Cardinal Financial Corporation (NASDAQ: CFNL) (the "Company") today reported that earnings for the quarter ended March 31, 2016 were $13.1 million, compared to $9.0 million for the previous quarter ended December 31, 2015 and $13.7 million for the year ago quarter ended March 31, 2015. Diluted earnings per share were $0.39, $0.27 and $0.42 for these same respective periods.

Selected Highlights
  • Total assets of the Company grew to $4.07 billion, increasing 18% from March 31, 2015.
  • Loans held for investment were $3.10 billion, also increasing 18% from a year ago.
  • Customer deposits, including repurchase agreements, were $2.80 billion, increasing 19% from a year ago.
  • The Company had $0 nonperforming assets and $0 past due loans 90 days or more and still accruing.
  • Net interest margin increased 6 basis points to 3.31% for the first quarter 2016 from 3.25% for the fourth quarter 2015.
  • Purchase money mortgage applications increased 30% to $1.02 billion compared to $787 million in the fourth quarter 2015.
  • Overall mortgage application volume increased 41% in the quarter to $1.50 billion from $1.06 billion in the fourth quarter 2015.

Review of Balance Sheet

At March 31, 2016, total assets of the Company were $4.07 billion, an increase of 18% from total assets of $3.45 billion at March 31, 2015. Average interest earning assets increased to $3.84 billion from $3.23 billion a year ago, and average interest bearing liabilities increased to $2.88 billion from $2.38 billion.

Loans held for investment grew to $3.10 billion at March 31, 2016 versus $2.63 billion a year ago, also an 18% increase. Balances increased $46 million, or 6% annualized, during the first quarter of the year, a period in which the Company historically experiences soft demand. Since year end, C&I loans decreased primarily due to paydowns on existing lines of credit associated with the government contracting division. Also during this period, commercial real estate loan balances increased commensurate with a decrease in real estate construction loan balances as a significant volume of construction lines converted to permanent financing. See the tables at the end of this release for detailed activity on the Company's loans held for investment portfolio. Loans held for sale increased to $365 million at March 31, 2016, compared to $315 million at March 31, 2015, but slightly decreasing from the fourth quarter 2015 balance of $384 million. As noted in the selected highlights, first quarter 2016 mortgage applications increased over the prior quarter but were seasonally affected early in the quarter causing a lower average balance for the quarter and quarter end balance. The Company's investment securities portfolio decreased to $418 million from $424 million at the end of the previous quarter primarily due to the repayment of callable agency bonds.

Over the past year, deposit balances increased $500 million to $3.15 billion from $2.65 billion, an increase of 19%. An increase of $68 million in customer deposits contributed to the decrease in the loan to deposit ratio to 99% at March 31, 2016. Non-interest bearing demand deposit accounts, which represent 22% of total deposits, or $687 million, increased $30 million since December 31, 2015, and $123 million since March 31, 2015. The increase in deposits is due primarily to solid growth in the number of accounts and balances in consumer and business checking and savings accounts.

Net Interest Income

The Company's net interest income increased 12%, to $30.7 million from $27.4 million, for the quarters ended March 31, 2016 and 2015, respectively. For the current quarter, the Company's tax equivalent net interest margin increased to 3.31% versus 3.25% for the prior sequential quarter. Purchase accounting adjustments related to the Company's 2014 acquisition of The Business Bank positively impacted the margin by 0.01% for the current quarter versus having a negative impact of 0.02% last quarter.

The yield on loans held for investment increased 0.02% over the fourth quarter of 2015 to 4.10%. The federal funds interest rate increase as well as new originations during the quarter contributed to the increase. The yield on interest earning assets increased to 3.99% for the first quarter of 2016 versus 3.95% last quarter. For these same respective periods, the Company's total cost of funds increased to 0.77% from 0.76%. The total cost of customer deposits remained at 0.54%. Interest bearing customer deposit costs decreased to 0.72% from 0.73%. In early February, the Company reduced the promotional rate on approximately $230 million of First Choice Checking balances by 0.25%.

Brokered CD cost increased 0.03% as maturing balances were replaced at slightly higher rates. Other borrowed funds, which include instruments that repriced closely to last December's increase in the federal funds target rate, were 0.05% higher than the prior sequential quarter.

Commercial Banking Review

For the quarter ended March 31, 2016, net income for the commercial banking segment (the Bank) was $10.2 million, an increase of 15% from $8.9 million for the first quarter of last year. For the first quarter of 2016, the provision for loan losses was $250,000 versus a provision of $130,000 for the year ago quarter. For the current quarter, there were recoveries from previously charged off loans in excess of current charge offs of 0.06% of average loans outstanding. The allowance for loan losses was 1.04% of loans outstanding at March 31, 2016 versus 1.10% at March 31, 2015. This ratio decrease from a year ago is primarily the result of improving credit quality. The Company had $0 nonperforming assets at March 31, 2016 versus nonperforming assets of 0.06% of total assets at March 31, 2015.

