Cardinal Announces Record Annual Earnings; Surpasses $4.0 Billion Total Assets

TYSONS CORNER, Va.--()--Cardinal Financial Corporation (NASDAQ: CFNL) (the “Company”) today reported that earnings for the 2015 year were a record $47.3 million, compared to $32.7 million for the 2014 year. Diluted earnings per share increased 43% to $1.43 compared to $1.00 per diluted share for 2014. Pre-tax, pre-provision, pre-merger and acquisition profits increased 30% to $73.3 million for 2015 compared to $56.4 million for 2014. For the year ended 2015, return on assets and return on equity were 1.29% and 11.76%, respectively.

For the fourth quarter of 2015, earnings were $9.0 million, or $0.27 per diluted share, compared to $10.5 million, or $0.32 per diluted share, for the quarterly period ended December 31, 2014. Strong fourth quarter 2015 loan growth of $138 million contributed to an increase in the loan loss provision expense of $1.1 million compared to the prior year. Pre-tax, pre-provision profits were stable at $14.3 million for 2015 compared to $14.6 million for 2014.

Selected Highlights

  • The Company achieved another milestone as total assets grew to $4.03 billion, increasing 19% from December 31, 2014. This represents the first reporting period that the Company’s total assets have exceeded $4.0 billion.
  • For the current quarter, loans held for investment grew $138 million, or 19% annualized, bringing the total growth for the year to $475 million, or 18%.
  • Asset quality remains excellent. At December 31, 2015, nonperforming assets decreased to $773,000, or 0.02% of total assets. The Company had $0 past due loans 90 days or more and still accruing, In 2015, the Company had net recoveries of 0.07% of average loans outstanding.
  • The Company’s mortgage banking subsidiary, George Mason Mortgage, had solid performance in 2015, with reported net income of $9.2 million and operating net income of $6.8 million. For the current quarter, it reported net income of $164,000 and operating net income of $929,000. 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.
  • All capital ratios of the Company exceeded the requirements of banking regulators to be considered well-capitalized. Tangible common equity capital (TCE) as a percentage of total assets was 9.24% at December 31, 2015.

Review of Balance Sheet

At December 31, 2015, total assets of the Company were $4.03 billion, an increase of 19% from total assets of $3.40 billion at December 31, 2014. Loans held for investment grew to $3.06 billion at December 31, 2015 versus $2.58 billion a year ago, an 18% increase. Loans held for sale increased to $384 million at December 31, 2015 compared to $315 million at December 31, 2014, and the Company’s investment securities portfolio increased to $424 million from $348 million for these same respective periods.

Over the past year, deposit balances increased $497 million to $3.03 billion from $2.54 billion, an increase of 20%. Non-interest bearing demand deposit accounts, which represent 22% of total deposits, increased $85 million to $657 million. Customer deposits and customer repurchase accounts were $2.74 billion, an increase of 18% since December 31, 2014.

Net Interest Income

The Company’s net interest income increased 8%, to $116.4 million from $107.7 million, for the years ended December 31, 2015 and 2014, respectively. Average interest earning assets increased to $3.5 billion in 2015 from $3.0 billion in 2014, and average interest bearing liabilities increased to $2.6 billion from $2.2 billion. The Company’s tax equivalent net interest margin was 3.37% for 2015 and 3.59% for 2014. For the current quarter, the net interest margin was 3.25% versus 3.48% for the year ago quarter and 3.37% for the quarter ended September 30, 2015. The yield on interest earning assets declined from 4.06% for the third quarter of 2015 to 3.95% for the current quarter as new loan originations and security purchases are being recorded at lower rates than maturing assets. This is 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%.

Commercial Banking Review

For the year ended December 31, 2015, net income for the commercial banking segment was $39.2 million, an increase of 14% from $34.4 million for the 2014 year. Before M&A expenses, net income for these same respective periods was $39.5 million versus $37.8 million, and pretax, pre-provision profit was $60.0 million versus, $53.0 million, an increase of 13% (see Table 6). For the fourth quarter of 2015, net income was $9.6 million, versus $10.8 million for fourth quarter of 2014, and pretax, pre-provision profit was $15.3 million, versus $15.0 million, for these same respective periods.

