SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 0-24557
CARDINAL FINANCIAL CORPORATION
(Name of Small Business Issuer in its Charter)
Virginia 54-1874630
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
10555 Main Street, Suite 500
Fairfax, Virginia 22030
(Address of Principal Executive Offices) (Zip Code)
(703) 934-9200
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $1.00 par value
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes __X__ No _____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. ____
The issuer's revenues for the fiscal year ended December 31, 1999 were
$5,650,115.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of March 29, 2000 was $17,766,030.
The number of shares outstanding of Common Stock, as of March 30, 2000
was 4,242,634.
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TABLE OF CONTENTS
PART I
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Page
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Item 1. Description of Business........................................................ 3
Item 2. Description of Property........................................................ 15
Item 3. Legal Proceedings.............................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............................ 16
PART II
Item 5. Market for Common Equity and Related Stockholder Matters....................... 17
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation....................................................... 17
Item 7. Financial Statements........................................................... 30
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................................... 30
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.............................. 30
Item 10. Executive Compensation......................................................... 30
Item 11. Security Ownership of Certain Beneficial Owners and Management................. 31
Item 12. Certain Relationships and Related Transactions................................. 31
Item 13. Exhibits, List and Reports on Form 8-K......................................... 31
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PART I
Item 1. Description of Business
General
Cardinal Financial Corporation (the "Company") is a bank holding
company that was incorporated under Virginia law in 1997. The Company's three
banking subsidiaries that have begun operations (collectively, the "Banks") are
the following:
o Cardinal Bank, N.A., which is based in Fairfax, Virginia and
commenced operations on June 8, 1998;
o Cardinal Bank - Manassas/Prince William, N.A., which is based in
Manassas, Virginia and commenced operations on July 26, 1999;
o Cardinal Bank - Dulles, N.A., which is based in Reston, Virginia
and commenced operations on August 2, 1999; and
The Company also has an investment advisory subsidiary, Cardinal Wealth
Services, Inc., which commenced operations on February 1, 1999. A fourth banking
subsidiary, Cardinal Bank - Alexandria/Arlington, N.A. (in organization), which
will be based in Alexandria, Virginia, is expected to commence operations in the
second quarter of 2000.
Through its banking subsidiaries, the Company pursues a community
banking strategy by offering a broad range of banking products to individuals,
professionals and small to medium-sized businesses, with an emphasis on
personalized service and local decision-making authority. Management's expansion
strategy to date has included attracting experienced local management teams, who
have significant decision-making authority at the local bank level, and local
independent boards of directors consisting of individuals with strong community
affiliations and extensive business backgrounds and business development
potential in the identified markets. Each management team operates in a manner
that provides responsive, personalized services. The Company provides credit
policies and procedures as well as centralized back office functions to provide
corporate, technological and marketing support to the Banks.
The Company's principal executive offices are located at 10555 Main
Street, Suite 500, Fairfax, Virginia 22030, and its telephone number is (703)
934-9200. The Company also maintains a web site at www.cardinalbank.com.
Business Development
Background. The Company was formed in late 1997, principally in
response to perceived opportunities resulting from the takeovers of several
Virginia-based banks by regional bank holding companies. Since January 1, 1997,
numerous community banks headquartered in northern Virginia have been acquired.
Collectively, these banks had deposits of approximately $1.0 billion. Moreover,
in 1997 and 1998, four statewide banks with substantial northern Virginia
operations -- Crestar Bank, Central Fidelity National Bank, Signet Bank, N.A.
and Jefferson National Bank -- were acquired by large out-of-state bank holding
companies.
In the Company's market area, the bank consolidations have been
accompanied by the dissolution of local boards of directors and relocation or
termination of management and customer service professionals. The Company
believes that local industry consolidation has disrupted customer
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relationships as the larger regional financial institutions increasingly focus
on larger corporate customers, standardized loan and deposit products and other
services. Generally, these products and services are offered through less
personalized delivery systems, which has created the demand for high quality,
personalized services to small and medium-sized businesses and professionals. In
addition, consolidation in the local market has created opportunities to attract
experienced bankers. Bank acquisitions have dislocated experienced and talented
management personnel due to the elimination of redundant functions and the drive
to achieve cost savings. Additionally, uncertainty over possible future
acquisitions has helped enable the Company to attract officers from banks that
have not been acquired. As a result of these factors, management believes that
the Company has taken advantage of a rare opportunity to attract its targeted
banking customers and experienced management personnel within the Company's
identified markets.
Initial Capitalization of the Company. The Company funded its start-up
and organizational costs through a private offering (the "Private Offering") of
1,409,509 shares of its common stock, par value of $1.00 per share (the "Common
Stock"), in the fourth quarter of 1997 and the first quarter of 1998. The total
proceeds to the Company in the Private Offering were $10.6 million, of which
$8.0 million were used to capitalize Cardinal Bank, N.A., in June 1998. In
addition, the Company raised additional capital for general corporate purposes,
including the capitalization of Cardinal Wealth Services, Inc. and the three
additional Banks, and to support the growth of assets and deposits through a
public offering (the "Public Offering") of 2,830,000 shares of Common Stock in
the third quarter of 1998. The total proceeds to the Company in the Public
Offering were $26.0 million, after deducting underwriting discounts and
expenses.
Experienced Board and Management. The Company's Board of Directors
consists of 11 individuals, seven of whom formerly were founding directors of
First Patriot Bankshares Corporation ("First Patriot"), the holding company for
Patriot National Bank, headquartered in Reston, Virginia. First Patriot was
organized in 1990 and was acquired in 1997 by an out-of-state bank holding
company. John H. Rust, Jr., the Company's Chairman, served as Chairman of First
Patriot. Directors of the Company who were former First Patriot directors
include the chairs of First Patriot's loan, audit, strategic planning,
compensation and marketing committees. Until he joined the Company in late 1997,
L. Burwell Gunn, Jr., the Company's President and Chief Executive Officer,
served as Executive Vice President and Commercial Division head for the Greater
Washington Region for Crestar Bank. The last 13 years of Mr. Gunn's 25 year
career with Crestar all involved service in the northern Virginia area. Each of
the Company's eight other executive officers has extensive banking experience in
northern Virginia. See Item 9., "Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of the Exchange Act," below.
Decentralized Operating Strategy. The foundation of the Company's
strategy is to operate a multi-community bank organization that emphasizes
decision-making at the local bank level combined with strong corporate,
technological, marketing, financial and managerial support. The Company's
operating model is for each bank to operate with local management and boards of
directors consisting of individuals with extensive knowledge of the local
community and the authority to make credit decisions. The Company believes that
this operating strategy enables the Banks to attract customers who wish to
conduct their business with a locally owned and managed institution with strong
ties and an active commitment to the community.
Centralized Corporate Support. The Company provides oversight and
various services to the Banks, including technology, finance and accounting,
human resources, credit administration, internal audit, compliance, loan review,
marketing, retail administration, administrative support, policies and
procedures, product development and item processing. By providing such services
and oversight, the Company expects not only to achieve monetary savings,
compared to the costs if the Banks were individually responsible for such
functions, but also expects to achieve a uniformity of operations and
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service that will be associated with the "Cardinal" name in the Company's
northern Virginia markets. The Banks' principal focus is to generate deposits
and loans. This corporate support system will enable the Company to achieve
administrative economies of scale while capitalizing on the responsiveness to
client needs of its decentralized community bank network. With the support from
its significant investment in infrastructure, particularly a management
information system that links the Company to the Banks and facilitates data
processing, compliance, and reporting requirements, the Company believes that it
has the operational and administrative capacity to accommodate the Banks and
effectively manage the Company's growth for the foreseeable future.
Growth Strategy
The Company intends to focus on the growth of the Banks. Each Bank's
growth is expected to come from within such Bank's primary service area through
loan and deposit business. The Company focuses on acquiring market share,
particularly from large bank holding companies, by emphasizing local management
and decision-making and through delivering personalized services to business
customers and individuals. Specifically, the Company's competitive strategy
consists of approving loan requests quickly with a local loan committee,
operating with flexible, but prudent, lending policies, personalizing service by
establishing a long-term banking relationship with the customer, and maintaining
the requisite personnel to ensure a high level of service. While the Company
does not currently intend to actively search for expansion opportunities beyond
its designated markets, the Company may consider opportunities that arise from
time to time, which could occur through acquisitions of existing institutions or
branches.
The Company believes that a management team that is familiar with the
needs of its community can provide higher quality personalized service to its
customers. The local management team of each Bank has a significant amount of
decision-making authority and is accessible to its customers. As a result of the
consolidation trend in the northern Virginia area, the Company's management
believes that there are significant opportunities to attract experienced bank
managers who would like to join an institution promoting a community banking
concept.
As it anticipated the opening of its subsidiary Banks, the Company
established through its first subsidiary, Cardinal Bank, N.A., loan production
offices in Manassas, the Reston area of Fairfax County, and Alexandria in order
to establish customer relationships, brand awareness and a pipeline of loan
business. The loan production offices were staffed by personnel who are now
employed by the Bank that opened in that location. Loans originated in these
loan production offices are transferred by Cardinal Bank, N.A. to the respective
Bank when it opens.
Each Bank has a local board of directors that is comprised of prominent
members of the community, including business leaders and professionals. These
directors not only operate the Banks, but also act as ambassadors of their
respective Banks within the community and are expected to promote the business
development of each Bank. The directors and officers of the Company and the
directors of the Banks are active in the civic, charitable and social
organizations located in the local communities. It is anticipated that members
of the local management teams will hold leadership positions in a number of
community organizations and continue to volunteer for other positions in the
future.
The Company believes that each Bank's ability to compete with other
financial institutions in its respective market area will be enhanced by its
posture as a locally managed bank with a broad base of local ownership. The
directors of each of the Banks, most of whom reside or work in the market area
in which their respective Banks will operate, own a significant amount of Common
Stock. The Company believes that local ownership of Common Stock is a highly
effective means of attracting customers and fostering loyalty to the Banks.
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Market Areas
The Company's targeted market includes areas in and around Fairfax
County, Virginia, including the independent cities of Fairfax and Alexandria, as
well as Arlington, Manassas, and Prince William and Loudoun Counties.
Interstates 95, 495, and 66 all pass through the market area and provide
efficient access to other regions of the state. Prominent local newspapers, the
Washington Post and Washington Times, and a number of radio and television
stations provide diverse media outlets. The broad exposure of television, print
media and radio offer several opportunities to explore effective advertising and
public relations avenues for the Company.
The Company has established banking operations in four locations in the
broad target market, each of which represents a separate market. These distinct,
but contiguous markets are: (1) the city of Fairfax and central Fairfax County;
(2) the city of Manassas and Prince William County; (3) the city of Alexandria
and Arlington County; and (4) the Reston and Herndon areas (of western Fairfax
County) and Loudoun County. As of 1997, Fairfax County, the city of Fairfax,
Prince William County, the city of Manassas, Arlington County, the city of
Alexandria and Loudoun County each ranked in the top ten for Virginia in median
household income, and collectively the population of the area represented 24.4%
of the state's total population. Northern Virginia continues to provide more
than half of all the jobs created in the state and outstrips the state in most
other measures of growth. In 1999, the number of jobs in northern Virginia
increased by 41,110, as compared to a state-wide increase of 64,137.
The Banks
The Banks engage in the commercial banking business in their respective
communities. The Company believes that there is a demand for, and that the
northern Virginia communities described above will support, new locally operated
community banks. Although the Company could have obtained a banking presence in
the identified markets by opening branch offices of Cardinal Bank, management of
the Company believes that separate banks with their own local boards of
directors and banking practices, tailored to the local market, is a preferable
approach. Each Bank provides personalized banking services, with emphasis on the
financial needs and objectives of individuals, professionals and small to
medium-sized businesses. Additionally, substantially all credit and related
decisions are made by the Banks' local management and board of directors,
thereby facilitating prompt response.
The principal business of each Bank is to accept deposits from the
public and to make loans and other investments. The principal sources of funds
for each Bank's loans and investments are demand, time, savings and other
deposits, repayment of loans, and borrowings. In addition, a portion of the net
proceeds of the Public Offering, after having been contributed to the capital of
each Bank, were used by each Bank to fund loans. The principal source of income
for each Bank is interest collected on loans. The principal expenses of each
Bank are interest paid on savings and other deposits, employee compensation,
office expenses, and other overhead expenses. The Banks do not currently offer
trust or fiduciary services.
The Company is committed to providing high quality banking products and
services to the Banks' customers and has made a significant investment in its
advanced automated operating accounting system, which supports virtually every
banking function. The system provides the technology that fully automates the
branches, processes bank transactions, mortgages, loans and electronic banking,
conducts data base and direct response marketing, provides cash management
solutions, streamlined reporting and reconciliation support as well as sales
support.
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With this investment in technology, the Company offers Internet-based
delivery products for both consumers and commercial customers. Customers can
open accounts, apply for loans, check balances, check account history, transfer
funds, download images of checks, pay bills, download active statements into
QuickenTM or Microsoft MoneyTM, use interactive calculators and transmit e-mail
with the Company over the Internet. The Internet provides an inexpensive way for
the Company to expand its geographic borders and branch activities while
providing the kind of services one would expect from the larger banks.
The Company also offers customers the convenience of digital imaged
checks that make it easy to reconcile statements, organize and store account
information while streamlining the back office. Every item is imaged and
available for inspection. Among the many features, check imaging allows for
instant statement reconstruction for research, which can be faxed or e-mailed
directly to a customer's personal computer.
