Cardinal Announces Fourth Quarter 2014 Earnings

TYSONS CORNER, Va.--()--Cardinal Financial Corporation (NASDAQ: CFNL) (the “Company”) today reported a 90% increase in reported earnings to $10.5 million, or $0.32 per diluted share, for the quarterly period ended December 31, 2014, compared to reported earnings of $5.5 million, or $0.18 per diluted share, for the fourth quarter of 2013. For the calendar year of 2014, reported earnings increased 28% to $32.7 million, or $1.00 per diluted share. This compares to reported earnings of $25.5 million, or $0.82 per diluted share, for 2013.

Selected Highlights

  • Operating net income (a non-GAAP measure) increased 56% to $11.1 million, or $0.34 per share, for the current quarter versus $7.1 million, or $0.23 per share, for the year ago quarter. Operating net income for the fourth quarter of 2014 excludes $31,000 of after-tax expenses related to acquisitions and eliminates a $587,000 after-tax decrease in unrealized gains from recognizing revenue on forward commitments to sell mortgages. Operating net income for the year ago quarter excludes $106,000 of after-tax acquisition expenses and a $1.5 million decrease in unrealized gains. Management believes operating net income more accurately reflects the performance of the Company.
  • Loans held for investment grew $92 million during the quarter, or 15% annualized, and $541 million for the 2014 year, or 27%. Excluding acquisitions, loans organically grew by a historical record of $343 million, or 17% for 2014. Asset quality remains excellent. At December 31, 2014, nonperforming loans decreased to $4.5 million, or 0.13% of total assets, and the Company had $0 real estate owned. For 2014, the Company had net loan charge offs of 0.06% of average loans outstanding.
  • Pretax, pre-provision income for the commercial banking segment, before acquisition expenses, was $58.2 million for the 2014 year, versus $50.6 million for the 2013 year, an increase of 15%.
  • The Company’s mortgage banking subsidiary, George Mason Mortgage, continued its solid operating performance from last quarter. It reported a net profit of $762,000 and delivered operating net income of $1.3 million for the current quarter after eliminating the $587,000 after-tax decrease in unrealized gains.
  • 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 9.79% at December 31, 2014.

2014 Acquisitions

On January 16, 2014, the Company completed its acquisition of United Financial Banking Companies (UFBC) and its primary subsidiary, The Business Bank. During 2014, the Company incurred legal and accounting costs, lease termination expenses, employee retention and severance payments related to this acquisition. These expenses totaled $5.8 million pretax. Expenses of approximately $700,000 related to one remaining branch consolidation will be incurred in the first quarter of 2015.

On November 7, 2014, the company acquired a banking office in Gainesville, Va. with approximately $60 million in deposits. Costs incurred to consummate this transaction and to consolidate the office were immaterial.

Review of Balance Sheet

At December 31, 2014, total assets of the Company were $3.40 billion, an increase of 17% from total assets of $2.89 billion at December 31, 2013. Loans held for investment grew to $2.58 billion versus $2.04 billion a year ago. Excluding acquired loans, organic growth was approximately $343 million, or 17%. During the most recent quarter, the Company had loans held for investment growth of $92 million, or approximately 15% annualized.

Loans held for sale decreased to $315 million at December 31, 2014 compared to $374 million at December 31, 2013. The investment securities portfolio also declined modestly to $348 million from $360 million a year ago. Deposit balances increased $476 million to $2.54 billion from $2.06 billion for these same periods, respectively. Non-interest bearing demand deposit accounts increased $138 million to $572 million, which represented 23% of total deposits. Other borrowed funds decreased to $438 million from $475 million.

Net Interest Income

The Company’s net interest income increased 14%, to $27.2 million from $23.8 million, for the three month periods ended December 31, 2014 and 2013, respectively. For the comparable twelve month year to date periods of 2014 and 2013, net interest income increased 17%, to $107.7 million from $92.3 million. The Company’s tax equivalent net interest margin was 3.48% for the current quarter and 3.59% for the year versus 3.65% and 3.52% for the same respective periods of last year.

