As filed with the Securities and Exchange Commission on May 9, 2002
Registration Statement No. 333-82946
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
Post-Effective Amendment No. 1 to
Form SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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CARDINAL FINANCIAL CORPORATION
(Name of small business issuer in its charter)
Virginia 6021 54-1874630
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
10555 Main Street, Suite 500
Fairfax, Virginia 22030
(703) 279-5050
(Address and telephone number of principal executive offices
and principal place of business or intended principal place of business)
Bernard H. Clineburg
President, Vice Chairman and Chief Executive Officer
Cardinal Financial Corporation
10555 Main Street, Suite 500
Fairfax, Virginia 22030
(703) 279-5050
(Name, address and telephone number
of agent for service)
Copy to:
James J. Maiwurm, Esq.
Squire, Sanders & Dempsey L.L.P.
8000 Towers Crescent Drive, 14th Floor
Tysons Corner, Virginia 22182-2700
(703) 720-7800
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
(CONTINUED)
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------
Proposed Proposed
Title of each class maximum maximum
of securities to Amount to be offering price aggregate Amount of
be registered registered per unit offering price(1) registration fee
- ---------------------------------------------------------------------------------------------------
Common Stock, $1.00
par value 2,437,354 (2) $3.25 $ 7,921,401 $ 729
Common Stock, $1.00
par value 3,312,646 (3) $3.50 $11,594,261 $1,066
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) of the Securities Act of 1933.
(2) These shares are to be registered for issuance to shareholders of record as
of the record date who choose to exercise their right to subscribe for 1
new common share for each 1.7 common shares then owned by the shareholder.
(3) These shares will be offered to the public immediately following the
expiration of the rights offering.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
2
EXPLANATORY NOTE
----------------
As originally filed, this registration statement contained two
prospectuses. The first prospectus related to the registration of 2,500,000
common shares of the registrant to be offered to shareholders who chose to
exercise their right to purchase 1 new share for each 1.7 common shares owned as
of the record date by the shareholder. The rights offering, which terminated on
May 3, 2002, was described in a final prospectus dated April 9, 2002 filed as
part of Pre-Effective Amendment No. 3 to this registration statement, which was
declared effective on April 9, 2002. The second prospectus related to the
registration of 3,250,000 additional common shares of the registrant, together
with the 62,646 common shares offered pursuant to the rights offering for which
the registrant's shareholders did not timely subscribe, to be offered to the
public following the completion of the rights offering. This Post-Effective
Amendment No. 1 to this registration statement contains the final prospectus for
this public offering.
3
PROSPECTUS
5,750,000 Shares
[LOGO]
CARDINAL FINANCIAL CORPORATION
COMMON STOCK
We are offering 5,750,000 of our common shares to the public in a
public offering. Of the 5,750,000 common shares described herein, 2,500,000
common shares were offered in a rights offering to our shareholders of record on
February 1, 2002 at $3.25 per share, on the basis of 1 common share for every
1.7 common shares owned on that date. Of the 2,500,000 common shares that were
offered in the rights offering to our shareholders 62,646 shares were not timely
subscribed for. Those shares plus an additional 3,250,000 common shares are
being offered to the public.
Our common shares are listed on the Nasdaq SmallCap Market under the
symbol "CFNL." The closing price of our common shares on May 8, 2002 was $4.13
per share.
Investing in our common shares involves risks. You should read the
"Risk Factors" section beginning on page 7 before investing.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Our common shares are not deposits or accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
---------------------------------
- ---------------------------------------------------------------------------------------------
Price to Public Underwriter's Commission/(1)/ Proceeds to Cardinal/(2)/
- ---------------------------------------------------------------------------------------------
Per share $3.50 $0.175 $3.325
- ---------------------------------------------------------------------------------------------
Total(3) $11,594,261 $579,713 $11,014,548
- ---------------------------------------------------------------------------------------------
/(1)/ Payable to the underwriter. We have agreed to indemnify the underwriter
against certain civil liabilities.
/(2)/ Before deducting expenses payable by us for the public offering estimated
at approximately $150,000.
/(3)/ Assumes the sale of the entire 3,312,646 common shares offered in the
public offering. In our offering of 2,500,000 common shares to our
shareholders of record on February 1, 2002, we sold 2,437,354 shares at
$3.25 per share for a total of 7,921,400.50, paid a financial
advisor/standby fee of $79,214.01 to the underwriter, and have incurred
expenses of approximately $150,000, yielding net proceeds of
$7,692,186.49.
The shares are offered by the underwriter, as our selling agent,
subject to prior sale, on a best efforts basis and subject to certain other
conditions, including the right to reject any order in whole or in part. Because
the public offering is being conducted on a best efforts basis, the underwriter
is not required to sell any specific number or dollar amount of common shares
and is not obligated to purchase the shares if they are not sold to the public.
This offering will close on or about May 14, 2002 and is not subject to the sale
of any minimum or maximum number of shares. Funds received by the underwriter
will be deposited at, and held by, an independent escrow agent in a non-interest
bearing account. We anticipate that delivery of the shares will be made on or
about May 14, 2002.
McKinnon & Company, Inc.
The date of this prospectus is May 9, 2002
[INSIDE FRONT COVER]
MAP SHOWING MARKET AREA
2
TABLE OF CONTENTS
Page
About This Prospectus .........................................................3
Prospectus Summary ............................................................4
Summary Financial Data ........................................................6
Risk Factors ..................................................................7
The Rights Offering ..........................................................12
Use of Proceeds ..............................................................12
Capitalization ...............................................................14
Dilution .....................................................................14
Market for Common Shares .....................................................16
Dividend Policy ..............................................................17
Business .....................................................................17
Selected Financial Data ......................................................27
Management's Discussion and Analysis of Financial Condition ..................28
Management ...................................................................45
Description of Securities ....................................................53
Government Supervision and Regulation ........................................57
Underwriting .................................................................64
Legal Matters ................................................................65
Expert .......................................................................65
Forward Looking Statements ...................................................65
Where You Can Find More Information ..........................................65
Index to Financial Statements ................................................66
Consolidated Financial Statements ...........................................F-1
ABOUT THIS PROSPECTUS
You should only rely on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. We are offering to sell, and seeking offers
to buy, our shares only in jurisdictions where offers and sales are permitted.
The information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of any
sale of shares.
In this prospectus, we frequently use the terms "we" and "Cardinal" to
refer to Cardinal Financial Corporation, Cardinal Bank, N.A. and other
subsidiaries we own. To understand the offerings fully and for a more complete
description of the offerings, you should read this entire document carefully,
including particularly the "Risk Factors" section beginning on page 7.
3
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. Because this is a summary, it may not contain all of the information
that may be important to you. Therefore, you should carefully read this entire
prospectus and other documents to which we refer herein before making a decision
to invest in our common shares, including the risks discussed under the "Risk
Factors" section and our financial statements and related notes.
OUR COMPANY
Cardinal Financial Corporation was founded in late 1997 and operates as
a bank holding company. Our original strategy, which we followed and implemented
from our inception through the early fall of 2001, was to organize and operate a
series of wholly owned and separately chartered community banks with separate
boards of directors and senior management. Consistent with this strategy we
organized:
o Cardinal Bank, N.A., headquartered in Fairfax, Virginia,
o Cardinal Bank - Manassas/Prince William, N.A., headquartered in
Manassas, Virginia, and
o Cardinal Bank - Dulles, N.A., headquartered in Reston, Virginia.
In addition, in 2000 we acquired by merger with Heritage Bancorp, Inc.
its wholly owned banking subsidiary. The Heritage Bank, which had been formed in
1988 and at the time of the merger had three offices (McLean, Tysons Corner and
Sterling, Virginia) and total assets of $64.4 million. We renamed The Heritage
Bank as Cardinal Bank - Potomac.
Through these bank subsidiaries we established seven full-service
banking locations in Northern Virginia. In addition to our banking subsidiaries,
we organized an investment advisory subsidiary, Cardinal Wealth Services, Inc.,
which began operations in February 1999 and is headquartered in McLean,
Virginia. Our address is 10555 Main Street, Suite 500, Fairfax, Virginia 22030
and our telephone number is (703) 279-5050.
In the summer of 2001, we concluded that while the multi-bank strategy
had permitted us to grow rapidly, the inherent operational inefficiencies of
conducting banking activities through four separate subsidiary banks resulted in
costs that placed us at significant competitive disadvantage and impeded our
ability to achieve profitability. In recognition of this and in the interest of
achieving profitability as quickly as possible, we began the process of
reorganizing and restructuring our operations for greater growth and
profitability. In connection with this restructuring, we streamlined operations
by merging our four banking subsidiaries into Cardinal Bank, N.A., which is now
our single remaining bank subsidiary. In October 2001, the board of directors
named Bernard H. Clineburg as our Vice Chairman, President and Chief Executive
Officer.
With the completion of the restructuring, we conduct virtually all of
our business through Cardinal Bank, N.A. and Cardinal Wealth Services, Inc. The
efficiencies inherent in the restructuring and streamlining of our banking
operations have allowed us to reduce our staffing levels and our space
requirements. As a result, we have reduced the number of our employees from 138
in June 2001 to 105 as of December 31, 2001, subleased excess space at our
Alexandria and McLean facilities, and placed excess space at our Reston facility
on the market.
At December 31, 2001, we had total assets of $279.6 million, loans net
of fees of $200.9 million, deposits of $246.0 million and shareholders' equity
of $20.6 million. In addition, Cardinal Wealth Services, Inc. had over $146.7
million in assets under management as of December 31, 2001.
Cardinal's target market is the Northern Virginia Metropolitan
Statistical Area (MSA) and is part of the fourth largest metropolitan
statistical area in the nation. The population of the MSA in 2000 was
approximately 2.2 million and is expected to grow to over 2.4 million by 2010.
Over 40% of the population is 25 years and older and have earned a Bachelor's
Degree or higher. This MSA has a low unemployment rate and the per capita
personal income in 1999 was in excess of $40,000. (See profiles for Fairfax
County, Virginia and the Northern Virginia Metropolitan Statistical Area
prepared and published by the Virginia Economic Development Partnership, an
authority of the Commonwealth of Virginia government (www.yesvirginia.org).)
4
THE OFFERINGS
o Securities Offered
A total of 5,750,000 common shares, of which 2,500,000 common shares
were offered in the rights offering to our shareholders of record as of February
1, 2002, on the basis of 1 common share for each 1.7 common shares then
beneficially owned. The 62,646 common shares not timely subscribed for in the
rights offering, together with 3,250,000 additional common shares, are being
offered to the public through McKinnon & Company, Inc., on a best efforts basis.
o Shares Outstanding
As of December 31, 2001 we had 4,294,323 common shares outstanding.
Assuming the sale of all 5,750,000 common shares in the offerings, we would have
10,044,323 common shares outstanding upon the completion of the offerings. This
number excludes
o 474,836 common shares issuable upon exercise of outstanding options
granted as of May 6, 2002 under our 1999 Stock Option Plan, as
amended, with a weighted average exercise price of $4.47, of which
293,487 are exercisable at a weighted average exercise price of
$4.81, and
o 1,023,535 common shares that are issuable upon conversion of our
1,364,714 outstanding shares of 7.25% Cumulative Convertible
Preferred Stock, Series A, which pays an annual dividend of $0.3625
per share, payable quarterly, and each of which is convertible into
0.75 shares of our common stock.
o Use of Proceeds
We will use the net proceeds from the offerings to increase our equity
and for general corporate purposes, including future growth and expansion
(potentially through acquisitions), the organization of a mortgage banking
subsidiary and potentially making a minority investment in a regional merchant
bank.
o Nasdaq SmallCap Market Symbol
Our shares are listed on the Nasdaq SmallCap Market under the symbol
"CFNL."
5
SUMMARY FINANCIAL DATA
You should read the summary financial data presented below in conjunction
with our audited consolidated financial statements, including the related notes
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this prospectus. The summary financial data as of
December 31, 2001 and 2000 and for the each of the two years ended December 31,
2001 and 2000 is derived from our audited consolidated financial statements and
related notes included in this prospectus. The summary financial data as of
December 31, 1999 and December 31, 1998 and for each of the two years ended
December 31, 1999 and 1998 is derived from our audited consolidated financial
statements which are not included in this prospectus.
Year Ended December 31,
2001 2000 1999 1998/(3)/
(Dollars in thousands, except per share data)
Income Statement Data:
Net interest income ............................ $ 9,077 $ 6,410 $ 3,025 $ 1,216
Provision for loan losses ...................... 1,201 753 514 212
Non-interest income ............................ 3,266 2,098 1,320 34
Non-interest expense ........................... 23,866 11,726 7,870 2,734
Income taxes ................................... - - - -
Loss ........................................... $ (12,724) $ (3,971) $ (4,039) $ (1,696)
Selected Financial Data:
Basic net loss ................................. $ (12,724) $ (3,971) $ (4,039) $ (1,696)
Fully diluted net loss ......................... (12,724) (3,971) (4,039) (1,696)
Cash dividends declared on common .............. - - - -
Cash dividends declared on preferred ........... 503 171 - -
Basic net loss to common shareholders .......... (13,227) (4,142) (4,039) (1,696)
Fully diluted net loss to common shareholders .. (13,227) (4,142) (4,039) (1,696)
Book value at year end ......................... 3.21 6.36 7.25 8.19
Tangible book value at year end ................ $ 3.06 $ 4.11 $ 7.25 $ 8.19
Common shares outstanding, year end ............ 4,294,323 4,253,155 4,242,634 4,239,509
Average common shares outstanding, basic ....... 4,258,087 4,246,346 4,240,819 2,646,036
Average common shares outstanding, diluted ..... 4,258,087 4,246,346 4,240,819 2,646,036
Balance Sheet Data:
Total assets ................................... $ 279,584 $ 207,048 $ 97,033 $ 57,295
Total loans, net of fees ....................... 200,911 154,271 68,167 16,327
Total loans held for sale ...................... 4,732 - - -
Total investment securities .................... 34,147 6,935 4,807 13,477
Total deposits ................................. 246,024 163,371 59,873 21,867
Shareholders' equity ........................... 20,624 34,112 30,745 34,728
Common shareholders' equity .................... $ 13,799 $ 27,055 $ 30,745 $ 34,728
Performance Ratios:
Loss on average assets ......................... (5.24%) (2.72%) (5.61%) (5.37%)
Loss on average equity ......................... (39.14%) (12.72%) (12.26%) (7.45%)
Net interest margin /(1)/ ...................... 4.17% 4.82% 4.59% 4.52%
Asset Quality Ratios:/(2)/
Allowance to year-end loans .................... 1.55% 1.23% 1.07% 1.30%
Nonperforming assets to total loans ............ 0.18% 0.28% 0.00% 0.00%
Net charge-offs to total loans ................. 0.00% 0.00% 0.00% 0.00%
Allowance to non-performing assets ............. 859.8% 324.8% N/A N/A
Capital Ratios:
Tier I risk-based capital ...................... 9.04% 18.89% 37.86% 146.90%
Total risk-based capital ....................... 10.42% 19.94% 38.75% 147.80%
Leverage capital ratio ......................... 8.57% 17.39% 32.55% 60.20%
Total equity to total assets ................... 7.38% 16.48% 31.69% 60.61%
- ----------------------------------------
/(1)/ Net interest margin is net interest income divided by total average
earning assets.
/(2)/ Nonperforming assets consist of nonaccrual loans, restructured loans and
foreclosed properties.
/(3)/ 1998 does not represent a full year of banking operations. Date of
inception for Cardinal is November 24, 1997; banking operations did not
begin until June 1998.
6
RISK FACTORS
You should carefully consider the risks described below in addition to
the other information in this prospectus before purchasing shares. The risks and
uncertainties described below are not the only risks facing us. Additional risks
and uncertainties, including those not presently known to us or that we
currently consider immaterial, may also impair our business. You should read
this section together with the other information in this prospectus.
Risks Related to Our Business
We have never operated profitably and may not be able to do so in the
future, which would adversely affect your investment.
We have operated at a loss since our organization in 1997. Our net loss
for the year ended December 31, 2001 was $13.2 million, or $3.11 per common
share, compared to a loss of $4.1 million, or $0.98 per common share, during
2000. Excluding an $8.3 million impairment of goodwill in the fourth quarter of
2001, our loss in 2001 was $4.9 million.
We cannot assure you that we will be able to reverse this history and
operate at a profit.
We have recently changed our senior management and operating strategy.
If these changes are not successful the value of our common stock could
be negatively affected.
In October 2001, we named Bernard H. Clineburg as our Vice Chairman,
President and Chief Executive Officer. Since Mr. Clineburg's arrival, we have
taken steps designed to streamline our operations, reduce costs and ongoing
operating losses, sharpen our operating strategy, and set the stage for
continued growth and attaining profitability. We cannot assure you that these
initiatives will be successful.
We may not be able to maintain and manage our growth, which may
adversely affect our results of operations and financial condition and
the value of our common stock.
During the last four years, we have experienced significant growth, and
our business strategy calls for continued expansion. We intend to use the funds
raised in these offerings to support anticipated increases in our loans and
deposits and to expand our mortgage banking activities and invest in the
merchant banking business. Our ability to continue to grow depends, in part,
upon our ability to:
o open new branch offices,
o attract deposits to those locations, and
o identify loan and investment opportunities.
Our ability to manage growth successfully also will depend on whether
we can maintain capital levels adequate to support our growth and maintain cost
controls and asset quality. If we are unable to sustain our growth, our earnings
could be adversely affected. If we grow too quickly, however, and are not able
to control costs and maintain asset quality, rapid growth also could adversely
affect our financial performance.
We depend on the services of key personnel. We cannot be certain that
we will be able to retain such personnel or hire replacements and a
loss of any of those personnel could disrupt our operations and result
in reduced earnings.
We are a customer-focused and relationship-driven organization. We
expect our future growth to be driven in a large part on the relationships
maintained with our customers by our Vice Chairman, President and Chief
Executive Officer, Bernard H. Clineburg, and other executives. We have entered
into employment agreements with Mr. Clineburg and five other executive officers,
but the existence of such agreements does not assure that we will be able to
retain their services. The unexpected loss of services of Mr. Clineburg or
7
other key employees could have a material adverse effect on our operations and
possibly result in reduced revenues and earnings. See "Compensation of
Management and the Board-Employment Agreements."
We may not be able to attract, hire, motivate and retain necessary
personnel; this could have a negative effect on the value of our common
stock.
The implementation of our revised business strategy will require us to
attract, hire, motivate and retain skilled personnel to develop new lines of
business and to attract new persons with appropriate business experience willing
to serve on our board of directors. The market for these people is competitive,
and we cannot assure you that we will be successful in attracting, hiring,
motivating or retaining them.
We may be unable to provide new financial products and services
demanded by our customers which could negatively affect our growth and
profitability.
As the banking industry changes, our success will depend upon our
ability to offer new products and provide new financial services that meet
changing customer requirements. We cannot assure you that we can successfully
develop and bring new products and services to the market in a timely manner.
Our plan to establish a mortgage banking subsidiary and increase our
participation in the residential mortgage lending business may not be
successful, which would negatively affect our performance.
We plan to use a portion of the proceeds from the offerings to
capitalize a residential mortgage banking subsidiary. We estimate that the costs
of establishing this subsidiary over the next 12 months will be approximately
$1,200,000. If we are successful in establishing a mortgage banking subsidiary,
our intention would be to limit our activities to the origination of residential
mortgages through the wholesale refinancing market, as well as through
establishing relationships with builders and realtors.
The successful start-up of a mortgage banking subsidiary will depend on
factors such as:
o Our ability to raise sufficient capital in the offerings to fund
start-up costs,
o Whether we can attract and retain experienced management, and
o The extent of interest rate fluctuations and the effect of such
fluctuations on the demand for mortgages.
The primary operating risks associated with mortgage banking include
application fraud and interest rate risk. Interest rate risk arises in cases
where interest rates rise between the time a loan is funded and the time it is
sold on the secondary market. Virtually all loans originated through the
mortgage banking subsidiary will be underwritten to conform to secondary market
underwriting standards and will be packaged to sell under interest rate
commitments made by secondary market investors, at the time of application or
approval.
An economic slowdown in our market area, or higher interest rates, may
negatively affect mortgage lending activity. Any sustained period of economic
slowdown, or higher interest rates, could adversely affect mortgage loan
originations, which would reduce revenue and income from mortgage banking
activities.
The mortgage banking industry is highly competitive and we will face
competition from a number of market participants, many of which are better
capitalized and have more mortgage banking experience than we do. We cannot
assure you that we will be able to compete successfully in the mortgage banking
business if we are successful in establishing this subsidiary.
8
Our concentration in loans secured by real estate may increase our
credit losses, which would negatively affect your investment.
We offer a variety of secured loans, including commercial lines of
credit, commercial term loans, real estate, construction, home equity, consumer
and other loans. Many of our loans are secured by real estate (both residential
and commercial) in our market area. At the present time and based on the
outstanding principal balance of our loan portfolio, approximately 43.4% of our
total loan portfolio is secured by commercial real estate and 17.8% is secured
by residential real estate. A major change in the real estate market or in the
local or national economy could have an adverse effect on our customers, which
in turn could impact us. 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. We cannot fully eliminate credit
risk and as a result credit losses may occur in the future.
Our allowance for loan losses could become inadequate; this would
adversely affect our results of operations.
We maintain an allowance for loan losses that we believe is a
reasonable estimate of known and inherent losses in our loan portfolio. Through
a periodic review and consideration of the loan portfolio, management determines
the amount of the allowance for loan losses by considering general market
conditions, credit quality of the loan portfolio, the collateral supporting the
loans and performance of our customers relative to their financial obligations
with us. Although we believe the allowance for loan losses is a reasonable
estimate of known and inherent losses in our loan portfolio, we cannot fully
predict such losses or that our loan loss allowance will be adequate in the
future. Excessive loan losses could have a material impact on our financial
performance.
Federal and state regulators periodically review our allowance for loan
losses and may require us to increase our provision for loan losses or recognize
further loan charge-offs, based on judgments different than those of our
management. Any increase in our loan allowance or loan charge-offs as required
by these regulatory agencies could have a negative effect on our operating
results.
Our business is dependent on technology and an inability to invest in
technological improvements may adversely affect our results of
operations and financial condition.
The financial services industry is undergoing rapid technological
changes with frequent introductions of new technology-driven products and
services. In addition to better serving customers, the effective use of
technology increases efficiency and enables financial institutions to reduce
costs. Our future success will depend in part upon our ability to address the
needs of our customers by using technology to provide products and services that
will satisfy customer demands for convenience as well as create additional
efficiencies in our operations. Many of our competitors have substantially
greater resources to invest in technological improvements. There can be no
assurance that we will be able to effectively implement new technology-driven
products and services or be successful in marketing these products and services
to our customers.
Our profitability and the value of your investment may suffer if we are
unable to successfully manage interest rate risk.
Our profitability will depend in substantial part upon the spread
between the interest rates earned on investments and loans and interest rates
paid on deposits and other interest-bearing liabilities. Changes in interest
rates will affect our operating performance and financial condition in diverse
ways. We intend to try to minimize our exposure to interest rate risk, but we
will be unable to eliminate it. Our net interest spread will depend on many
factors that are partly or entirely outside our control, including competition,
federal economic, monetary and fiscal policies, and economic conditions
generally.
9
Our profitability and the value of your investment depend significantly
on economic conditions in our market area.
We are headquartered in Northern Virginia. As we expand, we will face
stiff competition from banks and other financial institutions. In addition, as
our local economy experiences degrees of volatility, our success is dependent to
a certain extent upon the general economic conditions in our market. A
significant decline in general economic conditions caused by inflation,
recession, unemployment or other factors beyond our control would impact these
local economic conditions and could negatively affect our financial condition
and performance.
In recent years, there has been a proliferation of technology and
communications businesses in our market area. The current economic recession and
the downturn in those industries has had a significant adverse impact on a
number of those businesses. Although we do not have significant credit exposure
to these businesses, down turn in these industries could have a negative impact
on local economic conditions and real estate collateral values generally, which
could negatively affect our profitability.
Our profitability and the value of your investment may suffer because
of rapid and unpredictable changes in the highly regulated environment
in which we operate.
We are subject to supervision by several governmental regulatory
agencies at the federal and state levels. These regulations, and the
interpretation and application of them by federal and state regulators, are
beyond our control, may change rapidly and unpredictably and can be expected to
influence our earnings and growth. Although these regulations impose costs upon
us, they are intended to protect depositors and you should not assume that they
protect your interests as a shareholder. See "Government Supervision and
Regulation."
The Gramm-Leach-Bliley Act of 1999 covers a broad range of issues,
including a repeal of most of the restrictions on affiliations among depository
institutions, securities firms and insurance companies. Most of the Act's
provisions, which affect many banks, require bank regulatory agencies to adopt
regulations to implement the Act. While these agencies have adopted these
regulations, it is not possible to predict at this time the ultimate effect that
the Act will specifically have on us and our current and proposed operations and
business strategies. An assessment of the Act's ultimate impact on us must await
completion of the implementation of the regulatory process, and it is possible
that final regulations, when adopted, could adversely affect our current or
proposed business and profitability.
If we need additional capital in the future to continue our growth, we
may not be able to obtain it on terms that are favorable. This could
negatively affect our performance and the value of our common stock.
Our business strategy calls for continued growth. We anticipate that we
will support this growth through additional deposits at new branch locations and
investment opportunities. If we are able to complete successfully both of the
offerings, we do not presently anticipate having to raise additional capital
during the next 12 months. However, it is possible that we may need to raise
additional capital to support growth through, for example, acquisitions. Our
ability to raise capital through the sale of additional securities will depend
primarily upon our financial condition and the condition of financial markets at
that time. We cannot make any assurance that additional capital would be
available on terms satisfactory to us. If we are unable to raise additional
capital we may be forced to limit our growth strategy.
Our plan to use a portion of the proceeds to finance acquisitions of
other banks may not be successful, which would adversely affect our
performance and prospects.
We have not identified any specific bank acquisition targets. Moreover,
we cannot assure you that we will be able to identify any attractive acquisition
candidates or, if we can identify them, that we will be able to finance the
acquisitions or acquire them on attractive terms. Additionally, acquiring banks
requires special
10
regulatory approval and there is no assurance we will be able to obtain such
approval. Further, we may be unable to integrate any new acquisitions with our
existing business, and identifying, negotiating and integrating acquisitions may
distract our management from the day-to-day operation of our business. Any of
these risks could have an adverse effect on our business.
Our plan may use a portion of the proceeds to invest in a regional
merchant bank involves a number of risks that could adversely affect
the value of our investment.
We may use a portion of the proceeds to acquire a minority interest in
a regional merchant bank, or invest in a fund established by a merchant bank,
that is in the business of making private equity investments in non-financial
firms. We are aware of several such investment candidates, but we have not
negotiated any terms of such an investment and will not do so until we have
completed the offerings and have an opportunity to decide how much of the
proceeds we should use for this purpose. Although equity investments in
non-financial companies can contribute substantially to earnings, such
investments, like other rapidly growing and highly profitable business lines,
can entail significant market, liquidity and other risks. Such activities can
also give rise to increased volatility of earnings and capital. It is possible
that we could lose some or all of our investment in the merchant bank. Merchant
banking is highly competitive and a regional merchant bank in which we might
invest would face competition from a number of regional and national market
participants, many of which may be better capitalized and have more experience
than we do.
Our management will have discretion in allocating the proceeds of the
offerings and could delay the achievement of our strategic goals and
increased value for shareholders.
Subject to the requirements of safe and sound banking practices, our
management will have discretion in determining the specific use of the offering
proceeds. The discretion of management to allocate the proceeds of the offerings
may result in the use of the proceeds for non-banking activities that are
permitted for bank holding companies, but that are not otherwise specifically
identified in this prospectus. To the extent that proceeds are used for other
purposes, it may take us longer to grow our business and operations and
otherwise achieve our strategic goals.
Some of our directors and officers are our banking customers.
Some of our directors and officers are at present, our banking
customers. In addition, in the future we expect to have banking transactions in
the ordinary course of our business with directors, officers, principal
shareholders and their associates, on substantially the same terms, including
interest rates and collateral on loans, as those prevailing at the same time for
comparable transactions with others. These transactions do not involve more than
the normal risk of collectibility or present other unfavorable features. The
aggregate outstanding balance of loans to directors, executive officers and
their associates, as a group, at December 31, 2001 totaled approximately
$2.7 million, or 13.1% of the bank's equity capital at that date. See
"Transactions with Management."
Risks Related to the Securities Markets and Ownership of Our Common Shares
We expect a limited trading market for our common shares; it may be
difficult to sell our shares after you have purchased them.
Although our common shares are listed on the Nasdaq SmallCap Market,
the limited number of outstanding common shares, our lack of earnings history
and the absence of dividends in the foreseeable future will impede the
development of an active and liquid market for them. You should carefully
consider the lack of liquidity of your investment in the common shares when
making your investment decision.
11
Because we have no plans to pay cash dividends on our common shares,
you may recognize a return on your investment only through selling your
shares.
