Cardinal Financial Corporation (NASDAQ: CFNL) (the “Company”) today reported that second quarter of 2015 earnings increased 59% from a year ago, to $13.4 million, or $0.40 per diluted share, compared to $8.4 million, or $0.26 per diluted share, for the quarterly period ended June 30, 2014. For the six month year to date period, earnings increased 113%, and was $27.1 million, or $0.82 per diluted share, compared to $12.7 million, or $0.39 per diluted share, for the six month year to date period of 2014.

Certain non-operating items impacted the financial results for the periods reported above. During the current quarter, Cardinal recorded one-time non interest income of approximately $2.95 million related to a settlement of litigation and approximately $500,000 of related legal expenses. During previous quarters, results included expenses related to the Company’s January 2014 acquisition of United Financial Banking Companies, Inc. (UFBC). Before the impact associated with the litigation settlement and the acquisition expenses related to UFBC (see Table 4), adjusted net income was $11.8 million for the current quarter, a 17% increase over $10.1 million reported for the same quarterly period ended June 30, 2014. For the current year to date period, adjusted net income was $25.8 million, a 56% increase over $16.5 million reported for the same period a year ago.

Selected Highlights

  • Loans held for investment grew a record $170 million during the quarter, or 26% annualized. Asset quality remains excellent. At June 30, 2015, nonperforming assets decreased to $904,000, or 0.02% of total assets. Year to date, the Company had net recoveries of 0.03% of average loans outstanding.
  • Operating net income (a non-GAAP measure) increased 50% to $11.2 million, or $0.34 per share, for the current quarter versus $7.5 million, or $0.23 per share, for the year ago quarter. For the year to date period ended June 30, 2015, operating net income increased 80% to $20.9 million, or $0.64 per share, versus $11.6 million, or $0.36 per share, for the same period a year ago. Management believes operating net income more accurately reflects the performance of the Company. See Table 4 for a comparison of operating versus GAAP net income.
  • Net income for the commercial banking segment was $18.6 million for the current year to date period, versus $13.2 million for the same period a year ago. Before merger and acquisition (M&A) expenses, net income for these same respective periods was $18.9 million versus $16.6 million, an increase of 14%.
  • The Company’s mortgage banking subsidiary, George Mason Mortgage, continued its solid performance. For the current quarter, it reported net income of $2.4 million and delivered operating net income of $1.8 million.
  • All capital ratios exceed the requirements of banking regulators to be considered well-capitalized. Tangible common equity capital (TCE) as a percentage of total assets was 9.43% at June 30, 2015.

Review of Balance Sheet

At June 30, 2015, total assets of the Company were $3.77 billion, an increase of 15% from total assets of $3.28 billion at June 30, 2014. Loans held for investment grew to $2.80 billion versus $2.39 billion a year ago, a 17% increase. Loans held for sale increased to $456 million at June 30, 2015 compared to $360 million at June 30, 2014. Deposit balances increased $500 million to $2.94 billion from $2.44 billion for these same periods, respectively, an increase of 21%. Non-interest bearing demand deposit accounts, which represented 21% of total deposits, increased $28 million to $611 million over the past twelve months. Customer deposits and customer repurchase accounts were $2.53 billion, an increase of 12.9% since June 30, 2014.

Net Interest Income

The Company’s net interest income increased 7%, to $28.9 million from $26.9 million, for the three month periods ended June 30, 2015 and 2014, respectively. Average interest earning assets increased to $3.45 billion from $3.01 billion a year ago, and average interest bearing liabilities increased to $2.58 billion from $2.22 billion. The Company’s tax equivalent net interest margin was 3.40% for the current quarter and 3.63% for the same quarter of last year. The yield on interest earning assets declined from 4.32% for the year ago quarter to 4.07% for the current quarter as new loan originations and security purchases are being recorded at lower rates than maturing assets, a result of competition and the historically low rate environment that has existed for the past several years. For these same respective periods, the cost of interest bearing liabilities has declined from 0.96% to 0.90%. The Company initiated several deposit strategies to attract new banking relationships and new money during the first six months of the year. Such activities have added over 1,000 consumer and business relationships and over $160 million in deposits.