Comparing the current quarter to the same quarter of 2013, the average balance of loans held for sale decreased $7 million to $279 million, and the average loans held for investment balances increased $522 million to $2.48 billion. The average balance of investments and fed funds sold increased $10 million to $406 million. The yield on total interest earning assets decreased to 4.19% from 4.45%. Over this same period, average total deposit balances increased $432 million to $2.52 billion, and the average balance of other borrowed funds increased $80 million to $384 million. The average cost of interest bearing liabilities decreased to 0.96% from 1.07%.

Commercial Banking Review

For the current quarter ended December 31, 2014, net income for the commercial banking segment was $10.8 million, an increase of 39% from $7.8 million for the year ago quarter. For the comparable annual periods of 2014 and 2013, net income was $34.4 million versus $33.9 million. Before the current year acquisition expenses, year to date net income was $37.8 million. Pre-tax, pre-provision earnings, before M&A expenses, were $58.2 million for 2014, versus $50.6 million for 2013, an increase of 15%.

The allowance for loan losses was 1.10% of loans outstanding at December 31, 2014 versus 1.37% at December 31, 2013. This ratio decrease from a year ago is the result of improving credit quality and the addition of acquired loans from UFBC that were recorded at fair value with no allowance. The Company’s nonperforming assets were 0.13% of total assets at December 31, 2014 compared to 0.19% at September 30, 2014. For the year, net charge offs were a modest 0.06% of average loans outstanding.

Non-interest income was $2.3 million for the current quarter and $5.7 million for the year to date period ended December 31, 2014, compared to $1.2 million for the year ago quarter and $3.8 million for the 2013 year. Loan service charges were $1.0 million for the current quarter and $2.0 million for 2014, versus $590,000 and $1.4 million for the same periods of 2013. A prepayment penalty of $484,000 was received in the current quarter. Securities gains totaled $645,000 for the current quarter and $1.7 million for the 2014 year, versus loss of $32,000 and a gain of $68,000 for the same year ago periods.

Non-interest expense was $14.0 million for the current quarter versus $12.5 million for the prior year quarter. The bank’s efficiency ratio was 48.1% for the quarter ended December 31, 2014 compared to 51.4% for the same period of 2013. Approximately $208,000 of the increase from the year ago quarter is attributable to expenses associated with net acquired office growth in 2014. The Company also incurred $196,000 of intangible expense amortization as a result of these acquisitions. Another $314,000 of the expense increase resulted from the Company’s recent addition of two de novo banking offices. Current quarter incentive accruals were $700,000 higher than the year ago quarter.

Mortgage Banking Review

For the current quarter ended December 31, 2014, the mortgage banking segment reported a net profit of $762,000, and it delivered operating net income of $1.3 million, one of its most profitable quarters since refinance activity decreased over a year ago. Operating net income (a non-GAAP measure) excludes the impact of the Staff Accounting Bulletin (“SAB”) 109 accounting requirement to record the fair value of locked mortgage loan commitments. Comparable quarterly and annual results are shown below.

         

Q4 2014

Q4 2013

FY 2014

FY 2013

Mortgage Banking: (in 000's)

Reported Net Income $762 ($1,601 ) $2,658 ($5,215 )
Reverse Impact of SAB 109 587   1,474     (2,185 )   9,759  
Operating Net Income $1,349   ($127 )   $473     $4,544  
 

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

During the fourth quarter of 2014, closed loans were $779 million and loans sold to investors totaled $769 million, versus $797 million and $758 million, respectively, for the same quarter of 2013. Although production is similar to prior year levels, net realized gain on sales and other fees were $7.9 million for the current quarter versus $4.8 million for the same period a year ago. The increase of 65% is primarily the result of an improving gain on sale margin.

Loan applications totaled $922 million during the fourth quarter of 2014, down slightly from $973 million for the prior quarter ended September 30, 2014. October, November and December applications reflect typical seasonality and totaled $382 million, $279 million and $261 million, respectively. Purchase money represented 72% of total volume in the current quarter versus 80% last quarter.

