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, 1999.
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 $11,446,000.
The aggregate market value of the voting stock as of March 15, 2000, held
by non-affiliates of the registrant computed by reference to the price at which
the stock was sold, or the average bid and asked prices of such stock, as of a
specified date within the last 60 days was $18,812,729.
511,911 shares of the Issuer's common stock were issued and outstanding as
of March 15, 2000.
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, 1999 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 28, 2000 is incorporated by
reference into Form 10-KSB Part III, Items 9, 10, 11, and 12.
24
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(A) BUSINESS DEVELOPMENT
Cardinal Bankshares Corporation (the Company) was incorporated as a Virginia
corporation on March 12, 1996 to acquire the stock of The Bank of Floyd (the
Bank). The Bank was acquired by the Company on June 30, 1996.
The Bank was organized as a state chartered bank on February 24, 1951
through the consummation of a plan of consolidation between two state
chartered community banks then operating in Floyd County, Virginia.
The Bank and its wholly-owned subsidiary, FBC, Inc., are incorporated and
operate under the laws of the Commonwealth of Virginia. As a state chartered
Federal Reserve member, the Bank is subject to regulation by the Virginia
Bureau of Financial Institutions and the Federal Reserve. FBC, Inc.'s assets
and operations consist primarily of a minority interest in a title insurance
company.
(B) DESCRIPTION OF THE BUSINESS
The principal business of the Company and Bank is to provide compre- hensive
individual and corporate banking services through its main office in Floyd,
Virginia, and its branch in Hillsville, 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 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, 1999, 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 80% 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 $1,800,000. 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 $10,800,000 and $8,900,000 at December 31, 1999 and 1998,
respectively.
<PAGE>
(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. However, in the year 2000,
the Company will be weighing the opportunities now available after passage
of the Gramm-Leach-Bliley Act in 1999. Some of the products and services
that now may be offered by the Company are property, casualty, life,
automobile, disability, and group insurance products as well as brokerage
services and others.
(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 21 officers, 54 full-time employees and five part-time
employees as of December 31, 1999. 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 branch
offices in Hillsville and Roanoke, Virginia. All 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 as the Bank's conference room, training room and which provides
space for expansion of the financial services now offered.
<PAGE>
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 occurred 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.
Year High Low
---- ------ ------
1999 $53.00 $40.00
1998 $57.00 $48.25
1997 $47.00 $44.00
1996 $44.00 $35.45
1995 $35.45 $21.59
(B) The approximate number of holders of the Bank's 511,911 Common Stock
Securities as of December 31, 1999, is 600.
(C) Dividends paid for 1999 were $1.11 and 1998 were $1.06 per share 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 at the discretion of the
Board of Directors. The Company presently expects that dividends will
continue to be paid in the future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------
The information required under this item is incorporated by reference to the
Company's Annual Report to Stockholders, Exhibit 13.1, pages 24-42 and
inside front cover.
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
The following consolidated financial statements of the registrant and the
independent Auditor's Report set forth on pages 2 through 22 of the
Company's 1999 Annual Report to Stockholders are incorporated herein by
reference:
(1) Independent Auditor's Report
(2) Consolidated Balance Sheets as of December 31, 1999 and 1998
(3) Consolidated Statements of Income for the years ended December
31, 1999, 1998, and 1997
(4) Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998, and 1997
(5) Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997
(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, 1999 is listed on
page 3 of the Company's Proxy statement dated March 28, 2000 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 28, 2000, 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 28, 2000, which information is
incorporated by reference.
<PAGE>
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 Statement
dated March 28, 2000 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 28, 2000 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 28, 2000 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:
1999 Annual Report
To Stockholders Pages(s)*
-------------------------
1. Financial Statements:
--------------------
Independent Auditors' Report 2
Consolidated Balance Sheets
December 31, 1999 and 1998 3
Consolidated Statements of Income
Years ended December 31, 1999,
1998, and 1997 4
Consolidated Statements of Stock-
holders' Equity-Years ended
December 31, 1999, 1998, and 1997 5
Consolidated Statements of Cash
Flows-Years ended December 31,
1999, 1998, and 1997 6
Notes to Consolidated Financial
Statements 7 - 22
*Incorporated by reference from the indicated pages of the 1999 Annual Report
to Stockholders
<PAGE>
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>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CARDINAL BANKSHARES CORPORATION
Date: March 26, 2000 By: s/ Ronald Leon Moore
--------------------
Ronald Leon Moore
President and CEO
In accordance with the Exchange Act, this report has to be signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
s/Ronald Leon Moore Director, President and 3/26/00
- ------------------- Chief Executive Officer
Ronald Leon Moore (principal financial and
accounting officer).
s/K. Venson Bolt Director 3/26/00
- ----------------
K. Venson Bolt
s/J. H. Conduff Director 3/26/00
- ---------------
J. H. Conduff
s/W. R. Gardner, Jr. Director 3/26/00
- --------------------
W. R. Gardner, Jr.
s/C. W. Harman Director 3/26/00
- --------------
C. W. Harman
s/Kevin D. Mitchell Director 3/26/00
- -------------------
Kevin D. Mitchell
s/Dorsey H. Thompson Director 3/26/00
- --------------------
Dorsey H. Thompson
<PAGE>
INDEX TO EXHIBITS
PAGE NO. IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM
- ----------- ----------- -----------------
13.1 1999 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 ---
<PAGE>
Sec.8-Reference herein to directors, officers, employees or agents shall include
former directors, officers, employees and agents and their respective
heirs, executors and administrators.
================================================================================
1999 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.......................................................44
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS SUMMARY(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -------
SUMMARY OF OPERATIONS(2)
Interest income $ 11,060 $ 11,269 $ 11,078 $ 10,289 $ 10,003
Interest expense 5,603 5,797 5,681 5,307 5,060
----------- ----------- ----------- ----------- -----------
Net interest income 5,457 5,472 5,397 4,982 4,943
Provision for loan losses 142 175 500 325 136
Other income 386 489 543 343 225
Other expense 3,086 3,066 2,934 2,823 3,088
Income taxes 650 781 652 594 548
----------- ----------- ----------- ----------- -----------
Net income $ 1,965 $ 1,939 $ 1,854 $ 1,583 $ 1,396
=========== =========== =========== =========== ===========
PER SHARE DATA(3)
Basic earnings per share $ 3.84 $ 3.79 $ 3.62 $ 3.09 $ 2.73
Cash dividends declared 1.11 1.06 1.00 .94 .88
Book value 34.70 33.84 31.22 28.38 26.62
YEAR-END BALANCE SHEET SUMMARY
Loans, net $ 87,685 $ 85,810 $ 85,305 $ 85,372 $ 78,630
Securities 52,383 41,329 45,094 43,722 43,998
Total assets 158,140 153,410 145,072 136,422 130,901
Deposits 139,808 135,211 128,189 118,424 116,537
Stockholders' equity 17,758 17,321 15,984 14,535 13,631
Interest earning assets $ 148,878 $ 147,666 $ 140,397 $ 130,458 $ 125,121
Interest bearing liabilities 123,024 119,657 115,960 108,639 105,669
SELECTED RATIOS
Return on average assets 1.3% 1.3% 1.3% 1.2% 1.1%
Return on average equity 11.1% 11.5% 12.0% 11.6% 10.7%
Dividends declared as percent of
net income 28.9% 28.0% 27.7% 30.3% 32.4%
</TABLE>
- ----------
(1) In thousands of dollars, except per share data.
(2) Reflects Bank of Floyd operations prior to formation of Cardinal
Bankshares Corporation on March 12, 1996.
(3) Adjusted for the effects of a four for one stock split in 1995 and 10%
stock dividend in 1997.
<PAGE>
CARDINAL BANKSHARES CORPORATION
[GRAPHIC OF Post Office Box 215
A CARDINAL Floyd, Virginia 24091
APPEARS HERE] Phone: (540) 745-4191
Fax: (540) 745-4133
- --------------------------------------------------------------------------------
March 28, 2000
Dear Shareholder:
We are pleased to present the annual report of Cardinal Bankshares Corporation.
The accounting firm of Larrowe and Company, PLC has certified our report.
We again can report to you of strong growth and record earnings. Net earnings
for 1999 ended at $1,965,133.00 with a return on average assets of 1.30%. This
is very favorable to our peer banks.
Total assets of Cardinal Bankshares Corporation ended the year at
$158,140,000.00 and total deposits topped $139,808,000.00.
Earnings per share reached $3.84 for the year, along with a dividend pay out of
$1.11 per share. This was the eighth consecutive year we have increased cash
dividends.
And yes, the dreaded Y2K is behind us. We are happy to report to you that no
disruptions occurred with our bank, and no major disruptions occurred in the
financial industry. The financial institutions emerged stronger than ever.
Truly, 1999 was a good year. But as much as we like to look at the past, we must
plan for our future. With the passage of the Gramm - Leach - Bliley Act in
November 1999, financial modernization became a reality. This act opens the door
to products and services the banking industry has proposed for the last twenty
years.
The 21st Century will bring change and many opportunities for the financial
industry. Community banking is alive and well.
A sincere thanks to our shareholders, staff and Board of Directors for an
eventful 1999.
Sincerely,
/s/Leon Moore /s/J.H. Conduff
Leon Moore J.H. Conduff
President and Chief Executive Officer Chairman of the Board
LM/avb
<PAGE>
[LOGO]
LARROWE & COMPANY, P.L.C.
CPAs AND CONSULTANTS
=========================
Post Office Box 760
120 West Grayson Street
Galax, Virginia 24333
540-238-1800
Fax 540-238-1801
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, 1999 and 1998 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, 1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ LARROWE & COMPANY, P.L.C.
