SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-24557
CARDINAL FINANCIAL CORPORATION
(Name of Small Business Issuer in its Charter)
Virginia 54-1874630
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
10641 Lee Highway
Fairfax, Virginia 22030
(Address of Principal Executive Offices) (Zip Code)
(703) 934-9200
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $1.00 par value
(Title of Class)
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 past 90 days.
Yes __X__ No _____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. __X__
The issuer's revenues for the fiscal year ended December 31, 1998 were
$1,590,608.
The aggregate market value of the voting stock held by non-affiliates
(as of December 31, 1998) computed by reference to the price at which the stock
was sold, or the average bid and asked prices of such stock, as of March 25,
1999 was $25,489,750.
The number of shares outstanding of Common Stock, as of March 31, 1999
was 4,239,509.
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TABLE OF CONTENTS
PART I
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Page
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Item 1. Description of Business...................................................................... 3
Item 2. Description of Property......................................................................16
Item 3. Legal Proceedings............................................................................16
Item 4. Submission of Matters to a Vote of Security Holders..........................................16
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.....................................17
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation.....................................................................17
Item 7. Financial Statements.........................................................................29
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................................................29
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............................................29
Item 10. Executive Compensation.......................................................................29
Item 11. Security Ownership of Certain Beneficial Owners and Management...............................30
Item 12. Certain Relationships and Related Transactions...............................................30
Item 13. Exhibits, List and Reports on Form 8-K.......................................................30
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PART I
Item 1. Description of Business
General
Cardinal Financial Corporation is a bank holding company headquartered
in Fairfax, Virginia which currently operates Cardinal Bank, N.A. ("Cardinal
Bank") in Fairfax, Virginia and intends to organize and establish three
community banks ("Additional Banks") in the Manassas/Prince William County,
Reston/Loudoun County and Alexandria/Arlington County markets in northern
Virginia. Collectively, these markets are among the most affluent and fastest
growing areas in Virginia.
The Company intends to pursue a community banking strategy by offering
a broad range of banking products to individuals, professionals and small to
medium-sized businesses, with an emphasis on personalized service and local
decision-making authority. Management's expansion strategy includes attracting
experienced local management teams who will have significant decision-making
authority at the local bank level and local independent boards of directors
consisting of individuals with strong community affiliations and extensive
business backgrounds and business development potential in the identified
markets. Each management team will operate in a manner that provides responsive,
personalized services. The Company will provide credit policies and procedures
as well as centralized back office functions to provide corporate, technological
and marketing support to the Banks.
The Company was formed in late 1997, principally in response to
perceived opportunities resulting from the takeovers of several Virginia-based
banks by regional bank holding companies. Since January 1, 1997, numerous
community banks headquartered in northern Virginia have been acquired.
Collectively, these banks had deposits of approximately $1.0 billion. Moreover,
in 1997 and 1998 four statewide banks, Crestar Bank, Central Fidelity National
Bank, Signet Bank, N.A. and Jefferson National Bank, with substantial northern
Virginia operations were acquired by large out-of-state bank holding companies.
In the Company's market area, the bank consolidations have been
accompanied by the dissolution of local boards of directors and relocation or
termination of management and customer service professionals. The Company
believes that local industry consolidation has disrupted customer relationships
as the larger regional financial institutions increasingly focus on larger
corporate customers, standardized loan and deposit products and other services.
Generally, these products and services are offered through less personalized
delivery systems, which has created the demand for high quality, personalized
services to small and medium-sized businesses and professionals. In addition,
consolidation in the local market has created opportunities to attract
experienced bankers. Bank acquisitions have dislocated experienced and talented
management personnel due to the elimination of redundant functions and the drive
to achieve cost savings. Additionally, uncertainty over possible future
acquisitions has helped enable the Company to attract officers from banks that
have not been acquired. As a result of these factors, management believes the
Company has a rare opportunity to attract its targeted banking customers and
experienced management personnel within the Company's identified markets.
Initial Capitalization of the Company. The Company raised $10.57
million from the sale of Common Stock in a private placement. Proceeds of such
private placement were used in part for organizational and pre-opening expenses,
and proceeds totaling $8.0 million were used to capitalize Cardinal Bank, which
opened on June 8, 1998. In the summer of 1998 the Company raised $26.0 million,
net, in a Public Offering of Common Stock. The Company intends to use the
proceeds of the Public
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Offering to open the Additional Banks by capitalizing such banks and seeking
local deposits to fund loan growth. The Company anticipates the Additional Banks
will open during 1999. The order in which the Additional Banks open, and their
respective opening dates, may be influenced by a variety of factors, including
the availability of suitable sites and the receipt of regulatory approvals.
Experienced Board and Management. The Company's Board of Directors
consists of 10 individuals, seven of whom formerly were founding directors of
First Patriot Bankshares Corporation, the holding company for Patriot National
Bank, headquartered in Reston, Virginia. First Patriot was organized in 1990 and
in 1997 was acquired by an out-of-state bank holding company. John H. Rust, Jr.,
the Company's Chairman, served as Chairman of First Patriot. Company directors
who were former First Patriot directors include the chairs of First Patriot's
loan, audit, strategic planning, compensation and marketing committees. Until he
joined the Company in late 1997, L. Burwell Gunn, Jr., the Company's President
and Chief Executive Officer, served as Executive Vice President and Commercial
Division head for the Greater Washington Region for Crestar Bank. The last 13
years of Mr. Gunn's 25 year career with Crestar all involved service in the
northern Virginia area. Each of the Company's eight other executive officers has
extensive banking experience in northern Virginia. See Item 9., "Directors,
Executive Officers, Promoters and Control Persons; Compliance with Section 16(a)
of the Excahnge Act" below.
Strategy of the Company
The Company's business strategy is to successfully penetrate selected
northern Virginia markets by operating a locally-oriented organization of
independently managed community banks. The major elements of this strategy
include:
o Expand the Company's market share in the central Fairfax County market
through Cardinal Bank;
o Establish loan production offices in the Company's three additional
identified markets in anticipation of future openings of the Additional
Banks;
o Target small and medium-sized business customers, professionals and
individuals that demand the attention and service which a community-oriented
bank is well suited to provide;
o Deliver a broad array of modern banking products and services using
up-to-date technology and a decentralized operating strategy with local
decision-making; and
o Maintain centralized support functions, including back office operations,
credit policies and procedures, investment portfolio management,
administration, and human resources and training to maximize operating
efficiencies and facilitate responsiveness to customers. Each of the
Additional Banks will operate with a uniformity of service and products that
will be associated with the "Cardinal" name.
Management intends to gain market share by attracting customers through
a superior level of prompt and personalized banking service. The goal of the
Company's organizers and management is to create a customer-driven financial
institution that provides high value to its customers by delivering customized,
quality products and services. Management believes that such an institution will
appeal to customers who prefer to conduct their banking business with a
locally-managed financial institution that demonstrates both a genuine interest
in their financial affairs and an ability to cater to their financial needs.
The Company's directors and executive officers have made a significant
investment in the Company. This financial commitment by management, coupled with
the Company's strategy, is intended to result in an organization that is focused
on creating shareholder value.
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Decentralized Operating Strategy. The foundation of the Company's
strategy is to operate a multi-community bank organization which emphasizes
decision-making at the local bank level combined with strong corporate,
technological, marketing, financial and managerial support. The Company's
operating model is for each bank to operate with local management and boards of
directors consisting of individuals with extensive knowledge of the local
community and the authority to make credit decisions. The Company believes this
operating strategy will enable the Banks to attract customers who wish to
conduct their business with a locally owned and managed institution with strong
ties and an active commitment to the community.
Centralized Corporate Support. The Company will provide oversight and
various services to the Banks, including technology, finance and accounting,
human resources, credit administration, internal audit, compliance, loan review,
marketing, retail administration, administrative support, policies and
procedures, product development and item processing. By providing such services
and oversight, the Company expects not only to achieve monetary savings,
compared to the costs if the Banks were individually responsible for such
functions, but also expects to achieve a uniformity of operations and service
that will be associated with the "Cardinal" name in the Company's northern
Virginia markets. The Banks' principal focus will be to generate deposits and
loans. This corporate support system will enable the Company to achieve
administrative economies of scale while capitalizing on the responsiveness to
client needs of its decentralized community bank network. With the support from
its significant investment in infrastructure, particularly a management
information system which will link the Company to the Banks and facilitate data
processing, compliance, and reporting requirements, the Company believes it has
the operational and administrative capacity to accommodate the Additional Banks
and effectively manage the Company's growth for the foreseeable future.
Growth Strategy
The Company intends to focus on the development of the Additional Banks
and the growth of Cardinal Bank. Each Bank's growth is expected to come from
within such Bank's primary service area through loan and deposit business. The
Company will focus on acquiring market share, particularly from large bank
holding companies, by emphasizing local management and decision-making and
through delivering personalized services to business customers and individuals.
Specifically, the Company's competitive strategy will consist of approving loan
requests quickly with a local loan committee, operating with flexible, but
prudent, lending policies, personalizing service by establishing a long-term
banking relationship with the customer, and maintaining the requisite personnel
to ensure a high level of service. While the Company does not currently intend
to actively search for expansion opportunities beyond its designated markets,
the Company may consider opportunities that arise from time to time, which could
occur through acquisitions of existing institutions or branches. The Company has
no specific acquisition plans at the current time other than the establishment
of the Additional Banks.
The Company intends to organize and open three additional community
banks in northern Virginia and anticipates that all such banks will be national
banks. Each of the Additional Banks will operate under the "Cardinal" name with
appropriate modifiers to denote its distinct market area.
Management of the Company has identified individuals who will serve as
the presidents of the Additional Banks, as well as additional individuals who
will serve on the local board of directors. The Company believes that a
management team that is familiar with the needs of its community can provide
higher quality personalized service to its customers. The local management team
will have a significant amount of decision-making authority and will be
accessible to its customers. As a result of the consolidation trend in the
northern Virginia area, the Company's management believes there are significant
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opportunities to attract experienced bank managers who would like to join an
institution promoting a community banking concept.
In addition, in anticipation of opening the Additional Banks, the
Company has established through its Cardinal Bank subsidiary, loan production
offices in Manassas and the Reston area of Fairfax County to establish customer
relationships, brand awareness and a pipeline of loan business. The Company also
expects to open a loan production office in Alexandria, Virginia. The loan
production offices are or will be staffed by personnel who will ultimately be
employed by the respective Additional Banks when they open for business. Loans
originated in the loan production offices are expected to be transferred by
Cardinal Bank to the respective Additional Banks when they are opened.
Each Bank will have a local board of directors which will be comprised
of prominent members of the community, including business leaders and
professionals. These directors not only will operate the Banks, but also will
act as ambassadors of their respective Banks within the community and will be
expected to promote the business development of each bank. The directors and
officers of the Company and the proposed directors of the Additional Banks are
active in the civic, charitable and social organizations located in the local
communities. It is anticipated that members of the local management teams will
hold leadership positions in a number of community organizations, and continue
to volunteer for other positions in the future.
The Company believes that each Bank's ability to compete with other
financial institutions in its respective market area will be enhanced by its
posture as a locally managed bank with a broad base of local ownership. The
proposed directors of each of the Additional Banks, most of whom reside or work
in the market area in which their respective Banks will operate, own a
significant amount of Common Stock. The Company believes that local ownership of
the Company's Common Stock is a highly effective means of attracting customers
and fostering loyalty to the Banks.
Market Areas
The target market includes areas in and around Fairfax County including
the independent cities of Fairfax and Alexandria, as well as Arlington County,
Manassas, and Prince William and Loudoun counties. Interstates 95, 495, and 66
all pass through the market area and provide efficient access to other regions
of the state. Prominent local newspapers, the Washington Post and Washington
Times, and a number of radio and television stations provide diverse media
outlets. The broad exposure of television, print media and radio offer several
opportunities to explore effective advertising and public relations avenues for
the Company.
The Company plans to establish banking operations in four locations in
the broad target market, each representing a separate market. These distinct,
but contiguous markets are: (1) the City of Fairfax and central Fairfax County;
(2) the City of Manassas and Prince William County; (3) the City of Alexandria
and Arlington County; and, (4) Reston and Herndon (both in western Fairfax
County), together with Loudoun County. As of 1997, Fairfax County, the city of
Fairfax, Prince William County, the city of Manassas, Arlington County, the city
of Alexandria and Loudoun County each ranked in the top ten for Virginia in
median household income, and collectively the population of the area represented
24.4% of the state's total population. State income tax receipts for the area
represented 37.9% of the total income tax receipts collected by Virginia in
1995.
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The Banks
Cardinal Bank opened on June 8, 1998, and the Company intends to open
the Additional Banks by capitalizing each of the Additional Banks with
approximately $7.0 million and seeking local deposits to fund loan growth.
The Banks will engage in the commercial banking business in their
respective communities. The Company believes that there is a demand for, and
that the northern Virginia communities described herein will support, new
locally operated community banks. Although the Company could obtain a banking
presence in the identified markets by opening branch offices of Cardinal Bank,
management of the Company believes that separate banks with their own local
boards of directors and their own policies, tailored to the local market, is a
preferable approach. Each Bank will provide personalized banking services, with
emphasis on the financial needs and objectives of individuals, professionals and
small to medium-sized businesses. Additionally, substantially all credit and
related decisions will be made by the Banks' local management and board of
directors, thereby facilitating prompt response.
The principal business of each Bank will be to accept deposits from the
public and to make loans and other investments. The principal sources of funds
for each Bank's loans and investments are expected to be demand, time, savings
and other deposits, repayment of loans, and borrowings. In addition, a portion
of the net proceeds of the Public Offering, once contributed to the capital of
each Additional Bank, will be used by each Additional Bank to fund loans. The
principal source of income for each Bank is expected to be interest collected on
loans and other investments. The principal expenses of each Bank are expected to
be interest paid on savings and other deposits, employee compensation, office
expenses, and other overhead expenses. Initially, the Banks will not offer trust
or fiduciary services.
The Company is committed to providing high quality banking products and
services to the Banks' customers and has made a significant investment in its
advanced automated operating accounting system which supports virtually every
banking function. The system provides the technology that fully automates the
branches, processes bank transactions, mortgages, loans and electronic banking,
conducts data base and direct response marketing, provides cash management
solutions, streamlined reporting and reconciliation support as well as sales
support.
With this investment in technology, the Company offers Internet-based
delivery products for both consumers and commercial customers. Customers can
open accounts, apply for loans, check balances, check account history, transfer
funds, download images of checks, pay bills, download active statements into
QuickenTM or Microsoft MoneyTM, use interactive calculators and transmit e-mail
with the Company over the Internet. This is an inexpensive way for the Company
to expand its geographic borders and branch activities while providing the kind
of services one would expect from the larger banks.
The Company also offers customers the convenience of digital imaged
checks that make it easy to reconcile statements, organize and store account
information while streamlining the back office. Every item is imaged and
available for inspection. Among the many features, check imaging allows for
instant statement reconstruction for research which can be faxed or e-mailed
directly to a customer's personal computer.
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Customers
Management believes that the recent bank consolidation within northern
Virginia provides a significant opportunity to build a successful,
locally-oriented franchise. Management of the Company further believes that many
of the larger financial institutions do not emphasize a high level of
personalized service to the small and medium-sized commercial, professional or
individual retail customers. The Company intends to focus its marketing efforts
on attracting small and medium-sized businesses and professionals, such as
physicians, accountants and attorneys. Because the Company intends to focus on
businesses and professionals, management believes that the majority of its loan
portfolio will be in the commercial area with an emphasis placed on originating
sound, profitable commercial and industrial loans secured by real estate,
accounts receivable, inventory, property, plant and equipment.
Although the Company expects to concentrate its lending to commercial
businesses, management also anticipates that it will attract a significant
amount of professional and consumer business. Management expects that many of
its customers will be the principals of the small and medium-sized businesses
for whom the Banks will provide banking services. Management intends to
emphasize "relationship banking" in order that each customer will identify and
establish a comfort level with bank officers who come to understand their
customers' business and financial needs in depth. Management intends to develop
its retail business with individuals who appreciate a higher level of personal
service, contact with their lending officer and responsive decision-making. It
is further expected that most of the Company's business will be developed
through its lending officers and local boards of directors and by pursuing an
aggressive strategy of making calls on customers throughout the market area.
Products and Services
The Company intends to offer a broad array of banking products and
services to its customers. The proceeds from the Offering will enable the
Company to proceed to organize the Additional Banks. Cardinal Bank currently
provides, and the Additional Banks are expected to provide, products and
services that are substantially similar to those set forth below.
Loans. Through each Bank, the Company intends to offer a wide range of
short to long-term commercial and consumer loans, which are described in further
detail below. The Company has established pre-determined percentage levels as
targets for the division of the Company's loan portfolio across the various
categories of loans. The Company expects that commercial loans, commercial
mortgage loans, residential mortgage loans, consumer loans and credit card and
other loans will account for approximately 35%, 20%, 30%, 8% and 7%,
respectively, of its loan portfolio. The Company believes that this initial
division reflects the current credit demands of its markets and provides a
sufficient amount of diversification to avoid over-reliance on one category. The
Company may adjust these levels from time to time as the credit demands of the
community change and as each Bank's business evolves.
Credit Policies. With respect to each Bank's loan portfolio, the
Company will oversee credit operations while still granting local authority to
each Bank. The Company's chief credit officer will be primarily responsible for
maintaining a quality loan portfolio and developing a strong credit culture
throughout the entire organization. The chief credit officer will be responsible
for developing and updating the credit policies and procedures for the
organization. The Board of Directors of any Bank may make exceptions to these
credit policies and procedures as appropriate, but any such exception must be
documented and made for sound business reasons.
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Credit quality will be controlled by the chief credit officer through
compliance with the Company's credit policies and procedures. The Company's
risk-decision process will be actively managed in a disciplined fashion to
maintain an acceptable risk profile characterized by soundness, diversity,
quality, prudence, balance and accountability. The Company's credit approval
process will consist of specific authorities granted to the lending officers.
Loans exceeding a particular lending officer's level of authority will be
reviewed and considered for approval by an officers' loan committee and, then, a
Bank's Board of Directors. In addition, the chief credit officer will work
closely with each lending officer at the Bank level to ensure that the business
being solicited is of the quality and structure that fits the Company's desired
risk profile.
Under its credit policies, the Company will generally limit the
concentration of credit risk by a particular Bank in any loan or group of loans
to 20% of that Bank's capital. Such concentration limit pertains to any group of
borrowers related as to the source of repayment or any one specific industry.
Furthermore, each Bank will establish limits on the total amount of that Bank's
outstanding loans to one borrower, which will be set below legal lending limits.
Any loan that a Bank proposes to make that will exceed such established limits
will require the prior approval of the Company's Board of Directors.
Commercial Loans. The Company expects to make commercial loans to
qualified businesses in its market area. The Company's commercial lending will
consist primarily of commercial and industrial loans for the financing of
accounts receivable, inventory, property, plant and equipment. The Company also
expects to offer Small Business Administration guaranteed loans ("SBA loans")
and factoring arrangements to certain of its customers.
Commercial business loans generally have a higher degree of risk than
residential mortgage loans, but have commensurately higher yields. Residential
mortgage loans generally are made on the basis of the borrower's ability to make
repayment from his employment and other income and are secured by real estate
whose value tends to be easily ascertainable. In contrast, commercial business
loans typically are made on the basis of the borrower's ability to make
repayment from cash flow from its business and are secured by business assets,
such as commercial real estate, accounts receivable, equipment and inventory. As
a result, the availability of funds for the repayment of commercial business
loans may be substantially dependent on the success of the business itself.
Further, the collateral for commercial business loans may depreciate over time
and cannot be appraised with as much precision as residential real estate.
To manage these risks, the Company's policy is to secure commercial
loans with both the assets of the borrowing business and other additional
collateral and guarantees that may be available. In addition, the Company will
actively monitor certain measures of the borrower, including advance rate, cash
flow, collateral value and other appropriate credit factors.
Commercial Mortgage Loans. The Company also expects to originate
commercial mortgage loans. These loans are primarily secured by various types of
commercial real estate, including office, retail, warehouse, industrial and
other non-residential types of properties and are made to the owner and/or
occupiers of such property. The Company expects these loans to have maturities
generally ranging from one to 10 years.
Commercial mortgage lending entails significant additional risk,
compared with residential mortgage lending. Commercial mortgage loans typically
involve larger loan balances concentrated with single borrowers or groups of
related borrowers. Additionally, the payment experience on loans secured by
income producing properties is typically dependent on the successful operation
of a business or a real estate project and thus may be subject, to a greater
extent, to adverse conditions in the real estate market or in the
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economy generally. The Company's commercial real estate loan underwriting
criteria require an examination of debt service coverage ratios, the borrower's
creditworthiness and prior credit history and reputation, and the Company
generally requires personal guarantees or endorsements of borrowers. The Company
also carefully considers the location of the security property.
The Company expects that loan-to-value ratios for commercial mortgage
loans will not exceed 75%, with higher ratios permitted if the borrower has
unusually strong general liquidity, net worth and cash flow. Loan-to-value
ratios will not exceed 85% or, if a SBA guaranty has been obtained, 90%.
Residential Mortgage Loans. The Company expects that its residential
mortgage loans will consist of residential first and second mortgage loans,
residential construction loans and home equity lines of credit and term loans
secured by first and second mortgages on the residences of borrowers for home
improvements, education and other personal expenditures. Management expects that
the Company will make mortgage loans with a variety of terms, including fixed
and floating or variable rates and a variety of maturities. Maturities for
construction loans will generally range from six to 12 months for residential
property and from 12 to 18 months for non-residential and multi-family
properties.
Residential mortgage loans generally are made on the basis of the
borrower's ability to make repayment from his employment and other income and
are secured by real estate whose value tends to be easily ascertainable. These
loans will be made consistent with the Company's appraisal policy and real
estate lending policy, which will detail maximum loan-to-value ratios and
maturities. Loans for owner-occupied property will generally be made with a
loan-to-value ratio of up to 80% for first liens and 75% for junior liens.
Higher loan-to-value ratios may be allowed based on the borrower's unusually
strong general liquidity, net worth and cash flow. Loan-to-value ratios for home
equity lines of credit will generally not exceed 75%. If the loan-to-value ratio
exceeds 90% for residential mortgage loans, the Company will obtain appropriate
credit enhancement in the form of either mortgage insurance or readily
marketable collateral.
Construction lending entails significant additional risks, compared
with residential mortgage lending. Construction loans often involve larger loan
balances concentrated with single borrowers or groups of related borrowers.
Construction loans also involve additional risks attributable to the fact that
loan funds are advanced upon the security of property under construction, which
is of uncertain value prior to the completion of construction. Thus, it is more
difficult to evaluate accurately the total loan funds required to complete a
project and related loan-to-value ratios. To minimize the risks associated with
construction lending, the Company limits loan-to-value ratios for residential
property to 85% and for non-residential property and multi-family properties to
80%, in addition to its usual credit analysis of its borrowers.
Management expects that the loan-to-value ratios described above will
be sufficient to compensate for fluctuations in the real estate market to
minimize the risk of loss.
Consumer Loans. The Company expects that its consumer loans will
consist primarily of installment loans to individuals for personal, family and
household purposes. The specific types of consumer loans expected to be made by
the Banks include home improvement loans, debt consolidation loans and general
consumer lending.
Consumer loans may entail greater risk than residential mortgage loans
do, particularly in the case of consumer loans that are unsecured, such as lines
of credit, or secured by rapidly depreciable assets such as automobiles. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an
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adequate source of repayment of the outstanding loan balance as a result of the
greater likelihood of damage, loss or depreciation. The remaining deficiency
often does not warrant further substantial collection efforts against the
borrower. In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. Such loans may also give rise to claims and defenses by a consumer
loan borrower against an assignee of such loan such as the Company, and a
borrower may be able to assert against such assignee claims and defenses that it
has against the seller of the underlying collateral.
The Company's policy for consumer loans is to accept moderate risk
while minimizing losses, primarily through a careful analysis of the borrower.
In evaluating consumer loans, the Company will require its lending officers to
review the borrower's level and stability of income, past credit history and the
impact of these factors on the ability of the borrower to repay the loan in a
timely manner. In addition, the Company will require that its banking officers
maintain an appropriate margin between the loan amount and collateral value. The
Company expects that many of its consumer loans will be made to the principals
of the small and medium-sized businesses for whom the Banks provide banking
services.
Credit Card and Other Loans. The Company also expects to issue credit
cards to certain of its customers. In determining to whom it will issue credit
cards, the Company intends to evaluate the borrower's level and stability of
income, past credit history and other factors. Finally, the Company expects to
make additional loans that may not be classified in one of the above categories.
In making such loans, the Company will attempt to ensure that the borrower meets
the Company's credit quality standards.
Deposits. Management intends to offer a broad range of interest-bearing
and noninterest-bearing deposit accounts, including commercial and retail
checking accounts, money market accounts, individual retirement accounts,
regular interest-bearing savings accounts and certificates of deposit with a
range of maturity date options. Management anticipates that the primary sources
of deposits will be small and medium-sized businesses and individuals within an
identified market. In each identified market, senior management will have the
authority to set rates within specified parameters in order to remain
competitive with other financial institutions. All deposits will be insured by
the FDIC up to the maximum amount permitted by law. The Company expects to
implement a service charge fee schedule, which will be competitive with other
financial institutions in a Bank's market area, covering such matters as
maintenance fees on checking accounts, per item processing fees on checking
accounts, returned check charges and other similar fees.
Specialized Consumer Services. Management intends to offer specialized
products and services to its customers, such as lock boxes, travelers checks and
safe deposit services.
Courier Services. The Company expects to offer courier services to its
business customers. Courier services permit the Company to provide the
convenience and personalized service its customers require by scheduling
pick-ups of deposits.
Telephone and Internet Banking. The Company believes that there is a
strong demand within its market for telephone banking and internet banking. Both
services allow customers to access detailed account information, execute
transactions and pay bills electronically. Management believes that these
services are particularly attractive for its customers, as it will enable them
to conduct their banking business and monitor their bank accounts from remote
locations. Management of the Company believes
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that telephone and internet banking will assist the Banks in attracting and
retaining customers and will also encourage its customers to maintain their
total banking relationships with the Company.
Automatic Teller Machines ("ATMs"). The Company plans to have an ATM at
each office of each Bank. Management intends to make other financial
institutions' ATMs available to its customers and to offer customers a certain
number of free ATM transactions per month.
Other Products and Services. The Company intends to evaluate other
services such as trust services, brokerage and investment services, insurance,
and other permissible activities. Management expects to introduce these services
as they become economically viable.
Competition
Banks generally compete with other financial institutions through the
selection of banking products and services offered, the pricing of services, the
level of service provided, the convenience and availability of services, and the
degree of expertise and the personal manner in which services are offered.
Virginia law permits statewide branching by banks. Consequently, commercial
banking in Virginia is highly competitive. Many large banking organizations,
several of which are controlled by out-of-state holding companies, currently
operate in the Company's targeted market areas. In addition, competition between
commercial banks and thrift institutions (savings institutions and credit
unions) has intensified significantly by the elimination of many previous
distinctions between the various types of financial institutions and the
expanded powers and increased activity of thrift institutions in areas of
banking which previously had been the sole domain of commercial banks. Recent
legislation, together with other regulatory changes by the primary regulators of
the various financial institutions, has resulted in the almost total elimination
of practical distinctions between a commercial bank and a thrift institution.
Consequently, competition among financial institutions of all types is largely
unlimited with respect to legal ability and authority to provide most financial
services. Furthermore, as a consequence of legislation recently enacted by the
United States Congress, out-of-state banks not previously allowed to operate in
Virginia are allowed to commence operations and compete in the Company's
targeted market areas.
Each of the Banks will face competition from other banks, as well as
thrift institutions, consumer finance companies, insurance companies and other
institutions in the Banks' respective market areas. Some of these competitors
are not subject to the same degree of regulation and restriction imposed upon
the Banks. Many of these competitors also have broader geographic markets and
substantially greater resources and lending limits than the Banks and offer
certain services such as trust banking that the Banks are not expected to
provide in the near term. In addition, many of these competitors have numerous
branch offices located throughout the extended market areas of the Banks that
the Company believes may provide these competitors with an advantage in
geographic convenience that the Banks do not have at present. Such competitors
may also be in a position to make more effective use of media advertising,
support services, and electronic technology than can the Banks. Currently there
are 27 other commercial banks, 7 savings institutions, and 30 credit unions
operating in the Company's targeted market areas.
Employees
At December 31, 1998, the Company had 31 full time employees, none of
which is represented by a union or covered by a collective bargaining agreement.
Management considers employee relations to be good.
12
<PAGE>
Government Supervision and Regulation
The following discussion is a summary of the principal laws and
regulations that comprise the regulatory framework applicable to the Company and
the Banks. Other laws and regulations that govern various aspects of the
operations of banks and bank holding companies are not described herein,
although violations of such laws and regulations could result in supervisory
enforcement action against the Company or a Bank. The following descriptions, as
well as descriptions of laws and regulations contained elsewhere in this
Prospectus, summarize the material terms of the principal laws and regulations
and are qualified in their entirety by reference to applicable laws and
regulations.
As a bank holding company, the Company is subject to regulation under
the Bank Holding Company Act of 1956 (as amended, the "BHCA") and the
examination and reporting requirements of the Federal Reserve. Under the BHCA, a
bank holding company may not directly or indirectly acquire ownership or control
of more than 5% of the voting shares or substantially all of the assets of any
additional bank or merge or consolidate with another bank holding company
without the prior approval of the Federal Reserve. The BHCA also generally
limits the activities of a bank holding company to that of banking, managing or
controlling banks, or any other activity which is determined to be so closely
related to banking or to managing or controlling banks that an exception is
allowed for those activities.
As a national bank, Cardinal Bank is subject to regulation, supervision
and examination by the Office of the Comptroller of the Currency ("OCC"). The
Additional Banks also are expected to be national banks, supervised by the OCC
in the same fashion and to the same extent as Cardinal Bank. Cardinal Bank is
also subject to regulation, supervision and examination by the FDIC. Federal law
also governs the activities in which the Banks may engage, the investments they
may make and limits the aggregate amount of loans that may be granted to one
borrower to 15% of a bank's capital and surplus. Various consumer and compliance
laws and regulations also affect the Banks' operations.
