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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, 2016

 

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

 

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:

 

32,459,179 shares of common stock, par value $1.00 per share, outstanding as of August 1, 2016

 

 

 



Table of Contents

 

CARDINAL FINANCIAL CORPORATION

 

INDEX TO FORM 10-Q

 

PART I — FINANCIAL INFORMATION

4

 

 

Item 1. Financial Statements:

4

 

 

Consolidated Statements of Condition At June 30, 2016 and December 31, 2015 (unaudited)

4

 

 

Consolidated Statements of Income For the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)

5

 

 

Consolidated Statements of Comprehensive Income For the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)

6

 

 

Consolidated Statements of Changes in Shareholders’ Equity For the Six Months Ended June 30, 2016 and 2015 (unaudited)

7

 

 

Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2016 and 2015 (unaudited)

8

 

 

Notes to Consolidated Financial Statements (unaudited)

9

 

 

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

49

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

80

 

 

Item 4. Controls and Procedures

81

 

 

PART II — OTHER INFORMATION

82

 

 

Item 1. Legal Proceedings

82

Item 1A. Risk Factors

82

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

82

Item 3. Defaults Upon Senior Securities

82

 

2




Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

June 30, 2016 and December 31, 2015

(In thousands, except share data)

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015*

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

24,081

 

$

24,760

 

Federal funds sold

 

11,481

 

14,577

 

 

 

 

 

 

 

Total cash and cash equivalents

 

35,562

 

39,337

 

 

 

 

 

 

 

Investment securities available-for-sale

 

402,522

 

414,077

 

Investment securities held-to-maturity (fair value of $3,488 and $3,311 at June 30, 2016 and December 31, 2015, respectively)

 

3,796

 

3,836

 

Investment securities - trading

 

6,489

 

5,881

 

 

 

 

 

 

 

Total investment securities

 

412,807

 

423,794

 

 

 

 

 

 

 

Other investments

 

18,136

 

20,967

 

Loans held for sale

 

456,359

 

383,768

 

 

 

 

 

 

 

Loans receivable, net of deferred fees and costs

 

3,156,871

 

3,056,310

 

Allowance for loan losses

 

(32,984

)

(31,723

)

 

 

 

 

 

 

Loans receivable, net

 

3,123,887

 

3,024,587

 

 

 

 

 

 

 

Premises and equipment, net

 

24,273

 

25,163

 

Deferred tax asset, net

 

4,658

 

7,970

 

Goodwill and intangibles, net

 

36,262

 

36,576

 

Bank-owned life insurance

 

33,213

 

32,978

 

Other real estate owned

 

 

253

 

Accrued interest receivable and other assets

 

52,009

 

34,528

 

 

 

 

 

 

 

Total assets

 

$

4,197,166

 

$

4,029,921

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

$

710,318

 

$

657,398

 

Interest bearing deposits

 

2,534,488

 

2,375,373

 

 

 

 

 

 

 

Total deposits

 

3,244,806

 

3,032,771

 

 

 

 

 

 

 

Other borrowed funds

 

450,696

 

537,965

 

Mortgage funding checks

 

23,921

 

12,554

 

Escrow liabilities

 

2,491

 

2,676

 

Accrued interest payable and other liabilities

 

37,320

 

30,808

 

 

 

 

 

 

 

Total liabilities

 

3,759,234

 

3,616,774

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

2015

 

 

 

 

 

Common stock, $1 par value

 

 

 

 

 

 

 

 

 

Shares authorized

 

50,000,000

 

50,000,000

 

 

 

 

 

Shares issued and outstanding

 

32,441,279

 

32,373,433

 

32,441

 

32,373

 

Additional paid-in capital

 

 

 

 

 

209,199

 

207,429

 

Retained earnings

 

 

 

 

 

185,681

 

166,303

 

Accumulated other comprehensive income, net

 

 

 

 

 

10,611

 

7,042

 

 

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

 

 

 

 

437,932

 

413,147

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

 

 

 

 

$

4,197,166

 

$

4,029,921

 

 


*Derived from audited consolidated financial statements.