Non-interest income was $1.2 million for the current quarter compared to $1.3 million for the year ago quarter. Increases in deposit fee income and insurance commissions were offset by decreases in loan late charges and other fees. Also impacting the comparative results was a decrease in gains on available for sale securities and other assets from the year ago quarter.

For the first quarter of 2016, non-interest expense was $16.5 million versus $15.7 million for the fourth quarter of 2015, and $15.1 million for the year ago quarter. The efficiency ratio for the Bank was 52.0%, 50.8% and 53.4% for these respective quarters. Expenses in the first quarter reflect normal seasonally higher compensation, payroll tax and benefit expenses, which were $944,000 higher than the previous quarter. These higher expenses were partially offset by a decrease in incentive accruals. Additionally, during the current quarter, the Bank incurred $90,000 in one time charges for sign on bonuses to hire four commercial bankers and a $428,000 severance payment related to a former employee. Weather related utility and snow removal expenses increased occupancy expense by $80,000 from the previous quarter. The Bank announced the July closing of an office in Alexandria, Virginia, and it expects to realize expense savings of approximately $110,000 per quarter starting in the second half of 2016.

Mortgage Banking Review

The Company's mortgage banking subsidiary, George Mason Mortgage (GMM), was extremely active as it accepted over $1.50 billion of loan applications during the quarter. Mortgage refinancing represented 32% of this volume as long term interest rates approached historic lows. For the quarter ended March 31, 2016, GMM reported a net profit of $3.6 million and an operating net loss of $241,000. Operating net income (a non-GAAP measure) excludes the impact of the Staff Accounting Bulletin ("SAB") 109 accounting requirement to record unrealized gains associated with the Company's locked mortgage loan pipeline. Comparable recent quarterly results are shown below.
                     
    Q1 2016   Q4 2015   Q3 2015   Q2 2015   Q1 2015

Mortgage Banking: (in 000's)
                   
Reported Net Income   $3,553   $164   $631   $2,412   $5,974
Reverse Impact of SAB 109   (3,794)   765   1,760   (629)   (4,313)
Operating Net Income   ($241)   $929   $2,391   $1,783   $1,661
         

For the current quarter, GMM reported a slight operating loss due to lower seasonal revenues combined with seasonally higher employee benefit expenses as well as a decreased interest spread on the warehouse line of credit. The net realized gain on sales and other fees, before the impact of SAB 109, was $8.3 million for the three months ended March 31, 2016 versus $9.3 million for the last quarter of 2015. The decrease in revenue realized from loans sold to investors follows the typical pattern that occurs during the winter months. The gain on sale margin was 2.67% for the quarter versus 2.71% last quarter and 2.58% for the year ago quarter. The decrease from last quarter is primarily due to higher refinance volumes which exhibit more competitive loan pricing, offset by a higher percentage of loans sold on a mandatory delivery basis.

Operating expenses were $9.0 million for the most recent quarter compared to $8.6 million last quarter and $7.3 million for the year ago quarter. The sequential quarter expense increase reflects higher beginning of year payroll taxes, 401(k) and other employee benefits, which were $650,000 above last quarter. Implementation of the new TILA/RESPA Integrated Disclosure (TRID) regulations as well as increased production levels affected personnel and production expenses.

Loan applications totaled $1.50 billion during the first quarter of 2016, a significant increase from $1.06 billion last quarter and down slightly from $1.60 billion for the year ago quarter. However, refinance volume currently represented only 32% of total applications this quarter versus 51% for the year ago first quarter, which demonstrates GMM's continued focus on more stable purchase money business.
 
Monthly Mortgage Loan Applications (in millions)
    JAN   FEB   MAR   Total
First Quarter 2016   $333.80   $551.70   $617.80   $1,503.30
Purchase Money %   74%   56%   75%   68%
# of Units   975   1,590   1,837   4,402
    OCT   NOV   DEC   Total
Fourth Quarter 2015   $397.00   $335.40   $331.00   $1,063.40
Purchase Money %   71%   77%   74%   74%
# of Units   1,117   935   953   3,005
       

Parent Company Only Review

For the quarter ended March 31, 2016, Cardinal's parent company reported a net loss of $736,000 versus a net loss of $753,000 for the previous quarter and a net loss of $1.1 million for the year ago quarter, which included legal fees related to a litigation settlement that occurred in the second quarter of 2015. In addition, professional fees were $125,000 greater in the first quarter 2016 compared to the last quarter of 2015 primarily due to increased audit fees. The Company recently announced a change in outside audit firms which will result in a decrease in audit fees of over $400,000 for 2016.

Capital Ratios

All capital ratios of the Company comfortably exceeded the requirements of banking regulators to be considered well-capitalized. Tangible common equity capital (TCE) as a percentage of total assets was 9.39% at March 31, 2016.

MANAGEMENT COMMENTS

Bernard H. Clineburg, Executive Chairman, said:

"I am very pleased with how our Company performed during the first quarter of 2016. We reported near record earnings while our balance sheet and loan portfolio grew 18% from a year ago. Our net interest margin improved from last quarter, and Cardinal Bank's earnings increased 15% over last year's same quarter. Our business development efforts and commitment to the local markets continued to drive new relationships. Credit metrics can't get any better, as we had $0 nonperforming assets and $0 past due loans 90 days or more. We successfully executed upon our deposit gathering strategies to increase our core customer balances by 19%.

