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Cardinal Announces Third Quarter Earnings

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Cardinal Financial Corporation (NASDAQ:CFNL) (the “Company”) today reported a 217% increase in reported earnings of $9.4 million, or $0.29 per diluted share, for the quarterly period ended September 30, 2014, compared to reported earnings of $3.0 million, or $0.10 per diluted share, for the third quarter of 2013. For the nine month year to date period of 2014, reported earnings increased 11% to $22.2 million, or $0.68 per diluted share. This compares to reported earnings of $20.0 million, or $0.64 per diluted share for the same period of 2013.

Selected Highlights

  • Operating net income (a non-GAAP measure) increased 54% to $11.7 million, or $0.35 per share, for the current quarter versus $7.6 million, or $0.24 per share, for the year ago quarter. Operating net income for the third quarter of 2014 excludes $43,000 of after-tax expenses related to acquisitions and eliminates a $2.2 million after-tax decrease in unrealized gains from recognizing revenue on forward commitments to sell mortgages. The year ago quarter includes $203,000 of after tax acquisition expenses and a $4.4 million decrease in unrealized gains. Management believes operating net income more accurately reflects the performance of the Company.
  • Loans held for investment organically grew $97 million during the quarter and $211 million year to date, or approximately 14% annualized. Asset quality remains excellent. Nonperforming loans remained low at 0.19% of total assets, and the Company had net loan charge offs of 0.05% of average loans outstanding. The Company had $0 real estate owned at September 30, 2014, and $5.5 million of non-accruing loans.
  • Pretax, pre-provision income for the commercial banking segment, before acquisition expenses, was $43.1 million for the 2014 year to date period, versus $38.7 million for the 2013 year to date period, an increase of 11%.
  • Mortgage banking reported a net loss of $76,000, but delivered operating net income of $2.1 million for the current quarter after eliminating the $2.2 million after-tax decrease in unrealized gains. On an operating basis, this was the best performance in over a year.
  • 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 9.80% at September 30, 2014.

United Financial Banking Companies Acquisition (UFBC)

On January 16, 2014, the Company completed its acquisition of UFBC and its primary subsidiary, The Business Bank. During the year, the Company has incurred legal and accounting costs, lease termination expenses, plus employee retention and severance payments related to this acquisition. These expenses have totaled $5.7 million pretax. Expenses related to one remaining branch consolidation will be incurred in the next two quarters.

Review of Balance Sheet

At September 30, 2014, total assets of the Company were $3.31 billion, an increase of 18% from total assets of $2.80 billion at September 30, 2013. Loans held for investment grew to $2.49 billion versus $1.96 billion from a year ago. Excluding $238 million of loans associated with the UFBC acquisition, organic growth was approximately $288 million, or 15%. During the most recent quarter, the Company had near record loans held for investment growth of $97 million, or over 16% annualized.

Loans held for sale decreased slightly to $314 million at September 30, 2014 compared to $323 million at September 30, 2013. The investment securities portfolio also declined modestly to $341 million from $361 million a year ago. Deposit balances increased $343 million to $2.42 billion from $2.08 billion for these same periods, respectively. Non-interest bearing demand deposit accounts increased $119 million to $554 million, which represented 23% of total deposits. Other borrowed funds increased to $477 million from $355 million.

Net Interest Income

The Company’s net interest income increased 18% to $27.9 million from $23.7 million, for the three month periods ended September 30, 2014 and 2013, respectively. For the comparable nine month year to date periods of 2014 and 2013, net interest income increased 17%, to $80.5 million from $68.5 million. The Company’s tax equivalent net interest margin was 3.66% for the current quarter and 3.63% year to date versus 3.65% and 3.47% 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 $31 million and the average loans held for investment balances increased $496 million. The average balance of investments grew $21 million, and the yield on total interest earning assets decreased to 4.35% from 4.46%. Over this same period, average deposit balances increased $326 million and the average balance of other borrowed funds increased $124 million. The average cost of interest bearing liabilities decreased to 0.93% from 1.08%.

