XNAS:CFNL Cardinal Financial Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2012

 

or

 

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                          to                         

 

Commission File Number:  0-24557

 

CARDINAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Virginia

(State or other jurisdiction of

incorporation or organization)

 

54-1874630

(I.R.S. Employer

Identification No.)

 

8270 Greensboro Drive, Suite 500

 

 

McLean, Virginia

 

22102

(Address of principal executive offices)

 

(Zip Code)

 

(703) 584-3400

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

29,223,828 shares of common stock, par value $1.00 per share,

outstanding as of May 3, 2012

 

 

 



Table of Contents

 

CARDINAL FINANCIAL CORPORATION

 

INDEX TO FORM 10-Q

 

PART I — FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements:

 

 

 

Consolidated Statements of Condition
At March 31, 2012 (unaudited) and December 31, 2011

2

 

 

Consolidated Statements of Income
For the three months ended March 31, 2012 and 2011 (unaudited)

3

 

 

Consolidated Statements of Comprehensive Income
For the three months ended March 31, 2012 and 2011 (unaudited)

4

 

 

Consolidated Statements of Changes in Shareholders’ Equity
For the three months ended March 31, 2012 and 2011 (unaudited)

5

 

 

Consolidated Statements of Cash Flows
For the three months ended March 31, 2012 and 2011 (unaudited)

6

 

 

Notes to Consolidated Financial Statements (unaudited)

7

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

40

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

64

 

 

Item 4. Controls and Procedures

65

 

 

PART II — OTHER INFORMATION

66

 

 

Item 1. Legal Proceedings

66

Item 1A. Risk Factors

66

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

66

Item 3. Defaults Upon Senior Securities

66

Item 4. Mine Safety Disclosures

66

Item 5. Other Information

66

Item 6. Exhibits

67

 

 

SIGNATURES

68

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

March 31, 2012 and December 31, 2011

(In thousands, except share data)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

17,055

 

$

16,745

 

Federal funds sold

 

32,964

 

20,394

 

Total cash and cash equivalents

 

50,019

 

37,139

 

Investment securities available-for-sale

 

284,198

 

295,560

 

Investment securities held-to-maturity (market value of $9,603 and $9,966 at March 31, 2012 and December 31, 2011, respectively)

 

12,561

 

12,918

 

Investment securities-trading

 

2,725

 

2,065

 

Total investment securities

 

299,484

 

310,543

 

Other investments

 

17,910

 

17,120

 

Loans held for sale

 

501,215

 

529,500

 

Loans receivable, net of deferred fees and costs

 

1,660,271

 

1,631,882

 

Allowance for loan losses

 

(25,223

)

(26,159

)

Loans receivable, net

 

1,635,048

 

1,605,723

 

Premises and equipment, net

 

18,190

 

19,302

 

Deferred tax asset, net

 

4,160

 

4,732

 

Goodwill and intangibles, net

 

10,441

 

10,490

 

Bank-owned life insurance

 

35,326

 

35,154

 

Prepaid FDIC insurance premiums

 

3,061

 

3,350

 

Other real estate owned

 

2,500

 

3,046

 

Accrued interest receivable and other assets

 

31,312

 

26,617

 

Total assets

 

$

2,608,666

 

$

2,602,716

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Non-interest bearing deposits

 

$

303,685

 

$

263,752

 

Interest bearing deposits

 

1,557,862

 

1,511,508

 

Total deposits

 

1,861,547

 

1,775,260

 

Other borrowed funds

 

408,439

 

510,385

 

Mortgage funding checks

 

37,425

 

25,989

 

Escrow liabilities

 

6,298

 

4,095

 

Accrued interest payable and other liabilities

 

29,299

 

29,170

 

Total liabilities

 

2,343,008

 

2,344,899

 

Common stock, $1 par value

2012

 

2011

 

 

 

 

 

Shares authorized

50,000,000

 

50,000,000

 

 

 

 

 

Shares issued and outstanding

29,203,528

 

29,198,628

 

29,204

 

29,199

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

163,788

 

163,730

 

Retained earnings

 

60,149

 

53,372

 

Accumulated other comprehensive income, net

 

12,517

 

11,516

 

Total shareholders’ equity

 

265,658

 

257,817

 

Total liabilities and shareholders’ equity

 

$

2,608,666

 

$

2,602,716

 

 

See accompanying notes to consolidated financial statements.

