FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
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 or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
140 East Main Street, Everett, Pennsylvania 15537
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(Address of principal executive offices)
(Zip Code)
(814) 652-2131
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed 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 ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 990,000 shares of $.50
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par common stock were outstanding as of November 5, 1997.
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<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
EVERETT, PENNSYLVANIA
FORM 10-Q INDEX
Page
PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) 1
Consolidated Statements of Income (Unaudited) 2
Consolidated Statements of Cash Flows (Unaudited) 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of 6
Financial Condition and Results of Operations
PART II OTHER INFORMATION
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Item 1. Legal Proceedings 17
Item 2. Changes In Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote 17
of Security Holders
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature Page 18
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
CARDINAL BANCORP, INC. AND SUBSIDIARY
(dollars in thousands)
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,975 $ 6,452
Interest earning balances 1,128 14
Federal funds sold 1,015 0
Securities available-for-sale 45,238 51,446
Loans 74,247 70,104
Less: Unearned discount 2,403 2,931
Allowance for loan losses 973 957
-------- --------
Net Loans 70,871 66,216
Accrued interest receivable 845 1,161
Premises and equipment, net 2,686 2,757
Foreclosed assets 189 229
Other assets 960 1,282
-------- --------
TOTAL ASSETS $130,907 $129,557
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand (non-interest bearing) $ 18,064 $ 13,356
NOW, money market and savings 34,548 36,521
Time, less than $100,000 48,566 45,761
Time, $100,000 and over 10,353 10,117
-------- --------
Total Deposits 111,531 105,755
Securities sold under agreements
to repurchase 1,672 106
Short term borrowings 0 7,561
Accrued interest payable 552 531
Other liabilities 448 380
-------- --------
Total Liabilities 114,203 114,333
-------- --------
SHAREHOLDERS' EQUITY
Common stock, par value $.50,
2,000,000 shares authorized,
990,000 shares issued and outstanding 495 495
Surplus 2,264 2,264
Retained earnings 14,017 12,965
Net unrealized securities losses (72) (500)
-------- --------
Total Shareholders' Equity 16,704 15,224
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $130,907 $129,557
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
CARDINAL BANCORP, INC. AND SUBSIDIARY
(dollars in thousands)
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
1997 1996 1997 1996
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $1,655 $1,473 $4,796 $4,382
Depository institutions 76 1 216 22
Federal funds sold 28 4 72 53
Securities:
Taxable 656 725 1,971 2,193
Tax-exempt 71 151 327 433
Dividends 6 8 22 23
------ ------ ------ ------
Total Interest Income 2,492 2,362 7,404 7,106
------ ------ ------ ------
INTEREST EXPENSE
Deposits
NOW, money market and savings 199 248 603 746
Time, less than $100,000 692 611 2,017 1,839
Time, $100,000 and over 124 131 509 477
Interest on securities sold under
agreements to repurchase 18 4 31 4
Short-term borrowings 0 9 15 17
------ ------ ------ ------
Total Interest Expense 1,033 1,003 3,175 3,083
------ ------ ------ ------
Net Interest Income 1,459 1,359 4,229 4,023
Provision for Loan Losses 0 0 0 0
------ ------ ------ ------
Net Interest Income after
Provision for Loan Losses 1,459 1,359 4,229 4,023
------ ------ ------ ------
OTHER INCOME
Service charges on
deposit accounts 105 101 318 270
Other service charges and fees 32 27 97 100
Net security gains 26 (6) 31 5
Other noninterest income 0 6 8 10
------ ------ ------ ------
Total Other Income 163 128 454 385
------ ------ ------ ------
OTHER EXPENSES
Salaries and employee benefits 540 528 1,578 1,539
Occupancy and equipment expenses 105 108 317 311
Other operating expenses 333 257 907 838
------ ------ ------ ------
Total Other Expenses 978 893 2,802 2,688
------ ------ ------ ------
Income before income taxes 644 549 1,881 1,720
Income tax expense 184 153 492 372
------ ------ ------ ------
NET INCOME $ 460 $ 441 $1,389 $1,348
====== ====== ====== ======
EARNINGS PER SHARE $ 0.46 $ 0.45 $ 1.40 $ 1.36
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
2
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<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CARDINAL BANCORP, INC. AND SUBSIDIARY
(dollars in thousands)
<CAPTION>
Nine Months Ended
September 30,
1997 1996
(Unaudited)
<S> <C> <C>
Operating Activities
Net income $ 1,389 $ 1,348
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and Amortization 153 154
Net amortization of premiums and discounts 9 38
Net securities gains (31) (5)
Gain on sale of other assets (1) (4)
(Increase) decrease in accrued interest
and other assets 459 (138)
Increase in accrued interest
and other liabilities 89 34