Galax, Virginia
January 14, 2000
<PAGE>
================================================================================
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS 1999 1998
--------------- ----------------
Cash and due from banks $ 3,775,280 $ 2,985,331
Interest-bearing deposits with banks 2,000,000 7,100,000
Federal funds sold 6,975,000 11,825,000
Investment securities available for sale 33,213,933 25,981,443
Investment securities held to maturity 19,169,099 15,347,979
Loans, net of allowance for loan losses $1,661,521
in 1999 and $1,668,201 in 1998 87,684,925 85,809,506
Property and equipment, net 2,444,355 2,173,693
Accrued income 1,173,115 984,457
Other assets 1,704,778 1,202,294
--------------- ----------------
$ 158,140,485 $ 153,409,703
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Demand deposits $ 16,783,239 $ 15,553,868
NOW deposits 10,767,129 9,991,178
Savings deposits 18,901,235 18,476,177
Large denomination time deposits 18,142,525 15,666,927
Other time deposits 75,213,536 75,522,910
--------------- ----------------
Total deposits 139,807,664 135,211,060
Accrued interest payable 237,075 240,709
Other liabilities 338,149 636,809
--------------- ----------------
140,382,888 136,088,578
--------------- ----------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, $10 par value; 5,000,000 shares
authorized; 511,771 and 511,911 shares
issued in 1999 and 1998, respectively 5,117,710 5,119,110
Surplus 2,925,150 2,925,150
Retained earnings 10,514,759 9,123,733
Unrealized appreciation on investment securities
available for sale, net of income taxes (800,022) 153,132
--------------- ----------------
17,757,597 17,321,125
--------------- ----------------
$ 158,140,485 $ 153,409,703
=============== ================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
================================================================================
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
--------------- --------------- ----------------
INTEREST INCOME
Loans and fees on loans $ 7,706,722 $ 8,034,738 $ 8,074,494
Federal funds sold and securities purchased
under agreements to resell 479,205 476,913 315,065
Investment securities:
Taxable 1,903,517 1,843,843 2,159,381
Exempt from federal income tax 773,233 625,769 491,074
Deposits with banks 197,294 288,227 38,009
--------------- --------------- ----------------
11,059,971 11,269,490 11,078,023
--------------- --------------- ----------------
INTEREST EXPENSE
Deposits 5,603,020 5,797,887 5,538,989
Borrowings - - 142,467
--------------- --------------- ----------------
5,603,020 5,797,887 5,681,456
--------------- --------------- ----------------
Net interest income 5,456,951 5,471,603 5,396,567
PROVISION FOR LOAN LOSSES 141,721 175,000 500,000
--------------- --------------- ----------------
Net interest income after provision
for loan losses 5,315,230 5,296,603 4,896,567
--------------- --------------- ----------------
NONINTEREST INCOME
Service charges on deposit accounts 199,928 152,001 143,794
Other service charges and fees 47,445 37,977 36,128
Net realized gains on sales of securities 4,768 27,315 7,018
Gain on sale of other real estate owned 10,000 89,637 232,732
Other income 123,814 182,435 123,313
--------------- --------------- ----------------
385,955 489,365 542,985
--------------- --------------- ----------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,913,979 1,871,271 1,760,878
Occupancy expense 162,744 136,641 115,612
Equipment expense 282,646 274,861 273,026
Other expense 726,963 782,975 783,882
--------------- --------------- ----------------
3,086,332 3,065,748 2,933,398
--------------- --------------- ----------------
Income before income taxes 2,614,853 2,720,220 2,506,154
INCOME TAX EXPENSE 649,720 781,368 652,470
--------------- --------------- ----------------
Net income $ 1,965,133 $ 1,938,852 $ 1,853,684
=============== =============== ================
BASIC EARNINGS PER SHARE $ 3.84 $ 3.79 $ 3.62
=============== =============== ================
WEIGHTED AVERAGE SHARES OUTSTANDING 511,801 511,904 512,090
=============== =============== ================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
================================================================================
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK SURPLUS EARNINGS INCOME (LOSS) TOTAL
------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 taxes of $61,118 - - - 124,851 124,851
Reclassification adjustment - - - (7,018) (7,018)
--------------
TOTAL COMPREHENSIVE INCOME 1,971,517
Dividends paid
($.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
COMPREHENSIVE INCOME
Net income - - 1,938,852 - 1,938,852
Net change in unrealized
appreciation on investment
securities available for sale,
net of taxes of $(30,525) - - - (31,938) (31,938)
Reclassification adjustment - - - (27,315) (27,315)
--------------
TOTAL COMPREHENSIVE INCOME 1,879,599
Dividends paid
($1.06 per share) - - (542,625) - (542,625)
Common stock purchased (2,500) - (11,000) - (13,500)
Common stock reissued 2,500 - 11,000 - 13,500
------------- ------------- -------------- ------------- --------------
BALANCE, DECEMBER 31, 1998 5,119,110 2,925,150 9,123,733 153,132 17,321,125
COMPREHENSIVE INCOME
Net income - - 1,965,133 - 1,965,133
Net change in unrealized
appreciation on investment
securities available for sale,
net of taxes of $(491,019) - - - (953,154) (953,154)
--------------
TOTAL COMPREHENSIVE INCOME 1,011,979
Dividends paid
($1.11 per share) - - (568,147) - (568,147)
Common stock purchased (4,300) - (18,385) - (22,685)
Common stock reissued 2,900 - 12,425 - 15,325
------------- ------------- -------------- ------------- --------------
BALANCE, DECEMBER 31, 1999 $ 5,117,710 $ 2,925,150 $ 10,514,759 $ (800,022) $ 17,757,597
============= ============= ============== ============= ==============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
--------------- --------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,965,133 $ 1,938,852 $ 1,853,684
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 190,905 176,587 190,065
Accretion of discount on securities, net
of amortization of premiums 55,795 68,587 176
Provision for loan losses 141,721 175,000 500,000
Deferred income taxes 15,762 (82,635) (213,850)
Net realized (gains) losses on securities (4,768) (27,315) (7,018)
Deferred compensation and pension expense (154,782) 65,599 70,748
Changes in assets and liabilities:
Accrued income (188,658) 108,606 (39,487)
Other assets (26,954) 37,336 494,783
Accrued interest payable (3,634) (28,323) 22,032
Other liabilities (143,878) (59,198) 144,305
--------------- --------------- ----------------
Net cash provided by operating activities 1,846,642 2,373,096 3,015,438
--------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits 5,100,000 (2,100,000) (5,000,000)
Net (increase) decrease in federal funds sold 4,850,000 (8,000,000) (3,325,000)
Purchases of investment securities (27,768,647) (19,326,465) (15,236,219)
Sales of available for sale securities 493,672 12,125 2,075,317
Maturities of investment securities 14,725,892 22,947,560 11,974,853
Net (increase) decrease in loans (2,017,140) (679,767) (437,099)
Purchases of property and equipment (721,860) (922,050) (317,342)
Sales of property and equipment 260,293 259,629 -
--------------- --------------- ----------------
Net cash used in investing activities (5,077,790) (7,808,968) (10,265,490)
--------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, NOW,
and savings deposits 2,430,380 5,361,101 (404,102)
Net increase in time deposits 2,166,224 1,661,233 10,168,381
Net increase (decrease) in short-term debt - - (400,000)
Net increase (decrease) in long-term debt - - (2,400,000)
Redemption of fractional shares - - (8,430)
Dividends paid (568,147) (542,625) (513,855)
Common stock purchased (22,685) (13,500) -
Common stock reissued 15,325 13,500 -
--------------- --------------- ----------------
Net cash provided by financing activities 4,021,097 6,479,709 6,441,994
--------------- --------------- ----------------
Net increase (decrease) in cash and
cash equivalents 789,949 1,043,837 (808,058)
CASH AND CASH EQUIVALENTS, BEGINNING 2,985,331 1,941,494 2,749,552
--------------- --------------- ----------------
CASH AND CASH EQUIVALENTS, ENDING $ 3,775,280 $ 2,985,331 $ 1,941,494
=============== =============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 5,606,654 $ 5,826,210 $ 5,659,424
=============== =============== ================
Income taxes paid $ 639,555 $ 874,869 $ 750,470
=============== =============== ================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Other real estate acquired in settlement of loans $ - $ - $ 4,819
=============== =============== ================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
================================================================================
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, Carroll, and Roanoke, Virginia and the City of Roanoke, Virginia,
through four 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.
BUSINESS SEGMENTS
The Company reports its activities as a single business segment. In determining
the appropriateness of segment definition, the Company considers components of
the business about which financial information is available and regularly
evaluated relative to resource allocation and performance assessment.
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."
7
<PAGE>
================================================================================
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.
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
8
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
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.
9
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
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.
10
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
OTHER LIABILITIES: For fixed-rate loan commitments, fair value considers the
difference between current levels of interest rates and the committed rates. The
carrying amounts of other liabilities approximates fair value.
IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This Statement
(effective for fiscal quarters beginning after June 15, 2000) establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. While the Company has not
completed its analysis of all impacts of Statement No. 133, Management does not
believe that implementation of the Statement will be material to the financial
statements.
