SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
Commission file number 0-19209 .
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Cardinal Bancorp, Inc.
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(Exact Name of Registrant as Specified in its charter)
Pennsylvania 25-1537130
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(State of Incorporation) (I.R.S. Employer ID No.)
140 East Main Street, Everett, Pennsylvania 15537
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(Address of Principal Executive Office) (Zip Code)
(814) 652-2131
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(Registrant's Telephone Number, Including Area Code)
Not Applicable
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(Former Name, Former Address and Former Fiscal Year,
if changes since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 495,000 shares of $.50
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par common stock were outstanding as of November 8, 1996.
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<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
EVERETT, PENNSYLVANIA
FORM 10-Q INDEX
PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
Consolidated Statements of Income (Unaudited)
Consolidated Statements of Cash Flows (Unaudited)
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II OTHER INFORMATION
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Item 1. Legal Proceedings
Item 2. Changes In Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote
of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature Page
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
CARDINAL BANCORP, INC. AND SUBSIDIARY
(dollars in thousands)
<CAPTION>
September 30, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,781 $ 3,815
Interest earning balances 12 81
Federal funds sold 0 4,350
Securities:
Available-for-sale 51,591 50,999
Loans 65,475 65,411
Less: Unearned discount (3,118) (3,810)
Allowance for loan losses (1,244) (1,333)
-------- --------
Net Loans 61,113 60,268
Accrued interest receivable 958 975
Premises and equipment, net 2,807 2,872
Foreclosed assets 467 357
Other assets 1,372 755
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Total Assets $124,101 $124,472
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand (non-interest bearing) $ 14,358 $ 13,695
NOW, money market and savings 38,611 37,260
Time, less than $100,000 44,437 44,314
Time, $100,000 and over 10,378 13,527
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Total Deposits 107,784 108,796
Securities sold under agreements
to repurchase 152 0
Borrowed money 483 0
Accrued interest payable 513 608
Other liabilities 367 239
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Total Liabilities 109,299 109,643
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SHAREHOLDERS' EQUITY
Common stock, par value $.50,
2,000,000 shares authorized,
495,000 shares issued and outstanding 247 247
Surplus 2,264 2,264
Net unrealized securities gains/(losses) (845) 258
Retained earnings 13,136 12,060
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Total Shareholders' Equity 14,802 14,829
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $124,101 $124,472
======== =========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
CARDINAL BANCORP, INC. AND SUBSIDIARY
(dollars in thousands except per share data)
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
1996 1995 1996 1995
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest Income
Loans, including fees $1,473 $1,503 $4,382 $4,594
Depository Institutions 1 66 22 146
Federal funds sold 4 49 53 135
Securities:
Taxable 725 619 2,193 1,675
Tax-exempt 151 107 433 301
Dividends 8 14 23 21
------ ------ ------ ------
Total Interest Income 2,362 2,358 7,106 6,872
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Interest Expense
Deposits
NOW, money market and savings 248 258 746 787
Time, less than $100,000 611 611 1,839 1,734
Time, $100,000 and over 131 176 477 410
Interest on securities sold under
agreements to repurchase 4 0 4 0
Borrowed money 9 2 17 4
------ ------ ------ ------
Total Interest Expense 1,003 1,047 3,083 2,935
------ ------ ------ ------
Net Interest Income 1,359 1,311 4,023 3,937
Provision for loan losses 0 0 0 0
------ ------ ------ ------
Net Interest Income after
Provision for Loan Losses 1,359 1,311 4,023 3,937
------ ------ ------ ------
Other Income
Service charges on
deposit accounts 101 73 270 222
Other service charges and fees 27 30 100 105
Net security gains (6) 0 5 0
Other noninterest income 6 0 10 36
------ ------ ------ ------
Total Other Income 128 103 385 363
------ ------ ------ ------
Other Expense
Salaries and employee benefits 528 479 1,539 1,367
Occupancy and equipment expense 108 89 311 260
Other operating expense 257 272 838 1,028
------ ------ ------ ------
Total Other Expense 893 840 2,688 2,655
------ ------ ------ ------
Income before income tax 594 574 1,720 1,645
