Cardinal Announces Third Quarter 2015 Earnings

TYSONS CORNER, Va.--()--Cardinal Financial Corporation (NASDAQ: CFNL) (the “Company”) today reported that third quarter of 2015 earnings increased 19% from a year ago, to $11.2 million, or $0.34 per diluted share, compared to $9.4 million, or $0.29 per diluted share, for the quarterly period ended September 30, 2014. For the nine month year to date period, earnings increased 73% to $38.3 million, or $1.15 per diluted share, compared to $22.2 million, or $0.68 per diluted share, for the nine month year to date period of 2014.

Certain non-operating items impacted the financial results for the year to date periods reported above. In the second quarter of 2015, Cardinal recorded one-time non interest income of approximately $2.95 million related to litigation and approximately $500,000 of related expenses. Year to date results for 2014 included expenses related to the Company’s January 2014 acquisition of United Financial Banking Companies, Inc. (UFBC). Excluding the impact associated with the litigation and the acquisition expenses related to UFBC (see Table 4), the current year to date adjusted net income was $37.0 million, a 42% increase over $26.0 million for the same period a year ago.

Selected Highlights

  • Loans held for investment grew $122 million during the quarter, or 17% annualized. Asset quality remains excellent. At September 30, 2015, nonperforming assets decreased to $721,000, or 0.02% of total assets. The Company had $0 past due loans 90 days or more, and $0 real estate owned. Year to date, the Company had net recoveries of 0.12% of average loans outstanding.
  • Operating net income increased 11% to $13.0 million, or $0.39 per share, for the current quarter versus $11.7 million, or $0.35 per share, for the year ago quarter. For the year to date period ended September 30, 2015, operating net income increased 46% to $33.9 million, or $1.03 per share, versus $23.2 million, or $0.71 per share, for the same period a year ago. Operating net income is a non-GAAP measure which excludes the impact of Staff Accounting Bulletin (“SAB”) 109 that creates earnings volatility, and management believes operating net income more accurately reflects the performance of the Company. See Table 4 for a comparison of operating versus GAAP net income.
  • Net income for the commercial banking segment was $29.6 million for the current year to date period, versus $23.5 million for the same period a year ago. Before merger and acquisition (M&A) expenses, net income for these same respective periods was $29.9 million versus $27.0 million, an increase of 11%.
  • The Company’s mortgage banking subsidiary, George Mason Mortgage, continued its solid performance. For the current quarter, it reported net income of $631,000 and delivered operating net income of $2.4 million.
  • All capital ratios exceed the requirements of banking regulators to be considered well-capitalized. Tangible common equity capital (TCE) as a percentage of total assets was 9.36% at September 30, 2015.

Review of Balance Sheet

At September 30, 2015, total assets of the Company were $3.88 billion, an increase of 17% from total assets of $3.31 billion at September 30, 2014. Loans held for investment grew to $2.92 billion versus $2.49 billion a year ago, a 17% increase. Loans held for sale increased to $378 million at September 30, 2015 compared to $313 million at September 30, 2014, and the Company’s investment portfolio increased to $430 million from $341 million for these same respective periods.

Over the past year, deposit balances increased $514 million to $2.94 billion from $2.42 billion, an increase of 21%. Non-interest bearing demand deposit accounts, which represented 21% of total deposits, increased $67 million to $621 million. Customer deposits and customer repurchase accounts were $2.65 billion, an increase of 18% since September 30, 2014.

Net Interest Income

The Company’s net interest income increased 6%, to $29.6 million from $27.9 million, for the three month periods ended September 30, 2015 and 2014, respectively. Average interest earning assets increased to $3.58 billion from $3.09 billion a year ago, and average interest bearing liabilities increased to $2.65 billion from $2.27 billion. The Company’s tax equivalent net interest margin was 3.37% for the current quarter and 3.66% for the same quarter of last year. The yield on interest earning assets declined from 4.35% for the year ago quarter to 4.06% for the current quarter as new loan originations and security purchases are being recorded at lower rates than maturing assets, a result of competition and the historically low rate environment that has existed for the past several years. For these same respective periods, the cost of interest bearing liabilities has remained at 0.93%. The Company initiated several customer driven deposit strategies to attract new banking relationships and new money during the first nine months of the year.

Commercial Banking Review

For the current quarter ended September 30, 2015, net income for the commercial banking segment was $11.0 million, an increase of 6% from $10.4 million for the year ago quarter. For the current year to date period, net income was $29.6 million, versus $23.5 million a year ago. Before M&A expenses, net income for these same respective periods was $29.9 million versus $27.0 million, an increase of 11% (see Table 6).