------ ------
Net Cash Provided by Operating Activities 2,067 1,427
------ ------
Investing Activities
Proceeds from sales of available-for-sale
securities 14,731 11,068
Redemption of Federal Home Loan Bank Stock 74 51
Proceeds from maturities of available-for-sale
securities 2,623 5,916
Purchase of available-for-sale securities (10,550) (19,332)
Net loans originated by customers (4,655) (845)
Premises and equipment expenditures (82) (90)
Proceeds from sale of premises and equipment 0 1
------ ------
Net Cash Provided (Used) by Investing Activities 2,141 (3,231)
------ ------
Financing Activities
Net increase in deposit accounts 2,735 2,013
Net increase (decrease) in time deposits 3,041 (3,025)
Dividends paid (337) (272)
Increase (decrease) in other borrowings (5,995) 635
------ ------
Net Cash Used by Financing Activities (556) (649)
------ ------
Increase (Decrease) in Cash and Cash Equivalents 3,652 (2,453)
------ ------
Cash and Cash Equivalents at January 1 6,466 8,246
------ ------
Cash and Cash Equivalents at September 30 $ 10,118 $ 5,793
======= =======
Supplemental Information
Interest paid $ 3,154 $ 3,178
Income taxes paid $ 315 $ 264
Loans transferred to foreclosed assets $ 92 $ 275
</TABLE>
The accompanying notes are an integral part of these statements.
3
<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 the financial statements
and footnotes contained in the 1996 Annual Report to Shareholders.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
On March 3, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128, "Earnings Per Share." Statement No.
128 will become effective for the Corporation beginning in 1998. This
statement re-defines the standards for computing earnings per share (EPS)
previously found in Accounting Principles Board Opinion No. 15, Earnings Per
Share. Statement No. 128 establishes new standards for computing and
presenting EPS and requires dual presentation of "basic" and "diluted" EPS on
the face of the income statement for all entities with complex capital
structures. Under Statement No. 128, basic EPS is to be computed based upon
income available to common shareholders and the weighted average number of
common shares outstanding for the period. Diluted EPS is to reflect the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Corporation.
Statement No. 128 also requires the restatement of all prior-period EPS data
presented. The Corporation will adopt Statement No. 128 on December 31, 1997,
and based on current estimates, does not believe the effect of adoption will
have a significant impact on the Corporation's financial position or results
of operations.
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In July 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is presented with the same prominence as other financial statements. SFAS No.
130 requires that companies (i) classify items of other comprehensive income
by their nature in a financial statement and (ii) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the statement of financial
condition. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The Corporation will adopt Statement No. 130 for the year
beginning January 1, 1998, and does not believe the effect of adoption will
have a significant impact on the Corporation's financial position or results
of operations.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR SEPTEMBER 30, 1997.
FINANCIAL CONDITION
Total assets at September 30, 1997, were $130,907,000, an increase of
$1,350,000 from the $129,557,000 balance at December 31, 1996. The increase
was primarily the result of an increase in the balance of net loans coupled
with an increase in interest earning balances and federal funds sold which was
offset by a decrease in securities available-for-sale. Net loans increased
$4,655,000 and interest earning balances increased $2,129,000 while
investments in securities decreased in the aggregate amount of $6,208,000 in
the first nine months of 1997. Short term borrowings were $7,561,000 at
December 31, 1996, but the Bank had no such borrowings at September 30, 1997.
The reduction in short term borrowings was accomplished primarily through an
increase in total deposits of $5,776,000. On an individual basis, demand
accounts increased $4,708,000, NOW, money market and savings deposits
decreased in the aggregate amount of $1,973,000, time deposits of less than
$100,000 increased $2,805,000 and time deposits of $100,000 and over increased
$236,000. Securities sold under agreements to repurchase increased $1,566,000
as the Bank increased the number of new agreements entered into with its
commercial customers.
Shareholders equity increased by $1,480,000 or 9.7% as the fair value of
the Corporation's available-for-sale securities portfolio increased coupled
with an increase in earnings. Unrealized gains in the available-for-sale
securities portfolio net of tax effect increased $428,000 from December 31,
1996, to September 30, 1997. This positive impact on capital was coupled with
earnings of $1,389,000 for the first nine months of 1997, of which $1,052,000
was retained as part of the Corporation's equity capital with the balance of
$337,000 having been distributed to shareholders as dividends.