"George Mason had very strong activity as applications for loan originations exceeded $1.50 billion, with nearly 70% of volume from 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, 2015 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 $4.07 billion at March 31, 2016, 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 % Change
Current From
  03/31/16     12/31/15   Quarter   09/30/15     06/30/15     03/31/15   Year Ago
 
Cash and due from banks $ 19,379 $ 24,760 -21.7 % $ 18,744 $ 24,186 $ 21,780 -11.0 %
Federal funds sold 41,489 14,577 184.6 % 13,692 14,597 38,675 7.3 %
 
Investment securities available-for-sale 407,980 414,077 -1.5 % 421,214 332,551 314,260 29.8 %
Investment securities held-to-maturity 3,814 3,836 -0.6 % 3,857 3,879 4,019 -5.1 %
Investment securities - trading   6,221     5,881   5.8 %   5,274     5,271     5,453   14.1 %
Total investment securities 418,015 423,794 -1.4 % 430,345 341,701 323,732 29.1 %
 
Other investments 19,411 20,967 -7.4 % 16,111 15,049 15,049 29.0 %
Loans held for sale 365,489 383,768 -4.8 % 377,878 455,557 315,014 16.0 %
 
Loans receivable, net of fees:
Commercial and industrial 363,405 379,414 -4.2 % 347,914 342,079 324,692 11.9 %
Real estate - commercial 1,555,985 1,372,627 13.4 % 1,356,821 1,299,450 1,265,128 23.0 %
Real estate - construction 560,114 694,408 -19.3 % 620,982 571,561 487,678 14.9 %
Real estate - residential 455,952 448,168 1.7 % 436,832 432,956 407,634 11.9 %
Home equity lines 161,691 156,852 3.1 % 150,769 144,896 135,531 19.3 %
Consumer   4,831     4,841   -0.2 %   4,739     4,822     4,767   1.3 %
Total loans, net of fees 3,101,978 3,056,310 1.5 % 2,918,057 2,795,764 2,625,430 18.2 %
Allowance for loan losses   (32,407 )   (31,723 ) 2.2 %   (31,572 )   (30,198 )   (28,884 ) 12.2 %
Loans receivable, net 3,069,571 3,024,587 1.5 % 2,886,485 2,765,566 2,596,546 18.2 %
 
Premises and equipment, net 24,845 25,163 -1.3 % 25,398 24,600 25,139 -1.2 %
Goodwill and intangibles, net 36,415 36,576 -0.4 % 36,747 36,927 37,115 -1.9 %
Bank-owned life insurance 33,102 32,978 0.4 % 32,876 32,759 32,664 1.3 %
Other real estate owned - 253 -100.0 % - - - 0.0 %
Other assets 46,829 42,498 10.2 % 43,460 54,332 41,056 14.1 %
         
TOTAL ASSETS $ 4,074,545   $ 4,029,921   1.1 % $ 3,881,736   $ 3,765,274   $ 3,446,770   18.2 %
 
Non-interest bearing deposits $ 687,493 $ 657,398 4.6 % $ 620,630 $ 611,004 $ 564,583 21.8 %
Interest checking 459,377 451,545 1.7 % 433,372 440,319 448,702 2.4 %
Money markets 447,565 448,888 -0.3 % 447,536 388,842 365,978 22.3 %
Statement savings 310,055 291,484 6.4 % 278,871 278,873 270,495 14.6 %
Certificates of deposit 788,756 776,413 1.6 % 738,878 711,226 610,358 29.2 %
Brokered certificates of deposit   451,781     407,043   11.0 %   419,461     505,133     385,015   17.3 %
Total deposits 3,145,027 3,032,771 3.7 % 2,938,748 2,935,397 2,645,131 18.9 %
 
Other borrowed funds 437,065 537,965 -18.8 % 469,019 378,756 356,322 22.7 %
Mortgage funding checks 28,765 12,554 129.1 % 20,418 17,247 23,031 24.9 %
Escrow liabilities 2,777 2,676 3.8 % 2,861 3,160 2,611 6.4 %
Other liabilities 34,366 30,808 11.5 % 45,467 33,919 30,399 13.0 %
 
Shareholders' equity   426,545     413,147   3.2 %   405,223     396,795     389,276   9.6 %
 
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 4,074,545   $ 4,029,921   1.1 % $ 3,881,736   $ 3,765,274   $ 3,446,770   18.2 %
             
Table 2.
Cardinal Financial Corporation and Subsidiaries
Summary Income Statements
(In thousands, except share data and per share data)
(Unaudited)
 
For the Three Months Ended
% Change % Change
Current From
  03/31/16     12/31/15   Quarter   09/30/15     06/30/15     03/31/15   Year Ago
 