Management’s actions have led to overall operating expense reductions of $993,000 in the current quarter when compared to the year ago quarter. Operating non-interest expenses were $9.4 million versus $10.4 million for the fourth quarter of 2014 and 2013, respectively. For these periods, operating expenses include $2.2 million and $2.4 million of fixed salary expenses associated with loan closings that are reported as contra-revenue under GAAP. Two additional office consolidation opportunities have recently been completed which will lower rent and other expenses by $75,000 per month beginning early 2015.

Capital Ratios

The Company remains in excess of regulatory standards of a well capitalized bank. The tier 1 capital ratio is 10.89% and the total risk based capital ratio is 11.78%.

MANAGEMENT COMMENTS

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

“I am extremely pleased with how our Company finished 2014. Performance for the year reflects solid earnings, record loan growth and ongoing pristine credit quality. During the most recent quarter, the work of our commercial lenders was again exceptional resulting in total growth exceeding $90 million, and our retail team and back office worked together to seamlessly assimilate the Gainesville office acquisition.

“Our mortgage banking company delivered another solid quarter during what continues to be a challenging period for the mortgage industry. The continued execution of our business plan has led to increasing margins and reduced expenses. Although refinance activity has increased recently, we remained focused on building our purchase money relationships and continuing to increase our market share in the communities we serve. We were very proud with the recent announcement of George Mason Mortgage's top market share in the Washington Metropolitan Statistical Area for purchase money mortgages.

“As always, 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 building and maintaining a strong financial services company for our shareholders, employees, clients and the communities we serve.”

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 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, 2013 and other reports filed with and furnished to the Securities and Exchange Commission.

About Cardinal Financial Corporation: Cardinal Financial Corporation, a financial holding company headquartered in Tysons Corner, Virginia with assets of $3.40 billion at December 31, 2014, 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)
 
 
% Change
December 31, 2014 December 31, 2013 Current Year
(Unaudited)
Cash and due from banks $ 20,298 $ 18,285 11.0 %
Federal funds sold 17,891 10,924 63.8 %
 
Investment securities available-for-sale 339,131 349,319 -2.9 %
Investment securities held-to-maturity 4,024 6,477 -37.9 %
Investment securities – trading   5,067     3,890 30.3 %
Total investment securities 348,222 359,686 -3.2 %
 
Other investments 15,941 19,068 -16.4 %
Loans held for sale 315,323 373,993 -15.7 %
 
Loans receivable, net of fees:
Commercial and industrial 354,693 219,411 61.7 %
Real estate - commercial 1,254,270 1,045,346 20.0 %
Real estate - construction 432,171 361,102 19.7 %
Real estate - residential 403,744 300,336 34.4 %
Home equity lines 131,156 109,815 19.4 %
Consumer   5,080     4,158 22.2 %
Total loans, net of fees 2,581,114 2,040,168 26.5 %
Allowance for loan losses   (28,275 )   (27,864 ) 1.5 %
Loans receivable, net 2,552,839 2,012,304 26.9 %
 
Premises and equipment, net 25,253 20,389 23.9 %
Goodwill and intangibles, net 37,312 10,144 267.8 %
Bank-owned life insurance 32,546 32,063 1.5 %
Other assets 33,509 37,374 -10.3 %
     
TOTAL ASSETS $ 3,399,134   $ 2,894,230 17.4 %
 
Non-interest bearing deposits $ 572,071 $ 433,749 31.9 %
Interest checking 422,291 398,136 6.1 %
Money markets 372,591 266,316 39.9 %
Statement savings 254,722 209,391 21.6 %
Certificates of deposit 603,237 450,031 34.0 %
Brokered certificates of deposit   310,418     301,236 3.0 %
Total deposits 2,535,330 2,058,859 23.1 %
 