Income tax expense 153 43 372 269
------ ------ ------ ------
Net Income $ 441 $ 531 $1,348 $1,376
====== ====== ====== ======
Earnings per share $0.89 $1.07 $2.72 $2.78
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CARDINAL BANCORP, INC. AND SUBSIDIARY
(dollars in thousands)
<CAPTION>
Nine Months Ended
September 30,
1996 1995
(Unaudited)
<S> <C> <C>
Operating Activities
Net income $ 1,348 $ 1,376
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and Amortization 154 127
Net amortization of premiums and discounts 38 71
Net security gains (5) 0
(Gain) loss on sale of assets (4) 18
(Increase) decrease in other assets (138) 324
Increase in accrued interest
and other liabilities 34 185
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Net Cash Provided by Operating Activities 1,427 2,101
------ ------
Investing Activities
Proceeds from sales of available-for-sale securities 11,068 0
Redemption of Federal Home Loan Bank Stock 51 51
Proceeds from maturities of available-for-sale
securities 5,916 2,979
Proceeds from maturities of held-to-maturity
securities 0 363
Purchase of available-for-sale securities (19,332) (8,138)
Purchase of held-to-maturity securities 0 (100)
Net loans made to customers (845) (1,322)
Premises and equipment expenditures (90) (529)
Proceeds from sale of premises and equipment 1 1
------ ------
Net Cash Used by Investing Activities (3,231) (6,695)
------ ------
Financing Activities
Net increase in deposit accounts 2,013 866
Net increase (decrease) in time deposits (3,025) 9,783
Dividends paid (272) (223)
Cash inflows from other borrowing 635 0
------ ------
Net Cash Provided (Used) by Financing Activities (649) 10,426
------ ------
Increase in Cash and Cash Equivalents 2,453 5,832
------ ------
Cash and Cash Equivalents at Beginning of Period 8,246 8,057
------ ------
Cash and Cash Equivalents at End of Period $ 5,793 $13,889
======= =======
Supplemental Information
Interest paid $ 3,178 $ 2,796
Income taxes paid $ 264 $ 360
Loans transferred to foreclosed assets $ 275 $ 104
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of Cardinal Bancorp, Inc., includes its
wholly-owned subsidiary, First American National Bank of Pennsylvania. All
significant intercompany items have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do
not necessarily include all information that would be included in audited
financial statements. The information furnished reflects all adjustments
which are, in the opinion of management, necessary for a fair statement of the
results of operations. All such adjustments are of a normal recurring nature.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
These statements should be read in conjunction with notes to the financial
statements contained in the 1995 Annual Report to Shareholders.
NOTE 2 - ACCOUNTING FOR STOCK-BASED COMPENSATION
Effective January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards Statement No. 123, "Accounting for Stock-Based
Compensation." This statement encourages, but does not require the
Corporation to recognize compensation expense for all awards of equity
instruments issued after December 31, 1995. The statement establishes a fair
value based method of accounting for stock-based compensation plans. The
standard applies to all transactions in which an entity acquires goods or
services by issuing equity instruments or by incurring liabilities in amounts
based on the price of the entity's common stock or other equity instruments.
Statement 123 permits companies to continue to account for such transactions
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees", but requires disclosure in a note to the financial statements
pro forma net income and earnings per share as if the Corporation had applied
the new method of accounting. The Corporation has elected to continue to
apply the provisions of APB Opinion No. 25 and disclose such information only
in the notes to the consolidated financial statements. The adoption of this
standard has no effect on the Corporation's financial position or results of
operations.
NOTE 3 - SUBSEQUENT EVENT
On October 16, 1996, the Board of Directors approved a two for one stock
split. The additional shares resulting from the split, which was effected in
the form of a 100 percent stock dividend, will be distributed on November 14,
1996, to the holders of record on October 31, 1996.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR SEPTEMBER 30, 1996.
FINANCIAL CONDITION
Total assets at September 30, 1996, were $124,101,000, a decrease of
$371,000 from the $124,472,000 balance at December 31, 1995. The decrease was
primarily the result of a decline in the balance of time deposits of $100,000
and over. As, discussed below, time deposits of $100,000 and over declined
$3,149,000 during the first nine months of 1996.
Shareholders equity decreased by $27,000 or .2% due to a decline in the
fair value of the Corporation's available-for-sale securities portfolio.
