Attached files
file | filename |
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EX-31.1 - EX-31.1 - VIST FINANCIAL CORP | a10-6812_3ex31d1.htm |
EX-31.2 - EX-31.2 - VIST FINANCIAL CORP | a10-6812_3ex31d2.htm |
EX-32.1 - EX-32.1 - VIST FINANCIAL CORP | a10-6812_3ex32d1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
x Quarterly Report pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934
for the Quarterly Period Ended June 30, 2009,
or
o Transition report pursuant to Section 13 or 15(d) Of the Exchange Act
for the Transition Period from to .
Commission File Number No. 0-14555
VIST FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA |
|
23-2354007 |
(State or other jurisdiction of |
|
(I.R.S. Employer |
Incorporation or organization) |
|
Identification No.) |
1240 Broadcasting Road
Wyomissing, Pennsylvania 19610
(Address of principal executive offices)
(610) 208-0966
(Registrants telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Common Stock, $5.00 Par Value |
|
The NASDAQ Stock Market LLC |
(Title of each class) |
|
(Name of each exchange on which registered) |
Securities registered under Section 12(g) of the Exchange Act:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
|
Accelerated filer x |
|
|
|
Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
State the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
|
|
Number of Common Shares Outstanding |
|
|
as of March 26, 2010 |
COMMON STOCK ($5.00 Par Value) |
|
5,855,976 |
(Title of Class) |
|
(Outstanding Shares) |
TABLE OF CONTENTS
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PAGE |
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5 |
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5 |
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Unaudited Consolidated Balance Sheets as of June 30, 2009 (As Restated) and December 31, 2008 |
5 |
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6 |
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8 |
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9 |
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11 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
41 |
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56 |
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56 |
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57 |
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57 |
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57 |
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57 |
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57 |
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57 |
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58 |
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59 |
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59 |
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CERTIFICATIONS |
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EXPLANATORY NOTE
This Amendment on Form 10-Q/A amends our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, filed with the Securities and Exchange Commission (SEC) on August 10, 2009 (Amendment No. 1). We are filing this Amendment No. 1 to the consolidated financial statements of VIST Financial Corp. and its subsidiaries (the Company) for the quarterly period ended June 30, 2009 to correct the following accounting errors and the related effects of those errors: (i) correcting the calculation of fair value on junior subordinated debentures and interest rate swaps, (ii) correcting the accounting for changes in fair value of cash flow hedges and the junior subordinated debentures which was incorrectly recorded through accumulated other comprehensive income (loss) and should have been reflected through operations, and (iii) correcting the misapplication of cash flow hedge accounting to the junior subordinated debentures which were and continue to be accounted for at fair value.. The Companys previously issued financial statements for this period should no longer be relied upon.
The Company concluded that it would revise its financial statements to properly account for interest rate swaps that were incorrectly designated as cash flow hedging relationships under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). Changes in fair value of the interest rate swaps, previously recognized as unrealized gains (losses) in accumulated other comprehensive income, should have been recognized in earnings. In addition, the Company measures the fair value of its interest rate swaps by netting the discounted future fixed or variable cash payments and the discounted expected fixed or variable cash receipts based on an expectation of future interest rates derived from observed market interest rate curves and volatilities. The Company concluded that an incorrect forward yield curve was applied to the fair value of its interest rate swaps. The Company has adjusted the forward yield curve used in its determination of the fair value of the interest rate swaps which is reflected in these restated financial statements.
The Company has elected to report its junior subordinated debt at fair value with changes in fair value reflected in other income in the consolidated statements of operations. In addition, the Company measures the fair value of its junior subordinated debt utilizing the income approach whereby the expected cash flows over the remaining estimated life of the debentures are discounted using the Companys credit spread over the current fully indexed yield based on an expectation of future interest rates derived from observed market interest rate curves and volatilities. The Company concluded that an incorrect credit spread was applied to the fair value of its junior subordinated debt. The Company has adjusted the credit spread used in its determination of the fair value of its junior subordinated debt which is reflected in these restated financial statements.
The Company is not required to and has not updated any forward-looking statements previously included in the initial Form 10-Q filed on August 10, 2009. The errors discussed above do not affect periods prior to the three month period ended September 30, 2008. Accordingly, the Company has amended our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008, our Annual Report on Form 10-K for the year ended December 31, 2008 and our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2009 and June 30, 2009. The Company has not amended, and does not intend to amend, any of its other reports filed prior to the Form 10-Q for the quarterly period ended September 30, 2008.
This Amendment No. 1 includes changes in Part I, Item 4 - Controls and Procedures and reflects Managements restated assessment of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) as of June 30, 2009. This restatement of Managements assessment regarding disclosure controls and procedures results from managements determination that a material weakness existed with respect to the internal controls over financial reporting related to accounting for the fair value of junior subordinated debt and related interest rate swaps as of June 30, 2009.
The material weakness existed at September 30, 2008, December 31, 2008, March 31, 2009 and June 30, 2009 and was not identified until November 2009. To remediate this material weakness, the Company has added a review specifically for disclosures and accounting treatment for all complex financial instruments acquired or disposed of during each reporting period. The material weakness relates only to the applicable accounting treatment to these complex financial instruments. Although management has implemented these additional control procedures to remediate the material weakness, we believe that additional time and testing are necessary before concluding that the material weakness has been remediated.
Except as described in the preceding paragraph to remediate the material weakness described, there have been no changes in the Companys internal control over financial reporting during the second quarter of 2009 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
For additional discussion, see Note 2 included in Part I, Item 1 Financial Statements of this report.
FORWARD LOOKING STATEMENTS
VIST Financial Corp. (the Company), may from time to time make written or oral forward-looking statements, including statements contained in the Companys filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the exhibits hereto and thereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to the Companys beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Companys control). The words may, could, should, would, believe, anticipate, estimate, expect, intend, plan and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the Companys financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors products and services; the willingness of users to substitute competitors products and services for the Companys products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in laws and regulations applicable to financial institutions (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; the nature, extent, and timing of governmental actions and reforms, including the rules of participation for the Trouble Asset Relief Program voluntary Capital Purchase Program under the Emergency Economic Stabilization Act of 2008, which may be changed unilaterally and retroactively by legislative or regulatory actions; and the success of the Company at managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is not exclusive. Readers are also cautioned not to place undue reliance on these forward-looking statements, which reflect managements analysis only as of the date of this report, even if subsequently made available by the Company on its website or otherwise. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company to reflect events or circumstances occurring after the date of this report.
PART I FINANCIAL INFORMATION
VIST FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
|
|
June 30, |
|
December 31, |
|
||
ASSETS |
|
|
|
|
|
||
|
|
|
|
|
|
||
Cash and due from banks |
|
$ |
20,685 |
|
$ |
18,964 |
|
Federal funds sold |
|
19,950 |
|
|
|
||
Interest-bearing deposits in banks |
|
342 |
|
320 |
|
||
|
|
|
|
|
|
||
Total cash and cash equivalents |
|
40,977 |
|
19,284 |
|
||
|
|
|
|
|
|
||
Mortgage loans held for sale |
|
5,888 |
|
2,283 |
|
||
Securities available for sale |
|
229,107 |
|
226,665 |
|
||
Securities held to maturity, fair value 2009 - $1,741; 2008 - $1,926 |
|
3,048 |
|
3,060 |
|
||
Federal Home Loan Bank stock, at cost |
|
5,715 |
|
5,715 |
|
||
Loans, net of allowance for loan losses 2009 - $12,029; 2008 - $8,124 |
|
875,207 |
|
878,181 |
|
||
Premises and equipment, net |
|
6,408 |
|
6,591 |
|
||
Identifiable intangible assets |
|
4,491 |
|
4,833 |
|
||
Goodwill |
|
39,732 |
|
39,732 |
|
||
Bank owned life insurance |
|
18,736 |
|
18,552 |
|
||
Other assets |
|
28,084 |
|
21,174 |
|
||
|
|
|
|
|
|
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Total assets |
|
$ |
1,257,393 |
|
$ |
1,226,070 |
|
|
|
|
|
|
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LIABILITIES AND SHAREHOLDERS EQUITY |
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|
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Liabilities |
|
|
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Deposits: |
|
|
|
|
|
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Non-interest bearing |
|
$ |
111,231 |
|
$ |
108,645 |
|
Interest bearing |
|
836,683 |
|
741,955 |
|
||
|
|
|
|
|
|
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Total deposits |
|
947,914 |
|
850,600 |
|
||
|
|
|
|
|
|
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Securities sold under agreements to repurchase |
|
124,875 |
|
120,086 |
|
||
Federal funds purchased |
|
|
|
53,424 |
|
||
Long-term debt |
|
35,000 |
|
50,000 |
|
||
Junior subordinated debt, at fair value |
|
18,856 |
|
18,260 |
|
||
Other liabilities |
|
9,093 |
|
10,071 |
|
||
|
|
|
|
|
|
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Total liabilities |
|
1,135,738 |
|
1,102,441 |
|
||
|
|
|
|
|
|
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Shareholders equity |
|
|
|
|
|
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Preferred stock: $0.01 par value; authorized 1,000,000 shares; $1,000 liquidation preference per share; 25,000 shares of Series A 5% cumulative preferred stock issued and outstanding; Less: discount of $2,108 at June 30, 2009 and $2,307 at December 31, 2008 |
|
22,892 |
|
22,693 |
|
||
Common stock, $5.00 par value; authorized 20,000,000 shares; issued: 5,804,684 shares at June 30, 2009 and 5,768,429 shares at December 31, 2008 |
|
29,024 |
|
28,842 |
|
||
Stock warrant |
|
2,307 |
|
2,307 |
|
||
Surplus |
|
63,654 |
|
64,349 |
|
||
Retained earnings |
|
12,714 |
|
14,757 |
|
||
Accumulated other comprehensive loss |
|
(8,745 |
) |
(7,834 |
) |
||
Treasury stock; 10,484 shares at June 30, 2009 and 68,354 shares at December 31, 2008, at cost |
|
(191 |
) |
(1,485 |
) |
||
|
|
|
|
|
|
||
Total shareholders equity |
|
121,655 |
|
123,629 |
|
||
|
|
|
|
|
|
||
Total liabilities and shareholders equity |
|
$ |
1,257,393 |
|
$ |
1,226,070 |
|
See Notes to Consolidated Financial Statements.
VIST FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
June 30, 2009 |
|
June 30, 2008 |
|
June 30, 2009 |
|
June 30, 2008 |
|
||||
|
|
(As Restated) |
|
|
|
(As Restated) |
|
|
|
||||
Interest income: |
|
|
|
|
|
|
|
|
|
||||
Interest and fees on loans |
|
$ |
12,261 |
|
$ |
13,515 |
|
$ |
24,603 |
|
$ |
27,625 |
|
Interest on securities: |
|
|
|
|
|
|
|
|
|
||||
Taxable |
|
2,709 |
|
2,432 |
|
5,579 |
|
4,686 |
|
||||
Tax-exempt |
|
305 |
|
218 |
|
591 |
|
431 |
|
||||
Dividend income |
|
33 |
|
145 |
|
67 |
|
288 |
|
||||
Interest on federal funds sold |
|
5 |
|
|
|
8 |
|
|
|
||||
Other interest income |
|
|
|
5 |
|
1 |
|
9 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total interest income |
|
15,313 |
|
16,315 |
|
30,849 |
|
33,039 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Interest expense: |
|
|
|
|
|
|
|
|
|
||||
Interest on deposits |
|
5,172 |
|
5,014 |
|
10,326 |
|
10,517 |
|
||||
Interest on short-term borrowings |
|
|
|
429 |
|
17 |
|
1,150 |
|
||||
Interest on securities sold under agreements to repurchase |
|
1,100 |
|
895 |
|
2,163 |
|
1,849 |
|
||||
Interest on long-term debt |
|
412 |
|
604 |
|
917 |
|
1,203 |
|
||||
Interest on junior subordinated debt |
|
362 |
|
346 |
|
677 |
|
751 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total interest expense |
|
7,046 |
|
7,288 |
|
14,100 |
|
15,470 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net Interest Income |
|
8,267 |
|
9,027 |
|
16,749 |
|
17,569 |
|
||||
Provision for loan losses |
|
4,300 |
|
1,650 |
|
5,125 |
|
2,060 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net interest income after provision for loan losses |
|
3,967 |
|
7,377 |
|
11,624 |
|
15,509 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Other income: |
|
|
|
|
|
|
|
|
|
||||
Customer service fees |
|
596 |
|
676 |
|
1,254 |
|
1,296 |
|
||||
Mortgage banking activities |
|
408 |
|
342 |
|
675 |
|
665 |
|
||||
Commissions and fees from insurance sales |
|
3,036 |
|
2,787 |
|
5,994 |
|
5,471 |
|
||||
Brokerage and investment advisory commissions and fees |
|
152 |
|
227 |
|
482 |
|
464 |
|
||||
Earnings on bank owned life insurance |
|
108 |
|
164 |
|
184 |
|
332 |
|
||||
Gain on sale of loans |
|
|
|
24 |
|
|
|
47 |
|
||||
Other income |
|
667 |
|
487 |
|
1,624 |
|
984 |
|
||||
Net realized gains on sales of securities |
|
126 |
|
61 |
|
285 |
|
202 |
|
||||
Total other-than-temporary impairment losses on investments |
|
(973 |
) |
|
|
(973 |
) |
|
|
||||
Portion of non-credit impairment loss recognized in other comprehensive loss |
|
651 |
|
|
|
651 |
|
|
|
||||
Net credit impairment loss recognized in earnings |
|
(322 |
) |
|
|
(322 |
) |
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total other income |
|
4,771 |
|
4,768 |
|
10,176 |
|
9,461 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Other expense: |
|
|
|
|
|
|
|
|
|
||||
Salaries and employee benefits |
|
5,754 |
|
5,398 |
|
11,442 |
|
11,128 |
|
||||
Occupancy expense |
|
881 |
|
1,069 |
|
1,950 |
|
2,198 |
|
||||
Furniture and equipment expense |
|
634 |
|
673 |
|
1,240 |
|
1,345 |
|
||||
Marketing and advertising expense |
|
335 |
|
479 |
|
605 |
|
1,136 |
|
||||
Amortization of identifiable intangible assets |
|
171 |
|
150 |
|
342 |
|
300 |
|
||||
Professional services |
|
482 |
|
543 |
|
1,374 |
|
1,078 |
|
||||
Outside processing |
|
1,086 |
|
812 |
|
2,037 |
|
1,632 |
|
||||
FDIC deposit insurance |
|
984 |
|
274 |
|
1,428 |
|
545 |
|
||||
Other expense |
|
1,240 |
|
1,115 |
|
2,428 |
|
2,238 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total other expense |
|
11,567 |
|
10,513 |
|
22,846 |
|
21,600 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
(Loss) income before income taxes |
|
(2,829 |
) |
1,632 |
|
(1,046 |
) |
3,370 |
|
||||
Income tax (benefit) expense |
|
(1,321 |
) |
164 |
|
(1,069 |
) |
343 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net (loss) income |
|
(1,508 |
) |
1,468 |
|
23 |
|
3,027 |
|
||||
Preferred stock dividends and discount accretion |
|
(413 |
) |
|
|
(825 |
) |
|
|
||||
Net (loss) income available to common shareholders |
|
$ |
(1,921 |
) |
$ |
1,468 |
|
$ |
(802 |
) |
$ |
3,027 |
|
See Notes to Consolidated Financial Statements.
VIST FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
June 30, 2009 |
|
June 30, 2008 |
|
June 30, 2009 |
|
June 30, 2008 |
|
||||
|
|
(As Restated) |
|
|
|
(As Restated) |
|
|
|
||||
EARNINGS PER SHARE DATA |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Average shares outstanding for basic earnings per common share |
|
5,791,023 |
|
5,692,377 |
|
5,763,648 |
|
5,682,890 |
|
||||
Basic (loss) earnings per common share |
|
$ |
(0.33 |
) |
$ |
0.26 |
|
$ |
(0.14 |
) |
$ |
0.53 |
|
Average shares outstanding for diluted earnings per common share |
|
5,791,023 |
|
5,705,042 |
|
5,763,648 |
|
5,696,650 |
|
||||
Diluted (loss) earnings per common share |
|
$ |
(0.33 |
) |
$ |
0.26 |
|
$ |
(0.14 |
) |
$ |
0.53 |
|
Cash dividends declared per actual common shares outstanding |
|
$ |
0.10 |
|
$ |
0.20 |
|
$ |
0.20 |
|
$ |
0.40 |
|
See Notes to Consolidated Financial Statements.
VIST FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Six Months Ended June 30, 2009 and 2008
(Dollar amounts in thousands, except per share data)
|
|
Preferred Stock |
|
Common Stock |
|
|
|
|
|
Accumulated |
|
|
|
|
|
||||||||||||||
|
|
Number of |
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
||||||||
|
|
Shares |
|
Liquidation |
|
Shares |
|
Par |
|
Stock |
|
|
|
Retained |
|
Comprehensive |
|
Treasury |
|
|
|
||||||||
|
|
Issued |
|
Value |
|
Issued |
|
Value |
|
Warrant |
|
Surplus |
|
Earnings |
|
Loss |
|
Stock |
|
Total |
|
||||||||
Balance, January 1, 2009 |
|
25,000 |
|
$ |
22,693 |
|
5,768,429 |
|
$ |
28,842 |
|
$ |
2,307 |
|
$ |
64,349 |
|
$ |
14,757 |
|
$ |
(7,834 |
) |
$ |
(1,485 |
) |
$ |
123,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Net income (as restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
|
|
23 |
|
||||||||
Change in net unrealized gains (losses) on securities available for sale, net of tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(911 |
) |
|
|
(911 |
) |
||||||||
Total comprehensive loss (as restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(888 |
) |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Preferred stock discount accretion |
|
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
199 |
|
||||||||
Stock warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
(199 |
) |
|
|
|
|
(199 |
) |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Reissuance of 57,870 shares of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
(870 |
) |
|
|
|
|
1,294 |
|
424 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Common stock issued in connection with directors compensation |
|
|
|
|
|
28,243 |
|
141 |
|
|
|
78 |
|
|
|
|
|
|
|
219 |
|
||||||||
Common stock issued in connection with director and employee stock purchase plans |
|
|
|
|
|
8,012 |
|
41 |
|
|
|
20 |
|
|
|
|
|
|
|
61 |
|
||||||||
Compensation expense related to stock options |
|
|
|
|
|
|
|
|
|
|
|
77 |
|
|
|
|
|
|
|
77 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Common stock cash dividends paid ($0.20 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,151 |
) |
|
|
|
|
(1,151 |
) |
||||||||
Preferred stock cash dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
(716 |
) |
|
|
|
|
(716 |
) |
||||||||
Balance, June 30, 2009 (as restated) |
|
25,000 |
|
$ |
22,892 |
|
5,804,684 |
|
$ |
29,024 |
|
$ |
2,307 |
|
$ |
63,654 |
|
$ |
12,714 |
|
$ |
(8,745 |
) |
$ |
(191 |
) |
$ |
121,655 |
|
|
|
Preferred Stock |
|
Common Stock |
|
|
|
|
|
Accumulated |
|
|
|
|
|
||||||||||||||||
|
|
Number of |
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
||||||||||
|
|
Shares |
|
Liquidation |
|
Shares |
|
Par |
|
Stock |
|
|
|
Retained |
|
Comprehensive |
|
Treasury |
|
|
|
||||||||||
|
|
Issued |
|
Value |
|
Issued |
|
Value |
|
Warrant |
|
Surplus |
|
Earnings |
|
Loss |
|
Stock |
|
Total |
|
||||||||||
Balance, January 1, 2008 |
|
|
|
$ |
|
|
5,746,998 |
|
$ |
28,735 |
|
$ |
|
|
$ |
63,940 |
|
$ |
17,039 |
|
$ |
(1,116 |
) |
$ |
(2,006 |
) |
$ |
106,592 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,027 |
|
|
|
|
|
3,027 |
|
||||||||||
Change in net unrealized gains (losses) on securities available for sale, net of tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,503 |
) |
|
|
(4,503 |
) |
||||||||||
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,476 |
) |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Additional consideration in connection with acquisitions (21,499 shares) |
|
|
|
|
|
|
|
|
|
|
|
(138 |
) |
|
|
|
|
521 |
|
383 |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Common stock issued in connection with directors compensation |
|
|
|
|
|
10,808 |
|
54 |
|
|
|
139 |
|
|
|
|
|
|
|
193 |
|
||||||||||
Common stock issued in connection with director and employee stock purchase plans |
|
|
|
|
|
4,574 |
|
23 |
|
|
|
54 |
|
|
|
|
|
|
|
77 |
|
||||||||||
Tax benefits from employee stock transactions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Compensation expense related to stock options |
|
|
|
|
|
|
|
|
|
|
|
172 |
|
|
|
|
|
|
|
172 |
|
||||||||||
Common stock cash dividends declared ($0.40 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,277 |
) |
|
|
|
|
(2,277 |
) |
||||||||||
Balance, June 30, 2008 |
|
$ |
|
|
$ |
|
|
$ |
5,762,380 |
|
$ |
28,812 |
|
$ |
|
|
$ |
64,167 |
|
$ |
17,789 |
|
$ |
(5,619 |
) |
$ |
(1,485 |
) |
$ |
103,664 |
|
See Notes to Consolidated Financial Statements.