We do not expect to pay dividends on our common shares in the
foreseeable future. Moreover the directors are not required to declare
dividends, and federal banking laws restrict the payment of dividends. See under
"Government Supervision and Regulation-Payment of Dividends." You should not
purchase our common shares if you are depending upon dividend income from this
investment.
We may in the future issue additional stock, any or all of which will
dilute your percentage ownership and, possibly, the value of your
common shares.
The issuance of any new common or preferred shares for whatever purpose
would cause dilution in your percentage ownership, and the issuance of any new
common or preferred shares could cause dilution in the value of your shares.
Assuming 5,750,000 common shares are sold in the offerings, we will have
10,044,323 outstanding common shares and 1,364,714 outstanding shares of our
Series A 7.25% Cumulative Convertible Preferred Stock. At May 6, 2002, 474,836
common shares were issuable upon exercise of outstanding options granted under
our 1999 Stock Option Plan, of which 293,487 were exercisable. We anticipate
that, following the offerings, we will amend our 1999 Stock Option Plan to
increase the number of common shares reserved for the issuance of additional
options. Our 1,364,714 outstanding preferred shares as of December 31, 2001 are
convertible into 1,023,535 common shares. The board of directors may issue
common shares up to the authorized maximum of 50,000,000 shares and preferred
shares up to the authorized maximum of 10,000,000 shares without prior
shareholder approval and without allowing the shareholders the right to purchase
their pro rata portion of such shares. See "Description of Securities - Common
Stock - No Preemptive or Conversion Rights."
THE RIGHTS OFFERING
We offered 2,500,000 common shares in the rights offering, which
expired at 5:00 p.m., Eastern Daylight Time, on May 3, 2002. The rights offering
shares were offered for sale to the shareholders of record of our common shares
at 5:00 p.m. Eastern Standard Time on February 1, 2002 at the price of $3.25 per
share. Shareholders of record on the record date could buy 1 rights offering
share for each 1.7 common shares beneficially owned by them on such date.
Fractional shares were not sold, but shareholders could round any such fraction
up to a full share. Shareholders were permitted to subscribe for less than the
maximum number of rights offering shares allocated to them. A total of 2,437,354
common shares were timely subscribed for in the rights offering.
USE OF PROCEEDS
The following tables set forth the calculation of our net proceeds from
the offerings at the rights offering subscription price of $3.25 per share and a
public offering price of $3.50 per share and our anticipated use of those net
proceeds. Since neither offering is conditioned on the sale of a minimum number
of shares and since the public offering is being conducted on a "best efforts"
basis, we are presenting this information assuming in the alternative that we
sell 97% of the shares offered in the rights offering and 15%, 50% and 100% of
the shares offered in the public offering.
12
- ---------------------------------------------------------------------------------------
Proceeds
(Amounts in Thousands)
- ---------------------------------------------------------------------------------------
15% 50% 100%
--- --- ----
- ---------------------------------------------------------------------------------------
Gross offering proceeds from rights offering shares $7,921 $ 7,921 $ 7,921
- ---------------------------------------------------------------------------------------
Gross offering proceeds from public offering shares 1,739 5,797 11,594
- ---------------------------------------------------------------------------------------
Aggregate gross offering proceeds 9,660 13,718 19,515
- ---------------------------------------------------------------------------------------
Underwriter's commission 87 290 580
- ---------------------------------------------------------------------------------------
Estimated expenses of the offerings 300 300 300
- ---------------------------------------------------------------------------------------
Net proceeds to us 9,273 13,128 18,635
- ---------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Uses Of Net Proceeds if 97% of Rights Offering and Dollars Percentage of
15% of Public Offering Are Sold (In Thousands) Net Proceeds
- -------------------------------------------------------------------------------------------
General corporate purposes, including possible investment $7,373 79.51%
in regional merchant bank
- -------------------------------------------------------------------------------------------
Formation of mortgage banking subsidiary 1,200 12.94%
- -------------------------------------------------------------------------------------------
Branch Expansion 700 7.55%
- -------------------------------------------------------------------------------------------
Total 9,273 100.00%
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Uses Of Net Proceeds if 97% of Rights Offering and Dollars Percentage of
50% of Public Offering Are Sold (In Thousands) Net Proceeds
- -------------------------------------------------------------------------------------------
General corporate purposes, including possible investment $11,228 85.53%
in regional merchant bank
- -------------------------------------------------------------------------------------------
Formation of mortgage banking subsidiary 1,200 9.14%
- -------------------------------------------------------------------------------------------
Branch Expansion 700 5.33%
- -------------------------------------------------------------------------------------------
Total 13,128 100.00%
- -------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Uses Of Net Proceeds if 97% of Rights Offering and 100% of Dollars Percentage of
Public Offering Are Sold (In Thousands) Net Proceeds
- ----------------------------------------------------------------------------------------------
General corporate purposes, including possible investment $16,735 89.80%
in regional merchant bank
- ----------------------------------------------------------------------------------------------
Formation of mortgage banking subsidiary 1,200 6.44%
- ----------------------------------------------------------------------------------------------
Branch Expansion 700 3.76%
- ----------------------------------------------------------------------------------------------
Total 18,635 100.00%
- ----------------------------------------------------------------------------------------------
The allocation of the use of proceeds set forth in the above tables are
estimates, and are subject to change. As indicated above, we plan to use a
portion of the net proceeds from the offerings to form and capitalize a mortgage
banking subsidiary and for anticipated branch expansion. We will use the balance
of the net proceeds of the offerings for general corporate purposes. That is, we
will use such proceeds to provide additional equity capital to support
anticipated increases in our loans, including government contract, retail and
real estate lending, as our business grows. A portion of the net proceeds
designated for general corporate purposes may be reallocated to fund a minority
investment in a regional merchant bank, or a fund established by such a merchant
bank, or to provide additional equity capital for our investment advisory
subsidiary, Cardinal Wealth Services, Inc.
13
CAPITALIZATION
The following table sets forth our capitalization as of December 31,
2001. This table should be read with our audited consolidated financial
statements, including the related notes and included in this prospectus.
- --------------------------------------------------------------------------------
December 31, 2001
-----------------
- --------------------------------------------------------------------------------
Shareholders' equity (dollars in thousands):
- --------------------------------------------------------------------------------
Preferred stock, cumulative convertible, $1 par value $ 1,365
- --------------------------------------------------------------------------------
Common stock, $1 par value 4,294
- --------------------------------------------------------------------------------
Additional paid-in capital 38,488
- --------------------------------------------------------------------------------
Accumulated deficit (23,249)
- --------------------------------------------------------------------------------
Accumulated other comprehensive loss (274)
------
- --------------------------------------------------------------------------------
Total shareholders' equity $ 20,624
======
- --------------------------------------------------------------------------------
DILUTION
Effect of the Offerings on Book Value
At December 31, 2001, we had a net tangible book value of approximately
$20.0 million, or $3.06 per common share. Net tangible book value per common
share represents the amount of our shareholders' equity, less intangible assets,
preferred shares and associated surplus, divided by the number of common shares
that are outstanding. Dilution per share to new investors in the offerings
represents the difference between the amount per share that these investors paid
and the pro forma net tangible book value per common share immediately after
completion of the offerings.
After giving effect to the sale by us of all 5,750,000 shares in the
offerings at price of $3.25 per share in the rights offering and $3.50 per share
in the public offering, deducting estimated offering expenses, and giving effect
to the application of the estimated net proceeds described under "Use of
Proceeds," our pro forma net tangible book value at December 31, 2001 would have
been approximately $31.8 million, or $3.17 per common share. This represents an
immediate increase in net tangible book value of $0.11 per share to existing
shareholders and an immediate dilution of $0.08 per common share to shareholders
acquiring common shares in the rights offering and $0.33 to investors acquiring
common shares in the public offering.
The following tables illustrate the per share dilution assuming that we
sell 97% of the common shares offered in the rights offering and 15%, 50% and
100% of the common shares we are offering in the public offering.
Dilution Assuming Sale of 97% of the Rights Offering and 15% of the
Public Offering.
- ---------------------------------------------------------------------------------------------------
Net tangible book value per common share at December 31, 2001 $3.06
- ---------------------------------------------------------------------------------------------------
Increase per common share attributable to rights offering $0.03
- ---------------------------------------------------------------------------------------------------
Decrease per common share attributable to new investors under the public offering ($0.01)
- ---------------------------------------------------------------------------------------------------
Pro forma net tangible book value per common share after the offerings $3.09
- ---------------------------------------------------------------------------------------------------
Dilution per common share to investors in the rights offering $0.16
- ---------------------------------------------------------------------------------------------------
Dilution per common share to new investors under the public offering $0.41
- ---------------------------------------------------------------------------------------------------
Dilution as a percentage of offering price of the shares offered in the rights offering 4.97%
- ---------------------------------------------------------------------------------------------------
Dilution as a percentage of offering price of the shares offered in the public offering 11.76%
- ---------------------------------------------------------------------------------------------------
14
Dilution Assuming Sale of 97% of the Rights Offering and 50% of the
Public Offering.
- -----------------------------------------------------------------------------------------------------
Net tangible book value per common share at December 31, 2001 $3.06
- -----------------------------------------------------------------------------------------------------
Increase per common share attributable to rights offering $0.03
- -----------------------------------------------------------------------------------------------------
Increase per common share attributable to new investors under the public offering $0.05
- -----------------------------------------------------------------------------------------------------
Pro forma net tangible book value per common share after the offerings $3.12
- -----------------------------------------------------------------------------------------------------
Dilution per common share to investors in the rights offering $0.13
- -----------------------------------------------------------------------------------------------------
Dilution per common share to new investors under the public offering $0.38
- -----------------------------------------------------------------------------------------------------
Dilution as a percentage of offering price of the shares offered in the rights offering 3.96%
- -----------------------------------------------------------------------------------------------------
Dilution as a percentage of offering price of the shares offered in the public offering 10.82%
- -----------------------------------------------------------------------------------------------------
Dilution Assuming Sale of 97% of the Rights Offering and 100% of the
Public Offering.
- -----------------------------------------------------------------------------------------------------
Net tangible book value per common share at December 31, 2001 $3.06
- -----------------------------------------------------------------------------------------------------
Increase per common share attributable to rights offering $0.03
- -----------------------------------------------------------------------------------------------------
Increase per common share attributable to new investors under the public offering $0.09
- -----------------------------------------------------------------------------------------------------
Pro forma net tangible book value per common share after the offerings $3.15
- -----------------------------------------------------------------------------------------------------
Dilution per common share to investors in the rights offering $0.10
- -----------------------------------------------------------------------------------------------------
Dilution per common share to new investors under the public offering $0.35
- -----------------------------------------------------------------------------------------------------
Dilution as a percentage of offering price of the shares offered in the rights offering 5.86%
- -----------------------------------------------------------------------------------------------------
Dilution as a percentage of offering price of the shares offered in the public offering 9.86%
- -----------------------------------------------------------------------------------------------------
Comparison of Prices Paid for Common Shares
The following tables set forth on a pro forma basis, as of December 31,
2001 the number of common shares purchased from us prior to the offerings, and
the number of shares purchased in the offerings, and the total consideration,
prior to the deduction of any expenses and/or commissions, and average price per
share that our existing shareholders have paid to us and that subscribers and
investors will pay in the offerings at the rights offering subscription price of
$3.25 per share and an assumed price to the public of $3.50 per share.
Because the offerings are being made on a best efforts basis and there
is no minimum number of shares to be sold, we are presenting this information
assuming that we sell 97% of the common shares offered in the rights offering
and, in the alternative, that we sell 15%, 50% and 100% of the common shares we
are offering in the public offering.
If 97% of the Rights Offering and 15% of the Public Offering are sold.
- -------------------------------------------------------------------------------------------------
Shares Purchased(1) Total Consideration(1) Average
---------------- ------------------- Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
- -------------------------------------------------------------------------------------------------
Existing common shareholders (2) 4,294 59.4% $37,000 79.3% $8.62
- -------------------------------------------------------------------------------------------------
Subscribers in rights offering (3) 2,437 33.7 7,921 17.0 3.25
- -------------------------------------------------------------------------------------------------
Investors in the public offering 497 6.9 1,739 3.7 3.50
- -------------------------------------------------------------------------------------------------
Total 7,228 100% $46,660 100%
- -------------------------------------------------------------------------------------------------
15
If 97% of the Rights Offering and 50% of the Public Offering are sold.
- --------------------------------------------------------------------------------------------------------------------
Shares Purchased(1) Total Consideration(1) Average Price
---------------- ------------------- Per Share
Number Percent Amount Percent -------------
------ ------- ------ -------
- --------------------------------------------------------------------------------------------------------------------
Existing common shareholders (2) 4,294 51.2% $37,000 73.0% $8.62
- --------------------------------------------------------------------------------------------------------------------
Subscribers in rights offering (3) 2,437 29.1 7,921 15.6 3.25
- --------------------------------------------------------------------------------------------------------------------
Investors in the public offering 1,657 19.7 5,798 11.4 3.50
- --------------------------------------------------------------------------------------------------------------------
Total 8,388 100% $50,719 100%
- --------------------------------------------------------------------------------------------------------------------
If 97% of the Rights Offering and 100% of the Public Offering are sold.
- ------------------------------------------ ----------------------------- ---------------------------- ----------------
Shares Purchased(1) Total Consideration(1) Average Price
---------------- ------------------- Per Share
Number Percent Amount Percent -------------
------- ------- ------ -------
- --------------------------------------------------------------------------------------------------------------------
Existing common shareholders (2) 4,294 42.7% $37,000 65.5% $8.62
- --------------------------------------------------------------------------------------------------------------------
Subscribers in rights offering (3) 2,437 24.3 7,921 14.0 3.25
- --------------------------------------------------------------------------------------------------------------------
Investors in the public offering(4) 3,313 33.0 11,596 20.5 3.50
- --------------------------------------------------------------------------------------------------------------------
Total 10,044 100% $56,517 100%
- --------------------------------------------------------------------------------------------------------------------
Notes to Tables:
- ---------------
(1) Share and dollar amounts in thousands.
(2) Existing common shareholders as of December 31, 2001. Does not include
1,364,714 shares of convertible preferred stock issued in connection with
the acquisition of Heritage Bancorp, Inc. in September 2000.
(3) Purchases by existing shareholders in the rights offering.
(4) Purchases in the public offering.
MARKET FOR COMMON SHARES
Our common shares are traded on the Nasdaq SmallCap Market under the
symbol "CFNL." The following table sets forth the high and low bid information
for our shares on the NASDAQ SmallCap Market for the periods indicated
Periods Ended High Low
1999 ------------- ---- ---
First Quarter ....... $ 7.00 $ 6.25
Second Quarter ...... 10.94 6.75
Third Quarter ....... 7.88 6.25
Fourth Quarter ...... 7.38 5.50
2000
First Quarter ....... 4.75 4.50
Second Quarter ...... 5.25 5.06
Third Quarter ....... 5.13 4.13
Fourth Quarter ...... 3.88 3.25
2001
First Quarter ....... 4.88 3.50
Second Quarter ...... 5.96 4.25
Third Quarter ....... 6.69 5.18
Fourth Quarter ...... 6.60 5.90
2002
First Quarter ....... 6.50 3.60
Our 4,294,323 common shares outstanding as of December 31, 2001 were
held by approximately 1,605 holders of record.
DIVIDEND POLICY
We have not declared or distributed any cash dividends to the holders
of our common shares, and it is not likely that we will declare any cash
dividends on our common shares in the foreseeable future. A dividend accrues on
the Series A 7.25% Cumulative Convertible Preferred Stock at the rate of $0.3625
per share per annum. This dividend is payable, at the discretion of the board of
directors, on a quarterly basis. To date we have paid the dividend to the
holders of the Series A 7.25% Cumulative Convertible Preferred Stock. Our board
of directors intends to follow a policy of retaining any earnings to provide
funds to operate and expand our business for the foreseeable future. Our future
dividend policy is subject to the discretion of the board of directors and will
depend upon a number of factors, including future earnings, financial condition,
cash requirements, and general business conditions.
Our ability to distribute cash dividends will depend primarily on the
abilities of our subsidiaries to pay dividends to us. As a national bank,
Cardinal Bank is subject to legal limitations on the amount of dividends it is
permitted to pay. Furthermore, neither Cardinal Bank nor we may declare or pay a
cash dividend on any of our capital stock if we are insolvent or if the payment
of the dividend would render us insolvent or unable to pay our obligations as
they become due in the ordinary course of business. For additional information
on these limitations, see "Government Regulation and Supervision - Payment of
Dividends."
BUSINESS
Overview
We own Cardinal Bank, N.A., a nationally chartered full-service
community bank. We also have an investment advisory subsidiary, Cardinal Wealth
Services, Inc., which began operations on February 1, 1999. We conduct virtually
all of our business through Cardinal Bank, N.A. and Cardinal Wealth Services,
Inc.
In the fourth quarter of 2001 our net loss was $10.6 million, which
included: an impairment of $8.3 million that effectively eliminated the goodwill
associated with our merger with Heritage Bancorp and our related acquisition of
The Heritage Bank (the amount of the impairment was determined through an
independent appraisal of the remaining assets and liabilities of Heritage
Bancorp performed in the final quarter of 2001); non-recurring restructuring
charges of approximately $829,000, primarily related to severance payments to
former employees, the sublease of redundant commercial space, and merger costs;
and an additional provision to our loan loss reserve of $774,000.
History
Cardinal Financial Corporation was formed in late 1997, principally in
response to opportunities resulting from the takeovers of several Virginia-based
banks by regional bank holding companies and bank consolidations. In our market
area, these bank takeovers and consolidations had been accompanied by the
dissolution of local boards of directors and relocation or termination of
management and customer service professionals.
Our initial strategy was to operate a multi-bank organization that
emphasized decision-making at the local bank level combined with strong,
centralized corporate, technological, marketing, financial and managerial
support. Our operating model was for each local community bank to operate with
local management and boards of directors consisting of individuals with
extensive knowledge of the local community and the authority to make credit
decisions. We believed that this operating strategy would give us a competitive
advantage by coupling the benefits of local banking to attract customers who
wished to conduct their business with a locally owned and managed institution
with strong ties and an active commitment to the community with the
administrative economies of centralized oversight and services (such as
technology, finance and accounting, human resources, credit administration,
internal audit, compliance, loan review,
17
marketing, retail administration, administrative support, policies and
procedures, product development and item processing).
We implemented our initial strategy by organizing Cardinal Bank N.A.,
headquartered in Fairfax, Virginia, as a wholly owned subsidiary that commenced
operations on June 8, 1998. Subsequently, we organized two additional wholly
owned subsidiaries: Cardinal Bank - Manassas/Prince William, N.A., headquartered
in Manassas, Virginia, that commenced operations on July 26, 1999; and Cardinal
Bank - Dulles, N.A., headquartered in Reston, Virginia, that commenced
operations on August 2, 1999. In addition to the banks that we organized
ourselves, effective as of September 1, 2000, we acquired The Heritage Bank
through a merger with Heritage Bancorp, Inc. The Heritage Bank was renamed to
Cardinal Bank - Potomac as a result of the merger.
The results of our initial strategy were successful from the standpoint
of growth in core deposits and loans. By September 30, 2001, loans had grown to
$197 million, deposits had reached $213 million, total assets exceeded $250
million, and we had become the fourth largest community bank headquartered in
our target market, measured by total deposits. All three larger competitors had
been in business for over ten years.
Despite significant growth, we continued to experience operating
losses. The level of non-interest expense created by operating four separate
banks, including personnel expenses for four fully-staffed banks, plus occupancy
expense for four headquarters facilities, continued to exceed revenue generated
by net interest and fee income. In addition, the operation of four separate
banks negatively affected operating efficiencies with respect to centralized
accounting, deposit operations, credit administration, and information
technology.
Recent Developments; Shift in Operating Strategy
In the summer of 2001, we concluded that the inherent operational
inefficiencies of conducting banking activities through four separate subsidiary
banks resulted in costs that placed us at a significant competitive disadvantage
and impeded our ability to achieve profitability. In recognition of this and in
the interest of achieving profitability as quickly as possible, we began the
process of reorganizing and restructuring our operations for greater growth and
profitability.
In October 2001, the board of directors named Bernard H. Clineburg as
our Vice Chairman, President and Chief Executive Officer. Mr. Clineburg has over
30 years of experience in the banking industry in Northern Virginia. Mr.
Clineburg served as Chairman and Chief Executive Officer of George Mason
Bancshares from 1993 to March 1998 when George Mason Bancshares was acquired by
United Bancshares. During this period, Mr. Clineburg successfully oversaw the
growth of George Mason Bancshares assets from approximately $160 million to over
$1 billion; oversaw George Mason Bancshares initial public offering in 1994 and
negotiated the sale of George Mason Bancshares to United Bancshares in 1998.
From March 1998 through March 2000, Mr. Clineburg continued with United Bank of
Virginia as President, Chairman and Chief Executive Officer (which at the time
of his departure had assets of approximately $1.5 billion) and as President of
its holding company, United Bancshares (which at the time of his departure had
assets in excess of $5 billion). Prior to his involvement with George Mason
Bancshares, Mr. Clineburg served as the President and Chief Executive Officer of
Arlington Bank from 1986-1990 and in that capacity oversaw the growth and sale
of Arlington Bank to Citizens Bank & Trust (which was subsequently acquired by
Crestar Bank and is now SunTrust Bank). Since Mr. Clineburg's arrival, we have
taken steps designed to streamline our operations, reduce costs and achieve
profitability. In particular:
o We have completed the consolidation of our original four banking
subsidiaries into a single bank in order to reduce costs and streamline
operations and decision-making. The merger of Cardinal Bank - Dulles, N.A.
and Cardinal Bank - Potomac into Cardinal Bank, N.A. was completed in
November, 2001. The merger of Cardinal Bank Manassas/Prince William, N.A.
into Cardinal Bank, N.A., was effective as of March 1, 2002.
18
o In the fourth quarter of 2001 we had an $8.3 million impairment of
goodwill, substantially eliminating the goodwill attributable to the
purchase of Heritage Bancorp in September 2000. An evaluation of losses
incurred by Cardinal Bank - Potomac (the successor to The Heritage Bank)
during 2000 and 2001, coupled with expectations of future additional
losses, indicated a potential impairment in our investment in Heritage. A
valuation of Cardinal Bank - Potomac was performed by an external
consultant in response to these impairment indicators. The valuation
confirmed a significant impairment in the Company's investment in Heritage
and resulted in the write down of goodwill.
o We further reduced staffing levels during the fourth quarter. Since June
30, 2001 we have reduced our number of employees from 138 on June 30, 2001
to 105 as of December 31, 2001. Most of the staff reductions were made in
the commercial lending area of the banks, which had become overstaffed in
light of the shift in strategy from four banks to one. Significant
reductions in staff were also made in our centralized administration areas,
including accounting, deposit operations and credit administration.
o We have subleased excess commercial space at our Alexandria and McLean
facilities and have placed excess commercial space at our Reston facility
on the market.
These steps have significantly reduced our fixed costs and are intended to
accelerate our development of sustained profitability. Although our operations
experienced significant changes, we continued to experience annualized asset
growth in excess of 30 percent during the fourth quarter of 2001, with total
assets reaching $279.6 million as of December 31, 2001. We remain committed to
continually increase our share of the local banking market. We have filed with
the Securities and Exchange Commission a Form SB-2 Registration Statement under
which we intend to offer 2,500,000 shares to existing shareholders of record as
of February 1, 2002 and 2,500,000 shares to the public. The proposed offerings
are an important element of our revised strategy, but there can be no assurance
that we will be able to complete the offerings. If successful, we plan to use
the offering proceeds to support continued growth and achieve sustained
profitability. In particular:
o We plan to expand our branch network throughout Northern Virginia, by at
least two branches over the next 18 months at an estimated cost of $350,000
per branch, and increase core retail deposits by developing and marketing
innovative consumer oriented products and services. Further consolidation
of branch locations is expected in our target market as several mergers of
large regional and national banks are completed over the coming months.
This consolidation is expected to create opportunities to significantly
expand our branch network to attractive retail sites and increase our
market share of bank deposits within our target market.
o The capital we expect to raise in the offerings will provide us with larger
lending limits and will allow us to further expand our commercial lending
activities, using the breadth of experience of our senior lenders.
o We plan to organize a mortgage-banking subsidiary to enhance our
participation in the Northern Virginia residential mortgage lending market
and create fee income for us. We estimate that the start-up costs
associated with the first 12 twelve months of a mortgage-banking subsidiary
would be approximately $1.2 million.
o We may acquire a minority interest in a regional merchant bank, or a fund
established by such a bank.
o Although we have not at this time identified specific bank acquisition
targets, we will explore the possibility of further growth through
acquisition.
o We plan to expand certain existing product lines, including government
contract receivables lending, purchase of commercial accounts receivables,
origination of consumer credit, and provision of investment advisory
services through Cardinal Wealth Services, Inc. Our goal is to create a
diversified, community-focused banking franchise, balanced between retail,
commercial and real estate transactions and services.
19
Customers
We believe that the recent and ongoing bank consolidation within
Northern Virginia provides a significant opportunity to build a successful,
locally-oriented franchise. We also believe that many of the larger financial
institutions do not emphasize a high level of personalized service to the small
and medium-sized commercial, professional or individual retail customers. Our
commercial relationship managers focus their marketing efforts on attracting
small and medium-sized businesses and professionals, such as physicians,
accountants and attorneys. Because we focus on businesses and professionals, the
majority of our loan portfolio is in the commercial area with an emphasis placed
on originating sound, profitable commercial and industrial loans secured by real
estate, accounts receivable, inventory, property, plant and equipment.
Although we expect to continue serving the business and professional
market with experienced commercial relationship managers, we intend to increase
our marketing efforts to retail consumers through the expansion of our branch
network and development of innovative retail products and services.
Banking Products and Services
The principal business of the bank is to accept deposits from the
public and to make loans and other investments. The principal sources of funds
for the bank's loans and investments are demand, time, savings and other
deposits, repayment of loans, and borrowings. The principal source of income for
the bank is interest collected on loans and other investments. The principal
expenses of the bank are interest paid on savings and other deposits, employee
compensation, office expenses, and other overhead expenses. The bank does not
currently offer trust or fiduciary services.
The bank is committed to providing high quality banking products and
services to its customers, and has made a significant investment in its advanced
automated operating accounting system, which supports virtually every banking
function. The system provides the technology that fully automates the branches,
processes bank transactions, mortgages, loans and electronic banking, conducts
data base and direct response marketing, provides cash management solutions,
streamlined reporting and reconciliation support as well as sales support.
With this investment in technology, the bank offers Internet-based
delivery products for both consumers and commercial customers. Customers can
open accounts, apply for loans, check balances, check account history, transfer
funds, pay bills, download account transactions into Quicken(TM) and Microsoft
Money(TM), use interactive calculators and transmit e-mail with the bank over
the Internet. The Internet provides an inexpensive way for the bank to expand
its geographic borders and branch activities while providing the kind of
services one would expect from the larger banks.
We currently have seven full service banking offices, which are staffed
by 29 full-time employees and 9 part-time employees. We offer a broad array of
banking products and services to our customers. These products and services are
set forth below.
Loans. We offer a wide range of short- to long-term commercial and
consumer loans, which are described in further detail below. We have established
pre-determined percentage levels as targets for the division of our loan
portfolio across the various categories of loans. Commercial loans, real
estate-commercial loans, real estate-construction loans, real estate-residential
loans, home equity loans, and consumer loans account for approximately 28.7%,
43.4%, 3.2%, 7.2%, 10.6% and 6.9%, respectively of our loan portfolio at
December 31, 2001. We believe that this division reflects the current credit
demands of our market and provides a sufficient amount of diversification to
avoid over-reliance on one category. We may adjust these levels from time to
time as the credit demands of the community change and as our business evolves.
Credit Policies. Our senior lending officers and chief credit officer
are primarily responsible for maintaining a quality loan portfolio and
developing a strong credit culture throughout the entire organization.
20
The chief credit officer is responsible for developing and updating our credit
policies and procedures. The board of directors of the bank may make exceptions
to these credit policies and procedures as appropriate, but any such exception
must be documented and made for sound business reasons.
Credit quality is controlled by the chief credit officer through
compliance with our credit policies and procedures. Our risk-decision process is
actively managed in a disciplined fashion to maintain an acceptable risk profile
characterized by soundness, diversity, quality, prudence, balance and
accountability. Our credit approval process consists of specific authorities
granted to the lending officers. Loans exceeding a particular lending officer's
level of authority are reviewed and considered for approval by an officers' loan
committee and then by a committee of the bank's board of directors. In addition,
the chief credit officer works closely with each lending officer at the bank
level to ensure that the business being solicited is of the quality and
structure that fits our desired risk profile.
Under our credit policies, we generally limit our concentration of
credit risk in any loan or group of loans to 30% of the bank's capital. Such
concentration limit pertains to any group of borrowers related as to the source
of repayment or any one specific industry. Furthermore, the bank has established
limits on the total amount of the bank's outstanding loans to one borrower, all
of which are set below legal lending limits.
Commercial Loans. We make commercial loans to qualified businesses in
our market area. Our commercial lending consists primarily of commercial and
industrial loans for the financing of accounts receivable, inventory, property,
plant and equipment. We also offer Small Business Administration guaranteed
loans and asset-based lending arrangements to certain of our customers.
