment write-downs have been recorded on these securities during 2008, 2007, or 2006.  At December 31, 2008, the Bank had $53.4 million in short-term FHLB advances outstanding and $50.0 million in longer-term FHLB advances outstanding.

 

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The FHLB of Pittsburgh announced in December 2008 that it voluntarily suspended the payment of dividends and the repurchase of excess capital stock from member banks.  The FHLB cited a significant reduction in the level of core earnings resulting from lower short-term interest rates, the increased cost of maintaining liquidity and constrained access to the debt markets at attractive rates and maturities as the main reasons for the decision to suspend dividends and the repurchase excess capital stock.  The FHLB last paid a dividend in the third quarter of 2008.  Accounting guidance indicates that an investor in FHLB Pittsburgh capital stock should recognize impairment if it concludes that it is not probable that it will ultimately recover the par value of its shares.  The decision of whether impairment exists is a matter of judgment that should reflect the investor’s view of FHLB Pittsburgh’s long-term performance, which includes factors such as its operating performance, the severity and duration of declines in the market value of its net assets related to its capital stock amount, its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance, the impact of legislation and regulatory changes on FHLB Pittsburgh, and accordingly, on the members of FHLB Pittsburgh and its liquidity and funding position.  After evaluating all of these considerations, the Company believes the par value of its shares will be recovered.  Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.

 

Changes in interest rates could reduce our income, cash flows and asset values.

 

Our income and cash flows and the value of our assets depend to a great extent on the difference between the interest rates we earn on interest-earning assets, such as loans and investment securities, and the interest rates we pay on interest-bearing liabilities such as deposits and borrowings.  These rates are highly sensitive to many factors which are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, will influence not only the interest we receive on our loans and investment securities and the amount of interest we pay on deposits and borrowings but will also affect our ability to originate loans and obtain deposits and the value of our investment portfolio.  If the rate of interest we pay on our deposits and other borrowings increases more or decreases less than the rate of interest we earn on our loans and other investments, our net interest income, and therefore our earnings, could be adversely affected.  Our earnings also could be adversely affected if the rates on our loans and other investments fall more quickly than those on our deposits and other borrowings.

 

Our financial condition and results of operations would be adversely affected if our allowance for loan losses is not sufficient to absorb actual losses or if we are required to increase our allowance.

 

Despite our underwriting criteria, we may experience loan delinquencies and losses.  In order to absorb losses associated with nonperforming loans, we maintain an allowance for loan losses based on, among other things, historical experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality.  Determination of the allowance inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes.  At any time there are likely to be loans in our portfolio that will result in losses but that have not been identified as nonperforming or potential problem credits. We cannot be sure that we will be able to identify deteriorating credits before they become nonperforming assets or that we will be able to limit losses on those loans that are identified. We may be required to increase our allowance for loan losses for any of several reasons.  State and federal regulators, in reviewing our loan portfolio as part of a regulatory examination, may request that we increase our allowance for loan losses.  Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in our allowance.  In addition, if charge-offs in future periods exceed our allowance for loan losses, we will need additional increases in our allowance for loan losses.  Any increases in our allowance for loan losses will result in a decrease in our net income and, possibly, our capital, and may materially affect our results of operations in the period in which the allowance is increased.

 

Competition may decrease our growth or profits.

 

We face substantial competition in all phases of our operations from a variety of different competitors, including commercial banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, factoring companies, leasing companies, insurance companies and money market mutual funds.  There is very strong competition among financial services providers in our principal service area.  Our competitors may have greater resources, higher lending limits or larger branch systems than we do.  Accordingly, they may be able to offer a broader range of products and services as well as better pricing for those products and services than we can.

 

In addition, some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on federally insured financial institutions.  As a result, those non-bank competitors may be able to access funding and provide various services more easily or at less cost than we can, adversely affecting our ability to compete effectively.

 

We may be adversely affected by government regulation.

 

The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds and depositors, not shareholders. Changes in the laws, regulations, and regulatory practices affecting the banking industry may increase our costs of doing business or otherwise adversely affect us and create competitive advantages for others. Regulations

 

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affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of these changes, which could have a material adverse effect on our profitability or financial condition.

 

We rely on our management and other key personnel, and the loss of any of them may adversely affect our operations.

 

We are and will continue to be dependent upon the services of our executive management team. In addition, we will continue to depend on our ability to retain and recruit key commercial loan officers.  The unexpected loss of services of any key management personnel or commercial loan officers could have an adverse effect on our business and financial condition because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

 

Environmental liability associated with lending activities could result in losses.

 

In the course of our business, we may foreclose on and take title to properties securing our loans.  If hazardous substances were discovered on any of these properties, we could be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage.  Many environmental laws can impose liability regardless of whether we knew of, or were responsible for, the contamination.  In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site even if we neither own nor operate the disposal site.  Environmental laws may require us to incur substantial expenses and may materially limit use of properties we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default on the loans they secure.  In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.

 

Failure to implement new technologies in our operations may adversely affect our growth or profits.

 

The market for financial services, including banking services and consumer finance services, is increasingly affected by advances in technology, including developments in telecommunications, data processing, computers, automation, Internet-based banking and telebanking. Our ability to compete successfully in our markets may depend on the extent to which we are able to exploit such technological changes. However, we can provide no assurance that we will be able to properly or timely anticipate or implement such technologies or properly train our staff to use such technologies.  Any failure to adapt to new technologies could adversely affect our business, financial condition or operating results.

 

An investment in our common stock is not an insured deposit.

 

Our common stock is not a bank deposit and, therefore, is not insured against loss by the Federal Deposit Insurance Corporation, commonly referred to as the FDIC, any other deposit insurance fund or by any other public or private entity.  Investment in our common stock is subject to the same market forces that affect the price of common stock in any company.

 

Our ability to pay dividends is limited by law and federal banking regulation.

 

Our ability to pay dividends to our shareholders largely depends on our receipt of dividends from VIST Bank.  The amount of dividends that VIST Bank may pay to us is limited by federal laws and regulations. We also may decide to limit the payment of dividends even when we have the legal ability to pay them in order to retain earnings for use in our business.

 

Federal and state banking laws, our articles of incorporation and our by-laws may have an anti-takeover effect.

 

Federal law imposes restrictions, including regulatory approval requirements, on persons seeking to acquire control over us.  Pennsylvania law also has provisions that may have an anti-takeover effect.  In addition, our articles of incorporation and bylaws permit our board of directors to issue, without shareholder approval, preferred stock and additional shares of common stock that could adversely affect the voting power and other rights of existing common shareholders.  These provisions may serve to entrench management or discourage a takeover attempt that shareholders consider to be in their best interest or in which they would receive a substantial premium over the current market price.

 

We plan to continue to grow rapidly and there are risks associated with rapid growth.

 

We intend to continue to expand our business and operations to increase deposits and loans.   Continued growth may present operating and other problems that could adversely affect our business, financial condition and results of operations. Our growth may place a strain on our administrative and operational, personnel, and financial resources and increase demands on our systems and controls.   Our ability to manage growth successfully will depend on our ability to attract qualified personnel and maintain cost controls and asset quality while attracting additional loans and deposits on favorable terms, as well as on factors beyond our control, such as economic conditions and interest rate trends. If we grow too quickly and are not able to attract qualified personnel, control costs and maintain asset quality, this continued rapid growth could materially adversely affect our financial performance.

 

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Our legal lending limits are relatively low and restrict our ability to compete for larger customers.

 

At December 31, 2008, our lending limit per borrower was approximately $14.5 million, or approximately 12% of our capital.  Accordingly, the size of loans that we can offer to potential borrowers (without participation by other lenders) is less than the size of loans that many of our competitors with larger capitalization are able to offer.  Our legal lending limit also impacts the efficiency of our lending operation because it tends to lower our average loan size, which means we have to generate a higher number of transactions to achieve the same portfolio volume. We may engage in loan participations with other banks for loans in excess of our legal lending limits.  However, there can be no assurance that such participations will be available at all or on terms which are favorable to us and to our customers.

 

If we are unable to identify and acquire other financial institutions and successfully integrate their acquired businesses, our business and earnings may be negatively affected.

 

Acquisition of other financial institutions is a component of our growth strategy. The market for acquisitions remains highly competitive, and we may be unable to find acquisition candidates in the future that fit our acquisition and growth strategy.

 

Acquisitions of financial institutions involve operational risks and uncertainties, and acquired companies may have unforeseen liabilities, exposure to asset quality problems, key employee and customer retention problems and other problems that could negatively affect our organization.  We may not be able to complete future acquisitions and, if completed, we may not be able to successfully integrate the operations, management, products and services of the entities that we acquire and eliminate redundancies. The integration process may also require significant time and attention from our management that they would otherwise direct at servicing existing business and developing new business. Our failure to successfully integrate the entities we acquire into our existing operations may increase our operating costs significantly and adversely affect our business and earnings.

 

The market price for our common stock may be volatile.

 

The market price for our common stock has fluctuated, ranging between $18.43 and $7.73 per share during the 12 months ended December 31, 2008. The overall market and the price of our common stock may continue to be volatile. There may be a significant impact on the market price for our common stock due to, among other things, developments in our business, variations in our anticipated or actual operating results, changes in investors’ or analysts’ perceptions of the risks and conditions of our business and the size of the public float of our common stock.  The average daily trading volume for our common stock as reported on NASDAQ was 2,984 shares during the twelve months ended December 31, 2008, with daily volume ranging from a low of zero shares to a high of 85,700 shares.  There can be no assurance that a more active or consistent trading market in our common stock will develop. As a result, relatively small trades could have a significant impact on the price of our common stock.

 

Market conditions may adversely affect our fee based investment and insurance business.

 

The revenues of our fee based insurance business are derived primarily from commissions from the sale of insurance policies, which commissions are generally calculated as a percentage of the policy premium.  These insurance policy commissions can fluctuate as insurance carriers from time to time increase or decrease the premiums on the insurance products we sell.  Similarly, we receive fee based revenues from commissions from the sale of securities and investment advisory fees.  In the event of decreased stock market activity, the volume of trading facilitated by VIST Capital Management, LLC will in all likelihood decrease resulting in decreased commission revenue on purchases and sales of securities.  In addition, investment advisory fees, which are generally based on a percentage of the total value of an investment portfolio, will decrease in the event of decreases in the values of the investment portfolios, for example, as a result of overall market declines.

 

Item 1B.                        Unresolved Staff Comments

 

None

 

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Table of Contents

 

Item 2.           Properties

 

The Company’s principal office is located in the administration building at 1240 Broadcasting Road, Wyomissing, Pennsylvania.

 

Listed below are the locations of properties owned or leased by the Company and its subsidiaries.  Owned properties are not subject to any mortgage, lien or encumbrance.

 

Property Location

 

Leased or Owned

Corporate Office
1240 Broadcasting Road
Wyomissing, Pennsylvania

 

Leased

 

 

 

Operations Center
1044 MacArthur Road
Reading, Pennsylvania

 

Leased

 

 

 

North Pointe Financial Center
241 South Centre Avenue
Leesport, Pennsylvania

 

Leased

 

 

 

Northeast Reading Financial Center
1210 Rockland Street
Reading, Pennsylvania

 

Leased

 

 

 

Hamburg Financial Center
801 South Fourth Street
Hamburg, Pennsylvania

 

Leased

 

 

 

Bern Township Financial Center
909 West Leesport Road
Leesport, Pennsylvania

 

Leased

 

 

 

Wernersville Financial Center
1 Reading Drive
Wernersville, Pennsylvania

 

Leased

 

 

 

Breezy Corner Financial Center
3401-3 Pricetown Road
Fleetwood, Pennsylvania

 

Leased

 

 

 

Blandon Financial Center
100 Plaza Drive
Blandon, Pennsylvania

 

Leased

 

 

 

Wyomissing Financial Center
1199 Berkshire Boulevard
Wyomissing, Pennsylvania

 

Leased

 

 

 

Schuylkill Haven Financial Center
237 Route 61 South
Schuylkill Haven, Pennsylvania

 

Leased

 

 

 

Birdsboro Financial Center
350 West Main Street
Birdsboro, Pennsylvania

 

Leased

 

 

 

Exeter Financial Center
4361 Perkiomen Avenue
Reading, Pennsylvania

 

Leased

 

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Table of Contents

 

Property Location

 

Leased or Owned

Sinking Spring Financial Center
4708 Penn Ave
Sinking Spring, Pennsylvania

 

Leased

 

 

 

Blue Bell Financial Center
The Madison Bank Building
1767 Sentry Parkway West
Blue Bell, Pennsylvania

 

Leased

 

 

 

Centre Square Financial Center
1380 Skippack Pike
Blue Bell, Pennsylvania
(Scheduled to Close in 2009)

 

Leased

 

 

 

Conshohocken Financial Center
Plymouth Corporate Center
Suite 600
625 Ridge Pike
Conshohocken, Pennsylvania

 

Leased

 

 

 

Fox Chase Financial Center
8000 Verree Road
Philadelphia, Pennsylvania

 

Owned

 

 

 

Oaks Financial Center
1232 Egypt Road
Oaks, Pennsylvania

 

Leased

 

 

 

Strafford Financial Center
600 West Lancaster Avenue
Strafford, Pennsylvania

 

Leased

 

 

 

VIST Insurance
108 South Fifth Street
Reading, Pennsylvania

 

Owned

 

 

 

VIST Insurance
Suite 103
460 Norristown Road
Blue Bell, Pennsylvania

 

Leased

 

 

 

VIST Bank (Mortgage Banking Office)
Suite 220
1767 Sentry Parkway West
Blue Bell, Pennsylvania

 

Leased

 

 

 

VIST Bank (Mortgage Banking Office)
2213 Quarry Drive
West Lawn, Pennsylvania

 

Leased

 

VIST Insurance shares offices in the Company’s administration building located at 1240 Broadcasting Road, Wyomissing, Pennsylvania.  VIST Insurance is charged a pro rata amount of the total lease expense.

 

VIST Capital also shares office space in the Company’s administration building in Wyomissing as well as in VIST Insurance’s office in Blue Bell and are accordingly charged a pro rata amount of the total lease expense.

 

Item 3.           Legal Proceedings

 

A certain amount of litigation arises in the ordinary course of the business of the Company, and the Company’s subsidiaries. In the opinion of the management of the Company, there are no proceedings pending to which the Company, or the Company’s subsidiaries are a party or to which their property is subject, that, if determined adversely to the Company or its subsidiaries, would be material in relation to the Company’s shareholders’ equity or financial condition, nor are there any proceedings pending other than

 

16



Table of Contents

 

ordinary routine litigation incident to the business of the Company and its subsidiaries. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company or its subsidiaries by governmental authorities.

 

Item 4.                                   Submission of Matters to a Vote of Security Holders

 

At a special meeting of shareholders held on December 17, 2008, shareholders of the Company approved the following matters:

 

1.                                       Amendment of VIST Financial Corp.’s Articles of Incorporation to authorize the issuance of up to 1 million shares of preferred stock.

 

Votes

 

For

 

Against

 

Abstain

 

2,916,932

 

517,010

 

56,420

 

 

2.                                       Grant management the authority to adjourn, postpone or continue the special meeting.

 

Votes

 

For

 

Against

 

Abstain

 

2,929,075

 

501,227

 

60,060

 

 

Item 4A.                          Executive Officers of the Registrant

 

Certain information, as of December 31, 2008, including principal occupation during the past five years, relating to each executive officer of the Company is as follows:

 

Name, Address, and Position Held with the Company

 

Age

 

Position
Held
Since

 

Principal Occupation for Past 5 Years

 

 

 

 

 

 

 

ROBERT D. DAVIS
Chester Springs, Pennsylvania
President and Chief Executive Officer

 

61

 

2005

 

President and Chief Executive Officer of the Company and the Bank since September 2005; Chairman of VIST Insurance, LLC; Chairman of VIST Capital Management, LLC; prior thereto, President and Chief Executive Officer and Director of Republic First Bank since 1999.

 

 

 

 

 

 

 

EDWARD C. BARRETT
Wyomissing, Pennsylvania
Executive Vice President and Chief Financial
Officer

 

60

 

2002

 

Executive Vice President since October 2003 and Chief Financial Officer of the Company since September 2004; prior thereto, Chief Administrative Officer since July 2002.

 

 

 

 

 

 

 

CHRISTINA S. McDONALD
Oreland, Pennsylvania
Executive Vice President and Chief Retail
Banking Officer of VIST Bank

 

43

 

2004

 

Executive Vice President and Chief Retail Banking Officer of VIST Bank since 2002.

 

 

 

 

 

 

 

CHARLES J. HOPKINS
Sinking Spring, Pennsylvania
Senior Vice President of VIST Financial Corp.

 

58

 

1998

 

Vice Chair of VIST Insurance, LLC since January 2008; prior thereto, President and CEO of VIST Insurance, LLC since 1992.

 

 

 

 

 

 

 

TERRY F. FAVILLA
Lititz, Pennsylvania
Senior Vice President and Treasurer

 

47

 

2006

 

Senior Vice President and Treasurer of the Company since June 2006; prior thereto, Vice President and Corporate Controller of the Company since June 2004; prior thereto, Vice President and Asset/Liability Management Controller of Susquehanna Bancshares, Inc. since August 1996.

 

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Table of Contents

 

JENETTE L. ECK
Centerport, Pennsylvania
Senior Vice President and Corporate Secretary

 

46

 

1998

 

Senior Vice President and Secretary of the Company since 2001.

 

 

 

 

 

 

 

MICHAEL C. HERR
Wyomissing, Pennsylvania
Chief Operating Officer

 

43

 

2009

 

Chief Operating Officer of VIST Insurance, LLC since 2009; prior thereto, Senior Vice President of VIST Insurance, LLC since 2004.

 

 

 

 

 

 

 

NEENA M. MILLER

Reading, Pennsylvania
Executive Vice President and Chief Credit
Officer of VIST Bank

 

44

 

2008

 

Executive Vice President and Chief Credit Officer of VIST Bank since 2008: prior thereto, Executive Vice President and Chief Credit Officer of Republic First Bank since 2005; prior thereto, Senior Credit Officer of Republic First Bank since 2004.

 

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Table of Contents

 

PART II

 

Item 5.           Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

Performance Graph

 

Set forth below is a graph and table comparing the yearly percentage change in the cumulative total shareholder return on the Company’s common stock against the cumulative total return on the NASDAQ-Total US Index, and the SNL Mid-Atlantic Bank Index for the five-year period commencing December 31, 2003, and ending December 31, 2008.

 

Cumulative total return on the Company’s common stock, the NASDAQ Combination Bank Index, and the SNL Mid-Atlantic Bank Index equals the total increase in value since December 31, 2003, assuming reinvestment of all dividends.  The graph and table were prepared assuming that $100 was invested on December 31, 2003, in Company common stock, the NASDAQ-Total US Index, and the SNL Mid-Atlantic Bank Index.

 

VIST Financial Corp.

 

 

 

 

Period Ending

 

Index

 

12/31/03

 

12/31/04

 

12/31/05

 

12/31/06

 

12/31/07

 

12/31/08

 

VIST Financial Corp.

 

100.00

 

114.91

 

113.22

 

122.14

 

99.60

 

44.63

 

NASDAQ Composite

 

100.00

 

108.59

 

110.08

 

120.56

 

132.39

 

78.72

 

SNL Mid-Atlantic Bank

 

100.00

 

105.91

 

107.79

 

129.37

 

97.83

 

53.89

 

 

19



Table of Contents

 

As of December 31, 2008, there were 780 record holders of the Company’s common stock.  The market price of the Company’s common stock for each quarter in 2008 and 2007 and the dividends declared on the Company’s common stock for each quarter in 2008 and 2007 are set forth below.

 

Market Price of Common Stock

 

The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “VIST.”  The following table sets forth, for the fiscal quarters indicated, the high and low bid and asked price per share of the Company’s common stock, as reported on the NASDAQ Global Select Market, and has been adjusted for the 5% stock dividend distributed to shareholders on June 15, 2007:

 

 

 

Bid

 

Asked

 

 

 

High

 

Low

 

High

 

Low

 

2008

 

 

 

 

 

 

 

 

 

First Quarter

 

$

18.47

 

$

14.50

 

$

21.00

 

$

15.31

 

Second Quarter

 

17.65

 

11.00

 

18.00

 

14.23

 

Third Quarter

 

14.61

 

5.40

 

17.00

 

10.31

 

Fourth Quarter

 

11.90

 

7.48

 

20.00

 

7.51

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

First Quarter

 

$

23.69

 

$

20.00

 

$

24.19

 

$

20.84

 

Second Quarter

 

22.18

 

19.45

 

23.00

 

19.50

 

Third Quarter

 

20.00

 

18.00

 

20.13

 

18.28

 

Fourth Quarter

 

20.03

 

16.50

 

20.12

 

16.80

 

 

Series A Preferred Stock and Common Stock Dividends

 

On December 19, 2008, the Company issued to the Treasury 25,000 shares of Series A Preferred Stock which pays cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter.  Under ARRA, the Series A Preferred Stock may be redeemed at any time following consultation by the Company’s primary bank regulator and Treasury, not withstanding the terms of the original transaction documents.  Under FAQ’s issued recently by Treasury, participants in the Capital Purchase Program desiring to repay part of an investment by Treasury must repay a minimum of 25% of the issue price of the preferred stock.

 

Prior to the earlier of the third anniversary date of the issuance of the Series A Preferred Stock (December 19, 2011) or the date on which the Series A Preferred Stock have been redeemed in whole or the Treasury has transferred all of the Series A Preferred Stock to third parties which are not affiliates of the Treasury, the Company can not increase its common stock dividend from the last quarterly cash dividend per share ($0.10) declared on the common stock prior to October 14, 2008 without the consent of the Treasury,

 

Cash dividends on the Company’s common stock have historically been payable on the 15th of January, April, July, and October.  In 2008, cash dividends were paid in the months of January, April, July, and November.  In 2009, cumulative cash dividends on the Series A Preferred Stock and cash dividends on common stock are payable on the 15th of February, May, August, and November.

 

 

 

Dividends

 

 

 

Declared

 

 

 

(Per Share)

 

 

 

2008

 

2007

 

First Quarter

 

$

0.200

 

$

0.181

 

Second Quarter

 

0.200

 

0.190

 

Third Quarter

 

 

0.200

 

Fourth Quarter

 

0.100

 

0.200

 

 

20



Table of Contents

 

The Company derives a significant portion of its income from dividends paid to it by the Bank.  For a description of certain regulatory restrictions on the payment of dividends by the Bank to the Company, see “Business—Regulatory Restrictions on Dividends.”

 

Stock Repurchase Plan.  On July 17, 2007, the Company announced that it has increased the number of shares remaining for repurchase under its stock repurchase plan, originally effective January 1, 2003, and extended May 20, 2004, to 150,000 shares.  During 2008, the Company did not repurchase any of its outstanding shares of common stock.  At December 31, 2008, the maximum number of shares that may yet be purchased under the plan remained at 115,000.

 

The following table sets forth certain information relating to shares of the Company’s common stock repurchased by the company during the fourth quarter of 2008.

 

Period

 

Total Number of
Shares (or Units)
Purchased

 

Average Price Paid
Per Share (or
Units) Purchased

 

Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs

 

Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
That May Yet Be
Purchased Under
the Plans or
Programs

 

Month #1 (October 1 - October 31, 2008)

 

 

$

 

 

115,000

 

Month #2 (November 1 - November 30, 2008)

 

 

 

 

115,000

 

Month #3 (December 1 - December 31, 2008)

 

 

 

 

115,000

 

Total

 

 

$

 

 

115,000

 

 

As a result of the issuance of the Series A Preferred Stock, prior to the earlier of the third anniversary date of the issuance of the Series A Preferred Stock (December 19, 2011) or the date on which the Series A Preferred Stock has been redeemed in whole or the Treasury has transferred all of the Series A Preferred Stock to third parties which are not affiliates of the Treasury, the Company is generally restricted against redeeming, purchasing or acquiring any shares of Common Stock or other capital stock or other equity securities of any kind of the Company without the consent of the Treasury.

 

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Table of Contents

 

Item 6.    Selected Financial Data

 

The selected consolidated financial and other data and management’s discussion and analysis of financial condition and results of operation set forth below and in Item 7 hereof is derived in part from, and should be read in conjunction with, the consolidated financial statements and notes thereto contained elsewhere herein.

 

 

 

Year Ended December 31,

 

 

 

2008

 

 

 

 

 

 

 

 

 

 

 

(As Restated)

 

2007

 

2006

 

2005

 

2004

 

 

 

(Dollars in thousands except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,226,070

 

$

1,124,951

 

$

1,041,632

 

$

965,752

 

$

877,382

 

Securities available for sale

 

226,665

 

186,481

 

159,603

 

176,418

 

159,936

 

Securities held to maturity

 

3,060

 

3,078

 

3,117

 

6,173

 

6,403

 

Federal Home Loan Bank stock

 

5,715

 

5,562

 

4,577

 

6,123

 

5,842

 

Loans, net of unearned income

 

886,305

 

820,998

 

764,783

 

654,244

 

596,328

 

Allowance for loan losses

 

8,124

 

7,264

 

7,611

 

7,619

 

7,248

 

Deposits

 

850,600

 

712,645

 

702,839

 

659,730

 

612,291

 

Securities sold under agreements to repurchase

 

120,086

 

110,881

 

90,987

 

69,455

 

52,800

 

Federal funds purchased

 

53,424

 

118,210

 

82,105

 

66,230

 

36,092

 

Long-term debt

 

50,000

 

45,000

 

19,500

 

43,000

 

54,500

 

Junior subordinated debt

 

18,260

 

20,232

 

20,150

 

20,150

 

20,150

 

Shareholders’ equity

 

123,629

 

106,592

 

102,130

 

94,756

 

90,935

 

Book value per share

 

17.30

 

18.84

 

18.06

 

16.98

 

16.54

 

 


This table has been adjusted to reflect the Company’s 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.

 

Selected Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

65,838

 

$

68,076

 

$

61,377

 

$

50,475

 

$

33,518

 

Interest expense

 

30,637

 

34,835

 

29,521

 

20,319

 

12,842

 

Net interest income before provision for loan losses

 

35,201

 

33,241

 

31,856

 

30,156

 

20,676

 

Provision for loan losses

 

4,835

 

998

 

1,084

 

1,460

 

1,320

 

Net interest income after provision for loan losses

 

30,366

 

32,243

 

30,772

 

28,696

 

19,356

 

Other income

 

11,979

 

17,847

 

21,458

 

24,043

 

17,762

 

Other expense

 

43,638

 

40,874

 

40,238

 

41,281

 

30,548

 

Income (loss) before income taxes

 

(1,293

)

9,216

 

11,992

 

11,458

 

6,570

 

Income taxes (benefit)

 

(1,858

)

1,746

 

2,839

 

2,727

 

1,154

 

Net income (loss)

 

$

565

 

$

7,470

 

$

9,153

 

$

8,731

 

$

5,416

 

Earnings per share-basic

 

$

0.10

 

$

1.32

 

$

1.63

 

$

1.57

 

$

1.25

 

Earnings per share-diluted

 

$

0.10

 

$

1.31

 

$

1.62

 

$

1.55

 

$

1.23

 

Cash dividends per share

 

$

0.50

 

$

0.77

 

$

0.70

 

$

0.63

 

$

0.59

 

Return on average assets

 

0.05

%

0.70

%

0.92

%

0.95

%

0.78

%

Return on average shareholders’ equity

 

0.54

%

7.15

%

9.38

%

9.36

%

8.69

%

Dividend payout ratio

 

503.89

%

58.53

%

42.74

%

40.45

%

51.24

%

Average equity to average assets

 

8.95

%

9.78

%

9.82

%

10.16

%

9.03

%

 

22



Table of Contents

 

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The Company is a financial services company.  As of December 31, 2008, VIST Bank, VIST Insurance, LLC, and VIST Capital Management, LLC were wholly-owned subsidiaries of the Company.  As of December 31, 2008, VIST Mortgage Holdings, LLC was a wholly-owned, non-bank subsidiary of VIST Bank.

 

During 2000, VIST Realty Solutions, LLC was formed as a subsidiary of VIST Bank for the purpose of providing title insurance and other real estate related services to its customers through limited partnership arrangements with third parties involved in the real estate services industry.  On October 29, 2008, VIST Realty Solutions, LLC dissolved its operations by selling its partnership interest for an amount which approximated its initial capital contribution.

 

In May 2002, the Company’s subsidiary, VIST Bank, jointly formed VIST Mortgage Holdings, LLC with another  real estate company.  VIST Bank’s initial investment was $15,000.  In May 2004, VIST Bank dissolved its investment with the real estate company.  In May 2004, VIST Bank formed VIST Mortgage Holdings, LLC to provide mortgage brokerage services, including, without limitation, any activity in which a mortgage broker may engage.  It is operated as a permissible “affiliated business arrangement” within the meaning of the Real Estate Settlement Procedures Act of 1974.  VIST Mortgage Holdings, LLC is currently inactive.

 

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 Consultings operations have been included in the Company’s 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.

