U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1998
or
_____Transition Report under Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the transition period from__________________ to __________________.
Commission File No. -0-28780-
CARDINAL BANKSHARES CORPORATION
(Exact name of the registrant as specified in its charter)
Virginia 54-1804471
(State of Incorporation) (I.R.S. Employer Identification No.)
101 Jacksonville Circle (P. O. Box 215), Floyd VA 24091
(Address of principal executive offices)
(540) 745-4191
(Issuer's telephone number, including area code)
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 the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
The number of shares outstanding of the Issuer's Common Stock, $10 Par
Value, as of September 30, 1998 was 511,911.
Transitional Small Business Disclosure Format (check one):Yes No X
Page 1 of 13.
CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
FORM 10-QSB
INDEX
_____________________________________________________________________________
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements of Cardinal Bankshares Corporation
(the "Company") are set forth in the following pages.
Consolidated Balance Sheets as of September 30, 1998 and
December 31,1997........................................................3
Consolidated Statements of Operations for the Three
and Six Months Ended September 30, 1998 and 1997.......................4
Consolidated Statements of Stockholders' Equity for the
Periods Ended September 30, 1998 and 1997...............................5
Consolidated Statements of Cash Flows for the Periods
Ended September 30, 1998 and 1997.....................................6-7
Notes to Consolidated Financial Statements.............................8-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................9-11
PART II. OTHER INFORMATION................................................11
SIGNATURES.................................................................12
All schedules have been omitted because they are inapplicable or the
required information is provided in the financial statements, including the
notes thereto.
CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
________________________________________________________________________________
<TABLE>
<CAPTION> September 30, December 31,
1998 1997
____________ ____________
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,304,135 $ 1,941,494
Interest-bearing deposits with banks 5,099,231 5,000,000
Federal funds sold 10,760,000 3,825,000
Investment securities available for sale 24,191,724 31,663,068
Investment securities held to maturity;
market value of $16,089,806 in 1998 and
$13,614,488 in 1997 15,738,217 13,430,624
Loans, net of allowance for credit losses
of $1,648,316 in 1998 and $1,452,126 in
1997 84,158,220 85,304,739
Premises and equipment 2,093,233 1,687,859
Accrued income 1,078,389 1,093,063
Other assets 1,229,475 1,126,470
___________ ___________
Total assets $146,652,624 $145,072,317
___________ ___________
LIABILITIES
Demand deposits $ 14,768,229 $ 12,229,167
NOW deposits 8,876,281 8,923,777
Savings deposits 17,312,578 17,507,178
Large denomination time deposits 12,163,058 15,120,658
Other time deposits 75,432,545 74,407,946
___________ ___________
Total deposits 128,552,691 128,188,726
Short-term debt - -
Long-term debt - -
Accrued interest payable 292,001 269,032
Other liabilities 531,502 630,408
___________ ___________
Total liabilities 129,376,194 129,088,166
___________ ___________
Commitments and contingencies (Note 3)
STOCKHOLDERS'EQUITY:
Common stock, $10 par value, authorized
5,000,000 shares, issued 511,911
shares in 1998 and 1997 5,119,110 5,119,110
Surplus 2,925,150 2,925,150
Retained earnings 9,004,018 7,727,506
Unrealized appreciation (depreciation) on
investment securities available for sale,
net of income taxes 228,152 212,385
___________ ___________
Total stockholders' equity 17,276,430 15,984,151
___________ ___________
Total liabilities and stockholders'
equity $146,652,624 $145,072,317
___________ ___________
</TABLE>
See Notes to Consolidated Financial Statements <PAGE> 3
CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the quarter and nine months ended September 30, 1998 and 1997 (Unaudited)
________________________________________________________________________________
<TABLE>
<CAPTION> Nine Nine
Quarter Quarter Months Months
Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
____ ____ ____ ____
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans and fees on loans $ 2,035,113 $ 2,027,228 $ 6,058,998 $ 6,022,325
Federal funds sold 126,767 115,529 320,749 196,914
Taxable investment securities 492,524 517,421 1,663,411 1,616,004
Investment securities exempt
from federal tax 169,700 114,109 460,811 363,852
__________ __________ __________ __________
Total interest income 2,824,104 2,774,287 8,503,969 8,199,095
INTEREST EXPENSE ON DEPOSITS 1,442,340 1,451,389 4,345,718 4,190,984
__________ __________ __________ __________
Net interest income 1,381,764 1,322,898 4,158,251 4,008,111
PROVISION FOR CREDIT LOSSES 70,000 275,000 205,000 425,000
__________ __________ __________ __________
Net interest income after
provision for credit
losses 1,311,764 1,047,898 3,953,251 3,583,111
OTHER INCOME:
Service charges on deposit
accounts 37,662 38,331 107,651 109,838
Other service charges and fees 9,393 6,473 21,651 19,929
Securities gains 7,606 (1,706) 27,189 5,102
Other real estate owned gains - 231,494 - 231,494
Other income 124,308 51,916 177,887 169,608
__________ __________ __________ __________
Total other income 178,969 326,508 334,378 535,971
OTHER EXPENSE:
Salaries and employee benefits 470,391 455,793 1,339,294 1,200,898
Occupancy expense 32,798 28,245 92,690 77,777
Equipment expense 61,474 65,480 181,643 175,434
Other expense 197,470 212,475 554,299 717,158
__________ __________ __________ __________
Total other expense 762,133 761,993 2,167,926 2,171,267
__________ __________ __________ __________
Income before income taxes 728,600 612,413 2,119,703 1,947,815
Income tax expense 193,972 185,397 576,996 550,397
__________ __________ __________ __________
Net income $ 534,628 $ 427,016 $ 1,542,707 $ 1,397,418
__________ __________ __________ __________
BASIC AND DILUTED EARNINGS
PER SHARE $ 1.04 $ 0.83 $ 3.01 $ 2.73
__________ __________ __________ __________
</TABLE>
See Notes to Consolidated Financial Statements <PAGE> 4
CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the nine months ended September 30, 1998 and September 30, 1997 (Unaudited)
________________________________________________________________________________
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
OTHER STOCK-
COMMON RETAINED COMPREHENSIVE HOLDERS'
STOCK SURPLUS EARNINGS INCOME (LOSS) EQUITY
__________ _______ _________ _____________ ________
<S> <C> <C> <C> <C> <C>
January 1, 1997 $4,655,360 $1,200,000 $ 8,585,007 $ 94,552 $14,534,919
Comprehensive income
Net income 1,397,418 1,397,418
Net change in unrealized
appreciation on
investment securities
available for sale, net
of income taxes 102,928 102,928
Total comprehensive __________
income 1,500,346
__________
Dividends paid ($.51
per share) (237,423) (237,423)
_________ _________ __________ ________ __________
September 30, 1997 $4,655,360 $1,200,000 $ 9,745,002 $ 197,480 $15,797,842
_________ _________ __________ ________ __________
January 1, 1998 $5,119,110 $2,925,150 $ 7,727,506 $ 212,385 $15,984,151
Comprehensive income
Net income 1,542,707 1,542,707
Net change in unrealized
appreciation on
investment securities
available for sale, net
of income taxes 15,767 15,767
Total comprehensive __________
income 1,558,474
__________
Dividends paid ($.52
per share) (266,195) (266,195)
_________ _________ __________ ________ __________
September 30, 1998 $5,119,110 $2,925,150 $ 9,004,018 $ 228,152 $ 17,276,430
_________ _________ __________ ________ __________
</TABLE>
See Notes to Consolidated Financial Statements <PAGE> 5
CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1998 and 1997 (Unaudited)
_______________________________________________________________________________
<TABLE>
<CAPTION>
1998 1997
____ ____
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,542,707 $ 1,397,418
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 117,463 131,949
Accretion of discounts on securities,
net of amortization of premiums 38,130 (7,491)
Amortization of loan fees (91,438) (75,991)
Provision for credit losses 205,000 425,000
Deferred income taxes - (86,000)
Net realized gains on securities (27,189) (5,102)
Net realized gains on sale of ORE - (231,494)
Deferred compensation & pension expense 49,038 -
Changes in assets and liabilities:
Accrued income 14,674 72,241
Other assets (199,106) 117,219
Accrued interest payable 22,969 32,017
Other liabilities (147,944) 55,186
__________ ___________
Net cash provided by operating activities 1,524,304 1,824,952
__________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing
deposits in banks (99,231) -
Net (increase) decrease in federal funds
sold (6,935,000) (8,200,000)
Purchases of securities (12,216,872) (7,806,029)
Sale of securities 12,125 2,075,318
Maturities of securities 17,381,446 8,389,634
Net (increase) decrease in loans 1,032,957 (839,827)
Proceeds from sale of other real estate 87,979 408,358
Proceeds from sale of bank land 90,000 -
Purchases of properties and equipment (612,837) (211,253)
__________ __________
Net cash used in investing activities (1,259,433) (6,183,799)
__________ __________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, NOW,
and savings deposits 2,296,966 (551,582)
Net increase (decrease) in time deposits (1,933,001) 4,913,186
Dividends paid (266,195) (237,423)
Net decrease in short-term debt - (400,000)
__________ __________
Net cash provided (used) by financing
activities 97,770 3,724,181
__________ __________
Net increase (decrease) in cash and cash
equivalents 362,641 (634,666)
</TABLE>
See Notes to Consolidated Financial Statements <PAGE> 6
CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
For the nine months ended September 30, 1998 and 1997 (Unaudited)
_______________________________________________________________________________
<TABLE>
<CAPTION>
1998 1997
____ ____
<S> <C> <C>
CASH AND CASH EQUIVALENTS, BEGINNING 1,941,494 2,749,552
__________ __________
CASH AND CASH EQUIVALENTS, ENDING $ 2,304,135 $ 2,114,886
__________ __________
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 4,322,749 $ 4,158,967
__________ __________
Income taxes paid $ 724,089 $ 584,830
__________ __________
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Other real estate acquired in
settlement of loans $ - $ -
</TABLE>
See Notes to Consolidated Financial Statements <PAGE> 7
CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
________________________________________________________________________________
ITEM 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
NOTE 1. BASIS OF PRESENTATION:
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 July 1, 1996 and
used the pooling of interests accounting method.
The consolidated financial statements as of September 30, 1998 and for
the periods ended September 30, 1998 and 1997 included herein, have been
prepared by Cardinal Bankshares Corporation, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. In the
opinion of management, the information furnished in the interim consolidated
financial statements reflects all adjustments necessary to present fairly the
Company's consolidated financial position, results of operations, changes in
stockholders' equity and cash flows for such interim periods. Management
believes that all interim period adjustments are of a normal recurring nature.
These consolidated financial statements should be read in conjunction with the
Company's audited financial statements and the notes thereto as of December 31,
1997, included in the Company's Annual Report for the fiscal year ended December
31, 1997.
The Bank of Floyd and its wholly owned subsidiary, FBC, Inc. are organized
and incorporated under the laws of the Commonwealth of Virginia. As a state
chartered Federal Reserve Bank 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. The Bank serves the counties of Floyd, Montgomery, Carroll,
and Roanoke, Virginia and the City of Roanoke and Radford, Virginia through
four banking offices.
All significant intercompany accounts and transactions have been elimi-
nated in consolidation. Certain prior year amounts have been reclassified to
conform to the current year presentation.
NOTE 2. ALLOWANCES FOR CREDIT LOSSES
The following is an analysis of the allowance for credit losses for the
nine months ended September 30.
<TABLE>
<CAPTION>
1998 1997
____ ____
<S> <C> <C>
Balance at January 1 $ 1,452,126 $ 1,002,455
Provision charged to operations 205,000 425,000
Loans charged off, net of recoveries (8,810) (35,795)
__________ __________
Balance at September 30 $ 1,648,316 $ 1,391,660
</TABLE>
<PAGE> 8
NOTE 3. COMMITMENTS AND CONTINGENCIES
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as for on-balance-sheet instruments. A summary of the
Bank's commitments at September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
____ ____
<S> <C> <C>
Commitments to extend credit $ 4,980,531 $ 5,602,000
Standby letters of credit 368,600 188,000
__________ __________
$ 5,349,131 $ 5,790,000
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the nine month period ended September 30, 1998, the Bank earned
$1,542,707, an increase of $145,289 or 10.4% over the $1,397,418 earned for the
nine months ended September 30, 1997. The increase was primarily due to an
increase in net interest income and a slight reduction in total other expense.
For the quarter ended September 30, 1998, the Bank earned $534,628 in net
income compared to $427,016 for the quarter ended September 30, 1997. The
increase of $107,612 or 25.2% was due primarily to an increase in net interest
income while maintaining other noninterest expenses.
Interest income was $8,503,969 for the nine month period ending September
30, 1998, compared to $8,199,095 for the nine month period ending September 30,
1997. The increase was due mainly to increases in the volume of interest bearing
deposits at other banks, increases in the volume of federal funds sold, and
increases in the volume of investments in municipal bonds. Also contributing
to the increase in interest income was an increase in the yeilds on total loans.
Interest expense for the nine month period ending September 30, 1998, was
$4,345,718 compared to $4,190,984 for the prior period in 1997. The increase
was due primarily to increases in the volume and rates paid on time deposits.
CHANGES IN FINANCIAL CONDITION
Total assets at September 30, 1998 were $146,652,624 compared to
$145,072,317 at December 31, 1997. Net loans have decreased $1,146,519. These
funds have been invested in federal funds to fund future loans.
<PAGE> 9
CAPITAL ADEQUACY
Shareholder's equity totaled $17,276,430 at September 30, 1998, an increase
of $1,292,279 over the December 31, 1997 balance of $15,984,151. The increase
was a result of earnings for the six months and an increase in the market value
of securities that are classified available for sale offset by dividends paid of
$266,195.
Regulatory guidelines relating to capital adequacy provide minimum risk-
based ratios at the Bank level which assess capital adequacy while encompassing
all credit risks, including those related to off-balance sheet activities. The
Bank of Floyd (a wholly owned subsidiary of Cardinal Bankshares Corporation)
exceeds all regulatory capital guidelines and is considered to be well
capitalized. At September 30, 1998, the Bank had a ratio of Tier 1 capital to
risk-weighted assets of 15.4%, a ratio of total risk-based capital to
risk-weighted assets of 16.7% and a leverage ratio of Tier 1 capital to
average total assets for the quarter ended September 30, 1998 of 9.4%.
YEAR 2000 (Y2K) ISSUES
Y2K refers to the potential disruption to computers lacking the ability
to recognize years beyond 1999. During September 1997, management of the Bank
formed a Y2K committee to identify, monitor, and control the potential risks
associated with the Y2K computer problem. These risks include the inability
to process loan and deposit transations such as payment and computation
of interest due to a computer failure. Another risk is a possible disruption
to bank operations due to the failure of equipment that relies on embedded
technology such as microprocessors. Other risks include disruptions in
operations of the bank's service vendors and large loan and deposit customers.
Total estimated expenses to assess and control Y2K risks are $159,000
for the time period from September 1997 to March 2000. These expenses include
the following: (1) management time involved during risk assessment and
testing, (2) expenses for Y2K training conferences attended by management,
(3) expenses for seminars held by The Bank of Floyd for bank customers, (4)
expenses for hardware and software upgrades, (5) and potential increases in
legal expenses.
Bank management has established a Y2K plan with the following five phases:
awareness, assessment, renovation, validation and implementation. During
the awareness phase, management and the board of directors became aware of
the Y2K issue and potential risks. During the assessment phase, management
identified all hardware, software, and environmental systems such as security
systems, elevators, vaults and customer/vendor interdependencies affected by
the Y2K date change. These items and systems were prioritized by assigning
a significance rating of mission critical, mission necessary, mission
desirable, or mission unrelated. During the renovation phase management
performed necessary computer hardware and software upgrades and other system
replacements. Application testing will occur during the validation phase
with all mission critical applications tested by December 31, 1998. During
the implementation phase, all mission critical systems will be certified as
Y2K compliant and accepted by the users by March 31, 1999.
The Y2K risks involved in a worst case scenario involve malfunctions with
mission critical or mission desirable applications and systems. For example,
if certain systems such as the mainframe computer were to malfunction, it
would by almost impossible to operate the bank without a backup system. If
certain loan and deposit processing software were to malfunction, it would be
difficult to extend loans and open deposit accounts without an alternate
process. <PAGE> 10
To deal with the worst case possibilities, bank management has established
a Y2K contingency plan. This contingency plan includes identifying and using
other vendors who are fully Y2K compliant for critical functions, and
maintaining supplies necessary to perform functions manually.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no matters pending legal proceedings to which the Company or any
of its subsidiaries is a party or of which any of their property is subject.
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable.
(b) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CARDINAL BANKSHARES CORPORATION
Date: November 12, 1998 By: s/Ronald Leon Moore
President, Chief Executive
Officer, and Principal Financial
Officer
Date: November 12, 1998 By: s/Christopher B. Snodgrass
Chief Financial Officer
<PAGE> 12
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CARDINAL BANKSHARES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AT SEPTEMBER
30, 1998 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,304,135
<INT-BEARING-DEPOSITS> 5,099,231
<FED-FUNDS-SOLD> 10,760,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,191,724
<INVESTMENTS-CARRYING> 15,738,217
<INVESTMENTS-MARKET> 16,089,806
<LOANS> 85,806,536
<ALLOWANCE> (1,648,316)
<TOTAL-ASSETS> 146,652,624
<DEPOSITS> 128,552,691
<SHORT-TERM> 0
<LIABILITIES-OTHER> 823,503
<LONG-TERM> 0
0
0
<COMMON> 5,119,110
<OTHER-SE> 12,157,320
<TOTAL-LIABILITIES-AND-EQUITY> 146,652,624
<INTEREST-LOAN> 6,058,998
<INTEREST-INVEST> 2,124,222
<INTEREST-OTHER> 320,749
<INTEREST-TOTAL> 8,503,969
<INTEREST-DEPOSIT> 4,345,718
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 4,158,251
<LOAN-LOSSES> 205,000
<SECURITIES-GAINS> 27,189
<EXPENSE-OTHER> 2,167,926
<INCOME-PRETAX> 2,119,703
<INCOME-PRE-EXTRAORDINARY> 1,542,707
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,542,707
<EPS-PRIMARY> 3.01
<EPS-DILUTED> 3.01
<YIELD-ACTUAL> 3.75
<LOANS-NON> 351,571
<LOANS-PAST> 19,363
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,452,126
<CHARGE-OFFS> 36,686
<RECOVERIES> 27,876
<ALLOWANCE-CLOSE> 1,648,316
<ALLOWANCE-DOMESTIC> 1,648,316
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