Customers
Management believes that the recent bank consolidation within northern
Virginia provides a significant opportunity to build a successful,
locally-oriented franchise. Management of the Company further believes that many
of the larger financial institutions do not emphasize a high level of
personalized service to the small and medium-sized commercial, professional or
individual retail customers. The Company focuses its marketing efforts on
attracting small and medium-sized businesses and professionals, such as
physicians, accountants and attorneys. Because the Company focuses on businesses
and professionals, the majority of its loan portfolio is in the commercial area
with an emphasis placed on originating sound, profitable commercial and
industrial loans secured by real estate, accounts receivable, inventory,
property, plant and equipment.
Although the Company expects to concentrate its lending to commercial
businesses, the Company attracts a significant amount of professional and
consumer business. Many of its customers are the principals of the small and
medium-sized businesses for whom the Banks provide banking services. Management
emphasizes "relationship banking" in order that each customer can identify and
establish a comfort level with bank officers who come to understand their
customers' business and financial needs in depth. Management intends to develop
its retail business with individuals who appreciate a higher level of personal
service, contact with their lending officer and responsive decision-making. It
is expected that most of the Company's business will be further developed
through its lending officers and local boards of directors and by pursuing an
aggressive strategy of making calls on customers throughout the market area.
Banking Products and Services
The Company offers a broad array of banking products and services to
its customers. These products and services are set forth below.
Loans. Through each Bank, the Company offers a wide range of short to
long-term commercial and consumer loans, which are described in further detail
below. The Company has established pre-determined percentage levels as targets
for the division of the Company's loan portfolio across the various categories
of loans. Commercial loans, real estate-commercial loans, real
estate-construction loans, real estate-residential loans, home equity loans, and
consumer loans account for approximately 33%, 29%, 1%, 17%, 6% and 14%,
respectively, of its loan portfolio. The Company believes that this division
reflects the current credit demands of its markets and provides a sufficient
amount of diversification to avoid over-reliance on one category. The Company
may adjust these levels from time to time as the credit demands of the community
change and as each Bank's business evolves.
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Credit Policies. With respect to each Bank's loan portfolio, the
Company oversees credit operations while still granting local authority to each
Bank. The Company's chief credit officer is primarily responsible for
maintaining a quality loan portfolio and developing a strong credit culture
throughout the entire organization. The chief credit officer is responsible for
developing and updating the credit policies and procedures for the organization.
The Board of Directors of a Bank may make exceptions to these credit policies
and procedures as appropriate, but any such exception must be documented and
made for sound business reasons.
Credit quality is controlled by the chief credit officer through
compliance with the Company's credit policies and procedures. The Company's
risk-decision process is actively managed in a disciplined fashion to maintain
an acceptable risk profile characterized by soundness, diversity, quality,
prudence, balance and accountability. The Company's credit approval process
consists of specific authorities granted to the lending officers. Loans
exceeding a particular lending officer's level of authority are reviewed and
considered for approval by an officers' loan committee and, then, a Bank's Board
of Directors. In addition, the chief credit officer works closely with each
lending officer at the Bank level to ensure that the business being solicited is
of the quality and structure that fits the Company's desired risk profile.
Under its credit policies, the Company generally limits the
concentration of credit risk by a particular Bank in any loan or group of loans
to 30% of that Bank's capital. Such concentration limit pertains to any group of
borrowers related as to the source of repayment or any one specific industry.
Furthermore, each Bank has established limits on the total amount of that Bank's
outstanding loans to one borrower, all of which are set below legal lending
limits. Any loan that a Bank proposes to make that will exceed such established
limits requires the prior approval of the Company's Board of Directors.
Commercial Loans. The Company makes commercial loans to qualified
businesses in its market area. The Company's commercial lending consists
primarily of commercial and industrial loans for the financing of accounts
receivable, inventory, property, plant and equipment. The Company also offers
Small Business Administration ("SBA") guaranteed loans and asset-based lending
arrangements to certain of its customers.
Commercial business loans generally have a higher degree of risk than
residential mortgage loans, but have commensurately higher yields. Residential
mortgage loans generally are made on the basis of the borrower's ability to make
repayment from his employment and other income and are secured by real estate
whose value tends to be easily ascertainable. In contrast, commercial business
loans typically are made on the basis of the borrower's ability to make
repayment from cash flow from its business and are secured by business assets,
such as commercial real estate, accounts receivable, equipment and inventory. As
a result, the availability of funds for the repayment of commercial business
loans may be substantially dependent on the success of the business itself.
Further, the collateral for commercial business loans may depreciate over time
and cannot be appraised with as much precision as residential real estate.
To manage these risks, the Company's policy is to secure commercial
loans with both the assets of the borrowing business and other additional
collateral and guarantees that may be available. In addition, the Company
actively monitors certain measures of the borrower, including advance rate, cash
flow, collateral value and other appropriate credit factors.
Commercial Mortgage Loans. The Company also originates commercial
mortgage loans. These loans are primarily secured by various types of commercial
real estate, including office, retail, warehouse, industrial and other
non-residential types of properties and are made to the owner and/or occupiers
of such property. These loans have maturities generally ranging from one to 10
years.
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Commercial mortgage lending entails significant additional risk,
compared with residential mortgage lending. Commercial mortgage loans typically
involve larger loan balances concentrated with single borrowers or groups of
related borrowers. Additionally, the payment experience on loans secured by
income producing properties is typically dependent on the successful operation
of a business or a real estate project and thus may be subject, to a greater
extent, to adverse conditions in the real estate market or in the economy
generally. The Company's commercial real estate loan underwriting criteria
require an examination of debt service coverage ratios, the borrower's
creditworthiness and prior credit history and reputation, and the Company
generally requires personal guarantees or endorsements of borrowers. The Company
also carefully considers the location of the security property.
Loan-to-value ratios for commercial mortgage loans generally do not
exceed 75%. Loan-to-value ratios up to 85% are permitted if the borrower has
unusually strong general liquidity, net worth and cash flow, and loan-to-value
ratios up to 90% are permitted if an SBA guaranty has been obtained.
Residential Mortgage Loans. The Company's residential mortgage loans
consist of residential first and second mortgage loans, residential construction
loans and home equity lines of credit and term loans secured by first and second
mortgages on the residences of borrowers for home improvements, education and
other personal expenditures. The Company makes mortgage loans with a variety of
terms, including fixed and floating or variable rates and a variety of
maturities. Maturities for construction loans generally range from six to 12
months for residential property and from 12 to 18 months for non-residential and
multi-family properties.
Residential mortgage loans generally are made on the basis of the
borrower's ability to make repayment from his employment and other income and
are secured by real estate whose value tends to be easily ascertainable. These
loans are made consistent with the Company's appraisal policy and real estate
lending policy, which detail maximum loan-to-value ratios and maturities. Loans
for owner-occupied property generally are made with a loan-to-value ratio of up
to 80% for first liens and 75% for junior liens. Higher loan-to-value ratios may
be allowed based on the borrower's unusually strong general liquidity, net worth
and cash flow. Loan-to-value ratios for home equity lines of credit generally do
not exceed 75%. If the loan-to-value ratio exceeds 90% for residential mortgage
loans, the Company has determined that it is an unusually strong credit.
Construction lending entails significant additional risks, compared
with residential mortgage lending. Construction loans often involve larger loan
balances concentrated with single borrowers or groups of related borrowers.
Construction loans also involve additional risks attributable to the fact that
loan funds are advanced upon the security of property under construction, which
is of uncertain value prior to the completion of construction. Thus, it is more
difficult to evaluate accurately the total loan funds required to complete a
project and related loan-to-value ratios. To minimize the risks associated with
construction lending, the Company limits loan-to-value ratios for residential
property to 85% and for non-residential property and multi-family properties to
80%, in addition to its usual credit analysis of its borrowers.
Management expects that the loan-to-value ratios described above will
be sufficient to compensate for fluctuations in the real estate market to
minimize the risk of loss.
Consumer Loans. The Company's consumer loans consist primarily of
installment loans to individuals for personal, family and household purposes.
The specific types of consumer loans made by the Banks include home improvement
loans, debt consolidation loans and general consumer lending.
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Consumer loans may entail greater risk than residential mortgage loans
do, particularly in the case of consumer loans that are unsecured, such as lines
of credit, or secured by rapidly depreciable assets such as automobiles. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining deficiency
often does not warrant further substantial collection efforts against the
borrower. In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount that can be recovered on
such loans. A loan may also give rise to claims and defenses by a consumer loan
borrower against an assignee of such loan, such as the Company, and a borrower
may be able to assert against such assignee claims and defenses that it has
against the seller of the underlying collateral.
The Company's policy for consumer loans is to accept moderate risk
while minimizing losses, primarily through a careful analysis of the borrower.
In evaluating consumer loans, the Company requires its lending officers to
review the borrower's level and stability of income, past credit history and the
impact of these factors on the ability of the borrower to repay the loan in a
timely manner. In addition, the Company requires that its banking officers
maintain an appropriate margin between the loan amount and collateral value.
Many of the Company's consumer loans are made to the principals of the small and
medium-sized businesses for whom the Banks provide banking services.
In the fourth quarter of 1999, the Company purchased a $7.8 million
installment loan portfolio. While the Company does not have any current plans to
purchase additional loan portfolios, the Company may consider opportunities that
arise from time to time with respect to portfolios that meet established
underwriting criteria.
Credit Card and Other Loans. The Company also issues credit cards to
certain of its customers. In determining to whom it will issue credit cards, the
Company evaluates the borrower's level and stability of income, past credit
history and other factors. Finally, the Company makes additional loans that are
not classified in one of the above categories. In making such loans, the Company
attempts to ensure that the borrower meets the Company's credit quality
standards.
Deposits. Management offers a broad range of interest-bearing and
noninterest-bearing deposit accounts, including commercial and retail checking
accounts, money market accounts, individual retirement accounts, regular
interest-bearing savings accounts and certificates of deposit with a range of
maturity date options. The primary sources of deposits are small and
medium-sized businesses and individuals within an identified market. In each
identified market, senior management has the authority to set rates within
specified parameters in order to remain competitive with other financial
institutions. All deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to the maximum amount permitted by law. The Company
implements a service charge fee schedule, which is competitive with other
financial institutions in a Bank's market area, covering such matters as
maintenance fees on checking accounts, per item processing fees on checking
accounts, returned check charges and other similar fees.
Specialized Consumer Services. Management offers specialized products
and services to its customers, such as travelers checks and safe deposit
services.
Courier Services. The Company offers courier services to its business
customers. Courier services permit the Company to provide the convenience and
personalized service that its customers require by scheduling pick-ups of
deposits.
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Telephone and Internet Banking. The Company believes that there is a
strong demand within its market for telephone banking and internet banking. Both
services allow both commercial and retail customers to access detailed account
information and execute a wide variety of the banking transactions referred to
above. Management believes that these services are particularly attractive for
its customers, as it enables them to conduct their banking business and monitor
their bank accounts from remote locations. Telephone and internet banking
assists the Banks in attracting and retaining customers and encourages its
customers to maintain their total banking relationships with the Company.
Automatic Teller Machines ("ATMs"). The Company has an ATM at each
office of each Bank. Management makes other financial institutions' ATMs
available to its customers and offers customers a certain number of free ATM
transactions per month.
Other Products and Services. The Company evaluates other services such
as trust services, insurance, mortgage services and other permissible
activities. Management expects to introduce these services as they become
economically viable.
Brokerage and Investment Advisory Services
Through Cardinal Wealth Services, Inc., the Company provides financial
and estate planning services. Cardinal Wealth Services, Inc. has formed a
strategic alliance with LM Financial Partners, Inc., a wholly owned subsidiary
of Legg Mason Inc. Through this alliance, the Company's financial advisors can
offer its customers an extensive range of financial products and services,
including estate planning, qualified retirement plans, mutual funds, annuities,
life insurance, fixed income securities and equity research and recommendations.
Competition
Banks generally compete with other financial institutions through the
selection of banking products and services offered, the pricing of services, the
level of service provided, the convenience and availability of services, and the
degree of expertise and the personal manner in which services are offered.
Virginia law permits statewide branching by banks. Consequently, commercial
banking in Virginia is highly competitive. Many large banking organizations,
several of which are controlled by out-of-state holding companies, currently
operate in the Company's targeted market areas. In addition, competition between
commercial banks and thrift institutions (savings institutions and credit
unions) has intensified significantly by the elimination of many previous
distinctions between the various types of financial institutions and the
expanded powers and increased activity of thrift institutions in areas of
banking that previously had been the sole domain of commercial banks. Recent
legislation, together with other regulatory changes by the primary regulators of
the various financial institutions, has resulted in the almost total elimination
of practical distinctions between a commercial bank and a thrift institution.
Consequently, competition among financial institutions of all types is largely
unlimited with respect to legal ability and authority to provide most financial
services. Furthermore, as a consequence of legislation recently enacted by the
United States Congress, out-of-state banks not previously allowed to operate in
Virginia are allowed to commence operations and compete in the Company's
targeted market areas.
Each of the Banks faces competition from other banks, as well as thrift
institutions, consumer finance companies, insurance companies and other
institutions in the Banks' respective market areas. Some of these competitors
are not subject to the same degree of regulation and restriction imposed upon
the Banks. Many of these competitors also have broader geographic markets and
substantially greater resources and lending limits than the Banks and offer
certain services such as trust banking that the Banks are not expected to
provide in the near term. In addition, many of these competitors have numerous
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branch offices located throughout the extended market areas of the Banks that
the Company believes may provide these competitors with an advantage in
geographic convenience that the Banks do not have at present. Such competitors
may also be in a position to make more effective use of media advertising,
support services, and electronic technology than can the Banks. Employees
At December 31, 1999, the Company had 82 full time employees, none of
which is represented by a union or covered by a collective bargaining agreement.