Commercial Banking Review

For the current quarter ended September 30, 2014, net income for the commercial banking segment was $10.4 million, an increase of 21% from $8.6 million for the year ago quarter. For the comparable nine month periods ended September 30, 2014 and 2013, net income was $23.5 million versus $26.1 million. Before the current year acquisition expenses, year to date net income was $27.0 million, which includes a provision for loan losses of $2.5 million. The first nine months of 2013 included a negative provision of $517,000. Pre-tax, pre-provision earnings, before M&A expenses, were $43.1 million for the 2014 year to date period, versus $38.7 million for the 2013 year to date period, an increase of 11%.

The allowance for loan losses was 1.19% of loans outstanding at September 30, 2014 versus 1.24% at June 30, 2014 and 1.40% at September 30, 2013. This ratio decrease from a year ago is partially the result of the addition of acquired loans from UFBC that, under purchase accounting, were recorded at fair value. The allowance for loan losses on the Company’s legacy portfolio was 1.27% of loans outstanding at September 30, 2014. The Company’s nonperforming assets were 0.19% of total assets at September 30, 2014 compared to 0.19% at June 30, 2014 and 0.09% at September 30, 2013. For the current quarter, there were modest net charge offs equal to 0.05% of average loans outstanding, compared to 0.07% for the previous quarter and net recoveries of 0.03% for the year ago quarter.

Non-interest income was $1.6 million for the current quarter and $3.5 million for the year to date period ended September 30, 2014, compared to $1.0 million for the year ago quarter and $2.5 million for the year to date period ended September 30, 2013.

Non-interest expense was $13.4 million for the current quarter versus $11.1 million for the year ago quarter ended September 30, 2013, and the bank’s efficiency ratio was 46.3%. Approximately $850,000 of the expense increase from the year ago quarter is attributable to expenses associated with the former UFBC, representing a 66% cost savings from UFBC’s pre-acquisition expense levels. The Company also incurred $185,000 of intangible expense amortization as a result of the transaction. Another $370,000 of the expense increase resulted from the Company adding two banking offices since September 2013. Current quarter incentive accruals were $700,000 higher than the year ago quarter. The Company also recently announced the acquisition of a branch in Gainesville, VA, which is expected to be completed in early November.

Mortgage Banking Review

For the current quarter ended September 30, 2014, the mortgage banking segment reported a net loss of $76,000, and it delivered operating net income of $2.1 million, its most profitable quarter since refinance activity decreased over a year ago. Operating net income (a non-GAAP measure) is reported before the impact of the Staff Accounting Bulletin (“SAB”) 109 accounting requirement to record the fair value of locked mortgage loan commitments and their forward sale to investors. The revenue recognition impact of this rule upon unrealized gains resulted in a decrease in reported net income of $2.2 million in the current period.

For the year ago quarter ended September 30, 2013, there was a reported net loss of $4.9 million and an operating net loss of $447,000. The accompanying Table #7 provides recent quarterly information regarding the impact of SAB 109.

During the third quarter of 2014, closed loans were $827 million and loans sold to investors totaled $890 million, versus $928 million and $1.17 billion, respectively, for the same quarter of 2013. Although production has decreased slightly from prior year levels, net realized gain on sales and other fees were $9.9 million for the current quarter versus $6.7 million for the same period a year ago. The increase of 48% is primarily the result of an improving gain on sale margin.

Loan applications totaled $973 million during the current quarter of 2014, down from $1.12 billion for the last quarter ended June 30, 2014. July, August and September applications totaled $350 million, $316 million and $307 million, respectively. Purchase money applications represent 80% of total volume.

Management’s actions have led to overall operating expense reductions of $2.1 million in the current quarter when compared to the year ago quarter. Operating non-interest expenses were $10.1 million versus $12.2 million for the third quarter of 2014 and 2013, respectively. For these periods, operating expenses include $2.6 million and $3.4 million of fixed salary expenses associated with loan closings that are reported as contra-revenue under GAAP.

Capital Ratios

The Company remains in excess of regulatory standards of a well capitalized bank. The tier 1 capital ratio is 10.95% and the total risk based capital ratio is 11.91%.

MANAGEMENT COMMENTS

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

“This quarter reflects solid earnings, exceptional loan growth and pristine credit quality. Over the past year, we’ve expanded our traditional banking operations by opening two new banking offices, acquiring a bank and adding three new commercial lenders. In November, we will gain an entry point into the attractive Gainesville, VA market.

