U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2000
[ ] Transition Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____________ to _____________
Commission file number: 0-24557
CARDINAL FINANCIAL CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
Virginia 54-1874630
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10555 Main Street, Suite 500
Fairfax, Virginia 22030
(Address of Principal Executive Offices)
(703) 934-9200
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes __X__ No _____
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
4,245,759 shares of common stock, par value $1.00 per share,
outstanding as of June 30, 2000
<PAGE>
CARDINAL FINANCIAL CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Condition
June 30, 2000 (Unaudited) and December 31, 1999............................................3
Consolidated Statements of Operations (Unaudited)
For the Three and Six Months Ended June 30, 2000 and June 30, 1999.........................4
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
For the Three and Six Months Ended June 30, 2000 and June 30, 1999.........................5
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Six Months Ended June 30, 2000 and June 30, 1999...................................6
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2000 and June 30, 1999...................................7
Notes to Condensed Consolidated Financial Statements (Unaudited)...........................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.........................................................11
Part II. Other Information
Item 1. Legal Proceedings.........................................................................22
Item 2. Changes in Securities and Use of Proceeds.................................................22
Item 3. Defaults Upon Senior Securities...........................................................22
Item 4. Submission of Matters to a Vote of Security Holders.......................................22
Item 5. Other Information.........................................................................22
Item 6. Exhibits and Reports on Form 8-K..........................................................22
Signatures
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
As of June 30, 2000 and December 31, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
Assets 2000 1999
------------ ------------
<S> <C> <C>
Cash & due from banks $ 3,902 $ 6,018
Federal funds sold 18,800 13,025
------------ ------------
Total cash and cash equivalents 22,702 19,043
Investment securities available-for-sale 4,536 4,807
Other investments 1,028 1,015
Loans receivable, net of fees 93,492 68,167
Allowance for loan losses (1,077) (726)
------------ ------------
92,415 67,441
Premises and equipment, net 4,446 4,203
Accrued interest and other assets 1,514 524
------------ ------------
Total assets $ 126,641 $ 97,033
============ ============
Liabilities and Shareholders' Equity
Deposits $ 91,139 $ 59,873
Borrowings 6,000 6,000
Accrued interest and other liabilities 651 415
------------ ------------
Total liabilities 97,790 66,288
Common stock, $1 par value, 50,000,000 shares authorized,
shares outstanding 4,245,759 in 2000 and 4,242,634 in 1999 4,246 4,243
Additional paid in capital 32,499 32,496
Accumulated deficit (7,700) (5,881)
Accumulated other comprehensive income (loss) (194) (113)
------------ ------------
Total shareholders' equity 28,851 30,745
------------ ------------
Total liabilities and shareholders' equity $ 126,641 $ 97,033
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $ 1,883,548 $ 472,486 $ 3,412,486 $ 826,048
Federal funds sold 282,908 323,628 570,113 644,429
Investment securities available-for-sale 70,979 98,585 143,181 226,499
Other investments 17,032 4,304 32,512 7,597
------------ ------------ ------------ ------------
Total interest income 2,254,467 899,003 4,158,292 1,704,573
Interest expense:
Deposits 823,279 225,562 1,477,795 424,811
Borrowings 95,513 13 191,727 273
------------ ------------ ------------ ------------
Total interest expense 918,792 225,575 1,669,522 425,084
------------ ------------ ------------ ------------
Net interest income 1,335,675 673,428 2,488,770 1,279,489
Provision for loan losses 207,791 120,679 350,882 188,804
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 1,127,884 552,749 2,137,888 1,090,685
Non-interest income:
Service charges on deposit accounts 26,366 6,606 46,768 11,693
Loan service charges 99,099 19,593 162,203 40,126
Investment fee income 486,362 278,903 799,688 280,181
Gains from sale of securities - 884 - 12,087
Other income 44,704 6,228 71,551 14,683
------------ ------------ ------------ ------------
Total non-interest income 656,531 312,214 1,080,210 358,770
Non-interest expense:
Salary and benefits 1,479,161 1,005,212 2,842,020 1,766,830
Occupancy 222,717 205,617 444,225 420,845
Professional fees 151,509 138,723 253,063 255,730
Depreciation 134,737 73,315 263,237 133,732
Other operating expenses 674,030 448,650 1,235,452 703,189
------------ ------------ ------------ ------------
Total non-interest expense 2,662,154 1,871,517 5,037,997 3,280,326
------------ ------------ ------------ ------------
Net loss before income taxes (877,739) (1,006,554) (1,819,899) (1,830,871)
Provision for income taxes
------------ ------------ ------------ ------------