Commercial Banking Review

For the current quarter ended June 30, 2015, net income for the commercial banking segment was $9.7 million, an increase of 27% from $7.7 million for the year ago quarter. Before acquisition expenses, operating net income was $9.7 million for the current quarter, versus $9.2 million for the year ago quarter, an increase of 6%. For the current year to date period, net income was $18.6 million, versus $13.2 million for the same period a year ago. Before M&A expenses, net income for these same respective periods was $18.9 million versus $16.6 million, an increase of 14% (see Table 6).

The provision for loan losses was $1.4 million for the current quarter versus $615,000 for the year ago quarter. The increase is due to record quarterly growth in the loans held for investment portfolio. The allowance for loan losses was 1.08% of loans outstanding at June 30, 2015 versus 1.24% at June 30, 2014. This ratio decrease from a year ago is primarily the result of improving credit quality. The Company’s nonperforming assets were 0.02% of total assets at June 30, 2015 compared to 0.19% a year ago. For the year to date period, there were recoveries from previously charged off loans in excess of current charge offs of 0.03% of average loans outstanding.

Non-interest income was $1.3 million for the current quarter compared to $936,000 for the year ago quarter. Loan fees were $491,000 for the current quarter versus $399,000 for the same period of 2014. Securities gains totaled $356,000 for the current quarter versus $174,000 for the same year ago period.

Non-interest expense was $13.7 million for the current quarter versus $15.2 million for the prior year quarter. Before M&A expenses of $2.3 million, non-interest expenses for the prior year quarter were $12.9 million. The increase in non-interest expense from a year ago, excluding M&A, is primarily a result of the Company electing to change its parent company expense allocation associated with managing the bank, which resulted in a bank expense increase of over $640,000.

Mortgage Banking Review

For the current quarter ended June 30, 2015, the mortgage banking segment reported a net profit of $2.4 million, and it delivered operating net income of $1.8 million. Operating net income (a non-GAAP measure) excludes the impact of the Staff Accounting Bulletin (“SAB”) 109 accounting requirement to record unrealized gains on forward commitments to sell its locked mortgage loan pipeline. Comparable quarterly results are shown below.

                         
      Q2 2015     Q2 2014     YTD 2015     YTD 2014

Mortgage Banking: (in 000's)

                        
Reported Net Income     $2,412     $2,139     $8,386     $1,971
Reverse Impact of SAB 109     (629)     (2,586)     (4,942)     (4,939)
Operating Net Income     $1,783     $(447)     $3,444     $(2,968)
               

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

During the second quarter of 2015, closed loans were $1.09 billion and loans sold to investors totaled $923 million, versus $842 million and $744 million, respectively, for the same quarter of 2014. Net realized gain on sales and other fees, before the impact of SAB 109, were $10.1 million for the current quarter versus $6.2 million for the same period a year ago. The 63% improvement is the result of the higher production levels and a gain on sale margin increase to 2.53% from 2.30% a year ago. In late June, George Mason began a program to sell approximately 25% of its loan originations on a pooled mandatory delivery basis in order to increase profitability. Traditionally, all loans have been sold individually on a best efforts basis. If successful, more of its production will be incorporated into this new program in the future.

Loan applications totaled $1.4 billion during the second quarter of 2015, down slightly from $1.6 billion for quarter ended March 31, 2015. Purchase money applications were $1.08 billion, which represented 77% of total application volume in the current quarter versus 49% in the previous quarter. The second quarter of each year is typically the most active for home buyers in George Mason’s markets, and purchase money activity usually slows from these levels during the third and fourth quarter.

Operating expenses increased $254,000 in the current quarter when compared to the year ago quarter. The change was due to increases in employees’ overtime and higher incentive accruals resulting from higher levels of production.

Capital Ratios

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

MANAGEMENT COMMENTS

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

“I am extremely pleased with how our Company performed during the second quarter of 2015. On an operating basis, our commercial banking segment’s year to date net income improved 14%. Our business development efforts and commitment to the local markets continued to drive new relationships. Record loan growth of $170 million attests to the quality of our commercial team and their persistence in achieving goals. Our already pristine credit metrics continued to improve further, and our banking offices successfully executed upon our deposit campaigns to increase our core customer balances by almost 13%.

“The mortgage banking division had another strong quarter as home buying activity replaced refinancing volume. Although costs increased slightly due to production levels, we remained focused on increasing operating efficiencies and continuing to build on our already outstanding purchase money market share. As always, we stand ready to react to seasonal changes in volumes.

