<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended December 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 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 per share
------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K.
---
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 18,
1997 as reported on the Nasdaq National Market, was approximately $57,059,000.
Shares of Common Stock held by each executive officer and director have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares outstanding of the issuer's class of common stock, as of
March 18, 1997: 1,593,557 shares, common stock, no par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended December
31, 1996 are incorporated by reference into Parts II and IV of this report.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders are incorporated into Part III of this report.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C> <C>
PART I
1. Description of Business 3
2. Description of Property 7
3. Legal Proceedings 7
4. Submission of Matters to a Vote of Security Holders 8
PART II
5. Market for Common Equity and Related Stockholder Matters 8
6. Selected Financial Data 9
7. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
8. Financial Statements 9
9. Changes in and Disagreements with Accountants on Accounting and 10
Financial Disclosure
PART III
10. Directors, Executive Officers, Promoters and Control Persons; 10
Compliance with Section 16(a) of the Exchange Act
11. Executive Compensation 10
12. Security Ownership of Certain Beneficial Owners and Management 10
13. Certain Relationships and Related Transactions 10
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 10
</TABLE>
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ORGANIZATION AND BACKGROUND
Cardinal is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended ("BHCA") and a savings and loan holding company
registered under the Home Owners' Loan Act. As of December 31, 1996, Cardinal's
total consolidated assets were $629.1 million and its total consolidated
stockholders' equity was $50.3 million. Cardinal's business is conducted
primarily through its four bank subsidiaries, The Vine Street Trust Company
("Vine Street"), HNB Bank ("HNB"), First & Peoples Bank ("First & Peoples"), the
Jefferson Banking Company ("Jefferson"), and its thrift subsidiary, Alliance
Bank ("Alliance"). Vine Street, HNB, First & Peoples and Jefferson conduct a
commercial banking business throughout Fayette, Harlan, Estill, Washington and
Jefferson counties which includes accepting demand and time deposits, providing
checking and money market accounts, making commercial, consumer and mortgage
loans, and providing safe deposit facilities. Vine Street and Jefferson also
offer personal and corporate trust services. As part of Vine Street's activities
it originates Small Business Administration and Rural Economic Community
Development loans through loan production offices of its subsidiary, VST
Financial Services, Inc. ("VST"), located in Atlanta, Georgia, Wilmington, North
Carolina and Tampa, Florida as well as in its Lexington, Kentucky office. Mutual
Insurance Agency, Inc. ("Mutual Insurance"), a subsidiary of HNB, offers general
insurance products, including property and casualty insurance policies, and
annuity insurance products.
Alliance is principally engaged in the business of attracting retail
deposits from the general public and investing those funds in mortgage loans
(secured primarily by one-four family real estate), construction loans, consumer
loans and investment securities. Alliance has a subsidiary, Mutual Service
Corporation ("Mutual Service"), which offers a broad range of security products
through an agreement with Compulife Investor Services.
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 net cash proceeds of
the sale were invested in short-term securities.
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's 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
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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>
(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
Stockholders' equity (638)
======
</TABLE>
Below is a list of each bank and thrift subsidiary with the total assets,
total deposits, and shareholder's equity at year-end 1996, and net income of
each for fiscal 1996:
<TABLE>
<CAPTION>
In Thousands
STOCKHOLDER'S NET
NAME ASSETS DEPOSITS EQUITY INCOME
- ---- -------- -------- ----- ------
<S> <C> <C> <C> <C>
Vine Street $162,278 $128,581 $13,275 $6,147
HNB 170,436 156,512 12,720 1,582
First & Peoples 53,349 47,349 3,980 554
Jefferson 76,011 68,199 7,497 305
Alliance 163,772 151,110 12,076 373
</TABLE>
SUPERVISION AND REGULATION
Cardinal is subject to regulation, supervision and examination by the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board") under
the Bank Holding Company Act of 1956, as amended. HNB, as a national bank, is
subject to regulation, supervision and examination by the Office of the
Comptroller of the Currency (the "OCC"). Jefferson, First & Peoples and Vine
Street (collectively with HNB referred to as the "Banks") are Kentucky-chartered
banks subject to the regulation, supervision and examination by the FDIC as
their primary federal regulator and the Kentucky Department of Financial
Institutions (the "Kentucky Department") as their state regulator. Alliance Bank
("Alliance") is a federally chartered savings bank subject to the regulation,
supervision and examination of the Office of Thrift Supervision (the "OTS") as
its primary federal regulator. The Banks and Alliance also are subject to
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regulation, supervision and examination as to certain matters by the Federal
Reserve Board. In addition, VST is subject to the supervision of, and the
regular examination by the Kentucky Department, the Florida Department of
Banking and Finance, the Georgia Department of Banking and the North Carolina
Banking Commission. See "Management's Discussion and Analysis" and "Notes to
Consolidated Financial Statements" as to the impact of certain laws, rules and
regulations on the operations of Cardinal, the Banks and Alliance Bank. Set
forth below is a description of certain recent legislative and regulatory
developments.
In September 1996, legislation was enacted that provides regulatory relief
to financial institutions and their holding companies. Under the legislation,
bank holding companies, such as Cardinal, that own both banks and savings
associations are no longer subject to the requirements of the Savings and Loan
Holding Company Act. As a result, although Cardinal controls Alliance, it is no
longer subject to OTS regulation or reporting requirements as a savings and loan
holding company. The legislation also streamlined certain applications to the
Federal Reserve Board for approval to engage in nonbanking activities that are
set forth in the rules and regulations of the Federal Reserve Board, provided
that the holding company is well-capitalized, well-managed, and meets certain
other criteria specified in the legislation, as implemented by regulations
recently promulgated by the Federal Reserve Board. In order to qualify as a
well-capitalized bank holding company, its lead depository institution must be
well-capitalized under the standards set forth under the Prompt Corrective
Action Act and well-capitalized institutions also must control at least 80% of
the total risk-weighted assets held by the bank holding company. In order to
qualify as well-managed, no institution controlled by the bank holding company
can receive the two lowest composite examination ratings as of their most recent
examination. Currently, Cardinal qualifies as well-capitalized and well-managed.
At this time, however, Cardinal has no plans to engage in any new nonbanking
activities.
The legislation also addressed the undercapitalization of the Savings
Association Insurance Fund (the "SAIF"), of which Alliance is a member. As a
result of the legislation, the FDIC imposed a one-time special assessment of
.657% on deposits insured by the SAIF as of March 31, 1995. Alliance incurred a
one-time charge of $726,000 (before taxes) to pay for the special assessment
based upon its level of SAIF deposits as of March 31, 1995. After the SAIF was
deemed to be recapitalized, Alliance's deposit insurance premiums to the SAIF
were reduced as of September 30, 1996. Cardinal and Alliance expect that its
future deposit insurance premiums will continue to be lower than the premiums it
paid prior to the recapitalization.
The legislation contemplates the merger of the SAIF, which insures deposits
at savings associations such as Alliance, with the Bank Insurance Fund (the
"BIF"), which generally insures deposits in national and state-chartered banks,
such as the Banks. The combined deposit insurance fund, which will be formed no
earlier than January 1, 1999, will insure deposits at all FDIC insured
depository institutions. As a condition to the combined insurance fund, however,
no insured depository institution can be chartered as a savings association. The
Secretary of the Treasury is required to report to the Congress no later than
March 31, 1997 with respect to the development of a common charter for all
insured depository institutions. If legislation with respect to the development
of a common charter is enacted, Alliance may be required to convert
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its federal charter to either a new federal type of bank charter or a Kentucky
depository institution charter. Cardinal is unable to predict whether such
legislation will be enacted.
During 1996, each of the federal banking agencies continued their
respective review of regulations to eliminate duplicative, unduly burdensome and
unnecessary regulations. As part of such regulatory reviews, the OCC revised its
rules, policies and procedures with respect to activities conducted directly by
national banks or operating subsidiaries of national banks. OCC also issued
interpretative guidance with respect to national banks acting as insurance
agents in towns with populations of less than 5,000 in response to a recent
United States Supreme Court decision. Cardinal and HNB are currently reviewing
the Court's decision and OCC policies with respect to insurance sales, although
no assurances can be given with respect to any new activities of HNB.
Furthermore, the OTS revised its regulations pertaining to lending and
investments, corporate governance, subsidiaries and equity investments,
conflicts of interest and usurpation of corporate opportunity.
Separate legislation was enacted in 1996 to repeal Section 593 of the
Internal Revenue Code under which qualified savings institutions calculated
their bad debt deduction for federal income tax purposes. This legislation (i)
repealed future bad debt deductions; (ii) exempted pre-1988 bad debt deductions
from recapture; and (iii) suspended for two years post-1987 in bad debt
deductions from recapture, provided that a savings institution meets a new home
mortgage lending test. The legislation exempted from recapture $650,000 in
pre-1988 bad debt deductions taken by Alliance.
EMPLOYEES
As of February 15, 1997, Cardinal and its subsidiaries had 239 full-time
employees and 28 part-time employees. The employees are not represented by a
collective bargaining unit. Cardinal believes that it enjoys good relations with
its personnel.
COMPETITION
Vigorous competition from other major banking and financial institutions,
many with substantially greater resources, exists in the Cardinal subsidiaries'
markets. Many of these competitors have resources substantially in excess of
those of Cardinal, have broader geographical markets and higher lending limits
than the banking subsidiaries and therefore, may be able to make larger loans
and sell broader product lines. Each of the Banks and Thrifts competes with
thrifts, credit unions, loan companies, money market mutual funds and other
financial institutions. The Banks and Thrifts also compete with other
nonfinancial institutions such as brokerage houses and mortgage bankers.
Cardinal and its subsidiaries are not dependent upon a single customer or a
few customers, the loss of any one or more of which would have a material
adverse effect on Cardinal or its subsidiaries.
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ITEM 2. DESCRIPTION OF PROPERTY
Cardinal's main office and its operations center are located at 400 East
Vine Street, Suite 300, Lexington, Kentucky 40507. The Cardinal lease is due to
expire August 31, 2000.
Vine Street's main office is located at 360 East Vine Street, Lexington,
Kentucky 40507, in a three-story brick building owned by 360 Vine Street
Partners, a limited partnership in which Cardinal owns a 33-1/3% interest. The
Vine Street lease is due to expire January 31, 1999. Vine Street also leases
space for two branches in Lexington, Kentucky, which are due to expire November
30, 1998 and June 30, 2006.
HNB's main office is located at 101 North Main Street, Harlan, Kentucky
40831, in a two-story brick structure owned by HNB. HNB owns four of its five
branch locations. HNB's branches which are owned are located at 107 Yocum Street
in Evarts, Kentucky, Broadway and Court Street, Irvine, Kentucky, 894 Richmond
Road, Irvine, Kentucky, and 1202 East Main Street, Cumberland, Kentucky. The
leased branch is located in a supermarket in Harlan, Kentucky. The lease will
expire March 31, 1998. Four branches are one-story brick buildings. The Broadway
and Court Street branch in Irvine is a two-story brick structure.
First & Peoples owns the property where its main office is located at 110
East Main Street, Springfield, Kentucky. First & Peoples' branch office, located
at Lincoln Heritage Plaza, is leased. The lease expires December 1, 1998.
Jefferson leases a two-story brick building at 4201 Shelbyville Road,
Louisville, Kentucky. The lease will expire June 30, 2001.
VST leases office space in Atlanta, Georgia, Tampa, Florida, and
Wilmington, North Carolina.
Alliance's main office is at 124 North Main Street, Somerset, Kentucky.
Alliance owns the land and building where its main office is located. Alliance's
branch offices are located at 239 South Highway 27, Somerset, Kentucky,
Cumberland Crossing Center, Monticello, Kentucky, Lakeway Drive and Kentucky
Highway 80, Russell Springs, Kentucky, South Main Street, London, Kentucky and
Master Street, Corbin, Kentucky. Alliance owns the land and the buildings where
its Somerset branch, Russell Springs branch, Monticello branch and London
branches are located. Alliance leases the land and owns the building where its
Corbin branch is located.
Management believes the properties are adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings to which Cardinal or any subsidiary
is a party or to which their property is subject.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information
The Cardinal common stock began trading on The Nasdaq Stock Market's
National Market under the symbol "CARD" on December 7, 1993. Market makers in
Cardinal common stock at year end are Friedman, Billings, Ramsey & Co., Inc.,
The Robinson-Humphrey Company, Inc., Sterne, Agee & Leach, and Sherwood
Securities Corporation. Prior to December 7, 1993, Cardinal's common stock was
traded sporadically on The Nasdaq Over-the-Counter Bulletin Board, but there was
no established public trading market for Cardinal Common Stock.
The following table sets forth the high and low prices of Cardinal common
stock as reported by NASDAQ for the periods indicated:
<TABLE>
<CAPTION>
1996 1995
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $ 70.00 $ 52.50 $ 35.00 $ 26.75
Second Quarter 105.50 38.00 41.50 34.50
Third Quarter 42.00 39.00 45.50 38.50
Fourth Quarter 46.00 40.00 71.25 44.00
</TABLE>
The high and low prices of Cardinal set forth above for the periods prior
to May 23, 1996 are not adjusted to give effect to the spin-off of SFNB. SFNB's
common stock began trading separately from Cardinal's common stock on May 24,
1996.
(b) Holders
The 1,593,557 shares of Cardinal common stock outstanding as of March 18,
1997 are held by 458 stockholders of record, not including directors' qualifying
shares.
(c) Dividends
The holders of Cardinal Common Stock will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors of
Cardinal out of funds legally available. Declaration of dividends by the Board
of Directors will depend upon a number of factors, including investment
opportunities available to Cardinal and its subsidiaries, capital requirements,
regulatory
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limitations, Cardinal and its subsidiaries' results of operations and financial
conditions, tax considerations and general economic conditions. For a discussion
of certain dividend restrictions see Notes 10 and 15 to the Consolidated
Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operation".
<TABLE>
<CAPTION>
1996 Quarterly Dividends 1995 Quarterly Dividends
------------------------ ------------------------
<S> <C> <C> <C>
First $0.20 First $0.20
Second 0.20 Second 0.20
Third 0.20 Third 0.20
Fourth 0.20 Fourth 0.20
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item is incorporated by reference to page
5 of the Company's 1996 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by this Item is incorporated by reference to pages
6 through 32 of the Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS.
The following consolidated financial statements of Cardinal and report of
independent auditors, KPMG Peat Marwick LLP, included in the Annual Report to
Shareholders on pages 33 through 72 are incorporated by reference:
Report of KPMG Peat Marwick LLP, Independent Auditors
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Operations - Years Ended December 31, 1996, 1995 and
1994
Consolidated Statements of Stockholders' Equity - Years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and
1994
Notes to Consolidated Financial Statements
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this item is hereby incorporated by reference
to the sections entitled "Voting Securities and Ownership Thereof," "Election of
Directors" and "Information about Directors and Nominees" in Cardinal's Proxy
Statement for its 1997 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is hereby incorporated by reference
to the section entitled "Executive Compensation" in Cardinal's Proxy Statement
for its 1997 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The ownership required by this item is hereby incorporated by reference to
the section entitled "Voting Securities and Ownership Thereof" in Cardinal's
Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is hereby incorporated by reference
to the section entitled "Transactions with Management and Others" in Cardinal's
Proxy Statement for its 1997 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) The following documents are filed as a part of this report:
1. Financial Statements: the following Consolidated Financial Statements
of Cardinal Bancshares, Inc. and Independent Auditors Report are incorporated
by reference to pages 33 through 72 of Cardinal's 1996 Annual Report to
Shareholders:
Independent Auditors' Report
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Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Operations - Years Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity - Years Ended December
31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years Ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedules have been omitted because they are not applicable or are not
required or the information required to be set forth therein is included in the
Consolidated Financial Statements or Notes thereto.
3. Exhibits
The exhibits listed are filed as part of, or incorporated by reference
into, this report:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1(6) Amended and Restated Plan of Distribution
3.1(1) Restated Articles of Incorporation of the Registrant
3.2(2) Amended and Restated Bylaws of the Registrant
10.1 $15,000,000 Amended and Restated Line of Credit Note
10.2(9) Loan Agreement, with First, Second and Third Amendments and Amended
and Restated Stock Pledge Agreement, with First and Second Amendments
10.3(2)* Cardinal Bancshares, Inc. 1989 Restricted Stock Option Plan as amended
April 16, 1992
10.4(5)* Cardinal Bancshares, Inc. 1994 Restricted Stock Option Plan
10.5(3)* Cardinal Bancshares, Inc. 1992 Limited Stock Option Plan
</TABLE>
11
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<TABLE>
<S> <C>
10.6(2)* Cardinal Bancshares, Inc. 1992 First Federal Savings Bank
Restricted Stock Option Plan
10.7(4)* Cardinal Bancshares, Inc. 1993 Mutual Federal Savings Bank
Restricted Stock Option Plan
10.8(4)* Amendment Number 1 to Cardinal Bancshares, Inc. 1992 Limited
Stock Option Plan
10.9(3)* Cardinal Bancshares, Inc. VST Financial Services, Inc.
Restricted Stock Plan and Escrow Agreement
10.10(1)* Director Stock Contract by and among Registrant and each of the
Directors of Cardinal Bancshares, Inc. dated as of November 8, 1993
10.11(1)* Letter Agreement between the Registrant and Michael S. Karlin
dated December 13, 1993
10.12(5)* Amendment, dated October 26, 1994, to Letter Agreement between
Registrant and Michael S. Karlin dated December 13, 1993
10.13(5)* Second Amendment, dated December 30, 1994, to Letter Agreement
between Registrant and Michael S. Karlin dated December 13, 1993
10.14(1)* Letter Agreement between Registrant and Vincent D. Dailey dated
December 13, 1993
10.15(5)* Amendment, dated December 30, 1994, to Letter Agreement between
Registrant and Vincent D. Dailey dated December 13, 1993
10.16(1)* Stock Option Agreement dated December 13, 1993 between
Registrant and Michael S. Karlin
10.17(1)* Stock Option Agreement dated December 13, 1993 between
Registrant and Vincent S. Dailey
10.18(5)* Cardinal Bancshares, Inc. Affiliates' Employee Stock Ownership
Plan and Trust Agreement
</TABLE>
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<TABLE>
<S> <C>
10.19(2)* Cardinal Bancshares, Inc. Management Retention Plan and Trust
Agreement for the Benefit of SFNB Savings Bank
10.20(4)* Cardinal Bancshares, Inc. Management Retention Plan and Trust
Agreement for the Benefit of Alliance Savings Bank
10.21(6) Stock Purchase Agreements with Area Bancshares Corporation,
Huntington Bancshares, Incorporated and Wachovia Corporation
10.22(7) Stock Purchase Agreement with Synovus Financial Corporation
10.23(8) Agreement to Purchase Assets with Norwest Financial
Kentucky, Inc.
11.1 Statement regarding Computation of Per Share Earnings
13.1 1996 Annual Report to Shareholders
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Auditors
27.0 Financial Data Schedule (EDGAR version only)
</TABLE>
(1) Incorporated by reference to the exhibit filed with the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1993.
(2) Incorporated by reference from Registrant's Registration Statement on Form
S-1 (File Number 33-48129).
(3) Incorporated by reference to the exhibit filed with the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1992.
(4) Incorporated by reference for Registrant's Registration Statement on Form
SB-2 (File Number 33-60796).
(5) Incorporated by reference to the exhibit filed with the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
(6) Incorporated by reference from October 13, 1995 Form 8-K.
(7) Incorporated by reference from March 19, 1996 Form 8-K.
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(8) Incorporated by reference from March 15, 1996 Form 8-K.
(9) Incorporated by reference to the exhibit filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
* Denotes a management contract or compensating plan or arrangement.
(B) Reports on Form 8-K
There were no Forms 8-K filed for the fourth quarter 1996.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CARDINAL BANCSHARES, INC.
