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Cardinal Financial 10-Q 2007

 

 

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 September 30, 2007

 

or

 

o

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

 

 

For the transition period from                   to                   

 

Commission File Number:  0-24557

 

CARDINAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Virginia

 

54-1874630

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer  o        Accelerated filer  x    Non-accelerated filer  o

 

 

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

 

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

 

24,254,361 shares of common stock, par value $1.00 per share,

outstanding as of October 29, 2007

 

 

 



 

 

CARDINAL FINANCIAL CORPORATION

 

INDEX TO FORM 10-Q

 

PART I — FINANCIAL INFORMATION

 

Item 1.

Financial Statements:

 

 

 

 

 

Consolidated Statements of Condition

 

 

At September 30, 2007 (unaudited) and December 31, 2006

 

 

 

 

 

Consolidated Statements of Income

 

 

For the three and nine months ended September 30, 2007 and 2006 (unaudited)

 

 

 

 

 

Consolidated Statements of Comprehensive Income

 

 

For the three and nine months ended September 30, 2007 and 2006 (unaudited)

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity

 

 

For the nine months ended September 30, 2007 and 2006 (unaudited)

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

For the nine months ended September 30, 2007 and 2006 (unaudited)

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

 Controls and Procedures

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

Item 1A.

Risk Factors

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Item 3.

Defaults Upon Senior Securities

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

Item 5.

Other Information

 

Item 6.

Exhibits

 

 

 

 

SIGNATURES

 

 

 

 

 



PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

September 30, 2007 and December 31, 2006

(In thousands, except share data)

 

Assets

 

September 30,
2007

 

December 31,
2006

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

17,860

 

$

24,585

 

Federal funds sold

 

25,750

 

11,491

 

Total cash and cash equivalents

 

43,610

 

36,076

 

 

 

 

 

 

 

Investment securities available-for-sale

 

343,517

 

231,631

 

Investment securities held-to-maturity (market value of $81,426 and $95,450 at September 30, 2007 and December 31, 2006, respectively)

 

82,740

 

97,665

 

Total investment securities

 

426,257

 

329,296

 

 

 

 

 

 

 

Other investments

 

12,674

 

9,158

 

Loans held for sale, net

 

144,448

 

338,731

 

 

 

 

 

 

 

Loans receivable, net of deferred fees and costs

 

973,518

 

845,449

 

Allowance for loan losses

 

(10,857

)

(9,638

)

Loans receivable, net

 

962,661

 

835,811

 

 

 

 

 

 

 

Premises and equipment, net

 

18,892

 

20,039

 

Deferred tax asset

 

6,600

 

6,415

 

Goodwill and intangibles, net

 

17,303

 

17,493

 

Bank-owned life insurance

 

31,931

 

30,646

 

Accrued interest receivable and other assets

 

13,224

 

14,764

 

Total assets

 

$

1,677,600

 

$

1,638,429

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

$

127,119

 

$

123,301

 

Interest bearing deposits

 

1,010,751

 

1,095,581

 

Other borrowed funds

 

322,388

 

194,631

 

Mortgage funding checks

 

17,776

 

46,159

 

Escrow liabilities

 

1,594

 

3,229

 

Accrued interest payable and other liabilities

 

41,911

 

19,655

 

Total liabilities

 

1,521,539

 

1,482,556

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $1 par value

 

2007

 

2006

 

 

 

 

 

Shares authorized

 

50,000,000

 

50,000,000

 

 

 

 

 

Shares issued and outstanding

 

24,254,361

 

24,459,155

 

24,254

 

24,459

 

Additional paid-in capital

 

131,104

 

132,985

 

Retained earnings

 

3,074

 

705

 

Accumulated other comprehensive loss

 

(2,371

)

(2,276

)

Total shareholders’ equity

 

156,061

 

155,873

 

Total liabilities and shareholders’ equity

 

$

1,677,600

 

$

1,638,429

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

3



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

Three and nine months ended September 30, 2007 and 2006

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

 