VIST FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
|
|
Six Months Ended |
|
||||
|
|
June 30, |
|
June 30, |
|
||
|
|
2009 |
|
2008 |
|
||
|
|
(As Restated) |
|
|
|
||
Cash Flows From Operating Activities |
|
|
|
|
|
||
Net income |
|
$ |
23 |
|
$ |
3,027 |
|
Adjustments to reconcile net income to net cash (used) provided by operating activities: |
|
|
|
|
|
||
Provision for loan losses |
|
5,125 |
|
2,060 |
|
||
Provision for depreciation and amortization of premises and equipment |
|
677 |
|
768 |
|
||
Amortization of identifiable intangible assets |
|
342 |
|
300 |
|
||
Deferred income taxes |
|
(1,337 |
) |
(363 |
) |
||
Director stock compensation |
|
219 |
|
193 |
|
||
Net amortization of securities premiums and discounts |
|
437 |
|
11 |
|
||
Decrease in mortgage servicing rights |
|
106 |
|
86 |
|
||
Net realized losses on sales of foreclosed real estate |
|
9 |
|
92 |
|
||
Impairment charge on investment securities |
|
322 |
|
|
|
||
Net realized (gains) on sales of securities |
|
(285 |
) |
(202 |
) |
||
Proceeds from sales of loans held for sale |
|
38,459 |
|
20,589 |
|
||
Net gains on sale of loans |
|
(646 |
) |
(621 |
) |
||
Loans originated for sale |
|
(41,418 |
) |
(17,630 |
) |
||
Increase in investment in life insurance |
|
(184 |
) |
(332 |
) |
||
Compensation expense related to stock options |
|
77 |
|
172 |
|
||
Net change in fair value of liabilities |
|
596 |
|
(73 |
) |
||
(Increase) decrease in accrued interest receivable and other assets |
|
(2,323 |
) |
5,195 |
|
||
Decrease in accrued interest payable and other liabilities |
|
(2,096 |
) |
(3,043 |
) |
||
|
|
|
|
|
|
||
Net Cash (Used) Provided by Operating Activities |
|
(1,897 |
) |
10,229 |
|
||
|
|
|
|
|
|
||
Cash Flow From Investing Activities |
|
|
|
|
|
||
Investment securities: |
|
|
|
|
|
||
Purchases - available for sale |
|
(87,215 |
) |
(59,036 |
) |
||
Principal repayments, maturities and calls - available for sale |
|
41,847 |
|
19,439 |
|
||
Principal repayments, maturities and calls - held to maturity |
|
|
|
10 |
|
||
Proceeds from sales - available for sale |
|
41,073 |
|
17,738 |
|
||
Net increase in loans receivable |
|
(4,126 |
) |
(48,863 |
) |
||
Proceeds from sale of loans |
|
|
|
740 |
|
||
Net increase in Federal Home Loan Bank Stock |
|
|
|
(992 |
) |
||
Net increase in foreclosed real estate |
|
|
|
(173 |
) |
||
Purchases of premises and equipment |
|
(763 |
) |
(654 |
) |
||
Disposals of premises and equipment |
|
269 |
|
10 |
|
||
Net Cash Used In Investing Activities |
|
(8,915 |
) |
(71,781 |
) |
||
See Notes to Consolidated Financial Statements.
VIST FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollar amounts in thousands)
|
|
Six Months Ended |
|
||||
|
|
June 30, |
|
June 30, |
|
||
|
|
2009 |
|
2008 |
|
||
|
|
(As Restated) |
|
|
|
||
Cash Flow From Financing Activities |
|
|
|
|
|
||
Net increase in deposits |
|
97,314 |
|
66,795 |
|
||
Net decrease in federal funds purchased |
|
(53,424 |
) |
(35,464 |
) |
||
Net increase in securities sold under agreements to repurchase |
|
4,789 |
|
19,734 |
|
||
Proceeds from long-term debt |
|
|
|
15,000 |
|
||
Repayments of long-term debt |
|
(15,000 |
) |
|
|
||
Reissuance of treasury stock |
|
424 |
|
|
|
||
Proceeds from the exercise of stock options and stock purchase plans |
|
61 |
|
77 |
|
||
Cash dividends paid on preferred and common stock |
|
(1,659 |
) |
(2,270 |
) |
||
Net Cash Provided By Financing Activities |
|
32,505 |
|
63,872 |
|
||
|
|
|
|
|
|
||
Increase in cash and cash equivalents |
|
21,693 |
|
2,320 |
|
||
Cash and Cash Equivalents: |
|
|
|
|
|
||
January 1 |
|
19,284 |
|
25,789 |
|
||
June 30 |
|
$ |
40,977 |
|
$ |
28,109 |
|
|
|
|
|
|
|
||
Cash Payments For: |
|
|
|
|
|
||
Interest |
|
$ |
14,512 |
|
$ |
15,153 |
|
Taxes |
|
$ |
|
|
$ |
400 |
|
|
|
|
|
|
|
||
Supplemental Schedule of Non-cash Investing and Financing Activities |
|
|
|
|
|
||
Transfer of loans receivable to real estate owned |
|
$ |
1,975 |
|
$ |
81 |
|
See Notes to Consolidated Financial Statements.
VIST FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All significant inter-company accounts and transactions have been eliminated. In the opinion of management, all adjustments (including normal recurring adjustments) considered necessary for a fair presentation of the results for the interim periods have been included. Certain prior period amounts have been reclassified to conform to the current presentation.
The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
The results of operations for the three and six month periods ended June 30, 2009 are not necessarily indicative of the results to be expected for the entire fiscal year. For purpose of reporting cash flows, cash and cash equivalents include cash and due from banks, and interest bearing deposits in other banks. For further information, refer to the Consolidated Financial Statements and Footnotes included in the Companys Annual Report on Form 10-K/A, Amendment No. 1, for the year ended December 31, 2008.
Effective April 1, 2009, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 165, Subsequent Events. SFAS No. 165 establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. SFAS No. 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that should be made about events or transactions that occur after the balance sheet date. In preparing these financial statements, the Company has evaluated subsequent events and transactions for potential recognition and/or disclosure between June 30, 2009 and August 10, 2009, the date the consolidated financial statements included in the Companys Quarterly Report on Form 10-Q were originally issued, and between June 30, 2009 and March 26, 2010, the date the consolidated financial statements included in the Companys Quarterly Report on Form 10-Q/A were reissued.
2. Restatement of Consolidated Financial Statements
The Company concluded that it would revise its financial statements to properly account for interest rate swaps that were incorrectly designated in cash flow hedging relationships under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). Changes in fair value of the interest rate swaps, previously recognized as unrealized gains (losses) in accumulated other comprehensive income, should have been recognized in earnings. In addition, the Company measures the fair value of its interest rate swaps by netting the discounted future fixed or variable cash payments and the discounted expected fixed or variable cash receipts based on an expectation of future interest rates derived from observed market interest rate curves and volatilities. The Company concluded that an incorrect forward yield curve was applied to the fair value of its interest rate swaps. The Company has adjusted the forward yield curve used in its determination of the fair value of the interest rate swaps which is reflected in these restated financial statements.
The Company has elected to report its junior subordinated debt at fair value with changes in fair value reflected in other income in the consolidated statements of operations. In addition, the Company measures the fair value of its junior subordinated debt utilizing the income approach whereby the expected cash flows over the remaining estimated life of the debentures are discounted using the Companys credit spread over the current fully indexed yield based on an expectation of future interest rates derived from observed market interest rate curves and volatilities. The Company concluded that an incorrect credit spread was applied to the fair value of its junior subordinated debt. The Company has adjusted the credit
spread used in its determination of the fair value of its junior subordinated debt which is is reflected in these restated financial statements.
The following tables set forth the unaudited consolidated restated financial statements for the quarter ended June 30, 2009 previously filed in the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.
The following is a summary of the adjustments to our previously issued unaudited consolidated balance sheet as of June 30, 2009:
VIST FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
|
|
June 30, |
|
|
|
|
|
June 30, |
|
|||
|
|
2009 |
|
|
|
|
|
2009 |
|
|||
|
|
As Reported |
|
Adjustments |
|
Reclassifications |
|
As Restated |
|
|||
|
|
(unaudited) |
|
|
|
|
|
(unaudited) |
|
|||
ASSETS |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Cash and due from banks |
|
$ |
20,685 |
|
|
|
|
|
$ |
20,685 |
|
|
Federal funds sold |
|
19,950 |
|
|
|
|
|
19,950 |
|
|||
Interest-bearing deposits in banks |
|
342 |
|
|
|
|
|
342 |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Total cash and cash equivalents |
|
40,977 |
|
|
|
|
|
40,977 |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Mortgage loans held for sale |
|
5,888 |
|
|
|
|
|
5,888 |
|
|||
Securities available for sale (a) |
|
234,822 |
|
|
|
(5,715 |
) |
229,107 |
|
|||
Securities held to maturity, fair value 2009 - $1,741; 2008 - $1,926 |
|
3,048 |
|
|
|
|
|
3,048 |
|
|||
Federal Home Loan Bank stock (a) |
|
|
|
|
|
5,715 |
|
5,715 |
|
|||
Loans, net of allowance for loan losses 2009 - $12,029; 2008 - $8,124 |
|
875,207 |
|
|
|
|
|
875,207 |
|
|||
Premises and equipment, net |
|
6,408 |
|
|
|
|
|
6,408 |
|
|||
Identifiable intangible assets |
|
4,491 |
|
|
|
|
|
4,491 |
|
|||
Goodwill |
|
39,732 |
|
|
|
|
|
39,732 |
|
|||
Bank owned life insurance |
|
18,736 |
|
|
|
|
|
18,736 |
|
|||
Other assets (b) |
|
27,434 |
|
650 |
|
|
|
28,084 |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Total assets |
|
$ |
1,256,743 |
|
$ |
650 |
|
|
|
$ |
1,257,393 |
|
|
|
|
|
|
|
|
|
|
|
|||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|||
Liabilities |
|
|
|
|
|
|
|
|
|
|||
Deposits: |
|
|
|
|
|
|
|
|
|
|||
Non-interest bearing |
|
$ |
111,231 |
|
|
|
|
|
$ |
111,231 |
|
|
Interest bearing |
|
836,683 |
|
|
|
|
|
836,683 |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Total deposits |
|
947,914 |
|
|
|
|
|
947,914 |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Securities sold under agreements to repurchase |
|
124,875 |
|
|
|
|
|
124,875 |
|
|||
Federal funds purchased |
|
|
|
|
|
|
|
|
|
|||
Long-term debt |
|
35,000 |
|
|
|
|
|
35,000 |
|
|||
Junior subordinated debt, at fair value (c) |
|
19,989 |
|
(1,133 |
) |
|
|
18,856 |
|
|||
Other liabilities (b) |
|
8,171 |
|
922 |
|
|
|
9,093 |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Total liabilities |
|
1,135,949 |
|
(211 |
) |
|
|
1,135,738 |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Shareholders equity |
|
|
|
|
|
|
|
|
|
|||
Preferred stock: $0.01 par value; authorized 1,000,000 shares; $1,000 liquidation preference per share; 25,000 shares of Series A 5% cumulative preferred stock issued and outstanding; Less: discount of $2,108 at June 30, 2009 and a discount of $2,307 at December 31, 2008 |
|
22,892 |
|
|
|
|
|
22,892 |
|
|||
Common stock, $5.00 par value; authorized 20,000,000 shares; issued: 5,804,684 shares at June 30, 2009 and 5,768,429 shares at December 31, 2008 |
|
29,024 |
|
|
|
|
|
29,024 |
|
|||
Stock Warrants |
|
2,307 |
|
|
|
|
|
2,307 |
|
|||
Surplus |
|
63,654 |
|
|
|
|
|
63,654 |
|
|||
Retained earnings (d) |
|
12,341 |
|
373 |
|
|
|
12,714 |
|
|||
Accumulated other comprehensive loss (e) |
|
(9,233 |
) |
488 |
|
|
|
(8,745 |
) |
|||
Treasury stock; 10,484 shares at June 30, 2009 and 68,354 shares at December 31, 2008, at cost |
|
(191 |
) |
|
|
|
|
(191 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|||
Total shareholders equity |
|
120,794 |
|
861 |
|
|
|
121,655 |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Total liabilities and shareholders equity |
|
$ |
1,256,743 |
|
$ |
650 |
|
|
|
$ |
1,257,393 |
|
(a) Reclassification of Federal Home Loan Bank and American Central Bankers Bank stock from Securities Available for Sale to Federal Home Loan Bank stock.
(b) Adjustment to properly record the interest rate swaps at fair value. The Company adjusted the forward yield curve used in its determination of the fair value of the interest rate swaps to reflect a more appropriate fair value in the restated financial statements.
(c) Adjustment to properly record the junior subordinated debentures at fair value. The fair value is estimated utilizing the income approach whereby the expected cash flows over the remaining estimated life of the debentures are discounted using the Companys estimated credit spread over the current fully indexed yield based on an expectation of future interest rates derived from observed market interest rate curves and volatilities. The Company has adjusted the credit spreads used in its determination of the fair value of its junior subordinated debt to reflect a more appropriate fair value in the restated financial statements.
(d) Adjustment related to the change in net income as a result of the correction of the errors related to the measurement accounting for the fair value of certain junior subordinated debentures and the accounting and measurement of interest rate swaps that were improperly designated as cash flow hedges.
(e) Adjustment to reverse the effects of improper accounting treatment for interest rate swaps that were improperly accounted for as cash flow hedges. The change in fair value of the interest rate swaps is included as a component of other income in the restated consolidated statements of income.
The following is a summary of the adjustments to our previously issued unaudited consolidated statements of income for the three and six months ended June 30, 2009:
VIST FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For the Periods Ended June 30, 2009
(Amounts in thousands, except per share data)
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||||||||||||
|
|
June 30, 2009 |
|
|
|
|
|
June 30, 2009 |
|
June 30, 2009 |
|
|
|
|
|
June 30, 2009 |
|
||||||
|
|
As Reported |
|
Adjustments |
|
Reclassifications |
|
As Restated |
|
As Reported |
|
Adjustments |
|
Reclassifications |
|
As Restated |
|
||||||
|
|
(unaudited) |
|
|
|
|
|
(unaudited) |
|
(unaudited) |
|
|
|
|
|
(unaudited) |
|
||||||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest and fees on loans |
|
$ |
12,261 |
|
|
|
|
|
$ |
12,261 |
|
$ |
24,603 |
|
|
|
|
|
$ |
24,603 |
|
||
Interest on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Taxable |
|
2,709 |
|
|
|
|
|
2,709 |
|
5,579 |
|
|
|
|
|
5,579 |
|
||||||
Tax-exempt |
|
305 |
|
|
|
|
|
305 |
|
591 |
|
|
|
|
|
591 |
|
||||||
Dividend income (f) |
|
33 |
|
|
|
|
|
33 |
|
72 |
|
|
|
(5 |
) |
67 |
|
||||||
Interest on federal funds sold |
|
5 |
|
|
|
|
|
5 |
|
8 |
|
|
|
|
|
8 |
|
||||||
Other interest income |
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
1 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total interest income |
|
15,313 |
|
|
|
|
|
15,313 |
|
30,854 |
|
|
|
(5 |
) |
30,849 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest on deposits |
|
5,172 |
|
|
|
|
|
5,172 |
|
10,326 |
|
|
|
|
|
10,326 |
|
||||||
Interest on short-term borrowings |
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
17 |
|
||||||
Interest on securities sold under agreements to repurchase |
|
1,100 |
|
|
|
|
|
1,100 |
|
2,163 |
|
|
|
|
|
2,163 |
|
||||||
Interest on long-term debt |
|
412 |
|
|
|
|
|
412 |
|
917 |
|
|
|
|
|
917 |
|
||||||
Interest on junior subordinated debt |
|
362 |
|
|
|
|
|
362 |
|
677 |
|
|
|
|
|
677 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total interest expense |
|
7,046 |
|
|
|
|
|
7,046 |
|
14,100 |
|
|
|
|
|
14,100 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net Interest Income |
|
8,267 |
|
|
|
|
|
8,267 |
|
16,754 |
|
|
|
(5 |
) |
16,749 |
|
||||||
Provision for loan losses |
|
4,300 |
|
|
|
|
|
4,300 |
|
5,125 |
|
|
|
|
|
5,125 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net Interest Income after provision for loan losses |
|
3,967 |
|
|
|
|
|
3,967 |
|
11,629 |
|
|
|
(5 |
) |
11,624 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Customer service fees |
|
596 |
|
|
|
|
|
596 |
|
1,254 |
|
|
|
|
|
1,254 |
|
||||||
Mortgage banking activities |
|
408 |
|
|
|
|
|
408 |
|
675 |
|
|
|
|
|
675 |
|
||||||
Commissions and fees from insurance sales |
|
3,036 |
|
|
|
|
|
3,036 |
|
5,994 |
|
|
|
|
|
5,994 |
|
||||||
Brokerage and investment advisory commissions and fees |
|
152 |
|
|
|
|
|
152 |
|
482 |
|
|
|
|
|
482 |
|
||||||
Earnings on investment in life insurance |
|
108 |
|
|
|
|
|
108 |
|
184 |
|
|
|
|
|
184 |
|
||||||
Gains on sale of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other Income (f), (g) |
|
550 |
|
117 |
|
|
|
667 |
|
1,620 |
|
(1 |
) |
5 |
|
1,624 |
|
||||||
Net realized gains (losses) on sales of securities |
|
126 |
|
|
|
|
|
126 |
|
285 |
|
|
|
|
|
285 |
|
||||||
Total other-than-temporary impairment losses on investments |
|
(973 |
) |
|
|
|
|
(973 |
) |
(973 |
) |
|
|
|
|
(973 |
) |
||||||
Portion of non-credit impairment loss recognized in other comprehensive loss |
|
651 |
|
|
|
|
|
651 |
|
651 |
|
|
|
|
|
651 |
|
||||||
Net credit impairment loss recognized in earnings |
|
(322 |
) |
|
|
|
|
(322 |
) |
(322 |
) |
|
|
|
|
(322 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total other income |
|
4,654 |
|
117 |
|
|
|
4,771 |
|
10,172 |
|
(1 |
) |
5 |
|
10,176 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Salaries and employee benefits |
|
5,754 |
|
|
|
|
|
5,754 |
|
11,442 |
|
|
|
|
|
11,442 |
|
||||||
Occupancy expense |
|
881 |
|
|
|
|
|
881 |
|
1,950 |
|
|
|
|
|
1,950 |
|
||||||
Furniture and equipment expense |
|
634 |
|
|
|
|
|
634 |
|
1,240 |
|
|
|
|
|
1,240 |
|
||||||
Marketing and advertising expense |
|
335 |
|
|
|
|
|
335 |
|
605 |
|
|
|
|
|
605 |
|
||||||
Amortization of identifiable intangible assets |
|
171 |
|
|
|
|
|
171 |
|
342 |
|
|
|
|
|
342 |
|
||||||
Professional services |
|
482 |
|
|
|
|
|
482 |
|
1,374 |
|
|
|
|
|
1,374 |
|
||||||
Outside processing |
|
1,086 |
|
|
|
|
|
1,086 |
|
2,037 |
|
|
|
|
|
2,037 |
|
||||||
Insurance expense |
|
984 |
|
|
|
|
|
984 |
|
1,428 |
|
|
|
|
|
1,428 |
|
||||||
Other expense |
|
1,240 |
|
|
|
|
|
1,240 |
|
2,428 |
|
|
|
|
|
2,428 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total other expense |
|
11,567 |
|
|
|
|
|
11,567 |
|
22,846 |
|
|
|
|
|
22,846 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Income before income taxes |
|
(2,946 |
) |
117 |
|
|
|
(2,829 |
) |
(1,045 |
) |
(1 |
) |
|
|
(1,046 |
) |
||||||
Income taxes (h) |
|
(1,361 |
) |
40 |
|
|
|
(1,321 |
) |
(1,069 |
) |
|
|
|
|
(1,069 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net income |
|
(1,585 |
) |
77 |
|
|
|
(1,508 |
) |
24 |
|
(1 |
) |
|
|
23 |
|
||||||
Preferred stock dividends and discount accretion |
|
(413 |
) |
|
|
|
|
(413 |
) |
(825 |
) |
|
|
|
|
(825 |
) |
||||||
Net income available to common shareholders |
|
$ |
(1,998 |
) |
$ |
77 |
|
|
|
$ |
(1,921 |
) |
$ |
(801 |
) |
$ |
(1 |
) |
|
|
$ |
(802 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
EARNINGS PER SHARE DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Average shares outstanding |
|
5,791,023 |
|
|
|
|
|
5,791,023 |
|
5,763,648 |
|
|
|
|
|
5,763,648 |
|
||||||
Basic earnings per share |
|
$ |
(0.35 |
) |
$ |
0.02 |
|
|
|
$ |
(0.33 |
) |
$ |
(0.14 |
) |
$ |
|
|
|
|
$ |
(0.14 |
) |
Average shares outstanding for diluted earnings per share |
|
5,791,023 |
|
|
|
|
|
5,791,023 |
|
5,763,648 |
|
|
|
|
|
5,763,648 |
|
||||||
Diluted earnings per share |
|
$ |
(0.35 |
) |
$ |
0.02 |
|
|
|
$ |
(0.33 |
) |
$ |
(0.14 |
) |
$ |
|
|
|
|
$ |
(0.14 |
) |
Cash dividends declared per share |
|
$ |
0.10 |
|
|
|
|
|
$ |
0.10 |
|
$ |
0.20 |
|
|
|
|
|
$ |
0.20 |
|
(f) Reclassification of reclassify dividend income on Federal Home Loan Bank stock from interest income to other income.
(g) Adjustment to record the change in the fair market value of the interest rate swaps, the junior subordinated debentures and to reverse the effect of the treatment of the interest rate swaps as cash flow hedges.
(h) Adjustment to record the income tax effect of the change in the fair value of the cash flow hedge and junior subordinated debentures.
3. Earnings Per Common Share
Basic (loss) earnings per common share is calculated by dividing net income (loss), less Series A Preferred Stock dividends and discount accretion, by the weighted average number of shares of common stock outstanding. Diluted earnings per common share is calculated by adjusting the weighted average number of shares of common stock
outstanding to include the effect of stock options, if dilutive, using the treasury stock method. For 2008, there were no dividends or discount accretion on the Series A Preferred Stock. There was no dilution to common shares for 2009 due to the Company being in a loss position.