“Mortgage banking produced satisfying results with its best quarter in over a year. Ongoing initiatives have led to increasing margins and reduced expenses. Although we’ve seen an increase in activity compared to earlier in 2014, the mortgage banking business remains challenging. We continue to closely monitor current and expected future loan originations, and we will act appropriately to align operations to that volume.

“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 $3.31 billion at September 30, 2014, serves the Washington Metropolitan region through its wholly-owned subsidiary, Cardinal Bank, with 30 conveniently located banking offices. Cardinal also operates several other subsidiaries: George Mason Mortgage, LLC, a residential mortgage lending company based in Fairfax, with 17 offices throughout the Washington Metropolitan region; 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
September 30, 2014 December 31, 2013 September 30, 2013 Current Year Year Over Year
(Unaudited) (Unaudited)
Cash and due from banks $ 21,390 $ 18,285 $ 23,652 17.0 % -9.6 %
Federal funds sold 26,170 10,924 45,073 139.6 % -41.9 %
Investment securities available-for-sale 330,415 349,319 347,567 -5.4 % -4.9 %
Investment securities held-to-maturity 6,072 6,477 9,811 -6.3 % -38.1 %
Investment securities – trading 4,724 3,890 3,716 21.4 % 27.1 %
Total investment securities 341,211 359,686 361,094 -5.1 % -5.5 %
Other investments 19,394 19,068 14,048 1.7 % 38.1 %
Loans held for sale 313,525 373,993 323,341 -16.2 % -3.0 %
Loans receivable, net of fees 2,489,293 2,040,168 1,963,519 22.0 % 26.8 %
Allowance for loan losses (29,537 ) (27,864 ) (27,392 ) 6.0 % 7.8 %
Loans receivable, net 2,459,756 2,012,304 1,936,127 22.2 % 27.0 %
Premises and equipment, net 25,385 20,389 19,880 24.5 % 27.7 %
Goodwill and intangibles, net 37,012 10,144 10,144 264.9 % 264.9 %
Bank-owned life insurance 32,418 32,063 31,958 1.1 % 1.4 %
Other assets 38,664 37,374 39,089 3.5 % -1.1 %
TOTAL ASSETS $ 3,314,925 $ 2,894,230 $ 2,804,406 14.5 % 18.2 %
Non-interest bearing deposits $ 553,629 $ 433,749 $ 434,228 27.6 % 27.5 %
Interest checking 444,437 398,136 386,139 11.6 % 15.1 %
Money markets 338,087 266,316 301,179 26.9 % 12.3 %
Statement savings 254,770 209,391 215,334 21.7 % 18.3 %
Certificates of deposit 548,907 469,279 486,919 17.0 % 12.7 %
Brokered certificates of deposit 284,975 281,988 258,277 1.1 % 10.3 %
Total deposits 2,424,805 2,058,859 2,082,076 17.8 % 16.5 %
Other borrowed funds 476,828 475,232 355,321 0.3 % 34.2 %
Mortgage funding checks 15,510 6,528 10,140 137.6 % 53.0 %
Escrow liabilities 2,242 1,572 2,253 42.6 % -0.5 %
Other liabilities 27,473 31,507 37,748 -12.8 % -27.2 %
Shareholders’ equity 368,067 320,532 316,868 14.8 % 16.2 %
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY $ 3,314,925 $ 2,894,230 $ 2,804,406 14.5 % 18.2 %
Table 2.
Cardinal Financial Corporation and Subsidiaries
Summary Income Statements
(Dollars in thousands, except share and per share data)
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30 September 30
2014 2013 % Change 2014 2013 % Change
Net interest income $ 27,916 $ 23,692 17.8 % $ 80,496 $ 68,546 17.4 %
Provision for loan losses - (157 ) -100.0 % (2,541 ) 432 -688.2 %
Net interest income after provision for loan losses 27,916 23,535 18.6 % 77,955 68,978 13.0 %
Non-interest income:
Service charges on deposit accounts 571 507 12.6 % 1,641 1,498 9.5 %
Loan fees 340 364 -6.6 % 951 857 11.0 %
Income from bank owned life insurance 111 124 -10.5 % 356 306 16.3 %
Net realized gains on investment securities 721 18 100.0 % 1,046 100 946.0 %
Gain (loss) on sale of real estate 0.0 % 30 -100.0 %
Other non-interest income (loss) 13 9 44.4 % 44 38 15.8 %
Commercial banking & other segment non-interest income 1,756 1,022 71.8 % 4,038 2,829 42.7 %
Title insurance & other income 169 -100.0 % 918 -100.0 %
Management fee income 374 -100.0 % 21 1,483 -98.6 %
Gains from mortgage banking activities 19,015 15,566 22.2 % 55,930 64,964 -13.9 %
Less: mortgage loan origination expenses (12,448 ) (15,668 ) -20.6 % (31,742 ) (47,578 ) -33.3 %
Mortgage banking segment non-interest income 6,567 441 1389.1 % 24,209 19,787 22.3 %
Wealth management segment non-interest income 128 195 -34.4 % 554 1,143 -51.5 %
Total non-interest income 8,451 1,658 409.7 % 28,801 23,759 21.2 %
Net interest income and noninterest income 36,367 25,193 44.4 % 106,756 92,737 15.1 %
Salaries and benefits 10,726 9,992 7.3 % 33,586 30,367 10.6 %
Occupancy 2,601 1,981 31.3 % 7,776 6,148 26.5 %
Depreciation 972 808 20.3 % 2,789 2,331 19.6 %
Data processing & communications 1,603 1,212 32.3 % 4,905 3,481 40.9 %
Professional fees 783 786 -0.4 % 2,476 3,247 -23.7 %
FDIC insurance assessment 391 401 -2.5 % 1,119 1,049 6.7 %
Mortgage loan repurchases and settlements 111 -100.0 % 83 (49 ) -269.4 %
Merger and acquisition expense 64 304 100.0 % 5,733 304 100.0 %
Other operating expense 5,075 5,449 -6.9 % 14,733 16,098 -8.5 %
Total non-interest expense 22,215 21,044 5.6 % 73,200 62,976 16.2 %
Income before income taxes 14,152 4,149 241.1 % 33,556 29,761 12.8 %
Provision for income taxes 4,710 1,168 303.3 % 11,391 9,796 16.3 %
NET INCOME $ 9,442 $ 2,981 216.7 % $ 22,165 $ 19,965 11.0 %
Earnings per common share – basic $ 0.29 $ 0.10 199.3 % $ 0.69 $ 0.65 5.2 %
Earnings per common share – diluted $ 0.29 $ 0.10 198.7 % $ 0.68 $ 0.64 5.2 %
Weighted-average common shares outstanding – basic 32,482,195 30,692,595 5.8 % 32,345,319 30,654,343 5.5 %
Weighted-average common shares outstanding – diluted 32,933,774 31,060,572 6.0 % 32,771,787 31,053,448 5.5 %