 

 

 

 

 

2007

 

2006

 

2007

 

2006

 

 

Interest income:

 

 

 

 

 

 

 

 

 

 

Loans receivable

 

$

16,551

 

$

13,495

 

$

46,568

 

$

37,522

 

Loans held for sale

 

4,256

 

5,193

 

13,954

 

14,746

 

 

Federal funds sold

 

70

 

181

 

1,220

 

915

 

 

Investment securities available-for-sale

 

3,606

 

2,834

 

9,496

 

7,525

 

 

Investment securities held-to-maturity

 

896

 

1,079

 

2,858

 

3,306

 

 

Other investments

 

166

 

84

 

442

 

262

 

 

Total interest income

 

25,545

 

22,866

 

74,538

 

64,276

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

Deposits

 

11,378

 

10,678

 

35,188

 

27,605

 

 

Other borrowed funds

 

3,834

 

1,768

 

8,949

 

5,145

 

 

Total interest expense

 

15,212

 

12,446

 

44,137

 

32,750

 

 

Net interest income

 

10,333

 

10,420

 

30,401

 

31,526

 

 

Provision for loan losses

 

915

 

230

 

1,670

 

870

 

 

Net interest income after provision for loan losses

 

9,418

 

10,190

 

28,731

 

30,656

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

505

 

418

 

1,472

 

1,176

 

 

Loan service charges

 

365

 

386

 

1,187

 

1,567

 

 

Investment fee income

 

1,101

 

849

 

3,236

 

2,486

 

 

Net gain on sales of loans

 

2,093

 

2,455

 

7,157

 

7,753

 

 

Net realized gain on investment securities available-for-sale

 

 

66

 

14

 

66

 

 

Net realized loss on investment securities trading

 

 

 

(11

)

 

 

Management fee income

 

229

 

583

 

899

 

1,665

 

 

Litigation recovery on previously impaired investment

 

17

 

 

83

 

 

 

Increase in cash surrender value of bank-owned life insurance

 

428

 

212

 

1,285

 

212

 

 

Other income

 

5

 

(7

)

39

 

741

 

 

Total non-interest income

 

4,743

 

4,962

 

15,361

 

15,666

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

 

Salary and benefits

 

5,592

 

6,195

 

18,237

 

18,224

 

 

Occupancy

 

1,362

 

1,399

 

3,989

 

3,902

 

 

Professional fees

 

770

 

456

 

1,686

 

1,677

 

 

Depreciation

 

748

 

831

 

2,345

 

2,369

 

 

Data processing

 

345

 

362

 

1,044

 

1,002

 

 

Telecommunications

 

278

 

316

 

856

 

937

 

 

Loss related to escrow arrangement

 

3,500

 

 

3,500

 

 

 

Amortization of intangibles

 

63

 

63

 

190

 

356

 

 

Impairment of goodwill and intangible assets

 

 

2,927

 

 

2,927

 

 

Other operating expenses

 

2,811

 

2,496

 

8,293

 

7,531

 

 

Total non-interest expense

 

15,469

 

15,045

 

40,140

 

38,925

 

 

Net income (loss) before income taxes

 

(1,308

)

107

 

3,952

 

7,397

 

 

Provision for income taxes

 

(702

)

(148

)

851

 

2,209

 

 

Net income (loss)

 

$

(606

)

$

255

 

$

3,101

 

$

5,188

 

Earnings per common share — basic

 

$

(0.02

)

$

0.01

 

$

0.13

 

$

0.21

 

Earnings per common share — diluted

 

$

(0.02

)

$

0.01

 

$

0.12

 

$

0.21

 

Weighted-average common shares outstanding — basic

 

24,253,187

 

24,430,917

 

24,424,037

 

24,411,330

 

 

Weighted-average common shares outstanding — diluted

 

24,253,187

 

24,917,422

 

24,900,401

 

24,970,941

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

4



 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

Three and nine months ended September 30, 2007 and 2006

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

 