Net interest income $ 30,706 $ 30,471 0.8 % $ 29,634 $ 28,850 $ 27,439 11.9 %
Provision for loan losses   250     449   -44.3 %   (547 )   1,356     130   92.3 %
Net interest income after provision for loan losses   30,456     30,022   1.4 %   30,181     27,494     27,309   11.5 %
 
Non-interest income:
Service charges on deposit accounts 551 590 -6.6 % 584 576 544 1.3 %
Loan fees 309 307 0.7 % 344 491 454 -31.9 %
Income from bank-owned life insurance 124 102 21.6 % 118 95 118 5.1 %
Net realized gains (losses) on investment securities (84 ) (127 ) -33.9 % 960 356 202 -141.6 %
Litigation recovery - - 0.0 % - 2,950 - 0.0 %
Other non-interest income   145     22   559.1 %   6     6     5   2800.0 %
Commercial banking & other segment non-interest income 1,045 894 16.9 % 2,012 4,474 1,323 -21.0 %
 
Gains from mortgage banking activities 27,041 19,939 35.6 % 22,915 24,290 28,549 -5.3 %
Less: mortgage loan origination expenses   (12,902 )   (11,874 ) 8.7 %   (14,802 )   (13,178 )   (12,383 ) 4.2 %
Mortgage banking segment non-interest income 14,139 8,065 75.3 % 8,113 11,112 16,166 -12.5 %
 
Wealth management segment non-interest income   85     133   -36.1 %   142     143     115   -26.1 %
Total non-interest income   15,269     9,092   67.9 %   10,267     15,729     17,604   -13.3 %
 
Net interest income and non-interest income   45,725     39,114   16.9 %   40,448     43,223     44,913   1.8 %
 
Salaries and benefits 15,497 14,391 7.7 % 13,409 11,963 12,081 28.3 %
Occupancy 2,592 2,501 3.6 % 2,492 2,347 2,484 4.3 %
Depreciation 844 853 -1.1 % 828 845 876 -3.7 %
Data processing & communications 1,346 1,273 5.7 % 1,373 1,459 1,504 -10.5 %
Professional fees 1,135 1,034 9.8 % 852 1,137 1,589 -28.6 %
FDIC insurance assessment 516 516 0.0 % 516 516 516 0.0 %
Mortgage loan repurchases and settlements 100 350 -71.4 % 47 - - 100.0 %
Merger and acquisition expense - - 0.0 % - 3 468 -100.0 %
Other operating expense   4,262     4,364   -2.3 %   4,478     4,608     4,625   -7.8 %
Total non-interest expense   26,292     25,282   4.0 %   23,995     22,878     24,143   8.9 %
Income before income taxes 19,433 13,832 40.5 % 16,453 20,345 20,770 -6.4 %
Provision for income taxes   6,366       4,817   32.2 %   5,244       6,966       7,038   -9.5 %
NET INCOME $ 13,067     $ 9,015   44.9 % $ 11,209     $ 13,379     $ 13,732   -4.8 %
 
Earnings per common share - basic $ 0.40     $ 0.27   44.4 % $ 0.34     $ 0.41     $ 0.42   -5.8 %
Earnings per common share - diluted $ 0.39     $ 0.27   44.7 % $ 0.34     $ 0.40     $ 0.42   -5.9 %
Weighted-average common shares outstanding - basic   32,977,970       32,844,212   0.4 %   32,766,772       32,723,903       32,635,120   1.1 %
Weighted-average common shares outstanding - diluted   33,435,858       33,379,656   0.2 %   33,311,261       33,207,329       33,071,317   1.1 %
         
Table 3.
Cardinal Financial Corporation and Subsidiaries
Selected Financial Information
(In thousands, except per share data and ratios)
(Unaudited)
 
  03/31/16     12/31/15     09/30/15     06/30/15     03/31/15  
Capital Ratios:

At Period End:
Common equity tier 1 capital 9.99 % 9.86 % 9.91 % 9.76 % 9.91 %
Tier 1 risk-based capital 10.64 % 10.52 % 10.59 % 10.45 % 10.63 %
Total risk-based capital 11.50 % 11.37 % 11.47 % 11.30 % 11.48 %
Leverage capital ratio 10.28 % 10.18 % 10.46 % 10.60 % 11.02 %
Book value per common share $ 13.16 $ 12.76 $ 12.58 $ 12.32 $ 12.11
Tangible book value per common share (1) $ 12.04 $ 11.63 $ 11.44 $ 11.17 $ 10.95
Common shares outstanding 32,415 32,373 32,209 32,209 32,155
 
Performance Ratios (annualized):

For the Three Months Ended:
Return on average assets 1.31 % 0.92 % 1.20 % 1.48 % 1.62 %
Return on average equity 12.34 % 8.72 % 11.02 % 13.36 % 14.13 %
Net interest margin (2) 3.31 % 3.25 % 3.37 % 3.40 % 3.45 %
Efficiency ratio (3) 57.19 % 63.90 % 60.14 % 51.32 % 53.60 %
Non-interest income to average assets 1.53 % 0.93 % 1.10 % 1.74 % 2.08 %
Non-interest expense to average assets 2.63 % 2.57 % 2.57 % 2.53 % 2.86 %
 