Net loss $ (877,739) $ (1,006,554) $ (1,819,899) $ (1,830,871)
============ ============ ============ ============
Basic and diluted loss per share $ (0.21) $ (0.24) $ (0.43) $ (0.43)
============ ============ ============ ============
Weighted-average shares outstanding 4,245,759 4,239,509 4,244,197 4,239,509
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three months and six months ended June 30, 2000 and June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net loss $ (877,739) $ (1,006,554) $ (1,819,899) $ (1,830,871)
Other comprehensive loss:
Unrealized holding loss on available-for-sale
investment securities, net of tax (5,774) (60,694) (80,953) (82,327)
--------------- --------------- --------------- ---------------
Comprehensive loss $ (883,513) $ (1,067,248) $ (1,900,852) $ (1,913,198)
=============== =============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Six Months Ended June 30, 2000 and 1999
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Accumulated Comprehensive
Shares Stock Capital Deficit Income (Loss) Total
--------- -------- ---------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 4,240 $ 4,240 $ 32,327 $ (1,842) $ 3 $ 34,728
Change in unrealized holding loss on
investment securities available-for-sale, -- -- -- -- (82) (82)
net of tax
Reversal of Expense Accrual from
Public Offering -- -- 138 -- -- 138
Net loss -- -- -- (1,831) -- (1,831)
-------- -------- ---------- ----------- ------------- --------
Balance, June 30, 1999 4,240 $ 4,240 $ 32,465 $ (3,673) $ (79) $ 32,953
===============================================================================================================================
Balance, January 1, 2000 4,243 $ 4,243 $ 32,496 $ (5,881) $ (113) $ 30,745
Issuance of stock awards 3 3 3 -- -- 6
Change in unrealized holding loss on
investment securities available-for-sale -- -- -- -- (81) (81)
Net loss -- -- -- (1,819) -- (1,819)
-------- -------- ---------- ----------- ------------- --------
Balance, June 30, 2000 4,246 $ 4,246 $ 32,499 $ (7,700) $ (194) $ 28,851
===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2000 and 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,819) $ (1,831)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 263 131
Provision for loan losses 351 189
Gain on sale of investment securities avaiable-for-sale -- (12)
Increase in accrued interest and other assets (990) (647)
Decrease in accrued interest and other liabilities 178 319
Compensation related to stock awards 6 --
------------ ------------
Net cash used in operating activities (2,011) (1,851)
------------ ------------
Cash flows from investing activities:
Purchase of premises and equipment (506) (1,799)
Proceeds from sale of securities 5 3,285
Purchase of securities (19) (171)
Redemptions of investment securities-available-for-sale 249 3,864
Net increase in loan portfolio (25,325) (15,319)
------------ ------------
Net cash used in investing activities (25,596) (10,140)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 31,266 9,266
Net increase in short-term borrowings -- 3,000
Reversal of accrued costs related to public offering -- 138
------------ ------------
Net cash provided by financing activities 31,266 12,404
------------ ------------
Net increase in cash and cash equivalents 3,659 413
Cash and cash equivalents at beginning of period 19,043 25,350
------------ ------------
Cash and cash equivalents at end of period $ 22,702 $ 25,763
============ ============
Supplemental disclosure of cash flow information
Cash paid during period for interest: $ 1,686 $ 425
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
Note 1
Organization
Cardinal Financial Corporation (the "Company") was incorporated November 24,
1997 under the laws of the Commonwealth of Virginia as a holding company for
Cardinal Bank, N.A. Its activities currently consist of investment in its wholly
owned subsidiaries, Cardinal Bank, N.A., Cardinal Wealth Services, Inc.,
Cardinal Bank - Manassas/Prince William, N.A. and Cardinal Bank - Dulles, N.A.
Basis of Presentation
In the opinion of management, the accompanying condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. However, all
adjustments that are, in the opinion of management, necessary for a fair
presentation have been included. The results of operations for the three months
and six months ended June 30, 2000 are not necessarily indicative of the results
to be expected for the full year ending December 31, 2000. The unaudited interim
financial statements should be read in conjunction with the audited financial
statements and notes to financial statements that are presented in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1999.
Note 2
Segment Disclosures
The Company operates and reports in two business segments, commercial banking
and investment advisory services. The commercial banking segment includes both
commercial and consumer lending and provides customers such products as term
loans, real estate loans, other business financing and installment loans. In
addition, this segment also provides customers with several choices of deposit
products including demand deposit accounts, savings accounts and certificates of
deposit. The investment advisory services segment provides advisory services to
businesses and individuals including financial planning and retirement/estate
planning.
