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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
FORM 10-QSB10-Q
ýQUARTERLY REPORT PURSUANT TO SECTION Quarterly Report Pursuant to Section 13 ORor 15(d)OF THE SECURITIES EXCHANGE ACT OFof the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002March 31, 2004
o Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission File No.file number: 0-24557
CARDINAL FINANCIAL CORPORATION
(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)Charter)
Virginia | 54-1874630 | |
(State or | (I.R.S. Employer | |
8270 Greensboro Drive, Suite 500 | 22102 | |
(Address of Principal Executive Offices) | (Zip Code) |
10555 Main Street, Suite 500, Fairfax, Virginia, 22030(Address of principal executive offices)
Issuer's telephone number including area code: (703) 934-9200584-3400
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the Registrantregistrant (1) has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý Noo
On November 12, 2002, there were 10,044,345
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)
Yes o No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
18,371,395 shares of Cardinal Financial Corporation Common Stock,common stock, par value $1.00 per share, outstanding.
outstanding as of April 12, 2004
Transitional Small Business Disclosure Format: Yes No ý
CARDINAL FINANCIAL CORPORATION
3 | |||||
3 | |||||
Consolidated Statements of Condition | 3 | ||||
4 | |||||
5 | |||||
6 | |||||
7 | |||||
8 | |||||
12 | |||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 31 | ||||
32 | |||||
33 | |||||
33 | |||||
Changes in Securities and Use of Proceeds | 33 | ||||
Defaults Upon Senior Securities | 33 | ||||
Submission of Matters to a Vote of Security Holders | 33 | ||||
Other Information | 33 | ||||
Exhibits and Reports on Form 8-K | 33 | ||||
34 |
i
2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITIONSeptember 30, 2002
At March 31, 2004 and December 31, 2001
2003
(Dollars in thousands, except share data)
| (Unaudited) September 30, 2002 | December 31, 2001 | ||||||
---|---|---|---|---|---|---|---|---|
Assets | ||||||||
Cash and due from banks | $ | 25,729 | $ | 11,446 | ||||
Federal funds sold | 61,186 | 23,013 | ||||||
Total cash and cash equivalents | 86,915 | 34,459 | ||||||
Investment securities available-for-sale | 137,945 | 34,147 | ||||||
Other investments | 1,263 | 1,268 | ||||||
Loans held for sale | — | 4,732 | ||||||
Loans receivable, net of fees | 216,355 | 200,911 | ||||||
Allowance for loan losses | (3,073 | ) | (3,104 | ) | ||||
213,282 | 197,807 | |||||||
Premises and equipment, net | 4,610 | 5,077 | ||||||
Goodwill and other intangibles | 646 | 668 | ||||||
Accrued interest and other assets | 2,141 | 1,426 | ||||||
Total assets | $ | 446,802 | $ | 279,584 | ||||
Liabilities and Shareholders' Equity | ||||||||
Deposits | $ | 403,668 | $ | 246,024 | ||||
Other borrowed funds | 1,000 | 9,824 | ||||||
Accrued interest and other liabilities | 1,404 | 3,112 | ||||||
Total liabilities | 406,072 | 258,960 | ||||||
Preferred stock, $1 par value, 10,000,000 shares authorized Series A preferred stock, cumulative convertible, 1,364,686 and 1,364,714 shares outstanding in 2002 and 2001, respectively | 1,365 | 1,365 | �� | |||||
Common stock, $1 par value, 50,000,000 shares authorized, 10,044,345 and 4,294,323 shares outstanding in 2002 and 2001, respectively | 10,044 | 4,294 | ||||||
Additional paid-in capital | 51,231 | 38,488 | ||||||
Accumulated deficit | (24,358 | ) | (23,249 | ) | ||||
Accumulated other comprehensive income (loss) | 2,448 | (274 | ) | |||||
Total shareholders' equity | 40,730 | 20,624 | ||||||
Total liabilities and shareholders' equity | $ | 446,802 | $ | 279,584 | ||||
|
| March 31, |
| December 31, |
| ||
|
| (Unaudited) |
|
|
| ||
Assets |
|
|
|
|
| ||
|
|
|
|
|
| ||
Cash and due from banks |
| $ | 10,350 |
| $ | 9,555 |
|
Federal funds sold |
| 11,381 |
| 3,528 |
| ||
|
|
|
|
|
| ||
Total cash and cash equivalents |
| 21,731 |
| 13,083 |
| ||
|
|
|
|
|
| ||
Investment securities available-for-sale |
| 167,981 |
| 130,762 |
| ||
Investment securities held-to-maturity |
| 154,140 |
| 142,852 |
| ||
|
|
|
|
|
| ||
Total investment securities |
| 322,121 |
| 273,614 |
| ||
|
|
|
|
|
| ||
Other investments |
| 3,986 |
| 3,517 |
| ||
Loans held for sale |
| 688 |
| — |
| ||
|
|
|
|
|
| ||
Loans receivable, net of fees |
| 334,476 |
| 336,002 |
| ||
Allowance for loan losses |
| (4,347 | ) | (4,344 | ) | ||
|
|
|
|
|
| ||
Loans receivable, net |
| 330,129 |
| 331,658 |
| ||
|
|
|
|
|
| ||
Premises and equipment, net |
| 7,107 |
| 6,707 |
| ||
|
|
|
|
|
| ||
Deferred tax asset |
| 4,111 |
| 4,473 |
| ||
Accrued interest and other assets |
| 3,578 |
| 3,196 |
| ||
|
|
|
|
|
| ||
Total assets |
| $ | 693,451 |
| $ | 636,248 |
|
|
|
|
|
|
| ||
Liabilities and Shareholders’ Equity |
|
|
|
|
| ||
|
|
|
|
|
| ||
Deposits |
| $ | 525,931 |
| $ | 474,129 |
|
Other borrowed funds |
| 71,758 |
| 74,457 |
| ||
Accrued interest and other liabilities |
| 2,422 |
| 2,250 |
| ||
|
|
|
|
|
| ||
Total liabilities |
| 600,111 |
| 550,836 |
| ||
|
|
|
|
|
| ||
Preferred stock, $1 par value, 10,000,000 shares authorized; Series A preferred stock, cumulative convertible, 0 and 1,364,062 shares outstanding in 2004 and 2003, respectively |
| — |
| 1,364 |
| ||
Common stock, $1 par value, 50,000,000 shares authorized; 18,371,395 and 16,377,337 shares outstanding in 2004 and 2003, respectively |
| 18,371 |
| 16,377 |
| ||
Additional paid-in capital |
| 92,552 |
| 86,790 |
| ||
Accumulated deficit |
| (17,895 | ) | (18,614 | ) | ||
Accumulated other comprehensive income (loss) |
| 312 |
| (505 | ) | ||
|
|
|
|
|
| ||
Total shareholders’ equity |
| 93,340 |
| 85,412 |
| ||
|
|
|
|
|
| ||
Total liabilities and shareholders’ equity |
| $ | 693,451 |
| $ | 636,248 |
|
See accompanying notes to consolidated financial statements.
1
3
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONSFor the three and nine
Three months ended September 30, 2002March 31, 2004 and 2001
2003
(Dollars inIn thousands, except per share data)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | |||||||||||
Interest income: | |||||||||||||||
Loans receivable | $ | 3,737 | $ | 3,879 | $ | 10,967 | $ | 11,074 | |||||||
Federal funds sold | 260 | 218 | 613 | 926 | |||||||||||
Investment securities available-for-sale | 1,471 | 95 | 3,284 | 285 | |||||||||||
Other investments | 17 | 22 | 53 | 66 | |||||||||||
Total interest income | 5,485 | 4,214 | 14,917 | 12,351 | |||||||||||
Interest expense: | |||||||||||||||
Deposits | 2,603 | 1,703 | 6,834 | 5,335 | |||||||||||
Other borrowed funds | 40 | 122 | 208 | 368 | |||||||||||
Total interest expense | 2,643 | 1,825 | 7,042 | 5,703 | |||||||||||
Net interest income | 2,842 | 2,389 | 7,875 | 6,648 | |||||||||||
Provision for loan losses | 95 | 190 | 134 | 375 | |||||||||||
Net interest income after provision for loan losses | 2,747 | 2,199 | 7,741 | 6,273 | |||||||||||
Non-interest income: | |||||||||||||||
Service charges on deposit accounts | 133 | 102 | 363 | 271 | |||||||||||
Loan service charges | 91 | 144 | 286 | 349 | |||||||||||
Investment fee income | 188 | 472 | 754 | 1,560 | |||||||||||
Net gain on sales of loans | 3 | 2 | 50 | 14 | |||||||||||
Net gain on investment securities available-for-sale | 121 | — | 121 | — | |||||||||||
Net gain on sales of other assets | — | 1 | 39 | 5 | |||||||||||
Other income | 192 | 133 | 553 | 277 | |||||||||||
Total non-interest income | 728 | 854 | 2,166 | 2,476 | |||||||||||
Non-interest expense: | |||||||||||||||
Salary and benefits | 1,368 | 1,963 | 4,176 | 5,801 | |||||||||||
Occupancy | 367 | 344 | 1,002 | 1,027 | |||||||||||
Professional fees | 235 | 192 | 727 | 450 | |||||||||||
Depreciation | 176 | 210 | 555 | 596 | |||||||||||
Writedown on WorldCom bond | — | — | 1,660 | — | |||||||||||
Amortization of intangibles | — | 173 | 22 | 523 | |||||||||||
Other operating expenses | 900 | 877 | 2,503 | 2,626 | |||||||||||
Total non-interest expense | 3,046 | 3,759 | 10,645 | 11,023 | |||||||||||
Net income (loss) before income taxes | 429 | (706 | ) | (738 | ) | (2,274 | ) | ||||||||
Provision for income taxes | — | — | — | — | |||||||||||
Net income (loss) | $ | 429 | $ | (706 | ) | $ | (738 | ) | $ | (2,274 | ) | ||||
Dividends to preferred shareholders | 124 | 128 | 371 | 384 | |||||||||||
Net income (loss) to common shareholders | $ | 305 | $ | (834 | ) | $ | (1,109 | ) | $ | (2,658 | ) | ||||
Basic and diluted earnings (loss) per common share | $ | 0.03 | $ | (0.20 | ) | $ | (0.15 | ) | $ | (0.62 | ) | ||||
Weighted-average common shares outstanding — basic | 10,044,345 | 4,256,797 | 7,243,053 | 4,255,432 | |||||||||||
Weighted-average common shares outstanding — diluted | 10,142,930 | 4,256,797 | 7,243,053 | 4,255,432 | |||||||||||
|
| 2004 |
| 2003 |
| ||
Interest income: |
|
|
|
|
| ||
Loans receivable |
| $ | 4,728 |
| $ | 4,031 |
|
Federal funds sold |
| 28 |
| 39 |
| ||
Investment securities available-for-sale |
| 1,271 |
| 1,678 |
| ||
Investment securities held-to-maturity |
| 1,350 |
| — |
| ||
Other investments |
| 38 |
| 24 |
| ||
|
|
|
|
|
| ||
Total interest income |
| 7,415 |
| 5,772 |
| ||
|
|
|
|
|
| ||
Interest expense: |
|
|
|
|
| ||
Deposits |
| 2,282 |
| 2,240 |
| ||
Other borrowed funds |
| 300 |
| 73 |
| ||
|
|
|
|
|
| ||
Total interest expense |
| 2,582 |
| 2,313 |
| ||
|
|
|
|
|
| ||
Net interest income |
| 4,833 |
| 3,459 |
| ||
|
|
|
|
|
| ||
Provision for loan losses |
| 74 |
| 80 |
| ||
|
|
|
|
|
| ||
Net interest income after provision for loan losses |
| 4,759 |
| 3,379 |
| ||
|
|
|
|
|
| ||
Non-interest income: |
|
|
|
|
| ||
Service charges on deposit accounts |
| 170 |
| 134 |
| ||
Loan service charges |
| 195 |
| 113 |
| ||
Investment fee income |
| 178 |
| 126 |
| ||
Net gain on sales of loans |
| 13 |
| 9 |
| ||
Net realized gain on investment securities available-for-sale |
| 241 |
| 493 |
| ||
Other income |
| 80 |
| 101 |
| ||
|
|
|
|
|
| ||
Total non-interest income |
| 877 |
| 976 |
| ||
|
|
|
|
|
| ||
Non-interest expense: |
|
|
|
|
| ||
Salary and benefits |
| 2,140 |
| 1,649 |
| ||
Occupancy |
| 496 |
| 480 |
| ||
Professional fees |
| 154 |
| 369 |
| ||
Depreciation |
| 310 |
| 196 |
| ||
Other operating expenses |
| 1,455 |
| 1,171 |
| ||
|
|
|
|
|
| ||
Total non-interest expense |
| 4,555 |
| 3,865 |
| ||
|
|
|
|
|
| ||
Net income before income taxes |
| 1,081 |
| 490 |
| ||
|
|
|
|
|
| ||
Provision for income taxes |
| 362 |
| — |
| ||
|
|
|
|
|
| ||
Net income |
| $ | 719 |
| $ | 490 |
|
|
|
|
|
|
| ||
Dividends to preferred shareholders |
| — |
| 124 |
| ||
|
|
|
|
|
| ||
Net income to common shareholders |
| $ | 719 |
| $ | 366 |
|
|
|
|
|
|
| ||
Earnings per common share - basic |
| $ | 0.04 |
| $ | 0.04 |
|
|
|
|
|
|
| ||
Earnings per common share - diluted |
| $ | 0.04 |
| $ | 0.04 |
|
|
|
|
|
|
| ||
Weighted-average common shares outstanding - basic |
| 17,461 |
| 10,046 |
| ||
|
|
|
|
|
| ||
Weighted-average common shares outstanding - diluted |
| 17,885 |
| 10,171 |
|
See accompanying notes to consolidated financial statements.
2
4
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)For the three and nine
Three months ended September 30, 2002March 31, 2004 and 2001
2003
(Dollars in thousands)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | ||||||||||
Net income (loss) | $ | 429 | $ | (706 | ) | $ | (738 | ) | $ | (2,274 | ) | |||
Other comprehensive income: | ||||||||||||||
Unrealized gain on available-for-sale investment securities | 1,581 | 62 | 2,722 | — | ||||||||||
Comprehensive income (loss) | $ | 2,010 | $ | (644 | ) | $ | 1,984 | $ | (2,274 | ) | ||||
|
| 2004 |
| 2003 |
| ||
|
|
|
|
|
| ||
Net income |
| $ | 719 |
| $ | 490 |
|
Other comprehensive income (loss): |
|
|
|
|
| ||
Unrealized gain (loss) on available-for-sale investment securities: |
|
|
|
|
| ||
Unrealized holding gain (loss) arising during the quarter, net of tax |
| 976 |
| (2,199 | ) | ||
Less: reclassification adjustment for gains included in net income, net of tax |
| 159 |
| 493 |
| ||
|
|
|
|
|
| ||
Comprehensive income (loss) |
| $ | 1,536 |
| $ | (1,216 | ) |
See accompanying notes to consolidated financial statements.