Unrealized gains in the available-for-sale securities portfolio net of tax
effect declined $1,103,000 from December 31, 1995 to September 30, 1996. This
negative impact on capital was essentially offset by retained earnings for the
first nine months of 1996. Earnings through September 30, 1996, were
$1,348,000, of which $1,076,000 was retained as part of the Corporation's
equity capital with the balance of $272,000 having been distributed to
shareholders as dividends.
The amortized cost of the investment portfolio of the Corporation
increased $2,263,000 in the first nine months of 1996 primarily as the result
of the acquisition of additional fixed rate tax-exempt municipal securities.
Additional tax-exempt income was desirable due to the Bank's Federal Income
Tax position. Due to rate decreases which were projected at the time such
securities were acquired, the Bank also converted some variable rate U.S.
Government Agency securities to fixed rate Agency investments. The securities
acquisitions were funded in large part by utilizing the Corporation's federal
funds sold and interest bearing deposits, the most liquid interest earning
assets, resulting in a decline in such assets of $4,419,000 from December 31,
1995, to September 30, 1996. Due to the $3,149,000 decline in time deposits
having balances of $100,000 and over which was noted above, coupled with the
availability of short term borrowed funds at rates which have been comparable
to the rates required to be paid to obtain such time deposits, the Corporation
borrowed funds in the amount of $483,000 at September 30, 1996. The level of
the Corporation's liquid funds was also impacted by an increase in loans net
of unearned income in an amount of $756,000 during the first nine months of
1996.
RESULTS OF OPERATIONS
Cardinal Bancorp, Inc. realized a net profit of $1,348,000 for the first
nine months of 1996 as compared to a net profit of $1,376,000 for the first
nine months of 1995. On a per share basis, net income for the first three
quarters of 1996 was $2.72
<PAGE>
per share while net income for the first three quarters of 1995 was $2.78 per
share. Net income for the three months ended September 30, 1996 was $441,000
as compared to net income for the three months ended September 30, 1995 of
$531,000. On a per share basis, net income for the three month period ended
September 30, 1996, was approximately $.89 per share as compared to $1.07 per
share for the same period of 1995.
Net income may be analyzed by reviewing seven major elements: interest
income which consists primarily of income earned on loans and investments;
interest expense which generally consists of interest paid on deposits and
borrowed funds; the provision for loan losses which represents amounts set
aside in the allowance for loan losses to provide reserves for future losses
on loans; other noninterest operating income which is made up primarily of
safe deposit rentals, fee income derived from lending activities and service
charges on deposit accounts; gains or losses on securities; noninterest
expenses which consist primarily of salaries, expenses of premises and fixed
assets and other operating expenses; and income taxes. Each of these elements
is reviewed in greater detail in the following discussion.
INTEREST INCOME
Interest income for the first nine months of 1996 was $7,106,000 up
$234,000 or 3.4% above the $6,872,000 earned during the same period of 1995.
The increase was due to an increase in the volume of interest earning assets,
the average volume of which increased from $111,339,000 for the first three
quarters of 1995 to $118,106,000 for the first three quarters of 1996, an
increase of $6,767,000 or 6.1%. The yield on interest earning assets for the
first three quarters of 1996 was 7.96%, a 19 basis point decline from the
first three quarters of 1995 yield of 8.15%. Interest rate increases during
the first half of 1995 caused yields to increase temporarily, however, rates
began to decline during the second half of 1995 and continued to decline
through the first quarter of 1996. Although some rates increased slightly
since the first quarter of 1996, other rates have remained substantially
unchanged. Due to the repricing characteristics of the Bank's variable rate
investment portfolio, and the acquisition of additional securities, the yield
on investments increased from 6.21% for the first three quarters of 1995 to
6.48% for the same period of 1996. Due to repricing characteristics of the
Bank's loan portfolio which cause yields on loans to react more quickly to
changing rates than yields on investments react and due to competitive
pressures, the yield on the loan portfolio declined from 9.75% for the first
three quarters of 1995 to 9.36% for the first three quarters of 1996. The
changes in the investment and loan yields when applied to the volumes in each
category resulted in a decline in the total yield on earning assets from the
first nine months of 1995 compared to the first nine months of 1996, as noted
above.