Information about reportable segments, and reconciliation of such information to
the consolidated financial statements as of and for the three months and six
months ended June 30, 2000 and 1999 follows:
For the Three Months Ended June 30, 2000:
<TABLE>
<CAPTION>
Commercial Investment Intersegment
Banking Advisory Elimination Other Consolidated
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 1,203,833 $ - $ - $ 131,842 $ 1,335,675
Provision for loan losses 207,791 - - - 207,791
Non-interest income 162,283 486,362 - 7,886 656,531
Non-interest expense 1,484,581 561,273 - 616,300 2,662,154
----------------------------------------------------------------------------
Net income (loss) $ (326,256) $ (74,911) $ - $ (476,572) $ (877,739)
============================================================================
</TABLE>
8
<PAGE>
For the Six Months Ended June 30, 2000:
<TABLE>
<CAPTION>
Commercial Investment Intersegment
Banking Advisory Elimination Other Consolidated
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 2,197,441 $ - $ - $ 291,329 $ 2,488,770
Provision for loan losses 350,882 - - -- 350,882
Non-interest income 268,301 799,688 (3,551) 15,772 1,080,210
Non-interest expense 2,897,723 1,029,222 (3,551) 1,114,603 5,037,997
---------------------------------------------------------------------------------
Net income (loss) $ (782,863) $ (229,534) $ - $ (807,502) $ (1,819,899)
=================================================================================
Total Assets $ 116,241,892 $ 212,277 $ (18,910,425) $ 29,096,718 $ 126,640,462
</TABLE>
For the Three Months Ended June 30, 1999:
<TABLE>
<CAPTION>
Commercial Investment Intersegment
Banking Advisory Elimination Other Consolidated
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 374,868 $ - $ - $ 298,560 $ 673,428
Provision for loan losses 120,679 - - - 120,679
Non-interest income 33,311 278,903 - - 312,214
Non-interest expense 888,436 380,465 - 602,616 1,871,517
---------------------------------------------------------------------------------
Net income (loss) $ (600,936) $ (101,562) $ - $ (304,056) $ (1,006,554)
=================================================================================
</TABLE>
For the Six Months Ended June 30, 1999:
<TABLE>
<CAPTION>
Commercial Investment Intersegment
Banking Advisory Elimination Other Consolidated
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 653,943 $ - $ - $ 625,546 $ 1,279,489
Provision for loan losses 188,804 - - - 188,804
Non-interest income 78,589 280,181 - - 358,770
Non-interest expense 1,586,025 575,466 - 1,118,835 3,280,326
---------------------------------------------------------------------------------
Net income (loss) $ (1,042,297) $ (295,285) $ - $ (493,289) $ (1,830,871)
=================================================================================
Total Assets $ 56,168,403 $ 193,383 $ (22,108,723) $ 33,851,850 $ 68,104,913
</TABLE>
The Company does not have operating segments other than those reported. Parent
company financial information is included in the "Other" category above and
represents the overhead function rather than an operating segment.
Note 3
Earnings Per Share
The following table discloses the calculation of basic and diluted earnings per
share for the three months and six months ended June 30, 2000 and 1999. Because
the Company has net losses due to the start-up
9
<PAGE>
nature of the organization, stock options issued have an anti-dilutive effect on
the earnings per share calculation.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------------------
2000 1999 2000 1999
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Net loss $ (877,739) $(1,006,554) $(1,819,899) $(1,830,871)
Weighted average shares for basic and diluted 4,245,759 4,239,509 4,244,197 4,239,509
Basic and diluted loss per share $ (0.21) $ (0.24) $ (0.43) $ (0.43)
</TABLE>
Note 4
Recent Events
On April 17, 2000, the Company entered into a definitive agreement to acquire
Heritage Bancorp, Inc. ("Heritage"). Under the terms of the agreement, the
Company will issue a combination of cash and shares of convertible preferred
stock to the shareholders of Heritage in exchange for all of the outstanding
shares of Heritage's common stock. Heritage's shareholders will be able to elect
to receive $6.00 in cash or 1.2 shares of convertible preferred stock for each
share of Heritage stock, subject to certain adjustments to permit the Company to
issue an equal amount of cash and convertible preferred stock. The transaction
will be accounted for by Cardinal as a purchase. Under the purchase method, the
assets and liabilities of Heritage will be recorded on the books of Cardinal at
their respective fair values as of the effective date of the transaction. The
transaction has been approved by the shareholders of both the Company and
Heritage and by the Board of Governors of the Federal Reserve System. The
Company is currently awaiting state approval of the transaction and expects to
complete the transaction in the third quarter of 2000.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Cardinal Financial Corporation (the "Company") is the holding company for three
bank subsidiaries and one non-bank subsidiary. The Company began operations on
November 24, 1997 and completed a private offering in late 1997 and early 1998
that raised $10.6 million in capital. Following the private offering, the
Company opened its first bank subsidiary, Cardinal Bank, N.A., on June 8, 1998.
In July 1998, the Company raised an additional $26.0 million in an initial
public offering. In February 1999, Cardinal Wealth Services, Inc. began
operations as the Company's non-bank investment advisory subsidiary. Through a
strategic alliance with LM Financial Partners, Inc., a wholly owned subsidiary
of Legg Mason, Inc., Cardinal Wealth Services, Inc. can offer an extensive range
of financial products and services. The Company's second bank subsidiary,
Cardinal Bank-Manassas/Prince William, N.A., began operations in July 1999, the
company's third bank subsidiary, Cardinal Bank-Dulles, N.A., began operations in
August 1999.
In April 2000, the Company announced the acquisition of Heritage Bancorp, Inc.
("Heritage"), a bank holding company with over $64 million in assets
headquartered in McLean, Virginia. Heritage's only subsidiary, The Heritage
Bank, operates three branches in McLean, Sterling, and Tyson's Corner in
northern Virginia. The transaction will be accounted for as a purchase and is
expected to close in the third quarter of 2000.
The following discussion presents management's discussion and analysis of the
consolidated financial condition and results of operations of the Company as of
June 30, 2000 and for the three months and six months ended June 30, 2000 and
1999. This discussion should be read in conjunction with the Company's unaudited
Condensed Consolidated Financial Statements and the notes thereto appearing
elsewhere in this report.
