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 September 30, 1999
[ ] Transition Report under 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 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.)
10555 Main Street, Suite 500
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 __X__ No _____
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
4,242,634 shares of common stock, par value $1.00 per share,
outstanding as of September 30, 1999
<PAGE>
CARDINAL FINANCIAL CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
Part I. Financial Information
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Condition (Unaudited)
September 30, 1999 and December 31, 1998...................................................3
Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months Ended
September 30, 1999 and September 30, 1998..................................................4
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
For the Three and Nine Months Ended
September 30, 1999 and September 30, 1998..................................................5
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Nine Months Ended September 30, 1999 and September 30, 1998........................6
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 1999 and September 30, 1998........................7
Notes to Condensed Consolidated Financial Statements (Unaudited)...........................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.........................................................10
Part II. Other Information
Item 1. Legal Proceedings.........................................................................22
Item 2. Changes in Securities and Use of Proceeds.................................................22
Item 3. Defaults Upon Senior Securities...........................................................22
Item 4. Submission of Matters to a Vote of Security Holders.......................................22
Item 5. Other Information.........................................................................22
Item 6. Exhibits and Reports on Form 8-K..........................................................22
Signatures
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
As of September 30, 1999 and December 31, 1998
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ ------------------
<S> <C> <C>
ASSETS
Cash & due from banks $ 2,880 $ 1,073
Federal funds sold 24,453 24,277
------------------ ------------------
Total cash and cash equivalents 27,333 25,350
Investment securities available for sale 6,872 13,697
Loans receivable, net of fees 44,497 16,327
Less: Allowance for loan losses 613 212
------------------ ------------------
43,884 16,115
Premises and equipment, net 4,205 1,829
Accrued interest and other assets 616 304
------------------ ------------------
Total Assets $ 82,910 $ 57,295
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 47,175 $ 21,867
Borrowings 3,000 -
Accrued interest and other liabilities 1,037 700
Total Liabilities 51,212 22,567
Common stock, $1 par value, 50,000,000 shares authorized,
shares outstanding 4,242,634 at September 30, 1999 and
4,239,509 at December 31, 1998 4,243 4,240
Additional paid in capital 32,484 32,327
Accumulated deficit (4,928) (1,842)
Accumulated other comprehensive income (loss) (101) 3
Total Shareholders' Equity 31,698 34,728
Total Liabilities and Shareholders' Equity $ 82,910 $ 57,295
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1999 and September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable $ 754,039 $ 30,918 $ 1,581,454 $ 34,662
Investment securities 99,214 74,547 333,310 75,467
Federal funds sold 294,246 484,196 938,675 713,230
------------ ------------ ------------ ------------
Total Interest Income 1,147,499 589,661 2,853,439 823,359
INTEREST EXPENSE
Deposits 309,703 144,877 734,515 151,525
Borrowings 50,635 - 50,908 1,616
------------ ------------ ------------ ------------
Total Interest Expense 360,338 144,877 785,423 153,141
------------ ------------ ------------ ------------
NET INTEREST INCOME 787,161 444,784 2,068,016 670,218
Provision for loan losses 212,500 37,960 401,304 40,970
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 574,661 406,824 1,666,712 629,248
NON-INTEREST INCOME
Service charges on deposit accounts 10,257 1,156 21,949 1,172
Loan service charges 58,307 1,200 97,066 1,200
Investment fee income 368,553 - 648,734 -
Gains from sale of securities - - 12,087 -
Other income 3,214 7,616 17,898 8,302
------------ ------------ ------------ ------------
Total Non-interest income 440,331 9,972 797,734 10,674
NON-INTEREST EXPENSE
Salary and benefits 1,265,550 399,549 3,029,079 777,572
Depreciation 83,930 71,993 214,798 95,344
Occupancy 209,617 30,934 630,462 91,996
Professional fees 186,005 97,189 500,743 226,724
Other operating expenses 525,313 251,368 1,175,657 388,243
------------ ------------ ------------ ------------
Total non-interest expense 2,270,415 851,033 5,550,739 1,579,879
------------ ------------ ------------ ------------
Net loss before income taxes (1,255,423) (434,237) (3,086,293) (939,957)
Provision for income taxes - - - -
------------ ------------ ------------ ------------
NET LOSS $(1,255,423) $ (434,237) $(3,086,293) $ (939,957)
============ ============ ============ ============
Basic and diluted loss per share $ (0.30) $ (0.12) $ (0.73) $ (0.45)
Weighted-average shares outstanding 4,241,604 3,523,531 4,240,207 2,109,041