<PAGE>
The Bank has structured many of its loans with variable interest rates in
order to be able to react to nationwide changes in rates over which the Bank
has no control. Furthermore, many securities within the investment portfolio
have rates which adjust according to indexes which generally track with
changes in the rate environment. As a result, the Bank is able to reduce
interest rate risk and is more effectively able to maintain a necessary
interest spread in a changing economy. Although during periods of declining
interest rates the Bank's interest income will be negatively affected, a
general reduction in interest rates will have a corresponding impact on
reducing interest expense.
Fluctuating interest rates can, however, have a temporary positive or
negative impact upon the interest spread between interest earning assets and
interest bearing liabilities. For example, one segment of the Bank's loan
portfolio is tied to the Wall Street Journal Prime Rate and reprices
immediately upon a change in that index. In periods of increasing interest
rates, the immediate repricing of such interest earning assets results in an
immediate increase in interest income while the repricing of interest bearing
liabilities will often not occur as quickly due to factors such as maturity
distributions and competition. Through properly balancing repricing
opportunities the effect of changing interest rates is minimized but temporary
fluctuations can occur. As noted above, since mid-1995 interest rates
generally have been declining. Because the Bank's variable rate assets are
generally capable of repricing slightly more rapidly than corresponding
liabilities, the Bank's interest income has declined more rapidly than
interest expense. As a result, the Bank's interest spread for the first nine
months of 1996 was 3.73% as compared to 3.89% for the same period of 1995.
The decrease in interest rates also has had a negative effect on the
Corporation's net interest margin. In addition to the direct impact on net
interest margin caused by a decrease in interest spread, when interest earning
assets exceed interest bearing liabilities, such as exists within the
Corporation, a decrease in interest rates will cause a decrease in net
interest income even if interest spread and other factors remain constant.
This effect of declining rates has been offset in the Corporation, however,
through an increase in interest earning assets which has exceeded the growth
of interest bearing liabilities. As a result, the Corporation's interest
spread for the first nine months of 1996 declined 16 basis points from the
first nine months of 1995 and the Corporation's net interest margin comparison
for the same period shows a decrease of 16 basis points from 4.64% to 4.48%.
Interest income for the three months ended September 30, 1996, totalled
$2,362,000 or $4,000 above the $2,358,000 for the same period of 1995, an
increase of .2%.
<PAGE>
INTEREST EXPENSE
Interest expense for the first nine months of 1996 was $3,083,000, up
$148,000 or 5.0% above the $2,935,000 expense for the same period of the
previous year. The general decline in interest rates which began in the
second half of 1995, resulted in an average cost of funds on deposits of 4.22%
for the first three quarters of 1996 as compared to 4.26% for the first three
quarters of 1995, a decline of four basis points. Additionally, although the
balance of time deposits of $100,000 and over declined from December 31, 1995
to September 30, 1996, the Corporation experienced an increase in the average
balance of time deposits during 1996, especially time deposits of $100,000 and
over, the average balance of which increased $1,892,000 for the first nine
months of 1996 compared to the same period of 1995. These deposits bear
higher interest rates than other interest bearing deposits which has the
result of increasing interest expense to a greater degree than would increases
in other deposit types. The impact of these deposit increases somewhat
restricted the reduction in the average cost of funds on deposits.
The decrease in interest expense resulting from slightly lower interest
rates paid on deposits was offset by an increase in the average balance of
interest bearing liabilities outstanding. An evaluation of deposits by type
for the first three quarters of 1996 as compared to the same period of 1995
shows the Bank experienced an increase in the average balance of each general
category of deposits except savings accounts. Average interest bearing
deposits for the first nine months of 1996 were $96,607,000 as compared to
$91,718,000 for the first nine months of 1995, an increase of $4,889,000 or
5.3%. As a result of the increased volumes, interest expense increased
$148,000.
As noted above, the Bank has maintained a net interest margin of 4.48%
for the first nine months of 1996 as compared to 4.64% for the first nine
months of 1995. Net interest income for the first three quarters of 1996 was
$4,023,000 as compared to $3,937,000 for the same period during 1995, an
$86,000 or 2.2% increase.
For the three months ended September 30, 1996, total interest expense was
$1,003,000 or $44,000 less than the $1,047,000 interest expense for the same
period of 1995. Net interest income was $1,359,000 for the third quarter of
1996 or $48,000 higher than the $1,311,000 net interest income for the third
quarter of 1995.
