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, 1998
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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 _____
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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, 1998.
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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 Statement of Changes in
Shareholders' Equity (Unaudited) 3
Consolidated Statements of Cash Flows (Unaudited) 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 19
Item 2. Changes In Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote 19
of Security Holders
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature Page 20
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
CARDINAL BANCORP, INC. AND SUBSIDIARY
(dollars in thousands)
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,048 $ 5,361
Interest earning balances 6,021 1,434
Federal funds sold 3,119 1,508
Securities available-for-sale 41,536 44,156
Loans 81,964 76,172
Less: Unearned discount 1,713 2,232
Allowance for loan losses 932 958
------- -------
Net Loans 79,319 72,982
Accrued interest receivable 721 887
Premises and equipment, net 2,515 2,632
Foreclosed assets 137 169
Other assets 964 812
------- -------
TOTAL ASSETS $138,380 $129,941
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand (non-interest bearing) $ 18,436 $ 16,527
NOW, money market and savings 35,905 33,891
Time, less than $100,000 50,715 49,188
Time, $100,000 and over 8,826 9,815
------- -------
Total Deposits 113,882 109,421
Securities sold under agreements
to repurchase 5,554 2,476
Accrued interest payable 557 558
Other liabilities 352 306
------- -------
Total Liabilities 120,345 112,761
------- -------
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 15,184 14,339
Accumulated other comprehensive income 92 82
------- -------
Total Shareholders' Equity 18,035 17,180
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $138,380 $129,941
======= =======
</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,
1998 1997 1998 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $1,852 $1,655 $5,323 $4,796
Depository institutions 105 76 275 216
Federal funds sold 42 28 112 72
Securities:
Taxable 571 656 1,817 1,971
Tax-exempt 39 71 119 327
Dividends 6 6 22 22
------ ------ ------ ------
Total Interest Income 2,615 2,492 7,668 7,404
------ ------ ------ ------
INTEREST EXPENSE
Deposits
NOW, money market and savings 204 199 576 603
Time, less than $100,000 709 692 2,145 2,017
Time, $100,000 and over 98 124 322 509
Interest on securities sold under
agreements to repurchase 47 18 122 31
Short-term borrowings 0 0 0 15
------ ------ ------ ------
Total Interest Expense 1,058 1,033 3,165 3,175
------ ------ ------ ------
Net Interest Income 1,557 1,459 4,503 4,229
Provision for Loan Losses 0 0 0 0
------ ------ ------ ------
Net Interest Income after
Provision for Loan Losses 1,557 1,459 4,503 4,229
------ ------ ------ ------
OTHER INCOME
Service charges on
deposit accounts 109 105 390 318
Other service charges and fees 28 32 92 97
Net security gains 0 26 31 31
Other noninterest income 14 0 52 8
------ ------ ------ ------
Total Other Income 151 163 565 454
------ ------ ------ ------
OTHER EXPENSES
Salaries and employee benefits 543 540 1,608 1,578
Occupancy and equipment expenses 107 105 321 317
Other operating expenses 368 333 1,181 907
------ ------ ------ ------
Total Other Expenses 1,018 978 3,110 2,802
------ ------ ------ ------
Income before income taxes 690 644 1,958 1,881
Income tax expense 206 184 579 492
------ ------ ------ ------
NET INCOME $ 484 $ 460 $1,379 $1,389
====== ====== ====== ======
EARNINGS PER SHARE:
Basic $ .49 $ .46 $ 1.39 $ 1.40
Diluted .47 .46 1.34 1.38
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
CARDINAL BANCORP, INC. AND SUBSIDIARY
(dollars in thousands)
<CAPTION>
Common Retained
Stock Surplus Earnings
-------- -------- ---------
<S> <C> <C> <C>
Balance, December 31, 1997 $ 495 $ 2,264 $ 14,339
Net Income 1,379
Other comprehensive income:
Unrealized gain on available
for sale securities, net of
reclassification adjustment
Comprehensive Income
Cash dividends paid (534)
------ ------ ------
Balance Septebmer 30, 1998 $ 495 $ 2,264 $ 15,184
====== ====== ======
Disclosure of reclassification
adjustment:
Unrealized holding gain arising
during the period
Less: reclassification adjustment for
gain included in net income
Net unrealized gain on securities
<CAPTION>
Accumulated
Other Total
Comprehensive Shareholders' Comprehensive
Income Equity Income
------------- ------------ --------------
<S> <C> <C> <C>
Balance, December 31, 1997 $ 82 $ 17,180 $
Net Income 1,379 1,379
Other comprehensive income:
Unrealized gain on available
