<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 March 31, 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
incorporation or organization Identification No.)
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
April 30, 1996: 1,576,126 shares.
<PAGE> 2
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I Financial Information
Item 1. Consolidated Balance Sheet 1
Consolidated Statements of Operation 2
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operation
Part II
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 17
</TABLE>
<PAGE> 3
Cardinal Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks $ 20,768 22,172
Interest bearing deposits in banks 12,635 8,001
Federal funds sold 11,225 10,075
Securities available for sale (amortized cost of
$138,074 in 1996 and $137,126 in 1995) 139,525 139,372
Loans 482,158 481,136
Less: Allowance for loan losses 6,186 5,789
Unearned income 11,836 13,035
-------- --------
Net loans 464,136 462,312
Premises and equipment 12,991 12,300
Goodwill and other intangible assets, less accumulated
amortization of $2,916 in 1996 and $2,789 in 1995 5,739 5,866
Accrued interest receivable and other assets 8,392 8,391
-------- --------
Total assets $675,411 $668,489
======== ========
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 45,188 50,155
Interest bearing 534,712 520,579
-------- --------
Total deposits 579,900 570,734
Securities sold under agreements to repurchase 6,395 6,930
Notes payable 25,143 25,643
Advances from the Federal Home Loan Bank 18,219 18,167
Accrued interest payable and other liabilities 5,341 5,865
-------- --------
Total liabilities 634,998 627,339
Stockholders' equity:
Common stock, without par value. Authorized
5,000,000 shares; issued and outstanding
1,489,954 voting and 1,999 non-voting shares in 1996 and
1,474,087 voting and 1,969 non-voting shares in 1995. 29,108 28,918
Retained earnings 11,191 11,593
Net unrealized gain (loss) on securities available for sale
net of tax 957 1,482
ESOP and MRP loan obligations (843) (843)
-------- --------
Total stockholders' equity 40,413 41,150
-------- --------
Total liabilities and stockholders' equity $675,411 $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
March 31,
1996 1995
---- ----
<S> <C> <C>
Interest income:
Loans, including fees $11,869 9,629
Securities:
Taxable 2,326 2,328
Tax-exempt 40 29
Federal funds sold 273 158
Deposits in banks 103 58
------- -------
Total interest income 14,611 12,202
Interest expense:
Deposits 6,381 4,814
Notes Payable 516 454
Advances from the Federal Home
Loan Bank 315 316
Securities sold under agreements
to repurchase 60 28
------- -------
Total interest expense 7,272 5,612
------- -------
Net interest income 7,339 6,590
Provision for loan losses 838 335
------- -------
Net interest income after
provision for loan losses 6,501 6,255
Noninterest income:
Service charges on deposits 310 302
Insurance commissions 179 114
Car club fees 62 62
Trust income 89 8
Gains on sales of loans 89 202
Securities gains (losses), net 49 (15)
Loan servicing fees 47 35
Other 168 182
------- -------
Total noninterest income 993 890
Noninterest expense:
Salary and employee benefits 3,614 3,158
Net occupancy expense 506 394
</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
March 31,
1996 1995
---- ----
<S> <C> <C>
Furniture and equipment expenses 686 402
Professional fees 186 179
Bank shares tax 136 121
FDIC insurance 127 275
Amortization of goodwill and other
intangible assets 127 130
Data processing services 396 378
Operating supplies 205 232
Telephone expense 199 154
Postage and courier expense 218 152
Advertising and business development 330 204
Transportation, meals and lodging expense 139 84
Other 735 466
------- -------
Total noninterest expense 7,604 6,329
Income before income taxes (110) 816
Income taxes (6) 315
------- -------
Net income $ (104) 501
======= =======
Net income (loss) per share:
Primary $ (0.06) $ 0.34
======= =======
Fully diluted $ (0.06) $ 0.33
======= =======
</TABLE>
3
<PAGE> 6
Cardinal Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (104) 501
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 838 335
Depreciation, amortization and accretion, net 832 (60)
Deferred income tax expense 199 99
Gain on sales of securities and loans (138) (187)
Increase in accrued interest receivable
and other assets (200) (445)
Increase (decrease) in accrued interest payable
and other liabilities (254) 326
------- -------
Net cash provided by operating activities 1,173 569
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits
in banks (4,634) 975
Net increase in federal funds sold (1,150) (7,320)
Purchase of securities:
Available for sale (15,481) (58,494)
Held to maturity - -
Proceeds from sales of securities:
Available for sale 3,601 30,687
Proceeds from maturities of securities:
Available for sale 10,929 7,429
Held to maturity - 792
Net increase in loans (2,573) (20,861)
Purchases of premises and equipment (1,344) (380)
------- -------
Net cash used in investing activities (10,652) (47,172)
Cash flows from financing activities:
Net increase in deposits 9,166 43,467
Net increase (decrease) in securities sold under
agreements to repurchase (535) 135
Net increase (decrease) in notes and advances payable (448) 1,563
Repayment of obligations under capital lease - (16)
Dividends (298) (277)
Issuance of common stock 190 7
------- -------
Net cash provided by financing activities 8,075 44,879
------- -------
Net increase in cash and cash
equivalents (1,404) (1,724)
Cash and cash equivalents at beginning of period 22,172 17,847
------- -------
Cash and cash equivalents at end of period $20,768 16,123
======= =======
</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, Security First Network Bank ("SFNB"), 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
three months ended March 31, 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 three months ended March 31, 1996 are not necessarily indicative of the
results to be expected for the entire year ending December 31, 1996.