Other borrowed funds 437,995 475,232 -7.8 %
Mortgage funding checks 19,469 6,528 198.2 %
Escrow liabilities 2,035 1,572 29.5 %
Other liabilities 26,984 31,507 -14.4 %
 
Shareholders' equity   377,321     320,532 17.7 %
 
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 3,399,134   $ 2,894,230 17.4 %
 
             
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 Years Ended
December 31 December 31
2014 2013 % Change 2014 2013 % Change
 
Net interest income $ 27,204 $ 23,800 14.3 % $ 107,700 $ 92,345 16.6 %
Provision for loan losses   603   (400 ) -250.8 %   (1,938 )   32   -6156.3 %
Net interest income after provision for loan losses 27,807 23,400 18.8 % 105,762 92,377 14.5 %
 
Non-interest income:
Service charges on deposit accounts 529 494 7.1 % 2,170 1,992 8.9 %
Loan fees 1,044 590 76.9 % 1,995 1,447 37.9 %
Income from bank owned life insurance 127 105 21.0 % 483 411 17.5 %
Net realized gains on investment securities 645 (32 ) -2115.6 % 1,691 68 2386.8 %
Gain (loss) on sale of real estate - - 0.0 % - 30 -100.0 %
Other non-interest income (loss)   6   3   100.0 %   51     43   18.6 %
Commercial banking & other segment non-interest income 2,351 1,160 102.7 % 6,390 3,991 60.1 %
 
Title insurance & other income - 70 -100.0 % - 987 -100.0 %
Management fee income - 498 -100.0 % 21 1,981 -98.9 %
Gains from mortgage banking activities 18,607 14,711 26.5 % 74,538 79,675 -6.4 %
Less: mortgage loan origination expenses   (10,745 )   (10,482 ) 2.5 %   (42,487 )   (58,060 ) -26.8 %
Mortgage banking segment non-interest income 7,862 4,797 63.9 % 32,072 24,583 30.5 %
 
Wealth management segment non-interest income   163   194   -16.0 %   716     1,337   -46.4 %
Total non-interest income 10,376 6,151 68.7 % 39,178 29,911 31.0 %
 
Net interest income and noninterest income 38,183 29,551 29.2 % 144,940 122,288 18.5 %
 
Salaries and benefits 12,377 11,156 10.9 % 45,963 41,523 10.7 %
Occupancy 2,528 2,242 12.8 % 10,303 8,389 22.8 %
Depreciation 938 865 8.4 % 3,727 3,196 16.6 %
Data processing & communications 1,543 1,239 24.5 % 6,449 4,720 36.6 %
Professional fees 646 518 24.7 % 3,122 3,765 -17.1 %
FDIC insurance assessment 401 342 17.3 % 1,519 1,391 9.2 %
Impairment of pooled trust preferred securities - 300 -100.0 % - 300 -100.0 %
Mortgage loan repurchases and settlements - - 0.0 % 83 (49 ) -269.4 %
Merger and acquisition expense 47 160 -70.6 % 5,781 464 100.0 %
Other operating expense   4,547   4,804   -5.3 %   19,281     20,904   -7.8 %
Total non-interest expense 23,027 21,626 6.5 % 96,228 84,603 13.7 %
Income before income taxes   15,156   7,925   91.2 %   48,712     37,685   29.3 %
Provision for income taxes   4,638       2,379     95.0 %   16,029       12,175     31.7 %
NET INCOME $ 10,518     $ 5,546     89.7 % $ 32,683     $ 25,510     28.1 %
 
Earnings per common share - basic $ 0.32     $ 0.18     79.2 % $ 1.01     $ 0.83     21.4 %
Earnings per common share - diluted $ 0.32     $ 0.18     79.0 % $ 1.00     $ 0.82     21.3 %
Weighted-average common shares outstanding - basic   32,531,946       30,747,472     5.8 %   32,392,086       30,686,980     5.6 %
Weighted-average common shares outstanding - diluted   33,005,548       31,144,055     6.0 %   32,824,018       31,076,781     5.6 %
 
