<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 June 30, 1997
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
July 31, 1997: 1,604,577 shares of common stock, no par value.
<PAGE> 2
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
Part I Financial Information
Item 1. Consolidated Balance Sheets 1
Consolidated Statements of Income 2-3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-16
Part II Other Information
Item 4. Submission of Matters to a Vote of Security
Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
<PAGE> 3
Cardinal Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks $ 20,169 21,407
Interest bearing deposits in banks 1,478 1,400
Federal funds sold 1,900 11,647
Securities available for sale (amortized cost of
$112,696 in 1997 and $111,325 in 1996) 113,443 112,203
Loans 485,997 470,067
Less: Unearned income 1,885 2,851
Allowance for loan losses 6,742 6,374
--------- -------
Net loans 477,370 460,842
Premises and equipment 7,910 8,019
Goodwill and other intangible assets, less accumulated
amortization of $3,549 in 1997 and $3,295 in 1996 5,106 5,360
Accrued interest receivable and other assets 8,606 8,183
--------- -------
Total assets $ 635,982 629,061
========= =======
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 45,114 47,510
Interest bearing 504,988 501,738
--------- -------
Total deposits 550,102 549,248
Securities sold under agreements to repurchase 6,875 4,780
Notes payable 628 1,878
Advances from the Federal Home Loan Bank 19,142 16,776
Accrued interest payable and other liabilities 6,140 6,082
--------- -------
Total liabilities 582,887 578,764
Stockholders' equity:
Common stock, without par value. Authorized
5,000,000 shares; issued and outstanding
1,602,769 voting and 1,998 non-voting shares in 1997 and
1,592,853 voting and 1,958 non-voting shares in 1996 35,038 34,759
Retained earnings 18,191 15,587
Net unrealized gain on securities available for sale,
net of tax 494 579
ESOP and MRP loan obligations (628) (628)
--------- -------
Total stockholders' equity 53,095 50,297
--------- -------
Total liabilities and stockholders' equity $ 635,982 629,061
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
Cardinal Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 11,306 11,262 22,279 23,131
Securities:
Taxable 1,661 2,241 3,270 4,567
Tax-exempt 141 37 192 77
Federal funds sold 232 200 487 473
Deposits in banks 22 124 40 227
-------- ------ ------ ------
Total interest income 13,362 13,864 26,268 28,475
Interest expense:
Deposits 5,742 6,051 11,320 12,432
Notes payable 15 232 48 748
Advances from the Federal Home
Loan Bank 300 311 592 626
Securities sold under agreements
to repurchase 74 59 131 119
-------- ------ ------ ------
Total interest expense 6,131 6,653 12,091 13,925
-------- ------ ------ ------
Net interest income 7,231 7,211 14,177 14,550
Provision for loan losses 369 869 738 1,707
-------- ------ ------ ------
Net interest income after
provision for loan losses 6,862 6,342 13,439 12,843
Noninterest income:
Service charges on deposits 357 312 695 622
Insurance commissions 51 122 81 301
Car club fees - 24 - 86
Trust income 214 122 388 211
Gains on sales of loans 57 8,436 93 8,525
Securities gains (losses), net (9) (11) 7 38
Loan servicing fees 115 62 219 109
Taxable municipal bond securities
litigation settlement - - 51 -
Other 109 180 254 348
-------- ------ ------ ------
Total noninterest income 894 9,247 1,788 10,240
(Continued)
</TABLE>
<PAGE> 5
Cardinal Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Noninterest expense:
Salaries and employee benefits 2,560 3,287 5,077 6,901
Net occupancy expense 369 470 711 976
Furniture and equipment expenses 401 594 803 1,280
Professional fees 176 143 262 329
Bank shares tax 190 135 322 271
FDIC insurance 37 120 53 247
Amortization of goodwill and other
intangible assets 127 127 254 254
Data processing services 255 305 511 701
Operating supplies 101 178 217 383
Telephone expense 125 188 225 387
Postage and courier expense 162 170 313 388
Advertising and business development 240 270 472 600
Transportation, meals and lodging 54 146 108 285
Termination of business of subsidiary - 564 - 564
