-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IM9Ph6rEInBtk9EVJndEk5EyNQMIN66GaFWJHx1vTcRMddeOLD4W4Jbf0SIvo71j r3HDwniE4ckTHFMh1NQLEQ== 0000950168-00-000765.txt : 20000329 0000950168-00-000765.hdr.sgml : 20000329 ACCESSION NUMBER: 0000950168-00-000765 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARDINAL BANKSHARES CORP CENTRAL INDEX KEY: 0001022759 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 541804471 STATE OF INCORPORATION: VA FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-28780 FILM NUMBER: 581610 BUSINESS ADDRESS: STREET 1: P O BOX 215 CITY: FLOYD STATE: VA ZIP: 24091 BUSINESS PHONE: 5407454191 10KSB 1 FORM 10-KSB 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 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. (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. 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. 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 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. 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 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 --- 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. EX-13.1 2 1999 ANNUAL REPORT ================================================================================ 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 ================================================================================ FINANCIAL HIGHLIGHTS SUMMARY(1) - --------------------------------------------------------------------------------
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%
- ---------- (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. 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 [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 ================================================================================ CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 - --------------------------------------------------------------------------------
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 =============== ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 ================================================================================ CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
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 =============== =============== ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 ================================================================================ CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
ACCUMULATED OTHER COMMON RETAINED COMPREHENSIVE STOCK SURPLUS EARNINGS INCOME (LOSS) TOTAL ------------- ------------- -------------- ------------- -------------- 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 ============= ============= ============== ============= ==============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 ================================================================================ CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
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 =============== =============== ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Cardinal Bankshares Corporation (the Company) was incorporated as a Virginia corporation on March 12, 1996 to acquire the stock of The Bank of Floyd (the Bank). The Bank was acquired by the Company on June 30, 1996. The Bank of Floyd and its wholly-owned subsidiary, FBC, Inc., are incorporated and operate under the laws of the Commonwealth of Virginia. As a state chartered Federal Reserve member, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions and the Federal Reserve. The Bank serves the counties of Floyd, 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 ================================================================================ 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 ================================================================================ 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 ================================================================================ 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 ================================================================================ 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:
AMORTIZED UNREALIZED UNREALIZED FAIR 1999 COST GAINS LOSSES VALUE - ---- ------------- -------------- ------------- -------------- AVAILABLE FOR SALE 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 ============= ============== ============= ==============
11 ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3. SECURITIES, CONTINUED
AMORTIZED UNREALIZED UNREALIZED FAIR 1998 COST GAINS LOSSES VALUE - ---- ------------- -------------- ------------- -------------- AVAILABLE FOR SALE 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 ============= ============== ============= ==============
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:
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 ============== ============= ==============
The scheduled maturities of securities available for sale and held to maturity at December 31, 1999, were as follows:
AVAILABLE FOR SALE HELD TO MATURITY ------------------------------- ------------------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ------------- -------------- ------------- -------------- 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 ============= ============== ============= ==============
12 ================================================================================ 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):
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 ============= ==============
Nonperforming assets at December 31, 1999 and 1998 are detailed as follows:
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 ============= ==============
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 ================================================================================ 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.
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: 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: 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 ============= ==============
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 ================================================================================ 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.
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% 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 ============== ============= ==============
15 ================================================================================ 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):
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: 1999 1998 1997 -------------- ------------- -------------- Current $ 633,958 $ 864,003 $ 866,320 Deferred 15,762 (82,635) (213,850) -------------- ------------- -------------- $ 649,720 $ 781,368 $ 652,470 ============== ============= ==============
16 ================================================================================ 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:
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: 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: 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 ============= ==============
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 ================================================================================ 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 ================================================================================ 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 ================================================================================ 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).