Date: March 21, 1997 By: /s/ John S. Penn
-------------- ---------------------------
John S. Penn, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date: March 21, 1997 /s/ John S. Penn
--------------- --------------------------------
John S. Penn, President and
Chief Executive Officer
Date: March 21, 1997 /s/ Jack H. Brown
--------------- --------------------------------
Jack H. Brown, Chief Financial
Officer (Principal Financial and
Accounting Officer)
Date: March 21, 1997 /s/ Samuel A. B. Boone
--------------- --------------------------------
Samuel A. B. Boone, Director
Date: March 24, 1997 /s/ Vernon J. Cole
--------------- --------------------------------
Vernon J. Cole, Director
Date: March 24, 1997 /s/ James M. Hill, IV
--------------- --------------------------------
James M. Hill, IV, Director
Date: March 23, 1997 /s/ Loyd G. Jasper
--------------- --------------------------------
Loyd G. Jasper, Director
<PAGE> 16
Date: March 21, 1997 /s/ Ryan R. Mahan
--------------- --------------------------------
Ryan R. Mahan, Director
Date: March 21, 1997 /s/ John S. Penn
--------------- --------------------------------
John S. Penn, Director
Date: March 24, 1997 /s/ Ronald C. Switzer
--------------- --------------------------------
Ronald C. Switzer, Director
<PAGE> 1
EXHIBIT 10.1
AMENDED AND RESTATED
LINE OF CREDIT PROMISSORY NOTE
$15,000,000.00 Louisville, Kentucky
Effective May 31, 1996 but
executed on July ____, 1996
FOR VALUE RECEIVED, the undersigned, CARDINAL BANCSHARES, INC., a
Kentucky corporation with principal office and place of business in Lexington,
Kentucky (the "Maker"), hereby promises and agrees to pay to the order of
MID-AMERICA BANK OF LOUISVILLE & TRUST COMPANY, a Kentucky banking corporation
with principal office and place of business in Louisville, Kentucky (the
"Bank"), the principal sum of FIFTEEN MILLION DOLLARS ($15,000,000.00), or so
much thereof as may be outstanding from time to time, on June 30, 1997, subject
to extension thereof as provided in Section 1 below, together with interest
thereon as provided below. The terms and provisions of this Note are as follows:
1. Stated Maturity Date; Extension of Stated Maturity Date. Subject to
the provisions of the immediately succeeding sentence, the stated maturity date
of this Note is June 30, 1997, on which date the entire unpaid principal balance
of and all accrued and unpaid interest on this Note shall be due and payable in
full to the Bank. Provided, the Bank has the option, exercisable in its sole and
absolute discretion on or before each successive June 30, commencing on or
before June 30, 1997, to extend the stated maturity date of this Note for an
additional one (1) year period. In the event the Bank exercises its option to
extend the stated maturity date of this Note as of any June 30, whether one time
or from time to time, the stated maturity date of this Note, with respect to
each such extension of the stated maturity date of this Note, shall be June 30
of the calendar year immediately succeeding the calendar year in which the Bank
has exercised its option to extend the stated maturity date of this Note,
subject at all times to the Bank's absolute right to accelerate the stated
maturity date of this Note upon the occurrence and during the continuation of
any Event of Default under and as defined in the Loan Agreement referred to
below. In the event the Bank elects not to extend the stated maturity date of
this Note, the entire unpaid principal balance of and all accrued and unpaid
interest on this Note shall be due and payable in full to the Bank on the then
current stated maturity date of this Note, subject at all times to the Bank's
absolute right to accelerate the stated maturity date of this Note upon the
occurrence and during the continuation of an Event of Default under and as
defined in the Loan Agreement referred to below.
2. Interest Rate. The outstanding principal balance of this Note, as
the same shall exist from time to time, shall bear interest at a variable rate
equal to the "Prime Rate," as such term is defined below, minus one-half of one
percent (.5%) per annum. The interest rate which this Note bears shall be
adjusted from time to time on the same day on which the "Prime Rate" is changed
by the Bank. As used herein, the term "Prime Rate" means at all times the
interest rate per annum most recently designated or announced from time to time
by the Bank as its "Prime Rate" in effect at its principal office in Louisville,
Kentucky.
<PAGE> 2
3. Payment of Interest. All accrued interest on this Note shall be paid
to the Bank quarterly in arrears on the last day of each and every March, June,
September and December, commencing on June 30, 1996, for so long as any portion
of the principal of or interest on this Note shall remain unpaid, and shall also
be paid in full to the Bank on the maturity date of this Note, whether the
stated maturity date of this Note, an accelerated maturity date of this Note, or
otherwise.
4. Interest Calculated on 360-Day Year. All accrued interest on this
Note shall be calculated on the basis of the actual number of days elapsed over
an assumed year consisting of three hundred sixty (360) days.
5. Default Rate. In the event any installment of accrued interest on
this Note is not paid to the Bank when due or within fifteen (15) days
thereafter, the Maker shall pay to the Bank a late charge equal to five percent
(5%) of the amount of such overdue installment of accrued interest. Further,
commencing fifteen (15) days after the due date of any installment of accrued
interest on this Note, provided said installment of accrued interest remains
unpaid, such overdue installment of accrued interest shall commence to bear
interest at a variable rate equal to six percent (6%) per annum plus the "Prime
Rate," as such term is defined above, until such overdue installment of accrued
interest together with all accrued interest thereon at the rate set forth herein
have been paid in full to the Bank, and such overdue installment of accrued
interest together with all interest accrued thereon at the rate set forth herein
shall continue to be immediately due and payable in full to the Bank. In the
event the Bank accelerates the stated maturity date of this Note due to the
occurrence of any Event of Default under and as defined in the Loan Agreement
referred to below, or in the event this Note is not paid in full to the Bank on
the stated maturity date hereof, the entire unpaid principal balance of this
Note together with all accrued and unpaid interest thereon shall commence to
bear interest at a variable rate equal to six percent (6%) per annum plus the
"Prime Rate," as such term is defined above, from the date of acceleration of
the stated maturity date of this Note or from the stated maturity date of this
Note, as applicable, until the entire unpaid principal balance of an all accrued
interest on this Note (including all accrued interest thereon at the rate set
forth herein) have been paid in full to the Bank, and all such unpaid principal
together with all interest accrued and unpaid thereon, including, without
limitation, all interest accrued and accruing thereon as provided in this
sentence, shall continue to be immediately due and payable in full to the Bank.
6. Place of Payment. All payments of principal and interest on this
Note shall be made to the Bank in legal tender of the United States of America
at its offices located at Broadway at Fifth Street, Louisville, Kentucky 40202,
or to such other person or at such other place as may be designated in writing
by the Bank.
7. Loan Agreement; Security for Note. This Note has been issued
pursuant to that certain Loan Agreement dated March 31, 1993, between the Bank
and the Maker, as amended pursuant to (a) that certain First Amendment to Loan
Agreement dated March 31, 1994, between the Bank and the Maker, (b) that certain
Second Amendment to Loan Agreement dated as of June 30, 1994, between the Bank
and the Maker, (c) that certain Third Amendment to Loan Agreement dated as of
May 31, 1995, between the Bank and the Maker, and (d) that certain
<PAGE> 3
Fourth Amendment to Loan Agreement of even date herewith, between the Bank and
the Maker (collectively, together with all future amendments and modifications
thereof, the "Loan Agreement"). This Note is secured by that certain Amended and
Restated Stock Pledge Agreement dated March 31, 1994, between the Maker and the
Bank, as amended pursuant to (a) that certain First Amendment to Amended and
Restated Stock Pledge Agreement dated as of June 30, 1994, between the Maker and
the Bank, (b) that certain Second Amendment to Amended and Restated Stock Pledge
Agreement dated as of May 31, 1995, between the Maker and the Bank, and (c) that
certain Third Amendment to Amended and Restated Stock Pledge Agreement of even
date herewith, between the Maker and the Bank (collectively, together with all
future amendments and modifications thereto, the "Stock Pledge Agreement").
8. Acceleration. If there is a default in the payment of any
installment of accrued interest on this Note when due and such default is not
cured within fifteen (15) days thereafter, the Bank may, at its sole option,
during the continuation of such default, declare the entire unpaid principal
balance of and all accrued and unpaid interest on this Note to be, whereupon the
same shall be, immediately due and payable in full to the Bank. Further, if
there occurs any other Event of Default under and as defined in the Loan
Agreement, the same shall automatically be deemed a default hereunder and the
Bank may, at its sole option, declare the entire unpaid principal balance of and
all accrued and unpaid interest on this Note to be, whereupon the same shall be,
immediately due and payable in full to the Bank.
9. No Implied Waivers; Time is of the Essence. The failure of the Bank
to exercise any of its rights, powers and/or remedies shall not constitute a
waiver of the right to exercise the same at that or at any other time. All
rights and remedies of the Bank for default hereunder, under the Loan Agreement
and/or under the other Loan Instruments, as such term is defined in the Loan
Agreement, shall be cumulative to the greatest extent permitted by law. Time
shall be of the essence in the payment of each installment of accrued interest
on this Note and the payment of the entire unpaid principal balance of and all
accrued interest on this Note on its stated maturity date.
10. Attorneys' Fees. If there is any default under this Note, the Loan
Agreement and/or the other Loan Instruments which is not cured, and this Note is
referred to an attorney for collection, or is collected through any court,
including any bankruptcy court, the Maker promises and agrees to pay to the Bank
its reasonable attorneys' fees, court costs and other expenses incurred in
collecting or attempting to collect or securing or attempting to secure this
Note or enforcing the Bank's rights under the Loan Agreement and/or the other
Loan Instruments.
11. Prepayment. This Note may be prepaid at any time, in whole or in
part, without premium or penalty, and all such prepayments made on this Note
shall, at the sole option of the Bank, first be applied to accrued and unpaid
interest on this Note and then to the unpaid principal of this Note.
12. Governing Law. This Note has been delivered in, and shall be
governed by and construed in accordance with the laws of, the Commonwealth of
Kentucky.
<PAGE> 4
13. Waivers. The Maker hereby waives presentment, demand, notice of
dishonor, protest, notice of protest, notice of acceleration and notice of
nonpayment, and further waives all exemptions to which it may now or hereafter
be entitled to under the laws of the Commonwealth of Kentucky or any other state
or of the United States. The Bank shall have the right to grant the Maker any
extension of time for payment of this Note or any other indulgence or
forbearance whatsoever, and may release any security for the payment of this
Note, in every instance without the consent of the Maker and without in any way
affecting the liability of the Maker hereunder, and without waiving any rights
the Bank may have hereunder or by virtue of the laws of the Commonwealth of
Kentucky or any other state or of the United States.
14. Legal Rate of Interest. Nothing herein contained shall be construed
or so operate as to require payment of interest at a rate greater than the
highest permitted contract rate under applicable law, or to make any payment or
to do any act contrary to applicable law. To this end, if during the course of
any litigation involving the enforceability of the obligations represented by
this Note, a court having jurisdiction of the subject matter or of the parties
to said litigation shall determine that either the interest rate as set forth
herein, or the effect of said rate in relation to the particular circumstances
of default resulting in said litigation, are separately or collectively
usurious, then the interest rate set forth herein shall be reduced, or the
operation and effect thereof ameliorated, to achieve the highest interest rate
or charge which shall not be usurious. As an example of such an amelioration, in
the event the indebtedness represented by this Note is declared due by the Bank
prior to maturity, and the total amount of interest paid causes interest to
exceed the highest rate permitted by law, such interest rate shall be
recalculated at the highest rate which shall not be usurious and any excess over
such recalculated interest rate shall be credited to the unpaid principal of
this Note.
15. Captions. The section headings of this Note are inserted herein
solely for convenience of reference and shall not affect the construction or
interpretation of the provisions hereof.
16. Amendment, Restatement and Supersession of Original Note. This Note
amends, restates and supersedes in its entirety that certain Amended and
Restated Line of Credit Promissory Note dated May 31, 1995, made by the Maker,
payable to the order of the Bank, and in the face principal amount of Fifteen
Million Dollars ($15,000,000.00), which in turn amended and restated that
certain Amended and Restated Line of Credit Promissory Note dated June 30, 1994,
made by the Maker, payable to the order of the Bank, and in the face principal
amount of Fifteen Million Dollars ($15,000,000.00), which in turn amended and
restated that certain Lie of Credit Promissory Note dated March 31, 1994, made
by the Maker, payable to the order of the Bank, and in the face principal amount
of Twelve Million Dollars ($12,000,000.00), which in turn amended and restated
that certain Line of Credit Promissory Note dated March 31, 1993, made by the
Maker, payable to the order of the Bank, and in the face principal amount of Six
Million Dollars ($6,000,000.00) (collectively, the "Original Notes"). Provided,
nothing contained in this Note or otherwise shall be construed to constitute a
novation of the debt, respectively evidenced by the Original Notes by the debt
evidenced by this Note.
<PAGE> 5
WITNESS the signature of the Maker as of the 31st day of May, 1996.
CARDINAL BANCSHARES, INC.
By: /s/ John S. Penn
--------------------------
John S. Penn, President
(the "Maker")
<PAGE> 1
EXHIBIT 11.1
Cardinal Bancshares, Inc.
Statement Re: Computation of Per Share Earnings
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
PRIMARY:
<S> <C> <C> <C>
Average shares outstanding 1,556,439 1,414,975 1,389,938
Effect of assumed conversion of stock
options under treasury stock method 123,039 132,228 109,203
----------- ----------- -----------
1,679,478 1,547,203 1,499,141
=========== =========== ===========
Net income (loss) $ 4,331 $ 864 $ (538)
=========== =========== ===========
Net income (loss) per share $ 2.58 $ 0.56 $ (0.36)
=========== =========== ===========
FULLY DILUTED:
Average shares outstanding 1,556,439 1,414,975 1,389,938
Effect of assumed conversion of stock
options under treasury stock method 126,022 145,303 109,203(1)
----------- ----------- -----------
1,682,461 1,560,278 1,499,141
=========== =========== ===========
Net income (loss) $ 4,331 $ 864 $ (538)
=========== =========== ===========
Net income (loss) per share $ 2.57 $ 0.55 $ (0.36)
=========== =========== ===========
</TABLE>
(1) The effects of assumed conversion of stock options for the 1994 fully
diluted computations are antidilutive. Accordingly, the amount derived
from the primary computations are used.
<PAGE> 1
EXHIBIT 13.1
CARDINAL BANCSHARES, INC.
1996 ANNUAL REPORT
<PAGE> 2
[CARDINAL BANCSHARES, INC. LETTERHEAD]
March, 1997
Dear Cardinal Shareholders:
Based on the excitement of the first three quarters of 1996, one might
proclaim the fourth quarter to be decidedly mundane. The singular significant
event was the previously announced non-cash charge against earnings concerning
certain stock option plans, approved by you last October. On a full year basis,
I am confident all would agree it was a busy year.
FINANCIAL PERFORMANCE
Net income was $4.3 million for 1996 or $2.58 per share, compared to
$864,000 or $0.56 per share for 1995. Net loss for the fourth quarter of 1996
was $336,000 or $(.20) per share, compared to a loss of $81,000 for the fourth
quarter of 1995 or $(0.05) per share.
The 1996 fourth quarter loss is primarily attributable to the one time
non-cash charge against earnings pertaining to the amendments to the stock
option plans. The 1995 fourth quarter loss is attributed largely to losses at
Security First Network Bank (expenses associated with the Internet banking
activities) as well as losses at Cardinal Credit Corporation and Jefferson
Banking Company. In addition, in the fourth quarter of 1995, Cardinal recorded a
$172,000 charge to federal income tax expense associated with the recapture of
bad debt reserves at Security First Network Bank.
Net income for 1996 included (1) the expense totaling $726,000 or
$479,000 on an after-tax basis of the one-time special assessment on Savings
Association Insurance Fund ("SAIF") deposits, (2) the $4.6 million after-tax
gain on the sale of Cardinal Credit Corporation's assets, (3) $1,605,000 in
losses at Security First Network Bank recognized by Cardinal before that bank
was spun-off to Cardinal shareholders on May 23, 1996, and (4) the shareholder
approved amendments to certain stock option plans which resulted in the
previously announced $1,134,000 non-cash charge against earnings, net of
applicable tax benefits.
<PAGE> 3
Cardinal Shareholders
March, 1997
Page Two
The following table outlines in more detail the financial effects of
the significant events discussed above. The "1996 as adjusted" column depicts
the full year operating results of the core banking company. The resulting net
income of $3,233,000 in no way reflects what management would consider an
acceptable level of long-term performance. I can assure you our internal goals
are considerably higher. The 1996 performance reflects several expenditures of
investment in the future, not the least of which is the continued improvement of
the Jefferson Banking Company. As you remember, Jefferson is our de novo entry
into the Louisville, Kentucky market. 1996 marked the end of its second full
year. We are pleased with its growth and performance but it obviously has not
had time to achieve acceptable long-term returns. We believe that the resources
are in place to significantly improve upon the core banking earnings of 1996
reported above. We expect Jefferson to begin to contribute to earnings in a
meaningful fashion as we focus our attention on increased revenue generation on
a tightly controlled expense base.
Income Statement Reconciliation
(In thousands)
<TABLE>
<CAPTION>
SAIF and
Cardinal Stock
1996 Credit Security Compen- 1996
as reported Corp. First sation as adjusted
----------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Interest income 54,335 2,303 1,188 50,844
Interest expense 26,111 446 766 24,899
------ ----- ------ ------
Net interest income 28,224 1,857 422 25,945
Provision for loan losses 3,480 607 - 2,873
Noninterest income 11,635 8,548 81 3,006
Noninterest expense 28,000 2,556 1,985 2,445 21,014
Income before income taxes 8,379 7,242 (1,482) (2,445) 5,064
Income taxes 4,048 2,926 123 (832) 1,831
------ ----- ------ ------ ------
Net income 4,331 4,316 (1,605) (1,613) 3,233
====== ===== ====== ====== ======
</TABLE>
<PAGE> 4
Cardinal Shareholders
March, 1997
Page Three
At December 31, 1996, total assets of Cardinal were $629 million as
compared to $668 million at December 31, 1995. The decline in assets is largely
attributable to the sale of assets of Cardinal Credit Corporation and the
spin-off of Security First Network Bank. Credit quality remains strong with
nonperforming loans comprising 0.21% of the December 31, 1996 loan portfolio as
compared to 0.30% at December 31, 1995. Net loan losses for 1996 were 0.34% of
average loans for the year. Excluding Cardinal Credit net charge-offs, net loan
losses for the year were 0.20% of average loans. The reserve for loan losses was
650% of nonperforming loans at December 31, 1996.
FUTURE EVENTS
The central focus of our efforts as we enter 1997 is to grow customer
relationships. We feel we have the product offerings and a very knowledgeable
and well-trained workforce to accomplish this goal. To that end, we expect to
extend our presence in both the Somerset and Louisville, Kentucky markets, as
well as relocate our office in London, Kentucky and launch banking via the
Internet through The Vine Street Trust Company, Lexington, Kentucky.
Alliance Bank, Somerset, will open its third location on South U.S.
Highway 27 by the end of the third quarter, 1997. The Jefferson Banking Company
also hopes to have its second location open in the second half of 1997. Alliance
Bank, London, plans to relocate its offices to a more accessible, full-service
facility also located in London. Finally, Vine Street intends to begin offering
full banking services via the Internet in the spring. All of these additions are
being undertaken to both enhance existing customer accessibility and to further
our efforts to grow new customer relationships.
We firmly believe we can very ably provide a full range of banking and
investment services to all the customers in the markets we serve. With that in
mind, I would ask each of you, as shareholders, to help us grow your Company by
directing as many new customers as possible to our facilities. Or better yet,
direct them to any of our experienced lenders, investment advisors, or deposit
personnel. Personal endorsement is the strongest source of new business. I
personally extend an invitation to you to become a new business development
spokesperson for your Company. Together we will make 1997 a great year.
Sincerely,
/s/ John S. Penn
-----------------------------------
John S. Penn
President & Chief Executive Officer
JSP/clg
<PAGE> 5
CARDINAL BANCSHARES, INC.
ANNUAL REPORT 1996
*************************
BUSINESS OF CARDINAL BANCSHARES, INC.