 

2



Table of Contents

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three months ended March 31, 2012 and 2011

(In thousands, except per share data)

(Unaudited)

 

 

 

2012

 

2011

 

Interest income:

 

 

 

 

 

Loans receivable

 

$

20,699

 

$

18,819

 

Loans held for sale

 

4,038

 

1,301

 

Federal funds sold

 

21

 

46

 

Investment securities available-for-sale

 

2,779

 

3,433

 

Investment securities held-to-maturity

 

84

 

155

 

Other investments

 

49

 

31

 

Total interest income

 

27,670

 

23,785

 

Interest expense:

 

 

 

 

 

Deposits

 

3,559

 

3,416

 

Other borrowed funds

 

2,373

 

2,708

 

Total interest expense

 

5,932

 

6,124

 

Net interest income

 

21,738

 

17,661

 

Provision for loan losses

 

1,898

 

1,110

 

Net interest income after provision for loan losses

 

19,840

 

16,551

 

Non-interest income:

 

 

 

 

 

Service charges on deposit accounts

 

445

 

413

 

Loan fees

 

376

 

213

 

Title insurance & other related income

 

466

 

243

 

Investment fee income

 

613

 

548

 

Realized and unrealized gains on mortgage banking activities

 

6,881

 

3,091

 

Net realized gain on investment securities available-for-sale

 

 

403

 

Net realized gain on investment securities-trading

 

187

 

48

 

Management fee income

 

1,009

 

299

 

Increase in cash surrender value of bank-owned life insurance

 

172

 

180

 

Loss on sale of real estate

 

(473

)

 

Other income

 

6

 

8

 

Total non-interest income

 

9,682

 

5,446

 

Non-interest expense:

 

 

 

 

 

Salary and benefits

 

9,512

 

6,653

 

Occupancy

 

1,709

 

1,473

 

Professional fees

 

739

 

532

 

Depreciation

 

602

 

457

 

Data processing & communications

 

1,167

 

919

 

FDIC insurance premiums

 

327

 

634

 

Mortgage loan repurchases and settlements

 

115

 

100

 

Loss on extinguishment of debt

 

 

450

 

Amortization of intangibles

 

49

 

49

 

Other operating expenses

 

3,861

 

2,873

 

Total non-interest expense

 

18,081

 

14,140

 

Income before income taxes

 

11,441

 

7,857

 

Provision for income taxes

 

3,788

 

2,636

 

Net income

 

$

7,653

 

$

5,221

 

Earnings per common share - basic

 

$

0.26

 

$

0.18

 

Earnings per common share - diluted

 

$

0.26

 

$

0.18

 

Weighted-average common shares outstanding - basic

 

29,586

 

29,291

 

Weighted-average common shares outstanding - diluted

 

29,993

 

29,801

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended March 31, 2012 and 2011

(In thousands)

(Unaudited)

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net income

 

$

7,653

 

$

5,221

 

Other comprehensive income:

 

 

 

 

 

Unrealized gain (loss) on available-for-sale investment securities:

 

 

 

 

 

Unrealized holding gain (loss) arising during the period, net of tax benefit of $110 thousand in 2012 and net of tax expense of $131 thousand in 2011

 

(213

)

246

 

 

 

 

 

 

 

Less: reclassification adjustment for net gains included in net income net of tax expense of $0 in 2012 and $131 thousand in 2011

 

 

(271

)

 

 

 

 

 

 

 

 

(213

)

(25

)

 

 

 

 

 

 

Unrealized gain on derivative instruments designated as cash flow hedges, net of tax expense of $682 thousand in 2012 and net of tax expense of $353 thousand in 2011

 

1,214

 

669

 

 

 

 

 

 

 

Comprehensive income

 

$

8,654

 

$

5,865

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Three months ended March 31, 2012 and 2011

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Common

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Stock

 

Capital

 

Earnings

 

Income

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2010

 

28,770

 

$

28,770

 

$

160,859

 

$

28,848

 

$

4,425

 

$

222,902

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

154

 

154

 

1,226

 

 

 

1,380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense, net of tax benefit

 

 

 

63

 

 

 

63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock of $0.03 per share

 

 

 

 

(866

)

 

(866

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in accumulated other comprehensive income

 

 

 

 

 

644

 

644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

5,221

 

 

5,221

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2011

 

28,924

 

$

28,924

 

$

162,148

 

$

33,203

 

$

5,069

 

$

229,344

 

Balance, December 31, 2011

 

29,199

 

$

29,199

 

$

163,730

 

$

53,372

 

$

11,516

 

$

257,817

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

5

 

5

 

16

 

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense, net of tax benefit

 

 

 

42

 

 

 

42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock of $0.03 per share

 

 

 

 

(876

)

 

(876

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in accumulated other comprehensive income

 

 

 

 

 

1,001

 

1,001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

7,653

 

 

7,653

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2012

 

29,204

 

$

29,204

 

$

163,788

 

$

60,149

 