3
5
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'SHAREHOLDERS’ EQUITYFor the nine
Three months ended September 30, 2002March 31, 2004 and 2001
2003
(Dollars inIn thousands)
(Unaudited)
| Preferred Shares | Preferred Stock | Common Shares | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance, December 31, 2000 | 1,411 | $ | 1,411 | 4,253 | $ | 4,253 | $ | 38,466 | $ | (10,022 | ) | $ | 4 | $ | 34,112 | ||||||||
Issuance of stock awards | — | — | 3 | 3 | 3 | — | — | 6 | |||||||||||||||
Stock options exercised | — | — | 1 | 1 | 3 | — | — | 4 | |||||||||||||||
Dividends on preferred stock | — | — | — | — | — | (384 | ) | — | (384 | ) | |||||||||||||
Net loss | — | — | — | — | — | (2,274 | ) | — | (2,274 | ) | |||||||||||||
Balance, September 30, 2001 | 1,411 | $ | 1,411 | 4,257 | $ | 4,257 | $ | 38,472 | $ | (12,680 | ) | $ | 4 | $ | 31,464 | ||||||||
Balance, December 31, 2001 | 1,365 | $ | 1,365 | 4,294 | $ | 4,294 | $ | 38,488 | $ | (23,249 | ) | $ | (274 | ) | $ | 20,624 | |||||||
Dividends on preferred stock | — | — | — | — | — | (371 | ) | — | (371 | ) | |||||||||||||
Rights offering shares issued | — | — | 2,437 | 2,437 | 5,462 | — | — | 7,899 | |||||||||||||||
Public offering shares issued | — | — | 3,313 | 3,313 | 7,281 | — | — | 10,594 | |||||||||||||||
Change in unrealized gain on investment securities available-for-sale | — | — | — | — | — | — | 2,722 | 2,722 | |||||||||||||||
Net loss | — | — | — | — | — | (738 | ) | — | (738 | ) | |||||||||||||
Balance, September 30, 2002 | 1,365 | $ | 1,365 | 10,044 | $ | 10,044 | $ | 51,231 | $ | (24,358 | ) | $ | 2,448 | $ | 40,730 | ||||||||
|
| Preferred |
| Preferred |
| Common |
| Common |
| Additional |
| Accumulated |
| Accumulated |
| Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, December 31, 2002 |
| 1,365 |
| $ | 1,365 |
| 10,044 |
| $ | 10,044 |
| $ | 51,231 |
| $ | (24,273 | ) | $ | 2,345 |
| $ | 40,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Stock options exercised |
| — |
| — |
| 3 |
| 3 |
| 7 |
| — |
| — |
| 10 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Dividends on preferred stock |
| — |
| — |
| — |
| — |
| — |
| (124 | ) | — |
| (124 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Change in unrealized gain (loss) on investment securities available-for-sale |
| — |
| — |
| — |
| — |
| — |
| — |
| (1,706 | ) | (1,706 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| — |
| — |
| — |
| — |
| — |
| 490 |
| — |
| 490 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, March 31, 2003 |
| 1,365 |
| $ | 1,365 |
| 10,047 |
| $ | 10,047 |
| $ | 51,238 |
| $ | (23,907 | ) | $ | 639 |
| $ | 39,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, December 31, 2003 |
| 1,364 |
| $ | 1,364 |
| 16,377 |
| $ | 16,377 |
| $ | 86,790 |
| $ | (18,614 | ) | $ | (505 | ) | $ | 85,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Stock options exercised |
| — |
| — |
| 23 |
| 23 |
| 66 |
| — |
| — |
| 89 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Public offering shares issued |
| — |
| — |
| 945 |
| 945 |
| 5,358 |
| — |
| — |
| 6,303 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Preferred stock converted to common stock |
| (1,364 | ) | (1,364 | ) | 1,026 |
| 1,026 |
| 338 |
| — |
| — |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Change in unrealized gain (loss) on investment securities available-for-sale |
| — |
| — |
| — |
| — |
| — |
| — |
| 817 |
| 817 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| — |
| — |
| — |
| — |
| — |
| 719 |
| — |
| 719 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, March 31, 2004 |
| — |
| $ | — |
| 18,371 |
| $ | 18,371 |
| $ | 92,552 |
| $ | (17,895 | ) | $ | 312 |
| $ | 93,340 |
|
See accompanying notes to consolidated financial statements.
4
6
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSFor the nine
Three months ended September 30, 2002March 31, 2004 and 2001
2003
(Dollars in thousands)
(Unaudited)
| 2002 | 2001 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Cash flows from operating activities: | ||||||||||
Net loss | $ | (738 | ) | $ | (2,274 | ) | ||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||
Depreciation | 555 | 596 | ||||||||
Amortization of intangibles, premiums and discounts | 626 | 548 | ||||||||
Provision for loan losses | 134 | 375 | ||||||||
Originations of loans held for sale | (4,369 | ) | — | |||||||
Proceeds from the sale of loans held for sale | 9,038 | — | ||||||||
Writedown on WorldCom bond | 1,660 | — | ||||||||
Gain on sale of loans held for sale | (50 | ) | (14 | ) | ||||||
Gain on sale of investment securities available-for-sale | (121 | ) | — | |||||||
Gain on sale of other assets | (39 | ) | (5 | ) | ||||||
Increase in accrued interest and other assets | (715 | ) | (125 | ) | ||||||
Increase (decrease) in accrued interest and other liabilities | (1,708 | ) | 889 | |||||||
Compensation related to stock awards | — | 6 | ||||||||
Net cash provided by (used in) operating activities | 4,273 | (4 | ) | |||||||
Cash flows from investing activities: | ||||||||||
Purchase of premises and equipment | (88 | ) | (412 | ) | ||||||
Proceeds from sale of premises and equipment | — | 12 | ||||||||
Proceeds from sale, maturity and call of investment securities available-for-sale | 16,053 | 4,500 | ||||||||
Proceeds from sale of other investments | 188 | 349 | ||||||||
Purchase of investment securities available-for-sale | (131,129 | ) | (3,601 | ) | ||||||
Purchase of other investments | (184 | ) | (114 | ) | ||||||
Redemptions of investment securities available-for-sale | 11,736 | 1,043 | ||||||||
Net increase in loans receivable | (15,335 | ) | (42,448 | ) | ||||||
Net cash used in investing activities | (118,759 | ) | (40,671 | ) | ||||||
Cash flows from financing activities: | ||||||||||
Net increase in deposits | 157,644 | 49,279 | ||||||||
Net increase (decrease) in other borrowed funds | (8,824 | ) | 4,069 | |||||||
Proceeds from rights offering | 7,899 | — | ||||||||
Proceeds from public offering | 10,594 | — | ||||||||
Dividends on preferred stock | (371 | ) | (384 | ) | ||||||
Stock options exercised | — | 4 | ||||||||
Net cash provided by financing activities | 166,942 | 52,968 | ||||||||
Net increase in cash and cash equivalents | 52,456 | 12,293 | ||||||||
Cash and cash equivalents at beginning of period | 34,459 | 29,488 | ||||||||
Cash and cash equivalents at end of period | $ | 86,915 | $ | 41,781 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||
Cash paid during period for interest | $ | 6,947 | $ | 5,693 | ||||||
|
| 2004 |
| 2003 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
| $ | 719 |
| $ | 490 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
| ||
Depreciation |
| 310 |
| 196 |
| ||
Amortization of premiums and discounts |
| 503 |
| 427 |
| ||
Provision for loan losses |
| 74 |
| 80 |
| ||
Originations of loans held for sale |
| (2,569 | ) | (172 | ) | ||
Proceeds from the sale of loans held for sale |
| 1,894 |
| 172 |
| ||
Gain on sale of loans held for sale |
| (13 | ) | (9 | ) | ||
Gain on sale of investment securities available-for-sale |
| (241 | ) | (493 | ) | ||
(Increase) decrease in accrued interest, other assets and deferred tax asset |
| (20 | ) | 3,419 |
| ||
Increase (decrease) in accrued interest and other liabilities |
| 172 |
| (17,415 | ) | ||
|
|
|
|
|
| ||
Net cash provided by (used in) operating activities |
| 829 |
| (13,305 | ) | ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Purchase of premises and equipment |
| (710 | ) | (448 | ) | ||
Proceeds from sale, maturity and call of investment securities available-for-sale |
| 13,719 |
| 22,890 |
| ||
Proceeds from maturity and call of investment securities held-to-maturity |
| 3,490 |
| — |
| ||
Proceeds from sale of other investments |
| 261 |
| — |
| ||
Purchase of investment securities available-for-sale |
| (55,485 | ) | (71,017 | ) | ||
Purchase of investment securities held-to-maturity |
| (18,487 | ) | — |
| ||
Purchase of other investments |
| (729 | ) | (1,023 | ) | ||
Redemptions of investment securities available-for-sale |
| 3,602 |
| 11,537 |
| ||
Redemptions of investment securities held-to-maturity |
| 5,389 |
| — |
| ||
Net (increase) decrease in loans receivable |
| 1,274 |
| (2,781 | ) | ||
|
|
|
|
|
| ||
Net cash used in investing activities |
| (47,676 | ) | (40,842 | ) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Net increase (decrease) in deposits |
| 51,802 |
| (6,383 | ) | ||
Net decrease in other borrowed funds |
| (7,074 | ) | — |
| ||
Proceeds from FHLB advances - long term |
| 5,000 |
| 25,000 |
| ||
Repayments of FHLB advances - long term |
| (625 | ) | (2,000 | ) | ||
Proceeds from public offering |
| 6,303 |
| — |
| ||
Stock options exercised |
| 89 |
| 10 |
| ||
Dividends on preferred stock |
| — |
| (124 | ) | ||
|
|
|
|
|
| ||
Net cash provided by financing activities |
| 55,495 |
| 16,503 |
| ||
|
|
|
|
|
| ||
Net increase (decrease) in cash and cash equivalents |
| 8,648 |
| (37,644 | ) | ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of the quarter |
| 13,083 |
| 63,371 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at end of the quarter |
| $ | 21,731 |
| $ | 25,727 |
|
|
|
|
|
|
| ||
Supplemental disclosure of cash flow information: |
|
|
|
|
| ||
Cash paid during the quarter for interest |
| $ | 2,574 |
| $ | 2,275 |
|
See accompanying notes to consolidated financial statements.
5
7
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSeptember 30, 2002(Unaudited)
March 31, 2004
(Unaudited)
Note 1
Organization
Cardinal Financial Corporation (the "Company"”Company”) was incorporated on November 24, 1997 under the laws of the Commonwealth of Virginia as a bank holding company whose activities consist of investment in its wholly-owned subsidiaries. In addition toThe Company opened Cardinal Bank, N.A., which began operations in 1998 and Cardinal Wealth Services, Inc., an investment services subsidiary, in 1999. In 1999, the Company opened the following threetwo additional banking subsidiaries and, in 1999: CardinalWealth Services, Inc.,late 2000, completed an investment subsidiary (as of February 1, 1999); Cardinal Bank—Manassas/Prince William, N.A. (as of July 26, 1999); and Cardinal Bank—Dulles, N.A. (as of August 2, 1999). On September 1, 2000, the Company completed its acquisition of Heritage Bancorp, Inc. and its banking subsidiary, The Heritage Bank headquartered in McLean, Virginia. The Heritage Bank was renamed and became the Company's fourth banking subsidiary, Cardinal Bank—Potomac(“Heritage”). On November 1, 2001, the Company consolidated two of itsThese banking subsidiaries Cardinal Bank—Dulles, N.A. and Cardinal Bank—Potomac,were consolidated into Cardinal Bank, N.A. Onas of March 1, 2002, the Company consolidated Cardinal Bank—Manassas/ Prince William, N.A. into Cardinal Bank, N.A., now the Company's only remaining banking subsidiary.2002.
Basis of Presentation
In the opinion of management, the accompanying consolidated financial statements have been prepared in accordance with the requirements of Regulation S-X, Article 10. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2002March 31, 2004 are not necessarily indicative of the results to be expected for the full year ending December 31, 2002.2004. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are presented in the Company'sCompany’s Annual Report on Form 10-KSB for the year ended December 31, 2001.2003 (the “2003 Form 10-KSB”).
8
|
| Three Months Ended March 31, |
| ||||
(Dollars in thousands, except per share data) |
| 2004 |
| 2003 |
| ||
Net income to common shareholders |
| $ | 719 |
| $ | 366 |
|
Deduct: Total stock-based employee compensation expense determined under fair value- based method for all awards |
| (595 | ) | (223 | ) | ||
Pro forma net income |
| $ | 124 |
| $ | 143 |
|
|
|
|
|
|
| ||
Earnings per common share: |
|
|
|
|
| ||
Basic - as reported |
| $ | 0.04 |
| $ | 0.04 |
|
Basic - as pro forma |
| 0.01 |
| 0.01 |
| ||
Diluted - as reported |
| 0.04 |
| 0.04 |
| ||
Diluted - as pro forma |
| 0.01 |
| 0.01 |
|
The weighted average per share fair values of grants made for the three months ended March 31, 2004 and 2003 were $2.91 and $2.07, respectively. The fair values of the options granted were estimated on the grant date using the Black - Scholes option - pricing model based on the following weighted average assumptions:
|
| Three Months Ended March 31, |
| ||
|
| 2004 |
| 2003 |
|
Estimated option life |
| 10 years |
| 10 years |
|
Risk free interest rate |
| 3.99 | % | 4.25 | % |
Expected volatility |
| 11.80 | % | 20.40 | % |
Expected dividend yield |
| 0.00 | % | 0.00 | % |
There were 286,518 options granted during the three months ended March 31, 2004. Of those grants, 175,204 immediately vested on the grant date.
9
The Company operates and reports in two business segments, commercial banking and investment advisory services. The commercial banking segment includes both commercial and consumer lending and provides customers such products such as commercial loans, real estate loans, and other business financing and consumer loans. In addition, this segment also provides customers with several choices of deposit products including demand deposit accounts, savings accounts and certificates of deposit. The investment advisory services segment provides advisory services to businesses and individuals, including financial planning and retirement/estate planning.
6
Information about the reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the three and nine months ended September 30, 2002March 31, 2004 and 2001,2003, follows:
ForAs of and for the Three Months Ended September 30, 2002:March 31, 2004:
| Banking | Investment Advisory | Intersegment Elimination | Other | Consolidated | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | ||||||||||||||
Net interest income | $ | 2,810 | $ | — | $ | — | $ | 32 | $ | 2,842 | |||||
Provision for loan losses | 95 | — | — | — | 95 | ||||||||||
Non-interest income | 505 | 188 | — | 35 | 728 | ||||||||||
Non-interest expense | 2,725 | 223 | — | 98 | 3,046 | ||||||||||
Net income (loss) | $ | 495 | $ | (35 | ) | $ | — | $ | (31 | ) | $ | 429 | |||
Total Assets | $ | 443,511 | $ | 332 | $ | (38,192 | ) | $ | 41,151 | $ | 446,802 |
(Dollars in thousands) |
| Banking |
| Investment |
| Intersegment |
| Other |
| Consolidated |
| |||||
Net interest income |
| $ | 4,800 |
| $ | — |
| $ | — |
| $ | 33 |
| $ | 4,833 |
|
Provision for loan losses |
| 74 |
| — |
| — |
| — |
| 74 |
| |||||
Non-interest income |
| 699 |
| 178 |
| — |
| — |
| 877 |
| |||||
Non-interest expense |
| 4,050 |
| 239 |
| — |
| 266 |
| 4,555 |
| |||||
Provision for income taxes |
| 462 |
| (21 | ) |
|
| (79 | ) | 362 |
| |||||
Net income (loss) |
| $ | 913 |
| $ | (40 | ) | $ | — |
| $ | (154 | ) | $ | 719 |
|
Total assets |
| $ | 687,543 |
| $ | 741 |
| $ | (88,338 | ) | $ | 93,505 |
| $ | 693,451 |
|
For the Nine Months Ended September 30, 2002:
| Banking | Investment Advisory | Intersegment Elimination | Other | Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | |||||||||||||||
Net interest income | $ | 7,824 | $ | — | $ | — | $ | 51 | $ | 7,875 | ||||||
Provision for loan losses | 134 | — | — | — | 134 | |||||||||||
Non-interest income | 1,244 | 756 | — | 166 | 2,166 | |||||||||||
Non-interest expense | 9,246 | 914 | — | 485 | 10,645 | |||||||||||
Net loss | $ | (312 | ) | $ | (158 | ) | $ | — | $ | (268 | ) | $ | (738 | ) | ||
Total Assets | $ | 443,511 | $ | 332 | $ | (38,192 | ) | $ | 41,151 | $ | 446,802 |
ForAs of and for the Three Months Ended September 30, 2001:March 31, 2003:
| Commercial Banking | Investment Advisory | Intersegment Elimination | Other | Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | |||||||||||||||
Net interest income | $ | 2,387 | $ | — | $ | — | $ | 2 | $ | 2,389 | ||||||
Provision for loan losses | 190 | — | — | — | 190 | |||||||||||
Non-interest income | 350 | 474 | — | 30 | 854 | |||||||||||
Non-interest expense | 2,671 | 480 | — | 608 | 3,759 | |||||||||||
Net loss | $ | (124 | ) | $ | (6 | ) | $ | — | $ | (576 | ) | $ | (706 | ) | ||
Total Assets | $ | 255,252 | $ | 421 | $ | (29,355 | ) | $ | 32,319 | $ | 258,637 |
For the Nine Months Ended September 30, 2001:
| Commercial Banking | Investment Advisory | Intersegment Elimination | Other | Consolidated | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | |||||||||||||||
Net interest income | $ | 6,623 | $ | — | $ | — | $ | 25 | $ | 6,648 | ||||||
Provision for loan losses | 375 | — | — | — | 375 | |||||||||||
Non-interest income | 875 | 1,564 | — | 37 | 2,476 | |||||||||||
Non-interest expense | 7,761 | 1,597 | — | 1,665 | 11,023 | |||||||||||
Net loss | $ | (638 | ) | $ | (33 | ) | $ | — | $ | (1,603 | ) | $ | (2,274 | ) | ||
Total Assets | $ | 255,252 | $ | 421 | $ | (29,355 | ) | $ | 32,319 | $ | 258,637 |
7
(Dollars in thousands) |
| Banking |
| Investment |
| Intersegment |
| Other |
| Consolidated |
| |||||
Net interest income |
| $ | 3,432 |
| $ | — |
| $ | — |
| $ | 27 |
| $ | 3,459 |
|
Provision for loan losses |
| 80 |
| — |
| — |
| — |
| 80 |
| |||||
Non-interest income |
| 850 |
| 126 |
| — |
| — |
| 976 |
| |||||
Non-interest expense |
| 3,389 |
| 168 |
| — |
| 308 |
| 3,865 |
| |||||
Net income (loss) |
| $ | 813 |
| $ | (42 | ) | $ | — |
| $ | (281 | ) | $ | 490 |
|
Total assets |
| $ | 481,081 |
| $ | 241 |
| $ | (36,866 | ) | $ | 39,739 |
| $ | 484,195 |
|
The Company does not have any operating segments other than those reported. Parent Companycompany financial information is included in the Other“Other” category above and represents the overhead function rather than an operating segment. Parent Company'sThe parent company’s most significant assets are its net investments in its subsidiaries. The parent company’s net interest income is comprised of interest income from federal funds sold and investment securities.other investments.
