XNAS:CFNL Cardinal Financial Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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

 

54-1874630

(State or other jurisdiction of
incorporation or organization)

 

(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

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

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

 

29,254,478 shares of common stock, par value $1.00 per share,

outstanding as of August 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 June 30, 2012 (unaudited) and December 31, 2011

2

 

 

Consolidated Statements of Income

 

For the three and six months ended June 30, 2012 and 2011 (unaudited)

3

 

 

Consolidated Statements of Comprehensive Income

 

For the three and six months ended June 30, 2012 and 2011 (unaudited)

4

 

 

Consolidated Statements of Changes in Shareholders’ Equity

 

For the six months ended June 30, 2012 and 2011 (unaudited)

5

 

 

Consolidated Statements of Cash Flows

 

For the six months ended June 30, 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

43

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

79

 

 

Item 4. Controls and Procedures

80

 

 

PART II — OTHER INFORMATION

81

 

 

Item 1. Legal Proceedings

81

Item 1A. Risk Factors

81

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

81

Item 3. Defaults Upon Senior Securities

81

Item 4. Mine Safety Disclosures

81

Item 5. Other Information

81

Item 6. Exhibits

81

 

 

SIGNATURES

83

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

June 30, 2012 and December 31, 2011

(In thousands, except share data)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

13,257

 

$

16,745

 

Federal funds sold

 

16,164

 

20,394

 

Total cash and cash equivalents

 

29,421

 

37,139

 

Investment securities available-for-sale

 

297,826

 

295,560

 

Investment securities held-to-maturity (fair value of $9,658 and $9,966 at June 30, 2012 and December 31, 2011, respectively)

 

12,236

 

12,918

 

Investment securities-trading

 

2,969

 

2,065

 

Total investment securities

 

313,031

 

310,543

 

Other investments

 

15,534

 

17,120

 

Loans held for sale

 

519,349

 

529,500

 

Loans receivable, net of deferred fees and costs

 

1,748,715

 

1,631,882

 

Allowance for loan losses

 

(26,660

)

(26,159

)

Loans receivable, net

 

1,722,055

 

1,605,723

 

Premises and equipment, net

 

19,123

 

19,302

 

Deferred tax asset, net

 

3,499

 

4,732

 

Goodwill and intangibles, net

 

10,391

 

10,490

 

Bank-owned life insurance

 

35,497

 

35,154

 

Prepaid FDIC insurance premiums

 

2,771

 

3,350

 

Other real estate owned

 

3,126

 

3,046

 

Accrued interest receivable and other assets

 

40,373

 

26,617

 

Total assets

 

$

2,714,170

 

$

2,602,716

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Non-interest bearing deposits

 

$

303,138

 

$

263,752

 

Interest bearing deposits

 

1,686,352

 

1,511,508

 

Total deposits

 

1,989,490

 

1,775,260

 

Other borrowed funds

 

352,399

 

510,385

 

Mortgage funding checks

 

50,088

 

25,989

 

Escrow liabilities

 

3,409

 

4,095

 

Accrued interest payable and other liabilities

 

42,362

 

29,170

 

Total liabilities

 

2,437,748

 

2,344,899

 

Common stock, $1 par value

 

2012

 

2011

 

 

 

 

 

Shares authorized

 

50,000,000

 

50,000,000

 

 

 

 

 

Shares issued and outstanding

 

29,252,978

 

29,198,628

 

29,253

 

29,199

 

Additional paid-in capital

 

164,245

 

163,730

 

Retained earnings

 

69,132

 

53,372

 

Accumulated other comprehensive income, net

 

13,792

 

11,516

 

Total shareholders’ equity

 

276,422

 

257,817

 

Total liabilities and shareholders’ equity

 

$

2,714,170

 

$

2,602,716

 

 

See accompanying notes to consolidated financial statements.