$

12,517

 

$

265,658

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2012 and 2011

(In thousands)

(Unaudited)

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

7,653

 

$

5,221

 

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

 

 

 

 

 

Depreciation

 

602

 

457

 

Amortization of premiums, discounts and intangibles

 

36

 

111

 

Provision for loan losses

 

1,898

 

1,110

 

Loans held for sale originated

 

(1,411,582

)

(472,710

)

Proceeds from the sale of loans held for sale

 

1,446,748

 

513,279

 

Realized and unrealized gains on mortgage banking activities

 

(6,881

)

(3,091

)

Purchase of investment securities-trading

 

(544

)

(464

)

Unrealized gain on investment securities-trading

 

(187

)

(48

)

Gain on sale of investment securities available-for-sale

 

 

(403

)

Loss on sale of other real estate owned

 

473

 

 

Stock compensation expense, net of tax benefits

 

42

 

63

 

Increase in cash surrender value of bank-owned life insurance

 

(172

)

(180

)

Increase (decrease) in accrued interest receivable and other assets

 

(2,511

)

1,091

 

Increase (decrease) in accrued interest payable, escrow liabilities and other liabilities

 

2,404

 

(4,571

)

 

 

 

 

 

 

Net cash provided by operating activities

 

37,979

 

39,865

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Net purchases of premises and equipment

 

(594

)

(1,158

)

Proceeds from the sale of fixed assets

 

1,104

 

 

Proceeds from maturity and call of investment securities available-for-sale

 

 

 

Proceeds from maturity or call of investment securities held-to-maturity

 

 

4,264

 

Proceeds from sale of mortgage-backed securities available-for-sale

 

 

5,359

 

Purchase of investment securities available-for-sale

 

 

(17,281

)

Purchase of mortgage-backed securities available-for-sale

 

 

(62,539

)

Purchase of other investments

 

(790

)

 

Proceeds of other real estate owned

 

2,573

 

 

Redemptions of investment securities available-for-sale

 

11,053

 

13,595

 

Redemptions of investment securities held-to-maturity

 

356

 

1,397

 

Net increase in loans receivable, net of deferred fees and costs

 

(33,723

)

(5,026

)

 

 

 

 

 

 

Net cash used in investing activities

 

(20,021

)

(61,389

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase (decrease) in deposits

 

86,287

 

(16,812

)

Net increase (decrease) in other borrowed funds - short term

 

(101,946

)

41,268

 

Net increase in mortgage funding checks

 

11,436

 

7,319

 

Proceeds from FHLB advances

 

55,000

 

 

Repayment of FHLB advances

 

(55,000

)

(15,000

)

Stock options exercised

 

21

 

1,380

 

Dividends on common stock

 

(876

)

(866

)

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

(5,078

)

17,289

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

12,880

 

(4,235

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of the year

 

37,139

 

25,868

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

 

$

50,019

 

$

21,633

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for interest

 

$

6,053

 

$

6,037

 

Cash paid for income taxes

 

3,795

 

3,910

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

 

Note 1

 

Organization

 

Cardinal Financial Corporation (the “Company”) is incorporated under the laws of the Commonwealth of Virginia as a financial holding company whose activities consist of investment in its wholly-owned subsidiaries. The principal operating subsidiary of the Company is Cardinal Bank (the “Bank”), a state-chartered institution and its subsidiary, George Mason Mortgage, LLC (“George Mason”), a mortgage banking company based in Fairfax, Virginia. In January 2009, the Bank organized a second mortgage subsidiary, Cardinal First Mortgage, LLC (“Cardinal First”) also based in Fairfax, Virginia.  The Bank has a trust division, Cardinal Trust and Investment Services.  In addition to the Bank, the Company has two nonbank subsidiaries; Wilson/Bennett Capital Management, Inc. (“Wilson/Bennett”), an asset management firm and Cardinal Wealth Services, Inc. (“CWS”), an investment services subsidiary.

 

Basis of Presentation

 

In the opinion of management, the accompanying consolidated financial statements have been prepared in accordance with the requirements of Regulation S-X, Article 10. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

Note 2

 

Stock-Based Compensation

 

At March 31, 2012, the Company had two stock-based employee compensation plans, the 1999 Stock Option Plan (the “Option Plan”) and the 2002 Equity Compensation Plan (the “Equity Plan”).

 

In 1998, the Company adopted the Option Plan pursuant to which the Company may grant stock options for up to 625,000 shares of the Company’s common stock to employees and members of the Company’s and its subsidiaries’ boards of directors. As of November 23, 2008, the Option Plan expired, and therefore, there are no shares of common stock available to grant under this plan.