TO BE WELL REQUIRED CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ------ ----------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- DECEMBER 31, 1999: 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% - - - -
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 ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 15. PARENT COMPANY FINANCIAL INFORMATION Condensed financial information of Cardinal Bankshares Corporation is presented as follows:
BALANCE SHEETS DECEMBER 31, 1999 AND 1998 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 ============= ============== STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 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 ============== ============= ==============
21 ================================================================================ 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
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 ============== ============= ==============
22 ================================================================================ 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 ================================================================================ MANAGEMENT'S DISCUSSION AND ANALYSIS - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- 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: 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% ========= ===== ===== - -----------------------------------------------------------------------------------------------------------------------------------
24 ================================================================================ MANAGEMENT'S DISCUSSION AND ANALYSIS - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------- 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: 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 ======= ===== ====== ======== ====== ======= - ---------------------------------------------------------------------------------------------------------------------------
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 ================================================================================ 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 ================================================================================ 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 ================================================================================ MANAGEMENT'S DISCUSSION AND ANALYSIS - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------- TABLE 4. SOURCES OF NONINTEREST EXPENSE (THOUSANDS) - --------------------------------------------------------------------------------------------------------------- 1999 1998 1997 ---- ---- ---- 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 ====== ====== ====== - ---------------------------------------------------------------------------------------------------------------
28 ================================================================================ 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 ================================================================================ 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 ================================================================================ 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 5. AVERAGE ASSET MIX (THOUSANDS) - ---------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 -------------------------- ------------------------ ----------------------------- AVERAGE AVERAGE AVERAGE BALANCE % BALANCE % BALANCE % ---------- -------------- ----------- ------------ ----------- --------------- EARNING ASSETS: 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 ========== ======== ========== ========== ========== ======== - ----------------------------------------------------------------------------------------------------------------------------
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 ================================================================================ 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 ================================================================================ MANAGEMENT'S DISCUSSION AND ANALYSIS - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------ TABLE 7. MATURITY SCHEDULE OF LOANS (THOUSANDS) - ------------------------------------------------------------------------------------------------------------ CONSTRUCTION TOTAL AND --------------- DEVELOPMENT OTHERS AMOUNT % ----------- ------ ------ ------ 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 ======== ======= ======== ====== - ------------------------------------------------------------------------------------------------------------
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 ================================================================================ 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 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: 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% DECEMBER 31, 1998 BOOK MARKET VALUE VALUE ----- ----- 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 ======= ======= - --------------------------------------------------------------------------------------------------------------------------------
34 ================================================================================ 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 9. DEPOSIT MIX (THOUSANDS) - ------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 -------------------- ------------------- --------------------- AVERAGE AVERAGE AVERAGE BALANCE % BALANCE % BALANCE % ------- ------- ------- -------- ------- ------- INTEREST-BEARING DEPOSITS: 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 ========= ======= ========= ======= ========= ======== - -------------------------------------------------------------------------------------------------------------------------------
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 ================================================================================ 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 ================================================================================ 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 ================================================================================ 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 13. LOAN LOSSES - ----------------------------------------------------------------------------------------------------- 1999 1998 1997 ----------------- -------------- -------------- 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 ============ ============= =========== - -----------------------------------------------------------------------------------------------------
38 ================================================================================ 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 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) ------ -------- ------ -------- --------- -------- 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. - ------------------------------------------------------------------------------------------------------------------------
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 ================================================================================ 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 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: 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% - -------------------------------------------------------------------------------------------------------------------
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 ================================================================================ 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 - -------------------------------------------------------------------------------- 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 ================================================================================ 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.
OFFICERS OF CARDINAL BANKSHARES - ------------------------------------------------------------------------------------------------------------------- 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 OFFICERS OF THE BANK OF FLOYD - ------------------------------------------------------------------------------------------------------------------- EXECUTIVE --------- J. H. CONDUFF.................................................................................CHAIRMAN OF THE BOARD K. VENSON BOLT...........................................................................VICE CHAIRMAN OF THE BOARD LEON MOORE....................................................................PRESIDENT AND CHIEF EXECUTIVE OFFICER 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
43 ================================================================================ 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 EX-27 3 FINANCIAL DATA SCHEDULE
9 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. 1 12-MOS DEC-31-1999 DEC-31-1999 3,775,280 2,000,000 6,975,000 0 33,213,933 19,169,099 18,815,351 89,346,446 (1,661,521) 158,140,485 139,807,664 0 575,224 0 0 0 5,117,710 13,439,909 158,140,485 7,706,722 2,676,750 676,499 11,059,971 5,603,020 0 5,456,951 141,721 4,768 3,086,332 2,614,853 2,614,853 0 0 1,965,133 3.84 3.84 3.74 1,826,688 975,373 0 0 1,668,201 161,873 13,472 1,661,521 1,661,521 0 0
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