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(606

)

$

255

 

$

3,101

 

$

5,188

 

Other comprehensive gain:

 

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gain arising during the period, net of tax expense of $1.2 million and $163 thousand for the three and nine months ended September 30, 2007, respectively, and tax expense of $1.5 million and $26 thousand for the three and nine months ended September 30, 2006, respectively

 

2,230

 

2,851

 

307

 

97

 

 

 

 

 

 

 

 

 

 

 

Less: reclassification adjustment for gains included in net income net of tax expense of $5 thousand for the nine months ended September 30, 2007 and $23 thousand for each of the three and nine months ended September 30, 2006.

 

 

(43

)

(9

)

(43

)

 

 

2,230

 

2,808

 

298

 

54

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative instruments designated as cash flow hedges, net of tax benefit of $106 thousand and $218 thousand for the three and nine months ended September 30, 2007, respectively, and tax expense of $137 thousand and tax benefit of $31 thousand for the three and nine months ended September 30, 2006, respectively

 

(191

)

234

 

(393

)

(34

)

Comprehensive income

 

$

1,433

 

$

3,297

 

$

3,006

 

$

5,208

 

 

See accompanying notes to consolidated financial statements.

 

 

5



 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

Nine months ended September 30, 2007 and 2006

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated
Other
Comprehensive

 

 

 

 

 

 

 

 

 

Additional
Paid-in

 

Retained
Earnings

 

 

 

 

 

 

Common

 

Common

 

 

 

 

 

 

 

 

Shares

 

Stock

 

Capital

 

(Deficit)

 

Loss

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2005

 

24,363

 

$

24,363

 

$

132,150

 

$

(5,269

)

$

(3,365

)

$

147,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect at January 1, 2006 of change in method of quantifying errors

 

 

 

25

 

(438

)

 

(413

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

34

 

34

 

222

 

 

 

256

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment of deferred compensation shares

 

 

 

(4

)

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock of $0.03 per share

 

 

 

 

(732

)

 

(732

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in accumulated other comprehensive loss

 

 

 

 

 

20

 

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

5,188

 

 

5,188

 

Balance, September 30, 2006

 

24,397

 

$

24,397

 

$

132,393

 

$

(1,251

)

$

(3,345

)

$

152,194

 

Balance, December 31, 2006

 

24,459

 

$

24,459

 

$

132,985

 

$

705

 

$

(2,276

)

$

155,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

19

 

19

 

82

 

 

 

101

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment of deferred compensation shares

 

 

 

3

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase and retirement of common stock

 

(224

)

(224

)

(1,966

)

 

 

(2,190

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock of $0.03 per share

 

 

 

 

(732

)

 

(732

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in accumulated other comprehensive loss

 

 

 

 

 

(95

)

(95

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

3,101

 

 

3,101

 

Balance, September 30, 2007

 

24,254

 

$

24,254

 

$

131,104

 

$

3,074

 

$

(2,371

)

$

156,061

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

6



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended September 30, 2007 and 2006

(In thousands)

(Unaudited)

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

3,101

 

$

5,188

 

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

 

 

 

 

 

Depreciation

 

2,345

 

2,369

 

Amortization of premiums, discounts and intangibles

 

468

 

887

 

Impairment of goodwill and intangible assets

 

 

2,927

 

Provision for loan losses

 

1,670

 

870

 

Loans held for sale originated

 

(1,807,962

)

(2,277,231

)

Proceeds from the sale of loans held for sale

 

2,009,402

 

2,388,590

 

Gain on sales of loans held for sale

 

(7,157

)

(7,753

)

Proceeds from sale, maturity and call of investment securities trading

 

3,988

 

 

Purchase of investment securities trading

 

(3,999

)

 

Loss on sale of investments securities trading

 

11

 

 

Gain on sale of investment securities available-for-sale

 

(14

)

(66

)

Loss on sale of other assets

 

3

 

2

 