Financial Condition
Total assets of the Company were $126.6 million at June 30, 2000 compared to
$97.0 million at December 31, 1999, representing an increase of $29.6 million or
30.5%. The increase can be attributed to growth in deposit balances, which moved
from $59.9 million at December 31, 1999 to $91.1 million, an increase of $31.2
million or 52.1%. Loan production utilized the majority of the deposit balance
increase. Loans receivable, net of fees, increased $25.3 million from $68.2
million at December 31, 1999 to $93.5 million at June 30, 2000, a 37.1%
increase. (See Table 1 for loan portfolio details.) The increase in loan and
deposit balances as of June 30, 2000, as compared to those as of June 30, 1999,
was due to the operations of two additional bank subsidiaries. Total cash and
cash equivalents were $22.7 million at June 30, 2000 compared to $19.0 million
at December 31, 1999. Investment securities available for sale and other
investments declined $258 thousand to $5.6 million at June 30, 2000 from $5.8
million at December 31, 1999 (see Table 2 for details of the investment
securities available for sale portfolio). Shareholders' equity at June 30, 2000
was $28.9 million compared to $30.7 million at December 31, 1999. Book value per
share on June 30, 2000 was $6.80 compared to $7.25 on December 31, 1999.
Results of Operations
Net loss for the three and six months ended June 30, 2000 was $878 thousand and
$1.82 million, respectively, compared with $1.01 million and $1.83 million for
the same periods of 1999. The reduction in the net loss for the second quarter
of 2000 compared to the second quarter of 1999 is due to a
11
<PAGE>
combination of factors. Increased net interest income after provision for loan
losses and investment fee income were offset by operating losses associated with
the operation of two additional bank subsidiaries that opened in the third
quarter of 1999 as well as expenses incurred in opening the Alexandria loan
production and retail branch office. Return on average assets and return on
average equity for the three months ended June 30, 2000 were -2.93% and -11.95%,
respectively. For the three months ended June 30, 1999, return on average assets
and return on average equity were -6.39% and -11.98%, respectively.
Net interest income is the Company's primary source of revenue and represents
the difference between interest and fees earned on interest bearing assets and
the interest paid on deposits and other interest bearing liabilities. Net
interest income for the three and six months ended June 30, 2000 was $1.34
million and $2.49 million, respectively, compared to $673 thousand and $1.28
million for the same periods in 1999.
The Company's net interest margin for the three and six months ended June 30,
2000 was 4.97% and 4.93%, respectively, compared to 4.76% and 4.58% for the same
periods in 1999. The 21 basis point increase in the margin can be attributed to
a change in asset mix as loans represented a higher percentage of interest
earning assets at June 30, 2000 than at June 30, 1999. Table 3 presents an
analysis of average earning assets, interest bearing liabilities and demand
deposits with the related components of interest income and interest expense.
The provision for loan losses for the three and six months ended June 30, 2000
was $208 thousand and $351 thousand, respectively, compared to $121 thousand and
$189 thousand, for the same periods in 1999. The allowance for loan losses at
June 30, 2000 was $1.08 million compared to $726 thousand at December 31, 1999.
The ratio of the allowance for loan losses to gross loans at June 30, 2000 was
1.15% compared to a ratio of 1.07% at December 31, 1999. The Company's loan
balances include certain types of loans that have been structured such that the
risk of loss is reduced by third party guarantees or additional collateral.
These loans include purchased loans where the seller is required to absorb
losses of up to 115 basis points of the outstanding balances and business
manager loan receivables (funding of small business accounts receivable) where
the borrower maintains a minimum of 10% of the outstanding balance in a
restricted deposit account. Table 4 reflects the components of the allowance for
loan losses and calculates the loan loss ratio two ways: first, with total gross
loans, and second, with total gross loans less purchased loans and business
manager receivables.
During the second quarter, the Company downgraded a large credit ($1.5 million)
to substandard status and added approximately $55 thousand to the provision as a
result of the downgrade. A specific reserve has been established for this
credit. The loan is collateralized by equipment used by the borrower in its
business. The downgrade occurred as a result of the declaration of bankruptcy by
the borrower. However, it is management's opinion that, due to the solvency of
the borrower (assets exceed liabilities by a 3 to 1 ratio) and the strength of
collateral, the Company will be able to recover the full amount of this loan
either through payments from the borrower or through the liquidation of
collateral.
Non-interest income for the three and six months ended June 30, 2000 was $657
thousand and $1.08 million, respectively, compared to $312 thousand and $359
thousand for the same periods in 1999. The significant increase in non-interest
income was due to investment advisory fees generated by the Company's non-bank
subsidiary, Cardinal Wealth Services, Inc. This subsidiary opened in February
1999.
Non-interest expense for the three and six months ended June 30, 2000 was $2.66
million and $5.04 million, respectively, compared to $1.87 and $3.28 million for
the same periods in 1999. The increase in expenses can be attributed to the
opening of two additional bank subsidiaries in the third quarter of 1999.