For the fourth quarter of 2015, the provision for loan losses was $449,000 versus a negative provision of $603,000 for the year ago quarter. For the 2015 year, the provision expense was $1.4 million versus $1.9 million for 2014. For the 2015 year, there were recoveries from previously charged off loans in excess of current charge offs of 0.07% of average loans outstanding. The allowance for loan losses was 1.04% of loans outstanding at December 31, 2015 versus 1.10% at December 31, 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 December 31, 2015 compared to 0.13% a year ago.

Non-interest income was $5.3 million for the 2015 year compared to $5.7 million for the 2014 year. For the fourth quarter of 2015, non-interest income was $963,000, versus $2.3 million for the fourth quarter of 2014. Non-interest income for 2014 was affected by unusually large loan prepayment fees recognized in the fourth quarter of 2014, which totaled $810,000 versus the $107,000 for the current quarter. For the 2015 and 2014 years, prepayment fees were $451,000 and $1.0 million respectively. Excluding the change in prepayment income, loan fees increased 20% during the current year. Deposit fees increased 6% as a result of new accounts and interchange income. Also impacting the quarterly comparative results was a decrease in gains on available for sale securities of $428,000 from the year ago quarter.

Non-interest expense was $60.0 million for 2015 versus $58.3 million for the prior year. A $2.6 million increase in parent company expense allocations accounted for nearly all of the expense increase. Additionally, variable compensation expenses related to incentives for performance increased $750,000 in 2015 compared to 2014. The commercial bank’s efficiency ratio for the current year, excluding the parent company allocation, was 47.8%.

For the fourth quarter of 2015, non-interest expense was $15.7 million versus $14.0 million for the fourth quarter of 2014. Expenses in the fourth quarter include typical incentive increases related to company performance, occupancy expenses related to a new office and the parent company allocation noted above. For the fourth quarter of 2015, the commercial bank’s efficiency ratio was 50.8%.

Mortgage Banking Review

For the year ended December 31, 2015, the mortgage banking segment reported a net profit of $9.2 million and operating net income of $6.8 million. Operating net income (a non-GAAP measure) excludes the impact of the Staff Accounting Bulletin (“SAB”) 109 accounting requirement to record unrealized gains and losses on the Company’s forward commitments to sell its locked mortgage loan pipeline. Comparable quarterly results are shown below.

                         
      Q4 2015     Q4 2014     2015     2014

Mortgage Banking: (in 000's)

                       
Reported Net Income     $164     $762     $9,180     $2,658
Reverse Impact of SAB 109     765     587     (2,417)     (2,185)
Operating Net Income     $929     $1,349     $6,763     $473
               

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

The net realized gain on sales and other fees, before the impact of SAB 109, was $39.7 million for 2015 versus $28.7 million for 2014. The improvement is the result of the higher production levels, as loan closings increased to $3.6 billion from $3.0 billion, and a gain on sale margin increase to 2.60% from 2.40% a year ago. As previously announced, in late June, George Mason Mortgage 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 second half of 2015 as the mandatory loan sale program performed as expected.

Operating expenses increased to $31.8 million in 2015 compared to $30.8 million in 2014. The increase was due to expenses related to personnel and temporary help commensurate to the higher levels of production.

Loan applications totaled $1.06 billion during the fourth quarter of 2015, a slight decrease from $1.15 billion for quarter ended September 30, 2015 as activity normally decreases during the holiday season. Purchase money applications were $787 million, which represented 74% of total application volume in the current quarter, consistent with 74% in the previous quarter.

Parent Company Only Review

For the year ended December 31, 2015, Cardinal’s parent company reported a net loss of $1.1 million versus a net loss of $4.5 million in 2014. The change is partially due to the larger expense allocation associated with managing Cardinal Bank. Additionally, $2.95 million in income was realized as a litigation settlement. Offsetting these changes in income was an increase in legal and accounting fees in 2015 of $695,000 compared to fees in 2014.