The earnings of the Banks, and therefore the earnings of the Company,
are affected by general economic conditions, management policies and the
legislative and governmental actions of various regulatory authorities,
including those referred to above.
The OCC will conduct regular examinations of the Banks, reviewing such
matters as the adequacy of loan loss reserves, quality of loans and investments,
management practices, compliance with laws, and other aspects of their
operations. In addition to these regular examinations, the Banks must furnish
the OCC with periodic reports containing a full and accurate statement of its
affairs. Supervision, regulation and examination of banks by these agencies are
intended primarily for the protection of depositors rather than shareholders.
Insurance of Accounts, Assessments and Regulation by the FDIC. The
deposits of Cardinal Bank are insured by the FDIC up to the limits set forth
under applicable law. The deposits of Cardinal Bank are subject to the deposit
insurance assessments of the Bank Insurance Fund ("BIF") of the FDIC. The
Additional Banks will be subject to the same assessments.
The FDIC has implemented a risk-based deposit insurance assessment
system under which the assessment rate for an insured institutions may vary
according to regulatory capital levels of the institution and other factors
(including supervisory evaluations). Depository institutions insured by the BIF
that are "well capitalized", are required to pay only the statutory minimum
assessment of $2,000 annually for deposit insurance, while all other banks are
required to pay premiums ranging from .03% to .30% of domestic deposits. These
rate schedules are subject to future adjustments by the FDIC. In addition, the
13
<PAGE>
FDIC has authority to impose special assessments from time to time. However,
because the legislation enacted in 1996 requires that both Savings Association
Insurance Fund ("SAIF") insured and BIF-insured deposits pay a pro rata portion
of the interest due on the obligations issued by the Financing Corporation
("FICO"), the FDIC is assessing BIF-insured deposits an additional 1.30 basis
points per $100 of deposits to cover those obligations.
The FDIC is authorized to prohibit any BIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's primary
regulatory authority an opportunity to take such action. The FDIC may terminate
the deposit insurance of any depository institution if it determines, after a
hearing, that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, order or any condition imposed in
writing by the FDIC. It also may suspend deposit insurance temporarily during
the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If deposit insurance is terminated, the
deposits at the institution at the time of termination, less subsequent
withdrawals, shall continue to be insured for a period from six months to two
years, as determined by the FDIC. Management is aware of no existing
circumstances that could result in termination of Cardinal Bank's deposit
insurance.
Capital. The OCC and the Federal Reserve have issued risk-based and
leverage capital guidelines applicable to banking organizations they supervise.
Under the risk-based capital requirements, the Company and Cardinal Bank are
each generally required to maintain a minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) of 8%. At least half of the total capital is to be
composed of common equity, retained earnings and qualifying perpetual preferred
stock, less certain intangibles ("Tier 1 capital"). The remainder may consist of
certain subordinated debt, certain hybrid capital instruments and other
qualifying preferred stock and a limited amount of the loan loss allowance
("Tier 2 capital" and, together with Tier 1 capital, "total capital").
In addition, each of the Federal banking regulatory agencies has
established minimum leverage capital ratio requirements for banking
organizations. These requirements provide for a minimum leverage ratio of Tier 1
capital to adjusted average quarterly assets equal to 3% for bank holding
companies that are rated a composite "1" and 4% for all other bank holding
companies. Bank holding companies are expected to maintain higher than minimum
capital ratios if they have supervisory, financial, operational or managerial
weaknesses, or if they are anticipating or experiencing significant growth.
The risk-based capital standards of the OCC and the Federal Reserve
explicitly identify concentrations of credit risk and the risk arising from
non-traditional activities, as well as an institution's ability to manage these
risks, as important factors to be taken into account by the agency in assessing
an institution's overall capital adequacy. The capital guidelines also provide
that an institution's exposure to a decline in the economic value of its capital
due to changes in interest rates be considered by the agency as a factor in
evaluating a bank's capital adequacy. The OCC and the Federal Reserve also have
recently issued additional capital guidelines for bank holding companies that
engage in certain trading activities.
Other Safety and Soundness Regulations. There are a number of
obligations and restrictions imposed on bank holding companies and their
depository institution subsidiaries by Federal law and regulatory policy that
are designed to reduce potential loss exposure to the depositors of such
depository institutions and to the FDIC insurance funds in the event the
depository institution becomes in danger of default or is in default. For
example, under a policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as a source of
financial strength to its
14
<PAGE>
subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so otherwise. In addition,
the "cross-guarantee" provisions of Federal law require insured depository
institutions under common control to reimburse the FDIC for any loss suffered or
reasonably anticipated by the BIF as a result of the default of a commonly
controlled insured depository institution or for any assistance provided by the
FDIC to a commonly controlled insured depository institution in danger of
default. The FDIC may decline to enforce the cross-guarantee provision if it
determines that a waiver is in the best interests of the BIF. The FDIC's claim
for reimbursement is superior to claims of shareholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institution.
The Federal banking agencies also have broad powers under current
Federal law to take prompt corrective action to resolve problems of insured
depository institutions. The Federal Deposit Insurance Act requires that the
federal banking agencies establish five capital levels for insured depository
institutions - "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." It also
requires or permits such agencies to take certain supervisory actions should an
insured institution's capital level fall. For example, an "adequately
capitalized" institution is restricted from accepting brokered deposits. An
"undercapitalized" or "significantly undercapitalized" institution must develop
a capital restoration plan and is subject to a number of mandatory and
discretionary supervisory actions. These powers and authorities are in addition
to the traditional powers of the Federal banking agencies to deal with
undercapitalized institutions.
Federal regulatory authorities also have broad enforcement powers over
the Company and the Banks, including the power to impose fines and other civil
and criminal penalties, and to appoint a receiver in order to conserve the
assets of any such institution for the benefit of depositors and other
creditors.
Payment of Dividends. The Company is a legal entity separate and
distinct from the Banks. Virtually all of the revenues of the Company will
result from dividends paid to the Company by the Banks. Under OCC regulations a
national bank may not declare a dividend in excess of its undivided profits,
which will mean that each Bank must recover any start-up losses before it may
pay a dividend to the Company. Additionally, a national bank may not declare a
dividend if the total amount of all dividends, including the proposed dividend,
declared by the national bank in any calendar year exceeds the total of the
national bank's retained net income of that year to date, combined with its
retained net income of the two preceding years, unless the dividend is approved
by the OCC. A national bank may not declare or pay any dividend if, after making
the dividend, the national bank would be "undercapitalized," as defined in
regulations of the OCC. The Company is subject to state laws that limit the
amount of dividends it can pay. In addition, the Company is subject to various
general regulatory policies relating to the payment of dividends, including
requirements to maintain adequate capital above regulatory minimums. The Federal
Reserve has indicated that banking organizations should generally pay dividends
only if (1) the organization's net income available to common shareholders over
the past year has been sufficient to fund fully the dividends and (2) the
prospective rate of earnings retention appears consistent with the
organization's capital needs, asset quality and overall financial condition. The
Company expects that these laws, regulations or policies will materially impact
the ability of the Banks and, therefore, the Company to pay dividends in the
early years of operations.
Community Reinvestment. The requirements of the Community Reinvestment
Act ("CRA") are applicable to the Bank. The CRA imposes on financial
institutions an affirmative and ongoing obligation to meet the credit needs of
their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those institutions. A financial
institution's efforts in
15
<PAGE>
meeting community credit needs currently are evaluated as part of the
examination process pursuant to twelve assessment factors. These factors also
are considered in evaluating mergers, acquisitions and applications to open a
branch or facility.
Interstate Banking and Branching. Current Federal law authorizes
interstate acquisitions of banks and bank holding companies without geographic
limitation. Effective June 1, 1997, a bank headquartered in one state is able to
merge with a bank headquartered in another state, as long as neither of the
states has opted out of such interstate merger authority prior to such date.
States are authorized to enact laws permitting such interstate bank merger
transactions prior to June 1, 1997, as well as authorizing a bank to establish
"de novo" interstate branches. Virginia enacted early "opt in" laws, permitting
interstate bank merger transactions. Once a bank has established branches in a
state through an interstate merger transaction, the bank may establish and
acquire additional branches at any location in the state where a bank
headquartered in that state could have established or acquired branches under
applicable Federal or state law.
Economic and Monetary Polices. The operations of the Company are
affected not only by general economic conditions, but also by the economic and
monetary policies of various regulatory authorities. In particular, the Federal
Reserve regulates money, credit and interest rates in order to influence general
economic conditions. These policies have a significant influence on overall
growth and distribution of loans, investments and deposits and affect interest
rates charged on loans or paid for time and savings deposits. Federal Reserve
monetary policies have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future.
Item 2. Description of Property
The Company's headquarters is at 10555 Main Street, Fairfax, Virginia
and Cardinal Bank's office is at 10641 Lee Highway, Fairfax, Virginia. The
Company's headquarters occupies 10,000 square feet and are held under a five
year lease. Cardinal Bank's premises are held under a 10 year lease, which began
January 1, 1998. The building, which has been substantially renovated, is a
three-story brick structure, containing 9,000 square feet. It has five teller
stations, one drive-through window and a walk-up ATM and night depository. In
1999 the Company leased premises for the Reston and Alexandria loan production
offices, consisting of 6,625 and 5,256 square feet, respectively. These offices
will serve as the banking offices of the Company's bank subsidiaries in those
localities.
Item 3. Legal Proceedings
In the ordinary course of operations, the Company and the Banks expect
to be parties to various legal proceedings. At present, there are no pending or
threatened proceedings against the Company or any of the Banks which, if
determined adversely, would have a material effect on the business, results of
operations, or financial position of the Company or any of the Banks.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the transition period covered by
this report.
16
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Common Stock of the Company is traded on the Nasdaq SmallCap Market
under the symbol of "CFNL". The following table sets forth the high and low bid
information for the shares of Common Stock on the Nasdaq SmallCap Market for the
quarters indicated.
Bid Information
---------------
High ($) Low ($)
-------- -------
Fiscal Year Ended December 31, 1998
3rd quarter............................... $10.75 $7.25
4th quarter............................... 8.41 6.13
_______________________
(1) The Company's Common Stock began trading on the Nasdaq SmallCap Market
on July 17, 1998, at an initial public offering price of $10.00 per
share. Prior to that date, there was no established trading market for
the Common Stock.
As of March 26, 1999, there were approximately 253 record holders of
Common Stock.
The Company has never declared any cash dividends on the Common Stock,
and any future payment of dividends is solely in the discretion of the Board of
Directors and is dependent upon the earnings and financial condition of the
Company and such other factors as the Board of Directors from time to time may
deem relevant.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation
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, including, among others, problems with technology utilized by
the Company as described below, 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 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.
General
Cardinal Financial Corporation (the Company) is the bank holding
company for Cardinal Bank, N.A. (the Bank) in Fairfax, Virginia. The Company is
in a development stage having opened its first bank on June 8, 1998.
The Company funded its start-up and organizational costs through a
private offering of 1,409,509 shares of its common stock, par value $1.00 per
share, 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 was used to capitalize the Bank. The Company raised additional
capital for general corporate purposes and to capitalize three additional
separately chartered banks in three distinct market areas in northern Virginia.
In July 1998, the Company through its initial public offering of 2,830,000
shares of common stock, received net proceeds of $26.0 million.
The following presents management's discussion and analysis of the
consolidated financial condition and results of operation of the Company for the
year ended December 31,1998 and for the period from November 24, 1997 (date of
inception) to December 31, 1997. Principal banking operations commenced on June
8, 1998 and parent company operations began November 24, 1997.
17
<PAGE>
This discussion should be read in conjunction with the accompanying
consolidated financial statements and supplemental financial information.
Earnings Overview
Consolidated net loss for 1998 was $1,696,345 or $0.64 per diluted
share compared to a net loss of $145,178 or $0.12 per diluted share in 1997.
Results for 1998 include the opening of the Bank, the Company's sole subsidiary.
The key profitability measures of return on average assets (ROA) and
return on average shareholders' equity (ROE) for 1998 and 1997, for comparative
purposes, are not meaningful due to the Company's short period of operations in
1997. ROA for 1998 was -5.37% and ROE for 1998 was -7.45%. These ratios for
1998, along with other selected earnings and balance sheet information for the
year ended December 31, 1998 and for the period from November 24, 1997 (date of
inception) to December 31, 1997 are included in Table 1.
Net Interest Income and Net Interest Margin
The fundamental source of Cardinal's revenue, net interest income, is
defined as the difference between income on interest earning assets and the
interest bearing liabilities supporting those assets. The significant categories
of earning assets are loans and securities, while deposits represent
interest-bearing liabilities. The level of net interest income is impacted
primarily by variations in the volume and mix of these assets and liabilities,
as well as changes in interest rates when compared to previous periods of
operation. The year ended December 31, 1998 includes a full year of operations
for the Company and seven months of operations for the Bank. Average earning
assets increased in 1998 to $26.9 million from $204,000 in 1997. The increase
was due to the investment of the private and public offering proceeds and
consumer and commercial deposits into loans and money market instruments.
The net interest margin is calculated as net interest income divided by
average earning assets, and represents the Company's net yield on its earning
assets. A comparison of the 1998 net interest margin of 4.66% and the 1997 net
interest margin of 3.45% is not meaningful given the start-up nature of the
Company's operation. Table 2 reflects the components of interest income and
interest expense and their applicable yields and costs.
Non-Interest Income
Total non-interest income or fee income was $34,000 in 1998. The
components of non-interest income include service charges on deposit accounts,
loan service charges and securities gains and losses. The Company did not
generate non-interest income during its period of operation in 1997.
Non-Interest Expense
Non-interest expense, also called operating expenses, was $2.7 million
in 1998 compared to $149,000 in 1997. Again, it is important to note that when
comparing 1998 to 1997 the period of operation in 1997 covers only five weeks.
The components of non-interest expense include salary and benefits,
depreciation, occupancy, professional fees and other operating expenses. The
significant increase in expenses in 1998 reflect bringing staffing up to
required levels as well as the cost indicative of operating the Bank and the
Company. Footnote 16 provides additional detail of other operating expense.
18
<PAGE>
Income Taxes
The Company has not incurred any income tax liability due to the
recognition of net losses in 1998 and 1997. The ability to utilize net operating
loss carryforwards will be dependent on the Company's ability to generate future
earnings. Footnote 9 provides additional information with respect to the
deferred tax accounts and the net operating loss carryforward.
Liquidity Management
The objective of liquidity management is to ensure the continuous
availability of funds to meet the demands of depositors, investors and
borrowers. Liquidity is provided through investment securities available for
sale, money market investments and maturing loans. The Asset/Liability
Committee, a committee consisting of senior management that meets regularly is
responsible for managing liquidity needs which takes into account the
marketability of assets, the sources, stability and availability of funding and
the level of unfunded commitments.
Interest Rate Sensitivity
An important element of asset/liability management is the monitoring of
the Company's sensitivity to interest rate movements. The income stream of the
Company is subject to risk resulting from interest rate fluctuations to the
extent there is a difference between the amount of the Company's interest
earning assets and the amount of interest bearing liabilities that are prepaid,
mature or reprice in specified periods. The goal is to maximize net interest
income with acceptable levels of risk to changes in interest rates. Management
seeks to meet this goal by influencing the maturity and re-pricing
characteristics of the various assets and liabilities.
The Company uses a number of tools to measure interest rate risk,
including simulating net interest income under various rate scenarios and
monitoring the difference or gap between rate sensitive assets and liabilities
over various time periods.
The data in Table 3 reflects re-pricing or expected maturities of
various assets and liabilities at December 31, 1998. This gap represents the
difference between interest sensitive assets and liabilities in a specific time
interval. The 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 over the
next six to twelve months, management has maintained a high positive short-term
gap.
Capital
At December 31, 1998, shareholders' equity was $34.7 million, up from
$8.6 million at December 31, 1997. The increase in total capital in 1998 is
attributable to the receipt of net proceeds from both the private offering and
the initial public offering, reduced by accumulated losses. The Consolidated
Statements of Changes in Shareholders' Equity highlight the changes in equity
since November 24, 1997.
Capital adequacy is an important indicator of financial stability and
performance. Management's objectives are to maintain a level of capitalization
that is sufficient to sustain asset growth and promote depositor and investor
confidence.
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<PAGE>
Banking regulators define minimum capital ratios for bank holding
companies and their banking subsidiaries. Based on the risk-based capital rules
and definitions prescribed by the banking regulators, an institution whose
capital ratios fall below pre-defined minimum levels, would become subject to a
series of restrictive regulatory actions. Note 10- Regulatory Matters in the
accompanying consolidated financial statements shows the minimum capital
requirements and the Bank's capital position as of December 31, 1998.
Investment Securities
The investment portfolio of the Company has been designated as
available for sale. It consists of debt securities and is used as a source of
income and liquidity. Table 4 shows information pertaining to the composition,
yields and maturities of the investment portfolio as of December 31,1998.
Corporate policy calls for all securities purchased for the investment portfolio
to be rated investment grade by Moody's Investor Service or Standard & Poors. At
December 31, 1998, the Company was in compliance with these guidelines.
Lending
The Company's loan portfolio is segmented into two broad categories,
commercial loans and consumer loans. Commercial loans are comprised of
short-term lines of credit, term loans, or mortgage financing. Construction loan
funds are used by borrowers to build or develop real estate properties. Consumer
loans are comprised of residential real estate mortgage, bank card and
installment loans. Table 5 shows the various loan categories and balances
outstanding as of December 31, 1998. There were no loans outstanding as of
December 31, 1997.
Credit Risk Management and Asset Quality
The Company has comprehensive policies and procedures which cover both
commercial and consumer loan origination and management of risk. All loans are
underwritten in a manner that focuses on the borrowers ability to pay. The
Company's goal is not to avoid risk, but to manage it and to include credit risk
as part of the pricing decision for each product. At December 31, 1998, the
Company did not have any non-performing loans.
Provision and Allowance for Loan Losses
Management's policy is to maintain the allowance for loan losses at a
level sufficient to absorb the estimated losses inherent in the loan portfolio.
Both the amount of the provision and the level of the allowance for loan losses
are impacted by many factors, including general economic conditions, actual and
expected credit losses, loan performance measures, historical trends and
specific conditions of the individual borrower.
The allowance for loan losses at December 31, 1998 was $212,460. The
provision for loan loss was also $212,460 since the Company did not have a
provision or loan loss allowance in 1997. In addition, there were no charge-offs
in 1998. Table 6 reflects the components of the loan loss allowance and Table 7
reflects the reserve allocation.
20
<PAGE>
Table 1
Cardinal Financial Corporation and Subsidiary
Selected Financial Information
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
For the period from
For the year ended November 24, 1997 (date of inception)
December 31,1998 to December 31, 1997
---------------------- --------------------------
<S> <C> <C>
Results of Operations
Income from earning assets $ 1,557 $ 7
Net interest income 1,216 4
Provision for loan losses 212 -
Net Loss (1,696) (145)
Loss Per Share
Basic & Diluted:
Net Income $ (0.64) $ (0.12)
Average shares outstanding 2,646,036 1,174,988
Dividends paid per common share $ - $ -
=======================================================================================================
Financial Condition
Total assets $ 57,295 $ 8,796
Earning assets 54,317 4,210
Loans, net 16,115 -
Deposits 21,867 -
Total equity 34,728 8,551
=======================================================================================================
Selected Ratios
Return on average assets -5.37% N/M
Return on average equity -7.45% N/M
Total equity to total assets 60.61% 97.22%
Net interest margin 4.66% N/A
Net interest spread 1.09% N/A
Based on averages:
Total equity to total assets 72.09% N/M
Total loans to total equity 9.53% -
=======================================================================================================
</TABLE>
21
<PAGE>
Table 2
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
RATE AND VOLUME ANALYSIS (TAX EQUIVALENT BASIS)
(In thousands)
<TABLE>
<CAPTION>
Variance
Average Volume Average Rate Interest Increase Attributable to
1998 1997 1998 1997 1998 1997 (Decrease) Rate Volume
- - ---------------------- --------------------- -------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Loans:
$ 529 $ - 10.07% 0.00% Commercial $ 53 $ - $ 53 $ 53 $ -
287 - 8.12% 0.00% Real estate - commercial 23 - 23 23 -
63 - 8.05% 0.00% Real estate - construction 5 - 5 5 -
768 - 7.49% 0.00% Real estate - residential 58 - 58 58 -
155 - 10.21% 0.00% Home equity lines 16 - 16 16 -
168 - 13.93% 0.00% Consumer 23 - 23 23 -
- - ------------------------------------------------------------------------------------------------------------------------------------
1,970 - 9.06% 0.00% Total loans 178 - 178 178 -
5,617 - 5.63% 0.00% Investment Securities - AFS 316 - 316 316 -
764 204 4.17% 3.45% Money Market Accounts 32 7 25 5 19
18,574 - 5.55% 0.00% Federal funds sold 1,031 - 1,031 1,031 -
- - ------------------------------------------------------------------------------------------------------------------------------------
$ 26,925 $ 204 5.78% 3.45% Total interest-earning assets $ 1,557 $ 7 $ 1,550 $ 1,531 $ 19
====================================================================================================================================
Interest Expense
Deposits:
535 - 2.07% 0.00% Interest Checking 11 - 11 11 -
2,316 - 3.71% 0.00% Money Markets 86 - 86 86 -
62 - 2.95% 0.00% Statement Savings 2 - 2 2 -
4,336 - 5.56% 0.00% Certificates of Deposit 241 - 241 241 -
- - ------------------------------------------------------------------------------------------------------------------------------------
7,249 - 4.69% 0.00% Total interest-bearing liabilities 340 - 340 340 -
23,045 713 Other Sources - Net
- - ------------------------------------------------------------------------------------------------------------------------------------
30,294 713 1.12% 0.00% Total Sources of Funds 340 - 340 340 -
- - ------------------------------------------------------------------------------------------------------------------------------------
$ 19,676 $ 204 4.66% 3.45% Net Interest Margin $ 1,217 $ 7 $ 1,210 $ 1,191 $ 19
====================================================================================================================================
</TABLE>
22
<PAGE>
Table 3
Interest Rate Sensitivity Gap Analysis
As of December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
1-90 91-180 181-365 1-5 Over 5
Days Days Days Years Years TOTAL
- - ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Securities
U.S. Government agency securities 300 - - 9,005 1,001 $ 10,306
Mortgage-backed securities - - - 440 2,731 3,171
Other securities - - - - 220 220
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities 300 - - 9,445 3,952 13,697
- - ------------------------------------------------------------------------------------------------------------------------------------
Federal Funds Sold 24,277 24,277
- - ------------------------------------------------------------------------------------------------------------------------------------
Loans
Variable rate loans 5,514 - 1,212 6,745 - 13,471
Fixed rate loans 225 - 58 2,246 343 2,872
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Gross Loans 5,739 - 1,270 8,991 343 16,343
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 30,316 - 1,270 18,436 4,295 $ 54,317
- - ------------------------------------------------------------------------------------------------------------------------------------
Cumulative Rate Sensitive Assets 30,316 30,316 31,586 50,022 54,317
- - ------------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- - ------------------------------------------------------------------------------------------------------------------------------------
Deposits
Demand deposits 5,501 - - - - $ 5,501
Interest checking 1,746 - - - - 1,746
Statement savings 88 - - - - 88
Money market accounts 3,383 - - - - 3,383
Certificates of deposit 1,070 2,686 6,921 472 - 11,149
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Deposits 11,788 2,686 6,921 472 - 21,867
- - ------------------------------------------------------------------------------------------------------------------------------------
Other liabilities - - - - - -
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 11,788 2,686 6,921 472 - $ 21,867
- - ------------------------------------------------------------------------------------------------------------------------------------
Cumulative Rate Sensitive Liabilities 11,788 14,474 21,395 21,867 21,867
- - ------------------------------------------------------------------------------------------------------------------------------------
Gap 18,528 (2,686) (5,651) 17,964 4,295
Cumulative Gap 18,528 15,842 10,191 28,155 32,450
Gap/ Total Assets 32.34% -4.69% -9.86% 31.35% 7.50%
Cumulative Gap/ Total Assets 32.34% 27.65% 17.79% 49.14% 56.64%
Rate Sensitive Assets/ Rate Sensitive Liabilities 2.57 - 0.18 39.07 -
Cumulative RSA/ Cumulative RSL 2.57 2.09 1.48 2.29 2.48
</TABLE>
23
<PAGE>
Table 4
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Investment Securities - Available for Sale
As of December 31, 1998
(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 $ 300 300 300 - 5.28%
One to five years 9,000 9,002 9,005 3 5.79%
Five to ten years 500 501 502 1 5.79%
After ten years 500 499 499 - 6.26%
- - -------------------------------------------------------------------------------------------------------------------------------
Total U.S Government Agencies $ 10,300 10,302 10,306 4 5.78%
- - -------------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities
Within one year - - - - -
One to five years 437 441 440 (1) 5.43%
Five to ten years 460 460 460 - 5.27%
After ten years 2,278 2,271 2,271 - 5.87%
- - -------------------------------------------------------------------------------------------------------------------------------
Total Mortgage-Backed Securities $ 3,175 3,172 3,171 (1) 5.52%
- - -------------------------------------------------------------------------------------------------------------------------------
Other Securities
Within one year - - - - -
One to five years - - - - -
Five to ten years - - - - -
After ten years 220 220 220 - 6.00%
- - -------------------------------------------------------------------------------------------------------------------------------
Total Other Securities $ 220 220 220 - 6.00%
- - -------------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $ 13,695 13,694 13,697 3 5.77%
</TABLE>
24
<PAGE>
Table 5
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Loans
(In thousands)
<TABLE>
<CAPTION>
December 31, December 31
1998 1997
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Commercial $ 5,138 31.44% $ - -
Real estate - commercial 3,507 21.46% - -
Real estate - construction 760 4.65% - -
Real estate - residential 5,529 33.83% - -
Home equity lines 1,040 6.37% - -
Consumer 369 2.26% - -
---------------------------- -----------------------------
Gross loans $ 16,343 100.00% $ - -
Less: unearned income, net (16) - - -
Less: allowance for loan loss (212) - - -
---------------------------- -----------------------------
Total net loans $ 16,115 - $ - -
============================ =============================
</TABLE>
25
<PAGE>
Table 6
Cardinal Financial Corporation
Allowance for Loan Losses
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
---------------- ------------------
<S> <C> <C>
Beginning balance $ - $ -
Provision for loan losses 212 -
Loans charged off:
Commercial - -
Real estate - commercial - -
Real estate - construction - -
Real estate - residential - -
Home equity lines - -
Consumer - -
- - --------------------------------------------------------------------------------------
Total loans charged off - -
Recoveries:
Commercial - -
Real estate - commercial - -
Real estate - construction - -
Real estate - residential - -
Home equity lines - -
Consumer - -
- - --------------------------------------------------------------------------------------
Total recoveries - -
Net charge-offs - -
Balance, December 31 $ 212 $ -
======================================================================================
Loans:
Total at year end $ 16,343
Allowance for loan losses to:
Year-end loans 1.30%
</TABLE>
26
<PAGE>
Table 7
Cardinal Financial Corporation
Allocation of the Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31, December 31
1998 1997
----------------------- -----------------------
<S> <C> <C> <C> <C>
Commercial $ 67 31.54% $ - $ -
Real estate - commercial 45 21.25% - -
Real estate - construction 10 4.67% - -
Real estate - residential 72 33.94% - -
Home equity lines 13 6.33% - -
Consumer 5 2.27% - -
----------------------- ---------------------
Total loan loss reserve $ 212 100.00% $ - $ -
======================= =======================
</TABLE>
-27-
<PAGE>
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 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 to review the Year 2000
issues faced by its third-party vendors. Under this program, the Company is
examining 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 already compliant
or are in the process of becoming 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's Year 2000 compliance program provides that all critical data
processing applications will be tested beginning in November 1998 and ending on
or before March 31, 1999. For any software that is not Year 2000 compliant at
March 31, 1999, the vendor contract can be terminated and an alternative vendor
can be selected. Alternative vendors have been identified should they be
necessary. By definition of its loan policy on Year 2000 risk management
parameters, the Company has no Year 2000 credit risk at this time.
The Company does not expect the cost of its Year 2000 compliance
program, including possible remediation costs, to be material to its financial
condition and expects to satisfy compliance without material disruption of its
operations. The anticipated costs will be for testing of vendor Year 2000
compliance. The Company will utilize internal staff for this purpose, as well as
third-party vendors as necessary. The Company does not separately track the
internal costs incurred for its Year 2000 compliance program. However, such
costs are limited to the related payroll costs for its test team. 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 will be based on the ability to replace
mission critical vendors that do not achieve Year 2000 compliance. Alternate
vendors have been identified and, should any of the Company's existing vendors
not certify Year 2000 compliance by March 31, 1999, the Company will proceed
with plans to move to alternate vendors and to establish a contingency plan for
handling the Company's Year 2000 exposure.
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.
28
<PAGE>
Item 7. Financial Statements
The following financial statements are filed as a part of this report
following Item 13 below:
Independent Auditors' Report
Financial Statements
Consolidated Balance Sheets, December 31, 1998 and 1997
Consolidated Statements of Operations, Year Ended December 31,
1998, and the Period from November 24, 1997 (date of
inception) to December 31, 1997
Consolidated Statements of Comprehensive Income, Year Ended
December 31, 1998 and Period from November 24, 1997 (date of
inception) to December 31, 1997
Consolidated Statements of Changes in Shareholders' Equity,
Year Ended December 31, 1998 and the Period from November 24,
1997 (date of inception) to December 31, 1997
Consolidated Statements of Cash Flows, Year Ended December 31,
1998 and the Period from November 24, 1997 (date of inception)
to December 31, 1997
Notes to Consolidated Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No changes in the Company's independent accountants or disagreements on
accounting and financial disclosure required to be reported hereunder have taken
place.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Information set forth under the headings "Election of Directors,"
"Executive Officers who are not Directors," and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement for
its 1999 Annual Meeting of Shareholders, which Proxy Statement will be filed
with the Securities and Exchange Commission within 120 days of the end of the
Company's 1998 fiscal year (the "1999 Proxy Statement"), is hereby incorporated
by reference.