Other 536 721 989 1,456
-------- ------ ------ ------
Total noninterest expense 5,333 7,418 10,317 15,022
Income before income taxes 2,423 8,171 4,910 8,061
Income taxes expense 794 3,838 1,666 3,832
-------- ------ ------ ------
Net income $ 1,629 4,333 3,244 4,229
======== ====== ====== ======
Net income per share:
Primary $ 0.95 2.56 1.89 2.55
======== ====== ====== ======
Fully diluted $ 0.94 2.56 1.88 2.55
======== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
Cardinal Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,244 4,229
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 738 1,707
Depreciation, amortization and accretion, net 972 1,489
Deferred income tax expense (benefit) (52) 211
Net gain on sales of securities and loans (100) (8,425)
Increase in accrued interest receivable
and other assets (325) (618)
Increase in accrued interest payable
and other liabilities 58 4,495
-------- ------
Net cash provided by operating activities 4,535 3,088
-------- ------
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits
in banks (78) 2,999
Net decrease in federal funds sold 9,747 180
Purchase of securities available for sale (43,174) (47,839)
Proceeds from sales of securities available for sale 19,416 7,577
Proceeds from maturities of securities available for sale 22,525 25,564
Net increase in loans (17,173) (14,758)
Proceeds from sales of loans - 33,552
Spin-off of subsidiary (Note 2) - (764)
Purchases of premises and equipment (740) (1,745)
-------- ------
Net cash provided by (used in) investing activities (9,477) 4,766
-------- ------
Cash flows from financing activities:
Net increase in deposits 854 9,778
Net increase (decrease) in securities sold under
agreements to repurchase 2,095 (1,310)
Net increase (decrease) in notes and advances payable 1,116 (21,732)
Dividends paid (640) (615)
Issuance of common stock 279 5,413
-------- ------
Net cash provided by financing activities 3,704 (8,466)
-------- ------
Net decease in cash and cash equivalents (1,238) (612)
Cash and cash equivalents at beginning of period 21,407 22,172
-------- ------
Cash and cash equivalents at end of period $ 20,169 21,560
======== ======
Supplemental cash flow information:
Cash paid for income taxes $ 1,500 450
Cash paid for interest $ 12,165 14,824
======== ======
Noncash financing and investing activities:
Loans transferred to other assets $ 32 10
======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<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
three months and six months ended June 30, 1997 and 1996 are unaudited and do
not include information or footnotes necessary for a complete presentation of
financial condition, results of operations and cash flows. 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 consolidated financial statements
should be read in conjunction with the Summary of Significant Accounting
Policies footnote which appears in Cardinal's 1996 Annual Report and Form 10-K
filed with the Securities and Exchange Commission. The results of operations for
the six months ended June 30, 1997 are not necessarily indicative of the results
to be expected for the entire year ending December 31, 1997.
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 of SFNB common stock.
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."
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. The agreement with Norwest did not preclude Cardinal or
its affiliated banks from engaging in their banking business as presently
operated, including, without limitation, offering, originating or purchasing
consumer loans consistent with past practice as of May 14, 1996. The agreement
provides any party which acquires "control" (within the meaning of Section 7 of
the Federal Deposit Insurance Act, or Section 3 of the Bank Holding Company Act)
of Cardinal, subsequent to May 16, 1996, shall not be precluded from engaging in
the consumer finance business if such party then engages in that business in any
way as of the time it acquires control of Cardinal. Area Bancshares
Corporation, which has entered into a merger agreement with Cardinal (See Note
8 below), is presently engaging in the consumer finance business.