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 very pleased with how our Company performed in 2015. We reported record earnings and ended the year above $4.0 billion in total assets, growing 19% from the end of 2014. Our commercial banking segment’s 2015 net income improved 14%. Our business development efforts and commitment to the local markets continued to drive new relationships. Annual loan growth was $475 million, representing an 18% increase, and continues to illustrate the quality of our banking 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 18%.

“The mortgage banking division also had a strong year with operating earnings of $6.8 million. Approximately 74% of volume continues to be purchase money mortgages, providing stability in diverse economic conditions. George Mason continues to be the premier mortgage banking firm in the Washington DC metropolitan area.

“Looking forward, we will continue to concentrate on gaining profitable market share, either through de novo expansion or acquisition, with the goal of increasing 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 $4.03 billion at December 31, 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)
 
December 31, 2015 December 31, 2014

% Change
Current Year

(Unaudited) (Unaudited)
Cash and due from banks $ 24,760 $ 20,298 22.0 %
Federal funds sold 14,577 17,891 -18.5 %
 
Investment securities available-for-sale 414,077 339,131 22.1 %
Investment securities held-to-maturity 3,836 4,024 -4.7 %
Investment securities – trading   5,881     5,067   16.1 %
Total investment securities 423,794 348,222 21.7 %
 
Other investments 20,967 15,941 31.5 %
Loans held for sale 383,768 315,323 21.7 %
 
Loans receivable, net of fees:
Commercial and industrial 379,414 354,693 7.0 %
Real estate - commercial 1,372,627 1,254,270 9.4 %
Real estate - construction 694,408 432,171 60.7 %
Real estate - residential 448,168 403,744 11.0 %
Home equity lines 156,852 131,156 19.6 %
Consumer   4,841     5,080   -4.7 %
Total loans, net of fees 3,056,310 2,581,114 18.4 %
Allowance for loan losses   (31,723 )   (28,275 ) 12.2 %
Loans receivable, net 3,024,587 2,552,839 18.5 %
 
Premises and equipment, net 25,163 25,253 -0.4 %
Goodwill and intangibles, net 36,576 37,312 -2.0 %
Bank-owned life insurance 32,978 32,546 1.3 %
Other real estate owned 253 - 100.0 %
Other assets 42,498 33,509 26.8 %
     
TOTAL ASSETS $ 4,029,921   $ 3,399,134   18.6 %
 
Non-interest bearing deposits $ 657,398 $ 572,071 14.9 %
Interest checking 451,545 422,291 6.9 %
Money markets 448,888 372,591 20.5 %
Statement savings 291,484 254,722 14.4 %
Certificates of deposit 776,413 603,237 28.7 %
Brokered certificates of deposit   407,043     310,418   31.1 %
Total deposits 3,032,771 2,535,330 19.6 %
 
Other borrowed funds 537,965 437,995 22.8 %
Mortgage funding checks 12,554 19,469 -35.5 %
Escrow liabilities 2,676 2,035 31.5 %
Other liabilities 30,808 26,984 14.2 %
 
Shareholders' equity   413,147     377,321   9.5 %
 
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 4,029,921   $ 3,399,134   18.6 %
 
 
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
December 31

     

For the Years Ended
December 31

 
2015   2014 % Change 2015   2014 % Change
 
Net interest income $ 30,471 $ 27,204 12.0 % $ 116,394 $ 107,700 8.1 %
Provision for loan losses   (449 )   603   -174.5 %   (1,388 )   (1,938 ) -28.4 %
Net interest income after provision for loan losses 30,022 27,807 8.0 % 115,006 105,762 8.7 %
 
Non-interest income:
Service charges on deposit accounts 590 529 11.5 % 2,294 2,170 5.7 %
Loan fees 307 1,044 -70.6 % 1,596 1,995 -20.0 %
Income from bank-owned life insurance 102 127 -19.7 % 433 483 -10.4 %
Net realized gains (losses) on investment securities (127 ) 645 -119.7 % 1,391 1,691 -17.7 %
Litigation recovery - - 0.0 % 2,950 - 100.0 %
Other non-interest income   22     6   266.7 %   83     51   62.7 %
Commercial banking & other segment non-interest income 894 2,351 -62.0 % 8,747 6,390 36.9 %
 