Management considers employee relations to be good.
Government Supervision and Regulation
The following discussion is a summary of the principal laws and
regulations that comprise the regulatory framework applicable to the Company and
the Banks. Other laws and regulations that govern various aspects of the
operations of banks and bank holding companies are not described herein,
although violations of such laws and regulations could result in supervisory
enforcement action against the Company or a Bank. The following descriptions
summarize the material terms of the principal laws and regulations and are
qualified in their entirety by reference to applicable laws and regulations.
General. As a bank holding company, the Company is subject to
regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA"),
and the examination and reporting requirements of the Board of Governors of the
Federal Reserve System (the "Federal Reserve"). Under the BHCA, a bank holding
company may not directly or indirectly acquire ownership or control of more than
5% of the voting shares or substantially all of the assets of any additional
bank or merge or consolidate with another bank holding company without the prior
approval of the Federal Reserve. The BHCA also generally limits the activities
of a bank holding company to that of banking, managing or controlling banks, or
any other activity which is determined to be so closely related to banking or to
managing or controlling banks that an exception is allowed for those activities.
As national banks, the Banks are subject to regulation, supervision and
examination by the Office of the Comptroller of the Currency ("OCC"). The Banks
also are subject to regulation, supervision and examination by the FDIC. Federal
law also governs the activities in which the Banks may engage and the
investments that they may make and limits the aggregate amount of loans that may
be granted to one borrower to 15% of a bank's capital and surplus. Various
consumer and compliance laws and regulations also affect the Banks' operations.
The activities permissible to bank holding companies and their
affiliates were substantially expanded by the Gramm-Leach-Bliley Act, which the
President signed on November 12, 1999. Gramm-Leach-Bliley repeals the
anti-affiliation provisions of the Glass-Steagall Act to permit the common
ownership of commercial banks, investment banks and insurance companies. Under
Gramm-Leach-Bliley, a bank holding company can elect to be treated as a
financial holding company. A financial holding company may engage in any
activity and acquire and retain any company that the Federal Reserve determines
to be financial in nature. A financial holding company also may engage in any
activity that is complementary to a financial activity and does not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally. The Federal Reserve must consult with the Secretary
of the Treasury in determining whether an activity is financial in nature or
incidental to a financial activity.
The earnings of the Banks, and therefore the earnings of the Company,
are affected by general economic conditions, management policies and the
legislative and governmental actions of various regulatory authorities,
including those referred to above.
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The OCC conducts regular examinations of the Banks and reviews such
matters as the adequacy of loan loss reserves, quality of loans and investments,
management practices, compliance with laws, and other aspects of their
operations. In addition to these regular examinations, the Banks must furnish
the OCC with periodic reports containing a full and accurate statement of its
affairs. Supervision, regulation and examination of banks by these agencies are
intended primarily for the protection of depositors rather than shareholders.
Insurance of Accounts, Assessments and Regulation by the FDIC. The
deposits of the Banks are insured by the FDIC up to the limits set forth under
applicable law. The deposits of the Banks are subject to the deposit insurance
assessments of the Bank Insurance Fund ("BIF") of the FDIC.
The FDIC has implemented a risk-based deposit insurance assessment
system under which the assessment rate for an insured institution may vary
according to regulatory capital levels of the institution and other factors
(including supervisory evaluations). Depository institutions insured by the BIF
that are "well capitalized", are required to pay only the statutory minimum
assessment of $2,000 annually for deposit insurance, while all other banks are
required to pay premiums ranging from .03% to .30% of domestic deposits. These
rate schedules are subject to future adjustments by the FDIC. In addition, the
FDIC has authority to impose special assessments from time to time. However,
because the legislation enacted in 1996 requires that both Savings Association
Insurance Fund insured and BIF-insured deposits pay a pro rata portion of the
interest due on the obligations issued by the Financing Corporation, the FDIC is
assessing BIF-insured deposits an additional 1.30 basis points per $100 of
deposits to cover those obligations.
The FDIC is authorized to prohibit any BIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's primary
regulatory authority an opportunity to take such action. The FDIC may terminate
the deposit insurance of any depository institution if it determines, after a
hearing, that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, order or any condition imposed in
writing by the FDIC. It also may suspend deposit insurance temporarily during
the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If deposit insurance is terminated, the
deposits at the institution at the time of termination, less subsequent
withdrawals, shall continue to be insured for a period from six months to two
years, as determined by the FDIC. Management is not aware of any existing
circumstances that could result in termination of any Bank's deposit insurance.
Capital. The OCC and the Federal Reserve have issued risk-based and
leverage capital guidelines applicable to banking organizations that they
supervise. Under the risk-based capital requirements, the Company and the Banks
are each generally required to maintain a minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) of 8%. At least half of the total capital is to be
composed of common equity, retained earnings and qualifying perpetual preferred
stock, less certain intangibles ("Tier 1 capital"). The remainder may consist of
certain subordinated debt, certain hybrid capital instruments and other
qualifying preferred stock and a limited amount of the loan loss allowance
("Tier 2 capital" and, together with Tier 1 capital, "total capital").
In addition, each of the federal banking regulatory agencies has
established minimum leverage capital ratio requirements for banking
organizations. These requirements provide for a minimum leverage ratio of Tier 1
capital to adjusted average quarterly assets equal to 3% for bank holding
companies that are rated a composite "1" and 4% for all other bank holding
companies. Bank holding companies are
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expected to maintain higher than minimum capital ratios if they have
supervisory, financial, operational or managerial weaknesses, or if they are
anticipating or experiencing significant growth.
The risk-based capital standards of the OCC and the Federal Reserve
explicitly identify concentrations of credit risk and the risk arising from
non-traditional activities, as well as an institution's ability to manage these
risks, as important factors to be taken into account by the agency in assessing
an institution's overall capital adequacy. The capital guidelines also provide
that an institution's exposure to a decline in the economic value of its capital
due to changes in interest rates be considered by the agency as a factor in
evaluating a bank's capital adequacy. The OCC and the Federal Reserve also have
recently issued additional capital guidelines for bank holding companies that
engage in certain trading activities.
Other Safety and Soundness Regulations. There are a number of
obligations and restrictions imposed on bank holding companies and their
depository institution subsidiaries by federal law and regulatory policy that
are designed to reduce potential loss exposure to the depositors of such
depository institutions and to the FDIC insurance funds in the event that the
depository institution becomes in danger of default or is in default. For
example, under a policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
otherwise. In addition, the "cross-guarantee" provisions of federal law require
insured depository institutions under common control to reimburse the FDIC for
any loss suffered or reasonably anticipated by the BIF as a result of the
default of a commonly controlled insured depository institution or for any
assistance provided by the FDIC to a commonly controlled insured depository
institution in danger of default. The FDIC may decline to enforce the
cross-guarantee provision if it determines that a waiver is in the best
interests of the BIF. The FDIC's claim for reimbursement is superior to claims
of shareholders of the insured depository institution or its holding company but
is subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institution.
The federal banking agencies also have broad powers under current
federal law to take prompt corrective action to resolve problems of insured
depository institutions. The Federal Deposit Insurance Act requires that the
federal banking agencies establish five capital levels for insured depository
institutions - "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." It also
requires or permits such agencies to take certain supervisory actions should an
insured institution's capital level fall. For example, an "adequately
capitalized" institution is restricted from accepting brokered deposits. An
"undercapitalized" or "significantly undercapitalized" institution must develop
a capital restoration plan and is subject to a number of mandatory and
discretionary supervisory actions. These powers and authorities are in addition
to the traditional powers of the Federal banking agencies to deal with
undercapitalized institutions.
Federal regulatory authorities also have broad enforcement powers over
the Company and the Banks, including the power to impose fines and other civil
and criminal penalties, and to appoint a receiver in order to conserve the
assets of any such institution for the benefit of depositors and other
creditors.
Payment of Dividends. The Company is a legal entity separate and
distinct from the Banks. Virtually all of the revenues of the Company will
result from dividends paid to the Company by the Banks. Under OCC regulations, a
national bank may not declare a dividend in excess of its undivided profits,
which means that each Bank must recover any start-up losses before it may pay a
dividend to the Company. Additionally, a national bank may not declare a
dividend if the total amount of all dividends, including the proposed dividend,
declared by the national bank in any calendar year exceeds the total of the
national bank's retained net income of that year to date, combined with its
retained net income of the
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two preceding years, unless the dividend is approved by the OCC. A national bank
may not declare or pay any dividend if, after making the dividend, the national
bank would be "undercapitalized," as defined in regulations of the OCC. The
Company is subject to state laws that limit the amount of dividends it can pay.
In addition, the Company is subject to various general regulatory policies
relating to the payment of dividends, including requirements to maintain
adequate capital above regulatory minimums. The Federal Reserve has indicated
that banking organizations should generally pay dividends only if (1) the
organization's net income available to common shareholders over the past year
has been sufficient to fund fully the dividends and (2) the prospective rate of
earnings retention appears consistent with the organization's capital needs,
asset quality and overall financial condition. These laws, regulations or
policies will materially impact the ability of the Banks and, therefore, the
Company to pay dividends in the early years of operations.
Community Reinvestment. The requirements of the Community Reinvestment
Act ("CRA") are applicable to the Banks. The CRA imposes on financial
institutions an affirmative and ongoing obligation to meet the credit needs of
their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those institutions. A financial
institution's efforts in meeting community credit needs currently are evaluated
as part of the examination process pursuant to twelve assessment factors. These
factors also are considered in evaluating mergers, acquisitions and applications
to open a branch or facility.
Interstate Banking and Branching. Current federal law authorizes
interstate acquisitions of banks and bank holding companies without geographic
limitation. Effective June 1, 1997, a bank headquartered in one state is able to
merge with a bank headquartered in another state, as long as neither of the
states has opted out of such interstate merger authority prior to such date.
States are authorized to enact laws permitting such interstate bank merger
transactions prior to June 1, 1997, as well as authorizing a bank to establish
"de novo" interstate branches. Virginia enacted early "opt in" laws, permitting
interstate bank merger transactions. Once a bank has established branches in a
state through an interstate merger transaction, the bank may establish and
acquire additional branches at any location in the state where a bank
headquartered in that state could have established or acquired branches under
applicable federal or state law.
Economic and Monetary Polices. The operations of the Company are
affected not only by general economic conditions, but also by the economic and
monetary policies of various regulatory authorities. In particular, the Federal
Reserve regulates money, credit and interest rates in order to influence general
economic conditions. These policies have a significant influence on overall
growth and distribution of loans, investments and deposits and affect interest
rates charged on loans or paid for time and savings deposits. Federal Reserve
monetary policies have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future.
Item 2. Description of Property
The Company's headquarters are located at 10555 Main Street, Suite 500,
Fairfax, Virginia. The Company occupies 10,000 square feet under a five year
lease that began on January 15, 1999.
Cardinal Bank, N.A. is headquartered at 10641 Lee Highway, Fairfax,
Virginia. The Bank occupies a three-story brick structure, which contains 9,000
square feet, under a 10 year lease that began on January 1, 1998. The Bank has a
branch that has five teller stations, one drive-through window and a walk-up ATM
and night depository. Cardinal Bank, N.A. also operates an ATM at the Company's
headquarters.
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Cardinal Wealth Services, Inc. is headquartered at 10555 Main St, Suite
100, Fairfax, Virginia. The subsidiary occupies 3,597 square feet under a five
year lease. The subsidiary also rents offices at each Bank location.
Cardinal Bank - Manassas/Prince William, N.A. is headquartered at 9626
Center Street, Manassas, Virginia. The Bank occupies a two-story building,
containing approximately 6,000 square feet, that is owned by the Company. The
Bank includes a branch that has five teller stations, a night depository and a
two-lane drive through window with drive up ATM.
Cardinal Bank - Dulles, N.A. is headquartered at 11150 Sunset Hills
Road, Reston, Virginia. The Bank occupies 6,625 square feet of a three-story
structure, containing 50,012 square feet, under a 10 year lease that began on
January 1, 1999. The Bank includes a branch that has a walk-up ATM and night
depository and five teller stations, with future plans for a remote one-lane
drive through window with drive up ATM.
Cardinal Bank - Alexandria/Arlington, N.A. (in organization) will be
headquartered at 1737 King Street, Alexandria, Virginia. The Company currently
uses the office space as a loan production office. The office occupies 5,256
square feet under a 15 year lease that began on January 1, 1999. The bank's
branch will have five teller stations and a walk-up ATM and night depository.
Item 3. Legal Proceedings
In the ordinary course of operations, the Company and the Banks expect
to be parties to various legal proceedings. At present, there are no pending or
threatened proceedings against the Company or any of the Banks which, if
determined adversely, would have a material effect on the business, results of
operations, or financial position of the Company or any of the Banks.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the transition period covered by
this report.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Common Stock of the Company is traded on the Nasdaq SmallCap Market
under the symbol of "CFNL". The following table sets forth the high and low bid
information for the shares of Common Stock on the Nasdaq SmallCap Market for the
quarters indicated.