Reconciliation of Non-GAAP measures:

GAAP net income reported above $ 9,442 $ 2,981 $ 22,165 $ 19,965
Add: Merger and acquisition expense reported above 64 304 5,733 304
Subtract: provision for income taxes associated with merger and acquisition expense (21 ) (101 ) (1,898 ) (101 )
NET INCOME, excluding above merger and acquisition charges $ 9,485 $ 3,184 $ 26,000 $ 20,168
Earnings per common share – basic (excluding merger and acquisition charges) $ 0.29 $ 0.10 $ 0.80 $ 0.66
Earnings per common share – diluted (excluding merger and acquisition charges) $ 0.29 $ 0.10 $ 0.79 $ 0.65
Table 3.
Cardinal Financial Corporation and Subsidiaries
Selected Financial Information
(Dollars in thousands, except per share data and ratios)
(Unaudited)

For the Three Months Ended

For the Nine Months Ended

September 30

September 30

2014

2013

2014

2013

Performance Ratios:
Return on average assets 1.16 % 0.43 % 0.94 % 0.95 %
Return on average equity 10.20 % 3.73 % 8.03 % 8.34 %
Net interest margin (1) 3.66 % 3.65 % 3.63 % 3.47 %
Efficiency ratio (2) 61.09 % 83.01 % 66.97 % 68.23 %
Non-interest income to average assets 1.04 % 0.24 % 1.22 % 1.13 %
Non-interest expense to average assets 2.74 % 3.04 % 3.09 % 3.01 %
Mortgage Banking Select Data:
$ of loan applications – George Mason Mortgage $ 973,000 $ 1,077,000 $ 3,054,000 $ 4,251,000
$ of loan applications – Managed Mortgage Company Affiliates 373,000 1,400 1,530,000
Total 973,000 1,450,000 3,055,400 5,781,000
Refi % of loan applications – George Mason Mortgage 20 % 20 % 19 % 35 %
Refi % of loans applications- Managed Mortgage Company Affiliates 0 % 15 % 15 % 33 %
Total 20 % 19 % 19 % 34 %
$ of loans closed – George Mason Mortgage $ 826,786 $ 927,548 $ 2,220,318 $ 3,404,016
$ of loans closed – Managed Mortgage Company Affiliates 347,957 13,034 1,309,776
Total 826,786 1,275,505 2,233,352 4,713,792
# of loans closed – George Mason Mortgage 2,399 2,748 6,637 9,983
# of loans closed – Managed Mortgage Company Affiliates 899 30 3,384
Total 2,399 3,647 6,667 13,367
$ of loans sold – George Mason Mortgage $ 889,549 $ 1,170,953 $ 2,195,376 $ 3,741,135
$ of loans sold – Managed Mortgage Company Affiliates 435,828 71,504 1,449,974
Total 889,549 1,606,781 2,266,880 5,191,109
$ of locked commitments – George Mason Mortgage $ 761,137 $ 789,516 $ 2,274,853 $ 3,273,290
$ locked commitments at period end – George Mason Mortgage $ 265,443 $ 350,976
$ of loans held for sale at period end – George Mason Mortgage $ 259,703 $ 195,797
Realized gain on sales and fees as a % of loan sold (3) 2.52 % 1.91 % 2.35 % 2.08 %
Net realized gains as a % of realized gains (Gain on sale margin) (4) 44.37 % 30.03 % 38.52 % 38.85 %
Asset Quality Data:
Net charge-offs (recoveries) to average loans receivable, net of fees 0.05 % -0.03 %
Total nonaccrual loans $ 5,472 $ 2,510
Real estate owned $ $
Nonperforming loans to loans receivable, net of fees 0.25 % 0.13 %
Nonperforming loans to total assets 0.19 % 0.09 %
Nonperforming assets to total assets 0.19 % 0.09 %
Total loans receivable past due 30 to 89 days $ 883 $ 1,803
Total loans receivable past due 90 days or more $ 792 $
Allowance for loan losses to loans receivable, net of fees 1.19 % 1.40 %
Allowance for loan losses to nonperforming loans 471.54 % 1091.31 %
Capital Ratios:
Tier 1 risk-based capital 10.95 % 12.21 %
Total risk-based capital 11.91 % 13.28 %
Leverage capital ratio 10.70 % 11.50 %
Book value per common share $ 11.49 $ 10.46
Tangible book value per common share (5) $ 10.34 $ 10.13
Common shares outstanding 32,029 30,281

(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 and Nine Months Ended September 30, 2014 and 2013
(Dollars in thousands, except share and per share data)
(Unaudited)
For the Three Months Ended September 30 For the Nine Months Ended September 30

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) $ 19,015 $ 15,566 22.16 % $ 55,930 $ 64,964 -13.91 %
Loan origination expenses recognized @ Loan Sale Date 12,448 15,668 -20.55 % 31,742 47,578 -33.28 %
Reported Net Gains from Mortgage Banking Activities 6,567 (102 ) -6538.24 % 24,188 17,386 39.12 %

As Adjusted

Realized Gains Recognized @ Loan Sale Date 22,375 22,394 -0.08 % 51,632 77,808 -33.64 %
Loan origination expenses recognized @ Loan Sale Date 12,448 15,668 -20.55 % 31,742 47,578 -33.28 %
Adjusted Net Gains from Mortgage Banking Activities 9,927 6,726 47.59 % 19,890 30,230 -34.20 %