The recovery from loan losses was $547,000 for the current quarter versus $0 for the year ago quarter. The allowance for loan losses was 1.08% of loans outstanding at September 30, 2015 versus 1.19% at September 30, 2014. This ratio decrease from a year ago is primarily the result of improving credit quality. The Company’s nonperforming assets were 0.02% of total assets at September 30, 2015 compared to 0.19% a year ago. For the year to date period, there were recoveries from previously charged off loans in excess of current charge offs of 0.12% of average loans outstanding.

Non-interest income was $1.7 million for the current quarter compared to $1.6 million for the year ago quarter. Deposit and loan fees were $584,000 and $344,000, respectively for the current quarter versus $571,000 and $340,000 for the same period of 2014. Securities gains in the commercial banking segment totaled $769,000 for the current quarter versus $665,000 for the same year ago period.

Non-interest expense was $15.3 million for the current quarter versus $13.4 million for the prior year quarter. The increase in non-interest expense from a year ago is largely a result of the Company electing to change its parent company expense allocation associated with managing the bank, which resulted in a bank expense increase of over $670,000. Additionally, variable compensation expenses related to incentives for performance increased $800,000 compared to the year ago quarter. The commercial bank’s efficiency ratio for the current quarter was 49.7%.

Mortgage Banking Review

For the current quarter ended September 30, 2015, the mortgage banking segment reported a net profit of $631,000, and it delivered operating net income of $2.4 million. Operating net income (a non-GAAP measure) excludes the impact of the Staff Accounting Bulletin (“SAB”) 109 accounting requirement to record unrealized gains on forward commitments to sell its locked mortgage loan pipeline. Comparable quarterly results are shown below.

                         
      Q3 2015     Q3 2014     YTD 2015     YTD 2014

Mortgage Banking: (in 000's)

                       
Reported Net Income     $631     $(76)     $9,017     $1,896
Reverse Impact of SAB 109     1,760     2,167     (3,182)     (2,772)
Operating Net Income     $2,391     $2,091     $5,835     $(876)
               

The accompanying Table 7 provides additional recent quarterly information regarding the impact of SAB 109.

During the third quarter of 2015, closed loans were $885 million and loans sold to investors totaled $983 million, versus $827 million and $890 million, respectively, for the same quarter of 2014. Net realized gain on sales and other fees, before the impact of SAB 109, were $10.8 million for the current quarter versus $9.9 million for the same period a year ago. The improvement is the result of the higher production levels and a gain on sale margin increase to 2.61% from 2.52% a year ago. As previously announced, in late June, George Mason began a program to sell approximately 25% of its loan originations on a pooled mandatory delivery basis in order to increase profitability. Traditionally, all loans have been sold individually on a best efforts basis. The increase in the gain on sale margin is reflective of the success of this program during the third quarter as the mandatory loan sale program performed as expected.

Loan applications totaled $1.1 billion during the third quarter of 2015, down from $1.4 billion for quarter ended June 30, 2015. Purchase money applications were $850 million, which represented 74% of total application volume in the current quarter versus 77% in the previous quarter. The second quarter of each year is typically the most active for home buyers in George Mason’s markets, and purchase money activity usually slows from these levels during the third and fourth quarters.

Operating expenses increased $391,000 in the current quarter when compared to the year ago quarter. The change was due to expenses related to the higher levels of production.

Capital Ratios

The Company remains in excess of all regulatory standards to be considered a well capitalized bank.

MANAGEMENT COMMENTS

Bernard H. Clineburg, Chairman and Chief Executive Officer of the Company, said:

“I am again pleased with how our Company performed during the third quarter of 2015. On an operating basis, our commercial banking segment’s year to date net income improved 11%. Our business development efforts and commitment to the local markets continued to drive new relationships. Loan growth of $122 million continues to illustrate the quality of our commercial team and their persistence in achieving goals. Credit metrics remained pristine, and our banking offices successfully executed upon our deposit campaigns to increase our core customer balances by almost 18%.

“The mortgage banking division also had another strong quarter with operating earnings of $2.4 million. Approximately 75% of volume continues to be purchase money mortgages, providing stability in diverse economic conditions. Costs increased slightly due to production levels; however, we remained focused on increasing operating efficiencies.

“Looking forward, we will continue to concentrate on gaining profitable market share, either through de novo expansion or acquisition, which will increase our franchise value. We remain committed to maintaining and growing a strong financial services company for our employees, clients, the communities we serve, and especially our shareholders.”

CAUTION ABOUT FORWARD-LOOKING STATEMENTS

This press release contains “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements contain information related to matters such as the Company’s intent, belief or expectation with regard to such matters as financial and operational performance, credit quality and branch expansion. Such statements are necessarily based on management’s assumptions and estimates and are inherently subject to a variety of risks and uncertainties concerning the Company’s operations and business environment, which are difficult to predict and beyond the control of the Company. Such risks and uncertainties could cause actual results of the Company to differ materially from those matters expressed or implied in such forward-looking statements. For an explanation of some of the risks and uncertainties associated with forward-looking statements, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and other reports filed with and furnished to the Securities and Exchange Commission. The Company has no obligation and does not undertake to update, revise or correct any of the forward-looking statements after the date of this press release, or after the respective dates on which such statements otherwise are made.