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 $762,000 and $686,000 for the two week periods including December
31, 1999 and 1998, 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
1999 COST GAINS LOSSES VALUE
- ---- ------------- -------------- ------------- --------------
AVAILABLE FOR SALE
<S> <C> <C> <C> <C>
U.S. Government agency securities $ 13,248,125 $ 2,524 $ 343,902 $ 12,906,747
State and municipal securities 559,675 - 6,350 553,325
Mortgage-backed securities 19,042,333 61,724 898,960 18,205,097
Other securities 1,575,539 3,008 29,783 1,548,764
------------- -------------- ------------- --------------
$ 34,425,672 $ 67,256 $ 1,278,995 $ 33,213,933
============= ============== ============= ==============
HELD TO MATURITY
State and municipal securities $ 18,000,647 $ 30,135 $ 383,523 $ 17,647,259
Mortgaged-backed securities 487,977 1,577 1,937 487,617
Other securities 680,475 - - 680,475
------------- -------------- ------------- --------------
$ 19,169,099 $ 31,712 $ 385,460 $ 18,815,351
============= ============== ============= ==============
</TABLE>
11
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. SECURITIES, CONTINUED
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
1998 COST GAINS LOSSES VALUE
- ---- ------------- -------------- ------------- --------------
AVAILABLE FOR SALE
<S> <C> <C> <C> <C>
U.S. Government agency securities $ 7,897,742 $ 34,315 $ 1,070 $ 7,930,987
State and municipal securities 560,796 20,319 - 581,115
Mortgage-backed securities 15,793,265 151,472 30,238 15,914,499
Other securities 1,497,207 57,635 - 1,554,842
------------- -------------- ------------- --------------
$ 25,749,010 $ 263,741 $ 31,308 $ 25,981,443
============= ============== ============= ==============
HELD TO MATURITY
State and municipal securities $ 14,025,427 $ 398,185 $ 5,388 $ 14,418,224
Mortgaged-backed securities 684,527 2,355 2,093 684,789
Other securities 638,025 - - 638,025
------------- -------------- ------------- --------------
$ 15,347,979 $ 400,540 $ 7,481 $ 15,741,038
============= ============== ============= ==============
</TABLE>
Investment securities with amortized cost of approximately $4,700,000 and
$4,400,000 at December 31, 1999 and 1998, 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, 1999, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
-------------- ------------- --------------
Realized gains, available for sale securities $ 4,768 $ 27,358 $ 8,855
Realized losses, available for sale securities - (43) (1,837)
-------------- ------------- --------------
$ 4,768 $ 27,315 $ 7,018
============== ============= ==============
</TABLE>
The scheduled maturities of securities available for sale and held to maturity
at December 31, 1999, were as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
------------------------------- -------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Due in one year or less $ 802,746 $ 796,149 $ 1,367,121 $ 1,367,902
Due after one year through five years 15,612,212 15,352,302 5,695,412 5,678,117
Due after five years through ten years 2,024,816 1,969,993 7,990,899 7,821,698
Due after ten years 15,985,898 15,095,489 3,435,192 3,267,159
Restricted equity securities - - 680,475 680,475
------------- -------------- ------------- --------------
$ 34,425,672 $ 33,213,933 $ 19,169,099 $ 18,815,351
============= ============== ============= ==============
</TABLE>
12
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. LOANS RECEIVABLE
The major components of loans in the consolidated balance sheets at December 31,
1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
------------- --------------
Commercial $ 4,326 $ 5,630
Real estate:
Construction and land development 3,420 4,028
Residential, 1-4 families 24,664 24,545
Residential, 5 or more families 1,763 2,219
Farmland 3,767 4,134
Nonfarm, nonresidential 40,117 32,794
Agricultural 1,133 1,140
Consumer 6,004 7,244
Other 4,436 6,057
------------- --------------
89,630 87,791
Unearned discount - (7)
Unearned net loan origination costs, net of fees (283) (306)
------------- --------------
89,347 87,478
Allowance for loan losses (1,662) (1,668)
------------- --------------
$ 87,685 $ 85,810
============= ==============
</TABLE>
Nonperforming assets at December 31, 1999 and 1998 are detailed as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
------------- --------------
Nonaccrual loans and leases $ 1,826,688 $ 66,251
Restructured loans - -
Loans past due 90 days or more 975,373 343,225
------------- --------------
Total nonperforming loans 2,802,061 409,476
Foreclosed, repossessed and idled properties 97,256 101,756
------------- --------------
Total nonperforming assets $ 2,899,317 $ 511,232
============= ==============
</TABLE>
Leases receivable of approximately $1,021,000 are included in nonaccrual loans
and leases at December 31, 1999. The Bank discontinued this program in 1999 and
provided for estimated losses under these contracts in the allowance for loan
losses account.
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:
1999 1998 1997
---------- --------- -----------
NONACCRUAL LOANS:
Interest income, original terms $ 159,220 $ 4,433 $ 27,239
========== ========= ==========
Interest income recognized $ 81,339 $ 1,140 $ 20,840
========== ========= ==========
RESTRUCTURED LOANS:
Interest income, original terms $ - $ - $ -
========== ========= ==========
Interest income recognized $ - $ - $ -
========== ========= ==========
13
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. LOANS RECEIVABLE, CONTINUED
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>
<S> <C> <C> <C>
1999 1998 1997
-------------- ------------- --------------
Recorded investment at December 31 $ 3,105,966 $ 1,103,551 $ 1,467,636
============== ============= ==============
Allowance for loan losses $ 664,287 $ 286,250 $ 594,105
============== ============= ==============
Average recorded investment for the year $ 1,130,732 $ 847,271 $ 453,875
============== ============= ==============
Interest income recognized for the year $ 204,905 $ 103,056 $ 133,973
============== ============= ==============
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:
<CAPTION>
<S> <C> <C>
1999 1998
------------- ---------------
BALANCE, BEGINNING $ 1,668,201 $ 1,452,126
Provision charged to expense 141,721 175,000
Recoveries of amounts charged off 13,472 117,917
Amounts charged off (161,873) (76,842)
------------- --------------
BALANCE, ENDING $ 1,661,521 $ 1,668,201
============= ==============
NOTE 6. PROPERTY AND EQUIPMENT
Components of property and equipment and total accumulated depreciation at
December 31, 1999 and 1998, are as follows:
<CAPTION>
<S> <C> <C>
1999 1998
------------- --------------
Land $ 377,612 $ 377,612
Bank premises 2,630,155 2,301,028
Furniture and equipment 1,739,600 1,867,069
------------- --------------
4,747,367 4,545,709
Less accumulated depreciation (2,303,012) (2,372,016)
------------- --------------
$ 2,444,355 $ 2,173,693
============= ==============
</TABLE>
NOTE 7. DEBT
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 $7,500,000 and a secured line of credit with the
Federal Home Loan Bank of Atlanta of approximately $19,000,000. Additional
amounts are available from the Federal Home Loan Bank, with additional
collateral. At December 31, 1999 and 1998, there were no amounts outstanding
under these agreements.
14
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1999 and 1998.
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
------------- --------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 1,280,322 $ 1,167,829
Service cost 101,604 88,222
Interest cost 95,711 87,570
Plan participants' contributions - -
Amendments - -
Actuarial (gain) loss (4,432) 76,439
Acquisition - -
Benefits paid (87,398) (139,738)
------------- --------------
Benefit obligation at end of year $ 1,385,807 $ 1,280,322
============= ==============
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 1,022,036 $ 1,156,480
Actual return on plan assets 145,755 5,294
Acquisition - -
Employer contribution 153,998 -
Plan participants' contributions - -
Benefits paid (87,398) (139,738)
------------- --------------
Fair value of plan assets at end of year $ 1,234,391 $ 1,022,036
============= ==============
CHANGE IN PREPAID (ACCRUED) BENEFIT COST
Prepaid (accrued) benefit cost, beginning $ (332,368) $ (266,984)
Contributions 153,998 -
Pension cost (107,659) (65,384)
------------- --------------
Prepaid (accrued) benefit cost, ending $ (286,029) $ (332,368)
============= ==============
Funded status $ (151,416) $ (258,286)
Unrecognized transitional net assets (40,285) (44,313)
Unrecognized prior service cost 71,750 77,729
Unrecognized net actuarial (gain) loss (166,078) (107,498)
------------- --------------
Prepaid (accrued) benefit cost $ (286,029) $ (332,368)
============= ==============
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate 7.5% 7.5%
Expected return on plan assets 9.0% 9.0%
Rate of compensation increase 5.0% 5.0%
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
-------------- ------------- -------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 101,604 $ 88,222 $ 86,171
Interest cost 95,711 87,570 73,837
Return on plan assets (145,755) (5,294) (194,215)
Originating unrecognized asset gain (loss) 54,148 (98,769) 109,015
Amortization 1,951 (6,345) (4,108)
-------------- ------------- --------------
Net periodic benefit cost $ 107,659 $ 65,384 $ 70,700
============== ============= ==============
</TABLE>
15
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 $117,681 and $117,625 at December 31, 1999
and 1998, respectively.
Charges to income are based on present value of future cash payments, discounted
at 8%, and amounted to $9,412, $9,572 and $9,404 for 1999, 1998 and 1997,
respectively.
The Bank is owner and beneficiary of life insurance policies on these directors.