Secured Lending. Commercial loans generally have a higher degree of
risk than residential mortgage loans, but have commensurately higher yields.
Residential mortgage loans generally are made on the basis of the borrower's
ability to make repayment from his or her employment and other income and are
secured by real estate, the value of which generally is readily ascertainable.
In contrast, commercial loans typically are made on the basis of the borrower's
ability to make repayment from cash flow from its business and are secured by
business assets, such as commercial real estate, accounts receivable, equipment
and inventory. As a result, the availability of funds for the repayment of
commercial loans may be substantially dependent on the success of the business
itself. Further, the collateral for commercial loans may depreciate over time
and cannot be appraised with as much precision as residential real estate.
To manage these risks, our policy is to secure commercial loans with
both the assets of the borrowing business and other additional collateral and
guarantees that may be available. In addition, we actively monitor certain
measures of the borrower, including advance rate, cash flow, collateral value
and other appropriate credit factors.
Commercial Mortgage Loans. We also originate commercial mortgage loans.
These loans are primarily secured by various types of commercial real estate,
including office, retail, warehouse, industrial and other non-residential types
of properties and are made to the owners and/or occupiers of such property.
These loans have maturities generally ranging from one to ten years.
Commercial mortgage lending entails significant additional risk
compared with residential mortgage lending. Commercial mortgage loans typically
involve larger loan balances concentrated with single borrowers or groups of
related borrowers. Additionally, the payment experience on loans secured by
income producing properties is typically dependent on the successful operation
of a business or a real estate project and thus may be subject, to a greater
extent than is the case with residential mortgage loans, to adverse conditions
in the real estate market or in the economy generally. Our commercial real
estate loan underwriting criteria require an examination of debt service
coverage ratios, the borrower's creditworthiness and prior credit history and
reputation, and we generally require personal guarantees or endorsements. We
also carefully consider the location of the property that will be collateral for
the loan.
21
Loan-to-value ratios for commercial mortgage loans, generally do not
exceed 75%. We permit loan-to-value ratios up to 80% if the property is owner
occupied and the borrower has unusually strong general liquidity, net worth and
cash flow.
Residential Mortgage Loans. Our residential mortgage loans consist of
residential first and second mortgage loans, residential construction loans and
home equity lines of credit and term loans secured by first and second mortgages
on the residences of borrowers for home improvements, education and other
personal expenditures. We make mortgage loans with a variety of terms, including
fixed and floating or variable rates and a variety of maturities. Maturities for
construction loans generally range from six to twelve months for residential
property and from twelve to eighteen months for non-residential and multi-family
properties.
Residential mortgage loans generally are made on the basis of the
borrower's ability to make repayment from his or her employment and other income
and are secured by real estate the value of which tends to be easily
ascertainable. These loans are made consistent with our appraisal and real
estate lending policies, which detail maximum loan-to-value ratios and
maturities. Residential mortgage loans and home equity lines of credit secured
by owner-occupied property generally are made with a loan-to-value ratio of up
to 80%. Loan-to-value ratios of up to 90% may be allowed on residential
owner-occupied property based on the borrower's unusually strong general
liquidity, net worth and cash flow.
Construction Loans. Construction lending entails significant additional
risks compared with residential mortgage lending. Construction loans often
involve larger loan balances concentrated with single borrowers or groups of
related borrowers. Construction loans also involve additional risks attributable
to the fact that loan funds are advanced upon the security of property under
construction, which is of uncertain value prior to the completion of
construction. Thus, it is more difficult to evaluate accurately the total loan
funds required to complete a project and related loan-to-value ratios. To
minimize the risks associated with construction lending, we limit loan-to-value
ratios for owner occupied residential or commercial properties to 80%, and for
investor-owned residential or commercial properties to 75% of when-completed
appraised values. We expect that the loan-to-value ratios described above will
be sufficient to compensate for fluctuations in the real estate market to
minimize the risk of loss.
Consumer Loans. Our consumer loans consist primarily of installment
loans to individuals for personal, family and household purposes. The specific
types of consumer loans we make include home improvement loans, debt
consolidation loans and general consumer lending.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured, such as lines of
credit, or secured by rapidly depreciable assets such as automobiles. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining deficiency
often does not warrant further substantial collection efforts against the
borrower. In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount that can be recovered on
such loans. A loan may also give rise to claims and defenses by a consumer loan
borrower against an assignee of such loan, such as the bank, and a borrower may
be able to assert against such assignee claims and defenses that it has against
the seller of the underlying collateral.
Our policy for consumer loans is to accept moderate risk while
minimizing losses, primarily through a careful analysis of the borrower. In
evaluating consumer loans, we require our lending officers to review the
borrower's level and stability of income, past credit history and the impact of
these factors on the ability of the borrower to repay the loan in a timely
manner. In addition, we require our banking officers to maintain an appropriate
margin between the loan amount and collateral value.
22
We also issue credit cards to certain of our customers. In determining
to whom we will issue credit cards, we evaluate the borrower's level and
stability of income, past credit history and other factors. Finally, we make
additional loans that are not classified in one of the above categories. In
making such loans, we attempt to ensure that the borrower meets our credit
quality standards.
Purchase and Collection of Commercial Accounts Receivable. We offer a
product to our commercial customers involving the purchase, management and
collection of accounts receivable. This product is offered to small businesses
that do not have capital levels sufficient to qualify for traditional accounts
receivable lines of credit or whose borrowing needs exceed the amount that could
be borrowed under a traditional line of credit facility. Instead of earning
interest on outstanding balances, we earn a discount fee on the amount of
receivables purchased. Receivables are closely monitored and payments are
directed to a lockbox controlled by us. To manage risk, we perform independent
verifications of purchased receivables and maintain payment reserves of at least
10% of the amount advanced. Customers are required to repurchase all receivables
that become aged 90 days or more. This repurchase obligation is personally
guaranteed by the principal owner(s) of our customers. In addition, we maintain
both fraud and accounts receivable insurance coverage on the purchased
receivables.
Loan Participations: From time to time we purchase and sell loan
participations to or from other banks within our market area. In addition, in
1999 and 2001, we purchased two consumer loan portfolios from a bank outside of
our market area. All loan participations purchased have been underwritten using
the bank's standard and customary underwriting criteria.
Deposits. We offer a broad range of interest-bearing and
noninterest-bearing deposit accounts, including commercial and retail checking
accounts, money market accounts, individual retirement accounts, regular
interest-bearing savings accounts and certificates of deposit with a range of
maturity date options. The primary sources of deposits are small and
medium-sized businesses and individuals within our target market. Senior
management has the authority to set rates within specified parameters in order
to remain competitive with other financial institutions. We do not currently
engage in the purchase of any brokered deposits. All deposits are insured by the
Federal Deposit Insurance Corporation up to the maximum amount permitted by law.
We implement a service charge fee schedule, which is competitive with other
financial institutions in our market, covering such matters as maintenance fees
on checking accounts, per item processing fees on checking accounts, returned
check charges and other similar fees.
Courier Services. We offer courier services to our business customers.
Courier services permit us to provide the convenience and personalized service
that our customers require by scheduling pick-ups of deposits.
Telephone and Internet Banking. We believe that there is a strong
demand within our market for telephone banking and Internet banking. Both
services allow both commercial and retail customers to access detailed account
information and execute a wide variety of the banking transactions referred to
above. We believe that these services are particularly attractive for our
customers, as it enables them to conduct their banking business and monitor
their bank accounts from remote locations. Telephone and Internet banking
assists us in attracting and retaining customers and encourages our customers to
maintain more of their banking relationships with us.
Automatic Teller Machines. We have an ATM at each of our branch offices
plus one off-site and we make other financial institutions' ATMs available to
our customers.
Other Products and Services. We offer specialized products and services
to our customers, such as travelers checks and safe deposit services. We
periodically evaluate other services such as trust services, insurance and other
permissible activities. We intend to introduce these services as they become
economically viable. We do not currently engage in any interest rate hedging
activities and are not involved in any off balance sheet transactions or
relationships, except for letters of credit issued on behalf of
23
commercial customers in the ordinary course of business. We have not engaged in
any securitizations of loans.
Brokerage and Investment Advisory Services
Through our subsidiary, Cardinal Wealth Services, Inc., we provide
financial and estate planning services. Cardinal Wealth Services has formed a
strategic alliance with LM Financial Partners, Inc., a wholly owned subsidiary
of Legg Mason Inc. Through this alliance, Cardinal Wealth Services financial
advisors can offer its customers an extensive range of financial products and
services, including estate planning, qualified retirement plans, mutual funds,
annuities, life insurance, fixed income securities and equity research and
recommendations. Cardinal Wealth Services is located at 1313 Dolley Madison
Boulevard, McLean, Virginia 22101 and has 12 full-time employees, including 7
financial advisors.
Market Area
Our target market area includes areas in and around Fairfax County,
Virginia, including the independent cities of Fairfax, Alexandria and Manassas,
Virginia, as well as the counties of Arlington, Prince William and Loudoun. We
have established full-service banking offices in seven locations in the target
market.
Our target market is the Northern Virginia Metropolitan Statistical
Area (MSA) and is part of the fourth largest metropolitan statistical area in
the nation. The population of the MSA in 2000 was approximately 2.2 million and
is expected to grow to over 2.4 million by 2010. Over 40% of the population is
25 years and older and have earned a Bachelor's Degree or higher. This MSA has a
low unemployment rate and the per capita personal income in 1999 was in excess
of $40,000.
Fairfax County is the largest county in Virginia, with a population of
approximately 970,000 in 2000, and is expected to grow to just under 1.1 million
by 2010. With a per capita personal income of nearly $50,000, the county is one
of the most affluent in the country. The county is known as a major center for
U.S. and international corporate headquarters, technical and professional
service firms, and trade and professional organizations. A highly skilled and
educated labor force combined with a well-integrated transportation network,
including access to three major airports, positions Fairfax County for continued
business growth and expansion. Our headquarters is located approximately 20
miles west of Washington, D.C. and 115 miles north of Richmond, Virginia.
Our target market is one of the strongest banking markets in the
nation. As of June 30, 2001, total FDIC insured bank deposits in our target
market area, excluding deposits of E*TRADE Bank and Capital One Bank (which,
although based in our target market area, draw deposits nationally), was $24
billion, up 16% from the prior year. Of the $24 billion in bank deposits in our
target market area, just over 75% were held by banks based outside of our target
market area. A major focus of our revised strategy is to gain a larger share of
this robust market for insured bank deposits.
Competition
We are headquartered in Northern Virginia, where there is a growing but
limited community bank presence. It is a community generally serviced by the
branches of large regional banks headquartered, for the most part, in cities
outside Northern Virginia. Our market area is a highly competitive, highly
branched banking market. We compete as a financial intermediary with other
commercial banks, savings and loan associations, credit unions, mortgage banking
firms, consumer finance companies, securities brokerage firms, insurance
companies, money market mutual funds and other financial institutions operating
in the Northern Virginia market area and elsewhere.
24
Competition in the market area for loans to small businesses and
professionals is intense, and pricing is important. Many of our competitors have
substantially greater resources and lending limits than we do. In addition many
competitors offer services, such as extensive branch networks that we currently
do not provide. Moreover, larger institutions operating in the Northern Virginia
market have access to borrowed funds at lower costs than are available to us.
Deposit competition among institutions in the market area also is very
strong. As a result, it is possible that we will pay above-market rates to
attract deposits. According to a market share data obtained from the FDIC,
excluding deposits held by E*TRADE Bank and Capital One Bank, we held 0.83% of
total deposits in our target market as of June 30, 2001, compared to 0.68% as of
June 30, 2000. Banks headquartered in our target market area controlled just
24.6% of local deposits as of June 30, 2001, up from 24.1% in the prior year.
Deposit market share of banks' headquarters outside of our target market area
declined from 75.9% as of June 30, 2000 to 75.4% as of June 30, 2001. By
providing competitive products and more personalized service, local banks have
been able to take market share from their non-local competitors, a trend we see
continuing and one we intend to exploit as part of our revised strategy.
Employees
At December 31, 2001, we had 87 full-time employees and 18 part-time
employees. None of our employees are represented by any collective bargaining
unit.
Legal Proceedings
In the ordinary course of our operations, we may become party to legal
proceedings. Currently, we are not party to any material proceedings and no such
proceedings are, to management's knowledge, threatened against us.
25
PROPERTIES
We conduct our business from our main office in Fairfax, Virginia and
seven branch banking offices. The following table provides certain information
with respect to our properties:
- ------------------------------------------------------------------------------------------------------------
Location: Date Facility Opened: Ownership and Leasing
Arrangements
- ------------------------------------------------------------------------------------------------------------
Main Office: January, 1999 We occupy approximately 7,800
Cardinal Financial Corporation square feet under a lease that
10555 Main Street expires December 31, 2003.
Suite 500
Fairfax, Virginia 22030
- ------------------------------------------------------------------------------------------------------------
Branch Office #1 January, 1998 This branch occupies a three-story
Cardinal Bank, N.A. brick structure, which contains
10641 Lee Highway approximately 9,000 square feet
Fairfax, Virginia 22030 under a lease that expires
December 31, 2007.
- ------------------------------------------------------------------------------------------------------------
Branch Office #2 June, 2000 This branch occupies approximately
Cardinal Bank, N.A. 2,600 square feet under a lease
1737 King Street that expires December 31, 2013.
Alexandria, Virginia 22314
- ------------------------------------------------------------------------------------------------------------
Branch Office #3 August, 1999 This branch occupies approximately
Cardinal Bank, N.A. 6,600 square feet of a three-story
11150 Sunset Hills Road structure under a lease that
Reston, Virginia 20190 expires December 31, 2008.
Approximately 3,000 square feet
of space is currently on the
market for sublease.
- ------------------------------------------------------------------------------------------------------------
Branch Office #4 September, 2000 This branch occupies approximately
Cardinal Bank, N.A. 3,000 square feet under a lease
46005 Regal Plaza that expires February 29, 2009.
Sterling, Virginia 20165
- ------------------------------------------------------------------------------------------------------------
Branch Office #5 September, 2000 This branch occupies approximately
Cardinal Bank, N.A. 2,200 square feet under a lease
1313 Dolley Madison Blvd. that expires July 31, 2008.
McLean, Virginia 22101
Cardinal Wealth Services, Inc.
Also at the location is: occupies 2,600 square feet under
Cardinal Wealth Services, Inc. the same lease as the branch
office.
- ------------------------------------------------------------------------------------------------------------
Branch Office #6 September, 2000 This branch occupies approximately
Cardinal Bank, N.A. 4,100 square feet under a lease
1650 Tysons Boulevard that expires March 31, 2006.
McLean, Virginia 22102
- ------------------------------------------------------------------------------------------------------------
Branch Office #7 July, 1999 This branch occupies a two-story
Cardinal Bank - Manassas/Prince building containing approximately
William, N.A. 6,000 square feet and owned by us.
9626 Center Street
Manassas, Virginia 20110
- ------------------------------------------------------------------------------------------------------------
26
SELECTED FINANCIAL DATA
You should read the summary financial data presented below in
conjunction with our audited consolidated financial statements, including the
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operation" included in this prospectus. The summary financial
data as of December 31, 2001 and 2000 and for the each of the two years ended
December 31, 2001 and 2000 and is derived from our audited consolidated
financial statements and related notes included in this prospectus. The summary
financial data as of December 31, 1999 and for the year ended December 31, 1999
is derived from our audited consolidated financial statements which are not
included in this prospectus.
Year Ended December 31,
2001 2000 1999
Income Statement Data: (Dollars in thousands, except per share data)
Net interest income.............................. $ 9,077 $ 6,410 $ 3,025
Provision for loan losses........................ 1,201 753 514
Non-interest income.............................. 3,266 2,098 1,320
Non-interest expense............................. 23,866 11,726 7,870
Income taxes .................................... - - -
Loss............................................. $ (12,724) $ (3,971) $ (4,039)
Selected Financial Data:
Basic net loss................................... $ (12,724) $ (3,971) $ (4,039)
Fully diluted net loss........................... (12,724) (3,971) (4,039)
Cash dividends declared on common................ - - -
Cash dividends declared on preferred........... 503 171 -
Basic net loss to common shareholders.......... (13,227) (4,142) (4,039)
Fully diluted net loss to common shareholders.. (13,227) (4,142) (4,039)
Book value at year end........................... 3.21 6.36 7.25
Tangible book value at year end.................. $ 3.06 $ 4.11 $ 7.25
Common shares outstanding, year end.............. 4,294,323 4,253,155 4,242,634
Average common shares outstanding, basic......... 4,258,087 4,246,346 4,240,819
Average common shares outstanding, diluted....... 4,258,087 4,246,346 4,240,819
Balance Sheet Data:
Total assets..................................... $ 279,584 $ 207,048 $ 97,033
Total loans, net of fees......................... 200,911 154,271 68,167
Total loans held for sale........................ 4,732 - -
Total investment securities...................... 34,147 6,935 4,807
Total deposits .................................. 246,024 163,371 59,873
Shareholders' equity............................. 20,624 34,112 30,745
Common shareholders' equity...................... $ 13,799 $ 27,055 $ 30,745
Performance Ratios:
Loss on average assets........................... (5.24%) (2.72%) (5.61%)
Loss on average equity........................... (39.14%) (12.72%) (12.26%)
Net interest margin (1).......................... 4.17% 4.82% 4.59%
Asset Quality Ratios:(2)
Allowance to year-end loans...................... 1.55% 1.23% 1.07%
Allowance to nonperforming assets................ 859.8% 324.8% N/A
Nonperforming assets to total loans.............. 0.18% 0.28% 0.00%
Net charge-offs to loans......................... 0.00% 0.00% 0.00%
Capital Ratios:
Tier I risk-based capital........................ 9.04% 18.89% 37.86%
Total risk-based capital......................... 10.42% 19.94% 38.75%
Leverage capital ratio........................... 8.57% 17.39% 32.55%
Total equity to total assets..................... 7.38% 16.48% 31.69%
- ---------------
(1) Net interest margin is net interest income divided by total average
earning assets.
(2) Nonperforming assets consist of nonaccrual loans, restructured loans
and foreclosed properties.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following presents management's discussion and analysis of our
consolidated financial condition for the years ended December 31, 2001 and 2000
and the results of our operations for the years ended December 31, 2001, 2000
and 1999. The discussion should be read in conjunction with the accompanying
consolidated financial statements.
2001 Compared to 2000
Earnings Overview
In the fourth quarter of 2001 our net loss was $10.6 million, which
included an impairment of $8.3 million that effectively eliminated the goodwill
associated with our merger with Heritage Bancorp, Inc. An evaluation of current
year losses produced by Cardinal Bank - Potomac and expectations of future
additional losses indicated a potential impairment in our investment in
Heritage. Loan and deposit growth were materially less than what had been
anticipated in our original projections. The amount of the impairment was
determined through an independent appraisal of the remaining assets and
liabilities of Heritage Bancorp, Inc. performed during the fourth quarter of
2001. In addition, management refined its loan loss reserve methodology, which
resulted in an additional provision to our loan loss reserve of $774,000.
Additional costs relating to our restructuring totaled $829,000 during the last
quarter of 2001.
Our net loss for the year ended December 31, 2001 totaled $13.2 million
or ($3.11) per common share, compared with a loss of $4.1 million or ($0.98) per
common share for the same period of 2000. The 2001 loss included an impairment
of $8.3 million that substantially eliminated the goodwill attributed to the
purchase of Heritage Bancorp, Inc. The return on average assets was (5.24%) in
2001 as compared to (2.72%) in 2000. The return on average equity was (39.14%)
in 2001 as compared to (12.72%) in 2000. Earnings per common share reflect the
payment of preferred dividends of $503,000 and $171,000 for the years ended
December 31, 2001 and 2000, respectively. Excluding the preferred dividends and
the write down of goodwill, the loss for the year ended December 31, 2001 was
$4.5 million as compared to $4.1 million for the same period of 2000.
Total earning assets increased by 37.6% to $258.0 million at December
31, 2001 as compared to $187.5 million at December 31, 2000. This increase
consisted mainly of $46.6 million or 30.2% growth in total loans, net of fees
and a $27.2 million increase in investment securities available-for-sale. These
increases were primarily funded by total deposit growth of $82.7 million or
50.6% over December 31, 2000 balances.
Operating results in 2001 reflected significant increases in all income
and expense categories due to our growth. We purchased Heritage Bancorp, Inc.
and its sole operating subsidiary, The Heritage Bank on September 1, 2000, which
contributed a full year of operating income and expenses in 2001 as compared to
four months in 2000.
Net interest income was $9.1 million in 2001, up $2.7 million from 2000
or 42.2%. This increase was substantially due to increased volume as the net
interest margin had decreased. The net interest margin was 4.17% for the year
ended December 31, 2001 as compared to 4.82% for the same period of 2000. The
drop in interest rates by 475 basis points during 2001 contributed to this
decline as our earning assets have repriced sooner than interest-bearing
liabilities. Average total loans increased $77.0 million to $181.0 million in
2001 from $104.0 million in 2000, due to strong loan demand. Average total
deposits increased $91.5 million to $197.4 million in 2001 from $105.9 million
in 2000.
In 2001, the loan loss provision of $1.2 million was $448,000 greater
than the $753,000 recorded in 2000 due partially to the increase in loan
balances, both originated and acquired during 2001. Of the $1.2 million increase
in loan loss reserves in 2001, $644,000 was due to increases in loan balances,
$157,000 was
28
due to an increase in reserves specifically allocated to one non-performing
credit, and $399,000 was due to refinements in our loan loss methodology.
Non-interest income was $3.3 million, a 57.1% increase compared to
2000. The largest portion of this increase was investment fee income from our
subsidiary, Cardinal Wealth Services, Inc., which increased to $1.9 million in
2001 from $1.5 million in 2000. Service charges on deposit accounts increased
$245,000 to $398,000 during 2001 due to increased deposit accounts.
Non-interest expense was $23.9 million in 2001 compared to $11.7
million in 2000. The 2001 increase included an impairment of $8.3 million that
substantially eliminated the goodwill attributed to the purchase of Heritage
Bancorp, Inc. Additional expenses of approximately $884,000 in nonrecurring
costs associated with a corporate restructuring were included in 2001.
Net Interest Income/Margin
The primary source of our revenue, net interest income, is defined as
the difference between interest income on earning assets and the cost of funds
supporting those assets. 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. The
net interest margin was 4.17% for the year ended December 31, 2001 as compared
to 4.82% for the same period of 2000. The Federal Open Market Committee
decreased interest rates by 475 basis points during 2001 contributing to a
decline in the net interest margin as earning assets have repriced sooner than
interest-bearing liabilities. The rate on interest earning assets decreased to
7.61% in 2001 from 8.39% in 2000 and our cost of funds decreased to 3.13% in
2001 from 3.29% in 2000. Average total loans increased $77.0 million to $181.0
million in 2001 from $104.0 million in 2000, due to strong loan demand primarily
in commercial loans and commercial real estate loans. Average balances for
nonperforming assets are included in the net interest margin calculation and did
not have a material impact on our net interest margin in 2001 and 2000.
Additional interest income of approximately $17,000 for 2001 and $34,000 for
2000 would have been realized had all nonperforming assets performed as
originally expected. Nonperforming assets exclude loans that are both past due
90 days or more and not deemed nonaccrual, due to an assessment of
collectibility. Nonperforming assets consist of nonaccrual loans. Average total
deposits increased $91.5 million to $197.4 million in 2001 from $105.9 million
in 2000. Although all deposit accounts grew, the largest increase was in average
certificates of deposit.
Tables 1 and 2 contain more detailed information concerning average
balances, yields earned, and rates paid.
29
Table 1
Cardinal Financial Corporation and Subsidiaries
Average Balance Sheets and Interest Rates on Earning Assets and
Interest - Bearing Liabilities
(Dollars in thousands)
2001 2000 1999
------------------------ -------------------------- ------------------------
Interest Interest Interest
Average Income/ Average Income/ Average Income/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- ----- -------- -------- ------ ------- -------- -----
Assets
Interest-earning assets:
Loans: $ 52,063 $ 4,407 8.46% $ 35,605 $ 3,149 8.84% $11,087 $ 840 7.58%
Commercial
Real estate - commercial 72,500 6,288 8.67% 33,546 2,899 8.64% 9,718 790 8.13%
Real estate - construction 5,634 487 8.64% 2,425 287 11.84% 719 67 9.32%
Real estate - residential 17,972 1,501 8.35% 15,568 1,447 9.29% 8,089 628 7.76%
Home equity lines 18,023 1,146 6.36% 7,307 698 9.55% 2,340 168 7.18%
Consumer 14,827 1,144 7.72% 9,518 778 8.17% 1,724 168 9.74%
-------- -------- -------- -------- ------- --------
Total loans 181,019 14,973 8.27% 103,969 9,258 8.90% 33,677 2,661 7.90%
-------- -------- -------- -------- ------- --------
Investment securities available for sale 7,022 437 6.22% 6,068 371 6.11% 6,960 406 5.83%
Other investments 1,373 82 5.97% 1,036 70 6.76% 504 29 5.75%
Federal funds sold 28,467 1,085 3.81% 21,790 1,452 6.66% 24,804 1,234 4.98%
-------- -------- -------- -------- ------- --------
Total interest-earning assets and interest income 217,881 16,577 7.61% 132,863 11,151 8.39% 65,945 4,330 6.57%
======== ======== ========
Non-interest earning assets:
Cash and due from banks 10,467 5,890 2,712
Premises and equipment, net 5,579 4,698 3,247
Goodwill and other intangibles 9,228 3,262 -
Accrued interest and other assets 1,695 564 495
Allowance for loan losses (2,118) (1,184) (412)
-------- -------- -------
Total assets $242,732 $146,093 $71,987
======== ======== =======
Liabilities and Shareholders' Equity
Interest - bearing liabilities:
Interest - bearing deposits:
Interest checking 17,675 370 2.09% 5,375 130 2.42% 2,436 49 2.01%
Money markets 25,346 767 3.03% 15,256 624 4.09% 7,168 264 3.68%
Statement savings 4,371 102 2.33% 2,441 61 2.50% 239 7 2.93%
Certificates of deposit 101,932 5,788 5.68% 55,656 3,479 6.25% 18,980 887 4.67%
-------- -------- -------- -------- ------- --------
Total interest - bearing deposits 149,324 7,027 4.71% 78,728 4,294 5.45% 28,823 1,207 4.19%
-------- -------- -------- -------- ------- --------
Other borrowed funds 10,002 473 4.73% 6,904 447 6.47% 1,773 98 5.53%
-------- -------- -------- -------- ------- --------
Total interest-bearing liabilities
and interest expense 159,326 7,500 4.71% 85,632 4,741 5.54% 30,596 1,305 4.27%
======== ======== ========
Noninterest-bearing liabilities:
Demand deposits 48,110 27,203 7,309
Other liabilities 2,790 2,043 1,140
Preferred shareholders' equity 7,056 2,371 -
Common shareholders' equity 25,450 28,844 32,942
-------- -------- -------
Total liabilities and shareholders' equity $242,732 $146,093 $71,987
======== ======== =======
Net interest income and net interest margin $ 9,077 4.17% $ 6,410 4.82% $ 3,025 4.59%
-------- -------- --------
30
Table 2
Cardinal Financial Corporation and Subsidiaries
Rate and Volume Analysis (Tax Equivalent Basis)
(Dollars in thousands)
2001 Compared to 2000 2000 Compared to 1999
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------------------------------- --------------------------------
Interest Income:
Loans:
Commercial $ 1,456 $ (198) $ 1,258 $ 1,858 $ 451 $ 2,309
Real estate - commercial 3,366 23 3,389 1,937 172 2,109
Real estate - construction 380 (180) 200 159 61 220
Real estate - residential 223 (169) 54 581 238 819
Home equity lines 1,024 (576) 448 357 173 530
Consumer 434 (68) 366 760 (150) 610
-------------------------------- --------------------------------
Total loans 6,883 (1,168) 5,715 5,650 947 6,597
-------------------------------- --------------------------------
Investment securities available for sale 58 8 66 (52) 17 (35)
Other investments 23 (11) 12 31 10 41
Federal funds sold 445 (812) (367) (150) 368 218
-------------------------------- --------------------------------
Total interest income 7,409 (1,983) 5,426 5,479 1,342 6,821
Interest expense:
Interest-bearing deposits:
Interest checking 297 (57) 240 59 22 81
Money markets 413 (270) 143 298 62 360
Statement savings 48 (7) 41 64 (10) 54
Certificates of deposit 2,893 (584) 2,309 1,714 878 2,592
-------------------------------- --------------------------------
Total interest-bearing deposits 3,651 (918) 2,733 2,135 952 3,087
-------------------------------- --------------------------------
Other borrowed funds 201 (175) 26 284 65 349
Total interest expense 3,852 (1,093) 2,759 2,419 1,017 3,436
-------------------------------- --------------------------------
Net interest income $ 3,557 $ (890) $ 2,667 $ 3,060 $ 325 $ 3,385
-------------------------------- --------------------------------
Provision and Allowance for Loan Losses
Our policy is to maintain the allowance for loan losses at a level that
represents our best estimate of known and inherent losses in the loan portfolio.