         
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 Years Ended
December 31 December 31
2014 2013 2014 2013
Performance Ratios:
Return on average assets 1.27% 0.80% 1.02% 0.92%
Return on average equity 11.12% 6.83% 8.82% 7.96%
Net interest margin (1) 3.48% 3.65% 3.59% 3.52%
Efficiency ratio (2) 61.27% 72.20% 65.52% 69.20%
Non-interest income to average assets 1.25% 0.89% 1.23% 1.07%
Non-interest expense to average assets 2.78% 3.14% 3.01% 3.04%
 
Mortgage Banking Select Data:
$ of loan applications - George Mason Mortgage $ 922,000 $ 886,000 $ 3,976,000 $ 5,137,000
$ of loan applications - Managed Mortgage Company Affiliates   -   236,000   1,400   1,767,000
Total 922,000 1,122,000 3,977,400 6,904,000
 
Refi % of loans closed - George Mason Mortgage 28% 23% 21% 33%
Refi % of loans closed- Managed Mortgage Company Affiliates   0%   18%   15%   29%
Total 28% 22% 21% 32%
 
$ of loans closed - George Mason Mortgage $ 778,586 $ 797,319 $ 2,998,904 $ 4,201,335
$ of loans closed - Managed Mortgage Company Affiliates   -   268,833   13,034   1,578,656
Total 778,586 1,066,152 3,011,938 5,779,991
 
# of loans closed - George Mason Mortgage 2,213 2,436 8,850 12,420
# of loans closed - Managed Mortgage Company Affiliates   -   711   30   4,096
Total 2,213 3,147 8,880 16,516
 
$ of loans sold - George Mason Mortgage $ 768,971 $ 758,355 $ 2,964,347 $ 4,499,490
$ of loans sold - Managed Mortgage Company Affiliates   -   261,844   71,504   1,711,050
Total 768,971 1,020,199 3,035,851 6,210,540
 
$ of locked commitments - George Mason Mortgage $ 708,062 $ 657,250 $ 2,982,916 $ 3,930,540
$ locked commitments at period end - George Mason Mortgage $ 194,919 $ 210,907
$ of loans held for sale at period end - George Mason Mortgage $ 269,319 $ 234,761
Realized gain on sales and fees as a % of loan sold (3) 2.54% 2.24% 2.40% 2.11%
Net realized gains as a % of realized gains (Gain on sale margin) (4) 44.95% 38.33% 40.29% 38.76%
 
Asset Quality Data:
Net charge-offs (recoveries) to average loans receivable, net of fees 0.06% -0.03%
Total nonaccrual loans $ 4,497 $ 2,314
Real estate owned $ - $ -
Nonperforming loans to loans receivable, net of fees 0.17% 0.11%
Nonperforming loans to total assets 0.13% 0.08%
Nonperforming assets to total assets 0.13% 0.08%
Total loans receivable past due 30 to 89 days $ 786 $ 507
Total loans receivable past due 90 days or more $ - $ -
Allowance for loan losses to loans receivable, net of fees 1.10% 1.37%
Allowance for loan losses to nonperforming loans 628.75% 1204.15%
 
Capital Ratios:
Tier 1 risk-based capital 10.89% 11.85%
Total risk-based capital 11.78% 12.89%
Leverage capital ratio 10.81% 11.70%
Book value per common share $ 11.76 $ 10.57
Tangible book value per common share (5) $ 10.60 $ 10.23
Common shares outstanding 32,078 30,333
 
 

(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 2014 and 2013.