Policy cash values, net of policy loans, totaled $35,093 and $26,785 at December
31, 1999 and 1998, 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, 1999 DECEMBER 31, 1998
------------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
FINANCIAL ASSETS
Cash and cash equivalents $ 3,775 $ 3,775 $ 2,985 $ 2,985
Interest-bearing deposits with banks 2,000 2,000 7,100 7,100
Federal funds sold 6,975 6,975 11,825 11,825
Securities, available-for-sale 33,214 33,214 25,981 25,981
Securities, held to maturity 19,169 18,815 15,348 15,741
Loans, net of allowance for loan losses 87,685 86,180 85,810 89,213
FINANCIAL LIABILITIES
Deposits 139,808 139,451 135,211 136,993
OFF-BALANCE-SHEET ASSETS (LIABILITIES)
Commitments to extend credit and
standby letters of credit - - - -
Commercial letters of credit - - - -
NOTE 11. INCOME TAXES
CURRENT AND DEFERRED INCOME TAX COMPONENTS
The components of income tax expense (substantially all Federal) are as follows:
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
-------------- ------------- --------------
Current $ 633,958 $ 864,003 $ 866,320
Deferred 15,762 (82,635) (213,850)
-------------- ------------- --------------
$ 649,720 $ 781,368 $ 652,470
============== ============= ==============
</TABLE>
16
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. INCOME TAXES, CONTINUED
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>
<S> <C> <C> <C>
1999 1998 1997
-------------- ------------- --------------
Expected tax expense $ 889,050 $ 924,875 $ 852,092
Tax exempt interest (280,737) (233,669) (186,555)
Other 41,407 90,162 (13,067)
-------------- ------------- --------------
$ 649,720 $ 781,368 $ 652,470
============== ============= ==============
DEFERRED TAX ANALYSIS
The components of net deferred tax assets (substantially all Federal) at
December 31, 1999 and 1998 are summarized as follows:
<CAPTION>
<S> <C> <C>
1999 1998
------------- ---------------
Deferred tax assets $ 1,140,978 $ 739,541
Deferred tax liabilities (75,904) (149,997)
------------- --------------
$ 1,065,074 $ 589,544
============= ==============
The tax effects of each significant item creating deferred taxes are summarized
below:
<CAPTION>
<S> <C> <C>
1999 1998
------------- ---------------
Net unrealized appreciation on securities available for sale $ 411,991 $ (79,301)
Allowance for loan losses 440,684 392,499
Other valuation reserves 91,671 85,520
Deferred compensation and accrued pension costs 100,372 152,998
Deferred loan fees 96,260 108,524
Depreciation (66,976) (47,774)
Accretion of discount on investment securities (8,928) (22,922)
------------- --------------
$ 1,065,074 $ 589,544
============= ==============
</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.
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.
17
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. COMMITMENTS AND CONTINGENCIES, CONTINUED
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK, CONTINUED
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, 1999 and 1998, is as follows:
1999 1998
------------- --------------
Commitments to extend credit $ 13,647,000 $ 7,097,000
Standby letters of credit 30,000 132,000
------------- --------------
$ 13,677,000 $ 7,229,000
============= ==============
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 $1,800,000. 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, Carroll,
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 $10,800,000 and
$8,900,000 at December 31, 1999 and 1998, respectively.
The Company has cash and cash equivalents on deposit with financial institutions
which exceed federally-insured limits.
LEASES
The Bank's Willis office is leased under an operating lease at a yearly rental
of $1,500. The lease expires January 31, 2003. Rental expense was $1,500 for
1999 and 1998, and $1,125 for 1997.
18
<PAGE>
================================================================================
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 $1,300,000 at December 31,
1999. No 23A transactions were deemed to exist between the Company and the Bank
at December 31, 1999.
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, 1999, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1999, 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.
19
<PAGE>
================================================================================
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
------ ----- ------ ----- ------ -----
DECEMBER 31, 1999:
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets) $ 14,100 14.5% >$ 7,765 > 8.0% >$ 9,706 > 10.0%
- - - -
Tier I Capital
(to Risk-Weighted Assets) $ 12,881 13.3% >$ 3,882 > 4.0% >$ 5,824 > 6.0%
- - - -
Tier I Capital
(to Average Assets) $ 12,881 8.4% >$ 6,172 > 4.0% >$ 7,716 > 5.0%
- - - -
DECEMBER 31, 1998:
Total Capital
(to Risk-Weighted Assets) $ 13,501 15.1% >$ 7,159 > 8.0% >$ 8,948 > 10.0%
- - - -
Tier I Capital
(to Risk-Weighted Assets) $ 12,376 13.8% >$ 3,579 > 4.0% >$ 5,369 > 6.0%
- - - -
Tier I Capital
(to Average Assets) $ 12,376 8.2% >$ 6,066 > 4.0% >$ 7,582 > 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 1999 and 1998 loan transactions with related parties were as follows:
1999 1998
------------- --------------
BALANCE, BEGINNING $ 772,353 $ 926,805
New loans 40,966 590,946
Repayments (57,986) (693,999)
Relationship changes - (51,399)
------------- --------------
BALANCE, ENDING $ 755,333 $ 772,353
============= ==============
20
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information of Cardinal Bankshares Corporation is presented
as follows:
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<S> <C> <C>
1999 1998
------------- --------------
ASSETS
Cash due from banks $ 2,999,652 $ 3,011,801
Loans, net of allowance for loan losses
of $25,000 in 1999 and 1998 2,622,629 1,722,064
Investment in affiliate bank at equity 12,081,254 12,528,906
Other assets 71,164 58,568
------------- --------------
$ 17,774,699 $ 17,321,339
============= ==============
LIABILITIES
Accounts payable and other liabilities $ 17,102 $ 214
------------- --------------
SHAREHOLDERS' EQUITY
Common stock 5,117,710 5,119,110
Surplus 2,925,150 2,925,150
Retained earnings 10,514,759 9,123,733
Unrealized appreciation on affiliate's investment
securities available for sale, net of income taxes (800,022) 153,132
------------- --------------
17,757,597 17,321,125
------------- --------------
$ 17,774,699 $ 17,321,339
============= ==============
<CAPTION>
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<S> <C> <C> <C>
1999 1998 1997
-------------- ------------- --------------
INCOME:
Dividends from affiliate bank $ 1,500,000 $ 1,500,000 $ 1,100,000
Interest on taxable securities 121,032 160,679 207,432
Other income - 1,429 -
-------------- ------------- --------------
1,621,032 1,662,108 1,307,432
-------------- ------------- --------------
EXPENSES:
Salaries 98,232 88,078 27,166
Management and professional fees 65,835 37,692 132,588
Other expenses 24,088 34,443 25,791
-------------- ------------- --------------
188,155 160,213 185,545
-------------- ------------- --------------
Income before tax benefit and equity in
undistributed income of affiliate 1,432,877 1,501,895 1,121,887
INCOME TAX (EXPENSE) BENEFIT 26,754 (720) (8,308)
-------------- ------------- --------------
Income before equity in
undistributed income of affiliate 1,459,631 1,501,175 1,113,579
EQUITY IN UNDISTRIBUTED INCOME OF AFFILIATE 505,502 437,677 740,105
-------------- ------------- --------------
Net income $ 1,965,133 $ 1,938,852 $ 1,853,684
============== ============= ==============
</TABLE>
21
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
-------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,965,133 $ 1,938,852 $ 1,853,684
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization 5,929 5,929 5,929
Provision for loan losses - - -
Increase (decrease) in equity in undistributed
income of affiliate (505,502) (437,677) (740,105)
Deferred income taxes - - -
Net change in other assets (18,525) (16,323) 2,096
Net change in other liabilities 16,888 (7,454) 6,024
-------------- ------------- --------------
Net cash provided by operating activities 1,463,923 1,483,327 1,127,628
-------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES,
NET (INCREASE) DECREASE IN LOANS (900,565) 75,023 570,424
-------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (568,147) (542,625) (513,855)
Redemption of fractional shares - - (8,430)
Common stock purchased (22,685) (13,500) -
Common stock reissued 15,325 13,500 -
-------------- ------------- --------------
Net cash used by financing activities (575,507) (542,625) (522,285)
-------------- ------------- --------------
Net increase in cash and cash equivalents (12,149) 1,015,725 1,175,767
CASH AND CASH EQUIVALENTS, BEGINNING 3,011,801 1,996,076 820,309
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS, ENDING $ 2,999,652 $ 3,011,801 $ 1,996,076
============== ============= ==============
</TABLE>
22
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
OVERVIEW
Management's Discussion and Analysis is provided to assist in the understanding
and evaluation of Cardinal Bankshares Corporation's financial condition and its
results of operations. The following discussion should be read in conjunction
with the Corporation's consolidated financial statements.
Cardinal Bankshares Corporation, the parent company of The Bank of Floyd,
currently operates four offices in Floyd, Roanoke and Carroll 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. The Hillsville
office is located in Carroll County on Route 52 in Hillsville, Virginia.
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. The Bank of Floyd and bank
personnel work with local government and leaders in an effort to attract
industry to Floyd County.
The earnings position of the Bank continues to be strong. Cardinal Bankshares
Corporation experienced record net earnings for 1999, $1,965,133 compared to
$1,938,852 for 1998 and $1,853,684 in 1997. Return on average assets remained
constant at 1.3% for 1999, 1998 and 1997. During 1999, 1998 and 1997, revenues
from the Bank of Floyd represent over 95% of Cardinal Bankshares Corporation's
total revenues. All of these ratios compare favorably to members of our peer
group.
Average equity to average assets shows the Bank with a strong capital position
with a ratio of 11.4%. Our capital position continues to be above our peer
group's average.
The total assets of Cardinal Bankshares Corporation grew to $158,140,485 from
$153,409,703, a 3.08% increase, continuing our strategy to grow the Company.
Foreclosed properties were reduced by 4.4% to a balance of $97,256 at year end.
In 1999, a package of financial modernization laws were passed by the United
states Congress that were the most sweeping changes in our history. This
package, known as HR-10, opens many doors of opportuity and challenge to the
financial services industry. In the year 2000, we will be moving toward taking
advantage of the opportunities this legislation offers us.
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.
