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 June 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 August 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
Financial Condition and Results of Operations 6
PART II OTHER INFORMATION
-----------------
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 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature Page 19
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
CARDINAL BANCORP, INC. AND SUBSIDIARY
(dollars in thousands)
<CAPTION>
June 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,321 $ 6,452
Interest earning balances 9,378 14
Federal funds sold 202 0
Securities available-for-sale 43,064 51,446
Loans 71,954 70,104
Less: Unearned discount 2,587 2,931
Allowance for loan losses 992 957
-------- --------
Net Loans 68,375 66,216
Accrued interest receivable 976 1,161
Premises and equipment, net 2,737 2,757
Foreclosed assets 194 229
Other assets 1,153 1,282
-------- --------
TOTAL ASSETS $132,400 $129,557
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand (non-interesting bearing) $ 14,455 $ 13,356
NOW, money market and savings 37,154 36,521
Time, less than $100,000 48,207 45,761
Time, $100,000 and over 14,936 10,117
-------- --------
Total Deposits 114,752 105,755
Securities sold under agreements
to repurchase 564 106
Short term borrowings 0 7,561
Accrued interest payable 580 531
Other liabilities 445 380
-------- --------
Total Liabilities 116,341 114,333
-------- --------
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 13,686 12,965
Net unrealized securities losses (386) (500)
-------- --------
Total Shareholders' Equity 16,059 15,224
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $132,400 $129,557
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
1
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<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
CARDINAL BANCORP, INC. AND SUBSIDIARY
(dollars in thousands)
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
1997 1996 1997 1996
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $1,614 $1,451 $3,141 $2,909
Depository institutions 129 2 140 21
Federal funds sold 38 25 44 49
Securities:
Taxable 626 739 1,315 1,468
Tax-exempt 107 152 256 282
Dividends 8 7 16 15
------ ------ ------ ------
Total Interest Income 2,522 2,376 4,912 4,744
------ ------ ------ ------
INTEREST EXPENSE
Deposits
NOW, money market and savings 204 250 404 498
Time, less than $100,000 674 611 1,325 1,228
Time, $100,000 and over 212 167 385 346
Interest on securities sold under
agreements to repurchase 8 0 13 0
Short-term borrowings 0 4 15 8
------ ------ ------ ------
Total Interest Expense 1,098 1,032 2,142 2,080
------ ------ ------ ------
Net Interest Income 1,424 1,344 2,770 2,664
Provision for Loan Losses 0 0 0 0
------ ------ ------ ------
Net Interest Income after
Provision for Loan Losses 1,424 1,344 2,770 2,664
------ ------ ------ ------
OTHER INCOME
Service charges on
deposit accounts 109 85 213 169
Other service charges and fees 31 39 65 73
Net security gains 5 0 5 11
Other noninterest income 7 4 8 4
------ ------ ------ ------
Total Other Income 152 128 291 257
------ ------ ------ ------
OTHER EXPENSES
Salaries and employee benefits 536 521 1,038 1,011
Occupancy and equipment expenses 105 97 212 203
Other operating expenses 292 306 574 581
------ ------ ------ ------
Total Other Expenses 933 924 1,824 1,795
------ ------ ------ ------
Income before income taxes 643 548 1,237 1,126
Income tax expense 167 114 308 219
------ ------ ------ ------
NET INCOME $476 $434 $929 $907
====== ====== ====== ======
EARNINGS PER SHARE $.48 $.44 $.94 $.92
====== ====== ====== ======
</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>
Six Months Ended
June 30,
1997 1996
(Unaudited)
<S> <C> <C>
Operating Activities
Net income $ 929 $ 907
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and Amortization 102 103
Net amortization of premiums and discounts 11 33
Net securities gains (5) (11)
Gain on sale of other assets (2) (1)
(Increase) decrease in accrued interest
and other assets 292 (410)
Increase (decrease) in accrued interest
and other liabilities 114 (30)
------ ------
Net Cash Provided by Operating Activities 1,441 591
------ ------
Investing Activities
Proceeds from sales of available-for-sale
securities 6,321 9,538
Redemption of Federal Home Loan Bank Stock 74 51
Proceeds from maturities of available-for-sale
