Item 1. Business
General
Vista Bancorp, Inc. ("Vista"), is a New Jersey business corporation, incorporated on March 15, 1988, and is a bank holding company, registered with and supervised by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). Vista has two (2) wholly-owned subsidiary banks, The Phillipsburg National Bank and Trust Company ("Phillipsburg National Bank") and Twin Rivers Community Bank ("Twin Rivers"). These two banks are hereinafter collectively referred to as the "Bank Subsidiaries." The deposits of the Bank Subsidiaries are generally insured by the Federal Deposit Insurance Corporation ("FDIC") under the Bank Insurance Fund ("BIF"), although Phillipsburg National Bank has acquired some so-called "Oakar" deposits which are insured under the Savings Association Insurance Fund ("SAIF"). As of December 31, 1998, Vista had total consolidated assets of $ 593.0 million, total consolidated deposits of $522.7 million and total consolidated shareholders' equity of $46.8 million.
Vista provides a full range of retail and commercial banking services for consumers and small to medium size businesses. Lending is concentrated in commercial, consumer and real estate loans to local borrowers. Vista's lending and investing activities are funded principally by deposits gathered through its retail branch office network. Vista's retail approach is that of a community bank -- development of long-term customer relationships, personalized service, convenient locations, free checking for customers maintaining certain minimum balances and convenient hours of operation.
Vista's growth strategy is centered on the further development of its community-based retail banking network along the Interstate 78 corridor in the counties of Warren and Hunterdon in New Jersey and in the counties of Northampton and Lehigh in Pennsylvania, with the extension of its market to the East in New Jersey and to the West in Pennsylvania. This retail approach to banking has resulted in the growth of demand and savings deposits due to convenience and service. The objective of this strategy is to take advantage of the expected long-term economic growth along the Interstate 78 corridor in New Jersey and Pennsylvania.
Vista's and Phillipsburg National Bank's principal executive offices are currently located at 305 Roseberry Street, Post Office Box 5360, Phillipsburg, New Jersey 08865. Phillipsburg National Bank's main office is located at 115 South Main Street, Phillipsburg, New Jersey 08865. Vista has an operations center located at 291 Pickford Avenue, Phillipsburg, New Jersey 08865. Phillipsburg National Bank has, in addition, an administrative and consumer loan center located at 305 Roseberry Street, Post Office Box 5360, Phillipsburg, New Jersey and nine (9) branch offices located throughout Warren and Hunterdon
Counties, New Jersey. Twin Rivers' main office is located at 2925 William Penn Highway, Easton, Pennsylvania 18045, and has three (3) branch offices located in the Easton and Bethlehem areas of Pennsylvania.
As of December 31, 1998, Vista had forty-eight (48) full-time and one (1) part-time employee. These employees are in the following areas: accounting, corporate security/disaster recovery, compliance, audit, loan review, data processing and bookkeeping. The Bank Subsidiaries reimburse Vista for the respective services performed by these employees. Vista does not own real property. However, Vista does pay the rent for the premises in which the operations center is located. The operations center is the location where most of Vista's employees work. Vista is not a party to any collective bargaining agreement.
Supervision and Regulation - Vista
Vista is subject to the jurisdiction of the Securities and Exchange Commission ("SEC") for matters relating to the offering and sale of its securities. Vista is currently subject to the SEC's rules and regulations relating to periodic reporting, insider trading reports and proxy solicitation materials in accordance with the Securities Exchange Act of 1934 (the "Exchange Act").
Vista is also subject to the provisions of the Bank Holding Company Act of 1956, as amended ("Bank Holding Company Act"), and to supervision by the Federal Reserve Board ("FRB"). The Bank Holding Company Act requires Vista to secure the prior approval of the FRB before it owns or controls, directly or indirectly, more than 5% of the voting shares of substantially all of the assets of any institution, including another bank. The Bank Holding Company Act prohibits acquisition by Vista of more than 5% of the voting shares of, or interest in, or substantially all of the assets of, any bank located outside New Jersey unless such an acquisition is specifically authorized by laws of the state in which such bank is located.
A bank holding company is prohibited from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in non-banking activities unless the FRB, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making this determination, the FRB considers whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh possible adverse effects.
The Bank Holding Company Act also prohibits acquisitions of control of a bank holding company, such as Vista, without prior notice to the FRB. "Control" is defined for this purpose as the power, directly or indirectly, to direct the management or policies of a bank holding company or to vote 25% (or 10%, if no other person or persons acting in concert, holds a greater percentage of the Common Stock) or more of Vista's Common Stock.
Vista is required to file an annual report with the FRB and any additional information that the FRB may require pursuant to the Bank Holding Company Act. The FRB may also make examinations of Vista and any or all of its subsidiaries. Subject to certain exceptions, a bank holding company and its subsidiaries are
generally prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of credit or provision of any property or services. The so-called "Anti-tie-in" provisions state generally that a bank may not extend credit, lease, sell property or furnish any service to a customer on the condition that the customer provide additional credit or service to the bank, to its bank holding company or to any other subsidiary of its bank holding company or on the condition that the customer not obtain other credit or service from a competitor of the bank, its bank holding company or any subsidiary of its bank holding company.
Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities of the bank holding company and on taking of such stock or securities as collateral for loans to any borrower.
Permitted Nonbanking Activities
The Federal Reserve Board permits bank holding companies or their subsidiaries to engage in nonbanking activities so closely related to banking or managing or controlling banks as to be a proper incident thereto. While the types of permissible activities are subject to change by the Federal Reserve Board, the principal nonbanking activities that presently may be conducted by a bank holding company or its subsidiary without prior approval of the Federal Reserve Board are:
(1) Extending credit and servicing loans. Making, acquiring, brokering, or servicing loans or other extensions of credit (including factoring, issuing letters of credit and accepting drafts) for the company's account or for the account of others.