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three and six months ended June 30, 2016 and 2015

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans receivable

 

$

31,308

 

$

27,967

 

$

62,355

 

$

55,463

 

Loans held for sale

 

3,388

 

3,886

 

6,344

 

6,370

 

Federal funds sold

 

37

 

12

 

102

 

40

 

Investment securities available-for-sale

 

3,017

 

2,599

 

6,176

 

5,314

 

Investment securities held-to-maturity

 

14

 

18

 

28

 

39

 

Other investments

 

216

 

139

 

413

 

295

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

37,980

 

34,621

 

75,418

 

67,521

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

4,542

 

3,903

 

9,014

 

7,389

 

Other borrowed funds

 

1,915

 

1,868

 

4,175

 

3,843

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

 

6,457

 

5,771

 

13,189

 

11,232

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

31,523

 

28,850

 

62,229

 

56,289

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

430

 

1,356

 

680

 

1,486

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

31,093

 

27,494

 

61,549

 

54,803

 

 

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

581

 

576

 

1,132

 

1,121

 

Loan fees

 

359

 

491

 

668

 

945

 

Investment fee income

 

84

 

143

 

169

 

258

 

Realized and unrealized gains on mortgage banking activities

 

15,309

 

11,112

 

29,448

 

27,278

 

Net realized gain on investment securities-trading

 

304

 

176

 

108

 

176

 

Net realized gain on investment securities-available for sale

 

3,614

 

180

 

3,726

 

382

 

Litigation settlement

 

 

2,950

 

 

2,950

 

Increase in cash surrender value of bank-owned life insurance

 

111

 

95

 

235

 

213

 

Other income

 

127

 

6

 

272

 

11

 

 

 

 

 

 

 

 

 

 

 

Total non-interest income

 

20,489

 

15,729

 

35,758

 

33,334

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

Salary and benefits

 

16,037

 

11,963

 

31,534

 

24,044

 

Occupancy

 

2,448

 

2,347

 

5,040

 

4,831

 

Professional fees

 

549

 

1,137

 

1,684

 

2,726

 

Depreciation

 

833

 

845

 

1,677

 

1,721

 

Data processing & communications

 

1,517

 

1,459

 

2,863

 

2,963

 

FDIC insurance premiums

 

516

 

516

 

1,032

 

1,032

 

Mortgage loan repurchases and settlements

 

 

 

100

 

 

Loss on extinguishment of debt

 

3,638

 

 

3,638

 

 

Merger and acquisition expenses

 

 

3

 

 

471

 

Amortization of intangibles

 

152

 

188

 

314

 

385

 

Other operating expenses

 

4,427

 

4,420

 

8,527

 

8,849

 

 

 

 

 

 

 

 

 

 

 

Total non-interest expense

 

30,117

 

22,878

 

56,409

 

47,022

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

21,465

 

20,345

 

40,898

 

41,115

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

7,364

 

6,966

 

13,730

 

14,005

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

14,101

 

$

13,379

 

$

27,168

 

$

27,110

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - basic

 

$

0.43

 

$

0.41

 

$

0.82

 

$

0.83

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - diluted

 

$

0.42

 

$

0.40

 

$

0.81

 

$

0.82

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding - basic

 

33,033

 

32,724

 

33,005

 

32,682

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding - diluted

 

33,569

 

33,207

 

33,499

 

33,132

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three and six months ended June 30, 2016 and 2015

(In thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

14,101

 

$

13,379

 

$

27,168

 

$

27,110

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Unrealized holding gain (loss) arising during the period, net of tax expense of $1,420 and $3,476 for the three and six months ended June 30, 2016, respectively, net of tax benefit of $1,886 and $1,511 for the three and six months ended June 30, 2015, respectively.