12
<PAGE>
Business Segment Operations
The Company provides a diversified selection of banking and non-banking
financial services and products through its subsidiaries. Management operates
and reports the results of the Company's operations through two business
segments - commercial banking and investment advisory services.
Commercial Banking
The commercial banking segment provides comprehensive banking services to small
businesses and individuals through multiple delivery channels. Through three
banking subsidiaries, services include commercial and consumer lending, deposit
products, direct banking via the internet and telephone, and the funding of
small business receivables through the Business Manager product.
For the three and six months ended June 30, 2000, the commercial banking segment
had net losses of $326 thousand and $783 thousand, respectively, compared to net
losses of $601 thousand and $1.04 million for the same periods in 1999. As of
June 30, 2000, total assets were $116.2 million, total loans were $93.5 million
and deposits were $91.1 million. As of June 30, 1999, total assets were $56.2
million, total loans were $31.6 million and total deposits were $31.1 million.
Investment Advisory Services
The investment advisory services segment provides financial and estate planning
services utilizing a host of products provided through a strategic alliance with
Legg Mason Financial Partners, a wholly owned subsidiary of Legg Mason, Inc.
Operations for this segment began February 1, 1999.
For the three and six months ended June 30, 2000, the investment advisory
services segment had net losses of $75 thousand and $230 thousand respectively,
compared to net losses of $102 thousand and $295 thousand for the same periods
in 1999. As of June 30, 2000, total assets were $212 thousand and assets under
management were $72.0 million. As of June 30, 1999, total assets were $193
thousand and assets under management were $39.6 million.
Capital Resources
Shareholders' equity at June 30, 2000 was $28.9 million compared to $30.7
million at December 31, 1999. The reduction in equity reflects the net loss
recorded for the six months ended June 30, 2000. At June 30, 2000 the Company's
tier 1 and total risk-based capital ratios were 28.5% and 29.6%, respectively.
At December 31, 1999 the Company's tier 1 and total risk-based capital ratios
were 37.9% and 38.8%, respectively. The decline in the Company's capital is due
to the increase in assets as well as the absorption of operating losses. Table 5
reflects the components of regulatory capital. The Company continues to maintain
a capital structure that places it well above minimum regulatory requirements.
Liquidity
Liquidity provides the Company with the ability to meet normal deposit
withdrawals while also providing for the credit needs of customers. At June 30,
2000, cash and cash equivalents and securities available for sale totaled $27.2
million or 22% of total assets compared to $23.9 million or 25% of total assets
at December 31, 1999. Management is committed to maintaining liquidity at a
level sufficient to protect depositors, provide for reasonable growth, and fully
comply with all regulatory requirements.
13
<PAGE>
Interest Rate Sensitivity
An important element of asset/liability management is the monitoring of the
Company's sensitivity to interest rate movements. In order to measure the effect
of interest rates on the Company's net interest income, management takes into
consideration the expected cash flows from the loan and securities portfolios
and the expected magnitude of the repricing of specific asset and liability
categories. Management evaluates interest sensitivity risk and then formulates
guidelines to manage this risk based upon its outlook regarding the economy,
forecasted interest rate movements and other business factors. Management's goal
is to maximize and stabilize the net interest margin by limiting exposure to
interest rate changes.
The data in Table 6 reflects re-pricing or expected maturities of various assets
and liabilities as of June 30, 2000. This "gap" analysis represents the
difference between interest sensitive assets and liabilities in a specific time
interval. Interest sensitivity gap analysis presents a position that existed at
one particular point in time, and assumes that assets and liabilities with
similar re-pricing characteristics will re-price at the same time and to the
same degree.
Forward Looking Statements
Certain information contained in this discussion may include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements are generally identified by phrases such as
"the Company expects," "the Company believes" or words of similar import. Such
forward-looking statements involve known and unknown risks including, but not
limited to, changes in general economic and business conditions, interest rate
fluctuations, competition within and from outside the banking industry, new
products and services in the banking industry, risk inherent in making loans
such as repayment risks and fluctuating collateral values, problems with
technology utilized by the Company, changing trends in customer profiles and
changes in laws and regulations applicable to the Company. Although the Company
believes that its expectations with respect to the forward-looking statements
are based upon reliable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results,
performance or achievements of the Company will not differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. For more information on factors that could affect
expectations, see the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999.
14
<PAGE>
Table 1.
Cardinal Financial Corporation and Subsidiaries
Loans
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------------------- -----------------------------
<S> <C> <C> <C> <C>
Commercial $ 28,486 30.48% $ 22,558 33.10%
Real estate - commercial 30,502 32.64% 19,780 29.03%
Real estate - construction 2,222 2.38% 870 1.28%
Real estate - residential 16,270 17.41% 11,851 17.39%
Home equity lines 6,041 6.46% 3,777 5.54%
Consumer 9,940 10.64% 9,311 13.66%
-------------------------- -----------------------------
Gross loans $ 93,461 100.00% $ 68,147 100.00%
Less: unearned income, net 31 20
Less: allowance for loan losses (1,077) (726)
-------------- ---------------
Total loans, net $ 92,415 $ 67,441
============== ===============
</TABLE>
15
<PAGE>
Table 2.
