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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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Table of Contents

 

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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Table of Contents

 

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

 

$

402,132

 

$

12,454

 

$

(509

)

$

414,077

 

 

 

 

 

 

 

 

 

 

 

Investment Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

3

 

$

 

$

 

$

3

 

Pooled trust preferred securities

 

3,833

 

 

(525

)

3,308

 

Total

 

$

3,836

 

$

 

$

(525

)

$

3,311

 

 

The fair value and amortized cost of investment securities by contractual maturity at June 30, 2016 and December 31, 2015 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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June 30, 2016

 

 

 

Available-for-Sale

 

Held-to-Maturity

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

(In thousands)

 

Cost

 

Value

 

Cost

 

Value

 

Within One Year

 

$

18,661

 

$

19,052

 

$

 

$

 

After 1 year but within 5 years

 

46,595

 

49,168

 

 

 

After 5 years but within 10 years

 

28,818

 

30,325

 

 

 

After 10 years

 

128,739

 

135,173

 

3,795

 

3,487

 

Mortgage-backed securities

 

161,808

 

168,804

 

1

 

1

 

Total

 

$

384,621

 

$

402,522

 

$

3,796

 

$

3,488

 

 

 

 

 

 

 

December 31, 2015

 

 

 

Available-for-Sale

 

Held-to-Maturity

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

(In thousands)

 

cost

 

Value

 

cost

 

Value

 

Within One Year

 

$

9,225

 

$

9,382

 

$

 

$

 

After 1 year but within 5 years

 

52,510

 

55,120

 

 

 

After 5 years but within 10 years

 

38,095

 

40,243

 

 

 

After 10 years

 

143,343

 

146,608

 

3,833

 

3,308

 

Mortgage-backed securities

 

158,959

 

162,724

 

3

 

3

 

Total

 

$

402,132

 

$

414,077

 

$

3,836

 

$

3,311

 

 

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, 2016 and December 31, 2015.

 

At June 30, 2016

 

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

 

$

6,229

 

$

(197

)

$

612

 

$

(19

)

$

6,841

 

$

(216

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired securities

 

$

6,229

 

$

(197

)

$

612

 

$

(19

)

$

6,841

 

$

(216

)

 

 

 

 

 

 

 

 

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

 

$

 

$

 

$

3,487

 

$

(308

)

$

3,487

 

$

(308

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired securities

 

$

 

$

 

$

3,487

 

$

(308

)

$

3,487

 

$

(308

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

U.S. government sponsored agencies

 

$

9,970

 

$

(30

)

$

 

$

 

$

9,970

 

$

(30

)

Mortgage-backed securities

 

46,772

 

(202

)

677

 

(15

)

47,449

 

(217

)

Municipal securities

 

30,313

 

(261

)

259

 

(1

)

30,572

 

(262

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired securities

 

$

87,055

 

$

(493

)

$

936

 

$

(16

)

$

87,991

 

$

(509

)

 

 

 

 

 

 

 

 

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

 

$

 

$

 

$

3,308

 

$

(525

)

$

3,308

 

$

(525

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired securities

 

$

 

$

 

$

3,308

 

$

(525

)

$

3,308

 

$

(525

)

 

17



Table of Contents

 

The Company estimates the fair value of its pooled trust preferred securities portfolio by using third party projected cash flows for each of the issuances in the portfolio, and a discount rate that is commensurate with the risk inherent in the expected cash flows is applied to arrive at the estimated fair value.

 

The Company completes reviews for other-than-temporary impairment at least quarterly.  As of June 30, 2016, 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 June 30, 2016, 99% 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 $884,000 in non-government non-agency mortgage-related securities in its available-for-sale portfolio.  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 June 30, 2016, 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.

 

No other-than-temporary impairment was recognized for the securities in the Company’s investment portfolio for the three and six months ended June 30, 2016.

 

The Company has investment assets designated as trading to economically hedge against fair value changes in the Company’s nonqualified deferred compensation plan liability.  Those investments are designated as trading securities, and as such, the changes in fair value are reflected in earnings.  Trading securities at June 30, 2016 and December 31, 2015 are as follows:

 

(in thousands)

 

June 30, 2016

 

December 31, 2015

 

Cash equivalents

 

$

710

 

$

702

 

Mutual funds

 

5,779

 

5,179

 

 

 

$

6,489

 

$

5,881

 

 

18



Table of Contents

 

Note 6

 

Loans Receivable and Allowance for Loan Losses

 

The loan portfolio at June 30, 2016 and December 31, 2015 consist of the following:

 

 

 

June 30, 2016

 

(In thousands)

 

Originated

 

Acquired

 

Total

 

Commercial and industrial

 

$

339,537

 

$

10,976

 

$

350,513

 

Real estate - commercial

 

1,536,393

 

73,715

 

1,610,108

 

Real estate - construction

 

571,453

 

1,229

 

572,682

 

Real estate - residential

 

454,789

 

5,952

 

460,741

 

Home equity lines

 

159,472

 

1,985

 

161,457

 

Consumer

 

5,003

 

476

 

5,479

 

 

 

3,066,647

 

94,333

 

3,160,980

 

Net deferred fees

 

(4,109

)

 

(4,109

)

Loans receivable, net of deferred fees and costs

 

3,062,538

 

94,333

 

3,156,871

 

Allowance for loan losses

 

(32,537

)

(447

)

(32,984

)

Loans receivable, net

 

$

3,030,001

 

$

93,886

 

$

3,123,887

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

(In thousands)

 

Originated

 

Acquired

 

Total

 

Commercial and industrial

 

$

366,549

 

$

13,138

 

$

379,687

 

Real estate - commercial

 

1,421,976

 

78,329

 

1,500,305

 

Real estate - construction

 

572,260

 

1,341

 

573,601

 

Real estate - residential

 

439,346

 

6,420

 

445,766

 

Home equity lines

 

153,762

 

2,869

 

156,631

 

Consumer

 

4,278

 

568

 

4,846

 

 

 

2,958,171

 

102,665

 

3,060,836

 

Net deferred fees

 

(4,526

)

 

(4,526

)

Loans receivable, net of deferred fees and costs

 

2,953,645

 

102,665

 

3,056,310

 

Allowance for loan losses

 

(31,564

)

(159

)

(31,723

)

Loans receivable, net

 

$

2,922,081

 

$

102,506

 

$

3,024,587

 

 

The loan portfolio is segregated into two components:  loans accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired (referred to as “acquired” loans).

 

The loans in the acquired loan portfolio were initially measured at fair value and subsequently accounted for under either Accounting Standards Codification (“ASC”) Topic 310-30 or ASC 310-20.  The outstanding principal balance and related carrying amount of acquired loans included in the consolidated statements of condition at June 30, 2016 and December 31, 2015 are as follows:

 

19



Table of Contents

 

(in thousands)

 

June 30, 2016

 

Purchased credit impaired loans

 

 

 

Outstanding principal balance

 

$

9,033

 

Carrying amount

 

5,893

 

 

 

 

 

Purchased performing loans

 

 

 

Outstanding principal balance

 

89,800

 

Carrying amount

 

88,440

 

 

 

 

 

Total acquired loans

 

 

 

Outstanding principal balance

 

98,833

 

Carrying amount

 

94,333

 

 

(in thousands)

 

December 31, 2015

 

Purchased credit impaired loans

 

 

 

Outstanding principal balance

 

$

10,886

 

Carrying amount

 

7,723

 

 

 

 

 

Purchased performing loans

 

 

 

Outstanding principal balance

 

96,392

 

Carrying amount

 

94,942

 

 

 

 

 

Total acquired loans

 

 

 

Outstanding principal balance

 

107,278

 

Carrying amount

 

102,665

 

 

The following table presents changes in the accretable discount, which includes income recognized from contractual interest cash flows.

 

(in thousands)

 

 

 

Balance at December 31, 2015

 

$

(4,613

)

Charge-offs

 

 

Recoveries

 

(61

)

Accretion

 

174

 

Balance at June 30, 2016

 

$

(4,500

)

 

 

 

 

(in thousands)

 

 

 

Balance at December 31, 2014

 

$

(5,053

)

Charge-offs

 

504

 

Recoveries

 

(55

)

Accretion

 

(9

)

Balance at December 31, 2015

 

$

(4,613

)

 

20



Table of Contents

 

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.  For originated loans, 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.  The Company also maintains an allowance for loan losses for acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition.

 

For the three and six months ended June 30, 2016, the Company recorded an allowance for loan losses for the acquired loan portfolio of $290,000 and $447,000, respectively.  For the three and six months ended June 30, 2015, the Company did not record an allowance for loan losses for the acquired loan portfolio. There were no impairments recorded in the purchased credit impaired portfolio as of June 30, 2016 and 2015.

 

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 June 30, 2016 and 2015 and December 31, 2015, are below:

 

21



Table of Contents

 

Allowance for Loan Losses

For the Three Months Ended June 30, 2016

(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, April 1, 2016

 

$

1,551

 

$

21,097

 

$

7,714

 

$

1,619

 

$

396

 

$

30

 

$

32,407

 

Charge-offs

 

 

 

 

 

 

(2

)

(2

)

Recoveries

 

136

 

 

 

13

 

 

 

149

 

Provision for loan losses

 

(196

)

680

 

89

 

20

 

(174

)

11

 

430

 

Ending Balance, June 30, 2016

 

$

1,491

 

$

21,777

 

$

7,803

 

$

1,652

 

$

222

 

$

39

 

$

32,984

 

 

Allowance for Loan Losses

At and for the Six Months Ended June 30, 2016

(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

 

$

1,623

 

$

20,356

 

$

7,877

 

$

1,462

 

$

377

 

$

28

 

$

31,723

 

Charge-offs

 

(39

)

 

 

 

(51

)

(2

)

(92

)

Recoveries

 

147

 

50

 

451

 

25

 

 

 

673

 

Provision for loan losses

 

(240

)

1,371

 

(525

)

165

 

(104

)

13

 

680

 

Ending Balance, June 30, 2016

 

$

1,491

 

$

21,777

 

$

7,803

 

$

1,652

 

$

222

 

$

39

 

$

32,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance, June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

1,491

 

21,777

 

7,803

 

1,652

 

222

 

39

 

32,984

 

 

Loans Receivable

At June 30, 2016

(In thousands)

 

 

 

Commercial and
Industrial

 

Real Estate -
Commercial

 

Real Estate -
Construction

 

Real Estate -
Residential

 

Home Equity
Lines

 

Consumer

 

Total

 

Loans Receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance, June 30, 2016

 

$

350,513

 

$

1,610,108

 

$

572,682

 

$

460,741

 

$

161,457

 

$

5,479

 

$

3,160,980

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance, June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

665

 

$

2,015

 

$

 

$

 

$

676

 

$

 

$

3,356

 

Purchased Credit Impaired Loans

 

79

 

3,841

 

1,229

 

260

 

484

 

 

5,893

 

Collectively evaluated for impairment

 

349,769

 

1,604,252

 

571,453

 

460,481

 

160,297

 

5,479

 

3,151,731

 

 

22



Table of Contents

 

Allowance for Loan Losses

For the Three Months Ended June 30, 2015

(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, April 1, 2015

 

$

2,125

 

$

17,715

 

$

6,723

 

$

1,961

 

$

326

 

$

34

 

$

28,884

 

Charge-offs

 

(12

)

(38

)

 

 

(51

)

 

(101

)

Recoveries

 

14

 

31

 

6

 

8

 

 

 

59

 

Provision for loan losses

 

(82

)

508

 

1,060

 

(88

)

(39

)

(3

)

1,356

 

Ending Balance, June 30, 2015

 

$

2,045

 

$

18,216

 

$

7,789

 

$

1,881

 

$

236

 

$

31

 

$

30,198

 

 

Allowance for Loan Losses

At and for the Six Months Ended June 30, 2015

(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

 

$

2,061

 

$

17,820

 

$

6,105

 

$

1,954

 

$

301

 

$

34

 

$

28,275

 

Charge-offs

 

(53

)

 

 

 

(48

)

(16

)

(117

)

Recoveries

 

201

 

324

 

11

 

18

 

 

 

554

 

Provision for loan losses

 

(164

)

72

 

1,673

 

(91

)

(17

)

13

 

1,486

 

Ending Balance, June 30, 2015

 

$

2,045

 

$

18,216

 

$

7,789

 

$

1,881

 

$

236

 

$

31

 

$

30,198

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance, June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

2,045

 

18,216

 

7,789

 

1,881

 

236

 

31

 

30,198

 

 

Loans Receivable

At June 30, 2015

(In thousands)

 

 

 

Commercial and
Industrial

 

Real Estate -
Commercial

 

Real Estate -
Construction

 

Real Estate -
Residential

 

Home Equity
Lines

 

Consumer

 

Total

 

Loans Receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance, June 30, 2015

 

$

341,249

 

$

1,303,026

 

$

574,932

 

$

431,589

 

$

144,655

 

$

4,825

 

$

2,800,276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance, June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

738

 

$

6,583

 

$

250

 

$

 

$

51

 

$

 

$

7,622

 

Purchased Credit Impaired Loans

 

2,221

 

6,312

 

1,653

 

349

 

498

 

2

 

11,035

 

Collectively evaluated for impairment

 

338,290

 

1,290,131

 

573,029

 

431,240

 

144,106

 

4,823

 

2,781,619

 

 

23



Table of Contents

 

Allowance for Loan Losses

For the Year Ended December 31, 2015

(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

 

$

2,061

 

$

17,820

 

$

6,105

 

$

1,954

 

$

301

 

$

34

 

$

28,275

 

Charge-offs

 

(144

)

 

 

(28

)

(48

)

(71

)

(291

)

Recoveries

 

485

 

1,802

 

22

 

42

 

 

 

2,351

 

Provision for loan losses

 

(779

)

734

 

1,750

 

(506

)

124

 

65

 

1,388

 

Ending Balance, December 31, 2015

 

$

1,623

 

$

20,356

 

$

7,877

 

$

1,462

 

$

377

 

$

28

 

$

31,723

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance, December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

1,623

 

20,356

 

7,877

 

1,462

 

377

 

28

 

31,723

 

 

Loans Receivable

At December 31, 2015

(In thousands)

 

 

 

Commercial and
Industrial

 

Real Estate -
Commercial

 

Real Estate -
Construction

 

Real Estate -
Residential

 

Home Equity
Lines

 

Consumer

 

Total

 

Loans Receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance, December 31, 2015

 

$

379,687

 

$

1,500,305

 

$

573,601

 

$

445,766

 

$

156,631

 

$

4,846

 

$

3,060,836

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance, December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

893

 

$

5,616

 

$

 

$

587

 

$

51

 

$

 

$

7,147

 

Purchased Credit Impaired Loans

 

863

 

4,669

 

1,341

 

338

 

512

 

 

7,723

 

Collectively evaluated for impairment

 

377,931

 

1,490,020

 

572,260

 

444,841

 

156,068

 

4,846

 

3,045,966

 

 

The accounting policy related to the allowance for loan losses is considered a critical accounting policy given the level of estimation, judgment and uncertainty in evaluating the levels of the allowance required for the inherent probable losses in the loan portfolio and the material effect such estimation, judgment and uncertainty can have on the consolidated financial results.

 

The Company’s ongoing credit quality management process relies on a system of activities to assess and evaluate various factors that impact the estimation of the allowance for loan losses.  These factors include, but are not limited to; current economic conditions; loan concentrations, collateral adequacy and value; past loss experience for particular types of loans; size, composition and nature of loans; migration of loans through our loan rating methodology; trends in charge-offs and recoveries.  This process also contemplates a disciplined approach to managing and monitoring credit exposures to ensure that the structure and pricing of credit remains consistent with the Company’s assessment of risk.  The loan officer has frequent contact with the borrower and is a key player in the credit management process and

 

24



Table of Contents

 

must develop and diligently practice sound credit management skills and habits to ensure effectiveness.  Under the direction of the Company’s loan committee and the chief credit officer, the credit risk management function works with the loan officers and other groups within the Company to monitor the loan portfolio, maintain the watch list, and compile the analysis necessary to determine the allowance for loan losses.

 

Loans are added to the watch list when circumstances appear to warrant the inclusion of the relationship.  As a general rule, loans are added to the watch list when they are deemed to be problem assets.  Problem assets are defined as those that have been risk rated substandard or lower.   Successful problem asset management requires early recognition of deteriorating credits and timely corrective or risk management actions.  Generally, risk ratings are either approved or amended by the loan committee accordingly.  Problem loans are maintained on the watch list until the loan is either paid off or circumstances around the borrower’s situation improve to the point that the risk rating on the loan is adjusted upward.

 

In addition to internal activities, the Company also engages an external consultant on a quarterly basis to review the Company’s loan portfolio.  This external loan review function helps to ensure the soundness of the loan portfolio through a third party review of existing exposures in the portfolio, supporting the commercial loan officers in the execution of its credit management responsibilities, and monitoring the adherence to the Company’s credit risk management standards.

 

The following tables report the Company’s nonaccrual and past due loans at June 30, 2016 and December 31, 2015.  In addition, the credit quality of the loan portfolio is provided as of June 30, 2016 and December 31, 2015.

