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EX-21 - EX-21 - VIST FINANCIAL CORP | a2202787zex-21.htm |
EX-23.1 - EX-23.1 - VIST FINANCIAL CORP | a2202787zex-23_1.htm |
EX-99.1 - EX-99.1 - VIST FINANCIAL CORP | a2202787zex-99_1.htm |
EX-32.2 - EX-32.2 - VIST FINANCIAL CORP | a2202787zex-32_2.htm |
EX-31.1 - EX-31.1 - VIST FINANCIAL CORP | a2202787zex-31_1.htm |
EX-31.2 - EX-31.2 - VIST FINANCIAL CORP | a2202787zex-31_2.htm |
EX-99.2 - EX-99.2 - VIST FINANCIAL CORP | a2202787zex-99_2.htm |
EX-32.1 - EX-32.1 - VIST FINANCIAL CORP | a2202787zex-32_1.htm |
EX-10.20 - EX-10.20 - VIST FINANCIAL CORP | a2202787zex-10_20.htm |
EX-10.21 - EX-10.21 - VIST FINANCIAL CORP | a2202787zex-10_21.htm |
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010
Commission File Number No. 0-14555
VIST FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA (State or other jurisdiction of incorporation or organization) |
23-2354007 (I.R.S. Employer 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 (Title of each class) |
The NASDAQ Stock Market LLC (Name of each exchange on which registered) |
Securities registered under Section 12(g) of the Exchange Act:
Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 ý 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company ý |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of June 30, 2010, the aggregate market value of the voting and non-voting common stock of the registrant held by non-affiliates computed by reference to the price at which common stock was last sold was approximately $42.1 million.
Number of Shares of Common Stock Outstanding at March 21, 2011: 6,568,975
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement prepared in connection with its Annual Meeting of Stockholders to be held on April 26, 2011 are incorporated in Part III hereof.
VIST Financial Corp. (the "Company"), may from time to time make written or oral "forward-looking statements," including statements contained in the Company's filings with the Securities and Exchange Commission (including this Annual Report on Form 10-K and the exhibits hereto and thereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Company's control). The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the willingness of users to substitute competitors' products and services for the Company's products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; the nature, extent, and timing of governmental actions and reforms, including the rules of participation for the Trouble Asset Relief Program voluntary Capital Purchase Plan under the Emergency Economic Stabilization Act of 2008, which may be changed unilaterally and retroactively by legislative or regulatory actions; and the success of the Company at managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is not exclusive. Readers are also cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this report, even if subsequently made available by the Company on its website or otherwise. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company to reflect events or circumstances occurring after the date of this report.
On March 3, 2008, the Company changed its name from Leesport Financial Corp. to VIST Financial Corp. This re-branding initiative brought all the Leesport Financial family of companies under one new name and brand.
The consolidated financial statements include the accounts of VIST Financial Corp. (the "Company"), a bank holding company, which has elected to be treated as a financial holding company, and its wholly-owned subsidiaries, VIST Bank (the "Bank"), VIST Insurance, LLC ("VIST Insurance") and VIST Capital Management, LLC ("VIST Capital"). As of December 31, 2010, the Bank's wholly-owned subsidiary, VIST Mortgage Holdings, LLC, was inactive. All significant inter-company accounts and transactions have been eliminated.
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The Company is a Pennsylvania business corporation headquartered at 1240 Broadcasting Road, Wyomissing, Pennsylvania 19610. The Company was organized as a bank holding company on January 1, 1986. The Company's election with the Board of Governors of the Federal Reserve System to become a financial holding company became effective on February 7, 2002. The Company offers a wide array of financial services through its various subsidiaries. The Company's executive offices are located at 1240 Broadcasting Road, Wyomissing, Pennsylvania 19610.
The Company's common stock is traded on the NASDAQ Global Market system under the symbol "VIST."
At December 31, 2010, the Company had total assets of $1.4 billion, total shareholders' equity of $132.4 million, and total deposits of $1.1 billion.
Subsidiary Activities
The Bank
The Company's wholly-owned banking subsidiary is VIST Bank ("VIST Bank" or the "Bank"), a Pennsylvania chartered commercial bank. During the year ended December 31, 2000, the charters of The First National Bank of Leesport, incorporated under the laws of the United States of America as a national bank in 1909, and Merchants Bank of Pennsylvania, both wholly-owned banking subsidiaries of the Company at that time, were merged into a single charter. VIST Bank operates in Berks, Bucks, Chester, Delaware, Montgomery, Philadelphia and Schuylkill counties in Pennsylvania.
On October 1, 2004, the Company acquired 100% of the outstanding voting shares of Madison Bancshares Group, Ltd., the holding company for Madison Bank ("Madison"), a Pennsylvania state-chartered commercial bank and its mortgage banking division, Philadelphia Financial Mortgage Company, now known as VIST Mortgage. Madison and VIST Mortgage are both now divisions of VIST Bank. The transaction enhanced the Bank's strong presence in Pennsylvania, particularly in the high growth counties of Berks, Philadelphia, Montgomery and Delaware.
On November 19, 2010, the Company acquired certain assets and assumed certain liabilities of Allegiance Bank of North America ("Allegiance") of Bala Cynwyd, Pennsylvania, through an FDIC-assisted whole bank acquisition. The Allegiance acquisition added five full-service locations in Chester and Philadelphia counties, of which the Company expects to close one by March 31, 2011. As part of the Allegiance acquisition, the Company entered into a loss-sharing agreement with the FDIC that covers a portion of losses incurred after the acquisition date on loans and other real estate owned. As of the acquisition date, the Company recorded $7.0 million as an indemnification asset, which represents the present value of the estimated loss share reimbursements expected to be received from the FDIC for future losses on covered assets. As part of the agreement, the FDIC will reimburse the Company for 70% of any losses incurred related to loans and other real estate owned covered under the loss-sharing agreement. Realized losses in excess of the acquisition date estimates will result in the FDIC increasing its reimbursement to the Company to 80%.
The acquisition has been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the November 19, 2010 acquisition date. Prior to purchase accounting adjustments, the Company assumed approximately $93.0 million in deposit liabilities and acquired certain assets of approximately $106.0 million. The application of the acquisition method of accounting resulted in recorded goodwill of $1.5 million. Fair value adjustments include a write-down of $12.0 million related to the covered loan portfolio, and increased liabilities of $534,000 related to time deposits and $553,000 related to long-term debt.
VIST Bank has one wholly-owned subsidiary as of December 31, 2010; VIST Mortgage Holdings, LLC. VIST Mortgage Holdings, LLC, a Pennsylvania limited liability company, provides
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mortgage brokerage services, including, without limitation, any activity in which a mortgage broker may engage. It is operated as a permissible "affiliated business arrangement" within the meaning of the Real Estate Settlement Procedures Act of 1974. VIST Mortgage Holdings, LLC is currently inactive.
Commercial and Retail Banking
VIST Bank provides services to its customers through twenty-two full service and two limited service financial centers, which operate under VIST Bank's name in Leesport, Blandon, Bern Township, Wyomissing, Breezy Corner, Hamburg, Birdsboro, Northeast Reading, Exeter Township, and Sinking Spring all of which are in Berks County, Pennsylvania. VIST Bank also operates a financial center in Schuylkill Haven, which is located in Schuylkill County, Pennsylvania. VIST Bank also operates financial centers in Blue Bell, Conshohocken, Oaks, Centre Square, Worcester and King of Prussia all of which are in Montgomery County, Pennsylvania. VIST Bank expects to close the King of Prussia location by March 31, 2011. The Bank also operates financial centers in Fox Chase, Bala Cynwyd and Old City all of which are in Philadelphia County, Pennsylvania. The Bank also operates a financial center in Berwyn, which is in Chester County, Pennsylvania and another financial center in Strafford in Delaware County, Pennsylvania. The Bank also operates limited service facilities in Wernersville and Flying Hills, both in Berks County, Pennsylvania. Most full service financial centers provide automated teller machine services, with the exception of the Bala Cynwyd and King of Prussia locations. Each financial center that provides an automated teller machine, with the exception of the Wernersville, Exeter, Old City, Worcester, Berwyn and Breezy Corner locations, provides drive-in facilities.
VIST Bank engages in full service commercial and consumer banking business, including such services as accepting deposits in the form of time, demand and savings accounts. Such time deposits include certificates of deposit, individual retirement accounts and Roth IRAs. The Bank' savings accounts include money market accounts, club accounts, NOW accounts and traditional regular savings accounts. In addition to accepting deposits, the Bank makes both secured and unsecured commercial and consumer loans, provides equipment lease and accounts receivable financing and makes construction and mortgage loans, including home equity loans. The Bank does not engage in sub-prime lending. The Bank also provides small business loans and other services including rents for safe deposit facilities.
At December 31, 2010, the Company and VIST Bank had the equivalent of 295 and 195 full-time employees, respectively.
Mortgage Banking
VIST Bank provides mortgage banking services to its customers through VIST Mortgage, a division of the Bank. VIST Mortgage operates offices in Reading, Schuylkill Haven and Blue Bell, which are located in Berks County, Pennsylvania, Schuylkill County, Pennsylvania and Montgomery County, Pennsylvania, respectively. VIST Mortgage had 10 full-time employees at December 31, 2010.
Insurance
VIST Insurance, LLC ("VIST Insurance"), a full service insurance agency, offers a full line of personal and commercial property and casualty insurance as well as group insurance for businesses, employee and group benefit plans, and life insurance. VIST Insurance is headquartered in Wyomissing, Pennsylvania with sales offices at 1240 Broadcasting Road, Wyomissing, Pennsylvania, Pennsylvania; 1767 Sentry Parkway West (Suite 210) Blue Bell, Pennsylvania; and 5 South Sunnybrook Road (Suite 100), Pottstown, Pennsylvania. VIST Insurance had 66 full-time employees at December 31, 2010.
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Wealth Management
VIST Capital Management LLC, ("VIST Capital"), a full service investment advisory and brokerage services company, offers a full line of products and services for individual financial planning, retirement and estate planning, investments, corporate and small business pension and retirement planning. VIST Capital is headquartered at 1240 Broadcasting Road, Wyomissing, Pennsylvania and had 4 full-time employees at December 31, 2010.
Equity Investments
Health Savings AccountsIn July 2005, the Company purchased a 25% equity position in First HSA, LLC a national health savings account ("HSA") administrator. The investment formalized a relationship that existed since 2001. This relationship allowed the Company to be a custodian for HSA customers throughout the country. During the second quarter of 2010, the 25% equity interest in First HSA, LLC was sold, resulting in the transfer of approximately $89.0 million in HSA deposits and a recognized gain of $1.9 million.
Junior Subordinated Debt
The Company owns First Leesport Capital Trust I (the "Trust"), a Delaware statutory business trust formed on March 9, 2000, in which the Company owns all of the common equity. The Trust has outstanding $5.0 million of 10.875% fixed rate mandatory redeemable capital securities. These securities must be redeemed in March 2030, but became callable on March 9, 2010. In October, 2002 the Company entered into an interest rate swap agreement that effectively converts the securities to a floating interest rate of six month LIBOR plus 5.25%. In June, 2003 the Company purchased a six month LIBOR cap to create protection against rising interest rates for the interest rate swap. This interest rate cap matured in March 2010 and the payer exercised their call option to terminate the interest rate swap in September 2010.
On September 26, 2002, the Company established Leesport Capital Trust II, a Delaware statutory business trust, in which the Company owns all of the common equity. Leesport Capital Trust II issued $10.0 million of mandatory redeemable capital securities carrying a floating interest rate of three month LIBOR plus 3.45%. These securities must be redeemed in September 2032, but became callable on November 7, 2007. In September 2008, the Company entered into an interest rate swap agreement that effectively converts the $10.0 million of adjustable-rate capital securities to a fixed interest rate of 7.25%.
On June 26, 2003, Madison established Madison Statutory Trust I, a Connecticut statutory business trust. Pursuant to the purchase of Madison on October 1, 2004, the Company assumed Madison Statutory Trust I in which the Company owns all of the common equity. Madison Statutory Trust I issued $5.0 million of mandatory redeemable capital securities carrying a floating interest rate of three month LIBOR plus 3.10%. These securities must be redeemed in June 2033, but became callable on June 26, 2008. In September 2008, the Company entered into an interest rate swap agreement that effectively converts the $5.0 million of adjustable-rate capital securities to a fixed interest rate of 6.90%.
Competition
The Company faces substantial competition in originating loans, in attracting deposits, and generating fee-based income. This competition comes principally from other banks, savings institutions, credit unions, mortgage banking companies and, with respect to deposits, institutions offering investment alternatives, including money market funds. Competition also comes from other insurance agencies and direct writing insurance companies. Due to the passage of landmark banking legislation in November 1999, competition may increasingly come from insurance companies, large securities firms and other financial services institutions. As a result of consolidation in the banking industry, some of
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the Company's competitors and their respective affiliates may enjoy advantages such as greater financial resources, a wider geographic presence, a wider array of services, or more favorable pricing alternatives and lower origination and operating costs.
Supervision and Regulation
General
The Company is registered as a bank holding company, which has elected to be treated as a financial holding company, and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System under the Bank Holding Act of 1956, as amended. As a bank holding company, the Company's activities and those of its bank subsidiary are limited to the business of banking and activities closely related or incidental to banking. Bank holding companies are required to file periodic reports with and are subject to examination by the Federal Reserve Board. The Federal Reserve Board has issued regulations under the Bank Holding Company Act that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the Federal Reserve Board, pursuant to such regulations, may require the Company to stand ready to use its resources to provide adequate capital funds to its bank subsidiary during periods of financial stress or adversity.
The Bank Holding Company Act prohibits the Company from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock, or substantially all of the assets of any bank, or from merging or consolidating with another bank holding company, without prior approval of the Federal Reserve Board. Additionally, the Bank Holding Company Act prohibits the Company from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a non-banking business, unless such business is determined by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto. The types of businesses that are permissible for bank holding companies to own were expanded by the Gramm-Leach-Bliley Act in 1999.
As a Pennsylvania bank holding company for purposes of the Pennsylvania Banking Code, the Company is also subject to regulation and examination by the Pennsylvania Department of Banking.
The Company is under the jurisdiction of the Securities and Exchange Commission and of state securities commissions for matters relating to the offering and sale of its securities. In addition, the Company is subject to the Securities and Exchange Commission's rules and regulations relating to periodic reporting, proxy solicitation, and insider trading.
Regulation of VIST Bank
The Bank is a Pennsylvania chartered commercial bank, and its deposits are insured (up to applicable limits) by the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is subject to regulation and examination by the Pennsylvania Department of Banking and by the FDIC. The Community Reinvestment Act requires the Bank to help meet the credit needs of the entire community where the Bank operates, including low and moderate income neighborhoods. The Bank's rating under the Community Reinvestment Act, assigned by the FDIC pursuant to an examination of the Bank, is important in determining whether the Bank may receive approval for, or utilize certain streamlined procedures in, applications to engage in new activities.
The Bank is also subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation,
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commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.
Capital Adequacy Guidelines
Bank regulatory authorities in the United States issue risk-based capital standards. These capital standards relate a bank's capital to the risk profile of its assets and provide the basis by which all banks are evaluated in terms of its capital adequacy. The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, The Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Tier 1 capital to average assets and of total capital (as defined in the regulations) to risk-weighted assets.
As of December 31, 2010 and 2009, The Company and the Bank exceeded the current regulatory requirements to be considered a quantitatively "well capitalized" financial institution, i.e. a leverage ratio exceeding 5%, Tier 1 risk-based capital exceeding 6%, and total risk-based capital exceeding 10%.
Prompt Corrective Action Rules
Immediately upon becoming undercapitalized, a depository institution becomes subject to the provisions of Section 38 of the FDIA, which: (a) restrict payment of capital distributions and management fees; (b) require that the appropriate federal banking agency monitor the condition of the institute on and its efforts to restore its capital; (c) require submission of a capital restoration plan; (d) restrict the growth of the institution's assets; and (e) require prior approval of certain expansion proposals. The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the deposit insurance fund, subject in certain cases to specified procedures. These discretionary supervisory actions include: (a) requiring the institution to raise additional capital; (b) restricting transactions with affiliates; (c) requiring divestiture of the institution or the sale of the institution to a willing purchaser; and (d) any other supervisory action that the agency deems appropriate. These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions.
Basel III
On December 17, 2009, the Basel Committee proposed significant changes to bank capital and liquidity regulation, including revisions to the definitions of Tier I Capital and Tier II Capital applicable to Basel III. On September 12, 2010, the oversight body of the Basel Committee announced a package of reforms which will increase existing capital requirements substantially over the next four years. These capital reforms were endorsed by the G20 at the summit held in Seoul, South Korea in November 2010.
The short-term and long-term impact of the new Basel III capital standards and the forthcoming new capital rules to be proposed for non-Basel III U.S. banks is uncertain. As a result of the recent deterioration in the global credit markets and the potential impact of increased liquidity risk and
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interest rate risk, it is unclear what the short-term impact of the implementation of Basel III may be or what impact a pending alternative standardized approach to Basel III option for non-Basel III U.S. banks may have on the cost and availability of different types of credit and the potential compliance costs of implementing the new capital standards.
Regulatory Restrictions on Dividends
Dividend payments made by the Bank to the Company are subject to the Pennsylvania Banking Code, the Federal Deposit Insurance Act, and the regulations of the FDIC. Under the Banking Code, no dividends may be paid except from "accumulated net earnings" (generally, retained earnings). The Federal Reserve Bank ("FRB") and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions. The Prompt Corrective Action Rules, described above, further limit the ability of banks to pay dividends if they are not classified as well capitalized or adequately capitalized. Under these policies and subject to the restrictions applicable to the Bank, the Bank had approximately $4.0 million available for payment of dividends to the Company at December 31, 2010, without prior regulatory approval. The issuance of the Series A Preferred Stock also carries certain restrictions with regards to the Company's declaration and payment of cash dividends on common stock.
Dividends payable by the Company are subject to guidance published by the Board of Governors of the FRB. Consistent with the Federal Reserve guidance, companies are urged to strongly consider eliminating, deferring or significantly reducing dividends if (i) net income available to common shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividend, (ii) the prospective rate of earnings retention is not consistent with the bank holding company's capital needs and overall current and prospective financial condition, or (iii) the Company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy rations. As a result of this guidance, management intends to consult with the FRB of Philadelphia, and provide the FRB with information on the Company's then current and prospective earnings and capital position, on a quarterly basis in advance of declaring any cash dividends for the foreseeable future.
FDIC Insurance Assessments
Recent insured institution failures, as well as deterioration in banking and economic conditions, have significantly increased FDIC loss provisions, resulting in a decline in the designated reserve ratio to historical lows. The FDIC expects a higher rate of insured institution failures in the next few years compared to recent years; thus, the reserve ratio may continue to decline. The Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, that was enacted by Congress on July 15, 2010, and was signed into law by President Obama on July 21, 2010, enacted a number of changes to the federal deposit insurance regime that will affect the deposit insurance assessments the Bank will be obligated to pay in the future. For example:
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- The law permanently raises the federal deposit insurance limit to $250,000 per account ownership. This change may have the
effect of increasing losses to the FDIC insurance fund on future failures of other insured depository institutions.
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- The new law makes deposit insurance coverage unlimited in amount for non-interest bearing transaction accounts until December 31, 2012. This change may also have the effect of increasing losses to the FDIC insurance fund on future failures of other insured depository institutions.
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- The FDIC is required under the Dodd-Frank Act to establish assessment rates that will allow the Deposit Insurance Fund to achieve a reserve ratio of 1.35% of Insurance Fund insured deposits by September 2020. In addition, the FDIC has established a "designated reserve ratio" of 2.0%, a target ratio that, until it is achieved, will not likely result in the FDIC reducing assessment rates. In attempting to achieve the mandated 1.35% ratio, the FDIC is required to implement assessment formulas that charge banks over $10 billion in asset size more than banks under that size. Those new formulas begin in the second quarter of 2011, but do not affect the Bank. Under the Dodd-Frank Act, the FDIC is authorized to make reimbursements from the insurance fund to banks if the reserve ratio exceeds 1.50%, but the FDIC has adopted the "designated reserve ratio" of 2.0% and has announced that any reimbursements from the fund are indefinitely suspended.
Each of these changes may increase the rate of FDIC insurance assessments to maintain or replenish the FDIC's deposit insurance fund. This could, in turn, raise the Bank's future deposit insurance assessment costs. On the other hand, the law changes the deposit insurance assessment base so that it will generally be equal to average consolidated assets less average tangible equity. As the asset base of the banking industry is larger than the deposit base, the range of assessment rates will change to a low of 2.5 basis points to a high of 45 basis points, per $100 of assets. This change of the assessment base from an emphasis on deposits to an emphasis on assets is generally considered likely to cause larger banking organizations to pay a disproportionately higher portion of future deposit insurance assessments, which may, correspondingly, lower the level of deposit insurance assessments that smaller community banks such as the Bank may otherwise have to pay in the future. While it is likely that the new law will increase the Bank's future deposit insurance assessment costs, the specific amount by which the new law's combined changes will affect the Bank's deposit insurance assessment costs is hard to predict, particularly because the new law gives the FDIC enhanced discretion to set assessment rate levels.
On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured depository institution's assets minus Tier 1 capital as of June 30, 2009. The amount of the special assessment for any institution did not exceed 10 basis points times the institution's assessment base for the second quarter 2009. The assessment, in the amount of $574,000, was collected from the Bank on September 30, 2009.
On November 12, 2009, the FDIC approved a rule to require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. An insured institution's risk-based deposit insurance assessments will continue to be calculated on a quarterly basis, but will be paid from the amount the institution prepaid until the later of the date that amount is exhausted or June 30, 2013, at which point any remaining funds would be returned to the insured institution. Consequently, the Company's prepayment of DIF premiums made in December 2009 resulted in a prepaid asset of $5.7 million. As of December 31, 2010, the amount of the prepaid asset was $4.0 million.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank ("FHLB"), of Pittsburgh, which is one of 12 regional FHLB's. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the FHLB system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the FHLB. At December 31, 2010, the Bank had no short-term FHLB advances outstanding and $10.0 million in long-term FHLB debt outstanding (see note 14 of the consolidated financial statements).
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As a member, the Bank is required to purchase and maintain stock in the FHLB in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of its outstanding advances from the FHLB. On November 19, 2010, the Company acquired $1.7 million in FHLB stock as a result of the FDIC-assisted whole bank acquisition of Allegiance. At December 31, 2010, the Bank had $7.1 million in stock of the FHLB, which was in compliance with this requirement.
Emergency Economic Stabilization Act of 2008 and Related Programs
The Emergency Economic Stabilization Act of 2008 ("EESA") was enacted to enable the federal government, under terms and conditions developed primarily by the Secretary of the United States Department of Treasury ("Treasury"), to restore liquidity and stabilize the U.S. economy, including through implementation of the Troubled Asset Relief Program ("TARP"). Under the TARP, Treasury authorized a voluntary Capital Purchase Program ("CPP") to purchase up to $250.0 billion of senior preferred shares of qualifying financial institutions that elected to participate by November 14, 2008. As previously disclosed, on December 19, 2008, the Company issued to Treasury, 25,000 shares of Series A Preferred Stock and a warrant to purchase 367,982 shares of the Company's common stock for an aggregate purchase price of $25.0 million under the TARP CPP (see note 20 of the consolidated financial statements). Companies participating in the TARP CPP were required to adopt certain standards relating to executive compensation. The terms of the TARP CPP also limit certain uses of capital by the issuer, including with respect to repurchases of securities and increases in dividends.
The American Recovery and Reinvestment Act of 2009 ("ARRA") was intended to provide a stimulus to the U.S. economy in the wake of the economic downturn brought about by the subprime mortgage crisis and the resulting credit crunch. The bill includes federal tax cuts, expansion of unemployment benefits and other social welfare provisions, and domestic spending in education, healthcare, and infrastructure, including the energy structure. The new law also includes certain noneconomic recovery related items, including a limitation on executive compensation in federally aided financial institutions, including institutions, such as the Company, that had previously received an investment by Treasury under the TARP CPP. Under ARRA, an institution that either will receive funds or which had previously received funds under TARP, will be subject to certain restrictions and standards throughout the period in which any obligation arising under TARP remains outstanding (except for the time during which the federal government holds only warrants to purchase common stock of the issuer).
The following summarizes the significant requirements of ARRA, which are included in standards established by the Treasury:
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- limits on compensation incentives for risks by senior executive officers;
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- a requirement for recovery of any compensation paid based on inaccurate financial information;
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- a prohibition on "golden parachute payments" to specified officers or employees, which term is generally defined as any
payment for departure from a company for any reason;
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- a prohibition on compensation plans that would encourage manipulation of reported earnings to enhance the compensation of
employees;
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- a prohibition on bonus, retention award, or incentive compensation to designated employees, except in the form of
long-term restricted stock;
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- a requirement that the board of directors adopt a luxury expenditures policy;
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- a requirement that shareholders be permitted a separate nonbinding vote on executive compensation;
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- a requirement that the chief executive officer and the chief financial officer provide a written certification of compliance with the standards, when established, to the SEC.
Under ARRA, subject to consultation with the appropriate federal banking agency, Treasury is required to permit a recipient of TARP funds to repay any amounts previously provided to or invested in the recipient by Treasury without regard to whether the institution has replaced the funds from any other source or to any waiting period.
Recent Legislation
The Dodd-Frank Act was enacted on July 21, 2010. This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.
The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare various studies and reports for Congress. The federal agencies are given significant discretion in drafting such rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for some time.
Certain provisions of the Dodd-Frank Act are expected to have a near term impact on the Company. For example, effective July 21, 2011, a provision of the Dodd-Frank Act eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on the Company's interest expense.
The Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation insurance assessments. Under the Act, the assessment base will no longer be an institution's deposit base, but rather its average consolidated total assets less its average tangible equity during the assessment period. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013.
Bank and thrift holding companies with assets of less than $15 billion as of December 31, 2009, such as the Company, will be permitted to include trust preferred securities that were issued before May 19, 2010, as Tier 1 capital; however, trust preferred securities issued by a bank or thrift holding company (other than those with assets of less than $500 million) after May 19, 2010, will no longer count as Tier 1 capital. Trust preferred securities still will be entitled to be treated as Tier 2 capital.
The Dodd-Frank Act will require publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called "golden parachute" arrangements, and may allow greater access by shareholders to the company's proxy material by authorizing the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company's proxy materials. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded.
The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10.0 billion in assets. Banks and savings institutions with $10.0 billion or less in assets such as the Bank will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank Act also weakens the federal
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preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.
It is difficult to predict at this time the specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on community banks. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial institutions' operations is presently unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.
Other Legislation
The Gramm-Leach-Bliley Act, passed in 1999, dramatically changed certain banking laws. One of the most significant changes was that the separation between banking and the securities businesses mandated by the Glass-Steagall Act has now been removed, and the provisions of any state law that prohibits affiliation between banking and insurance entities have been preempted. Accordingly, the legislation now permits firms engaged in underwriting and dealing in securities, and insurance companies, to own banking entities, and permits bank holding companies (and in some cases, banks) to own securities firms and insurance companies. The provisions of federal law that preclude banking entities from engaging in non-financially related activities, such as manufacturing, have not been changed. For example, a manufacturing company cannot own a bank and become a bank holding company, and a bank holding company cannot own a subsidiary that is not engaged in financial activities, as defined by the regulators.
The legislation creates a new category of bank holding company called a "financial holding company." In order to avail itself of the expanded financial activities permitted under the law, a bank holding company must notify the Federal Reserve Board ("Federal Reserve") that it elects to be a financial holding company. A bank holding company can make this election if it, and all its bank subsidiaries, are well capitalized, well managed, and have at least a satisfactory Community Reinvestment Act rating, each in accordance with the definitions prescribed by the Federal Reserve and the regulators of the subsidiary banks. Once a bank holding company makes such an election, and provided that the Federal Reserve does not object to such election by such bank holding company, the financial holding company may engage in financial activities (i.e., securities underwriting, insurance underwriting, and certain other activities that are financial in nature as to be determined by the Federal Reserve) by simply giving a notice to the Federal Reserve within thirty days after beginning such business or acquiring a company engaged in such business. This makes the regulatory approval process to engage in financial activities much more streamlined than under prior law. On February 7, 2002, the Company's election with the Board of Governors of the Federal Reserve System to become a financial holding company became effective.
The Sarbanes-Oxley Act of 2002 was enacted to enhance penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures under the federal securities laws. The Sarbanes-Oxley Act generally applies to all companies, including the Company, that file or are required to file periodic reports with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, or the Exchange Act. The legislation includes provisions, among other things, governing the services that can be provided by a public company's independent auditors and the procedures for approving such services, requiring the chief executive officer and chief financial officer to certify certain matters relating to the company's periodic filings under the Exchange Act, requiring expedited filings of reports
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by insiders of their securities transactions and containing other provisions relating to insider conflicts of interest, increasing disclosure requirements relating to critical financial accounting policies and their application, increasing penalties for securities law violations, and creating a new Public Company Accounting Oversight Board ("PCAOB"), a regulatory body subject to the SEC jurisdiction with broad powers to set auditing, quality control and ethics standards for accounting firms. In connection with this legislation, the national securities exchanges and NASDAQ have adopted rules relating to certain matters, including the independence of members of a company's audit committee, as a condition to listing or continued listing. The Company does not believe that the application of these rules to the Company will have a material effect on its business, financial condition or results of operations.
The USA PATRIOT Act, enacted in direct response to the terrorist attacks on September 11, 2001, strengthens the anti-money laundering provisions of the Bank Secrecy Act. Many of the new provisions added by the Act apply to accounts at or held by foreign banks, or accounts of or transactions with foreign entities. While the Bank does not have a significant foreign business, the new requirements of the Bank Secrecy Act still require the Bank to use proper procedures to identify its customers. The Act also requires the banking regulators to consider a bank's record of compliance under the Bank Secrecy Act in acting on any application filed by a bank. As the Bank is subject to the provisions of the Bank Secrecy Act (i.e., reporting of cash transactions in excess of $10,000), the Bank's record of compliance in this area will be an additional factor in any applications filed by it in the future. To the Bank's knowledge, its record of compliance in this area is satisfactory.
The Fair and Accurate Credit Transaction Act was adopted in 2003. It extends and expands upon provisions in the Fair Credit Reporting Act, affecting the reporting of delinquent payments by customers and denials of credit applications. The revised act imposes additional record keeping, reporting, and customer disclosure requirements on all financial institutions, including the Bank. Also in late 2003, the Check 21 Act was adopted. This Act affects the way checks can be processed in the banking system, allowing payments to be converted to electronic transfers rather than processed as traditional paper checks.
VIST Insurance and VIST Capital are subject to additional regulatory requirements. VIST Insurance is subject to Pennsylvania insurance laws and the regulations of the Pennsylvania Department of Insurance. The securities brokerage activities of VIST Capital are subject to regulation by the SEC and the FINRA/SIPC, and VIST Capital is a registered investment advisor subject to regulation by the SEC.
Congress is often considering some financial industry legislation, and the federal banking agencies routinely propose new regulations. The Company cannot predict how any new legislation, or new rules adopted by federal or state banking agencies, may affect the business of the Company and its subsidiaries in the future. Given that the financial industry remains under stress and severe scrutiny, and given that the U.S. economy has not yet fully recovered to pre-crisis levels of activity, the Company expects that there will be significant legislation and regulatory actions that may materially affect the banking industry for the foreseeable future.
Failure to comply with the terms of the loss sharing agreements with the FDIC may result in significant losses.
On November 19, 2010, the Company entered into a Whole Bank Purchase and Assumption Agreement with the FDIC, pursuant to which the Company acquired certain assets and assumed certain liabilities of Allegiance Bank of North America ("Allegiance"), headquartered in Bala Cynwyd, Pennsylvania. The Company also entered into loss sharing agreements with the FDIC. Under the loss sharing agreements, the Company will share in the losses on assets covered under the Purchase and Assumption Agreement. Under the terms of the loss sharing agreements, the FDIC will reimburse the
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Bank for 70 percent of net losses on covered assets incurred up to $12.0 million, and 80 percent of net losses exceeding $12.0 million. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is five years in respect to losses and eight years in respect to loss recoveries.
The Purchase and Assumption Agreement and their respective loss sharing agreements have specific, detailed and cumbersome compliance, servicing, notification and reporting requirements, including certain restrictions on our change of control. The loss sharing agreements prohibit the assignment by the Company of its rights under the loss sharing agreements and the sale or transfer of any subsidiary of the Company holding title to assets covered under the loss sharing agreements without the prior written consent of the FDIC. An assignment would include (i) the merger or consolidation of the Company with or into another bank, if we will own less than 66.66% of the equity of the resulting bank; (ii) our merger or consolidation with or into another company, if our shareholders will own less than 66.66% of the equity of the resulting company; (iii) the sale of all or substantially all of the assets of the Company to another company or person; or (iv) a sale of shares by any one or more shareholders of the Company that would effect a change in control of the Company. The Company's rights under the loss sharing agreements will terminate if any assignment of the loss sharing agreements occurs without the prior written consent of the FDIC.
Our failure to comply with the terms of the agreements or to properly service the loans and OREO under the requirements of the loss sharing agreements may cause individual loans or large pools of loans to lose eligibility for loss share payments from the FDIC. This could result in material losses that are currently not anticipated.
Difficult market conditions and economic trends have adversely affected our industry and our business.
We are particularly affected by downturns in the U. S. housing market. Dramatic declines in the housing market over the past year, with decreasing home prices and increasing delinquencies and foreclosures, may have a negative impact on the credit performance of mortgage, consumer, commercial and construction loan portfolios resulting in significant write-downs of assets by many financial institutions. In addition, the values of real estate collateral supporting many loans have declined and may continue to decline. General downward economic trends, reduced availability of commercial credit and increasing unemployment may negatively impact the credit performance of commercial and consumer credit, resulting in additional write-downs. Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other. This market turmoil and tightening of credit has led to increased commercial and consumer deficiencies, lack of customer confidence, increased market volatility and widespread reduction in general business activity. Competition among depository institutions for deposits has increased significantly. Financial institutions have experienced decreased access to deposits or borrowings. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets may adversely affect our business, financial condition, results of operations and stock price. We do not expect that the difficult market conditions will improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the industry. In particular, we may face the following risks in connection with these events:
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- We expect to face increased regulation of our industry. Compliance with such regulation may increase our costs and limit
our ability to pursue business opportunities.
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- Our ability to assess the creditworthiness of customers and to estimate the losses inherent in our credit exposure is made more complex by these difficult market and economic conditions.
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- We also may be required to pay higher FDIC premiums, because financial institution failures resulting from the depressed
market conditions have depleted and may continue to deplete the deposit insurance fund and reduce its ratio of reserves to insured deposits.
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- Our ability to borrow from other financial institutions or the FHLB on favorable terms or at all could be adversely
affected by further disruptions in the capital markets or other events.
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- We may experience a prolonged decrease in dividend income from our investment in FHLB stock.
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- We may experience increases in foreclosures, delinquencies and customer bankruptcies, as well as more restricted access to funds.