Both the amount of the provision and the level of the allowance for loan losses
are impacted by many factors, including general economic conditions, trends
within our peer group, actual and expected credit losses, historical trends and
specific conditions of the individual borrower. The loan loss provision was $1.2
million in 2001 as compared to $753,000 in 2000 due partially to the increase in
loan balances, both originated and acquired during 2001. In addition to the
increased loan balances, we refined our loan loss reserve methodology during the
fourth quarter of 2001, which, together with the growth in loan balances
experienced during the fourth quarter, resulted in an additional provision of
$774,000. A specific reserve of $157,000 was recorded within the allowance for
loan losses to reflect the non-performing status of one credit in our loan
portfolio.
The allowance for loan losses increased to $3.1 million in 2001 from
$1.9 million in 2000. The ratio of the allowance for loan losses to gross loans
at December 31, 2001 was 1.55% compared to 1.23% at December 31, 2000. Of the
$1.2 million increase in loan loss reserves in 2001, $644,000 was due to
increases in loan balances, $157,000 was due to an increase in reserves
specifically allocated to one non-performing credit, and $399,000 was due to
refinements in our loan loss reserve methodology.
From our inception through December 31, 2001, we had not experienced
any loan losses, due primarily to the lack of maturity of our loan portfolio.
Under normal circumstances, we would base the level of our loan loss reserves on
actual loss experience. In the absence of a history of actual loss experience,
we had used peer group loss factors, adjusted by certain qualitative factors,
including levels of and trends in
31
delinquencies and nonaccrual loans, national and local economic trends and
conditions, and concentrations of loans exhibiting similar risk profiles.
During the fourth quarter of 2001, we refined our loan loss analysis in
three ways:
o We updated our comparative peer group to commercial banks located in
Virginia, the District of Columbia and Maryland with total assets of $250
million to $500 million, to better reflect the anticipated consolidation of
all banking subsidiaries into one. Prior to the fourth quarter of 2001,
peer group averages had been based on the Uniform Bank Performance Report
for all commercial banks with assets of less than $100 million and was
consistent with our prior structure of four separately chartered banks.
o We adjusted peer group loss averages by a "duration" factor beginning in
the fourth quarter of 2001 which had previously not been included in our
analysis.
o We elevated the importance of qualitative factors in our analysis, due
primarily to declining economic conditions and an increase in our
concentration in commercial real estate loans from 36% of the total loan
portfolio as of December 31, 2000 to 43% as of December 31, 2001. Under the
revised analysis, qualitative adjustments to loss factors ranged from 40
basis points on residential mortgages to 95 basis points on commercial real
estate loans. Under the methodology used prior to the fourth quarter of
2001, qualitative adjustments had resulted in adjusting factors ranging
from zero to fifty basis points.
As part of our loan loss reserve analysis methodology, we categorize our
loans into one of five pools of loans: Commercial and industrial,
o Commercial real estate,
o Home equity lines of credit,
o Residential mortgages, and
o Consumer loans.
Peer group annual loss factors are applied to all pools and are adjusted by
the projected duration of the loan pool and by the qualitative factors mentioned
above. The indicated loss factors resulting from this analysis are applied to
each of the loan pools to determine a reserve level for each of the five pools
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. In the absence of historical data on which to base loss factors for
classified loans, we apply a 5% loss factor to all special mention loans and a
15% loss factor to all substandard loans (in accordance with regulatory
guidelines).
32
Tables 3 and 4 contain additional information pertaining to the
calculation and allocation of the allowance for loan losses.
Table 3
Cardinal Financial Corporation and Subsidiaries
Allowance for Loan Losses
As of December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
------ ------ ------
Beginning balance, January 1 $1,900 $ 726 $ 212
Provision for loan losses 1,201 753 514
Assumed allowance for loan losses
from acquisition of Heritage - 421 -
Loans charged off:
Commercial - - -
Real estate - commercial - - -
Real estate - construction - - -
Real estate - residential - - -
Home equity lines - - -
Consumer - - -
------ ------ ------
Total loans charged off - - -
Recoveries:
Commercial 3 - -
Real estate - commercial - - -
Real estate - construction - - -
Real estate - residential - - -
Home equity lines - - -
Consumer - - -
------ ------ ------
Total recoveries 3 - -
Net recoveries 3 - -
Balance, December 31, $3,104 $1,900 $ 726
====== ====== ======
December 31, December 31, December 31,
Loans: 2001 2000 1999
------------ ------------ ------------
Balance at year end $200,887 $154,078 $68,147
Allowance for loan losses to
year end loans 1.55% 1.23% 1.07%
33
Table 4 shows the allocation of the allowance for loan losses by loan
type and the percentage of the loan type to the total loan portfolio.
Table 4
Cardinal Financial Corporation and Subsidiaries
Allocation of the Allowance for Loan Losses
As of December 31, 2001, 2000, and 1999
(Dollars in thousands)
December 31, December 31, December 31,
2001 2000 1999
------------------ -------------------- ------------------
Commercial $ 1,149 28.71% 612 32.21% 241 33.20%
Real estate - commercial 1,270 43.37% 678 35.68% 211 29.06%
Real estate - construction 34 3.18% 50 2.63% 9 1.24%
Real estate - residential 98 7.20% 181 9.53% 126 17.36%
Home equity lines 176 10.60% 126 6.63% 40 5.51%
Consumer 377 6.94% 253 13.32% 99 13.63%
-------- ------- ------ ------- ------ -------
Total allowance for loan losses $ 3,104 100.00% $1,900 100.00% $ 726 100.00%
======= ======= ====== ======= ====== =======
Lending
We have comprehensive policies and procedures that cover both
commercial and consumer loan origination and management of credit risk. Loans
are underwritten in a manner that focuses on the borrower's ability to repay.
Our goal is not to avoid risk, but to manage it and to include credit risk as
part of the pricing decision for each product.
Total loans, net of fees and premiums and discounts, increased $51.4
million to $205.6 million at December 31, 2001. The strongest growth was in
commercial loans and commercial real estate loans reflecting our strength as a
local small business community bank.
Our loan portfolio has a heavy commercial orientation as evidenced by
the information provided in Table 5. We began in late 1999 to better diversify
the loan portfolio by purchasing consumer loans. We continued to diversify our
portfolio in 2000 and 2001 by purchasing consumer installment loans.
34
Table 5
Cardinal Financial Corporation and Subsidiaries
Loans Receivable
As of December 31, 2001, 2000 and 1999
(Dollars in thousands)
December 31, December 31, December 31,
2001 2000 1999
------------------ -------------------- ------------------
Commercial $ 57,665 28.71% $ 49,646 32.22% $22,558 33.10%
Real estate - commercial 87,116 43.37% 57,083 37.05% 19,780 29.03%
Real estate - construction 6,397 3.18% 4,088 2.65% 870 1.28%
Real estate - residential 14,469 7.20% 17,729 11.51% 11,851 17.39%
Home equity lines 21,299 10.60% 14,867 9.65% 3,777 5.54%
Consumer 13,941 6.94% 10,665 6.92% 9,311 13.66%
-------- ------- -------- ------- ------- -------
Gross loans $200,887 100.00% $154,078 100.00% $68,147 100.00%
Add: unearned income, net 24 193 20
Less: allowance for loan losses (3,104) (1,900) (726)
-------- -------- -------
Total loans, net $197,807 $152,371 $67,441
======== ======== =======
Loans receivable accounted for on a non-accrual basis at December 31,
2001 and 2000 were $361,000 and $585,000, respectively. Accruing loans, which
are contractually past due 90 days or more as to principal or interest payments
as of December 31, 2001 and 2000, were $566,000 and $2,000, respectively. There
are no loans as of December 31, 2001 and 2000 included above which are "troubled
debt restructurings" as defined in Statement of Financial Accounting Standards
("SFAS") No. 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings. Specific reserves of $157,000 were made in 2001 for one of the
non-accrual loans. Interest income on non-accrual loans, if recognized, is
recorded using the cash basis method of accounting. When a loan is placed on
non-accrual, unpaid interest is reversed against interest income if it was
accrued in the current year and is charged to the allowance for loan losses if
it was accrued in prior years. When, in our opinion the borrower has
demonstrated the ability to pay and remain current, the loan is returned to an
accruing status. When this occurs, any unpaid interest is recorded as interest
income only after all past due principal has been collected. At December 31,
2001 the ratio of non-performing loans to total loans was 0.18% as compared to
0.38% at December 31, 2000.
Non-Interest Income
Non-interest income continues to be an important factor in our
operating results. Non-interest income was $3.3 million for the year ended
December 31, 2001, an increase of $1.2 million over the same period of 2000. The
largest portion of this increase was investment fee income from our subsidiary
Cardinal Wealth Services, Inc., which increased to $1.9 million in 2001 from
$1.5 million in 2000. Due to increased deposit accounts, service charges on
deposit accounts increased $245,000 to $398,000 during 2001 as compared to
$154,000 in 2000. Loan service charges increased to $433,000 or 87.9% from
$230,000 in 2000 due to the increase in the loan portfolio. During 2001, we
consolidated operations, sublet the excess space and received rental income of
$110,000 for that space. Table 6 provides additional detail on non-interest
income for the years ended December 31, 2001, 2000 and 1999.
35
Table 6
Cardinal Financial Corporation and Subsidiaries
Non-interest Income
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------------- ------------------ -----------------
Service charges on deposit accounts $ 398,326 $ 153,769 $ 41,612
Loan service charges 432,508 230,228 226,211
Investment fee income 1,941,200 1,515,530 1,017,924
Gain from sale of assets 67,045 2,687 4,207
ATM transaction fees 92,392 26,108 4,950
Credit card fees 38,900 29,124 13,325
Check order fees 61,758 34,039 10,999
Other income 234,530 106,456 1,257
----------------- ------------------ -----------------
$ 3,266,659 $ 2,097,941 $ 1,320,485
================= ================== =================
Non-Interest Expense
Non-interest expense was $23.9 million and $11.7 million for the years
ended December 31, 2001 and 2000, respectively. The 2001 increase included a
one-time charge of $8.3 million that substantially eliminated the goodwill
attributed to the purchase of Heritage Bancorp, Inc. An evaluation of current
year losses produced by Cardinal Bank - Potomac and expectations of future
additional losses indicated a potential impairment in our investment in
Heritage. Loan and deposit growth were materially less than what had been
anticipated in our original projections. Projections were based on historical
growth under prior management and the experience of the Heritage lending group.
At September 30, 2001, total loans and deposits were $29.0 million and $22.0
million less than what we had projected. This differential between actual and
projected growth was partially due to the loss of customer generating employees
and the subsequent loss of their respective portfolios. In the fourth quarter of
2001, a valuation of Cardinal Bank - Potomac was performed by an external
consultant in response to these impairment indicators. The valuation was
performed in compliance with SFAS 121 and indicated a significant impairment
which resulted in the write down of goodwill of $8.3 million. Also, during 2001,
we made the decision to restructure from four banks to one to simplify our
structure and reduce costs. Consequently, included in non-interest expense is
approximately $884,000 in non-recurring costs associated with the restructuring.
This restructuring is expected to be completed in the first quarter of 2002. In
addition, operating results in 2001 and 2000 reflected significant increases in
all income and expense categories due to our growth. Table 7 reflects the
components of non-interest expense for the years ended December 31, 2001, 2000
and 1999.
Table 7
Cardinal Financial Corporation and Subsidiaries
Non-interest Expense
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
------------- -------------------- -------------------
Salary and benefits $ 7,730,504 $ 6,317,278 $ 4,277,231
Occupancy 1,373,265 1,075,075 811,578
Professional fees 705,313 507,769 494,472
Depreciation 804,065 600,397 356,435
Amortization/ write down of intangibles 8,907,010 235,297 --
Data processing 957,079 560,825 353,498
Stationery and supplies 305,878 344,623 322,586
Brokerage clearing 370,397 344,978 197,822
Advertising and marketing 367,569 241,225 175,100
Telecommunications 325,183 253,826 163,481
Other taxes 269,047 220,902 94,670
Travel and entertainment 163,967 139,212 79,128
Bank operations 875,390 165,058 125,541
Premises and equipment 246,851 142,137 103,739
Miscellaneous 464,640 577,513 314,788
-------------- -------------------- -------------------
$ 23,866,158 $ 11,726,115 $ 7,870,069
-------------- -------------------- -------------------
Income Taxes
We have not recorded income tax expense or benefit due to the
recognition of net losses in 2001 and all prior years of operations. The ability
to utilize net operating loss carryforwards will be dependent on our ability to
generate future taxable earnings. Footnote 9 of the Consolidated Financial
Statements provides additional information with respect to the deferred tax
accounts and the net operating loss carryforward.
Securities Available-for-Sale
Our investment securities portfolio is used as a source of income and
liquidity. Investment securities increased to $34.1 million at December 31, 2001
as compared to $6.9 million at December 31, 2000. Our growth and simplification
of our structure have made more funds available for investments. The portfolio
yield decreased from 6.60% as of December 31, 2000 to 5.36% as of December 31,
2001 due to higher yielding investments maturing or being called. Table 8
reflects the composition of the investment portfolio as of December 31, 2001,
2000 and 1999.
Table 8
Cardinal Financial Corporation and Subsidiaries
Investment Securities Available-for-Sale
As of December 31, 2001, 2000 and 1999
(Dollars in thousands)
Amortized Fair Unrealized Average
As of December 31, 2001 Par Value Cost Value Gain/(Loss) Yield
-------------------------------------------------------------
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%
=============================================================
Amortized Fair Unrealized Average
As of December 31, 2000 Par Value Cost Value Gain/(Loss) Yield
--------------------------------------------------------
U.S. government agencies and enterprises
Within one year $ 500 $ 500 $ 497 $ (3) 5.25%
One to five years 4,000 3,949 3,999 50 6.85%
After ten years 1,377 1,403 1,374 (29) 6.64%
- ---------------------------------------------------------------------------------------------------------------------
Total U.S. government agencies $ 5,877 $ 5,852 $ 5,870 $ 18 6.66%
- ---------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities
Within one year $ 30 $ 30 $ 30 $ - 5.50%
One to five years 740 742 734 (8) 6.44%
Five to ten years 306 307 301 (6) 5.92%
- ---------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities $ 1,076 $ 1,079 $ 1,065 $ (14) 6.27%
- ---------------------------------------------------------------------------------------------------------------------
Total investment securities available-for-sale $ 6,953 6,931 $ 6,935 $ 4 6.60%
========================================================
Amortized Fair Unrealized Average
As of December 31, 1999 Par Value Cost Value Gain/(Loss) Yield
--------------------------------------------------------
U.S. government agencies and enterprises
One to five years $ 3,000 $ 3,000 $ 2,927 $ (73) 5.90%
After ten years 500 499 445 (54) 6.26%
- ---------------------------------------------------------------------------------------------------------------------
Total U.S. government agencies $ 3,500 $ 3,499 $ 3,372 $ (127) 5.95%
- ---------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities
Within one year $ 89 $ 89 $ 89 $ - 6.20%
Five to ten years 216 217 215 (2) 5.40%
After ten years 1,170 1,173 1,131 (42) 5.86%
- ---------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities $ 1,475 $ 1,479 $ 1,435 $ (44) 5.87%
- ---------------------------------------------------------------------------------------------------------------------
Total investment securities available-for-sale $ 4,975 $ 4,978 $ 4,807 $ (171) 5.93%
========================================================
39
Interest Rate Sensitivity
The most important element of asset/liability management is the
monitoring of our sensitivity to interest rate movements. Fluctuations in
interest rates may result in changes in the fair market value of our financial
instruments, cash flows and net interest income. Our goal is to maximize net
interest income with acceptable levels of risk to changes in interest rates. We
seek to meet this goal by influencing the maturity and re-pricing
characteristics of the various loan and deposit lines of business and by
managing discretionary balance sheet asset and liability portfolios.
We utilize a simulation modeling process to measure interest rate risk
and the impact that rate fluctuations will have on net interest income. These
simulations incorporate assumptions regarding balance sheet growth and mix,
pricing and the re-pricing and maturity characteristics of the 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
interest rates will have on net interest income. The difference between rate
sensitive assets and rate sensitive liabilities for a specific period of time is
known as the "GAP." The data in Table 9 reflects re-pricing or expected
maturities of various assets and liabilities at December 31, 2001. Interest
sensitivity GAP analysis presents a position that existed at one particular
point in time and assumes that assets and liabilities with similar
characteristics will re-price at the same time and to the same degree. As shown
in the table, we were liability sensitive (excess of liabilities over assets) in
the three-month to one-year horizon. We regularly review the overall interest
rate risk position and develop and implement appropriate strategies to manage
the risk.
Table 9
Cardinal Financial Corporation and Subsidiaries
Interest Rate Sensitivity Gap Analysis
As of December 31, 2001
(Dollars in thousands)
Immediate 2-90 91-180 181-365 1-3 Over 3
Repricing Days Days Days Years Years Total
Assets
Investment securities - available for sale $ - $ 249 $ - $ 183 $ 7,143 $ 26,572 $ 34,147
Federal funds sold 23,013 - - - - - 23,013
Loans
Commercial & industrial 32,560 6,395 3,813 6,832 44,929 50,252 144,781
Real estate - residential 207 170 103 468 5,992 7,529 14,469
Home equity lines 4,951 16,348 - - - - 21,299
Real estate - construction 4,936 17 4 15 1,425 - 6,397
Consumer 3,452 1,552 989 2,500 3,431 2,017 13,941
Total gross loans 46,106 24,482 4,909 9,815 55,777 59,798 200,887
Total earning assets 69,119 24,731 4,909 9,998 62,920 86,370 258,047
Cumulative rate sensitive assets $ 69,119 $ 93,850 $ 98,759 $ 108,757 $171,677 $258,047
Liabilities
Deposits
Noninterest-bearing demand $ - $ - $ - $ - $ - $ 61,739 $ 61,739
Interest-bearing transaction accounts 73,989 - - - - - 73,989
Certificates of deposit - fixed 136 13,873 10,160 16,999 14,354 4,090 59,612
Certificates of deposit - no penalty - 4,297 4,323 16,114 25,950 - 50,684
Total deposits 74,125 18,170 14,483 33,113 40,304 65,829 246,024
Other borrowed funds 24 - 2,800 7,000 - - 9,824
Total interest bearing liabilities 74,149 18,170 17,283 40,113 40,304 65,829 255,848
Cumulative rate sensitive liabilities $ 74,149 $ 92,319 $ 109,602 $ 149,715 $190,019 $255,848
Gap $ (5,030) $ 6,561 $ (12,374) $ (30,115) $ 22,616 $ 20,541
Cumulative gap (5,030) 1,531 (10,843) (40,958) (18,342) 2,199
Gap/total assets -1.80% 2.35% -4.43% -10.77% 8.09% 7.35%
Cumulative gap total assets -1.80% 0.55% -3.88% -14.65% -6.56% 0.79%
Rate sensitive assets/rate sensitive liabilities 0.93x 1.36x 0.28x 0.25x 1.56x 1.31x
Cumulative rate sensitive assets/Cumulative rate
sensitive liabilities 0.93x 1.02x 0.90x 0.73x 0.90x 1.01x
40
Quarterly Data
We recorded a loss of $10.6 million or $2.48 per common share for the
fourth quarter of 2001 as compared to a $0.20 loss per common share for the
prior quarter. The loss for the fourth quarter included an impairment charge of
$8.3 million that effectively eliminated the goodwill associated with our merger
with Heritage Bancorp, Inc., non-recurring restructuring charges of
approximately $829,000 and an additional provision for loan loss reserve of
$774,000. The loss per common share without these expenses would have been
approximately $0.16. Table 10 reflects quarterly data for the years ended
December 31, 2001 and 2000.
Table 10
Cardinal Financial Corporation and Subsidiaries
Quarterly Data (Unaudited)
Years ended December 31, 2001 and 2000
2001 2000
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
----------------------------------------------------------------------------------------------------
Interest income $ 4,225,268 $4,213,153 $4,167,302 $3,970,895 $3,997,404 $2,912,334 $2,266,548 $1,973,996
Interest expense 1,796,307 1,824,397 1,973,376 1,905,949 1,802,981 1,267,860 918,791 750,729
----------------------------------------------------------------------------------------------------
Net interest income 2,428,961 2,388,756 2,193,926 2,064,946 2,194,423 1,644,474 1,347,757 1,223,267
Provision for loan losses (826,000) (190,000) (128,889) (56,517) (221,804) (180,069) (207,792) (143,090)
----------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 1,602,961 2,198,756 2,065,037 2,008,429 1,972,619 1,464,405 1,139,965 1,080,177
Non-interest income 790,431 853,825 970,494 651,909 534,640 565,346 644,450 353,505
Non-interest expense 12,843,467 3,758,906 3,700,488 3,563,297 3,670,464 3,017,154 2,662,154 2,376,343
----------------------------------------------------------------------------------------------------
Net loss before income taxes (10,450,075) (706,325) (664,957) (902,959) (1,163,205) (987,403) (877,739) (942,661)
Provision for income taxes 0 0 0 0 0 0 0 0
----------------------------------------------------------------------------------------------------
Net loss $(10,450,075) $ (706,325) $ (664,957) $ (902,959) $(1,163,205) $ (987,403) $ (877,739) $ (942,661)
====================================================================================================
Dividends to preferred 119,474 127,913 127,913 127,912 127,919 42,636 0 0
shareholders ----------------------------------------------------------------------------------------------------
Net loss to common $(10,569,549) $ (834,238) $ (792,870) $(1,030,871) $(1,291,124) $(1,030,039) $ (877,739) $ (942,661)
shareholders ====================================================================================================
Basic and diluted loss $ (2.48) (0.20) (0.19) (0.24) (0.30) (0.24) (0.21) (0.23)
per common share ====================================================================================================
41
2000 Compared to 1999
Earnings Overview
Our net loss for 2000 totaled $3,971,000 or ($0.98) per common share,
compared with a net loss of $4,039,000 or ($0.95) per share in 1999. The return
on average assets was (2.72%) in 2000 as compared to (5.61%) in 1999. The return
on average equity was (12.72%) in 2000 as compared to (12.26%) in 1999.
Operating results in 2000 reflected significant increases in all income
and expense categories as three of our five operating subsidiaries, Cardinal
Bank -Manassas/Prince William, N.A., Cardinal Bank -Dulles, N.A., and Cardinal
Wealth Services, Inc., each recorded their first full year of operations. The
acquisition of Heritage Bancorp, Inc. and its sole operating subsidiary, The
Heritage Bank (known as Cardinal Bank -Potomac) on September 1, 2000 also
contributed to the aforementioned increases. Net interest income was $6.4
million in 2000, up $3.4 million from 1999 or 112%.
The net interest margin was 23 basis points higher than last year as
the rate on interest earning assets increased to 8.39% in 2000 from 6.57% in
1999 and our cost of funds increased to 3.29% in 2000 from 1.82% in 1999. In
particular, rates on commercial loans increased 126 basis points to 8.84% in
2000 from 7.58% in 1999. A major reason for this increase is the business
manager receivable loans that generally carry a higher interest rate than other
types of credit. Business manager loan average balances were $3.0 million for
2000 compared to $0.6 million for 1999. Average total loans increased $70.3
million to $104.0 million in 2000 from $33.7 million in 1999, due to strong
commercial loan demand. Average total deposits increased $49.9 million to $78.7
million in 2000 from $28.8 million in 1999.
The 2000 loan loss provision of $753,000 was 47% higher than the
$514,000 recorded in 1999 primarily due to the increase in loan balances, both
originated and acquired during 2000.
Non-interest income was $2.1 million, a 59% increase compared to 1999.
The primary reason for this increase was investment fee income, which increased
to $1.5 million in 2000 from $1.0 million in 1999. Non-interest expense was
$11.7 million in 2000 compared to $7.9 million in 1999. Total personnel expense,
the single largest component of non-interest expenses, was up $2.0 million or
48%, primarily as a result of a full year of expense for three subsidiaries,
Cardinal Wealth Services, Inc., Cardinal Bank -Manassas/Prince William, N.A.,
Cardinal Bank -Dulles, N.A., all of which opened in 1999.
Net Interest Income/Margin
Net interest income for 2000 was $6.4 million, 112% higher than the
prior year. The net interest margin was 4.82% in 2000 compared to 4.59% in 1999.
The average rate on earning assets increased 182 basis points to 8.39% primarily
due to prime rate increases in the first half of 2000 as well as increased
average balances in our business manager receivable product which carries a
significantly higher yield than other loan products. The average rate on
interest bearing liabilities increased 127 basis points again as a result of
rate increases primarily on time deposits. Tables 1 and 2 above contain more
detailed information concerning average balances, yields earned, and rates paid.
Provision and Allowance for Loan Losses
Our policy is to maintain the allowance for loan losses at a level
which represents management's best estimate of known and inherent losses in the
loan portfolio. Both the amount of the provision 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. The loan loss provision for 2000 was
$753,000 compared to $514,000 in 1999. The increase is due primarily to higher
loan
42
balances as the result of loan production. In addition, a specific reserve
of $104,000 was recorded to reflect the non-performing status of one credit in
our loan portfolio.
The allowance for loan losses increased to $1.9 million in 2000 from
$726,000 in 1999. The ratio of the allowance for loan losses to gross loans at
December 31, 2000 was 1.23% compared to 1.07% at December 31, 1999. Tables 3 and
4 above contain additional information pertaining to the calculation and
allocation of the allowance for loan losses.
Lending
Total loans, net of fees and premiums and discounts, increased $86.1
million to $154.3 million at December 31, 2000. Included in the increase were
$37.9 million of loans acquired in the merger with Heritage. The strongest
growth was in commercial loans and commercial real estate loans reflecting
Cardinal's strength as a local small business community bank.
The loan portfolio has a heavy commercial orientation as evidenced by
the information provided in Table 5 above. We began in late 1999 to better
diversify the loan portfolio by purchasing consumer loans.
Non-performing assets were $585,000 at December 31, 2000 compared to
none at December 31, 1999. At December 31, 2000 the ratio of non-performing
loans to total loans was 0.38% compared to 0.00% at December 31, 1999.
Non-Interest Income
Non-interest income was $2.1 million in 2000, an increase of $778,000
or 58.9%. Investment fee income, our largest source of non-interest income,
increased $498,000 or 48.9% compared to 1999, and service charges on deposit
accounts increased to $154,000 in 2000 from $42,000 in 1999. The increases can
be attributed to additional growth as well as the first full year of operations
for three of our operating subsidiaries. Table 6 above provides additional
detail on non-interest income for 2000 and 1999.
Non-Interest Expense
Non-interest expense was $11.7 million in 2000 compared to $7.9 million
in 1999. The increase can be attributed to the full year of operations of
Cardinal Bank -Manassas/Prince William, N.A., Cardinal Bank -Dulles, N.A., and
Cardinal Wealth Services, Inc., which were opened in July, August and February
of 1999, and the merger with Heritage Bancorp, Inc. effective September 1, 2000.
Total personnel expense increased to $6.3 million in 2000 from $4.3 million in
1999. This increase as well as increases in most expense categories are due to
the aforementioned full year of operations of three of our operating
subsidiaries. Table 7 above reflects the components of non-interest expense.
Income Taxes
We have not recorded income tax expense or benefit due to the
recognition of net losses in 2000 and all prior years of operations. The ability
to utilize net operating loss carryforwards will be dependent on our ability to
generate future taxable earnings. Footnote 9 of the Consolidated Financial
Statements provides additional information with respect to the deferred tax
accounts and the net operating loss carryforward.
Securities Available-for-Sale
Our investment securities portfolio is used as a source of income and
liquidity. The securities portfolio was $6.9 million at December 31, 2000
compared to $4.8 million at December 31, 1999. The
43
increase is due primarily to the merger with Heritage, which added $4.9 million
in securities. We sold $2.5 million in securities for liquidity purposes at a
net loss of $32,000. The portfolio yield increased from 5.83% in 1999 to 6.12%
in 2000. Table 8 above reflects the composition of the investment portfolio as
of December 31, 2000 and 1999.
Interest Rate Sensitivity
As previously discussed, we utilize a simulation modeling process to
measure interest rate risk and the impact that rate fluctuations will have on
net interest income. At December 31, 2000, we were liability sensitive (excess
of liabilities over assets) in the three month to one-year horizon. We regularly
review the overall interest rate risk position and develop and implement
appropriate strategies to manage the risk.
Capital Resources
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.
Regulatory agencies measure capital adequacy utilizing a formula that
takes into account the individual risk profile of financial institutions. The
guidelines define capital as either Tier 1 (primarily common shareholders'
equity, defined to include certain debt obligations) and Tier 2 (to include
certain other debt obligations and a portion of the allowance for loan losses
and 45% of unrealized gains in equity securities).
At December 31, 2001, shareholders' equity was $20.6 million compared
to $34.1 million at December 31, 2000.
Footnote 10 of the Consolidated Financial Statements shows the minimum
capital requirement and our capital position as of December 31, 2001 and 2000.