Item 10. Executive Compensation
Information as set forth under the headings "Executive Compensation -
Summary of Cash and Certain Other Compensation," "- Stock Option Grants,"
"-Option Exercises and Holdings," "- Directors' Fees," and "- Employment
Agreements" in the 1999 Proxy Statement is hereby incorporated by reference.
29
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information set forth under the headings "Securities Ownership of
Management" and "Security Ownership of Certain Beneficial Owners" in the 1999
Proxy Statement is incorporated by reference.
Item 12. Certain Relationships and Related Transactions
Information set forth under the heading "Transactions With Management"
in the 1999 Proxy Statement is hereby incorporated by reference.
Item 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits.
3.1 Articles of Incorporation of Cardinal Financial
Corporation, attached as Exhibit 3.1 to the Registration
Statement on Form SB-2, Registration No. 333-52279,
filed with the Commission on May 8, 1998 (the "Form
SB-2"), incorporated herein by reference.
3.2 Bylaws of Cardinal Financial Corporation, attached as
Exhibit 3.2 to the Form SB-2, incorporated herein by
reference.
4 Form of Stock Certificate, attached as Exhibit 4 to the
Form SB-2, incorporated herein by reference.
10.1 Employment Agreement, dated as of September 30, 1997,
between Commercial Fidelity Financial Partnership
(predecessor to Cardinal Financial Corporation) and L.
Burwell Gunn, Jr., attached as Exhibit 10 to the Form
SB-2, incorporated herein by reference.
10.2 Employment Agreement, dated as of October 13, 1998,
between Cardinal Financial Corporation and Thomas C.
Kane.
10.3 Employment Agreement, dated as of December 17, 1998,
between Cardinal Financial Corporation and Edgar M.
Andrews, III.
10.4 Employment Agreement, dated as of December 17, 1998,
between Cardinal Financial Corporation and Christopher
W. Bergstrom.
10.5 Employment Agreement, dated as of February 17, 1999,
between Cardinal Financial Corporation and Joseph L.
Borrelli.
10.6 Employment Agreement, dated as of February 12, 1999,
between Cardinal Financial Corporation and F. Kevin
Reynolds.
10.7 Employment Agreement, dated as of August 31, 1998,
between Cardinal Financial Corporation and Greg D.
Wheeless.
21 Subsidiaries of the Registrant.
30
<PAGE>
27 Financial Data Schedule (filed electronically only).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during
the last quarter of the period covered by this report.
31
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Cardinal Financial Corporation and subsidiary:
We have audited the accompanying consolidated statements of condition of
Cardinal Financial Corporation and subsidiary as of December 31, 1998 and 1997,
and the related consolidated statements of operations, comprehensive income,
changes in shareholders' equity, and cash flows for the year ended December 31,
1998 and for the period from November 24, 1997 (date of inception) to December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cardinal Financial Corporation
and subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the year ended December 31, 1998 and for the
period from November 14, 1997 (date of inception) to December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Washington, D.C.
January 29, 1999
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data)
As of December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
<S> <C> <C>
ASSETS
Cash & due from banks $ 1,073 $ 73
Federal funds sold 24,277 4,210
----------------- ----------------
Total cash and cash equivalents 25,350 4,283
Investment securities (Note 3) 13,697 -
Loans receivable (Note 4) 16,327 -
Less: Allowance for loan losses 212 -
-----------------
----------------
16,115
Subscriptions receivable (Note 7) - 4,510
Premises and equipment, net (Note 6) 1,829 -
Accrued interest and other assets 304 3
----------------- ----------------
Total Assets $ 57,295 $ 8,796
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (Note 8) $ 21,867 $ -
Borrowings - 185
Accrued interest and other liabilities 700 60
----------------- ----------------
Total Liabilities 22,567 245
Common stock, $1 par value, 50,000,000 shares authorized;
shares outstanding 4,239,509 in 1998 and 1,174,988 in 1997 4,240 1,175
Uncollected subscriptions receivable - (100)
Additional paid in capital 32,327 7,621
Accumulated deficit (1,842) (145)
Accumulated other comprehensive income 3 -
----------------- ----------------
Total Shareholders' Equity 34,728 8,551
----------------- ----------------
Total Liabilities and Shareholders' Equity $ 57,295 $ 8,736
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year ended December 31, 1998 and the period from
November 24, 1997 (date of inception) to December 31, 1997
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
INTEREST INCOME
Loans receivable $ 178,697 $ -
Investment securities 316,059 -
Federal funds sold 1,061,815 7,041
------------------ -----------------
Total Interest Income 1,556,571 7,041
INTEREST EXPENSE
Deposits 338,608 -
Borrowings 1,616 2,724
------------------ -----------------
Total Interest Expense 340,224 2,724
------------------ -----------------
NET INTEREST INCOME 1,216,347 4,317
Provision for loan losses 212,460 -
------------------ -----------------
Net interest income after provision for loan losses 1,003,887 4,317
NON-INTEREST INCOME
Service charges on deposit accounts 3,388 -
Loan service charges 16,145
Investment securities gains 8,760
Other income 5,744 -
-----------------
------------------
Total Non-interest income 34,037 -
NON-INTEREST EXPENSE
Salary and benefits 1,401,117 66,918
Depreciation 106,654 -
Occupancy 151,583 42,500
Professional fees 463,497 18,142
Other operating expenses (Note 16) 611,419 21,935
------------------ -----------------
Total non-interest expense 2,734,269 149,495
Net loss before income taxes (1,696,345) (145,178)
Provision for income taxes - -
NET LOSS $ (1,696,345) $ (145,178)
================== =================
Basic and diluted loss per share $ (0.64) $ (0.12)
Weighted-average shares outstanding 2,646,036 1,174,988
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Year ended December 31, 1998 and the period from
November 24, 1997 (date of inception) to December 31, 1997
<TABLE>
<CAPTION>
Year Period from
Ended November 24, 1997
December 31, to December 31,
1998 1997
------------------- ----------------------
<S> <C> <C>
Net loss $ (1,696,345) $ (145,178)
Other comprehensive income:
Unrealized holding gain on available-for-sale
investment securities, net of tax 2,605 -
------------------- ----------------------
Comprehensive income
$ (1,693,740) $ (145,178)
=================== ======================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Year ended December 31, 1998 and the period from November 24, 1997 (date of inception) to December 31, 1997
(In thousands, except per share data)
Accumulated
Additional Other
Common Paid-in Accumulated Comprehensive
Shares Stock Capital Deficit Income
------ ------- --------- ----------- ------
<S> <C> <C> <C> <C> <C>
Balance, November 24, 1997 $ - - - -
Issuance of subscription receivable - - - -
Issuance of 1,175 shares of common stock
at $7.50 per share, net of costs 1,175 1,175 7,621 - -
Net loss - - - (145) -
------ ------- --------- ----------- -------------
BALANCE, DECEMBER 31, 1997 1,175 $ 1,175 7,621 (145) -
Issuance of 235 shares of common stock
at $7.50 per share, net of costs 235 235 1,525 - -
Issuance of 2,830 shares of common stock
at $10.00 per share, net of costs 2,830 2,830 23,181 - -
Payment of subscription receivable - - - - -
Change in unrealized holding gain on investment
securities available for sale - - - - 3
Net loss - - - (1,697) -
------ ------- --------- ----------- -------------
BALANCE, December 31, 1998. 4,240 $ 4,240 32,327 (1,842) 3
====== ======= ========= =========== =============
</TABLE>
Uncollected
Subscription
Receivable Total
------------ -------
Balance, November 24, 1997 - -
Issuance of subscription receivable (100) (100)
Issuance of 1,175 shares of common stock
at $7.50 per share, net of costs - 8,796
Net loss - (145)
------------ -------
BALANCE, DECEMBER 31, 1997 (100) 8,551
Issuance of 235 shares of common stock
at $7.50 per share, net of costs - 1,760
Issuance of 2,830 shares of common stock
at $10.00 per share, net of costs - 26,011
Payment of subscription receivable 100 100
Change in unrealized holding gain on investment
securities available for sale - 3
Net loss - (1,697)
------------ -------
BALANCE, December 31, 1998. - 34,728
============ =======
See accompanying notes to consolidated financial statements.
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year ended December 31, 1998 and the period from
November 24, 1997 (date of inception) to December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Period from
Year ended November 24, 1997 to
December 31, 1998 December 31, 1997
--------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,697) $ (145)
Adjustments to reconcile net loss to net cash used in operating activities:
Realized gain on investment securities (9) -
Unrealized appreciation available-for-sale investment securitites (3) -
Depreciation 107 -
Provision for loan losses 212 -
Increase in accrued interest and other assets (301) (3)
Increase in accrued interest and other liabilities 640 60
--------------------- ---------------------
NET CASH USED IN OPERATING ACTIVITIES (1,051) (88)
--------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (1,936) -
Proceeds from sale of investment securities 3,460 -
Purchase of investment securities (17,142) -
Net increase in loan portfolio (16,327) -
--------------------- ---------------------
NET CASH USED IN INVESTING ACTIVITIES (31,945) -
--------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 21,867 -
Proceeds from stock issuance, net 27,871 8,696
Decrease (increase) in subscription receivables 4,510 (4,510)
(Repayment) proceeds of borrowings (185) 185
--------------------- ---------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 54,063 4,371
--------------------- ---------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 21,067 4,283
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,283 -
--------------------- ---------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,350 $ 4,283
===================== =====================
Supplemental disclosure of cash flow information
Cash paid during period for interest: $ 341 $ -
===================== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
(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 a wholly
owned subsidiary, Cardinal Bank, National Association (the "Bank")
which was established in April 1998.
(2) Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and contingent
liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and the Bank. All significant intercompany transactions and
balances have been eliminated in consolidation.
Cash and Cash Equivalents
For the purpose of presentation in the consolidated statements of cash
flows, the Company has defined cash and cash equivalents as those
amounts included in Cash, Due from Banks, and Federal Funds Sold.
Investment Securities
The Company may classify its debt and marketable equity securities in
one of three categories: trading, available-for-sale, or
held-to-maturity. Trading securities are bought and held principally
for the purpose of selling them in the near term. Held-to-maturity
securities are those securities for which the Company has the ability
and intent to hold until maturity. All other securities not classified
as trading or held-to-maturity are classified as available-for-sale.
The Company does not engage in trading activities and, accordingly, has
no trading portfolio.
1
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
Available-for-sale securities are recorded at fair value. Unrealized
holding gains and losses, net of tax, on available-for-sale securities
are reported as a net amount in other comprehensive income.
Gains and losses on the sale of available-for-sale securities are
determined using the specific identification method. Declines in the
fair value of individual held-to-maturity and available-for-sale
securities below their cost that are deemed other than temporary are
charged to earnings as realized losses, resulting in the establishment
of a new cost basis for the security.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity. Prepayment of the
mortgages securing the collateralized mortgage obligations may affect
the maturity date and yield to maturity. The Company uses actual
principal prepayment experience and estimates of future principal
prepayments in calculating the yield necessary to apply the effective
interest method.
Loans Receivable
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off are reported at
their outstanding principal adjusted for any charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related
loan.
The accrual of interest on impaired loans is discounted when, in
management's opinion, the borrower may be unable to meet payments as
they become due. When interest accrual is discounted, all unpaid
accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received.
The allowance for loan losses is increased by provisions for loan
losses and decreased by charge-offs (net of recoveries). Management's
periodic evaluation of the adequacy of the allowance is based on the
Bank's past loan loss experience, known and inherent risks in the
portfolio,
2
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current economic
conditions.
Premises and Equipment
Land is carried at cost. Bank premises, furniture, equipment, and
leasehold improvements are carried at cost, less accumulated
depreciation and amortization computed principally by the straight-line
method. Amortization of leasehold improvements is computed using the
straight-line method over the useful lives of the improvements or the
lease term, whichever is shorter. Depreciation of bank premises,
furniture and equipment is computed using the straight-line method over
their estimated useful lives from 3 to 10 years.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
Net Income Per Share
Basic and diluted loss per common share was computed by dividing net
loss by the weighted average number of shares of common stock
outstanding during the periods. Common stock equivalents outstanding at
December 31, 1998 were antidilutive and consequently not included in
the EPS calculation.
Stock Option Plan
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations,
in accounting for its fixed plan stock options. As such, compensation
expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price.
3
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
New Accounting Standards
On January 1, 1998 the Company implemented Statement of Financial
Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income. The disclosures required under SFAS 130 have been included in
the financial statements since the Company had items of Comprehensive
income at December 31, 1998.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities (SOP 98-5). SOP 98-5 requires that costs incurred during the
start-up activities, including organization costs, be expenses as
incurred. SOP 98-5 is effective for financial statements for fiscal
years beginning after December 15, 1998, but the Company has elected
early adoption.
Reclassifications
Certain amounts for 1997 have been reclassified to conform to the
presentation for 1998.
(3) Investment Securities
The carrying amount and amortized cost of available-for-sale securities
at December 31, 1998 is shown below.
<TABLE>
<CAPTION>
1998
--------------------------------------------------
Fair Value Amortized Cost
(In thousands)
-------------------------------------------------------------- ------------------------- ------------------------
<S> <C> <C>
Obligations of U.S. government-sponsored
agencies $10,306 $10,302
Mortgage-backed securities 3,171 3,172
Federal Reserve Stock 220 220
-------------------------------------------------------------- ------------------------- ------------------------
Total $13,697 $13,694
-------------------------------------------------------------- ------------------------- ------------------------
</TABLE>
The carrying amount and amortized cost of available-for-sale securities
by contractual maturity at December 31, 1998 is shown below. Expected
maturities may differ from contractual maturities because many issuers
have the right to call or prepay obligations with or without call or
prepayment penalties.
4
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998
--------------------------------------------------
Carrying Value Amortized Cost
(In thousands)
-------------------------------------------------------------- ------------------------- ------------------------
<S> <C> <C>
Maturing within 1 year $ 300 $ 300
After 1 but within 5 years 9,445 9,443
After 5 but within 10 years 962 961
After 10 years 2,770 2,770
Marketable equity securities 220 220
-------------------------------------------------------------- ------------------------- ------------------------
Total $13,697 $13,694
-------------------------------------------------------------- ------------------------- ------------------------
</TABLE>
Gross realized gains and gross realized losses on sales of
available-for-sale securities were $12,996 and $4,236 respectively in
1998. Gross unrealized holding losses in the available-for-sale
securities at December 31, 1998 were $13,348, while gross unrealized
holding gains were $15,953.
As a member of the Federal Reserve System, the Bank is required to hold
stock in the Federal Reserve Bank of Richmond. This stock is carried at
cost since no active trading markets exist.
(4) Loans Receivable
The loan portfolio at December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
(In thousands) 1998
-------------------------------------------------------------- -----------------------------
<S> <C>
Commercial $ 5,138
Real estate - commercial 3,507
Real estate - construction 760
Real estate - residential 5,529
Home equity lines 1,040
Consumer 369
-------------------------------------------------------------- -----------------------------
16,343
Net deferred loan fees, premiums and discounts (16)
-------------------------------------------------------------- -----------------------------
16,327
</TABLE>
An analysis of the change in the allowance for loan losses follows:
5
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands) 1998
----------------------------------------------------------- -----------------------------
<S> <C>
Balance, beginning of year $ -
Provision for loan losses 212
Loans charged off -
Recoveries -
----------------------------------------------------------- -----------------------------
Balance, end of year $212
----------------------------------------------------------- -----------------------------
</TABLE>
There were no impaired or nonaccrual loans at December 31, 1998.
(5) Significant Concentrations of Credit Risk
All of the Bank's loans, commitments and standby letters of credit have
been granted to customers located in the Washington, D.C. metropolitan
area. The concentrations of credit by type of loan are set forth above.
The Bank, as a matter of regulatory restriction, does not extend
credit, net of participated amounts, to any single borrower or group of
related borrowers in excess of $1,014,085.
(6) Premises and Equipment
Components of properties and equipment included in the consolidated
statements of financial condition at December 31, 1998 and 1997 were as
follows:
1998 1997
----------------- ----------------
Land $ 20 $ -
Furniture and equipment 1,334 -
Leasehold improvements 582 -
----------------- ----------------
Total cost 1,936 -
Less accumulated depreciation 107 -
================= ================
Net book value $1,829 $ -
================= ================
The Company has entered into leases for office space over various terms
beginning January 1998. The leases are subject to annual increases as
well as allocations of real estate taxes and certain operating
expenses.
6
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
Minimum future rental payments under the noncancelable operating
leases, as of December 31, 1998 for each of the next five years and in
the aggregate, are as follows:
Year ending December 31 Amount
------------------------------ ---------------
1999 $621,151
2000 686,533
2001 707,129
2002 728,342
2003 750,193
Thereafter 3,147,707
------------------------------ ---------------
$6,641,055
The total rent expense was $71,687 and $42,500 in 1998 and 1997,
respectively.
(7) Subscription Receivable
Subscription receivable represents stock subscribed for which payment
has yet to be received. Subscription receivable of $4,509,652 at
December 31, 1997 was collected as of April 29, 1998.
(8) Deposits
The aggregate amount of jumbo CDs, each with a minimum denomination of
$100,000 was approximately $1,056,580 and in 1998.
At December 31, 1998, the scheduled maturities of CDs are as follows:
(In thousands)
1999 $10,677
2000 367
2001 -
2002 105
2003 and thereafter -
-------------------
$11,149
7
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
(9) Income Taxes
The Company and the Bank file consolidated tax returns on a
calendar-year basis. The provision for income taxes consisted of the
following for the years ended December 31, 1998 and 1997 respectfully:
<TABLE>
<CAPTION>
1998 1997
--------------------------- --------------------------
<S> <C> <C>
Current $ - $ -
Deferred - -
--------------------------- --------------------------
$ - $ -
--------------------------- --------------------------
</TABLE>
The provisions for income taxes are reconciled to the amount computed
by applying the federal corporate tax rate to income before taxes
follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------- --------------------- ----------------------
<S> <C> <C>
Income tax (benefit) at federal corporate rate $(576,757) $ (40,861)
Nondeductible expenses (1,870) 1,947
Change in valuation allowance $ 574,887 38,914
-------------------------------------------------------------------- --------------------- ----------------------
$ - $ -
-------------------------------------------------------------------- --------------------- ----------------------
The tax benefits of temporary differences between the financial
reporting basis and income tax basis of assets and liabilities relate
to the following:
1998 1997
-------------------------------------------------------------------- --------------------- ----------------------
Deferred tax assets:
Bad debts $ 64,465 $ -
Organization and other costs 18,730 14,570
Net operating loss carryforwards 538,901 24,344
Other 567 -
-------------------------------------------------------------------- --------------------- ----------------------
Total gross deferred assets 622,663 38,914
Less valuation allowance (612,915) (38,914)
-------------------------------------------------------------------- --------------------- ----------------------
Net deferred tax assets 9,748 -
Deferred tax liabilities
Unrealized gains on investments AFS (886) -
Prepaid expenses (8,862) -
-------------------------------------------------------------------- --------------------- ----------------------
Total gross deferred tax liabilities (9,748) -
-------------------------------------------------------------------- --------------------- ----------------------
</TABLE>
8
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
Deferred income taxes reflect temporary differences in the recognition
of revenue and expenses for tax reporting and financial statement
purposes, principally because certain items, such as depreciation and
amortization are recognized in different periods for financial
reporting and tax return purposes. A valuation allowance in the amount
of $612,915 at December 31, 1998 and $38,914 at December 31, 1997 has
been established for deferred tax assets as realization is dependent
upon generating future taxable income.
The Company has a net operating loss carryforward of approximately
$1,585,004 at December 31, 1998 which are available to offset future
taxable income. There are no annual limitations on utilization of the
net operating loss carryforwards.
(10) Regulatory Matters
The Bank, as a national bank, is subject to the dividend restrictions
set forth by the Comptroller of the Currency. Under such restrictions,
the Bank may not, without the prior approval of the Comptroller of the
Currency, declare dividends in excess of the sum of the current year's
earnings (as defined) plus the retained earnings (as defined) from the
prior two years. At December 31, 1998, there were no earnings against
which dividends could be charged.
The Bank is required to maintain a minimum average reserve balance with
the Federal Reserve Bank. The average amount of the required reserve
was $150,000 for 1998.
As a member of the Federal Reserve Bank system, the Bank is required to
subscribe to shares of $100 par value Federal Reserve Bank stock equal
to 6 percent of the Bank's capital and surplus. The Bank is required to
pay for one-half of the subscription. The remaining amount is subject
to call when deemed necessary by the Board of Governors of the Federal
Reserve.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires the regulators to stratify institutions into five
quality tiers based upon their relative capital strengths and to
increase progressively the degree of regulation over the weaker
institutions, limits the pass through deposit insurance treatment of
certain types of accounts, adopts a "truth in savings" program, calls
for the adoption of risk-based premiums on deposit insurance and
requires the Bank to observe insider credit underwriting products no
less strict than those applied to comparable noninsider transactions.
At December 31, 1998, the Company and its subsidiary bank met all
regulatory capital requirements. The key measures of capital are: (1)
Tier I capital (as defined) as a percent
9
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
of total risk-weighted assets (as defined); (2) Tier I capital (as
defined) as a percent of average assets (as defined), and (3) total
capital (Tier I capital plus the allowance for loan losses up to
certain limitations) as a percent of total risk-weighted assets.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
(In thousands) Actual Adequacy Purposes Action Provisions
--------------------- ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted assets $34,938 147.8% $1,892 >= 8.00% $2,365 >= 10.0%
Tier I capital to risk weighted assets 34,725 146.9% 946 >= 4.00% 1,419 >= 6.0%
Tier I capital to average assets 34,725 60.2% 2,308 >= 4.00% 2,885 >= 5.0%
</TABLE>
(11) Related-Party Transactions
Officers, directors, employees and their related business interests are
loan customers in the ordinary course of business. In management's
opinion, these loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the
time for comparable loans with other persons and do not involve more
than normal risk of collectibility or present other unfavorable
features.
Analysis of activity for loans to related parties is as follows:
(In thousands) 1998
------------------------------------------------------- ---------------
Balance, beginning of year $ -
New loans 999
Loans paid off or paid down (3)
------------------------------------------------------- ---------------
Balance, end of year $996
------------------------------------------------------- ---------------
(12) Employee Benefit Plan
The Company established a 401K plan in January 1998 for all eligible
employees. The Company began to match a portion of employee
contributions beginning January 1, 1999.
10
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
(13) Director Stock Compensation Plan
In 1998, the Company adopted a stock option plan (the "Plan") pursuant
to which the Company's Board of Directors may grant stock options to
certain directors. The Plan authorizes grants of options to purchase up
to 13,750 shares of authorized but unissued common stock.
Stock options are granted with an exercise price equal to the stock's
fair market value at the date of grant. All stock options have 10-year
terms and vest and become fully exercisable immediately.
At December 31, 1998, there were 386,250 additional shares available
for grant under the Plan. The per share weighted-average fair value of
stock options granted during 1998 was $ 4.03 on the date of grant using
the Black Scholes option-pricing model (using an expected volatility
over the expected life of the options of 40%) with the following
weighted-average assumptions: expected dividend yield 0.00%, risk-free
interest rate of 4.81%, and an expected life of 10 years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net loss would have
been increased to the pro forma amounts indicated below:
1998
Net loss As reported $(1,696,345)
Pro forma (1,751,758)
Loss Per Share As reported $(0.64)
Pro forma $(0.66)
Stock option activity during the periods indicated is as follows:
11
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
Number of Weighted-Average
Shares Exercise Price
Balance at December 31, 1997 - $ -
Granted 13,750 6.75
Exercised - -
Forfeited - -
Expired - -
------ --------
Balance at December 31, 1998 13,750 6.75
====== ========
At December 31, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $ 6.75 and 10
years, respectively.
All outstanding options are exerciseable at December 31, 1998.
(14) Financial Instruments with Off Balance Sheet Risk
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and standby letters of credit and financial guarantees.
Commitments to extend credit are agreements to lend to a customer so
long as there is no violation of any condition established in the
contract. Commitments usually have fixed expiration dates up to one
year or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of the contractual obligations by
a customer to a third party. The majority of these guarantees extend
until satisfactory completion of the customer's contractual
obligations. All standby letters of credit outstanding at December 31,
1998, are collateralized.
Those instruments represent obligations of the Company to extend credit
or guarantee borrowings, therefore, they are not recorded on the
consolidated statements of financial condition. The rates and terms of
these instruments are competitive with others in the market in which
the Company operates. Almost all of these instruments as of December
31, 1998 have floating rates, therefore significantly mitigating the
market risk.
12
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
Those instruments may involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the
consolidated statements of financial condition. Credit risk is defined
as the possibility of sustaining a loss because the other parties to a
financial instrument fail to perform in accordance with the terms of
the contract. The Company's maximum exposure to credit loss under
standby letters of credit and commitments to extend credit is
represented by the contractual amounts of those instruments.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------- ----------------
<S> <C>
(In thousands)
Financial instruments whose contract amounts represent potential
credit risk:
Commitments to extend credit $3,206
Standby letters of credit 5
---------------------------------------------------------------------------------- ----------------
</TABLE>
The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
The Company evaluates each customer's creditworthiness on a
case-by-case basis and requires collateral to support financial
instruments when deemed necessary. The amount of collateral obtained
upon extension of credit is based on management's evaluation of the
counterparty. Collateral held varies but may include deposits held by
the Company; marketable securities; accounts receivable; inventory;
property, plant and equipment; and income-producing commercial
properties.
(15) Disclosures of Fair Value of Financial Instruments
The assumptions used and the estimates disclosed represent management's
best judgment of appropriate valuation methods. These estimates are
based on pertinent information available to management as of December
31, 1998. In certain cases, fair values are not subject to precise
quantification or verification and may change as economic and market
factors, and management's evaluation of those factors change.
Although management uses its best judgment in estimating the fair value
of these financial instruments, there are inherent limitations in any
estimation technique. Therefore, these fair value estimates are not
necessarily indicative of the amounts that the Company would realize in
a market transaction. Because of the wide range of valuation techniques
and the numerous estimates which must be made, it may be difficult to
make reasonable comparisons of the Company's fair value information to
that of other financial institutions. It is important that the many
uncertainties discussed above be considered
13
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
when using the estimated fair value disclosures and to realize that
because of these uncertainties, the aggregate fair value amount should
in no way be construed as representative of the underlying value of the
Company.
Fair Value of Financial Instruments
The following summarizes the significant methodologies and assumptions
used in estimating the fair values presented in the accompanying table.
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents was used as a
reasonable estimate of fair value.
Investment Securities
Fair values for Investment Securities are based on quoted
market prices or prices quoted for similar financial
instruments.
Loans Receivable
In order to determine the fair market value for loans, the
loan portfolio was segmented based on loan type, credit
quality and maturities. For certain variable rate loans with
no significant credit concerns and frequent repricings,
estimated fair values are based on current carrying amounts.
The fair values of other loans are estimated using discounted
cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar
credit quality.
Deposit Liabilities
The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the
reporting date (that is, their carrying amounts.) The carrying
amounts of variable rate, fixed-term money-market accounts and
certificates of deposit (CDs) approximate their fair value at
the reporting date. Fair values for fixed-rate CDs are
estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on
time deposits.
14
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
Commitments
The fair value of these financial instruments is based on the
credit quality and relationship, fees, interest rates,
probability of funding, compensating balance and other
convenants or requirements. These commitments generally have
fixed expiration dates expiring within one year. Many
commitments are expected to, and typically do, expire without
being drawn upon. The rates and terms of these instruments are
competitive with others in the market in which the Company
operates. The carrying amounts are reasonable estimates of the
fair value of these financial instruments. The carrying
amounts of these instruments are zero at December 31, 1998.
Accrued Interest
The carrying amounts of accrued interest approximate their
fair values.
Fair Value of Financial Instruments as of December 31, 1998:
<TABLE>
December 31, 1998
--------------------------------------------
Carrying Estimated
(In thousands) Amount Fair Value
------------------------------------------------------- --------------------- ----------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $25,350 $25,350
Investment securities 13,697 13,697
Loans receivable 16,343 16,343
Financial liabilities:
Demand deposits 5,501 5,501
Interest checking 1,746 1,746
Statement savings 88 88
Money market accounts 3,383 3,383
Certificates of deposit 11,149 11,149
</TABLE>
15
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- - --------------------------------------------------------------------------------
(16) Other Operating Expenses
Other operating expenses for December 31, 1998 include the following:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Stationary & Supplies $133,821 $ 327
Data Processing 104,067 -
Advertising & Marketing 82,069 -
Travel and Entertainment 54,031 3,615
Furniture, Fixtures & Equipment 42,766 -
Dues & Memberships 42,708 -
Telecommuncations 36,591 256
Miscellaneous 115,366 17,737
--------------------------------------------------------------------------- ------------------ ------------------
$611,419 $21,935
</TABLE>
16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
CARDINAL FINANCIAL CORPORATION
Date: March 30, 1999 By: /s/ L. Burwell Gunn, Jr.
-------------------------------------
President and Chief Executive Officer
In accordance with Section 13 or 15(d) of the Exchange Act, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ L. Burwell Gunn, Jr. President and Chief Executive March 30, 1999
- - ------------------------------------------- Officer and Director
(Principal Executive Officer)
/s/ Joseph L. Borrelli Chief Financial Officer, Secretary and March 30, 1999
- - ------------------------------------------- Treasurer (Principal Financial and
Principal Accounting Officer)
/s/ Robert M. Barlow Director March 30, 1999
- - -------------------------------------------
/s/ Nancy K. Falck Director March 30, 1999
- - -------------------------------------------
/s/ Wayne W. Broadwater Director March 30, 1999
- - -------------------------------------------
/s/ Dale B. Peck Director March 30, 1999
- - -------------------------------------------
/s/ John H. Rust, Jr. Chairman March 30, 1999
- - -------------------------------------------
/s/ Harvey W. Huntzinger Director March 30, 1999
- - -------------------------------------------
<PAGE>
Director March __, 1999
- - -------------------------------------------
Director March __, 1999
- - -------------------------------------------
Director March __, 1999
- - -------------------------------------------
</TABLE>
<PAGE>
EXHIBIT INDEX
Number Document
3.1 Articles of Incorporation of Cardinal Financial
Corporation, attached as Exhibit 3.1 to the Registration
Statement on Form SB-2, Registration No. 333-52279, filed
with the Commission on May 8, 1998 (the "Form SB-2"),
incorporated herein by reference.