Asset Quality Data:

For the Three Months Ended:
Net charge-offs (recoveries) to average loans receivable, net of fees (annualized) -0.06 % 0.04 % -0.27 % 0.01 % -0.07 %

At Period End:
Total nonaccrual loans $ - $ 520 $ 721 $ 904 $ 1,983
Other real estate owned $ - $ 253 $ - $ - $ -
Nonperforming loans to loans receivable, net of fees 0.00 % 0.02 % 0.02 % 0.03 % 0.08 %
Nonperforming loans to total assets 0.00 % 0.01 % 0.02 % 0.02 % 0.06 %
Nonperforming assets to total assets 0.00 % 0.02 % 0.02 % 0.02 % 0.06 %
Total loans receivable past due 30 to 89 days $ 163 $ 938 $ 56 $ 120 $ 1,426
Total loans receivable past due 90 days or more $ - $ - $ - $ - $ -
Allowance for loan losses to loans receivable, net of fees 1.04 % 1.04 % 1.08 % 1.08 % 1.10 %
 
Mortgage Banking Data:

For the Three Months Ended:
Applications $ 1,503,300 $ 1,063,400 $ 1,149,000 $ 1,402,600 $ 1,595,900
Loans closed 769,080 786,363 885,715 1,086,264 843,734
Loans sold 791,680 778,854 983,355 923,406 848,559
Purchase money % of loans closed - George Mason Mortgage 62 % 74 % 80 % 71 % 49 %
Realized gain on sales and fees as a % of loan sold (4) 2.67 % 2.71 % 2.61 % 2.52 % 2.58 %

At Period End:
Locked Pipeline $ 451,905 $ 247,448 $ 316,684 $ 363,613 $ 449,865
Loans Held for Sale 314,621 337,221 329,712 427,351 264,494
SAB 109 Total Unrealized Gains Recognized 22,453 16,571 17,757 20,485 19,510
Change in Unrealized Gains 5,882 (1,186 ) (2,728 ) 975 6,687
Change in After-tax Income 3,794 (765 ) (1,760 ) 629 4,313
 

(1)

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

(2)

The average yields for loans receivable and investment securities available-for-sale are reported on a fully taxable-equivalent basis at a rate of 35% for 2016 and 2015.

(3)

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

(4)

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.
             
Table 4.
Cardinal Financial Corporation and Subsidiaries
Mortgage Revenue Recognition Impact of SAB 109 (Written Loan Commitments Recorded at Fair Value Through Earnings)
(Dollars in thousands, except per share data and ratios)
(Unaudited)
 
For the Three Months Ended
% Change % Change
Current From
  03/31/16     12/31/15   Quarter   09/30/15     06/30/15     03/31/15   Year Ago

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

As Reported
Fair Value of LCs / Unrealized Gains Recognized @ LC date $ 27,041 $ 19,939 35.6 % $ 22,915 $ 24,290 $ 28,549 -5.3 %
Loan origination expenses recognized @ Loan Sale Date   12,902     11,874     8.7 %   14,802     13,178     12,383     4.2 %
Reported Net Gains from Mortgage Banking Activities   14,139     8,065     75.3 %   8,113     11,112     16,166     -12.5 %
 

As Adjusted
Realized Gains Recognized @ Loan Sale Date 21,159 21,125 0.2 % 25,643 23,315 21,862 -3.2 %
Loan origination expenses recognized @ Loan Sale Date   12,902     11,874     8.7 %   14,802     13,178     12,383     4.2 %
Adjusted Net Gains from Mortgage Banking Activities   8,257     9,251     -10.7 %   10,841     10,137     9,479     -12.9 %
 

Impact of SAB 109 on Net Gains from Mortgage Banking Activities:
Increase/(Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109 $ 5,882   $ (1,186 )   -596.0 % $ (2,728 ) $ 975   $ 6,687     -12.0 %
 
 

Net Income Reconciliation:
Reported Net Income $ 13,067 $ 9,015 44.9 % $ 11,209 $ 13,379 $ 13,732 -4.8 %
After-tax litigation settlement (less associated legal expenses) - - 0.0 % - (1,592 ) - 0.0 %
After-tax Merger and Acquisition Expense   -     -     0.0 %   -     2     313     -100.0 %
Adjusted Net Income $ 13,067 $ 9,015 44.9 % $ 11,209 $ 11,789 14,045 -7.0 %
After-tax Net Increase / (Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109   3,794     (765 )   -596.0 %   (1,760 )   629     4,313     -12.0 %
Operating Net Income $ 9,273   $ 9,780     -5.2 % $ 12,969   $ 11,160   $ 9,732     -4.7 %
 
 

Diluted Earnings per Share (EPS) Reconciliation:
Reported Net Income $ 0.39 $ 0.27 44.7 % $ 0.34 $ 0.40 $ 0.42 -6.9 %
After-tax litigation settlement (less associated legal expenses) - - 0.0 % - (0.04 ) - 0.0 %
After-tax Merger and Acquisition Expense   -     -     0.0 %   -     -     0.01     -100.0 %
Adjusted Net Income   0.39     0.27     44.7 %   0.34     0.36     0.43     -9.1 %
After-tax Net Increase / (Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109   0.11     (0.02 )   -617.8 %   (0.05 )   0.02     0.13     -12.7 %
Operating Net Income $ 0.28   $ 0.29   -5.0 % $ 0.39   $ 0.34   $ 0.30   -7.5 %
 