Cardinal is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended ("BHCA") and a savings and loan holding company
registered under the Home Owners' Loan Act. As of December 31, 1996, Cardinal's
total consolidated assets were $629.1 million and its total consolidated
stockholders' equity was $50.3 million. Cardinal's business is conducted
primarily through its four bank subsidiaries, The Vine Street Trust Company
("Vine Street"), HNB Bank ("HNB"), First & Peoples Bank ("First & Peoples"), the
Jefferson Banking Company ("Jefferson"), and its thrift subsidiary, Alliance
Bank ("Alliance"). Vine Street, HNB, First & Peoples and Jefferson conduct a
commercial banking business throughout Fayette, Harlan, Estill, Washington and
Jefferson counties which includes accepting demand and time deposits, providing
checking and money market accounts, making commercial, consumer and mortgage
loans, and providing safe deposit facilities. Vine Street and Jefferson also
offer personal and corporate trust services. As part of Vine Street's activities
it originates Small Business Administration and Rural Economic Community
Development loans through loan production offices of its subsidiary, VST
Financial Services, Inc. ("VST"), located in Atlanta, Georgia, Wilmington, North
Carolina and Tampa, Florida as well as in its Lexington, Kentucky office. Mutual
Insurance Agency, Inc. ("Mutual Insurance"), a subsidiary of HNB, offers general
insurance products, including property and casualty insurance policies, and
annuity insurance products.
Alliance is principally engaged in the business of attracting retail
deposits from the general public and investing those funds in mortgage loans
(secured primarily by one-four family real estate), construction loans, consumer
loans and investment securities. Alliance has a subsidiary, Mutual Service
Corporation ("Mutual Service"), which offers a broad range of security products
through an agreement with Compulife Investor Services.
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 net cash proceeds of
the sale were invested in short-term securities.
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's 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
<PAGE> 6
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
Stockholders' equity (638)
========
</TABLE>
MANAGEMENT OF CARDINAL
The following information, as of March 28, 1997, concerns the
principal occupation of the Company's executive officers for at least the
past five years. Information concerning the principal occupation of John S.
Penn is set forth under "Directors of Cardinal."
JACK H. BROWN, has been the Chief Financial Officer of Cardinal since
1988. He is currently the Secretary-Treasurer of VST and a vice president
of Vine Street, Jefferson, First & Peoples, HNB and Alliance.
SCOTT P. CVENGROS, has been the Senior Credit Officer of Cardinal since
January 1996. Mr. Cvengros served as a lending officer at Vine Street from
February 1989 until January 1995. He was a lending officer at VST from January
1995 until June 1995 at which time he became president of VST. He served as
president of VST until he joined Cardinal in January 1996.
DIRECTORS OF CARDINAL
The following information, as of March 28, 1997, sets forth the
principal occupation of the Company's directors for at least the past five
years.
SAMUEL A. B. BOONE is President of The Lexington Quarry Company. He
serves as a director at First & Peoples.
VERNON J. COLE, was President and Chief Executive Officer of HNB from
1986 until 1991. Mr. Cole is currently Chairman of the Board of HNB.
JAMES M. HILL, IV, a veterinarian, is a self-employed breeder and racer
of thoroughbred horses. In addition, Dr. Hill entered the boot manufacturing and
marketing business in May 1996.
<PAGE> 7
LOYD G. JASPER, was President and Chief Executive Officer of Alliance
from 1985 to July 1994. Mr. Jasper has been a member of the Board of Alliance
since 1985 and became Chairman of the Board of Directors of Alliance in January
1993. He has also been the President and a director of Mutual Service since
January 1986 and served as President and director of Mutual Insurance, now a
wholly-owned subsidiary of HNB, from 1985 to February, 1994.
RYAN R. MAHAN, has owned and operated Ryan R. Mahan and Associates, an
equine auctioneer firm since 1975. He is also Vice President and co-owner of
Swinebroad-Denton, a real estate brokerage firm and has been associated with
such firm since 1988. Mr. Mahan is also an auctioneer at Keeneland Association,
Lexington, Kentucky. He is also director of auctions for Ocala Breeders Sales,
Inc., Barretts Equine Sales and Canadian Breeders Sales.
JOHN S. PENN, was President and Chief Operating Officer of Cardinal
from November 1987 to October 1996. In October 1996 he was elected President and
Chief Executive Officer of Cardinal. He is also a director of VST.
RONALD C. SWITZER, has been a certified public accountant since 1969.
His accounting firm is Switzer, McGaughey & Co., PSC in Lexington, Kentucky. He
also has owned and been the president of various restaurant franchises, a
computer franchise, and an athletic club. Mr. Switzer is also a director of Vine
Street.
DIVIDEND POLICY
The holders of Cardinal Common Stock will be entitled to receive and
share equally in such dividends as may be declared by the Board of Directors of
Cardinal out of funds legally available. Declaration of dividends by the Board
of Directors will depend upon a number of factors, including investment
opportunities available to Cardinal and its subsidiaries, capital requirements,
regulatory limitations, Cardinal and its subsidiaries' results of operations and
financial conditions, tax considerations and general economic conditions. For a
discussion of certain dividend restrictions see Notes 10 and 15 to the
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operation".
<TABLE>
<CAPTION>
1996 Quarterly Dividends 1995 Quarterly Dividends
------------------------ ------------------------
<S> <C> <C> <C>
First $0.20 First $0.20
Second 0.20 Second 0.20
Third 0.20 Third 0.20
Fourth 0.20 Fourth 0.20
</TABLE>
MARKET INFORMATION
The 1,593,557 shares of Cardinal common stock outstanding as of March
18, 1997 are held by 458 stockholders of record, not including directors'
qualifying shares.
The Cardinal common stock began trading on The Nasdaq Stock Market's
National Market under the symbol "CARD" on December 7, 1993. Market makers in
Cardinal common stock at year end are Friedman, Billings, Ramsey & Co., Inc.,
The Robinson-Humphrey Company,
<PAGE> 8
Inc., Sterne, Agee & Leach, and Sherwood Securities Corporation. Prior to
December 7, 1993, Cardinal's common stock was traded sporadically on The Nasdaq
Over-the-Counter Bulletin Board, but there was no established public trading
market for Cardinal Common Stock.
The following table sets forth the high and low prices of Cardinal
common stock as reported by NASDAQ for the periods indicated:
<TABLE>
<CAPTION>
1996 1995
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First quarter $ 70.00 $52.50 $35.00 $26.75
Second quarter 105.50 38.00 41.50 34.50
Third quarter 42.00 39.00 45.50 38.50
Fourth quarter 46.00 40.00 71.25 44.00
</TABLE>
The high and low prices of Cardinal set forth above for the periods
prior to May 23, 1996 are not adjusted to give effect to the spin-off of SFNB.
SFNB's common stock began trading separately from Cardinal's common stock on May
24, 1996.
TRANSFER AGENT AND REGISTRAR
The Registrar and Transfer Agent is Wachovia Bank of North Carolina,
N.A., P.O. Box 3001, Winston-Salem, North Carolina 27150.
FORM 10-K
A copy of Cardinal's Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission for 1996, including the financial statements
and financial statement schedules, but excluding certain exhibits thereto, may
be obtained without charge by writing to Cardinal Bancshares, Inc., 400 East
Vine Street, Suite 300, Lexington, KY 40507, Attention: Carolyn L. Gabriel,
Corporate Secretary.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Lexington, Kentucky
CORPORATE HEADQUARTERS
Cardinal Bancshares, Inc., 400 East Vine Street, Suite 300
Lexington, Kentucky 40507
(606) 255-8300.
<PAGE> 9
CARDINAL BANCSHARES, INC.
AND SUBSIDIARIES
* * * * * * * * * * * * *
FINANCIAL INFORMATION
* * * * * * * * * * * * *
CONTENTS
PAGE
----
CORPORATE FINANCIAL REVIEW:
Consolidated Selected Historical Financial Data 5
Management's Discussion and Analysis 6
CONSOLIDATED FINANCIAL STATEMENTS:
Report of KPMG Peat Marwick LLP, Independent Auditors 33
Consolidated Balance Sheets 34
Consolidated Statements of Operations 36
Consolidated Statements of Stockholders' Equity 38
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 41
<PAGE> 10
Cardinal Bancshares, Inc.
Consolidated Selected Historical Financial Data
(Dollars in thousands except for per share data)
<TABLE>
<CAPTION>
For the year ended December 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net interest income $ 28,224 $ 27,781 $ 23,093 $ 17,261 $ 16,018
Provision for loan losses 3,480 1,994 1,791 656 1,014
Net interest income after provision for
loan losses 24,744 25,787 21,302 16,605 15,004
Non-interest income, excluding investment
securities gains (losses) 11,586 4,315 2,837 3,000 2,308
Investment securities gains (losses) 49 308 (1,563) 62 56
Non-interest expense 28,000 28,648 23,329 15,257 13,321
Income tax (benefit) expense 4,048 898 (215) 893 1,434
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 4,331 $ 864 $ (538) $ 3,517 $ 2,613
=========== =========== =========== =========== ===========
Per common share:
Net income (loss) (1):
Primary $ 2.58 $ 0.56 $ (0.36) $ 3.14 $ -
Fully diluted 2.57 0.55 (0.36) 3.10 -
Stockholders' equity at period-end (1) 31.58 27.92 26.20 27.73 -
Cash dividends declared 0.80 0.80 0.80 0.80 0.60
=========== =========== =========== =========== ===========
At period-end:
Total assets $ 629,061 $ 668,489 $ 559,735 $ 482,391 $ 451,247
Total loans, net of unearned income 467,216 468,101 378,037 293,211 260,687
Total deposits 549,248 570,734 475,741 431,975 409,450
Notes payable and capital lease obligations 18,654 43,810 38,964 4,936 5,518
Total stockholders' equity 50,297 41,150 36,282 39,201 29,401
Allowance for loan losses 6,374 5,789 5,214 3,600 3,198
=========== =========== =========== =========== ===========
Selected Ratios:
Return on average assets 0.67% 0.14% -0.10% 0.76% 0.59%
Return on average stockholders' equity 9.17% 2.28% -1.41% 10.88% 10.29%
Average stockholders' equity to average
total assets 7.28% 6.01% 7.40% 6.96% 5.73%
Allowance for loan losses as a percentage
of average net loans 1.38% 1.36% 1.57% 1.33% 1.29%
Nonperforming loans as a percentage of
period-end net loans 0.21% 0.30% 0.23% 0.17% 0.23%
Net charge-offs as a percentage of
average net loans 0.34% 0.33% 0.05% 0.09% 0.09%
Net interest margin 4.65% 4.69% 4.78% 4.00% 3.90%
Capital ratios:
Tier 1 risk-based 10.47% 7.84% 9.32% 12.92% 10.66%
Total risk-based 11.72% 9.09% 10.57% 14.17% 12.09%
Leverage 7.09% 5.08% 5.53% 7.11% 5.34%
</TABLE>
(1) Net income per share and stockholders' equity per share for 1992 are not
reported due to the effects of the poolings-of-interests related to the
mergers with Alliance Bank and Security First Network Bank.
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CARDINAL
This discussion and analysis supplements and highlights information
contained in the accompanying consolidated financial statements and the selected
financial data presented elsewhere in this report and should be read in
conjunction therewith.
GENERAL
Cardinal is a bank and savings and loan holding company with subsidiary
banks in Harlan, Cumberland, Irvine, Springfield, Lexington and Louisville,
Kentucky and with a subsidiary thrift in Corbin, London, Somerset, Monticello
and Russell Springs, Kentucky. During April, 1992, Cardinal formed VST as a
wholly-owned subsidiary of Vine Street for the purpose of originating and
facilitating the processing of Small Business Administration guaranteed loans.
Cardinal acquired SFNB, Pineville, Kentucky on October 27, 1992. Cardinal
acquired Alliance, Somerset, Kentucky on October 29, 1993 and F&P Bancshares,
Inc. ("F&P"), Springfield, Kentucky on November 10, 1993. The SFNB, Alliance and
F&P business combinations were accounted for as poolings of interests. Cardinal
acquired Jefferson on September 30, 1994. Set forth below is a discussion of
Cardinal's financial condition at December 31, 1996 compared to December 31,
1995 and its results of operations for each of the years in the three-year
period ended December 31, 1996.
RECENT DEVELOPMENTS
CARDINAL CREDIT CORPORATION
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 net cash proceeds of
the sale were invested in short-term securities.
SFNB
On May 23, 1996 Cardinal effected the spin-off of its wholly-owned
subsidiary, SFNB. Cardinal stockholders received on a pro rata basis the
distribution of 2,398,908 shares of SFNB's 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."
In connection with the spin-off of SFNB, Cardinal and SFNB agreed with
federal banking regulators that, among other things, Cardinal would terminate
its various management and director interlocks with SFNB. Accordingly, during
the third quarter of 1996, Robert W. Copelan, James S. Mahan, III, and Howard J.
Runnion, Jr. resigned from the board of directors of Cardinal
<PAGE> 12
(as well as other positions at Cardinal and its subsidiaries), and
Robert F. Stockwell resigned as treasurer of Cardinal.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
Net income for 1996 was $4.331 million, compared to net income of
$864,000 for 1995 and a net loss of $538,000 for 1994. Fully diluted earnings
per share for 1996, 1995 and 1994 were $2.57, $0.55 and $(0.36), respectively.
Below is a condensed income statement that reflects Cardinal's core banking
business for years 1996, 1995 and 1994 without the net income effect of Cardinal
Credit Corporation, SFNB and any nonrecurring income or expense item, including
securities gains and losses.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Interest income $50,844 45,679 30,817
Interest expense 24,899 23,752 12,616
------- ------ ------
Net interest income 25,945 21,927 18,201
Provision for loan losses 2,873 806 841
------- ------ ------
Net interest income after
provision for loan losses 23,072 21,121 17,360
Noninterest income 2,957 2,680 1,841
Noninterest expense 21,014 19,860 16,848
------- ------ ------
Income before taxes 5,015 3,941 2,353
Income taxes 1,814 1,464 566
------- ------ ------
Net income $ 3,201 2,477 1,787
======= ====== ======
</TABLE>
Nonrecurring noninterest expenses in 1996 are stock compensation
expense of $1.7 million and $726,000 of FDIC insurance incurred in connection
with the recapitalization of the SAIF insurance fund. Included in 1995
noninterest income is a nonrecurring $324,000 gain on deposit sale and a
nonrecurring $359,000 recovery of taxable municipal bond securities litigation.
Included in 1994 noninterest expenses are approximately $452,000 of losses in
connection with a check kiting incident.
NET INTEREST INCOME
Net interest income is the principal source of a financial
institution's income stream and represents the difference or spread between
interest and fee income generated from earning assets and the interest expense
on deposits and borrowed funds. Fluctuations in interest rates as well as volume
and mix changes in earning assets and interest-bearing liabilities materially
impact net interest income. The discussion of net interest income is presented
on a taxable equivalent basis, unless otherwise noted, to facilitate performance
comparisons among various taxable and tax-exempt assets.
<PAGE> 13
Total net interest income was $28.3 million in 1996, a 1.7% increase
over the $27.8 million in 1995. From 1994 to 1995, net interest income increased
$4.6 million, a 19.8% increase, from $23.2 million to $27.8 million. The
relative low net interest income growth between 1995 and 1996 was principally
the result of the modest growth in average earning assets as the sale of
Cardinal Credit and the spin-off of SFNB effected the level of earning assets
within Cardinal. Growth in net interest income from 1994 to 1995 was primarily
due to a 22.2% increase in average earning assets and offset slightly by a
decline in net interest margin from 4.78% in 1994 to 4.69% in 1995. The increase
in average earning assets was primarily due to a 28.7% increase in average
loans, principally consumer related loans, and a 4.5% increase in securities.
Average deposits increased 3.4% from 1995 to 1996 and increased 21.3% from 1994
to 1995. The decline in average notes payable between 1995 and 1996 resulted
from repayments of borrowings after the sale of Cardinal Credit.
Net interest margin, the ratio of net interest income divided by
average earning assets, was 4.65% in 1996, 4.69% in 1995 and 4.78% in 1994. The
decrease from 1995 to 1996 was due primarily to increased average balances in
certificates of deposit and a decline in average balances in consumer loans as a
result of the sale of Cardinal Credit's finance receivables. The decline was
partially offset by higher loan volume in 1996. The slight decline from 1994 to
1995 was primarily due to increased funding costs as deposits shifted out of
lower cost savings and interest-bearing demand into higher cost time deposits.
The following table entitled "Average Balances and Interest Rates" sets
forth Cardinal's average balances of, and the interest earned or expensed on,
each principal category of assets, liabilities, and capital for the periods
indicated, as well as the related rates on the interest-earning assets and
interest-bearing liabilities and the difference thereof for the periods
indicated.
<PAGE> 14
Average Balances and Interest Rates
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995
----------------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest(1) Yield/Rate(5) Balance Interest(1) Yield/Rate(5)
----------------------------------------- ----------------------------------------
Earning Assets:
<S> <C> <C> <C> <C> <C> <C>
Loans: (2)
Commercial loans $ 90,694 $ 8,442 9.31% $ 87,594 $ 8,673 9.90%
Mortgage loans 300,152 28,074 9.35 261,314 25,168 9.63
Consumer loans 70,353 8,326 11.83 77,844 9,897 12.71
----------- ----------- ---------- ----------- ----------- ----------
Total loans 461,199 44,842 9.72 426,752 43,738 10.25
Taxable securities 123,542 8,230 6.72 142,290 9,776 6.87
Non-taxable securities 3,259 256 7.94 2,855 203 7.11
----------- ----------- ---------- ----------- ----------- ----------
Total securities 126,801 8,486 6.75 145,145 9,979 6.88
Interest-bearing deposits in banks 5,254 267 5.08 6,486 389 6.00
Federal funds sold 15,170 827 5.45 14,883 832 5.59
----------- ----------- ---------- ----------- ----------- ----------
Total interest-earning assets 608,424 54,422 8.94 593,266 54,938 9.26
Non-earning assets, net of
allowance for loan losses 40,079 38,935
Total assets $ 648,503 $ 632,201
Interest-bearing liabilities:
Interest-bearing demand deposits $ 150,059 $ 5,012 3.34% $ 139,678 $ 4,781 3.42%
Savings deposits 48,329 1,411 2.92 56,446 1,699 3.01
Time deposits 310,975 17,383 5.59 295,032 17,143 5.81
Short-term borrowings 6,499 251 3.86 5,339 215 4.03
Notes payable and capital
lease obligations 27,229 2,054 7.54 41,356 3,250 7.86
----------- ----------- ---------- ----------- ----------- ----------
Total interest-bearing liabilities 543,091 26,111 4.81 537,851 27,088 5.04
Non-interest-bearing liabilities
and stockholders' equity:
Demand deposits 48,781 48,428
Other liabilities 9,414 7,945
Stockholders' equity 47,217 37,977
----------- -----------
Total non-interest-bearing liabilities
and stockholders' equity 105,412 94,350
----------- -----------
Total liabilities and stockholders'
equity $ 648,503 $ 632,201
=========== ===========
Net interest income $ 28,311 $ 27,850
=========== ===========
Interest rate spread (3) 4.13% 4.22%
Net interest margin (4) 4.65% 4.69%
</TABLE>
<TABLE>
<CAPTION>
1994
---------------------------------------
Average Average
Balance Interest(1) Yield/Rate(5)
---------------------------------------
Earning Assets:
<S> <C> <C> <C>
Loans: (2)
Commercial loans $ 58,839 $ 5,162 8.77%
Mortgage loans 230,469 19,538 8.48
Consumer loans 42,208 5,222 12.37
----------- ----------- ---------
Total loans 331,516 29,922 9.03
Taxable securities 135,282 7,724 5.71
Non-taxable securities 3,548 330 9.30
----------- ----------- ---------
Total securities
138,830 8,054 5.80
Interest-bearing deposits in banks
4,939 228 4.62
Federal funds sold 10,203 419 4.11
----------- ----------- ---------
Total interest-earning assets 485,488 38,623 7.96
Non-earning assets, net of
allowance for loan losses 30,098
Total assets $ 515,586
Interest-bearing liabilities:
Interest-bearing demand deposits
$ 143,393 $ 4,007 2.79%
Savings deposits
70,837 2,064 2.91
Time deposits
186,500 7,706 4.13
Short-term borrowings
2,987 88 2.95
Notes payable and capital
lease obligations 25,259 1,553 6.15
----------- ----------- ---------
Total interest-bearing liabilities 428,976 15,418 3.59
Non-interest-bearing liabilities
and stockholders' equity:
Demand deposits 44,133
Other liabilities 4,346
Stockholders' equity 38,131
-----------
Total non-interest-bearing liabilities
and stockholders' equity 86,610
-----------
Total liabilities and stockholders'
equity $ 515,586
===========
Net interest income $ 23,205
===========
Interest rate spread (3) 4.37%
Net interest margin (4) 4.78%
</TABLE>
(1) Interest income is calculated on a tax-equivalent basis using an effective
tax rate of 34% for each year.