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three and Nine Months Ended September 30, 1999 and September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------- -------------------------------
1999 1998 1999 1998
---------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $ (1,255,423) $ (434,237) (3,086,293) (939,957)
Other comprehensive income:
Unrealized holding loss on available-for-sale
investment securities, net of tax (21,551) 20,831 (103,878) 20,831
---------------- ----------------- ---------------- --------------
Comprehensive income (loss) $ (1,276,974) $ (413,406) (3,190,171) (919,126)
================ ================= ================ ==============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 1999 and September 30, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
Additional Other Uncollected
Common Paid-in Accumulated Comprehensive Subscription
Shares Stock Capital Deficit Income Receivable Total
-------- --------- ---------- ----------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998.......................... 1,175 $ 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.... 235 235 1,525 - - - 1,760
Issuance of 2,830,000 shares of common stock
par value $1, at $10.00 per share, net of costs... 2,830 2,830 23,181 - - - 26,011
Payment of subscription receivable................ - - - - - 100 100
Change in unrealized holding gain on investment
securities available for sale, net of tax......... - - - - 21 - 21
Net loss.......................................... - - - (940) - - (940)
---------
Total comprehensive loss.......................... - - - - - - (919)
BALANCE, September 30, 1998....................... 4,240 $ 4,240 32,327 (1,085) 21 - 35,503
===================================================================================================================================
Balance, January 1, 1999.......................... 4,240 $ 4,240 32,327 (1,842) 3 - 34,728
Issuance of 3,125 shares of common stock
par value $1, at $7.06 per share, net of costs.... 3 3 19 - - - 22
Reversal of accrued costs related to
public offering................................... - - 138 - - - 138
Change in unrealized holding loss on investment
securities available for sale, net of tax......... - - - - (104) - (104)
Net loss.......................................... - - - (3,086) - - (3,086)
---------
Total Comprehensive Loss.......................... - - - - - - (3,190)
BALANCE, September 30, 1999....................... 4,243 $ 4,243 32,484 (4,928) (101) - 31,698
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months ended September 30, 1999 and September 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,086) $ (940)
Adjustments to reconcile net loss to net cash used in operating activities:
Realized gain on investment securities (12) -
Depreciation 215 98
Provision for loan losses 401 41
Increase in accrued interest and other assets (313) (165)
Increase in accrued interest and other liabilities 337 100
Reversal of accrued costs related to public offering 138 -
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (2,320) (866)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (2,591) (1,425)
Proceeds from sale of investment securities 3,341 -
Purchases of investment securities available for sale (637) (15,556)
Redemptions of investment securities 4,030 -
Net increase in loan portfolio (28,170) (3,148)
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (24,027) (20,129)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 25,308 18,335
Net increase in short-term borrowings 3,000 -
Proceeds from stock issuance, net 22 27,771
Decrease in subscription receivables - 4,610
Repayment of borrowings - -
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 28,330 50,716
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,983 29,721
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,350 4,283
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 27,333 $ 34,004
============== ==============
Supplemental disclosure of cash flow information
Cash paid during period for interest: $ 733 $ 158
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(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 subsidiaries, Cardinal
Bank, N.A., Cardinal Wealth Services, Inc., Cardinal Bank - Manassas/Prince
William, N.A. (as of July 26, 1999), and Cardinal Bank - Dulles, N.A. (as of
August 2, 1999).
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. 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 months and nine months ended
September 30, 1999 are not necessarily indicative of the results to be expected
for the full year ending December 31, 1999. 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 Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998.
Note 2
Segment Disclosures
The Company operates and reports in two business segments, commercial banking
and investment advisory services. The commercial banking segment includes both
commercial and consumer lending and provides customers such products as term
loans, real estate loans, other business financing and installment loans. In
addition, this segment also provides customers with several choices of deposit
products including demand deposit accounts, savings accounts and certificates of
deposit. The investment advisory services segment provides advisory services to
businesses and individuals including financial planning and retirement/estate
planning.