 

In 2002, the Company adopted the Equity Plan. The Equity Plan authorizes the granting of options, which may be incentive stock options or non-qualified stock options, stock appreciation rights, restricted stock awards, phantom stock awards and performance share awards to directors, eligible officers and key employees of the Company.  There were 1,015,168 shares of the Company’s common stock available for future grants and awards in the Equity Plan as of March 31, 2012.

 

Stock options are granted with an exercise price equal to the common stock’s fair market value at the date of grant. Director stock options have ten year terms and vest and become fully exercisable at the grant date. Employee stock options have ten year terms and vest and become fully exercisable in 20% increments beginning after their first year of service.

 

7



Table of Contents

 

The Company has only made awards of stock options under the Option Plan and the Equity Plan.

 

Total expense related to the Company’s share-based compensation plans for the three months ended March 31, 2012 and 2011 was $42,000 and $63,000, respectively.  The total income tax benefit recognized in the income statement for share-based compensation arrangements was $14,000 and $20,500 for the three months ended March 31, 2012 and 2011, respectively.

 

Options granted for the three months ended March 31, 2012 and 2011 were 9,000 and 56,100, respectively.  The weighted average per share fair value of stock option grants for the three months ended March 31, 2012 and 2011 was $4.22 and $5.07, respectively.  The fair values of the options granted during all periods ended March 31, 2012 and 2011 were estimated as of the grant date using the Black-Scholes option-pricing model based on the following weighted average assumptions:

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Estimated option life

 

6.5 Years

 

6.5 Years

 

Risk free interest rate

 

1.34 - 1.69%

 

2.75 - 2.76%

 

Expected volatility

 

42.10%

 

44.70%

 

Expected dividend yield

 

1.10%

 

1.02%

 

 

Expected volatility is based upon the average annual historical volatility of the Company’s common stock. The estimated option life is derived from specific historical data to estimate the expected term of the option, such as employee option exercise and employee post-vesting departure behavior. The risk free interest rate is based upon the seven-year U.S. Treasury note rate in effect at the time of grant.  The expected dividend yield is based upon implied and historical dividend declarations.

 

Stock option activity during the three months ended March 31, 2012 is summarized as follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

Number of

 

Exercise

 

Contractual

 

Value

 

 

 

Shares

 

Price

 

Term (Years)

 

($000)

 

Outstanding at December 31, 2011

 

1,832,860

 

$

9.38

 

 

 

 

 

Granted

 

9,000

 

10.94

 

 

 

 

 

Exercised

 

(4,900

)

4.35

 

 

 

 

 

Forfeited

 

(9,600

)

9.79

 

 

 

 

 

Outstanding at March 31, 2012

 

1,827,360

 

$

9.40

 

3.92

 

$

3,474,713

 

Options exercisable at March 31, 2012

 

1,680,530

 

$

9.38

 

3.53

 

$

3,226,772

 

 

The intrinsic value of options exercised during the three months ended March 31, 2012 and 2011 was $34,000 and $489,435, respectively.

 

A summary of the status of the Company’s non-vested stock options and changes during the three months ended March 31, 2012 is as follows:

 

8



Table of Contents

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number of

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Balance at December 31, 2011

 

173,700

 

$

3.94

 

Granted

 

9,000

 

4.22

 

Vested

 

(27,770

)

3.62

 

Forfeited

 

(8,100

)

3.91

 

Balance at March 31, 2012

 

146,830

 

$

4.02

 

 

At March 31, 2012, there was $566,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. The cost is expected to be recognized over a weighted average period of 3.5 years. The total fair value of shares that vested during the three months ended March 31, 2012 and 2011 was $100,000 and $136,000, respectively.

 

Note 3

 

Segment Information

 

The Company operates in three business segments: commercial banking, mortgage banking, and wealth management and trust services.

 

The commercial banking segment includes both commercial and consumer lending and provides customers with such products as commercial loans, real estate loans, business financing and consumer loans. In addition, this segment provides customers with several choices of deposit products including demand deposit accounts, savings accounts and certificates of deposit. The mortgage banking segment engages primarily in the origination and acquisition of residential mortgages for sale into the secondary market on a best efforts basis. The wealth management and trust services segment provides investment and financial advisory services to businesses and individuals, including financial planning, retirement/estate planning, trust, estates, custody, investment management, escrows, and retirement plans.