 

2



Table of Contents

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three and six months ended June 30, 2012 and 2011

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans receivable

 

$

21,072

 

$

18,996

 

$

41,770

 

$

37,815

 

Loans held for sale

 

3,602

 

1,894

 

7,641

 

3,194

 

Federal funds sold

 

66

 

11

 

87

 

57

 

Investment securities available-for-sale

 

2,701

 

3,477

 

5,479

 

6,911

 

Investment securities held-to-maturity

 

79

 

108

 

164

 

262

 

Other investments

 

62

 

31

 

111

 

63

 

Total interest income

 

27,582

 

24,517

 

55,252

 

48,302

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

3,815

 

3,317

 

7,374

 

6,733

 

Other borrowed funds

 

2,326

 

2,537

 

4,699

 

5,245

 

Total interest expense

 

6,141

 

5,854

 

12,073

 

11,978

 

Net interest income

 

21,441

 

18,663

 

43,179

 

36,324

 

Provision for loan losses

 

2,225

 

750

 

4,123

 

1,860

 

Net interest income after provision for loan losses

 

19,216

 

17,913

 

39,056

 

34,464

 

Non-interest income:

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

473

 

433

 

918

 

846

 

Loan fees

 

441

 

279

 

825

 

513

 

Title insurance & other related income

 

506

 

244

 

964

 

467

 

Investment fee income

 

649

 

711

 

1,262

 

1,259

 

Realized and unrealized gains on mortgage banking activities

 

13,513

 

4,301

 

20,395

 

7,392

 

Net realized gain on investment securities available-for-sale

 

 

423

 

 

826

 

Net realized gain (loss) on investment securities-trading

 

(29

)

2

 

158

 

50

 

Management fee income

 

883

 

683

 

1,892

 

982

 

Increase in cash surrender value of bank-owned life insurance

 

171

 

207

 

343

 

387

 

Loss on sale of real estate

 

 

 

(473

)

 

Other loss

 

(44

)

(9

)

(40

)

(3

)

Total non-interest income

 

16,563

 

7,274

 

26,244

 

12,719

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

Salary and benefits

 

10,872

 

7,900

 

20,384

 

14,553

 

Occupancy

 

1,751

 

1,414

 

3,460

 

2,886

 

Professional fees

 

832

 

946

 

1,571

 

1,478

 

Depreciation

 

643

 

760

 

1,244

 

1,216

 

Data processing & communications

 

1,031

 

924

 

2,197

 

1,843

 

FDIC insurance premiums

 

326

 

610

 

653

 

1,244

 

Mortgage loan repurchases and settlements

 

185

 

400

 

300

 

500

 

Loss on extinguishment of debt

 

 

 

 

450

 

Amortization of intangibles

 

49

 

49

 

99

 

99

 

Other operating expenses

 

4,682

 

3,281

 

8,543

 

6,154

 

Total non-interest expense

 

20,371

 

16,284

 

38,451

 

30,423

 

Income before income taxes

 

15,408

 

8,903

 

26,849

 

16,760

 

Provision for income taxes

 

5,257

 

2,998

 

9,045

 

5,634

 

Net income

 

$

10,151

 

$

5,905

 

17,804

 

11,126

 

Earnings per common share - basic

 

$

0.34

 

$

0.20

 

0.60

 

0.38

 

Earnings per common share - diluted

 

$

0.34

 

$

0.20

 

0.59

 

0.37

 

Weighted-average common shares outstanding - basic

 

29,639,938

 

29,382,149

 

29,612,979

 

29,337,032

 

Weighted-average common shares outstanding - diluted

 

30,103,480

 

29,884,189

 

30,043,009

 

29,841,614

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three and six months ended June 30, 2012 and 2011

(In thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,151

 

$

5,905

 

$

17,804

 

$

11,126

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale investment securities:

 

 

 

 

 

 

 

 

 

Unrealized holding gain arising during the period, net of tax expense of $607 thousand and $497 thousand for the three and six months ended June 30, 2012, respectively, net of tax expense of $1.4 million for each of the three and six months ended June 30, 2011, respectively.

 

1,178

 

2,941

 

965

 

3,188

 

 

 

 

 

 

 

 

 

 

 

Less: reclassification adjustment for net gains included in net income net of tax expense of $0 for each of the three and six months ended June 30, 2012, respectively, and net of tax expense of $138 thousand and $270 thousand for the three and six months ended June 30, 2011, respectively.