8
<PAGE>
Information about reportable segments, and reconciliation of such information to
the consolidated financial statements as of and for the quarter and year to date
ended September 30, follows:
For the Three Months Ended September 30, 1999:
<TABLE>
<CAPTION>
Commercial Investment Intersegment
Banking Advisory Elimination Other Consolidated
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income 646,807 - - 140,354 787,161
Provision for loan losses 212,500 - - - 212,500
Non-interest income 71,778 368,553 - - 440,331
Non-interest expense 1,250,459 554,753 - 465,202 2,270,415
Net income (loss) (744,374) (186,200) - (324,849) (1,255,423)
Total Assets 69,606,898 477,197 (19,774,865) 32,600,662 82,909,892
</TABLE>
For the Year to Date September 30, 1999:
<TABLE>
<CAPTION>
Commercial Investment Intersegment
Banking Advisory Elimination Other Consolidated
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income 1,302,116 - - 765,900 2,068,016
Provision for loan losses 401,304 - - - 401,304
Non-interest income 149,000 648,734 - - 797,734
Non-interest expense 2,836,484 1,130,218 - 1,584,037 5,550,739
Net income (loss) (1,786,671) (481,485) - (818,137) (3,086,293)
Total Assets 69,606,898 477,197 (19,774,865) 32,600,662 82,909,892
</TABLE>
The Company does not have operating segments other than those reported. Parent
Company financial information is included in the Other category above and
represents the overhead function rather than an operating segment. Comparable
information for September 30, 1998 is not shown as the Company had one operating
segment and one subsidiary, Cardinal Bank, N.A. The investment advisory segment
began operations in February 1999.
9
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Cardinal Financial Corporation (the "Company") is the holding company for
Cardinal Bank, N.A. (operations commenced on June 8, 1998) Cardinal Wealth
Services, Inc., an investment subsidiary (operations commenced on February 1,
1999), Cardinal Bank-Manassas/Prince William, N.A. (operations commenced on July
26, 1999), and Cardinal Bank-Dulles, N.A. (operations commenced on August 2,
1999).
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 were $10.6 million, of which $8.0 million were used to capitalize
Cardinal Bank, N.A. in June 1998. In addition, the Company raised additional
capital for general corporate purposes, including the capitalization of Cardinal
Wealth Services, Inc. and three additional banking subsidiaries, and to support
the growth of assets and deposits through a public offering (the "Public
Offering") of 2,830,000 shares of Common Stock in the third quarter of 1998. The
total proceeds to the Company in the Public Offering were $26.1 million, after
deducting underwriting discounts and expenses.
The following discussion presents management's discussion and analysis of the
consolidated financial condition and results of operations of the Company as of
September 30, 1999 and for the three and nine months ended September 30, 1999
and September 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.
Financial Condition
Total assets of the Company increased to $82.9 million at September 30, 1999
from $57.3 million at December 31, 1998. Total loans increased to $44.5 million
at September 30, 1999 from $16.3 million at December 31, 1998 (see Table 1 for
details of the loan portfolio). Total deposits increased to $47.2 million at
September 30, 1999 from $21.9 million at December 31, 1998. Cash and cash
equivalents including fed funds sold increased to $27.3 at September 30, 1999
from $25.4 million at December 31, 1998. Securities available for sale declined
to $6.9 million at September 30, 1999 from $13.7 million at December 31, 1998
(see Table 2 for details of investment securities available for sale). The
increase of $28.2 million in loans was funded primarily through the $25.3
million increase in deposits and $7.4 million from the sale, redemption and
amortization of securities. Shareholders' equity at September 30, 1999 was $31.7
million compared to $34.7 million at December 31, 1998. Book value per share on
September 30, 1999 was $7.47 compared to $8.19 at December 31, 1998.
Results of Operations
The Company reported a net loss of $1.26 million and $3.09 million for the third
quarter and first nine months of 1999, respectively, compared with $434 thousand
and $940 thousand in the same periods of 1998. The increase in the net loss
reflects the organizational and operational expenses associated with the
Company's investment and banking subsidiaries. During the quarter, two banking
subsidiaries commenced operations. Cardinal Bank-Manassas/Prince William, N.A.
opened on July 26, 1999, and
10
<PAGE>
Cardinal Bank-Dulles, N.A. opened on August 2, 1999. Cardinal
Bank-Alexandria/Arlington, the Company's fourth banking subsidiary, is scheduled
to open in the first quarter of 2000.