Cardinal Financial Corporation and Subsidiaries
Investment Securities - Available-for-Sale
As of June 30, 2000 and December 31, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Amortized Fair Unrealized Average
As of June 30, 2000 Par Value Cost Value Gain/(Loss) Yield
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government Agencies and Enterprises
One to five years $ 3,000 $ 3,000 $ 2,919 $ (81) 5.90%
After ten years 500 499 433 (66) 6.24%
-----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Government Agencies $ 3,500 $ 3,499 $ 3,352 $ (147) 5.95%
-----------------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities
Five to ten years 116 116 115 (1) 5.25%
After ten years 1,110 1,115 1,069 (46) 6.39%
-----------------------------------------------------------------------------------------------------------------------------------
Total Mortgage-Backed Securities $ 1,226 $ 1,231 $ 1,184 $ (47) 6.29%
-----------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities-Available-for-Sale $ 4,726 $ 4,730 $ 4,536 $ (194) 6.04%
=====================================================================================================================
Amortized Fair Unrealized Average
As of December 31, 1999 Par Value Cost Value Gain/(Loss) Yield
-----------------------------------------------------------------
U.S. Government Agencies and Enterprises
One to five years $ 3,000 $ 3,000 $ 2,927 $ (73) 5.90%
After ten years 500 499 445 (54) 6.26%
-----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Government Agencies $ 3,500 $ 3,499 $ 3,372 $ (127) 5.95%
-----------------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities
Within one year $ 89 $ 89 $ 89 - 6.20%
Five to ten years 216 217 215 (2) 5.40%
After ten years 1,170 1,173 1,131 (42) 5.86%
-----------------------------------------------------------------------------------------------------------------------------------
Total Mortgage-Backed Securities $ 1,475 $ 1,479 $ 1,435 $ (44) 5.87%
-----------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities-Available-for-Sale $ 4,975 $ 4,978 $ 4,807 $ (171) 5.93%
====================================================================
</TABLE>
16
<PAGE>
Table 3.
Cardinal Financial Corporation and Subsidiaries
Rate and Volume Analysis (Tax Equivalent Basis)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Three Months Three Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
Average Volume Average Rate Interest Increase Attributable to
2000 1999 2000 1999 2000 1999 (Decrease) Rate Volume
-------------------------------------- ------------------- -------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Loans:
$ 27,394 $ 6,542 9.45% 8.49% Commercial $ 647 $ 140 $ 507 $ 66 $ 441
29,192 6,519 8.13% 7.81% Real estate - commercial 594 129 465 23 442
1,564 971 9.66% 7.97% Real estate - construction 38 20 18 7 11
15,486 6,427 7.90% 7.72% Real estate - residential 306 125 181 7 174
5,714 2,157 8.65% 6.41% Home equity lines 124 35 89 32 57
9,358 1,085 7.48% 8.55% Consumer 175 23 152 (25) 177
------------------------------------------------------------------------------------------------------------------------------------
88,708 23,701 8.49% 7.89% Total loans 1,884 472 1,412 $ 110 $ 1,302
4,831 6,822 5.88% 5.80% Investment Securities - AFS 71 99 (28) 1 (29)
885 287 7.70% 6.01% Other Investments 17 4 13 4 9
17,652 27,095 6.43% 4.78% Federal funds sold 283 324 (41) 71 (112)
------------------------------------------------------------------------------------------------------------------------------------
$112,076 $ 57,905 8.05% 6.21% Total interest-earning assets $ 2,255 $ 899 $ 1,356 $ 186 $ 1,170
====================================================================================================================================
Interest Expense
3,846 2,216 2.30% 2.06% Interest Checking 22 11 11 3 8
11,966 5,343 3.47% 3.62% Money Markets 103 48 55 (5) 60
721 173 2.94% 2.97% Statement Savings 5 1 4 (0) 4
46,825 13,791 5.93% 4.80% Certificates of Deposit 693 165 528 132 396
------------------------------------------------------------------------------------------------------------------------------------
63,358 21,523 5.21% 4.19% Total interest-bearing liabilities 823 225 598 130 468
5,901 726 6.40% 0.00% Borrowings 96 - 96 96 -
------------------------------------------------------------------------------------------------------------------------------------
$ 69,259 $ 22,249 5.32% 4.06% Total interest-bearing liabilities $ 919 $ 225 $ 694 $ 226 $ 468
====================================================================================================================================
50,374 40,053 Other Sources - Net - - - - -
------------------------------------------------------------------------------------------------------------------------------------
119,633 62,302 3.08% 1.45% Total Sources of Funds 919 225 694 226 468
------------------------------------------------------------------------------------------------------------------------------------
$ 42,817 $ 35,656 4.97% 4.76% Net Interest Margin $ 1,336 $ 674 $ 662 $ (40) $ 702
====================================================================================================================================
</TABLE>
17
<PAGE>
Table 3 continued.