10
The following disclosesis the calculation of basic and diluted earnings (loss) per common share for the three and nine months ended September 30, 2002March 31, 2004 and 2001.2003. Stock options outstanding as of September 30, 2002March 31, 2004 and 2001 are 573,0732003 were 1,108,835 and 378,678,873,412, respectively. Stock options issued, which were not included in the calculation of diluted earnings per share because the options' exercise prices were greater than the average market price, were 474,48810,000 and 291,667 for the three months ended September 30, 2002. BecauseMarch 31, 2004 and 2003, respectively.
(Dollars in thousands, |
| Three Months Ended March 31, |
| ||||
| 2004 |
| 2003 |
| |||
|
|
|
|
|
| ||
Net income |
| $ | 719 |
| $ | 490 |
|
|
|
|
|
|
| ||
Dividends to preferred shareholders |
| — |
| 124 |
| ||
|
|
|
|
|
| ||
Net income to common shareholders |
| $ | 719 |
| $ | 366 |
|
|
|
|
|
|
| ||
Weighted average common shares for basic |
| 17,461,000 |
| 10,046,000 |
| ||
|
|
|
|
|
| ||
Weighted average common shares for diluted |
| 17,885,000 |
| 10,171,000 |
| ||
|
|
|
|
|
| ||
Basic earnings per common share |
| $ | 0.04 |
| $ | 0.04 |
|
|
|
|
|
|
| ||
Diluted earnings per common share |
| $ | 0.04 |
| $ | 0.04 |
|
Note 4
In 2001, the Company has net losses forsubstantially eliminated the nine months ended September 30, 2002 and for the three months and nine months ended September 30, 2001, all stock options issued have an anti-dilutive effect and, therefore, have been excludedgoodwill attributable from the earnings per share calculation for those respective periods.
| Three Months Ended September 30, | ||||||
---|---|---|---|---|---|---|---|
| 2002 | 2001 | |||||
| (Dollars in thousands) | ||||||
Net income (loss) | $ | 429 | $ | (706 | ) | ||
Dividends to preferred shareholders | 124 | 128 | |||||
Net income (loss) to common shareholders | 305 | (834 | ) | ||||
Weighted average common shares for basic calculation | 10,044,345 | 4,256,797 | |||||
Weighted average common shares for diluted calculation | 10,142,930 | 4,256,797 | |||||
Basic and diluted earnings (loss) per common share | $ | 0.03 | $ | (0.20 | ) |
Nine Months Ended September 30, | |||||||
---|---|---|---|---|---|---|---|
| 2002 | 2001 | |||||
| (Dollars in thousands) | ||||||
Net loss | $ | (738 | ) | $ | (2,274 | ) | |
Dividends to preferred shareholders | 371 | 384 | |||||
Net loss to common shareholders | (1,109 | ) | (2,658 | ) | |||
Weighted average common shares for basic and diluted calculation | 7,243,053 | 4,255,432 | |||||
Basic and diluted loss per common share | $ | (0.15 | ) | $ | (0.62 | ) |
8
Adoptionacquisition of New Accounting Standards
Heritage. The initial investment in Heritage, which was subsequently renamed Cardinal Bank – Potomac, resulted in the Company recording $9.7 million of goodwill at the time of the acquisition. In Junethe fourth quarter of 2001, an evaluation of 2001 losses and expectations of additional future losses indicated a potential impairment in the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."Company’s investment in Heritage. In compliance with SFAS No. 142 discontinues the practice of amortizing goodwill and requires that goodwill be evaluated at least annually for impairment by comparing its fair value with its recorded amount and written down when appropriate. SFAS No. 142 requires that other intangible assets that have been separately identified and accounted for continue to be amortized over a determinable useful life. SFAS No. 142 also requires disclosure of the changes in the carrying amounts of goodwill from period to period, the carrying amounts of intangible assets by major intangible asset class for those subject to and not subject to amortization, and the estimated intangible asset amortization expense for the next five years. The Company adopted SFAS No. 142 as of January 1, 2002, and, therefore, discontinued the amortization of goodwill on January 1, 2002. The Company has evaluated goodwill for impairment as specified under SFAS No. 142 and determined that goodwill under this statement is not impaired. Information on the Company's intangible assets is contained in the table below.
| September 30, 2002 | December 31, 2001 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | |||||||||
| (Dollars in thousands) | ||||||||||||
Amortizable core deposit intangible | $ | 102 | $ | (102 | ) | $ | 102 | $ | (80 | ) | |||
Unamortizable goodwill (1) | 646 | — | 646 | — |
Core Deposit Intangible | Goodwill | |||||
---|---|---|---|---|---|---|
Amortization expense: | ||||||
Three months ended September 30, 2002 | $ | — | $ | — | ||
Nine months ended September 30, 2002 | 22 | — | ||||
Three months ended September 30, 2001 | $ | 15 | $ | 158 | ||
Nine months ended September 30, 2001 | 45 | 478 | ||||
Estimated amortization expense: | ||||||
Three months ended December 31, 2002 | $ | — | $ | — | ||
For the years ended December 31, | ||||||
2003 | — | — | ||||
2004 | — | — | ||||
2005 | — | — | ||||
2006 | — | — | ||||
2007 | — | — |
9
Three months ended Sept. 30, | Nine months ended Sept. 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | |||||||||
Reported net income (loss) to common shareholders | $ | 305 | $ | (834 | ) | $ | (1,109 | ) | $ | (2,658 | ) | ||
Add: goodwill amortization | — | 158 | — | 478 | |||||||||
Adjusted net income (loss) | 305 | (676 | ) | (1,109 | ) | (2,180 | ) | ||||||
Reported basic and diluted earnings (loss) per share | $ | 0.03 | $ | (0.20 | ) | $ | (0.15 | ) | $ | (0.62 | ) | ||
Add: goodwill amortization per share | — | 0.04 | — | 0.11 | |||||||||
Adjusted basic and diluted earnings (loss) per share | $ | 0.03 | $ | (0.16 | ) | $ | (0.15 | ) | $ | (0.51 | ) |
10
11
Item 2. Management's2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following presents management'smanagement’s discussion and analysis of our consolidated financial condition as of September 30, 2002March 31, 2004 and December 31, 20012003 and the results of our operations for the three and nine months ended September 30, 2002March 31, 2004 and September 30, 2001.2003. This discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report.
Overview
Cardinal Financial Corporation, a financial services organization headquartered in Tysons Corner, Virginia, is committed to providing top quality customer service, a diversified product mix and convenient avenues for banking to consumers and businesses. We own Cardinal Bank, N.A., a nationally chartered community bank, and Cardinal Wealth Services, Inc., an investment services subsidiary. Through these two subsidiaries, we offer a wide range of banking products and services to both our commercial and retail customers. Our commercial relationship managers focus on attracting small and medium-sized business as well as commercial real estate developers and builders and professionals, such as physicians, accountants and attorneys. We have an expansive retail branch network and develop competitive retail products and services. We complement our core banking operations by offering investment products and services to our customers through our third-party brokerage relationship with Raymond James Financial Services, Inc.
Net interest income is our primary source of income. As discussed further in our interest rate sensitivity section, we manage our balance sheet and interest rate risk to enhance our net interest income. We do this by monitoring the spread between the interest rates earned on investment securities and loans and the interest rates paid on deposits and other interest-bearing liabilities. Changes in interest rates will affect our operating performance and financial condition. We attempt to minimize our exposure to interest rate risk, but are unable to eliminate it. In addition to management of interest rate risk, we analyze our loan portfolio for exposure to credit risk. Risk of loan defaults and foreclosures are unavoidable in the banking industry, and we try to limit our exposure to this risk by monitoring our extensions of credit carefully. In addition to net interest income, non-interest income is a source of income for us and includes service charges on deposits and loans, investment fee income and gains on sales on investment securities available-for-sale.
Our business strategy is to grow through geographic expansion while maintaining strong asset quality and achieving sustained profitability. We completed a secondary common stock offering that raised $41.7 million in capital in December 2003 and an additional $6.3 million in capital following the exercise of the underwriters’ over-allotment option in January 2004. This capital is being used to support the expansion of our branch office network and balance sheet growth. We were able to increase our legal lending limit to over $12 million, which will allow us
12
to expand our commercial and real estate lending loan portfolios. We expect to increase our loan-to-deposit ratio and shift the mix of our earning assets to higher yielding loans. We intend to increase our selection of banking products and financial services in order to diversify our revenue base, increase fee income, and strengthen customer relationships.
Critical Accounting Policies; Policies
Accounting policies generally accepted in the United States are complex and require management to apply significant judgment to various accounting, reporting, and disclosure matters. Management must use assumptions and estimates to apply these principles where actual measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the consolidated financial statements. Actual results could differ from those estimates.
The accounting policies we view as critical to us are those relating to estimates and judgments regarding the determination of the allowance for loan losses and the valuation of deferred tax assets.
Our policy forWe maintain the allowance for loan loss calculation is to maintain the allowancelosses at a level that represents themanagement’s best estimate of known and inherent losses in the loan portfolio. Both the amount of the provision expense and the level of the allowance for loan losses are impacted by many factors, including general economic conditions, actual and expected credit losses, historical trends and specific conditions of the individual borrower. As a part of our analysis, we use comparative peer group data, duration factors and qualitative factors such as levels of and trends in delinquencies and nonaccrual loans, national and local economic trends and conditions and concentrations of loans exhibiting similar risk profiles to support our estimates. The loan loss provision was $95,000 and $134,000 for the three and nine months ended September 30, 2002 and $190,000 and $375,000 for the three and nine months ended September 30, 2001. The allowance for loan losses decreased slightly to $3.07 million as of September 30, 2002 from $3.10 million at December 31, 2001. The ratio of the allowance for loan losses to gross loans at September 30, 2002 was 1.42% compared to 1.55% at December 31, 2001. Additional information on the allowance for loan losses and provision expense can be found below under "Results of Operations".
Credit losses are an inherent part of our business. Althoughbusiness and, although we believe the methodologies for determining the allowance for loan losses and the current level of the allowance are adequate, it is possible that there may be unidentified losses in the portfolio that may become evident only at a future date. Additional provisions for such losses, if necessary, would negatively impact earnings and would be recorded in the Commercial Banking segment.commercial banking segment and would negatively impact earnings.
We
For purposes of our analysis, we categorize our loans into one of five pools:categories: commercial and industrial, commercial real estate, home equity lines of credit, residential mortgages, and consumer loans.consumer. Peer group annual loss factors (in the absence of historical results) are applied to all poolscategories and are adjusted by the projected duration of the loan poolloans in a particular category and by the qualitative factors mentioned above. The indicated loss factors resulting from this analysis are applied to each of the loan poolscategories to determine a reserve level for each of the five poolscategories of loans. In addition, we individually assign loss factors to all loans that have been identified as having loss attributes, as indicated by deterioration in the financial condition of the borrower or a decline in underlying collateral values. Since we have limited historical data on which to base loss factors for classified loans, we apply, in accordance with regulatory guidelines, a 5% loss factor to all special mention loans and a 15% loss factor to all substandard loans (in accordance with regulatory guidelines).
Financial Conditionloans.
Total
13
We record a provision for income tax expense based on the amounts of current taxes payable (or refundable) and the change in net deferred tax assets were $446.8 million at September 30, 2002 compared to $279.6 million at December 31, 2001, an increaseor liabilities during the year. Deferred tax assets and liabilities are recognized for the tax effects of $167.2 million or 59.8% due primarily to higher cash equivalentsdiffering carrying values of assets and investments. Investment securities available-for-sale increased by $103.8 million to $137.9 million at September 30, 2002 compared to $34.1 million at December 31, 2001 (see Table 1liabilities for detailstax and financial statement purposes that will reverse in future periods. When substantial uncertainty exists concerning the recoverability of a deferred tax asset, the carrying value of the investment securities available-for-sale portfolio). Loans receivable, net of fees, increasedasset is reduced by $15.5 million to $216.4 million at September 30, 2002 from $200.9 million at December 31, 2001 (see Table 2 for loan portfolio details). Total deposits increased by $157.7 million to $403.7 million at September 30, 2002 compared to $246.0 million at December 31, 2001 (see Table 3 for certificates of deposit of $100,000 or more) and total borrowings decreased by $8.8 million to $1.0 million at September 30, 2002 from $9.8 million at December 31, 2001. Deposits increased primarily in the retaila valuation allowance.
11
money market accounts and certificates of deposit categories due to the results of our advertising program. Total cash and cash equivalents increased to $86.9 million at September 30, 2002 from $34.5 million at December 31, 2001. The increase in cash and cash equivalents was primarily the result of increased deposit balances not yet invested as loans or securities by September 30, 2002. Shareholders' equity at September 30, 2002 was $40.7 million compared to $20.6 million at December 31, 2001, due primarily to our successful second quarter 2002 stock rights and public offerings which raised $18.5 million in new capital. Changes in the unrealized gain on investment securities portfolio amounting to $2.7 million more than offset the dividends on preferred stock and the net loss for the period. Book value per common share on September 30, 2002 was $3.38 compared to $3.21 on December 31, 2001.
ResultsOn March 9, 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 105 (“SAB No. 105”), Application of Accounting Principles to Loan Commitments. SAB No. 105 provides guidance regarding loan commitments accounted for as derivative instruments, and is effective for quarters beginning April 1, 2004. The Company is currently retaining substantially all of the loans it originates and therefore SAB No. 105 is not expected to have a material impact.
Net income before preferred dividends for the three months ended September 30, 2002 was $429,000, an improvement of $1,135,000 when compared to the same period of 2001, due to the impact of higher earning assets and reduced operating expenses. Net loss before preferred dividends for the nine months ended September 30, 2002 was $738,000, an improvement of $1,536,000 compared to the same period of the 2001. Our writedown of $1,660,000 of a Worldcom bond in the second quarter contributed to the loss for the nine months ended September 30, 2002.
Dividends to preferred shareholders were $124,000 and $371,000 for the three and nine months ended September 30, 2002 compared to $128,000 and $384,000 for the same periods in 2001. Net income to common shareholders for the three months ended September 30, 2002March 31, 2004 and 2003 was $305,000$719,000 and the$366,000, respectively, an improvement of $353,000, or 96.5%. The increase in net lossincome to common shareholders was $1,109,000is primarily a result of increased net interest income. In addition, on March 29, 2004, our preferred stock automatically converted to common stock. As a result of the stock conversion, net income to common shareholders for the nine months ended September 30, 2002, asfirst quarter of 2004 did not include expenses related to preferred stock dividends. Expenses for preferred dividends totaled $124,000 for the first quarter of 2003. Net income for the first quarter of 2004 also reflects an income tax provision of $362,000 compared to losses of $834,000 and $2,658,000, respectively,no tax provision for the three and nine months ended September 30, 2001. same period in 2003. The 2003 results were not subject to a tax provision because of available net operating loss carryforwards.
Basic and diluted earnings per common share increased by $0.23 per common sharewere $0.04 for each of the three months ended March 31, 2004 and 2003. These results are presented after the effect of dividends paid to $0.03 as comparedpreferred shareholders in the 2003 period. Dividends to a loss of $0.20preferred shareholders were $0 and $124,000 for the three months ended September 30, 2002March 31, 2004 and 2001,2003, respectively. Basic andWeighted average fully diluted loss per common shareshares outstanding for the ninethree months ended September 30, 2002 was $0.15, an improvement of $0.47 whenMarch 31, 2004 were 17,885,000 compared to 10,171,000 for the ninethree months ended September 30, 2001.March 31, 2003.
Return on average assets for the three and nine months ended September 30, 2002March 31, 2004 and 2003 was 0.41%0.43% and (0.27%)0.42%, respectively, compared to (1.15%) and (1.30%) for the three and nine months ended September 30, 2001, respectively. Return on average equity for the three and nine months ended September 30, 2002March 31, 2004 and 2003 was 4.33%3.14% and (3.25%)4.81%, respectively,respectively. The decrease in the return on average equity is a result of the increased equity in 2004 compared to (8.77%) and (9.20%) for the three and nine months ended September 30, 2001, respectively.2003 from our common stock offering.