securities 2,153 4,059
Purchase of available-for-sale securities 0 (18,335)
Net loans originated by customers (2,158) (1,018)
Premises and equipment expenditures (82) (73)
Proceeds from sale of premises and equipment 0 1
------ ------
Net Cash Provided (Used) by Investing Activities 6,308 (5,777)
------ ------
Financing Activities
Net increase in deposit accounts 1,732 2,430
Net increase (decrease) in time deposits 7,265 (3,042)
Dividends paid (208) (173)
Increase (decrease) in other borrowings (7,103) 1,595
------ ------
Net Cash Provided by Financing Activities 1,686 810
------ ------
Increase (Decrease) in Cash and Cash Equivalents 9,435 (4,376)
------ ------
Cash and Cash Equivalents at January 1 6,466 8,246
------ ------
Cash and Cash Equivalents at June 30 $15,901 $ 3,870
======= =======
Supplemental Information
Interest paid $ 2,095 $ 2,178
Income taxes paid $ 125 $ 164
Loans transferred to foreclosed assets $ 33 $ 250
</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 JUNE 30, 1997.
FINANCIAL CONDITION
Total assets at June 30, 1997, were $132,400,000, an increase of
$2,843,000 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 which was offset by a decrease
in securities available-for-sale. Net loans increased $2,159,000 and interest
earning balances increased $9,364,000 while investments in securities
decreased in the aggregate amount of $8,382,000 in the first six months of
1997. Short term borrowings were $7,561,000 at December 31, 1996, but the
Bank had no such borrowing at June 30, 1997. The reduction in short term
borrowings was accomplished through an increase in total deposits of
$8,997,000. On an individual basis, demand accounts increased $1,099,000,
NOW, money market and savings deposits increased in the aggregate amount of
$633,000, time deposits of less than $100,000 increased $2,446,000 and time
deposits of $100,000 and over increased $4,819,000.
Shareholders equity increased by $835,000 or 5.5% 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 $114,000 from December 31,
1996, to June 30, 1997. This positive impact on capital was coupled with
earnings of $929,000 for the first six months of 1997, of which $721,000 was
retained as part of the Corporation's equity capital with the balance of
$208,000 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 $8,555,000 in the first six months of 1997 primarily as
the result of the sale of Agency and Municipal securities with an amortized
cost of $3,499,000 and $2,817,000, respectively. Also, attributing to the
decline in the investment portfolio were calls of securities in the amount of
$1,012,000 and paydowns on mortgage-backed securities in the amount of
$1,153,000. 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. The funds to be
utilized in purchasing investments and meeting liquidity needs were placed in
interest earning balances which have increased $9,364,000 since December 31,
1996.
RESULTS OF OPERATIONS
Cardinal Bancorp, Inc. realized a net profit of $929,000 for the first
six months of 1997 as compared to a net profit of
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$907,000 for the first six months of 1996. On a per share basis, net income
for the first two quarters of 1997 was $.94 per share while net income for the
first two quarters of 1996 was $.92 per share.
Net income for the three months ended June 30, 1997, was $476,000 as
compared to net income for the three months ended June 30, 1996, of $434,000.
On a per share basis, net income for the three month period ended June 30,
1997, was approximately $.48 per share compared to $.44 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 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 1997 was $4,912,000 up
$168,000 or 3.5% above the $4,744,000 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 $118,555,000 for
the first two quarters of 1996 to $123,219,000 for the first two quarters of
1997, an increase of $4,664,000 or 3.9%. The yield on interest earning assets
increased slightly from the first two quarters 1996 yield of 7.97% to the
first two quarters 1997 yield of 7.99%. 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
part of the first quarter of 1997 impacting the variable rate earning assets
in the second quarter of 1997. Due to the differing indexes and repricing
frequencies, some rates have increased slightly during the second quarter of
1997, other rates have remained substantially unchanged.