Cardinal Financial Corporation and Subsidiaries
Rate and Volume Analysis (Tax Equivalent Basis)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
Average Volume Average Rate Interest Increase Attributable to
2000 1999 2000 1999 2000 1999 (Decrease) Rate Volume
-------------------------------------- ------------------- ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Loans:
$ 25,523 $ 6,721 9.20% 8.03% Commercial $ 1,174 $ 270 $ 904 $ 150 $ 754
26,064 5,782 8.16% 7.51% Real estate - commercial 1,063 217 846 85 761
1,293 727 9.38% 8.27% Real estate - construction 61 30 31 7 24
14,220 6,522 7.76% 6.73% Real estate - residential 552 220 332 73 259
4,986 1,852 8.45% 5.83% Home equity lines 211 54 157 65 92
9,323 907 7.52% 7.99% Consumer 351 36 315 (22) 337
------------------------------------------------------------------------------------------------------------------------------------
81,409 22,511 8.38% 7.34% Total loans 3,412 827 2,585 $ 358 $ 2,227
4,842 7,803 5.91% 5.81% Investment Securities - AFS 143 226 (83) 3 (86)
938 270 7.03% 5.63% Other Investments 33 8 25 7 18
17,900 26,393 6.42% 4.92% Federal funds sold 570 644 (74) 134 (208)
------------------------------------------------------------------------------------------------------------------------------------
$105,089 $ 56,976 7.91% 5.99% Total interest-earning assets $ 4,158 $ 1,705 $ 2,453 $ 502 $ 1,951
====================================================================================================================================
Interest Expense
3,576 2,092 2.29% 2.03% Interest Checking 41 21 20 5 15
11,419 5,028 3.53% 3.68% Money Markets 200 92 108 (9) 117
673 150 2.94% 2.81% Statement Savings 10 2 8 0 8
42,503 13,299 5.82% 4.70% Certificates of Deposit 1,227 310 917 238 679
------------------------------------------------------------------------------------------------------------------------------------
58,171 20,568 5.12% 4.16% Total interest-bearing liabilities 1,478 425 1,053 $ 234 $ 819
5,951 750 6.41% 0.00% Borrowings 192 - 192 192 -
------------------------------------------------------------------------------------------------------------------------------------
$ 64,122 $ 21,318 5.25% 4.02% Total interest-bearing liabilities $ 1,670 $ 425 $ 1,245 $ 426 819
====================================================================================================================================
48,621 39,579 Other Sources - Net
------------------------------------------------------------------------------------------------------------------------------------
112,743 60,897 2.99% 1.41% Total Sources of Funds 1,670 425 1,245 426 819
------------------------------------------------------------------------------------------------------------------------------------
$ 40,967 $ 35,658 4.93% 4.58% Net Interest Margin $ 2,488 $ 1,280 $ 1,208 76 1,132
====================================================================================================================================
</TABLE>
18
<PAGE>
Table 4.
Cardinal Financial Corporation and Subsidiaries
Allowance for Loan Losses
(Dollars in thousands)
(Unaudited)
2000 1999
------------- -------------
Beginning balance, January 1 $ 726 $ 212
Provision for loan losses 351 189
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, June 30 $ 1,077 $ $ 401
==============================================================================
<TABLE>
<CAPTION>
June 30, December 31, June 30,
Loans: 2000 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Balance at period end $ 93,461 $ 68,147 $ 32,079
Allowance for loan losses to
Period end loans 1.15% 1.07% 1.25%
Less: Business Manager $ 2,697 $ 1,522 $ 414
Less: Purchased Loans 6,804 7,687 -
------------ ------------ ------------
Adjusted Loan Balance $ 83,960 $ 58,938 $ 31,665
Allowance for loan losses to
Period end adjusted loans 1.28% 1.23% 1.27%
</TABLE>
19
<PAGE>
Table 5.
Cardinal Financial Corporation and Subsidiaries
Capital Components
As of June 30, 2000 and December 31, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000
Total risk based capital to risk weighted assets $ 30,122 29.58% $ 8,101 >= 8.00% $ 10,127 >= 10.00%
Tier I capital to risk weighted assets 29,045 28.52% 4,051 >= 4.00% 6,076 >= 6.00%
Leverage ratio total risk based capital to total
assets 30,122 23.79% 5,043 >= 4.00% 6,304 >= 5.00%
------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1999
Total risk based capital to risk weighted assets $ 31,585 38.75% $ 6,521 >= 8.00% $ 8,151 >= 10.00%
Tier I capital to risk weighted assets 30,858 37.86% 3,261 >= 4.00% 4,891 >= 6.00%
Leverage ratio total risk based capital to total
assets 31,585 32.55% 3,881 >= 4.00% 4,852 >= 5.00%
</TABLE>
20
<PAGE>
Table 6.