Net interest income is our primary source of revenue and represents the difference between interest and fees earned on interest-bearinginterest earning assets and the interest paid on deposits and other interest-bearinginterest bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates when compared to previous periods of operations. Net interest income for the three months ended September 30, 2002March 31, 2004 and 2003 was $2,842,000$4.8 million and $3.5 million, respectively, a period-to-period increase of $1.4 million, or 39.7%. The increase in net interest income is a result of the increases in the average volume of investment securities and loans receivable, net of the impact of decreased yields, during 2004, compared to $2,389,000 forwith the same period ended September 30, 2001, an increase of 19.0%. Net interest income for2003. These increases were funded through the nine months ended September 30, 2002 was $7,875,000 compared to $6,648,000 ofincreases in total deposits, other borrowed funds and proceeds from the same period ended September 30, 2001, an increase of 18.5% due primarily to the impact of higher earning assets.common stock offering.
Our net interest margin for the three and nine months ended September 30, 2002March 31, 2004 and 2003 was 2.86%3.00% and 3.05%3.11%, respectively, as compared to 4.34% and 4.26% for the three and nine months ended September 30, 2001, respectively. The decrease in the net interest margin can be attributed towas a result of the change in the mix of earning assets towards lower yielding investments,earning assets and also to the mix of interest-bearing liabilitiesdecreased interest rate
14
environment. Tables 1 and lower overall interest rates between September 2001 and September 2002. Tables 4, 4a, 5 and 5a2 present an analysis of average interest-earningearning assets, interest-bearinginterest bearing liabilities and demand deposits with the related components of interest income and interest expense.
12
Average Balance Sheets and Interest Rates on Earning Assets and Interest - - Bearing Liabilities
Three Months Ended March 31, 2004, 2003 and 2002
(Dollars in thousands)
|
| 2004 |
| 2003 |
| 2002 |
| ||||||||||||||||||
|
| Average |
| Interest |
| Rate |
| Average |
| Interest |
| Rate |
| Average |
| Interest |
| Rate |
| ||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loans (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial and industrial |
| $ | 59,327 |
| $ | 796 |
| 5.37 | % | $ | 53,060 |
| $ | 833 |
| 6.28 | % | $ | 54,760 |
| $ | 964 |
| 7.04 | % |
Real estate - commercial |
| 137,776 |
| 2,223 |
| 6.45 | % | 115,685 |
| 2,064 |
| 7.14 | % | 86,345 |
| 1,744 |
| 8.08 | % | ||||||
Real estate - construction |
| 41,609 |
| 567 |
| 5.45 | % | 8,955 |
| 137 |
| 6.12 | % | 5,967 |
| 93 |
| 6.23 | % | ||||||
Real estate - residential |
| 42,871 |
| 617 |
| 5.76 | % | 34,284 |
| 577 |
| 6.73 | % | 17,655 |
| 357 |
| 8.09 | % | ||||||
Home equity lines |
| 44,829 |
| 363 |
| 3.24 | % | 28,352 |
| 241 |
| 3.40 | % | 21,615 |
| 226 |
| 4.18 | % | ||||||
Consumer |
| 10,373 |
| 162 |
| 6.25 | % | 9,639 |
| 179 |
| 7.43 | % | 13,605 |
| 243 |
| 7.14 | % | ||||||
Total loans |
| 336,785 |
| 4,728 |
| 5.62 | % | 249,975 |
| 4,031 |
| 6.45 | % | 199,947 |
| 3,627 |
| 7.26 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Investment securities available-for-sale |
| 142,128 |
| 1,271 |
| 3.58 | % | 180,044 |
| 1,678 |
| 3.73 | % | 47,731 |
| 595 |
| 4.99 | % | ||||||
Investment securities held-to-maturity |
| 150,016 |
| 1,350 |
| 3.60 | % | — |
| — |
| 0.00 | % | — |
| — |
| 0.00 | % | ||||||
Other investments |
| 3,634 |
| 38 |
| 4.18 | % | 1,853 |
| 24 |
| 5.18 | % | 1,194 |
| 19 |
| 6.37 | % | ||||||
Federal funds sold |
| 12,146 |
| 28 |
| 0.92 | % | 13,503 |
| 39 |
| 1.16 | % | 37,961 |
| 154 |
| 1.62 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total interest-earning assets and interest income |
| 644,709 |
| 7,415 |
| 4.60 | % | 445,375 |
| 5,772 |
| 5.18 | % | 286,833 |
| 4,395 |
| 6.13 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Non-interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash and due from banks |
| 10,256 |
|
|
|
|
| 14,720 |
|
|
|
|
| 13,280 |
|
|
|
|
| ||||||
Premises and equipment, net |
| 6,833 |
|
|
|
|
| 5,007 |
|
|
|
|
| 5,015 |
|
|
|
|
| ||||||
Accrued interest and other assets |
| 7,234 |
|
|
|
|
| 5,113 |
|
|
|
|
| 1,836 |
|
|
|
|
| ||||||
Allowance for loan losses |
| (4,408 | ) |
|
|
|
| (3,397 | ) |
|
|
|
| (3,103 | ) |
|
|
|
| ||||||
Total assets |
| $ | 664,624 |
|
|
|
|
| $ | 466,818 |
|
|
|
|
| $ | 303,861 |
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest - bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest - bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest checking |
| 155,523 |
| 529 |
| 1.36 | % | 139,080 |
| 638 |
| 1.83 | % | 69,762 |
| 516 |
| 2.96 | % | ||||||
Money markets |
| 24,470 |
| 36 |
| 0.59 | % | 26,131 |
| 69 |
| 1.06 | % | 25,947 |
| 133 |
| 2.05 | % | ||||||
Statement savings |
| 7,191 |
| 9 |
| 0.50 | % | 4,493 |
| 9 |
| 0.80 | % | 4,294 |
| 13 |
| 1.21 | % | ||||||
Certificates of deposit |
| 237,562 |
| 1,708 |
| 2.88 | % | 173,249 |
| 1,524 |
| 3.52 | % | 115,538 |
| 1,262 |
| 4.37 | % | ||||||
Total interest - bearing deposits |
| 424,746 |
| 2,282 |
| 2.15 | % | 342,953 |
| 2,240 |
| 2.61 | % | 215,541 |
| 1,924 |
| 3.57 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other borrowed funds |
| 73,545 |
| 300 |
| 1.63 | % | 14,957 |
| 73 |
| 1.95 | % | 9,398 |
| 97 |
| 4.13 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total interest-bearing liabilities and interest expense |
| 498,291 |
| 2,582 |
| 2.07 | % | 357,910 |
| 2,313 |
| 2.59 | % | 224,939 |
| 2,021 |
| 3.59 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Demand deposits |
| 72,399 |
|
|
|
|
| 66,638 |
|
|
|
|
| 55,985 |
|
|
|
|
| ||||||
Other liabilities |
| 2,204 |
|
|
|
|
| 1,588 |
|
|
|
|
| 2,308 |
|
|
|
|
| ||||||
Preferred shareholders’ equity |
| 6,391 |
|
|
|
|
| 6,825 |
|
|
|
|
| 6,825 |
|
|
|
|
| ||||||
Common shareholders’ equity |
| 85,339 |
|
|
|
|
| 33,857 |
|
|
|
|
| 13,804 |
|
|
|
|
| ||||||
Total liabilities and shareholders’ equity |
| $ | 664,624 |
|
|
|
|
| $ | 466,818 |
|
|
|
|
| $ | 303,861 |
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net interest income and net interest margin (2) |
|
|
| $ | 4,833 |
| 3.00 | % |
|
| $ | 3,459 |
| 3.11 | % |
|
| $ | 2,374 |
| 3.31 | % |
(1) Non-accrual loans are included in average balances and do not have a material effect on the average yield. Interest income on non-accruing loans was not material for the quarters presented.
(2) We do not have investments that have tax benefit attributes; therefore, there are no tax equivalent adjustments to our net interest income.
15
Rate and Volume Analysis
Three Months Ended March 31, 2004, 2003 and 2002
(Dollars in thousands)
|
| 2004 Compared to 2003 |
| 2003 Compared to 2002 |
| ||||||||||||||
|
| Change Due to |
|
|
| Change Due to |
|
|
| ||||||||||
|
| Average |
| Average |
| Increase |
| Average |
| Average |
| Increase |
| ||||||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loans (1): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial and industrial |
| $ | 98 |
| $ | (135 | ) | $ | (37 | ) | $ | (30 | ) | $ | (101 | ) | $ | (131 | ) |
Real estate - commercial |
| 394 |
| (235 | ) | 159 |
| 593 |
| (273 | ) | 320 |
| ||||||
Real estate - construction |
| 500 |
| (70 | ) | 430 |
| 47 |
| (3 | ) | 44 |
| ||||||
Real estate - residential |
| 145 |
| (105 | ) | 40 |
| 335 |
| (115 | ) | 220 |
| ||||||
Home equity lines |
| 140 |
| (18 | ) | 122 |
| 71 |
| (56 | ) | 15 |
| ||||||
Consumer |
| 14 |
| (31 | ) | (17 | ) | (71 | ) | 7 |
| (64 | ) | ||||||
Total loans |
| 1,291 |
| (594 | ) | 697 |
| 945 |
| (541 | ) | 404 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Investment securities available-for-sale |
| (353 | ) | (54 | ) | (407 | ) | 1,649 |
| (566 | ) | 1,083 |
| ||||||
Investment securities held-to-maturity |
| 1,350 |
| — |
| 1,350 |
| — |
| — |
| — |
| ||||||
Other investments |
| 23 |
| (9 | ) | 14 |
| 10 |
| (5 | ) | 5 |
| ||||||
Federal funds sold |
| (4 | ) | (7 | ) | (11 | ) | (98 | ) | (17 | ) | (115 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total interest income |
| 2,307 |
| (664 | ) | 1,643 |
| 2,506 |
| (1,129 | ) | 1,377 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest - bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest checking |
| 75 |
| (184 | ) | (109 | ) | 521 |
| (399 | ) | 122 |
| ||||||
Money markets |
| (4 | ) | (29 | ) | (33 | ) | 2 |
| (66 | ) | (64 | ) | ||||||
Statement savings |
| 5 |
| (5 | ) | — |
| 1 |
| (5 | ) | (4 | ) | ||||||
Certificates of deposit |
| 565 |
| (381 | ) | 184 |
| 656 |
| (394 | ) | 262 |
| ||||||
Total interest - bearing deposits |
| 641 |
| (599 | ) | 42 |
| 1,180 |
| (864 | ) | 316 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other borrowed funds |
| 286 |
| (59 | ) | 227 |
| 56 |
| (80 | ) | (24 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total interest expense |
| 927 |
| (658 | ) | 269 |
| 1,236 |
| (944 | ) | 292 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net interest income (2) |
| $ | 1,380 |
| $ | (6 | ) | $ | 1,374 |
| $ | 1,270 |
| $ | (185 | ) | $ | 1,085 |
|
(1) Non-accrual loans are included in average balances and do not have a material effect on the average yield.
Interest income on non-accruing loans was not material for the quarters presented.
(2) We do not have investments that have tax benefit attributes; therefore, there are no tax equivalent adjustments to our net interest income.
16
Provision for loan losses for the three and nine months ended September 30, 2002March 31, 2004 and 2003 was $95,000$74,000 and $134,000, respectively, as compared to a provision of $190,000 and $375,000 for the three and nine months ended September 30, 2001.$80,000, respectively. The decrease in provision is primarily driven by the reduction in our commercial loan portfolios and increases in our residential real estate loans and refinement of our loan loss reserve methodology during the fourth quarter of 2001. Our allowance for loan losses at September 30, 2002each of March 31, 2004 and December 31, 2003 was $3.07 million$4.3 million. Our allowance for loan loss ratio at March 31, 2004 was 1.30%, compared to $3.10 million1.29% at December 31, 2001. The ratio2003. We continued to experience strong loan quality with annualized net charged-off loans equal to 0.08% to total loans for the three months ended March 31, 2004, compared to 0.03% for the same period of 2003. Non-performing loans were equal to 0.07% of total loans at March 31, 2004, compared to 0.12% at December 31, 2003. Additional information on the allowance for loan losses, its allocation to the total loans at September 30, 2002 was 1.42% compared to a ratioreceivable portfolio and information on nonperforming loans can be found in Tables 3, 4 and 5.
Allowance for Loan Losses
Three Months Ended March 31, 2004 and 2003
(Dollars in thousands)
|
| 2004 |
| 2003 |
| ||
Beginning balance, January 1 |
| $ | 4,344 |
| $ | 3,372 |
|
|
|
|
|
|
| ||
Provision for loan losses |
| 74 |
| 80 |
| ||
|
|
|
|
|
| ||
Loans charged off: |
|
|
|
|
| ||
Commercial and industrial |
| (74 | ) | (60 | ) | ||
Real estate - commercial |
| — |
| — |
| ||
Real estate - construction |
| — |
| — |
| ||
Real estate - residential |
| — |
| — |
| ||
Home equity lines |
| — |
| — |
| ||
Consumer |
| (1 | ) | (3 | ) | ||
Total loans charged off |
| (75 | ) | (63 | ) | ||
|
|
|
|
|
| ||
Recoveries: |
|
|
|
|
| ||
Commercial and industrial |
| 2 |
| 40 |
| ||
Real estate - commercial |
| — |
| — |
| ||
Real estate - construction |
| — |
| — |
| ||
Real estate - residential |
| — |
| — |
| ||
Home equity lines |
| — |
| — |
| ||
Consumer |
| 2 |
| 2 |
| ||
Total recoveries |
| 4 |
| 42 |
| ||
|
|
|
|
|
| ||
Net (charge offs) recoveries |
| (71 | ) | (21 | ) | ||
|
|
|
|
|
| ||
Ending balance |
| $ | 4,347 |
| $ | 3,431 |
|
|
| March 31, |
| December 31, |
| ||
Loans: |
|
|
|
|
| ||
Balance at period end |
| $ | 334,746 |
| $ | 336,002 |
|
Allowance for loan losses to loans receivable, net of fees |
| 1.30 | % | 1.29 | % | ||
Annualized net charge-offs to average loans receivable |
| 0.08 | % | 0.01 | % | ||
17
Allocation of 1.55% atthe Allowance for Loan Losses
At March 31, 2004 and December 31, 2001. Tables 62003
(Dollars in thousands)
|
| March 31, |
| December 31, |
| ||||||
|
| Allocation |
| % of Total* |
| Allocation |
| % of Total* |
| ||
Commercial |
| $ | 1,094 |
| 16.35 | % | $ | 1,046 |
| 17.21 | % |
Real estate - commercial |
| 1,532 |
| 40.81 | % | 1,662 |
| 41.56 | % | ||
Real estate - construction |
| 552 |
| 12.92 | % | 497 |
| 12.57 | % | ||
Real estate - residential |
| 436 |
| 12.93 | % | 418 |
| 12.64 | % | ||
Home equity lines |
| 546 |
| 14.06 | % | 486 |
| 12.84 | % | ||
Consumer |
| 187 |
| 2.93 | % | 235 |
| 3.18 | % | ||
|
|
|
|
|
|
|
|
|
| ||
Total allowance for loan losses |
| $ | 4,347 |
| 100.00 | % | $ | 4,344 |
| 100.00 | % |
* Percentage of loan type to the total loan portfolio.
18
Nonperforming Loans Receivable
At March 31, 2004 and 7 portray the components and the allocation of the allowance for loan losses.December 31, 2003
(Dollars in thousands)
|
| March 31, |
| December 31, |
| ||
Nonaccruing loans |
| $ | 237 |
| $ | 390 |
|
|
|
|
|
|
| ||
Loans contractually past-due 90 days or more |
| 4 |
| 4 |
| ||
|
|
|
|
|
| ||
Troubled debt restructurings |
| — |
| — |
| ||
Total nonperforming loans receivable |
| $ | 241 |
| $ | 394 |
|
19
Non-interest income for the three months ended September 30, 2002March 31, 2004 and 2003 was $728,000 compared to $854,000 for the three months ended September 30, 2001,$877,000 and $976,000, respectively, a period-to-period decrease of 14.8%. For the nine months September 30, 2002, non-interest income was $2,166,000 compared to $2,476,000 for the same period ended September 30, 2001, a decrease of 12.5%$99,000, or 10.1%. The decrease in non-interest income wasis primarily dueattributable to decreasesthe decrease in realized gains on sales of investment fee incomesecurities available-for-sale during the first quarter of $284,0002004. These gains were recorded on sales of mortgage-backed securities with accelerated pre-payment speeds. Excluding the realized gains on the sale of investment securities of $241,000 and $806,000, respectively,$493,000 for the threefirst quarters of 2004 and nine months ended September 30, 2002 as2003, respectively, non-interest income would have increased $153,000 to $636,000 for the first quarter of 2004, compared to $483,000 for the three and nine months ended September 30, 2001. These decreases were partially offset by gains on investment securities and increases in servicefirst quarter of 2003. Service charges on deposit accounts and rentalincreased $36,000 to $170,000 for the three months ended March 31, 2004, compared to $134,000 for the same period of 2003. Loan service charge income fromincreased $82,000 to $195,000 for the subleasesthree months ended March 31, 2004, compared to $113,000 for the same period of excess space in various locations.2003. Investment fee income increased to $178,000 for the three months ended March 31, 2004, compared to $126,000 for the three months ended March 31, 2003.