for sale securities, net of
reclassification adjustment
10 10 10
------
Comprehensive Income $ 1,389
======
Cash dividends paid (534)
------ ------
Balance Septebmer 30, 1998 $ 92 $ 18,035
====== ======
Disclosure of reclassification
adjustment:
Unrealized holding gain arising
during the period $ 31
Less: reclassification adjustment for
gain included in net income 21
------
Net unrealized gain on securities $ 10
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CARDINAL BANCORP, INC. AND SUBSIDIARY
(dollars in thousands)
<CAPTION>
Nine Months Ended
September 30,
1998 1997
(Unaudited)
<S> <C> <C>
Operating Activities
Net income $ 1,379 $ 1,389
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and Amortization 156 153
Net amortization of premiums and discounts 72 9
Net securities gains (31) (31)
Gain on sale of other assets (3) (1)
Decrease in accrued interest
and other assets 9 459
Increase in accrued interest
and other liabilities 45 89
------ ------
Net Cash Provided by Operating Activities 1,627 2,067
------ ------
Investing Activities
Proceeds from sales of available-for-sale
securities 19,902 14,731
Redemption of Federal Home Loan Bank Stock 0 74
Proceeds from maturities of available-for-sale
securities 11,063 2,623
Purchase of available-for-sale securities (28,371) (10,550)
Net loans originated by customers (6,390) (4,655)
Premises and equipment expenditures (39) (82)
Proceeds from sale of foreclosed assets 87 0
------- -------
Net Cash Provided (Used) by Investing Activities (3,748) 2,141
------- -------
Financing Activities
Net increase in deposit accounts 3,923 2,735
Net increase in time deposits 538 3,041
Dividends paid (534) (337)
Increase (decrease) in other borrowings 3,078 (5,995)
------- -------
Net Cash Provided (Used) by Financing Activities 7,005 (556)
------- -------
Increase in Cash and Cash Equivalents 4,884 3,652
------- -------
Cash and Cash Equivalents at January 1 8,304 6,466
------- -------
Cash and Cash Equivalents at September 30 $ 13,188 $ 10,118
======= =======
Supplemental Information
Interest paid $ 3,167 $ 3,154
Income taxes paid $ 685 $ 315
Loans transferred to foreclosed assets $ 53 $ 92
</TABLE>
The accompanying notes are an integral part of these statements.
4
<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 1997 Annual Report to Shareholders.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Corporation adopted the Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." In adopting
Statement No. 130, the Corporation is required to present comprehensive income
and its components in a full set of general purpose financial statements. The
Corporation has elected to report the effects of Statement No. 130 as part of
the Consolidated Statement of Changes in Shareholders' Equity.
NOTE 3 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Statement No. 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants, and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share.
All earnings per share for all periods have been presented, and where
necessary, restated to conform to the Statement No. 128 requirements.
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The following table sets forth the computation of basic and diluted earnings
per share. There were no convertible securities which would effect the
numerator in calculating basic and diluted earnings per share; therefore, net
income as presented on the Consolidated Statement of Income will be used as
the numerator. The following table sets forth a reconciliation of the
denominator of the basic and diluted earnings per share computation.
<TABLE>
<CAPTION>
September 30 September 30
1998 1997
------------ ------------
<S> <C> <C>
Denominator:
Denominator for basic earnings per
share-weighted-average shares 990,000 990,000
Stock options 37,473 14,693
-------- --------
Denominator for diluted earnings per
share-adjusted weighted-average
average assumed conversions 1,027,473 1,004,693
========= =========
</TABLE>
NOTE 4 - OTHER MATTERS
On April 13, 1998, the Board of Directors executed a definitive Agreement and
Plan of Merger (the Agreement), which provides for the affiliation of the
Corporation with Susquehanna Bancshares, Inc. (Susquehanna) headquartered in
Lititz, Pennsylvania. The Agreement provides that the affiliation will be
effected by means of a merger of the Corporation and Susquehanna. The merger
is anticipated to be completed during the fourth quarter of 1998. A merger of
this type will enable the Corporation's subsidiary, First American National
Bank of Pennsylvania, to remain a community-based organization with expanded
financial products and services beneficial in today's rapidly changing
technology-based marketplace.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR SEPTEMBER 30, 1998.
