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 March 31, 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
---- ----
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 May 8, 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
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Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote 18
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>
March 31, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,555 $ 5,361
Interest earning balances 9,069 1,434
Federal funds sold 388 1,508
Securities available-for-sale 42,532 44,156
Loans 78,948 76,172
Less: Unearned discount 2,023 2,232
Allowance for loan losses 947 958
------- -------
Net Loans 75,978 72,982
Accrued interest receivable 761 887
Premises and equipment, net 2,588 2,632
Foreclosed assets 147 169
Other assets 1,067 812
------- -------
TOTAL ASSETS $137,085 $129,941
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand (non-interesting bearing) $ 17,116 $ 16,527
NOW, money market and savings 35,491 33,891
Time, less than $100,000 49,008 49,188
Time, $100,000 and over 13,836 9,815
------- -------
Total Deposits 115,451 109,421
Securities sold under agreements
to repurchase 3,135 2,476
Short term borrowings 0 0
Accrued interest payable 562 558
Other liabilities 546 306
------- -------
Total Liabilities 119,694 112,761
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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 14,612 14,339
Accumulated other comprehensive income 20 82
------- -------
Total Shareholders' Equity 17,391 17,180
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $137,085 $129,941
======= =======
</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
March 31,
1998 1997
(Unaudited)
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 1,702 $ 1,527
Depository institutions 76 11
Federal funds sold 40 6
Securities:
Taxable 672 689
Tax-exempt 40 149
Dividends 7 8
------ ------
Total Interest Income 2,537 2,390
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INTEREST EXPENSE
Deposits
NOW, money market and savings 180 200
Time, less than $100,000 737 651
Time, $100,000 and over 116 173
Interest on securities sold under
agreements to repurchase 33 5
Short-term borrowings 0 15
------ ------
Total Interest Expense 1,066 1,044
------ ------
Net Interest Income 1,471 1,346
Provision for Loan Losses 0 0
------ ------
Net Interest Income after
Provision for Loan Losses 1,471 1,346
------ ------
OTHER INCOME
Service charges on
deposit accounts 132 104
Other service charges and fees 36 34
Net security gains 25 0
Other noninterest income 16 1
------ ------
Total Other Income 209 139
------ ------
OTHER EXPENSES
Salaries and employee benefits 515 502
Occupancy and equipment expenses 106 107
Other operating expenses 448 282
------ ------
Total Other Expenses 1,069 891
------ ------
Income before income taxes 611 594
Income tax expense 180 141
------ ------
NET INCOME $ 431 $ 453
====== ======
EARNINGS PER SHARE:
Basic $ .43 $ .46
Diluted .42 .45
</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 431
Other comprehensive income:
Unrealized loss on available
for sale securities, net of
reclassification adjustment
Comprehensive Income
Cash dividends paid (158)
------ ------ ------
Balance March 31, 1998 $ 495 $ 2,264 $ 14,612
====== ====== ======
Disclosure of reclassification
adjustment:
Unrealized holding loss arising
during the period
Less: reclassification adjustment for
gain included in net income
Net unrealized loss 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 431 431
Other comprehensive income:
Unrealized loss on available
for sale securities, net of
reclassification adjustment (62) (62) (62)
Comprehensive Income $ 369
=======
Cash dividends paid (158)
------- -------
Balance March 31, 1998 $ 20 $ 17,391
======= =======
Disclosure of reclassification
adjustment:
Unrealized holding loss arising
during the period $ (79)
Less: reclassification adjustment for
gain included in net income 17
------
Net unrealized loss on securities $ (62)
======
</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>
Three Months Ended
March 31,
1998 1997
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 431 $ 453
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 52 51
Net amortization of premiums and discounts 14 3
Net securities gains (25) 0
Loss on sale of assets 3 0
(Increase) decrease in accrued interest
and other assets (97) 164
Increase (decrease) in accrued interest
and other liabilities 244 (54)
------ ------
Net Cash Provided by Operating Activities 622 617
------ ------
INVESTING ACTIVITIES
Proceeds from sales of available-for-sale
securities 16,406 0
Redemption of Federal Home Loan Bank Stock 0 74
Proceeds from maturities of available-for-sale
securities 6,420 716
Purchase of available-for-sale securities (21,285) 0
Net loans originated by customers (3,011) (1,370)
Premises and equipment purchases (8) (56)
Proceeds from sales of foreclosed assets 33 19
------ ------
Net Cash Used by Investing Activities (1,445) (617)
------ ------
FINANCING ACTIVITIES
Net increase in deposit accounts 2,190 1,158
Net increase in time deposits 3,840 6,394
Dividends paid (158) (99)
Increase (decrease) in other borrowings 659 (7,506)
------ ------
Net Cash Provided (Used) by Financing Activities 6,531 (53)
(Increase) decrease in Cash and Cash Equivalents 5,708 (53)
------ ------
Cash and Cash Equivalents at January 1 8,304 6,466
------ ------
Cash and Cash Equivalents at March 31 $ 14,012 $ 6,413
====== ======
SUPPLEMENTAL INFORMATION
Interest paid on deposits $ 1,062 $ 1,025
Income taxes paid 75 0
Loans transferred to foreclosed assets 15 3
</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.
