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 June 30, 1996
Commission file number 0-19209
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Cardinal Bancorp, Inc.
(Exact Name of Registrant as Specified in its charter)
Pennsylvania 25-1537130
- - ------------------------ ------------------------
(State of Incorporation) (I.R.S. Employer ID No.)
140 East Main Street, Everett, Pennsylvania 15537
- - ------------------------------------------- ----------
(Address of Principal Executive Office) (Zip Code)
(814) 652-2131
----------------------------------------------------
(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 par common stock were outstanding
--------------------------------------------------------
as of August 5, 1996.
- - --------------------
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
EVERETT, PENNSYLVANIA
FORM 10-Q INDEX
PART I FINANCIAL INFORMATION:
---------------------
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
-----------------
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>
June 30, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,827 $ 3,815
Interest earning balances 43 81
Federal funds sold 0 4,350
Securities:
Available-for-sale 53,884 50,999
Loans 65,881 65,411
Less: Unearned discount (3,318) (3,810)
Allowance for loan losses (1,277) (1,333)
--------- --------
Net Loans 61,286 60,268
Accrued interest receivable 1,165 975
Premises and equipment, net 2,841 2,872
Foreclosed assets 472 357
Other assets 1,466 755
--------- --------
Total Assets $124,984 $124,472
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand (non-interesting bearing) $ 12,813 $ 13,695
NOW, money market and savings 40,573 37,260
Time, less than $100,000 44,981 44,314
Time, $100,000 and over 9,818 13,527
-------- --------
Total Deposits 108,185 108,796
Borrowed money 1,595 0
Accrued interest payable 509 608
Other liabilities 307 239
-------- --------
Total Liabilities 110,596 109,643
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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) (917) 258
Retained Earnings 12,794 12,060
-------- --------
Total Shareholders' Equity 14,388 14,829
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $124,984 $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
June 30,
1996 1995
(Unaudited)
<S> <C> <C>
INTEREST INCOME
Loans, including fees $1,451 $1,579
Depository institutions 2 50
Federal funds sold 25 49
Securities:
Taxable 739 544
Tax-exempt 152 101
Dividends 7 3
------ ------
TOTAL INTEREST INCOME 2,376 2,326
------ ------
INTEREST EXPENSE
Deposits
NOW, money market and savings 250 261
Time, less than $100,000 611 594
Time, $100,000 and over 167 134
Borrowed money 4 1
------ ------
Total Interest Expense 1,032 990
------ ------
Net Interest Income 1,344 1,336
Provision for Loan Losses 0 0
------ ------
Net Interest Income after
Provision for Loan Losses 1,344 1,336
------ ------
OTHER INCOME
Service charges on
deposit accounts 85 77
Other service charges and fees 39 40
Net security gains 0 0
Other noninterest income 4 24
------ ------
Total Other Income 128 141
------ ------
OTHER EXPENSES
Salaries and employee benefits 521 455
Occupancy and equipment expenses 97 81
Other operating expenses 306 364
------ ------
Total Other Expenses 924 900
------ ------
Income before income taxes 548 577
Income tax expense 114 139
------ ------
NET INCOME $ 434 $ 438
====== ======
EARNINGS PER SHARE $ .88 $ .88
<CAPTION>
Six Months
ended
June 30,
1996 1995
(Unaudited)
<S> <C> <C>
INTEREST INCOME
Loans, including fees $2,909 $3,091
Depository institutions 21 80
Federal funds sold 49 86
Securities:
Taxable 1,468 1,056
Tax-exempt 282 194
Dividends 15 7
------ ------
TOTAL INTEREST INCOME 4,744 4,514
------ ------
INTEREST EXPENSE
Deposits
NOW, money market and savings 498 529
Time, less than $100,000 1,228 1,123
Time, $100,000 and over 346 234
Borrowed money 8 2
------ ------
Total Interest Expense 2,080 1,888
------ ------
Net Interest Income 2,664 2,626
Provision for Loan Losses 0 0
------ ------
Net Interest Income after
Provision for Loan Losses 2,664 2,626
------ ------
OTHER INCOME
Service charges on
deposit accounts 169 149
Other service charges and fees 73 75
Net security gains 11 0
Other noninterest income 4 36
------ ------
Total Other Income 257 260
------ ------
OTHER EXPENSES