FINANCIAL CONDITION
Total assets at September 30, 1998, were $138,380,000, an increase of
$8,439,000 from the $129,941,000 balance at December 31, 1997. 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
$6,337,000 and interest earning balances and federal funds sold increased
$6,198,000 while investments in securities decreased in the aggregate amount
of $2,620,000 in the first nine months of 1998. Total deposits increased
$4,461,000 from the December 31, 1997 balance. On an individual basis, demand
deposits increased $1,909,000, NOW, money market and savings deposits
increased in the aggregate amount of $2,014,000, time deposits of less than
$100,000 increased $1,527,000 and time deposits of $100,000 and over decreased
$989,000. Securities sold under agreements to repurchase increased $3,078,000
from the December 31, 1997 balance as the Bank increased the number of new
agreements entered into with its commercial customers.
Shareholders equity increased by $855,000 or 5.0% 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 $10,000 from $82,000 at
December 31, 1997, to $92,000 at September 30, 1998. This positive impact on
capital was coupled with earnings of $1,379,000 for the first nine months of
1998, of which $845,000 was retained as part of the Corporation's equity
capital with the balance having been distributed to shareholders as dividends.
Excluding the change in the investment portfolio attributable to the
increase in the fair value of securities, the investment portfolio of the
Corporation decreased $2,605,000 in the first nine months of 1998 primarily as
the result of the receipt of paydowns on mortgage-backed securities of
approximately $4,800,000. During the first nine months of 1998, the
Corporation as part of its investment strategy, sold or had called $25,871,000
of securities. The Corporation during the same period purchased securities
totalling $28,348,000. The securities sold were mostly fixed rate securities
and the securities purchased were mostly variable rate and shorter term fixed
rate agencies. The planned investment transactions will provide security with
less price volatility for future rate fluctuations. In meeting liquidity
needs the excess funds resulting from the above investment activities were
placed
7
<PAGE>
in interest earning balances which have increased $6,198,000 since December
31, 1997.
RESULTS OF OPERATIONS
Cardinal Bancorp, Inc. realized a net profit of $1,379,000 for the first
nine months of 1998 as compared to a net profit of $1,389,000 for the first
nine months of 1997. On a per share basis, net income for the first three
quarters of 1998 represents $1.39 basic earnings per share or $1.34 diluted
earnings per share. Net income for the first three quarters of 1997
represents $1.40 basic earnings per share or $1.38 diluted earnings per share.
Net income for the three months ended September 30, 1998 was $484,000 as
compared to net income for the three months ended September 30, 1997 of
$460,000. On a per share basis, net income for the three month period ended
September 30, 1998 represents $.49 basic earnings per share or $.47 diluted
earnings per share. Net income for the same period of 1997 represents $.46
basic earnings per share or $.46 diluted earnings per share.
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 1998 was $7,668,000 up
$264,000 or 3.6% above the $7,404,000 earned during the same period of 1997.
The increase was primarily due to an increase in the volume of interest
earning assets, the average volume of which increased from $122,759,000 for
the first three quarters of 1997 to $127,110,000 for the first three quarters
of 1998, an increase of $4,351,000 or 3.5%. The yield on interest earning
assets for the first three quarters of 1998 was 8.00%, a 1 basis point
decrease from the first three quarters of 1997 yield of 8.01%. Interest rates
remained fairly stable throughout 1997 and through the first nine months of
1998. Due to the differing
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<PAGE>
indexes and repricing frequencies, some rates have decreased slightly during
the first nine months of 1998, other rates have remained substantially
unchanged.