(2) Average balances and rates include non-accrual loans.
(3) Average rate earned on interest-earning assets less average rate expensed on
interest-bearing liabilities.
(4) Net interest income divided by total interest-earning assets.
(5) The yields on securities are based on historical cost, excluding FAS No. 115
adjustments to fair value.
<PAGE> 15
The change in net interest income between periods is derived from the
interaction of changes in the volume of and rates earned and paid on
interest-earning assets and interest-paying liabilities.
The following table entitled "Rate/Volume Variance Analysis" presents
certain information regarding changes in interest income and interest expense of
Cardinal for the periods indicated. For each major category of interest-earning
assets and interest-bearing liabilities, information is provided with respect
to changes attributable to: (i) changes in volume (change in average portfolio
balance multiplied by prior period rate); (ii) changes in interest rates (change
in weighted average interest rate multiplied by prior period average portfolio
balance); and (iii) the combined effect of changes in volume and interest rates
(change in average portfolio balance multiplied by change in weighted average
rate). The change in interest income and interest expense attributable to
changes in both volume and rate, which cannot be segregated, has been allocated
proportionally to the change due to volume and the change due to rate based upon
their absolute values.
Rate/Volume Variance Analysis
Taxable Equivalent Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 vs. 1995 1995 vs. 1994
Increase (Decrease) Increase (Decrease)
due to change in due to change in
Average Average Average Average
Balance Rate Total Balance Rate Total
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ 3,188 $ (2,084) $ 1,104 $ 10,098 $ 3,718 $ 13,816
Securities (1,207) (286) (1,493) 360 1,565 1,925
Federal funds sold 16 (21) (5) 231 182 413
Interest-bearing deposits
in banks (16) (106) (122) 82 79 161
-------- -------- -------- -------- -------- --------
Total interest income 1,981 (2,497) (516) 10,771 5,544 16,315
-------- -------- -------- -------- -------- --------
Interest expense:
Interest-bearing demand
deposits 343 (112) 231 (101) 875 774
Savings deposits (235) (53) (288) (431) 66 (365)
Time deposits 808 (568) 240 5,557 3,880 9,437
Short-term borrowings 44 (8) 36 87 40 127
Long-term debt (1,060) (136) (1,196) 1,181 516 1,697
-------- -------- -------- -------- -------- --------
Total interest expense (100) (877) (977) 6,293 5,377 11,670
-------- -------- -------- -------- -------- --------
Change in net interest income $ 2,081 $ (1,620) $ 461 $ 4,478 $ 167 $ 4,645
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE> 16
PROVISION FOR LOAN LOSSES
The provision for loan losses reflects management's judgment of the
cost associated with the credit risk inherent in the loan portfolio. The
provision for loan losses was $3.480 million in 1996, $1.994 million in 1995 and
$1.791 million in 1994. The provision for loan losses as a percent of average
loans was 0.75% in 1996, 0.47% in 1995 and 0.54% in 1994. The higher provision
for loan losses in 1996 compared to 1995 and 1994 reflects the continuing need
to maintain an adequate allowance for loan losses on loans. (See "Allowance for
Loan Losses, Provision for Loan Losses and Net Charge-Offs.")
NONINTEREST INCOME
The following table shows the items of noninterest income for the years
ended December 31, 1996, 1995 and 1994 and the percentage change therein:
Noninterest Income
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31 Percent Change
-----------------------------------------------------------------
1996 1995 1994 1996/1995 1995/1994
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 1,256 $ 1,218 $ 1,148 3.1% 6.1%
Securities gains (losses), net 49 308 (1,563) - -
Gain on sale of loans 8,563 372 257 - 44.7
Insurance commissions 400 577 619 (30.7) (6.8)
Car club commissions 85 353 234 (75.9) 50.90
Trust fees 462 138 141 234.8 (2.1)
Gain on deposit sale - 324 - - -
Taxable municipal bond securities
litigation settlement - 359 - - -
Loan servicing fees 223 289 76 (22.8) 280.3
Other 597 685 362 (12.8) 89.2
-------- -------- -------- ----- -----
Total noninterest income $ 11,635 $ 4,623 $ 1,274 151.7% 262.9%
======== ======== ======== ===== =====
</TABLE>
<PAGE> 17
Noninterest income is a significant source of Cardinal's revenues.
Excluding net securities gains, noninterest income represented 29.0% of
tax-equivalent revenues in 1996, compared with 13.4% in 1995 and 10.9% in 1994.
Contributing to the increase in 1996 is a nonrecurring $8.2 million gain on the
sale of Cardinal Credit loans. Also, due to the sale of Cardinal Credit loans,
insurance commissions and car club fees are significantly less in 1996 as
compared to 1995. Trust fees are higher in 1996 primarily due to average assets
under management having increased on average $40 million from $58 million for
1995 to $98 million for 1996.
Cardinal had three nonrecurring income items for 1995: (1) a gain on
the sale of deposits and loans of a branch of Alliance; (2) receipt of a
settlement claim in connection with litigation involving certain taxable
municipal bond losses incurred in 1992; and (3) net gain on sale of fixed
assets, principally the gain on the sale of the building that housed the branch
office of Alliance that was sold.
Gross security gains of approximately $126,000, $411,000 and $10,000
and gross losses of $77,000, $103,000 and $1,573,000 were realized on sales of
securities for 1996, 1995 and 1994, respectively. The gross gains reported in
1995 primarily resulted from sales of equity securities held by the parent
company. Gross losses in 1994 include approximately $499,000 attributable to
other than temporary declines in market value of securities available for sale.
Such securities were sold in 1995. The decline in market value of such
securities was attributable to increases in market interest rates which caused
Cardinal not to collect all of the principal upon sale. The significant security
losses in 1994 provided the opportunity to reinvest at higher yields.
NONINTEREST EXPENSES
The following table shows the items of noninterest expenses for the years
ended December 31, 1996, 1995 and 1994, and the percentage change therein.
<PAGE> 18
Noninterest Expense
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31 Percent Change
1996 1995 1994 1996/1995 1995/1994
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $13,700 $13,782 $10,660 (0.6)% 29.3%
Net occupancy expense 1,632 1,819 1,433 (10.3) 26.9
Furniture and equipment expense 2,100 1,957 1,357 7.3 44.2
Bank shares tax 532 496 422 7.3 17.5
Professional fees 674 1,473 1,157 (54.2) 27.3
FDIC insurance 1,215 834 1,076 45.7 (22.5)
Advertising and business development 1,137 1,277 979 (11.0) 30.4
Operating supplies 650 981 856 (33.7) 14.6
Data processing services 1,198 1,134 1,003 5.6 13.1
Fraud loss - - 452 - -
Amortization of excess cost over
fair value of net assets acquired 506 509 395 (0.6) 28.9
Telephone expense 596 736 500 (19.0) 47.2
Postage and courier expense 695 694 484 - 43.4
Transportation, meals and lodging expense 398 643 508 (38.1) 26.6
Termination of subsidiary 427 - - - -
Other 2,540 2,313 2,047 9.8 13.0
------- ------- ------- ------ -------
Total noninterest expense $28,000 $28,648 $23,329 (2.3)% 22.8%
======= ======= ======= ======= =======
</TABLE>
Noninterest expense decreased 2.3% from 1995 to 1996 following a 22.8%
increase from 1994 to 1995. A number of transactions during the period 1994-1996
affected the comparability of noninterest expense. During this period Cardinal
incurred a check kiting loss, expansion and sale of Cardinal Credit, development
of the Internet banking product at SFNB, significant one-time stock compensation
expense incurred in connection with amendments to certain stock option
<PAGE> 19
plans and payment of a FDIC special assessment on SAIF-insured deposits. The
table below eliminates the noninterest expenses associated with the
aforementioned transactions and/or companies from the reported noninterest
expense totals.
<TABLE>
<CAPTION>
For Years
1996 1995 1994
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Noninterest expense, as reported $28,000 28,648 23,329
Cardinal Credit noninterest expense 2,556 4,695 3,544
SFNB noninterest expense 1,985 4,093 2,485
Stock compensation expense 1,719 - -
FDIC special insurance assessment 726 - -
Check kiting loss - - 452
------- ------ ------
Noninterest expense, as adjusted $21,014 19,860 16,848
======= ====== ======
</TABLE>
Noninterest expense, as adjusted, increased $1.2 million (5.8%) from
1995 to 1996 and $3.0 million (17.9%) from 1994 to 1995. Of the $3.0 million
increase from 1994 to 1995, $824,000 (4.9%) is attributable to the expansion of
Jefferson in the Louisville, Kentucky market. Jefferson was opened in October,
1994; therefore, it incurred a full year of expenses in 1995.
Cardinal has no plan or employment policy that provides for
postretirement employee benefits or postemployment benefits. As provided by
Statements of Financial Accounting Standards No. 106 and 112, "Employers
Accounting for Postretirement Employee Benefits and Employers Accounting for
Postemployment Benefits," respectively, employers are required to accrue for
these costs for fiscal years beginning after December 15, 1992 and December 15,
1993, respectively.
INCOME TAXES
The effective tax rate as a percentage of pre-tax income (loss) was
48.3% in 1996, 51.0% in 1995 and (28.6%) in 1994. These tax rates are different
from the statutory Federal tax rate of 34% primarily due to tax-exempt interest
income, the effect of nondeductible goodwill and certain tax consequences
related to the spin-off of SFNB. Included in income tax expense for 1996 is
$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. State and
local income taxes, net of federal income tax benefit, were $310,000 in 1996.
Cardinal and its wholly-owned subsidiaries file a consolidated tax return. The
provision for federal income taxes is based upon earnings reported for
financial statement purposes rather than amounts reported on Cardinal's income
tax returns. Deferred income taxes, which result from temporary differences in
the book and tax bases of assets and liabilities for financial statements and
tax reporting purposes, are included in the calculation of income tax expense.
(See Note 12 to the Consolidated Financial Statements.)
<PAGE> 20
Alliance is permitted under the Internal Revenue code to deduct an
annual addition to a reserve for bad debts in determining taxable income,
subject to certain limitations. This addition differs significantly from the bad
debt experience used for financial accounting purposes. Bad debt deductions for
income tax purposes are included in taxable income of later years if the bad
debt reserves are used subsequently for purposes other than to absorb bad debt
losses. Because SFNB intends to use its reserve for purposes other than to
absorb loan losses, $172,000 in deferred income taxes have been provided in the
consolidated statement of operations for the year ended December 31, 1995.
Alliance does not intend to use the reserve for purposes other than to absorb
losses, accordingly, no deferred income taxes have been provided. Retained
earnings at December 31, 1996 and 1995, include approximately $650,000 and
$505,000, respectively, representing such bad debt deductions for tax purposes
in excess of the bad debt deduction for financial statement purposes for which
no deferred income taxes have been provided.
Net deferred tax assets carried on the consolidated balance sheets
amounted to $1,374,000 at December 31, 1996, and $258,000 at December 31, 1995.
The extent to which deferred tax assets may continue to be recognized in the
future depends upon management's estimates that such assets "more likely than
not" will be realized. Deferred tax assets may be reduced by a valuation
allowance, if necessary, if certain deferred tax assets may not be realized.
Cardinal believes that it is more likely than not that the reversal of future
taxable amounts and results of future operations will generate sufficient
taxable income to realize the net deferred tax asset recorded as of December 31,
1996.
CONSOLIDATED BALANCE SHEET
Total assets were $629.1 million at December 31, 1996, compared to
$668.5 million in 1995. Total assets averaged $648.5 million during 1996, an
increase from 1995 of $16.3 million, or 2.6%. Average earning assets increased
$15.2 million, or 2.6%, to $608.4 million. The level of assets was effected by
the sale of Cardinal Credit and the spin-off of SFNB.
SECURITIES PORTFOLIO
Effective January 1, 1994, Cardinal adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities. This
accounting standard requires, among other things, that equity securities having
readily determinable fair values and all investments in debt securities be
classified and accounted for in one of three categories: securities held to
maturity, trading account assets and securities available for sale. Debt
securities that management has the positive intent and ability to hold to
maturity are included in the securities held to maturity category are carried at
amortized cost. Management does not anticipate classifying any security as
"Trading Securities". The designation of securities as available for sale
applies to all other securities that may be sold in response to changes in
interest rates, changes in prepayment risk, increases in loan demand, general
liquidity needs and other similar factors. These securities are carried at their
fair values with unrealized gains and losses excluded from operating results and
reported as a component of shareholders' equity. Effective December 1, 1996, a
one-time reassessment of Cardinal's securities held to maturity was undertaken,
as permitted by the Financial Accounting Standards Board's special report
related to the implementation of FASB Statement No. 115. In connection with that
reassessment, Cardinal transferred securities held to maturity with an amortized
cost of $29,166,000 to securities
<PAGE> 21
available for sale in order to permit more responsiveness to changes in interest
rates and other balance sheet management factors. At the date of transfer,
December 1, 1996, the securities held to maturity had a net unrealized pretax
gain of $1,095,000.
Securities totaled $112.2 million at December 31, 1996, which represents a
19.5% decrease from December 31, 1995. U.S. Treasury and federal agency
securities were $103.7 million at December 31, 1996 compared to $131.6 million
in 1995. Correspondingly, municipal securities increased $987,000 in 1996 to
$3.9 million. This results in U.S. Treasury and federal agency securities
representing 92.4% and 94.4% of the securities portfolio at December 31, 1996
and 1995, respectively.
The composition of Cardinal's securities portfolio reflects Cardinal's
strategy of maximizing portfolio yields while giving consideration to risk and
liquidity. Securities available for sale may be sold for liquidity or risk
assessment purposes. In recent years, more taxable securities have been
purchased due to the removal of the preferential treatment given tax-exempt
securities under the tax laws. During 1994, Cardinal sold approximately $50
million in securities available-for-sale at a net loss of $1.563 million.
Cardinal used the majority of the proceeds of these security sales to purchase
other securities that provided enhanced portfolio yield. The following table
contains the carrying amount of the securities portfolio at the end of each of
the last three years.
Securities Portfolio
(Dollars in thousands)
Years Ended December 31
------------------------------
1996 1995 1994
-------- -------- --------
U.S. Treasury and Federal Agencies $103,729 $131,569 $127,280
States and Political Subdivisions 3,944 2,957 2,616
Other 4,530 4,846 4,874
-------- -------- --------
Total Securities Portfolio $112,203 $139,372 $134,770
======== ======== ========
At December 31, 1996, Cardinal had $41.3 million invested in
mortgage-backed securities and collateralized mortgage obligations ("CMO")
within the available for sale portfolio, compared with $42.5 million at December
31, 1995. A CMO is a mortgage-backed security that is comprised of classes of
bonds created by prioritizing the cash flows from the underlying mortgage pool
in order to meet different objectives of investors. Cardinal had $16.1 million
invested in CMO securities at December 31, 1996. Cardinal will continue to
invest in CMOs and mortgage-backed securities issued or backed by Federal
agencies.
<PAGE> 22
Cardinal has historically used liquidation of securities as a means to
fund loans in excess of its ability to generate deposits. When appropriate,
Cardinal intends to utilize its borrowing capacity to fund its lending
activities. To that end, during 1997 Cardinal intends to lengthen the average
life and thus, the yield, of its securities portfolio by maintaining a higher
percentage of its securities portfolio in municipal bonds.
The maturities and weighted average yields of the securities portfolio
at December 31, 1996 are presented in the table below entitled "Securities
Portfolio Maturity Schedule" using contractual maturity of the various
securities. Expected maturity may differ from contractual maturity because the
issuers may have the right to call or the obligors may have the right to prepay
the obligations with or without call or prepayment penalties. The average
contractual life of the total debt security portfolio at December 31, 1996 was
five years, two months with an average yield of 6.67%. (Taxable equivalent
adjustments, using a 34% tax rate, have been made in calculating yields on
tax-exempt obligations.)
Securities Portfolio Maturity Schedule
(Dollars in Thousands)
<TABLE>
<CAPTION>
After Five
After One But But
Within Within Five Within After Ten
One Year Years Ten Years Years
----------------------- ---------------------- ---------------------- -----------------------
Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
Federal Agency $ 40,696 6.28% $ 29,472 6.88% $ 12,567 6.62% $ 20,994 7.23%
States and Political
Subdivisions 246 8.39% 477 7.14% 966 7.47% 2,255 8.38%
Other Equity - - - - - - 4,530 6.91%
-------- ---- -------- ---- ------- ----- -------- ----
Total Securities
Maturity
Schedule $ 40,942 6.29% $ 29,949 6.88% $ 13,533 6.68% $ 27,779 7.27%
======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
Average interest-bearing deposits with banks decreased 19.0% from 1995
to 1996. In 1996 and 1995, interest-bearing deposits in banks principally
represent balances in the Federal Home Loan Banks.
<PAGE> 23
LOAN PORTFOLIO
Cardinal's loan portfolio, before deducting unearned income, totaled
$470.1 million at December 31, 1996, which represented an $11.0 million decline
over year-end 1995. This decrease year over year is a result of the sale of
Cardinal Credit consumer finance receivables and the spin-off of SFNB. At
year-end 1995, Cardinal Credit had approximately $27 million in finance
receivables and SFNB had approximately $21 million in loans. Cardinal's loan
portfolio at year-end 1996 was primarily comprised of real estate related loans
(71%), commercial loans (12%) and consumer loans (17%).
The real estate portfolio primarily consists of residential mortgage
loans (35% of total loans) and commercial mortgage loans (33% of total loans)
with relatively little activity in construction and land development (3% of
total loans). Cardinal's commercial real estate portfolio consists primarily of
owner-occupied or guarantor supported lending.
Cardinal's commercial loan portfolio is primarily generated in its
larger urban markets of Lexington and Louisville, Kentucky. This portfolio
primarily consists of secured transactions and typically has a strong secondary
source of repayment beyond the success of the underlying commercial business.
Out-of-area lending primarily occurs through Cardinal's Small Business
Administration ("SBA") loan originating subsidiary, VST. At year-end 1996, VST
had generated approximately $72 million or 15.3% of the loan portfolio. Of the
$72 million in outstanding loans generated by VST approximately 50% are
guaranteed by the SBA, 16% represents the unguaranteed portion of a particular
SBA loan, 11% are loans generated under the SBA's 504 loan program which is not
a guaranty program, and the remaining 23% represents either construction or
conventional first mortgage lending. The 504 program is a second mortgage
program which allows Cardinal to hold a first mortgage after the completion of
construction with the SBA placing a debenture to fund the second mortgage. This
type of financing provides Cardinal with a loan with a loan-to-value ranging
from 35%-50%. The conventional first mortgage loans are generally on hospitality
industry properties located in the southeastern United States with a
loan-to-value generally in the 50%-55% range. Cardinal has a concentration of
its loans in the hospitality industry with approximately $53 million in loans
related to hotel/motel projects throughout the southeastern United States.
Cardinal's consumer portfolio totaled $78 million, net of unearned
income, at year-end 1996. Approximately 50% of the consumer portfolio is
indirect automobile loans. While the indirect loan portfolio is a significant
percentage of the total loan portfolio (8.4%), the loans are dispensed
geographically and actuarially. The indirect portfolio represents approximately
4,000 accounts throughout south central and eastern Kentucky.
