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| VIST > SEC Filings for VIST > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
Critical Accounting Policies
Note 1 to the Company's consolidated financial statements (included in Item 8 of
the Form 10-K for the year ended December 31, 2008) lists significant accounting
policies used in the development and presentation of its financial statements.
This discussion and analysis, the significant accounting policies, and other
financial statement disclosures identify and address key variables and other
qualitative and quantitative factors that are necessary for an understanding and
evaluation of the Company and its results of operations.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, revenue recognition for insurance activities, stock based compensation, derivative financial instruments, goodwill and intangible assets, other than temporary impairment losses on available for sale securities and the valuation of deferred tax assets. In estimating other-than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Results of Operations
OVERVIEW
Net income for the Company for the quarter ended March 31, 2009 was $1.61 million, an increase of 3.2%, as compared to $1.56 million for the same period in 2008. Basic and diluted earnings per share for the first quarter of 2009 were $.21 and $.21, respectively, compared to basic and diluted earnings per share of $.28 and $.27, respectively, for the same period of 2008.
The following are the key ratios for the Company as of:
As Of or For
Three Months Ended
March 31, December 31,
2009 2008
Return on average assets 0.53 % 0.59 %
Return on average shareholders' equity 5.29 % 6.96 %
Dividend payout ratio 47.62 % 48.23 %
Average shareholders' equity to average assets 9.98 % 8.45 %
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Net Interest Income
Net interest income is a primary source of revenue for the Company. Net interest income results from the difference between the interest and fees earned on loans and investments and the interest paid on deposits to customers and other non-deposit sources of funds, such as repurchase agreements and short and long-term borrowed funds. Net interest margin is the difference between the gross (tax-effected) yield on earning assets and the cost of interest bearing funds as a percentage of earning assets. All discussion of net interest margin is on a fully taxable equivalent basis (FTE).
Net interest income before the provision for loan losses for the three months ended March 31, 2009 was $8.5 million, a decrease of $118,000, or 1.4%, compared to the $8.6 million reported for the same period in 2008. The FTE net interest margin decreased to 3.19% for the first quarter of 2009 from 3.51% for the same period in 2008.
The following summarizes net interest margin information:
Three months ended March 31,
2009 2008
Interest Interest
Average Income/ % Income/ %
Balance Expense Rate Average Balance Expense Rate
(Dollar amounts in thousands, except percentages)
Interest-Earning Assets:
Loans: (1) (2)
Commercial $ 699,514 $ 9,938 5.68 $ 656,344 $ 11,317 6.82
Mortgage 50,411 763 6.06 46,522 756 6.50
Consumer 139,792 1,883 5.46 126,922 2,228 7.06
Other - - - - - -
Investments (2) 234,132 3,360 5.74 197,504 2,853 5.78
Federal funds sold 6,626 3 0 - - -
Other short-term
investments 346 1 0.66 519 4 2.86
Total interest-earning
assets $ 1,130,821 $ 15,948 5.64 $ 1,027,811 $ 17,158 6.60
Interest-Bearing
Liabilities:
Transaction accounts $ 320,118 $ 1,110 1.40 $ 316,145 $ 1,879 2.39
Certificates of deposit 469,016 4,044 3.49 316,774 3,624 4.60
Securities sold under
agreement to repurchase 119,503 1,065 3.56 111,150 954 3.39
Short-term borrowings 9,914 17 0.67 84,317 721 3.38
Long-term borrowings 59,167 504 3.41 59,396 599 3.99
Junior subordinated debt 19,712 314 6.47 20,230 405 8.06
Total interest-bearing
liabilities 997,430 7,054 2.87 908,012 8,182 3.62
Noninterest-bearing
deposits 105,444 - 103,299 -
Total cost of funds $ 1,102,874 7,054 2.59 $ 1,011,311 8,182 3.25
Net interest margin (fully
taxable equivalent) $ 8,894 3.19 $ 8,976 3.51
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(2) Interest income on loans and investments is presented on a taxable equivalent basis using an effective tax rate of 34%.
Average interest-earning assets for the three months ended March 31, 2009 were $1.13 billion, a $103.0 million, or 10.0%, increase over average interest-earning assets of $1.03 billion for the same period in 2008. The yield on average interest-earning assets decreased by 96 basis points to 5.64% for the first quarter of 2009, compared to 6.60% for the same period in 2008.
Average interest-bearing liabilities for the three months ended March 31, 2009 were $997.4 million, an $89.4 million, or 9.8%, increase over average interest-bearing liabilities of $908.0 million for the same period in 2008. In addition, average noninterest-bearing deposits increased to $105.4 million for the three months ended March 31, 2009, from $103.3 million for the same time period of 2008. The interest rate on total interest-bearing liabilities decreased by 75 basis points to 2.87% for the three months ended March 31, 2009, compared to 3.62% for the same period in 2008.