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

Increase/(Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109

$ (3,360 ) $ (6,828 ) -50.79 % $ 4,298 $ (12,844 ) -133.46 %

Net Income Reconciliation:

Reported Net Income $ 9,442 $ 2,981 216.74 % $ 22,165 $ 19,965 11.02 %
Aftertax Merger and Acquisition Expense 43 203 -78.90 % 3,835 203 1790.50 %
Adjusted Net Income $ 9,485 $ 3,184 197.90 % $ 26,000 $ 20,168 28.92 %
Aftertax Net Increase / (Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB109 (2,167 ) (4,404 ) -50.79 % 2,772 (8,284 ) -133.46 %
Operating Net Income $ 11,652 $ 7,588 53.56 % $ 23,228 $ 28,452 -18.36 %

Earnings per Share (EPS) Reconciliation:

Reported Net Income $ 0.29 $ 0.10 198.72 % $ 0.68 $ 0.64 5.20 %
Aftertax Merger and Acquisition Expense 0.00 (0.00 ) 0.11 0.01
Adjusted Net Income 0.29 0.10 180.96 % 0.79 0.65 22.16 %
Aftertax Net Increase / (Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB109 (0.06 ) (0.14 ) -54.30 % 0.08 (0.27 ) -131.71 %
Operating Net Income $ 0.35 $ 0.24 44.42 % $ 0.71 $ 0.91 -22.09 %