Excluding the change in the investment portfolio attributable to the
decrease in the fair value of securities, the investment portfolio of the
Corporation decreased $6,856,000 in the first nine months of 1997 primarily as
the result of the sale of U.S. Agency and Municipal securities in April with
an amortized cost of $3,499,000 and $2,817,000, respectively. In addition to
meeting liquidity needs, the Bank sold the securities primarily in
anticipation of future rate increases which would allow the Bank to purchase
new securities at a higher rate. Since that time, rates have remained fairly
flat and in August the Bank sold additional U.S. Agency and Municipal
securities totalling $3,396,750 and $5,013,064, respectively. Following the
sale of securities in August, the Bank then purchased higher yielding U.S.
6
<PAGE>
Agency securities totalling $10,550,179. The planned investment transactions
will enable the Bank to maintain after tax income at the current level while
shortening the duration (life) of the portfolio. This will result in less
volatility in the market value of the portfolio due to interest rate changes
while income will be maintained at the current level.
RESULTS OF OPERATIONS
Cardinal Bancorp, Inc. realized a net profit of $1,389,000 for the first
nine months of 1997 as compared to a net profit of $1,348,000 for the first
nine months of 1996. On a per share basis, net income for the first three
quarters of 1997 was $1.40 per share while net income for the first three
quarters of 1996 was $1.36 per share. Net income for the three months ended
September 30, 1997, was $460,000 as compared to net income for the three
months ended September 30, 1996, of $441,000. On a per share basis, net
income for the three month period ended September 30, 1997, was approximately
$.46 per share as compared to $.45 per share for the same period of 1996.
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 1997 was $7,404,000 up
$298,000 or 4.2% above the $7,106,000 earned during the same period of 1996.
The increase was primarily due to an increase in the volume of interest
earning assets, the average volume of which increased from $118,106,000 for
the first three quarters of 1996 to $122,759,000 for the first three quarters
of 1997, an increase of $4,653,000 or 3.9%. The yield on interest earning
assets for the first three quarters of 1997 was 8.01%, a 5 basis point
increase from the first three quarters of 1996 yield of 7.96%. Interest rates
declined in the first quarter of 1996 and remained fairly stable through the
remainder of 1996 and into the first part of 1997, however, interest rates
increased in the latter
7
<PAGE>
part of the first quarter of 1997 impacting the variable rate earning assets
in the second and third quarters of 1997. Due to the differing indexes and
repricing frequencies, some rates have increased slightly during 1997, other
rates have remained substantially unchanged.
Due to the repricing characteristics of the Bank's variable rate
investment portfolio, and the conversion of some variable rate securities into
higher yielding fixed rate securities, the yield on investments increased from
6.48% for the first three quarters of 1996 to 6.59% for the same period of
1997. As a result of the sale of securities in April, the Bank increased the
level of its lowest yielding assets, federal funds sold and interest bearing
balances at the Federal Home Loan Bank, from an average balance of $1,856,326
for the first three quarters of 1996 to an average of $6,968,866 for the first
three quarters of 1997. Due to competitive pressures, a general decline in
rates in early 1996 and repricing characteristics of the Bank's loan
portfolio, the yield on the loan portfolio declined from 9.36% for the first
three quarters of 1996 to 9.22% for the first three quarters of 1997. The
changes in the investment and loan yields when applied to the volumes in each
category resulted in an increase in the total yield on earning assets from the
first nine months of 1996 compared to the first nine months of 1997, as noted
above.
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, some 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 increasing
interest rates the Bank's interest income will be positively affected, a
general increase in interest rates will have a corresponding impact on
increasing 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, after a decline in early 1996,
interest rates remained fairly stable during 1996 but increased in the latter
part of the first quarter of 1997 and have remained fairly stable since.
8
<PAGE>
Although the federal funds rate and Wall Street Journal Prime rate increased
in the latter part of the first quarter of 1997, the increases had little or
no effect on the Bank's investment and deposit rates. The weighted average
rate paid on interest bearing deposits was 4.23% for the first nine months of
1997, compared to a weighted average rate of 4.22% for the same period of
1996. As a result, the Bank's interest spread for the first nine months of
1997 was 3.76% as compared to 3.73% for the same period of 1996.