(2) Activities related to extending credit. Any activity usual in connection with making, acquiring, brokering or servicing loans or other extensions of credit, as determined by the Federal Reserve Board. The Federal Reserve Board has determined that the following activities are usual in connection with making, acquiring, brokering or servicing loans or other extensions of credit:
(i) Real estate and personal property appraising. Performing appraisals of real estate and tangible and intangible personal property, including securities.
(ii) Arranging commercial real estate equity financing. Acting as intermediary for the financing of commercial or industrial income-producing real estate by arranging for the transfer of the title, control, and risk of such a real estate project to one or more investors, if the bank holding company and its affiliates do not have an interest in, or participate in managing or developing, a real estate project for which it arranges equity financing, and do not promote or sponsor the development of the property.
(iii) Check-guaranty services. Authorizing a subscribing merchant to accept personal checks tendered by the merchant's customers in payment for goods and services, and purchasing from the merchant validly authorized checks that are subsequently dishonored.
(iv) Collection agency services. Collecting overdue accounts receivable, either retail or commercial.
(v) Credit bureau services. Maintaining information related to the credit history of consumers and providing the information to a credit grantor who is considering a borrower's application for credit or who has extended credit to the borrower.
(vi) Asset management, servicing, and collection activities. Engaging under contract with a third party in asset management, servicing, and collection of assets of a type that an insured depository institution may originate and own, if the company does not engage in real property management or real estate brokerage services as part of these services.
(vii) Acquiring debt in default. Acquiring debt that is in default at the time of acquisition under certain conditions.
(viii) Real estate settlement servicing. Providing real estate settlement services.
(3) Leasing personal or real property. Leasing personal or real property or acting as agent, broker, or adviser in leasing such property under certain conditions.
(4) Operating nonbank depository institutions:
(i) Industrial banking. Owning, controlling, or operating an industrial bank, Morris Plan bank, or industrial loan company, so long as the institution is not a bank.
(ii) Operating savings association. Owning, controlling or operating a savings association, if the savings association engages only in deposit-taking activities, lending, and other activities that are permissible for bank holding companies.
(5) Trust company functions. Performing functions or activities that may be performed by a trust company (including activities of a fiduciary, agency, or custodial nature), in the manner authorized by federal or state law, so long as the company is not a bank for purposes of the Bank Holding Company Act.
(6) Financial and investment advisory activities. Acting as investment or financial advisor to any person, including (without, in any way, limiting the foregoing):
(i) Serving as investment adviser (as defined in section 2(a)(20) of the Investment Company Act of 1940, 15 U.S.C. 80a-2(a)(20)), to an investment company registered under that act, including sponsoring, organizing, and managing a closed-end investment company;
(ii) Furnishing general economic information and advice, general economic statistical forecasting services, and industry studies;
(iii) Providing advice in connection with mergers, acquisitions, divestitures, investments, joint ventures, leveraged buyouts, recapitalizations, capital structurings, financing transactions and similar transactions, and conducting financial feasibility studies;
(iv) Providing information, statistical forecasting, and advice with respect to any transaction in foreign exchange, swaps, and similar transactions, commodities, and any forward contract, option, future, option on a future, and similar instruments;
(v) Providing educational courses, and instructional materials to consumers on individual financial management matters; and
(vi) Providing tax-planning and tax-preparation services to any person.
(7) Agency transactional services for customer investments:
(i) Securities brokerage. Providing securities brokerage services (including securities clearing and/or securities execution services on an exchange), whether alone or in combination with investment advisory services, and incidental activities (including related securities credit activities and custodial services), if the securities brokerage services are restricted to buying and selling securities solely as agent for the account of customers and do not include securities underwriting or dealing.
(ii) Riskless principal transactions. Buying and selling in the secondary market all types of securities on the order of customers as a "riskless principal" to the extent of engaging in a transaction in which the company, after receiving an order to buy (or sell) a security from a customer, purchases (or sells) the security for its own account to offset a contemporaneous sale to (or purchase from) the customer. This does not include:
(A) Selling bank-ineligible securities at the order of a customer that is the issuer of the securities, or selling
bank-ineligible securities in any transaction where the company has a contractual agreement to place the securities as agent of the issuer; or
(B) Acting as a riskless principal in any transaction involving a bank-ineligible security for which the company or any of its affiliates acts as underwriter (during the period of the underwriting or for 30 days thereafter) or dealer.
(iii) Private placement services. Acting as agent for the private placement of securities in accordance with the requirements of the Securities Act of 1933 ("1933 Act") and the rules of the Securities and Exchange Commission, if the company engaged in the activity does not purchase or repurchase for its own account the securities being placed, or hold in inventory unsold portions of issues of these securities.
(iv) Futures commission merchant. Acting as a futures commission merchant ("FCM") for unaffiliated persons in the execution, clearance, or execution and clearance of any futures contract and option on a futures contract traded on an exchange in the United States or abroad under certain conditions.
(v) Other transactional services. Providing to customers as agent transactional services with respect to swaps and similar transactions.
(8) Investment transactions as principal:
(i) Underwriting and dealing in government obligations and money market instruments. Underwriting and dealing in obligations of the United States, general obligations of states and their political subdivisions, and other obligations that state member banks of the Federal Reserve System may be authorized to underwrite and deal in under 12 U.S.C. 24 and 335, including banker's acceptances and certificates of deposit, under the same limitations as would be applicable if the activity were performed by the bank holding company's subsidiary member banks or its subsidiary nonmember banks as if they were member banks.
(ii) Investing and trading activities. Engaging as principal in:
(A) Foreign exchange;
(B) Forward contracts, options, futures, options on futures, swaps, and similar contracts, whether traded on exchanges or not, based on any rate, price, financial asset (including gold, silver, platinum, palladium, copper, or any other metal approved by the Board), nonfinancial asset, or group of assets, other than a bank-ineligible security under certain conditions.
(C) Forward contracts, options, futures, options on futures, swaps, and similar contracts, whether traded on exchanges or not, based on an index of a rate, a price, or the value of any financial asset, nonfinancial asset, or group of assets, if the contract requires such settlement.