3.2 Bylaws of Cardinal Financial Corporation, attached as
Exhibit 3.2 to the Form SB-2, incorporated herein by
reference.
4 Form of Stock Certificate, attached as Exhibit 4 to the
Form SB-2, incorporated herein by reference.
10.1 Employment Agreement, dated as of September 30, 1997,
between Commercial Fidelity Financial Partnership
(predecessor to Cardinal Financial Corporation) and L.
Burwell Gunn, Jr., attached as Exhibit 10 to the Form SB-2,
incorporated herein by reference.
10.2 Employment Agreement, dated as of October 13, 1998, between
Cardinal Financial Corporation and Thomas C. Kane.
10.3 Employment Agreement, dated as of December 17, 1998,
between Cardinal Financial Corporation and Edgar M.
Andrews, III.
10.4 Employment Agreement, dated as of December 17, 1998,
between Cardinal Financial Corporation and Christopher W.
Bergstrom.
10.5 Employment Agreement, dated as of February 17, 1999,
between Cardinal Financial Corporation and Joseph L.
Borrelli.
10.6 Employment Agreement, dated as of February 12, 1999,
between Cardinal Financial Corporation and F. Kevin
Reynolds.
10.7 Employment Agreement, dated as of August 31, 1998, between
Cardinal Financial Corporation and Greg D. Wheeless.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule (filed electronically only).
Exhibit 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), is made and entered into as of
the 13th day of October, 1998, by and between CARDINAL FINANCIAL CORPORATION, a
Virginia corporation with its principal offices at 10641 Lee Highway, Fairfax,
Virginia 22030 ("Company"), and THOMAS C. KANE ("Kane"), an individual residing
at 2851 Woodlawn Avenue, Falls Church, Virginia 22042.
W I T N E S S E T H:
WHEREAS, the Company has been formed as a multi-bank holding company
for the purpose of organizing or acquiring and owning banking institutions; and
WHEREAS, the Company intends to organize and charter an investment
institution to provide financial and brokerage services throughout the Northern
Virginia region ("Subsidiary"); and
WHEREAS, Kane has been retained to provide services in an executive
capacity for the Company and the Subsidiary, and the parties desire to
memorialize the terms and conditions of Kane's continuing employment; and
NOW, THEREFORE, in consideration of the promises and obligations of the
Company and Kane under this Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
ARTICLE 1
SCOPE OF EMPLOYMENT
1.1. Title. Initially, Kane shall assume the title of Senior Vice
President of the Company. Kane shall assume the title of President and Chief
Executive Officer of the Subsidiary effective as of the date the Subsidiary is
chartered, or as soon thereafter as all regulatory approvals are obtained
allowing Kane to serve in that position. Kane shall remain as Senior Vice
President of the Company.
1.2. Duties and Responsibilities. As Senior Vice President of the
Company, Kane shall perform such duties as may be assigned to him by the Company
consistent with that position. As President and Chief Executive Officer of the
Subsidiary, Kane will be responsible for the supervision of the all Subsidiary
operations, the development of recommendations to the board of directors of the
Subsidiary ("Subsidiary Board") of plans and policies for the Subsidiary, and
shall serve on professional or civic organizations to promote the interests of
the Subsidiary if so directed by the Subsidiary Board. Kane is also required to
perform such other duties consistent with his position as the Subsidiary Board
may direct from time to time.
<PAGE>
Prior to Kane becoming President and CEO of the Subsidiary, the board
of directors of the Company ("Company Board"), and thereafter the Subsidiary
Board, may, in their sole discretion, increase, lessen, or limit the specific
duties and responsibilities of Kane. During the term of his employment, Kane is
required to devote his full time, attention, and efforts, with undivided
loyalty, to the business of the Company and the Subsidiary and shall use his
best effort to promote their interests.
Kane's principal office shall be at a location determined by the
President and CEO of the Company.
1.3. Failure to Obtain Regulatory Approval. If the applicable
regulatory authorities refuse the necessary approvals for Kane to serve as
President and Chief Executive Officer of the Subsidiary, or otherwise
substantially limit the scope of duties he may perform in that capacity, this
Agreement shall terminate automatically and be of no further legal force or
effect.
1.4. Other Affairs. Notwithstanding anything in this Agreement to
the contrary, Kane may engage in charitable and community affairs and manage his
personal investments, provided that such activities are not inconsistent with
the purposes of the Company or the Subsidiary and do not unreasonably interfere
with the performance of his duties or responsibilities as set forth in this
Agreement, and provided that Kane shall not engage in any activities in
violation of Articles 7 and 8 of this Agreement. Kane may also serve as a member
of the board of directors of other organizations, subject to the advance
approval of the Company President and CEO.
ARTICLE 2
RELATIONSHIP WITH BOARD
2.1. Significant Actions. Unless otherwise specifically permitted
by Company or Subsidiary policy, Kane agrees not to undertake, or authorize any
other employee of the Company or Subsidiary to undertake, any of the following
actions, except with the prior written consent of the Company's Board (prior to
becoming President and CEO of the Subsidiary), or the written consent of the
Subsidiary Board (after becoming the Subsidiary's President and CEO), which
consent may be withheld in the Board's absolute discretion (or except as
authorized by the Company's CEO in certain instances noted below):
(a) guarantee by the Company or the Subsidiary of any
loans or indebtedness of any kind;
(b) acquisition or disposition of stock, securities,
properties, or material assets of any corporation, company, or other entity by
the Company or the Subsidiary;
(c) amendment, change, extension, renewal, waiver, or
modification of any material agreement to which the Company, the Subsidiary, or
affiliates are or may be a party, or any rights or obligations of the parties
under any of the foregoing;
-2-
<PAGE>
(d) change corporate purpose of the Company or
Subsidiary, or the Company's or Subsidiary's Articles of Incorporation, ByLaws,
or other organizational documents;
(e) sale, assignment, pledge, mortgage, encumbrance or
other transfer affecting assets or real or personal property of the Company or
Subsidiary except in the ordinary course of business;
(f) enter into any contract or commitment, or series of
contracts or commitments, written or oral, which singularly or in the aggregate,
requires the Company or Subsidiary to expend or incur liability or debt in
excess of the approved Company or Subsidiary budgets for such expenditure;
(g) compromise or settle any material claim asserted by
or against the Company or Subsidiary;
(h) change the Company's or Subsidiary's certified public
accountants, law firms, or other professionals currently retained or utilized by
the Company or Subsidiary;
(i) change location of the principal office, or other
facilities of the Company or Subsidiary;
(j) lend money on behalf of the Company or Subsidiary; or
(k) add a position or personnel function, hire an
officer, or terminate Company employees without the prior consent of the Company
President and CEO.
2.2. Board Action. Unless otherwise noted herein, whenever any
action by the Company's Board or the Subsidiary's Board is required or permitted
under this Agreement, the Chairman of the respective Board, or his designee, may
decide and take such action without approval or involvement of the full Board or
a majority of the Board. To the extent required, a vote of the full Board shall
occur at a meeting duly called and held with a quorum acting throughout in
accordance with the applicable Articles of Incorporation and ByLaws, and such
action must be evidenced in writing before being effective. Meetings held by the
Board in accordance with this Agreement may be conducted by teleconference, and
in executive session.
ARTICLE 3
COMPENSATION AND BENEFITS
3.1. Salary. The Company agrees to pay Kane, for services rendered
hereunder, salary at the annual rate of ONE HUNDRED AND SEVENTY-FIVE THOUSAND
DOLLARS ($175,000). Such salary shall be payable in equal periodic installments,
not less frequently than monthly, less any sums which may be required to be
deducted or withheld under the provisions of law. Kane's salary may not be
adjusted downward at any time during the term of this Agreement without his
express consent. Kane's salary may be adjusted upward annually at the discretion
of the Company's Board,
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based upon the Board's assessment of Kane's performance and the Company's
financial circumstances. Kane will be considered for his first annual salary
raise at the time of his initial performance review in March 2000, and will be
considered for further raises at each one-year anniversary thereafter during the
term of this Agreement. As referred to hereinafter, "Salary" means the
compensation described in this Section 3.1.
3.2. General Expenses. Kane is expected from time to time to incur
reasonable and necessary expenses for promoting the business of the Company,
including expenses for travel, entertainment, and other activities associated
with Kane's duties. Reasonable and necessary expenses, as determined by the
Company, incurred by Kane in connection with the performance of his duties
hereunder will be reimbursed provided that Kane follows Company procedures for
the reimbursement of such expenses, including submission of reasonably detailed
verification of the nature and amount of such expenses.
3.3. Benefits. Except as otherwise provided in this Agreement, Kane
will be entitled to participate in the same manner as other executive and
managerial employees of the Company in all retirement, health and welfare, and
other fringe benefit programs applicable to other managerial employees of the
Company generally which may be authorized, adopted and amended from time to time
by the Company Board. This includes eligibility to participate in the Company's
qualified retirement plans as permitted by the terms of such plans. Specific
benefits that Kane is eligible to receive include:
(i) Medical Insurance. So long as the Company provides health and
dental insurance, Kane (and his eligible family members) shall have the
opportunity to participate in the same manner and on the same terms as other
officers and employees of the Company.
(ii) Long-term disability. The Company shall pay Kane's full premiums
for long-term disability insurance coverage, providing a disability benefit of
up to 60% of Kane's salary (as defined by the applicable plan or policy), up to
a maximum of $10,000 per month, so long as the Company offers group long-term
disability insurance coverage for its employees.
(iii) Annual physical examination. The Company agrees to provide, at no
cost to Kane, one annual physical examination through a doctor of Kane's choice.
(iv) Life insurance. The Company shall pay Kane's premiums for his
purchase of a term life insurance policy, providing a death benefit of $500,000,
through a Company-approved carrier.
(vi) Vacation. Kane shall be entitled to receive four weeks of vacation
leave each calendar year. Provisions regarding the accrual and carry-over of any
unused vacation time will be governed by the Company's standard policies.
3.4. No Other Compensation. Except as provided in Article 4 hereof,
Kane shall receive no compensation or remuneration in addition to that set forth
in this Article 3 for any services by him in any capacity to the Company, the
Subsidiary, or any affiliated corporation. Nothing contained herein shall,
however, preclude Kane from receiving any additional discretionary bonus or
compensation specifically approved in writing for Kane in advance by the
Company's Board.
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3.5. Tax Consequences. Kane acknowledges that, to the extent the
value of any of the benefits provided to him under this Article 3 constitute
taxable income to him, he shall be responsible for the payment of such taxes and
the Company may withhold or deduct to satisfy his tax liability as permitted by
applicable law.
ARTICLE 4
VARIABLE AND EQUITY COMPENSATION
4.1. Incentive Pay. Kane shall be paid a 5% override of gross
revenues generated by the Subsidiary, including fees and commissions. These
amounts will be paid on a monthly basis, 30 days in arrears, following the
period in which the commissions or fees are earned.
4.2. Equity Bonus. Kane will be granted 9,375 shares of the
Company's common stock (having a per share price of $8 and an aggregate value of
$75,000 as of October 1998), subject to a forfeiture provision if the stock does
not become vested. The stock shall vest in equal one-third increments beginning
on the first anniversary of the date of grant, and each one-year anniversary
thereafter, if Kane is employed by the Company at that time and has met certain
performance objectives for that one-year period as established for him by the
Company.
For his initial performance goal, Kane shall be required to
satisfactorily complete (as determined by the Company's CEO) by December 31,
1998, (i) an acceptable budget, (ii) operating plan, (iii) proper regulatory
filings, (iv) hiring plan, and (v) incorporation of the Subsidiary, unless he
cannot complete these tasks through no fault on his part, or because the Company
management has changed his assignment and goals. Additional or different
performance criteria may be established by the Company as it sees fit each year.
In a situation where Kane has satisfactorily and timely completed some, but not
all, of his assigned performance goals, as determined by the Company CEO, the
stock will vest with respect to the shares on a pro-rata basis according to the
percentage of tasks he has successfully completed.
For calendar year 1999, and each subsequent calendar year thereafter,
Kane, if he achieves certain performance parameters established by the Company
in early 1999, will be granted: (i) an option to buy Company stock up to a value
of $37,500 on the date of grant, and (ii) up to a lump-sum cash payment of
$37,500, less applicable deductions or withholding. These performance goals
include (a) the achievement of budgeted profitability, (b) achievement and
stability of an annual 25% ROE minimum, (c) net income growth of 10% per year or
greater, (d) satisfactory regulatory exams; and (e) other performance standards
established by the Company. The lump-sum cash incentive payment, if earned,
shall be payable in March 2000, and each subsequent March thereafter. The stock
option, if earned, shall be granted and immediately exercisable in March 2000,
and each subsequent March thereafter. The specific terms and conditions of the
Company stock and option grant under this provision shall be contained in a
separate stock and option agreement, executed by the parties.
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ARTICLE 5
TERM; RENEWAL
5.1. Term. Kane's employment pursuant to this Agreement shall
commence on October 15, 1998 and shall continue until October 15, 2001, at which
time this Agreement shall expire unless extended as provided in Section 5.2, or
unless earlier terminated under Article 6.
5.2. Renewal. In October 2001, the Company and Kane agree to
discuss whether to extend the terms of the Agreement for an additional two-year
period, through October 15, 2003. Neither party is under any obligation to renew
or extend the terms of this Agreement. There shall be no extension or renewal of
this Agreement (except Articles 7 and 8, each of which shall continue in effect
as provided in this Agreement, unless and until modified in writing by the
parties), by operation of law or otherwise unless by the written agreement or
consent of both the Company and Kane prior to the expiration of the initial
term.
ARTICLE 6
EVENTS OF TERMINATION
6.1. Termination for Failure to Obtain Regulatory Approval. If the
applicable regulatory authorities refuse the necessary approvals for Kane to
serve as President and CEO of the Subsidiary, or otherwise substantially limit
the scope of duties he may perform in that capacity, this Agreement shall
terminate automatically and be of not further legal force or effect.
6.2. Termination by the Company.
(a) General. The Company shall have the right to
terminate this Agreement, with or without cause, upon the vote of at least
two-thirds of a quorum of the Company Board, at any time during the term of this
Agreement by giving written notice to Kane. The termination shall become
effective on the date specified in the notice, which termination date shall not
be a date prior to the date fourteen (14) days following the date of the notice
of termination itself.
(b) Cause Defined. For purposes of this Section 6,
"cause" shall mean (i) a material breach by Kane of any covenant or condition
under this Agreement; (ii) the commission by Kane of any willful act
constituting dishonesty, fraud, immoral or disreputable conduct which is harmful
to the Company, or the Bank, or their reputation; (iii) any felony conviction of
Kane; (iv) any willful act of gross misconduct which is materially and
demonstrably injurious to the Company; (v) material violation by Kane of the
Company's policies as set forth in the Company's personnel handbook, if one has
been adopted, or announced by Company management from time to time; (vi)
violation of the Company's drug and alcohol policy as set forth in the Company's
personnel handbook, if one has been adopted, or announced by Company management
from time to time; or (vii) any conduct that renders Kane unsuitable for duty as
determined by any regulatory authority that oversees banking or financial
institutions. Prior to termination for cause
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<PAGE>
under subparagraph (i) above, Kane shall be notified of the cause for
termination and given sixty (60) days from the date of such notice to cure his
breach.
6.3. Termination by Death or Disability of the Employee.
(a) General. In the event of Kane's death during the term
of this Agreement, all obligations of the parties hereunder shall terminate
immediately.
(b) Disability. If the Kane is unable to perform his
duties hereunder, with or without any reasonable accommodation (if such
accommodation is legally required), due to mental, physical or other disability
for a period of ninety (90) consecutive days in any 180-day period, as
determined in good faith by the Company Board, this Agreement may be terminated
by the Company, at its option, by written notice to Kane, effective on the
termination date specified in such notice, provided that such termination date
shall not be a date prior to the date of the notice of termination itself.
6.4. Termination by Kane. Kane may terminate this Agreement at any
time, with or without cause, by giving written notice to the Company. Any such
termination shall become effective on the date specified in such notice,
provided that the Company may elect to have such termination become effective on
a date after, but not more than, fourteen (14) days after the date of the
notice.
6.5. Effect of Expiration or Termination.
(a) General. In the event this Agreement expires or is
terminated for any reason, then both parties' obligations hereunder shall
immediately cease (including any right to compensation and benefits under
Articles 3 and 4), except that: (i) Kane or his estate or personal
representative shall be entitled to receive the Salary owed to him through the
effective date of such expiration or termination; (ii) the Company will pay, or
reimburse, Kane's reasonable and necessary business expenses incurred prior to
the date this Agreement expires or terminates; and (iii) Kane may continue to
participate in any Company benefit plans to the extent he remains eligible to do
so.
(b) Treatment of Incentive Pay and Equity Bonus.
Notwithstanding the above, if this Agreement expires by its terms pursuant to
Article 5, Kane shall receive any Incentive Pay and Equity Bonus he has earned
for the period at issue. Additionally, if the Agreement is terminated by the
Company for any reason other than cause (including Kane's death or disability),
Kane may be considered for his Incentive Pay and Equity Bonus, on a pro-rata
basis, in the sole discretion of the Company's Board. Such Incentive Pay and
Equity Bonus will not be available to Kane if he terminates the Agreement or if
the Company terminates the Agreement for cause.
(c) Special payments in the event of termination for
other than "cause". Kane also shall be entitled to the following additional
payments, or rights, if the Agreement is terminated without cause by the Company
for a reason other than Kane' death or disability: (i) severance in an amount
equal to his annual base Salary, less any applicable deductions or withholding,
by a lump-sum payment made within thirty (30) days of the Agreement's
termination
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date; (ii) the right, for a 90-day period after the date of termination, to
exercise the option under the stock option agreement referenced in Paragraph 4.2
to the extent the option is exercisable (vested) at the time of termination.
Neither the option nor any stock granted under Section 4.2 will continue to vest
with respect to any additional shares during this 90-day period.
6.6. Cooperation. Following any termination, Kane shall fully
cooperate with the Company in all matters related to the handing over and
transitioning of his pending work to other employees of the Company as may be
designated by the Company's Board.
ARTICLE 7
NONCOMPETITION
7.1. Noncompetition.
(a) Kane agrees that, during his employment hereunder,
and for a period of one (1) year after the effective date of termination of this
Agreement for any reason, he will not:
(1) Compete (as defined below) with the Company or the
Subsidiary; or
(2) assist a Competitor (as defined below) of the Company
or the Subsidiary by providing consulting or other advisory
services to that Competitor.
(b) The following terms, as used in this Article 7 shall
have the meanings set forth below:
(1) The term "Business" in the case of the
Subsidiary means the provision of investment management
services, investment sales, and purchase and sale of
securities on behalf of the customers of the Subsidiary, the
Company or their affiliates. In the case of the Company, the
term means the provision of banking and financial services,
and other businesses or services that the Company may
establish from time to time during the term of this
Agreement..
(2) The term "Competitor" means any firm,
corporation or entity that is engaged in business
substantially similar to the Company's or the Subsidiary's
Business and that has a facility within five (5) miles of any
financial institution or office owned by the Company or
Subsidiary.
(3) The term "Compete" means to engage in direct
competition with the Company or the Subsidiary by serving as
an employee, consultant, officer, director, proprietor,
partner, stockholder or other security holder (other than a
holder of securities of a corporation listed on a national
securities exchange or the securities of which are regularly
traded in the over-the-counter market, provided that the
Employee at no time owns in excess of 1% of the outstanding
securities of such corporation entitled to vote for the
election of directors or other than of a corporation in which
the Employee makes passive investments through a venture
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<PAGE>
fund or similar investment vehicle) of any firm, corporation
or entity that is a Competitor of the Company or Subsidiary.
(c) Kane further acknowledges that this Article 7 is an
independent covenant within this Agreement, and that this
covenant shall survive any termination of Agreement and shall
be treated as an independent covenant for the purposes of
enforcement.
(d) Kane shall, during the term of this Agreement and
thereafter, notify any prospective employer of the terms and
conditions of this Agreement regarding confidentiality,
nondisclosure and noncompetition.
ARTICLE 8
CONFIDENTIALITY AND NON-DISCLOSURE
8.1. Kane shall hold in strict confidence and shall not, either
during the term of this Agreement or after the termination hereof, disclose,
directly or indirectly, to any third party, person, firm, corporation or other
entity, irrespective of whether such person or entity is a competitor of the
Company or is engaged in a business similar to that of the Company or
Subsidiary, any trade secrets or other proprietary or confidential information
of the Company or any Subsidiary or affiliate of the Company or Subsidiary
(collectively, "Proprietary Information") obtained by Kane from or through his
employment hereunder. Such Proprietary Information includes but is not limited
to marketing plans, product plans, business strategies, financial information,
forecasts, personnel information and customer lists. Kane hereby acknowledges
and agrees that all Proprietary Information referred to in this Article 8 shall
not be used for any purpose other than his duties hereunder and shall be deemed
trade secrets of the Company or the Subsidiary and of its subsidiaries and
affiliates, and that Kane shall take such steps, undertake such actions and
refrain from taking such other actions, as mandated by the provisions hereof and
by the provisions of the Virginia Uniform Trade Secret Act. Kane further
acknowledges that the Company's or Subsidiary's products and titles may consist
of copyrighted material, and Kane shall exercise his best efforts to prevent the
use of such copyrighted material by any person or entity which has not prior
thereto been authorized to use such information by the Company or Subsidiary.
8.2. Kane further hereby agrees and acknowledges that any
disclosure of any Proprietary Information prohibited herein, or any breach of
the provisions of Articles 7 or 8 of this Agreement, may result in irreparable
injury and damage to the Company or Subsidiary which will not be adequately
compensable in monetary damages, that the Company or Subsidiary will have no
adequate remedy at law therefor, and that the Company or Subsidiary may obtain
such preliminary, temporary or permanent mandatory or restraining injunctions,
orders or decrees as may be necessary to protect the Company or Subsidiary
against, or on account of, any breach by Kane of the provisions contained in
Articles 7 and 8.
8.3. Kane further agrees that, upon termination of this Agreement,
whether voluntary or involuntary or with or without cause, he shall notify any
new employer, partner, associate or
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any other firm or corporation with whom Kane shall become associated in any
capacity whatsoever of the provisions of Articles 7 and 8, and that the Company
may give such notice to such firm, corporation or other person.
ARTICLE 9
MISCELLANEOUS
9.1. Severability. The Company and Kane recognize that the laws and
public policies of the Commonwealth of Virginia are subject to varying
interpretations and change. It is the intention of the Company and of Kane that
the provisions of this Agreement shall be enforced to the fullest extent
permissible under the laws and public policies of Virginia, but that the
unenforceability (or the modification to conform to such laws or public
policies) of any provision or provisions hereof shall not render unenforceable,
or impair, the remainder of this Agreement. Accordingly, if any provisions of
this Agreement shall be determined to be invalid or unenforceable, either in
whole or in part, this Agreement shall be deemed amended to delete or modify, as
necessary, the offending provision or provisions and to alter the balance of
this Agreement in order to render it valid and enforceable.
9.2. Assignment. Except as provided below, neither the rights nor
obligations under this Agreement may be assigned by either party, in whole or in
part, by operation of law or otherwise, except that it shall be binding upon and
inure to the benefit of any successor of the Company and its subsidiaries and
affiliates, whether by merger, reorganization or otherwise, or any purchaser of
all or substantially all of the assets of the Company.
Notwithstanding the above, upon the Subsidiary's charter and Kane's
approval as President and CEO, the Company may assign this Agreement to the
Subsidiary. In that event, all references to the "Company" in this Agreement are
deemed to be references to the "Subsidiary," (and references to the Company
Board are deemed to refer to the Subsidiary Board), except that any provision of
this Agreement which refers to both the "Company" and the "Subsidiary"
separately shall continue to be effective with respect to the Company after such
an assignment (and will also be effective as to the Subsidiary). Upon an
assignment of the Agreement by the Company, any obligations owed by Kane to the
Company under this Agreement shall be owed to the Subsidiary (except, as noted
above, in those instances where specific references have been made, and
obligations are owed, to both entities). Additionally, any references to the
Company's CEO or President shall remain unchanged after such an assignment, and
the rights and duties of the Company's CEO under this Agreement shall continue
in effect after any assignment.
9.3. Notices. Any notice expressly provided for under this
Agreement shall be in writing, shall be given either manually or by mail and
shall be deemed sufficiently given when actually received by the party to be
notified or when mailed, if mailed by certified or registered mail, postage
prepaid, addressed to such party at their addresses as set forth below. Either
party may, by notice to the other party, given in the manner provided for
herein, change their address for receiving such notices.
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If to the Company, to:
L. Burwell Gunn
President & CEO
Cardinal Financial Corporation
10641 Lee Highway
Fairfax, Virginia 22030
If to Kane, to:
Mr. Thomas C. Kane
2851 Woodlawn Avenue
Falls Church, Virginia 22042
9.4. Governing Law. This Agreement shall be executed, construed and
performed in accordance with the laws of the Commonwealth of Virginia without
reference to conflict of laws principles. The parties agree that the venue for
any dispute hereunder will be the state or federal courts sitting in Virginia
and the parties hereby agree to the exclusive jurisdiction thereof.
9.5. Headings. The section headings contained in this Agreement are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
9.6. Entire Agreement; Amendments. This Agreement constitutes and
embodies the entire agreement between the parties in connection with the subject
matter hereof and supersedes all prior and contemporaneous agreements and
understandings in connection with such subject matter. No covenant or condition
not expressed in this Agreement shall affect or be effective to interpret,
change or restrict this Agreement. In the event of a conflict or inconsistency
between the terms of this Agreement and the Company's policies regarding
employees, the terms of this Agreement shall supersede the conflicting or
inconsistent Company policies. No change, termination or attempted waiver of any
of the provisions of this Agreement shall be binding unless in writing signed by
Kane and on behalf of the Company by an officer thereunto duly authorized by the
Company's Board of Directors. No modification, waiver, termination, rescission,
discharge or cancellation of this Agreement shall affect the right of any party
to enforce any other provision or to exercise any right or remedy in the event
of any other default.
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IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
COMPANY:
CARDINAL FINANCIAL CORPORATION
By:
--------------------------------
Title:
--------------------------------
EMPLOYEE:
--------------------------------
Thomas C. Kane
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Exhibit 10.3
THIS EMPLOYMENT AGREEMENT ("Agreement"), is made and entered into as of
the 17th day of December, 1998, by and between CARDINAL FINANCIAL CORPORATION, a
Virginia corporation with its principal offices at 10641 Lee Highway, Fairfax,
Virginia 22030 ("Company"), and EDGAR M. ANDREWS, III ("Andrews"), an individual
residing at 3207 Circle Hill Road, Alexandria, Virginia 22305.
W I T N E S S E T H:
WHEREAS, the Company, a multi-bank holding company, has organized and
chartered a national bank subsidiary, known as Cardinal Bank, N.A.; and
WHEREAS, the Company intends to organize and charter a number of
banking institutions to provide financial and banking services throughout the
Northern Virginia region, including a local bank located in Alexandria, Virginia
("Bank"); and
WHEREAS, Andrews has been retained to provide services in an executive
capacity for the Company and the Bank, and the parties desire to memorialize the
terms and conditions of Andrews' continuing employment; and
NOW, THEREFORE, in consideration of the promises and obligations of the
Company and Andrews under this Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
ARTICLE 1
SCOPE OF EMPLOYMENT
1.1. Title. Andrews shall be employed as Executive Vice President
of the Company after the effective date of this Agreement, but no later than
October 31, 1998. Andrews shall assume the title of President and Chief
Executive Officer of the Bank effective as of the date the Bank is chartered, or
as soon thereafter as all necessary regulatory approvals are obtained allowing
Andrews to serve in that position. Andrews shall continue as Executive Vice
President of the Company.
1.2. Duties and Responsibilities. During the period he is Executive
Vice President of the Company, Andrews shall perform such duties as may be
assigned to him consistent with that position.
Upon becoming President and Chief Executive Officer of the Bank,
Andrews will be responsible for the supervision of all Bank operations, the
development of recommendations to the board of directors of the Bank ("Bank
Board") of plans and policies for the Bank, and shall serve on professional or
civic organizations to promote the interests of the Bank if so directed.
<PAGE>
Andrews is also required to perform such other duties consistent with his
position as the Bank Board may direct from time to time.
Prior to Andrews becoming President and CEO of the Bank, the board of
directors of the Company ("Company Board"), and thereafter the Bank Board, may,
in its sole discretion, increase, lessen, or limit the specific duties and
responsibilities of Andrews. During the term of his employment, Andrews is
required to devote his full time, attention, and efforts, with undivided
loyalty, to the business of the Company and the Bank and shall use his best
efforts to promote their interests.
Andrews' principal office shall be at a location determined by the
President and CEO of the Company.
1.3. Failure to Obtain Regulatory Approval. In the event Andrews
does not receive regulatory approval to hold the position of President and CEO
of the Bank, the Company may offer him employment in another senior-level
position, but is under no obligation to do so. If Andrews accepts employment by
the Company in an alternate position, Andrews and the Company agree to negotiate
in good faith regarding an equitable compensation and benefits package based on
the position he holds.
1.4. Other Affairs. Notwithstanding anything in this Agreement to
the contrary, Andrews may engage in charitable and community affairs and manage
his personal investments, provided that such activities are not inconsistent
with the purposes of the Company or the Bank and do not unreasonably interfere
with the performance of his duties or responsibilities as set forth in this
Agreement, and provided that Andrews shall not engage in any activities in
violation of Articles 7 and 8 of this Agreement. Andrews may also serve as a
member of the board of directors of other organizations, subject to the advance
approval of the Company's CEO.