Non-interest expense for the three and nine months ended September 30, 2002 totaled $3,046,000 and $10,645,000March 31, 2004 was $4.6 million, compared to $3,759,000 and $11,023,000$3.9 million for the three and nine months ended September 30, 2001, due primarily to lower staff related expenses. Duesame period of 2003, an increase of $690,000, or 17.9%. The increase is attributable to the adoptionbranch expansion we have completed over the past twelve months. We opened our twelfth branch on February 27, 2004 in Herndon, Virginia. In addition, our Tysons Corner, Leesburg and Woodbridge branches opened during the third and fourth quarters of SFAS No. 142, amortization2003 and are not included in the non-interest expense for the three-month period of intangibles decreased by $173,0002003. Expenses related to the branch expansion are represented in the increases in our salaries and benefits expense, occupancy expense and depreciation expense. Other operating expenses on our statements of operations includes business development, data processing and communications expenses, and office administration expenses.
The effective tax rate for the first quarter of 2004 was 33.5%, compared to 0% for the same period of 2003. The increase in the effective tax rate is a result of having recognized our deferred tax assets related to the net operating loss carryforwards during the fourth quarter of 2003. We recorded a provision for income tax expense of $362,000 for the three months ended September 30, 2002March 31, 2004, compared to none for the same three-month period of 2003. For more information, see “Critical Accounting Policies” above in 2001this discussion.
20
Statements of Condition
Total assets were $693.5 million at March 31, 2004, compared to $636.2 million at December 31, 2003, an increase of $57.3 million or 9.0%. This growth was driven by increases in total deposits and the proceeds raised in the common stock offering during December 2003 and the first quarter of 2004.
Investment securities were $322.1 million at March 31, 2004, compared to $273.6 million at December 31, 2003, an increase of $48.5 million or 17.7%. The investment portfolio consists of investment securities available-for-sale and investment securities held-to-maturity. Investment securities held-to-maturity are those securities that we have the intent and ability to hold to maturity and are carried at amortized cost. These securities are utilized for pledging of advances from the Federal Home Loan Bank and other borrowing activities. Investment securities available-for-sale are those securities that we intend to hold for an indefinite period of time, but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability strategy, liquidity management, interest rate risk management, regulatory capital management or similar factors. At March 31, 2004, investment securities available-for-sale were $168.0 million and investment securities held-to-maturity were $154.1 million. See Table 6 for additional information on our investment securities portfolio.
Investment Securities
At March 31, 2004 and December 31, 2003
(Dollars in thousands)
Available-for-sale at March 31, 2004 |
| Amortized |
| Fair |
| Average |
| ||
Obligations of U.S. government-sponsored agencies and enterprises |
|
|
|
|
|
|
| ||
Five to ten years |
| $ | 4,000 |
| $ | 4,047 |
| 4.11 | % |
Total U.S. government-sponsored agencies |
| $ | 4,000 |
| $ | 4,047 |
| 4.11 | % |
|
|
|
|
|
|
|
| ||
Mortgage-backed securities* |
|
|
|
|
|
|
| ||
Five to ten years |
| $ | 15,659 |
| $ | 15,724 |
| 3.79 | % |
After ten years |
| 135,805 |
| 136,108 |
| 3.79 | % | ||
Total mortgage-backed securities |
| $ | 151,464 |
| $ | 151,832 |
| 3.79 | % |
|
|
|
|
|
|
|
| ||
Corporate bonds |
|
|
|
|
|
|
| ||
After ten years |
| $ | 10,000 |
| $ | 10,016 |
| 2.42 | % |
Total corporate bonds |
| $ | 10,000 |
| $ | 10,016 |
| 2.42 | % |
|
|
|
|
|
|
|
| ||
Treasury bonds |
|
|
|
|
|
|
| ||
One to five years |
| $ | 2,044 |
| $ | 2,086 |
| 2.63 | % |
Total treasury bonds |
| $ | 2,044 |
| $ | 2,086 |
| 2.63 | % |
Total investment securities available-for-sale |
| $ | 167,508 |
| $ | 167,981 |
| 3.70 | % |
Held-to-maturity at March 31, 2004 |
| Amortized |
| Fair |
| Average |
| ||
Obligations of U.S. government-sponsored agencies and enterprises |
|
|
|
|
|
|
| ||
One to five years |
| $ | 5,999 |
| $ | 6,041 |
| 3.26 | % |
Five to ten years |
| 16,977 |
| 17,119 |
| 4.51 | % | ||
After ten years |
| 2,999 |
| 2,993 |
| 4.20 | % | ||
Total U.S. government-sponsored agencies |
| $ | 25,975 |
| $ | 26,153 |
| 4.19 | % |
|
|
|
|
|
|
|
| ||
Mortgage-backed securities* |
|
|
|
|
|
|
| ||
Five to ten years |
| $ | 9,069 |
| $ | 9,078 |
| 3.08 | % |
After ten years |
| 111,096 |
| 111,141 |
| 3.83 | % | ||
Total mortgage-backed securities |
| $ | 120,165 |
| $ | 120,219 |
| 3.77 | % |
|
|
|
|
|
|
|
| ||
Corporate bonds |
|
|
|
|
|
|
| ||
After ten years |
| $ | 8,000 |
| $ | 8,003 |
| 4.21 | % |
Total corporate bonds |
| $ | 8,000 |
| $ | 8,003 |
| 4.21 | % |
Total investment securities held-to-maturity |
| $ | 154,140 |
| $ | 154,375 |
| 3.87 | % |
|
|
|
|
|
|
|
| ||
Total investment securities |
| $ | 321,648 |
| $ | 322,356 |
| 3.78 | % |
* Based on contractual maturities.
21
Available-for-sale at December 31, 2003 |
| Amortized |
| Fair |
| Average |
| ||
Obligations of U.S. government-sponsored agencies and enterprises |
|
|
|
|
|
|
| ||
One to five years |
| $ | 3,000 |
| $ | 3,016 |
| 3.92 | % |
Five to ten years |
| 2,000 |
| 1,986 |
| 4.23 | % | ||
After ten years |
| 1,000 |
| 1,027 |
| 5.79 | % | ||
Total U.S. government-sponsored agencies |
| $ | 6,000 |
| $ | 6,029 |
| 4.33 | % |
|
|
|
|
|
|
|
| ||
Mortgage-backed securities* |
|
|
|
|
|
|
| ||
Five to ten years |
| $ | 15,615 |
| $ | 15,630 |
| 3.92 | % |
After ten years |
| 97,865 |
| 97,041 |
| 4.02 | % | ||
Total mortgage-backed securities |
| $ | 113,480 |
| $ | 112,671 |
| 4.00 | % |
|
|
|
|
|
|
|
| ||
Corporate bonds |
|
|
|
|
|
|
| ||
After ten years |
| $ | 10,000 |
| $ | 9,995 |
| 2.41 | % |
Total corporate bonds |
| $ | 10,000 |
| $ | 9,995 |
| 2.41 | % |
|
|
|
|
|
|
|
| ||
Treasury bonds |
|
|
|
|
|
|
| ||
One to five years |
| $ | 2,047 |
| $ | 2,067 |
| 2.64 | % |
Total treasury bonds |
| $ | 2,047 |
| $ | 2,067 |
| 2.64 | % |
Total investment securities available-for-sale |
| $ | 131,527 |
| $ | 130,762 |
| 3.87 | % |
Held-to-maturity at December 31, 2003 |
| Amortized |
| Fair |
| Average |
| ||
Obligations of U.S. government-sponsored agencies and enterprises |
|
|
|
|
|
|
| ||
One to five years |
| $ | 4,000 |
| $ | 3,951 |
| 3.39 | % |
Five to ten years |
| 9,993 |
| 9,884 |
| 4.65 | % | ||
After ten years |
| 2,999 |
| 2,950 |
| 4.20 | % | ||
Total U.S. government-sponsored agencies |
| $ | 16,992 |
| $ | 16,785 |
| 4.27 | % |
|
|
|
|
|
|
|
| ||
Mortgage-backed securities* |
|
|
|
|
|
|
| ||
Five to ten years |
| $ | 9,476 |
| $ | 9,450 |
| 3.70 | % |
After ten years |
| 108,384 |
| 107,547 |
| 4.01 | % | ||
Total mortgage-backed securities |
| $ | 117,860 |
| $ | 116,997 |
| 3.98 | % |
|
|
|
|
|
|
|
| ||
Corporate bonds |
|
|
|
|
|
|
| ||
After ten years |
| $ | 8,000 |
| $ | 7,848 |
| 4.21 | % |
Total corporate bonds |
| $ | 8,000 |
| $ | 7,848 |
| 4.21 | % |
Total investment securities held-to-maturity |
| $ | 142,852 |
| $ | 141,630 |
| 4.03 | % |
|
|
|
|
|
|
|
| ||
Total investment securities |
| $ | 274,379 |
| $ | 272,392 |
| 3.96 | % |
* Based on contractual maturities.
22
Loans receivable, net of fees, decreased slightly, by $501,000$1.5 million or 0.5%, to $334.5 million at March 31, 2004 from $336.0 million at December 31, 2003 (see Table 7 for details on the loans receivable portfolio). We experienced decreases in our commercial and commercial real estate loan portfolios offset by increases in our construction, residential real estate and home equity loan portfolios. The decreases in our commercial and commercial real estate loan portfolios are the result of more paydowns than fundings in those loan categories. We expect increases within these loan categories over the next three quarters of 2004 due to our increased legal lending limit of $12.0 million and the volume of loans we have scheduled for funding.
Loans Receivable
At March 31, 2004 and December 31, 2003
(Dollars in thousands)
|
| March 31, 2004 |
| December 31, 2003 |
| ||||||
|
|
|
|
|
|
|
|
|
| ||
Commercial |
| $ | 54,723 |
| 16.35 | % | $ | 57,854 |
| 17.21 | % |
Real estate - commercial |
| 136,541 |
| 40.81 | % | 139,725 |
| 41.56 | % | ||
Real estate - construction |
| 43,214 |
| 12.92 | % | 42,243 |
| 12.57 | % | ||
Real estate - residential |
| 43,273 |
| 12.93 | % | 42,495 |
| 12.64 | % | ||
Home equity lines |
| 47,049 |
| 14.06 | % | 43,176 |
| 12.84 | % | ||
Consumer |
| 9,807 |
| 2.93 | % | 10,690 |
| 3.18 | % | ||
|
|
|
|
|
|
|
|
|
| ||
Gross loans |
| $ | 334,607 |
| 100.00 | % | $ | 336,183 |
| 100.00 | % |
|
|
|
|
|
|
|
|
|
| ||
Add: net deferred (fees) costs |
| (131 | ) |
|
| (181 | ) |
|
| ||
Less: allowance for loan losses |
| (4,347 | ) |
|
| (4,344 | ) |
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Loans receivable, net |
| $ | 330,129 |
|
|
| $ | 331,658 |
|
|
|
23
Total deposits increased $51.8 million, or 9.9%, to $525.9 million at March 31, 2004, compared to $474.1 million at December 31, 2003 (see Table 8 for details on certificates of deposit with balances of $100,000 or more). We experienced increases in non-interest bearing demand deposits, money market and savings deposits and certificates of deposit. The increase in deposits is a result of new customers from our branch expansion and increased advertising efforts.
Certificates of Deposit of $100,000 or More
At March 31, 2004
(Dollars in thousands)
Maturities: |
|
|
| |
Three months or less |
| $ | 12,279 |
|
Over three months through six months |
| 14,599 |
| |
Over six months through twelve months |
| 25,362 |
| |
Over twelve months |
| 63,885 |
| |
|
| $ | 116,125 |
|
24
Other borrowed funds decreased $2.7 million to $71.8 million at March 31, 2004, compared to $74.5 million at December 31, 2003. We had Federal Home Loan Bank advances that matured during the first quarter of 2004 and replaced them with lower cost borrowings from the treasury, tax and loan note option of the Federal Reserve System. Table 9 provides information on our short-term borrowings.
Short-Term Borrowings
At March 31, 2004
(Dollars in thousands)
Advance Date |
| Interest Rate |
| Term of Advance |
| Date Amount |
| Outstanding |
| |
Dec-03 |
| 1.23 | % | 12 months |
| Dec-04 |
| $ | 5,000 |
|
Jan-04 |
| 1.56 | % | 12 months |
| Jan-05 |
| 5,000 |
| |
|
| 1.40 | % |
|
|
|
| $ | 10,000 |
|
All other borrowed funds |
|
|
|
|
|
|
| 61,758 |
| |
Total other borrowed funds |
|
|
|
|
|
|
| $ | 71,758 |
|
25
Shareholders’ equity at March 31, 2004 was $93.3 million, an increase of $7.9 million, or 9.3%, compared to $85.4 million at December 31, 2003. The increase of $7.9 million from the prior year was primarily driven by the underwriters’ exercise in January 2004 of their over allotment option from the secondary offering in December 2003. The over-allotment exercise resulted in the issuance of an additional 945,000 shares of the Company’s common stock and the receipt of $6.3 million in total capital. Net income of $719,000 for the yearquarter ended March 31, 2004 also added to date September 30, 2002the increase in shareholders’ equity for the period. In addition, the Company had a favorable market value adjustment of $817,000 on investment securities available-for-sale as of March 31, 2004. Book value per common share at March 31, 2004 was $5.08, compared to the year to date September 30, 2001.$4.80 at December 31, 2003.
We have not recorded income tax expense or benefit due to the existence of net losses for the nine months ended September 30, 2002 and all prior years of operations. We have net deferred tax assets, including net operating loss carryforwards, all of which have a full valuation allowance as of September 30, 2002. A valuation allowance is established against a deferred tax asset when, in the judgment of management, it is more likely than not that such deferred tax assets will be realized. The benefit of our deferred tax assets will only be recognized when it becomes more likely than not that they will be realized.
Business Segment Operations
We provide banking and non-banking financial services and products through our subsidiaries. Management operates and reports on the results of our operations through two business segments, commercial banking and investment advisory services.
servicesBanking.
The commercial banking segment provides comprehensivea wide range of banking services to small businesses and individuals through multiple delivery channels. Services offered include commercial and consumer lending, deposit products directand banking via the internetInternet or telephone, and the funding of small business receivables through the Business Manager product.telephone.
For the three months ended September 30, 2002March 31, 2004, the commercial banking segment hadrecorded net income of $495,000 and for the nine months ended September 30, 2002 net losses of $312,000,$913,000 compared to net losses of $124,000 and $638,000$813,000 for the three and nine months ended September 30, 2001.March 31, 2003, an improvement of $100,000. The improvement in earnings is a result of higherincreased net interest income, due to increased volume of earning assets and lower operating expenses.for this segment. As of September 30, 2002,March 31, 2004, total assets were $443.5 million, while loans receivable, net of fees, were
13
$216.4 million and deposits were $403.7 million. As of September 30, 2001, total assets were $255.3$687.5 million, loans receivable, net of fees, were $196.7$334.5 million and total deposits were $212.7$525.9 million. As of March 31, 2003, total assets were $481.1 million, loans receivable, net of fees were $252.0 million and total deposits were $417.1 million.
The investment advisory services segment offersprovides investment and financial and estate planning services centered onthrough an affiliation with a group of products provided through a strategic alliance with Legg Mason Financial Partners, a wholly owned subsidiary of Legg Mason, Inc. Operations for this segment began February 1, 1999.third party broker-dealer.
For the three and nine months ended September 30, 2002,March 31, 2004, the investment advisory services segment hadrecorded a net lossesloss of $35,000 and $158,000, respectively.$40,000, compared to a loss of $42,000 during the same period of 2003, an improvement of $2,000. As of September 30, 2002,March 31, 2004, total assets were $332,000$741,000 and total assets under management were $102.2$175.8 million. For the three months ended September 30, 2001, the net loss was $6,000 and for the nine months ended September 30, 2001, the net loss was $33,000. As of September 30, 2001,March 31, 2003, total assets were $421,000$241,000 and total assets under management were $133.8$84.6 million. Fee incomeThe revenues and assets under management from this business segment have increased for the three and nine months ended September 30, 2002 decreased asMarch 31, 2004 compared to the same three and nine month period of 2001, due primarily2003 as a result of increased transaction activity and accumulation of assets under management through new customers to reduced transaction activity.this business segment. The financial results of this business segment should continue to improve as the assets under management increase.