Management fee income - - 0.0 % - 21 -100.0 %
Gains from mortgage banking activities 19,939 18,607 7.2 % 95,693 74,538 28.4 %
Less: mortgage loan origination expenses   (11,874 )   (10,745 ) 10.5 %   (52,237 )   (42,487 ) 22.9 %
Mortgage banking segment non-interest income 8,065 7,862 2.6 % 43,456 32,072 35.5 %
 
Wealth management segment non-interest income   133     163   -18.4 %   489     716   -31.7 %
Total non-interest income 9,092 10,376 -12.4 % 52,692 39,178 34.5 %
 
Net interest income and non-interest income 39,114 38,183 2.4 % 167,698 144,940 15.7 %
 
Salaries and benefits 14,391 12,377 16.3 % 51,844 45,963 12.8 %
Occupancy 2,501 2,528 -1.1 % 9,823 10,303 -4.7 %
Depreciation 853 938 -9.1 % 3,403 3,727 -8.7 %
Data processing & communications 1,273 1,543 -17.5 % 5,609 6,449 -13.0 %
Professional fees 1,034 646 60.1 % 4,611 3,122 47.7 %
FDIC insurance assessment 516 401 28.7 % 2,064 1,519 35.9 %
Mortgage loan repurchases and settlements 350 - 100.0 % 397 83 378.3 %
Merger and acquisition expense - 47 -100.0 % 472 5,781 -91.8 %
Other operating expense   4,364     4,547   -4.0 %   18,075     19,281   -6.3 %
Total non-interest expense 25,282 23,027 9.8 % 96,298 96,228 0.1 %
Income before income taxes   13,832     15,156   -8.7 %   71,400     48,712   46.6 %
Provision for income taxes   4,817       4,638     3.9 %   24,066       16,029     50.1 %
NET INCOME $ 9,015     $ 10,518     -14.3 % $ 47,334     $ 32,683     44.8 %
 
Earnings per common share - basic $ 0.27     $ 0.32     -15.1 % $ 1.45     $ 1.01     43.3 %
Earnings per common share - diluted $ 0.27     $ 0.32     -15.3 % $ 1.43     $ 1.00     43.2 %
Weighted-average common shares outstanding - basic   32,844,212       32,531,946     1.0 %   32,744,154       32,392,086     1.1 %
Weighted-average common shares outstanding - diluted   33,379,656       33,005,548     1.1 %   33,208,266       32,824,018     1.2 %
 
 
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
December 31

 

For the Years Ended
December 31

2015   2014 2015   2014
Performance Ratios:
Return on average assets 0.92 % 1.27 % 1.29 % 1.02 %
Return on average equity 8.72 % 11.12 % 11.76 % 8.82 %
Net interest margin (1) 3.25 % 3.48 % 3.37 % 3.59 %
Efficiency ratio (2) 63.90 % 61.27 % 56.95 % 65.52 %
Non-interest income to average assets 0.93 % 1.25 % 1.44 % 1.23 %
Non-interest expense to average assets 2.57 % 2.78 % 2.62 % 3.01 %
 
Mortgage Banking Select Data:
$ of loan applications - George Mason Mortgage $ 1,063,000 $ 922,000 $ 5,211,000 $ 3,976,000
$ of loan applications - Managed Mortgage Company Affiliates   -     -     -     1,400  

Total

1,063,000 922,000 5,211,000 3,977,400
 
Refi % of loans closed - George Mason Mortgage 26 % 28 % 31 % 21 %
Refi % of loans closed- Managed Mortgage Company Affiliates   0 %   0 %   0 %   15 %

Total

26 % 28 % 31 % 21 %
 
$ of loans closed - George Mason Mortgage $ 786,363 $ 778,586 $ 3,602,075 $ 2,998,904
$ of loans closed - Managed Mortgage Company Affiliates   -     -     -     13,034  