Bid Information
---------------
High ($) Low ($)
Fiscal Year Ended December 31, 1998 (1) -------- -------
- ---------------------------------------
3rd quarter................................... 10.63 7.25
4th quarter................................... 8.13 6.13
Fiscal Year Ended December 31, 1999
- -----------------------------------
1st quarter................................... 7.00 6.25
2nd quarter................................... 10.94 6.75
3rd quarter................................... 7.88 6.25
4th quarter................................... 7.38 5.50
________________
(1) The Company's Common Stock began trading on the Nasdaq SmallCap Market
on July 17, 1998, at an initial public offering price of $10.00 per
share. Prior to that date, there was no established trading market for
the Common Stock.
As of March 29, 2000, there were approximately 255 record holders of
Common Stock.
The Company has never declared any cash dividends on the Common Stock,
and any future payment of dividends is solely in the discretion of the Board of
Directors and is dependent upon the earnings and financial condition of the
Company and such other factors as the Board of Directors from time to time may
deem relevant.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Forward Looking Statements
This report contains certain forward-looking statements, which can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," or "continue," or the negative thereof or
other comparable terminology. The Company cautions readers that certain
important factors, including among others, problems with technology utilized by
the Company as described below, in some cases have affected, and in the future
could affect, the Company's actual results and could cause the Company's actual
results in 1999 and beyond to differ materially from those expressed in any
forward-looking statements in this report. Reference is made to the "Risk
Factors" section of the Prospectus dated July 17, 1998 that is part of the
Company's Registration Statement on Form SB-2 (Registration No. 333-52279) and
that was filed with the Securities and Exchange Commission on July 20, 1998
pursuant to Rule 424(b) under the Securities Act of 1933, as amended, for a
description of certain of these important factors.
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General
The Company is the holding company for three bank subsidiaries and one
non-bank subsidiary. The Company began operations November 24, 1997 and opened
its first bank subsidiary, Cardinal Bank, N.A., on June 8, 1998. Following its
private offering in December 1997 that generated $10.6 million in capital, the
Company raised an additional $26.0 million in an initial public offering of
2,830,000 shares in July 1998. In February 1999, Cardinal Wealth Services, Inc.
began operations as the Company's nonbank investment 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. In July 1999, the Company's second bank
subsidiary, Cardinal Bank -Manassas/Prince William, N.A. began operations.
Cardinal Bank - Dulles, N.A., the third banking subsidiary, began operations in
August 1999. A fourth bank subsidiary is scheduled to open in the second quarter
of 2000 located in Alexandria, Virginia.
The following presents management's discussion and analysis of the
consolidated financial condition and results of operation of the Company for the
years ended December 31, 1999 and 1998. The discussion should be read in
conjunction with the accompanying consolidated financial statements.
1999 Compared to 1998
Earnings Summary
The net loss for the year ended December 31, 1999 was $4,038,719 or
$0.95 per diluted share, compared to a net loss of $1,696,345, or $0.64 per
diluted share, for the year ended December 31, 1998. The increase in the net
loss in 1999 compared to 1998 was primarily due to increased non-interest
expenses associated with the opening of three subsidiaries. Two bank
subsidiaries, Cardinal Bank - Manassas/Prince William, N.A., and Cardinal Bank
- -Dulles, N.A., opened in the third quarter of 1999 and one non-bank subsidiary,
Cardinal Wealth Services, Inc., opened in the first quarter of 1999.
These operating results represent a return on average shareholders'
equity of -12.26% for the year ended December 31, 1999 compared to -7.45% for
the year ended December 31, 1998. Return on average assets for the year ended
December 31, 1999 was -5.61% compared to -5.37% in 1998.
Financial Condition Summary
Total assets were $97.0 million at December 31, 1999, an increase of
$39.7 million, or 69.4%, compared with December 31, 1998. Loans, net of unearned
income, increased $51.8 million in 1999 to $68.2 million. This increase can be
attributed to strong results from Cardinal Bank, N.A. as well as the activity
associated with two new banking subsidiaries that opened in the third quarter of
1999. Cash and cash equivalents declined $6.3 million and investment securities
available-for-sale declined $8.7 million in 1999 compared to 1998. These
declines can be attributed to funding increased loan growth.
Total deposits grew $38.0 million to $59.9 million in 1999 from $21.9
million at year-end 1998 due again to having multiple banks operating for part
of 1999 versus only one operating in 1998. Non- interest-bearing deposits
increased $7.3 million or 144.5% and interest-bearing deposits increased $30.7
million or 182.6%. The Company's short-term borrowings were $6.0 million at
December 31, 1999. There were no borrowings at December 31, 1998. The short-term
borrowings are FHLB advances and were utilized for loan growth and other
operating purposes.
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Shareholders' equity decreased $4.0 million or 11.5% from December 31,
1998 to December 31, 1999. Operating losses for the year ended December 31, 1999
caused the decline. At December 31, 1999 the Company's regulatory capital levels
exceeded those established for well-capitalized institutions.
Net Interest Income and Net Interest Margin
The fundamental source of the Company's revenue, net interest income,
is defined as the difference between income on earning assets and the cost of
funds supporting those assets. The significant categories of earning assets are
loans and investment securities, while deposits and FHLB advances represent
interest bearing liabilities. The level of net interest income is impacted
primarily by variations in the volume and mix of these assets and liabilities,
as well as changes in interest rates when compared to previous periods of
operation. Net interest income for 1999 was $3.02 million, 148.7% higher than
the prior year. The growth in net interest income was due to the increase in
average interest-earning assets of 144.9% which was the result of three bank
subsidiaries operating in 1999 compared to only one operating in 1998. The net
interest margin increased to 4.75% in 1999 compared to 4.66% in 1998. The
average rate on earning assets increased 79 basis points to 6.57% and the
average rate on interest-bearing liabilities decreased 42 basis points to 4.67%.
Table 1 reflects the components of interest income and interest expense and
their applicable yields and costs.
Provision and Allowance for Loan Losses
Management's policy is to maintain the allowance for loan losses at a
level sufficient to absorb the estimated losses inherent in the loan portfolio.
Both the amount of the provision and the level of the allowance for loan losses
are impacted by many factors, including general economic conditions, actual and
expected credit losses, loan performance measures, historical trends and
specific conditions of the individual borrower. Due to the relatively short
credit history of its subsidiaries Cardinal Bank, N.A. (18 months of operation),
Cardinal Bank - Manassas/Prince William, N.A. (five months) and Cardinal Bank -
Dulles, N.A. (five months) management is currently providing for loan losses at
a rate of 1.25% which approximates its peer group average.
The ratio of the allowance for losses to gross loans at December 31,
1999 was 1.07% compared to 1.30% at December 31, 1998. While the calculated
reserve ratio reflects a 23 basis point decline there are two factors that need
to be taken into account in order to better understand the Company's level of
loan loss coverage. In the fourth quarter of 1999, the Company purchased a $7.8
million installment loan portfolio. This transaction was structured in such a
way that the seller absorbs losses up to 115 basis points of the outstanding
balances. Consequently, the Company does not expect losses on this portfolio and
did not add to its allowance for loan losses when this transaction was recorded.
The second factor to be considered is the Company's Business Manager product.
Under this product, advances to customers are fully collateralized by customer
receivables and a restricted deposit account equal to at least 10% of the amount
borrowed.
As a result, the Company does not expect losses on those transactions
and therefore has not added to its allowance for loan losses. Table 2 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 the Business Manager receivables.
Non-Interest Income
Non-interest income is an important factor in the Company's operating
results. Management continues to evaluate and identify new sources of
non-interest income as well as enhance existing ones. Non-interest income
increased to $1,320,485 in 1999 from $34,037 in 1998. The significant increase
in
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non-interest income for 1999 was due to $1,017,924 of investment fee income
generated by Cardinal Wealth Services, Inc. which began operations on February
1, 1999. Other non-interest income includes loan and deposit service charges,
which increased to $267,823 in 1999 from $19,533 in 1998. Table 3 reflects the
components of non-interest income for 1999 and 1998.
Non-Interest Expense
Non-interest expense was $7,870,069 in 1999 compared to $2,734,269 in
1998. The significant increase in expense can be attributed to the opening of
two bank subsidiaries and one non-bank subsidiary during 1999. Total personnel
expense increased to $4,277,231 from $1,401,117 in 1998 as a result of the
staffing of the above mentioned subsidiaries. Increases in depreciation,
occupancy and other operating expenses are also associated with start-up
subsidiary operations. Footnote 17 of the Consolidated Financial Statements
provides additional details of non-interest expense.
Income Taxes
The Company has not incurred income tax liability due to the
recognition of net losses in 1999, 1998 and 1997. The ability to utilize net
operating loss carryforwards will be dependent on the Company's ability to
generate future earnings. Footnote 8 of the Consolidated Financial Statements
provides additional information with respect to the deferred tax accounts and
the net operating loss carryforward.
Liquidity
The objective of liquidity management is to ensure the continuous
availability of funds to meet the demands of depositors, investors and
borrowers. Stable core deposits and a strong capital position are the components
of a solid foundation for the Company's liquidity position. In addition, the
availability of the investment portfolio and access to regional and national
wholesale funding sources including fed funds purchased, negotiable certificates
of deposits, securities sold under agreements to repurchase, and Federal Home
Loan Bank advances enhances the Company's liquidity. Cash flows from operations,
such as loan payments and pay-offs are also a significant source of liquidity.
The Company has a contingency plan that provides for continued monitoring of
liquidity needs and available sources of liquidity. Management believes the
Company has the ability to meet its liquidity needs.
Capital Resources
Capital adequacy is an important measure of financial stability and
performance. Management's objectives are to maintain a level of capitalization
that is sufficient to sustain asset growth and promote depositor and investor
confidence.
Regulatory agencies measure capital adequacy utilizing a formula that
takes into account the individual risk profiles of financial institutions. The
guidelines define capital as either Tier 1 (primarily common shareholders'
equity, defined to include certain debt obligations) and Tier 2 (to include
certain other debt obligations and a portion of the allowance for loan losses
and 45% of unrealized gains in equity securities).
At December 31, 1999, shareholders' equity was $30.7 million compared
to $34.7 million at December 31, 1998. The decline in shareholders' equity is
attributable to the net loss incurred in 1999. Footnote 9 of the Consolidated
Financial Statements shows the minimum capital requirements and the Company's
capital position as of December 31, 1999 and 1998. The Company's regulatory
capital levels exceed those established for well-capitalized institutions.
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Lending
The Company has comprehensive policies and procedures which cover both
commercial and consumer loan origination and management of credit risk. Loans
are underwritten in a manner that focuses on the borrowers' ability to repay.
The Company's goal is not to avoid risk, but to manage it and to include credit
risk as part of the pricing decision for each product.
Total loans, net of fees and premiums and discounts, increased to $68.2
million as of December 31, 1999 compared to $16.3 million as of December 31,
1998. The increase is the result of a full years operation of Cardinal Bank,
N.A. in addition to the activity of Cardinal Bank -Manassas/Prince William,
N.A., and Cardinal Bank -Dulles, N.A., both of which opened in the third quarter
of 1999. There were no non-performing loans at December 31, 1999 and 1998.
The Company's loan portfolio consists of commercial short-term lines of
credit, term loans, mortgage financing and construction loan funds that are used
by the borrower to build or develop real estate properties. The consumer
portfolio includes residential real estate mortgages, bankcard, home equity
lines and installment loans. Table 4 reflects the components of the loan
portfolio as of December 31, 1999 and 1998. Table 5 reflects the allocation of
the allowance for loan loss by loan category.
Securities Available-for-Sale
The investment securities portfolio of the Company is used as a source
of income and liquidity. The portfolio has declined to $4.8 million as of
December 31, 1999 from $13.5 million as of December 31, 1998. The decline
reflects liquidity needs associated with funding the loan growth experienced in
1999. Table 6 reflects the composition of the investment portfolio as of
December 31, 1999 and 1998.
Interest Rate Sensitivity
The most important element of asset/liability management is the
monitoring of the Company's sensitivity to interest rate movements. The income
stream of the Company is subject to risk resulting from interest rate
fluctuations to the extent there is a difference between the amount of the
Company's interest earning assets and the amount of interest bearing liabilities
that are prepaid, mature or reprice in specified periods. The Company's goal is
to maximize net interest income with acceptable levels of risk to changes in
interest rates. Management seeks to meet this goal by influencing the maturity
and re-pricing characteristics of the various lending and deposit taking lines
of business and by managing discretionary balance sheet asset and liability
portfolios.
One of the ways the Company identifies and manages its interest rate
risk is through an analysis of the relationship between interest-earning assets
and interest-bearing liabilities to measure the impact that future changes in
interest rates will have on net interest income. The difference between rate
sensitive assets and rate sensitive liabilities for specified periods of time is
known as the "GAP." The data in Table 7 reflects re-pricing or expected
maturities of various assets and liabilities at December 31, 1999. Interest
sensitivity gap analysis presents a position that existed at one particular
point in time and assumes that assets and liabilities with similar
characteristics will re-price at the same time and to the same degree. As shown
in the table, the Company was liability sensitive (excess of liabilities over
assets) in the three month to one year horizon. Management has included
estimates in the table with respect to certain deposit balances of Cardinal
Bank, N.A. that reflect the fact that not all of these deposits re-price on a
contractual basis. Deposit balances for Cardinal Bank -Manassas/Prince William,
N.A. and Cardinal Bank -Dulles, N.A. have not been adjusted due to the lack of
historical data. The result of these
21
<PAGE>
adjustments was to reduce the negative gap in the three-month to one-year period
to that reflected in the table.