The slight increase in interest rates also has had a positive effect on
the Corporation's net interest margin. In addition to the direct impact on
net interest margin caused by an increase in interest spread, when interest
earning assets exceed interest bearing liabilities, such as exists within the
Corporation, an increase in interest rates will cause an increase in net
interest income even if interest spread and other factors remain constant.
This effect of slightly increasing rates has been coupled with 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 1997 increased 3 basis points from the first nine months of
1996 and the Corporation's net interest margin comparison for the same period
shows an increase of 7 basis points from 4.48% to 4.55%.
Interest income for the three months ended September 30, 1997, totalled
$2,492,000 or $130,000 above the $2,362,000 for the same period of 1996, an
increase of 5.5%. The increase was primarily due to an increase in the volume
of interest earning assets as interest rates remained fairly stable.
INTEREST EXPENSE
Interest expense for the first nine months of 1997 was $3,175,000, up
$92,000 or 3.0% above the $3,083,000 expense for the same period of the
previous year. The fairly stable interest rates in 1996 and 1997 resulted in
the average cost of funds increasing slightly at 4.25% for the first three
quarters of 1997 as compared to 4.23% for the first three quarters of 1996, an
increase of two basis points. The slight increase in the cost of funds rate
resulted from replacing savings and money market accounts, which bear lower
interest rates, with other interest bearing liabilities which bear higher
interest rates.
The increase in interest expense resulted primarily from an increase in
the average balance of interest bearing liabilities outstanding. An
evaluation of deposits by type for the first three quarters of 1997 as
compared to the same period of 1996 shows the Bank experienced increases in
the average balances in all time deposit accounts except savings and money
market accounts. The primary increase in the average balances was in time
deposits of less than $100,000, the average balance of which increased
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$3,828,000 for the first nine months of 1997 compared to the same period of
1996. Average interest bearing deposits for the first nine months of 1997
were $98,865,000 as compared to $96,607,000 for the first nine months of 1996,
an increase of $2,258,000 or 2.3%. Also attributing to the increase in volume
is the increase in securities sold under agreements to repurchase in which the
average balance increased from $93,000 for the first nine months of 1996 to
$779,000 for the first nine months of 1997, an increase of $686,000. As a
result of the increased volumes, interest expense increased $92,000.
As noted above, the Bank has maintained a net interest margin of 4.55%
for the first nine months of 1997 as compared to 4.48% for the first nine
months of 1996. Net interest income for the first three quarters of 1997 was
$4,229,000 as compared to $4,023,000 for the same period during 1996, a
$206,000 or 5.1% increase.
For the three months ended September 30, 1997, total interest expense was
$1,033,000 or $30,000 greater than the $1,003,000 interest expense for the
same period of 1996. Net interest income was $1,459,000 for the third quarter
of 1997 or $100,000 higher than the $1,359,000 net interest income for the
third quarter of 1996.
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.
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 increased $744,000 in 1995 to $2,201,000 as
several large commercial loans were placed on nonaccrual status in July of
1995. Nonperforming assets totaled $813,000 at December 31, 1996, a decline of
$1,388,000 from December 31, 1995. During the first three quarters of 1997,
nonperforming assets declined further by $317,000 or 39.0% of the December 31,
1996, balance. During the first nine months of 1997, the Corporation realized
a net recovery on charged-off loans of $16,000 as compared to total net
charge-offs of $376,000 for the full year of 1996. 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 3.17 at September 30, 1997, as compared to 1.64 at
December 31, 1996.
10
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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 1997. Similarly, there
was no provision required in the first three quarters of 1996.
NONINTEREST INCOME AND GAINS ON SECURITIES
Noninterest income for the first nine months of 1997 was $454,000, up
$69,000 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 $318,000 in the
first three quarters of 1997 compared to $270,000 in the first three quarters
of 1996. Additionally, the Corporation realized net gains on sales of
securities during the first nine months of 1997 of $31,000 as compared to
$5,000 for the same period of 1996. The increase in service charges on
deposit accounts was the result of an increase in the volume of overdraft
charges coupled with a large sum assessed one customer for photocopying and
research costs. The increase in net security gains was the result of the sale
of specific Municipal and U.S. Agency securities in August of 1997 to enable
the Corporation to purchase higher yielding U.S. Agency securities.
Noninterest income during the three months ended September 30, 1997,
totalled $163,000 compared to $128,000 for the same period of 1996, an
increase of 27.3%. The increase is primarily due to the Corporation realizing
net gains on sales of securities in the amount of $26,000 for the three months
ended September 30, 1997, compared to a $6,000 net loss during the same three
month period of 1996.