(iii) Buying and selling bullion, and related activities. Buying, selling and storing bars, rounds, bullion, and coins of gold, silver, platinum, palladium, copper, and any other metal approved by the Federal Reserve Board, for the company's own account and the account of others, and providing incidental services such as arranging for storage, safe custody, assaying, and shipment.
(9) Management consulting and counseling activities:
(i) Management consulting. Providing management consulting advice under certain conditions.
(ii) Employee benefits consulting services. Providing consulting services to employee benefit, compensation and insurance plans, including designing plans, assisting in the implementation of plans, providing administrative services to plans, and developing employee communication programs for plans.
(iii) Career counseling services. Providing career counseling services to:
(A) A financial organization and individuals currently employed by, or recently displaced from, a financial organization;
(B) Individuals who are seeking employment at a financial organization; and
(C) Individuals who are currently employed in or who seek positions in the finance, accounting, and audit departments of any company.
(10) Support services:
(i) Courier services. Providing courier services for:
(A) Checks, commercial papers, documents, and written instruments (excluding currency or bearer-type negotiable instruments) that are exchanged among banks and financial institutions; and
(B) Audit and accounting media of a banking or financial nature and other business records and documents used in processing such media.
(ii) Printing and selling MICR-encoded items. Printing and selling checks and related documents, including corporate image checks, cash tickets, voucher checks, deposit slips, savings withdrawal packages, and other forms that require Magnetic Ink Character Recognition ("MICR") encoding.
(11) Insurance agency and underwriting:
(i) Credit insurance. Acting as principal, agent, or broker for insurance (including home mortgage redemption insurance) that is:
(A) Directly related to an extension of credit by the bank holding company or any of its subsidiaries; and
(B) Limited to ensuring the repayment of the outstanding balance due on the extension of credit in the event of the death, disability, or involuntary unemployment of the debtor.
(ii) Finance company subsidiary. Acting as agent or broker for insurance directly related to an extension of credit by a finance company that is a subsidiary of a bank holding company under certain conditions.
(iii) Insurance in small towns. Engaging in any insurance agency activity in a place where the bank holding company or a subsidiary of the bank holding company has a lending office and that:
(A) Has a population not exceeding 5,000 (as shown in the preceding decennial census); or
(B) Has inadequate insurance agency facilities, as determined by the Federal Reserve Board, after notice and opportunity for hearing.
(iv) Insurance-agency activities conducted on May 1, 1982. Under certain restrictions, engaging in any specific insurance-agency activity if the bank holding company, or subsidiary conducting the specific activity, conducted such activity on May 1, 1982, or received the Federal Reserve Board approval to conduct such activity on or before May 1, 1982.
(v) Supervision of retail insurance agents. Supervising on behalf of insurance underwriters the activities of retail insurance agents who sell:
(A) Fidelity insurance and property and casualty insurance on the real and personal property used in the operations of the bank holding company or its subsidiaries; and
(B) Group insurance that protects the employees of the bank holding company or its subsidiaries.
(vi) Small bank holding companies. Engaging in any insurance-agency activity if the bank holding company has total consolidated assets of $50 million or less.
(v) Insurance-agency activities conducted before 1971. Engaging in any insurance-agency activity performed at any location in the United States directly or indirectly by a bank holding company that was engaged in insurance-agency activities prior to January 1, 1971, as a consequence of approval by the Federal Reserve Board prior to January 1, 1971.
(12) Community development activities:
(i) Financing and investment activities. Making equity and debt investments in corporations or projects designed primarily to promote community welfare, such as the economic rehabilitation and development of low-income areas by providing housing, services, or jobs for residents.
(ii) Advisory activities. Providing advisory and related services for programs designed primarily to promote community welfare.
(13) Money orders, savings bonds, and traveler's checks. The issuance and sale at retail of money orders and similar consumer-type payment instruments; the sale of U.S. savings bonds; and the issuance and sale of traveler's checks.
(14) Data processing. Providing data processing and data processing and data transmission services, facilities (including data processing and data transmission hardware, software, documentation, or operating personnel), data bases, advice, and access to such services, facilities, or data bases by any technological means under certain conditions.
New Jersey Banking Law
Under Article 48 of the New Jersey Banking Act of 1948, as amended (the "New Jersey Act"), Vista is permitted to acquire an unlimited number of banks subject to certain limitations. However, Vista would be required, under the Bank Holding Company Act and the New Jersey Act, to obtain the prior approval of the FRB and the Commissioner of Banking of New Jersey, respectively, before Vista could acquire all or substantially all of the assets of any bank, or acquire ownership or control of any voting shares of any bank other than the Bank Subsidiaries, if, after such acquisition it would own or control more than 5% of the voting shares of the bank (as to the FRB) or in any other manner control the election of a majority of directors or exercise a controlling influence over the management and policies of such bank.
In addition, the New Jersey Act authorizes reciprocal interstate banking without any geographic limitation. Reciprocity between states exists when another state's law (including the District of Columbia) authorizes or permits a New Jersey bank holding company to acquire banks or bank holding companies located in that state on terms and conditions substantially the same as the terms and conditions pursuant to which a bank holding company located in that state may acquire banks or bank holding companies located in that state. The fact that the law of that state imposes limitations or restrictions on the acquisition of banks or bank holding companies located in that state by a bank or bank holding company located in New Jersey shall not necessarily mean that the law of that state is not reciprocal legislation; provided, however, that if the law of that state limits acquisitions by a bank or bank holding company located in New Jersey to banks or bank holding companies which are not in competition with banks or bank holding companies located in or chartered by that state or to banks or bank holding companies which do not have customary banking deposit and commercial loan powers, the law of that state shall not be reciprocal legislation. If the reciprocal legislation of that state imposes limitations or restrictions on the acquisition or ownership of a bank or bank holding company located in that state by a bank holding company located in New Jersey, substantially the same limitations and restrictions shall be applicable to the eligible bank holding company located in that state with respect to its acquisition of banks or bank holding companies located in New Jersey.
Interstate Banking and Branching
The following discussion describes those provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act") that would pertain to Vista. It is not an exhaustive description of all provisions of the Interstate Banking Act.