5
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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 affect 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>
March 31 March 31
1998 1997
-------- --------
<S> <C> <C>
Denominator:
Denominator for basic earnings per
share-weighted-average shares 990,000 990,000
Stock options 34,482 12,431
-------- --------
Denominator for diluted earnings per
share-adjusted weighted-average
average assumed conversions 1,024,482 1,002,431
========= =========
</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. 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 MARCH 31, 1998.
FINANCIAL CONDITION
Total assets at March 31, 1998, were $137,085,000, an increase of
$7,144,000 from the $129,941,000 balance at December 31, 1997. The increase
was primarily the result of an increase in the balances of deposits and
securities sold under agreements to repurchase which increased $6,689,000 in
the first quarter of 1998. The increase in deposits is primarily the result
of an increase in certificates of deposit over $100,000 obtained through
competitive bids coupled with the Bank's perception that customers are being
attracted by the quality, personalized service a community bank provides. On
an individual basis, demand accounts increased $589,000, NOW, money market and
savings accounts increased $1,600,000 and time deposits of $100,000 and over
increased $4,021,000. Securities sold under agreements to repurchase
increased $659,000. Net loans increased $2,996,000 while investments in
securities decreased in the aggregate amount of $1,624,000 in the first
quarter of 1998.
Shareholders' equity increased by $211,000 or 1.2% despite a decline in
the fair value of the Corporation's available-for-sale investment portfolio.
Unrealized gains in the available-for-sale investment portfolio net of tax
effect decreased $62,000 from $82,000 at December 31, 1997, to $20,000 at
March 31, 1998. This negative impact on capital was offset by earnings of
$431,000 for the first three months of 1998, of which $273,000 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
decrease in the fair value of securities, the investment portfolio of the
Corporation decreased $1,531,000 in the first three months of 1998, primarily
as the result of paydowns on mortgage-backed securities of approximately
$1,300,000. During the first three months of 1998, the Corporation, as part
of its investment strategy, sold or had called $21,400,000 of securities. The
Corporation during the same period purchased securities totalling $21,300,000.
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.
7
<PAGE>
RESULTS OF OPERATIONS
Cardinal Bancorp, Inc. realized a net profit of $431,000 for the first
three months of 1998 as compared to a net profit of $453,000 for the first
three months of 1997. On a per share basis, net income for the first quarter
of 1998 represents $.43 basic earnings per share or $.42 diluted earnings per
share. Net income for the first quarter of 1997 represents $.46 basic
earnings per share or $.45 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 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 three months of 1998 was $2,537,000 up
$147,000 or 6.2% above the $2,390,000 earned during the same period of 1997.
The increase was due to an increase in the volume of interest earning assets,
the average volume of which increased from $120,126,000 for the first quarter
of 1997 to $126,308,000 for the first quarter of 1998, an increase of
$6,182,000 or 5.2%. The yield on interest earning assets was increased
slightly from the first quarter 1997 yield of 8.03% to the first quarter 1998
yield of 8.11%. Interest rates remained fairly stable through 1997 and the
first part of 1998. Due to the differing indexes and repricing frequencies,
some rates have increased slightly during 1997 and the first part of 1998,
other rates have remained substantially unchanged.