Earnings per common share for the respective periods indicated have been computed based upon the following:
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
June 30, |
|
|
|
June 30, |
|
|
|
||||
|
|
2009 |
|
June 30, |
|
2009 |
|
June 30, |
|
||||
|
|
(Dollar amounts in thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Net (loss) income |
|
$ |
(1,508 |
) |
$ |
1,468 |
|
$ |
23 |
|
$ |
3,027 |
|
Less: preferred stock dividends |
|
(313 |
) |
|
|
(626 |
) |
|
|
||||
Less: preferred stock discount accretion |
|
(100 |
) |
|
|
(199 |
) |
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net (loss) income available to common shareholders |
|
$ |
(1,921 |
) |
$ |
1,468 |
|
$ |
(802 |
) |
$ |
3,027 |
|
|
|
|
|
|
|
|
|
|
|
||||
Average common shares outstanding |
|
5,791,023 |
|
5,692,377 |
|
5,763,648 |
|
5,682,890 |
|
||||
Effect of dilutive stock options |
|
|
|
12,665 |
|
|
|
13,760 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Average number of common shares used to calculate diluted earnings per common share |
|
5,791,023 |
|
5,705,042 |
|
5,763,648 |
|
5,696,650 |
|
4. Comprehensive Income
Accounting principles generally require that recognized revenue, expense, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The components of other comprehensive income and related tax effects were as follows:
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
June 30, |
|
|
|
June 30, |
|
|
|
||||
|
|
2008 |
|
June 30, |
|
2009 |
|
June 30, |
|
||||
|
|
(Dollar amounts in thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Net (loss) income |
|
$ |
(1,508 |
) |
$ |
1,468 |
|
$ |
23 |
|
$ |
3,027 |
|
|
|
|
|
|
|
|
|
|
|
||||
Unrealized holding losses on available for sale securities |
|
(1,493 |
) |
(6,972 |
) |
(1,417 |
) |
(6,621 |
) |
||||
Reclassification adjustment for credit related impairment on investment security realized in income |
|
322 |
|
|
|
322 |
|
|
|
||||
Reclassification adjustment for investment gains realized in income |
|
(126 |
) |
(61 |
) |
(285 |
) |
(202 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Net unrealized losses |
|
(1,297 |
) |
(7,033 |
) |
(1,380 |
) |
(6,823 |
) |
||||
Income tax effect |
|
441 |
|
2,391 |
|
469 |
|
2,320 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Other comprehensive loss |
|
(856 |
) |
(4,642 |
) |
(911 |
) |
(4,503 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Total comprehensive loss |
|
$ |
(2,364 |
) |
$ |
(3,174 |
) |
$ |
(888 |
) |
$ |
(1,476 |
) |
5. Guarantees
Outstanding letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The Company had $12.7 million and $14.5 million of financial and performance standby letters of credit as of June 30, 2009 and December 31, 2008, respectively. The Bank uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments.
The majority of these standby letters of credit expire within the next 24 months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Company requires collateral and personal guarantees supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of June 30, 2009 and December 31, 2008 for guarantees under standby letters of credit is not material.
6. Segment Information
The Companys insurance operations, investment operations and mortgage banking operations are managed separately from the traditional banking and related financial services that the Company also offers. The mortgage banking operation offers residential lending products and generates revenue primarily through gains recognized on loan sales. The insurance operation utilizes insurance companies and acts as an agent or brokers to provide coverage for commercial, individual, surety bond, and group and personal benefit plans. The investment operation provides services for individual financial planning, retirement and estate planning, investments, corporate and small business pension and retirement planning.
|
|
Banking |
|
Mortgage |
|
Insurance |
|
Investment |
|
Total |
|
|||||
|
|
(Dollar amounts in thousands) |
|
|||||||||||||
Three months ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net interest income and other income from external sources (as restated) |
|
$ |
8,858 |
|
$ |
994 |
|
$ |
3,015 |
|
$ |
171 |
|
$ |
13,038 |
|
(Loss) income before income taxes (as restated) |
|
(3,851 |
) |
601 |
|
464 |
|
(43 |
) |
(2,829 |
) |
|||||
Total Assets (as restated) |
|
1,159,210 |
|
79,455 |
|
17,589 |
|
1,139 |
|
1,257,393 |
|
|||||
Purchases of premises and equipment |
|
136 |
|
|
|
140 |
|
14 |
|
290 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Three months ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net interest income and other income from external sources |
|
$ |
9,849 |
|
$ |
913 |
|
$ |
2,785 |
|
$ |
248 |
|
$ |
13,795 |
|
Income (loss) before income taxes |
|
697 |
|
506 |
|
433 |
|
(4 |
) |
1,632 |
|
|||||
Total Assets |
|
1,107,864 |
|
62,908 |
|
17,066 |
|
1,260 |
|
1,189,098 |
|
|||||
Purchases of premises and equipment |
|
237 |
|
1 |
|
30 |
|
1 |
|
269 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net interest income and other income from external sources (as restated) |
|
$ |
18,013 |
|
$ |
1,860 |
|
$ |
6,535 |
|
$ |
517 |
|
$ |
26,925 |
|
(Loss) income before income taxes (as restated) |
|
(3,318 |
) |
1,096 |
|
1,162 |
|
14 |
|
(1,046 |
) |
|||||
Total Assets (as restated) |
|
1,159,210 |
|
79,455 |
|
17,589 |
|
1,139 |
|
1,257,393 |
|
|||||
Purchases of premises and equipment |
|
608 |
|
|
|
141 |
|
14 |
|
763 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Six Months Ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net interest income and other income from external sources |
|
$ |
19,298 |
|
$ |
1,751 |
|
$ |
5,474 |
|
$ |
507 |
|
$ |
27,030 |
|
Income (loss) before income taxes |
|
1,781 |
|
805 |
|
803 |
|
(19 |
) |
3,370 |
|
|||||
Total Assets |
|
1,107,864 |
|
62,908 |
|
17,066 |
|
1,260 |
|
1,189,098 |
|
|||||
Purchases of premises and equipment |
|
617 |
|
1 |
|
35 |
|
1 |
|
654 |
|
7. Stock Incentive Plans
The Company has an Employee Stock Incentive Plan (ESIP) that covers all officers and key employees of the Company and its subsidiaries and is administered by a committee of the Board of Directors. The total number of shares of common stock that may be issued pursuant to the ESIP is 486,781. The option price for options issued under the ESIP
must be at least equal to 100% of the fair market value of the common stock on the date of grant and shall not be less than the stocks par value. Options granted under the ESIP have various vesting periods ranging from immediate up to 5 years, 20% exercisable not less than one year after the date of grant, but no later than ten years after the date of grant in accordance with the vesting. Vested options expire on the earlier of ten years after the date of grant, three months from the participants termination of employment or one year from the date of the participants death or disability. As of June 30, 2009, a total of 148,072 shares have been issued under the ESIP. The ESIP expired on November 10, 2008.
The Company has an Independent Directors Stock Option Plan (IDSOP). The total number of shares of common stock that may be issued pursuant to the IDSOP is 121,695. The IDSOP covers all directors of the Company who are not employees and former directors who continue to be employed by the Company. The option price for options issued under the IDSOP will be equal to the fair market value of the Companys common stock on the date of grant. Options are exercisable from the date of grant and expire on the earlier of ten years after the date of grant, three months from the date the participant ceases to be a director of the Company or the cessation of the participants employment, or twelve months from the date of the participants death or disability. As of June 30, 2009, a total of 21,166 shares have been issued under the IDSOP. The IDSOP expired on November 10, 2008.
On April 17, 2007, shareholders approved the VIST Financial Corp. 2007 Equity Incentive Plan (EIP). The total number of shares which may be granted under the EIP is equal to 12.5% of the outstanding shares of the Companys common stock on the date of approval of the EIP and is subject to automatic annual increases by an amount equal to 12.5% of any increase in the number of the Companys outstanding shares of common stock during the preceding year or such lesser number as determined by the Companys board of directors. The total number of shares of common stock that may be issued pursuant to the EIP is 676,572. The EIP covers all employees and non-employee directors of the Company and its subsidiaries. Incentive stock options, nonqualified stock options and restricted stock grants are authorized for issuance under the EIP. The exercise price for stock options granted under the EIP must equal the fair market value of the Companys common stock on the date of grant. Vesting of awards under the EIP is determined by the Human Resources Committee of the board of directors, but must be at least one year. The Committee may also subject an award to one or more performance criteria. Stock options and restricted stock awards generally expire upon termination of employment. In certain instances after an optionee terminates employment or service, the Committee may extend the exercise period for a vested nonqualified stock option up to the remaining term of the option. A vested incentive stock option must be exercised within three months following termination of employment if such termination is for reasons other than cause. Performance goals generally cannot be accelerated or waived except in the event of a change in control or upon death, disability or retirement. As of June 30, 2009, no shares have been issued under the EIP. The EIP will expire on April 17, 2017.
The Companys total stock-based compensation expense for the six months ended June 30, 2009 and 2008 was approximately $77,000 and $172,000, respectively. Total stock-based compensation expense, net of related tax effects, was approximately $51,000 and $114,000 for the six months ended June, 2009 and 2008, respectively. The Companys total stock-based compensation expense for the three months ended June 30, 2009 and 2008 was approximately $56,000 and $95,000, respectively. Total stock-based compensation expense, net of related tax effects, was approximately $37,000 and $63,000 for the three months ended June, 2009 and 2008, respectively. Cash flows from financing activities included in cash inflows from excess tax benefits related to stock compensation were approximately $0 for the three and six months ended June 30, 2009 and 2008. Total unrecognized compensation costs related to non-vested stock options at June 30, 2009 and 2008 were approximately $235,000 and $480,000, respectively.
Stock option transactions under the Plans for the six months ended June 30, 2009 were as follows:
|
|
|
|
|
|
|
|
Weighted- |
|
||
|
|
|
|
Weighted- |
|
|
|
Average |
|
||
|
|
|
|
Average |
|
Aggregate |
|
Remaining |
|
||
|
|
|
|
Exercise |
|
Intrinsic |
|
Term |
|
||
|
|
Options |
|
Price |
|
Value |
|
(in years) |
|
||
Outstanding at the beginning of the year |
|
708,889 |
|
$ |
17.23 |
|
|
|
|
|
|
Granted |
|
13,000 |
|
8.50 |
|
|
|
|
|
||
Exercised |
|
|
|
|
|
|
|
|
|
||
Expired |
|
(7,350 |
) |
22.93 |
|
|
|
|
|
||
Forfeited |
|
(95,331 |
) |
13.52 |
|
|
|
|
|
||
Outstanding as of June 30, 2009 |
|
619,208 |
|
$ |
17.55 |
|
$ |
|
|
6.8 |
|
Exercisable as of June 30, 2009 |
|
397,035 |
|
$ |
19.65 |
|
$ |
|
|
5.8 |
|
The fair value of options granted for the six month period ended June 30, 2009 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
As of and for the year ended |
|
||||
|
|
June 30, |
|
December 31, |
|
||
|
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
||
Dividend yield |
|
7.76 |
% |
6.09 |
% |
||
Expected life |
|
7 years |
|
7 years |
|
||
Expected volatility |
|
25.71 |
% |
21.52 |
% |
||
Risk-free interest rate |
|
1.96 |
% |
2.54 |
% |
||
Weighted average fair value of options granted |
|
$ |
0.68 |
|
$ |
1.29 |
|
8. Investment in Limited Partnership
On December 29, 2003, the Bank entered into a limited partner subscription agreement with Midland Corporate Tax Credit XVI Limited Partnership, where the Bank will receive special tax credits and other tax benefits. The Bank subscribed to a 6.2% interest in the partnership, which is subject to an adjustment depending on the final size of the partnership at a purchase price of $5 million. This investment is included in other assets and is not guaranteed. It is accounted for in accordance with Statement of Position (SOP) 78-9, Accounting for Investments in Real Estate Ventures, using the equity method. This agreement was accompanied by a payment of $1.7 million. The associated non-interest bearing promissory note payable included in other liabilities was zero at June 30, 2009. Installments were paid as requested.
9. Recently Issued Accounting Standards
In January 2009, the FASB issued FSP EITF 99-20-1, Amendments to the Impairment of Guidance of EITF Issue No. 99-20 (FSP EITF 99-20-1). FSP EITF 99-20-1 amends the impairment guidance in EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, to achieve more consistent determination of whether an other-than-temporary impairment has occurred. FSP EITF 99-20-1 also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and other related guidance. FSP EITF 99-20-1 is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. The implementation of this standard did not have a material impact on the Companys consolidated financial position and results of operations.
In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FASB Statement 157, Fair Value Measurements, defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.
FSP FAS 157-4 provides additional guidance on determining when the volume and level of activity for the asset or liability has significantly decreased. The FSP also includes guidance on identifying circumstances when a transaction may not be considered orderly.
FSP FAS 157-4 provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with Statement 157.
This FSP clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The FSP provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.
This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 157-4 must also early adopt FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. The implementation of this standard did not have a material impact on the Companys consolidated financial position and results of operations.
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). FSP FAS 115-2 and FAS 124-2 clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.
In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.
This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 115-2 and FAS 124-2 must also early adopt FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. The implementation of this standard did not have a material impact on the Companys consolidated financial position and results of operations.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140. This statement prescribes the information that a reporting entity must provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferors continuing involvement in transferred financial assets. Specifically, among other aspects, SFAS 166 amends Statement of Financial Standard No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, or SFAS 140, by removing the concept of a qualifying special-purpose entity from SFAS 140 and removes the exception from applying FIN 46(R) to variable interest entities that are qualifying special-purpose entities. It also modifies the financial-components approach used in SFAS 140. SFAS 166 is effective for fiscal years beginning after November 15, 2009. We have not determined the effect that the adoption of SFAS 166 will have on our financial position or results of operations.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). This statement amends FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised December 2003) an interpretation of ARB No. 51, or FIN 46(R), to require an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entitys economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS 167 also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS 167 is effective for fiscal years beginning after November 15, 2009. We have not determined the effect that the adoption of SFAS 167 will have on our financial position or results of operations.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. SFAS 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. We do not expect the adoption of this standard to have an impact on our financial position or results of operations.
10. Fair Value Measurements and Fair Value of Financial Instruments
Fair Value Measurements
Management uses its best judgment in estimating the fair value of the Companys financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amount the Company could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year ends and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end.
The following methods and assumptions were used to estimate the fair values of the Companys financial instruments at June 30, 2009 and December 31, 2008:
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entitys own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
The three levels defined by SFAS 157 hierarchy are as follows:
Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level 2: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level 3: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using managements best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
The following table presents the assets and liabilities measured on a recurring basis reported on the consolidated statements of financial condition at their fair value by level within the fair value hierarchy.
|
|
As of June 30, 2009 |
|
||||||||||
|
|
Quoted |
|
Significant |
|
Significant |
|
|
|
||||
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
|
||||
|
|
(In thousands) |
|
||||||||||
ASSETS: |
|
|
|
|
|
|
|
|
|
||||
Securities Available For Sale* |
|
|
|
|
|
|
|
|
|
||||
Obligations of U.S. Government agencies and corporations |
|
$ |
|
|
$ |
7,715 |
|
$ |
|
|
$ |
7,715 |
|
Mortgage-backed debt securities |
|
|
|
188,825 |
|
|
|
188,825 |
|
||||
State and municipal obligations |
|
|
|
26,913 |
|
|
|
26,913 |
|
||||
Other securities |
|
1,320 |
|
4,334 |
|
|
|
5,654 |
|
||||
|
|
$ |
1,320 |
|
$ |
227,787 |
|
$ |
|
|
$ |
229,107 |
|
|
|
|
|
|
|
|
|
|
|
||||
LIABILITIES (as restated): |
|
|
|
|
|
|
|
|
|
||||
Junior subordinated debt |
|
$ |
|
|
$ |
|
|
$ |
18,856 |
|
$ |
18,856 |
|
Interest rate swaps |
|
|
|
|
|
730 |
|
730 |
|
|
|
As of December 31, 2008 |
|
||||||||||
|
|
Quoted |
|
Significant |
|
Significant |
|
|
|
||||
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
|
||||
|
|
(In thousands) |
|
||||||||||
ASSETS: |
|
|
|
|
|
|
|
|
|
||||
Securities Available For Sale |
|
|
|
|
|
|
|
|
|
||||
Obligations of U.S. Government agencies and corporations |
|
$ |
|
|
$ |
9,331 |
|
$ |
|
|
$ |
9,331 |
|
Mortgage-backed debt securities |
|
|
|
185,177 |
|
|
|
185,177 |
|
||||
State and municipal obligations |
|
|
|
25,033 |
|
|
|
25,033 |
|
||||
Other securities |
|
1,675 |
|
5,449 |
|
|
|
7,124 |
|
||||
|
|
$ |
1,675 |
|
$ |
224,990 |
|
$ |
|
|
$ |
226,665 |
|
|
|
|
|
|
|
|
|
|
|
||||
LIABILITIES: |
|
|
|
|
|
|
|
|
|
||||
Junior subordinated debt |
|
$ |
|
|
$ |
|
|
$ |
18,260 |
|
$ |
18,260 |
|
Interest rate swaps |
|
|
|
|
|
1,325 |
|
1,325 |
|
*This table has been adjusted to reflect the Companys reclassification of Federal Home Loan Bank stock from securities available for sale to Federal Home Loan Bank stock. See Note 2, Restatement of Consolidated Financial Statements to the consolidated financial statements included in this Form 10-Q.
The following table presents the assets and liabilities measured on a non-recurring basis reported on the consolidated statements of financial condition at their fair value by level within the fair value hierarchy.
|
|
As of June 30, 2009 |
|
||||||||||
|
|
Quoted |
|
Significant |
|
Significant |
|
|
|
||||
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
|
||||
|
|
(Dollar amounts in thousands) |
|
||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
||||
Loans held for sale |
|
$ |
|
|
$ |
5,888 |
|
$ |
|
|
$ |
5,888 |
|
Impaired loans |
|
|
|
|
|
6,724 |
|
6,724 |
|
||||
OREO |
|
|
|
|
|
2,238 |
|
2,238 |
|
||||
|
|
As of December 31, 2008 |
|
||||||||||
|
|
Quoted |
|
Significant |
|
Significant |
|
|
|
||||
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
|
||||
|
|
(Dollar amounts in thousands) |
|
||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
||||
Loans held for sale |
|
$ |
|
|
$ |
2,283 |
|
$ |
|
|
$ |
2,283 |
|
Impaired loans |
|
|
|
|
|
5,270 |
|
5,270 |
|
||||
OREO |
|
|
|
|
|
263 |
|
263 |
|
||||
The changes in Level 3 liabilities measured at fair value on a recurring basis are summarized as follows:
|
|
Three months ended June 30, 2009 |
|
|||||||||||||
|
|
|
|
Total realized and |
|
|
|
|
|
|||||||
|
|
|
|
Unrealized Gains (Losses) |
|
|
|
|
|
|||||||
|
|
Fair
Value at |
|
Recorded
in |
|
Recorded
in |
|
Transfers
Into |
|
Fair
Value at |
|
|||||
|
|
(Dollar amounts in thousands) |
|
|||||||||||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Junior subordinated debt |
|
$ |
19,050 |
|
$ |
194 |
|
$ |
|
|
$ |
|
|
$ |
18,856 |
|
Interest rate swaps |
|
653 |
|
(77 |
) |
|
|
|
|
730 |
|
|||||
|
|
$ |
19,703 |
|
$ |
117 |
|
$ |
|
|
$ |
|
|
$ |
19,586 |
|
|
|
Six months ended June 30, 2009 |
|
|||||||||||||
|
|
|
|
Total realized and |
|
|
|
|
|
|||||||
|
|
|
|
Unrealized Gains (Losses) |
|
|
|
|
|
|||||||
|
|
Fair
Value at |
|
Recorded
in |
|
Recorded
in |
|
Transfers
Into |
|
Fair
Value at |
|
|||||
|
|
(Dollar amounts in thousands) |
|
|||||||||||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Junior subordinated debt |
|
$ |
18,260 |
|
$ |
(596 |
) |
$ |
|
|
$ |
|
|
$ |
18,856 |
|
Interest rate swaps |
|
1,325 |
|
595 |
|
|
|
|
|
730 |
|
|||||
|
|
$ |
19,585 |
|
$ |
(1 |
) |
$ |
|
|
$ |
|
|
$ |
19,586 |
|
As a result of the change in fair value of the junior subordinated debt and interest rate swaps, included in other non-interest income for the first three and six months of 2009 are net pre-tax gains (losses) of approximately $117,000 and ($1,000), respectively. As a result of the change in fair value of the junior subordinated debt and interest rate swaps for the first three and six months of 2008, respectively, there were no net pre-tax gains (losses) included in other non-interest income.
Certain assets, including goodwill, loan servicing rights, core deposits, other intangible assets, certain impaired loans and other long-lived assets, such as other real estate owned, are to be written down to their fair value on a nonrecurring basis through recognition of an impairment charge to the consolidated statements of operations. There were no other material impairment charges incurred for financial instruments carried at fair value on a nonrecurring basis during the three or six months ended June 30, 2009 and 2008.
Fair Value of Financial Instruments
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Companys assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Companys disclosures and those of other companies may not be meaningful.
The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of observable pricing. Pricing observability is impacted by a number of factors, including the type of liability, whether the asset and liability has an established market and the characteristics specific to the transaction. Assets and Liabilities with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, assets and liabilities rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment utilized in measuring fair value.
Generally accepted accounting principles require disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. This disclosure does not and is not intended to represent the fair value of the Company.