Due to the repricing characteristics of the Corporation's variable rate
investment portfolio, and the conversion of some variable rate securities into
higher yielding fixed rate securities in early 1996, the yield on investments
increased from 6.47% for the first two quarters of 1996 to 6.55% for the same
period of 1997. As a result of the sale of securities, the Bank increased the
level of its lowest yielding assets, federal funds sold and
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<PAGE>
interest bearing balances at the Federal Home Loan Bank, from an average
balance of $2,601,638 for the first two quarters of 1996 to an average of
$6,705,793 for the first two 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 9.40% for
the first two quarters of 1996 to 9.22% for the first two quarters of 1997.
The changes in investment and loan yields when applied to the volumes in each
category resulted in a slight increase in the total yield on earning assets
from the first six months of 1996 compared to the first six months of 1997, as
noted above.
The Bank structures 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 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 through the
second quarter of 1997. Although the Federal fund 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 4.25%
for the first six months of 1997, compared to a weighted average rate of 4.27%
for the same period of 1996. As a result, the Bank's interest spread for the
first six months of 1997 was 3.72% as compared to 3.70% for the same period of
1996.
For the three months ended June 30, 1997, total interest income was
$2,522,000 or $146,000 greater than the $2,376,000 interest income for the
same period of 1996. The increase was
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primarily due to an increase in the volume of interest earning assets as
interest rates remained fairly stable.
The slight increase in the interest spread also had a positive effect on
the Corporation's net interest margin. The Corporation's interest spread for
the first six months of 1997 increased 2 basis points from the first six
months of 1996, the Corporation's net interest margin comparison for the same
periods shows an increase of 2 basis points from 4.46% to 4.48%.
INTEREST EXPENSE
Interest expense for the first six months of 1997 was $2,142,000, up
$62,000 or 3.0% above the $2,080,000 expense for the same period of the
previous year. The fairly stable interest rates in 1996 and for the first
half of 1997 resulted in the average cost of funds on deposits declining
slightly at 4.25% for the first two quarters of 1997 as compared to 4.27% for
the first two quarters of 1996.
The increased interest expense resulting from an increase in the average
balance of interest bearing liabilities outstanding was offset by slightly
lower interest rates paid on deposits. An evaluation of deposits by type for
the first six months 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 $3,314,000 for the first six months of 1997
compared to the same period of 1996. Average interest bearing deposits for
the first six months of 1997 were $100,408,000 as compared to $97,370,000 for
the first six months of 1996, an increase of $3,038,000 or 3.1%. This
increase in deposit volumes offset with the slight decline in rates resulted
in an increase in interest expense of $62,000.
As noted above, the Bank has maintained a net interest margin of 4.48%
for the first six months of 1997 as compared to 4.46% for the first six months
of 1996. Net interest income for the first two quarters of 1997 was
$2,770,000 as compared to $2,664,000 for the same period during 1996, a
$106,000 or 4.0% increase.
For the three months ended June 30, 1997, total interest expense was
$1,098,000 or $66,000 greater than the $1,032,000 interest expense for the
same period of 1996. The increase was primarily due to an increase in the
volume of interest bearing liabilities as interest rates remained fairly
stable. Net interest income was $1,424,000 for the second quarter of 1997 or
$80,000 higher than the $1,344,000 net interest income for the second quarter
of 1996.
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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 two quarters of 1997,
nonperforming assets declined further by $97,000 or 11.9% of the balance at
December 31, 1996. During the first six months of 1997, the Corporation
realized a net recovery on charged-off loans of $35,000 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 1.90 at June 30, 1997, as compared to 1.64 at December
31, 1996.
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 1997. Similarly, there was
no provision required in the first two quarters of 1996.
NONINTEREST INCOME AND GAINS ON SECURITIES
Noninterest income for the first six months of 1997 was $291,000, up
$34,000 from the same period of the previous year. The primary reason for the
increase was due to a rise in income from service charges on deposit accounts
which totaled $213,000 in the first six months of 1997 compared to $169,000 in
the first six months 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. Other service charges and fees, not related to deposit accounts,
decreased $8,000 from $73,000 for the first two quarters of 1996 to $65,000
for the first two quarters of 1997 primarily as the result of the termination
of a customer's monthly cash management fee in February of 1997.