 

Nonaccrual and Past Due Loans - Originated Loan Portfolio

At June 30, 2016

(In thousands)

 

 

 

30-59 Days
Past Due

 

60-89 Days
Past Due

 

90 Days or
More Past Due
(includes
nonaccrual)

 

Total Past Due

 

Current

 

Total Loans

 

90 Days Past
Due and Still 
Accruing

 

Nonaccrual
Loans

 

Commercial and industrial

 

$

 

$

 

$

 

$

 

$

339,537

 

$

339,537

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

375,631

 

375,631

 

 

 

Non-owner occupied

 

 

 

 

 

1,160,762

 

1,160,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

241,895

 

241,895

 

 

 

Commercial

 

 

 

 

 

329,558

 

329,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single family

 

 

 

 

 

215,486

 

215,486

 

 

 

Multi-family

 

 

 

 

 

239,303

 

239,303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines

 

734

 

 

41

 

775

 

158,697

 

159,472

 

41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Installment

 

1

 

 

 

1

 

4,525

 

4,526

 

 

 

Credit cards

 

1

 

 

 

1

 

476

 

477

 

 

 

 

 

$

736

 

$

 

$

41

 

$

777

 

$

3,065,870

 

$

3,066,647

 

$

41

 

$

 

 

25



Table of Contents

 

Nonaccrual and Past Due Loans - Acquired Loan Portfolio

At June 30, 2016

(In thousands)

 

 

 

30-59 Days
Past Due

 

60-89 Days
Past Due

 

90 Days or
More Past Due
(includes
nonaccrual)

 

Total Past Due

 

Current

 

Total Loans

 

90 Days Past
Due and Still
Accruing

 

Nonaccrual
Loans

 

Commercial and industrial

 

$

 

$

 

$

 

$

 

$

10,976

 

10,976

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

34,141

 

34,141

 

 

 

Non-owner occupied

 

 

 

 

 

39,574

 

39,574

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

744

 

744

 

 

 

Commercial

 

 

 

 

 

485

 

485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single family

 

 

 

 

 

 

5,952

 

5,952

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines

 

 

 

 

 

1,985

 

1,985

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Installment

 

 

 

 

 

476

 

476

 

 

 

Credit cards

 

 

 

 

 

 

 

 

 

 

 

$

 

$

 

$

 

$

 

$

94,333

 

$

94,333

 

$

 

$

 

 

 

Nonaccrual and Past Due Loans - Originated Loan Portfolio

At December 31, 2015

(In thousands)

 

 

 

30-59 Days
Past Due

 

60-89 Days
Past Due

 

90 Days or
More Past Due
(includes
nonaccrual)

 

Total Past Due

 

Current

 

Total Loans

 

90 Days Past
Due and Still
Accruing

 

Nonaccrual
Loans

 

Commercial and industrial

 

$

 

$

 

$

58

 

$

58

 

$

366,491

 

366,549

 

$

 

$

58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

360,287

 

360,287

 

 

 

Non-owner occupied

 

 

 

 

 

1,061,689

 

1,061,689

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

257,679

 

257,679

 

 

 

Commercial

 

 

 

 

 

314,581

 

314,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single family

 

351

 

587

 

 

938

 

250,063

 

251,001

 

 

 

Multi-family

 

 

 

 

 

188,345

 

188,345

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines

 

 

 

51

 

51

 

153,711

 

153,762

 

 

51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Installment

 

 

 

 

 

3,830

 

3,830

 

 

 

Credit cards

 

 

 

 

 

448

 

448

 

 

 

 

 

$

351

 

$

587

 

$

109

 

$

1,047

 

$

2,957,124

 

$

2,958,171

 

$

 

$

109

 

 

26



Table of Contents

 

Nonaccrual and Past Due Loans - Acquired Loan Portfolio

At December 31, 2015

(In thousands)

 

 

 

30-59 Days
Past Due

 

60-89 Days
Past Due

 

90 Days or
More Past Due
(includes
nonaccrual)

 

Total Past Due

 

Current

 

Total Loans

 

90 Days Past
Due and Still
Accruing

 

Nonaccrual
Loans

 

Commercial and industrial

 

$

 

$

 

$

342

 

$

342

 

$

12,796

 

13,138

 

$

 

$

342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

37,450

 

37,450

 

 

 

Non-owner occupied

 

 

 

 

 

40,879

 

40,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

811

 

811

 

 

 

Commercial

 

 

 

 

 

530

 

530

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single family

 

 

 

 

 

 

6,420

 

6,420

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines

 

 

 

 

 

2,869

 

2,869

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Installment

 

 

 

 

 

568

 

568

 

 

 

Credit cards

 

 

 

 

 

 

 

 

 

 

 

$

 

$

 

$

342

 

$

342

 

$

102,323

 

$

102,665

 

$

 

$

342

 

 

Additional information on the Company’s impaired loans that were evaluated for specific reserves as of June 30, 2016 and December 31, 2015, including the recorded investment on the statement of condition and the unpaid principal balance, is shown below:

 

27



Table of Contents

 

Impaired Loans — Originated Loan Portfolio

At June 30, 2016

(In thousands)

 

 

 

Recorded
Investment

 

Unpaid Principal
Balance

 

Related
Allowance

 

Interest Income
Recognized

 

Average Recorded
Investment

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

665

 

$

665

 

$

 

$

2

 

$

769

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

Non-owner occupied

 

2,015

 

2,434

 

 

2

 

3,223

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

Single family

 

 

 

 

 

196

 

Multi-family

 

 

 

 

 

 

Home equity lines

 

676

 

676

 

 

6

 

256

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With related allowance:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

$

 

$

 

$

 

$

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

Non-owner occupied

 

 

 

 

 

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

Single family

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

Home equity lines

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By segment total:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

665

 

$

665

 

$

 

$

2

 

$

769

 

Real estate - commercial

 

2,015

 

2,434

 

 

2

 

3,223

 

Real estate - construction

 

 

 

 

 

 

Real estate - residential

 

 

 

 

 

196

 

Home equity lines

 

676

 

676

 

 

6

 

256

 

Consumer

 

 

 

 

 

 

Total

 

$

3,356

 

$

3,775

 

$

 

$

10

 

$

4,444

 

 

28



Table of Contents

 

Impaired Loans — Acquired Loan Portfolio

At June 30, 2016

(In thousands)

 

 

 

Recorded
Investment

 

Unpaid Principal
Balance

 

Related
Allowance

 

Interest Income
Recognized

 

Average Recorded
Investment

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

$

 

$

 

$

 

$

114

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

Non-owner occupied

 

 

 

 

 

63

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

Residential

 

744

 

895

 

 

6

 

495

 

Commercial

 

485

 

621

 

 

4

 

499

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

Single family

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

Home equity lines

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With related allowance:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

$

 

$

 

$

 

$

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

Non-owner occupied

 

 

 

 

 

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

Single family

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

Home equity lines

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By segment total:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

$

 

$

 

$

 

$

114

 

Real estate - commercial

 

 

 

 

 

63

 

Real estate - construction

 

1,229

 

1,516

 

 

10

 

994

 

Real estate - residential

 

 

 

 

 

 

Home equity lines

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

Total

 

$

1,229

 

$

1,516

 

$

 

$

10

 

$

1,171

 

 

29



Table of Contents

 

Impaired Loans — Originated Loan Portfolio

At December 31, 2015

(In thousands)

 

 

 

Recorded
Investment

 

Unpaid Principal
Balance

 

Related
Allowance

 

Interest Income
Recognized

 

Average Recorded
Investment

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

893

 

$

916

 

$

 

$

1

 

$

1,026

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

Non-owner occupied

 

5,616

 

6,461

 

 

30

 

2,953

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

 

Commercial

 

 

 

 

 

125

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

Single family

 

587

 

587

 

 

8

 

294

 

Multi-family

 

 

 

 

 

 

Home equity lines

 

51

 

51

 

 

 

116

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With related allowance:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

$

 

$

 

$

 

$

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

Non-owner occupied

 

 

 

 

 

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

Single family

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

Home equity lines

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By segment total:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

893

 

$

916

 

$

 

$

1

 

$

1,026

 

Real estate - commercial

 

5,616

 

6,461

 

 

30

 

2,953

 

Real estate - construction

 

 

 

 

 

125

 

Real estate - residential

 

587

 

587

 

 

8

 

294

 

Home equity lines

 

51

 

51

 

 

 

116

 

Consumer

 

 

 

 

 

 

Total

 

$

7,147

 

$

8,015

 

$

 

$

39

 

$

4,514

 

 

30



Table of Contents

 

Impaired Loans — Acquired Loan Portfolio

At December 31, 2015

(In thousands)

 

 

 

Recorded
Investment

 

Unpaid Principal
Balance

 

Related
Allowance

 

Interest Income
Recognized

 

Average Recorded
Investment

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

342

 

$

470

 

$

 

$

 

$

459

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

Non-owner occupied

 

190

 

225

 

 

1

 

728

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

 

Commercial

 

530

 

627

 

 

4

 

685

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

Single family

 

 

 

 

 

153

 

Multi-family

 

 

 

 

 

 

Home equity lines

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With related allowance:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

$

 

$

 

$

 

$

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

Non-owner occupied

 

 

 

 

 

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

Single family

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

Home equity lines

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By segment total:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

342

 

$

470

 

$

 

$

 

$

459

 

Real estate - commercial

 

190

 

225

 

 

1

 

728

 

Real estate - construction

 

530

 

627

 

 

4

 

685

 

Real estate - residential

 

 

 

 

 

153

 

Home equity lines

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

Total

 

$

1,062

 

$

1,322

 

$

 

$

5

 

$

2,025

 

 

In order to maximize the collection of certain loans, the Company will attempt to work with borrowers when necessary to extend or modify loan terms to better align with the borrower’s ability to repay.  Extensions and modifications to loans are made in accordance with the Company’s policy and conform to regulatory guidance.  Each occurrence is unique to the borrower and is evaluated separately.  The Company considers regulatory guidelines when restructuring a loan to ensure that prudent lending practices are followed.  As such, qualification criteria and payment terms consider the borrower’s current and prospective ability to comply with the modified terms of the loan.

 

A modification is classified as a troubled debt restructuring (“TDR”) if both of the following exist: (1) the borrower is experiencing financial difficulty and (2) the Company has granted a concession to the borrower.  The Company determines that a borrower may be experiencing financial difficulty if the borrower is currently in default on any of its debt, or if the Company is concerned that the borrower may not be able to perform in accordance with the current terms of the loan agreement in the foreseeable future.

 

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Although each occurrence is unique to the borrower and is evaluated separately, for all portfolio segments, TDRs are typically modified through reductions in interest rates, reductions in payments, changing the payment terms from principal and interest to interest only, and/or extensions in term maturity.

 

During the three and six months ended June 30, 2016 and 2015, there were no loans modified in a TDR.  At June 30, 2016 and December 31, 2015, the Company had two TDRs totaling $359,000 and $365,000, respectively (both of which are related to one borrower).  Loans reported as TDRs as of June 30, 2016 and December 31, 2015 are not on nonaccrual.  While the borrower is having financial difficulty, the borrower has not missed a scheduled payment under the terms of the loan agreement.  The Company did not place these TDRs on nonaccrual as the only concession granted to the borrower was an extension of the maturity date to provide the borrower additional time needed to sell the collateral associated with these two loans.

 

At June 30, 2016, these loans are performing as expected post-modification. There were no acquired loans classified as TDRs.  For restructured loans in the portfolio, the Company had no loan loss reserves at June 30, 2016 and December 31, 2015, respectively.  There were no outstanding commitments to advance additional funds to customer relationships whose loans had been restructured as of June 30, 2016 and December 31, 2015.

 

Loans modified as TDRs within the previous 12 months and for which there was a payment default during the period are calculated by first identifying TDRs that defaulted during the period and then determining whether they were modified within the 12 months prior to the default.  For the three and six months ended June 30, 2016 and 2015, there were no loans modified during the previous 12 months that defaulted during the period.

 

One of the most significant factors in assessing the credit quality of the Company’s loan portfolio is the risk rating.  The Company uses the following risk ratings to manage the credit quality of its loan portfolio: pass, other loans especially mentioned (OLEM), substandard, doubtful and loss.  OLEM are those loans in which the borrower exhibits potential weakness that may, if not corrected or reversed, weaken the Bank’s credit position at some future date.  These loans may not show problems as yet due to the borrower’s apparent ability to service the debt, but special circumstances surround the loans of which the Bank’s management should be aware.  Substandard risk rated loans are those loans whose full final collectability may not appear to be a matter for serious doubt, but which nevertheless have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and require close supervision by management.  Loans that have a risk rating of doubtful have all the weakness inherent in one graded substandard with the added provision that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and value, highly questionable.  A loss loan is one that is considered uncollectible and will be charged-off immediately.  All other loans not rated OLEM, substandard, doubtful or loss are considered to have a pass risk rating.  Substandard and doubtful risk rated loans are evaluated for impairment.  The following table presents a summary of the risk ratings by portfolio segment and class segment at June 30, 2016 and December 31, 2015.

 

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Internal Risk Rating Grades - Originated Loan Portfolio

At June 30, 2016

(In thousands)

 

 

 

Pass

 

OLEM

 

Substandard

 

Doubtful

 

Loss

 

Commercial and industrial

 

$

338,408

 

$

464

 

$

665

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

375,631

 

 

 

 

 

Non-owner occupied

 

1,158,370

 

377

 

2,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

Residential

 

241,895

 

 

 

 

 

Commercial

 

325,226

 

4,332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

Single family

 

215,486

 

 

 

 

 

Multi-family

 

239,303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines

 

158,697

 

99

 

676

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Installment

 

4,525

 

1

 

 

 

 

Credit cards

 

476

 

1

 

 

 

 

Total Loans Receivable

 

$

3,058,017

 

$

5,274

 

$

3,356

 

$

 

$

 

 

33



Table of Contents

 

Internal Risk Rating Grades - Acquired Loan Portfolio

At June 30, 2016

(In thousands)

 

 

 

Pass

 

OLEM

 

Substandard

 

Doubtful

 

Loss

 

Commercial and industrial

 

$

10,939

 

$

37

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

34,141

 

 

 

 

 

Non-owner occupied

 

30,679

 

8,895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

744

 

 

 

Commercial

 

 

 

485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

Single family

 

5,952

 

 

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines

 

1,985

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Installment

 

476

 

 

 

 

 

Credit cards

 

 

 

 

 

 

Total Loans Receivable

 

$

84,172

 

$

8,932

 

$

1,229

 

$

 

$

 

 

34



Table of Contents

 

Internal Risk Rating Grades - Originated Loan Portfolio

At December 31, 2015

(In thousands)

 

 

 

Pass

 

OLEM

 

Substandard

 

Doubtful

 

Loss

 

Commercial and industrial

 

$

364,932

 

$

724

 

$

893

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

360,287

 

 

 

 

 

Non-owner occupied

 

1,058,293

 

3,396

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

Residential

 

257,679

 

 

 

 

 

Commercial

 

304,580

 

4,385

 

5,616

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

Single family

 

250,063

 

351

 

587

 

 

 

Multi-family

 

188,345

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines

 

153,711

 

 

51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Installment

 

3,830

 

 

 

 

 

Credit cards

 

448

 

 

 

 

 

Total Loans Receivable

 

$

2,942,168

 

$

8,856

 

$

7,147

 

$

 

$

 

 

35



Table of Contents

 

Internal Risk Rating Grades - Acquired Loan Portfolio

At December 31, 2015

(In thousands)

 

 

 

Pass

 

OLEM

 

Substandard

 

Doubtful

 

Loss

 

Commercial and industrial

 

$

12,744

 

$

52

 

$

342

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

37,450

 

 

 

 

 

Non-owner occupied

 

35,430

 

5,259

 

190

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

Residential

 

811

 

 

 

 

 

Commercial

 

 

 

530

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

Single family

 

6,420

 

 

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines

 

2,869

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Installment

 

568

 

 

 

 

 

Credit cards

 

 

 

 

 

 

Total Loans Receivable

 

$

96,292

 

$

5,311

 

$

1,062

 

$

 

$

 

 

Note 7

 

Derivative Instruments and Hedging Activities

 

The Company enters into rate lock commitments with its mortgage customers.  The Company is also a party to forward mortgage loan sales contracts to sell loans servicing released and short sales of mortgage-backed securities.  When the interest rate is locked with the borrower, the rate lock commitment, forward sale agreement, and mortgage-backed security position are undesignated derivatives and marked to fair value through earnings.  The fair value of the rate lock derivative includes the servicing premium and the interest spread for the difference between retail and wholesale mortgage rates.  Realized and unrealized gains on mortgage banking activities represents the gain recognized for the period presented and associated with these elements of fair value. 

 

The Company sells mortgage loans on either a best efforts or mandatory delivery basis.  For those loans selected to be sold under best efforts delivery, at the closing of the loan, the rate lock commitment derivative expires and the Company records a loan held for sale at lower of cost or fair value and continues to be obligated under the same forward loan sales contract entered into at inception of the rate lock commitment.  On the date the mortgage loan closes, the anticipated future sales proceeds from loan held for sale is designated as the hedged item in a cash flow hedge relationship and the forward loan sale commitment or mortgage-backed security position is designated as the hedging instrument.

 

For loans sold on a mandatory delivery basis, the Company enters into a trade of mortgage-backed securities (the “residual hedge”) to mitigate the effect of interest rate risk.  Both the rate lock commitment under mandatory delivery and the residual hedge are recorded at fair value through earnings and are not designated as accounting hedges.  At the closing of the mandatory delivery loan, the loan commitment derivative expires and the Company records a loan held for sale at fair value. The Company closes out of the trading mortgage-backed securities assigned within the residual hedge and replaces the securities with a forward sales contract once a price has been accepted by an investor and recorded at fair value.

 

At June 30, 2016, accumulated other comprehensive income included an unrealized loss, net of tax, of $729,000 related to forward loan sales contracts designated as the hedging instrument in the cash flow hedge. Loans held for sale are generally sold within thirty days of closing and, therefore, all or substantially all of the amount recorded in accumulated other comprehensive income at June 30, 2016 which is related to the Company’s cash flow hedges will be recognized in earnings during the third quarter of 2016. For the three and six months ended June 30, 2016 and 2015, the Company recognized minimal amounts due to cash flow hedge ineffectiveness.  For the three and six months ended June 30, 2016, the Company recognized net gains of $1.0 million and $425,000, respectively, related to the fair values of the rate lock commitments and loans held for sale under mandatory delivery net of losses related to the residual hedge.

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Table of Contents

 

At June 30, 2016, the Company had $426.6 million in residential mortgage rate lock commitments and associated forward loan sales and mortgage-backed securities in the residual hedge, and $178.2 million in forward loan sales associated with $456.4 million of loans that had closed and were presented as held for sale.

 

Note 8

 

Fair Value of Derivative Instruments and Hedging Activities

 

The Company sells mortgage loans on either a best efforts or mandatory delivery basis.  For those loans selected to be sold under best efforts delivery, at the closing of the loan, the rate lock commitment derivative expires and the Company records a loan held for sale at lower of cost or fair value and continues to be obligated under the same forward loan sales contract entered into at inception of the rate lock commitment.  On the date the mortgage loan closes, the anticipated future sales proceeds from the loan held for sale is designated as the hedged item in a cash flow hedge relationship and the forward loan sale commitment is designated as the hedging instrument.

 

For loans sold on a mandatory basis, the Company enters into a trade of mortgage-backed securities (the “residual hedge”) to mitigate the effect of interest rate risk.  Both the rate lock commitment under mandatory delivery and the residual hedge are recorded at fair value through earnings and are not designated as accounting hedges.  At the closing of the mandatory delivery loan, the loan commitment derivative expires and the Company records a loan held for sale at fair value. The Company closes out of the trading mortgage-backed securities assigned within the residual hedge and replaces the securities with a forward sales contract once a price has been accepted by an investor and recorded at fair value.

 

The following tables disclose the derivative instruments’ location on the Company’s statement of condition and the fair value of those instruments at June 30, 2016 and December 31, 2015.  In addition, the gains and losses related to these derivative instruments is provided for the three and six months ended June 30, 2016 and 2015.