About Cardinal Financial Corporation: Cardinal Financial Corporation, a financial holding company headquartered in Tysons Corner, Virginia with assets of $3.88 billion at September 30, 2015, serves the Washington Metropolitan region through its wholly-owned subsidiary, Cardinal Bank. Cardinal also operates several other subsidiaries: George Mason Mortgage, LLC, a residential mortgage lending company based in Fairfax, Virginia and Cardinal Wealth Services, Inc., a wealth management services company. The Company's stock is traded on NASDAQ (CFNL). For additional information please visit our Web site at www.cardinalbank.com or call (703) 584-3400.

 
Table 1.
 
Cardinal Financial Corporation and Subsidiaries
Summary Statements of Condition
(Dollars in thousands)
(Unaudited)
 
                % Change
September 30, 2015 December 31, 2014 September 30, 2014 Current Year     Year Over Year
 
Cash and due from banks $ 18,744 $ 20,298 $ 21,390 -7.7 % -12.4 %
Federal funds sold 13,692 17,891 26,170 -23.5 % -47.7 %
 
Investment securities available-for-sale 421,214 339,131 330,415 24.2 % 27.5 %
Investment securities held-to-maturity 3,857 4,024 6,072 -4.2 % -36.5 %
Investment securities – trading   5,274     5,067     4,724   4.1 % 11.6 %
Total investment securities 430,345 348,222 341,211 23.6 % 26.1 %
 
Other investments 16,111 15,941 19,394 1.1 % -16.9 %
Loans held for sale 377,878 315,323 313,525 19.8 % 20.5 %
 
Loans receivable, net of fees:
Commercial and industrial 347,914 354,693 321,978 -1.9 % 8.1 %

Real estate - commercial

1,356,821

1,254,270

1,221,498

8.2

%

11.1

%
Real estate - construction 620,982 432,171 426,111 43.7 % 45.7 %
Real estate - residential 436,832 403,744 388,247 8.2 % 12.5 %
Home equity lines 150,769 131,156 126,317 15.0 % 19.4 %
Consumer   4,739     5,080     5,142   -6.7 % -7.8 %
Loans receivable, net of fees 2,918,057 2,581,114 2,489,293 13.1 % 17.2 %
Allowance for loan losses   (31,572 )   (28,275 )   (29,537 ) 11.7 % 6.9 %
Loans receivable, net 2,886,485 2,552,839 2,459,756 13.1 % 17.3 %
 
Premises and equipment, net 25,398 25,253 25,385 0.6 % 0.1 %
Goodwill and intangibles, net 36,747 37,312 37,012 -1.5 % -0.7 %
Bank-owned life insurance 32,876 32,546 32,418 1.0 % 1.4 %
Other assets 43,460 33,509 38,664 29.7 % 12.4 %
         
TOTAL ASSETS $ 3,881,736   $ 3,399,134   $ 3,314,925   14.2 % 17.1 %
 
Non-interest bearing deposits $ 620,630 $ 572,071 $ 553,629 8.5 % 12.1 %
Interest checking 433,372 422,291 444,437 2.6 % -2.5 %
Money markets 447,536 372,591 338,087 20.1 % 32.4 %
Statement savings 278,871 254,722 254,770 9.5 % 9.5 %
Certificates of deposit 738,878 603,237 548,907 22.5 % 34.6 %
Brokered certificates of deposit   419,461     310,418     284,975   35.1 % 47.2 %
Total deposits 2,938,748 2,535,330 2,424,805 15.9 % 21.2 %
 
Other borrowed funds 469,019 437,995 476,828 7.1 % -1.6 %
Mortgage funding checks 20,418 19,469 15,510 4.9 % 31.6 %
Escrow liabilities 2,861 2,035 2,242 40.6 % 27.6 %
Other liabilities 45,467 26,984 27,473 68.5 % 65.5 %
 
Shareholders' equity   405,223     377,321     368,067   7.4 % 10.1 %
 
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 3,881,736   $ 3,399,134   $ 3,314,925   14.2 % 17.1 %
 
 
Table 2.
 