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

Return on average assets 1.44 % 1.10 % 0.98 % 1.36 %
Return on average equity 12.59 % 9.50 % 8.42 % 11.89 %
Efficiency ratio 55.92 % 65.40 % 69.71 % 59.89 %
Non-interest income to average assets 1.46 % 1.23 % 1.04 % 1.75 %
**
Per the accounting guidance set forth by SEC Staff Accounting Bulleting (SAB) 109 regarding mortgage lending activities, the fair value of a “locked” commitment, or an unrealized gain, is recognized in income on the day of the locked commitment (LC). As a result of this revenue recognition, the unrealized gains then become part of the basis of the ensuing loan held for sale (LHFS) when the loan is closed. When the loan is sold to investors, the “price” received is equal to the basis of the loan held for sale, and there is no gain or loss recognized. At any point in time (e.g. quarter end) the fair value of the LCs and the premium to the par value of LHFS represent unrealized gains that have been recognized in income, either in the current period or prior periods. This accounting creates a mismatch between the income recognition on loan production and expense recognition for those same loans, which is discussed below.
In accordance with accounting rules (formally FAS 91), direct (e.g. commissions) and indirect loan expenses associated with originating, underwriting and closing loans are deferred and amortized over the life of the loan. In mortgage banking, this results in the mentioned expenses being recognized at the time of investor purchase of the loan (i.e. loan sale date) which often occurs in the quarter subsequent to the original LC and creates a mismatch in the timing of the revenue and expense. These expenses are “netted” from the gain on sale from mortgage banking activities, which is included in non-interest income.
Table 5.
Cardinal Financial Corporation and Subsidiaries
Average Statements of Condition and Yields on Earning Assets and Interest-Bearing Liabilities
Three and Nine Months Ended September 30, 2014 and 2013
(Dollars in thousands)
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, 2014 September 30, 2013 September 30, 2014 September 30, 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 $ 301,251 4.44 % $ 214,301 4.04 % $ 285,329 4.44 % $ 214,232 4.04 %
Real estate – commercial 1,185,110 4.54 % 960,770 4.65 % 1,173,169 4.43 % 881,570 4.79 %
Real estate – construction 419,110 5.09 % 345,072 5.28 % 411,073 5.02 % 351,975 5.27 %
Real estate – residential 357,502 3.82 % 259,395 4.31 % 327,656 3.97 % 240,380 4.44 %
Home equity lines 121,025 3.69 % 110,297 3.67 % 117,178 3.70 % 113,573 3.69 %
Consumer 4,921 5.88 % 2,601 5.18 % 5,432 5.78 % 3,156 5.33 %
Total loans 2,388,919 4.48 % 1,892,436 4.65 % 2,319,837 4.45 % 1,804,886 4.71 %
Loans held for sale 341,925 4.16 % 373,318 4.44 % 291,585 4.26 % 447,519 3.95 %
Investment securities – available-for-sale (1) 319,567 3.93 % 294,445 4.11 % 330,205 3.97 % 256,059 4.21 %
Investment securities – held-to-maturity 6,173 2.40 % 10,146 1.72 % 6,877 2.17 % 10,647 1.85 %