Increase in cash surrender value of bank-owned life insurance

 

(1,285

)

 

(Increase) decrease in accrued interest receivable, other assets and deferred tax asset

 

803

 

(13,065

)

Increase in accrued interest payable, escrow liabilities and other liabilities

 

20,668

 

7,086

 

Net cash provided by operating activities

 

222,042

 

109,804

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of premises and equipment

 

(1,201

)

(4,568

)

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

 

33,946

 

 

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

 

4,000

 

 

Proceeds from sale of other investments

 

3,328

 

2,938

 

Purchase of investment securities available-for-sale

 

(130,758

)

(29,300

)

Purchase of mortgage-backed securities available-for-sale

 

(32,421

)

(62,568

)

Purchase of other investments

 

(6,844

)

(2,522

)

Purchase of Bank-owned life insurance

 

 

(30,212

)

Redemptions of investment securities available-for-sale

 

17,678

 

18,893

 

Redemptions of investment securities held-to-maturity

 

10,740

 

12,315

 

Net cash paid in acquisition

 

 

(339

)

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

 

(128,520

)

(100,913

)

Net cash used in investing activities

 

(230,052

)

(196,276

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase (decrease) in deposits

 

(81,012

)

106,987

 

Net increase in other borrowed funds - short term

 

39,882

 

21,757

 

Net increase (decrease) in mortgage funding checks

 

(28,383

)

3,758

 

Proceeds from FHLB advances - long term

 

115,000

 

15,000

 

Repayments of FHLB advances - long term

 

(27,125

)

(41,125

)

Stock options exercised

 

101

 

256

 

Purchase and retirement of common stock

 

(2,190

)

 

Deferred compensation payments

 

3

 

(4

)

Dividends on common stock

 

(732

)

(732

)

Net cash provided by financing activities

 

15,544

 

105,897

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

7,534

 

19,425

 

Cash and cash equivalents at beginning of the period

 

36,076

 

36,589

 

Cash and cash equivalents at end of the period

 

$

43,610

 

$

56,014

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for interest

 

$

43,693

 

$

32,942

 

Cash paid for income taxes

 

3,925

 

4,963

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

Unsettled purchases of investment securities available-for-sale

 

$

413

 

$

1,419

 

Unsettled sale of investment securities available-for-sale

 

 

10,210

 

 

 

 

 

 

 

On February 9, 2006, the Company acquired certain fiduciary and other assets and assumed the liabilities of FBR National Trust Company. In conjunction with the acquisition, the following noncash changes to our financial condition occurred:

 

 

 

 

 

Fair value of non-cash assets acquired

 

 

 

$

507

 

Fair value of liabilities assumed

 

 

 

127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

7



 

 

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

(Unaudited)

 

Note 1

 

Organization

 

Cardinal Financial Corporation (the ”Company”) is incorporated under the laws of the Commonwealth of Virginia as a financial holding company whose activities consist of investment in its wholly-owned subsidiaries. The principal operating subsidiary of the Company is Cardinal Bank (the “Bank”), a state-chartered institution. On July 7, 2004, the Bank acquired George Mason Mortgage, LLC (“George Mason”), a mortgage banking company based in Fairfax, Virginia. On June 9, 2005, the Company acquired Wilson/Bennett Capital Management, Inc. (“Wilson/Bennett”), an asset management firm. The Company also owns Cardinal Wealth Services, Inc. (“CWS”), an investment services subsidiary. On February 9, 2006, the Bank acquired certain fiduciary and other assets and assumed certain liabilities of FBR National Trust Company, formerly a subsidiary of Friedman, Billings, Ramsey Group, Inc.

 

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 nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year ending December 31, 2007. 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, 2006.

 

Note 2

 

Summary of Significant Accounting Policies

 

Investment Securities Held for Trading

 

During the first quarter of 2007, the Company established a new investment securities category, investment securities held for trading. Investment securities held for trading are those securities for which the Company has purchased and holds for the purpose of selling in the near future.