 

 

(285

)

 

(557

)

 

 

 

 

 

 

 

 

 

 

 

 

1,178

 

2,656

 

965

 

2,631

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative instruments designated as cash flow hedges, net of tax expense of $54 thousand and $736 thousand for the three and six months ended June 30, 2012, respectively; net of tax benefit of $10 thousand for the three months ended June 30, 2011, and net of tax expense of $346 thousand for the six months ended June 30, 2011.

 

97

 

(11

)

1,311

 

658

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

11,426

 

$

8,550

 

$

20,080

 

$

14,415

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Six months ended June 30, 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

 

162

 

162

 

1,290

 

 

 

1,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense, net of tax benefit

 

 

 

495

 

 

 

495

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock of $0.06 per share

 

 

 

 

(1,734

)

 

(1,734

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in accumulated other comprehensive income

 

 

 

 

 

3,289

 

3,289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

11,126

 

 

11,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2011

 

28,932

 

$

28,932

 

$

162,644

 

$

38,240

 

$

7,714

 

$

237,530

 

Balance, December 31, 2011

 

29,199

 

$

29,199

 

$

163,730

 

$

53,372

 

$

11,516

 

$

257,817

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

54

 

54

 

384

 

 

 

438

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense, net of tax benefit

 

 

 

131

 

 

 

131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock of $0.07 per share

 

 

 

 

(2,044

)

 

(2,044

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in accumulated other comprehensive income

 

 

 

 

 

2,276

 

2,276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

17,804

 

 

17,804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2012

 

29,253

 

$

29,253

 

$

164,245

 

$

69,132

 

$

13,792

 

$

276,422

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2012 and 2011

(In thousands)

(Unaudited)

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

17,804

 

$

11,126

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation

 

1,244

 

1,216

 

Amortization of premiums, discounts and intangibles

 

58

 

159

 

Provision for loan losses

 

4,123

 

1,860

 

Loans held for sale originated

 

(2,806,817

)

(1,195,399

)

Proceeds from the sale of loans held for sale

 

2,837,363

 

1,157,098

 

Realized and unrealized gains on mortgage banking activities

 

(20,395

)

(4,301

)

Proceeds from sale of investment securities-trading

 

 

272

 

Purchase of investment securities-trading

 

(626

)

(891

)

Unrealized gain on investment securities-trading

 

(158

)

(50

)

Gain on sale of investment securities available-for-sale

 

 

(826

)

Loss on sale of other real estate owned

 

473

 

 

Stock compensation expense, net of tax benefits

 

131

 

495

 

Increase in cash surrender value of bank-owned life insurance

 

(343

)

(387

)

Increase in accrued interest receivable and other assets

 

(11,131

)

(2,973

)

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

 

9,748

 

(1,160

)

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

31,474

 

(33,761

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Net purchases of premises and equipment

 

(2,169

)

(2,204

)

Proceeds from the sale of fixed assets

 

1,104

 

 

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

 

 

970

 

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

 

 

11,954

 

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

 

 

4,264

 

Purchase of investment securities available-for-sale

 

(20,172

)

(17,271

)

Purchase of mortgage-backed securities available-for-sale

 

 

(62,539

)

Purchases of other investments

 

(790

)

 

Redemptions of investment securities available-for-sale

 

22,051

 

23,166

 

Redemptions of investment securities held-to-maturity

 

679

 

2,003

 

Proceeds from the sale of other real estate owned

 

2,573

 

531

 

Proceeds from the sale of other investments

 

2,376

 

12

 

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

 

(123,581

)

(40,063

)

 

 

 

 

 

 

Net cash used in investing activities

 

(117,929

)

(79,177

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

214,230

 

44,090

 

Net increase (decrease) in other borrowed funds

 

(77,986

)

55,794

 

Net increase in mortgage funding checks

 

24,099

 

10,972

 

Proceeds from FHLB advances

 

55,000

 

15,000

 

Repayment of FHLB advances

 

(135,000

)

(15,450

)

Stock options exercised

 

438

 

1,452

 

Dividends on common stock

 

(2,044

)

(1,734

)

 

 

 

 

 

 

Net cash provided by financing activities

 

78,737

 

110,124

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(7,718

)

(2,814

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of the year

 

37,139

 

25,868

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

 

$

29,421

 

$

23,054

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for interest

 

$

12,638

 

$

12,002

 

Cash paid for income taxes

 

8,003

 

6,700

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

Transfer of loans to other real estate owned

 

$

3,126

 

$

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 and six months ended June 30, 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 June 30, 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 978,698 shares of the Company’s common stock available for future grants and awards in the Equity Plan as of June 30, 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.