A summary of the carrying amounts and estimated fair values of financial instruments is as follows:
|
|
As of June 30, 2009 |
|
As of December 31, 2008 |
|
||||||||
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
|
||||
|
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
|
||||
|
|
(In thousands) |
|
||||||||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
40,977 |
|
$ |
40,977 |
|
$ |
19,284 |
|
$ |
19,284 |
|
Securities available for sale |
|
229,107 |
|
229,107 |
|
226,665 |
|
226,665 |
|
||||
Securities held to maturity |
|
3,048 |
|
1,740 |
|
3,060 |
|
1,926 |
|
||||
Federal Home Loan Bank stock |
|
5,715 |
|
5,715 |
|
5,715 |
|
5,715 |
|
||||
Mortgage loans held for sale |
|
5,888 |
|
5,888 |
|
2,283 |
|
2,283 |
|
||||
Loans, net |
|
875,207 |
|
881,054 |
|
878,181 |
|
897,930 |
|
||||
Cash surrender value of life insurance policies |
|
18,736 |
|
18,736 |
|
18,552 |
|
18,552 |
|
||||
Accrued interest receivable |
|
4,639 |
|
4,639 |
|
4,734 |
|
4,734 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
||||
Deposits |
|
947,914 |
|
955,943 |
|
850,600 |
|
858,744 |
|
||||
Federal funds purchased and agreements to repurchase |
|
124,875 |
|
116,757 |
|
173,510 |
|
174,996 |
|
||||
Junior subordinated debt (as restated) |
|
18,856 |
|
18,856 |
|
18,260 |
|
18,260 |
|
||||
Interest rate swap (as restated) |
|
730 |
|
730 |
|
1,325 |
|
1,325 |
|
||||
Long-term debt |
|
35,000 |
|
35,682 |
|
50,000 |
|
50,975 |
|
||||
Accrued interest payable |
|
3,001 |
|
3,001 |
|
3,413 |
|
3,413 |
|
||||
This table has been adjusted to reflect the Companys reclassification of Federal Home Loan Bank stock from securities available for sale to Federal Home Loan Bank stock. See Note 2, Restatement of Consolidated Financial Statements to the consolidated financial statements included in this Form 10-K.
Cash and cash equivalents:
The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets fair values.
Investment Securities Available for Sale:
Securities classified as available for sale are reported at fair value utilizing Level 1, Level 2 and Level 3 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the bonds terms and conditions, among other things.
Federal Home Loan Bank Stock:
Federal law requires a member institution of the Federal Home Loan Bank to hold stock of its district FHLB according to a predetermined formula. The Federal Home Loan Bank stock is carried at cost.
Loans Held for Sale:
The fair value of loans held for sale is determined, when possible, using Level 2 quoted secondary-market prices. If no such quoted price exists, the fair value of a loan is determined based on expected proceeds based on sales contracts and commitments.
Impaired Loans:
The Company generally values impaired loans that are accounted for under SFAS 114, Accounting by creditors for impairment of a loan an amendment of FASB Statements No. 5 & 15, based on the fair value of the loans collateral. Loans are determined to be impaired when management has utilized current information and economic events and judged that it is probable that not all of the principal and interest due under the contractual terms of the loan agreement will be collected. Impaired loans are initially evaluated and revalued at the time the loan is identified as impaired. Impaired loans are loans where the current appraisal of the underlying collateral is less than the principal balance of the loan and the loan is a non-accruing loan. Fair value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy or based on the present value of estimated future cash flows if repayment is not collateral dependent. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable and is determined based on appraisals by qualified licensed appraisers hired by the Company. For the purposes of determining the fair value of impaired loans that are collateral dependent, the company defines a current appraisal and evaluation as those completed within 12 months and performed by an independent third party. Appraised and reported values may be discounted based on managements historical knowledge, changes in market conditions from the time of valuation, and/or managements expertise and knowledge of the client and clients business.
As of June 30, 2009, 96.0% of all impaired loans had current third party appraisals or evaluations of their collateral to measure impairment. For these impaired loans, the bank takes immediate action to determine the current value of collateral securing its troubled loans. The remaining 4.0% of impaired loans were in process of being evaluated at June 30, 2009. During the ongoing supervision of a troubled loan, the Company performs a cash flow evaluation, obtains an appraisal update or obtains a new appraisal. The Company reviews all impaired loans on a quarterly basis to ensure that the market values are reasonable and that no further deterioration has occurred. If the evaluation indicates that the market value has deteriorated below the carrying value of the loan, either the entire loan or the partial difference between the market value and principal balance is charged-off unless there are material mitigating factors to the contrary. If a loan is not charged down reserves are allocated to reflect the estimated collateral shortfall. Loans that have been partially charged-off are classified as non-performing loans for which none of the current loan terms have been modified. During the first six months of 2009, there were no partial loan charge-offs. In order for an impaired loan not to have a specific valuation allowance it must be determined by the Company through a current evaluation that there is sufficient underlying collateral after appropriate discounts have been applied, that is in excess of the carrying value.
Other Real Estate Owned:
Foreclosed properties are adjusted to fair value less estimated selling costs at the time of foreclosure in preparation for transfer from portfolio loans to other real estate owned (OREO), establishing a new accounting basis. The Company subsequently adjusts the fair value on the OREO utilizing Level 3 on a non-recurring basis to reflect partial write-downs based on the observable market price, current appraised value of the asset or other estimates of fair value.
Mortgage servicing rights:
The fair value of mortgage servicing rights is based on observable market prices when available or the present value of expected future cash flows when not available.
Deposit liabilities:
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings and certain types of money market accounts) are considered to be equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities on time deposits.
Securities sold under agreements to repurchase and federal funds purchased:
The carrying amounts of these borrowings approximate their fair values.
Long-term debt:
The fair value of long-term debt is calculated based on the discounted value of contractual cash flows, using rates currently available for borrowings with similar maturities.
Junior Subordinated Debt:
The Company has elected to record its junior subordinated debt at fair value. The Company recorded the fair value of its junior subordinated debt utilizing Level 3 inputs, with unrealized gains and losses reflected in other income in the consolidated statements of operations. The fair value is estimated utilizing the income approach whereby the expected cash flows over the remaining estimated life of the debentures are discounted using the Companys credit spread over the current fully indexed yield based on an expectation of future interest rates derived from observed market interest rate curves and volatilities. The Companys credit spread was calculated based on similar trust preferred securities issued within the last twelve months.
Interest Rate Swap Agreements:
The Company has recorded the fair value of its interest rate swaps utilizing Level 3 inputs, with unrealized gains and losses reflected in other income in the consolidated statements of operations. The fair value measurement of the interest rate swaps is determined by netting the discounted future fixed or variable cash payments and the discounted expected fixed or variable cash receipts based on an expectation of future interest rates derived from observed market interest rate curves and volatilities.
Accrued interest receivable and payable:
The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.
Off-balance sheet instruments:
Fair values for the off-balance sheet instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing.
11. Investment Securities
The amortized cost, gross unrealized gains and losses and fair value of investment securities available for sale and investment securities held to maturity at June 30, 2009 and December 31, 2008 were as follows:
Securities Available For Sale
|
|
June 30, 2009 |
|
December 31, 2008 |
|
||||||||||||||||||||
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
Gross |
|
Gross |
|
|
|
||||||||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
||||||||
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
||||||||
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
U.S. Government agency securities |
|
$ |
7,487 |
|
$ |
228 |
|
$ |
|
|
$ |
7,715 |
|
$ |
9,438 |
|
$ |
110 |
|
$ |
(217 |
) |
$ |
9,331 |
|
Agency Mortgage-backed debt securities |
|
162,143 |
|
3,040 |
|
(1,525 |
) |
163,658 |
|
151,782 |
|
3,176 |
|
(159 |
) |
154,799 |
|
||||||||
Non-Agency Mortgage-backed debt securities |
|
30,073 |
|
229 |
|
(5,135 |
) |
25,167 |
|
34,163 |
|
39 |
|
(3,824 |
) |
30,378 |
|
||||||||
Obligations of states and political subdivisions |
|
28,048 |
|
100 |
|
(1,235 |
) |
26,913 |
|
26,582 |
|
42 |
|
(1,591 |
) |
25,033 |
|
||||||||
Trust preferred securities - single issuer |
|
500 |
|
|
|
(110 |
) |
390 |
|
500 |
|
|
|
(96 |
) |
404 |
|
||||||||
Trust preferred securities - pooled |
|
8,069 |
|
|
|
(7,355 |
) |
714 |
|
8,408 |
|
|
|
(7,682 |
) |
726 |
|
||||||||
Corporate and other debt securities |
|
2,453 |
|
|
|
(307 |
) |
2,146 |
|
4,264 |
|
|
|
(904 |
) |
3,360 |
|
||||||||
Equity securities |
|
3,583 |
|
37 |
|
(1,216 |
) |
2,404 |
|
3,398 |
|
34 |
|
(798 |
) |
2,634 |
|
||||||||
Total investment securities available for sale |
|
$ |
242,356 |
|
$ |
3,634 |
|
$ |
(16,883 |
) |
$ |
229,107 |
|
$ |
238,535 |
|
$ |
3,401 |
|
$ |
(15,271 |
) |
$ |
226,665 |
|
Securities Held To Maturity
|
|
June 30, 2009 |
|
December 31, 2008 |
|
||||||||||||||||||||
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
Gross |
|
Gross |
|
|
|
||||||||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
||||||||
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
||||||||
|
|
(In thousands) |
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Trust preferred securities - single issuer |
|
$ |
2,016 |
|
$ |
5 |
|
$ |
(339 |
) |
$ |
1,682 |
|
$ |
2,019 |
|
$ |
2 |
|
$ |
(153 |
) |
$ |
1,868 |
|
Trust preferred securities - pooled |
|
1,032 |
|
|
|
(973 |
) |
59 |
|
1,041 |
|
|
|
(983 |
) |
58 |
|
||||||||
Total investment securities held to maturity |
|
$ |
3,048 |
|
$ |
5 |
|
$ |
(1,312 |
) |
$ |
1,741 |
|
$ |
3,060 |
|
$ |
2 |
|
$ |
(1,136 |
) |
$ |
1,926 |
|
This table has been adjusted to reflect the Companys reclassification of Federal Home Loan Bank stock from securities available for sale to Federal Home Loan Bank stock. See Note 2, Restatement of Consolidated Financial Statements to the consolidated financial statements included in this Form 10-K.
Management evaluates investment securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Factors that may be indicative of impairment include, but are not limited to, the following:
· Fair value below cost and the length of time
· Adverse condition specific to a particular investment
· Rating agency activities (e.g., downgrade)
· Financial condition of an issuer
· Dividend activities
· Suspension of trading
· Management intent
· Changes in tax laws or other policies
· Subsequent market value changes
· Economic or industry forecasts
Other-than-temporary impairment means management believes the securitys impairment is due to factors that could include its inability to pay interest or dividends, its potential for default, and/or other factors. When a held to maturity or available for sale debt security is assessed for other-than-temporary impairment, management has to first consider (a) whether the Company intends to sell the security, and (b) whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis. If one of these circumstances applies to a security, an other-than-temporary impairment loss is recognized in the statement of operations equal to the full amount of the decline in fair value below amortized cost. If neither of these circumstances applies to a security, but the Company does not expect to recover the entire amortized cost basis, an other-than-temporary impairment loss has occurred that must be separated into two categories: (a) the amount related to credit loss, and (b) the amount related to other factors. In assessing the level of other-than-temporary impairment attributable to credit loss, management compares the present value of cash flows expected to be collected with the amortized cost basis of the security. The portion of the total other-than-temporary impairment related to credit loss is recognized in earnings (as the difference between the fair value and the present value of the estimated cash flows), while the amount related to other factors is recognized in other comprehensive income. The total other-than-temporary impairment loss is presented in the statement of operations, less the portion
recognized in other comprehensive income. When a debt security becomes other-than-temporarily impaired, its amortized cost basis is reduced to reflect the portion of the total impairment related to credit loss.
As of June 30, 2009, the Company had approximately $3.0 million and $229.1 million in held to maturity and available for sale investment securities, respectively. The Company may record impairment charges on its investment securities if they suffer a decline in value that is considered other-than-temporary. Numerous factors, including those set forth above as well as adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on the Companys investment portfolio and may result in other-than-temporary impairment on certain investment securities in future periods. The Companys investment portfolios include private label mortgage-backed securities, trust preferred securities principally issued by bank holding companies (bank issuers) (including nine pooled securities), perpetual preferred securities issued by banks, equity securities, and bank issued corporate bonds. These investments may pose a higher risk of future impairment charges by the Company as a result of the current downturn in the U.S. economy and its potential negative effect on the future performance of these bank issuers and/or the underlying mortgage loan collateral. Based on recent stress tests and potential recommendations by the U.S. Government and the banking regulators, some bank trust preferred issuers may elect to defer future payments of interest on such securities. Such elections by issuers of securities within the Companys investment portfolio could adversely affect securities valuations and result in future impairment charges. Approximately $30.1 million of the residential mortgage-backed securities classified as available for sale securities were non-agency mortgage-backed securities at June 30, 2009, while the remainder of the residential mortgage-backed securities portfolio ($162.1 million) was issued by U.S. government sponsored agencies. The non-agency mortgage-backed securities classified as available for sale securities had net unrealized losses of $4.9 million at June 30, 2009.
The age of unrealized losses and fair value of related investment securities available for sale and investment securities held to maturity at June 30, 2009 and December 31, 2008 were as follows:
Securities Available for Sale
|
|
June 30, 2009 |
|
||||||||||||||||
|
|
Less than Twelve Months |
|
More than Twelve Months |
|
Total |
|
||||||||||||
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
||||||
|
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
||||||
|
|
(In thousands) |
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. Government agency securities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Agency Mortgage-backed debt securities |
|
47,458 |
|
(1,525 |
) |
|
|
|
|
47,458 |
|
(1,525 |
) |
||||||
Non-Agency Mortgage-backed debt securities |
|
4,596 |
|
(121 |
) |
12,412 |
|
(5,014 |
) |
17,008 |
|
(5,135 |
) |
||||||
Obligations of states and political subdivisions |
|
19,391 |
|
(869 |
) |
4,108 |
|
(366 |
) |
23,499 |
|
(1,235 |
) |
||||||
Trust preferred securities - single issuer |
|
|
|
|
|
390 |
|
(110 |
) |
390 |
|
(110 |
) |
||||||
Trust preferred securities - pooled |
|
|
|
|
|
714 |
|
(7,355 |
) |
714 |
|
(7,355 |
) |
||||||
Corporate and other debt securities |
|
1,384 |
|
(81 |
) |
774 |
|
(226 |
) |
2,158 |
|
(307 |
) |
||||||
Equity securities |
|
126 |
|
(168 |
) |
1,637 |
|
(1,048 |
) |
1,763 |
|
(1,216 |
) |
||||||
Total investment securities available for sale |
|
$ |
72,955 |
|
$ |
(2,764 |
) |
$ |
20,035 |
|
$ |
(14,119 |
) |
$ |
92,990 |
|
$ |
(16,883 |
) |
Securities Held To Maturity
|
|
June 30, 2009 |
|
||||||||||||||||
|
|
Less than Twelve Months |
|
More than Twelve Months |
|
Total |
|
||||||||||||
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
||||||
|
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
||||||
|
|
(In thousands) |
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Trust preferred securities - single issuer |
|
$ |
|
|
$ |
|
|
$ |
637 |
|
$ |
(339 |
) |
$ |
637 |
|
$ |
(339 |
) |
Trust preferred securities - pooled |
|
|
|
|
|
59 |
|
(973 |
) |
59 |
|
(973 |
) |
||||||
Total investment securities held to maturity |
|
$ |
|
|
$ |
|
|
$ |
696 |
|
$ |
(1,312 |
) |
$ |
696 |
|
$ |
(1,312 |
) |
Securities Available for Sale
|
|
December 31, 2008 |
|
||||||||||||||||
|
|
Less than Twelve Months |
|
More than Twelve Months |
|
Total |
|
||||||||||||
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
||||||
|
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
||||||
|
|
(In thousands) |
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. Government agency securities |
|
$ |
5,707 |
|
$ |
(217 |
) |
$ |
|
|
$ |
|
|
$ |
5,707 |
|
$ |
(217 |
) |
Agency Mortgage-backed debt securities |
|
9,470 |
|
(94 |
) |
1,389 |
|
(65 |
) |
10,859 |
|
(159 |
) |
||||||
Non-Agency Mortgage-backed debt securities |
|
18,614 |
|
(2,460 |
) |
3,134 |
|
(1,364 |
) |
21,748 |
|
(3,824 |
) |
||||||
Obligations of states and political subdivisions |
|
22,740 |
|
(1,591 |
) |
|
|
|
|
22,740 |
|
(1,591 |
) |
||||||
Trust preferred securities - single issuer |
|
|
|
|
|
404 |
|
(96 |
) |
404 |
|
(96 |
) |
||||||
Trust preferred securities - pooled |
|
|
|
|
|
726 |
|
(7,682 |
) |
726 |
|
(7,682 |
) |
||||||
Corporate and other debt securities |
|
1,065 |
|
(157 |
) |
2,295 |
|
(747 |
) |
3,360 |
|
(904 |
) |
||||||
Equity securities |
|
162 |
|
(53 |
) |
1,778 |
|
(745 |
) |
1,940 |
|
(798 |
) |
||||||
Total investment securities available for sale |
|
$ |
57,758 |
|
$ |
(4,572 |
) |
$ |
9,726 |
|
$ |
(10,699 |
) |
$ |
67,484 |
|
$ |
(15,271 |
) |
Securities Held To Maturity
|
|
December 31, 2008 |
|
||||||||||||||||
|
|
Less than Twelve Months |
|
More than Twelve Months |
|
Total |
|
||||||||||||
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
||||||
|
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
||||||
|
|
(In thousands) |
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Trust preferred securities - single issuer |
|
$ |
823 |
|
$ |
(153 |
) |
$ |
|
|
$ |
|
|
$ |
823 |
|
$ |
(153 |
) |
Trust preferred securities - pooled |
|
58 |
|
(983 |
) |
|
|
|
|
58 |
|
(983 |
) |
||||||
Total investment securities held to maturity |
|
$ |
881 |
|
$ |
(1,136 |
) |
$ |
|
|
$ |
|
|
$ |
881 |
|
$ |
(1,136 |
) |
At June 30, 2009, there were 57 securities with unrealized losses in the less than twelve month category and 56 securities with unrealized losses in the twelve month or more categories.
A. Obligations of U. S. Government Agencies and Corporations. The unrealized losses on the Companys investments in obligations of U.S. Government agencies were caused by changing credit spreads in the market as a result of the ongoing credit crisis. At June 30, 2009, the fair value of the U. S. Government agencies and corporations bonds represented 3.4% of the total fair value of the available for sale securities held in the investment securities portfolio. The contractual cash flows are guaranteed by an agency of the U.S. Government. Because the Company has no intention to sell these securities, nor is it more likely than not that the Company will be required to sell these securities, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2009. Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.
B. Mortgage-Backed Debt Securities. The unrealized losses on the Companys investments in federal agency mortgage-backed securities and corporate (non-agency) collateralized mortgage obligations were primarily caused by changing credit and pricing spreads in the market as a result of the ongoing credit crisis. At June 30, 2009, federal agency mortgage-backed securities and collateralized mortgage obligations represented 71.4% of the total fair value of available for sale securities held in the investment securities portfolio and corporate (non-agency) collateralized mortgage obligations represented 11.0% of the total fair value of available for sale securities held in the investment securities portfolio. The Company purchased those securities at a price relative to the market at the time of the purchase. The contractual cash flows of those federal agency mortgage-backed securities are guaranteed by the U.S. Government. Because the Company has no intention to sell these securities, nor is it more likely than not that the Company will be required to sell these securities, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2009.
As of June 30, 2009, the Company owned 11 corporate (non-agency) collateralized mortgage obligations (CMO) whose aggregate historical cost basis is greater than estimated fair value. The Company uses a two step modeling approach to analyze each issue to determine whether or not the current unrealized losses are due to credit impairment and therefore other-than-temporarily impaired. Step one in the modeling process applies default and severity vectors to each security based on current credit data detailing delinquency, bankruptcy, foreclosure and real estate owned (REO) performance. The results of the vector analysis are compared to the securitys current credit support coverage to determine if the security has adequate collateral support. If the securitys current credit support coverage falls below certain predetermined levels, step two is utilized. In step two, the Company uses a third party to assist in calculating the present value of current estimated cash flows to ensure there are no adverse changes in cash flows during the quarter leading to an other-than-temporary-impairment. Managements assumptions used in step two include default and severity vectors and prepayment assumptions along with various other criteria including: percent decline in fair value; credit rating downgrades; probability of repayment of amounts due and changes in average life. At June 30, 2009, no CMO qualified for the step two modeling approach. Because of the results of the modeling process and because the Company has no intention to sell these securities, nor is it more likely than not that the Company will be required to sell these securities, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2009. Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.
Because the decline in the market value of agency mortgage-backed debt securities is primarily attributable to changes in market pricing since the time of purchase and not credit quality, and because the Company has no intention to sell these securities, nor is it more likely than not that the Company will be required to sell these securities, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2009. Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.
C. State and Municipal Obligations. The unrealized losses on the Companys investments in state and municipal obligations were primarily caused by changing credit spreads in the market as a result of the ongoing credit crisis and the deterioration of the creditworthiness of certain mono-line bond insurers. At June 30, 2009, state and municipal obligation bonds represented 11.8% of the total fair value of available for sale securities held in the investment securities portfolio. The Company purchased those obligations at a price relative to the market at the time of the purchase, and the tax advantaged benefit of the interest earned on these investments reduces the Companys federal tax liability. Because the Company has no intention to sell these securities, nor is it more likely than not that the Company will be required to sell these securities, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2009. Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.
D. Other Debt Securities and Trust Preferred Securities. Included in other debt securities available for sale at June 30, 2009, was 1 asset-backed security and 2 corporate debt issues representing 0.9% of the total fair value of available for sale securities. Included in trust preferred securities were single issue, trust preferred securities (TRUPS or CDO) representing 0.2% and 96.6% of the total fair value of available for sale securities and the total held to maturity securities, respectively, and pooled TRUPS representing 0.3% and 3.4% of the total fair value of available for sale securities and the total held to maturity securities, respectively.