2. The Spin-Off and Related Transactions
The Spin-Off is defined and described below. Immediately following the
Spin-Off, the SFNB Board of Directors has approved a 4 for 1 stock split of all
of the to-be-issued and outstanding shares of Common Stock, which will become
effective upon the consummation of the Spin-Off. Accordingly, all of the
Common Stock information, including information related to the Spin-Off, gives
effect to such stock split. The Spin-Off remains subject to various conditions
including regulatory approvals. There can be no assurances that such
conditions will be satisfied and that required approvals will be received.
The Distribution
Cardinal's board of directors has approved the distribution (the
"Distribution") to Cardinal's stockholders on a pro rata basis of all of the
2,400,000 shares of Common Stock which will be outstanding immediately prior to
the Distribution. Cash will be paid in lieu of fractional shares based on the
$1.25 per share price to be paid by Area Bancshares Corporation, Huntington
Bancshares, Incorporated and Wachovia Corporation. The terms and conditions of
the Distribution are set forth in the Plan of Distribution, which has been
adopted by Cardinal's board of directors. Presently, SFNB is a wholly-owned
subsidiary of Cardinal. After the Distribution, Cardinal will no longer have
any ownership interest in SFNB.
In connection with the Distribution, SFNB has adopted the Plan of
Recapitalization pursuant to which, among other things, SFNB will (i) pay a
$3.0 million cash dividend to Cardinal, (ii) sell a combination of 2,400,00
shares of Common Stock and Preferred Stock for an
5
<PAGE> 8
aggregate of $3.0 million to Huntington, Wachovia and Area Bancshares, (iii)
issue an additional 1,920,000 shares of Common Stock to acquire Five Paces,
Inc. and (iv) grant options to officers, other employees and non-employee
directors for up to 2,880,000 shares of Common Stock. Collectively, the
transactions contemplated by the Plans of Distribution and Recapitalization are
referred to as the Spin-Off. In addition, SFNB has agreed to sell to two other
bank holding companies an additional 205,716 shares of Common Stock for $3.0
million.
Cash Dividend
The distribution will take place immediately following the payment of a
$3.0 million cash dividend from SFNB to Cardinal. The dividend, which SFNB
will pay from cash on hand, approximates the amount by which SFNB's
stockholder's equity exceeded Cardinal's basis in SFNB as of the time the Plan
of Distribution was adopted.
Stock Sale
Following the Distribution, SFNB will be recapitalized by selling (i) for
$600,000, 254,056 shares of Common Stock and 225,944 shares of Preferred Stock
to Area Bancshares, (ii) for $1.2 million, 254,056 shares of Common Stock and
705,944 shares of Preferred Stock to Huntington, and (iii) for $1.2 million,
254,056 shares of Common Stock and 705,944 shares of Preferred Stock to
Wachovia. Huntington, Wachovia and Area Bancshares are the only purchasers of
the Preferred Stock in the Spin-Off. No other Preferred Stock is currently
contemplated to be issued by the Company.