 

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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 June 30, 2012 and 2011 was $89,000 and $432,000, respectively.  Total stock compensation expense for the six months ended June 30, 2012 and 2011 was $131,000 and $495,000, respectively.  The total income tax benefit recognized in the income statement for share-based compensation arrangements was $30,000 and $141,000 for the three months ended June 30, 2012 and 2011, respectively.  For the six months ended June 30, 2012 and 2011, total income tax benefit recognized in the income statement for share-based compensation arrangements was $44,000 and $161,000, respectively.

 

Options granted for the three and six months ended June 30, 2012 were 41,000 and 50,000, respectively.  Options granted for the three and six months ended June 30, 2011 were 84,500 and 140,600, respectively.  The weighted average per share fair value of stock option grants for the three and six months ended June 30, 2012 was $4.55 and $4.49, respectively.  The weighted average per share fair value of stock option grants for the three and six months ended June 30, 2011 was $4.79 and $4.90, respectively.  The fair values of the options granted during all periods ended June 30, 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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Estimated option life

 

6.5 years

 

6.5 years

 

6.5 years

 

6.5 years

 

Risk free interest rate

 

1.06 — 1.38%

 

2.26 — 2.81%

 

1.06 — 1.69%

 

2.26 — 2.81%

 

Expected volatility

 

42.10%

 

44.70%

 

42.10%

 

44.70%

 

Expected dividend yield

 

1.10%

 

1.02%

 

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 six months ended June 30, 2012 is summarized as follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

Number of

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

Shares

 

Price

 

Term (Years)

 

Value

 

Outstanding at December 31, 2011

 

1,832,860

 

$

9.38

 

 

 

 

 

Granted

 

50,000

 

11.65

 

 

 

 

 

Exercised

 

(54,350

)

8.07

 

 

 

 

 

Forfeited

 

(14,130

)

10.21

 

 

 

 

 

Outstanding at June 30, 2012

 

1,814,380

 

$

9.47

 

3.80

 

$

5,109,777

 

Options exercisable at June 30, 2012

 

1,641,530

 

$

9.42

 

3.32

 

$

4,708,094

 

 

The intrinsic value of options exercised during the three and six months ended June 30, 2012 was $190,000 and $229,000, respectively. For the options exercised during the three and six months ended June 30, 2011 the intrinsic value was $20,000 and $375,000, respectively.

 

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Table of Contents

 

A summary of the status of the Company’s non-vested stock options and changes during the six months ended June 30, 2012 is as follows:

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number of

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Balance at December 31, 2011

 

173,700

 

$

3.94

 

Granted

 

50,000

 

4.49

 

Vested

 

(38,470

)

3.88

 

Forfeited

 

(12,380

)

4.25

 

Balance at June 30, 2012

 

172,850

 

$

4.09

 

 

At June 30, 2012, there was $639,000 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 3.6 years. The total fair value of shares that vested during the three months ended June 30, 2012 and 2011 was $49,000 and $425,000, respectively.  For the six months ended June 30, 2012 and 2011, the total fair value of shares that vested was $149,000 and $561,000, 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 and six months ended June 30, 2012 and 2011 is as follows:

 

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Table of Contents

 

At and for the Three Months Ended June 30, 2012 (in thousands):

 

 

 

 

 

 

 

Wealth Management

 

 

 

 

 

 

 

 

 

Commercial

 

Mortgage 

 

and

 

 

 

Intersegment

 

 

 

 

 

Banking 

 

Banking 

 

Trust Services

 

Other

 

Elimination

 

Consolidated

 

Net interest income

 

$

21,056

 

$

593

 

$

 

$

(208

)

$

 

$

21,441

 

Provision for loan losses

 

2,225

 

 

 

 

 

2,225

 

Non-interest income

 

1,009

 

14,936

 

649

 

(24

)

(7

)

16,563

 