<PAGE> 8
4. The amortized cost and market value of securities available for sale
are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
Amortized Market Amortized Market
(In thousands) Cost Value Cost Value
-------------- ---- ----- ---- -----
<S> <C> <C> <C> <C>
U. S. Treasury $ 19,629 19,975 23,721 24,174
Federal Agencies 26,103 26,116 38,155 38,214
Mortgage backed securities 46,714 47,045 41,021 41,341
States and political subdivision 15,567 15,624 3,898 3,944
Equity and other securities 4,683 4,683 4,530 4,530
-------- ------- ------- -------
$112,696 113,443 111,325 112,203
======== ======= ======= =======
</TABLE>
5. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands) 1997 1996
-------------- ---- ----
<S> <C> <C>
Balance, January 1 $6,374 5,789
Provision for Loan Losses 738 3,480
Recoveries 145 474
Loans charged off (515) (2,035)
Changes incident to spin-off
and sale of loans - (1,334)
------ -----
Balance, end of period $6,742 6,374
====== =====
</TABLE>
6. Adoption of New Accounting Principles
On January 1, 1997 Cardinal implemented Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." Under this standard,
accounting for transfers and servicing of financial assets and extinguishments
of liabilities is based on control. After a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered and derecognizes liabilities when extinguished.
<PAGE> 9
The implementation of SFAS No. 125 did not have a material effect on
Cardinal's consolidated financial statements as a result of Cardinal not having
a material amount of asset transfers and asset servicing.
7. Off-balance-sheet Instruments Used for Interest Rate Risk Management
The Company enters into interest rate swaps to manage its sensitivity
to interest rate risk by using these instruments to offset the inherent price
or interest rate risk of specific on-balance-sheet assets or liabilities.
Interest revenue or interest expense on such transactions is accrued over the
term of the agreement as an adjustment to the yield or cost of the related
asset or liability. Transaction fees and realized gains and losses, if any, are
deferred and amortized to interest revenue or interest expense over the term of
the agreement. The fair values of any interest rate swaps are not recognized
in the financial statements.
8. Subsequent Event
On May 1, 1997 Cardinal announced that it had signed a definitive
agreement to merge with Area Bancshares Corporation, ("Area") (Nasdaq - NMS:
AREA). Under terms of the agreement, Area will exchange 2.7391 shares of its
common stock for each share of Cardinal common stock outstanding. Based on
Area's closing price of $22.00 on April 30, 1997 and Cardinal's total
outstanding shares and options, the transaction would be valued at approximately
$109 million and represent an exchange value of $60.26 for each share of
Cardinal common stock. The purchase price would be 1.88 times Cardinal's March
31, 1997 book value. The combination, which will be accounted for as a pooling
of interests, is expected to be consummated during the fourth quarter of 1997,
pending Area and Cardinal shareholder approval, regulatory approval, and other
customary conditions of closing. The exchange of Area stock for Cardinal stock
is expected to be a tax-free exchange for federal income tax purposes.
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CARDINAL
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996.
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 1997 was $3.244 million or
$1.89 primary earnings per share as compared to a net income of $4.229 million
and $2.55 primary earnings per share for the same period in 1996. Annualized
return on average stockholders' equity and average assets for the first six
months of 1997 were 12.54% and 1.02%, respectively. Because of the spin-off of
SFNB and the sale of Cardinal Credit Corporation loans, the return on average
equity and average assets for 1996 are not meaningful.
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 six months ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in thousands)
Six months ended June 30
1997 1996
-------- ------
<S> <C> <C>
Interest income, including loan fees $ 26,268 28,475
Interest expense 12,091 13,925
-------- ------
Net interest income $ 14,177 14,550
======== ======
Average earning assets $600,159 $627,914
Net interest margin (annualized) (tax
equivalent) 4.76% 4.65%
</TABLE>
Net interest income was relatively flat from 1996 to 1997 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 loans 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 (see Notes 2 and 3 to the Consolidated Financial
Statements).
