-----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, Afbh+7z5osOh9lbf1XE3MAjeAG8EtcIXRi/9rS7g0+iY3vGVDfd874EBI73Swfqk 1gM8yRtnIvCL5VfVx5VNwQ== 0001046249-98-000002.txt : 19980330 0001046249-98-000002.hdr.sgml : 19980330 ACCESSION NUMBER: 0001046249-98-000002 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NONE 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: 98575040 BUSINESS ADDRESS: STREET 1: P O BOX 215 CITY: FLOYD STATE: VA ZIP: 24091 BUSINESS PHONE: 5407454191 10KSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) __X__ Annual Report under Section 13 or 15(d) of the Securities Exchange Act 1934 (Fee required). For the fiscal year ended December 31, 1997. or _____ Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (No fee required) For the transition period from _____ to _____ Commission file No. _0-28780_ Cardinal Bankshares Corporation (Name of small business issuer in its charter) Virginia 54-1804471 (State or other jurisdiction (IRS Employer of incorporation or organization Identification No.) 101 Jacksonville Circle, Floyd, Virginia 24091 (Address of principal executive offices) (540) 745-4191 Issuer's telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $10.00 per share ________________________________________ Title of Class Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes__X__ No_____ Check if there is no disclosure of delinquent filers in response to Item 405 of regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-KSB or any amendment to this Form 10-KSB. [X] The issuer's revenues for its most recent fiscal year were $11,621,000 The aggregate market value of the voting stock as of March 26, 1997, held by non-affiliates of the registrant computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the last 60 days was $21,010,410. 511,911 shares of the Issuer's common stock were issued and outstanding as of March 23, 1998. Transitional Small Business Disclosure Format. (Check one): Yes_____ No__X__ DOCUMENTS INCORPORATED BY REFERENCE The annual report to security holders for fiscal year ended December 31, 1997 is incorporated by reference into Form 10-KSB Part II, Items 7 and 8, and Part III, Item 13. The issuer's Proxy Statement dated March 27, 1998 is incorporated by reference into Form 10-KSB Part III, Items 9, 10, 11, and 12. 1 PART I ITEM 1. DESCRIPTION OF BUSINESS ________________________________ (A) BUSINESS DEVELOPMENT Cardinal Bankshares Corporation (the Company) was incorporated as a Virginia corporation on March 12, 1996 to acquire the stock of The Bank of Floyd (the Bank). The Bank was acquired by the Company on June 30, 1996. The Bank was organized as a state chartered bank on February 24, 1951 through the consummation of a plan of consolidation between two state chartered community banks then operating in Floyd County, Virginia. The Bank and its wholly-owned subsidiary, FBC, Inc., are incorporated and operate under the laws of the Commonwealth of Virginia. As a state chartered Federal Reserve member, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions and the Federal Reserve. FBC, Inc.'s assets and operations consist primarily of annuity sales and a minority interest in a title insurance company. (B) DESCRIPTION OF THE BUSINESS The principal business of the Company and Bank is to provide compre- hensive individual and corporate banking services through its main office in Floyd, Virginia, and its branch offices in Roanoke and Willis, Virginia. Effective April 6, 1994, the Bank acquired a 7-1/2% interest in Virginia Title Center, LLC (a title insurance company) through its acquisition by FBC, Inc. (a wholly owned subsidiary of the Bank). FBC, Inc. has no significant assets or operations other than annuity sales and its interest in Virginia Title Center, LLC. (1) SERVICES The Bank is a full service retail commercial bank offering a wide range of services, including demand and time deposits as well as installment, mortgage and other consumer lending services. The Bank makes seasonal and term commercial loans, both alone and in conjunction with other banks or governmental agencies. (2) COMPETITIVE CONDITIONS The banking business is highly competitive. The Company competes as a financial intermediary with other commercial banks, savings and loan associations, credit unions and money market mutual funds operating in its trade area and elsewhere. As of December 31, 1997, there were two commercial banks (one of which is the Bank) operating a total of three offices in Floyd County, Virginia. The competing institution is not locally owned. Floyd County generates approximately 70% of the Bank's total deposits. In the other parts of the Bank's trade area (the Virginia Counties of Roanoke and Montgomery and the City of Roanoke, Virginia), there are a number of locally owned community banks, statewide banking organizations, and affiliate banks of southeast regional bank holding companies in operation. (3) MATERIAL CUSTOMERS Deposits are derived from a broad base of customers in its trade area. No material portion of deposits have been obtained from a single person or a few persons (including Federal, State, and local governments and agencies thereunder), the loss of which would have a materially adverse effect on the business of the Bank. The majority of loans, commitments to extend credit, and standby letters of credit have been granted to customers in the Company's market area. The majority of such customers are depositors. The Company generally does not extend credit to any single borrower or group of related borrowers in excess of approximately $1,750,000. Although the Company has a reasonably diversified loan portfolio, it has a loan concentration relating to customers who are motel and bed-and-breakfast owners and operators. Total loans and loan commitments to this industrial group amounted to approximately $6,400,000 and $5,600,000 at December 31, 1997 and 1996, respectively. 2 (B) DESCRIPTION OF BUSINESS, CONTINUED (4) RIGHTS No patents, trademarks, licenses, franchises or concessions held are of material significance to the Company. (5) NEW SERVICES The Company has expended no material dollars on research activities relating to new lines of business in the last two years and has not announced any new line of business which will require an investment of material assets. (6) ENVIRONMENTAL LAWS Compliance with Federal, State, or Local provisions regulating the discharge of materials into the environment has not had, nor is it expected to have in the future, a material effect upon the Company's capital expenditures, earnings or competitive position. (7) EMPLOYEES The Bank had 24 officers, 29 full-time employees and 7 part-time employees as of December 31, 1997. Employee relations have been good. ITEM 2. DESCRIPTION OF PROPERTY ________________________________ The present headquarters of the Company consists of a three-story brick building, with approximately 21,200 square feet of floor space located at 101 Jacksonville Circle, Floyd, Virginia. The Bank also operates a branch office in Roanoke, Virginia. These facilities are owned by the Bank and each has drive-up facilities. The Bank's Willis, Virginia office operates from a leased facility. The Bank also owns a three-story brick building adjacent to its main office which serves primarily as community meeting rooms and off-site data backup storage. 3 ITEM 3. LEGAL PROCEEDINGS __________________________ Neither the Company nor the Bank or its subsidiary are a party to, nor is any of their property the subject of, any material pending legal proceedings incidental to the business of the Company or the Bank or its subsidiary. ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS ___________________________________________________________ No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS _________________________________________________________________ (A) Beginning in 1997, the Company's stock was listed on the NASDAQ Bulletin Board under the symbol CDBK. Prior to 1997, no active public market existed for the common stock of the Bank. Transfers of the common stock occured from time to time, but management had no direct access to the prices realized in those trades. Based on information available to the Bank concerning such trading, the following table shows the trading ranges of the Common Stock for the previous five years. The table has been adjusted for the effects of a four for one stock split in 1995 and a 10% stock dividend in 1997. 1997 $47.00 $44.00 1996 $44.00 $35.45 1995 $35.45 $21.59 1994 $21.59 $20.45 1993 $20.90 $20.45
Year High Low ____ ______ ______
