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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2015

or

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                          to                        

Commission File Number:  0-24557

CARDINAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

(703) 584-3400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

32,209,214 shares of common stock, par value $1.00 per share, outstanding as of August 3, 2015

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CARDINAL FINANCIAL CORPORATION

INDEX TO FORM 10-Q

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PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

June 30, 2015 and December 31, 2014

(In thousands, except share data)

(Unaudited)

See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three and six months ended June 30, 2015 and 2014

(In thousands, except per share data)

(Unaudited)

See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three and six months ended June 30, 2015 and 2014

(In thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Six months ended June 30, 2015 and 2014

(In thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2015 and 2014

(In thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2015

(Unaudited)

Note 1

Organization

Cardinal Financial Corporation (the “Company” or “Cardinal”) is incorporated under the laws of the Commonwealth of Virginia as a financial holding company whose activities consist of investment in its wholly-owned subsidiaries. The principal operating subsidiary of the Company is Cardinal Bank (the “Bank”), a state-chartered institution and its subsidiary, George Mason Mortgage, LLC (“George Mason”), a mortgage banking company based in Fairfax, Virginia. In addition to the Bank, the Company has one nonbank subsidiary, Cardinal Wealth Services, Inc. (“CWS”), an investment services subsidiary.

On January 16, 2014, the Company announced the completion of its acquisition of United Financial Banking Companies, Inc. (“UFBC”), the holding company of The Business Bank (“TBB”), pursuant to a previously announced definitive merger agreement.  The merger of UFBC into Cardinal was effective January 16, 2014.  TBB, which was headquartered in Vienna, Virginia, merged into Cardinal Bank effective March 8, 2014.

Basis of Presentation

In the opinion of management, the accompanying consolidated financial statements have been prepared in accordance with the requirements of Regulation S-X, Article 10. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the full year ending December 31, 2015. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Note 2

Business Combinations

UFBC Acquisition

On January 16, 2014, the Company acquired UFBC, the holding company for TBB, a commercial bank with approximately $356 million in assets, after purchase accounting adjustments.  For each share of UFBC common stock outstanding, the shareholders of UFBC received a fixed exchange ratio of $19.13 in cash and 1.154 shares of the Company’s common stock.  The total consideration for the acquisition was $54.3 million, which was comprised of $26.8 million in cash and 1.6 million shares of the Company’s common stock.

In connection with the acquisition, the Company acquired all of the voting and common shares of UFBC Capital Trust I (the “UFBC Trust”), which is a wholly-owned subsidiary established for the sole purpose of issuing $5.0 million of floating rate junior subordinated deferrable interest debentures (“trust preferred securities”).  These trust preferred securities are due in 2035 and have an interest rate of LIBOR (London Interbank Offering Rate) plus 2.10%, which adjusts quarterly.  The UFBC Trust is an unconsolidated subsidiary since the Company is not the primary beneficiary of this entity.  The additional

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$155,000 that is payable by the Company to the UFBC Trust represents the Company’s unfunded capital investment in the UFBC Trust.

Merger and acquisition expense was $2.4 million and $5.7 million for the three and six months ended June 30, 2014, which are primarily related to legal and accounting costs, contract termination expenses, system conversion and integration expenses, employee retention and severance payments.

The following table sets forth the assets acquired and liabilities assumed in the acquisition at their estimated fair values as of the closing date of the transaction:

The fair value estimates are subject to change for up to one year after the closing date of the transaction if additional information relative to closing dates fair values becomes available.

Fair Value Measurement of Assets Acquired and Liabilities Assumed

Below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in the acquisition.

Cash and cash equivalents.  The carrying amount of cash and cash equivalents was used as a reasonable estimate of fair value.

Investment securities available for sale.  The estimated fair values of investment securities available-for-sale was based on reliable and unbiased evaluations by an industry-wide valuation service.  This service uses evaluated pricing models that vary based on asset class and include available trade, bid, and other market information.  Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

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Loans. The acquired loan portfolio was segregated into one of two categories for valuation purposes: purchased credit impaired loans and performing loans.  Purchased credit impaired loans were identified as those loans that were nonaccrual prior to the business combination and those loans that had been identified as potentially impaired.  Potentially impaired loans were those loans that were identified during the credit review process where there was an indication that the borrower did not have sufficient cash flows to service the loan in accordance with its terms.  Performing loans were those loans that were currently performing in accordance with the loan contract and do not appear to have any significant credit issues.