Total

786,363 778,586 3,602,075 3,011,938
 
# of loans closed - George Mason Mortgage 2,282 2,213 10,598 8,850
# of loans closed - Managed Mortgage Company Affiliates   -     -     -     30  

Total

2,282 2,213 10,598 8,880
 
$ of loans sold - George Mason Mortgage $ 778,854 $ 768,971 $ 3,534,175 $ 2,964,347
$ of loans sold - Managed Mortgage Company Affiliates   -     -     -     71,504  

Total

778,854 768,971 3,534,175 3,035,851
 
$ of locked commitments - George Mason Mortgage $ 717,127 $ 708,062 $ 3,654,604 $ 2,982,916
$ locked commitments at period end - George Mason Mortgage $ 247,448 $ 194,919
$ of loans held for sale at period end - George Mason Mortgage $ 337,221 $ 269,319
Realized gain on sales and fees as a % of loan sold (Gain on sale margin) (3) 2.71 % 2.54 % 2.60 % 2.40 %
Net realized gains as a % of realized gains (4) 43.79 % 44.95 % 43.19 % 40.29 %
 
Asset Quality Data:
Net charge-offs (recoveries) to average loans receivable, net of fees -0.07 % 0.06 %
Total nonaccrual loans $ 520 $ 4,497
Real estate owned $ 253 $ -
Nonperforming loans to loans receivable, net of fees 0.02 % 0.17 %
Nonperforming loans to total assets 0.01 % 0.13 %
Nonperforming assets to total assets 0.02 % 0.13 %
Total loans receivable past due 30 to 89 days $ 938 $ 786
Total loans receivable past due 90 days or more $ - $ -
Allowance for loan losses to loans receivable, net of fees 1.04 % 1.10 %
Allowance for loan losses to nonperforming loans 6100.58 % 628.75 %
 
Capital Ratios:
Common equity tier 1 capital 9.86 % N/A
Tier 1 risk-based capital 10.52 % 10.89 %
Total risk-based capital 11.37 % 11.78 %
Leverage capital ratio 10.18 % 10.81 %
Book value per common share $ 12.76 $ 11.76
Tangible book value per common share (5) $ 11.63 $ 10.60
Common shares outstanding 32,373 32,078
 

(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 34% for 2015 and 33% for 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
Mortgage Revenue Recognition Impact of SAB 109 (Written Loan Commitments Recorded at Fair Value Through Earnings)
For the Three Months and Years Ended December 31, 2015 and 2014
(Dollars in thousands, except share and per share data)
(Unaudited)
 
 

For the Three Months Ended
December 31

   

For the Years Ended
December 31

 
2015   2014 % Change 2015   2014 % Change

Net Gains from Mortgage Banking Activities **(see note below):

As Reported

Fair Value of LCs / Unrealized Gains Recognized @ LC date $ 19,939 $ 18,607 7.16 % $ 95,693 $ 74,538 28.38 %
Loan origination expenses recognized @ Loan Sale Date   11,874     10,745   10.51 %   52,237     42,487   22.95 %
Reported Net Gains from Mortgage Banking Activities   8,065     7,862   2.58 %   43,456     32,051   35.58 %
 

As Adjusted

Realized Gains Recognized @ Loan Sale Date 21,125 19,517 8.24 % 91,945 71,150 29.23 %
Loan origination expenses recognized @ Loan Sale Date   11,874     10,745   10.51 %   52,237     42,487   22.95 %
Adjusted Net Gains from Mortgage Banking Activities   9,251     8,772   5.46 %   39,708     28,663   38.53 %
 

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

Increase/(Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109 $ (1,186 ) $ (910 ) 30.33 % $ 3,748   $ 3,388   10.63 %
 
 

Net Income Reconciliation:

Reported Net Income $ 9,015 $ 10,518 -14.29 % $ 47,334 $ 32,683 44.83 %
After-tax litigation settlement (less associated legal expenses) - - 0.00 %

 

(1,592 ) - -100.00 %
After-tax Merger and Acquisition Expense   -     31   -100.00 %

 