(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, 2014 and 2013
(Dollars in thousands, except share and per share data)
(Unaudited)
 
For the Three Months Ended For the Years Ended
December 31 December 31
2014 2013 % Change 2014 2013 % Change  

Net Gains from Mortgage Banking Activities: As Reported

Fair Value of LCs / Unrealized Gains Recognized @ LC date **(see note below) $ 18,607 $ 14,711 26.48 % $ 74,538 $ 79,675 -6.45 %
Loan origination expenses recognized @ Loan Sale Date   10,745     10,482   2.51 %   42,487     58,060   -26.82 %
Reported Net Gains from Mortgage Banking Activities   7,862     4,229   85.91 %   32,051     21,615   48.28 %
 

As Adjusted

Realized Gains Recognized @ Loan Sale Date 19,517 16,997 14.83 % 71,150 94,805 -24.95 %
Loan origination expenses recognized @ Loan Sale Date   10,745     10,482   2.51 %   42,487     58,060   -26.82 %
Adjusted Net Gains from Mortgage Banking Activities   8,772     6,515   34.64 %   28,663     36,745   -21.99 %
 

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

Increase/(Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109 $ (910 ) $ (2,286 ) -60.19 % $ 3,388   $ (15,130 ) -122.39 %
 
 

Net Income Reconciliation:

Reported Net Income $ 10,518 $ 5,546 89.65 % $ 32,683 $ 25,510 28.12 %
Aftertax Merger and Acquisition Expense   31     106   -70.35 %   3,867     310   1147.92 %
Adjusted Net Income $ 10,549 $ 5,652 86.65 % $ 36,550 $ 25,820 41.56 %
Aftertax Net Increase / (Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB109   (587 )   (1,474 ) -60.19 %   2,185     (9,759 ) -122.39 %
Operating Net Income $ 11,136   $ 7,126   56.27 % $ 34,365   $ 35,579   -3.41 %
 
 

Earnings per Share (EPS) Reconciliation:

Reported Net Income $ 0.32 $ 0.18 78.95 % $ 1.00 $ 0.82 21.30 %
Aftertax Merger and Acquisition Expense   0.00     0.00  

0.00

%

  0.12     0.01  

1,081.49

%

Adjusted Net Income   0.32     0.18   76.12 %

 

1.12     0.83   35.23 %
Aftertax Net Increase / (Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB109   (0.02 )   (0.05 ) -64.55 %   0.07     (0.31 ) -121.20 %
Operating Net Income $ 0.34   $ 0.23   47.02 % $ 1.05   $ 1.14   -8.55 %
 
 

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

Return on average assets 1.34 % 1.03 % 1.08 % 1.28 %
Return on average equity 11.78 % 8.78 % 9.28 % 11.10 %
Efficiency ratio 59.83 % 67.08 % 67.06 % 61.58 %
Non-interest income to average assets 1.36 % 1.22 % 1.12 % 1.62 %
 
**
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
For the Three Months and Years Ended December 31, 2014 and 2013
(Dollars in thousands)
(Unaudited)
 
For the Three Months Ended For the Years Ended
December 31, 2014 December 31, 2013 December 31, 2014 December 31, 2013
Average Average Average Average Average Average Average Average
Balance Yield Balance Yield Balance Yield Balance Yield
Interest-earning assets:
Loans receivable, net of fees (1)
Commercial and industrial $ 341,186 3.71 % $ 218,324 4.24 % $ 299,408 4.23 % $ 215,263 4.09 %
Real estate - commercial 1,209,418 4.52 % 1,000,286 4.52 % 1,182,306 4.45 % 911,493 4.71 %
Real estate - construction 423,666 5.05 % 343,793 5.17 % 414,248 5.03 % 349,913 5.24 %
Real estate - residential 377,226 3.82 % 286,403 4.22 % 340,150 3.89 % 251,980 4.37 %
Home equity lines 128,384 3.44 % 110,333 3.65 % 120,002 3.63 % 112,756 3.68 %
Consumer   4,936   5.70 %   3,853   5.56 %   5,307   5.74 %   3,333   5.46 %
Total loans   2,484,816   4.34 %   1,962,992   4.57 %   2,361,421   4.42 %   1,844,738   4.67 %
 