For loans that were identified as performing, the fair values were determined using a discounted cash flow analysis (the “income approach”).  Performing loans were segmented into pools based on loan type (1-4 family residential, commercial, commercial owner occupied, construction and development), and further segmented based on payment type (fully amortizing, non-fully amortizing balloon, or interest only), rate type (fixed versus variable), and remaining maturity.  The estimated cash flows expected to be collected for each loan was determined using a valuation model that included the following key assumptions: prepayment speeds, expected credit loss rates and discount rates.  Prepayment speeds were influenced by many factors including, but not limited to, current yields, historic rate trends, payment types, interest rate type, and the duration of the individual loan.  Expected credit loss rates were based on recent and historical default and loss rates observed for loans with similar characteristics, and further influenced by a credit review by management and a third party consultant on a selection of loans within the acquired portfolio.  The discount rates used were based on rates market participants might charge for cash flows with similar risk characteristics at the acquisition date.  The market rates were estimated using a build up approach which included assumptions with respect to loan servicing costs, interest rate volatility, and systemic risk, among other factors.

For loans that were identified as purchased credit impaired (“PCI”), either the above income approach was used or the asset approach was used.  The income approach was used for PCI loans where there was an expectation that the borrower would more likely than not continue to pay based on the current terms of the loan contract.  Management used the asset approach for all nonaccrual loans to reflect market participant assumptions.  Under the asset approach, the fair value of each loan was determined based on the estimated values of the underlying collateral.

The methods used to estimate the Level 3 fair values of loans are extremely sensitive to the assumptions and estimates used.  While management attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets.

The difference between the fair value and the expected cash flows from acquired loans will be accreted to interest income over the remaining term of the loans in accordance with Accounting Standards Codification (“ASC”) topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.”  See Note 7 for further details.

Premises and equipment.  The land and buildings acquired were recorded at fair value as determined by third party appraisals.

Other intangible assets.  Other intangible assets consisting of core deposit intangibles (“CDI”) are measures of the value of non-interest checking, savings, interest-bearing checking, and money market deposits that are acquired in a business combination excluding certificates of deposit with balances over $250,000 and high yielding interest bearing deposit accounts, which the Company determines customer related intangible assets as non-existent.  The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative funding source.  The CDI is being amortized over an estimated useful life of 6.7 years to approximate the existing deposit relationships acquired.

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Deposits.  The fair values of deposit liabilities with no stated maturity (non-interest checking, savings, interest-bearing checking, and money market deposits) are equal to the carrying amounts payable on demand.  The fair values of the certificates of deposit represent contractual cash flows, discounted to present value using interest rates currently offered by market participants on deposits with similar characteristics and remaining maturities.

Junior subordinated debentures issued to Trust.  There is no active market for trust preferred securities issued by UFBC Capital Trust I; therefore, the fair value of junior subordinated debentures was estimated utilizing the income approach.  Under the income approach, the expected cash flows over the remaining estimated life of the debentures were discounted at the prevailing market rate.  The prevailing market rate was based on: (i) a third-party broker opinion; (ii) implied market yields for recent trust preferred sales; and (iii) new trust preferred issuances for instruments with similar long durations.

Gainesville Branch Acquisition

On November 7, 2014, the Company acquired a branch location in Gainesville, VA, with approximately $66.3 million in assets, after purchase accounting adjustments.  The total consideration for the acquisition was $195,000 in cash.

The following table sets forth the assets acquired and liabilities assumed in the acquisition at their estimated fair values as of the closing date of the transaction:

Fair Value Measurement of Assets Acquired and Liabilities Assumed

Below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in the acquisition.

Cash.  The carrying amount of the cash received was used as a reasonable estimate of fair value.