In general, the Federal Reserve Board may approve an application by Vista to acquire control of, or acquire all or substantially all of the assets of, a bank located outside of the State of New Jersey, without regard to whether such acquisition is prohibited under the law of any state, but subject to certain state law restrictions and requirements enumerated in the Interstate Banking Act. The Federal Reserve Board may approve such application if it finds, among other things, that Vista is "adequately capitalized" and "adequately managed." Moreover, the Federal Reserve Board may not approve such acquisition if the target bank has not been in existence for the minimum period of time, if any, required by such target bank's "home" state.
The Federal Reserve Board may, however, approve the acquisition of the target bank that has been in existence for at least five years without regard to any longer minimum period of time required under the law of the "home" state of the target bank.
Furthermore, the Interstate Banking Act provides that appropriate federal supervisory agencies may approve a merger of one of the Bank Subsidiaries with another bank located in a different state or the establishment by the Bank Subsidiaries of a new branch office either by acquisition or de novo, unless the State of New Jersey (with respect to Phillipsburg National Bank) or the Commonwealth of Pennsylvania (with respect to Twin Rivers) enacts a law, allowing an interstate merger or expressly prohibiting merger with an out-of-state bank. Such transactions may be completed, if the relevant states have opted-in to the Interstate Banking Act. With respect to both interstate branching by acquisition or merger, both Pennsylvania and New Jersey have opted-in. On April 17, 1996, Governor Whitman signed into law legislation (referred to as "Chapter 17") to implement the provisions of the Interstate Banking Act in New Jersey. Chapter 17 contains an early opt-in to the provisions of the Interstate Banking Act regarding interstate branching by acquisition or merger. On the other hand, Chapter 17 does not contain an "opt-in" to the de novo interstate branching provisions of Chapter 17. The Commonwealth of Pennsylvania opted-in to the Interstate Banking Act, both with respect to interstate branching by acquisition or merger and de novo interstate branching.
The Banking Commissioners of the State of New Jersey and the Commonwealth of Pennsylvania executed a Cooperative Agreement which governs the manner in which state-chartered banks (such as Twin Rivers) with branches in multiple states will be supervised. This Cooperative Agreement was necessitated by the Interstate Banking Law and was drafted to create a level playing field for state-chartered banks with respect to supervision and regulation of branch offices in a multiple state setting. Specifically, this agreement outlines general principles for determining whether home or host state law applies, including the following: (1) host state law applies to operational issues relating to a branch located in a host state, including antitrust, community reinvestment, consumer protection, usury and fair lending laws; (2) the state law of the home state will apply to corporate structure issues, such as, charter, by-laws, incorporation, liquidation, shareholders and directors, capital and investments; and (3) bank powers issues will be resolved with reference to both home and host state laws.
Legislation and Regulatory Changes
From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, and before various bank regulatory agencies. No prediction can be made as to the likelihood of any major changes or the impact such changes might have on Vista and the Bank Subsidiaries. Certain changes of potential significance to Vista which have been enacted or promulgated, as the case may be, by Congress or various regulatory agencies, respectively, are discussed below.
Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA")
On August 9, 1989, major reform and financing legislation, more commonly known as FIRREA, was enacted into law in order to restructure the regulation of the thrift industry, to address the financial condition of the Federal Savings and Loan Insurance Corporation and to enhance the supervisory and enforcement powers of the federal bank and thrift regulatory agencies. The Office of the Comptroller of the Currency ("OCC"), as the primary federal regulator of Phillipsburg National Bank, and the FRB, as the primary regulator of Twin Rivers, are primarily responsible for supervision of Phillipsburg National Bank and Twin Rivers, respectively. The OCC and FRB have far greater flexibility to impose supervisory agreements on an institution that fails to comply with its regulatory requirements, particularly with respect to the capital requirements under FIRREA. Possible enforcement actions include the imposition of a capital plan, termination of deposit insurance and removal or temporary suspension of an officer, director or other institution-affiliated party.
Under FIRREA, civil penalties are classified into three levels, with amounts increasing with the severity of the violation. The first tier provides for civil penalties of up to $5,000 per day for any violation of law or regulation. A civil penalty of up to $25,000 per day may be assessed if more than a minimal loss or a pattern of misconduct is involved. Finally, a civil penalty of up to $1.0 million per day may be assessed for knowingly or recklessly causing a substantial loss to an institution or taking action that results in a substantial pecuniary gain or other benefit. Criminal penalties are increased to $1.0 million per violation, up to $5.0 million for continuing violations or for the actual amount of gain or loss. These monetary penalties may be combined with prison sentences for up to five years.
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
General. FDICIA reformed a variety of bank regulatory laws. Certain of these new provisions are discussed below.
Examinations and Audits. Annual full-scope, on-site examinations are required for all FDIC-insured institutions with assets of $500 million or more. For bank holding companies that have at least one subsidiary bank which has $500 million or more in assets, the independent accountants of such companies shall attest to the accuracy of management's report. Such accountants shall also monitor management's compliance with governing laws and regulations. Such companies are also required to select an independent audit committee composed of outside directors who are independent of management, to review with management and the independent accountants the reports that must be submitted to the appropriate bank regulatory agencies. If the independent accountants resign or are dismissed, written notification must be given to the FDIC and to the appropriate federal and state bank regulatory agency.
Prompt Corrective Action. In order to reduce losses to the deposit insurance funds, FDICIA established a format to more closely monitor FDIC-insured institutions and to enable prompt corrective action by the appropriate federal supervisory agency if an institution begins to experience
any difficulty. FDICIA established five "Capital" categories. They are: (1) well-capitalized; (2) adequately capitalized; (3) undercapitalized; (4) significantly undercapitalized; and (5) critically undercapitalized. The overall goal of these new capital measures is to impose more scrutiny and operational restrictions on depository institutions as they descend the capital categories from well capitalized to critically undercapitalized.