“Looking forward, we will continue to concentrate on gaining profitable market share, either through de novo expansion or acquisition, which will increase our franchise value. We remain committed to maintaining and growing a strong financial services company for our 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 some of the risks and uncertainties associated with forward-looking statements, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and other reports filed with and furnished to the Securities and Exchange Commission. The Company has no obligation and does not undertake to update, revise or correct any of the forward-looking statements after the date of this press release, or after the respective dates on which such statements otherwise are made.

About Cardinal Financial Corporation: Cardinal Financial Corporation, a financial holding company headquartered in Tysons Corner, Virginia with assets of $3.77 billion at June 30, 2015, serves the Washington Metropolitan region through its wholly-owned subsidiary, Cardinal Bank. Cardinal also operates several other subsidiaries: George Mason Mortgage, LLC, a residential mortgage lending company based in Fairfax, Virginia and Cardinal Wealth Services, Inc., a wealth management services company. The Company's stock is traded on NASDAQ (CFNL). For additional information please visit our Web site at www.cardinalbank.com or call (703) 584-3400.

                 
Cardinal Financial Corporation and Subsidiaries
Summary Statements of Condition

(Dollars in thousands)

 
 
% Change
June 30, 2015 December 31, 2014 June 30, 2014 Current Year Year Over Year
(Unaudited) (Unaudited)
Cash and due from banks $ 24,186 $ 20,298 $ 32,457 19.2 % -25.5 %
Federal funds sold 14,597 17,891 21,175 -18.4 % -31.1 %
 
Investment securities available-for-sale 332,551 339,131 337,482 -1.9 % -1.5 %
Investment securities held-to-maturity 3,879 4,024 5,933 -3.6 % -34.6 %
Investment securities – trading   5,271     5,067     4,577   4.0 % 15.2 %
Total investment securities 341,701 348,222 347,992 -1.9 % -1.8 %
 
Other investments 15,049 15,941 17,144 -5.6 % -12.2 %
Loans held for sale 455,557 315,323 360,107 44.5 % 26.5 %
 
Loans receivable, net of fees:
Commercial and industrial 342,079 354,693 295,101 -3.6 % 15.9 %
Real estate - commercial 1,299,450 1,254,270 1,186,702 3.6 % 9.5 %
Real estate - construction 571,561 432,171 414,825 32.3 % 37.8 %
Real estate - residential 432,956 403,744 373,582 7.2 % 15.9 %
Home equity lines 144,896 131,156 117,112 10.5 % 23.7 %
Consumer   4,822     5,080     4,945   -5.1 % -2.5 %
Loans receivable, net of fees 2,795,764 2,581,114 2,392,267 8.3 % 16.9 %
Allowance for loan losses   (30,198 )   (28,275 )   (29,566 ) 6.8 % 2.1 %
Loans receivable, net 2,765,566 2,552,839 2,362,701 8.3 % 17.1 %
 
Premises and equipment, net 24,600 25,253 26,048 -2.6 % -5.6 %
Goodwill and intangibles, net 36,927 37,312 37,197 -1.0 % -0.7 %
Bank-owned life insurance 32,759 32,546 32,307 0.7 % 1.4 %
Other assets 54,332 33,509 40,544 62.1 % 34.0 %
         
TOTAL ASSETS $ 3,765,274   $ 3,399,134   $ 3,277,672   10.8 % 14.9 %
 
Non-interest bearing deposits $ 611,004 $ 572,071 $ 583,138 6.8 % 4.8 %
Interest checking 440,319 422,291 444,056 4.3 % -0.8 %
Money markets 388,842 372,591 324,693 4.4 % 19.8 %
Statement savings 278,873 254,722 252,334 9.5 % 10.5 %
Certificates of deposit 711,226 603,237 530,886 17.9 % 34.0 %
Brokered certificates of deposit   505,133     310,418     300,309   62.7 % 68.2 %
Total deposits 2,935,397 2,535,330 2,435,416 15.8 % 20.5 %
 
Other borrowed funds 378,756 437,995 432,127 -13.5 % -12.4 %
Mortgage funding checks 17,247 19,469 16,704 -11.4 % 3.3 %
Escrow liabilities 3,160 2,035 2,060 55.3 % 53.4 %
Other liabilities 33,919 26,984 30,134 25.7 % 12.6 %
 
Shareholders' equity   396,795     377,321     361,231   5.2 % 9.8 %
 
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 3,765,274   $ 3,399,134   $ 3,277,672   10.8 % 14.9 %
 