Our regulatory capital levels meet those established for well capitalized
institutions
Liquidity
The objective of liquidity management is to 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 advances 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 our liquidity needs. Liquid
assets, which include cash and due from banks, federal funds sold and investment
securities available-for-sale, at December 31, 2001, totaled $66.5 million. Of
that, $25.0 million in investment securities available-for-sale were available
as collateral for additional Federal Home Loan Bank borrowings. Table 11
reflects the maturities of the certificates of deposit of $100,000 or more.
44
Table 11
Cardinal Financial Corporation and Subsidiaries
Certificates of Deposit of $100,000 or More
As of December 31, 2001
(Dollars in thousands)
December 31,
2001
----
Maturities
Three months or less $ 9,531
Over three months through six months 8,046
Over six months through twelve months 16,855
Over twelve months 25,349
$ 59,781
Management
The Board of Directors
Our board of directors currently consists of 11 members. The board of
directors is divided into three classes each of which serves for a term of three
years. The terms of the current directors expire in 2002, 2003 and 2004. The
following table sets forth the composition of the board of directors.
- -------------------------------------------------------------------------------------------------------------
Terms Expiring In
- -------------------------------------------------------------------------------------------------------------
2002 2003 2004
- -------------------------------------------------------------------------------------------------------------
Nancy K. Falck Robert M. Barlow Wayne W. Broadwater
- -------------------------------------------------------------------------------------------------------------
Jones V. Isaac James D. Russo Harold E. Lieding
- -------------------------------------------------------------------------------------------------------------
J. Hamilton Lambert George P. Shafran John H. Rust, Jr.
- -------------------------------------------------------------------------------------------------------------
Kevin P. Tighe Bernard H. Clineburg
- -------------------------------------------------------------------------------------------------------------
The following information sets forth as of December 31, 2001 the names,
ages, principal occupations and business experience for all 11 directors. Unless
otherwise indicated, the business experience and principal occupations shown for
each director has extended five or more years.
Robert M. Barlow, 72, has been a director since 1997. Mr. Barlow was
the founder and principal shareholder of a group of companies engaged in
construction, manufacturing and real estate in Northern Virginia for 38 years.
In 1995 he sold those ventures and is now retired.
Wayne W. Broadwater, 77, has been a director since 1997. Mr. Broadwater
served as a director of First Patriot Bankshares and Patriot National Bank. He
served as President and CEO of Shipmates, Ltd., which he founded in 1972, until
its sale in 1997.
Bernard H. Clineburg, 53, has been a director since 2001. Mr. Clineburg
is Vice Chairman, President, and CEO of Cardinal. Mr. Clineburg, a local bank
executive for thirty-years, is the former Chairman, President & CEO of United
Bank (formerly George Mason Bankshares). While Mr. Clineburg served as the Chief
Executive Officer, George Mason Bank grew from $160 million to $1 billion in
assets prior to its being acquired by United Bank. Mr. Clineburg also serves on
the board of directors of Precision Auto Care Corporation.
45
Nancy K. Falck, 72, has been a director since 1997. She is the
organizing director and Secretary of Cardinal Financial Corporation. She is a
former member of the Fairfax County Board of Supervisors and School Board, and
has been active in her family's business and numerous community and state
boards. She is also a member of the board of directors of Cardinal Bank.
Jones V. Isaac, 69, has been a director since 1997. Mr. Isaac is
President of Isaac Enterprises, Inc., a financial consulting firm located in
Potomac, Maryland. Prior to 1995, Mr. Isaac was the Administrator of Finance and
Administration for the Construction Specifications Institute, where he had been
employed since 1967.
J. Hamilton Lambert, 61, has been a director since 1999. Mr. Lambert is
President of J. Hamilton Lambert and Associates, a consulting firm based in
Fairfax, Virginia. He served as County Executive of Fairfax County from August
1980 to December 1990.
Harold E. Lieding, 65, has been a director since 2000. Mr. Lieding
served as Chairman of the Board and a director of Heritage Bancorp Inc. and its
predecessor The Heritage Bank from 1990 until our acquisition of it in 2000. Mr.
Lieding is an attorney and has practiced law in McLean, Virginia since 1970.
James D. Russo, 55, has been a director since 1997. Mr. Russo has been
the Managing Director of Potomac Consultants Group in Virginia since 2000. He
was Senior Vice President and Chief Financial Officer of Shire Laboratories,
Inc., a pharmaceutical research and development company in Rockville, Maryland,
from 1994 to 2000. Mr. Russo also serves on the Board of Trustees of Tesst
College of Technology.
John H. Rust, Jr., 54, has been chairman of the board of directors
since 1997. Mr. Rust is an attorney with the law firm of Rust & Rust in Fairfax,
Virginia. He previously was of counsel in the law firm of McCandlish and
Lillard. Mr. Rust was a member of the Virginia House of Delegates from 1980-1982
and 1997-2000.
George P. Shafran, 74, has been a director since 2000. Mr. Shafran was
a director of Heritage from 1998 to 2000. Mr. Shafran is president of Geo. P.
Shafran & Associates, Inc., a consulting firm in McLean, Virginia. Mr. Shafran
also serves as a member of the board of directors for NVR Mortgage Finance,
Inc., and I-Mark Corporation.
Kevin P. Tighe, 56, has been a director since 2000. Mr. Tighe was a
director of Heritage from 1994 to 2000. Mr. Tighe is a senior partner in the law
firm of Tighe Patton Armstrong Teasdale in Washington, D.C. He is also the owner
and Chairman of the Board of Directors of the McLean Racquet and Health Club in
McLean, Virginia.
The board of directors holds regular meetings each year including the
annual meeting. During 2001, the board of directors held thirteen regular
meetings and one special meeting. The board of directors has an Executive
Committee, a Capital Committee, an Audit Committee, an Investment Committee, a
Budget Committee, a Compensation Committee, a Business Development Committee, a
Real Estate Committee, a Loan Committee, and a Nominating Committee. All
Committees met at various times in 2001.
Other Executive Officers
Christopher W. Bergstrom, 41, has been President of Cardinal Bank
- -Manassas/Prince William, N.A., since 1999 and Executive Vice President and
Commercial Lending Officer of the Cardinal Bank, N.A. since 1998. Prior to 1998,
Mr. Bergstrom was employed with Crestar Bank, where he served in a variety of
retail and commercial functions including management of one of the
organization's commercial banking divisions covering Northern Virginia, the
District of Columbia, and Southern Maryland.
46
Carl E. Dodson, 47, has been our Executive Vice President and Chief
Operating Officer since August 2001. He served as President of Cardinal
Bank-Potomac and as our Chief Credit Officer from May 1998 through July 2001.
Prior to 1998, Mr. Dodson was the senior commercial lending officer of Palmer
National Bank in Washington, D.C. and, following its sale to George Mason Bank
shares in 1996, he was the Senior Vice President of Credit Administration of
George Mason Bank (now United Bank of Virginia).
Thomas C. Kane, 40, has been President of Cardinal Wealth Services,
Inc., our subsidiary offering full service investment products, since December
1998. Prior to that time, Mr. Kane was Senior Vice President and Division
Manager, Retail Securities & Personal Trust & Investment Management Sales for
Crestar Bank in its Greater Washington Region. Prior to that, Mr. Kane worked in
a variety of financial service positions at Citibank.
F. Kevin Reynolds, 41, has been President of Cardinal Bank, N.A. since
1999 and Executive Vice President and Senior Lending Officer of the bank since
1998. Prior to 1998, Mr. Reynolds was the senior lending officer responsible for
all facets of the commercial lending business of George Mason Bank and helped
create George Mason Bank's commercial lending group.
Eleanor D. Schmidt, 41, has been Executive Vice President and Retail
Banking Head of the bank since 1998. Prior to 1998, Ms. Schmidt was employed
with NationsBank, where she managed multiple branches in the Fairfax area
serving a large and diverse deposit and loan base.
Janet A. Valentine, 50, has been Senior Vice President and Chief
Financial Officer of the bank since April 2001. From the date of the merger
until March 2001 she was the bank's and our Senior Vice President in charge of
risk management. Prior to that, she was the Executive Vice President and Chief
Financial Officer of Heritage Bancorp, Inc. from 1999 until its merger with us.
Ms. Valentine has over 29 years of banking experience. From 1998 to 1999, Ms.
Valentine was Executive Vice President and Chief Financial Officer of Alliance
Bank, and from 1996 to 1998, she was the Chief Financial Officer of Tysons
National Bank.
COMPENSATION OF MANAGEMENT AND THE BOARD
Executive Compensation
The following table shows, for the years ended December 31, 2001, 2000,
1999 and 1998, the cash compensation we paid, as well as certain other
compensation paid or accrued for those years, to each of the named executive
officers in all capacities in which they served:
47
Summary Compensation Table
Long Term
Annual Compensation Compensation
------------------- ------------
================================================================================================================================
Name and Other Annual Securities Other
Principal Position Year Salary Bonus Compensation Underlying Compensation
($) ($) ($) Options (#)(1) ($)(2)
- --------------------------------------------------------------------------------------------------------------------------------
Bernard H. Clineburg 2001 50,186 - * - -
Vice Chairman, President and Chief
Executive Officer, Cardinal
Financial Corporation**
- --------------------------------------------------------------------------------------------------------------------------------
L. Burwell Gunn, Jr. 2001 222,814 - 18,000 4,472
(former President and Chief 2000 163,562 25,000 14,000 5,350
Executive Officer, Cardinal 1999 159,497 42,325 14,750 4,982
Financial Corporation)*** 1998 150,000 50,000 1,250 100
- --------------------------------------------------------------------------------------------------------------------------------
F. Kevin Reynolds 2001 109,068 - * 4,800 3,150
President, Cardinal Bank N.A. 2000 108,037 22,830 * 3,000 3,151
1999 104,587 26,000 * 3,131 2,999
1998 (3) 98,640 30,000 * - -
- --------------------------------------------------------------------------------------------------------------------------------
Christopher W. Bergstrom 2001 110,984 - 14,500 4,800 8,141
President, Cardinal Bank 2000 108,037 21,740 * 2,554 6,150
Manassas/Prince William N.A. 1999 105,504 23,000 * 3,131 6,001
1998 (4) 70,189 30,000 * - 3,000
- --------------------------------------------------------------------------------------------------------------------------------
Carl E. Dodson 2001 102,395 - * 4,800 408
Chief Operating Officer, Cardinal 2000 105,370 22,000 * 3,000 2,466
Financial Corporation 1999 101,202 14,700 * 1,534 2,103
1998 (5) 54,594 - * - -
- --------------------------------------------------------------------------------------------------------------------------------
Thomas C. Kane 2001 263,914 - * - 3,828
President, Cardinal Wealth 2000 252,651 - * - 3,414
Services, Inc. 1999 224,327 36,625 * - 3,634
1998 (6) 32,981 - * - -
- --------------------------------------------------------------------------------------------------------------------------------
Janet A. Valentine 2001 102,325 - * 600 3,063
Senior Vice and Chief Financial 2000 (7) 23,750 3,800 * 1,500 823
Officer, Cardinal Financial
Corporation
- --------------------------------------------------------------------------------------------------------------------------------
John H. Rust, Jr., Chairman of 2001 25,000 - 9,410 2,500 625
board of directors of Cardinal 2000 25,000 - * 2,000 600
Financial Corporation. 1999 25,000 - * 750 648
1998 (8) 25,000 - * 1,250 -
================================================================================================================================
* All benefits that might be considered of a personal nature did not exceed
the lesser of $50,000 or 10% of total annual salary and
bonus.
** Mr. Clineburg's employment commenced in October, 2001.
*** Mr. Gunn resigned in 2001.
(1) Amounts disclosed include 750 common shares for the year ended December 31,
1999 and 1,250 common shares for the year ended December 31, 1998 that
underlie options granted to Mr. Gunn in his capacity as a director.
(2) Amounts presented represent (i) gross value of payments made by us pursuant
to life insurance agreements between us and the named executive officers
and (ii) total contributions to our 401(k) plan on behalf of each of the
named executive officers to match pre-tax elective deferral contributions
(which are included under the "Salary" column) made by each to such plan.
(3) Mr. Reynolds' employment with us commenced on January 19, 1998.
(4) Mr. Bergstrom's employment with us commenced on April 6, 1998.
48
(5) Mr. Dodson's employment with us commenced on May 25, 1998.
(6) Mr. Kane's employment with us commenced on October 18, 1998. Per Mr. Kane's
prior contract, his annual other compensation included the granting of
3,125 common shares each year for 1999, 2000, and 2001. Total value of
annual other compensation did not exceed the lesser of $50,000 or 10% of
compensation and bonus.
(7) Ms. Valentine's employment with us commenced on October 1, 2000.
(8) Mr. Rust joined our board of directors in 1997. As a director, all of his
options are immediately vested when granted.
Director Compensation
Except for the Chairman of the Board (as noted in the previous table),
our directors do not receive any cash compensation. In lieu of cash fees for
service on the board of directors, each non-employee director receives an annual
grant of options to purchase 2,000 common shares. Such options are granted with
an exercise price at or above the fair market value of the shares as of the date
of grant and expire ten years from the date of grant. In light of our financial
performance, no options were granted in 2002 for 2001 services. Three of our
directors received cash compensation as directors of our subsidiary Cardinal
Bank - Potomac per the merger agreement with Heritage Bancorp, Inc. Cash
compensation for Cardinal Bank - Potomac directors totaled $31,450 and $13,800
for the years ended December 31, 2001 and 2000, respectively. No other
subsidiary banks paid directors' fees in 2000 or 2001.
Stock Options
The following table sets forth for the year ended December 31, 2001,
the grants of stock options to the named executive officers in 2001 for services
rendered in 2000:
Option Grants In the Year ended December 31, 2001
Name Number of Securities Percent of Total Options Exercise or Base Expiration Date
Underlying Options Granted to Employees in Price ($/Share)(3)
Granted (1) 2001 (%)(2)
- ------------------------------------------------------------------------------------------------------------------------------
Bernard H. Clineburg - - - -
- ------------------------------------------------------------------------------------------------------------------------------
L. Burwell Gunn, Jr.* 18,000 22.2% 4.50 Forfeited 10/01
- ------------------------------------------------------------------------------------------------------------------------------
F. Kevin Reynolds 4,800 5.9% 4.50 2/22/11
- ------------------------------------------------------------------------------------------------------------------------------
Christopher W. Bergstrom 4,800 5.9% 4.50 2/22/11
- ------------------------------------------------------------------------------------------------------------------------------
Carl E. Dodson 4,800 5.9% 4.50 2/22/11
- ------------------------------------------------------------------------------------------------------------------------------
Thomas C. Kane 1,000 1.2% 4.50 2/22/11
- ------------------------------------------------------------------------------------------------------------------------------
Janet A. Valentine 600 .0% 4.50 2/22/11
- ------------------------------------------------------------------------------------------------------------------------------
John H. Rust ** 2,500** 5.1%** 3.56 1/20/11
- ------------------------------------------------------------------------------------------------------------------------------
* Mr. Gunn resigned in 2001.
** Options are granted to Mr. Rust in his capacity as a director and are
therefore immediately vested. The percentage of total granted is in
relationship to total options granted to all directors.
(1) All options except for Mr. Rust's were granted to the named executive
officers in their capacities as such and become fully exercisable after
three years. Options granted in 2001were for services in 2000. No options
have been granted in 2002 for the year ended 2001.
(2) Options to purchase a total of 81,240 common shares were granted to
employees during the year ended December 31, 2001. (3) Stock options were
awarded at or above the fair market value of the common shares at the date of
award.
Year End Option Values
In the year ended December 31, 2001, no stock options were exercised by
any of the named executive officers. The following table sets forth the amount
and value of stock options held by the named executive officers as of December
31, 2001.
49
--------------------------------------------------------------------------------------------------------------
Value of Unexercised In-the-Money Options at Year End ($)(3) Number of Securities Underlying
Unexercised Options at Year End
--------------------------------------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
--------------------------------------------------------------------------------------------------------------
L. Burwell Gunn, Jr* (1) - - 2,000 -
--------------------------------------------------------------------------------------------------------------
F. Kevin Reynolds - 7,800 3,131 -
--------------------------------------------------------------------------------------------------------------
Christopher W. Bergstrom - 7,354 3,131 -
--------------------------------------------------------------------------------------------------------------
Bernard H. Clineburg - - - -
--------------------------------------------------------------------------------------------------------------
Carl E. Dodson - 7,800 1,534 -
--------------------------------------------------------------------------------------------------------------
Thomas C. Kane - 9,500 - -
--------------------------------------------------------------------------------------------------------------
Janet A. Valentine - 2,100 - -
--------------------------------------------------------------------------------------------------------------
John H. Rust, Jr. (2) 2,500 - 4,000 -
--------------------------------------------------------------------------------------------------------------
* Mr. Gunn resigned in 2001.
(1) Amounts disclosed represent common shares that underlie options granted
to Mr. Gunn in 1998 and 1999 in his capacity as a director of Cardinal.
(2) Amounts disclosed represent common shares that underlie options granted
to Mr. Rust in his capacity as a director of Cardinal.
(3) The value of in-the-money options at year end is calculated by
determining the difference between the closing price of a common share
as reported on the Nasdaq SmallCap Market on December 31, 2001 and the
exercise price of the options.
Employment Agreements
Bernard H. Clineburg has an employment agreement with us. Mr.
Clineburg's agreement, which is dated as of February 12, 2002, provides for his
services as our Vice Chairman, President and Chief Executive Officer. The
agreement also provides that Mr. Clineburg will serve as Chairman of our
Executive Committee, a member or Chair of all of our Board Committees except the
Audit Committee, and as a director or Chair of all our subsidiary boards of
directors. Mr. Clineburg's employment agreement provides for a base salary of
$200,000 and includes annual salary increases at the discretion of the board of
directors and provides bonuses at the discretion of the board of directors, in
cash or in stock, or both. Under Mr. Clineburg's employment agreement, he will
be granted the option to purchase 150,000 shares of our common stock, of which
50,000 will vest as of the date of the closing of the rights offering. The
option to purchase the remaining 100,000 shares will vest over a five-year
period at 20,000 shares per year. All options granted under the employment
agreement will be awarded with an option exercise price equal to the price on
the date of the closing of the rights offering. In the event we terminate Mr.
Clineburg's agreement without cause, he will receive a lump-sum severance
payment equal to one year's annual salary and bonus. In the event Mr.
Clineburg's employment agreement is terminated after a change in control, he
will receive a lump-sum severance payment equal to 2.99 times his average total
compensation over the most recent five calendar year period of his employment
with the us prior to termination. Mr. Clineburg's employment agreement includes
a covenant not to compete with us for a period of one year from the date he is
no longer employed by us.
Each of F. Kevin Reynolds, Christopher W. Bergstrom, Carl E. Dodson,
and Janet A. Valentine has employment agreements with us, that are terminable at
will. Each of these employment agreements are effective as of February 12, 2002
and provide for the provision of a base salary, eligibility for annual
performance bonus and stock option grants, and participation in our benefits
plans, all of which may be adjusted by us in our discretion. Mr. Reynolds's and
Mr. Bergstrom's employment agreements provide for severance payments equal to
twelve (12) months of their current base salary in the event of termination
without cause and eighteen (18) months of their current base salary in the event
of a change in control . Mr. Dodson's and Ms. Valentine's employment agreements
provide for severance payments equal to six (6) months of their current base
salary in the event of termination without cause and eighteen (18) months of
their
50
current base salary in the event of a change in control. Each of the
employment agreements replaced prior employment agreements that provided for
certain cash bonuses, stock option grants and payment of auto allowances,
country club dues and certain life insurance benefits. The benefits provided for
in the prior employment agreements were retired by us in a lump-sum settlement
and replaced with the employment agreements described above, that do not include
any benefits other than those provided to all of our other employees.
Thomas C. Kane has an employment agreement with us. Mr. Kane's
agreement, which is dated as of August 27, 2001, provides for his services as
our Senior Vice President and President and Chief Executive Officer of Cardinal
Wealth Services, Inc. and provides for a base salary of $182,000. Mr. Kane's
employment agreement includes annual salary increases at the discretion of the
board of directors and provides for incentive pay equal to 2.5% of gross
revenues generated by Cardinal Wealth Services, Inc. Mr. Kane's employment
agreement also includes stock option grants of up to 15,000 shares of our common
shares upon achievement of certain performance goals for the period beginning
August 27, 2001 and ending December 31, 2002. In addition, Mr. Kane may, upon
achieving certain performance goals established by us, earn additional incentive
pay of up to 2.5% of gross revenues generated by Cardinal Wealth Services, Inc.,
and, annually, up to $37,500 in cash bonuses, and additional stock option grants
up to a value of $37,500, at the then-current market price, on the date of
grant. All options granted under the agreement are awarded with an option
exercise price equal to the fair market value of shares of common shares at the
date of grant, and the options vest and become exercisable three years after the
date of grant. Mr. Kane's employment agreement provides for a lump-sum severance
payment equal to six (6) months of his current base salary in the event of
termination without cause. Mr. Kane's employment agreement with us expires on
June 30, 2004.
No cash bonuses have been paid to any of the executive officers since
March, 2001, which represented bonuses paid for services provided during 2000.
TRANSACTIONS WITH MANAGEMENT
Some of our directors and officers are at present, as in the past, our
banking customers, and we have had, and expect to have in the future, banking
transactions in the ordinary course of its business with directors, officers,
principal shareholders and their associates, on substantially the same terms,
including interest rates and collateral on loans, as those prevailing at the
same time for comparable transactions with others. These transactions do not
involve more than the normal risk of collectibility or present other unfavorable
features. The aggregate outstanding balance of loans to directors, executive
officers and their associates, as a group, at December 31, 2001 totaled
approximately $2.7 million, or 13.1% of the bank's equity capital at that
date. Certain of our directors were also on the board of directors of Cardinal
Bank-Potomac and in such capacity have received directors fees in the aggregate
amount of $31,450 in 2001 and $13,800 in 2000. Ms. Falck's son-in-law, John R,
Rollison, III, Mr. Broadwater's son, David L. Broadwater and Mr. Barlow's son,
George E. Barlow serve as members of the board of directors of Cardinal Bank. In
addition, Mr. Kane's spouse, Joan A. Mulligan, is a Senior Vice President of
Cardinal Wealth Services, Inc. In this capacity Ms. Mulligan receives a draw
against commissions of $40,000 per annum and commissions of approximately
$100,000. Ms. Mulligan's compensation arrangements with Cardinal Wealth
Services, Inc. are as favorable as those with employees who are not affiliated
with us.
Security Ownership of Management
The following table sets forth, as of December 31, 2001, certain
information with respect to beneficial ownership of our shares by each of the
members of the board of directors as of that date, by each of the executive
officers named in the "Summary Compensation Table" above and by all directors
and executive officers as a group. Beneficial ownership includes shares, if any,
held in the name of the spouse, minor children or other relatives of the
individual living in such person's home, as well as shares, if any, held in the
51
name of another person under an arrangement whereby the director or executive
officer can vest title in himself at once or at some future time.
------------------------------------------------------------------------------------------------------
Common Exercisable Options
Stock included in Percentage
Name* Beneficially Beneficially Owned of Class
Owned (1) Common Stock
------------------------------------------------------------------------------------------------------
Robert M. Barlow 108,500 6,500 2.5
------------------------------------------------------------------------------------------------------
Christopher W. Bergstrom 19,189 3,131 **
------------------------------------------------------------------------------------------------------
Wayne W. Broadwater 33,500 6,500 **
------------------------------------------------------------------------------------------------------
Bernard H. Clineburg 85,129 50,000 2.0
------------------------------------------------------------------------------------------------------
Carl E. Dodson 12,270 1,534 **
------------------------------------------------------------------------------------------------------
Nancy K. Falck 71,436 6,500 1.7
------------------------------------------------------------------------------------------------------
L. Burwell Gunn, Jr.*** 50,191 2,000 1.2
------------------------------------------------------------------------------------------------------
Harvey W. Huntzinger 139,900 6,500 3.3
------------------------------------------------------------------------------------------------------
Jones V. Isaac 60,200 6,500 1.4
------------------------------------------------------------------------------------------------------
Thomas C. Kane 94,569 60,000 2.2
------------------------------------------------------------------------------------------------------
J. Hamilton Lambert 20,300 5,000 **
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Harold E. Lieding (2) 354,468 15,540 7.6
------------------------------------------------------------------------------------------------------
F. Kevin Reynolds 21,292 3,131 **
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James D. Russo 70,300 6,500 1.6
------------------------------------------------------------------------------------------------------
John H. Rust, Jr. 47,725 6,500 1.1
------------------------------------------------------------------------------------------------------
George P. Shafran (2) 54,066 14,352 1.3
------------------------------------------------------------------------------------------------------
Kevin P. Tighe (2) 20,940 15,540 **
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Janet A. Valentine 1,525 - **
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Total as a group of 19**** 1,241,112 216,728 25.5%
------------------------------------------------------------------------------------------------------
* The business address of each named person is c/o Cardinal
Financial Corporation, 10555 Main Street, Suite 500,
Fairfax, VA 22030.
** Percentage of ownership is less than 1% of the outstanding common
shares.
*** Mr. Gunn resigned in 2001. The 2,000 in common stock options
have been forfeited in 2002.
**** Total represents all Directors and executive officers named plus
Eleanor D. Schmidt with exercisable options of 1,000 and beneficial
common stock ownership totaling 9,112 which is under 1% of the class
of common stock.
(1) The number of common shares shown in the table includes 60,175
shares held for certain directors and executive
officers in our 401(k) plan as of December 31, 2001, and 216,728
shares that certain directors and executive officers have the
right to acquire through the exercise of stock options within 60
days following December 31, 2001. Mr. Clineburg's options are
exercisable at the close of this rights offering.
(2) The number of common shares shown in the table includes shares
that certain directors have the right to acquire through the
conversion of shares of 7.25% Cumulative Convertible Preferred
Stock, Series A, par value $1.00 per share, as follows: Lieding,
333,443; Shafran, 23,714; and Tighe, 5,400.
Security Ownership of Certain Beneficial Owners
The following table sets forth, as of December 31, 2001, certain
information with respect to the beneficial ownership of common shares by each
person who owns, to our knowledge, more than five percent of our outstanding
common shares.
-------------------------------------------------------------------------------------------------------
Name Address Common Shares Percentage
Beneficially Owned of Class
-------------------------------------------------------------------------------------------------------
Harold E. Lieding 1433 Blandfield, Vienna, VA 22182 354,468 (1) 7.6%
-------------------------------------------------------------------------------------------------------
(1) The number of common shares shown in the table includes 15,540 shares
that Mr. Lieding has the right to acquire through the exercise of stock
options within 60 days following March 31, 2001 and 333,443 shares that
Mr. Lieding has the right to acquire through the conversion of shares
of Series A Preferred Stock.
52
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 50,000,000 common shares, par
value $1.00 per share, and 10,000,000 preferred shares, par value $1.00 per
share, issuable in series. As of December 31, 2001 there were 4,294,323 common
shares issued and outstanding held by 1,605 shareholders of record and 1,364,714
shares of 7.25% Cumulative Convertible Preferred, Series A issued and
outstanding held by 1,701 shareholders of record. All outstanding common and
preferred shares are fully paid and nonassessable. The issued common and
preferred shares represent non-withdrawable capital, are not accounts of an
insurable type, and are not federally insured.
Common Stock
Voting Rights
Each holder of common shares is entitled to one vote per share held.
There are no cumulative voting rights in the election of directors.
Dividends
Holders of common shares are entitled to receive dividends when and as
declared by the board of directors out of funds legally available therefor,
provided, however, that the payment of dividends to holders of common shares is
subject to the preferential dividend rights of the preferred stock. Cardinal
Financial is a corporation separate and distinct from Cardinal Bank. Since most
of Cardinal Financial revenues will be received by it in the form of dividends
or interest paid by Cardinal Bank our ability to pay dividends will be subject
to regulatory restrictions as described in "Government Supervision and
Regulation" "Cardinal Financial Corporation--Investments, Control and
Activities" and "Cardinal Bank, N.A.-Dividend Restrictions."
No Preemptive or Conversion Rights
Holders of our common shares (i) do not have preemptive rights to
purchase additional shares of any class of our stock and (ii) have no conversion
or redemption rights.
Calls and Assessments
All of the issued and outstanding common shares are nonassessable.
Liquidation Rights
In the event of our liquidation, dissolution or winding up, the holders
of common shares (and the holders of any class or series of stock entitled to
participate with the common shares in the distribution of assets) shall be
entitled to receive, in cash or in kind, our assets available for distribution
remaining after payment or provision for payment of our debts and liabilities
and distributions or provision for distributions to holders of the preferred
stock having preference over the common shares.
Preferred Stock
Our Articles of Incorporation authorize the board of directors to
determine the preferences, limitations and relative rights of any class or
series of preferred stock before the issuance of any shares of that class or
series. There are currently 10,000,000 authorized shares of preferred stock, par
value $1.00 per share, of which 1,412,000 have been designated as the 7.25%
Cumulative Convertible Preferred Stock, Series A.
53
1,411,268 of the Series A preferred were issued. As of December 31, 2001, 46,554
shares of the Series A preferred have been converted at the election of the
holders into common shares and the remaining 1,364,714 Series A preferred shares
remain outstanding.