314     3,867   -91.89 %
Adjusted Net Income $ 9,015 $ 10,549 -14.54 % $ 46,056 $ 36,550 26.01 %
After-tax Net Increase / (Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109   (765 )   (587 ) 30.33 %   2,417     2,185   10.63 %
Operating Net Income $ 9,780   $ 11,136   -12.18 %   43,639   $ 34,365   26.99 %
 
 

Earnings per Share (EPS) Reconciliation:

Reported Net Income $ 0.27 $ 0.32 -15.25 % $ 1.43 $ 1.00 43.15 %
After-tax litigation settlement (less associated legal expenses) - - 100.00 % (0.05 ) - 100.00 %
After-tax Merger and Acquisition Expense   -       -   0.00 %     0.01     0.12     -91.99 %
Adjusted Net Income   0.27     0.32   -15.50 %   1.39     1.12   23.44 %
After-tax Net Increase / (Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109   (0.02 )   (0.02 ) 23.25 %   0.07     0.07   9.35 %
Operating Net Income $ 0.29   $ 0.34   -13.46 % $ 1.32   $ 1.05   26.47 %
 
 

Performance Ratios (adjusted for change in unrealized mortgage banking gains):

Return on average assets 1.00 % 1.34 % 1.19 % 1.08 %
Return on average equity 9.46 % 11.78 % 10.84 % 9.28 %
Efficiency ratio 62.04 % 59.83 % 58.24 % 67.06 %
Non-interest income to average assets 1.05 % 1.36 % 1.33 % 1.12 %
 
**
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 (ASC 310-20, formerly 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
For the Three Months and Years Ended December 31, 2015 and 2014
(Dollars in thousands)
(Unaudited)
 
  For the Three Months Ended   For the Years Ended
December 31, 2015   December 31, 2014 December 31, 2015   December 31, 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 $ 358,711 3.32 % $ 341,186 3.71 % $ 345,486 3.66 % $ 299,408 4.23 %
Real estate - commercial 1,361,134 4.27 % 1,209,418 4.52 % 1,305,202 4.37 % 1,182,306 4.45 %
Real estate - construction 661,665 4.59 % 423,666 5.05 % 554,527 4.67 % 414,248 5.03 %
Real estate - residential 423,533 3.65 % 377,226 3.82 % 405,517 3.73 % 340,150 3.89 %
Home equity lines 153,366 3.10 % 128,384 3.44 % 143,180 3.17 % 120,002 3.63 %
Consumer   4,739   5.44 %   4,936   5.70 %   4,819   5.64 %   5,307   5.74 %
Total loans   2,963,148   4.08 %   2,484,816   4.34 %   2,758,731   4.18 %   2,361,421   4.42 %
 
Loans held for sale 339,793 3.87 % 278,549 4.09 % 344,501 3.85 % 288,299 4.22 %
Investment securities - available-for-sale (1) 406,162 3.53 % 320,753 3.96 % 348,449 3.71 % 327,823 3.96 %
Investment securities - held-to-maturity 3,840 1.19 % 5,773 2.32 % 3,903 1.62 % 6,599 2.20 %
Other investments 16,774 3.56 % 14,563 4.48 % 14,259 4.22 % 14,921 3.85 %
Federal funds sold   45,307   0.25 %   65,322   0.26 %   41,167   0.22 %   40,323   0.23 %
Total interest-earning assets 3,775,024 3.95 % 3,169,776 4.19 % 3,511,010 4.06 % 3,039,386 4.29 %
 
Non-interest earning assets:
Cash and due from banks 22,226 19,902 21,069 23,917
Premises and equipment, net 25,498 25,395 25,191 25,672
Goodwill and intangibles, net 36,662 37,226 36,943 32,813
Accrued interest and other assets 102,977 96,392 104,991 104,521
Allowance for loan losses (31,515 ) (29,645 ) (30,346 ) (29,749 )
       