PROVISION FOR LOAN LOSSES
The provision for loan losses is an addition to the allowance for loan
losses which is based upon an analysis of the adequacy of the allowance. The
allowance is maintained at a level deemed adequate to absorb potential future
loan losses contained in the portfolio and is formally reviewed by Management.
The level of the
<PAGE>
allowance and the provision for loan losses is based upon a quarterly
evaluation of the loan portfolio using a consistent methodology.
The tables which follow this discussion provide information regarding
nonperforming and past due loans, and an analysis of the allowance for loan
losses. Nonperforming assets declined in 1993 and 1994, however, several
large commercial loans were placed on nonaccrual status in July 1995 resulting
in an increase in nonperforming assets of $744,000 in 1995. During the first
three quarters of 1996, nonperforming assets declined $637,000 or 85.6% of the
1995 increase. During the first nine months of 1996 net charge-offs were
$89,000 compared to total net charge-offs of $161,000 for the full year of
1995. Although nonperforming assets have been reduced in recent years, future
losses on loans may be expected to continue. The allowance for loan losses as
a multiple of nonperforming loans was 1.13 at September 30, 1996, as compared
to .72 at December 31, 1995.
As noted above, ongoing evaluations of the allowance are being performed.
Based upon the current evaluation of the allowance, no provision for loan
losses was necessary in the first three quarters of 1996. Similarly, there
was no provision required in the first three quarters of 1995.
NONINTEREST INCOME AND GAINS ON SECURITIES
Noninterest income for the first nine months of 1996 was $385,000, up
$22,000 from the same period of the previous year. The increase in
noninterest income was attributable primarily to additional income generated
through service charges on deposit accounts which totalled $270,000 in the
first three quarters of 1996 compared to $222,000 in the first three quarters
of 1995. Additionally, the Corporation realized net gains on sales of
securities during the first nine months of 1996 of $5,000 while the
Corporation realized no gains or losses on sales of securities during the same
period of 1995. These increases were partially offset by a reduction of
income realized upon the sale of loan collateral which had been repossessed.
During the first nine months of 1995, the Corporation realized gains on
dispositions of loan collateral repossessed in the amount of $33,000 while
income from that source totalled $3,000 during the first nine months of 1996.
Noninterest income during the three months ended September 30, 1996,
totalled $128,000 compared to $103,000 for the same period of 1995, an
increase of 24.3%.
NONINTEREST EXPENSE
Noninterest expense for the first nine months of 1996 was $2,688,000, a
$33,000 increase from the $2,655,000 expense incurred
<PAGE>
in the first nine months of 1995. Noninterest expense increased materially in
several categories. Employee salaries and benefits increased $172,000 from
$1,367,000 in the first three quarters of 1995 to $1,539,000 in the first
three quarters of 1996. The increase was due principally to additional staff
hired in connection with the opening of another branch of the Corporation's
subsidiary, First American National Bank of Pennsylvania. Depreciation
expense also increased $27,000 from $127,000 in the first nine months of 1995
to $154,000 in the first nine months of 1996, primarily due to capital
expenditures related to the new branch. Expense of data processing increased
from $71,000 in the first three quarters of 1995 to $92,000 for the same
period of 1996, an increase of $21,000 or 29.6%. The increase was also
primarily the result of greater volume of transactions and additional data
processing fees attributable to the new branch.
In addition to the increases in noninterest expense noted above,
noninterest expense decreased materially in several categories. Due to the
FDIC's Bank Insurance Fund having become fully funded in 1995, the Bank's FDIC
assessment rate was reduced in the second half of 1995, which resulted in a
decrease in such expense from $107,000 for the first three quarters of 1995 to
$2,000 for the same period of 1996, a reduction of $105,000. A second
significant factor in the decrease in noninterest expense related to losses
during the first three quarters of 1995 in the amount of $51,000 realized on
the sale of parcels of other real estate owned as a result of loan defaults by
borrowers. The Corporation incurred no such losses in the first three
quarters of 1996.