Additionally, the Corporation realized net gains on sales of securities during
the first six months of 1997 of $5,000 compared to $11,000 for the same period
in 1996.
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Noninterest income during the three months ended June 30, 1997, totalled
$152,000 compared to $128,000 for the same period of 1996, an increase of
18.8%. The most significant portion of such increase was the result of a rise
in income from service charges on deposit accounts of $24,000.
NONINTEREST EXPENSE
Noninterest expense for the first six months of 1997 was $1,824,000, a
$29,000 increase from the $1,795,000 expense incurred in the first six months
of 1996. The most significant factor in the increase in noninterest expense
is related to an increase in employee benefits during the first two quarters
of 1997 in the amount of $32,000. The additional expense was due to the
Corporation increasing its contribution toward the premium for employee's
family health insurance benefits from 50% to 80% in November of 1996 and also
an increase in the Corporation's matching contribution to the 40l(k) Plan at
June 30, 1997. The second most significant factor in the increase in
noninterest expense related to the increase in charitable contributions to
$23,000 in the first six months of 1997 from $2,000 in the first six months of
1996. 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 in 1997 was increased, Shares Tax expense was reduced by
$10,000 in 1997.
Noninterest expense for the three month period ended June 30, 1997,
totalled $933,000 compared to $924,000 for the same quarter of 1996, an
increase of 1.0%.
INCOME TAXES
Income tax expense for the first six months of 1997 was $308,000, an
increase of $89,000 from the $219,000 expense for the same period of 1996.
The increase is primarily due to the reduction of income tax expense in 1996
resulting from the elimination of the deferred tax valuation allowance. As
noted above, net income after income taxes totaled $929,000 for the first two
quarters of 1997 as compared to $907,000 for the first two quarters of 1996.
CAPITAL
Capital adequacy is critical to the Corporation's well being and future
growth. Capital for the period ended June 30, 1997, was $16,059,000 while
capital at the end of 1996 totalled 15,224,000. In addition to the
Corporation's earnings during the first six months of 1997 of $929,000,
capital increased further as a result of an increase in the fair value of
securities held by the Bank
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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 1997, the equity capital
adjustment required by SFAS No. 115 was an increase of $114,000.
Capital was also reduced during the first two quarters of 1997 by
dividend distributions of $208,000. 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 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 June 30, 1997, the Corporation's
Tier 1 risk-adjusted capital ratio was 20.1% and the total capital ratio was
21.3%. 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, 1997, was 12.1%.
CREDIT RISK AND LOAN QUALITY
Table 1 - Nonperforming Assets, reveals that nonperforming loans were
$522,000 as of June 30, 1997, representing a decrease of $62,000 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 June 30,
1997, are impaired loans. At June 30, 1997, the Corporation's impaired loans
totalled approximately $33,000 or 6.3% of the total nonperforming loans. All
of these loans were on a nonaccrual basis and have a related allowance for
loan losses
12
<PAGE>
allocation of $17,000. The average recorded investment in impaired loans in
the first two quarters of 1997 was approximately $33,000.
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 $194,000 at June 30, 1997, which includes a decline of $35,000 in
the first two quarters of 1997. Foreclosed assets at the end of the second
quarter of 1997 included commercial real estate with a carrying value of
$159,000, liquor license with a carrying value of $30,000 and mobile homes
valued at $5,500.
Table 2 - Analysis of Allowance for Loan Losses, indicates a $35,000
increase in the allowance since December 31, 1996. The Corporation had net
recoveries on charged-off loans in the first two quarters of 1997 in the
amount of $35,000 and 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. 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 June
30, 1997, the level of the allowance was at 1.43% 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 $6,706,000 during the first
six 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 six months of 1997. The average balance of borrowed money during such
period was $852,000.
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.
13
<PAGE>
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.