 

Performance Ratios (adjusted for change in unrealized mortgage banking gains):
Return on average assets 0.93 % 1.00 % 1.39 % 1.23 % 1.15 %
Return on average equity 8.76 % 9.46 % 12.75 % 11.15 % 10.01 %
Efficiency ratio 65.58 % 62.04 % 56.29 % 52.47 % 62.94 %
Non-interest income to average assets 0.94 % 1.05 % 1.39 % 1.63 % 1.29 %
 
**

Per the accounting guidance set forth by SEC Staff Accounting Bulletin (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
(Dollars in thousands)
(Unaudited)
 
For the Three Months Ended
3/31/2016 12/31/2015 9/30/2015 6/30/2015 3/31/2015

Average Balance
 

Average Yield

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 $ 266,353 3.74 % $ 255,255 3.66 % $ 255,011 3.68 % $ 281,357 3.62 % $ 315,644 3.61 %
Commercial and industrial - tax exempt (1) 105,386 2.80 % 103,456 2.50 % 82,656 2.64 % 72,567 2.50 % 34,298 1.96 %
Real estate - commercial (1) 1,532,293 4.28 % 1,361,134 4.27 % 1,311,664 4.38 % 1,269,520 4.42 % 1,258,988 4.53 %
Real estate - construction 549,907 4.62 % 661,665 4.59 % 592,669 4.69 % 515,073 4.75 % 445,913 4.70 %
Real estate - residential 441,134 3.67 % 423,533 3.65 % 410,605 3.69 % 396,447 3.77 % 391,070 3.80 %
Home equity lines 160,240 3.16 % 153,366 3.10 % 145,625 3.12 % 139,748 3.16 % 133,737 3.31 %
Consumer   5,284     4.72 %   4,739     5.44 %   4,602     5.52 %   5,128     5.94 %   4,807     5.56 %
Total loans 3,060,597 4.10 % 2,963,148 4.08 % 2,802,832 4.17 % 2,679,841 4.20 % 2,584,457 4.27 %
 
Loans held for sale 304,653 3.88 % 339,793 3.87 % 364,513 3.97 % 412,083 3.77 % 260,524 3.81 %
Investment securities (1) 419,678 3.76 % 426,776 3.52 % 372,188 3.78 % 333,583 3.71 % 332,801 3.88 %
Federal funds sold   55,018     0.47 %   45,307     0.25 %   41,108     0.22 %   26,305     0.19 %   52,022     0.22 %
Total interest-earning assets 3,839,946 3.99 % 3,775,024 3.95 % 3,580,641 4.06 % 3,451,812 4.07 % 3,229,804 4.12 %
 
Non-interest earning assets:
Cash and due from banks 21,169 22,226 19,964 21,845 20,232
Premises and equipment, net 25,185 25,498 25,043 25,013 25,208
Goodwill and intangibles, net 36,498 36,662 36,842 37,039 37,235
Accrued interest and other assets 105,663 102,977 110,463 108,404 98,009
Allowance for loan losses (32,113 ) (31,515 ) (31,564 ) (29,432 ) (28,828 )
         
TOTAL ASSETS $ 3,996,348   $ 3,930,872   $ 3,741,389   $ 3,614,681   $ 3,381,660  
 
Interest-bearing liabilities:
Interest checking $ 457,528 0.40 % $ 438,527 0.48 % $ 429,211 0.48 % $ 428,937 0.49 % $ 424,284 0.50 %
Money markets 451,303 0.37 % 466,452 0.36 % 431,958 0.36 % 378,268 0.33 % 367,485 0.31 %
Statement savings 301,734 0.42 % 285,257 0.40 % 280,467 0.37 % 272,319 0.34 % 263,938 0.30 %
Certificates of deposit 784,306 1.23 % 752,104 1.23 % 724,527 1.26 % 668,822 1.22 % 616,797 1.19 %
Brokered certificates of deposit   398,455     0.91 %   400,793     0.88 %   417,095     0.83 %   440,569     0.73 %   358,104     0.76 %
Total interest-bearing deposits 2,393,326 0.75 % 2,343,133 0.76 % 2,283,258 0.75 % 2,188,915 0.72 % 2,030,608 0.70 %
 
Other borrowed funds   487,087     1.87 %   470,416     1.82 %   369,481     2.02 %   386,872     1.94 %   350,331     2.29 %
Total interest-bearing liabilities 2,880,413 0.94 % 2,813,549 0.93 % 2,652,739 0.93 % 2,575,787 0.90 % 2,380,939 0.93 %
 
Noninterest-bearing liabilities:
Noninterest-bearing deposits 653,432 660,236 638,658 596,892 579,059
Other liabilities 38,986 43,357 43,058 41,572 32,926
 
Shareholders' equity 423,517 413,730 406,934 400,430 388,736
         
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 3,996,348   $ 3,930,872   $ 3,741,389   $ 3,614,681   $ 3,381,660  
 
NET INTEREST MARGIN (1) 3.31 % 3.25 % 3.37 % 3.40 % 3.45 %
 

(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 35% for 2016 and 2015.
             