Current levels of market volatility are unprecedented.
The capital and credit markets have been experiencing volatility and disruption for more than a year. In recent months, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers' underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition, results of operations and cash flows.
The market value of our securities portfolio may continue to be impacted by the level of interest rates and the credit quality and strength of the underlying issuers.
If a decline in market value of a security is determined to be other than temporary, under generally accepted accounting principles, we are required to write these securities down to their estimated fair value. As of December 31, 2010, we owned single issuer and pooled trust preferred securities and private label collateralized mortgage obligations whose aggregate historical cost basis is greater than their estimated fair value (see note 8 of the consolidated financial statements). We have reviewed these securities and, with the exception of those securities which we identified as other-than-temporarily impaired, we have determined that the decreases in estimated fair value are temporary. We perform an ongoing analysis of these securities utilizing both readily available market data and third party analytical models. Future changes in interest rates or the credit quality and strength of the underlying issuers may reduce the market value of these and other securities. If such decline is determined to be other than temporary, we will write them down through a charge to earnings to their then current fair value.
The Bank is a member of the FHLB and is required to purchase and maintain stock in the FHLB in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of its outstanding advances from the FHLB. As a result of the FDIC-assisted whole bank acquisition of Allegiance on November 19, 2010, the bank acquired $1.7 million in FHLB stock. At December 31, 2010, the Bank had $7.1 million in stock of the FHLB which was in compliance with this requirement. These equity securities are "restricted" in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other tradable equity securities, their fair value is equal to amortized cost, and no impairment write-downs have been recorded on these securities during 2010, 2009, or 2008.
The FHLB announced in December 2008 that it voluntarily suspended the payment of dividends and the repurchase of excess capital stock from member banks. The FHLB cited a significant reduction in the level of core earnings resulting from lower short-term interest rates, the increased cost of maintaining liquidity and constrained access to the debt markets at attractive rates and maturities as
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the main reasons for the decision to suspend dividends and the repurchase excess capital stock. The FHLB last paid a dividend in the third quarter of 2008. In the fourth quarter of 2010, as a result of improved core earnings and a decrease in OTTI charges on non-agency investment securities, the FHLB repurchased stock totaling $283,000 from the Bank. Accounting guidance indicates that an investor in FHLB capital stock should recognize impairment if it concludes that it is not probable that it will ultimately recover the par value of its shares. The decision of whether impairment exists is a matter of judgment that should reflect the investor's view of the FHLB's long-term performance, which includes factors such as its operating performance, the severity and duration of declines in the market value of its net assets related to its capital stock amount, its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance, the impact of legislation and regulatory changes on FHLB, and accordingly, on the members of FHLB and its liquidity and funding position. After evaluating all of these considerations and in light of the fourth quarter FHLB stock repurchase, the Company believes the par value of its shares will be recovered. Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.
Changes in interest rates could reduce our income, cash flows and asset values.
Our income and cash flows and the value of our assets depend to a great extent on the difference between the interest rates we earn on interest-earning assets, such as loans and investment securities, and the interest rates we pay on interest-bearing liabilities such as deposits and borrowings. These rates are highly sensitive to many factors which are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, will influence not only the interest we receive on our loans and investment securities and the amount of interest we pay on deposits and borrowings but will also affect our ability to originate loans and obtain deposits and the value of our investment portfolio. If the rate of interest we pay on our deposits and other borrowings increases more or decreases less than the rate of interest we earn on our loans and other investments, our net interest income, and therefore our earnings, could be adversely affected. Our earnings also could be adversely affected if the rates on our loans and other investments fall more quickly than those on our deposits and other borrowings.
Our financial condition and results of operations would be adversely affected if our allowance for loan losses is not sufficient to absorb actual losses or if we are required to increase our allowance.
Despite our underwriting criteria, we may experience loan delinquencies and losses. In order to absorb losses associated with nonperforming loans, we maintain an allowance for loan losses based on, among other things, historical experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Determination of the allowance inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. At any time there are likely to be loans in our portfolio that will result in losses but that have not been identified as nonperforming or potential problem credits. We cannot be sure that we will be able to identify deteriorating credits before they become nonperforming assets or that we will be able to limit losses on those loans that are identified. We may be required to increase our allowance for loan losses for any of several reasons. State and federal regulators, in reviewing our loan portfolio as part of a regulatory examination, may request that we increase our allowance for loan losses. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in our allowance. In addition, if charge-offs in future periods exceed our allowance for loan losses, we will need additional increases in our allowance for loan losses. Any increases in our allowance for loan losses will result in a decrease in our net income and, possibly, our capital, and may materially affect our results of operations in the period in which the allowance is increased.
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Recently enacted legislation, legislation enacted in the future, and government programs could subject us to increased regulation and may adversely affect us.
The Emergency Economic Stabilization Act of 2008 ("EESA") provided the U.S. Treasury authority to, among other things, invest in financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Pursuant to this authority, the U.S. Treasury announced its CPP, under which it purchased preferred stock and warrants in eligible institutions, including the Company, to increase the flow of credit to businesses and consumers and to support the economy. In accordance with the terms of the CPP, the Company issued to the U.S. Treasury 25,000 shares of Series A Preferred Stock and a stock purchase warrant to purchase 367,982 shares of the Company's common stock at $10.19 per share, for an aggregate purchase price of $25 million.
Participation in the CPP subjects the Company to increased oversight by the U.S. Treasury, regulators and Congress. On February 17, 2009, EESA was amended by the American Recovery and Reinvestment Act of 2009 ("ARRA"). EESA, the ARRA and the rules issued under these acts contain executive compensation restrictions and corporate governance standards that apply to all CPP participants, including the Company. For example, participation in the CPP imposes restrictions on the Company's ability to pay cash dividends on or repurchase the Company's common stock. With regard to increased oversight, Treasury has the power to unilaterally amend the terms of the CPP purchase agreement to the extent required to comply with changes in applicable federal law and to inspect the Company's corporate books and records through its federal banking regulator. In addition, Treasury has the right to appoint two persons to the Company's board of directors if the Company misses dividend payments for six dividend periods, whether or not consecutive, on the preferred stock. EESA, the ARRA and the related rules subject the Company to substantial restrictions on executive compensation that could adversely affect the Company's ability to attract, motivate, and retain key executives and other key personnel. The ultimate impact that EESA, the ARRA and their implementing regulations, or any other legislation or governmental program, will have on the financial markets is unknown at this time. The failure of the financial markets to stabilize and a continuation or worsening of current financial market conditions could materially and adversely affect the Company's business, results of operations, financial condition, access to funding and the trading price of the Company's common stock.
Other recent legislation and proposals could also affect us, the Dodd-Frank Act provides for the creation of a consumer protection division at the Board of Governors of the Federal Reserve System that will have broad authority to issue regulations governing the services and products we provide consumers. This additional regulation could increase our compliance costs and otherwise adversely impact our operations. That legislation also contains provisions that, over time, could result in higher regulatory capital requirements and loan loss provisions for the Bank, and may increase interest expense due to the ability in July 2011 to pay interest on all demand deposits. In addition, there have been proposals made by members of Congress and others that would reduce the amount delinquent borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution's ability to foreclose on mortgage collateral. These proposals could result in credit losses or increased expense in pursuing our remedies as a creditor. Recent regulatory changes impose limits on our ability to charge overdraft fees, which may decrease our non-interest income as compared to more recent prior periods.
The potential exists for additional federal or state laws and regulations, or changes in policy, affecting many aspects of our operations, including capital levels, lending and funding practices, and liquidity standards. New laws and regulations may increase our costs of regulatory compliance and of doing business and otherwise affect our operations, and may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the fees we can charge and our ongoing operations, costs and profitability.
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The Company may be required to pay significantly higher FDIC premiums or special assessments that could adversely affect earnings.
Recent insured institution failures, as well as deterioration in banking and economic conditions, have significantly increased FDIC loss provisions, resulting in a decline in the designated reserve ratio to historical lows. The FDIC expects a higher rate of insured institution failures in the next few years compared to recent years; thus, the reserve ratio may continue to decline. The Dodd-Frank Act enacted a number of changes to the federal deposit insurance regime that will affect the deposit insurance assessments the Bank will be obligated to pay in the future. For example:
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- The law permanently raises the federal deposit insurance limit to $250,000 per account ownership. This change may have the
effect of increasing losses to the FDIC insurance fund on future failures of other insured depository institutions.
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- The new law makes deposit insurance coverage unlimited in amount for non-interest bearing transaction accounts
until December 31, 2012. This change may also have the effect of increasing losses to the FDIC insurance fund on future failures of other insured depository institutions.
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- The law increases the insurance fund's minimum designated reserve ratio from 1.15 to 1.35, and removes the current 1.50 cap on the reserve ratio. The law gives the FDIC discretion to suspend or limit the declaration or payment of dividends even when the reserve ratio exceeds the minimum designated reserve ratio.
Each of these changes may increase the rate of FDIC insurance assessments to maintain or replenish the FDIC's deposit insurance fund. This could, in turn, raise the Bank's future deposit insurance assessment costs. On the other hand, the law changes the deposit insurance assessment base so that it will generally be equal to average consolidated assets less average tangible equity. This change of the assessment base from an emphasis on deposits to an emphasis on assets is generally considered likely to cause larger banking organizations to pay a disproportionately higher portion of future deposit insurance assessments, which may, correspondingly, lower the level of deposit insurance assessments that smaller community banks such as the Bank may otherwise have to pay in the future. While it is likely that the new law will increase the Bank's future deposit insurance assessment costs, the specific amount by which the new law's combined changes will affect the Bank's deposit insurance assessment costs is hard to predict, particularly because the new law gives the FDIC enhanced discretion to set assessment rate levels.
Competition may decrease our growth or profits.
We face substantial competition in all phases of our operations from a variety of different competitors, including commercial banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, factoring companies, leasing companies, insurance companies and money market mutual funds. There is very strong competition among financial services providers in our principal service area. Our competitors may have greater resources, higher lending limits or larger branch systems than we do. Accordingly, they may be able to offer a broader range of products and services as well as better pricing for those products and services than we can.
In addition, some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on federally insured financial institutions. As a result, those non-bank competitors may be able to access funding and provide various services more easily or at less cost than we can, adversely affecting our ability to compete effectively.
We may be adversely affected by government regulation.
The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds and depositors, not shareholders. Changes in the laws, regulations,
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and regulatory practices affecting the banking industry may increase our costs of doing business or otherwise adversely affect us and create competitive advantages for others. Regulations affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of these changes, which could have a material adverse effect on our profitability or financial condition.
We rely on our management and other key personnel, and the loss of any of them may adversely affect our operations.
We are and will continue to be dependent upon the services of our executive management team. In addition, we will continue to depend on our ability to retain and recruit key commercial loan officers. The unexpected loss of services of any key management personnel or commercial loan officers could have an adverse effect on our business and financial condition because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
Environmental liability associated with lending activities could result in losses.
In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous substances were discovered on any of these properties, we could be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether we knew of, or were responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site even if we neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may materially limit use of properties we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.
Failure to implement new technologies in our operations may adversely affect our growth or profits.
The market for financial services, including banking services and consumer finance services, is increasingly affected by advances in technology, including developments in telecommunications, data processing, computers, automation, internet-based banking and tele-banking. Our ability to compete successfully in our markets may depend on the extent to which we are able to exploit such technological changes. However, we can provide no assurance that we will be able to properly or timely anticipate or implement such technologies or properly train our staff to use such technologies. Any failure to adapt to new technologies could adversely affect our business, financial condition or operating results.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the Federal Deposit Insurance Corporation, commonly referred to as the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is subject to the same market forces that affect the price of common stock in any company.
Our ability to pay dividends is limited by law and federal banking regulation.
Our ability to pay dividends to our shareholders may depend on our receipt of dividends from the Bank. The amount of dividends that the Bank may pay to us is limited by federal laws and regulations. We also may decide to limit the payment of dividends even when we have the legal ability to pay them in order to retain earnings for use in our business.
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Dividends payable by the Company are subject to guidance published by the Board of Governors of the Federal Reserve System. Consistent with the Federal Reserve guidance, companies are urged to strongly consider eliminating, deferring or significantly reducing dividends if (i) net income available to common shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividend, (ii) the prospective rate of earnings retention is not consistent with the bank holding company's capital needs and overall current and prospective financial condition, or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy rations. As a result of this guidance, management consults with the Federal Reserve Bank of Philadelphia, and provides the Reserve Bank with information on the Company's then current and prospective earnings and capital position, on a quarterly basis in advance of declaring any cash dividends for the foreseeable future.
In addition, under the terms of the TARP CPP, the Company cannot increase its common stock dividend from the last quarterly dividend per share declared on its common stock prior to October 14, 2008 ($0.10) without the consent of Treasury until the third anniversary date of the issuance of the Series A Preferred Stock (December 19, 2011).
Federal and state banking laws, our articles of incorporation and our by-laws may have an anti-takeover effect.
Federal law imposes restrictions, including regulatory approval requirements, on persons seeking to acquire control over the Company. Pennsylvania law also has provisions that may have an anti-takeover effect. In addition, the Company's articles of incorporation and bylaws permit our board of directors to issue, without shareholder approval, preferred stock and additional shares of common stock that could adversely affect the voting power and other rights of existing common shareholders. These provisions may serve to entrench management or discourage a takeover attempt that shareholders consider to be in their best interest or in which they would receive a substantial premium over the current market price.
We plan to continue to grow and there are risks associated with continued growth.
We intend to continue to expand our business and operations to increase deposits and loans. Continued growth may present operating and other problems that could adversely affect our business, financial condition and results of operations. Our growth may place a strain on our administrative and operational, personnel, and financial resources and increase demands on our systems and controls. Our ability to manage growth successfully will depend on our ability to attract qualified personnel and maintain cost controls and asset quality while attracting additional loans and deposits on favorable terms, as well as on factors beyond our control, such as economic conditions and interest rate trends. If we grow too quickly and are not able to attract qualified personnel, control costs and maintain asset quality, this continued rapid growth could materially adversely affect our financial performance.
Our legal lending limits are relatively low and restrict our ability to compete for larger customers.
At December 31, 2010, our lending limit per borrower was approximately $16.0 million, or approximately 12% of our capital. Accordingly, the size of loans that we can offer to potential borrowers (without participation by other lenders) is less than the size of loans that many of our competitors with larger capitalization are able to offer. Our legal lending limit also impacts the efficiency of our lending operation because it tends to lower our average loan size, which means we have to generate a higher number of transactions to achieve the same portfolio volume. We may engage in loan participations with other banks for loans in excess of our legal lending limits. However, there can be no assurance that such participations will be available at all or on terms which are favorable to us and to our customers.
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If we are unable to identify and acquire other financial institutions and successfully integrate their acquired businesses, our business and earnings may be negatively affected.
Acquisition of other financial institutions is a component of our growth strategy. The market for acquisitions remains highly competitive, and we may be unable to find acquisition candidates in the future that fit our acquisition and growth strategy.
Acquisitions of financial institutions involve operational risks and uncertainties, and acquired companies may have unforeseen liabilities, exposure to asset quality problems, key employee and customer retention problems and other problems that could negatively affect our organization. We may not be able to complete future acquisitions and, if completed, we may not be able to successfully integrate the operations, management, products and services of the entities that we acquire and eliminate redundancies. The integration process may also require significant time and attention from our management that they would otherwise direct at servicing existing business and developing new business. Our failure to successfully integrate the entities we acquire into our existing operations may increase our operating costs significantly and adversely affect our business and earnings.
The market price for our common stock may be volatile.
The market price for our common stock has fluctuated, ranging between $5.22 and $10.20 per share during the 12 months ended December 31, 2010. The overall market and the price of our common stock may continue to be volatile. There may be a significant impact on the market price for our common stock due to, among other things, developments in our business, variations in our anticipated or actual operating results, changes in investors' or analysts' perceptions of the risks and conditions of our business and the size of the public float of our common stock. The average daily trading volume for our common stock as reported on NASDAQ was 7,252 shares during the twelve months ended December 31, 2010, with daily volume ranging from a low of 100 shares to a high of 64,113 shares. There can be no assurance that a more active or consistent trading market in our common stock will develop. As a result, relatively small trades could have a significant impact on the price of our common stock.
Market conditions may adversely affect our fee based insurance and investment business.
The revenues of our fee based insurance business are derived primarily from commissions from the sale of insurance policies, which commissions are generally calculated as a percentage of the policy premium. These insurance policy commissions can fluctuate as insurance carriers from time to time increase or decrease the premiums on the insurance products we sell. Similarly, we receive fee based revenues from commissions from the sale of securities and investment advisory fees. In the event of decreased stock market activity, the volume of trading facilitated by VIST Capital Management, LLC will in all likelihood decrease resulting in decreased commission revenue on purchases and sales of securities. In addition, investment advisory fees, which are generally based on a percentage of the total value of an investment portfolio, will decrease in the event of decreases in the values of the investment portfolios, for example, as a result of overall market declines.
Item 1B. Unresolved Staff Comments
None
20
The Company's executive office is located in the administration building at 1240 Broadcasting Road, Wyomissing, Pennsylvania. Listed below are the locations of properties owned or leased by the Company and its subsidiaries. Owned properties are not subject to any mortgage, lien or encumbrance.
Property Location
|
Leased or Owned | |
---|---|---|
Corporate Office |
Leased | |
Operations Center |
Leased |
|
North Pointe Financial Center |
Leased |
|
Northeast Reading Financial Center |
Leased |
|
Hamburg Financial Center |
Leased |
|
Bern Township Financial Center |
Leased |
|
Wernersville Financial Center |
Leased |
|
Breezy Corner Financial Center |
Leased |
|
Blandon Financial Center |
Leased |
|
Wyomissing Financial Center |
Leased |
|
Schuylkill Haven Financial Center |
Leased |
|
Birdsboro Financial Center |
Leased |
21
Property Location
|
Leased or Owned | |
---|---|---|
Exeter Financial Center |
Leased |
|
Sinking Spring Financial Center |
Leased |
|
Heritage Financial Center |
Leased |
|
Blue Bell Financial Center |
Leased |
|
Centre Square Financial Center |
Leased |
|
Conshohocken Financial Center |
Leased |
|
Fox Chase Financial Center |
Owned |
|
Oaks Financial Center |
Leased |
|
Strafford Financial Center |
Leased |
|
Bala Cynwyd Financial Center(2) |
Leased |
|
Old City Financial Center(2) |
Leased |
|
King of Prussia Financial Center(1) |
Leased |
|
Worcester Financial Center(2) |
Leased |
22
Property Location
|
Leased or Owned | |
---|---|---|
Berwyn Financial Center(2) |
Leased |
|
VIST Insurance |
Leased |
|
VIST Insurance |
Leased |
|
VIST Bank (Mortgage Banking Office) |
Leased |
- (1)
- The
Company expects to close its King of Prussia Financial Center acquired in the Allegiance acquisition by March 31, 2011.
- (2)
- Per the Purchase and Assumption Agreement with the FDIC, the leases associated with the branches acquired in the Allegiance acquisition are in the process of being renegotiated with a lease term not to exceed three years.
VIST Insurance shares offices in the Company's administration building located at 1240 Broadcasting Road, Wyomissing, Pennsylvania. VIST Insurance is charged a pro rata amount of the total lease expense.
VIST Capital also shares office space in the Company's administration building in Wyomissing, Pennsylvania, as well as in VIST Insurance's office located in Blue Bell, Pennsylvania and are charged accordingly a pro rata amount of the total lease expense.
A certain amount of litigation arises in the ordinary course of the business of the Company, and the Company's subsidiaries. In the opinion of the management of the Company, there are no proceedings pending to which the Company, or the Company's subsidiaries are a party or to which their property is subject, that, if determined adversely to the Company or its subsidiaries, would be material in relation to the Company's shareholders' equity or financial condition, nor are there any proceedings pending other than ordinary routine litigation incident to the business of the Company and its subsidiaries. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company or its subsidiaries by governmental authorities.
Item 4. [Removed and Reserved]
23
Item 4A. Executive Officers of the Registrant
Certain information, as of December 31, 2010, including principal occupation during the past five years, relating to each executive officer of the Company is as follows:
Name, Address, and Position Held with the Company
|
Age | Position Held Since |
Principal Occupation for Past 5 Years | |||||
---|---|---|---|---|---|---|---|---|
ROBERT D. DAVIS |
63 | 2005 | President and Chief Executive Officer of the Company and the Bank since September 2005; Chairman of VIST Insurance, LLC; Chairman of VIST Capital Management, LLC; prior thereto, President and Chief Executive Officer and Director of Republic First Bank since 1999. | |||||
EDWARD C. BARRETT |
62 |
2002 |
Executive Vice President since October 2003 and Chief Financial Officer of the Company since September 2004; prior thereto, Chief Administrative Officer since July 2002. |
|||||
LOUIS J. DECESARE, JR. |
51 |
2008 |
Executive Vice President and Chief Lending Officer of VIST Bank since September 2008. Prior thereto, President of Republic First Bank since January 2007. Prior thereto, Chief Lending Officer of Republic First Bank since January 2005. |
|||||
NEENA M. MILLER |
46 |
2008 |
Executive Vice President and Chief Credit Officer of VIST Bank since 2008: prior thereto, Executive Vice President and Chief Credit Officer of Republic First Bank since 2005; prior thereto, Senior Credit Officer of Republic First Bank since 2004. |
|||||
CHRISTINA S. McDONALD |
45 |
2004 |
Executive Vice President and Chief Retail Banking Officer of VIST Bank since 2002. |
|||||
JENETTE L. ECK |
48 |
1998 |
Senior Vice President and Secretary of the Company since 2001. |
|||||
MICHAEL C. HERR |
45 |
2009 |
Chief Operating Officer of VIST Insurance, LLC since 2009; prior thereto, Senior Vice President of VIST Insurance, LLC since 2004. |
24
Item 5. Market For Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Performance Graph
Set forth below is a graph and table comparing the yearly percentage change in the cumulative total shareholder return on the Company's common stock against the cumulative total return on the NASDAQ-Total US Index, and the SNL Mid-Atlantic Bank Index for the five-year period commencing December 31, 2005, and ending December 31, 2010.
Cumulative total return on the Company's common stock, the NASDAQ Combination Bank Index, and the SNL Mid-Atlantic Bank Index equals the total increase in value since December 31, 2005, assuming reinvestment of all dividends. The graph and table were prepared assuming that $100 was invested on December 31, 2005, in Company common stock, the NASDAQ-Total US Index, and the SNL Mid-Atlantic Bank Index.
|
Period Ending | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Index
|
12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | |||||||||||||
VIST Financial Corp. |
100.00 | 107.88 | 87.97 | 39.42 | 27.90 | 39.08 | |||||||||||||
NASDAQ Composite |
100.00 | 110.39 | 122.15 | 73.32 | 106.57 | 125.91 | |||||||||||||
SNL Mid-Atlantic Bank |
100.00 | 120.02 | 90.76 | 50.00 | 52.63 | 61.40 |
25
As of December 31, 2010, there were 877 record holders of the Company's common stock. The market price of the Company's common stock for each quarter in 2010 and 2009 and the dividends declared on the Company's common stock for each quarter in 2010 and 2009 are set forth below.
Market Price of Common Stock
The Company's common stock is traded on the NASDAQ Global Select Market under the symbol "VIST". The following table sets forth, for the fiscal quarters indicated, the high and low bid and asked price per share of the Company's common stock, as reported on the NASDAQ Global Select Market:
|
Bid | Asked | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
High | Low | High | Low | |||||||||
2010 |
|||||||||||||
First Quarter |
$ | 10.20 | $ | 4.00 | $ | 10.30 | $ | 5.23 | |||||
Second Quarter |
9.45 | 7.00 | 9.50 | 7.31 | |||||||||
Third Quarter |
7.99 | 6.31 | 10.00 | 6.57 | |||||||||
Fourth Quarter |
7.62 | 6.31 | 8.84 | 6.60 | |||||||||
2009 |
|||||||||||||
First Quarter |
$ | 9.40 | $ | 5.00 | $ | 10.70 | $ | 5.50 | |||||
Second Quarter |
8.45 | 6.10 | 9.50 | 6.43 | |||||||||
Third Quarter |
7.86 | 5.00 | 8.25 | 5.69 | |||||||||
Fourth Quarter |
6.24 | 5.00 | 7.37 | 5.11 |
Series A Preferred Stock and Common Stock Dividends
On December 19, 2008, the Company issued to the Treasury 25,000 shares of Series A Preferred Stock which pays cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. Under ARRA, the Series A Preferred Stock may be redeemed by the Company in 25% increments at any time following consultation with its primary bank regulator and Treasury.
Prior to the earlier of the third anniversary date of the issuance of the Series A Preferred Stock (December 19, 2011) or the date on which the Series A Preferred Stock has been redeemed in whole or the Treasury has transferred all of the Series A Preferred Stock to third parties which are not affiliates of the Treasury, the Company cannot increase its common stock dividend from the last quarterly cash dividend per share ($0.10) declared on the common stock prior to October 14, 2008 without the consent of the Treasury,
During 2010 and 2009, cumulative cash dividends on the Series A Preferred Stock and cash dividends on common stock were paid on the 15th of February, May, August, and November.
|
Dividends Declared (Per Share) |
||||||
---|---|---|---|---|---|---|---|
|
2010 | 2009 | |||||
First Quarter |
$ | 0.050 | $ | 0.100 | |||
Second Quarter |
0.050 | 0.100 | |||||
Third Quarter |
0.050 | 0.050 | |||||
Fourth Quarter |
0.050 | 0.050 |
The Company can derive a portion of its income from dividends paid to it by the Bank. For a description of certain regulatory restrictions on the payment of dividends by the Bank to the Company and by the Company, see "Regulatory Restrictions on Dividends" on page 7.
26
Stock Repurchase Plan. On July 17, 2007, the Company increased the number of shares remaining for repurchase under its stock repurchase plan, originally effective January 1, 2003, and extended May 20, 2004, to 150,000 shares. During 2010, the Company did not repurchase any of its outstanding shares of common stock. At December 31, 2010, the maximum number of shares that may yet be purchased under the plan was 115,000.
The following table sets forth certain information relating to shares of the Company's common stock repurchased by the Company during the fourth quarter of 2010.
Period
|
Total Number of Shares (or Units) Purchased |
Average Price Paid Per Share (or Units) Purchased |
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(October 1 - October 31, 2010) |
| $ | | | 115,000 | |||||||||
(November 1 - November 30, 2010) |
| | | 115,000 | ||||||||||
(December 1 - December 31, 2010) |
| | | 115,000 | ||||||||||
Total |
| $ | | | 115,000 | |||||||||
As a result of the issuance of the Series A Preferred Stock, prior to the earlier of the third anniversary date of the issuance of the Series A Preferred Stock (December 19, 2011) or the date on which the Series A Preferred Stock has been redeemed in whole or the Treasury has transferred all of the Series A Preferred Stock to third parties which are not affiliates of the Treasury, the Company is generally restricted against redeeming, purchasing or acquiring any shares of common stock or other capital stock or other equity securities of any kind of the Company without the consent of the Treasury.
Item 6. Selected Financial Data
The following table presents the Company's summary consolidated financial data. We derived our balance sheet and income statement data for the years ended December 31, 2010, 2009, 2008, 2007 and 2006 from our audited financial statements. The summary consolidated financial data should be read in
27
conjunction with, and are qualified in their entirety by, our financial statements and the accompanying notes and the other information included elsewhere in this Annual Report.
|
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||
|
(Dollars in thousands except per share data) |
|||||||||||||||
Financial Condition: |
||||||||||||||||
Total assets |
$ | 1,425,012 | $ | 1,308,719 | $ | 1,226,070 | $ | 1,124,951 | $ | 1,041,632 | ||||||
Securities available for sale |
279,755 | 268,030 | 226,665 | 186,481 | 159,603 | |||||||||||
Securities held to maturity |
2,022 | 3,035 | 3,060 | 3,078 | 3,117 | |||||||||||
Federal Home Loan Bank stock |
7,099 | 5,715 | 5,715 | 5,562 | 4,577 | |||||||||||
Loans, net of unearned income |
954,363 | 910,964 | 886,305 | 820,998 | 764,783 | |||||||||||
Allowance for loan losses |
14,790 | 11,449 | 8,124 | 7,264 | 7,611 | |||||||||||
Covered Loans |
66,770 | | | | | |||||||||||
Deposits |
1,149,280 | 1,020,898 | 850,600 | 712,645 | 702,839 | |||||||||||
Securities sold under agreements to repurchase |
106,843 | 115,196 | 120,086 | 110,881 | 90,987 | |||||||||||
Federal funds purchased |
| | 53,424 | 118,210 | 82,105 | |||||||||||
Borrowings |
10,000 | 20,000 | 50,000 | 45,000 | 19,500 | |||||||||||
Junior subordinated debt |
18,437 | 19,658 | 18,260 | 20,232 | 20,150 | |||||||||||
Shareholders' equity |
132,447 | 125,428 | 123,629 | 106,592 | 102,130 | |||||||||||
Book value per share |
16.31 | 17.22 | 17.30 | 18.84 | 18.06 | |||||||||||
Operating Results: |
||||||||||||||||
Interest income |
$ | 64,087 | $ | 62,740 | $ | 65,838 | $ | 68,076 | $ | 61,377 | ||||||
Interest expense |
23,343 | 27,318 | 30,637 | 34,835 | 29,521 | |||||||||||
Net interest income before provision for loan losses |
40,744 | 35,422 | 35,201 | 33,241 | 31,856 | |||||||||||
Provision for loan losses |
10,210 | 8,572 | 4,835 | 998 | 1,084 | |||||||||||
Net interest income after provision for loan losses |
30,534 | 26,850 | 30,366 | 32,243 | 30,772 | |||||||||||
Non-interest income |
20,776 | 19,555 | 19,209 | 20,171 | 20,943 | |||||||||||
Net realized gains (losses) on sales of securities |
691 | 344 | (7,230 | ) | (2,324 | ) | 515 | |||||||||
Net credit impairment losses |
(850 | ) | (2,468 | ) | | | | |||||||||
Non-interest expense |
47,632 | 45,703 | 43,638 | 40,874 | 40,238 | |||||||||||
Income (loss) before income taxes |
3,519 | (1,422 | ) | (1,293 | ) | 9,216 | 11,992 | |||||||||
Income taxes (benefit) |
(465 | ) | (2,029 | ) | (1,858 | ) | 1,746 | 2,839 | ||||||||
Net income |
3,984 | 607 | 565 | 7,470 | 9,153 | |||||||||||
Preferred stock dividends and discount accretion |
(1,678 | ) | (1,649 | ) | | | | |||||||||
Net income (loss) available to common shareholders |
$ | 2,306 | $ | (1,042 | ) | $ | 565 | $ | 7,470 | $ | 9,153 | |||||
Per Share Data: |
||||||||||||||||
Earnings (loss) per common sharebasic |
$ | 0.37 | $ | (0.18 | ) | $ | 0.10 | $ | 1.32 | $ | 1.63 | |||||
Earnings (loss) per common sharediluted |
$ | 0.37 | $ | (0.18 | ) | $ | 0.10 | $ | 1.31 | $ | 1.62 | |||||
Cash dividends per share |
$ | 0.20 | $ | 0.30 | $ | 0.50 | $ | 0.77 | $ | 0.70 | ||||||
Selected Ratios: |
||||||||||||||||
Return on average assets |
0.29 | % | 0.05 | % | 0.05 | % | 0.70 | % | 0.92 | % | ||||||
Return on average shareholders' equity |
3.02 | % | 0.51 | % | 0.54 | % | 7.15 | % | 9.38 | % | ||||||
Dividend payout ratio |
53.69 | % | (166.22 | )% | 503.89 | % | 58.53 | % | 42.74 | % | ||||||
Average equity to average assets |
9.73 | % | 9.38 | % | 8.95 | % | 9.78 | % | 9.82 | % |
28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Management's discussion and analysis represents an overview of the financial condition and results of operations, and highlights the significant changes in the financial condition and results of operations, as presented in the accompanying consolidated financial statements for VIST Financial Corp. (the "Company"), a financial holding company, and its wholly-owned subsidiaries, VIST Bank (the "Bank"), VIST Insurance, LLC ("VIST Insurance"), and VIST Capital Management, LLC ("VIST Capital Management"). The Bank's wholly-owned subsidiary, VIST Mortgage Holdings, LLC was inactive at December 31, 2010.
During 2000, VIST Realty Solutions, LLC was formed as a subsidiary of VIST Bank for the purpose of providing title insurance and other real estate related services to its customers through limited partnership arrangements with third parties involved in the real estate services industry. On October 29, 2008, VIST Realty Solutions, LLC dissolved its operations by selling its partnership interest for an amount which approximated its initial capital contribution.
In May 2002, the Bank jointly formed VIST Mortgage Holdings, LLC with another real estate company. The Bank's initial investment was $15,000. In May 2004, the Bank dissolved its investment with the real estate company and in May 2004, the Bank formed VIST Mortgage Holdings, LLC to provide mortgage brokerage services, including, without limitation, any activity in which a mortgage broker may engage. It is operated as a permissible "affiliated business arrangement" within the meaning of the Real Estate Settlement Procedures Act of 1974. VIST Mortgage Holdings, LLC was inactive at December 31, 2010.
On September 1, 2008, the Company acquired Fisher Benefits Consulting, an insurance agency specializing in Group Employee Benefits, located in Pottstown, Pennsylvania. Fisher Benefits Consulting was merged into VIST Insurance. As a result of the acquisition, VIST Insurance expanded its retail and commercial insurance presence into southeastern Pennsylvania counties. The results of operations for Fisher Benefits Consulting have been included in the Company's consolidated statements of operations since September 2, 2008. The purchase price of $1.8 million for Fisher Benefits Consulting included goodwill of $200,000 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. 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. Contingent payments of $250,000 were paid in both, 2009 and 2010 and resulted in an increase to goodwill.
On October 1, 2004, the Company acquired 100% of the outstanding voting shares of Madison Bancshares Group, Ltd. ("Madison"), the holding company for Madison Bank, a Pennsylvania state-chartered commercial bank and its mortgage banking division, now VIST Mortgage. Madison Bank became a division of the Bank.
On April 30, 2010, VIST Insurance purchased a client list from KDN/Lanchester Corp for contingent payments estimated to be $231,000. Included in the purchase price was $78,000 and $152,000 of goodwill and intangible assets, respectively. The agreement between VIST Insurance and KDN/Lanchester Corp contains a purchase price consisting of a percentage of revenue for a three year period, after which all revenues generated from the use of the list will revert to VIST Insurance. As a result of this purchase, VIST Insurance expects to expand its retail and commercial presence in southeastern Pennsylvania.