Cardinal Financial Corporation and Subsidiaries
Summary Income Statements
(Dollars in thousands, except share and per share data)
(Unaudited)
 
    For the Three Months Ended         For the Nine Months Ended    
September 30 September 30
2015     2014 % Change 2015     2014 % Change
 
Net interest income $ 29,634 $ 27,916 6.2 % $ 85,923 $ 80,496 6.7 %
Provision for loan losses   547     -   100.0 %   (939 )   (2,541 ) -63.0 %
Net interest income after provision for loan losses 30,181 27,916 8.1 % 84,984 77,955 9.0 %
 
Non-interest income:
Service charges on deposit accounts 584 571 2.3 % 1,705 1,641 3.9 %
Loan fees 344 340 1.2 % 1,289 951 35.5 %
Income from bank owned life insurance 118 111 6.3 % 330 356 -7.3 %
Net realized gains on investment securities 960 721 33.1 % 1,518 1,046 45.1 %
Litigation recovery - - 100.0 % 2,950 - 100.0 %
Other non-interest income   6     13   -53.8 %   17     44   -61.4 %
Commercial banking & other non-interest income 2,012 1,756 14.6 % 7,809 4,038 93.4 %
 
Management fee income - - 0.0 % - 21 -100.0 %
Gains from mortgage banking activities 22,915 19,015 20.5 % 75,754 55,930 35.4 %
Less: mortgage loan origination expenses   (14,802 )   (12,448 ) 18.9 %   (40,363 )   (31,742 ) 27.2 %
Mortgage banking non-interest income 8,113 6,567 23.5 % 35,391 24,209 46.2 %
 
Wealth management non-interest income   142     128   10.9 %   400     554   -27.8 %
Total non-interest income 10,267 8,451 21.5 % 43,600 28,801 51.4 %
 
Net interest income and non-interest income 40,448 36,367 11.2 % 128,584 106,756 20.4 %
 
Salaries and benefits 13,409 10,726 25.0 % 37,453 33,586 11.5 %
Occupancy 2,492 2,601 -4.2 % 7,323 7,776 -5.8 %
Depreciation 828 972 -14.8 % 2,550 2,789 -8.6 %
Data processing & communications 1,373 1,603 -14.3 % 4,336 4,905 -11.6 %
Professional fees 852 783 8.8 % 3,577 2,476 44.5 %
FDIC insurance assessment 516 391 32.0 % 1,548 1,119 38.3 %
Mortgage loan repurchases and settlements 47 - 100.0 % 47 83 -43.4 %
Merger and acquisition expense - 64 -100.0 % 472 5,733 -91.8 %
Other operating expense   4,478     5,075   -11.8 %   13,710     14,733   -6.9 %
Total non-interest expense 23,995 22,215 8.0 % 71,016 73,200 -3.0 %
Income before income taxes   16,453     14,152   16.3 %   57,568     33,556   71.6 %
Provision for income taxes   5,244         4,710       11.3 %   19,249         11,391       69.0 %
NET INCOME $ 11,209       $ 9,442       18.7 % $ 38,319       $ 22,165       72.9 %
 
Earnings per common share - basic $ 0.34       $ 0.29       17.7 % $ 1.17       $ 0.69       71.0 %
Earnings per common share - diluted $ 0.34       $ 0.29       17.4 % $ 1.15       $ 0.68       70.7 %
Weighted-average common shares outstanding - basic   32,766,772         32,482,195       0.9 %   32,710,435         32,345,319       1.1 %
Weighted-average common shares outstanding - diluted   33,311,261         32,933,774       1.1 %   33,191,915         32,771,787       1.3 %
 
 
Table 3.
 
Cardinal Financial Corporation and Subsidiaries
Selected Financial Information
(Dollars in thousands, except per share data and ratios)
(Unaudited)
 
    For the Three Months Ended     For the Nine Months Ended
September 30 September 30
2015     2014 2015     2014
Performance Ratios:
Return on average assets 1.20 % 1.16 % 1.43 % 0.94 %
Return on average equity 11.02 % 10.20 % 12.81 % 8.03 %
Net interest margin (1) 3.37 % 3.66 % 3.40 % 3.63 %
Efficiency ratio (2) 60.14 % 61.09 % 54.83 % 66.97 %
Non-interest income to average assets 1.10 % 1.04 % 1.62 % 1.22 %
Non-interest expense to average assets 2.57 % 2.74 % 2.64 % 3.09 %
 
Mortgage Banking Select Data:
$ of loan applications - George Mason Mortgage $ 1,149,000 $ 973,000 $ 4,147,000 $ 3,054,000
$ of loan applications - Managed Mortgage Company Affiliates   -     -     -     1,400  

Total

1,149,000 973,000 4,147,000 3,055,400
 
Refi % of loan applications - George Mason Mortgage 26 % 20 % 32 % 19 %

Refi % of loans applications - Managed Mortgage Company Affiliates

  0 %   0 %   0 %   15 %

Total

26 % 20 % 32 % 19 %
 
$ of loans closed - George Mason Mortgage $ 885,715 $ 826,786 $ 2,815,713 $ 2,220,318
$ of loans closed - Managed Mortgage Company Affiliates   -     -     -     13,034  

