<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
( X ) Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the quarter ended September 30, 1996
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 34-0-20494
CARDINAL BANCSHARES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Kentucky 61-1128205
------------------------------ ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 East Vine St., Suite 300 Lexington, Kentucky 40507
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (606) 255-8300
--------------
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, No Par Value
--------------------------
(Title of Class)
Indicate by check mark whether 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 registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of the issuer's class of common stock, as of
October 31, 1996: 1,584,468 shares of common stock, no par value.
<PAGE> 2
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
INDEX
Page
----
Part I Financial Information
Item 1. Consolidated Balance Sheets 1
Consolidated Statements of Operation 2-3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-14
Part II
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE> 3
Cardinal Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
(Unaudited)
Assets
<S> <C> <C>
Cash and due from banks $ 20,029 22,172
Interest bearing deposits in banks 186 8,001
Federal funds sold 6,865 10,075
Securities available for sale ( amortized cost of
$110,059 in 1996 and $137,126 in 1995) 110,632 139,372
Loans 464,214 481,136
Less: Allowance for loan losses 5,685 5,789
Unearned income 3,295 13,035
--------- ---------
Net loans 455,234 462,312
Premises and equipment 8,191 12,300
Goodwill and other intangible assets, less accumulated
amortization of $3,170 in 1996 and $2,789 in 1995 5,485 5,866
Accrued interest receivable and other assets 8,363 8,391
--------- ---------
Total assets $ 614,985 668,489
========= =========
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 43,310 50,155
Interest bearing 489,961 520,579
--------- ---------
Total deposits 533,271 570,734
Securities sold under agreements to repurchase 5,660 6,930
Notes payable 2,193 25,643
Advances from the Federal Home Loan Bank 16,841 18,167
Accrued interest payable and other liabilities 7,188 5,865
--------- ---------
Total liabilities 565,153 627,339
Stockholders' equity:
Common stock, without par value. Authorized
5,000,000 shares; issued and outstanding
1,584,338 voting and 1,878 non-voting shares in 1996 and 1,474,087 voting
and 1,969 non-voting shares in 1995 34,331 28,918
Retained earnings 15,966 11,593
Net unrealized gain (loss) on securities available for sale
net of tax 378 1,482
ESOP and MRP loan obligations (843) (843)
--------- ---------
Total stockholders' equity 49,832 41,150
--------- ---------
Total liabilities and stockholders' equity $ 614,985 668,489
========= =========
</TABLE>
1
<PAGE> 4
Cardinal Bancshares, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------- ------ ------ -----
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $10,708 11,622 33,839 31,937
Securities:
Taxable 1,961 2,633 6,528 7,435
Tax-exempt 44 40 121 101
Federal funds sold 151 235 624 640
Deposits in banks 37 131 264 263
------- ------ ------ ------
Total interest income 12,901 14,661 41,376 40,376
Interest expense:
Deposits 5,670 6,393 18,102 16,991
Notes payable 51 539 799 1,466
Advances from the Federal Home
Loan Bank 299 299 925 937
Securities sold under agreements
to repurchase 57 87 176 153
------- ------ ------ ------
Total interest expense 6,077 7,318 20,002 19,547
------- ------ ------ ------
Net interest income 6,824 7,343 21,374 20,829
Provision for loan losses 700 532 2,407 1,399
------- ------ ------ ------
Net interest income after
provision for loan losses 6,124 6,811 18,967 19,430
Noninterest income:
Service charges on deposits 322 321 944 926
Insurance commissions 51 100 352 442
Car club fees -- 93 86 239
Trust income 114 19 325 79
Gains on sales of loans 45 39 8,570 327
Securities gains (losses), net 39 111 77 109
Loan servicing fees 48 14 157 66
Other 89 158 437 473
------- ------ ------ ------
Total noninterest income 708 855 10,948 2,661
Noninterest expense:
Salary and employee benefits 2,488 3,476 9,389 10,079