Loans held for sale 278,549 4.09 % 285,466 4.82 % 288,299 4.22 % 406,673 4.11 %
Investment securities - available-for-sale (1) 320,753 3.96 % 337,097 4.03 % 327,823 3.96 % 276,483 4.16 %
Investment securities - held-to-maturity 5,773 2.32 % 9,694 1.70 % 6,599 2.20 % 10,407 1.82 %
Other investments 14,563 4.48 % 13,728 2.68 % 14,921 3.85 % 13,473 2.47 %
Federal funds sold   65,322   0.26 %   35,880   0.25 %   40,323   0.23 %   106,192   0.25 %
Total interest-earning assets 3,169,776 4.19 % 2,644,857 4.45 % 3,039,386 4.29 % 2,657,966 4.33 %
 
Non-interest earning assets:
Cash and due from banks 19,902 18,159 23,917 17,122
Premises and equipment, net 25,395 19,995 25,672 19,701
Goodwill and intangibles, net 37,226 10,144 32,813 10,199
Accrued interest and other assets 96,392 92,763 104,521 105,657
Allowance for loan losses (29,645 ) (27,565 ) (29,749 ) (27,397 )
 
TOTAL ASSETS $ 3,319,046   $ 2,758,353   $ 3,196,560   $ 2,783,248  
 
Interest-bearing liabilities:
Interest checking $ 425,298 0.50 % $ 387,340 0.53 % $ 428,030 0.51 % $ 375,193 0.58 %
Money markets 367,501 0.33 % 301,097 0.25 % 335,785 0.31 % 294,466 0.27 %
Statement savings 252,195 0.26 % 214,209 0.27 % 252,832 0.27 % 213,677 0.27 %
Certificates of deposit   895,821   1.04 %   741,677   1.18 %   834,137   1.00 %   825,070   1.14 %
Total interest-bearing deposits   1,940,815   0.69 %   1,644,323   0.74 %   1,850,784   0.66 %   1,708,406   0.76 %
 
Other borrowed funds   384,453   2.32 %   304,069   2.87 %   387,394   2.30 %   293,927   2.98 %
Total interest-bearing liabilities 2,325,268 0.96 % 1,948,392 1.07 % 2,238,178 0.95 % 2,002,333 1.09 %
 
Noninterest-bearing liabilities:
Noninterest-bearing deposits 580,720 444,791 553,949 414,192
Other liabilities 34,837 40,583 33,989 46,171
 
Shareholders' equity 378,221 324,587 370,444 320,552
       
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 3,319,046   $ 2,758,353   $ 3,196,560   $ 2,783,248  
 
NET INTEREST MARGIN (1) 3.48 % 3.65 % 3.59 % 3.52 %
 
(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 2014 and 2013.
 
           
Table 6.
Cardinal Financial Corporation and Subsidiaries
Segment Reporting
(Dollars in thousands, as Reported and Non-GAAP Reconciliation)
(Unaudited)
 
Commercial Mortgage Wealth Intersegment
Banking Banking Management Other Elimination Consolidated
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 expense reported above 47 - - - - 47
Increase/(Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109 -

 

910

 

-

 

-

 

-

 

910
Less: provision for income taxes associated with merger & acquisition expense & SAB 109   (16 )   (323 )   -   -     -   (339 )
Operating Net Income $ 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
 
 
At and for the Three Months Ended December 31, 2013:
Net interest income $ 23,153 $ 809 $ - $ (162 ) $ - $ 23,800
Non-interest income 1,237 4,760 194 (27 ) (13 ) 6,151
Non-interest expense   12,537   7,963   108   1,031     (13 )   21,626  
Net income (loss) before provision and taxes

11,853

(2,394

)

86

 

(1,220 )

 

-

 

8,325
Provision for loan losses 400 - - - - 400
Provision for income taxes   3,671   (793 )   30   (529 )   -   2,379  
Net income (loss) $ 7,782 $ (1,601 ) $ 56 $ (691 ) $ - $ 5,546  
Add: merger & acquisition expense reported above 17 - - 143 - 160
Increase/(Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109 -

 

2,286

 

-

 

-

 

-

 

2,286
Less: provision for income taxes associated with merger & acquisition expense & SAB 109   (6 )   (812 )   -   (48 )   -   (865 )
Operating Net Income $ 7,793 $ (127 ) $ 56 $ (596 ) $ - $ 7,127  
 