Salaries and employee benefits 1,011 888
Occupancy and equipment expenses 203 171
Other operating expenses 581 756
------ ------
Total Other Expenses 1,795 1,815
------ ------
Income before income taxes 1,126 1,071
Income tax expense 219 226
------ ------
NET INCOME $ 907 $ 845
====== ======
EARNINGS PER SHARE $ 1.83 $ 1.71
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>
Six Months Ended
June 30,
1996 1995
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 907 $ 845
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and Amortization 103 84
Net amortization of premiums and discounts 33 50
Net security gains (11) 0
(Gain) loss on sale of other assets (1) 18
(Increase) decrease in other assets (410) 389
Increase (decrease) in accrued interest
and other liabilities (30) 11
------- ------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 591 1,397
------- ------
<PAGE>
INVESTING ACTIVITIES
Proceeds from sales of
available-for-sale securities 9,538 0
Redemption of Federal Home Loan
Bank Stock 51 51
Proceeds from maturities of
available-for-sale securities 4,059 1,929
Proceeds from maturities of
held-to-maturity securities 0 300
Purchase of available-for-sale
securities (18,335) (4,555)
Net loans made to customers (1,018) (2,403)
Premises and equipment expenditures (73) (320)
Proceeds from sale of premises
and equipment 1 1
-------- --------
NET CASH USED BY INVESTING
ACTIVITIES (5,777) (4,997)
FINANCING ACTIVITIES
Net increase (decrease) in
deposit accounts 2,430 (1,255)
Net increase (decrease) in
time deposits (3,042) 7,534
Dividends paid (173) (149)
Cash inflows from borrowed money 1,595 0
-------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 810 6,130
-------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (4,376) 2,530
-------- ---------
CASH AND CASH EQUIVALENTS AT
JANUARY 1 8,246 8,057
-------- ---------
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 3,870 $10,587
======== =========
SUPPLEMENTAL INFORMATION
Interest paid on deposits $ 2,170 $ 1,793
Income taxes paid $ 164 $ 285
Loans transferred to foreclosed assets $ 250 $ 94
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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR JUNE 30, 1996.
FINANCIAL CONDITION
Total assets at June 30, 1996, were $124,984,000, an
increase of $512,000 from the $124,472,000 balance at December
31, 1995. The increase was primarily the result of a rise in the
balance of NOW, money market and savings deposits coupled with an
increase in borrowed funds. NOW, money market and savings
deposits increased in the aggregate amount of $3,313,000 in the
first six months of 1996. On an individual basis, NOW accounts
increased $669,000, money market accounts increased $1,630,000
and savings accounts increased $1,014,000.
Shareholders equity decreased by $441,000 or 3.0% 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 decreased $1,175,000 from
December 31, 1995, to June 30, 1996. This negative impact on
capital was partially offset by earnings of $907,000 for the
first six months of 1996, of which $734,000 was retained as part
of the Corporation's equity capital with the balance of $173,000
having been distributed to shareholders as dividends.
The investment portfolio of the Corporation increased
$2,885,000 in the first six 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, 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 of such assets of
$4,350,000 from December 31, 1995, to June 30, 1996.
Additionally, due to a decline in time deposits with balances of
$100,000 and over in an amount of $3,709,000, coupled with the
availability of short term borrowed funds at rates which have
been routinely lower than the rates required to be paid to obtain
such time deposits, the Corporation borrowed funds in the amount
of $1,595,000 at June 30, 1996. Liquidity was also impacted due
to an increase in loans net of unearned income in an amount of
$962,000 during the first six months of 1996.
RESULTS OF OPERATIONS
Cardinal Bancorp, Inc. realized a net profit of $907,000 for
the first six months of 1996 as compared to a net profit of
<PAGE>
$845,000 for the first six months of 1995. On a per share basis,
net income for the first two quarters of 1996 was $1.83 per share
while net income for the first two quarters of 1995 was $1.71 per
share.
