================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 8-K/A
Amendment No. 1
to
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: September 1, 2000
(Date of earliest event reported)
CARDINAL FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Virginia 0-24557 54-1874630
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
10555 Main Street, Suite 500
Fairfax, Virginia 22030
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(703) 934-9200
================================================================================
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On September 1, 2000, Heritage Bancorp, Inc. ("Heritage"), a Virginia
corporation, was merged with and into Cardinal Merger Corp. ("CMC"), a Virginia
corporation and wholly owned subsidiary of Cardinal Financial Corporation (the
"Company"), a Virginia corporation (the "Merger"). The Merger was consummated
pursuant to an Amended and Restated Agreement and Plan of Reorganization, dated
as of June 19, 2000, by and between Heritage, CMC and the Company, as amended by
a First Amendment to Amended and Restated Agreement and Plan of Reorganization,
dated as of August 28, 2000, by and between such parties, and a related Plan of
Merger.
Under the terms of the Merger, each outstanding share of Heritage's
common stock, without par value, was converted into the right to receive, at the
election of the shareholder, $6.00 in cash, 1.2 shares of the Company's 7.25%
Cumulative Convertible Preferred Stock, Series A, par value $1.00 per share (the
"Series A Preferred Stock"), or a combination thereof, and cash in lieu of
fractional shares. Each such election was subject to certain adjustments to
permit the Company to issue in the aggregate an equal amount of cash and Series
A Preferred Stock. There were 2,352,729 shares of Heritage Common Stock
outstanding immediately prior to the consummation of the Merger.
In connection with the Merger, The Heritage Bank, the former subsidiary
of Heritage, became a wholly owned subsidiary of CMC. In addition, three of the
former directors of Heritage became directors of the Company.
For a more detailed description of the Merger, see the Joint Proxy
Statement/Prospectus that is a part of Amendment No. 1 to the Registration
Statement on Form S-4, Registration No. 333-38380, filed by the Company with the
Securities and Exchange Commission on June 20, 2000, under the Securities Act of
1933, as amended, which is incorporated herein by reference.
2
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Businesses Acquired.
HERITAGE BANCORP, INC.
AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report
Consolidated Financial Statements
Statements of Condition as of December 31, 1999 and 1998
Statements of Operations for the years ended December 31, 1999, 1998 and 1997
Statements of Changes in Stockholders' Equity for the years ended December 31,
1999, 1998 and 1997
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Consolidated Interim Financial Statements
Balance Sheets as of June 30, 2000 and December 31, 1999
Statements of Income for the six months ended June 30, 2000 and 1999
Statements of Stockholders' Equity for the six months ended June 30, 2000
Statements of Cash Flows for the six months ended June 30, 2000 and 1999
Notes to Consolidated Interim Financial Statements
3
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Heritage Bancorp, Inc. and Subsidiary
McLean, Virginia
We have audited the accompanying consolidated statements of condition of
Heritage Bancorp, Inc. and Subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the three years then ended. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Heritage
Bancorp, Inc. and Subsidiary as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the three years then ended, in
conformity with generally accepted accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
February 4, 2000
4
<PAGE>
HERITAGE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Cash and due from banks $ 2,667,443 $ 5,824,649
Federal funds sold -- 8,550,000
------------ ------------
Total cash and cash equivalents $ 2,667,443 $ 14,374,649
Securities available for sale, at approximate market value 24,054,515 19,823,754
Loans, net of allowance for loan losses of $420,940 in 1999
and $429,059 in 1998 31,268,232 29,181,039
Premises and equipment, net 848,995 376,453
Accrued interest receivable 535,571 459,340
Other real estate owned -- 263,199
Other assets 564,657 297,160
------------ ------------
Total assets $ 59,939,413 $ 64,775,594
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 13,707,792 $ 17,385,307
Interest-bearing deposits 34,284,891 36,056,672
------------ ------------
Total deposits $ 47,992,683 $ 53,441,979
Accrued interest and other liabilities 347,527 119,170
Securities sold under agreement to repurchase 3,001,225 2,286,781
Commitments and contingent liabilities -- --
------------ ------------
Total liabilities $ 51,341,435 $ 55,847,930
============ ============
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized 10,000,000
shares; issued and outstanding 2,294,617 shares $ 2,294,617 $ 2,294,617
Capital surplus 6,529,539 6,529,539
Retained earnings 210,534 28,549
Accumulated other comprehensive income (loss) (436,712) 74,959
------------ ------------
Total stockholders' equity $ 8,597,978 $ 8,927,664
------------ ------------
Total liabilities and stockholders' equity $ 59,939,413 $ 64,775,594
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
HERITAGE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 2,689,853 $ 2,386,091 $ 2,285,986
Securities 1,413,942 1,117,858 816,256
Federal funds sold 277,106 262,053 154,066
----------- ----------- -----------
Total interest income $ 4,380,901 $ 3,766,002 $ 3,256,308
----------- ----------- -----------
INTEREST EXPENSE
Deposits $ 1,342,470 $ 1,233,550 $ 1,103,974
Securities sold under agreement to repurchase 96,794 38,859 6,797
----------- ----------- -----------
Total interest expense $ 1,439,264 $ 1,272,409 $ 1,110,771
----------- ----------- -----------
Net interest income $ 2,941,637 $ 2,493,593 $ 2,145,537
Provision for loan losses -- 117,000 3,825
----------- ----------- -----------
Net interest income after
provision for loan losses $ 2,941,637 $ 2,376,593 $ 2,141,712
----------- ----------- -----------
OTHER INCOME
Service charges on deposit accounts $ 116,343 $ 122,684 $ 112,039
Other operating income, net 47,835 15,477 21,233
Gain (loss) on sale of securities 1,468 (781) 47,261
Gain on sale of other real estate 56,611 -- --
----------- ----------- -----------
Total other income $ 222,257 $ 137,380 $ 180,533
----------- ----------- -----------
OTHER EXPENSES
Salaries and employee benefits $ 1,472,136 $ 1,074,228 $ 953,246
Occupancy expense 328,105 204,669 215,204
Equipment expense 146,172 73,667 88,275
Other operating expenses 942,821 1,068,643 579,961
----------- ----------- -----------
Total other expenses $ 2,889,234 $ 2,421,207 $ 1,836,686
----------- ----------- -----------
Income before income taxes $ 274,660 $ 92,766 $ 485,559
Income tax expense (benefit) 92,675 (40,639) (85,297)
----------- ----------- -----------
Net income $ 181,985 $ 133,405 $ 570,856
=========== =========== ===========
EARNINGS PER SHARE, BASIC $ 0.08 $ 0.07 $ 0.45
=========== =========== ===========
EARNINGS PER SHARE, ASSUMING DILUTION $ 0.08 $ 0.07 $ 0.44
=========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
6
<PAGE>
HERITAGE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON CAPITAL RETAINED COMPREHENSIVE COMPREHENSIVE
STOCK SURPLUS EARNINGS INCOME (LOSS) INCOME (LOSS) TOTAL
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 1,249,634 $ 2,967,448 $ (675,712) $ 1,464 $ 3,542,834
Net income -- -- 570,856 -- $ 570,856 570,856
Other comprehensive income,
net of tax:
Unrealized holding gains on
securities available for sale
arising during period,
net of tax of $25,401 -- -- -- -- $ 47,845 --
Less reclassification adjustment,
net of tax of $16,068 -- -- -- -- (31,192) --
-----------
Other comprehensive income -- -- -- 16,653 $ 16,653 16,653
-----------
Comprehensive income -- -- -- -- $ 587,509 --
-----------
Warrants exercised 240,002 360,003 -- -- 600,005
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 $ 1,489,636 $ 3,327,451 $ (104,856) $ 18,117 $ 4,730,348
Net income -- -- 133,405 -- $ 133,405 133,405
-----------
Other comprehensive income,
net of tax:
Unrealized holding gains on
securities available for sale
arising during period,
net of tax of $29,016 -- -- -- -- $ 56,327 --
Add reclassification adjustment,
net of tax of $266 -- -- -- -- 515 --
-----------
Other comprehensive income -- -- -- 56,842 $ 56,842 56,842
-----------
Comprehensive income -- -- -- -- $ 190,247 --
-----------
Stock options exercised 2,700 7,120 -- -- 9,820
Repurchase of stock in odd lot tender (2,719) (12,236) -- -- (14,955)
Issuance of common stock 805,000 3,207,204 -- -- 4,012,204
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 $ 2,294,617 $ 6,529,539 $ 28,549 $ 74,959 $ 8,927,664
Net income -- -- 181,985 -- $ 181,985 181,985
-----------
Other comprehensive income,