Information pertaining to both business segments can be found in Footnote 2 to the Notes to Consolidated Financial Statements.
26
Capital adequacy is an important measure of financial stability and performance. Our objectives are to maintain a level of capitalization that is sufficient to sustain asset growth and promote depositor and investor confidence.
Shareholders'
Regulatory agencies measure capital adequacy utilizing a formula that takes into account the individual risk profile of a financial institution. The guidelines define capital as both tier 1 (primarily common shareholders’ equity, at September 30, 2002 was $40.7 million compareddefined to $20.6 million atinclude certain debt obligations) and tier 2 (certain other debt obligations and a portion of the allowance for loan losses and 45% of unrealized gains in equity securities).
At March 31, 2004, our tier 1 and total (tier 1 and tier 2) risk-based capital ratios were 19.9% and 20.8%, respectively. At December 31, 2001. During the second quarter of 2002, we completed a stock rights and public offerings which raised $18.5 million in new capital and increased the total number of outstanding shares to 10,044,345 at September 30, 2002 as compared to 4,294,323 at December 31, 2001. Changes in the unrealized gain on investment securities portfolio totaling $2.7 million more than offset dividends paid on preferred stock and the net loss for the period. At September 30, 2002,2003, our tier 1 and total risk-based capital ratios were 14.0%19.7% and 15.2%20.7%, respectively. At December 31, 2001, our tier 1Our regulatory capital levels for the bank and total risk-based capital ratios were 9.0% and 10.4%, respectively.bank holding company meet those established for well-capitalized institutions. Table 810 provides additional information onpertaining to our capital resources.ratios.
Capital Components
At March 31, 2004 and December 31, 2003
(Dollars in thousands)
|
| Actual |
| For Capital |
| To Be Well |
| |||||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
At March 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total risk based capital to net risk-weighted assets |
| $ | 97,352 |
| 20.84 | % | $ | 37,363 | > | 8.00 | % | $ | 46,704 | > | 10.00 | % |
Tier I capital to net risk-weighted assets |
| 93,006 |
| 19.91 | % | 18,682 | > | 4.00 | % | 28,022 | > | 6.00 | % | |||
Total risk based capital to average total assets |
| 97,352 |
| 14.65 | % | 26,585 | > | 4.00 | % | 33,231 | > | 5.00 | % | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
At December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total risk based capital to net risk-weighted assets |
| $ | 90,239 |
| 20.66 | % | $ | 34,951 | > | 8.00 | % | $ | 43,688 | > | 10.00 | % |
Tier I capital to net risk-weighted assets |
| 85,896 |
| 19.66 | % | 17,475 | > | 4.00 | % | 26,213 | > | 6.00 | % | |||
Total risk based capital to average total assets |
| 90,239 |
| 15.45 | % | 23,365 | > | 4.00 | % | 29,206 | > | 5.00 | % |
27
As of March 31, 2004, there were no material changes in our contractual obligations as presented in the 2003 Form 10-KSB.
LiquidityThe objective of liquidity management is an important element in determiningto ensure the continuous availability of funds to meet the demands of depositors, investors and borrowers. Stable core deposits and a strong capital position are the current components of a solid foundation for our liquidity position. In addition, the availability of regional and national wholesale funding sources including federal funds purchased, negotiable certificates of deposit, securities sold under agreements to repurchase, and borrowings from the Federal Home Loan Bank enhance our liquidity. Cash flows from operations, such as loan payments and payoffs are also a significant source of liquidity. We have a contingency plan that provides for continued monitoring of liquidity needs and available sources of liquidity. We believe we have the ability to meet normal deposit withdrawals while also providing for the credit needs of customers. At September 30, 2002,our increased liquidity needs. Liquid assets, which include cash and cash equivalentsdue from banks, federal funds sold and investment securities available-for-sale totaled $224.9$189.7 million, or 50.3% of total assets compared to $68.6 million or 24.5%27.4% of total assets, at DecemberMarch 31, 2001. The improvement in liquidity2004. We had investment securities that are classified as compared to prior year is due to the availabilityheld-to-maturity of funds from the recent capital raising,$154.1 million at March 31, 2004. We also had $201.3 million of our total investment securities portfolio available as well as higher deposit levels resulting from our advertising program.collateral for additional Federal Home Loan Bank borrowings. Management is committed to maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth and fully comply with all regulatory requirements.
Asset/liability management involves the monitoring of our sensitivity to interest rate movements. In order to measure the effect of interest rates on our net interest income, management takeswe take into consideration the expected cash flows from the loan and investment securities portfolios and the expected magnitude of the repricing of specific asset and liability categories. Management evaluates interest sensitivity risk and then formulates guidelines to manage this risk based upon its outlook regarding the economy, forecasted interest rate movements and other business factors. Management's
28
Management’s goal is to maximize and stabilize the net interest margin by limiting exposure to interest rate changes.
The data in Table 911 reflects the repricing or expected maturities of various assets and liabilities as of September 30, 2002.at March 31, 2004. This "gap"“gap” analysis represents the difference between interest sensitive assets and liabilities in a specific time interval. The interest sensitivity gap analysis presents a position that
14
existed at one particular point in time, and assumes that assets and liabilities with similar repricing characteristics will reprice at the same time and to the same degree.
Forward LookingInterest Rate Sensitivity Gap Analysis
At March 31, 2004
(Dollars in thousands)
|
| Immediate |
| 2-90 |
| 91-180 |
| 181-365 |
| 1-3 |
| Over 3 |
| TOTAL |
| |||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total investment securities and other investments |
| $ | — |
| $ | 11,447 |
| $ | 13,477 |
| $ | 26,343 |
| $ | 106,091 |
| $ | 168,749 |
| $ | 326,107 |
|
Federal funds sold |
| 11,381 |
| — |
| — |
| — |
| — |
| — |
| 11,381 |
| |||||||
Loans held for sale |
| 688 |
| — |
| — |
| — |
| — |
| — |
| 688 |
| |||||||
Loans Receivable, net of fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial & industrial |
| 36 |
| 174,364 |
| 39 |
| 188 |
| 2,865 |
| 13,641 |
| 191,133 |
| |||||||
Residential |
| — |
| 18,308 |
| 434 |
| 1,293 |
| 1,613 |
| 21,625 |
| 43,273 |
| |||||||
Home equity lines |
| — |
| 42,040 |
| 3,929 |
| 1,080 |
| — |
| — |
| 47,049 |
| |||||||
Construction |
| — |
| 30,754 |
| 456 |
| 6,118 |
| 5,886 |
| — |
| 43,214 |
| |||||||
All other |
| 1,002 |
| 4,044 |
| 87 |
| 34 |
| 417 |
| 4,223 |
| 9,807 |
| |||||||
Total loans receivable, net of fees |
| 1,038 |
| 269,510 |
| 4,945 |
| 8,713 |
| 10,781 |
| 39,489 |
| 334,476 |
| |||||||
Total earning assets |
| 13,107 |
| 280,957 |
| 18,422 |
| 35,056 |
| 116,872 |
| 208,238 |
| 672,652 |
| |||||||
Cumulative rate sensitive assets |
| $ | 13,107 |
| $ | 294,064 |
| $ | 312,486 |
| $ | 347,542 |
| $ | 464,414 |
| $ | 672,652 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Noninterest-bearing demand |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 81,466 |
| $ | 81,466 |
|
Interest-bearing transaction accounts |
| 36,658 |
| 18,329 |
| 18,329 |
| 18,329 |
| 18,329 |
| 73,316 |
| 183,290 |
| |||||||
Certificates of deposit - fixed |
| 29 |
| 12,842 |
| 12,766 |
| 23,528 |
| 48,102 |
| 14,288 |
| 111,555 |
| |||||||
Certificates of deposit - no penalty |
| 273 |
| 15,412 |
| 24,013 |
| 27,606 |
| 82,316 |
| — |
| 149,620 |
| |||||||
Total deposits |
| 36,960 |
| 46,583 |
| 55,108 |
| 69,463 |
| 148,747 |
| 169,070 |
| 525,931 |
| |||||||
Other borrowed funds |
| 24,425 |
| 625 |
| 4,625 |
| 19,250 |
| 6,000 |
| 16,833 |
| 71,758 |
| |||||||
Total deposits & other borrowed funds |
| 61,385 |
| 47,208 |
| 59,733 |
| 88,713 |
| 154,747 |
| 185,903 |
| 597,689 |
| |||||||
Cumulative rate sensitive liabilities |
| $ | 61,385 |
| $ | 108,593 |
| $ | 168,326 |
| $ | 257,039 |
| $ | 411,786 |
| $ | 597,689 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Gap |
| $ | (48,278 | ) | $ | 233,749 |
| $ | (41,311 | ) | $ | (53,657 | ) | $ | (37,875 | ) | $ | 22,335 |
|
|
| |
Cumulative gap |
| (48,278 | ) | 185,471 |
| 144,160 |
| 90,503 |
| 52,628 |
| 74,963 |
|
|
| |||||||
Gap/ total assets |
| -6.96 | % | 33.71 | % | -5.96 | % | -7.74 | % | -5.46 | % | 3.22 | % |
|
| |||||||
Cumulative gap/ total assets |
| -6.96 | % | 26.75 | % | 20.79 | % | 13.05 | % | 7.59 | % | 10.81 | % |
|
| |||||||
Rate sensitive assets/ rate sensitive liabilities |
| 0.21 |
| 5.95 |
| 0.31 |
| 0.40 |
| 0.76 |
| 1.12 |
|
|
| |||||||
Cumulative rate sensitive assets/ cumulative rate sensitive liabilities |
| 0.21 |
| 2.71 |
| 1.86 |
| 1.35 |
| 1.13 |
| 1.13 |
|
|
|
29
Forward-Looking Statements
This Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are not historical facts, but rather are predictions and generally can be identified by use of statements that include phrases such as "believe," "expect," "anticipate," "estimate," "intend," "plan," "foresee"“believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan, “ “foresee” or other words or phrases of similar import. Similarly, statements that describe our future financial condition or results of operations, objectives, strategies, plans, goals or future performance and business also are forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors, including those described in the 2003 Form 10-KSB under “Caution About Forward-Looking Statements,” that could cause our actual results to differ materially from those currently anticipated in these forward-looking statements. In light of these risks and uncertainties, the forward-looking events might or might not occur.
Important
30
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our Asset/ Liability Committee is responsible for reviewing our liquidity requirements and maximizing our net interest income, consistent with capital requirements, liquidity, interest rate and economic outlooks, competitive factors and customer needs. One of the tools we use to determine our interest rate risk is gap analysis. Gap analysis attempts to examine the volume of interest rate sensitive assets less interest rate sensitive liabilities in various time intervals. The difference is the interest sensitivity gap, which indicates how future changes in interest rates may affect net interest income. Interest sensitivity gap analysis presents a position that could cause actual resultsexists at one particular point in time and assumes that assets and liabilities with similar characteristics will re-price at the same time and to differ materially from those suggested bythe same degree. Under our asset/liability policies, regardless of whether interest rates are expected to increase or decrease, the objective is to maintain a gap position that will minimize any changes in net interest income. A negative gap, or liability sensitive position, exists when we have more interest sensitive liabilities maturing within a certain gap interval than interest sensitive assets. Under this scenario, if interest rates were to increase, it would tend to reduce interest income.
We can reprice our interest checking, savings, and money market accounts at any time. We carefully analyze the impact of any decrease in interest rates on our deposits, as we may experience a runoff in deposit balances as a result of such changes in interest rates. Based on the degree and frequency of movement being limited in practice, we have classified 20% of these forward-looking statements, and could adversely affect our future financial performance, include those referred todeposits in our Annual Report on Form 10-KSB for the year ended December 31, 2001.
15
Cardinal Financial Corporation and SubsidiariesInvestment Securities Available-for-SaleAsimmediate gap interval, 10% of September 30, 2002 and December 31, 2001(Dollarsthese deposits in thousands)
| Par Value | Amortized Cost | Fair Value | Unrealized Gain/(Loss) | Average Yield | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
As of September 30, 2002 | |||||||||||||||||
U.S. government agencies and enterprises | |||||||||||||||||
One to five years | $ | 23,000 | $ | 22,988 | $ | 23,256 | $ | 268 | 3.90 | % | |||||||
Total U.S. government agencies | $ | 23,000 | $ | 22,988 | $ | 23,256 | $ | 268 | 3.90 | % | |||||||
Mortgage-backed securities | |||||||||||||||||
Within one year | $ | 3,784 | $ | 3,841 | $ | 3,884 | $ | 43 | 3.61 | % | |||||||
One to five years | 97,595 | 99,386 | 101,458 | 2,072 | 5.16 | % | |||||||||||
Five to ten years | 5,962 | 6,073 | 6,183 | 110 | 5.85 | % | |||||||||||
After ten years | 342 | 360 | 360 | — | 9.69 | % | |||||||||||
Total mortgage-backed securities | $ | 107,683 | $ | 109,660 | $ | 111,885 | $ | 2,225 | 5.16 | % | |||||||
Corporate bonds | |||||||||||||||||
One to five years | $ | 2,000 | $ | 340 | $ | 260 | $ | (80 | ) | 0.00 | % | ||||||
Total corporate bonds | $ | 2,000 | $ | 340 | $ | 260 | $ | (80 | ) | 0.00 | % | ||||||
Treasury bonds | |||||||||||||||||
One to five years | $ | 2,500 | $ | 2,509 | $ | 2,544 | $ | 35 | 2.67 | % | |||||||
Total treasury bonds | $ | 2,500 | $ | 2,509 | $ | 2,544 | $ | 35 | 2.67 | % | |||||||
Total investment securities available-for-sale | $ | 135,183 | $ | 135,497 | $ | 137,945 | $ | 2,448 | 4.82 | % | |||||||
Par Value | Amortized Cost | Fair Value | Unrealized Gain/(Loss) | Average Yield | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
As of December 31, 2001 | |||||||||||||||||
U.S. government agencies and enterprises | |||||||||||||||||
One to five years | $ | 3,000 | $ | 2,985 | $ | 2,950 | $ | (35 | ) | 4.15 | % | ||||||
Five to ten years | 1,500 | 1,516 | 1,508 | (8 | ) | 4.67 | % | ||||||||||
Total U.S. government agencies | $ | 4,500 | $ | 4,501 | $ | 4,458 | $ | (43 | ) | 4.32 | % | ||||||
Mortgage-backed securities | |||||||||||||||||
Within one year | $ | 182 | $ | 182 | $ | 183 | $ | 1 | 2.55 | % | |||||||
One to five years | 11,210 | 11,456 | 11,383 | (73 | ) | 5.22 | % | ||||||||||
Five to ten years | 5,804 | 5,927 | 5,865 | (62 | ) | 5.79 | % | ||||||||||
After ten years | 4,849 | 4,965 | 4,926 | (39 | ) | 5.96 | % | ||||||||||
Total mortgage-backed securities | $ | 22,045 | $ | 22,530 | $ | 22,357 | $ | (173 | ) | 5.51 | % | ||||||
Corporate bonds | |||||||||||||||||
One to five years | $ | 6,000 | $ | 6,154 | $ | 6,114 | $ | (40 | ) | 5.42 | % | ||||||
Five to ten years | 1,000 | 986 | 969 | (17 | ) | 6.98 | % | ||||||||||
Total corporate bonds | $ | 7,000 | $ | 7,140 | $ | 7,083 | $ | (57 | ) | 5.64 | % | ||||||
Treasury bonds | |||||||||||||||||
Within one year | $ | 250 | $ | 250 | $ | 249 | $ | (1 | ) | 1.87 | % | ||||||
Total treasury bonds | $ | 250 | $ | 250 | $ | 249 | $ | (1 | ) | 1.87 | % | ||||||
Total investment securities available-for-sale | $ | 33,795 | $ | 34,421 | $ | 34,147 | $ | (274 | ) | 5.36 | % | ||||||
16
Cardinal Financial Corporation and SubsidiariesLoans ReceivableAs of September 30, 2002 and December 31, 2001(Dollars in thousands)
| September 30, 2002 | December 31, 2001 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Commercial | $ | 52,717 | 24.37 | % | $ | 57,665 | 28.71 | % | |||
Real estate—commercial | 95,699 | 44.24 | % | 87,116 | 43.37 | % | |||||
Real estate—construction | 6,224 | 2.88 | % | 6,397 | 3.18 | % | |||||
Real estate—residential | 25,329 | 11.71 | % | 14,469 | 7.20 | % | |||||
Home equity lines | 24,776 | 11.45 | % | 21,299 | 10.60 | % | |||||
Consumer | 11,592 | 5.35 | % | 13,941 | 6.94 | % | |||||
Gross loans | $ | 216,337 | 100.00 | % | $ | 200,887 | 100.00 | % | |||
Add: unearned income, net | 18 | 24 | |||||||||
Less: allowance for loan losses | (3,073 | ) | (3,104 | ) | |||||||
Total loans, net | $ | 213,282 | $ | 197,807 | |||||||
Table 3.