ARTICLE 2
RELATIONSHIP WITH BOARD
2.1. Significant Actions. Unless otherwise specifically permitted
by Company or Bank policy, Andrews agrees not to undertake, or authorize any
other employee of the Company or Bank to undertake, any of the following
actions, except with the prior written consent of the Company's Board (prior to
becoming President and CEO of the Bank) or the written consent of the Bank Board
(after becoming the Bank's President and CEO), which consent may be withheld in
either Board's absolute discretion, or except as authorized by the Company's CEO
in certain instances noted below:
(a) guarantee by the Company or Bank of any loans or
indebtedness of any kind;
(b) acquisition or disposition of stock, securities,
properties, or material assets of any corporation, company, or other entity by
the Company or Bank;
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(c) amendment, change, extension, renewal, waiver, or
modification of any material agreement to which the Company, Bank or their
affiliates are or may be a party, or any rights or obligations of the parties
under any of the foregoing;
(d) change corporate purpose of the Company or Bank, or
the Company's or Bank's Articles of Incorporation, ByLaws, or other
organizational documents;
(e) sale, assignment, pledge, mortgage, encumbrance or
other transfer affecting assets or real or personal property of the Company or
Bank except in the ordinary course of business;
(f) enter into any contract or commitment, or series of
contracts or commitments, written or oral, which singularly or in the aggregate,
requires the Company or Bank to expend or incur liability or debt in excess of
the approved Company or Bank budgets for such expenditure.
(g) compromise or settle any material claim asserted by
or against the Company or Bank;
(h) change the Company's or Bank's certified public
accountants, law firms, or other professionals currently retained or utilized by
the Company or Bank;
(i) change location of the principal office, or other
facilities of the Company or Bank;
(j) lend money on behalf of the Company or Bank, except
routine transactions in the ordinary course of business; or
(k) add a position or personnel function, hire an
officer, or terminate Company employees without the prior consent of the
Company's CEO.
2.2. Board Action. Unless otherwise noted herein, whenever any
action by the Company's Board or the Bank's Board is required or permitted under
this Agreement, the Chairman of the respective Board, or his designee, may
decide and take such action without approval or involvement of the full Board or
a majority of the Board. To the extent required, a vote of the full Board shall
occur at a meeting duly called and held with a quorum acting throughout in
accordance with the applicable Articles of Incorporation and ByLaws, and such
action must be evidenced in writing before being effective. Meetings held by the
Board in accordance with this Agreement may be conducted by teleconference, and
in executive session.
ARTICLE 3
COMPENSATION AND BENEFITS
3.1. Salary. The Company agrees to pay Andrews, for services
rendered hereunder, salary at the annual rate of ONE HUNDRED THOUSAND DOLLARS
($100,000). Such salary shall be
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payable in equal periodic installments, not less frequently than monthly, less
any sums which may be required to be deducted or withheld under the provisions
of law. Andrews' salary may not be adjusted downward at any time during the term
of this Agreement without his express consent. Andrews' salary may be adjusted
upward annually at the discretion of the Company Board, based upon its
assessment of Andrews' performance and the Company's financial circumstances.
Andrews will be considered for his first annual salary raise at the time of his
initial performance review in March 1999, and will be considered for further
raises at each one-year anniversary thereafter during the term of this
Agreement. As referred to hereinafter, "Salary" means the compensation described
in this Section 3.1.
3.2. General Expenses. Andrews is expected from time to time to
incur reasonable and necessary expenses for promoting the business of the
Company, including expenses for travel, entertainment, and other activities
associated with Andrews' duties. Reasonable and necessary expenses, as
determined by the Company, incurred by Andrews in connection with the
performance of his duties hereunder will be reimbursed provided that Andrews
follows Company procedures for the reimbursement of such expenses, including
submission of reasonably detailed verification of the nature and amount of such
expenses.
3.3. Special Expenses. In addition to the general expenses
authorized by Section 3.2, the Company agrees to pay, or reimburse, the
following specific items:
(i) Country club membership. The Company will consider paying Andrews'
initiation fee (up to an amount set by the Company's President/CEO), monthly
dues, and reasonable food and entertainment expenses for business purposes at a
country club approved by the Company ("Club") if Andrews desires membership in a
Club, while the Company is under no obligation to do so. In the event the
Company provides this benefit, and Andrews subsequently terminates his
membership in the Club, any proceeds that Andrews receives from the sale of his
membership interest or equity in the Club shall be reimbursed by him to the
Company.
(ii) Mobile telephone. The Company agrees to purchase a mobile phone
for Andrews at its expense, which shall remain Company property, and shall
reimburse Andrews for reasonable and necessary fees and charges related to the
use of such phone for business purposes.
3.4. Benefits. Except as otherwise provided in this Agreement,
Andrews will be entitled to participate in the same manner as other executive
and managerial employees of the Company in all retirement, health and welfare,
and other fringe benefit programs applicable to other managerial employees of
the Company generally which may be authorized, adopted and amended from time to
time by the Board. This includes eligibility to participate in the Company's
qualified retirement plans as permitted by the terms of such plans. Specific
benefits that Andrews is eligible to receive include:
(i) Medical Insurance. So long as the Company provides health and
dental insurance, Andrews (and his eligible family members) shall have the
opportunity to participate in the same manner and on the same terms as other
officers and employees of the Company.
(ii) Long-term disability. The Company shall pay Andrews' full premiums
for long-term disability insurance coverage, providing a disability benefit of
up to 60% of Andrews' salary (as defined
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by the applicable plan or policy), so long as the Company offers group long-term
disability insurance coverage for its employees.
(iii) Annual physical examination. The Company agrees to provide, at no
cost to Andrews, one annual physical examination through a doctor of Andrews'
choice.
(iv) Life insurance. The Company shall pay Andrews' premiums, for his
purchase of a term life insurance policy providing a death benefit of $500,000,
through a carrier selected by the Company.
(v) Automobile. The Company agrees to purchase an automobile for use by
Andrews, which will be owned by the Company, with a retail purchase cost not to
exceed $30,000 taking into account all taxes, fees, charges and the trade-in or
resale value received for Andrews' existing automobile. Andrews may select the
automobile of his choice, subject to these restrictions. Alternatively, the
Company may lease an automobile on behalf of Andrews, if he so elects, with
monthly payments not to exceed $600, or may provide a monthly transportation
allowance to Andrews not to exceed $600.
(vi) Vacation. Andrews shall be entitled to receive four weeks of
vacation leave each calendar year. Provisions regarding the accrual and
carry-over of any unused vacation time will be governed by the Company's
standard policies.
3.5. No Other Compensation. Except as provided in Article 4 hereof,
Andrews shall receive no compensation or remuneration in addition to that set
forth in this Article 3 for any services by him in any capacity to the Company,
the Bank, or any affiliated corporation. Nothing contained herein shall,
however, preclude Andrews from receiving any additional discretionary bonus or
compensation specifically approved in writing for Andrews in advance by the
Company's Board.
3.6. Tax Consequences. Andrews acknowledges that, to the extent the
value of any of the benefits provided to him under this Article 3 constitute
taxable income to him, he shall be responsible for the payment of such taxes and
the Company may withhold or deduct to satisfy his tax liability as permitted by
applicable law.
ARTICLE 4
VARIABLE AND EQUITY COMPENSATION
4.1. Performance Bonus. Andrews shall be considered annually for a
cash bonus, up to, but not to exceed, thirty percent (30%) of his annual Salary,
based on the attainment of certain performance objectives established in a
Company-approved bonus/performance plan. This maximum bonus opportunity may not
be decreased below 30% of his Salary for the period in question. Andrews shall
be considered for his initial Performance Bonus in March 1999 and each March
thereafter for the term of this Agreement. If awarded, payment of the bonus will
occur as soon as practicable after March 1 of each year.
4.2. Stock Option Grant. Each year Andrews shall be considered for
a non-qualified stock option grant to buy stock of the Company on the date the
Company Board determines that
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he has achieved certain annual performance objectives established under a
Company-approved bonus/performance plan. This grant will be up to, but will not
exceed twenty percent (20%) of his annual Salary, based on the attainment of
certain performance objectives established in a Company-approved
bonus/performance plan. This maximum grant opportunity may not be decreased
below 20% of Andrews' Salary for the period in question. The Company Board
reserves the right to modify the performance goals established for Andrews from
year to year. The other specific terms and conditions of the option will be
memorialized in a separate stock option agreement, executed by the parties on
the date of grant of the option. The parties agree generally, however, that the
exercise price of the option shall be the fair market value of the stock on the
date of grant, and that the option will vest and become exercisable in equal
installment over a three-year period. Andrews shall be considered for an initial
stock option grant in March 1999 and each March hereafter for the term of this
Agreement. The option, if earned, shall be granted as soon as practicable after
March 1 of each year.
ARTICLE 5
TERM; RENEWAL
5.1. Term. Andrews' employment, pursuant to this Agreement, shall
commence no later than October 31, 1998 and shall continue until October 31,
2001, at which time this Agreement shall expire unless extended as provided in
Section 5.2, or unless earlier terminated under Article 6.
5.2. Renewal. Before the expiration of the initial term of this
Agreement on October 31, 2001, the Company and Andrews agree to discuss whether
to extend the terms of the Agreement for an additional two-year period, through
October 31, 2003. Neither party is under any obligation to renew or extend the
terms of this Agreement. There shall be no extension or renewal of this
Agreement (except Articles 7 and 8, each of which shall continue in effect as
provided in this Agreement, unless and until modified in writing by the
parties), by operation of law or otherwise unless by the written agreement or
consent of both the Company and Andrews prior to the expiration of the initial
term.
ARTICLE 6
EVENTS OF TERMINATION
6.1. Termination for Failure to Obtain Regulatory Approval. If the
applicable regulatory authorities refuse the necessary approvals for Andrews to
serve as President and CEO of the Bank, or otherwise substantially limit the
scope of duties he may perform in that capacity, this Agreement shall terminate
automatically and be of no further legal force or effect.
6.2. Termination by the Company.
General. The Company shall have the right to terminate this Agreement,
with or without cause, by at least a two-thirds vote of the Company's Board, at
any time during the term of this
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Agreement by giving written notice to Andrews. The termination shall become
effective on the date specified in the notice, which termination date shall not
be a date prior to the date fourteen (14) days following the date of the notice
of termination itself.
(a) Cause Defined. For purposes of this Section 6,
"cause" shall mean (i) a material breach by Andrews of any covenant or condition
under this Agreement; (ii) the commission by Andrews of any willful act
constituting dishonesty, fraud, immoral or disreputable conduct which is harmful
to the Company or the Bank, or its reputation; (iii) any felony conviction of
Andrews; (iv) any willful act of gross misconduct which is materially and
demonstrably injurious to the Company or the Bank; (v) material violation by
Andrews of the Company's or Bank's policies as set forth in the Company's or
Bank's personnel handbook, if one has been adopted, or announced by Company or
Bank management from time to time; (vi) violation of the Company's or Bank's
drug and alcohol policy as set forth in the Company's or Bank's personnel
handbook, if one has been adopted, or announced by Company or Bank management
from time to time; or (vii) any conduct that renders Andrews unsuitable for duty
as determined by any regulatory authority that oversees banking or financial
institutions. Prior to termination for cause under subparagraph (i) above,
Andrews shall be notified of the cause for termination and given sixty (60) days
from the date of such notice to cure his breach.
6.3. Termination by Death or Disability of the Employee.
(a) General. In the event of Andrews' death during the
term of this Agreement, all obligations of the parties hereunder shall terminate
immediately.
(b) Disability. If the Andrews is unable to perform his
duties hereunder, with or without any reasonable accommodation (if such
accommodation is legally required), due to mental, physical or other disability
for a period of ninety (90) consecutive days in any 180-day period, as
determined in good faith by the Company Board, this Agreement may be terminated
by the Company, at its option, by written notice to Andrews, effective on the
termination date specified in such notice, provided that such termination date
shall not be a date prior to the date of the notice of termination itself.
6.4. Termination by Andrews. Andrews may terminate this Agreement
at any time, with or without cause, by giving written notice to the Company. Any
such termination shall become effective on the date specified in such notice,
provided that the Company may elect to have such termination become effective on
a date after, but not more than, fourteen (14) days after the date of the
notice.
6.5. Effect of Expiration or Termination.
(a) General. In the event this Agreement expires or is
terminated for any reason, then both parties' obligations hereunder shall
immediately cease (including any right to compensation and benefits under
Articles 3 and 4), except that: (i) Andrews or his estate or personal
representative shall be entitled to receive the Salary owed to him through the
effective date of such expiration or termination; (ii) the Company will pay, or
reimburse, Andrews' reasonable and necessary business expenses incurred prior to
the date this Agreement expires or
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terminates; (iii) Andrews may continue to participate in any Company benefit
plans to the extent he remains eligible to do so; (iv) Andrews agrees to return
his Company-owned or Company-leased automobile and mobile telephone to the
Company (unless he purchases the automobile as provided below); and (v) Andrews
shall become solely responsible for the payment of any outstanding Club
initiation fees, and all Club dues and expenses thereafter.
(b) Treatment of Performance Bonus. Notwithstanding the
above, if this Agreement expires by its terms pursuant to Article 5, Andrews
shall receive any Performance Bonus he has earned for the period at issue.
Additionally, if the Agreement is terminated by the Company for any reason other
than cause (including Andrews' death or disability), Andrews may be considered
for his Performance Bonus, on a pro-rata basis, in the sole discretion of the
Company's Board. Such Performance Bonus will not be available to Andrews if he
terminates the Agreement or if the Company terminates the Agreement for cause.
(c) Special payments in the event of termination for
other than "cause." Andrews also shall be entitled to the following additional
payments, or rights, if the Agreement is terminated without cause by the Company
for a reason other than Andrews' death or disability: (i) severance in an amount
equal to his annual base Salary, less any applicable deductions or withholding,
by a lump-sum payment made within thirty (30) days of the Agreement's
termination date; (ii) the right to purchase his Company automobile at current
book value, as determined by the Company; (iii) the right, for a 90-day period
after the date of termination, to exercise the option under the stock option
agreement referenced in Paragraph 4.2 to the extent the option is exercisable
(vested) at the time of termination. The option will not continue to vest with
respect to any additional shares during this 90-day period.
6.6. Cooperation. Following any termination, Andrews shall fully
cooperate with the Company in all matters related to the handing over and
transitioning of his pending work to other employees of the Company as may be
designated by the Company's Board.
ARTICLE 7
NONCOMPETITION
7.1. Noncompetition.
(a) Andrews agrees that, during his employment hereunder,
and for a period of one (1) year after the effective date of termination of this
Agreement, he will not:
(1) Compete (as defined below) with the Company
or the Bank; or
(2) assist a Competitor (as defined below) of
the Company or the Bank by providing consulting or other
advisory services to that Competitor.
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(b) The following terms, as used in this Article 7 shall
have the meanings set forth below:
(1) The Company's or Bank's "Business" means the
provision of banking and financial services and other
businesses or services that the Company or Bank may establish
from time to time during the term of this Agreement.
(2) The term "Competitor" means any firm,
corporation or entity that is engaged in business
substantially similar to the Company's or Bank's business and
that has a facility within five (5) miles of the Company or
Bank or any banking institution owned by the Company or Bank.
(3) The term "Compete" means to engage in direct
competition with the Company or Bank by serving as an
employee, consultant, officer, director, proprietor, partner,
stockholder or other security holder (other than a holder of
securities of a corporation listed on a national securities
exchange or the securities of which are regularly traded in
the over-the-counter market, provided that the Employee at no
time owns in excess of 1% of the outstanding securities of
such corporation entitled to vote for the election of
directors or other than of a corporation in which the Employee
makes passive investments through a venture fund or similar
investment vehicle) of any firm, corporation or entity that is
a Competitor of the Company or Bank.
(c) Andrews further acknowledges that this Article 7 is
an independent covenant within this Agreement, and that this covenant shall
survive any termination of Agreement and shall be treated as an independent
covenant for the purposes of enforcement.
(d) Andrews shall, during the term of this Agreement and
thereafter, notify any prospective employer of the terms and conditions of this
Agreement regarding confidentiality, nondisclosure and noncompetition.
ARTICLE 8
CONFIDENTIALITY AND NON-DISCLOSURE
8.1. Andrews shall hold in strict confidence and shall not, either
during the term of this Agreement or after the termination hereof, disclose,
directly or indirectly, to any third party, person, firm, corporation or other
entity, irrespective of whether such person or entity is a competitor of the
Company or Bank or is engaged in a business similar to that of the Company or
Bank, any trade secrets or other proprietary or confidential information of the
Company or Bank or any subsidiary or affiliate of the Company or Bank
(collectively, "Proprietary Information") obtained by Andrews from or through
his employment hereunder. Such Proprietary Information includes but is not
limited to marketing plans, product plans, business strategies, financial
information, forecasts, personnel information and customer lists. Andrews hereby
acknowledges and agrees that all Proprietary Information referred to in this
Article 8 shall not be used for any purpose other than his duties hereunder and
shall be deemed trade secrets of the Company or
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Bank and of its subsidiaries and affiliates, and that Andrews shall take such
steps, undertake such actions and refrain from taking such other actions, as
mandated by the provisions hereof and by the provisions of the Virginia Uniform
Trade Secret Act. Andrews further acknowledges that the Company's or Bank's
products and titles may consist of copyrighted material, and Andrews shall
exercise his best efforts to prevent the use of such copyrighted material by any
person or entity which has not prior thereto been authorized to use such
information by the Company or Bank.
8.2. Andrews further hereby agrees and acknowledges that any
disclosure of any Proprietary Information prohibited herein, or any breach of
the provisions of Articles 7 and 8 of this Agreement, may result in irreparable
injury and damage to the Company which will not be adequately compensable in
monetary damages, that the Company will have no adequate remedy at law therefor,
and that the Company may obtain such preliminary, temporary or permanent
mandatory or restraining injunctions, orders or decrees as may be necessary to
protect the company against, or on account of, any breach by Andrews of the
provisions contained in Articles 7 or 8.
8.3. Andrews further agrees that, upon termination of this
Agreement, whether voluntary or involuntary or with or without cause, he shall
notify any new employer, partner, associate or any other firm or corporation
with whom Andrews shall become associated in any capacity whatsoever of the
provisions of Articles 7 and 8, and that the Company may give such notice to
such firm, corporation or other person.
ARTICLE 9
MISCELLANEOUS
9.1. Severability. The Company and Andrews recognize that the laws
and public policies of the Commonwealth of Virginia are subject to varying
interpretations and change. It is the intention of the Company and of Andrews
that the provisions of this Agreement shall be enforced to the fullest extent
permissible under the laws and public policies of Virginia, but that the
unenforceability (or the modification to conform to such laws or public
policies) of any provision or provisions hereof shall not render unenforceable,
or impair, the remainder of this Agreement. Accordingly, if any provisions of
this Agreement shall be determined to be invalid or unenforceable, either in
whole or in part, this Agreement shall be deemed amended to delete or modify, as
necessary, the offending provision or provisions and to alter the balance of
this Agreement in order to render it valid and enforceable.
9.2. Assignment. Except as provided below, neither the rights nor
obligations under this Agreement may be assigned by either party, in whole or in
part, by operation of law or otherwise, except that it shall be binding upon and
inure to the benefit of any successor of the Company and its subsidiaries and
affiliates, whether by merger, reorganization or otherwise, or any purchaser of
all or substantially all of the assets of the Company.
Notwithstanding the above, upon the Bank's charter and Andrews'
approval as President and CEO, the Company may assign this Agreement to the
Bank. In the event of an assignment of
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this Agreement by the Company to the Bank, all references to the "Company" in
this Agreement are deemed to be references to the "Bank," (and references to the
Company Board are deemed to refer to the Bank Board), except that any provision
of this Agreement which refers to both the "Company" and the "Bank" shall
continue to be effective with respect to the Company after such an assignment
(and will also be effective as to the Bank). Upon an assignment of the Agreement
by the Company, any obligations owed by Andrews to the Company under this
Agreement shall be owed to the Bank (except, as noted above, in those instances
where specific references have been made, and obligations are owed, to both
entities). Additionally, any references to the Company's CEO or President shall
remain unchanged after such an assignment, and the rights and duties of the
Company's CEO under this Agreement shall continue in effect after any
assignment.
9.3. Notices. Any notice expressly provided for under this
Agreement shall be in writing, shall be given either manually or by mail and
shall be deemed sufficiently given when actually received by the party to be
notified or when mailed, if mailed by certified or registered mail, postage
prepaid, addressed to such party at their addresses as set forth below. Either
party may, by notice to the other party, given in the manner provided for
herein, change their address for receiving such notices.
If to the Company, to:
L. Burwell Gunn
President & CEO
Cardinal Financial Corporation
10641 Lee Highway
Fairfax, Virginia 22030
If to Andrews, to:
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Mr. Edgar M. Andrews, III
3207 Circle Hill Road
Alexandria, Virginia 22305
9.4. Governing Law. This Agreement shall be executed, construed and
performed in accordance with the laws of the Commonwealth of Virginia without
reference to conflict of laws principles. The parties agree that the venue for
any dispute hereunder will be the state or federal courts sitting in Virginia
and the parties hereby agree to the exclusive jurisdiction thereof.
9.5. Headings. The section headings contained in this Agreement are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
9.6. Entire Agreement; Amendments. This Agreement constitutes and
embodies the entire agreement between the parties in connection with the subject
matter hereof and supersedes all prior and contemporaneous agreements and
understandings in connection with such subject matter. No covenant or condition
not expressed in this Agreement shall affect or be effective to interpret,
change or restrict this Agreement. In the event of a conflict or inconsistency
between the terms of this Agreement and the Company's policies regarding
employees, the terms of this Agreement shall supersede the conflicting or
inconsistent Company policies. No change, termination or attempted waiver of any
of the provisions of this Agreement shall be binding unless in writing signed by
Andrews and on behalf of the Company by an officer thereunto duly authorized by
the Company's Board of Directors. No modification, waiver, termination,
rescission, discharge or cancellation of this Agreement shall affect the right
of any party to enforce any other provision or to exercise any right or remedy
in the event of any other default.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
CARDINAL FINANCIAL CORPORATION
By:
--------------------------------
Title:
--------------------------------
EMPLOYEE:
--------------------------------
Edgar M. Andrews, III
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Exhibit 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), is made and entered into as of
the 17th day of December, 1998, by and between CARDINAL FINANCIAL CORPORATION, a
Virginia corporation with its principal offices at 10641 Lee Highway, Fairfax,
Virginia 22030 ("Company"), and CHRISTOPHER W. BERGSTROM ("Bergstrom"), an
individual residing at 7002 Bear Den Court, Manassas, Virginia 20111.
W I T N E S S E T H:
WHEREAS, the Company, a multi-bank holding company, has organized and
chartered a national bank subsidiary, known as Cardinal Bank, N.A.; and
WHEREAS, the Company intends to organize and charter a number of
banking institutions to provide financial and banking services throughout the
Northern Virginia region, including a local bank located in Prince William
County, Virginia ("Bank"); and
WHEREAS, Bergstrom has been retained to provide services in an
executive capacity for the Company and the Bank, and the parties desire to
memorialize the terms and conditions of Bergstrom's continuing employment; and
NOW, THEREFORE, in consideration of the promises and obligations of the
Company and Bergstrom under this Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
ARTICLE 1
SCOPE OF EMPLOYMENT
1.1. Title. Bergstrom has been employed as Executive Vice President
of the Company since April 6, 1998, and as Senior Vice President of Cardinal
Bank, N.A. since June 8, 1998. Bergstrom shall assume the title of President and
Chief Executive Officer of the Bank effective as of the date the Bank is
chartered, or as soon thereafter as all necessary regulatory approvals are
obtained allowing Bergstrom to serve in that position. Bergstrom shall continue
as Executive Vice President of the Company, but will no longer hold any position
with Cardinal Bank, N.A.
1.2. Duties and Responsibilities. As Executive Vice President of
the Company, Bergstrom shall perform such duties as may be assigned to him
consistent with that position.
Upon becoming President and Chief Executive Officer of the Bank,
Bergstrom will be responsible for the supervision of all Bank operations, the
development of recommendations to the board of directors of the Bank ("Bank
Board") of plans and policies for the Bank, and shall serve on professional or
civic organizations to promote the interests of the Bank if so directed by the
Bank Board. Bergstrom is also required to perform such other duties consistent
with his position as the Bank Board may direct from time to time.
<PAGE>
Prior to Bergstrom becoming President and CEO of the Bank, the board of
directors of the Company ("Company Board"), and thereafter the Bank Board, may,
in its sole discretion, increase, lessen, or limit the specific duties and
responsibilities of Bergstrom. During the term of his employment, Bergstrom is
required to devote his full time, attention, and efforts, with undivided
loyalty, to the business of the Bank and the Company and shall use his best
efforts to promote their interests.
Bergstrom's principal office shall be at a location determined by the
President and CEO of the Company.
1.3. Failure to Obtain Regulatory Approval. In the event Bergstrom
does not receive regulatory approval to hold the position of President and CEO
of the Bank, the Company may offer him employment in another senior-level
position, but is under no obligation to do so. If Bergstrom accepts employment
by the Company in an alternate position, Bergstrom and the Company agree to
negotiate in good faith regarding an equitable compensation and benefits package
based on the position he holds.
1.4. Other Affairs. Notwithstanding anything in this Agreement to
the contrary, Bergstrom may engage in charitable and community affairs and
manage his personal investments, provided that such activities are not
inconsistent with the purposes of the Company or the Bank and do not
unreasonably interfere with the performance of his duties or responsibilities as
set forth in this Agreement, and provided that Bergstrom shall not engage in any
activities in violation of Articles 7 and 8 of this Agreement. Bergstrom may
also serve as a member of the board of directors of other organizations, subject
to the advance approval of the Company's CEO.
ARTICLE 2
RELATIONSHIP WITH BOARD
2.1. Significant Actions. Unless otherwise specifically permitted
by Company or Bank policy, Bergstrom agrees not to undertake, or authorize any
other employee of the Company or Bank to undertake, any of the following
actions, except with the prior written consent of the Company's Board (prior to
becoming President and CEO of the Bank) or the written consent of the Bank Board
(after becoming the Bank's President and CEO), which consent may be withheld in
either Board's absolute discretion, or except as authorized by the Company's CEO
in certain instances noted below:
(a) guarantee by the Company or Bank of any loans or
indebtedness of any kind;
(b) acquisition or disposition of stock, securities,
properties, or material assets of any corporation, company, or other entity by
the Company or Bank;
(c) amendment, change, extension, renewal, waiver, or
modification of any material agreement to which the Company, Bank or their
affiliates are or may be a party, or any rights or obligations of the parties
under any of the foregoing;
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(d) change corporate purpose of the Company or Bank, or
the Company's or Bank's Articles of Incorporation, ByLaws, or other
organizational documents;
(e) sale, assignment, pledge, mortgage, encumbrance or
other transfer affecting assets or real or personal property of the Company or
Bank except in the ordinary course of business;
(f) enter into any contract or commitment, or series of
contracts or commitments, written or oral, which singularly or in the aggregate,
requires the Company or Bank to expend or incur liability or debt in excess of
the approved Company or Bank budgets for such expenditure.
(g) compromise or settle any material claim asserted by
or against the Company or Bank;
(h) change the Company's or Bank's certified public
accountants, law firms, or other professionals currently retained or utilized by
the Company or Bank;
(i) change location of the principal office, or other
facilities of the Company or Bank;
(j) lend money on behalf of the Company or Bank, except
routine transactions in the ordinary course of business; or
(k) add a position or personnel function, hire an
officer, or terminate Company employees without the prior consent of the
Company's CEO.
2.2. Board Action. Unless otherwise noted herein, whenever any
action by the Company's Board or the Bank's Board is required or permitted under
this Agreement, the Chairman of the respective Board, or his designee, may
decide and take such action without approval or involvement of the full Board or
a majority of the Board. To the extent required, a vote of the full Board shall
occur at a meeting duly called and held with a quorum acting throughout in
accordance with the applicable Articles of Incorporation and ByLaws, and such
action must be evidenced in writing before being effective. Meetings held by the
Board in accordance with this Agreement may be conducted by teleconference, and
in executive session.
ARTICLE 3
COMPENSATION AND BENEFITS
3.1. Salary. The Company agrees to pay Bergstrom, for services
rendered hereunder, salary at the annual rate of ONE HUNDRED THOUSAND DOLLARS
($100,000). Such salary shall be payable in equal periodic installments, not
less frequently than monthly, less any sums which may be required to be deducted
or withheld under the provisions of law. Bergstrom's salary may not be adjusted
downward at any time during the term of this Agreement without his express
consent. Bergstrom's salary may be adjusted upward annually at the discretion of
the Company's Board, based
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upon the Board's assessment of Bergstrom's performance and the Company's
financial circumstances. Bergstrom will be considered for his first annual
salary raise at the time of his initial performance review in March 1999, and
will be considered for further raises at each one-year anniversary thereafter
during the term of this Agreement. As referred to hereinafter, "Salary" means
the compensation described in this Section 3.1.
3.2. General Expenses. Bergstrom is expected from time to time to
incur reasonable and necessary expenses for promoting the business of the
Company, including expenses for travel, entertainment, and other activities
associated with Bergstrom's duties. Reasonable and necessary expenses, as
determined by the Company, incurred by Bergstrom in connection with the
performance of his duties hereunder will be reimbursed provided that Bergstrom
follows Company procedures for the reimbursement of such expenses, including
submission of reasonably detailed verification of the nature and amount of such
expenses.
3.3. Special Expenses. In addition to the general expenses
authorized by Section 3.2, the Company agrees to pay, or reimburse, the
following specific items:
(i) Country club membership. The Company agrees to pay Bergstrom's
initiation fee (up to $5,000), monthly dues, and reasonable food and
entertainment expenses for business purposes at Montclair Golf, Tennis, and Swim
Club ("Club"). In the event Bergstrom terminates his membership in the Club, any
proceeds that Bergstrom receives from the sale of his membership interest or
equity in the Club shall be reimbursed by him to the Company.
(ii) Mobile telephone. The Company agrees to purchase a mobile phone
for Bergstrom at its expense, which shall remain Company property, and shall
reimburse Bergstrom for reasonable and necessary fees and charges related to the
use of such phone for business purposes.
3.4. Benefits. Except as otherwise provided in this Agreement,
Bergstrom will be entitled to participate in the same manner as other executive
and managerial employees of the Company in all retirement, health and welfare,
and other fringe benefit programs applicable to other managerial employees of
the Company generally which may be authorized, adopted and amended from time to
time by the Company Board. This includes eligibility to participate in the
Company's qualified retirement plans as permitted by the terms of such plans.
Specific benefits that Bergstrom is eligible to receive include:
(i) Medical Insurance. So long as the Company provides health and
dental insurance, Bergstrom (and his eligible family members) shall have the
opportunity to participate in the same manner and on the same terms as other
officers and employees of the Company.