Net income for the three months ended June 30, 1996, was
$434,000 as compared to net income for the three months ended
June 30, 1995, of $438,000. On a per share basis, net income for
the three month period ended June 30, 1996, was approximately
$.88 per share compared to $.88 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
sales 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 six months of 1996 was
$4,744,000 up $230,000 or 5.1% above the $4,514,000 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 $109,026,000 for the first two quarters of
1995 to $118,555,000 for the first two quarters of 1996, an
increase of $9,529,000 or 8.7%. The yield on interest earning
assets declined from the first two quarters 1995 yield of 8.18%
to the first two quarters 1996 yield of 7.97%. Interest rates
rose during the first half of 1995 but began to decline during
the second half of the year and continued to decline through the
first quarter of 1996. Although some rates have increased
slightly during the second quarter of 1996, other rates have
remained substantially unchanged. Due to the repricing
characteristics of the Corporation's variable rate investment
portfolio, and the acquisition of additional securities, the
yield on investments increased from 6.05% for the first two
quarters of 1995 to 6.47% 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, the yield on the loan portfolio
declined from 9.82% for the first two quarters of 1995 to 9.40%
for the first two quarters of 1996. The changes in investment
and loan yields when applied to the volumes in each category
resulted in the slight decline in the total yield on earning
assets from the first six months of 1995 compared to the first
six 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 six months of 1996 was 3.70%
as compared to 4.00% 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, although the Corporation's interest
spread for the first six months of 1996 declined 30 basis points
from the first six months of 1995, the Corporation's net interest
margin comparison for the same periods shows a decrease of only
26 basis points from 4.72% to 4.46%.
Interest income for the three months ended June 30, 1996,
totalled $2,376,000 or $50,000 above the $2,326,000 for the same
period of 1995, an increase of 2.1%.
<PAGE>
INTEREST EXPENSE
Interest expense for the first six months of 1996 was
$2,080,000, up $192,000 or 10.2% above the $1,888,000 expense for
the same period of the previous year. The general increase in
interest rates in the first half of 1995 coupled with the slower
repricing of deposits discussed above resulted in the average
cost of funds on deposits increasing to 4.27% for the first two
quarters of 1996 as compared to 4.18% for the first two quarters
of 1995. Additionally, although the balance of time deposits of
$100,000 and over declined from December 31, 1995 to June 30,
1996, the Corporation has 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
$4,260,000 for the first six 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 increased interest expense resulting from higher
interest rates paid on deposits was enhanced by an increase in
the average balance of interest bearing liabilities outstanding.
An evaluation of deposits by type for the first two 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 six months of 1996 were
$97,370,000 as compared to $90,003,000 for the first six months
of 1995, an increase of $7,367,000 or 8.2%. As a result of
increased rates and volumes, interest expense increased $192,000.
As noted above, the Bank has maintained a net interest
margin of 4.46% for the first six months of 1996 as compared to
4.72% for the first six months of 1995. Net interest income for
the first two quarters of 1996 was $2,664,000 as compared to
$2,626,000 for the same period during 1995, a $38,000 or 1.4%
increase.
For the three months ended June 30, 1996, total interest
expense was $1,032,000 or $42,000 greater than the $990,000
interest expense for the same period of 1995. Net interest
income was $1,344,000 for the second quarter of 1996 or $8,000
higher than the $1,336,000 net interest income for the second
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 allowance and the provision for
loan losses is based upon a quarterly evaluation of the loan
portfolio using a consistent methodology.
<PAGE>
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 of 1995 resulting in an increase in
nonperforming assets of $744,000 in 1995. During the first two
quarters of 1996, nonperforming assets declined $611,000 or 82.1%
of the 1995 increase. During the first six months of 1996, net
charge-offs were $56,000 as 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 1.14 at June 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 two quarters of 1996. Similarly, there was no provision
required in the first two quarters of 1995.
NONINTEREST INCOME AND GAINS ON SECURITIES
Noninterest income for the first six months of 1996 was
$257,000, down $3,000 from the same period of the previous year.
Although less than $1,000 in income was realized from other real
estate owned or from gains upon sales of loan collateral
repossessed during the first two quarters of 1996, income
realized from such sources in the amount of $36,000 was included
in other noninterest income during the first two quarters of
1995. This reduction in income was partially offset by an
increase of $20,000 in income from service charges on deposit
accounts which totalled $169,000 in the first six months of 1996
compared to $149,000 in the first six months of 1995.
Additionally, the Corporation realized net gains on sales of
securities during the first six months of 1996 of $11,000 while
the Corporation realized no gains or losses on sales of
securities during the same period of 1995.
Noninterest income during the three months ended June 30,
1996, totalled $128,000 compared to $141,000 for the same period
of 1995, a decrease of 9.2%. The most significant portion of
such decrease was the result of a reduction of $24,000 in gains
upon sales of loan collateral repossessed.
NONINTEREST EXPENSE
Noninterest expense for the first six months of 1996 was
$1,795,000, a $20,000 decrease from the $1,815,000 expense
incurred in the first six months of 1995. 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 $112,000 for the
first two quarters of 1995 to $1,000 for the same period of 1996,
a reduction of
<PAGE>
$111,000. The second most significant factor in the decrease in
noninterest expense related to losses during the first two 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
two 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 $30,000 in the
first six months of 1995 to $8,000 in the same period of 1996.