Voting Rights
The holders of Series A preferred shares are not entitled to receive
notice of, or to participate in, or to vote on any matter at any meeting of the
shareholders, except to the extent that they are afforded a vote by the laws of
the Commonwealth of Virginia in existence at the time any matter requiring such
a vote shall arise. Notwithstanding the lack of voting rights, under Sections
13.1-707 and 708 of the Virginia Stock Corporation Act the holders of the Series
A preferred are entitled to notice of any meeting of the shareholders
considering an amendment to our Articles of Incorporation relating to any of the
matters described in Section 13.1-708 of the Virginia Stock Corporation Act and
to vote as a class.
Dividends
Holders the Series A preferred are entitled to receive dividends at the
annual rate of $.3625 per share, when and as declared by the board of directors
out of funds legally available therefor. This dividend is payable in equal
quarterly installments on the last day of March, June, September and December of
each year. To the extent that the dividend is not paid when due, it is
cumulative and accrues. No dividend can be paid on the common shares unless a
proportionate dividend for the same dividend period is declared and paid on the
Series A preferred (or declared and a sufficient sum set apart for the payment
of the dividend upon all outstanding shares of the Series A preferred). Cardinal
Financial is a corporation separate and distinct from Cardinal Bank. Since most
of our revenues will be received in the form of dividends or interest paid by
the bank our ability to pay dividends will be subject to regulatory restrictions
as described in "Government Supervision and Regulation" - "Cardinal Financial
Corporation--Investments, Control and Activities" and "Cardinal Bank,
N.A.-Dividend Restrictions."
No Preemptive Rights
Holders of our Series A preferred shares do not have preemptive rights
to purchase additional shares of any class of our stock.
Calls and Assessments
All of the issued and outstanding Series A preferred shares are
nonassessable.
Conversion Rights
The holders of the Series A preferred shares have the right at any time
to convert any or all of their Series A preferred shares into common shares. The
number of common shares into which each Series A preferred share may be
converted is equal at any time to the number arrived at by dividing $5.00 by the
"Conversion Price" (as defined in our Articles of Incorporation). The Conversion
Price is currently $6.65, but is subject to adjustment pursuant to the terms of
the Articles of Incorporation.
If at any time after March 31, 2004, the last sales price of the common
shares for 20 consecutive trading days exceeds an amount equal to the product of
the then applicable Conversion Price times 1.3, then all outstanding shares of
Series A preferred shares shall automatically convert into and become common
shares.
54
Redemption
At any time after December 31, 2020, we may redeem all or a portion of
the outstanding Series A preferred shares at a redemption price per share equal
to the sum of $5.00 per share and the "Dividends Accrued" (as defined in the
Articles of Incorporation) on a per share basis.
If at any time after March 31, 2004, we are involved in a merger, share
exchange or similar transaction (not including a merger in which we are the
surviving corporation, or a share exchange in which our shares are issued to
shareholders of another corporation) which provides that each outstanding Series
A preferred share shall be converted into or exchanged for the kind and amount
of stock, other securities and property receivable upon such merger, share
exchange or similar transaction by a holder of the number of shares of common
shares into which such share of Series A preferred might have been converted
immediately prior to the transaction and (A) the holders of the common shares
approve the transaction and (B) the holders of the Series A preferred upon
submission of the transaction for their approval or disapproval, disapprove the
transaction, then we may redeem all or any portion of the then outstanding
Series A preferred at a redemption price per share equal to the sum of $5.00 per
share and "Dividends Accrued" (as defined in the Articles of Incorporation) on a
per share basis.
Liquidation Rights
In the event of any liquidation, dissolution or winding up of Cardinal,
the holders of our Series A preferred shares (and the holders of any class or
series of stock entitled to participate with the Series A preferred in the
distribution of assets) shall be entitled to receive, in cash or in kind, the
assets of Cardinal available for distribution remaining after payment or
provision for payment of Cardinal's debts and liabilities and distributions or
provision for distributions to holders of any preferred having preference over
the Series A preferred in the liquidation, dissolution or winding up of
Cardinal.
Limitations on Liability of Officers and Directors
As permitted by the Virginia Stock Corporation Act, our Articles of
Incorporation contain provisions that permit us to indemnify our directors and
officers to the full extent permitted by Virginia law and eliminate the personal
liability of our directors and officers for monetary damages to us or our
shareholders for breach of their fiduciary duties, except to the extent that
Virginia law prohibits indemnification or elimination of liability. These
provisions do not limit or eliminate our rights or the rights of any shareholder
to seek an injunction or any other non-monetary relief in the event of a breach
of a director's or officer's fiduciary duty. In addition, these provisions apply
only to claims against a director or officer arising out of his or her role as a
director or officer and do not relieve a director or officer from liability if
he or she engaged in willful misconduct or a knowing violation of the criminal
law or any federal or state securities law.
The rights of indemnification provided in our Articles of Incorporation
are not exclusive of any other rights that may be available under any insurance
or other agreement, by vote of shareholders or disinterested directors or
otherwise.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers or
persons controlling us pursuant to the foregoing provisions, we have been
informed that in the opinion of the Securities and Exchange Commission this type
of indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
55
Shares Eligible for Future Sale
All of the shares that we will issue in the offerings will be freely
tradable without restriction or registration under the Securities Act, unless
owned by our affiliates.
Rule 144 under the Securities Act defines an affiliate of an issuer as
a person that directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with the issuer. Rule 405
under the Securities Act defines the term "control" to mean the possession,
direct or indirect, of the power to direct or cause the direction of the
management and policies of the person whether through the ownership of voting
securities, by contract, or otherwise. All of our directors and executive
officers will likely be deemed to be affiliates of us.
In general, under Rule 144, any person (or persons whose shares are
aggregated) who has beneficially owned restricted securities for at least one
year, including affiliates, and any affiliate who holds shares sold in a public
offering, may sell, within any three-month period, a number of such shares that
does not exceed the greater of 1% of the then outstanding shares or the average
weekly trading volume of the shares during the four calendar weeks preceding the
sale. Rule 144 also requires that the securities must be sold in "brokers'
transactions," as defined in the Securities Act, and the person selling the
securities may not solicit orders or make any payment in connection with the
offer or sale of securities to any person other than the broker who executes the
order to sell the securities. After restricted securities are held for two
years, a person who is not deemed an affiliate of us may sell shares under Rule
144 without regard to the volume and manner of sale limitations described above.
Sales of shares by our affiliates will continue to be subject to the volume and
manner of sale limitations.
We cannot predict the effect, if any, that future sales of shares, or
the availability of shares for future sales, will have on the market price
prevailing from time to time. Sales of substantial amounts of shares, or the
perception that such sales could occur, could adversely affect the prevailing
market price of the shares.
Reports to Shareholders
We furnish annual reports to shareholders which include audited
financial statements reported on by our independent accountants. We will
continue to comply with the periodic reporting requirements imposed by the
Securities Exchange Act of 1934 as long as such requirements apply to us. In
addition, we furnish quarterly reports to shareholders containing unaudited
financial statements for each quarter of each fiscal year.
56
GOVERNMENT SUPERVISION AND REGULATION
General
As a bank holding company, we are subject to regulation under the Bank
Holding Company Act of 1956, as amended, and the examination and reporting
requirements of the Board of Governors of the Federal Reserve System. Other
federal and state laws, including various consumer and compliance laws, govern
the activities of our bank subsidiary, the investments that it makes and the
aggregate amount of loans that it may grant to one borrower. Our national bank
subsidiary, Cardinal Bank, N.A. is subject to regulation, supervision and
examination by the Office of the Comptroller of the Currency. Our bank
subsidiary also is subject to regulation, supervision and examination by the
Federal Deposit Insurance Corporation.
The following description summarizes the significant federal and state
laws applicable to us. To the extent that statutory or regulatory provisions are
described, the description is qualified in its entirety by reference to that
particular statutory or regulatory provision
The Bank Holding Company Act
Under the Bank Holding Company Act, we are subject to periodic
examination by the Federal Reserve and required to file periodic reports
regarding our operations and any additional information that the Federal Reserve
may require. Our activities at the bank holding company level are limited to:
o banking, managing or controlling banks;
o furnishing services to or performing services for our subsidiary; and
o engaging in other activities that the Federal Reserve has determined
by regulation or order to be so closely related to banking as to be a
proper incident to these activities.
Some of the activities that the Federal Reserve Board has determined by
regulation to be proper incidents to the business of a bank holding company
include making or servicing loans and specific types of leases, performing
specific data processing services and acting in some circumstances as a
fiduciary or investment or financial adviser.
With some limited exceptions, the Bank Holding Company Act requires
every bank holding company to obtain the prior approval of the Federal Reserve
before:
o acquiring substantially all the assets of any bank;
o acquiring direct or indirect ownership or control of any voting
shares of any bank if after such acquisition it would own or control
more than 5% of the voting shares of such bank (unless it already owns
or controls the majority of such shares); or
o merging or consolidating with another bank holding company.
In addition, and subject to some exceptions, the Bank Holding Company
Act and the Change in Bank Control Act, together with their regulations, require
Federal Reserve approval prior to any person or company acquiring "control" of a
bank holding company. Control is conclusively presumed to exist if an individual
or company acquires 25% or more of any class of voting securities of the bank
holding company. Control is rebuttably presumed to exist if a person acquires
10% or more, but less than 25%, of any class of voting securities and either has
registered securities under Section 12 of the Securities Exchange Act of 1934 or
no other person owns a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure for
challenging this rebuttable control presumption.
57
In November 1999, Congress enacted the Gramm-Leach-Bliley Act, which
made substantial revisions to the statutory restrictions separating banking
activities from other financial activities. Under the GLBA, bank holding
companies that are well-capitalized and well-managed and meet other conditions
can elect to become "financial holding companies." As financial holding
companies, they and their subsidiaries are permitted to acquire or engage in
previously impermissible activities such as insurance underwriting, securities
underwriting and distribution, travel agency activities, insurance agency
activities, merchant banking and other activities that the Federal Reserve
determines to be financial in nature or complementary to these activities.
Financial holding companies continue to be subject to the overall oversight and
supervision of the Federal Reserve, but the GLBA applies the concept of
functional regulation to the activities conducted by subsidiaries. For example,
insurance activities would be subject to supervision and regulation by state
insurance authorities. Although we have not elected to become a financial
holding company in order to exercise the broader activity powers provided by the
GLBA, we will likely do so in the future.
Payment of Dividends
We are a legal entity separate and distinct from our banking and other
subsidiaries. Virtually all of our revenues will result from dividends paid to
us by our bank subsidiary. Our bank subsidiary is subject to laws and
regulations that limit the amount of dividends that it can pay. Under OCC
regulations, a national bank may not declare a dividend in excess of its
undivided profits, which means that our national bank subsidiary must recover
any start-up losses before it may pay a dividend to us. Additionally, our
national bank subsidiary may not declare a dividend if the total amount of all
dividends, including the proposed dividend, declared by the national bank in any
calendar year exceeds the total of the national bank's retained net income of
that year to date, combined with its retained net income of the two preceding
years, unless the dividend is approved by the OCC. Our national bank subsidiary
may declare or pay any dividend if, after making the dividend, the national bank
would be "undercapitalized," as defined in the federal regulations.
The FDIC has the general authority to limit the dividends paid by
insured banks if the payment is deemed an unsafe and unsound practice. The FDIC
has indicated that paying dividends that deplete a bank's capital base to an
inadequate level would be an unsound and unsafe banking practice.
In addition, both we and our bank subsidiary are subject to various
regulatory restrictions relating to the payment of dividends, including
requirements to maintain capital at or above regulatory minimums. Banking
regulators have indicated that banking organizations should generally pay
dividends only if the organization's net income available to common shareholders
over the past year has been sufficient to fully fund the dividends, and the
prospective rate of earnings retention appears consistent with the
organization's capital needs, asset quality and overall financial condition.
Virginia law also imposes some restrictions on our ability to pay dividends. See
"Description of Securities" above.
Insurance of Accounts, Assessments and Regulation by the FDIC
The deposits of our bank subsidiary are insured by the FDIC up to the
limits set forth under applicable law. The deposits of our bank subsidiaries are
subject to the deposit insurance assessments of the Bank Insurance Fund, or
"BIF", of the FDIC.
The FDIC has implemented a risk-based deposit insurance assessment
system under which the assessment rate for an insured institution may vary
according to regulatory capital levels of the institution and other factors,
including supervisory evaluations. For example, depository institutions insured
by the BIF that are "well capitalized" and that present few or no supervisory
concerns are required to pay only the statutory minimum assessment of $2,000
annually for deposit insurance, while all other banks are required to pay
premiums ranging from .03% to .27% of domestic deposits. These rate schedules
are subject to future adjustments by the FDIC. In addition, the FDIC has
authority to impose special assessments from time to time.
58
The FDIC is authorized to prohibit any BIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's primary
regulatory authority an opportunity to take such action. The FDIC may terminate
the deposit insurance of any depository institution if it determines, after a
hearing, that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, order or any condition imposed in
writing by the FDIC. It also may suspend deposit insurance temporarily during
the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If deposit insurance is terminated, the
deposits at the institution at the time of termination, less subsequent
withdrawals, shall continue to be insured for a period from six months to two
years, as determined by the FDIC. We are not aware of any existing circumstances
that could result in termination of any of our bank subsidiary's deposit
insurance.
Capital Requirements
Each of the OCC and the Federal Reserve Board has issued risk-based and
leverage capital guidelines applicable to banking organizations that it
supervises. Under the risk-based capital requirements, we and our bank
subsidiary are each generally required to maintain a minimum ratio of total
capital to risk-weighted assets (including specific off-balance sheet
activities, such as standby letters of credit) of 8%. At least half of the total
capital must be composed of "Tier 1 Capital", which is defined as common equity,
retained earnings and qualifying perpetual preferred stock, less certain
intangibles. The remainder may consist of "Tier 2 Capital", which is defined as
specific subordinated debt, some hybrid capital instruments and other qualifying
preferred stock and a limited amount of the loan loss allowance. In addition,
each of the federal banking regulatory agencies has established minimum leverage
capital requirements for banking organizations. Under these requirements,
banking organizations must maintain a minimum ratio of Tier 1 Capital to
adjusted average quarterly assets equal to 3% to 5%, subject to federal bank
regulatory evaluation of an organization's overall safety and soundness. In sum,
the capital measures used by the federal banking regulators are:
o the Total Capital ratio, which is the total of Tier 1 Capital and
Tier 2 Capital;
o the Tier 1 Capital ratio; and
o the leverage ratio.
Under these regulations, a bank will be:
o "well capitalized" if it has a Total Capital ratio of 10% or greater,
a Tier 1 Capital ratio of 6% or greater, and is not subject to any
written agreement, order, capital directive, or prompt corrective
action directive by a federal bank regulatory agency to meet and
maintain a specific capital level for any capital measure;
o "adequately capitalized" if it has a Total Capital ratio of 8% or
greater, a Tier 1 Capital ratio of 4% or greater, and a leverage ratio
of 4% or greater - or 3% in certain circumstances - and is not well
capitalized;
o "undercapitalized" if it has a Total Capital ratio of less than 8% or
greater, a Tier 1 Capital ratio of less than 4% - or 3% in certain
circumstances;
o "significantly undercapitalized" if it has a Total Capital ratio of
less than 6%, a Tier 1 Capital ratio of less than 3%, or a leverage
ratio of less than 3%; or
59
o "critically undercapitalized" if its tangible equity is equal to or
less than 2% of average quarterly tangible assets.
The risk-based capital standards of each of the OCC and the Federal
Reserve Board explicitly identify concentrations of credit risk and the risk
arising from non-traditional activities, as well as an institution's ability to
manage these risks, as important factors to be taken into account by the agency
in assessing an institution's overall capital adequacy. The capital guidelines
also provide that an institution's exposure to a decline in the economic value
of its capital due to changes in interest rates be considered by the agency as a
factor in evaluating a banking organization's capital adequacy.
The OCC and the FDIC may take various corrective actions against any
undercapitalized bank and any bank that fails to submit an acceptable capital
restoration plan or fails to implement a plan accepted by the OCC or the FDIC.
These powers include, but are not limited to, requiring the institution to be
recapitalized, prohibiting asset growth, restricting interest rates paid,
requiring prior approval of capital distributions by any bank holding company
that controls the institution, requiring divestiture by the institution of its
subsidiaries or by the holding company of the institution itself, requiring new
election of directors, and requiring the dismissal of directors and officers.
Our bank subsidiary presently maintains sufficient capital to remain in
compliance with these capital requirements.
Other Safety and Soundness Regulations
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by federal law
and regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event that the depository institution is insolvent or is in danger of
becoming insolvent. For example, under the requirements of the Federal Reserve
Board with respect to bank holding company operations, a bank holding company is
required to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so otherwise. In addition, the
"cross-guarantee" provisions of federal law require insured depository
institutions under common control to reimburse the FDIC for any loss suffered or
reasonably anticipated by the FDIC as a result of the insolvency of commonly
controlled insured depository institutions or for any assistance provided by the
FDIC to commonly controlled insured depository institutions in danger of
failure. The FDIC may decline to enforce the cross-guarantee provision if it
determines that a waiver is in the best interests of the deposit insurance
funds. The FDIC's claim for reimbursement under the cross guarantee provisions
is superior to claims of shareholders of the insured depository institution or
its holding company but is subordinate to claims of depositors, secured
creditors and nonaffiliated holders of subordinated debt of the commonly
controlled insured depository institutions.
Interstate Banking and Branching
Current federal law authorizes interstate acquisitions of banks and
bank holding companies without geographic limitation. Effective June 1, 1997, a
bank headquartered in one state is authorized to merge with a bank headquartered
in another state, as long as neither of the states had opted out of such
interstate merger authority prior to such date. After a bank has established
branches in a state through an interstate merger transaction, the bank may
establish and acquire additional branches at any location in the state where a
bank headquartered in that state could have established or acquired branches
under applicable federal or state law.
60
Monetary Policy
The commercial banking business is affected not only by general
economic conditions but also by the monetary policies of the Federal Reserve
Board. The instruments of monetary policy employed by the Federal Reserve Board
include open market operations in United States government securities, changes
in the discount rate on member bank borrowing and changes in reserve
requirements against deposits held by all federally insured banks. The Federal
Reserve Board's monetary policies have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future. In view of changing conditions in the national and international
economy and in the money markets, as well as the effect of actions by monetary
fiscal authorities, including the Federal Reserve Board, no prediction can be
made as to possible future changes in interest rates, deposit levels, loan
demand or the business and earnings of our bank subsidiary.
Federal Reserve System
In 1980, Congress enacted legislation that imposed reserve requirements
on all depository institutions that maintain transaction accounts or nonpersonal
time deposits. NOW accounts, money market deposit accounts and other types of
accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to these reserve
requirements, as are any nonpersonal time deposits at an institution. For net
transaction accounts in 2002, the first $5.7 million will be exempt from reserve
requirements. A 3% reserve ratio will be assessed on net transaction accounts
over $5.7 million to and including $41.3 million. A 10% reserve ratio will be
applied to net transaction accounts in excess of $41.3 million. These
percentages are subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
non-interest-bearing account at, or on behalf of, a Federal Reserve Bank, the
effect of the reserve requirement is to reduce the amount of the institution's
interest-earning assets.
Transactions with Affiliates
Transactions between banks and their affiliates are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any
bank or entity that controls, is controlled by or is under common control with
such bank. Generally, Sections 23A and 23B (i) limit the extent to which the
bank or its subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and maintain an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital stock and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the association or subsidiary as those provided to a
nonaffiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions.
Loans to Insiders
The Federal Reserve Act and related regulations impose specific
restrictions on loans to directors, executive officers and principal
shareholders of banks. Under Section 22(h) of the Federal Reserve Act, loans to
a director, an executive officer and to a principal shareholder of a bank, and
some affiliated entities of any of the foregoing, may not exceed, together with
all other outstanding loans to such person and affiliated entities, the bank's
loan-to-one borrower limit. Loans in the aggregate to insiders and their related
interests as a class may not exceed two times the bank's unimpaired capital and
unimpaired surplus until the bank's total assets equal or exceed $100,000,000,
at which time the aggregate is limited to the bank's unimpaired capital and
unimpaired surplus. Section 22(h) also prohibits loans, above amounts prescribed
by the appropriate federal banking agency, to directors, executive officers and
principal shareholders of a bank or bank holding company, and their respective
affiliates, unless such loan is approved in advance by a majority of the board
of
61
directors of the bank with any "interested" director not participating in the
voting. The FDIC has prescribed the loan amount, which includes all other
outstanding loans to such person, as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Section 22(h) requires that loans to directors,
executive officers and principal shareholders be made on terms and underwriting
standards substantially the same as offered in comparable transactions to other
persons.
Community Reinvestment Act
Under the Community Reinvestment Act and related regulations,
depository institutions have an affirmative obligation to assist in meeting the
credit needs of their market areas, including low and moderate-income areas,
consistent with safe and sound banking practice. The Community Reinvestment Act
requires the adoption by each institution of a Community Reinvestment Act
statement for each of its market areas describing the depository institution's
efforts to assist in its community's credit needs. Depository institutions are
periodically examined for compliance with the Community Reinvestment Act and are
periodically assigned ratings in this regard. Banking regulators consider a
depository institution's Community Reinvestment Act rating when reviewing
applications to establish new branches, undertake new lines of business, and/or
acquire part or all of another depository institution. An unsatisfactory rating
can significantly delay or even prohibit regulatory approval of a proposed
transaction by a bank holding company or its depository institution
subsidiaries.
The Gramm-Leach-Bliley Act and federal bank regulators have made
various changes to the Community Reinvestment Act. Among other changes,
Community Reinvestment Act agreements with private parties must be disclosed and
annual reports must be made to a bank's primary federal regulatory. A bank
holding company will not be permitted to become a financial holding company and
no new activities authorized under the GLBA may be commenced by a holding
company or by a bank financial subsidiary if any of its bank subsidiaries
received less than a "satisfactory" rating in its latest Community Reinvestment
Act examination.
Fair Lending; Consumer Laws
In addition to the Community Reinvestment Act, other federal and state
laws regulate various lending and consumer aspects of the banking business.
Governmental agencies, including the Department of Housing and Urban
Development, the Federal Trade Commission and the Department of Justice, have
become concerned that prospective borrowers experience discrimination in their
efforts to obtain loans from depository and other lending institutions. These
agencies have brought litigation against depository institutions alleging
discrimination against borrowers. Many of these suits have been settled, in some
cases for material sums, short of a full trial.
Recently, these governmental agencies have clarified what they consider
to be lending discrimination and have specified various factors that they will
use to determine the existence of lending discrimination under the Equal Credit
Opportunity Act and the Fair Housing Act, including evidence that a lender
discriminated on a prohibited basis, evidence that a lender treated applicants
differently based on prohibited factors in the absence of evidence that the
treatment was the result of prejudice or a conscious intention to discriminate,
and evidence that a lender applied an otherwise neutral non-discriminatory
policy uniformly to all applicants, but the practice had a discriminatory
effect, unless the practice could be justified as a business necessity.
Banks and other depository institutions also are subject to numerous
consumer-oriented laws and regulations. These laws, which include the Truth in
Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures
Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, and
the Fair
62
Housing Act, require compliance by depository institutions with various
disclosure requirements and requirements regulating the availability of funds
after deposit or the making of some loans to customers.
Gramm-Leach-Bliley Act of 1999
The Gramm-Leach-Bliley Act of 1999 was signed into law on November 12,
1999. The GLBA covers a broad range of issues, including a repeal of most of the
restrictions on affiliations among depository institutions, securities firms and
insurance companies. Most of its provisions require the federal bank regulatory
agencies and other regulatory bodies to adopt implementing regulations, and for
that reason an assessment of the full impact of the GLBA on us must await
completion of that regulatory process. The following description summarizes some
of its significant provisions.
The GLBA repeals sections 20 and 32 of the Glass-Steagall Act, thus
permitting unrestricted affiliations between banks and securities firms. It also
permits bank holding companies to elect to become financial holding companies. A
financial holding company may engage in or acquire companies that engage in a
broad range of financial services, including securities activities such as
underwriting, dealing, investment, merchant banking, insurance underwriting,
sales and brokerage activities. In order to become a financial holding company,
the bank holding company and all of its affiliated depository institutions must
be well-capitalized, well-managed and have at least a satisfactory Community
Reinvestment Act rating.
The GLBA provides that the states continue to have the authority to
regulate insurance activities, but prohibits the states in most instances from
preventing or significantly interfering with the ability of a bank, directly or
through an affiliate, to engage in insurance sales, solicitations or
cross-marketing activities. Although the states generally must regulate bank
insurance activities in a nondiscriminatory manner, the states may continue to
adopt and enforce rules that specifically regulate bank insurance activities in
specific areas identified under the law. Under the new law, the federal bank
regulatory agencies adopted insurance consumer protection regulations that apply
to sales practices, solicitations, advertising and disclosures.
The GLBA adopts a system of functional regulation under which the
Federal Reserve Board is designated as the umbrella regulator for financial
holding companies, but financial holding company affiliates are principally
regulated by functional regulators such as the FDIC for state nonmember bank
affiliates, the Securities and Exchange Commission for securities affiliates,
and state insurance regulators for insurance affiliates. It repeals the broad
exemption of banks from the definitions of "broker" and "dealer" for purposes of
the Securities Exchange Act of 1934, as amended. It also identifies a set of
specific activities, including traditional bank trust and fiduciary activities,
in which a bank may engage without being deemed a "broker," and a set of
activities in which a bank may engage without being deemed a "dealer."
Additionally, the new law makes conforming changes in the definitions of
"broker" and "dealer" for purposes of the Investment Company Act of 1940, as
amended, and the Investment Advisers Act of 1940, as amended.
The GLBA contains extensive customer privacy protection provisions.
Under these provisions, a financial institution must provide to its customers,
both at the inception of the customer relationship and on an annual basis, the
institution's policies and procedures regarding the handling of customers'
nonpublic personal financial information. The new law provides that, except for
specific limited exceptions, an institution may not provide such personal
information to unaffiliated third parties unless the institution discloses to
the customer that such information may be so provided and the customer is given
the opportunity to opt out of such disclosure. An institution may not disclose
to a non-affiliated third party, other than to a consumer reporting agency,
customer account numbers or other similar account identifiers for marketing
purposes. The GLBA also provides that the states may adopt customer privacy
protections that are more strict than those contained in the act.
63
Future Regulatory Uncertainty
Because federal regulation of financial institutions changes regularly
and is the subject of constant legislative debate, we cannot forecast how
federal regulation of financial institutions may change in the future and impact
our operations. Although Congress in recent years has sought to reduce the
regulatory burden on financial institutions with respect to the approval of
specific transactions, we fully expect that the financial institution industry
will remain heavily regulated in the near future and that additional laws or
regulations may be adopted further regulating specific banking practices.
UNDERWRITING
The underwriter, McKinnon & Company, Inc., has agreed, subject to the
terms and conditions contained in an Underwriting Agreement with us, to sell, as
selling agent for us on a best efforts basis, the common shares offered in the
rights offering that are not purchased by our shareholders, together with
3,250,000 additional common shares in the public offering. Because the public
offering will be conducted on a best efforts basis, the underwriter is not
obligated to purchase any shares if they are not sold to the public, and the
underwriter is not required to sell any specific number or dollar amount of
shares.
The underwriter has informed us that it proposes to offer the shares in
the public offering as selling agent for us, subject to prior sale, when, as and
if issued by us, in part to the public at the public offering price, and in part
through certain selected dealers to customers of such selected dealers at the
public offering price. Each selected dealer will receive a commission of $0.105
for each share it sells. The underwriter reserves the right to reject any order
for the purchase of shares through it, in whole or in part.
The underwriter provides investment banking services to us from time to
time in the ordinary course of business and has advised us on the structure of
the rights offering. We will pay the underwriter a financial advisory fee equal
to 1% of the price of the shares sold in the rights offering and a commission
equal to 5% of the price of the shares sold in the public offering. We have
agreed to indemnify the underwriter against certain civil liabilities, including
liability under the Securities Act of 1933, as amended.
We will also pay the expenses of both the rights offering and the
public offering, which we expect to be approximately $300,000.
Neither the rights offering nor the public offering is contingent upon
the occurrence of any event or the sale of a minimum number of shares. Funds
received by the underwriter from investors in the public offering will be
deposited with an escrow agent in a non-interest bearing escrow account until
the closing of the both the rights offering and public offering. The closing of
both offerings is expected to occur on or about May 14, 2002.
DETERMINATION OF OFFERING PRICE
The price of the shares offered in the rights offering was determined
by us after consultation with the underwriter and is based on a variety of
factors, including:
o the per share book value of the common shares as of December 31,
2001,
o the trading history of our common shares,
o our history of operating losses
o our prospects for future earnings,
o our current performance,
o the prospects of the banking industry in which we compete,
64
o the general condition of the securities market at the time of the
offerings, and
o the prices of equity securities of comparable companies.
The price of the shares offered in the public offering will be determined
by negotiations between us and the underwriter. The factors mentioned above will
be considered in determining the price of the shares offered in the public
offering.