23
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
TABLE 1. NET INTEREST INCOME AND AVERAGE BALANCES (THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- -------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE COST BALANCE EXPENSE COST BALANCE EXPENSE COST
------- ------- ---- ------- ------- ---- ------- ------- ----
Interest earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Deposit in other banks $ 394 $ 197 4.99% $ 5,278 $ 288 5.46% $ 652 $ 38 5.83%
Taxable investment securities 30,676 1,904 6.21% 28,845 1,844 6.39% 31,364 2,159 6.88%
Nontaxable investment securities 16,848 773 4.59% 13,331 626 4.70% 10,183 491 4.82%
Federal funds sold 9,633 479 4.97% 9,040 477 5.28% 5,743 315 5.48%
Loans, net 84,920 7,707 9.08% 83,611 8,035 9.61% 86,528 8,075 9.33%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-earning assets 146,021 11,060 140,105 11,270 134,470 11,078
--------- ------- -------- -------- -------- --------
Yield on average
interest-earning assets 7.57% 8.04% 8.24%
===== ===== =====
Noninterest-earning assets:
Cash and due from banks 2,579 2,150 1,942
Premises and equipment 2,398 2,020 1,593
Interest receivable and other 5,629 4,473 3,524
--------- -------- -----
Total noninterest-earning
assets 10,606 8,643 7,059
-------- -------- --------
Total assets $156,627 $148,748 $141,529
======== ======== ========
Interest-bearing liabilities:
Demand deposits $ 10,180 $ 240 2.36% $ 8,892 $ 250 2.81% $ 8,766 $ 253 2.89%
Savings deposits 18,945 569 3.00% 18,055 582 3.22% 18,096 582 3.22%
Time deposits 89,764 4,794 5.34% 88,100 4,966 5.64% 83,002 4,703 5.67%
Other borrowings - - 0.00% - - 0.00% 2,485 143 5.75%
-------- ------- ----- -------- ------- ----- ------ -------- -----
Total interest-bearing
liabilities 118,889 5,603 115,047 5,798 112,349 5,681
-------- ------- -------- ------- ------- ------
Cost on average interest-
bearing liabilities 4.71% 5.04% 5.06%
========= ===== =====
Noninterest-bearing
liabilities
Demand deposits $ 18,669 15,537 12,863
Interest payable and other 1,269 1, 272 908
--------- --------- ------
Total noninterest-bearing
liabilities 19,938 16,809 13,771
-------- -------- -------
Total liabilities 138,827 131,856 126,120
Stockholders' equity 17,800 16,892 15,409
--------- --------- ---------
Total liabilities and
stockholders' equity $156,627 $148,748 $141,529
======== ======== ========
Net interest income $ 5,457 $ 5,472 $ 5,397
========== ====== ========
Net yield on
interest-earning assets 3.74% 3.91% 4.01%
========= ===== =====
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
TABLE 2. RATE/VOLUME VARIANCE ANALYSIS (THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
1999 COMPARED TO 1998 1998 COMPARED TO 1997
----------------------------------- --------------------------------
INTEREST VARIANCE INTEREST VARIANCE
INCOME/ ATTRIBUTABLE TO INCOME/ ATTRIBUTABLE TO
EXPENSE ------------------- EXPENSE ------------------
VARIANCE RATE VOLUME VARIANCE RATE VOLUME
-------- ---- ------ -------- ---- ------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Deposits in other banks $ (91) $ (18) $ (73) $ 250 $ (20) $ 270
Taxable investment securities 60 (57) 117 (315) (142) (173)
Nontaxable investment securities 147 (18) 165 135 (17) 152
Federal funds sold 2 (29) 31 162 (19) 181
Loans (328) (454) 126 (40) 232 (272)
------- ----- ------ -------- ------ -------
Total (210) (576) 366 192 34 158
------- ----- ------ --------- ------ -------
Interest-bearing liabilities:
Demand deposits (10) (46) 36 (3) (7) 4
Savings deposits (13) (42) 29 - 1 (1)
Time deposits (172) (266) 94 263 (26) 289
Other borrowings - - - (143) - (143)
------- ----- ------ -------- ------ -------
Total (195) (354) 159 117 (32) 149
------- ----- ------ -------- ------ -------
Net interest income $ (15) $(222) $ 207 $ 75 $ 66 $ 9
======= ===== ====== ======== ====== =======
- ---------------------------------------------------------------------------------------------------------------------------
</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 remained constant in 1999 at $5.5 million, approximately the
same as 1998 and increased by $75,036 from 1997. The net interest income
realized in 1999 remained constant in spite of an increase in the volume of
average interest earning assets. Competition for deposits and loans continue to
be a major factor in net margins. Predatory pricing and competition from
unregulated organizations have also been a factor in the declining net interest
margin. The net interest margin for 1999 decreased by 17 basis points to 3.74%
compared to 3.91% for 1998 and 4.01% for 1997. The effects of changes in volumes
and rates on net interest income in 1999 compared to 1998, and 1998 compared to
1997 are shown in Table 2.
25
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Interest income for 1999 decreased $209,519 to $11.1 million from $11.3 million
in 1998. Interest income in 1997 totaled $11.1 million. The decrease in interest
income in 1999 from 1998 was the result of an increase in interest-earning
assets coupled with lower interest yields on loans. The lower yield on loans was
a result of maturing loans and refinancing of loans with higher rates. The
increase in interest income in 1998 from 1997 was the result of an increase in
the volume of deposits in other banks, federal funds sold and nontaxable
investment securities along with a 28 basis point increase in the yield on net
average loans.
Interest expense decreased by $194,867 in 1999 to $5.6 million from $5.8 million
in 1998 and $5.7 million in 1997. The decrease in 1999 from 1998 was due
primarily to lower rates paid on deposits. Interest expense increased by
$116,431 in 1998 from 1997. The increase was due primarily to a $5.1 million or
6.1% increase in the volume of time deposits. Interest paid on time deposits,
which make up the largest portion of interest-bearing deposits, decreased
$172,000, or 3.5% from 1998 to 1999. This decrease is due primarily to lower
rates in the market place. The average rate paid on time deposits decreased 30
basis points to 5.34% in 1999 from 5.64% in 1998 and 5.67% in 1997.
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 1999, management decreased the provision for loan loss reserve from $175,000
in 1998 to $141,721 in 1999. The provision for loan losses was $500,000 in 1997.
The Bank's allowance for loan losses as a percentage of total loans at the end
of 1999 was 1.86% as compared to 1.91% in 1998 and 1.67% in 1997. When compared
to the most recent available peer bank information as of September 30, 1999 the
allowance for loan losses as percentage of total loans at the end of 1999 was in
the top 10% of all peer banks.
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 items and fees charged for nondeposit services. Noninterest income totaled
$385,955 in 1999, a decrease of 21.1% from the $489,365 recorded in 1998.
Noninterest income in 1997 totaled $542,985. The majority of the decrease in
noninterest income from 1999 to 1998 is explained by a lower amount of gains on
the sale of other real estate owned and a lower amount of gains on securities.
Noninterest income also includes fees charged for services such as safe deposit
box rental fees, letters of credit fees, and gains realized on the sale of fixed
assets. The primary sources of noninterest income for the past three years are
summarized in Table 3.
26
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
TABLE 3. SOURCES OF NONINTEREST INCOME (THOUSANDS)
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Service charges on deposit accounts $ 200 $ 152 $ 144
Other service charges and fees 47 38 36
Insurance commissions 82 54 46
Gain on the sale of securities 5 27 7
Gain on sale of other real estate owned 10 90 233
Other income 42 128 77
----- ---- -----
Total noninterest income $ 386 $489 $ 543
===== ==== =====
- --------------------------------------------------------------------------------
OTHER EXPENSE
Noninterest expense for 1999 increased by $20,584 or 0.7% to $3.09 million.
Noninterest expense in 1998 was $3.07 million and $2.93 million in 1997 (see
Table 4). The overhead ratio of noninterest expense to adjusted total revenues
(net interest income plus noninterest income excluding securities transactions)
was 52.9% in 1999, 51.7% in 1998 and 49.4% in 1997.
While there were significant increases in items such as building depreciation
expense, $19,238, furniture and equipment, $18,000, telephone expense, $12,000,
and building insurance, $2,364, There were also significant decreases in items
such as education & seminars, travel and other operating expenses. The majority
of the increases were due to the renovations to the main building in Floyd which
were completed in 1999. The areas that saw decreases were the result of
management's cost control efforts.
Table 4 provides a further breakdown of noninterest expense for the past three
years.
27
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
TABLE 4. SOURCES OF NONINTEREST EXPENSE (THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Salaries & wages $1,340 $1,386 $1,298
Employee benefits 574 485 463
-------- -------- --------
Total personnel expense 1,914 1,871 1,761
Occupancy expense 163 137 116
Furniture & equipment 283 275 273
Printing & supplies 56 55 44
FDIC deposit insurance 16 15 14
Professional services 123 119 120
Postage 78 76 72
Telephone 61 49 40
Courier fees 37 29 21
Education & seminars 7 17 20
Travel expense 9 17 21
Director fees and expense 43 48 38
Advertising and public relations 33 33 31
Insurance expense 30 33 36
Capital Stock Tax 96 97 77
Outside services 30 28 26
Other real estate expense, net 1 4 46
Real estate loan servicing fee 13 16 12
Other operating expense 93 147 165
------ ------ ------
Total noninterest expense $3,086 $3,066 $2,933
====== ====== ======
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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 $649,720 in 1999, $781,368 in
1998 and $652,470 for 1997 representing 24.9%, 28.7% and 26.0% of income before
income taxes, respectively. The tax expense decreased $131,648 or 16.9% in 1999
from 1998.
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 $1,065,000, $589,000 and $468,000 at
December 31, 1999, 1998, and 1997, respectively, are included in other assets.
At December 31, 1999, $411,991 of the total deferred tax asset is applicable to
unrealized depreciation on investment securities available for sale.
Accordingly, this amount was not charged to income but recorded directly to the
related stockholders' equity account.