The FDIC, the OCC, the FRB and the Office of Thrift Supervision issued jointly the regulations relating to these capital categories and prompt corrective action. These capital measures for prompt corrective action are defined as follows:
A "well-capitalized" institution would be one that has at least a 10% total risk-based capital ratio, a 6% or greater Tier I risk-based capital ratio, a 5% or greater Tier I leverage capital ratio, and is not subject to any written order or final directive by the FDIC to meet and maintain a specific capital level.
An "adequately capitalized" institution would be one that meets the required minimum capital levels, but does not meet the definition of a "well-capitalized" institution. The existing capital rules generally require banks to maintain a Tier I leverage capital ratio of at least 4% and an 8% or greater total risk-based capital ratio. Since the risk-based standards also require at least half of the total risk-based capital requirement to be in the form of Tier I capital, this also will mean that an institution would need to maintain at least a 4% Tier I risk-based capital ratio. Thus, an institution would need to meet each of the required minimum capital levels in order to be deemed "adequately capitalized."
An "undercapitalized" institution would fail to meet one or more of the required minimum capital levels for an "adequately capitalized" institution. An "undercapitalized" institution must file a capital restoration plan and is automatically subject to restrictions on dividends, management fees and asset growth. In addition, the institution is prohibited from making acquisitions, opening new branches or engaging in new lines of business without the prior approval of its primary federal regulator. A number of other discretionary restrictions also may be imposed on a case-by-case basis, and harsher restrictions that otherwise would apply to "significantly undercapitalized" institutions may be imposed on an "undercapitalized" institution that fails to file or implement an acceptable capital restoration plan.
A "significantly undercapitalized" institution would have a total risk-based capital ratio of less than 6%, a Tier I risk-based capital ratio of less than 3%, or a Tier I leverage capital ratio of less than 3%, as the case may be. Institutions in this category would be subject to all the restrictions that apply to "undercapitalized" institutions. Certain other mandatory prohibitions also would apply, such as restrictions against the payment of bonuses or raises to senior executive officers without the prior approval of the institution's primary federal regulator. A number of other restrictions may be imposed.
A "critically undercapitalized" institution would be one with a tangible equity (Tier I capital) ratio of 2% or less. In addition to the same restrictions and prohibitions that apply to "undercapitalized" and "significantly undercapitalized" institutions, the FDIC's rule implementing
this provision of FDICIA also addresses certain other provisions for which the FDIC has been accorded responsibility as the insurer of depository institutions.
At a minimum, any institution that becomes "critically undercapitalized" is prohibited from taking the following actions without the prior written approval of its primary federal supervisory agency: engaging in any material transactions other than in the usual course of business; extending credit for highly leveraged transactions ("HLTs"); amending its charter or bylaws; making any material changes in accounting methods; engaging in certain transactions with affiliates; paying excessive compensation or bonuses; and paying interest on liabilities exceeding the prevailing rates in the institution's market area. In addition, a "critically undercapitalized" institution is prohibited from paying interest or principal on its subordinated debt and is subject to being placed in conservatorship or receivership if its tangible equity capital level is not increased within certain mandated time frames.
At any time, an institution's primary federal supervisory agency may reclassify it into a lower capital category. All institutions are prohibited from declaring any dividends, making any other capital distribution, or paying a management fee if it would result in downward movement into any of the three undercapitalized categories. FDICIA provides an exception to this requirement for stock redemptions that do not lower an institution's capital and would improve its financial condition, if the appropriate federal supervisory agency has consulted with the FDIC and approved the redemption.
The regulation requires institutions to notify the FDIC following any material event that would cause such institution to be placed in a lower category. Additionally, the FDIC monitors capital levels through regulatory and examination reports.
Real Estate Lending Standards. Pursuant to FDICIA, the OCC and other federal banking agencies adopted real estate lending guidelines which would set loan-to-value ("LTV") ratios for different types of real estate loans. A LTV ratio is generally defined as the total loan amount divided by the appraised value of the property at the time the loan is originated. If the institution does not hold a first lien position, the total loan amount would be combined with the amount of all senior liens when calculating the ratio. These guidelines became effective on March 19, 1993. In addition to establishing the LTV ratios, the guidelines require all real estate loans to be based upon proper loan documentation and a recent appraisal of the property.
Bank Enterprise Act of 1991. Within the overall FDICIA is a separate subtitle called the "Bank Enterprise Act of 1991." The purpose of this Act is to encourage banking institutions to establish "basic transaction services for consumers" or so-called "life-line accounts." The FDIC assessment rate is reduced for all life-line depository accounts. This Act establishes ten (10) factors which are the minimum requirements to qualify as a life-line depository account. Some of these factors relate to minimum opening and balance amounts, minimum number of monthly withdrawals, the absence of discriminatory practices against low-income individuals and minimum service charges and fees. Moreover, the Housing and Community Development Act of 1972 requires that the FDIC's
risk-based assessment system include provisions regarding life-line accounts. Assessment rates applicable to life-line accounts are to be established by FDIC rule.
Truth in Savings Act. FDICIA also contains the Truth in Savings Act ("TSA"). The FRB has adopted regulations ("Regulation DD") under the TSA. The purpose of TSA is to require the clear and uniform disclosure of the rates of interest which are payable on deposit accounts by depository institutions and the fees that are assessable against deposit accounts, so that consumers can make a meaningful comparison between the competing claims of banks with regard to deposit accounts and products. In addition to disclosures to be provided when a customer establishes a deposit account, TSA requires the depository institution to include, in a clear and conspicuous manner, the following information with each periodic statement of a deposit account: (1) the annual percentage yield earned; (2) the amount of interest earned; (3) the amount of any fees and charges imposed; and (4) the number of days in the reporting period. TSA allows for civil lawsuits to be initiated by customers if the depository institution violates any provision or regulation under TSA.
FDIC Insurance Assessments
The FDIC has implemented a risk-related premium schedule for all insured depository institutions that results in the assessment of premiums based on capital and supervisory measures.