On November 19, 2010, the Company acquired certain assets and assumed certain liabilities of Allegiance Bank of North America ("Allegiance") from the FDIC, as Receiver of Allegiance. Allegiance operated five community banking branches within Chester and Philadelphia counties. The
29
Bank's bid to purchase Allegiance included the purchase of certain Allegiance assets at a discount of $5.9 million and time deposits at a premium of $534,000, in exchange for assuming certain Allegiance deposits and certain other liabilities. Based on the terms of this transaction, the FDIC paid the Company $1.8 million ($2.0 million less a settlement of approximately $200,000). As a result of the Allegiance acquisition, the Company recorded $1.5 million of goodwill. No cash or other consideration was paid by the Bank. The Bank and the FDIC entered into loss sharing agreements regarding future losses incurred on loans and other real estate acquired through foreclosure existing at the acquisition date. Under the terms of the loss sharing agreements, the FDIC will reimburse the Bank for 70 percent of net losses on covered assets incurred up to $12.0 million, and 80 percent of net losses exceeding $12.0 million. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is five years in respect to losses and eight years in respect to loss recoveries. The acquisition of Allegiance represents a significant market extension of the Company's core Berks, Schuylkill, and Montgomery county markets into Philadelphia and the surrounding areas.
Critical Accounting Policies
The following discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). US GAAP is complex and require management to apply significant judgment to various accounting, reporting and disclosure matters. Management must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. Actual results may differ from these estimates under different assumptions or conditions.
In management's opinion, the most critical accounting policies and estimates impacting the Company's consolidated financial statements are listed below. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. For a complete discussion of the Company's significant accounting policies, see the footnotes to the Consolidated Financial Statements and discussion throughout this Form 10-K.
Determination of the Allowance for Loan Losses
The level of the allowance for credit losses and the provision for credit losses involve significant estimates by management. In evaluating the adequacy of the allowance for loan losses, management considers the specific collectability of impaired and nonperforming loans, past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect borrowers ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant qualitative factors. While management uses available information to make such evaluations, future adjustments to the allowance for credit losses and the provision for credit losses may be necessary if economic conditions, loan credit quality, or collateral issues differ substantially from the factors and assumptions used in making the evaluation.
The allowance for loan losses is evaluated on a regular basis by management and consists of specific and general components. The specific component relates to loans that are classified as either loss, doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical industry loss experience adjusted for qualitative factors. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the
30
contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and commercial real estate loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
Revenue Recognition for Insurance Activities
Insurance revenues are derived from commissions and fees. Commission revenues, as well as the related premiums receivable and payable to insurance companies, are recognized the later of the effective date of the insurance policy or the date the client is billed, net of an allowance for estimated policy cancellations. The reserve for policy cancellations is periodically evaluated and adjusted as necessary. Commission revenues related to installment premiums are recognized as billed. Commissions on premiums billed directly by insurance companies are generally recognized as income when received. Contingent commissions from insurance companies are generally recognized as revenue when the data necessary to reasonably estimate such amounts is obtained. A contingent commission is a commission paid by an insurance company that is based on the overall profit and/or volume of the business placed with the insurance company. Fee income is recognized as services are rendered.
Stock-Based Compensation
FASB Accounting Standards Codification ("ASC") 718, "Share-Based Payment" addresses the accounting for share-based payment transactions subsequent to 2006 in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. FASB ASC 718 requires an entity to recognize the grant-date fair-value of stock options and its other equity-based compensation issued to the employees in the consolidated statements of operations. The revised Statement generally requires that an entity account for those transactions using the fair-value-based method, and eliminates the intrinsic value method of accounting in APB Opinion No. 25. "Accounting for Stock Issued to Employees," which was permitted under FASB ASC 718, as originally issued. Effective January 1, 2006, the Company adopted FASB ASC 718 using the modified prospective method. Any additional impact the adoption of this statement will have on our results of operations will be determined by share-based payments granted in future periods.
Derivative Financial Instruments:
The Company maintains an overall interest rate risk-management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. The Company's goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin is not, on a material basis, adversely affected by movements in interest rates. As a result of
31
interest rate fluctuations, hedged assets and liabilities will appreciate or depreciate in market value. The effect of this unrealized appreciation or depreciation will generally be offset by income or loss on the derivative instruments that are linked to the hedged assets and liabilities. The Company views this strategy as a prudent management of interest rate sensitivity, such that earnings are not exposed to undue risk presented by changes in interest rates.
By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk exists to the extent of the fair value gain in a derivative. When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes the Company, and, therefore, creates a repayment risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it has no repayment risk. The Company minimizes the credit (or repayment) risk in the derivative instruments by entering into transactions with high quality counterparties.
Market risk is the adverse effect that a change in interest rates, currency, or implied volatility rates has on the value of a financial instrument. The Company manages the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. The Company periodically measures this risk by using value-at-risk methodology (refer to Note 21 of the consolidated financial statements for information on interest rate swap and interest rate cap agreements the Company has used to manage its exposure to interest rate risk).
Goodwill and Other Intangible Assets
The Company had goodwill and other intangible assets of $45.7 million at December 31, 2010, related to the acquisition of its banking, insurance and wealth management companies. The Company utilizes a third party valuation service to perform its goodwill impairment test both on an interim and annual basis. A fair value is determined for the banking and financial services, insurance services and investment services reporting units. If the fair value of the reporting business unit exceeds the book value, then no impairment write down of goodwill is necessary (a Step One evaluation). If the fair value is less than the book value, then an additional test (a Step Two evaluation) is necessary to assess goodwill for potential impairment. As a result of the goodwill impairment valuation analysis, the Company determined that no goodwill impairment write-off for any of its reporting units was necessary for the year ended December 31, 2010; however, a Step Two evaluation was necessary for the banking and financial services reporting unit (For additional information, refer to Note 5Acquisitions Including Goodwill and Other Intangible Assets of the consolidated financial statements.
Reporting unit valuation is inherently subjective, with a number of factors based on assumption and management judgments. Among these are future growth rates, discount rates and earnings capitalization rates. Changes in assumptions and results due to economic conditions, industry factors and reporting business unit performance could result in different assessments of the fair value and could result in impairment charges in the future.
Framework for Interim Impairment Analysis
The Company utilizes the following framework from FASB ASC 350 "IntangiblesGoodwill & Other" 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;
32
-
- 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;
-
- recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.
Financing Transactions," of a significant asset group within a reporting unit; and
When applying the framework above, management additionally considers that a decline in the Company's market capitalization could reflect an event or change in circumstances that would more likely than not reduce the fair value of reporting business unit below its carrying value. However, in considering potential impairment of goodwill, management does not consider the fact that our market capitalization is less than the carrying value of our Company to be determinative that impairment exists. This is because there are factors, such as our small size and small market capitalization, which do not take into account important factors in evaluating the value of our Company and each reporting business unit, such as the benefits of control or synergies. Consequently, management's annual process for evaluating potential impairment of our goodwill (and evaluating subsequent interim period indicators of impairment) involves a detailed level analysis and incorporates a more granular view of each reporting business unit than aggregate market capitalization, as well as significant valuation inputs.
Annual and Interim Impairment Tests and Results
Management estimates fair value annually utilizing multiple methodologies which include discounted cash flows, comparable companies and comparable transactions. Each valuation technique requires management to make judgments about inputs and assumptions which form the basis for financial projections of future operating performance and the corresponding estimated cash flows. The analyses performed require the use of objective and subjective inputs which include market-price of non-distressed financial institutions, similar transaction multiples, and required rates of return. Management works closely in this process with third party valuation professionals, who assist in obtaining comparable market data and performing certain of the calculations, based on information provided and assumptions made by management.
FASB ASC 820 "Fair Value Measurements and Disclosures" defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell or transfer the asset or transfer the liability occurs in the principal market for the asset or liability, or in the absence of a principal market, the most advantageous market for the asset or liability. FASB ASC 820 further defines market participants as buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
FASB ASC 820 establishes a fair value hierarchy to prioritize the inputs used in valuation techniques:
- 1.
- Level 1
inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
- 2.
- Level 2
inputs are inputs other than quoted prices included in level 1 that are observable for the asset or liability through corroboration
with observable market data
- 3.
- Level 3 inputs are unobservable inputs, such as a company's own data
The Company will continue to monitor the interim indicators noted in FASB ASC 350 to evaluate whether an interim goodwill impairment test is required, given the occurrence of events or if circumstances change that would more likely than not reduce the fair value of a reporting unit below
33
its carrying amount, absent those events, the Company will perform its annual goodwill impairment evaluation during the fourth quarter of each calendar year.
Consideration of Market Capitalization in Light of the Results of Our Annual and Interim Goodwill Assessments
The Company's stock price, like the stock prices of many other financial services companies, is trading below both book value as well as tangible book value. We believe that the Company's current market value does not represent the fair value of the Company when taken as a whole and in consideration of other relevant factors. Because the Company is viewed by investors predominantly as a community bank, we believe our market capitalization is based on net tangible book value, reduced by nonperforming assets in excess of the allowance for loan losses. We believe that the market place ascribes effectively no value to the Company's fee-based reporting units, the assets of which are composed principally of goodwill and intangibles. Management believes that as a stand-alone business each of these reporting units has value which is not being incorporated in the market's valuation of the Company reflected in the share price. Management also believes that if these reporting units were carved out of the Company and sold, they would command a sales price reflective of their current performance. Management further believes that if these reporting units were sold, the results of the sale would increase both the tangible book value (resulting from, among other things, the reduction in associated goodwill) and therefore market capitalization, given the market's current valuation approach described above.
Management believes that its goodwill in its reporting units is not impaired as of December 31, 2010.
Investment Securities Impairment Evaluation
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 security's 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
34
amount of the decline in fair value below amortized cost. If neither of these circumstances applies to a security, but the Company does not expect to recover the entire amortized cost basis, an other-than-temporary impairment loss has occurred that must be separated into two categories: (a) the amount related to credit loss, and (b) the amount related to other factors. In assessing the level of other-than-temporary impairment attributable to credit loss, management compares the present value of cash flows expected to be collected with the amortized cost basis of the security. The portion of the total other-than-temporary impairment related to credit loss is recognized in earnings (as the difference between the fair value and the present value of the estimated cash flows), while the amount related to other factors is recognized in other comprehensive income. The total other-than-temporary impairment loss is presented in the statement of operations, less the portion recognized in other comprehensive income. When a debt security becomes other-than-temporarily impaired, its amortized cost basis is reduced to reflect the portion of the total impairment related to credit loss.
If a decline in market value of a security is determined to be other than temporary, under generally accepted accounting principles, we are required to write these securities down to their estimated fair value. As of December 31, 2010, we owned single issuer and pooled trust preferred securities of other financial institutions, private label collateralized mortgage obligations and equity securities whose aggregate historical cost basis is greater than their estimated fair value (see note 8 of the consolidated financial statements). We reviewed all investment securities and have identified those securities that are other-than-temporarily impaired. The losses associated with these other-than-temporarily impaired securities have been bifurcated into the portion of non-credit impairment losses recognized in other comprehensive loss and into the portion of credit impairment losses recorded in earnings (see Note 3 of the consolidated financial statements). We perform an ongoing analysis of all investment securities utilizing both readily available market data and third party analytical models. Future changes in interest rates or the credit quality and strength of the underlying issuers may reduce the market value of these and other securities. If such decline is determined to be other than temporary, we will write them down through a charge to earnings to their then current fair value.
Federal Home Loan Bank Stock Impairment Evaluation
The Bank is required to maintain certain amounts of FHLB stock as a member of the FHLB. These equity securities are "restricted" in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other tradable equity securities, their fair value is equal to amortized cost, and no impairment write-downs have been recorded on these securities during 2010, 2009, or 2008. As a result of the FDIC-assisted whole bank acquisition of Allegiance on November 19, 2010, the bank acquired $1.7 million in FHLB stock.
In December 2008, the FHLB of Pittsburgh suspended the payment of dividends and the repurchase of excess capital stock from member banks. The FHLB cited a significant reduction in the level of core earnings resulting from lower short-term interest rates, the increased cost of maintaining liquidity and constrained access to the debt markets at attractive rates and maturities as the main reasons for the decision to suspend dividends and the repurchase excess capital stock. The FHLB last paid a dividend in the third quarter of 2008. In the fourth quarter of 2010, as a result of improved core earnings and a decrease in OTTI charges on non-agency investment securities, the FHLB repurchased stock totaling $283,000 from the Bank. Accounting guidance indicates that an investor in FHLB Pittsburgh capital stock should recognize impairment if it concludes that it is not probable that it will ultimately recover the par value of its shares. The decision of whether impairment exists is a matter of judgment that should reflect the investor's view of FHLB Pittsburgh's long-term performance, which includes factors such as its operating performance, the severity and duration of declines in the market value of its net assets related to its capital stock amount, its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance, the impact
35
of legislation and regulatory changes on FHLB Pittsburgh, and accordingly, on the members of FHLB Pittsburgh and its liquidity and funding position. After evaluating all of these considerations and in light of the fourth quarter FHLB stock repurchase, the Company believes the par value of its shares will be recovered. Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.
RESULTS OF OPERATIONS
Summary of Performance2010 Compared to 2009
Overview. Net income for the twelve months ended December 31, 2010 was $3,984,000, as compared to $607,000 for the same period in 2009. Return on average assets was 0.29% for 2010, as compared to 0.05% for 2009. Return on average shareholder's equity was 3.02% for 2010, as compared to 0.51% for 2009. The discussion that follows explains the changes in the components of net income when comparing the twelve months ended December 31, 2010, to the same period in 2009.
Net Interest Income
Net interest income, our primary source of revenue, is the amount by which interest income on loans, investments and interest-earning cash balances exceeds interest incurred on deposits and other non-deposit sources of funds, such as repurchase agreements and borrowings from the FHLB and other correspondent banks. The amount of net interest income is affected by changes in interest rates and by changes in the volume and mix of interest-sensitive assets and liabilities. Net interest income and corresponding yields are presented in the discussion and analysis below on a fully taxable-equivalent basis. Income from tax-exempt assets, primarily loans to or securities issued by state and local governments, is adjusted by an amount equivalent to the federal income taxes which would have been paid if the income received on these assets was taxable at the statutory rate of 34%. 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.
36
Average Balances, Rates and Net Yield
The table below provides average asset and liability balances and the corresponding interest income and expense along with the average interest yields (assets) and interest rates (liabilities) for the years 2010, 2009 and 2008.
|
Year Ended December 31, | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2008 | |||||||||||||||||||||||||
|
Average Balances |
Interest Income/ Expense |
% Rate |
Average Balances |
Interest Income/ Expense |
% Rate |
Average Balances |
Interest Income/ Expense |
% Rate |
|||||||||||||||||||
|
(Dollars in thousands, except percentage data) |
|||||||||||||||||||||||||||
Interest Earning Assets: |
||||||||||||||||||||||||||||
Interest bearing deposits in other banks and federal funds sold |
$ | 46,361 | $ | 304 | 0.66 | % | $ | 12,137 | $ | 19 | 0.15 | % | $ | 400 | $ | 12 | 2.88 | % | ||||||||||
Securities (taxable) |
234,786 | 11,006 | 4.69 | 213,906 | 11,620 | 5.43 | 180,562 | 10,519 | 5.83 | |||||||||||||||||||
Securities (tax-exempt)(1) |
36,748 | 2,489 | 6.77 | 28,492 | 1,895 | 6.65 | 22,502 | 1,451 | 6.45 | |||||||||||||||||||
Loans(1)(2)(3) |
923,531 | 52,195 | 5.65 | 899,105 | 50,934 | 5.59 | 859,268 | 55,372 | 6.34 | |||||||||||||||||||
Total interest earning assets |
1,241,426 | 65,994 | 5.32 | 1,153,640 | 64,468 | 5.51 | 1,062,732 | 67,354 | 6.23 | |||||||||||||||||||
Interest Bearing Liabilities: |
||||||||||||||||||||||||||||
Interest bearing transaction accounts |
396,383 | 4,851 | 1.22 | 301,403 | 4,481 | 1.48 | 238,144 | 4,637 | 1.95 | |||||||||||||||||||
Savings deposits |
110,075 | 767 | 0.70 | 77,823 | 751 | 0.97 | 84,453 | 1,432 | 1.70 | |||||||||||||||||||
Time deposits |
452,587 | 11,046 | 2.44 | 460,374 | 14,757 | 3.20 | 351,011 | 14,805 | 4.22 | |||||||||||||||||||
Total interest bearing deposits |
959,045 | 16,664 | 1.74 | 839,600 | 19,989 | 2.38 | 673,608 | 20,874 | 3.10 | |||||||||||||||||||
Short-term borrowings |
3,650 | 18 | 0.49 | 2,694 | 18 | 0.66 | 76,307 | 1,826 | 2.35 | |||||||||||||||||||
Repurchase agreements |
111,265 | 4,789 | 4.30 | 121,046 | 4,421 | 3.60 | 120,615 | 4,128 | 3.37 | |||||||||||||||||||
Borrowings |
11,041 | 408 | 3.70 | 40,672 | 1,509 | 3.66 | 58,811 | 2,372 | 3.97 | |||||||||||||||||||
Junior subordinated debt |
19,166 | 1,464 | 7.64 | 19,756 | 1,381 | 6.99 | 20,163 | 1,437 | 7.14 | |||||||||||||||||||
Total interest bearing liabilities |
1,104,167 | 23,343 | 2.11 | 1,023,768 | 27,318 | 2.67 | 949,504 | 30,637 | 3.23 | |||||||||||||||||||
Noninterest bearing deposits |
$ | 111,791 | $ | 107,629 | $ | 107,642 | ||||||||||||||||||||||
Net interest income |
$ | 42,651 | $ | 37,150 | $ | 36,717 | ||||||||||||||||||||||
Net interest margin |
3.44 | % | 3.22 | % | 3.45 | % | ||||||||||||||||||||||
- (1)
- Interest
income and rates on loans and investment securities are reported on a tax-equivalent basis using a tax rate of 34%.
- (2)
- Held
for sale and non-accrual loans have been included in average loan balances.
- (3)
- For 2010, covered loans acquired in the Allegiance acquisition on November 19, 2010 are included in loans. The impact on average balance, interest income and yield was not significant for 2010.
Net interest income as adjusted for tax-exempt financial instruments was $42.7 million for the twelve months ended December 31, 2010, as compared to $37.2 million for the same period in 2009. A benefit of a lower cost of funds resulted in less interest paid on average interest-bearing liabilities, which more than offset the decrease in the yield on interest-earning assets, which resulted in a higher net interest margin for 2010, as compared to 2009. The taxable-equivalent net interest margin percentage for 2010 was 3.44%, as compared to 3.22% for 2009. The interest rate paid on average interest-bearing liabilities decreased by 56 basis points to 2.11% for 2010, as compared to 2.67% for
37
2009. The yield on interest-earning assets decreased by 19 basis points to 5.32% for 2010, as compared to 5.51% for 2009.
Interest and fees on loans on a taxable equivalent basis increased by $1.3 million, or 2.4% to $52.2 million for the year ended December 31, 2010, as compared to $50.9 million for the same period in 2009. The increase in interest and fees on loans was primarily the result of an increase in the average balance of loans resulting from strong commercial loan growth, which increased by $24.4 million in 2010, as compared to 2009. Management attributes this increase in organic commercial loan growth to a well established market in the Reading, Pennsylvania area as well as continued penetration into the Philadelphia, Pennsylvania market through successful marketing initiatives. The Allegiance acquisition which occurred on November 19, 2010 did not have a significant impact on the year-over-year increase related to interest and fees on loans.
Interest on securities on a taxable-equivalent basis was $13.5 million for both the twelve months ended December 31, 2010 and 2009. The average balance of securities increased $29.1 million to $271.5 million for 2010, as compared to $242.4 million for 2009. The taxable-equivalent yield decreased by 60 basis points to 4.97% for 2010, as compared 5.57% for 2009. The additional interest income generated in 2010 resulting from a higher average balance of securities was mostly offset by the decrease in yield for 2010, as compared to 2009.
Interest expense on deposits decreased by $3.3 million, or 16.5%, to $16.7 million for the twelve months ended December 31, 2010, as compared to $20.0 million for the same period in 2009. A benefit of a lower cost of deposits resulted in less interest paid on deposits, which more than offset the increase in the average balance of deposits. The average rate paid on deposits decreased by 64 basis points to 1.74% for 2010, as compared to 2.38% for 2009. The average balance of deposits increased by $119.4 million to $959.0 million for 2010, as compared to $839.6 million for 2009. The growth in interest-bearing deposits provided the funding needed for the growth in interest-earning assets.
Interest expense on borrowings decreased by $1.1 million, or 73%, to $408,000 for the twelve months ended December 31, 2010, as compared to $1.5 million for the same period in 2009. The Company reduced long-term borrowings by $10.0 million and $30.0 million during 2010 and 2009, respectively, which contributed to a $29.7 million decrease in the average balance of borrowings for 2010, as compared to 2009.
Changes in Interest Income and Interest Expense
The following table sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (period to period changes in average balance multiplied by beginning rate), and (2) changes in rate (period to period changes in rate multiplied by beginning average balance).
38
Analysis of Changes in Interest Income/Expense(1)(2)(3)
|
2010/2009 Increase (Decrease) Due to Change in |
2009/2008 Increase (Decrease) Due to Change in |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Volume | Rate | Net | Volume | Rate | Net | ||||||||||||||
|
(Dollars in thousands, except percentage data) |
|||||||||||||||||||
Interest-bearing deposits in other banks and federal funds sold |
$ | 281 | $ | 4 | $ | 285 | $ | 18 | $ | (11 | ) | $ | 7 | |||||||
Securities (taxable) |
714 | (1,328 | ) | (614 | ) | 1,981 | (880 | ) | 1,101 | |||||||||||
Securities (tax-exempt) |
560 | 34 | 594 | 399 | 45 | 444 | ||||||||||||||
Loans |
1,011 | 250 | 1,261 | 1,710 | (6,148 | ) | (4,438 | ) | ||||||||||||
Total Interest Income |
2,566 | (1,040 | ) | 1,526 | 4,108 | (6,994 | ) | (2,886 | ) | |||||||||||
Short-term borrowed funds |
4 | (4 | ) | | (518 | ) | (1,290 | ) | (1,808 | ) | ||||||||||
Repurchase agreements |
(47 | ) | 415 | 368 | 141 | 152 | 293 | |||||||||||||
Borrowings |
(1,093 | ) | (8 | ) | (1,101 | ) | (681 | ) | (182 | ) | (863 | ) | ||||||||
Junior Subordinated Debt |
(45 | ) | 128 | 83 | (26 | ) | (30 | ) | (56 | ) | ||||||||||
Interest-bearing transaction accounts |
1,155 | (785 | ) | 370 | 943 | (1,099 | ) | (156 | ) | |||||||||||
Savings deposits |
226 | (210 | ) | 16 | (70 | ) | (611 | ) | (681 | ) | ||||||||||
Time deposits |
(511 | ) | (3,200 | ) | (3,711 | ) | 2,970 | (3,018 | ) | (48 | ) | |||||||||
Total Interest Expense |
(311 | ) | (3,664 | ) | (3,975 | ) | 2,759 | (6,078 | ) | (3,319 | ) | |||||||||
Increase (Decrease) in Net Interest Income |
$ | 2,877 | $ | 2,624 | $ | 5,501 | $ | 1,349 | $ | (916 | ) | $ | 433 | |||||||
- (1)
- Loan
fees have been included in the change in interest income totals presented. Non-accrual loans have been included in average loan balances.
- (2)
- Changes
due to both volume and rates have been allocated in proportion to the relationship of the dollar amount change in each.
- (3)
- Interest income on loans and securities is presented on a taxable-equivalent basis.
Provision for Credit Losses
Management closely monitors the loan portfolio and the adequacy of the allowance for loan losses considering underlying borrower financial performance and collateral values, and increasing credit risks. Future material adjustments may be necessary to the provision for loan losses, and consequently the allowance for loan losses, if economic conditions or loan credit quality differ substantially from the assumptions management used in making our evaluation of the level of the allowance for loan losses as compared to the balance of outstanding loans. The provision for loan losses is an expense charged against net interest income to provide for estimated losses attributable to uncollectible loans. The provision is based on management's analysis of the adequacy of the allowance for loan losses. The provision for loan losses was $10.2 million for the twelve months ended December 31, 2010, as compared to $8.6 million for the same period in 2009. The provision for both periods reflects both the level of charge-offs for the respective period and the increased credit risk related to the loan portfolio at December 31, 2010, as compared to December 31, 2009 (refer to the related discussions on the "Allowance for Loan Losses" on page 55).
39
Non-Interest Income
Non-interest income increased by $3.2 million, or 18.3%, to $20.6 million for the twelve months ended December 31, 2010, as compared to $17.4 million for the same period in 2009. Increases (decreases) in the components of non-interest income when comparing the twelve months ended December 31, 2010 to the same period in 2009 are as follows:
|
2010 versus 2009 | |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | Increase/ (Decrease) |
% | 2009 | |||||||||
|
(Dollars in thousands, except percentage data) |
||||||||||||
Customer service fees |
$ | 2,046 | $ | (397 | ) | (16.3 | ) | $ | 2,443 | ||||
Mortgage banking activities, net |
1,082 | (173 | ) | (13.8 | ) | 1,255 | |||||||
Commissions and fees from insurance sales |
11,915 | (339 | ) | (2.8 | ) | 12,254 | |||||||
Broker and investment advisory commissions and fees |
737 | 23 | 3.2 | 714 | |||||||||
Earnings on investment in life insurance |
423 | 32 | 8.2 | 391 | |||||||||
Other commissions and fees |
1,901 | (32 | ) | (1.7 | ) | 1,933 | |||||||
Gain on sale of equity interest |
1,875 | 1,875 | | | |||||||||
Other income |
797 | 232 | 41.1 | 565 | |||||||||
Net realized gains on sales of securities |
691 | 347 | 100.9 | 344 | |||||||||
Net credit impairment loss |
(850 | ) | 1,618 | 100.0 | (2,468 | ) | |||||||
Total |
$ | 20,617 | $ | 3,186 | 18.3 | $ | 17,431 | ||||||
A significant portion of the $3.2 million increase in non-interest income was related to a $1.9 million gain recognized on the sale of a 25% equity interest in First HSA, LLC related to the transfer of approximately $89.0 million of health savings account deposits in the second quarter of 2010.
Investment securities activities accounted for $2.0 million of the increase in non-interest income. Net realized gains on the sale of available for sale securities were $691,000 for 2010, as compared to $344,000 for 2009. Sales of available for sale securities during 2010 were the result of liquidity and asset/liability management strategies. The 2010 gain on sales of available for sale securities included $122,000 of net losses on the sale of available for sale investment securities related to the Allegiance acquisition. Net credit impairment losses recognized in earnings were $850,000 during 2010, as compared to $2.5 million in 2009. During 2010, the net credit impairment losses recognized in earnings include other-than-temporary impairment ("OTTI") charges for estimated credit losses on both available for sale and held to maturity pooled trust preferred securities that resulted primarily from changes in the underlying cash flow assumptions used in determining credit losses due to provisions related to such securities included in the Dodd-Frank Wall Street Reform and Consumer Protection Act (see Note 8 of the consolidated financial statements).
In 2010, a premium of $272,000 was paid to the Company resulting from a counterparty exercising a call option to terminate an interest rate swap, which was recognized in other income. Other income also primarily includes service fee income on SBA commercial loans and market value adjustments on junior subordinated debt and interest rate swaps. The portion of other income associated with fair market value adjustments was $193,000 for the twelve months ended December 31, 2010 as compared to ($184,000) for the same period in 2009. Income related to a settlement of a previously accrued contingent payment of $575,000 was recognized in 2009 and included in other income. Fees generated on servicing health savings account deposits were $21,000 and $84,000 for 2010 and 2009, respectively. The decrease in HSA servicing fees was attributable to the sale and transfer of the HSA deposits to a third party.
40
The Company's primary source of non-interest income is from commissions and other revenue generated through sales of insurance products through its insurance subsidiary, VIST Insurance. Revenues from insurance operations totaled $11.9 million in 2010 compared to $12.3 million for 2009. The decrease in revenue in 2010 from insurance operations was due mainly to a decrease in contingency income on insurance products.
The income recognized from customer service fees was approximately $2.0 million for the twelve months ended December 31, 2010, as compared to $2.4 million for the same period in 2009. During the third quarter of 2010, new regulations took effect, which requires the Company to receive the customer's permission before covering overdrafts for debit card transactions made with ATM or debit cards. The implementation of this new legislation significantly reduced income related to non-sufficient funds charges.
The Company generates income from the sale of newly originated mortgage loans, which is recorded in non-interest income as mortgage banking activities. The income recognized from mortgage banking activities was $1.1 million for the twelve months ended December 31, 2010, as compared to $1.3 million in 2009. The decrease in mortgage banking revenue from 2009 to 2010 was mainly attributable to a decrease in the volume of mortgage loan originations sold into the secondary mortgage market through the Company's mortgage banking division, VIST Mortgage.
Other commissions and fees were $1.9 million for both the twelve months ended December 31, 2010 and 2009. Most of these fees are generated through ATM surcharges and interchange income generated from debit card transactions.
The Company also recognizes non-interest income from broker and investment advisory commissions generated through VIST Capital, the Company's investment subsidiary, which totaled $737,000 for the twelve months ended December 31, 2010, as compared to $714,000 for the same period in 2009.
Earnings on investment in life insurance represent the change in cash value of Bank Owned Life Insurance ("BOLI") policies. The BOLI policies of the Company are designed to offset the costs of employee benefit plans and to enhance tax-free earnings. The income recognized from earnings on investment in life insurance was $423,000 for the twelve months ended December 31, 2010, as compared to $391,000 for the same period in 2009.
41
Non-Interest Expense
Non-interest expense was $47.6 million for the year ended December 31, 2010, as compared to $45.7 million for the same period in 2009. Increases (decreases) in the components of non-interest expense when comparing the year ended December 31, 2010, to the same period in 2009, are as follows:
|
2010 versus 2009 | |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | Increase/ (Decrease) |
% | 2009 | |||||||||
|
(Dollars in thousands, except percentage data) |
||||||||||||
Salaries and employee benefits |
$ | 21,979 | $ | (155 | ) | (0.7 | ) | $ | 22,134 | ||||
Occupancy expense |
4,415 | 255 | 6.1 | 4,160 | |||||||||
Equipment expense |
2,559 | 64 | 2.6 | 2,495 | |||||||||
Marketing and advertising expense |
1,022 | 11 | 1.1 | 1,011 | |||||||||
Amortization of indentifiable intangible assets |
543 | (105 | ) | (16.2 | ) | 648 | |||||||
Professional services |
3,093 | 613 | 24.7 | 2,480 | |||||||||
Outside processing services |
3,908 | (75 | ) | (1.9 | ) | 3,983 | |||||||
FDIC deposit and other insurance expense |
2,128 | (351 | ) | (14.2 | ) | 2,479 | |||||||
Other real estate owned expense |
4,245 | 1,683 | 65.7 | 2,562 | |||||||||
Other expense |
3,740 | (11 | ) | (0.3 | ) | 3,751 | |||||||
Total |
$ | 47,632 | $ | 1,929 | 4.2 | $ | 45,703 | ||||||
A significant portion of the increase in non-interest expense for 2010 was related to other real estate owned expense ("OREO"), which increased $1.7 million, or 65.7%, to $4.2 million for the twelve months ended December 31, 2010, as compared to $2.6 million for the same period in 2009. Included in OREO expense were loses on the sale of OREO of $1.6 million and $1.1 million for 2010 and 2009, respectively. The additional increase in OREO expense reflects costs associated with adjusting foreclosed properties to fair value after they have been classified as OREO as well as other costs to operate and maintain OREO property.
Total professional services increased by $613,000, or 24.7%, to $3.1 million for the twelve months ended December 31, 2010, as compared to $2.5 million for the same period in 2009. The increase in professional services was primarily due to accounting related services and consulting fees associated with various corporate projects. Professional service fees for 2010 included $150,000 of investment banking fees related to the Allegiance acquisition.
Total occupancy expense and equipment expense increased by $319,000, or 4.8%, in 2010 compared to 2009 primarily due to increases in building lease expense and equipment and software maintenance expenses.
FDIC and other insurance expense decreased by $351,000 to $2.1 million for the twelve months ended December 31, 2010, as compared to $2.5 million for the same period in 2009. The twelve months ended December 31, 2009 included an expense of $574,000 related to an FDIC special assessment on deposit-insured institutions, which resulted in a decrease of expense for 2010 as there was no such special assessment during 2010. As noted in the table below (in thousands), the total expense associated with FDIC insurance assessments decreased when comparing the twelve months ended December 31, 2010, to the same period in 2009. However, the expense associated with FDIC base insurance assessments increased by $266,000, or 16.8% , to $1.8 million for the twelve months ended December 31, 2010, as compared to $1.6 million for the same period in 2009. The increase in expense associated with FDIC base insurance assessments was the result of increased base assessment rates, as determined by the FDIC, and an increase in the Company's overall deposit balances.
42
|
Twelve Months Ended December 31, |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Increase (Decrease) |
|||||||||
|
2010 | 2009 | ||||||||
|
(in thousands) |
|||||||||
Base insurance assessments |
$ | 1,848 | $ | 1,582 | $ | 266 | ||||
Special insurance assessments |
| 574 | (574 | ) | ||||||
Total FDIC insurance expense |
$ | 1,848 | $ | 2,156 | $ | (308 | ) |
Salaries and employee benefits, the largest component of non-interest expense, decreased by $155,000 to $22.0 million for the twelve months ended December 31, 2010, as compared to $22.1 million for the same period in 2009. The decrease was primarily the result of a decrease in commissions paid resulting from less fees generated from insurance sales, which decreased by $300,000 to $1.1 million for the twelve months ended December 31, 2010, as compared to $1.4 million for the same period in 2009. The Company's total number of full-time equivalent employees increased to 295 at December 31, 2010, as compared to 283 at December 31, 2009. The increase in full-time equivalent employees during 2010 was primarily attributable to additions in staff related to the Allegiance acquisition. Included in salaries and benefits were stock-based compensation costs of $148,000 and $198,000 for the twelve months ended December 31, 2010 and 2009, respectively.
Marketing and advertising expense includes costs associated with market research, corporate donations, direct mail production and business development. Expenses associated with outside processing services includes charges related to the Company's core operating software system, computer network and system upgrades, and data line charges. Other expense includes utility expense, postage expense, stationary and supplies expense, as well as, other miscellaneous expense items.
Income Taxes
The effective income tax rate for the Company for the twelve months ended December 31, 2010 and 2009 was (13.2%) and 142.7%, respectively. The decrease in effective tax rate for 2010 was primarily due to the increase in the income tax benefit resulting from an increase in tax exempt investment securities and loans. Generally, the Company's effective tax rate is below the statutory rate due to tax-exempt earnings on loans, investments, and bank-owned life insurance, and the impact of tax credits. Included in the income tax provision is a federal tax benefit related to our $5.0 million investment in an affordable housing, corporate tax credit limited partnership of $495,000 and $550,000 for the twelve months ended December 31, 2010 and 2009, respectively.
Summary of Performance2009 Compared to 2008
Overview. Net income for the twelve months ended December 31, 2009 was $607,000, as compared to $565,000 for the same period in 2009. Return on average assets was 0.05% for both 2009 and 2008. Return on average shareholder's equity was 0.51% for 2009, as compared to 0.54% for 2008. The discussion that follows explains the changes in the components of net income when comparing the twelve months ended December 31, 2009, to the same period in 2008.