For the three months ended March 31, 2009, FTE net interest income before the provision for loan losses decreased 0.9% to $8.9 million compared to $9.0 million for the same period in 2008.
For the three months ended March 31, 2009, total interest income decreased 7.4% to $15.5 million compared to $16.8 million for the same period in 2008. The decrease in total interest income for the three months ended March 31, 2009 was primarily the result of a decrease in the interest rates on average outstanding commercial, mortgage and consumer loans compared to the same period in 2008. Earning asset yields on average outstanding loans decreased due mainly to a decrease in the targeted short-term interest rate, as established by the Federal Reserve Bank ("FRB"), which resulted in a decrease in the prime rate from 5.25% at March 31, 2008 to 3.25% at March 31, 2009. Average outstanding commercial loan balances increased by $43.2 million, or 6.6% from March 31, 2008 to March 31, 2009. Additionally, average outstanding total investment securities increased by $36.6 million or 18.5% from March 31, 2008 to March 31,
2009. Earning asset yields on average outstanding investment securities decreased slightly from 5.8% at March 31, 2008 to 5.7% at March 31, 2009.
For the three months ended March 31, 2009, total interest expense decreased 13.8% to $7.1 million compared to $8.2 million for the same period in 2008. The decrease in total interest expense for the three months ended March 31, 2009 resulted primarily from a decrease in average rates paid on average outstanding interest-bearing deposits and short-term borrowings compared to the same period in 2008. The average rate paid on total average outstanding interest-bearing liabilities decreased from 3.62% at March 31, 2008 to 2.87% at March 31, 2009. Total cost of funds decreased to 2.59% in 2009 from 3.25% in 2008. The decrease in total average interest-bearing deposit rates was the result of management's disciplined approach to deposit pricing in response to the decrease in short-term interest rates. Total average interest-bearing deposits increased $156.2 million or 24.7% from March 31, 2008 to March 31, 2009 due primarily to growth in time deposits. The average rate paid on short-term borrowings and securities sold under agreements to repurchase increased from 3.39% at March 31, 2008 to 3.56% at March 31, 2009. The decrease in short-term borrowings and securities sold under agreements to repurchase rates was the result of decreases in targeted short term interest rates, as established by the FRB. Average short-term borrowings and securities sold under agreements to repurchase decreased $66.1 million or 33.8% from March 31, 2008 to March 31, 2009 due primarily to the growth in total average interest-bearing deposits.
Provision for Loan Losses
The provision for loan losses for the three months ended March 31, 2009 was $825,000 compared to $410,000 for the same period of 2008. Net charge-offs to average loans was 0.36% annualized for the three months ended March 31, 2009 compared to 0.46% for the year ended December 31, 2008. The provision reflects the amount deemed appropriate by management to provide an adequate reserve to meet the present risk characteristics of the loan portfolio. Management continues to evaluate and classify the credit quality of the loan portfolio utilizing a qualitative and quantitative internal loan review process and, based on the results of the analysis at March 31, 2009, management has determined that the current allowance for loan losses is adequate as of such date. The ratio of the allowance for loan losses to loans outstanding at March 31, 2009 and December 31, 2008 was .92% and .92%, respectively. Please see further discussion under the caption "Allowance for Loan Losses."
Other Non-Interest Income
Total other income for the three months ended March 31, 2009 totaled $5.5 million, an increase of $0.9 million, or 19.2%, from other income of $4.6 million for the same period in 2008.
Revenue from customer service fees increased 6.1% to $658,000 for the first three months of 2009 as compared to $620,000 for the same period in 2008. The increase in customer service fees for the comparative three months periods is primarily due to an increase in commercial account analysis fees, uncollected funds charges and non-sufficient funds charges.
Revenue from mortgage banking activities decreased 17.3% to $267,000 for the first three months of 2009 as compared to $323,000 for the same period in 2008. The decrease in mortgage banking activities for the comparative three month periods is primarily due to a decline in the volume of loans sold into the secondary mortgage market. The Company operates its mortgage banking activities through VIST Mortgage, a division of VIST Bank.
Revenue from commissions and fees from insurance sales increased 10.2% to $3.0 million for the first three months of 2009 as compared to $2.7 million for the same period in 2008. The increase in commissions and fees from insurance sales for the comparative three month periods is mainly attributed to an increase in commission income on group insurance products offered through VIST Insurance, LLC, a wholly owned subsidiary of the Company.
Revenue from brokerage and investment advisory commissions and fees increased 39.2% to $330,000 in the first three months of 2009 as compared to $237,000 for the same period in 2008. The increase in brokerage and investment advisory commissions and fees for the comparative three month periods is due primarily to an increase in investment advisory service activity offered through VIST Capital Management, LLC, a wholly owned subsidiary of the Company.