 

On October 1, 2004, the Company acquired 100% of the outstanding voting shares of Madison Bancshares Group, Ltd. (“Madison”), the holding company for Madison Bank, a Pennsylvania state-chartered commercial bank and its mortgage banking division, VIST Mortgage.  Madison Bank has become a division of VIST Bank.  For each share of Madison common stock, the Company exchanged 0.6028 shares of the Company’s common stock resulting in the issuance of 1,311,010 shares of the Company’s common stock and a cash payment of $11,790.  The total purchase price was $34.6 million.  The value of the common shares issued was determined based on the average market price of the Company’s common shares five days before and five days after the date of the announcement.  In connection with the transaction, Madison paid cash of $7.1 million and recognized the expense for 699,122 Madison options and warrants outstanding at September 30, 2004.  In addition, Madison paid cash of $2.3 million and recognized the expense for the termination of existing contractual arrangements.

 

Critical Accounting Policies

 

Disclosure of the Company’s significant accounting policies is included in Note 1 to the consolidated financial statements. Certain of these policies are particularly sensitive requiring significant judgments, estimates and assumptions to be made by management.  Additional information is contained in Management’s Discussion and Analysis and the Notes to the Consolidated Financial Statements for the most sensitive of these issues.  These include, the provision and allowance for loan losses, revenue recognition for insurance activities, stock based compensation, derivative financial instruments, goodwill and intangible assets and investment securities other-than-temporary impairment evaluation.  These discussions, analysis and 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.

 

Allowance for Loan Losses

 

The provision for loan losses charged to operating expense reflects the amount deemed appropriate by management to provide for known and inherent losses in the existing loan portfolio.  Management’s judgment is

 

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based on the evaluation of individual loans past experience, the assessment of current economic conditions, and other relevant factors.  Loan losses are charged directly against the allowance for loan losses and recoveries on previously charged-off loans are added to the allowance.

 

Management uses significant estimates to determine the allowance for loan losses.  Consideration is given to a variety of factors in establishing these estimates including current economic conditions, diversification of the loan portfolio, delinquency statistics, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant factors.  Since the sufficiency of the allowance for loan losses is dependent, to a great extent, on conditions that may be beyond our control, it is possible that management’s estimates of the allowance for loan losses and actual results could differ in the near term.  Although we believe that we use the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary if certain future events occur that may cause actual results to differ from the assumptions used in making the evaluation.  For example, a downturn in the local economy could cause increases in non-performing loans.  Additionally, a decline in real estate values could cause some of our loans to become inadequately collateralized.  In either case, this may require us to increase our provisions for loan losses, which would negatively impact earnings.  Additionally, a large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively impact earnings.  In addition, regulatory authorities, as an integral part of their examination, periodically review the allowance for loan losses.  They may require additions to the allowance for loan losses based upon their judgments about information available to them at the time of examination.  Future increases to our allowance for loan losses, whether due to unexpected changes in economic conditions or otherwise, could adversely affect our future results of operations.

 

Revenue Recognition for Insurance Activities

 

Insurance revenues are derived from commissions and fees.  Commission revenues, as well as the related premiums receivable and payable to insurance companies, are recognized the later of the effective date of the insurance policy or the date the client is billed, net of an allowance for estimated policy cancellations.  The reserve for policy cancellations is periodically evaluated and adjusted as necessary.  Commission revenues related to installment premiums are recognized as billed.  Commissions on premiums billed directly by insurance companies are generally recognized as income when received.  Contingent commissions from insurance companies are generally recognized as revenue when the data necessary to reasonably estimate such amounts is obtained.  A contingent commission is a commission paid by an insurance company that is based on the overall profit and/or volume of the business placed with the insurance company.  Fee income is recognized as services are rendered.

 

Stock-Based Compensation

 

Prior to 2006, the Company accounted for stock-based compensation in accordance with Accounting Principals Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123.  Under APB No. 25, no compensation expense was recognized in the income statement related to any option granted under the Company’s stock option plans.

 

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (R), “Share-Based Payment.”  Statement No. 123 (R) addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments.  Statement 123 (R) requires an entity to recognize the grant-date fair-value of stock options and it’s other equity-based compensation issued to the employees in the income statement.  The revised Statement generally requires that an entity account for those transactions using the fair-value-based method, and eliminates the intrinsic value method of accounting in APB Opinion No. 25 which was permitted under Statement No. 123, as originally issued.

 

The revised Statement requires entities to disclose information about the nature of the share-based payment transaction and the effects of those transactions on the financial statements.  Statement No. 123 (R) is effective for fiscal periods beginning after June 15, 2005.  All public companies use either the modified prospective or the modified retrospective transition method.  Effective January 1, 2006, the Company adopted SFAS No. 123 using the modified prospective method.  Using the modified prospective method, the Company’s total stock-based compensation expense, net of related tax effects, was $211,000 for the year ending December 31, 2008.  Any additional impact that the adoption of this statement will have on our results of operations will be determined by share-based payments granted in future periods.

 

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Derivative Financial Instruments

 

The Company maintains an overall interest rate risk-management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility.  The Company’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin is not, on a material basis, adversely affected by movements in interest rates.  As a result of interest rate fluctuations, hedged assets and liabilities will appreciate or depreciate in market value.  The effect of this unrealized appreciation or depreciation will generally be offset by income or loss on the derivative instruments that are linked to the hedged assets and liabilities.  The Company views this strategy as a prudent management of interest rate sensitivity, such that earnings are not exposed to undue risk presented by changes in interest rates.

 

By using derivative instruments, the Company is exposed to credit and market risk.  If the counterparty fails to perform, credit risk exists to the extent of the fair value gain in a derivative.  When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes the Company, and, therefore, creates a repayment risk for the Company.  When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it has no repayment risk.  The Company minimizes the credit (or repayment) risk in the derivative instruments by entering into transactions with high quality counterparties.

 

Market risk is the adverse effect that a change in interest rates, currency, or implied volatility rates has on the value of a financial instrument.  The Company manages the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken.  The Company periodically measures this risk by using value-at-risk methodology.

 

During 2002, the Company entered into an interest rate swap to convert its fixed rate trust preferred securities to floating rate debt.  Both the interest rate swap and the related debt are recorded on the balance sheet at fair value through adjustments to other expense.

 

During 2003, the Company also entered into an interest rate cap agreement to limit its exposure to the variable rate interest achieved through the interest rate swap.  The interest rate cap was not designated as a cash flow hedge and thus, it is carried on the balance sheet in other assets at fair value through adjustments to interest expense.

 

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 Company’s 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.  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.

 

Goodwill and Other Intangible Assets

 

The Company has recorded goodwill of $39.7 million at December 31, 2008 related to the acquisition of its banking, insurance and wealth management companies.  The Company utilizes a third party valuation service to perform its annual goodwill impairment test in the fourth quarter of each calendar year.  A fair value is determined for the banking and financial services, insurance services and investment services reporting segments.  If the fair value of the reporting unit exceeds the book value, no write downs of goodwill is necessary.  If the fair value is less than the book value, an additional test is necessary to assess the proper carrying value of goodwill.  As a result of the third part valuation analysis, the Company determined that no goodwill impairment write-off was necessary during 2008 and 2007.

 

Business unit valuation is inherently subjective, with a number of factors based on assumption and management judgments.  Among these are future growth rates, discount rates and earnings capitalization rates.  Changes in assumptions and results due to economic conditions, industry factors and reporting unit performance could result in different assessments of the fair value and could result in impairment charges in the future.

 

Framework for Interim Impairment Analysis

 

The Company utilizes the following framework from SFAS No. 142 “Goodwill and Other Intangible Assets” to evaluate whether an interim goodwill impairment test is required, given the occurrence of events or if

 

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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 Assets” of a significant asset group within a reporting unit; and

·                  recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.

 

When applying the framework above, management additionally considers that a decline in the Company’s market capitalization could reflect an event or change in circumstances that would more likely than not reduce the fair value of reporting unit below its carrying value.  However, in considering potential impairment of our goodwill, management does not consider the fact that our market capitalization is less than the carrying value of our Company to be determinative that impairment exists.  This is because there are factors, such as our small size and small market capitalization, which do not take into account important factors in evaluating the value of our Company and each reporting unit, such as the benefits of control or synergies.  Consequently, management’s annual process for evaluating potential impairment of our goodwill (and evaluating subsequent interim period indicators of impairment) involves a detailed level analysis and incorporates a more granular view of each reporting unit than aggregate market capitalization, as well as significant valuation inputs.

 

Annual and Interim Impairment Tests and Results

 

Management estimates fair value annually utilizing multiple methodologies which include discounted cash flows, comparable companies and comparable transactions.  Each valuation technique requires management to make judgments about inputs and assumptions which form the basis for financial projections of future operating performance and the corresponding estimated cash flows.  The analyses performed require the use of objective and subjective inputs which include market-price of non-distressed financial institutions, similar transaction multiples, and required rates of return.  Management works closely in this process with third party valuation professionals, who assist in obtaining comparable market data and performing certain of the calculations, based on information provided by management and assumptions developed with management.  Our annual impairment assessment was completed in January 2009, with an effective date of October 31, 2008.  That assessment reflected that the fair values of our reporting units with recorded goodwill was more than their carrying amounts, and therefore there was no need to perform an additional test to assess the proper carrying value of goodwill (a step 2 evaluation).

 

On an interim basis, 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 our stock price continues to be influenced by the financial services sector as well as our relative small size, based upon a more detailed review of the assumptions underlying the valuation of each reporting unit, we do not believe that there has been a substantial change in any of the material assumptions.  Management concluded that there has not been significant deterioration in the underlying inputs and assumptions since the annual impairment assessment date of October 31, 2008; therefore, an interim goodwill impairment test during 2008 was not required.

 

Consideration of Market Capitalization in Light of the Results of Our Annual and Interim Goodwill Assessments

 

The Company’s stock price, like the stock prices of many other financial services companies, is trading below both book value as well as tangible book value.  We believe that the Company’s current market value does not represent the fair value of the Company when taken as a whole and in consideration of other relevant factors.  Because the Company is viewed by investors predominantly as a community bank, we believe our market capitalization is based on net tangible book value, reduced by nonperforming assets in excess of the allowance for loan and lease losses.  We believe that the market place ascribes effectively no value on the Company’s fee-based reporting units, the assets of which are composed principally of goodwill and intangibles.  Management believes that as a stand-alone business each of these reporting units has value which is not being incorporated in the market’s valuation of VIST reflected in its share price.  Management also believes that if these reporting units were carved

 

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out of the Company and sold, they would command a sales price reflective of their current performance.  Management further believes that if these reporting units were sold, the results of the sale would increase both the tangible book value (resulting from, among other things, the reduction in associated goodwill) and therefore market capitalization, given the market’s current valuation approach described above.

 

In summary, management believes that:

 

·      the market capitalization of the Company is not reflective of the value of the Company as a whole,

·      the marketplace is effectively ascribing no value to the fee-based reporting units, and

·                  the facts and circumstances we considered in our 2008 annual impairment test have not significantly changed.

 

The following lists (in tabular format) each reporting unit, and identifies the respective unit’s fair value, carrying amount, and reporting unit goodwill with respect to the annual goodwill impairment test performed in the fourth quarter of 2008:

 

Results of Fourth Quarter Impairment Testing (October 31, 2008 Testing Date)

(amounts in thousands)

 

Reporting Unit

 

Fair Value at (10/31/08)

 

Carrying Amount
(including goodwill)
(10/31/08)

 

Goodwill at
(10/31/08)

 

VIST Bank

 

$

132,076

 

$

98,250

 

$

27,769

 

VIST Insurance, LLC

 

13,334

 

12,523

 

10,942

 

VIST Capital Management

 

1,573

 

1,331

 

1,021

 

Totals

 

$

146,983

 

$

112,104

 

$

39,732

 

 

Since the fair value of the Company’s reporting units exceeded their respective carrying amounts, the Company concluded that goodwill was not impaired; thus, an additional test to assess the proper carrying value of goodwill (a step 2 evaluation) was not considered necessary.

 

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Investment Securities Impairment Evaluation

 

Management evaluates securities for the other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) 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.

 

If a decline in market value of a security is determined to be other than temporary, under generally accepted accounting principles, we are required to write these securities down to their estimated fair value.  As of December 31, 2008, we owned single issue and pooled trust preferred securities of other financial institutions and private label collateralized mortgage obligations whose aggregate historical cost basis is greater than their estimated fair value (see note 5 of the consolidated financial statements).  We have reviewed these securities and determined that the decreases in estimated fair value are temporary.  We perform 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, we will write them down through a charge to earnings to their then current fair value.

 

Federal Home Loan Bank Stock Impairment Evaluation

 

The Company’s banking subsidiary, VIST Bank, is required to maintain certain amounts of FHLB stock as a member of the FHLB.  These equity securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par.  Therefore, they are less liquid than other tradable equity securities, their fair value is equal to amortized cost, and no impairment write-downs have been recorded on these securities during 2008, 2007, or 2006.

 

The FHLB of Pittsburgh announced in December 2008 that it voluntarily suspended the payment of dividends and the repurchase of excess capital stock from member banks.  The FHLB cited a significant reduction in the level of core earnings resulting from lower short-term interest rates, the increased cost of maintaining liquidity and constrained access to the debt markets at attractive rates and maturities as the main reasons for the decision to suspend dividends and the repurchase excess capital stock.  The FHLB last paid a dividend in the third quarter of 2008.  Accounting guidance indicates that an investor in FHLB Pittsburgh capital stock should recognize impairment if it concludes that it is not probable that it will ultimately recover the par value of its shares.  The decision of whether impairment exists is a matter of judgment that should reflect the investor’s view of FHLB Pittsburgh’s long-term performance, which includes factors such as its operating performance, the severity and duration of declines in the market value of its net assets related to its capital stock amount, its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance, the impact of legislation and regulatory changes on FHLB Pittsburgh, and accordingly, on the members of FHLB Pittsburgh and its liquidity and funding position.  After evaluating all of these considerations, the Company believes the par value of its shares will be recovered.  Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.

 

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 year ended December 31 2008.  The discussion in this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, gives effect to the restatement of the Company’s financial statements.

 

Results of Operations

 

Net income for 2008 was $565,000 or $0.10 per share diluted compared to $7.47 million or $1.31 per share diluted for 2007 and $9.15 million or $1.62 per share diluted for 2006.  These changes are a result of increasing net interest income after provision for loan losses offset by decreases in other income each year, net of increases in other expenses.  Details regarding changes in net income and diluted earnings per share follows.

 

Return on average assets was 0.05% for 2008, 0.70% for 2007 and 0.92% for 2006.  Return on average shareholders’ equity was 0.54% for 2008, 7.15% for 2007 and 9.38% for 2006.

 

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Included in the operating results for the twelve months ended December 31, 2008 was a pre-tax loss of $7.3 million, or $4.8 million after-tax, relating to the sale of perpetual preferred stock associated with the federal takeover of Fannie Mae and Freddie Mac.  Also included in the operating results for the twelve months ended December 31, 2008, were pre-tax losses associated with the sale of the Company’s equity holdings of $141,000 in Fannie Mae common stock and $104,000 in Wachovia Corporation common stock.  The total amount of pre-tax losses relating to the sale of the Company’s equity holdings included in the operating results for the twelve months ended December 31, 2008, were approximately $7.5 million.  Included in the operating results for the twelve months ended December 31, 2007 was a pre-tax loss of $2.5 million, or $1.6 million after-tax, resulting primarily from a balance sheet restructuring in March 2007 which included the sale of $64.1 million in lower-yielding available for sale securities and the reinvestment of the sale proceeds into higher yielding available for sale investment securities.

 

Net Interest Income

 

Net interest income is a primary source of revenue for the Company.  This income results from the difference between the interest and fees earned on loans and investments and the interest paid on deposits to customers and other non-deposit sources of funds, such as repurchase agreements and borrowings from the Federal Home Loan Bank and other correspondent banks.  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 margin is on a fully taxable equivalent basis.  Both net interest income and net interest margin are influenced by the frequency, magnitude and direction of interest rate changes and by product concentrations and volumes of earning assets and funding sources.

 

Average Balances, Rates and Net Yield

 

The following table sets forth the average daily balances of major categories of interest earning assets and interest bearing liabilities, the average rate paid thereon, and the net interest margin for each of the periods indicated.

 

 

 

Year Ended December 31,

 

 

 

2008
(As Restated)

 

2007

 

2006

 

 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

 

 

 

Average

 

Income/

 

%

 

Average

 

Income/

 

%

 

Average

 

Income/

 

%

 

 

 

Balances

 

Expense

 

Rate

 

Balances

 

Expense

 

Rate

 

Balances

 

Expense

 

Rate

 

 

 

(in thousands except percentage data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits in other banks and federal funds sold

 

$

400

 

$

12

 

2.88

%

$

639

 

$

28

 

4.39

%

$

317

 

$

18

 

5.57

%

Securities (taxable)(3)

 

180,562

 

10,519

 

5.83

 

153,912

 

8,423

 

5.47

 

156,527

 

7,781

 

4.97

 

Securities (tax-exempt)(1)

 

22,502

 

1,451

 

6.45

 

14,190

 

862

 

6.07

 

18,539

 

1,192

 

6.43

 

Loans(1)(2)

 

859,268

 

55,372

 

6.34

 

791,440

 

59,945

 

7.47

 

711,240

 

53,409

 

7.41

 

Total interest earning assets

 

1,062,732

 

67,354

 

6.23

 

960,181

 

69,258

 

7.11

 

886,623

 

62,400

 

6.94

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand deposits

 

238,144

 

4,637

 

1.95

 

222,335

 

6,398

 

2.88

 

222,385

 

5,945

 

2.67

 

Savings deposits

 

84,453

 

1,432

 

1.70

 

90,419

 

2,632

 

2.91

 

68,536

 

1,598

 

2.33

 

Time deposits

 

351,011

 

14,805

 

4.22

 

322,235

 

15,398

 

4.78

 

288,644

 

12,598

 

4.36

 

Total interest bearing deposits

 

673,608

 

20,874

 

3.10

 

634,989

 

24,428

 

3.85

 

579,565

 

20,141

 

3.48

 

Short-term borrowings

 

76,307

 

1,826

 

2.35

 

76,805

 

3,940

 

5.06

 

67,192

 

3,507

 

5.15

 

Repurchase agreements

 

120,615

 

4,128

 

3.37

 

95,178

 

3,906

 

4.05

 

71,809

 

2,847

 

3.96

 

Long-term borrowings

 

58,811

 

2,372

 

3.97

 

17,716

 

663

 

3.69

 

34,038

 

1,174

 

3.40

 

Junior Subordinated Debt

 

20,163

 

1,437

 

7.13

 

20,312

 

1,898

 

9.34

 

20,150

 

1,852

 

9.19

 

Total interest bearing liabilities

 

949,504

 

30,637

 

3.23

 

845,000

 

34,835

 

4.12

 

772,754

 

29,521

 

3.82

 

Noninterest bearing deposits

 

$

107,642

 

 

 

 

 

$

106,782

 

 

 

 

 

$

111,759

 

 

 

 

 

Net interest margin

 

 

 

$

36,717

 

3.45

%

 

 

$

34,423

 

3.59

%

 

 

$

32,879

 

3.71

%

 


(1)                               Interest Income and rates on loans and investment securities are reported on a tax-equivalent basis using a tax rate of 34%.

 

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(2)                               Held for Sale and Non-accrual loans have been included in average loan balances.

 

(3)                               This table has been adjusted to reflect the Company’s 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.

 

Tax-equivalent net interest income increased to $36.7 million or 6.7% for the year ended December 31, 2008, compared to $34.4 million for 2007.  The increase in tax-equivalent interest income during 2008 was primarily the result of an increase in average earning assets, due mainly to strong commercial loan growth and an increase in available for sale security investment yields as a result of the $64.1 million balance sheet restructuring in early 2007.  Average loans increased by $67.8 million or 8.6% from 2007 to 2008.  Management attributes this increase in organic commercial loan growth to a well established market in the Reading area and continued penetration into the Philadelphia market through successful marketing initiatives.

 

Tax-equivalent net interest income increased to $34.4 million or 4.7% for the year ended December 31, 2007, compared to $32.9 million for 2006.  The increase in tax-equivalent interest income during 2007 was primarily the result of an increase in average earning assets, due mainly to strong commercial loan growth and an increase in available for sale security investment yields as a result of the $64.1 million balance sheet restructuring. Average loans increased by $80.2 million or 11.3% from 2006 to 2007.  Management attributes the increase in organic commercial loan growth to a well established market in the Reading area and continued penetration into the Philadelphia market through successful marketing initiatives.

 

Interest expense decreased during 2008 along with an increase in the overall growth in funding sources.  The overall cost of funds decreased from 4.12% in 2007 to 3.23% in 2008.  Interest bearing deposit rates decreased from 3.85% in 2007 to 3.10% in 2008.  The decrease in interest-bearing deposit rates was the result of management’s disciplined approach to deposit pricing in response to the decrease in short-term interest rates.  Average interest bearing deposits increased $38.6 million or 6.1% from 2007 to 2008 due primarily to growth in time deposits.  Total average short and long term borrowings grew by $66.0 million and, combined with the growth in interest bearing deposits, provided all of the funding needed for the $102.8 million in average loan and investment security growth.  Average balances for federal funds purchased and repurchase agreements for the year 2008 were $76.3 million and $120.6 million, respectively, compared to average balances for federal funds purchased and repurchase agreements for the year 2007 of $76.8 million and $95.2 million, respectively.  Average rates paid for federal funds purchased and repurchase agreements for the year 2008 were 2.35% and 3.37%, respectively compared to average rates paid for federal funds purchased and repurchase agreements for the year 2007 of 5.06% and 4.05%, respectively.  Average long-term borrowings increased $41.1 million or 232.0% from 2007 to 2008.

 

Interest expense increased during 2007 along with the overall growth in funding sources.  The overall cost of funds increased from 3.82% in 2006 to 4.12% in 2007.  Interest bearing deposit rates increased from 3.48% in 2006 to 3.85% in 2007.  The increase in interest-bearing deposit rates was the result of both management pricing strategy as well as the effect of longer-term certificates of deposit that matured during the year and repriced at higher rates.  Average interest bearing deposits increased $55.4 million or 9.6% from 2006 to 2007 due primarily to strong organic growth in business solutions savings and escrow deposits and time deposits.  Total average interest-bearing funding grew by $16.7 million and, combined with the growth in interest bearing deposits, provided all of the funding needed for the $72.7 million in average loan and investment security growth.  Average balances for federal funds purchased and repurchase agreements for the year 2007 were $76.8 million and $95.2 million, respectively, compared to average balances for federal funds purchased and repurchase agreements for the year 2006 of $67.2 million and $71.8 million, respectively.  Average rates paid for federal funds purchased and repurchase agreements for the year 2007 were 5.06% and 4.05%, respectively compared to average rates paid for federal funds purchased and repurchase agreements for the year 2006 of 5.15% and 3.96%, respectively.  Average long-term borrowings decreased $16.3 million or 48.0% from 2006 to 2007.

 

In 2008, as a result of an increase in the volume of commercial loans originated offset by a decrease in commercial loan yields along with an increased yield in the available for sale investment portfolio, tax-equivalent net interest income increased as a result of a decrease in overall cost of funds.  Tax-equivalent net interest margin decreased to 3.45% in 2008 from 3.59% in 2007.

 

In 2007, as a result of an increase in the volume of commercial loans originated and an increase in the yield on available for sale investments, tax-equivalent net interest income was able to increase despite rising cost of funds.  Tax-equivalent net interest margin, however, decreased to 3.59% in 2007 from 3.71% in 2006.

 

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Table of Contents

 

Changes in Interest Income and Interest Expense

 

The following table sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated.  For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (period to period changes in average balance multiplied by beginning rate), and (2) changes in rate (period to period changes in rate multiplied by beginning average balance).

 

Analysis of Changes in Interest Income/Expense (1) (2) (3) (4)

 

 

 

2008/2007 Increase (Decrease)

 

 

 

 

 

Due to Change in

 

2007/2006 Increase (Decrease)

 

 

 

(As Restated)

 

Due to Change in

 

 

 

Volume

 

Rate

 

Net

 

Volume

 

Rate

 

Net

 

 

 

(in thousands)

 

Interest-bearing deposits in other banks and federal funds sold

 

$

(6

)

$

(10

)

(16

)

$

19

 

$

(9

)

10

 

Securities (taxable)

 

1,714

 

382

 

2,096

 

(298

)

940

 

642

 

Securities (tax-exempt)

 

535

 

54

 

589

 

(279

)

(51

)

(330

)

Loans

 

4,310

 

(8,883

)

(4,573

)

5,895

 

641

 

6,536

 

Total Interest Income

 

6,553

 

(8,457

)

(1,904

)

5,337

 

1,521

 

6,858

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowed funds

 

(33

)

(2,081

)

(2,114

)

501

 

(68

)

433

 

Repurchase agreements

 

983

 

(761

)

222

 

915

 

144

 

1,059

 

Long-term borrowed funds

 

1,659

 

50

 

1,709

 

(563

)

52

 

(511

)

Junior Subordinated Debt

 

(14

)

(447

)

(461

)

17

 

29

 

46

 

Interest-bearing demand deposits

 

285

 

(2,046

)

(1,761

)

111

 

342

 

453

 

Savings deposits

 

(93

)

(1,107

)

(1,200

)

430

 

604

 

1,034

 

Time deposits

 

1,138

 

(1,731

)

(593

)

1,478

 

1,322

 

2,800

 

Total Interest Expense

 

3,925

 

(8,123

)

(4,198

)

2,889

 

2,425

 

5,314

 

Increase (Decrease) in Net Interest Income

 

$

2,628

 

$

(334

)

$

2,294

 

$

2,448

 

$

(904

)

$

1,544

 

 


(1)          Loan fees have been included in the change in interest income totals presented. Non-accrual loans have been included in average loan balances.

 

(2)                               Changes due to both volume and rates have been allocated in proportion to the relationship of the dollar amount change in each.

 

(3)          Interest income on loans and securities is presented on a taxable equivalent basis.

 

(4)                               This table has been adjusted to reflect the Company’s 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.

 

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Table of Contents

 

Other Income

 

The following table details non-interest income as follows:

 

 

 

2008 versus 2007

 

 

 

 

 

 

 

(As Restated)

 

 

 

2007 versus 2006

 

 

 

 

 

Increase/

 

 

 

 

 

Increase/

 

 

 

 

 

 

 

2008

 

Decrease

 

%

 

2007

 

Decrease

 

%

 

2006

 

 

 

(Dollars in thousands)

 

Customer service fees

 

$

2,964

 

$

307

 

11.6

 

$

2,657

 

$

(32

)

(1.2

)

$

2,689

 

Mortgage banking activities, net

 

897

 

(997

)

(52.6

)

1,894

 

(1,680

)

(47.0

)

3,574

 

Commissions and fees from insurance sales

 

11,284

 

(78

)

(0.7

)

11,362

 

93

 

0.8

 

11,269

 

Broker and investment advisory commissions and fees

 

813

 

(73

)

(8.2

)

886

 

165

 

22.9

 

721

 

Gain on sale of loans

 

47

 

(117

)

(71.3

)

164

 

62

 

60.8

 

102

 

Earnings on investment in life insurance

 

690

 

(116

)

(14.4

)

806

 

246

 

43.9

 

560

 

Other income

 

2,514

 

112

 

4.7

 

2,402

 

374

 

18.4

 

2,028

 

Net realized (losses) gains on sale of securities

 

(7,230

)

(4,906

)

211.1

 

(2,324

)

(2,839

)

(551.3

)

515

 

Total

 

$

11,979

 

$

(5,868

)

(32.9

)

$

17,847

 

$

(3,611

)

(16.8

)

$

21,458

 

 


This table has been adjusted to reflect the Company’s 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.

 

The Company’s primary source of other income for 2008 was commissions and other revenue generated through sales of insurance products through its insurance subsidiary, VIST Insurance.  Revenues from insurance operations totaled $11.3 million in 2008 compared to $11.4 million in 2007 and $11.3 million in 2006.  The decrease in revenue from insurance operations was due mainly to a decrease in contingency income received.  Revenues from broker and investment advisory commissions generated through VIST Capital, the Company’s investment subsidiary, decreased to $813,000 in 2008 from $886,000 in 2007 due to a decrease in investment and advisory services.  Also, annuity and other insurance commissions generated by VIST Capital of $113,000, $130,000 and $151,000 are included in commissions and fees from insurance sales for the years 2008, 2007 and 2006, respectively.

 

Revenues from VIST Insurance operations totaled $11.4 million in 2007 compared to $11.3 million in 2006.  Revenues from broker and investment advisory commissions generated through VIST Capital, the Company’s investment subsidiary, decreased to $886,000 in 2007 from $721,000 in 2006 due to an increase in investment and advisory services.

 

The Company also relies on several other sources for its other income, including sales of newly originated mortgage loans and service charges on deposit accounts.  The income recognized from mortgage banking activities was $0.9 million in 2008 and $1.9 million in 2007.  The decrease in mortgage banking revenue from 2007 to 2008 is mainly attributable to a decrease in the volume of mortgage loan originations sold into the secondary mortgage market through the Company’s mortgage banking division, VIST Mortgage.  The decrease in mortgage loan originations and sales is related to a general slowdown in the housing market as a result of the industry wide effects of the ongoing sub-prime credit crisis.  VIST Mortgage does not underwrite any sub-prime loans.

 

The income recognized from mortgage banking activities was $1.9 million in 2007 and $3.6 million in 2006.  The decrease in mortgage banking revenue from 2006 to 2007 is attributable to a decrease in the volume of mortgage loan originations sold into the secondary mortgage market through the Company’s mortgage banking division, VIST Mortgage volumes of mortgage loans originated and sold into the secondary mortgage market.