Five Paces Acquisition
Following the distribution, SFNB will acquire Five Paces, Inc. by merging
an inactive wholly owned subsidiary of SFNB, Equitable Service Corporation,
into Five Paces. In connection therewith, SFNB will issue an aggregate of
1,920,000 shares of Common Stock to Five Paces' stockholders. The principal
stockholders of Five Paces are Messrs. Michael McChesney, David Arnovitz,
Stephen Kramer and W. Reese Jacobs. As a result, giving effect to the Spin-Off
and related transactions, and the Offering, they collectively will beneficially
own approximately 21.27% of the outstanding Common Stock (without giving effect
to the conversion of any Preferred Stock).
Strategic Investors
As part of its strategy to develop strategic alliances and key
relationships, SFNB has entered into a stock purchase agreement with Synovus
Financial Corporation pursuant to which SFNB will sell to Synovus 137,144
shares of Common Stock in a private placement immediately following the
Spin-Off for $2.0 million. In addition, SFNB has entered into a stock purchase
agreement with National Commerce Bancorporation ("NCB") pursuant to which SFNB
will sell to NCB 68,572 shares of Common Stock in a private placement
immediately following the Spin-Off for $1.0 million. The purchase price of
such shares of Common Stock to the Strategic Investors is approximately $14.58
per share. In connection with the sale of stock to the Strategic
6
<PAGE> 9
Investors, Synovus has indicated that it intends to contract Virtual Bank
Manager for its subsidiary banks. NCB has entered into a letter agreement with
Five Paces as to marketing arrangements for Virtual Financial Manager.
Option Plans
In connection with the Spin-Off, SFNB has adopted the Employee Stock
Option Plan which provides for the grant of options for up to 2,601,240 shares
of Common Stock to management and employees of SFNB and subsidiaries, and
Directors Option Plan which provides for the grant of options for 278,760
shares of Common Stock to the three non-employee directors of SFNB. As of
March 31, 1996, options for 2,410,740 shares have been granted under the
Employee Stock Option Plan, including options for 1,811,740 shares of Common
Stock having been granted to employees of Cardinal or its subsidiaries, and
other persons who will become employees of SFNB and its subsidiary, at a per
share exercise price of $0.625, which represents 50% of the $1.25 per share
price to be paid for the Common Stock and Preferred Stock to be purchased by
each of Area Bancshares, Wachovia and Huntington. As of March 31, 1996,
options for and additional 599,000 shares at an exercise price of $1.25 per
share have been granted to other employees under the Employee Stock Option
Plan. The Options to each of the three outside directors of SFNB for 92,920
shares are at an exercise price of $1.25 per share.
3. Statement of Financial Accounting Standards No. 114 and No. 118
Effective January 1, 1995, Cardinal adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan", as amended by Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of Loan-Income Recognition and
Disclosures". These statements require that impaired loans be measured based
on the present value of future cash flows discounted at the loan's effective
interest rate or, as a practical alternative, at the loan's observable market
price or fair value of the collateral if the loan is collateral dependent. The
implementation of these accounting standards has not had a significant impact
on Cardinal's financial position or results of operations.
4. Cardinal Credit Corporation
In March 1996, Cardinal Credit and The Vine Street Trust Company agreed to
sell substantially all of assets of Cardinal Credit to Norwest Financial
Kentucky, Inc. On an after-tax basis, Cardinal expects to recognize a gain of
approximately $4.6 million in connection with such sale and the related
termination of Cardinal Credit's business. As part of the agreement with
Norwest, Vine Street has also 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 engages in that business. Such agreement does not,
however, preclude Vine Street or any other Cardinal subsidiary from engaging in
its banking business, including the origination of consumer loans, as currently
conducted.
7
<PAGE> 10
The expected $4.6 million after-tax gain on the sale will increase
Cardinal's equity capital by the same amount. Vine Street will use the cash
proceeds of the sale to invest in short-term securities. The transaction is
expected to close in mid-May 1996.
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CARDINAL
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995.