Revenue from earnings on investment in life insurance decreased 54.8% to $76,000 in the first three months of 2009 as compared to $168,000 for the same period in 2008. The decrease in earnings on investment in life insurance for
the comparative three month periods is due primarily to decreased earnings credited on the Company's separate investment account, bank owned life insurance ("BOLI").
Other income, including gain on sale of loans, increased 134.1% to $1.1 million for the first three months of 2009 as compared to $457,000 for the same period in 2008. The increase in other income for the comparative three month periods is due primarily to a settlement of a previously accrued contingent payment and an increase in network interchange income.
Net securities gains were $159,000 for the three months ended March 31, 2009 compared to net securities gains of $141,000 for the same period in 2008. The net securities gains for the first three months of 2009 are primarily from the planned sale of existing agency mortgage-backed securities. For the three months ended March 31, 2008, net security gains were due primarily to the mandatory redemption of VISA Inc. common stock acquired as a result of VISA's initial public offering.
Other Non-Interest Expense
Total other expense for the three months ended March 31, 2009 totaled $11.3 million, an increase of $0.2 million, or 1.7%, over total other expense of $11.1 million for the same period in 2008.
Salaries and benefits decreased slightly remaining at $5.7 million for the three months ended March 31, 2009 similar to the $5.7 million for the three months ended March 31, 2008. Included in salaries and benefits for the three months ended March 31, 2009 and March 31, 2008 were pre-tax stock-based compensation costs of $20,000 and $77,000, respectively. Also included in salaries and benefits for the three months ended March 31, 2009 were total commissions paid of $384,000 on mortgage origination activity through VIST Mortgage, insurance sales activity through VIST Insurance and investment advisory sales through VIST Capital Management compared to $389,000 for the same period in 2008. Included in salaries and benefits expense for the three months ended March 31, 2008 are severance costs of approximately $51,000 relating to the outsourcing of the Company's internal audit function and staff reductions in the mortgage banking operation. Full-time equivalent (FTE) employees decreased to 300 at March 31, 2009 from 316 at March 31, 2008.
Occupancy expense and furniture and equipment expense decreased 7.0% to $1.7 million for the first three months of 2009 as compared to $1.8 million for the same period in 2008. The decrease in occupancy expense and furniture and equipment expense for the comparative three month periods is due primarily to a decrease in building lease expense, equipment repairs expense, software maintenance expense, and equipment depreciation.
Marketing and advertising expense decreased 58.9% to $270,000 for the first three months of 2009 as compared to $657,000 for the same period in 2008. The decrease in marketing and advertising expense is due primarily to a reduction in marketing costs associated with market research, media space, media production and special events.
Professional services expense increased 66.7% to $892,000 for the first three months of 2009 as compared to $535,000 for the same period in 2008. The increase in professional services expense is due primarily to increases in legal fees associated with a settlement of a previously accrued contingent payment, outsourcing of the Company's internal audit function and other general Company business.
Outside processing expense increased 16.0% to $951,000 for the first three months of 2009 as compared to $820,000 for the same period in 2008. The increase in outside processing expense is due primarily to costs incurred for computer services, network fees, data-line charges and internet banking expenses.
Insurance expense increased 63.8% to $444,000 for the first three months of 2009 as compared to $271,000 for the same period in 2008. The increase in insurance expense is due primarily to higher FDIC deposit insurance premiums resulting from the implementation of the new FDIC risk-related premium assessment.
Other expense increased 5.8% to $1.2 million for the first three months of 2009 as compared to $1.1 million for the same period in 2008. The increase in other expense is primarily due primarily to an increase in foreclosure and other real estate expense.
Income Taxes
Income tax expense increased to $292,000 for the first three months of 2009 as compared to $179,000 for the same period in 2008. The effective income tax rate for the Company for the first three months ended March 31, 2009 was 15.4% compared to 10.3% for the same period of 2008. The effective income tax rate increased primarily due to an increase in state tax expense and tax exempt income remaining relatively flat while net income before income taxes increased. Included in income tax expense for the three months ended March 31, 2009 and 2008 is a federal tax benefit from a $5,000,000 investment in an affordable housing, corporate tax credit limited partnership.
Financial Condition
The total assets of the Company at March 31, 2009 were $1.26 billion, an increase of approximately $34.2 million, or 11.2% annualized, from $1.22 billion at December 31, 2008.
Mortgage Loans Held for Sale
Mortgage loans held for sale increased $558,000, or 97.8% annualized, to $2.8 million at March 31, 2009 from $2.3 million at December 31, 2008. This increase is primarily related to an increase in loans originated for sale into the secondary residential real estate loan market through VIST Mortgage.