Net occupancy expense 331 457 1,307 1,272
</TABLE>
2
<PAGE> 5
Cardinal Bancshares, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------- ------ ------ ------
<S> <C> <C> <C> <C>
Furniture and equipment expenses 430 441 1,710 1,291
Professional fees 191 528 520 1,035
Bank shares tax 130 121 401 364
FDIC insurance 884 87 1,131 638
Amortization of goodwill and other
intangible assets 127 126 381 383
Data processing services 242 277 943 843
Operating supplies 138 221 521 692
Telephone expense 101 198 488 522
Postage and courier expense 161 185 549 507
Advertising and business development 258 329 858 835
Transportation, meals and lodging 55 222 340 429
Termination of business of subsidiary - - 564 -
Other 582 551 2,038 1,629
------- ------ ------ ------
Total noninterest expense 6,118 7,219 21,140 20,519
Income before income taxes 714 447 8,775 1,572
Income taxes 276 213 4,108 627
------- ------ ------ ------
Net income $ 438 234 4,667 945
======= ====== ====== ======
Net income per share:
Primary $ 0.26 0.15 2.79 0.62
------- ------ ------ ------
Fully diluted $ 0.26 0.15 2.79 0.61
======= ====== ====== ======
</TABLE>
3
<PAGE> 6
Cardinal Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
------- ------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,667 945
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 2,407 1,399
Depreciation, amortization and accretion, net 1,935 139
Deferred income tax (benefit) expense 298 (92)
Gain on sales of securities and loans (8,647) (436)
Increase in accrued interest receivable
and other assets (841) (3,982)
Increase in accrued interest payable
and other liabilities 2,461 2,921
------ -----
Net cash provided by operating activities 2,280 894
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits
in banks 4,158 (5,290)
Net decrease in federal funds sold 3,210 1,658
Purchase of securities:
Available for sale (53,202) (101,871)
Held to maturity - (1,469)
Proceeds from sales of securities:
Available for sale 29,980 52,194
Proceeds from maturities of securities:
Available for sale 36,179 42,309
Held to maturity - 1,272
Net increase in loans (40,298) (76,346)
Purchases of premises and equipment (2,105) (1,708)
Proceeds from sales of loans 33,552 -
Spin-off of subsidiary (Note 2) (764) -
------- -------
Net cash used in investing activities 10,710 (89,251)
Cash flows from financing activities:
Net increase in deposits 5,202 83,943
Net increase (decrease) in securities sold under
agreements to repurchase (1,270) 1,613
Net increase (decrease) in notes and advances payable (23,546) 3,756
Repayment of obligations under capital lease - (48)
Dividends (932) (845)
Issuance of common stock 5,413 929
-------- ------
Net cash provided by financing activities (15,133) 89,348
-------- ------
Net increase (decrease) in cash and cash equivalents (2,143) 991
Cash and cash equivalents at beginning of period 22,172 17,847
-------- ------
Cash and cash equivalents at end of period $ 20,029 18,838
-------- ------
</TABLE>
4
<PAGE> 7
Cardinal Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accounting and reporting policies of Cardinal Bancshares, Inc.
("Cardinal") and its wholly-owned subsidiaries, The Vine Street Trust Company,
HNB Bank, NA, First & Peoples Bank, Alliance Bank, FSB, and Jefferson Banking
Company, conform to generally accepted accounting principles and, in
management's view, general practices within the banking industry.
The consolidated financial statements include the accounts of Cardinal
and its subsidiaries. Significant intercompany accounts and transactions have
been eliminated in consolidation. The consolidated financial statements for the
nine months and the three months ended September 30, 1996 and 1995 are
unaudited and do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations and statements of
cash flow. The interim financial statements include all adjustments, consisting
only of normal recurring accruals, which in the opinion of management are
necessary in order to make the financial statements not misleading. The results
of operations for the nine months ended September 30, 1996 are not necessarily
indicative of the results to be expected for the entire year ending December
31, 1996.