(B) The approximate number of holders of the Bank's 511,911 Common Stock Securities as of December 31, 1997, is 583. (C) Dividends paid for 1997 were $1.00 and 1996 were $0.94 per share (adjusted for the effects of a four for one stock split in 1995 and a 10% stock dividend in 1997) owned. The Company's ability to declare and pay dividends in the future will be dependent upon its consolidated income and fiscal condition, tax considerations, and general business condition. Subject to these considerations, dividends may be declared only in the discretion of the Board of Directors. The Company presently expects that dividends will continue to be paid in the future. 4 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS ____________________________________________ The information required under this item is incorporated by reference to the Company's Annual Report to Stockholders, Exhibit 13.1, pages 23-41 and inside front cover. ITEM 7. FINANCIAL STATEMENTS _____________________________ The following consolidated financial statements of the registrant and the independent Auditor's Report set forth on pages 2 through 21 of the Company's 1997 Annual Report to Stockholders are incorporated herein by reference: (1) Independent Auditor's Report (2) Consolidated Balance Sheets as of December 31, 1997 and 1996 (3) Consolidated Statements of Income for the years ended December 31, 1997, 1996, and 1995 (4) Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995 (5) Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995 (6) Notes to Consolidated Financial Statements ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND ________________________________________________________________________ FINANCIAL DISCLOSURE ____________________ NONE PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: ______________________________________________________________________ COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT _________________________________________________ The Executive Officer of the Company as of December 31, 1997 is listed on page 3 of the Company's Proxy statement dated March 27, 1998 and is incorporated herein by reference. Information with respect to the directors of the Company is set out under the caption "Election of Directors" on page 2 of The Company's Proxy statement dated March 27, 1998, which information is incorporated herein by reference. The disclosure required by item 405 of regulation S-K is set out under the caption "Beneficial Ownership Reporting Compliance" section 16(a) on page 5 of the Company's Proxy Statement dated March 27, 1998, which information is incorporated by reference. 5 ITEM 10. EXECUTIVE COMPENSATION ________________________________ The information set forth under "Executive Compensation" and "Directors Meetings, Committees and Fees" on page 4 of the Company's Proxy State- ment dated March 27, 1998 is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ________________________________________________________________________ The information set forth under "Ownership of Common Stock" on pages 3, 4 and 5 of the Company's Proxy Statement dated March 27, 1998 is incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ________________________________________________________ The information contained under "Certain Transactions" on page 5 of the Company's Proxy Statement dated March 27, 1998 is incorporated herein by reference. PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K __________________________________________ (a) The following documents are filed as part of the report: 1. Financial Statements: ____________________ Independent Auditors' Report 2 Consolidated Balance Sheets December 31, 1997 and 1996 3 Consolidated Statements of Income Years ended December 31, 1997, 1996, and 1995 4 Consolidated Statements of Stock- holders' Equity-Years ended December 31, 1997, 1996, and 1995 5 Consolidated Statements of Cash Flows-Years ended December 31, 1997, 1996, and 1995 6 Notes to Consolidated Financial Statements 7 - 21 *Incorporated by reference from the indicated pages of the 1997 Annual Report to Stockholders
1997 Annual Report To Stockholders Pages(s)* _________________________
6 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K, CONTINUED _____________________________________________________ 2. Financial Statement Schedules: _____________________________ All schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related notes. 3. Exhibits ________ The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed in the Index to Exhibits to this Annual Report on Form 10-KSB. REPORTS ON FORM 8-K ___________________ None. EXHIBITS ________ See Item 13(a)3 above. FINANCIAL STATEMENT SCHEDULES _____________________________ See Item 13(a)2 above. 7 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CARDINAL BANKSHARES CORPORATION Date: March 27, 1998 By: s/ Ronald Leon Moore ____________________ Ronald Leon Moore President and CEO In accordance with the Exchange Act, this report has to be signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Director, President and Chief Executive Officer (principal financial and s/Ronald Leon Moore accounting officer). 3/27/98 ___________________ Ronald Leon Moore s/K. Venson Bolt Director 3/27/98 ________________ K. Venson Bolt s/J. H. Conduff Director 3/27/98 _______________ J. H. Conduff s/W. R. Gardner, Jr. Director 3/27/98 ____________________ W. R. Gardner, Jr. s/C. W. Harman Director 3/27/98 ______________ C. W. Harman s/Kevin D. Mitchell Director 3/27/98 ___________________ Kevin D. Mitchell s/Dorsey H. Thompson Director 3/27/98 ____________________ Dorsey H. Thompson
Signature Title Date _________ _____ ____
8 INDEX TO EXHIBITS 13.1 1997 Annual Report to Stock- holders (Such Report, except to the extent incorporated herein by reference, is being furnished for the information of the Commission only and is not deemed to be filed as part of this Report on Form 10-KSB). --- 3.1 Cardinal Bankshares Corporation, Incorporated by Articles of Incorporation reference to the Company's Registration on Form 8-A, filed August 16, 1996 3.2 Cardinal Bankshares Corporation Incorporated by by-laws reference to the Company's 1996 Annual Report filed on Form 10-KSB on March 26, 1997 21.1 Subsidiaries of Cardinal Bankshares Corporation --- 27.1 Financial Data Schedule ---
PAGE NO. IN EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM ___________ ___________ _________________
9 ________________________________________________________________________________ 1997 Annual Report ________________________________________________________________________________ Table of Contents Letter to Stockholders 1 Independent Auditor's Report 2 Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Changes in Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Management's Discussion of Financial Condition and Results of Operations 23 Staff 42 Directors and Officers 43 Stockholder Information Inside Back Cover ________________________________________________________________________________ Financial Highlights Summary ________________________________________________________________________________ Interest income $11,078 $10,289 $10,003 $ 8,724 $ 7,975 Interest expense 5,681 5,307 5,060 3,887 3,609 _______ _______ _______ _______ _______ Net interest income 5,397 4,982 4,943 4,837 4,366 Provision for loan losses 500 325 136 255 300 Other income 543 343 225 233 169 Other expense 2,934 2,823 3,088 2,811 2,570 Income taxes 652 594 548 564 447 _______ _______ _______ _______ _______ Net income $ 1,854 $ 1,583 $ 1,396 $ 1,440 $ 1,218 _______ _______ _______ _______ _______ Per Share Data Basic earnings per share $ 3.62 $ 3.09 $ 2.73 $ 2.81 $ 2.38 Cash dividends declared 1.00 .94 .88 .86 .82 Book value 31.22 28.38 26.62 23.59 22.53 Year-end Balance Sheet Summary Loans, net $85,305 $85,372 $78,630 $ 79,635 $ 73,187 Securities 45,094 43,722 43,998 31,449 34,752 Total assets 145,072 136,422 130,901 122,097 119,598 Deposits 128,189 118,424 116,537 109,299 107,313 Stockholders' equity 15,984 14,535 13,631 12,081 11,537 Interest earning assets $140,397 $130,458 $125,121 $115,872 $112,881 Interest bearing liabilities 115,960 108,639 105,669 98,394 96,283 Selected Ratios Return on average assets 1.3% 1.2% 1.1% 1.2% 1.1% Return on average equity 12.0% 11.6% 10.7% 12.7% 10.9% Dividends declared as percent of net income 27.7% 30.3% 32.4% 29.3% 34.4% ____________________________ In thousands of dollars, except per share data. Reflects Bank of Floyd operations prior to formation of Cardinal Bankshares Corporation on March 12, 1996. Adjusted for the effects of a four for one stock split in 1995 and 10% stock dividend in 1997.