Non-interest expense

 

10,186

 

8,684

 

596

 

912

 

(7

)

20,371

 

Provision for income taxes

 

3,193

 

2,448

 

16

 

(400

)

 

5,257

 

Net income (loss)

 

$

6,461

 

$

4,397

 

$

37

 

$

(744

)

$

 

$

10,151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

2,628,995

 

$

550,843

 

$

527

 

$

282,510

 

$

(748,705

)

$

2,714,170

 

Average Assets

 

2,553,766

 

347,048

 

556

 

283,807

 

(637,591

)

2,547,586

 

 

At and for the Three Months Ended June 30, 2011 (in thousands):

 

 

 

 

 

 

 

Wealth Management

 

 

 

 

 

 

 

 

 

Commercial

 

Mortgage

 

and

 

 

 

Intersegment

 

 

 

 

 

Banking

 

Banking

 

Trust Services

 

Other

 

Elimination

 

Consolidated

 

Net interest income

 

$

18,291

 

$

575

 

$

 

$

(203

)

$

 

$

18,663

 

Provision for loan losses

 

750

 

 

 

 

 

750

 

Non-interest income

 

1,300

 

5,268

 

711

 

6

 

(11

)

7,274

 

Non-interest expense

 

10,359

 

3,821

 

690

 

1,425

 

(11

)

16,284

 

Provision for income taxes

 

2,838

 

722

 

5

 

(567

)

 

2,998

 

Net income (loss)

 

$

5,644

 

$

1,300

 

$

16

 

$

(1,055

)

$

 

$

5,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

2,134,956

 

$

234,197

 

$

547

 

$

248,327

 

$

(453,080

)

$

2,164,947

 

Average Assets

 

2,060,008

 

161,130

 

604

 

250,904

 

(403,052

)

2,069,594

 

 

At and for the Six Months Ended June 30, 2012 (in thousands):

 

 

 

 

 

 

 

Wealth Management

 

 

 

 

 

 

 

 

 

Commercial

 

Mortgage

 

and

 

 

 

Intersegment

 

 

 

 

 

Banking

 

Banking

 

Trust Services

 

Other

 

Elimination

 

Consolidated

 

Net interest income

 

$

42,357

 

$

1,239

 

$

 

$

(417

)

$

 

$

43,179

 

Provision for loan losses

 

3,865

 

258

 

 

 

 

4,123

 

Non-interest income

 

1,343

 

23,487

 

1,263

 

167

 

(16

)

26,244

 

Non-interest expense

 

21,760

 

13,593

 

1,253

 

1,861

 

(16

)

38,451

 

Provision for income taxes

 

5,894

 

3,888

 

2

 

(739

)

 

9,045

 

Net income (loss)

 

$

12,181

 

$

6,987

 

$

8

 

$

(1,372

)

$

 

$

17,804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

2,628,995

 

$

550,843

 

$

527

 

$

282,510

 

$

(748,705

)

$

2,714,170

 

Average Assets

 

2,524,295

 

371,186

 

566

 

283,440

 

(663,440

)

2,516,047

 

 

At and for the Six Months Ended June 30, 2011 (in thousands):

 

 

 

 

 

 

 

Wealth Management

 

 

 

 

 

 

 

 

 

Commercial

 

Mortgage

 

and

 

 

 

Intersegment

 

 

 

 

 

Banking

 

Banking

 

Trust Services

 

Other

 

Elimination

 

Consolidated

 

Net interest income

 

$

35,728

 

$

1,000

 

$

 

$

(404

)

$

 

$

36,324

 

Provision for loan losses

 

1,860

 

 

 

 

 

1,860

 

Non-interest income

 

2,526

 

8,909

 

1,259

 

58

 

(33

)

12,719

 

Non-interest expense

 

19,804

 

7,073

 

1,463

 

2,116

 

(33

)

30,423

 

Provision for income taxes

 

5,530

 

1,011

 

(71

)

(836

)

 

5,634

 

Net income (loss)

 

$

11,060

 

$

1,825

 

$

(133

)

$

(1,626

)

$

 

$

11,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

2,134,956

 

$

234,197

 

$

547

 

$

248,327

 

$

(453,080

)

$

2,164,947

 

Average Assets

 

2,047,850

 

136,500

 

590

 

252,146

 

(378,967

)

2,058,119

 

 

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Table of Contents

 

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 and six months ended June 30, 2012 and 2011.  Antidilutive outstanding stock options excluded from the weighted average shares outstanding for the diluted earnings per share calculation were 4,504 and 12,723 for the three months ended June 30, 2012 and 2011, respectively.  For the six months ended June 30, 2012 and 2011, antidilutive outstanding stock options excluded from the weighted average shares outstanding for the diluted earnings per share calculation were 6,494 and 8,706, 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.

 

 

 

Three Months Ended

 

Six Months Ended

 

(In thousands,

 

June 30,

 

June 30,

 

except per share data)

 

2012

 

2011

 

2012

 

2011

 

Net income available to common shareholders

 

$

10,151

 

$

5,905

 

$

17,804

 

$

11,126

 

Weighted average common shares - basic

 

29,640

 

29,382

 

29,613

 

29,337

 

Weighted average common shares - diluted

 

30,103

 

29,884

 

30,043

 

29,842

 

Earnings per common share - basic

 

$

0.34

 

$

0.20

 

$

0.60

 

$

0.38

 

Earnings per common share - diluted

 

$

0.34

 

$

0.20

 

$

0.59

 

$

0.37

 

 

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 and six months ended June 30, 2012 and 2011:

 

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Table of Contents

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

29,234

 

28,930

 

29,218

 

28,892

 

Weighted average shares attributable to the deferred compensation plans

 

406

 

452

 

395

 

445

 

Total weighted average shares - basic

 

29,640

 

29,382

 

29,613

 

29,337

 

 

The following shows the composition of diluted outstanding shares for the three and six months ended June 30, 2012 and 2011:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic (from above)

 

29,640

 

29,382

 

29,613

 

29,337

 

Incremental weighted average shares attributable to deferred compensation plans

 

250

 

225

 

239

 

218

 

Weighted average shares attributable to vested stock options

 

213

 

277

 

191

 

287

 

Total weighted average shares - diluted

 

30,103

 

29,884

 

30,043

 

29,842

 

 

Note 5

 

Investment Securities

 

The approximate fair value and amortized cost of investment securities at June 30, 2012 and December 31, 2011 are shown in the table below.

 

12



Table of Contents

 

 

 

June 30, 2012

 

 

 

Gross

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

Investment Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

U.S. government-sponsored agencies

 

$

55,838

 

4,978

 

 

$

60,816

 

Mortgage-backed securities

 

135,665

 

10,181

 

(54

)

145,792

 

Municipal securities

 

79,119

 

6,958

 

 

86,077

 

U.S. treasury securities

 

4,957

 

184

 

 

5,141

 

Total

 

$

275,579

 

$

22,301

 

$

(54

)

$

297,826

 

 

 

 

 

 

 

 

 

 

 

Investment Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

4,525

 

299

 

 

4,824

 

Pooled trust preferred securities

 

7,711

 

 

(2,877

)

4,834

 

Total

 

$

12,236

 

$

299

 

$

(2,877

)

$

9,658

 

 

 

 

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 June 30, 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.

 

 

 

June 30, 2012

 

 

 

Available-for-Sale

 

Held-to-Maturity

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

(In thousands)

 

Cost

 

Value

 

Cost

 

Value

 

After 1 year but within 5 years

 

$

32,349

 

34,648

 

 

 

After 5 years but within 10 years

 

53,109

 

58,181

 

 

 

After 10 years

 

54,456

 

59,205

 

7,711

 

4,834

 

Mortgage-backed securities

 

135,665

 

145,792

 

4,525

 

4,824

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

275,579

 

$

297,826

 

$

12,236

 

$

9,658

 

 

 

 

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

 

 

13



Table of Contents

 

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 June 30, 2012 and December 31, 2011.

 

June 30, 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

 

$

2,231

 

$

(8

)

$

350

 

$

(46

)

$

2,581

 

$

(54

)

Total temporarily impaired securities

 

$

2,231

 

$

(8

)

$

350

 

$

(46

)

$

2,581

 

$

(54

)

 

Investment Securities Held-to-
Maturity