 

2,537

 

(3,295

)

6,206

 

(2,481

)

 

 

 

 

 

 

 

 

 

 

Less: reclassification adjustment for net gains included in net income net of tax expense of $1,298 and $1,338 thousand for the three and six months ended June 30, 2016, respectively, and net of tax expense $61 and $129 for the three and six months ended June 30, 2015, respectively.

 

(2,316

)

(119

)

(2,388

)

(253

)

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative instruments designated as cash flow hedges, net of tax expense of $113 and and net of tax benefit $141 for the three and six months ended June 30, 2016, respectively, net of tax expense of $167 and $30 for the three and six months ended June 30, 2015, respectively.

 

201

 

300

 

(249

)

55

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

422

 

(3,114

)

3,569

 

(2,679

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

14,523

 

$

10,265

 

$

30,737

 

$

24,431

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Six months ended June 30, 2016 and 2015

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Common

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Stock

 

Capital

 

Earnings

 

Income

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

32,078

 

$

32,078

 

$

201,948

 

$

133,129

 

$

10,166

 

$

377,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

124

 

124

 

1,127

 

 

 

1,251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of restricted stock grants

 

7

 

7

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense, net of tax benefit

 

 

 

866

 

 

 

866

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock of $0.22 per share

 

 

 

 

(7,074

)

 

(7,074

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss)

 

 

 

 

 

(2,679

)

(2,679

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

27,110

 

 

27,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2015

 

32,209

 

$

32,209

 

$

203,934

 

$

153,165

 

$

7,487

 

$

396,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

 

32,373

 

$

32,373

 

$

207,429

 

$

166,303

 

$

7,042

 

$

413,147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

20

 

20

 

243

 

 

 

263

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of restricted stock grants

 

48

 

48

 

(48

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense, net of tax benefit

 

 

 

1,575

 

 

 

1,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock of $0.24 per share

 

 

 

 

(7,790

)

 

(7,790

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

3,569

 

3,569

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

27,168

 

 

27,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2016

 

32,441

 

$

32,441

 

$

209,199

 

$

185,681

 

$

10,611

 

$

437,932

 

 

See accompanying notes to consolidated financial statements.

 

7



Table of Contents

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six months ended June 30, 2016 and 2015

(In thousands)

(Unaudited)

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

27,168

 

$

27,110

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

Depreciation

 

1,677

 

1,721

 

Amortization of premiums, discounts and intangibles

 

1,049

 

783

 

Provision for loan losses

 

680

 

1,486

 

Loans held for sale originated

 

(1,941,140

)

(1,929,998

)

Proceeds from the sale of loans held for sale

 

1,897,997

 

1,817,042

 

Realized and unrealized gains on mortgage banking activities

 

(29,448

)

(27,278

)

Purchase of investment securities-trading

 

(1,715

)

(929

)

Gain on investment securities-trading

 

(108

)

(176

)

Gain on sale of investment securities-available for sale

 

(3,614

)

(180

)

Gain on call of investment securities available-for-sale

 

(112

)

(202

)

Gain on sale of other real estate owned

 

(40

)

 

Stock compensation expense

 

1,575

 

866

 

Increase in cash surrender value of bank-owned life insurance

 

(235

)

(213

)

Increase in accrued interest receivable and other assets

 

(16,556

)

(20,742

)

Increase in accrued interest payable, escrow liabilities and other liabilities

 

7,542

 

10,442

 

 

 

 

 

 

 

Net cash used in operating activities

 

(55,280

)

(120,268

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Net purchases of premises and equipment

 

(787

)

(1,068

)

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

 

32,283

 

27,480

 

Proceeds from sale of mortgage-backed securities available for sale

 

37,811

 

 

Proceeds from sale of investment securities available for sale

 

16,495

 

 

Proceeds from the sale of other investments

 

9,775

 

4,212

 