2. Security First Network Bank Spin-Off
On May 23, 1996 Cardinal effected the spin-off of its wholly-owned
subsidiary, Security First Network Bank ("SFNB"). Cardinal stockholders
received on a pro rata basis the distribution of 2,398,908 shares. The terms
and conditions of the spin-off are set forth in the First Amended and Restated
Plan of Distribution adopted by the Board of Directors of Cardinal on October
5, 1995. Cardinal no longer has any ownership interest in SFNB. SFNB's Common
Stock is traded on NASDAQ's National Market System under the trading symbol
"SFNB." Summary balance sheet information of SFNB as of the spin-off date is as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
----------------------
<S> <C>
Cash $ 764
Interest-bearing deposits 3,657
Securities 14,216
Net loans 20,637
Premises 3,959
Other assets 870
Deposits 42,644
FHLB advances 1,230
Other liabilities 867
Stockholder's equity (638)
======
</TABLE>
5
<PAGE> 8
3. Cardinal Credit Corporation Sale of Assets
On May 14, 1996 Cardinal completed the sale of substantially all of
the assets of its subsidiary, Cardinal Credit Corporation, to Norwest Financial
Kentucky, Inc. Cardinal recorded an after-tax gain of approximately $4.6
million in connection with such sale and the related termination of Cardinal
Credit Corporation's business. As part of the agreement with Norwest, Cardinal
agreed that for three years it would not engage in the consumer finance
business in the same or substantially similar manner in which Cardinal Credit
Corporation engaged in that business. Such agreement does not, however,
preclude any Cardinal subsidiary from engaging in its banking business,
including the origination of consumer loans, as currently conducted. The cash
proceeds of the sale was invested in short-term securities.
4. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
September 30, December 31,
1996 1995
<S> <C> <C>
Balance, January 1 $ 5,789 5,214
Provisions for loan losses 2,407 1,994
Recoveries 322 292
Loans charged-off (1,499) (1,711)
Adjustments for sale of
Cardinal Credit Corporation and
Spin-Off of SFNB (1,334)
-------- ------
Balance, end of period $ 5,685 5,789
======= ======
</TABLE>
5. On September 30, 1996 the Deposit Insurance Funds Act of 1996 was
signed into law. As a result of this law, the FDIC will collect a special
assessment of 65.7 basis points on Savings Association Insurance Fund ("SAIF")
assessable deposits as of March 31, 1995. Cardinal recorded an expense of
$726,000 for the special assessment.
6
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CARDINAL
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995.
RESULTS OF OPERATIONS
Net income for the nine months ended September 30, 1996 was $4.667
million or $2.79 primary earnings per share as compared to net income of
$945,000 and $0.62 primary earnings per share for the same period in 1995.
Annualized return on average stockholders' equity and average assets for the
first nine months of 1996 and 1995 were 13.45%, 0.95%, 3.26% and 0.19%,
respectively.
Net interest income is the difference between interest earned and
interest expensed plus any loan fees earned. Net interest margin is net
interest income divided by average earning assets. The following table
summarizes the above for the nine months ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
(Dollars in thousands)
Nine months ended September 30
1996 1995
-------- --------
<S> <C> <C>
Interest income, including loan fees $ 41,376 40,376
Interest expense 20,002 19,547
-------- --------
Net interest income $ 21,374 20,829
======== ========
Average earning assets $614,065 $620,211
Net interest margin (annualized) 4.64% 4.48%
</TABLE>
Net interest income was relatively flat from 1995 to 1996 with the
increase in the net interest margin offsetting the decline in average earning
assets. The comparison of net interest income between reporting periods is and
will continue to be effected by the sale of Cardinal Credit Corporation and the
spin-off of SFNB. Below is the same table as above, but eliminating the
interest income, interest expense and average assets of Cardinal Credit
Corporation and SFNB.