1998 Compared to 1997
The comparison of operating results between 1998 and 1997 should be
read in the context of the start-up nature of the Company. The holding company
began operations on November 24, 1997 and its first bank subsidiary began
operations on June 8, 1998.
Consolidated net loss for 1998 was $1,696,345 or $0.64 per diluted
share compared to a net loss of $145,178 or $0.12 per diluted share in 1997. Net
interest income was $1,216,347 in 1998 compared to $4,317 in 1997. Non-interest
income totaled $34,037 in 1998 compared to $0 recorded in 1997. Total
non-interest expense increased in 1998 to $2,734,269 from $149,495 in 1997.
Total assets increased to $57.3 million in 1998 compared to $8.8
million in 1997. The increase was due to the Company's initial public offering
which generated net proceeds of $26.0 million, and an increase of $21.9 million
in deposit balances. Total loans were $16.3 million at December 31, 1998
compared to zero at December 31, 1997. The remaining sources of funds were
invested into government agency securities totaling $13.7 million and fed funds
sold which increased $20.1 million to $24.3 million at December 31, 1998.
Year 2000
The Company successfully completed the transition to the year 2000 with
no impact to the Company's financial condition. The Company is not aware of any
significant third party relationships which were negatively impacted by the year
2000 transition. The cost of year 2000 readiness was minimal to the Company due
to its recent formation and the ability to incorporate year 2000 ready systems
and vendors at its inception.
22
<PAGE>
Table 1.
Cardinal Financial Corporation and Subsidiaries
Rate and Volume Analysis
(Dollars in thousands)
<TABLE>
<CAPTION>
Variance
Average Volume Average Rate Interest Increase Attributable to
1999 1998 1999 1998 1999 1998 (Decrease) Rate Volume
- ---------------------- --------------------- --------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Loans:
$ 11,087 $ 529 7.58% 10.01% Commercial $ 840 $ 53 $ 787 $ (270) $ 1,057
9,718 287 8.13% 8.01% Real estate - commercial 790 23 767 12 755
719 63 9.32% 7.89% Real estate - construction 67 5 62 10 52
8,089 768 7.76% 7.42% Real estate - residential 628 57 571 28 543
2,340 155 7.17% 10.36% Home equity lines 168 16 152 (74) 226
1,724 168 9.75% 13.73% Consumer 168 23 145 (69) 214
- ------------------------------------------------------------------------------------------------------------------------------------
33,677 1,970 7.90% 8.99% Total loans 2,661 177 2,484 (363) 2,847
6,960 5,484 5.83% 5.62% Investment Securities - AFS 406 308 98 15 83
504 133 5.74% 5.97% Other Investments 29 8 21 (1) 22
- 764 0.00% 4.17% Money Market Accounts - 32 (32) - (32)
24,804 18,574 4.97% 5.55% Federal Funds Sold 1,234 1,031 203 (143) 346
- ------------------------------------------------------------------------------------------------------------------------------------
$ 65,945 $ 26,925 6.57% 5.78% Total interest-earning assets $ 4,330 $ 1,556 $ 2,774 $ (492) $ 3,266
====================================================================================================================================
Interest Expense
2,436 535 2.01% 2.06% Interest Checking 49 11 38 (1) 39
7,168 2,316 3.68% 3.71% Money Markets 264 86 178 (2) 180
239 62 2.93% 3.23% Statement Savings 7 2 5 (1) 6
18,980 4,336 4.67% 5.54% Certificates of Deposit 887 240 647 (164) 811
- ------------------------------------------------------------------------------------------------------------------------------------
28,823 7,249 4.19% 4.68% Total deposits 1,207 339 868 (168) 1,036
1,773 - 5.53% 0.00% Borrowings 98 1 97 97 -
- ------------------------------------------------------------------------------------------------------------------------------------
30,596 7,249 4.27% 4.69% Total interest-bearing liabilities 1,305 340 965 (71) 1,036
====================================================================================================================================
41,151 23,045 Other Sources
- ------------------------------------------------------------------------------------------------------------------------------------
71,747 30,294 1.82% 1.12% Total Sources of Funds 1,305 340 965 (71) 1,036
- ------------------------------------------------------------------------------------------------------------------------------------
$ 35,349 $ 19,676 4.75% 4.66% Net Interest Margin $ 3,025 $ 1,216 $ 1,809 $ (421) $ 2,230
====================================================================================================================================
</TABLE>
No tax equivalent adjustment made to the above table.
23
<PAGE>
Table 2.
Cardinal Financial Corporation and Subsidiaries
Allowance for Loan Losses
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
----------------- ------------------
<S> <C> <C>
Beginning balance $ 212 $ -
Provision for loan losses 514 212
Loans charged off:
Commercial - -
Real estate - commercial - -
Real estate - construction - -
Real estate - residential - -
Home equity lines - -
Consumer - -
- -------------------------------------------------------------------------------------------
Total loans charged off - -
Recoveries:
Commercial - -
Real estate - commercial - -
Real estate - construction - -
Real estate - residential - -
Home equity lines - -
Consumer - -
- -------------------------------------------------------------------------------------------
Total recoveries - -
Net charge-offs - -
Balance, December 31 $ 726 $ 212
===========================================================================================
Loans:
Balance at year end $ 68,147 $ 16,343
Allowance for loan losses to
Year-end loans 1.07% 1.30%
Less: Business Manager $ 1,522 $ -
Less: Purchased Loans 7,687 -
----------------- ------------------
Adjusted Loan Balance $ 58,938 $ 16,343
Allowance for loan losses to
Year-end adjusted loans 1.23% 1.30%
</TABLE>
24
<PAGE>
Table 3.
Cardinal Financial Corporation and Subsidiaries
Non-interest Income
For the years ended December 31, 1999 and 1998
1999 1998
-------------- -------------
Service charges on deposit accounts $ 41,612 $ 3,388
Loan service charges 226,211 16,145
Investment fee income 1,017,924 -
Gain on sale of investment securities 4,207 8,760
Other income 30,531 5,744
-------------- -------------
$ 1,320,485 $ 34,037
============== =============
25
<PAGE>
Table 4.
Cardinal Financial Corporation and Subsidiaries
Loans
(Dollars in thousands)
December 31, December 31,
1999 1998
---------------------- ---------------------
Commercial $ 22,558 33.10% $ 5,138 31.43%
Real estate - commercial 19,780 29.03% 3,507 21.46%
Real estate - construction 870 1.28% 760 4.65%
Real estate - residential 11,851 17.39% 5,529 33.83%
Home equity lines 3,777 5.54% 1,040 6.37%
Consumer 9,311 13.66% 369 2.26%
---------------------- ---------------------
Gross loans $ 68,147 100.00% $ 16,343 100.00%
Less: unearned income, net 20 - (16) -
Less: allowance for loan loss (726) - (212) -
---------------------- ---------------------
Total loans, net $ 67,441 - $ 16,115 -
====================== =====================
26
<PAGE>
Table 5.
Cardinal Financial Corporation and Subsidiaries
Allocation of the Allowance for Loan Losses
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
Commercial $ 241 33.20% $ 59 27.83%
Real estate - commercial 211 29.06% 40 18.87%
Real estate - construction 9 1.24% 9 4.25%
Real estate - residential 126 17.36% 64 30.19%
Home equity lines 40 5.51% 12 5.66%
Consumer 24 3.31% 4 1.89%
Unallocated 75 10.32% 24 11.31%
-------------------- --------------------
Total allowance for loan losses $ 726 100.00% $ 212 100.00%
==================== ====================
</TABLE>
27
<PAGE>
Table 6.
Cardinal Financial Corporation and Subsidiaries
Investment Securities - Available-for-Sale
As of December 31, 1999 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Amortized Fair Unrealized Average
As of December 31, 1999 Par Value Cost Value Gain/(Loss) Yield
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government Agencies and Enterprises
Within one year $ 2,000 2,000 1,948 (52) 5.99%
One to five years 1,000 1,000 979 (21) 5.74%
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 305 305 304 (1) 5.63%
One to five years 367 368 368 - 5.92%
Five to ten years 803 806 763 (43) 5.93%
- ---------------------------------------------------------------------------------------------------------------------------------
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%
Amortized Fair Unrealized Average
As of December 31, 1998 Par Value Cost Value Gain/(Loss) Yield
----------------------------------------------------------------------
U.S. Government Agencies and Enterprises
Within one year $ 300 300 300 - 5.28%
One to five years 9,000 9,002 9,005 3 5.79%
Five to ten years 500 501 502 1 5.79%
After ten years 500 499 499 - 6.26%
- ---------------------------------------------------------------------------------------------------------------------------------
Total U.S Government Agencies $ 10,300 10,302 10,306 4 5.78%
- ---------------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities
Within one year - - - - -
One to five years 437 441 440 (1) 5.43%
Five to ten years 460 460 460 - 5.27%
After ten years 2,278 2,271 2,271 - 5.87%
- ---------------------------------------------------------------------------------------------------------------------------------
Total Mortgage-Backed Securities $ 3,175 3,172 3,171 (1) 5.52%
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale $ 13,475 13,474 13,477 3 5.65%
</TABLE>
28
<PAGE>
Table 7.
Cardinal Financial Corporation and Subsidiaries
Interest Rate Sensitivity Gap Analysis
As of December 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
1-90 91-180 181-365 1-5 Over 5
Days Days Days Years Years TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment securities
U.S. Government agency securities 1,462 486 - 980 445 $ 3,373
Mortgage-backed securities 89 215 - 367 763 1,434
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,551 701 - 1,347 1,208 4,807
- ---------------------------------------------------------------------------------------------------------------------------------
Federal funds sold 13,025 13,025
- ---------------------------------------------------------------------------------------------------------------------------------
Loans
Commercial -fixed 541 1,109 1,133 3,542 237 6,562
Commercial - variable 11,677 398 295 3,418 208 15,996
Real estate - commercial fixed 5 3 7 309 175 499
Real estate - commercial variable 161 131 270 16,096 2,623 19,281
Real estate - construction fixed - - - - - -
Real estate - construction variable 870 - - - - 870
Real estate - residential fixed 10 12 23 1,482 61 1,588
Real estate - residential variable 280 39 81 9,025 838 10,263
Home equity lines 3,691 86 - - - 3,777
Consumer - fixed 207 52 104 676 7,693 8,732
Consumer - variable 442 3 6 128 - 579
- ---------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net of fees 17,884 1,833 1,919 34,676 11,835 68,147
- ---------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 32,460 2,534 1,919 36,023 13,043 $ 85,979
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative Rate Sensitive Assets 32,460 34,994 36,913 72,936 85,979
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Deposits
Demand deposits 9,971 337 337 337 1,348 $ 12,330
Interest checking 2,607 770 257 257 - 3,891
Statement savings 317 43 43 76 - 479
Money market accounts 7,660 2,016 672 672 - 11,020
Certificates of deposit - fixed 558 3,860 5,560 5,404 539 15,921
Certificates of deposit - no penalty 4,141 1,895 1,793 8,403 - 16,232
- ---------------------------------------------------------------------------------------------------------------------------------
Total Deposits 25,254 8,921 8,662 15,149 1,887 59,873
- ---------------------------------------------------------------------------------------------------------------------------------
Borrowings - short term - 4,000 2,000 - - 6,000
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 25,254 12,921 10,662 15,149 1,887 $ 65,873
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative Rate Sensitive Liabilities 25,254 38,175 48,837 63,986 65,873
- ---------------------------------------------------------------------------------------------------------------------------------
Gap 7,206 (10,387) (8,743) 20,874 11,156
Cumulative Gap 7,206 (3,181) (11,924) 8,950 20,106
Gap/ Total Assets 7.43% -10.70% -9.01% 21.51% 11.50%
Cumulative Gap/ Total Assets 7.43% -3.28% -12.29% 9.22% 20.72%
Rate Sensitive Assets/ Rate Sensitive Liabilities 1.29 0.20 0.18 2.38 6.91
Cumulative Rate Sensitive Assets/
Cumulative Rate Sensitive Liabilities 1.29 0.92 0.76 1.14 1.31
</TABLE>
29
<PAGE>
Item 7. Financial Statements
The following financial statements are filed as a part of this report
following Item 13 below:
Independent Auditors' Report
Financial Statements
Consolidated Balance Sheets, December 31, 1999 and 1998
Consolidated Statements of Operations, Years Ended December
31, 1999 and 1998
Consolidated Statements of Comprehensive Income (Loss), Years
Ended December 31, 1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended December 31, 1999 and 1998
Consolidated Statements of Cash Flows, Years Ended December
31, 1999 and 1998
Notes to Consolidated Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No changes in the Company's independent accountants or disagreements on
accounting and financial disclosure required to be reported hereunder have taken
place.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Information set forth under the headings "Election of Directors,"
"Executive Officers Who Are Not Directors," and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement for
its 2000 Annual Meeting of Shareholders, which Proxy Statement will be filed
with the Securities and Exchange Commission within 120 days of the end of the
Company's 1999 fiscal year (the "2000 Proxy Statement"), is hereby incorporated
by reference.
Item 10. Executive Compensation
Information as set forth under the headings "Executive Compensation -
Summary of Cash and Certain Other Compensation," "- Stock Option Grants," "-
Option Exercises and Holdings," "- Directors' Fees," and "- Employment
Agreements" in the 2000 Proxy Statement is hereby incorporated by reference.