Purchase of investment securities available for sale

 

(27,481

)

(35,378

)

Purchase of mortgage-backed securities available-for-sale

 

(45,655

)

 

Purchase of other investments

 

(6,944

)

(3,320

)

Redemptions of investment securities available-for-sale

 

7,049

 

10,221

 

Redemptions of investment securities held-to-maturity

 

40

 

145

 

Proceeds from sale of other real estate owned

 

293

 

 

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

 

(99,980

)

(214,213

)

 

 

 

 

 

 

Net cash used in investing activities

 

(77,101

)

(211,921

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

212,035

 

400,067

 

Net decrease in other borrowed funds - short term

 

(7,269

)

(49,239

)

Net increase (decrease) in mortgage funding checks

 

11,367

 

(2,222

)

Proceeds from FHLB advances

 

200,000

 

75,000

 

Repayment of FHLB advances

 

(280,000

)

(85,000

)

Stock options exercised

 

263

 

1,251

 

Dividends on common stock

 

(7,790

)

(7,074

)

 

 

 

 

 

 

Net cash provided by financing activities

 

128,606

 

332,783

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(3,775

)

594

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of the year

 

39,337

 

38,189

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

 

$

35,562

 

$

38,783

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

13,543

 

$

11,483

 

Income taxes

 

12,814

 

14,596

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain on available-for-sale investment securities

 

5,956

 

(4,241

)

Change in fair value of derivative instruments designated as cash flow hedges

 

(390

)

85

 

 

See accompanying notes to consolidated financial statements.

 

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

 

Note 1

 

Organization

 

Cardinal Financial Corporation (the “Company” or “Cardinal”) 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 addition to the Bank, the Company has one nonbank subsidiary, Cardinal Wealth Services, Inc. (“CWS”), an investment services subsidiary.

 

On January 16, 2014, the Company announced the completion of its acquisition of United Financial Banking Companies, Inc. (“UFBC”), the holding company of The Business Bank (“TBB”), pursuant to a previously announced definitive merger agreement.  The merger of UFBC into Cardinal was effective January 16, 2014.  TBB, which was headquartered in Vienna, Virginia, merged into Cardinal Bank effective March 8, 2014.

 

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, 2016 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016. 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, 2015.

 

Note 2

 

Stock-Based Compensation

 

At June 30, 2016, 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 could 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 was amended in 2011 to increase the number of shares available under the plan and extend the term to 2021.  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 95,956 shares of the Company’s common stock available for future grants and awards in the Equity Plan as of June 30, 2016.

 

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Stock options are granted with an exercise price equal to the fair value of the Company’s common stock on the date of grant. Director stock options have ten year terms and vest and become fully exercisable at the grant date. Certain employee stock options have ten year terms and vest and become fully exercisable in 25% increments beginning as of the date of grant. In addition, the Company has granted stock options to employees of the Company that have ten year terms and vest and become fully exercisable in 20% annual increments beginning after their first year of service.  Other grants have ten year terms and vest and become fully exercisable in one-third increments beginning as of the date of grant.

 

Restricted stock awards are granted at the fair value of the Company’s common stock on the grant date.  Most employee restricted stock awards vest in one-third increments on the anniversary date of the grant.  Certain restricted stock awards granted to executive officers vest one-third immediately on the grant date with the remaining unvested options vesting over the next two years.

 

The Company has only made awards of stock options and restricted stock 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, 2016 and 2015 was $537,000 and $306,000, respectively.  Total stock compensation expense for the six months ended June 30, 2016 and 2015 was $1.6 million and $866,000, respectively.  The total income tax benefit recognized in the income statement for share-based compensation arrangements was $180,000 and $103,000 for the three months ended June 30, 2016 and 2015, respectively.  For the six months ended June 30, 2016 and 2015, total income tax benefit recognized in the income statements for share-based compensation arrangements was $523,000 and $292,000, respectively.