YEAR 2000 (Y2K) ISSUES
Y2K refers to the potential disruption to computers lacking the ability to
recognize years beyond 1999. During September 1997, management of the Bank
formed a Y2K committee to identify, monitor, and control the potential risks
associated with the Y2K computer problem. These risks included the inability to
process loan and deposit transactions such as payments and computation of
interest due to a computer failure. Another risk was a possible disruption to
bank operations due to the failure of equipment that relies on embedded
technology such as microprocessors. Other risks included disruptions in
operations of the bank's service vendors and large loan and deposit customers.
Total estimated expenses to assess and control Y2K risks were $180,000 for the
time period from September 1997 to December 1999. These expenses included the
following: (1) management time involved during risk assessment and testing, (2)
expenses for Y2K training conferences attended by management, (3) expenses for
seminars held by The Bank of Floyd for bank customers, (4) expenses for hardware
and software upgrades, (5) and increases in legal expenses.
Bank management established a Y2K plan with the following five phases:
awareness, assessment, renovation, validation and implementation. During the
awareness phase, management and the board of directors became aware of the Y2K
issue and potential risks. During the assessment phase, management identified
all hardware, software, and environmental systems such as security systems,
elevators, vaults and customer/vendor interdependencies affected by the Y2K date
change. These items and systems were prioritized by assigning a significance
rating of mission critical, mission necessary, mission desirable, or mission
unrelated. During the renovation phase management performed necessary computer
hardware and software upgrades and other system replacements.
29
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
During the validation and implementation phase management tested all mission
critical applications. All mission critical systems were certified as Y2K
compliant as of January 18th, 1999. These mission critical systems included the
following items: mainframe hardware, software and interfaces with other bank
computer systems, the Federal Reserve Fedline system and new account and loan
processing systems.
The Y2K risks involved in a worst case scenario involved malfunctions with
mission critical or mission desirable applications and systems. For example, if
certain systems such as the mainframe computer were to malfunction it would be
almost impossible to operate the bank without a backup system. If certain loan
and deposit processing software were to malfunction it would be difficult to
extend loans and open deposit accounts without an alternate process. Other
disruptions beyond management control would include loss of electrical and
telephone service.
To deal with the worst case possibilities, bank management established a Y2K
contingency plan. This contingency plan included identifying and using other
vendors who were fully Y2K compliant for critical functions, and maintaining
supplies necessary to perform functions manually. To plan for a mainframe
computer malfunction, management had back up arrangements in place with a third
party to use a comparable mainframe. Management had in place manual, paper based
processes in the event of the failure of loan and deposit processing software.
Bank management maintained constant communication with electric and telephone
companies to evaluate their Y2K efforts and allow the Bank of Floyd to develop
needed plans. The Federal Reserve bank had the ability to ship extra currency to
various locations to cover any potential increased demand for currency.
During Y2K preparation period (September 1997 until present), the most well
informed people were available for guidance. Beginning in 1997, Mr. Moore,
President and CEO of Cardinal Bankshares Corporation, served on the American
Bankers Association (ABA) Task Force for Y2K Preparedness.
During the same period, Ms. Whitlock, Manager of Data Processing at the Bank of
Floyd, served as Technical Advisor for the ABA's Y2K training films. These
training films were used by banks nationwide to train their staffs how to handle
potential problems related to Y2K. Through these contacts with the ABA, the bank
had ready access to the most well informed people in the banking industry
regarding Y2K preparedness.
Fortunately for everyone, the millenium date change occurred with no problems
being encountered.
30
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
EARNING ASSETS
One of the areas impacted by preparations for potential heavy cash demands near
the Y2K date change was earning assets. The extra cash on hand in anticipation
of heavier than normal demand amounted to approximately $1.8 million. For
approximately two months, this cash was not available for investing. As a
result, average earning assets increased only $1,212,000 (.8%) from the 1998
year-end. Total average earning assets represented 93.2% of total average assets
in 1999 compared to 94.2% in 1998. The mix of average earning assets changed in
1999 with an increase in average federal funds sold and investment securities, a
decrease in interest bearing bank balances and an increase in loans. Average
federal funds sold accounted for 6.2% of total average assets compared to 6.1%
in 1998. Average interest bearing bank balances accounted for 2.5% of total
average assets compated to 3.5% in 1998. Average loans accounted for 54.2% of
total average assets in 1999 compared to 56.2% in 1998. For 1997, average net
loans represented 61.1% of average assets. A summary of average assets for the
past three years is shown in Table 5.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
TABLE 5. AVERAGE ASSET MIX (THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- ------------------------ -----------------------------
AVERAGE AVERAGE AVERAGE
BALANCE % BALANCE % BALANCE %
---------- -------------- ----------- ------------ ----------- ---------------
EARNING
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Loans, net $ 84,920 54.22 $ 83,611 56.21 $ 86,528 61.14
Investment securities 47,524 30.34 42,176 28.35 41,547 29.36
Federal funds sold 9,633 6.15 9,040 6.08 5,743 4.06
Interest-bearing bank balances 3,944 2.52 5,278 3.55 652 0.45
------- -------- ------- ---------- ------- ---------
Total earning assets 146,021 93.23 140,105 94.19 134,470 95.01
--------- ------------ --------- ----------- ------- --------
NONEARNING ASSETS:
Cash and due from banks 2,579 1.65 2,150 1.44 1,942 1.37
Premises and equipment 2,398 1.53 2,020 1.36 1,593 1.13
Other assets 5,629 3.59 4,473 3.01 3,524 2.49
---------- -------- ---------- ---------- ---------- --------
Total nonearning assets 10,606 6.77 8,643 5.81 7,059 4.99
----------- -------- ---------- ---------- ---------- --------
Total assets $ 156,627 100.00 $ 148,748 100.00 $ 141,529 100.00
========== ======== ========== ========== ========== ========
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
LOANS
Average net loans totaled $84.9 million during 1999, an increase of $1.3 million
or 1.6% more than 1998. A significant portion of the loan portfolio, $73.7
million or 82.3%, is made up of loans secured by various types of real estate.
Total loans secured by 1-4 family residential properties represented 27.5% of
total loans at the end of 1999. The growth in 1999 and 1998 in loan
classifications, other than real estate, is primarily the result of an increase
in commercial loans to leasing companies (See Table 6). This leasing program has
been discontinued in 1999.
31
<PAGE>
================================================================================
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. Predatory pricing and competition
from unregulated organizations have also been a factor when generating new
loans. The amounts of loans outstanding by type at year-end 1999 and 1998, and
the maturity distribution of variable and fixed rate loans as of year-end 1999
are presented in Table 6 and Table 7, respectively.
- --------------------------------------------------------------------------------
TABLE 6. LOAN PORTFOLIO SUMMARY (THOUSANDS)
- --------------------------------------------------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
AMOUNT % AMOUNT %
Construction and development $ 3,420 3.82 $ 4,028 4.59
Farmland 3,767 4.20 4,134 4.71
1-4 family residential 24,664 27.52 24,545 27.96
Multifamily residential 1,763 1.97 2,219 2.53
Nonfarm, nonresidential 40,117 44.75 32,794 37.35
-------- ------ -------- ------
Total real estate 73,731 82.26 67,720 77.14
Agricultural 1,133 1.26 1,140 1.30
Commercial & industrial 4,326 4.83 5,630 6.41
Consumer 6,004 6.70 7,244 8.25
Other 688 0.77 - -
Leases 3,748 4.18 6,057 6.90
-------- ------ -------- ------
Total $ 89,630 100.00 $ 87,791 100.00
======== ====== ======== ======
- --------------------------------------------------------------------------------
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 9.08% in 1999 compared to an average yield of 9.61% in 1998.
32
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
TABLE 7. MATURITY SCHEDULE OF LOANS (THOUSANDS)
- ------------------------------------------------------------------------------------------------------------
CONSTRUCTION TOTAL
AND ---------------
DEVELOPMENT OTHERS AMOUNT %
----------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate loans:
Three months or less $ 71 $ 1,196 $ 1,267 1.41
Over three months to twelve months - 1,876 1,876 2.09
Over twelve months to three years 1,000 7,841 8,841 9.86
Over three years to five years - 9,088 9,088 10.14
Over five years to fifteen years - 8,512 8,512 9.50
Over fifteen years - 1,961 1,961 2.19
-------- ------- ------- ------
Total fixed rate loans 1,071 30,474 31,545 35.19
-------- ------- ------- ------
Variable rate loans:
Three months or less 1,817 11,248 13,065 14.58
Over three months to twelve months - 12,321 12,321 13.75
Over twelve months to three years - 18,415 18,415 20.55
Over three years to five years 194 12,355 12,549 14.00
Over five years to fifteen years 338 1,397 1,735 1.93
Over fifteen years - - - -
-------- ------- ------- ------
Total variable rate loans 2,349 55,736 58,085 64.81
-------- ------- ------- ------
Total loans:
Three months or less 1,888 12,444 14,332 15.99
Over three months to twelve months - 14,197 14,197 15.84
Over twelve months to three years 1,000 26,256 27,256 30.41
Over three years to five years 194 21,443 21,637 24.14
Over five years to fifteen years 338 9,909 10,247 11.43
Over fifteen years - 1,961 1,961 2.19
-------- ------- ------- ------
Total loans $ 3,420 $86,210 $ 89,630 100.00
======== ======= ======== ======
- ------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT SECURITIES
The Bank uses its investment portfolio to provide liquidity for unexpected
deposit decreases or increased 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.
All securities are high quality and high grade. 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 1999 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
33
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
or repaid prior to the scheduled maturity date. Maturities on all other
securities are based on the earlier of the contractual maturity or the call
date, if any.