 

The income recognized from customer service fees was approximately $3.0 million, $2.7 million and $2.7 million for the years ended 2008, 2007 and 2006, respectively.  The changes in income from customer service fees reflect an expanded customer base, new products and services and an annual review of the fee pricing.  During 2008, the Company completed a thorough review of its service charge routines.  As a result of its service charge analysis, the Company was able to increase service charge revenue.  The increase in service charge revenue resulted primarily from increases in commercial account analysis fees, uncollected funds charges and non-sufficient funds charges.

 

Also included in other income are net gains on other loan sales of $47,000 in 2008, $164,000 in 2007 and $102,000 in 2006 from the sale of $0.7 million, $2.0 million and $1.6 million, respectively, of fixed and adjustable rate portfolio residential mortgage loans, SBA loans and USDA loans.

 

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Table of Contents

 

Earnings on investment in life insurance represent the change in cash value of Bank Owned Life Insurance (BOLI) policies.  The BOLI policies of the Company are designed to offset the costs of employee benefit plans and to enhance tax-free earnings.  The investment in BOLI totaled $18.6 million, $17.9 million and $17.2 million at December 31, 2008, 2007 and 2006.  In 2006, the Bank purchased an additional $5 million in BOLI.  Earnings on BOLI are affected by fluctuations in interest rates.

 

Other income includes dividend income from Federal Home Loan Bank stock, market value adjustments for both junior subordinated debt and interest rate swaps, debit card network interchange income, merchant fee income, SBA service fee income and safe deposit box rentals, as well as, other miscellaneous income items.  The most significant volume of income in this category is derived from ATM surcharge fees and interchange fees from the Bank’s ATM network and fees from debit card transactions.  These fees totaled $1.1 million in 2008 which represents a 13.2% increase over 2007.  Throughout the year, the Bank has initiated marketing campaigns to encourage its customers to use debit cards as a convenient alternative to traditional check transactions.  ATM surcharge fees and interchange fees from the Bank’s ATM network and fees from debit card transactions totaled $1.0 million in 2007 which represents an 11.0% increase over 2006.

 

Net securities losses totaled $7,230,000 for 2008 compared to net security losses of $2,324,000 for 2007.  The net securities losses for 2008 were primarily due to the loss on the sale of approximately $7.3 million in perpetual preferred stock associated with the federal takeover of government sponsored enterprises (“GSE’s”) Fannie Mae and Freddie Mac, placed into conservatorship by the Federal Housing Finance Agency and the U.S. Treasury.  Net securities losses totaled $2,324,000 for 2007 compared to net security gains of $515,000 for 2006.  The net securities losses for 2007 were primarily due to the sale of $64.1 million in lower-yielding available for sale securities as part of a balance sheet restructuring completed in the first quarter of 2007, which resulted in a pre-tax loss of $2,493,000.

 

Other Expenses

 

The following table details non-interest expense as follows:

 

 

 

2008 versus 2007

 

 

 

2007 versus 2006

 

 

 

 

 

Increase/

 

 

 

 

 

Increase/

 

 

 

 

 

 

 

2008

 

Decrease

 

%

 

2007

 

Decrease

 

%

 

2006

 

 

 

(Dollars in thousands)

 

Salaries and employee benefits

 

$

22,078

 

$

517

 

2.4

 

$

21,561

 

$

(581

)

(2.6

)

$

22,142

 

Occupancy expense

 

4,707

 

398

 

9.2

 

4,309

 

(156

)

(3.5

)

4,465

 

Equipment expense

 

2,690

 

145

 

5.7

 

2,545

 

(96

)

(3.6

)

2,641

 

Marketing and advertising expense

 

1,635

 

(37

)

(2.2

)

1,672

 

318

 

23.5

 

1,354

 

Amortization of indentifiable intangible assets

 

629

 

7

 

1.1

 

622

 

(14

)

(2.2

)

636

 

Professional services

 

2,594

 

759

 

41.4

 

1,835

 

578

 

46.0

 

1,257

 

Outside processing services

 

3,334

 

131

 

4.1

 

3,203

 

222

 

7.4

 

2,981

 

Insurance expense

 

1,262

 

648

 

105.5

 

614

 

114

 

22.8

 

500

 

Other expense

 

4,709

 

196

 

4.3

 

4,513

 

251

 

5.9

 

4,262

 

Total

 

$

43,638

 

$

2,764

 

6.8

 

$

40,874

 

$

636

 

1.6

 

$

40,238

 

 

Non-interest expense consists primarily of costs associated with personnel, occupancy and equipment, data processing, marketing and professional fees.

 

The Company’s non-interest expense for the year ended December 31, 2008 totaled $43.6 million, representing an increase of $2.8 million or 6.8% as compared to 2007.  Salaries and employee benefits, the largest component of non-interest expense, increased $517,000 or 2.4% from 2007 to 2008.  Full-time equivalent (FTE) employees for the Company are 293 and 317 for the years ended December 31, 2008 and 2007, respectively.  The increase in salaries and employee benefits from 2007 to 2008 was primarily attributed to merit increases and increased health benefits costs.  The decrease in FTE employees from 2007 to 2008 was primarily attributed to a decrease in operational staff as a result of improved efficiencies through the implementation of new programs such as Check 21.  Total commissions paid for the year ended December 31, 2008 and 2007 were $1.6 million and $1.6 million, respectively.

 

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Table of Contents

 

The Company’s non-interest expense for the year ended December 31, 2007 totaled $40.9 million, representing an increase of $636,000 or 1.6% as compared to 2006.  Salaries and employee benefits decreased $581,000 or 2.6% from 2006 to 2007.  The decrease in salaries and employee benefits from 2006 to 2007 was primarily the result of a reduction in staff due to a corporate-wide reorganization plan and a reduction of commissions paid on revenue generated from sales of insurance products through VIST Insurance and wealth management products through VIST Capital, as well as, higher benefits costs consistent with industry trends.  Full-time equivalent (FTE) employees for the Company are 317 and 323 for the years ended December 31, 2007 and 2006, respectively.

 

Total occupancy expense and equipment expense decreased 7.9% in 2008 compared to 2007 primarily due to an increase in building lease expense including a lease termination for a planned branch consolidation and an increase in general building repairs and maintenance.

 

Total occupancy expense and equipment expense decreased 3.5% in 2007 compared to 2006 primarily due to a reduction in general building repairs and maintenance and a termination of leases for VIST Insurance’s Langhorne, PA office and VIST Mortgage’s Lancaster office which were no longer needed due to efficiencies gained through systems and personnel reorganizations.

 

Total marketing expense decreased $37,000 or 2.2% in 2008 compared to 2007 primarily due to a decrease in re-branding initiative expenses of changing the Company’s name to VIST Financial Corp. A significant portion of these expenses occurred in 2007.  The new Company name and logo increased visibility for the Company, setting the stage for continued commercial loan and core franchise growth in the Reading and Philadelphia markets. The decrease is also due to reduced costs for market research and media advertisement.

 

Total marketing expense increased $318,000 or 23.5% in 2007 compared to 2006 primarily due to the re-branding initiative changing the Company’s name to VIST Financial Corp.  The Company continues its marketing campaigns for the introduction of new products and services, as well as new marketing campaigns targeting the greater Philadelphia region.  The re-branding gives the Company a more cohesive and strategic branding approach designed to focus on our overall portfolio of banking, insurance and wealth management products and services.

 

Total amortization of identifiable intangible assets increased $7,000 or 1.1% in 2008 as compared to 2007 due to the Fisher Benefits Consulting acquisition, total outside processing services increased $131,000 or 4.1% in 2008 as compared to 2007 due to an increase in network fees and computer services and total insurance expense increased $648,000 or 105.5% in 2008 as compared to 2007 due to an increase in FDIC deposit insurance assessments.

 

Total amortization of identifiable intangible assets decreased $14,000 or 2.2% in 2007 as compared to 2006, total outside processing services increased $222,000 or 7.4% in 2007 as compared to 2006 and total insurance expense increased $114,000 or 22.8% in 2007 as compared to 2006.  The increase in outside processing services is due primarily to continuing the implementation of various projects utilizing our core processing system.  The increase in insurance expense is due primarily to general increases in insurance policy premiums.

 

Total professional services increased $759,000 or 41.4% in 2008 as compared to 2007.  The increase in professional services is due primarily to an increase in legal fees associated with the Company’s name change to VIST Financial Corp. and general corporate counsel, costs associated with the outsourcing of the internal audit function and other consulting, accounting and tax services and general Company business.

 

Total professional services and outside processing services increased $578,000 or 46.0% in 2007 as compared to 2006.  The increase in professional services is due primarily to an increase in legal and consultative expenses for the Company’s re-branding initiative, general Company business initiatives, employment contract renewals and accounting and tax services.

 

Other expense includes utility expense, postage expense, stationary and supplies expense and OREO and foreclosure expense, as well as, other miscellaneous expense items.  These costs totaled $4.7 million in 2008 which represents a 4.3% increase over 2007.  Increases in other expenses were primarily attributable to an increase in collections costs and OREO expenses.

 

Other expense includes utility expense, postage expense, stationary and supplies expense and OREO and foreclosure expense, as well as, other miscellaneous expense items.  These costs totaled $4.5 million in 2007 which represents a 5.9% increase over 2006.  Increases in other expenses were primarily attributable to purchase

 

34



Table of Contents

 

accounting amortization, an increase in shares tax expense as a result of an increase in the Bank’s equity and an increase in master escrow fees associated with business solutions escrow accounts.

 

Income Taxes

 

The effective income tax rate for the Company for the years ended December 31, 2008, 2007 and 2006 was 143.7%, 19.0% and 23.7%, respectively.  The effective tax rate for 2008 increased from 2007 and 2006 primarily due to the increase in the income tax benefit resulting from an increase in the net loss before taxes.  Included in the income tax provision is a federal tax benefit from our $5.0 million investment in an affordable housing, corporate tax credit limited partnership of $600,000, respectively, for each of the years ended December 31, 2008, 2007 and 2006.

 

Financial Condition

 

The Company’s total assets at December 31, 2008 and 2007 were $1.2 billion and $1.1 billion, respectively.

 

Cash and Securities Portfolio

 

Cash and balances due from banks decreased to $19.3 million at December 31, 2008 from $25.8 million at December 31, 2007.

 

The securities portfolio increased 21.2% to $229.7 million at December 31, 2008, from $189.6 million at December 31, 2007 primarily due to investments in higher yielding available for sale securities.  Securities are used to supplement loan growth as necessary, to generate interest and dividend income, to manage interest rate risk, and to provide pledging and liquidity.  To accomplish these ends, most of the purchases in the portfolio during 2008 and 2007 were of mortgage-backed securities issued by US Government agencies.

 

The securities portfolio included a net unrealized loss on available for sale securities of $11.9 million and $1.7 million at December 31, 2008 and 2007, respectively.  In addition, net unrealized losses of $1.1 million were present in the held to maturity securities at December 31, 2008. Changes in longer-termed treasury interest rates, underlying collateral and credit concerns and dislocation and illiquidity in the current market were primarily responsible for the decrease in the fair market value of the securities.

 

Debt securities that management has the positive ability and intent to hold to maturity are classified as held-to-maturity and recorded at amortized cost.  Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity.  Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors.  Securities available for sale are carried at fair value.  Unrealized gains and losses are reported in other comprehensive income or loss, net of the related deferred tax effect.  Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings.  Purchased premiums and discounts are recognized in interest income using a method which approximates the interest method over the terms of the securities.  Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.  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.

 

Federal Home Loan Bank Stock

 

The Bank is a member of the Federal Home Loan Bank of Pittsburgh (the “FHLB”), which is one of 12 regional Federal Home Loan Banks.  Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region.  It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank System.  It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank.

 

35



Table of Contents

 

Loans

 

Loans increased to $886.3 million at December 31, 2008 from $821.0 million at December 31, 2007, an increase of $65.3 million or 8.0%.  Management has targeted the commercial loan portfolio as a key to the Company’s continuing growth.  Specifically, the Company has a commercial lending focus within the Reading and Philadelphia market areas targeting higher yielding commercial loans made to small and medium sized businesses.  Through a strong commercial lending footprint in the Reading market and through acquisition and the expansion of the commercial lending staff in the Philadelphia market, the year over year growth in commercial loans originated underscores the commercial customer focus as the commercial loan portfolio increased to $590.2 million at December 31, 2008, from $530.7 million at December 31, 2007, an increase of $59.5 million or 11.2%.

 

Loans secured by 1 to 4 family residential real estate decreased to $185.9 million at December 31, 2008, from $198.6 million as of December 31, 2007, an increase of $12.7 million or 6.4%.  Loans secured by multi-family residential real estate increased to $34.9 million at December 31, 2008, from $33.5 million as of December 31, 2007, an increase of $1.4 million or 4.2%.  The overall decrease in residential real estate loans is attributable to a decrease in the volume of mortgage loan originations generated and sold into the secondary mortgage market through the Company’s mortgage banking division, VIST Mortgage.

 

Home equity lending products increased to $76.1 million at December 31, 2008, from $59.1 million as of December 31, 2007.  Consumer demand for these types of loans increased in 2008.  Although the Company’s focus primarily centered on the commercial customer, management remained disciplined in its pricing of consumer loans.  Despite the numerous economic challenges faced in 2008, the Company was able to increase our outstanding balances through the successful marketing of its Equilock consumer loan product which carries both a fixed and variable component allowing the consumer to lock and unlock the loan at the prevailing interest rate.

 

The loans held for sale category is composed of $2.3 million of mortgage loans committed for sale to other institutions and the secondary market as of December 31, 2008 versus $3.2 million as of December 31, 2007.  The decrease in loans held for sale is primarily due to decreased loan origination and sale activity through VIST Mortgage.

 

The sales of residential real estate loans in the secondary market reflects the Company’s strategy of de-emphasizing the retention of long-term, fixed rate loans in the portfolio utilizing these loans sales to generate fees, improve interest-rate risk and fund growth in higher yielding assets.

 

Premises and Equipment

 

Premises and equipment, net of accumulated depreciation and amortization, decreased to $6.6 million for 2008 from $6.9 million in 2007.  Purchases of premises and equipment totaled $1.2 million in 2008 and $1.5 million in 2007.  During 2008, as a result of the Company’s re-branding initiative, the Company purchased new signage totaling approximately $595,000.  During 2007, the Company purchased a corporate-wide telephone system.  The total cost for the telephone system was approximately $673,000.  This new system allows for seamless communication between the Company’s banking, insurance and wealth management affiliates.  Depreciation expense and amortization of leasehold improvements totaled $1.5 million in 2008 and $1.5 million in 2007.

 

Goodwill and Identifiable Intangible Assets

 

Goodwill increased to $39.7 million for the years ended December 31, 2008 from $39.2 million for 2007.  During 2008, the Company recorded goodwill of $320,000 representing contingent payments as part of the VIST Insurance asset purchase agreement.  In addition, $223,000 in goodwill was added due to the Fisher Benefits Consulting acquisition in 2008.  Identifiable intangible assets increased to $4.8 million from $3.9 million for the years ended December 31, 2008 and 2007, respectively.  The increase in identifiable intangible assets is due mainly to the acquisition of Fisher Benefits Consulting in 2008. Amortization of identifiable intangible assets was $629,000 in 2008 and $622,000 in 2007.

 

Bank Owned Life Insurance

 

Bank owned life insurance increased $695,000 to $18.6 million at December 31, 2008 from $17.9 million at December 31, 2007.  The increase in bank owned life insurance is due primarily to increased earnings on the cash surrender value of the underlying policies.

 

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Deposits and Borrowings

 

Total deposits at December 31, 2008 and 2007 were $850.6 million and $712.6 million, respectively.

 

Non-interest bearing deposits decreased to $108.6 million at December 31, 2008, from $109.7 million at December 31, 2007, a decrease of $1.1 million or 1.0%.  The decrease in non-interest bearing deposits is primarily due to a decrease in non-interest bearing personal accounts.  Management continues its efforts to promote growth in these types of deposits, such as offering a free checking product, as a method to help reduce the overall cost of the Company’s funds.  Interest bearing deposits increased by $139.0 million or 23.1%, from $602.9 million at December 31, 2007 to $742.0 million at December 31, 2008.  The increase in interest bearing deposits is due primarily to an increase in interest bearing core deposits including time deposits maturing in one year or less.  Management continues to promote these types of deposits through a disciplined pricing strategy as a means of managing the Company’s overall cost of funds, as well as, management’s continuing emphasis on commercial and retail marketing programs and customer service.

 

Borrowed funds from various sources are generally used to supplement deposit growth.  Federal funds purchased from the Federal Home Loan Bank (“FHLB”)  were $53.4 million at December 31, 2008, and $118.2 million at December 31, 2007.  This decrease is primarily the result of an increase in deposits.  Securities sold under agreements to repurchase were $120.1 million at December 31, 2008 and $110.9 at December 31, 2007. Increases in commercial loan demand and investment securities were funded primarily by interest-bearing deposits.  Long-term borrowings consisting of advances from the FHLB totaling $50.0 million and $45.0 million at December 31, 2008 and 2007, respectively, and long-term securities sold under agreements to repurchase totaling $100.0 million and $85.0 million at December 31, 2008 and 2007, respectively..

 

Shareholders’ Equity

 

Total equity, including common and preferred stock, surplus, retained earnings, treasury stock and accumulated other comprehensive loss, increased by $17.0 million or 16.0% to $123.6 million at December 31, 2008 from $106.6 million at December 31, 2007.  The increase for 2008 is primarily the result of a Series A 5% cumulative preferred stock issuance of $25 million offset by cash dividends declared of $2.8 million and a $6.7 million increase in accumulated other comprehensive loss.

 

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 Company’s common stock, par value $5.00 per share, for an aggregate purchase price of $25,000,000 in cash.

 

The Series A Preferred Stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter.  Under ARRA, the Series A Preferred Stock may be redeemed at any time following consultation by the Company’s primary bank regulator and Treasury, not withstanding the terms of the original transaction documents.  Under FAQ’s issued recently by Treasury, participants in the Capital Purchase Program desiring to repay part of an investment by Treasury must repay a minimum of 25% of the issue price of the preferred stock.

 

Prior to the earlier of the third anniversary date of the issuance of the Series A Preferred Stock (December 19, 2011) or the date on which the Series A Preferred Stock have been redeemed in whole or the Treasury has transferred all of the Series A Preferred Stock to third parties which are not affiliates of the Treasury, the Company can not increase its common stock dividend from the last quarterly cash dividend per share ($0.10) declared on the common stock prior to October 14, 2008 without the consent of the Treasury,

 

The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $10.30 per share of common stock.  If the Company receives aggregate gross cash proceeds of not less than $25,000,000 from qualified equity offerings on or prior to December 31, 2009, the number of shares of common stock issuable pursuant to exercise of the Warrant will be reduced by one half of the original number of shares underlying the Warrant.  In addition, in the event that the Company redeems the Series A Preferred Stock, the Company can repurchase the warrant at “fair value” as defined in the investment agreement with Treasury.

 

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Total shareholders’ equity includes accumulated other comprehensive loss, which includes an adjustment for the fair value of the Company’s securities portfolio.  This amount attempts to identify the impact to equity in the unlikely event that the Company’s entire securities portfolio would be liquidated under current economic conditions.  The amounts and types of securities held by the Company at the end of 2008, combined with current interest rates, resulted in a decrease in equity, net of taxes, of $6.7 million.  This compares with an increase to equity, net of taxes, of $1.4 million during 2007.

 

Interest Rate Sensitivity

 

Through the years, the banking industry has adapted to an environment in which interest rates have fluctuated dramatically and in which depositors have been provided with liquid, rate sensitive investment options. The industry utilizes a process known as asset/liability management as a means of managing this adaptation.

 

Asset/liability management is intended to provide for adequate liquidity and interest rate sensitivity by analyzing and understanding the underlying cash flow structures of interest rate sensitive assets and liabilities and coordinating maturities and repricing characteristics on those assets and liabilities.

 

Interest rate risk management involves managing the extent to which interest-sensitive assets and interest-sensitive liabilities are matched.  Interest rate sensitivity is the relationship between market interest rates and earnings volatility due to the repricing characteristics of assets and liabilities.  The Company’s net interest income is affected by changes in the level of market interest rates. In order to maintain consistent earnings performance, the Company seeks to manage, to the extent possible, the repricing characteristics of its assets and liabilities.

 

One major objective of the Company when managing the rate sensitivity of its assets and liabilities is to stabilize net interest income.  The management of and authority to assume interest rate risk is the responsibility of the Company’s Asset/Liability Committee (“ALCO”), which is comprised of senior management and Board members.  The ALCO meets quarterly to monitor the ratio of interest sensitive assets to interest sensitive liabilities.  The process to review interest rate risk management is a regular part of management of the Company.  In addition, there is an annual process to review the interest rate risk policy with the Board of Directors which includes limits on the impact to earnings and value from shifts in interest rates.

 

To manage the interest rate sensitivity position, an asset/liability model called “gap analysis” is used to monitor the difference in the volume of the Company’s interest sensitive assets and liabilities that mature or reprice within given periods.  A positive gap (asset sensitive) indicates that more assets reprice during a given period compared to liabilities, while a negative gap (liability sensitive) has the opposite effect.

 

During October 2002, the Company entered into its first 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 Company’s variable rate assets with variable rate liabilities.  The Company considers the credit risk inherent in the contracts to be negligible.

 

Interest rate caps are generally used to limit the exposure from the repricing and maturity of liabilities and to limit the exposure created by interest rate swaps.  In June of 2003, the Company purchased a six month LIBOR cap to create protection against rising interest rates for the above mentioned $5 million interest rate swap.  The initial premium related to this interest rate cap was $102,000.  At December 31, 2008 and 2007, the carrying value and market value of the interest rate cap was approximately $0 and $3,000, respectively.

 

During September 2008, the Company entered into two interest rate swap agreements with an aggregate notional amount of $15 million.  This interest rate swap transaction involved the exchange of the Company’s floating rate interest rate payment on $15.0 million in floating rate junior subordinated debt for a fixed rate interest payment without the exchange of the underlying principal amount.

 

Also, the Company sells fixed and adjustable rate residential mortgage loans to limit the interest rate risk of holding longer-term assets on the balance sheet.  In 2008, 2007 and 2006, the Company sold $0.7 million, $2.0 million and $1.7 million, respectively, of fixed and adjustable rate loans.

 

At December 31, 2008, the Company was in a positive one-year cumulative gap position.  Commercial adjustable rate loans increased $35.3 million or 8.4% from $440.1 million at December 31, 2007 to $475.4 million at December 31, 2008.  Installment adjustable rate loans increased $12.1 million or 26.4% from $45.8 million at

 

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December 31, 2007 to $57.9 million at December 31, 2008.  During 2008, the targeted short-term interest rate, as established by the FRB, decreased which resulted in a decrease in the prime rate from 7.25% at December 31, 2007, to 3.25% at December 31, 2008.  The decrease in interest rates throughout 2008 contributed to margin compression as the Bank’s adjustable and variable rate commercial and consumer loan portfolio tied to the prime rate repriced downward.  As a result of an ongoing industry-wide credit crisis due to sub-prime lending, the refinance market remains stagnant effectively extending the maturities for fixed rate loans and investments.  In order to augment the funding needs for new commercial and consumer loan originations and investment security purchases, interest-bearing deposits, which include interest-bearing NOW and time deposits, increased $139.0 million or 23.1% from $602.9 million at December 31, 2007 to $741.9 million at December 31, 2008.  These factors contributed to the Company’s positive one-year cumulative gap position.  In 2009, the Company will continue its strategy to originate fixed and adjustable rate commercial and consumer loans and use investment security cash flows and interest-bearing and non-interest bearing deposits to rebalance commercial borrowings to maintain a more neutral gap position.

 

Interest Sensitivity Gap at December 31, 2008

(As Restated)

 

 

 

 

 

3 to

 

 

 

 

 

 

 

0-3 months

 

12 months

 

1-3 years

 

over 3 years

 

 

 

(Dollars in thousands)

 

Interest bearing deposits

 

$

320

 

$

 

$

 

$

 

Securities(1),(2),(4)

 

78,069

 

72,753

 

42,160

 

36,743

 

Mortgage loans held for sale

 

2,283

 

 

 

 

Loans(2)

 

367,259

 

172,631

 

213,258

 

125,033

 

Total rate sensitive assets (RSA)

 

447,931

 

245,384

 

255,418

 

161,776

 

Interest bearing deposits(3)

 

179,352

 

9,470

 

25,582

 

92,806

 

Time deposits

 

144,456

 

173,934

 

85,732

 

30,623

 

Federal funds purchased

 

53,424

 

 

 

 

Securities sold under agreements to repurchase

 

65,086

 

35,000

 

15,000

 

5,000

 

Long-term borrowed funds

 

 

30,000

 

20,000

 

 

Junior subordinated debt

 

13,250

 

 

5,010

 

 

Total rate sensitive liabilities (RSL)

 

455,568

 

248,404

 

151,324

 

128,429

 

Interest rate swap

 

(21,325

)

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2008:

 

 

 

 

 

 

 

 

 

Interest sensitivity gap

 

$

13,688

 

$

(3,020

)

$

104,094

 

$

33,347

 

 

 

 

 

 

 

 

 

 

 

Cumulative gap

 

13,688

 

10,668

 

114,762

 

148,109

 

RSA/RSL

 

1.0

%

1.0

%

1.7

%

1.3

%

 


(1)          Includes gross unrealized gains/losses on available for sale securities.

 

(2)                               Securities and loans are included in the earlier of the period in which interest rates were next scheduled to adjust or the period in which they are due.

 

(3)                               Demand and savings accounts are generally subject to immediate withdrawal.  However, management considers a certain amount of such accounts to be core accounts having significantly longer effective maturities based on the retention experiences of such deposits in changing interest rate environments.

 

(4)                               This table has been adjusted to reflect the Company’s 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.

 

Certain shortcomings are inherent in the method of analysis presented in the above table.  Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates.  The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates.  Certain assets, such as adjustable-rate mortgages, have features which restrict

 

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changes in interest rates on a short-term basis and over the life of the asset.  In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the table. The ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

 

The Company also measures its near-term sensitivity to interest rate movements through simulations of the effects of rate changes upon its net interest income.  Net interest income simulations evaluate the effect that interest rate changes have on the prepayment, repricing and maturity attributes of the Company’s interest earning assets and interest bearing liabilities over the next twelve months.  Interest rate movements of up 100, 200 and 300 basis points and down 100, 200 and 300 basis points, adjusted for activity in the current and forecasted interest rate environment, were applied to the Company’s interest earning assets and interest bearing liabilities as of December 31, 2008.  The results of these simulations on net interest income for 2008 are as follows:

 

Simulated % change in 2008

 

Net Interest Income

 

Assumed Changes

 

 

 

in Interest Rates

 

% Change

 

-300

 

0.0

%

-200

 

0.5

%

-100

 

0.6

%

0

 

0.0

%

+100

 

-1.1

%

+200

 

-2.3

%

+300

 

-4.4

%

 

The Company also measures its longer-term sensitivity to interest rate movements through simulations of the effects of rate changes upon its economic value of shareholders’ equity.  Economic value of shareholders’ equity simulations evaluate the effect that interest rate changes have on the prepayment, repricing and maturity attributes of the Company’s interest earning assets and interest bearing liabilities over the life of each financial instrument.  Interest rate movements of up 100, 200 and 300 basis points and down 100, 200 and 300 basis points, adjusted for activity in the current and forecasted interest rate environment, were applied to the Company’s interest earning assets and interest bearing liabilities as of December 31, 2008.  The results of these simulations on economic value of shareholders’ equity for 2008 are as follows:

 

Simulated % change in Economic

 

Value of Shareholders’ equity

 

Assumed Changes

 

 

 

in Basis Points

 

% Change

 

-300

 

-10.9

%

-200

 

-7.5

%

-100

 

-3.0

%

0

 

0.0

%

+100

 

-0.6

%

+200

 

-0.9

%

+300

 

-2.4

%

 

Capital

 

Federal bank regulatory agencies have established certain capital-related criteria that must be met by banks and bank holding companies. The measurements which incorporate the varying degrees of risk contained within the balance sheet and exposure to off-balance sheet commitments were established to provide a framework for comparing different institutions.

 

Other than Tier 1 capital restrictions on the Company’s 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 Company’s capital, resources, or liquidity if they were implemented, nor is the Company under any agreements with any regulatory authorities.

 

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The adequacy of the Company’s capital is reviewed on an ongoing basis with regard to size, composition and quality of the Company’s 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, to average quarterly assets less intangible assets.  The leverage ratio at December 31, 2008 was 9.07% compared to 7.99% at December 31, 2007.  The increase is primarily the result of an increase in Tier 1 capital due to the issuance of Series A Preferred Stock.  For 2008 and 2007, the 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 capital consists of common shareholders’ equity less intangible assets plus the junior subordinated debt, and Tier 2 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 capital.  In addition, federal banking regulating authorities have issued a final rule restricting the Company’s junior subordinated debt to 25% of Tier 1 capital.  Amounts of junior subordinated debt in excess of the 25% limit generally may be included in Tier 2 capital.  The final rule provides a five-year transition period ending March 31, 2009.

 

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 Company’s common stock, par value $5.00 per share, for an aggregate purchase price of $25,000,000 in cash.

 

The Series A Preferred Stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter.  Under ARRA, the Series A Preferred Stock may be redeemed at any time following consultation by the Company’s primary bank regulator and Treasury, not withstanding the terms of the original transaction documents.  Under FAQ’s issued recently by Treasury, participants in the Capital Purchase Program desiring to repay part of an investment by Treasury must repay a minimum of 25% of the issue price of the preferred stock.