Due to the Corporation converting some higher yielding fixed rate
securities in 1998 into variable rate and shorter term fixed rate securities,
the yield on investments decreased from 6.59% for the first three quarters of
1997 to 6.44% for the same period of 1998. As interest rates remained fairly
stable throughout 1997 and through the first nine months of 1998, competitive
pressures resulted in the yield on the loan portfolio declining slightly from
9.22% in the first three quarters of 1997 to 9.10% in the first three quarters
of 1998. The changes in the investment and loan yields when applied to the
volumes in each category resulted in virtually no change in the total yield on
earning assets from the first nine months of 1997 compared to the first nine
months of 1998, as noted above.
The Corporation 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, interest rates remained fairly stable
during 1997 and into the first nine months of 1998 resulting in a minimal
increase in the rate paid on interest bearing deposits of 4.24% for the first
three quarters of 1998, compared to a rate of 4.23% for the same period of
1997. As a result, the Bank's interest spread for the first nine months of
1998 was 3.75% as compared to 3.76% for the same period of 1997.
As noted above, the stable interest rates resulted in virtually no change
in the Corporation's interest spread for the
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first nine months of 1998 compared to the same period of 1997. The effect of
an increase in interest earning assets coupled with a slight decline in
interest bearing liabilities resulted in the Corporation's net interest margin
increasing to 4.67% for the first nine months of 1998 from 4.55% for the same
period of 1997.
Interest income for the three months ended September 30, 1998, totalled
$2,615,000 or $123,000 above the $2,492,000 for the same period of 1997, an
increase of 4.9%. For reasons noted above, 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 1998 was $3,165,000, down
$10,000 or .3% below the $3,175,000 expense for the same period of the
previous year. The fairly stable interest rates in 1997 and 1998 resulted in
the average cost of funds increasing slightly at 4.24% for the first three
quarters of 1998 as compared to 4.23% for the first three quarters of 1997.
The decrease in interest expense resulted primarily from a decrease in
the average balance of interest bearing liabilities outstanding. An
evaluation of deposits by type for the first three quarters of 1998 as
compared to the same period of 1997 shows the Corporation experienced
increases in the average balances in NOW accounts and time deposits of less
than $100,000. The Corporation experienced decreases in the average balances
in savings, money market, time deposits over $100,000 and IRA accounts. The
primary increase in the average balances was in time deposits of less than
$100,000, the average balance of which increased $3,492,000 for the first nine
months of 1998 compared to the same period of 1997. The increase was
primarily due to expanded account volume resulting from the Corporation's
increasingly positive image in the communities it serves. The primary
decrease in the average balances was in time deposits over $100,000, the
average balance of which decreased $4,701,000 for the first nine months of
1998 compared to the same period of 1997. The decrease was primarily due to
the run-off of temporary funds resulting from competitors paying above market
rates. Average interest bearing deposits for the first nine months of 1998
were $96,004,000 as compared to $98,865,000 for the first nine months of 1997,
a decrease of $2,861,000 or 2.9%. Offsetting the decrease in average interest
bearing deposits was an increase in securities sold under agreements to
repurchase in which the average balance increased from $779,000 for the first
nine months of 1997 to $3,774,000 for the first nine months of 1998, an
increase of $2,995,000. The increase was due to the initiation of the
Corporation's cash management product in the first half of 1997. As a result
of the net decreased volumes, interest expense decreased $10,000.
10
<PAGE>
As noted above, the Bank has maintained a net interest margin of 4.67%
for the first nine months of 1998 as compared to 4.55% for the first nine
months of 1997. Net interest income for the first three quarters of 1998 was
$4,503,000 as compared to $4,229,000 for the same period during 1997, a
$274,000 or 6.5% increase.
For the three months ended September 30, 1998, total interest expense was
$1,058,000 or $25,000 greater than the $1,033,000 interest expense for the
same period of 1997. Net interest income was $1,557,000 for the third quarter
of 1998 or $98,000 higher than the $1,459,000 net interest income for the
third quarter of 1997.
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. During the first three quarters of 1998, nonperforming assets
totalled $511,000, a decrease of $184,000 or 26.5% below the December 31,
1997, balance of $695,000. The decrease in nonperforming assets is primarily
the result of the transfer of a loan included in the category of accrual loans
90 days or more past due at December 31, 1997, back to performing status.
During the first nine months of 1998, the Corporation realized net charge-offs
on loans of $26,000 as compared to a net recovery on charged-off loans of
$1,000 for the full year of 1997. 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 2.49 at
September 30, 1998, as compared to 1.82 at December 31, 1997.
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 1998. Similarly, there
was no provision required in the first three quarters of 1997.
NONINTEREST INCOME AND GAINS ON SECURITIES
Noninterest income for the first nine months of 1998 was $565,000, up
$111,000 from the same period of the previous year. The increase in
noninterest income was attributable primarily to
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<PAGE>
additional income generated through service charges on deposit accounts which
totalled $390,000 in the first three quarters of 1998 compared to $318,000 in
the first three quarters of 1997. The increase in service charges on deposit
accounts resulted from increased overdraft volume. In addition to the above,
other noninterest income increased $44,000 to a balance of $52,000 for the
first nine months of 1998 from a balance of $8,000 during the same period of
1997. The increase resulted primarily from adjusting the net periodic pension
income in the amount of $31,000 in the first nine months of 1998 while net
periodic pension income in 1997 was adjusted in its entirety at the end of the
year.
Noninterest income during the three months ended September 30, 1998,
totalled $151,000 compared to $163,000 for the same period of 1997, a decrease
of 7.4%. The most significant portion of such decrease resulted from the
Corporation realizing net gains on sales of securities during the three months
ended September 30, 1997 of $26,000 compared to $0 for the same period of
1998.
NONINTEREST EXPENSE
Noninterest expense for the first nine months of 1998 was $3,110,000, a
$308,000 increase from the $2,802,000 expense incurred in the first nine
months of 1997. Noninterest expense increased materially in several
categories. The most significant factor in the increase in noninterest
expense is related to an increase in legal and consulting expenses during the
first three quarters of 1998 in the amount of $204,000 of which $200,000 was
directly related to the plan of merger with Susquehanna Bancshares, Inc.
Another area in which noninterest expense increased from the 1997 level was in
Director fees which increased $51,000 in the first nine months of 1998
compared to the same period of 1997 primarily due to a present value
adjustment on the directors deferred income benefit expense in 1998.
Unrealized losses on other real estate owned for the first nine months of 1998
were $35,000 compared to $0 for the same period of 1997. With the exception
to the categories above, noninterest expense remained fairly stable when
comparing the first nine months of 1998 to the first nine months of 1997.
Noninterest expense for the three month period ended September 30, 1998,
totaled $1,018,000 compared to $978,000 for the same quarter of 1997, an
increase of 4.1%. The increase in expense is primarily the result of the
additional legal and consulting expenses directly related to the plan of
merger with Susquehanna Bancshares, Inc.
INCOME TAXES
Income tax expense for the first nine months of 1998 was $579,000, an
increase of $87,000 from the $492,000 expense for the same period of 1997.
The Corporation's effective tax rate
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<PAGE>
increased to 29.6% in the first nine months of 1998 from 26.2% in the first
nine months of 1997. This is the result of a reduction in the Corporation's
tax-exempt income. As noted above, net income after income taxes totaled
$1,379,000 for the first three quarters of 1998 as compared to $1,389,000 for
the first three quarters of 1997.
CAPITAL
Capital adequacy is critical to the Corporation's well being and future
growth. Capital for the period ended September 30, 1998, was $18,035,000
while capital at the end of 1997 totalled 17,180,000. In addition to the
Corporation's earnings during the first nine months of 1998 of 1,379,000,
capital increased further as a result of an increase in the fair value of
securities held by the Corporation which are held as available-for-sale.
Under Statement No. 130 of the Financial Accounting Standards Board which has
been adopted by the Corporation, increases and decreases in comprehensive
income and its components will be reported as equity capital adjustments net
of tax effect. During the first three quarters of 1998, the equity capital
adjustment required by SFAS No. 130 was an increase of $10,000.
Capital was also reduced during the first three quarters of 1998 by
dividend distributions of $534,000. 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 September 30, 1998, the
Corporation's Tier 1 risk-adjusted capital ratio was 20.4% and the total
capital ratio was 21.5%. 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,
1998, was 13.0%.