Cardinal Financial Corporation and SubsidiariesCertificates of Deposit of $100,000 or MoreAs of September 30, 2002(Dollars in thousands)
| September 30, 2002 | ||
---|---|---|---|
Maturities: | |||
Three months or less | $ | 8,356 | |
Over three months through six months | 8,918 | ||
Over six months through twelve months | 19,675 | ||
Over twelve months | 35,634 | ||
$ | 72,583 | ||
17
Cardinal Financial Corporation and SubsidiariesAverage Balance Sheets and Interest Rates on Earning Assets and Interest—Bearing LiabilitiesFor the Three Months Ended September 30, 2002, 2001 and 2000(Dollars in thousands)
| 2002 | 2001 | 2000 | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average Balance | Interest Income/ Expense | Rate | Average Balance | Interest Income/ Expense | Rate | Average Balance | Interest Income/ Expense | Rate | ||||||||||||||||||
Assets | |||||||||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||||
Loans: | |||||||||||||||||||||||||||
Commercial | $ | 49,780 | $ | 893 | 7.18 | % | $ | 53,237 | $ | 1,115 | 8.38 | % | $ | 33,601 | $ | 821 | 9.77 | % | |||||||||
Real estate—commercial | 94,614 | 1,887 | 7.98 | % | 77,165 | 1,673 | 8.67 | % | 33,901 | 633 | 7.47 | % | |||||||||||||||
Real estate—construction | 6,675 | 100 | 5.96 | % | 6,044 | 127 | 8.40 | % | 3,373 | 85 | 10.12 | % | |||||||||||||||
Real estate—residential | 19,103 | 369 | 7.72 | % | 17,864 | 384 | 8.59 | % | 19,746 | 460 | 9.33 | % | |||||||||||||||
Home equity lines | 24,268 | 263 | 4.30 | % | 18,755 | 287 | 6.12 | % | 8,253 | 183 | 8.85 | % | |||||||||||||||
Consumer | 11,884 | 225 | 7.51 | % | 14,911 | 293 | 7.86 | % | 9,635 | 216 | 8.95 | % | |||||||||||||||
Total loans | 206,324 | 3,737 | 7.24 | % | 187,976 | 3,879 | 8.25 | % | 108,509 | 2,398 | 8.84 | % | |||||||||||||||
Investment securities available for sale | 127,307 | 1,471 | 4.62 | % | 5,788 | 95 | 6.57 | % | 6,310 | 99 | 6.30 | % | |||||||||||||||
Other investments | 1,199 | 17 | 5.67 | % | 1,319 | 22 | 6.67 | % | 1,036 | 16 | 6.24 | % | |||||||||||||||
Federal funds sold | 62,104 | 260 | 1.66 | % | 25,168 | 218 | 3.44 | % | 22,906 | 391 | 6.85 | % | |||||||||||||||
Total interest-earning assets and interest income | 396,934 | 5,485 | 5.53 | % | 220,251 | 4,214 | 7.65 | % | 138,761 | 2,904 | 8.37 | % | |||||||||||||||
Non-interest earning assets: | |||||||||||||||||||||||||||
Cash and due from banks | 19,861 | 10,706 | 5,711 | ||||||||||||||||||||||||
Premises and equipment, net | 4,678 | 5,572 | 4,678 | ||||||||||||||||||||||||
Goodwill and other intangibles | 646 | 9,167 | 3,300 | ||||||||||||||||||||||||
Accrued interest and other assets | 3,500 | 1,836 | 687 | ||||||||||||||||||||||||
Allowance for loan losses | (3,049 | ) | (2,138 | ) | (1,278 | ) | |||||||||||||||||||||
Total assets | $ | 422,570 | $ | 245,394 | $ | 151,859 | |||||||||||||||||||||
Liabilities and Shareholders' Equity | |||||||||||||||||||||||||||
Interest—bearing liabilities: | |||||||||||||||||||||||||||
Interest—bearing deposits: | |||||||||||||||||||||||||||
Interest checking | 130,110 | 904 | 2.76 | % | 16,128 | 74 | 1.84 | % | 6,244 | 33 | 2.10 | % | |||||||||||||||
Money markets | 32,019 | 151 | 1.87 | % | 26,350 | 185 | 2.82 | % | 16,169 | 136 | 3.37 | % | |||||||||||||||
Statement savings | 4,287 | 13 | 1.24 | % | 4,502 | 24 | 2.16 | % | 2,216 | 16 | 2.97 | % | |||||||||||||||
Certificates of deposit | 150,658 | 1,535 | 4.04 | % | 103,439 | 1,420 | 5.51 | % | 62,115 | 966 | 6.24 | % | |||||||||||||||
Total interest—bearing deposits | 317,074 | 2,603 | 3.26 | % | 150,419 | 1,703 | 4.49 | % | 86,744 | 1,151 | 5.32 | % | |||||||||||||||
Other borrowed funds | 4,065 | 40 | 3.93 | % | 10,912 | 122 | 4.45 | % | 6,875 | 117 | 6.83 | % | |||||||||||||||
Total interest-bearing liabilities and interest expense | 321,139 | 2,643 | 3.27 | % | 161,331 | 1,825 | 4.50 | % | 93,619 | 1,268 | 5.43 | % | |||||||||||||||
Noninterest-bearing liabilities: | |||||||||||||||||||||||||||
Demand deposits | 60,161 | 49,337 | 27,053 | ||||||||||||||||||||||||
Other liabilities | 1,659 | 2,500 | 1,169 | ||||||||||||||||||||||||
Preferred shareholders' equity | 6,825 | 7,057 | 2,378 | ||||||||||||||||||||||||
Common shareholders' equity | 32,786 | 25,169 | 27,640 | ||||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 422,570 | $ | 245,394 | $ | 151,859 | |||||||||||||||||||||
Net interest income and net interest margin | $ | 2,842 | 2.86 | % | $ | 2,389 | 4.34 | % | $ | 1,636 | 4.72 | % | |||||||||||||||
18
Cardinal Financial Corporation and SubsidiariesRate and Volume Analysis (Tax Equivalent Basis)(Dollars in thousands)
| Three Months Ended September 30, 2002 Compared to 2001 | Three Months Ended September 30, 2001 Compared to 2000 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average Volume | Average Rate | Increase (Decrease) | Average Volume | Average Rate | Increase (Decrease) | |||||||||||||||
Interest income: | |||||||||||||||||||||
Loans: | |||||||||||||||||||||
Commercial | $ | (72 | ) | $ | (150 | ) | $ | (222 | ) | $ | 480 | $ | (186 | ) | $ | 294 | |||||
Real estate—commercial | 379 | (165 | ) | 214 | 808 | 232 | 1,040 | ||||||||||||||
Real estate—construction | 14 | (41 | ) | (27 | ) | 68 | (26 | ) | 42 | ||||||||||||
Real estate—residential | 27 | (42 | ) | (15 | ) | (43 | ) | (33 | ) | (76 | ) | ||||||||||
Home equity lines | 84 | (108 | ) | (24 | ) | 234 | (130 | ) | 104 | ||||||||||||
Consumer | (60 | ) | (8 | ) | (68 | ) | 119 | (42 | ) | 77 | |||||||||||
Total loans | 372 | (514 | ) | (142 | ) | 1,666 | (185 | ) | 1,481 | ||||||||||||
Investment securities available for sale | 1,995 | (619 | ) | 1,376 | (8 | ) | 4 | (4 | ) | ||||||||||||
Other investments | (2 | ) | (3 | ) | (5 | ) | 5 | 1 | 6 | ||||||||||||
Federal funds sold | 321 | (279 | ) | 42 | 39 | (212 | ) | (173 | ) | ||||||||||||
Total interest income | 2,686 | (1,415 | ) | 1,271 | 1,702 | (392 | ) | 1,310 | |||||||||||||
Interest expense: | |||||||||||||||||||||
Interest—bearing deposits: | |||||||||||||||||||||
Interest checking | 527 | 303 | 830 | 52 | (11 | ) | 41 | ||||||||||||||
Money markets | 40 | (74 | ) | (34 | ) | 87 | (38 | ) | 49 | ||||||||||||
Statement savings | (1 | ) | (10 | ) | (11 | ) | 17 | (9 | ) | 8 | |||||||||||
Certificates of deposit | 656 | (541 | ) | 115 | 650 | (196 | ) | 454 | |||||||||||||
Total interest—bearing deposits | 1,222 | (322 | ) | 900 | 806 | (254 | ) | 552 | |||||||||||||
Other borrowed funds | (77 | ) | (5 | ) | (82 | ) | 69 | (64 | ) | 5 | |||||||||||
Total interest expense | 1,145 | (327 | ) | 818 | 875 | (318 | ) | 557 | |||||||||||||
Net interest income | $ | 1,541 | $ | (1,088 | ) | $ | 453 | $ | 827 | $ | (74 | ) | $ | 753 | |||||||
19
Cardinal Financial Corporation and SubsidiariesAverage Balance Sheets and Interest Rates on Earning Assets and Interest—Bearing LiabilitiesFor the Nine Months Ended September 30, 2002, 2001 and 2000(Dollars in thousands)
| 2002 | 2001 | 2000 | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average Balance | Interest Income/ Expense | Rate | Average Balance | Interest Income/ Expense | Rate | Average Balance | Interest Income/ Expense | Rate | ||||||||||||||||||
Assets | |||||||||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||||
Loans: | |||||||||||||||||||||||||||
Commercial | $ | 52,156 | $ | 2,788 | 7.13 | % | $ | 50,710 | $ | 3,345 | 8.80 | % | $ | 27,978 | $ | 1,996 | 9.51 | % | |||||||||
Real estate—commercial | 89,634 | 5,408 | 8.04 | % | 67,475 | 4,445 | 8.78 | % | 30,020 | 1,696 | 7.53 | % | |||||||||||||||
Real estate—construction | 6,185 | 282 | 6.07 | % | 5,538 | 374 | 9.01 | % | 1,990 | 146 | 9.78 | % | |||||||||||||||
Real estate—residential | 17,448 | 1,033 | 7.90 | % | 18,062 | 1,133 | 8.36 | % | 15,068 | 1,012 | 8.96 | % | |||||||||||||||
Home equity lines | 23,270 | 741 | 4.26 | % | 17,172 | 896 | 6.96 | % | 6,078 | 393 | 8.62 | % | |||||||||||||||
Consumer | 12,864 | 715 | 7.43 | % | 14,965 | 881 | 7.85 | % | 9,428 | 566 | 8.01 | % | |||||||||||||||
Total loans | 201,557 | 10,967 | 7.26 | % | 173,922 | 11,074 | 8.49 | % | 90,562 | 5,809 | 8.55 | % | |||||||||||||||
Investment securities available for sale | 91,846 | 3,284 | 4.77 | % | 5,325 | 285 | 7.14 | % | 5,136 | 243 | 6.30 | % | |||||||||||||||
Other investments | 1,197 | 53 | 5.90 | % | 1,427 | 66 | 6.17 | % | 971 | 49 | 6.68 | % | |||||||||||||||
Federal funds sold | 49,428 | 613 | 1.66 | % | 27,223 | 926 | 4.55 | % | 19,245 | 961 | 6.66 | % | |||||||||||||||
Total interest-earning assets and interest income | 344,028 | 14,917 | 5.78 | % | 207,897 | 12,351 | 7.92 | % | 115,914 | 7,062 | 8.12 | % | |||||||||||||||
Non-interest earning assets: | |||||||||||||||||||||||||||
Cash and due from banks | 16,955 | 10,207 | 4,499 | ||||||||||||||||||||||||
Premises and equipment, net | 4,843 | 5,649 | 4,496 | ||||||||||||||||||||||||
Goodwill and other intangibles | 652 | 9,337 | 1,108 | ||||||||||||||||||||||||
Accrued interest and other assets | 2,003 | 1,723 | 1,209 | ||||||||||||||||||||||||
Allowance for loan losses | (3,051 | ) | (2,038 | ) | (999 | ) | |||||||||||||||||||||
Total assets | $ | 365,430 | $ | 232,775 | $ | 126,227 | |||||||||||||||||||||
Liabilities and Shareholders' Equity | |||||||||||||||||||||||||||
Interest—bearing liabilities: | |||||||||||||||||||||||||||
Interest—bearing deposits: | |||||||||||||||||||||||||||
Interest checking | 104,351 | 2,252 | 2.89 | % | 14,188 | 203 | 1.93 | % | 4,264 | 73 | 2.32 | % | |||||||||||||||
Money markets | 28,229 | 424 | 2.01 | % | 24,485 | 617 | 3.39 | % | 12,666 | 336 | 3.57 | % | |||||||||||||||
Statement savings | 4,275 | 40 | 1.24 | % | 4,396 | 88 | 2.70 | % | 1,096 | 26 | 3.23 | % | |||||||||||||||
Certificates of deposit | 131,106 | 4,118 | 4.20 | % | 99,781 | 4,427 | 5.98 | % | 48,564 | 2,193 | 6.08 | % | |||||||||||||||
Total interest—bearing deposits | 267,961 | 6,834 | 3.41 | % | 142,850 | 5,335 | 4.99 | % | 66,590 | 2,628 | 5.31 | % | |||||||||||||||
Other borrowed funds | 6,802 | 208 | 4.09 | % | 9,817 | 368 | 5.02 | % | 6,261 | 309 | 6.55 | % | |||||||||||||||
Total interest-bearing liabilities and interest expense | 274,763 | 7,042 | 3.43 | % | 152,667 | 5,703 | 5.00 | % | 72,851 | 2,937 | 5.43 | % | |||||||||||||||
Noninterest-bearing liabilities: | |||||||||||||||||||||||||||
Demand deposits | 57,915 | 44,566 | 21,517 | ||||||||||||||||||||||||
Other liabilities | 2,505 | 2,593 | 1,917 | ||||||||||||||||||||||||
Preferred shareholders' equity | 6,825 | 7,057 | 798 | ||||||||||||||||||||||||
Common shareholders' equity | 23,422 | 25,892 | 29,144 | ||||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 365,430 | $ | 232,775 | $ | 126,227 | |||||||||||||||||||||
Net interest income and net interest margin | $ | 7,875 | 3.05 | % | $ | 6,648 | 4.26 | % | $ | 4,125 | 4.74 | % | |||||||||||||||
20
Cardinal Financial Corporation and SubsidiariesRate and Volume Analysis (Tax Equivalent Basis)(Dollars in thousands)
| Nine Months Ended September 30, 2002 Compared to 2001 | Nine Months Ended September 30, 2001 Compared to 2000 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average Volume | Average Rate | Increase (Decrease) | Average Volume | Average Rate | Increase (Decrease) | |||||||||||||||
Interest income: | |||||||||||||||||||||
Loans: | |||||||||||||||||||||
Commercial | $ | 95 | $ | (652 | ) | $ | (557 | ) | $ | 1,622 | $ | (273 | ) | $ | 1,349 | ||||||
Real estate—commercial | 1,460 | (497 | ) | 963 | 2,116 | 633 | 2,749 | ||||||||||||||
Real estate—construction | 44 | (136 | ) | (92 | ) | 260 | (32 | ) | 228 | ||||||||||||
Real estate—residential | (39 | ) | (61 | ) | (100 | ) | 202 | (81 | ) | 121 | |||||||||||
Home equity lines | 317 | (472 | ) | (155 | ) | 715 | (212 | ) | 503 | ||||||||||||
Consumer | (123 | ) | (43 | ) | (166 | ) | 332 | (17 | ) | 315 | |||||||||||
Total loans | 1,754 | (1,861 | ) | (107 | ) | 5,247 | 18 | 5,265 | |||||||||||||
Investment securities available for sale | 4,631 | (1,632 | ) | 2,999 | 9 | 33 | 42 | ||||||||||||||
Other investments | (11 | ) | (2 | ) | (13 | ) | 23 | (6 | ) | 17 | |||||||||||
Federal funds sold | 755 | (1,068 | ) | (313 | ) | 397 | (432 | ) | (35 | ) | |||||||||||
Total interest income | 7,129 | (4,563 | ) | 2,566 | 5,676 | (387 | ) | 5,289 | |||||||||||||
Interest expense: | |||||||||||||||||||||
Interest—bearing deposits: | |||||||||||||||||||||
Interest checking | 1,300 | 749 | 2,049 | 172 | (42 | ) | 130 | ||||||||||||||
Money markets | 95 | (288 | ) | (193 | ) | 315 | (34 | ) | 281 | ||||||||||||
Statement savings | (2 | ) | (46 | ) | (48 | ) | 80 | (18 | ) | 62 | |||||||||||
Certificates of deposit | 1,400 | (1,709 | ) | (309 | ) | 2,329 | (95 | ) | 2,234 | ||||||||||||
Total interest—bearing deposits | 2,793 | (1,294 | ) | 1,499 | 2,896 | (189 | ) | 2,707 | |||||||||||||
Other borrowed funds | (113 | ) | (47 | ) | (160 | ) | 174 | (115 | ) | 59 | |||||||||||
Total interest expense | 2,680 | (1,341 | ) | 1,339 | 3,070 | (304 | ) | 2,766 | |||||||||||||
Net interest income | $ | 4,449 | $ | (3,222 | ) | $ | 1,227 | $ | 2,606 | $ | (83 | ) | $ | 2,523 | |||||||
21
Cardinal Financial Corporation and SubsidiariesAllowance for Loan LossesFor the Nine Months Ended September 30, 2002 and 2001(Dollars in thousands)
| 2002 | 2001 | |||||
---|---|---|---|---|---|---|---|
Beginning balance, January 1 | $ | 3,104 | $ | 1,900 | |||
Provision for loan losses | 134 | 375 | |||||
Transfer to bank's liability on unfunded commitments | (74 | ) | — | ||||
Loans charged off: | |||||||
Commercial | (63 | ) | — | ||||
Real estate—commercial | — | — | |||||
Real estate—construction | — | — | |||||
Real estate—residential | — | — | |||||
Home equity lines | — | — | |||||
Consumer | (41 | ) | — | ||||
Total loans charged off | (104 | ) | — | ||||
Recoveries: | |||||||
Commercial | 2 | 2 | |||||
Real estate—commercial | — | — | |||||
Real estate—construction | — | — | |||||
Real estate—residential | — | — | |||||
Home equity lines | — | — | |||||
Consumer | 11 | — | |||||
Total recoveries | 13 | 2 | |||||
Net (charge-offs) recoveries | (91 | ) | 2 | ||||
Ending balance | $ | 3,073 | $ | 2,277 | |||
September 30, 2002 | September 30, 2001 | |||||||
---|---|---|---|---|---|---|---|---|
Loans: | ||||||||
Balance at period end | $ | 216,337 | $ | 196,668 | ||||
Allowance for loan losses to period end loans receivable | 1.42 | % | 1.16 | % |
22
