10QSB 1 d10qsb.txt FORM 10-QSB Quarterly Report for Period Ending 06-30-02 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) X Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2002 or ____ Transition Report under Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the transition period from _______________ to ________________. Commission File No. -0-28780- CARDINAL BANKSHARES CORPORATION (Exact name of the registrant as specified in its charter) Virginia 54-1804471 (State of Incorporation) (I.R.S. Employer Identification No.) 101 Jacksonville Circle (P. O. Box 215), Floyd VA 24091 (Address of principal executive offices) (540) 745-4191 (Issuer's telephone number, including area code) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: The number of shares outstanding of the Issuer's Common Stock, $10 Par Value, as of August 12, 2002 was 1,535,733. Transitional Small Business Disclosure Format (check one):Yes No X 1 ================================================================================ Cardinal Bankshares Corporation and Subsidiaries Form 10-QSB Index -------------------------------------------------------------------------------- PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The consolidated financial statements of Cardinal Bankshares Corporation (the "Company") are set forth in the following pages. Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 .............................. 3 Consolidated Statements of Operations for the Six Months Ended June 30, 2002 and 2001 .............. 4 Consolidated Statements of Operations for the Three Months Ended June 30, 2002 and 2001 ............ 5 Consolidated Statements of Stockholders' Equity for the Six Months Ended June 30, 2002 and the Year Ended December 31, 2001 ............................................................. 6 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 ..................................................................... 7-8 Notes to Consolidated Financial Statements ......................................................... 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ..................................................................... 10-11 PART II. OTHER INFORMATION .............................................................................. 12 All schedules have been omitted because they are inapplicable or the required information is provided in the financial statements, including the notes thereto. SIGNATURES .............................................................................................. 13
2 ================================================================================ Cardinal Bankshares Corporation and Subsidiaries Consolidated Balance Sheets June 30, 2002 and December 31, 2001 --------------------------------------------------------------------------------
June 30, December 31, 2002 2001 ------------ ------------ ASSETS Cash and due from banks $ 5,065,756 $ 3,986,448 Interest-bearing deposits with banks 5,000,000 - Federal funds sold 10,575,000 18,990,000 Investment securities available for sale 25,428,772 23,651,152 Investment securities held to maturity 18,241,703 19,255,289 Restricted equity securities 1,614,100 2,125,700 Loans, net of allowance for credit losses of $1,528,134 in 2002 and $1,300,148 in 2001 108,811,601 113,206,493 Property and equipment, net 2,275,632 2,302,243 Accrued income 1,084,706 1,070,693 Foreclosed assets 315,140 58,428 Other assets 4,440,667 1,151,297 ------------ ------------ Total assets $182,853,077 $185,797,743 ============ ============ LIABILITIES Noninterest-bearing deposits $ 21,365,807 $ 20,107,070 Interest-bearing deposits 138,538,671 143,360,505 ------------ ------------ Total deposits 159,904,478 163,467,575 Accrued interest payable 218,785 297,772 Other liabilities 303,952 578,099 ------------ ------------ Total liabilities 160,427,215 164,343,446 ------------ ------------ Commitments and contingencies STOCKHOLDERS'EQUITY Common stock, $10 par value, authorized 5,000,000 shares, issued 1,535,733 shares in 2002 and in 2001 15,357,330 15,357,330 Surplus 2,925,150 2,925,150 Retained earnings 3,871,322 2,971,630 Unrealized appreciation (depreciation) on investment securities available for sale 272,060 200,187 ------------ ------------ Total stockholders' equity 22,425,862 21,454,297 ------------ ------------ Total liabilities and stockholders' equity $182,853,077 $185,797,743 ============ ============