<PAGE> 24
Loan Portfolio
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993
-------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 57,325 12.2% $ 75,556 15.7% $ 50,357 13.0% $ 38,429
Real estate - construction 15,677 3.3 7,424 1.6 9,068 2.3 8,152
Real estate - mortgage 316,119 67.3 281,661 58.5 242,612 62.5 212,857
Consumer 80,946 17.2 116,495 24.2 86,196 22.2 36,417
-------- ----- -------- ----- -------- ----- --------
470,067 100.0% 481,136 100.0% 388,233 100.0% 295,855
===== ===== =====
Less: Unearned income 2,851 13,035 10,196 2,644
Allowance for loan losses 6,374 5,789 5,214 3,600
-------- -------- -------- --------
Total loans $460,842 $462,312 $372,823 $289,611
======== ======== ======== ========
<CAPTION>
December 31,
---------------------------------
1992
---------------------------------
Percent Amount Percent
<S> <C> <C> <C>
Commercial, financial
and agricultural 13.0% $ 37,634 14.3%
Real estate - construction 2.8 7,974 3.1
Real estate - mortgage 71.9 187,013 71.2
Consumer 12.3 30,056 11.4
----- -------- -----
100.0% 262,677 100.0%
===== =====
Less: Unearned income 1,990
Allowance for loan losses 3,198
--------
Total loans $257,489
========
</TABLE>
<PAGE> 25
The following table entitled "Selected Loan Maturity and Interest Rate
Sensitivity" shows the maturity of certain loan classifications and an analysis
of the rate structure for such loans due in over one year.
Selected Loan Maturity and Interest Rate Sensitivity
(Dollars in Thousands)
Rate Structure for Loans
Maturing Over One Year
<TABLE>
<CAPTION>
Over One Year
One Year Through Five Over Five Pre-
Or Less Years Years Total determined Adjustable
--------- ------------- --------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 54,438 $ 2,875 $ 12 $ 57,325 $ 2,887 $ -
Real estate
- construction 14,029 1,454 194 15,677 476 1,172
-------- ------- ----- -------- ------- ------
Total Selected Loan
Maturity and Interest
Rate Sensitivity $ 68,467 $ 4,329 $ 206 $ 73,002 $ 3,363 $1,172
======== ======= ===== ======== ======= ======
</TABLE>
ALLOWANCE FOR LOAN LOSSES, PROVISION FOR LOAN LOSSES AND NET CHARGE-OFFS.
Cardinal's allowance for loan losses increased $585,000 in 1996 to
$6,374,000 or 10.1% over December 31, 1995. The increase in the allowance for
loan losses is reflective of the change in mix in the loan portfolio. The
allowance as a percentage of total loans, less unearned income, was 1.36% at
year end 1996 as compared to 1.24% at year-end 1995. The sale of Cardinal Credit
loans, net of the allowance, and the spin-off of SFNB decreased loans by
approximately $45.0 million and decreased the allowance by approximately $1.3
million.
The company's provision for loan losses totaled $3,480,000 in 1996
representing an increase of $1,486,000 over 1995 or 74.5%. The company's
provision is established each year after careful consideration of many factors
including loan growth, net charge-offs, loan mix, delinquencies, management's
assessment of loan quality as well as general economic conditions. Loan
Administration, in conjunction with Loan Review, monitors and performs extensive
procedures to track the on-going success of the loan portfolio. These procedures
include techniques such as loan grading, on-site loan review, collateral
evaluations, extensive monthly past due reporting, monthly criticized asset
reporting/follow-up and monthly watchlist reporting. The techniques referenced
above are utilized by senior management to assess any potential for loan losses
which will generally result in a charge to the provision for loan losses thereby
increasing the allowance for loan losses available for the potential risk that
<PAGE> 26
has been identified. Management continuously monitors, tests and assesses its
risk within the loan portfolio in an attempt to identify its risk and allow for
it properly and prudently.
Net charge-offs in 1996 represented .34% of average outstanding loans
which was up slightly from 1995 levels of .33%. Net charge-offs related to
Cardinal's non-consumer portfolio were $164,000 or 0.04% of average outstanding
loans. Net charge-offs in the company's consumer portfolios remained within
acceptable levels for the respective types of consumer credit. For the year
ended 1996, net charge-offs as a percentage of average outstanding loans in the
consumer portfolio were 1.99%.
The following table entitled "Summary of Loan Loss Experience"
summarizes the allowance for loan losses, the provision and net charge-off
experience for the preceding five years.
<PAGE> 27
Summary of Loan Loss Experience
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Loans, net of unearned income:
Average outstanding during
period $ 461,199 $426,752 $331,516 $270,602 $248,333
Allowance for loan losses:
Balance at beginning of
period 5,789 5,214 3,600 3,198 2,406
Charge-offs:
Commercial, financial &
agricultural 223 132 28 4 78
Real estate - construction - - - - -
Real estate - mortgage 10 78 41 138 153
Consumer 1,802 1,501 345 253 137
--------- -------- -------- -------- --------
Total 2,035 1,711 414 395 368
Recoveries:
Commercial, financial &
agricultural 39 8 22 10 44
Real estate - construction - - - - -
Real estate - mortgage 30 60 25 41 72
Consumer 405 224 190 90 30
--------- -------- -------- -------- --------
Total 474 292 237 141 146
Net charge-offs 1,561 1,419 177 254 222
Changes incident to spin-off and
sale of loans (1,334)
Provision charged to
operations 3,480 1,994 1,791 656 1,014
--------- -------- -------- -------- --------
Balance at end of period $ 6,374 $ 5,789 $ 5,214 $ 3,600 $ 3,198
========= ======== ======== ======== ========
Net charge-offs to average
loans outstanding during
period 0.34% 0.33% 0.05% 0.09% 0.09%
========= ======== ======== ======== ========
</TABLE>
<PAGE> 28
Cardinal's allocation of the loan loss reserve has been summarized in
the following table entitled "Allocation of Loan Loss Reserve". The allocation
of the loan loss reserve between the various types of loan categories was done
after consideration of such factors as management's evaluation of risk by
category, current economic conditions, delinquency, and charge-off experience
within the various loan categories.
<PAGE> 29
Allocation of Loan Loss Reserve
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------
1996 1995 1994 1993
--------------------- --------------------- -------------------- ---------------------
Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial &
agricultural $ 669 12.2% $ 980 15.7% $ 683 13.0% $ 720 13.0%
Real estate - construction 290 3.3 120 1.5 152 2.3 76 2.8
Real estate - mortgage 3,154 67.3 1,796 58.5 2,562 62.5 2,374 71.9
Installment loans to
individuals 1,942 17.2 2,855 24.3 1,777 22.2 342 12.3
Unallocated 319 - 38 - 40 - 88 -
------ ------ ------ ------ ------ ------ ------ ------
$6,374 100.0% $5,789 100.0% $5,214 100.0% $3,600 100.0%
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
December 31,
---------------------
1992
---------------------
Amount Percent(1)
<S> <C> <C>
Commercial, financial &
agricultural $ 894 14.3%
Real estate - construction 183 3.1
Real estate - mortgage 1,597 71.2
Installment loans to
individuals 422 11.4
Unallocated 102 -
------ ------
$3,198 100.0%
====== ======
</TABLE>
(1) Represents percent of loans in each category to total loans.
<PAGE> 30
NON-PERFORMING ASSETS
Non-performing assets include non-performing loans (loans classified as
non-accrual or renegotiated and loans that are 90 days or more past due for
which interest is still accruing) and foreclosed real estate held for sale. It
is the policy of Cardinal banks to stop accruing interest income and place the
recognition of interest on a cash basis when any commercial, industrial or real
estate loan is past due as to principal or interest and the ultimate collection
of either is in doubt. Consumer loans are generally charged-off when any
payment of principal or interest, or both, is more than 120 days delinquent.
When a loan is placed on a non-accrual basis, any interest previously accrued
but not collected is reversed against current income. Cardinal's approach to
managing properties classified as foreclosed real estate is to promptly
liquidate such properties. At December 31, 1996, Cardinal had a total of
$18,000 in other real estate owned.
Non-performing assets at December 31, 1996 were $998,000 or .21% of net
loans and OREO which represented a $493,000 decrease over 1995. The decrease in
non-performing assets can be attributed primarily to the sale of Cardinal
Credit. Non-accrual loans comprised 62% (or $607,000) of non-performing loans
while the remaining 38% were accruing loans delinquent more than 90 days.
Approximately 52% ($508,000) of the non-performing loans are collateralized by
residential real estate. Reserves for any and all expected losses have been
properly allocated.
A summary of non-performing assets for the previous five years is
provided in the following table entitled "Non-performing Assets."
<PAGE> 31
Non-Performing Assets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Loans 90 days past due $ 373 $ 616 $ 175 $ 21 $ 37
Loans on non-accrual 607 782 686 461 565
------ ------ ------ ------ ------
Total non-performing loans 980 1,398 861 482 602
Other real estate owned 18 93 - 209 455
------ ------ ------ ------ ------
Total non-performing assets $ 998 $1,491 $ 861 $ 691 $1,057
====== ====== ====== ====== ======
Loans 90 days past due as
a percentage of net loans 0.08% 0.13% 0.05% 0.01% 0.01%
====== ====== ====== ====== ======
Total non-performing loans
as a percentage of net loans 0.21% 0.30% 0.23% 0.17% 0.23%
====== ====== ====== ====== ======
Total non-performing assets
as a percentage of net loans
and OREO 0.21% 0.32% 0.23% 0.24% 0.41%
====== ====== ====== ====== ======
Details of non-accrual loans
at December 31, 1996:
Principal $ 607
Interest that would have
been recorded under
original terms 90
Interest actually recorded 33
======
</TABLE>
<PAGE> 32
DEPOSITS AND SHORT-TERM BORROWINGS
Total deposits were $549.2 million at December 31, 1996, a decrease of
$21.5 million from year-end 1995. The decline primarily was the result of the
spin-off of SFNB. At December 31, 1995, SFNB had approximately $34.8 million in
deposits. The composition of deposits by major classification is provided in the
table below. In order to have meaningful comparison, the deposits at December
31, 1995 have been adjusted to eliminate the deposits at SFNB.
<TABLE>
<CAPTION>
December 31,
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Noninterest-bearing deposits $ 47,510 48,536
NOW accounts 86,398 78,084
Savings deposits 43,938 45,310
Money market deposits 70,406 62,590
Certificate of deposits < $100M 224,999 232,301
Certificate of deposits > $100M 75,997 69,101
-------- -------
Total $549,248 535,922
======== =======
</TABLE>
The maturity of time deposits of $100,000 or more issued by Cardinal at
December 31, 1996 are summarized in the following table:
Maturities of Time Deposits
(In thousands)
<TABLE>
<CAPTION>
Large ($100,000 or More)
Certificates of Deposit
December 31, 1996
<S> <C>
Three months or less $40,915
Over three through six months 14,811
Over six through twelve months 11,092
Over twelve months 9,179
-------
Total Maturities of Time
Deposits $75,997
=======
</TABLE>
<PAGE> 33
Borrowed funds consist of securities sold under agreements to
repurchase, Federal Home Loan Bank advances and long-term debt. Average
short-term borrowings comprised less than 2% of average total interest-bearing
liabilities for years 1996 and 1995. Long-term debt represents borrowings of the
parent company incurred in acquisitions and recapitalization of subsidiaries
(see Footnote 10 to the Consolidated Financial Statements.)
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
Liquidity represents an institution's ability to generate cash or otherwise
obtain funds at a reasonable price to satisfy contractual liabilities, meet
deposit/withdrawal requirements, fund operations and provide funds for
customers' credit needs. The adequacy of liquidity is measured by examining the
asset and liability components of Cardinal's consolidated balance sheet.
Liquidity is provided through the receipt of loan payments and conversion of
securities available-for-sale and money market assets into cash and accessing
diversified funding sources at reasonable rates, while providing for liquidity.
At the same time, management must also monitor the rate sensitivity of
interest-earning assets and interest-bearing liabilities to provide for
continued profitability in any interest rate environment.
Cardinal's liquid assets in the form of securities and money market
investments with maturity dates of one year or less were $54.0 million at the
end of 1996. This position reflects the monitoring of Cardinal's interest rate
sensitivity as demonstrated by the table set forth below. Management's goal is
to maintain a balanced interest rate sensitivity position (i.e., an interest
rate sensitivity ratio of approximately 1.00), although certain deviations may
occur at given points in time. Management believes that such a policy provides
the basis for achieving stability in net interest income regardless of interest
rate volatility. During 1995 and 1996, Cardinal utilized an interest rate swap
contract with the Federal Home Loan Bank as a means of controlling the potential
negative impact on net interest income from potential volatile increases in
interest rates. Cardinal was party to a notional amount of $752,000 of an
interest rate swap contract at December 31, 1996. The purpose of the interest
rate swap contract is to modify the interest rate risk on a fixed rate mortgage
loan. In this interest rate swap contract, Cardinal has agreed to pay a fixed
rate of interest to the counterparty, The Federal Home Loan Bank, on a fixed
amortizing notional amount, in exchange for which the counterparty agreed to pay
Cardinal a variable rate of interest on the notional amount.
Cardinal controls interest rate risk by managing the difference between
rate sensitive assets and liabilities through adjustments to the maturity and
pricing of loans and deposits. Interest rate risk occurs when an asset or a
liability matures, or its interest rate changes during a time period different
from that of the supporting asset or liability. The difference between assets
and liabilities subject to rate change over the same period is referred to as
the interest rate sensitivity gap. A positive gap occurs when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A negative gap occurs when the amount of interest rate sensitive
liabilities exceeds interest rate sensitive assets. During a period of rising
interest rates, a negative gap adversely affects net interest income while a
positive gap results in an increase in net interest income. During a period of
declining interest rates, a negative gap results in an increase in net interest
income while a positive gap adversely affects net interest
<PAGE> 34
income. Based on Cardinal's perception as to the trend of interest rates, the
Company may adjust the maturities and pricing of the Company's loan and deposit
products in order to achieve or maintain a level of interest rate risk which
Cardinal believes is acceptable. The level of interest rate risk which Cardinal
considers acceptable may change periodically in an effort to attain a desired
level of profits within the framework of the Company's loan and investment
policies.
Cardinal monitors its liquidity position to ensure that it is able to
meet its needs for funds. Financing activities have been a source of cash
primarily from increases in deposits. Borrowings through draws on Cardinal's
line of credit and FHLB lending programs provide Cardinal with access to funds
for its short-term and long-term financing needs. Cardinal's borrowing capacity
with the FHLB is based in part on the amount of qualifying collateral available,
specifically U.S. Treasury and agency securities, mortgage-backed securities and
residential mortgage loans. Unused borrowing capacity with the FHLB was
approximately $33.2 million at December 31, 1996. Cardinal had additional
borrowing capacity from a line of credit which had $13.7 million available for
borrowing as of December 31, 1996. The table below lists the principal sources
of cash available to Cardinal as of December 31, 1996.
Investing activities used funds on a net basis in 1996, 1995 and 1994
due primarily to the increase in loans. Operating activities have been a net
provider on a net basis due principally to net income on a cash basis.
Consolidated Sources of Liquidity
as of December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
SOURCE AMOUNT
------ --------
<S> <C>
Federal funds sold $ 11,647
Interest-bearing deposits in banks 1,400
Unpledged U.S. Treasury securities (Market value) 4,161
Other unpledged securities less than 2 years to maturity 44,678
Guaranteed portion of SBA loans (Market value) 40,025
FHLB borrowing capacity 33,204
Parent company unused line of credit 13,750
Federal funds purchased lines 4,000
--------
Total 152,865
</TABLE> ========
<PAGE> 35
The following table entitled "Maturity or Pricing of Cardinal Assets"
presents a detailed summary of Cardinal's interest rate sensitivity position at
December 31, 1996. Adjustments have not been made to reflect anticipated
prepayments or scheduled amortization of loans and mortgage-backed securities.
In general, the table reflects that cumulatively within the one-year period, a
rising interest rate environment would lower the net interest margin and,
conversely, a declining interest rate environment would raise the net interest
margin. NOW and savings accounts are included in the shortest term period
("within 0-90 days"). Cardinal considers these accounts as less interest rate
sensitive, thus they may not reprice as interest rates in general increase or
decrease.
This table does not necessarily indicate the impact of general interest
rate movements on Cardinal's net interest income because the repricing of
certain assets and liabilities is discretionary and is subject to competitive
and other pressures. As a result, assets and liabilities indicated as repricing
within the same period may in fact reprice at different times and at different
rate levels.
<PAGE> 36
Maturity or Pricing of Cardinal Assets
and Liabilities at December 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
After 90 Days After 1 Year Non-
Within But Within But Within After 5 Interest-
0-90 Days 1 Year 5 Years Years Bearing Total
--------- ------------- ------------ ------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned
income and deferred
loan fees $ 256,636 $ 49,571 $ 115,293 $ 45,716 $ - $467,216
Securities
Taxable 24,039 16,657 29,472 38,091 - 108,259
Tax exempt 50 196 477 3,221 - 3,944
--------- --------- --------- --------- -------- --------
Total securities 24,089 16,853 29,949 41,312 - 112,203
Interest-bearing deposits
in banks 1,400 - - - - 1,400
Federal funds sold 11,647 - - - - 11,647
--------- --------- --------- --------- -------- --------
Total interest-earning assets 293,772 66,424 145,242 87,028 - 592,466
--------- --------- --------- --------- -------- --------
Cash, premises and other
assets - - - - 42,969 42,969
Allowance for loan losses - - - - (6,374) (6,374)
--------- --------- --------- --------- -------- --------
Total assets 293,772 66,424 145,242 87,028 36,595 629,061
--------- --------- --------- --------- -------- --------
Interest-bearing deposits
Demand 156,804 - - - - 156,804
Savings 43,938 - - - - 43,938
Time deposits 124,374 115,307 61,300 15 - 300,996
--------- --------- --------- --------- -------- --------
Total interest-bearing deposits 325,116 115,307 61,300 15 - 501,738
Repurchase agreements 4,780 - - - - 4,780
Notes payable - 1,506 653 16,495 - 18,654
--------- --------- --------- --------- -------- --------
Total interest-bearing liabilities 329,896 116,813 61,953 16,510 - 525,172
--------- --------- --------- --------- -------- --------
Demand deposits - - - - 47,510 47,510
Other liabilities - - - - 6,082 6,082
Stockholders' equity - - - - 50,297 50,297
--------- --------- --------- --------- -------- --------
Total liabilities and equity 329,896 116,813 61,953 16,510 $103,889 $629,061
--------- --------- --------- --------- -------- --------
Interest rate swap 752 - - -
--------- --------- --------- ---------
Excess interest-earning
assets (liabilities) $ (35,372) $ (50,389) $ 83,289 $ 70,518
========= ========= ========= =========
Cumulative excess interest
earning assets (liabilities) $ (35,372) $ (85,761) $ (2,472) $ 68,046
========= ========= ========= =========
Cumulative interest rate
sensitivity ratio (1) 0.89 0.81 1.00 1.13
========= ========= ========= =========
</TABLE>
(1) Interest-earning assets divided by interest-bearing liabilities.
<PAGE> 37
CAPITAL RESOURCES
Total stockholders' equity was $50.3 million at year-end 1996, up 22.4%
from the $41.1 million recorded at the end of 1995. The increase was primarily
due to $5.8 million of common stock issuances, net income of $4.3 million for
1996. During 1996, Cardinal declared four quarterly dividends of $0.20 each, or
$0.80 for the year.
Risk-based capital guidelines take into consideration risk factors
associated with various categories of assets, both on and off the balance sheet.
Under these guidelines, capital strength is measured in two tiers. These tiers
are used in conjunction with risk-adjusted assets in determining the risk-based
capital ratios. Cardinal's Tier 1 capital, which consists of common equity less
net unrealized gain on securities available for sale and goodwill, amounted to
$44.4 million at December 31, 1996. Tier 2 capital, which includes supplemental
capital components such as qualifying allowances for loan losses, was $5.3
million. The sum of Tier 1 and Tier 2 capital comprise qualifying total capital
for Cardinal. The percentage ratios were approximately 10.47% and 11.72% for
Tier 1 and qualifying total capital, respectively, at December 31, 1996. The
guidelines require a minimum ratio of qualifying total capital to weighted risk
assets of 8%, of which at least 4% must be in the form of Tier 1 capital.