net of tax:
Unrealized holding losses on
securities available for sale
arising during period,
net of tax of $263,089 -- -- -- -- $ (510,702) --
Less reclassification adjustment,
net of tax of $499 -- -- -- -- (969) --
-----------
Other comprehensive income (loss) -- -- -- (511,671) $ (511,671) (511,671)
-----------
Comprehensive income (loss) -- -- -- -- $ (329,686) --
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 $ 2,294,617 $ 6,529,539 $ 210,534 $ (436,712) $ 8,597,978
----------- ----------- ----------- ----------- -----------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
7
<PAGE>
HERITAGE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 181,985 $ 133,405 $ 570,856
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses -- 117,000 3,825
(Gain) loss on sale of securities (1,486) 781 (47,261)
(Gain) on sale of fixed assets (200) -- --
(Gain) on sale of other real estate (56,611) -- --
Depreciation and amortization 81,460 50,958 67,733
Deferred tax (benefit) expense 72,362 (45,239) (85,297)
Amortization of investment security premiums,
net of discounts 22,442 37,438 13,845
(Increase) decrease in accrued interest and other assets (152,502) (319,486) 64,677
Increase (decrease) in accrued interest and other liabilities 228,357 5,412 (30,169)
------------ ------------ ------------
Net cash provided by (used in) operating activities $ 375,807 $ (19,731) $ 558,209
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and calls of securities available for sale $ 9,250,000 $ 9,195,000 $ 1,800,000
Purchase of securities available for sale (14,923,462) (17,676,403) (9,236,816)
Maturities of securities held to maturity -- 250,000 250,000
Proceeds from sale of securities available for sale 646,486 499,219 8,984,402
Net (increase) decrease in loans (2,087,193) (6,543,481) 1,825,409
Purchase of premises and equipment (554,002) (48,472) (90,920)
Proceeds from sale of equipment 200 -- --
Proceeds from sale of other real estate owned 319,810 -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities $ (7,348,161) $(14,324,137) $ 3,532,075
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in demand deposits, NOW accounts
and savings deposits $ (3,677,515) $ 8,639,394 $ 550,791
Increase (decrease) in certificates of deposit (1,771,781) 4,198,750 (2,333,488)
Proceeds from stock warrants exercised -- -- 600,005
Proceeds from sale of common stock -- 4,022,024 --
Repurchase of common stock -- (14,955) --
Increase in securities sold under agreement to repurchase 714,444 2,286,781 --
------------ ------------ ------------
Net cash provided by (used in) financing activities $ (4,734,852) $ 19,131,994 $ (1,182,692)
------------ ------------ ------------
Net change in cash and cash equivalents $(11,707,206) $ 4,788,126 $ 2,907,592
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 14,374,649 9,586,523 6,678,931
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,667,443 $ 14,374,649 $ 9,586,523
============ ============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
8
<PAGE>
HERITAGE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 1,437,740 $ 1,269,516 $ 1,113,620
=========== ============ ===========
Income taxes $ 40,500 $ -- $ 9,187
=========== ============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES,
unrealized gain (loss) on securities available for sale $ (775,258) $ 86,124 $ 25,986
=========== ============ ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
9
<PAGE>
HERITAGE BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Heritage Bancorp, Inc. (Company) is a bank holding company organized
under Virginia law in July, 1998. During 1998, the Company acquired
The Heritage Bank through a share exchange in which the stockholders
of The Heritage Bank received one share of the Company for each share
of The Heritage Bank. The exchange was a tax-free transaction for
federal income tax purposes. The merger was accounted for on the same
basis as a pooling-of-interests. Financial statements for the prior
years, have been retroactively adjusted for the exchange as if it
occurred on January 1, 1997.
The Company's wholly-owned subsidiary, The Heritage Bank (Bank) was
incorporated under Virginia law in 1987. It operated as a wholly-owned
subsidiary of Heritage Bankshares, Inc. until September 1, 1992, when
it became independent. The Bank is a state chartered member of the
Federal Reserve System with deposits insured by the Federal Deposit
Insurance Corporation (FDIC) and is headquartered in McLean, Virginia.
During 1999, the Bank opened its first branch office in Sterling,
Virginia.
BUSINESS
Heritage Bancorp, Inc. is a bank holding company that provides a
variety of banking services to individuals and businesses. Its primary
deposit products are demand and savings deposits and certificates of
deposit. Its primary lending products are commercial business and real
estate mortgage loans. The loans are expected to be repaid from cash
flow or proceeds from the sale of selected assets of the borrowers.
PRINCIPLES OF CONSOLIDATION
The accounting and reporting policies of Heritage Bancorp, Inc. and
subsidiary conform to generally accepted accounting principles and
general practices within the banking industry. The following is a
description of the more significant of those policies:
SECURITIES
Debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity"
and recorded at amortized cost. Securities not classified as held
to maturity, including equity securities with readily
determinable fair values, are classified as "available for sale"
and recorded at fair value, with unrealized gains and losses
excluded from earnings and reported in other comprehensive
income.
Purchased premiums and discounts are recognized in interest
income using the interest method over the terms of the
securities. Declines in the fair value of held to maturity and
available for sale securities below their cost that are deemed to
be other than temporary are reflected in earnings as realized
losses. Gains and losses on the sale of securities are recorded
on the trade date and are determined using the specific
identification method.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
LOANS
The Company grants mortgage, commercial and consumer loans to
customers. A substantial portion of the loan portfolio is
represented by residential and commercial real estate loans. The
ability of the Company's debtors to honor their contracts is
dependent upon the real estate and general economic conditions of
the Company's market area.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are
reported at their outstanding unpaid principal balances adjusted
for the allowance for loan losses and any deferred fees or costs
on originated loans. Interest income is accrued on the unpaid
principal balance. Loan origination fees, net of certain
origination costs, are deferred and recognized as an adjustment
of the related loan yield using the interest method.
The accrual of interest on mortgage and commercial loans is
discontinued at the time the loan is 90 days delinquent unless
the credit is well-secured and in process of collection.
Installment loans are typically charged off no later than 180
days past due. In all cases, loans are placed on nonaccrual or
charged-off at an earlier date if collection of principal or
interest is considered doubtful.
All interest accrued but not collected for loans that are placed
on nonaccrual or charged-off is reversed against interest income.
The interest on these loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all principal and
interest amounts contracturally due are brought current and
future payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are
estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan
balance is confirmed. Subsequent recoveries, if any, are credited
to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience,
the nature and volume of the loan portfolio, adverse situations
that may affect the borrower's ability to repay, estimated value
of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information
becomes available.
A loan is considered impaired when, based on current information
and events, it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due
according to the contractural terms of the loan agreement.
Factors considered by management in determining impairment
include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment
shortfalls
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including
the length of the delay, the reasons for the delay, the
borrower's prior payment record, and the amount of the shortfall
in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction
loans by either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if
the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment. Accordingly, the Company
does not separately identify individual consumer and residential
loans for impairment disclosures.
BANK PREMISES AND EQUIPMENT
Land is carried at cost. Buildings and equipment are carried at
cost, less accumulated depreciation computed on the straight-line
method over the estimated useful lives of the assets.