Expense of supplies, stationery and printing decreased $33,000
from $95,000 in the first six months of 1995 to $62,000 for the
same period of 1996, a decrease of 34.7%. 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 $70,000 in the first six
months of 1995 to $2,000 in the first six 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 $38,000 for the first two
quarters of 1995. During 1996, Shares Tax expense increased to a
more typical level of $73,000, an increase of $35,000.
In addition to the reductions in noninterest expense noted
above, noninterest expense increased materially in several
categories. Employee salaries and benefits increased $123,000
from $888,000 in the first two quarters of 1995 to $1,011,000 in
the first two 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 increased
$18,000 from $85,000 in the first six months of 1995 to $103,000
in the first six months of 1996, primarily due to capital
expenditures related to the new branch. Expense of data
processing increased from $40,000 in the first two quarters of
1995 to $61,000 for the same period of 1996, an increase of
$21,000 or 52.5%. The increase was also primarily the result of
greater volume of transactions and additional data processing
fees attributable to the new branch.
Noninterest expense for the three month period ended June
30, 1996, totalled $924,000 compared to $900,000 for the same
quarter of 1995, an increase of 2.7%.
INCOME TAXES
Income tax expense for the first six months of 1996 was
$219,000, a slight decrease from the $226,000 expense for the
same period of 1995. As noted above, net income after income
taxes totaled $907,000 for the first two quarters of 1996 as
compared to $845,000 for the first two quarters of 1995.
<PAGE>
CAPITAL
Capital adequacy is critical to the Corporation's well being
and future growth. Capital for the period ended June 30, 1996,
was $14,388,000 while capital at the end of 1995 totalled
$14,829,000. Despite the Corporation's earnings during the first
six months of 1996 of $907,000, 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
two quarters of 1996, the equity capital adjustment required by
SFAS No. 115 was a decrease of $1,175,000.
Capital was also reduced during the first two quarters of
1996 by dividend distributions of $173,000. 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
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 June 30,
1996, the Corporation's Tier 1 risk-adjusted capital ratio was
20.5% and the total capital ratio was 21.7%. 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 June 30,
1996, was 12.0%.
CREDIT RISK AND LOAN QUALITY
Table 1 - Nonperforming Assets, reveals that nonperforming
loans were $1,118,000 as of June 30, 1996, representing a
decrease of $726,000 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.
<PAGE>
Included within the classification of nonperforming loans at
June 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 that
the Corporation will be unable to collect all principal and
interest amounts due according to the contractual terms of the
loan agreement. At June 30, 1996, the Corporation's impaired
loans totalled approximately $595,000 or 53% of the total
nonperforming loans. All of these loans were on a nonaccrual
basis and have a related allowance for loan losses allocation of
$336,000. The average recorded investment in impaired loans in
the first two quarters of 1996 was approximately $1,080,000.
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 $472,000 at June 30, 1996, an increase of $115,000.
Foreclosed assets at the end of the second quarter of 1996
included commercial real estate with a carrying value of
$259,000, residential real estate with a carrying value of
$169,000 and mobile homes valued at $34,000.
Table 2 - Analysis of Allowance for Loan Losses, indicates a
$56,000 decrease in the allowance since December 31, 1995. The
Corporation had net charge-offs in the first two quarters of 1996
in the amount of $56,000, 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 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 June 30, 1996, the level of the allowance was at
2.04% 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 $2,602,000 during the first six months of
1996. Although such amount is generally sufficient to meet
normal fluctuations in loan demand or depositor needs, it was
necessary for the Corporation to borrow funds for short terms
from time to time during the first six months of 1996. The
average balance of borrowed money during such period was
$223,000.