Other intangible assets.  Other intangible assets consisting of core deposit intangibles (“CDI”) are measures of the value of non-interest checking, savings, interest-bearing checking, and money market deposits that are acquired in a business combination excluding certificates of deposit with balances over $250,000 and high yielding interest bearing deposit accounts, which the Company determines customer related intangible assets as non-existent.  The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit

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funding, relative to an alternative funding source.  The CDI is being amortized over an estimated useful life of 5.9 years to approximate the existing deposit relationships acquired.

Deposits.  The fair values of deposit liabilities with no stated maturity (non-interest checking, savings, interest-bearing checking, and money market deposits) are equal to the carrying amounts payable on demand.  The fair values of the certificates of deposit represent contractual cash flows, discounted to present value using interest rates currently offered by market participants on deposits with similar characteristics and remaining maturities.

Other borrowed funds. Other borrowed funds consist of one customer repurchase agreement.  The fair value of this repurchase agreement is equal to the carrying amount payable on demand as the stated maturity for customer repurchases agreements is between one and four days.

Note 3

Stock-Based Compensation

At June 30, 2015, the Company had two stock-based employee compensation plans, the 1999 Stock Option Plan (the “Option Plan”) and the 2002 Equity Compensation Plan (the “Equity Plan”).

In 1998, the Company adopted the Option Plan pursuant to which the Company may grant stock options for up to 625,000 shares of the Company’s common stock to employees and members of the Company’s and its subsidiaries’ boards of directors. As of November 23, 2008, the Option Plan expired, and therefore, there are no shares of common stock available to grant under this plan.

In 2002, the Company adopted the Equity Plan. The Equity Plan was amended in 2011 to increase the number of shares available under the plan and extend the term to 2021.  The Equity Plan authorizes the granting of options, which may be incentive stock options or non-qualified stock options, stock appreciation rights, restricted stock awards, phantom stock awards and performance share awards to directors, eligible officers and key employees of the Company.  There were 247,418 shares of the Company’s common stock available for future grants and awards in the Equity Plan as of June 30, 2015.

Stock options are granted with an exercise price equal to the common stock’s fair market value at the date of grant. Director stock options have ten year terms and vest and become fully exercisable at the grant date. Most employee stock options have ten year terms and vest and become fully exercisable in 20% increments beginning after their first year of service. Certain stock options granted to executive officers of the Company have ten year terms and vest in increments of 25% with immediate vesting of the first 25% on the date of grant and vesting of the remaining three increments on the anniversary date of the grant.  Stock options granted to executive officers during 2014 and the first quarter of 2015 have ten year terms with one-third of the options vested on the grant date and the remaining unvested options vesting over the next two years. Restricted stock awards are granted at the fair market value of the Company’s common stock on the grant date.  Most employee restricted stock grants vest in one-third increments on the anniversary date of the grant.  Certain restricted stock awards granted to executive officers vest one-third of the restricted stock award on the grant date and the remaining unvested options vest over the next two years.

The Company has only made awards of stock options and restricted stock under the Option Plan and the Equity Plan.

Total expense related to the Company’s share-based compensation plans for the three months ended June 30, 2015 and 2014 was $306,000 and $562,000, respectively.  Total stock compensation expense for the six months ended June 30, 2015 and 2014 was $866,000 and $714,000, respectively.  The total income tax benefit recognized in the income statement for share-based compensation arrangements was $103,000 and $187,000 for the three months ended June 30, 2015 and 2014, respectively.  For the six

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months ended June 30, 2015 and 2014, total income tax benefit recognized in the income statements for share-based compensation arrangements was $292,000 and $237,000, respectively.

Options granted for the three and six months ended June 30, 2015 were 9,000 and 118,250, respectively.  Options granted for the three and six months ended June 30, 2014 were 75,250 and 293,250, respectively.  The weighted average per share fair value of stock option grants for the three and six months ended June 30, 2015 was $6.27 and $5.94, respectively.  The weighted average per share fair value of stock option grants for the three and six months ended June 30, 2014 was $5.65 and $5.61, respectively.  The fair values of the options granted during all periods ended June 30, 2015 and 2014 were estimated as of the grant date using the Black-Scholes option-pricing model based on the following weighted average assumptions: