U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
[ ] Transition Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____________ to _____________
Commission file number: 333-52279
CARDINAL FINANCIAL CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
Virginia 54-1874630
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10641 Lee Highway
Fairfax, Virginia 22030
(Address of Principle Executive Offices)
(703) 934-9200
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 ____ No __X__
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
4,239,509 shares of common stock, par value $1.00 per share,
outstanding as of August 19, 1998
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CARDINAL FINANCIAL CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
Part I. Financial Information
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Condition
June 30, 1998 and December 31, 1997...............................................3
Condensed Consolidated Statements of Income
Three Months and Six Months Ended June 30, 1998...................................4
Condensed Consolidated Statements of Cash Flows
Three Months and Six Months Ended June 30, 1998...................................5
Condensed Consolidated Statement of Changes in Stockholders' Equity
Six Months Ended June 30, 1998....................................................6
Notes to Condensed Consolidated Financial Statements.......................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation..........................................................9
Part II. Other Information
Item 1. Legal Proceedings.........................................................................12
Item 2. Changes in Securities and Use of Proceeds.................................................12
Item 3. Defaults Upon Senior Securities...........................................................13
Item 4. Submission of Matters to a Vote of Security Holders.......................................13
Item 5. Other Information.........................................................................13
Item 6. Exhibits and Reports on Form 8-K..........................................................13
</TABLE>
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<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 13,162 $ 4,283
Securities available for sale, at market value 240 -
Loans, net of unearned discount and deferred loan fees 341 -
Less: Allowance for loan losses 3 -
------------ ------------
338 4,283
Subscriptions receivable - 4,510
Property, plant and equipment, net 1,176 -
Accrued interest and other assets 145 3
------------ ------------
Total Assets $ 15,061 $ 8,796
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 4,801 $ -
Accrued interest and other liabilities 358 245
------------ ------------
Total Liabilities 5,159 245
Common stock, $1 par value, 50,000,000 shares
authorized, 1,409,509 and 1,174,988 outstanding at
June 30, 1998 and December 31, 1997 1,410 1,175
Uncollected subscriptions receivable - (100)
Additional paid in capital 9,146 7,621
Accumulated deficit (654) (145)
Net unrealized gain on securities available for sale - -
------------ ------------
Total Stockholders' Equity 9,902 8,551
------------ ------------
Total Liabilities and Stockholders' Equity $ 15,061 $ 8,796
============ ============
</TABLE>
See accompanying notes to interim financial statements.
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<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans $ 3,743 $ 3,743
Investment securities 920 920
Interest bearing deposits 127,799 229,035
------------ ------------
Total Interest Income 132,462 233,698
INTEREST EXPENSE
Deposits 8,001 8,001
Borrowings - 1,616
------------ ------------
Total Interest Expense 8,001 9,617
------------ ------------
NET INTEREST INCOME 124,461 224,081
Provision for loan losses 3,010 3,010
------------ ------------
Net interest income after provision for loan losses 121,451 221,071
NON-INTEREST INCOME
Service fees 16 16
Other income 687 687
------------ ------------
Total Non-interest income 703 703
NON-INTEREST EXPENSE
Salary and benefits 257,734 378,023
Occupancy 50,051 110,855
Professional fees 68,074 129,535
Other operating expenses 69,681 112,047
------------ ------------
Total non-interest expense 445,540 730,460
Net loss before income taxes (323,386) (508,686)
Provision for income taxes - -
NET LOSS $ (323,386) $ (508,686)
============ ============
Basic and diluted loss per common share $ 0.23 $ 0.37
Weighted-average shares outstanding 1,409,509 1,390,074
</TABLE>
See accompanying notes to interim financial statements.
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<PAGE>
CARDINAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (323) $ (509)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 24 27
Provision for loan losses 3 3
Increase in other assets (143) (143)
Increase (decrease) in accounts payable and accrued expenses 324 300
----------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES (115) (322)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (921) (1,203)
Purchase of investment (240) (240)
Net increase in loan portfolio (341) (341)
----------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES. (1,502) (1,784)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 4,801 4,801
Proceeds from stock issuance, net - 1,759
Decrease (increase) in subscription receivables 302 4,610
(Repayment) proceeds of borrowings - (185)
----------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,103 10,985
----------------- -----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,486 8,879
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,676 4,283
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,162 $ 13,162
================= =================
Supplemental disclosure of cash flow information
Cash paid during period for interest $ 6,842 $ 8,458
See accompanying notes to interim financial statements.
</TABLE>
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<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands except for share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Additional Uncollected
Shares Common Paid-in Accumulated Subscription
Outstanding Stock Capital Deficit Receivable Total
------------- ------------- ------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 1,174,988 $ 1,175 7,621 (145) (100) 8,551
Issuance of 234,521 shares of common
stock par value $1, at $7.50 per
share, net of costs 234,521 235 1,525 - - 1,760
Payment of subscription receivable - - - - 100 100
Net loss - - - (509) - (509)
------------- ------------- ------------- -------------- ------------- ------------
BALANCE, JUNE 30, 1998 1,409,509 $ 1,410 9,146 (654) - 9,902
============= ============= ============= ============== ============= ============
</TABLE>
See accompanying notes to interim financial statements.
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<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
Note 1
Organization
Cardinal Financial Corporation (the "Company") was incorporated November 24,
1997 under the laws of the Commonwealth of Virginia as a holding company whose
activities consist of investment in its wholly owned subsidiary, Cardinal Bank,
N.A.
Basis of Presentation
In the opinion of management, the accompanying condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The results of operations for the
three months ended June 30, 1998 are not necessarily indicative of the results
to be expected for the full year ending December 31, 1998. The unaudited interim
financial statements should be read in conjunction with the audited financial
statements and notes to financial statements that are presented in the
Prospectus dated July 17, 1998 that is part of the Company's Registration
Statement on Form SB-2 (Registration No. 333-52279) and that was filed with the
Securities and Exchange Commission on July 20, 1998 pursuant to Rule 424(b)
under the Securities Act of 1933, as amended.
Note 2
Income Recognition on Loans
Interest on loans is credited to income as earned on the principal amount
outstanding. When, in management's judgment, the full collectibility of
principal or interest on a loan becomes uncertain, that loan is placed on
nonaccrual. Any accrued but uncollected interest on nonaccrual loans is charged
against current income. Interest income is then recognized as cash is received.
Interest accruals are resumed on such loans only when they are brought fully
current with respect to principal and interest and when, in the judgment of
management, the loans have demonstrated a new period of performance and are
estimated to be fully collectible as to both principal and interest.
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<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance available for losses
incurred on loans. It is established through charges to earnings in the form of
provisions for loan losses. Loan losses are charged to the allowance for loan
losses when a determination is made that collection is unlikely to occur.
Recoveries are credited to the allowance at the time of recovery.
Prior to the beginning of each year, and quarterly during the year, management
estimates whether the allowance for loan losses is adequate to absorb losses
that can be anticipated in the existing portfolio. Based on these estimates, an
amount is charged to the provision for loan losses to adjust the allowance to a
level determined to be adequate to absorb currently anticipated losses.
Management's judgment as to the level of future losses on existing loans is
based on management's internal review of the loan portfolio, including an
analysis of the borrowers' current financial position, the consideration of
current and anticipated economic conditions and their potential effects on
specific borrowers, an evaluation of the existing relationships among loans,
potential loan losses, and the present level of the loan loss allowance and
results of examinations by independent consultants. In determining the
collectibility of certain loans, management also considers the fair value of any
underlying collateral. In addition, various regulatory agencies, as a part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cardinal Financial Corporation (the "Company") is the bank holding
company for Cardinal Bank, N.A. in Fairfax, Virginia (the "Bank"). The Company
was in a development stage until the Bank commenced operations on June 8, 1998.
The Company funded its start-up and organizational costs through a
private offering (the "Private Offering") of 1,409,509 shares of its common
stock, par value $1.00 per share (the "Common Stock"), in the fourth quarter of
1997 and the first quarter of 1998. The total proceeds to the Company in the
Private Offering was $10.6 million, of which $8.0 million was used to capitalize
the Bank.
The following discussion presents management's discussion and analysis
of the consolidated financial condition and results of operations of the
Corporation as of June 30, 1998 and December 31, 1997 and for the three and six
months ended June 30, 1998. This discussion should be read in conjunction with
the Company's Unaudited Condensed Consolidated Financial Statements and the
notes thereto appearing elsewhere in this report. Since principal banking
operations commenced on June 8, 1998, a comparison of the June 30, 1998 results
(when banking operations were in progress) to those of June 30, 1997 (prior to
the Company's formation) is not meaningful.
Results of Operation
The total assets of the Company increased to $15.1 million at June 30,
1998, compared to $8.8 million at December 31, 1997, representing an increase of
$6.3 million or 71.2%. This increase is attributable to additional proceeds from
the Private Offering of $1.5 million and deposits of $4.8 million. Total loans
at June 30, 1998 was $341,000, and the investment portfolio and securities
available-for-sale at June 30, 1998 was $240,000.
Net loss for the six months ended June 30, 1998 was $508,686, or $0.37
per share. While implementing its growth strategy, the Company does not
anticipate profitable operations on a consolidated basis through December 31,
1999.
Net interest income is the Company's primary source of earnings and
represents the difference between interest and fees earned on interest earning
assets and the interest expense paid on deposits and other interest bearing
liabilities. Net interest income for the three months and the six months ended
June 30, 1998 totaled $124,461 and $224,081, respectively.
Non-interest income for the three months and the six months ended June
30, 1998 totaled $703 and $703, respectively. These amounts reflect the service
charges on deposit accounts and other noninterest income from fees on deposit
related products and sales of non-deposit investment products since the Bank
opened on June 8, 1998.
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<PAGE>
Non-interest expense for the three months and the six months ended June
30, 1998 totaled $445,540 and $730,460, respectively. These expenses are being
incurred in support of the Company's growth and consist of salaries and
benefits, occupancy, professional fees and other operating expenses.
The allowance for loan losses at June 30, 1998 was $3,010. The current
ratio of the allowance for loan losses to loans is 0.88%. Additions to the
allowance for loan losses will be made periodically to maintain the allowance at
an appropriate level based upon management's analysis of potential risk in the
loan portfolio. The amount of the loan loss provision will be determined by an
evaluation of the level of loans outstanding, the level of non-performing loans,
historical loan loss experience, delinquency trends, the amount of actual losses
charged to the reserve in a given period, and assessment of present and
anticipated economic conditions.
Capital Resources and Liquidity
Stockholders' equity at June 30, 1998 was $9.9 million, compared to
$8.6 million at December 31, 1997. The growth in stockholders' equity is
attributable to receipt of proceeds from the Private Offering, reduced by net
losses.
At June 30, 1998, the Company's tier 1 and total risk-based capital
ratios were 241.56% and 241.48%, respectively. The Company's leverage ratio was
84.10% at June 30, 1998. Comparative ratios at December 31, 1997 are not
meaningful since the Bank did not commence operations until June 8, 1998. The
Company's capital structure places it above the regulatory guidelines, as the
Company maintains a strong capital base to take advantage of business
opportunities while ensuring that it has the resources to protect against the
risks inherent in its business.
Liquidity provides the Company with the ability to meet normal deposit
withdrawals, while also providing for the credit needs of customers. At June 30,
1998, cash and cash equivalents totaled $13.2 million, representing 87.4% of
total assets. Management is committed to maintaining capital at a level
sufficient to protect depositors, provide for reasonable growth, and fully
comply with all regulatory requirements. Management's strategy to achieve this
goal is to retain sufficient earnings while providing a reasonable return on
equity.
The Company is not aware of any current recommendation by the
regulatory authorities which, if they were to be implemented, would have a
material effect on the Company's liquidity, capital resources, or results of
operations.
Year 2000 Compliance
As the year 2000 approaches, an important business issue has emerged
regarding how existing software programs and operating systems can accommodate
this date value. Many existing application software products were designed to
accommodate a two-digit year. For example, "98" is stored on the systems and
represents 1998 and "00" represents 1900. The Company utilizes a third-party
vendor for processing its primary banking applications. In
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<PAGE>
addition, the Company also uses several other third-party vendors for ancillary
computer applications. All third party vendors for the Company's banking
applications either are already Year 2000 ready or are in the process of
modifying, upgrading or replacing their computer applications to ensure Year
2000 compliance. Because the Company was recently formed, all of its data
processing equipment is new and is Year 2000 ready. The Company does not expect
to incur any material expense to replace data processing equipment. The Company
has a Year 2000 compliance program where it reviews the Year 2000 issues that
may be faced by its third-party vendors. Under such program, the Company is
examining the need for modifications or replacement of all non-Year 2000 ready
software. Because the Company is new, it has had the opportunity to screen its
third-party vendors and those it has chosen either are Year 2000 ready or are in
the process of becoming Year 2000 compliant. All of the Company's data
processing vendor contracts have Year 2000 clauses, which allow the Company to
test for compliance and to cancel without penalty if a vendor does not meet its
Year 2000 compliance plan. The Company's Year 2000 compliance program provides
that all critical data processing applications will be tested and that testing
will be completed on or before March 31, 1999. If any software is not Year 2000
ready at March 31, 1999, the vendor contract can be terminated and an
alternative vendor can be selected. The Company has identified alternative
vendors, should they be necessary. The Company's loan policy includes Year 2000
risk management parameters and, because the Company is new, it has no Year 2000
credit risk at this time. The Company does not currently expect that the cost of
its Year 2000 compliance program, including possible remediation costs, will be
material to its financial condition and expects that it will satisfy such
compliance program without material disruption of its operations. In the event
that the Company's significant vendors, including its correspondent, the Federal
Reserve Bank of Richmond, do not successfully and timely achieve Year 2000
compliance, however, the Company's business, results of operations or financial
condition would be adversely affected.
Forward-Looking Statements
This report contains certain forward-looking statements, which can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate" or "continue" or the negative thereof or
other comparable terminology. The Company cautions readers that certain
important factors, among others, in some cases have affected, and in the future
could affect, the Company's actual results and could cause the Company's actual
results in 1998 and beyond to differ materially from those expressed in any
forward-looking statements made in this report. Reference is made to the "Risk
Factors" section of the Prospectus dated July 17, 1998 that is part of the
Company's Registration Statement on Form SB-2 (Registration No. 333-52279) and
that was filed with the Securities and Exchange Commission on July 20, 1998
pursuant to Rule 424(b) under the Securities Act of 1933, as amended, for a
description of certain of these important factors.
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<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) On March 31, 1998, the Company issued 1,409,509 shares of
Common Stock in a private placement to both accredited and
non-accredited investors. The total offering price was $10.6
million. There were no underwriting discounts or commissions. An
exemption from the registration of such issuance was claimed
pursuant to Rule 506 of Regulation D promulgated under Section 4(2)
of the Securities Act of 1933, as amended.
(d) On July 17, 1998, the Commission declared the effectiveness
of the Company's Registration Statement on Form SB-2 (the
"Registration Statement"), file number 333-52279. The Registration
Statement covered 2,600,000 shares of the Company's Common Stock,
and up to 390,000 additional shares of Common Stock that the Company
granted Scott & Stringfellow, Inc., Interstate/Johnson Lane
Corporation and Ferris, Baker Watts, Incorporated, as underwriters,
under a 30-day option to purchase solely to cover over-allotments,
if any. The offering commenced on July 17, 1998, the sale of the
2,600,000 shares of Common Stock closed on July 22, 1998, and the
sale of an additional 230,000 shares of Common Stock covering the
over-allotment closed on August 19, 1998.
The amount of Common Stock registered was 2,990,000 shares,
and the aggregate price of the offering amount registered was
$32,890,000. The amount of Common Stock sold was 2,830,000 shares,
and the aggregate offering price of the amount sold was $28,300,000.
Reasonable estimates for the amount of expenses incurred for
the Company's account in connection with the issuance and
distribution of the 2,830,000 shares of Common Stock described above
are $1,981,000 in underwriting discounts and an estimated $180,000
in offering expenses, neither of which represent direct or indirect
payments to directors or officers of the Company or their
associates, to persons owning ten percent or more of any class of
equity securities of the Company, or to affiliates of the Company.
The net offering proceeds to the Company after deducting total
discounts and estimated expenses was $26,139,000.
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<PAGE>
The net proceeds from the shares of Common Stock offered as
described above are being used for general corporate purposes,
including financing the opening of additional banks, and to support
the growth of assets and deposits.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
quarter ended June 30, 1998.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (filed electronically only).
(b) Reports on Form 8-K - none.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CARDINAL FINANCIAL CORPORATION
Date: August 28, 1998 /s/ L. Burwell Gunn, Jr.
-------------------------------------
L. Burwell Gunn, Jr.
President and Chief Executive Officer
Date: August 28, 1998 /s/ Joseph L. Borrelli
-------------------------------------
Joseph L. Borrelli
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 972
<INT-BEARING-DEPOSITS> 4,311
<FED-FUNDS-SOLD> 12,190
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 240
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 341
<ALLOWANCE> 3
<TOTAL-ASSETS> 15,061
<DEPOSITS> 4,801
<SHORT-TERM> 0
<LIABILITIES-OTHER> 358
<LONG-TERM> 0
0
0
<COMMON> 1,410
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<INCOME-PRETAX> (323)
<INCOME-PRE-EXTRAORDINARY> (323)
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<NET-INCOME> 323
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
<YIELD-ACTUAL> 6.05
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</TABLE>