INCOME TAXES
Deferred income tax assets and liabilities are determined using
the balance sheet method. Under this method, the net deferred tax
asset or liability is determined based on the tax effects of the
temporary differences between the book and tax bases of the
various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.
EARNINGS PER SHARE
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share
reflects additional common shares that would have been
outstanding if dilutive potential common shares had been issued,
as well as any adjustment to income that would result from the
assumed issuance. Potential common shares that may be issued by
the Company relate solely to outstanding stock options, and are
determined using the treasury method.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents
include cash and balances due from banks and federal funds sold.
OTHER REAL ESTATE
Assets acquired through, or in lieu of, loan foreclosure are held
for sale and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to
foreclosure, valuations are periodically performed by management
and the assets are carried at the lower of carrying amount or
fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in
net expenses from foreclosed assets.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
USE OF ESTIMATES
In preparing consolidated financial statements in conformity with
generally accepted accounting principles, management is required
to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the balance
sheet and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible
to significant change in the near term relate to the
determination of the allowance for loan losses, and the valuation
of foreclosed real estate and deferred tax assets.
ADVERTISING
The Company follows the policy of charging the costs of
advertising to expense as incurred. The amount of advertising
included in expense for December 31, 1999, 1998 and 1997 was
$37,231, $31,482 and $20,394, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which is required
to be adopted in years beginning after June 15, 2000. The
statement permits early adoption as of the beginning of any
fiscal quarter after its issuance. This Statement establishes
accounting and reporting standards for derivative instruments and
hedging activities, including certain derivative instruments
embedded in other contracts, and requires that an entity
recognize all derivatives as assets or liabilities in the balance
sheet and measure them at fair value. Because the Company does
not use these derivative instruments and strategies, management
does not expect the adoption of this Statement to have any effect
on earnings or financial position.
NOTE 2. CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances with the Federal
Reserve Bank. For the final weekly reporting period in the years ended
December 31, 1999 and 1998, the aggregate amounts of daily average
required balances were approximately $469,000 and $391,000,
respectively.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 3. SECURITIES
The amortized cost, with gross unrealized gains and losses, follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Securities Available for Sale
U.S. Government agencies $22,916,301 $ -- $ (643,120) $22,273,181
Obligations of states and
political subdivisions 1,009,856 -- (3,378) 1,006,478
Corporate 525,343 -- (15,187) 510,156
Other 264,700 -- -- 264,700
----------- ----- ----------- -----------
Total $24,716,200 $ -- $ (661,685) $24,054,515
=========== ===== =========== ===========
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Securities Available for Sale
U.S. Treasury securities $ 3,021,530 $ 29,721 $ -- $ 3,051,251
U.S. Government agencies 14,769,231 57,082 (2,344) 14,823,969
Obligations of states and
political subdivisions 1,654,720 29,114 -- 1,683,834
Corporate
Other 264,700 -- -- 264,700
----------- ----------- ----------- -----------
Total $19,710,181 $ 115,917 $ (2,344) $19,823,754
=========== =========== =========== ===========
</TABLE>
The amortized cost and fair value of securities by contractural
maturity follows:
<TABLE>
<CAPTION>
1999
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less $ 510,000 $ 508,477
Due from one year to five years 22,565,980 21,961,130
Due from five years to ten years 1,000,000 944,688
Due after ten years 375,520 375,520
Federal Reserve stock 264,700 264,700
----------- -----------
Total $24,716,200 $24,054,515
=========== ===========
</TABLE>
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
Proceeds from sale of securities available for sale during 1999, 1998
and 1997 were $646,486 $449,219 and $8,984,402. Gross gains on those
sales during 1999, 1998 and 1997 were $1,468, $0 and $47,261. Gross
losses on those sales were $0, $781 and $0 during 1999, 1998 and 1997,
respectively.
Securities having a book value of approximately $5,496,544 and
$3,792,558 at December 31, 1999 and 1998, were pledged to secure
public deposits, letters of credit, and customer repurchase
agreements.
NOTE 4. LOANS
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Real estate:
Residential $ 10,475 $ 11,168
Commercial 13,088 11,791
Farmland 972 992
Construction 1,157 441
Commercial 3,665 3,279
Consumer 1,507 1,306
All other loans 825 633
-------- --------
$ 31,689 $ 29,610
Less: allowance for loan losses (421) (429)
-------- --------
Loans, net $ 31,268 $ 29,181
======== ========
</TABLE>
Analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 429 $ 634 $ 617
Provision for loan losses -- 117 4
Loans charged-off (20) (339) (61)
Recoveries 12 17 74
----- ----- -----
Balance at end of year $ 421 $ 429 $ 634
===== ===== =====
</TABLE>
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
Information about impaired loans is as follows:
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Impaired loans for which an allowance
has been provided $ -- $ 29,370
Impaired loans for which no allowance
has been provided -- --
------- --------
Total impaired loans $ -- $ 29,370
------- --------
Allowance provided for impaired loans,
included in the allowance for loan
losses $ -- $ 11,405
------- --------
<CAPTION>
1999 1998 1997
------- --------- ---------
<S> <C> <C> <C>
Average balance in impaired loans $ 2,719 $ 176,334 $ 378,901
------- --------- ---------
Interest income recognized $ 524 $ 23,605 $ 26,858
------- --------- ---------
</TABLE>
There were no nonaccrual loans excluded from impaired loan disclosure
at December 31, 1999. Nonaccrual loans excluded from impaired loan
disclosure under FASB 114 amounted to $365,670 at December 31, 1998.
If interest on these loans had been accrued, such income would have
approximated $26,836.
NOTE 5. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has granted loans to
principal officers and directors and their affiliates amounting to
$306,496 at December 31, 1999 and $279,384 at December 31, 1998.
During the year ended December 31, 1999, total principal additions
were $150,500 and total principal payments were $123,388.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 6. PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of premises and
equipment follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Land $ 245,000 $ 245,000
Land improvements 41,964 31,885
Leasehold improvements 242,997 147,647
Equipment, furniture and fixtures 459,268 354,200
--------- ---------
$ 989,229 $ 778,732
Less accumulated depreciation
and amortization (140,234) (402,279)
--------- ---------
$ 848,995 $ 376,453
========= =========
</TABLE>
Depreciation and amortization charged to operations totaled $81,460,
$50,958 and $67,733 in 1999, 1998 and 1997, respectively.
NOTE 7. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase, which are classified
as secured borrowings, generally mature within one to four days from
the transaction date. Securities sold under agreements to repurchase
are reflected at the amount of cash received in connection with the
transaction. The Company may be required to provide additional
collateral based on the fair value of the underlying securities.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 8. INCOME TAXES
The components of the net deferred tax assets, included in other
assets, are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ -- $ 47,105
Alternative minimum tax credits -- 6,652
Unrealized loss on securities available for sale 224,973 --
Accumulated depreciation 24,794 28,160
Allowance for loan losses 32,448 32,448
Organization costs 15,286 19,362
Other -- 11,163
-------- --------
Gross deferred tax asset $297,501 $144,890
======== ========
DEFERRED TAX LIABILITIES, unrealized gain
on securities available for sale $ -- $ 38,615
-------- --------
Net deferred tax assets $297,501 $106,275
-------- --------
</TABLE>
Allocation of federal income taxes between current and deferred
portions is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Current $ 165,498 $ 4,600 $ --
Deferred (72,823) 40,058 161,717
Change in valuation allowance -- (85,297) (247,014)
--------- --------- ---------
$ 92,675 $ (40,639) $ (85,297)
========= ========= =========
</TABLE>
The reasons for the difference between the statutory federal income
tax rate and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Tax expense at statutory rate $ 93,384 $ 31,540 $ 165,090
Change in valuation allowance -- (85,297) (247,014)
Other, net (709) 13,118 (3,373)
--------- --------- ---------
$ 92,675 $ (40,639) $ (85,297)
========= ========= =========
</TABLE>
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 9. DEPOSITS
The aggregate amount of time deposits, in denominations of $100,000 or
more at December 31, 1999 and 1998 was $4,738,768 and $6,339,277,
respectively.