1997 1996 1995 1994 1993 ____ ____ ____ ____ ____ Summary of Operations
CARDINAL BANKSHARES CORPORATION POST OFFICE BOX 215 FLOYD, VIRGINIA 24091 Dear Shareholders: We are pleased to present our second financial report on Cardinal Bankshares Corporation. Our financial statements are audited and certified by the accounting firm Larrowe, Cardwell & Company, L.C. Cardinal Bankshares Corporation experienced record net earnings in 1997. After tax income was $1,853,684, an increase of $270,764 over 1996 earnings of $1,582,920. This is a 17.1% increase over 1996. Net income per share increased from $3.09 in 1996 to $3.62 in 1997. Our dividend also increased from $.94 in 1996 to $1.00 in 1997 (adjusted for the effects of a 10% stock dividend in 1997.) This was the sixth consecutive year of increased dividends to our shareholders. Market value of our stock continues to be strong. Information is listed on the Bulletin Board under the call symbol CDBK. Your broker can handle your needs. Return on average assets was 1.3% and return on average equity was 12.0% reflecting a strong performance. An equity to average assets ratio of 10.9% indicates that your company has sufficient capital to support both growth and safety in the future. Overall asset growth continued at a moderate pace while net loan balances declined slightly and deposit balances increased. There continues to be both moderate growth in the county and intense competition for loans and deposits. During July we opened our Willis branch, and construction is progressing well with the Hillsville branch. We anticipate opening the Hillsville branch during Spring of 1998. We continue to study locations that will enhance our growth and franchise value. Many of you have heard and read about the potential problems facing the computer systems January 1, 2000. Management is actively taking steps to address the Year 2000 issue. A management committee has been assessing the risks relating to the Year 2000 issue and will ensure that all necessary steps are taken to address any potential problems. We appreciate the continued support of our shareholders and Board of Directors. The accomplishments of the past year reflect well on them as well as our dedicated staff. To all these and the many friends and customers of the Bank who helped make 1997 a successful year, we express our gratitude. Sincerely, Leon Moore J. H. Conduff President and CEO Chairman of the Board 1 LARROWE, CARDWELL & COMPANY, LC POST OFFICE BOX 760 GALAX, VIRGINIA 24333 Independent Auditor's Report Board of Directors and Stockholders Cardinal Bankshares Corporation Floyd, Virginia We have audited the consolidated balance sheets of Cardinal Bankshares Corporation and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cardinal Bankshares Corporation and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Larrowe, Cardwell & Company, LC Galax, Virginia January 9, 1998 2 Consolidated Balance Sheets December 31, 1997 and 1996 ________________________________________________________________________________ ---- ---- Assets Cash and due from banks $1,941,494 $2,749,552 Interest-bearing deposits with banks 5,000,000 - Federal funds sold 3,825,000 500,000 Investment securities available for sale 31,663,068 30,338,456 Investment securities held to maturity 13,430,624 13,383,394 Loans, net of allowance for loan losses $1,452,126 in 1997 and $1,002,455 in 1996 85,304,739 85,372,459 Property and equipment, net 1,687,859 1,560,582 Accrued income 1,093,063 1,053,576 Other assets 1,126,470 1,463,702 ____________ ____________ $145,072,317 $136,421,721 ____________ ____________ Liabilities and Stockholders' Equity Liabilities Demand deposits $ 12,229,167 $ 12,585,858 NOW deposits 8,923,777 8,572,681 Savings deposits 17,507,178 17,905,685 Large denomination time deposits 15,120,658 10,693,230 Other time deposits 74,407,946 68,666,993 ____________ ____________ Total deposits 128,188,726 118,424,447 Short-term debt - 400,000 Long-term debt - 2,400,000 Accrued interest payable 269,032 247,000 Other liabilities 630,408 415,355 ____________ ____________ 129,088,166 121,886,802 ____________ ____________ Commitments and contingencies Stockholders' equity Common stock, $10 par value; 5,000,000 shares authorized; 511,911 and 465,536 shares issued in 1997 and 1996, respectively 5,119,110 4,655,360 Surplus 2,925,150 1,200,000 Retained earnings 7,727,506 8,585,007 Unrealized appreciation on investment securities available for sale, net of income taxes 212,385 94,552 ____________ ____________ 15,984,151 14,534,919 ____________ ____________ $145,072,317 $136,421,721 ____________ ____________
1997 1996
See Notes to Consolidated Financial Statements 3 Consolidated Statements of Income Years ended December 31, 1997, 1996 and 1995 ________________________________________________________________________________ Interest income Loans and fees on loans $ 8,074,494 $ 7,472,380 $ 7,255,003 Federal funds sold and securities purchased under agreements to resell 315,065 169,334 323,657 Investment securities: Taxable 2,159,381 2,177,067 2,086,981 Exempt from federal income tax 491,074 469,751 337,088 Deposits with banks 38,009 - - __________ ___________ ___________ 11,078,023 10,288,532 10,002,729 ___________ ___________ ___________ Interest expense Deposits 5,538,989 5,288,779 5,059,503 Borrowings 142,467 17,812 - ___________ ___________ ___________ 5,681,456 5,306,591 5,059,503 ___________ ___________ ___________ Net interest income 5,396,567 4,981,941 4,943,226 Provision for loan losses 500,000 325,000 135,958 ___________ ___________ ___________ Net interest income after provision for loan losses 4,896,567 4,656,941 4,807,268 ___________ ___________ ___________ Noninterest income Service charges on deposit accounts 143,794 114,280 120,521 Other service charges and fees 36,128 27,411 13,493 Net realized gains on sales of securities 7,018 5,856 4,728 Gain on sale of other real estate owned 232,732 - - Other income 123,313 195,741 86,304 ___________ ___________ ___________ 542,985 343,288 225,046 ___________ ___________ ___________ Noninterest expense Salaries and employee benefits 1,760,878 1,754,020 1,576,139 Occupancy expense 115,612 122,006 104,082 Equipment expense 273,026 230,367 183,223 Other expense 783,882 717,169 1,225,139 ___________ ___________ ___________ 2,933,398 2,823,562 3,088,583 ___________ ___________ ___________ Income before income taxes 2,506,154 2,176,667 1,943,731 Income tax expense 652,470 593,747 548,151 ___________ ___________ ___________ Net income $ 1,853,684 $ 1,582,920 $ 1,395,580 ___________ ___________ ___________ Basic earnings per share $ 3.62 $ 3.09 $ 2.73 ___________ ___________ ___________ Weighted average shares outstanding 512,090 512,090 512,090 ___________ ___________ ___________
1997 1996 1995 ____ ____ ____
See Notes to Consolidated Financial Statements 4 Consolidated Statements of Changes in Stockholders' Equity Years ended December 31, 1997, 1996 and 1995 ________________________________________________________________________________ Balance, December 31, 1994 $1,163,840 $1,200,000 $10,029,100 $(311,538) $12,081,402 Comprehensive income Net income - - 1,395,580 - 1,395,580 Net change in unrealized appreciation on investment securities available for sale, net of income taxes - - - 606,067 606,067 ___________ Total comprehensive income - - - - 2,001,647 Dividends paid ($.97 per share) - - (451,571) - (451,571) Stock split (4 for 1), effected in the form of a dividend 3,491,520 - (3,491,520) - - __________ __________ ___________ _________ ___________ Balance, December 31, 1995 4,655,360 1,200,000 7,481,589 294,529 13,631,478 Comprehensive income Net income - - 1,582,920 - 1,582,920 Net change in unrealized appreciation on investment securities available for sale, net of income taxes - - - (199,977) (199,977) ___________ Total comprehensive income - - - - 1,382,943 Dividends paid ($1.03 per share) - - (479,502) - (479,502) Balance, December __________ __________ ___________ _________ ___________ 31, 1996 4,655,360 1,200,000 8,585,007 94,552 14,534,919 Comprehensive income Net income - - 1,853,684 - 1,853,684 Net change in unrealized appreciation on investment securities available for sale, net of income taxes - - - 117,833 117,833 ___________ Total comprehensive income - - - - 1,971,517 Dividends paid ($.51 per share) - - (237,423) - (237,423) 10% stock dividend 465,540 1,731,790 (2,197,330) - - Redemption of fractional shares (1,790) (6,640) - - (8,430) Dividends paid ($.54 per share) - - (276,432) - (276,432) __________ __________ ___________ _________ ___________ Balance, December 31, 1997 $5,119,110 $2,925,150 $ 7,727,506 $ 212,385 $15,984,151 __________ __________ ___________ _________ ___________