Cardinal Financial Corporation and Subsidiaries
Interest Rate Sensitivity Gap Analysis
As of June 30, 2000
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
1-90 91-180 181-365 1-5 Over 5
Days Days Days Years Years TOTAL
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
------------------------------------------------------------------------------------------------------------------------------------
Investment securities available-for-sale
U.S. Government agency securities $ - $ - $ - $ 2,919 $ 433 $ 3,352
Mortgage-backed securities - - - - 1,184 1,184
------------------------------------------------------------------------------------------------------------------------------------
Total investment securities available-for-sale - - - 2,919 1,617 4,536
------------------------------------------------------------------------------------------------------------------------------------
Other investments - - - - 1,028 1,028
------------------------------------------------------------------------------------------------------------------------------------
Federal funds sold 18,800 - - - - 18,800
------------------------------------------------------------------------------------------------------------------------------------
Loans
Commercial -fixed 4,939 1,060 1,648 8,778 3,394 19,819
Commercial - variable 12,241 241 487 19,339 6,861 39,169
Real estate - construction fixed - - - - - -
Real estate - construction variable 2,222 - - - - 2,222
Real estate - residential fixed 13 14 32 1,806 439 2,304
Real estate - residential variable 1,643 49 101 9,454 2,720 13,967
Home equity lines 5,549 492 - - - 6,041
Consumer - fixed 799 89 182 998 2,477 4,545
Consumer - variable 812 111 4 80 4,418 5,425
------------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net of fees 28,218 2,056 2,454 40,455 20,309 93,492
------------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 47,018 2,056 2,454 43,374 22,954 117,856
------------------------------------------------------------------------------------------------------------------------------------
Cumulative Rate Sensitive Assets $ 47,018 $ 49,074 $ 51,528 $ 94,902 $117,856
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
------------------------------------------------------------------------------------------------------------------------------------
Deposits
Demand deposits $ 22,520 $ - $ - $ - $ - $ 22,520
Interest checking 3,760 - - - - 3,760
Statement savings 818 - - - - 818
Money market accounts 12,240 - - - - 12,240
Certificates of deposit - fixed 4,026 3,923 16,929 8,109 - 32,987
Certificates of deposit - no penalty 2 105 7,270 11,437 - 18,814
------------------------------------------------------------------------------------------------------------------------------------
Total Deposits 43,366 4,028 24,199 19,546 - 91,139
------------------------------------------------------------------------------------------------------------------------------------
Borrowings - short term - 2,000 - 4,000 - 6,000
------------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 43,366 6,028 24,199 23,546 - $ 97,139
------------------------------------------------------------------------------------------------------------------------------------
Cumulative Rate Sensitive Liabilities $ 43,366 $ 49,394 $ 73,593 $ 97,139 $ 97,139
------------------------------------------------------------------------------------------------------------------------------------
Gap $ 3,652 $ (3,972) $(21,745) $ 19,828 $ 22,954
Cumulative Gap 3,652 (320) (22,065) (2,237) 20,717
Gap/ Total Assets 2.88% -3.14% -17.17% 15.66% 18.13%
Cumulative Gap/ Total Assets 2.88% -0.25% -17.42% -1.77% 16.36%
Rate Sensitive Assets/ Rate Sensitive Liabilities 1.08x 0.34x 0.10x 1.84x -
Cumulative Rate Sensitive Assets/
Cumulative Rate Sensitive Liabilities 1.08x 1.00x 0.70x 0.98x 1.21x
</TABLE>
21
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders (the "Meeting") of Cardinal
Financial Corporation (the "Company") was held on June 14, 2000.
The Shareholders voted on the election of three individuals to
serve as directors of the Company for a term of three years each
and one individual to serve as a director of the Company for a
term of two years. The results of the voting on these matters are
set forth below.
Election of Directors
<TABLE>
<CAPTION>
For Withheld
Terms of Three Years
--------------------
<S> <C> <C>
Robert M. Barlow 3,313,606 68,850
Anne B. Hazel 3,311,806 70,650
James D. Russo 3,313,606 68,850
Term of Two Years
-----------------
J. Hamilton Lambert 3,308,272 74,184
</TABLE>
No other matters were voted upon at the Meeting or during the
quarter for which this report is filed.
Item 5. Other Information
On April 17, 2000, the Company entered into a definitive
agreement to acquire Heritage Bancorp, Inc. ("Heritage"). Under
the terms of the agreement, the Company will issue a combination
of cash and shares of convertible preferred stock to the
shareholders of Heritage in exchange for all of the outstanding
shares of Heritage's common stock. Heritage's shareholders will
be able to elect to receive $6.00 in cash or 1.2 shares of
convertible preferred stock for each share of Heritage stock,
subject to certain adjustments to permit the Company to issue an
equal amount of cash and convertible preferred stock. The
transaction will be accounted for by Cardinal as a purchase.
Under the purchase method, the assets and liabilities of Heritage
will be recorded on the books of Cardinal at their respective
fair values as of the effective date of the transaction. The
transaction has been approved by the shareholders of both the
Company and Heritage and by the Board of Governors of the Federal
Reserve System. The Company is currently awaiting state approval
of the transaction and expects to complete the transaction in the
third quarter of 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (filed electronically only).
(b) Reports on Form 8-K - none.
22
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CARDINAL FINANCIAL CORPORATION
Date: August 14, 2000 /s/ L. Burwell Gunn, Jr.
-------------------------------------
L. Burwell Gunn, Jr.
President and Chief Executive Officer
Date: August 14, 2000 /s/ Joseph L. Borrelli
-------------------------------------
Joseph L. Borrelli
Chief Financial Officer