 

Information about the reportable segments and reconciliation of this information to the consolidated financial statements at and for the three months ended March 31, 2012 and 2011 is as follows:

 

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Table of Contents

 

At and for the Three Months Ended March 31, 2012 (in thousands):

 

 

 

 

 

 

 

Wealth Management

 

 

 

 

 

 

 

 

 

Commercial

 

Mortgage

 

and

 

 

 

Intersegment

 

 

 

 

 

Banking

 

Banking

 

Trust Services

 

Other

 

Elimination

 

Consolidated

 

Net interest income

 

$

21,300

 

$

647

 

$

 

$

(209

)

$

 

$

21,738

 

Provision for loan losses

 

1,640

 

258

 

 

 

 

1,898

 

Non-interest income

 

336

 

8,550

 

613

 

192

 

(9

)

9,682

 

Non-interest expense

 

11,575

 

4,909

 

657

 

949

 

(9

)

18,081

 

Provision for income taxes

 

2,701

 

1,441

 

(16

)

(338

)

 

3,788

 

Net income (loss)

 

$

5,720

 

$

2,589

 

$

(28

)

$

(628

)

$

 

$

7,653

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

2,547,665

 

$

505,722

 

$

575

 

$

283,538

 

$

(728,834

)

$

2,608,666

 

Average Assets

 

$

2,494,825

 

$

395,325

 

$

574

 

$

283,073

 

$

(689,288

)

$

2,484,509

 

 

At and for the Three Months Ended March 31, 2011 (in thousands):

 

 

 

 

 

 

 

Wealth Management

 

 

 

 

 

 

 

 

 

Commercial

 

Mortgage

 

and

 

 

 

Intersegment

 

 

 

 

 

Banking

 

Banking

 

Trust Services

 

Other

 

Elimination

 

Consolidated

 

Net interest income

 

$

17,437

 

$

425

 

$

 

$

(201

)

 

 

$

17,661

 

Provision for loan losses

 

1,110

 

 

 

 

 

 

1,110

 

Non-interest income

 

776

 

3,640

 

549

 

53

 

(22

)

4,996

 

Non-interest expense

 

8,995

 

3,251

 

773

 

693

 

(22

)

13,690

 

Provision for income taxes

 

2,690

 

290

 

(74

)

(270

)

 

 

2,636

 

Net income (loss)

 

$

5,418

 

$

524

 

$

(150

)

$

(571

)

$

 

$

5,221

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

2,035,241

 

$

167,699

 

$

593

 

$

250,203

 

$

(393,693

)

$

2,060,043

 

Average Assets

 

$

2,035,558

 

$

111,596

 

$

575

 

$

253,401

 

$

(354,662

)

$

2,046,468

 

 

The Company did not have any operating segments other than those reported. Parent company financial information is included in the “Other” category and represents an overhead function rather than an operating segment. The parent company’s most significant assets are its net investments in its subsidiaries. The parent company’s net interest expense is comprised of interest income from short-term investments and interest expense on trust preferred securities.

 

Note 4

 

Earnings Per Share

 

The following is the calculation of basic and diluted earnings per share for the three months ended March 31, 2012 and 2011.  Antidilutive outstanding stock options excluded from the weighted average shares outstanding for the diluted earnings per share calculation were 10,385 and 7,211 for the three months ended March 31, 2012 and 2011, respectively.  These stock options have exercise prices that were greater than the average market price of the Company’s common stock for the periods presented.

 

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Table of Contents

 

(In thousands,

 

Three Months Ended

 

except per share data)

 

2012

 

2011

 

Net income available to common shareholders

 

$

7,653

 

$

5,221

 

Weighted average common shares - basic

 

29,586

 

29,291

 

Weighted average common shares - diluted

 

29,993

 

29,801

 

Earnings per common share - basic

 

$

0.26

 

$

0.18

 

Earnings per common share - diluted

 

$

0.26

 

$

0.18

 

 

Weighted average shares for the basic earnings per share calculation is increased by the number of shares required to be issued under the Company’s various deferred compensation plans.  These plans provide for a Company match, such match must be in the common stock of the Company.  Employees who participate in the Company’s deferred compensation plans can allocate, at their discretion, their contributions to various investment options, including an option to invest in Company Common Stock.  The incremental weighted average shares attributable to the deferred compensation plans included in diluted outstanding shares assumes the participants opt to invest all of their contributions into the Company’s Common Stock investment option.

 

The following shows the composition of basic outstanding shares for the three months ended March 31, 2012 and 2011:

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

29,201

 

28,853

 

Weighted average shares attributable to the deferred compensation plans

 

385

 

438

 

Total weighted average shares - basic

 

29,586

 

29,291

 

 

The following shows the composition of diluted outstanding shares for the three months ended March 31, 2012 and 2011:

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Weighted average shares outstanding - basic (from above)

 

29,586

 

29,291

 

Incremental weighted average shares attributable to deferred compensation plans

 

228

 

211

 

Weighted average shares attributable to stock options

 

179

 

299

 

Total weighted average shares - diluted

 

29,993

 

29,801

 

 

Note 5

 

Investment Securities

 

The approximate fair value and amortized cost of investment securities at March 31, 2012 and December 31, 2011 are shown in the table below.