Total

885,715 826,786 2,815,713 2,233,352
 
# of loans closed - George Mason Mortgage 2,628 2,399 8,316 6,637
# of loans closed - Managed Mortgage Company Affiliates   -     -     -     30  

Total

2,628 2,399 8,316 6,667
 
$ of loans sold - George Mason Mortgage $ 983,355 $ 889,549 $ 2,755,321 $ 2,195,176
$ of loans sold - Managed Mortgage Company Affiliates   -     -     -     71,504  

Total

983,355 889,549 2,755,321 2,266,680
 
$ of locked commitments - George Mason Mortgage $ 838,785 $ 761,137 $ 2,937,477 $ 2,274,853
$ locked commitments at period end - George Mason Mortgage $ 316,684 $ 265,443
$ of loans held for sale at period end - George Mason Mortgage $ 329,712 $ 259,703
Realized gain on sales and fees as a % of loan sold (3) 2.61 % 2.52 % 2.57 % 2.35 %
Net realized gains as a % of realized gains (Gain on sale margin) (4) 42.28 % 44.37 % 43.01 % 38.52 %
 
Asset Quality Data:
Net charge-offs (recoveries) to average loans receivable, net of fees -0.12 % 0.05 %
Total nonaccrual loans $ 721 $ 5,472
Real estate owned $ - $ -
Nonperforming loans to loans receivable, net of fees 0.02 % 0.25 %
Nonperforming loans to total assets 0.02 % 0.19 %
Nonperforming assets to total assets 0.02 % 0.19 %
Total loans receivable past due 30 to 89 days $ 56 $ 883
Total loans receivable past due 90 days or more $ - $ 792
Allowance for loan losses to loans receivable, net of fees 1.08 % 1.19 %
Allowance for loan losses to nonperforming loans 4378.92 % 471.54 %
 
Capital Ratios:
Common equity tier 1 capital 9.91 % N/A
Tier 1 risk-based capital 10.59 % 10.95 %
Total risk-based capital 11.47 % 11.91 %
Leverage capital ratio 10.46 % 10.70 %
Book value per common share $ 12.58 $ 11.49
Tangible book value per common share (5) $ 11.44 $ 10.34
Common shares outstanding 32,209 32,029
 

(1)

 

The average yields for loans receivable and investment securities available-for-sale are reported on a fully taxable-equivalent basis at a rate of 33% for 2015 and 2014.

(2)

Efficiency ratio is calculated as total non-interest expense divided by the total of net interest income and non-interest income.

(3)

Realized gains are those gains recognized on the date the loan is sold and do not include the unrealized gains recognized at the loan commitment date.

(4)

Net realized gains are gains net of loan origination expense recognized on the date the loan is sold and do not include the unrealized gains recognized at the loan commitment date.

(5)

Tangible book value is calculated as total shareholders' equity less goodwill and other intangible assets, divided by common shares outstanding.

 
 
Table 4.
 
Cardinal Financial Corporation and Subsidiaries
(Dollars in thousands, except share and per share data)
(Unaudited)
 
 
Mortgage Revenue Recognition Impact of SAB 109 (Written Loan Commitments Recorded at Fair Value Through Earnings)
 

 

   

For the Three Months Ended
September 30

       

For the Nine Months Ended
September 30

   
2015     2014 % Change 2015     2014 % Change

Net Gains from Mortgage Banking Activities:

As Reported

Fair value of LCs / unrealized gains recognized @ LC date **(see note below) $ 22,915 $ 19,015 20.51 % $ 75,754 $ 55,930 35.44 %
Loan origination expenses recognized @ loan sale date   14,802     12,448   18.91 %   40,363     31,742   27.16 %
Reported Net Gains from Mortgage Banking Activities   8,113     6,567   23.54 %   35,391     24,188   46.32 %
 

As Adjusted

Realized gains recognized @ loan sale date 25,643 22,375 14.61 % 70,820 51,632 37.16 %
Loan origination expenses recognized @ loan sale date   14,802     12,448   18.91 %   40,363     31,742   27.16 %
Adjusted Net Gains from Mortgage Banking Activities   10,841     9,927   9.21 %   30,457     19,890   53.13 %
 

Impact of SAB 109 on Net Gains from Mortgage Banking Activities:

Increase/(Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109 $ (2,728 ) $ (3,360 ) -18.81 % $ 4,934   $ 4,298   14.80 %
 
 

Net Income Reconciliation for the Impact of Merger and Acquisition Expenses and SAB 109

 

For the Three Months Ended
September 30

For the Nine Months Ended
September 30

2015 2014 % Change 2015 2014 % Change

Net Income Reconciliation:

Reported net income $ 11,209 $ 9,442 18.71 % 38,319 $ 22,165 72.88 %
Aftertax litigation settlement (less associated legal expenses) - - 100.00 % (1,592 ) - 100.00 %
Aftertax merger and acquisition expense   -     43   -100.00 %   313     3,835   -91.84 %
Adjusted net income 11,209 9,485 18.18 % $ 37,040 $ 26,000 42.46 %
Aftertax net increase / (decrease) in unrealized gains on mortgage banking activities related to SAB 109   (1,760 )   (2,167 ) -18.81 %   3,182     2,772   14.80 %

Operating Net Income

$ 12,969   $ 11,652   11.30 % $ 33,857   $ 23,228   45.76 %
 
 

Earnings per Share (EPS) Reconciliation:

Reported net income $ 0.34 $ 0.29 17.37 % $ 1.15 $ 0.68 70.69 %
Aftertax litigation settlement (less associated legal expenses) - - 100.00 % (0.04 ) - 100.00 %
Aftertax merger and acquisition expense   -     0.00   -100.00 %   0.01     0.11   -91.19 %
Adjusted net income 0.34 0.29 16.84 % 1.13 0.79 41.92 %
Aftertax net increase / (decrease) in unrealized gains on mortgage banking activities related to SAB 109   (0.05 )   (0.06 ) -5.35 %   0.10     0.08   13.34 %
Operating Net Income $ 0.39   $ 0.35   10.04 % $ 1.03   $ 0.71   45.33 %
 

 

Operating Performance Ratios:

Return on average assets 1.39 % 1.44 % 1.26 % 0.98 %
Return on average equity 12.75 % 12.59 % 11.32 % 8.42 %
Efficiency ratio 56.29 % 55.92 % 57.00 % 69.71 %
Non-interest income to average assets 1.39 % 1.46 % 1.44 % 1.04 %
 
**
Per the accounting guidance set forth by SEC Staff Accounting Bulleting (SAB) 109 regarding mortgage lending activities, the fair value of a "locked" commitment, or an unrealized gain, is recognized in income on the day of the locked commitment (LC). As a result of this revenue recognition, the unrealized gains then become part of the basis of the ensuing loan held for sale (LHFS) when the loan is closed. When the loan is sold to investors, the “price" received is equal to the basis of the loan held for sale, and there is no gain or loss recognized. At any point in time (e.g. quarter end) the fair value of the LCs and the premium to the par value of LHFS represent unrealized gains that have been recognized in income, either in the current period or prior periods. This accounting creates a mismatch between the income recognition on loan production and expense recognition for those same loans, which is discussed below.
 
In accordance with accounting rules (formally FAS 91), direct (e.g. commissions) and indirect loan expenses associated with originating, underwriting and closing loans are deferred and amortized over the life of the loan. In mortgage banking, this results in the mentioned expenses being recognized at the time of investor purchase of the loan (i.e. loan sale date) which often occurs in the quarter subsequent to the original LC and creates a mismatch in the timing of the revenue and expense. These expenses are “netted” from the gain on sale from mortgage banking activities, which is included in non-interest income.
 
 
Table 5.
 
Cardinal Financial Corporation and Subsidiaries
Average Statements of Condition and Yields on Earning Assets and Interest-Bearing Liabilities
Three and Nine Months Ended September 30, 2015 and 2014
(Dollars in thousands)
(Unaudited)
 
    For the Three Months Ended     For the Nine Months Ended
September 30, 2015     September 30, 2014 September 30, 2015     September 30, 2014

Average
Balance

   

Average
Yield

Average
Balance

   

Average
Yield

Average
Balance

   

Average
Yield

Average
Balance

   

Average
Yield

Interest-earning assets:
Loans receivable, net of fees (1)
Commercial and industrial $ 337,667 3.43 % $ 301,251 4.44 % $ 341,030 3.58 % $ 285,329 4.44 %
Real estate - commercial 1,311,664 4.38 % 1,185,110 4.54 % 1,286,353 4.42 % 1,173,169 4.43 %
Real estate - construction 592,669 4.69 % 419,110 5.09 % 518,423 4.71 % 411,073 5.02 %
Real estate - residential 410,605 3.69 % 357,502 3.82 % 399,446 3.75 % 327,656 3.97 %
Home equity lines 145,625 3.12 % 121,025 3.69 % 139,747 3.19 % 117,178 3.70 %
Consumer   4,602   5.52 %   4,921   5.88 %   4,845   5.71 %   5,432   5.78 %
Total loans   2,802,832   4.17 %   2,388,919   4.48 %   2,689,844   4.21 %   2,319,837   4.45 %
 