Other investments 15,431 3.39 % 13,312 2.50 % 15,042 3.65 % 13,387 2.39 %
Federal funds sold 19,229 0.19 % 44,788 0.25 % 31,899 0.21 % 129,884 0.25 %
Total interest-earning assets 3,091,244 4.35 % 2,628,445 4.46 % 2,995,445 4.32 % 2,662,382 4.71 %
Non-interest earning assets:
Cash and due from banks 19,390 16,876 25,270 16,773
Premises and equipment, net 25,806 19,846 25,765 19,602
Goodwill and intangibles, net 37,116 10,168 33,548 10,217
Accrued interest and other assets 99,027 120,034 105,038 110,004
Allowance for loan losses (29,865 ) (27,211 ) (29,784 ) (27,340 )
TOTAL ASSETS $ 3,242,718 $ 2,768,158 $ 3,155,282 $ 2,791,638
Interest-bearing liabilities:
Interest checking $ 433,251 0.50 % $ 387,367 0.53 % $ 428,951 0.51 % $ 371,099 0.59 %
Money markets 336,586 0.29 % 300,920 0.23 % 325,097 0.30 % 292,232 0.28 %
Statement savings 257,212 0.27 % 219,021 0.26 % 253,047 0.27 % 213,498 0.27 %
Certificates of deposit 828,053 0.99 % 761,246 1.21 % 813,349 0.98 % 853,174 1.13 %
Total interest-bearing deposits 1,855,102 0.65 % 1,668,554 0.75 % 1,820,444 0.65 % 1,730,003 0.77 %
Other borrowed funds 415,635 2.17 % 291,787 2.98 % 388,385 2.29 % 290,509 3.02 %
Total interest-bearing liabilities 2,270,737 0.93 % 1,960,341 1.08 % 2,208,829 0.94 % 2,020,512 1.09 %
Noninterest-bearing liabilities:
Noninterest-bearing deposits 565,650 426,265 544,928 403,881
Other liabilities 36,120 62,150 33,702 48,052
Shareholders’ equity 370,211 319,402 367,823 319,193
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY $ 3,242,718 $ 2,768,158 $ 3,155,282 $ 2,791,638
NET INTEREST MARGIN (1) 3.66 % 3.65 % 3.63 % 3.47 %
(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 September 30, 2014:
Net interest income $ 27,302 $ 794 $ $ (180 ) $ $ 27,916
Non-interest income 1,609 6,685 113 44 8,451
Non-interest expense 13,375 7,514 108 1,218 22,215
Net income (loss) before provision and taxes 15,536 (35 )

5

(1,354 )

14,152
Provision for loan losses
Provision for income taxes 5,176 41 2 (509 ) 4,710
Net income (loss) $ 10,360 $ (76 ) $ 3 $ (845 ) $ $ 9,442
Add: merger & acquisition expense reported above 43 21 64
Increase/(Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109

3,360

3,360
Less: provision for income taxes associated with merger & acquisition expense & SAB 109 (14 ) (1,193 ) (7 ) (1,214 )
Operating Net Income $ 10,389 $ 2,091 $ 3 $ (831 ) $ $ 11,652
Average Assets $ 3,188,855 $ 352,621 $ 2,418 $ 388,497 $ (689,673 ) $ 3,242,718
At and for the Three Months Ended September 30, 2013:
Net interest income $ 23,110 $ 750 $ $ (168 ) $ $ 23,692
Non-interest income 1,010 441 195 22 (10 ) 1,658
Non-interest expense 11,100 8,764 101 1,089 (10 ) 21,044
Net income (loss) before provision and taxes 13,020 (7,573 )

94

(1,235 )

4,306
Provision for loan losses 157 157
Provision for income taxes 4,291 (2,722 ) 33 (434 ) 1,168
Net income (loss) $ 8,572 $ (4,851 ) $ 61 $ (801 ) $ $ 2,981
Add: merger & acquisition expense reported above 70 234 304
Increase/(Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109