Securities Available for Sale
Investment securities available for sale increased $11.8 million, or 20.2% annualized, to $244.1 million at March 31, 2009 from $232.4 million at December 31, 2008. Investment securities are used to supplement loan growth as necessary, to generate interest and dividend income, to manage interest rate risk, and to provide liquidity. The increase in investment securities available for sale was due to the purchases of mortgage-backed securities used as collateral for the Company's public funds and structured borrowings.
Loans
Total loans, net of allowance for loan losses, rose slightly to $878.4 million, or 0.1% annualized, at March 31, 2009 from $878.2 million at December 31, 2008.
The components of loans were as follows:
March 31, December 31,
2009 2008
(Dollar amounts in thousands)
Residential real estate - 1 to 4 family $ 181,743 $ 185,866
Residential real estate - multi family $ 33,778 34,869
Commercial 171,982 174,219
Commercial, secured by real estate 320,026 326,442
Construction 92,503 89,556
Consumer 4,157 3,995
Home equity lines of credit 83,189 72,137
Loans 887,378 887,084
Net deferred loan fees (788 ) (779 )
Allowance for loan losses (8,165 ) (8,124 )
Loans, net of allowance for loan losses $ 878,425 $ 878,181
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Loans secured by real estate (not including home equity lending products) decreased $11.6 million, or 8.5% annualized, to $535.5 million at March 31, 2009 from $547.2 million at December 31, 2008. This decrease is primarily due to a decrease in commercial real estate loan originations and commercial real estate loans moved to real estate owned included in other assets.
Total commercial loans decreased to $492.0 million at March 31, 2009 from $500.7 million at December 31, 2008, a decrease of $8.7 million, or 6.9% annualized. The decrease is due primarily to a decrease in commercial real estate loans outstanding. There were no SBA loans sold during the period.
Allowance for Loan Losses
The allowance for loan losses at March 31, 2009 was $8.2 million compared to $8.1 million at December 31, 2008. The allowance at March 31, 2009 was 0.92% of outstanding loans compared to 0.92% of outstanding loans at December 31, 2008. The provision for loan losses for the three months ended March 31, 2009 was $825,000 compared to $410,000 for the same period in 2008. The increase in the provision is due primarily to an increase in outstanding loans and the result of management's evaluation and classification of the credit quality of the loan portfolio utilizing a qualitative and quantitative internal loan review process. At March 31, 2009, total non-performing loans were $8.6 million or 1.0% of total loans compared to $10.8 million or 1.2% of total loans at December 31, 2008. The $2.2 million decrease in non-performing loans from December 31, 2008 to March 31, 2009, was due primarily to three commercial real estate loans totaling approximately $6.0 million transferred to other real estate owned offset by net additions to non-performing loans of approximately $4.0 million. At March 31, 2009, $4.4 million in commercial properties transferred to other real estate owned were under contract to sell. For the three months ended March 31, 2009, net charge-offs to average loans was 0.36% annualized as compared to 0.46% for the three months ended December 31, 2008.
The allowance for loan losses is an amount that management believes to be adequate to absorb potential losses in the loan portfolio. Additions to the allowance are charged through the provision for loan losses. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. Management regularly assesses the adequacy of the allowance by performing both quantitative and qualitative evaluations of the loan portfolio, including such factors as charge-off history, the level of delinquent loans, the current financial condition of specific borrowers, the value of any underlying collateral, risk characteristics in the loan portfolio, local and national economic conditions, and other relevant factors. Significant loans are individually analyzed, while other smaller balance loans are evaluated by loan category. This evaluation is inherently subjective as it requires material estimates that may be susceptible to change. Based upon the results of such reviews, management believes that the allowance for loan losses at March 31, 2009 was adequate to absorb credit losses inherent in the portfolio at that date.
The following table shows the activity in the Company's allowance for loan losses:
Three Months Ended
March 31,
2009 2008
(Dollar amounts in thousands)
Balance of allowance for loan losses, beginning of
period $ 8,124 $ 7,264
Loans charged-off:
Commercial, financial and agricultural (739 ) (384 )
Real estate - mortgage - (105 )
Consumer (70 ) (13 )
Total loans charged-off (809 ) (502 )
Recoveries of loans previously charged-off:
Commercial, financial and agricultural 11 2
Real estate - mortgage - -
Consumer 14 7
Total recoveries 25 9
Net loans (charged-off) recoveries (784 ) (493 )
Provision for loan losses 825 410
Balance, end of period $ 8,165 $ 7,181
Net charge-offs to average loans (annualized) 0.36 % 0.24 %
Allowance for loan losses to loans outstanding 0.92 % 0.87 %
Loans outstanding at end of period (net of
unearned income) $ 886,590 $ 828,065
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