 

11



Table of Contents

 

 

 

March 31, 2012

 

 

 

Gross

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

Investment Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

U.S. government-sponsored agencies

 

$

35,701

 

4,359

 

 

$

40,060

 

Mortgage-backed securities

 

146,572

 

9,422

 

(50

)

155,944

 

Municipal securities

 

76,513

 

6,526

 

 

83,039

 

U.S. treasury securities

 

4,951

 

204

 

 

5,155

 

Total

 

$

263,737

 

$

20,511

 

$

(50

)

$

284,198

 

 

 

 

 

 

 

 

 

 

 

Investment Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

4,824

 

300

 

 

5,124

 

Pooled trust preferred securities

 

7,737

 

 

(3,258

)

4,479

 

Total

 

$

12,561

 

$

300

 

$

(3,258

)

$

9,603

 

 

 

 

December 31, 2011

 

 

 

Gross

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In thousands)

 

cost

 

Gains

 

Losses

 

value

 

Investment Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

U.S. government-sponsored agencies

 

$

35,735

 

$

4,365

 

$

 

$

40,100

 

Mortgage-backed securities

 

157,550

 

9,753

 

(209

)

167,094

 

Municipal securities

 

76,546

 

6,644

 

(5

)

83,185

 

U.S. treasury securities

 

4,945

 

236

 

 

5,181

 

Total

 

$

274,776

 

$

20,998

 

$

(214

)

$

295,560

 

 

 

 

 

 

 

 

 

 

 

Investment Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

5,115

 

319

 

 

5,434

 

Pooled trust preferred securities

 

7,803

 

 

(3,271

)

4,532

 

Total

 

$

12,918

 

$

319

 

$

(3,271

)

$

9,966

 

 

The fair value and amortized cost of investment securities by contractual maturity at March 31, 2012 and December 31, 2011 are shown below.  Expected maturities may differ from contractual maturities because many issuers have the right to call or prepay obligations with or without call or prepayment penalties.

 

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Table of Contents

 

 

 

March 31, 2012

 

 

 

Available-for-Sale

 

Held-to-Maturity

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

(In thousands)

 

Cost

 

Value

 

Cost

 

Value

 

After 1 year but within 5 years

 

$

10,911

 

11,782

 

 

 

After 5 years but within 10 years

 

51,425

 

56,997

 

 

 

After 10 years

 

54,829

 

59,475

 

7,737

 

4,479

 

Mortgage-backed securities

 

146,572

 

155,944

 

4,824

 

5,124

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

263,737

 

$

284,198

 

$

12,561

 

$

9,603

 

 

 

 

December 31, 2011

 

 

 

Available-for-Sale

 

Held-to-Maturity

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

(In thousands)

 

Cost

 

Value

 

Cost

 

Value

 

After 1 year but within 5 years

 

$

10,439

 

$

11,347

 

$

 

$

 

After 5 years but within 10 years

 

50,971

 

56,642

 

 

 

After 10 years

 

55,816

 

60,477

 

7,803

 

4,532

 

Mortgage-backed securities

 

157,550

 

167,094

 

5,115

 

5,434

 

Total

 

$

274,776

 

$

295,560

 

$

12,918

 

$

9,966

 

 

The following table shows the Company’s investment securities’ gross unrealized losses and their fair value, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position at March 31, 2012 and December 31, 2011.

 

March 31, 2012

 

Investment Securities Available-for-

 

 

 

 

 

 

 

 

 

 

 

 

 

Sale

 

Less than 12 months

 

12 months or more

 

Total

 

(In thousands)

 

Fair value

 

Unrealized loss

 

Fair value

 

Unrealized loss

 

Fair value

 

Unrealized loss

 

Mortgage-backed securities

 

 

 

354

 

(50

)

354

 

(50

)

Municipal securities

 

 

 

 

 

 

 

Total temporarily impaired securities

 

$

 

$

 

$

354

 

$

(50

)

$

354

 

$

(50

)

 

Investment Securities Held-to-
Maturity

 

Less than 12 months

 

 

 

Total

 

(In thousands)

 

Fair value

 

Unrealized loss

 

12 months or more

 

Fair value

 

Unrealized loss

 

Pooled trust preferred securities

 

 

 

4,479

 

(3,258

)

4,479

 

(3,258

)

Total temporarily impaired securities

 

$

 

$

 

$

4,479

 

$

(3,258

)

$

4,479

 

$

(3,258

)

 

December 31, 2011

 