<TABLE>
<CAPTION>
(Dollars in thousands)
Six months ended June 30,
1997 1996
-------- --------
<S> <C> <C>
Interest income, including loan fees $ 26,268 24,984
Interest expense 12,091 12,713
-------- ------
Net interest income $ 14,177 12,271
======== ======
Average earning assets $600,159 $575,876
Net interest margin (annualized) (tax
equivalent) 4.76% 4.26%
</TABLE>
<PAGE> 11
Management provided $738,000 in provision for loan losses for the first
six months of 1997 compared to $1,707,000 for the same period in 1996.
Management provides a level of reserves based upon an evaluation of the loan
portfolio's quality, growth, mix and prior loan loss experience. The decrease in
the level of provision for loan losses between reporting periods is primarily
the result of decreases in the level of net charge-offs. Net charge-offs for the
six months ended June 30, 1997 were $370,000 compared to $965,000 for the same
period in 1996. Net charge-offs in 1996 primarily resulted from losses in the
consumer finance portfolio, principally of Cardinal Credit Corporation, which
totaled $663,000 for the first six months in 1996. In addition, net charge-offs
in the indirect automobile loan portfolio decreased from $333,000 for the six
months in 1996 to $268,000 for the same period in 1997. As discussed above at
Note 3 to the Consolidated Financial Statements, on May 14, 1996 Cardinal sold
substantially all of the assets of Cardinal Credit Corporation, including all of
its $26 million of consumer finance loans. See "Notes to Consolidated Financial
Statements." See "Risk Elements in Loan Portfolio."
Noninterest income decreased $8.452 million for the first six months of
1997 as compared to the same period in 1996. Below is a table that eliminates
the noninterest income of Cardinal Credit Corporation and SFNB from the amounts
reported in the first six months of 1996.
<TABLE>
<CAPTION>
Six months ended June 30
------------------------------------------------------------
1997 1996
as as Cardinal 1996 as
(Dollars in thousands) reported reported Credit SFNB adjusted
--------- --------- -------- ---- --------
<S> <C> <C> <C> <C> <C>
Noninterest income:
Service charges on deposits $ 695 622 -- 46 576
Insurance commissions 81 301 213 23 65
Car club fees -- 86 86 -- --
Trust income 388 211 -- -- 211
Gains on sale of loans 93 8,525 8,230 -- 295
Security gains, net 7 38 -- -- 38
Loan servicing fees 219 109 -- -- 109
Taxable municipal bond
securities litigation
settlement 51 -- -- -- --
Other 254 348 54 12 282
------ ------ ----- -- -----
Total noninterest income $1,788 10,240 8,583 81 1,576
====== ====== ===== == =====
</TABLE>
The increase in trust income results primarily from an increase in
average assets under management. The decrease in gains on sales of loans results
from a decline in mortgage loans sold in the secondary market and a decline in
SBA loan sales. The $51,000 taxable municipal bond securities litigation
settlement represented monies received as a result of losses incurred in 1992
from the sale of certain taxable municipal bonds and is considered nonrecurring.
<PAGE> 12
Noninterest expenses decreased $4.7 million between reporting periods
of 1997 and 1996, substantially all of which can be attributed to the
termination of business of Cardinal Credit Corporation and the spin-off of SFNB.
Cardinal's noninterest expenses were not impacted by Cardinal Credit Corporation
and SFNB for the first six months of 1997 since Cardinal Credit Corporation
terminated business on May 14, 1996 and SFNB was spun-off effective May 23,
1996. Below is a table that eliminates the effect of Cardinal Credit Corporation
and SFNB from noninterest expenses for the first six months of 1996.