Accumulated Other Common Retained Comprehensive Stock Surplus Earnings Income (Loss) Total __________ __________ ___________ _________ ___________
See Notes to Consolidated Financial Statements 5 Consolidated Statements of Cash Flows Years ended December 31, 1997, 1996 and 1995 ________________________________________________________________________________ Cash flows from operating activities Net income $ 1,853,684 $ 1,582,920 $ 1,395,580 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 190,065 166,307 155,058 Accretion of discount on securities, net of amortization of premiums 176 (73,699) (72,053) Provision for loan losses 500,000 325,000 135,958 Deferred income taxes (213,850) 168,713 (27,821) Net realized (gains) losses on securities (7,018) (5,857) (4,728) Deferred compensation and pension expense 70,748 38,989 (22,352) Changes in assets and liabilities: Accrued income (39,487) 15,908 (223,256) Other assets 494,783 529,779 811,262 Accrued interest payable 22,032 (5,957) (60,599) Other liabilities 144,305 (103,546) 99,652 ____________ ____________ ____________ Net cash provided by operating activities 3,015,438 2,638,557 2,186,701 ____________ ____________ ____________ Cash flows from investing activities Net increase in interest-bearing deposits (5,000,000) - - Net (increase) decrease in federal funds sold (3,325,000) 1,250,000 2,300,000 Purchases of investment securities (15,236,219) (19,551,812) (24,972,526) Sales of investment securities 2,075,317 3,466,994 - Maturities of investment securities 11,974,853 16,137,232 13,418,835 Net (increase) decrease in loans (437,099) (7,106,355) 97,732 Purchases of property and equipment (317,342) (200,586) (120,646) Net cash used in investing ____________ ____________ ____________ activities (10,265,490) (6,004,527) (9,276,605) ____________ ____________ ____________ Cash flows from financing activities Net increase (decrease) in demand, NOW, and savings deposits (404,102) 1,318,505 (4,948,210) Net increase in time deposits 10,168,381 569,304 12,185,716 Net increase (decrease) in short-term debt (400,000) 400,000 - Net increase (decrease) in long-term debt (2,400,000) 2,400,000 Redemption of fractional shares (8,430) - - Dividends paid (513,855) (479,502) (451,571) ____________ ____________ ____________ Net cash provided by financing activities 6,441,994 4,208,307 6,785,935 ____________ ____________ ____________ Net increase (decrease) in cash and cash equivalents (808,058) 842,337 (303,969) Cash and cash equivalents, beginning 2,749,552 1,907,215 2,211,184 ____________ ____________ ____________ Cash and cash equivalents, ending $ 1,941,494 $ 2,749,552 $ 1,907,215 ____________ ____________ ____________ Supplemental disclosures of cash flow information Interest paid $ 5,659,424 $ 5,312,548 $ 5,046,091 ____________ ____________ ____________ Income taxes paid $ 750,470 $ 357,964 $ 622,455 ____________ ____________ ____________ Supplemental disclosure of noncash investing activities Other real estate acquired in settlement of loans $ 4,819 $ 39,194 $ 770,553 ____________ ____________ ____________
1997 1996 1995 ____ ____ ____
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, Montgomery and Roanoke, Virginia and the City of Roanoke, Virginia, through three banking offices. FBC, Inc.'s assets and operations consist primarily of annuity sales and a minority interest in a title insurance company. The accounting and reporting policies of the Company, the Bank and FBC, Inc. follow generally accepted accounting principles and general practices within the financial services industry. Following is a summary of the more significant policies. Principles of Consolidation The consolidated financial statements include the accounts of the Company, the Bank and FBC, Inc.. All material intercompany accounts and transactions are eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan and foreclosed real estate losses, management obtains independent appraisals for significant properties. The majority of the Company's loan portfolio consists of loans in Southwest Virginia. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions. The regional economy is diverse, but is influenced by the agricultural, textile and governmental segments. While management uses available information to recognize loan and foreclosed real estate losses, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as a part of their routine examination process, periodically review the Company's allowances for loan and foreclosed real estate losses. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examinations. Because of these factors, it is reasonably possible that the allowances for loan and foreclosed real estate losses may change materially in the near term. Cash and Cash Equivalents For purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption "cash and due from banks." 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. 8 Notes to Consolidated Financial Statements ________________________________________________________________________________ Note 1. Organization and Summary of Significant Accounting Policies, continued Property and Equipment Land is carried at cost. Bank premises, furniture and equipment are carried at cost, less accumulated depreciation and amortization computed principally by the straight-line method over the following estimate useful lives: Years Buildings and improvements 20-40 Furniture and equipment 5-20 Foreclosed Properties Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less cost to sell at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in loss on foreclosed real estate. The historical average holding period for such properties is in excess of 36 months. Pension Plan The Bank maintains a noncontributory defined benefit pension plan covering all employees who meet eligibility requirements. To be eligible, an employee must be 21 years of age and have completed one year of service. Plan benefits are based on final average compensation and years of service. The funding policy is to contribute the maximum deductible for Federal income tax purposes. Income Taxes Provision for income taxes is based on amounts reported in the statements of income (after exclusion of non-taxable income such as interest on state and municipal securities) and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred taxes assets and liabilities are adjusted through the provision for income taxes. Deferred income tax liability relating to unrealized appreciation (or the deferred tax asset in the case of unrealized depreciation) on investment securities available for sale is recorded in other liabilities (assets). Such unrealized appreciation or depreciation is recorded as an adjustment to equity in the financial statements and not included in income determination until realized. Accordingly, the resulting deferred income tax liability or asset is also recorded as an adjustment to equity. Basic Earnings per Share Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends. Diluted Earning per Share The computation of diluted earnings per share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares. For the years presented, the Company has no potentially dilutive securities outstanding. 