The Corporation converted some fixed rate securities in the first part of
1998 into variable rate and shorter term fixed rate securities, however, prior
to the above transactions the Corporation in 1997 converted some variable rate
securities into higher yielding fixed rate securities. The yield on
investments for the first quarter of 1998 was 6.72% as compared to a yield of
6.53% for the same period of 1997. The increase in the yield is reflective of
the higher yielding fixed rate securities purchased in 1997 which were then
liquidated in the early part of 1998 as part of the Corporation's planned
investment strategy. Due to
8
<PAGE>
rates remaining fairly stable during 1997 and into the early part of 1998, the
yield on the loan portfolio remained fairly stable showing a slight decline
from 9.16% for the first quarter of 1997 to 9.14% for the first quarter of
1998. The Corporation 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 $1,264,000 for the first quarter of 1997 to
an average of $8,437,000 for the first quarter of 1998. The changes in
investment and loan yields when applied to the volumes in each category offset
with an increase of lower yielding assets resulted in a minimal change in the
total yield on earning assets from the first three months of 1997 compared to
the first three 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 Corporation has no control. Furthermore, a portion of the investment
portfolio contains securities with rates which adjust according to indexes
which generally track with changes in the rate environment. As a result, the
Corporation 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 Corporation'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 Corporation'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 early part of the first quarter of 1998, however, due
to competitive pressures a slight increase resulted in the rate paid on
interest bearing deposits of 4.33% for the first quarter of 1998, compared to
a rate of 4.28% for the same period of 1997. Despite the increase in the rate
paid on interest bearing deposits, the Corporation's interest spread for the
first three months of 1998 increased slightly to 3.78% from 3.75% for the
first three months of 1997.
The increase in interest spread also has had a positive effect on the
Corporation's net interest margin. The Corporation's interest spread for the
first three months of 1998 increased 3
9
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basis points from the first three months of 1997, the Corporation's net
interest margin comparison for the same periods shows an increase of 18 basis
points from 4.50% to 4.68%.
INTEREST EXPENSE
Interest expense for the first three months of 1998 was $1,066,000, up
$22,000 or 2.1% above the $1,044,000 expense for the same period of the
previous year. The fairly stable interest rates in 1997 and the first part of
1998 resulted in the average cost of funds on deposits increasing only
slightly to 4.33% for the first quarter of 1998 as compared to 4.28% for the
first quarter of 1997.
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 quarter of 1998 as compared to
the same period of 1997 shows the Corporation experienced increases in the
average balances in NOW accounts, time deposits of less than $100,000 and IRA
accounts. The Corporation experienced decreases in the average balances in
savings, money market and time deposits over $100,000. The primary increase
in the average balances was in time deposits of less than $100,000, the
average balance of which increased $5,823,266 for the first three months of
1998 compared to the same period of 1997. The primary decrease in the average
balances was in time deposits over $100,000, the average balance of which
decreased $4,448,000 over the same period. Average interest bearing deposits
for the first three months of 1998 were $96,970,000 as compared to $97,863,000
for the first three months of 1997, a decrease of $893,000 or .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 $320,000 for the first three months of 1997 to $3,045,000 for
the first three months of 1998, an increase of $2,725,000. As a result of the
net increased volumes, interest expense increased $22,000.
As noted above, the Corporation has maintained a net interest margin of
4.68% for the first three months of 1998 as compared to 4.50% for the first
three months of 1997. Net interest income for the first quarter of 1998 was
$1,471,000 as compared to $1,346,000 for the same period during 1997, a
$125,000 or 9.3% increase.
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
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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 quarter of 1998 nonperforming assets totalled
$769,000, an increase of $74,000 or 10.6% above the December 31, 1997, balance
of $695,000. The increase in nonperforming assets is primarily the result of
converting a loan included in the category of accrual loans 90 days or more
past due at December 31, 1997, to the category of restructured troubled debt
during the first quarter of 1998. The conversion resulted in an increase of
$87,000 to nonperforming assets. During the first three months of 1998, the
Corporation realized net charge-offs on loans of $11,000 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 1.53 at March 31, 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 quarter of 1998. Similarly, there was no
provision required in the first quarter of 1997.
NONINTEREST INCOME AND GAINS ON SECURITIES
Noninterest income for the first three months of 1998 was $209,000, up
$70,000 over the same period of the previous year. The primary reasons for
the increase were due to a rise in income from service charges on deposit
accounts which totaled $132,000 in the first quarter of 1998 compared to
$104,000 in the first quarter of 1997 and to the Corporation realizing $25,000
in net gains on sales of securities during the first three months of 1998
while the Corporation realized no gains or losses on sales of securities
during the same period of 1997. In addition to the above, other noninterest
income increased $15,000 to a balance of $16,000 during the first three months
of 1998 from a balance of $1,000 during the same period of 1997. The increase
resulted primarily from adjusting the net periodic pension income in the
amount of $12,000 in the first three months of 1998 while net periodic pension
income in 1997 was adjusted in its entirety at the end of the year.