Investment Securities Available-for-
Sale

 

Less than 12 months

 

12 months or more

 

Total

 

(In thousands)

 

Fair value

 

Unrealized loss

 

Fair value

 

Unrealized loss

 

Fair value

 

Unrealized loss

 

Mortgage-backed securities

 

$

721

 

$

(86

)

$

2,107

 

$

(123

)

$

2,828

 

$

(209

)

Municipal securities

 

524

 

(5

)

 

 

524

 

(5

)

Total temporarily impaired securities

 

$

1,245

 

$

(91

)

$

2,107

 

$

(123

)

$

3,352

 

$

(214

)

 

Investment Securities Held-to-
Maturity

 

Less than 12 months

 

12 months or more

 

Total

 

(In thousands)

 

Fair value

 

Unrealized loss

 

Fair value

 

Unrealized loss

 

Fair value

 

Unrealized loss

 

Pooled trust preferred securities

 

$

 

$

 

$

4,532

 

$

(3,271

)

$

4,532

 

$

(3,271

)

Total temporarily impaired securities

 

$

 

$

 

$

4,532

 

$

(3,271

)

$

4,532

 

$

(3,271

)

 

13



Table of Contents

 

The Company completes reviews for other-than-temporary impairment at least quarterly.  As of March 31, 2012, the majority of the investment securities portfolio consisted of securities rated AAA by a leading rating agency.  Investment securities which carry a AAA rating are judged to be of the best quality and carry the smallest degree of investment risk.  At March 31, 2012, 97% of the Company’s mortgage-related securities are guaranteed by the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Government National Mortgage Association (GNMA).

 

The Company has $4.3 million in non-government non-agency mortgage-related securities.  These securities are rated from AAA to AA.  The various protective elements on the non agency securities may change in the future if market conditions or the financial stability of credit insurers changes, which could impact the ratings of these securities.

 

At March 31, 2012, certain of the Company’s investment grade securities were in an unrealized loss position.  Investment securities with unrealized losses are a result of pricing changes due to recent and negative conditions in the current market environment and not as a result of permanent credit impairment.  Contractual cash flows for the agency mortgage-backed securities are guaranteed and/or funded by the U.S. government.  Other mortgage-backed securities and municipal securities have third party protective elements and there are no negative indications that the contractual cash flows will not be received when due.  The Company does not intend to sell nor does the Company believe it will be required to sell any of the temporarily impaired securities prior to the recovery of the amortized cost.

 

The held-to-maturity portfolio includes investments in four pooled trust preferred securities, totaling $7.7 million of par value at March 31, 2012.  The collateral underlying these structured securities are instruments issued by financial institutions or insurers.  The Company owns the senior A-3 tranches in each issuance.  Each of the bonds is rated by more than one rating agency.  One security has a composite rating of A, one security has a composite rating of A-, one of the securities has a composite rating of BB and the other security has a composite rating of B.  Observable trading activity remains limited for these types of securities.  The Company has estimated the fair value of the securities through the use of internal calculations and through information provided by external pricing services.  Given the level of subordination below the senior A-3 tranches, and the actual and expected performance of the underlying collateral, the Company expects to receive all contractual interest and principal payments recovering the amortized cost basis of each of the four securities, and concluded that these securities are not other-than-temporarily impaired.  The Company continuously monitors the financial condition of the underlying issues and the level of subordination below the senior A-3 tranches.  The Company also utilizes a multi-scenario model which assumes varying levels of additional defaults and deferrals and the effects of such adverse developments on the contractual cash flows for the senior A-3 tranches.  In each of the adverse scenarios, there was no indication of a break to the senior A-3 contractual cash flows.  Significant judgment is involved in the evaluation of other-than-temporary impairment.  The Company does not intend to sell nor does the Company believe it is probable that it will be required to sell these corporate bonds prior to the recovery of its investment.

 

In one of the pooled trust preferred securities issues, 42% of the principal balance is subordinate to the Company’s class of ownership, and it is estimated that a break in contractual cash flow would occur if $151 million of the remaining $304 million, or 50% of the performing collateral defaulted or deferred payment.  In another of the pooled trust preferred securities issues, 44% of the principal balance is subordinate to the Company’s class of ownership, and it is estimated that a break in contractual cash flow would occur if $74 million of the remaining $239 million, or 31% of the performing collateral defaulted or deferred payment.  In the third of the pooled trust preferred securities issues, 71% of the principal balance is subordinate to the Company’s class of ownership, and it is estimated that a break in contractual cash flow would occur if $137 million of the remaining $156 million, or 88% of the performing collateral defaulted or deferred payment.  In the fourth of the pooled trust preferred securities issues, 57% of the principal balance is subordinate to the Company’s class of ownership, and it is estimated that a break in

 

14



Table of Contents

 

contractual cash flow would occur if $256 million of the remaining $323 million, or 79% of the performing collateral defaulted to deferred payment.