Cardinal currently exceeds these minimum ratios.
A minimum leverage ratio, based on Tier 1 capital as a percentage of total
assets is required. The minimum leverage ratio is 3%, however, most bank holding
companies are required to maintain a minimum of 4% or 5%. Cardinal's leverage
ratio at December 31, 1996 was 7.09%.
Following is a summary of Cardinal's actual capital and leverage ratio and
the required minimum ratio are as follows:
<TABLE>
<CAPTION>
Actual Required
<S> <C> <C>
Tier 1 risk-based 10.47% 4.00%
Total risk-based 11.72% 8.00%
Leverage 7.09% 3.00%
</TABLE>
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.
<PAGE> 38
CARDINAL BANCSHARES, INC.
400 EAST VINE STREET
SUITE 300
LEXINGTON, KENTUCKY 40507
<PAGE> 39
Independent Auditors' Report
The Board of Directors and Stockholders
Cardinal Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of Cardinal
Bancshares, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cardinal Bancshares,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, the Corporation
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 115, "Accounting For Certain Investments
in Debt and Equity Securities," in 1994.
/s/ KPMG Peat Marwick LLP
Lexington, Kentucky
February 17, 1997
<PAGE> 40
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Consoldiated Balance Sheets
December 31, 1996 and 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks (note 4) $ 21,407 22,172
Interest bearing deposits with banks 1,400 8,001
Federal funds sold 11,647 10,075
Securities available for sale (amortized cost of $111,325
and $137,126 in 1996 and 1995) (note 5) 112,203 139,372
Loans (notes 6, 11, 16 and 19) 470,067 481,136
Less:
Unearned income 2,851 13,035
Allowance for loan losses 6,374 5,789
--------- ---------
Net loans 460,842 462,312
--------- ---------
Premises and equipment (note 7) 8,019 12,300
Goodwill and other intangible assets, less accumulated
amortization of $3,295 and $2,789 in 1996 and 1995 5,360 5,866
Accrued interest receivable and other assets (notes 12 and 13) 8,183 8,391
--------- ---------
Total assets $ 629,061 668,489
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
2
<PAGE> 41
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - Continued
December 31, 1996 and 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1996 1995
------------------------------------ ---- ----
<S> <C> <C>
Deposits:
Non-interest bearing $ 47,510 50,155
Interest bearing (note 8) 501,738 520,579
------------- --------------
Total deposits 549,248 570,734
Securities sold under agreements to repurchase (note 9) 4,780 6,930
Notes payable (note 10) 1,878 25,643
Advances from the Federal Home Loan Bank (note 11) 16,776 18,167
Accrued interest payable and other liabilities (note 13) 6,082 5,865
------------- --------------
Total liabilities 578,764 627,339
------------- --------------
Stockholders' equity:
Common stock, without par value. Authorized 5,000,000 shares; issued and
outstanding 1,592,853 voting and 1,958 non-voting shares in 1996 and
1,474,087 voting and 1,969 non-voting shares
in 1995 34,759 28,918
Retained earnings (notes 2, 10 and 15) 15,587 11,593
Net unrealized gain on securities available for sale,
net of tax (note 5) 579 1,482
ESOP and MRP loan obligations (notes 10 and 13) (628) (843)
------------- --------------
Total stockholders' equity 50,297 41,150
Commitments and contingent liabilities (notes 17 and 19) ------------- --------------
Total liabilities and stockholders' equity $ 629,061 668,489
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 42
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
(In thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans, including fees $ 44,842 43,738 29,922
Securities:
Taxable 8,230 9,776 7,724
Tax-exempt 169 134 218
Federal funds sold 827 832 419
Deposits with banks 267 389 228
-------------- ------------- --------------
Total interest income 54,335 54,869 38,511
-------------- ------------- --------------
Interest expense:
Deposits 23,806 23,623 13,777
Notes payable 835 1,993 605
Advances from the Federal Home Loan Bank 1,219 1,257 948
Securities sold under agreements to repurchase 251 215 88
-------------- ------------- --------------
Total interest expense 26,111 27,088 15,418
-------------- ------------- --------------
Net interest income 28,224 27,781 23,093
Provision for loan losses (note 6) 3,480 1,994 1,791
-------------- ------------- --------------
Net interest income after provision for
loan losses 24,744 25,787 21,302
-------------- ------------- --------------
Non-interest income:
Securities gains (losses), net (note 5) 49 308 (1,563)
Gain on sales of loans, net 8,563 372 257
Service charges on deposit accounts 1,256 1,218 1,148
Insurance commissions 400 577 619
Other 1,367 2,148 813
-------------- ------------- --------------
Total non-interest income 11,635 4,623 1,274
-------------- ------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 43
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations - Continued
Years ended December 31, 1996, 1995 and 1994
(In thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Non-interest expenses:
<S> <C> <C> <C>
Salaries and employee benefits (notes 13 and 14) 13,700 13,782 10,660
Net occupancy expense (notes 16 and 17) 1,632 1,819 1,433
Furniture and equipment expense 2,100 1,957 1,357
Amortization of goodwill and other
intangible assets 506 509 395
Other (note 18) 10,062 10,581 9,484
-------------- ------------- --------------
Total non-interest expenses 28,000 28,648 23,329
-------------- ------------- --------------
Income (loss) before income taxes 8,379 1,762 (753)
Income tax expense (benefit) (note 12) 4,048 898 (215)
-------------- ------------- --------------
Net income (loss) $ 4,331 864 (538)
============== ============= ==============
Net income (loss) per share:
Primary $ 2.58 .56 (.36)
============== ============ =============
Fully diluted $ 2.57 .55 (.36)
============== ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 44
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Common Stock
----------------------------------
Number of Shares
------------------------- Retained
Voting Non-Voting Amount Earnings
--------- ---------- -------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 1,413,755 1,436 $27,642 12,832
Issuance of common stock 14,502 - 404 -
Issuance of non-voting common stock - 272 - -
Repurchase of common stock (43,533) - (1,212) -
Net loss - - - (538)
Cash dividends declared, $0.80 per share - - - (1,109)
Repayment of ESOP and MRP loan obligations
(notes 10 and 13) - - - -
Net unrealized losses on securities available for sale (note 5) - - - -
--------- ------- -------- -------
Balance, December 31, 1994 1,384,724 1,708 26,834 11,185
Issuance of common stock 89,363 - 2,084 -
Issuance of non-voting common stock - - - -
Repurchase of non-voting common stock - 1,800 - -
Net income - (1,539) - 864
Income tax benefit related to exercise of stock options (note 12) - - - 684
Cash dividends declared, $0.80 per share - - - (1,140)
Repayment of ESOP and MRP loan obligations
(notes 10 and 13) - - - -
Net unrealized gain on securities transferred from
held-to-maturity to available for sale (note 5) - - - -
Increase in net unrealized gain on securities available
for sale (note 5) - - - -
--------- ------- -------- -------
Balance, December 31, 1995 1,474,087 1,969 28,918 11,593
Issuance of common stock 118,766 - 5,841 -
Issuance of non-voting common stock - 240 - -
Repurchase of non-voting common stock - (251) - -
Net income - - - 4,331
Income tax benefit related to exercise of stock options (note 12) - - - 275
Cash dividends declared, $0.80 per share - - - (1,250)
Spin-off of subsidiary (note 2) - - - 638
Repayment of ESOP and MRP loan obligations
(notes 10 and 13) - - - -
Decrease in net unrealized gain on securities available
for sale (note 5) - - - -
--------- ------- -------- -------
Balance, December 31, 1996 1,592,853 1,958 $34,759 15,587
========= ======= ======== =======
</TABLE>
<TABLE>
Net Unrealized
Gain (Loss) ESOP and
on Securities MRP Loan
Available for Sale Obligations Total
------------------ ----------- -----
<S> <C> <C> <C>
Balance, December 31, 1993 - (1,273) 39,201
Issuance of common stock - - 404
Issuance of non-voting common stock - - -
Repurchase of common stock - - (1,212)
Net loss - - (538)
Cash dividends declared, $0.80 per share - - (1,109)
Repayment of ESOP and MRP loan obligations
(notes 10 and 13) - 215 215
Net unrealized losses on securities available for sale (note 5) (679) - (679)
------------- -------------- ---------
Balance, December 31, 1994 (679) (1,058) 36,282
Issuance of common stock - - 2,084
Issuance of non-voting common stock - - -
Repurchase of non-voting common stock - - -
Net income - - 864
Income tax benefit related to exercise of stock options (note 12) - - 684
Cash dividends declared, $0.80 per share - - (1,140)
Repayment of ESOP and MRP loan obligations
(notes 10 and 13) - 215 215
Net unrealized gain on securities transferred from
held-to-maturity to available for sale (note 5) 723 - 723
Increase in net unrealized gain on securities available
for sale (note 5) 1,438 - 1,438
------ -------- --------
Balance, December 31, 1995 1,482 (843) 41,150
Issuance of common stock - - 5,841
Issuance of non-voting common stock - - -
Repurchase of non-voting common stock - - -
Net income - - 4,331
Income tax benefit related to exercise of stock options (note 12) - - 275
Cash dividends declared, $0.80 per share - - (1,250)
Spin-off of subsidiary (note 2) - - 638
Repayment of ESOP and MRP loan obligations
(notes 10 and 13) - 215 215
Decrease in net unrealized gain on securities available
for sale (note 5) (903) - (903)
------ -------- --------
Balance, December 31, 1996 579 (628) 50,297
====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 45
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,331 864 (538)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Provision for loan losses 3,480 1,994 1,791
Provision for losses on other real estate - - 25
Depreciation, amortization and accretion, net 2,457 843 1,160
Noncash compensation expense 2,059 340 400
Deferred income tax expense (benefit) (651) 252 (793)
(Gain) loss on sales of securities available
for sale (49) (308) 1,563
Gain on sales of loans (8,563) (372) (257)
Gain on sales of fixed assets, net (4) (49) (2)
(Gain) loss on sales of other real estate (4) - 6
Loss on termination of business of subsidiary 427 - -
Originations of loans held for sale (23,824) (12,936) (5,267)
Proceeds from sales of loans held for sale 23,887 13,099 5,358
(Increase) decrease in accrued interest receivable
and other assets 630 (2,519) 164
(Decrease) increase in accrued interest payable
and other liabilities (950) 941 (136)
-------------- ------------- --------------
Net cash provided by operating
activities 3,226 2,149 3,474
-------------- ------------- --------------
Cash flows from investing activities:
Decrease (increase) in interest-bearing deposits
with banks 2,944 (4,348) 2,732
(Increase) decrease in federal funds sold (1,572) (1,715) 1,653
Purchases of securities:
Available for sale (82,250) (103,293) (115,869)
Held to maturity - (2,989) (50)
Proceeds from maturities of securities:
Available for sale 43,688 63,043 64,301
Held to maturity - 3,797 10,984
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
7
<PAGE> 46
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows - Continued
Years ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Proceeds from sales of securities available for sale 50,264 39,856 49,858
Net increase in loans (47,089) (91,402) (84,966)
Purchases of premises and equipment (2,821) (4,919) (4,383)
Proceeds from sales of premises and equipment 107 347 35
Proceeds from sale of loans 33,551 - -
Spin-off of subsidiary (764) - -
Acquisition of intangible assets - - (1,500)
Proceeds from sales of other real estate owned 67 35 306
-------------- ------------- --------------
Net cash used in investing activities (3,875) (101,588) (76,899)
-------------- ------------- --------------
Cash flows from financing activities:
Net increase in deposits 21,179 94,993 43,766
Net (decrease) increase in securities sold under
agreements to repurchase (2,150) 2,748 2,212
Net increase in line of credit notes 6,550 6,974 15,401
Repayment of notes payable (30,100) (104) (84)
Proceeds from advances from Federal Home
Loan Bank 3,961 12,712 59,755
Repayment of advances from Federal Home
Loan Bank (4,122) (14,521) (40,829)
Proceeds from issuance of common stock 5,841 2,084 404
Repurchase of common stock - - (1,212)
Dividends paid (1,275) (1,122) (1,116)
-------------- ------------- --------------
Net cash (used in) provided by
financing activities (116) 103,764 78,297
Net (decrease) increase in cash and cash equivalents (765) 4,325 4,872
Cash and cash equivalents at beginning of period 22,172 17,847 12,975
-------------- ------------- --------------
Cash and cash equivalents at end of period $ 21,407 22,172 17,847
============== ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 47
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
Cardinal Bancshares, Inc. (the Corporation) is a bank and thrift
holding company whose subsidiaries include: The Vine Street
Trust Company (Vine Street) and its principal subsidiary, VST
Financial Services; HNB Bank, N.A. (HNB), Alliance Bank, FSB
(formerly Mutual Federal Savings Bank) (Alliance), First &
Peoples Bank (First and Peoples), The Jefferson Banking Company
(Jefferson) and Cardinal Data Services Corporation (Cardinal
Data). The Corporation and its subsidiaries are primarily
engaged in commercial and personal banking services and the
consumer finance business. Operations are conducted
predominantly in central and southeastern Kentucky.
During 1996, Security First Network Bank (Security First) was
spun off and substantially all of the assets of Cardinal Credit
Corporation (Cardinal Credit) were sold (note 2). Accordingly,
the accompanying consolidated statements of operations include
the operations of Security First and Cardinal Credit through
their respective dates of disposition.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been
reclassified to conform to 1996 presentation.
(Continued)
9
<PAGE> 48
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies - Continued
(c) Securities
Effective January 1, 1994, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Debt
securities are classified as securities held to maturity and
are carried at amortized cost if management has the positive
intent and ability to hold the securities to maturity. Debt
securities to be held for indefinite periods of time and not
intended to be held to maturity, and equity securities, are
classified as securities available for sale and are carried at
fair value with unrealized gains and losses, net of tax
effects, reported as a separate component of stockholders'
equity. Securities available for sale include securities that
management intends to use as part of its asset/liability
management strategy and that may be sold in response to or in
anticipation of changes in interest rates or based on other
factors. Amortization of premiums and accretion of discounts
are computed on the interest method. The specific
identification method is used in determining gains and losses
on the sale of securities.
(d) Loans and Allowance for Loan Losses
Loans are stated at the unpaid principal balance. Interest income
on loans is recorded on the accrual basis except for those
loans in a nonaccrual income status. Loans, including loans
impaired under SFAS No. 114, are placed in a nonaccrual income
status when the loan has been delinquent for ninety days, or,
in the opinion of management, the prospects for recovering both
principal and accrued interest are considered doubtful.
Interest received on impaired and nonaccrual loans is either
applied to principal or reported as interest income according
to management's judgment as to the collectibility of principal.
Unearned income, arising principally from consumer installment
loans, is reflected as a reduction of loans and recognized as
income over the term of the loan by a method that approximates
the interest method.
(Continued)
10
<PAGE> 49
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies - Continued
(d) Loans and Allowance for Loan Losses - Continued
The allowance for loan losses is maintained at a level adequate to
absorb probable losses. Management determines the adequacy of
the allowance based upon reviews of individual credits, recent
loss experience, current economic conditions, the risk
characteristics of the various categories of loans, and such
other factors as, in management's judgment, deserve current
recognition in estimating loan losses. The allowance for loan
losses is increased by the provision for loan losses and
reduced by net charge-offs.
Effective January 1, 1995, the Corporation adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended
by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures" . SFAS No. 114
requires that impaired loans be measured based on the present
value of expected future cash flows, the loan's market value,
or for collateral dependent loans, the market value of the
collateral. The Corporation does not apply SFAS 114 to loans
which are part of a large group of smaller-balance homogeneous
loans, such as residential mortgage and consumer loans. Such
loans are evaluated collectively for impairment. Adoption of
this new standard did not have a material impact on the
Corporation's financial position or results of operations.
(e) Premises and Equipment
Premises and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation and amortization
are computed by straight-line and accelerated methods over the
estimated useful lives of the assets.
The Corporation capitalized external costs of computer software
incurred by Security First prior to its spin-off from the time
technological feasibility of the software is established until
the software was ready for use. Research and development costs
related to software were expensed as incurred. Such costs were
$0, $142,500 and $0 for 1996, 1995 and 1994, respectively.
Capitalized computer software costs were amortized using the
straight-line method over a period of three years.
The carrying value of premises and equipment is reviewed by the
Corporation and impairments are recognized when the expected
undiscounted future cash flows from such assets are less than
their carrying value.
(Continued)
11
<PAGE> 50
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies - Continued
(f) Goodwill and Other Intangible Assets
The excess of cost, including acquisition costs, over fair value
of net assets acquired in purchase business combinations
(goodwill) of $4,197,000 and $4,553,000 as of December 31, 1996
and 1995, respectively, net of accumulated amortization, is
being amortized over a twenty-year period on a straight-line
basis. Other intangible assets consist of a purchased bank
charter of $1,163,000 and $1,313,000 as of December 31,
1996 and 1995, respectively, which is being amortized over
a ten-year period on a straight-line basis. The Corporation
assesses recoverability of goodwill and other intangible
assets by comparing the carrying amount with the projected
undiscounted future net cash flows. Based on this calculation,
the Corporation determined that there was no impairment of
these intangible assets at December 31, 1996.
(g) Other Assets
Included in other assets is real estate acquired in settlement of
loans which is carried at the lower of cost or fair value minus
estimated selling costs. Any write-downs at the date of
acquisition are charged to the allowance for loan losses.
Expenses incurred in maintaining assets, write-downs to reflect
subsequent declines in value, and realized gains or losses are
reflected in income.
(h) Income Taxes
The Corporation uses the asset and liability method of accounting
for income taxes. Accordingly, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
tax bases measured by the provisions of enacted laws and tax
rates.
(i) Net Income Per Share
Net income per share is based on the weighted average number of
common shares outstanding during the year, adjusted for the
number of shares that would be issued assuming the exercise of
stock options (1,679,478, 1,547,203 and 1,499,141 for 1996,
1995 and 1994, respectively, primary and 1,682,461, 1,560,278
and 1,499,141 for 1996, 1995 and 1994, respectively, fully
diluted).
(Continued)
12
<PAGE> 51
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Spin-Off of Security First and Asset Dispositions
The spin-off of Security First from the Corporation was effected pursuant
to the Cardinal Bancshares, Inc. Amended and Restated Plan of
Distribution. Under the Plan of Distribution, following a payment of a
$3.0 million cash dividend from Security First, the Corporation
effected the distribution by delivering pro rata to each of its
stockholders of record on the record date for the distribution all of
the then outstanding shares of the Security First's common stock
(2,398,908 shares). As a result of the distribution, the Corporation
no longer owns any interest in Security First.
Summary financial data related to Security First as of May 23, 1996, the
date of the spin-off, follows:
<TABLE>
<CAPTION>
In thousands
<S> <C>
Cash and due from banks $ 764
Interest bearing deposits in banks 3,657
Securities available for sale 14,216
Loans, net 20,637
Premises and equipment 3,959
Other assets 870
Deposits 42,644
Advances from FHLB 1,230
Other liabilities 867
Stockholders' equity (638)
==========
</TABLE>
During the period from January 1, 1996 to May 23, 1996, and for the years
ended December 31, 1995 and 1994, Security First's net income (loss)
before income taxes was ($1,482,000), ($1,983,000) and $459,000,
respectively.
On May 14, 1996, Cardinal completed the sale of substantially all of the
assets of Cardinal Credit to Norwest Financial Kentucky, Inc. Cardinal
recorded a gain of approximately $8.2 million in connection with such
sale. 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
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.
(Continued)
13
<PAGE> 52
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Statements of Cash Flows
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand and non-interest bearing balances due
from banks.