Net Interest Income
Net interest income as adjusted for tax-exempt financial instruments was $37.2 million for the twelve months ended December 31, 2009, as compared to $36.7 million for the same period in 2008. A decrease in the yield on interest-earning assets more than offset the benefit of a lower cost of funds, which resulted in a lower net interest margin for the year ended December 31, 2009, as compared to the same period in 2008. The taxable-equivalent net interest margin percentage for 2009 was 3.22%, as
43
compared to 3.45% for 2008. The yield on interest-earning assets decreased by 72 basis points to 5.51% for 2010, as compared to 6.23% for 2009. The interest rate paid on average interest-bearing liabilities decreased by 56 basis points to 2.67% for 2009, as compared to 3.23% for 2009.
Interest and fees on loans on a taxable equivalent basis decreased by $4.5 million, or 8.1% to $50.9 million for the year ended December 31, 2009, as compared to $55.4 million for the same period in 2008. The average yield decreased by 75 basis points to 5.59% for 2009, as compared to 6.34% for 2008. The variable rate structure of many of the Company's loans reduced overall yield due to the persistent low market interest rates which contributed to the decline in interest income generated from loans. Strong commercial loan growth contributed to an increase in the average balance of loans, which increased by $39.8 million in 2009, as compared to 2008. Management attributes this increase in organic commercial loan growth to a well established market in the Reading, Pennsylvania area as well as continued penetration into the Philadelphia, Pennsylvania market through successful marketing initiatives.
Interest on securities on a taxable-equivalent basis was $13.5 million for the twelve months ended December 31, 2009, as compared to $12.0 million for the same period in 2008. The average balance of securities increased $39.3 million to $242.4 million for 2009, as compared to $203.1 million for 2008. The taxable-equivalent yield decreased by 33 basis points to 5.57% for 2009, as compared 5.90% for 2008. The additional interest income generated in 2009 resulting from a higher average balance of securities was slightly offset by the decrease in yield for 2009, as compared to 2008.
Interest expense on deposits decreased by $885,000 to $20.0 million for the twelve months ended December 31, 2009, as compared to $20.9 million for the same period in 2008. A benefit of a lower cost of deposits resulted in less interest paid on deposits, which more than offset the increase in the average balance of deposits. The average rate paid on deposits decreased by 72 basis points to 2.38% for 2009, as compared to 3.10% for 2008. The average balance of deposits increased $166.0 million to $839.6 million for 2009, as compared to $673.6 million for 2008. The growth in interest-bearing deposits provided the funding needed for the growth in interest-earning assets.
Interest expense on borrowings decreased by $863,000 to $1.5 million for the twelve months ended December 31, 2009, as compared to $2.4 million for the same period in 2008. The Company reduced long-term borrowings by $30.0 million during 2009, which contributed to a $18.1 million decrease in the average balance of borrowings for 2009, as compared to 2008.
Provision for Credit Losses
Management closely monitors the loan portfolio and the adequacy of the allowance for loan losses considering underlying borrower financial performance and collateral values, and increasing credit risks. Future material adjustments may be necessary to the provision for loan losses, and consequently the allowance for loan losses, if economic conditions or loan credit quality differ substantially from the assumptions management used in making our evaluation of the level of the allowance for loan losses as compared to the balance of outstanding loans. The provision for loan losses is an expense charged against net interest income to provide for estimated losses attributable to uncollectible loans. The provision is based on management's analysis of the adequacy of the allowance for loan losses. The provision for loan losses was $8.6 million for the twelve months ended December 31, 2009, as compared to $4.8 million for the same period in 2008. The provision for both periods reflects both the level of charge-offs for the respective period and the increased credit risk related to the loan portfolio at December 31, 2009, as compared to December 31, 2008 (refer to the related discussions on the "Allowance for Loan Losses" on page 55).
44
Non-Interest Income
Non-interest income increased by $5.4 million, or 45.5%, to $17.4 million for the twelve months ended December 31, 2009, as compared to $12.0 million for the same period in 2008. Increases (decreases) in the components of non-interest income when comparing the twelve months ended December 31, 2009 to the same period in 2008 are as follows:
|
2009 versus 2008 | |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | Increase/ (Decrease) |
% | 2008 | |||||||||
|
(Dollars in thousands, except percentage data) |
||||||||||||
Customer service fees |
$ | 2,443 | $ | (521 | ) | (17.6 | ) | $ | 2,964 | ||||
Mortgage banking activities, net |
1,255 | 358 | 39.9 | 897 | |||||||||
Commissions and fees from insurance sales |
12,254 | 970 | 8.6 | 11,284 | |||||||||
Broker and investment advisory commissions and fees |
714 | (99 | ) | (12.2 | ) | 813 | |||||||
Earnings on investment in life insurance |
391 | (299 | ) | (43.3 | ) | 690 | |||||||
Other commissions and fees |
1,933 | 245 | 14.5 | 1,688 | |||||||||
Gain on sale of loans |
| (47 | ) | | 47 | ||||||||
Other income |
565 | (261 | ) | (31.6 | ) | 826 | |||||||
Net realized gains (losses) on sales of securities |
344 | 7,574 | (104.8 | ) | (7,230 | ) | |||||||
Net credit impairment loss |
(2,468 | ) | (2,468 | ) | 100.0 | | |||||||
Total |
$ | 17,431 | $ | 5,452 | 45.5 | $ | 11,979 | ||||||
Investment securities activities accounted for $5.1 million of the increase in non-interest income during 2009. Net realized gains on the sale of available for sale securities were $344,000 for 2009, as compared to net realized losses of $7.2 million for 2008. Sales of available for sale securities during 2009 were the result of liquidity and asset/liability management strategies. The net realized losses on sales of securities during 2008 resulted from the sale of perpetual preferred stock associated with the federal takeover of government sponsored enterprises ("GSE's") Fannie Mae and Freddie Mac, placed into conservatorship by the Federal Housing Finance Agency and the U.S. Treasury. Net credit impairment losses recognized in earnings were $2.5 million for the twelve months ended December 31, 2009. There was no net credit impairment losses recognized in earnings in 2008. The net credit impairment losses recognized in earnings in 2009 include OTTI charges for estimated credit losses on five pooled trust preferred securities and one equity security (see Note 8 of the consolidated financial statements).
The Company's primary source of non-interest income is from commissions and other revenue generated through sales of insurance products through its insurance subsidiary, VIST Insurance. Revenues from insurance operations increased by $970,000 to $12.3 million for the twelve months ended December 31, 2009, as compared to $11.3 million for the same period in 2008. The increase in revenue from insurance operations in 2009 was due mainly to an increase in commission income on group insurance products resulting from the acquisition of Fisher Benefits Consulting in September 2008.
The Company generates income from the sale of newly originated mortgage loans, which is recorded in non-interest income as mortgage banking activities. The income recognized from mortgage banking activities increased by $358,000 to $1.3 million for the twelve months ended December 31, 2010, as compared to $900,000 for the same period in 2009. The increase in mortgage banking revenue from 2008 to 2009 was mainly attributable to an increase in the volume of mortgage loan originations sold into the secondary mortgage market through the Company's mortgage banking division, VIST Mortgage.
45
Other commissions and fees include ATM network and fees from debit card transactions and various other charges and commission related to checkbook fees, internet banking fees and other fees and commissions. The most significant volume of income in this category is derived from ATM surcharge fees and interchange fees from the Bank's ATM network and fees from debit card transactions. These fees totaled $1.4 million in 2009 which represents a 27.2% increase over $1.1 million in 2008. The increase in fee income is attributed primarily to an increase in interchange transaction volume related to the Bank's debit card program. Throughout the year, the Bank has initiated marketing campaigns to encourage its customers to use debit cards as a convenient alternative to traditional check transactions.
The income recognized from customer service fees decreased by $521,000 to $2.4 million for the twelve months ended December 31, 2009, as compared to $3.0 million for the same period in 2008. The decrease in service charge revenue during 2009 resulted primarily from a decrease in non-sufficient funds charges.
Earnings on investment in life insurance represent the change in cash value of Bank Owned Life Insurance ("BOLI") policies. The BOLI policies of the Company are designed to offset the costs of employee benefit plans and to enhance tax-free earnings. The income recognized from earnings on investment in life insurance decreased by $299,000 to $391,000 for the twelve months ended December 31, 2009, as compared to $690,000 for the same period in 2008. The decrease in earnings on investment in life insurance in 2009 was due primarily to decreased earnings credited to the Company.
Other income generally includes dividend income on FHLB stock, market value adjustments for both junior subordinated debt and interest rate swaps, service fee income on SBA commercial loans, as well as other miscellaneous income items. For the twelve months ended December 31, 2009, other income decreased by $261,000 to $565,000, or 31.6%, from $826,000 for the same period in 2008, primarily due to the suspension of dividends paid on the FHLB stock.
The Company also recognizes non-interest income from broker and investment advisory commissions generated through VIST Capital, the Company's investment subsidiary, which totaled $714,000 for the twelve months ended December 31, 2009, as compared to $813,000 for the same period in 2008.
46
Non-Interest Expense
Non-interest expense was $45.7 million for the year ended December 31, 2009, as compared to $43.6 million for the same period in 2008. Increases (decreases) in the components of non-interest expense when comparing the year ended December 31, 2009, to the same period in 2008, are as follows:
|
2009 versus 2008 | |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | Increase/ (Decrease) |
% | 2008 | |||||||||
|
(Dollars in thousands, except percentage data) |
||||||||||||
Salaries and employee benefits |
$ | 22,134 | $ | 56 | 0.3 | $ | 22,078 | ||||||
Occupancy expense |
4,160 | (547 | ) | (11.6 | ) | 4,707 | |||||||
Equipment expense |
2,495 | (195 | ) | (7.2 | ) | 2,690 | |||||||
Marketing and advertising expense |
1,011 | (624 | ) | (38.2 | ) | 1,635 | |||||||
Amortization of indentifiable intangible assets |
648 | 19 | 3.0 | 629 | |||||||||
Professional services |
2,480 | (114 | ) | (4.4 | ) | 2,594 | |||||||
Outside processing services |
3,983 | 649 | 19.5 | 3,334 | |||||||||
FDIC deposit and other insurance expense |
2,479 | 1,217 | 96.4 | 1,262 | |||||||||
Other real estate owned expense |
2,562 | 1,728 | 207.2 | 834 | |||||||||
Other expense |
3,751 | (124 | ) | (3.2 | ) | 3,875 | |||||||
Total |
$ | 45,703 | $ | 2,065 | 4.7 | $ | 43,638 | ||||||
A significant portion of the increase in non-interest expense for 2009 was related to other real estate owned expense, which increased $1.7 million, or 207.2%, to $2.6 million for the twelve months ended December 31, 2009, as compared to $834,000 for the same period in 2008. Included in OREO expense were loses on the sale of OREO of $1.1 million and $120,000 for 2009 and 2008, respectively. The additional increase in OREO expense reflects an increase in legal and other costs to operate and maintain OREO property as a result of an increase in the total number of properties held in OREO during 2009.
FDIC and other insurance expense increased by $1.2 million to $2.5 million for the twelve months ended December 31, 2009, as compared to $1.3 million for the same period in 2008. The twelve months ended December 31, 2009 included an expense of $574,000 related to an FDIC special assessment on deposit-insured institutions, which contributed to the increase of expense for 2009. The Company's deposit levels increased throughout 2009, which also contributed to the increase of FDCI and other insurance expense for 2009. There was no such special assessment during 2008.
Total professional services decreased by $114,000 to $2.5 million for the twelve months ended December 31, 2009, as compared to $2.6 million for the same period in 2008. The decrease in professional services was primarily due to the outsourcing of the Company's internal audit function and fewer general corporate projects.
Total occupancy expense and equipment expense decreased by $742,000 to $6.7 million for the twelve months ended December 31, 2009, as compared to $7.4 million for the same period in 2009 primarily due to decreases in expenses related to building leases, equipment maintenance and equipment depreciation.
Salaries and employee benefits, the largest component of non-interest expense was $22.1 million for both the twelve months ended December 31, 2009 and 2008. Full-time equivalent employees for the Company were 283 and 293 at December 31, 2009 and 2008, respectively. The decrease in FTE employees from 2008 to 2009 was attributable to a decrease in operational staff as a result of improved efficiencies through the implementation of corporate-wide cost reduction initiatives. Included in salaries and benefits for 2009 and 2008 were stock-based compensation costs of $198,000 and $319,000,
47
respectively. Total commissions paid for the year ended December 31, 2009 and 2008 were $1.4 million and $1.6 million, respectively.
The Company's marketing and advertising expense include costs associated with market research, corporate donations, direct mail production and business development. Total marketing expense decreased $624,000 or 38.2% in 2009 compared to 2008 primarily due to a reduction in marketing costs associated with market research, media space, media production and special events.
Expenses associated with outside processing services includes charges related to the Company's core operating software system, computer network and system upgrades, and data line charges. The expense for outside processing services increased by $649,000 to $4.0 million for the twelve months ended December 31, 2009, as compared to $3.3 million for the same period in 2008.
Other expense includes utility expense, postage expense, stationary and supplies expense, as well as, other miscellaneous expense items.
Income Taxes
An income tax benefit of $2.0 million and $1.9 million was recorded for the year ended December 31, 2009 and 2008, respectively. The income tax benefit for both years resulted from a pre-tax loss as well as from the benefits of tax-exempt income. Generally, the Company's effective tax rate is below the statutory rate due to tax-exempt earnings on loans, investments, and bank-owned life insurance, and the impact of tax credits. Included in the income tax benefit is a federal tax benefit related to our $5.0 million investment in an affordable housing, corporate tax credit limited partnership of $550,000 and $600,000 for the twelve months ended December 31, 2009 and 2008, respectively.
FINANCIAL CONDITION
Total assets increased by 8.9% to $1.4 billion at December 31, 2010 from $1.3 billion at December 31, 2009. The Company successfully grew its assets (i) through commercial loan originations with lending focused on creditworthy consumers and businesses, with necessary consideration given to increased credit risks posed by the current economy and weak housing and real estate market, and (ii) through acquiring certain assets in the Allegiance Bank of North America ("Allegiance") acquisition. On November 19, 2010, the Bank acquired certain assets and assumed certain liabilities of Allegiance from the FDIC, as Receiver of Allegiance. Allegiance operated five community banking branches within Chester and Philadelphia counties. At December 31, 2010, total assets recorded related to Allegiance were $80.9 million (for additional information, refer to Note 6FDIC-Assisted Acquisition of the consolidated financial statements).
Securities Portfolio
The securities portfolio increased to $281.8 million at December 31, 2010, from $271.1 million at December 31, 2009 primarily due to the purchase of available for sale investments in U.S. Government agency securities, agency mortgage-backed debt securities and obligations of state and political subdivisions (for additional information, refer to Note 8Securities Available for Sale and Securities Held to Maturity of the consolidated financial statements). Securities are used to supplement loan growth as necessary, to generate interest and dividend income, to manage interest rate risk, and to provide pledging and liquidity. To accomplish these ends, most of the purchases in the portfolio during 2010 and 2009 were of agency mortgage-backed securities.
48
The following table sets forth the amortized cost of the investment securities at its last three fiscal year ends:
|
As of December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2008 | |||||||
|
(Dollar amounts in thousands) |
|||||||||
Securities Available For Sale |
||||||||||
U.S. Government agency securities |
$ | 11,648 | $ | 23,087 | $ | 9,438 | ||||
Agency residential mortgage-backed debt securities |
216,956 | 183,104 | 151,782 | |||||||
Non-Agency collateralized mortgage obligations |
13,663 | 22,970 | 34,163 | |||||||
Obligations of states and political subdivisions |
33,141 | 33,436 | 26,582 | |||||||
Trust preferred securitiessingle issuer |
500 | 500 | 500 | |||||||
Trust preferred securitiespooled |
5,396 | 5,957 | 8,408 | |||||||
Corporate and other debt securities |
1,117 | 2,444 | 4,264 | |||||||
Equity securities |
3,345 | 3,368 | 3,398 | |||||||
Total |
$ | 285,766 | $ | 274,866 | $ | 238,535 | ||||
|
As of December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2008 | |||||||
|
(Dollar amounts in thousands) |
|||||||||
Securities Held to Maturity |
||||||||||
Trust preferred securitiessingle issuer |
$ | 2,007 | $ | 2,012 | $ | 2,019 | ||||
Trust preferred securitiespooled |
650 | 1,023 | 1,041 | |||||||
Total |
$ | 2,657 | $ | 3,035 | $ | 3,060 | ||||
For financial reporting purposes, available for sale securities are carried at fair value.
49
Securities Portfolio Maturities and Yields
The following table sets forth information about the maturities and weighted average yield on the Company's securities portfolio. Floating rate securities are included in the "Due in 1 Year or Less" bucket. Yields are not reported on a tax equivalent basis.
|
Amortized Cost at December 31, 2010 | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Due in 1 Year or Less |
After 1 Year to 5 Years |
After 5 Years to 10 Years |
After 10 Years |
No Stated Maturity |
Total | Fair Value |
|||||||||||||||
|
(Dollars in thousands except percentage data) |
|||||||||||||||||||||
Securities Available For Sale |
||||||||||||||||||||||
U.S. Government agency securities |
$ | | $ | | $ | 4,747 | $ | 6,901 | $ | | $ | 11,648 | $ | 11,790 | ||||||||
|
| % | | % | 4.35 | % | 4.86 | % | | % | 4.65 | % | ||||||||||
Obligations of states and political subdivisions |
$ |
|
$ |
|
$ |
|
$ |
33,141 |
$ |
|
$ |
33,141 |
$ |
30,907 |
||||||||
|
| % | | % | | % | 4.47 | % | | % | 4.47 | % | ||||||||||
Trust preferred securitiessingle issuer |
$ |
|
$ |
|
$ |
|
$ |
500 |
$ |
|
$ |
500 |
$ |
501 |
||||||||
Trust preferred securitiespooled |
| | | 5,396 | | 5,396 | 484 | |||||||||||||||
Corporate and other debt securities |
| | 117 | 1,000 | | 1,117 | 1,048 | |||||||||||||||
Equity securities |
| | | | 3,345 | 3,345 | 2,645 | |||||||||||||||
Total |
$ | | $ | | $ | 117 | $ | 6,896 | $ | 3,345 | $ | 10,358 | $ | 4,678 | ||||||||
|
| % | | % | 5.19 | % | 4.67 | % | 2.62 | % | 4.01 | % | ||||||||||
Agency residential mortgage-backed debt securities |
$ | | $ | | $ | | $ | 216,956 | $ | | $ | 216,956 | 222,365 | |||||||||
Non-Agency collateralized mortgage obligations |
| | | 13,663 | | 13,663 | 10,015 | |||||||||||||||
Total |
$ | | $ | | $ | | $ | 230,619 | $ | | $ | 230,619 | $ | 232,380 | ||||||||
|
| % | | % | | % | 3.57 | % | | % | 3.57 | % |
|
Amortized Cost at December 31, 2010 | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Due in 1 Year or Less |
After 1 Year to 5 Years |
After 5 Years to 10 Years |
After 10 Years |
No Stated Maturity |
Total | Fair Value |
|||||||||||||||
|
(Dollars in thousands except percentage data) |
|||||||||||||||||||||
Securities Held to Maturity |
||||||||||||||||||||||
Trust preferred securitiessingle issuer |
$ | | $ | | $ | | $ | 2,007 | $ | | $ | 2,007 | $ | 1,873 | ||||||||
Trust preferred securitiespooled |
| | | 650 | | 650 | 15 | |||||||||||||||
Total |
$ | | $ | | $ | | $ | 2,657 | $ | | $ | 2,657 | $ | 1,888 | ||||||||
|
| % | | % | | % | 10.10 | % | | % | 10.10 | % |
The securities portfolio included a net unrealized loss on available for sale securities of $6.0 million and $6.8 million at December 31, 2010 and 2009, respectively. In addition, net unrealized losses of $769,000 and $1.2 million were present in the held to maturity securities at December 31, 2010 and 2009, respectively. Changes in longer-term treasury interest rates, government monetary policy, the easing of underlying collateral and credit concerns, and dislocation in the current market were primarily responsible for the change in the fair market value of the securities.
Debt securities that management has the positive ability and intent to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Securities classified as available for sale
50
are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available for sale are carried at fair value. Unrealized gains and losses are reported in other comprehensive income or loss, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Purchased premiums and discounts are recognized in interest income using a method which approximates the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.
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 security's impairment is due to factors that could include the issuer's inability to pay interest or dividends, the issuer's 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.
51
Federal Home Loan Bank Stock
The Company had $7.1 million and $5.7 million of FHLB stock at December 31, 2010 and 2009, respectively. As a result of the FDIC-assisted whole bank acquisition of Allegiance on November 19, 2010, the bank acquired $1.7 million in FHLB stock. The Bank is a member of the Federal Home Loan Bank ("FHLB") of Pittsburgh, which is one of 12 regional Federal Home Loan Banks. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the FHLB. Investment in FHLB stock is "restricted". Investment in FHLB stock is necessary to participate in FHLB programs.
Loans
Loans, net of deferred loan fees, increased to $954.4 million at December 31, 2010 from $911.0 million at December 31, 2009, an increase of $43.4 million or 4.8%. Management has targeted the commercial loan portfolio as a key to the Company's continuing growth. Specifically, the Company has a commercial lending focus within the Reading, Pennsylvania and Philadelphia, Pennsylvania market areas targeting higher yielding commercial loans made to small and medium sized businesses. Through a strong commercial lending footprint in the Reading, Pennsylvania market and through acquisition and the expansion of the commercial lending staff in the Philadelphia, Pennsylvania market, the year over year growth in commercial and construction loans originated underscores the commercial customer focus as the commercial loan portfolio increased to $657.3 million at December 31, 2010, from $613.9 million at December 31, 2009, an increase of $43.4 million or 6.6%.
Loans secured by one-to-four family residential real estate decreased to $153.4 million at December 31, 2010, from $169.0 million as of December 31, 2009, a decrease of $15.6 million or 9.2%. Loans secured by multi-family residential real estate increased to $53.6 million at December 31, 2010, from $39.0 million as of December 31, 2009, an increase of $14.6 million or 37.5%. The overall increase in residential real estate loans is attributable to an increase in the volume of mortgage loan originations generated through VIST Mortgage.
Home equity and consumer lending increased 1.2 million, or 1.3%, to $91.2 million at December 31, 2010, from $90.0 million as of December 31, 2009. Consumer demand for these types of loans increased in 2010. Although the Company's focus primarily centered on the commercial customer, management remained disciplined in its pricing of consumer loans. Despite the numerous economic challenges faced in 2010, the Company was able to growth the home equity and consumer loan portfolio through the successful marketing of its Equilock consumer loan product which carries both a fixed and variable component allowing the consumer to lock and unlock the loan at the prevailing interest rate.
For the most recent five years, the Company's loan portfolio consisted of the following categories:
|
December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||
|
(Dollar amounts in thousands) |
|||||||||||||||
Commercial real estate, industrial and agricultural |
$ | 577,858 | $ | 512,238 | $ | 499,847 | $ | 450,353 | $ | 389,455 | ||||||
Real estate construction |
78,294 | 100,713 | 89,556 | 79,414 | 96,163 | |||||||||||
Residential real estate |
295,565 | 294,772 | 292,707 | 285,330 | 272,925 | |||||||||||
Consumer |
2,646 | 3,241 | 4,195 | 5,901 | 6,240 | |||||||||||
Total |
$ | 954,363 | $ | 910,964 | $ | 886,305 | $ | 820,998 | $ | 764,783 | ||||||
52
The table below presents maturities of (i) commercial real estate, industrial and agricultural loans and (ii) real estate construction loans, (iii) residential real estate loans and (iv) consumer loans, outstanding at December 31, 2010:
|
Maturities of Outstanding Loans | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Within One Year |
After One But Within Five Years |
After Five Years |
Total | |||||||||
|
(Dollar amounts in thousands) |
||||||||||||
Commercial real estate, industrial and agricultural |
$ | 135,262 | $ | 269,678 | $ | 172,918 | $ | 577,858 | |||||
Real estate construction |
53,130 | 12,125 | 13,039 | 78,294 | |||||||||
Residential real estate |
106,915 | 87,733 | 100,917 | 295,565 | |||||||||
Consumer |
1,538 | 842 | 266 | 2,646 | |||||||||
Total |
$ | 296,845 | $ | 370,378 | $ | 287,140 | $ | 954,363 | |||||
The Bank is required to pledge residential and commercial real estate secured loans to collateralize its potential borrowing capacity with the FHLB. At December 31, 2010, the Bank had pledged approximately $713.5 million in loans to the FHLB to secure its maximum borrowing capacity.
Credit Quality and Risk
Non-performing loans, consisting of loans on non-accrual status, loans past due 90 days or more and still accruing interest, and renegotiated troubled debt were $37.9 million at December 31, 2010, an increase from $33.2 million at December 31, 2009. Generally, loans that are more than 90 days past due are placed on non-accrual status. As a percentage of total loans, non-performing loans represented 3.97% at December 31, 2010 and 3.64% at December 31, 2009. The allowance for loan losses represents 39.0% of non-performing loans at December 31, 2010, compared to 34.5% at December 31, 2009 (see the Allowance for Loan Loss discussion on page 55).
The Company generally values impaired loans that are accounted for under FASB ASC 310, Accounting by Creditors for Impairment of a Loan ("FASB ASC 310"), based on the fair value of the loan's 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 management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business.
Impaired loans for all loan portfolio types, net of required specific reserves, totaled $39.6 million at December 31, 2010, compared to $33.9 million at December 31, 2009. The $5.7 million increase in non-performing loans from December 31, 2009 to December 31, 2010 is due primarily to continued economic difficulties experienced in the region. As of December 31, 2010, 97.7% 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
53
its troubled loans. The remaining 2.3% of impaired loans were in process of being evaluated at December 31, 2010. During the ongoing supervision of a troubled loan, the Company performs a cash flow evaluation, obtains an appraisal update or obtains a new appraisal. The Company reviews all impaired loans on a quarterly basis to ensure that the market values are reasonable and that no further deterioration has occurred. If the evaluation indicates that the market value has deteriorated below the carrying value of the loan, either the entire loan or the partial difference between the market value and principal balance is charged-off unless there are material mitigating factors to the contrary. If a loan is not charged down, reserves are allocated to reflect the estimated collateral shortfall. Loans that have been partially charged-off are classified as non-performing loans for which none of the current loan terms have been modified. During 2010, there were $1.8 million in partial loan charge-offs. In order for an impaired loan not to have a specific valuation allowance it must be determined by the Company through a current evaluation that there is sufficient underlying collateral, after appropriate discounts have been applied, in excess of the carrying value.
The recorded investment in impaired loans requiring an allowance for loan losses was $40.7 million at December 31, 2010 compared to $18.9 million at December 31, 2009. At December 31, 2010 and 2009, the related allowance for loan losses associated with those loans was $9.5 million and $6.8 million respectively. The gross recorded investment in impaired loans not requiring an allowance for loan losses was $8.4 million at December 31, 2010 as compared to $6.3 million at December 31, 2009. For 2010, and 2009, the average recorded investment in these impaired loans was $41.2 million and $18.6 million, respectively; and the interest income recognized on impaired loans was $1.5 million for 2010, $42,000 for 2009 and $33,000 for 2008.
Loans on which the accrual of interest has been discontinued amounted to $26.5 million and $25.1 million at December 31, 2010 and 2009, respectively. Loan balances past due 90 days or more and still accruing interest but which management expects will eventually be paid in full, amounted to $600,000 and $1.8 million at December 31, 2010 and 2009, respectively. The loan balances past due 90 days or more and still accruing interest decreased in 2010 due to loans 90 days or more past due moving out of this category due to being brought current at December 31, 2010. Subsequent to December 31, 2010, loan balances past due 90 days or more and still accruing interest that are brought current will reduce the balance of outstanding loans in this category.
The Company performs some troubled debt restructurings. Once the Company is contacted by a customer indicating the potential for default, a modification of terms in the form of interest only payments, term modification or rate reduction from normal bank requirements may occur. These loans will still be subjected to approval evaluations in a similar manner as a new loan origination. Included in the approval process is the reason for the restructuring, the length of time for the restructure and an exit plan for return to original loan terms. No loans are approved for indefinite restructurings. If a restructured loan defaults, it follows the same process as any other loan in default per Company policy.
The Company continues to emphasize credit quality and believes that pre-funding analysis and diligent intervention at the first signs of delinquency will help to manage these levels.
54
The following table is a summary of non-performing loans and renegotiated loans for the years presented. Not included in this table are an additional $4.7 million in non performing loans associated with covered loans assumed in the Allegiance acquisition that are covered under a loss share agreement with the FDIC.
|
As of December 31, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||
|
(in thousands) |
||||||||||||||||
Non-accrual loans: |
|||||||||||||||||
Real estate |
$ | 24,482 | $ | 24,420 | $ | 2,947 | $ | 1,160 | $ | 1,317 | |||||||
Consumer |
15 | 4 | 459 | 259 | 578 | ||||||||||||
Commercial |
2,016 | 716 | 7,298 | 2,133 | 2,094 | ||||||||||||
Total |
26,513 | 25,140 | 10,704 | 3,552 | 3,989 | ||||||||||||
Loans past due 90 days or more and still accruing interest: |
|||||||||||||||||
Real estate |
594 | 1,664 | 28 | 331 | 47 | ||||||||||||
Consumer |
| | | 408 | | ||||||||||||
Commercial |
| 147 | 112 | 2,266 | 46 | ||||||||||||
Total loans past due 90 days or more |
594 | 1,811 | 140 | 3,005 | 93 | ||||||||||||
Troubled debt restructurings: |
|||||||||||||||||
Real estate |
8,913 | 5,938 | | | | ||||||||||||
Consumer |
| | | | | ||||||||||||
Commercial |
3,925 | 307 | 285 | 267 | 319 | ||||||||||||
Total troubled debt restructurings |
12,838 | 6,245 | 285 | 267 | 319 | ||||||||||||
Total non-performing loans |
$ | 39,945 | $ | 33,196 | $ | 11,129 | $ | 6,824 | $ | 4,401 | |||||||
The following summary shows the impact on interest income of non-accrual and restructured loans for the year ended December 31, 2010 (in thousands):
Amount of interest income on loans that would have been recorded under original terms |
$ | 1,387 | ||
Interest income reported during the period |
$ | 93 |
Allowance for Loan Loss
The allowance for loan losses at December 31, 2010 was $14.8 million, or 1.55% of outstanding loans, compared to $11.4 million or 1.26% of outstanding loans at December 31, 2009. In accordance with U.S. GAAP, the allowance for loan losses represents management's estimate of losses inherent in the loan and lease portfolio as of the balance sheet date and is recorded as a reduction to loans and leases. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Non-residential consumer loans are generally charged off no later than 90 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are immediately
55
charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance, which is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan and lease portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans and leases that are classified as impaired. For such loans and leases, an allowance is established when the (i) discounted cash flows, or (ii) collateral value, or (iii) observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity loans, home equity lines of credit and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for relevant qualitative factors. Separate qualitative adjustments are made for higher-risk criticized loans that are not impaired. These qualitative risk factors include:
- 1.
- Lending
policies and procedures, including underwriting standards and historical-based loss/collection, charge-off, and recovery practices.
- 2.
- National,
regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying
collateral for collateral dependent loans.
- 3.
- Nature
and volume of the portfolio and terms of loans.
- 4.
- Experience,
ability, and depth of lending management and staff.
- 5.
- Volume
and severity of past due, classified and nonaccrual loans as well as trends and other loan modifications.
- 6.
- Quality
of the Company's loan review system, and the degree of oversight by the Company's Board of Directors.
- 7.
- Existence
and effect of any concentrations of credit and changes in the level of such concentrations.
- 8.
- Effect of external factors, such as competition and legal and regulatory requirements.
Each factor is assigned a value to reflect improving, stable or declining conditions based on management's best judgment using relevant information available at the time of the evaluation.
An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment
56
delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for all criticized and classified loans by either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent.
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company's impaired loans are measured based on the estimated fair value of the loan's collateral.
For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals or evaluations. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower's financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
For loans that are not rated as criticized or classified, the Company collectively evaluates the loans for impairment based upon homogeneous loan groups.
Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate, an extension of a loan's stated maturity date or a change in the loan payment to interest-only. For troubled debt restructurings on loans that are accruing interest, the Company will continue to accrue interest based upon the modified terms. Troubled debt restructurings on loans not accruing interest are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are tested for impairment.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower's overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized as special mention have potential weaknesses that deserve management's close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.
57
In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management's comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.
The following table presents a comparative allocation of the allowance for loan losses for each of the past five year-ends. Amounts were allocated to specific loan categories based upon management's classification of loans under the Company's internal loan grading system and assessment of near-term charge-offs and losses existing in specific larger balance loans that are reviewed in detail by the Company's internal loan review department and pools of other loans that are not individually analyzed. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future credit losses may occur.
Allocation of Allowance for Loan Losses
|
As of December 31, | |||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||||||||||
|
Amount | % of Total Loans |
Amount | % of Total Loans |
Amount | % of Total Loans |
Amount | % of Total Loans |
Amount | % of Total Loans |
||||||||||||||||||||||
|
(Dollar amounts in thousands, except percentage data) |
|||||||||||||||||||||||||||||||
Commercial |
$ | 8,960 | 61.2 | % | $ | 4,745 | 56.2 | % | $ | 6,851 | 56.4 | % | $ | 6,125 | 54.9 | % | $ | 6,451 | 50.9 | % | ||||||||||||
Residential Real Estate |
5,366 | 36.7 | 6,170 | 43.4 | 263 | 43.1 | 233 | 44.4 | 216 | 48.3 | ||||||||||||||||||||||
Consumer |
310 | 2.1 | 527 | 0.4 | 738 | 0.5 | 622 | 0.7 | 808 | 0.8 | ||||||||||||||||||||||
Total Allocated |
14,636 | 100.0 | 11,442 | 100.0 | 7,852 | 100.0 | 6,980 | 100.0 | 7,475 | 100.0 | ||||||||||||||||||||||
Unallocated |
154 | | 7 | | 272 | | 284 | | 136 | | ||||||||||||||||||||||
Total |
$ | 14,790 | 100.0 | % | $ | 11,449 | 100.0 | % | $ | 8,124 | 100.0 | % | $ | 7,264 | 100.0 | % | $ | 7,611 | 100.0 | % | ||||||||||||
The unallocated portion of the allowance is intended to provide for probable losses that are not otherwise accounted for and to compensate for the imprecise nature of estimating future loan losses. While allocations have been established for particular loan categories, management considers the entire allowance to be available to absorb probable losses in any category.
58
The following tables set forth an analysis of the Company's allowance for loan losses for the years presented.