Other areas in which noninterest expense decreased notably from the 1995
levels were other real estate expense, expense of supplies, stationery and
printing and charitable contributions. Other real estate expense decreased
$22,000 from $36,000 in the first nine months of 1995 to $14,000 in the same
period of 1996. Expense of supplies, stationery and printing decreased
$61,000 from $150,000 in the first nine months of 1995 to $89,000 for the same
period of 1996, a decrease of 68.5%. Much of the additional printing expense
in 1995 involved purchases related to the change of the name of the
Corporation's subsidiary in February, 1995. Charitable contributions
decreased from $71,000 in the first nine months of 1995 to $5,000 in the first
nine months of 1996. The additional contributions in 1995 were primarily
related to the donation of assets for which the Bank received tax credits to
be utilized in payment of Pennsylvania Shares Tax. As a result, although
charitable contribution expense in 1995 was increased, Shares Tax expense was
reduced to $74,000 for the first three quarters of 1995. During 1996, Shares
Tax expense increased to a more typical nine-month level of $108,000, an
increase of $34,000.
The final area in which noninterest expense increased related to the
recognition of an expense for interest rebates due loan customers on mobile
home loans which were paid before maturity. The total amount of expense
relating to such loans recognized in
<PAGE>
the first nine months of 1996 was $40,000, while the Corporation did not
recognize any such expense during the first nine months of 1995.
Noninterest expense for the three month period ended September 30, 1996,
totalled $893,000 compared to $840,000 for the same quarter of 1995, an
increase of 6.3%.
INCOME TAXES
Income tax expense for the first nine months of 1996 was $372,000, an
increase of $103,000 from the $269,000 expense for the same period of 1995.
Income tax expense for 1995 had been reduced due to the elimination of a
valuation allowance for deferred income taxes. This factor coupled with an
increase in pre-tax income of $75,000 resulted in a 38.3% increase in income
tax expense. As noted above, net income after income taxes totaled $1,348,000
for the first three quarters of 1996 as compared to $1,376,000 for the first
three quarters of 1995.
CAPITAL
Capital adequacy is critical to the Corporation's well being and future
growth. Capital for the period ended September 30, 1996, was $14,802,000
while capital at the end of 1995 totalled 14,829,000. Despite the
Corporation's earnings during the first nine months of 1996 of $1,348,000,
capital decreased as a result of a decrease in the fair value of securities
held by the Bank which are held as available-for-sale. Under Statement No.
115 of the Financial Accounting Standards Board which has been adopted by the
Corporation, increases and decreases in the fair value of securities held
which are available-for-sale must be reported as equity capital adjustments
net of tax effects. During the first three quarters of 1996, the equity
capital adjustment required by SFAS No. 115 was a decrease of $1,103,000.
Capital was also reduced during the first three quarters of 1996 by dividend
distributions of $272,000.
Management believes the Corporation's current capital and liquidity
positions are adequate to support its operations. Additionally, the
Corporation's capital adequacy as measured by capital ratios defined by
Federal regulators is considered adequate.
The Corporation has capital ratios exceeding regulatory requirements.
Federal regulators have adopted risk-based capital adequacy guidelines under
which the components of capital are referred to as Tier 1 and Tier 2 capital.
For the Corporation, Tier 1 capital is shareholder's equity and Tier 2 capital
is the allowance for loan losses. The risk-based capital ratios are computed
by dividing the components of capital by risk-adjusted assets. Risk-adjusted
assets are determined by assigning credit
<PAGE>
risk weighing factors from 0% to 100% to various categories of assets and off-
balance-sheet financial instruments.
Minimum risk-based capital ratios are 4.0% for the Tier 1 capital ratio
and 8.0% for the total capital ratio. At September 30, 1996, the
Corporation's Tier 1 risk-adjusted capital ratio was 20.9% and the total
capital ratio was 22.1%. National banks must also have and maintain a total
assets leverage ratio of at least 3.0%. The total assets leverage ratio is
the ratio between Tier 1 capital and adjusted total assets (the quarterly
average of total assets). The Corporation's leverage ratio at September 30,
1996, was 12.4%.
CREDIT RISK AND LOAN QUALITY
Table 1 - Nonperforming Assets, reveals that nonperforming loans were
$1,097,000 as of September 30, 1996, representing a decrease of $747,000 since
December 31, 1995. As noted in the table, nonperforming loans increased
significantly in 1995. The 1995 increase was principally attributable to the
placement on nonaccrual status of loans to related entities of one individual
which totalled approximately $1,093,000.