The interest rate environment in 1999 caused the average yield of the investment
portfolio to increase to 7.23% from 5.89% in 1998. At December 31, 1999, the
market value of the investment portfolio was $52.0 million, representing a $1.4
million unrealized depreciation below amortized cost. This compared to a market
value of $41.7 million and a $625,000 appreciation over amortized cost a year
earlier.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
TABLE 8. INVESTMENT SECURITIES (THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
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
---- --------- -------- ------- ------------ ------ -------
INVESTMENT SECURITIES:
<S> <C> <C> <C> <C> <C> <C> <C>
US Government Agencies
and Mortgage Backed Securities $ 870 $ 14,374 $ 1,465 $ 16,069 $ - $ 32,778 $ 31,599
State and political subs. 1,300 5,357 8,551 3,352 - 18,560 18,201
Other - 1,576 - - - 1,576 1,549
Restricted Equity Securities - - - - 680 680 680
-------- -------- -------- -------- ------- --------- ----------
Total $ 2,170 $ 21,307 $ 10,016 $ 19,421 $ 680 $ 53,594 $ 52,029
======== ======== ======== ======== ======= ========= ==========
WEIGHTED AVERAGE YIELDS:
U.S. Government agencies
and Mortgage Backed Securities 7.26% 6.15% 6.68% 6.57% -
States and political subs. 6.57% 6.89% 7.03% 6.93% -
Other - 6.65% - - -
Restricted Equity Securities - - - - 6.89%
Consolidated 7.08% 6.33% 6.94% 6.64% 6.89% 6.52%
<CAPTION>
DECEMBER 31, 1998 BOOK MARKET
VALUE VALUE
----- -----
<S> <C> <C>
INVESTMENT SECURITIES:
U.S. Government agencies and Mortgage Backed Securities $24,376 $24,530
States and political subdivisions 14,586 14,999
Other 1,497 1,555
Restricted Equity Securities 638 638
------- -------
Total $41,097 $41,722
======= =======
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
================================================================================
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, 1999 amounted to $137.6
million which was an increase of $7.0 million, or 5.3% over 1998. Average core
deposits totaled $121.8 million in 1999 representing a 4.8% increase over the
$116.2 million in 1998. The percentage of the Bank's average deposits that are
interest-bearing decreased to 86.4% in 1999 from 88.1% in 1998. Average demand
deposits which earn no interest increased to $18.7 million in 1999 from $15.5
million in 1998 and $12.9 million in 1997. Average deposits for the past three
years are summarized in Table 9.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
TABLE 9. DEPOSIT MIX (THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------- ------------------- ---------------------
AVERAGE AVERAGE AVERAGE
BALANCE % BALANCE % BALANCE %
------- ------- ------- -------- ------- -------
INTEREST-BEARING DEPOSITS:
<S> <C> <C> <C> <C> <C> <C>
NOW accounts $ 10,180 7.40 $ 8,892 6.81 $ 8,766 7.14
Money Market 3,323 2.42 3,365 2.58 3,228 2.63
Savings 15,622 11.36 14,690 11.25 14,868 12.12
Small denomination certificates 73,980 53.78 73,755 56.48 70,924 57.79
Large denomination certificates 15,784 11.47 14,345 10.98 12,078 9.84
------- ------ -------- ------ -------- -----
Total interest-bearing deposits 118,889 86.43 115,047 88.10 109,864 89.52
Noninteresting-bearing deposits 18,669 13.57 15,537 11.90 12,863 10.48
-------- ------ -------- ------ -------- ------
Total deposits $137,558 100.00 $ 130,584 100.00 $122,727 100.00
========= ======= ========= ======= ========= ========
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The average balance of certificates of deposit issued in denominations of
$100,000 or more increased by $1.4 million or 10.0%, in 1999. Much of the
increase in large certificates of deposit is from local government funds. 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, 1999.
35
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE 10. LARGE TIME DEPOSIT MATURITIES (THOUSANDS)
- --------------------------------------------------------------------------------
ANALYSIS OF TIME DEPOSITS OF $100,000 OR MORE AT DECEMBER 31, 1999:
Remaining maturity of three months or less $ 4,059
Remaining maturity over three through twelve month 9,706
Remaining maturity over twelve months 4,378
-------
Total time deposits of $100,000 or more $18,143
=======
- --------------------------------------------------------------------------------
CAPITAL ADEQUACY
Shareholder's equity amounted to $17.8 million at December 31, 1999, a 2.5%
increase over the 1998 year-end total of $17.3 million. The increase was
primarily a result of earnings partially offset by dividends and a decrease in
the market value of available for sale securites. Average shareholders' equity
as a percentage of average total assets amounted to 11.3% in 1999 and 11.4% in
1998.
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, 1999 the Bank has a ratio of Tier 1 capital to
risk-weighted assets of 13.3% and a ratio of total capital to risk-weighted
assets of 14.5%. These ratios continue to be equal to or above most of our peer
group.
36
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE 11. YEAR-END RISK-BASED CAPITAL (THOUSANDS)
- --------------------------------------------------------------------------------
1999 1998
----------- -----------
Tier I capital $ 12,881 $ 12,376
Qualifying allowance for loan losses
(limited to 1.25% of risk-weighted assets) 1,219 1,125
----------- -----------
Total regulatory capital $ 14,100 $ 13,501
=========== ===========
Total risk-weighted assets $ 97,062 $ 90,000
=========== ===========
Tier I as a percent of risk-weighted assets 13.3% 13.8%
Total regulatory capital as a percent of risk-
weighted assets 14.5% 15.1%
Leverage Ratio* 8.4% 8.2%
* TIER I CAPITAL DIVIDED BY AVERAGE TOTAL ASSETS FOR THE QUARTER ENDED DECEMBER
31.
- --------------------------------------------------------------------------------
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, 1999, the Bank had a ratio of year-end Tier I
capital to average total assets for the fourth quarter of 1999 of 8.4%. Table 11
sets forth summary information with respect to the Bank's capital ratios at
December 31, 1999. All capital ratio levels indicate that the Bank is well
capitalized.
At December 31, 1999 the Company had 511,771 shares of common stock outstanding
which were held by approximately 622 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, 1999 and 1998 are analyzed in Table 12.
37
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE 12. NONPERFORMING ASSETS
- --------------------------------------------------------------------------------
1999 1998
-------- ---------
Non-Accrual Loans $1,826,688 $ 66,251
Loans Past Due 90 Days or More 975,373 343,225
Foreclosed Properties 97,256 101,756
---------- ---------
$2,899,317 $ 511,232
========== =========
- --------------------------------------------------------------------------------
Nonperforming assets at year-end 1999 were 3.2% of loans outstanding and 0.6% at
year-end 1998.
Leases receivable of approximately $1,021,000 are included in nonaccural loans
and leases at December 31, 1999. The Bank discontinued this program in 1999 and
provided for estimated losses under these contracts in the allowance for loan
losses account.
The allowance for loan losses is maintained at a level adequate to absorb
potential 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>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
TABLE 13. LOAN LOSSES
- -----------------------------------------------------------------------------------------------------
1999 1998 1997
----------------- -------------- --------------
<S> <C> <C> <C>
Allowance for loan losses, beginning $ 1,668,201 $ 1,452,126 $ 1,002,455
Provision for loan losses, added 141,721 175,000 500,000
Loans charged off (161,873) (76,842) (68,249)
Recoveries of loans previously charged off 13,472 117,917 17,920
----------- ------------- -----------
Net charge-offs (148,401) 41,075 (50,329)
------------ ------------- -----------
Allowance for loan losses, ending $ 1,661,521 $ 1,668,201 $ 1,452,126
============ ============= ===========
- -----------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Net loan charge-offs as a percentage of average loans were .02% in 1999. Net
loan recoveries as a percentage of average loans were 0.14% in 1998 and net loan
charge-offs as a percentage of average loans were .06% in 1997. Gross
charge-offs during 1999 totaled $161,873 and consisted of $24,004 in installment
loans and $137,869 in leases. Recoveries during 1999 totaled $13,472 and
consisted of $7,965 in installment loans and $5,507 in leases. There were no
charge-offs or recoveries of real estate loans in 1999.
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 $1.66 million, or 1.86% of gross
loans outstanding at December 31, 1999, an decrease of $6,680 below the 1.91%
reserve at December 31, 1998. 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, 1999.