<PAGE>
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 borrowings 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) June 30, ---- December----
1996 1995 1994
----------------------------
<S> <C> <C> <C>
Nonaccruing loans $ 520 $ 375 $ 620
Impaired Loans 595 1,299 --
Restructured troubled
debt 0 170 0
Accrual Loans 90 days
or more past due 3 0 1
-----------------------------
Total Nonperforming Loans $1,118 $1,844 $ 621
Foreclosed Assets 472 357 836
-----------------------------
Total Nonperforming Assets $1,590 $2,201 $1,457
=============================
Ratios:
Nonperforming loans as a
percent of period-end loans 1.79% 2.99% 1.02%
Nonperforming loans as a
percent of total period-end
stockholders' equity 7.77% 12.44% 5.12%
Allowance as multiple
of nonperforming loans 1.14x .72x 2.41x
<CAPTION>
(dollars in thousands) ---------- December --------
1993 1992
----------------------------
<S> <C> <C>
Nonaccruing loans $ 921 $1,260
Impaired Loans --- ---
Restructured troubled
debt 0 0
Accrual Loans 90 days
or more past due 38 109
-----------------------------
Total Nonperforming Loans $ 959 $1,369
Foreclosed Assets 1,334 1,457
-----------------------------
Total Nonperforming Assets $2,293 $2,826
=============================
Ratios:
Nonperforming loans as a
percent of period-end loans 1.48% 1.92%
Nonperforming loans as a
percent of total period-end
stockholders' equity 7.96% 12.24%
Allowance as multiple
of nonperforming loans 2.04x 1.64x
</TABLE>
<PAGE>
<TABLE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
TABLE 2 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<CAPTION>
(dollars in thousands) June 30, ---- December----
1996 1995 1994
----------------------------
<S> <C> <C> <C>
Balance - beginning of period $1,333 $1,494 $1,953
Provision (benefit) charged
to operating expense 0 0 (300)
Loans charged off:
Commercial and Agricultural 72 15 38
Real estate mortgage 0 0 23
Consumer 83 180 155
-----------------------------
Total loans charged off 155 195 216
Recoveries:
Commercial and Agricultural 72 27 51
Real estate mortgage 22 0 0
Consumer 5 7 6
-----------------------------
Total recoveries 99 34 57
-----------------------------
Net charge-offs (recoveries) 56 161 159
Balance - end of period $1,277 $1,333 $1,494
=============================
Ratios:
Annualized net charge-offs to
average loans .18% .27% .26%
Allowance to period-end
loans 2.04% 2.16% 2.46%
Allowance as multiple of
annualized net charge-offs 11.40x 8.28x 9.40x
<CAPTION>
(dollars in thousands) ---------- December --------
1993 1992
----------------------------
<S> <C> <C>
Balance - beginning of period $2,239 $ 925
Provision (benefit) charged
to operating expense 125 2,470
Loans charged off:
Commercial and Agricultural 500 1,201
Real estate mortgage 0 48
Consumer 18 65
-----------------------------
Total loans charged off 518 1,314
Recoveries:
Commercial and Agricultural 86 142
Real estate mortgage 0 4
Consumer 21 12
-----------------------------
Total recoveries 107 158
-----------------------------
Net charge-offs (recoveries) 411 1,156
Balance - end of period $1,953 $2,239
=============================
Ratios:
Annualized net charge-offs to
average loans .60% 1.49%
Allowance to period-end
loans 3.01% 3.14%
Allowance as multiple of
annualized net charge-offs 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.
- - -------------------------------------------------------------
(a) As previously reported in Form 10-Q for the quarterly
period ended March 31, 1996, the annual meeting of security
holders was held on April 9, 1996.
(b), (c) As previously reported in Form 10-Q for the
quarterly period ended March 31, 1996, at the April 9, 1996,
annual meeting, the shareholders of Cardinal Bancorp, Inc.
elected three Class B Directors to serve for a three year term
and until their successors are elected and qualified. The
following individuals were elected and the votes cast are set
forth opposite their names.
Individuals Elected For Against
------------------- --- -------
Donald W. DeArment 316,247 8,375
Clyde R. Morris 320,257 4,365
William B. Zimmerman 316,982 7,640
Additionally, following is a list of each other director
whose term of office as director continued after the meeting.
James B. Bexley Robert E. Ritchey
Darrell Dodson James C. Vreeland
Ray E. Koontz
The shareholders of Cardinal Bancorp, Inc. also voted to
ratify the selection of S.R. Snodgrass, A.C., Certified Public
Accountants, of Wexford, Pennsylvania, as the auditors for the
Corporation for the year ending December 31, 1996. There were
313,282 votes for ratification, 10,905 votes against and 435
abstentions. No other matters were considered.
<PAGE>
(d) Not applicable.
Item 5. Other Information.
- - ---------------------------
Not applicable.
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: August 12, 1996
By: /s/ Merle W. Helsel
---------------------------------------
Merle W. Helsel
Chief Financial Officer
(principal financial and accounting officer)
Date: August 12, 1996
:62051