At December 31, 1999, the scheduled maturities of time deposits are as
follows:
2000 $ 9,095,970
2001 4,932,561
2002 1,368,049
------------
$ 15,396,580
============
NOTE 10. OTHER OPERATING EXPENSES
The components of other operating expenses consisted of the following
for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Data processing $ 126,762 $ 99,589 $ 78,702
Professional fees 175,555 374,229 115,024
Stationary and supplies 85,693 70,172 61,957
Postage 38,461 33,235 36,899
Stockholder expense 49,329 77,524 18,116
Bank franchise tax 59,556 27,597 27,366
Business development 84,533 31,482 20,794
Other (includes no items in excess of
1% of total revenue) 322,932 354,815 221,103
---------- ---------- ----------
$ 942,821 $1,068,643 $ 579,961
========== ========== ==========
</TABLE>
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 11. EARNINGS PER SHARE
The following shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number
of shares of diluted potential common stock. Potential dilutive common
stock had no effect on income available to common stockholders.
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- -----------------------------
PER SHARE PER SHARE PER SHARE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------------ --------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings
per share 2,294,617 $ 0.08 1,890,666 $ 0.07 1,271,176 $ 0.45
============ ============ =============
Effect of dilutive
securities:
Stock options 6,931 5,585 1,307
Warrants -- -- 22,726
Diluted earnings
per share 2,301,548 $ 0.08 1,896,251 $ 0.07 1,295,209 $ 0.44
============ ============ =============
</TABLE>
NOTE 12. COMMITMENTS AND CONTINGENCIES
The Company leases its main office and operations center in McLean and
its branch office in Sterling. The McLean lease contains three, five
year renewal periods and expires in 2008. The Sterling lease has a
term of ten years with one five year renewal option. The Sterling
lease expires in 2009. Total rent expense was $310,910, $191,272 and
$194,945 for 1999, 1998 and 1997, respectively, and was included in
occupancy expense.
The following is a schedule, by year, of future minimum lease payments
required under the long-term noncancelable lease agreements.
2000 $ 336,892
2001 350,194
2002 364,325
2003 374,705
2004 385,959
Due thereafter 1,355,997
----------
$3,168,072
==========
The Company entered into a long-term lease for its Tyson's branch on
March 16, 2000, which is subject to regulatory approval. The lease
expires March 31, 2006 and has annual base rent of $111,078 with 3%
yearly increases.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
In the normal course of business there are outstanding various
commitments and contingent liabilities, which are not reflected in the
accompanying consolidated financial statements. Management does not
anticipate any material losses as a result of these transactions.
See Note 15 with respect to financial instruments with
off-balance-sheet risk.
NOTE 13. STOCK-BASED COMPENSATION
In 1998, the stockholders approved an employee incentive stock option
plan. The option price for shares granted under this plan shall be
determined by a Committee of the Company's Board of Directors, but in
no event shall the option price be less than the fair market value of
the Company's stock at the time of grant. The term of each option
granted under the plan is ten years, unless the optionee has been
discharged from his or her employment by the Company for cause in
which case the option must be exercised no later than six months
following the date of discharge. The maximum aggregate number of
shares which may be optioned and sold under the plan is 75,000 shares.
As of December 31, 1999, 29,480 options were outstanding under this
plan.
In 1992, the Company adopted a nonqualified stock option plan which
full-time employees and part-time employees working at least 25 hours
per week were eligible to receive options to acquire Common Stock.
Options expire ten years after the date of grant. There are 18,125
options outstanding under this plan as of December 31, 1999.
Grants under the above plans are accounted for following APB Opinion
No. 25 and related interpretations. Accordingly, no compensation cost
has been recognized for grants under the stock option plans. No
employee stock options were granted during 1997 and 1996. Had
compensation cost for the employee stock-based compensation plan been
determined based on the grant date fair values of awards (the method
described in FASB Statement No. 123), reported net income and earnings
per common share would have been reduced to the pro forma amounts
shown below for 1999:
<TABLE>
<S> <C>
Net income:
As reported $ 181,985
Pro forma $ 139,600
Basic earnings per share:
As reported $ .08
Pro forma $ .06
Diluted earnings per share:
As reported $ .08
Pro forma $ .06
</TABLE>
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model. The following weighted average
assumptions for grants in 1999 were used: price volatility of 20.9%;
risk-free interest rate of 6.5%; dividend rate of 0.00% and expected
life of 10 years.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
The status of the Option Plans during 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1 29,550 $ 3.45 27,375 $ 3.43 30,675 $ 3.51
Granted 24,500 3.97 8,925 3.875 -- --
Exercised -- -- (2,700) 3.64 -- --
Canceled (6,445) 3.96 (4,050) 4.13 (3,300) 4.20
------ ------ ------
Outstanding at
December 31 47,605 $ 3.65 29,550 $ 3.45 27,375 $ 3.43
------ ------ ------
Exercisable at
end of year 47,605 29,550 27,375
====== ====== ======
Weighted-average
fair value per
option of options
granted during
the year $ 2 $ 2 $ --
====== ====== =====
</TABLE>
The Status of the options outstanding at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE
EXERCISE AND CONTRACTUAL EXERCISE
PRICE EXERCISABLE LIFE PRICE
------------- ----------- ----------- --------
<S> <C> <C> <C>
$3.10 - $3.15 18,125 0.75 years 3.14
$3.875 12,480 9.35 3.875
$4.00 16,000 9.75 4.00
$4.25 1,000 9.75 4.25
------
47,605 6.22 3.65
======
</TABLE>
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 14. DIRECTOR COMPENSATION PLAN
In 1998, the stockholders approved a stock option plan for outside
directors of the Company. The option price for shares to be issued
upon exercise of any option granted under this plan shall be
determined by a Committee of the Company's Board of Directors, but in
no event shall the option price be less than the fair market value of
the Company's stock at the time of grant. The term of each option
granted under this plan shall be ten years from the date of grant. If
a director resigns or is removed from the Board, all of the Director's
stock options must be exercised within sixty days of his or her
departure from the Board. The maximum aggregate number of shares which
may be optioned and sold under the plan is 75,000 shares. As of
December 31, 1999, 28,500 options were outstanding under this plan.
On March 26, 1997, the Board of Directors granted stock options to
those members serving on the Bank's Board of Directors, who were not
employees or officers of the Bank, to acquire common stock at an
exercise price of $2.86. The options expire ten years after the grant
date, unless the Director ceases to be a member of the Bank's Board of
Directors, in which case the options expire sixty days following such
date. As of December 31, 1999, there were 10,000 options outstanding.
The status of the Option Plan during 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ------------------------ -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 26,000 $ 3.48 10,000 $ 2.86 -- $ --
Granted 14,000 4.00 16,000 3.875 10,000 2.86
Forfeited (1,500) 3.875 -- -- -- --
------ ------ ------
Outstanding at December 31 38,500 $ 3.66 26,000 $ 3.48 10,000 $ 2.86
====== ====== ======
</TABLE>
The status of the options outstanding as of December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED NUMBER
AVERAGE OUTSTANDING REMAINING
EXERCISE AND CONTRACTUAL
PRICE EXERCISABLE LIFE
------- ----------- ---------
<S> <C> <C>
$ 2.860 10,000 7.25 years
3.875 14,500 8.75
4.000 14,000 10
------
$ 3.660 38,500 8.81
======
</TABLE>
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is party to credit related 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. Such
commitments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the
consolidated balance sheets.
The Company's exposure to credit loss is represented by the
contractural amount of these commitments. The Company uses the same
credit policies in making commitments as it does for on-balance-sheet
instruments.