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------------------------------------------
1997 1996 1996
as as Cardinal as
(Dollars in thousands) reported reported Credit SFNB adjusted
-------- -------- -------- ---- --------
<S> <C> <C> <C> <C> <C>
Noninterest expense:
Salaries and employee benefits 5,077 6,901 1,321 729 4,851
Net occupancy expense 711 976 266 52 658
Furniture & equipment
expenses 803 1,280 91 426 763
Professional fees 262 329 41 12 276
Bank share taxes 322 271 -- 9 262
FDIC insurance 53 247 -- 30 217
Amortization of goodwill
and other intangibles 254 254 -- -- 254
Data processing services 511 701 22 158 521
Operating supplies 217 383 50 53 280
Telephone 225 387 84 52 251
Postage and courier 313 388 49 26 313
Advertising and business
development 472 600 34 152 414
Transportation, meals
and lodging 108 285 21 144 120
Other 989 2,020 712 142 1,166
------- ------ ----- ----- ------
Total noninterest expense $10,317 15,022 2,691 1,985 10,346
======= ====== ===== ===== ======
</TABLE>
FDIC insurance substantially declined as a result of passage of the
Deposit Insurance Funds Act of 1996, which, among other things, decreased the
insurance assessments for banks and thrifts. Deposit accounts at Cardinal's
subsidiary banks are insured to applicable limits by the Bank Insurance Fund
("BIF") of the FDIC and deposit amounts at Cardinal's subsidiary thrift are
insured to the applicable limits by the Savings Association Insurance Fund
("SAIF"). Included in the 1997 noninterest expenses are approximately $85,000 in
nonrecurring items, primarily legal and consultant fees associated with the
pending merger with Area Bancshares Corporation (see footnote 7 to the Notes to
Consolidated Financial Statements).
<PAGE> 13
Beginning January 1, 1997, BIF institutions are required to pay a
portion of the $780 million in annual FICO interest payments. For the first
three years, the BIF assessment rates for the 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.
CONSOLIDATED BALANCE SHEET
Total assets increased $6.9 million from December 31,1996 to June 30,
1997. Loans, net of unearned income, increased $16.9 million between December
31, 1996 and June 30, 1997 funded primarily by a decline in liquid assets and
borrowing from the Federal Home Loan Bank. Deposits were flat from $549.2
million at December 31, 1996 to $550.1 million at June 30, 1997.
<PAGE> 14
RISK ELEMENTS IN LOAN PORTFOLIO
A summary of nonperforming loans and assets follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Nonaccrual loans $ 673 607
90 days or more past due and
still accruing 2,893 373
------- ---
Total nonperforming loans 3,566 980
Other real estate owned 32 18
------- ---
Total nonperforming assets $ 3,598 998
======= ===
Total nonperforming loans as a
percentage of period-end net loans 0.74% 0.21%
Total nonperforming assets as a per-
centage of period-end net loans
and OREO 0.74% 0.21%
Allowance for loan losses to
period end net loans 1.39% 1.36%
Allowance for loan losses to
nonperforming loans 189.1% 650.4%
</TABLE>
At June 30, 1997, total impaired loans as recognized under SFAS
No. 114 were $1.3 million as compared to $509,000 at December 31, 1996.
At June 30, 1997, nonperforming loans totaled $3.566 million, an
increase of $2.586 million over December 31, 1996. The primary reason for the
increase in nonperforming loans was the failure to renew one loan totaling $2.5
million, which is expected to be renewed in August. Documentation requirements,
not credit quality concerns, precluded the loan from being renewed in a timely
manner. Adjusting Cardinal's nonperforming loans for the $2.5 million renewal
loan results in the following ratios:
<PAGE> 15
<TABLE>
<S> <C>
Total adjusted nonperforming loans as a
percentage of period-end net loans 0.22%
Total adjusted nonperforming assets as a
percentage of period-end net loans
and OREO 0.23%
Allowance for loan losses to adjusted
nonperforming loans 632.5%
</TABLE>
At June 30, 1997, Cardinal's loan portfolio was comprised of the
following:
<TABLE>
<CAPTION>
(Dollars in thousands) Percent
--------------------- -------
<S> <C> <C>
Commercial $ 53,319 11.0%
SBA 69,388 14.3%
Commercial Real Estate 109,505 22.6%
Residential Real Estate 172,447 35.6%
Consumer 79,453 16.5%
--------- ------
Total $ 484,112 100.0%
========= ======
</TABLE>
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 73% 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 49% 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 June 30,
1997 totaled approximately $41 million and consisted mainly of used car paper
generated in south central and eastern Kentucky. Of the $370,000 in net
charge-offs for the six months ended June 30, 1997, $268,000 was attributable to
the indirect automobile portfolio or 1.31% of the indirect automobile portfolio
(annualized).