 

In December 2008, the Company infused $10 million in capital into the Bank.

 

The following table sets forth the Company’s capital ratios.

 

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Table of Contents

 

 

 

At December 31,

 

 

 

2008
(As Restated)

 

2007

 

 

 

(Dollars in thousands)

 

Tier 1

 

 

 

 

 

Common shareholders’ equity (including unrealized gains (losses) on securities)

 

$

123,629

 

$

106,592

 

Disallowed intangible assets

 

(44,347

)

(42,793

)

Junior subordinated debt

 

18,110

 

20,082

 

 

 

 

 

 

 

Tier 2

 

 

 

 

 

Allowable portion of allowance for loan losses

 

8,124

 

7,264

 

Unrealized losses on available for sale equity securities

 

7,330

 

375

 

Total risk-based capital

 

$

112,846

 

$

91,520

 

Risk adjusted assets (including off-balance sheet exposures)

 

$

883,949

 

$

823,056

 

 

 

 

 

 

 

Leverage ratio

 

9.07

%

7.99

%

Tier 1 risk-based capital ratio

 

11.85

%

10.24

%

Total risk-based capital ratio

 

12.77

%

11.12

%

 

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.

 

Liquidity and Funds Management

 

Liquidity management ensures that adequate funds will be available to meet anticipated and unanticipated deposit withdrawals, debt servicing payments, investment commitments, commercial and consumer loan demand and ongoing operating expenses.  Funding sources include principal repayments on loans and investment securities, sales of loans, growth in core deposits, short and long-term borrowings and repurchase agreements.  Regular loan payments are a dependable source of funds, while the sale of loans and investment securities, deposit flows, and loan prepayments are significantly influenced by general economic conditions and level of interest rates.

 

At December 31, 2008, the Company maintained $19.3 million in cash and cash equivalents primarily consisting of cash and due from banks.  In addition, the Company had $226.7 million in available for sale securities and $3.1 million in held to maturity securities.  Cash and investment securities totaled $249.0 million which represented 20.3% of total assets at December 31, 2008 compared to 19.1% at December 31, 2007.

 

The Company considers its primary source of liquidity to be its core deposit base, which includes non-interest-bearing and interest-bearing demand deposits, savings, and time deposits under $100,000.  This funding source has grown steadily over the years through organic growth and acquisitions and consists of deposits from customers throughout the financial center network.  The Company will continue to promote the growth of deposits through its financial center offices.  At December 31, 2008, approximately 55.4% of the Company’s assets were funded by core deposits acquired within its market area.  An additional 10.1% of the assets were funded by the Company’s equity.  These two components provide a substantial and stable source of funds.

 

Off-Balance Sheet Arrangements

 

The Company’s financial statements do not reflect various off-balance sheet arrangements that are made in the normal course of business, which may involve some liquidity risk.  These commitments consist mainly of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments.  Unused commitments, at December 31, 2008 totaled $260.7 million.  This consisted of $59.1 million in commercial real estate and construction loans, $48.9 million in home equity lines of credit, $138.2 million in unused business lines of credit and $14.5 million in standby letters of credit.  Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Company.  Any amounts actually drawn upon, management believes, can be funded in the normal course

 

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of operations.  The Company has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources.

 

Contractual Obligations

 

The following table represents the Company’s aggregate contractual obligations to make future payments.

 

 

 

December 31, 2008

 

 

 

(As Restated)

 

 

 

Less than

 

 

 

 

 

Over

 

 

 

 

 

1 year

 

1-3 Years

 

4-5 Years

 

5 Years

 

Total

 

 

 

(in thousands)

 

Time deposits

 

$

318,390

 

$

85,732

 

$

30,491

 

$

132

 

$

434,745

 

Long-term securities sold under agreements to repurchase

 

80,000

 

15,000

 

5,000

 

 

100,000

 

Long-term debt

 

30,000

 

20,000

 

 

 

50,000

 

Junior subordinated debt (1)

 

15,150

 

5,000

 

 

 

20,150

 

Operating leases

 

2,517

 

4,156

 

2,947

 

14,122

 

23,742

 

Unconditional purchase obligations

 

477

 

668

 

 

 

1,145

 

Total

 

$

446,534

 

$

130,556

 

$

38,438

 

$

14,254

 

$

629,782

 

 


(1) Junior subordinated debt is classified based on the earliest date on which it may be redeemed, and not contractual maturity.

 

Risk Elements

 

Non-performing loans, consisting of loans on non-accrual status, loans past due 90 days or more and still accruing interest, and renegotiated troubled debt were $11.1 million at December 31, 2008, an increase from $6.8 million at December 31, 2007. Generally, loans that are more than 90 days past due are placed on non-accrual status.  As a percentage of total loans, non-performing loans represented 1.25% at December 31, 2008 and .83% at December 31, 2007.  The allowance for loan losses represents 73.0% of non-performing loans at December 31, 2008, compared to 106.5% at December 31, 2007.

 

The Company continues to emphasize credit quality and believes that pre-funding analysis and diligent intervention at the first signs of delinquency will help to manage these levels.

 

The following table is a summary of non-performing loans and renegotiated loans for the years presented.

 

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Table of Contents

 

 

 

Non-performing Loans

 

 

 

As of December 31,

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

 

 

(in thousands)

 

Non-accrual loans:

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

$

2,947

 

$

1,160

 

$

1,317

 

$

1,231

 

$

2,447

 

Consumer

 

459

 

259

 

578

 

366

 

 

Commercial

 

7,298

 

2,133

 

2,094

 

3,970

 

471

 

Total

 

10,704

 

3,552

 

3,989

 

5,567

 

2,918

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans past due 90 days or more and still accruing interest:

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

28

 

331

 

47

 

12

 

2,384

 

Consumer

 

 

408

 

 

 

33

 

Commercial

 

112

 

2,266

 

46

 

594

 

548

 

Total loans past due 90 days or more

 

140

 

3,005

 

93

 

606

 

2,965

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings:

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

Commercial

 

285

 

267

 

319

 

150

 

103

 

Total troubled debt restructurings

 

285

 

267

 

319

 

150

 

103

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-performing loans

 

$

11,129

 

$

6,824

 

$

4,401

 

$

6,323

 

$

5,986

 

 

At December 31, 2008, there were no commercial loans for which payments are current, but where the borrowers were experiencing significant financial difficulties, that were not classified as non-accrual.

 

The following summary shows the impact on interest income of non-accrual and restructured loans for the year ended December 31, 2008 (in thousands):

 

Amount of interest income on loans that would have been recorded under original terms

 

$

277

 

Interest income reported during the period

 

$

187

 

 

Provision and Allowance for Loan Losses

 

The provision for loan losses for 2008 was $4.8 million compared to $1.0 million in 2007 and $1.1 million in 2006.  The Company performs a review of the credit quality of its loan portfolio on a monthly basis to determine the adequacy of the allowance for probable loan losses.  The Company experienced growth in the loan portfolio of 8.0% in 2008 and 7.3% in 2007.  The allowance for loan losses at December 31, 2008 was $8.1 million, or 0.92% of outstanding loans, compared to $7.3 million or 0.88% of outstanding loans at December 31, 2007.  The increase in the provision for loan losses for 2008 over 2007 is due primarily to the result of management’s evaluation and classification of the credit quality of the loan portfolio utilizing a qualitative and quantitative internal loan review process.

 

The allowance for loan losses is an amount that management believes to be adequate to absorb probable losses in the loan portfolio.  Additions to the allowance are charged through the provision for loan losses.  Management regularly assesses the adequacy of the allowance by performing an ongoing evaluation of the loan portfolio, including such factors as charge-off history, the level of delinquent loans, the current financial condition of specific borrowers, value of any collateral, risk characteristics in the loan portfolio, and local and national economic conditions.  All loans are individually analyzed, while other smaller balance loans are evaluated by loan category.  Based upon the results of such reviews, management believes that the allowance for loan losses at December 31, 2008 was adequate to absorb credit losses inherent in the portfolio as of that date.

 

The following table presents a comparative allocation of the allowance for loan losses for each of the past five year-ends. Amounts were allocated to specific loan categories based upon management’s classification of loans under the Company’s internal loan grading system and assessment of near-term charge-offs and losses existing in

 

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Table of Contents

 

specific larger balance loans that are reviewed in detail by the Company’s internal loan review department and pools of other loans that are not individually analyzed.  The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future credit losses may occur.

 

Allocation of Allowance for Loan Losses

(In thousands except percentage data)

 

 

 

As of December 31,

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

 

 

 

 

% of

 

 

 

% of

 

 

 

% of

 

 

 

% of

 

 

 

% of

 

 

 

 

 

Total

 

 

 

Total

 

 

 

Total

 

 

 

Total

 

 

 

Total

 

 

 

Amount

 

Loans

 

Amount

 

Loans

 

Amount

 

Loans

 

Amount

 

Loans

 

Amount

 

Loans

 

Commercial

 

$

 6,851

 

56.4

%

$

 6,125

 

54.9

%

$

 6,451

 

50.9

%

$

 6,318

 

49.4

%

$

 6,071

 

46.9

%

Residential Real Estate

 

263

 

43.1

 

233

 

44.4

 

216

 

48.3

 

229

 

49.0

 

387

 

51.1

 

Consumer

 

738

 

0.5

 

622

 

0.7

 

808

 

0.8

 

884

 

1.6

 

782

 

2.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Allocated

 

7,852

 

100.0

 

6,980

 

100.0

 

7,475

 

100.0

 

7,431

 

100.0

 

7,240

 

100.0

 

Unallocated

 

272

 

 

284

 

 

136

 

 

188

 

 

8

 

 

TOTAL

 

$

 8,124

 

100.0

%

$

 7,264

 

100.0

%

$

 7,611

 

100.0

%

$

 7,619

 

100.0

%

$

 7,248

 

100.0

%

 

The unallocated portion of the allowance is intended to provide for probable losses that are not otherwise accounted for and to compensate for the imprecise nature of estimating future loan losses.  Management believes the allowance is adequate to cover the inherent risks associated with the Company’s loan portfolio.  While allocations have been established for particular loan categories, management considers the entire allowance to be available to absorb losses in any category.

 

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Table of Contents

 

The following tables set forth an analysis of the Company’s allowance for loan losses for the years presented.

 

Analysis of the Allowance for Loan Losses

(in thousands except ratios)

 

 

 

Year Ended December 31,

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

Balance, Beginning of year

 

$

7,264

 

$

7,611

 

$

7,619

 

$

7,248

 

$

4,356

 

Balance acquired in merger

 

 

 

 

 

2,079

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

3,613

 

1,087

 

708

 

663

 

315

 

Real Estate

 

30

 

56

 

356

 

413

 

202

 

Consumer

 

430

 

405

 

241

 

202

 

111

 

Total

 

4,073

 

1,548

 

1,305

 

1,278

 

628

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

79

 

112

 

59

 

53

 

9

 

Real Estate

 

 

53

 

94

 

89

 

87

 

Consumer

 

19

 

38

 

60

 

47

 

25

 

Total

 

98

 

203

 

213

 

189

 

121

 

Net Charge-offs

 

3,975

 

1,345

 

1,092

 

1,089

 

507

 

Provision Charged to Operations

 

4,835

 

998

 

1,084

 

1,460

 

1,320

 

Balance, End of Year

 

$

8,124

 

$

7,264

 

$

7,611

 

$

7,619

 

$

7,248

 

Average Loans

 

$

857,835

 

$

791,440

 

$

711,240

 

$

632,631

 

$

433,941

 

Ratio of Net Charge-offs to Average Loans

 

0.46

%

0.17

%

0.15

%

0.17

%

0.12

%

Ratio of Allowance to Loans, End of Year

 

0.92

%

0.88

%

1.00

%

1.16

%

1.22

%

 

Loan Policy and Procedure

 

The Bank’s loan policies and procedures have been approved by the Board of Directors, based on the recommendation of the Bank’s 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 Bank’s Relationship Managers originate loan requests through a variety of sources which include the Bank’s existing customer base, referrals from directors and various networking sources (accountants, attorneys, and realtors), and market presence.  Over the past several years, the Bank’s Relationship Managers have been significantly increased through (1) the hiring of experienced commercial lenders in the Bank’s geographic markets, (2) the Bank’s 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 Bank’s 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 Bank’s 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 Bank’s 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 December 31, 2008, 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 Bank’s credit department, along with the Relationship

 

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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 Bank’s 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 Bank’s written loan policies are continually evaluated and updated as necessary to reflect changes in the marketplace.  Annually, credit loan policies are approved by the Bank’s 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 Bank’s 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 Bank’s 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 Bank’s interest, seek as much collateral as practical.

 

Commercial Real Estate

 

a)

Unapproved land (raw land)

 

50

%

b)

Approved but Unimproved land

 

65

%

c)

Approved and Improved land

 

75

%

d)

Improved Real Estate

 

80

%

 

Investments

 

a)

Stocks listed on a nationally recognized exchange Stock value should be greater than $10.

 

75

%

b)

Bonds, Bills, Notes

 

 

 

c)

US Gov’t 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

 

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Table of Contents

 

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.

 

Loan Portfolio

 

The following table sets forth the Company’s loan distribution at the periods presented:

 

 

 

December 31,

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

 

 

(in thousands)

 

Commercial, Financial, and Agricultural

 

$

499,847

 

$

450,353

 

$

389,455

 

$

322,875

 

$

279,756

 

Real Estate Construction

 

89,556

 

79,414

 

96,163

 

61,123

 

     30,039

 

Residential Real Estate

 

292,707

 

285,330

 

272,925

 

259,434

 

   274,417

 

Consumer

 

4,195

 

5,901

 

6,240

 

10,812

 

     12,116

 

Total

 

$

886,305

 

$

820,998

 

$

764,783

 

$

654,244

 

$

596,328

 

 

Loan Maturities

 

The following table shows the maturity of commercial, financial and agricultural loans outstanding at December 31, 2008:

 

 

 

Maturities of Outstanding Loans

 

 

 

Within

 

After One

 

After

 

 

 

 

 

One

 

But Within

 

Five

 

 

 

 

 

Year

 

Five Years

 

Years

 

Total

 

 

 

 (in thousands)

 

Commercial, Financial, and Agricultural

 

$

147,182

 

$

156,873

 

$

195,792

 

$

499,847

 

Real Estate Construction

 

73,829

 

12,572

 

3,155

 

89,556

 

 

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Table of Contents

 

Securities Portfolio

 

The following table sets forth the amortized cost of the Company’s investment securities at its last three fiscal year ends:

 

 

 

As of December 31,

 

Securities Available For Sale

 

2008

 

2007

 

2006

 

 

 

(In thousands)

 

Corporations

 

$

9,438

 

$

5,889

 

$

9,703

 

State and Municipal Obligations

 

26,582

 

20,582

 

16,327

 

Mortgage Backed Securities

 

185,945

 

136,103

 

113,953

 

Other Securities and Equity Securities

 

16,570

 

25,598

 

23,447

 

Total

 

$

238,535

 

$

188,172

 

$

163,430

 

 

 

 

As of December 31,

 

Securities Held to Maturity

 

2008

 

2007

 

2006

 

 

 

(In thousands)

 

Other Securities and Equity Securities

 

$

3,060

 

$

3,078

 

$

3,117

 

Total

 

$

3,060

 

$

3,078

 

$

3,117

 

 


This table has been adjusted to reflect the Company’s 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.

 

For purposes of financial reporting, available for sale securities are reflected at estimated fair value.

 

Securities Portfolio Maturities and Yields

 

The following table sets forth information about the maturities and weighted average yield on the Company’s securities portfolio.  Floating rate securities are included in the “Due in 1 Year or Less” bucket.  Yields are not reported on a tax equivalent basis.

 

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Table of Contents

 

 

 

Amortized Cost at December 31, 2008

 

 

 

Due in

 

After 1

 

After 5

 

 

 

 

 

 

 

 

 

1 Year

 

Year to

 

Years to

 

After

 

 

 

Fair

 

Securities Available For Sale

 

or Less

 

5 Years

 

10 Years

 

10 Years

 

Total

 

Value

 

 

 

(In thousands except percentage data)

 

Obligations of U.S. Government Agencies and Corporations

 

$

 

$

 

$

60

 

$

9,378

 

$

9,438

 

$

9,331

 

 

 

%

%

7.08

%

6.26

%

6.27

%

 

 

State and Municipal Obligations

 

$

 

$

 

$

361

 

$

26,221

 

$

26,582

 

25,033

 

 

 

%

%

4.00

%

4.34

%

4.34

%

 

 

Other Securities and Equity Securities

 

$

1,500

 

$

1,542

 

$

1,000

 

$

12,528

 

$

16,570

 

7,124

 

 

 

5.10

%

5.00

%

5.35

%

4.56

%

4.70

%

 

 

Mortgage Backed Securities

 

$

 

$

 

$

6,343

 

$

179,602

 

$

185,945

 

185,177

 

 

 

 

 

5.38

%

5.74

%

5.73

%

 

 

 

 

 

Amortized Cost at December 31, 2008

 

 

 

Due in

 

After 1

 

After 5

 

 

 

 

 

 

 

 

 

1 Year

 

Year to

 

Years to

 

After

 

 

 

Fair

 

Securities Held to Maturity

 

or Less

 

5 Years

 

10 Years

 

10 Years

 

Total

 

Value

 

 

 

(In thousands except percentage data)

 

Corporate Debt Securities

 

$

 

$

 

$

 

$

3,060

 

$

3,060

 

$

1,926

 

 

 

%

%

%

7.94

%

7.94

%

 

 

 


This table has been adjusted to reflect the Company’s 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.

 

Maturity of Certificates of Deposit of $100,000 or More

 

The following table sets forth the amounts of the Bank’s certificates of deposit of $100,000 or more by maturity date.

 

 

 

December 31, 2008

 

 

 

(in thousands)

 

Three Months or Less

 

$

69,629

 

Over Three Through Six Months

 

46,357

 

Over Six Through Twelve Months

 

44,001

 

Over Twelve Months

 

35,825

 

TOTAL

 

$

195,812

 

 

Average Deposits and Average Rates by Major Classification

 

The following table sets forth the average balances of the Bank’s deposits and the average rates paid for the years presented.

 

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Table of Contents

 

 

 

Year Ended December 31,

 

 

 

2008

 

2007

 

2006

 

 

 

Amount

 

Rate

 

Amount

 

Rate

 

Amount

 

Rate

 

 

 

(Dollars in thousands)

 

Non-interest bearing demand

 

$

107,642

 

 

 

$

106,782

 

 

 

$

111,759

 

 

 

Interest bearing demand

 

238,144

 

1.95

%

222,335

 

2.88

%

222,385

 

2.67

%

Savings deposits

 

84,453

 

1.70

%

90,419

 

2.91

%

68,536

 

2.33

%

Time deposits

 

351,011

 

4.22

%

322,235

 

4.78

%

288,644

 

4.36

%

Total

 

$

781,250

 

 

 

$

741,771

 

 

 

$

691,324

 

 

 

 

Other Borrowed Funds

 

Other borrowings at December 31, 2008 consisted of overnight borrowings from the FHLB under a repurchase agreement, overnight borrowings from other correspondent financial institutions, and repurchase agreements with customers and other financial institutions.  The borrowings are collateralized by certain qualifying assets of the Bank.

 

Federal funds purchased by the Bank were $53.4 million and $118.2 million at December 31, 2008 and 2007, respectively.  The federal funds purchased typically mature in one day.

 

Information concerning the short-term borrowings is summarized as follows:

 

 

 

As of December 31,

 

 

 

2008

 

2007

 

2006

 

 

 

(In thousands except percentage data)

 

Federal funds purchased:

 

 

 

 

 

 

 

Average balance during the year

 

$

76,307

 

$

76,805

 

$

67,192

 

Rate

 

2.35

%

5.06

%

5.15

%

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase:

 

 

 

 

 

 

 

Average balance during the year

 

25,000

 

26,781

 

22,014

 

Rate

 

2.10

%

4.05

%

4.13

%

 

 

 

 

 

 

 

 

Maximum month end balance of short-term borrowings during the year

 

$

124,308

 

$

155,110

 

$

129,039

 

 

Dividends and Shareholders’ Equity

 

The Company declared cash dividends in 2008 of $0.50 per share and $0.77 per share in 2007.  The cash dividends have been adjusted for the 5% stock dividend in 2007.

 

 

 

Year Ended December 31,

 

 

 

2008

 

 

 

 

 

 

 

(As Restated)

 

2007

 

2006

 

Return on average assets

 

0.05

%

0.70

%

0.92

%

Return on average equity

 

0.54

%

7.15

%

9.38

%

Dividend payout ratio

 

503.89

%

58.53

%

42.74

%

Average equity to average assets

 

8.95

%

9.78

%

9.82

%

 

Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the Company’s disclosure relating to it in this “Management’s Discussion and Analysis”.

 

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Table of Contents

 

Item 7A.       Quantitative and Qualitative Disclosures About Market Risk.

 

The discussion concerning the effects of interest rate changes on the Company’s estimated net interest income for the year ended December 31, 2008 set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Interest Rate Sensitivity” in Item 7 hereof, is incorporated herein by reference.

 

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Table of Contents

 

Item 8.       Financial Statements and Supplementary Data

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders

VIST Financial Corp.
Wyomissing, Pennsylvania

 

We have audited the accompanying consolidated balance sheets of VIST Financial Corp. and its subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2008. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of VIST Financial Corp. and its subsidiaries as of December 31, 2008 and 2007 and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2007, the Company early adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, and SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities.

 

As discussed in Note 2 to the consolidated financial statements, the December 31, 2008 consolidated financial statements have been restated to (i) correct the calculation of fair value on the junior subordinated debentures, (ii) record changes in fair value of the junior subordinated debentures and related cash flow hedges in operations, and (iii) correct the misapplication of cash flow hedge accounting to the junior subordinated debentures accounted for at fair value.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), VIST Financial Corp.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 26, 2010 expressed an adverse opinion.

 

 

 

 

ParenteBeard LLC

/s/ ParenteBeard LLC

Reading, Pennsylvania

 

March 4, 2009 (except for Note 2,

 

 

as to which the date is March 26, 2010)

 

 

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Table of Contents

 

VIST FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)

 

 

 

December 31,

 

 

 

2008

 

 

 

 

 

(As Restated)

 

2007

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

18,964

 

$

25,473

 

Interest-bearing deposits in banks

 

320

 

316

 

 

 

 

 

 

 

Total cash and cash equivalents

 

19,284

 

25,789

 

 

 

 

 

 

 

Mortgage loans held for sale

 

2,283

 

3,165

 

Securities available for sale

 

226,665

 

186,481

 

Securities held to maturity, fair value 2008 - $1,926; 2007 - $3,100

 

3,060

 

3,078

 

Federal Home Loan Bank stock

 

5,715

 

5,562

 

Loans, net of allowance for loan losses 2008 - $8,124; 2007 - $7,264

 

878,181

 

813,734

 

Premises and equipment, net

 

6,591

 

6,892

 

Identifiable intangible assets

 

4,833

 

3,892

 

Goodwill

 

39,732

 

39,189

 

Bank owned life insurance

 

18,552

 

17,857

 

Other assets

 

21,174

 

19,312

 

 

 

 

 

 

 

Total assets

 

$

1,226,070

 

$

1,124,951

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest bearing

 

$

108,645

 

$

109,718

 

Interest bearing

 

741,955

 

602,927

 

 

 

 

 

 

 

Total deposits

 

850,600

 

712,645

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

120,086

 

110,881

 

Federal funds purchased

 

53,424

 

118,210

 

Long-term debt

 

50,000

 

45,000

 

Junior subordinated debt, at fair value as of December 31, 2008

 

18,260

 

20,232

 

Other liabilities

 

10,071

 

11,391

 

 

 

 

 

 

 

Total liabilities

 

1,102,441

 

1,018,359

 

 

 

 

 

 

 

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 at December 31, 2008 and no shares at December 31, 2007; Less: discount of $2,307 at December 31, 2008 and no discount at December 31, 2007

 

22,693

 

 

Common stock, $5.00 par value; authorized 20,000,000 shares; issued: 5,768,429 shares at December 31, 2008 and 5,746,998 shares at December 31, 2007

 

28,842

 

28,735

 

Stock warrants

 

2,307

 

 

Surplus

 

64,349

 

63,940

 

Retained earnings

 

14,757

 

17,039

 

Accumulated other comprehensive loss

 

(7,834

)

(1,116

)

Treasury stock; 68,354 shares at December 31, 2008 and 89,853 shares at December 31, 2007, at cost

 

(1,485

)

(2,006

)

 

 

 

 

 

 

Total shareholders’ equity

 

123,629

 

106,592

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,226,070

 

$

1,124,951

 

 

See Notes to Consolidated Financial Statements.

 

54



Table of Contents

 

VIST FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2008, 2007 and 2006

(Amounts in thousands, except per share data)

 

 

 

Years Ended December 31,

 

 

 

2008

 

 

 

 

 

 

 

(As Restated)

 

2007

 

2006

 

Interest and dividend income:

 

 

 

 

 

 

 

Interest and fees on loans

 

$

54,532

 

$

59,234

 

$

52,971

 

Interest on securities:

 

 

 

 

 

 

 

Taxable

 

9,942

 

7,859

 

7,202

 

Tax-exempt

 

959

 

571

 

790

 

Dividend income

 

393

 

384

 

396

 

Other interest income

 

12

 

28

 

18

 

Total interest and dividend income

 

65,838

 

68,076

 

61,377

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Interest on deposits

 

20,874

 

24,428

 

20,141

 

Interest on short-term borrowings

 

1,826

 

3,940

 

3,507

 

Interest on securities sold under agreements to repurchase

 

4,128

 

3,906

 

2,847

 

Interest on long-term debt

 

2,372

 

663

 

1,174

 

Interest on junior subordinated debt

 

1,437

 

1,898

 

1,852

 

Total interest expense

 

30,637

 

34,835

 

29,521

 

 

 

 

 

 

 

 

 

Net interest income

 

35,201

 

33,241

 

31,856

 

Provision for loan losses

 

4,835

 

998

 

1,084

 

Net interest income after provision for loan losses

 

30,366

 

32,243

 

30,772

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

Customer service fees

 

2,964

 

2,657

 

2,689

 

Mortgage banking activities, net

 

897

 

1,894

 

3,574

 

Commissions and fees from insurance sales

 

11,284

 

11,362

 

11,269

 

Broker and investment advisory commissions and fees

 

813

 

886

 

721

 

Earnings on investment in life insurance

 

690

 

806

 

560

 

Gains on sale of loans

 

47

 

164

 

102

 

Net realized gains (losses) on sales of securities

 

(7,230

)

(2,324

)

515

 

Other income

 

2,514

 

2,402

 

2,028

 

Total other income

 

11,979

 

17,847

 

21,458

 

 

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

 

 

Salaries and employee benefits

 

22,078

 

21,561

 

22,142

 

Occupancy expense

 

4,707

 

4,309

 

4,465

 

Equipment expense

 

2,690

 

2,545

 

2,641

 

Marketing and advertising expense

 

1,635

 

1,672

 

1,354

 

Amortization of identifiable intangible assets

 

629

 

622

 

636

 

Professional services

 

2,594

 

1,835

 

1,257

 

Outside processing services

 

3,334

 

3,203

 

2,981

 

Insurance expense

 

1,262

 

614

 

500

 

Other expense

 

4,709

 

4,513

 

4,262

 

Total other expense

 

43,638

 

40,874

 

40,238

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(1,293

)

9,216

 

11,992

 

Income taxes (benefit)

 

(1,858

)

1,746

 

2,839

 

Net income

 

$

565

 

$

7,470

 

$

9,153

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.10

 

$

1.32

 

$

1.63

 

Diluted earnings per share

 

$

0.10

 

$

1.31

 

$

1.62

 

 

See Notes to Consolidated Financial Statements.