NONINTEREST EXPENSE
Noninterest expense for the first three months of 1998 was $1,069,000, a
$178,000 increase from the $891,000 expense incurred in the first three months
of 1997. The most significant factor in
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the increase in noninterest expense is related to an increase in legal and
consulting expenses during the first quarter of 1998 in the amount of
$118,000. The additional expense was directly related to the Corporation
incurring expenses regarding the plan of merger with Susquehanna Bancshares,
Inc. Another area in which noninterest expense increased from the 1997 level
was in employee benefits which rose $13,000. The increase was due primarily
to accruing for each pay in 1998 the employers matching portion of the 401(k)
plan where as no accrual took place for the same period in 1997. Directors'
fees increased $11,000 in the first three months of 1998 compared to the same
period of 1997 primarily due to a first quarter present value rate adjustment
on the directors deferred income benefit expense. Supplies, stationery and
printing expense increased $9,000 in the first three months of 1998 compared
to the same period of 1997 primarily due to the timing of ordering large
quantities of supplies. Unrealized losses on other real estate owned and
losses on sales of loan collateral repossessed for the first three months of
1998 were $18,000 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 three months of 1998 to the first three months of
1997.
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.
The Corporation is utilizing both internal and external resources to
identify, correct or reprogram, and test the systems for the year 2000
compliance. It is anticipated that all reprogramming efforts will be complete
by December 31, 1998, allowing adequate time for testing. To date,
confirmations have been received from the Corporation's primary processing
vendors that plans are being developed to address processing of transactions
in the year 2000. 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.
INCOME TAXES
Income tax expense increased $39,000 for the first three months of 1998
over the same period of 1997 primarily as a result of the conversion during
1997 of some tax free municipal interest income into taxable interest income
which was part of the Corporation's planned investment strategy. As noted
above, net
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income after income taxes totaled $431,000 for the first quarter of 1998 as
compared to $453,000 for the first quarter of 1997.
CAPITAL
Capital adequacy is critical to the Corporation's well being and future
growth. Capital for the period ended March 31, 1998, was $17,391,000 while
capital at the end of 1997 totalled 17,180,000. Despite a decrease in the
fair value of securities held by the Corporation which are held as available-
for-sale, the Corporation's earnings during the first three months of 1998 of
$431,000 resulted in an increase in capital. 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 quarter of 1998, the equity capital adjustment required by
SFAS No. 130 was a decrease of $62,000.
Capital was also reduced during the first quarter of 1998 by dividend
distributions of $158,000. 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 shareholders' equity and Tier 2 capital
is the allowance for loan losses. The risk-based capital ratios are computed
by dividing the components of capital by risk-adjusted assets. Risk-adjusted
assets are determined by assigning credit risk weighing factors from 0% to
100% to various categories of assets and off-balance-sheet financial
instruments.
Minimum risk-based capital ratios are 4.0% for the Tier 1 capital ratio
and 8.0% for the total capital ratio. At March 31, 1998, the Corporation's
Tier 1 risk-adjusted capital ratio was 20.5% and the total capital ratio was
21.6%. 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 March 31, 1998, was 12.9%.
CREDIT RISK AND LOAN QUALITY
Table 1 - Nonperforming Assets, reveals that nonperforming loans were $622,000
as of March 31, 1998, representing an increase
13
<PAGE>
of $96,000 since December 31, 1997. Included within the classification of
nonperforming loans at March 31, 1998, are impaired loans. At March 31, 1998,
the Corporation's impaired loans totalled approximately $376,000 or 60.5% of
the total nonperforming loans. All of these loans were on either a nonaccrual
basis or were restructured troubled debt and have a related allowance for loan
losses allocation of $21,000. The average recorded investment in impaired
loans in the first quarter of 1998 was approximately $318,000.
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 $147,000 at March 31, 1998, which includes a decline of $22,000
in the first quarter of 1998.
Table 2 - Analysis of Allowance for Loan Losses, indicates a $11,000
decrease in the allowance since December 31, 1997. The Corporation had net
charge-offs on loans in the first quarter of 1998 in the amount of $11,000 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 in 1996.
At March 31, 1998, the level of the allowance was at 1.23% 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 $8,437,000 during the first
three months of 1998.
To provide an additional source of liquidity, the Corporation's
investment 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
14
<PAGE>
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. If needed, the
Corporation 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.