The allocation of the reserve for loan losses is detailed in Table 14 below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
TABLE 14. ALLOCATION OF THE RESERVE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------ ------------------- -----------------------
BALANCE AT END OF PERIOD APPLICABLE TO AMOUNT PERCENT(1) AMOUNT PERCENT(1) AMOUNT PERCENT(1)
------ -------- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 427 10.29 $ 502 12.42 $ 194 9.21
Real estate, construction - 3.82 - 4.59 60 5.61
Real estate, mortgage 681 74.24 657 67.84 1,089 71.32
Installment loans to individuals, other 113 7.47 120 8.25 109 13.86
Leases 441 4.18 389 6.90 - 0.00
------ -------- ------ ------ ----- -----
Total $1,662 100.00 $1,668 100.00 $1,452 100.00
====== ====== ====== ====== ====== ======
(1) Represents the percentage of loans in each rategury to the total loans
outstanding.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
LIQUIDITY AND INTEREST RATE 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 sheet, liquidity sources include core deposits, the ability to
increase large denomination certificates, federal
39
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
funds lines from correspondent banks, borrowings from the Federal Reserve Bank
and the Federal Home Loan 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) is considered to be adequate by management.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
TABLE 15. INTEREST RATE SENSITIVITY (THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
MATURITIES/REPRICING
----------------------------------------------------
1-3 4-12 13-60 OVER 60
MONTHS MONTHS MONTHS MONTHS TOTAL
------ ------ ------ ------ -----
Earnings Assets:
<S> <C> <C> <C> <C> <C>
Loans $ 13,729 $ 22,053 $46,190 $ 7,374 $ 89,346
Investments 1,141 5,923 21,875 23,444 52,383
Interest-bearing deposits with other banks 2,000 - - - 2,000
Federal Funds Sold 6,975 - - - 6,975
-------- -------- ------ ------- --------
Total $ 23,845 $ 27,976 $68,065 $30,818 $ 150,704
======== ======== ======= ======= ========
Interest-bearing deposits:
NOW accounts $ 10,767 $ - $ - $ - $ 10,767
Money market 3,931 - - - 3,931
Savings 15,113 - - - 15,113
Certificates of Deposit 17,981 40,901 34,332 - 93,214
-------- -------- -------- -------- --------
Total $ 47,792 $ 40,901 $34,332 $ - $123,025
======== ======== ======= ======= ========
Interest sensitivity gap $(23,947) $(12,925) $33,733 $30,818 $ -
Cumulative interest
sensitivity gap $(23,947) $(36,872) $(3,139) $27,679 $ 27,679
Ratio of sensitivity gap
to total earning assets -15.9% -8.6% 22.4% 20.4% -
Cumulative ratio of
sensitivity gap to
total earning assets -15.9% -24.5% -2.1% 18.4% 18.4%
- -------------------------------------------------------------------------------------------------------------------
</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, 1999. 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, 1999, 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 three
months are NOW accounts and savings accounts totaling $25.9 million 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
40
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
1999 1998 1997
----------- ---------- ----------
Return on average assets 1.3% 1.3% 1.3%
Return on average equity 11.1% 11.5% 12.0%
Average equity to average assets 11.4% 11.4% 10.9%
- --------------------------------------------------------------------------------
41
<PAGE>
- --------------------------------------------------------------------------------
STAFF
- --------------------------------------------------------------------------------
MAIN OFFICE
-----------
CUSTOMER SERVICE LOAN OPERATIONS SECRETARIES
- ---------------- --------------- ----------------
Diane Bishop Renee Akers Beulah Correll
Sherrie Janney Debra Funkhouser Michelle Harris
Betty Moran Gail Phillips, Supervisor Donna Prescott
Sharon Zeman Jan Rorrer
DATA PROCESSING CENTER
Karen Sowers, Supervisor ----------------------
Jill Caldwell
PAYING AND RECEIVING TELLERS Gina West
- ---------------------------- Leslie Cox
Jessica Bower
COLLECTIONS Judy Durham
Karen Bowman -------------
Ralph Edwards Gail Goad
Kay Chaffin
Gay Grim
Regina Compton CREDIT CARDS
------------ Lisa Thomas
Regina Gibson Shelia DeHart
Wendy Taylor CUSTODIANS
ACCOUNTING ------------------
Patsy Wallace ------------- Roger Dickerson
Yara Middleton
Lucy Harris
CAVE SPRING OFFICE WILLIS OFFICE HILLSVILLE OFFICE
------------------ ------------- -----------------
CUSTOMER SERVICE CUSTOMER SERVICE
HEAD TELLER -----------------
Margaret Caldwell ------------- Frances Sharpe
Karen Sutphin
PAYING AND RECEIVING PAYING AND RECEIVING
------------------------- --------------------
Kevin Harvey, Head Teller Rebecca Adams
Paula McDaniel Karen Arnold
Louise Goad, Head Teller
42
<PAGE>
================================================================================
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.
<TABLE>
<CAPTION>
OFFICERS OF CARDINAL BANKSHARES
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
J. H. CONDUFF.................................................................................CHAIRMAN OF THE BOARD
LEON MOORE....................................................................PRESIDENT AND CHIEF EXECUTIVE OFFICER
DAVID E. WELCH.................................................ASSISTANT VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
WANDA M. GARDNER................................................................VICE PRESIDENT AND INTERNAL AUDITOR
ANNETTE V. BATTLE....................................................EXECUTIVE SECRETARY AND SECRETARY TO THE BOARD
<CAPTION>
OFFICERS OF THE BANK OF FLOYD
- -------------------------------------------------------------------------------------------------------------------
EXECUTIVE
---------
<S> <C>
J. H. CONDUFF.................................................................................CHAIRMAN OF THE BOARD
K. VENSON BOLT...........................................................................VICE CHAIRMAN OF THE BOARD
LEON MOORE....................................................................PRESIDENT AND CHIEF EXECUTIVE OFFICER
FRED L. NEWHOUSE, JR.......................................................................EXECUTIVE VICE PRESIDENT
DAVID E. WELCH........................................ASSISTANT VICE PRESIDENT, CASHIER AND CHIEF FINANCIAL OFFICER
LEE NAFF...................................................................................ASSISTANT VICE PRESIDENT
C. W. HARMAN..............................................................................................SECRETARY
SUNNY K. CORNWELL........................................................ASSISTANT VICE PRESIDENT AND CREDIT REVIEW
MAIN OFFICE
-----------
LOIS A. BOND...............................................................................ASSISTANT VICE PRESIDENT
PATRICIA B. SPANGLER............................................................ASSISTANT CASHIER AND FUNDS MANAGER
PATRICIA K. HARRIS................................................................................ASSISTANT CASHIER
CAROLYN W. REED...................................................................................ASSISTANT CASHIER
CAVE SPRING OFFICE
------------------
PATRICIA A. BOWER................................................................ASSISTANT CASHIER AND LOAN OFFICER
KEVIN W. HARVEY...........................................................................BRANCH OPERATIONS MANAGER
HILLSVILLE OFFICE
-----------------
EUGENE G. SHOCKLEY......................................................ASSISTANT VICE PRESIDENT AND BRANCH MANAGER
ADMINISTRATIVE
--------------
MARIE V. THOMAS..................................................................VICE PRESIDENT AND HUMAN RESOURCES
MARY ANN COX.............................................ASSISTANT VICE PRESIDENT, FINANCIAL PRODUCTS AND MARKETING
ANNETTE V. BATTLE..........................................ASSISTANT SECRETARY TO THE BOARD AND RECORDING SECRETARY
SHELBY L. RUTHERFORD.......................................................................ADMINISTRATIVE ASSISTANT
LENDING
-------
DIANNE H. HAMM......................................................ASSISTANT VICE PRESIDENT AND COMPLIANCE OFFICER
OLA LEE DRISKELL.................................................................ASSISTANT CASHIER AND LOAN OFFICER
DENNIS D. MCDANIEL...............................................................ASSISTANT CASHIER AND LOAN OFFICER
OPERATIONS
----------
BETTY A. WHITLOCK..................................................ASSISTANT CASHIER AND MANAGER OF DATA PROCESSING
AUDIT
-----
WANDA M. GARDNER................................................................VICE PRESIDENT AND INTERNAL AUDITOR
</TABLE>
43
<PAGE>
================================================================================
STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
ANNUAL MEETING
- --------------
The annual meeting of shareholders will be held Wednesday, April 26, 2000, at
2:00 p.m. in the Bank of Floyd's conference room, 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 1999 will be
furnished, without charge, after March 31, 2000 upon written request.
INDEPENDENT AUDITORS STOCK TRANSFER AGENT
- -------------------- --------------------
Larrowe & Company, PLC 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.
Member of Federal Reserve Bank of Richmond.
------------------
Member of Federal Home Loan Bank of Atlanta.
------------------
BANKING OFFICES
---------------
FLOYD OFFICE ROANOKE OFFICE
101 Jacksonville Circle 4094 Postal Drive
Floyd, Virginia 24091 Roanoke, Virginia 24018
(540) 745-4191 (540) 774-1111
ATM location ATM location
WILLIS OFFICE HILLSVILLE OFFICE
Floyd Highway South 185 South Main Street
Willis, Virginia 24380 Hillsville, Virginia 24343
(540) 745-4191 (540) 728-2341
ATM location
44
<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, 1999 AND
THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,775,280
<INT-BEARING-DEPOSITS> 2,000,000
<FED-FUNDS-SOLD> 6,975,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,213,933
<INVESTMENTS-CARRYING> 19,169,099
<INVESTMENTS-MARKET> 18,815,351
<LOANS> 89,346,446
<ALLOWANCE> (1,661,521)
<TOTAL-ASSETS> 158,140,485
<DEPOSITS> 139,807,664
<SHORT-TERM> 0
<LIABILITIES-OTHER> 575,224
<LONG-TERM> 0
0
0
<COMMON> 5,117,710
<OTHER-SE> 13,439,909
<TOTAL-LIABILITIES-AND-EQUITY> 158,140,485
<INTEREST-LOAN> 7,706,722
<INTEREST-INVEST> 2,676,750
<INTEREST-OTHER> 676,499
<INTEREST-TOTAL> 11,059,971
<INTEREST-DEPOSIT> 5,603,020
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 5,456,951
<LOAN-LOSSES> 141,721
<SECURITIES-GAINS> 4,768
<EXPENSE-OTHER> 3,086,332
<INCOME-PRETAX> 2,614,853
<INCOME-PRE-EXTRAORDINARY> 2,614,853
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,965,133
<EPS-BASIC> 3.84
<EPS-DILUTED> 3.84
<YIELD-ACTUAL> 3.74
<LOANS-NON> 1,826,688
<LOANS-PAST> 975,373
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,668,201
<CHARGE-OFFS> 161,873
<RECOVERIES> 13,472
<ALLOWANCE-CLOSE> 1,661,521
<ALLOWANCE-DOMESTIC> 1,661,521
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