 

55



Table of Contents

 

VIST FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Years Ended December 31, 2008, 2007 and 2006

(Dollar amounts in thousands, except share data)

 

 

 

Preferred Stock

 

Common Stock

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Number of

 

 

 

Number of

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Shares

 

Liquidation

 

Shares

 

 

 

Stock

 

 

 

Retained

 

Comprehensive

 

Treasury

 

 

 

 

 

Issued

 

Value

 

Issued

 

Par Value

 

Warrants

 

Surplus

 

Earnings

 

(Loss)

 

Stock

 

Total

 

Balance, December 31, 2005

 

 

$

 

5,111,178

 

$

25,556

 

$

 

$

52,581

 

$

20,790

 

$

(3,143

)

$

(1,028

)

$

94,756

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

9,153

 

 

 

9,153

 

Change in net unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effect

 

 

 

 

 

 

 

 

617

 

 

617

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,770

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of treasury stock (45,000 shares)

 

 

 

 

 

 

 

 

 

(1,118

)

(1,118

)

Additional consideration in connection with acquisitions (11,727 shares)

 

 

 

 

 

 

58

 

 

 

223

 

281

 

Common stock dividend (5%)

 

 

 

253,241

 

1,266

 

 

4,463

 

(5,729

)

 

 

 

Common stock issued in connection with Directors’ compensation (7,124 shares)

 

 

 

 

 

 

39

 

 

 

132

 

171

 

Common stock issued in connection with director and employee stock purchase plans

 

 

 

90,170

 

451

 

 

1,220

 

 

 

139

 

1,810

 

Tax benefits from employee stock transactions

 

 

 

 

 

 

127

 

 

 

 

127

 

Compensation expense related to stock options

 

 

 

 

 

 

245

 

 

 

 

245

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared ($0.70 per share)

 

 

 

 

 

 

 

(3,912

)

 

 

(3,912

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2006

 

 

 

5,454,589

 

27,273

 

 

58,733

 

20,302

 

(2,526

)

(1,652

)

102,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment to opening balance, net of tax, for the adoption of SFAS No. 159 (see Note 1)

 

 

 

 

 

 

 

(409

)

 

 

(409

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted opening balance, January 1, 2007

 

 

 

5,454,589

 

27,273

 

 

58,733

 

19,893

 

(2,526

)

(1,652

)

101,721

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

7,470

 

 

 

7,470

 

Change in net unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effect

 

 

 

 

 

 

 

 

1,410

 

 

1,410

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of treasury stock (35,000 shares)

 

 

 

 

 

 

 

 

 

(660

)

(660

)

Additional consideration in connection with acquisitions (13,381 shares)

 

 

 

 

 

 

14

 

 

 

306

 

320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock dividend (5%)

 

 

 

270,413

 

1,353

 

 

4,591

 

(5,944

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued in connection with directors’ compensation

 

 

 

9,323

 

46

 

 

176

 

 

 

 

222

 

Common stock issued in connection with director and employee stock purchase plans

 

 

 

12,673

 

63

 

 

159

 

 

 

 

222

 

Tax benefits from employee stock transactions

 

 

 

 

 

 

12

 

 

 

 

12

 

Compensation expense related to stock options

 

 

 

 

 

 

255

 

 

 

 

255

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared ($0.77 per share)

 

 

 

 

 

 

 

(4,380

)

 

 

(4,380

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2007

 

 

 

5,746,998

 

28,735

 

 

63,940

 

17,039

 

(1,116

)

(2,006

)

106,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (as restated)

 

 

 

 

 

 

 

565

 

 

 

565

 

Change in net unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effect

 

 

 

 

 

 

 

 

(6,718

)

 

(6,718

)

Total comprehensive loss (as restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,153

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of preferred stock

 

25,000

 

25,000

 

 

 

 

 

 

 

 

25,000

 

Preferred stock discount

 

 

(2,307

)

 

 

 

 

 

 

 

(2,307

)

Issuance of stock warrants

 

 

 

 

 

2,307

 

 

 

 

 

2,307

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional consideration in connection with acquisitions (21,499 shares)

 

 

 

 

 

 

(137

)

 

 

521

 

384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

10,623

 

53

 

 

88

 

 

 

 

141

 

Compensation expense related to stock options

 

 

 

 

 

 

319

 

 

 

 

319

 

Cash dividends declared ($0.50 per share)

 

 

 

 

 

 

 

(2,847

)

 

 

(2,847

)

Balance, December 31, 2008 (as restated)

 

25,000

 

$

22,693

 

5,768,429

 

$

28,842

 

$

2,307

 

$

64,349

 

$

14,757

 

$

(7,834

)

$

(1,485

)

$

123,629

 

 

See Notes to Consolidated Financial Statements.

 

56



Table of Contents

 

VIST FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2008, 2007 and 2006

(Dollar amounts in thousands)

 

 

 

Years Ended December 31,

 

 

 

2008

 

 

 

 

 

 

 

(As Restated)

 

2007

 

2006

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

Net income

 

$

565

 

$

7,470

 

$

9,153

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Provision for loan losses

 

4,835

 

998

 

1,084

 

Provision for depreciation and amortization of premises and equipment

 

1,470

 

1,539

 

1,653

 

Amortization of identifiable intangible assets

 

629

 

622

 

636

 

Deferred income taxes

 

(345

)

(45

)

121

 

Director stock compensation

 

193

 

222

 

171

 

Net amortization of securities premiums and discounts

 

14

 

160

 

285

 

Amortization of mortgage servicing rights

 

202

 

143

 

77

 

Decrease in mortgage servicing rights

 

(6

)

(8

)

(18

)

Net realized losses (gains) on sales of foreclosed real estate

 

120

 

(28

)

(13

)

Net realized losses (gains) on sales of securities

 

7,230

 

2,324

 

(515

)

Proceeds from sales of loans held for sale

 

42,787

 

100,014

 

187,040

 

Net gains on sale of loans

 

(831

)

(1,743

)

(3,121

)

Loans originated for sale

 

(41,074

)

(95,854

)

(172,945

)

Increase in investment in life insurance

 

(695

)

(667

)

(487

)

Compensation expense related to stock options

 

319

 

255

 

245

 

Net change in fair value of liabilities

 

(1,972

)

103

 

 

Decrease (increase) in accrued interest receivable and other assets

 

7,816

 

66

 

(1,642

)

(Decrease) increase in accrued interest payable and other liabilities

 

(6,907

)

(11,667

)

12,256

 

 

 

 

 

 

 

 

 

Net Cash Provided by Operating Activities

 

14,350

 

3,904

 

33,980

 

 

 

 

 

 

 

 

 

Cash Flow From Investing Activities

 

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

 

 

Purchases - available for sale

 

(182,595

)

(169,175

)

(16,732

)

Principal repayments, maturities and calls - available for sale

 

33,631

 

23,334

 

26,729

 

Principal repayments, maturities and calls - held to maturity

 

 

 

3,031

 

Proceeds from sales - available for sale

 

91,376

 

118,654

 

8,006

 

Net increase in loans receivable

 

(70,022

)

(59,755

)

(113,339

)

Proceeds from sale of loans

 

740

 

2,195

 

1,708

 

Net (increase) decrease in Federal Home Loan Bank Stock

 

(153

)

(985

)

1,546

 

Net (increase) decrease in foreclosed real estate

 

166

 

337

 

(758

)

Purchases of premises and equipment

 

(1,180

)

(1,492

)

(834

)

Disposals of premises and equipment

 

11

 

2

 

51

 

Purchases of bank owned life insurance

 

 

 

(5,000

)

Net cash used in acquisitions

 

(1,750

)

 

 

Net Cash Used In Investing Activities

 

(129,776

)

(86,885

)

(95,592

)

 

See Notes to Consolidated Financial Statements.

 

57



Table of Contents

 

VIST FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Years ended December 31, 2008, 2007 and 2006

(Dollar amounts in thousands)

 

 

 

Years Ended December 31,

 

 

 

2008

 

 

 

 

 

 

 

(As Restated)

 

2007

 

2006

 

Cash Flow From Financing Activities

 

 

 

 

 

 

 

Net increase in deposits

 

137,955

 

9,806

 

43,109

 

Net (decrease) increase in federal funds purchased

 

(64,786

)

36,105

 

15,875

 

Net increase in securities sold under agreements to repurchase

 

9,205

 

19,894

 

21,532

 

Proceeds from long-term debt

 

20,000

 

40,000

 

 

Repayments of long-term debt

 

(15,000

)

(14,500

)

(23,500

)

Issuance of preferred stock, including stock warrant

 

25,000

 

 

 

Purchase of treasury stock

 

 

(660

)

(1,118

)

Reissuance of treasury stock

 

384

 

320

 

281

 

Proceeds from the exercise of stock options and stock purchase plans

 

141

 

222

 

1,810

 

Tax benefits from employee stock transactions

 

 

12

 

127

 

Cash dividends paid

 

(3,978

)

(4,264

)

(3,800

)

Net Cash Provided By Financing Activities

 

108,921

 

86,935

 

54,316

 

 

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(6,505

)

3,954

 

(7,296

)

Cash and Cash Equivalents:

 

 

 

 

 

 

 

January 1

 

25,789

 

21,835

 

29,131

 

December 31

 

$

19,284

 

$

25,789

 

$

21,835

 

 

 

 

 

 

 

 

 

Cash Payments For:

 

 

 

 

 

 

 

Interest

 

$

30,421

 

$

34,833

 

$

28,862

 

Taxes

 

$

703

 

$

1,500

 

$

2,910

 

 

 

 

 

 

 

 

 

Supplemental Schedule of Non-cash Investing and Financing Activities

 

 

 

 

 

 

 

Other real estate acquired in settlement of loans

 

$

736

 

$

$

466

 

$

$

771

 

 

See Notes to Consolidated Financial Statements.

 

58



Table of Contents

 

1.         Significant Accounting Policies

 

Principles of Consolidation:

 

On March 3, 2008, the Company changed its name from Leesport Financial Corp. to VIST Financial Corp.  This re-branding initiative brought all the Leesport Financial Family of Companies under one new name and brand.

 

The consolidated financial statements include the accounts of VIST Financial Corp. (the “Company”), a bank holding company, which has elected to be treated as a financial holding company, and its wholly-owned subsidiaries, VIST Bank (the “Bank”), VIST Insurance, LLC (“VIST Insurance”) and VIST Capital Management, LLC (“VIST Capital”).  As of December 31, 2008, the Bank’s wholly-owned subsidiary was VIST Mortgage Holdings, LLC.  All significant inter-company accounts and transactions have been eliminated.

 

Nature of Operations:

 

The Bank provides full banking services.  VIST Insurance provides risk management services, employee benefits insurance and personal and commercial insurance coverage through multiple insurance companies.  VIST Capital provides investment advisory and brokerage services.  VIST Mortgage Holdings, LLC provides mortgage brokerage services through its limited partnership agreements with unaffiliated third parties involved in the real estate services industry.  First Leesport Capital Trust I, Leesport Capital Trust II and Madison Statutory Trust I are trusts formed for the purpose of issuing mandatory redeemable debentures on behalf of the Company.  These trusts are wholly-owned subsidiaries of the Company, but are not consolidated for financial statement purposes.  See “Junior Subordinated Debt” in Note 11 of the consolidated financial statements.  The Company and the Bank are subject to the regulations of various federal and state agencies and undergo periodic examinations by various regulatory authorities.

 

Use of Estimates:

 

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, the potential impairment of goodwill and intangible assets, restricted stock, the valuation of deferred tax assets and the determination of other-than-temporary impairment on securities.

 

Significant Group Concentrations of Credit Risk:

 

Most of the Company’s banking, insurance and wealth management activities are with customers located within Berks, Schuylkill, Philadelphia, Montgomery and Delaware Counties, as well as, within other southeastern Pennsylvania market areas.  Note 5 of the consolidated financial statements details the Company’s investment securities portfolio for both available for sale and held to maturity investments.  Note 6 of the consolidated financial statements details the Company’s loan concentrations.  Although the Company has a diversified loan portfolio, its debtors’ ability to honor contracts is influenced by the region’s economy.

 

Reclassifications:

 

For comparative purposes, certain prior period amounts have been reclassified to conform to the current period presentation.  These reclassifications had no effect on net income.

 

Presentation of Cash Flows:

 

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and interest-bearing deposits in other banks.

 

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Investment Securities Impairment Evaluation:

 

Debt securities that management has the positive ability and intent to hold to maturity are classified as held-to-maturity and recorded at amortized cost.  Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity.  Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors.  Securities available for sale are carried at fair value.  Unrealized gains and losses are reported in other comprehensive income or loss, net of the related deferred tax effect.  Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings.  Purchased premiums and discounts are recognized in interest income using a method which approximates the interest method over the terms of the securities.  Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.  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.

 

If a decline in market value of a security is determined to be other than temporary, under generally accepted accounting principles, we are required to write these securities down to their estimated fair value.  As of December 31, 2008, we owned single issue and pooled trust preferred securities of other financial institutions and private label collateralized mortgage obligations whose aggregate historical cost basis is greater than their estimated fair value (see note 5 of the consolidated financial statements).  We have reviewed these securities and determined that the decreases in estimated fair value are temporary.  We perform 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, we will write them down through a charge to earnings to their then current fair value.

 

The Company’s banking subsidiary, VIST Bank, is required to maintain certain amounts of FHLB stock as a member of the FHLB.  These equity securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par.  Therefore, they are less liquid than other tradable equity securities, their fair value is equal to amortized cost, and no impairment write-downs have been recorded on these securities during 2008, 2007, or 2006.

 

Federal Home Loan Bank Stock:

 

The FHLB of Pittsburgh announced in December 2008 that it voluntarily suspended the payment of dividends and the repurchase of excess capital stock from member banks.  The FHLB cited a significant reduction in the level of core earnings resulting from lower short-term interest rates, the increased cost of maintaining liquidity and constrained access to the debt markets at attractive rates and maturities as the main reasons for the decision to suspend dividends and the repurchase excess capital stock.  The FHLB last paid a dividend in the third quarter of 2008.  Accounting guidance indicates that an investor in FHLB Pittsburgh capital stock should recognize impairment if it concludes that it is not probable that it will ultimately recover the par value of its shares.  The decision of whether impairment exists is a matter of judgment that should reflect the investor’s view of FHLB Pittsburgh’s long-term performance, which includes factors such as its operating performance, the severity and duration of declines in the market value of its net assets related to its capital stock amount, its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance, the impact of legislation and regulatory changes on FHLB Pittsburgh, and accordingly, on the members of FHLB Pittsburgh and its liquidity and funding position.  After evaluating all of these considerations, the Company believes the par value of its shares will be recovered.  Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.

 

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Loans:

 

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, generally are stated at their outstanding unpaid principal balances, net of any deferred fees or costs on originated loans or unamortized premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans.  These amounts are generally being amortized over the contractual life of the loan.  Discounts and premiums on purchased loans are amortized to income using the interest method over the expected lives of the loans.

 

The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing.  A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured.  When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses.  Interest received on non-accrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal.  Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

 

Allowance for Loan Losses:

 

The allowance for loan losses is established through provisions for loan losses charged against income.  Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated.  Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

The allowance consists of specific, general and unallocated components.  The specific component relates to loans that are classified as either doubtful or substandard or special mention.  For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value for that loan.  The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.  An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

 

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

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Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Bank does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

 

Loans Held for Sale:

 

Mortgage loans originated and intended for sale in the secondary market at the time of origination are carried at the lower of cost or estimated fair value on an aggregate basis.  The majority of all sales are made with 90 day recourse.

 

Rate Lock Commitments:

 

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments).  Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives.  Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans.  Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments also considers the difference between current levels of interest rates and the committed rates.

 

Foreclosed Assets:

 

Foreclosed assets, which are recorded in other assets were $263,000 and $548,000 at December 31, 2008 and 2007, respectively, include properties acquired through foreclosure or in full or partial satisfaction of the related loan.

 

Foreclosed assets are initially recorded at fair value, net of estimated selling costs, at the date of foreclosure, establishing a new cost basis.  After foreclosure, valuations are periodically performed by management, and the real estate is carried at the lower of carrying amount or fair value, less estimated costs to sell.  Revenue and expense from operations and changes in the valuation allowance are included in other expense.

 

Premises and Equipment:

 

Land and land improvements are stated at cost.  Premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is calculated principally on the straight-line method over the respective assets estimated useful lives as follows:.

 

 

 

Years

 

Buildings and leasehold improvements

 

10-40

 

Furniture and equipment

 

3-10

 

 

Transfer of Financial Assets:

 

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

 

Bank-Owned Life Insurance:

 

The Bank invests in bank owned life insurance (“BOLI”) as a source of funding for employee benefit expenses.  BOLI involves the purchasing of life insurance by the Bank on a chosen group of employees.  The Bank is the owner and beneficiary of the policies and, in 2006, the Bank purchased $5 million of additional BOLI.  This life insurance investment is carried at the cash surrender value of the underlying policies in the amount of $18.6

 

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million and $17.9 million at December 31, 2008 and 2007, respectively.  Income from the increase in cash surrender value of the policies is included in other income on the income statement.

 

Stock-Based Compensation:

 

Prior to January 1, 2006, employee compensation expense under stock option plans was recognized only if options were granted with exercise prices below the market price of the related stock at the stock option grant date in accordance with the intrinsic value method of Accounting Principles Board (APB) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.  Because the exercise price of the Company’s employee stock options always equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized on options granted.  The Company adopted the provisions of SFAS No. 123, “Share-Based Payment (Revised 2004),” on January 1, 2006.  SFAS No. 123R eliminates the ability to account for stock-based compensation using APB No. 25 and requires that such transactions be recognized as compensation cost in the consolidated statements of income based on their fair values on the measurement date, which, for the Company, is the date of the grant.  The Company transitioned to fair-value based accounting for stock-based compensation using the modified-prospective transition method.  Under the modified-prospective method, the Company is required to record compensation cost for new awards and to awards modified, purchased or cancelled after January 1, 2006.  Additionally, compensation cost for the portion of non-vested awards (awards for which the requisite service has not been rendered) that were outstanding as of January 1, 2006 will be recognized prospectively over the remaining vesting period of such awards.

 

Loan Servicing:

 

Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.  Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.  Impairment is recognized through a valuation allowance to the extent that fair value is less than the capitalized amount.

 

Revenue Recognition for Insurance Activities:

 

Insurance revenues are derived from commissions and fees.  Commission revenues, as well as the related premiums receivable and payable to insurance companies, are recognized the later of the effective date of the insurance policy or the date the client is billed, net of an allowance for estimated policy cancellations.  The reserve for policy cancellations is periodically evaluated and adjusted as necessary.  Commission revenues related to installment premiums are recognized as billed.  Commissions on premiums billed directly by insurance companies are generally recognized as income when received.  Contingent commissions from insurance companies are generally recognized as revenue when the data necessary to reasonably estimate such amounts is obtained.  A contingent commission is a commission paid by an insurance company that is based on the overall profit and/or volume of the business placed with the insurance company.  Fee income is recognized as services are rendered.

 

Goodwill and Other Intangible Assets:

 

The Company accounts for goodwill and other intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 142 revised the accounting for purchased intangible assets and, in general, requires that goodwill no longer be amortized, but rather that it be tested for impairment on an annual basis at the reporting unit level, which is either at the same level or one level below an operating segment.  Other acquired intangible assets with finite lives, such as purchased customer accounts, are required to be amortized over their estimated lives.  Other intangible assets are amortized using the straight line method over estimated useful lives of four to twenty years.  The Company periodically assesses whether events or changes in circumstances indicate that the carrying amounts of goodwill and other intangible assets may be impaired.

 

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Income Taxes:

 

Income Taxes — The calculation of the provision for federal and state income taxes is complex and requires the use of estimates and judgments.  In the Company’s consolidated balance sheet, the Company maintains two accruals for income taxes: the Company’s income tax payable represents the estimated amount currently due to the federal and state government and is reported as a component of “other liabilities”; the Company’s deferred federal and state income tax asset or liability represents the estimated impact of temporary differences between how the Company recognizes its assets and liabilities under GAAP, and how such assets and liabilities are recognized under the federal and state tax codes.

 

Deferred federal and state taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred federal and state tax liabilities are recognized for taxable temporary differences.  Temporary differences are the differences between the reported amounts of assets and liabilities in the financial statements and their tax basis.  Deferred federal and state tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Deferred federal and state tax assets and liabilities are adjusted through the provision for income taxes for the effects of changes in tax laws and rates on the date of enactment.

 

The effective tax rate is based in part on the Company’s interpretation of the relevant current tax laws.  The Company believes the aggregate liabilities related to taxes are appropriately reflected in the consolidated financial statements.  The Company reviews the appropriate tax treatment of all transactions taking into consideration statutory, judicial, and regulatory guidance in the context of the Company’s tax positions.  In addition, the Company relies on various tax opinions, recent tax audits, and historical experience.

 

From time to time, the Company engages in business transactions that may have an effect on its tax liabilities.  Where appropriate, the Company obtains opinions of outside experts and has assessed the relative merits and risks of the appropriate tax treatment of business transactions taking into account statutory, judicial, and regulatory guidance in the context of the tax position.  However, changes to the Company’s estimates of accrued taxes can occur due to changes in tax rates, implementation of new business strategies, resolution of issues with taxing authorities regarding previously taken tax positions and newly enacted statutory, judicial, and regulatory guidance.  Such changes could affect the amount of our accrued taxes and could be material to the Company’s financial position and/or results of operations. (See Note 13 of the consolidated financial statements.)

 

Off-Balance Sheet Financial Instruments:

 

In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit.  Such financial instruments are recorded in the consolidated balance sheets when they become receivable or payable.

 

Derivative Financial Instruments:

 

The Company maintains an overall interest rate risk-management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility.  The Company’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin is not, on a material basis, adversely affected by movements in interest rates.  As a result of interest rate fluctuations, hedged assets and liabilities will appreciate or depreciate in market value.  The effect of this unrealized appreciation or depreciation will generally be offset by income or loss on the derivative instruments that are linked to the hedged assets and liabilities.  The Company views this strategy as a prudent management of interest rate sensitivity, such that earnings are not exposed to undue risk presented by changes in interest rates.

 

By using derivative instruments, the Company is exposed to credit and market risk.  If the counterparty fails to perform, credit risk exists to the extent of the fair value gain in a derivative.  When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes the Company, and, therefore, creates a repayment risk for the Company.  When the fair value of a derivative contract is negative, the Company

 

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owes the counterparty and, therefore, it has no repayment risk.  The Company minimizes the credit (or repayment) risk in the derivative instruments by entering into transactions with high quality counterparties.

 

Market risk is the adverse effect that a change in interest rates, currency, or implied volatility rates has on the value of a financial instrument.  The Company manages the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken.  The Company periodically measures this risk by using value-at-risk methodology.

 

During 2002, the Company entered into an interest rate swap to convert its fixed rate trust preferred securities to floating rate debt.  Both the interest rate swap and the related debt are recorded on the balance sheet at fair value through adjustments to other expense.

 

During 2003, the Company also entered into an interest rate cap agreement to limit its exposure to the variable rate interest achieved through the interest rate swap.  The interest rate cap was not designated as a cash flow hedge and thus, it is carried on the balance sheet in other assets at fair value through adjustments to interest expense.

 

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 Company’s 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.

 

Advertising:

 

Advertising costs are expensed as incurred.

 

Earnings Per Common Share:

 

Basic earnings per common share is calculated by dividing net income, less Series A Preferred Stock dividends, by the weighted average number of shares of common stock outstanding.  Diluted earnings per share is calculated by adjusting the weighted average number of shares of common stock outstanding to include the effect of stock options, if dilutive, using the treasury stock method.  For 2008, dividends on the Series A Preferred Stock were immaterial and were not included in income available for common shareholders or basic and diluted earnings per common share.

 

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The Company’s calculation of earnings per share for the years ended December 31, 2008, 2007, and 2006 is as follows:

 

 

 

Net

 

Weighted

 

 

 

 

 

Income

 

Average shares

 

Per share

 

 

 

(numerator)

 

(denominator)

 

amount

 

 

 

(In thousands except per share data)

 

 

 

 

 

2008 (As Restated)

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

565

 

5,689

 

$

0.10

 

Effect of dilutive stock options

 

 

6

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

Net income available to common shareholders plus assumed conversion

 

$

565

 

5,695

 

$

0.10

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

7,470

 

5,672

 

$

1.32

 

Effect of dilutive stock options

 

 

24

 

(0.01

)

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

Net income available to common shareholders plus assumed conversion

 

$

7,470

 

5,696

 

$

1.31

 

 

 

 

 

 

 

 

 

2006

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

9,153

 

5,610

 

$

1.63

 

Effect of dilutive stock options

 

 

47

 

(0.01

)

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

Net income available to common shareholders plus assumed conversion

 

$

9,153

 

5,657

 

$

1.62

 

 

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.

 

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The components of other comprehensive income (loss) and related tax effects were as follows:

 

 

 

Years Ended December 31,

 

 

 

2008
(As Restated)

 

2007

 

2006

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains on available for sale securities

 

$

(17,408

)

$

(188

)

$

1,447

 

 

 

 

 

 

 

 

 

Reclassification adjustment for losses (gains) realized in income

 

7,230

 

2,324

 

(515

)

Net unrealized (losses) gains

 

(10,178

)

2,136

 

932

 

Income tax effect

 

3,460

 

(726

)

(315

)

 

 

 

 

 

 

 

 

Other comprehensive (loss) income

 

$

(6,718

)

$

1,410

 

$

617

 

 

Equity Method Investment:

 

On December 29, 2003, the Bank entered into a limited partner subscription agreement with Midland Corporate Tax Credit XVI Limited Partnership, where the Bank receives 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 of $3.6 million and $3.9 million is included and recorded in other assets as of December 31, 2008 and 2007, respectively, and is not guaranteed; therefore, it is accounted for in accordance with Statement of Position (SOP) 78-9, “Accounting for Investments in Real Estate Ventures” using the equity method.

 

Segment Reporting:

 

The Bank acts as an independent community financial services provider which offers traditional banking and related financial services to individual, business and government customers.  Through its branch and automated teller machine networks, the Bank offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and the providing of other financial services.  Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial and retail operations of the Bank.  As such, discrete financial information is not available and segment reporting for the Bank would not be meaningful.  See Note 19 for a discussion of insurance operations, investment advisory and brokerage operations and mortgage banking operations.

 

Recently Issued Accounting Standards:

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115.”  SFAS No. 159 permits certain financial assets and financial liabilities to be measured at fair value, using an instrument-by-instrument election. The initial effect of adopting SFAS No. 159 must be accounted for as a cumulative-effect adjustment to opening retained earnings for the year in which SFAS No. 159 is applied.  Retrospective application of SFAS No. 159 to years preceding the effective date is not permitted.  The Company elected to early adopt SFAS No. 159 as of January 1, 2007.  This adoption resulted in a one-time cumulative after-tax charge of $409,000 ($619,000 pre-tax) to opening retained earnings as of January 1, 2007.  See Note 18, for additional information.

 

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about assets and liabilities measured at fair value.  FASB Statement No. 157 does not change existing guidance as to whether or not an asset or liability is carried at fair value.  The new standard provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs.  The standard also establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  The standard eliminates large position discounts for financial instruments quoted in active markets, requires costs related to acquiring

 

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financial instruments carried at fair value to be included in earnings as incurred and requires that an issuer’s credit standing be considered when measuring liabilities at fair value.  The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, with early adoption permitted.  In conjunction with the early adoption of SFAS No. 159 indicated above, the Company adopted SFAS No. 157 beginning January 1, 2007.  See Note 18, for the new disclosures required by SFAS No. 157 regarding the market-based pricing associated with assets and liabilities carried at fair value.  No significant impact to amounts reported in the consolidated financial position or results of operations resulted from the adoption of SFAS No. 157.

 

In December 2007, the FASB issued FASB statement No. 141 (R) “Business Combinations”.  This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree.  The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The guidance is effective for fiscal years beginning after December 15, 2008.  This new pronouncement will impact the Company’s accounting for business combinations completed beginning January 1, 2009.

 

In December 2007, the FASB issued FASB statement No. 160 “Non-controlling Interests in Consolidated Financial Statements—an amendment of ARB No. 51”.  This Statement establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary.  The guidance is effective for fiscal years beginning after December 15, 2008.  The implementation of this standard will not have a material impact on the Company’s consolidated financial position and results of operations.

 

In February 2008, the FASB issued a FASB Staff Position (FSP) FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.”  This FSP addresses the issue of whether or not these transactions should be viewed as two separate transactions or as one “linked” transaction.  The FSP includes a “rebuttable presumption” that presumes linkage of the two transactions unless the presumption can be overcome by meeting certain criteria.  The FSP will be effective for fiscal years beginning after November 15, 2008 and will apply only to original transfers made after that date; early adoption will not be allowed.  The implementation of this standard will not have a material impact on the Company’s consolidated financial statements.

 

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (Statement 161).  Statement 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives.  Statement 161 also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of SFAS No. 133 has been applied, and the impact that hedges have on an entity’s financial position, financial performance, and cash flows.  Statement 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  The implementation of this standard will not have a material impact on the Company’s consolidated financial position and results of operations.

 

In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life of Intangible Assets.”  This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”).  The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R, and other GAAP.  This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited.  The implementation of this standard will not have a material impact on the Company’s consolidated financial position and results of operations.

 

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60” (Statement 163).  This Statement clarifies how FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities. It also

 

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requires expanded disclosures about financial guarantee insurance contracts.  Statement 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for disclosures about the insurance enterprise’s risk-management activities, which are effective the first period (including interim periods) beginning after May 23, 2008. Except for the required disclosures, earlier application is not permitted.  The implementation of this standard will not have a material impact on the Company’s consolidated financial position and results of operations.

 

In June 2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.”  This FSP clarifies that all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common shareholders.  Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied.  This FSP is effective for fiscal years beginning after December 15, 2008.  The implementation of this standard will not have a material impact on the Company’s consolidated financial position and results of operations.

 

In September 2008, the FASB issued FSP SFAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (FSP SFAS 133-1 and FIN 45-4).  FSP SFAS 133-1 and FIN 45-4 amends and enhances disclosure requirements for sellers of credit derivatives and financial guarantees.  It also clarifies that the disclosure requirements of SFAS No. 161 are effective for quarterly periods beginning after November 15, 2008, and fiscal years that include those periods.  FSP SFAS 133-1 and FIN 45-4 are effective for reporting periods (annual or interim) ending after November 15, 2008.  The implementation of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.

 

In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). Under the proposed roadmap, the Company may be required to prepare financial statements in accordance with IFRS as early as 2014.  The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. The Company is currently assessing the impact that this potential change would have on its consolidated financial statements, and it will continue to monitor the development of the potential implementation of IFRS.