14
<PAGE>
<TABLE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
TABLE 1 - NONPERFORMING ASSETS
Nonaccruing, Restructured and Past Due Loans
(dollars in thousands)
<CAPTION>
June 30, ---------- December -----------
1997 1996 1995 1994 1993
---------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 513 $ 584 $1,674 $ 620 $ 921
Restructured troubled
debt 0 0 170 0 0
Accrual Loans 90 days
or more past due 9 0 0 1 38
---------------------------------------------
Total Nonperforming Loans $ 522 $ 584 $1,844 $ 621 $ 959
Foreclosed Assets 194 229 357 836 1,334
---------------------------------------------
Total Nonperforming Assets $ 716 $ 813 $2,201 $1,457 $2,293
=============================================
Ratios:
Nonperforming loans as a
percent of period-end loans .75% .87% 2.99% 1.02% 1.48%
Nonperforming loans as a
percent of total period-end
stockholders' equity 3.25% 3.84% 12.44% 5.12% 7.96%
Allowance as multiple
of nonperforming loans 1.90x 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>
June 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 5 149 180 155 18
---------------------------------------------
Total loans charged off 5 490 195 216 518
Recoveries:
Commercial and Agricultural 11 76 27 51 86
Real estate mortgage 28 23 0 0 0
Consumer 1 15 7 6 21
---------------------------------------------
Total recoveries 40 114 34 57 107
---------------------------------------------
Net charge-offs (recoveries) (35) 376 161 159 411
Balance - end of period $ 992 $ 957 $1,333 $1,494 $1,953
============================================
Ratios:
Net charge-offs to
average loans * .61% .27% .26% .60%
Allowance to period-end
loans 1.43% 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.
- -------------------------------------------------------------
(a) As previously reported in Form 10-Q for the quarterly period ended
March 31, 1997, the annual meeting of security holders was held on April 8,
1997.
(b), (c) As previously reported in Form 10-Q for the quarterly period
ended March 31, 1997, at the April 8, 1997, annual meeting, the shareholders
of Cardinal Bancorp, Inc. elected two Class C 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 Authority Withheld
------------------- --- ------------------
Ray E. Koontz 650,360 46,931
Darrell Dodson 649,845 47,446
Additionally, following is a list of each other director whose term of
office as director continued after the meeting.
Merle W. Helsel Robert E. Ritchey
Donald W. DeArment James C. Vreeland
Clyde R. Morris William B. Zimmerman
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, 1997. There were 678,765 votes for ratification, 14,880 votes against and
3,646 abstentions. No other matters were considered.
17
<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.
18
<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: August 12, 1997
By: /s/ Robert F. Lafferty
-------------------------------------
Robert F. Lafferty
Chief Financial Officer
(principal financial and accounting officer)
Date: August 12, 1997
19
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,321
<INT-BEARING-DEPOSITS> 9,378
<FED-FUNDS-SOLD> 202
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,064
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 69,367
<ALLOWANCE> 992
<TOTAL-ASSETS> 132,400
<DEPOSITS> 114,752
<SHORT-TERM> 564
<LIABILITIES-OTHER> 1,025
<LONG-TERM> 0
0
0
<COMMON> 2,759
<OTHER-SE> 13,300
<TOTAL-LIABILITIES-AND-EQUITY> 132,400
<INTEREST-LOAN> 3,141
<INTEREST-INVEST> 1,587
<INTEREST-OTHER> 184
<INTEREST-TOTAL> 4,912
<INTEREST-DEPOSIT> 2,114
<INTEREST-EXPENSE> 28
<INTEREST-INCOME-NET> 2,770
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 1,824
<INCOME-PRETAX> 1,237
<INCOME-PRE-EXTRAORDINARY> 929
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 929
<EPS-PRIMARY> .94
<EPS-DILUTED> .94
<YIELD-ACTUAL> 4.48
<LOANS-NON> 513
<LOANS-PAST> 9
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 957
<CHARGE-OFFS> 5
<RECOVERIES> 40
<ALLOWANCE-CLOSE> 992
<ALLOWANCE-DOMESTIC> 595
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 397
</TABLE>