30
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information set forth under the headings "Securities Ownership of
Management" and "Security Ownership of Certain Beneficial Owners" in the 2000
Proxy Statement is hereby incorporated by reference.
Item 12. Certain Relationships and Related Transactions
Information set forth under the heading "Transactions With Management"
in the 2000 Proxy Statement is hereby incorporated by reference.
Item 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits.
3.1 Articles of Incorporation of Cardinal Financial Corporation,
attached as Exhibit 3.1 to the Registration Statement on
Form SB-2, Registration No. 333-52279, filed with the
Commission on May 8, 1998 (the "Form SB-2"), incorporated
herein by reference.
3.2 Bylaws of Cardinal Financial Corporation, attached as
Exhibit 3.2 to the Form SB-2, incorporated herein by
reference.
4 Form of Stock Certificate, attached as Exhibit 4 to the Form
SB-2, incorporated herein by reference.
10.1 Employment Agreement, dated as of September 30, 1997,
between Commercial Fidelity Financial Partnership
(predecessor to Cardinal Financial Corporation) and L.
Burwell Gunn, Jr., attached as Exhibit 10 to the Form SB-2,
incorporated herein by reference.
10.2 Employment Agreement, dated as of October 13, 1998, between
Cardinal Financial Corporation and Thomas C. Kane, attached
as Exhibit 10.2 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998 (the "1998 Form
10-KSB"), incorporated herein by reference.
10.3 Employment Agreement, dated as of December 17, 1998, between
Cardinal Financial Corporation and Edgar M. Andrews, III,
attached as Exhibit 10.3 to the 1998 Form 10-KSB,
incorporated herein by reference.
10.4 Employment Agreement, dated as of December 17, 1998, between
Cardinal Financial Corporation and Christopher W. Bergstrom,
attached as Exhibit 10.4 to the 1998 Form 10-KSB,
incorporated herein by reference.
10.5 Employment Agreement, dated as of February 17, 1999, between
Cardinal Financial Corporation and Joseph L. Borrelli,
attached as Exhibit 10.5 to the 1998 Form 10-KSB,
incorporated herein by reference.
31
<PAGE>
10.6 Employment Agreement, dated as of February 12, 1999, between
Cardinal Financial Corporation and F. Kevin Reynolds,
attached as Exhibit 10.6 to the 1998 Form 10-KSB,
incorporated herein by reference.
10.7 Employment Agreement, dated as of August 31, 1998, between
Cardinal Financial Corporation and Greg D. Wheeless,
attached as Exhibit 10.7 to the 1998 Form 10-KSB,
incorporated herein by reference.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule (filed electronically only).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during
the last quarter of the period covered by this report.
32
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Cardinal Financial Corporation and subsidiaries:
We have audited the accompanying consolidated statements of condition of
Cardinal Financial Corporation and subsidiaries (the Company) as of December 31,
1999 and 1998, and the related consolidated statements of operations,
comprehensive income (loss), changes in shareholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 Cardinal Financial
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
McLean, Virginia
January 20, 2000
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition
December 31, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
Assets 1999 1998
----------------- -----------------
<S> <C> <C>
Cash & due from banks $ 6,018 $ 1,073
Federal funds sold 13,025 24,277
----------------- -----------------
Total cash and cash equivalents 19,043 25,350
Investment securities available-for-sale (Note 3) 4,807 13,477
Other investments (Note 3) 1,015 220
Loans receivable, net of fees (Note 4) 68,167 16,327
Allowance for loan losses (Note 4) (726) (212)
----------------- -----------------
67,441 16,115
Premises and equipment, net (Note 5) 4,203 1,829
Accrued interest and other assets 524 304
----------------- -----------------
Total assets $ 97,033 $ 57,295
================= =================
Liabilities and Shareholders' Equity
Deposits (Note 6) $ 59,873 $ 21,867
Borrowings (Note 7) 6,000 --
Accrued interest and other liabilities 415 700
----------------- -----------------
Total liabilities 66,288 22,567
Common stock, $1 par value, 50,000,000 shares authorized,
shares outstanding 4,242,634 in 1999 and 4,239,509 in 1998 4,243 4,240
Additional paid in capital 32,496 32,327
Accumulated deficit (5,881) (1,842)
Accumulated other comprehensive income (loss) (113) 3
----------------- -----------------
Total shareholders' equity 30,745 34,728
----------------- -----------------
Total liabilities and shareholders' equity $ 97,033 $ 57,295
================= =================
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Interest income:
Loans receivable $ 2,660,851 $ 178,697
Federal funds sold 1,234,273 1,061,815
Investment securities 405,604 308,131
Other investments 28,902 7,928
----------------- -----------------
Total interest income 4,329,630 1,556,571
Interest expense:
Deposits (Note 6) 1,206,882 338,608
Borrowings 98,036 1,616
----------------- -----------------
Total interest expense 1,304,918 340,224
----------------- -----------------
Net interest income 3,024,712 1,216,347
Provision for loan losses (Note 4) 513,847 212,460
----------------- -----------------
Net interest income after provision for loan losses 2,510,865 1,003,887
Non-interest income:
Service charges on deposit accounts 41,612 3,388
Loan service charges 226,211 16,145
Investment fee income 1,017,924 --
Gains from sale of securities 4,207 8,760
Other income 30,531 5,744
----------------- -----------------
Total non-interest income 1,320,485 34,037
Non-interest expense:
Salary and benefits 4,277,231 1,401,117
Occupancy 811,578 151,583
Professional fees 494,472 463,497
Depreciation 356,435 106,653
Other operating expenses (Note 17) 1,930,353 611,419
----------------- -----------------
Total non-interest expense 7,870,069 2,734,269
----------------- -----------------
Net loss before income taxes (4,038,719) (1,696,345)
Provision for income taxes (Note 8) -- --
----------------- -----------------
Net loss $ (4,038,719) $ (1,696,345)
================= =================
Basic and diluted loss per share $ (0.95) $ (0.64)
================= =================
Weighted-average shares outstanding 4,240,819 2,646,036
================= =================
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Net loss $ (4,038,719) $ (1,696,345)
Other comprehensive income (loss):
Unrealized holding gain (loss) on available-for-sale
investment securities, net of tax (115,491) 2,605
----------------- -----------------
Comprehensive loss $ (4,154,210) $ (1,693,740)
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1999 and 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
Additional Other Uncollected
Common Paid-in Accumulated Comprehensive Subscription
Shares Stock Capital Deficit Income (Loss) Receivable Total
--------- ---------- ------------ ----------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,175 $ 1,175 $ 7,621 $ (145) $ -- $ (100) $ 8,551
Issuance of 235 shares of common stock
at $7.50 per share, net of costs 235 235 1,525 -- -- -- 1,760
Issuance of 2,830 shares of common stock
at $10.00 per share, net of costs 2,830 2,830 23,181 -- -- -- 26,011
Payment of subscription receivable -- -- -- -- -- 100 100
Change in unrealized holding gain (loss) on
investment securities available-for-sale -- -- -- -- 3 -- 3
Net loss -- -- -- (1,697) -- -- (1,697)
--------- ---------- ------------ ----------- -------------- ------------ ---------
Balance, December 31, 1998 4,240 4,240 32,327 (1,842) 3 -- 34,728
Issuance of stock awards 3 3 19 -- -- -- 22
Reversal of accrued cost related to public
offering -- -- 138 -- -- -- 138
Accrual of stock award -- -- 12 -- -- -- 12
Change in unrealized holding gain (loss) on
investment securities available-for-sale,
net of tax -- -- -- -- (116) -- (116)
Net loss -- -- -- (4,039) -- -- (4,039)
--------- ---------- ------------ ----------- -------------- ------------ ---------
Balance, December 31, 1999 4,243 $ 4,243 $ 32,496 $ (5,881) $ (113) $ -- $ 30,745
========= ========== ============ =========== ============== ============ =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (4,039) $ (1,697)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 356 107
Amortization of premium 13 --
Provision for loan losses 514 212
Gain on sale of securities (4) (9)
Increase in accrued interest and other assets (220) (301)
Increase (decrease) in accrued interest and other liabilities (227) 640
Non-cash charges for issuance of stock award 22 --
Compensation related to stock awards 12 --
----------------- -----------------
Net cash used in operating activities (3,573) (1,048)
----------------- -----------------
Cash flows from investing activities:
Purchase of premises and equipment (2,730) (1,936)
Proceeds from sale of securities 7,722 3,460
Purchase of securities (850) (17,379)
Redemptions of available-for-sale 820 234
Net increase in loan portfolio (51,840) (16,327)
----------------- -----------------
Net cash used in investing activities (46,878) (31,948)
----------------- -----------------
Cash flows from financing activities:
Net increase in deposits 38,006 21,867
Proceeds from stock issuance, net -- 27,871
Decrease in subscription receivables -- 4,510
Proceeds (repayment) of short-term borrowings 6,000 (185)
Reversal of accrued costs related to public offering 138 --
----------------- -----------------
Net cash provided by financing activities 44,144 54,063
----------------- -----------------
Net increase (decrease) in cash and cash equivalents (6,307) 21,067
Cash and cash equivalents at beginning of period 25,350 4,283
----------------- -----------------
Cash and cash equivalents at end of period $ 19,043 $ 25,350
================= =================
Supplemental disclosure of cash flow information
Cash paid during period for interest: $ 1,259 $ 341
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(1) Organization
Cardinal Financial Corporation (the "Company") was incorporated November
24, 1997 under the laws of the Commonwealth of Virginia as a holding
company whose activities consist of investment in its wholly-owned
subsidiaries. In addition to Cardinal Bank, N.A. which began operations
in 1998, the Company opened the following three subsidiaries in 1999,
Cardinal Wealth Services, Inc. an investment subsidiary (as of February
1, 1999), Cardinal Bank - Manassas/Prince William, N.A. (as of July 26,
1999), and Cardinal Bank - Dulles, N.A. (as of August 2, 1999).
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
contingent liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
(c) Cash and Cash Equivalents
For the purpose of presentation in the consolidated statements of
cash flows, the Company has defined cash and cash equivalents as
those amounts included in cash, due from banks, and Federal funds
sold.
(d) Investment Securities
The Company classifies its debt and marketable equity securities
in one of two categories: available-for-sale or held-to-maturity.
Held-to-maturity securities are those securities for which the
Company has the ability and intent to hold until maturity. All
other securities not classified as trading or held-to-maturity are
classified as available-for-sale.
Available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses, net of tax, on
available-for-sale securities are reported in other comprehensive
income (loss).
Gains and losses on the sale of securities are determined using
the specific identification method. Declines in the fair value of
individual held-to-maturity and available-for-sale securities
below their cost that are deemed other than temporary are charged
to earnings as realized losses, resulting in the establishment of
a new cost basis for the security.
Premiums and discounts are recognized in interest income using the
effective interest method over the period to maturity. Prepayment
of the mortgages securing the collateralized mortgage obligations
may affect the maturity date and yield to maturity. The Company
uses actual principal prepayment experience and estimates of
future principal prepayments in calculating the yield necessary to
apply the effective interest method.
7
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(e) Loans Receivable
Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off are
reported at their outstanding principal balance adjusted for any
charge-offs, and net of the allowance for loan losses and any
deferred fees or costs on originated loans.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the
related loan.
Loans are placed in nonaccrual status when they are past-due 90
days as to either principal or interest or when, in the opinion of
management, the collection of principal and interest is in doubt.
A loan remains in nonaccrual status until the loan is current as
to payment of both principal and interest or past-due less than 90
days, and the borrower demonstrates the ability to pay and remain
current. Loans are charged-off when a loan or a portion thereof is
considered uncollectible.
The Company determines and recognizes impairment of certain loans
when based on current information and events, it is probable that
the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. A loan is not
considered impaired during a period of delay in payment if the
Company expects to collect all amounts due, including past-due
interest. An impaired loan is measured at the present value of its
expected future cash flows discounted at the loan's effective
interest rate, or at the loan's observable market price or fair
value of the collateral if the loan is collateral dependent. As of
December 31, 1999 and 1998, the Company had no impaired loans.
The allowance for loan losses is increased by provisions for loan
losses and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance
is based on the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may
affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions. In
addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's
allowance for loan losses. Such agencies may require the Company
to recognize additions to the allowance based on their judgments
about information available to them at the time of their
examination. Management believes that the current allowance for
loan losses is adequate to absorb losses that are inherent in the
current loan portfolio.
(f) Premises and Equipment
Land is carried at cost. Premises, furniture, equipment, and
leasehold improvements are carried at cost, less accumulated
depreciation and amortization. Depreciation of premises, furniture
and equipment is computed using the straight-line method over
their estimated useful lives from 3 to 10 years. Amortization of
leasehold improvements is computed using the straight-line method
over the useful lives of the improvements or the lease term,
whichever is shorter.
(g) Investment Fee Income
Investment fee income represents commissions paid by customers of
Cardinal Wealth Services, Inc. for investment transactions. Fees
are recognized into income when received.
8
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(h) Income Taxes
Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for
income taxes.
(i) Net Income Per Share
Basic and diluted loss per common share is computed by dividing
net loss by the weighted average number of shares of common stock
outstanding during the periods. Common stock equivalents
outstanding at December 31, 1999 and 1998 were antidilutive and
consequently not included in the EPS calculation.
(j) Stock Option Plan
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations, in accounting for its fixed plan stock options.
As such, compensation expense is recorded only if the current
market price of the underlying stock exceeded the exercise price
on the date of grant.