                       
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 Six Months Ended
June 30 June 30
20152014% Change20152014% Change
 
Net interest income $ 28,850 $ 26,913 7.2 % $ 56,289 $ 52,579 7.1 %
Provision for loan losses   (1,356 )   (615 ) 120.5 %   (1,486 )   (2,541 ) -41.5 %
Net interest income after provision for loan losses 27,494 26,298 4.5 % 54,803 50,038 9.5 %
 
Non-interest income:
Service charges on deposit accounts 576 536 7.5 % 1,121 1,071 4.7 %
Loan fees 491 399 23.1 % 945 610 54.9 %
Income from bank owned life insurance 95 126 -24.6 % 213 244 -12.7 %
Net realized gains on investment securities 356 174 104.6 % 558 326 71.2 %
Litigation settlement 2,950 - 100.0 % 2,950 - 100.0 %
Other non-interest income   6     6   0.0 %   11     31   -64.5 %
Commercial banking & other non-interest income 4,474 1,241 260.5 % 5,798 2,282 154.1 %
 
Management fee income - - 0.0 % - 21 -100.0 %
Gains from mortgage banking activities 24,290 21,098 15.1 % 52,839 36,916 43.1 %
Less: mortgage loan origination expenses   (13,178 )   (10,859 ) 21.4 %   (25,561 )   (19,295 ) 32.5 %
Mortgage banking non-interest income 11,112 10,239 8.5 % 27,278 17,642 54.6 %
 
Wealth management non-interest income   143     204   -29.9 %   258     426   -39.4 %
Total non-interest income 15,729 11,684 34.6 % 33,334 20,350 63.8 %
 
Net interest income and non-interest income 43,223 37,982 13.8 % 88,137 70,388 25.2 %
 
Salaries and benefits 11,963 11,471 4.3 % 24,044 22,860 5.2 %
Occupancy 2,347 2,544 -7.7 % 4,831 5,174 -6.6 %
Depreciation 845 905 -6.6 % 1,721 1,817 -5.3 %
Data processing & communications 1,459 1,688 -13.6 % 2,963 3,303 -10.3 %
Professional fees 1,137 876 29.8 % 2,726 1,693 61.0 %
FDIC insurance assessment 516 345 49.6 % 1,032 728 41.8 %
Mortgage loan repurchases and settlements - 83 -100.0 % - 83 -100.0 %
Merger and acquisition expense 3 2,404 -99.9 % 471 5,669 -91.7 %
Other operating expense   4,608     4,881   -5.6 %   9,234     9,657   -4.4 %
Total non-interest expense 22,878 25,197 -9.2 % 47,022 50,984 -7.8 %
Income before income taxes   20,345     12,785   59.1 %   41,115     19,404   111.9 %
Provision for income taxes   6,966         4,352       60.1 %   14,005         6,681       109.6 %
NET INCOME $ 13,379       $ 8,433       58.7 % $ 27,110       $ 12,723       113.1 %
 
Earnings per common share - basic $ 0.41       $ 0.26       57.2 % $ 0.83       $ 0.39       110.4 %
Earnings per common share - diluted $ 0.40       $ 0.26       57.0 % $ 0.82       $ 0.39       110.4 %
Weighted-average common shares outstanding - basic   32,723,903         32,422,673       0.9 %   32,681,800         32,275,747       1.3 %
Weighted-average common shares outstanding - diluted   33,207,329         32,866,666       1.0 %   33,132,076         32,709,500       1.3 %
 
               
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 Six Months Ended

June 30

June 30
2015201420152014
Performance Ratios:
Return on average assets 1.48 % 1.07 % 1.55 % 0.82 %
Return on average equity 13.36 % 9.32 % 13.74 % 6.94 %
Net interest margin (1) 3.40 % 3.63 % 3.42 % 3.62 %
Efficiency ratio (2) 51.32 % 65.28 % 52.47 % 69.91 %
Non-interest income to average assets 1.74 % 1.48 % 1.91 % 1.31 %
Non-interest expense to average assets 2.53 % 3.19 % 2.69 % 3.28 %
 
Mortgage Banking Select Data:
$ of loan applications - George Mason Mortgage $ 1,403,000 $ 1,120,000 $ 2,998,000 $ 2,081,000
$ of loan applications - Managed Mortgage Company Affiliates   -     -     -     1,400  
Total 1,403,000 1,120,000 2,998,000 2,082,400
 