9 Notes to Consolidated Financial Statements ________________________________________________________________________________ Note 1. Organization and Summary of Significant Accounting Policies, continued Comprehensive Income Annual comprehensive income reflects the change in the Company's equity during the year arising from transactions and events other than investments by and distributions to stockholders. It consists of net income plus certain other changes in assets and liabilities that are reported as separate components of stockholders' equity rather than as income or expense. Financial Instruments All derivative financial instruments held or issued by the Company are held or issued for purposes other than trading. In the ordinary course of business the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit and commercial and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. The Bank does not utilize interest-rate exchange agreements or interest-rate futures contracts. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate their fair values. Interest-bearing deposits with banks: Fair values for time deposits are estimated using a discounted cash flow analysis that applies interest rates currently offered on certificates to a schedule of aggregated contractual maturities on such time deposits. Available-for-sale and held-to-maturity securities: Fair values for securities, excluding restricted equity securities, are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying values of restricted equity securities approximate fair values. Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable. The carrying amount of accrued interest receivable approximates its fair value. Deposit liabilities: The fair values disclosed for demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date. The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits. The carrying amount of accrued interest payable approximates fair value. 10 Notes to Consolidated Financial Statements ________________________________________________________________________________ Note 1. Organization and Summary of Significant Accounting Policies, continued Fair Value of Financial Instruments, continued Short-term and long-term debt: The carrying amounts of short- term debt approximate their fair values. The fair values for long- term debt are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms. Other liabilities: For fixed-rate loan commitments, fair value considers the difference between current levels of interest rates and the committed rates. The carrying amounts of other liabilities approximates fair value. Reclassification Certain reclassifications have been made to the prior years' financial statements to place them on a comparable basis with the current year. Net income and stockholders' equity previously reported were not affected by these reclassifications. Note 2. Restrictions on Cash and Due from Banks To comply with banking regulations, the Company is required to maintain certain average cash reserve balances. The daily average cash reserve requirement was approximately $576,000 and $537,000 for the two week periods including December 31, 1997 and 1996, respectively. Note 3. Securities Debt and equity securities have been classified in the consolidated balance sheets according to management's intent. The carrying amount of securities and their approximate fair values at December 31 follow: 1997 Available for sale U.S. Government agency securities $ 15,613,575 $ 40,349 $ 5,320 $ 15,648,604 State and municipal securities 561,886 5,106 - 566,992 Mortgage-backed securities 13,676,416 233,482 36,217 13,873,681 Other securities 1,488,980 84,811 - 1,573,791 ____________ _________ _______ ____________ $ 31,340,857 $ 363,748 $41,537 $ 31,663,068 ____________ _________ _______ ____________ Held to maturity U.S. Government agencies securities $ 498,191 $ 1,809 $ - $ 500,000 State and municipal securities 11,165,507 183,311 - 11,348,818 Mortgaged-backed securities 1,156,601 5,762 7,018 1,155,345 Other securities 610,325 - - 610,325 ____________ _________ _______ ____________ $ 13,430,624 $ 190,882 $ 7,018 $ 13,614,488 ____________ _________ _______ ____________ 1996 Available for sale U.S. Treasury securities $ 979,311 $ - $ 745 $ 978,566 U.S. Government agency securities 13,868,779 25,966 103,282 13,791,463 Mortgage-backed securities 13,665,654 156,777 51,827 13,770,604 Other securities 1,681,452 116,371 - 1,797,823 ____________ _________ ________ ____________ $ 30,195,196 $ 299,114 $155,854 $ 30,338,456 ____________ _________ ________ ____________ Held to maturity U.S. Government agencies securities $ 497,949 $ - $ 2,299 $ 495,650 State and municipal securities 10,609,943 17,535 33,707 10,593,771 Mortgaged-backed securities 1,706,802 12,012 15,359 1,703,455 Other securities 568,700 - - 568,700 ____________ _________ _______ ____________ $ 13,383,394 $ 29,547 $51,365 $ 13,361,576 ____________ _________ _______ ____________
Amortized Unrealized Unrealized Fair Cost Gains Losses Value ____ _____ ______ _____
11 Notes to Consolidated Financial Statements ________________________________________________________________________________ Note 3. Securities, continued Investment securities with amortized cost of approximately $4,337,036 and $4,083,039 at December 31, 1997 and 1996, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. Gross realized gains and losses for the years ended December 31, 1997, 1996 and 1995 are as follows: Realized gains $ 8,855 $ 7,000 $ 4,728 Realized losses (1,837) (1,144) - ________ ________ ________ $ 7,018 $ 5,856 $ 4,728 ________ ________ ________
1997 1996 1995 ____ ____ ____
The scheduled maturities of securities available-for-sale and held-to-maturity at December 31, 1997, were as follows: ____ _____ ____ _____ Due in one year or less $ 11,660,030 $ 11,700,353 $ 1,841,240 $ 1,855,931 Due after one year through five years 11,981,646 12,132,318 5,903,549 5,981,914 Due after five years through ten years 3,545,476 3,602,551 4,975,668 5,065,556 Due after ten years 4,153,705 4,227,846 99,842 100,762 Restricted equity securities - - 610,325 610,325 ____________ ____________ ____________ ____________ $ 31,340,857 $ 31,663,068 $ 13,430,624 $ 13,614,488 ____________ ____________ ____________ ____________
Available for Sale Held to Maturity ____________________ ____________________ Amortized Fair Amortized Fair Cost Value Cost Value
Note 4. Loans Receivable The major components of loans in the consolidated balance sheets at December 31, 1997 and 1996 are as follows (in thousands): Commercial $ 6,208 $ 6,219 Real estate: Construction and land development 4,888 5,610 Residential, 1-4 families 25,629 25,717 Residential, 5 or more families 1,785 1,519 Farmland 3,905 4,143 Nonfarm, nonresidential 30,795 30,970 Agricultural 1,815 1,766 Consumer 7,689 8,999 Other 4,383 1,898 ________ ________ 87,097 86,841 Unearned discount (44) (190) Unearned net loan origination costs, net of fees (296) (277) ________ ________ 86,757 86,374 Allowance for loan losses (1,452) (1,002) ________ ________ $ 85,305 $ 85,372 ________ ________
1997 1996 ____ ____
12 Notes to Consolidated Financial Statements ________________________________________________________________________________ Note 4. Loans Receivable, continued Nonperforming assets at December 31, 1997 and 1996 are detailed as follows: Nonaccrual loans $ 278,782 $ 139,161 Restructured loans - - Loans past due 90 days or more 312,332 215,000 __________ ___________ Total nonperforming loans 591,114 354,161 Foreclosed, repossessed and idled properties 210,709 838,130 __________ ___________ Total nonperforming assets $ 801,823 $ 1,192,291 __________ ___________