(k) New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, effective for fiscal years beginning after
June 15, 1999. Statement No. 133 established accounting and
reporting standards for derivative instruments and hedging
activities and requires that the Company recognize all derivatives
as assets or liabilities on the balance sheet at fair market
value. In June 1999, the FASB issued Statement No. 137, which
deferred the implementation of Statement No. 133 to fiscal years
beginning after June 15, 2000. As of December 31, 1999 and 1998,
the Company had no derivative instruments or hedging activities
and therefore does not expect Statement No. 133 to have any
material impact on the Company's financial position or results of
operations.
(l) Reclassifications
Certain amounts for 1998 have been reclassified to conform to the
presentation for 1999.
9
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(3) Investment Securities and Other Investments
The fair value and amortized cost of available-for-sale securities as of
December 31, 1999 and 1998 are shown below.
<TABLE>
<CAPTION>
1999
-------------------------------------
Fair Amortized
(In thousands) value cost
----------------- -----------------
<S> <C> <C>
Obligations of U.S. government-sponsored
agencies and enterprises $ 3,373 $ 3,499
Mortgage - backed securities 1,434 1,479
----------------- -----------------
Total $ 4,807 $ 4,978
================= =================
1998
-------------------------------------
Fair Amortized
(In thousands) value cost
----------------- -----------------
Obligations of U.S. government-sponsored
agencies and enterprises $ 10,306 $ 10,302
Mortgage - backed securities 3,171 3,172
----------------- -----------------
Total $ 13,477 $ 13,474
================= =================
</TABLE>
The fair value and amortized cost of available-for-sale securities by
contractual maturity at December 31, 1999 is shown below. Expected
maturities may differ from contractual maturities because many issuers
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
1999
-------------------------------------
Fair Amortized
(In thousands) value cost
----------------- -----------------
<S> <C> <C>
Maturing within 1 year $ 2,252 $ 2,305
After 1 year but within 5 years 1,347 1,368
After 5 years but within 10 years 763 806
After 10 years 445 499
Marketable equity securities
----------------- -----------------
Total $ 4,807 $ 4,978
================= =================
</TABLE>
Gross realized gains and gross realized losses on sales of
available-for-sale securities were $13,532 and $9,325, respectively, in
1999 and $12,996 and $4,236, respectively, in 1998. Gross unrealized
holding losses in the available-for-sale securities at December 31, 1999
and 1998 were $171,348 and $13,348, respectively, while gross unrealized
holding gains were $309 and $15,953, respectively.
Other investments include $585 thousand of Federal Reserve Bank stock,
$346 thousand of Federal Home Loan Bank stock, $63 thousand of Community
Bankers' Bank stock and $21 thousand in other investments. As members of
the Federal Reserve Bank of Richmond and Federal Home Loan Bank of
Atlanta, the Company's banking subsidiaries are required to hold stock in
these entities. Stock
10
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
membership in Community Bankers' Bank allows the Company to participate
in loan purchases or sales including participations. These stocks are
carried at cost since no active trading markets exist.
Securities available-for-sale that were pledged to secure short-term
borrowings had fair values of $2,834,867 at December 31, 1999. There were
no pledged investment securities as of December 31, 1998.
(4) Loans Receivable
The loan portfolio at December 31, 1999 and 1998 consists of the
following:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
----------------- ------------------
<S> <C> <C>
Commercial $ 22,558 $ 5,138
Real estate - commercial 19,780 3,507
Real estate - construction 870 760
Real estate - residential 11,851 5,529
Home equity lines 3,777 1,040
Consumer 9,311 369
----------------- ------------------
68,147 16,343
Net deferred loan fees, premiums and discounts 20 (16)
----------------- ------------------
Loans receivable, net of fees 68,167 16,327
Allowance for loan losses (726) (212)
----------------- ------------------
Loans receivable, net of fees and allowance $ 67,441 $ 16,115
================= ==================
</TABLE>
Most of the Company's loans, commitments and standby letters of credit
have been granted to customers located in the Washington, D.C.
metropolitan area. The concentrations of credit by type of loan are set
forth above. Cardinal Bank, N.A., Cardinal Bank-Manassas/Prince William,
N.A. and Cardinal Bank-Dulles, N.A., as a matter of regulatory
restriction, do not extend credit, net of participated amounts, to any
single borrower or group of related borrowers in excess of $855,000,
$1,004,000, and $975,000, respectively.
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
---------------- ----------------
<S> <C> <C>
Balance, beginning of year $ 212 $ --
Provision for loan losses 514 212
Loans charged off -- --
Recoveries -- --
---------------- ----------------
Balance, end of year $ 726 $ 212
================ ================
</TABLE>
There were no impaired or nonaccrual loans at December 31, 1999 and 1998,
or during the years then ended.
11
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(5) Premises and Equipment
Components of premises and equipment included in the consolidated
statements of condition at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- ------------------
<S> <C> <C>
Land $ 197 $ 20
Building 789 --
Furniture and equipment 2,413 1,334
Leasehold improvements 1,267 582
----------------- ------------------
Total cost 4,666 1,936
Less accumulated depreciation and amortization 463 107
----------------- ------------------
Premises and equipment, net $ 4,203 $ 1,829
================= ==================
</TABLE>
The Company has entered into leases for office space over various terms
beginning January 1998. The leases are subject to annual increases as
well as allocations of real estate taxes and certain operating expenses.
Minimum future rental payments under the noncancelable operating leases,
as of December 31, 1999 for each of the next five years and in the
aggregate, are as follows:
Year ending December 31, Amount
-----------------
2000 $ 720,177
2001 741,075
2002 762,288
2003 784,139
2004 489,774
Thereafter 2,997,433
-----------------
$ 6,494,886
=================
The total rent expense was $742,179 and $71,687 in 1999 and 1998,
respectively.
(6) Deposits
Deposits consist of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
----------------- -----------------
<S> <C> <C>
Demand deposits $ 12,330 $ 5,044
Interest checking 3,891 1,746
Money market and statement savings 11,499 3,471
Certificates of deposit 32,153 11,606
----------------- -----------------
$ 59,873 $ 21,867
================= =================
</TABLE>
12
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Interest expense by deposit categories is as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Interest checking $ 48,527 $ 11,088
Money market and statement savings 271,140 87,832
Certificates of deposit 887,215 239,688
----------------- -----------------
$ 1,206,882 $ 338,608
================= =================
</TABLE>
The aggregate amount of time deposits, each with a minimum denomination
of $100,000 was $22,290,439 and $1,056,580 in 1999 and 1998,
respectively.
At December 31, 1999, the scheduled maturities of CDs are as follows:
(In thousands)
2000 $ 11,906
2001 17,195
2002 1,851
2003 299
2004 and thereafter 902
-----------------
$ 32,153
=================
(7) Borrowings
The Company has obtained advances from the Federal Home Loan Bank of
Atlanta in the amount of $6.0 million in 1999. The Company had no
advances in 1998. As of December 31, 1999, the Company had the following
advances outstanding:
<TABLE>
<CAPTION>
Amount
Advance Date Interest Rate Term of Advance Date Due Outstanding
----------------------- --------------------- ------------------------- --------------- -----------------
<S> <C> <C> <C> <C>
12/09/99 6.15% 6 months 06/09/00 $ 3,000,000
12/21/99 6.35% 6 months 06/21/00 1,000,000
12/23/99 6.53% 12 months 12/26/00 2,000,000
-----------------
$ 6,000,000
=================
</TABLE>
Total interest expense for the year ended December 31, 1999 was $97,775.
(8) Income Taxes
The Company and its subsidiaries file consolidated tax returns on a
calendar-year basis. The Company had no provision for current and
deferred income taxes for the years ended December 31, 1999 and 1998,
respectively.
13
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The provision for income taxes is reconciled to the amount computed by
applying the federal corporate tax rate to income before taxes and is as
follows:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Income tax (benefit) at federal corporate rate $ (1,373,165) $ (576,757)
Nondeductible expenses 18,363 1,870
Change in valuation allowance 1,354,802 574,887
----------------- -----------------
$ -- $ --
================= =================
</TABLE>
The tax benefits of temporary differences between the financial reporting
basis and income tax basis of assets and liabilities relate to the
following:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Bad debts $ 223,126 $ 64,465
Organization and other costs 71,438 18,730
Net operating loss carryforwards 1,765,588 538,901
Unrealized (gains) losses on investments available-for-sale 58,153 (886)
Other 6,890 567
----------------- -----------------
Total gross deferred assets 2,125,195 621,777
Less valuation allowance (2,026,756) (612,915)
----------------- -----------------
Net deferred tax assets 98,439 8,862
----------------- -----------------
Deferred tax liabilities:
Prepaid expenses (6,960) (8,862)
Depreciation (91,479) --
----------------- -----------------
Total gross deferred tax liabilities $ -- $ --
================= =================
</TABLE>
Deferred income taxes reflect temporary differences in the recognition of
revenue and expenses for tax reporting and financial statement purposes,
principally because certain items, such as depreciation and amortization
are recognized in different periods for financial reporting and tax
return purposes. A valuation allowance in the amount of $2,026,756 at
December 31, 1999 and $612,915 at December 31, 1998 has been established
for deferred tax assets as realization is dependent upon generating
future taxable income.
The Company has net operating loss carryforwards of approximately
$5,192,906 at December 31, 1999 which are available to offset future
taxable income. There are no annual limitations on utilization of the net
operating loss carryforwards.
(9) Regulatory Matters
The Company's banking subsidiaries ("the Banks"), as national banks, are
subject to the dividend restrictions set forth by the Comptroller of the
Currency. Under such restrictions, the Banks may not, without the prior
approval of the Comptroller of the Currency, declare dividends in excess
of the sum of the current year's earnings (as defined) plus the retained
earnings (as defined) from the prior two years. At December 31, 1999,
there were no earnings against which dividends could be paid.
14
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The Banks are required to maintain a minimum average reserve balance with
the Federal Reserve Bank. The average amount of the required reserve was
$150,000 for 1999. As members of the Federal Reserve Bank system, the
Banks are required to subscribe to shares of $100 par value Federal
Reserve Bank stock equal to 6 percent of the Bank's capital and surplus.
The Banks are required to pay for one-half of the subscription. The
remaining amount is subject to call when deemed necessary by the Board of
Governors of the Federal Reserve.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires the regulators to stratify institutions into five
quality tiers based upon their relative capital strengths and to increase
progressively the degree of regulation over the weaker institutions,
limits the pass through deposit insurance treatment of certain types of
accounts, adopts a "truth in savings" program, calls for the adoption of
risk-based premiums on deposit insurance and requires the Banks to
observe insider credit underwriting products no less strict than those
applied to comparable noninsider transactions.
At December 31, 1999, the Company and its subsidiary banks met all
regulatory capital requirements. The key measures of capital are: (1)
total capital (Tier I capital plus the allowance for loan losses up to
certain limitations) as a percent of total risk-weighted assets, (2) Tier
I capital (as defined) as a percent of total risk-weighted assets (as
defined), and (3) Tier I capital (as defined) as a percent of total
assets (as defined).
<TABLE>
<CAPTION>
As of December 31, 1999 To Be Well
(in thousands) Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total 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%
Tier I capital to average assets 30,858 32.55% 3,881 >= 4.00% 4,852 >= 5.00%
As of December 31, 1998 To Be Well
(in thousands) Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----------- ----------- ---------- ---------- -----------
Total capital to risk weighted assets $ 34,938 147.80% $ 1,892 >= 8.00% $ 2,365 >= 10.00%
Tier I capital to risk weighted assets 34,725 146.90% 946 >= 4.00% 1,419 >= 6.00%
Tier I capital to average assets 34,725 60.20% 2,292 >= 4.00% 2,865 >= 5.00%
</TABLE>
(10) Related-Party Transactions
Officers, directors, employees and their related business interests are
loan customers in the ordinary course of business. In management's
opinion, these loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable loans with other persons and do not involve more than normal
risk of collectibility or present other unfavorable features.
15
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Analysis of activity for loans to related parties is as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
----------------- -----------------
<S> <C> <C>
Balance, beginning of year $ 996 $ --
New loans 2,336 999
Loans paid off or paid down (456) (3)
----------------- -----------------
Balance, end of year $ 2,876 $ 996
================= =================
</TABLE>
(11) Earnings Per Share
The following discloses the calculation of basic and diluted earnings per
share. Because the Company has net losses due to the start-up nature of
the organization, stock options issued have an anti-dilutive effect on
the earnings per share calculation.
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Net loss $ (4,038,719) $ (1,696,345)
Weighted average shares for basic and diluted 4,240,819 2,646,036
Basic earnings (loss) per share $ (0.95) $ (0.64)
Diluted earnings (loss) per share $ (0.95) $ (0.64)
</TABLE>
(12) Employee Benefit Plan
The Company established a 401(k) plan in January 1998 for all eligible
employees. The Company began to match a portion of employee contributions
beginning January 1, 1999. The Company's match was $60,513 in 1999.
(13) Director and Employee Stock Compensation Plan
In 1998, the Company adopted a stock option plan (the "Plan") pursuant to
which the Company may grant stock options to members of its holding
company and subsidiaries' Board of Directors. The Company has granted
options to purchase up to 178,151 shares of common stock as of December
31, 1999.
The Company also granted stock awards to an employee. The stock awards
vest ratably over a three year period and are contingent upon continued
employment of the individual and other factors as set forth in the
agreement. As of December 31, 1999, the Company recognized $12,000 in
compensation expense related to the stock awards.