NONINTEREST EXPENSE
Noninterest expense for the first nine months of 1997 was $2,802,000, a
$114,000 increase from the $2,688,000 expense incurred in the first nine
months of 1996. Noninterest expense increased materially in several
categories. Employee benefits increased $55,000 from $262,000 in the first
three quarters of 1996 to $317,000 in the first three quarters of 1997. The
additional expense was due to the Corporation increasing its contribution
toward the premium for employees' family health insurance benefits from 50% to
80% in November of 1996 and also an increase in the corporation's matching
contribution to the 401(k) Plan in 1997. Charitable contributions increased
from $5,000 in the first nine months of 1996 to $26,000 in the first nine
months of 1997, an increase of $21,000. The additional contributions in 1997
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
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in 1997 was increased, Shares Tax expense was reduced by $10,000 in 1997.
Expense of data processing increased from $92,000 in the first three quarters
of 1996 to $119,000 for the same period of 1997, an increase of $27,000 or
29.3%. The increase was primarily the result of increased Federal Reserve
service charges attributable to increased volume of transactions generated
primarily from large volume commercial customers.
Noninterest expense for the three month period ended September 30, 1997,
totaled $978,000 compared to $893,000 for the same quarter of 1996, an
increase of 9.5%.
INCOME TAXES
Income tax expense for the first nine months of 1997 was $492,000, an
increase of $120,000 from the $372,000 expense for the same period of 1996.
The increase is primarily due to the reduction of income tax expense in 1996
resulting from the utilization of alternative minimum tax credits. Also
attributing to the increase in income tax expense was the conversion of some
tax free municipal interest income into taxable interest income as the result
of planned investment transactions which occurred in the first nine months of
1997. These factors coupled with an increase in pre-tax income of $161,000
resulted in a 32.3% increase in income tax expense. As noted above, net
income after income taxes totaled $1,389,000 for the first three quarters of
1997 as compared to $1,348,000 for the first three quarters of 1996.
CAPITAL
Capital adequacy is critical to the Corporation's well being and future
growth. Capital for the period ended September 30, 1997, was $16,704,000
while capital at the end of 1996 totalled $15,224,000. In addition to the
Corporation's earnings during the first nine months of 1997 of $1,389,000,
capital increased further as a result of an increase 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
1997, the equity capital adjustment required by SFAS No. 115 resulted in a
$72,000 decrease to capital which was a $428,000 improvement over December 31,
1996. Capital was also reduced during the first three quarters of 1997 by
dividend distributions of $337,000.
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.
12
<PAGE>
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 shareholders' equity exclusive of
securities gains or losses 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 September 30, 1997, the
Corporation's Tier 1 risk-adjusted capital ratio was 20.8% and the total
capital ratio was 22.0%. 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,
1997, was 12.8%.
CREDIT RISK AND LOAN QUALITY
Table 1 - Nonperforming Assets, reveals that nonperforming loans were
$307,000 as of September 30, 1997, representing a decrease of $277,000 since
December 31, 1996. As noted in the table, nonperforming loans decreased
significantly in 1996. Approximately $1,067,000 of such decrease was
attributable to the liquidation from nonaccrual status of loans to related
entities of one individual for which provision for potential losses had been
previously made.
Included within the classification of nonperforming loans at September
30, 1997, are impaired loans. At September 30, 1997, the Corporation did not
have any impaired loans. The average recorded investment in impaired loans in
the first three quarters of 1997 was approximately $22,000.
Table 1 also reflects a decrease in foreclosed assets in each year since
1993. As noted, foreclosed assets have decreased from $1,334,000 at December
31, 1993, to $189,000 at September 30, 1997, which includes a decline of
$40,000 in the first three quarters of 1997. Foreclosed assets at the end of
the third quarter of 1997 included commercial real estate with a carrying
value of $178,000, a mobile home valued at $5,500 and vehicles with a carrying
value of $5,500.
Table 2 - Analysis of Allowance for Loan Losses, indicates a $16,000
increase in the allowance since December 31, 1996. The Corporation had net
recoveries on charged-off loans in the first three quarters of 1997 in the
amount of $16,000 and it was not necessary to make a provision to the
allowance during that period.