Loans held for sale 364,513 3.97 % 341,925 4.16 % 346,088 3.85 % 291,585 4.26 %
Investment securities - available-for-sale (1) 355,216 3.77 % 319,567 3.93 % 328,999 3.78 % 330,205 3.97 %
Investment securities - held-to-maturity 3,859 1.31 % 6,173 2.40 % 3,924 1.76 % 6,877 2.17 %
Other investments 13,113 4.74 % 15,431 3.39 % 13,412 4.50 % 15,042 3.65 %
Federal funds sold   41,108   0.22 %   19,229   0.19 %   39,772   0.21 %   31,899   0.21 %
Total interest-earning assets 3,580,641 4.06 % 3,091,244 4.35 % 3,422,039 4.08 % 2,995,445 4.32 %
 
Non-interest earning assets:
Cash and due from banks 19,964 19,390 20,679 25,270
Premises and equipment, net 25,043 25,806 25,087 25,765
Goodwill and intangibles, net 36,842 37,116 37,037 33,548
Accrued interest and other assets 110,463 99,027 105,670 105,038
Allowance for loan losses (31,564 ) (29,865 ) (29,951 ) (29,784 )
       
TOTAL ASSETS $ 3,741,389   $ 3,242,718   $ 3,580,561   $ 3,155,282  
 
Interest-bearing liabilities:
Interest checking $ 429,211 0.48 % $ 433,251 0.50 % $ 427,496 0.49 % $ 428,951 0.51 %
Money markets 431,958 0.36 % 336,586 0.29 % 392,806 0.34 % 325,097 0.30 %
Statement savings 280,467 0.37 % 257,212 0.27 % 272,302 0.34 % 253,047 0.27 %
Certificates of deposit   1,141,622   1.10 %   828,053   0.99 %   1,075,915   1.05 %   813,349   0.98 %
Total interest-bearing deposits   2,283,258   0.75 %   1,855,102   0.65 %   2,168,519   0.72 %   1,820,444   0.65 %
 
Other borrowed funds   369,481   2.02 %   415,635   2.17 %   368,965   2.07 %   388,385   2.29 %
Total interest-bearing liabilities 2,652,739 0.93 % 2,270,737 0.93 % 2,537,484 0.92 % 2,208,829 0.94 %
 
Noninterest-bearing liabilities:
Noninterest-bearing deposits 638,658 565,650 605,088 544,928
Other liabilities 43,058 36,120 39,222 33,702
 
Shareholders' equity 406,934 370,211 398,767 367,823
       
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 3,741,389   $ 3,242,718   $ 3,580,561   $ 3,155,282  
 
NET INTEREST MARGIN (1) 3.37 % 3.66 % 3.40 % 3.63 %
 

(1)

 

The average yields for loans receivable and investment securities available-for-sale are reported on a fully taxable-equivalent basis at a rate of 33% for 2015 and 2014.

 
 
Table 6.
 
Cardinal Financial Corporation and Subsidiaries
Segment Reporting
(Dollars in thousands)
(Unaudited)
 
    Commercial     Mortgage     Wealth         Intersegment    
Banking Banking Management Other Elimination Consolidated
At and for the Three Months Ended September 30, 2015:
Net interest income $ 29,137 $ 682 $ - $ (185 ) $ - $ 29,634
Non-interest income 1,723 8,217 131 196 - 10,267
Non-interest expense   15,339     7,905     112   639     -     23,995  

Net income (loss) before provision and taxes

15,521

994

19

(628

)

-

15,906

Provision for loan losses (547 ) - - - - (547 )
Provision for income taxes   5,089     363     7   (215 )   -     5,244  
Reported net income (loss) $ 10,979   $ 631   $ 12 $ (413 ) $ -   $ 11,209  
Increase (decrease) in unrealized gains on mortgage banking activities (SAB 109) - 2,728 - - - 2,728
Change in provision for income taxes associated with SAB 109   -     (968 )   -   -     -     (968 )
Operating net income (loss) $ 10,979   $ 2,391   $ 12 $ (413 ) $ -   $ 12,969  
 
Average Assets $ 3,674,500 $ 380,504 $ 2,430 $ 409,191 $ (725,236 ) $ 3,741,389
 
At and for the Three Months Ended September 30, 2014:
Net interest income $ 27,302 $ 794 $ - $ (180 ) $ - $ 27,916
Non-interest income 1,609 6,685 113 44 - 8,451
Non-interest expense   13,375     7,514     108   1,218     -     22,215  
Net income (loss) before provision and taxes

15,536

(35

)

5

(1,354

)

-

14,152

Provision for loan losses - - - - - -
Provision for income taxes   5,176     41     2   (509 )   -     4,710  
Reported net income (loss) $ 10,360   $ (76 ) $ 3 $ (845 ) $ -   $ 9,442  
Add: merger & acquisition expense reported above 43 - - 21 - 64
Increase (decrease) in unrealized gains on mortgage banking activities (SAB 109) - 3,360 - - - 3,360
Change in provision for income taxes associated with merger & acquisition expense & SAB 109   (14 )   (1,193 )   -   (7 )   -     (1,214 )
Operating net income (loss) $ 10,389   $ 2,091   $ 3 $ (831 ) $ -   $ 11,652  
 