3 ================================================================================ Cardinal Bankshares Corporation and Subsidiaries Consolidated Statements of Operations For the Six Months ended June 30, 2002 and 2001 (Unaudited) -------------------------------------------------------------------------------- Six Months Ended June 30, 2002 2001 (Unaudited) (Unaudited) ----------- ----------- INTEREST INCOME Loans and fees on loans $ 4,540,479 $ 4,473,344 Federal funds sold 99,307 170,012 Taxable investment securities 717,470 1,050,797 Investment securities exempt from federal tax 487,179 478,466 Deposits with banks 57,816 3,242 ----------- ----------- Total interest income 5,902,251 6,175,861 ----------- ----------- INTEREST EXPENSE ON DEPOSITS Deposits 2,692,549 3,235,750 Other borrowed funds - - ----------- ----------- Total interest expense 2,692,549 3,235,750 ----------- ----------- Net interest income 3,209,702 2,940,111 PROVISION FOR CREDIT LOSSES 270,000 255,000 ----------- ----------- Net interest income after provision for loan loss 2,939,702 2,685,111 ----------- ----------- NON INTEREST INCOME Service charges on deposit accounts 146,294 136,851 Other service charges and fees 37,904 38,350 Net realized gains on sales of securities 10,497 3,715 Other income 118,596 123,589 ----------- ----------- Total non interest income 313,291 302,505 ----------- ----------- NON INTEREST EXPENSE Salaries and employee benefits 973,587 749,112 Occupancy expense 101,656 94,726 Equipment expense 156,673 274,230 Foreclosed assets, net 429 7,272 Other expense 408,035 502,089 ----------- ----------- Total non interest expense 1,640,380 1,627,429 ----------- ----------- Income before income taxes 1,612,613 1,360,187 Income tax expense 405,774 329,000 ----------- ----------- Net income $ 1,206,839 $ 1,031,187 =========== =========== BASIC EARNINGS PER SHARE $ 0.79 $ 0.67 =========== =========== 4 ================================================================================ Cardinal Bankshares Corporation and Subsidiaries Consolidated Statements of Operations For the Three Months ended June 30, 2002 and 2001 (Unaudited) -------------------------------------------------------------------------------- Three Months Ended June 30, 2002 2001 (Unaudited) (Unaudited) ----------- ----------- INTEREST INCOME Loans and fees on loans $ 2,287,758 $ 2,308,090 Federal funds sold 52,670 96,659 Taxable investment securities 324,407 475,486 Investment securities exempt from federal tax 237,843 240,792 Deposits with banks 37,008 3,242 ----------- ----------- Total interest income 2,939,686 3,124,269 ----------- ----------- INTEREST EXPENSE ON DEPOSITS Deposits 1,270,393 1,617,870 Other borrowed funds - - ----------- ----------- Total interest expense 1,270,393 1,617,870 ----------- ----------- Net interest income 1,669,293 1,506,399 PROVISION FOR CREDIT LOSSES 120,000 157,500 ----------- ----------- Net interest income after provision for loan loss 1,549,293 1,348,899 ----------- ----------- NON INTEREST INCOME Service charges on deposit accounts 82,586 67,961 Other service charges and fees 19,745 20,741 Net realized gains on sales of securities 2,000 295 Other income 60,885 82,331 ----------- ----------- Total non interest income 165,216 171,328 ----------- ----------- NON INTEREST EXPENSE Salaries and employee benefits 511,578 297,412 Occupancy expense 51,274 41,243 Equipment expense 82,732 204,663 Foreclosed assets, net 429 5,394 Other expense 204,571 282,265 ----------- ----------- Total non interest expense 850,584 830,977 ----------- ----------- Income before income taxes 863,925 689,250 Income tax expense 210,027 199,304 ----------- ----------- Net income $ 653,898 $ 489,946 =========== =========== BASIC EARNINGS PER SHARE $ 0.43 $ 0.32 =========== =========== 5 ================================================================================ Cardinal Bankshares Corporation and Subsidiaries Consolidated Statement of Changes in Stockholders' Equity For the Six Months ended June 30, 2002 (Unaudited) and the Year ended December 31, 2001 (Audited) --------------------------------------------------------------------------------