15
<PAGE>
<TABLE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
TABLE 1 - NONPERFORMING ASSETS
Nonaccruing, Restructured and Past Due Loans
(dollars in thousands)
<CAPTION>
March 31, ---------- December -----------
1998 1997 1996 1995 1994
---------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccruing loans $ 313 $ 311 $ 584 $1,674 $ 620
Restructured troubled
debt 285 0 0 170 0
Accrual Loans 90 days
or more past due 24 215 0 0 1
---------------------------------------------
Total Nonperforming Loans $ 622 $ 526 $ 584 $1,844 $ 621
Foreclosed Assets 147 169 229 357 836
---------------------------------------------
Total Nonperforming Assets $ 769 $ 695 $ 813 $2,201 $1,457
=============================================
Ratios:
Nonperforming loans as a
percent of period-end loans .82% .71% .87% 2.99% 1.02%
Nonperforming loans as a
percent of total period-end
stockholders' equity 3.58% 3.06% 3.84% 12.44% 5.12%
Allowance as multiple
of nonperforming loans 1.53x 1.82x 1.64x .72x 2.41x
</TABLE>
16
<PAGE>
<TABLE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
TABLE 2 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
<CAPTION>
March 31, ----------- 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 0 1 328 15 38
Real estate mortgage 0 0 13 0 23
Consumer 15 75 149 180 155
---------------------------------------------
Total loans charged off 15 76 490 195 216
Recoveries:
Commercial and Agricultural 2 45 76 27 51
Real estate mortgage 0 28 23 0 0
Consumer 2 4 15 7 6
---------------------------------------------
Total recoveries 4 77 114 34 57
---------------------------------------------
Net charge-offs (recoveries) 11 (1) 376 161 159
Balance - end of period $ 947 $ 958 $ 957 $1,333 $1,494
============================================
Ratios:
Net charge-offs to
average loans .01% * .61% .27% .26%
Allowance to period-end
loans 1.23% 1.29% 1.42% 2.16% 2.46%
Allowance as multiple of
net charge-offs 86.09x * 2.54x 8.28x 9.40x
* Recoveries exceeded charge-offs in 1997.
</TABLE>
17
<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) The annual meeting of security holders was held on April 14,
1998.
(b), (c) At the April 14, 1998, annual meeting, the shareholders of
Cardinal Bancorp, Inc. elected three Class A 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
------------------- --- ------------------
Merle W. Helsel 756,056 9,100
Robert E. Ritchey 755,414 9,742
James C. Vreeland 711,891 53,265
Additionally, following is a list of each other director whose term of
office as director continued after the meeting.
Donald W. DeArment Ray E. Koontz
Darrell Dodson Clyde R. Morris
William B. Zimmerman
18
<PAGE>
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, 1998. There were 745,386 votes for ratification, 18,910 votes against and
860 abstentions. No other matters were considered.
(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:
By Form 8-K report dated April 20, 1998, notification was given
under Item 5 that on April 14, 1998, the Corporation issued a
press release announcing the execution of a definitive agreement
relating to the Corporation's affiliation with Susquehanna
Bancshares, Inc. The Agreement provides that the affiliation
will be effected by means of a merger of the Corporation and
Susquehanna Bancshares, Inc.
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: May 14, 1998
By: /s/ Robert F. Lafferty
-------------------------------------
Robert F. Lafferty
Chief Financial Officer
(principal financial and accounting officer)
Date: May 14, 1998
20
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 4,555
<INT-BEARING-DEPOSITS> 9,069
<FED-FUNDS-SOLD> 388
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,532
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 76,925
<ALLOWANCE> 947
<TOTAL-ASSETS> 137,085
<DEPOSITS> 115,451
<SHORT-TERM> 3,135
<LIABILITIES-OTHER> 1,108
<LONG-TERM> 0
0
0
<COMMON> 2,759
<OTHER-SE> 14,632
<TOTAL-LIABILITIES-AND-EQUITY> 137,085
<INTEREST-LOAN> 1,702
<INTEREST-INVEST> 719
<INTEREST-OTHER> 116
<INTEREST-TOTAL> 2,537
<INTEREST-DEPOSIT> 1,033
<INTEREST-EXPENSE> 33
<INTEREST-INCOME-NET> 1,471
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 25
<EXPENSE-OTHER> 1,069
<INCOME-PRETAX> 611
<INCOME-PRE-EXTRAORDINARY> 431
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 431
<EPS-PRIMARY> .43
<EPS-DILUTED> .42
<YIELD-ACTUAL> 4.68
<LOANS-NON> 313
<LOANS-PAST> 24
<LOANS-TROUBLED> 285
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 958
<CHARGE-OFFS> 15
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 947
<ALLOWANCE-DOMESTIC> 637
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 309
</TABLE>