Net interest income is the Company's primary source of earnings and represents
the difference between interest and fees earned on interest bearing assets and
the interest paid on interest bearing liabilities. Net interest income for the
three and nine months ended September 30, 1999 totaled $787 thousand and $2.07
million, respectively, compared to $445 thousand and $670 thousand for the same
periods in 1998.
The Company's net interest margin for the three and nine months ended September
30, 1999 was 4.58% and 4.61%, respectively, compared to 4.33% and 4.66% for the
same periods in 1998. Table 3 presents an analysis of average earning assets,
interest bearing liabilities and demand deposits with the related components of
interest income and interest expense.
The provisions for loan losses for the three and nine months ended September 30,
1999 was $213 thousand and $401 thousand, respectively, compared to $38 thousand
and $41 thousand for the same periods in 1998. The allowance for loan losses at
September 30, 1999 was $613 thousand compared to $212 thousand at December 31,
1998. The ratio of the allowance for loan losses to gross loans at September 30,
1999 was 1.38% compared to 1.30% at December 31, 1998. Due to the Company's
short credit history with its lead bank, Cardinal Bank, N.A., and the opening of
two additional banks in the quarter, management is currently maintaining a loan
loss allowance comparable to its peers. The slight increase in the ratio of the
allowance for loan losses to gross loans is related to the opening of additional
banks in the third quarter. It is expected that this ratio will not be
significantly different at December 31, 1999 from that of December 31, 1998. The
amount of loan loss provision is usually 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. Table 4 reflects the components of the allowance for loan losses.
Non-interest income for the three and nine months ended September 30, 1999 was
$440 thousand and $798 thousand, respectively, compared to $10 thousand and $11
thousand for the same periods in 1998. Non-interest income is significantly
higher in 1999 due to the investment income generated by Cardinal Wealth
Services, Inc., which began operations on February 1, 1999.
Non-interest expense for the three and nine months ended September 30, 1999 was
$2.27 million and $5.55 million, respectively, compared to $851 thousand and
$1.58 million for the same periods in 1998. Non-interest expense is
significantly higher in 1999 due to the costs associated with the opening of the
investment subsidiary and the two additional banking subsidiaries. A fourth
banking subsidiary is anticipated to open in the first quarter of 2000.
Business Segment Operations
The Company provides a diversified selection of banking and nonbanking financial
services and products through its subsidiaries. Management operates and reports
the results of the Company's operations through two business segments,
commercial banking and investment advisory services.
Commercial Banking
The commercial banking segment provides comprehensive banking services to small
businesses and individuals through multiple delivery channels. Through three
banking subsidiaries, services include commercial and consumer lending, deposit
products, direct banking via the internet and telephone and the funding of small
business receivables through the Business Manager product (a receivables funding
program).
11
<PAGE>
Commercial banking operations for the third quarter 1999 include operations for
three banking subsidiaries. The third quarter of 1998 includes the operations of
only one banking subsidiary. Consequently, the periods are not comparable and
comparisons between the periods are not provided.
For the three months ended September 30, 1999 the commercial banking segment had
a net loss of $744 thousand. As of September 30, 1999, total assets were $69.6
million, total loans were $44.5 million and deposits were $47.2 million.
Investment Advisory Services
The investment advisory services segment provides financial and estate planning
services utilizing a host of products provided through a strategic alliance with
Legg Mason Financial Partners. Operations for this segment began February 1,
1999. For the three months ended September 30, 1999, the investment advisory
services segment had a net loss of $186 thousand. As of September 30, 1999,
total assets were $477 thousand and total assets under management were $49.3
million.
Capital Resources
Shareholders' equity at September 30, 1999 was $31.7 million compared to $34.7
million at December 31, 1998. The reduction in equity was due primarily to
operating losses for the nine months ended September 30, 1999.
At September 30, 1999 the Company's tier 1 and total risk-based capital ratios
were 55.4% and 56.5%, respectively. At December 31, 1998, the Company's tier 1
and total risk-based capital ratios were 146.9% and 146.0%, respectively. Table
5 reflects the components of regulatory capital. The Company's capital structure
places it well above minimum regulatory requirements. The Company maintains a
strong capital base in order to implement its growth strategy, which includes
the funding of four bank subsidiaries and an investment subsidiary, as well as
ensuring that it has the resources to protect against the risks inherent in its
business.