 

No other-than-temporary impairment has been recognized on the securities in the Company’s investment portfolio for the three months ended March 31, 2012.  The Company does not continue to hold any investment securities for which the Company previously recognized other-than-temporary impairment.

 

Note 6

 

Loans Receivable and Allowance for Loan Losses

 

The loan portfolio at March 31, 2012 and December 31, 2011 consist of the following:

 

(In thousands)

 

2012

 

2011

 

Commercial and industrial

 

$

245,061

 

$

244,874

 

Real estate - commercial

 

719,522

 

745,317

 

Real estate - construction

 

308,934

 

295,189

 

Real estate - residential

 

267,392

 

224,171

 

Home equity lines

 

119,140

 

122,130

 

Consumer

 

3,178

 

3,148

 

 

 

1,663,227

 

1,634,829

 

Net deferred fees

 

(2,956

)

(2,947

)

Loans receivable, net of fees

 

1,660,271

 

1,631,882

 

Allowance for loan losses

 

(25,223

)

(26,159

)

Loans receivable, net

 

$

1,635,048

 

$

1,605,723

 

 

The Company’s allowance for loan losses is based first, on a segmentation of its loan portfolio by general loan type, or portfolio segments, as presented in the preceding table.  Certain portfolio segments are further disaggregated and evaluated collectively for impairment based on class segments, which are largely based on the type of collateral underlying each loan.

 

Activity in the Company’s allowance for loan losses for the three months ended March 31, 2012 and 2011 is shown below.

 

15



Table of Contents

 

 

 

2012

 

2011

 

Beginning balance, January 1

 

$

26,159

 

$

24,210

 

 

 

 

 

 

 

Provision for loan losses

 

1,898

 

1,110

 

 

 

 

 

 

 

Loans charged off:

 

 

 

 

 

Commercial and industrial

 

(2,710

)

(1,215

)

Residential

 

(291

)

 

Consumer

 

(15

)

(10

)

Total loans charged off

 

(3,016

)

(1,225

)

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

Commercial and industrial

 

2

 

1

 

Residential

 

180

 

112

 

Consumer

 

 

1

 

Total recoveries

 

182

 

114

 

 

 

 

 

 

 

Net charge offs

 

(2,834

)

(1,111

)

 

 

 

 

 

 

Ending balance, March 31,

 

$

25,223

 

$

24,209

 

 

An analysis of the allowance for loan losses based on loan type, or segment, and the Company’s loan portfolio, which identifies certain loans that are evaluated for individual or collective impairment, as of March 31, 2012 and December 31, 2011, are below:

 

16



Table of Contents

 

Allowance for Loan Losses

At and for the Three Months Ended March 31, 2012

(In thousands)

 

 

 

Commercial and
Industrial

 

Real Estate -
Commercial

 

Real Estate -
Construction

 

Real Estate -
Residential

 

Home Equity
Lines

 

Consumer

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance, January 1

 

$

3,390

 

$

13,377

 

$

6,495

 

$

1,709

 

$

1,119

 

$

69

 

$

26,159

 

Charge-offs

 

 

(2,710

)

 

(291

)

 

(15

)

(3,016

)

Recoveries

 

2

 

 

 

169

 

11

 

 

182

 

Provision for loan losses

 

161

 

2,505

 

(1,255

)

522

 

(51

)

16

 

1,898

 

Ending Balance, March 31, 2012

 

$

3,553

 

$

13,172

 

$

5,240

 

$

2,109

 

$

1,079

 

$

70

 

$

25,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance, March 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

1,451

 

$

 

$

 

$

 

$

 

$

1,451

 

Collectively evaluated for impairment

 

3,553

 

11,721

 

5,240

 

2,109

 

1,079

 

70

 

23,772

 

 

Loans Receivable

At March 31, 2012

(In thousands)

 

 

 

Commercial and
Industrial

 

Real Estate -
Commercial

 

Real Estate -
Construction

 

Real Estate -
Residential

 

Home Equity
Lines

 

Consumer

 

Total

 

Loans Receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance, March 31, 2012

 

$

245,061

 

$

719,522

 

$

308,934

 

$

267,392

 

$

119,140

 

$

3,178

 

$

1,663,227

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance, March 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

3,349

 

$

7,827

 

$

6,361

 

$

417

 

$

 

$

 

$

17,954

 

Collectively evaluated for impairment

 

241,712

 

711,695

 

302,573

 

266,975