6,828

6,828
Less: provision for income taxes associated with merger & acquisition expense & SAB 109 (23 ) (2,424 ) (78 ) (2,525 )
Operating Net Income $ 8,619 $ (447 ) $ 61 $ (645 ) $ $ 7,588
Average Assets $ 2,745,832 $ 409,394 $ 2,172 $ 321,867 $ (711,107 ) $ 2,768,158
Commercial Mortgage Wealth Intersegment
Banking Banking

Management Other Elimination Consolidated
At and for the Nine Months Ended September 30, 2014:
Net interest income $ 78,842 $ 2,177 $ $ (523 ) $ $ 80,496
Non-interest income 3,475 24,443 484 399 28,801
Non-interest expense 44,363 23,544 321 4,972 73,200
Net income (loss) before provision and taxes 37,954 3,076

163

(5,096 )

36,097
Provision for loan losses 2,541 2,541
Provision for income taxes 11,874 1,180 57 (1,720 ) 11,391
Net income (loss) $ 23,539 $ 1,896 $ 106 $ (3,376 ) $ $ 22,165
Add: merger & acquisition expense reported above 5,157 576 5,733
Increase/(Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109

(4,298 )

(4,298 )
Less: provision for income taxes associated with merger & acquisition expense & SAB 109 (1,707 ) 1,526 (191 ) (372 )
Operating Net Income $ 26,989 $ (876 ) $ 106 $ (2,991 ) $ $ 23,228
Average Assets $ 3,054,416 $ 302,635 $ 2,346 $ 385,890 $ (590,005 ) $ 3,155,282
At and for the Nine Months Ended September 30, 2013:
Net interest income $ 67,410 $ 1,665 $ $ (529 ) $ $ 68,546
Non-interest income 2,530 20,000 1,143 112 (26 ) 23,759
Non-interest expense 31,296 27,222 1,472 3,012 (26 ) 62,976
Net income (loss) before provision and taxes 38,644 (5,557 )

(329 )

(3,429 )

29,329
Provision for loan losses (517 ) 85 (432 )
Provision for income taxes 13,062 (2,028 ) (111 ) (1,127 ) 9,796
Net income (loss) $ 26,099 $ (3,614 ) $ (218 ) $ (2,302 ) $ $ 19,965
Add: merger & acquisition expense reported above 70 234 304
Increase/(Decrease) in Unrealized Gains on Mortgage Banking Activities Related to SAB 109

12,844

12,844
Less: provision for income taxes associated with merger & acquisition expense & SAB 109 (23 ) (4,560 ) (78 ) (4,661 )
Operating Net Income $ 26,146 $ 4,670 $ (218 ) $ (2,146 ) $ $ 28,452
Average Assets $ 2,780,602 $ 461,212 $ 2,342 $ 328,183 $ (780,701 ) $ 2,791,638
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)
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 $ 973,000 $ 1,120,000 $ 960,600 $ 886,000 $ 1,077,000 $ 1,691,000 $ 1,483,300 $ 1,413,000
Loans closed 826,786 842,089 551,443 797,319 927,548 1,393,253 1,083,217 1,271,651
Loans sold 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 $ 265,443 $ 331,092 $ 327,243 $ 210,907 $ 350,976 $ 489,000 $ 572,794 $ 481,703
Loans Held for Sale 259,703 322,466 224,248 234,761 195,797 439,000 370,623 532,916
SAB 109 Total Unrealized Gains Recognized 13,734 17,094 13,084 9,436 11,722 18,550 19,859 24,566
Change in Unrealized Gains (3,360 ) 4,010 3,648 (2,286 ) (6,828 ) (1,309 ) (4,707 ) (2,332 )
Change in Aftertax Income (2,167 ) 2,586 2,353 (1,474 ) (4,404 ) (844 ) (3,036 ) (1,505 )
REPORTED NET INCOME $ (76 ) $ 2,139 $ (167 ) $ (1,601 ) $ (4,851 ) $ 2,383 $ (1,146 ) $ 3,653
OPERATING NET INCOME 2,091 (447 ) (2,520 ) (127 ) (447 ) 3,227 1,890 5,158

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