Average Assets $ 3,188,855 $ 352,621 $ 2,418 $ 388,497 $ (689,673 ) $ 3,242,718
 
Commercial Mortgage Wealth Intersegment
Banking Banking Management Other Elimination Consolidated
At and for the Nine Months Ended September 30, 2015:
Net interest income $ 84,632 $ 1,834 $ - $ (543 ) $ - $ 85,923
Non-interest income 4,329 35,583 356 3,332 - 43,600
Non-interest expense   44,223     23,213     330   3,250     -     71,016  

Net income (loss) before provision and taxes

44,738

14,204

26

(461

)

-

58,507

Provision for loan losses 939 - - - - 939
Provision for income taxes   14,209     5,187     9   (156 )   -     19,249  
Reported net income (loss) $ 29,590   $ 9,017   $ 17 $ (305 ) $ -   $ 38,319  
Add: merger & acquisition (M&A) expense reported above 471 - - - - 471
Add: legal expense associated with litigation settlement - - - 500 - 500
Less: litigation settlement - - - (2,950 ) - (2,950 )
Increase (decrease) in unrealized gains on mortgage banking activities (SAB 109) - (4,934 ) - - - (4,934 )
Change in provision for income taxes associated with M&A expense, litigation settlement & SAB 109   (158 )   1,752     -   858     -     2,452  
Operating net income (loss) $ 29,903   $ 5,835   $ 17 $ (1,897 ) $ -   $ 33,858  
 
Average Assets $ 3,516,829 $ 359,173 $ 2,418 $ 413,978 $ (711,837 ) $ 3,580,561
 
At and for the Nine Months Ended September 30, 2014:
Net interest income $ 78,842 $ 2,177 $ - $ (523 ) $ - $ 80,496
Non-interest income 3,475 24,443 484 399 - 28,801
Non-interest expense   44,363     23,544     321   4,972     -     73,200  

Net income (loss) before provision and taxes

37,954

3,076

163

(5,096

)

-

36,097

Provision for loan losses 2,541 - - - - 2,541
Provision for income taxes   11,874     1,180     57   (1,720 )   -     11,391  
Reported net income (loss) $ 23,539   $ 1,896   $ 106 $ (3,376 ) $ -   $ 22,165  
Add: merger & acquisition expense reported above 5,157 - - 576 - 5,733
Increase (decrease) in unrealized gains on mortgage banking activities (SAB 109) - (4,298 ) - - - (4,298 )
Change in provision for income taxes associated with merger & acquisition expense & SAB 109   (1,707 )   1,526     -   (191 )   -     (372 )
Operating net income (loss) $ 26,989   $ (876 ) $ 106 $ (2,991 ) $ -   $ 23,228  
 
Average Assets $ 3,054,416 $ 302,635 $ 2,346 $ 385,890 $ (590,005 ) $ 3,155,282
 
 
Table 7.
 
Cardinal Financial Corporation and Subsidiaries
Mortgage Banking Segment Supplemental Information
Summary of Activity and Impact of SAB 109 on Net Income
(Dollars in thousands)
(Unaudited)
 
    9/30/15     6/30/15     3/31/15     12/31/14     09/30/14

For the Three Months Ended:

Applications $ 1,149,000 $ 1,403,000 $ 1,595,000 $ 922,000 $ 973,000
Loans closed 885,715 1,086,264 843,734 778,586 826,786
Loans sold 983,355 923,406 848,559 768,971 889,549
 

At Period End:

Locked pipeline $ 316,684 $ 363,613 $ 449,865 $ 194,919 $ 265,443
Loans held for sale 329,712 427,351 264,494 269,319 259,703
SAB 109 total unrealized gains recognized 17,757 20,485 19,510 12,823 13,734
Change in unrealized gains (2,728 ) 975 6,687 (910 ) (3,360 )
Change in aftertax income (1,760 ) 629 4,313 (587 ) (2,167 )
 
REPORTED NET INCOME $ 631 $ 2,412 $ 5,974 $ 762 $ (76 )
OPERATING NET INCOME 2,391 1,783 1,661 1,349 2,091
 

Contacts

Cardinal Financial Corporation
Bernard H. Clineburg
Chairman, Chief Executive Officer
703-584-3400
or
Mark A. Wendel
EVP, Chief Financial Officer
703-584-3400

Contacts

Cardinal Financial Corporation
Bernard H. Clineburg
Chairman, Chief Executive Officer
703-584-3400
or
Mark A. Wendel
EVP, Chief Financial Officer
703-584-3400