 

Derivative Instruments and Hedging Activities

At June 30, 2016

(in thousands)

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet
Location

 

Fair Value

 

Balance Sheet
Location

 

Fair Value

 

Derivatives Instruments Designated Within a Hedging Relationship

 

 

 

 

 

 

 

 

 

Forward Loan Sales Commitments

 

Accrued Interest Receivable and Other Assets

 

$

5

 

Accrued Interest Payable and Other Liabilities

 

$

1,138

 

Total Designated Instruments

 

 

 

5

 

 

 

1,138

 

 

 

 

 

 

 

 

 

 

 

Derivatives Instruments Not Designated Within a Hedging Relationship

 

 

 

 

 

 

 

 

 

Forward Loan Sales Commitments

 

Accrued Interest Receivable and Other Assets

 

$

86

 

Accrued Interest Payable and Other Liabilities

 

$

2,704

 

TBA mortgage-backed securities

 

Accrued Interest Receivable and Other Assets

 

 

Accrued Interest Payable and Other Liabilities

 

4,112

 

Interest Rate Lock Commitments

 

Accrued Interest Receivable and Other Assets

 

30,438

 

Accrued Interest Payable and Other Liabilities

 

86

 

Total Undesignated Instruments

 

 

 

30,524

 

 

 

6,902

 

 

 

 

 

 

 

 

 

 

 

Total Derivatives

 

 

 

$

30,529

 

 

 

$

8,040

 

 

37



Table of Contents

 

Derivative Instruments and Hedging Activities

At December 31, 2015

(in thousands)

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet
Location

 

Fair Value

 

Balance Sheet
Location

 

Fair Value

 

Derivatives Instruments Designated Within a Hedging Relationship

 

 

 

 

 

 

 

 

 

Forward Loan Sales Commitments

 

Accrued Interest Receivable and Other Assets

 

$

1,569

 

Accrued Interest Payable and Other Liabilities

 

$

1,419

 

Interest Rate Lock Commitments

 

Accrued Interest Receivable and Other Assets

 

416

 

Accrued Interest Payable and Other Liabilities

 

477

 

Total Designated Instruments

 

 

 

1,985

 

 

 

1,896

 

 

 

 

 

 

 

 

 

 

 

Derivatives Instruments Not Designated Within a Hedging Relationship

 

 

 

 

 

 

 

 

 

Forward Loan Sales Commitments

 

Accrued Interest Receivable and Other Assets

 

$

16,784

 

Accrued Interest Payable and Other Liabilities

 

$

168

 

TBA mortgage-backed securities

 

Accrued Interest Receivable and Other Assets

 

64

 

Accrued Interest Payable and Other Liabilities

 

181

 

Interest Rate Lock Commitments

 

Accrued Interest Receivable and Other Assets

 

313

 

Accrued Interest Payable and Other Liabilities

 

213

 

Total Undesignated Instruments

 

 

 

17,161

 

 

 

562

 

 

 

 

 

 

 

 

 

 

 

Total Derivatives

 

 

 

$

19,146

 

 

 

$

2,458

 

 

38



Table of Contents

 

Impact of Derivative Instruments on the Statement of Income

For the Three Months Ended June 30, 2016

(in thousands)

 

Derivatives in
Cash Flow
Hedging
Relationships

 

Amount of Gain
(Loss) Recognized
in Other
Comprehensive
Income on
Derivative (Effective
Portion)

 

Location of Gain
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into
Income (Effective
Portion)

 

Amount of Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income into Income
(Effective Portion)

 

Location of Gain
(Loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

 

Amount of Gain
(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward Loan Sales Commitments

 

$

201

 

Other Income

 

$

159

 

Other Income

 

$

 

Total

 

$

201

 

 

 

$

159

 

 

 

$

 

 

 

 

Amount of Gain
(Loss) Recognized
in Income on
Derivative

 

Location of Gain
(Loss) Recognized
in Income on
Derivative

 

Derivatives Not Designated as Hedging Instruments

 

 

 

 

 

Interest Rate Lock Commitment

 

$

30,352

 

Realized and unrealized gains on mortgage banking activities

 

TBA mortgage-backed securities

 

(4,112

)

Realized and unrealized gains on mortgage banking activities

 

Forward Loan Sales Commitments

 

(2,618

)

Other Income

 

Total

 

$

23,622

 

 

 

 

39



Table of Contents

 

Impact of Derivative Instruments on the Statement of Income

For the Six Months Ended June 30, 2016

(in thousands)

 

Derivatives in
Cash Flow
Hedging
Relationships

 

Amount of Gain
(Loss) Recognized
in Other
Comprehensive
Income on
Derivative (Effective
Portion)

 

Location of Gain
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into
Income (Effective
Portion)

 

Amount of Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income into Income
(Effective Portion)

 

Location of Gain
(Loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

 

Amount of Gain
(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward Loan Sales Commitments

 

$

(249

)

Other Income

 

$

(373

)

Other Income

 

$

 

Total

 

$

(249

)

 

 

$

(373

)

 

 

$

 

 

 

 

Amount of Gain
(Loss) Recognized
in Income on
Derivative

 

Location of Gain
(Loss) Recognized
in Income on
Derivative

 

Derivatives Not Designated as Hedging Instruments

 

 

 

 

 

Interest Rate Lock Commitment

 

$

52,806

 

Realized and unrealized gains on mortgage banking activities

 

TBA mortgage-backed securities

 

(4,112

)

Realized and unrealized gains on mortgage banking activities

 

Forward Loan Sales Commitments

 

(3,532

)

Other Income

 

Total

 

$

45,162

 

 

 

 

40



Table of Contents

 

Impact of Derivative Instruments on the Statement of Income

For the Three Months Ended June 30, 2015

(in thousands)

 

Derivatives in
Cash Flow
Hedging
Relationships

 

Amount of Gain
(Loss) Recognized
in Other
Comprehensive
Income on
Derivative (Effective
Portion)

 

Location of Gain
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into
Income (Effective
Portion)

 

Amount of Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income into Income
(Effective Portion)

 

Location of Gain
(Loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

 

Amount of Gain
(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward Loan Sales Commitments

 

$

300

 

Other Income

 

$

8,629

 

Other Income

 

$

 

Total

 

$

300

 

 

 

$

8,629

 

 

 

$

 

 

 

 

Amount of Gain
(Loss) Recognized
in Income on
Derivative

 

Location of Gain
(Loss) Recognized
in Income on
Derivative

 

Derivatives Not Designated as Hedging Instruments

 

 

 

 

 

Rate Lock Commitment

 

$

20,485

 

Realized and unrealized gains on mortgage banking activities

 

 

 

 

 

 

 

Forward Loan Sales Commitments

 

1,063

 

Other Income

 

Rate Lock Commitments

 

(1,063

)

Other Income

 

Total

 

$

20,485

 

 

 

 

Impact of Derivative Instruments on the Statement of Income

For the Six Months Ended June 30, 2015

(in thousands)

 

Derivatives in
Cash Flow
Hedging
Relationships

 

Amount of Gain
(Loss) Recognized
in Other
Comprehensive
Income on
Derivative (Effective
Portion)

 

Location of Gain
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into
Income (Effective
Portion)

 

Amount of Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income into Income
(Effective Portion)

 

Location of Gain
(Loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

 

Amount of Gain
(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward Loan Sales Commitments

 

$

55

 

Other Income

 

$

9,336

 

Other Income

 

$

 

Total

 

$

55

 

 

 

$

9,336

 

 

 

$

 

 

 

 

Amount of Gain
(Loss) Recognized
in Income on
Derivative

 

Location of Gain
(Loss) Recognized
in Income on
Derivative

 

Derivatives Not Designated as Hedging Instruments

 

 

 

 

 

Rate Lock Commitment

 

$

39,997

 

Realized and unrealized gains on mortgage banking activities

 

 

 

 

 

 

 

Forward Loan Sales Commitments

 

(993

)

Other Income

 

Rate Lock Commitments

 

993

 

Other Income

 

Total

 

$

39,997

 

 

 

 

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The following table reflects the notional amount and fair value of mortgage banking derivatives included in the Company’s statement of condition:

 

Mortgage Banking Derivatives

At June 30, 2016

(in thousands)

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet
Location

 

Notional Amount

 

Fair Value

 

Balance Sheet Location

 

Notional Amount

 

Fair Value

 

Forward Loan Sales Commitments

 

Accrued Interest Receivable and Other Assets

 

$

11,275

 

$

91

 

Accrued Interest Payable and Other Liabilities

 

$

184,112

 

$

3,842

 

Interest Rate Lock Commitments

 

Accrued Interest Receivable and Other Assets

 

390,545

 

30,438

 

Accrued Interest Payable and Other Liabilities

 

36,055

 

86

 

TBA mortgage-backed securities

 

Accrued Interest Receivable and Other Assets

 

 

 

Accrued Interest Payable and Other Liabilities

 

405,500

 

4,112

 

 

 

 

 

$

401,820

 

$

30,529

 

 

 

$

625,667

 

$

8,040

 

 

Note 9

 

Goodwill and Other Intangibles

 

Information concerning total amortizable other intangible assets at June 30, 2016 is as follows:

 

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Commercial Banking

 

Mortgage Banking

 

Total

 

(In thousands)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Balance at December 31, 2015

 

$

3,080

 

$

1,511

 

$

1,781

 

$

1,781

 

$

4,861

 

$

3,292

 

2016 activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

 

314

 

 

 

 

314

 

Balance at June 30, 2016

 

$

3,080

 

$

1,825

 

$

1,781

 

$

1,781

 

$

4,861

 

$

3,606

 

 

The aggregate amortization expense was $152,000 and $188,000 for three months ended June 30, 2016 and 2015, respectively.  For the six months ended June 30, 2016 and 2015, the aggregate amortization expense was $314,000 and $385,000, respectively.   The estimated amortization expense for the next five years and thereafter is as follows:

 

(In thousands)

 

 

 

2016 (June – December)

 

$

281

 

2017

 

454

 

2018

 

313

 

2019

 

172

 

2020

 

35

 

 

The carrying amount of goodwill at June 30, 2016 was as follows:

 

(In thousands)

 

Commercial 
Banking

 

Mortgage 
Banking

 

Total

 

Balance at December 31, 2015

 

$

24,887

 

$

10,120

 

$

35,007

 

Activity: None

 

 

 

 

Balance at June 30, 2016

 

$

24,887

 

$

10,120

 

$

35,007

 

 

Goodwill is evaluated for impairment on an annual basis or more frequently if events or circumstances warrant.

 

Note 10

 

Commitments and Contingencies

 

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract.  Commitments usually have fixed expiration dates up to one year or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  These instruments represent obligations of the Company to extend credit or guarantee borrowings and are not recorded on the consolidated statements of financial condition.  The rates and terms of these instruments are competitive with others in the market in which the Company operates.

 

The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.  The Company evaluates each customer’s creditworthiness on a case-by-case basis and requires collateral to support financial instruments when deemed necessary.  The amount of collateral obtained upon extension of credit is based upon management’s evaluation of the counterparty.  Collateral held varies but may include deposits held by the Company, marketable securities,

 

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accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of the contractual obligations by a customer to a third party.  The majority of these guarantees extend until satisfactory completion of the customer’s contractual obligations.  All standby letters of credit outstanding at June 30, 2016 are collateralized.

 

Commitments to extend credit of $1.1 billion primarily have floating rates as of June 30, 2016.  At June 30, 2016, standby letters of credit were $30.6 million. In addition, commitments to extend credit of $458.6 million as of June 30, 2016 are related to George Mason’s mortgage loan funding commitments and are of a short term nature.

 

These off-balance sheet financial instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition.  Credit risk is defined as the possibility of sustaining a loss because the other parties to a financial instrument fail to perform in accordance with the terms of the contract.  The Company’s maximum exposure to credit loss under standby letters of credit and commitments to extend credit is represented by the contractual amounts of those instruments. It is uncertain as to the amount, if any, that the Company will be required to fund on these commitments as many such arrangements expire with no amounts drawn.

 

George Mason provides for its estimated exposure to repurchase loans previously sold to investors for which borrowers failed to provide full and accurate information on their loan application or for which appraisals have not been acceptable or where the loan was not underwritten in accordance with the loan program specified by the loan investor, and for other exposure to its investors related to loan sales activities.  The Company evaluates the merits of each claim and estimates its reserve based on actual and expected claims received and considers the historical amounts paid to settle such claims. George Mason has a reserve of $0 and $500,000 as of June 30, 2016 and December 31, 2015, respectively.

 

The Company has derivative counter-party risk that may arise from the possible inability of George Mason’s third party investors to meet the terms of their forward sales contracts.  George Mason works with third-party investors that are generally well-capitalized, are investment grade and exhibit strong financial performance to mitigate this risk.  The Company does not expect any third-party investor to fail to meet its obligation.

 

Note 11

 

Fair Value Measurements

 

The fair value framework under U.S. generally accepted accounting principles defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring the fair value.  There are three levels of inputs that may be used to measure fair value:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities as of the measurement date.

 

Level 2 — Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

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Recurring Fair Value Measurements

 

All classes of the Company’s investment securities available-for-sale, the Company’s trading investment securities, which include cash equivalents and mutual funds, and bank-owned life insurance are recorded at fair value, measured using reliable and unbiased valuations by an industry-wide valuation service and therefore fall into the Level 2 category.  This service uses evaluated pricing models that vary based on asset class and include available trade, bid, and other market information.  Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

 

The Company records its interest rate lock commitments and forward loan sales commitments at fair value determined as the amount that would be required to settle each of these derivative financial instruments at the balance sheet date.  In the normal course of business, George Mason enters into contractual interest rate lock commitments to extend credit to borrowers with fixed expiration dates.  The commitments become effective when the borrowers “lock-in” a specified interest rate within the time frames established by the mortgage companies.  All borrowers are evaluated for credit worthiness prior to the extension of the commitment.  Market risk arises if interest rates move adversely between the time of the interest rate lock by the borrower and the sale date of the loan to the investor.  To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, George Mason enters into either a forward sales contract to sell loans to investors when using best efforts or a TBA mortgage-backed security under mandatory delivery.  As TBA mortgage-backed securities are actively traded in an open market, TBA mortgage-backed securities fall into a Level 1 category.  The forward sales contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments.  Both rate lock commitments to borrowers and the forward sales contracts to investors through to the date the loan closes are undesignated derivatives and accordingly, are marked to fair value through earnings.  These valuations fall into a Level 2 category.

 

The Company sells certain residential mortgage loans on a mandatory delivery basis.  These loans are recorded at fair value which is measured using valuations from investors for loans with similar characteristics which is then adjusted for the Company’s actual sales experience versus the investor’s indicated pricing.  These valuations fall into the Level 2 category.

 

There were no significant transfers between Level 1, Level 2 and Level 3 measurements in the fair value hierarchy during the six months ended June 30, 2016.  Transfers between levels are recognized at the end of each reporting period.  The valuation technique used for fair value measurements using significant other observable inputs (Level 2) is the market approach for each class of assets and liabilities.

 

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015 are shown below:

 

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At June 30, 2016

(In Thousands)

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

Quoted Prices in
Active markets for
Identical Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable 
Inputs

 

Description

 

Balance

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

U.S. government-sponsored agencies

 

$

46,238

 

$

 

$

46,238

 

$

 

Mortgage-backed securities

 

168,804

 

 

168,804

 

 

Municipal securities

 

187,480

 

 

187,480

 

 

Total investment securities available-for-sale

 

402,522

 

 

402,522

 

 

Investment securities — trading

 

6,489

 

 

6,489

 

 

Loans held for sale

 

225,776

 

 

225,776

 

 

Bank-owned life insurance

 

33,213

 

 

33,213

 

 

Derivative asset - rate lock and forward loan sales commitments

 

27,154

 

 

27,154

 

 

Derivative asset — interest rate lock commitments

 

3,375

 

 

3,375

 

 

Derivative liability - rate lock and forward loan sales commitments

 

3,918

 

 

3,918

 

 

Derivative liability — interest rate lock commitments

 

10

 

 

10

 

 

Derivative liability — TBA mortgage-backed securities

 

4,112

 

4,112

 

 

 

 

At December 31, 2015

(In Thousands)

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

Quoted Prices in
Active markets for
Identical Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

Description

 

Balance

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

U.S. government-sponsored agencies

 

$

72,905

 

$

 

$

72,905

 

$

 

Mortgage-backed securities

 

162,724

 

 

162,724

 

 

Municipal securities

 

178,448

 

 

178,448

 

 

Total investment securities available-for-sale

 

414,077

 

 

414,077

 

 

Investment securities — trading

 

5,881

 

 

5,881

 

 

Bank-owned life insurance

 

32,978

 

 

32,978

 

 

Derivative asset - rate lock and forward loan sales commitments

 

18,353

 

 

18,353

 

 

Derivative asset — interest rate lock commitments

 

729

 

 

729

 

 

Derivative asset — TBA mortgage-backed securities

 

64

 

64

 

 

 

Derivative liability - rate lock and forward loan sales commitments

 

1,587

 

 

1,587

 

 

Derivative liability — interest rate lock commitments

 

690

 

 

690

 

 

Derivative liability — TBA mortgage-backed securities

 

181

 

181

 

 

 

 

Nonrecurring Fair Value Measurements

 

Certain assets and liabilities are measured at fair value on a nonrecurring basis and are not included in the tables above.  These assets include the valuation of the Company’s loans receivable — evaluated for impairment and other real estate owned. Neither was measured at fair value at June 30, 2016 or December 31, 2015.

 

In addition, loans held for sale that are delivered on a best efforts basis are recorded at the lower of cost or fair value.  Loans held for sale with fair values less than cost are measured at fair value on a nonrecurring basis.  Fair value for fixed rate residential mortgages is based upon the pricing of similar coupon mortgage-backed securities and for adjustable rate loans the Company uses investor indicated pricing.  Loans held for sale that are measured at fair value on a nonrecurring basis at June 30, 2016 and December 31, 2015 were $1.7 million and $335,000, respectively.

 

The Company’s loans receivable — evaluated for impairment are measured at the present value of its expected future cash flows discounted at the loan’s coupon rate, or at the loan’s observable market price or fair value of the collateral if the loan is collateral dependent.  The Company measures the collateral value on loans receivable — evaluated for impairment by obtaining an updated appraisal of the underlying

 

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collateral and may discount further the appraised value, if necessary, to an amount equal to the expected cash proceeds in the event the loan is foreclosed upon and the collateral is sold.  This third party appraisal data is based on market comparisons and may be subject to further adjustment for certain non-observable criteria.  In addition, an estimate of costs to sell the collateral is assumed.

 

Although management uses its best judgment in estimating the fair value of financial instruments, there are inherent limitations in any estimation technique.  Because of the wide range of valuation techniques and the numerous estimates and assumptions which must be made, it may be difficult to make reasonable comparisons between the Company’s fair value information and that of other banking institutions.  It is important that the many uncertainties be considered when using the estimated fair value disclosures and that, because of these uncertainties, the aggregate fair value amount should not be construed as representative of the underlying value of the Company.

 

Fair Value of Financial Instruments

 

The assumptions used and the estimates disclosed represent management’s best judgment of appropriate valuation methods for estimating the fair value of financial instruments.  These estimates are based on pertinent information available to management at the valuation date.  In certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and management’s evaluation of those factors change.

 

The following summarizes the significant methodologies and assumptions used in estimating the fair values presented in the following table, and not disclosed elsewhere in this footnote.

 

Cash and Cash Equivalents

 

The carrying amount of cash and cash equivalents is used as a reasonable estimate of fair value.

 

Investment Securities Held-to-Maturity and Other Investments

 

Fair values for certain investment securities held-to-maturity are based on quoted market prices or prices quoted for similar financial instruments.  For the pooled trust preferred securities that are held-to-maturity, the Company estimates the fair value of these securities through the use of internal calculations and through information provided by external pricing sources.  Certain other investments such as Federal Home Loan Bank stock is recorded at cost as this is the estimated fair value based on its redemption provisions.

 

Loans Held for Sale

 

Loans held for sale that are sold under best efforts delivery are carried at the lower of cost or estimated fair value.  The estimated fair value is based upon the related purchase price commitments from secondary market investors.

 

Loans Receivable, Net

 

In order to determine the fair market value for loans receivable, the loan portfolio was segmented based on loan type, credit quality and maturities.  For certain variable rate loans with no significant credit concerns and frequent repricings, estimated fair values are based on current carrying amounts.  The fair values of other loans are estimated using discounted cash flow analyses, at interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.  The fair value analysis also included other assumptions to estimate fair value, intended to approximate those a market participant would use in an orderly transaction, with adjustments for discount rates, interest rates, liquidity, as appropriate.  This method of estimating fair value does not incorporate the exit-price concept of fair value which is appropriate for this disclosure.