RESULTS OF OPERATIONS
Net loss for the three months ended March 31, 1996 was $104,000 or $0.06
primary loss per share as compared to net income of $501,000 and $0.34 primary
earnings per share for the same period in 1995. Annualized return on average
stockholders' equity and average assets for the first three months of 1996 and
1995 were (1.02)%, 5.47%, (0.06)% and 0.35%, 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 three months ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Three months ended March 31
1996 1995
----------- ----------
<S> <C> <C>
Interest income, including loan fees $ 14,611 12,202
Interest expense 7,272 5,612
------------ ------------
Net interest Income $ 7,339 6,590
============ ============
Average earning assets $ 626,141 $ 542,892
Net interest margin (annualized) 4.69% 4.86%
</TABLE>
Growth in net interest income from 1995 to 1996 was primarily due to a
15.3% increase in average earning assets and offset slightly by a decline in
the net interest margin from 4.86% in 1995 to 4.69% in 1996. The increase in
average earning assets was primarily due to investing funds received from
increases in deposits at The Vine Street Trust Company and Jefferson Banking
Company. Average deposits increased 18.5% between reporting periods.
Management provided $838,000 in provision for loan losses for the first
three months of 1996 compared to $335,000 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. Net charge-offs
for the three months ended March 31, 1996 were $441,000 compared to $108,000
for the same period in 1995. The significant increase in net charge-offs
primarily resulted from losses in the consumer finance portfolio, principally
of Cardinal Credit Corporation, totaled $344,000 for the first three months in
1996 as compared to $132,000 for the same period in 1995. See "Notes to
Consolidated Financial Statements." See "Risk Elements in Loan Portfolio."
9
<PAGE> 12
<TABLE>
<CAPTION>
(Dollars in Thousands)
Three Months Ended March 31
1996 1995
---------- ----------
<S> <C> <C>
Balance, beginning of period $ 5,789 $ 5,214
Provision for loan losses 838 335
Loans charged off (633) (210)
Less: Recoveries 192 102
------- -------
Net charge-offs (441) (108)
------- -------
Balance, end of period $ 6,186 $ 5,441
======= =======
</TABLE>
Noninterest income increased 11.6% from $890,000 for the first quarter of
1995 to $993,000 for the same period in 1996. The net change in securities net
gains and losses was $64,000 of the $103,000 difference between periods.
Increases in insurance commissions are the result of increased loan production
at Cardinal Credit. Insurance commissions and car club fees will materially
decrease after the assets of Cardinal Credit are sold. (See Notes to
Consolidated Financial Statements.) The decrease in gains on sales of loans
resulted from a decrease in the level of SBA loan sales in the secondary
market. Trust income increased as a result of an increase in the level of
assets under management.
Noninterest expense for the first three months of 1996 was $7.604 million
as compared to $6.329 million for the comparative period in 1995. The
following table sets forth certain information relating to noninterest expenses
incurred during the three months ended March 31, 1996 and 1995. Due to the
significant expenses incurred to establish the Internet banking operations, the
1996 expenses are segregated between the Internet operations and the
established traditional banking operations including Cardinal Credit.
10
<PAGE> 13
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------
1996
--------------------------------
Internet Traditional
Total Banking Banking 1995
----- ------- ------- ----
(In thousands)
<S> <C> <C> <C> <C>
Salary and benefits $3,614 358 3,256 3,158
Net occupancy expense 506 25 481 394
Furniture and equipment expense 686 213 473 402
Professional fees 186 65 121 179
Bank shares tax 136 1 135 121
FDIC insurance 127 3 124 275
Amortization of goodwill and
other intangible assets 127 - 127 130
Data processing services 396 65 331 378
Operating supplies 205 17 188 232
Telephone expense 199 32 167 154
Postage and courier expense 218 - 218 152
Advertising and business
development 330 73 257 204
Transportation, meals and lodging 139 78 61 84
Other 735 79 656 466
------ ------ ------ ------
$7,604 1,009 6,595 6,329
====== ====== ====== ======
</TABLE>
The increase in non-interest expenses for initiation of Internet banking
activities relates to operational expenses of Cardinal and SFNB in connection
with the implementation of SFNB's Internet banking activities. SFNB commenced
offering services over the Internet in mid-October 1995. With total assets of
$44.6 million and deposits of $39.9 million at March 31, 1996, Cardinal expects
that SFNB will continue to incur losses until the Internet banking activities
begin to support operations. SFNB expects to incur, on a quarterly basis,
approximately $750,000 to $1,000,000 in operating expenses (e.g., compensation,
premises, data processing) related primarily to Internet banking activities.