 

Investment securities held for trading are carried at estimated fair value. Unrealized market value adjustments, fees, and realized gains or losses, net of applicable tax, on trading securities are reported in non-interest income.  Interest income on trading securities is included in interest income from investment securities within the consolidated statements of income.

 

 

8



 

 

Note 3

 

Stock-Based Compensation

 

At September 30, 2007, the Company had two stock-based employee compensation plans, the 1999 Stock Option Plan (the “Option Plan”) and the 2002 Equity Compensation Plan (the “Equity Plan”).

 

In 1998, the Company adopted the Option Plan pursuant to which the Company may grant stock options for up to 625,000 shares of the Company’s common stock to employees and members of the Company’s and its subsidiaries’ boards of directors. There were 16,371 shares of the Company’s common stock available for future grants in the Option Plan as of September 30, 2007.

 

In 2002, the Company adopted the Equity Plan. The Equity Plan authorizes the granting and award of incentive stock options, 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.  The Equity Plan currently authorizes grants and awards with respect to 2,420,000 shares of the Company’s common stock.  There were 263,258 shares of the Company’s common stock available for future grants and awards in the Equity Plan as of September 30, 2007.

 

Stock options are granted with an exercise price equal to the common stock’s fair market value at the date of grant. Director stock options have ten year terms and vest and become fully exercisable at the grant date. Certain employee stock options have ten year terms and vest and become fully exercisable after three years. Other employee stock options have ten year terms and vest and become fully exercisable in 20% increments beginning as of the grant date. 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% increments beginning after their first year of service. During 2005, certain stock options granted to employees had ten year terms and vested and became fully exercisable immediately.

 

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

 

Total expense related to the Company’s share-based compensation plans for the three months ended September 30, 2007 and 2006 was $77,000 and $103,000, respectively. Total expense related to the Company’s share-based compensation plans for the nine months ended September 30, 2007 and 2006 was $256,000 and $250,000, respectively.  The total income tax benefit recognized in the income statement for share-based compensation arrangements was $27,000 and $36,000 for the three months ended September 30, 2007 and 2006, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $90,000 and $88,000 for the nine months ended September 30, 2007 and 2006, respectively.

 

There were no options granted during the three months ended September 30, 2007. The weighted average per share fair values of stock option grants made during the three months ended September 30, 2006 was $5.38.  The weighted average per share fair values of stock option grants made during the nine months ended September 30, 2007 and 2006 were $4.89 and $5.71, respectively. The fair values of the options granted for these periods were estimated as of the grant date using the Black-Scholes option-pricing model based on the following weighted average assumptions:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2006

 

2007

 

2006

 

Estimated option life

 

6.5 years

 

6.5 years

 

6.5 years

 

Risk free interest rate

 

4.69 — 5.02

%

4.81

%

4.44 — 5.03

%

Expected volatility

 

43.20

%

42.10

%

43.20

%

Expected dividend yield

 

0.50

%

0.40

%

0.50

%

 

 

9



 

Expected volatility is based upon the average annual historical volatility of the Company’s common stock. The estimated option life is derived from the “simplified method” formula as described in Staff Accounting Bulletin No. 107. The risk free interest rate is based upon the five-year U.S. Treasury Note rate in effect at the time of grant.  The expected dividend yield is based upon implied and historical dividend declarations.

 

Stock option activity during the nine months ended September 30, 2007 is summarized as follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

Number of

 

Exercise

 

Contractual

 

Value

 

 

 

Shares

 

Price

 

Term (Years)

 

($000)

 

Outstanding at December 31, 2006

 

2,419,274

 

$

8.70

 

 

 

 

 

Granted

 

500

 

10.18

 

 

 

 

 

Exercised

 

(18,946

)

5.31

 

 

 

 

 

Forfeited

 

(17,075

)

10.13

 

 

 

 

 

Outstanding at September 30, 2007

 

2,383,753

 

$

8.71

 

6.88

 

$

3,057

 

Options exercisable at September 30, 2007

 

2,137,675

 

$

8.39

 

6.71

 

$

3,428

 

 

 

 

 

 

 

 

 

 

 

 

Total intrinsic values of options exercised during the three months ended September 30, 2007 and 2006 were $12,000 and $5,000, respectively. Total intrinsic values of options exercised during the nine months ended September 30, 2007 and 2006 were $89,000 and $124,000, respectively.