LEGAL MATTERS
The validity of the common shares offered hereby and certain other legal
matters will be passed upon for us and for the underwriter by Squire, Sanders &
Dempsey L.L.P.
EXPERTS
The consolidated financial statements of Cardinal Financial Corporation and
subsidiaries as of December 31, 2001 and 2000 and for each of the years then
ended have been included in this prospectus and the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere in this prospectus and upon their authority as experts in
accounting and auditing.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 31E 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" or other words or phrases of similar import.
Similarly, statements that describe our future financial condition or results of
operations, objectives, 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
"Risk Factors" and the "Management's Discussion and Analysis of Financial
Condition and Results of Operations "sections and other parts of this
prospectus, that could cause our actual results to differ materially from those
anticipated in these forward-looking statements.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement that we have filed with
the Securities and Exchange Commission. Because the rules and regulations of the
SEC allow us to omit certain portions of the registration statement from this
prospectus, this prospectus does not contain all the information set forth in
the registration statement. You may review the registration statement and the
exhibits filed with the registration statement for further information regarding
us and our securities. The registration statement and its exhibits may be
inspected at the SEC's public reference room facility located at 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room. Our SEC filings are also
available to the public at the SEC's website at http://www.sec.gov.
In the third quarter of 1998 we became subject to the information
requirements of the Securities Exchange Act of 1934 and accordingly have
thereafter filed with the SEC all required annual, quarterly and current
reports, proxy statements and other information. You may read and copy any
document that we have or will file at the public reference facilities of the SEC
at the addresses set forth above or on the SEC's Internet site.
65
INDEX TO FINANCIAL STATEMENTS
CARDINAL FINANCIAL CORPORATION
Page
Independent Auditors' Report of KPMG LLP ...................... F-2
Consolidated Financial Statements
Consolidated Statements of Condition as of December 31, 2001
and 2000 ................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 2001 and 2000 ................................. F-4
Consolidated Statements of Comprehensive Income (Loss) for
the years ended December 31, 2001 and 2000 ................. F-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2001 and 2000 ............. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2001 and 2000 ................................. F-7
Notes to Consolidated Financial Statements ................. F-8 through F-32
66
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2001 and 2000
(With Independent Auditors' Report Thereon)
F-1
Independent Auditors' Report
The Board of Directors and Shareholders
Cardinal Financial Corporation and subsidiaries:
We have audited the accompanying consolidated statements of condition of
Cardinal Financial Corporation and subsidiaries (the Company) as of December 31,
2001 and 2000, and the related consolidated statements of operations,
comprehensive income (loss), changes in shareholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cardinal Financial
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
McLean, Virginia
January 18, 2002
F-2
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 2001 and 2000
(Dollars in thousands, except share data)
Assets 2001 2000
-------------- ----------------
Cash and due from banks $ 11,446 $ 4,734
Federal funds sold 23,013 24,754
-------------- ----------------
Total cash and cash equivalents 34,459 29,488
Investment securities available-for-sale 34,147 6,935
Other investments 1,268 1,513
Loans held for sale 4,732 --
Loans receivable, net of fees 200,911 154,271
Allowance for loan losses (3,104) (1,900)
-------------- ----------------
197,807 152,371
Premises and equipment, net 5,077 5,659
Goodwill and other intangibles 668 9,576
Accrued interest and other assets 1,426 1,506
-------------- ----------------
Total assets $ 279,584 $ 207,048
============== ================
Liabilities and Shareholders' Equity
Deposits $ 246,024 $ 163,371
Other borrowed funds 9,824 7,287
Accrued interest and other liabilities 3,112 2,278
-------------- ----------------
Total liabilities 258,960 172,936
Preferred stock, $1 par value, 10,000,000 shares authorized; Series A preferred
stock, cumulative convertible, 1,364,714 and
1,411,268 shares outstanding in 2001 and 2000, respectively 1,365 1,411
Common stock, $1 par value, 50,000,000 shares authorized,
4,294,323 and 4,253,155 shares outstanding in 2001
and 2000, respectively 4,294 4,253
Additional paid-in capital 38,488 38,466
Accumulated deficit (23,249) (10,022)
Accumulated other comprehensive income (loss) (274) 4
-------------- ----------------
Total shareholders' equity 20,624 34,112
-------------- ----------------
Total liabilities and shareholders' equity $ 279,584 $ 207,048
============== ================
See accompanying notes to consolidated financial statements.
F-3
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2001 and 2000
2001 2000
---------------------- -------------------
Interest income:
Loans receivable $ 14,973,409 $ 9,257,708
Federal funds sold 1,084,569 1,451,315
Investment securities available-for-sale 436,590 371,386
Other investments 82,050 69,873
---------------------- -------------------
Total interest income 16,576,618 11,150,282
Interest expense:
Deposits 7,027,130 4,293,522
Other borrowed funds 472,899 446,839
---------------------- -------------------
Total interest expense 7,500,029 4,740,361
---------------------- -------------------
Net interest income 9,076,589 6,409,921
Provision for loan losses 1,201,406 752,755
---------------------- -------------------
Net interest income after provision for loan losses 7,875,183 5,657,166
Non-interest income:
Service charges on deposit accounts 398,326 153,769
Loan service charges 432,508 230,228
Investment fee income 1,941,200 1,515,530
Net gain (loss) on sales of loans 48,775 (22,660)
Net gain on sales of assets 18,270 25,347
Other income 427,580 195,727
---------------------- -------------------
Total non-interest income 3,266,659 2,097,941
Non-interest expense:
Salary and benefits 7,730,504 6,317,278
Occupancy 1,373,265 1,075,075
Professional fees 705,313 507,769
Depreciation 804,065 600,397
Amortization and write down of intangibles 8,907,010 235,297
Other operating expenses 4,346,001 2,990,299
---------------------- -------------------
Total non-interest expense 23,866,158 11,726,115
---------------------- -------------------
Net loss before income taxes (12,724,316) (3,971,008)
Provision for income taxes - -
---------------------- -------------------
Net loss $ (12,724,316) $ (3,971,008)
====================== ===================
Dividends to preferred shareholders 503,212 170,555
---------------------- -------------------
Net loss to common shareholders $ (13,227,528) $ (4,141,563)
====================== ===================
Basic and diluted loss per common share $ (3.11) $ (0.98)
====================== ===================
Weighted-average common shares outstanding 4,258,087 4,246,346
====================== ===================
See accompanying notes to consolidated financial statements.
F-4
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 2001 and 2000
2001 2000
------------- ------------
Net loss $ (12,724,316) $ (3,971,008)
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale
investment securities (277,678) 116,939
------------- ------------
Comprehensive loss $ (13,001,994) $ (3,854,069)
============= ============
See accompanying notes to consolidated financial statements.
F-5
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2001 and 2000
(Dollars in thousands)
Accumulated
Additional Other
Preferred Preferred Common Common Paid-in Accumulated Comprehensive
Shares Stock Shares Stock Capital Deficit Income (Loss) Total
--------- --------- ------ ------- ---------- ----------- ------------- --------
Balance, December 31, 1999 -- $ -- 4,243 $ 4,243 $ 32,496 $ (5,881) $ (113) $ 30,745
Issuance of 1,411,499 shares of cumulative
preferred stock, par value $1 1,411 1,411 -- -- 5,645 -- -- 7,056
Issuance of common stock options in
connection with acquisition -- -- -- -- 301 -- -- 301
Stock options exercised -- -- 7 7 15 -- -- 22
Issuance of stock awards -- -- 3 3 9 -- -- 12
Dividends on preferred stock -- -- -- -- -- (170) -- (170)
Change in unrealized gain (loss) on
investment securities available-for-sale -- -- -- -- -- -- 117 117
Net loss -- -- -- -- -- (3,971) -- (3,971)
---------------------------------------------------------------------- --------
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 -- -- 3 3 8 -- -- 11
Dividends on preferred stock -- -- -- -- -- (503) -- (503)
Preferred stock converted to common stock (46) (46) 35 35 11 -- -- --
Change in unrealized gain (loss) on
investment securities available-for-sale -- -- -- -- -- -- (278) (278)
Net loss -- -- -- -- -- (12,724) (12,724)
--------- --------- ------ ------- --------- ---------- ----------- --------
Balance, December 31, 2001 1,365 $ 1,365 4,294 $ 4,294 $ 38,488 $ (23,249) $ (274) $ 20,624
=============================================================================================================================
See accompanying notes to consolidated financial statements.
F-6
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001 and 2000
(Dollars in thousands)
2001 2000
---------- --------
Cash flows from operating activities:
Net loss $ (12,724) $ (3,971)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 804 600
Amortization and write down of intangibles, premiums and discounts 8,960 230
Provision for loan losses 1,201 753
Loss on sale of investment securities available-for-sale -- 32
Originations of loans held for sale (15,807) 1,275
Net proceeds from the sale of loans held for sale 11,124 (1,252)
Gain on sale of assets (67) (48)
(Increase) decrease in accrued interest and other assets 117 (1,082)
Increase in accrued interest and other liabilities 834 1,268
Compensation related to stock awards 6 12
---------- --------
Net cash used in operating activities (5,552) (2,183)
---------- --------
Cash flows from investing activities:
Purchase of premises and equipment (501) (1,456)
Proceeds from sale of premises and equipment 28 175
Proceeds from sale, maturity and call of investment securities available-for-sale 4,500 2,468
Proceeds from sale of other investments 832 --
Purchase of investment securities available-for-sale (34,101) --
Purchase of other investments (587) (133)
Redemptions of investment securities available-for-sale 2,111 421
Net increase in loans receivable (46,457) (48,244)
Net cash acquired in merger -- 11,090
---------- --------
Net cash used in investing activities (74,175) (35,679)
---------- --------
Cash flows from financing activities:
Net increase in deposits 82,653 49,600
Net increase in other borrowed funds 2,537 (1,145)
Dividends on preferred stock (503) (170)
Stock options exercised 11 22
Reversal of accrued costs related to public offering -- --
---------- --------
Net cash provided by financing activities 84,698 48,307
---------- --------
Net increase in cash and cash equivalents 4,971 10,445
Cash and cash equivalents at beginning of year 29,488 19,043
---------- --------
Cash and cash equivalents at end of year $ 34,459 $ 29,488
========== ========
Supplemental disclosure of cash flow information:
Cash paid during year for interest $ 7,538 $ 4,676
========== ========
Supplemental schedule of noncash investing and financing activities:
In 2000, the company purchased all of the common stock of Heritage Bancorp, Inc.
for $14.4 million. In conjunction with the acquisition, liabilities were assumed
as follows:
Fair value of assets acquired $ 62,162
Goodwill and other intangibles 9,812
Cash paid (7,059)
Preferred stock issued (7,056)
Issuance of common stock options (301)
--------
Fair value of liabilities assumed $ 57,558
========
See accompanying notes to consolidated financial statements.
F-7
CARDINAL FINANCIAL CORPORTATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 amd 2000
(1) Organization
Cardinal Financial Corporation (the "Company") was incorporated November
24, 1997 under the laws of the Commonwealth of Virginia as a holding
company whose activities consist of investment in its wholly-owned
subsidiaries. In addition to Cardinal Bank, N.A. which began operations
in 1998, the Company opened the following three subsidiaries in 1999,
Cardinal Wealth Services, Inc. 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 it's 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.
On November 1, 2001, the Company consolidated two of its banking
subsidiaries, Cardinal Bank - Dulles, N.A. and Cardinal Bank - Potomac
into Cardinal Bank, N.A.
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosures of contingent assets and contingent liabilities at the
date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material
estimates that are particularly susceptible to changes in the near
term are the allowance for loan losses and the valuation of
deferred tax assets.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
(c) Cash and Cash Equivalents
For the purpose of presentation in the consolidated statements of
cash flows, the Company has defined cash and cash equivalents as
those amounts included in cash, due from banks, and federal funds
sold.
(d) Investment Securities
The Company classifies its debt and marketable equity securities
in one of two categories: available-for-sale or held-to-maturity.
Held-to-maturity securities are those securities for which the
Company has the ability and intent to hold until maturity. All
other securities are classified as available-for-sale. The Company
has no trading securities.
F-8
CARDINAL FINANCIAL CORPORTATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 amd 2000
Held to maturity securities are held at cost. Available-for-sale
securities are recorded at fair value. Unrealized gains and losses, net
of tax if applicable, on available-for-sale securities are reported in
other comprehensive income (loss).
Gains and losses on the sale of securities are determined using the
specific identification method. Declines in the fair value of individual
held-to-maturity and available-for-sale securities below their cost that
are deemed other than temporary are charged to earnings as realized
losses, resulting in the establishment of a new cost basis for the
security.
Premiums and discounts are recognized in interest income using the
effective interest method over the period to maturity. Prepayment of the
mortgages securing the mortgage-backed securities may affect the
maturity date and yield to maturity. The Company uses actual principal
prepayment experience and estimates of future principal prepayments in
calculating the yield necessary to apply the effective interest method.
(e) Loans Held for Sale
Loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value on an individual
loan basis as determined by outstanding commitments from investors. Net
unrealized losses, if any, are recognized through a valuation allowance
by charges to operations. Cost basis includes unpaid principal balances,
origination premiums or discounts, and deferred net fees or costs.
(f) Loans Receivable
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off are reported at
their outstanding principal balance adjusted for any charge-offs, and
net of the allowance for loan losses and any deferred fees or costs.
Loan origination fees and certain direct origination costs are
capitalized and amortized as an adjustment of the yield of the related
loan.
Loans are placed in nonaccrual status when they are past-due 90 days as
to either principal or interest or when, in the opinion of management,
the collection of principal and interest is in doubt. A loan remains in
nonaccrual status until the loan is current as to payment of both
principal and interest or past-due less than 90 days, and the borrower
demonstrates the ability to pay and remain current. Loans are
charged-off when a loan or a portion thereof is considered
uncollectible. When cash payments are received, they are applied to
principal first, then accrued interest. It is the Company's policy not
to record interest income until principal has become current.
The Company determines and recognizes impairment of certain loans when
based on current information and events, it is probable that the Company
will be unable to collect all amounts due according to the contractual
terms of the loan agreement. A loan is not considered impaired during a
period of delay in payment if the Company expects to collect all amounts
due, including past-due interest. An impaired loan is measured at the
present value of its expected future cash
F-9
CARDINAL FINANCIAL CORPORTATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 amd 2000
flows discounted at the loan's effective interest rate, or at the loan's
observable market price or fair value of the collateral if the loan is
collateral dependent.
The allowance for loan losses is increased by provisions for loan losses
and decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such
agencies may require the Company to recognize additions to the allowance
based on their judgments about information available to them at the time
of their examination. Management believes that the current allowance for
loan losses is a reasonable estimate of known and inherent losses in the
current loan portfolio.
(g) Premises and Equipment
Land is carried at cost. Premises, furniture, equipment, and leasehold
improvements are carried at cost, less accumulated depreciation and
amortization. Depreciation of premises, furniture and equipment is
computed using the straight-line method over their estimated useful
lives from 3 to 10 years. Amortization of leasehold improvements is
computed using the straight-line method over the useful lives of the
improvements or the lease term, whichever is shorter.
(h) Goodwill and other intangibles
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over 15
years. The Company assesses the recoverability of this intangible asset
by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. If the projected undiscounted net
operating cash flows are less than the carrying amount, a loss is
recognized to reduce the carrying amount to fair value, and when
appropriate, the amortization period is also reduced. The other
intangible includes a core deposit intangible for the value placed on
long term deposit relationships that exist at acquisition. The core
deposit intangible is amortized on a straight-line basis over the
estimated lives of the deposit relationships acquired, which is 1.5
years.
(i) Investment Fee Income
Investment fee income represents commissions paid by customers of
Cardinal Wealth Services, Inc. for investment transactions. Fees are
recognized in income as it is earned.
(j) Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As
F-10
CARDINAL FINANCIAL CORPORTATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 amd 2000
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
(k) Loss Per Common Share
Basic and diluted loss per common share is computed by dividing net loss
by the weighted average number of shares of common stock outstanding
during the periods. Common stock equivalents outstanding at December 31,
2001 and 2000 were antidilutive and consequently not included in the EPS
calculation.
(l) Stock Option Plan
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations, in
accounting for its fixed plan stock options. As such, compensation
expense is recorded only if the current market price of the underlying
stock exceeded the exercise price on the date of grant.
(m) New Accounting Standards
In June 2001, Financial Accounting Standard No. 142, Goodwill and Other
Intangible Assets was issued. SFAS 142 adopts a more aggregate view of
goodwill and bases the accounting for goodwill on the units of the
combined entity into which an acquired entity is integrated. Furthermore,
goodwill and other intangible assets that have indefinite useful lives
will not be amortized but rather will be tested at least annually for
impairment using specific guidelines. Additional supplemental disclosures
of information about goodwill and other intangibles in the years
subsequent to their acquisitions are also required. The provisions of
SFAS 142 are required to be applied starting with fiscal years beginning
after December 15, 2001. Goodwill and some intangible assets will not
decrease in the same manner as under previous standards which could lead
to more volatility in reported income because impairment losses, if any,
are likely to occur irregularly and in varying amounts. As a result of
SFAS 142, the Company will no longer amortize its goodwill, but will be
required to determine if the value of the goodwill is impaired. If such
impairment exists a write down of the goodwill will be required at that
time. Goodwill no longer subject to amortization as of December 31, 2001
is $646,000. The Company has not yet evaluated impairment under FAS 142,
however, the Company does not anticipate the adoption of this statement
will result in further impairment of the goodwill.
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment of Long-Lived Assets. SFAS No 141 supercedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of and the accounting and reporting
provisions of APB No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. SFAS No. 144
retains many of the
F-11
CARDINAL FINANCIAL CORPORTATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 amd 2000
provisions of SFAS No. 121, but addresses certain implementation
issues associated with that statement. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. This statement is not
expected to have a material impact on the Company's financial
statements.
(n) Reclassifications
Certain amounts for 2000 have been reclassified to conform to the
presentation for 2001.
(3) Investment Securities and Other Investments
The fair value and amortized cost of available-for-sale securities as of
December 31, 2001 and 2000 are shown below.
2001
---------------------
Fair Amortized
value cost
(Dollars in thousands) ------- ---------
Obligations of U.S. government-sponsored $ 4,458 $ 4,501
agencies and enterprises 22,357 22,530
Mortgage-backed securities 7,083 7,140
Corporate bonds 249 250
Treasury bonds ------- -------
$34,147 $34,421
Total ======= =======
2000
---------------------
Fair Amortized
value cost
(Dollars in thousands) -------- ---------
Obligations of U.S. government-sponsored $ 5,870 $ 5,852
agencies and enterprises 1,065 1,079
Mortgage-backed securities ------- -------
$ 6,935 $ 6,931
Total ======= =======
The fair value and amortized cost of available-for-sale securities by
contractual maturity at December 31, 2001 is shown below. Expected
maturities may differ from contractual maturities because many issuers have
the right to call or prepay obligations with or without call or prepayment
penalties.
F-12
CARDINAL FINANCIAL CORPORTATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 amd 2000
2001
-------------------------------
Fair Amortized
(Dollars in thousands) value cost
------------- ----------------
Maturing within 1 year $ 249 $ 250
After 1 year but within 5 years 9,063 9,139
After 5 years but within 10 years 2,477 2,502
Mortgage-backed securities 22,358 22,530
------------- ----------------
Total $ 34,147 $ 34,421
============= ================
For the years ended December 31, 2001 and 2000, proceeds from sales of
investment securities available-for-sale amounted to $0 and $2.5 million
respectively. There were no gross realized gains in 2001 and 2000 and gross
realized losses amounted to $0 and $32,000, respectively. Gross unrealized
losses in the available-for-sale investment securities at December 31, 2001 and
2000 were $289,000 and $61,000, respectively. Gross unrealized gains at December
31, 2001 and 2000 were $15,000 and $65,000, respectively.
Investment securities available-for-sale that were pledged to secure short-term
borrowings at December 31, 2001 and 2000 had fair values of $1,341,000 and
$2,017,000, respectively. At December 31, 2001 and 2000, investment securities
available-for-sale that were pledged to secure repurchase agreements were
$507,000 and $1,418,000, respectively. Investment securities available-for-sale
that were pledged to secure debtor in possession deposit accounts at December
31, 2001 was $249,000. The Company had no such deposit accounts in 2000.
Other investments at December 31, 2001 include $613,000 of Federal Reserve Bank
stock, $588,000 of Federal Home Loan Bank stock, $63,000 of Community Bankers'
Bank stock and $4,000 in other investments. As members of the Federal Reserve
Bank of Richmond and Federal Home Loan Bank of Atlanta, the Company's banking
subsidiaries are required to hold stock in these entities. Stock membership in
Community Bankers' Bank allows the Company to participate in loan purchases or
sales including participations. These stocks are carried at cost since no active
trading markets exist.
F-13
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(4) Loans Receivable
The loan portfolio at December 31, 2001 and 2000 consists of the
following:
(Dollars in thousands) 2001 2000
------------------ ---------------
Commercial $ 57,665 $ 49,646
Real estate - commercial 87,116 57,083
Real estate - construction 6,397 4,088
Real estate - residential 14,469 17,729
Home equity lines 21,299 14,867
Consumer 13,941 10,665
----------------- --------------
200,887 154,078
Net deferred fees 24 193
----------------- --------------
Loans receivable, net of fees 200,911 154,271
Allowance for loan losses (3,104) (1,900)
----------------- --------------
Loans receivable, net of fees and allowance $ 197,807 $ 152,371
================= ==============
Most of the Company's loans, commitments and standby letters of credit
have been granted to customers located in the Washington, D.C.
metropolitan area. The concentrations of credit by type of loan are set
forth above. As a matter of regulatory restriction, the Company's banking
subsidiaries limit the amount of credit extended to any single borrower
or group of related borrowers.
An analysis of the change in the allowance for loan losses follows:
(Dollars in thousands) 2001 2000
------------------ -----------------
Balance, beginning of year $ 1,900 $ 726
Provision for loan losses 1,201 753
Assumed allowance for loan losses from
acquisition of Heritage -- 421
Loans charged off -- --
Recoveries 3 --
------------------ -----------------
Balance, end of year $ 3,104 $ 1,900
================== =================
As of December 31, 2001 and 2000, the Company had impaired loans of
$361,000 and $585,000, respectively, which were on nonaccrual status.
These impairments had valuation allowances of $193,000 and $104,000 as of
December 31, 2001 and 2000, respectively. The average balance of impaired
loans was $207,000 and $195,000 for 2001 and 2000, respectively. The
Company recorded no interest income on impaired loans. Interest income
that would have been recorded had these loans been performing would have
been $17,000 and $34,000 for 2001 and 2000, respectively.
F-14
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(5) Premises and Equipment
Components of premises and equipment at December 31, 2001 and 2000 were
as follows:
(Dollars in thousands) 2001 2000
---------------- -----------------
Land $ 197 $ 197
Building 789 789
Furniture and equipment 3,834 4,132
Leasehold improvements 2,161 1,604
------------------ -----------------
Total cost 6,981 6,722
Less accumulated depreciation and amortization 1,904 1,063
------------------ -----------------
Premises and equipment, net $ 5,077 $ 5,659
================== =================
Depreciation expense for the years ended December 31, 2001 and 2000 was
$804,000 and $600,000, respectively.
The Company has entered into leases for office space over various terms.
The leases are subject to annual increases as well as allocations of real
estate taxes and certain operating expenses.
Minimum future rental payments under the noncancelable operating leases,
as of December 31, 2001 for each of the next five years and in the
aggregate, are as follows:
Year ending December 31, Amount
------------------
2002 $ 1,204,000
2003 1,240,000
2004 961,000
2005 989,000
2006 931,000
Thereafter 2,437,000
------------------
$ 7,762,000
==================
The total rent expense was $1,251,000 and $965,000 in 2001 and 2000,
respectively.
In 2001, the Company has entered into contracts as sublessor for excess
office space. Future minimum lease payment receivables under
noncancellable leasing arrangements as of December 31, 2001 for each of
the next five years and in the aggregate are as follows:
F-15
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Year ending December 31, Amount
------------------
2002 $ 240,000
2003 247,000
2004 167,000
2005 164,000
2006 169,000
Thereafter 969,000
------------------
$ 1,956,000
==================
The total rent income was $110,000 and $0 in 2001 and 2000, respectively.
(6) Deposits
Deposits consist of the following at December 31, 2001 and 2000:
(Dollars in thousands) 2001 2000
------------------ -----------------
Demand deposits $ 61,739 $ 40,943
Interest checking 45,313 12,069
Money market and statement savings 28,676 25,683
Certificates of deposit 110,296 84,676
------------------ -----------------
$ 246,024 $ 163,371
================== =================
Interest expense by deposit categories is as follows:
(Dollars in thousands) 2001 2000
------------- ----------------
Interest checking $ 370 $ 130
Money market and statement savings 869 685
Certificates of deposit 5,788 3,479
------------- ----------------
$ 7,027 $ 4,294
============= ================
The aggregate amount of time deposits, each with a minimum denomination
of $100,000 was $59,781,000 and $40,459,000 in 2001 and 2000,
respectively.
At December 31, 2001, the scheduled maturities of certificates of deposit
are as follows:
F-16
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Dollars in thousands)
2002 $ 66,026
2003 33,785
2004 5,552
2005 1,635
2006 and thereafter 3,298
-----------------
$ 110,296
=================
(7) Other Borrowed Funds
The Company has obtained and renewed advances from the Federal Home Loan
Bank of Atlanta of $9.8 million and $6.0 million for the years ended
December 31, 2001 and 2000, respectively. As of December 31, 2001 and
2000, the Company had the following advances outstanding:
As of December 31, 2001
Amount
Advance Date Interest Rate Term of Advance Date Due Outstanding
------------------- --------------------- ------------------------- ---------------- ---------------------
3/19/2001 4.68% 12 months 3/19/2002 $ 1,800,000
3/19/2001 4.68% 12 months 3/19/2002 1,000,000
8/06/2001 4.05% 12 months 8/06/2002 3,000,000
8/28/2001 3.89% 12 months 8/28/2002 3,000,000
9/19/2001 3.70% 24 months 9/19/2003 1,000,000
------------------
$ 9,800,000
==================
As of December 31, 2000
Amount
Advance Date Interest Rate Term of Advance Date Due Outstanding
------------------- -------------------- ------------------------- ---------------- ------------------
12/12/2000 6.70% 3 months 3/12/2001 $ 3,000,000
12/26/2000 6.42% 4 months 4/26/2001 3,000,000
------------------
$ 6,000,000
==================
The average balances of short-term borrowings for the years ended
December 31, 2001 and 2000 were $9.0 million and $6.0 million,
respectively, while the maximum amount outstanding at any month-end
during the years ended December 31, 2001 and 2000 was $9.8 million and
$6.0 million, respectively. Total interest expense on borrowings for the
years ended December 31, 2001 and 2000 was $448,000 and $398,000,
respectively.
F-17
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Securities sold under agreements to repurchase, which are classified as
secured borrowings, generally mature within one to four days from the
transaction date. Securities sold under agreements to repurchase are
reflected at the amount of cash received in connection with the
transaction. The Company is required to provide additional collateral
based on the fair value of the underlying securities.
As of December 31, 2001 and 2000, the Company had repurchase agreements
of $24,000 and $1,287,000 at a rate of 0.50% and 5.00%, respectively. The
average balances of the repurchase agreements for 2001 and 2000 was $1.0
million and $929,000, respectively, and the maximum amount outstanding at
any month-end during 2001 and 2000 was $1,556,000 and $3,720,000,
respectively. Interest expense on repurchase agreements for 2001 and 2000
was $25,000 and $48,000, respectively.
(8) Preferred Stock
In connection with the acquisition of Heritage Bancorp, Inc. on September
1, 2000, the Company issued 1,411,268 shares of Series A Preferred
Stock, cumulative convertible. Shares of the Preferred stock outstanding
at December 31, 2001 and 2000 were 1,364,714 and 1,411,268, respectively.
The Series A Preferred Stock has a par value of $1.00 per share and a
liquidation preference of $5.00 per share. It is redeemable by the
Company at any time on or after March 31, 2004 if the Company's common
stock trades at a price above $8.65 for 20 consecutive days at a
redemption price of $5.00 per share. Dividends on the Series A Preferred
Stock are payable quarterly for a cumulative annual dividend of $0.3625
or 7.25% of the $5.00 liquidation amount, before any dividend is paid on
any Cardinal common stock. Holders of Series A Preferred Stock have the
right to convert 1 share of Series A Preferred Stock for 0.75 shares of
Cardinal common stock at any time. Holders of Series A Preferred Stock
have no voting rights except with respect to mergers and similar
transactions that affect the Series A Preferred stock.
(9) Income Taxes
The Company and its subsidiaries file consolidated tax returns on a
calendar-year basis. The Company had no provision for current and
deferred income taxes for the years ended December 31, 2001 and 2000,
respectively.
