U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
__X__ Annual Report under Section 13 or 15(d) of the Securities Exchange Act
1934 (Fee required). For the fiscal year ended December 31, 1996.
or
_____ Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required)
For the transition period from _____ to _____
Commission file No. _0-28780_
Cardinal Bankshares Corporation
(Name of small business issuer in its charter)
Virginia 54-1804471
(State or other jurisdiction (IRS Employer
of incorporation or organization Identification No.)
101 Jacksonville Circle, Floyd, Virginia 24091
(Address of principal executive offices)
(540) 745-4191
Issuer's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $10.00 per share
________________________________________
Title of Class
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for past 90 days.
Yes__X__ No_____
Check if there is no disclosure of delinquent filers in response to
Item 405 of regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of the Form
10-KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $10,362,000
The aggregate market value of the voting stock as of March 26, 1997,
held by non-affiliates of the registrant computed by reference to the price
at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within the last 60 days was $18,977,895.
465,536 shares of the Issuer's common stock were issued and outstanding
as of March 26, 1997.
Transitional Small Business Disclosure Format. (Check one):
Yes_____ No__X__
DOCUMENTS INCORPORATED BY REFERENCE
The annual report to security holders for fiscal year ended December 31, 1996
is incorporated by reference into Form 10-KSB Part II, Items 7 and 8, and
Part III, Item 13. The issuer's Proxy Statement dated March 31, 1997 is
incorporated by reference into Form 10-KSB Part III, Items 9, 10, 11, and 12.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
________________________________
(A) BUSINESS DEVELOPMENT
Cardinal Bankshares Corporation (the Company) was incorporated as a
Virginia corporation on March 12, 1996 to acquire the stock of The
Bank of Floyd (the Bank). The Bank was acquired by the Company on
June 30, 1996.
The Bank was organized as a state chartered bank on February 24, 1951
through the consummation of a plan of consolidation between two state
chartered community banks then operating in Floyd County, Virginia.
The Bank and its wholly-owned subsidiary, FBC, Inc., are incorporated
and operate under the laws of the Commonwealth of Virginia. As a state
chartered Federal Reserve member, the Bank is subject to regulation by
the Virginia Bureau of Financial Institutions and the Federal Reserve.
FBC, Inc.'s assets and operations consist primarily of a minority
interest in a title insurance company.
(B) DESCRIPTION OF THE BUSINESS
The principal business of the Company and Bank is to provide compre-
hensive individual and corporate banking services through its main
office in Floyd, Virginia, and its branch in Roanoke, Virginia.
Effective April 6, 1994, the Bank acquired a 7-1/2% interest in Virginia
Title Center, LLC (a title insurance company) through its acquisition
by FBC, Inc. (a wholly owned subsidiary of the Bank). FBC, Inc. has no
significant assets or operations other than its interest in Virginia Title
Center, LLC.
(1) SERVICES
The Bank is a full service retail commercial bank offering a wide range
of services, including demand and time deposits as well as installment,
mortgage and other consumer lending services. The Bank makes seasonal
and term commercial loans, both alone and in conjunction with other
banks or governmental agencies.
(2) COMPETITIVE CONDITIONS
The banking business is highly competitive. The Company competes as a
financial intermediary with other commercial banks, savings and loan
associations, credit unions and money market mutual funds operating in
its trade area and elsewhere. As of December 31, 1996, there were two
commercial banks (one of which is the Bank) operating a total of two
offices in Floyd County, Virginia. The competing institution is not
locally owned.
Floyd County generates approximately 70% of the Bank's total deposits.
In the other parts of the Bank's trade area (the Virginia Counties of
Roanoke and Montgomery and the City of Roanoke, Virginia), there are a
number of locally owned community banks, statewide banking organizations,
and affiliate banks of southeast regional bank holding companies in
operation.
(3) MATERIAL CUSTOMERS
Deposits are derived from a broad base of customers in its trade area. No
material portion of deposits have been obtained from a single person or a
few persons (including Federal, State, and local governments and agencies
thereunder), the loss of which would have a materially adverse effect on
the business of the Bank.
The majority of loans, commitments to extend credit, and standby letters
of credit have been granted to customers in the Company's market area.
The majority of such customers are depositors. The Company generally
does not extend credit to any single borrower or group of related
borrowers in excess of approximately $1,500,000. Although the Company
has a reasonably diversified loan portfolio, it has a loan concentration
relating to customers who are motel and bed-and-breakfast owners and
operators. Total loans and loan commitments to this industrial group
amounted to approximately $5,600,000 and $4,500,000 at December 31, 1996
and 1995, respectively.
<page2>
(B) DESCRIPTION OF BUSINESS, CONTINUED
(4) RIGHTS
No patents, trademarks, licenses, franchises or concessions held are of
material significance to the Company.
(5) NEW SERVICES
The Company has expended no material dollars on research activities
relating to new lines of business in the last two years and has not
announced any new line of business which will require an investment
of material assets.
(6) ENVIRONMENTAL LAWS
Compliance with Federal, State, or Local provisions regulating the
discharge of materials into the environment has not had, nor is it
expected to have in the future, a material effect upon the Company's
capital expenditures, earnings or competitive position.
(7) EMPLOYEES
The Bank had 17 officers, 31 full-time employees and four part-time
employees as of December 31, 1996. Employee relations have been good.
ITEM 2. DESCRIPTION OF PROPERTY
________________________________
The present headquarters of the Company consists of a three-story brick
building, with approximately 21,200 square feet of floor space located
at 101 Jacksonville Circle, Floyd, Virginia. The Bank also operates a
branch office in Roanoke, Virginia. All facilities are owned by the
Bank and each has drive-up facilities.
The Bank also owns a three-story brick building adjacent to its main
office which serves primarily as community meeting rooms and off-site
data backup storage.
<page3>
ITEM 3. LEGAL PROCEEDINGS
__________________________
Neither the Company nor the Bank or its subsidiary are a party to, nor
is any of their property the subject of, any material pending legal
proceedings incidental to the business of the Company or the Bank or its
subsidiary.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
___________________________________________________________
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
_________________________________________________________________
(A) No active public market presently exists for the common stock of the
Bank. Transfers of the common stock occur from time to time, but
management has no direct access to the prices realized in those
trades. Based on information available to the Bank concerning such
trading, the following table shows the trading ranges of the Common
Stock for the previous five years. The table has been adjusted for
the effects of a four for one stock split in 1995.
Year High Low
____ ______ ______
1996 $48.00 $39.00
1995 $39.00 $23.75
1994 $23.75 $22.50
1993 $23.00 $22.50
1992 $23.75 $22.50
(B) The approximate number of holders of the Bank's 465,536 Common Stock
Securities as of December 31, 1996, is 505.
(C) Dividends are paid yearly on December 31. Dividends paid for 1996
were $1.03 and 1995 were $0.97 per share (adjusted for the effects
of a four for one stock split in 1995) owned. The Company's ability
to declare and pay dividends in the future will be dependent upon its
consolidated income and fiscal condition, tax considerations, and
general business condition. Subject to these considerations,
dividends may be declared only in the discretion of the Board of
Directors. The Company presently expects that dividends will continue
to be paid in the future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
____________________________________________
The information required under this item is incorporated by reference to
the Company's Annual Report to Stockholders, Exhibit 13.1, pages 23-40
and inside front cover.
ITEM 7. FINANCIAL STATEMENTS
_____________________________
The following consolidated financial statements of the registrant and the
independent Auditor's Report set forth on pages 2 through 22 of the
Company's 1996 Annual Report to Stockholders are incorporated herein by
reference:
(1) Independent Auditor's Report
(2) Consolidated Balance Sheets as of December 31, 1996 and 1995
(3) Consolidated Statements of Income for the years ended December
31, 1996, 1995, and 1994
(4) Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995, and 1994
(5) Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994
(6) Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
________________________________________________________________________
FINANCIAL DISCLOSURE
____________________
NONE
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
______________________________________________________________________
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
_________________________________________________
The Executive Officer of the Company as of December 31, 1996 is listed
on page 3 of the Company's Proxy statement dated March 31, 1997 and is
incorporated herein by reference. Information with respect to the
directors of the Company is set out under the caption "Election of
Directors" on page 2 of The Company's Proxy statement dated March 31,
1997, which information is incorporated herein by reference.
The disclosure required by item 405 of regulation S-K is set out under
the caption "Beneficial Ownership Reporting Compliance" section 16(a)
on page 5 of the Company's Proxy Statement dated March 31, 1997, which
information is incorporated by reference.
<page5>
ITEM 10. EXECUTIVE COMPENSATION
________________________________
The information set forth under "Executive Compensation" and "Directors
Meetings, Committees and Fees" on page 4 of the Company's Proxy State-
ment dated March 31, 1997 is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
________________________________________________________________________
The information set forth under "Ownership of Common Stock" on pages
3, 4 and 5 of the Company's Proxy Statement dated March 31, 1997 is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
________________________________________________________
The information contained under "Certain Transactions" on page 5 of the
Company's Proxy Statement dated March 31, 1997 is incorporated herein by
reference.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
__________________________________________
(a) The following documents are filed as part of the report:
1996 Annual Report
To Stockholders Pages(s)*
_________________________
1. Financial Statements:
____________________
Independent Auditors' Report 2
Consolidated Balance Sheets
December 31, 1996 and 1995 3
Consolidated Statements of Income
Years ended December 31, 1996,
1995, and 1994 4
Consolidated Statements of Stock-
holders' Equity-Years ended
December 31, 1996, 1995, and 1994 5
Consolidated Statements of Cash
Flows-Years ended December 31,
1996, 1995, and 1994 6
Notes to Consolidated Financial
Statements 7 - 22
*Incorporated by reference from the indicated pages of the 1996 Annual Report
to Stockholders
<page6>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K, CONTINUED
_____________________________________________________
2. Financial Statement Schedules:
_____________________________
All schedules are omitted as the
required information is inapplicable
or the information is presented in
the Consolidated Financial Statements
or related notes.
3. Exhibits
________
The exhibits filed as part of this
report and exhibits incorporated
herein by reference to other
documents are listed in the Index
to Exhibits to this Annual Report
on Form 10-KSB.
REPORTS ON FORM 8-K
___________________
None.
EXHIBITS
________
See Item 13(a)3 above.
FINANCIAL STATEMENT SCHEDULES
_____________________________
See Item 13(a)2 above.
<page7>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CARDINAL BANKSHARES CORPORATION
Date: March 26, 1997 By: s/ Ronald Leon Moore
____________________
Ronald Leon Moore
President and CEO
In accordance with the Exchange Act, this report has to be signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
_________ _____ ____
Director, President and
Chief Executive Officer
(principal financial and
s/Ronald Leon Moore accounting officer). 3/26/97
___________________
Ronald Leon Moore
s/K. Venson Bolt Director 3/26/97
________________
K. Venson Bolt
s/J. H. Conduff Director 3/26/97
_______________
J. H. Conduff
s/W. R. Gardner, Jr. Director 3/26/97
____________________
W. R. Gardner, Jr.
s/C. W. Harman Director 3/26/97
______________
C. W. Harman
s/Kevin D. Mitchell Director 3/26/97
___________________
Kevin D. Mitchell
s/Dorsey H. Thompson Director 3/26/97
____________________
Dorsey H. Thompson
s/J. T. Williams, Jr. Director 3/26/97
_____________________
J. T. Williams, Jr.
<page8>
INDEX TO EXHIBITS
PAGE NO. IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM
___________ ___________ _________________
13.1 1996 Annual Report to Stock-
holders (Such Report, except
to the extent incorporated
herein by reference, is being
furnished for the information
of the Commission only and is
not deemed to be filed as part
of this Report on Form 10-KSB). ---
3.1 Cardinal Bankshares Corporation, Incorporated by
Articles of Incorporation reference to the
Company's Registration
on Form 8-A, filed
August 16, 1996
3.2 Cardinal Bankshares Corporation
by-laws ---
21.1 Subsidiaries of Cardinal
Bankshares Corporation ---
27.1 Financial Data Schedule ---
<page9>
FINANCIAL HIGHLIGHTS SUMMARY1
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
________ ________ ________ ________ ________
SUMMARY OF OPERATIONS
<S> <C> <C> <C> <C> <C>
Interest income $ 10,289 $ 10,003 $ 8,724 $ 7,975 $ 7,905
Interest expense 5,307 5,060 3,887 3,609 4,116
_________ ________ ________ ________ ________
Net interest income 4,982 4,943 4,837 4,366 3,789
Provision for loan
losses 325 136 255 300 845
Other income 343 225 233 169 250
Other expense 2,823 3,088 2,811 2,570 2,223
Income taxes 594 548 564 447 123
_________ ________ ________ ________ ________
Net income $ 1,583 $ 1,396 $ 1,440 $ 1,218 $ 848
PER SHARE DATA2
Net income $ 3.40 $ 3.00 $ 3.09 $ 2.62 $ 1.82
Cash dividend
declared 1.03 .97 .95 .90 .875
Book value 31.22 29.28 25.95 24.78 22.76
YEAR-END BALANCE SHEET SUMMARY
Loans, net $ 85,372 $ 78,630 $ 79,635 $ 73,187 $ 65,731
Securities 43,722 43,998 31,449 34,752 25,690
Total assets 136,422 130,901 122,097 119,598 105,710
Deposits 118,424 116,537 109,299 107,313 94,562
Stockholder's equity 14,535 13,631 12,081 11,537 10,597
Interest earning
assets $ 130,458 $125,121 $115,872 $112,881 $ 98,427
Interest bearing
liabilities 108,639 105,669 98,394 96,283 84,708
SELECTED RATIOS
Return on average
assets 1.2% 1.1% 1.2% 1.1% .8%
Return on average
equity 11.6% 10.7% 12.7% 10.9% 8.0%
Dividends declared as
percent of net
income 30.3% 32.4% 29.3% 34.4% 48.1%
_______________________
1 In thousands of dollars, except per share data.
2 Adjusted for the effects of a four for one stock split
in 1995.
</TABLE>
<page inside front cover>
1996 ANNUAL REPORT
________________________________________________________________________________
TABLE OF CONTENTS
Letter to Stockholders......................................................1
Independent Auditor's Report................................................2
Consolidated Balance Sheets.................................................3
Consolidated Statements of Income...........................................4
Consolidated Statements of Changes in Stockholders' Equity..................5
Consolidated Statements of Cash Flows.......................................6
Notes to Consolidated Financial Statements..................................7
Management's Discussion of Financial Condition and Results of Operations...23
Directors and Officers.....................................................42
Staff......................................................................43
Stockholder Information.....................................Inside Back Cover
<PAGE>
CARDINAL BANKSHARES CORPORATION
POST OFFICE BOX 215
FLOYD, VIRGINIA 24091
Dear Shareholders:
We are pleased to present our first financial report on Cardinal Bankshares
Corporation. Our financial figures are audited and certified by our accounting
firm of Larrowe, Cardwell & Company, L.C.
Nineteen ninety six was a strong and record earnings year. After tax income
amounted to $1,582,920.00, an increase of $187,340.00 over 1995 earnings of
$1,395,580.00.
Net income per share increased from $3.00 in 1995 to $3.40 in 1996. Our
dividend also increased from $.97 in 1995 to $1.03 in 1996 (adjusted for
1995 stock split). This was the fifth year of increased dividends to our
stockholders.
Return on average assets 1.2% and return on average equity 11.6% continued
to be strong. An equity to ending assets of 10.65% indicates that your
company is very strong.
Loan and deposit growth continued at a solid but moderate pace. Deposit
growth was somewhat slower than loan growth. There continues to be intense
competition for deposits. Commercial banks continue to compete for deposits
to service loan volume. The competition from non-bank sources continue to
erode the deposit base in commercial banks. For the first time in history,
alternative financial products now exceed deposits in commercial banks.
This year was also another year of hard work and dedication by the staff and
directors. In August we opened our first automated banking machines, one at
Cave Spring office and one at your main office in Floyd. Annuity products
were introduced and our long term secondary market real estate program began.
Building improvements included the installation of an elevator at our main
office. Plans were approved for a branch in Willis, Virginia and Hillsville,
Virginia.
We appreciate the support and faithful cooperation of our stockholders and
Board of Directors. The accomplishments of the past year reflect credit on
them as well as on all members of our loyal staff. To all these and the many
other friends of the Bank who helped make 1996 a successful year, we express
our gratitude.
Sincerely,
Leon Moore J. H. Conduff
President and CEO Chairman of the Board
<page1>
LARROWE, CARDWELL & COMPANY, LC
POST OFFICE BOX 706
GALAX, VIRGINIA 24333
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Cardinal Bankshares Corporation
Floyd, Virginia
We have audited the consolidated balance sheets of Cardinal Bankshares Corpo-
ration and subsidiaries as of December 31, 1996 and 1995 and the related con-
solidated statements of income, changes in stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These con-
solidated financial statements are the responsibility of the Company's manage-
ment. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting 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
Bankshares Corporation and subsidiaries at December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
LARROWE, CARDWELL & COMPANY, LC
Galax, Virginia
January 10, 1997
<page2>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 and 1995
________________________________________________________________________________
<TABLE>
<CAPTION>
ASSETS 1996 1995
_____________ _____________
<S> <C> <C>
Cash and due from banks $ 2,749,552 $ 1,907,215
Federal funds sold 500,000 1,750,000
Investment securities available
for sale 30,338,456 31,387,218
Investment securities held to maturity 13,383,394 12,610,486
Loans, net of allowance for loan
losses of $1,002,455 in 1996 and
$1,134,182 in 1995 85,372,459 78,630,298
Property and equipment, net 1,560,582 1,526,303
Accrued income 1,053,576 1,069,484
Other assets 1,463,702 2,019,981
_____________ _____________
$ 136,421,721 $ 130,900,985
_____________ _____________
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Demand deposits 12,585,858 10,867,355
NOW deposits 8,572,681 8,127,608
Savings deposits 17,905,685 18,750,756
Large denomination time deposits 10,693,230 8,481,053
Other time deposits 68,666,993 70,309,866
_____________ _____________
118,424,447 116,536,638
Short-term debt 400,000 -
Long-term debt 2,400,000 -
Accrued interest payable 247,000 252,957
Other liabilities 415,355 479,912
_____________ _____________
121,886,802 117,269,507
_____________ _____________
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, $10 par value; 2,000,000
shares authorized; 465,536 shares
issued in 1996 and 1995 4,655,360
Surplus 1,200,000 1,200,000
Retained earnings 8,585,007 7,481,589
Unrealized appreciation on investment
securities available for sale, net
of income taxes 94,552 294,529
_____________ _____________
14,534,919 13,631,478
_____________ _____________
$ 136,421,721 $ 130,900,985
_____________ _____________
</TABLE>
See Notes to Consolidated Financial Statements
<page3>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
___________ ___________ ___________
<S> <C> <C> <C>
INTEREST INCOME:
Loans and fees on loans $ 7,472,380 $ 7,255,003 $ 6,624,500
Federal funds sold and securities
purchased under agreements to resell 169,334 323,657 167,291
Investment securities:
Taxable 2,177,067 2,086,981 1,654,626
Exempt from federal income tax 469,751 337,088 277,447
___________ ___________ ___________
10,288,532 10,002,729 8,723,864
INTEREST EXPENSE ON DEPOSITS 5,306,591 5,059,503 3,886,861
___________ ___________ ___________
Net interest income 4,981,941 4,943,226 4,837,003
PROVISION FOR LOAN LOSSES 325,000 135,958 255,000
___________ ___________ ___________
Net interest income after provision
for loan losses 4,656,941 4,807,268 4,582,003
___________ ___________ ___________
NONINTEREST INCOME:
Service charges on deposit accounts 114,280 120,521 116,377
Other service charges and fees 27,411 13,493 15,232
Securities gains (losses) 5,856 4,728 (211)
Other income 195,741 86,304 101,526
___________ ___________ ___________
343,288 225,046 232,924
___________ ___________ ___________
NONINTEREST EXPENSE:
Salaries and employee benefits 1,754,020 1,576,139 1,497,445
Occupancy expense 122,006 104,082 124,029
Equipment expense 230,367 183,223 153,022
Other expense 717,169 1,225,139 1,037,042
___________ ___________ ___________
2,823,562 3,088,583 2,811,538
___________ ___________ ___________
Income before income taxes 2,176,667 1,943,731 2,003,389
INCOME TAX EXPENSE 593,747 548,151 563,524
___________ ___________ ___________
$ 1,582,920 $ 1,395,580 $ 1,439,865
___________ ___________ ___________
Net income per common share $ 3.40 $ 3.00 $ 3.09
___________ ___________ ___________
</TABLE>
See Notes to Consolidated Financial Statements
<page4>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
________________________________________________________________________________
<TABLE>
<CAPTION>
Unrealized
Appreciation
Common Retained (Depreciation)
Stock Surplus Earnings Securities Total
___________ ___________ ___________ __________ ____________
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1993 $ 1,163,840 $ 1,200,000 $ 9,031,495 $ 141,714 $11,537,049
Net Income - - 1,439,865 - 1,439,865
Dividends paid
($3.80 per share) - - (442,260) - (442,260)
Net change in unrealized
depreciation on in-
vestment securities
available for sale,
net of income taxes - - - (453,252) (453,252)
___________ ___________ ___________ __________ ___________
DECEMBER 31, 1994 1,163,840 1,200,000 10,029,100 (311,538) 12,081,402
Net income - - 1,395,580 - 1,395,580
Dividends paid
($.97 per share) - - (451,571) _ (451,571)
Stock split (4 for 1)
effected in the form
of a dividend 3,491,520 - (3,491,520) - -
Net change in
unrealized ap-
preciation on in-
vestment securities
available for
sale, net of
income taxes - - - 606,067 606,067
___________ __________ __________ _________ ___________
DECEMBER 31, 1995 4,655,360 1,200,000 7,481,589 294,529 13,631,478
Net income - - 1,582,920 - 1,582,920
Dividends paid
($1.03 per share) - - (479,502) - (479,502)
Net change in un-
realized appreci-
ation on investment
securities availa-
ble for sale, net
of income taxes - - - (199,977) (199,977)
___________ __________ __________ _________ ___________
DECEMBER 31, 1996 $ 4,655,360 $1,200,000 $8,585,007 $ 94,552 $14,534,919
___________ __________ __________ _________ ___________
</TABLE>
See Notes to Consolidated Financial Statements
<page5>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, 1994
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
___________ ___________ ___________
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,582,920 $ 1,395,580 $ 1,439,865
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 166,307 155,058 167,281
Accretion of discount on securities,
net of amortization of premiums (73,699) (72,053) (42,459)
Provision of loan losses 325,000 135,958 255,000
Other valuation provision - - 30,000
Deferred income taxes 168,713 (27,821) 31,872
Net realized (gains) losses on
securities (5,857) (4,728) 211
Deferred compensation and pension
expense 38,989 (22,352) 8,987
Changes in assets and liabilities:
Accrued income 15,908 (223,256) (136,729)
Other assets 529,779 811,262 1,147,135
Accrued interest payable (5,957) (60,599) 30,314
Other liabilities (103,546) 99,652 40,033
___________ ___________ ___________
Net cash provided by
operating activities 2,638,557 2,186,701 2,971,510
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal
funds sold 1,250,000 2,300,000 (300,000)
Purchases of investment securities (19,551,812) (24,972,526) (11,383,265)
Sales of investment securities 3,466,994 - 497,500
Maturities of investment securities 16,137,232 13,418,835 13,544,795
Net increase in loans (7,106,355) 97,732 (6,743,759)
Purchases of property and equipment (200,586) (120,646) (17,303)
___________ ___________ ___________
Net cash used in
investing activities (6,004,527) (9,276,605) (4,402,032)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand,
NOW, and savings deposits 1,318,505 (4,948,210) (2,924,546)
Net increase in time deposits 569,304 12,185,716 4,910,525
Net increase in short-term debt 400,000 - -
Net increase in long-term debt 2,400,000 - -
Dividends paid (479,502) (451,571) (442,260)
___________ ___________ ___________
Net cash provided by
financing activities 4,208,307 6,785,935 1,543,719
___________ ____________ __________
Net increase (decrease)
in cash and cash
equivalents 842,337 (303,969) 113,197
CASH AND CASH EQUIVALENTS, BEGINNING 1,907,215 2,211,184 2,097,987
___________ ____________ ___________
CASH AND CASH EQUIVALENTS, ENDING $ 2,749,552 $ 1,907,215 $ 2,211,184
___________ ____________ ___________
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 5,312,548 $ 5,046,091 $ 3,856,547
___________ ___________ ___________
Income taxes paid $ 357,964 $ 622,455 $ 575,782
___________ ___________ ___________
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Other real estate acquired in
settlement of loans $ 39,194 $ 770,553 $ 40,873
___________ ___________ ___________
</TABLE>
See Notes to Consolidated Financial Statements
<page6>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Cardinal Bankshares Corporation (the Company) was incorporated as a Virginia
corporation on March 12, 1996 to acquire the stock of The Bank of Floyd (the
Bank). The Bank was acquired by the Company on June 30, 1996.
The Bank of Floyd and its wholly-owned subsidiary, FBC, Inc., are incorporated
and operate under the laws of the Commonwealth of Virginia. As a state
chartered Federal Reserve member, the Bank is subject to regulation by the
Virginia Bureau of Financial Institutions and the Federal Reserve. The Bank
serves the counties of Floyd, Montgomery and Roanoke, Virginia and the City
of Roanoke, Virginia, through two banking offices. FBC, Inc.'s assets and
operations consist primarily of a minority interest in a title insurance
company.
The accounting and reporting policies of the Company, the Bank and FBC, Inc.
follow generally accepted accounting principles and general practices within
the financial services industry. Following is a summary of the more
significant policies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
the Bank and FBC, Inc.. All material intercompany accounts and transactions
are eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the 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 significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for loan and
foreclosed real estate losses, management obtains independent appraisals for
significant properties.
The majority of the Company's loan portfolio consists of loans in Southwest
Virginia. Accordingly, the ultimate collectibility of a substantial portion
of the Company's loan portfolio and the recovery of a substantial portion of
the carrying amount of foreclosed real estate are susceptible to changes in
local market conditions. The regional economy is diverse, but is influenced
by the agricultural, textile and governmental segments.
While management uses available information to recognize loan and foreclosed
real estate losses, future additions to the allowances may be necessary based
on changes in local economic conditions. In addition, regulatory agencies,
as a part of their routine examination process, periodically review the
Company's allowances for loan and foreclosed real estate losses. Such agencies
may require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the of their examinations.
Because of these factors, it is reasonably possible that the allowances for
loan and foreclosed real estate losses may change materially in the near term.
CASH AND CASH EQUIVALENTS
For purpose of presentation in the consolidated statements of cash flows, cash
and cash equivalents are defined as those amounts included in the balance
sheet caption "cash and due from banks."
<page7>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
TRADING SECURITIES
The Company does not hold securities for short-term resale and therefore does
not maintain a trading securities portfolio.
SECURITIES HELD TO MATURITY
Bonds, notes, and debentures for which the Company has the positive intent
and ability to hold to maturity are reported at cost, adjusted for premiums
and discounts that are recognized in interest income using the interest method
over the period to maturity or to call dates.
SECURITIES AVAILABLE FOR SALE
Available-for-sale securities are reported at fair value and consist of bonds,
notes, debentures, and certain equity securities not classified as trading
securities or as held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale se-
curities are reported as a net amount in a separate component of stockholders'
equity. Realized gains and losses on the sale of available-for-sale securities
are determined using the specific-identification method. Premiums and
discounts are recognized in interest income using the interest method over
the period to maturity or to call dates.
Declines in the fair value of individual held-to-maturity and available-for-
sale securities below cost that are other than temporary are reflected as
write-downs of the individual securities to fair value. Related write-downs
are included in earnings as realized losses.
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
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 out-
standing principal amount adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan. Discounts and
premiums on any purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts and premiums on any purchased
consumer loans are recognized over the expected lives of the loans using
methods that approximate the interest method.
Interest is accrued and credited to income based on the principal amount out-
standing. The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued interest
is reversed. Interest income is subsequently recognized only to the extent
cash payments are received.
The allowance for loan losses is increased by charges to income 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,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying col-
lateral, and current economic conditions.
<page8>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PROPERTY AND EQUIPMENT
Land is carried at cost. Bank premises, furniture and equipment are carried
at cost, less accumulated depreciation and amortization computed principally
by the straight-line method over the following estimate useful lives:
<TABLE>
<CAPTION>
Years
_____
<S> <C>
Buildings and improvements 20-40
Furniture and equipment 5-20
</TABLE>
FORECLOSED PROPERTIES
Real estate properties acquired through, or in lieu of, loan foreclosure are
to be sold and are initially recorded at fair value less cost to sell at the
date of foreclosure establishing a new cost basis. After foreclosure, valu-
ations are periodically performed by management and the real estate is carried
at the lower of carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are included
in loss on foreclosed real estate. The historical average holding period for
such properties is in excess of 36 months.
PENSION PLAN
The Bank maintains a noncontributory defined benefit pension plan covering all
employees who meet eligibility requirements. To be eligible, an employee must
be 21 years of age and have completed one year of service. Plan benefits are
based on final average compensation and years of service. The funding policy
is to contribute the maximum deductible for Federal income tax purposes.
INCOME TAXES
Provision for income taxes is based on amounts reported in the statements of
income (after exclusion of non-taxable income such as interest on state and
municipal securities) and consists of taxes currently due plus deferred taxes
on temporary differences in the recognition of income and expense for tax and
financial statement purposes. Deferred tax assets and liabilities are included
in the financial statements 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 changes in tax laws or rates are enacted, deferred
taxes assets and liabilities are adjusted through the provision for income
taxes.
Deferred income tax liability relating to unrealized appreciation (or the
deferred tax asset in the case of unrealized depreciation) on investment se-
curities available for sale is recorded in other liabilities (assets). Such
unrealized appreciation or depreciation is recorded as an adjustment to equity
in the financial statements and not included in income determination until
realized. Accordingly, the resulting deferred income tax liability or asset
is also recorded as an adjustment to equity.
EARNING PER COMMON SHARE
Net income per share is computed based on the weighted average number of shares
outstanding during the period, after giving retroactive effect to stock splits
and dividends.
FINANCIAL INSTRUMENTS
All derivative financial instruments held or issued by the Company are held
or issued for purposes other than trading.
<page9>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FINANCIAL INSTRUMENTS, CONTINUED
In the ordinary course of business the Company has entered into off-balance-
sheet financial instruments consisting of commitments to extend credit and
commercial and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or related fees are
incurred or received.
The Bank does not utilize interest-rate exchange agreements or interest-rate
futures contracts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet.
In cases where quoted market prices are not available, fair values are based
on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets, and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate their fair values.
Interest-bearing deposits with banks: Fair values for time deposits are esti-
mated using a discounted cash flow analysis that applies interest rates
currently offered on certificates to a schedule of aggregated contractual
maturities on such time deposits.
Available-for-sale and held-to-maturity securities: Fair values for securi-
ties, excluding restricted equity securities, are based on quoted market
prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments. The
carrying values of restricted equity securities approximate fair values.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans are estimated using discounted cash flow
analysis, based on interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Loan fair value
estimates include judgments regarding future expected loss experience and
risk characteristics. Fair values for impaired loans are estimated using
discounted cash flow analysis or underlying collateral values, where
applicable. The carrying amount of accrued interest receivable approximates
its fair value.
Deposit liabilities: The fair values disclosed for demand and savings deposits
are, by definition, equal to the amount payable on demand at the reporting
date. The fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual maturities
on such time deposits. The carrying amount of accrued interest payable
approximates fair value.
Short-term and long-term debt: The carrying amounts of short-term debt
approximate their fair values. The fair values for long-term debt are
estimated using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms.
<page10>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
Other liabilities: For fixed-rate loan commitments, fair value considers the
difference between current levels of interest rates and the committed rates.
The carrying amounts of other liabilities approximates fair value.
RECLASSIFICATION
Certain reclassifications have been made to the prior years' financial
statements to place them on a comparable basis with the current year. Net
income and stockholders' equity previously reported were not affected by these
reclassifications.
NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
To comply with banking regulations, the Company is required to maintain certain
average cash reserve balances. The daily average cash reserve requirement was
approximately $537,000 and $455,000 for the two week periods including
December 31, 1996 and 1995, respectively.
NOTE 3. SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities
and their approximate fair values at December 31 follow:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
____ ____________ _________ _________ ____________
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury securities $ 979,311 $ - $ 745 $ 978,566
U.S. Government agency
securities 13,868,779 25,966 103,282 13,791,463
Mortgage-backed securities 13,665,654 156,777 51,827 13,770,604
Other securities 1,681,452 116,371 - 1,797,823
____________ _________ _________ ____________
$ 30,195,196 $ 299,114 $ 155,854 $ 30,338,456
____________ _________ _________ ____________
HELD TO MATURITY:
U.S. Government agencies
securities $ 497,949 $ - $ 2,299 $ 495,650
State and municipal
securities 10,609,943 17,535 33,707 10,593,771
Mortgaged-backed
securities 1,706,802 12,012 15,359 1,703,455
Other securities 568,700 - - 568,700
____________ _________ _________ ____________
$ 13,383,394 $ 29,547 $ 51,365 $ 13,361,576
____________ _________ _________ ____________
1995
____
AVAILABLE FOR SALE
U.S. Treasury securities $ 1,483,687 $ - $ 1,837 $ 1,481,850
U.S. Government agency
securities 18,361,155 184,419 70,150 18,475,424
Mortgage-backed securities 8,036,383 194,363 43,682 8,187,064
Other securities 3,059,737 183,852 709 3,242,880
____________ _________ _________ ____________
$ 30,940,962 $ 562,634 $ 116,378 $ 31,387,218
____________ _________ _________ ____________
HELD TO MATURITY:
U.S. Treasury securities $ 475,621 $ - $ 1,201 $ 474,420
U.S. Government agency
securities 497,740 4,937 - 502,677
State and municipal
securities 9,565,886 156,508 72,132 9,650,262
Mortgaged-backed securities 2,000,319 11,168 7,428 2,004,059
Other securities 70,920 - - 70,920
____________ _________ _________ ____________
$ 12,610,486 $ 172,613 $ 80,761 $ 12,702,338
____________ _________ _________ ____________
</TABLE>
<page11>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 3. SECURITIES, CONTINUED
Investment securities with amortized cost of approximately $4,083,039 and
$3,731,140 at December 31, 1996 and 1995, respectively, were pledged as
collateral on public deposits and for other purposes as required or permitted
by law.
Gross realized gains and losses for the years ended December 31, 1996, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
___________ ___________ ___________
<S> <C> <C> <C>
Realized gains $ 7,000 $ 4,728 $ 2,300
Realized losses (1,144) - (2,511)
___________ ___________ ___________
$ 5,856 $ 4,728 $ (211)
___________ ___________ ___________
</TABLE>
The scheduled maturities of securities available-for-sale and held-to-maturity
at December 31, 1996, were as follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
________________________ ________________________
Amortized Fair Amortized Fair
Cost Value Cost Value
___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
Due in one year or less $ 722,167 $ 722,036 $ 2,260,618 $
2,266,083
Due after one year through
five years 9,860,062 10,046,051 3,947,727 3,956,669
Due after five years
through ten years 11,772,762 11,718,906 5,183,233 5,183,983
Due after ten years 7,840,205 7,851,463 1,991,816 1,954,841
___________ ___________ ___________ ___________
$30,195,196 $30,338,456 $13,383,394 $13,361,576
___________ ___________ ___________ ___________
</TABLE>
NOTE 4. LOANS RECEIVABLE
The major components of loans in the consolidated balance sheets at December
31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
___________ ___________
<S> <C> <C>
Commercial $ 6,219 $ 6,074
Real estate:
Construction and land development 5,610 3,526
Residential, 1-4 families 25,717 26,781
Residential 5 or more families 1,519 1,100
Farmland 4,143 4,106
Nonfarm, nonresidential 30,970 27,957
Agricultural 1,766 1,516
Consumer 8,999 7,989
Other 1,898 1,519
__________ ___________
86,841 80,568
Unearned discount (190) (589)
Unearned net loan origination costs,
net of fees (277) (215)
__________ ___________
86,374 79,764
Allowance for loan losses (1,002) (1,134)
__________ ___________
$ 85,372 $ 78,630
__________ ___________
</TABLE>
<page12>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 4. LOANS RECEIVABLE, CONTINUED
Nonperforming assets at December 31, 1996 and 1995 are detailed as follows:
<TABLE>
<CAPTION>
1996 1995
___________ ___________
<S> <C> <C>
Nonaccrual Loans $ 139,161 $ 390,907
Restructured loans - -
Loans past due 90 days or more 215,000 57,000
___________ ___________
Total nonperforming loans 354,161 447,907
Foreclosed, repossessed and idled properties 838,130 914,489
___________ ___________
Total nonperforming assets $ 1,192,291 $ 1,362,396
___________ ___________
</TABLE>
Gross interest income that would have been recognized for each year if the
nonaccrual loans and restructured loans had been current in accordance with
their original terms and had been outstanding throughout the period or since
origination, if held part of the period, is detailed below. Applicable
interest income that was actually collected and included in net income for
each year is also summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
___________ ___________ ___________
<S> <C> <C> <C>
NONACCRUAL LOANS:
Interest income, original terms $ 13,033 $ 31,687 $ 46,278
___________ ___________ ___________
Interest income recognized $ 3,212 $ - $ 26,314
___________ ___________ ___________
RESTRUCTURED LOANS:
Interest income, original terms $ - $ - $ -
___________ ___________ ___________
Interest income recognized $ _ $ _ $ _
___________ ___________ ___________
</TABLE>
An allowance determined in accordance with SFAS No. 114 and No. 118 is
provided for all impaired loans. The total recorded investment in impaired
loans and the related allowance for loan losses at December 31, the average
annual recorded investment in impaired loans, and interest income recognized
on impaired loans for the year (all approximate) are summarized below.
<TABLE>
<CAPTION>
1996 1995 1994
___________ ___________ ___________
<S> <C> <C> <C>
Recorded investment at
December 31 $ 2,205,464 $ 1,794,000
___________ ___________
Allowance for loan losses $ 271,538 $ 117,050
___________ ___________
Average recorded investment
for the year $ 1,674,412 $ 384,000 $ 546,200
___________ ___________ ___________
Interest income recognized
for the year $ 147,742 $ 32,000 $ 26,000
___________ ___________ ___________
</TABLE>
The Company is not committed to lend additional funds to debtors whose loans
have been modified.
NOTE 5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1996 1995
___________ ___________
<S> <C> <C>
BALANCE, BEGINNING $ 1,134,182 $ 1,264,798
Provision charged to expense 325,000 135,958
Recoveries of amounts charged off 38,474 21,345
Amounts charged off (495,201) (287,919)
___________ ___________
BALANCE, ENDING $ 1,002,455 $ 1,134,182
___________ ___________
</TABLE>
<page13>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 6. PROPERTY AND EQUIPMENT
Components of property and equipment and total accumulated depreciation at
December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
___________ ___________
<S> <C> <C>
Land $ 407,245 $ 407,245
Bank premises 1,358,822 1,609,350
Furniture and equipment 1,799,879 1,348,765
___________ ___________
3,565,946 3,365,360
Less accumulated depreciation (2,005,364) (1,839,057)
___________ ___________
$ 1,560,582 $ 1,526,303
___________ ___________
</TABLE>
NOTE 7. SHORT-TERM DEBT
Short-term debt consists of short-term borrowings from Federal Home Loan Bank
of Atlanta which matures on February 21, 1997. Additional information at
December 31, 1996 and for the year then ended is summarized below:
<TABLE>
<CAPTION>
1996
___________
<S> <C>
Outstanding balance at December 31 $ 400,000
___________
Year-end weighted average rate 6.89%
___________
Daily average outstanding during the year $ 44,930
___________
Average rate for the year 5.46%
___________
Maximum outstanding at any month-end during the year $ 400,000
___________
</TABLE>
The Bank has established various credit facilities to provide additional
liquidity if and as needed. These include unsecured lines of credit with
correspondent banks totaling $5,500,000, and a secured line of credit with
the Federal Home Loan Bank of Atlanta of approximately $15,000,000. Additional
amounts are available from the Federal Home Loan Bank, with additional col-
lateral. At December 31, 1996, the only amount outstanding was the advance
from Federal Home Loan Bank of Atlanta.
NOTE 8. LONG-TERM DEBT
At December 31, 1996 the Company had indebtedness to Federal Home Loan Bank of
Atlanta in the amount of $2,400,000. This note bears interest, adjustable
monthly, at the London Interbank Offered Rate plus seventeen basis points
(5.8263% at December 31, 1996). This note matures November 21, 2001, but may be
repaid at any time after November 21, 1997.
<page14>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 9. EMPLOYEE BENEFIT PLAN
The Bank has a qualified noncontributory, defined benefit pension plan which
covers substantially all of its employees. The benefits are primarily based
on years of service and earnings.
The following is a summary of the plan's funded status as of December 31,
1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
___________ ___________
<S> <C> <C>
Plan assets at estimated fair value $ 970,764 $ 923,621
Projected benefit obligation, including the
accumulated benefit obligation noted below (984,721) (947,318)
___________ ___________
(13,957) (23,697)
Unrecognized net gain and prior service cost (129,958) (156,209)
Unrecognized net asset at January 1, 1988 (52,369) (56,397)
___________ ___________
Accrued pension cost included in other liabilities $ (196,284) $ (236,303)
___________ ___________
Actuarial present value of benefit obligations:
Vested benefit obligation $ 523,686 $ 553,816
___________ ___________
Accumulated benefit obligation $ 546,486 $ 574,603
___________ ___________
</TABLE>
The weighted average discount rate and rate of increase in compensation levels
used in determining the actuarial present value of the projected benefit obli-
gation were 7.5% and 6.0% for all years presented. The weighted average
expected long-term rate of return on assets was 9.0% for 1996, 1995 and 1994.
Net pension cost includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
___________ ___________ ___________
<S> <C> <C> <C>
Service cost (benefits earned) $ 79,707 $ 71,848 $ 64,427
Interest cost on projected benefit
obligation 71,032 61,179 52,998
Actual return on plan assets (105,080) (140,943) (15,733)
Originating unrecognized asset gain (loss) 21,974 73,153 (51,782)
Amortization (5,532) (3,203) (6,188)
___________ ___________ ___________
$ 62,101 $ 62,034 $ 43,722
___________ ___________ ___________
</TABLE>
NOTE 10. DEFERRED COMPENSATION AND LIFE INSURANCE
Deferred compensation plans have been adopted for certain members of the Board
of Directors for future compensation upon retirement. Under plan provisions
aggregate annual payments ranging from $1,568 to $8,482 are payable for ten
years certain, generally beginning at age 65. Liability accrued for compen-
sation deferred under the plan amounts to $117,362 and $117,408 at December
31, 1996 and 1995, respectively.
Charges to income are based on present value of future cash payments,
discounted at 8%, and amounted to $9,310, $4,024 and $8,617 for 1996, 1995
and 1994, respectively.
The Bank is owner and beneficiary of life insurance policies on these
directors. Policy cash values, net of policy loans, totaled $22,956 and
$18,969 at December 31, 1996 and 1995, respectively.
<page15>
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
________________________________________________________________________________
NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
________________________ ________________________
Carrying Fair Carrying Fair
Amount Value Amount Value
___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 2,750 $ 2,750 $ 1,907 $ 1,907
Federal funds sold 500 500 1,750 1,750
Securities, available-
for-sale 30,338 30,338 31,387 31,387
Securities, held to
maturity 13,383 13,362 12,610 12,702
Loans, net of allowance
for credit losses 85,372 86,527 78,630 79,368
FINANCIAL LIABILITIES:
Deposits 118,424 118,076 116,537 118,064
Short-term debt 400 400 - -
Long-term debt 2,400 1,841 - -
OFF-BALANCE-SHEET ASSETS (LIABILITIES):
Commitments to extend credit
and standby letters of credit - - - -
Commercial letters of credit - - - -
</TABLE>
NOTE 12. INCOME TAXES
CURRENT AND DEFERRED INCOME TAX COMPONENTS
The components of income tax expense (substantially all Federal) are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
___________ ___________ ____________
<S> <C> <C> <C>
Current $ 425,034 $ 575,972 $ 531,652
Deferred 168,713 (27,821) 31,872
___________ ___________ ____________
$ 593,747 $ 548,151 $ 563,524
___________ ___________ ____________
</TABLE>
RATE RECONCILIATION
A reconciliation of the expected income tax expense computed at 34% to income
tax expense included in the statements of income is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
___________ ___________ ____________
<S> <C> <C> <C>
Expected tax expense $ 740,067 $ 660,869 $ 681,152
Tax exempt interest (178,641) (135,266) (135,460)
Other 32,321 22,548 17,832
___________ ___________ ____________
$ 593,747 $ 548,151 $ 563,524
___________ ___________ ____________
</TABLE>
<page16>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 12. INCOME TAXES, CONTINUED
DEFERRED TAX ANALYSIS
The components of net deferred tax assets (all Federal) at December 31, 1996
and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
___________ ___________
<S> <C> <C>
Deferred tax assets $ 435,732 $ 612,679
Deferred tax liabilities (120,580) (231,833)
___________ ___________
$ 315,152 $ 380,846
___________ ___________
</TABLE>
The tax effects of each significant item creating deferred taxes are summa-
rized below:
<TABLE>
<CAPTION>
1996 1995
___________ ___________
<S> <C> <C>
Net unrealized depreciation (appreciation)
on securities available for sale $ (48,708) $ (151,727)
Allowance for loan losses 154,499 252,944
Other valuation reserves 67,552 77,682
Deferred compensation and accrued pension costs 106,640 93,384
Depreciation (43,358) (49,400)
Accretion of discount on investment securities (28,514) (30,706)
Deferred loan fees 107,041 87,275
Loss on sale of other real estate - 101,394
__________ ___________
$ 315,152 $ 380,846
__________ ___________
</TABLE>
NOTE 13. COMMITMENTS AND CONTINGENCIES
LITIGATION
In the normal course of business, the Company is involved in various legal
proceedings. After consultation with legal counsel, management believes that
any liability resulting from such proceedings will not be material to the
consolidated financial statements.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is 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 commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, credit risk in
excess of the amount recognized in the consolidated balance sheets.
The Bank's exposure to loan loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instru-
ments. The Bank uses the same credit policies in making commitments and con-
ditional obligations as for on-balance-sheet instruments. A summary of the
Bank's commitments at December 31, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
1996 1995
___________ ___________
<S> <C> <C>
Commitments to extend credit $ 5,428,210 $ 4,390,576
Standby letters of credit 197,100 396,500
___________ ___________
$ 5,625,310 $ 4,787,076
___________ ___________
</TABLE>
<page17>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 13. COMMITMENTS AND CONTINGENCIES, CONTINUED
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK, CONTINUED
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Com-
mitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit-worthiness on a case-by-case basis. The amount of col-
lateral obtained, if deemed necessary by the Bank upon extension of credit,
is based on management's credit evaluation of the party. Collateral held
varies, but may include accounts receivable, crops, livestock, inventory,
property and equipment, residential real estate and income producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held
varies as specified above and is required in instances which the Bank deems
necessary.
CONCENTRATIONS OF CREDIT RISK
The majority of the Company's loans, commitments to extend credit, and standby
letters of credit have been granted to customers in the Company's market
area. The majority of such customers are depositors of the Bank. Investments
in state and municipal securities involve governmental entities within and
outside the Company's market area. The concentrations of credit by type of
loan are set forth in Note 4. The distribution of commitments to extend
credit approximates the distribution of loans outstanding. Standby letters
of credit are granted primarily to commercial borrowers. The Company, as a
matter of policy, does not extend credit to any single borrower or group of
related borrowers in excess of approximately $1,750,000. Although the Bank
has a reasonably diversified loan portfolio, a substantial portion of its
debtors' ability to honor their contracts is dependent upon economic
conditions in and around Floyd, Montgomery, and Roanoke Counties and the City
of Roanoke, Virginia. A significant amount of the real estate loans set forth
in Note 4 are secured by commercial real estate. In addition, the Company has
a loan concentration relating to customers who are motel and bed-and-breakfast
owners and operators. Total loans and loan commitments to this industrial
group amounted to approximately $5,575,261 and $4,534,000 at December 31,
1996 and 1995, respectively.
The Company has cash and cash equivalents on deposit with financial insti-
tutions which exceed federally-insured limits.
NOTE 14. REGULATORY RESTRICTIONS
DIVIDENDS
The Company's dividend payments are made from dividends received from the Bank.
The Bank, as a Virginia banking corporation, may pay dividends only out of its
retained earnings. However, regulatory authorities may limit payment of divi-
dends by any bank when it is determined that such a limitation is in the public
interest and is necessary to ensure financial soundness of the Bank.
<page18>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 14. REGULATORY RESTRICTIONS, CONTINUED
INTERCOMPANY TRANSACTIONS
The Bank's legal lending limit on loans to the Company are governed by Federal
Reserve Act 23A, and differ from legal lending limits on loans to external
customers. Generally, a bank may lend up to 10% of its capital and surplus
to its Parent, if the loan is secured. If collateral is in the form of stocks,
bonds, debentures or similar obligations, it must have a market value when the
loan is made of at least 20% more than the amount of the loan, and if obli-
gations of a state or political subdivision or agency thereof, it must have a
market value of at least 10% more than the amount of the loan. If such loans
are secured by obligations of the United States or agencies thereof, or by
notes, drafts, bills of exchange or bankers' acceptances eligible for
rediscount or purchase by a Federal Reserve Bank, requirements for collateral
in excess of the loan amount do not apply. Under this definition, the legal
lending limit for the Bank on loans to the Company was approximately $1,129,300
at December 31, 1996. No 23A transactions were deemed to exist between the
Company and the Bank at December 31, 1996.
CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory (and possibly additional discretionary) actions by
regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements. Under capital adequacy guide-
lines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and classi-
fication are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier
I capital to average assets, as all those terms are defined in the regu-
lations. Management believes, as of December 31, 1996, that the Bank meets
all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal Reserve
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed the institution's
category.
<page19>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 14. REGULATORY RESTRICTIONS, CONTINUED
CAPITAL REQUIREMENTS, CONTINUED
The Bank's actual capital amounts and ratios are also presented in the table
(in thousands).
<TABLE>
<CAPTION>
To Be Well
For Capitalized
Capital Under Prompt
Adequacy Corrective Action
Actual Purposes Provisions
_______________ _______________ ________________
Amount Ratio Amount Ratio Amount Ratio
________ _____ ________ _____ ________ _____
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996:
Total Capital
(to Risk-Weighted Assets) $ 12,200 14.3% >$ 6,814 >8.0% >$ 8,518 >10.0%
Tier I Capital
(to Risk-Weighted Assets) $ 11,198 13.1% >$ 3,407 >4.0% >$ 5,111 > 6.0%
Tier I Capital
(to Average Assets) $ 11,198 8.5% >$ 5,243 >4.0% >$ 6,554 > 5.0%
DECEMBER 31, 1995:
Total Capital
(to Risk-Weighted Assets) $ 14,380 17.2% >$ 6,678 >8.0% >$ 8,347 >10.0%
Tier I Capital
(to Risk-Weighted Assets) $ 13,337 16.0% >$ 3,339 >4.0% >$ 5,008 > 6.0%
Tier I Capital
(to Average Assets) $ 13,337 10.2% >$ 5,240 >4.0% >$ 6,551 > 5.0%
</TABLE>
NOTE 15. TRANSACTIONS WITH RELATED PARTIES
The Bank has entered into transactions with its directors, significant share-
holders and their affiliates (related parties). Such transactions were made
in the ordinary course of business on substantially the same terms and con-
ditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in
the opinion of management, involve more than normal credit risk or present
other unfavorable features.
Aggregate 1996 and 1995 loan transactions with related parties were as follows:
<TABLE>
<CAPTION>
1996 1995
___________ ___________
<S> <C> <C>
BALANCE, BEGINNING $ 672,581 $ 477,829
New loans 1,296,282 499,269
Repayments (1,068,399) (304,517)
___________ ___________
BALANCE, ENDING $ 900,464 $ 672,581
___________ ___________
</TABLE>
<page20>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information of Cardinal Bankshares Corporation is presented
as follows:
<TABLE>
<CAPTION>
BALANCE SHEET
DECEMBER 31, 1996
<S> <C>
ASSETS
Cash due from banks $ 820,309
Loans, net of allowance for loan losses
of $25,000 in 1996 2,367,511
Investment in affiliate bank at equity 11,292,544
Other assets 56,199
____________
$ 14,536,563
____________
LIABILITIES
Accounts payable and other liabilities $ 1,644
____________
SHAREHOLDERS' EQUITY
Common stock 4,655,360
Surplus 1,200,000
Retained earnings 8,585,007
Unrealized depreciation on affiliate's
investment securities available for
sale, net of income taxes 94,552
____________
14,534,919
____________
$ 14,536,563
____________
STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
INCOME
Dividends from affiliate bank $ 3,750,000
Interest and fees on loans 17,512
____________
$ 3,767,512
____________
EXPENSES
Management and professional fees 30,794
Other expenses 30,452
____________
61,246
____________
Income before tax benefit and equity in
undistributed income affiliate 3,706,266
INCOME TAX (EXPENSE) BENEFIT 15,611
____________
Income before equity in undistributed
income of affiliate 3,721,877
EQUITY IN UNDISTRIBUTED INCOME OF AFFILIATE
Net income (2,914,620)
____________
$ 807,257
____________
</TABLE>
<page21>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 807,257
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization 2,564
Provision for loan losses 25,000
Increase in equity undistributed income
of affiliate 2,914,620
Deferred income taxes (8,500)
Net change in other assets (50,263)
Net change in other liabilities 1,644
___________
Net cash provided by operating activities 3,692,322
___________
CASH FLOWS FROM FINANCING ACTIVITIES, NET INCREASE IN LOANS (2,392,511)
___________
CASH FLOWS FROM FINANCING ACTIVITIES, DIVIDENDS PAID (479,502)
___________
Net increase in cash and cash equivalents 820,309
CASH AND CASH EQUIVALENTS, BEGINNING -
___________
CASH AND CASH EQUIVALENTS, ENDING $ 820,309
___________
</TABLE>
<page22>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
OVERVIEW
Management's Discussion and Analysis is provided to assist in the understanding
and evaluation of Cardinal Bankshares Corporation's financial condition and its
results of operations. The following discussion should be read in conjunction
with the Corporation's financial statements and related notes.
Cardinal Bankshares Corporation operates in a rural community of Southwest
Virginia with one branch in Roanoke. The County of Floyd has a population of
approximately 12,000. The Roanoke Branch serves the Cave Spring area of
Roanoke and Roanoke County.
The economy of the area has remained constant over the last two years. Unem-
ployment continues to be slightly above the state average. Future economic
growth appears to be stable and improving. A completed shell building and a
new commerce park has generated more interest in the county.
The earnings position of the Bank continues to improve. Cardinal Bankshares
Corporation experienced record net earnings for 1996, $1,582,920 compared to
$1,395,580 for 1995 and $1,439,865 in 1994. Return on average assets was 1.2%
compared to 1.1% for 1995 and 1.2% for 1994.
Ending equity to assets shows the Bank in a strong capital position with a
ratio of 10.4%.
The total assets of Cardinal Bankshares Corporation grew to $136,421,721 from
$130,900,985, a 4.22% increase, continuing our strategy to grow the company
while increasing asset quality. Foreclosed and In-Substance foreclosed proper-
ties were reduced by 8.3% to a balance of $838,130 at year end.
Management continues to look at increasing market share by expanding to con-
tiguous markets as it becomes feasible, with capital generated through normal
earnings supporting growth of the Company. Management of Cardinal Bankshares
Corporation has no plans to raise new capital from external sources to finance
expansion activities in the foreseeable future.
<page 23>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
________________________________________________________________________________
TABLE 1. NET INTEREST INCOME AND AVERAGE BALANCES (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
_______________________ _____________________ ______________________
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/Yield
Balance Expense Cost Balance Expense Cost Balance Expense Cost
_________ _______ _____ _______ _______ _____ ________ ______ _____
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Deposit
in other
banks $ - $ - -% $ - $ - -% $ 26 $ - -%
Taxable
investment
securities 32,540 2,177 6.69% 30,331 2,087 6.88% 27,142 1,655 6.10%
Nontaxable
investment
securities 8,660 470 5.43% 6,494 337 5.19% 5,047 277 5.49%
Federal funds
sold and
securities
purchased with
agreements
to resell 3,187 169 5.30% 5,475 324 5.92% 4,135 167 4.04%
Loans, net 80,721 7,473 9.26% 78,673 7,255 9.22% 77,005 6,625 8.60%
_________ _______ _____ ________ _______ _____ ________ ______ _____
Total
interest-
earning
assets 125,108 10,289 120,973 10,003 113,355 8,724
________ _______ ________ _______ ________ ______
Yield on
average
interest-
earning
assets 8.22% 8.27% 7.70%
_____ _____ _____
Noninterest-earning assets:
Cash and
due from
banks 1,912 1,998 2,004
Premises and
equipment 1,572 1,487 1,445
Interest
receivable
and other 2,668 3,513 3,433
________ ________ _______
Total non-
interest-
earning
assets 6,152 6,998 6,882
________ ________ ________
Total
assets $131,260 $127,971 $120,237
________ ________ ________
Interest-bearing liabilities:
Demand
deposits 8,263 $ 208 2.52% $ 8,456 $ 228 2.70% $ 8,478 $ 204 2.41%
Savings
deposits 18,530 588 3.17% 20,921 642 3.07% 26,765 833 3.11%
Time
deposits 78,630 4,493 5.71% 74,115 4,190 5.65% 61,896 2,850 4.60%
Other
borrowings 306 18 5.88% - - -% - - -%
________ _______ ____ _________ _______ ____ ________ ______ ____
Total
interest-
bearing
liabilities
105,729 5,307 103,492 5,060 97,139 3,887
________ _______ ____ _________ _______ ____ ________ ______ ____
Cost on
average
interest-
bearing
liabilities 5.02% 4.89% 4.00%
____ ____ ____
Noninterest-bearing
liabilities
Demand
deposit 11,043 10,523 10,630
Interest
payable and
other 831 942 1,107
________ ________ ________
Total
noninterest-
bearing
liabilities
11,874 11,465 11,737
________ ________ ________
Total
liabilities
117,603 114,957 108,876
Stockholders'
equity 13,657 13,014 11,361
________ ________ ________
Total
liabilities
and stock-
holders'
equity
$131,260 $127,971 $120,237
________ ________ ________
Net interest
income $ 4,982 $ 4,943 $4,837
_______ _______ ______
Net yield on
interest-
earning
assets 3.98% 4.09% 4.27%
____ ____ ____
________________________________________________________________________________
</TABLE>
<page24>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
________________________________________________________________________________
TABLE 2. RATE/VOLUME VARIANCE ANALYSIS (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
________________________ _______________________
Interest Variance Interest Variance
Income/ Attributable To Income/ Attributable To
Expense Expense
Variance Rate Volume Variance Rate Volume
________ ______ ______ ________ ______ ______
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Deposits in other banks $ - $ - $ - $ - $ - $ -
Taxable investment
securities 90 (58) 148 432 226 206
Nontaxable investment
securities 133 17 116 60 (14) 74
Federal funds sold and
securities purchased
with agreements to resell (155) (31) (124) 157 93 64
Loans 218 31 187 630 484 146
________ ______ ______ ________ ______ ______
Total 286 (41) 327 1,279 789 490
Interest-bearing liabilities:
Demand deposits (20) (15) (5) 24 24 -
Savings deposits (54) 21 (75) (191) (12) (179)
Time deposits 303 45 258 1,340 718 622
Other borrowings 18 - 18 - - -
________ ______ ______ ________ _____ ______
Total 247 51 196 1,173 730 443
________ ______ ______ ________ _____ ______
Net interest income $ 39 $ (92) $ 131 $ 106 $ 59 $ 47
________ ______ ______ ________ _____ ______
________________________________________________________________________________
</TABLE>
NET INTEREST INCOME
Net interest income, the principal source of bank earnings, is the amount of
income generated by earning assets (primarily loans and investment securities)
less the interest expense incurred on interest-bearing liabilities (primarily
deposits used to fund earning assets). Table 1 summarizes the major components
of net interest income for the past three years and also provides yields and
average balances.
Net interest income in 1996 increased by .81% to $4.98 million from $4.94
million in 1995 and $4.83 million in 1994. The increase in net interest income
realized in 1996 was the result of an increase in the volume of net average
earning assets which was offset by an 11 basis point decrease in net interest
margin. Competition for deposits and loans continue to be a major factor in
net margins. The net interest margin for 1996 was 3.98% compared to 4.09% for
1995 and 4.27% for 1994. Net interest income in 1995 increased by
$106,000, or 2.2%, over 1994. The increase in net interest income realized in
1995 was the result of an increase in net average earning assets which was also
offset by an 18 basis point decrease in net interest margin. The effects of
changes in volumes and rates on net interest income in 1996 compared to 1995,
and 1995 compared to 1994 are shown in Table 2.
Interest income for 1996 increased $.3 million to $10.3 million from $10.0
million in 1995. Interest income in 1994 totaled $8.7 million. The increase
in interest income from 1995 to 1996 was the result of an increase in the
volume of average earning assets which was offset by a 5 basis point decrease
in yield. The increase in interest income from 1994 to 1995 was due mainly to
an increase in average yields on earning assets of 57 basis points in 1995 to
8.27% from 7.70% in 1994.
<page25>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
Interest expense increased by $247,000 in 1996 to $5.3 million from $5.1
million in 1995 and $3.9 million in 1994. The increase from 1995 to 1996 was
due to an increase in average interest bearing liabilities of $2.2 million to
$105.7 million in 1996 at an increased rate of 5.02%, or 13 basis points
higher than 1995. Interest expense increased by $1.2 million from 1994 to
1995. The increase was due to the average interest bearing liabilities
increasing by $6.4 million while the average rate paid on interest bearing
liabilities increased by 89 basis points. Interest paid on time deposits,
which make up the largest portion of interest-bearing deposits, increased
$303,000, or 7.2% from 1995 to 1996. The average rate paid on time deposits
increased 6 basis points to 5.71% in 1996 from 5.65% in 1995 and 4.60% in
1994. Savings deposits also experienced a slight increase in interest rate
as the average rate paid on these deposits increased 10 basis points in 1996
compared to 1995.
PROVISION FOR LOAN LOSSES
The allowance for loan losses is established to provide for potential losses
in the Bank's loan portfolio. Loan losses and recoveries are charged or
credited directly to the allowance. Management determines the provision for
loan losses required to maintain an allowance adequate to provide for any
potential losses. The factors considered in making this decision are the
collectibility of past due loans, volume of new loans, composition of the loan
portfolio, and general economic outlook.
In 1996, management increased the provision for loan loss reserve from
$136,000 in 1995 to $325,000 in 1996. The provision for loan losses was
$255,000 in 1994. The Bank's allowance for loan losses as a percentage of
total loans at the end of 1996 was 1.16% as compared to 1.42% in 1995 and
1.56% in 1994.
Additional information is contained in Tables 12, 13 and 14, and is discussed
in Nonperforming and Problem Assets.
OTHER INCOME
Noninterest income consists of revenues generated from a broad range of
financial services and activities. The majority of noninterest income is a
result of service charges on deposit accounts including charges for insuf-
ficient funds checks and fees charged for nondeposit services. Noninterest
income totaled $343,000 in 1996, an increase of 52% over the $225,000 recorded
in 1995. Noninterest income in 1994 totaled $233,000. The majority of the
increase in noninterest income from 1995 to 1996 is explained by an increase
in the amount of fees generated from other fee income and all other non-
interest income, which includes stop payment fees, charge back fees, official
check fees, and travelers check fees. The Bank has made a concerted effort to
upgrade its customer base and close accounts which habitually write checks
against insufficient funds. The primary sources of noninterest income for the
past three years are summarized in Table 3.
The Bank's fee structure is reviewed annually to determine if adjustments to
fees are warranted. The fee schedule was updated and changes were effective
as of December 1, 1996. Another review of the deposit and service fees will
be made in 1997.
<page26>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
________________________________________________________________________________
TABLE 3. SOURCES OF NONINTEREST INCOME (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Service charges on deposit accounts $ 114 $ 121 $ 116
Other service charges and fees 27 13 15
Insurance commissions 12 12 16
Gain on the sale of securities 6 5 -
Other income 184 74 86
_____ _____ _____
Total noninterest income $ 343 $ 225 $ 233
_____ _____ _____
________________________________________________________________________________
</TABLE>
Other noninterest income, including securities gains, was up $110,000 in 1996
to $184,000 from $74,000 in 1995 and $86,000 in 1994. Noninterest income also
includes fees charged for various bank services such as safe deposit box
rental fees, letters of credit fees, and gains realized on the sale of fixed
assets.
OTHER EXPENSE
Noninterest expense for 1996 decreased by $265,000 or 8.6% to $2.8 million.
Noninterest expense in 1995 was $3.1 million and it was $2.8 million in 1994
(see Table 4). The overhead ratio of noninterest expense to adjusted total
revenues (net interest income plus noninterest income excluding securities
transactions) was 53.1% in 1996, 59.8% in 1995 and 55.5% in 1994.
Total personnel expenses, the largest component of noninterest expense,
increased $178,000 or 11.3% to $1.75 million in 1996. The personnel expenses
for 1995 amounted to $1.6 million, an increase of $79,000 or 5.3%, from the
1994 level of $1.5 million. These increases were attributable to normal annual
increases in base compensation, increase in major medical insurance of 12.2%,
the position of Chief Financial Officer was created during 1996, and two full
time employees were hired. There was also one extra pay period in 1996, making
the total 27 instead of 26.
Combined occupancy, and furniture and equipment expense increased $65,000 in
1996 compared to a $10,000, or 3.6%, increase from 1994 to 1995. The increase
was primarily due to equipment additions and the reclassification of software
amortization to equipment expense.
<page27>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
________________________________________________________________________________
TABLE 4. SOURCES OF NONINTERST EXPENSE (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
_______ _______ _______
<S> <C> <C> <C>
Salaries & wages $ 1,242 $ 1,154 $ 1,095
Employee benefits 512 422 402
_______ _______ _______
Total personnel expense 1,754 1,576 1,497
Occupancy expense 122 104 124
Furniture & equipment 230 183 153
Printing & supplies 54 64 46
FDIC deposit insurance 2 126 236
Professional services 177 176 138
Postage 69 62 59
Telephone 33 25 18
Courier fees 21 20 21
Education & seminars 13 17 15
Travel expense 27 25 29
Director fees and expense 40 31 31
Advertising and public relations 38 42 41
Insurance expense 37 33 38
Capital Stock Tax 98 100 80
Outside services - 7 3
Other real estate expense, net 35 389 145
Real estate loan servicing fee 16 20 18
Other operating expense 58 89 120
______ ______ ______
Total noninterest expense $2,824 $3,089 $2,812
______ ______ ______
________________________________________________________________________________
</TABLE>
Other real estate expense, net of related income, amounted to $35,000 in 1996,
$389,000 in 1995, and $145,000 in 1994. Items included in this category
include charges for market value declines on foreclosed real estate, direct
maintenance costs, and losses on ultimate dispositions, net of operating
revenues and gains on dispositions. The increases in these categories for
1994 and 1995 were due to the deteriorating market value of one piece of
property that was ultimately sold at the end of 1995 at a loss of approxi-
mately $298,000. The sale of this property reduces the amount of nonper-
forming assets and also increases the amount of earning assets available to
the bank.
Professional services expense, fees paid to attorneys, independent auditors,
and state examiners increased only $1,000 to $177,000 during 1996. Pro-
fessional services expense totaled $176,000 in 1995 and $138,000 in 1994.
The increase in 1995 and 1994 was primarily due to increased legal fees
relating to loan collection actions, the disposal of classified assets, and
the final disposition of certain legal actions against the bank.
Deposit insurance premiums paid to the Federal Deposit Insurance Corporation
(FDIC) decreased by 98.4% to $2,000 in 1996 from $126,000 in 1995 and $236,000
in 1994. The premium decreases were due to the Bank Insurance Fund (BIF)
reaching its target goal of having an insurance reserve equal to 1.25% of all
FDIC covered deposits for BIF institutions during 1995. After reaching this
goal, BIF took two actions that directly impacted the bank: 1) BIF refunded
approximately $70,000 to the bank in overpayments due to BIF becoming fully
capitalized, and 2) BIF reduced the assessment rate for the Bank from $0.23
per $100 in
<page28>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
deposits to a flat quarterly fee of $500. Although a drop in rate of this
magnitude was very beneficial to the bank, management cautions shareholders
that the rate may be increased again if the Savings Association Insurance
Fund (SAIF), which has not reached its target goal, is merged with the BIF
fund as is currently being proposed.
The increase occurring during 1996 and 1995 in the remaining categories of
noninterest expense were primarily attributable to the higher level of activity
associated with the growth in deposits. Table 4 provides a further breakdown
of noninterest expense for the past three years.
INCOME TAXES
Income tax expense is based on amounts reported in the statements of income
(after adjustments for non-taxable income and non-deductible expenses) and
consists of taxes currently due plus deferred taxes on temporary differences
in the recognition of income and expense for tax and financial statement
purposes. The deferred tax assets and liabilities represent the future Federal
income tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled.
Income tax expense (substantially all Federal) was $594,000 in 1996, $548,000
in 1995 and $564,000 for 1994 representing 27.3%, 28.2% and 28.1% of income
before income taxes, respectively.
The Bank's deferred income tax benefits and liabilities result primarily from
temporary differences (discussed above) in provisions for credit losses,
valuation reserves, depreciation, deferred compensation, deferred income,
pension expense, and investment security discount accretion.
Net deferred income tax benefits of $315,000, $381,000 and $665,000 at
December 31, 1996, 1995, and 1994, respectively, are included in other
assets. At December 31, 1996, $49,000 of the total deferred tax liability
is applicable to unrealized appreciation on investment securities available
for sale. Accordingly, this amount was not charged to income but recorded
directly to the related stockholders' equity account.
<page29>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS
Average earning assets increased 3.4% over the past twelve months. Total
earning assets represented 95.3% of total average assets in 1996 compared
to 94.5% in 1995. The mix of average earning assets was relatively unchanged
in 1996. Average loans remained at 61.5% of total average assets while
average investment securities and federal funds sold combined accounted for
33.8% of total average assets in 1996 compared to 33.1% in 1995. For 1995,
average net loans represented 61.5% of average assets and average investment
securities represented 28.8% of average assets. A summary of average assets
for the past three years is shown in Table 5.
_______________________________________________________________________________
TABLE 5. AVERAGE ASSET MIX (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
________________ ________________ ________________
Average Average Average
Balance % Balance % Balance %
________ ______ ________ ______ ________ ______
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans, net $ 80,721 61.50 $ 78,673 61.47 $ 77,005 64.04
Investment securities 41,200 31.39 36,825 28.78 32,189 26.77
Federal funds sold 3,187 2.42 5,475 4.28 4,135 3.44
Interest-bearing
bank balances - 0.00 - 0.00 26 .02
________ ______ ________ ______ ________ ______
Total earning assets 125,108 95.31 120,973 94.53 113,355 94.27
Nonearning assets:
Cash and due from banks 1,912 1.46 1,998 1.56 2,004 1.67
Premises and equipment 1,572 1.20 1,487 1.16 1,445 1.20
Other assets 2,668 2.03 3,513 2.75 3,433 2.86
________ ______ ________ ______ ________ ______
Total nonearning
assets 6,152 4.69 6,998 5.47 6,882 5.73
________ ______ ________ ______ ________ ______
Total assets $131,260 100.00 $127,971 100.00 $120,237 100.00
________ ______ ________ ______ ________ ______
_______________________________________________________________________________
</TABLE>
LOANS
Average net loans totaled $80.7 million during 1996 an increase of $2 million
or 2.5% more than 1995. The increase in average loans outstanding during the
past year is due to increased demand.
A significant portion of the loan portfolio, $67.9 million or 78.7%, is made
up of loans secured by various types of real estate. Total loans secured by
1-4 family residential properties represented 29.8% of total loans at the end
of 1996. During 1996, the Bank also experienced growth in loans for investment
and business purposes which are secured by nonresidential properties. These
loans increased by 10.8% during 1996 to a total of $31.0 million, or 35.9%
of total loans outstanding compared to a total of $28.0 million at the end
of 1995.
<page30>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
The Bank makes both consumer and commercial loans to all neighborhoods within
its market area, including the low- and moderate-income areas. The market
area is generally defined to be all or portions of the Floyd, Roanoke and
Montgomery Counties of Virginia and the City of Roanoke, Virginia. The Bank
places emphasis on consumer based installment loans and commercial loans to
small and medium sized businesses. The amounts of loans outstanding by type
at year-end 1996 and 1995, and the maturity distribution of variable and
fixed rate loans as of year-end 1996 are presented in Table 6 and Table 7,
respectively.
The outlook for the economy appears mixed in the year ahead. The positive
signs are: a completed shell building in Floyd county is available for sale
and a new commerce park has generated more interest in the county, and Cross
Creek Apparel, Inc. has openings for employment. The negative signs are:
consumer debt has hit an all time high and bankruptcy cases nationally and
in the western district of Virginia reached all time highs in 1996. We
believe the economy is going to slow down in 1997, how severe is yet to be
seen. In spite of a slowing economy we believe that with our alert and
capable loan officers, who provide competitive and quality service, the Bank
can expect to experience profitable growth in the loan portfolio during 1997.
________________________________________________________________________________
TABLE 6. LOAN PORTFOLIO SUMMARY (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
_________________ _________________
Amount % Amount %
________ ______ ________ ______
<S> <C> <C> <C> <C>
Construction and development $ 5,610 6.49 $ 3,526 4.42
Farmland 4,143 4.80 4,106 5.15
1-4 family residential 25,717 29.77 26,781 33.57
Multifamily residential 1,519 1.76 1,100 1.38
Nonfarm, nonresidential 30,970 35.86 27,957 35.05
________ ______ ________ ______
Total real estate 67,959 78.68 63,470 79.57
Agricultural 1,766 2.04 1,516 1.90
Commercial & industrial 6,219 7.20 6,074 7.61
Consumer 8,999 10.42 7,989 10.02
Other 1,432 1.66 715 0.90
________ ______ ________ ______
Total $ 86,375 100.00 $ 79,764 100.00
________ ______ ________ ______
________________________________________________________________________________
</TABLE>
Interest rates charged on loans vary with the degree of risk, maturity and
amount of the loan. Competitive pressures, money market rates, availability
of funds, and government regulation also influence interest rates. On average,
loans yielded 9.26% in 1996 compared to an average yield of 9.22% in 1995.
<page31>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
________________________________________________________________________________
TABLE 7. MATURITY SCHEDULE OF LOANS (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
Commercial
Financial Construction Total
and and _________________
Agriculture Development Others Amount %
___________ ___________ _______ _______ _______
<S> <C> <C> <C> <C> <C>
FIXED RATE LOANS:
Three months
or less $ 479 $ - $ 1,623 $ 2,102 2.44
Over three months
to twelve months 62 - 3,042 3,104 3.60
Over one year
to five years 2,267 - 12,981 15,248 17.65
Over five years 124 - 12,897 13,021 15.07
_______ ________ _______ _______ ______
Total fixed rate loans $ 2,932 $ - $30,543 $33,475 38.76
_______ ________ _______ _______ ______
VARIABLE RATE LOANS:
Three months or less $ 4,872 $ 1,056 $10,728 $16,656 19.28
Over three months to
twelve months 43 - 6,163 6,206 7.18
Over one year to
five years 138 4,554 25,083 29,775 34.47
Over five years - - 263 263 .31
_______ ________ _______ _______ ______
Total variable
rate loans $ 5,053 $ 5,610 $42,237 $52,900 61.24
_______ ________ _______ _______ ______
TOTAL LOANS:
Three months or less $ 5,351 $ 1,056 $12,351 $18,758 21.72
Over three months
to twelve months 105 - 9,205 9,310 10.78
Over one year to
five years 2,405 4,554 38,064 45,023 52.12
Over five years 124 - 13,160 13,284 15.38
_______ ________ _______ _______ ______
Total loans $ 7,985 $ 5,610 $72,780 $86,375 100.00
_______ ________ _______ _______ ______
________________________________________________________________________________
</TABLE>
INVESTMENT SECURITIES
The Bank uses its investment portfolio to provide liquidity for unexpected
deposit decreases or loan generation, to meet the Bank's interest rate
sensitivity goals, and to generate income.
Management of the investment portfolio has always been conservative with
virtually all investments taking the form of purchases of U.S. Treasury,
U.S. Government agencies, Mortgage Backed Securities and State and local
bond issues. Management views the investment portfolio as a source of
income, and purchases securities with the intent of retaining them until
maturity. However, adjustments are necessary in the portfolio to provide
an adequate source of liquidity which can be used to meet funding re-
quirements for loan demand and deposit fluctuations and to control interest
rate risk. Therefore, from time to time, management may sell certain
securities prior to their maturity. Table 8 presents the investment
portfolio at the end of 1996 by major types of investments and maturity
ranges. Maturities may differ from scheduled maturities in mortgage-backed
securities because the mortgages underlying the securities may be called or
repaid prior to the scheduled maturity date. Maturities on all other
securities are based on the earlier of the contractual maturity or the call
date, if any.
<page32>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
The interest rate environment in 1996 caused the average yield of the
investment portfolio to increase to 6.60% from 6.48% in 1995. At December
31, 1996, the market value of the investment portfolio was $43.5 million,
representing a $121,000 appreciation over amortized cost. This compared to
a market value of $44.1 million and a $538,000 appreciation over amortized
cost a year earlier.
________________________________________________________________________________
TABLE 8. INVESTMENT SECURITIES (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
DECEMBER 31, 1996
Amortized Cost Due
______________________
In One After After
Year One Five After
or Through Through Ten Market
Less FiveYrs Ten Yrs Years Total Value
______ _______ _______ ______ _______ _______
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES:
U.S. Treasury $ 491 $ 488 $ - $ - $ 979 $ 979
U.S. Government
agencies and
Mortgage Backed
Securities 31 8,531 13,025 8,152 29,739 29,760
State and
political subs. 2,261 3,634 3,428 1,287 10,610 10,594
Other 200 979 503 393 2,075 2,191
______ _______ _______ ______ _______ _______
Total $2,983 $13,632 $16,956 $9,832 $43,403 $43,524
______ _______ _______ ______ _______ _______
WEIGHTED AVERAGE YIELDS:
U.S. Treasury 5.07% 5.08% - -
U.S. Government
agencies and
Mortgage Backed
Securities 8.97% 7.39% 6.77% 7.31%
States and
political subs. 4.70% 4.68% 4.98% 4.97%
Other 7.09% 10.62% 7.71% 4.16%
Consolidated 4.97% 6.82% 6.44% 7.08% 6.60%
DECEMBER 31, 1995 BOOK MARKET
VALUE VALUE
_______ ______
INVESTMENT SECURITIES:
U.S. Treasury and Government agencies $ 1,959 $ 1,956
U.S. Government agencies (Mortgage Backed Securities) 28,896 29,170
States and political subdivisions 9,566 9,650
Other 3,131 3,314
_______ _______
Total $43,552 $44,090
_______ _______
________________________________________________________________________________
</TABLE>
Average federal funds sold totaled $3.2 million in 1996 which represented a
41.8% decrease from the $5.5 million in 1995. Federal funds represent the
most liquid portion of the Bank's invested funds and generally the lowest
yielding portion of earning assets. Management has made an effort to main-
tain these funds at the lowest level possible consistent with prudent rate
risk management strategies. During 1996, average federal funds represented
2.5% of average earning assets, down from the 4.5% during 1995 (See Table 5).
<page33>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
DEPOSITS
The Bank relies on deposits generated in its market area to provide the
majority of funds needed to support lending activities and for investments
in liquid assets. More specifically, core deposits (total deposits less
certificates of deposits in denominations of $100,000 or more) are the
primary funding source. The Bank's balance sheet growth is largely determined
by the availability of deposits in its markets, the cost of attracting the
deposits, and the prospects of profitably utilizing the available deposits
by increasing the loan or investment portfolios. Market conditions have
resulted in depositors shopping for deposit rates more than in the past. An
increased customer awareness of interest rates adds to the importance of rate
management. The Bank's management must continuously monitor market pricing,
competitor's rates, and internal interest rate spreads to maintain the Bank's
growth and profitability. The Bank attempts to structure rates so as to
promote deposit and asset growth while at the same time increasing overall
profitability of the Bank.
Average total deposits for the year ended December 31, 1996 amounted to $116.5
million which was an increase of $2.5 million, or 2.1% over 1995. Average
core deposits totaled $106.8 million in 1996 representing a slight increase
over the $106.7 million in 1995. The percentage of the Bank's average deposits
that are interest-bearing decreased to 90.5% in 1996 from 90.8% in 1995.
Average demand deposits which earn no interest increased to $11.0 million in
1996 from $10.5 million in 1995 and $10.6 million in 1994. Average deposits
for the past three years are summarized in Table 9.
________________________________________________________________________________
TABLE 9. DEPOSIT MIX (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
________________ ________________ ________________
Average Average Average
Balance % Balance % Balance %
________ ______ ________ ______ ________ _______
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
NOW accounts $ 8,263 7.10 $ 8,456 7.42 $ 8,478 7.87
Money Market 3,417 2.93 4,061 3.56 4,154 3.85
Savings 15,113 12.98 16,860 14.79 22,611 20.99
Small denomination
certificates 68,943 59.20 66,790 58.58 56,120 52.07
Large denomination
certificates 9,687 8.32 7,325 6.42 5,776 5.36
________ ______ ________ ______ ________ ______
Total interest-
bearing deposits 105,423 90.53 103,492 90.77 97,139 90.14
Noninteresting-bearing
deposits 11,043 9.47 10,523 9.23 10,630 9.86
________ ______ ________ ______ ________ ______
Total deposits $116,466 100.00 $114,015 100.00 $107,769 100.00
________ ______ ________ ______ ________ ______
________________________________________________________________________________
</TABLE>
The average balance of certificates of deposit issued in denominations of
$100,000 or more increased by $2.4 million or 32.2%, in 1996. The strategy
of management has been to support loan and investment growth with core
deposits and not to aggressively solicit the more volatile, large denomi-
nation certificates of deposit. Table 10 provides maturity information
relating to Certificate of Deposits of $100,000 or more at December 31, 1996.
<page34>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
________________________________________________________________________________
TABLE 10. LARGE TIME DEPOSIT MATURITIES (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
Analysis of time deposits of $100,000 or more at December 31, 1996:
<S> <C>
Remaining maturity of three months or less $ 944
Remaining maturity over three through twelve months 5,619
Remaining maturity over twelve months 4,130
_________
Total time deposits of $100,000 or more $ 10,693
_________
________________________________________________________________________________
</TABLE>
SHORT-TERM/LONG-TERM DEBT
The Bank had short-term debt on December 31, 1996, of $400,000 and long-term
debt of $2,400,000. All debt represents borrowings from the Federal Home Loan
Bank of Atlanta. Short-term borrowings mature on February 21, 1997. The long-
term debt bears interest at the London Interbank offered rate plus seventeen
basis points (5.8263% at December 31, 1996) and matures November 21, 2001, but
may be repaid at any time after November 21, 1997.
CAPITAL ADEQUACY
Shareholder's equity amounted to $14.5 million at December 31, 1996, a 6.6%
increase over the 1995 year-end total of $13.6 million. The increase was
primarily a result of earnings which was offset by a $200,000 decrease in the
value of securities that are classified as available for sale. Average share-
holders' equity as a percentage of average total assets amounted to 10.4% in
1996 and 10.2% in 1995.
Regulatory guidelines relating to capital adequacy provide minimum risk-based
ratios which assess capital adequacy while encompassing all credit risks,
including those related to off-balance sheet activities. Capital ratios under
these guidelines are computed by weighing the relative risk of each asset
category to derive risk-adjusted assets. The risk-based capital guidelines
require minimum ratios of core (Tier 1) capital (common shareholders' equity)
to risk-weighted assets of 4.0% and total regulatory capital (core capital plus
allowance for loan losses up to 1.25% of risk-weighted assets) to risk-weighted
assets of 8%. As of December 31, 1996 the Bank has a ratio of Tier 1 capital
to risk-weighted assets of 13.1% and a ratio of total capital to risk-weighted
assets of 17.2%.
<page35>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
________________________________________________________________________________
TABLE 11. YEAR-END RISK-BASED CAPITAL (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
1996
________
<S> <C>
Tier I capital $ 11,198
Qualifying allowance for loan losses
(limited to 1.25% of risk-weighted assets) 1,002
________
Total regulatory capital $ 12,200
________
Total risk-weighted assets $ 83,474
________
Tier I as a percent of risk-weighted assets 13.1%
Total regulatory capital as a percent of risk-
weighted assets 14.3%
Leverage Ratio* 11.13%
* Tier I capital divided by average total assets for the quarter
ended December 31, 1996.
________________________________________________________________________________
</TABLE>
In addition, a minimum leverage ratio of Tier I capital to average total assets
for the previous quarter is required by federal bank regulators, ranging from
3% to 5%, subject to the regulator's evaluation of the Bank's overall safety
and soundness. As of December 31, 1996, the Bank had a ratio of year-end Tier
I capital to average total assets for the fourth quarter of 1996 of 11.0%.
Table 11 sets forth summary information with respect to the Bank's capital
ratios at December 31, 1996. All capital ratio levels indicate that the Bank
is well capitalized.
At December 31, 1996 the Bank had 465,536 shares of common stock outstanding
which was held by approximately 505 shareholders of record.
NONPERFORMING AND PROBLEM ASSETS
Certain credit risks are inherent in making loans, particularly commercial and
consumer loans. Management prudently assesses these risks and attempts to
manage them effectively. The Bank attempts to use shorter-term loans and,
although a portion of the loans have been made based upon the value of col-
lateral, it tries to rely primarily on the cash flow of the borrower as the
source of repayment rather than the value of the collateral.
The Bank also attempts to reduce repayment risks by adhering to internal credit
policies and procedures. These policies and procedures include officer and
customer limits, periodic loan documentation review and follow up on exceptions
to credit policies.
Nonperforming Assets at December 31, 1996 and 1995 are analyzed in Table 12.
<page36>
MANAGEMENT'S DISCUSSION AND ANALYSIS
_______________________________________________________________________________
________________________________________________________________________________
TABLE 12. NONPERFORMING ASSETS
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995
_________ ___________
<S> <C> <C>
Non-Accrual Loans $ 139,161 $ 390,907
Restructured - -
Foreclosed and In-Substance
Foreclosed Properties 838,130 914,489
_________ ___________
$ 977,291 $ 1,305,396
_________ ___________
________________________________________________________________________________
</TABLE>
Nonperforming assets at year-end 1996 were 1.1% of loans outstanding and 1.6%
at year-end 1995. In addition to the nonperforming assets, loans which were
90 days and over past due amounted to $215,000 at December 31, 1996 and
$57,155 at December 31, 1995.
The allowance for loan losses is maintained at a level adequate to absorb
probable losses. Some of the factors which management considers in de-
termining the appropriate level of the allowance for loan losses are: past
loss experience, an evaluation of the current loan portfolio, identified
loan problems, the loan volume outstanding, the present and expected economic
conditions in general, and in particular, how such conditions relate to the
market areas that the Bank serves. Bank regulators also periodically review
the Bank's loans and other assets to assess their quality. Credits deemed
uncollectible are charged to the allowance. Provisions for loan losses and
recoveries on loans previously charged off are added to the allowance.
The accrual of interest on loans is discontinued on a loan when, in the
opinion of management, there is an indication that the borrower may be
unable to meet payments as they become due. Upon such discontinuance, all
unpaid accrued interest is reversed.
The provision for loan losses, net charge-offs and the activity in the
allowance for loan losses is detailed in Table 13.
________________________________________________________________________________
TABLE 13. LOAN LOSSES
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
___________ ___________ ___________
<S> <C> <C> <C>
Allowance for loan losses, beginning $ 1,134,182 $ 1,264,798 $ 1,222,044
Provision for loan losses, added 325,000 135,958 255,000
Loans charged off (495,201) (287,919) (243,515)
Recoveries of loans previously
charged off 38,474 21,345 31,269
___________ ___________ ___________
Net charge-offs (456,727) (266,574) (212,246)
Allowance for loan losses, ending $ 1,002,455 $ 1,134,182 $ 1,264,798
___________ ___________ ___________
________________________________________________________________________________
</TABLE>
<page37>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
Net loan charge-offs as a percentage of average loans were 0.57%, 0.34% and
0.28% in 1996, 1995, and 1994, respectively.
The loan portfolio also included loans to various borrowers (watch loans) at
year-end for which management had concerns about the ability of the borrowers
to continue to comply with present loan repayment terms, and which could
result in some or all of these loans being uncollectible. Management monitors
these loans carefully and has provided for these loans in the allowance for
loan losses.
The allowance for loan losses was approximately $1.0 million, or 1.16% of total
loans outstanding at December 31, 1996, a decrease of $132,000 below the 1.42%
reserve at December 31, 1995. Management realizes that general economic trends
greatly affect loan losses and no assurances can be made about future losses.
Management does, however, consider the allowance for loan losses to be adequate
at December 31, 1996.
The allocation of the reserve for loan losses is detailed in Table 14 below:
________________________________________________________________________________
TABLE 14. ALLOCATION OF THE RESERVE FOR LOAN LOSSES
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
_______________ _______________ _______________
Balance at end of period
applicable to Amount Percent1 Amount Percent1 Amount Percent1
________________________ ______ ________ ______ ________ ______ ________
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 93 9.24 $ 108 9.51 $ 125 9.90
Real estate, construction 65 6.49 50 4.42 50 3.97
Real estate, mortgage 723 72.19 852 75.15 907 71.70
Installment loans to
individuals, other 121 12.08 124 10.92 183 14.43
______ ______ ______ ______ ______ ______
Total $1,002 100.00 $1,134 100.00 $1,265 100.00
______ ______ ______ ______ ______ ______
______________________________________________________________________________
</TABLE>
LIQUIDITY AND SENSITIVITY
The principal goals of the Bank's asset and liability management strategy are
the maintenance of adequate liquidity and the management of interest rate risk.
Liquidity is the ability to convert assets to cash to fund depositors' with-
drawals or borrowers' loans without significant loss. Interest rate risk
management balances the effects of interest rate changes on assets that earn
interest or liabilities on which interest is paid, to protect the Bank from
wide fluctuations in its net interest income which could result from interest
rates changes.
Management must insure that adequate funds are available at all times to meet
the needs of its customers. On the asset side of the balance sheet, maturing
investments, loan payments, maturing loans, federal funds sold, and unpledged
investment securities are principal sources of liquidity. On the liability
side of the balance
<page38>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
sheet, liquidity sources include core deposits, the ability
to increase large denomination certificates, federal funds lines from
correspondent banks, borrowings from the Federal Reserve Bank, as well as the
ability to generate funds through the issuance of long-term debt and equity.
______________________________________
1Percent of loans in each category to total loans.
The liquidity ratio (the level of liquid assets divided by total deposits plus
short-term liabilities) was 18.0% at December 31, 1996 compared to 30.1% at
December 31, 1995. These ratios are considered to be adequate by management.
________________________________________________________________________________
TABLE 15. INTEREST RATE SENSITIVITY (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
December 31, 1996
Maturities/Repricing
______________________________________
1-3 4-12 13-60 Over 60
Months Months Months Months Total
_________ ________ ________ ________ ________
<S> <C> <C> <C> <C> <C>
EARNINGS ASSETS:
Loans $ 18,758 $ 9,310 $ 45,023 $ 13,284 $ 86,375
Investments 315 2,668 13,632 26,788 43,403
Federal Funds Sold 500 - - - 500
_________ ________ ________ ________ ________
$ 19,573 $ 11,978 $ 58,655 $ 40,072 $130,278
_________ ________ ________ ________ ________
INTEREST-BEARING DEPOSITS:
NOW accounts 8,573 - - - 8,573
Money market 2,985 - - - 2,985
Savings 14,920 - - - 14,920
Certificates of Deposit 10,973 32,566 35,821 - 79,360
Other borrowings 400 - - 2,400 2,800
_________ ________ ________ ________ ________
$ 37,851 $ 32,566 $ 35,821 $ 2,400 $108,638
_________ ________ ________ ________ ________
Interest sensitivity gap $ (18,278) $(20,588) $ 22,834 $ 37,672 $ -
Cumulative interest
sensitivity gap $ (18,278) $(38,866) $(16,032) $ 21,640 $ 21,640
Ratio of sensitivity gap
to total earning assets (14.0)% (15.8)% (17.5)% 28.9% -
Cumulative ratio of
sensitivity gap to
total earning assets (14.0)% (29.8)% (12.3)% 16.6% 16.6%
________________________________________________________________________________
</TABLE>
Interest rate risk is the effect that changes in interest rates would have on
interest income and interest expense as interest-sensitive assets and interest-
sensitive liabilities either reprice or mature. Management attempts to main-
tain the portfolios of earning assets and interest-bearing liabilities with
maturities or repricing opportunities at levels that will afford protection
from erosion of net interest margin, to the extent practical, from changes in
interest rates. Table 15 shows the sensitivity of the Bank's balance sheet on
December 31, 1996. This table reflects the sensitivity of the balance sheet
as of that specific date and is not necessarily indicative of the position
on other dates. At December 31, 1996, the Bank appeared to be cumulatively
asset-sensitive (earning assets subject to interest rate changes exceeding
interest-bearing liabilities subject to changes in interest rates). Included
in the interest-bearing liabilities subject to interest rate changes within
<page39>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
three months are NOW accounts and savings accounts totaling $23,493,000 which
historically have not been as interest-sensitive as other types of interest-
bearing deposits. Therefore, the Bank is asset sensitive in the three month
or less time period; liability sensitive in the four to twelve months time
period and thirteen to sixty months time period and asset-sensitive in the
over sixty months time period.
Matching sensitive positions alone does not ensure that the Bank has no
interest rate risk. The repricing characteristics of assets are different
from the repricing characteristics of funding sources. Thus, net interest
income can be impacted by changes in interest rates even if the repricing
opportunities of assets and liabilities are perfectly matched.
________________________________________________________________________________
TABLE 16. KEY FINANCIAL RATIOS
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
_____ _____ _____
<S> <C> <C> <C>
Return on average assets 1.2% 1.1% 1.2%
Return on average equity 11.6% 10.7% 12.7%
Average equity to average assets 10.4% 10.2% 9.5%
________________________________________________________________________________
<page40>
________________________________________________________________________________
PERSONNEL
________________________________________________________________________________
<page41>
________________________________________________________________________________
BOARD OF DIRECTORS
________________________________________________________________________________
K. Venson Bolt C. W. Harman Leon Moore
J. H. Conduff Kevin D. Mitchell Dorsey H. Thompson
William R. Gardner, Jr. J. T. Williams, Jr.
OFFICERS
________________________________________________________________________________
EXECUTIVE
J. H. Conduff...........................................Chairman of the Board
K. Venson Bolt.....................................Vice Chairman of the Board
Leon Moore..............................President and Chief Executive Officer
Lawrence M. Renfroe..................................Executive Vice President
C. W. Harman........................................................Secretary
G. Albert Owen, Jr.................................Vice President and Cashier
MAIN OFFICE
Lois A. Bond.........................................Assistant Vice President
Patricia K. Harris..........................................Assistant Cashier
Carolyn W. Reed.............................................Assistant Cashier
CAVE SPRING OFFICE
Larry J. Hurt.....................Assistant Vice President and Branch Manager
ADMINISTRATIVE
Marie V. Thomas................................................Vice President
Mary Ann Ayers..............................................Marketing Officer
Annette V. Battle....Assistant Secretary to the Board and Recording Secretary
Patricia B. Spangler.................................Administrative Assistant
LENDING
Dianne H. Hamm................Assistant Vice President and Compliance Officer
Patricia A. Bower...........................................Assistant Cashier
Troy L. Abell.......................Assistant Vice President and Loan Officer
Brenda J. Conroy......................................................Lending
OPERATIONS
Betty A. Whitlock.....................................Data Processing Officer
AUDIT
Wanda M. Gardner.............................................Internal Auditor
<page42>
STAFF
________________________________________________________________________________
MAIN OFFICE
CUSTOMER SERVICE CREDIT DEPARTMENT SECRETARIES
________________ _________________ ___________
Melodie Bower Renee Akers Shelby Rutherford
Sherrie Janney Ola Driskell, Manager Lisa Thomas
Betty Moran Shelia DeHart Beulah Correll
Sharon Zeman Gail Phillips, Supervisor Yara Middleton
Jan Rorrer DATA PROCESSING CENTER
______________________
PAYING AND RECEIVING Karen Sowers Gail Goad
TELLERS
____________________ Debra Funkhauser Gay Grim
Karen Bowman COLLECTIONS Alva Mae Harman
___________
Jennifer Hollandsworth Patricia Whitlock
Paula McDaniel Ralph Edwards
Helen Roberson Ruth Anders
Karen Sutphin CUSTODIANS
__________
Patsy Wallace
Roger Dickerson
Regina Gibson
Lucy Harris
Tammy Rutrough
____________________
CAVE SPRING OFFICE
__________________
BRANCH OPERATIONS MANAGER CUSTOMER SERVICE PAYING AND RECEIVING TELLERS
_________________________ ________________ ____________________________
Kit Edwards Margaret Caldwell Kevin Harvey
<page43>
SHAREHOLDER INFORMATION
________________________________________________________________________________
ANNUAL MEETING
______________
The annual meeting of shareholders will be held at 2:00 p.m. on April 23,
1997, in the community room at The Bank of Floyd, 101 Jacksonville Circle,
Floyd, Virginia.
____________________
REQUESTS FOR INFORMATION
________________________
Requests for information should be directed to Mrs. Annette Battle, Recording
Secretary, at The Bank of Floyd, Post Office Box 215, Floyd, Virginia, 24091;
telephone (540) 745-4191. A copy of the Company's Form 10-KSB for 1996 will
be furnished, without charge, after March 31, 1997 upon written request.
_____________________
INDEPENDENT AUDITORS STOCK TRANSFER AGENT
____________________ ____________________
Larrowe, Cardwell & Company, LC The Bank of Floyd
Certified Public Accountants Post Office Box 215
Post Office Box 760 Floyd, Virginia 24091
Galax, Virginia 24333
_____________________
FEDERAL DEPOSIT INSURANCE CORPORATION
_____________________________________
The Bank is a member of the FDIC. This statement has not been reviewed, or
confirmed for accuracy or relevance by the Federal Deposit Insurance
Corporation.
______________________
BANKING OFFICES
_______________
101 Jacksonville Circle
Floyd, Virginia
4094 Postal Drive
(Off Route 419 near Cave Spring Corners)
Roanoke, Virginia
(540) 745-4191 * (540) 774-1111
<pageinside back cover>
CARDINAL BANKSHARES CORPORATION
BYLAWS
ARTICLE I
_________
SHAREHOLDERS
____________
Section I.I. Annual Meeting. The annual meeting of the shareholders to
elect directors and for the transaction of such other business as may
properly come before the meeting shall be held on the fourth Wednesday in
April of each year or, if such date falls on a legal holiday, the next
business day.
Section 1.2. Special Meetings. Special meetings of shareholders may be
called by the Chairman of the Board of Directors, the President or by a
majority of the Board of Directors. Business transacted at all special
meetings shall be confined to the purpose(s) stated in the notice.
Section 1.3. Place of Meeting. The Board of Directors (the "Board") may
designate any place inside or outside Virginia for any annual or special
meeting of the shareholders. If no designation is made, the meeting will be
at the principal office of the Corporation.
Section 1.4. Notice of Meeting. Except as otherwise required by the
Virginia Stock Corporation Act, as now in effect or hereafter from time to
time amended (the "Act"), written notice stating the time and location of
the meeting, and, in case of a special meeting, the purpose(s) of the
meeting, shall be delivered not less than ten nor more than sixty days
before the meeting date, either personally or by mail, to each shareholder
of record entitled to vote at such meeting. If mailed, the notice will be
deemed to be delivered when deposited in the United States mail, postage
prepaid, addressed to the shareholder at his address as it appears on the
stock transfer books of the Corporation.
Section 1.5. Closing of Transfer Books or Fixing of Record Date
For the purpose of determining shareholders entitled to notice of or vote
at any shareholders' meeting, or any adjournment thereof, or entitled to
receive payment of any dividend, or in order to determine shareholders for
any other proper purpose, the Board may close the stock transfer books for
a stated period not to exceed seventy days. If the stock transfer books are
closed to determine shareholders entitled to notice of or vote at a share-
holders' meeting, such books shall be closed for at least ten days immediately
preceding such meeting. In lieu of closing the stock transfer books, the
Board may fix in advance a date as the record date for a determination of
shareholders, such date to be not more than seventy days, and in case of a
stockholders' meeting, not less than ten days, prior to the date on which
the particular aciton requiring a determination of shareholders is to be
taken. If the stock transfer books are not closed and no record date is
fixed for the determination of shareholders entitled to notice of or vote
at a shareholders' meeting, or shareholders entitled to receive payment of
a dividend, the day before the notice of the meeting is mailed or the date
on which the resolution of the Board declaring such dividend is adopted, as
the case may be, shall be the record date for the determination of share-
holders. Any determination of shareholders entitled to vote at a share-
holders' meeting made as provided in this Section shall apply to any
adjournment thereof, unless the Board fixes a new record date, which it
shall do if the meeting is adjourned to a date more than 120 days after the
date fixed for the original meeting.
Section 1.6. Presiding Officer and the Secretary. The Chairman or the
President, or, in their absence, an officer designated by the Board, shall
preside at all shareholder meetings, and the Secretary shall serve as
secretary. Otherwise, a chairman or secretary shall be elected by a majority
vote of the shareholders present to act in the absence of those officers.
Section 1.7. Voting Lists. The Secretary or other person having charge of
the stock transfer books of the Corporation shall make, at least ten days
before each shareholders' meeting, a complete list of the shareholders
entitled to vote at such meeting, or any adjournment thereof, with the
address of and the number of shares held by each, which list, for a period
of ten days prior to such meeting, shall be kept on file at the registered
office of the Corporation and shall be subject to inspection by any share-
holder at any time during usual business hours, subject to any limitations
on such right provided by the Act or other provisions of law. Such list
shall also be produced and kept open at the time and palce of the meeting for
inspection by any shareholder during the whole time of the meeting for the
purposes thereof. The original stock transfer book is prima facie evidence
as to the shareholders who are entitled to examine such list or transfer
books or to vote at any shareholders' meeting.
Section 1.8. Quorum. Unless otherwise provided in the Corporation's
Articles of Incorporation (the "Articles"), a majority of the outstanding
shares of the Corporation entitled to vote, represented in person or by
proxy, shall constitute a quorum at a shareholders' meeting. If less than
a quorum is present at a meeting, a majority of the shares so represented
may adjourn the meeting from time to time without further notice. At such
adjourned meeting at which a quorum is present or represented, any business
may be transacted which might have been transacted at the original meeting.
The affirmative vote of the majority of the shares represented at the
at the meeting and entitled to vote on the subject matter shall be the act
of the shareholders, unless the vote of a greater number is required by the
Act or the Articles, and except that in the election of directors those
receiving the greatest number of votes shall be deemed elected, even though
not receiving a majority.
Section 1.9 Proxies. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his duly authorized
attorney in fact. Such proxy shall be filed with the Secretary before or at
the beginning of the meeting, prior to the call to order. No proxy shall be
valid after eleven months from the date of its execution, unless otherwise
provided in the proxy.
Section 1.10. Action by Shareholders Without a Meeting. Any action required
to be taken at a meeting of the shareholders of the Corporation, or any
action which may be taken at a meeting of the shareholders, may be taken
without a meeting if a consent in writing, setting forth the action so
taken, shall be signed by all of the shareholders entitled to vote with
respect to the subject matter thereof.
Section 1.11. Shareholder Proposals or Nominations. No business shall be
transacted at any meeting of shareholders, except such business as shall
be (a) specified in the notice of meeting given as provided in Section 1.4
of this Article I; (b) otherwise brought before the meeting by or at the
direction of the Board; or (c) otherwise brought before the meeting by a
shareholder of record of the Corporation entitled to vote at the meeting
in compliance with the procedure set forth in this Section 1.11. For
business to be brought before a meeting by a shareholder pursuant to (c)
above, the shareholder must have given timely notice in writing to the
President of the Corporation. To be timely, a shareholder's notice shall be
delivered to, or mailed and received at, the principal executive offices of
the Corporation not less than sixty days nor more than ninety days prior to
the meeting; provided, however, in the event that less than seventy days'
notice or prior public disclosure of the date of the meeting is given or
made to shareholders, notice by the shareholder to be timely must be so
received not later than the close of business on the tenth day following
the day on which such notice of the date of the meeting or such public
disclosure was made. Notice shall be deemed to have been given more than
seventy days in advance of an annual meeting of shareholders if the annual
meeting is called on the date indicated by Section 1.1 of this Article 1
without regard to when public disclosure therof is made. Notice of actions
to be brought before a meeting pursuant to (c) above shall set forth, as to
each matter the shareholder proposes to bring before the meeting; (a) a
brief description of the business desired to be brought before the meeting
and the reasons for bringing such business before the meeting; and (b) as
to the shareholder giving the notice, (i) the name and address, as they
appear on the Corporation's books, of such shareholder, (ii) the classes
and number of shares of the Corporation which are owned of record or
beneficially by such shareholder, and (iii) any material interest of such
shareholder in such business other than his interest as a shareholder of
the Corporation. Notwithstanding anything in these Bylawls to the contrary,
no business shall be conducted on a shareholder proposal or nomination
except in accordance with the provisions set forth in this Section 1.11.
The requirements of this Section are in addition to any other requirements
established by law and do not impair the effect of the requirements of
Section 1.2 of these Bylaws relating to business permitted to be transacted
at special shareholders' meetings. The Chairman of the meeting shall, if
the facts warrant,determine and declare to the meeting that any business
was not properly brought before the meeting in accordance with the
provision prescribed by these Bylaws and, if he should so determine, he
shall so declare to the meeting and any such business not so properly
brought before the meeting shall not be transacted.
ARTICLE II
----------
DIRECTORS
_________
Section 2.1. Board of Directors. The Board of Directors (hereinafter
referred to as the "Board"), shall have power to manage and administer the
business and affairs of the holding company. Except as expressly limited by
law, all corporate powers of the holding company shall be vested in and may
be exercised by said Board.
Section 2.2. Number. Tenure and Oualifications. The number of directors of
the Corporation shall be eight. The number of directors may be increased or
decreased from time to time by amendment of these Bylaws within the variable
range established by the Articles. At each annual meeting of shareholders,
the number of directors equal to the number of the class whose term expires
at the time of such meeting shall be elected to hold office until the next
succeeding annual meeting and until their successors shall have been elected
and qualify.
Directors reaching the age of 70 shall be ineligible for renomination to the
Board of Directors of the Corporation at the expiration of the term of office
during which the director becomes 70 years of age. Provided, however, that
the foregoing clause shall not apply to the original Directors, K. Venson
Bolt, J. H. Conduff, William R. Gardner, Jr., C. W. Harman, Kevin D. Mitchell,
R. Leon Moore, Dorsey H. Thompson and J. T. Williams, Jr., their tenure shall
be grandfathered under The Bank of Floyd Bylaws.
Section 2.3. Class of Directors. Directors shall be as set forth in the
holding company's Articles of Incorporation.
Section 2.4. Organization Meeting. The President or Vice-President, upon
receiving the certificate of the judges, of the result of any election, shall
notify the directors-elect of their election and of the time at which they
are required to meet at the main office of the holding company for the
purpose of organizing the new Board and electing and appointing officers of
the holding company for the succeeding year. Such meeting shall be appointed
to be held on the day of the election or as soon thereafter as practicable,
and in any event, within thirty days thereof, and if, at the time fixed for
such meeting, there shall not be a quorum present, the Directors present may
adjourn the meeting, from time to time, until a quorum is obtained.
Section 2.5. Regular Meetings. The Regular Meetings of the Board of
Directors shall be held, without notice, on the second Wednesday of the first
month of each quarter, in The Bank of Floyd Board of Directors' room or at
such other time and place as the Board may establish at a regular meeting.
Section 2.6. Special Meetings. Special Meetings of the Board of Directors
may be called by the President of the holding company, or at the request of
a majority of the Directors. Each member of the Board of Directors shall be
given notice stating the time and place, by facsimile, letter, or in person,
of each such special meeting.
Section 2.7. Ouorum. A majority of the Directors shall constitute a quorum
at any meeting, except when otherwise provided by law; but a less number may
adjourn any meeting, from time to time, and the meeting may be held, as
adjourned, without further notice. If a quorum is present, the Board may
take action through the vote of a majority of directors who are in attendance.
Section 2.8. Vacancies. When any vacancy occurs among the Directors, the
remaining members of the Board, in accordance with the laws of the United
States or the Commonwealth of Virginia, may appoint a Director to fill such
vacancy at any regular meeting of the Board, or at a special meeting called
for that purpose.
ARTICLE III
___________
COMMITTEES OF THE BOARD
_______________________
The Board of Directors has power over and is solely responsible for the
management, supervision, and administration of the holding company. The
Board of Directors may delegate its power, but not any of its responsibilities,
to such persons or committees as the Board may determine.
The Board of Directors must formally ratify written policies authorized by
committees of the Board before such policies become effective. Each committee
must have one or more member(s), who serve at the pleasure of the Board of
Directors. Provisions of the articles and bylaws governing place of meetings,
notice of meeting, quorum and voting requirements of the Board of Directors,
apply to committees and their members as well. The creation of a committee
and appointment of members to it must be approved by the Board of Directors.
Section 3.1. Executive Committee. The Board may appoint an Executive
Committee composed of not less than three (3) directors and the Chief
Executive Officer, appointed by the Board annually or more often. The
Executive Committee shall have power to discount and purchase bills, notes
and other evidences of debt, to buy and sell bills of exchange, to examine
and approve loans and discounts, to exercise authority regarding loans and
discounts, and to exercise, when the Board is not in session, all other
powers of the Board that may lawfully be delegated. The Executive Committee
shall keep minutes of its meetings and such minutes shall be sumitted at the
next regular meeting of the Board of Directors at which a quorum is present,
and any action taken by the Board with respect thereto shall be entered in
the minutes of the Board.
Section 3.2. Risk and/or Asset Liability Management Committee. The Board
may appoint a Risk and/or Asset Liability Management Committee composed of not
less than two (2) directors and the Chief Executive Officer appointed by
the Board annually or more often. The Committee shall have the power to
ensure adherence to the Risk and/or Asset Liability Policy, to recommend
amendments thereto, to manage interest rate risk, approve purchase or sell
of investments and loans to manage risk, when the Board is not in session,
all other powers of the Board may be lawfully delegated. The Committee shall
keep minutes of its meetings, and such minutes shall be submitted at the
next regular meeting of the Board of Directors at which a quorum is present,
and any action taken by the Board with respect thereto shall be entered in
the minutes of the Board.
Section 3.3. Audit Committee. There shall be an Audit Committee composed
of not less than three (3) directors, exclusive of any active officers,
appointed by the Board annually or more often. The duty of that committee
shall be to examine at least once during each calendar year and within 15
months of the last examination the affairs of the holding company or its
affiliates or cause suitable examinations to be made by auditors responsible
only to the Board of Directors and to report the result of such examination
in writing to the Board at the next regular meeting thereafter. Such report
shall state whether th eholding company or its affiliates is in a sound
condition, and whether adequate internal controls and procedures are being
maintained and shall recommend to the Board such changes in the manner of
conducing the affairs of the holding company as shall be deemed advisable.
Section 3.4. Other Committees. The Board of Directors may appoint,
from time to time, from its own members, other committees of one or more
persons, for such purposes and with such powers as the Board may determine.
However, a committee may not:
(1) Authorize distributions of assets or dividends.
(2) Approve action required to be approved by shareholders.
(3) Fill vacancies on the Board of Directors or any of its committees.
(4) Amend Articles of Incorporation.
(5) Adopt, amend or repeal bylaws.
(6) Authorize or approve issuance or sale or contract for sale
of shares, or determine the designation and relative rights,
preferences and limitations of a class or series of shares.
ARTICLE IV
__________
OFFICERS AND EMPLOYEES
______________________
Section 4.1. Chairman of the Board. The Board of Directors may appoint one
of its members to be Chairman of the Board to serve at the pleasure of the
Board. He shall preside at all meetings of the Board of Directors. He
shall also have and may exercise such further powers and duties as from
time to time may be conferred upon, or assigned to him by the Board of
Directors.
Section 4.2. President. The Board of Directors shall appoint one of its
members to be President and Chief Executive Officer of the holding company.
The President shall have general executive powers, and shall have and may
exercise any and all other powers and duties pertaining by law, regulation,
or practice, to the office of President, or imposed by these Bylaws. He
shall also have and may exercise such further powers and duties as from
time to time may be conferred upon, or assigned to him by the Board of
Directors.
Section 4.3. Executive Vice President. The Board of Directors may appoint
an Executive Vice President. The Executive Vice President shall have such
powers and duties as may be assigned to him by the Board of Directors.
Section 4.4. Secretary. The Board of Directors shall appoint a Secretary
of the Board and of the holding company, and shall keep accurate minutes of
all meetings. He shall give all notices required by these Bylaws. He shall
be custodian of the corporate seal, records, documentsand papers of the
holding company. He shall provide for the keeping of proper records of all
transactions of the holding company. He shall have and may exercise any and
all other powers and duties pertaining by law, regulation or practice, or
imposed by these Bylaws. He shall also perform such other duties as may be
assigned to him, from time to time, by the Board of Directors.
Section 4.5. Treasurer. The Treasurer shall keep all records and
perform all other duties usually performed by the Treasurer of a banking
corporation, subject to the direction and control of the Board.
Section 4.6. Other Officers. The Board of Directors may appoint one or
more Vice Presidents, one or more Assistant Vice Presidents, one or more
Assistant Secretaries, and such other officers and Attorneys-in-fact as from
time to time may appear to the Board of Directors to be required or desirable
to transact the business of the holding company. Such officers shall
respectively exercise such powers and perform such duties as pertain to
their several offices, or as may be conferred upon, or assigned to them by
the Board of Directors or the President.
Section 4.7. Tenure of Office. Subject to any agreement to the contrary,
the President shall hold his office for the current year for which the Board
of which he shall be a member has elected, unless he shall resign, become
disqualified, or be removed, and any vacancy occurring in the office of
President shall be filled promptly by the Board of Directors. Any one or
more offices may be held by the same person, unless prohibited by law or
regulation.
ARTICLE V
STOCK AND STOCK CERTIFICATES
Section 5.1. Transfers. Shares of stock shall be transferable on the
books of the holding company or such other party as designated by the Board
of Directors, and a transfer book shall be kept in which all transfers
of stock shall be recorded. Every person becoming a shareholder by such
transfer shall, in proportion to his shares, succeed to all rights of
the prior holder of such shares. The Board of Directors may impose
conditions upon the transfer of the stock reasonably calculated to
simplify the work of the holding company with respect to stock transfers,
voting at shareholder's meetings, and related matters and to protect
against fraudulent transfers.
Section 5.2. Stock Certificates. Certificates of Stock shall bear the
signature of any holding company officer and attested by any other holding
company officer, each of whom shall be appointed by the Board of Directors.
Each certificate shall recite on its face that the stock represented thereby
is transferable only upon the books of the holding company and properly
endorsed.
Section 5.3. Authorized Capital. The amount of authorized capital stock of
this holding company shall be $50,000,000 divided into 5,000,000 shares of
common stock, the par value per share of $lO, but the capital stock may be
increased or decreased from time to time, in accordance with the provisions
of the laws of the Commonwealth of Virginia. No shares shall possess
preemptive rights.
ARTICLE VI
__________
CORPORATE SEAL
______________
The President, the Executive Vice President, the Secretary, or any other
officer designated by the Board of Directors, shall have authority to affix
the corporate seal to any document requiring such seal, and to attest the
same. Such seal shall be substantially in the following form:
( )
(Impression)
( of )
( seal )
( )
ARTICLE VII
___________
MISCELLANEOUS PROVISIONS
________________________
Section 7.1. Fiscal Year. The fiscal year of the holding company shall
be the calendar year.
Section 7.2. Execution of Instruments. All agreements, indentures,
mortgages, deeds, conveyances, transfers, certificates, declarations,
receipts, discharges, releases, satisfactions, settlements, petitions,
schedules, accounts, affidavits, bonds, undertakings, proxies and other
instruments or documents may be signed, executed, acknowledged, verified,
delivered or accepted on behalf of the bank by the President, any Vice
President, or any other holding company officer appointed by the Board of
Directors. The provisions of this Section 7.2 are supplementary to any
other provision of these Bylaws.
Section 7.3. Records. The Articles ofIncorporation, the Bylaws and the
proceedings of all meetings of the shareholders, the Board of Directors,
standing committees of the Board, shall be recorded in appropriate minute
books provided for the purpose. The minutes of each meeting shall be signed
by the Secretary or other officer appointed to act as Secretary of the
meeting. A shareholder shall be entitled to inspect the records of the
association provided (1) he has been a shareholder of record for at least
six months immediately preceding his demand or is the holder of record of
at least five percent of all outstanding shares and (2) he gives the holding
company written notice of his demand at least five business days before
the date he wishes to inspect and copy.
ARTICLE VIII
____________
BYLAWS
______
Section 8.1. Inspection. A copy of the Bylaws, with all amendments
thereto, shall at all times by kept in a convenient place within the holding
company offices, and shall be open for inspection to all shareholders, during
banking hours only, and according to the procedures outlined in Section 7.3.
Section 8.2. Amendments. The Bylaws may be amended, altered or repealed, at
any regular meeting of the Board of Directors, by a vote of a majority of the
whole number of the Directors. The Bylaws may also be amended, altered or
replaced by shareholders either by unanimous action without a meeting or by
a majority vote of the outstanding shares at a duly called meeting.
INDEMNIFICATION
_______________
Sec.1-In any proceeding brought by a shareholder of the Holding
Company in the right of the Holding Company or brought by
or on behalf of shareholders of the Holding Company, an
officer or a director of the Holding Companyshall not be liable
to the Holding Company or its shareholders for any monetary
damages in excess of the limit of liability then insured for by
the Holding Company, pursuant to an effective directors and
officers liability insurance policy, if such insurance is then
carried by the Holding misconduct or a knowing violation of the
criminal law or any federal or state securities law.
Sec.2-If such insurance is not then carried by the Holding Company, in
any such proceeding referred to in the preceding paragraph, an
officer or a director of the Holding Company shall not be liable
to the Holding Company or its shareholders for any monetary damages
in excess of $1.00 arising out of any transaction, occurrence or
course of conduct, unless in such proceeding a judgment shall have
been entered against the director or officer because of a finding
that the act or omission for which the officer or director was
adjudged liable had been proved to be due to his willful misconduct
or a knowing violation of the criminal law or federal or state
securities law.
Sec.3-To the full extent required or permitted and in the manner
prescribed by the Virginia Stock Corporation Act and any
other applicable law, the Holding Company shall indemnify
a director of Holding Company who is or was a party to any
proceeding by reason of the fact that he is or was such a
director or officer or is or was serving at the request of
the Holding Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust,
employee benefit plan or other profit or nonprofit enterprise.
The Holding Company shall promptly pay for or reimburse the
reasonable expenses, including attorneys fees, incurred by
any such officer or director of the Holding Company in
connection with any proceeding (whether or not made a party)
arising from his status as such officer or director, in
advance of final disposition of any such proceeding upon
receipt by the Holding Company from such officer of director
of (a) a written statement of good faith belief that he is
entitled to indemnity by the Holding Company, and (b) a
written undertaking, executed personally or on his behalf, to
repay the amount so paid or reimbursed if after final
disposition of such proceeding it is determined that he did
not meet the applicable standard of conduct. The Board of
Directors is hereby empowered, by a majority vote of a
quorum of disinterested directors, to contract in advance to
indemnify any director or officer.
Sec.4-The Board of Directors is hereby empowered, by majority vote
of a quorum of disinterested directors, to cause the Holding
Company to indemnify or contract in advance to indemnify any
person not specified in Section 3 of this Article who was or
is a party to any proceeding, by reason of the fact that he is
or was an employee or agent of the Holding Company, or is or was
serving at the request of the Holding Company as director, officer,
employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other profit or nonprofit
enterprise, to the same extent as if such person were specified as
one to whom indemnification is granted in Section 3 of this Article.
Sec.5-The Holding Company may purchase and maintain insurance to
indemnify it against the whole or any portion of the
liability assumed by it in accordance with this Article
and may also procure insurance, in such amounts as the
Board of Directors may determine, on behalf of any person
who is or was a director, officer, employee or agent of
the Holding Company, or is or was serving at the request
of the Holding Company as a director, officer, employee or
agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other profit or nonprofit
enterprise, against any liability asserted against or
incurred by any such person in any such capacity or arising
from his status as such, whether or not the Holding Company
would have power to indemnify him against such liability
under the provisions of this Article.
Sec.6-In the event there has been a change in the composition of
a majority of the Board of Directors after the date of the
alleged act or omission with respect to which indemnification
is claimed, any determination as to indemnification
and advancement of expenses with respect to any claim for
indemnification made pursuant to this Article shall be
made by special legal counsel agreed upon by the Board
of Directors and the proposed indemnitee. If the Board
of Directors and the proposed indemnitee are unable to
agree upon such special legal counsel, the Board of
Directors and the proposed indemnitee each shall select
a nominee, and the nominee shall select such special legal counsel.
Sec.7-The provisions of this Article shall be applicable
to all actions, claims, suits or proceedings commenced after
the adoption hereof, whether arising from any action taken or
failure to act before or after such adoption. No amendment,
modification or repeal of this Article shall diminish the
rights provided hereby or diminish the right to indemnification
with respect to any claim, issue or matter in any then pending
or subsequent proceeding that is based in any material respect
on any alleged action or failure to act prior to such amendment,
modification or repeal.
Sec.8-Reference herein to directors, officers, employees or agents shall
include former directors, officers, employees and agents and their
respective heirs, executors and administrators.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CARDINAL BANKSHARES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AT DECEMBER 30,
1996 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,749,552
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,338,456
<INVESTMENTS-CARRYING> 13,383,394
<INVESTMENTS-MARKET> 13,361,576
<LOANS> 86,374,914
<ALLOWANCE> (1,002,455)
<TOTAL-ASSETS> 136,421,721
<DEPOSITS> 118,424,447
<SHORT-TERM> 400,000
<LIABILITIES-OTHER> 662,355
<LONG-TERM> 2,400,000
0
0
<COMMON> 4,655,360
<OTHER-SE> 9,879,559
<TOTAL-LIABILITIES-AND-EQUITY> 136,421,721
<INTEREST-LOAN> 7,472,380
<INTEREST-INVEST> 2,646,818
<INTEREST-OTHER> 169,334
<INTEREST-TOTAL> 10,288,532
<INTEREST-DEPOSIT> 5,306,591
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 4,981,941
<LOAN-LOSSES> 325,000
<SECURITIES-GAINS> 5,856
<EXPENSE-OTHER> 2,823,562
<INCOME-PRETAX> 2,176,667
<INCOME-PRE-EXTRAORDINARY> 2,176,667
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,582,920
<EPS-PRIMARY> 3.40
<EPS-DILUTED> 3.40
<YIELD-ACTUAL> 3.91
<LOANS-NON> 139,161
<LOANS-PAST> 215,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,134,182
<CHARGE-OFFS> 495,201
<RECOVERIES> 38,474
<ALLOWANCE-CLOSE> 1,002,455
<ALLOWANCE-DOMESTIC> 1,002,455
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