<TABLE>
<CAPTION>
(Dollars in thousands)
Nine months ended September 30
1996 1995
------- -------
<S> <C> <C>
Interest income, including loan fees $ 37,885 33,312
Interest expense 18,790 16,948
-------- --------
Net interest income $ 19,095 16,364
======== ========
Average earning assets $579,488 $539,369
Net interest margin (annualized) 4.39% 4.04%
</TABLE>
7
<PAGE> 10
Management provided $2,407,000 in provision for loan losses for the
first nine months of 1996 compared to $1,399,000 for the same period in
1995. Management provides a level of reserves based upon an evaluation of the
loan portfolio's quality, growth, mix and prior loan loss experience. The
increase in the level of provision for loan losses between reporting periods is
primarily the result of increases in level of net charge-offs and growth in the
loan portfolio. Net charge-offs for the nine months ended September 30, 1996
were $1,177,000 compared to $876,000 for the same period in 1995. Net
charge-offs primarily resulted from losses in the consumer finance portfolio,
principally of Cardinal Credit Corporation, which totaled $663,000 for the
first nine months in 1996 as compared to $637,000 for the same period in 1995.
In addition, net charge-offs in the indirect automobile loan portfolio
increased from $167,000 for the nine months in 1995 to $488,000 for the same
period in 1996. As discussed above at Note 3 to Consolidated Financial
Statements, on May 14, 1996 Cardinal sold substantially all of the assets of
Cardinal Credit Corporation, including $26 million of consumer finance loans.
See "Notes to Consolidated Financial Statements." See "Risk Elements in Loan
Portfolio." .
Noninterest income increased $8.3 million for the first nine months of
1996 as compared to same period in 1995. Of this increase, $8.2 million is
attributable to the gain on the sale of $26 million of Cardinal Credit
Corporation loans. See Note 3 of "Notes to Consolidated Financial Statements."
Insurance commissions and car club fees declined from $681,000 for the nine
months in 1995 to $438,000 for the same period in 1996. This decline was
primarily the result of the termination of business of Cardinal Credit
Corporation on May 14, 1996. Of the $438,000 of such commissions and fees
earned in the first nine months of 1996, approximately $299,000 is attributable
to the operations of Cardinal Credit Corporation. Trust income increased from
$79,000 for the first nine months of 1995 to $325,000 for the same period in
1996. Assets under management for the trust division increased from $70.4
million at September 30, 1995 to $93.3 million at September 30, 1996. Loan
servicing fees increased as a result of an increase in the size of the loan
servicing portfolio.
Noninterest expenses increased $621,000 or 3.0% during the first nine
months of 1996 compared to the prior year. The most significant causes of the
increase was expenses incurred in terminating the operations of Cardinal Credit
Corporation ($564,000) and expenses incurred to establish the Internet banking
operations (approximately $1.3 million) at SFNB. Cardinal's noninterest
expenses are no longer impacted by the SFNB Internet banking operations nor
Cardinal Credit Corporation since the SFNB spin-off was effected May 23, 1996
and Cardinal Credit Corporation was sold May 14, 1996. Eliminating the effect
of Cardinal Credit Corporation's and SFNB's noninterest expenses for 1996 and
1995, noninterest expenses would have increased from $14.5 million for the
first nine months of 1995 to $16.4 million for the same period in 1996. In the
fourth quarter of 1996, Cardinal expects to contract for Internet banking
services from SFNB's subsidiary, Security First Technologies. Cardinal intends
to begin offering its Internet banking product through Vine Street Trust during
the first quarter of 1997.
In connection with the spin-off of SFNB, Cardinal and SFNB agreed with
the Board of Governors of the Federal Reserve System that, among other things,
Cardinal and SFNB would terminate its various management and director
interlocks. Accordingly, on September 20, 1996, Robert W. Copelan, Howard J.
Runnion, Jr. and James S. Mahan, III, resigned from the board of
8
<PAGE> 11
directors of Cardinal (as well as all other positions at Cardinal and its
subsidiaries), and Robert F. Stockwell resigned as treasurer of Cardinal. On
July 19, 1996 and October 24, 1996 Samuel A. B. (Alex) Boone and James M. Hill,
IV, respectively, were elected to the board of directors of Cardinal. In
connection with the resignations of Messrs. Mahan and Stockwell the Cardinal
shareholders approved amendments to the 1992 Limited Stock Option Plan and 1989
Restricted Stock Option Plan which accelerated the vesting of options
previously granted to Mahan and Stockwell. The amendments, together with
amendments to the 1994 Restricted Stock Option Plan, will result in a non-cash
charge against earnings, net of applicable tax benefits, for Cardinal's fourth
quarter and fiscal 1996 equal to approximately $1,134,000.