1997 1996 ____ ____
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: Nonaccrual loans: Interest income, original terms $ 27,239 $ 13,033 $ 31,687 ________ ________ ________ Interest income recognized $ 20,840 $ 3,212 $ - ________ ________ ________ Restructured loans: Interest income, original terms $ - $ - $ - ________ ________ ________ Interest income recognized $ - $ - $ - ________ ________ ________
1997 1996 1995 ____ ____ ____
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. Recorded investment at December 31 $1,467,636 $2,205,464 $1,794,000 __________ __________ __________ Allowance for loan losses $ 594,105 $ 271,538 $ 117,050 __________ __________ __________ Average recorded investment for the year $ 453,875 $1,674,412 $ 384,000 __________ __________ __________ Interest income recognized for the year $ 133,973 $ 147,742 $ 32,000 __________ __________ __________
1997 1996 1995 ____ ____ ____
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: Balance, beginning $1,002,455 $1,134,182 Provision charged to expense 500,000 325,000 Recoveries of amounts charged off 17,920 38,474 Amounts charged off (68,249) (495,201) __________ __________ Balance, ending $1,452,126 $1,002,455 __________ __________
1997 1996 ____ ____
13 Notes to Consolidated Financial Statements ________________________________________________________________________________ Note 6. Property and Equipment Components of property and equipment and total accumulated depreciation at December 31, 1997 and 1996, are as follows: Land $ 407,245 $ 407,245 Bank premises 1,719,754 1,678,505 Furniture and equipment 1,593,952 1,480,196 Construction in progress 162,337 - ___________ ___________ 3,883,288 3,565,946 Less accumulated depreciation (2,195,429) (2,005,364) ___________ ___________ $ 1,687,859 $ 1,560,582 ___________ ___________
1997 1996 ____ ____
Note 7. Debt Short-term Debt Short-term debt consists of short-term borrowings from Federal Home Loan Bank of Atlanta. Additional information for the years ended December 31, 1997 and 1996 is summarized below: Outstanding balance at December 31 $ - $ 400,000 _________ _________ Year-end weighted average rate - 6.89% _________ _________ Daily average outstanding during the year $ 63,561 $ 44,930 _________ _________ Average rate for the year 6.89% 5.46% _________ _________ Maximum outstanding at any month-end during the year $ 400,000 $ 400,000 _________ _________
1997 1996 ____ ____
The Bank has established various credit facilities to provide additional liquidity if and as needed. These include unsecured lines of credit with correspondent banks totaling $6,500,000 and a secured line of credit with the Federal Home Loan Bank of Atlanta of approximately $15,000,000. Additional amounts are available from the Federal Home Loan Bank, with additional collateral. Long-term Debt At December 31, 1996 the Company had long-term indebtedness to Federal Home Loan Bank of Atlanta in the amount of $2,400,000. This note bears interest, adjustable monthly, at the London Interbank Offered Rate plus seventeen basis points (5.8263% at December 31, 1996). This note was repaid on December 22, 1997. Note 8. Employee Benefit Plan The Bank has a qualified noncontributory, defined benefit pension plan which covers substantially all of its employees. The benefits are primarily based on years of service and earnings. The following is a summary of the plan's funded status as of December 31, 1997 and 1996. Plan assets at estimated fair value $ 1,156,480 $ 970,764 Projected benefit obligation, including the accumulated benefit obligation (1,167,829) (984,721) ___________ __________ (11,349) (13,957) Unrecognized net gain and prior service cost (207,294) (129,958) Unrecognized net asset at January 1, 1988 (48,341) (52,369) ___________ _________ Accrued pension cost included in other liabilities $ (266,984) $(196,284) ___________ _________ Actuarial present value of benefit obligations: Vested benefit obligation $ 668,524 $ 523,686 ___________ _________ Accumulated benefit obligation $ 687,636 $ 546,486 ___________ _________
1997 1996 ____ ____
14 Notes to Financial Statements ________________________________________________________________________________ Note 8. Employee Benefit Plan, continued The weighted average discount rate and rate of increase in compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.5% and 6.0% for all years presented. The weighted average expected long-term rate of return on assets was 9.0% for 1997, 1996 and 1995. Net pension cost includes the following components: Service cost $ 86,171 $ 79,707 $ 71,848 Interest cost on projected benefit obligation 73,837 71,032 61,179 Actual return on plan assets (194,215) (105,080) (140,943) Originating unrecognized asset gain 109,015 21,974 73,153 Amortization (4,108) (5,532) (3,203) ________ ________ ________ $ 70,700 $ 62,101 $ 62,034 ________ ________ ________
1997 1996 1995 ____ ____ ____
Note 9. Deferred Compensation and Life Insurance Deferred compensation plans have been adopted for certain members of the Board of Directors for future compensation upon retirement. Under plan provisions aggregate annual payments ranging from $1,568 to $8,482 are payable for ten years certain, generally beginning at age 65. Liability accrued for compensation deferred under the plan amounts to $117,410 and $117,362 at December 31, 1997 and 1996, respectively. Charges to income are based on present value of future cash payments, discounted at 8%, and amounted to $9,404, $9,310 and $4,024 for 1997, 1996 and 1995, respectively. The Bank is owner and beneficiary of life insurance policies on these directors. Policy cash values, net of policy loans, totaled $21,530 and $22,956 at December 31, 1997 and 1996, respectively. Note 10. Fair Value of Financial Instruments The estimated fair values of the Company's financial instruments are as follows (dollars in thousands): Financial Assets Cash and cash equivalents $ 1,941 $ 1,941 $ 2,750 $ 2,750 Interest-bearing deposits with banks 5,000 5,000 - - Federal funds sold 3,825 3,825 500 500 Securities, available-for-sale 31,663 31,663 30,338 30,338 Securities, held to maturity 13,431 13,614 13,383 13,362 Loans, net of allowance for loan losses 85,305 87,934 85,372 86,527 Financial Liabilities Deposits 128,189 128,845 118,424 118,076 Short-term debt - - 400 400 Long-term debt - - 2,400 1,841 Off-Balance-Sheet Assets (Liabilities) Commitments to extend credit and standby letters of credit - - - - Commercial letters of credit - - - -
December 31, 1997 December 31, 1996 __________________ __________________ Carrying Fair Carrying Fair Amount Value Amount Value ______ _____ ______ _____
15 Notes to Consolidated Financial Statements __________________________________________________________________________ Note 11. Income Taxes Current and Deferred Income Tax Components The components of income tax expense (substantially all Federal) are as follows: Current $866,320 $425,034 $575,972 Deferred (213,850) 168,713 (27,821) ________ ________ ________ $652,470 $593,747 $548,151 ________ ________ ________
1997 1996 1995 ____ ____ ____
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: Expected tax expense $852,092 $740,067 $660,869 Tax exempt interest (186,555) (178,641) (135,266) Other (13,067) 32,321 22,548 ________ ________ ________ $652,470 $593,747 $548,151 ________ ________ ________
1997 1996 1995 ____ ____ ____