Included within the classification of nonperforming loans at September
30, 1996, are loans classified as impaired under Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by SFAS No. 118. Under this Standard, a loan is
considered impaired when, based upon current information and events, it is
probable the Corporation will be unable to collect all principal and interest
amounts due according to the contractual terms of the loan agreement. At
September 30, 1996, the Corporation's impaired loans totalled approximately
$591,000 or 54% of the total nonperforming loans. All of these loans were on
a nonaccrual basis and have a related allowance for loan losses allocation of
$259,000. The average recorded investment in impaired loans in the first
three quarters of 1996 was approximately $899,000.
Table 1 also reflects a decrease in foreclosed assets in each year from
1992 through 1995. During 1996, however, foreclosed assets have increased
from $357,000 at December 31, 1995, to $467,000 at September 30, 1996, an
increase of $110,000. Foreclosed assets at the end of the third quarter of
1996 included commercial real estate with a carrying value of $259,000,
residential real estate with a carrying value of $175,000, mobile homes valued
at $31,000 and personal property with a carrying value of $2,000.
Table 2 - Analysis of Allowance for Loan Losses, indicates an $89,000
decrease in the allowance since December 31, 1995. The Corporation had net
charge-offs in the first three quarters of 1996 in the amount of $89,000,
however, it was not necessary to make a provision to the allowance during that
period. Provisions are made to the allowance for loan losses based upon
periodic analyses of
<PAGE>
the entire loan portfolio which includes a thorough review of nonperforming
loans. Despite the increase in nonperforming loans in 1995 noted above, based
upon the analyses, it is the opinion of Management that the level of the
allowance is adequate. At September 30, 1996, the level of the allowance was
at 1.99% of period-end loans.
LIQUIDITY
Liquidity is a measure of the ability of the Corporation to meet its
obligations and cash needs on a timely basis. For a bank, liquidity requires
the ability to meet the day-to-day demands of deposit customers, along with
the ability to fulfill the needs of borrowing customers. Generally, the
Corporation arranges its mix of cash, securities and loans in order to match
the volatility, interest sensitivity and growth trends of its deposit funds.
Federal funds sold and excess funds held in an interest bearing account with
the Federal Home Loan Bank of Pittsburgh averaged $1,856,000 during the first
nine months of 1996. Although such amount is generally sufficient to meet
normal fluctuations in loan demand or depositor needs, in recent months the
Corporation has chosen to invest some of its liquid funds in assets which
carry a higher yield. As a result, it has been necessary for the Corporation
to borrow funds for short terms from time to time during the first nine months
of 1996. The average balance of borrowed money during such period was
$400,000.
To provide an additional source of liquidity, the Bank's securities
portfolio has been deemed available-for-sale. Although the Corporation's
securities are generally purchased with the intention of holding them until
maturity, by holding the investments as available-for-sale the Corporation's
liquidity position is improved. In addition, a portion of the Corporation's
investment portfolio consists of securities, such as U.S. Government Agency
and other mortgage-backed securities, on which a portion of the principal
amount is repaid each month. Payments on these securities, together with
payments on loans and overnight investments in federal funds sold provide
additional sources of liquidity. When needed, the Bank also has alternative
sources of liquidity in the forms of borrowing from the Federal Reserve Bank
and lines of credit with several financial institutions and the Federal Home
Loan Bank of Pittsburgh.
There are no known trends or known demands, commitments, events or
uncertainties that will result in or that are reasonably likely to result in
liquidity increasing or decreasing in any material way.