Analysis of the Allowance for Loan Losses
|
Year Ended December 31, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||
|
(Dollars in thousands) |
|||||||||||||||||
Balance, beginning of year |
$ | 11,449 | $ | 8,124 | $ | 7,264 | $ | 7,611 | $ | 7,619 | ||||||||
Charge-offs: |
||||||||||||||||||
Commercial |
500 | 1,226 | 3,613 | 1,087 | 708 | |||||||||||||
Real estate |
6,838 | 4,078 | 30 | 56 | 356 | |||||||||||||
Consumer |
45 | 173 | 430 | 405 | 241 | |||||||||||||
Total |
7,383 | 5,477 | 4,073 | 1,548 | 1,305 | |||||||||||||
Recoveries: |
||||||||||||||||||
Commercial |
150 | 148 | 79 | 112 | 59 | |||||||||||||
Real estate |
347 | 52 | | 53 | 94 | |||||||||||||
Consumer |
17 | 30 | 19 | 38 | 60 | |||||||||||||
Total |
514 | 230 | 98 | 203 | 213 | |||||||||||||
Net charge-offs |
6,869 | 5,247 | 3,975 | 1,345 | 1,092 | |||||||||||||
Provision |
10,210 | 8,572 | 4,835 | 998 | 1,084 | |||||||||||||
Balance, end of Year |
$ | 14,790 | $ | 11,449 | $ | 8,124 | $ | 7,264 | $ | 7,611 | ||||||||
Average loans(1) |
$ | 915,009 | $ | 895,598 | $ | 857,835 | $ | 791,440 | $ | 711,240 | ||||||||
Ratio of net charge-offs to average loans |
0.74 | % | 0.58 | % | 0.46 | % | 0.17 | % | 0.15 | % | ||||||||
Ratio of allowance for loan losses to total loans |
1.55 | % | 1.26 | % | 0.92 | % | 0.88 | % | 1.00 | % |
- (1)
- Excludes mortgage loans held for sale
Loan Policy and Procedure
The Bank's loan policies and procedures have been approved by the Board of Directors, based on the recommendation of the Bank's President, Chief Lending Officer, Chief Credit Officer, and the Risk Management Officer, who collectively establish and monitor credit policy issues. Application of the loan policy is the direct responsibility of those who participate either directly or administratively in the lending function.
The Bank's Relationship Managers originate loan requests through a variety of sources which include the Bank's existing customer base, referrals from directors and various networking sources (accountants, attorneys, and realtors), and market presence. Over the past several years, the effectiveness of the Bank's Relationship Managers have been significantly increased through (1) the hiring of experienced commercial lenders in the Bank's geographic markets, (2) the Bank's continued participation in community and civic events, (3) strong networking efforts, (4) local decision making, and (5) consolidation and other changes which are occurring with respect to other local financial institutions.
A credit loan committee comprised of senior management approves commercial and consumer loans with total loan exposures in excess of $2.0 million. The executive loan committee comprised of senior management and 5 independent members from the Board of Directors approves commercial and consumer loans with total exposures in excess of $4.5 million up to the Bank's legal lending limit. One
59
of the affirmative votes on both the credit and/or executive loan committee must be either the Chief Credit Officer or the Chief Lending Officer in order to ensure that proper standards are maintained.
Lending authorities are granted to individuals based on position and experience. All commercial loan approvals require dual signatures. Loans over $1,000,000 and up to $2,000,000 require the additional approval of the Chief Lending Officer ("CLO"), Chief Credit Officer ("CCO"), Senior Credit Officer and/or the Bank Chief Executive Officer ("CEO"). Loans in excess of $2,000,000 are presented to the Bank's Credit Committee, comprised of the Chief Lending Officer, Chief Credit Officer, Senior Credit Officer, Chief Risk Officer (non-voting), and selected market Executives. The Credit Committee can approve loans up to $4,500,000 and recommend loans to the Executive Loan Committee for approval up to the Bank's legal lending limit of approximately $16.0 million at December 31, 2010. The Executive Loan Committee is comprised of the Bank CEO, the Chief Lending Officer, the Chief Credit Officer, the Chief Financial Officer, Senior Credit Officer, the Chief Risk Officer (non-voting member) and selected Board members. At least one affirmative vote in both the Credit Committee and the Executive Loan Committee must come from the CCO or the CLO. Individual joint lending authority is granted based on the level of experience of the individual for commercial loan exposures under $2 million. Higher risk credits (as determined by internal loan ratings) and unsecured facilities (in excess of $100,000) require the signature of an officer with more credit experience.
The Bank has established an "in-house" lending limit of 80% of its legal lending limit and, at December 31, 2010, the Bank had one loan relationship in excess of its in-house limit. One client had a loan exposure of $14.1 million that was approximately $2.0 million over the 80% in-house limit. Although Bank policy does not prohibit going over the 80% limit, these credits need to be generally considered of "high quality".
The Bank does occasionally purchase or sell portions of large dollar amount commercial loans through participations with other financial institutions, but no significant participations occurred during 2010. The Bank also performs loans sales of retail mortgage loans on a regular basis. During 2010, the Bank received $44.4 million in proceeds from mortgage loan sales. The Bank does not buy or sell any retail consumer loans.
Through the Chief Credit Officer and the Credit Committee, the Bank has successfully implemented individual, joint, and committee level approval procedures which have monitored and solidified credit quality as well as provided lenders with a process that is responsive to customer needs.
The Bank manages credit risk in the loan portfolio through adherence to consistent standards, guidelines, and limitations established by the credit policy. The Bank's credit department, along with the Relationship Managers, analyzes the financial statements of the borrower, collateral values, loan structure, and economic conditions, to then make a recommendation to the appropriate approval authority. Commercial loans generally consist of real estate secured loans, lines of credit, term, and equipment loans. The Bank's underwriting policies impose strict collateral requirements and normally will require the guaranty of the principals. For requests that qualify, the Bank will use Small Business Administration guarantees to improve the credit quality and support local small business.
The Bank's written loan policies are continually evaluated and updated as necessary to reflect changes in the marketplace. Annually, credit loan policies are approved by the Bank's Board of Directors thus providing Board oversight. These policies require specified underwriting, loan documentation and credit analysis standards to be met prior to funding.
One of the key components of the Bank's commercial loan policy is loan to value. The following guidelines serve as the maximum loan to value ratios which the Bank would normally consider for new loan requests. Generally, the Bank will use the lower of cost or market when determining a loan to value ratio (except for investment securities). The values are not appropriate in all cases, and Bank
60
lending personnel, pursuant to their responsibility to protect the Bank's interest, seek as much collateral as practical.
Commercial Real Estate |
||||||||
|
a) | Unapproved land (raw land) | 50 | % | ||||
|
b) | Approved but Unimproved land | 65 | % | ||||
|
c) | Approved and Improved land | 75 | % | ||||
|
d) | Improved Real Estate | 80 | % | ||||
Investments |
||||||||
|
a) | Stocks listed on a nationally recognized exchange Stock value should be greater than $10. | 75 | % | ||||
|
b) | Bonds, Bills, Notes | ||||||
|
c) | US Gov't obligations (fully guaranteed) | 95 | % | ||||
|
d) | State, county, & municipal general obligations rated BBB or higher | varies: 65 - 80 | % | ||||
|
Corporate obligations rated BBB or higher | varies: 65 - 80 | % | |||||
Other Assets |
||||||||
|
a) | Accounts Receivable (eligible) | 80 | % | ||||
|
b) | Inventory (raw material and finished goods) | 50 | % | ||||
|
c) | Equipment (new) | 80 | % | ||||
|
d) | Equipment (purchase money used) | 70 | % | ||||
|
e) | Cash or cash equivalents | 100 | % |
Exception reporting is presented to the audit committee on a quarterly basis to ensure that the Bank remains in compliance with the FDIC limits on exceeding supervisory loan of the Bank's board of directors 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.
Covered Loans
At December 31, 2010, the Company had $66.8 million of covered loans (covered under loss share agreements with the FDIC). Covered loans were recorded at fair value pursuant to the purchase accounting guidelines in FASB ASC 805"Fair Value Measurements and Disclosures". Upon acquisition, the Company evaluated whether each acquired loan (regardless of size) was within the scope of ASC 310-30, "ReceivablesLoans and Debt Securities Acquired with Deteriorated Credit Quality".
The carrying value of covered loans not exhibiting evidence of credit impairment at the time of the acquisition (i.e. loans outside of the scope of ASC 310-30) was $37.8 million at December 31, 2010. The fair value of the acquired loans not exhibiting evidence of credit impairment was determined by projecting contractual cash flows discounted at risk-adjusted interest rates.
61
The carrying value of covered loans acquired and accounted for in accordance with ASC Subtopic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality," was $29.0 million at December 31, 2010. Under ASC Subtopic 310-30, loans may be aggregated and accounted for as pools of loans if the loans being aggregated have common risk characteristics. Of the loans acquired with evidence of credit deterioration, some of the loans were aggregated into ten pools of loans based on common risk characteristics such as credit risk and loan type. Other loans acquired in the acquisition evidencing credit deterioration are recorded initially at the amount paid. For pools or loans or individual loans evidencing credit deterioration, the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the pool or loan's contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). There were no material increases or decreases in the expected cash flows of covered loans in each of the pools between November 19, 2010 (the "acquisition date") and December 31, 2010. The Company recognized $47,000 of income on the loans acquired with evidence of credit deterioration in period since acquisition.
Deposits
Total deposits were $1.1 billion and $1.0 billion at December 31, 2010 and 2009, respectively. A significant portion of the overall increase in deposits can be attributed to the assumed deposits from the Allegiance acquisition, which was $81.4 million at December 31, 2010. Non-interest bearing deposits increased to $122.5 million at December 31, 2010, from $102.3 million at December 31, 2009, an increase of $20.2 million or 19.7%. The increase in non-interest bearing deposits was primarily due to an increase in non-interest bearing personal accounts. Management continues its efforts to promote growth in these types of deposits, such as offering a free checking product, as a method to help reduce the overall cost of funds. Interest bearing deposits increased by $108.2 million or 11.8%, from $918.6 million at December 31, 2009 to $1.0 billion at December 31, 2010. The increase in interest bearing deposits was primarily due to an increase in interest bearing core deposits including time deposits maturing in one year or less.
Management continues to promote interest-bearing deposits through a disciplined pricing strategy with a continuing emphasis on commercial and retail marketing programs.
Maturity of Certificates of Deposit of $100,000 or More
The following table sets forth the Bank's certificates of deposit of $100,000 or more by maturity date.
|
At December 31, 2010 | ||||
---|---|---|---|---|---|
|
(in thousands) |
||||
Three Months or Less |
$ | 33,670 | |||
Over Three Through Six Months |
77,829 | ||||
Over Six Through Twelve Months |
68,701 | ||||
Over Twelve Months |
113,503 | ||||
Total |
$ | 293,703 | |||
62
Average Deposits and Average Rates by Major Classification
The following table sets forth the average balances of deposits and the average rates paid for the years presented.
|
Year Ended December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2008 | ||||||||||||||||
|
Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||
Non-interest bearing demand |
$ | 111,791 | $ | 107,629 | $ | 107,642 | |||||||||||||
Interest bearing demand |
396,383 | 1.22 | % | 301,403 | 1.48 | % | 238,144 | 1.95 | % | ||||||||||
Savings deposits |
110,075 | 0.70 | % | 77,823 | 0.97 | % | 84,453 | 1.70 | % | ||||||||||
Time deposits |
452,587 | 2.44 | % | 460,374 | 3.20 | % | 351,011 | 4.22 | % | ||||||||||
Total |
$ | 1,070,836 | $ | 947,229 | $ | 781,250 | |||||||||||||
Borrowings
Borrowed funds from various sources are generally used to supplement deposit growth. There were no Federal funds purchased at either December 31, 2010 or December 31, 2009. Federal funds purchased typically mature in one day. An increase in core deposit levels has reduced the need for the Company to borrow overnight funds. Short-term securities sold under agreements to repurchase were $6.8 million and $15.2 million at December 31, 2010 and 2009, respectively. Borrowings, representing advances from the FHLB, was $10.0 million and $20.0 million at December 31, 2010 and 2009, respectively. Long-term securities sold under agreements to repurchase were at $100.0 million at both December 31, 2010 and 2009.
Information concerning short-term borrowings is summarized as follows:
|
As of December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2008 | |||||||
|
(Dollar amounts in thousands, except percentage data) |
|||||||||
Federal funds purchased: |
||||||||||
Average balance during the year |
$ | 3,650 | $ | 2,694 | $ | 76,307 | ||||
Average rate during the year |
0.50 | % | 0.66 | % | 2.35 | % | ||||
Securities sold under agreements to repurchase: |
||||||||||
Average balance during the year |
11,265 | 21,046 | 25,000 | |||||||
Average rate during the year |
0.54 | % | 0.99 | % | 2.10 | % | ||||
Maximum month end balance of short-term borrowings during the year |
$ |
26,313 |
$ |
29,444 |
$ |
124,308 |
Shareholders' Equity
Shareholders' equity increased by $7.0 million to $132.4 million at December 31, 2010, as compared to $125.4 million at December 31, 2009. The increase in stockholders' equity was primarily the result of $4.8 million (net of offering costs) received from the issuance of common stock and $4.0 million received from year-to-date earnings, offset by $2.5 million of dividends paid on common and preferred stock.
On April 21, 2010, the Company entered into separate stock purchase agreements with two institutional investors relating to the sale of an aggregate of 644,000 shares of the Company's authorized but unissued common stock, par value $5.00 per share, at a purchase price of $8.00 per
63
share. The Company completed the issuance of $4.8 million of common stock, net of related offering costs of $321,000, on May 12, 2010.
The Company declared common stock cash dividends in 2010 of $0.20 per share and $0.30 per share in 2009. The following table presents a few ratios that are used to measure the Company's performance.
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2008 | |||||||
Return on average assets |
0.29 | % | 0.05 | % | 0.05 | % | ||||
Return on average equity |
3.02 | % | 0.51 | % | 0.54 | % | ||||
Dividend payout ratio |
53.69 | % | 166.22 | % | 503.89 | % | ||||
Average equity to average assets |
9.73 | % | 9.38 | % | 8.95 | % |
Regulatory Capital
Federal bank regulatory agencies have established certain capital-related criteria that must be met by banks and bank holding companies. The measurements which incorporate the varying degrees of risk contained within the balance sheet and exposure to off-balance sheet commitments were established to provide a framework for comparing different institutions.
Other than Tier 1 capital restrictions on the Company's junior subordinated debt discussed later, the Company is not aware of any pending recommendations by regulatory authorities that would have a material impact on the Company's capital, resources, or liquidity if they were implemented.
The adequacy of the Company's regulatory capital is reviewed on an ongoing basis with regard to size, composition and quality of the Company's resources. An adequate capital base is important for continued growth and expansion in addition to providing an added protection against unexpected losses.
An important indicator in the banking industry is the leverage ratio, defined as the ratio of common shareholders' equity less intangible assets, to average quarterly assets less intangible assets. The leverage ratio was 8.01% and 8.36% at December 31, 2010 and 2009, respectively. The decrease was primarily the result of an increase in average risk weighted assets due to the acquisition of Allegiance.
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 generally consists of common shareholders' equity less intangible assets plus the junior subordinated debt, and Tier 2 risk-based capital includes the allowable portion of the allowance for loan losses, currently limited to 1.25% of risk-weighted assets. Any portion of the allowance for loan losses that exceeds the 1.25% limit of risk-weighted assets is disallowed for Tier 2 risk-based capital but is used to adjust the overall risk weighted asset calculation. At December 31, 2010, $2.4 million of the allowance for loan losses was disallowed for Tier 2 risk-based capital, but was used to adjust the overall risk weighted assets used in the regulatory ratio calculations. Under Tier 1 risk-based capital guidelines, any amount of net deferred tax assets that exceeds either forecasted net income for the period or 10% of Tier 1 risk-based capital is disallowed. At December 31, 2010, $198,000 of net deferred tax assets was disallowed in the Tier 1 risk-based capital calculation. By regulatory guidelines, the separate component of equity for unrealized appreciation or depreciation on available for sale securities is excluded from Tier 1 risk-based capital. In addition, federal banking regulatory authorities have issued a final rule restricting the Company's junior subordinated debt to 25% of Tier 1 risk-based capital. Amounts of junior subordinated debt in excess of the 25% limit generally may be included in Tier 2 risk-based capital. The final rule provided a
64
five-year transition period, ending March 21, 2009. In 2009, the Federal Reserve extended this transition period to March 21, 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 December 31, 2010, the entire amount of these securities was allowable to be included as Tier 1 risk-based capital for the Company. For the periods ended December 31, 2010 and December 31, 2009, the Company's regulatory 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 367,982 shares of the Company's common stock, par value $5.00 per share, for an aggregate purchase price of $25.0 million in cash.
The Series A Preferred Stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. Under ARRA, the Series A Preferred Stock may be redeemed at any time following consultation by the Company's primary bank regulator and Treasury, not withstanding the terms of the original transaction documents. Under FAQ's issued recently by Treasury, participants in the Capital Purchase Program desiring to repay part of an investment by Treasury must repay a minimum of 25% of the issue price of the preferred stock.
In December 2008, the Company infused $10.0 million of capital into the Bank.
The following table sets forth the Company's capital ratios at December 31, 2010 and 2009:
|
At December 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | |||||||
|
(Dollars amounts in thousands) |
||||||||
Tier 1 Capital |
|||||||||
Common shareholders' equity excluding unrealized gains (losses) on securities |
$ | 132,447 | $ | 125,428 | |||||
Disallowed intangible assets |
(45,787 | ) | (44,024 | ) | |||||
Junior subordinated debt |
18,287 | 19,508 | |||||||
Unrealized losses on available for sale debt securities |
3,925 | 3,942 | |||||||
Total Tier 1 Capital |
108,872 | 104,854 | |||||||
Tier 2 Capital |
|||||||||
Allowable portion of allowance for loan losses |
12,544 | 11,449 | |||||||
Total Tier 2 Capital |
12,544 | 11,449 | |||||||
Total risk-based capital |
$ | 121,416 | $ | 116,303 | |||||
Risk adjusted assets (including off-balance sheet exposures) |
$ | 1,001,299 | $ | 984,296 | |||||
Leverage ratio |
8.01 | % | 8.36 | % | |||||
Tier I risk-based capital ratio |
10.87 | % | 10.65 | % | |||||
Total risk-based capital ratio |
12.13 | % | 11.82 | % |
Regulatory guidelines require the Company's Tier 1 capital ratios and the total risk-based capital ratios to be at least 4.0% and 8.0%, respectively.
65
Interest Rate Sensitivity
Through the years, the banking industry has adapted to an environment in which interest rates have fluctuated dramatically and in which depositors have been provided with liquid, rate sensitive investment options. The industry utilizes a process known as asset/liability management as a means of managing this adaptation.
Asset/liability management is intended to provide for adequate liquidity and interest rate sensitivity by analyzing and understanding the underlying cash flow structures of interest rate sensitive assets and liabilities and coordinating maturities and repricing characteristics on those assets and liabilities.
Interest rate risk management involves managing the extent to which interest-sensitive assets and interest-sensitive liabilities are matched. Interest rate sensitivity is the relationship between market interest rates and earnings volatility due to the repricing characteristics of assets and liabilities. The Company's net interest income is affected by changes in the level of market interest rates. In order to maintain consistent earnings performance, the Company seeks to manage, to the extent possible, the repricing characteristics of its assets and liabilities.
One major objective of the Company when managing the rate sensitivity of its assets and liabilities is to stabilize net interest income. The management of and authority to assume interest rate risk is the responsibility of the Company's Asset/Liability Committee ("ALCO"), which is comprised of senior management and Board members. The ALCO meets quarterly to monitor the ratio of interest sensitive assets to interest sensitive liabilities. The process to review interest rate risk management is a regular part of management of the Company. In addition, there is an annual process to review the interest rate risk policy with the Board of Directors which includes limits on the impact to earnings and value from shifts in interest rates.
To manage the interest rate sensitivity position, an asset/liability model called "gap analysis" is used to monitor the difference in the volume of the Company's interest sensitive assets and liabilities that mature or reprice within given periods. A positive gap (asset sensitive) indicates that more assets reprice during a given period compared to liabilities, while a negative gap (liability sensitive) has the opposite effect.
During 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 Company's variable rate assets with variable rate liabilities. In September 2010, the fixed rate payer exercised a call option to terminate this interest rate swap.
During 2008, the Company entered into two interest rate swap agreements with an aggregate notional amount of $15 million. This interest rate swap transaction involved the exchange of the Company's floating rate interest rate payment on $15.0 million in floating rate junior subordinated debt for a fixed rate interest payment without the exchange of the underlying principal amount.
Interest rate caps are generally used to limit the exposure from the repricing and maturity of liabilities and to limit the exposure created by interest rate swaps. In June of 2003, the Company purchased a six month LIBOR cap to create protection against rising interest rates for the above mentioned $5 million interest rate swap. This interest rate cap matured in March 2010.
In October of 2010, the Company purchased a three month LIBOR interest rate cap to create protection against rising interest rates. The notional amount of this interest rate cap was $5 million and the initial premium paid for the interest rate cap was $206,000. At December 31, 2010, the recorded value of the interest rate cap was $300,000.
Also, the Bank sells fixed and adjustable rate residential mortgage loans to limit the interest rate risk of holding longer-term assets on the balance sheet. The Company did not sell any fixed and adjustable rate loans in 2010 or 2009. In 2008, the Company sold $0.7 million of fixed and adjustable rate loans.
66
At December 31, 2010, the Company was in a positive one-year cumulative gap position. Commercial adjustable rate loans increased $46.7 million or 9.5% from $491.7 million at December 31, 2009 to $538.4 million at December 31, 2010. Installment adjustable rate loans increased $2.0 million or 2.7% from $73.8 million at December 31, 2009 to $75.8 million at December 31, 2010. During 2010, targeted short-term interest rates remained low. Both the national prime rate and the overnight federal funds rates remained unchanged throughout 2010. Throughout 2010, the low interest rate environment contributed to lower yields on the Bank's adjustable and variable rate commercial and consumer loan portfolios as well as contributing to lower yields on federal funds sold and taxable investment securities. Also, decreases in interest-bearing core deposit and time deposit interest rates contributed to the reduction of the Bank's overall cost of funds. As a result of an ongoing industry-wide economic crisis fueled in part by a continued downturn in the housing market, the mortgage refinance market remained relatively flat in 2010 but did produce an increase in prepayments on loans and investment securities throughout the year. The increase in loan and investment securities prepayments helped limit extension risk within the fixed rate loan and investment securities portfolios. In order to augment the funding needs for new commercial and consumer loan originations and investment security purchases during 2010, interest-bearing core deposits and time deposits increased $108.2 million or 11.8% from $918.6 million at December 31, 2009 to $1.0 billion at December 31, 2010. These factors contributed to the Company's positive one-year cumulative gap position. In 2011, the Company will continue its strategy to originate fixed and adjustable rate commercial and consumer loans and use investment security cash flows and interest-bearing and non-interest bearing deposits to rebalance wholesale borrowings to maintain a more neutral gap position.
Interest Sensitivity Gap at December 31, 2010
|
0 - 3 months | 3 to 12 months |
1 - 3 years | over 3 years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Dollars in thousands) |
||||||||||||
Interest bearing deposits and federal funds sold |
$ | 2,372 | $ | | $ | | $ | | |||||
Securities(1)(2) |
35,456 | 58,092 | 73,045 | 122,283 | |||||||||
Mortgage loans held for sale |
3,695 | | | | |||||||||
Loans(2) |
351,400 | 99,027 | 231,643 | 324,273 | |||||||||
Total rate sensitive assets (RSA) |
392,923 | 157,119 | 304,688 | 446,556 | |||||||||
Interest bearing deposits(3) |
26,460 | 79,381 | 211,684 | 211,488 | |||||||||
Time deposits |
66,009 | 217,995 | 194,056 | 19,756 | |||||||||
Securities sold under agreements to repurchase |
106,843 | | | | |||||||||
Borrowings |
10,000 | | | | |||||||||
Junior subordinated debt |
10,150 | | | 8,287 | |||||||||
Total rate sensitive liabilities |
219,462 | 297,376 | 405,740 | 239,531 | |||||||||
Interest rate swap (notional) |
(15,000 | ) | | | | ||||||||
As of December 31, 2010: |
|||||||||||||
Interest sensitivity gap |
$ | 188,461 | $ | (140,257 | ) | $ | (101,052 | ) | $ | 207,025 | |||
Cumulative gap |
$ | 188,461 | $ | 48,204 | $ | (52,848 | ) | $ | 154,177 | ||||
RSA/RSL |
1.8 | % | 0.5 | % | 0.8 | % | 1.9 | % |
- (1)
- Includes
gross unrealized gains/losses on available for sale securities.
- (2)
- Securities and loans are included in the earlier of the period in which interest rates were next scheduled to adjust or the period in which they are due.
67
- (3)
- Demand and savings accounts are generally subject to immediate withdrawal. However, management considers a certain amount of such accounts to be core accounts having significantly longer effective maturities based on the retention experiences of such deposits in changing interest rate environments.
Certain shortcomings are inherent in the method of analysis presented in the above table. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the table. The ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.
The Company also measures its near-term sensitivity to interest rate movements through simulations of the effects of rate changes upon its net interest income. Net interest income simulations evaluate the effect that interest rate changes have on the prepayment, repricing and maturity attributes of the Company's interest earning assets and interest bearing liabilities over the next twelve months. Interest rate movements of up 100, 200 and 300 basis points and down 100, 200 and 300 basis points, adjusted for activity in the current and forecasted interest rate environment, were applied to the Company's interest earning assets and interest bearing liabilities as of December 31, 2010. The results of these simulations on net interest income for 2010 are as follows:
Simulated % change in 2010 Net Interest Income |
|||||
---|---|---|---|---|---|
Assumed Changes in Interest Rates |
% Change | ||||
-300 |
-3.7 | % | |||
-200 |
-.3 | % | |||
-100 |
-0.1 | % | |||
0 |
0.0 | % | |||
+100 |
1.2 | % | |||
+200 |
1.2 | % | |||
+300 |
-0.7 | % |
The Company also measures its longer-term sensitivity to interest rate movements through simulations of the effects of rate changes upon its economic value of shareholders' equity. Economic value of shareholders' equity simulations evaluate the effect that interest rate changes have on the prepayment, repricing and maturity attributes of the Company's interest earning assets and interest bearing liabilities over the life of each financial instrument. Interest rate movements of up 100, 200 and 300 basis points and down 100, 200 and 300 basis points, adjusted for activity in the current and forecasted interest rate environment, were applied to the Company's interest earning assets and interest
68
bearing liabilities as of December 31, 2010. The results of these simulations on economic value of shareholders' equity for 2010 are as follows:
Simulated % change in Economic Value of Shareholders' equity |
|||||
---|---|---|---|---|---|
Assumed Changes in Basis Points |
% Change | ||||
-300 |
6.8 | % | |||
-200 |
7.5 | % | |||
-100 |
5.4 | % | |||
0 |
0.0 | % | |||
+100 |
-6.4 | % | |||
+200 |
-22.4 | % | |||
+300 |
-33.0 | % |
Liquidity and Funds Management
Liquidity management ensures that adequate funds will be available to meet anticipated and unanticipated deposit withdrawals, debt servicing payments, investment commitments, commercial and consumer loan demand and ongoing operating expenses. Funding sources include principal repayments on loans and investment securities, sales of loans, growth in core deposits, short and long-term borrowings and repurchase agreements. Regular loan payments are typically a dependable source of funds, while the sale of loans and investment securities, deposit flows, and loan prepayments are significantly influenced by general economic conditions and level of interest rates. In 2010, the increase in impaired loans continued to lessen the dependability of regular loan payments.
At December 31, 2010, the Company maintained $17.8 million in cash and cash equivalents primarily consisting of cash and due from banks. In addition, the Company had $279.8 million in available for sale securities and $2.0 million in held to maturity securities. Cash and investment securities totaled $299.6 million which represented 21.0% of total assets at December 31, 2010 compared to 22.8% at December 31, 2009.
The Company considers its primary source of liquidity to be its core deposit base, which includes non-interest-bearing and interest-bearing demand deposits, savings, and time deposits under $100,000. This funding source has grown steadily over the years through organic growth and acquisitions and consists of deposits from customers throughout the Company's financial center network. The Company will continue to promote the growth of deposits through its financial center offices. At December 31, 2010, a portion of the Company's assets were funded by core deposits acquired within its market area and by the Company's equity. These two components provide a substantial and stable source of funds.
Off-Balance Sheet Arrangements
The Company's financial statements do not reflect various off-balance sheet arrangements that are made in the normal course of business, which may involve some liquidity risk. These commitments consist mainly of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments. Unused commitments, at December 31, 2010 totaled $212.4 million. This consisted of $41.8 million in commercial real estate and construction loans, $38.1 million in home equity lines of credit, $132.5 million in unused business lines of credit and $9.2 million in standby letters of credit. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Company. Any amounts actually drawn upon, management believes, can be funded in the normal course of operations. The Company has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources.
69
Contractual Obligations
The following table represents the Company's aggregate contractual obligations to make future payments.
|
December 31, 2010 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Less than 1 year |
1 - 3 Years | 4 - 5 Years | Over 5 Years |
Total | |||||||||||
|
(Dollar amounts in thousands) |
|||||||||||||||
Time deposits |
$ | 284,004 | $ | 194,056 | $ | 19,411 | $ | 345 | $ | 497,816 | ||||||
Securities sold under agreements to repurchase(1) |
100,000 | | | | 100,000 | |||||||||||
Borrowings |
10,000 | | | | 10,000 | |||||||||||
Junior subordinated debt(1) |
20,150 | | | | 20,150 | |||||||||||
Operating leases |
3,151 | 5,673 | 4,827 | 13,695 | 27,346 | |||||||||||
Unconditional purchase obligations |
1,813 | 3,752 | 3,752 | 469 | 9,786 | |||||||||||
Total |
$ | 419,118 | $ | 203,481 | $ | 27,990 | $ | 14,509 | $ | 665,098 | ||||||
- (1)
- Classified based on the earliest date on which it may be redeemed and not contractual maturity.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The discussion concerning the effects of interest rate changes on the Company's estimated net interest income for the year ended December 31, 2010 set forth under "Management's Discussion and Analysis of Financial Condition and Results of OperationsInterest Rate Sensitivity" in Item 7 hereof, is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
70
Report of Independent Registered Public Accounting Firm
To
the Board of Directors and Shareholders
VIST Financial Corp.
Wyomissing, Pennsylvania
We have audited the accompanying consolidated balance sheets of VIST Financial Corp. and its subsidiaries (the "Company") as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2010. The Company's management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of VIST Financial Corp. and its subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), VIST Financial Corp.'s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 21, 2011 expressed an unqualified opinion.
/s/ ParenteBeard LLC |
||
Reading, Pennsylvania |
||
March 21, 2011 |
71
VIST FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar in thousands, except share data)
|
December 31, 2010 |
December 31, 2009 |
||||||
---|---|---|---|---|---|---|---|---|
ASSETS |
||||||||
Cash and due from banks |
$ | 15,443 | $ | 18,487 | ||||
Federal funds sold |
1,500 | 8,475 | ||||||
Interest-bearing deposits in other banks |
872 | 410 | ||||||
Total cash and cash equivalents |
17,815 | 27,372 | ||||||
Mortgage loans held for sale |
3,695 |
1,962 |
||||||
Securities available for sale |
279,755 | 268,030 | ||||||
Securities held to maturity, fair value 2010$1,888; 2009$1,857 |
2,022 | 3,035 | ||||||
Federal Home Loan Bank stock |
7,099 | 5,715 | ||||||
Loans, net of allowance for loan losses 2010$14,790; 2009$11,449 |
939,573 | 899,515 | ||||||
Covered loans |
66,770 | | ||||||
Premises and equipment, net |
5,639 | 6,114 | ||||||
Other real estate owned |
5,303 | 5,221 | ||||||
Covered other real estate owned |
247 | | ||||||
Identifiable intangible assets |
3,795 | 4,186 | ||||||
Goodwill |
41,858 | 39,982 | ||||||
Bank owned life insurance |
19,373 | 18,950 | ||||||
FDIC prepaid deposit insurance |
3,985 | 5,712 | ||||||
FDIC indemnification asset |
7,003 | | ||||||
Other assets |
21,080 | 22,925 | ||||||
Total assets |
$ | 1,425,012 | $ | 1,308,719 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
||||||||
Liabilities |
||||||||
Deposits: |
||||||||
Non-interest bearing |
$ | 122,450 | $ | 102,302 | ||||
Interest bearing |
1,026,830 | 918,596 | ||||||
Total deposits |
1,149,280 | 1,020,898 | ||||||
Securities sold under agreements to repurchase |
106,843 |
115,196 |
||||||
Borrowings |
10,000 | 20,000 | ||||||
Junior subordinated debt, at fair value |
18,437 | 19,658 | ||||||
Other liabilities |
8,005 | 7,539 | ||||||
Total liabilities |
1,292,565 | 1,183,291 | ||||||
Shareholders' equity |
||||||||
Preferred stock: $0.01 par value; authorized 1,000,000 shares; $1,000 liquidation preference per share; 25,000 shares of Series A 5% (increasing to 9% in 2014) cumulative preferred stock issued and outstanding; Less: discount of $1,480 at December 31, 2010 and $1,908 at December 31, 2009 |
23,520 | 23,092 | ||||||
Common stock, $5.00 par value; authorized 20,000,000 shares; issued: |
||||||||
6,546,273 shares at December 31, 2010 and 5,819,174 shares at December 31, 2009 |
32,732 | 29,096 | ||||||
Stock warrant |
2,307 | 2,307 | ||||||
Surplus |
65,506 | 63,744 | ||||||
Retained earnings |
12,960 | 11,892 | ||||||
Accumulated other comprehensive loss |
(4,387 | ) | (4,512 | ) | ||||
Treasury stock: 10,484 shares at cost |
(191 | ) | (191 | ) | ||||
Total shareholders' equity |
132,447 | 125,428 | ||||||
Total liabilities and shareholders' equity |
$ | 1,425,012 | $ | 1,308,719 | ||||
See Notes to Consolidated Financial Statements.