<PAGE> 16
CAPITAL ADEQUACY
As of June 30, 1997 stockholders' equity totaled $53.1 million, an
increase of $2.8 million since December 31, 1996. Below is a summary of the
changes in stockholders' equity between December 31, 1996 and June 30, 1997.
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Balance, December 31, 1996 $ 50,297
Issuance of common stock 279
Net income 3,244
Dividends paid (640)
Decrease in net unrealized gain on
securities available for sale (85)
--------
Balance, June 30, 1997 $ 53,095
========
</TABLE>
At June 30, 1997, 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
10.52%, 11.77% and 7.49%, respectively. All capital ratios are in compliance
with regulatory minimum requirements.
COMPARATIVE RESULTS FOR THREE MONTHS ENDED
JUNE 30, 1997 AND JUNE 30, 1996.
Net income for the three months ended June 30, 1997 was $1.629 million
as compared to $4.333 million for the same period in 1996. Excluding the income
statement effect of the spin-off of SFNB and the sale of loans and related
termination of business of Cardinal Credit Corporation, Cardinal would have
reported net income for the second quarter of 1996 of $917,000. Below is a
condensed income statement for the three months ended June 30, 1996 that adjusts
for the spin-off of SFNB and sale of loans and termination of business of
Cardinal Credit Corporation.
<PAGE> 17
<TABLE>
<CAPTION>
Three months ended June 30,
--------------------------------------------------------------------
(In thousands) 1997 as 1996 as 1996 as
reported reported CCC SFNB adjusted
-------- -------- ----- ---- --------
<S> <C> <C> <C> <C> <C>
Interest income $ 13,362 13,864 764 487 12,613
Interest expense 6,131 6,653 138 303 6,212
-------- ------ ----- ---- ------
Net interest income 7,231 7,211 626 184 6,401
Provision for loan
losses 369 869 319 - 550
-------- ------ ----- ---- ------
Net interest income
after provision for
loan losses 6,862 6,342 307 184 5,851
Noninterest income 894 9,247 8,356 30 861
Noninterest expense 5,333 7,418 1,448 693 5,277
-------- ------ ----- ---- ------
Income before
income taxes 2,423 8,171 7,215 (479) 1,435
Income taxes 794 3,838 2,859 461 518
-------- ------ ----- ---- ------
Net income $ 1,629 4,333 4,356 (940) 917
======== ====== ===== ==== ======
</TABLE>
Net interest income from adjusted 1996 to reported 1997, reflects an
increase in the net interest margin from 4.39% for the second quarter of 1996 to
4.77% for the second quarter of 1997.
Management provided $369,000 in provision for loan losses for the
three months ended June 30, 1997 as compared to the adjusted $550,000 for the
comparable period in 1996. The decline between periods is primarily the result
in a decline in the level of net charge-offs. Net charge-offs for the three
months ended June 30, 1997 were $251,000 as compared to $319,000 for the same
period in 1996.
Noninterest income and noninterest expense were relatively flat between
reporting periods. Included in the noninterest expenses for the second quarter
of 1997 were approximately $85,000 of nonrecurring items that are primarily
attributable to the pending merger with Area Bancshares Corporation (see
Note 8, Notes to Consolidated Financial Statements).
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128 "Earnings Per Share" and SFAS No. 129 "Disclosure of
Information About Capital Structure." SFAS No. 128 simplifies the computation of
earnings per share ("EPS") by replacing the presentation of primary EPS with a
presentation of basic EPS. The Statement requires dual
<PAGE> 18
presentation of basic and diluted EPS by entities with complex capital
structures. Basic EPS includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution of
securities that could share in the earnings of and entity, similar to fully
diluted EPS.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods, and requires
restatement of all prior period EPS data presented. Cardinal does not expect the
implementation of this Statement to have a material effect on the consolidated
financial statements.