<PAGE>
<TABLE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
Table 1 - Nonperforming Assets
Nonaccruing, Restructured and Past Due Loans
<CAPTION>
(dollars in thousands)
September 30, -------- December 31, ----------
1996 1995 1994 1993 1992
------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccruing loans $ 506 $ 375 $ 620 $ 921 $1,260
Impaired Loans 591 1,299 - - -
Restructured troubled
debt 0 170 0 0 0
Accrual Loans 90 days
or more past due 0 0 1 38 109
-----------------------------------------
Total Nonperforming Loans $1,097 $1,844 $ 621 $ 959 $1,369
Foreclosed Assets $ 467 357 $ 836 $1,334 $1,457
------------------------------------------
Total Nonperforming Assets $1,564 $2,201 $1,457 $2,293 $2,826
==========================================
Ratios:
Nonperforming loans as a
percent of period-end loans 1.80% 2.99% 1.02% 1.48% 1.92%
Nonperforming loans as a
percent of total period-end
stockholders' equity 7.41% 12.44% 5.12% 7.96% 12.24%
Allowance as multiple
of nonperforming loans 1.13x .72x 2.41x 2.04x 1.64x
</TABLE>
<PAGE>
<TABLE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
Table 2 - Analysis of Allowance for Loan Losses
<CAPTION>
(dollars in thousands)
Years Ended
September 30, ------ December 31, ---------
1996 1995 1994 1993 1992
-----------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - beginning of period $1,333 $1,494 $1,953 $2,239 $ 925
Provision (benefit) charged
to operating expense 0 0 (300) 125 2,470
Loans charged off:
Commercial and Agricultural 72 15 38 500 1,201
Real estate mortgage 13 0 23 0 48
Consumer 114 180 155 18 65
----------------------------------------
Total loans charged off 199 195 216 518 1,314
Recoveries:
Commercial and Agricultural 75 27 51 86 142
Real estate mortgage 22 0 0 0 4
Consumer 14 7 6 21 12
----------------------------------------
Total recoveries 110 34 57 107 158
----------------------------------------
Net charge-offs (recoveries) 89 161 159 411 1,156
Balance - end of period $1,244 $1,333 $1,494 $1,953 $2,239
======================================
Ratios:
Annualized net charge-offs to
average loans .19% .27% .26% .60% 1.49%
Allowance to period-end
loans 1.99% 2.16% 2.46% 3.01% 3.14%
Allowance as multiple of
annualized net charge-offs 10.45x 8.28x 9.40x 4.75x 1.94x
</TABLE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
- ---------------------------
Management and the Corporation's legal counsel are not aware of any
litigation that would have a material adverse effect on the consolidated
financial position of the Corporation. There are no proceedings pending other
than the ordinary routine litigation incident to the business of the
Corporation and its subsidiary, First American National Bank of Pennsylvania
In addition, no material proceedings are pending or are known to be threatened
or contemplated against the Corporation or the Bank by government authorities.
Item 2. Changes in Securities.
- -------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
- -----------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
Not applicable.
Item 5. Other Information.
- ---------------------------
As disclosed in Note 3 to the above interim consolidated financial
statements, on October 16, 1996, the Board of Directors of Cardinal
Bancorp, Inc. approved a two for one stock split. The additional shares
resulting from the split, which was effected in the form of a 100 percent
stock dividend, will be distributed on November 14, 1996, to the holders
of record on October 31, 1996.
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibits:
None
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
EVERETT, PENNSYLVANIA
Signatures
------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Cardinal Bancorp, Inc.
- -----------------------------------------
(Registrant)
By: /s/ James B. Bexley
-------------------------------------
James B. Bexley
President and Chief Executive Officer
Date: November 13, 1996
By: /s/ Merle W. Helsel
------------------------------------
Merle W. Helsel
Chief Financial Officer
(principal financial and accounting officer)
Date: November 13, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,781
<INT-BEARING-DEPOSITS> 12
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 51,591
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 62,357
<ALLOWANCE> 1,244
<TOTAL-ASSETS> 124,101
<DEPOSITS> 107,784
<SHORT-TERM> 635
<LIABILITIES-OTHER> 880
<LONG-TERM> 0
0
0
<COMMON> 2,511
<OTHER-SE> 12,291
<TOTAL-LIABILITIES-AND-EQUITY> 124,101
<INTEREST-LOAN> 4,382
<INTEREST-INVEST> 2,649
<INTEREST-OTHER> 75
<INTEREST-TOTAL> 7,106
<INTEREST-DEPOSIT> 3,062
<INTEREST-EXPENSE> 3,083
<INTEREST-INCOME-NET> 4,023
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 2,688
<INCOME-PRETAX> 1,720
<INCOME-PRE-EXTRAORDINARY> 1,348
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,348
<EPS-PRIMARY> 2.72
<EPS-DILUTED> 2.72
<YIELD-ACTUAL> 4.48
<LOANS-NON> 1,097
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,333
<CHARGE-OFFS> 199
<RECOVERIES> 110
<ALLOWANCE-CLOSE> 1,244
<ALLOWANCE-DOMESTIC> 747
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 497
</TABLE>