The provision for income taxes is reconciled to the amount computed by
applying the federal corporate tax rate to income before taxes and is as
follows:
2001 2000
------------------ -----------------
Income tax (benefit) at federal corporate rate $ (4,326,267) $ (1,350,143)
Nondeductible expenses 2,997,973 90,233
Change in valuation allowance 1,328,294 1,259,910
------------------ -----------------
$ -- $ --
================== =================
The tax benefits of temporary differences between the financial reporting
basis and income tax basis of assets and liabilities relate to the
following:
F-18
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
2001 2000
------------------ -----------------
Deferred tax assets:
Bad debts $ 908,942 $ 500,464
Organization and other costs 46,541 66,632
Net operating loss carryforwards 4,482,286 3,552,745
Unrealized (gains) losses on investments available-for-sale 95,441 (1,379)
Other 153,640 1,279
------------- ------------
Total gross deferred assets 5,686,850 4,119,741
Less valuation allowance (5,365,285) (3,940,171)
------------- ------------
Net deferred tax assets 321,565 179,570
------------- ------------
Deferred tax liabilities:
Prepaid expenses (31,076) (35,710)
Depreciation (154,216) (94,084)
Loan origination costs (135,385) (49,776)
Other (888) --
------------- ------------
Total gross deferred tax liabilities (321,565) (179,570)
------------- ------------
Net deferred tax asset $ -- $ --
============= ============
Deferred income taxes reflect temporary differences in the recognition of
revenue and expenses for tax reporting and financial statement purposes,
principally because certain items, such as depreciation and amortization
are recognized in different periods for financial reporting and tax
return purposes. A valuation allowance in the amount of $5,365,000 at
December 31, 2001 and $3,940,000 at December 31, 2000 has been
established for deferred tax assets as realization is dependent upon
generating future taxable income.
The Company has net operating loss carryforwards of approximately $13.1
million at December 31, 2001 which are available to offset future taxable
income. $1.9 million of the net operating loss carryforwards is subject
to annual limitation on utilization. The Company's net operating loss
carryforwards expire as follows: $1.5 million in 2018, $3.6 million in
2019, $5.1 million in 2020, and $2.9 in 2021.
(10) Regulatory Matters
The Company's banking subsidiaries ("the Banks"), as national banks, are
subject to the dividend restrictions set forth by the Comptroller of the
Currency. Under such restrictions, the Banks may not, without the prior
approval of the Comptroller of the Currency, declare dividends in excess
of the sum of the current year's earnings (as defined) plus the retained
earnings (as defined) from the prior two years. At December 31, 2001,
there were no earnings against which dividends could be paid.
F-19
CARDINAL FINANCIAL CORPORATIONAND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31,2001 and 2000
The Banks are required to maintain a minimum average reserve balance with
the Federal Reserve Bank. The average amount of the required reserve was
$2.5 million for 2001. As members of the Federal Reserve Bank system, the
Banks are required to subscribe to shares of $100 par value Federal
Reserve Bank stock equal to 6 percent of the Bank's capital and surplus.
The Banks are required to pay for one-half of the subscription. The
remaining amount is subject to call when deemed necessary by the Board of
Governors of the Federal Reserve.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires the regulators to stratify institutions into five
quality tiers based upon their relative capital strengths and to increase
progressively the degree of regulation over the weaker institutions,
limits the pass through deposit insurance treatment of certain types of
accounts, adopts a "truth in savings" program, calls for the adoption of
risk-based premiums on deposit insurance and requires the Banks to
observe insider credit underwriting products no less strict than those
applied to comparable noninsider transactions.
At December 31, 2001, the Company and its subsidiary banks met all
regulatory capital requirements. The key measures of capital are: (1)
total capital (Tier I capital plus the allowance for loan losses up to
certain limitations) as a percent of total risk-weighted assets, (2) Tier
I capital (as defined) as a percent of total risk-weighted assets (as
defined), and (3) Tier I capital (as defined) as a percent of total
assets (as defined).
As of December 31, 2001 To Be Well
(Dollars in thousands) Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ ----------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----------- ----------- ----------- ------------- ----------
Total capital to risk weighted assets $23,333 10.42% $17,909 * 8.00% $22,387 * 10.00%
Tier I capital to risk weighted assets 20,230 9.04% 8,955 * 4.00% 13,432 * 6.00%
Tier I capital to average assets 20,230 8.57% 10,891 * 4.00% 13,614 * 5.00%
As of December 31, 2000 To Be Well
(Dollars in thousands) Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ ----------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----------- ----------- ----------- ------------- -----------
Total capital to risk weighted assets $36,002 19.94% $14,443 * 8.00% $18,053 * 10.00%
Tier I capital to risk weighted assets 34,102 18.89% 7,221 * 4.00% 10,832 * 6.00%
Tier I capital to average assets 34,102 17.39% 8,282 * 4.00% 10,35 * 5.00%
* Greater than or equal to
(11) Related-Party Transactions
Officers, directors, employees and their related business interests are
loan customers in the ordinary course of business. In management's
opinion, these loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable loans with other
F-20
CARDINAL FINANCIAL CORPORATIONAND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31,2001 and 2000
persons and do not involve more than normal risk of collectibility or
present other unfavorable features.
Analysis of activity for loans to related parties is as follows:
(Dollars in thousands) 2001 2000
------------------ -----------------
Balance, beginning of year $ 3,308 $ 2,876
New loans 1,144 853
Loans paid off or paid down (1,725) (421)
------------------ -----------------
Balance, end of year $ 2,727 $ 3,308
================== =================
(12) Loss Per Common Share
The following is the calculation of basic and diluted loss per common
share. Because the Company has net losses, all stock options issued have
an anti-dilutive effect and, therefore, have been excluded from the loss
per common share calculation.
2001 2000
----------------- ------------------
Net loss $ (12,724,316) $ (3,971,008)
Dividends to preferred shareholders 503,212 170,555
----------------- ------------------
Net loss to common shareholders (13,227,528) (4,141,563)
Weighted average shares for basic and diluted 4,258,087 4,246,346
Basic loss per common share $ (3.11) $ (0.98)
================= ==================
Diluted loss per common share $ (3.11) $ (0.98)
================= ==================
(13) Employee Benefit Plan
The Company established a 401(k) plan in January 1998 for all eligible
employees. The Company began to match a portion of employee contributions
beginning January 1, 1999. The Company's match for December 31, 2001 and
2000 was $118,000 and $109,000, respectively.
(14) Director and Employee Stock Compensation Plan
In 1998, the Company adopted a stock option plan (the "Plan") pursuant to
which the Company may grant stock options to employees and members of its
holding company and subsidiaries' Board of
F-21
CARDINAL FINANCIAL CORPORATIONAND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31,2001 and 2000
Directors. The Company has granted options to purchase up to 368,028 shares of
common stock as of December 31, 2001.
The Company also granted stock awards to an employee. The stock awards vest
ratably over a three year period and are contingent upon continued employment of
the individual and other factors as set forth in the agreement. For the years
ended December 31, 2001 and 2000, the Company recognized $6,000 and $12,000,
respectively, in compensation expense related to the stock awards.
Stock options are granted with an exercise price equal to the stock's fair
market value at the date of grant. Director stock options have 10-year terms and
vest and become fully exercisable immediately. Employee stock options have
10-year terms and vest and become fully exercisable after 3 years.
Stock option activity during the years indicated is as follows:
Weighted
Average
Number of Exercise
Shares Price
------------- --------------
Balance at December 31, 1999 180,801 $ 13.22
Granted 66,886 4.90
Issued at acquisition 95,534 3.56
Exercised (7,259) 2.92
Forfeited (10,750) 6.21
Expired - -
------------- --------------
Balance at December 31, 2000 325,212 $ 5.74
Granted 130,740 4.07
Exercised (2,809) 3.75
Forfeited (85,115) 5.77
Expired - -
------------- --------------
Balance at December 31, 2001 368,028 $ 5.23
============= ==============
At December 31, 2001, the range of exercise prices and weighted-average
remaining contractual life of outstanding options were $2.41 - $10.00 and 7.7
years, respectively. At December 31, 2000, the range of exercise prices and
weighted-average remaining contractual life of outstanding options were $2.41 -
$7.50 and 8.4 years, respectively. As of December 31, 2001 and 2000, the
outstanding options exercisable were 171,793 and 133,075, respectively. The
weighted average exercise price for the outstanding options exercisable as of
December 31, 2001 and 2000 are $8.76 and $4.63, respectively.
Information pertaining to options outstanding at December 31, 2001 is as
follows:
F-22
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Comsolidated Financial Statements
December 31, 2001 and 2000
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Weighted Average Weighted Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
----------------------- ------------- -------------------------------- -------------------------------
$2.41 - $3.58 91,701 7.4 years $ 3.27 91,701 $ 3.27
$4.22 - $5.50 125,376 8.5 years 4.77 39,842 4.25
$6.38 - $7.50 150,201 7.2 years 6.82 39,500 6.50
$10.00 - $10.00 750 6.9 years 10.00 750 10.00
------------ ----------------------------- ----------------------------
Outstanding at year end 368,028 7.7 years $ 5.46 171,793 $ 4.48
============ ======= ============================
At December 31, 2001 and 2000, additional shares available for grant under
the Plan were 246,904 and 74,788, respectively. The per share
weighted-average fair value of stock options granted during 2001 and 2000
was $2.04 and $2.23, respectively, on the date of grant using the Black
Scholes option-pricing model (using an expected volatility over the
expected life of the options of 36.3 percent and 33.5 percent,
respectively). As of December 31, 2001 the weighted-average assumptions
were as follows: expected dividend yield 0.00 percent, risk-free interest
rate of 4.90 percent, and an expected life of 10 years. As of December 31,
2000, the weighted-average assumptions were as follows: expected dividend
yield 0.00 percent, risk-free interest rate of 6.54 percent, and an
expected life of 10 years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock
options. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts
indicated below:
2001 2000
-------------- --------------
Net loss:
As reported $ (12,724,316) $ (3,971,000)
Pro forma (12,862,316) (4,091,000)
Loss per share:
As reported (3.11) (0.98)
Pro forma (3.14) (1.00)
F-23
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Comsolidated Financial Statements
December 31, 2001 and 2000
(15) Segment Reporting
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 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.
Information about reportable segments, and reconciliation of such
information to the consolidated financial statements as of and for the
years ended December 31, 2001 and 2000 follows:
Segment Reporting - December 31, 2001
Commercial Investment Intersegment
Banking Advisory Other Elimination Consolidated
-------------- ------------- ------------ -------------- --------------
Net interest income $ 9,050,676 $ - $ 25,913 $ - $ 9,076,589
Provision for loan losses 1,201,406 - - - 1,201,406
Non-interest income 1,210,543 1,946,583 109,533 - 3,266,659
Non-interest expense 19,221,032 2,033,478 2,611,648 - 23,866,158
------------ ------------ ------------ ------------ ------------
Net loss $(10,161,219) $ (86,895) $ (2,476,202) $ - $(12,724,316)
============ ============ ============ ============ ============
Total assets 277,930,308 419,912 23,227,616 (21,994,225) 279,583,611
Segment Reporting - December 31, 2000
Commercial Investment Intersegment
Banking Advisory Other Elimination Consolidated
-------------- ------------- ------------ -------------- --------------
Net interest income $ 5,913,862 $ - $ 496,059 $ - $ 6,409,921
Provision for loan losses 752,755 - - - 752,755
Non-interest income 573,754 1,515,530 12,210 (3,553) 2,097,941
Non-interest expense 6,694,546 1,990,297 3,044,825 (3,553) 11,726,115
------------ ------------ ------------ ------------ ------------
Net loss $ (959,685) $ (474,767) $(2,536,556) $ - $ (3,971,008)
============ ============ ============ ============ ============
Total assets $193,641,120 $ 175,842 $35,013,763 $(21,782,385) $207,048,340
The Company does not have operating segments other than those reported.
Parent Company financial information is included in the Other category and
represents the overhead function rather than an operating segment.
(16) Financial Instruments with Off Balance Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include
F-24
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
commitments to extend credit and standby letters of credit and financial
guarantees. Commitments to extend credit are agreements to lend to a
customer so long as there is no violation of any condition established in
the contract. Commitments usually have fixed expiration dates up to one
year or other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of the contractual obligations by a customer
to a third party. The majority of these guarantees extend until
satisfactory completion of the customer's contractual obligations. All
standby letters of credit outstanding at December 31, 2001 are
collateralized.
Those instruments represent obligations of the Company to extend credit or
guarantee borrowings, therefore, they are not recorded on the consolidated
statements of financial condition. The rates and terms of these instruments
are competitive with others in the market in which the Company operates.
Almost all of these instruments as of December 31, 2001 have floating
rates, therefore significantly mitigating the market risk.
Those instruments may involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statements of financial condition. Credit risk is defined as the
possibility of sustaining a loss because the other parties to a financial
instrument fail to perform in accordance with the terms of the contract.
The Company's maximum exposure to credit loss under standby letters of
credit and commitments to extend credit is represented by the contractual
amounts of those instruments.
(Dollars in thousands)
Financial instruments whose contract amounts represent potential
credit risk: 2001 2000
---------- -----------
Commitments to extend credit $ 56,382 $ 45,739
Standby letters of credit 3,168 3,215
========== ===========
The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. The
Company evaluates each customer's creditworthiness on a case-by-case basis
and requires collateral to support financial instruments when deemed
necessary. The amount of collateral obtained upon extension of credit is
based on management's evaluation of the counterparty. Collateral held
varies but may include deposits held by the Company, marketable securities,
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
F-25
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(17) Disclosures of Fair Value of Financial Instruments
The assumptions used and the estimates disclosed represent management's
best judgment of appropriate valuation methods. These estimates are based
on pertinent information available to management as of December 31, 2001.
In certain cases, fair values are not subject to precise quantification
or verification and may change as economic and market factors, and
management's evaluation of those factors change.
Although management uses its best judgment in estimating the fair value
of these financial instruments, there are inherent limitations in any
estimation technique. Therefore, these fair value estimates are not
necessarily indicative of the amounts that the Company would realize in a
market transaction. Because of the wide range of valuation techniques and
the numerous estimates which must be made, it may be difficult to make
reasonable comparisons of the Company's fair value information to that of
other financial institutions. It is important that the many uncertainties
discussed above be considered when using the estimated fair value
disclosures and that because of these uncertainties, the aggregate fair
value amount should in no way be construed as representative of the
underlying value of the Company.
Fair Value of Financial Instruments
The following summarizes the significant methodologies and assumptions
used in estimating the fair values presented in the accompanying table.
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents is used as a reasonable
estimate of fair value.
Investment Securities and Other Investments
Fair values for investment securities are based on quoted market prices
or prices quoted for similar financial instruments. Fair value for other
investments is estimated as their cost since no active trading markets
exist.
Loans Held for Sale
Loans held for sale are valued based on quoted market prices from
secondary market investors with commitments to purchase the loans.
Loans Receivable
In order to determine the fair market value for loans receivable, the
loan portfolio was segmented based on loan type, credit quality and
maturities. For certain variable rate loans with no significant credit
concerns and frequent repricings, estimated fair values are based on
current carrying amounts. The fair values of other loans are estimated
using discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality.
F-26
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Deposits
The fair values disclosed for demand deposits are, by definition, equal
to the amount payable on demand at the reporting date (that is, their
carrying amounts.) The carrying amounts of variable rate, fixed-term
money market accounts and certificates of deposit (CDs) approximate their
fair value at the reporting date. Fair values for fixed-rate CDs are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
Borrowings
The fair value of borrowings is estimated using a discounted cash flow
calculation that applies an interest rate currently available with
similar terms.
Commitments
The fair value of these financial instruments is based on the credit
quality and relationship, fees, interest rates, probability of funding,
compensating balance and other convenants or requirements. These
commitments generally have fixed expiration dates expiring within one
year. Many commitments are expected to, and typically do, expire without
being drawn upon. The rates and terms of these instruments are
competitive with others in the market in which the Company operates. The
carrying amounts are reasonable estimates of the fair value of these
financial instruments. The carrying amounts of these instruments are zero
at December 31, 2001 and 2000.
Accrued Interest
The carrying amounts of accrued interest approximate their fair values.
Fair value of financial instruments as of December 31, 2001 and 2000:
F-27
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
December 31, 2001
--------------------------------
Carrying Estimated
(Dollars in thousands) Amount Fair Value
------------ -------------
Financial assets:
Cash and cash equivalents $ 34,459 $ 34,459
Investment securities and other investments 35,415 35,415
Loans held for sale 4,732 4,760
Loans receivable 197,807 200,143
Accrued interest receivable 1,090 1,090
Financial liabilities:
Demand deposits $ 61,739 $ 61,739
Interest checking 45,313 45,313
Money market and statement savings 28,676 28,676
Certificates of deposit 110,296 114,629
Borrowings 9,824 9,824
Accrued interest payable 12 12
December 31, 2000
--------------------------------
Carrying Estimated
(Dollars in thousands) Amount Fair Value
------------ -------------
Financial assets:
Cash and cash equivalents $ 29,488 $ 29,488
Investment securities and other investments 8,448 8,448
Loans receivable 152,371 152,462
Accrued interest receivable 1,059 1,059
Financial liabilities:
Demand deposits $ 40,943 $ 40,943
Interest checking 12,069 12,069
Money market and statement savings 25,683 25,683
Certificates of deposit 84,676 85,535
Borrowings 7,287 7,287
Accrued interest payable 78 78
(18) Parent Company -Only Financial Statements
The Cardinal Financial Corporation (parent company-only) condensed
financial statements are as follows:
F-28
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
PARENT COMPANY ONLY CONDENSED STATEMENTS OF CONDITION
December 31, 2001 and 2000
(Dollars in thousands)
Assets 2001 2000
------ ------
Cash and cash equivalents $ 2,584 $ 3,478
Other investments 67 84
Investment in subsidiaries 17,799 19,341
Premises and equipment, net 1,986 2,365
Goodwill and other intangibles 668 9,576
Other assets 124 169
------ ------
Total assets $ 23,228 $ 35,013
====== ======
Liabilities and Shareholders' Equity
Total liabilities $ 2,604 901
Total shareholders' equity $ 20,624 $ 34,112
------ ------
Total liabilities and shareholders
equity $ 23,228 $ 35,013
====== ======
F-29
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
PARENT COMPANY ONLY CONDENSED STATEMENTS OF OPERATIONS
Years Ended December 31, 2001 and 2000
2001 2000
----------- ----------
Income:
Interest income $ 25,913 $ 496,059
Other income 109,533 12,210
----------- ----------
Total income 135,446 508,269
Expense - General and administrative 10,875,148 3,044,825
----------- ----------
Net loss before income taxes and equity in
undistributed earnings of subsidiaries (10,739,702) (2,536,556)
Provision for income taxes - -
Equity in undistributed earnings of subsidiaries (1,984,614) (1,434,452)
----------- ----------
Net loss $ (12,724,316) $(3,971,008)
=========== ==========
F-30
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
PARENT COMPANY ONLY CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001 and 2000
(Dollars in thousands)
2001 2000
-------- --------
Cash flows from operating activities:
Net loss $(12,724) $ (3,971)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Equity in undistributed earnings of subsidiaries 1,984 1,434
Depreciation and amortization and write down of goodwill 9,129 465
Increase in other assets and liabilities 1,754 544
-------- --------
Net cash (used in) provided by operating activities 143 (1,528)
-------- --------
Cash flows from investing activities:
Capital infusions in subsidiaries (720) (750)
Dividends from subsidiary -- 3,000
Net change in premises and equipment 158 (62)
Proceeds from sale and redemptions of securities -- 2,468
Proceeds from sale of other investments 17 --
Cash paid in acquisition -- (7,726)
-------- --------
Net cash used in investing activities (545) (3,070)
-------- --------
Cash flows from financing activities:
Dividends declared on preferred stock (503) (170)
Stock options exercised 11 22
-------- --------
Net cash used in financing activities (492) (148)
-------- --------
Net decrease in cash and cash equivalents (894) (4,746)
Cash and cash equivalents at beginning of year 3,478 8,224
-------- --------
Cash and cash equivalents at end of year $ 2,584 $ 3,478
======== ========
(19) Goodwill Impairment
In 2001, the Company substantially eliminated the goodwill attributable to
the purchase of Heritage Bancorp, Inc. The initial investment in Heritage,
which was subsequently renamed Cardinal Bank -
F-31
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Potomac, resulted in the Company recording $9.7 million of goodwill at
the time of the acquisition. In the fourth quarter of 2001, an
evaluation of current year losses and expectations of additional future
losses indicated a potential impairment in the Company's investment in
Heritage. In compliance with SFAS 121, the Company wrote down goodwill
by $8.3 million based upon a valuation obtained from an independent
third party consultant.
(20) Restructuring Costs
In 2001, the Company announced plans to restructure and merge all of
its banking subsidiaries into one central lead bank under the holding
company. This decision was made in order to reduce the costs associated
with operating multiple banking subsidiaries. In connection with the
restructuring, the Company recorded $884,000 of restructuring costs.
Included in the total are severance and other employee related costs
including contract buyouts, write-downs of leasehold improvements
associated with the subleasing of redundant property, liabilities
recorded related to the subleased property, and merger costs related to
data processing conversions with outside vendors.
Expenses
Total Paid or Liability at
Restructuring Assets December 31,
Costs Written Off 2001
--------------------------------------------
Employee termination benefits and contract buyouts $ 395,000 214,000 181,000
Leasehold write-downs 251,000 251,000 -
Merger expenses 165,000 51,000 114,000
Sublease liability 73,000 - 73,000
--------------------------------------------
$ 884,000 516,000 368,000
============================================
(21) Other Operating Expenses
The following shows the composition of operating expenses for the years
ended December 31, 2001 and 2000:
2001 2000
------------- ------------
Data processing $ 957,079 $ 560,825
Stationary and supplies 305,878 344,623
Brokerage clearing 370,397 344,978
Advertising and marketing 367,569 241,225
Telecommunications 325,183 253,826
Other taxes 269,047 220,902
Travel and entertainment 163,967 139,212
Bank operations 875,390 165,058
Premises and equipment 246,851 142,137
Miscellaneous 464,640 577,513
-------------- -------------
$ 4,346,001 $ 2,990,299
============== =============
F-32
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 13.1-697 of the Virginia Stock Corporation Act provides that a
corporation may indemnify an individual made a party to a proceeding because he
is or was a director against liability incurred in the proceeding if he
conducted himself in good faith; and he believed: (a) in the case of conduct in
his official capacity with the corporation, that his conduct was in its best
interests; and (b) in all other cases, that his conduct was at least not opposed
to its best interests; and in the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful. The termination of a
proceeding by judgment, order, settlement or conviction is not, of itself,
determinative that the director did not meet the standard of conduct described
in this section. A Virginia corporation may not, however, indemnify a director
in connection with a proceeding by or in the right of the corporation in which
the director was adjudged liable to the corporation or in connection with any
other proceeding charging improper personal benefit to him, whether or not
involving action in his official capacity, in which he was adjudged liable on
the basis that personal benefit was improperly received by him. Indemnification
permitted under such section in connection with a proceeding by or in the right
of the corporation is limited to reasonable expenses incurred in connection with
the proceeding.
As permitted by the Virginia Stock Corporation Act, our Articles of
Incorporation contain provisions that permit us to indemnify our directors and
officers to the full extent permitted by Virginia law and eliminate the personal
liability of our directors and officers for monetary damages to us or our
shareholders for breach of their fiduciary duties, except to the extent that
Virginia law prohibits indemnification or elimination of liability. These
provisions do not limit or eliminate the rights of us or any shareholder to seek
an injunction or any other non-monetary relief in the event of a breach of a
director's or officer's fiduciary duty. In addition, these provisions apply only
to claims against a director or officer arising out of the director's role as a
director or officer and do not relieve a director or officer from liability if
the director engaged in willful misconduct or a knowing violation of the
criminal law or any federal or state securities law.
Our directors and officers are covered by insurance policies indemnifying
against certain liabilities, including certain liabilities arising under the
Securities Act that might be incurred by them in such capacities and against
which they may not be indemnified by us.
The form of underwriting agreement filed as Exhibit 1 contains certain
indemnification provisions applicable to the offerings.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
SEC registration fee ................................................. $ 1,795
NASD Corporate Financing Department Fee .............................. $ 2,450
Printing and engraving expenses ...................................... $ 70,000
Legal fees and expenses .............................................. $ 110,000
Accounting fees and expenses ......................................... $ 70,000
Blue Sky fees and expenses (including related legal fees) ............ $ 30,000
Transfer agent's fees and expenses ................................... $ 3,000
Miscellaneous ........................................................ $ 12,755
---------
Total ................................................................ $ 300,000
* All expenses other than the SEC and NASD fees are estimates.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Under a Registration Statement on Form S-4 filed on June 20, 2000, as amended
(Registration No. 333-38380), we issued shares of our 7.25% Cumulative
Convertible Preferred Stock. The Series A Preferred is convertible for no
additional consideration into our common shares. During 2001 46,859 shares of
our Series A Preferred Stock were converted into 35,234 of our common shares as
described below:
(a) On March 23, 2001, Cynthia Ottaviani converted, for no additional
consideration, 22 shares of our Series A Preferred Stock into 17 of our common
shares; and
(b) On December 11, 2001, 46,837 shares of our Series A Preferred Stock held in
the street name "CEDE & Co." were converted, for no additional consideration,
into 35,217 of our common shares.
The issuance of such common shares was registered under the Form S-4
Registration Statement referred to above or is exempt under Section 3(a)(9) or
Section 4(2) of the Securities Act of 1933, as amended.
II-2
ITEM 27. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1 Form of Underwriting Agreement.
1.2 Form of Escrow Agreement.
3.1 Articles of Incorporation of Cardinal Financial Corporation.
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.
3.3 Bylaws of Cardinal Financial Corporation and amendments thereto
4.1 Form of Common Stock Certificate.
4.2 Form of Subscription Agreement.
4.3 Form of Stock Registration Form.
5 Opinion of Squire, Sanders & Dempsey L.L.P.
10.1 Employment Agreement, dated as of February 12, 2002, between Cardinal
Financial Corporation and Bernard H. Clineburg.
10.2 Executive Employment Agreement, dated as of February 12, 2002, between
Cardinal Financial Corporation and Carl E. Dodson.
10.3 Employment Agreement, dated as of August 27, 2001, between Cardinal
Financial Corporation and Thomas C. Kane.
10.4 Executive Employment Agreement, dated as of February 12, 2002 between
Cardinal Financial Corporation and F. Kevin Reynolds.
10.5 Executive Employment Agreement, dated as of February 12, 2002, between
Cardinal Financial Corporation and Christopher W. Bergstrom.
10.6 Executive Employment Agreement, dated as of February 12, 2002, between
Cardinal Financial Corporation and Janet A. Valentine.
10.7 Cardinal Financial Corporation 1999 Stock Option Plan, as amended.
11 Statement re: computation of per share loss.
21 Subsidiaries of the registrant.
23.1 Consent of Squire, Sanders & Dempsey L.L.P. (included in Exhibit 5).
23.2 Consent of KPMG LLP.
24 Powers of Attorney.
II-3
ITEM 28. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under Item 24 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(b) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
provided, however, that paragraphs 1(i) and 1(ii) do not apply if the
registration statement is on Form S-3 or Form S-8 and the information
required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to
the Commission by the registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(4) With respect to the subscription offer registered by this Registration
Statement, to supplement the prospectus for the public offering
registered by this Registration Statement, after the end of the
subscription period, to include the results of the subscription offer,
the transactions by the underwriters during the subscription period,
the amount of unsubscribed securities that the underwriters will
purchase and the terms of any later reoffering. If the underwriters
make any public offering of the securities on terms different from
those on the cover page of such prospectus, the undersigned registrant
will file a post-effective amendment to state the terms of such
offering.
II-4
(5) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fairfax, Commonwealth of Virginia, on May 8, 2002.
CARDINAL FINANCIAL CORPORATION
By:/s/
-----------------------------------------------------
Name: Janet A. Valentine
Title: Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
In accordance with the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities indicated on May 8, 2002.
Signatures Title
- ---------- -----
/s/ President and Chief Executive Officer, Director
-----------------------------------------
Name: Bernard H. Clineburg
/s/ Senior Vice President and Chief Financial Officer
----------------------------------------- (Principal Financial and Accounting Officer)
Name: Janet A. Valentine
* Director
- --------------------------------------------
Name: Robert M. Barlow
* Director
- -------------------------------------------
Name: Wayne W. Broadwater
* Director
- -------------------------------------------
Name: Nancy K. Falck
* Director
- -------------------------------------------
Name: Jones V. Isaac
* Director
- -------------------------------------------
Name: J. Hamilton Lambert
* Director
- -------------------------------------------
Name: Howard E. Lieding
II-6
*
- ------------------------------------------- Director
Name: James D. Russo
*
- ------------------------------------------- Director
Name: John H. Rust, Jr.
*
- ------------------------------------------- Director
Name: George P. Shafran
*
- ------------------------------------------- Director
Name: Kevin B. Tighe
*By: /s/
-----------------------------------
Janet A. Valentine,
Attorney-in-Fact
- ------------------------
*Powers of attorney authorizing Bernard H. Clineburg, Carl
Dodson, or Janet Valentine to sign this Registration Statement on behalf of
certain Directors of the registrant have been filed with the Securities and
Exchange Commission.
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