 

In December 2008, the FASB issued FSP SFAS 140-4 and FASB Interpretation (FIN) 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (FSP SFAS 140-4 and FIN 46(R)-8). FSP SFAS 140-4 and FIN 46(R)-8 amends FASB SFAS 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, to require public entities to provide additional disclosures about transfers of financial assets. It also amends FIN 46(R), “Consolidation of Variable Interest Entities”, to require public enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities. Additionally, this FSP requires certain disclosures to be provided by a public enterprise that is (a) a sponsor of a qualifying special purpose entity (SPE) that holds a variable interest in the qualifying SPE but was not the transferor of financial assets to the qualifying SPE and (b) a servicer of a qualifying SPE that holds a significant variable interest in the qualifying SPE but was not the transferor of financial assets to the qualifying SPE. The disclosures required by FSP SFAS 140-4 and FIN 46(R)-8 are intended to provide greater transparency to financial statement users about a transferor’s continuing involvement with transferred financial assets and an enterprise’s involvement with variable interest entities and qualifying SPEs. FSP SFAS 140-4 and FIN 46(R) are effective for reporting periods (annual or interim) ending after December 15, 2008.  The implementation of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.

 

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. 

 

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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 Company’s consolidated financial position and results of operations, however, see note 5 of the consolidated financial statements for a further discussion.

 

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 Company’s 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 is reflected in these restated financial statements.

 

The following tables set forth the unaudited consolidated restated financial statements for the year ended December 31, 2008 previously filed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

The following is a summary of the adjustments to our previously issued consolidated balance sheet as of December 31, 2008:

 

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VIST FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)

 

 

 

December 31,

 

 

 

 

 

December 31,

 

 

 

2008

 

 

 

 

 

2008

 

 

 

As Reported

 

Adjustments

 

Reclassifications

 

As Restated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

18,964

 

 

 

 

 

$

18,964

 

Interest-bearing deposits in banks

 

320

 

 

 

 

 

320

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

19,284

 

 

 

 

 

19,284

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale

 

2,283

 

 

 

 

 

2,283

 

Securities available for sale (a)

 

232,380

 

 

 

(5,715

)

226,665

 

Securities held to maturity, fair value 2008 - $1,926; 2007 - $3,100

 

3,060

 

 

 

 

 

3,060

 

Federal Home Loan Bank stock (a)

 

 

 

 

5,715

 

5,715

 

Loans, net of allowance for loan losses 2008 - $8,124; 2007 - $7,264

 

878,181

 

 

 

 

 

878,181

 

Premises and equipment, net

 

6,591

 

 

 

 

 

6,591

 

Identifiable intangible assets

 

4,833

 

 

 

 

 

4,833

 

Goodwill

 

39,732

 

 

 

 

 

39,732

 

Bank owned life insurance

 

18,552

 

 

 

 

 

18,552

 

Other assets (b) 

 

19,968

 

1,206

 

 

 

21,174

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,224,864

 

$

1,206

 

 

 

$

1,226,070

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

Non-interest bearing

 

$

108,645

 

 

 

 

 

$

108,645

 

Interest bearing

 

741,955

 

 

 

 

 

741,955

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

850,600

 

 

 

 

 

850,600

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

120,086

 

 

 

 

 

120,086

 

Federal funds purchased

 

53,424

 

 

 

 

 

53,424

 

Long-term debt

 

50,000

 

 

 

 

 

50,000

 

Junior subordinated debt, at fair value as of December 31, 2008 (c)

 

19,711

 

(1,451

)

 

 

18,260

 

Other liabilities (b)

 

8,554

 

1,517

 

 

 

10,071

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

1,102,375

 

66

 

 

 

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 at December 31, 2008 and no shares at December 31, 2007; Less: discount of $2,307 at December 31, 2008 and no discount at December 31, 2007

 

22,693

 

 

 

 

 

22,693

 

Common stock, $5.00 par value; authorized 20,000,000 shares; issued: 5,768,429 shares at December 31, 2008 and 5,746,998 shares at December 31, 2007

 

28,842

 

 

 

 

 

28,842

 

Stock Warrants

 

2,307

 

 

 

 

 

2,307

 

Surplus

 

64,349

 

 

 

 

 

64,349

 

Retained earnings (d) 

 

14,383

 

374

 

 

 

14,757

 

Accumulated other comprehensive loss (e) 

 

(8,600

)

766

 

 

 

(7,834

)

Treasury stock; 68,354 shares at December 31, 2008 and 89,853 shares at December 31, 2007, at cost

 

(1,485

)

 

 

 

 

(1,485

)

 

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

122,489

 

1,140

 

 

 

123,629

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,224,864

 

$

1,206

 

 

 

$

1,226,070

 

 


(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 Company’s 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 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.

 

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The following is a summary of the adjustments to our previously issued consolidated statements of income for the three months and year ended December 31, 2008:

 

VIST FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2008

(Amounts in thousands, except per share data)

 

 

 

Three Months Ended

 

Twelve Months Ended

 

 

 

December 31, 2008

 

 

 

 

 

December 31, 2008

 

December 31, 2008

 

 

 

 

 

December 31, 2008

 

 

 

As Reported

 

Adjustments

 

Reclassifications

 

As Restated

 

As Reported

 

Adjustments

 

Reclassifications

 

As Restated

 

 

 

(unaudited)

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

13,049

 

 

 

 

 

$

13,049

 

$

54,532

 

 

 

 

 

$

54,532

 

Interest on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

2,733

 

 

 

 

 

2,733

 

9,942

 

 

 

 

 

9,942

 

Tax-exempt

 

280

 

 

 

 

 

280

 

959

 

 

 

 

 

959

 

Dividend income (f) 

 

26

 

 

 

3

 

29

 

533

 

 

 

(140

)

393

 

Other interest income

 

3

 

 

 

 

 

3

 

12

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

16,091

 

 

 

3

 

16,094

 

65,978

 

 

 

(140

)

65,838

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

5,351

 

 

 

 

 

5,351

 

20,874

 

 

 

 

 

20,874

 

Interest on short-term borrowings

 

117

 

 

 

 

 

117

 

1,826

 

 

 

 

 

1,826

 

Interest on securities sold under agreements to repurchase

 

1,111

 

 

 

 

 

1,111

 

4,128

 

 

 

 

 

4,128

 

Interest on long-term debt

 

562

 

 

 

 

 

562

 

2,372

 

 

 

 

 

2,372

 

Interest on junior subordinated debt

 

355

 

 

 

 

 

355

 

1,437

 

 

 

 

 

1,437

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

 

7,496

 

 

 

 

 

7,496

 

30,637

 

 

 

 

 

30,637

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

8,595

 

 

 

3

 

8,598

 

35,341

 

 

 

(140

)

35,201

 

Provision for loan losses

 

2,250

 

 

 

 

 

2,250

 

4,835

 

 

 

 

 

4,835

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income after provision for loan losses

 

6,345

 

 

 

3

 

6,348

 

30,506

 

 

 

(140

)

30,366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer service fees

 

775

 

 

 

 

 

775

 

2,964

 

 

 

 

 

2,964

 

Mortgage banking activities

 

87

 

 

 

 

 

87

 

897

 

 

 

 

 

897

 

Commissions and fees from insurance sales

 

2,761

 

 

 

 

 

2,761

 

11,284

 

 

 

 

 

11,284

 

Brokerage and investment advisory commissions and fees

 

163

 

 

 

 

 

163

 

813

 

 

 

 

 

813

 

Earnings on investment in life insurance

 

187

 

 

 

 

 

187

 

690

 

 

 

 

 

690

 

Gains on sale of loans

 

 

 

 

 

 

 

47

 

 

 

 

 

47

 

Net realized gains (losses) on sales of securities

 

(436

)

 

 

 

 

(436

)

(7,230

)

 

 

 

 

(7,230

)

Other Income (f), (g) 

 

409

 

540

 

(3

)

946

 

1,808

 

566

 

140

 

2,514

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other income

 

3,946

 

540

 

(3

)

4,483

 

11,273

 

566

 

140

 

11,979

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

5,569

 

 

 

 

 

5,569

 

22,078

 

 

 

 

 

22,078

 

Occupancy expense

 

1,422

 

 

 

 

 

1,422

 

4,707

 

 

 

 

 

4,707

 

Furniture and equipment expense

 

686

 

 

 

 

 

686

 

2,690

 

 

 

 

 

2,690

 

Marketing and advertising expense

 

233

 

 

 

 

 

233

 

1,635

 

 

 

 

 

1,635

 

Amortization of identifiable intangible assets

 

171

 

 

 

 

 

171

 

629

 

 

 

 

 

629

 

Professional services

 

797

 

 

 

 

 

797

 

2,594

 

 

 

 

 

2,594

 

Outside processing

 

875

 

 

 

 

 

875

 

3,334

 

 

 

 

 

3,334

 

Insurance expense

 

440

 

 

 

 

 

440

 

1,262

 

 

 

 

 

1,262

 

Other expense

 

1,276

 

 

 

 

 

1,276

 

4,709

 

 

 

 

 

4,709

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other expense

 

11,469

 

 

 

 

 

11,469

 

43,638

 

 

 

 

 

43,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

(1,178

)

540

 

 

 

(638

)

(1,859

)

566

 

 

 

(1,293

)

Income taxes (h) 

 

(2,950

)

183

 

 

 

(2,767

)

(2,050

)

192

 

 

 

(1,858

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,772

 

$

357

 

$

 

$

2,129

 

$

191

 

$

374

 

$

 

$

565

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER SHARE DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

5,697,280

 

 

 

 

 

5,697,280

 

5,689,421

 

 

 

 

 

5,689,421

 

Basic earnings per share

 

$

0.31

 

$

0.07

 

 

 

$

0.38

 

$

0.03

 

$

0.07

 

 

 

$

0.10

 

Average shares outstanding for diluted earnings per share

 

5,697,280

 

 

 

 

 

5,697,280

 

5,689,421

 

 

 

 

 

5,689,421

 

Diluted earnings per share

 

$

0.31

 

$

0.07

 

 

 

$

0.38

 

$

0.03

 

$

0.07

 

 

 

$

0.10

 

Cash dividends declared per share

 

$

0.10

 

 

 

 

 

$

0.10

 

$

0.50

 

 

 

 

 

$

0.50

 

 


(f) Reclassification of 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.             Acquisitions Including Goodwill and Other Intangible Assets

 

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 Consultings operations have been included in the Company’s consolidated financial statements since September 2, 2008.

 

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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, the Company amortizes other intangible assets over the estimated remaining life of each respective asset.  Amortizable intangible assets were composed of the following:

 

 

 

December 31, 2008

 

December 31, 2007

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

 

 

(In thousands)

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

Purchase of client accounts (20 year weighted average useful life)

 

$

4,805

 

$

992

 

$

3,295

 

$

802

 

Employment contracts (7 year weighted average useful life)

 

1,135

 

968

 

1,075

 

810

 

Assets under management (20 year weighted average useful life)

 

184

 

58

 

184

 

49

 

Trade name (20 year weighted average useful life)

 

196

 

196

 

196

 

189

 

Core deposit intangible (7 year weighted average useful life)

 

1,852

 

1,125

 

1,852

 

860

 

Total

 

$

8,172

 

$

3,339

 

$

6,602

 

$

2,710

 

 

 

 

 

 

 

 

 

 

 

Aggregate Amortization Expense:

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2008

 

$

629

 

 

 

 

 

 

 

For the year ended December 31, 2007

 

622

 

 

 

 

 

 

 

For the year ended December 31, 2006

 

636

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Amortization Expense:

 

 

 

 

 

 

 

 

 

For the year ending December 31, 2009

 

648

 

 

 

 

 

 

 

For the year ending December 31, 2010

 

534

 

 

 

 

 

 

 

For the year ending December 31, 2011

 

461

 

 

 

 

 

 

 

For the year ending December 31, 2012

 

249

 

 

 

 

 

 

 

For the year ending December 31, 2013

 

249

 

 

 

 

 

 

 

 

The changes in the carrying amount of goodwill for the years ended December 31, 2008 and 2007 are as follows:

 

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Banking and

 

 

 

Brokerage and

 

 

 

 

 

Financial

 

 

 

Investment

 

 

 

 

 

Services

 

Insurance

 

Services

 

Total

 

 

 

(In thousands)

 

Balance as of January 1, 2007

 

$

27,768

 

$

10,400

 

$

1,021

 

$

39,189

 

Contingent payments during the year 2007

 

 

 

 

 

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

 

 

4.             Restrictions on Cash and Due from Banks

 

The Federal Reserve Bank requires the Bank to maintain average reserve balances.  For the year 2008 and 2007, the average of the daily reserve balances required to be maintained approximated $2.6 million and $1.2 million, respectively.

 

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5.             Securities Available For Sale and Securities Held to Maturity

 

The following table details the amortized cost and estimated fair values of securities available for sale and securities held to maturity were as follows at December 31, 2008 and 2007:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Securities Available For Sale

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(In thousands)

 

December 31, 2008:

 

 

 

 

 

 

 

 

 

Obligations of U.S. Government agencies and corporations

 

$

9,438

 

$

110

 

$

(217

)

$

9,331

 

Mortgage-backed debt securities

 

185,945

 

3,215

 

(3,983

)

185,177

 

State and municipal obligations

 

26,582

 

42

 

(1,591

)

25,033

 

Other debt securities

 

13,172

 

 

(8,682

)

4,490

 

Equity securities

 

3,398

 

34

 

(798

)

2,634

 

 

 

$

238,535

 

$

3,401

 

$

(15,271

)

$

226,665

 

December 31, 2007:

 

 

 

 

 

 

 

 

 

Obligations of U.S. Government agencies and corporations

 

$

5,889

 

$

11

 

$

(2

)

$

5,898

 

Mortgage-backed debt securities

 

136,103

 

683

 

(587

)

136,199

 

State and municipal obligations

 

20,582

 

20

 

(199

)

20,403

 

Other debt securities

 

14,415

 

 

(494

)

13,921

 

Equity securities

 

11,183

 

135

 

(1,258

)

10,060

 

 

 

$

188,172

 

$

849

 

$

(2,540

)

$

186,481

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Securities Held To Maturity

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

3,060

 

$

2

 

$

(1,136

)

$

1,926

 

 

 

$

3,060

 

$

2

 

$

(1,136

)

$

1,926

 

 

 

 

 

 

 

 

 

 

 

December 31, 2007:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

3,078

 

$

79

 

$

(57

)

$

3,100

 

 

 

$

3,078

 

$

79

 

$

(57

)

$

3,100

 

 


This table has been adjusted to reflect the Company’s 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.

 

Proceeds from sales of investment securities available-for-sale were $91.4 million in 2008, $118.7 million in 2007 and $8.0 million in 2006.

 

The following gross gains and losses were realized on sales of securities available for sale in 2008, 2007 and 2006 (in thousands):

 

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Year

 

Gains

 

Losses

 

Net

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

2008

 

$

490

 

$

(7,720

)

$

(7,230

)

2007

 

$

377

 

$

(2,701

)

$

(2,324

)

2006

 

$

519

 

$

(4

)

$

515

 

 

Securities with a market value of $182.8 million and $173.4 million at December 31, 2008 and 2007, respectively, were pledged to secure securities sold under agreements to repurchase, public deposits and for other purposes as required or permitted by law.

 

The federal income tax provision includes ($2,460,000), ($790,000) and $175,000 in 2008, 2007 and 2006, respectively, of federal income taxes related to net gains and losses on the sale of securities.

 

The following table shows the gross unrealized losses and fair value of securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2008 and 2007:

 

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Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

(In thousands)

 

December 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. Government agencies and corporations

 

$

5,707

 

$

(217

)

$

 

$

 

$

5,707

 

$

(217

)

Mortgage-backed debt securities

 

28,084

 

(2,554

)

4,523

 

(1,429

)

32,607

 

(3,983

)

State and municipal obligations

 

22,740

 

(1,591

)

 

 

22,740

 

(1,591

)

Other debt securities

 

1,065

 

(157

)

3,425

 

(8,525

)

4,490

 

(8,682

)

Equity securities

 

162

 

(53

)

1,778

 

(745

)

1,940

 

(798

)

Total

 

$

57,758

 

$

(4,572

)

$

9,726

 

$

(10,699

)

$

67,484

 

$

(15,271

)

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

(In thousands)

 

December 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

881

 

$

(1,136

)

$

 

$

 

$

881

 

$

(1,136

)

Total

 

$

881

 

$

(1,136

)

$

 

$

 

$

881

 

$

(1,136

)

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

(In thousands)

 

December 31, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. Government agencies and corporations

 

$

 

$

 

$

998

 

$

(2

)

$

998

 

$

(2

)

Mortgage-backed debt securities

 

22,708

 

(109

)

27,685

 

(478

)

50,393

 

(587

)

State and municipal obligations

 

11,449

 

(187

)

350

 

(12

)

11,799

 

(199

)

Other debt securities

 

1,483

 

(16

)

10,764

 

(478

)

12,247

 

(494

)

Equity securities

 

1,046

 

(306

)

5,767

 

(952

)

6,813

 

(1,258

)

Total

 

$

36,686

 

$

(618

)

$

45,564

 

$

(1,922

)

$

82,250

 

$

(2,540

)

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

(In thousands)

 

December 31, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Other debt securities

 

$

 

$

 

$

1,000

 

$

(57

)

$

1,000

 

$

(57

)

Total

 

$

 

$

 

$

1,000

 

$

(57

)

$

1,000

 

$

(57

)

 

Other-Than-Temporary-Impairment

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (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.

 

If a decline in market value of a security is determined to be other than temporary, under generally accepted accounting principles, we are required to write these securities down to their estimated fair value.  As of December 31, 2008, we owned single issue and pooled trust preferred securities of other financial institutions and private label

 

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collateralized mortgage obligations whose aggregate historical cost basis is greater than their estimated fair value  We have reviewed these securities and determined that the decreases in estimated fair value are temporary.  We perform 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, we will write them down through a charge to earnings to their then current fair value.

 

At December 31, 2008, there were 65 securities with unrealized losses in the less than twelve month category and 37 securities with unrealized losses in the twelve month or more category.

 

A.            Obligations of U. S. Government Agencies and Corporations.  The unrealized losses on the Company’s investments in obligations of U S Government agencies were caused by illiquidity and dislocation in the market as a result of the ongoing credit crisis.  At December 31, 2008, U. S. Government agencies and corporations bonds represented 4.1% of the total available for sale securities held in the investment securities portfolio.  The Company purchased those investments at par or at a discount relative to their face amount and the contractual cash flows are guaranteed by an agency of the U S Government.  Because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2008.  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 Company’s investments in federal agency mortgage-backed securities and corporate (non-agency) collateralized mortgage obligations were primarily caused by illiquidity and dislocation in the market as a result of the ongoing credit crisis.  At December 31, 2008, federal agency mortgage-backed securities represented 62.1% of the total fair value of available for sale securities held in the investment securities portfolio and corporate collateralized mortgage obligations represented 19.6% 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 US Government.

 

For corporate (non-agency) collateralized mortgage obligations, the Company uses a model to further analyze each issue to determine whether or not the current unrealized losses are other-than-temporary.  This framework applies stress to each issue based on current market data detailing underlying collateral, delinquency, bankruptcy, foreclosure and real estate owned (REO).  Each category is assigned a standard default and severity rate to derive a total custom credit coverage rate.  This custom credit coverage rate is compared to the current credit support along with various other criteria including: percent decline in fair value; credit rating downgrades; probability of repayment of amounts due; changes in average life and the Company’s ability and intent to hold the securities to recovery of its full value to determine whether the issue is other-than-temporarily impaired.

 

Because the decline in the market value of mortgage-backed debt securities is primarily attributable to illiquidity and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2008.  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 Company’s investments in state and municipal obligations were primarily caused by illiquidity, dislocation in the market as a result of the ongoing credit crisis and the deterioration of the creditworthiness of certain monoline bond insurers.  At December 31, 2008, state and municipal obligation bonds represented 11.0% 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 reduce the Company’s federal tax liability.  Because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2008.  Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.

 

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D.            Other Debt Securities.  Included in other debt securities at December 31, 2008, were one asset-backed security which represented 0.1% of the total fair value of available for sale securities, three corporate debt issues representing 1.4% of the total fair value of available for sale securities, three single issue trust preferred securities (“TRUPS”) representing 0.2% and 97.0% of the total fair value of available for sale securities and the total held to maturity securities, respectively, and ten pooled TRUPS representing 0.3% and 3.0% of the total fair value of available for sale securities and the total held to maturity securities, respectively.

 

The Company’s unrealized losses on other debt securities relate primarily to its investment in pooled TRUPS.  The decline in value is primarily attributable to temporary illiquidity and the financial crisis affecting these markets and not necessarily the expected cash flows of the individual securities.  Due to the illiquidity in the market, 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 cash flow characteristics of the securities and has the ability and intent to hold these securities until a recovery of fair value, which may be at maturity; and determined that there was no adverse change in the expected cash flows, it does not consider the investment in these securitized assets to be other-than-temporarily impaired at December 31, 2008.

 

Investments in other debt securities include $16.2 million book value of single issue and pooled TRUPS of other financial institutions.  The issuers in these securities are primarily banks, but some of the pools do include a limited number of insurance companies.  For pooled TRUPS, the Company uses a third party OTTI evaluation model to compare the present value of current cash flows to the previous estimate to ensure there are no adverse changes in cash flows during the quarter.  The OTTI model considers the structure and term of the CDO and the financial condition of the underlying issuers.  Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes.  The current estimate of cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying TRUPS.  Management assumptions used in the model include expected future default rates and prepayments.  The Company assumes no recoveries on defaults and treats all interest payment deferrals as defaults.  In addition, the model “stresses” each CDO, or makes assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate underlying collateral before the CDO could break yield and no longer fully support repayments.  At December 31, 2008, the cash flow model indicated no OTTI impairment charge.  Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.

 

E.             Equity Securities.  Included in equity securities available for sale at December 31, 2008, were equity investments in 30 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 29 equity securities have an average amortized cost of approximately $83,000 and an average fair value of approximately $56,000.  While $1.8 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 December 31, 2008.

 

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The following table details the amortized cost and fair value of securities as of December 31, 2008, by contractual maturity, are shown below.  Expected maturities may differ from contractual maturities because certain securities may be called or prepaid without penalty.

 

 

 

Securities Available for Sale

 

Securities Held to Maturity

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Cost

 

Value

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

1,500

 

$

1,470

 

$

 

$

 

Due after one year through five years

 

1,542

 

825

 

 

 

Due after five years through ten years

 

1,421

 

1,277

 

 

 

Due after ten years

 

44,729

 

35,282

 

3,060

 

1,926

 

Mortgage-backed securities

 

185,945

 

185,177

 

 

 

Equity securities

 

3,398

 

2,634

 

 

 

 

 

$

238,535

 

$

226,665

 

$

3,060

 

$

1,926

 

 


This table has been adjusted to reflect the Company’s 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.

 

6.             Loans

 

The components of loans were as follows:

 

 

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

 

 

 

 

 

 

Residential real estate - 1 to 4 family

 

$

185,866

 

$

198,607

 

Residential real estate - multi family

 

34,869

 

33,457

 

Commercial

 

174,219

 

156,396

 

Commercial, secured by real estate

 

326,442

 

294,932

 

Construction

 

89,556

 

79,414

 

Consumer

 

3,995

 

5,690

 

Home equity lines of credit

 

72,137

 

53,405

 

 

 

887,084

 

821,901

 

Net deferred loan fees

 

(779

)

(903

)

Allowance for loan losses

 

(8,124

)

(7,264

)

Loans, net of allowance for loan losses

 

$

878,181

 

$

813,734

 

 

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Changes in the allowance for loan losses were as follows:

 

 

 

Year Ended December 31,

 

 

 

2008

 

2007

 

2006

 

 

 

(In thousands)

 

Balance, beginning

 

$

7,264

 

$

7,611

 

$

7,619

 

Provision for loan losses

 

4,835

 

998

 

1,084

 

Loans charged off

 

(4,073

)

(1,548

)

(1,305

)

Recoveries

 

98

 

203

 

213

 

Balance, ending

 

$

8,124

 

$

7,264

 

$

7,611

 

 

The recorded investment in impaired loans not requiring an allowance for loan losses was $3.2 million at December 31, 2008 and $6.0 million at December 31, 2007.  The recorded investment in impaired loans requiring an allowance for loan losses was $7.5 million and $2.1 million at December 31, 2008 and 2007, respectively.  At December 31, 2008 and 2007, the related allowance for loan losses associated with those loans was $2.3 million and $1.3 million, respectively.  For the years ended December 31, 2008, 2007 and 2006, the average recorded investment in these impaired loans was $8.8 million, $8.9 million and $9.9 million, respectively; and the interest income recognized on impaired loans was $33,000 for 2008, $407,000 for 2007 and $702,000 for 2006.

 

Loans on which the accrual of interest has been discontinued amounted to $10.7 million and $3.6 million at December 31, 2008 and 2007, respectively.  Loan balances past due 90 days or more and still accruing interest but which management expects will eventually be paid in full, amounted to $140,000 and $3.0 million at December 31, 2008 and 2007, respectively.

 

7.             Loan Servicing

 

Loans serviced for others are not included in the accompanying consolidated balance sheets.  The unpaid principal balance of these loans as of December 31, 2008 and 2007 was $19.7 million and $22.2 million, respectively.

 

The balance of capitalized servicing rights included in other assets at December 31, 2008 and 2007, was $295,000 and $491,000, respectively.  The fair value of these rights was $295,000 and $491,000, respectively.  The fair value of servicing rights was determined using a 9.5 percent discount rate for 2008 and 2007.

 

The following summarizes mortgage servicing rights capitalized and amortized:

 

 

 

Years Ended

 

 

 

December 31,

 

 

 

2008

 

2007

 

2006

 

 

 

(In thousands)

 

Mortgage servicing rights capitalized

 

$

6

 

$

8

 

$

18

 

Mortgage servicing rights amortized

 

$

202

 

$

143

 

$

77

 

 

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8.             Premises and Equipment

 

Components of premises and equipment were as follows:

 

 

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Land and land improvements

 

$

263

 

$

263

 

Buildings

 

873

 

865

 

Leasehold improvements

 

3,910

 

3,463

 

Furniture and equipment

 

11,567

 

10,879

 

 

 

16,613

 

15,470

 

Less accumulated depreciation

 

10,022

 

8,578

 

Premises and equipment, net

 

$

6,591

 

$

6,892

 

 

Certain facilities and equipment are leased under various operating leases.  Rental expense for these leases was $3.3 million, $2.9 million and $3.1 million for the years ended December 31, 2008, 2007 and 2006, respectively.

 

Future minimum rental commitments under non-cancelable leases as of December 31, 2008 were as follows (in thousands):

 

2009

 

$

2,517

 

2010

 

2,296

 

2011

 

1,860

 

2012

 

1,469

 

2013

 

1,478

 

Subsequent to 2013

 

14,122

 

Total minimum payments

 

$

23,742

 

 

9.             Deposits

 

The components of deposits were as follows:

 

 

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Demand, non-interest bearing

 

$

108,645

 

$

109,718

 

Demand, interest bearing

 

231,504

 

221,071

 

Savings

 

75,706

 

88,151

 

Time, $100,000 and over

 

195,812

 

90,906

 

Time, other

 

238,933

 

202,799

 

Total deposits

 

$

850,600

 

$

712,645

 

 

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At December 31, 2008, the scheduled maturities of time deposits were as follows (in thousands):

 

2009

 

$

318,390

 

2010

 

73,137

 

2011

 

12,595

 

2012

 

18,628

 

2013

 

11,863

 

Thereafter

 

132

 

 

 

$

434,745

 

 

10.          Borrowings and Other Obligations

 

At December 31, 2008 and 2007, the Bank had purchased federal funds from the FHLB and correspondent banks totaling $53.4 million and $118.2 million, respectively.

 

During 2007, the Bank entered into securities sold under agreements to repurchase totaling $65 million.  These securities sold under agreements to repurchase have 8 to 10 year terms, carry a fixed rate or a variable interest rate spread to the three month LIBOR rate ranging from 3.25% to 4.85%, and, at the contractual reset dates, may either convert to a fixed rate or variable rate loan or may be called.  During 2008, the Bank entered into securities sold under agreements to repurchase totaling $35 million.  These securities sold under agreements to repurchase have 8 to 10 year terms, carry a fixed rate or a variable interest rate spread to the three month LIBOR rate ranging from 1.95% to 4.75%, and, at the contractual reset dates, may either convert to a fixed rate or variable rate loan or may be called.  Total borrowings under these repurchase agreements were $100.0 million and $85.0 million at December 31, 2008 and 2007, respectively.

 

These repurchase agreements are treated as financings with the obligations to repurchase securities sold reflected as a liability in the balance sheet.  The dollar amount of securities underlying the agreements remains recorded as an asset, although the securities underlying the agreements are delivered to the broker who arranged the transactions.  In certain instances, the brokers may have sold, loaned, or disposed of the securities to other parties in the normal course of their operations, and have agreed to deliver to the Company substantially similar securities at the maturity of the agreement.  The broker/dealers who participated with the Company in these agreements are primarily broker/dealers reporting to the Federal Reserve Bank of New York.  Securities underlying sales of securities under repurchase agreements consisted of investment securities that had an amortized cost of $106.2 million and a market value of $108.3 million at December 31, 2008.