The unrealized losses on other debt securities relate primarily to changing pricing due to the financial crisis affecting these markets and not necessarily the expected cash flows of the individual securities. Due to market conditions, it is unlikely that the Company would be able to recover its investment in these securities if the Company sold the securities at this time. Because the Company has analyzed the credit risk and cash flow characteristics of these securities and the Company has no intention to sell these securities, nor is it more likely than not that the Company will be required to sell these securities, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2009.
As of June 30, 2009, the Company owned 3 single issuer TRUPS and 8 pooled TRUPS of other financial institutions whose aggregate historical cost basis is greater than their estimated fair value. Investments in trust preferred securities included (a) amortized cost of $2.5 million of single issuer TRUPS of other financial institutions with a fair value of $2.1 million and (b) amortized cost of $9.1 million of pooled TRUPS of other financial institutions with a fair value of $0.8 million. The issuers in these securities are primarily banks, but some of the pools do include a limited number of insurance companies. The Company has evaluated these securities and determined that the decreases in estimated fair value are temporary with the exception of one pooled TRUPS which was other than temporarily impaired at June 30, 2009 and resulted in a net credit impairment charge to earnings of $322,000 for the three and six months ended June 30, 2009 as the Companys estimate of projected cash flows it expected to receive was less than the securitys carrying value. The Company performs an ongoing analysis of these securities utilizing both readily available market data and third party analytical models. Future changes in interest rates or the credit quality and strength of the underlying issuers may reduce the market value of these and other securities. If such decline is determined to be other than temporary, the Company will record the necessary charge to earnings and/or AOCI to reduce the securities to their then current fair value.
For pooled TRUPS, the Company uses a third party model (model) to assist in calculating the present value of current estimated cash flows to the previous estimate to ensure there are no adverse changes in cash flows during the quarter. The models valuation methodology is based on the premise that the fair value of a CDOs collateral should approximate the fair value of its liabilities. Conceptually, this premise is supported by the notion that cash generated by the collateral flows through the CDO structure to bond and equity holders, and that the CDO structure neither enhances nor diminishes its value. This approach was designed to value structured assets like TRUPS that currently do not have an active trading market, but are secured by collateral that can be benchmarked to comparable, publicly traded securities. The following describes the models assumptions, cash flow projections, and the valuation approach developed using the market value equivalence approach:
Defaults and Expected Deferrals
The model takes into account individual defaults that have already occurred by any participating entity within the pool of entities that make up the securities underlying collateral. The analyses show the individual names of each entity which are currently in default or have deferred their dividend payment. In light of the severity of current economic and credit market conditions, the model makes the conservative assumption that all deferring issuers will default. The model assesses incremental, near-term default risk by performing a ratio analysis designed to generate an estimate of the CAMELS rating that regulators use to assess the financial health of banks and thrifts which is updated quarterly. These shadow ratios reflect the key metrics that define the acronym CAMELS, specifically capital adequacy, asset quality, earnings, liquidity, and sensitivity to interest rates. The model calculates these ratios for each individual issuer in the TRUPS pool using publicly available data for the most recent quarter, and weighs the results. Capital adequacy and liquidity measures are emphasized relative to benchmark weights to account for the current stress on the banking system. The model assigned a numerical score to each issuer based on their CAMELS ratios, with scores ranging from 1 for the strongest institutions, to 4 and 5 for banks believed to be experiencing above average stress in the current credit cycle. Similar to the default assumption regarding deferring issuers, the model assumes that all shadow CAMEL ratings of 4 and 5 will also default. The models assumptions incorporate the belief that the severity of the stress on the banking system has introduced the potential for a sudden and dramatic decline in the operating performance of banks. Although difficult to identify, the model uses an estimated pool-wide default probability of .36% annually for the duration of each deal. This
default rate is consistent with Moodys idealized default probability for applicable corporate credits, and represents the base case default scenario used to model each deal.
Prepayments
Generally, TRUPS are callable within five to ten years of issuance. Due to current market conditions and the limited, eight year history of TRUPS, prepayments are difficult to predict. The model assumes that prepayments will be limited to those issuers that are acquired by large banks with low financing costs. In deference to the conventional view that the banking industry will undergo significant consolidation over the next several years, the model conservatively estimates that 10% of TRUPs pools will be acquired and recapitalized over the next 3 to 4 years. Thereafter, the model assumes no further prepayments.
Auction Calls
Auction calls are a structural feature designed to create a 10-year expected life for collateral secured by 30-year TRUPS. Auction call provisions mandate that at the end of the tenth year of a deal, the Trustee submit the collateral to auction at a minimum price sufficient to retire the deals liabilities at par. If the initial auction is unsuccessful, turbo payments take effect that divert cash flows from equity holders to pay down senior bond principal, and auctions are repeated quarterly until successful. During the period that the TRUPS market was active, it was generally assumed that auction calls would succeed because they offered a source of collateral that dealers could recycle into new TRUPS. However, given the uncertain future of the TRUPS market, negative collateral credit migration, and the decline in market value of TRUPS, the model assumes that a successful auction call is highly unlikely. Therefore, model expects that the TRUPS will extend through their full 30-year maturity.
Cash Flow Projections
The model projects deal cash flows using a proprietary model that incorporates the priority of payments defined in each TRUPS offering memorandum, and specific structural features such as over collateralization and interest coverage tests. The model estimates gross collateral cash flows based on the default, recovery, prepayment, and auction call assumptions described above, a forward LIBOR curve, and the specific terms of each issue, including collateral coupon spreads, payment dates, first call dates, and maturity dates. To derive a measure of each securitys net revenue, the model adjusts projected gross cash flows by an estimate of net hedge payments based on the terms of the deals swap agreements, and subtracted the administrative expenses disclosed in each TRUPS offering memorandum. To project cash flows to bond and equity holders, the model analyzes net revenue projections through a vector of each TRUPS priority of payments. The model captures coupon payments to each tranche, the priority of principal distributions, and diversions of cash flows from each securitys lower tranches to the senior tranche in the event of over-collateralization or interest coverage test failures.
Valuation
The fair value of an asset is determined by the markets required rate of return for its cash flows. Identifying the markets required rate of return for the Notes is challenging, given that, over the last year, trading in TRUPS has virtually ceased, and the few secondary market transactions that have occurred have been limited to distressed sales that do not accurately represent a measure of fair value. This task of obtaining a reasonable fair value is further complicated by the fact that TRUPS do not have a benchmark index, such as the ABX, and are not readily comparable to other CDO asset classes. The models solution to this problem was to rely on market value equivalence to derive the fair value of the Notes based on the models assessment of the fair value of the underlying collateral. At this stage of the analysis, it is important to note that the model accounts for the negative credit migration of TRUPS pools by incorporating projected defaults and recoveries into the models cash flow projections. Therefore, so as not to double-count incremental default risk when discounting these cash flows to fair value, the model produces a market discount rate for each pool that reflects the pools credit rating at origination.
Under market value equivalence, the decline in market value of the TRUPS liabilities should correspond to the decline in the market value of the collateral. Since there is no observable spread curve for TRUPS on which to base the allocation of this loss, the model allocates the loss pro rata across tranches. This assumption approximates a parallel shift in the credit curve, which is broadly consistent with the general movement of spreads during the credit crisis. The model then calculates internal rates of return for each tranche based on their loss-adjusted values and scheduled interest and
principal income. These rates serve as the basis for the models estimate of the markets required rate of return for each tranche, as originally rated.
At this stage of the valuation, the model addressed the decline in the credit quality of the collateral. TRUPS are designed so that credit losses are absorbed sequentially within the capital structure, beginning with the equity tranche and ending with the senior notes. The par amount of the capital structure that is junior to a particular bond is called subordination, which is a measure of the collateral losses that can be sustained prior to that bond suffering a loss. As defaults occur, the bonds subordination is reduced or eliminated, increasing its default risk and reducing its market value. To account for this increased risk, the model reduces the subordination of each tranche by incremental defaults that are projected to occur over the next two years, and then re-calibrates the market discount rate for each tranche based on the remaining subordination.
The final step in our valuation was to discount the cash flows that the model projects for each tranche by their respective market required rates of return. To confirm that the models valuation results were reliable, the model noted that under market equivalence constraints, the fair values of the TRUPS assets and liabilities should vary proportionately.
The following table provides additional information related to our single issuer trust preferred securities as of:
|
|
June 30, 2009 |
|
|||||||||
|
|
|
|
|
|
Gross |
|
|
|
|||
|
|
Amortized |
|
Fair |
|
Unrealized |
|
Number of |
|
|||
|
|
Cost |
|
Value |
|
Gain/Losses |
|
Securities |
|
|||
|
|
(Dollar amounts in thousands) |
|
|||||||||
Investment grades: |
|
|
|
|
|
|
|
|
|
|||
BBB Rated |
|
$ |
976 |
|
$ |
637 |
|
$ |
(339 |
) |
1 |
|
Not rated |
|
1,540 |
|
1,435 |
|
(105 |
) |
2 |
|
|||
Totals |
|
$ |
2,516 |
|
$ |
2,072 |
|
$ |
(444 |
) |
3 |
|
There were no interest deferrals or defaults in any of the single issuer trust preferred securities in our investment portfolio as of June 30, 2009.
The following table provides additional information related to our pooled trust preferred securities as of:
June 30, 2009 |
|
|||||||||||||||||||||||||||||||||
Deal |
|
Class |
|
Book Value |
|
Fair Value |
|
Unrealized |
|
Lowest Credit |
|
# of |
|
Actual |
|
Expected |
|
Current |
|
Current |
|
Actual |
|
Expected |
|
Excess |
|
|||||||
(Dollar amounts in thousands) |
|
|||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||
Pooled trust preferred securities for which an other-than-temporary impairment charge has been recognized: |
|
|||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding #1 |
|
Class D-1 |
|
$ |
700 |
|
$ |
49 |
|
$ |
(651 |
) |
Ca (Moodys) |
|
55 |
|
$ |
94,300 |
|
$ |
7,651 |
|
$ |
643,379 |
|
$ |
65,300 |
|
14.7 |
% |
1.4 |
% |
0.0 |
% |
|
|
Total |
|
$ |
700 |
|
$ |
49 |
|
$ |
(651 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Pooled trust preferred securities for which an other-than-temporary impairment charge has not been recognized: |
|
|||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||
Holding #2 |
|
Class B-1 |
|
1,300 |
|
174 |
|
(1,126 |
) |
A- (S&P) |
|
16 |
|
35,000 |
|
|
|
211,000 |
|
$ |
108,700 |
|
9.0 |
% |
0.0 |
% |
14.1 |
% |
||||||
Holding #3 |
|
Class C |
|
1,003 |
|
92 |
|
(911 |
) |
Caa1 (Moodys) |
|
32 |
|
13,000 |
|
|
|
315,000 |
|
31,648 |
|
4.1 |
% |
0.0 |
% |
17.6 |
% |
|||||||
Holding #4 |
|
Senior Subordinate |
|
583 |
|
62 |
|
(521 |
) |
Baa2 (Moodys) |
|
50 |
|
28,000 |
|
|
|
129,000 |
|
81,000 |
|
4.0 |
% |
0.0 |
% |
16.2 |
% |
|||||||
Holding #5 |
|
Class B-2 |
|
1,489 |
|
73 |
|
(1,416 |
) |
Caa3 (Moodys) |
|
30 |
|
41,250 |
|
|
|
247,750 |
|
33,000 |
|
16.6 |
% |
0.0 |
% |
1.7 |
% |
|||||||
Holding #6 |
|
Mezzanine Notes |
|
1,032 |
|
59 |
|
(973 |
) |
Caa1 (Moodys) |
|
29 |
|
44,000 |
|
8,000 |
|
277,500 |
|
20,289 |
|
15.9 |
% |
3.4 |
% |
3.3 |
% |
|||||||
Holding #7 |
|
Class B-3 |
|
494 |
|
46 |
|
(448 |
) |
Ca (Moodys) |
|
64 |
|
61,750 |
|
19,000 |
|
601,775 |
|
53,600 |
|
10.3 |
% |
3.5 |
% |
11.2 |
% |
|||||||
Holding #8 |
|
Class B |
|
1,000 |
|
107 |
|
(893 |
) |
Caa3 (Moodys) |
|
50 |
|
57,000 |
|
4,000 |
|
345,900 |
|
62,650 |
|
16.5 |
% |
1.4 |
% |
3.8 |
% |
|||||||
Holding #9 |
|
Class B-2 |
|
1,500 |
|
111 |
|
(1,389 |
) |
Ca (Moodys) |
|
36 |
|
39,250 |
|
|
|
303,000 |
|
38,500 |
|
13.0 |
% |
0.0 |
% |
7.7 |
% |
|||||||
|
|
Total |
|
$ |
8,401 |
|
$ |
724 |
|
$ |
(7,677 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the above factors, our evaluation of impairment also includes a stress test analysis which provides an estimate of excess subordination for each tranche. We stress the cash flows of each pool by increasing current default assumptions to the level of defaults which results in an adverse change in estimated cash flows. This stressed breakpoint is then used to calculate excess subordination levels for each pooled trust preferred security.
Future evaluations of the above mentioned factors could result in the Company recognizing additional impairment charges on its TRUPS portfolio.
E. Equity Securities. Included in equity securities available for sale at June 30, 2009, were equity investments in 29 financial services companies. The Company owns 1 qualifying Community Reinvestment Act (CRA) equity investment with an amortized cost and fair value of approximately $1.0 million, respectively. The remaining 30 equity securities have an average amortized cost of approximately $81,000 and an average fair value of approximately $46,000. While $1.6 million in fair value of the equity securities has been below amortized cost for a period of more than twelve months, the Company believes the decline in market value of the equity investment in financial services companies is primarily attributable to changes in market pricing and not fundamental changes in the earning potential of the individual companies. The Company has the intent and ability to retain its investment in these securities for a period of time sufficient to allow for any anticipated recovery in market value. The Company does not consider its equity securities to be other-than-temporarily-impaired as June 30, 2009.
As of June 30, 2009, the fair value of all securities available for sale that were pledged to secure public deposits, repurchase agreements, and for other purposes required by law, was $211.4 million.
The contractual maturities of investment securities available for sale at June 30, 2009, are set forth in the following table. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, mortgage-backed securities are not included in the maturity categories in the following summary.
|
|
Securities
Available for |
|
Securities Held to Maturity |
|
||||||||
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
|
||||
|
|
Cost |
|
Value |
|
Cost |
|
Value |
|
||||
|
|
(In thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Due in one year or less |
|
$ |
1,275 |
|
$ |
1,236 |
|
$ |
|
|
$ |
|
|
Due after one year through five years |
|
|
|
|
|
|
|
|
|
||||
Due after five years through ten years |
|
1,421 |
|
1,194 |
|
|
|
|
|
||||
Due after ten years |
|
43,861 |
|
35,448 |
|
3,048 |
|
1,741 |
|
||||
Mortgage-backed securities |
|
192,216 |
|
188,825 |
|
|
|
|
|
||||
Equity securities |
|
3,583 |
|
2,404 |
|
|
|
|
|
||||
|
|
$ |
242,356 |
|
$ |
229,107 |
|
$ |
3,048 |
|
$ |
1,741 |
|
This table excludes Federal Home Loan Bank stock
Actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to the scheduled maturity without penalty.
The following gross gains (losses) were realized on sales of investment securities available for sale included in earnings for the three and nine months ended June 30, 2009 and 2008:
|
|
Three
Months Ended |
|
Six
Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
(in thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Gross gains |
|
$ |
175 |
|
$ |
100 |
|
$ |
363 |
|
$ |
252 |
|
Gross losses |
|
(49 |
) |
(39 |
) |
(78 |
) |
(50 |
) |
||||
Net realized gains on sales of securities |
|
$ |
126 |
|
$ |
61 |
|
$ |
285 |
|
$ |
202 |
|
The specific identification method was used to determine the cost basis for all investment security available for sale transactions.
There are no securities classified as trading, therefore, there were no gains or losses included in earnings that were a result of transfers of securities from the available-for-sale category into a trading category.
There were no sales or transfers from securities classified as held-to-maturity.
See Note 4 for unrealized holding losses on available-for-sale securities for the periods reported.
Other-than-temporary impairment recognized in earnings in the three and nine month periods ended June 30, 2009, for credit impaired debt securities is presented as additions in two components based upon whether the current period is the first time the debt security was credit impaired (initial credit impairment) or is not the first time the debt security was credit impaired (subsequent credit impairments). The credit loss component is reduced if the Company sells, intends to sell or believes it will be required to sell previously credit impaired debt securities. Additionally, the credit loss component is reduced if (i) the Company receives the cash flows in excess of what it expected to receive over the remaining life of the credit impaired debt security, (ii) the security matures or (iii) the security is fully written down.
Changes in the credit loss component of credit impaired debt securities were:
|
|
Three Months Ended |
|
Six Months Ended |
|
||
|
|
June 30, 2009 |
|
June 30, 2009 |
|
||
|
|
(in thousands) |
|
||||
Balance, beginning of period |
|
$ |
|
|
$ |
|
|
Additions: |
|
|
|
|
|
||
Initial credit impairments |
|
322 |
|
322 |
|
||
Balance, end of period |
|
$ |
322 |
|
$ |
322 |
|
12. Derivative Instruments
During October 2002, the Company entered into an interest rate swap agreement with a notional amount of $5 million. This derivative financial instrument effectively converted fixed interest rate obligations of outstanding mandatory redeemable capital debentures to variable interest rate obligations, decreasing the asset sensitivity of its balance sheet by more closely matching the Companys variable rate assets with variable rate liabilities. The Company considers the credit risk inherent in the contracts to be negligible. This swap has a notional amount equal to the outstanding principal amount of the related trust preferred securities, together with the same payment dates, maturity date and call provisions as the related trust preferred securities.
Under the swap, the Company pays interest at a variable rate equal to six month LIBOR plus 5.25%, adjusted semiannually, and the Company receives a fixed rate equal to the interest that the Company is obligated to pay on the related trust preferred securities. Both the interest rate swap and the related debt are recorded on the balance sheet at fair value through adjustments to operations.
In September 2008, the Company entered into two interest rate swaps to manage its exposure to interest rate risk. The interest rate swap transactions involved the exchange of the Companys floating rate interest rate payment on its $15 million in floating rate junior subordinated debt for a fixed rate interest payment without the exchange of the underlying principal amount. Entering into interest rate derivatives exposes the Company to the risk of counterparties failure to fulfill their legal obligations including, but not limited to, amounts due under each derivative contract. Notional principal amounts are often used to express the magnitude of these transactions, but the amounts due or payable are much smaller. These interest rate swaps are recorded on the balance sheet at fair value through adjustments to other income in the consolidated results of operations.
Interest rate caps are generally used to limit the exposure from the repricing and maturity of liabilities and to limit the exposure created by other interest rate swaps. In June 2003, the Company purchased a six month LIBOR cap to create protection against rising interest rates for the above mentioned $5 million interest rate swap.
The following table details the fair values of the derivative instruments included in the consolidated balance sheet for the period ended:
|
|
Liability Derivatives |
|
|||
|
|
June 30, 2009 |
|
|||
|
|
(Dollar amounts in thousands) |
|
|||
Derivatives Not Designated as Hedging |
|
Balance |
|
Fair |
|
|
|
|
|
|
|
|
|
Interest rate swap contracts |
|
Other liabilities |
|
$ |
730 |
|
Interest rate cap |
|
Other liabilities |
|
|
|
|
Total derivatives |
|
|
|
$ |
730 |
|
The following table details the effect of the change in fair values of the derivative instruments included in the consolidated statement of operations for the three and six month periods ended:
|
|
|
|
Amount
of Gain or (Loss) |
|
||||
Derivatives Not
Designated as Hedging |
|
Location
of Gain or |
|
For
the Three |
|
For
the Six |
|
||
|
|
|
|
(Dollar amounts in thousands) |
|
||||
|
|
|
|
|
|
|
|
||
Interest rate swap contracts |
|
Other income |
|
$ |
(77 |
) |
$ |
595 |
|
Interest rate cap |
|
Other income |
|
|
|
|
|
||
Total |
|
|
|
$ |
(77 |
) |
$ |
595 |
|
13. Loans
Total loans, net of allowance for loan losses, decreased to $875.2 million, or 0.7% annualized, at June 30, 2009 from $878.2 million at December 31, 2008.
The components of loans were as follows:
|
|
June 30, |
|
December 31, |
|
||
|
|
2009 |
|
2008 |
|
||
|
|
(Dollar amounts in thousands) |
|
||||
Residential real estate - 1 to 4 family |
|
$ |
173,674 |
|
$ |
185,866 |
|
Residential real estate - multi family |
|
35,953 |
|
34,869 |
|
||
Commercial |
|
166,952 |
|
174,219 |
|
||
Commercial, secured by real estate |
|
319,256 |
|
326,442 |
|
||
Construction |
|
99,683 |
|
89,556 |
|
||
Consumer |
|
4,641 |
|
3,995 |
|
||
Home equity lines of credit |
|
87,911 |
|
72,137 |
|
||
Loans |
|
888,070 |
|
887,084 |
|
||
|
|
|
|
|
|
||
Net deferred loan fees |
|
(834 |
) |
(779 |
) |
||
Allowance for loan losses |
|
(12,029 |
) |
(8,124 |
) |
||
Loans, net of allowance for loan losses |
|
$ |
875,207 |
|
$ |
878,181 |
|
Loans secured by real estate (not including home equity lending products) decreased $18.3 million, or 6.7% annualized, to $528.9 million at June 30, 2009 from $547.2 million at December 31, 2008. This decrease is primarily due to a decrease in commercial real estate loan originations.
Total commercial loans decreased to $486.2 million at June 30, 2009 from $500.7 million at December 31, 2008, a decrease of $14.5 million, or 5.8% annualized. The decrease is due primarily to a decrease in commercial real estate loans outstanding. There were no SBA loans sold during the period.