The following summarizes supplemental cash flow information for 1995,
1994, and 1993:
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
------------ ---- ---- ----
<S> <C> <C> <C>
Cash paid for income taxes $ 4,183 520 362
Cash paid for interest 26,119 26,266 15,224
======== ========== ==========
Noncash financing and investing activities:
Loans transferred to other assets $ 41 128 129
======== ========== ==========
</TABLE>
(4) Restriction on Cash and Due from Banks
Bank regulatory authorities require the Corporation's banking
subsidiaries to maintain average reserve balances relating to customer
deposits. At December 31, 1996, the amount of those reserve balances
was approximately $3,505,000.
(5) Securities
The amortized cost and market value of securities available for sale and
gross unrealized gains and losses at December 31, 1996 and 1995
follows:
<TABLE>
<CAPTION>
1996
-------------------------------------------------
Amortized Unrealized Market
In thousands Cost Gains Losses Value
------------ ---------- -------- --------- --------
<S> <C> <C> <C> <C>
U.S. Treasury $ 23,721 453 - 24,174
Federal agencies 38,155 99 (40) 38,214
Mortgage-backed securities 41,021 487 (167) 41,341
States and political subdivisions 3,898 51 (5) 3,944
Equity and other securities 4,530 - - 4,530
---------- -------- --------- ---------
$ 111,325 1,090 (212) 112,203
========== ======== ========= =========
</TABLE>
(Continued)
14
<PAGE> 53
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Securities - Continued
<TABLE>
<CAPTION>
1995
------------------------------------------------
Amortized Unrealized Market
In thousands Cost Gains Losses Value
------------ ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury $ 43,931 1,078 - 45,009
Federal agencies 43,491 541 (6) 44,026
Mortgage-backed securities 42,004 719 (189) 42,534
States and political subdivisions 2,868 89 - 2,957
Equity and other securities 4,832 14 - 4,846
---------- -------- --------- ---------
$ 137,126 2,441 (195) 139,372
========== ======== ========= =========
</TABLE>
Effective December 1, 1995, a one-time reassessment of the Corporation's
securities held to maturity was undertaken, as permitted by the
Financial Accounting Standards Board's special report related to the
implementation of FASB Statement No. 115. In connection with that
reassessment, the Corporation transferred securities held to maturity
with an amortized cost of $29,166,000 to securities available for sale
in order to permit more responsiveness to changes in interest rates and
other balance sheet management factors.
A summary of debt securities available for sale at December 31, 1996
based on contractual maturities is presented below. Expected maturities
may differ from contractual maturities because the issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Market
In thousands Cost Value
------------ ---- -----
<S> <C> <C>
Due within one year $ 40,856 40,942
Due after one year through five years 29,544 29,949
Due after five years through ten years 13,588 13,533
Due after ten years 22,807 23,249
--------- -----------
$ 106,795 107,673
========= ===========
</TABLE>
(Continued)
15
<PAGE> 54
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Securities - Continued
Securities with a par value of $37,318,000 and $37,295,000 at December
31, 1996 and 1995, respectively, were pledged to secure public funds,
repurchase agreements, and for other purposes.
Gross gains of approximately $126,000, $411,000 and $10,000 and gross
losses of $77,000, $103,000 and $1,573,000, were realized on sales of
securities for 1996, 1995 and 1994, respectively. Gross losses in 1994
include approximately $499,000 attributable to other than temporary
declines in market value of securities available for sale.
(6) Loans
The composition of loans at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
In thousands 1996 1995
------------ ---- ----
<S> <C> <C>
Commercial and industrial $ 57,325 75,556
Real estate - mortgage 316,119 281,661
Real estate - construction 15,677 7,424
Consumer 80,946 116,495
---------- ---------
$ 470,067 481,136
========== =========
</TABLE>
Most of the Corporation's credit exposure is with customers located
within the state of Kentucky. A majority of the loans are secured by
residential or commercial real estate or other personal property. The
loans are expected to be repaid from cash flow or proceeds from the
sale of selected assets of the borrowers.
As of December 31, 1996 and 1995, the Corporation had the following
balances related to impaired loans under SFAS No. 114:
<TABLE>
<CAPTION>
In thousands 1996 1995
------------ ---- ----
<S> <C> <C>
Recorded investment in impaired loans $ 509 717
Impaired loans with SFAS No. 114 allowance 509 675
Amount of SFAS No. 114 allowance 161 226
Impaired loans without SFAS No. 114 allowance - 42
Average recorded investment in impaired loans 519 701
Interest income recognized on impaired loans 43 64
</TABLE>
(Continued)
16
<PAGE> 55
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Loans - Continued
The principal balance of nonaccrual and restructured loans at December
31, 1994 was approximately $686,000. The interest that would have been
recorded if all such loans were on a current basis in accordance with
their original terms was approximately $75,000. The amount of interest
income that was recorded for such loans was approximately $46,000.
The amount of loans serviced for the benefit of others at December 31,
1996 and 1995 was approximately $61,101,000 and $57,602,000,
respectively.
An analysis of the changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
------------ ---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $ 5,789 5,214 3,600
Provision for loan losses 3,480 1,994 1,791
---------- ---------- ----------
9,269 7,208 5,391
---------- ---------- ----------
Loans charged-off 2,033 1,711 414
Less recoveries 472 292 237
---------- ---------- ----------
Net loans charged-off 1,561 1,419 177
---------- ---------- ----------
Adjustment for sale of Cardinal Credit
and spin-off of Security First (1,334) - -
---------- ---------- ----------
Balance at December 31 $ 6,374 5,789 5,214
========== ========== ==========
</TABLE>
(7) Premises and Equipment
A summary of premises and equipment at December 31, 1996 and 1995
follows:
<TABLE>
<CAPTION>
In thousands 1996 1995
------------ ---- ----
<S> <C> <C>
Land $ 1,340 1,279
Buildings and improvements 7,366 8,158
Computer software costs - 2,140
Furniture and equipment 7,619 8,288
--------- ----------
16,325 19,865
Less accumulated depreciation and amortization 8,306 7,565
--------- ----------
$ 8,019 12,300
========= ==========
</TABLE>
(Continued)
17
<PAGE> 56
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Interest Bearing Deposits
The composition of interest bearing deposits at December 31, 1996 and
1995 follows:
<TABLE>
<CAPTION>
In thousands 1996 1995
------------ ---- ----
<S> <C> <C>
Demand $ 156,804 144,578
Savings 43,938 51,733
Time deposits $100,000 and over 75,997 70,750
Other time deposits 224,999 253,518
--------- ----------
$ 501,738 520,579
========= ==========
</TABLE>
At December 31, 1996, the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 239,681
1998 36,469
1999 15,078
2000 8,421
2001 and thereafter 1,347
---------
$ 300,996
=========
</TABLE>
(9) Repurchase Agreements
Securities sold under agreements to repurchase generally mature within
one to four days from the transaction date. Information concerning
securities sold under agreements to repurchase is summarized as
follows:
<TABLE>
<CAPTION>
In thousands 1996 1995
------------ ---- ----
<S> <C> <C>
Average balance during the year $ 6,499,000 5,339,000
Average interest rate during the year 3.86% 4.03%
Maximum month-end balance during the year $ 8,835,000 6,930,000
</TABLE>
(Continued)
18
<PAGE> 57
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Notes Payable
Notes payable consist of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
In thousands
<S> <C> <C>
Line of credit payable to a bank, due June 30, 1997. Interest is
payable quarterly at the prime rate minus .5% as of December 31, 1996
and at the prime rate as of December 31, 1995 (7.75% at December 31, $ 1,250 10,000
1996 and 8.5% at December 31, 1995).
Revolving line of credit payable to banks, due May 31,
1996. Interest is payable monthly at the prime rate. - 14,800
Cardinal Bancshares, Inc. Affiliates Employee Stock Ownership Plan
(ESOP) note payable to a bank in annual principal installments of
$26,015 through December 1999. Interest is payable quarterly at
the prime rate. 78 104
Cardinal Bancshares, Inc. Affiliates Employee Stock Ownership Plan
(ESOP) note payable to a bank in annual principal installments of
$94,875 through December 2000. Interest is payable quarterly at
the prime rate. 380 474
First Federal Management Retention Plan (MRP) note payable to a bank
in annual principal installments of $18,211 through December 1997.
Interest is payable quarterly at the prime rate. 18 37
Mutual Federal Management Retention Plan (MRP) note payable to a bank
in annual principal installments of $75,900 through December 1998.
Interest is payable quarterly at the prime rate. 152 228
---------- ----------
$ 1,878 25,643
========== ==========
</TABLE>
(Continued)
19
<PAGE> 58
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Notes Payable - Continued
The Corporation has obtained a $15,000,000 amended and restated line of
credit agreement with a bank which expires June 30, 1997, with
optional one year extensions at the discretion of the lender.
Borrowings are secured by the issued and outstanding common stock of
Alliance, HNB, Vine Street, Jefferson and First and Peoples. The line
of credit agreement contains provisions requiring the maintenance of
certain levels of capital funds, as defined, and allowances for loan
losses of the bank subsidiaries, as well as restrictions on dividend
payments applicable to both the Corporation and its subsidiaries. The
Corporation has obtained a waiver relative to noncompliance with
certain of the provisions at December 31, 1996. The Corporation had
retained earnings of $3,248,000 available for dividends under this
agreement at December 31, 1996.
During 1994, Cardinal Credit entered into a $25,000,000 revolving credit
agreement with four banks which had a balance of $14,800,000 at
December 31, 1995. The note was repaid in 1996 from the proceeds from
the sale of Cardinal Credit's assets (note 2).
The ESOP and MRP loans were for the purpose of purchasing shares of the
Corporation's common stock by the plans in connection with the
acquisitions of Alliance and Security First, and are guaranteed by the
Corporation. The loan obligations of the ESOPs and MRPs are recorded
in the Corporation's consolidated balance sheet with a corresponding
amount recorded as a reduction of stockholders' equity. Both the loan
obligations and the reduction of stockholders' equity will be reduced
by the amount of any loan repayments made by the ESOPs and MRPs.
Aggregate principal repayment requirements of notes payable for the years
ended December 31 are $1,465,000, $197,000, $121,000, $95,000, $0 for
1997 through 2001, respectively.
(Continued)
20
<PAGE> 59
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Advances from the Federal Home Loan Bank
Certain of the Corporation's subsidiaries are members of the Federal Home
Loan Bank of Cincinnati (FHLB) and, accordingly, are eligible to borrow
from the FHLB. The subsidiaries pledge certain securities and first
mortgage loans as collateral for these advances. The aggregate balance
of the securities and mortgages must equal 150% of the advances
outstanding. Certain information with respect to outstanding advances
from FHLB at December 31, 1996 and 1995 is summarized below.
<TABLE>
<CAPTION>
Weighted
Average
In thousands Amount Interest Rate %
------------ ------ ---------------
Year of Final Maturity
----------------------
<S> <C> <C>
1997 $ 41 7.60%
1998 49 4.67
1999 178 5.51
2000 13 8.15
2001 - -
2002 thru 2006 9,185 6.39
2007 thru 2011 7,162 7.93
2012 148 8.00
--------- --------
$ 16,776 7.05%
========= ========
</TABLE>
Scheduled principal repayments on advances from the FHLB are $270,000,
$243,000, $173,000, $155,000, $165,000 for 1997 through 2001,
respectively.
(Continued)
21
<PAGE> 60
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Income Taxes
Income taxes consist of the following:
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
------------ ---- ---- ----
<S> <C> <C> <C>
Applicable to operations:
Current $ 4,699 646 578
Deferred (651) 252 (793)
------------ ----- ----
4,048 898 (215)
Charged (credited) to components of stockholders' equity:
Net unrealized securities gains (losses) 465 1,112 (349)
Stock options exercised (275) (684) -
------------ ----- ----
Total income taxes $ 4,238 1,326 (564)
============ ===== ====
</TABLE>
Income tax expense (benefit) differed from the amounts computed by
applying the U.S. Federal income tax rate of 34% to pretax income
(loss) before cumulative effect of change in accounting principle as a
result of the following:
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
------------ ---- ---- ----
<S> <C> <C> <C>
Federal income tax rate 34.0% 34.0% (34.0)%
Increase (reduction) in income tax rate resulting from:
Tax exempt interest income (.8) (3.4) (13.4)
Amortization of goodwill 2.1 9.3 18.1
Dividend in excess of tax basis of Security First 9.4 - -
Recapture of Security First bad debt reserve - 9.3 -
State and local income taxes, net of federal
income tax benefit 3.7 - -
Other (.1) 1.8 0.7
------- -------- -------
48.3% 51.0% (28.6)%
======= ======== =======
</TABLE>
(Continued)
22
<PAGE> 61
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Income Taxes - Continued
During 1996, legislation was enacted which eliminated the percentage of
taxable income bad debt deduction for thrift institutions for tax
years beginning after December 31, 1995. This new legislation also
requires a thrift to generally recapture the excess of its current tax
reserves in excess of its 1987 base year reserves. As Alliance has
previously provided deferred taxes on this amount, no financial
statement tax expense should result from this new legislation. For
1996 and subsequent years, Alliance will utilize the experience method
in computing their tax bad debt deduction.
Bad debt deductions for income tax purposes are included in taxable
income of later years if the bad debt reserves are used subsequently
for purposes other than to absorb bad debt losses. Retained earnings
at December 31, 1996 and 1995, include approximately $650,000 and
$505,000, respectively, representing such bad debt deductions for tax
purposes in excess of the bad debt deduction for financial statement
purposes for which no deferred income taxes have been provided.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
In thousands 1996 1995
------------ -------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 1,572 1,014
Deferred compensation 1,058 575
Deferred income 95 324
Alternative minimum tax credit carryforward - 172
Deferred expenses - 33
-------- -------
Total gross deferred tax asset 2,725 2,118
-------- -------
Deferred tax liabilities:
Fair value adjustments to assets acquired in purchase
business combinations 298 306
Net unrealized gains on securities available for sale 298 763
FHLB stock dividends 444 474
Depreciation 153 160
Other 158 157
-------- -------
Total gross deferred tax liabilities 1,351 1,860
-------- -------
Net deferred tax asset $ 1,374 258
========= =======
</TABLE>
(Continued)
23
<PAGE> 62
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Income Taxes - Continued
Management believes it is more likely than not that the reversal of
future taxable amounts and results of future operations will generate
sufficient taxable income to realize the deferred tax asset recorded
as of December 31, 1996 and 1995.
(13) Benefit Plans
The Corporation has a defined benefit pension plan which covers
substantially all employees who have met certain requirements as to
age and length of service. The plan's benefit formula generally bases
payments to retired employees upon their length of service and a
percentage of their highest consecutive five-year average annual base
compensation. The Corporation contributes annually the maximum
tax-deductible contribution.
The following table sets forth the Plan's funded status and the
components of net pension income (expense):
<TABLE>
<CAPTION>
In thousands 1996 1995
------------ ---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $3,302 and $2,593, respectively $ 3,369 2,656
========== =========
Projected benefit obligation for service rendered to
date $ (4,499) (3,530)
Plan assets at fair value 3,845 3,086
---------- ---------
Funded status (654) (444)
Unrecognized prior service cost 775 969
Unrecognized net loss from past experience different
from that assumed 481 104
Unrecognized net asset value at January 1, 1989 being
recognized over 15 years (169) (193)
---------- ---------
Prepaid pension plan cost $ 433 436
========== =========
</TABLE>
(Continued)
24
<PAGE> 63
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Benefit Plans - Continued
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net pension plan expense (income) includes the following components:
Service cost-benefits earned during the period $ 281 159 127
Interest cost on projected benefit obligation 251 224 207
Actual (return) loss on plan assets (515) (741) (12)
Net amortization and deferral 327 638 (53)
------- ------- ------
Net pension plan expense $ 344 280 269
======= ======= ======
</TABLE>
The following table sets forth the actuarial assumptions:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate 7.5 7.25 8.25
Rate of increase in future compensation levels 5.0 5.0 5.0
Long-term rate of return on assets 8.0 8.0 8.0
</TABLE>
Non-qualified deferred compensation agreements cover certain officers and
employees. Expenses of these agreements amounted to $11,000, $68,000
and $99,000 for 1996, 1995 and 1994, respectively. Accrued liabilities
of $149,000 and $640,000 at December 31, 1996 and 1995, respectively,
are included in accrued interest payable and other liabilities.
The Corporation sponsors and defined benefit 401(k) plan that covers
substantially all employees. Contributions to the plan are made to
match employee contributions up to 4% of the employees salary.
Expenses of the plan were $162,000, $267,000 and $47,000 for 1996,
1995 and 1994, respectively.
The Corporation established the leveraged ESOPs and MRPs in connection
with the acquisitions of Security First and Alliance. The Corporation
makes annual contributions to the ESOPs and MRPs equal to their
related debt service less dividends received by the plans. As the
related debt is repaid, shares are released and allocated to
employees. Debt of the ESOPs and MRPs is recorded as debt (see note
10) and the shares pledged as collateral are reported as a reduction
of stockholders' equity in the consolidated balance sheet. As shares
are released from collateral, the Corporation reports compensation
expense. Compensation expense related to the ESOP and MRP plans was
approximately $283,000, $308,000 and $305,000 in 1996, 1995 and 1994,
respectively.
(Continued)
25
<PAGE> 64
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Stock Compensation Plans
As permitted by SFAS No. 123, the Corporation applies APB Opinion No. 25
and related interpretations in accounting for its stock option
plans. Accordingly, except for the 1992 Cardinal Bancshares Limited
Stock Option Plan (the 1992 Plan), no compensation cost has been
recognized in the accompanying consolidated statements of operations.
Options granted under the 1992 Plan were at an option price of $5 per
share. The market value of the Corporation's common stock at the grant
date was $17.50 per share. Furthermore, during 1996, the 1992 Plan and
the 1989 and 1994 Restricted Stock Option Plans were amended to
accelerate the vesting provisions related to 66,666 and 4,000 and
3,500 options, respectively, requiring remeasurement of compensation
cost at the market value of the Corporation's common stock at the date
of the amendment, or $41.75 per share. Compensation cost related to
these plans amounted to $1,969,000, $250,000 and $250,000 in 1996,
1995, and 1994, respectively.
A summary of the status of the Corporation's stock option plans as of
December 31 1996, 1995, and 1994 and the changes therein for the years
then ended is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 193,565 $ 15.29 232,569 $ 16.10 189,840 $ 12.55
Granted 35,850 39.79 31,750 31.94 49,164 29.95
Exercised (19,928) 22.45 (33,119) 19.99 (390) 17.50
Forfeited (11,935) 30.52 (37,635) 29.89 (6,045) 19.25
------- ------- -------
Outstanding at end of year 197,552 18.09 193,565 15.29 232,569 16.10
======= ======= =======
Options exercisable at
year-end 13,511 22.11 5,632 22.12 28,533 19.42
======= ===== ======= ===== ======= =====
Weighted-average fair
value of options granted
during the year $ 21.35 $ 15.82
======= =======
</TABLE>
(Continued)
26
<PAGE> 65
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Stock Compensation Plans - Continued
Had compensation cost for options granted during 1995 and 1996 been
determined consistent with the fair value methodology of SFAS No. 123,
the Corporation's net income and earnings per share would have been
reduced to the pro forma amounts presented below:
<TABLE>
<CAPTION>
(in thousands, except per share data) 1996 1995
---- ----
<S> <C> <C> <C>
Net income As reported $ 4,331 864
Pro forma 4,251 829
Primary earnings per share As reported 2.58 .56
Pro forma 2.55 .54
Fully diluted earnings
per share As reported 2.57 .55
Proforma 2.55 .54
</TABLE>
The fair value of options granted during 1995 and 1996 for purposes of
the accompanying pro forma disclosures is estimated on the grant date
using the Black-Scholes option-pricing model with the following
weighted-average assumptions: (1) dividend yield of 2.5% and 2.0%,
respectively; (2) expected volatility of 46% in both years;
(3) risk-free rates of return of 7.4% and 7.1%, respectively; and
expected lives of 8.5 years and 10.0 years, respectively.