72
VIST FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2010, 2009 and 2008
(Dollars
in thousands, except per share data)
|
Years Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2008 | |||||||||
Interest and dividend income: |
||||||||||||
Interest and fees on loans |
$ | 51,158 | $ | 49,900 | $ | 54,532 | ||||||
Interest on securities: |
||||||||||||
Taxable |
10,920 | 11,453 | 9,942 | |||||||||
Tax-exempt |
1,646 | 1,253 | 959 | |||||||||
Dividend income |
59 | 115 | 393 | |||||||||
Other interest income |
304 | 19 | 12 | |||||||||
Total interest and dividend income |
64,087 | 62,740 | 65,838 | |||||||||
Interest expense: |
||||||||||||
Interest on deposits |
16,664 | 19,989 | 20,874 | |||||||||
Interest on short-term borrowings |
18 | 18 | 1,826 | |||||||||
Interest on securities sold under agreements to repurchase |
4,789 | 4,421 | 4,128 | |||||||||
Interest on borrowings |
408 | 1,509 | 2,372 | |||||||||
Interest on junior subordinated debt |
1,464 | 1,381 | 1,437 | |||||||||
Total interest expense |
23,343 | 27,318 | 30,637 | |||||||||
Net interest income |
40,744 | 35,422 | 35,201 | |||||||||
Provision for loan losses |
10,210 | 8,572 | 4,835 | |||||||||
Net interest income after provision for loan losses |
30,534 | 26,850 | 30,366 | |||||||||
Non-interest income: |
||||||||||||
Customer service fees |
2,046 | 2,443 | 2,964 | |||||||||
Mortgage banking activities, net |
1,082 | 1,255 | 897 | |||||||||
Commissions and fees from insurance sales |
11,915 | 12,254 | 11,284 | |||||||||
Broker and investment advisory commissions and fees |
737 | 714 | 813 | |||||||||
Earnings on investment in life insurance |
423 | 391 | 690 | |||||||||
Other commissions and fees |
1,901 | 1,933 | 1,688 | |||||||||
Gain on sale of equity interest |
1,875 | | | |||||||||
Gains on sale of loans |
| | 47 | |||||||||
Other income |
797 | 565 | 826 | |||||||||
Net realized gains (losses) on sales of securities |
691 | 344 | (7,230 | ) | ||||||||
Total other-than-temporary impairment losses: |
||||||||||||
Total other-than-temporary impairment losses on investments |
(869 | ) | (5,569 | ) | | |||||||
Portion of non-credit impairment loss recognized in other comprehensive loss |
19 | 3,101 | | |||||||||
Net credit impairment loss recognized in earnings |
(850 | ) | (2,468 | ) | | |||||||
Total non-interest income |
20,617 | 17,431 | 11,979 | |||||||||
Non-interest expense: |
||||||||||||
Salaries and employee benefits |
21,979 | 22,134 | 22,078 | |||||||||
Occupancy expense |
4,415 | 4,160 | 4,707 | |||||||||
Equipment expense |
2,559 | 2,495 | 2,690 | |||||||||
Marketing and advertising expense |
1,022 | 1,011 | 1,635 | |||||||||
Amortization of identifiable intangible assets |
543 | 647 | 629 | |||||||||
Professional services |
3,093 | 2,480 | 2,594 | |||||||||
Outside processing services |
3,908 | 3,983 | 3,334 | |||||||||
FDIC deposit and other insurance expense |
2,128 | 2,479 | 1,262 | |||||||||
Other real estate owned expense |
4,245 | 2,562 | 834 | |||||||||
Other expense |
3,740 | 3,752 | 3,875 | |||||||||
Total non-interest expense |
47,632 | 45,703 | 43,638 | |||||||||
Income (loss) before income taxes |
3,519 | (1,422 | ) | (1,293 | ) | |||||||
Income tax benefit |
(465 | ) | (2,029 | ) | (1,858 | ) | ||||||
Net income |
3,984 | 607 | 565 | |||||||||
Preferred stock dividends and discount accretion |
(1,678 | ) | (1,649 | ) | | |||||||
Net income (loss) available to common shareholders |
$ | 2,306 | $ | (1,042 | ) | $ | 565 | |||||
Basic earnings (loss) per common share |
$ | 0.37 | $ | (0.18 | ) | $ | 0.10 | |||||
Diluted earnings (loss) per common share |
$ | 0.37 | $ | (0.18 | ) | $ | 0.10 | |||||
See Notes to Consolidated Financial Statements.
73
VIST FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2010, 2009 and 2008
(Dollars in thousands, except share data)
|
Preferred Stock | Common Stock | |
|
|
|
|
|||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Accumulated Other Comprehensive Loss |
|
|
|||||||||||||||||||||||||||
|
Number of Shares Issued |
Liquidation Value |
Number of Shares Issued |
Par Value |
Stock Warrant |
Surplus | Retained Earnings |
Treasury Stock |
Total | |||||||||||||||||||||||
Balance, January 1, 2008 |
| $ | | 5,746,998 | $ | 28,735 | $ | | $ | 63,940 | $ | 17,039 | $ | (1,116 | ) | $ | (2,006 | ) | $ | 106,592 | ||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||
Net income |
| | | | | | 565 | | | 565 | ||||||||||||||||||||||
Change in net unrealized gains (losses) on securities available for sale, net of tax effect |
| | | | | | | (6,718 | ) | | (6,718 | ) | ||||||||||||||||||||
Total comprehensive loss |
| | | | | | | | | (6,153 | ) | |||||||||||||||||||||
Issuance of preferred stock |
25,000 | 25,000 | | | | | | | | 25,000 | ||||||||||||||||||||||
Preferred stock discount accretion |
| (2,307 | ) | | | | | | | | (2,307 | ) | ||||||||||||||||||||
Stock warrants |
| | | | 2,307 | | | | | 2,307 | ||||||||||||||||||||||
Additional consideration in connection with acquisitions (21,499 shares) |
| | | | | (137 | ) | | | 521 | 384 | |||||||||||||||||||||
Common stock issued in connection with directors' compensation |
| | 10,808 | 54 | | 139 | | | | 193 | ||||||||||||||||||||||
Common stock issued in connection with director and employee stock purchase plans |
| | 10,623 | 53 | | 88 | | | | 141 | ||||||||||||||||||||||
Compensation expense related to stock options |
| | | | | 319 | | | | 319 | ||||||||||||||||||||||
Common stock cash dividends declared ($0.50 per share) |
| | | | | | (2,847 | ) | | | (2,847 | ) | ||||||||||||||||||||
Balance, December 31, 2008 |
25,000 | 22,693 | 5,768,429 | 28,842 | 2,307 | 64,349 | 14,757 | (7,834 | ) | (1,485 | ) | 123,629 | ||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
| | | | | | 607 | | | 607 | ||||||||||||||||||||||
Change in net unrealized gains (losses) on securities available for sale, net of tax effect and reclassification adjustments for restated losses and impairment charges |
| | | | | | | 3,322 | | 3,322 | ||||||||||||||||||||||
Total comprehensive income |
3,929 | |||||||||||||||||||||||||||||||
Preferred stock discount accretion |
| 399 | | | | | | | | 399 | ||||||||||||||||||||||
Stock warrants |
| | | | | | (399 | ) | | | (399 | ) | ||||||||||||||||||||
Reissuance of 57,870 shares of treasury stock |
| | | | | (870 | ) | | | 1,294 | 424 | |||||||||||||||||||||
Restricted stock issued in connection with employee compensation |
| | 7,000 | 35 | | (35 | ) | | | | | |||||||||||||||||||||
Common stock issued in connection with directors' compensation |
| | 28,243 | 141 | | 77 | | | | 218 | ||||||||||||||||||||||
Common stock issued in connection with director and employee stock purchase plans |
| | 15,502 | 78 | | 25 | | | | 103 | ||||||||||||||||||||||
Compensation expense related to stock options |
| | | | | 198 | | | | 198 | ||||||||||||||||||||||
Common stock cash dividends paid ($0.30 per share) |
| | | | | | (1,732 | ) | | | (1,732 | ) | ||||||||||||||||||||
Preferred stock cash dividends paid or declared |
| | | | | | (1,341 | ) | | | (1,341 | ) | ||||||||||||||||||||
Balance, December 31, 2009 |
25,000 | 23,092 | 5,819,174 | 29,096 | 2,307 | 63,744 | 11,892 | (4,512 | ) | (191 | ) | 125,428 | ||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
| | | | | | 3,984 | | | 3,984 | ||||||||||||||||||||||
Change in net unrealized gains on securities available for sale, net of tax effect and reclassification adjustments for losses and impairment charges |
| | | | | | | 544 | | 544 | ||||||||||||||||||||||
Change in net unrealized losses on securities held to maturity, net of tax effect and reclassification adjustments for losses and impairment charges |
| | | | | | | (419 | ) | | (419 | ) | ||||||||||||||||||||
Total comprehensive income |
4,109 | |||||||||||||||||||||||||||||||
Issuance of common stock, net of costs of $321 |
| | 644,000 | 3,220 | | 1,611 | | | | 4,831 | ||||||||||||||||||||||
Preferred stock discount accretion |
| 428 | | | | | | | | 428 | ||||||||||||||||||||||
Stock warrants |
| | | | | | (428 | ) | | | (428 | ) | ||||||||||||||||||||
Restricted stock issued in connection with employee compensation |
| | 14,500 | 73 | | (73 | ) | | | | | |||||||||||||||||||||
Common stock issued in connection with directors' compensation |
| | 58,569 | 293 | | 50 | | | | 343 | ||||||||||||||||||||||
Common stock issued in connection with director and employee stock purchase plans |
| | 10,030 | 50 | | 26 | | | | 76 | ||||||||||||||||||||||
Compensation expense related to stock options |
| | | | | 148 | | | | 148 | ||||||||||||||||||||||
Common stock cash dividends paid ($0.20 per share) |
| | | | | | (1,238 | ) | | | (1,238 | ) | ||||||||||||||||||||
Preferred stock cash dividends paid or declared |
| | | | | | (1,250 | ) | | | (1,250 | ) | ||||||||||||||||||||
Balance, December 31, 2010 |
25,000 | $ | 23,520 | 6,546,273 | $ | 32,732 | $ | 2,307 | $ | 65,506 | $ | 12,960 | $ | (4,387 | ) | $ | (191 | ) | $ | 132,447 | ||||||||||||
See Notes to Consolidated Financial Statements.
74
VIST FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In thousands)
|
Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2008 | ||||||||
Cash Flows From Operating Activities |
|||||||||||
Net income |
$ | 3,984 | $ | 607 | $ | 565 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|||||||||||
Provision for loan losses |
10,210 | 8,572 | 4,835 | ||||||||
Provision for depreciation and amortization of premises and equipment |
1,288 | 1,332 | 1,470 | ||||||||
Amortization of identifiable intangible assets |
543 | 647 | 629 | ||||||||
Deferred tax benefit |
(674 | ) | (3,958 | ) | (345 | ) | |||||
Director stock compensation |
343 | 218 | 193 | ||||||||
Net amortization of securities premiums and discounts |
1,224 | 851 | 14 | ||||||||
Amortization of mortgage servicing rights |
114 | 150 | 202 | ||||||||
Decrease in mortgage servicing rights |
| | (6 | ) | |||||||
Accretion of fair value discounts related to FDIC receivable |
(3 | ) | | | |||||||
Accretion of fair value discounts related to covered loans |
(61 | ) | | | |||||||
Net realized losses on sales of other real estate owned |
1,640 | 1,117 | 120 | ||||||||
Impairment charge on investment securities recognized in earnings |
850 | 2,468 | | ||||||||
Net realized (gains) losses on sales of securities |
(691 | ) | (344 | ) | 7,230 | ||||||
Gain on sale of equity interest |
(1,875 | ) | | | |||||||
Proceeds from sales of loans held for sale |
44,439 | 65,514 | 42,787 | ||||||||
Net gains on sales of loans held for sale (included in mortgage banking activities) |
(963 | ) | (1,168 | ) | (831 | ) | |||||
Loans originated for sale |
(45,209 | ) | (64,025 | ) | (41,074 | ) | |||||
Realized gain on sale of premises and equipment |
| (25 | ) | | |||||||
Earnings on bank owned life insurance |
(423 | ) | (398 | ) | (695 | ) | |||||
Decrease (increase) in FDIC prepaid deposit insurance |
1,727 | (5,712 | ) | | |||||||
Compensation expense related to stock options |
148 | 198 | 319 | ||||||||
Net change in fair value of junior subordinated debt |
(1,221 | ) | 1,398 | (1,972 | ) | ||||||
Net change in fair value of interest rate swaps |
1,027 | (1,214 | ) | 1,407 | |||||||
Increase in accrued interest receivable and other assets |
6,052 | 82 | 7,816 | ||||||||
Decrease in accrued interest payable and other liabilities |
(435 | ) | (1,528 | ) | (8,314 | ) | |||||
Net Cash Provided by Operating Activities |
22,034 | 4,782 | 14,350 | ||||||||
Cash Flow From Investing Activities |
|||||||||||
Investment securities: |
|||||||||||
Purchasesavailable for sale |
(146,953 | ) | (182,598 | ) | (182,595 | ) | |||||
Principal repayments, maturities and callsavailable for sale |
68,638 | 77,405 | 33,631 | ||||||||
Principal repayments, maturities and callsheld to maturity |
51 | | | ||||||||
Proceeds from salesavailable for sale |
73,579 | 65,912 | 91,376 | ||||||||
Net increase in loans receivable |
(57,519 | ) | (41,232 | ) | (70,022 | ) | |||||
Proceeds from sale of loans |
| | 740 | ||||||||
Net decrease in covered loans |
1,986 | | | ||||||||
Net decrease (increase) in Federal Home Loan Bank stock |
283 | | (153 | ) | |||||||
Sales of other real estate owned |
5,641 | 5,251 | 166 | ||||||||
Proceeds from the sale of premises and equipment |
| 259 | | ||||||||
Purchases of premises and equipment |
(876 | ) | (1,165 | ) | (1,180 | ) | |||||
Disposals of premises and equipment |
65 | 76 | 11 | ||||||||
Contingent payments |
(250 | ) | (250 | ) | (1,750 | ) | |||||
Net cash received from acquisitions |
18,275 | | | ||||||||
Net Cash Used In Investing Activities |
(37,080 | ) | (76,342 | ) | (129,776 | ) | |||||
See Notes to Consolidated Financial Statements.
75
VIST FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars In thousands)
|
Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2008 | |||||||
Cash Flow From Financing Activities |
||||||||||
Net increase in deposits |
34,584 | 170,298 | 137,955 | |||||||
Net decrease in federal funds purchased |
| (53,424 | ) | (64,786 | ) | |||||
Net (decrease) increase in short-term securities sold under agreements to repurchase |
(8,353 | ) | (4,890 | ) | 9,205 | |||||
Proceeds from long-term debt |
| | 20,000 | |||||||
Repayments of long-term debt |
(23,161 | ) | (30,000 | ) | (15,000 | ) | ||||
Issuance of preferred stock, including stock warrant |
| | 25,000 | |||||||
Issuance of common stock |
4,831 | | | |||||||
Reissuance of treasury stock |
| 424 | 384 | |||||||
Proceeds from stock purchase plans |
76 | 103 | 141 | |||||||
Cash dividends paid on preferred and common stock |
(2,488 | ) | (2,863 | ) | (3,978 | ) | ||||
Net Cash Provided By Financing Activities |
5,489 | 79,648 | 108,921 | |||||||
(Decrease) increase in cash and cash equivalents |
(9,557 | ) | 8,088 | (6,505 | ) | |||||
Cash and Cash Equivalents: |
||||||||||
January 1 |
27,372 | 19,284 | 25,789 | |||||||
December 31 |
$ | 17,815 | $ | 27,372 | $ | 19,284 | ||||
Cash Payments For: |
||||||||||
Interest |
$ | 23,569 | $ | 27,989 | $ | 30,421 | ||||
Taxes |
$ | 600 | $ | | $ | 703 | ||||
Supplemental Schedule of Non-cash Investing and Financing Activities |
||||||||||
Transfer of loans receivable to real estate owned |
$ | 7,252 | $ | 11,326 | $ | 736 | ||||
Acquisitions (for more information, refer to Note 6FDIC-Assisted Acquisition): |
||||||||||
Assets acquired at fair value |
$ | 105,084 | $ | | $ | | ||||
Liabilities assumed at fair value |
(106,632 | ) | | | ||||||
Net liabilities assumed |
$ | (1,548 | ) | $ | | $ | | |||
See Notes to Consolidated Financial Statements.
76
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation:
On March 3, 2008, the Company changed its name from Leesport Financial Corp. to VIST Financial Corp. This re-branding initiative brought all the Leesport Financial Family of Companies under one new name and brand.
The consolidated financial statements include the accounts of VIST Financial Corp. (the "Company"), a bank holding company, which has elected to be treated as a financial holding company, and its wholly-owned subsidiaries, VIST Bank (the "Bank"), VIST Insurance, LLC ("VIST Insurance") and VIST Capital Management, LLC ("VIST Capital"). As of December 31, 2010, the Bank's wholly-owned subsidiary was VIST Mortgage Holdings, LLC. All significant inter-company accounts and transactions have been eliminated.
Nature of Operations:
The Bank provides full banking services. VIST Insurance provides risk management services, employee benefits insurance and personal and commercial insurance coverage through multiple insurance companies. VIST Capital provides investment advisory and brokerage services. VIST Mortgage Holdings, LLC provides mortgage brokerage services through its limited partnership agreements with unaffiliated third parties involved in the real estate services industry. First Leesport Capital Trust I, Leesport Capital Trust II and Madison Statutory Trust I are trusts formed for the purpose of issuing mandatory redeemable debentures on behalf of the Company. These trusts are wholly-owned subsidiaries of the Company, but are not consolidated for financial statement purposes. See "Junior Subordinated Debt" in Note 15 to the consolidated financial statements. The Company and the Bank are subject to the regulations of various federal and state agencies and undergo periodic examinations by various regulatory authorities.
Basis of Presentation:
The accompanying audited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for year end financial information and with the instructions to Form 10-K. 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 year ended December 31, 2010 have been included.
The Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") became effective on July 1, 2009. On that date, the FASB's ASC became the official source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with U.S. GAAP. The ASC supersedes all existing FASB, American Institute of Certified Public Accountants ("AICPA"), Emerging Issues Task Force ("EITF") and related literature. Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the ASC carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the ASC is superseded and deemed non-authoritative. While the conversion to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies, it does not change U.S. GAAP. Citing particular content in
77
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1. Summary of Significant Accounting Policies (Continued)
the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.
Subsequent Events:
Effective April 1, 2009, the Company adopted FASB ASC 855, Subsequent Events. FASB ASC 855 establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. FASB ASC 855 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that should be made about events or transactions that occur after the balance sheet date. In preparing these financial statements, the Company evaluated the events and transactions that occurred after December 31, 2010 through the date these financial statements were issued.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the potential impairment of goodwill, intangible assets, restricted stock, the valuation of deferred tax assets, the calculations of income tax provisions and the determination of other-than-temporary impairment on securities.
Significant Group Concentrations of Credit Risk:
Most of the Company's banking, insurance and wealth management activities are with customers located within Berks, Schuylkill, Philadelphia, Montgomery, Chester and Delaware Counties, as well as, within other southeastern Pennsylvania market areas. Note 8 to the consolidated financial statements included in this Form 10-K details the Company's investment securities portfolio for both available for sale and held to maturity investments. Note 9 and Note 10 to the consolidated financial statements included in this Form 10-K details the Company's loan concentrations. Although the Company has a diversified loan portfolio, its debtors' ability to honor contracts is influenced by the region's economy.
Reclassifications:
Certain amounts previously reported have been reclassified to conform to the financial statement presentation for 2010. Such reclassifications did not have a material impact on the presentation of the overall financial statements.
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Note 1. Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents:
For purposes of reporting the consolidated statement of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing demand deposits with banks, and federal funds sold. Generally, federal funds sold are for one-day periods.
Investment Securities and Related Impairment Evaluation:
Certain debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. For the years ended December 31, 2010, 2009 and 2008, respectively, there were 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.
For equity securities, when the Company has decided to sell an impaired available for sale security and the entity does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other than temporary even if the decision to sell has not been made.
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 security's 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
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Note 1. Summary of Significant Accounting Policies (Continued)
impairment, management has to first consider (a) whether the Company intends to sell the security, and (b) whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis. If one of these circumstances applies to a security, an other-than-temporary impairment loss is recognized in the statement of operations equal to the full amount of the decline in fair value below amortized cost. If neither of these circumstances applies to a security, but the Company does not expect to recover the entire amortized cost basis, an other-than-temporary impairment loss has occurred that must be separated into two categories: (a) the amount related to credit loss, and (b) the amount related to other factors. In assessing the level of other-than-temporary impairment attributable to credit loss, management compares the present value of cash flows expected to be collected with the amortized cost basis of the security. The portion of the total other-than-temporary impairment related to credit loss is recognized in earnings (as the difference between the fair value and the present value of the estimated cash flows), while the amount related to other factors is recognized in other comprehensive income. The total other-than-temporary impairment loss is presented in the statement of operations, less the portion recognized in other comprehensive income. When a debt security becomes other-than-temporarily impaired, its amortized cost basis is reduced to reflect the portion of the total impairment related to credit loss.
Federal Home Loan Bank Stock and Related Impairment Evaluation:
The Bank is required to maintain certain amounts of FHLB stock as a member of the FHLB. These equity securities are "restricted" in that they can only be sold back to the respective institutions or another member institution at par, therefore, they are less liquid than other tradable equity securities and are carried at amortized cost.
The FHLB of Pittsburgh announced in December 2008 that it voluntarily suspended the payment of dividends and the repurchase of excess capital stock from member banks. The FHLB last paid a dividend in the third quarter of 2008. Accounting guidance indicates that an investor in FHLB Pittsburgh capital stock should recognize impairment if it concludes that it is not probable that it will ultimately recover the par value of its shares. The decision of whether impairment exists is a matter of judgment that should reflect the investor's view of FHLB Pittsburgh's long-term performance, which includes factors such as its operating performance, the severity and duration of declines in the market value of its net assets related to its capital stock amount, its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance, the impact of legislation and regulatory changes on FHLB Pittsburgh, and accordingly, on the members of FHLB Pittsburgh and its liquidity and funding position. Based on the financial results of the FHLB for the year-ended December 31, 2010 and 2009, management believes that the suspension of both the dividend payments and excess capital stock repurchase is temporary in nature. In the fourth quarter of 2010, as a result of improved core earnings and a decrease in OTTI charges on non-agency investment securities, the FHLB repurchased stock totaling $283,000 from the Bank. Management further believes that the FHLB will continue to be a primary source of wholesale liquidity for both short-term and long-term funding and has concluded that its investment in FHLB stock is not other-than-temporarily impaired. After evaluating all of these considerations, the Company believes the par value of its shares will be recovered. Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.
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Note 1. Summary of Significant Accounting Policies (Continued)
Loans:
Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, generally are stated at their outstanding unpaid principal balances, net of any deferred fees or costs on originated loans or unamortized premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. These amounts are generally being amortized over the contractual life of the loan. Discounts and premiums on purchased loans are amortized to income using the interest method over the expected lives of the loans. The Bank has not underwritten any hybrid loans or sub-prime loans.
The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on non-accrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Allowance for Loan Losses:
In accordance with U.S. GAAP, the allowance for loan losses represents management's estimate of losses inherent in the loan and lease portfolio as of the balance sheet date and is recorded as a reduction to loans and leases. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Non-residential consumer loans are generally charged off no later than 90 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance, which is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan and lease portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans and leases that are classified as impaired. For such loans and leases, an allowance is established when the (i) discounted cash flows, or (ii) collateral value, or (iii) observable market price
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Note 1. Summary of Significant Accounting Policies (Continued)
of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity loans, home equity lines of credit and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for relevant qualitative factors. Separate qualitative adjustments are made for higher-risk criticized loans that are not impaired. These qualitative risk factors include:
- 1.
- Lending
policies and procedures, including underwriting standards and historical-based loss/collection, charge-off, and recovery practices.
- 2.
- National,
regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying
collateral for collateral dependent loans.
- 3.
- Nature
and volume of the portfolio and terms of loans.
- 4.
- Experience,
ability, and depth of lending management and staff.
- 5.
- Volume
and severity of past due, classified and nonaccrual loans as well as trends and other loan modifications.
- 6.
- Quality
of the Company's loan review system, and the degree of oversight by the Company's Board of Directors.
- 7.
- Existence
and effect of any concentrations of credit and changes in the level of such concentrations.
- 8.
- Effect of external factors, such as competition and legal and regulatory requirements.
Each factor is assigned a value to reflect improving, stable or declining conditions based on management's best judgment using relevant information available at the time of the evaluation.
An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for all criticized and classified loans by either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent.
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Note 1. Summary of Significant Accounting Policies (Continued)
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company's impaired loans are measured based on the estimated fair value of the loan's collateral.
For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals or evaluations. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower's financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
For loans that are not classified as impaired, the Company collectively evaluates the loans for impairment based upon homogeneous loan groups.
Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate, an extension of a loan's stated maturity date or a change in the loan payment to interest-only. For troubled debt restructurings on loans that are accruing interest, the Company will continue to accrue interest based upon the modified terms. Troubled debt restructurings on loans not accruing interest are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are tested for impairment.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower's overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified as special mention have potential weaknesses that deserve management's close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.
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Note 1. Summary of Significant Accounting Policies (Continued)
In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management's comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.
Covered Loans
In connection with the acquisition discussed in Note 6, the Bank has purchased loans of a failed bank, some of which have shown evidence of credit deterioration since origination. These purchased loans are recorded at the amount paid, such that there is no carryover of the seller's allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses. Of the loans acquired with evidence of credit deterioration, some of the loans were aggregated into ten pools of loans based on common risk characteristics such as credit risk and loan type. The cash flows expected over the life of the pools are estimated using an internal cash flow model that projects cash flows and calculates the carrying values of the pools, book yields, effective interest income and impairment, if any, based on pool level events. Assumptions as to cumulative loss rates and prepayment speeds are utilized to calculate the expected cash flows. Other loans acquired in the acquisition evidencing credit deterioration are recorded initially at the amount paid. For pools or loans or individual loans evidencing credit deterioration, the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the pool or loan's contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).
Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
Our determination of the initial fair value of loans purchased in the FDIC-assisted acquisitions involved a high degree of judgment and complexity. The carrying value of the acquired loans reflects management's best estimate of the amount to be realized from the acquired loan and lease portfolios. However, the amounts the Company actually realizes on these loans could differ materially from the carrying value reflected in these financial statements, based upon the timing of collections on the acquired loans in future periods, underlying collateral values and the ability of borrowers to continue to make payments.
Purchased performing loans are recorded at fair value, including a credit discount. Credit losses on acquired performing loans are estimated based on analysis of the performing portfolio. Such estimated credit losses are recorded as non-accretable discounts in a manner similar to purchased impaired loans. The fair value discount other than for credit loss is accreted as an adjustment to yield over the estimated lives of the loans. Interest is accrued daily on the outstanding principal balances of purchased performing loans. Fair value adjustments are also accreted into income over the estimated lives of the loans on a level yield basis.
Prospective losses incurred on Covered loans are eligible for partial reimbursement by the FDIC under loss sharing agreements. Subsequent decreases in the amount expected to be collected result in a
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Note 1. Summary of Significant Accounting Policies (Continued)
provision for credit losses, an increase in the allowance for loan losses, and a proportional adjustment to the FDIC receivable for the estimated amount to be reimbursed. Subsequent increases in the amount expected to be collected result in the reversal of any previously-recorded provision for credit losses and related allowance for loan loss and adjustments to the FDIC receivable, or prospective adjustment to the accretable yield if no provision for credit losses had been recorded. No allowance for loan losses has been recorded against Covered loans as of December 31, 2010.
In accordance with the loss sharing agreements with the FDIC, certain expenses relating to covered assets of external parties such as legal, property taxes, insurance, and the like may be reimbursed by the FDIC at 70% or if certain levels of reimbursement are reached, 80%, as defined. Such qualifying future expenditures on covered assets will result in an increase to the FDIC receivable.
Loans Held for Sale:
Mortgage loans originated and intended for sale in the secondary market at the time of origination are carried at the lower of cost or estimated fair value on an aggregate basis. The fair value of mortgage loans held for sale is determined, when possible, using Level 2 quoted secondary-market prices. If no such quoted price exists, the fair value of a loan is determined based on expected proceeds based on sales contracts and commitments.
These loans are all sold 100% servicing released to various financial institutions, usually within a 30 day period after origination. The loans are generally sold to institutions approved by the Company. Loan sales are typically subject to recourse agreements ranging from 90 to 150 days. Recourse only becomes an issue in the instance of payment delinquency or fraud during the recourse period which rarely occurs due to the strictness of the underwriting guidelines. The Company does not engage in any subprime lending. These loan sales are not subject to any other agreements or indemnifications. The Company is not currently involved in any servicing, pooling or securitization of these loans. There are no reserves set up for any contingencies or litigation that may occur with regard to this portfolio due to the portfolio's immateriality to the Company's balance sheet.
Rate Lock Commitments:
The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments also considers the difference between current levels of interest rates and the committed rates.
Other Real Estate Owned
Other real estate owned ("OREO") includes assets acquired through foreclosure, deed in-lieu of foreclosure, and loans identified as in-substance foreclosures. A loan is classified as an in-substance foreclosure when effective control of the collateral has been taken prior to completion of formal foreclosure proceedings. OREO is held for sale and is recorded at fair value of the property, based on current independent appraisals obtained at the time of acquisition less estimated costs to sell. Costs to
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Note 1. Summary of Significant Accounting Policies (Continued)
maintain OREO and subsequent gains and losses attributable to OREO liquidation are included in the Consolidated Statements of Operations in other income and other expense as realized. No depreciation or amortization expense is recognized.
Covered Other Real Estate Owned
Other real estate acquired through foreclosure covered under loss sharing agreements with the FDIC is reported exclusive of expected reimbursement cash flows from the FDIC. Subsequent decreases to the estimated recoverable value of covered other real estate result in a reduction of covered other real estate, and a charge to non-interest expense, and an increase in the FDIC receivable for the estimated amount to be reimbursed, with a corresponding amount recorded in non-interest expense.
Premises and Equipment:
Land and land improvements are stated at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is calculated principally on the straight-line method over the respective assets estimated useful lives as follows:
|
Years | |||
---|---|---|---|---|
Buildings and leasehold improvements |
10 - 40 | |||
Furniture and equipment |
3 - 10 |
Transfer of Financial Assets:
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Bank-Owned Life Insurance:
The Bank invests in bank owned life insurance ("BOLI") as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Bank on a chosen group of employees. The Bank is the owner and beneficiary of the policies. This life insurance investment is carried at the cash surrender value of the underlying policies. Income from the increase in cash surrender value of the policies is reflected in non-interest income on the consolidated statements of operations.
FDIC Indemnification Asset
Under the terms of the loss sharing agreements with the FDIC, which is a significant component of the acquisition discussed in Note 6, the FDIC will absorb 70% of the losses and certain related expenses and share in loss recoveries on loans and other real estate owned covered under the loss share agreements. The FDIC indemnification asset is measured separately from each of the covered
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Note 1. Summary of Significant Accounting Policies (Continued)
asset categories. The indemnification asset represents the present value of the estimated cash payments expected to be received from the FDIC for future losses on covered assets based on the credit adjustment estimated for each covered asset and the loss sharing percentages. These cash flows are discounted at a market-based rate to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC. The FDIC indemnification asset will be reduced as losses are recognized on covered assets and loss sharing payments are received from the FDIC. Realized losses in excess of acquisition date estimates will increase the FDIC indemnification asset and the indemnifiable loss recovery is recorded in other income. Conversely, if realized losses are less than initial estimates, the FDIC indemnification asset will be reduced by a charge to earnings.
FDIC Assisted Acquisition
U.S. GAAP requires that the acquisition method of accounting, formerly referred to as purchase method, be used for all business combinations and that an acquirer be identified for each business combination. Under U.S. GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. U.S. GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date.
The Company's wholly-owned subsidiary acquired Allegiance Bank of North America ("Allegiance") headquartered in Bala Cynwyd, Pennsylvania. The acquisition was completed with the assistance of the Federal Deposit Insurance Corporation ("FDIC"). The acquired assets and assumed liabilities of Allegiance were measured at estimated fair value as of the date of the acquisition. Management made significant estimates and exercised significant judgment in accounting for the acquisition of Allegiance. Management judgmentally assigned risk ratings to loans based on appraisals and estimated collateral values, expected cash flows, and estimated loss factors to measure fair values for loans. Other real estate acquired through foreclosure was valued based upon pending sales contracts and appraised values, adjusted for current market conditions. Management used quoted or current market prices to determine the fair value of investment securities, short-term borrowings and long-term obligations that were assumed from Allegiance.
Stock-Based Compensation:
On January 1, 2006, the Company transitioned to fair-value based accounting for stock-based compensation using the modified-prospective transition method. Under the modified-prospective method, the Company is required to record compensation cost for new awards and to awards modified, purchased or cancelled after January 1, 2006. Additionally, compensation cost for the portion of non-vested awards (awards for which the requisite service has not been rendered) that were outstanding as of January 1, 2006 are being recognized prospectively over the remaining vesting period of such awards.
Mortgage Servicing Rights:
Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Fair value is determined using prices for similar assets with similar
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Note 1. Summary of Significant Accounting Policies (Continued)
characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance to the extent that fair value is less than the capitalized amount.
Revenue Recognition for Insurance Activities:
Insurance revenues are derived from commissions and fees. Commission revenues, as well as the related premiums receivable and payable to insurance companies, are recognized the later of the effective date of the insurance policy or the date the client is billed, net of an allowance for estimated policy cancellations. The reserve for policy cancellations is periodically evaluated and adjusted as necessary. Commission revenues related to installment premiums are recognized as billed. Commissions on premiums billed directly by insurance companies are generally recognized as income when received. Contingent commissions from insurance companies are generally recognized as revenue when the data necessary to reasonably estimate such amounts is obtained. A contingent commission is a commission paid by an insurance company that is based on the overall profit and/or volume of the business placed with the insurance company. Fee income is recognized as services are rendered.
Goodwill and Other Intangible Assets:
The Company accounts for goodwill and other intangible assets in accordance with FASB ASC 350, "Goodwill and Other Intangible Assets." FASB ASC 350 revised the accounting for purchased intangible assets and, in general, requires that goodwill no longer be amortized, but rather that it be tested for impairment on an annual basis at the reporting unit level, which is either at the same level or one level below an operating segment. Other acquired intangible assets with finite lives, such as purchased customer accounts, are required to be amortized over their estimated lives. Other intangible assets are amortized using the straight line method over estimated useful lives of four to twenty years.
The Company performs an annual goodwill impairment test in the fourth quarter each year (see Note 5 of the consolidated financial statements). 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 FASB ASC 860 of a significant asset group within a reporting unit; and
-
- recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.
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Note 1. Summary of Significant Accounting Policies (Continued)
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 Company's 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, management's 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 Company's 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 management's annual impairment test (December 31, 2010 as of October 31, 2010) and the evaluation of the relevant inputs that form the basis for management's 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 for 2010, the "Fair Value" of one of the units was less than the carrying amount. Therefore, a second step test was required. As a result of the third party valuation analysis and the second step test, the Company determined that no goodwill impairment write-off was necessary for the twelve months ended December 31, 2010. The Company's 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
89
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1. Summary of Significant Accounting Policies (Continued)
Income Taxes:
The calculation of the provision for federal and state income taxes is complex and requires the use of estimates and judgments. In the Company's consolidated balance sheet, the Company maintains two accruals for income taxes: the Company's income tax payable represents the estimated amount currently due to the federal and state government and is reported as a component of other liabilities; the Company's deferred federal and state income tax asset or liability are reported as a component of other assets" and represent the estimated impact of temporary differences between how the Company recognizes its assets and liabilities under U.S. GAAP, and how such assets and liabilities are recognized under the federal and state tax codes.