13
<PAGE>
CREDIT RISK AND LOAN QUALITY
Table 1 - Nonperforming Assets, reveals that nonperforming loans were
$374,000 as of September 30, 1998, representing a decrease of $152,000 since
December 31, 1997. Included within the classification of nonperforming loans
at September 30, 1998, are impaired loans. At September 30, 1998, the
Corporation's impaired loans totalled approximately $88,000 or 23.5% of the
total nonperforming loans. The average recorded investment in impaired loans
in the first three quarters of 1998 was approximately $228,000.
Table 1 also reflects a decrease in foreclosed assets in each year since
1994. As noted, foreclosed assets have decreased from $836,000 at December
31, 1994 to $137,000 at September 30, 1998, which includes a decline of
$32,000 in the first three quarters of 1998.
Table 2 - Analysis of Allowance for Loan Losses, indicates a $26,000
decrease in the allowance since December 31, 1997. The Corporation had net
charge-offs on loans in the first three quarters of 1998 in the amount of
$26,000 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 recoveries on charged-off loans for 1997 totalled $1,000 as
compared to net charge-offs of $376,000 in 1996. The large decrease in net
charge-offs in 1997 was due to a $256,000 charge-off of loans to related
entities of one individual. At September 30, 1998, the level of the allowance
was at 1.16% 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 $9,284,000 during the first
nine months of 1998.
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
14
<PAGE>
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.
MARKET RISKS
The types of market risk exposures generally faced by banking entities
include interest rate risk, liquidity risk, equity market price risk, foreign
currency risk and commodity price risk. Due to the nature of its operations,
only interest rate risk and liquidity risk are significant to the Corporation.
Liquidity and interest rate risk are related but distinctly different
from one another. The maintenance of adequate liquidity, the ability to meet
the cash requirements of its customers and other financial commitments, is a
fundamental aspect of the Corporation's asset/liability management strategy.
The Corporation's policy of diversifying its funding sources, purchased funds
and deposit accounts, allows it to avoid undue concentration in any single
financial market and also to avoid heavy funding requirements within short
periods of time.
However, liquidity is not entirely dependent on increasing the
Corporation's liability balances. Liquidity can also be generated from
maturing or readily marketable assets. The carrying value of investment
securities maturing within one year amounted to $319,000 at September 30,
1998. These maturing investments represent 1% of total securities.
Additionally, the Corporation's investment portfolio includes $34,878,000 in
mortgage-backed securities on which a portion of the principal is repaid each
month continually providing funds to meet liquidity needs. Short-term
investments amounted to $9,140,000 and represent additional sources of
liquidity. Consequently, the Corporation's exposure to liquidity risk is not
considered significant.
Closely related to the management of liquidity is the management of
interest rate risk which focuses on maintaining stability in the net interest
margin, an important factor in
15
<PAGE>
earnings growth. Interest rate sensitivity is measured as the difference
between the volume of assets and liabilities that are subject to repricing in
a future period of time. These differences are known as interest sensitivity
gaps. The Corporation utilizes gap management as the primary means of
measuring interest rate risk. Gap analysis identifies and quantifies the
Corporation's exposure or vulnerability to changes in interest rates in
relationship to the Corporation's interest rate sensitivity position. A rate
sensitive asset or liability is one which is capable of being repriced (i.e.,
the interest rate can be adjusted or principal can be reinvested) within a
specified period of time. Subtracting total rate sensitive liabilities (RSL)
from total rate sensitive assets (RSA) within specified time horizons nets the
Corporation's gap positions. These gaps will reflect the Corporation's
exposure to changes in market interest rates.
YEAR 2000
The Corporation is aware of the issues associated with the programming
code in existing computer systems as the millennium (year 2000) approaches.
The "year 2000" problem is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two-digit year
value to 00. The issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
A plan has been developed and is being followed to ensure that the
modifications and conversions are implemented and thoroughly tested on a
timely basis. Based on progress made to date, management anticipates that
software for the primary information systems will be Year 2000-compliant by
the end of 1998. Other less essential software applications will be modified
and/or replaced during 1999 which would enable all internal software
applications to become Year 2000-compliant prior to the year 2000.