(Continued)
27
<PAGE> 66
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Stock Compensation Plans - Continued
Information about stock options outstanding at December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------- -------------------------------
Range Weighted-Avg
of Number Remaining Weighted-Avg. Number Weighted-Avg
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 5.00 100,000 5.8 $ 5.00 - $ -
17.50 - 25.00 30,738 6.3 23.15 13,235 21.96
27.60 - 31.75 29,714 7.6 29.80 276 29.50
39.67 - 42.87 37,100 9.4 39.80 - -
------- --------
197,552 6.8 $ 18.09 13,511 $ 22.11
======= === ===== ======== =====
</TABLE>
During 1994, the Corporation granted 18,896 shares of common stock to
certain employees of VST Financial Services. The shares granted vest
over a four year period ending December 31, 1997. Compensation expense
applicable to the stock grant was $90,000, $90,000 and $150,000 for
1996, 1995 and 1994 respectively.
(Continued)
28
<PAGE> 67
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Dividend Restriction and Regulatory Capital Matters
The Corporation's principal source of funds is dividends received from
its subsidiaries. Under applicable laws, regulatory authorities must
approve the declaration of dividends in any year, in an amount in
excess of the sum of net income of that year and retained earnings of
the preceding two years. At January 1, 1997, retained earnings of
subsidiaries amounting to $9,086,000 were available for the payment of
dividends without prior regulatory approval, subject to maintaining
required regulatory capital.
The Corporation and the Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if
undertaken could have a direct material affect on the Corporation's
and Banks' financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Corporation
and the Bank must meet specific capital guidelines that involve
quantitative measures of the Corporation's and the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Corporation's and the Banks'
capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation and the Banks to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I
Capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I Capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1996, that the
Corporation and the Banks meet all capital adequacy requirements to
which they are subject.
(Continued)
29
<PAGE> 68
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Dividend Restriction and Regulatory Capital Matters - Continued
As of December 31, 1996, the most recent notification from the Federal
Reserve Bank categorized the Corporation as well capitalized under the
regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Corporation must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth
in the table. There are no conditions or events since that
notification that management believes have changed the Corporation's
category.
The Corporation's and its banking subsidiaries' actual capital amounts
and ratios are presented in the following tables.
<TABLE>
<CAPTION>
To Be Adequately To Be Well
Capitalized Under Capitalized Under
Prompt Corrective Prompt Corrective
Actual Action Provisions Action Provisions
--------------- ----------------- -----------------
Dollars in Thousands Amount Ratio Amount Ratio Amount Ratio
-------------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital
(to risk weighted assets)
Consolidated $ 49,670 11.72% > $ 33,900 > 8.0% > $ 42,380 > 10.0%
- - - -
HNB 13,220 11.63 > 9,100 > 8.0 > 11,370 > 10.0
- - - -
Vine Street 14,820 11.32 > 10,470 > 8.0 > 13,090 > 10.0
- - - -
Alliance 13,270 12.56 > 8,450 > 8.0 > 10,570 > 10.0
- - - -
First and Peoples 4,370 12.94 > 2,700 > 8.0 > 3,380 > 10.0
- - - -
Jefferson 7,040 12.21 > 4,610 > 8.0 > 5,760 > 10.0
- - - -
Tier I Capital
(to risk weighted assets)
Consolidated 44,360 10.47 > 16,950 > 4.0 > 25,430 > 6.0
- - - -
HNB 11,800 10.38 > 4,550 > 4.0 > 6,820 > 6.0
- - - -
Vine Street 13,230 10.11 > 5,230 > 4.0 > 7,850 > 6.0
- - - -
Alliance 11,960 11.32 > 4,230 > 4.0 > 6,340 > 6.0
- - - -
First and Peoples 3,950 11.70 > 1,350 > 4.0 > 2,030 > 6.0
- - - -
Jefferson 6,310 10.95 > 2,310 > 4.0 > 3,460 > 6.0
- - - -
Tier I Capital
(to average assets)
Consolidated 44,360 7.09 > 25,020 > 4.0 > 31,270 > 5.0
- - - -
HNB 11,800 6.95 > 6,800 > 4.0 > 8,500 > 5.0
- - - -
Vine Street 13,230 7.98 > 6,630 > 4.0 > 8,290 > 5.0
- - - -
Alliance 11,960 7.31 > 6,550 > 4.0 > 8,180 > 5.0
- - - -
First and Peoples 3,950 7.49 > 2,110 > 4.0 > 2,640 > 5.0
- - - -
Jefferson 6,310 8.63 > 2,920 > 4.0 > 3,650 > 5.0
- - - -
</TABLE>
(Continued)
30
<PAGE> 69
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Dividend Restriction and Regulatory Capital Matters - Continued
<TABLE>
<CAPTION>
To Be Adequately To Be Well
Capitalized Under Capitalized Under
Prompt Corrective Prompt Corrective
Actual Action Provisions Action Provisions
--------------- ----------------- -----------------
Dollars in Thousands Amount Ratio Amount Ratio Amount Ratio
-------------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1995:
Total capital
(to risk weighted assets)
Consolidated $ 39,200 9.09% > $ 34,490 > 8.0% > $ 43,110 > 10.0%
- - - -
HNB 13,900 12.42 > 8,950 > 8.0 > 11,200 > 10.0
- - - -
Vine Street 10,100 7.61 > 10,610 > 8.0 > 13,270 > 10.0
- - - -
Alliance 13,390 16.37 > 6,540 > 8.0 > 8,180 > 10.0
- - - -
Security First 3,370 17.82 > 1,510 > 8.0 > 1,890 > 10.0
- - - -
First and Peoples 4,280 12.59 > 2,720 > 8.0 > 3,400 > 10.0
- - - -
Jefferson 4,870 7.17 > 5,430 > 8.0 > 6,790 > 10.0
- - - -
Tier I Capital
(to risk weighted assets)
Consolidated 33,800 7.84 > 17,240 > 4.0 > 25,870 > 6.0
- - - -
HNB 12,500 11.17 > 4,480 > 4.0 > 6,710 > 6.0
- - - -
Vine Street 8,440 6.36 > 5,310 > 4.0 > 7,960 > 6.0
- - - -
Alliance 12,390 15.14 > 3,270 > 4.0 > 4,910 > 6.0
- - - -
Security First 3,370 17.82 > 760 > 4.0 > 1,140 > 6.0
- - - -
First and Peoples 3,880 11.41 > 1,360 > 4.0 > 2,040 > 6.0
- - - -
Jefferson 4,180 6.16 > 2,720 > 4.0 > 4,070 > 6.0
- - - -
Tier I Capital
(to average assets)
Consolidated 33,800 5.08 > 26,620 > 4.0 > 33,270 > 5.0
- - - -
HNB 12,500 7.19 > 6,950 > 4.0 > 8,700 > 5.0
- - - -
Vine Street 8,440 5.54 > 6,100 > 4.0 > 7,620 > 5.0
- - - -
Alliance 12,390 7.35 > 6,740 > 4.0 > 8,430 > 5.0
- - - -
Security First 3,370 8.36 > 1,610 > 4.0 > 2,010 > 5.0
- - - -
First and Peoples 3,880 8.12 > 1,910 > 4.0 > 2,390 > 5.0
- - - -
Jefferson 4,180 5.47 > 3,060 > 4.0 > 3,820 > 5.0
- - - -
</TABLE>
(Continued)
31
<PAGE> 70
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) Related Party Transactions
Loans to executive officers and directors and their associates, including
loans to affiliated companies for which these individuals are
principal owners, amounted to approximately $22,750,000 and
$18,050,000 at December 31, 1996 and 1995, respectively. During 1996,
new loans of $13,663,000 were made and repayments of $8,651,000 were
received. Other changes include decreases for changes in executive
officers, directors and related interests of $312,000. These loans
were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for other customers.
The Corporation leases certain office facilities from related parties.
Total rental expense under these leases amounted to approximately
$362,000, $341,000 and $321,000 for 1996, 1995 and 1994, respectively.
(17) Leases
The Corporation and its subsidiaries lease various premises and equipment
under noncancelable operating leases. Rental expense on operating
leases, including amounts included in note 16, was approximately
$718,000, $803,000 and $745,000 in 1996, 1995 and 1994, respectively.
Future minimum lease payments under noncancelable operating leases with
initial or remaining terms in excess of one year as of December 31,
1996 are:
<TABLE>
<CAPTION>
In thousands Gross Rentals
------------ -------------
Year ending December 31,
-----------------------
<S> <C>
1997 $ 534
1998 366
1999 264
2000 217
2001 76
Thereafter 125
======
</TABLE>
(Continued)
32
<PAGE> 71
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(18) Other Operating Expenses
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
------------ ---- ---- ----
<S> <C> <C> <C>
Operating supplies $ 650 981 856
Data processing services 1,198 1,134 1,003
Professional fees 674 1,473 1,157
Advertising and business development 1,137 1,277 979
Bank share taxes 532 496 422
FDIC insurance (including a $726 SAIF
assessment in 1996) 1,215 834 1,076
Telephone expense 596 736 500
Postage and courier expense 695 694 484
Transportation, meals and lodging expense 398 643 508
Fraud loss - - 452
Termination of business of subsidiary 427 - -
Other 2,540 2,313 2,047
--------- -------- ---------
$ 10,062 10,581 9,484
========= ======== =========
</TABLE>
(19) Commitments and Contingent Liabilities
In the normal course of business, the Corporation has various outstanding
commitments and contingent liabilities. At December 31, 1996 and 1995,
the subsidiaries had $107,040,000 and $93,761,000, respectively, of
commitments to extend credit, including standby letters of credit of
$6,637,000 and $3,626,000, respectively, which are properly not
reflected in the consolidated financial statements. The subsidiaries'
exposure to credit loss in the event of nonperformance by the other
party to these commitments is represented by the contractual amount of
those instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The subsidiaries evaluate each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the subsidiaries upon extension of
credit, is based on management's credit evaluation of the customer.
Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment, and income-producing commercial
properties. Most commitments to extend credit are based upon variable
rates, accordingly, market risk is minimal.
(Continued)
33
<PAGE> 72
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(19) Commitments and Contingent Liabilities - Continued
Standby letters of credit and financial guarantees written are
conditional commitments issued by the subsidiaries to guarantee the
performance of a customer to a third party. Those guarantees are
issued primarily to support private borrowing arrangements.
Interest rate swap contracts are entered into as an asset/liability
management strategy to reduce interest rate risk. Interest rate swap
contracts are exchanges of interest payments, such as fixed-rate
payments for floating-rate payments, based on a notional principal
amount, which is an agreed-upon amount upon which calculations of
interest payments to be exchanged are based, and is significantly
greater than the amount at risk. The primary risk associated with
swaps is the exposure to movements in interest rates and the abilities
of the counterparties to meet the terms of the contract.
One of the bank subsidiaries has entered into a fixed amortizing interest
rate swap contract for an original notional amount of $1,000,000,
which matures in September 2003. The notional amount outstanding was
$752,000 and $835,000 at December 31, 1996 and 1995, respectively. The
bank is a fixed-rate payor at a rate of 7.45% over the term of the
contract, and receives interest at the prime rate. The net receipts or
payments under the agreement are recorded as adjustments to interest
income on the accrual basis. The contract was entered into to convert
a specific loan from a fixed to a variable interest rate. Certain
mortgages are designated as collateral for the swap agreement.
As of December 31, 1996, there were various pending legal actions and
proceedings in which claims for damages are asserted. Management,
after discussion with legal counsel, believes the ultimate result of
these legal actions and proceedings will not have a material adverse
effect upon the consolidated financial statements of the Corporation.
(20) Disclosures About the Fair Value of Financial Instruments
The estimated fair values of the Corporation's financial instruments are
as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------------ ----------------------
In thousands Carrying Fair Carrying Fair
------------ Amount Value Amount Value
------ ----- -------- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 34,454 34,454 40,248 40,248
Securities 112,203 112,203 139,372 139,372
Loans 460,842 469,523 462,312 472,511
</TABLE>
(Continued)
34
<PAGE> 73
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(20) Disclosures About the Fair Value of Financial Instruments - Continued
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------------ ----------------------
In thousands Carrying Fair Carrying Fair
------------ Amount Value Amount Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial liabilities:
Deposits $ 549,248 552,433 570,734 575,365
Securities sold under agreements
to repurchase 4,780 4,780 6,930 6,930
Notes payable 1,878 1,878 25,643 25,643
Advances from the Federal Home
Loan Bank 16,776 17,804 18,167 18,761
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments.
The estimated fair value for cash, short term investments and
securities sold under agreements to repurchase is the financial
statement carrying amount.
The fair value for securities equals quoted market price, if
available. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities or
dealer quotes.
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and remaining maturities.
Loans which are frequently repriced are reported at carrying
value.
The fair value of demand deposits and certain money market deposits is
the amount payable on demand at the reporting date. The fair value
of certificates of deposit is estimated by discounting the future
cash flows using rates currently offered for deposits with similar
remaining maturities.
The fair value of notes payable and advances from the Federal Home
Loan Bank are based upon rates currently available to the
Corporation for debt with similar terms and remaining maturities.
(Continued)
35
<PAGE> 74
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(20) Disclosures About the Fair Value of Financial Instruments - Continued
The fair value of commitments to extend credit and stand-by letters of
credit are estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms
of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates
and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting date. At
December 31, 1996 and 1995, the carrying value of loan commitments
and stand-by letters of credit was not significant, and no
significant fair value differences exist.
The fair value of interest rate swaps used for hedging purposes is the
estimated amount that the Corporation would receive or pay to
terminate the swap agreements at the reporting date, taking into
account current interest rates and the current creditworthiness of
the swap counterparties. At December 31, 1996 and 1995, the
carrying value and fair value of interest rate swaps was not
significant.
The fair value estimates are made as of a certain point in time based
on relevant market information about the financial instruments.
Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
(Continued)
36
<PAGE> 75
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(21) Cardinal Bancshares, Inc. (parent company only)
Condensed Balance Sheets
December 31, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Cash on deposit with subsidiaries $ 231 553
Investment in subsidiaries 54,360 52,223
Securities available for sale - 49
Premises and equipment 211 312
Other assets 342 643
----------- -----------
Total assets $ 55,144 53,780
=========== ===========
Liabilities and Stockholders' Equity
Notes payable $ 1,878 10,843
Other liabilities 2,969 1,787
Stockholders' equity 50,297 41,150
----------- -----------
Total liabilities and stockholders' equity $ 55,144 53,780
=========== ===========
</TABLE>
(Continued)
37
<PAGE> 76
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(21) Cardinal Bancshares, Inc. (parent company only) - Continued
Condensed Statements of Operations
Years Ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income:
Dividends from subsidiary banks $ 7,000 2,600 2,700
Other income 535 1,017 59
----------- ----------- -----------
7,535 3,617 2,759
----------- ----------- -----------
Expenses:
Interest 389 1,008 419
Other 4,169 2,803 2,741
----------- ----------- -----------
4,558 3,811 3,160
----------- ----------- -----------
Income (loss) before income taxes and equity
in undistributed earnings of subsidiaries 2,977 (194) (401)
Income tax benefit 761 964 1,061
----------- ----------- -----------
Income before equity in undistributed
earnings (loss) of subsidiaries 3,738 770 660
Equity in undistributed earnings (loss)
of subsidiaries 593 94 (1,198)
----------- ----------- -----------
Net income (loss) $ 4,331 864 (538)
=========== =========== ===========
</TABLE>
(Continued)
38
<PAGE> 77
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(21) Cardinal Bancshares, Inc. (parent company only) - Continued
Condensed Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,331 864 (538)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Securities gain (66) (217) (3)
Deferred income taxes (719) (100) 144
Depreciation and amortization 92 59 47
Noncash compensation 2,059 340 400
Equity in undistributed earnings of
subsidiaries (593) (94) 1,198
Decrease in due from subsidiaries - - 1,312
Decrease in refundable income taxes 330 431 203
Decrease in other assets 477 277 543
Decrease in other liabilities (364) (172) (195)
----------- ----------- ----------
Net cash provided by operating
activities 5,547 1,388 3,111
----------- ----------- ----------
Cash flows from investing activities:
Investment in subsidiaries (1,800) (1,300) (9,704)
Purchases of securities - - (20)
Proceeds from sales of securities 106 611 23
Proceeds from sale of premises and equipment 26 - -
Purchases of premises and equipment (17) (119) (80)
----------- ----------- ----------
Net cash used in investing activities (1,685) (808) (9,781)
----------- ----------- ----------
Cash flows from financing activities:
Net (decrease) increase in line of credit note (8,750) (1,125) 8,700
Proceeds from issuance of common stock 5,841 2,084 404
Dividends paid (1,275) (1,122) (1,116)
Repurchase of common stock - - (1,212)
----------- ----------- ----------
Net cash (used in) provided by
financing activities (4,184) (163) 6,776
----------- ----------- ----------
</TABLE>
(Continued)
39
<PAGE> 78
CARDINAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(21) Cardinal Bancshares, Inc. (parent company only) - Continued
Condensed Statements of Cash Flows - Continued
Years Ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1993
---- ---- ----
<S> <C> <C> <C>
Net (decrease) increase in cash (322) 417 106
Cash at beginning of period 553 136 30
----------- ----------- ----------
Cash at end of period $ 231 553 136
=========== =========== ==========
Supplemental cash flow information:
Cash paid for income taxes $ 3,828 520 (1,014)
Cash paid for interest 389 1,008 419
=========== =========== ==========
</TABLE>
40
<PAGE> 1
EXHIBIT 21.1
<TABLE>
<CAPTION>
SUBSIDIARIES OF REGISTRANT STATE OF INCORPORATION
- -------------------------- ----------------------
<S> <C>
The Vine Street Trust Company Kentucky
VST Financial Services, Inc. Kentucky
HNB Bank, N.A. Chartered by the Office of the
Comptroller of the Currency
Jefferson Banking Company Kentucky
First & Peoples Bank Kentucky
Alliance Bank, FSB Chartered by the Office of Thrift
Supervision
Cardinal Data Service Corporation Kentucky
Mutual Insurance Agency, Inc. Kentucky
Mutual Service Corporation Kentucky
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Cardinal Bancshares, Inc.:
We consent to incorporation by reference in the Registration Statement
Nos. 33-00004, 33-71858, 33-78724 and 33-85690 on Forms S-8 of Cardinal
Bancshares, Inc. of our report dated February 17, 1997, relating to the
consolidated balance sheets of Cardinal Bancshares, Inc. and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996, which report appears in
the 1996 annual report to shareholders, which is incorporated by reference in
the December 31, 1996 Form 10-K of Cardinal Bancshares, Inc.
Our report refers to a change in the method of accounting for certain
investments in debt and equity securities in 1994.
/s/ KPMG Peat Marwick LLP
Lexington, Kentucky
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 1996 AND DECEMBER 31, 1995 AND CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996, 1995 AND
1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 21,407
<INT-BEARING-DEPOSITS> 1,400
<FED-FUNDS-SOLD> 11,647
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 112,203
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 467,216
<ALLOWANCE> 6,374
<TOTAL-ASSETS> 629,061
<DEPOSITS> 549,248
<SHORT-TERM> 4,780
<LIABILITIES-OTHER> 6,082
<LONG-TERM> 18,654
0
0
<COMMON> 34,759
<OTHER-SE> 15,538
<TOTAL-LIABILITIES-AND-EQUITY> 629,061
<INTEREST-LOAN> 44,842
<INTEREST-INVEST> 8,399
<INTEREST-OTHER> 1,094
<INTEREST-TOTAL> 54,335
<INTEREST-DEPOSIT> 23,806
<INTEREST-EXPENSE> 26,111
<INTEREST-INCOME-NET> 28,224
<LOAN-LOSSES> 3,480
<SECURITIES-GAINS> 49
<EXPENSE-OTHER> 28,000
<INCOME-PRETAX> 8,379
<INCOME-PRE-EXTRAORDINARY> 8,379
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,331
<EPS-PRIMARY> 2.58
<EPS-DILUTED> 2.57
<YIELD-ACTUAL> 4.65
<LOANS-NON> 607
<LOANS-PAST> 373
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,789
<CHARGE-OFFS> 2,033
<RECOVERIES> 472
<ALLOWANCE-CLOSE> 6,374
<ALLOWANCE-DOMESTIC> 6,055
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 319
</TABLE>