ACCUMULATED OTHER TOTAL COMPREHENSIVE STOCK- COMMON RETAINED INCOME HOLDERS' STOCK SURPLUS EARNINGS (LOSS) EQUITY ------------ ------------ ------------ ------------ ------------ January 1, 2001 $ 5,119,110 $ 2,925,150 $ 11,764,483 $ (130,655) $ 19,678,088 Net income - - 2,090,375 - 2,090,375 Net change in unrealized depreciation on investment securities available for sale, net of income taxes - - - 330,842 330,842 ------------ 2,421,217 Dividends paid ($0.42 per share) - - (645,008) - (645,008) Stock split (3 for 1) effected in the form of a dividend 10,238,220 - (10,238,220) - - ------------ ------------ ------------ ------------ ------------ December 31, 2001 15,357,330 2,925,150 2,971,630 200,187 21,454,297 Net income - - 1,206,839 - 1,206,839 Net change in unrealized depreciation on investment securities available for sale, net of income taxes - - - 71,873 71,873 ------------ 1,278,712 Dividends paid ($0.20 per share) - - (307,147) - (307,147) ------------ ------------ ------------ ------------ ------------ June 30, 2002 $ 15,357,330 $ 2,925,150 $ 3,871,322 $ 272,060 $ 22,425,862 ============ ============ ============ ============ ============
6 ================================================================================ Cardinal Bankshares Corporation and Subsidiaries Consolidated Statements of Cash Flows For the Six Months ended June 30, 2002 and 2001 (Unaudited) --------------------------------------------------------------------------------
Six Months Ended June 30, 2002 2001 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,206,839 $ 1,031,187 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 122,521 123,291 Accretion of discounts on securities 1,933 (19,316) Provision for loan losses 270,000 255,000 Deferred income taxes - 76,243 Net realized gains on securities (10,497) (44,340) Deferred compensation & pension expense (16,300) 51,377 Changes in assets and liabilities: Accrued income (14,013) 76,255 Other assets (530,367) 1,360,654 Accrued interest payable (78,987) 14,567 Other liabilities (247,319) 7,655 --------------- --------------- Net cash provided by operating activities 703,810 2,932,573 --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in federal funds sold 8,415,000 (155,000) Increase in interest-bearing deposits in banks (5,000,000) - Purchases of investment securities (8,661,402) (6,792,602) Sale of investment securities 758,957 - Maturity of investment securities 7,767,474 14,202,400 Net (increase) decrease in loans 4,124,892 (12,711,290) Proceeds from sale of other real estate - 6,729 Purchases of properties and equipment (95,909) (41,058) Net investment in BOLI (3,063,270) - --------------- --------------- Net cash (used) in investing activities 4,245,742 (5,490,821) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) noninterest-bearing deposits 1,258,737 (144,988) Net increase (decrease) in interest-bearing deposits (4,821,834) 9,158,163 Dividends paid (307,147) (291,789) --------------- --------------- Net cash used in financing activities (3,870,244) 8,721,386 --------------- --------------- Net decrease in cash & cash equivalents 1,079,308 6,163,138 CASH AND CASH EQUIVALENTS, BEGINNING 3,986,448 2,631,298 --------------- --------------- CASH AND CASH EQUIVALENTS, ENDING $ 5,065,756 $ 8,794,436 =============== ===============
7 ================================================================================ Cardinal Bankshares Corporation and Subsidiaries Consolidated Statements of Cash Flows, continued For the Six Months ended June 30, 2002 and 2001 (Unaudited) -------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
2002 2001 --------------- --------------- Interest paid $ 2,771,536 $ 3,221,183 =============== =============== Income taxes paid $ 547,627 $ 250,060 =============== =============== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: Other real estate acquired in settlement of loans $ 244,912 $ - =============== ===============
-------------------------------------------------------------------------------- 8 Item 1. Organization and Summary of Significant Accounting Policies Organization Note 1. Basis of Presentation Cardinal Bankshares Corporation (the Company) was incorporated as a Virginia corporation on March 12, 1996 to acquire the stock of Bank of Floyd (the Bank). The Bank was acquired by the Company on July 1, 1996 and used the pooling of interests accounting method. The consolidated financial statements as of June 30, 2002 and for the periods ended June 30, 2002 and 2001 included herein, have been prepared by Cardinal Bankshares Corporation, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the information furnished in the interim consolidated financial statements reflects all adjustments necessary to present fairly the Company's consolidated financial position, results of operations, changes in stockholders' equity and cash flows for such interim periods. Management believes that all interim period adjustments are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the