 

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Table of Contents

 

Deposits

 

The fair values for demand deposits are equal to the carrying amount since they are payable on demand at the reporting date.  The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit (CDs) approximate their fair value at the reporting date.  Fair values for fixed rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on CDs to a schedule of aggregated expected monthly maturities on time deposits.

 

Other Borrowed Funds

 

The fair value of other borrowed funds is estimated using a discounted cash flow calculation that applies interest rates currently available for loans with similar terms.

 

Accrued Interest Receivable

 

The carrying amount of accrued interest receivable approximates its fair value.

 

The following summarizes the carrying amount of these financial assets and liabilities that the Company has not recorded at fair value on a recurring or nonrecurring basis disclosed elsewhere in this note at June 30, 2016 and December 31, 2015:

 

 

 

June 30, 2016

 

 

 

Carrying

 

Estimated

 

Fair Value Measurements Using

 

(In thousands)

 

Amount

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,562

 

$

35,562

 

$

35,562

 

$

 

$

 

Investment securities held-to-maturity and other investments

 

21,932

 

21,624

 

 

21,624

 

 

Loans held for sale

 

228,895

 

235,156

 

 

235,156

 

 

Loans receivable, net

 

3,123,887

 

3,156,950

 

 

2,291

 

3,154,659

 

Accrued interest receivable

 

10,586

 

10,586

 

10,586

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

710,318

 

$

710,318

 

$

710,318

 

$

 

$

 

Interest checking

 

437,724

 

437,724

 

437,724

 

 

 

Money market and statement savings

 

764,755

 

764,755

 

764,755

 

 

 

Certificates of deposit

 

1,332,009

 

1,332,672

 

 

1,332,672

 

 

Other borrowed funds

 

450,696

 

457,519

 

 

457,519

 

 

Accrued interest payable

 

925

 

925

 

925

 

 

 

 

 

 

December 31, 2015

 

 

 

Carrying

 

Estimated

 

Fair Value Measurements Using

 

(In thousands)

 

Amount

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

39,337

 

$

39,337

 

$

39,337

 

$

 

$

 

Investment securities held-to-maturity and other investments

 

24,803

 

24,278

 

 

20,970

 

3,308

 

Loans held for sale

 

383,768

 

383,768

 

 

383,768

 

 

Loans receivable, net

 

3,024,587

 

3,005,260

 

 

707

 

3,004,553

 

Accrued interest receivable

 

10,633

 

10,633

 

10,633

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

657,398

 

$

657,398

 

$

657,398

 

$

 

$

 

Interest checking

 

451,545

 

451,545

 

451,545

 

 

 

Money market and statement savings

 

740,372

 

740,372

 

740,372

 

 

 

Certificates of deposit

 

1,183,456

 

1,185,188

 

 

1,185,188

 

 

Other borrowed funds

 

537,965

 

540,755

 

 

540,755

 

 

Accrued interest payable

 

1,266

 

1,266

 

1,266

 

 

 

 

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

 

The following presents management’s discussion and analysis of our consolidated financial condition at June 30, 2016 and December 31, 2015 and the results of our operations for the three and six months ended June 30, 2016 and 2015. This discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report and the audited consolidated financial statements and the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Caution About Forward-Looking Statements

 

We make certain forward-looking statements in this Form 10-Q that are subject to risks and uncertainties.  These forward-looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals.  The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements.

 

These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by factors including:

 

·                  the risks of changes in interest rates on levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities;

·                  changes in assumptions underlying the establishment of reserves for possible loan losses, reserves for repurchases of mortgage loans sold and other estimates;

·                  changes in market conditions, specifically declines in the residential and commercial real estate market, volatility and disruption of the capital and credit markets, soundness of other financial institutions we do business with;

·                  decrease in the volume of loan originations at our mortgage banking subsidiary as a result of the cyclical nature of mortgage banking, changes in interest rates, economic conditions, decreased economic activity, and slowdowns in the housing market which would negatively impact the income recorded on the sales of loans held for sale;

·                  risks inherent in making loans such as repayment risks and fluctuating collateral values;

·                  declines in the prices of assets and market illiquidity may cause us to record an other-than-temporary impairment or other losses, specifically in our pooled trust preferred securities portfolio resulting from increases in underlying issuers’ defaulting or deferring payments;

·                  changes in operations within the wealth management services segment, its customer base and assets under management;

·                  changes in operations of George Mason Mortgage, LLC as a result of the activity in the residential real estate market and any associated impact on the fair value of goodwill in the future;

·                  legislative and regulatory changes, including the Dodd Frank Wall Street Reform and Consumer Protection Act (the “Financial Reform Act”) and other changes in banking, securities, and tax laws and regulations and their application by our regulators, and changes in the scope and cost of FDIC insurance and other coverages;

·                  exposure to repurchase loans sold to investors for which borrowers failed to provide full and accurate information on or related to their loan application or for which appraisals have not been acceptable or when the loan was not underwritten in accordance with the loan program specified by the loan investor;

·                  the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions;

·                  the ability to successfully manage our growth or implement our growth strategies as we implement new or change internal operating systems or if we are unable to identify attractive markets, locations or opportunities to expand in the future;

·                  the effects of future economic, business and market conditions;

·                  governmental monetary and fiscal policies;

 

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·                  changes in accounting policies, rules and practices;

·                  maintaining cost controls and asset quality as we open or acquire new branches;

·                  maintaining capital levels adequate to support our growth;

·                  reliance on our management team, including our ability to attract and retain key personnel;

·                  competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;

·                  demand, development and acceptance of new products and services;

·                  problems with technology utilized by us;

·                  changing trends in customer profiles and behavior; and

·                  other factors described from time to time in our reports filed with the Securities and Exchange Commission.

 

Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.  In addition, our past results of operations do not necessarily indicate our future results.

 

In addition, this section should be read in conjunction with the description of our “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Overview

 

We are a financial holding company formed in 1997 and headquartered in Fairfax County, Virginia.  We own Cardinal Bank, or the Bank, a Virginia state-chartered community bank with 31 banking offices located in Northern Virginia and the greater Washington D.C. metropolitan area.  The Bank offers a wide range of traditional bank loan and deposit products and services to both our commercial and retail customers.  Our commercial relationship managers focus on attracting small and medium sized businesses as well as government contractors, commercial real estate developers and builders and professionals, such as physicians, accountants and attorneys.

 

Additionally, we complement our core banking operations by offering a wide range of services through our various subsidiaries, including mortgage banking through George Mason Mortgage, LLC (“George Mason”) and retail securities brokerage through Cardinal Wealth Services, Inc. (“CWS”).

 

Net interest income is our primary source of revenue. We define revenue as net interest income plus noninterest income. As discussed further in the interest rate sensitivity section, we manage our balance sheet and interest rate risk exposure to maximize, and concurrently stabilize, net interest income. We do this by monitoring our liquidity position and the spread between the interest rates earned on interest-earning assets and the interest rates paid on interest-bearing liabilities. We attempt to minimize our exposure to interest rate risk, but are unable to eliminate it entirely.  In addition to management of interest rate risk, we analyze our loan portfolio for exposure to credit risk. Loan defaults and foreclosures are inherent risks in the banking industry, and we attempt to limit our exposure to these risks by carefully underwriting and then monitoring our extensions of credit. In addition to net interest income, noninterest income is an important source of revenue for us and includes, among other things, service charges on deposits and loans, investment fee income, gains and losses on sales of investment securities available-for-sale, and gains on sales of mortgage loans.

 

Critical Accounting Policies

 

General

 

U.S. generally accepted accounting principles (“GAAP”) are complex and require management to apply significant judgment to various accounting, reporting, and disclosure matters.  Management must use assumptions, judgments and estimates when applying these principles where precise measurements are not possible or practical.  These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates.  Changes in such judgments, assumptions and estimates may have a significant impact on the consolidated financial statements.  Actual results, in fact, could differ from initial estimates.

 

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The accounting policies we view as critical are those relating to judgments, assumptions and estimates regarding the determination of the allowance for loan losses, accounting for purchased credit-impaired loans, the fair value measurements of certain assets and liabilities, accounting for economic hedging activities, and accounting for impairment testing of goodwill.

 

Allowance for Loan Losses

 

We maintain the allowance for loan losses at a level that represents management’s best estimate of known and inherent losses in our loan portfolio.  Both the amount of the provision expense and the level of the allowance for loan losses are impacted by many factors, including general and industry-specific economic conditions, actual and expected credit losses, historical trends and specific conditions of individual borrowers.  Unusual and infrequently occurring events, such as weather-related disasters, may impact our assessment of possible credit losses.  As a part of our analysis, we use our historical losses, loss emergence experience and qualitative factors, such as levels of and trends in delinquencies, nonaccrual loans, charged-off loans, changes in volume and terms of loans, effects of changes in lending policy, experience and ability and depth of management, national and local economic trends and conditions, and concentrations of credit, competition, and loan review results to support our estimates.

 

The allowance for loan losses is based first on a segmentation of the loan portfolio by general loan type, or portfolio segments.  For originated loans, 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.  For purposes of this analysis, we categorize loans into one of five categories:  commercial and industrial, commercial real estate (including construction), home equity lines of credit, residential mortgages, and consumer loans.  We also maintain an allowance for loan losses for acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition.

 

During the fourth quarter of 2014, we transitioned to using our historical loss experience and trends in losses for each category which were then adjusted for portfolio trends and economic and environmental factors in determining the allowance for loan losses.  The indicated loss factors resulting from this analysis are applied to each of the five categories of loans.  Prior to the fourth quarter of 2014, the allowance model used the average loss rates of similar institutions based on its custom peer group as a baseline, which was adjusted for its particular loan portfolio characteristics and environmental factors.  These changes did not have an impact to the overall allowance.

 

The allowance for loan losses consists of specific and general components. The specific component relates to loans that are determined to be impaired and, therefore, individually evaluated for impairment. We individually assign loss factors to all loans that have been identified as having loss attributes, as indicated by deterioration in the financial condition of the borrower or a decline in underlying collateral value if the loan is collateral dependent.  In certain cases, we apply, in accordance with regulatory guidelines, a 5% loss factor to all loans classified as special mention, a 15% loss factor to all loans classified as substandard and a 50% loss factor to all loans classified as doubtful.  Loans classified as loss loans are fully reserved or charged-off.   However, in most instances, we evaluate the impairment of certain loans on a loan by loan basis for those loans that are adversely risk rated.  For these loans, we analyze the fair value of the collateral underlying the loan and consider estimated costs to sell the collateral on a discounted basis.  If the net collateral value is less than the loan balance (including accrued interest and any unamortized premium or discount associated with the loan) we recognize an impairment and establish a specific reserve for the impaired loan. Because of the limited number of impaired loans within the portfolio, we are able to evaluate each impaired loan individually and therefore specific reserves for impaired loans are generally less than those recommended by the listed regulatory guidelines above.

 

The general component relates to groups of homogeneous loans not designated for a specific allowance and are collectively evaluated for impairment. The general component is based on historical loss experience adjusted for qualitative factors. To arrive at the general component, the loan portfolio is grouped by loan type. A weighted average historical loss rate is computed for each group of loans over the trailing seven year period.   We selected a seven year evaluation period as a result of the limited historical loss experience we have incurred, even during the recent economic downturn.  We also believe that a seven year time horizon represents a full economic cycle.  The historical loss factors

 

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are updated at least annually, unless a more frequent review of such factors is warranted.  In addition to the use of historical loss factors, a qualitative adjustment factor is applied. This qualitative adjustment factor, which may be favorable or unfavorable, represents management’s judgment that inherent losses in a given group of loans are different from historical loss rates due to environmental factors unique to that specific group of loans. These factors may relate to growth rate factors within the particular loan group; whether the recent loss history for a particular group of loans differs from its historical loss rate; the amount of loans in a particular group that have recently been designated as impaired and that may be indicative of future trends for this group; reported or observed difficulties that other banks are having with loans in the particular group; changes in the experience, ability, and depth of lending personnel; changes in the nature and volume of the loan portfolio and in the terms of loans; and changes in the volume and severity of past due loans, nonaccrual loans, and adversely classified loans. The sum of the historical loss rate and the qualitative adjustment factor comprise the estimated annual loss rate. To adjust for inherent loss levels within the loan portfolio, a loss emergence factor is estimated based on an evaluation of the period of time it takes for a loan within each of our loan segments to deteriorate to the point an impairment loss is recorded within the allowance.  The loss emergence factor is applied to the estimated annual loss rate to determine the expected annual loss amount.

 

Credit losses are an inherent part of our business and, although we believe the methodologies for determining the allowance for loan losses and the current level of the allowance are appropriate, it is possible that there may be unidentified losses in the portfolio at any particular time that may become evident at a future date pursuant to additional internal analysis or regulatory comment.  Additional provisions for such losses, if necessary, would be recorded in the commercial banking or mortgage banking segments, as appropriate, and would negatively impact earnings.

 

Allowance for Loan Losses - Acquired Loans

 

Acquired loans accounted for under ASC 310-30

 

For our acquired loans, to the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.

 

Acquired loans accounted for under ASC 310-20

 

Subsequent to the acquisition date, we establish our allowance for loan losses through a provision for loan losses based upon an evaluation process that is similar to our evaluation process used for originated loans. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other factors, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which includes the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses.

 

Purchased Credit-Impaired Loans

 

Purchased credit-impaired (PCI) loans, which are the loans acquired in our acquisition of UFBC, are loans acquired at a discount (that is due, in part, to credit quality). These loans are initially recorded at fair value (as determined by the present value of expected future cash flows) with no allowance for loan losses. We account for interest income on all loans acquired at a discount (that is due, in part, to credit quality) based on the acquired loans’ expected cash flows. The acquired loans may be aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flow. The difference between the undiscounted cash flows expected at acquisition and the investment in the loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each pool. Increases in expected cash flows subsequent to the acquisition are recognized prospectively through adjustment of the yield on the pool over its remaining life, while decreases in expected cash flows are recognized as impairment through a loss provision and an increase in the allowance for loan losses. Therefore, the allowance for loan losses on these impaired pools reflect only losses incurred after the acquisition (representing the present value of all cash flows that were expected at acquisition but currently are not expected to be received).  At June 30, 2016, there was no reserve for impairment of PCI loans within our allowance for loan losses.

 

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We periodically evaluate the remaining contractual required payments due and estimates of cash flows expected to be collected. These evaluations, performed quarterly, require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Changes in the contractual required payments due and estimated cash flows expected to be collected may result in changes in the accretable yield and non-accretable difference or reclassifications between accretable yield and the non-accretable difference. On an aggregate basis, if the acquired pools of PCI loans perform better than originally expected, we would expect to receive more future cash flows than originally modeled at the acquisition date. For the pools with better than expected cash flows, the forecasted increase would be recorded as an additional accretable yield that is recognized as a prospective increase to our interest income on loans.

 

Fair Value Measurements

 

We determine the fair values of financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value.  Our investment securities available-for-sale are recorded at fair value using reliable and unbiased valuations by an industry-wide valuation service.  This service uses evaluated pricing models that vary based on asset class and include available trade, bid, and other market information.  Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

 

We also fair value our interest rate lock commitments, forward loan sales commitments, and mortgage-backed securities used to hedge our interest rate lock commitments and certain loans held for sale.  The fair value of our interest rate lock commitments considers the expected premium (discount) to par and we apply certain fallout rates for those rate lock commitments for which we do not close a mortgage loan.  In addition, we calculate the effects of the changes in interest rates from the date of the commitment through loan origination, and then period end, using applicable published mortgage-backed investment security prices for fixed rate loan products and investor indicated pricing for adjustable rate products.  The fair value of the forward sales contracts to investors and mortgage-backed securities considers the market price movement of the same type of security between the trade date and the balance sheet date.

 

We sell mortgage loans on either a best efforts or mandatory delivery basis.  Loans held for sale that are delivered on a best efforts basis are recorded at the lower of cost or fair value.  For loans sold on a mandatory delivery basis, we have elected to record these loans at fair value using valuations from investors for loans with similar characteristics which is then adjusted for GMM’s actual sales experience versus the investor’s indicated pricing.

 

Accounting for Economic Hedging Activities

 

We record all derivative instruments on the statement of condition at their fair values. We do not enter into derivative transactions for speculative purposes. For derivatives designated as hedges, we contemporaneously document the hedging relationship, including the risk management objective and strategy for undertaking the hedge, how effectiveness will be assessed at inception and at each reporting period and the method for measuring ineffectiveness.  We evaluate the effectiveness of these transactions at inception and on an ongoing basis.  Ineffectiveness is recorded through earnings.  For derivatives designated as cash flow hedges, the fair value adjustment is recorded as a component of other comprehensive income, except for the ineffective portion which is recorded in earnings.

 

We discontinue hedge accounting prospectively when it is determined that the derivative is no longer highly effective. In situations in which cash flow hedge accounting is discontinued, we continue to carry the derivative at its fair value on the statement of condition and recognize any subsequent changes in fair value in earnings over the term of the forecasted transaction. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, we recognize immediately in earnings any gains and losses that were accumulated in other comprehensive income.

 

In the normal course of business, we enter into contractual commitments, including rate lock commitments, to finance residential mortgage loans. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the time frame established by us. Interest rate risk arises on these commitments and subsequently closed loans if interest rates change between the time of the interest rate lock and the delivery of the loan to the investor. Loan commitments related to residential mortgage loans intended to be sold are considered derivatives and are marked to market through earnings.

 

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To mitigate the effect of the interest rate risk inherent in providing rate lock commitments, we economically hedge our commitments by entering into either a forward loan sales contract under best efforts or a trade of mortgage —backed securities for mandatory delivery (the “residual hedge”). During the rate lock commitment period, these forward loan sales contracts and the residual hedge are marked to market through earnings and are not designated as accounting hedges. Exclusive of the fair value elements of the rate lock commitment related to servicing and the wholesale and retail rate spread, the changes in fair value related to movements in market rates of the rate lock commitments and the forward loan sales contracts and residual hedge generally move in opposite directions, and the net impact of changes in these valuations on net income during the loan commitment period is generally inconsequential. At the closing of the loan, the loan commitment derivative expires and we record a loan held for sale and continue to be obligated under the same forward loan sales contract under best efforts.  Loans held for sale that are delivered on a best efforts basis are recorded at the lower of cost or fair value.  For mandatory delivery, we close out of the trading mortgage-backed securities assigned within the residual hedge and replace them with a forward sales contract once a price has been accepted by an investor.  For loans sold on a mandatory delivery basis, we have elected to record these loans at fair value using valuations from investors for loans with similar characteristics which is then adjusted for GMM’s actual sales experience versus the investor’s indicated pricing.

 

 

Accounting for Impairment Testing of Goodwill

 

We test goodwill for impairment pursuant to ASU 2011-08, Testing Goodwill for Impairment.  This ASU permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test. We perform our annual review of goodwill during the third quarter.