On October 24, 1996, Cardinal's board of directors elected John S. Penn
to the position of President and Chief Executive Officer. Mr. Penn had been
Cardinal's President and Chief Operating Officer.
Set forth below is a condensed income statement reflecting Cardinal's
earnings for the nine months ending September 30, 1996 without the effect of
Cardinal Credit Corporation, SFNB and the one-time SAIF special assessment.
[CAPTION]
<TABLE>
Cardinal
Cardinal as Credit SAIF Cardinal
Reported Corporation SFNB Assessment as Adjusted
----------- ----------- ------ ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest income $ 41,376 2,303 1,188 37,885
Interest expense 20,002 446 766 18,790
-------- ----- ----- ------
Net interest income 21,374 1,857 422 19,095
Provision for loan losses 2,407 607 - 1,800
-------- ----- ----- ------
Net interest income after
provision for loan losses 18,967 1,250 422 17,295
Non-interest income 10,948 8,575 (1) 81 2,292
Non-interest expense 21,140 2,761 1,985 726 15,668
-------- ----- ----- --- ------
Income before (1,482) (726) 3,919
income taxes 8,775 7,064
Income taxes 4,108 2,807 (1) 123 (2) (247) 1,425
-------- ----- ----- --- -----
Net income $ 4,667 4,257 (1) (1,605) (479) 2,494
======== ===== ===== === =====
</TABLE>
(1) Includes the gain on the sale of substantially all of the assets of
Cardinal Credit Corporation of $8.2 million and the related federal,
state, and local income tax effect of $3.4 million
(2) Includes $625,000 related to a dividend Cardinal received from SFNB in
excess of Cardinal's tax basis in SFNB upon SFNB's spin-off from
Cardinal.
9
<PAGE> 12
After eliminating the effect of the one-time SAIF special assessment
of $726,000, FDIC deposit insurance declined from $638,000 to $405,000 due to
the change in deposit insurance rates. Deposit accounts at the Banks are
insured to applicable limits by the Bank Insurance Fund ("BIF") of the FDIC and
deposit accounts at the Thrift are insured to applicable limits by the Savings
Association Insurance Fund ("SAIF"). Deposit insurance premiums are paid to the
FDIC on a quarterly basis. The FDIC has a risk-based deposit insurance premium
assessment system pursuant to which member institutions pay deposit insurance
assessment rates depending on the risk classification assigned to each
institution. The FDIC places each institution into one of nine assessment risk
classifications based on the institution's capital and supervisory
classification.
Deposit insurance premiums for the BIF and the SAIF are set to
facilitate each fund achieving a designated reserve ratio. In August 1995, the
FDIC determined that the BIF had achieved its designated reserve ratio and
lowered BIF deposit insurance premiums for all but the riskiest institutions.
Since the one-time assessment will capitalize the SAIF fund at the appropriate
1.25 percent ratio, the FDIC must establish a new premium schedule and reduce
SAIF premiums to an amount necessary to maintain that ratio. It is expected
that the reduction will occur as of October 1, 1996. Since fourth quarter SAIF
premiums have already been paid at the higher rate, as of September 30, SAIF
institutions will be entitled to a refund of the premiums paid at the higher
rate. For SAIF institutions not all of fourth quarter premiums will be refunded
because approximately $200 million of it has already been earmarked for FICO
payments. It is expected that the fourth quarter premiums will be netted
against the next quarterly payment due the first business day in January of
1997.
Beginning January 1, 1997, BIF institutions will be required to pay a
portion of the $780 million in annual FICO interest payments. For the first
three years, the BIF assessment rates for FICO payments must be one-fifth of
that for SAIF institutions. It is currently estimated that this will equal an
amount of 1.29 cents per $100 in deposits on BIF-insured deposits and 6.44
cents for SAIF deposits. After January 1, 2000, the FICO assessment will be
spread evenly among all BIF and SAIF deposits which is estimated to be at the
rate of 2.43 cents per $100 in deposits.