Liquidity
Liquidity provides the Company with the ability to meet normal deposit
withdrawals, while also providing for the credit needs of customers. At
September 30, 1999, cash, cash equivalents and investment securities available
for sale totaled $34.2 million or 41% of total assets compared to $39.0 million
or 68% of total assets at December 31, 1998. Management is committed to
maintaining liquidity at a level sufficient to protect depositors, provide for
reasonable growth, and fully comply with all regulatory requirements.
Interest Rate Sensitivity
An important element of asset/liability management is the monitoring of the
Company's sensitivity to interest rate movements. In order to measure the effect
of interest rates on the Company's net interest income, management takes into
consideration the expected cash flows from the securities and loan portfolios
and the expected magnitude of the repricing of specific asset and liability
categories. Management evaluates interest sensitivity risk and then formulates
guidelines to manage this risk based upon its outlook regarding the economy,
forecasted interest rate movements and other business factors. Management's goal
is to maximize and stabilize the net interest margin by limiting exposure to
interest rate changes.
12
<PAGE>
The data in Table 6 reflects re-pricing or expected maturities of various assets
and liabilities as of September 30, 1999. This gap analysis represents the
difference between interest sensitive assets and liabilities in a specific time
interval. Interest sensitivity gap analysis presents a position that existed at
one particular point in time, and assumes that assets and liabilities with
similar re-pricing characteristics will re-price at the same time and to the
same degree. Given the Company's short history, and anticipated growth,
management has maintained a high positive short-term gap.
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 addition, the Company also uses several other third-party
vendors for ancillary computer applications. All mission critical vendors for
the Company's banking applications are Year 2000 ready. 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 executed its Year 2000-compliance program to review the Year
2000 issues faced by its third-party vendors. Under this program, the Company
examined the need for modifications or replacement of all non-compliant
software. The Company's recent entrance into the market has allowed it the
opportunity to screen third party vendors. Vendors chosen are Year 2000
compliant. 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 has satisfactorily
completed testing of its primary operating system. All hardware has been
certified compliant. All of the Company's critical outsource partners have
reported successful testing and are Year 2000 compliant. The Company does not
contemplate changing any vendors.
The Company does not expect the cost of its Year 2000 compliance program to be
material to its financial condition, and continues to expect to satisfy
compliance without material disruption of its operations. The Company has used
internal staff for testing purposes as well as third-party vendors as necessary.
The Company does not separately track the internal costs incurred for its Year
2000 compliance program and such costs are principally the related payroll costs
for its test team. While unlikely, based on satisfactory testing and monitoring,
in the event that the Company's significant vendors, including its
correspondent, the Federal Reserve Bank of Richmond, do not successfully achieve
Year 2000 compliance, the Company's business, results of operations or financial
condition could be adversely affected.
The Company's contingency plan has been completed and tested. The plan provides
an outline for operating in the Company's expected worst case scenario.
The Company is subject to periodic review by its primary regulator, the Office
of the Comptroller of the Currency, to ensure existence of and adherence to a
Year 2000 compliance plan.
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,"
"estimate," or "continue," or the negative thereof or other comparable
terminology. The Company cautions readers that certain important factors,
including, among others, problems with technology utilized by the Company as
described above, in some cases have
13
<PAGE>
affected, and in the future could affect, the Company's actual results and could
cause the Company's actual results in 1999 and beyond to differ materially from
those expressed in any forward-looking statements 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.
14
<PAGE>
Table 1.
Cardinal Financial Corporation and Subsidiaries
Loans, net
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Commercial $ 13,886 31.20% $ 5,138 31.43%
Real estate - commercial 15,847 35.61% 3,507 21.46%
Real estate - construction 415 0.93% 760 4.65%
Real estate - residential 9,635 21.65% 5,529 33.83%
Home equity lines 2,862 6.43% 1,040 6.37%
Consumer 908 2.04% 369 2.26%
Business Manager receivables 948 2.14% - 0.00%
------------------------------------------------------------------------
Gross loans $ 44,501 100.00% $ 16,343 100.00%
Less: unearned income, net (4) - (16) -
Less: allowance for loan loss (613) - (212) -
---------------------------------- ----------------------------------
Total loans, net $ 43,884 - $ 16,115 -
================================== ==================================
</TABLE>
15
<PAGE>
Table 2.