Stock options are granted with an exercise price equal to the stock's
fair market value at the date of grant. Director stock options have
10-year terms and vest and become fully exercisable immediately. Employee
stock options have 10-year terms and vest and become fully exercisable
after three years.
16
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
----------------- ----------------
<S> <C> <C>
Balance at December 31, 1997 -- $ --
Granted 13,750 6.75
Exercised -- --
Forfeited -- --
Expired -- --
----------------- ----------------
Balance at December 31, 1998 13,750 6.75
Granted 164,841 6.84
Exercised -- --
Forfeited 440 --
Expired -- --
----------------- ----------------
Balance at December 31, 1999 178,151 $ 6.84
================= ================
</TABLE>
At December 31, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $6.38 - $7.50 and
9.2 years, respectively. All outstanding director options are exercisable
at December 31, 1999.
At December 31, 1999, there were 221,849 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock
options granted during 1999 was $2.74 on the date of grant using the
Black Scholes option-pricing model (using an expected volatility over the
expected life of the options of 37.5 percent) with the following
weighted-average assumptions: expected dividend yield 0.00 percent,
risk-free interest rate of 4.94 percent, and an expected life of 10
years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock
options. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Net loss:
As reported $ (4,038,719) $ (1,696,345)
Pro forma (4,490,383) (1,751,758)
Loss per share:
As reported $ (0.95) $ (0.64)
Pro forma (1.06) (0.66)
</TABLE>
17
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(14) Segment Reporting
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 commercial loans, real estate loans, other business financing
and consumer 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
year ended December 31, 1999 follows:
<TABLE>
<CAPTION>
Commercial Investment Intersegment
Banking Advisory Other Elimination Consolidated
------------------ ------------ ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 2,136,974 $ -- $ 887,738 $ -- $ 3,024,712
Provision for loan losses 513,847 -- -- -- 513,847
Non-interest income 310,441 1,017,924 -- (7,880) 1,320,485
Non-interest expense 4,240,540 1,612,411 2,017,118 -- 7,870,069
Net income (loss) (2,306,972) (594,487) (1,129,380) (7,880) (4,038,719)
Total assets $ 91,628,884 $ 792,792 $ 31,056,219 $ (26,444,928) $ 97,032,967
----------------- ------------ ------------- ---------------- ---------------
</TABLE>
The Company does not have operating segments other than those reported.
Parent Company financial information is included in the Other category
and represents the overhead function rather than an operating segment.
Comparable information for December 31, 1998 is not shown as the Company
had one operating segment and one subsidiary, Cardinal Bank, N.A. The
investment advisory segment began operations in February 1999.
(15) Financial Instruments with Off Balance Sheet Risk
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit and financial guarantees.
Commitments to extend credit are agreements to lend to a customer so long
as there is no violation of any condition established in the contract.
Commitments usually have fixed expiration dates up to one year or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of the contractual obligations by a
customer to a third party. The majority of these guarantees extend until
satisfactory completion of the customer's contractual obligations. All
standby letters of credit outstanding at December 31, 1999 are
collateralized.
Those instruments represent obligations of the Company to extend credit
or guarantee borrowings, therefore, they are not recorded on the
consolidated statements of financial condition. The rates and terms of
these instruments are competitive with others in the market in which the
Company operates. Almost all of these instruments as of December 31, 1999
have floating rates, therefore significantly mitigating the market risk.
18
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Those instruments may involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statements of financial condition. Credit risk is defined as the
possibility of sustaining a loss because the other parties to a financial
instrument fail to perform in accordance with the terms of the contract.
The Company's maximum exposure to credit loss under standby letters of
credit and commitments to extend credit is represented by the contractual
amounts of those instruments.
<TABLE>
<CAPTION>
<S> <C>
(In thousands)
Financial instruments whose contract amounts represent potential
credit risk:
Commitments to extend credit $ 19,411
Standby letters of credit 916
==============
</TABLE>
The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. The
Company evaluates each customer's creditworthiness on a case-by-case
basis and requires collateral to support financial instruments when
deemed necessary. The amount of collateral obtained upon extension of
credit is based on management's evaluation of the counterparty.
Collateral held varies but may include deposits held by the Company,
marketable securities, accounts receivable, inventory, property, plant
and equipment, and income-producing commercial properties.
(16) Disclosures of Fair Value of Financial Instruments
The assumptions used and the estimates disclosed represent management's
best judgment of appropriate valuation methods. These estimates are based
on pertinent information available to management as of December 31, 1999.
In certain cases, fair values are not subject to precise quantification
or verification and may change as economic and market factors, and
management's evaluation of those factors change.
Although management uses its best judgment in estimating the fair value
of these financial instruments, there are inherent limitations in any
estimation technique. Therefore, these fair value estimates are not
necessarily indicative of the amounts that the Company would realize in a
market transaction. Because of the wide range of valuation techniques and
the numerous estimates which must be made, it may be difficult to make
reasonable comparisons of the Company's fair value information to that of
other financial institutions. It is important that the many uncertainties
discussed above be considered when using the estimated fair value
disclosures and to realize that because of these uncertainties, the
aggregate fair value amount should in no way be construed as
representative of the underlying value of the Company.
Fair Value of Financial Instruments
The following summarizes the significant methodologies and assumptions
used in estimating the fair values presented in the accompanying table.
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents is used as a reasonable
estimate of fair value.
19
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Investment Securities and Other Investments
Fair values for investment securities are based on quoted market prices
or prices quoted for similar financial instruments. Fair value for other
investments is estimated as their cost since no active trading markets
exist.
Loans Receivable
In order to determine the fair market value for loans, the loan portfolio
was segmented based on loan type, credit quality and maturities. For
certain variable rate loans with no significant credit concerns and
frequent repricings, estimated fair values are based on current carrying
amounts. The fair values of other loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality.
Deposits
The fair values disclosed for demand deposits are, by definition, equal
to the amount payable on demand at the reporting date (that is, their
carrying amounts.) The carrying amounts of variable rate, fixed-term
money market accounts and certificates of deposit (CDs) approximate their
fair value at the reporting date. Fair values for fixed-rate CDs are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
Commitments
The fair value of these financial instruments is based on the credit
quality and relationship, fees, interest rates, probability of funding,
compensating balance and other convenants or requirements. These
commitments generally have fixed expiration dates expiring within one
year. Many commitments are expected to, and typically do, expire without
being drawn upon. The rates and terms of these instruments are
competitive with others in the market in which the Company operates. The
carrying amounts are reasonable estimates of the fair value of these
financial instruments. The carrying amounts of these instruments are zero
at December 31, 1999.
Accrued Interest
The carrying amounts of accrued interest approximate their fair values.
20
<PAGE>
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Fair Value of Financial Instruments as of December 31, 1999
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------
Carrying Estimated
(In thousands) Amount Fair Value
----------------- -----------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 19,043 $ 19,043
Investment securities and other investments 5,822 5,822
Loans receivable 68,147 67,622
Accrued interest receivable 351 351
Financial liabilities:
Demand deposits $ 12,330 $ 12,330
Interest checking 3,891 3,891
Money market and statement savings 11,499 11,499
Certificates of deposit 32,153 32,124
Accrued interest payable 48 48
</TABLE>
(17) Other Operating Expenses
Other operating expenses for December 31, 1999 and 1998 include the
following:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Data processing $ 353,498 $ 104,067
Stationary and supplies 322,586 133,821
Brokerage clearing 197,822 -
Advertising and marketing 175,100 82,069
Telecommunications 163,481 36,591
Bank operations 125,541 38,216
Premises and equipment 103,739 6,047
Other taxes 94,670 11,225
Insurance 85,182 36,719
Travel and entertainment 79,128 54,031
Dues and membership 57,959 42,708
Miscellaneous 171,647 65,925
----------------- -----------------
$ 1,930,353 $ 611,419
================= =================
</TABLE>
21
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CARDINAL FINANCIAL CORPORATION
Date: March 27, 2000 By: /s/ L. Burwell Gunn, Jr.
--------------------------------------
L. Burwell Gunn, Jr.
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ L. Burwell Gunn, Jr. President and Chief Executive March 27, 2000
- ------------------------------------------- Officer and Director
L. Burwell Gunn, Jr. (Principal Executive Officer)
/s/ Joseph L. Borrelli Chief Financial Officer March 27, 2000
- ------------------------------------------- (Principal Financial and
Joseph L. Borrelli Accounting Officer)
Director March __, 2000
- -------------------------------------------
Robert M. Barlow
/s/ Wayne W. Broadwater Director March 27, 2000
- -------------------------------------------
Wayne W. Broadwater
/s/ Nancy K. Falck Director March 27, 2000
- -------------------------------------------
Nancy K. Falck
/s/ Anne B. Hazel Director March 27, 2000
- -------------------------------------------
Anne B. Hazel
/s/ Harvey W. Huntzinger Director March 27, 2000
- -------------------------------------------
Harvey W. Huntzinger
<PAGE>
Signature Title Date
--------- ----- ----
/s/ Jones V. Isaac Director March 27, 2000
- -------------------------------------------
Jones V. Isaac
/s/ Dale B. Peck Director March 27, 2000
- -------------------------------------------
Dale B. Peck
/s/ James D. Russo Director March 27, 2000
- -------------------------------------------
James D. Russo
/s/ John H. Rust, Jr. Director March 27, 2000
- -------------------------------------------
John H. Rust, Jr.
/s/ J. Hamilton Lambert Director March 27, 2000
- -------------------------------------------
J. Hamilton Lambert
</TABLE>
<PAGE>
EXHIBIT INDEX
Number Document
3.1 Articles of Incorporation of Cardinal Financial Corporation,
attached as Exhibit 3.1 to the Registration Statement on Form
SB-2, Registration No. 333-52279, filed with the Commission
on May 8, 1998 (the "Form SB-2"), incorporated herein by
reference.
3.2 Bylaws of Cardinal Financial Corporation, attached as Exhibit
3.2 to the Form SB-2, incorporated herein by reference.
4 Form of Stock Certificate, attached as Exhibit 4 to the Form
SB-2, incorporated herein by reference.
10.1 Employment Agreement, dated as of September 30, 1997, between
Commercial Fidelity Financial Partnership (predecessor to
Cardinal Financial Corporation) and L. Burwell Gunn, Jr.,
attached as Exhibit 10 to the Form SB-2, incorporated herein
by reference.
10.2 Employment Agreement, dated as of October 13, 1998, between
Cardinal Financial Corporation and Thomas C. Kane, attached
as Exhibit 10.2 to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1998 (the "1998 Form
10-KSB"), incorporated herein by reference.
10.3 Employment Agreement, dated as of December 17, 1998, between
Cardinal Financial Corporation and Edgar M. Andrews, III,
attached as Exhibit 10.3 to the 1998 Form 10-KSB,
incorporated herein by reference.
10.4 Employment Agreement, dated as of December 17, 1998, between
Cardinal Financial Corporation and Christopher W. Bergstrom,
attached as Exhibit 10.4 to the 1998 Form 10-KSB,
incorporated herein by reference.
10.5 Employment Agreement, dated as of February 17, 1999, between
Cardinal Financial Corporation and Joseph L. Borrelli,
attached as Exhibit 10.5 to the 1998 Form 10-KSB,
incorporated herein by reference.
10.6 Employment Agreement, dated as of February 12, 1999, between
Cardinal Financial Corporation and F. Kevin Reynolds,
attached as Exhibit 10.6 to the 1998 Form 10-KSB,
incorporated herein by reference.
10.7 Employment Agreement, dated as of August 31, 1998, between
Cardinal Financial Corporation and Greg D. Wheeless, attached
as Exhibit 10.7 to the 1998 Form 10-KSB, incorporated herein
by reference.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule (filed electronically only).
Exhibit 21
Subsidiaries of the Registrant
------------------------------
Name of Subsidiary State of Incorporation
----------------- ----------------------
Cardinal Bank, N.A. Virginia
Cardinal Wealth Services, Inc. Virginia
Cardinal Bank - Manassas/Prince William, N.A. Virginia
Cardinal Bank - Dulles, N.A. Virginia
Cardinal Bank - Alexandria/Arlington, N.A. (in organization) Virginia
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR CARDINAL FINANCIAL CORPORATION FOR THE YEAR ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FINANCIAL
STATEMENTS CONTAINED IN SUCH REPORT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,018
<INT-BEARING-DEPOSITS> 47,543
<FED-FUNDS-SOLD> 13,025
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,807
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 68,167
<ALLOWANCE> 726
<TOTAL-ASSETS> 97,033
<DEPOSITS> 59,873
<SHORT-TERM> 6,000
<LIABILITIES-OTHER> 415
<LONG-TERM> 0
0
0
<COMMON> 4,243
<OTHER-SE> 26,502
<TOTAL-LIABILITIES-AND-EQUITY> 97,033
<INTEREST-LOAN> 2,661
<INTEREST-INVEST> 406
<INTEREST-OTHER> 1,263
<INTEREST-TOTAL> 4,330
<INTEREST-DEPOSIT> 1,207
<INTEREST-EXPENSE> 1,305
<INTEREST-INCOME-NET> 3,025
<LOAN-LOSSES> 514
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 7,870
<INCOME-PRETAX> (4,039)
<INCOME-PRE-EXTRAORDINARY> (4,039)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,039)
<EPS-BASIC> (0.95)
<EPS-DILUTED> (0.95)
<YIELD-ACTUAL> 6.57
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 212
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 726
<ALLOWANCE-DOMESTIC> 726
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 75
</TABLE>