Refi % of loan applications - George Mason Mortgage 23 % 17 % 34 % 18 %
Refi % of loans applications- Managed Mortgage Company Affiliates   0 %   0 %   0 %   15 %
Total 23 % 17 % 34 % 18 %
 
$ of loans closed - George Mason Mortgage $ 1,086,264 $ 842,089 $ 1,929,998 $ 1,393,532
$ of loans closed - Managed Mortgage Company Affiliates   -     -     -     13,034  
Total 1,086,264 842,089 1,929,998 1,406,566
 
# of loans closed - George Mason Mortgage 3,234 2,549 5,688 4,238
# of loans closed - Managed Mortgage Company Affiliates   -     -     -     30  
Total 3,234 2,549 5,688 4,268
 
$ of loans sold - George Mason Mortgage $ 923,406 $ 743,871 $ 1,771,966 $ 1,305,827
$ of loans sold - Managed Mortgage Company Affiliates   -     -     -     71,504  
Total 923,406 743,871 1,771,966 1,377,331
 
$ of locked commitments - George Mason Mortgage $ 1,000,012 $ 845,938 $ 2,098,692 $ 1,513,716
$ locked commitments at period end - George Mason Mortgage $ 363,613 $ 331,092
$ of loans held for sale at period end - George Mason Mortgage $ 427,351 $ 322,466
Realized gain on sales and fees as a % of loan sold (3) 2.52 % 2.30 % 2.55 % 2.24 %
Net realized gains as a % of realized gains (Gain on sale margin) (4) 43.48 % 36.45 % 43.42 % 34.05 %
 
Asset Quality Data:
Net charge-offs (recoveries) to average loans receivable, net of fees -0.03 % 0.07 %
Total nonaccrual loans $ 904 $ 6,259
Real estate owned $ - $ -
Nonperforming loans to loans receivable, net of fees 0.03 % 0.26 %
Nonperforming loans to total assets 0.02 % 0.19 %
Nonperforming assets to total assets 0.02 % 0.19 %
Total loans receivable past due 30 to 89 days $ 120 $ 688
Total loans receivable past due 90 days or more $ - $ -
Allowance for loan losses to loans receivable, net of fees 1.08 % 1.24 %
Allowance for loan losses to nonperforming loans 3340.49 % 472.38 %
 
Capital Ratios:
Common equity tier 1 capital 9.76 % N/A
Tier 1 risk-based capital 10.45 % 11.13 %
Total risk-based capital 11.30 % 12.13 %
Leverage capital ratio 10.60 % 10.74 %
Book value per common share $ 12.32 $ 11.30
Tangible book value per common share (5) $ 11.17 $ 10.13
Common shares outstanding 32,209 31,976
 
 
(1) The average yields for loans receivable and investment securities available-for-sale are reported on a fully taxable-equivalent basis at a rate of 33% for 2015 and 2014.
(2) Efficiency ratio is calculated as total non-interest expense divided by the total of net interest income and non-interest income.
(3) Realized gains are those gains recognized on the date the loan is sold and do not include the unrealized gains recognized at the loan commitment date.
(4) Net realized gains are gains net of loan origination expense recognized on the date the loan is sold and do not include the unrealized gains recognized at the loan commitment date.
(5) Tangible book value is calculated as total shareholders' equity less goodwill and other intangible assets, divided by common shares outstanding.
 
     
Cardinal Financial Corporation and Subsidiaries
(Dollars in thousands, except share and per share data)
(Unaudited)
                 
 
Mortgage Revenue Recognition Impact of SAB 109 (Written Loan Commitments Recorded at Fair Value Through Earnings)
 
For the Three Months Ended For the Six Months Ended
June 30 June 30
20152014% Change20152014% Change

Net Gains from Mortgage Banking Activities:

As Reported

Fair value of LCs / unrealized gains recognized @ LC date **(see note below) $ 24,290 $ 21,098 15.13% $ 52,839 $ 36,916 43.13%
Loan origination expenses recognized @ loan sale date 13,178 10,859 21.36% 25,561 19,295 32.47%
Reported Net Gains from Mortgage Banking Activities 11,112 10,239 8.53% 27,278 17,621 54.80%
 