 

A summary of the status of the Company’s non-vested stock options and changes during the nine months ended September 30, 2007 is as follows:

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number of

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Balance at December 31, 2006

 

410,606

 

$

4.63

 

Granted

 

500

 

4.89

 

Vested

 

(158,828

)

3.42

 

Forfeited

 

(6,200

)

4.48

 

Balance at September 30, 2007

 

246,078

 

$

5.42

 

 

 

 

 

 

 

 

 

At September 30, 2007, there were $1.5 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 3.4 years. The total fair value of shares that vested during the three months ended September 30, 2007 and 2006 were $53,000 and $10,000, respectively. The total fair value of shares that vested during the nine months ended September 30, 2007 and 2006 were $578,000 and $368,000, respectively.

 

 

 

10



 

Note 4

 

Segment Information

 

The Company operates in three business segments: Commercial Banking, Mortgage Banking, and Wealth Management and Trust Services.

 

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

 

Results related to the assets acquired, and liabilities assumed, from FBR National Trust Company are reflected in the Wealth Management and Trust Services segment since the date of their acquisition and assumption, February 9, 2006.

 

Information about the reportable segments and reconciliation of this information to the consolidated financial statements at and for the three and nine months ended September 30, 2007 and 2006 is as follows:

 

 

11



 

 

At and for the Three Months Ended September 30, 2007 (in thousands):

 

 

 

 

 

 

 

Wealth
Management

 

 

 

 

 

 

 

 

 

Commercial

 

Mortgage

 

and

 

 

 

Intersegment

 

 

 

 

 

Banking

 

Banking

 

Trust Services

 

Other

 

Elimination

 

Consolidated

 

Net interest income

 

$

 9,969

 

$

 767

 

$

 —

 

$

 (403

)

$

 —

 

$

 10,333

 

Provision for loan losses

 

915

 

 

 

 

 

915

 

Non-interest income

 

1,029

 

2,601

 

1,101

 

12

 

 

4,743

 

Non-interest expense

 

7,533

 

2,697

 

4,363

 

876

 

 

15,469

 

Provision for income taxes

 

715

 

242

 

(1,222

)

(437

)

 

(702

)

Net income (loss)

 

$

 1,835

 

$

 429

 

$

 (2,040

)

$

 (830

)

$

 —

 

$

 (606

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

 1,641,766

 

$

 163,896

 

$

 4,152

 

$

 173,607

 

$

 (305,821

)

$

 1,677,600

 

Average Assets

 

$

 1,650,498

 

$

 239,395

 

$

 4,247

 

$

 173,802

 

$

 (408,502

)

$

 1,659,440

 

 

At and for the Three Months Ended September 30, 2006 (in thousands):

 

 

 

 

 

 

 

Wealth
Management

 

 

 

 

 

 

 

 

 

Commercial

 

Mortgage

 

and

 

 

 

Intersegment

 

 

 

 

 

Banking

 

Banking

 

Trust Services

 

Other

 

Elimination

 

Consolidated

 

Net interest income

 

$

 9,565

 

$

 1,126

 

$

 —

 

$

 (271

)

$

 —

 

$

 10,420

 

Provision for loan losses

 

230

 

 

 

 

 

230

 

Non-interest income

 

759

 

3,341

 

849

 

13

 

 

4,962

 

Non-interest expense

 

6,972

 

3,615

 

3,912

 

546

 

 

15,045

 

Provision for income taxes

 

893

 

305

 

(1,093

)

(253

)

 

(148

)

Net income (loss)

 

$

 2,229

 