Average Assets $ 2,756,264 $ 297,443 $ 2,237 $ 325,669 $ (623,260 ) $ 2,758,353
 
 
 
Commercial Mortgage Wealth Intersegment
Banking Banking Management Other Elimination Consolidated
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: merger & acquisition expense reported above 5,205 - - 576 - 5,781
Increase/(Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109 -

 

(3,388

)

-

 

-

 

-

 

(3,388 )
Less: provision for income taxes associated with merger & acquisition expense & SAB 109   (1,723 )   1,203   -   (191 )   -   (711 )
Operating Net Income $ 37,833 $ 473 $ 135 $ (4,076 ) $ - $ 34,365  
 
Average Assets $ 3,097,228 $ 299,535 $ 2,370 $ 386,084 $ (588,657 ) $ 3,196,560
 
 
At and for the Years Ended December 31, 2013:
Net interest income $ 90,563 $ 2,474 $ - $ (692 ) $ - $ 92,345
Non-interest income 3,767 24,760 1,337 85 (38 ) 29,911
Non-interest expense   43,832   35,185   1,580   4,044     (38 )   84,603  
Net income (loss) before provision and taxes 50,498 (7,951

)

(243

)

(4,651 )

 

-

 

37,653
Provision for loan losses (117 ) 85 - - - (32 )
Provision for income taxes   16,734   (2,821 )   (81 )   (1,657 )   -   12,175  
Net income (loss) $ 33,881 $ (5,215 ) $ (162 ) $ (2,994 ) $ - $ 25,510  
Add: merger & acquisition expense reported above 87 - - 377 - 464
Increase/(Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109 -

 

15,130

 

-

 

-

 

-

 

15,130
Less: provision for income taxes associated with merger & acquisition expense & SAB 109   (29 )   (5,371 )   -   (125 )   -   (5,525 )
Operating Net Income $ 33,939 $ 4,544 $ (162 ) $ (2,742 ) $ - $ 35,579  
 
Average Assets $ 2,774,462 $ 419,933 $ 2,321 $ 327,549 $ (741,017 ) $ 2,783,248
 
                 
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)
 
12/31/14 09/30/14 06/30/14 03/31/14 12/31/13 09/30/13 06/30/13 03/31/13 12/31/12

For the Three Months Ended:

Applications $ 922,000 $ 973,000 $ 1,120,000 $ 960,600 $ 886,000 $ 1,077,000 $ 1,691,000 $ 1,483,300 $ 1,413,000
Loans closed 778,586 826,786 842,089 551,443 797,319 927,548 1,393,253 1,083,217 1,271,651
Loans sold 768,971 889,549 743,871 561,956 758,355 1,170,953 1,324,674 1,245,510 1,257,327
 

At Period End:

Locked Pipeline $ 194,919 $ 265,443 $ 331,092 $ 327,243 $ 210,907 $ 350,976 $ 489,000 $ 572,794 $ 481,703
Loans Held for Sale 269,319 259,703 322,466 224,248 234,761 195,797 439,000 370,623 532,916
SAB 109 Total Unrealized Gains Recognized 12,823 13,734 17,094 13,084 9,436 11,722 18,550 19,859 24,566
Change in Unrealized Gains (910 ) (3,360 ) 4,010 3,648 (2,286 ) (6,828 ) (1,309 ) (4,707 ) (2,332 )
Change in Aftertax Income (587 ) (2,167 ) 2,586 2,353 (1,474 ) (4,404 ) (844 ) (3,036 ) (1,505 )
 
REPORTED NET INCOME $ 762 $ (76 ) $ 2,139 $ (167 ) $ (1,601 ) $ (4,851 ) $ 2,383 $ (1,146 ) $ 3,653
OPERATING NET INCOME 1,349 2,091 (447 ) (2,520 ) (127 ) (447 ) 3,227 1,890 5,158
 

Contacts

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

Contacts

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