The Corporation is utilizing both internal and external resources to
identify, correct or reprogram, and test the systems for the year 2000
compliance. To date, confirmations have been received from the Corporation's
primary vendors that plans are being developed or have been completed to
address processing of transactions in the year 2000. A contingency plan has
been established for critical business system applications to mitigate
potential delays or other problems associated with either new system
replacements or established vendor delivery dates. Management's assessment of
the year 2000 compliance expense was determined to be immaterial and not have
a material effect on the Corporation's future financial position or results of
operations.
16
<PAGE>
<TABLE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
TABLE 1 - NONPERFORMING ASSETS
Nonaccruing, Restructured and Past Due Loans
(dollars in thousands)
<CAPTION>
September 30, ---------- December -----------
1998 1997 1996 1995 1994
---------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccruing loans $ 367 $ 311 $ 584 $1,674 $ 620
Restructured troubled
debt 0 0 0 170 0
Accrual Loans 90 days
or more past due 7 215 0 0 1
---------------------------------------
Total Nonperforming Loans $ 374 $ 526 $ 584 $1,844 $ 621
Foreclosed Assets 137 169 229 357 836
----------------------------------------
Total Nonperforming Assets $ 511 $ 695 $ 813 $2,201 $1,457
========================================
Ratios:
Nonperforming loans as a
percent of period-end loans .47% .71% .87% 2.99% 1.02%
Nonperforming loans as a
percent of total period-end
shareholders' equity 2.07% 3.06% 3.84% 12.44% 5.12%
Allowance as multiple
of nonperforming loans 2.49x 1.82x 1.64x .72x 2.41x
</TABLE>
17
<PAGE>
<TABLE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
TABLE 2 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
<CAPTION>
September 30, ----------- December ----------
1998 1997 1996 1995 1994
-------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - beginning of period $ 958 $ 957 $1,333 $1,494 $1,953
Provision charged to
operating expense 0 0 0 0 (300)
Loans charged off:
Commercial and Agricultural 2 1 328 15 38
Real estate mortgage 0 0 13 0 23
Consumer 33 75 149 180 155
---------------------------------------------
Total loans charged off 35 76 490 195 216
Recoveries:
Commercial and Agricultural 4 45 76 27 51
Real estate mortgage 0 28 23 0 0
Consumer 5 4 15 7 6
---------------------------------------------
Total recoveries 9 77 114 34 57
---------------------------------------------
Net charge-offs (recoveries) 26 (1) 376 161 159
Balance - end of period $ 932 $ 958 $ 957 $1,333 $1,494
============================================
Ratios:
Net charge-offs to
average loans .03% * .61% .27% .26%
Allowance to period-end
loans 1.16% 1.29% 1.42% 2.16% 2.46%
Allowance as multiple of
net charge-offs 45.85x * 2.54x 8.28x 9.40x
* Recoveries exceeded charge-offs in 1997.
</TABLE>
18
<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.
19
<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 12, 1998
By /s/ Robert F. Lafferty
- -------------------------------------
Robert F. Lafferty
Chief Financial Officer
(principal financial and accounting officer)
Date: November 12, 1998
20
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,048
<INT-BEARING-DEPOSITS> 6,021
<FED-FUNDS-SOLD> 3,119
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,536
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 80,251
<ALLOWANCE> 932
<TOTAL-ASSETS> 138,380
<DEPOSITS> 113,882
<SHORT-TERM> 5,554
<LIABILITIES-OTHER> 909
<LONG-TERM> 0
0
0
<COMMON> 2,759
<OTHER-SE> 15,276
<TOTAL-LIABILITIES-AND-EQUITY> 138,380
<INTEREST-LOAN> 5,323
<INTEREST-INVEST> 1,958
<INTEREST-OTHER> 387
<INTEREST-TOTAL> 7,668
<INTEREST-DEPOSIT> 3,043
<INTEREST-EXPENSE> 122
<INTEREST-INCOME-NET> 4,503
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 31
<EXPENSE-OTHER> 3,110
<INCOME-PRETAX> 1,958
<INCOME-PRE-EXTRAORDINARY> 1,379
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,379
<EPS-PRIMARY> 1.39
<EPS-DILUTED> 1.34
<YIELD-ACTUAL> 4.67
<LOANS-NON> 367
<LOANS-PAST> 7
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 958
<CHARGE-OFFS> 35
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 932
<ALLOWANCE-DOMESTIC> 670
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 262
</TABLE>