It is important to note that these assessments are only for FICO
interest payments and that further premiums could be assessed in order to
maintain the BIF and SAIF funds at the required 1.25 percent ratio.
Cardinal had income tax expense of $4.1 million for the first nine
months of 1996 compared to $627,000 for the same period in 1995, which yielded
effective tax rates of 46.8% for 1996 and 39.9% for 1995. The income tax
expense for 1996 includes $625,000 in tax expense related to a dividend
received from SFNB in excess of Cardinal's tax basis in SFNB upon SFNB's
spin-off from Cardinal and $543,000 in tax expense for the elimination of
deferred tax assets for Cardinal Credit Corporation.
10
<PAGE> 13
CONSOLIDATED BALANCE SHEET
Total assets decreased $53.5 million from December 31,1995 to
September 30, 1996 primarily reflecting the effects of the spin-off of SFNB and
the sale of assets at Cardinal Credit Corporation. These events had a similar
effect on total loan loans, total deposits and borrowings as net loans declined
$7 million between December 31, 1995 and September 30, 1996, total deposits
declined $37.5 million and total borrowings declined $26 million.
RISK ELEMENTS IN LOAN PORTFOLIO
A summary of nonperforming loans and assets follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
September 30, December 31,
1996 1995
<S> <C> <C>
Non-accrual loans $ 899 782
90 days or more past due 274 616
-------- -----
Total non-performing loans 1,173 1,398
Other real estate owned 20 93
------- -----
Total non-performing assets $ 1,193 1,491
======= =====
Total non-performing loans as a
percentage of period-end net loans 0.25% 0.30%
Total non-performing assets as a per-
centage of period-end net loans
and OREO 0.26% 0.32%
Allowance for loan losses to
period end net loans 1.23% 1.24%
Allowance for loan losses to
non-performing loans 484.7% 414.1%
</TABLE>
At September 30, 1996, total impaired loans as recognized under SFAS
No. 114 was $796,000 as compared to $717,000 at December 31, 1995. Non-accrual
loans at September 30, 1996 totaled $899,000 which represented a $117,000
increase from December 31, 1995. Non-
11
<PAGE> 14
performing assets at September 30, 1996 totaled $1,193,000 or 0.26% of
total loans which compares favorably with peer levels of 0.67%.
At September 30, 1996, Cardinal's loan portfolio was comprised of the
following:
<TABLE>
<CAPTION>
(Dollars in thousands) Percentage
--------------------- ----------
<S> <C> <C>
Commercial $ 89,132 19.3%
SBA 67,499 14.6%
Commercial Real Estate 111,793 24.3%
Residential Real Estate 133,137 28.9%
Consumer 59,358 12.9%
-------- ------
Totals $460,919 100.0%
</TABLE>
The chart above illustrates the diversity in the Cardinal loan
portfolio as evidenced by the fact that no one category comprises more that 29%
of the total. Cardinal's loan portfolio is fairly equally distributed between
commercial, SBA, real estate and consumer loans. The commercial loans are
primarily locally generated and represent lower middle market business loans.
The commercial real estate loans are primarily owner-occupied facilities. The
SBA portfolio is largely real estate related. Approximately 75% of the SBA
portfolio is related to the hospitality industry. These loans are typically to
owner operators of franchised middle or economy class hotels. The hospitality
portfolio has been generated utilizing various SBA programs which significantly
limit Cardinal's risk related to this industry. Approximately 54% of the SBA
loan portfolio is guaranteed by the SBA.
The consumer loan portfolio is comprised of direct installment loans
and indirect automobile loans which are generated and serviced in the local
markets served by Cardinal subsidiaries. The indirect loan portfolio at
September 30, 1996 totaled approximately $41 million and consisted mainly of
used car paper generated in south central and eastern Kentucky. Of the
$1,177,000 in net charge-offs for the nine months ended September 30, 1996,
$488,000 was attributable to the indirect automobile portfolio or 1.6% of the
indirect automobile portfolio (annualized).