At December 31, 1999 and 1998, the following financial instruments
were outstanding whose contract amounts represent credit risk:
<TABLE>
<CAPTION>
1999 1998
---------------- --------------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 10,594,692 $ 8,708,866
Standby letters of credit $ 92,333 $ 181,900
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates 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. The Company evaluates each customer's credit worthiness
on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property and
equipment, and income-producing commercial properties.
Unfunded commitments under commercial lines of credit, revolving
credit lines and overdraft protection agreements are commitments for
possible future extensions of credit to existing customers. These
lines of credit may be uncollateralized and usually do not contain a
specified maturity date and may not be drawn upon to the total extent
to which the Company is committed.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing,
and similar transactions. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan
facilities to customers. The Company holds cash and marketable
securities supporting those commitments for which collateral is deemed
necessary.
The Company maintains several cash accounts in other commercial banks.
The amount on deposit with correspondent institutions at December 31,
1999, exceeded the insurance limits of the Federal Deposit Insurance
Corporation by $490,963.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 16. RESTRICTIONS ON TRANSFERS TO PARENT
Federal and state banking regulations place certain restrictions on
dividends paid and loans or advances made by the Bank to the Company.
The total amount of dividends, which may be paid at any date is
generally limited to the retained earnings of the Bank, and loans or
advances are limited to 10 percent of the Bank's capital stock and
surplus on a secured basis. As of December 31, 1999, the aggregate
amount of unrestricted funds, which could be transferred from the
banking subsidiary to the Parent Company without prior regulatory
approval totaled $1,025,519 or 11.93% of the consolidated net assets.
NOTE 17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
SECURITIES
For securities held for investment purposes, fair values are
based on quoted market prices or dealer quotes.
LOAN RECEIVABLES
For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on
carrying values. Fair values for certain mortgage loans (e.g.,
one-to-four family residential), and other consumer loans are
based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for
differences in loan characteristics. Fair values for other loans
(e.g., commercial real estate and investment property mortgage
loans, commercial and industrial 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. Fair values for non-performing loans are
estimated using discounted cash flow analyses or underlying
collateral values, where applicable.
DEPOSITS
The fair values disclosed for demand deposits (e.g., interest and
non-interest checking, statement savings, and certain types of
money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying
amounts). The carrying amounts of variable-rate, fixed-term money
market accounts and certificates of deposit approximate their
fair values at the reporting date. Fair values for fixed-rate
certificates of deposit 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.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
ACCRUED INTEREST
The carrying amounts of accrued interest approximate fair value.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit were evaluated and fair value was
estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the
counterparties. The fair value of standby letters of credit is
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting date. The
carrying amount of treasury, tax and loan deposits approximates
the fair value.
The carrying amounts and fair values of financial instruments as
of December 31, 1999 are presented below:
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 2,667 $ 2,667 $ 5,825 $ 5,825
Federal funds sold and securities
purchased under agreement to resell -- -- 8,550 8,550
Securities 24,055 24,055 19,824 19,824
Loans, net 31,268 31,113 29,181 29,539
Accrued interest receivable 536 536 459 459
Financial liabilities:
Deposits $47,993 $47,918 $53,442 $53,684
Securities sold under agreement
to repurchase 3,001 3,001 2,287 2,287
Accrued interest payable 53 53 55 55
</TABLE>
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 18. CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the Bank are subject to
various regulatory capital requirements administered by the Federal
banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct
material effect on the Company's and Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Prompt corrective action provisions are not applicable to bank holding
companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined)
and of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1999 and 1998, that the
Company and the Bank met all capital adequacy requirements to which
they are subject.
As of December 31, 1999, the most recent notification from the Federal
Reserve Bank categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized
as well capitalized, an institution must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth
in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
The Company and Subsidiary's actual capital amounts and ratios are
also presented in the table. No amount was deducted from capital for
interest-rate risk.
<TABLE>
<CAPTION>
MINIMUM
TO BE WELL
CAPITALIZED UNDER
MINIMUM CAPITAL PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
------ ----------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(Amount in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 9,456 24.5% greater than greater than N/A
or equal to $ 3,088 or equal to 8.0%
The Heritage Bank $ 9,456 24.5% greater than greater than greater than greater than
or equal to $ 3,088 or equal to 8.0% or equal to $ 3,860 or equal to 10.0%
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $ 9,035 23.4% greater than greater than N/A
or equal to $ 1,544 or equal to 4.0%
The Heritage Bank $ 9,035 23.4% greater than greater than greater than greater than
or equal to $ 1,544 or equal to 4.0% or equal to $ 2,316 or equal to 6.0%
Tier 1 Capital (to
Average Assets)
Consolidated $ 9,035 14.7% greater than greater than N/A
or equal to $ 2,453 or equal to 4.0%
The Heritage Bank $ 9,035 14.7% greater than greater than greater than greater than
or equal to $ 2,453 or equal to 4.0% or equal to $ 3,066 or equal to 5.0%
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 9,282 25.7% greater than greater than N/A
or equal to $ 2,886 or equal to 8.0%
The Heritage Bank $ 9,282 25.7% greater than greater than greater than greater than
or equal to $ 2,886 or equal to 8.0% or equal to $ 3,607 or equal to 10.0%
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $ 8,853 24.5% greater than greater than N/A
or equal to $ 1,443 or equal to 4.0%
The Heritage Bank $ 8,853 24.5% greater than greater than greater than greater than
or equal to $ 1,443 or equal to 4.0% or equal to $ 2,164 or equal to 6.0%
Tier 1 Capital (to
Average Assets)
Consolidated $ 8,853 17.2% greater than greater than N/A
or equal to $ 2,060 or equal to 4.0%
The Heritage Bank $ 8,853 17.2% greater than greater than greater than greater than
or equal to $ 2,060 or equal to 4.0% or equal to $ 2,575 or equal to 5.0%
</TABLE>
NOTE 19. COMMON STOCK
On May 18, 1998, the Company completed a secondary stock offering in
which it sold 805,000 shares of common stock at a price of $5.50 per
share. Net proceeds for the Company were $4,012,204 after deducting
underwriting commissions of $309,925 and direct offering costs of
$105,371. On June 8, 1998, the Company used part of the new capital to
complete an odd-lot tender offer, purchasing 2,719 shares at $5.50 per
share for a total cost of $14,955.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE 20. PARENT COMPANY ONLY FINANCIAL STATEMENTS
HERITAGE BANCORP, INC.
(Parent Company Only)
BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
ASSETS
<S> <C> <C>
Investment in subsidiary, at cost, plus
equity in undistributed net income $ 8,737,251 $ 9,017,608
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES, due to subsidiary $ 139,273 $ 89,944
----------- -----------
STOCKHOLDERS' EQUITY
Common stock $ 2,294,617 $ 2,294,617
Surplus 6,529,539 6,529,539
Retained earnings 210,534 28,549
Accumulated other comprehensive income (436,712) 74,959
----------- -----------
Total stockholders' equity $ 8,597,978 $ 8,927,664
----------- -----------
Total liabilities and stockholders' equity $ 8,737,251 $ 9,017,608
=========== ===========
</TABLE>
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
HERITAGE BANCORP, INC.