Deferred Tax Analysis The components of net deferred tax assets (substantially all Federal) at December 31, 1997 and 1996 are summarized as follows: Deferred tax assets $653,399 $435,732 Deferred tax liabilities (185,515) (120,580) ________ ________ $467,884 $315,152 ________ ________
1997 1996 ____ ____
The tax effects of each significant item creating deferred taxes are summarized below: Net unrealized appreciation on securities available for sale $(109,826) $(48,708) Allowance for loan losses 324,499 154,499 Other valuation reserves 89,370 67,552 Deferred compensation and accrued pension costs 130,694 106,640 Depreciation (37,718) (43,358) Accretion of discount on investment securities (37,971) (28,514) Deferred loan fees 108,836 107,041 _________ ________ $ 467,884 $315,152 _________ ________
1997 1996 ____ ____
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. 16 Notes to Consolidated Financial Statements ________________________________________________________________________________ Note 12. Commitments and Contingencies, continued Financial Instruments with Off-Balance-Sheet Risk The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the consolidated balance sheets. The Bank's exposure to loan loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Bank's commitments at December 31, 1997 and 1996, is as follows: Commitments to extend credit $7,348,000 $5,428,210 Standby letters of credit 307,000 197,100 __________ __________ $7,655,000 $5,625,310 __________ __________
1997 1996 ____ ____
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies, but may include accounts receivable, crops, livestock, inventory, property and equipment, residential real estate and income producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Bank deems necessary. Concentrations of Credit Risk The majority of the Company's loans, commitments to extend credit, and standby letters of credit have been granted to customers in the Company's market area. The majority of such customers are depositors of the Bank. Investments in state and municipal securities involve governmental entities within and outside the Company's market area. The concentrations of credit by type of loan are set forth in Note 4. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit are granted primarily to commercial borrowers. The Company, as a matter of policy, does not extend credit to any single borrower or group of related borrowers in excess of approximately $1,750,000. Although the Bank has a reasonably diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon economic conditions in and around Floyd, Montgomery and Roanoke Counties and the City of Roanoke, Virginia. A significant amount of the real estate loans set forth in Note 4 are secured by commercial real estate. In addition, the Company has a loan concentration relating to customers who are motel and bed-and-breakfast owners and operators. Total loans and loan commitments to this industrial group amounted to approximately $6,439,303 and $5,575,261 at December 31, 1997 and 1996, respectively. The Company has cash and cash equivalents on deposit with financial institutions which exceed federally-insured limits. Leases During 1997 the bank leased a building used as a branch location under an operating lease. Rent expense in 1997 was $1,125. Future minimum lease payments are $1,500 in 1998 and 1999, and $375 in 2000. 17 Notes to Consolidated Financial Statements ________________________________________________________________________________ Note 13. Regulatory Restrictions Dividends The Company's dividend payments are made from dividends received from the Bank. The Bank, as a Virginia banking corporation, may pay dividends only out of its retained earnings. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the Bank. Intercompany Transactions The Bank's legal lending limit on loans to the Company are governed by Federal Reserve Act 23A, and differ from legal lending limits on loans to external customers. Generally, a bank may lend up to 10% of its capital and surplus to its Parent, if the loan is secured. If collateral is in the form of stocks, bonds, debentures or similar obligations, it must have a market value when the loan is made of at least 20% more than the amount of the loan, and if obligations of a state or political subdivision or agency thereof, it must have a market value of at least 10% more than the amount of the loan. If such loans are secured by obligations of the United States or agencies thereof, or by notes, drafts, bills of exchange or bankers' acceptances eligible for rediscount or purchase by a Federal Reserve Bank, requirements for collateral in excess of the loan amount do not apply. Under this definition, the legal lending limit for the Bank on loans to the Company was approximately $1,215,000 at December 31, 1997. No 23A transactions were deemed to exist between the Company and the Bank at December 31, 1997. Capital Requirements The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as all those terms are defined in the regulations. Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the Federal Reserve categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. 18 Notes to Consolidated Financial Statements ________________________________________________________________________________ Note 13. Regulatory Restrictions, continued Capital Requirements, continued The Bank's actual capital amounts and ratios are also presented in the table (in thousands). December 31, 1997: Total Capital (to Risk-Weighted Assets)$ 13,084 14.3% >$ 7,315 >8.0% >$ 9,144 >10.0% Tier I Capital - - - - (to Risk-Weighted Assets)$ 11,938 13.0% >$ 3,658 >4.0% >$ 5,487 > 6.0% Tier I Capital - - - - (to Average Assets) $ 11,938 8.2% >$ 5,777 >4.0% >$ 7,221 > 5.0% - - - - December 31, 1996: Total Capital (to Risk-Weighted Assets)$ 12,200 14.3% >$ 6,814 >8.0% >$ 8,518 >10.0% Tier I Capital - - - - (to Risk-Weighted Assets)$ 11,198 13.1% >$ 3,407 >4.0% >$ 5,111 > 6.0% Tier I Capital - - - - (to Average Assets) $ 11,198 8.5% >$ 5,243 >4.0% >$ 6,554 > 5.0% - - -
To Be Well Required Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions _________________ _________________ __________________ Amount Ratio Amount Ratio Amount Ratio ______ _____ ______ _____ ______ _____
Note 14. Transactions with Related Parties The Bank has entered into transactions with its directors, significant shareholders and their affiliates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. Aggregate 1997 and 1996 loan transactions with related parties were as follows: Balance, beginning $ 900,464 $ 672,581 New loans 575,194 1,296,282 Repayments (548,853) (1,068,399) ___________ ___________ Balance, ending $ 926,805 $ 900,464 ___________ ___________
1997 1996 ____ ____
19 Notes to Consolidated Financial Statements ________________________________________________________________________________ Note 15. Parent Company Financial Information Condensed financial information of Cardinal Bankshares Corporation is presented as follows: Balance Sheets December 31, 1997 and 1996 Assets Cash due from banks $ 1,996,076 $ 820,309 Loans, net of allowance for loan losses of $25,000 in 1997 and 1996 1,797,087 2,367,511 Investment in affiliate bank at equity 12,150,482 11,292,544 Other assets 48,174 56,199 ___________ ___________ $15,991,819 $14,536,563 ___________ ___________ Liabilities Accounts payable and other liabilities $ 7,668 $ 1,644 ___________ ___________ Shareholders' equity Common stock 5,119,110 4,655,360 Surplus 2,925,150 1,200,000 Retained earnings 7,727,506 8,585,007 Unrealized appreciation on affiliate's investment securities available for sale, net of income taxes 212,385 94,552 ___________ ___________ 15,984,151 14,534,919 ___________ ___________ $15,991,819 $14,536,563 ___________ ___________
1997 1996 ____ ____