12
<PAGE> 15
CAPITAL ADEQUACY
As of September 30, 1996 stockholders' equity totaled $49,832,000, an
increase of $8,682,000 since December 31, 1995. Below is a statement of the
changes in stockholders' equity between December 31, 1995 and September 30,
1996.
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Balance, December 31, 1995 $ 41,150
Issuance of common stock 5,413
Net Income 4,667
Dividends paid (932)
Decrease in net unrealized gain on
securities available for sale (1,104)
Spin-Off of SFNB 638
--------
Balance, September 30, 1996 $ 49,832
========
</TABLE>
At September 30, 1996, each of Cardinal's financial institution
subsidiaries met all applicable regulatory capital requirements. Also at that
date, Cardinal had Tier I risk-based capital, total risk based capital and
leverage ratios of 10.40%, 11.65% and 7.14%, respectively. All capital ratios
are in compliance with regulatory minimum requirements.
On April 15, 1996, Cardinal sold 85,246 shares of common stock at
$61.00 per share in a private placement. After fees and expenses, Cardinal
netted $4,955,000.
COMPARATIVE RESULTS FOR THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
Net income for the three months ended September 30, 1996 was $438,000
as compared to $234,000 for the same period in 1995.
Net interest income for the three months ended September 30, 1996 was
$6,824,000 as compared to $7,343,000 for the same period in 1995. The net
interest margin declined slightly between reporting periods from 4.77% to
4.63%. Average earning assets decreased from $616.3 million in 1995 to $586.7
million in 1996. The decline in net interest margin and average earning assets
are largely attributable to the sale of Cardinal Credit Corporation and the
spin-off of SFNB.
Management provided $700,000 in provision for loan losses for the
three months ended September 30, 1996 as compared to $532,000 for the same
period in 1995. The increase between
13
<PAGE> 16
periods is primarily the result of providing adequate loan loss reserves
for growth in net loans. Net charge-offs for the three months ended September
30, 1996 were $212,000 compared to $392,000 for the same period in 1995. Net
loans increased $25.5 million from June 30, 1996 to September 30, 1996.
Noninterest income decreased $147,000 for the three months ended
September 30, 1996 as compared to the same period in 1995. Insurance
commissions and car club fees decreased $142,000 primarily the result of
termination of business of Cardinal Credit Corporation. Trust income increased
$95,000 as a result of increased assets under management. Loan servicing fees
increased $34,000 as a result of an increase in the size of the loan servicing
portfolio.
Noninterest expense for the three months ended September 30, 1996 was
$6.1 million as compared to $7.2 million for the same period in 1995. In the
third quarter of 1996, Cardinal expensed $726,000 in connection with the FDIC
one-time special assessment of 65.7 basis points on SAIF deposits. The
decreases between reporting periods for other line items principally was the
result of the sale of Cardinal Credit Corporation and the spin-off of SFNB.
14
<PAGE> 17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K -- There were no reports on Form 8-K
filed for three months ended September 30, 1996.
15
<PAGE> 18
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 BANCSHARES, INC.
/s/ John S. Penn
-----------------------------------
John S. Penn
President & Chief Executive Officer
/s/ Jack H. Brown
-----------------------------------
Jack H. Brown
Chief Financial Officer
Principal Accounting Officer
Date: November 14, 1996
16
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AS OF SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 AND CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 21,560
<INT-BEARING-DEPOSITS> 186
<FED-FUNDS-SOLD> 6,865
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 110,632
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 460,919
<ALLOWANCE> 5,685
<TOTAL-ASSETS> 614,985
<DEPOSITS> 533,271
<SHORT-TERM> 9,066
<LIABILITIES-OTHER> 7,188
<LONG-TERM> 15,628
0
0
<COMMON> 34,331
<OTHER-SE> 15,501
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<INTEREST-DEPOSIT> 18,102
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<LOAN-LOSSES> 2,407
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<EXPENSE-OTHER> 21,140
<INCOME-PRETAX> 8,775
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,667
<EPS-PRIMARY> 2.79
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<LOANS-NON> 899
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</TABLE>