Table 6.
Cardinal Financial Corporation and Subsidiaries
Segment Reporting - as Reported and Non-GAAP Reconciliation
(Dollars in thousands)
(Unaudited)
 
For the Three Months Ended
% Change % Change
Current From
3/31/2016 12/31/2015 Quarter 9/30/2015 6/30/2015 3/31/2015 Year Ago

Commercial Banking:
Net interest income $ 30,545 $ 30,042 1.7 % $ 29,137 $ 28,389 $ 27,105 12.7 %
Non-interest income 1,216 963 26.3 % 1,723 1,329 1,278 -4.9 %
Non-interest expense   16,514     15,734     5.0 %   15,339     13,736     15,146     9.0 %
Net income before provision for loan losses and taxes 15,247 15,271 -0.2 % 15,521 15,982 13,237 15.2 %
Provision for loan losses 250 449 -44.3 % (547 ) 1,356 130 92.3 %
Provision for income taxes   4,757     5,238     -9.2 %   5,089     4,905     4,215     12.9 %
Net income $ 10,240   $ 9,584   6.8 % $ 10,979   $ 9,721   $ 8,892   15.2 %
Add: merger & acquisition (M&A) expense reported above - - - 3 468 -100.0 %
Less: provision for income taxes associated with M&A expense   -     -         -     (1 )   (155 )   -100.0 %
Operating net income $ 10,240   $ 9,584   6.8 % $ 10,979   $ 9,723   $ 9,205   11.2 %
Average Assets $ 3,937,805 $ 3,866,407 $ 3,674,500 $ 3,549,647 $ 3,322,472
Commercial Banking Segment Contribution to earnings 78 % 106 % 98 % 73 % 65 %

Mortgage Banking:
Net interest income $ 358 $ 619 -42.2 % $ 682 $ 642 $ 511 -29.9 %
Non-interest income 14,158 8,115 74.5 % 8,217 11,150 16,216 -12.7 %
Non-interest expense   8,963     8,589     4.4 %   7,905     7,990     7,319     22.5 %
Net income before provision for taxes 5,553 145 3729.7 % 994 3,802 9,408 -41.0 %
Provision for income taxes   2,000     (19 )   -10626.3 %   363     1,390     3,434     -41.8 %
Net income $ 3,553   $ 164   2066.5 % $ 631   $ 2,412   $ 5,974   -40.5 %
Less: increase/(decrease) in unrealized mortgage banking gains (5,882 ) 1,186 -596.0 % 2,728 (975 ) (6,687 ) -12.0 %
Less: provision for income taxes associated with SAB 109   2,088     (421 )   -595.9 %   (968 )   346     2,374     -12.0 %
Operating net income (loss) $ (241 ) $ 929   -125.9 % $ 2,391   $ 1,783   $ 1,661   -114.5 %
Average Assets $ 317,034 $ 351,129 -9.7 % $ 380,504 $ 428,458 $ 267,313 18.6 %
Mortgage Banking Segment Contribution to earnings 27 % 2 % 6 % 18 % 43 %

Wealth Management/Other:
Net interest income $ (197 ) $ (190 ) 3.7 % $ (185 ) $ (181 ) $ (177 ) 11.3 %
Non-interest income (105 ) 14 -850.0 % 327 3,250 110 -195.5 %
Non-interest expense   815     959     -15.0 %   751     1,152     1,678     -51.4 %
Net income (loss) before provision for taxes (1,117 ) (1,135 ) -1.6 % (609 ) 1,917 (1,745 ) -36.0 %
Provision for income taxes   (391 )   (402 )   -2.7 %   (208 )   671     (611 )   -36.0 %
Net income (loss) $ (726 ) $ (733 ) -1.0 % $ (401 ) $ 1,246   $ (1,134 ) -36.0 %
Add: legal expense associated with litigation settlement - - 0.0 % - 500 - 0.0 %
Less: litigation settlement - - 0.0 % - (2,950 ) - 0.0 %
Less: provision for income taxes associated with M&A expense, litigation settlement & SAB 109   -     -     0.0 %   -     858     -     0.0 %
Operating net income (loss) $ (726 ) $ (733 ) -1.0 % $ (401 ) $ (346 ) $ (1,134 ) -36.0 %
Average Assets / Intersegment Eliminations $ (258,491 ) $ (286,664 ) -9.8 % $ (313,615 ) $ (363,424 ) $ (208,125 ) 24.2 %
Wealth Management/Other Segments Contribution to earnings -5 % -8 % -44.0 % -4 % 9 % -8 % -44.8 %