Company's audited financial statements and the notes thereto as of December 31, 2001, included in the Company's Annual Report for the fiscal year ended December 31, 2001. Bank of Floyd and its wholly owned subsidiary, FBC, Inc. are organized and incorporated under the laws of the Commonwealth of Virginia. As a state chartered Federal Reserve member, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions and the Federal Reserve. FBC, Inc.'s assets and operations consist primarily of annuity sales and minority interests in an insurance company and a title insurance company. The Bank serves the counties of Floyd, Carroll, Montgomery, and Roanoke, Virginia and the City of Roanoke, Virginia through five banking offices. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation. Note 2. Allowances for Loan Losses The following is an analysis of the allowance for credit losses for the six months ended June 30. 2002 2001 ------------- ------------- Balance at January 1 $ 1,300,148 $ 1,133,993 Provision charged to operations 270,000 255,000 Loans charged off, net of recoveries (42,014) (241,088) ------------- ------------- Balance at June 30 $ 1,528,134 $ 1,147,905 ============= ============= Note 3. Commitments and Contingencies The Bank's exposure to credit loss in the event of nonperformance by the other party 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 June 30, 2002 and 2001 is as follows: 2002 2001 ------------- ------------- Commitments to extend credit $ 7,113,000 $ 13,278,000 Standby letters of credit 872,000 612,000 ------------- ------------- $ 7,985,000 $ 13,890,000 ============= ============= 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Bank earned $1,206,839 or $0.79 basic net income per share for the six months ended June 30, 2002 compared to $1,031,187 or $0.67 basic net income per share for the first half of 2001. Total interest income of $5,902,251 less interest expense of $2,692,549 resulted in net interest income of $3,209,702 for the six months, an increase of 9.2% over the first half of 2001. Provision for loan losses charged to operations was $270,000 for the six months ending June 30, 2002 compared to $255,000 in the same period of 2001. Noninterest income and expenses amounted to $313,291 and $1,640,380, respectively for the first six months of 2002 and $302,505 and $1,360,187 for the same period in 2001. Total assets at June 30, 2002 were $182,853,077 compared to $185,797,743 at December 31, 2001. The decrease in assets was primarily due to the $4,394,892 decrease in net loans. Net income for the quarter ended June 30, 2002 increased 33.5% over the same period in 2001. Lower interest rates resulted in less interest expense and a higher net interest income of $1,669,293 as compared to $1,506,399 for the quarter ended June 30, 2001. Noninterest income decreased during the second quarter of 2002, amounting to $165,216 compared to $171,328 for the second quarter of 2001. Noninterest expense increased $19,607. Loans At June 30, 2002, gross loans totaled $110,339,735 and represented 60.3% of total assets compared to $114,506,641 or 61.6% of total assets at December 31, 2001. The loan-to-deposit ratios for June 30, 2002 and December 31, 2001 was 69.0% and 70.0%, respectively. Allowance for Loan Losses The allowance for loan losses was $1,528,134 or 1.38% of outstanding loans at June 30, 2002 compared to $1,300,148 or 1.14% of outstanding loans at December 31, 2001. The allowance for loan losses represents management's estimate of an amount adequate to provide for potential losses inherent in the loan portfolio. The adequacy for loan losses and the related provision are based upon management's evaluation of the risk characteristics of the loan portfolio under current economic conditions with consideration to such factors as financial condition of the borrowers, collateral values, growth and composition of the loan portfolio, the relationship of the allowance for loan losses to outstanding loans, and delinquency trends. Management believes that the allowance for loan losses is adequate. While management uses all available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Deposits Total deposits decreased from $163,467,575 at December 31, 2001 to $159,904,478 at June 30, 2002, a decrease of $3,563,097 or 2.2%. As of June 30, 2002, the Bank had $22,474,508 in time deposits of $100,000 or more. Stockholders' Equity and Capital Adequacy Total stockholders' equity was $22,425,862 at June 30, 2002, compared to $21,454,297 at December 31, 2001, an increase of $971,565. The increase is attributed to net earnings of $1,206,839, dividends of $307,147 paid, and the change in the unrealized appreciation on available for sale securities of $71,873. 