TOTAL ASSETS $ 3,930,872   $ 3,319,046   $ 3,668,858   $ 3,196,560  
 
Interest-bearing liabilities:
Interest checking $ 438,527 0.48 % $ 425,298 0.50 % $ 430,276 0.49 % $ 428,030 0.51 %
Money markets 466,452 0.36 % 367,501 0.33 % 411,369 0.34 % 335,785 0.31 %
Statement savings 285,257 0.40 % 252,195 0.26 % 275,567 0.36 % 252,832 0.27 %
Certificates of deposit   1,152,897   1.11 %   895,821   1.04 %   1,095,319   1.07 %   834,137   1.00 %
Total interest-bearing deposits   2,343,133   0.76 %   1,940,815   0.69 %   2,212,531   0.73 %   1,850,784   0.66 %
 
Other borrowed funds   470,416   1.82 %   384,453   2.32 %   394,536   2.00 %   387,394   2.30 %
Total interest-bearing liabilities 2,813,549 0.93 % 2,325,268 0.96 % 2,607,067 0.92 % 2,238,178 0.95 %
 
Noninterest-bearing liabilities:
Noninterest-bearing deposits 660,236 580,720 618,988 553,949
Other liabilities 43,357 34,837 40,264 33,989
 
Shareholders' equity 413,730 378,221 402,539 370,444
       
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 3,930,872   $ 3,319,046   $ 3,668,858   $ 3,196,560  
 
NET INTEREST MARGIN (1) 3.25 % 3.48 % 3.37 % 3.59 %
 

(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 34% for 2015 and 33% for 2014.
 
 
Table 6.
 
Cardinal Financial Corporation and Subsidiaries
Segment Reporting
(Dollars in thousands, as Reported and Non-GAAP Reconciliation)
(Unaudited)
 
 

Commercial
Banking

 

Mortgage
Banking

 

Wealth
Management

  Other  

Intersegment
Elimination

  Consolidated
At and for the Three Months Ended December 31, 2015:
Net interest income $ 30,042 $ 619 $ - $ (190 ) $ - $ 30,471
Non-interest income 963 8,115 134 (120 ) - 9,092
Non-interest expense   15,734     8,589     103   856     -     25,282  

Net income (loss) before provision and taxes

15,271

145

31

(1,166 )

-

14,281
Provision for loan losses 449 - - - - 449
Provision for income taxes   5,238     (19 )   11   (413 )   -     4,817  
Net income (loss) $ 9,584   $ 164   $ 20 $ (753 ) $ -   $ 9,015  
Increase/(decrease) in unrealized gains on mortgage banking activities (SAB 109)

-

1,186

-

-

-

1,186
Change in provision for income taxes associated with SAB 109   -     (421 )   -   -     -     (421 )
Operating net income (loss) $ 9,584   $ 929   $ 20 $ (753 ) $ -   $ 9,780  
 
Average Assets $ 3,866,407 $ 351,129 $ 2,459 $ 408,350 $ (697,473 ) $ 3,930,872
 
 
At and for the Three Months Ended December 31, 2014:
Net interest income $ 26,742 $ 642 $ - $ (180 ) $ - $ 27,204
Non-interest income 2,253 7,869 152 102 - 10,376
Non-interest expense   13,952     7,268     108   1,699     -     23,027  
Net income (loss) before provision and taxes 15,043

1,243

44

(1,777 )

-

14,553
Provision for loan losses (603 ) - - - - (603 )
Provision for income taxes   4,834     481     15   (692 )   -     4,638  
Net income (loss) $ 10,812   $ 762   $ 29 $ (1,085 ) $ -   $ 10,518  
Add: merger & acquisition (M&A) expense included in non-interest expense 47 - - - - 47
Increase/(decrease) in unrealized gains on mortgage banking activities (SAB 109)

-

910

-

-

-

910
Change in provision for income taxes associated with M&A expense and SAB 109   (16 )   (323 )   -   -     -     (339 )
Operating net income (loss) $ 10,843   $ 1,349   $ 29 $ (1,085 ) $ -   $ 11,136  
 
Average Assets $ 3,265,003 $ 286,446 $ 2,442 $ 386,661 $ (621,506 ) $ 3,319,046
 
 
 