Under the risk-related premium schedule, the FDIC, on a semiannual basis, assigns each institution to one of three capital groups (well capitalized, adequately capitalized or under capitalized) and further assigns such institution to one of three subgroups within a capital group corresponding to the FDIC's judgment of the institution's strength based on supervisory evaluations, including examination reports, statistical analysis and other information relevant to gauging the risk posed by the institution. Only institutions with a total capital to risk-adjusted assets ratio of 10.0% or greater, a Tier 1 capital to risk-adjusted assets ratio of 6.0% or greater and a Tier 1 leverage ratio of 5.0% or greater, are assigned to the well-capitalized group.
Over the last two years, FDIC insurance assessments have seen several changes for both BIF and SAIF institutions. The most recent change occurred on September 30, 1996, when the President signed into law a bill designed to remedy the disparity between BIF and SAIF deposit premiums. The first part of the bill called for the SAIF to be capitalized by a one-time assessment on all SAIF insured deposits held as of March 31, 1995. This assessment, which was 65.7 cents per $100 in deposits, raised approximately $4.7 billion to bring the SAIF up to is required 1.25 reserve ratio. Vista paid this special assessment in 1996 for those "SAIF-insured" deposits it held. The second part of the bill remedied the future anticipated shortfall with respect to the payment of FICO interest. For 1997 through 1999, the banking industry will help pay the FICO interest payments at an assessment rate that is one-fifth the rate paid by thrifts. The FICO assessment on BIF insured deposits is 1.22 cents per $100 in deposits; for SAIF insured deposits it is 6.10 cents per $100 in deposits. Beginning January 1, 2000, the FICO interest payments will be paid pro-rata by banks and thrifts based on deposits. At December 31, 1998, the FICO interest assessment paid by Vista was approximately $ 86 thousand. The Bank Subsidiaries have not been
required to pay any FDIC insurance assessments since the fourth quarter of 1996, because BIF has met its statutorily required ratios and the Bank Subsidiaries are categorized as "well capitalized."
Capital Standards
The FRB has issued risk-based capital guidelines. The guidelines require all bank holding companies to maintain a minimum risk-based capital ratio of 8%, of which at least half must be in the form of common shareholders' equity. Assets will be assigned to five risk categories, with higher levels of capital being required for the categories perceived as representing greater credit risk. The required capital ratios will represent equity and (to the extent permitted) nonequity capital as a percentage of total risk-weighted assets. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and to minimize disincentives for holding liquid assets.
The following table presents Vista's consolidated regulatory capital based on these guidelines as of December 31, 1998 (in thousands):
Tier I Capital ............................................ $ 45,055 Tier II Capital ........................................... 4,415 -------- Total Capital ............................................. $ 49,470 ========
Total Average Quarterly Assets ............................ $583,067 Total Risk-Weighted Assets(1) ............................. $353,084
Tier I Risk-Based Capital Ratio(2) ........................ 12.76% Required Tier I Risk-Based Capital Ratio .................. 4.00% ------- Excess Tier I Risk-Based Capital Ratio .................... 8.76%
Total Risk-Based Capital Ratio(3) ......................... 14.01% Required Total Risk-Based Capital Ratio ................... 8.00% ------- Excess Total Risk-Based Capital Ratio ..................... 6.01%
Tier I Leverage Ratio(4) .................................. 7.73% Required Tier I Leverage Ratio ............................ 4.00% ------- Excess Tier I Leverage Ratio .............................. 3.73%
- ----------- (1) Includes off-balance sheet items at credit equivalent values.
(2) Tier I Risk-Based Capital Ratio is defined as the ratio of Tier I Capital to Total Risk-Weighted Assets.
(3) Total Risk-Based Capital Ratio is defined as the ratio of Tier I Capital plus Tier II Capital to Total Risk-Weighted Assets.
(4) Tier I Leverage Ratio is defined as the ratio of Tier I Capital to Total Average Quarterly Assets.
Vista's ability to maintain the required levels of capital is substantially dependent upon the success of its capital plan, business plan, the impact of future economic events, the ability to manage its interest rate risk, and the ability to control its growth and other operating expenses.
Effect of Government Monetary Policies
The earnings of Vista are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies.
The monetary policies of the FRB have had, and will likely continue to have, an impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The FRB has a major effect upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulations of, among other things, the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature and impact of future changes in monetary policies.
History and Business - Phillipsburg National Bank
Phillipsburg National Bank was established in 1856, became a national banking association in 1865 and is under the supervision of the OCC. Its legal headquarters is located at 115 South Main Street, Phillipsburg, New Jersey 08865. Phillipsburg National Bank owns its legal headquarters building, the Alpha branch office, the Greenwich branch office, the Phillipsburg Mall branch office (building only) on Route 22, the Washington branch office, the Washington Township branch office, the Flemington branch office (building only) and the administrative offices and loan center at 305 Roseberry Street. Phillipsburg National Bank rents the following premises under various operating leases: the Hillcrest branch office, the Clinton branch office, the land on which is located the Phillipsburg Mall branch office and the land on which is located the Flemington branch office. See Item 2
Item 2. Properties
The following table describes the properties owned or leased by Vista and the Bank Subsidiaries:
* Leases commenced subsequent to year-end 1998.
For information with respect to obligations for lease rentals, refer to Note 13 of the Notes to Consolidated Financial Statements in Vista's Annual Report filed at Exhibit 13 hereto and is incorporated in its entirety by reference. The branches that are under lease have customary commercial lease options to extend the terms of the applicable lease.
It is management's opinion that the facilities currently utilized are suitable and adequate for current and immediate future purposes.
Item 3.
Item 3. Legal Proceedings
General
The nature of Vista's and the Bank Subsidiaries' business generates a certain amount of litigation involving matters arising in the ordinary course of business. However, in the opinion of management of Vista and the Bank Subsidiaries, there are no proceedings pending to which Vista and the Bank Subsidiaries are a party or to which their property is subject, which, if determined adversely to Vista and the Bank Subsidiaries, would be material in relation to Vista's and the Bank Subsidiaries' undivided profits or financial condition, nor are there any proceedings pending other than ordinary routine litigation incident to the business of Vista and the Bank Subsidiaries. In addition, no material proceedings are pending or are known to be threatened or contemplated against Vista and the Bank Subsidiaries by government authorities or others.