(Parent Company Only)
STATEMENTS OF INCOME
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
INCOME
Equity in undistributed net income of subsidiary $231,314 $223,349
-------- --------
EXPENSES
Organization costs $ -- $ 89,944
Stockholder expense 49,329 --
-------- --------
Total expenses $ 49,329 $ 89,944
-------- --------
Net income $181,985 $133,405
======== ========
</TABLE>
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 181,985 $ 133,405
Adjustments to reconcile net income to
net cash provided by operating activities,
increase in due to subsidiary 49,329 89,944
Undistributed earnings of subsidiary (181,985) (223,349)
--------- ---------
Net cash provided by operating activities $ 49,329 $ --
CASH AND CASH EQUIVALENTS, beginning of year -- --
--------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 49,329 $ --
========= =========
</TABLE>
30
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 30, December 31,
ASSETS: 2000 1999
------------ ------------
<S> <C> <C>
Cash and due from banks $ 3,362 $ 2,667
Securities available for sale (at market value) 23,688 24,054
Loans, net 36,901 31,268
Premises and equipment 912 849
Other assets 1,213 1,101
------------ ------------
Total assets $ 66,076 $ 59,939
============ ============
LIABILITIES:
Deposits
Non-interest bearing $ 13,736 $ 13,708
Interest-bearing 37,248 34,285
------------ ------------
Total deposits 50,984 47,993
Short-term debt 6,309 3,001
Other liabilities 315 347
------------ ------------
Total liabilities 57,608 51,341
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock; $1 par value per share;
authorized 10,000,000 shares; issued and
outstanding 2,294,617 shares 2,295 2,295
Surplus 6,530 6,530
Undivided profits 146 210
Accumulated other comprehensive
income (loss), net (503) (437)
------------ ------------
Total stockholders' equity 8,468 8,598
------------ ------------
Total liabilities and
stockholders' equity $ 66,076 $ 59,939
============ ============
</TABLE>
Notes to financial statements are an integral part of these statements.
31
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME:
Loans and fees $ 1,516 $ 1,391
Federal funds sold 16 145
Investment securities 778 675
------------ ------------
Total interest income 2,310 2,211
INTEREST EXPENSE:
Interest on deposits 701 691
Interest on federal funds purchased
and other borrowings 103 35
------------ ------------
Total interest expense 804 726
------------ ------------
Net interest income 1,506 1,485
PROVISION FOR LOAN
AND LEASE LOSSES (92) 13
------------ ------------
Net interest income after 1,598 1,472
provision for loan losses
OTHER INCOME:
Service charges & fees 86 71
Securities gains (losses) (13) 1
------------ ------------
Total other income 73 72
OTHER EXPENSES:
Salaries & employee benefits 661 649
Occupancy expenses 224 162
Furniture & equipment expenses 124 35
Other operating expenses 759 473
------------ ------------
Total other expenses 1,768 1,319
------------ ------------
Income (loss) before income taxes (97) 225
Applicable income taxes (benefit) (33) 33
------------ ------------
Net income (loss) $ (64) $ 192
============ ============
EARNINGS PER SHARE, BASIC $ (0.03) $ 0.08
============ ============
EARNINGS PER SHARE, ASSUMING
DILUTION $ (0.03) $ 0.08
============ ============
</TABLE>
Notes to financial statements are an integral part of these statements.
32
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the six months ended June 30, 2000 and 1999
(in thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive Comprehensive
Stock Surplus Earnings Income(loss) Income (loss) Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $ 2,295 $ 6,530 $ 28 $ 75 $ 8,928
Comprehensive income:
Net income - - 192 - $ 192 192
Other comprehensive income:
Unrealized holding gains (losses) on
securities available for sale arising
during the period net of tax of $(124) - - - (314) (314) (314)
------------
Other comprehensive income, net of tax - - - - -
------------
Total comprehensive income - - - - $ (122) -
------------ ------------ ------------ ------------ ============ ------------
Balance, June 30, 1999 $ 2,295 $ 6,530 $ 220 $ ( 239) $ 8,806
============ ============ ============ ============ ============
Balance, January 1, 2000 $ 2,295 $ 6,530 $ 210 $ (437) $ 8,598
Comprehensive income:
Net income (loss) - - (64) - $ (64) (64)
Other comprehensive income:
Unrealized holding gains (losses) on
securities available for sale arising
during the period net of tax of $(34) - - - (66) (66) (66)
------------
Other comprehensive income, net of tax - - - - - -
------------
Total comprehensive income - - - - $ (130) -
------------ ------------ ------------ ------------ ============ ------------
Balance, June 30, 2000 $ 2,295 $ 6,530 $ 146 $ (503) $ 8,468
============ ============ ============ ============ ============
</TABLE>
Notes to financial statements are an integral part of these statements.
33
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ (64) $ 192
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 50 33
Provision for loan losses (92) 13
Amortization of premiums, net 9 15
(Gain) loss on sale of securities available for sale 13 (1)
Changes in assets and liabilities:
Decrease (increase) in other assets (43) 36
(Decrease) in other liabilities (32) (26)
------------ ------------
Net cash (used in ) operating activities (159) 262
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (5,540) (366)
Purchase of securities available for sale (813) (11,552)
Proceeds from sales of securities available for sale 987 646
Proceeds from calls and maturities of securities available for sale 73 7,249
Purchase of premises and equipment (152) (496)
------------ ------------
Net cash used in investing activities (5,445) (4,519)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits 2,991 (4,571)
Net increase in short-term borrowings 3,308 308
------------ ------------
Net cash provided by financing activities 6,299 (4,263)
------------ ------------
Net increase (decrease) in cash and cash equivalents 695 (8,520)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 2,667 14,375
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 3,362 $ 5,855
============ ============
Supplemental disclosures of cash flow information Cash payments for:
Interest on deposits $ 700 $ 690
Income taxes $ - $ -
Supplemental schedule of non-cash investing activities
Unrealized gain (loss) on securities available for sale $ (761) $ (363)
</TABLE>
Notes to financial statements are an integral part of these statements.
34
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. General
The consolidated statements include the accounts of Heritage Bancorp,
Inc. (the "Company") and its subsidiary, The Heritage Bank (the "Bank").
All significant intercompany balances and transactions have been
eliminated. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the financial
positions as of June 30, 2000 and December 31, 1999, and the results of
operations and cash flows for the six months ended June 30, 2000 and 1999.
The results of operations for the six months ended June 30, 2000 and
1999 are not necessarily indicative of the results to be expected for the
full year.
2. Investment Securities
Amortized cost and carrying amount (estimated fair value) of securities
available for sale are summarized as follows:
<TABLE>
<CAPTION>
June 30, 2000
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In thousands of dollars) Cost Gains Losses Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
US government agencies & corporations $ 23,074 $ - $ (763) $ 22,311
Obligations of states & political subdivisions 510 - (2) 508
Corporate debt obligations 500 4 - 504
Other securities 100 - - 100
Federal reserve stock 265 - - 265
---------- ---------- ---------- ----------
$ 24,449 $ 4 $ (765) $ 23,688
========== ========== ========== ==========
</TABLE>
Securities available for sale at December 31, 1999 consist of the following:
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(in thousands of dollars) Cost Gains Losses Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
US government & federal agencies $ 22,916 $ - $ (643) $ 22,273
Obligations of states & political subdivisions 1,010 - (4) 1,006
Corporate debt obligations 525 - (15) 510
Federal reserve stock 265 - - 265
---------- ---------- ---------- ----------
$ 24,716 $ - $ (662) $ 24,054
========== ========== ========== ==========
</TABLE>
Six Months Ended
(in thousands of dollars)
June 30,
2000 1999
--------- -------
Gross proceeds from sales of securities 987 646
========= =======
Gross gains on sale of securities - 1
Gross losses on sale of securities 13 -
--------- -------
Net securities gains/losses 13 1
========= =======
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
3. LOANS
Major classifications of loans are as follows:
(in thousands of dollars)
June 30, December 31,
2000 1999
------------ ------------
Commercial $ 5,894 $ 3,665
Real estate:
Construction 1,838 1,157
Residential (1-4 family) 11,214 10,475
Commercial 15,331 13,088
Agricultural 962 972
Consumer 1,262 1,507
All other Loans 729 825
------------ ------------
37,230 31,689
Less allowance for loan losses (329) (421)
------------ ------------
$ 36,901 $ 31,268
============ ============
The following schedule summarizes the changes in the allowance for loan and
lease losses:
Six Months Six Months
Ending Ending December 31,
June 30, 2000 June 30, 1999 1999
(in thousands of dollars) ------------- ------------- -------------
Balance, beginning $ 421 $ 429 $ 429
Provision charged against income (92) 13 -
Recoveries 5 9 12
Loans charged off 5 20 20
------------- ------------- -------------
Balance, ending $ 329 $ 431 $ 421
============= ============= =============
There were no nonperforming assets on June 30, 2000 or on December 31, 1999.