 

In the event we are required to perform a Step 1 fair value evaluation of the reporting unit, we make estimates of the discounted cash flows from the expected future operations of the reporting unit. This discounted cash flow analysis involves the use of unobservable inputs including:  estimated future cash flows from operations; an estimate of a terminal value; a discount rate; and other inputs.  Our estimated future cash flows are largely based on our historical actual cash flows.  If the analysis indicates that the fair value of the reporting unit is less than its carrying value, we do an analysis to compare the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of the goodwill is determined by allocating the fair value of the reporting unit to all its assets and liabilities. If the implied fair value of the goodwill is less than the carrying value, an impairment loss is recognized.

 

New Financial Accounting Standards

 

In August 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date.  The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU 2014-09. The Company does not expect the adoption of ASU 2015-14 (or ASU 2014-09) to have a material impact on its consolidated financial statements.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  The amendments in ASU 2016-01, among other things: 1) Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Requires public business entities to use the exit price notion when measuring the fair value of financial

 

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instruments for disclosure purposes. 3) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). 4) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.

 

During March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting. The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.

 

During June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.

 

2016 Economic Environment

 

The banking environment and the markets in which we conduct our businesses will continue to be strongly influenced by developments in the U.S. and global economies, as well as the continued implementation of rulemaking from recent financial reforms.  Although global economic conditions remain unsettled, the metropolitan Washington, D.C. area, the region in which we operate, continues to perform relatively well compared to other regions.  Although we believe that our region has weathered the recession better than most over the past several years, a protracted low interest rate environment, and the burden of regulatory requirements enacted in response to the recent financial crisis make for a challenging operating environment.  We continue to consider future economic events and their impact on our performance.

 

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Our credit quality continues to remain strong.  At June 30, 2016, we had no loans on nonaccrual and $41,000 of loans contractually past due 90 days or more as to principal or interest and still accruing.  We recorded annualized net recoveries of 0.02% of our average loans receivable for the quarter ended June 30, 2016.

 

Market illiquidity and concerns over credit risk continue to impact the ratings of our pooled trust preferred securities. We hold investments of $3.8 million in par value of pooled trust preferred securities, which are below book value as of June 30, 2016 due to the lack of liquidity in the market, deferrals and defaults of issuers, and continued investor apprehension for investing in these types of investments.

 

We expect challenging economic and operating conditions and an evolving regulatory regime to continue for the foreseeable future.  These conditions could continue to affect the markets in which we do business and could adversely impact our results for 2016. The degree of the impact is dependent upon the duration and severity of the aforementioned conditions and the nature of new banking regulations.

 

While our loan growth has continued to be strong, continued uncertainty and sluggish economic growth could adversely affect our loan portfolio, including causing increases in delinquencies and default rates, which would adversely impact our charge-offs and provision for loan losses.  Deterioration in real estate values and household incomes may also result in higher credit losses for us.  Also, in the ordinary course of business, we may be subject to a concentration of credit risk to a particular industry, counterparty, borrower or issuer.  A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our businesses, perhaps materially. The systems by which we set limits and monitor the level of our credit exposure to individual entities and industries also may not function as we have anticipated.

 

Liquidity is essential to our business.  The primary sources of funding for our Bank include customer deposits and wholesale funding.  Our liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash, including deposits.  This situation may arise due to circumstances that we may be unable to control, such as general market disruption, negative views about the financial services industry generally, or an operational problem that affects a third party or us.  Our ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events.  While we believe we have a healthy liquidity position, any of the above factors could materially impact our liquidity position in the future.

 

The U.S. government continues to enact legislation and develop various programs and initiatives designed to regulate the financial services industry, stabilize the housing markets and stimulate the economy.  The banking industry is awaiting many of the regulations resulting from the implementation of the Financial Reform Act.  We remain unsure of the full impact this legislation will have on our business, operations, or our financial condition.

 

Statements of Income

 

General

 

For the three months ended June 30, 2016 and 2015, we reported net income of $14.1 million and $13.4 million, respectively, an increase of $722,000, or 5%.  Net interest income after the provision for loan losses increased $3.6 million to $31.1 million for the three months ended June 30, 2016 compared to $27.5 million for the three months ended June 30, 2015.  Provision for loan losses recorded for the three months ended June 30, 2016 was $430,000, compared to provision expense of $1.4 million for the same period of 2015.  Noninterest income for the three months ended June 30, 2016 and 2015 was $20.5 million and $15.7 million, respectively, an increase of $4.8 million.  This increase was primarily due to an increase in realized and unrealized gains on mortgage banking activities of $4.2 million and gains on sales of investment securities available-for-sale of $3.6 million for the second quarter of 2016 compared to the same 2015 period (which included a $3.0 million litigation settlement).  For the three months ended June 30, 2016, noninterest expense increased to $30.1 million, compared to $22.9 million for the same period of 2015.  The increase in noninterest expense is partially attributable to an increase in salary and benefits expense, a result of an increase in the variable components of our compensation and additional staffing on both the sales and operational areas of the Company over the past year as a result of our continued growth and increased regulatory environment. In addition, we extinguished $95.0 million of FHLB advances which had prepayment penalties of $3.6 million for the three months ended June 30, 2016.

 

During the second quarter of 2016, we executed a balance sheet restructuring which we expect to enhance net interest income.  As a result of the restructuring, we incurred $3.6 million of prepayment penalties related to

 

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extinguishment of FHLB advances totaling $95 million.  As part of the restructuring, we sold $50 million in investment securities available-for-sale and recorded gains of $3.6 million.  This restructuring had minimal impact on interest rate risk and no impact to regulatory capital ratios.

 

For the three months ended June 30, 2016, basic and diluted earnings per common share were $0.43 and $0.42, respectively.  Basic and diluted earnings per common share for the three months ended June 30, 2015 were $0.41 and $0.40, respectively.  Weighted average fully diluted shares outstanding for the three months ended June 30, 2016 and 2015 were 33,569,058 and 33,207,329, respectively.

 

Return on average assets for the three months ended June 30, 2016 and 2015 was 1.39% and 1.48%, respectively. Return on average equity for the three months ended June 30, 2016 and 2015 was 12.92% and 13.36%, respectively.

 

For the six months ended June 30, 2016 and 2015, we reported net income of $27.2 million and $27.1 million, respectively.  Net interest income after the provision for loan losses increased $6.7 million to $61.5 million for the six months ended June 30, 2016 compared to $54.8 million for the six months ended June 30, 2015.  Provision for loan losses recorded for the six months ended June 30, 2016 was $680,000, compared to provision expense of $1.5 million for the same period of 2015.  Noninterest income for the six months ended June 30, 2016 and 2015 was $35.8 million and $33.3 million, respectively, an increase of $2.4 million.  This increase was primarily due to an increase in realized and unrealized gains on mortgage banking activities of $2.2 million for 2016 compared to the same 2015 period.  For the six months ended June 30, 2016, noninterest expense increased to $56.4 million, compared to $47.1 million for the same period of 2015.  The increase in noninterest expense is primarily attributable to an increase in salary and benefits expense, a result of an increase in the variable components of our compensation and additional staffing on both the sales and operational areas of the Company over the past year as a result of our continued growth and increased regulatory environment.  In addition, the 2016 period included the aforementioned prepayment penalty on extinguishment of debt of $3.6 million.  The 2015 period did not have any debt extinguishment losses.

 

For the six months ended June 30, 2016, basic and diluted earnings per common share were $0.82 and $0.81, respectively.  Basic and diluted earnings per common share for the six months ended June 30, 2015 were $0.83 and $0.82, respectively.  Weighted average fully diluted shares outstanding for the six months ended June 30, 2016 and 2015 were 33,499,462 and 33,132,076, respectively.

 

Return on average assets for the six months ended June 30, 2016 and 2015 was 1.35% and 1.55%, respectively. Return on average equity for the six months ended June 30, 2016 and 2015 was 12.63% and 13.74%, respectively.

 

General —Business Segments

 

We operate in three business segments: commercial banking, mortgage banking, and wealth management services.

 

Net income attributable to the commercial banking segment for the three months ended June 30, 2016 was $10.8 million compared to net income of $9.7 million for the three months ended June 30, 2015.  Net interest income increased $3.1 million to $31.4 million for the three months ended June 30, 2016, compared to $28.4 million for the same period of 2015.  Provision for loan losses was $430,000 for the three months ended June 30, 2016 compared to a provision of $1.4 million for the same period of 2015.  Noninterest income increased to $4.7 million for the three months ended June 30, 2016 compared to $1.3 million for the three months ended June 30, 2015, as a result of gains recorded for the sales of investment securities available-for-sale of $3.6 million during the second quarter of 2016.  Noninterest expense was $19.5 million for the three months ended June 30, 2016, compared to $13.7 million for the same period of 2015.  The increase in noninterest expense was primarily attributable to increases in staffing and the variable component of our compensation at the Bank in addition to the aforementioned debt extinguishment penalty of $3.6 million.

 

Net income attributable to the commercial banking segment for the six months ended June 30, 2016 was $21.0 million compared to net income of $18.6 million for the six months ended June 30, 2015.  Net interest income increased $6.5 million to $62.0 million for the six months ended June 30, 2016, compared to $55.5 million for the same period of

 

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2015.  Provision for loan losses was $680,000 for the six months ended June 30, 2016 compared to a provision of $1.5 million for the same period of 2015.  Noninterest income increased to $5.9 million for the six months ended June 30, 2016 compared to $2.6 million for the six months ended June 30, 2015, as a result of gains recorded for the sales of investment securities available-for-sale of $3.6 million during the second quarter of 2016.  Noninterest expense was $36.0 million for the six months ended June 30, 2016, compared to $28.9 million for the same period of 2015.  The increase in noninterest expense was primarily attributable to increases in staffing and the variable component of our compensation at the Bank in addition to the aforementioned debt extinguishment penalty of $3.6 million.

 

The mortgage banking segment reported net income of $4.0 million for the three months ended June 30, 2016 compared to net income of $2.4 million for the three months ended June 30, 2015.  Realized and unrealized gains associated with the fair value of commitments and loans held for sale increased to $15.3 million for the three months ended June 30, 2016 compared to $11.1 million for the same period of 2015, a result of an increase in the volume of loans sold.  Noninterest expense increased $1.4 to $9.4 million for the three months ended June 30, 2016 compared to $8.0 million for the same period of 2015.

 

The mortgage banking segment reported net income of $7.5 million for the six months ended June 30, 2016 compared to net income of $8.4 million for the six months ended June 30, 2015.  Realized and unrealized gains associated with the fair value of commitments and loans held for sale increased to $29.4 million for the six months ended June 30, 2016 compared to $27.3 million for the same period of 2015, a result of an increase in the volume of loans sold.  Noninterest expense increased $3.0 million to $18.3 million for the six months ended June 30, 2016 compared to $15.3 million for the same period of 2015.  The increase in non-interest expense is primarily related to expenses attributable to loan volumes (overtime, application processing and closing expenses) in addition to increased personnel expenses related to compliance with the new TILA/RESPA Integrated Disclosure (“TRID”) regulations.

 

The wealth management services segment, which includes CWS, recorded net income of $52,000 for the three months ended June 30, 2016, compared to net income of $3,000 for the three months ended June 30, 2015.

 

The wealth management services segment, which includes CWS, recorded net income of $62,000 for the six months ended June 30, 2016, compared to net income of $4,000 for the six months ended June 30, 2015.

 

Net Interest Income

 

Net interest income is our primary source of revenue, representing the difference between interest and fees earned on interest-earning assets and the interest paid on deposits and other interest-bearing liabilities. The level of net interest income is affected primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates. For the three months ended June 30, 2016 and 2015, net interest income was $31.5 million and $28.9 million, respectively.  The yields on our loans receivable portfolio decreased 11 basis points for the three months ended June 30, 2016 compared to the same period of 2015 as a result of the low interest rate environment.  The yield on our loans held for sale portfolio decreased 6 basis points, which is again due to the low interest rate environment.  The yields of our interest-bearing deposits increased 3 basis points as we have increased rates on certain savings and certificates of deposit products to remain competitive in our market.  However, to offset this slight increase, we have reduced our rates on our interest checking products and costs related to other borrowed funds.  Other borrowed funds costs decreased by 25 basis points primarily due to a restructuring of a portion of our fixed rate FHLB advance portfolio during February 2015.  This restructuring reduced our FHLB advance funding costs from 3.33% to 2.80%.  In addition, we completed a balance sheet restructuring during the second quarter of 2016 to help further reduce our funding costs. This restructuring is expected to positively impact net interest margin by approximately 0.06% annualized beginning during the third quarter of 2016.

 

Our net interest margin, on a tax-equivalent basis, which is calculated as net interest income divided by average interest earning assets, was 3.33% and 3.41% for the three months ended June 30, 2016 and 2015, respectively.  Our net interest margin decreased as a result of the decrease in yield on our interest-earning assets due to the low interest rate environment.

 

Interest income on loans receivable increased $3.3 million to $31.3 million for the three months ended June 30, 2016 compared to $28.0 million for the same three month period of 2015.  The increase in interest income on loans

 

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receivable is primarily a result of the increase in the volume of the loans receivable portfolio.  Interest income on loans held for sale was $3.4 million for the three months ended June 30, 2016 and $3.9 million for the same period of 2015.

 

Interest income on investment securities increased $491,000 to $3.2 million for the three months ended June 30, 2016 compared to $2.8 million for the three months ended June 30, 2015. The increase in interest income in our investment securities portfolio is attributable to purchases of securities that occurred during the third and fourth quarters of 2015.

 

Total interest expense increased $686,000 to $6.5 million for the three months ended June 30, 2016 compared to $5.8 million for the same period of 2015.  The increase is primarily attributable to the increase in deposits, specifically certificates of deposit, over the past year.

 

For the six months ended June 30, 2016 and 2015, net interest income was $62.2 million and $56.3 million, respectively.  The yields on our loans receivable portfolio decreased 14 basis points for the six months ended June 30, 2016 compared to the same period of 2015 as a result of the low interest rate environment.  The yields of our interest-bearing deposits increased 4 basis points as we have increased rates on certain savings and certificates of deposit products to remain competitive in our market, offset by reducing our rates on our interest checking products and costs related to other borrowed funds.  Other borrowed funds costs decreased by 32 basis points primarily due to the aforementioned restructuring of our FHLB advance portfolio in 2015 and 2016.

 

Our net interest margin, on a tax-equivalent basis, was 3.31% and 3.42% for the six months ended June 30, 2016 and 2015, respectively.  Our net interest margin decreased as a result of the decrease in yield on our interest-earning assets due to the low interest rate environment.

 

Interest income on loans receivable increased $6.9 million to $62.4 million for the six months ended June 30, 2016 compared to $55.5 million for the same six month period of 2015.  The increase in interest income on loans receivable is primarily a result of the increase in the volume of the loans receivable portfolio.  Interest income on loans held for sale was $6.3 million for the six months ended June 30, 2016 and $6.4 million for the same period of 2015.

 

Interest income on investment securities increased $969,000 to $6.6 million for the six months ended June 30, 2016 compared to $5.6 million for the six months ended June 30, 2015. The increase in interest income in our investment securities portfolio is attributable to purchases of securities that occurred during the third and fourth quarters of 2015.

 

Total interest expense increased $2.0 million to $13.2 million for the six months ended June 30, 2016 compared to $11.2 million for the same period of 2015.  The increase is primarily attributable to the increase in deposits, specifically certificates of deposit, over the past year.

 

The following tables present an analysis of average earning assets and interest-bearing liabilities with related components of interest income and interest expense on a tax equivalent basis.

 

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Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities

Three Months Ended June 30, 2016, 2015 and 2014

(In thousands)

 

 

 

2016

 

2015

 

2014

 

 

 

 

 

Interest

 

Average

 

 

 

Interest

 

Average

 

 

 

Interest

 

Average

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

 

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

258,678

 

$

2,418

 

3.74

%

$

281,357

 

$

2,624

 

3.62

%

$

275,984

 

$

3,110

 

4.51

%

Commercial and industrial - tax exempt

 

103,221

 

729

 

2.82

%

72,567

 

453

 

2.50

%

18,644

 

54

 

1.17

%

Real estate - commercial

 

1,563,089

 

17,062

 

4.37

%

1,269,520

 

14,032

 

4.42

%

1,175,020

 

13,071

 

4.35

%

Real estate - construction

 

556,939

 

6,082

 

4.37

%

515,073

 

6,119

 

4.75

%

416,671

 

5,319

 

5.10

%

Real estate - residential

 

448,453

 

3,998

 

3.57

%

396,447

 

3,733

 

3.77

%

320,339

 

3,210

 

4.00

%

Home equity lines

 

160,303

 

1,286

 

3.23

%

139,748

 

1,102

 

3.16

%

115,719

 

1,094

 

3.83

%

Consumer

 

5,239

 

64

 

4.91

%

5,128

 

76

 

5.94

%

4,926

 

77

 

6.18

%

Total loans

 

3,095,922

 

31,639

 

4.09

%

2,679,841

 

28,139

 

4.20

%

2,327,303

 

25,935

 

4.42

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

365,520

 

3,388

 

3.71

%

412,083

 

3,886

 

3.77

%

313,376

 

3,296

 

4.21

%

Investment securities

 

400,085

 

3,817

 

3.82

%

333,583

 

3,091

 

3.71

%

349,519

 

3,459

 

3.96

%

Federal funds sold

 

33,435

 

37

 

0.45

%

26,305

 

12

 

0.19

%

17,617

 

9

 

0.21

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets and interest income (2)

 

3,894,962

 

38,881

 

3.99

%

3,451,812

 

35,128

 

4.07

%

3,007,815

 

32,699

 

4.32

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

21,899

 

 

 

 

 

21,845

 

 

 

 

 

20,768

 

 

 

 

 

Premises and equipment, net

 

24,642

 

 

 

 

 

25,013

 

 

 

 

 

26,629

 

 

 

 

 

Goodwill and other intangibles, net

 

36,333

 

 

 

 

 

37,039

 

 

 

 

 

37,318

 

 

 

 

 

Accrued interest and other assets

 

119,723

 

 

 

 

 

108,404

 

 

 

 

 

95,457

 

 

 

 

 

Allowance for loan losses

 

(32,702

)

 

 

 

 

(29,432

)

 

 

 

 

(29,446

)

 

 

 

 

Total assets

 

$

4,064,857

 

 

 

 

 

$

3,614,681

 

 

 

 

 

$

3,158,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest - bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest - bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking

 

445,991

 

397

 

0.36

%

428,937

 

519

 

0.49

%

433,175

 

546

 

0.51

%

Money markets

 

438,863

 

398

 

0.36

%

378,268

 

312

 

0.33

%

325,786

 

255

 

0.31

%

Statement savings

 

315,804

 

331

 

0.43

%

272,319

 

234

 

0.34

%

254,254

 

176

 

0.28

%

Certificates of deposit

 

773,053

 

2,363

 

1.23

%

668,822

 

2,036

 

1.22

%

535,855

 

1,441

 

1.08

%

Brokered certificates of deposit

 

454,152

 

1,053

 

0.93

%

440,569

 

802

 

0.73

%

294,048

 

588

 

0.81

%

Total interest - bearing deposits

 

2,427,863

 

4,542

 

0.75

%

2,188,915

 

3,903

 

0.72

%

1,843,118

 

3,006

 

0.66

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other borrowed funds

 

456,044

 

1,915

 

1.69

%

386,872

 

1,868

 

1.94

%

373,306

 

2,219

 

2.41

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities and interest expense

 

2,883,907

 

6,457

 

0.90

%

2,575,787

 

5,771

 

0.90

%

2,216,424

 

5,225

 

0.96

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

698,123

 

 

 

 

 

596,892

 

 

 

 

 

549,605

 

 

 

 

 

Other liabilities

 

46,193

 

 

 

 

 

41,572

 

 

 

 

 

30,440

 

 

 

 

 

Common shareholders’ equity

 

436,634

 

 

 

 

 

400,430

 

 

 

 

 

362,072

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

4,064,857

 

 

 

 

 

$

3,614,681

 

 

 

 

 

$

3,158,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and net interest margin (2)

 

 

 

$

32,424

 

3.33

%

 

 

$

29,357

 

3.41

%

 

 

$

27,474

 

3.63

%

 


(1) Non-accrual loans are included in average balances and do not have a material effect on the average yield.  Interest income on non-accruing loans was not material for the periods presented.