Changes in the allowance for loan losses were as follows:
|
|
As of and For The Period Ended |
|
||||
|
|
June 30, |
|
December 31, |
|
||
|
|
2009 |
|
2008 |
|
||
|
|
(Dollar amounts in thousands) |
|
||||
|
|
|
|
|
|
||
Balance, beginning |
|
$ |
8,124 |
|
$ |
7,264 |
|
Provision for loan losses |
|
5,125 |
|
4,835 |
|
||
Loans charged-off |
|
(1,255 |
) |
(4,073 |
) |
||
Recoveries |
|
35 |
|
98 |
|
||
Balance, ending |
|
$ |
12,029 |
|
$ |
8,124 |
|
The gross recorded investment in impaired loans not requiring an allowance for loan losses was $10.6 million at June 30, 2009 and $3.2 million at December 31, 2008. The gross recorded investment in impaired loans requiring an allowance for loan losses was $11.9 million at June 30, 2009 and $7.5 million at December 31, 2008. At June 30, 2009 and December 31, 2008, the related allowance for loan losses associated with those loans was $5.2 million and 2.3 million, respectively. For the periods ended June 30, 2009 and December 31, 2008, the average recorded investment in impaired loans was $12.8 million and $8.8 million, respectively. No interest income was recognized on impaired loans for the period ended June 30, 2009 and interest income of $33,000 was recognized on impaired loans for the year ended December 31, 2008.
14. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill as allocated to our reporting units for the periods indicated were:
|
|
Banking and |
|
|
|
Brokerage and |
|
|
|
||||
|
|
Financial |
|
|
|
Investment |
|
|
|
||||
|
|
Services |
|
Insurance |
|
Services |
|
Total |
|
||||
|
|
(Dollar amounts in thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Balance as of December 31, 2007 |
|
$ |
27,768 |
|
$ |
10,400 |
|
$ |
1,021 |
|
$ |
39,189 |
|
Goodwill acquired during the year 2008 |
|
|
|
223 |
|
|
|
223 |
|
||||
Contingent payments during the year 2008 |
|
|
|
320 |
|
|
|
320 |
|
||||
Balance as of December 31, 2008 |
|
27,768 |
|
10,943 |
|
1,021 |
|
39,732 |
|
||||
Balance as of June 30, 2009 |
|
$ |
27,768 |
|
$ |
10,943 |
|
$ |
1,021 |
|
$ |
39,732 |
|
On September 1, 2008, the Company paid cash of $1.8 million for Fisher Benefits Consulting, an insurance agency specializing in Group Employee Benefits, located in Pottstown, Pennsylvania. Fisher Benefits Consulting has become a part of VIST Insurance. As a result of the acquisition, VIST Insurance continues to expand its retail and commercial insurance presence in southeastern Pennsylvania counties. The results of Fisher Benefits Consulting operations have been included in the Companys consolidated financial statements since September 2, 2008.
Included in the $1.8 million purchase price for Fisher Benefits Consulting was goodwill of $0.2 million and identifiable intangible assets of $1.6 million. Contingent payments totaling $750,000, or $250,000 for each of the first three years following the acquisition, will be paid if certain predetermined revenue target ranges are met. These payments are expected to be added to goodwill when paid. The contingent payments could be higher or lower depending upon whether actual revenue earned in each of the three years following the acquisition is less than or exceeds the predetermined revenue goals.
In accordance with the provisions of SFAS No. 142 Goodwill and Other Intangible Assets, the Company amortizes other intangible assets over the estimated remaining life of each respective asset. Amortizable intangible assets were composed of the following:
|
|
June 30, 2009 |
|
December 31, 2008 |
|
||||||||
|
|
Gross |
|
|
|
Gross |
|
|
|
||||
|
|
Carrying |
|
Accumulated |
|
Carrying |
|
Accumulated |
|
||||
|
|
Amount |
|
Amortization |
|
Amount |
|
Amortization |
|
||||
|
|
(Dollar amounts in thousands) |
|
||||||||||
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
||||
Purchase of client accounts (20 year weighted average useful life) |
|
$ |
4,805 |
|
$ |
1,112 |
|
$ |
4,805 |
|
$ |
992 |
|
Employment contracts (7 year weighted average useful life) |
|
1,135 |
|
1,054 |
|
1,135 |
|
968 |
|
||||
Assets under management (20 year weighted average useful life) |
|
184 |
|
63 |
|
184 |
|
58 |
|
||||
Trade name (20 year weighted average useful life) |
|
196 |
|
196 |
|
196 |
|
196 |
|
||||
Core deposit intangible (7 year weighted average useful life) |
|
1,852 |
|
1,256 |
|
1,852 |
|
1,125 |
|
||||
Total |
|
$ |
8,172 |
|
$ |
3,681 |
|
$ |
8,172 |
|
$ |
3,339 |
|
|
|
|
|
|
|
|
|
|
|
||||
Aggregate Amortization Expense: |
|
|
|
|
|
|
|
|
|
||||
For the six months ended June 30, 2009 |
|
$ |
342 |
|
|
|
|
|
|
|
|||
For the year ended December 31, 2008 |
|
$ |
629 |
|
|
|
|
|
|
|
The Company performs an annual goodwill impairment test in the fourth quarter each year. The Company utilizes the following framework to evaluate whether an interim goodwill impairment test is required, given the occurrence of events or if circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include:
· a significant adverse change in legal factors or in the business climate;
· an adverse action or assessment by a regulator;
· unanticipated competition;
· a loss of key personnel;
· a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of;
· the testing for recoverability under SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assetsof a significant asset group within a reporting unit; and
· recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.
The Company acknowledges that a decline in market capitalization may represent an event or change in circumstances that would more likely than not reduce the fair value of reporting unit below its carrying value. However, management does not place primary emphasis on the Companys market capitalization for a number of reasons, not the least of which is lack of liquidity of its common shares due to a lack of consistent trading volume. This view also considers that substantial value may result from the ability to leverage certain synergies or control. Therefore, managements valuation methodology for assessing annual (and evaluating subsequent indicators of) impairment is performed at a detailed level as it incorporates a more granular view of each reporting unit and the significant valuation inputs.
Management estimates fair value utilizing multiple methodologies which include discounted cash flows, comparable companies and comparable transactions. Each valuation technique requires management to make judgments about inputs and assumptions which form the basis for financial projections of future operating performance and the corresponding estimated cash flows. The analyses performed require the use of objective and subjective inputs which include market-price of non-distressed financial institutions, similar transaction multiples, and required rates of return. Management works closely in this process with third-party valuation professionals, who assist in obtaining comparable market data and performing certain of the calculations, based on information provided by management and assumptions developed with management.
Given that the level at which management performs its impairment testing for each reporting unit is more granular than simply market capitalization, management evaluates the underlying data and assumptions that comprise the most recent goodwill impairment test for evidence of deterioration at a level which may indicate the fair value of the reporting segment has meaningfully declined. While the Companys stock price continues to be influenced by the financial services sector as well as our relative small size, management does not believe that there has been a substantial change in the business climate relative to our valuation analysis. To the contrary, the Company believes the economy shows signs of stabilization.
Given the timing of the completion of managements annual impairment test (January 2009 as of October 31, 2008) and the evaluation of the relevant inputs that form the basis for managements estimate for the fair value of each reporting unit, management concluded that there has not been significant deterioration in the underlying inputs and assumptions which would lead it to conclude an interim goodwill impairment test was required.
As of the time of the annual goodwill impairment test, the Fair Value of all units was in excess of the carrying amounts. Therefore, a second step test was not required. The Companys stock, like the stock of many other financial services companies, is trading below both book value as well as tangible book value. The Company believes that the current market value does not represent the fair value of the Company when taken as a whole and in consideration of other relevant factors.
Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
Note 1 to the Companys consolidated financial statements (included in Item 8 of the Form 10-K/A, Amendment No. 1, for the year ended December 31, 2008) lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, revenue recognition for insurance activities, stock based compensation, derivative financial instruments, goodwill and intangible assets, other than temporary impairment losses on available for sale securities and the valuation of deferred tax assets. In estimating other-than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Restatement of Consolidated Financial Statements
As indicated in Note 2 to the Notes to Consolidated Financial Statements, the Company has restated its financial statements for the quarter ended June 30, 2009. The discussion in this Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations, gives effect to the restatement of the Companys financial statements.
Results of Operations
OVERVIEW
Net loss for the Company for the quarter ended June 30, 2009 was $1.5 million, a decrease of 202.7%, as compared to income of $1.5 million for the same period in 2008. Basic and diluted loss per common share for the second quarter of 2009 were $.33 and $.33, respectively, compared to basic and diluted earnings per common share of $.26 and $.26, respectively, for the same period of 2008. Net income for the Company for the first six months ended June 30, 2009 was $23,000, a decrease of 99.2%, as compared to $3.0 million for the same period in 2008. Basic and diluted loss per common share for the first six months ended June 30, 2009 was $.14 and $.14, respectively, compared to basic and diluted earnings per common share of $.53 and $.53, respectively, for the same period of 2008.
The following are the key ratios for the Company as of or for the:
|
|
Three Months Ended |
|
Six Months Ended |
|
||||
|
|
June 30, |
|
|
|
June 30, |
|
|
|
|
|
2009 |
|
June 30, |
|
2009 |
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
Return on average assets (annualized) |
|
-0.48 |
% |
0.51 |
% |
0.00 |
% |
0.53 |
% |
Return on average shareholders equity (annualized) |
|
-4.81 |
% |
5.46 |
% |
0.04 |
% |
5.63 |
% |
Common dividend payout ratio |
|
-29.01 |
% |
76.92 |
% |
-143.91 |
% |
75.47 |
% |
Average shareholders equity to average assets |
|
9.99 |
% |
9.29 |
% |
10.30 |
% |
9.43 |
% |
Net Interest Income
Net interest income is a primary source of revenue for the Company. Net interest income results from the difference between the interest and fees earned on loans and investments and the interest paid on deposits to customers
and other non-deposit sources of funds, such as repurchase agreements and short and long-term borrowed funds. Net interest margin is the difference between the gross (tax-effected) yield on earning assets and the cost of interest bearing funds as a percentage of earning assets. All discussion of net interest income and net interest margin is on a fully taxable equivalent basis (FTE).
FTE net interest income before the provision for loan losses for the three months ended June 30, 2009 was $8.7 million, a decrease of $0.7 million, or 7.6%, compared to the $9.4 million reported for the same period in 2008. FTE net interest income before the provision for loan loss for the six months ended June 30, 2009 was $17.6 million, a decrease of $0.7 million, or 4.0%, compared to the $18.3 million reported for the same period in 2008. The FTE net interest margin decreased to 3.05% for the second quarter of 2009 from 3.59% for the same period in 2008. The FTE net interest margin decreased to 3.12% for the first six months of 2009 from 3.55% for the same period in 2008.
The following tables summarize net interest margin information:
|
|
Three months ended June 30, |
|
||||||||||||||
|
|
2009 |
|
2008 |
|
||||||||||||
|
|||||||||||||||||
|
|
Average |
|
Interest |
|
% |
|
Average |
|
Interest |
|
% |
|
||||
|
|
(Dollar amounts in thousands) |
|
||||||||||||||
Interest-Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loans: (1) (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial |
|
$ |
699,919 |
|
$ |
9,946 |
|
5.62 |
|
$ |
674,994 |
|
$ |
10,923 |
|
6.40 |
|
Mortgage |
|
49,622 |
|
685 |
|
5.52 |
|
46,907 |
|
765 |
|
6.52 |
|
||||
Consumer |
|
141,335 |
|
1,884 |
|
5.35 |
|
127,208 |
|
2,029 |
|
6.42 |
|
||||
Investments (2) (3) |
|
239,876 |
|
3,219 |
|
5.37 |
|
204,942 |
|
2,970 |
|
5.80 |
|
||||
Federal funds sold |
|
13,298 |
|
5 |
|
0.17 |
|
|
|
|
|
|
|
||||
Other short-term investments |
|
363 |
|
|
|
0.15 |
|
351 |
|
5 |
|
5.59 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total interest-earning assets |
|
$ |
1,144,413 |
|
$ |
15,739 |
|
5.44 |
|
$ |
1,054,402 |
|
$ |
16,692 |
|
6.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest-Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Transaction accounts |
|
$ |
351,272 |
|
$ |
1,302 |
|
1.49 |
|
$ |
327,056 |
|
$ |
1,453 |
|
1.79 |
|
Certificates of deposit |
|
479,449 |
|
3,869 |
|
3.23 |
|
333,455 |
|
3,561 |
|
4.30 |
|
||||
Securities sold under agreement to repurchase |
|
125,003 |
|
1,100 |
|
3.48 |
|
123,911 |
|
895 |
|
2.86 |
|
||||
Short-term borrowings |
|
253 |
|
|
|
0.00 |
|
73,757 |
|
429 |
|
3.98 |
|
||||
Long-term borrowings |
|
41,925 |
|
413 |
|
3.90 |
|
60,000 |
|
604 |
|
3.98 |
|
||||
Junior subordinated debt |
|
18,953 |
|
362 |
|
7.66 |
|
20,037 |
|
346 |
|
6.94 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total interest-bearing liabilities |
|
1,016,855 |
|
7,046 |
|
2.78 |
|
938,216 |
|
7,288 |
|
3.12 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Noninterest-bearing deposits |
|
106,362 |
|
|
|
|
|
106,735 |
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total cost of funds |
|
$ |
1,123,217 |
|
7,046 |
|
2.52 |
|
$ |
1,044,951 |
|
7,288 |
|
2.81 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net interest margin (fully taxable equivalent) |
|
|
|
$ |
8,693 |
|
3.05 |
|
|
|
$ |
9,404 |
|
3.59 |
|
(1) Loan fees have been included in the interest income totals presented. Nonaccrual loans have been included in average loan balances.
(2) Interest income on loans and investments is presented on a taxable equivalent basis using an effective tax rate of 34%.
(3) This table has been adjusted to reflect the Companys reclassification of Federal Home Loan Bank stock from securities available for sale to Federal Home Loan Bank stock. See Note 2, Restatement of Consolidated Financial Statements to the consolidated financial statements included in this Form 10-Q.
|
|
Six Months Ended June 30, |
|
||||||||||||||
|
|
2009 |
|
2008 |
|
||||||||||||
|
|
Average |
|
Interest |
|
% |
|
Average |
|
Interest |
|
% |
|
||||
|
|
(Dollar amounts in thousands) |
|
||||||||||||||
Interest-Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loans: (1) (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial |
|
$ |
699,717 |
|
$ |
19,885 |
|
5.66 |
|
$ |
665,669 |
|
$ |
22,239 |
|
6.61 |
|
Mortgage |
|
50,160 |
|
1,448 |
|
5.77 |
|
46,715 |
|
1,521 |
|
6.51 |
|
||||
Consumer |
|
140,421 |
|
3,766 |
|
5.41 |
|
127,065 |
|
4,257 |
|
6.74 |
|
||||
Investments (2) (3) |
|
234,178 |
|
6,574 |
|
5.61 |
|
198,323 |
|
5,761 |
|
5.81 |
|
||||
Federal funds sold |
|
9,981 |
|
9 |
|
0.17 |
|
|
|
|
|
0.00 |
|
||||
Other short-term investments |
|
355 |
|
1 |
|
0.39 |
|
435 |
|
9 |
|
3.96 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total interest-earning assets |
|
$ |
1,134,812 |
|
$ |
31,683 |
|
5.55 |
|
$ |
1,038,207 |
|
$ |
33,787 |
|
6.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest-Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Transaction accounts |
|
$ |
335,782 |
|
$ |
2,411 |
|
1.45 |
|
$ |
321,601 |
|
$ |
3,332 |
|
2.08 |
|
Certificates of deposit |
|
474,261 |
|
7,914 |
|
3.37 |
|
325,115 |
|
7,185 |
|
4.44 |
|
||||
Securities sold under agreement to repurchase |
|
122,268 |
|
2,164 |
|
3.52 |
|
117,530 |
|
1,849 |
|
3.11 |
|
||||
Short-term borrowings |
|
5,057 |
|
17 |
|
0.66 |
|
79,037 |
|
1,150 |
|
2.88 |
|
||||
Long-term borrowings |
|
50,498 |
|
917 |
|
3.61 |
|
59,698 |
|
1,203 |
|
3.99 |
|
||||
Junior subordinated debt |
|
18,565 |
|
677 |
|
7.35 |
|
20,133 |
|
751 |
|
7.50 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total interest-bearing liabilities |
|
1,006,431 |
|
14,100 |
|
2.83 |
|
923,114 |
|
15,470 |
|
3.37 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Noninterest-bearing deposits |
|
105,905 |
|
|
|
|
|
105,017 |
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total cost of funds |
|
$ |
1,112,336 |
|
14,100 |
|
2.56 |
|
$ |
1,028,131 |
|
15,470 |
|
3.03 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net interest margin (fully taxable equivalent) |
|
|
|
$ |
17,583 |
|
3.12 |
|
|
|
$ |
18,317 |
|
3.55 |
|
(1) Loan fees have been included in the interest income totals presented. Nonaccrual loans have been included in average loan balances.
(2) Interest income on loans and investments is presented on a taxable equivalent basis using an effective tax rate of 34%.
(3) This table has been adjusted to reflect the Companys reclassification of Federal Home Loan Bank stock from securities available for sale to Federal Home Loan Bank stock. See Note 2, Restatement of Consolidated Financial Statements to the consolidated financial statements included in this Form 10-Q.
Average interest-earning assets for the three months ended June 30, 2009 were $1.14 billion, an $90.0 million, or 8.5%, increase over average interest-earning assets of $1.05 billion for the same period in 2008. Average interest-earning assets for the six months ended June 30, 2009 were $1.13 billion, a $96.6 million, or 9.3%, increase over average interest-earning assets of $1.04 billion for the same period in 2008. The yield on average interest-earning assets decreased by 82 basis points to 5.44% for the second quarter of 2009, compared to 6.26% for the same period in 2008. The yield on average interest-earning assets decreased by 89 basis points to 5.55% for the first six months of 2009, compared to 6.44% for the same period in 2008.
Average interest-bearing liabilities for the three months ended June 30, 2009 were $1.02 billion, a $78.6 million, or 8.4%, increase over average interest-bearing liabilities of $938.2 million for the same period in 2008. Average interest-bearing liabilities for the six months ended June 30, 2009 were $1.01 billion, an $83.3 million, or 9.0%, increase over average interest-bearing liabilities of $923.1 million for the same period in 2008. In addition, average noninterest-bearing deposits decreased to $106.4 million for the three months ended June 30, 2009, from $106.7 million for the same time period of 2008. Average noninterest-bearing deposits increased to $105.9 million for the six months ended June 30, 2009, from $105.0 million for the same time period of 2008. The interest rate on total interest-bearing liabilities decreased by 34 basis points to 2.78% for the three months ended June 30, 2009, compared to 3.12% for the same period in 2008. The
average interest rate paid on total interest-bearing liabilities decreased by 54 basis points to 2.83% for the six months ended June 30, 2009, compared to 3.37% for the same period in 2008.
For the six months ended June 30, 2009, FTE total interest income decreased 6.2% to $31.7 million compared to $33.8 million for the same period in 2008. The decrease in total interest income for the six months ended June 30, 2009 was primarily the result of a decrease in the interest rates on average investments and average outstanding commercial, mortgage and consumer loans compared to the same period in 2008. Earning asset yields on average outstanding loans decreased due mainly to a decrease in the targeted short-term interest rate, as established by the Federal Reserve Bank (FRB), which resulted in a decrease in the prime rate from 5.00% at June 30, 2008 to 3.25% at June 30, 2009. Average outstanding commercial loan balances increased by $34 million, or 5.1% from June 30, 2008 to June 30, 2009. Additionally, average outstanding total investment securities increased by $35.8 million or 18.1% from June 30, 2008 to June 30, 2009. Earning asset yields on average outstanding investment securities decreased from 5.8% at June 30, 2008 to 5.6% at June 30, 2009.
For the six months ended June 30, 2009, total interest expense decreased 8.9% to $14.1 million compared to $15.5 million for the same period in 2008. The decrease in total interest expense for the six months ended June 30, 2009 resulted primarily from a decrease in average rates paid on average outstanding interest-bearing deposits and short-term borrowings compared to the same period in 2008. The average rate paid on total average outstanding interest-bearing liabilities decreased from 3.37% at June 30, 2008 to 2.83% at June 30, 2009. Total cost of funds decreased to 2.56% in 2009 from 3.03% in 2008. The decrease in total average interest-bearing deposit rates was the result of managements disciplined approach to deposit pricing in response to the decrease in short-term interest rates. Total average interest-bearing deposits increased $163.3 million or 25.3% from June 30, 2008 to June 30, 2009 due primarily to growth in time deposits and interest checking. The average rate paid on short-term borrowings and securities sold under agreements to repurchase increased from 3.02% at June 30, 2008 to 3.40% at June 30, 2009. The increase in short-term borrowings and securities sold under agreements to repurchase rates was the result of increases in targeted short term interest rates, as established by the FRB. Average short-term borrowings and securities sold under agreements to repurchase decreased $69.2 million or 35.2% from June 30, 2008 to June 30, 2009 due primarily to the growth in total average interest-bearing deposits.
Provision for Loan Losses
The provision for loan losses for the three months ended June 30, 2009 was $4.3 million compared to $1.7 million for the same period of 2008. The provision for loan losses for the six months ended June 30, 2009 was $5.1 million compared to $2.1 million for the same period of 2008. Net charge-offs to average loans was 0.27% annualized for the six months ended June 30, 2009 compared to 0.46% for the year ended December 31, 2008. The provision reflects the amount deemed appropriate by management to provide an adequate reserve to meet the present risk characteristics of the loan portfolio. Management continues to evaluate and classify the credit quality of the loan portfolio utilizing a qualitative and quantitative internal loan review process and, based on the results of the analysis at June 30, 2009, management has determined that the current allowance for loan losses is adequate as of such date. The ratio of the allowance for loan losses to loans outstanding at June 30, 2009 and December 31, 2008 was 1.36% and .92%, respectively. Please see further discussion under the caption Allowance for Loan Losses.
