They said that "a bird in the hand is worth two in the bush". A bigger question for investors is:
"Is Cardinal Financial Corporation's (NASDAQ:CFNL) stock worth it in their portfolio?"
This mid-Atlantic bank has seen a meteoric rise over the last few years.company. Combining retail banking services with mortgages, an asset management company and a financial trust management company, this bank provides full services to its customers in Virginia, Maryland and the District of Columbia.
Flight of the Cardinal
Cardinal's mortgage operations seem solid. Cardinal's loans, a combination of Cardinal bank's and George Mason Mortgage, LLC (a fully owned subsidiary of Cardinal) have a loan to asset ratio of 73%.
Though this is typical for a mid-size banks like Cardinal, it's the review of the loans that really speak volumes about company's lending strategy.
As of December 2013, 51% of the company's loans were real estate-commercial loans, followed at a distance by real estate-construction loans and real estate-residential loans at 18% and 14% respectfully. With its main three loan sources backed by real estate, the collateral on these loans make them a very safe bet for the company. With no past due loans greater than 90 days, no real estate owned through foreclosure and 0.08% classified as non-performing assets, this conservative lending style is reaping rewards.
What happened in 2013?
While Cardinal and George Mason mortgage's loans seem to be solid, there may be signs that this 15 year old company has stretched itself too far.
While the mortgage side of company continues to reap its conservative rewards, Cardinal Bank released some very concerning numbers for its last fiscal year, with net income dropping to $25.5 million, a decrease of 44% since 2012 and even below 2011 levels of $27.9 million.
While the commercial bank's net income grew by 11% to $33.9 million, a big red flag can be seen when it comes to looking at the bank's deposits. Total deposits, the lifeblood of any bank, dropped by nearly $80 Million, from $2.2 billion to $2.0 billion in the span of one year .
While the bank's net interest income grew from $83.8 million in 2012 to $92.3 million in 2013 , a $30 million drop in non-interest income may lead investors to wonder why, if the bank's probability is good, such a drastic drop over one year?
Outlook for 2014: Cardinal or Phoenix?
While it seems like Cardinal Bank has fallen out of the nest a little, management found a quick way to respond to boost their deposits: just buy out a competitor.
In January of 2014, Cardinal completed its acquisition of United Financials Banking Companies for $26.8 million in cash and 1.6 Million shares of stock. In return, Cardinal bought $329 million in total assets, including $238 Million in loans and $295 million worth of deposits. Total loans in Q1 grew by $563 million, or 32%, to $2.3 billion up from last year's Q1 of $1.7 billion, and organic growth (excluding the loans acquired by acquisition) grew by $325 million. Even the core bank grew from 2013, with net interest income increasing by approximately $700,000 and non-interest income increase of roughly $24,000 over last year .
With expected gains to be realized from the acquisition, Cardinal believes itself to be a Phoenix with strong positive outlooks into 2014 and beyond.
Is Cardinal overpriced?
With a price-to-book ratio of 1.6 and a P/E of 24.1 ( as of 5/29/2014), Cardinal looks to be a bit pricey when compared its peers in the mid-Atlantic.
While it has a good net interest margin of 3.52% for 2013, the fact that their net interest margin has dropped is now at the lowest it has been since 2009 is just another cause for concern.
This, combined with the recent drop in deposits shows that there may still be things Cardinal has to fix within its banking division. Its ROE is higher than many of its peers (8.12%), but much like the net interest margin, just far enough from a sweet-spot of 10% to make investors think twice about including it in their portfolio.
Final Thoughts: Maybe one day, but not today
Cardinal's mortgage operations are working well and they seem to be making a lot of proactive steps to become a regional leader within the Washington DC Metro area.
However, at its current price and with internal troubles inside its flagship division, Cardinal Bank, it just seems to be a little less rewarding for the risk investors would be taking. Not to say that this would be a bad investment, but until Cardinal can prove that they have ironed out the issues with the banking division and improve its ROE slightly, it might be best to leave this bird in the bush for now.