 

No options were granted for the three months ended June 30, 2016 and 17,000 were granted during the six months ended June 30, 2016.  Options granted for the three and six months ended June 30, 2015 were 9,000 and 118,250, respectively.  The weighted average per share fair value of stock option grants for the six months ended June 30, 2016 was $5.59.  The weighted average per share fair value of stock option grants for the three and six months ended June 30, 2015 was $6.27 and $5.94, respectively.  The fair values of the options granted during all periods ended June 30, 2016 and 2015 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,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Estimated option life

 

N/A

 

6.5 Years

 

6.5 Years

 

6.5 Years

 

Risk free interest rate

 

N/A

 

1.68 - 1.98%

 

1.53%

 

1.66 - 1.98%

 

Expected volatility

 

N/A

 

36.90%

 

36.50%

 

36.90%

 

Expected dividend yield

 

N/A

 

2.46%

 

2.40%

 

2.46%

 

 

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.

 

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Table of Contents

 

Stock option activity during the six months ended June 30, 2016 is summarized as follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

Number of

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

Shares

 

Price

 

Term (Years)

 

Value

 

Outstanding at December 31, 2015

 

1,023,550

 

$

14.97

 

 

 

 

 

Granted

 

17,000

 

19.18

 

 

 

 

 

Exercised

 

(19,912

)

13.23

 

 

 

 

 

Forfeited

 

(4,734

)

16.54

 

 

 

 

 

Outstanding at June 30, 2016

 

1,015,904

 

$

15.06

 

6.44

 

$

6,985,285

 

Options exercisable at June 30, 2016

 

885,792

 

$

14.65

 

6.20

 

$

6,457,042

 

 

The intrinsic value of options exercised during the three and six months ended June 30, 2016 was $127,000 and $165,000, respectively. For options exercised during the three and six months ended June 30, 2015, the intrinsic value of options was $607,000 and $1.2 million, respectively.

 

A summary of the status of the Company’s non-vested stock options and changes during the six months ended June 30, 2016 is as follows:

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number of

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Balance at December 31, 2015

 

300,125

 

$

5.67

 

Granted

 

17,000

 

5.59

 

Vested

 

(183,579

)

5.73

 

Forfeited

 

(3,434

)

5.90

 

Balance at June 30, 2016

 

130,112

 

$

5.57

 

 

A summary of the Company’s restricted stock grant activity during the six months ended June 30, 2016 is as follows:

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number of

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Balance at December 31, 2015

 

65,932

 

$

21.76

 

Granted

 

104,120

 

19.52

 

Vested

 

(47,747

)

20.01

 

Forfeited

 

(13,817

)

20.37

 

Balance at June 30, 2016

 

108,488

 

$

20.56

 

 

At June 30, 2016, there was $2.4 million 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 2.3 years. The total fair value of shares from stock options that vested during the three months ended June 30, 2016 and 2015 was $69,000 and $63,000, respectively. For the six

 

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months ended June 30, 2016 and 2015, the total fair value of shares that vested was $1.1 million and $963,000, respectively.  The total fair value of restricted stock grants that vested during the three and six months ended June 30, 2016 were $245,000 and $959,000, respectively. The total fair value of restricted stock grants that vested during the three and six months ended June 30, 2015 were $0 and $134,000, respectively.

 

Note 3

 

Segment Information

 

The Company operates in three business segments: commercial banking, mortgage banking, and wealth management 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. The wealth management services segment provides investment and financial advisory services to businesses and individuals, including financial planning, retirement/estate planning, and investment management.

 

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, 2016 and 2015 is as follows:

 

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Table of Contents

 

At and for the Three Months Ended June 30, 2016 (in thousands):

 

 

 

Commercial

 

Mortgage

 

Wealth Management

 

 

 

Intersegment

 

 

 

 

 

Banking

 

Banking

 

Services

 

Other

 

Elimination

 

Consolidated

 

Net interest income

 

$

31,441

 

$

283

 

$

 

$

(201

)

$

 

$

31,523

 

Provision for loan losses

 

430

 

 

 

 

 

430

 

Non-interest income

 

4,672

 

15,344

 

164

 

309

 

 

20,489

 

Non-interest expense

 

19,462

 

9,382

 

84

 

1,189

 

 

30,117

 

Provision for income taxes

 

5,464

 

2,251

 

28

 

(379

)

 

7,364

 

Net income (loss)

 

$

10,757

 

$

3,994

 

$

52

 

$

(702

)

$

 

$

14,101

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

4,103,454

 

$

527,342

 

$

2,530

 

$

453,218

 

$

(889,378

)

$

4,197,166

 

Average Assets

 

3,983,461

 

398,262

 

589

 

456,808

 

(774,263

)

4,064,857

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At and for the Three Months Ended June 30, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Mortgage

 

Wealth Management

 

 

 

Intersegment

 

 

 

 

 

Banking

 

Banking

 

Services

 

Other

 

Elimination

 

Consolidated

 

Net interest income

 

$

28,389

 

$

642

 

$

 

$

(181

)

$

 

$

28,850

 

Provision for loan losses

 

1,356

 

 

 

 

 

1,356

 

Non-interest income

 

1,329

 

11,150

 

119

 

3,131

 

 

15,729

 

Non-interest expense

 

13,736

 

7,990

 

114

 

1,038

 

 

22,878

 

Provision for income taxes

 

4,905

 

1,390

 

2

 

669

 

 

6,966

 

Net income

 

$

9,721

 

$

2,412

 

$

3

 

$

1,243

 

$

 

$

13,379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

3,691,168

 

$

526,078

 

$

2,404

 

$

410,330

 

$

(864,706

)

$

3,765,274

 

Average Assets

 

3,549,647

 

428,458

 

2,415

 

415,288

 

(781,127

)

3,614,681

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At and for the Six Months Ended June 30, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Mortgage

 

Wealth Management

 

 

 

Intersegment

 

 

 

 

 

Banking

 

Banking

 

Services

 

Other

 

Elimination

 

Consolidated

 

Net interest income

 

$

61,988

 

$

640

 

$

 

$

(399

)

$

 

$

62,229

 

Provision for loan losses

 

680

 

 

 

 

 

680

 

Non-interest income

 

5,887

 

29,502

 

250

 

119

 

 

35,758

 

Non-interest expense

 

35,975

 

18,345

 

155

 

1,934

 

 

56,409

 

Provision for income taxes

 

10,222

 

4,250

 

33

 

(775

)

 

13,730

 

Net income (loss)

 

$

20,998

 

$

7,547

 

$

62

 

$

(1,439

)

$

 

$

27,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

4,103,454

 

$

527,342

 

$

2,530

 

$

453,218

 

$

(889,378

)

$

4,197,166

 

Average Assets

 

3,952,952

 

365,329

 

1,524

 

456,470

 

(745,672

)

4,030,603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At and for the Six Months Ended June 30, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Mortgage

 

Wealth Management

 

 

 

Intersegment

 

 

 

 

 

Banking

 

Banking

 

Services

 

Other

 

Elimination

 

Consolidated

 

Net interest income

 

$

55,495

 

$

1,153

 

$

 

$

(359

)

$

 

$

56,289

 

Provision for loan losses

 

1,486

 

 

 

 

 

1,486

 

Non-interest income

 

2,608

 

27,366

 

224

 

3,136

 

 

33,334

 

Non-interest expense

 

28,884

 

15,309

 

218

 

2,611

 

 

47,022

 

Provision for income taxes

 

9,121

 

4,824

 

2

 

58

 

 

14,005

 

Net income

 

$

18,612

 

$

8,386

 

$

4

 

$

108

 

$

 

$

27,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

3,691,168

 

$

526,078

 

$

2,404

 

$

410,330

 

$

(864,706

)

$

3,765,274

 

Average Assets

 

3,436,687

 

348,331

 

2,412

 

416,411

 

(705,027

)

3,498,814

 

 

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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, 2016 and 2015.  There were 0 and 1,500 antidilutive outstanding stock options excluded from the calculation of weighted average shares outstanding for the diluted earnings per share calculation for the three and six months ended June 30, 2016, respectively. There were 0 and 35,993 antidilutive outstanding stock options excluded from the calculation of weighted average shares outstanding for the diluted earnings per share calculation for the three and six months ended June 30, 2015.  There were 1,311 and 2,651 antidilutive outstanding restricted stock awards excluded from the calculation of weighted average shares outstanding for the diluted earnings per share calculation for the three and six months ended June 30, 2016.  There were 75 and 153 antidilutive outstanding restricted stock grants excluded from the calculation of weighted average shares outstanding for the diluted earnings per share calculation for the three and six months ended June 30, 2015.

 

 

 

Three Months Ended

 

Six Months Ended

 

(In thousands,

 

June 30,

 

June 30,

 

except per share data)

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

14,101

 

$

13,379

 

$

27,168

 

$

27,110

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares - basic

 

33,033

 

32,724

 

33,005

 

32,682

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares - diluted

 

33,569

 

33,207

 

33,499

 

33,132

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - basic

 

$

0.43

 

$

0.41

 

$

0.82

 

$

0.83

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - diluted

 

$

0.42

 

$

0.40

 

$

0.81

 

$

0.82

 

 

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, and 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, 2016 and 2015:

 

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Table of Contents

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

32,425

 

32,188

 

32,408

 

32,155

 

Weighted average shares attributable to the deferred compensation plans

 

608

 

536

 

597

 

527

 

Total weighted average shares - basic

 

33,033

 

32,724

 

33,005

 

32,682

 

 

The following shows the composition of diluted outstanding shares for the three and six months ended June 30, 2016 and 2015:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic (from above)

 

33,033

 

32,724

 

33,005

 

32,682

 

Incremental weighted average shares attributable to deferred compensation plans

 

344

 

287

 

328

 

274

 

Weighted average shares attributable to vested stock options

 

187

 

196

 

164

 

176

 

Incremental shares from restricted stock grants

 

5

 

 

2

 

 

Total weighted average shares - diluted

 

33,569

 

33,207

 

33,499

 

33,132

 

 

Note 5

 

Investment Securities

 

The approximate fair value and amortized cost of investment securities at June 30, 2016 and December 31, 2015 are shown in the table below.

 

15



Table of Contents

 

 

 

June 30, 2016

 

 

 

Gross

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In thousands)

 

cost

 

Gains

 

Losses

 

value

 

Investment Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

U.S. government-sponsored agencies

 

$

45,266

 

$

972

 

$

 

$

46,238

 

Mortgage-backed securities

 

161,808

 

7,212

 

(216

)

168,804

 

Municipal securities

 

177,547

 

9,933

 

 

187,480

 

Total

 

$

384,621

 

$

18,117

 

$

(216

)

$

402,522

 

 

 

 

 

 

 

 

 

 

 

Investment Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

1

 

$

 

$

 

$

1

 

Pooled trust preferred securities

 

3,795

 

 

(308

)

3,487

 

Total

 

$

3,796

 

$

 

$

(308

)

$

3,488

 

 

 

 

December 31, 2015

 

 

 

Gross

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In thousands)

 

cost

 

Gains

 

Losses

 

value

 

Investment Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

U.S. government-sponsored agencies

 

$

70,617

 

$

2,318

 

$

(30

)

$

72,905

 

Mortgage-backed securities

 

158,959

 

3,982

 

(217

)

162,724

 

Municipal securities

 

172,556

 

6,154

 

(262

)

178,448

 

Total

 

$