 

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Securities sold under agreements to repurchase at December 31, 2008 and 2007 consisted of the following:

 

 

 

 

 

 

 

Weighted

 

 

 

Amount

 

Average Rate

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(In thousands)

 

 

 

 

 

Fixed rate securities sold under agreements to repurchase maturing:

 

 

 

 

 

 

 

 

 

2013

 

$

-

$

20,000

(1)

%

4.85

%

2015

 

30,000

(2)(4)

15,000

(2)

2.60

 

3.25

 

2017

 

50,000

(3)

50,000

(3)

4.57

 

3.45

 

2018

 

20,000

(5)

 

4.75

 

 

Total securities sold under agreements to repurchase

 

$

100,000

 

$

85,000

 

4.02

%

3.75

%

 


(1) $20 million called during 2008

(2) $15 million callable 12/26/2009

(3) $5 million callable 03/05/2009; $20 million callable 04/30/2009; $25 million callable 03/22/2009

(4) $15 million callable 01/17/2010

(5) $20 million callable 05/22/2009

 

In addition, the Bank enters into agreements with bank customers as part of cash management services where the Bank sells securities to the customer overnight with the agreement to repurchase them at par.  Securities sold under agreements to repurchase generally mature one day from the transaction date.

 

The securities underlying the agreements are under the Bank’s control.  The outstanding customer balances and related information of securities sold under agreements to repurchase are summarized as follows:

 

 

 

Years Ended

 

 

 

December 31,

 

 

 

2008

 

2007

 

2006

 

 

 

(Dollars in thousands)

 

Average balance during the year

 

$

25,000

 

$

26,781

 

$

22,014

 

Average interest rate during the year

 

2.10

%

4.05

%

4.13

%

Weighted average interest rate at year-end

 

1.10

%

3.64

%

4.53

%

Maximum month-end balance during the year

 

$

30,615

 

$

32,560

 

$

31,547

 

Balance as of year-end

 

$

20,086

 

$

25,881

 

$

25,987

 

 

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Long-term debt at December 31, 2008 and 2007 consisted of the following:

 

 

 

Amount

 

Weighted
Average Rate

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(In thousands)

 

 

 

 

 

Fixed rate FHLB advances maturing:

 

 

 

 

 

 

 

 

 

2008

 

$

 

$

15,000

 

%

4.06

%

2009

 

30,000

 

30,000

 

4.28

 

4.28

 

2010

 

10,000

 

 

3.45

 

 

2011

 

10,000

 

 

3.53

 

 

Total long term debt

 

$

50,000

 

$

45,000

 

3.96

%

4.20

%

 

The Bank has a maximum borrowing capacity with the FHLB of approximately $189.2 million, of which advances of $53.4 million of overnight advances and $50.0 million of fixed rate term advances and letters of credit of $13.1 million were outstanding at December 31, 2008.  The letters of credit are used to collateralize public deposits.  Advances and letters of credit from the FHLB are secured by qualifying assets of the Bank.

 

The Company has entered into a contract with a provider of information systems services for the supply of such services through April 2011.  The Company is required to make minimum annual payments as follows, whether or not it uses the services (in thousands):

 

Year Ended

 

Amount

 

2009

 

$

477

 

2010

 

501

 

2011

 

167

 

Total minimum payments

 

$

1,145

 

 

Total expenditures during 2008, 2007 and 2006 in connection with the contract were $1.9 million, $1.9 million and $1.7 million, respectively.

 

11.                               Junior Subordinated Debt

 

First Leesport Capital Trust I, a Delaware statutory business trust, was formed on March 9, 2000 and is a wholly-owned subsidiary of the Company.  The Trust issued $5 million of 107/8% fixed rate capital trust pass-through securities to investors. First Leesport Capital Trust I purchased $5 million of fixed rate junior subordinated deferrable interest debentures from VIST Financial Corp.  The debentures are the sole asset of the Trust.  The terms of the junior subordinated debentures are the same as the terms of the capital securities.  The obligations under the debentures constitute a full and unconditional guarantee by VIST Financial Corp. of the obligations of the Trust under the capital securities.  The capital securities are redeemable by VIST Financial Corp. on or after March 9, 2010, at stated premiums, or earlier if the deduction of related interest for federal income taxes is prohibited, classification as Tier 1 Capital is no longer allowed, or certain other contingencies arise.  The capital securities must be redeemed upon final maturity of the subordinated debentures on March 9, 2030.  In October 2002, the Company entered into an interest rate swap agreement with a notional amount of $5 million that effectively converts the securities to a floating interest rate of six month LIBOR plus 5.25% (8.36% at December 31, 2008).  In June, 2003, the Company purchased a six month LIBOR cap with a rate of 5.75% to create protection against rising interest rates for the above mentioned $5 million interest rate swap.  Interest rate caps are generally used to limit the exposure from the repricing and maturity of liabilities and to limit the exposure created by other interest rate swaps.

 

On September 26, 2002, the Company established Leesport Capital Trust II, a Delaware statutory business trust, in which the Company owns all of the common equity.  Leesport Capital Trust II issued $10 million of mandatory redeemable capital securities carrying a floating interest rate of three month LIBOR plus 3.45% (6.25%

 

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at December 31, 2008).  These debentures are the sole assets of the Trust.  The terms of the junior subordinated debentures are the same as the terms of the capital securities.  The obligations under the debentures constitute a full and unconditional guarantee by VIST Financial Corp. of the obligations of the Trust under the capital securities. These securities must be redeemed in September 2032, but may be redeemed on or after November 7, 2007 or earlier in the event that the interest expense becomes non-deductible for federal income tax purposes or if the treatment of these securities is no longer qualified as Tier 1 capital for the Company.  As of December 31, 2008, the Company has not exercised the call option on these debentures.  In September 2008, the Company entered into an interest rate swap agreement that effectively converts the $10 million of adjustable-rate capital securities to a fixed interest rate of 7.25%.  Interest began accruing on the Leesport Capital Trust II swap in February 2009 (see note 17 of the consolidated financial statements).

 

On June 26, 2003, Madison established Madison Statutory Trust I, a Connecticut statutory business trust.  Pursuant to the purchase of Madison on October 1, 2004, the Company assumed Madison Statutory Trust I in which the Company owns all of the common equity.  Madison Statutory Trust I issued $5 million of mandatory redeemable capital securities carrying a floating interest rate of three month LIBOR plus 3.10% (6.58% at December 31, 2008).  These debentures are the sole assets of the Trusts.  The terms of the junior subordinated debentures are the same as the terms of the capital securities.  The obligations under the debentures constitute a full and unconditional guarantee by VIST Financial Corp. of the obligations of the Trust under the capital securities. These securities must be redeemed in June 2033, but may be redeemed on or after September 26, 2008 or earlier in the event that the interest expense becomes non-deductible for federal income tax purposes or if the treatment of these securities is no longer qualified as Tier 1 capital for the Company.  In September 2008, the Company entered into an interest rate swap agreement that effectively converts the $5 million of adjustable-rate capital securities to a fixed interest rate of 6.90%.  Interest began accruing on the Madison Statutory Trust I swap in March 2009 (see note 17 of the consolidated financial statements).

 

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” which was revised in December 2003.  This Interpretation provides guidance for the consolidation of variable interest entities (VIEs).  First Leesport Capital Trust I, Leesport Capital Trust II and Madison Statutory Trust I (the “Trusts”) each qualify as a variable interest entity under FIN 46(R).  The Trusts issued mandatory redeemable preferred securities (Trust Preferred Securities) to third-party investors and loaned the proceeds to the Company.  The Trusts hold, as their sole assets, subordinated debentures issued by the Company.

 

FIN 46 required the Company to deconsolidate First Leesport Capital Trust I and Leesport Capital Trust II from the consolidated financial statements as of March 31, 2004 and to deconsolidate Madison Statutory Trust I as of December 31, 2004.  There has been no restatement of prior periods. The impact of this deconsolidation was to increase junior subordinated debentures by $20,150,000 and reduce the mandatory redeemable capital debentures line item by $20,150,000 which had represented the trust preferred securities of the trust.  For regulatory reporting purposes, the Federal Reserve Board has indicated that the preferred securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice. If regulators make a determination that Trust Preferred Securities can no longer be considered in regulatory capital, the securities become callable and the Company may redeem them.  The adoption of FIN 46 did not have an impact on the Company’s results of operations or liquidity.

 

12.                               Employee Benefits

 

The Company has an Employee Stock Ownership Plan (ESOP) to provide its employees with future retirement plan assistance.  The ESOP invests primarily in the Company’s common stock. Contributions to the Plan are at the discretion of the Board of Directors.  For the years ended December 31, 2008, 2007 and 2006, no amounts were accrued to provide for contribution of shares to the Plan.  During 2008, 2007 and 2006 respectively, no shares, no shares and 11,873 shares were purchased on behalf of the ESOP.  The ESOP plan was terminated as of June 30, 2006.  The Company received a favorable determination from the Internal Revenue Service that the ESOP is qualified under Sections 401(a), 409(1) and 4975(e)(7) of the Internal Revenue Code of 1986.

 

The Company has a 401(k) Salary Deferral Plan.  This plan covers all eligible employees who elect to contribute to the Plan.  An employee who has attained 18 years of age and has been employed for at least 30 calendar days is eligible to participate in the Plan effective with the next quarterly enrollment period.  Employees become eligible for the Company contribution to the Salary Deferral Plan at each future enrollment period upon completion of one year of service.  The Company contributes 150% match of the first 2% of a participants pay

 

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deferred into the Plan plus 100% of next 1%, 50% of next 4% for a total available match of 6%.  Contributions from the Company vest to the employee over a five year schedule.  The annual expense included in salaries and employee benefits representing the expense of the Company’s contribution was $713,000, $715,000, and $708,000 for the years ended December 31, 2008, 2007, and 2006, respectively.

 

The Company has entered into deferred compensation agreements with certain directors and a salary continuation plan for certain key employees.  At December 31, 2008 and 2007, the present value of the future liability for these agreements was $1.6 million for both years.  For the years ended December 31, 2008, 2007 and 2006, $159,000, $168,000 and $214,000, respectively, was charged to expense in connection with these agreements.  To fund the benefits under these agreements, the Company is the owner and beneficiary of life insurance policies on the lives of certain directors and employees.  These bank-owned life insurance policies had an aggregate cash surrender value of $18.6 million and $17.9 million at December 31, 2008 and 2007, respectively.

 

The Company has a non-compensatory Employee Stock Purchase Plan (ESPP).  Under the ESPP, employees of the Company who elect to participate are eligible to purchase common stock at prices up to a 5 percent discount from the market value of the stock.  The ESPP does not allow the discount in the event that the purchase price would fall below the Company’s most recently reported book value per share.  The ESPP allows an employee to make contributions through payroll deductions to purchase common shares up to 15 percent of annual compensation.  The total number of shares of common stock that may be issued pursuant to the ESPP is 250,886.  As of December 31, 2008, a total of 52,990 shares have been issued under the ESPP.

 

13.                               Stock Option Plans and Shareholders’ Equity

 

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 Plan 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 stock’s par value.  Options granted under the Plan 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 participant’s termination of employment or one year from the date of the participant’s death or disability.  As of December 31, 2008, a total of 148,072 shares have been issued under the ESIP.  This ESIP plan 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 Plan 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 Plan will be equal to the fair market value of the Company’s 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 participant’s employment, or twelve months from the date of the participant’s death or disability.  As of December 31, 2008, a total of 21,166 shares have been issued under the IDSOP.  This IDSOP plan 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 Equity Incentive Plan is equal to 12.5% of the outstanding shares of the Company’s common stock on the date of approval of the Plan and is subject to automatic annual increases by an amount equal to 12.5% of any increase in the number of the Company’s outstanding shares of common stock during the preceding year or such lesser number as determined by the Company’s 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 Company’s 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

 

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retirement.  As of December 31, 2008, no shares have been issued under the EIP.  This EIP will expire on April 17, 2017.

 

A combined summary of stock option transactions under the Plans is presented in the following table:

 

 

 

Years Ended December 31,

 

 

 

2008

 

2007

 

2006

 

 

 

 

 

Weighted-

 

 

 

Weighted-

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Average

 

 

 

Average

 

 

 

 

 

Exercise

 

 

 

Exercise

 

 

 

Exercise

 

 

 

Options

 

Price

 

Options

 

Price

 

Options

 

Price

 

Outstanding at the beginning of the year

 

443,562

 

$

20.15

 

438,502

 

$

20.20

 

380,720

 

$

18.29

 

Granted

 

292,229

 

13.07

 

24,978

 

19.11

 

162,356

 

22.88

 

Exercised

 

 

 

(5,249

)

13.42

 

(83,488

)

16.94

 

Forfeited

 

(11,589

)

19.56

 

(12,402

)

22.31

 

(17,400

)

19.27

 

Expired

 

(15,313

)

20.29

 

(2,267

)

21.96

 

(3,686

)

19.88

 

Outstanding at the end of the year

 

708,889

 

$

17.23

 

443,562

 

$

20.15

 

438,502

 

$

20.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 31

 

374,892

 

$

19.87

 

323,384

 

$

19.49

 

236,676

 

$

18.37

 

 

Options available for grant at December 31, 2008 were 406,921.

 

Other information regarding options outstanding and exercisable as of December 31, 2008 is as follows:

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

Average

 

Weighted

 

 

 

Weighted

 

 

 

 

 

Remaining

 

Average

 

 

 

Average

 

 

 

Options

 

Term

 

Exercise

 

Options

 

Exercise

 

Range of Exercise Price

 

Outstanding

 

in Years

 

Price

 

Outstanding

 

Price

 

$   8.00  to  $   9.99

 

141,500

 

10.0

 

$

9.43

 

 

$

 

   10.00  to     11.99

 

19,209

 

7.2

 

11.12

 

6,536

 

11.31

 

   12.00  to     13.99

 

54,798

 

3.8

 

12.99

 

43,298

 

12.79

 

   14.00  to     15.49

 

11,550

 

3.7

 

14.68

 

11,550

 

14.68

 

   15.50  to     16.99

 

29,824

 

3.1

 

15.97

 

29,824

 

15.97

 

   17.00  to     18.49

 

140,924

 

9.1

 

17.41

 

10,868

 

17.99

 

   18.50  to     21.49

 

160,579

 

6.7

 

21.21

 

160,301

 

21.21

 

   21.50  to     22.99

 

131,037

 

7.5

 

22.90

 

101,125

 

22.89

 

   23.00  to     24.49

 

19,468

 

8.0

 

23.25

 

11,390

 

23.23

 

 

 

708,889

 

7.6

 

$

17.23

 

374,892

 

19.87

 

 

Proceeds from stock option exercises from director and employee stock purchase plans totaled $0 in 2008, $222,000 in 2007 and $1.8 million in 2006.

 

As of December 31, 2008, 2007 and 2006, the aggregate intrinsic value of options outstanding was $0, $350,000 and $1.1 million, respectively.  As of December 31, 2008, 2007 and 2006, the weighted average remaining term of options outstanding was 7.6 years, 7.1 years and 8.2 years, respectively.  As of December 31, 2008, 2007 and 2006, the aggregate intrinsic value of options exercisable was $0, $350,000 and $1.0 million, respectively.  As of December 31, 2008, 2007 and 2006, the weighted average remaining term of options exercisable was 6.0 years, 6.4 years and 7.0 years, respectively.

 

The aggregate intrinsic value of a stock option represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holder had all option holders exercised their options on December 31, 2008.  The aggregate intrinsic value of a stock option will change based on fluctuations in the market value of the Company’s stock.

 

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Stock-Based Compensation Expense.  As stated in Note 1 — Significant Accounting Policies, the Company adopted the provisions of SFAS No. 123R on January 1, 2006.  SFAS No. 123R requires that stock-based compensation to employees be recognized as compensation cost in the consolidated statements of income based on their fair values on the measurement date, which, for the Company, is the date of grant.  Included in the results for the years ended December 31, 2008, 2007 and 2006 were compensation costs relating to the adoption of Statement No. 123R of approximately $319,000, $255,000 and $245,000, respectively, or $211,000 net of tax, $168,000 net of tax and $162,000 net of tax, respectively.  Cash flows from financing activities for 2008 and 2007 included $0 and $12,000, respectively, in cash inflows from excess tax benefits related to stock compensation.  As of December 31, 2008 and 2007, there was approximately $436,000 and $414,000, respectively, of total unrecognized compensation cost related to non-vested stock options under the plans.

 

Valuation of Stock-Based Compensation.  The fair value of options granted during 2008, 2007 and 2006 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

 

 

 

Years ended December 31,

 

 

 

2008

 

2007

 

2006

 

 

 

 

 

 

 

 

 

Dividend yield

 

6.09

%

3.75

%

3.06

%

Expected life

 

7 years

 

7 years

 

7 years

 

Expected volatility

 

21.52

%

16.91

%

17.43

%

Risk-free interest rate

 

2.54

%

3.91

%

4.61

%

Weighted average fair value of options granted

 

$

1.29

 

$

2.76

 

$

4.47

 

 

The expected volatility is based on historic volatility.  The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant.  The expected life is based on historical exercise experience.  The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

 

Stock Repurchase Plan.  On July 17, 2007, the Company announced that it has increased the number of shares remaining for repurchase under its stock repurchase plan, originally effective January 1, 2003, and extended May 20, 2004, to 150,000 shares.  During 2008, the Company repurchased no shares of common stock.  At December 31, 2008, the maximum number of shares that may yet be purchased under the plan is 115,000.

 

As a result of the issuance of the Series A Preferred Stock, prior to the earlier of the third anniversary date of the issuance of the Series A Preferred Stock (December 19, 2011) or the date on which the Series A Preferred Stock have been redeemed in whole or the Treasury has transferred all of the Series A Preferred Stock to third parties which are not affiliates of the Treasury, the Company is restriced against redeeming, purchasing or acquiring any shares of Common Stock or other capital stock or other equity securities of any kind of the Company without the consent of the Treasury.

 

14.                               Income Taxes

 

The components of federal and state income tax expense were as follows:

 

 

 

Years ended December 31,

 

 

 

2008

 

 

 

 

 

 

 

(As Restated)

 

2007

 

2006

 

 

 

(In thousands)

 

Current federal income tax expense

 

$

(1,708

)

$

1,791

 

$

2,718

 

Current state income tax expense

 

195

 

 

 

Deferred federal and state income tax expense (benefit)

 

(345

)

(45

)

121

 

 

 

$

(1,858

)

$

1,746

 

$

2,839

 

 

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Reconciliation of the statutory federal income tax expense computed at 34% to the income tax expense included in the consolidated statements of income is as follows:

 

 

 

Years ended December 31,

 

 

 

2008

 

 

 

 

 

 

 

(As Restated)

 

2007

 

2006

 

 

 

(In thousands)

 

Federal income tax at statutory rate

 

$

(440

)

$

3,133

 

$

4,077

 

State tax expense

 

195

 

 

 

Tax exempt interest

 

(958

)

(729

)

(584

)

Interest disallowance

 

112

 

109

 

78

 

Bank owned life insurance

 

(236

)

(227

)

(165

)

Tax credits

 

(600

)

(600

)

(600

)

Incentive stock option expense

 

101

 

87

 

54

 

Other

 

(32

)

(27

)

(21

)

 

 

$

(1,858

)

$

1,746

 

$

2,839

 

 

Deferred income taxes reflect temporary differences in the recognition of revenue and expenses for tax reporting and financial statement purposes, principally because certain items, such as, the allowance for loan losses and loan fees are recognized in different periods for financial reporting and tax return purposes.  A valuation allowance has not been established for deferred tax assets.  Realization of the deferred tax assets is dependent on generating sufficient taxable income.  Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized.  Deferred tax assets are recorded in other assets.

 

Net deferred tax assets consisted of the following components:

 

 

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Deferred tax assets:

 

 

 

 

 

Allowance for loan losses

 

$

2,762

 

$

2,470

 

Deferred compensation

 

550

 

530

 

Net operating loss carryovers

 

508

 

1,247

 

Net unrealized losses on available for sale securities

 

4,036

 

575

 

Non-qualified stock option expense

 

8

 

45

 

Deferred issuance costs

 

199

 

210

 

Other

 

202

 

40

 

 

 

 

 

 

 

Total deferred tax assets

 

8,265

 

5,117

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

Premises and equipment

 

122

 

(407

)

Goodwill

 

(776

)

(807

)

Core deposit intangible

 

(248

)

(337

)

Mortgage servicing rights

 

(100

)

(167

)

Loans receivable

 

 

(62

)

Prepaid expense and deferred loan costs

 

(556

)

(436

)

Other

 

 

 

 

 

 

 

 

 

Total deferred tax liabilities

 

(1,558

)

(2,216

)

 

 

 

 

 

 

Net deferred tax assets

 

$

6,707

 

$

2,901

 

 

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As of December 31, 2008, the Company has utilized all of the federal net operating loss carryovers from the acquisition of Madison.  The utilization of these losses is subject to annual limitation under Section 382 of the Internal Revenue Code.  The Company has approximately $5.1 million of state net operating loss carryovers which will expire in 2024.

 

In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, Accounting for Income Taxes.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company adopted FIN 48 as of January 1, 2007.  The Company has evaluated its tax positions as of December 31, 2008.  A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that has a likelihood of being realized on examination of more than 50 percent.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.  Under the “more likely than not” threshold guidelines, the Company believes no significant uncertain tax positions exist, either individually or in the aggregate, that would give rise to the non-recognition of an existing tax benefit.  As of December 31, 2008, the Company had no material unrecognized tax benefits or accrued interest and penalties.  The Company’s policy is to account for interest as a component of interest expense and penalties as a component of other expense.  The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the Commonwealth of Pennsylvania.  The Company is no longer subject to examination by U.S. Federal taxing authorities for the years before January 1, 2005 and for all state income taxes through December 31, 2004.

 

15.                               Transactions with Executive Officers and Directors

 

The Bank has had banking transactions in the ordinary course of business with its executive officers and directors and their related interests on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.  At December 31, 2008 and 2007, these persons were indebted to the Bank for loans totaling $10.6 million and $7.9 million, respectively.  During 2008, $0.7 million of new loans were made and repayments totaled $2.0 million.

 

16.                               Regulatory Matters and Capital Adequacy

 

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on their financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.  The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets.  Management believes, as of December 31, 2008, that the Company and the Bank meet all minimum capital adequacy requirements to which they are subject.

 

As of December 31, 2008, the most recent notification from the Bank’s primary regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  There are no conditions or events since that notification that management believes have changed its category.

 

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The Company’s and the Bank’s actual capital amounts and ratios are presented below:

 

 

 

 

 

 

 

 

 

 

 

Minimum

 

 

 

 

 

 

 

 

 

 

 

To Be Well

 

 

 

 

 

 

 

Minimum

 

Capitalized Under

 

 

 

 

 

 

 

For Capital

 

Prompt Corrective

 

 

 

Actual

 

Adequacy Purposes

 

Action Provisions

 

 

 

Amount

 

 Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

 

(Dollar amounts in thousands)

 

As of December 31, 2008 (As Restated):

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

VIST Financial Corp.,

 

$

112,846

 

12.77

%

$

>70,716

 

>8.00

%

N/A

 

N/A

 

VIST Bank

 

96,873

 

11.11

 

>69,776

 

>8.00

 

$

>87,220

 

>10.00

%

Tier 1 capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

VIST Financial Corp.,

 

104,722

 

11.85

 

>35,358

 

>4.00

 

N/A

 

N/A

 

VIST Bank

 

88,749

 

10.18

 

>34,888

 

>4.00

 

>52,332

 

>6.00

 

Tier 1 capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

VIST Financial Corp.,

 

104,722

 

9.07

 

>46,182

 

>4.00

 

N/A

 

N/A

 

VIST Bank

 

88,749

 

7.73

 

>45,933

 

>4.00

 

>57,416

 

>5.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

VIST Financial Corp.,

 

$

91,520

 

11.12

%

$

>65,844

 

>8.00

%

N/A

 

N/A

 

VIST Bank

 

85,258

 

10.51

 

>64,918

 

>8.00

 

$

>81,148

 

>10.00

%

Tier 1 capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

VIST Financial Corp.,

 

84,256

 

10.24

 

>32,922

 

>4.00

 

N/A

 

N/A

 

VIST Bank

 

77,994

 

9.61

 

>32,459

 

>4.00

 

>48,689

 

>6.00

 

Tier 1 capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

VIST Financial Corp.,

 

84,256

 

7.99

 

>42,157

 

>4.00

 

N/A

 

N/A

 

VIST Bank

 

77,994

 

7.47

 

>41,763

 

>4.00

 

>52,204

 

>5.00

 

 

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 Company’s common stock, par value $5.00 per share, for an aggregate purchase price of $25,000,000 in cash.

 

The Series A Preferred Stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter.  Under ARRA, the Series A Preferred Stock may be redeemed at any time following consultation by the Company’s primary bank regulator and Treasury, not withstanding the terms of the original transaction documents.  Under FAQ’s issued recently by Treasury, participants in the Capital Purchase Program desiring to repay part of an investment by Treasury must repay a minimum of 25% of the issue price of the preferred stock.

 

Prior to the earlier of the third anniversary date of the issuance of the Series A Preferred Stock (December 19, 2011) or the date on which the Series A Preferred Stock have been redeemed in whole or the Treasury has transferred all of the Series A Preferred Stock to third parties which are not affiliates of the Treasury, the Company can not increase its common stock dividend from the last quarterly cash dividend per share ($0.10) declared on the common stock prior to October 14, 2008 without the consent of the Treasury,

 

The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $10.30 per share of common stock.  If the Company receives aggregate gross cash proceeds of not less than $25,000,000 from qualified equity offerings on or prior to December 31, 2009, the number of shares of common stock issuable pursuant to exercise of the Warrant will be reduced by one half of the original number of shares underlying the Warrant.  In addition, in the event that the Company redeems the Series A Preferred Stock, the Company can repurchase the warrant at “fair value” as defined in the investment agreement with Treasury.

 

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Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company.  At December 31, 2008, the Bank had approximately $10.0 million available for payment of dividends to the Company.  Loans or advances are limited to 10 percent of the Bank’s capital stock and surplus on a secured basis.  At December 31, 2008, the Bank had a $1.0 million loan outstanding to VIST Insurance.  At December 31, 2007, the Bank had no secured loans outstanding to the Company or any of its subsidiaries.

 

As of January 20, 2009, the Company had declared a $0.10 per share cash dividend for common shareholders of record on February 2, 2009, payable February 13, 2009.  As of December 19, 2007, the Company had declared a $.20 per share cash dividend for common shareholders of record on January 2, 2008, payable January 15, 2008.

 

For 2008, dividends on the Series A Preferred Stock were immaterial and were not included in income available for common shareholders or basic and diluted earnings per common share.

 

In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

 

17.                               Financial Instruments with Off-Balance Sheet Risk

 

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and letters of credit.  Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.

 

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments.  The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet investments.

 

A summary of the Bank’s financial instrument commitments is as follows:

 

 

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Commitments to extend credit:

 

 

 

 

 

Loan origination commitments

 

$

59,093

 

$

79,886

 

Unused home equity lines of credit

 

48,919

 

52,030

 

Unused business lines of credit

 

138,181

 

167,136

 

Total commitments to extend credit

 

$

246,193

 

$

299,052

 

 

 

 

 

 

 

Standby letters of credit

 

$

14,479

 

$

18,135

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  The Bank evaluates each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.

 

Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  The majority of these standby letters of credit expire within the next twelve months.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments.  The Bank requires collateral supporting these letters of credit as deemed necessary.  Management believes that the proceeds obtained through a liquidation of such collateral would be

 

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sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees.  The current amount of the liability as of December 31, 2008 and 2007 for guarantees under standby letters of credit issued is not material.

 

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 Company’s 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.  For the period ended December 31, 2008 the estimated credit spreads the Company used in determining the fair value of its junior subordinated debt were incorrect.  Due to the escalation of the credit crisis in the fourth quarter of 2008, credit spreads widened as the underlying credit quality of the institutions issuing these debentures deteriorated.  Short-term interest rate indexes (LIBOR) declined several hundred basis points in the fourth quarter of 2008.  The Company has adjusted these credit spreads to reflect a more appropriate fair value in the restated financial statements.

 

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 Company’s 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 (8.36% at December 31, 2008), and the Company receives a fixed rate equal to the interest that the Company is obligated to pay on the related trust preferred securities (10.875%).

 

In September 2008, the Company entered into two interest rate swaps to manage its exposure to interest rate risk.  The interest rate swap transactions involved the exchange of the Company’s floating rate interest rate payment on its $15 million in floating rate junior subordinated debt for a fixed rate interest payment without the exchange of the underlying principal amount.  The first interest rate swap agreement effectively converts the $10 million of adjustable-rate capital securities to a fixed interest rate of 7.25%. Interest began accruing on this swap in February 2009. The second interest rate swap agreement effectively converts the $5 million of adjustable-rate capital securities to a fixed interest rate of 6.90%. Interest began accruing on this swap in March 2009.  Entering into interest rate derivatives potentially exposes the Company to the risk of counterparties’ failure to fulfill their legal obligations including, but not limited to, potential amounts due or payable under each derivative contract.  Notional principal amounts are often used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller.  These interest rate swaps are recorded on the balance sheet at fair value through adjustments to other income in the consolidated results of operations.  The fair value measurement of the interest rate swaps is determined by netting the discounted future fixed or variable cash payments and the discounted expected fixed or variable cash receipts based on an expectation of future interest rates derived from observed market interest rate curves and volatilities.