Cardinal Financial Corporation and Subsidiaries
Investment Securities - Available for Sale
As of September 30, 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Amortized Market Unrealized Average
Par Value Cost Value Gain/(Loss) Yield
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government Agencies
Within one year $ 1,000 1,000 993 (7) 5.31%
One to five years 3,000 3,000 2,949 (51) 5.82%
Five to ten years - - - - 0.00%
After ten years 500 499 440 (59) 6.26%
- ---------------------------------------------------------------------------------------------------------------------------------
Total U.S Government Agencies $ 4,500 4,499 4,382 (117) 5.76%
- ---------------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities
Within one year 255 255 255 - 5.91%
One to five years - - - - 0.00%
Five to ten years 273 273 272 (1) 5.38%
After ten years 1,190 1,195 1,159 (36) 5.80%
- ---------------------------------------------------------------------------------------------------------------------------------
Total Mortgage-Backed Securities $ 1,718 1,723 1,686 (37) 5.75%
- ---------------------------------------------------------------------------------------------------------------------------------
Other Securities
Within one year - - - - -
One to five years - - - - -
Five to ten years - - - - -
After ten years 804 804 804 - 6.21%
- ---------------------------------------------------------------------------------------------------------------------------------
Total Other Securities $ 804 804 804 - 6.21%
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale $ 7,022 7,026 6,872 (154) 5.81%
</TABLE>
16
<PAGE>
Table 3.
Cardinal Financial Corporation and Subsidiaries
Rate and Volume Analysis
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Three Months Three Months
Ended September 30, Ended September 30, Ended September 30, Ended September 30,
Average Volume Average Rate Interest Increase Attributable to
1999 1998 1999 1998 1999 1998 (Decrease) Rate Volume
- ------------------------------------------- ------------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Loans:
$ 10,530 $ 331 8.28% 8.85% Commercial $ 223 $ 7 $ 215 $ (15) $ 903
12,746 81 7.15% 8.64% Real estate - commercial 233 2 231 $ (49) $ 1,095
1,071 - 8.30% 0.00% Real estate - construction 23 - 23 $ 23 $ -
9,446 253 7.38% 6.45% Real estate - residential 178 4 174 $ 22 $ 593
2,819 169 7.20% 8.76% Home equity lines 52 4 48 $ (11) $ 232
1,053 284 8.32% 18.77% Consumer 22 14 9 $ (28) $ 144
- ------------------------------------------------------------------------------------------------------------------------------------
37,665 1,118 7.59% 10.80% Total loans 731 31 700 $(308) $ 3,946
6,783 5,031 5.77% 5.80% Investment Securities - AFS 100 75 25 $ (1) $ 102
- - 0.00% 0.00% Money Market Accounts - - - $ - $ -
22,995 34,557 5.00% 5.47% Federal funds sold 294 483 (190) $ (28) $ (633)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 67,443 $ 40,706 6.52% 5.66% Total interest-earning assets $1,125 $ 589 $ 536 $(337) $ 3,415
====================================================================================================================================
Interest Expense
2,461 662 2.03% 2.12% Interest Checking 13 4 9 $ (1) $ 38
7,692 4,639 3.61% 3.84% Money Markets 70 45 25 $ (4) $ 117
248 130 2.97% 2.97% Statement Savings 2 1 1 $ (0) $ 4
18,201 6,623 4.90% 5.75% Certificates of Deposit 225 96 129 $ (39) $ 666
3,000 - 6.65% 0.00% FHLB Short-Term Advances 51 - 51 $ 51 $ -
- ------------------------------------------------------------------------------------------------------------------------------------
31,603 12,054 4.52% 4.78% Total interest-bearing liabilities 360 145 215 $ (21) $ 935
41,810 30,705 Other Sources - Net - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
73,414 42,759 1.95% 1.35% Total Sources of Funds 360 145 215 (21) 935
- ------------------------------------------------------------------------------------------------------------------------------------
$ 35,840 $ 28,652 4.58% 4.31% Net Interest Margin $ 764 $ 443 $ 321 $(316) $ 2,480
====================================================================================================================================
</TABLE>
17
<PAGE>
Table 3 continued.