$

 547

 

$

 (1,970

)

$

 (551

)

$

 —

 

$

 255

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

 1,481,653

 

$

 273,126

 

$

 5,501

 

$

 160,511

 

$

 (371,646

)

$

 1,549,145

 

Average Assets

 

$

 1,470,211

 

$

 276,383

 

$

 7,602

 

$

 158,898

 

$

 (424,252

)

$

 1,488,842

 

 

At and for the Nine Months Ended September 30, 2007 (in thousands):

 

 

 

 

 

 

 

Wealth
Management

 

 

 

 

 

 

 

 

 

Commercial

 

Mortgage

 

and

 

 

 

Intersegment

 

 

 

 

 

Banking

 

Banking

 

Trust Services

 

Other

 

Elimination

 

Consolidated

 

Net interest income

 

$

 29,055

 

$

 2,319

 

$

 —

 

$

 (973

)

$

 —

 

$

 30,401

 

Provision for loan losses

 

1,670

 

 

 

 

 

1,670

 

Non-interest income

 

3,052

 

9,036

 

3,236

 

37

 

 

15,361

 

Non-interest expense

 

22,693

 

9,045

 

6,267

 

2,135

 

 

40,140

 

Provision for income taxes

 

2,365

 

828

 

(1,283

)

(1,059

)

 

851

 

Net income (loss)

 

$

 5,379

 

$

 1,482

 

$

 (1,748

)

$

 (2,012

)

$

 —

 

$

 3,101

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

 1,641,766

 

$

 163,896

 

$

 4,152

 

$

 173,607

 

$

 (305,821

)

$

 1,677,600

 

Average Assets

 

$

 1,628,777

 

$

 265,305

 

$

 4,680

 

$

 169,925

 

$

 (428,502

)

$

 1,640,185

 

 

At and for the Nine Months Ended September 30, 2006 (in thousands):

 

 

 

 

 

 

 

Wealth
Management

 

 

 

 

 

 

 

 

 

Commercial

 

Mortgage

 

and

 

 

 

Intersegment

 

 

 

 

 

Banking

 

Banking

 

Trust Services

 

Other

 

Elimination

 

Consolidated

 

Net interest income

 

$

 28,921

 

$

 3,405

 

$

 —

 

$

 (800

)

$

 —

 

$

 31,526

 

Provision for loan losses

 

870

 

 

 

 

 

870

 

Non-interest income

 

2,527

 

10,618

 

2,487

 

34

 

 

15,666

 

Non-interest expense

 

20,077

 

11,604

 

5,543

 

1,701

 

 

38,925

 

Provision for income taxes

 

3,290

 

853

 

(1,071

)

(863

)

 

2,209

 

Net income (loss)

 

$

 7,211

 

$

 1,566

 

$

 (1,985

)

$

 (1,604

)

$

 —

 

$

 5,188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

 1,481,653

 

$

 273,126

 

$

 5,501

 

$

 160,511

 

$

 (371,646

)

$

 1,549,145

 

Average Assets

 

$

 1,417,778

 

$

 268,592

 

$

 7,397

 

$

 159,849

 

$

 (421,208

)

$

 1,432,408

 

 

At September 30, 2007, the Company did not have any operating segments other than those reported. Parent company financial information is included in the “Other” category and represents

 

 

12



 

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. The parent company’s non-interest expense is primarily non-allocable executive salaries and professional services related to the Company’s regulatory requirements.

 

Note 5

 

Earnings Per Share

 

The following is the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2007 and 2006. Stock options issued that were not included in the calculation of diluted earnings per share because the exercise prices were greater than the average market price were 81,359 and 2,971 for the three months ended September 30, 2007 and 2006, respectively. Stock options issued that were not included in the calculation of diluted earnings per share because the exercise prices were greater than the average market price were 54,887 and none for the nine months ended September 30, 2007 and 2006, respectively.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In thousands, except per share data)

 

2007

 

2006

 

2007

 

2006

 

Net income available to