Environmental Issues
There are several federal and state statutes that govern the obligations of financial institutions with respect to environmental issues. Besides being responsible under such statutes for its own conduct, a bank also may be held liable under certain circumstances for actions of borrowers or other third parties on properties that collateralize loans held by the bank. Such potential liability may far exceed the original amount of the loan made by the bank. Currently, the Bank Subsidiaries are not a party to any pending legal proceedings under any environmental statue nor are the Bank Subsidiaries aware of any circumstances that may give rise to liability of them under any such statute.
Part II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters
Market Information
Vista Bancorp, Inc. Common Stock trades on The Nasdaq Stock Market(R) under the symbol "VBNJ" .
The Nasdaq Stock Market(R), which began operation in 1971, is the world's first electronic securities market and the fastest growing stock market in the U.S. Nasdaq utilizes today's information technologies - computers and telecommunications - to unite its participants in a screen-based market. It enables market participants to compete with each other for investor orders in each Nasdaq security and, through the use of Nasdaq Workstation II(R) and other automated systems, it facilitates the trading and surveillance of thousands of securities. This competitive marketplace, along with many products and services available to issuers and their shareholders, attracts today's largest and fastest growing companies to Nasdaq. These include industry leaders in computers, pharmaceuticals, telecommunications, biotechnology, and financial services. More domestic and foreign companies list on Nasdaq than on all other U.S. stock markets combined.
The table below presents the high and low prices reported for Vista's Common Stock for the periods indicated. The range of high and low prices is based on trade prices reported on the NASDAQ Stock Market. On December 31, 1998, the closing price of a share of Vista Common Stock on the NASDAQ Stock Market was $21.25. All prices have been restated to reflect the 10% stock dividend of June 1998.
High Low ---- --- 1998: First quarter ....................... $20.00 $16.82 Second quarter ...................... $22.95 $19.32 Third quarter ....................... $22.75 $19.00 Fourth quarter ...................... $24.75 $19.88
1997: First quarter ....................... $12.95 $11.82 Second quarter ...................... $14.32 $12.27 Third quarter ....................... $16.25 $13.18 Fourth quarter ...................... $18.41 $16.59
Dividends
Vista pays dividends on the outstanding shares of its Common Stock as determined by the Board of Directors from time to time. It has been the practice of the Board of Directors to declare cash dividends on a quarterly basis. It is the present intention of Vista's Board of Directors to continue to pay regular quarterly cash dividends; however, the declaration and payment of future dividends is at the sole discretion of the Board of Directors and the amount, if any, depends upon the earnings, financial condition and capital needs of Vista and the Bank Subsidiaries, as well as other factors, including restrictions arising from federal and state banking laws and regulations to which Vista and the Bank Subsidiaries are subject.
The following table shows the cash dividends paid per share of Vista Common Stock for the indicated periods. The dividends paid per share have been adjusted to reflect the 10% stock dividend paid in June 1998.
Cash Dividends Paid Per Share -------------- 1998: First quarter ...................................... $.10 Second quarter ..................................... .12 Third quarter ...................................... .12 Fourth quarter ..................................... .12
1997: First quarter ...................................... $.09 Second quarter ..................................... .09 Third quarter ...................................... .10 Fourth quarter ..................................... .10
Shareholders
As of December 31, 1998, Vista had approximately 898 holders of the Common Stock.
Dividend Restrictions
Under the New Jersey Business Corporation Act, Vista may not pay a dividend if, after giving effect thereto, either (a) Vista would be unable to pay its debts as they become due in the usual course of business or (b) Vista's total assets would be less than its total liabilities. The determination of total assets and liabilities may be based upon: (i) financial statements prepared on the basis of generally accepted accounting principles, (ii) financial statements that are prepared on the basis of other accounting practices and principles that are reasonable under the circumstances, or (iii) a fair valuation or other method that is reasonable under the circumstances.
Phillipsburg National Bank is subject to the rules governing the payment of dividends promulgated by the OCC. Phillipsburg National Bank may not pay dividends from capital (unimpaired common and preferred stock outstanding) but only from retained earnings after deducting losses and bad debts therefrom. "Bad debts" are defined as matured obligations in which interest is past due and unpaid for ninety (90) days, but do not include well-secured obligations that are in the process of collection.
Phillipsburg National Bank may not pay any dividends on its capital stock during the period in which it may be in default in the payment of its assessment for deposit insurance premium due to the FDIC, nor may it pay dividends on its capital common stock until any cumulative dividends on Phillipsburg National Bank's preferred stock (if any) have been paid in full. Phillipsburg National Bank has never been in default in the payments of its assessments to the FDIC; and, moreover, Phillipsburg National Bank has no outstanding preferred stock. In addition, under the Federal Deposit Insurance Act (912 U.S.C. ss.1818), dividends cannot be declared and paid if the OCC obtains a cease and desist order because such payment would constitute an unsafe and unsound banking practice. Phillipsburg National Bank's unrestricted retained earnings and net income available that could be paid as a dividend to Vista under the current OCC rules were $6.9 million as of December 31, 1998.
Similar to Phillipsburg National Bank, the future dividends of Twin Rivers are also subject to certain regulatory considerations and the discretion of its Board of Directors and will depend upon a number of factors, including operating results, financial conditions and general business conditions. Vista is entitled to receive dividends, as and when declared by the Board of Directors of Twin Rivers, out of funds legally available therefor, subject to the restrictions set forth in the Pennsylvania Banking Code of 1965 (the "Pennsylvania Banking Code") and the Federal Deposit Insurance Act.