(ii) Long-term disability. The Company shall pay Bergstrom's full
premiums for long-term disability insurance coverage, providing a disability
benefit of up to 60% of Bergstrom's salary (as defined by the applicable plan or
policy), so long as the Company offers group long-term disability insurance
coverage for its employees.
(iii) Annual physical examination. The Company agrees to provide, at no
cost to Bergstrom, one annual physical examination through a doctor of
Bergstrom's choice.
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<PAGE>
(iv) Life insurance. The Company shall pay Bergstrom's premiums of up
to $3,000 annually for his purchase of a life insurance policy, through a
carrier selected by Bergstrom.
(v) Automobile. The Company agrees to purchase an automobile for use by
Bergstrom, which will be owned by the Company, with a retail purchase cost not
to exceed $30,000 taking into account all taxes, fees, charges and the trade-in
or resale value received for Bergstrom's existing automobile. Bergstrom may
select the automobile of his choice, subject to these restrictions.
Alternatively, the Company may lease an automobile on behalf of Bergstrom, if he
so elects, with monthly payments not to exceed $600.
(vi) Vacation. Bergstrom shall be entitled to receive four weeks of
vacation leave each calendar year. Provisions regarding the accrual and
carry-over of any unused vacation time will be governed by the Company's
standard policies.
3.5. No Other Compensation. Except as provided in Article 4 hereof,
Bergstrom shall receive no compensation or remuneration in addition to that set
forth in this Article 3 for any services by him in any capacity to the Company,
the Bank, or any affiliated corporation. Nothing contained herein shall,
however, preclude Bergstrom from receiving any additional discretionary bonus or
compensation specifically approved in writing for Bergstrom in advance by the
Company's Board.
3.6. Tax Consequences. Bergstrom acknowledges that, to the extent
the value of any of the benefits provided to him under this Article 3 constitute
taxable income to him, he shall be responsible for the payment of such taxes and
the Company may withhold or deduct to satisfy his tax liability as permitted by
applicable law.
ARTICLE 4
VARIABLE AND EQUITY COMPENSATION
4.1. Performance Bonus. Bergstrom shall be considered annually for
a cash bonus, up to, but not to exceed, thirty percent (30%) of his annual
Salary, based on the attainment of certain performance objectives established in
a Company-approved bonus/performance plan. This maximum bonus opportunity may
not be decreased below 30% of his Salary for the period in question. Bergstrom
shall be considered for his initial Performance Bonus in March 1999 and each
March thereafter for the term of this Agreement. If awarded, payment of the
bonus will occur as soon as practicable after March 1 of each year.
4.2. Stock Option Grant. Each year Bergstrom shall be considered
for a non-qualified stock option grant to buy stock of the Company on the date
the Company Board determines that he has achieved certain annual performance
objectives established under a Company-approved bonus/performance plan. This
grant will be up to, but will not exceed twenty percent (20%) of his annual
Salary, based on the attainment of certain performance objectives established in
a Company-approved bonus/performance plan. This maximum grant opportunity may
not be decreased below 20% of Bergstrom's Salary for the period in question. The
Company Board reserves the right to modify the performance goals established for
Bergstrom from year to year. The other specific terms
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<PAGE>
and conditions of the option will be memorialized in a separate stock option
agreement, executed by the parties on the date of grant of the option. The
parties agree generally, however, that the exercise price of the option shall be
the fair market value of the stock on the date of grant, and that the option
will vest and become exercisable in equal installment over a three-year period.
Bergstrom shall be considered for an initial stock option grant in March 1999
and each March hereafter for the term of this Agreement. The option, if earned,
shall be granted as soon as practicable after March 1 of each year.
ARTICLE 5
TERM; RENEWAL
5.1. Term. Bergstrom's employment pursuant to this Agreement shall
commence on October 15, 1998 and shall continue until March 31, 2001, at which
time this Agreement shall expire unless extended as provided in Section 5.2, or
unless earlier terminated under Article 6.
5.2. Renewal. Before the expiration of the initial term of this
Agreement on March 31, 2001, the Company and Bergstrom agree to discuss whether
to extend the terms of the Agreement for an additional two-year period, through
March 31, 2003. Neither party is under any obligation to renew or extend the
terms of this Agreement. There shall be no extension or renewal of this
Agreement (except Articles 7 and 8, each of which shall continue in effect as
provided in this Agreement, unless and until modified in writing by the
parties), by operation of law or otherwise unless by the written agreement or
consent of both the Company and Bergstrom prior to the expiration of the initial
term.
ARTICLE 6
EVENTS OF TERMINATION
6.1. Termination for Failure to Obtain Regulatory Approval. If the
applicable regulatory authorities refuse the necessary approvals for Bergstrom
to serve as President and CEO of the Bank, or otherwise substantially limit the
scope of duties he may perform in that capacity, this Agreement shall terminate
automatically and be of no further legal force or effect.
6.2. Termination by the Company.
(a) General. The Company shall have the right to
terminate this Agreement, with or without cause, by at least a two-thirds vote
of the Company's Board, at any time during the term of this Agreement by giving
written notice to Bergstrom. The termination shall become effective on the date
specified in the notice, which termination date shall not be a date prior to the
date fourteen (14) days following the date of the notice of termination itself.
(b) Cause Defined. For purposes of this Section 6,
"cause" shall mean (i) a material breach by Bergstrom of any covenant or
condition under this Agreement; (ii) the commission by Bergstrom of any willful
act constituting dishonesty, fraud, immoral or disreputable conduct which is
harmful to the Company or the Bank, or its reputation; (iii) any
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felony conviction of Bergstrom; (iv) any willful act of gross misconduct which
is materially and demonstrably injurious to the Company or the Bank; (v)
material violation by Bergstrom of the Company's or Bank's policies as set forth
in the Company's or Bank's personnel handbook, if one has been adopted, or
announced by Company or Bank management from time to time; (vi) violation of the
Company's or Bank's drug and alcohol policy as set forth in the Company's or
Bank's personnel handbook, if one has been adopted, or announced by Company or
Bank management from time to time; or (vii) any conduct that renders Bergstrom
unsuitable for duty as determined by any regulatory authority that oversees
banking or financial institutions. Prior to termination for cause under
subparagraph (i) above, Bergstrom shall be notified of the cause for termination
and given sixty (60) days from the date of such notice to cure his breach.
6.3. Termination by Death or Disability of the Employee.
(a) General. In the event of Bergstrom's death during the
term of this Agreement, all obligations of the parties hereunder shall terminate
immediately.
(b) Disability. If Bergstrom is unable to perform his
duties hereunder, with or without any reasonable accommodation (if such
accommodation is legally required), due to mental, physical or other disability
for a period of ninety (90) consecutive days in any 180-day period, as
determined in good faith by the Company Board, this Agreement may be terminated
by the Company, at its option, by written notice to Bergstrom, effective on the
termination date specified in such notice, provided that such termination date
shall not be a date prior to the date of the notice of termination itself.
6.4. Termination by Bergstrom. Bergstrom may terminate this
Agreement at any time, with or without cause, by giving written notice to the
Company. Any such termination shall become effective on the date specified in
such notice, provided that the Company may elect to have such termination become
effective on a date after, but not more than, fourteen (14) days after the date
of the notice.
6.5. Effect of Expiration or Termination.
(a) General. In the event this Agreement expires or is
terminated for any reason, then both parties' obligations hereunder shall
immediately cease (including any right to compensation and benefits under
Articles 3 and 4), except that: (i) Bergstrom or his estate or personal
representative shall be entitled to receive the Salary owed to him through the
effective date of such expiration or termination; (ii) the Company will pay, or
reimburse, Bergstrom's reasonable and necessary business expenses incurred prior
to the date this Agreement expires or terminates; (iii) Bergstrom may continue
to participate in any Company benefit plans to the extent he remains eligible to
do so; (iv) Bergstrom agrees to return his Company-owned automobile and mobile
telephone to the Company (unless he purchases the automobile as provided below);
and (v) Bergstrom shall become solely responsible for the payment of any
outstanding Club initiation fees, and all Club dues and expenses thereafter.
(b) Treatment of Performance Bonus. Notwithstanding the
above, if this Agreement expires by its terms pursuant to Article 5, Bergstrom
shall receive any Performance
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Bonus he has earned for the period at issue. Additionally, if the Agreement is
terminated by the Company for any reason other than cause (including Bergstrom's
death or disability), Bergstrom may be considered for his Performance Bonus, on
a pro-rata basis, in the sole discretion of the Company's Board. Such
Performance Bonus will not be available to Bergstrom if he terminates the
Agreement or if the Company terminates the Agreement for cause.
(c) Special payments in the event of termination for
other than "cause". Bergstrom also shall be entitled to the following additional
payments, or rights, if the Agreement is terminated without cause by the Company
for a reason other than Bergstrom's death or disability: (i) severance in an
amount equal to his annual base Salary, less any applicable deductions or
withholding, by a lump-sum payment made within thirty (30) days of the
Agreement's termination date; (ii) the right to purchase his Company automobile
at current book value, as determined by the Company; (iii) the right, for a
90-day period after the date of termination, to exercise the option under the
stock option agreement referenced in Paragraph 4.2 to the extent the option is
exercisable (vested) at the time of termination. The option will not continue to
vest with respect to any additional shares during this 90-day period.
6.6. Cooperation. Following any termination, Bergstrom shall fully
cooperate with the Company in all matters related to the handing over and
transitioning of his pending work to other employees of the Company as may be
designated by the Company's Board.
ARTICLE 7
NONCOMPETITION
7.1. Noncompetition.
(a) Bergstrom agrees that, during his employment
hereunder, and for a period of one (1) year after the effective date of
termination of this Agreement, he will not:
(1) Compete (as defined below) with the Company
or the Bank; or
(2) assist a Competitor (as defined below) of
the Company or Bank by providing consulting or other advisory
services to that Competitor.
(b) The following terms, as used in this Article 7 shall
have the meanings set forth below:
(1) The Company's or Bank's "Business" means the
provision of banking and financial services and other
businesses or services that the Company or Bank may establish
from time to time during the term of this Agreement.
(2) The term "Competitor" means any firm,
corporation or entity that is engaged in business
substantially similar to the Company's or Bank's Business and
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<PAGE>
that has a facility within five (5) miles of the Company or
Bank or any financial institution or office owned by the
Company or Bank.
(3) The term "Compete" means to engage in direct
competition with the Company or Bank by serving as an
employee, consultant, officer, director, proprietor, partner,
stockholder or other security holder (other than a holder of
securities of a corporation listed on a national securities
exchange or the securities of which are regularly traded in
the over-the-counter market, provided that the Employee at no
time owns in excess of 1% of the outstanding securities of
such corporation entitled to vote for the election of
directors or other than of a corporation in which the Employee
makes passive investments through a venture fund or similar
investment vehicle) of any firm, corporation or entity that is
a Competitor of the Company or Bank.
(c) Bergstrom further acknowledges that this Article 7 is
an independent covenant within this Agreement, and that this covenant shall
survive any termination of Agreement and shall be treated as an independent
covenant for the purposes of enforcement.
(d) Bergstrom shall, during the term of this Agreement
and thereafter, notify any prospective employer of the terms and conditions of
this Agreement regarding confidentiality, nondisclosure and noncompetition.
ARTICLE 8
CONFIDENTIALITY AND NON-DISCLOSURE
8.1. Bergstrom shall hold in strict confidence and shall not,
either during the term of this Agreement or after the termination hereof,
disclose, directly or indirectly, to any third party, person, firm, corporation
or other entity, irrespective of whether such person or entity is a competitor
of the Company or Bank or is engaged in a business similar to that of the
Company or Bank, any trade secrets or other proprietary or confidential
information of the Company or Bank or any subsidiary or affiliate of the Company
or Bank (collectively, "Proprietary Information") obtained by Bergstrom from or
through his employment hereunder. Such Proprietary Information includes but is
not limited to marketing plans, product plans, business strategies, financial
information, forecasts, personnel information and customer lists. Bergstrom
hereby acknowledges and agrees that all Proprietary Information referred to in
this Article 8 shall not be used for any purpose other than his duties hereunder
and shall be deemed trade secrets of the Company or Bank and of its subsidiaries
and affiliates, and that Bergstrom shall take such steps, undertake such actions
and refrain from taking such other actions, as mandated by the provisions hereof
and by the provisions of the Virginia Uniform Trade Secret Act. Bergstrom
further acknowledges that the Company's or Bank's products and titles may
consist of copyrighted material, and Bergstrom shall exercise his best efforts
to prevent the use of such copyrighted material by any person or entity which
has not prior thereto been authorized to use such information by the Company or
Bank.
8.2. Bergstrom further hereby agrees and acknowledges that any
disclosure of any Proprietary Information prohibited herein, or any breach of
the provisions of Articles 7 or 8 of this
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Agreement, may result in irreparable injury and damage to the Company and the
Bank which will not be adequately compensable in monetary damages, that the
Company and Bank will have no adequate remedy at law therefor, and that the
Company or Bank may obtain such preliminary, temporary or permanent mandatory or
restraining injunctions, orders or decrees as may be necessary to protect the
Company or Bank against, or on account of, any breach by Bergstrom of the
provisions contained in Articles 7 and 8.
8.3. Bergstrom further agrees that, upon termination of this
Agreement, whether voluntary or involuntary or with or without cause, he shall
notify any new employer, partner, associate or any other firm or corporation
with whom Bergstrom shall become associated in any capacity whatsoever of the
provisions of Articles 7 and 8, and that the Company may give such notice to
such firm, corporation or other person.
ARTICLE 9
MISCELLANEOUS
9.1. Severability. The Company and Bergstrom recognize that the
laws and public policies of the Commonwealth of Virginia are subject to varying
interpretations and change. It is the intention of the Company and of Bergstrom
that the provisions of this Agreement shall be enforced to the fullest extent
permissible under the laws and public policies of Virginia, but that the
unenforceability (or the modification to conform to such laws or public
policies) of any provision or provisions hereof shall not render unenforceable,
or impair, the remainder of this Agreement. Accordingly, if any provisions of
this Agreement shall be determined to be invalid or unenforceable, either in
whole or in part, this Agreement shall be deemed amended to delete or modify, as
necessary, the offending provision or provisions and to alter the balance of
this Agreement in order to render it valid and enforceable.
9.2. Assignment. Except as provided below, neither the rights nor
obligations under this Agreement may be assigned by either party, in whole or in
part, by operation of law or otherwise, except that it shall be binding upon and
inure to the benefit of any successor of the Company and its subsidiaries and
affiliates, whether by merger, reorganization or otherwise, or any purchaser of
all or substantially all of the assets of the Company.
Notwithstanding the above, upon the Bank's charter and Bergstrom's
approval as President and CEO, the Company may assign this Agreement to the
Bank. In that event, all references to the "Company" in this Agreement are
deemed to be references to the "Bank," (and references to the Company Board are
deemed to refer to the Bank Board), except that any provision of this Agreement
which refers to both the "Company" and the "Bank" separately shall continue to
be effective with respect to the Company after such an assignment (and will also
be effective as to the Bank). Upon an assignment of the Agreement by the
Company, any obligations owed by Bergstrom to the Company under this Agreement
shall be owed to the Bank (except, as noted above, in those instances where
specific references have been made, and obligations are owed, to both entities).
Additionally, any references to the Company's CEO or President shall remain
unchanged after such an assignment, and the rights and duties of the Company's
CEO under this Agreement shall continue in effect after any assignment.
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<PAGE>
9.3. Notices. Any notice expressly provided for under this
Agreement shall be in writing, shall be given either manually or by mail and
shall be deemed sufficiently given when actually received by the party to be
notified or when mailed, if mailed by certified or registered mail, postage
prepaid, addressed to such party at their addresses as set forth below. Either
party may, by notice to the other party, given in the manner provided for
herein, change their address for receiving such notices.
If to the Company, to:
L. Burwell Gunn
President & CEO
Cardinal Financial Corporation
10641 Lee Highway
Fairfax, Virginia 22030
If to Bergstrom, to:
Mr. Christopher W. Bergstrom
7002 Bear Den Court
Manassas, Virginia 20111
9.4. Governing Law. This Agreement shall be executed, construed and
performed in accordance with the laws of the Commonwealth of Virginia without
reference to conflict of laws principles. The parties agree that the venue for
any dispute hereunder will be the state or federal courts sitting in Virginia
and the parties hereby agree to the exclusive jurisdiction thereof.
9.5. Headings. The section headings contained in this Agreement are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
9.6. Entire Agreement; Amendments. This Agreement constitutes and
embodies the entire agreement between the parties in connection with the subject
matter hereof and supersedes all prior and contemporaneous agreements and
understandings in connection with such subject matter. No covenant or condition
not expressed in this Agreement shall affect or be effective to interpret,
change or restrict this Agreement. In the event of a conflict or inconsistency
between the terms of this Agreement and the Company's policies regarding
employees, the terms of this Agreement shall supersede the conflicting or
inconsistent Company policies. No change, termination or attempted waiver of any
of the provisions of this Agreement shall be binding unless in writing signed by
Bergstrom and on behalf of the Company by an officer thereunto duly authorized
by the Company's Board of Directors. No modification, waiver, termination,
rescission, discharge or cancellation of this Agreement shall affect the right
of any party to enforce any other provision or to exercise any right or remedy
in the event of any other default.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
COMPANY:
CARDINAL FINANCIAL CORPORATION
By:
--------------------------------
Title:
--------------------------------
EMPLOYEE:
--------------------------------
Christopher W. Bergstrom
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Exhibit 10.5
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), is made and entered into as of
the 17th day of February, 1999, by and between CARDINAL FINANCIAL CORPORATION, a
Virginia corporation with its principal offices at 10641 Lee Highway, Fairfax,
Virginia 22030 ("Company"), and JOSEPH L. BORRELLI ("Borrelli"), an individual
residing at 12220 Thoroughbred Road, Oak Hill, Virginia 20171
W I T N E S S E T H:
WHEREAS, the Company has been formed as a multi-bank holding company
for the purpose of organizing or acquiring and owning banking institutions; and
WHEREAS, Borrelli has been retained to provide services in an executive
capacity for the Company, and the parties desire to memorialize the terms and
conditions of Borrelli's continuing employment; and
NOW, THEREFORE, in consideration of the promises and obligations of the
Company and Borrelli under this Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
ARTICLE 1
SCOPE OF EMPLOYMENT
1.1. Title. Borrelli was employed as Senior Vice President and
Chief Financial Officer of the Company on January 1, 1998, and promoted to
Executive Vice President and Chief Financial Officer of the Company on December
1, 1998. He will continue in that position.
1.2. Duties and Responsibilities. As Executive Vice President and
CFO of the Company, Borrelli will be responsible for the supervision of the
Company's human resources, investment, and financial operations, including all
regulatory and financial reporting requirements, subject to supervision by the
Company's President and Chief Executive Officer, and the board of directors of
the Company ("Company Board"). Borrelli will serve as cashier of local bank
subsidiaries established by the Company.
Borrelli is also required to perform such other duties consistent with
his position as the Company's President/CEO or Company Board may direct from
time to time. The President/CEO or Company Board may, in their sole discretion,
increase, lessen, or limit the specific duties and responsibilities of Borrelli.
During the term of his employment, Borrelli is required to devote his full time,
attention, and efforts, with undivided loyalty, to the business of the Company
and shall use his best efforts to promote its interests.
<PAGE>
Borrelli's principal office shall be at a location determined by the
Company's President and CEO.
1.3. Other Affairs. Notwithstanding anything in this Agreement to
the contrary, Borrelli may engage in charitable and community affairs and manage
his personal investments, provided that such activities are not inconsistent
with the purposes of the Company and do not unreasonably interfere with the
performance of his duties or responsibilities as set forth in this Agreement,
and provided that Borrelli shall not engage in any activities in violation of
Articles 7 and 8 of this Agreement. Borrelli may also serve as a member of the
board of directors of other organizations, subject to the advance approval of
the Company's President.
ARTICLE 2
RELATIONSHIP WITH PRESIDENT AND BOARD
2.1. Significant Actions. Unless otherwise specifically permitted
by Company policy, Borrelli agrees not to undertake, or authorize any other
employee of the Company to undertake, any of the following actions, except with
the prior written consent of the Company's President, which consent may be
withheld in the President's absolute discretion:
(a) guarantee by the Company of any loans or indebtedness
of any kind;
(b) acquisition or disposition of stock, securities,
properties, or material assets of any corporation, company, or other entity by
the Company;
(c) amendment, change, extension, renewal, waiver, or
modification of any material agreement to which the Company, or its affiliates
are or may be a party, or any rights or obligations of the parties under any of
the foregoing;
(d) change corporate purpose of the Company, or the
Company's Articles of Incorporation, ByLaws, or other organizational documents;
(e) sale, assignment, pledge, mortgage, encumbrance or
other transfer affecting assets or real or personal property of the Company
except in the ordinary course of business;
(f) enter into any contract or commitment, or series of
contracts or commitments, written or oral, which singularly or in the aggregate,
requires the Company to expend or incur liability or debt in excess of the
approved Company budgets for such expenditure;
(g) compromise or settle any material claim asserted by
or against the Company;
(h) change the Company's certified public accountants,
law firms, or other professionals currently retained or utilized by the Company;
(i) change location of the principal office, or other
facilities of the Company;
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(j) lend money on behalf of the Company; or
(k) add a position or personnel function, hire an
officer, or terminate Company employees without the prior consent of the
President of the Company.
2.2. Board Action. Unless otherwise noted herein, whenever any
action by the Company's Board is required or permitted under this Agreement, the
Chairman of the Board, or his designee, may decide and take such action without
approval or involvement of the full Board or a majority of the Board. To the
extent required, a vote of the full Board shall occur at a meeting duly called
and held with a quorum acting throughout in accordance with the Company's
Articles of Incorporation and ByLaws, and such action must be evidenced in
writing to be effective. Meetings held by the Board may be conducted by
teleconference, and in executive session.
ARTICLE 3
COMPENSATION AND BENEFITS
3.1. Salary. The Company agrees to pay Borrelli, for services
rendered hereunder, salary at the annual rate of ONE HUNDRED THOUSAND DOLLARS
($100,000). Such salary shall be payable in equal periodic installments, not
less frequently than monthly, less any sums which may be required to be deducted
or withheld under the provisions of law. Borrelli's salary may not be adjusted
downward at any time during the term of this Agreement without his express
consent. Borrelli's salary may be adjusted upward annually at the discretion of
the Company's Board, based upon the Board's assessment of Borrelli's performance
and the Company's financial circumstances. Borrelli will be considered for his
first annual salary raise at the time of his performance review in March 2000,
and will be considered for further raises at each one-year anniversary
thereafter during the term of this Agreement. As referred to hereinafter,
"Salary" means the compensation described in this Section 3.1.
3.2. General Expenses. Borrelli is expected from time to time to
incur reasonable and necessary expenses for promoting the business of the
Company, including expenses for travel, entertainment, and other activities
associated with Borrelli's duties. Reasonable and necessary expenses, as
determined by the President, incurred by Borrelli in connection with the
performance of his duties hereunder will be reimbursed provided that Borrelli
follows Company procedures for the reimbursement of such expenses, including
submission of reasonably detailed verification of the nature and amount of such
expenses.
3.3. Special Expenses. In addition to the general expenses
authorized by Section 3.2, the Company agrees to purchase a mobile phone for
Borrelli at its expense, which shall remain Company property, and shall
reimburse Borrelli for reasonable and necessary fees and charges related to the
use of such phone for business purposes. In addition, the Company agrees to
reimburse Borrelli for the cost of Continuing Practice Education (CPE) credits
required to retain Borrelli's CPA certificate as required by the AICPA and
Virginia State Society of CPAs.
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3.4. Benefits. Except as otherwise provided in this Agreement,
Borrelli will be entitled to participate in the same manner as other executive
and managerial employees of the Company in all retirement, health and welfare,
and other fringe benefit programs applicable to other managerial employees of
the Company generally which may be authorized, adopted and amended from time to
time by the Board. This includes eligibility to participate in the Company's
qualified retirement plans as permitted by the terms of such plans. Specific
benefits that Borrelli is eligible to receive include:
(i) Medical Insurance. So long as the Company provides health and
dental insurance, Borrelli (and his eligible family members) shall have the
opportunity to participate in the same manner and on the same terms as other
officers and employees of the Company.
(ii) Long-term disability. The Company shall pay Borrelli's full
premiums for long-term disability insurance coverage, providing a disability
benefit of up to 60% of Borrelli's salary (as defined by the applicable plan or
policy), so long as the Company offers group long-term disability insurance
coverage for its employees.
(iii) Annual physical examination. The Company agrees to provide, at no
cost to Borrelli, one annual physical examination through a doctor of Borrelli's
choice.
(iv) Life insurance. The Company shall pay Borrelli's premiums for a
term life insurance policy, providing a death benefit of $500,000, through a
Company-approved carrier.
(v) Automobile. The Company agrees to lease an automobile on behalf of
Borrelli with monthly payments not to exceed $600, or, alternatively, at
Borrelli's request, will assume his existing lease for his current automobile,
up to $600.
(vi) Vacation. Borrelli shall be entitled to receive four weeks of
vacation leave each calendar year. Provisions regarding the accrual and
carry-over of any unused vacation time will be governed by the Company's
standard policies.
3.5. No Other Compensation. Except as provided in Article 4 hereof,
Borrelli shall receive no compensation or remuneration in addition to that set
forth in this Article 3 for any services by him in any capacity to the Company,
or any affiliated corporation. Nothing contained herein shall, however, preclude
Borrelli from receiving any additional discretionary bonus or compensation
specifically approved in writing for Borrelli in advance by the Company's Board.
3.6. Tax Consequences. Borrelli acknowledges that, to the extent
the value of any of the benefits provided to him under this Article 3 constitute
taxable income to him, he shall be responsible for the payment of such taxes and
the Company may withhold or deduct to satisfy his tax liability as permitted by
applicable law.
ARTICLE 4
VARIABLE AND EQUITY COMPENSATION
4.1. Performance Bonus. Borrelli shall be considered annually for a
cash bonus, up to, but not to exceed, thirty percent (30%) of his annual Salary,
based on the attainment of certain
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performance objectives established in a Company-approved bonus/performance plan.
This maximum bonus opportunity may not be decreased below 30% of his Salary for
the period in question. Borrelli shall be considered for his initial Performance
Bonus in March 1999 and each March thereafter for the term of this Agreement. If
awarded, payment of the bonus will occur as soon as practicable after March 1 of
each year.
4.2. Stock Option Grant. Each year Borrelli shall be considered for
a non-qualified stock option grant to buy stock of the Company on the date the
Company Board determines that he has achieved certain annual performance
objectives established under a Company-approved bonus/performance plan. This
grant will be up to, but will not exceed twenty percent (20%) of his annual
Salary, based on the attainment of certain performance objectives established in
a Company-approved bonus/performance plan. This maximum grant opportunity may
not be decreased below 20% of Borrelli's Salary for the period in question. The
Company Board reserves the right to modify the performance goals established for
Borrelli from year to year. The other specific terms and conditions of the
option will be memorialized in a separate stock option agreement, executed by
the parties on the date of grant of the option. The parties agree generally,
however, that the exercise price of the option shall be the fair market value of
the stock on the date of grant, and that the option will vest and become
exercisable in equal installment over a three-year period. Borrelli shall be
considered for an initial stock option grant in March 1999 and each March
hereafter for the term of this Agreement. The option, if earned, shall be
granted as soon as practicable after March 1 of each year.
ARTICLE 5
TERM; RENEWAL
5.1. Term. Borrelli's employment pursuant to this Agreement shall
commence on February 17, 1999 and shall continue until January 15, 2001, at
which time this Agreement shall expire unless extended as provided in Section
5.2, or unless earlier terminated under Article 6.
5.2. Renewal. Before the expiration of the initial term of this
Agreement on January 15, 2001, the Company and Borrelli agree to discuss whether
to extend the terms of the Agreement for an additional two-year period, through
January 15, 2003. Neither party is under any obligation to renew or extend the
terms of this Agreement. There shall be no extension or renewal of this
Agreement (except Articles 7 and 8, each of which shall continue in effect as
provided in this Agreement, unless and until modified in writing by the
parties), by operation of law or otherwise unless by the written agreement or
consent of both the Company and Borrelli prior to the expiration of the initial
term.
ARTICLE 6
EVENTS OF TERMINATION
6.1. Termination by the Company.
(a) General. The Company shall have the right to
terminate this Agreement, with or without cause, by at least a two-thirds vote
of the Company's Board, at any time during
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the term of this Agreement by giving written notice to Borrelli. The termination
shall become effective on the date specified in the notice, which termination
date shall not be a date prior to the date fourteen (14) days following the date
of the notice of termination itself.
(b) Cause Defined. For purposes of this Section 6,
"cause" shall mean (i) a material breach by Borrelli of any covenant or
condition under this Agreement; (ii) the commission by Borrelli of any willful
act constituting dishonesty, fraud, immoral or disreputable conduct which is
harmful to the Company or its reputation; (iii) any felony conviction of
Borrelli; (iv) any willful act of gross misconduct which is materially and
demonstrably injurious to the Company; (v) material violation by Borrelli of the
Company's policies as set forth in the Company's personnel handbook, if one has
been adopted, or announced by Company management from time to time; (vi)
violation of the Company's drug and alcohol policy as set forth in the Company's
personnel handbook, if one has been adopted, or announced by Company management
from time to time; or (vii) any conduct that renders Borrelli unsuitable for
duty in his current position as determined by any regulatory authority that
oversees banking or financial institutions. Prior to termination for cause under
subparagraph (i) above, Borrelli shall be notified of the cause for termination
and given sixty (60) days from the date of such notice to cure his breach.
6.2. Termination by Death or Disability of the Employee.
(a) General. In the event of Borrelli's death during the
term of this Agreement, all obligations of the parties hereunder shall terminate
immediately.
(b) Disability. If Borrelli is unable to perform his
duties hereunder, with or without any reasonable accommodation (if such
accommodation is legally required), due to mental, physical or other disability
for a period of ninety (90) consecutive days in any 180-day period, as
determined in good faith by the Company Board, this Agreement may be terminated
by the Company, at its option, by written notice to Borrelli, effective on the
termination date specified in such notice, provided that such termination date
shall not be a date prior to the date of the notice of termination itself.