Deferred federal and state taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred federal and state tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities in the financial statements and their tax basis. Deferred federal and state tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred federal and state tax assets and liabilities are adjusted through the provision for income taxes for the effects of changes in tax laws and rates on the date of enactment.
The effective tax rate is based in part on the Company's interpretation of the relevant current tax laws. The Company believes the aggregate liabilities related to taxes are appropriately reflected in the consolidated financial statements. The Company reviews the appropriate tax treatment of all transactions taking into consideration statutory, judicial, and regulatory guidance in the context of the Company's tax positions. In addition, the Company relies on various tax opinions, recent tax audits, and historical experience. The Company files a consolidated U.S. Federal income tax return. The Company and its subsidiaries file individual shares or corporate net income state tax returns dependent upon the requirements as set forth by the state of Pennsylvania.
From time to time, the Company engages in business transactions that may have an effect on its tax liabilities. Where appropriate, the Company obtains opinions of outside experts and has assessed the relative merits and risks of the appropriate tax treatment of business transactions taking into account statutory, judicial, and regulatory guidance in the context of the tax position. However, changes to the Company's estimates of accrued taxes can occur due to changes in tax rates, implementation of new business strategies, resolution of issues with taxing authorities regarding previously taken tax positions and newly enacted statutory, judicial, and regulatory guidance. Such changes could affect the amount of our accrued taxes and could be material to the Company's financial position and/or results of operations. (See Note 18 to the consolidated financial statements.)
Equity Method Investment:
On December 29, 2003, the Bank entered into a limited partner subscription agreement with Midland Corporate Tax Credit XVI Limited Partnership, where the Bank receives special tax credits and other tax benefits. The Bank subscribed to a 6.2% interest in the partnership, which is subject to an adjustment depending on the final size of the partnership at a purchase price of $5.0 million. This investment of $2.8 million and $3.2 million is recorded in other assets as of December 31, 2010 and 2009, respectively, and is not guaranteed; therefore, it is accounted for in accordance with FASB ASC 970, "Accounting for Investments in Real Estate Ventures" using the equity method.
90
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1. Summary of Significant Accounting Policies (Continued)
Segment Reporting:
The Bank acts as an independent community financial services provider which offers traditional banking and related financial services to individual, business and government customers. Through its branch and automated teller machine networks, the Bank offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and the providing of other financial services.
The Company's insurance, investment and mortgage banking operations are managed separately from the Bank. The mortgage banking operation offers residential lending products and generates revenue primarily through gains recognized on loan sales. VIST Insurance provides coverage for commercial, individual, surety bond, and group and personal benefit plans. VIST Capital Management provides services for individual financial planning, retirement and estate planning, investments, corporate and small business pension and retirement planning (See Note 23Segment and Related Information, for segment related information on mortgage banking, VIST Insurance and VIST Capital Management).
Marketing and Advertising:
Marketing and advertising costs are expensed as incurred.
Off-Balance Sheet Financial Instruments:
In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in the consolidated balance sheets when they become receivable or payable.
Derivative Financial Instruments:
The Company maintains an overall interest rate risk-management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. The Company's goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin is not, on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged assets and liabilities will appreciate or depreciate in market value. The effect of this unrealized appreciation or depreciation will generally be offset by income or loss on the derivative instruments that are linked to the hedged assets and liabilities. The Company views this strategy as a prudent management of interest rate sensitivity, such that earnings are not exposed to undue risk presented by changes in interest rates.
By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk exists to the extent of the fair value gain in a derivative. When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes the Company, and, therefore, creates a repayment risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it has no repayment risk. The Company minimizes the credit (or repayment) risk in the derivative instruments by entering into transactions with high quality counterparties.
91
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1. Summary of Significant Accounting Policies (Continued)
Market risk is the adverse effect that a change in interest rates, currency, or implied volatility rates has on the value of a financial instrument. The Company manages the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. The Company periodically measures this risk by using value-at-risk methodology.
During 2002, the Company entered into an interest rate swap to convert its fixed rate trust preferred securities to floating rate debt. Both the interest rate swap and the related debt are recorded on the balance sheet at fair value through adjustments to other expense. In 2010, a premium of $272,000 was paid to the Company resulting from a counterparty exercising a call option to terminate this interest rate swap, which was recognized in other income during the twelve months ended December 31, 2010.
During 2003, the Company also entered into an interest rate cap agreement to limit its exposure to the variable rate interest achieved through the interest rate swap. The interest rate cap was not designated as a cash flow hedge and thus, it is carried on the balance sheet in other assets at fair value through adjustments to interest expense. This interest rate cap matured in March 2010.
During 2008, the Company entered into two interest rate swaps to manage its exposure to interest rate risk. The interest rate swap transactions involved the exchange of the Company's floating rate interest rate payment on its $15.0 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.
In October of 2010, the Company purchased a three month LIBOR interest rate cap to create protection against rising interest rates. The notional amount of this interest rate cap was $5.0 million and the initial premium paid for the interest rate cap was $206,000. At December 31, 2010, the recorded value of the interest rate cap was $300,000. This interest rate cap is recorded on the balance sheet at fair value through adjustments to other income in the consolidated statements of operations.
Note 2. Earnings Per Common Share:
Basic earnings per common share is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per common share reflects the potential dilution that could occur if options to issue common stock were exercised. Potential common shares that may be issued related to outstanding stock options are determined using the treasury stock method. Stock options with exercise prices that exceed the average market price of the Company's common stock during the periods presented are excluded from the dilutive earrings per common share calculation. For the years ended December 31, 2010, 2009 and 2008, anti-dilutive common stock options totaled 579,270, 645,036 and 506,632, respectively.
92
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Earnings Per Common Share: (Continued)
The Company's calculation of earnings (loss) per common share for the years ended December 31, 2010, 2009, and 2008 is presented below:
|
Net Income (Loss) (numerator) |
Weighted Average Common Shares (denominator) |
Per Share Amount |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(In thousands except per share data) |
|||||||||
2010 |
||||||||||
Basic earnings per common share: |
||||||||||
Net income available to common shareholders |
$ | 2,306 | 6,275 | $ | 0.37 | |||||
Effect of dilutive stock options |
| 43 | | |||||||
Diluted earnings per share: |
||||||||||
Net income available to common shareholders plus assumed conversion |
$ | 2,306 | 6,318 | $ | 0.37 | |||||
2009 |
||||||||||
Basic loss per common share: |
||||||||||
Net loss available to common shareholders |
$ | (1,042 | ) | 5,781 | $ | (0.18 | ) | |||
Effect of dilutive stock options |
| | | |||||||
Diluted loss per common share: |
||||||||||
Net loss available to common shareholders plus assumed conversion |
$ | (1,042 | ) | 5,781 | $ | (0.18 | ) | |||
2008 |
||||||||||
Basic earnings per common share: |
||||||||||
Net income available to common shareholders |
$ | 565 | 5,689 | $ | 0.10 | |||||
Effect of dilutive stock options |
| 6 | | |||||||
Diluted earnings per common share: |
||||||||||
Net income available to common shareholders plus assumed conversion |
$ | 565 | 5,695 | $ | 0.10 | |||||
Note 3. 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.
93
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Comprehensive Income: (Continued)
The components of other comprehensive income (loss) for the years ended December 31, 2010, 2009 and 2008, were as follows:
|
Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2008 | ||||||||
|
(Dollar amounts in thousands) |
||||||||||
Net income |
$ | 3,984 | $ | 607 | $ | 565 | |||||
Other comprehensive income (loss): |
|||||||||||
Change in unrealized holding gains (losses) on available for sale securities |
895 | 3,679 | (17,409 | ) | |||||||
Change in non-credit impairment losses on available for sale securities |
139 | (769 | ) | | |||||||
Reclassification adjustment for credit related impairment on available for sale securities realized in income |
481 | 2,468 | | ||||||||
Change in non-credit impairment losses on held to maturity securities |
(1,004 | ) | | | |||||||
Reclassification adjustment for credit related impairment on held to maturity securities realized in income |
369 | | | ||||||||
Reclassification adjustment for investment (gains) losses realized in income |
(691 | ) | (344 | ) | 7,230 | ||||||
Net unrealized gains (losses) |
189 | 5,034 | (10,179 | ) | |||||||
Income tax effect |
(64 | ) | (1,712 | ) | 3,461 | ||||||
Other comprehensive income (loss) |
125 | 3,322 | (6,718 | ) | |||||||
Total comprehensive income (loss) |
$ | 4,109 | $ | 3,929 | $ | (6,153 | ) | ||||
Note 4. Recently Issued Accounting Standards:
In January 2010, the FASB has issued ASU 2010-06, "Fair Value Measurements and Disclosures (ASC Topic 820)Improving Disclosures about Fair Value Measurements". This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in ASC Subtopic 820-10. The FASB's objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU 2010-06 amends ASC Subtopic 820-10 to now require:
-
- A reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and
Level 2 fair value measurements and describe the reasons for the transfers; and
-
- In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements.
In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures:
-
- For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and
94
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Recently Issued Accounting Standards: (Continued)
-
- A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.
ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. The adoption of this new pronouncement did not have a material impact on the Company's consolidated financial statements.
In March 2010, the FASB issued ASU 2010-11 Derivatives and Hedging (Topic 815). This Update clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Only one form of embedded credit derivative qualifies for the exemptionone that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The amendments in this Update are effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. No significant impact was reported in the consolidated financial position or results of operations from the adoption of ASU 2010-11.
In April 2010, the FASB issued (ASU) 2010-15 Financial ServicesInsurance (Topic 944). This Update clarifies that an insurance entity should not consider any separate account interests held for the benefit of policy holders in an investment to be the insurer's interests and should not combine those interests with its general account interest in the same investment when assessing the investment for consolidation, unless the separate account interests are held for the benefit of a related party policy holder as defined in the Variable Interest Entities Subsections of Subtopic 810-10 and those Subsections require the consideration of related parties. This Update also amends Subtopic 944-80 to clarify that for the purpose of evaluating whether the retention of specialized accounting for investments in consolidation is appropriate, a separate account arrangement should be considered a subsidiary. The amendments do not require an insurer to consolidate an investment in which a separate account holds a controlling financial interest if the investment is not or would not be consolidated in the standalone financial statements of the separate account. The amendments also provide guidance on how an insurer should consolidate an investment fund in situations in which the insurer concludes that consolidation is required. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2010. Early adoption is permitted. The amendments in this Update should be applied retrospectively to all prior periods upon the date of adoption. No significant impact to amounts reported in the consolidated financial position or results of operations have resulted or are expected from the adoption of ASU 2010-15.
In July 2010, the FASB issued (ASU) 2010-20 Receivables (Topic 310) covering disclosures about the credit quality of financing receivables and the allowance for credit losses. This Update is intended to provide additional information and greater transparency to assist financial statement users in assessing an entity's credit risk exposures and evaluating the adequacy of its allowance for credit losses. The Update requires increased disclosures on the nature of the credit risk inherent in the entity's portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses and the changes and reasons for those changes in the allowance for credit losses. Entities will need to provide a rollforward schedule of the allowance for credit losses for the reporting period
95
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Recently Issued Accounting Standards: (Continued)
with ending balances further disaggregated on the basis of impairment methods, the related recorded investments in financing receivables, the nonaccrual status of financing receivables by class and the impaired financing receivables by class. The Update will also require additional disclosures on credit quality indicators of financing receivables, the aging of past due financing receivables by class, the nature and extent of troubled debt restructurings by class with their effect on the allowance for credit losses, the nature and extent of financing receivables modified as troubled debt restructurings by class for the past 12 months that defaulted during the reporting period and significant purchases and sales of financing receivables during the reporting period. The amendments in this Update are effective for public entities for interim and annual reporting periods ending on or after December 15, 2010. The amendments in this Update encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. No significant impact to amounts reported in the consolidated financial position or results of operations are expected from the adoption of ASU 2010-20.
In December 2010, the FASB issued (ASU) 2010-28 IntangiblesGoodwill and Other (Topic 350) covering when to perform step 2 of the Goodwill Impairment Test for reporting units with zero or negative carrying amounts. This Update is intended to modify step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts as these entities will be required to perform step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this Update are effective for all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing step 1 of the goodwill impairment test is zero or negative. For public entities, the amendments in this Update are effective for fiscal years and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. No significant impact to amounts reported in the consolidated financial position or results of operations are expected from the adoption of ASU 2010-28.
In December 2010, the FASB issued (ASU) 2010-29 Business Combinations (Topic 805) Disclosure of Supplementary Pro Forma Information for Business Combinations. This Update specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this Update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. No significant impact to amounts reported in the consolidated financial position or results of operations are expected from the adoption of ASU 2010-29.
In January 2011, the FASB issued (ASU) 2011-01 Receivables (Topic 310) Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. This Update temporarily delays the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. The amendments in this Update delay the effective date of the new disclosures about troubled debt restructurings for public entities and the coordination of the guidance for determining what constitutes a troubled debt restructuring until interim and annual periods ending after June 15, 2011. No significant impact to amounts reported in the consolidated financial position or results of operations are expected from the adoption of ASU 2011-01.
96
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5. Acquisitions Including Goodwill and Other Intangible Assets
Acquisitions
On September 1, 2008, the Company paid cash of $1.8 million for Fisher Benefits Consulting, an insurance agency specializing in group employee benefits, located in Pottstown, Pennsylvania. Fisher Benefits Consulting has become a part of VIST Insurance. As a result of the acquisition, VIST Insurance continues to expand its retail and commercial insurance presence in southeastern Pennsylvania counties. The results of Fisher Benefits Consulting operations have been included in the Company's consolidated financial statements since September 2, 2008. Included in the $1.8 million purchase price for Fisher Benefits Consulting was goodwill of $200,000 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 achieved. 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. A contingent payment of $250,000 was made in both 2009 and 2010 as predetermined revenue targets were achieved.
On April 30, 2010, VIST Insurance purchased a client list from KDN/Lanchester Corp for contingent payments estimated to be $231,000. Included in the purchase price was $78,000 and $152,000 of goodwill and intangible assets, respectively. The agreement between VIST Insurance and KDN/Lanchester Corp contains a purchase price consisting of a percentage of revenue for a three year period, after which all revenues generated from the use of the list will revert to VIST Insurance. As a result of this purchase, VIST Insurance expects to expand its retail and commercial presence in southeastern Pennsylvania.
On November 19, 2010, the Bank acquired certain assets and assumed certain liabilities of Allegiance Bank of North America ("Allegiance") from the FDIC, as Receiver of Allegiance. Allegiance operated five community banking branches within Chester and Philadelphia counties. The Bank's bid to purchase Allegiance included the purchase of certain Allegiance assets at a discount of $5.9 million and time deposits at a premium of $534,000, in exchange for assuming certain Allegiance deposits and certain other liabilities. Based on the terms of this transaction, the FDIC paid the Company $1.8 million ($2.0 million less a settlement of approximately $200,000). As a result of the Allegiance acquisition, the Company recorded $1.5 million of goodwill. No cash or other consideration was paid by the Bank. This acquisition provides the Company with a significant market extension of our core markets. The franchise expansion gives the Company a quick and profitable entry into Philadelphia and the surrounding areas of Bala Cynwyd, Berwyn, Old City and Worcester. All of the goodwill acquired has been allocated to the Company's Banking and Financial Services segment (For additional information on this acquisition, refer to Note 6FDIC-Assisted Acquisition).
Goodwill
The Company had goodwill and other intangible assets of $45.7 million at December 31, 2010, related to the acquisition of its banking, insurance and wealth management companies. The Company utilizes a third party valuation service to perform its goodwill impairment test both on an interim and annual basis. A fair value is determined for the banking and financial services, insurance services and investment services reporting units. If the fair value of the reporting business unit exceeds the book value, then no impairment write down of goodwill is necessary (a Step One evaluation). If the fair value is less than the book value, then an additional test (a Step Two evaluation) is necessary to assess
97
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5. Acquisitions Including Goodwill and Other Intangible Assets (Continued)
goodwill for potential impairment. As a result of the goodwill impairment valuation analysis, the Company determined that no goodwill impairment write-off for any of its reporting units was necessary for the year ended December 31, 2010, however a Step Two evaluation was necessary for the banking and financial services reporting unit.
Reporting unit valuation is inherently subjective, with a number of factors based on assumption and management judgments. Among these are future growth rates, discount rates and earnings capitalization rates. Changes in assumptions and results due to economic conditions, industry factors and reporting business unit performance could result in different assessments of the fair value and could result in impairment charges in the future.
Framework for Interim Impairment Analysis
The Company utilizes the following framework from FASB ASC 350 "IntangiblesGoodwill & Other" 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;
-
- recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.
Financing Transactions," of a significant asset group within a reporting unit; and
When applying the framework above, management additionally considers that a decline in the Company's market capitalization could reflect an event or change in circumstances that would more likely than not reduce the fair value of reporting business unit below its carrying value. However, in considering potential impairment of goodwill, management does not consider the fact that our market capitalization is less than the carrying value of our Company to be determinative that impairment exists. This is because there are factors, such as our small size and small market capitalization, which do not take into account important factors in evaluating the value of our Company and each reporting business unit, such as the benefits of control or synergies. Consequently, management's annual process for evaluating potential impairment of our goodwill (and evaluating subsequent interim period indicators of impairment) involves a detailed level analysis and incorporates a more granular view of each reporting business unit than aggregate market capitalization, as well as significant valuation inputs.
98
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5. Acquisitions Including Goodwill and Other Intangible Assets (Continued)
Annual and Interim Impairment Tests and Results
Management estimates fair value annually utilizing multiple methodologies which include discounted cash flows, comparable companies and comparable transactions. Each valuation technique requires management to make judgments about inputs and assumptions which form the basis for financial projections of future operating performance and the corresponding estimated cash flows. The analyses performed require the use of objective and subjective inputs which include market-price of non-distressed financial institutions, similar transaction multiples, and required rates of return. Management works closely in this process with third party valuation professionals, who assist in obtaining comparable market data and performing certain of the calculations, based on information provided and assumptions made by management.
FASB ASC 820 "Fair Value Measurements and Disclosures" defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell or transfer the asset or transfer the liability occurs in the principal market for the asset or liability, or in the absence of a principal market, the most advantageous market for the asset or liability. FASB ASC 820 further defines market participants as buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
FASB ASC 820 establishes a fair value hierarchy to prioritize the inputs used in valuation techniques:
- 1.
- Level 1
inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
- 2.
- Level 2
inputs are inputs other than quoted prices included in level 1 that are observable for the asset or liability through corroboration
with observable market data
- 3.
- Level 3 inputs are unobservable inputs, such as a company's own data
The Company will continue to monitor the interim indicators noted in FASB ASC 350 to evaluate whether an interim goodwill impairment test is required, given the occurrence of events or if circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, absent those events, the Company will perform its annual goodwill impairment evaluation during the fourth quarter of 2011.
Consideration of Market Capitalization in Light of the Results of Our Annual and Interim Goodwill Assessments
The Company's stock price, like the stock prices of many other financial services companies, is trading below both book value as well as tangible book value. We believe that the Company's current market value does not represent the fair value of the Company when taken as a whole and in consideration of other relevant factors. Because the Company is viewed by investors predominantly as a community bank, we believe our market capitalization is based on net tangible book value, reduced by nonperforming assets in excess of the allowance for loan losses. We believe that the market place ascribes effectively no value to the Company's fee-based reporting units, the assets of which are composed principally of goodwill and intangibles. Management believes that as a stand-alone business each of these reporting units has value which is not being incorporated in the market's valuation of the
99
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5. Acquisitions Including Goodwill and Other Intangible Assets (Continued)
Company reflected in the share price. Management also believes that if these reporting units were carved out of the Company and sold, they would command a sales price reflective of their current performance. Management further believes that if these reporting units were sold, the results of the sale would increase both the tangible book value (resulting from, among other things, the reduction in associated goodwill) and therefore market capitalization, given the market's current valuation approach described above.
Insurance services and investment services reporting units:
In performing step one of the goodwill impairment tests, it was necessary to determine the fair value of the insurance services and investment services reporting units. The fair value of these reporting units was estimated using a weighted average of both an income approach and a market approach. The income approach utilizes level 3 inputs and uses a dividend discount analysis, which calculates the present value of all excess cash flows plus the present value of a terminal value. This approach calculates cash flows based on financial results after a change of control transaction. The Market Approach utilizes level 2 inputs and is used to calculate the fair value of a company by examining pricing multiples in recent acquisitions of companies similar in size and performance to the company being valued.
Two key inputs to the income approach were our future cash flow projection and the discount rate. For the insurance services reporting unit, a 17.5% discount rate was applied, which was based on recently reported expected internal rates of return by market participants in the financial services industry as well as to account for the execution risk inherent in achieving the projections provided by the Company. For the investment services unit, a 15.0% to 25.0% discount rate range was applied which was representative of the required returns of investment of a market participant and the risk inherent in such an investment.
The table below presents the fair value, carrying amount, and goodwill associated with the insurance and investment services reporting units with respect to the annual goodwill impairment test completed as of October 31, 2010:
Results of Annual Goodwill Impairment Testing
Reporting Segment
|
Fair Value at 10/31/2010 |
Carrying Amount* at 10/31/2010 |
Goodwill at 10/31/2010 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Dollar amounts in thousands) |
|||||||||
VIST Insurance, LLC |
$ | 14,928 | $ | 13,352 | $ | 11,460 | ||||
VIST Capital Management |
1,687 | 1,359 | 1,021 | |||||||
|
$ | 16,615 | $ | 14,711 | $ | 12,481 | ||||
- *
- Includes Goodwill
The annual impairment assessment for our insurance services and investment services reporting units was completed in December 2010, with an effective date of October 31, 2010. The results of the impairment analysis indicated no goodwill impairment existed.
100
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5. Acquisitions Including Goodwill and Other Intangible Assets (Continued)
Banking and financial services unit:
In performing step one of the goodwill impairment test, it was necessary to determine the fair value of the banking and financial services reporting unit. The fair value of this reporting unit was estimated using a weighted average of a discounted dividend approach, a market ("selected transactions") approach, a change in control premium to parent market price approach, and a change in control premium to peer market price approach.
The table below presents the fair value, carrying amount, and goodwill associated with the banking and financial services reporting unit with respect to the annual goodwill impairment test completed as of December 31, 2010:
Results of Annual Goodwill Impairment Testing
Reporting Segment
|
Fair Value at 12/31/2010 | Carrying Amount* at 12/31/2010 | Goodwill at 12/31/2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Dollar amounts in thousands) |
|||||||||
VIST Bank |
$ | 104,409 | $ | 117,669 | $ | 29,316 | ||||
|
$ | 104,409 | $ | 117,669 | $ | 29,316 | ||||
- *
- Includes Goodwill
The annual impairment assessment for the banking and financial services reporting unit was completed in February 2011, with an effective date of December 31, 2010. Based on the results of the Step One goodwill impairment evaluation, the estimated fair value was less than the carrying value of this reporting unit and, therefore, in accordance with FASB ASC 350-20, a Step Two analysis was required to determine if there was goodwill impairment of the reporting unit.
A Step Two goodwill impairment evaluation was completed for the banking and financial services reporting unit. The Step Two evaluation consisted of the purchase price allocation method which, in determining the implied fair value of goodwill, the fair value of net assets (fair value of all assets other than goodwill, minus fair value of liabilities) is subtracted from the fair value of the reporting unit. Fair value estimates were made for all material balance sheet accounts to reflect the estimated fair value of the Company's unrecorded adjustments to assets and liabilities including: loans, investment securities, building, core deposit intangible, certificates of deposit and borrowings.
Based on the results of the Step Two goodwill impairment evaluation, the fair value of the banking and financial services reporting units was more than its carrying amount, resulting in no goodwill impairment. In summary, management believes that its goodwill associated with its reporting units was not impaired as of December 31, 2010.
101
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5. Acquisitions Including Goodwill and Other Intangible Assets (Continued)
The changes in the carrying amount of goodwill for the years ended December 31, 2010 and 2009 were as follows:
|
Banking and Financial Services | Insurance | Brokerage and Investment Services | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Dollar amounts in thousands) |
||||||||||||
Balance as of January 1, 2009 |
$ | 27,768 | $ | 10,943 | $ | 1,021 | $ | 39,732 | |||||
Contingent payments during 2009 |
| 250 | | 250 | |||||||||
Balance as of December 31, 2009 |
27,768 | 11,193 | 1,021 | 39,982 | |||||||||
Goodwill acquired during 2010 |
1,548 | 78 | | 1,626 | |||||||||
Contingent payments during 2010 |
| 250 | | 250 | |||||||||
Balance as of December 31, 2010 |
$ | 29,316 | $ | 11,521 | $ | 1,021 | $ | 41,858 | |||||
Other Intangible Assets
In accordance with the provisions of FASB ASC 350, the Company amortizes other intangible assets over the estimated remaining life of each respective asset. Amortizable intangible assets were composed of the following:
|
December 31, 2010 | December 31, 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
||||||||||
|
(Dollar amounts in thousands) |
|||||||||||||
Amortizable intangible assets: |
||||||||||||||
Purchase of client accounts (20 year weighted average useful life) |
$ | 4,957 | $ | 1,481 | $ | 4,805 | $ | 1,232 | ||||||
Employment contracts (7 year weighted average useful life) |
1,135 | 1,122 | 1,135 | 1,102 | ||||||||||
Assets under management (20 year weighted average useful life) |
184 | 77 | 184 | 68 | ||||||||||
Trade name (20 year weighted average useful life) |
196 | 196 | 196 | 196 | ||||||||||
Core deposit intangible (7 year weighted average useful life) |
1,852 | 1,653 | 1,852 | 1,388 | ||||||||||
Total |
$ | 8,324 | $ | 4,529 | $ | 8,172 | $ | 3,986 | ||||||
Aggregate Amortization Expense: |
||||||||||||||
For the year ended December 31, 2010 |
$ | 543 | ||||||||||||
For the year ended December 31, 2009 |
647 | |||||||||||||
For the year ended December 31, 2008 |
629 | |||||||||||||
Estimated Amortization Expense: |
||||||||||||||
For the year ending December 31, 2011 |
476 | |||||||||||||
For the year ending December 31, 2012 |
265 | |||||||||||||
For the year ending December 31, 2013 |
265 | |||||||||||||
For the year ending December 31, 2014 |
265 | |||||||||||||
For the year ending December 31, 2015 |
265 | |||||||||||||
Subsequent to 2015 |
2,259 |
102
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6. FDIC-Assisted Acquisition
On November 19, 2010, the Bank acquired certain assets and assumed certain liabilities of Allegiance Bank of North America ("Allegiance") from the FDIC, as Receiver of Allegiance. Allegiance operated five community banking branches within Chester and Philadelphia counties. The Bank's bid to purchase Allegiance included the purchase of certain Allegiance assets at a discount of $5.9 million and time deposits at a premium of $534,000, in exchange for assuming certain Allegiance deposits and certain other liabilities. Based on the terms of this transaction, the FDIC paid the Company $1.8 million ($2.0 million less a settlement of approximately $200,000), resulting in $1.5 million of goodwill. No cash or other consideration was paid by the Bank. The Bank and the FDIC entered into loss sharing agreements regarding future losses incurred on loans and other real estate acquired through foreclosure existing at the acquisition date. Under the terms of the loss sharing agreements, the FDIC will reimburse the Bank for 70 percent of net losses on covered assets incurred up to $12.0 million, and 80 percent of net losses exceeding $12.0 million. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is five years in respect to losses and eight years in respect to loss recoveries. As a result of the loss sharing agreements with the FDIC, the Bank recorded an indemnification asset of $7.0 million at the time of acquisition (for additional information, refer to "FDIC Indemnification Asset" on page 86. As of December 31, 2010, the Company has not submitted any cumulative net losses for reimbursement to the FDIC under the loss-sharing agreements. The loss sharing agreements include clawback provisions should losses not meet the specified thresholds and other conditions not be met. Based on the current estimate of principal loss, the Company would not be subject to a clawback indemnification and no liability for this arrangement has been recognized in the consolidated financial statements.
The acquisition of Allegiance was accounted for under the acquisition method of accounting. A summary of net assets acquired and liabilities assumed is presented in the following table. The purchased assets and assumed liabilities were recorded at the acquisition date fair value. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values become available.
|
As of November 19, 2010 |
||||
---|---|---|---|---|---|
|
(in thousands) |
||||
Assets |
|||||
Cash and due from banks |
$ | 16,283 | |||
Securities |
7,221 | ||||
FHLB stock |
1,666 | ||||
Covered loans, net of unearned income |
68,696 | ||||
Covered other real estate owned |
358 | ||||
Goodwill |
1,548 | ||||
FDIC Indemnification Asset |
6,999 | ||||
Other assets |
1,839 | ||||
Total assets acquired |
$ | 104,610 | |||
Liabilities |
|||||
Deposits |
93,797 | ||||
FHLB advances |
13,161 | ||||
Other liabilities |
(326 | ) | |||
Total liabilities assumed |
$ | 106,632 | |||
Cash received on acquisition |
$ | 2,022 |
103
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6. FDIC-Assisted Acquisition (Continued)
Results of operations for Allegiance prior to the acquisition date are not included in the consolidated statements of operations for the year ended December 31, 2010. Due to the significant amount of fair value adjustments, the resulting accretion of those fair value adjustments and the protection resulting from the FDIC loss sharing agreements, historical results of Allegiance are not relevant to the Company's results of operations. Therefore, no pro forma information is presented.
U.S. GAAP prohibits carrying over an allowance for loan losses for impaired loans purchased in the Allegiance FDIC-assisted acquisition. On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired in the Allegiance acquisition was $41.5 million and the estimated fair value of the loans was $30.3 million. Total contractually required payments on these loans, including interest, at the acquisition date was $46.8 million. However, the Company's preliminary estimate of expected cash flows was $36.4 million. At such date, the Company established a credit risk related non-accretable discount (a discount representing amounts which are not expected to be collected from the customer nor liquidation of collateral) of $10.3 million relating to these impaired loans, reflected in the recorded net fair value. Such amount is reflected as a non-accretable fair value adjustment to loans and a portion is also reflected in a receivable from the FDIC. The Bank further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount of $6.1 million on the acquisition date relating to these impaired loans.
The carrying value of covered loans acquired and accounted for in accordance with ASC Subtopic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality," was determined by projecting contractual cash flows discounted at risk-adjusted interest rates. The table below presents the components of the purchase accounting adjustments related to the purchased impaired loans acquired in the Allegiance acquisition:
|
As of November 19, 2010 |
|||
---|---|---|---|---|
Unpaid principal balance |
$ | 41,459 | ||
Interest |
5,321 | |||
Contractual cash flows |
46,780 | |||
Non-accretable discount |
(10,346 | ) | ||
Expected cash flows |
36,434 | |||
Accretable difference |
(6,104 | ) | ||
Estimated fair value |
$ | 30,330 | ||
On the acquisition date, the preliminary estimate of the unpaid principal balance for all other loans acquired in the acquisition was $39.2 million and the estimated fair value of these loans was $38.4 million. The difference between unpaid principal balance and fair value of these loans which will be recognized in income on a level yield basis over the life of the loans, representing periods up to sixty months.
At the time of acquisition, the Company also recorded a net FDIC Indemnification Asset of $7.0 million representing the present value of the FDIC's indemnification obligations under the loss sharing agreements for covered loans and other real estate. Such indemnification asset has been discounted by $465,000 for the expected timing of receipt of these cash flows.
104
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. Restrictions on Cash and Due from Banks
The Federal Reserve Bank requires the Bank to maintain average reserve balances. For the year 2010 and 2009, the average of the daily reserve balances required to be maintained approximated $3.3 million and $4.5 million, respectively.