10 Stockholders' Equity and Capital Adequacy, continued The Bank's regulators define risk-based capital guidelines as "core," or Tier 1 capital, and "supplementary," or Tier 2 capital. Core capital consists of common stockholders' equity while "supplementary," or Tier 2 capital, consists of the allowance for loan losses, subject to certain limitations. These amounts are referred to collectively as total qualifying capital. Banks are expected to meet a minimum ratio of total qualifying capital to risk adjusted assets of 8.0%. The Bank's total risk-based capital ratio exceeded 12% at June 30, 2002. In addition to the risk-based capital guidelines mentioned above, banking regulatory agencies have adopted leverage capital ratio requirements. The leverage ratio - or core capital to assets ratio - works in tandem with the risk-based capital guidelines. The minimum leverage ratios range from three to five percent. At June 30, 2002, the Bank's leverage capital ratio was in excess of 7%. Management is not presently aware of any current recommendations to the Bank by regulatory authorities, which if they were to be implemented, would have a material effect on the Bank's liquidity, capital resources, or operations. Interest Rate Risk Management Interest rate risk is the sensitivity of interest income and interest expense to changes in interest rates. Management continues to structure its assets and liabilities in an attempt to protect net interest income from large fluctuations associated with changes in interest rates. Forward-Looking Statements This document contains forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, changes in the interest rate environment, management's business strategy, national, regional, and local market conditions and legislative and regulatory conditions. Readers should not place undue reliance on forward-looking statements, which reflect management's view only as to the date hereof. The Bank undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. Liquidity The liquidity of a bank measures its access to or ability to raise funds. Sustaining adequate liquidity requires a bank to ensure the availability of funds to satisfy reserve requirements, loan demand, deposit withdrawals, and maturing liabilities while funding asset growth and producing appropriate earnings. Liquidity is provided through maturities and repayments of loans and investments, deposit growth, and access to sources of funds other than deposits, such as the federal funds market or other borrowing sources. The Bank's primary liquid assets are Cash and due from banks, Interest-bearing deposits with banks, Federal funds sold and Investment securities. At June 30, 2002, the ratio of liquid assets to total deposits was 41.2% compared to a ratio of 41.6% at December 31, 2001. 11 Part II. Other Information Item 1. Legal Proceedings There are no matters pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is subject. Item 2. Changes in Securities (a) Not applicable. (b) Not applicable Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders The Bank's annual stockholders meeting was held April 24, 2002 and the following actions were approved: (a) Election of directors: Bolt; Conduff, Jr.; Gardner, Jr.; Harman; Mitchell; Moore; and Thompson were elected to serve until the 2003 annual meeting of stockholders. (b) Appointment of independent auditor: Larrowe & Company, PLC, was appointed the independent auditor for the year ending December 31, 2002. Item 5. Other Information On May 31, 2002, the Company announced the signing of a definitive agreement for the merger of the Company with MountainBank Financial Corporation. The transaction is subject to shareholder and regulator approval. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 2.1 Agreement and Plan of Reorganization and Merger By and Between the Registrant and MountainBank Financial Corporation dated June 20, 2002 (b) Reports on Form 8-K (1) Form 8-K filed May 31, 2002 to report definitive agreement entered into with MountainBank Financial Corporation. (2) Form 8-K filed June 24, 2002 to announce merger plans with MountainBank Financial Corporation. 12 SIGNATURES Pursuant to the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Cardinal Bankshares Corporation Date: August 12, 2002 By: /s/ Ronald Leon Moore President, Chief Executive Officer