6.3. Termination by Borrelli. Borrelli may terminate this Agreement
at any time, with or without cause, by giving written notice to the Company. Any
such termination shall become effective on the date specified in such notice,
provided that the Company may elect to have such termination become effective on
a date after, but not more than, fourteen (14) days after the date of the
notice.
6.4. Effect of Expiration or Termination.
(a) General. In the event this Agreement expires or is
terminated for any reason, then both parties' obligations hereunder shall
immediately cease (including any right to compensation and benefits under
Articles 3 and 4), except that: (i) Borrelli or his estate or personal
representative shall be entitled to receive the Salary owed to him through the
effective date of such expiration or termination; (ii) the Company will pay, or
reimburse, Borrelli's reasonable and necessary business expenses incurred prior
to the date this Agreement expires or terminates; (iii) Borrelli may continue to
participate in any Company benefit plans to the extent he
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remains eligible to do so; and (iv) Borrelli agrees to return his Company-leased
automobile and mobile telephone to the Company.
(b) Treatment of Performance Bonus. Notwithstanding the
above, if this Agreement expires by its terms pursuant to Article 5, Borrelli
shall receive any Performance Bonus he has earned for the period at issue.
Additionally, if the Agreement is terminated by the Company for any reason other
than cause (including Borrelli's death or disability), Borrelli may be
considered for his Performance Bonus, on a pro-rata basis, in the sole
discretion of the Company's Board. Such Performance Bonus will not be available
to Borrelli if he terminates the Agreement or if the Company terminates the
Agreement for cause.
(c) Special payments in the event of termination for
other than "cause". Borrelli also shall be entitled to the following additional
payments, or rights, if the Agreement is terminated without cause by the Company
for a reason other than Borrelli's death or disability: (i) severance in an
amount equal to his annual base Salary, less any applicable deductions or
withholding, by a lump-sum payment made within thirty (30) days of the
Agreement's termination date; (ii) the right, for a 90-day period after the date
of termination, to exercise the option under the stock option agreement
referenced in Paragraph 4.2 to the extent the option is exercisable (vested) at
the time of termination. The option will not continue to vest with respect to
any additional shares during this 90-day period.
6.5. Cooperation. Following any termination, Borrelli shall fully
cooperate with the Company in all matters related to the handing over and
transitioning of his pending work to other employees of the Company as may be
designated by the Company's Board.
ARTICLE 7
NONCOMPETITION
7.1. Noncompetition.
(a) Borrelli agrees that, during his employment
hereunder, and for a period of one (1) year after the effective date of
termination of this Agreement for any reason, he will not:
(1) Compete (as defined below) with the Company;
or
(2) assist a Competitor (as defined below) of
the Company by providing consulting or other advisory services
to that Competitor.
(b) The following terms, as used in this Article 7 shall
have the meanings set forth below:
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(1) The Company's "Business" means the provision
of banking and financial services and other businesses or services that
the Company may establish from time to time during the term of this
Agreement.
(2) The term "Competitor" means any firm,
corporation or entity that is engaged in business substantially similar
to the Company's Business that: (i) is in the process of starting up
operations or which has been chartered and operating for fewer than
five (5) years; (ii) has assets of five hundred million dollars
($500,000,000) or less; and (iii) has a facility within five (5) miles
of the Company or any banking institution owned by the Company.
(3) The term "Compete" means to engage in direct
competition with the Company by serving as an employee, consultant,
officer, director, proprietor, partner, stockholder or other security
holder (other than a holder of securities of a corporation listed on a
national securities exchange or the securities of which are regularly
traded in the over-the-counter market, provided that the Employee at no
time owns in excess of 1% of the outstanding securities of such
corporation entitled to vote for the election of directors or other
than of a corporation in which the Employee makes passive investments
through a venture fund or similar investment vehicle) of any firm,
corporation or entity that is a Competitor of the Company.
(c) Borrelli further acknowledges that this Article 7 is an
independent covenant within this Agreement, and that this covenant shall survive
any termination of Agreement and shall be treated as an independent covenant for
the purposes of enforcement.
(d) Borrelli shall, during the term of this Agreement and
thereafter, notify any prospective employer of the terms and conditions of this
Agreement regarding confidentiality, nondisclosure and noncompetition.
ARTICLE 8
CONFIDENTIALITY AND NON-DISCLOSURE
8.1. Borrelli shall hold in strict confidence and shall not, either
during the term of this Agreement or after the termination hereof, disclose,
directly or indirectly, to any third party, person, firm, corporation or other
entity, irrespective of whether such person or entity is a competitor of the
Company or is engaged in a business similar to that of the Company, any trade
secrets or other proprietary or confidential information of the Company or any
subsidiary or affiliate of the Company (collectively, "Proprietary Information")
obtained by Borrelli from or through his employment hereunder. Such Proprietary
Information includes but is not limited to marketing plans, product plans,
business strategies, financial information, forecasts, personnel information and
customer lists. Borrelli hereby acknowledges and agrees that all Proprietary
Information referred to in this Article 8 shall not be used for any purpose
other than his duties hereunder and shall be deemed trade secrets of the Company
and of its subsidiaries and affiliates, and that Borrelli shall take such steps,
undertake such actions and refrain from taking such other
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<PAGE>
actions, as mandated by the provisions hereof and by the provisions of the
Virginia Uniform Trade Secret Act. Borrelli further acknowledges that the
Company's products and titles may consist of copyrighted material, and Borrelli
shall exercise his best efforts to prevent the use of such copyrighted material
by any person or entity which has not prior thereto been authorized to use such
information by the Company.
8.2. Borrelli further hereby agrees and acknowledges that any
disclosure of any Proprietary Information prohibited herein, or any breach of
the provisions of Articles 7 or 8 of this Agreement, may result in irreparable
injury and damage to the Company which will not be adequately compensable in
monetary damages, that the Company will have no adequate remedy at law therefor,
and that the Company may obtain such preliminary, temporary or permanent
mandatory or restraining injunctions, orders or decrees as may be necessary to
protect the Company against, or on account of, any breach by Borrelli of the
provisions contained in Articles 7 or 8.
8.3. Borrelli further agrees that, upon termination of this
Agreement, whether voluntary or involuntary or with or without cause, he shall
notify any new employer, partner, associate or any other firm or corporation
with whom Borrelli shall become associated in any capacity whatsoever of the
provisions of Articles 7 and 8, and that the Company may give such notice to
such firm, corporation or other person.
ARTICLE 9
MISCELLANEOUS
9.1. Severability. The Company and Borrelli recognize that the laws
and public policies of the Commonwealth of Virginia are subject to varying
interpretations and change. It is the intention of the Company and of Borrelli
that the provisions of this Agreement shall be enforced to the fullest extent
permissible under the laws and public policies of Virginia, but that the
unenforceability (or the modification to conform to such laws or public
policies) of any provision or provisions hereof shall not render unenforceable,
or impair, the remainder of this Agreement. Accordingly, if any provisions of
this Agreement shall be determined to be invalid or unenforceable, either in
whole or in part, this Agreement shall be deemed amended to delete or modify, as
necessary, the offending provision or provisions and to alter the balance of
this Agreement in order to render it valid and enforceable.
9.2. Assignment. The rights and obligations under this Agreement
may be assigned by the Company, in whole or in part, by operation of law or
otherwise, and those rights and obligations shall be binding upon and inure to
the benefit of any successor of the Company and its subsidiaries and affiliates,
whether by merger, reorganization or otherwise, or any purchaser of all or
substantially all of the assets of the Company. No rights or obligations under
this Agreement may be assigned by Borrelli.
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9.3. Notices. Any notice expressly provided for under this
Agreement shall be in writing, shall be given either manually or by mail and
shall be deemed sufficiently given when actually received by the party to be
notified or when mailed, if mailed by certified or registered mail, postage
prepaid, addressed to such party at their addresses as set forth below. Either
party may, by notice to the other party, given in the manner provided for
herein, change their address for receiving such notices.
If to the Company, to:
L. Burwell Gunn
President & CEO
Cardinal Financial Corporation
10641 Lee Highway
Fairfax, Virginia 22030
If to Borrelli, to:
Mr. Joseph L. Borrelli
12220 Thoroughbred Road
Oak Hill, Virginia 20171
9.4. Governing Law. This Agreement shall be executed, construed and
performed in accordance with the laws of the Commonwealth of Virginia without
reference to conflict of laws principles. The parties agree that the venue for
any dispute hereunder will be the state or federal courts sitting in Virginia
and the parties hereby agree to the exclusive jurisdiction thereof.
9.5. Headings. The section headings contained in this Agreement are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
9.6. Entire Agreement; Amendments. This Agreement constitutes and
embodies the entire agreement between the parties in connection with the subject
matter hereof and supersedes all prior and contemporaneous agreements and
understandings in connection with such subject matter. No covenant or condition
not expressed in this Agreement shall affect or be effective to interpret,
change or restrict this Agreement. In the event of a conflict or inconsistency
between the terms of this Agreement and the Company's policies regarding
employees, the terms of this Agreement shall supersede the conflicting or
inconsistent Company policies. No change, termination or attempted waiver of any
of the provisions of this Agreement shall be binding unless in writing signed by
Borrelli and on behalf of the Company by an officer thereunto duly authorized by
the Company's Board of Directors. No modification, waiver, termination,
rescission, discharge or cancellation of this Agreement shall affect the right
of any party to enforce any other provision or to exercise any right or remedy
in the event of any other default.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
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COMPANY:
CARDINAL FINANCIAL CORPORATION
By:
--------------------------------
Title:
--------------------------------
EMPLOYEE:
--------------------------------
Joseph L. Borrelli
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Exhibit 10.6
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), is made and entered into as of
the 12th day of February, 1999, by and between CARDINAL BANK, N.A., a Virginia
corporation with its principal offices at 10641 Lee Highway, Fairfax, Virginia
22030 ("Bank"), and F. KEVIN REYNOLDS ("Reynolds"), an individual residing at
2683 Linda Marie Drive, Oakton, Virginia 22124.
W I T N E S S E T H:
WHEREAS, Cardinal Financial Corporation, a multi-bank holding company
("Company"), has organized and chartered a national bank subsidiary, known as
Cardinal Bank, N.A.; and
WHEREAS, Reynolds has been retained to provide services in an executive
capacity for the Bank and the Company and the parties desire to memorialize the
terms and conditions of Reynolds' continuing employment; and
NOW, THEREFORE, in consideration of the promises and obligations of the
Bank and Reynolds under this Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
ARTICLE 1
SCOPE OF EMPLOYMENT
1.1. Title. Reynolds has been employed as Executive Vice President
of the Company since January 19, 1998, and as Executive Vice President of the
Bank since June 8, 1998. Reynolds shall assume the title of President and Chief
Executive Officer of the Bank effective as of the date all necessary regulatory
approvals are obtained allowing Reynolds to serve in that position. Reynolds
shall continue as Executive Vice President of the Company.
1.2. Duties and Responsibilities. As Executive Vice President of
the Company and Executive Vice President of the Bank, Reynolds shall perform
such duties as may be assigned to him consistent with those positions.
Upon becoming President and Chief Executive Officer of the Bank,
Reynolds will be responsible for the supervision of all Bank operations, the
development of recommendations to the board of directors of the Bank ("Bank
Board") of plans and policies for the Bank, and shall serve on professional or
civic organizations to promote the interests of the Bank if so directed by the
Bank Board. Reynolds is also required to perform such other duties consistent
with his position as the Bank Board may direct from time to time. The Bank Board
may, in its sole discretion, increase, lessen, or limit the specific duties and
responsibilities of Reynolds. During the term of his employment, Reynolds is
required to devote his full time, attention, and efforts, with undivided
loyalty, to the business of the Bank and the Company and shall use his best
efforts to promote their interests.
<PAGE>
Reynolds' principal office shall be at a location determined by the
President and CEO of the Company.
1.3. Failure to Obtain Regulatory Approval. In the event Reynolds
does not receive regulatory approval to hold the position of President and CEO
of the Bank, the Bank may offer him employment in another senior-level position
with the Bank or another banking subsidiary of the Company, but is under no
obligation to do so. If Reynolds accepts employment by the Bank in an alternate
position, Reynolds and the Bank agree to negotiate in good faith regarding an
equitable compensation and benefits package based on the position he holds.
1.4. Other Affairs. Notwithstanding anything in this Agreement to
the contrary, Reynolds may engage in charitable and community affairs and manage
his personal investments, provided that such activities are not inconsistent
with the purposes of the Company or the Bank and do not unreasonably interfere
with the performance of his duties or responsibilities as set forth in this
Agreement, and provided that Reynolds shall not engage in any activities in
violation of Articles 7 and 8 of this Agreement. Reynolds may also serve as a
member of the board of directors of other organizations, subject to the advance
approval of the Company CEO.
ARTICLE 2
RELATIONSHIP WITH BOARD
2.1. Significant Actions. Unless otherwise specifically permitted
by Company or Bank policy, Reynolds agrees not to undertake, or authorize any
other employee of the Company or Bank to undertake, any of the following
actions, except with the prior written consent of the Bank's Board or the
Board's designee, which consent may be withheld in the Board's absolute
discretion, or as authorized by the Company's CEO in certain instances noted
below:
(a) guarantee by the Company or Bank of any loans or
indebtedness of any kind;
(b) acquisition or disposition of stock, securities,
properties, or material assets of any corporation, company, or other entity by
the Company or Bank;
(c) amendment, change, extension, renewal, waiver, or
modification of any material agreement to which the Company, Bank or their
affiliates are or may be a party, or any rights or obligations of the parties
under any of the foregoing;
(d) change corporate purpose of the Company or Bank, or
the Company's or Bank's Articles of Incorporation, ByLaws, or other
organizational documents;
(e) sale, assignment, pledge, mortgage, encumbrance or
other transfer affecting assets or real or personal property of the Company or
Bank except in the ordinary course of business;
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(f) enter into any contract or commitment, or series of
contracts or commitments, written or oral, which singularly or in the aggregate,
requires the Company or Bank to expend or incur liability or debt in excess of
the approved Company or Bank budgets for such expenditure.
(g) compromise or settle any material claim asserted by
or against the Company or Bank;
(h) change the Company's or Bank's certified public
accountants, law firms, or other professionals currently retained or utilized by
the Company or Bank;
(i) change location of the principal office, or other
facilities of the Company or Bank;
(j) lend money on behalf of the Company or Bank, except
routine transactions in the ordinary course of business; or
(k) add a position or personnel function, hire an
officer, or terminate Company employees without the prior consent of the Company
CEO.
2.2. Board Action. Unless otherwise noted herein, whenever any
action by the Bank Board is required or permitted under this Agreement, the
Chairman of the Board, or his designee, may decide and take such action without
approval or involvement of the full Board or a majority of the Board. To the
extent required, a vote of the full Board shall occur at a meeting duly called
and held with a quorum acting throughout in accordance with the Bank's Articles
of Incorporation and ByLaws, and such action must be evidenced in writing before
being effective. Meetings held by such Board in accordance with this Agreement
may be conducted by teleconference, and in executive session.
ARTICLE 3
COMPENSATION AND BENEFITS
3.1. Salary. The Bank agrees to pay Reynolds, for services rendered
hereunder, salary at the annual rate of ONE HUNDRED THOUSAND DOLLARS ($100,000).
Such salary shall be payable in equal periodic installments, not less frequently
than monthly, less any sums which may be required to be deducted or withheld
under the provisions of law. Reynolds' salary may not be adjusted downward at
any time during the term of this Agreement without his express consent.
Reynolds' salary may be adjusted upward annually at the discretion of the Bank
Board, based upon the Board's assessment of Reynolds' performance and the Bank's
financial circumstances. Reynolds will be considered for his first annual salary
raise at the time of his initial performance review in March 1999, and will be
considered for further raises at each one-year anniversary thereafter during the
term of this Agreement. As referred to hereinafter, "Salary" means the
compensation described in this Section 3.1.
3.2. General Expenses. Reynolds is expected from time to time to
incur reasonable and necessary expenses for promoting the business of the Bank,
including expenses for travel,
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entertainment, and other activities associated with Reynolds' duties. Reasonable
and necessary expenses, as determined by the Bank, incurred by Reynolds in
connection with the performance of his duties hereunder will be reimbursed
provided that Reynolds follows Bank procedures for the reimbursement of such
expenses, including submission of reasonably detailed verification of the nature
and amount of such expenses.
3.3. Special Expenses. In addition to the general expenses
authorized by Section 3.2, the Bank agrees to pay, or reimburse, the following
specific items:
(i) Country club dues. The Bank agrees to pay Reynolds' monthly dues,
and reasonable food and entertainment expenses for business purposes at Westwood
Country Club ("Club").
(ii) Mobile telephone. The Bank agrees to purchase a mobile phone for
Reynolds at its expense, which shall remain Bank property, and shall reimburse
Reynolds for reasonable and necessary fees and charges related to the use of
such phone for business purposes.
3.4. Benefits. Except as otherwise provided in this Agreement,
Reynolds will be entitled to participate in the same manner as other executive
and managerial employees in all retirement, health and welfare, and other fringe
benefit programs applicable to other managerial employees of the Bank generally
which may be authorized, adopted and amended from time to time by the Bank
Board. This includes eligibility to participate in the Bank's qualified
retirement plans as permitted by the terms of such plans. Specific benefits that
Reynolds is eligible to receive include:
(i) Medical Insurance. So long as the Bank provides health and dental
insurance, Reynolds (and his eligible family members) shall have the opportunity
to participate in the same manner and on the same terms as other officers and
employees of the Bank.
(ii) Long-term disability. The Bank shall pay Reynolds' full premiums
for long-term disability insurance coverage, providing a disability benefit of
up to 60% of Reynolds' salary (as defined by the applicable plan or policy), so
long as the Company offers group long-term disability insurance coverage for its
employees.
(iii) Annual physical examination. The Bank agrees to provide, at no
cost to Reynolds, one annual physical examination through a doctor of Reynolds'
choice.
(iv) Life insurance. The Bank shall pay Reynolds' premiums for his
purchase of a term life insurance policy, providing a death benefit of $500,000,
through a Bank-approved carrier.
(v) Automobile. The Bank agrees to pay Reynolds $600 per month, as an
automobile or personal transportation allowance.
(vi) Vacation. Reynolds shall be entitled to receive four weeks of
vacation leave each calendar year. Provisions regarding the accrual and
carry-over of any unused vacation time will be governed by the Bank's standard
policies.
3.5. No Other Compensation. Except as provided in Article 4 hereof,
Reynolds shall receive no compensation or remuneration in addition to that set
forth in this Article 3 for any services
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by him in any capacity to the Company, the Bank, or any affiliated corporation.
Nothing contained herein shall, however, preclude Reynolds from receiving any
additional discretionary bonus or compensation specifically approved in writing
for Reynolds in advance by the Bank's Board.
3.6. Tax Consequences. Reynolds acknowledges that, to the extent
the value of any of the benefits provided to him under this Article 3 constitute
taxable income to him, he shall be responsible for the payment of such taxes and
the Bank may withhold or deduct to satisfy his tax liability as permitted by
applicable law.
ARTICLE 4
VARIABLE AND EQUITY COMPENSATION
4.1. Performance Bonus. Reynolds shall be considered annually for a
cash bonus, up to, but not to exceed, thirty percent (30%) of his annual Salary,
based on the attainment of certain performance objectives established in a
Bank-approved bonus/performance plan. This maximum bonus opportunity may not be
decreased below 30% of his Salary for the period in question. Reynolds shall be
considered for his initial Performance Bonus in March 1999 and each March
thereafter for the term of this Agreement. If awarded, payment of the bonus will
occur as soon as practicable after March 1 of each year.
4.2. Stock Option Grant. Each year Reynolds shall be considered for
a non-qualified stock option grant to buy stock of the Company on the date the
Bank Board determines that he has achieved certain annual performance objectives
established under a Bank-approved bonus/performance plan. This grant will be up
to, but will not exceed twenty percent (20%) of his annual Salary, based on the
attainment of certain performance objectives established in a Bank-approved
bonus/performance plan. This maximum grant opportunity may not be decreased
below 20% of Reynolds' Salary for the period in question. The Bank Board
reserves the right to modify the performance goals established for Reynolds from
year to year. The other specific terms and conditions of the option will be
memorialized in a separate stock option agreement, executed by the parties on
the date of grant of the option. The parties agree generally, however, that the
exercise price of the option shall be the fair market value of the stock on the
date of grant, and that the option will vest and become exercisable in equal
installment over a three-year period. Reynolds shall be considered for an
initial stock option grant in March 1999 and each March hereafter for the term
of this Agreement. The option, if earned, shall be granted as soon as
practicable after March 1 of each year.
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ARTICLE 5
TERM; RENEWAL
5.1. Term. Reynolds' employment pursuant to this Agreement shall
commence on February 12, 1999 and shall continue until January 15, 2001, at
which time this Agreement shall expire unless extended as provided in Section
5.2, or unless earlier terminated under Article 6.
5.2. Renewal. Before the expiration of the initial term of this
Agreement on January 15, 2001, the Bank and Reynolds agree to discuss whether to
extend the terms of the Agreement for an additional two-year period, through
January 15, 2003. Neither party is under any obligation to renew or extend the
terms of this Agreement. There shall be no extension or renewal of this
Agreement (except Articles 7 and 8, each of which shall continue in effect as
provided in this Agreement, unless and until modified in writing by the
parties), by operation of law or otherwise unless by the written agreement or
consent of both the Bank and Reynolds prior to the expiration of the initial
term.
ARTICLE 6
EVENTS OF TERMINATION
6.1. Termination for Failure to Obtain Regulatory Approval. If the
applicable regulatory authorities refuse the necessary approvals for Reynolds to
serve as President and CEO of the Bank, or otherwise substantially limit the
scope of duties he may perform in that capacity, this Agreement shall terminate
automatically and be of no further legal force or effect.
6.2. Termination by the Bank.
(a) General. The Bank shall have the right to terminate
this Agreement, with or without cause, by at least a two-thirds vote of
the Bank's Board, at any time during the term of this Agreement by
giving written notice to Reynolds. The termination shall become
effective on the date specified in the notice, which termination date
shall not be a date prior to the date fourteen (14) days following the
date of the notice of termination itself.
(b) Cause Defined. For purposes of this Section 6,
"cause" shall mean (i) a material breach by Reynolds of any covenant or
condition under this Agreement; (ii) the commission by Reynolds of any
willful act constituting dishonesty, fraud, immoral or disreputable
conduct which is harmful to the Company or the Bank, or its reputation;
(iii) any felony conviction of Reynolds; (iv) any willful act of gross
misconduct which is materially and demonstrably injurious to the
Company or the Bank; (v) material violation by Reynolds of the
Company's or Bank's policies as set forth in the personnel handbook, if
one has been adopted, or announced by Company or Bank management from
time to time; (vi) violation of the Company's or Bank's drug and
alcohol policy as set forth in the personnel handbook, if one has been
adopted, or announced by Company or Bank management from time to time;
or (vii) any conduct that renders Reynolds unsuitable for duty as
determined by any regulatory authority that oversees banking or
financial institutions. Prior to termination for cause under
subparagraph (i) above,
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Reynolds shall be notified of the cause for termination and given sixty
(60) days from the date of such notice to cure his breach
6.3. Termination by Death or Disability of the Employee.
(a) General. In the event of Reynolds' death during the
term of this Agreement, all obligations of the parties hereunder shall
terminate immediately.
(b) Disability. If Reynolds is unable to perform his
duties hereunder, with or without any reasonable accommodation (if such
accommodation is legally required), due to mental, physical or other
disability for a period of ninety (90) consecutive days in any 180-day
period, as determined in good faith by the Bank Board, this Agreement
may be terminated by the Bank, at its option, by written notice to
Reynolds, effective on the termination date specified in such notice,
provided that such termination date shall not be a date prior to the
date of the notice of termination itself.
6.4. Termination by Reynolds. Reynolds may terminate this Agreement
at any time, with or without cause, by giving written notice to the Bank. Any
such termination shall become effective on the date specified in such notice,
provided that the Bank may elect to have such termination become effective on a
date after, but not more than, fourteen (14) days after the date of the notice.
6.5. Effect of Expiration or Termination.
(a) General. In the event this Agreement expires or is
terminated for any reason, then both parties' obligations hereunder
shall immediately cease (including any right to compensation and
benefits under Articles 3 and 4), except that: (i) Reynolds or his
estate or personal representative shall be entitled to receive the
Salary owed to him through the effective date of such expiration or
termination; (ii) the Bank will pay, or reimburse, Reynolds' reasonable
and necessary business expenses incurred prior to the date this
Agreement expires or terminates; (iii) Reynolds may continue to
participate in any Bank benefit plans to the extent he remains eligible
to do so; (iv) Reynolds agrees to return his mobile telephone to the
Bank; and (v) Reynolds shall become solely responsible for the payment
of any outstanding Club dues and expenses thereafter.
(b) Treatment of Performance Bonus. Notwithstanding the
above, if this Agreement expires by its terms pursuant to Article 5,
Reynolds shall receive any Performance Bonus he has earned for the
period at issue. Additionally, if the Agreement is terminated by the
Bank for any reason other than cause (including Reynolds' death or
disability), Reynolds may be considered for his Performance Bonus, on a
pro-rata basis, in the sole discretion of the Bank Board. Such
Performance Bonus will not be available to Reynolds if he terminates
the Agreement or if the Bank terminates the Agreement for cause.
(c) Special payments in the event of termination for
other than "cause". Reynolds also shall be entitled to the following
additional payments, or rights, if the Agreement is terminated without
cause by the Bank for a reason other than Reynolds' death or
disability: (i)
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severance in an amount equal to his annual base Salary, less any
applicable deductions or withholding, by a lump-sum payment made within
thirty (30) days of the Agreement's termination date; and (ii) the
right, for a 90-day period after the date of termination, to exercise
the option under the stock option agreement referenced in Paragraph 4.2
to the extent the option is exercisable (vested) at the time of
termination. The option will not continue to vest with respect to any
additional shares during this 90-day period.
6.6. Cooperation. Following any termination, Reynolds shall fully
cooperate with the Bank in all matters related to the handing over and
transitioning of his pending work to other employees of the Bank as may be
designated by the Bank's Board.
ARTICLE 7
NONCOMPETITION
7.1. Noncompetition.
(a) Reynolds agrees that, during his employment
hereunder, and for a period of six (6) months after the effective date of
termination of this Agreement, he will not:
(1) Compete (as defined below) with the Company
or Bank; or
(2) assist a Competitor (as defined below) of
the Company or Bank by providing consulting or other advisory
services to that Competitor.
(b) The following terms, as used in this Article 7 shall
have the meanings set forth below:
(1) The Company's and Bank's "Business" means
the provisions of banking and financial services and other
businesses or services that the Company or Bank may establish
from time to time during the term of this Agreement.
(2) The term "Competitor" means any firm,
corporation or entity that is engaged in business
substantially similar to the Company's Business that: (i) is
in the process of starting up operations or which has been
chartered and operating for fewer than five (5) years; (ii)
has assets of five hundred million dollars ($500,000,000) or
less; and (iii) has a facility within five (5) miles of the
Company or Bank or any banking institution owned by the
Company.
(3) The term "Compete" means to engage in direct
competition with the Company or Bank by serving as an
employee, consultant, officer, director, proprietor, partner,
stockholder or other security holder (other than a holder of
securities of a corporation listed on a national securities
exchange or the securities of which are regularly traded in
the over-the-counter market, provided that the Employee at no
time owns in excess of 1% of the outstanding securities of
such
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corporation entitled to vote for the election of directors or
other than of a corporation in which the Employee makes
passive investments through a venture fund or similar
investment vehicle) of any firm, corporation or entity that is
a Competitor of the Bank or the Company.
(c) Reynolds further acknowledges that this Article 7 is
an independent covenant within this Agreement, and that this covenant shall
survive any termination of Agreement and shall be treated as an independent
covenant for the purposes of enforcement.
(d) Reynolds shall, during the term of this Agreement and
thereafter, notify any prospective employer of the terms and conditions of this
Agreement regarding confidentiality, nondisclosure and noncompetition.
ARTICLE 8
CONFIDENTIALITY AND NON-DISCLOSURE
8.1. Reynolds shall hold in strict confidence and shall not, either
during the term of this Agreement or after the termination hereof, disclose,
directly or indirectly, to any third party, person, firm, corporation or other
entity, irrespective of whether such person or entity is a competitor of the
Company or Bank or is engaged in a business similar to that of the Company or
Bank, any trade secrets or other proprietary or confidential information of the
Company or Bank or any subsidiary or affiliate of the Company or Bank
(collectively, "Proprietary Information") obtained by Reynolds from or through
his employment hereunder. Such Proprietary Information includes but is not
limited to marketing plans, product plans, business strategies, financial
information, forecasts, personnel information and customer lists. Reynolds
hereby acknowledges and agrees that all Proprietary Information referred to in
this Article 8 shall not be used for any purpose other than his duties hereunder
and shall be deemed trade secrets of the Company or Bank and of their
subsidiaries and affiliates, and that Reynolds shall take such steps, undertake
such actions and refrain from taking such other actions, as mandated by the
provisions hereof and by the provisions of the Virginia Uniform Trade Secret
Act. Reynolds further acknowledges that the Company's or Bank's products and
titles may consist of copyrighted material, and Reynolds shall exercise his best
efforts to prevent the use of such copyrighted material by any person or entity
which has not prior thereto been authorized to use such information by the
Company or Bank.
8.2. Reynolds further hereby agrees and acknowledges that any
disclosure of any Proprietary Information prohibited herein, or any breach of
the provisions of Articles 7 or 8 of this Agreement, may result in irreparable
injury and damage to the Company or Bank which will not be adequately
compensable in monetary damages, that the Company and Bank will have no adequate
remedy at law therefor, and that the Company or Bank may obtain such
preliminary, temporary or permanent mandatory or restraining injunctions, orders
or decrees as may be necessary to protect the Company and Bank against, or on
account of, any breach by Reynolds of the provisions contained in Articles 7 and
8.
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8.3. Reynolds further agrees that, upon termination of this
Agreement, whether voluntary or involuntary or with or without cause, he shall
notify any new employer, partner, associate or any other firm or corporation
with whom Reynolds shall become associated in any capacity whatsoever of the
provisions of Articles 7 and 8, and that the Company or Bank may give such
notice to such firm, corporation or other person.