Note 8. Securities Available For Sale and Securities Held to Maturity
The amortized cost and estimated fair values of securities available for sale and securities held to maturity were as follows at December 31, 2010 and 2009:
|
December 31, 2010 | December 31, 2009 | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Securities Available For Sale |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||||||||
|
(Dollar amounts in thousands) |
|||||||||||||||||||||||||
U.S. Government agency securities |
$ | 11,648 | $ | 366 | $ | (224 | ) | $ | 11,790 | $ | 23,087 | $ | 160 | $ | (350 | ) | $ | 22,897 | ||||||||
Agency residential mortgage-backed debt securities |
216,956 | 6,220 | (811 | ) | 222,365 | 183,104 | 5,518 | (719 | ) | 187,903 | ||||||||||||||||
Non-Agency collateralized mortgage obligations |
13,663 | | (3,648 | ) | 10,015 | 22,970 | 115 | (5,255 | ) | 17,830 | ||||||||||||||||
Obligations of states and political subdivisions |
33,141 | 18 | (2,252 | ) | 30,907 | 33,436 | 450 | (246 | ) | 33,640 | ||||||||||||||||
Trust preferred securitiessingle issuer |
500 | 1 | | 501 | 500 | | (80 | ) | 420 | |||||||||||||||||
Trust preferred securitiespooled |
5,396 | | (4,912 | ) | 484 | 5,957 | 13 | (5,474 | ) | 496 | ||||||||||||||||
Corporate and other debt securities |
1,117 | | (69 | ) | 1,048 | 2,444 | 1 | (107 | ) | 2,338 | ||||||||||||||||
Equity securities |
3,345 | 30 | (730 | ) | 2,645 | 3,368 | 13 | (875 | ) | 2,506 | ||||||||||||||||
Total investment securities available for sale |
$ | 285,766 | $ | 6,635 | $ | (12,646 | ) | $ | 279,755 | $ | 274,866 | $ | 6,270 | $ | (13,106 | ) | $ | 268,030 | ||||||||
|
December 31, 2010 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Securities Held To Maturity
|
Amortized Cost |
Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Loss |
Carrying Value |
Gross Unrealized Holding Gains |
Gross Unrealized Holding Losses |
Fair Value |
||||||||||||||
|
(Dollar amounts in thousands) |
|||||||||||||||||||
Trust preferred securitiessingle issuer |
$ | 2,007 | $ | | $ | 2,007 | $ | 26 | $ | (160 | ) | $ | 1,873 | |||||||
Trust preferred securitiespooled |
650 | (635 | ) | 15 | | | 15 | |||||||||||||
Total investment securities held to maturity |
$ | 2,657 | $ | (635 | ) | $ | 2,022 | $ | 26 | $ | (160 | ) | $ | 1,888 | ||||||
105
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Securities Available For Sale and Securities Held to Maturity (Continued)
|
December 31, 2009 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized Cost |
Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Loss |
Carrying Value |
Gross Unrealized Holding Gains |
Gross Unrealized Holding Losses |
Fair Value |
||||||||||||||
|
(Dollar amounts in thousands) |
|||||||||||||||||||
Trust preferred securitiessingle issuer |
$ | 2,012 | $ | | $ | 2,012 | $ | 5 | $ | (257 | ) | $ | 1,760 | |||||||
Trust preferred securitiespooled |
1,023 | | 1,023 | | (926 | ) | 97 | |||||||||||||
Total investment securities held to maturity |
$ | 3,035 | $ | | $ | 3,035 | $ | 5 | $ | (1,183 | ) | $ | 1,857 | |||||||
The age of unrealized losses and fair value of related investment securities available for sale and investment securities held to maturity at December 31, 2010 and December 31, 2009 were as follows:
|
December 31, 2010 | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Less than Twelve Months | More than Twelve Months | Total | ||||||||||||||||||||||||||
Securities Available for Sale |
Fair Value |
Unrealized Losses |
Number of Securities |
Fair Value |
Unrealized Losses |
Number of Securities |
Fair Value |
Unrealized Losses |
Number of Securities |
||||||||||||||||||||
|
(Dollar amounts in thousands) |
||||||||||||||||||||||||||||
U.S. Government agency securities |
$ | 4,244 | $ | (224 | ) | 3 | $ | | $ | | | $ | 4,244 | $ | (224 | ) | 3 | ||||||||||||
Agency residential mortgage-backed debt securities |
43,774 | (811 | ) | 21 | | | | 43,774 | (811 | ) | 21 | ||||||||||||||||||
Non-Agency collateralized mortgage obligations |
1,510 | (6 | ) | 1 | 7,450 | (3,642 | ) | 8 | 8,960 | (3,648 | ) | 9 | |||||||||||||||||
Obligations of states and political subdivisions |
27,200 | (2,130 | ) | 31 | 965 | (122 | ) | 2 | 28,165 | (2,252 | ) | 33 | |||||||||||||||||
Trust preferred securitiespooled |
| | | 484 | (4,912 | ) | 8 | 484 | (4,912 | ) | 8 | ||||||||||||||||||
Corporate and other debt securities |
934 | (66 | ) | 1 | 114 | (3 | ) | 1 | 1,048 | (69 | ) | 2 | |||||||||||||||||
Equity securities |
989 | (11 | ) | 1 | 1,031 | (719 | ) | 22 | 2,020 | (730 | ) | 23 | |||||||||||||||||
Total investment securities available for sale |
$ | 78,651 | $ | (3,248 | ) | 58 | $ | 10,044 | $ | (9,398 | ) | 41 | $ | 88,695 | $ | (12,646 | ) | 99 | |||||||||||
106
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Securities Available For Sale and Securities Held to Maturity (Continued)
|
December 31, 2010 | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Less than Twelve Months | More than Twelve Months | Total | ||||||||||||||||||||||||||
Securities Held To Maturity
|
Fair Value |
Unrealized Losses |
Number of Securities |
Fair Value |
Unrealized Losses |
Number of Securities |
Fair Value |
Unrealized Losses |
Number of Securities |
||||||||||||||||||||
|
(Dollar amounts in thousands) |
||||||||||||||||||||||||||||
Trust preferred securitiessingle issuer |
$ | 870 | $ | (160 | ) | 1 | $ | | $ | | | $ | 870 | $ | (160 | ) | 1 | ||||||||||||
Trust preferred securitiespooled |
| | | 15 | (635 | ) | | 15 | (635 | ) | 1 | ||||||||||||||||||
Total investment securities held to maturity |
$ | 870 | $ | (160 | ) | $ | 1 | $ | 15 | $ | (635 | ) | $ | | $ | 885 | $ | (795 | ) | $ | 2 | ||||||||
|
December 31, 2009 | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Less than Twelve Months | More than Twelve Months | Total | ||||||||||||||||||||||||||
Securities Available for Sale |
Fair Value |
Unrealized Losses |
Number of Securities |
Fair Value |
Unrealized Losses |
Number of Securities |
Fair Value |
Unrealized Losses |
Number of Securities |
||||||||||||||||||||
|
(Dollar amounts in thousands) |
||||||||||||||||||||||||||||
U.S. Government agency securities |
$ | 16,115 | $ | (350 | ) | 9 | $ | | $ | | | $ | 16,115 | $ | (350 | ) | 9 | ||||||||||||
Agency residential mortgage-backed debt securities |
32,690 | (719 | ) | 12 | | | | 32,690 | (719 | ) | 12 | ||||||||||||||||||
Non-Agency collateralized mortgage obligations |
3,468 | (368 | ) | 2 | 8,524 | (4,887 | ) | 8 | 11,992 | (5,255 | ) | 10 | |||||||||||||||||
Obligations of states and political subdivisions |
11,907 | (246 | ) | 16 | | | | 11,907 | (246 | ) | 16 | ||||||||||||||||||
Trust preferred securitiessingle issue |
| | | 420 | (80 | ) | 1 | 420 | (80 | ) | 1 | ||||||||||||||||||
Trust preferred securitiespooled |
| | | 482 | (5,474 | ) | 8 | 482 | (5,474 | ) | 8 | ||||||||||||||||||
Corporate and other debt securities |
138 | (31 | ) | 1 | 924 | (76 | ) | 1 | 1,062 | (107 | ) | 2 | |||||||||||||||||
Equity securities |
1,041 | (24 | ) | 2 | 687 | (851 | ) | 22 | 1,728 | (875 | ) | 24 | |||||||||||||||||
Total investment securities available for sale |
$ | 65,359 | $ | (1,738 | ) | 42 | $ | 11,037 | $ | (11,368 | ) | 40 | $ | 76,396 | $ | (13,106 | ) | 82 | |||||||||||
107
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Securities Available For Sale and Securities Held to Maturity (Continued)
|
December 31, 2009 | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Less than Twelve Months | More than Twelve Months | Total | ||||||||||||||||||||||||||
Securities Held To Maturity
|
Fair Value |
Unrealized Losses |
Number of Securities |
Fair Value |
Unrealized Losses |
Number of Securities |
Fair Value |
Unrealized Losses |
Number of Securities |
||||||||||||||||||||
|
(Dollar amounts in thousands) |
||||||||||||||||||||||||||||
Trust preferred securitiessingle issue |
$ | | $ | | | $ | 720 | $ | (257 | ) | 1 | $ | 720 | $ | (257 | ) | 1 | ||||||||||||
Trust preferred securitiespooled |
| | | 97 | (926 | ) | 1 | 97 | (926 | ) | 1 | ||||||||||||||||||
Total investment securities held to maturity |
$ | | $ | | | $ | 817 | $ | (1,183 | ) | 2 | $ | 817 | $ | (1,183 | ) | 2 | ||||||||||||
At December 31, 2010, there were 59 securities with unrealized losses in the less than twelve month category and 42 securities with unrealized losses in the twelve month or more category.
Management evaluates investment securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Factors that may be indicative of impairment include, but are not limited to, the following:
-
- Fair value below cost and the length of time
-
- Adverse condition specific to a particular investment
-
- Rating agency activities (e.g., downgrade)
-
- 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 security's 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
108
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Securities Available For Sale and Securities Held to Maturity (Continued)
total other-than-temporary impairment related to credit loss is recognized in earnings (as the difference between the fair value and the present value of the estimated cash flows), while the amount related to other factors is recognized in other comprehensive income. The total other-than-temporary impairment loss is presented in the statement of operations, less the portion recognized in other comprehensive income. When a debt security becomes other-than-temporarily impaired, its amortized cost basis is reduced to reflect the portion of the total impairment related to credit loss.
If a decline in market value of a security is determined to be other than temporary, under generally accepted accounting principles, we are required to write these securities down to their estimated fair value. As of December 31, 2010, we owned single issuer and pooled trust preferred securities of other financial institutions, private label collateralized mortgage obligations and equity securities whose aggregate historical cost basis is greater than their estimated fair value (see table above). We reviewed all investment securities and have identified those securities that are other-than-temporarily impaired. The losses associated with these other-than-temporarily impaired securities have been bifurcated into the portion of non-credit impairment losses recognized in other comprehensive loss and into the portion of credit impairment losses recorded in earnings (see Note 3 to the consolidated financial statements). We perform an ongoing analysis of all investment securities utilizing both readily available market data and third party analytical models. Future changes in interest rates or the credit quality and strength of the underlying issuers may reduce the market value of these and other securities. If such decline is determined to be other than temporary, we will write them down through a charge to earnings to their then current fair value.
A. Obligations of U. S. Government Agencies and Corporations. The net unrealized losses on the Company's investments in obligations of U.S. Government agencies were caused by changing credit spreads in the market as a result of current monetary policy and fluctuating interest rates. At December 31, 2010, the fair value of the U. S. Government agencies and corporations bonds represented 4.2% of the total fair value of the available for sale securities held in the investment securities portfolio. The contractual cash flows are guaranteed by an agency of the U.S. Government. Because the Company has no intention to sell these securities, nor is it more likely than not that the Company will be required to sell these securities, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2010. Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.
B. Mortgage-Backed Debt Securities. The net unrealized losses on the Company's investments in federal agency residential mortgage-backed securities and corporate (non-agency) collateralized mortgage obligations ("CMO") were primarily caused by changing credit and pricing spreads in the market and fluctuating interest rates. At December 31, 2010, federal agency residential mortgage-backed securities and collateralized mortgage obligations represented 79.5% of the total fair value of available for sale securities held in the investment securities portfolio and corporate (non-agency) collateralized mortgage obligations represented 3.6% of the total fair value of available for sale securities held in the investment securities portfolio. The Company purchased those securities at a price relative to the market at the time of the purchase. The contractual cash flows of those federal agency residential mortgage-backed securities are guaranteed by the U.S. Government. Because the decline in the market value of agency residential mortgage-backed debt securities is primarily attributable to changes in market pricing since the time of purchase and not credit quality, and because the Company has no intention to sell these securities, nor is it more likely than not that the Company will be required to sell these securities, the Company does not consider those investments to be
109
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Securities Available For Sale and Securities Held to Maturity (Continued)
other-than-temporarily impaired at December 31, 2010. Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.
As of December 31, 2010, the Company owned 9 corporate (non-agency) collateralized mortgage obligations in super senior or senior tranches of which 8 corporate (non-agency) collateralized mortgage obligations aggregate historical cost basis is greater than estimated fair value. At December 31, 2010, 1 non-agency CMO with an amortized cost basis of $1.5 million was collateralized by commercial real estate and 8 non-agency CMO's with an amortized cost basis of $12.2 million were collateralized by residential real estate. The Company uses a two step modeling approach to analyze each non-agency CMO issue to determine whether or not the current unrealized losses are due to credit impairment and therefore other-than-temporarily impaired. Step one in the modeling process applies default and severity vectors to each security based on current credit data detailing delinquency, bankruptcy, foreclosure and real estate owned (REO) performance. The results of the vector analysis are compared to the security's current credit support coverage to determine if the security has adequate collateral support. If the security's 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. Management's 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 December 31, 2010, no CMO qualified for the step two modeling approach. Because of the results of the modeling process and because the Company has no intention to sell these securities, nor is it more likely than not that the Company will be required to sell these securities, the Company does not consider these CMO investments to be other-than-temporarily impaired at December 31, 2010. Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.
C. State and Municipal Obligations. The net unrealized losses on the Company's investments in state and municipal obligations were primarily caused by changing credit spreads in the market as a result of current monetary policy and fluctuating interest rates. At December 31, 2010, state and municipal obligation bonds represented 11.1% 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 Company's 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 December 31, 2010. Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.
D. Corporate and Other Debt Securities and Trust Preferred Securities. Included in corporate and other debt securities available for sale at December 31, 2010, was 1 asset-backed security and 1 corporate debt issues representing 0.4% of the total fair value of available for sale securities. The net unrealized losses on other debt securities relate primarily to changing pricing due to the ongoing economic downturn 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
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Note 8. Securities Available For Sale and Securities Held to Maturity (Continued)
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 December 31, 2010.
Included in trust preferred securities were single issue, trust preferred securities ("TRUPS" or "CDO") representing 0.2% and 99.2% of the total fair value of available for sale securities and the total held to maturity securities, respectively, and pooled TRUPS representing 0.2% and 0.8% of the total fair value of available for sale securities and the total held to maturity securities, respectively.
As of December 31, 2010, the Company owned 3 single issuer TRUPS and 8 pooled TRUPS of other financial institutions. At December 31, 2010, the historical cost basis of 1 single issuer TRUPS and 8 pooled TRUPS was greater than each security's estimated fair value. Investments in TRUPs included (a) amortized cost of $2.5 million of single issuer TRUPS of other financial institutions with a fair value of $2.4 million and (b) amortized cost of $6.0 million of pooled TRUPS of other financial institutions with a fair value of $499,000. The issuers in these securities are primarily banks, but some of the pools do include a limited number of insurance companies. The Company has evaluated these securities and determined that the decreases in estimated fair value are temporary with the exception of five pooled TRUPS which were other than temporarily impaired at December 31, 2010. For the three months ended December 31, 2010, the Company recognized a subsequent net credit impairment charge to earnings of $79,000 on 2 available for sale pooled TRUPS. For the twelve months ended December 31, 2010, the Company recognized a subsequent net credit impairment charge to earnings of $480,000 on 4 available for sale pooled TRUPS. Also for the twelve months ended December 31, 2010, the Company recognized an initial net credit impairment charge to earnings and a subsequent net credit impairment charge to earnings of $82,000 and $288,000, respectively, on 1 held to maturity pooled TRUPS. The total net credit impairment charge to earnings for the three and twelve months ended December 31, 2010 was $79,000 and $850,000, respectively, as the Company's estimate of projected cash flows it expected to receive for these TRUPs was less than the security's carrying value. For the three months ended December 31, 2010, the OTTI losses recognized on available for sale pooled trust preferred securities resulted primarily from continuing collateral default and deferrals as a result of current economic conditions affecting the financial services industry. For the twelve months ended December 31, 2010, the OTTI losses recognized on available for sale and held to maturity pooled trust preferred securities resulted primarily from changes in the underlying cash flow assumptions used in determining credit losses due to the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As of December 31, 2010, no OTTI charges were recorded on any of the single issuer TRUPs.
The Company performs an ongoing analysis of these securities utilizing both readily available market data and third party analytical models. Future changes in interest rates or the credit quality and strength of the underlying issuers may reduce the market value of these and other securities. If such decline is determined to be other than temporary, the Company will record the necessary charge to earnings and/or AOCI to reduce the securities to their then current fair value.
For pooled TRUPS, on a quarterly basis, the Company uses a third party model ("model") to assist in calculating the present value of current estimated cash flows to the previous estimate to ensure there are no adverse changes in cash flows. The model's valuation methodology is based on the premise that the fair value of a CDO's collateral should approximate the fair value of its liabilities. Conceptually, this premise is supported by the notion that cash generated by the collateral flows
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Note 8. Securities Available For Sale and Securities Held to Maturity (Continued)
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 model's 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 model's 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 Moody's 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 TRUP's pools will be acquired and recapitalized over the next 3 to 4 years. As a result of the recent passage of the Dodd-Frank ("Dodd-Frank") Wall Street Reform and Consumer Protection Act, prepayment assumptions for certain individual issuers within each TRUPS pool were modified. The Dodd-Frank bill contains a provision that eliminates the Tier 1 capital treatment of TRUP's for banks with total assets greater than $15 billion beginning in the first half of 2013. The model assumes that these larger banks would begin to call and prepay their TRUP's during this timeframe. In addition, the model assumes that certain individual issuers that are both profitable and well capitalized and currently paying fixed rates greater than 9% or floating rate with spreads greater than 325bps will begin to call
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Note 8. Securities Available For Sale and Securities Held to Maturity (Continued)
and prepay their TRUP's in the middle of 2011. Beyond the middle of 2011, the model assumes a 5% prepayment every 5 years going forward. Thereafter, the model assumes no further prepayments.
Auction Calls
Auction calls are a structural feature designed to create a 10-year expected life for secured by 30-year TRUPS collateral. Auction call provisions mandate that at the end of the tenth year of a deal, the Trustee submit the collateral to auction at a minimum price sufficient to retire the deal's 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 security's net revenue, the model adjusts projected gross cash flows by an estimate of net hedge payments based on the terms of the deal's 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 security's 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 market's required rate of return for its cash flows. Identifying the market's 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 model's solution to this problem was to rely on market value equivalence to derive the fair value of the Notes based on the model's 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 model's cash flow projections. Therefore, so as not to double-count incremental default risk when discounting these cash flows to fair value, the model produces a purchased yield discount rate for the each pool that reflects the pools credit rating at origination.
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VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Securities Available For Sale and Securities Held to Maturity (Continued)
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 model's estimate of the market's 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 bond's subordination is reduced or eliminated, increasing its default risk and reducing its market value. To account for this increased risk, the model reduces the subordination of each tranche by incremental defaults that projected to occur over the next two years, and then re-calibrates the market discount rate for each tranche based on the remaining subordination.
The final step in our valuation was to discount the cash flows that the model projects for each tranche by their respective market required rates of return. To confirm that the model's 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:
|
December 31, 2010 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized Cost |
Fair Value |
Gross Unrealized Gain/(Losses) |
Number of Securities |
|||||||||||
|
(in thousands) |
||||||||||||||
Investment grades: |
|||||||||||||||
BBB rated |
$ | 977 | $ | 1,003 | $ | 26 | 1 | ||||||||
Not rated |
500 | 501 | 1 | 1 | |||||||||||
Not rated |
1,030 | 870 | (160 | ) | 1 | ||||||||||
Total |
$ | 2,507 | $ | 2,374 | $ | (133 | ) | $ | 3 | ||||||
There were no interest deferrals or defaults in any of the single issuer trust preferred securities in our investment portfolio as of December 31, 2010.
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VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Securities Available For Sale and Securities Held to Maturity (Continued)
The following table provides additional information related to our pooled trust preferred securities as of December 31, 2010:
Deal
|
Class | Amortized Cost |
Fair Value |
Unrealzied Gain/Loss |
Lowest Credit Rating |
# of Performing Issuers |
Actual Deferral |
Expected Deferral |
Current Outstanding Collateral Balance |
Current Tranche Subordination |
Actual Defaults/ Deferrals as a % of Outstanding Collateral |
Expected Defaults/ Deferrals as a % of Remaining Collateral |
Excess Subordination as a % of Current Performing Collateral |
|||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Dollar amounts in thousands) |
|||||||||||||||||||||||||||||||||||||
Pooled trust preferred available for sale securities for which an other-than-temporary inpairment charge has been recognized: |
||||||||||||||||||||||||||||||||||||||
Holding #2 |
Class B-2 |
$ | 656 | $ | 32 | $ | (624 | ) | Caa3 (Moody's) | 17 | $ | 116,250 | $ | 10,000 | $ | 242,750 | $ | 33,000 | 47.9 | % | 7.9 | % | 0.0 | % | ||||||||||||||
Holding #3 |
Class B |
595 | 178 | (417 | ) | Caa3 (Moody's) | 18 | 147,100 | 10,000 | 345,500 | 62,650 | 42.6 | % | 5.0 | % | 0.0 | % | |||||||||||||||||||||
Holding #4 |
Class B-2 |
1,001 | 32 | (969 | ) | Ca (Moody's) | 22 | 109,750 | | 280,000 | 38,500 | 39.2 | % | 0.0 | % | 0.0 | % | |||||||||||||||||||||
Holding #5 |
Class B-3 |
345 | 15 | (330 | ) | Ca (Moody's) | 49 | 178,780 | 10,000 | 588,745 | 53,600 | 30.4 | % | 2.4 | % | 0.0 | % | |||||||||||||||||||||
|
Total |
$ | 2,597 | $ | 257 | $ | (2,340 | ) | ||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||
Holding #9 |
Mezzanine |
650 | 15 | (635 | ) | Caa1 (Moody's) | 22 | 94,000 | 5,000 | 259,500 | 20,289 | 36.2 | % | 3.0 | % | 0.0 | % | |||||||||||||||||||||
|
Total |
$ | 650 | $ | 15 | $ | (635 | ) | ||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||
Holding #6 |
Class B-1 |
1,300 | 163 | (1,137 | ) | CCC- (S&P) | 15 | $ | 17,500 | $ | | $ | 193,500 | $ | 108,700 | 9.0 | % | 0.0 | % | 18.2 | % | |||||||||||||||||
Holding #7 |
Class C |
1,003 | 20 | (983 | ) | CCC- (S&P) | 28 | 36,000 | 10,000 | 310,750 | 31,704 | 11.6 | % | 3.6 | % | 4.4 | % | |||||||||||||||||||||
Holding #8 |
Senior Subordinate |
496 | 44 | (452 | ) | Baa2 (Moody's) | 5 | 34,000 | | 116,000 | 81,000 | 29.3 | % | 0.0 | % | 12.5 | % | |||||||||||||||||||||
|
Total |
$ | 2,799 | $ | 227 | $ | (2,572 | ) | ||||||||||||||||||||||||||||||
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 December 31, 2010, were equity investments in 25 financial services companies. The Company owns 1 qualifying Community Reinvestment Act ("CRA") equity investment with an amortized cost and fair value of approximately $1.0 million and $989,000, respectively. The remaining 25 equity securities have an average amortized cost of approximately $94,000 and an average fair value of approximately $66,000. Testing for other-than-temporary-impairment for equity securities is governed by FASB ASC 320-10 issued in April 2009. While equity securities with a fair value of $1.0 million have been below amortized cost for a period of more than twelve months, the Company believes the decline in market value of the equity investment in financial services companies is primarily attributable to changes in market pricing and not fundamental changes in the earning potential of the individual companies. For the twelve months ended December 31, 2010 and 2009, respectively, the Company did not recognize any net credit impairment charges to earnings. The Company has the intent and ability to retain its investment in its equity securities for a period of time sufficient to allow for any anticipated recovery in market value. The Company does not consider its equity securities to be other-than-temporarily-impaired as December 31, 2010.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Securities Available For Sale and Securities Held to Maturity (Continued)
As of December 31, 2010, the fair value of all securities available for sale that were pledged to secure public deposits, repurchase agreements, and for other purposes required by law, was $226.9 million.
The contractual maturities of investment securities at December 31, 2010, 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.
|
At December 31, 2010 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Available for Sale | Held to Maturity | |||||||||||
|
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
|||||||||
|
(in thousands) |
||||||||||||
Due in one year or less |
$ | | $ | | $ | | $ | | |||||
Due after one year through five years |
| | | | |||||||||
Due after five years through ten years |
4,864 | 4,949 | | | |||||||||
Due after ten years |
46,938 | 39,781 | 2,657 | 1,888 | |||||||||
Agency residential mortgage-backed debt securities |
216,956 | 222,365 | | | |||||||||
Non-agency collateralized mortgage obligations |
13,663 | 10,015 | | | |||||||||
Equity securities |
3,345 | 2,645 | | | |||||||||
|
$ | 285,766 | $ | 279,755 | $ | 2,657 | $ | 1,888 | |||||
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 years ended December 31, 2010 and 2009:
|
Year ended December 31, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | ||||||
|
(in thousands) |
|||||||
Gross gains |
$ | 827 | $ | 556 | ||||
Gross losses |
(136 | ) | (212 | ) | ||||
Net realized gains on sales of securities |
$ | 691 | $ | 344 | ||||
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Securities Available For Sale and Securities Held to Maturity (Continued)
See Note 3 to the consolidated financial statements for unrealized holding losses on available for sale securities and held to maturity securities for the periods reported.
Other-than-temporary impairment recognized in earnings for credit impaired debt securities is presented as additions in two components based upon whether the current period is the first time the debt security was credit impaired (initial credit impairment) or is not the first time the debt security was credit impaired (subsequent credit impairments). The credit loss component is reduced if the Company sells, intends to sell or believes it will be required to sell previously credit impaired debt securities. Additionally, the credit loss component is reduced if (i) the Company receives the cash flows in excess of what it expected to receive over the remaining life of the credit impaired debt security, (ii) the security matures or (iii) the security is fully written down.
Changes in the credit loss component of credit impaired debt and equity securities were:
|
Year ended Decmber 31, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | ||||||
|
(in thousands) |
|||||||
Balance, beginning of period |
$ | 2,468 | $ | | ||||
Additions: |
||||||||
Subsequent credit impairments |
850 | 2,468 | ||||||
Reductions: |
||||||||
Fully written down credit impaired debt and equity securities |
(1,062 | ) | | |||||
Balance, end of period |
$ | 2,256 | $ | 2,468 | ||||
Note 9. Loans and Related Allowance for Credit Losses
Covered loans acquired from Allegiance are shown as a separate line item on the consolidated balance sheet and are not included in the consolidated net loan totals. Covered loans are excluded from the analysis of the allowance for loan loss, as they are accounted for separately per U.S. GAAP requirements. Accordingly, no allowance for loan losses related to the acquired loans was recorded on
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9. Loans and Related Allowance for Credit Losses (Continued)
the acquisition date as the fair value of the loans acquired incorporate assumptions regarding credit risk. The components of loans by portfolio class as of December 31, 2010 and 2009 were as follows:
|
December 31, | |||||||
---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | ||||||
|
(in thousands) |
|||||||
Residential real estate1 to 4 family |
$ | 153,399 | $ | 169,009 | ||||
Residential real estatemulti family |
53,626 | 38,994 | ||||||
Commercial industrial & agricultural |
152,802 | 150,823 | ||||||
Commercial, secured by real estate |
426,232 | 362,376 | ||||||
Construction |
78,294 | 100,713 | ||||||
Consumer |
2,551 | 3,108 | ||||||
Home equity lines of credit |
88,645 | 86,916 | ||||||
|
955,549 | 911,939 | ||||||
Net deferred loan fees |
(1,186 | ) | (975 | ) | ||||
Allowance for loan losses |
(14,790 | ) | (11,449 | ) | ||||
Loans, net of allowance for loan losses |
$ | 939,573 | $ | 899,515 | ||||
An analysis of changes in the allowance for credit losses for the years ended December 31, 2010, 2009 and 2008 is as follows:
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2008 | |||||||
|
(in thousands) |
|||||||||
Beginning Balance |
$ | 11,449 | $ | 8,124 | $ | 7,264 | ||||
Provision for loan losses |
10,210 | 8,572 | 4,835 | |||||||
Loans charged off |
(7,383 | ) | (5,477 | ) | (4,073 | ) | ||||
Recoveries |
514 | 230 | 98 | |||||||
Ending Balance |
$ | 14,790 | $ | 11,449 | $ | 8,124 | ||||
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VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9. Loans and Related Allowance for Credit Losses (Continued)
The following table represents the changes in the allowance for loan loss for 2010 based on the Company's loan portfolio class.
For The Year Ended December 31, 2010
(Dollar amounts in thousands)
|
Residential Real Estate 1-4 Family |
Residential Real Estate Multi Family |
Commercial Industrial & Agricultural |
Commercial Real Estate |
Construction | Consumer | Home Equity Lines of Credit |
Unallocated | Total Loans |
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Allowance for Loan Losses: |
||||||||||||||||||||||||||||||
Beginning balance, January 1, 2010 |
$ | 1,159 | $ | 205 | $ | 2,027 | $ | 2,730 | $ | 4,413 | $ | 526 | $ | 389 | $ | 7 | $ | 11,456 | ||||||||||||
Charge offs |
1,978 | 62 | 500 | 440 | 2,983 | 45 | 1,375 | | 7,383 | |||||||||||||||||||||
Recoveries |
101 | | 150 | 18 | 46 | 17 | 182 | | 514 | |||||||||||||||||||||
Provision |
3,636 | 592 | 899 | 1,013 | 1,587 | (188 | ) | 2,517 | 147 | 10,203 | ||||||||||||||||||||
Ending balance, December 31, 2010 |
$ | 2,918 | $ | 735 | $ | 2,576 | $ | 3,321 | $ | 3,063 | $ | 310 | $ | 1,713 | $ | 154 | $ | 14,790 | ||||||||||||
ALLL ending balance: |
||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 2,163 | $ | 633 | $ | 1,155 | $ | 1,895 | $ | 2,203 | $ | 276 | $ | 1,193 | $ | | $ | 9,518 | ||||||||||||
Collectively evaluated for impairment |
755 | 102 | 1,421 | 1,426 | 860 | 34 | 520 | | 5,118 | |||||||||||||||||||||
Loans acquired with deteriorated |
||||||||||||||||||||||||||||||
credit quality |
| | | | | | | | | |||||||||||||||||||||
Unallocated balance |
| | | | | | | 154 | 154 | |||||||||||||||||||||
Loans ending balance: |
||||||||||||||||||||||||||||||
Individually evaluated for impairment(1) |
15,852 | 2,740 | 6,912 | 18,748 | 23,460 | 277 | 2,309 | | 70,298 | |||||||||||||||||||||
Collectively evaluated for impairment |
136,090 | 49,265 | 206,343 | 357,665 | 47,904 | 1,886 | 84,912 | | 884,065 | |||||||||||||||||||||
Loans acquired with deteriorated credit quality |
| | | | | | | | |
- (1)
- At December 31, 2010, the Company had $70.3 million of loans that were individually evaluated for impairment, of which $21.2 million were not deemed to be impaired.
The recorded investment in impaired loans not requiring an allowance for loan losses was $8.4 million at December 31, 2010 and $6.3 million at December 31, 2009. The recorded investment in impaired loans requiring an allowance for loan losses was $40.7 million and $18.9 million at December 31, 2010 and 2009, respectively. At December 31, 2010 and 2009, the related allowance for loan losses associated with those loans was $9.5 million and $3.8 million, respectively. For 2010, 2009 and 2008, the average recorded investment in impaired loans was $41.2 million, $18.6 million and $8.8 million, respectively; and the interest income recognized on impaired loans was $1.5 million for 2010, $42,000 for 2009 and $33,000 for 2008. Non accrual loans that maintained a current payment status for six consecutive months are placed back on accrual status under the Bank's loan policy.
Loans on which the accrual of interest has been discontinued amounted to $26.5 million and $25.1 million at December 31, 2010 and 2009, respectively. Loan balances past due 90 days or more and still accruing interest but which management expects will eventually be paid in full, amounted to $594,000 and $1.8 million at December 31, 2010 and 2009, respectively.
119
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9. Loans and Related Allowance for Credit Losses (Continued)
The following table presents non accrual loans that are individually and collectively evaluated for impairment and their related allowance for loan loss by loan portfolio class as of December 31, 2010. The following table also includes $22.6 million in loans that are still accruing but have been determined to be impaired after being individually evaluated for impairment.
For The Year Ended December 31, 2010
(in thousands)
|
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Impaired Loans: |
|||||||||||||||||
With no specific allowance recorded: |
|||||||||||||||||
Residential real estate 1 - 4 family |
$ | 1,866 | $ | 1,866 | $ | | $ | 2,150 | $ | 14 | |||||||
Residential real estate multi family |
365 | 365 | | 92 | | ||||||||||||
Commercial industrial & agricultural |
363 | 363 | | 280 | | ||||||||||||
Commercial real estate |
900 | 900 | | 895 | 5 | ||||||||||||
Construction |
4,123 | 4,123 | | 2,867 | | ||||||||||||
Consumer |
| | | | | ||||||||||||
Home equity lines of credit |
755 | 755 | | 596 | 1 | ||||||||||||
|
8,372 | 8,372 | | 6,880 | 20 | ||||||||||||
With an allowance recorded: |
|||||||||||||||||
Residential real estate 1 - 4 family |
9,792 | 9,792 | 2,163 | 8,815 | 323 | ||||||||||||
Residential real estate multi family |
2,067 | 2,067 | 633 | 1,592 | 26 | ||||||||||||
Commercial industrial & agricultural |
4,114 | 4,114 | 1,155 | 4,212 | 270 | ||||||||||||
Commercial real estate |
8,755 | 8,755 | 1,895 | 5,846 | 264 | ||||||||||||
Construction |
14,289 | 14,289 | 2,203 | 12,550 | 512 | ||||||||||||
Consumer |
277 | 277 | 276 | 198 | 10 | ||||||||||||
Home equity lines of credit |
1,420 | 1,420 | 1,193 | 1,155 | 38 | ||||||||||||
|
40,714 | 40,714 | 9,518 | 34,368 | 1,443 | ||||||||||||
Total: |
|||||||||||||||||
Residential real estate 1 - 4 family |
11,658 | 11,658 | 2,163 | 10,965 | 337 | ||||||||||||
Residential real estate multi family |
2,432 | 2,432 | 633 | 1,684 | 26 | ||||||||||||
Commercial industrial & agricultural |
4,477 | 4,477 | 1,155 | 4,492 | 270 | ||||||||||||
Commercial real estate |
9,655 | 9,655 | 1,895 | 6,741 | 269 | ||||||||||||
Construction |
18,412 | 18,412 | 2,203 | 15,417 | 512 | ||||||||||||
Consumer |
277 | 277 | 276 | 198 | 10 | ||||||||||||
Home equity lines of credit |
2,175 | 2,175 | 1,193 | 1,751 | 39 | ||||||||||||
|
$ | 49,086 | $ | 49,086 | $ | 9,518 | $ | 41,248 | $ | 1,463 | |||||||
120
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9. Loans and Related Allowance for Credit Losses (Continued)
The following table presents loans that are no longer accruing interest. These loans are considered impaired and included in the previous impaired loan table. There was an additional $4.4 million in non accrual loans assumed with the acquisition of Allegiance that are not included in the following non accrual table, but are presented in a table in the covered loan section below.
|
As of December 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | |||||||
|
(in thousands) |
||||||||
Non-accrual loans: |
|||||||||
Residential real estate 1 - 4 family |
$ | 5,595 | $ | 5,552 | |||||
Residential real estate multi family |
1,950 | 427 | |||||||
Commercial industrial & agricultural |
2,016 | 716 | |||||||
Commercial real estate |
5,477 | 3,217 | |||||||
Construction |
10,393 | 14,574 | |||||||
Consumer |
15 | 4 | |||||||
HELOC |
1,067 | 650 | |||||||
Total non accrual loans |
$ | 26,513 | $ | 25,140 | |||||
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2010:
Age Analysis of Past Due Loans
|
31 - 60 days Past Due |
61 - 90 days Past Due |
>90 days Past Due |
Total Past Due |
Current | Total Financing Receivables |
Recorded Investment >90 days and Accruing |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands) |
|||||||||||||||||||||
Residential real estate 1 - 4 family |
$ | 914 | $ | 1,659 | $ | 4,204 | $ | 6,777 | $ | 146,517 | $ | 153,294 | $ | 249 | ||||||||
Residential real estate multi family |
549 | 465 | 1,400 | 2,414 | 51,212 | 53,626 | | |||||||||||||||
Commercial industrial & agricultural |
582 | 417 | 1,693 | 2,692 | 150,110 | 152,802 | | |||||||||||||||
Commercial real estate |
857 | 756 | 4,625 | 6,238 | 418,818 | 425,056 | | |||||||||||||||
Construction |
| | 10,610 | 10,610 | 67,684 | 78,294 | 245 | |||||||||||||||
Consumer |
5 | 17 | 15 | 37 | 2,609 | 2,646 | | |||||||||||||||
Home equity lines of credit |
557 | 550 | 534 | 1,641 | 87,004 | 88,645 | 100 | |||||||||||||||
Total loans |
$ | 3,464 | $ | 3,864 | $ | 23,081 | $ | 30,409 | $ | 923,954 | $ | 954,363 | $ | 594 | ||||||||
121
VIST FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9. Loans and Related Allowance for Credit Losses (Continued)