As Adjusted

Realized gains recognized @ loan sale date 23,315 17,088 36.44% 45,177 29,258 54.41%
Loan origination expenses recognized @ loan sale date 13,178 10,859 21.36% 25,561 19,295 32.47%
Adjusted Net Gains from Mortgage Banking Activities 10,137 6,229 62.74% 19,616 9,963 96.89%
 

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

Increase/(Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109 $ 975 $ 4,010 -75.69% $ 7,662 $ 7,658 0.05%
 
 

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

 
For the Three Months Ended For the Six Months Ended
June 30 June 30
20152014% Change20152014% Change

Net Income Reconciliation:

Reported net income $ 13,379 $ 8,433 58.65% 27,110 $ 12,723 113.08%
Aftertax litigation settlement (less associated legal expenses) (1,592) - 100.00% (1,592) - 100.00%
Aftertax merger and acquisition expense 2 1,617 -99.88% 313 3,814 -91.80%
Adjusted net income 11,789 10,050 17.30% $ 25,831 $ 16,537 56.20%
Aftertax net increase / (decrease) in unrealized gains on mortgage banking activities related to SAB 109 629 2,586 -75.69% 4,942 4,939 0.05%
Operating Net Income $ 11,160 $ 7,464 49.53% $ 20,889 $ 11,598 80.11%
 
 

Earnings per Share (EPS) Reconciliation:

Reported net income $ 0.40 $ 0.26 57.02% $ 0.82 $ 0.39 110.36%
Aftertax litigation settlement (less associated legal expenses) (0.04) - 100.00% (0.04) - 100.00%
Aftertax merger and acquisition expense 0.00 0.05 -99.88% 0.01   0.12   -91.90%
Adjusted net income 0.36 0.31 16.10% 0.79 0.51 56.19%
Aftertax net increase / (decrease) in unrealized gains on mortgage banking activities related to SAB 109 0.02 0.08 -75.94% 0.15 0.15 -1.22%

Operating Net Income

 $ 0.34 $ 0.23 47.99% $ 0.64 $ 0.36 75.68%
 
 

Operating Performance Ratios:

Return on average assets 1.23% 0.95% 1.19% 0.75%
Return on average equity 11.15% 8.25% 10.59% 6.33%
Efficiency ratio 52.47% 72.85% 57.37% 78.11%
Non-interest income to average assets 1.63% 0.97% 1.47% 0.82%
 
 

**

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.
 
                             
Cardinal Financial Corporation and Subsidiaries
Average Statements of Condition and Yields on Earning Assets and Interest-Bearing Liabilities
Three and Six Months Ended June 30, 2015 and 2014
(Dollars in thousands)
(Unaudited)
 
For the Three Months Ended For the Six Months Ended
June 30, 2015 June 30, 2014 June 30, 2015 June 30, 2014
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 $ 353,925 3.48 % $ 294,628 4.04 % $ 351,944 3.56 % $ 277,236 4.32 %
Real estate - commercial 1,269,520 4.42 % 1,175,020 4.35 % 1,264,283 4.48 % 1,167,100 4.33 %
Real estate - construction 515,073 4.75 % 416,671 5.10 % 480,684 4.73 % 406,989 4.98 %
Real estate - residential 396,447 3.77 % 320,339 4.00 % 393,773 3.78 % 312,486 4.06 %
Home equity lines 139,748 3.16 % 115,719 3.83 % 136,759 3.24 % 115,222 3.71 %
Consumer   5,128   5.94 %   4,926   6.18 %   4,969   5.76 %   5,691   5.70 %
Total loans   2,679,841   4.20 %   2,327,303   4.42 %   2,632,412   4.23 %   2,284,724   4.43 %
 
Loans held for sale 412,083 3.77 % 313,376 4.21 % 336,722 3.78 % 265,998 4.34 %
Investment securities - available-for-sale (1) 315,813 3.72 % 329,167 3.98 % 315,673 3.80 % 335,611 3.98 %
Investment securities - held-to-maturity 3,894 1.87 % 6,176 2.33 % 3,957 1.98 % 7,235 2.07 %
Other investments 13,876 3.98 % 14,176 4.07 % 13,564 4.38 % 14,845 3.78 %
Federal funds sold (1)   26,305   0.19 %   17,617   0.21 %   39,093   0.21 %   38,338   0.21 %
Total interest-earning assets 3,451,812 4.07 % 3,007,815 4.32 % 3,341,421 4.10 % 2,946,751 4.31 %
 