The Pennsylvania Banking Code provides that cash dividends may be declared and paid only out of accumulated net earnings and that, prior to the declaration of any dividend, if the surplus of Twin Rivers is less than the amount of its capital, Twin Rivers shall, until surplus is equal to such amount, transfer to surplus an amount which is at least 10% of the net earnings of Twin Rivers for the period since the end of the last fiscal year or for any shorter period since the declaration of a dividend. If the surplus of Twin Rivers is less than 50% of
the amount of capital, no dividend may be declared or paid without the prior approval of the Pennsylvania Department of Banking until such surplus is equal to 50% of Twin Rivers' capital.
As of December 31, 1998, there were $1.9 million accumulated net earnings available at Twin Rivers that could be paid as a dividend to Vista under current Pennsylvania law.
The Federal Deposit Insurance Act generally prohibits all payments of dividends by any bank which is in default on any assessment for deposit insurance premium to the FDIC.
Item 6.
Item 6. Selected Financial Data
The information called for by this item is filed at Exhibit 13 hereto and is incorporated in its entirety by reference under this Item 6.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Vista's Annual Report (at page 9) filed at Exhibit 13 hereto is incorporated in its entirety by reference under this Item 7.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information called for by this item is found under the caption "Interest Rate Sensitivity" in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Vista's Annual Report (at page 20) filed at Exhibit 13 hereto and is incorporated in its entirety by reference under this Item 7A.
Item 8.
Item 8. Financial Statements and Supplementary Data
Vista's Consolidated Financial Statements and notes thereto contained in the Annual Report (beginning at page 24) filed at Exhibit 13 hereto are incorporated in their entirety by reference under this Item 8. Moreover, certain additional financial information pertaining to bank holding companies, under SEC Guide 3, is set forth (at page 86) and filed at Exhibit 99B hereto is incorporated by reference under this Item 8.
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The captions "Board of Directors" and "Stock Ownership" contained in Vista's Proxy Statement (at pages 2, and 5, respectively) filed at Exhibit 99A hereto are incorporated in their entirety by reference under this Item 10.
Principal Officers of Vista
The following table sets forth selected information, as of March 12, 1999, about the principal officers of Vista each of whom is selected by the Board of Directors and each of whom holds office at the discretion of the Board of Directors:
- ------------- (1) Messrs. Curry and Cline are not employees.
(2) For further information on these stockholdings, see information under Item 12 hereto.
Item 11.
Item 11. Executive Compensation
The captions "Executive Compensation" contained in Vista's Proxy Statement (at page 7) filed at Exhibit 99A hereto is incorporated in its entirety by reference under this Item 11.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The caption "Stock Ownership" contained in Vista's Proxy Statement (at page 5) filed at Exhibit 99A hereto is incorporated in its entirety by reference under this Item 12.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information under the caption "Other Information" contained in Vista's Proxy Statement (at page 11) filed at Exhibit 99A hereto is incorporated in its entirety by reference under this Item 13.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. The Registrant's consolidated financial statements and notes thereto as well as the applicable reports of the independent certified public accountants are filed at Exhibit 13 hereto and are incorporated in their entirety by reference under this Item 14(a)1.
2. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. The exhibits required by Item 601 of Regulation S-K are included under Item 14(c) hereto.
(b) Reports on Form 8-K
Vista filed no reports on Form 8-K during the last quarter of the year ended December 31, 1998.
(c) Exhibits required by Item 601 of Regulation S-K:
Exhibit Number Referred to Item 601 of Regulation S-K Description of Exhibit - -------------------------- ----------------------
2 None.
3A Articles of Incorporation filed on April 15, 1988, at Exhibit B to Form S-4 (No. 33-21260), and hereby incorporated by reference.
3B By-laws of Vista filed on April 15, 1988, at Exhibit C to Form S-4 (No. 33-21260), and hereby incorporated by reference.
4 None.
9 None.
10 None.
11 None.
13 Portions of the Annual Report to Shareholders for Fiscal Year Ended December 31, 1998.
16 None.
18 None.
19 None.
21 List of Subsidiaries, filed on September 4, 1991, at Exhibit 22 to Form S-1 (Nos. 33-42565 and 33-42569), and hereby incorporated by reference.
22 None.
23 None.
24 None.
27 Financial Data Schedule.
99A Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held April 22, 1999.
99B SEC Guide 3 Financial Information.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VISTA BANCORP, INC. (Issuer)
By: /s/ Barbara Harding Date: March 18, 1999 ----------------------------------- ---------------- Barbara Harding President
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Barbara Harding Date: March 18, 1999 ----------------------------------- ---------------- Barbara Harding President and Director (Chief Executive Officer)
By: Date: ----------------------------------- ---------------- Richard A. Cline Director
By: /s/ Harold J. Curry Date: March 18, 1999 ----------------------------------- ---------------- Harold J. Curry Chairman of the Board and Director
By: /s/ Dale F. Falcinelli Date: March 18, 1999 ----------------------------------- ---------------- Dale F. Falcinelli Director
By: /s/ James T. Finegan, Jr. Date: March 18, 1999 ----------------------------------- ---------------- James T. Finegan, Jr. Director
By: /s/ Barry L. Hajdu Date: March 18, 1999 ----------------------------------- ---------------- Barry L. Hajdu Director
By: /s/ David L. Hensley Date: March 18, 1999 ----------------------------------- ---------------- David L. Hensley Director
By: /s/ Mark A. Reda Date: March 18, 1999 ----------------------------------- ---------------- Mark A. Reda Director
By: /s/ Marc S. Winkler Date: March 18, 1999 ----------------------------------- ---------------- Marc S. Winkler Director
By: /s/ J. Marshall Wolff Date: March 18, 1999 ----------------------------------- ---------------- J. Marshall Wolff Director
By: /s/ William F. Keefe Date: March 18, 1999 ----------------------------------- ---------------- William F. Keefe Executive Vice President and Chief Financial Officer (Chief Financial and Accounting Officer)
INDEX TO EXHIBITS
Item Number Description Page - ----------- ----------- ---- 13 Portions of the Annual Report to Shareholders for Fiscal Year Ended December 31, 1998 36
27 Financial Data Schedule 91
99A Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held April 22, 1999 76
99B SEC Guide 3 Financial Information 86