Consolidated:
Net interest income $ 30,706 $ 30,471 0.8 % $ 29,634 $ 28,850 $ 27,439 11.9 %
Non-interest income 15,269 9,092 67.9 % 10,267 15,729 17,604 -13.3 %
Non-interest expense   26,292     25,282     4.0 %   23,995     22,878     24,143     8.9 %
Net income before provision for loan losses and taxes 19,683 14,281 37.8 % 15,906 21,701 20,900 -5.8 %
Provision for loan losses 250 449 -44.3 % (547 ) 1,356 130 92.3 %
Provision for income taxes   6,366     4,817     32.2 %   5,244     6,966     7,038     -9.5 %
Net income $ 13,067   $ 9,015   44.9 % $ 11,209   $ 13,379   $ 13,732   -4.8 %
Add: merger & acquisition (M&A) expense reported above - - 0.0 % - 3 468 -100.0 %
Add: legal expense associated with litigation settlement - - 0.0 % - 500 - 0.0 %
Less: litigation settlement - - 0.0 % - (2,950 ) - 0.0 %
Less: increase/(decrease) in unrealized gains on mortgage banking activities (SAB 109) (5,882 ) 1,186 -596.0 % 2,728 (975 ) (6,687 ) -12.0 %
Less: provision for income taxes associated with M&A expense, litigation settlement & SAB 109   2,088     (421 )   -595.9 %   (968 )   1,203     2,219     -5.9 %
Operating net income $ 9,273   $ 9,780   -5.2 % $ 12,969   $ 11,160   $ 9,732   -4.7 %
Average Assets $ 3,996,348 $ 3,930,872 1.7 % $ 3,741,389 $ 3,614,681 $ 3,381,660 18.2 %
 
       
Table 7.
Cardinal Financial Corporation and Subsidiaries
Historical Segment Performance
(Dollars in thousands, except per share data)
(Unaudited)
 

Commercial Banking

Mortgage Banking

Wealth Management/ Other
Consolidated
For the Three Months Ended March 31, 2016:
Net income (loss) $ 10,240 $ 3,553 $ (726) $ 13,067
Earnings per common share - diluted $ 0.31 $ 0.10 $ (0.02) $ 0.39
Segment Contribution to Earnings 79.5% 25.6% -5.1% 100%
 
For the Three Months Ended March 31, 2015:
Net income (loss) $ 8,892 $ 5,974 $ (1,134) $ 13,732
Earnings per common share - diluted $ 0.27 $ 0.18 $ (0.03) $ 0.42
Segment Contribution to Earnings 64.8% 43.5% -8.3% 100%
 
For the Year Ended December 31, 2015:
Net income (loss) $ 39,175 $ 9,180 $ (1,021) $ 47,334
Earnings per common share - diluted $ 1.18 $ 0.28 $ (0.03) $ 1.43
Segment Contribution to Earnings 82.8% 19.4% -2.2% 100.0%
 
For the Year Ended December 31, 2014:
Net income (loss) $ 34,351 $ 2,658 $ (4,326) $ 32,683
Earnings per common share - diluted $ 1.05 $ 0.08 $ (0.13) $ 1.00
Segment Contribution to Earnings 105.1% 8.1% -13.2% 100%
 
For the Year Ended December 31, 2013:
Net income (loss) $ 33,881 $ (5,215) $ (3,156) $ 25,510
Earnings per common share - diluted $ 1.09 $ (0.17) $ (0.10) $ 0.82
Segment Contribution to Earnings 132.8% -20.4% -12.4% 100.0%
 
For the Year Ended December 31, 2012:
Net income (loss) $ 30,544 $ 17,608 $ (2,855) $ 45,297
Earnings per common share - diluted $ 1.02 $ 0.59 $ (0.10) $ 1.51
Segment Contribution to Earnings 67.4% 38.9% -6.3% 100.0%
 
For the Year Ended December 31, 2011:
Net income (loss) $ 23,063 $ 7,791 $ (2,856) $ 27,998
Earnings per common share - diluted $ 0.78 $ 0.25 $ (0.10) $ 0.94
Segment Contribution to Earnings 83.4% 26.8% -10.2% 100.0%
 
 
Table 8.
Cardinal Financial Corporation and Subsidiaries
Loan Fundings and Payoffs
(Dollars in thousands)
(Unaudited)
         
 
Ending Balance 12/31/2015   New Loans   Loan Payoffs  

Net Draws/Pay Downs andTransfers
 

Ending Balance 3/31/2016
 
 
Commercial and industrial $ 379,414 $ 15,183 $ (4,861 ) $ (26,331 ) $ 363,405
Real estate - commercial 1,372,627 51,552 (15,918 ) 147,724 1,555,985
Real estate - construction 694,408 6,051 (21,183 ) (119,162 ) 560,114
Real estate - residential 448,168 29,592 (4,815 ) (16,993 ) 455,952
Home equity lines 156,852 7,859 (4,275 ) 1,255 161,691
Consumer   4,841     3,582     (216 )     (3,376 )     4,831
Total loans, net of fees $ 3,056,310 $ 113,819 $ (51,268 ) $ (16,883 ) $ 3,101,978
 

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