(2) Interest income for loans receivable and investment securities available-for-sale is reported on a fully taxable-equivalent basis at a rate of of 36% for 2016 and 35% for 2015.

 

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Rate and Volume Analysis

Three Months Ended June 30, 2016, 2015 and 2014

(In thousands)

 

 

 

2016 Compared to 2015

 

2015 Compared to 2014

 

 

 

Change Due to

 

 

 

Change Due to

 

 

 

 

 

Average

 

Average

 

Increase

 

Average

 

Average

 

Increase

 

 

 

Volume (3)

 

Rate

 

(Decrease)

 

Volume (3)

 

Rate

 

(Decrease)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

(283

)

$

77

 

$

(206

)

$

60

 

$

(546

)

$

(486

)

Commercial and industrial - tax exempt

 

194

 

82

 

276

 

158

 

241

 

399

 

Real estate - commercial

 

3,245

 

(215

)

3,030

 

734

 

227

 

961

 

Real estate - construction

 

497

 

(534

)

(37

)

1,244

 

(444

)

800

 

Real estate - residential

 

490

 

(225

)

265

 

753

 

(230

)

523

 

Home equity lines

 

158

 

26

 

184

 

241

 

(233

)

8

 

Consumer

 

2

 

(14

)

(12

)

2

 

(3

)

(1

)

Total loans

 

4,303

 

(803

)

3,500

 

3,192

 

(988

)

2,204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

(439

)

(59

)

(498

)

1,038

 

(448

)

590

 

Investment securities available-for-sale

 

616

 

110

 

726

 

(158

)

(210

)

(368

)

Federal funds sold

 

3

 

22

 

25

 

4

 

(1

)

3

 

Total interest income (2)

 

4,483

 

(730

)

3,753

 

4,076

 

(1,647

)

2,429

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest - bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking

 

31

 

(153

)

(122

)

(6

)

(21

)

(27

)

Money markets

 

50

 

36

 

86

 

41

 

16

 

57

 

Statement savings

 

30

 

67

 

97

 

13

 

45

 

58

 

Certificates of deposit

 

299

 

28

 

327

 

361

 

234

 

595

 

Brokered certificates of deposit

 

26

 

225

 

251

 

303

 

(89

)

214

 

Total interest - bearing deposits

 

436

 

203

 

639

 

712

 

185

 

897

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other borrowed funds

 

332

 

(285

)

47

 

94

 

(445

)

(351

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

 

768

 

(82

)

686

 

806

 

(260

)

546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (2)

 

$

3,715

 

$

(648

)

$

3,067

 

$

3,270

 

$

(1,387

)

$

1,883

 

 


(1) Non-accrual loans are included in average balances and do not have a material effect on the average yield.  Interest income on non-accruing loans was not material for the periods presented.

(2) Interest income for loans receivable and investment securities available-for-sale is reported on a fully taxable-equivalent basis at a rate of 36% for 2016 and 35% for 2015.

(3) Changes attributable to rate/volume have been allocated to volume.

 

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Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities

Six Months Ended June 30, 2016, 2015 and 2014

(In thousands)

 

 

 

2016

 

2015

 

2014

 

 

 

 

 

Interest

 

Average

 

 

 

Interest

 

Average

 

 

 

Interest

 

Average

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

 

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

262,516

 

$

4,911

 

3.74

%

$

298,405

 

$

5,336

 

3.56

%

$

267,306

 

$

6,147

 

4.60

%

Commercial and industrial - tax exempt

 

104,303

 

1,467

 

2.81

%

53,539

 

924

 

3.45

%

9,930

 

55

 

1.10

%

Real estate - commercial

 

1,474,348

 

31,887

 

4.33

%

1,264,283

 

28,289

 

4.48

%

1,167,100

 

25,828

 

4.33

%

Real estate - construction

 

626,766

 

14,017

 

4.47

%

480,684

 

11,365

 

4.73

%

406,989

 

10,147

 

4.98

%

Real estate - residential

 

444,794

 

8,051

 

3.62

%

393,773

 

7,450

 

3.78

%

312,486

 

6,355

 

4.06

%

Home equity lines

 

160,272

 

2,544

 

3.19

%

136,759

 

2,195

 

3.24

%

115,222

 

2,117

 

3.71

%

Consumer

 

5,261

 

126

 

4.78

%

4,969

 

142

 

5.76

%

5,691

 

340

 

5.70

%

Total loans

 

3,078,260

 

63,003

 

4.09

%

2,632,412

 

55,701

 

4.23

%

2,284,724

 

50,989

 

4.43

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

335,087

 

6,344

 

3.79

%

336,722

 

6,370

 

3.78

%

265,998

 

5,773

 

4.34

%

Investment securities

 

409,865

 

7,765

 

3.79

%

333,194

 

6,327

 

3.80

%

357,691

 

7,042

 

3.94

%

Federal funds sold

 

44,226

 

102

 

0.46

%

39,093

 

40

 

0.21

%

38,338

 

40

 

0.21

%

Total interest-earning assets and interest income (2)

 

3,867,438

 

77,214

 

3.99

%

3,341,421

 

68,438

 

4.10

%

2,946,751

 

63,844

 

4.33

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

21,534

 

 

 

 

 

21,043

 

 

 

 

 

28,258

 

 

 

 

 

Premises and equipment, net

 

24,914

 

 

 

 

 

25,110

 

 

 

 

 

25,744

 

 

 

 

 

Goodwill and other intangibles, net

 

36,416

 

 

 

 

 

37,136

 

 

 

 

 

35,084

 

 

 

 

 

Accrued interest and other assets

 

112,708

 

 

 

 

 

103,236

 

 

 

 

 

104,746

 

 

 

 

 

Allowance for loan losses

 

(32,407

)

 

 

 

 

(29,132

)

 

 

 

 

(29,743

)

 

 

 

 

Total assets

 

$

4,030,603

 

 

 

 

 

$

3,498,814

 

 

 

 

 

$

3,110,840

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest - bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest - bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking

 

451,760

 

856

 

0.38

%

426,624

 

1,038

 

0.49

%

426,766

 

1,080

 

0.51

%

Money markets

 

445,083

 

809

 

0.37

%

372,906

 

600

 

0.32

%

319,257

 

493

 

0.31

%

Statement savings

 

308,769

 

644

 

0.42

%

268,152

 

431

 

0.32

%

250,929

 

343

 

0.28

%

Certificates of deposit

 

778,680

 

4,751

 

1.23

%

642,953

 

3,844

 

1.21

%

540,818

 

2,828

 

1.05

%

Brokered certificates of deposit

 

426,304

 

1,954

 

0.92

%

399,564

 

1,476

 

0.74

%

265,058

 

1,083

 

0.82

%

Total interest - bearing deposits

 

2,410,596

 

9,014

 

0.75

%

2,110,199

 

7,389

 

0.71

%

1,802,828

 

5,827

 

0.65

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other borrowed funds

 

471,565

 

4,175

 

1.78

%

368,702

 

3,843

 

2.10

%

374,534

 

4,392

 

2.36

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities and interest expense

 

2,882,161

 

13,189

 

0.92

%

2,478,901

 

11,232

 

0.91

%

2,177,362

 

10,219

 

0.95

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

675,778

 

 

 

 

 

588,025

 

 

 

 

 

534,395

 

 

 

 

 

Other liabilities

 

42,589

 

 

 

 

 

37,273

 

 

 

 

 

32,473

 

 

 

 

 

Common shareholders’ equity

 

430,075

 

 

 

 

 

394,615

 

 

 

 

 

366,610

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

4,030,603

 

 

 

 

 

$

3,498,814

 

 

 

 

 

$

3,110,840

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and net interest margin (2)

 

 

 

$

64,025

 

3.31

%

 

 

$

57,206

 

3.42

%

 

 

$

53,625

 

3.62

%

 


(1) Non-accrual loans are included in average balances and do not have a material effect on the average yield.  Interest income on non-accruing loans was not material for the periods presented.

(2) Interest income for loans receivable and investment securities available-for-sale is reported on a fully taxable-equivalent basis at a rate of 36% for 2016 and 35% for 2015.

 

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Table of Contents

 

Rate and Volume Analysis

Six Months Ended June 30, 2016, 2015 and 2014

(In thousands)

 

 

 

2016 Compared to 2015

 

2015 Compared to 2014

 

 

 

Change Due to

 

 

 

Change Due to

 

 

 

 

 

Average

 

Average

 

Increase

 

Average

 

Average

 

Increase

 

 

 

Volume (3)

 

Rate

 

(Decrease)

 

Volume (3)

 

Rate

 

(Decrease)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

(668

)

$

243

 

$

(425

)

$

745

 

$

(1,556

)

$

(811

)

Commercial and industrial - tax exempt

 

876

 

(333

)

543

 

239

 

630

 

869

 

Real estate - commercial

 

4,700

 

(1,102

)

3,598

 

1,518

 

943

 

2,461

 

Real estate - construction

 

3,454

 

(802

)

2,652

 

1,814

 

(596

)

1,218

 

Real estate - residential

 

965

 

(364

)

601

 

1,633

 

(538

)

1,095

 

Home equity lines

 

385

 

(36

)

349

 

403

 

(325

)

78

 

Consumer

 

10

 

(26

)

(16

)

(200

)

2

 

(198

)

Total loans

 

9,722

 

(2,420

)

7,302

 

6,152

 

(1,440

)

4,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

(31

)

5

 

(26

)

1,535

 

(938

)

597

 

Investment securities available-for-sale

 

1,456

 

(18

)

1,438

 

(482

)

(233

)

(715

)

Federal funds sold

 

8

 

54

 

62

 

(1

)

1

 

(0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income (2)

 

11,155

 

(2,379

)

8,776

 

7,204

 

(2,610

)

4,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest - bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking

 

58

 

(240

)

(182

)

(1

)

(41

)

(42

)

Money markets

 

95

 

114

 

209

 

83

 

24

 

107

 

Statement savings

 

67

 

146

 

213

 

38

 

50

 

88

 

Certificates of deposit

 

813

 

94

 

907

 

509

 

507

 

1,016

 

Brokered certificates of deposit

 

103

 

375

 

478

 

547

 

(154

)

393

 

Total interest - bearing deposits

 

1,136

 

489

 

1,625

 

1,176

 

386

 

1,562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other borrowed funds

 

1,088

 

(756

)

332

 

(93

)

(456

)

(549

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

 

2,224

 

(267

)

1,957

 

1,083

 

(70

)

1,013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (2)

 

$

8,931

 

$

(2,112

)

$

6,819

 

$

6,121

 

$

(2,540

)

$

3,581

 

 


(1) Non-accrual loans are included in average balances and do not have a material effect on the average yield.  Interest income on non-accruing loans was not material for the periods presented.

(2) Interest income for loans receivable and investment securities available-for-sale is reported on a fully taxable-equivalent basis at a rate of 36% for 2016 and 35% for 2015.

(3) Changes attributable to rate/volume have been allocated to volume.

 

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Table of Contents

 

Provision for Loan Losses

 

The provision for loan losses for the three months ended June 30, 2016 and 2015 was $430,000 and $1.4 million, respectively.  For the six months ended June 30, 2016 and 2015, provision for loan losses was $680,000 and $1.5 million, respectively.  The decrease in our provision expense during 2016 compared to 2015 is primarily a result of improved credit quality in our loan portfolio.

 

The allowance for loan losses was $33.0 million at June 30, 2016 and $31.7 million at December 31, 2015. Our allowance for loan losses ratio as a percent of total loans was 1.04% as of June 30, 2016 and December 31, 2015.

 

During 2016, we recorded charge-offs of $92,000 primarily related to commercial and residential loans.  Recoveries from previously charged-off loans totaled $673,000 for the six months ended June 30, 2016.  During 2016, we received recoveries on three commercial relationships totaling $600,000.  Nonperforming loans at June 30, 2016 and December 31, 2015, were $41,000 and $451,000, respectively. The decrease in nonperforming loans is primarily a result of one nonperforming loan paying off in total during 2016.

 

A sluggish job market and declining home values could adversely affect our home equity lines of credit, credit card and other loan portfolios, including causing increases in delinquencies and default rates, which we expect could impact our charge-offs and provision for loan losses.  Deterioration in commercial and residential real estate values, employment data and household incomes may also result in higher credit losses in our commercial loan portfolio.  Also, in the ordinary course of business, we may be subject to a concentration of credit risk to a particular industry, counterparty, borrower or issuer.  At June 30, 2016, our commercial real estate (including construction lending) portfolio was 69% of our total loan portfolio.  A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our businesses, perhaps materially, and the systems by which we set limits and monitor the level of our credit exposure to individual entities and industries may not function as we have anticipated.

 

Additional information on the allowance for loan losses, its allocation to the loans receivable portfolio and information on nonperforming loans can be found in the following tables.

 

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Table of Contents

 

Allowance for Loan Losses

Three and Six Months Ended June 30, 2016 and 2015

(In thousands)

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Balance, beginning of the period

 

$

32,407

 

$

28,884

 

$

31,723

 

$

28,275

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

430

 

1,356

 

680

 

1,486

 

 

 

 

 

 

 

 

 

 

 

Loans charged off:

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

(50

)

(39

)

(53

)

Residential

 

 

 

(51

)

 

Consumer

 

(2

)

(51

)

(2

)

(64

)

Total loans charged off

 

(2

)

(101

)

(92

)

(117

)

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

136

 

51

 

648

 

536

 

Residential

 

13

 

8

 

25

 

18

 

Consumer

 

 

 

 

 

Total recoveries

 

149

 

59

 

673

 

554

 

 

 

 

 

 

 

 

 

 

 

Net (charge offs) recoveries

 

147

 

(42

)

581

 

437

 

 

 

 

 

 

 

 

 

 

 

Ending balance, June 30,

 

$

32,984

 

$

30,198

 

$

32,984

 

$

30,198

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

June 30,

 

 

 

 

 

Loans:

 

2016

 

2015

 

 

 

 

 

Balance at period end

 

$

3,156,871

 

$

2,795,764

 

 

 

 

 

Allowance for loan losses to loans receivable net of fees

 

1.04

%

1.08

%

 

 

 

 

Six months annualized net charge-offs (recoveries) to average loans receivable

 

-0.04

%

-0.03

%

 

 

 

 

 

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Table of Contents

 

Allocation of the Allowance for Loan Losses

At June 30, 2016 and December 31, 2015

(In thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

Allocation

 

% of Total*

 

Allocation

 

% of Total*

 

Commercial and industrial

 

$

1,491

 

11.09

%

$

1,623

 

12.40

%

Real estate - commercial

 

21,777

 

50.94

%

20,356

 

49.02

%

Real estate - construction

 

7,803

 

18.12

%

7,877

 

18.74

%

Real estate - residential

 

1,652

 

14.58

%

1,462

 

14.56

%

Home equity lines

 

222

 

5.11

%

377

 

5.12

%

Consumer

 

39

 

0.16

%

28

 

0.16

%

 

 

 

 

 

 

 

 

 

 

Total allowance for loan losses

 

$

32,984

 

100.00

%

$

31,723

 

100.00

%

 


* Percentage of loan type to the total loan portfolio.

 

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Table of Contents

 

Nonperforming Loans

At June 30, 2016 and December 31, 2015

(In thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

Nonaccruing loans

 

$

 

$

451

 

 

 

 

 

 

 

Loans contractually past-due 90 days or more and still accruing

 

41

 

 

 

 

 

 

 

 

Total nonperforming loans

 

$

41

 

$

451

 

 

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Table of Contents

 

Noninterest Income

 

Noninterest income includes service charges on deposits and loans, realized and unrealized gains on mortgage banking activities, investment fee income, and gains on sales of investment securities available-for-sale, and continues to be an important factor in our operating results.

 

Noninterest income for the three months ended June 30, 2016 and 2015 was $20.5 million and $15.7 million, respectively. Noninterest income for the six months ended June 30, 2016 and 2015 was $35.8 million and $33.3 million, respectively.   Realized and unrealized gains on mortgage banking activities, which are reported net of commission & incentive expense and typically the largest portion of our non-interest income, totaled $15.3 million for the three months ended June 30, 2016 compared to $11.1 million for the same period of 2015. For the six months ended June 30, 2016 and 2015, realized and unrealized gains on mortgage banking activities were $29.4 million and $27.3 million, respectively.

 

The change in net gains from mortgage banking activities is mainly due to changes in the unrealized gains associated with the fair value of our locked commitments and closed loans held for sale.  For the three months ended June 30, 2016, the unrealized gains increased $10.3 million to $34.6 million, compared to $24.3 million for the three months ended June 30, 2015.  For the six months ended June 30, 2016, the unrealized gains increased $8.8 million to $61.7 million, compared to $52.8 million for the six months ended June 30, 2015.  In accordance with GAAP, if a lender enters into a mortgage loan commitment with a customer and intends to sell the mortgage loan after it is funded, the written loan commitment is to be accounted for as a derivative instrument and is to be recorded at fair value, which represents  an unrealized gain that is included in earnings.  This gain is also recognized earlier in earnings than the expenses associated with originating, underwriting and closing the loan.  When the loan actually closes, the unrealized gain is added to the basis of the ensuing loan held for sale (LHFS).  At any point in time (e.g. quarter end) the fair value of the existing loan commitments and the premium to the basis of existing LHFS (loans closed but not yet purchased by investors) represent unrealized gains that have been recognized in income, either in the current period or prior periods.  At the time the loan is sold to investors, the “investor buy price” is equal to the basis of the loan held for sale, and there is no gain or loss recognized.  This accounting creates a mismatch between the income recognition on loan production and the expense recognition for those same loans.  Direct costs associated with loan origination, such as commission and salaries, are recorded as a reduction to realized and unrealized gains on mortgage banking activities.

 

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Table of Contents

 

For the three months ended June 30, 2016 and 2015, we closed $1.17 billion and $1.09 billion in mortgage originations, respectively.  The increase in mortgage originations is a result of a slight increase in refinance activity for the three months ended June 30, 2016 compared to the same period of 2015.   Refinance activity decreased to 24% of our total loan origination volume for the second quarter of 2016 compared to 29% for the same period of 2015, demonstrating our continued focus on the more stable purchase money mortgage business.  For the six months ended June 30, 2016 and 2015, we closed $1.94 billion and $1.93 billion in mortgage originations, respectively.

 

During the second quarter of 2016, we sold $50.0 million in investment securities available-for-sale as part of a balance sheet restructuring.  As a result, we recorded gains on available-for-sale securities of $3.6 million for the three months ended June 30, 2016.