Cardinal Financial Corporation and Subsidiaries
Rate and Volume Analysis
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months Nine Months Nine Months
Ended September 30, Ended September 30, Ended September 30, Ended September 30,
Average Volume Average Rate Interest Increase Attributable to
1999 1998 1999 1998 1999 1998 (Decrease) Rate Volume
- ------------------------------------------- ------------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Loans:
$ 7,977 $ 140 8.11% 7.06% Commercial $ 490 $ 7 $ 483 $ 63 $ 553
7,335 35 8.09% 6.75% Real estate - commercial 450 2 448 $ 75 $ 493
796 - 8.74% 0.00% Real estate - construction 53 - 53 $ 53 $ -
7,194 85 7.29% 6.47% Real estate - residential 398 4 394 $ 45 $ 460
2,068 57 6.73% 8.75% Home equity lines 105 4 102 $ (32) $ 176
910 120 8.44% 14.95% Consumer 58 14 45 $ (45) $ 118
- ------------------------------------------------------------------------------------------------------------------------------------
26,282 437 7.80% 9.31% Total loans 1,555 31 1,524 $ (300) $ 2,405
7,769 1,900 5.61% 5.17% Investment Securities - AFS 331 75 256 $ 26 $ 304
- 1,451 0.00% 2.91% Money Market Accounts - 32 (32) $ - $ (42)
25,641 16,930 4.82% 5.31% Federal funds sold 938 682 256 $ (95) $ 463
- ------------------------------------------------------------------------------------------------------------------------------------
$ 59,692 $ 20,718 6.24% 5.22% Total interest-earning assets $ 2,823 $ 819 $ 2,004 $ (369) $ 3,130
====================================================================================================================================
Interest Expense
2,199 224 2.05% 2.12% Interest Checking 34 4 30 $ (1) $ 42
5,791 1,550 3.61% 3.87% Money Markets 156 45 111 $ (11) $ 164
178 44 2.97% 2.96% Statement Savings 4 1 3 $ 0 $ 4
14,715 2,212 4.83% 5.68% Certificates of Deposit 532 94 438 $ (93) $ 710
1,011 - 6.65% 0.00% FHLB Short-Term Advances 51 - 51 $ 50 $ -
- ------------------------------------------------------------------------------------------------------------------------------------
23,893 4,030 4.35% 4.76% Total interest-bearing liabilities 777 143 633 $ (73) $ 945
39,901 30,705 Other Sources - Net -
- ------------------------------------------------------------------------------------------------------------------------------------
63,795 34,735 1.63% 0.55% Total Sources of Funds 777 143 633 (73) 945
- ------------------------------------------------------------------------------------------------------------------------------------
$ 35,799 $ 16,688 4.61% 4.66% Net Interest Margin $ 2,047 $ 676 $ 1,371 $ (296) $ 2,185
====================================================================================================================================
</TABLE>
18
<PAGE>
Table 4.
Cardinal Financial Corporation and Subsidiaries
Allowance for Loan Losses
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the nine For the year
months ended ended
September 30, December 31,
1999 1998
----------------- -----------------
<S> <C> <C>
Beginning balance $ 212 $ -
Provision for loan losses 401 212
Loans charged off:
Commercial - -
Real estate - commercial - -
Real estate - construction - -
Real estate - residential - -
Home equity lines - -
Consumer - -
Business Manager Receivables - -
- --------------------------------------------------------------------------------------------
Total loans charged off - -
Recoveries:
Commercial - -
Real estate - commercial - -
Real estate - construction - -
Real estate - residential - -
Home equity lines - -
Consumer - -
Business Manager Receivables - -
- --------------------------------------------------------------------------------------------
Total recoveries - -
Net charge-offs - -
Ending Balance $ 613 $ 212
============================================================================================
Loans:
Total at period end $ 44,501 $ 16,343
Allowance for loan losses to:
Period-end loans 1.38% 1.30%
</TABLE>
19
<PAGE>
Table 5.
Cardinal Financial Corporation and Subsidiaries
Capital Components
As of September 30, 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total risk based capital to risk weighted assets $ 32,413 56.47% $ 4,592 >= 8.00% $ 5,740 >= 10.0%
Tier I capital to risk weighted assets 31,799 55.40% 2,296 >= 4.00% 3,444 >= 6.0%
Leverage ratio total risk based capital to quarterly
average assets 32,413 39.09% 2,296 >= 4.00% 2,870 >= 5.0%
</TABLE>
20
<PAGE>
Table 6.