Until Cardinal's Plan of Distribution is completed, the operations of SFNB will
continue to negatively impact Cardinal.
Deposit accounts at the Banks are insured to applicable limits by the Bank
Insurance Fund ("BIF") of the FDIC and deposit accounts at the Thrifts 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.
11
<PAGE> 14
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 ad achieved its designated reserve ratio and lowered
BIF deposit insurance premiums for all but the riskiest institutions.
Effective January 1, 1996, BIF deposit insurance premiums for well capitalized
banks were further reduced to the statutory minimum of $2,000 per institution
per year. Because the SAIF remains significantly below its designated reserve
ratio, SAIF deposit insurance premiums were not reduced and remain at 0.23% to
0.31% of deposits based upon an institution's supervisory evaluations and
capital levels.
The current financial condition of the SAIF has resulted in proposed
legislation to recapitalize the SAIF through a one-time special assessment of
SAIF insured institutions of approximately 80 cents to 85 cents per $100 of
assessable SAIF deposits. After the special assessment, it is expected that
SAIF will achieve its designated reserve ratio and that SAIF premium rates will
then become the same as BIF rates. Proposed legislation also contemplates a
merger of the SAIF into the BIF, which will require special legislation.
Cardinal is unable to predict whether the proposed legislation will be enacted
or the amount or the precise retroactive date of any one-time assessment or the
deposit insurance premium rates that would ultimately apply to assessable SAIF
deposits at the Thrifts.
Legislation also has been proposed that could eliminate the federal
savings association charter. If such legislation is enacted, each of the
Thrifts would be required to convert their federal savings bank charters to
either a national bank charter or to a Kentucky depository institution charter.
Pending legislation may provide relief as to recapture of the bad debt
deduction for federal tax purposes that otherwise would be applicable if the
Thrifts converted their charters, provided that the Thrifts meet a proposed
residential loan origination requirement. Cardinal is unable to predict
whether such legislation will be enacted or, if enacted, whether it will
contain relief as to bad debt deductions previously taken.
CONSOLIDATED BALANCE SHEET
Total assets were $675.4 million at March 31, 1996 compared to $668.5
million at December 31, 1995, which represents a $6.9 million increase for the
period. Total deposits between periods increased $9.2 million from $570.7
million at December 31, 1995 to $579.9 million at March 31, 1996. The growth
in deposits is primarily attributable to increases at The Vine Street Trust
Company which grew $10.5 million between periods. The increase in deposits
were primarily used to fund loans and short-term investments.
Assuming SFNB was distributed to Cardinal shareholders on March 31, 1996,
Cardinal's total assets would have declined approximately $41.6 million with
deposits declining approximately $39.9 million.
12
<PAGE> 15
RISK ELEMENTS IN LOAN PORTFOLIO
The aggregate of the principal amount of nonaccrual loans, accrual loans
past due 90 days or more, and renegotiated loans was $1.362 million at March
31, 1996. This represents a $36,000 decrease from December 31, 1995.
Nonaccrual loans totaled $842,000 at March 31,1996 compared to $782,000 at
December 31, 1995. Nonaccrual loans at March 31, 1996 and December 31, 1995
represent 0.18% and 0.17% of net loans outstanding, respectively. Management
has reviewed each of these loans and has taken charge-offs where appropriate
after reviewing collateral and guarantees. Management reappraises the
collectability of each loan in the nonaccrual portfolio quarterly and takes
charge-offs if collateral and guarantees are less than carrying values.
Loans ninety (90) days past due decreased by $96,000 to $520,000 at March
31, 1996 compared to December 31, 1995. Most of the decrease is a result of
collection efforts in the indirect lending portfolio. After analyzing
collateral and guarantees, management does not believe there is any significant
risk of loss of principal with respect to any loan ninety (90) days or more
past due or to any loan on nonaccrual.
Net charge-offs totaled $441,000 for the three months ended March 31,
1996, representing 0.38% of average loans on an annualized basis. The
allowance for loan losses was $6.186 million at March 31, 1996 and represented
1.32% of total loans and 4.54 times the nonperforming loan portfolio. The
allowance for loan losses was $5.789 million at December 31, 1995 and
represented 1.24% of total loans and 4.14 times the nonperforming loan
portfolio.