 

Investment fee income decreased to $84,000 for the three months ended June 30, 2016 compared to $143,000 for the same period of 2015.  For the six months ended June 30, 2016 and 2015, investment fee income was $169,000 and $258,000, respectively.

 

The increase in the cash surrender value of our bank-owned life insurance for the three months ended June 30, 2016 and 2015 was $111,000 and $95,000, respectively.  For the six months ended June 30, 2016 and 2015, the increase in the cash surrender value of our bank-owned life insurance was $235,000 and $213,000, respectively.

 

During the second quarter of 2015, we recorded a litigation settlement of $3.0 million which contributed to noninterest income for 2015.

 

Noninterest income represented 39% and 35% of our total revenues (defined as net interest income plus noninterest income) for the three months ended June 30, 2016 and 2015, respectively.  For the six months ended June 30, 2016 and 2015, noninterest income represented 36% and 37% of our total revenues, respectively.

 

Noninterest Expense

 

Noninterest expense includes, among other things, salaries and benefits, occupancy costs, professional fees, depreciation, data processing, telecommunications and miscellaneous expenses. Noninterest expense for the three months ended June 30, 2016 was $30.1 million, compared to $22.9 million for the same period of 2015, an increase of $7.2 million, or 32%.  For the six months ended June 30, 2016 and 2015, noninterest expense was $56.4 million and $47.0 million, respectively, an increase of $9.4 million.  The increase is a result of prepayment penalties of $3.6 million during the second quarter of 2016 in connection with our balance sheet restructuring. In addition, salaries and benefits expense, increased both as a result of an increase in the variable components or our compensation and additional staffing on both the sales and operational areas of the Company over the past year as a result of our continued growth and increased regulatory environment.  For the quarter ended June 30, 2016, salaries and benefits expense increased to $16.0 million from $12.0 million for the quarter ended June 30, 2015.  For the six months ended June 30, 2016 and 2015, salaries and benefits expense was $31.5 million and $24.0 million, respectively.

 

Occupancy expense was $2.4 million for the three months ended June 30, 2016 compared to $2.3 million for the same period of 2015.  For the six months ended June 30, 2016 and 2015, occupancy expense was $5.0 million and $4.8 million, respectively.

 

Professional fees were $549,000 and $1.1 million for the three months ended June 30, 2016 and 2015, respectively.  For the six months ended June 30, 2016 and 2015, professional fees expense was $1.7 million and $2.7 million, respectively.  The decrease in professional fees for 2016 was a result of increased legal fees recorded during 2015 as a result of litigation which was settled during the second quarter of 2015.

 

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Table of Contents

 

Income Taxes

 

For the three months ended June 30, 2016, we recorded a provision for income taxes of $7.4 million, compared to $7.0 million for the same period of 2015.  Our effective tax rate for the three months ended June 30, 2016 and 2015 was 34.3% and 34.2%, respectively.  For the six months ended June 30, 2016 and 2015, we recorded a provision for income taxes of $13.7 million and $14.0 million, respectively.  Our effective tax rate for the six months ended June 30, 2016 and 2015 was 33.6% and 34.1%, respectively.  Our effective tax rate is less than the statutory rate because of income we receive on tax-exempt investments.  See also “Critical Accounting Policies — Valuation of Deferred Tax Assets.”

 

Statements of Condition

 

Total assets were $4.20 billion and $4.03 billion at June 30, 2016 and December 31, 2015, respectively.

 

Investment Securities

 

Our investment securities portfolio is used as a source of income and liquidity.  Investment securities were $412.8 million at June 30, 2016, compared to $423.8 million at December 31, 2015, a decrease of $11.0 million.  The decrease in investment securities was a result of sales, maturities, calls, and scheduled principal payments.  During the quarter ended June 30, 2016, we sold $50.7 million in available-for-sale investment securities and recorded associated gains of $3.6 million as part of the balance sheet restructuring that occurred.  We purchased $73.1 million in available-for-sale investment securities to replace what was sold and the maturities and calls that have occurred during 2016.  The investment securities portfolio consists of investment securities available-for-sale, investment securities held-to-maturity and trading securities. Investment securities available-for-sale are those securities that we intend to hold for an indefinite period of time, but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability strategy, liquidity management or regulatory capital management.  Investment securities held-to-maturity are those securities that we have the intent and ability to hold to maturity and are carried at amortized cost. Investment securities-trading are securities we purchase to economically hedge against fair value changes in our nonqualified deferred compensation plan liability.  These securities include cash equivalents, equities and mutual funds.  See the following table for additional information on our available-for-sale and held-to-maturity investment securities portfolios.

 

Investment Securities

At June 30, 2016 and December 31, 2015

(In thousands)

 

 

 

Amortized

 

Fair

 

Average

 

 

 

Cost

 

Value

 

Yield

 

Available-for-sale at June 30, 2016

 

 

 

 

 

 

 

U.S. government-sponsored agencies

 

 

 

 

 

 

 

Within one year

 

$

15,092

 

$

15,439

 

4.15

%

One to five years

 

15,174

 

15,781

 

2.12

%

Five to ten years

 

5,000

 

5,004

 

2.52

%

After ten years

 

10,000

 

10,014

 

2.73

%

Total U.S. government-sponsored agencies

 

45,266

 

46,238

 

2.98

%

 

 

 

 

 

 

 

 

Mortgage-backed securities (1)

 

 

 

 

 

 

 

One to five years

 

5,949

 

6,160

 

2.60

%

Five to ten years

 

51,842

 

54,403

 

2.76

%

After ten years

 

104,017

 

108,241

 

2.97

%

Total mortgage-backed securities

 

161,808

 

168,804

 

2.89

%

 

 

 

 

 

 

 

 

Tax exempt municipal securities (2)

 

 

 

 

 

 

 

Within one year

 

3,569

 

3,613

 

4.16

%

One to five years

 

28,184

 

29,852

 

3.20

%

Five to ten years

 

21,576

 

22,876

 

3.48

%

After ten years

 

85,268

 

90,348

 

3.04

%

Taxable municipal securities

 

 

 

 

 

 

 

One to five years

 

3,237

 

3,535

 

4.96

%

Five to ten years

 

2,242

 

2,445

 

4.07

%

After ten years

 

33,471

 

34,811

 

3.31

%

Total municipal securities

 

177,547

 

187,480

 

3.24

%

Total investment securities available-for-sale

 

$

384,621

 

$

402,522

 

3.06

%

 

 

 

 

 

 

 

 

 

 

Amortized

 

Fair

 

Average

 

 

 

Cost

 

Value

 

Yield

 

Held-to-maturity at June 30, 2016

 

 

 

 

 

 

 

Mortgage-backed securities (1)

 

 

 

 

 

 

 

One to five years

 

$

1

 

$

1

 

8.15

%

Total mortgage-backed securities

 

1

 

1

 

8.15

%

 

 

 

 

 

 

 

 

Pooled trust preferred securities

 

 

 

 

 

 

 

After ten years

 

3,795

 

3,487

 

1.49

%

Total pooled trust preferred securities

 

3,795

 

3,487

 

1.49

%

Total investment securities held-to-maturity

 

3,796

 

3,488

 

1.49

%

 

 

 

 

 

 

 

 

Total available-for-sale and held-to-maturity investment securities

 

$

388,417

 

$

406,010

 

3.05

%

 

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Amortized

 

Fair

 

Average

 

 

 

Cost

 

Value

 

Yield

 

Available-for-sale at December 31, 2015

 

 

 

 

 

 

 

U.S. government-sponsored agencies

 

 

 

 

 

 

 

Within one year

 

$

5,538

 

$

5,643

 

3.62

%

One to five years

 

35,244

 

36,887

 

3.23

%

Five to ten years

 

4,957

 

5,453

 

4.06

%

After ten years

 

24,878

 

24,922

 

2.71

%

Total U.S. government-sponsored agencies

 

70,617

 

72,905

 

3.14

%

 

 

 

 

 

 

 

 

Mortgage-backed securities (1)

 

 

 

 

 

 

 

One to five years

 

2,029

 

2,065

 

2.66

%

Five to ten years

 

46,626

 

48,086

 

3.26

%

After ten years

 

110,304

 

112,573

 

3.02

%

Total mortgage-backed securities

 

158,959

 

162,724

 

3.09

%

 

 

 

 

 

 

 

 

Tax exempt municipal securities (2)

 

 

 

 

 

 

 

Within one year

 

3,687

 

3,739

 

4.25

%

One to five years

 

14,021

 

14,727

 

3.13

%

Five to ten years

 

30,896

 

32,448

 

3.53

%

After ten years

 

84,717

 

88,085

 

3.17

%

Taxable municipal securities

 

 

 

 

 

 

 

One to five years

 

3,245

 

3,506

 

4.96

%

Five to ten years

 

2,242

 

2,342

 

4.07

%

After ten years

 

33,748

 

33,601

 

3.30

%

Total municipal securities

 

172,556

 

178,448

 

3.33

%

Total investment securities available-for-sale

 

$

402,132

 

$

414,077

 

3.20

%

 

 

 

 

 

 

 

 

 

 

Amortized

 

Fair

 

Average

 

 

 

Cost

 

Value

 

Yield

 

Held-to-maturity at December 31, 2015

 

 

 

 

 

 

 

Mortgage-backed securities (1)

 

 

 

 

 

 

 

One to five years

 

$

3

 

$

3

 

8.13

%

Total mortgage-backed securities

 

3

 

3

 

8.13

%

 

 

 

 

 

 

 

 

Pooled trust preferred securities

 

 

 

 

 

 

 

After ten years

 

3,833

 

3,308

 

1.18

%

Total pooled trust preferred securities

 

3,833

 

3,308

 

1.18

%

Total investment securities held-to-maturity

 

3,836

 

3,311

 

1.19

%

 

 

 

 

 

 

 

 

Total available-for-sale and held-to-maturity investment securities

 

$

405,968

 

$

417,388

 

3.18

%

 


(1) Based on contractual maturities.

(2) Yields for our tax-exempt municipal securities are not reported on a tax-equivalent basis.

 

We complete reviews for other-than-temporary impairment at least quarterly.  As of June 30, 2016, the majority of our 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 June 30, 2016, 99% of our mortgage-related investment securities portfolio is guaranteed by the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Government National Mortgage Association (GNMA).

 

At June 30, 2016, certain of our investment grade securities were in an unrealized loss position.  Investment securities with unrealized losses are a result of pricing changes 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.  We do not intend to sell nor do we believe we will be required to sell any of our temporarily impaired securities prior to the recovery of their amortized cost.

 

No other-than-temporary impairment has been recognized for the securities in our investment portfolio as of June 30, 2016.

 

We hold $15.3 million in FHLB stock at June 30, 2016, which is included in other investments on the statement of condition.

 

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Loans Receivable

 

Total loans receivable, net of deferred fees and costs, were $3.16 billion at June 30, 2016 and $3.06 billion at December 31, 2015.  See the following table for details on the loans receivable portfolio.

 

Loans held for sale at June 30, 2016 were $456.4 million compared to $383.8 million at December 31, 2015.  Loans closed at our mortgage subsidiary totaled $1.17 billion for the three months ended June, 2016 compared to $1.09 billion for the three months ended June 30, 2015.

 

Loans Receivable

At June 30, 2016 and December 31, 2015

(In thousands)

 

 

 

June 30, 2016

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

350,513

 

11.09

%

$

379,687

 

12.40

%

Real estate - commercial

 

1,610,108

 

50.94

%

1,500,305

 

49.02

%

Real estate - construction

 

572,682

 

18.12

%

573,601

 

18.74

%

Real estate - residential

 

460,741

 

14.58

%

445,766

 

14.56

%

Home equity lines

 

161,457

 

5.11

%

156,631

 

5.12

%

Consumer

 

5,479

 

0.16

%

4,846

 

0.16

%

 

 

 

 

 

 

 

 

 

 

Gross loans

 

$

3,160,980

 

100.00

%

3,060,836

 

100.00

%

 

 

 

 

 

 

 

 

 

 

Net deferred (fees) costs

 

(4,109

)

 

 

(4,526

)

 

 

Less: allowance for loan losses

 

(32,984

)

 

 

(31,723

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable, net

 

$

3,123,887

 

 

 

$

3,024,587

 

 

 

 

Deposits

 

Total deposits were $3.24 billion at June 30, 2016 compared to $3.03 billion at December 31, 2015.  See the following table for details on certificates of deposit with balances of $250,000 or more.

 

Certificates of Deposit that Meet or Exceed FDIC Insurance Limit

At June 30, 2016

(In thousands)

 

 

 

Fixed Term

 

No-Penalty*

 

Total

 

Maturities:

 

 

 

 

 

 

 

Three months or less

 

$

30,730

 

$

3,531

 

$

34,261

 

Over three months through six months

 

36,832

 

28,856

 

65,688

 

Over six months through twelve months

 

57,256

 

3,230

 

60,486

 

Over twelve months

 

126,842

 

9,390

 

136,232

 

 

 

$

251,660

 

$

45,007

 

$

296,667

 

 


* No-Penalty certificates of deposit can be redeemed at anytime at the request of the depositor.

 

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We are a member of the Certificates of Deposit Account Registry Service (“CDARS”).  CDARS allows our customers to access FDIC insurance protection on multi-million dollar certificates of deposit through our Bank.  When a customer places a large deposit through CDARS, we place their funds into certificates of deposit with other banks in the CDARS network in increments of less than $250,000 so that principal and interest are eligible for FDIC insurance protection.  At June 30, 2016 and December 31, 2015, we had $106.6 million and $67.0 million, respectively, in CDARS deposits, which are considered to be brokered deposits.  Brokered certificates of deposit not in the CDARS network were $462.4 million and $340.0 million at June 30, 2016 and December 31, 2015, respectively. We use this type of funding to lock in low cost term funding to support mortgage loans we originate and intend to sell.

 

Borrowings

 

Other borrowed funds were $450.7 million at June 30, 2016 compared to $538.0 million at December 31, 2015.  FHLB advances at June 30, 2016 and December 31, 2015 were $275.0 million and $355.0 million, respectively.  Customer repurchase agreements increased $7.0 million to $120.6 million at June 30, 2016 compared to $113.6 million at December 31, 2015.  Federal funds purchased at June 30, 2016 was $30.7 million compared to $45.0 million at December 31, 2015.  During the second quarter of 2016, we extinguished $95.0 million in FHLB advances with prepayment penalties of $3.6 million as part of the restructuring of our balance sheet during the period. The following table provides information on our borrowings.

 

Short-Term Borrowings and Other Borrowed Funds

At June 30, 2016

(In thousands)

 

 

 

 

 

Maturity or

 

 

 

Amount

 

Advance Date

 

Term of Advance

 

Call Date

 

Interest Rate

 

Outstanding

 

Jun-16

 

1 month

 

Jul-16

 

0.45

%

$

25,000

 

Jun-16

 

1 month

 

Jul-16

 

0.40

%

25,000

 

Jun-16

 

1 month

 

Jul-16

 

0.38

%

25,000

 

Total short-term FHLB advances and weighted average rate

 

 

 

 

 

0.41

%

$

75,000

 

 

 

 

 

 

 

 

 

 

 

Other short-term borrowed funds:

 

 

 

 

 

 

 

 

 

Customer repurchase agreements

 

 

 

 

 

0.17

%

$

120,640

 

Federal Funds Purchased

 

 

 

 

 

0.64

%

30,650

 

Total other short-term borrowed funds and weighted average rate

 

 

 

 

 

0.27

%

$

151,290

 

 

 

 

 

 

 

 

 

 

 

Other borrowed funds:

 

 

 

 

 

 

 

 

 

Trust preferred

 

 

 

 

 

3.29

%

$

24,406

 

FHLB advances - long term

 

 

 

 

 

2.21

%

200,000

 

Other borrowed funds and weighted average rate

 

 

 

 

 

2.33

%

$

224,406

 

 

 

 

 

 

 

 

 

 

 

Total other borrowed funds and weighted average rate

 

 

 

 

 

1.32

%

$

450,696

 

 

Shareholders’ Equity

 

Shareholders’ equity at June 30, 2016 was $437.9 million compared to $413.1 million at December 31, 2015, an increase of $24.8 million, or 6%. The increase in shareholders’ equity at June 30, 2016 compared to December 31, 2015 is primarily attributable to net income of $27.2 million recorded for the six months ended June 30, 2016 less dividends of $7.8 million that were declared during 2016.  In addition, accumulated other comprehensive income increased $3.6 million for the six months ended June 30, 2016.

 

Book value per share at June 30, 2016 was $13.50 compared to $12.76 at December 31, 2015. Tangible book value per share (which is book value per share less goodwill and other intangible assets) at June 30, 2016 was $12.38 compared to $11.63 at December 31, 2015.

 

Business Segment Operations

 

We provide banking and non-banking financial services and products through our subsidiaries. We operate in three business segments, commercial banking, mortgage banking and wealth management services.

 

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Table of Contents

 

Commercial Banking

 

The commercial banking segment includes both commercial and consumer lending and provides customers such products as commercial loans, real estate loans, and other business financing and consumer loans. In addition, this segment also provides customers with various deposit products including demand deposit accounts, savings accounts and certificates of deposit.

 

For the three months ended June 30, 2016, the commercial banking segment recorded net income of $10.8 million compared to $9.7 million for the same period of 2015.  For the six months ended June 30, 2016 and 2015, net income recorded in the commercial banking segment was $21.0 million and $18.6 million, respectively.  See “Statements of IncomeGeneral—Business Segments” above for additional information regarding the operating results for the commercial banking segment for the periods presented.  At June 30, 2016, total assets for this segment were $4.1 billion, loans receivable, net of deferred fees and costs, were $3.16 billion and total deposits were $3.24 billion. At June 30, 2015, total assets for this segment were $3.69 billion, loans receivable, net of deferred fees and costs, were $2.80 billion and total deposits were $2.94 billion.

 

Mortgage Banking

 

The operations of the mortgage banking segment are conducted through George Mason. George Mason engages primarily in the origination and acquisition of residential mortgages for sale into the secondary market.

 

For the three months ended June 30, 2016 and 2015, the mortgage banking segment recorded net income of $4.0 million and $2.4 million, respectively.  For the six months ended June 30, 2016 and 2015, the mortgage banking segment recorded net income of $7.5 million and $8.4 million, respectively.  See “Statements of IncomeGeneral—Business Segments” above for additional information regarding the operating results for the mortgage banking segment for the periods presented.  At June 30, 2016, total assets for this segment were $512.0 million; loans held for sale were $456.4 million and mortgage funding checks were $23.9 million. At June 30, 2015, total assets for this segment were $526.1 million; loans held for sale were $455.6 million and mortgage funding checks were $17.2 million.

 

Wealth Management Services

 

The wealth management services segment provides investment and financial services to businesses and individuals, including financial planning, retirement/estate planning, and investment management.

 

For the three months ended June 30, 2016 and 2015, the wealth management services segment recorded net income of $52,000 and $3,000, respectively.  For the six months ended June 30, 2016 and 2015, the wealth management services segment reported net income of $62,000 and $4,000, respectively.  See “Statements of IncomeGeneral—Business Segments” above for additional information regarding the operating results for this business segment for the periods presented.  At June 30, 2016, total assets were $2.5 million and managed and custodial assets were $266 million. At June 30, 2015, total assets were $2.4 million and managed and custodial assets were $280 million.