Other Non-Interest Income
Total other income for the three months ended June 30, 2009 totaled $4.8 million, remaining similar to income of $4.8 million for the same period in 2008. Total other income for the six months ended June 30, 2009 totaled $10.2 million, an increase of $0.7 million, or 7.6%, from other income of $9.5 million for the same period in 2008.
Revenue from customer service fees decreased 11.8% to $596,000 for the second quarter of 2009 as compared to $676,000 for the same period in 2008. Revenue from customer service fees remained similar at $1.3 million for the first six months of 2009 and the same period in 2008. The decrease in customer service fees for the comparative three month periods is primarily due to a decrease in commercial account analysis fees and non-sufficient funds charges.
Revenue from mortgage banking activities increased 19.3% to $408,000 for the second quarter of 2009 as compared to $342,000 for the same period in 2008. Revenue from mortgage banking activities increased 1.5% to $675,000 for the first six months of 2009 as compared to $665,000 for the same period in 2008. The increase in mortgage banking activities for the comparative three and six month periods is primarily due to an increase in the volume of loans
sold into the secondary mortgage market. The Company operates its mortgage banking activities through VIST Mortgage, a division of VIST Bank.
Revenue from commissions and fees from insurance sales increased 8.9% to $3.0 million for the second quarter of 2009 as compared to $2.8 million for the same period in 2008. Revenue from commissions and fees from insurance sales increased 9.6% to $6.0 million for the first six months of 2009 as compared to $5.5 million for the same period in 2008. The increase for the comparative three and six month periods is mainly attributed to an increase in commission income on group insurance products due to the acquisition of Fisher Benefits Consulting in September 2008. VIST Insurance, LLC is a wholly owned subsidiary of the Company.
Revenue from brokerage and investment advisory commissions and fees decreased 33.0% to $152,000 in the second quarter of 2009 as compared to $227,000 for the same period in 2008. Revenue from brokerage and investment advisory commissions and fees increased 3.9% to $482,000 in the first six months of 2009 as compared to $464,000 for the same period in 2008. Fluctuations for the comparative three and six month periods are due primarily to the volume of investment advisory services offered through VIST Capital Management, LLC, a wholly owned subsidiary of the Company.
Revenue from earnings on investment in life insurance decreased 34.1% to $108,000 in the second quarter of 2009 as compared to $164,000 for the same period in 2008. Revenue from earnings on investment in life insurance decreased 44.6% to $184,000 in the first six months of 2009 as compared to $332,000 for the same period in 2008. The decrease in earnings on investment in life insurance for the comparative three and six month periods is due primarily to decreased earnings credited on the Companys separate investment account, bank owned life insurance (BOLI).
Other income, including gain on sale of loans, increased 30.5% to $667,000 for the second quarter of 2009 as compared to $511,000 for the same period in 2008. Other income, including gain on sale of loans, increased 57.5% to $1.6 million for the first six months of 2009 as compared to $1.0 million for the same period in 2008. The increase in other income for the comparative three and six month periods is due primarily to a settlement of a previously accrued contingent payment of $575,000, which was partially offset by an adjustment for related expenses of $232,000, and an increase in network interchange income.
Net securities gains were $126,000 for the three months ended June 30, 2009 compared to net securities gains of $61,000 for the same period in 2008. Net securities gains were $285,000 for the six months ended June 30, 2009 compared to net securities gains of $202,000 for the same period in 2008. Net securities gains for the comparative three and six month periods are due primarily to sales of available for sale investment securities. For the three and six month periods ended June 30, 2009, an impairment charge of $322,000 was recorded on one of the Companys available for sale trust preferred investment securities.
Other Non-Interest Expense
Total other expense for the three months ended June 30, 2009 totaled $11.6 million, an increase of $1.1 million, or 10.0%, over total other expense of $10.5 million for the same period in 2008. Total other expense for the six months ended June 30, 2009 totaled $22.8 million, an increase of $1.2 million, or 5.8%, over total other expense of $21.6 million for the same period in 2008.
Salaries and benefits increased 6.6% to $5.8 million for the three months ended June 30, 2009 over the $5.4 million for the three months ended June 30, 2008. Salaries and benefits increased 2.8% to $11.4 million for the six months ended June 30, 2009 over the $11.1 million for the six months ended June 30, 2008. Included in salaries and benefits for the three months ended June 30, 2009 and June 30, 2008 were pre-tax stock-based compensation costs of $56,000 and $95,000, respectively. Included in salaries and benefits for the six months ended June 30, 2009 and June 30, 2008 were pre-tax stock-based compensation costs of $77,000 and $172,000, respectively. Also included in salaries and benefits for the three months ended June 30, 2009 were total commissions paid of $353,000 on mortgage origination activity through VIST Mortgage, insurance sales activity through VIST Insurance and investment advisory sales through VIST Capital Management compared to $511,000 for the same period in 2008. Also included in salaries and benefits for the six months ended June 30, 2009 were total commissions paid of $736,000 on mortgage origination activity through VIST Mortgage, insurance sales activity through VIST Insurance and investment advisory sales through VIST Capital Management compared to $900,000 for the same period in 2008. Included in salaries and benefits expense for the six months ended June 30, 2009 are severance costs of approximately $133,000 relating to corporate-wide cost reduction initiatives. Full-time equivalent (FTE) employees decreased to 301 at June 30, 2009 from 304 at June 30, 2008.
Occupancy expense and furniture and equipment expense decreased 13.0% to $1.5 million for the second quarter of 2009 as compared to $1.7 million for the same period in 2008. Occupancy expense and furniture and equipment expense decreased 10.0% to $3.2 million for the first six months of 2009 as compared to $3.5 million for the same period in 2008. The decrease in occupancy expense and furniture and equipment expense for the comparative three and six month periods is due primarily to a decrease in building lease expense and equipment depreciation expense.
Marketing and advertising expense decreased 30.1% to $335,000 for the second quarter of 2009 as compared to $479,000 for the same period in 2008. Marketing and advertising expense decreased 46.7% to $0.6 million for the first six months of 2009 as compared to $1.1 million for the same period in 2008. The decrease in marketing and advertising expense for the comparative three and six month periods is due primarily to a reduction in marketing costs associated with market research, media space, media production and special events.
Professional services expense decreased 11.2% to $482,000 for the second quarter of 2009 as compared to $543,000 for the same period in 2008. Professional services expense increased 27.5% to $1.4 million for the first six months of 2009 as compared to $1.1 million for the same period in 2008. The increase for the comparative six month periods is due primarily to an increase in legal fees associated with a litigation settlement related to a previously accrued contingent payment, outsourcing of the Companys internal audit function and other general Company business.
Outside processing expense increased 33.7% to $1.1 million for the second quarter of 2009 as compared to $0.8 million for the same period in 2008. Outside processing expense increased 24.8% to $2.0 million for the first six months of 2009 as compared to $1.6 million for the same period in 2008. The increase in outside processing expense for the comparative three and six month periods are due primarily to costs incurred for computer services and network fees.
Insurance expense increased 259.1% to $984,000 for the second quarter of 2009 as compared to $274,000 for the same period in 2008. Insurance expense increased 162.0% to $1.4 million for the first six months of 2009 as compared to $0.5 million for the same period in 2008. The increase in insurance expense for the comparative three and six month periods is due primarily to higher FDIC deposit insurance premiums resulting from the implementation of the new FDIC risk-related premium assessment. Additionally, the increase in insurance expense for the comparative three and six month periods is due primarily to a special industry-wide FDIC deposit insurance premium assessment to the Company of $580,000.
Other expense increased 11.2% to $1.2 million for the second quarter of 2009 as compared to $1.1 million for the same period in 2008. Other expense increased 8.5% to $2.4 million for the first six months of 2009 as compared to $2.2 million for the same period in 2008. The increase in other expense for the comparative three and six month periods is primarily due to an increase in foreclosure and other real estate expense.
Income Taxes
There was an income tax benefit of $1.3 million for the second quarter of 2009 as compared to income tax expense of $0.2 million for the same period in 2008. There was an income tax benefit of $1.1 million for the first six months of 2009 as compared to income tax expense of $0.3 million for the same period in 2008. The effective income tax rate for the Company for the second quarter ended June 30, 2009 was 46.7% compared to 10.0% for the same period of 2008. The effective income tax rate for the Company for the first six months ended June 30, 2009 was 102.2% compared to 10.2% for the same period of 2008. The effective income tax rate for the comparative three and six month periods fluctuated primarily due to variations in state tax, tax exempt income and net income before income taxes. Included in income tax expense for the comparative three and six month periods ended June 30, 2009 and 2008 is a federal tax benefit from a $5,000,000 investment in an affordable housing, corporate tax credit limited partnership.
Financial Condition
The total assets of the Company at June 30, 2009 were $1.26 billion, an increase of approximately $31.3 million, or 5.1% annualized, from $1.23 billion at December 31, 2008.
Cash and Cash Equivalents:
Cash and cash equivalents increased $21.7 million, or 225.0% annualized, to $41.0 million at June 30 2009 from $19.3 million at December 31, 2008. This increase is primarily related to an increase in federal funds sold.
Mortgage Loans Held for Sale
Mortgage loans held for sale increased $3.6 million, or 315.8% annualized, to $5.9 million at June 30, 2009 from $2.3 million at December 31, 2008. This increase is primarily related to an increase in loans originated for sale into the secondary residential real estate loan market through VIST Mortgage.
Securities Available for Sale
Management evaluates investment securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Factors that may be indicative of impairment include, but are not limited to, the following:
· Fair value below cost and the length of time
· Adverse condition specific to a particular investment
· Rating agency activities (e.g., downgrade)
· Financial condition of an issuer
· Dividend activities
· Suspension of trading
· Management intent
· Changes in tax laws or other policies
· Subsequent market value changes
· Economic or industry forecasts
Other-than-temporary impairment means management believes the securitys impairment is due to factors that could include its inability to pay interest or dividends, its potential for default, and/or other factors. When a held to maturity or available for sale debt security is assessed for other-than-temporary impairment, management has to first consider (a) whether the Company intends to sell the security, and (b) whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis. If one of these circumstances applies to a security, an other-than-temporary impairment loss is recognized in the statement of operations equal to the full amount of the decline in fair value below amortized cost. If neither of these circumstances applies to a security, but the Company does not expect to recover the entire amortized cost basis, an other-than-temporary impairment loss has occurred that must be separated into two categories: (a) the amount related to credit loss, and (b) the amount related to other factors. In assessing the level of other-than-temporary impairment attributable to credit loss, management compares the present value of cash flows expected to be collected with the amortized cost basis of the security. The portion of the total other-than-temporary impairment related to credit loss is recognized in earnings (as the difference between the fair value and the present value of the estimated cash flows), while the amount related to other factors is recognized in other comprehensive income. The total other-than-temporary impairment loss is presented in the statement of operations, less the portion recognized in other comprehensive income. When a debt security becomes other-than-temporarily impaired, its amortized cost basis is reduced to reflect the portion of the total impairment related to credit loss.
Investment securities available for sale increased $2.4 million, or 1.1% annualized, to $229.1 million at June 30, 2009 from $226.7 million at December 31, 2008. Investment securities are used to supplement loan growth as necessary, to generate interest and dividend income, to manage interest rate risk, and to provide liquidity. The increase in investment securities available for sale was due to the purchases of mortgage-backed securities used as collateral for the Companys public funds and structured borrowings.
Federal Home Loan Bank Stock
Federal law requires a member institution of the Federal Home Loan Bank to hold stock of its district FHLB according to a predetermined formula. The Federal Home Loan Bank stock is carried at cost.
Loans
Total loans, net of allowance for loan losses, decreased to $875.2 million, or 0.7% annualized, at June 30, 2009 from $878.2 million at December 31, 2008.
The components of loans were as follows:
|
|
June 30, |
|
December 31, |
|
||
|
|
2009 |
|
2008 |
|
||
|
|
(Dollar amounts in thousands) |
|
||||
Residential real estate - 1 to 4 family |
|
$ |
173,674 |
|
$ |
185,866 |
|
Residential real estate - multi family |
|
35,953 |
|
34,869 |
|
||
Commercial |
|
166,952 |
|
174,219 |
|
||
Commercial, secured by real estate |
|
319,256 |
|
326,442 |
|
||
Construction |
|
99,683 |
|
89,556 |
|
||
Consumer |
|
4,641 |
|
3,995 |
|
||
Home equity lines of credit |
|
87,911 |
|
72,137 |
|
||
Loans |
|
888,070 |
|
887,084 |
|
||
|
|
|
|
|
|
||
Net deferred loan fees |
|
(834 |
) |
(779 |
) |
||
Allowance for loan losses |
|
(12,029 |
) |
(8,124 |
) |
||
Loans, net of allowance for loan losses |
|
$ |
875,207 |
|
$ |
878,181 |
|
Loans secured by real estate (not including home equity lending products) decreased $18.3 million, or 6.7% annualized, to $528.9 million at June 30, 2009 from $547.2 million at December 31, 2008. This decrease is primarily due to a decrease in commercial and residential real estate loan originations.
Total commercial loans decreased to $486.2 million at June 30, 2009 from $500.7 million at December 31, 2008, a decrease of $14.5 million, or 5.8% annualized. The decrease is due primarily to a decrease in commercial real estate loans outstanding. There were no SBA loans sold during the period.
The gross recorded investment in impaired loans not requiring an allowance for loan losses was $10.6 million at June 30, 2009 and $3.2 million at December 31, 2008. The gross recorded investment in impaired loans requiring an allowance for loan losses was $11.9 million at June 30, 2009 and $7.5 million at December 31, 2008. At June 30, 2009 and December 31, 2008, the related allowance for loan losses associated with those loans was $5.2 million and 2.3 million, respectively. For the periods ended June 30, 2009 and December 31, 2008, the average recorded investment in impaired loans was $12.8 million and $8.8 million, respectively. No interest income was recognized on impaired loans for the period ended June 30, 2009 and interest income of $33,000 was recognized on impaired loans for the year ended December 31, 2008.
Allowance for Loan Losses
The allowance for loan losses at June 30, 2009 was $12.0 million compared to $8.1 million at December 31, 2008. The allowance at June 30, 2009 was 1.36% of outstanding loans compared to 0.92% of outstanding loans at December 31, 2008. The provision for loan losses for the six months ended June 30, 2009 was $5.1 million compared to $2.1 million for the same period in 2008. The increase in the provision is due primarily to economic conditions and an increase in nonperforming loans and the result of managements evaluation and classification of the credit quality of the loan portfolio utilizing a qualitative and quantitative internal loan review process. At June 30, 2009, total non-performing loans were $22.5 million or 2.5% of total loans compared to $10.8 million or 1.2% of total loans at December 31, 2008. The $11.7 million increase in non-performing loans from December 31, 2008 to June 30, 2009, was due primarily to two commercial construction and development credits totaling approximately $10.9 million transferred to non accrual as well as by net additions to non-performing loans of approximately $0.8 million. At June 30, 2009, $2.2 million in commercial properties were transferred to other real estate owned. This is net of $4.4 million which was transferred out of other real estate owned from March 31, 2009. For the six months ended June 30, 2009, net charge-offs to average loans was 0.27% annualized as compared to 0.46% for the year ended December 31, 2008.
The allowance for loan losses is an amount that management believes to be adequate to absorb probable losses in the loan portfolio. Additions to the allowance are charged through the provision for loan losses. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. Management regularly assesses the adequacy of the allowance by performing both quantitative and qualitative evaluations of the loan portfolio, including such factors as charge-off history, the level of delinquent loans, the current financial condition of specific borrowers, the value of any underlying collateral, risk characteristics in the loan portfolio, local and national economic conditions, and other relevant factors. Significant loans are individually analyzed, while other smaller balance loans are evaluated by loan category. This evaluation is inherently subjective as it requires material
estimates that may be susceptible to change. Based upon the results of such reviews, management believes that the allowance for loan losses at June 30, 2009 was adequate to absorb probable credit losses inherent in the portfolio at that date.
The following table shows the activity in the Companys allowance for loan losses:
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
June 30, |
|
June 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
(Dollar amounts in thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Balance of allowance for loan losses, beginning of period |
|
$ |
8,165 |
|
$ |
7,181 |
|
$ |
8,124 |
|
$ |
7,264 |
|
Loans charged-off: |
|
|
|
|
|
|
|
|
|
||||
Commercial, financial and agricultural |
|
(359 |
) |
(981 |
) |
(894 |
) |
(1,448 |
) |
||||
Real estate mortgage |
|
(11 |
) |
|
|
(222 |
) |
|
|
||||
Consumer |
|
(76 |
) |
(30 |
) |
(139 |
) |
(64 |
) |
||||
Total loans charged-off |
|
(446 |
) |
(1,011 |
) |
(1,255 |
) |
(1,512 |
) |
||||
Recoveries of loans previously charged-off: |
|
|
|
|
|
|
|
|
|
||||
Commercial, financial and agricultural |
|
8 |
|
38 |
|
19 |
|
40 |
|
||||
Real estate mortgage |
|
|
|
|
|
|
|
|
|
||||
Consumer |
|
2 |
|
4 |
|
16 |
|
10 |
|
||||
Total recoveries |
|
10 |
|
42 |
|
35 |
|
50 |
|
||||
Net loans (charged-off) recoveries |
|
(436 |
) |
(969 |
) |
(1,220 |
) |
(1,462 |
) |
||||
Provision for loan losses |
|
4,300 |
|
1,650 |
|
5,125 |
|
2,060 |
|
||||
Balance, end of period |
|
$ |
12,029 |
|
$ |
7,862 |
|
$ |
12,029 |
|
$ |
7,862 |
|
|
|
|
|
|
|
|
|
|
|
||||
Net charge-offs to average loans (annualized) |
|
0.20 |
% |
0.46 |
% |
0.27 |
% |
0.35 |
% |
||||
Allowance for loan losses to loans outstanding |
|
1.36 |
% |
0.91 |
% |
1.36 |
% |
0.91 |
% |
||||
Loans outstanding at end of period (net of unearned income) |
|
$ |
887,236 |
|
$ |
867,659 |
|
$ |
887,236 |
|
$ |
867,659 |
|
Average balance of loans outstanding during the period |
|
$ |
885,233 |
|
$ |
847,357 |
|
$ |
885,852 |
|
$ |
837,544 |
|
The following table summarizes the Companys non-performing assets:
|
|
June 30, |
|
December 31, |
|
||
|
|
2009 |
|
2008 |
|
||
|
|
(Dollar amounts in thousands) |
|
||||
Non-accrual loans: |
|
|
|
|
|
||
Real estate |
|
$ |
21,647 |
|
$ |
2,947 |
|
Consumer |
|
5 |
|
459 |
|
||
Commercial, financial and agricultural |
|
776 |
|
7,298 |
|
||
Total |
|
22,428 |
|
10,704 |
|
||
|
|
|
|
|
|
||
Loans past due 90 days or more and still accruing: |
|
|
|
|
|
||
Real estate |
|
108 |
|
28 |
|
||
Consumer |
|
|
|
|
|
||
Commercial, financial and agricultural |
|
|
|
112 |
|
||
Total |
|
108 |
|
140 |
|
||
|
|
|
|
|
|
||
Total non-performing loans |
|
22,536 |
|
10,844 |
|
||
Other real estate owned |
|
2,238 |
|
263 |
|
||
Total non-performing assets |
|
$ |
24,774 |
|
$ |
11,107 |
|
|
|
|
|
|
|
||
Troubled debt restructurings |
|
$ |
2,592 |
|
$ |
285 |
|
|
|
|
|
|
|
||
Non-performing loans to loans outstanding at end of period (net of unearned income) |
|
2.54 |
% |
1.22 |
% |
||
Non-performing assets to loans outstanding at end of period (net of unearned income) plus OREO |
|
2.79 |
% |
1.25 |
% |
Loan Policy and Procedure
The Banks loan policies and procedures have been approved by the Board of Directors, based on the recommendation of the Banks President, Chief Lending Officer, Chief Credit Officer, and the Risk Management Officer, who collectively establish and monitor credit policy issues. Application of the loan policy is the direct responsibility of those who participate either directly or administratively in the lending function.
The Banks Relationship Managers originate loan requests through a variety of sources which include the Banks existing customer base, referrals from directors and various networking sources (accountants, attorneys, and realtors), and market presence. Over the past several years, the Banks Relationship Managers have been significantly increased through (1) the hiring of experienced commercial lenders in the Banks geographic markets, (2) the Banks continued participation in community and civic events, (3) strong networking efforts, (4) local decision making, and (5) consolidation and other changes which are occurring with respect to other local financial institutions.
The Banks Relationship Managers have a combined lending authority up to $1,000,000. Loans over $1,000,000 and up to $2,000,000 require the additional approval of the Chief Lending Officer, Chief Credit Officer and/or the Bank President. Loans in excess of $2,000,000 are presented to the Banks Credit Committee, comprised of the Chief Lending Officer, Chief Credit Officer, Chief Credit Officer (non-voting), and selected market Executives. The Credit Committee can approve loans up to $4,500,000 and recommend loans to the Executive Loan Committee for approval up to the Banks legal lending limit of approximately $14,460,000. The Executive Loan Committee is composed of the Bank President, the Chief Lending Officer, the Chief Credit Officer, the Chief Financial Officer, the Chief Credit Officer (non-voting member) and selected Board members. The Bank has established an in-house lending limit of 80% of its legal lending limit and, at June 30, 2009, the Bank has no loan relationships in excess of its in-house limit.
Through the Chief Credit Officer and the Credit Committee, the Bank has successfully implemented individual, joint, and committee level approval procedures which have monitored and solidified credit quality as well as provided lenders with a process that is responsive to customer needs.
The Bank manages credit risk in the loan portfolio through adherence to consistent standards, guidelines, and limitations established by the credit policy. The Banks credit department, along with the Relationship Managers, analyzes the financial statements of the borrower, collateral values, loan structure, and economic conditions, to then make a recommendation to the appropriate approval authority. Commercial loans generally consist of real estate secured loans, lines of credit, term, and equipment loans. The Banks underwriting policies impose strict collateral requirements and normally will require the guaranty of the principals. For requests that qualify, the Bank will use Small Business Administration guarantees to improve the credit quality and support local small business.