Cardinal Financial Corporation and SubsidiariesAllocationeach of the Allowance for Loan LossesAsgap intervals from 2-90 days through the 1-3 year gap interval, leaving the remaining portion or 40% of September 30, 2002these deposits in the over 3 year gap interval. We continue to analyze the activity in our deposit portfolio and Decembermake changes in our gap assumptions as the activity dictates. See Table 11 from our management’s discussion and analysis above, which reflects the repricing or expected maturities of various assets and liabilities at March 31, 2001(Dollars2004. This “gap” analysis represents the difference between interest sensitive assets and liabilities in thousands)
| September 30, 2002 | December 31, 2001 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Total* | Amount | % of Total* | ||||||
Commercial | $ | 948 | 24.37% | $ | 1,149 | 28.71% | ||||
Real estate—commercial | 1,342 | 44.24% | 1,270 | 43.37% | ||||||
Real estate—construction | 173 | 2.88% | 34 | 3.18% | ||||||
Real estate—residential | 190 | 11.71% | 98 | 7.20% | ||||||
Home equity lines | 198 | 11.45% | 176 | 10.60% | ||||||
Consumer | 222 | 5.35% | 377 | 6.94% | ||||||
Total allowance for loan losses | $ | 3,073 | 100.00% | $ | 3,104 | 100.00% | ||||
23
Cardinal Financial Corporation
We also use a simulation process to measure interest rate risk and SubsidiariesCapital ComponentsAsthe impact of September 30, 2002rate fluctuations on net interest income. These simulations incorporate assumptions regarding balance sheet growth and December 31, 2001(Dollarsmix, and the re-pricing and maturity characteristics of existing and projected balance sheets. One of the ways we manage our interest rate risk is through an analysis of the relationship between interest-earning assets and interest-bearing liabilities to measure the impact that future changes in thousands)
| Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | Ratio | Amount | | Ratio | Amount | | Ratio | ||||||||||||
As of September 30, 2002 | ||||||||||||||||||||
Total risk based capital/ Total capital to risk-weighted assets | $ | 40,708 | 15.21 | % | $ | 21,407 | ³ | 8.00 | % | $ | 26,759 | ³ | 10.00 | % | ||||||
Tier I capital/ Tier I capital to risk-weighted assets | 37,636 | 14.06 | % | 10,704 | ³ | 4.00 | % | 16,055 | ³ | 6.00 | % | |||||||||
Total risk based capital/ Total capital to average assets | 40,708 | 9.63 | % | 16,903 | ³ | 4.00 | % | 13,380 | ³ | 5.00 | % | |||||||||
As of December 31, 2001 | ||||||||||||||||||||
Total risk based capital/ Total capital to risk-weighted assets | $ | 23,333 | 10.42 | % | $ | 17,909 | ³ | 8.00 | % | $ | 22,387 | ³ | 10.00 | % | ||||||
Tier I capital/ Tier I capital to risk-weighted assets | 20,230 | 9.04 | % | 8,955 | ³ | 4.00 | % | 13,432 | ³ | 6.00 | % | |||||||||
Total risk based capital/ Total capital to average assets | 23,333 | 8.57 | % | 10,891 | ³ | 4.00 | % | 13,614 | ³ | 5.00 | % |
24
Table 9.interest rates will have on net interest income. Using this relationship analysis, changes in interest rates and volumes are used to test the sensitivity of our net interest income. While we show liability sensitivity in the short term indicating that an increase in interest rates may negatively affect short-term net interest income, we would likely take actions to minimize our exposure to negative results and within a short period of time make adjustments so that net interest income would not be materially impacted.
Cardinal Financial Corporation
We expect our net interest income will be greater over the longer term at higher prevailing interest rate levels, although we may be negatively affected by rising rates in the shorter term. This is due to the large proportion of low-cost core deposits such as demand, interest checking, savings, and SubsidiariesInterest Rate Sensitivity Gap AnalysisAs of September 30, 2002(Dollarsmoney market accounts comprising our funding sources, which tend to be less sensitive to rising rates and can be invested in thousands)relatively higher yielding loans and investment securities.
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| Immediate Repricing | 2-90 Days | 91-180 Days | 181-365 Days | 1-3 Years | Over 3 Years | TOTAL | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets | |||||||||||||||||||||
Investment securities available-for-sale and other investments | $ | — | $ | 7,382 | $ | 6,018 | $ | 13,009 | $ | 65,206 | $ | 47,593 | $ | 139,208 | |||||||
Federal funds sold | 61,186 | — | — | — | — | — | 61,186 | ||||||||||||||
Loans | |||||||||||||||||||||
Commercial & industrial | 15,152 | 5,761 | 3,722 | 8,358 | 45,320 | 70,102 | 148,416 | ||||||||||||||
Residential | 108 | 249 | 294 | 2,129 | 7,821 | 14,729 | 25,329 | ||||||||||||||
Home equity lines | 4,471 | 20,305 | — | — | — | — | 24,776 | ||||||||||||||
Construction | 4,770 | 13 | 6 | 12 | 55 | 1,368 | 6,224 | ||||||||||||||
All other | 1,706 | 555 | 397 | 711 | 2,416 | 5,806 | 11,592 | ||||||||||||||
Total Gross Loans | 26,207 | 26,884 | 4,420 | 11,210 | 55,612 | 92,005 | 216,337 | ||||||||||||||
Total Earning Assets | 87,393 | 34,266 | 10,438 | 24,219 | 120,818 | 139,598 | 416,731 | ||||||||||||||
Cumulative Rate Sensitive Assets | 87,393 | 121,659 | 132,097 | 156,315 | 277,133 | 416,731 | |||||||||||||||
Liabilities | |||||||||||||||||||||
Deposits | |||||||||||||||||||||
Noninterest-bearing demand | — | — | — | — | — | 73,474 | 73,474 | ||||||||||||||
Interest-bearing transaction accounts | 33,666 | 16,833 | 16,833 | 16,833 | 16,833 | 67,332 | 168,331 | ||||||||||||||
Certificates of deposit—fixed | 104 | 8,611 | 5,487 | 22,485 | 50,451 | 16,209 | 103,347 | ||||||||||||||
Certificates of deposit—no penalty | 116 | 7,395 | 9,973 | 16,404 | 24,628 | — | 58,516 | ||||||||||||||
Total Deposits | 33,886 | 32,839 | 32,293 | 55,722 | 91,912 | 157,015 | 403,668 | ||||||||||||||
Other borrowed funds | — | — | — | 1,000 | — | — | 1,000 | ||||||||||||||
Total Deposits & Other Borrowed Funds | 33,886 | 32,839 | 32,293 | 56,722 | 91,912 | 157,015 | 404,668 | ||||||||||||||
Cumulative Rate Sensitive Liabilities | $ | 33,886 | $ | 66,725 | $ | 99,018 | $ | 155,741 | $ | 247,653 | $ | 404,668 | |||||||||
Gap | $ | 53,507 | $ | 1,427 | $ | (21,855 | ) | $ | (32,504 | ) | $ | 28,906 | $ | (17,417 | ) | ||||||
Cumulative Gap | 53,507 | 54,934 | 33,079 | 575 | 29,480 | 12,063 | |||||||||||||||
Gap/ Total Assets | 11.98 | % | 0.32 | % | -4.89 | % | -7.27 | % | 6.47 | % | -3.90 | % | |||||||||
Cumulative Gap/ Total Assets | 11.98 | % | 12.29 | % | 7.40 | % | 0.13 | % | 6.60 | % | 2.70 | % | |||||||||
Rate Sensitive Assets/ Rate Sensitive Liabilities | 2.58 | x | 1.04 | x | 0.32 | x | 0.43 | x | 1.31 | x | 0.89 | x | |||||||||
Cumulative Rate Sensitive Assets/ Rate Sensitive Liabilities | 2.58 | x | 1.82 | x | 1.33 | x | 1.00 | x | 1.12 | x | 1.03 | x |
25
Item 3.4. Controls and Procedures
Based upon an evaluation by our Chief Executive Officer and Chief Financial Officer within 90 days prior to the filing date of this Quarterly Report on Form 10-QSB, they have concluded that our
The Company maintains disclosure controls and procedures as definedthat are designed to ensure that information required to be disclosed by it in Rule 13a-14(c)the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, including, without limitation, those controls and procedures designed to ensure that such information is accumulated and communicated to the Company’s management to allow timely decisions regarding required disclosures.
As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was carried out under the supervision and with the participation of the Company’s management, including the chief executive officer and chief financial officer. Based on and as of the date of such evaluation, these officers concluded that the Company’s disclosure controls and procedures were effective.
The Company also maintains a system of internal accounting controls that is designed to provide assurance that assets are effectivesafeguarded and that transactions are executed in ensuring that all material information requiredaccordance with management’s authorization and properly recorded. This system is continually reviewed and is augmented by written policies and procedures, the careful selection and training of qualified personnel and an internal audit program to be filed in this Quarterly Report has been made known to them in a timely fashion.
monitor its effectiveness. There were no significant changes in our internal controlscontrol over financial reporting identified in connection with our evaluation of it that occurred during our last fiscal quarter that materially affected, or in other factors that could significantlyare reasonably likely to materially affect, our internal controls subsequent to the date of the evaluation referred to above.control over financial reporting.
26
32
PART IIPart II—Other Information
– OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is a party to legal proceedings in
In the ordinary course of business. However, the Company isour operations, we may become party to legal proceedings. Currently, we are not engaged inparty to any material legal proceedings of a material nature at the present time.and no such proceedings are, to management’s knowledge, threatened against us.
Item 2. Changes in Securities
and Use of Proceeds
(a)
(b)
(c)
(d)
(e) None.
Item 3. Defaults Upon Senior Securities
(a)
(b)
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on July 22, 2002.
The following persons
No matters were elected as directors for terms expiring in the year indicated:
| | Votes | ||||
---|---|---|---|---|---|---|
Director | Term Expires | |||||
For | Withheld | |||||
Nancy K. Falck | 2003 | 8,255,864 | 178,602 | |||
J. Hamilton Lambert | 2003 | 8,214,501 | 219,965 | |||
Jones V. Isaac | 2004 | 8,288,364 | 146,102 | |||
B.G. Beck | 2005 | 8,288,364 | 146,102 | |||
William G. Buck | 2005 | 8,288,364 | 146,102 | |||
Bernard H. Clineburg | 2005 | 8,288,364 | 146,102 | |||
John W. Fisher | 2005 | 8,255,864 | 178,602 | |||
Emad Saadeh | 2005 | 8,288,364 | 146,102 |
The following directors have terms of office that continued after the meeting:
The approval of the Cardinal Financial Corporation 2002 Equity Compensation Plan was voted on at the meeting and approved bysubmitted to a vote of 4,507,317 for, 445,230 against, with 605,135 abstentions.
27
Finally,security holders, through the shareholders voted on and approvedsolicitation of proxies or otherwise, during the appointmentfirst quarter of KPMG LLP as the Company's independent auditors by a vote of 8,415,648 for, 15,730 against, with 3,088 abstentions.2004.
Item 5.5. Other Information
None
Item 6.6. Exhibits and Reports on Form 8-K
3.1 Articles of Incorporation of Cardinal Financial Corporation (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form SB-2, Registration No. 333-82946, filed with the Commission on February 19, 2002 (the "Original Form SB-2")).
3.2 Articles of Amendment to the Articles of Incorporation of Cardinal Financial Corporation, setting forth the designation for the Series A Preferred Stock and other changes (incorporated by reference to Exhibit 3.2 to the Original Form SB-2) and Articles of Amendment to the Articles of Incorporation of Cardinal Financial Corporation, further setting forth the designation for the Series A Preferred Stock and other changes (incorporated by reference to Exhibit 3.2 to the Pre-Effective Amendment No. 1 to Form SB-2, Registration No. 333-82946, filed with the Commission on March 21, 2002 ("Amendment No. 1")).
(a) Exhibits:
3.3 Amended Bylaws of Cardinal Financial Corporation (incorporated by reference to Exhibit 3.3 to the Form 10-QSB filed with the Commission on August 14, 2002).
3.1 | Bylaws of Cardinal Financial Corporation (restated in electronic format to reflect all amendments through April 21, 2004) | |
31.1 | Rule 13a-14(a) Certification of Chief Executive Officer | |
31.2 | Rule 13a-14(a) Certification of Chief Financial Officer | |
32.1 | Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 | |
32.2 | Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Original Form SB-2).
10.1 Employment Agreement, dated as of February 12, 2002, between Cardinal Financial Corporation and Bernard H. Clineburg (incorporated by reference to Exhibit 10.1 to the Original Form SB-2).
10.2 Executive Employment Agreement, dated as of February 12, 2002, between Cardinal Financial Corporation and Carl E. Dodson (incorporated by reference to Exhibit 10.2 to the Original Form SB-2).
10.3 Executive Employment Agreement, dated as of February 12, 2002 between Cardinal Financial Corporation and F. Kevin Reynolds (incorporated by reference to Exhibit 10.4 to the Original Form SB-2).
10.4 Executive Employment Agreement, dated as of February 12, 2002, between Cardinal Financial Corporation and Christopher W. Bergstrom (incorporated by reference to Exhibit 10.5 to the Original Form SB-2).
10.5 Cardinal Financial Corporation 1999 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.7 to the Original Form SB-2).
10.6 Cardinal Financial Corporation 2002 Equity Compensation Plan (incorporated by reference to Exhibit 10.8 to the Form 10-QSB filed with the Commission on August 14, 2002).
99.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
On July 8, 2002 the registrant filedJanuary 16, 2004 we furnished a Current Report on Form 8-K attaching its July 3, 2002 press release concerning a writedown of a Worldcom bond.
28
dated January 14, 2004 to report under Item 12SIGNATURES
our financial results for the year ended December 31, 2003.
33
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-QSB to be signed on its behalf by the undersigned thereunto duly authorized.
CARDINAL FINANCIAL CORPORATION | |||
(Registrant) | |||
Date: |
Bernard H. Clineburg | ||
Bernard H. Clineburg | |||
Chairman, President and | |||
(Principal Executive Officer) | |||
Date: |
| ||
Domingo Rodriguez | |||
Senior Vice President and | |||
(Principal Financial Officer) |
29
Date: May 6, 2004
I, Bernard H. Clineburg, Chief Executive Officer of the registrant, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Cardinal Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ |
30
I, John P. Hollerbach, Chief Financial Officer of the registrant, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Cardinal Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Jennifer L. Deacon | ||
Vice President and | ||
(Principal Accounting Officer) |
31
34