Cardinal Financial Corporation and Subsidiaries
Interest Rate Sensitivity Gap Analysis - Consolidated
As of September 30, 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1-90 91-180 181-365 1-5 Over 5
Days Days Days Years Years TOTAL
------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment Securities
U.S. Government agency securities - - 993 2,949 440 $ 4,382
Mortgage-backed securities - 255 272 372 787 1,686
Other securities - - - - 804 804
- ---------------------------------------------------------------------------------------------------------------
Total Investment Securities - 255 1,265 3,321 2,031 6,872
- ---------------------------------------------------------------------------------------------------------------
Federal Funds Sold 24,453 24,453
- ---------------------------------------------------------------------------------------------------------------
Loans
Variable rate loans 11,879 1,847 333 22,000 34 36,093
Fixed rate loans 517 909 407 5,941 635 8,409
- ---------------------------------------------------------------------------------------------------------------
Total Gross Loans 12,396 2,756 740 27,941 669 44,502
- ---------------------------------------------------------------------------------------------------------------
Total Earning Assets 36,849 3,011 2,005 31,262 2,700 $ 75,827
- ---------------------------------------------------------------------------------------------------------------
Cumulative Rate Sensitive Assets 36,849 39,860 41,865 73,127 75,827
- ---------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Deposits
Demand deposits 10,919 - - - - $ 10,919
Interest checking 2,734 - - - - 2,734
Statement savings 281 - - - - 281
Money market accounts 9,802 - - - - 9,802
Certificates of deposit 5,119 2,150 4,524 11,249 397 23,439
- ---------------------------------------------------------------------------------------------------------------
Total Deposits 28,855 2,150 4,524 11,249 397 47,175
- ---------------------------------------------------------------------------------------------------------------
Other liabilities - - - - - -
- ---------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 28,855 2,150 4,524 11,249 397 $ 47,175
- ---------------------------------------------------------------------------------------------------------------
Cumulative Rate Sensitive Liabilities 28,855 31,005 35,529 46,778 47,175
- ---------------------------------------------------------------------------------------------------------------
Gap 7,994 861 (2,519) 20,013 2,303
Cumulative Gap 7,994 8,855 6,336 26,349 28,652
Gap/ Total Assets 9.64% 1.04% -3.04% 24.14% 2.78%
Cumulative Gap/ Total Assets 9.64% 10.68% 7.64% 31.78% 34.56%
Rate Sensitive Assets/ Rate Sensitive Liabilities 1.28 1.40 0.44 2.78 6.80
Cumulative RSA/ Cumulative RSL 1.28 1.29 1.18 1.56 1.61
</TABLE>
21
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
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 September 30, 1999.
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.
22
<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: November 15, 1999 /s/ L. Burwell Gunn, Jr.
--------------------------------------
L. Burwell Gunn, Jr.
President and Chief Executive Officer
Date: November 15, 1999 /s/ Joseph L. Borrelli
--------------------------------------
Joseph L. Borrelli
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-QSB FOR CARDINAL FINANCIAL CORPORATION FOR THE
PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,005
<INT-BEARING-DEPOSITS> 36,256
<FED-FUNDS-SOLD> 24,328
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,872
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 44,497
<ALLOWANCE> 613
<TOTAL-ASSETS> 82,910
<DEPOSITS> 41,175
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 1,037
<LONG-TERM> 0
0
0
<COMMON> 4,243
<OTHER-SE> 27,455
<TOTAL-LIABILITIES-AND-EQUITY> 82,910
<INTEREST-LOAN> 1,581
<INTEREST-INVEST> 333
<INTEREST-OTHER> 939
<INTEREST-TOTAL> 2,853
<INTEREST-DEPOSIT> 735
<INTEREST-EXPENSE> 785
<INTEREST-INCOME-NET> 2,068
<LOAN-LOSSES> 401
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 5,551
<INCOME-PRETAX> (3,086)
<INCOME-PRE-EXTRAORDINARY> (3,086)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,086)
<EPS-BASIC> (0.73)
<EPS-DILUTED> (0.73)
<YIELD-ACTUAL> 6.24
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 212
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 613
<ALLOWANCE-DOMESTIC> 613
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