ARTICLE 9
MISCELLANEOUS
9.1. Severability. The Bank and Reynolds recognize that the laws
and public policies of the Commonwealth of Virginia are subject to varying
interpretations and change. It is the intention of the Bank and of Reynolds that
the provisions of this Agreement shall be enforced to the fullest extent
permissible under the laws and public policies of Virginia, but that the
unenforceability (or the modification to conform to such laws or public
policies) of any provision or provisions hereof shall not render unenforceable,
or impair, the remainder of this Agreement. Accordingly, if any provisions of
this Agreement shall be determined to be invalid or unenforceable, either in
whole or in part, this Agreement shall be deemed amended to delete or modify, as
necessary, the offending provision or provisions and to alter the balance of
this Agreement in order to render it valid and enforceable.
9.2. Assignment. The rights and obligations under this Agreement
may be assigned by the Bank, in whole or in part, by operation of law or
otherwise, and those rights and obligations shall be binding upon and inure to
the benefit of any successor of the Bank and its subsidiaries and affiliates,
whether by merger, reorganization or otherwise, or any purchaser of all or
substantially all of the assets of the Bank. No rights or obligations under this
Agreement may be assigned by Reynolds.
9.3. Notices. Any notice expressly provided for under this
Agreement shall be in writing, shall be given either manually or by mail and
shall be deemed sufficiently given when actually received by the party to be
notified or when mailed, if mailed by certified or registered mail, postage
prepaid, addressed to such party at their addresses as set forth below. Either
party may, by notice to the other party, given in the manner provided for
herein, change their address for receiving such notices.
If to the Bank, to:
L. Burwell Gunn
President & CEO
Cardinal Financial Corporation
10641 Lee Highway
Fairfax, Virginia 22030
If to Reynolds, to:
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Mr. F. Kevin Reynolds
2683 Linda Marie Drive
Oakton, Virginia 22124
9.4. Governing Law. This Agreement shall be executed, construed and
performed in accordance with the laws of the Commonwealth of Virginia without
reference to conflict of laws principles. The parties agree that the venue for
any dispute hereunder will be the state or federal courts sitting in Virginia
and the parties hereby agree to the exclusive jurisdiction thereof.
9.5. Headings. The section headings contained in this Agreement are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
9.6. Entire Agreement; Amendments. This Agreement constitutes and
embodies the entire agreement between the parties in connection with the subject
matter hereof and supersedes all prior and contemporaneous agreements and
understandings in connection with such subject matter. No covenant or condition
not expressed in this Agreement shall affect or be effective to interpret,
change or restrict this Agreement. In the event of a conflict or inconsistency
between the terms of this Agreement and the Bank's policies regarding employees,
the terms of this Agreement shall supersede the conflicting or inconsistent Bank
policies. No change, termination or attempted waiver of any of the provisions of
this Agreement shall be binding unless in writing signed by Reynolds and on
behalf of the Bank by an officer thereunto duly authorized by the Bank's Board
of Directors. No modification, waiver, termination, rescission, discharge or
cancellation of this Agreement shall affect the right of any party to enforce
any other provision or to exercise any right or remedy in the event of any other
default.
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IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
COMPANY:
CARDINAL FINANCIAL CORPORATION
By:
--------------------------------
Title:
--------------------------------
EMPLOYEE:
--------------------------------
F. Kevin Reynolds
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Exhibit 10.7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), is made and entered into as of
the 31st day of August, 1998, by and between CARDINAL FINANCIAL CORPORATION, a
Virginia corporation with its principal offices at 10641 Lee Highway, Fairfax,
Virginia 22030 ("Company"), and GREG D. WHEELESS ("Wheeless"), an individual
currently residing at 21578 Goodwin Court, Ashburn, Virginia 20148.
W I T N E S S E T H:
WHEREAS, the Company, a multi-bank holding company, has organized and
chartered a national bank subsidiary, known as Cardinal Bank, N.A.; and
WHEREAS, the Company intends to organize and charter a number of
banking institutions to provide financial and banking services throughout the
Northern Virginia region, including a local bank located in the Reston/Herndon
area of Fairfax County, Virginia ("Bank"); and
WHEREAS, the Company has retained Wheeless to provide services in an
executive capacity for the Company and the Bank, and the Company and Wheeless
("the parties") desire to memorialize the terms and conditions of Wheeless'
continuing employment; and
NOW, THEREFORE, in consideration of the promises and obligations of the
Company and Wheeless under this Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
ARTICLE 1
SCOPE OF EMPLOYMENT
1.1. Title. Wheeless has been employed as Executive Vice President
of the Company, and as Senior Vice President of Cardinal Bank, N.A. since August
31, 1998. Wheeless shall assume the title of President and Chief Executive
Officer of the Bank effective as of the date the Bank is chartered, or as soon
thereafter as all necessary regulatory approvals are obtained allowing Wheeless
to serve in that position. Wheeless shall continue as Executive Vice President
of the Company, but will no longer hold any position with Cardinal Bank, N.A.
after he becomes President and CEO of the Bank.
1.2. Duties and Responsibilities. As Executive Vice President of
the Company, Wheeless shall perform such duties as may be assigned to him
consistent with that position.
Upon becoming President and Chief Executive Officer of the Bank,
Wheeless will be responsible for the supervision of all Bank operations and
personnel, the development of recommendations to the board of directors of the
Bank ("Bank Board") of plans and policies for the Bank, and shall serve on
professional or civic organizations to promote the interests of the
<PAGE>
Bank if so directed by the Board of Directors of Cardinal Financial Corporation
and/or the Cardinal Financial Corporation CEO. Wheeless is also required to
perform such other duties consistent with his position as the Bank Board may
direct from time to time.
Prior to Wheeless becoming President and CEO of the Bank, the board of
directors of the Company ("Company Board"), and thereafter the Bank Board, may,
in its sole discretion, increase, lessen, or limit the specific duties and
responsibilities of Wheeless. During the term of his employment, Wheeless is
required to devote his full time, attention, and efforts, with undivided
loyalty, to the business of the Company and the Bank and shall use his best
efforts to promote their interests.
Wheeless' principal office shall be at a Northern Virginia location
determined by the President and CEO of the Company.
1.3. Failure to Obtain Regulatory Approval. In the event Wheeless
does not receive regulatory approval to hold the position of President and CEO
of the Bank, the Company may offer him employment in another senior-level
position, but is under no obligation to do so. If Wheeless accepts employment by
the Company in an alternate position, Wheeless and the Company agree to
negotiate in good faith regarding a written contract for an equitable
compensation and benefits package based on the position he holds.
1.4. Other Affairs. Notwithstanding anything in this Agreement to
the contrary, Wheeless may engage in charitable and community affairs and manage
his personal investments, provided that such activities are not inconsistent
with the purposes of the Company or the Bank and do not unreasonably interfere
with the performance of his duties or responsibilities as set forth in this
Agreement, and provided that Wheeless shall not engage in any activities in
violation of Articles 7 and 8 of this Agreement. Wheeless may also serve as a
member of the board of directors of other organizations, subject to the advance
approval of the Company's CEO.
ARTICLE 2
RELATIONSHIP WITH BOARD
2.1. Significant Actions. Unless otherwise specifically permitted
by Company or Bank policy, Wheeless agrees not to undertake, or authorize any
other employee of the Company or Bank to undertake, any of the following
actions, except with the prior written consent of the Company Board (prior to
becoming President and CEO of the Bank) or the Bank Board (after becoming the
Bank's President and CEO), which consent may be withheld in either Board's
absolute discretion, or except as authorized by the Company's CEO in certain
instances noted below:
(a) guarantee by the Company or Bank of any loans or
indebtedness of any kind;
(b) acquisition or disposition of stock, securities,
properties, or material assets of any corporation, company, or other entity by
the Company or Bank;
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(c) amendment, change, extension, renewal, waiver, or
modification of any material agreement to which the Company, Bank or their
affiliates are or may be a party, or any rights or obligations of the parties
under any of the foregoing except when acting within approved loan authorities;
(d) change corporate purpose of the Company or Bank, or
the Company's or Bank's Articles of Incorporation, ByLaws, or other
organizational documents;
(e) sale, assignment, pledge, mortgage, encumbrance or
other transfer affecting assets or real or personal property of the Company or
Bank except in the ordinary course of business;
(f) enter into any contract or commitment, or series of
contracts or commitments, written or oral, which singularly or in the aggregate,
requires the Company or Bank to expend or incur liability or debt in excess of
the approved Company or Bank budgets for such expenditure.
(g) compromise or settle any material claim asserted by
or against the Company or Bank;
(h) change the Company's or Bank's certified public
accountants, law firms, or other professionals currently retained or utilized by
the Company or Bank;
(i) change location of the principal office, or other
facilities of the Company or Bank;
(j) lend money on behalf of the Company or Bank, except
routine transactions in the ordinary course of business; or
(k) add a position or personnel function, hire an
officer, or terminate Company employees without the prior consent of the
Company's CEO.
2.2. Board Action. Unless otherwise noted herein, whenever any
action by the Company's Board or the Bank's Board is required or permitted under
this Agreement, the Chairman of the respective Board, or his designee, may
decide and take such action without approval or involvement of the full Board or
a majority of the Board. To the extent required, a vote of the full Board shall
occur at a meeting duly called and held with a quorum acting throughout in
accordance with the applicable Articles of Incorporation and ByLaws, and such
action must be evidenced in writing before being effective. Meetings held by the
Board in accordance with this Agreement may be conducted by teleconference and
in executive session.
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ARTICLE 3
COMPENSATION AND BENEFITS
3.1. Salary. The Company agrees to pay Wheeless, for services
rendered hereunder, salary at the annual rate of ONE HUNDRED THOUSAND DOLLARS
($100,000). Such salary shall be payable in equal periodic installments, not
less frequently than monthly, less any sums which may be required to be deducted
or withheld under the provisions of law. Wheeless' salary may not be adjusted
downward at any time during the term of this Agreement without his express
consent. Wheeless' salary may be adjusted upward annually at the discretion of
the Company Board, based upon its assessment of Wheeless' performance and the
Company's financial circumstances. Wheeless will be considered for his first
annual salary raise at the time of his initial performance review in March 1999,
and will be considered for further raises at each one-year anniversary
thereafter during the term of this Agreement. As referred to hereinafter,
"Salary" means the compensation described in this Section 3.1.
3.2. General Expenses. Wheeless is expected from time to time to
incur reasonable and necessary expenses for promoting the business of the
Company, including expenses for travel, entertainment, and other activities
associated with Wheeless' duties. Reasonable and necessary expenses, as
determined by the Company, incurred by Wheeless in connection with the
performance of his duties hereunder will be reimbursed provided that Wheeless
follows Company procedures for the reimbursement of such expenses, including
submission of reasonably detailed verification of the nature and amount of such
expenses.
3.3. Special Expenses. In addition to the general expenses
authorized by Section 3.2, the Company agrees to pay, or reimburse, the
following specific items:
(i) Country club membership. The Company agrees to pay Wheeless'
initiation fee (up to an amount set by the President/CEO of the Company),
monthly dues, and reasonable food and entertainment expenses for business
purposes at Hidden Creek Country Club, or another club approved by the Company
as being comparable in cost to Hidden Creek Country Club ("Club"). In the event
Wheeless terminates his membership in the Club within five (5) years after
initial employment with the Company and this Agreement has not been terminated,
any proceeds that Wheeless receives from the sale of his membership interest or
equity in the Club shall be reimbursed by him to the Company.
(ii) Mobile telephone. The Company agrees to purchase a mobile phone
for Wheeless at its expense, which shall remain Company property, and shall
reimburse Wheeless for reasonable and necessary fees and charges related to the
use of such phone for business purposes.
3.4. Benefits. Except as otherwise provided in this Agreement,
Wheeless will be entitled to participate in the same manner as other executive
and managerial employees of the Company in all retirement, health and welfare,
and other fringe benefit programs applicable to other managerial employees of
the Company generally which may be authorized, adopted and amended from time to
time by the Board. This includes eligibility to participate in the Company's
qualified retirement plans as permitted by the terms of such plans. Specific
benefits that Wheeless is eligible to receive include, but are not limited to:
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(i) Medical Insurance. So long as the Company provides health and
dental insurance, Wheeless (and his eligible family members, which include his
wife and children) shall have the opportunity to participate in the same manner
and on the same terms as other officers and employees of the Company.
(ii) Long-term disability. The Company shall pay Wheeless' full
premiums for long-term disability insurance coverage, providing a disability
benefit of up to 60% of Wheeless' salary (as defined by the applicable plan or
policy), so long as the Company offers group long-term disability insurance
coverage for its employees.
(iii) Annual physical examination. The Company agrees to provide, at no
cost to Wheeless, one annual physical examination through a doctor of Wheeless'
choice.
(iv) Life insurance. The Company shall pay Wheeless' premiums, for his
purchase of a term life insurance policy providing a death benefit of $500,000,
through a carrier selected by the Company.
(v) Automobile. The Company agrees to purchase an automobile for use by
Wheeless, which will be owned by the Company, with a retail purchase cost not to
exceed $35,000 taking into account all taxes, fees, charges and the trade-in or
resale value received for Wheeless' existing automobile. Wheeless may select the
automobile of his choice, subject to these restrictions. Alternatively, the
Company may lease an automobile on behalf of Wheeless, if he so elects, with
monthly payments not to exceed $600.
(vi) Vacation. Wheeless shall be entitled to receive four weeks of paid
vacation leave each calendar year. Provisions regarding the accrual and
carry-over of any unused vacation time will be governed by the Company's
standard policies.
3.5. No Other Compensation. Except as provided in Article 4 hereof,
Wheeless shall receive no compensation or remuneration in addition to that set
forth in this Article 3 for any services by him in any capacity to the Company,
the Bank, or any affiliated corporation. Nothing contained herein shall,
however, preclude Wheeless from receiving any additional discretionary bonus or
compensation specifically approved in writing for Wheeless in advance by the
Company's Board.
3.6. Tax Consequences. Wheeless acknowledges that, to the extent
the value of any of the benefits provided to him under this Article 3 constitute
taxable income to him, he shall be responsible for the payment of such taxes and
the Company may withhold or deduct to satisfy his tax liability as permitted by
applicable law.
ARTICLE 4
VARIABLE AND EQUITY COMPENSATION
4.1. Performance Bonus. Wheeless shall be considered annually for a
cash bonus, up to, but not to exceed, thirty percent (30%) of his annual Salary,
based on the attainment of certain performance objectives established in a
Company-approved bonus/performance plan. This maximum bonus opportunity may not
be decreased below 30% of his Salary for the period in
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question. Wheeless shall be considered for his initial Performance Bonus in
March 1999 and each March thereafter for the term of this Agreement. If awarded,
payment of the bonus will occur as soon as practicable after March 1 of each
year.
4.2. Stock Option Grant. As soon as practicable, but in no event
later than 30 days, after the execution of this Agreement, Wheeless shall be
granted a non-qualified option to buy 750 shares of the Company's common stock,
at an exercise price of $10.00 per share. This option will contain a three-year
vesting schedule, and shall expire ten years after the option is fully
exercisable. The parties agree to execute a separate stock option agreement
memorializing the terms of the option.
Each year Wheeless shall be considered for a non-qualified stock option
grant to buy stock of the Company on the date the Company Board determines that
he has achieved certain annual performance objectives established under a
Company-approved bonus/performance plan. This grant will be up to, but will not
exceed twenty percent (20%) of his annual Salary, based on the attainment of
certain performance objectives established in a Company-approved
bonus/performance plan. This maximum grant opportunity may not be decreased
below 20% of Wheeless' Salary for the period in question. The Company Board
reserves the right to modify the performance goals established for Wheeless from
year to year. The other specific terms and conditions of the option will be
memorialized in a separate stock option agreement, executed by the parties on
the date of grant of the option. The parties agree generally, however, that the
exercise price of the option shall be the fair market value of the stock on the
date of grant, and that the option will vest and become exercisable in equal
installment over a three-year period. Wheeless shall be considered for an
initial stock option grant in March 1999 and each March hereafter for the term
of this Agreement. The option, if earned, shall be granted as soon as
practicable after March 1 of each year.
ARTICLE 5
TERM; RENEWAL
5.1. Term. Wheeless' employment, pursuant to this Agreement, shall
commence on August 31, 1998 and shall continue until August 31, 2001, at which
time this Agreement shall expire unless extended as provided in Section 5.2, or
unless earlier terminated under Article 6.
5.2. Renewal. Before the expiration of the initial term of this
Agreement on August 31, 2001, the Company and Wheeless agree to discuss in good
faith whether to extend the terms of the Agreement for an additional two-year
period, through August 31, 2003. Neither party is under any obligation to renew
or extend the terms of this Agreement. There shall be no extension or renewal of
this Agreement (except Articles 7 and 8, each of which shall continue in effect
as provided in this Agreement, unless and until modified in writing by the
parties), by operation of law or otherwise unless by the written agreement or
consent of both the Company and Wheeless prior to the expiration of the initial
term.
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ARTICLE 6
EVENTS OF TERMINATION
6.1. Termination for Failure to Obtain Regulatory Approval. If the
applicable regulatory authorities refuse the necessary approvals for Wheeless to
serve as President and CEO of the Bank, or otherwise substantially limit the
scope of duties he may perform in that capacity, this Agreement shall terminate
automatically and be of no further legal force or effect.
6.2. Termination by the Company.
General. The Company shall have the right to terminate this Agreement,
with or without cause, by at least a two-thirds vote of the Company's Board, at
any time during the term of this Agreement by giving written notice to Wheeless.
The termination shall become effective on the date specified in the notice,
which termination date shall not be a date prior to the date fourteen (14) days
following the date of the notice of termination itself.
(a) Cause Defined. For purposes of this Section 6,
"cause" shall mean (i) a material breach by Wheeless of any covenant or
condition under this Agreement; (ii) the commission by Wheeless of any willful
act constituting dishonesty, fraud, immoral or disreputable conduct which is
harmful to the Company, or its reputation; (iii) any felony conviction of
Wheeless; (iv) any willful act of gross misconduct which is materially and
demonstrably injurious to the Company; (v) material violation by Wheeless of the
Company's policies as set forth in the Company's personnel handbook, if one has
been adopted, or announced by Company management from time to time; (vi)
violation of the Company's drug and alcohol policy as set forth in the Company's
personnel handbook, if one has been adopted, or announced by Company management
from time to time; or (vii) any conduct that renders Wheeless unsuitable for
duty as determined by any regulatory authority that oversees banking or
financial institutions. Prior to termination for cause under subparagraph (i)
above, Wheeless shall be notified of the cause for termination and given sixty
(60) days from the date of such notice to cure his breach.
6.3. Termination by Death or Disability of the Employee.
(a) General. In the event of Wheeless' death during the
term of this Agreement, all obligations of the parties hereunder shall terminate
immediately.
(b) Disability. If the Wheeless is unable to perform his
duties hereunder, with or without any reasonable accommodation (if such
accommodation is legally required), due to mental, physical or other disability
for a period of ninety (90) consecutive days in any 180-day period, as
determined in good faith by the Company Board, this Agreement may be terminated
by the Company, at its option, by written notice to Wheeless, effective on the
termination date specified in such notice, provided that such termination date
shall not be a date prior to the date of the notice of termination itself.
6.4. Termination by Wheeless. Wheeless may terminate this Agreement
at any time, with or without cause, by giving written notice to the Company. Any
such termination shall
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become effective on the date specified in such notice, provided that the Company
may elect to have such termination become effective on a date after, but not
more than, fourteen (14) days after the date of the notice.
6.5. Effect of Expiration or Termination.
(a) General. In the event this Agreement expires or is
terminated for any reason, then both parties' obligations hereunder shall
immediately cease (including any right to compensation and benefits under
Articles 3 and 4), except that: (i) Wheeless or his estate or personal
representative shall be entitled to receive the Salary owed to him through the
effective date of such expiration or termination; (ii) the Company will pay, or
reimburse, Wheeless' reasonable and necessary business expenses incurred prior
to the date this Agreement expires or terminates; (iii) Wheeless may continue to
participate in any Company benefit plans to the extent he remains eligible to do
so; (iv) Wheeless agrees to return his Company-owned automobile, if he elected
this option under Section 3.4(v) under this Agreement, and mobile telephone to
the Company (unless he purchases the automobile as provided below); and (v)
Wheeless shall become solely responsible for the payment of any outstanding Club
initiation fees, and all Club dues and expenses thereafter.
(b) Treatment of Performance Bonus. Notwithstanding the
above, if this Agreement expires by its terms pursuant to Article 5, Wheeless
shall receive any Performance Bonus he has earned for the period at issue.
Additionally, if the Agreement is terminated by the Company for any reason other
than cause (including Wheeless' death or disability), Wheeless may be considered
for his Performance Bonus, on a pro-rata basis, in the sole discretion of the
Company's Board. Such Performance Bonus will not be available to Wheeless if he
terminates the Agreement or if the Company terminates the Agreement for cause.
(c) Special payments in the event of termination for
other than "cause." Wheeless also shall be entitled to the following additional
payments, or rights, if the Agreement is terminated without cause by the Company
for a reason other than Wheeless' death or disability: (i) severance in an
amount equal to his annual base Salary, less any applicable deductions or
withholding, by a lump-sum payment made within thirty (30) days of the
Agreement's termination date; (ii) the right to purchase his Company automobile
at current book value, as determined by the Company; (iii) the right, for a
90-day period after the date of termination, to exercise the option under the
stock option agreement referenced in Paragraph 4.2 to the extent the option is
exercisable (vested) at the time of termination. The option will not continue to
vest with respect to any additional shares during this 90-day period.
6.6. Cooperation. Following any termination, Wheeless shall fully
cooperate with the Company in all matters related to the handing over and
transitioning of his pending work to other employees of the Company as may be
designated by the Company's Board.
-8-
<PAGE>
ARTICLE 7
NONCOMPETITION
7.1. Noncompetition.
(a) Wheeless agrees that, during his employment
hereunder, and for a period of one (1) year after the effective date of
termination of this Agreement, he will not:
(1) Compete (as defined below) with the Company
or the Bank; or
(2) assist a Competitor (as defined below) of
the Company or the Bank by providing consulting or other
advisory services to that Competitor.
(b) The following terms, as used in this Article 7 shall
have the meanings set forth below:
(1) The Company's or Bank's "Business" means the
provision of banking and financial services and other
businesses or services that the Company or Bank may establish
from time to time during the term of this Agreement.
(2) The term "Competitor" means any firm,
corporation or entity that is engaged in business
substantially similar to the Company's or Bank's business
that: (i) is in the process of starting up operations or which
has been chartered and operating for fewer than five (5)
years; (ii) has assets of five hundred million ($500,000,000)
or less; and (iii) has a facility within five (5) miles of the
Company or Bank or any banking institution owned by the
Company or Bank.
(3) The term "Compete" means to engage in direct
competition with the Company or Bank by serving as an
employee, consultant, officer, director, proprietor, partner,
stockholder or other security holder (other than a holder of
securities of a corporation listed on a national securities
exchange or the securities of which are regularly traded in
the over-the-counter market, provided that the Employee at no
time owns in excess of 1% of the outstanding securities of
such corporation entitled to vote for the election of
directors or other than of a corporation in which the Employee
makes passive investments through a venture fund or similar
investment vehicle) of any firm, corporation or entity that is
a Competitor of the Company or Bank.
(c) Wheeless further acknowledges that this Article 7 is
an independent covenant within this Agreement, and that this covenant shall
survive any termination of Agreement and shall be treated as an independent
covenant for the purposes of enforcement.
-9-
<PAGE>
(d) Wheeless shall, during the term of this Agreement and
thereafter, notify any prospective employer of the terms and conditions of this
Agreement regarding confidentiality, nondisclosure and noncompetition.
ARTICLE 8
CONFIDENTIALITY AND NON-DISCLOSURE
8.1. Wheeless shall hold in strict confidence and shall not, either
during the term of this Agreement or after the termination hereof, disclose,
directly or indirectly, to any third party, person, firm, corporation or other
entity, irrespective of whether such person or entity is a competitor of the
Company or Bank or is engaged in a business similar to that of the Company or
Bank, any trade secrets or other proprietary or confidential information of the
Company or Bank or any subsidiary or affiliate of the Company or Bank
(collectively, "Proprietary Information") obtained by Wheeless from or through
his employment hereunder. Such Proprietary Information includes but is not
limited to marketing plans, product plans, business strategies, financial
information, forecasts, personnel information and customer lists. Wheeless
hereby acknowledges and agrees that all Proprietary Information referred to in
this Article 8 shall not be used for any purpose other than his duties hereunder
and shall be deemed trade secrets of the Company or Bank and of its subsidiaries
and affiliates, and that Wheeless shall take such steps, undertake such actions
and refrain from taking such other actions, as mandated by the provisions hereof
and by the provisions of the Virginia Uniform Trade Secret Act. Wheeless further
acknowledges that the Company's or Bank's products and titles may consist of
copyrighted material, and Wheeless shall exercise his best efforts to prevent
the use of such copyrighted material by any person or entity which has not prior
thereto been authorized to use such information by the Company or Bank.
8.2. Wheeless further hereby agrees and acknowledges that any
disclosure of any Proprietary Information prohibited herein, or any breach of
the provisions of Articles 7 and 8 of this Agreement, may result in irreparable
injury and damage to the Company which will not be adequately compensable in
monetary damages, that the Company will have no adequate remedy at law therefor,
and that the Company may obtain, if warranted in the discretion of a competent
court, such preliminary, temporary or permanent mandatory or restraining
injunctions, orders or decrees as may be necessary to protect the company
against, or on account of, any breach by Wheeless of the provisions contained in
Articles 7 or 8.
8.3. Wheeless further agrees that, upon termination of this
Agreement, whether voluntary or involuntary or with or without cause, he shall
notify any new employer, partner, associate or any other firm or corporation
with whom Wheeless shall become associated in any capacity whatsoever of the
provisions of Articles 7 and 8, if applicable to such new employment or
association, and that the Company may give such notice to such firm, corporation
or other person if the Company deems those Articles applicable as described in
this Agreement.
-10-
<PAGE>
ARTICLE 9
MISCELLANEOUS
9.1. Severability. The Company and Wheeless recognize that the laws
and public policies of the Commonwealth of Virginia are subject to varying
interpretations and change. It is the intention of the Company and of Wheeless
that the provisions of this Agreement shall be enforced to the fullest extent
permissible under the laws and public policies of Virginia, but that the
unenforceability (or the modification to conform to such laws or public
policies) of any provision or provisions hereof shall not render unenforceable,
or impair, the remainder of this Agreement. Accordingly, if any provisions of
this Agreement shall be determined to be invalid or unenforceable, either in
whole or in part, this Agreement shall be deemed amended to delete or modify, as
necessary, the offending provision or provisions and to alter the balance of
this Agreement in order to render it valid and enforceable.
9.2. Assignment. Except as provided below, neither the rights nor
obligations under this Agreement may be assigned by either party, in whole or in
part, by operation of law or otherwise, except that it shall be binding upon and
inure to the benefit of any successor of the Company and its subsidiaries and
affiliates, whether by merger, reorganization or otherwise, or any purchaser of
all or substantially all of the assets of the Company.
Notwithstanding the above, upon the Bank's charter and Wheeless'
approval as President and CEO, the Company may assign this Agreement to the
Bank. In that event, all references to the "Company" in this Agreement are
deemed to be references to the "Bank," (and references to the Company Board are
deemed to refer to the Bank Board), except that any provision of this Agreement
which refers to both the "Company" and the "Bank" separately shall continue to
be effective with respect to the Company after such an assignment (and will also
be effective as to the Bank). Upon an assignment of the Agreement by the
Company, any obligations owed by Wheeless to the Company under this Agreement
shall be owed to the Bank (except, as noted above, in those instances where
specific references have been made, and obligations are owed, to both entities).
Additionally, any references to the Company's CEO or President shall remain
unchanged after such an assignment, and the rights and duties of the Company's
CEO under this Agreement shall continue in effect after any assignment.
9.3. Notices. Any notice expressly provided for under this
Agreement shall be in writing, shall be given either personally or by mail and
shall be deemed sufficiently given when actually received by the party to be
notified or when mailed, if mailed by certified or registered mail, postage
prepaid, addressed to such party at their addresses as set forth below. Either
party may, by notice to the other party, given in the manner provided for
herein, change their address for receiving such notices.
-11-
<PAGE>
If to the Company, to:
L. Burwell Gunn
President & CEO
Cardinal Financial Corporation
10641 Lee Highway
Fairfax, Virginia 22030
If to Wheeless, to:
Mr. Greg D. Wheeless
21578 Goodwin Court
Ashburn, Virginia 20148
9.4. Governing Law. This Agreement shall be executed, construed and
performed in accordance with the laws of the Commonwealth of Virginia without
reference to conflict of laws principles. The parties agree that the venue for
any dispute hereunder will be the state or federal courts sitting in Virginia
and the parties hereby agree to the exclusive jurisdiction thereof.
9.5. Headings. The section headings contained in this Agreement are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
9.6. Entire Agreement; Amendments. This Agreement constitutes and
embodies the entire agreement between the parties in connection with the subject
matter hereof and supersedes all prior and contemporaneous agreements and
understandings in connection with such subject matter. No covenant or condition
not expressed in this Agreement shall affect or be effective to interpret,
change or restrict this Agreement. In the event of a conflict or inconsistency
between the terms of this Agreement and the Company's policies regarding
employees, the terms of this Agreement shall supersede the conflicting or
inconsistent Company policies. No change, termination or attempted waiver of any
of the provisions of this Agreement shall be binding unless in writing signed by
Wheeless and on behalf of the Company by an officer thereunto duly authorized by
the Company's Board of Directors. No modification, waiver, termination,
rescission, discharge or cancellation of this Agreement shall affect the right
of any party to enforce any other provision or to exercise any right or remedy
in the event of any other default.
-12-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
CARDINAL FINANCIAL CORPORATION
By:
--------------------------------
Title:
--------------------------------
EMPLOYEE:
--------------------------------
Greg D. Wheeless
-13-
Exhibit 21
Subsidiaries of the Registrant
------------------------------
State of
Name Incorporation
---- -------------
Cardinal Bank, N.A. Virginia
Cardinal Wealth Services, Inc. Virginia
(as of February 1, 1999)
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