 

The estimated fair values of the interest rate swap agreements represent the amount the Company would have expected to receive to terminate such contract.  At December 31, 2008 and 2007, the estimated fair value of the interest rate swap agreements was $(1,325,000) and $82,000, respectively, and was offset by an increase in the fair value of the related trust preferred security.  The swap agreements expose the Company to market and credit risk if the counterparty fails to perform.  Credit risk is equal to the extent of a fair value gain on the swaps.  The Company manages this risk by entering into these transactions with high quality counterparties.

 

During the years ended December 31, 2008, 2007 and 2006, the Company recognized amounts received or receivable under the agreement of $100,000, $4,000 and $27,000, which were recorded as a reduction of interest expense on the trust preferred securities.

 

Interest rate caps are generally used to limit the exposure from the repricing and maturity of liabilities and to limit the exposure created by other interest rate swaps.  In June 2003, the Company purchased a six month LIBOR cap to create protection against rising interest rates for the above mentioned $5 million interest rate swap.  The initial premium related to this interest rate cap was $102,000.  At December 31, 2008 and 2007, the carrying and market values were approximately $0 and $3,000, respectively.

 

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18.                               Fair Value of Financial Instruments

 

Management uses its best judgment in estimating the fair value of the Company’s 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.

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements.  SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements.  The Company adopted SFAS 157 effective for its fiscal year beginning January 1, 2007.

 

The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at December 31, 2008 and 2007:

 

SFAS No. 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.

 

Fair Value Measurements (SFAS No. 159)

 

The Company elected to early adopt SFAS No. 159 as of January 1, 2007.  Early adoption was elected to accommodate balance sheet strategies to facilitate the Company’s regulatory capital, liquidity management and interest rate risk management.  The Company adopted the fair value option for its junior subordinated debt that had been carried at approximately $20.2 million at December 31, 2006.  Effective January 1, 2007, junior subordinated debt was accounted for at their then fair value. This resulted in a one-time cumulative after-tax charge of $409,000 ($619,000 pre-tax) to opening retained earnings as of January 1, 2007.  As a result of the change in fair value of the junior subordinated debt, included in other non-interest income for the first nine months of 2007 is a pre-tax loss of approximately $67,000.

 

The following table presents information about the eligible financial liabilities for which the Company elected the fair value measurement option and for which a transition adjustment was recorded to retained earnings as of January 1, 2007:

 

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Table of Contents

 

 

 

January 1,
2007
(Carrying
value prior
to
adoption)

 

Cumulative-
effect
adjustment to
January 1, 2007
retained
earnings-loss

 

January 1,
2007 fair
value
(Carrying
value after
adoption)

 

 

 

(In thousands)

 

Liabilities:

 

 

 

 

 

 

 

Junior subordinated debt

 

$

20,150

 

$

185

 

$

20,335

 

Total Liabilities

 

$

20,150

 

$

185

 

$

20,335

 

 

 

 

 

 

 

 

 

Pre-tax cumulative effect of adoption of SFAS No. 159

 

 

 

$

185

 

 

 

Unamortized deferred issuance costs

 

 

 

$

434

 

 

 

Income tax benefit

 

 

 

(210

)

 

 

Cumulative effect of adoption of SFAS No. 159

 

 

 

$

409

 

 

 

 

SFAS No. 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 entity’s 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 No. 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.

 

The three levels defined by SFAS No. 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 management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

 

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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 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

 

$

1,675

 

$

224,990

 

$

 

$

226,665

 

 

 

 

 

 

 

 

 

 

 

Liabilities (as restated):

 

 

 

 

 

 

 

 

 

Junior subordinated debt

 

$

 

$

 

$

18,260

 

18,260

 

Interest rate swaps

 

 

 

1,325

 

1,325

 

 

 

 

As of December 31, 2007

 

 

 

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

 

$

1,675

 

$

184,806

 

$

 

$

186,481

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Junior subordinated debt

 

$

 

$

 

$

20,232

 

20,232

 

Interest rate swaps

 

 

 

(82

)

(82

)

 


This table has been adjusted to reflect the Company’s 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.

 

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The following table presents the assets measured on a nonrecurring basis reported on the consolidated statements of financial condition at their fair value by level within the fair value hierarchy.

 

 

 

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:

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

 

$

2,283

 

$

 

$

2,283

 

Impaired loans

 

 

 

5,270

 

5,270

 

 

 

 

As of December 31, 2007

 

 

 

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:

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

 

$

3,165

 

$

 

$

3,165

 

Impaired loans

 

 

 

837

 

837

 

 

Impaired loans totaled $5.3 million at December 31, 2008, compared to $837,000 at December 31, 2007.  The $4.4 million increase in non-performing loans from December 31, 2007 to December 31, 2008, was due primarily to three commercial real estate loans totaling approximately $4.6 million.

 

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 twelve months ended December 31, 2008 is a gain of approximately $566,000.

 

Certain assets and liabilities are measured at fair value on a nonrecurring basis, that is, are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  Assets and liabilities measured at fair value on a non-recurring basis were not significant at December 31, 2008.

 

Net securities losses for the year ended December 31, 2008, were primarily due to the pre-tax losses of approximately $7.5 million on the sale of perpetual preferred stock associated with the federal takeover of Fannie Mae and Freddie Mac, government sponsored enterprises (“GSE’s”), placed into conservatorship on September 7, 2008, by the Federal Housing Finance Agency and the U.S. Treasury and other corporate equity securities.

 

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 Company’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

 

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 and Level 2 inputs.  For these securities, the Company obtains fair value measurements from an independent pricing service.  The fair value

 

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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 bond’s 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 stock is carried at cost.

 

Loans Held for Sale:

 

The fair value of loans held for sale is determined, when possible, using 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.

 

Impaired Loans:

 

Impaired loans are those that are accounted for under FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan (“SFAS 114”), in which the Company has measured impairment generally based on the fair value of the loan’s collateral.  Impaired loans are evaluated and valued at the time the loan is identified as impaired. 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.  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.  Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business.  Impaired loans are reviewed and evaluated on a monthly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

 

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.

 

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.

 

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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 Company’s 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’s 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.

 

The estimated fair values of the Company’s financial instruments as of December 31, 2008 and 2007 were as follows:

 

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2008

 

2008

 

2007

 

2007

 

 

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

 

 

(In thousands)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents and federal funds sold

 

$

19,284

 

$

19,284

 

$

25,789

 

$

25,789

 

Mortgage loans held for sale

 

2,283

 

2,283

 

3,165

 

3,165

 

Securities available for sale

 

226,665

 

226,665

 

186,481

 

186,481

 

Securities held to maturity

 

3,060

 

1,926

 

3,078

 

3,100

 

Federal Home Loan Bank stock

 

5,715

 

5,715

 

5,562

 

5,562

 

Loans, net

 

878,181

 

897,930

 

813,734

 

830,357

 

Mortgage servicing rights

 

295

 

295

 

491

 

491

 

Accrued interest receivable

 

4,734

 

4,734

 

4,845

 

4,845

 

Interest rate cap

 

 

 

3

 

3

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

Deposits

 

850,600

 

858,744

 

712,645

 

713,206

 

Securities sold under agreements to repurchase

 

120,086

 

121,572

 

110,881

 

110,881

 

Federal funds purchased

 

53,424

 

53,424

 

118,210

 

118,210

 

Long-term debt

 

50,000

 

50,975

 

45,000

 

45,157

 

Junior subordinated debt (as restated)

 

18,260

 

18,260

 

20,232

 

20,232

 

Accrued interest payable

 

3,413

 

3,413

 

3,197

 

3,197

 

Interest rate swap (as restated)

 

1,325

 

1,325

 

(82

)

(82

)

 

 

 

 

 

 

 

 

 

 

Off-balance Sheet Financial Instruments:

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

 

 

 

 

Standby letters of credit

 

 

 

 

 

 


This table has been adjusted to reflect the Company’s 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.

 

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19.          Segment and Related Information

 

The Company’s 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 VIST Insurance operation provides coverage for commercial, individual, surety bond, and group and personal benefit plans.  The VIST Capital operation provides services for individual financial planning, retirement and estate planning, investments, corporate and small business pension and retirement planning.

 

Segment information for 2008, 2007 and 2006 is as follows (in thousands):

 

 

 

Banking and

 

 

 

Brokerage and

 

 

 

 

 

 

 

Financial

 

Mortgage

 

Investment

 

 

 

 

 

 

 

Services

 

Banking

 

Services

 

Insurance

 

Total

 

2008 (As Restated)

 

 

 

 

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

31,975

 

$

2,956

 

$

892

 

$

11,357

 

$

47,180

 

Income (loss) before income taxes

 

(4,335

)

1,332

 

(150

)

1,860

 

(1,293

)

Total assets

 

1,131,797

 

75,370

 

1,247

 

17,656

 

1,226,070

 

Purchases of premises and equipment

 

1,142

 

1

 

1

 

36

 

1,180

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

35,924

 

$

2,806

 

$

987

 

$

11,371

 

$

51,088

 

Income (loss) before income taxes

 

6,413

 

645

 

(23

)

2,181

 

9,216

 

Total assets

 

1,045,800

 

60,648

 

1,198

 

17,305

 

1,124,951

 

Purchases of premises and equipment

 

1,200

 

39

 

16

 

237

 

1,492

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

36,675

 

$

4,458

 

$

788

 

$

11,393

 

$

53,314

 

Income (loss) before income taxes

 

8,822

 

1,001

 

(158

)

2,327

 

11,992

 

Total assets

 

967,040

 

53,758

 

1,226

 

19,608

 

1,041,632

 

Purchases of premises and equipment

 

758

 

10

 

6

 

60

 

834

 

 

Income (loss) before income taxes, as presented above, does not reflect referral and management fees of approximately $588,000, $1.6 million and $213,000 that the mortgage banking operation, insurance operation and the brokerage and investment operation, respectively, paid to the Company during 2008.  For 2007, referral and management fees of approximately $694,000, $1.4 million and $149,000 were paid by the mortgage banking operation, insurance operation and the brokerage and investment operation, respectively.  For 2006, referral and management fees of approximately $891,000, $1.2 million and $140,000 were paid by the mortgage banking operation, insurance operation and the brokerage and investment operation, respectively.

 

20.            Legal Proceedings

 

The Company is party to legal actions that are routine and incidental to its business.  In management’s opinion, the outcome of these matters, individually or in the aggregate, will not have a material effect on the financial statements of the Company.

 

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21.            VIST Financial Corp. (Parent Company Only) Financial Information

 

BALANCE SHEET

 

 

 

December 31,

 

 

 

2008
(As Restated)

 

2007

 

 

 

(In thousands)

 

ASSETS

 

 

 

 

 

Cash and short-term investments

 

$

15,715

 

$

331

 

Investment in bank subsidiary

 

109,774

 

106,331

 

Investment in non-bank subsidiary

 

13,717

 

14,634

 

Securities available for sale

 

2,079

 

3,881

 

Premises and equipment and other assets

 

2,763

 

4,072

 

Total assets

 

$

144,048

 

$

129,249

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Other liabilities

 

2,159

 

2,425

 

Junior subordinated debt, at fair value as of December 31, 2008

 

18,260

 

20,232

 

Shareholders’ equity

 

123,629

 

106,592

 

Total liabilities and shareholders’ equity

 

$

144,048

 

$

129,249

 

 

STATEMENTS OF INCOME

 

 

 

Years Ended December 31,

 

 

 

2008
(As Restated)

 

2007

 

2006

 

 

 

(In thousands)

 

Dividends from subsidiaries

 

$

3,209

 

$

4,372

 

$

3,912

 

Other income

 

9,591

 

9,377

 

8,771

 

Interest expense on junior subordinated debt

 

(1,437

)

(1,898

)

(1,852

)

Other expense

 

(8,617

)

(7,568

)

(6,648

)

Income before equity in undistributed net income (loss) of subsidiaries and income taxes

 

2,746

 

4,283

 

4,183

 

Income tax expense (benefit)

 

2

 

50

 

138

 

Net equity in undistributed net income (loss) of subsidiaries

 

(2,179

)

3,237

 

5,108

 

Net income

 

$

565

 

$

7,470

 

$

9,153

 

 

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Table of Contents

 

STATEMENTS OF CASH FLOWS

 

 

 

Years Ended December 31,

 

 

 

2008
(As Restated)

 

2007

 

2006

 

 

 

(In thousands)

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

Net Income

 

$

565

 

$

7,470

 

$

9,153

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

322

 

283

 

273

 

Equity in undistributed loss (income) of subsidiaries

 

2,179

 

(3,237

)

(5,108

)

Directors’ stock compensation

 

193

 

222

 

171

 

Loss (Gain) on sale of available for sale securities

 

236

 

(55

)

(262

)

Increase (decrease) other liabilities

 

(21

)

313

 

825

 

Decrease (increase) in other assets

 

1,777

 

1,215

 

286

 

Other, net

 

(9,664

)

4,388

 

5,985

 

Net Cash (Used In) Provided by Operating Activities

 

(4,413

)

10,599

 

11,323

 

 

 

 

 

 

 

 

 

Cash Flow From Investing Activities

 

 

 

 

 

 

 

Purchase of available for sale investment securities

 

(118

)

(350

)

(1,267

)

Sales and principal repayments, maturities and calls of available for sale securities

 

1,322

 

882

 

2,680

 

Purchase of premises and equipment

 

(428

)

(337

)

(391

)

Investment in bank subsidiary

 

(3,443

)

(7,855

)

(7,072

)

Investment in non-bank subsidiary

 

917

 

(978

)

(139

)

Net Cash Used In Investing Activities

 

(1,750

)

(8,638

)

(6,189

)

 

 

 

 

 

 

 

 

Cash Flow From Financing Activities

 

 

 

 

 

 

 

Proceeds from the exercise of stock options and stock purchase plans

 

141

 

222

 

1,810

 

Issuance of preferred stock

 

25,000

 

 

 

Purchase of treasury stock and warrant

 

 

(660

)

(1,118

)

Reissuance of treasury stock

 

384

 

320

 

281

 

Cash dividends paid

 

(3,978

)

(4,264

)

(3,800

)

Net Cash Provided By (Used In) Financing Activities

 

21,547

 

(4,382

)

(2,827

)

Increase (decrease) in cash and cash equivalents

 

15,384

 

(2,421

)

2,307

 

Cash:

 

 

 

 

 

 

 

Beginning

 

331

 

2,752

 

445

 

Ending

 

$

15,715

 

$

331

 

$

2,752

 

 

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Table of Contents

 

21.          Quarterly Data (Unaudited)

 

 

 

Year Ended December 31, 2008

 

 

 

Fourth

 

Third

 

 

 

 

 

 

 

Quarter
(As Restated)

 

Quarter
(As Restated)

 

Second
Quarter

 

First
Quarter

 

 

 

(In thousands, except per share data)

 

Interest income

 

$

16,094

 

$

16,705

 

$

16,315

 

$

16,724

 

Interest expense

 

7,496

 

7,671

 

7,288

 

8,182

 

Net interest income

 

8,598

 

9,034

 

9,027

 

8,542

 

Provision for loan losses

 

2,250

 

525

 

1,650

 

410

 

Net interest income after provision for loan losses

 

6,348

 

8,509

 

7,377

 

8,132

 

Other income

 

4,919

 

5,031

 

4,707

 

4,552

 

Net realized (losses) gains on sales of securities and impairment charges

 

(436

)

(6,996

)

61

 

141

 

Other expense

 

11,469

 

10,569

 

10,513

 

11,087

 

Income before income taxes

 

(638

)

(4,025

)

1,632

 

1,738

 

Income taxes (benefit)

 

(2,767

)

566

 

164

 

179

 

Net income

 

$

2,129

 

$

 (4,591

)

$

1,468

 

$

1,559

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.38

 

$

 (0.81

)

$

0.26

 

$

0.27

 

Diluted earnings per share

 

$

0.38

 

$

 (0.81

)

$

0.26

 

$

0.27

 

 

 

 

Year Ended December 31, 2007

 

 

 

Fourth

 

Third

 

Second

 

First

 

 

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

 

 

(In thousands, except per share data)

 

Interest income

 

$

17,271

 

$

17,305

 

$

17,049

 

$

16,451

 

Interest expense

 

8,821

 

8,903

 

8,655

 

8,456

 

Net interest income

 

8,450

 

8,402

 

8,394

 

7,995

 

Provision for loan losses

 

400

 

300

 

148

 

150

 

Net interest income after provision for loan losses

 

8,050

 

8,102

 

8,246

 

7,845

 

Other income

 

4,814

 

5,168

 

5,216

 

4,973

 

Net realized gains on sale of securities

 

84

 

85

 

 

(2,493

)

Other expense

 

10,436

 

10,034

 

10,206

 

10,198

 

Income before income taxes

 

2,512

 

3,321

 

3,256

 

127

 

Income taxes

 

480

 

786

 

754

 

(274

)

Net income

 

$

2,032

 

$

2,535

 

$

2,502

 

$

401

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.36

 

$

0.45

 

$

0.44

 

$

0.07

 

Diluted earnings per share

 

$

0.35

 

$

0.45

 

$

0.44

 

$

0.07

 

 


This table has been adjusted to reflect the Company’s 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.

 

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Item 9.        Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A.     Controls and Procedures

 

The Company’s management has evaluated the effectiveness of the design and operation of the Company’s 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 December 31, 2008.  Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded, as a result of the material weakness described in the following paragraph, that the Company’s 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.

 

These accounting errors and the corresponding restatements have resulted in management’s determination that a material weakness existed with respect to the internal controls over financial reporting related to accounting for the fair value of junior subordinated debt and related interest rate swaps at December 31, 2008.  The material weakness 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 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 Company’s internal control over financial reporting during 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting.  An adequate system of internal control over financial reporting encompasses the processes and procedures that have been established by management to:

 

·      Maintain records that, in reasonable detail, accurately reflect the company’s transactions

·      Provide reasonable assurance that the transactions are recorded as necessary to permit preparation of the financial statement and footnote disclosures in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the directors of the Corporation

·      Provide reasonable assurance regarding the prevention of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on this evaluation under the criteria in Internal Control- Integrated Framework, management identified a material weakness in our internal control over financial reporting as described below:

 

·      Insufficient internal controls over financial reporting related to accounting for the fair value of junior subordinated debt and related interest rate swaps.  The material weakness relates only to the applicable accounting treatment to these complex financial instruments.

 

The Board of Directors of VIST Financial Corp., through its Audit Committee, provides oversight to managements’ conduct of the financial reporting process.  The Audit Committee, which is composed entirely of independent directors, is also responsible to recommend the appointment of independent public accountants.  The Audit Committee also meets with management, the internal audit staff, and the independent public accountants throughout the year to provide assurance as to the adequacy of the financial reporting process and to monitor the overall scope of the work performed by the internal audit staff and the independent public accountants.

 

The consolidated financial statements of VIST Financial Corp. have been audited by ParenteBeard LLC, an independent registered public accounting firm, who was engaged to express an opinion as to the fairness of presentation of such financial statements.  In connection therewith, ParenteBeard LLC is required to form an opinion on the effectiveness of VIST Financial Corp.’s internal control over financial reporting.  Its opinion on the fairness of the financial statement presentation, and its opinion on internal control over financial reporting are included herein.

 

/s/ ROBERT D. DAVIS

 

/s/ EDWARD C. BARRETT

Robert D. Davis
President and

 

Edward C. Barrett
Executive Vice President and

Chief Executive Officer

 

Chief Financial Officer

 

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Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders

VIST Financial Corp.

Wyomissing, Pennsylvania

 

We have audited VIST Financial Corp.’s (the “Company”) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified in the accompanying Management’s Report On Internal Control Over Financial Reporting: insufficient internal controls over financial reporting related to accounting for the fair value of junior subordinated debt and related interest rate swaps.  The material weakness relates only to the applicable accounting treatment to these complex financial instruments.  This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the December 31, 2008 consolidated financial statements, and this report does not affect our report dated March 4, 2009 (except for Note 2, as to which the date is March 26, 2010) on those consolidated financial statements.

 

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, VIST Financial Corp. has not maintained effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related consolidated statements of operations, shareholders’ equity, and cash flows of VIST Financial Corp. and its subsidiaries, and our report dated March 4, 2009 (except for Note 2, as to which the date is March 26, 2010) expressed an unqualified opinion.

 

 

 

 

ParenteBeard LLC

/s/ ParenteBeard LLC

Reading, Pennsylvania

 

March 26, 2010

 

 

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Item 9B.     Other Information

 

None.

 

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PART III

 

Item 10.     Directors, Executive Officers and Corporate Governance

 

The information under the captions “MATTER NO. 1—Election of Directors,” “Director Information;” “Corporate Governance;” “Board of Directors and Committee Meetings;” and “Other Director and Officer Information” included in the Registrant’s Proxy Statement for the Annual meeting of Shareholders to be held on April 21, 2009 is incorporated herein by reference.

 

Item 11.     Executive Compensation

 

The information under the captions “Director Compensation;” “Compensation Discussion and Analysis,” “Executive Compensation;” and “Other Director and Officer information” included in the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 21, 2009 is incorporated herein by reference.

 

Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

 

The information under the captions “Beneficial Ownership by Directors and Executive Officers” and “Additional Information” included in the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 21, 2009 is incorporated herein by reference.

 

The following table provides certain information regarding securities issued or issuable under the Company’s equity compensation plans as of December 31, 2008.

 

 

 

 

 

 

 

Number of securities

 

 

 

Number of Securities

 

 

 

remaining available for

 

 

 

to be issued

 

Weighted average

 

future issuance under

 

 

 

upon exercise of

 

exercise price of

 

equity plans (excluding

 

 

 

outstanding options,

 

outstanding options,

 

securities reflected in

 

Plan category

 

warrants and rights

 

warrants and rights

 

first column)

 

Equity compensation plans approved by security holders

 

708,889

 

$

17.2300

 

406,921

 

 

 

 

 

 

 

 

 

Equity compensation plans not approved by security holders

 

 

N/A

 

 

 

 

 

 

 

 

 

 

Total

 

708,889

 

$

17.2300

 

406,921

 

 

Item 13.     Certain Relationships and Related Transactions, and Director Independence

 

The information relating to certain relationships and related transactions is incorporated herein by reference to the information disclosed under the captions “Corporate Governance” and “Other Director and Officer Information” included in the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 21, 2009 is incorporated herein by reference.

 

Item 14.     Principal Accounting Fees and Services

 

The information relating to principal accounting fees and services is incorporated herein by reference to the information under the caption “Audit and Other Fees” included in the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 21, 2009.

 

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PART IV

 

Item 15.     Exhibits, Financial Statement Schedules

 

(a) 1.       Financial Statements.

 

Consolidated financial statements are included under Item 8 of Part II of this Form 10-K/A, Amendment No. 1.

 

(a) 2.       Financial Statement Schedules.

 

Financial statement schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statements or in the notes thereto.

 

(b)           Exhibits

 

EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

3.1

 

Articles of Incorporation of VIST Financial Corp., as amended, including Statement with Respect to Shares for the Fixed rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to Exhibit 3.1 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

 

 

 

3.2

 

Bylaws of VIST Financial Corp. (incorporated by reference to Exhibit 3.2 to Registrant’s Current Report on Form 8-K filed on March 6, 2008).

 

 

 

4.1

 

Form of Rights Agreement, dated as of September 19, 2001, between VIST Financial Corp., and American Stock Transfer & Trust Company as Rights Agent, as amended (incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on March 6, 2008).

 

 

 

4.2

 

Amendment to Amended and Restated Rights Agreement, dated as of December 17, 2008, between VIST Financial Corp. and American Stock Transfer & Trust Company, as the rights agent (incorporated by reference to Exhibit 4.3 to Registrant’s Current Report on Form 8-K filed on December 23, 2008).

 

 

 

10.1

 

Employment Agreement, dated September 19, 2005, among VIST Financial Corp., VIST Bank, and Robert D. Davis (incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K/A filed on September 22, 2005).*

 

 

 

10.2

 

Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996).*

 

 

 

10.3

 

Deferred Compensation Plan for Directors (incorporated herein by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996).*

 

 

 

10.4

 

VIST Financial Corp. Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10-1 to Registrant’s Registration Statement on Form S-8 No. 333-37452).*

 

 

 

10.5

 

1998 Employee Stock Incentive Plan (incorporated by reference to Exhibit 99-1 to Registrant’s Registration Statement on Form S-8 No. 333-108130).*

 

 

 

10.6

 

1998 Independent Directors Stock Option Plan (incorporated by reference to Exhibit 99-1 to Registrant’s Registration Statement on Form S-8 No. 333-108129).*

 

 

 

10.7

 

Employment Agreement, dated September 17, 1998, among VIST Financial Corp., VIST Insurance, LLC, and Charles J. Hopkins, as amended (incorporated herein by reference to Exhibit 10.4 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002).*

 

 

 

10.9

 

Change in Control Agreement, dated February 11, 2004, among VIST Financial Corp., VIST Bank, and Jenette L. Eck. (incorporated by reference to Exhibit 10.10 of Registrant’s Annual Report Form 10-K for the year ended December 31, 2005).*

 

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Exhibit No.

 

Description

 

 

 

10.11

 

Amended and Restated Employment Agreement, dated as of July 2, 2007, among VIST Financial Corp., VIST Insurance, LLC, and Michael C. Herr (incorporated by reference to Exhibit 10.11 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).*

 

 

 

10.12

 

Change in Control Agreement, dated January 3, 2007, among VIST Financial Corp., VIST Bank, and Christina S. McDonald (incorporated by reference to Exhibit 10.13 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007).*

 

 

 

10.13

 

Change in Control Agreement, dated December 12, 2008, among VIST Financial Corp., VIST Bank, and Terry F. Favilla (incorporated by reference to Exhibit 10.14 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007).*

 

 

 

10.14

 

VIST Financial Corp. 2007 Equity Incentive Plan (incorporated by reference to Exhibit A of the Registrant’s definitive proxy statement, dated March 9, 2007).*

 

 

 

10.15

 

Letter Agreement, including Securities Purchase Agreement - Standard Terms, dated December 19, 2008, between VIST Financial Corp. and the United States Department of the Treasury (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on December 23, 2008).

 

 

 

10.16

 

Form of Letter Agreement, dated December 19, 2008, between VIST Financial Corp. and certain of its executive officers relating to executive compensation limitations under the United States Treasury Department’s Capital Purchase Program (incorporated by reference to Exhibit 10.16 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).*

 

 

 

11

 

No statement setting forth the computation of per share earnings is included because such computation is reflected clearly in the financial statements set forth in response to Item 8 of this Report.

 

 

 

21

 

Subsidiaries of VIST Financial Corp. (incorporated by reference to Exhibit 21 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

 

 

 

23.1

 

Consent of Beard Miller Company LLP.

 

 

 

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

 

Section 1350 Certification of Chief Executive Officer.

 

 

 

32.2

 

Section 1350 Certification of Chief Financial Officer.

 


*      Denotes a management contract or compensatory plan or arrangement.

 

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Signatures

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

March 26, 2010

 

 

VIST FINANCIAL CORP.

 

 

 

By:

/s/ ROBERT D. DAVIS

 

 

Robert D. Davis
President and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

/s/ ROBERT D. DAVIS

 

President and Chief Executive
Officer, Director (Principal Executive Officer)

 

March 26, 2010

Robert D. Davis

 

 

 

 

 

 

 

 

/s/ EDWARD C. BARRETT

 

Chief Financial Officer (Principal
Financial and Accounting Officer)

 

March 26, 2010

Edward C. Barrett

 

 

 

 

 

 

 

 

/s/ JAMES H. BURTON

 

Director

 

March 26, 2010

James H. Burton

 

 

 

 

 

 

 

 

 

/s/ PATRICK J. CALLAHAN

 

Director

 

March 26, 2010

Patrick J. Callahan

 

 

 

 

 

 

 

 

 

/s/ ROBERT D. CARL, III

 

Director

 

March 26, 2010

Robert D. Carl, III

 

 

 

 

 

 

 

 

 

/s/ CHARLES J. HOPKINS

 

Director

 

March 26, 2010

Charles J. Hopkins

 

 

 

 

 

 

 

 

 

/s/ PHILIP E. HUGHES, JR.

 

Director

 

March 26, 2010

Philip E. Hughes, Jr.

 

 

 

 

 

 

 

 

 

/s/ ANDREW J. KUZNESKI III

 

Director

 

March 26, 2010

Andrew J. Kuzneski III

 

 

 

 

 

 

 

 

 

/s/ M. DOMER LEIBENSPERGER

 

Director

 

March 26, 2010

M. Domer Leibensperger

 

 

 

 

 

 

 

 

 

/s/ FRANK C. MILEWSKI

 

Vice Chairman of the Board; Director

 

March 26, 2010

Frank C. Milewski

 

 

 

 

 

 

 

 

 

/s/ MICHAEL J. O’DONOGHUE

 

Director

 

March 26, 2010

Michael J. O’Donoghue

 

 

 

 

 

 

 

 

 

/s/ HARRY J. O’NEILL III

 

Director

 

March 26, 2010

Harry J. O’Neill III

 

 

 

 

 

 

 

 

 

/s/ BRIAN R. RICH

 

Director

 

March 26, 2010

Brian R. Rich

 

 

 

 

 

 

 

 

 

/s/ KAREN A. RIGHTMIRE

 

Director

 

March 26, 2010

Karen A. Rightmire

 

 

 

 

 

 

 

 

 

/s/ ALFRED J. WEBER

 

Chairman of the Board; Director

 

March 26, 2010

Alfred J. Weber

 

 

 

 

 

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