There were no loans past due 90 days or more and still accruing on June 30, 2000
or on December 31, 1999.
4. EARNINGS PER SHARE
The following shows the weighted average number of shares used in computing
earnings per share and the effect on weighted average number of shares of
diluted potential common stock income available to common shareholders.
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
Per Share Per Share
Shares Amount Shares Amount
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Basic Earnings Per Share 2,294,617 $ (0.03) 2,294,617 $ .08
Effect of dilutive securities:
Nonemployee directors' stock options 10,000 10,000
Employee incentive stock options 21,544 44,050
----------- -----------
Diluted Earnings Per Share 2,424,907 $ (0.03) 2,348,667 $ .08
========= -------- ========= =======
</TABLE>
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
5. CAPITAL REQUIREMENTS
A comparison of the Company's capital as of June 30, 2000 with the minimum
requirements is presented below:
Minimum
Actual Requirements
------ ------------
Tier I risk-based capital 22.41% 4.00 %
Total risk-based capital 23.23% 8.00 %
Leverage ratio 14.29% 4.00 %
37
<PAGE>
(b) Pro Forma Financial Information.
The following unaudited pro forma condensed financial statements have
been prepared on a consolidated basis based upon the historical financial
statements of the Company and Heritage. The pro forma combined information gives
effect to the Merger, accounted for as a purchase, and is based on the issuance
of 1,376,770 shares of Series A Preferred Stock and the payment of $6,883,851 in
cash in the Merger, which in turn is based on the number of shares of Heritage
common stock outstanding at June 30, 2000. Accordingly, the assets and
liabilities of Heritage have been recorded on the Company's books at their fair
market value and Heritage's capital accounts have been eliminated. The amount by
which the sum of the cash paid by the Company and the fair value of the Series A
Preferred Stock issued in the Merger exceeds the net fair value of Heritage's
assets and liabilities has been allocated to goodwill.
The pro forma statement of condition combines the balance sheet of the
Company and Heritage as of June 30, 2000. The pro forma statements of operations
for the six months ended June 30, 2000 and for the year ended December 31, 1999
combine the results of operations of the Company and Heritage for the respective
periods. The pro forma statement of condition and statement of operations for
the six months ended June 30, 2000 are based on unaudited financial statements,
and the pro forma statement of operations for the year ended December 31, 1999
is based on audited financial statements.
The pro forma financial statements should be read in conjunction with
the historical financial statements and the related notes of the Company, which
have been filed with the Commission, and of Heritage, which are included in Item
7(a) above. There are no adjustments necessary to the historical results of
operations as a result of these transactions. The pro forma combined financial
position and results of operations are not necessarily indicative of the results
that would actually have been attained if the Merger had occurred in the past or
that may be attained in the future.
38
<PAGE>
CARDINAL AND HERITAGE
PRO FORMA COMBINED CONDENSED STATEMENT OF CONDITION
JUNE 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Cardinal Heritage Adjustments Combined
------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Assets
Cash and due from banks 3,902 3,362 (3,040) (A) 4,224
Federal funds sold 18,800 - (6,884) (C) 11,916
Investment securities, available-for-sale 4,536 23,688 - 28,224
Loans receivable, net 92,415 36,901 (1,173) (C) 128,143
Premises and equipment, net 4,446 912 - 5,358
Goodwill - - 9,168 (C) 9,168
Other assets 2,542 1,213 - 3,755
------------------------------------------------------------------------
Total Assets 126,641 66,076 (1,929) 190,788
========================================================================
Liabilities & Stockholders' Equity
Liabilities:
Deposits 91,139 50,984 (345) (C) 141,778
Borrowings 6,000 6,309 - 12,309
Other liabilities 651 315 - 966
------------------------------------------------------------------------
Total liabilities 97,790 57,608 (345) 155,053
========================================================================
Stockholders' equity:
Preferred stock - - 6,884 (B) 6,884
Common stock 4,246 2,295 (2,295) (B) 4,246
Additional paid in capital 32,499 6,530 (6,230) (B) 32,799
Retained earnings (7,700) 146 (446) (B) (8,000)
Accumulated other comprehensive
income (loss) (194) (503) 503 (B) (194)
------------------------------------------------------------------------
Total stockholders' equity 28,851 8,468 (1,584) 35,735
------------------------------------------------------------------------
Total liabilities and stockholders' equity 126,641 66,076 (1,929) 190,788
========================================================================
</TABLE>
39
<PAGE>
CARDINAL AND HERITAGE
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Cardinal Heritage Adjustments Combined
------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans 3,412 1,516 196 (D) 5,124
Federal funds sold 570 16 (216) (D) 370
Investment securities 176 778 - 954
------------------------------------------------------------------------
Total interest income 4,158 2,310 (20) 6,448
------------------------------------------------------------------------
Interest expense:
Deposits 1,478 701 173 (D) 2,352
Borrowings 192 103 - 295
------------------------------------------------------------------------
Total interest expense 1,670 804 173 2,647
------------------------------------------------------------------------
Net interest income 2,488 1,506 (193) 3,801
Provision for loan losses 351 (92) - 259
------------------------------------------------------------------------
Net interest income after provision for
loan losses 2,137 1,598 (193) 3,542
------------------------------------------------------------------------
Non-interest income:
Service charges 209 86 - 295
Investment fee income 800 - - 800
Other 72 (13) - 59
------------------------------------------------------------------------
Total non-interest income 1,081 73 - 1,154
------------------------------------------------------------------------
Non-interest expense:
Salary and benefits 2,842 661 - 3,503
Occupancy 444 224 - 668
Professional fees 253 136 - 389
Depreciation 263 50 - 313
Amortization of goodwill - - 306 (D) 306
Other 1,236 697 - 1,933
------------------------------------------------------------------------
Total non-interest expense 5,038 1,768 306 7,112
------------------------------------------------------------------------
Income (loss) before income taxes (1,820) (97) (499) (2,416)
Provision for income taxes - (33) 33 (D) -
------------------------------------------------------------------------
Net income (loss) (1,820) (64) (532) (2,416)
========================================================================
Dividend to preferred stockholders - - 250 (E) 250
Net income (loss) to common
stockholders (1,820) (64) (782) (2,666)
========================================================================
Earnings per common share:
Basic $(0.43) $0.03 (E) $(0.63)
Diluted $(0.43) $0.03 (E) $(0.63)
Weighted average shares outstanding:
Basic 4,244,197 2,294,617 (E) 4,244,197
Diluted 4,244,197 2,424,907 (E) 4,244,197
</TABLE>
40
<PAGE>
CARDINAL AND HERITAGE
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR YEAR ENDED DECEMBER 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Cardinal Heritage Adjustments Combined
------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans $ 2,661 $ 2,690 138 (D) $ 5,489
Federal funds sold 1,234 277 (344) (D) 1,167
Investment securities 435 1,414 -- 1,849
------------------------------------------------------------------------------
Total interest income 4,330 4,381 (206) 8,505
------------------------------------------------------------------------------
Interest expense:
Deposits 1,207 1,342 75 (D) 2,624
Borrowings 98 97 -- 195
------------------------------------------------------------------------------
Total interest expense 1,305 1,439 75 2,819
------------------------------------------------------------------------------
Net interest income 3,025 2,942 (281) 5,686
Provision for loan losses 514 -- -- 514
------------------------------------------------------------------------------
Net interest income after provision for
loan losses 2,511 2,942 (281) 5,172
------------------------------------------------------------------------------
Non-interest income:
Service charges 268 164 -- 432
Investment fee income 1,018 -- -- 1,018
Other 35 58 -- 93
------------------------------------------------------------------------------
Total non-interest income 1,321 222 -- 1,543
------------------------------------------------------------------------------
Non-interest expense:
Salary and benefits 4,277 1,472 -- 5,749
Occupancy 812 328 -- 1,140
Professional fees 495 176 -- 671
Depreciation 356 146 -- 502
Amortization of Goodwill -- -- 478 (D) 478
Other 1,931 767 -- 2,698
------------------------------------------------------------------------------
Total non-interest expense 7,871 2,889 478 11,238
------------------------------------------------------------------------------
Income (loss) before income taxes (4,039) 275 (759) (4,523)
Provision for income taxes -- 93 (93) (D) -
------------------------------------------------------------------------------
Net income (loss) $ (4,039) $ 182 (666) $ (4,523)
==============================================================================
Dividend to preferred stockholders -- -- 499 (E) 499
Net income (loss) to common
stockholders $ (4,039) $ 182 (1,165) $ (5,022)
==============================================================================
Earnings per common share:
Basic $ (0.95) $ 0.08 (E) $ (1.18)
Diluted $ (0.95) $ 0.08 (E) $ (1.18)
Weighted average shares outstanding:
Basic 4,240,819 2,294,617 (E) 4,240,819
Diluted 4,240,819 2,301,548 (E) 4,240,819
</TABLE>
41
<PAGE>
Notes to Pro Forma Combined Financial Information
The merger will be accounted for by Cardinal using the purchase method
of accounting in accordance with Accounting Principles Board Opinion ("APB") No.