13
<PAGE>
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. As nonperforming loans have shown a favorable decline as
noted above, based upon the analyses, it is the opinion of Management that the
level of the allowance is adequate. As noted in the table, net charge-offs
for 1996 totalled $376,000 as compared to $161,000 in 1995. The large
increase in net charge-offs in 1996 was due to a $256,000 charge-off of loans
to related entities of one individual. At September 30, 1997, the level of
the allowance was at 1.35% 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 $6,967,000 during the first
nine months of 1997. 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 nine months of 1997. The average balance of borrowed money during such
period was $250,000.
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.
14
<PAGE>
<TABLE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
TABLE 1 - NONPERFORMING ASSETS
Nonaccruing, Restructured and Past Due Loans
(dollars in thousands)
<CAPTION>
September 30, ---------- December -----------
1997 1996 1995 1994 1993
---------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 292 $ 584 $1,674 $ 620 $ 921
Restructured troubled
debt 0 0 170 0 0
Accrual Loans 90 days
or more past due 15 0 0 1 38
---------------------------------------------
Total Nonperforming Loans $ 307 $ 584 $1,844 $ 621 $ 959
Foreclosed Assets 189 229 357 836 1,334
---------------------------------------------
Total Nonperforming Assets $ 496 $ 813 $2,201 $1,457 $2,293
=============================================
Ratios:
Nonperforming loans as a
percent of period-end loans .43% .87% 2.99% 1.02% 1.48%
Nonperforming loans as a
percent of total period-end
stockholders' equity 1.84% 3.84% 12.44% 5.12% 7.96%
Allowance as multiple
of nonperforming loans 3.17x 1.64x .72x 2.41x 2.04x
</TABLE>
15
<PAGE>
<TABLE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
TABLE 2 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
<CAPTION>
September 30, ----------- December -----------
1997 1996 1995 1994 1993
--------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - beginning of period $ 957 $1,333 $1,494 $1,953 $2,239
Provision charged to
operating expense 0 0 0 (300) 125
Loans charged off:
Commercial and Agricultural 0 328 15 38 500
Real estate mortgage 0 13 0 23 0
Consumer 27 149 180 155 18
---------------------------------------------
Total loans charged off 27 490 195 216 518
Recoveries:
Commercial and Agricultural 12 76 27 51 86
Real estate mortgage 28 23 0 0 0
Consumer 3 15 7 6 21
---------------------------------------------
Total recoveries 43 114 34 57 107
---------------------------------------------
Net charge-offs (recoveries) (16) 376 161 159 411
Balance - end of period $ 973 $ 957 $1,333 $1,494 $1,953
============================================
Ratios:
Net charge-offs to
average loans * .61% .27% .26% .60%
Allowance to period-end
loans 1.35% 1.42% 2.16% 2.46% 3.01%
Allowance as multiple of
net charge-offs * 2.54x 8.28x 9.40x 4.75x
* A net recovery was realized during this period.
</TABLE>
16
<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.
- ---------------------------
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.
17
<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/ Merle W. Helsel
-------------------------------------
Merle W. Helsel
President and Chief Executive Officer
Date: November 13, 1997
By: /s/ Robert F. Lafferty
-------------------------------------
Robert F. Lafferty
Chief Financial Officer
(principal financial and accounting officer)
Date: November 13, 1997
18
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,975
<INT-BEARING-DEPOSITS> 1,128
<FED-FUNDS-SOLD> 1,015
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,238
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 71,844
<ALLOWANCE> 973
<TOTAL-ASSETS> 130,907
<DEPOSITS> 111,531
<SHORT-TERM> 1,672
<LIABILITIES-OTHER> 1,000
<LONG-TERM> 0
0
0
<COMMON> 2,759
<OTHER-SE> 13,945
<TOTAL-LIABILITIES-AND-EQUITY> 130,907
<INTEREST-LOAN> 4,796
<INTEREST-INVEST> 2,320
<INTEREST-OTHER> 288
<INTEREST-TOTAL> 7,404
<INTEREST-DEPOSIT> 3,129
<INTEREST-EXPENSE> 46
<INTEREST-INCOME-NET> 4,229
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 31
<EXPENSE-OTHER> 2,802
<INCOME-PRETAX> 1,881
<INCOME-PRE-EXTRAORDINARY> 1,389
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,389
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.40
<YIELD-ACTUAL> 4.55
<LOANS-NON> 292
<LOANS-PAST> 15
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 957
<CHARGE-OFFS> 27
<RECOVERIES> 43
<ALLOWANCE-CLOSE> 973
<ALLOWANCE-DOMESTIC> 611
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 362
</TABLE>