Commercial
Banking

Mortgage
Banking

Wealth
Management

Other

Intersegment
Elimination

Consolidated
At and for the Years Ended December 31, 2015:
Net interest income $ 114,674 $ 2,454 $ - $ (734 ) $ - $ 116,394
Non-interest income 5,293 43,700 489 3,210 - 52,692
Non-interest expense   59,956     31,806     432   4,104     -     96,298  
Net income (loss) before provision and taxes 60,011

14,348

57

(1,628 )

-

72,788
Provision for loan losses 1,388 - - - - 1,388
Provision for income taxes   19,448     5,168     20   (570 )   -     24,066  
Net income (loss) $ 39,175   $ 9,180   $ 37 $ (1,058 ) $ -   $ 47,334  
Add: M&A expense included in non-interest expense 472 - - - - 472
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)

-

(3,748 )

-

-

-

(3,748 )
Change in provision for income taxes associated with M&A expense, litigation settlement, and SAB 109   (158 )   1,331     -   858     -     2,030  
Operating net income (loss) $ 39,489   $ 6,763   $ 37 $ (2,650 ) $ -   $ 43,638  
 
Average Assets $ 3,604,942 $ 357,145 $ 2,429 $ 412,559 $ (708,217 ) $ 3,668,858
 
 
At and for the Years Ended December 31, 2014:
Net interest income $ 105,584 $ 2,818 $ - $ (702 ) $ - $ 107,700
Non-interest income 5,727 32,314 636 501 - 39,178
Non-interest expense   58,315     30,813     428   6,672     -     96,228  
Net income (loss) before provision and taxes 52,996

4,319

208

(6,873 )

-

50,650
Provision for loan losses 1,938 - - - - 1,938
Provision for income taxes   16,707     1,661     73   (2,412 )   -     16,029  
Net income (loss) $ 34,351   $ 2,658   $ 135 $ (4,461 ) $ -   $ 32,683  
Add: M&A expense included in non-interest expense 5,205 - - 576 - 5,781
Increase/(decrease) in unrealized gains on mortgage banking activities (SAB 109)

-

(3,388 )

-

-

-

(3,388 )
Change in provision for income taxes associated with M&A expense and SAB 109   (1,723 )   1,203     -   (191 )   -     (711 )
Operating net income (loss) $ 37,833   $ 473   $ 135 $ (4,076 ) $ -   $ 34,365  
 
Average Assets $ 3,097,228 $ 299,535 $ 2,370 $ 386,084 $ (588,657 ) $ 3,196,560
 
 
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)
 
  12/31/15   9/30/15   6/30/15   3/31/15   12/31/14   09/30/14   06/30/14   03/31/14   12/31/13

For the Three Months Ended:

Applications $ 1,063,000 $ 1,149,000 $ 1,403,000 $ 1,595,000 $ 922,000 $ 973,000 $ 1,120,000 $ 960,600 $ 886,000
Loans closed 786,363 885,715 1,086,264 843,734 778,586 826,786 842,089 551,443 797,319
Loans sold 778,854 983,355 923,406 848,559 768,971 889,549 743,871 561,956 758,355
 

At Period End:

Locked Pipeline $ 247,448 $ 316,684 $ 363,613 $ 449,865 $ 194,919 $ 265,443 $ 331,092 $ 327,243 $ 210,907
Loans Held for Sale 337,221 329,712 427,351 264,494 269,319 259,703 322,466 224,248 234,761
SAB 109 Total Unrealized Gains Recognized 16,571 17,757 20,485 19,510 12,823 13,734 17,094 13,084 9,436
Change in Unrealized Gains (1,186 ) (2,728 ) 975 6,687 (910 ) (3,360 ) 4,010 3,648 (2,286 )
Change in After-tax Income (765 ) (1,760 ) 629 4,313 (587 ) (2,167 ) 2,586 2,353 (1,474 )
 
REPORTED NET INCOME $ 164 $ 631 $ 2,412 $ 5,974 $ 762 $ (76 ) $ 2,139 $ (167 ) $ (1,601 )
OPERATING NET INCOME 929 2,391 1,783 1,661 1,349 2,091 (447 ) (2,520 ) (127 )
 

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