16 and Statement of Financial Accounting Standards ("SFAS" No. 72). Under this
method, the aggregate cost of the merger will be allocated to assets acquired
and liabilities assumed based on their estimated fair values as of the closing
date. For purposes of pro forma presentation, estimates of the fair values of
Heritage's assets and liabilities as of June 30,2000 have been combined with the
book values of Cardinal's assets and liabilities as of June 30, 2000.
(A) As part of the transaction, Cardinal expects to incur, on a pre-tax
basis, $715,000 in transaction costs, primarily for professional
expenses, including financial advisory, legal and accounting fees.
Additionally, it is estimated that Heritage will incur, on a pre-tax
basis, $2,025,000 in transaction costs, including financial advisory,
legal, accounting and contract termination costs. Cardinal also expects
to incur nonrecurring charges of $300,000 as a result of the merger
during the 12 months after its closing. These charges are included in
the pro forma combined condensed statements of condition, but are not
considered in the pro forma combined condensed statements of
operations.
(B) As stated in the merger agreement, Cardinal will issue 1,376,770 shares
of 7.25% cumulative, convertible preferred stock valued at $5 per share
and cash of $6,884,000 to Heritage's shareholders. Cardinal will issue
vested Cardinal stock options for vested Heritage stock options with
terms based on the merger consideration.
The following table details the adjustments to stockholders' equity
based on the assumed purchase price:
<TABLE>
<CAPTION>
Accumulated
Other
Preferred Common Paid - In Retained Comprehensive
Stock Stock Capital Earnings Income
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Elimination of Heritage's stockholders' equity - (2,295) (6,530) (146) 503
Issuance of Cardinal stock options for
Heritage carryover stock options - - 300 - -
Issuance of Cardinal preferred stock 6,884 - - - -
Nonrecurring charges subsequent to merger - - - (300) -
------------------------------------------------------------
Total pro forma adjustment 6,884 (2,295) (6,230) (446) 503
</TABLE>
(C) The purchase price is allocated to identifiable tangible and intangible
assets at their fair values. Although not included here, a core deposit
intangible is expected to be identified. Any portion of the purchase
price that cannot be assigned to specifically identifiable tangible and
intangible assets acquired less liabilities assumed is considered
goodwill, which is expected to be amortized over 15 years.
42
<PAGE>
The following table provides a reconciliation of the excess cost of the
merger to Cardinal over the fair value of net assets acquired from
Heritage (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash to be paid by Cardinal $ 6,884
Value of preferred stock to be issued by Cardinal 6,884
Fair value of 138,420 Cardinal stock options issued for Heritage carryover options 300
Cardinal transaction costs 715
--------
14,783
Less:
Stockholders' equity of Heritage 8,468
Fair value adjustments, net (828)
Heritage transaction costs (2,025)
--------
Cost in excess of fair value of net assets acquired $ 9,168
========
</TABLE>
The fair value adjustments as of June 30, 2000 were calculated for
loans receivable and deposits. Loans receivable were decreased by
approximately $1,173,000, while deposits were decreased by $345,000.
The fair values ultimately recorded by Cardinal may be materially
different from the values indicated due to (a) changes in future
interest rates and economic conditions beyond the control of
management, (b) changes in the composition of Heritage's assets and
liabilities, and (c) refinements to the underlying assumptions made by
Cardinal.
(D) The purchase accounting adjustments, including the recording of
goodwill have the following impact on the unaudited pro forma combined
condensed statements of operations:
Interest income on loans receivable in the unaudited pro forma combined
condensed statement of operations for the six months ended June 30,
2000 is increased by $196,000, reflecting the amortization of the
discount calculated on loans receivable using the level yield method
over the estimated life of 36 months.
Interest income on federal funds sold in the unaudited pro forma
combined condensed statement of operations for the six months ended
June 30, 2000 is decreased by $216,000, reflecting the decrease in
federal funds sold due to the pay out of $6,884,000 in cash to Heritage
shareholders.
Interest expense on deposits in the unaudited pro forma combined
condensed statement of operations for the six months ended June 30,
2000 is increased by $173,000, to reflect amortization of the discount
on certificates of deposit using the level yield method over the
estimated life of 12 months.
Goodwill amortization expense in the unaudited pro forma combined
condensed statement of operations for the six months ended June 30,
2000, reflects $306,000 of goodwill amortization on a straight line
basis over 15 years.
Provision for income taxes in the unaudited pro forma combined
condensed statements of operations for the six months ended June 30,
2000, is decreased by $33,000 to reduce the historical income tax
expense due to pro forma net losses.
43
<PAGE>
(E) Basic and diluted earnings per share in the pro forma combined
condensed statements of operations were computed by dividing pro forma
net loss less dividends to preferred stockholders by the pro forma
total average shares outstanding of Cardinal's common stock for the
period and the elimination of Heritage's average shares outstanding.
Conversion of Cardinal's preferred stock and options results in
antidilution and therefore was excluded.
44
<PAGE>
(c) Exhibits.
Exhibit No. Description
----------- -----------
2.1 Amended and Restated Agreement and Plan of
Reorganization, dated as of June 19, 2000, by and
between Heritage, CMC and the Company, filed as
Exhibit 2.1 to the Registration Statement on Form
S-4 (File No. 333-38380), dated June 20, 2000,
incorporated herein by reference.
2.2 First Amendment to Amended and Restated Agreement
and Plan of Reorganization, dated as of August
28, 2000, by and between Heritage, CMC and the
Company.*
----------
* Filed previously.
45
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
CARDINAL FINANCIAL CORPORATION
Dated: November 16, 2000 By: /s/ Joseph L. Borrelli
--------------------------------------
Joseph L. Borrelli
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
No. Description
--- -----------
2.1 Amended and Restated Agreement and Plan of Reorganization, dated as
of June 19, 2000, by and between Heritage Bancorp, Inc., Cardinal
Merger Corp. and Cardinal Financial Corporation, filed as Exhibit
2.1 to the Registration Statement on Form S-4 (File No. 333-38380),
dated June 20, 2000, incorporated herein by reference.
2.2 First Amended to Amended and Restated Agreement and Plan of
Reorganization, dated as of August 28, 2000, by and between Heritage
Bancorp, Inc., Cardinal Merger Corp. and Cardinal Financial
Corporation.*
-------------
* Filed previously.