Non-interest earning assets:
Cash and due from banks 21,845 20,768 21,043 28,258
Premises and equipment, net 25,013 26,629 25,110 25,744
Goodwill and intangibles, net 37,039 37,318 37,136 35,084
Accrued interest and other assets 108,404 95,457 103,236 104,746
Allowance for loan losses (29,432 ) (29,446 ) (29,132 ) (29,743 )
       
TOTAL ASSETS $ 3,614,681   $ 3,158,541   $ 3,498,814   $ 3,110,840  
 
Interest-bearing liabilities:
Interest checking $ 428,937 0.49 % $ 433,175 0.51 % $ 426,624 0.49 % $ 426,766 0.51 %
Money markets 378,268 0.33 % 325,786 0.31 % 372,906 0.32 % 319,257 0.31 %
Statement savings 272,319 0.34 % 254,254 0.28 % 268,152 0.32 % 250,929 0.28 %
Certificates of deposit   1,109,391   1.03 %   829,903   0.98 %   1,042,517   1.03 %   805,876   0.97 %
Total interest-bearing deposits   2,188,915   0.72 %   1,843,118   0.66 %   2,110,199   0.71 %   1,802,828   0.65 %
 
Other borrowed funds   386,872   1.94 %   373,306   2.41 %   368,702   2.10 %   374,534   2.36 %
Total interest-bearing liabilities 2,575,787 0.90 % 2,216,424 0.96 % 2,478,901 0.91 % 2,177,362 0.95 %
 
Noninterest-bearing liabilities:
Noninterest-bearing deposits 596,892 549,605 588,025 534,395
Other liabilities 41,572 30,440 37,273 32,473
 
Shareholders' equity 400,430 362,072 394,615 366,610
       
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 3,614,681   $ 3,158,541   $ 3,498,814   $ 3,110,840  
 
NET INTEREST MARGIN (1) 3.40 % 3.63 % 3.42 % 3.62 %
 
 
(1) The average yields for loans receivable and investment securities available-for-sale are reported on a fully taxable-equivalent basis at a rate 33% for 2015 and 2014.
 
                       
Cardinal Financial Corporation and Subsidiaries
Segment Reporting
(Dollars in thousands)
(Unaudited)
 
Commercial Mortgage Wealth Intersegment
Banking Banking Management Other Elimination Consolidated
At and for the Three Months Ended June 30, 2015:
Net interest income $ 28,389 $ 642 $ - $ (181 ) $ - $ 28,850
Non-interest income 1,329 11,150 119 3,131 - 15,729
Non-interest expense   13,736     7,990     114   1,038     -     22,878  
Net income (loss) before provision and taxes 15,982 3,802

 

5

 

1,912

 

-

 

21,701
Provision for loan losses 1,356 - - - - 1,356
Provision for income taxes   4,905     1,390     2   669     -     6,966  
Reported net income (loss) $ 9,721   $ 2,412   $ 3 $ 1,243   $ -   $ 13,379  
Add: merger & acquisition (M&A) expense reported above 3 - - - - 3
Add: legal expense associated with litigation settlement - - - 500 - 500
Less: litigation settlement - - - (2,950 ) - (2,950 )
Less: increase/(decrease) in unrealized gains on mortgage banking activities (SAB 109) - (975 ) - - - (975 )
Less: provision for income taxes associated with M&A expense, litigation settlement & SAB 109   (1 )   346     -   858     -     1,203  
Operating net income (loss) $ 9,723   $ 1,783   $ 3 $ (349 ) $ -   $ 11,160  
 
Average Assets $ 3,549,647 $ 428,458 $ 2,415 $ 415,288 $ (781,127 ) $ 3,614,681
 
At and for the Three Months Ended June 30, 2014:
Net interest income $ 26,346 $ 745 $ - $ (178 ) $ - $ 26,913
Non-interest income 936 10,366 204 178 - 11,684
Non-interest expense   15,200     7,736     101   2,160     -     25,197  
Net income (loss) before provision and taxes 12,082 3,375

 

103

 

(2,160 )

 

-

 