 

Additional information pertaining to our business segments can be found in Note 3 to the notes to consolidated financial statements.

 

Capital Resources

 

Capital adequacy is an important measure of our financial stability and performance. Our objectives are to maintain a level of capitalization that is sufficient to sustain asset growth and promote depositor and investor confidence.

 

Regulatory agencies measure capital adequacy utilizing a formula that takes into account the individual risk profile of the financial institution. On January 1, 2015, the new Basel III regulatory risk-based capital rules became effective.  Basel III includes new minimum risk-based capital and leverage ratios and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 (“CET1”) capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%, which is

 

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Table of Contents

 

increased from 4%; (iii) a total capital ratio of 8%, which is unchanged from the former rules; and (iv) a Tier 1 leverage ratio of 4%.

 

Beginning January 1, 2016, a capital conservation buffer requirement is being phased in at 0.625% of risk-weighted assets, increasing by the same amount each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and is applicable to our CET1 capital, Tier 1 capital and total capital ratios. Including the conservation buffer, we consider our new minimum capital ratios to be as follows: 5.125% for CET1; 6.625% for Tier 1 capital; and 8.625% for Total capital.  Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

 

This new regulatory standard also provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing assets, deferred tax assets related to temporary differences that could not be realized through net operating loss carrybacks, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.

 

Basel III prescribes a standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.

 

Total risk-based capital to risk-weighted assets was 11.86% at June 30, 2016 compared to 11.37% at December 31, 2015.  Our Tier 1 risk-based capital ratio was 10.99% at June 30, 2016 compared to 10.52% at December 31, 2015.  Common equity Tier 1 capital was 10.33% at June 30, 2016 compared to 9.86% at December 31, 2015.

 

Accordingly, our regulatory capital levels for the Bank and bank holding company meet those established for well-capitalized institutions at both June 30, 2016 and December 31, 2015.

 

The following table shows the minimum capital requirements and our capital position at June 30, 2016 and December 31, 2015 for the Company and for the Bank.

 

Capital Components

At June 30, 2016 and December 31, 2015

(In thousands)

 

Cardinal Financial Corporation (Consolidated):

 

 

 

 

 

 

 

 

 

 

 

 

 

To Be Well

 

 

 

 

 

 

 

 

 

 

 

 

 

Capitalized Under

 

 

 

 

 

 

 

For Capital

 

Prompt Corrective

 

 

 

Actual

 

Adequacy Purposes

 

Action Provisions

 

 

 

Amount

 

Ratio

 

Amount

 

 

 

Ratio

 

Amount

 

 

 

Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

$

451,476

 

11.86

%

$

328,199

 

> 

 

8.625

%

N/A

 

> 

 

N/A

 

Tier I risk-based capital

 

418,093

 

10.99

%

252,095

 

> 

 

6.625

%

N/A

 

> 

 

N/A

 

Common Equity Tier 1 risk-based capital

 

393,093

 

10.33

%

195,017

 

> 

 

5.125

%

N/A

 

> 

 

N/A

 

Leverage capital ratio

 

418,093

 

10.38

%

161,878

 

> 

 

4.000

%

N/A

 

> 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

$

428,554

 

11.37

%

$

301,450

 

> 

 

8.00

%

N/A

 

> 

 

N/A

 

Tier I risk-based capital

 

396,382

 

10.52

%

226,087

 

> 

 

6.00

%

N/A

 

> 

 

N/A

 

Common equity tier I capital

 

371,382

 

9.86

%

169,565

 

> 

 

4.50

%

N/A

 

> 

 

N/A

 

Leverage capital ratio

 

396,382

 

10.18

%

156,757

 

> 

 

4.00

%

N/A

 

> 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cardinal Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To Be Well

 

 

 

 

 

 

 

 

 

 

 

 

 

Capitalized Under

 

 

 

 

 

 

 

For Capital

 

Prompt Corrective

 

 

 

Actual

 

Adequacy Purposes

 

Action Provisions

 

 

 

Amount

 

Ratio

 

Amount

 

 

 

Ratio

 

Amount

 

 

 

Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

$

447,116

 

11.82

%

$

326,328

 

> 

 

8.625

%

$

378,351

 

> 

 

10.00

%

Tier I risk-based capital

 

413,733

 

10.94

%

250,658

 

> 

 

6.625

%

302,681

 

> 

 

8.00

%

Common Equity Tier 1 risk-based capital

 

413,733

 

10.94

%

193,905

 

> 

 

5.125

%

245,928

 

> 

 

6.50

%

Leverage capital ratio

 

413,733

 

10.32

%

160,074

 

> 

 

4.000

%

200,093

 

> 

 

5.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

$

424,302

 

11.32

%

$

299,886

 

> 

 

8.00

%

$

374,857

 

> 

 

10.00

%

Tier I risk-based capital

 

392,130

 

10.46

%

224,914

 

> 

 

6.00

%

299,886

 

> 

 

8.00

%

Common equity tier I capital

 

392,130

 

10.46

%

168,686

 

> 

 

4.50

%

243,657

 

> 

 

6.50

%

Leverage capital ratio

 

392,130

 

10.13

%

154,862

 

> 

 

4.00

%

193,578

 

> 

 

5.00

%

 

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Table of Contents

 

Liquidity

 

Liquidity in the banking industry is defined as the ability to meet the demand for funds of both depositors and borrowers. We must be able to meet these needs by obtaining funding from depositors or other lenders or by converting non-cash items into cash.  The objective of our liquidity management program is to ensure that we always have sufficient resources to meet the demands of our depositors and borrowers. Stable core deposits and a strong capital position provide the base for our liquidity position. We believe we have demonstrated our ability to attract deposits because of our convenient branch locations, personal service and pricing.

 

In addition to deposits, we have access to different wholesale funding markets. These markets include the brokered CD market, the repurchase agreement market and the federal funds market. We are a member of the Certificates of Deposit Account Registry Service (“CDARS”).  CDARS allows our customers to access FDIC insurance protection on multi-million dollar certificates of deposit through our Bank.  When a customer places a large deposit through CDARS, we place their funds into certificates of deposit with other banks in the CDARS network in increments of less than $250,000 so that principal and interest are eligible for FDIC insurance protection.  At June 30, 2016 and December 31, 2015, we had $106.6 million and $67.0 million, respectively, in CDARS deposits, which are considered to be brokered deposits.  Brokered certificates of deposit not in the CDARS network were $462.4 million and $340.0 million at June 30, 2016 and December 31, 2015, respectively.

 

We also maintain secured lines of credit with the Federal Reserve Bank of Richmond and the Federal Home Loan Bank of Atlanta (“FHLB”) for which we can borrow up to the allowable amount for the collateral pledged. Having diverse funding alternatives reduces our reliance on any one source for funding.

 

Cash flow from amortizing assets or maturing assets can also provide funding to meet the needs of depositors and borrowers.

 

We have established a formal liquidity contingency plan which establishes a liquidity management team and provides guidelines for liquidity management. For our liquidity management program, we first determine our current liquidity position and then forecast liquidity based on anticipated changes in the balance sheet. In this forecast, we expect to maintain a liquidity cushion. We also stress test our liquidity position under several different stress scenarios, from moderate to severe. Guidelines for the forecasted liquidity cushion and for liquidity cushions for each stress scenario have been established. We believe that we have sufficient resources to meet our liquidity needs.

 

Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled $438.1 million at June 30, 2016 or 10.4% of total assets. To maintain ready access to the Bank’s secured lines of credit, the Bank has pledged a portion of its investment securities and a portion of its commercial real estate and residential real estate loan portfolios to the FHLB with additional investment securities and certain loans in its commercial & industrial loan portfolio pledged to the Federal Reserve Bank of Richmond. Additional borrowing capacity at the FHLB at June 30, 2016 was approximately $776.3 million. Borrowing capacity with the Federal Reserve Bank of Richmond was $187.1 million at June 30, 2016. These facilities are subject to the FHLB and the Federal Reserve approving disbursement to us.  In addition, we have unsecured federal funds purchased lines of $315 million available to us.  We anticipate maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth and fully comply with all regulatory requirements.

 

Contractual Obligations

 

We have entered into a number of long-term contractual obligations to support our ongoing activities. These contractual obligations will be funded through operating revenues and liquidity sources held or available to us and exclude contractual interest costs, where applicable.

 

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The required payments under such obligations are detailed in the following table.

 

Contractual Obligations

At June 30, 2016

(In thousands)

 

 

 

Payments Due by Period

 

 

 

Total

 

Less than 1
Year

 

1 - 3 Years

 

3 - 5 Years

 

More than 5
Years

 

Long-Term Debt Obligations:

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

763,013

 

$

419,317

 

$

253,007

 

$

60,599

 

$

30,090

 

 

 

 

 

 

 

 

 

 

 

 

 

Brokered certificates of deposit

 

568,996

 

388,161

 

180,835

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advances from the Federal Home Loan Bank of Atlanta

 

275,000

 

100,000

 

50,000

 

105,000

 

20,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust preferred securities

 

24,406

 

 

 

 

24,406

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease obligations

 

31,871

 

8,198

 

12,660

 

6,762

 

4,251

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,663,286

 

$

915,676

 

$

496,502

 

$

172,361

 

$

78,747

 

 

Financial Instruments with Off-Balance-Sheet Risk and Credit Risk

 

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the balance sheet.

 

The Bank’s maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. We evaluate each customer’s credit worthiness on a case-by-case basis and require collateral to support financial instruments when deemed necessary.  The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the counterparty.  Collateral held varies but may include deposits held by us, marketable securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates up to one year or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without

 

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being drawn upon, total commitment amounts do not necessarily represent future funding requirements. These instruments represent obligations to extend credit or guarantee borrowings and are not recorded on the consolidated statements of condition.  The rates and terms of these instruments are competitive with others in the market in which we do business.

 

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers.  Those lines of credit may not be drawn upon to the total extent to which we have committed.

 

Standby letters of credit are conditional commitments we issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. We hold certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.

 

At June 30, 2016 and December 31, 2015, commitments to extend credit were $1.1 billion and $1.5 billion, respectively.  Standby letters of credit were $30.6 million and $32.5 million at June 30, 2016 and December 31, 2015, respectively. In addition, commitments to extend credit of $458.6 million at June 30, 2016 are related to the mortgage banking segment’s mortgage loan funding commitments and are of a short term nature, compared to $247.4 million at December 31, 2015.  The increase in mortgage loan funding commitments is related to the increased origination production at George Mason during the second quarter of 2016 as compared to the fourth quarter of 2015.

 

We have counter-party risk which may arise from the possible inability of George Mason’s third-party investors to meet the terms of their forward sales contracts. George Mason works with third-party investors that are generally well-capitalized, are investment grade and exhibit strong financial performance to mitigate this risk.  We continuously monitor the financial condition of these third parties.  We do not expect these third parties to fail to meet their obligations.

 

George Mason provides for its estimated exposure to repurchase loans previously sold to investors for which borrowers failed to provide full and accurate information on their loan application or for which appraisals have not been acceptable or when the loan was not underwritten in accordance with the loan program specified by the loan investor, and for other exposure to its investors related to loan sales activities. We evaluate the merits of each claim and estimate the reserve based on actual and expected claims received and consider the historical amounts paid to settle such claims.  We have taken steps to limit our exposure to such loan repurchases through agreements entered into with various investors.  As a result, we receive a limited number of additional claims.

 

Interest Rate Sensitivity

 

We are exposed to various business risks including interest rate risk. Our goal is to maximize net interest income without incurring excessive interest rate risk. Management of net interest income and interest rate risk must be consistent with the level of capital and liquidity that we maintain. We manage interest rate risk through an asset and liability committee (“ALCO”). ALCO is responsible for managing our interest rate risk in conjunction with liquidity and capital management.

 

We employ an independent consulting firm to model our interest rate sensitivity.  We use a net interest income simulation model as our primary tool to measure interest rate sensitivity. Many assumptions are developed based on expected activity in the balance sheet. For maturing assets, assumptions are created for the redeployment of these assets. For maturing liabilities, assumptions are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that could reprice during the modeled time period. These assumptions also cover how we expect rates to change on non-maturity deposits such as interest checking, money market checking, and savings accounts as well as certificates of deposit. Based on inputs that include the current balance sheet, the current level of interest rates and the developed assumptions, the model then produces an expected level of net interest income assuming that market rates remain unchanged. This is considered the base case. Next, the model determines what net interest income would be based on specific changes in interest rates. The rate simulations are performed for a two year period and include ramped rate changes of down 100 basis points and up 200 basis points. The down 200 basis point scenario

 

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was discontinued given the current level of interest rates.  In the ramped down rate change, the model moves rates gradually down 100 basis points over the first year and then rates remain flat in the second year.

 

For the up 200 basis point scenario, rates are gradually moved up 200 basis points in the first year and then rates remain flat in the second year. In both the up and down scenarios, the model assumes a parallel shift in the yield curve. The results of these simulations are then compared to the base case.

 

At June 30, 2016, our asset/liability position was slightly asset sensitive based on our interest rate sensitivity model.  Our net interest income would decrease by less than 1.4% in a down 100 basis point scenario and would increase by less than 1.2% in an up 200 basis point scenario over a one-year time frame.  In the two-year time horizon, our net interest income would decrease by less than 2.5% in a down 100 basis point scenario and would increase less than 1.2% in an up 200 basis point scenario.

 

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Our Asset/Liability Committee is responsible for reviewing our liquidity requirements and maximizing our net interest income consistent with capital requirements, liquidity, interest rate and economic outlooks, competitive factors and customer needs. Interest rate risk arises because the assets of the Bank and the liabilities of the Bank have different maturities and characteristics. In order to measure this interest rate risk, we use a simulation process that measures the impact of changing interest rates on net interest income. This model is run for the Bank by an independent consulting firm. The simulations incorporate assumptions related to expected activity in the balance sheet. For maturing assets, assumptions are developed for the redeployment of these assets. For maturing liabilities, assumptions are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that reprice during the modeled time period. These assumptions also cover how we expect rates to change on non-maturity deposits such as interest checking, money market checking, and savings accounts as well as certificates of deposit. Based on inputs that include the most recent period end balance sheet, the current level of interest rates and the developed assumptions, the model then produces an expected level of net interest income assuming that interest rates remain unchanged. This becomes the base case. Next, the model determines the impact on net interest income given specified changes in interest rates. The rate simulations are performed for a two year period and include ramped rate changes of down 100 basis points and up 200 basis points. The down 200 basis point scenario was discontinued given the current level of interest rates.  In the ramped down rate change, the model moves rates gradually down 100 basis points over the first year and then rates remain flat in the second year.

 

For the up 200 basis point scenario, rates are gradually increased by 200 basis points in the first year and remain flat in the second year. In both the up and down scenarios, the model assumes a parallel shift in the yield curve. The results of these simulations are then compared to the base case.

 

At June 30, 2016, our asset/liability position was slightly asset sensitive based on our interest rate sensitivity model.  Our net interest income would decrease by less than 1.4% in a down 100 basis point scenario and would increase by less than 1.2% in an up 200 basis point scenario over a one-year time frame.  In the two-year time horizon, our net interest income would decrease by less than 2.5% in a down 100 basis point scenario and would increase less than 1.2% in an up 200 basis point scenario.

 

See also “Interest Rate Sensitivity” in Item 2 above for a discussion of our interest rate risk.

 

We have counter-party risk that may arise from the possible inability of George Mason’s third party investors to meet the terms of their forward sales contracts.  George Mason works with third-party investors that are generally well-capitalized, are investment grade and exhibit strong financial performance to mitigate this risk.  We monitor the financial condition of these third parties on an annual basis.  We do not expect any third-party investor to fail to meet its obligation.

 

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Item 4.  Controls and Procedures

 

The Company maintains disclosure controls and procedures (as defined in Rule 13a — 15(e) under the Exchange Act).  As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was carried out under the supervision and with the participation of the Company’s management, including its chief executive officer and chief financial officer. Based on and as of the date of such evaluation, because of the material weakness in internal control over financial reporting as described in our 2015 Form 10-K, related to the process of estimating the allowance for loan losses, the aforementioned officers concluded that the Company’s disclosure controls and procedures were not effective.  The Company’s remediation efforts related to this material weakness are ongoing.

 

The Company also maintains a system of internal accounting controls that is designed to provide assurance that assets are safeguarded and that transactions are executed in accordance with management’s authorization and are properly recorded. This system is continually reviewed and is augmented by written policies and procedures, the careful selection and training of qualified personnel and an internal audit program to monitor its effectiveness. Except as described below, there were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that materially affected, or are likely to materially affect, our internal control over financial reporting.

 

Remediation Plan for Material Weakness in Internal Control Over Financial Reporting

 

In response to the material weakness identified above, the Company has implemented changes to its internal control over financial reporting, including changes to the allowance for loan losses process owners and control operators.  However, the Company has not yet come to the conclusion that the material weakness has been fully remediated as of the date of this filing.

 

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PART II — OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

In the ordinary course of our operations, we become party to various legal proceedings.  Currently, we are not party to any material legal proceedings, and no such proceedings except as noted above are, to management’s knowledge, threatened against us.

 

Item 1A.  Risk Factors

 

Our operations are subject to many risks that could adversely affect our future financial condition and performance and, therefore, the market value of our securities, including the risk factors that are outlined in our Annual Report on Form 10-K for the year ended December 31, 2015.  There have been no material changes in our risk factors from those disclosed.

 

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

 

(a)  None.

(b)  Not applicable.

(c)  For the three months ended June 30, 2016, we did not purchase shares of our common stock.

 

Item 3.  Defaults Upon Senior Securities

 

(a)  None.

(b)  None.

 

Item 4.  Mine Safety Disclosures

 

None.

 

Item 5.  Other Information

 

(a)  None.

(b)  None.

 

Item 6.  Exhibits

 

31.1                        Rule 13a-14(a) Certification of Principal Executive Officer

31.2                        Rule 13a-14(a) Certification of Chief Executive Officer

31.3                        Rule 13a-14(a) Certification of Chief Financial Officer

32.1                        Statement of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350

32.2                        Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

32.3                        Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

101                           The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

CARDINAL FINANCIAL CORPORATION

 

(Registrant)

 

 

 

 

Date: August 5, 2016

/s/ Bernard H. Clineburg

 

Bernard H. Clineburg

 

Executive Chairman

 

(Principal Executive Officer)

 

 

 

 

Date: August 5, 2016

/s/ Christopher W. Bergstrom

 

Christopher W. Bergstrom

 

President and Chief Executive Officer

 

 

 

 

 Date: August 5, 2016

/s/ Mark A. Wendel

 

Mark A. Wendel

 

Executive Vice President and Chief Financial Officer

 

(Principal Financial Officer)

 

 

 

 

Date: August 5, 2016

/s/ Jennifer L. Deacon

 

Jennifer L. Deacon

 

Executive Vice President and Chief Accounting Officer

 

(Principal Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

31.1

 

Rule 13a-14(a) Certification of Principal Executive Officer

 

 

 

31.2

 

Rule 13a-14(a) Certification of Chief Executive Officer

 

 

 

31.3

 

Rule 13a-14(a) Certification of Chief Financial Officer

 

 

 

32.1

 

Statement of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350

 

 

 

32.2

 

Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

 

 

 

32.3

 

Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

 

 

 

101

 

The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes.

 

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