The Banks written loan policies are continually evaluated and updated as necessary to reflect changes in the marketplace. Annually, credit loan policies are approved by the Banks Board of Directors thus providing Board oversight. These policies require specified underwriting, loan documentation and credit analysis standards to be met prior to funding.
A credit loan committee comprised of senior management approves commercial and consumer loans with total loan exposures in excess of $2 million. The executive loan committee comprised of senior management and 5 independent members from the Board of Directors approves commercial and consumer loans with total exposures in excess of $4.5 million up to the Banks legal lending limit. One of the affirmative votes on both the credit and/or executive loan committee must be either the Chief Credit Officer or the Chief Lending Officer in order to ensure that proper standards are maintained.
Individual joint lending authority is granted based on the level of experience of the individual for commercial loan exposures under $2 million. Higher risk credits (as determined by internal loan ratings) and unsecured facilities (in excess of $100,000) require the signature of an officer with more credit experience.
One of the key components of the Banks commercial loan policy is loan to value. The following guidelines serve as the maximum loan to value ratios which the Bank would normally consider for new loan requests. Generally, the Bank will use the lower of cost or market when determining a loan to value ratio (except for investment securities). The values are not appropriate in all cases, and Bank lending personnel, pursuant to their responsibility to protect the Banks interest, seek as much collateral as practical.
Commercial Real Estate |
|
|
a) Unapproved land (raw land) |
|
50% |
b) Approved but Unimproved land |
|
65% |
c) Approved and Improved land |
|
75% |
d) Improved Real Estate |
|
80% |
|
|
|
Investments |
|
|
a) Stocks listed on a nationally recognized exchange Stock value should be greater than $10. |
|
75% |
b) Bonds, Bills, Notes |
|
|
c) US Govt obligations (fully guaranteed) |
|
95% |
d) State, county, & municipal general obligations rated BBB or higher |
|
varies: 65 - 80% |
Corporate obligations rated BBB or higher |
|
varies: 65 - 80% |
|
|
|
Other Assets |
|
|
a) Accounts Receivable (eligible) |
|
80% |
b) Inventory (raw material and finished goods) |
|
50% |
c) Equipment (new) |
|
80% |
d) Equipment (purchase money used) |
|
70% |
e) Cash or cash equivalents |
|
100% |
Exception reporting is presented to the audit committee on a quarterly basis to ensure that the Bank remains in compliance with the FDIC limits on exceeding supervisory loan to value guidelines established for real estate secured transactions.
Generally, when evaluating a commercial loan request, the Bank will require 3 years of financial information on the borrower and any guarantor. The Bank has established underwriting standards that are expected to be maintained by all lending personnel. These requirements include loans being evaluated and underwritten at fully indexed rates. Larger loan exposures are typically analyzed by credit personnel that are independent from the sales personnel.
The Bank has not underwritten any hybrid loans or sub-prime loans. Loans that are generally considered to be sub-prime are loans where the borrower has a FICO score below 640 and shows data on their credit reports associated with higher default rates, limited debt experience, excessive debt, a history of missed payments, failures to pay debts, and recorded bankruptcies.
All loan closings, loan funding and appraisal ordering and review involve personnel that are independent from the sales function to ensure that bank standards and requirements are met prior to disbursement.
Premises and Equipment
Components of premises and equipment were as follows:
|
|
June 30, |
|
December 31, |
|
||
|
|
2009 |
|
2008 |
|
||
|
|
(In thousands) |
|
||||
|
|
|
|
|
|
||
Land and land improvements |
|
$ |
263 |
|
$ |
263 |
|
Buildings |
|
523 |
|
873 |
|
||
Leasehold improvements |
|
4,393 |
|
3,910 |
|
||
Furniture and equipment |
|
11,457 |
|
11,567 |
|
||
|
|
16,636 |
|
16,613 |
|
||
|
|
|
|
|
|
||
Less: accumulated depreciation |
|
10,228 |
|
10,022 |
|
||
|
|
|
|
|
|
||
Premises and equipment, net |
|
$ |
6,408 |
|
$ |
6,591 |
|
Deposits
Total deposits at June 30, 2009 were $947.9 million compared to $850.6 million at December 31, 2008, an increase of $97.3 million, or 22.9% annualized.
The components of deposits were as follows:
|
|
June 30, |
|
December 31, |
|
||
|
|
2009 |
|
2008 |
|
||
|
|
(In thousands) |
|
||||
|
|
|
|
|
|
||
Demand, non-interest bearing |
|
$ |
111,231 |
|
$ |
108,645 |
|
Demand, interest bearing |
|
304,579 |
|
231,504 |
|
||
Savings |
|
70,539 |
|
75,706 |
|
||
Time, $100,000 and over |
|
223,927 |
|
195,812 |
|
||
Time, other |
|
237,638 |
|
238,933 |
|
||
|
|
|
|
|
|
||
Total deposits |
|
$ |
947,914 |
|
$ |
850,600 |
|
The increase in interest bearing deposits is due primarily to an increase in time deposits with the majority of these deposits maturing in one year or less and an increase in interest bearing demand deposits. Management continues to promote these types of deposits through a disciplined pricing strategy as a means of managing the Companys overall cost of funds, as well as, managements continuing emphasis on commercial and retail marketing programs and customer service.
Borrowings
Total debt decreased by $63.0 million, or 52.1% annualized, to $178.7 million at June 30, 2009 from $241.8 million at December 31, 2008. The decrease in total debt and borrowings was primarily due to an increase in organic growth in total deposits of $97.3 million to $947.9 million at June 30, 2009 from $850.6 million at December 31, 2008.
Off Balance Sheet Commitments
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.
The Banks exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
A summary of the contractual amount of the Companys financial instrument commitments is as follows:
|
|
June 30, |
|
December 31, |
|
||
|
|
2009 |
|
2008 |
|
||
|
|
(Dollar amounts in thousands) |
|
||||
Commitments to extend credit: |
|
|
|
|
|
||
Loan origination committments |
|
$ |
59,526 |
|
$ |
59,093 |
|
Unused home equity lines of credit |
|
43,567 |
|
48,919 |
|
||
Unused business lines of credit |
|
141,727 |
|
138,181 |
|
||
Total commitments to extend credit |
|
$ |
244,820 |
|
$ |
246,193 |
|
Standby letters of credit |
|
$ |
12,749 |
|
$ |
14,479 |
|
Capital
Total shareholders equity decreased $2.0 million, or 3.2% annualized, to $121.7 million at June 30, 2009 from $123.6 million at December 31, 2008. The decrease is the net result of net income for the period of $23,000 less common stock dividends declared of $1.15 million, preferred stock dividends declared of $716,000, proceeds of $280,000 from the issuance of shares of common stock under the Companys employee benefit and director compensation plans, a net decrease in the unrealized loss on securities available for sale, net of tax, of $911,000, the reissuance of treasury stock of $424,000 primarily in connection with earn-outs of contingent consideration to principals resulting from the Companys acquisition of VIST Insurance, and stock-based compensation costs of $77,000.
Federal bank regulatory agencies have established certain capital-related criteria that must be met by banks and bank holding companies. The measurements which incorporate the varying degrees of risk contained within the balance sheet and exposure to off-balance sheet commitments were established to provide a framework for comparing different institutions. Regulatory guidelines require that Tier 1 capital and total risk-based capital to risk-adjusted assets must be at least 4.0% and 8.0%, respectively.
Other than Tier 1 capital restrictions on the Companys junior subordinated debt discussed later, the Company is not aware of any pending recommendations by regulatory authorities that would have a material impact on the Companys capital, resources, or liquidity if they were implemented, nor is the Company under any agreements with any regulatory authorities.
The adequacy of the Companys capital is reviewed on an ongoing basis with regard to size, composition and quality of the Companys resources. An adequate capital base is important for continued growth and expansion in addition to providing an added protection against unexpected losses.
An important indicator in the banking industry is the leverage ratio, defined as the ratio of common shareholders equity less intangible assets (Tier 1 risk-based capital), to average quarterly assets less intangible assets. The leverage ratio at June 30, 2009 was 8.60% compared to 9.07% at December 31, 2008. This decrease is primarily the result of an increase in average total assets. For the six months ended June 30, 2009, the capital ratios were above minimum regulatory guidelines.
As required by the federal banking regulatory authorities, guidelines have been adopted to measure capital adequacy. Under the guidelines, certain minimum ratios are required for core capital and total capital as a percentage of risk-weighted assets and other off-balance sheet instruments. For the Company, Tier 1 risk-based capital consists of common shareholders equity less intangible assets plus the junior subordinated debt, and Tier 2 risk-based capital includes the allowable portion of the allowance for loan losses, currently limited to 1.25% of risk-weighted assets. By regulatory guidelines, the separate component of equity for unrealized appreciation or depreciation on available for sale securities is excluded from Tier 1 risk-based capital. In addition, federal banking regulatory authorities have issued a final rule restricting the Companys junior subordinated debt to 25% of Tier 1 risk-based capital. Amounts of junior subordinated debt in excess of the 25% limit generally may be included in Tier 2 risk-based capital. The final rule provides a five-year transition period, ending June 30, 2009. Recently, the Federal Reserve extended this transition period to March 31, 2011. This will allow bank holding companies more flexibility in managing their compliance with these new limits in light of the current conditions of the capital markets. At June 30, 2009, the entire amount of these securities was allowable to be included as Tier 1 risk-based capital for the Company. For the periods ended June 30, 2009 and December 31, 2008, the Companys capital ratios were above minimum regulatory guidelines.
On December 19, 2008, the Company issued to the United States Department of the Treasury (Treasury) 25,000 shares of Series A, Fixed Rate, Cumulative Perpetual Preferred Stock (Series A Preferred Stock), with a par value of $0.01 per share and a liquidation preference of $1,000 per share, and a warrant (Warrant) to purchase 364,078 shares of the Companys common stock, par value $5.00 per share, for an aggregate purchase price of $25,000,000 in cash. The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $10.30 per share of common stock. The Series A Preferred Stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series A Preferred Stock may be redeemed at any time following consultation by the Companys primary bank regulator and Treasury. Participants in the Capital Purchase Program desiring to redeem part of an investment by Treasury must redeem a minimum of 25% of the issue price of the preferred stock from the proceeds of a qualifying equity offering.
The following table sets forth the Companys risk-based capital amounts and ratios.
|
|
June 30, |
|
|
|
||
|
|
2009 |
|
December 31, |
|
||
|
|
(As Restated) |
|
2008 |
|
||
|
|
(Dollar amounts in thousands) |
|
||||
|
|
|
|
|
|
||
Tier I |
|
|
|
|
|
||
Common shareholders equity excluding unrealized gains (losses) on securities |
|
$ |
121,655 |
|
$ |
123,629 |
|
Disallowed intangible assets |
|
(44,039 |
) |
(44,347 |
) |
||
Junior subordinated debt |
|
18,706 |
|
18,110 |
|
||
Tier II |
|
|
|
|
|
||
Allowable portion of allowance for loan losses |
|
12,029 |
|
8,124 |
|
||
Unrealized losses on available for sale equity securities |
|
7,965 |
|
7,330 |
|
||
|
|
|
|
|
|
||
Total risk-based capital |
|
$ |
116,316 |
|
$ |
112,846 |
|
|
|
|
|
|
|
||
Risk adjusted assets (including off-balance sheet exposures) |
|
$ |
977,446 |
|
$ |
883,949 |
|
|
|
|
|
|
|
||
Leverage ratio |
|
8.60 |
% |
9.07 |
% |
||
Tier I risk-based capital ratio |
|
10.67 |
% |
11.85 |
% |
||
Total risk-based capital ratio |
|
11.90 |
% |
12.77 |
% |
The Company is not aware of any pending recommendations by regulatory authorities that would have a material impact on the Companys capital resources, or liquidity if they were implemented, nor is the Company under any agreements with any regulatory authorities.
Junior Subordinated Debt
The Company has elected to record its junior subordinated debt at fair value with changes in fair value reflected in other income in the consolidated statements of operations. The fair value is estimated utilizing the income approach whereby the expected cash flows over the remaining estimated life of the debentures are discounted using the Companys estimated credit spread over the current fully indexed yield based on an expectation of future interest rates derived from observed market interest rate curves and volatilities.
On March 9, 2000 and September 26, 2002, the Company established First Leesport Capital Trust I and Leesport Capital Trust II, respectively, in which the Company owns all of the common equity. First Leesport Capital Trust I issued $5 million of mandatory redeemable capital securities carrying an interest rate of 10.875%, and Leesport Capital Trust II issued $10 million of mandatory redeemable capital securities carrying a floating interest rate of three month LIBOR plus 3.45%. These debentures are the sole assets of the Trusts. These securities must be redeemed in March 2030 and September 2032, respectively, but may be redeemed on or after March 2010 and November 2007, respectively, or earlier in the event that the interest expense becomes non-deductible for federal income tax purposes or if the treatment of these securities no longer qualifies as Tier I capital for the Company. In October 2002, the Company entered into an interest rate swap agreement that effectively converts the First Leesport Capital Trust I $5 million of fixed-rate capital securities to a floating interest rate of six month LIBOR plus 5.25%. In September 2008, the Company entered into an interest rate swap agreement that effectively converts the Leesport Capital Trust II $10 million of adjustable-rate capital securities to a fixed interest rate of 7.25%. Interest began accruing on the Leesport Capital Trust II swap in February 2009.
On June 26, 2003, Madison established Madison Statutory Trust I in which the Company owns all of the common equity. Madison Statutory Trust I issued $5 million of mandatory redeemable capital securities carrying a floating interest rate of three month LIBOR plus 3.10%. These debentures are the sole assets of the Trusts. These securities must be redeemed in June 2033, but may be redeemed on or after September 26, 2008 or earlier in the event that the interest expense becomes non-deductible for federal income tax purposes or if the treatment of these securities no longer qualifies as Tier I capital for the Company. In September 2008, the Company entered into an interest rate swap agreement that
effectively converts the Madison Statutory Trust I $5 million of adjustable-rate capital securities to a fixed interest rate of 6.90%. Interest began accruing on the Madison Statutory Trust I swap in March 2009.
Liquidity and Interest Rate Sensitivity
The banking industry has been required to adapt to an environment in which interest rates may be volatile and in which deposit deregulation has provided customers with the opportunity to invest in liquid, interest rate-sensitive deposits. The banking industry has adapted to this environment by using a process known as asset/liability management.
Adequate liquidity means the ability to obtain sufficient cash to meet all current and projected needs promptly and at a reasonable cost. These needs include deposit withdrawal, liability runoff, and increased loan demand. The principal sources of liquidity are deposit generation, overnight federal funds transactions with other financial institutions, investment securities portfolio maturities and cash flows, and maturing loans and loan payments. The Bank can also package and sell residential mortgage loans into the secondary market. Other sources of liquidity are term borrowings from the Federal Home Loan Bank, and the discount window of the Federal Reserve Bank. In view of all factors involved, the Banks management believes that liquidity is being maintained at an adequate level.
At June 30, 2009, the Company had a total of $178.7 million, or 14.2% of total assets, in borrowed funds. These borrowings included $124.9 million of repurchase agreements, $35 million of term borrowings with the Federal Home Loan Bank, and $18.9 million in junior subordinated debt. The FHLB borrowings have final maturities ranging from November 2009 through January 2011 at interest rates ranging from 3.45% to 4.27%. At June 30, 2009, the Company had a maximum borrowing capacity with the Federal Home Loan Bank of approximately $186.7 million. The Company remains slightly asset sensitive and will continue its strategy to originate adjustable rate commercial and installment loans and use investment security cash flows and non-interest bearing and core deposits and repurchase agreements to reduce the overnight borrowings to maintain a more neutral gap position.
Asset/liability management is intended to provide for adequate liquidity and interest rate sensitivity by matching interest rate-sensitive assets and liabilities and coordinating maturities on assets and liabilities. With the exception of the majority of residential mortgage loans, loans generally are written having terms that provide for a readjustment of the interest rate at specified times during the term of the loan. In addition, interest rates offered for all types of deposit instruments are reviewed weekly and are established on a basis consistent with funding needs and maintaining a desirable spread between cost and return.
During October 2002, the Company entered into an interest rate swap agreement with a notional amount of $5 million. This derivative financial instrument effectively converted fixed interest rate obligations of outstanding junior subordinated debt to variable interest rate obligations, decreasing the asset sensitivity of its balance sheet by more closely matching the Companys variable rate assets with variable rate liabilities. The Company considers the credit risk inherent in the contracts to be negligible. The interest rate swap is recorded on the balance sheet at fair value through adjustments to other income in the consolidated results of operations (see note 12 of the consolidated financial statements).
During 2008, the Company entered into two interest rate swaps to manage its exposure to interest rate risk. The interest rate swap transactions involved the exchange of the Companys floating rate interest rate payment on its $15 million in floating rate junior subordinated debt for a fixed rate interest payment without the exchange of the underlying principal amount. These interest rate swaps are recorded on the balance sheet at fair value through adjustments to other income in the consolidated results of operations (see note 12 of the consolidated financial statements).
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Companys assessment of its sensitivity to market risk since its presentation in the Annual Report on Form 10-K/A, Amendment No. 1, for the year ended December 31, 2008 filed with the SEC.
Item 4 - Controls and Procedures
The Companys management has evaluated the effectiveness of the design and operation of the Companys disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of June 30, 2009. Based on that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded, as a result of the material weakness described in the following paragraph, that the Companys disclosure controls and procedures were not effective as of such date.
On November 9, 2009 the Company concluded that it will amend its Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and Forms 10-Q for the quarters ended September 30, 2008, March 31, 2009 and June 30, 2009, to properly account for interest rate swaps that were incorrectly designated in cash flow hedging relationships under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). Changes in fair value of the interest rate swaps, previously recognized as unrealized gains (losses) in accumulated other comprehensive income, should have been recognized in earnings. In addition, the Company applied an incorrect forward yield curve used in its determination of the fair value of the interest rate swaps. The Company has adjusted the forward yield curve used in its determination of the fair value of the interest rate swaps which is reflected in these restated financial statements. The Company has elected to report its junior subordinated debt at fair value with changes in fair value reflected in other income in the consolidated statements of operations. The Company concluded that an incorrect credit spread was applied to the fair value of its junior subordinated debt. The Company has adjusted the credit spread used in its determination of the fair value of its junior subordinated debt which is is reflected in these restated financial statements.
This accounting error and the corresponding restatements have resulted in managements determination that a material weakness existed with respect to the internal controls over financial reporting related to accounting for the fair value of junior subordinated debt and related interest rate swaps at June 30, 2009. The material weakness also existed at September 30, 2008, December 31, 2008 and March 31, 2009 and was not identified until November 2009. To remediate this material weakness, the Company has added a review specifically for disclosures and accounting treatment for all complex financial instruments acquired or disposed of during each reporting period. The material weakness described relates only to the applicable accounting treatment to these complex financial instruments.
Except as described in the preceding paragraph to remediate the material weakness described, there have been no changes in the Companys internal control over financial reporting during the second quarter of 2009 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Item 1 Legal Proceedings None
There are no material changes to the risk factors set forth in Part I, Item 1A, Risk Factors, of the Companys Annual Report on Form 10-K/A, Amendment No. 1, for the year ended December 31, 2008. Please refer to that section for disclosures regarding the risks and uncertainties related to the companys business.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
No shares of the Companys common stock were repurchased by the Company during the three month period ended June 30, 2009. The maximum number of common shares that may yet be purchased under the Companys current stock repurchase program is 115,000 shares.
Item 3 Defaults Upon Senior Securities None
Item 4 Submission of Matters to Vote of Security Holders
At the annual meeting of shareholders, held on April 21, 2009, shareholders of the Company approved the following matters:
1. Election of five Class III directors to hold office for three years from the date of election and until their respective successors shall have been elected and qualified.
Nominee |
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For |
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Withheld |
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James H. Burton |
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4,152,737 |
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361,147 |
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Robert D. Carl, III |
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4,248,263 |
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265,621 |
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Philip E. Hughes, Jr. |
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3,728,348 |
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785,536 |
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Frank C. Milewski |
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4,250,738 |
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263,146 |
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Harry J. ONeill, III |
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4,277,584 |
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236,300 |
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2. Approval of the VIST Financial Corp. 2010 Non-Employee Director Compensation Plan.
The votes cast in this matter were as follows:
For |
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Against |
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Abstain |
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Broker Non Vote |
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3,071,271 |
|
373,374 |
|
53,874 |
|
1,015,365 |
|
3. Approval of the advisory (non-binding) vote on executive compensation.
The votes cast in this matter were as follows:
For |
|
Against |
|
Abstain |
|
Broker Non Vote |
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3,105,896 |
|
342,675 |
|
49,948 |
|
1,015,365 |
|
4. Ratification of the appointment of Beard Miller Company LLP as the Companys auditors for 2009.
The votes cast in this matter were as follows:
For |
|
Against |
|
Abstain |
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4,406,577 |
|
66,583 |
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40,722 |
|
Exhibit No. |
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Title |
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3.1 |
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Articles of Incorporation of VIST Financial Corp. (incorporated by reference to Exhibit 3.1 to Registrants Current Report on Form 8-K filed on March 7, 2008). |
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3.2 |
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Bylaws of VIST Financial Corp. (incorporated by reference to Exhibit 3.2 to Registrants Current Report on Form 8-K filed on March 7, 2008). |
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
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32.1 |
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Rule 1350 Certification of Chief Executive Officer and Chief Financial Officer |
In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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VIST FINANCIAL CORP. |
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(Registrant) |
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Dated: March 26, 2010 |
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By |
/s/Robert D. Davis |
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Robert D. Davis |
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President and Chief |
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Executive Officer |
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Dated: March 26, 2010 |
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By |
/s/Edward C. Barrett |
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Edward C. Barrett |
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Executive Vice President and |
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Chief Financial Officer |