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, 1997.
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 $11,621,000
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 $21,010,410.
511,911 shares of the Issuer's common stock were issued and outstanding
as of March 23, 1998.
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, 1997
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 27, 1998 is
incorporated by reference into Form 10-KSB Part III, Items 9, 10, 11, and 12.
<PAGE>1
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 annuity sales and
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 offices in Roanoke and Willis,
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 annuity sales and 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, 1997, there were two
commercial banks (one of which is the Bank) operating a total of three
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 $1,750,000. 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 $6,400,000 and $5,600,000 at December 31, 1997
and 1996, respectively.
<PAGE>2
(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 24 officers, 29 full-time employees and 7 part-time
employees as of December 31, 1997. 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. These facilities are owned by the
Bank and each has drive-up facilities. The Bank's Willis, Virginia
office operates from a leased facility.
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.
<PAGE>3
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) Beginning in 1997, the Company's stock was listed on the NASDAQ
Bulletin Board under the symbol CDBK. Prior to 1997, no active
public market existed for the common stock of the Bank. Transfers
of the common stock occured from time to time, but management had 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 and a 10% stock
dividend in 1997.
<TABLE>
<CAPTION>
Year High Low
____ ______ ______
</CAPTION>
<S> <C> <C>
1997 $47.00 $44.00
1996 $44.00 $35.45
1995 $35.45 $21.59
1994 $21.59 $20.45
1993 $20.90 $20.45
</TABLE>
(B) The approximate number of holders of the Bank's 511,911 Common Stock
Securities as of December 31, 1997, is 583.
(C) Dividends paid for 1997 were $1.00 and 1996 were $0.94 per share
(adjusted for the effects of a four for one stock split in 1995 and a
10% stock dividend in 1997) 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.
<PAGE>4
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 23-41
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 21 of the
Company's 1997 Annual Report to Stockholders are incorporated herein by
reference:
(1) Independent Auditor's Report
(2) Consolidated Balance Sheets as of December 31, 1997 and 1996
(3) Consolidated Statements of Income for the years ended December
31, 1997, 1996, and 1995
(4) Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996, and 1995
(5) Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995
(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, 1997 is listed
on page 3 of the Company's Proxy statement dated March 27, 1998 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 27,
1998, 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 27, 1998, which
information is incorporated by reference.
<PAGE>5
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 27, 1998 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 27, 1998 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 27, 1998 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:
<TABLE>
<CAPTION>
1997 Annual Report
To Stockholders Pages(s)*
_________________________
</CAPTION>
<S> <C>
1. Financial Statements:
____________________
Independent Auditors' Report 2
Consolidated Balance Sheets
December 31, 1997 and 1996 3
Consolidated Statements of Income
Years ended December 31, 1997,
1996, and 1995 4
Consolidated Statements of Stock-
holders' Equity-Years ended
December 31, 1997, 1996, and 1995 5
Consolidated Statements of Cash
Flows-Years ended December 31,
1997, 1996, and 1995 6
Notes to Consolidated Financial
Statements 7 - 21
*Incorporated by reference from the indicated pages of the 1997 Annual Report
to Stockholders
</TABLE>
<PAGE>6
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.
<PAGE>7
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 27, 1998 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.
<TABLE>
<CAPTION>
Signature Title Date
_________ _____ ____
</CAPTION>
<S> <C> <C>
Director, President and
Chief Executive Officer
(principal financial and
s/Ronald Leon Moore accounting officer). 3/27/98
___________________
Ronald Leon Moore
s/K. Venson Bolt Director 3/27/98
________________
K. Venson Bolt
s/J. H. Conduff Director 3/27/98
_______________
J. H. Conduff
s/W. R. Gardner, Jr. Director 3/27/98
____________________
W. R. Gardner, Jr.
s/C. W. Harman Director 3/27/98
______________
C. W. Harman
s/Kevin D. Mitchell Director 3/27/98
___________________
Kevin D. Mitchell
s/Dorsey H. Thompson Director 3/27/98
____________________
Dorsey H. Thompson
</TABLE>
<PAGE>8
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE NO. IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM
___________ ___________ _________________
</CAPTION>
<S> <C> <C>
13.1 1997 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 Incorporated by
by-laws reference to the
Company's 1996 Annual
Report filed on Form
10-KSB on March 26,
1997
21.1 Subsidiaries of Cardinal
Bankshares Corporation ---
27.1 Financial Data Schedule ---
</TABLE>
<PAGE>9
________________________________________________________________________________
1997 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
Staff 42
Directors and Officers 43
Stockholder Information Inside Back Cover
<PAGE>
________________________________________________________________________________
Financial Highlights Summary<F1>
________________________________________________________________________________
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
____ ____ ____ ____ ____
Summary of Operations<F2>
</CAPTION>
<S> <C> <C> <C> <C> <C>
Interest income $11,078 $10,289 $10,003 $ 8,724 $ 7,975
Interest expense 5,681 5,307 5,060 3,887 3,609
_______ _______ _______ _______ _______
Net interest income 5,397 4,982 4,943 4,837 4,366
Provision for loan losses 500 325 136 255 300
Other income 543 343 225 233 169
Other expense 2,934 2,823 3,088 2,811 2,570
Income taxes 652 594 548 564 447
_______ _______ _______ _______ _______
Net income $ 1,854 $ 1,583 $ 1,396 $ 1,440 $ 1,218
_______ _______ _______ _______ _______
Per Share Data<F3>
Basic earnings per share $ 3.62 $ 3.09 $ 2.73 $ 2.81 $ 2.38
Cash dividends declared 1.00 .94 .88 .86 .82
Book value 31.22 28.38 26.62 23.59 22.53
Year-end Balance Sheet Summary
Loans, net $85,305 $85,372 $78,630 $ 79,635 $ 73,187
Securities 45,094 43,722 43,998 31,449 34,752
Total assets 145,072 136,422 130,901 122,097 119,598
Deposits 128,189 118,424 116,537 109,299 107,313
Stockholders' equity 15,984 14,535 13,631 12,081 11,537
Interest earning assets $140,397 $130,458 $125,121 $115,872 $112,881
Interest bearing liabilities 115,960 108,639 105,669 98,394 96,283
Selected Ratios
Return on average assets 1.3% 1.2% 1.1% 1.2% 1.1%
Return on average equity 12.0% 11.6% 10.7% 12.7% 10.9%
Dividends declared as percent of
net income 27.7% 30.3% 32.4% 29.3% 34.4%
<FN>
____________________________
<F1> In thousands of dollars, except per share data.
<F2> Reflects Bank of Floyd operations prior to formation of
Cardinal Bankshares Corporation on March 12, 1996.
<F3> Adjusted for the effects of a four for one stock split in
1995 and 10% stock dividend in 1997.
</FN>
</TABLE>
<PAGE>
CARDINAL BANKSHARES CORPORATION
POST OFFICE BOX 215
FLOYD, VIRGINIA 24091
Dear Shareholders:
We are pleased to present our second financial report on
Cardinal Bankshares Corporation. Our financial statements
are audited and certified by the accounting firm Larrowe,
Cardwell & Company, L.C.
Cardinal Bankshares Corporation experienced record net
earnings in 1997. After tax income was $1,853,684, an
increase of $270,764 over 1996 earnings of $1,582,920. This
is a 17.1% increase over 1996.
Net income per share increased from $3.09 in 1996 to $3.62
in 1997. Our dividend also increased from $.94 in 1996 to
$1.00 in 1997 (adjusted for the effects of a 10% stock
dividend in 1997.) This was the sixth consecutive year of
increased dividends to our shareholders. Market value of
our stock continues to be strong. Information is listed on
the Bulletin Board under the call symbol CDBK. Your broker
can handle your needs.
Return on average assets was 1.3% and return on average
equity was 12.0% reflecting a strong performance. An equity
to average assets ratio of 10.9% indicates that your company
has sufficient capital to support both growth and safety in
the future. Overall asset growth continued at a moderate
pace while net loan balances declined slightly and deposit
balances increased. There continues to be both moderate
growth in the county and intense competition for loans and
deposits.
During July we opened our Willis branch, and construction is
progressing well with the Hillsville branch. We anticipate
opening the Hillsville branch during Spring of 1998. We
continue to study locations that will enhance our growth and
franchise value.
Many of you have heard and read about the potential problems
facing the computer systems January 1, 2000. Management is
actively taking steps to address the Year 2000 issue. A
management committee has been assessing the risks relating
to the Year 2000 issue and will ensure that all necessary
steps are taken to address any potential problems.
We appreciate the continued support of our shareholders and
Board of Directors. The accomplishments of the past year
reflect well on them as well as our dedicated staff. To all
these and the many friends and customers of the Bank who
helped make 1997 a successful year, we express our
gratitude.
Sincerely,
Leon Moore J. H. Conduff
President and CEO Chairman of the Board
<PAGE>1
LARROWE, CARDWELL & COMPANY, LC
POST OFFICE BOX 760
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 Corporation and subsidiaries as of December 31, 1997
and 1996 and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the
Company's management. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted
accounting principles.
Larrowe, Cardwell & Company, LC
Galax, Virginia
January 9, 1998
<PAGE>2
Consolidated Balance Sheets
December 31, 1997 and 1996
________________________________________________________________________________
<TABLE>
<CAPTION>
1997 1996
</CAPTION> ---- ----
<S> <C> <C>
Assets
Cash and due from banks $1,941,494 $2,749,552
Interest-bearing deposits with banks 5,000,000 -
Federal funds sold 3,825,000 500,000
Investment securities available for sale 31,663,068 30,338,456
Investment securities held to maturity 13,430,624 13,383,394
Loans, net of allowance for loan losses $1,452,126
in 1997 and $1,002,455 in 1996 85,304,739 85,372,459
Property and equipment, net 1,687,859 1,560,582
Accrued income 1,093,063 1,053,576
Other assets 1,126,470 1,463,702
____________ ____________
$145,072,317 $136,421,721
____________ ____________
Liabilities and Stockholders' Equity
Liabilities
Demand deposits $ 12,229,167 $ 12,585,858
NOW deposits 8,923,777 8,572,681
Savings deposits 17,507,178 17,905,685
Large denomination time deposits 15,120,658 10,693,230
Other time deposits 74,407,946 68,666,993
____________ ____________
Total deposits 128,188,726 118,424,447
Short-term debt - 400,000
Long-term debt - 2,400,000
Accrued interest payable 269,032 247,000
Other liabilities 630,408 415,355
____________ ____________
129,088,166 121,886,802
____________ ____________
Commitments and contingencies
Stockholders' equity
Common stock, $10 par value; 5,000,000 shares
authorized; 511,911 and 465,536 shares issued
in 1997 and 1996, respectively 5,119,110 4,655,360
Surplus 2,925,150 1,200,000
Retained earnings 7,727,506 8,585,007
Unrealized appreciation on investment securities
available for sale, net of income taxes 212,385 94,552
____________ ____________
15,984,151 14,534,919
____________ ____________
$145,072,317 $136,421,721
____________ ____________
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>3
Consolidated Statements of Income
Years ended December 31, 1997, 1996 and 1995
________________________________________________________________________________
<TABLE>
<CAPTION> 1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Interest income
Loans and fees on loans $ 8,074,494 $ 7,472,380 $ 7,255,003
Federal funds sold and securities purchased
under agreements to resell 315,065 169,334 323,657
Investment securities:
Taxable 2,159,381 2,177,067 2,086,981
Exempt from federal income tax 491,074 469,751 337,088
Deposits with banks 38,009 - -
__________ ___________ ___________
11,078,023 10,288,532 10,002,729
___________ ___________ ___________
Interest expense
Deposits 5,538,989 5,288,779 5,059,503
Borrowings 142,467 17,812 -
___________ ___________ ___________
5,681,456 5,306,591 5,059,503
___________ ___________ ___________
Net interest income 5,396,567 4,981,941 4,943,226
Provision for loan losses 500,000 325,000 135,958
___________ ___________ ___________
Net interest income after provision
for loan losses 4,896,567 4,656,941 4,807,268
___________ ___________ ___________
Noninterest income
Service charges on deposit accounts 143,794 114,280 120,521
Other service charges and fees 36,128 27,411 13,493
Net realized gains on sales of securities 7,018 5,856 4,728
Gain on sale of other real estate owned 232,732 - -
Other income 123,313 195,741 86,304
___________ ___________ ___________
542,985 343,288 225,046
___________ ___________ ___________
Noninterest expense
Salaries and employee benefits 1,760,878 1,754,020 1,576,139
Occupancy expense 115,612 122,006 104,082
Equipment expense 273,026 230,367 183,223
Other expense 783,882 717,169 1,225,139
___________ ___________ ___________
2,933,398 2,823,562 3,088,583
___________ ___________ ___________
Income before income taxes 2,506,154 2,176,667 1,943,731
Income tax expense 652,470 593,747 548,151
___________ ___________ ___________
Net income $ 1,853,684 $ 1,582,920 $ 1,395,580
___________ ___________ ___________
Basic earnings per share $ 3.62 $ 3.09 $ 2.73
___________ ___________ ___________
Weighted average shares outstanding 512,090 512,090 512,090
___________ ___________ ___________
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>4
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
________________________________________________________________________________
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive
Stock Surplus Earnings Income (Loss) Total
__________ __________ ___________ _________ ___________
</CAPTION>
<S> <C> <C> <C> <C> <C>
Balance, December
31, 1994 $1,163,840 $1,200,000 $10,029,100 $(311,538) $12,081,402
Comprehensive income
Net income - - 1,395,580 - 1,395,580
Net change in unrealized
appreciation on investment
securities available for
sale, net of income taxes - - - 606,067 606,067
___________
Total comprehensive income - - - - 2,001,647
Dividends paid
($.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) - -
__________ __________ ___________ _________ ___________
Balance, December
31, 1995 4,655,360 1,200,000 7,481,589 294,529 13,631,478
Comprehensive income
Net income - - 1,582,920 - 1,582,920
Net change in unrealized
appreciation on investment
securities available for
sale, net of income taxes - - - (199,977) (199,977)
___________
Total comprehensive income - - - - 1,382,943
Dividends paid
($1.03 per share) - - (479,502) - (479,502)
Balance, December __________ __________ ___________ _________ ___________
31, 1996 4,655,360 1,200,000 8,585,007 94,552 14,534,919
Comprehensive income
Net income - - 1,853,684 - 1,853,684
Net change in unrealized
appreciation on investment
securities available for
sale, net of income taxes - - - 117,833 117,833
___________
Total comprehensive income - - - - 1,971,517
Dividends paid
($.51 per share) - - (237,423) - (237,423)
10% stock dividend 465,540 1,731,790 (2,197,330) - -
Redemption of
fractional shares (1,790) (6,640) - - (8,430)
Dividends paid
($.54 per share) - - (276,432) - (276,432)
__________ __________ ___________ _________ ___________
Balance, December
31, 1997 $5,119,110 $2,925,150 $ 7,727,506 $ 212,385 $15,984,151
__________ __________ ___________ _________ ___________
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>5
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
________________________________________________________________________________
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,853,684 $ 1,582,920 $ 1,395,580
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 190,065 166,307 155,058
Accretion of discount on securities, net
of amortization of premiums 176 (73,699) (72,053)
Provision for loan losses 500,000 325,000 135,958
Deferred income taxes (213,850) 168,713 (27,821)
Net realized (gains) losses on securities (7,018) (5,857) (4,728)
Deferred compensation and pension expense 70,748 38,989 (22,352)
Changes in assets and liabilities:
Accrued income (39,487) 15,908 (223,256)
Other assets 494,783 529,779 811,262
Accrued interest payable 22,032 (5,957) (60,599)
Other liabilities 144,305 (103,546) 99,652
____________ ____________ ____________
Net cash provided by operating
activities 3,015,438 2,638,557 2,186,701
____________ ____________ ____________
Cash flows from investing activities
Net increase in interest-bearing
deposits (5,000,000) - -
Net (increase) decrease in federal
funds sold (3,325,000) 1,250,000 2,300,000
Purchases of investment securities (15,236,219) (19,551,812) (24,972,526)
Sales of investment securities 2,075,317 3,466,994 -
Maturities of investment securities 11,974,853 16,137,232 13,418,835
Net (increase) decrease in loans (437,099) (7,106,355) 97,732
Purchases of property and equipment (317,342) (200,586) (120,646)
Net cash used in investing ____________ ____________ ____________
activities (10,265,490) (6,004,527) (9,276,605)
____________ ____________ ____________
Cash flows from financing activities
Net increase (decrease) in demand, NOW,
and savings deposits (404,102) 1,318,505 (4,948,210)
Net increase in time deposits 10,168,381 569,304 12,185,716
Net increase (decrease) in
short-term debt (400,000) 400,000 -
Net increase (decrease) in
long-term debt (2,400,000) 2,400,000
Redemption of fractional shares (8,430) - -
Dividends paid (513,855) (479,502) (451,571)
____________ ____________ ____________
Net cash provided by financing
activities 6,441,994 4,208,307 6,785,935
____________ ____________ ____________
Net increase (decrease) in cash and
cash equivalents (808,058) 842,337 (303,969)
Cash and cash equivalents, beginning 2,749,552 1,907,215 2,211,184
____________ ____________ ____________
Cash and cash equivalents, ending $ 1,941,494 $ 2,749,552 $ 1,907,215
____________ ____________ ____________
Supplemental disclosures of cash flow information
Interest paid $ 5,659,424 $ 5,312,548 $ 5,046,091
____________ ____________ ____________
Income taxes paid $ 750,470 $ 357,964 $ 622,455
____________ ____________ ____________
Supplemental disclosure of noncash investing activities
Other real estate acquired in
settlement of loans $ 4,819 $ 39,194 $ 770,553
____________ ____________ ____________
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>6
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 three banking offices. FBC, Inc.'s
assets and operations consist primarily of annuity sales and 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
time 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."
<PAGE>7
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 securities 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 outstanding 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 outstanding. 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 collateral, and current economic conditions.
<PAGE>8
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:
Years
Buildings and improvements 20-40
Furniture and equipment 5-20
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, valuations 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 securities 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.
Basic Earnings per Share
Basic earnings per share is computed by dividing income available
to common stockholders by the weighted average number of common
shares outstanding during the period, after giving retroactive
effect to stock splits and dividends.
Diluted Earning per Share
The computation of diluted earnings per share is similar to the
computation of basic earnings per share except that the
denominator is increased to include the number of additional
common shares that would have been outstanding if dilutive
potential common shares had been issued. The numerator is
adjusted for any changes in income or loss that would result from
the assumed conversion of those potential common shares. For the
years presented, the Company has no potentially dilutive
securities outstanding.
<PAGE>9
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 1. Organization and Summary of Significant Accounting
Policies, continued
Comprehensive Income
Annual comprehensive income reflects the change in the Company's
equity during the year arising from transactions and events other
than investments by and distributions to stockholders. It
consists of net income plus certain other changes in assets and
liabilities that are reported as separate components of
stockholders' equity rather than as income or expense.
Financial Instruments
All derivative financial instruments held or issued by the
Company are held or issued for purposes other than trading.
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 estimated 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 securities, 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.
<PAGE>10
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 1. Organization and Summary of Significant Accounting
Policies, continued
Fair Value of Financial Instruments, continued
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.
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 $576,000 and
$537,000 for the two week periods including December 31, 1997 and
1996, 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
Cost Gains Losses Value
____ _____ ______ _____
</CAPTION>
<S> <C> <C> <C> <C>
1997
Available for sale
U.S. Government agency
securities $ 15,613,575 $ 40,349 $ 5,320 $ 15,648,604
State and municipal securities 561,886 5,106 - 566,992
Mortgage-backed securities 13,676,416 233,482 36,217 13,873,681
Other securities 1,488,980 84,811 - 1,573,791
____________ _________ _______ ____________
$ 31,340,857 $ 363,748 $41,537 $ 31,663,068
____________ _________ _______ ____________
Held to maturity
U.S. Government agencies
securities $ 498,191 $ 1,809 $ - $ 500,000
State and municipal securities 11,165,507 183,311 - 11,348,818
Mortgaged-backed securities 1,156,601 5,762 7,018 1,155,345
Other securities 610,325 - - 610,325
____________ _________ _______ ____________
$ 13,430,624 $ 190,882 $ 7,018 $ 13,614,488
____________ _________ _______ ____________
1996
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
____________ _________ _______ ____________
</TABLE>
<PAGE>11
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 3. Securities, continued
Investment securities with amortized cost of approximately
$4,337,036 and $4,083,039 at December 31, 1997 and 1996,
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,
1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Realized gains $ 8,855 $ 7,000 $ 4,728
Realized losses (1,837) (1,144) -
________ ________ ________
$ 7,018 $ 5,856 $ 4,728
________ ________ ________
</TABLE>
The scheduled maturities of securities available-for-sale and
held-to-maturity at December 31, 1997, were as follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
____________________ ____________________
Amortized Fair Amortized Fair
Cost Value Cost Value
</CAPTION> ____ _____ ____ _____
<S> <C> <C> <C> <C>
Due in one year or less $ 11,660,030 $ 11,700,353 $ 1,841,240 $ 1,855,931
Due after one year through
five years 11,981,646 12,132,318 5,903,549 5,981,914
Due after five years
through ten years 3,545,476 3,602,551 4,975,668 5,065,556
Due after ten years 4,153,705 4,227,846 99,842 100,762
Restricted equity securities - - 610,325 610,325
____________ ____________ ____________ ____________
$ 31,340,857 $ 31,663,068 $ 13,430,624 $ 13,614,488
____________ ____________ ____________ ____________
</TABLE>
Note 4. Loans Receivable
The major components of loans in the consolidated balance sheets
at December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Commercial $ 6,208 $ 6,219
Real estate:
Construction and land development 4,888 5,610
Residential, 1-4 families 25,629 25,717
Residential, 5 or more families 1,785 1,519
Farmland 3,905 4,143
Nonfarm, nonresidential 30,795 30,970
Agricultural 1,815 1,766
Consumer 7,689 8,999
Other 4,383 1,898
________ ________
87,097 86,841
Unearned discount (44) (190)
Unearned net loan origination costs, net of fees (296) (277)
________ ________
86,757 86,374
Allowance for loan losses (1,452) (1,002)
________ ________
$ 85,305 $ 85,372
________ ________
</TABLE>
<PAGE>12
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 4. Loans Receivable, continued
Nonperforming assets at December 31, 1997 and 1996 are detailed
as follows:
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Nonaccrual loans $ 278,782 $ 139,161
Restructured loans - -
Loans past due 90 days or more 312,332 215,000
__________ ___________
Total nonperforming loans 591,114 354,161
Foreclosed, repossessed and idled properties 210,709 838,130
__________ ___________
Total nonperforming assets $ 801,823 $ 1,192,291
__________ ___________
</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>
1997 1996 1995
____ ____ ____
</CAPTION>
<S>
Nonaccrual loans: <C> <C> <C>
Interest income, original terms $ 27,239 $ 13,033 $ 31,687
________ ________ ________
Interest income recognized $ 20,840 $ 3,212 $ -
________ ________ ________
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>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Recorded investment at December 31 $1,467,636 $2,205,464 $1,794,000
__________ __________ __________
Allowance for loan losses $ 594,105 $ 271,538 $ 117,050
__________ __________ __________
Average recorded investment for the
year $ 453,875 $1,674,412 $ 384,000
__________ __________ __________
Interest income recognized for
the year $ 133,973 $ 147,742 $ 32,000
__________ __________ __________
</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>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Balance, beginning $1,002,455 $1,134,182
Provision charged to expense 500,000 325,000
Recoveries of amounts charged off 17,920 38,474
Amounts charged off (68,249) (495,201)
__________ __________
Balance, ending $1,452,126 $1,002,455
__________ __________
</TABLE>
<PAGE>13
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 6. Property and Equipment
Components of property and equipment and total accumulated
depreciation at December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Land $ 407,245 $ 407,245
Bank premises 1,719,754 1,678,505
Furniture and equipment 1,593,952 1,480,196
Construction in progress 162,337 -
___________ ___________
3,883,288 3,565,946
Less accumulated depreciation (2,195,429) (2,005,364)
___________ ___________
$ 1,687,859 $ 1,560,582
___________ ___________
</TABLE>
Note 7. Debt
Short-term Debt
Short-term debt consists of short-term borrowings from Federal
Home Loan Bank of Atlanta. Additional information for the years
ended December 31, 1997 and 1996 is summarized below:
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Outstanding balance at December 31 $ - $ 400,000
_________ _________
Year-end weighted average rate - 6.89%
_________ _________
Daily average outstanding during the year $ 63,561 $ 44,930
_________ _________
Average rate for the year 6.89% 5.46%
_________ _________
Maximum outstanding at any month-end during the year $ 400,000 $ 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 $6,500,000 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
collateral.
Long-term Debt
At December 31, 1996 the Company had long-term 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 was repaid on December 22, 1997.
Note 8. 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, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Plan assets at estimated fair value $ 1,156,480 $ 970,764
Projected benefit obligation, including
the accumulated benefit obligation (1,167,829) (984,721)
___________ __________
(11,349) (13,957)
Unrecognized net gain and prior service cost (207,294) (129,958)
Unrecognized net asset at January 1, 1988 (48,341) (52,369)
___________ _________
Accrued pension cost included in other
liabilities $ (266,984) $(196,284)
___________ _________
Actuarial present value of benefit obligations:
Vested benefit obligation $ 668,524 $ 523,686
___________ _________
Accumulated benefit obligation $ 687,636 $ 546,486
___________ _________
</TABLE>
<PAGE>14
Notes to Financial Statements
________________________________________________________________________________
Note 8. Employee Benefit Plan, continued
The weighted average discount rate and rate of increase in
compensation levels used in determining the actuarial present
value of the projected benefit obligation 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 1997, 1996 and 1995. Net
pension cost includes the following components:
<TABLE>
<CAPTION> 1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Service cost $ 86,171 $ 79,707 $ 71,848
Interest cost on projected benefit
obligation 73,837 71,032 61,179
Actual return on plan assets (194,215) (105,080) (140,943)
Originating unrecognized asset gain 109,015 21,974 73,153
Amortization (4,108) (5,532) (3,203)
________ ________ ________
$ 70,700 $ 62,101 $ 62,034
________ ________ ________
</TABLE>
Note 9. 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
compensation deferred under the plan amounts to $117,410 and
$117,362 at December 31, 1997 and 1996, respectively.
Charges to income are based on present value of future cash
payments, discounted at 8%, and amounted to $9,404, $9,310 and
$4,024 for 1997, 1996 and 1995, respectively.
The Bank is owner and beneficiary of life insurance policies on
these directors. Policy cash values, net of policy loans,
totaled $21,530 and $22,956 at December 31, 1997 and 1996,
respectively.
Note 10. 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, 1997 December 31, 1996
__________________ __________________
Carrying Fair Carrying Fair
Amount Value Amount Value
______ _____ ______ _____
</CAPTION>
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 1,941 $ 1,941 $ 2,750 $ 2,750
Interest-bearing deposits
with banks 5,000 5,000 - -
Federal funds sold 3,825 3,825 500 500
Securities, available-for-sale 31,663 31,663 30,338 30,338
Securities, held to maturity 13,431 13,614 13,383 13,362
Loans, net of allowance for
loan losses 85,305 87,934 85,372 86,527
Financial Liabilities
Deposits 128,189 128,845 118,424 118,076
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>
<PAGE>15
Notes to Consolidated Financial Statements
__________________________________________________________________________
Note 11. Income Taxes
Current and Deferred Income Tax Components
The components of income tax expense (substantially all Federal)
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Current $866,320 $425,034 $575,972
Deferred (213,850) 168,713 (27,821)
________ ________ ________
$652,470 $593,747 $548,151
________ ________ ________
</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>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Expected tax expense $852,092 $740,067 $660,869
Tax exempt interest (186,555) (178,641) (135,266)
Other (13,067) 32,321 22,548
________ ________ ________
$652,470 $593,747 $548,151
________ ________ ________
</TABLE>
Deferred Tax Analysis
The components of net deferred tax assets (substantially all
Federal) at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Deferred tax assets $653,399 $435,732
Deferred tax liabilities (185,515) (120,580)
________ ________
$467,884 $315,152
________ ________
</TABLE>
The tax effects of each significant item creating deferred taxes
are summarized below:
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Net unrealized appreciation on
securities available for sale $(109,826) $(48,708)
Allowance for loan losses 324,499 154,499
Other valuation reserves 89,370 67,552
Deferred compensation and accrued pension costs 130,694 106,640
Depreciation (37,718) (43,358)
Accretion of discount on investment securities (37,971) (28,514)
Deferred loan fees 108,836 107,041
_________ ________
$ 467,884 $315,152
_________ ________
</TABLE>
Note 12. 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.
<PAGE>16
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 12. Commitments and Contingencies, continued
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 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 December 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Commitments to extend credit $7,348,000 $5,428,210
Standby letters of credit 307,000 197,100
__________ __________
$7,655,000 $5,625,310
__________ __________
</TABLE>
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount
of collateral 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 $6,439,303 and $5,575,261 at
December 31, 1997 and 1996, respectively.
The Company has cash and cash equivalents on deposit with
financial institutions which exceed federally-insured limits.
Leases
During 1997 the bank leased a building used as a branch location
under an operating lease. Rent expense in 1997 was $1,125.
Future minimum lease payments are $1,500 in 1998 and 1999, and
$375 in 2000.
<PAGE>17
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 13. 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 dividends 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.
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 obligations 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 $1,215,000 at
December 31, 1997. No 23A transactions were deemed to exist
between the Company and the Bank at December 31, 1997.
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
guidelines 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
classification 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 regulations. Management
believes, as of December 31, 1997, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1997, 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.
<PAGE>18
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 13. 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
Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
_________________ _________________ __________________
Amount Ratio Amount Ratio Amount Ratio
______ _____ ______ _____ ______ _____
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997:
Total Capital
(to Risk-Weighted Assets)$ 13,084 14.3% >$ 7,315 >8.0% >$ 9,144 >10.0%
Tier I Capital - - - -
(to Risk-Weighted Assets)$ 11,938 13.0% >$ 3,658 >4.0% >$ 5,487 > 6.0%
Tier I Capital - - - -
(to Average Assets) $ 11,938 8.2% >$ 5,777 >4.0% >$ 7,221 > 5.0%
- - - -
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%
- - -
</TABLE>
Note 14. Transactions with Related Parties
The Bank has entered into transactions with its directors,
significant shareholders and their affiliates (related parties).
Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, 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 1997 and 1996 loan transactions with related parties
were as follows:
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Balance, beginning $ 900,464 $ 672,581
New loans 575,194 1,296,282
Repayments (548,853) (1,068,399)
___________ ___________
Balance, ending $ 926,805 $ 900,464
___________ ___________
</TABLE>
<PAGE>19
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 15. Parent Company Financial Information
Condensed financial information of Cardinal Bankshares
Corporation is presented as follows:
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Assets
Cash due from banks $ 1,996,076 $ 820,309
Loans, net of allowance for loan losses
of $25,000 in 1997 and 1996 1,797,087 2,367,511
Investment in affiliate bank at equity 12,150,482 11,292,544
Other assets 48,174 56,199
___________ ___________
$15,991,819 $14,536,563
___________ ___________
Liabilities
Accounts payable and other liabilities $ 7,668 $ 1,644
___________ ___________
Shareholders' equity
Common stock 5,119,110 4,655,360
Surplus 2,925,150 1,200,000
Retained earnings 7,727,506 8,585,007
Unrealized appreciation on affiliate's
investment securities available for sale,
net of income taxes 212,385 94,552
___________ ___________
15,984,151 14,534,919
___________ ___________
$15,991,819 $14,536,563
___________ ___________
</TABLE>
Statements of Income
For the year ended December 31, 1997 and the six months ended
December 31, 1996
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Income
Dividends from affiliate bank $ 1,100,000 $ 3,750,000
Interest and fees on loans 207,432 17,512
___________ ___________
1,307,432 3,767,512
___________ ___________
Expenses
Salaries 27,166 -
Management and professional fees 132,588 30,794
Other expenses 25,791 30,452
___________ ___________
185,545 61,246
___________ ___________
Income before tax benefit and equity in
undistributed income of affiliate 1,121,887 3,706,266
Income tax (expense) benefit (8,308) 15,611
___________ ___________
Income before equity in undistributed
income of affiliate 1,113,579 3,721,877
Equity in undistributed income of affiliate 740,105 (2,914,620)
___________ ___________
Net income $ 1,853,684 $ 807,257
___________ ___________
</TABLE>
<PAGE>20
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 15. Parent Company Financial Information, continued
Statements of Cash Flows
For the year ended December 31, 1997 and the six months ended
December 31, 1996
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <S> <S>
Cash flows from operating activities
Net income $ 1,853,684 $ 807,257
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization 5,929 2,564
Provision for loan losses - 25,000
Increase (decrease) in equity in undistributed
income of affiliate (740,105) 2,914,620
Deferred income taxes - (8,500)
Net change in other assets 2,096 (50,263)
Net change in other liabilities 6,024 1,644
___________ ___________
Net cash provided by operating activities 1,127,628 3,692,322
___________ ___________
Cash flows from investing activities, net
(increase) decrease in loans 570,424 (2,392,511)
___________ ___________
Cash flows from financing activities
Dividends paid (513,855) (479,502)
Redemption of fractional shares (8,430) -
___________ ___________
Net cash used by financing activities (522,285) (479,502)
___________ ___________
Net increase in cash and cash equivalents 1,175,767 820,309
___________ ___________
Cash and cash equivalents, beginning 820,309 -
___________ ___________
Cash and cash equivalents, ending $ 1,996,076 $ 820,309
___________ ___________
</TABLE>
<PAGE>21
TITLE PAGE TO MD&A
<PAGE>22
________________________________________________________________________________
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 consolidated financial
statements.
Cardinal Bankshares Corporation, the parent company of The
Bank of Floyd, currently operates three offices in Floyd and
Roanoke Counties of Virginia. The main office is in Floyd
with a limited service office in Willis. The Roanoke office
is in the Cave Spring area of Roanoke County. Management
anticipates completing construction of a fourth office in the
Spring of 1998. The fourth office will be located in Carroll
County on Route 52 in Hillsville, VA.
The individual market conditions of each county vary from
rural to urban with Floyd County being the most rural and
Roanoke the most urban. Each have their own growth patterns
which vary in intensity but share the same quality of strength
in their local economies.
The earnings position of the Bank continues to improve.
Cardinal Bankshares Corporation experienced record net
earnings for 1997, $1,853,684 compared to $1,582,920 for 1996
and $1,395,580 in 1995. Return on average assets was 1.3%
compared to 1.2% for 1996 and 1.1% for 1995.
Ending equity to assets shows the Bank with a strong capital
position with a ratio of 10.9%.
The total assets of Cardinal Bankshares Corporation grew to
$145,072,317 from $136,421,721, a 6.34% increase, continuing
our strategy to grow the company while increasing asset
quality. Foreclosed and in-substance foreclosed properties
were reduced by 74.9% to a balance of $210,709 at year end.
Management continues to look at increasing market share by
expanding to contiguous 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>
1997 1996 1995
____________________ ____________________ ____________________
Interest Interest Interest
Average Income Yield Average Income Yield Average Income Yield
Balance Expense Cost Balance Expense Cost Balance Expense Cost
_______ _______ ____ _______ _______ ____ _______ _______ ____
</CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Deposit
in other
banks $ 652 $ 37 5.67% $ - $ - -% $ - $ - -%
Taxable
investment
securities
31,364 2,158 6.88% 32,540 2,177 6.69% 30,331 2,087 6.88%
Nontaxable
investment
securities
10,183 490 4.81% 8,660 470 5.43% 6,494 337 5.19%
Federal funds
sold 5,743 315 5.48% 3,187 169 5.30% 5,475 324 5.92%
Loans,
net 86,528 8,078 9.34% 80,721 7,473 9.26% 78,673 7,255 9.22%
_______ ______ ____ _______ ______ ____ _______ _______ ____
Total
interest-
earning
assets
134,470 11,078 125,108 10,289 120,973 10,003
_______ ______ _______ ______ _______ _______
Yield on
average
interest-
earning
assets 8.24% 8.22% 8.27%
____ ____ ____
Noninterest-earning assets:
Cash and
due from
banks 1,942 1,912 1,998
Premises and
equipment 1,593 1,572 1,487
Interest
receivable
and other 3,524 2,668 3,513
_______ _______ _______
Total
noninterest-
earning
assets 7,059 6,152 6,998
_______ _______ _______
Total
assets
$141,529 $131,260 $127,971
_______ _______ _______
Interest-bearing liabilities:
Demand
deposits
$ 8,766 $ 253 2.89% $ 8,263 $ 208 2.52% $ 8,456 $ 228 2.70%
Savings
deposits 18,096 582 3.22% 18,530 588 3.17% 20,921 642 3.07%
Time
deposits 83,002 4,703 5.67% 78,630 4,493 5.71% 74,115 4,190 5.65%
Other
borrowings 2,485 143 5.75% 306 18 5.88% - - -%
_______ ______ ____ _______ ______ ____ _______ _______ ____
Total
interest-
bearing
liabilities
112,349 5,681 105,729 5,307 103,492 5,060
_______ ______ _______ ______ _______ _______
Cost on
average
interest-
bearing
liabilities 5.06% 5.02% 4.89%
____ ____ ____
Noninterest-bearing liabilities:
Demand
deposits
12,863 11,043 10,523
Interest
payable
and other 908 831 942
_______ _______ _______
Total
noninterest
-bearing
liabilities
13,771 11,874 11,465
_______ _______ _______
Total
liabilities
126,120 117,603 114,957
_______ _______ _______
Stockholders'
equity 15,409 13,657 13,014
_______ _______ _______
Total
liabilities
and stock-
holders'
equity
$141,529 $131,260 $127,971
_______ _______ _______
Net interest
income $ 5,397 $ 4,982 $ 4,943
______ ______ _______
Net yield on
interest-earning
assets 4.01% 3.98% 4.09%
____ ____ ____
</TABLE>
<PAGE>24
Management's Discussion and Analysis
________________________________________________________________________________
Table 2. Rate/Volume Variance Analysis (thousands)
<TABLE>
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
______________________ ______________________
Interest Variance Interest Variance
Income/ Attributable Income/ Attributable
Expense To Expense To
Variance Rate Volume Variance Rate Volume
________ ____ ______ ________ ____ ______
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Deposits in
other banks $ 37 $ - $ 37 $ - $ - $ -
Taxable investment
securities (19) 60 (79) 90 (58) 148
Nontaxable investment
securities 20 (63) 83 133 17 116
Federal funds sold 146 11 135 (155) (31) (124)
Loans 605 68 537 218 31 187
______ ______ ______ ______ ______ ______
Total 789 76 713 286 (41) 327
______ ______ ______ ______ ______ ______
Interest-bearing liabilities:
Demand deposits 45 32 13 (20) (15) (5)
Savings deposits (6) 8 (14) (54) 21 (75)
Time deposits 210 (33) 243 303 45 258
Other borrowings 125 - 125 18 - 18
______ ______ ______ ______ ______ ______
Total 374 7 367 247 51 196
______ ______ ______ ______ ______ ______
Net interest income $ 415 $ 69 $ 346 $ 39 $ (92) $ 131
______ ______ ______ ______ ______ ______
</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 1997 increased by 8.43% to $5.40
million from $4.98 million in 1996 and $4.94 million in 1995.
The increase in net interest income realized in 1997 was the
result of an increase in the volume of net average earning
assets and a 3 basis point increase in net interest margin.
Competition for deposits and loans continue to be a major
factor in net margins. The net interest margin for 1997 was
4.01% compared to 3.98% for 1996 and 4.09% for 1995. Net
interest income in 1996 increased by $39,000, or .81%, over
1995. The increase in net interest income realized in 1996
was the result of an increase in net average earning assets
which was also offset by an 11 basis point decrease in net
interest margin. The effects of changes in volumes and rates
on net interest income in 1997 compared to 1996, and 1996
compared to 1995 are shown in Table 2.
Interest income for 1997 increased $.8 million to $11.1
million from $10.3 million in 1996. Interest income in 1995
totaled $10.0 million. The increase in interest income from
1996 to 1997 was the result of an increase in the volume of
average earning assets and a 2 basis point increase in yield.
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.
<PAGE>25
Management's Discussion and Analysis
________________________________________________________________________________
Interest expense increased by $374,000 in 1997 to $5.7 million
from $5.3 million in 1996 and $5.1 million in 1995. The
increase from 1996 to 1997 was due to an increase in average
interest bearing liabilities of $6.6 million to $112.4
million in 1997 at an increased rate of 5.06%, or 4 basis
points higher than 1996. Interest expense increased by
$247,000 from 1995 to 1996. The increase was due to the
average interest bearing liabilities increasing by $2.2
million while the average rate paid on interest bearing
liabilities increased by 13 basis points. Interest paid on
time deposits, which make up the largest portion of interest-
bearing deposits, increased $210,000, or 4.67% from 1996 to
1997. The average rate paid on time deposits decreased 4
basis points to 5.67% in 1997 from 5.71% in 1996 and 5.65% in
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 1997, management increased the provision for loan loss
reserve from $325,000 in 1996 to $500,000 in 1997. The
provision for loan losses was $135,958 in 1995. The Bank's
allowance for loan losses as a percentage of total loans at
the end of 1997 was 1.67% as compared to 1.16% in 1996 and
1.42% in 1995.
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 insufficient funds checks and
fees charged for nondeposit services. Noninterest income
totaled $543,000 in 1997, an increase of 58.3% over the
$343,000 recorded in 1996. Noninterest income in 1995 totaled
$225,000. The majority of the increase in noninterest income
from 1996 to 1997 is explained by a $233,000 gain on the sale
of other real owned. Service charges on deposit accounts
increased $30,000 during 1997 due to a $24,000 increase in
returned check fees resulting from a $2 per item increase in
returned check fees implemented during December 1996. The
$34,000 increase in insurance commissions is due to an
increase in dividends from title insurance sales by the Bank
of Floyd's subsidiary. The primary sources of noninterest
income for the past three years are summarized in Table 3.
<PAGE>26
Management's Discussion and Analysis
________________________________________________________________________________
Table 3. Sources of Noninterest Income (thousands)
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Service charges on deposit accounts $ 144 $ 114 $ 121
Other service charges and fees 36 27 13
Insurance commissions 46 12 12
Gain on the sale of securities 7 6 5
Gain on sale of other real estate owned 233 - -
Other income 77 184 74
_______ _______ _______
Total noninterest income $ 543 $ 343 $ 225
_______ _______ _______
</TABLE>
Other noninterest income was down $107,000 in 1997 to $77,000
from $184,000 in 1996 and $74,000 in 1995. Noninterest income
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 1997 increased by $109,000 or 3.9% to
$2.9 million. Noninterest expense in 1996 was $2.8 million
and it was $3.1 million in 1995 (see Table 4). The overhead
ratio of noninterest expense to adjusted total revenues (net
interest income plus noninterest income excluding securities
transactions) was 50.8% in 1997, 53.1% in 1996 and 59.8% in
1995.
Furniture and equipment expense increased $43,000 or 18.7% to
$273,000 in 1997 from $230,000 in 1996. This increase is due
to increased depreciation expense due to the addition of the
Willis Branch, the purchase of a new bank automobile and
software purchases. In addition, ATM expenses were realized
for a full year versus approximately four months in 1996. The
bank also experienced an increase in equipment maintenance and
repair expenses.
<PAGE>27
Management's Discussion and Analysis
________________________________________________________________________________
Table 4. Sources of Noninterest Expense (thousands)
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Salaries & wages $ 1,298 $ 1,242 $ 1,154
Employee benefits 463 512 422
_________ _________ _________
Total personnel expense 1,761 1,754 1,576
Occupancy expense 116 122 104
Furniture & equipment 273 230 183
Printing & supplies 44 54 64
FDIC deposit insurance 14 2 126
Professional services 120 177 176
Postage 72 69 62
Telephone 40 33 25
Courier fees 21 21 20
Education & seminars 20 13 17
Travel expense 21 27 25
Director fees and expense 38 40 31
Advertising and public relations 31 38 42
Insurance expense 36 37 33
Capital Stock Tax 77 98 100
Outside services 26 - 7
Other real estate expense, net 46 35 389
Real estate loan servicing fee 12 16 20
Other operating expense 165 58 89
_________ _________ _________
Total noninterest expense $ 2,933 $ 2,824 $ 3,089
_________ _________ _________
</TABLE>
Other real estate expense increased $11,000 or 31.4% to
$46,000 in 1997 from $35,000 in 1996. This increase is the
result of increased reserves on various other real estate
parcels. During 1997 management disposed of a number of
properties reducing the net other real estate owned balance by
$627,439 or 74.9% from $838,148 as of December 31, 1996 to
$210,709 as of December 31, 1997. The sale of this property
reduces the amount of nonperforming assets and also increases
the amount of earning assets available to the bank. The 1995
other real estate expense balance of $389,000 was high due to
the sale of one piece of property with a loss of approximately
$298,000.
Professional services expense, fees paid to attorneys,
independent auditors, and state examiners decreased $57,000
or 32.2% to $120,000 in 1997 from $177,000 in 1996. This
decrease is primarily the result of a $51,000 decrease in
legal fees due to a decline in the number of foreclosures, a
decrease in other real estate owned and a number of settled
bankruptcies. Professional services expense totaled $176,000
in 1995.
Capital stock tax expense decreased $21,000 from $98,000 in
1996 to $77,000 in 1997 representing a 21.4% decline. This
decline is the result of a lower taxable capital base at the
bank level due to dividends to the holding company.
<PAGE>28
Management's Discussion and Analysis
________________________________________________________________________________
Deposit insurance premiums paid to the Federal Deposit
Insurance Corporation (FDIC) increased to $14,000 in 1997 from
a low of $2,000 in 1996. The premium increases were due to
the Financing Corporation (FICO) debt service assessments
which went into effect on January 1, 1997. The FICO
assessment is the result of the Deposit Insurance Funds Act of
1996 which requires that the Bank Insurance Fund (BIF) rate
equal one-fifth the Savings Association Insurance Fund (SAIF)
rate through year-end 1999, or until the insurance funds are
merged, whichever occurs first.
The increase occurring during 1997 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 $652,000 in
1997, $594,000 in 1996 and $548,000 for 1995 representing
26.0%, 27.3% and 28.2% 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 $468,000, $315,000 and
$381,000 at December 31, 1997, 1996, and 1995, respectively,
are included in other assets. At December 31, 1997, $110,000
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.
<PAGE>29
Management's Discussion and Analysis
________________________________________________________________________________
Management's Discussion and Analysis of Financial Condition
Earning Assets
Average earning assets increased 7.5% over the past twelve
months. Total earning assets represented 95.0% of total
average assets in 1997 compared to 95.3% in 1996. The mix of
average earning assets changed slightly in 1997 with an
increase in the mix of federal funds sold and a decrease in
the mix of investment securities. Average federal funds sold
accounted for 4.1% of total average assets compared to 2.4% in
1996. Average investment securities accounted for 29.4% of
total average assets in 1997 compared to 31.4% in 1996.
Average loans accounted for 61.1% of total average assets in
1997 compared to 61.5% in 1996. For 1995, average net loans
represented 61.5% of average assets and average investment
securities represented 28.9% 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>
1997 1996 1995
_______________ _______________ _______________
Average Average Average
Balance % Balance % Balance %
________ ______ ________ ______ ________ ______
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans, net $ 86,528 61.14 $ 80,721 61.50 $ 78,673 61.47
Investment securities 41,547 29.36 41,200 31.39 36,825 28.78
Federal funds sold 5,743 4.06 3,187 2.42 5,475 4.28
Interest-bearing bank
balances 652 0.45 - - - -
________ ______ ________ ______ ________ ______
Total earning
assets 134,470 95.01 125,108 95.31 120,973 94.53
________ ______ ________ ______ ________ ______
Nonearning assets:
Cash and due from banks 1,942 1.37 1,912 1.46 1,998 1.56
Premises and equipment 1,593 1.13 1,572 1.20 1,487 1.16
Other assets 3,524 2.49 2,668 2.03 3,513 2.75
________ ______ ________ ______ ________ ______
Total nonearning
assets 7,059 4.99 6,152 4.69 6,998 5.47
________ ______ ________ ______ ________ ______
Total assets $141,529 100.00 $131,260 100.00 $127,971 100.00
________ ______ ________ ______ ________ ______
</TABLE>
Loans
Average net loans totaled $86.5 million during 1997 an
increase of $6 million or 7.2% more than 1996. The increase
in average loans outstanding during the past year is due to
increased demand.
A significant portion of the loan portfolio, $67.0 million or
76.9%, is made up of loans secured by various types of real
estate. Total loans secured by 1-4 family residential
properties represented 29.4% of total loans at the end of
1997. The loans represented in the other loan classification
in Table 6 increased by 130.9% during 1997 to a total of $4.4
million, or 5.0% of total loans outstanding compared to a
total of $1.9 million at the end of 1996. The growth in the
other loan classification is primarily the result of an
increase in commercial loans to leasing companies.
<PAGE>30
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, Montgomery and
Carroll Counties of Virginia and the Cities of Roanoke and
Radford, Virginia. The Bank places emphasis on consumer based
installment loans and commercial loans to small and medium
sized businesses. The local economy remains stable with a
lower unemployment level. The Bank can expect to experience
profitable growth in the loan portfolio during 1997. The
amounts of loans outstanding by type at year-end 1997 and
1996, and the maturity distribution of variable and fixed rate
loans as of year-end 1997 are presented in Table 6 and Table
7, respectively.
Table 6. Loan Portfolio Summary (thousands)
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
_________________ _________________
Amount % Amount %
________ ____ ________ ____
</CAPTION>
<S> <C> <C> <C> <C>
Construction and development $ 4,888 5.61 $ 5,610 6.46
Farmland 3,905 4.48 4,143 4.77
1-4 family residential 25,629 29.43 25,717 29.62
Multifamily residential 1,785 2.05 1,519 1.75
Nonfarm, nonresidential 30,795 35.36 30,970 35.66
________ ______ ________ ______
Total real estate 67,002 76.93 67,959 78.26
Agricultural 1,815 2.08 1,766 2.03
Commercial & industrial 6,208 7.13 6,219 7.16
Consumer 7,689 8.83 8,999 10.36
Other 4,383 5.03 1,898 2.19
________ ______ ________ ______
Total $ 87,097 100.00 $ 86,841 100.00
________ ______ ________ ______
</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
9.34% in 1997 compared to an average yield of 9.26% in 1996.
<PAGE>31
Management's Discussion and Analysis
________________________________________________________________________________
Table 7. Maturity Schedule of Loans (thousands)
<TABLE>
<CAPTION>
Construc-
Commercial tion & Total
Financial & Develop- ________________
Agriculture ment Others Amount %
___________ ________ ________ ________ _____
</CAPTION>
<S> <C> <C> <C> <C> <C>
Fixed rate loans:
Three months or less $ 1,213 $ - $ 1,301 $ 2,514 2.89
Over three months to
twelve months 1,156 138 2,633 3,927 4.51
Over twelve months to
three years 2,342 - 5,233 7,575 8.70
Over three years to
five years 2,037 - 7,091 9,128 10.48
Over five years to
fifteen years 2,840 - 3,366 6,206 7.13
Over fifteen years 443 - 2,462 2,905 3.32
________ ________ ________ ________ ______
Total fixed rate loans $ 10,031 $ 138 $ 22,086 $ 32,255 37.03
________ ________ ________ ________ ______
Variable rate loans:
Three months or less $ 8,544 $ 1,762 $ 4,361 $ 14,667 16.84
Over three months to
twelve months 6,422 1,068 6,200 13,690 15.72
Over twelve months to
three years 13,841 1,780 7,797 23,418 26.89
Over three years to
five years 1,888 140 801 2,829 3.25
Over five years to
fifteen years 238 - - 238 0.27
Over fifteen years - - - - -
________ ________ ________ ________ ______
Total variable rate
loans $ 30,933 $ 4,750 $ 19,159 $ 54,842 62.97
________ ________ ________ ________ ______
Total loans:
Three months or less $ 9,757 $ 1,762 $ 5,662 $ 17,181 19.73
Over three months to
twelve months 7,578 1,206 8,833 17,617 20.23
Over twelve months to
three years 16,183 1,780 13,030 30,993 35.59
Over three years to
five years 3,925 140 7,892 11,957 13.73
Over five years to
fifteen years 3,078 - 3,366 6,444 7.40
Over fifteen years 443 - 2,462 2,905 3.32
________ ________ ________ ________ ______
Total loans $ 40,964 $ 4,888 $ 41,245 $ 87,097 100.00
________ ________ ________ ________ ______
</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 requirements 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 1997 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
<PAGE>32
Management's Discussion and Analysis
________________________________________________________________________________
the scheduled maturity date. Maturities on all other securities
are based on the earlier of the contractual maturity or the
call date, if any.
The interest rate environment in 1997 caused the average yield
of the investment portfolio to decrease to 6.30% from 6.60% in
1996. At December 31, 1997, the market value of the
investment portfolio was $45.3 million, representing a
$507,000 appreciation over amortized cost. This compared to a
market value of $43.5 million and a $121,000 appreciation over
amortized cost a year earlier.
Table 8. Investment Securities (thousands)
December 31, 1997
<TABLE>
<CAPTION>
Amortized Cost Due
____________________________
In One After One After Five After Restricted
Year or Through Through Ten Equity Market
Less Five Yrs. Ten Yrs. Years Securities Total Value
_______ _______ ______ ______ ______ _______ _______
</CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government agencies
and Mortgage Backed
Securities $12,439 $11,340 $3,090 $4,076 - $30,945 $31,178
State and
political subs. 1,240 5,056 5,431 - - 11,727 11,916
Other - 1,489 - - - 1,489 1,574
Restricted Equity
Securities - - - - 610 610 610
_______ _______ ______ ______ ____ _______ _______
Total $13,679 $17,885 $8,521 $4,076 $610 $44,771 $45,278
_______ _______ ______ ______ ____ _______ _______
Weighted average yields:
U.S. Government agencies
and Mortgage
Backed Securities 6.59% 6.62% 6.84% 7.08% -
States and
political subs. 4.88% 4.76% 4.86% - -
Other - 9.64% - - -
Restricted Equity
Securities - - - - 6.89%
Consolidated 6.43% 6.35% 5.57% 7.08% 6.89% 6.30%
</TABLE>
<TABLE>
<CAPTION>
Book Market
December 31, 1996 Value Value
_____ _____
</CAPTION>
<S> <C> <C>
Investment securities:
U.S. Treasury and Government agencies $ 979 $ 979
U.S. Government agencies (Mortgage Backed Securities) 29,739 29,760
States and political subdivisions 10,610 10,594
Other 2,075 2,191
_______ _______
Total $43,403 $43,524
_______ _______
</TABLE>
Average federal funds sold totaled $5.7 million in 1997 which
represented an 80.2% increase from the $3.2 million in 1996.
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 maintain
these funds at the lowest level possible consistent with
prudent interest rate risk management strategies. During
1997, average federal funds represented 4.1% of average
earning assets, up from the 2.4% during 1996 (See Table 5).
<PAGE>33
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, 1997
amounted to $122.7 million which was an increase of $6.3
million, or 5.4% over 1996. Average core deposits totaled
$97.8 million in 1997 representing a slight increase over the
$95.7 million in 1996. The percentage of the Bank's average
deposits that are interest-bearing decreased to 89.5% in 1997
from 90.5% in 1996. Average demand deposits which earn no
interest increased to $12.9 million in 1997 from $11.0 million
in 1996 and $10.5 million in 1995. Average deposits for the
past three years are summarized in Table 9.
Table 9. Deposit Mix (thousands)
<TABLE>
<CAPTION>
1997 1996 1995
______________ ______________ _______________
Average Average Average
Balance % Balance % Balance %
________ _____ ________ _____ ________ _____
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
NOW accounts $ 8,766 7.14 $ 8,263 7.10 $ 8,456 7.42
Money Market 3,228 2.63 3,417 2.93 4,061 3.56
Savings 14,868 12.12 15,113 12.98 16,860 14.79
Small denomination
certificates 70,924 57.79 68,943 59.20 66,790 58.58
Large denomination
certificates 12,078 9.84 9,687 8.32 7,325 6.42
________ ______ ________ ______ _______ ______
Total interest-
bearing deposits 109,864 89.52 105,423 90.53 103,492 90.77
Noninteresting-bearing
deposits 12,863 10.48 11,043 9.47 10,523 9.23
________ ______ ________ ______ ________ ______
Total deposits $122,727 100.00 $116,466 100.00 $114,015 100.00
________ ______ ________ ______ ________ ______
</TABLE>
The average balance of certificates of deposit issued in
denominations of $100,000 or more increased by $2.4 million or
24.7%, in 1997. The strategy of management has been to
support loan and investment growth with core deposits and not
to aggressively solicit the more volatile, large denomination
certificates of deposit. Table 10 provides maturity
information relating to Certificate of Deposits of $100,000 or
more at December 31, 1997.
<PAGE>34
Management's Discussion and Analysis
________________________________________________________________________________
Table 10. Large time deposit maturities (thousands)
Analysis of time deposits of $100,000 or more at December 31,
1997:
<TABLE>
<S> <C>
Remaining maturity of three months or less $ 721
Remaining maturity over three through twelve months 8,959
Remaining maturity over twelve months 5,441
_________
Total time deposits of $100,000 or more $ 15,121
</TABLE> _________
Capital Adequacy
Shareholder's equity amounted to $16.0 million at December 31,
1997, a 10.0% increase over the 1996 year-end total of $14.5
million. The increase was primarily a result of earnings and
a $117,833 increase in the value of securities that are
classified as available for sale. Average shareholders'
equity as a percentage of average total assets amounted to
10.9% in 1997 and 10.4% in 1996.
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, 1997 the
Bank has a ratio of Tier 1 capital to risk-weighted assets of
13.0% and a ratio of total capital to risk-weighted assets of
14.3%.
<PAGE>35
Management's Discussion and Analysis
________________________________________________________________________________
Table 11. Year-end Risk-Based capital (thousands)
<TABLE>
<CAPTION>
1997
____
</CAPTION>
<S> <C>
Tier I capital $ 11,938
Qualifying allowance for loan losses
(limited to 1.25% of risk-weighted assets) 1,146
_________
Total regulatory capital $ 13,084
_________
Total risk-weighted assets $ 91,680
_________
Tier I as a percent of risk-weighted assets 13.0%
Total regulatory capital as a percent of risk-
weighted assets 14.3%
Leverage Ratio<F1> 8.2%
<FN>
_________________________
<F1> Tier I capital divided by average total assets for the
quarter ended December 31, 1997.
</FN>
</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, 1997, the Bank had a ratio of
year-end Tier I capital to average total assets for the fourth
quarter of 1997 of 8.2%. Table 11 sets forth summary
information with respect to the Bank's capital ratios at
December 31, 1997. All capital ratio levels indicate that the
Bank is well capitalized.
At December 31, 1997 the Company had 511,911 shares of common
stock outstanding which was held by approximately 583
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 collateral, 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, 1997 and 1996 are
analyzed in Table 12.
<PAGE>36
Management's Discussion and Analysis
________________________________________________________________________________
Table 12. Nonperforming Assets
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Non-Accrual Loans $278,782 $139,161
Restructured - -
Foreclosed and In-Substance
Foreclosed Properties 210,709 838,130
________ ________
$489,491 $977,291
________ ________
</TABLE>
Nonperforming assets at year-end 1997 were 0.6% of loans
outstanding and 1.1% at year-end 1996. In addition to the
nonperforming assets, loans which were 90 days and over past
due amounted to $312,332 at December 31, 1997 and $215,000 at
December 31, 1996.
The allowance for loan losses is maintained at a level
adequate to absorb probable losses. Some of the factors which
management considers in determining 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.
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>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Allowance for loan losses, beginning $ 1,002,455 $ 1,134,182 $ 1,264,798
Provision for loan losses, added 500,000 325,000 135,958
Loans charged off (68,249) (495,201) (287,919)
Recoveries of loans previously charged off 17,920 38,474 21,345
___________ ___________ ___________
Net charge-offs (50,329) (456,727) (266,574)
___________ ___________ ___________
Allowance for loan losses, ending $ 1,452,126 $ 1,002,455 $ 1,134,182
___________ ___________ ___________
</TABLE>
<PAGE>37
Management's Discussion and Analysis
________________________________________________________________________________
Net loan charge-offs as a percentage of average loans were
0.06%, 0.57% and 0.34% in 1997, 1996, and 1995, 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 $1.5 million,
or 1.67% of gross loans outstanding at December 31, 1997, an
increase of $449,671 above the 1.16% reserve at December 31,
1996. 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, 1997.
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>
1997 1996 1995
___________________ __________________ _________________
Balance at end of
period applicable to Amount Percent<F1> Amount Percent<F1> Amount Percent<F1>
______ _______ ______ _______ ______ _______
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 194 9.21 $ 93 9.24 $ 108 9.51
Real estate,
construction 60 5.61 65 6.49 50 4.42
Real estate, mortgage 1,089 71.32 723 72.19 852 75.15
Installment loans to
individuals, other 109 13.86 121 12.08 124 10.92
______ ______ ______ ______ ______ ______
Total $1,452 100.00 $1,002 100.00 $1,134 100.00
______ ______ ______ ______ ______ ______
<FN>
___________________
<F1> Percent of loans in each category to total loans.
</FN>
</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'
withdrawals 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
<PAGE>38
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.
The liquidity ratio (the level of liquid assets divided by
total deposits plus short-term liabilities) was 18.9% at
December 31, 1997 compared to 18.0% at December 31, 1996.
These ratios are considered to be adequate by management.
Table 15. Interest Rate Sensitivity (thousands)
<TABLE>
<CAPTION>
December 31, 1997
Maturities/Repricing
________________________________________
1-3 4-12 13-60 Over 60
Months Months Months Months Total
______ ______ ______ ______ _____
</CAPTION>
<S> <C> <C> <C> <C> <C>
Earnings Assets:
Loans $ 17,134 $ 22,641 $ 42,914 $ 4,408 $ 87,097
Investments 1,145 12,534 17,885 13,207 44,771
Interest-bearing
deposits with other
banks 5,000 - - - 5,000
Federal Funds Sold 3,825 - - - 3,825
________ ________ ________ ________ ________
Total $ 27,104 $ 35,175 $ 60,799 $ 17,615 $140,693
________ ________ ________ ________ ________
Interest-bearing deposits:
NOW accounts 8,924 - - - 8,924
Money market 3,339 - - - 3,339
Savings 14,168 - - - 14,168
Certificates of
Deposit 11,799 41,263 36,467 - 89,529
Other borrowings - - - - -
________ ________ ________ ________ ________
Total $ 38,230 $ 41,263 $ 36,467 $ - $115,960
________ ________ ________ ________ ________
Interest sensitivity
gap $(11,126) $ (6,088) $ 24,332 $ 17,615 $ -
Cumulative interest
sensitivity gap $(11,126) $(17,214) $ 7,118 $ 24,733 $ 24,733
Ratio of sensitivity gap
to total earning assets (7.9)% (4.3)% 17.3% 12.5% -
Cumulative ratio of
sensitivity gap to
total earning assets (7.9)% (12.2)% 5.1% 17.5% 17.5%
</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 maintain 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, 1997. 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,
1997, 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
<PAGE>39
Management's Discussion and Analysis
________________________________________________________________________________
three months are NOW accounts and savings accounts totaling
$23,092,000 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 asset-sensitive in the thirteen to
sixty months time period and 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>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Return on average assets 1.3% 1.2% 1.1%
Return on average equity 12.0% 11.6% 10.7%
Average equity to average assets 10.9% 10.4% 10.2%
</TABLE>
<PAGE>40
Title page for Personnel
<PAGE>41
________________________________________________________________________________
Staff
________________________________________________________________________________
Main Office
___________
Customer Service Loan Operations Secretaries
________________ _______________ ___________
Diane Bishop Renee Akers Beulah Correll
Sherrie Janney Ola Driskett, Manager Yara Middleton
Betty Moran Debra Funkhouser Lisa Thomas
Sharon Zeman Gail Phillips, Supervisor Data Processing Center
______________________
Jan Rorrer
Paying and Ruth Anders
Receiving Tellers Karen Sowers
_________________ Gail Goad
Collections
Karen Bowman ___________ Gay Grim
Regina Compton Ralph Edwards Alva Mae Harman
Regina Gibson Credit Cards Patricia Whitlock
____________
Jennifer Hollandsworth Custodians
Shelia Dehart __________
Anthony Nolen
Accounting Roger Dickerson
Helen Roberson __________
Lucy Harris
Tammy Rutrough Deborah Reed
Patsy Wallace
Cave Spring Office Willis Office Hillsville Office
__________________ _____________ _________________
Customer Service Head Teller Branch Manager
________________ ___________ ______________
Margaret Caldwell Karen Sutphin Eugene Shockley
Paying and Receiving
____________________
Kevin Harvey
Paula McDaniel
<PAGE>42
________________________________________________________________________________
Board of Directors of Cardinal Bankshares and The Bank of Floyd
________________________________________________________________________________
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 of Cardinal Bankshares
_______________________________
J. H. Conduff Chairman of the Board
Leon Moore President and CEO
Christopher B. Snodgrass Financial Officer
Wanda M. Gardner Internal Auditor
Annette V. Battle Secretary
Officers of The Bank of Floyd
_____________________________
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
Christopher B. Snodgrass Assist. V.P. and Financial Officer
C. W. Harman Secretary
G. Albert Owen, Jr. Vice President and Cashier
Ron Doane Assist. Vice President and Branch Administrator
Sunny K. Cornwell Assist. Vice President and Credit Review
Main Office
___________
Lois A. Bond Assistant Vice President
Patricia K. Harris Assistant Cashier
Carolyn W. Reed Assistant Cashier
Cave Spring Office
__________________
Larry J. Hurt Assist. Vice President and Branch Manager
Kit C. Edwards Branch Operations Officer
Administrative
______________
Marie V. Thomas Vice President
Mary Ann Ayers Marketing Officer
Annette V. Battle Assist. Secretary to the Board &
Recording Secretary
Patricia B. Spangler Administrative Assistant
Shelby L. Rutherford Administrative Assistant
Lending
_______
Dianne H. Hamm Assist. Vice Pres. & Compliance Officer
Patricia A. Bower Assistant Cashier
Troy L. Abell Assist. Vice President and Loan Officer
Operations
__________
Betty A. Whitlock Assist. Cashier & Manager of Data Processing
Audit
_____
Wanda M. Gardner Assist. Vice President & Internal Auditor
<PAGE>43
________________________________________________________________________________
Stockholder Information
________________________________________________________________________________
Annual Meeting
______________
The annual meeting of shareholders will be held at 2:00 p.m. on
April 22, 1998, 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 1997 will be furnished,
without charge, after March 31, 1998 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.
Federal Home Loan Bank
______________________
The Bank of Floyd is a member of the Federal Home Loan Bank of Atlanta.
Federal Reserve
_______________
The Bank of Floyd is a state-chartered bank and a member of the Federal
Reserve Bank of Richmond.
Banking Offices
_______________
Floyd Office Roanoke Office
____________ ______________
101 Jacksonville Circle 4094 Postal Drive
Floyd, Virginia 24091 Roanoke, Virginia 24018
(540) 745-4191 (540) 774-1111
Willis Office Hillsville Office
_____________ _________________
Floyd Highway South Opening Spring 1998
Willis, Virginia 24380 185 South Main Street
(540) 745-4191 Hillsville, Virginia 24343
(540) 745-4191
<INSIDE BACK COVER>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CARDINAL BANKSHARES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AT DECEMBER 31,
1997 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,941,494
<INT-BEARING-DEPOSITS> 500,000
<FED-FUNDS-SOLD> 3,825,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,663,068
<INVESTMENTS-CARRYING> 13,430,624
<INVESTMENTS-MARKET> 13,614,488
<LOANS> 86,756,865
<ALLOWANCE> (1,452,126)
<TOTAL-ASSETS> 145,072,317
<DEPOSITS> 128,188,726
<SHORT-TERM> 0
<LIABILITIES-OTHER> 899,440
<LONG-TERM> 0
<COMMON> 5,119,110
0
0
<OTHER-SE> 10,865,041
<TOTAL-LIABILITIES-AND-EQUITY> 145,072,317
<INTEREST-LOAN> 8,074,494
<INTEREST-INVEST> 2,650,455
<INTEREST-OTHER> 353,074
<INTEREST-TOTAL> 11,078,023
<INTEREST-DEPOSIT> 5,538,989
<INTEREST-EXPENSE> 5,681,456
<INTEREST-INCOME-NET> 5,396,567
<LOAN-LOSSES> 500,000
<SECURITIES-GAINS> 7,018
<EXPENSE-OTHER> 2,933,398
<INCOME-PRETAX> 2,506,154
<INCOME-PRE-EXTRAORDINARY> 2,506,154
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,853,684
<EPS-PRIMARY> 3.62
<EPS-DILUTED> 3.62
<YIELD-ACTUAL> 4.01
<LOANS-NON> 278,762
<LOANS-PAST> 312,332
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,002,455
<CHARGE-OFFS> 68,249
<RECOVERIES> 17,920
<ALLOWANCE-CLOSE> 1,452,126
<ALLOWANCE-DOMESTIC> 1,452,126
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