Cardinal is responsible for maintaining an allowance for loan losses
adequate to absorb estimated credit losses in the entire loan portfolio. FASB
Statement No. 114, "Accounting by Creditors for Impairment of a Loan" sets
forth measurement methods for estimating the portion of the overall allowance
for loan losses attributable to impaired loans. The effect of FASB Statement
No. 114, as amended, on Cardinal's financial condition is not significant.
CAPITAL ADEQUACY
Total stockholders' equity was $40.4 million at March 31, 1996, which
represents a decrease of $700,000 over year-end 1995. The decrease was
primarily the result of a change in the market value of securities available
for sale, net of tax effect, in the amount of $525,000. Dividends and the net
loss for the first quarter caused equity capital to decline by $402,000.
Exercise of stock options added $190,000 to equity capital.
At March 31, 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 7.92%, 9.17% and 5.04%, respectively. All capital ratios are in
compliance with regulatory minimum requirements. Among Cardinal's
subsidiaries, Vine Street Trust is currently "adequately capitalized" under the
prompt corrective action regulations of the Federal Deposit Insurance
Corporation ("FDIC"). However, because it was deemed to be
13
<PAGE> 16
"undercapitalized" as of year-end 1995, in March 1996 Vine Street received
notice from the FDIC that it is subject to certain provisions applicable to
undercapitalized institutions under the Federal Deposit Insurance Act ("FDIA").
Under such provisions Vine Street was required to file a capital restoration
plan with the FDIC that specifies the steps it will take to become at least
"adequately capitalized." Moreover, Vine Street is subject to close
supervisory monitoring by the FDIC to ensure compliance with its capital
restoration plan, and the limitations on its asset growth, ability to engage in
acquisitions, branching and new lines of business imposed on undercapitalized
institutions by the FDIC pursuant to the FDIA. Vine Street has since become
"adequately capitalized" under the FDIC's prompt corrective action regulations
and expects that it will become "well capitalized" upon the sale of Cardinal
Credit in mid-May 1996. Cardinal does not believe the limitations applicable
under the FDIA will have any material impact on Cardinal's operations.
On April 15, 1996, Cardinal sold 85,246 shares at $61.00 per share in a
private placement. After broker fees and expenses, Cardinal netted $4,955,000.
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) During the first quarter of 1996, Cardinal
filed Reports on 8-K as of March 15, 1996
(reporting an agreement to sell assets of
Cardinal Credit) and March 19, 1996 (reporting
an agreement of SFNB to sell stock to Synovus
Financial Corporation.
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/ James S. Mahan, III
-----------------------
James S. Mahan, III
Chairman & Chief Executive Officer
/s/ Jack H. Brown
-----------------
Jack H. Brown
Chief Financial Officer
Principal Accounting Officer
Date: May 13, 1996
------------
17
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AS OF MARCH 31, 1996 AND DECEMBER 31, 1995 AND CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 20,768
<INT-BEARING-DEPOSITS> 12,635
<FED-FUNDS-SOLD> 11,225
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 139,525
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 470,322
<ALLOWANCE> 6,186
<TOTAL-ASSETS> 675,411
<DEPOSITS> 579,900
<SHORT-TERM> 34,757
<LIABILITIES-OTHER> 5,341
<LONG-TERM> 15,000
0
0
<COMMON> 29,108
<OTHER-SE> 11,305
<TOTAL-LIABILITIES-AND-EQUITY> 675,411
<INTEREST-LOAN> 11,869
<INTEREST-INVEST> 2,366
<INTEREST-OTHER> 376
<INTEREST-TOTAL> 14,611
<INTEREST-DEPOSIT> 6,381
<INTEREST-EXPENSE> 7,272
<INTEREST-INCOME-NET> 7,339
<LOAN-LOSSES> 838
<SECURITIES-GAINS> 49
<EXPENSE-OTHER> 7,604
<INCOME-PRETAX> (110)
<INCOME-PRE-EXTRAORDINARY> (110)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (104)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
<YIELD-ACTUAL> 4.69
<LOANS-NON> 842
<LOANS-PAST> 520
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,789
<CHARGE-OFFS> 633
<RECOVERIES> 192
<ALLOWANCE-CLOSE> 6,186
<ALLOWANCE-DOMESTIC> 6,146
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 40
</TABLE>