13,400
Provision for loan losses 615 - - - - 615
Provision for income taxes   3,803     1,236     36   (723 )   -     4,352  
Reported net income (loss) $ 7,664   $ 2,139   $ 67 $ (1,437 ) $ -   $ 8,433  
Add: merger & acquisition expense reported above 2,289 - - 115 - 2,404
Less: increase/(decrease) in unrealized gains on mortgage banking activities (SAB 109) - (4,010 ) - - - (4,010 )
Less: provision for income taxes associated with merger & acquisition expense & SAB 109   (749 )   1,424     -   (38 )   -     637  
Operating net income (loss) $ 9,204   $ (447 ) $ 67 $ (1,360 ) $ -   $ 7,464  
 
Average Assets $ 3,110,069 $ 323,518 $ 2,318 $ 389,266 $ (666,630 ) $ 3,158,541
 
Commercial Mortgage Wealth Intersegment
Banking   Banking   Management   Other Elimination   Consolidated
At and for the Six Months Ended June 30, 2015:
Net interest income $ 55,495 $ 1,153 $ - $ (359 ) $ - $ 56,289
Non-interest income 2,608 27,366 224 3,136 - 33,334
Non-interest expense   28,884     15,309     218   2,611     -     47,022  
Net income (loss) before provision and taxes 29,219 13,210

 

6

 

166

 

-

 

42,601
Provision for loan losses 1,486 - - - - 1,486
Provision for income taxes   9,121     4,824     2   58     -     14,005  
Reported net income (loss) $ 18,612   $ 8,386   $ 4 $ 108   $ -   $ 27,110  
Add: merger & acquisition (M&A) expense reported above 471 - - - - 471
Add: legal expense associated with litigation settlement - - - 500 - 500
Less: litigation settlement - - - (2,950 ) - (2,950 )
Less: increase/(decrease) in unrealized gains on mortgage banking activities (SAB 109) - (7,662 ) - - - (7,662 )
Less: provision for income taxes associated with M&A expense, litigation settlement & SAB 109   (158 )   2,720     -   858     -     3,420  
Operating net income (loss) $ 18,925   $ 3,444   $ 4 $ (1,484 ) $ -   $ 20,889  
 
Average Assets $ 3,436,687 $ 348,331 $ 2,412 $ 416,411 $ (705,027 ) $ 3,498,814
 
At and for the Six Months Ended June 30, 2014:
Net interest income $ 51,539 $ 1,382 $ - $ (342 ) $ - $ 52,579
Non-interest income 1,865 17,758 371 356 - 20,350
Non-interest expense   30,987     16,030     213   3,754     -     50,984  
Net income (loss) before provision and taxes 22,417 3,110

 

158

 

(3,740 )

 

-

 

21,945
Provision for loan losses 2,541 - - - - 2,541
Provision for income taxes   6,698     1,139     55   (1,211 )   -     6,681  
Reported net income (loss) $ 13,178   $ 1,971   $ 103 $ (2,529 ) $ -   $ 12,723  
Add: merger & acquisition expense reported above 5,114 - - 555 - 5,669
Less: increase/(decrease) in unrealized gains on mortgage banking activities (SAB 109) - (7,658 ) - - - (7,658 )
Less: provision for income taxes associated with merger & acquisition expense & SAB 109   (1,675 )   2,719     -   (180 )   -     864  
Operating net income (loss) $ 16,617   $ (2,968 ) $ 103 $ (2,154 ) $ -   $ 11,598  
 
Average Assets $ 3,047,522 $ 227,228 $ 2,309 $ 384,564 $ (550,783 ) $ 3,110,840
 
               
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)
   
6/30/153/31/1512/31/1409/30/1406/30/14

For the Three Months Ended:

Applications $ 1,403,000 $ 1,595,000 $ 922,000 $ 973,000 $ 1,120,000
Loans closed 1,086,264 843,734 778,586 826,786 842,089
Loans sold 923,406 848,559 768,971 889,549 743,871
 

At Period End:

Locked pipeline $ 363,613 $ 449,865 $ 194,919 $ 265,443 $ 331,092
Loans held for sale 427,351 264,494 269,319 259,703 322,466
SAB 109 total unrealized gains recognized 20,485 19,510 12,823 13,734 17,094
Change in unrealized gains 975 6,687 (910 ) (3,360 ) 4,010
Change in aftertax income 629 4,313 (587 ) (2,167 ) 2,586
 
REPORTED NET INCOME $ 2,412 $ 5,974 $ 762 $ (76 ) $ 2,139
OPERATING NET INCOME 1,783 1,661 1,349 2,091 (447 )