SFAS No. 129 establishes standards for disclosing information about an
entity's capital structure. This Statement contains no change in disclosure
requirements for companies that were subject to previously existing
requirements. This Statement was issued to eliminate the exemption of nonpublic
entities from certain previously issued disclosure requirements.
This Statement is effective for financial statements for periods ending
after December 15, 1997. The implementation of this Statement will not have a
material effect on Cardinal's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information". SFAS No. 130 defines comprehensive income as the change
in equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. The
Statement requires comprehensive income to be reported in a financial statement
that is displayed with the same prominence as other financial statements. This
Statement is effective for fiscal years beginning after December 15, 1997. The
Company does not expect the implementation of this Statement to have a material
effect on the consolidated financial statements.
SFAS No. 131 changes the way public companies report information about
segments of their business in their annual financial statements and requires
them to report selected segment information in their quarterly report to
shareholders. This Statement requires that companies disclose segment data
based on how management makes decisions about allocating resources to segments
and measures their performance. This Statement is effective for fiscal years
beginning after December 15, 1997. The Company does not expect the
implementation of this Statement to have a material effect on the consolidated
financial statements.
<PAGE> 19
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On May 1, 1997, Cardinal held an annual meeting of stockholders to
elect seven directors for a one year term. Set forth below is a list of the
directors elected, along with the number of votes cast for or withheld for each
nominee. There were no abstentions or broker non-votes.
<TABLE>
<S> <C> <C>
Samuel A. B. Boone For: 1,385,903
Withheld: 7,055
James M. Hill, IV For: 1,391,958
Withheld: 1,000
Loyd G. Jasper For: 1,391,958
Withheld: 1,000
Ryan R. Mahan For: 1,391,958
Withheld: 1,000
John S. Penn For: 1,391,958
Withheld: 1,000
Ronald C. Switzer For: 1,391,958
Withheld: 1,000
</TABLE>
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 -- Cardinal Bancshares, Inc. filed one report
on Form 8-K during the quarter ended June 30, 1997. The report, dated May 9,
1997, contained (i) the press release, dated May 1, 1997, announcing that
Cardinal had entered into an agreement to merge with Area Bancshares Corporation
and (ii) the agreement and Plan of Merger, dated as of May 1, 1997, by and
between Area Bancshares Corporation and Cardinal Bancshares, Inc.
<PAGE> 20
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: August 6, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AS OF JUNE 30, 1997 AND DECEMBER 31, 1996 AND CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 20,169
<INT-BEARING-DEPOSITS> 1,478
<FED-FUNDS-SOLD> 1,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 113,443
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 484,112
<ALLOWANCE> 6,742
<TOTAL-ASSETS> 635,982
<DEPOSITS> 550,102
<SHORT-TERM> 6,875
<LIABILITIES-OTHER> 6,140
<LONG-TERM> 19,770
0
0
<COMMON> 35,038
<OTHER-SE> 18,057
<TOTAL-LIABILITIES-AND-EQUITY> 635,982
<INTEREST-LOAN> 22,279
<INTEREST-INVEST> 3,462
<INTEREST-OTHER> 527
<INTEREST-TOTAL> 26,268
<INTEREST-DEPOSIT> 11,320
<INTEREST-EXPENSE> 12,091
<INTEREST-INCOME-NET> 14,177
<LOAN-LOSSES> 738
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 10,317
<INCOME-PRETAX> 4,910
<INCOME-PRE-EXTRAORDINARY> 4,910
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,244
<EPS-PRIMARY> 1.89
<EPS-DILUTED> 1.88
<YIELD-ACTUAL> 4.72
<LOANS-NON> 673
<LOANS-PAST> 2,893
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,374
<CHARGE-OFFS> 515
<RECOVERIES> 145
<ALLOWANCE-CLOSE> 6,742
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 319
</TABLE>