Statements of Income For the year ended December 31, 1997 and the six months ended December 31, 1996 Income Dividends from affiliate bank $ 1,100,000 $ 3,750,000 Interest and fees on loans 207,432 17,512 ___________ ___________ 1,307,432 3,767,512 ___________ ___________ Expenses Salaries 27,166 - Management and professional fees 132,588 30,794 Other expenses 25,791 30,452 ___________ ___________ 185,545 61,246 ___________ ___________ Income before tax benefit and equity in undistributed income of affiliate 1,121,887 3,706,266 Income tax (expense) benefit (8,308) 15,611 ___________ ___________ Income before equity in undistributed income of affiliate 1,113,579 3,721,877 Equity in undistributed income of affiliate 740,105 (2,914,620) ___________ ___________ Net income $ 1,853,684 $ 807,257 ___________ ___________
1997 1996 ____ ____
20 Notes to Consolidated Financial Statements ________________________________________________________________________________ Note 15. Parent Company Financial Information, continued Statements of Cash Flows For the year ended December 31, 1997 and the six months ended December 31, 1996 Cash flows from operating activities Net income $ 1,853,684 $ 807,257 Adjustments to reconcile net income to net cash provided by operating activities: Amortization 5,929 2,564 Provision for loan losses - 25,000 Increase (decrease) in equity in undistributed income of affiliate (740,105) 2,914,620 Deferred income taxes - (8,500) Net change in other assets 2,096 (50,263) Net change in other liabilities 6,024 1,644 ___________ ___________ Net cash provided by operating activities 1,127,628 3,692,322 ___________ ___________ Cash flows from investing activities, net (increase) decrease in loans 570,424 (2,392,511) ___________ ___________ Cash flows from financing activities Dividends paid (513,855) (479,502) Redemption of fractional shares (8,430) - ___________ ___________ Net cash used by financing activities (522,285) (479,502) ___________ ___________ Net increase in cash and cash equivalents 1,175,767 820,309 ___________ ___________ Cash and cash equivalents, beginning 820,309 - ___________ ___________ Cash and cash equivalents, ending $ 1,996,076 $ 820,309 ___________ ___________
1997 1996 ____ ____
21 TITLE PAGE TO MD&A 22 ________________________________________________________________________________ Management's Discussion and Analysis of Operations ________________________________________________________________________________ Overview Management's Discussion and Analysis is provided to assist in the understanding and evaluation of Cardinal Bankshares Corporation's financial condition and its results of operations. The following discussion should be read in conjunction with the Corporation's consolidated financial statements. Cardinal Bankshares Corporation, the parent company of The Bank of Floyd, currently operates three offices in Floyd and Roanoke Counties of Virginia. The main office is in Floyd with a limited service office in Willis. The Roanoke office is in the Cave Spring area of Roanoke County. Management anticipates completing construction of a fourth office in the Spring of 1998. The fourth office will be located in Carroll County on Route 52 in Hillsville, VA. The individual market conditions of each county vary from rural to urban with Floyd County being the most rural and Roanoke the most urban. Each have their own growth patterns which vary in intensity but share the same quality of strength in their local economies. The earnings position of the Bank continues to improve. Cardinal Bankshares Corporation experienced record net earnings for 1997, $1,853,684 compared to $1,582,920 for 1996 and $1,395,580 in 1995. Return on average assets was 1.3% compared to 1.2% for 1996 and 1.1% for 1995. Ending equity to assets shows the Bank with a strong capital position with a ratio of 10.9%. The total assets of Cardinal Bankshares Corporation grew to $145,072,317 from $136,421,721, a 6.34% increase, continuing our strategy to grow the company while increasing asset quality. Foreclosed and in-substance foreclosed properties were reduced by 74.9% to a balance of $210,709 at year end. Management continues to look at increasing market share by expanding to contiguous markets as it becomes feasible, with capital generated through normal earnings supporting growth of the Company. Management of Cardinal Bankshares Corporation has no plans to raise new capital from external sources to finance expansion activities in the foreseeable future. 23 Management's Discussion and Analysis ________________________________________________________________________________ Table 1. Net Interest Income and Average Balances (thousands) Interest earning assets: Deposit in other banks $ 652 $ 37 5.67% $ - $ - -% $ - $ - -% Taxable investment securities 31,364 2,158 6.88% 32,540 2,177 6.69% 30,331 2,087 6.88% Nontaxable investment securities 10,183 490 4.81% 8,660 470 5.43% 6,494 337 5.19% Federal funds sold 5,743 315 5.48% 3,187 169 5.30% 5,475 324 5.92% Loans, net 86,528 8,078 9.34% 80,721 7,473 9.26% 78,673 7,255 9.22% _______ ______ ____ _______ ______ ____ _______ _______ ____ Total interest- earning assets 134,470 11,078 125,108 10,289 120,973 10,003 _______ ______ _______ ______ _______ _______ Yield on average interest- earning assets 8.24% 8.22% 8.27% ____ ____ ____ Noninterest-earning assets: Cash and due from banks 1,942 1,912 1,998 Premises and equipment 1,593 1,572 1,487 Interest receivable and other 3,524 2,668 3,513 _______ _______ _______ Total noninterest- earning assets 7,059 6,152 6,998 _______ _______ _______ Total assets $141,529 $131,260 $127,971 _______ _______ _______ Interest-bearing liabilities: Demand deposits $ 8,766 $ 253 2.89% $ 8,263 $ 208 2.52% $ 8,456 $ 228 2.70% Savings deposits 18,096 582 3.22% 18,530 588 3.17% 20,921 642 3.07% Time deposits 83,002 4,703 5.67% 78,630 4,493 5.71% 74,115 4,190 5.65% Other borrowings 2,485 143 5.75% 306 18 5.88% - - -% _______ ______ ____ _______ ______ ____ _______ _______ ____ Total interest- bearing liabilities 112,349 5,681 105,729 5,307 103,492 5,060 _______ ______ _______ ______ _______ _______ Cost on average interest- bearing liabilities 5.06% 5.02% 4.89% ____ ____ ____ Noninterest-bearing liabilities: Demand deposits 12,863 11,043 10,523 Interest payable and other 908 831 942 _______ _______ _______ Total noninterest -bearing liabilities 13,771 11,874 11,465 _______ _______ _______ Total liabilities 126,120 117,603 114,957 _______ _______ _______ Stockholders' equity 15,409 13,657 13,014 _______ _______ _______ Total liabilities and stock- holders' equity $141,529 $131,260 $127,971 _______ _______ _______ Net interest income $ 5,397 $ 4,982 $ 4,943 ______ ______ _______ Net yield on interest-earning assets 4.01% 3.98% 4.09% ____ ____ ____
1997 1996 1995 ____________________ ____________________ ____________________ Interest Interest Interest Average Income Yield Average Income Yield Average Income Yield Balance Expense Cost Balance Expense Cost Balance Expense Cost _______ _______ ____ _______ _______ ____ _______ _______ ____
24 Management's Discussion and Analysis ________________________________________________________________________________ Table 2. Rate/Volume Variance Analysis (thousands) Interest-earning assets: Deposits in other banks $ 37 $ - $ 37 $ - $ - $ - Taxable investment securities (19) 60 (79) 90 (58) 148 Nontaxable investment securities 20 (63) 83 133 17 116 Federal funds sold 146 11 135 (155) (31) (124) Loans 605 68 537 218 31 187 ______ ______ ______ ______ ______ ______ Total 789 76 713 286 (41) 327 ______ ______ ______ ______ ______ ______ Interest-bearing liabilities: Demand deposits 45 32 13 (20) (15) (5) Savings deposits (6) 8 (14) (54) 21 (75) Time deposits 210 (33) 243 303 45 258 Other borrowings 125 - 125 18 - 18 ______ ______ ______ ______ ______ ______ Total 374 7 367 247 51 196 ______ ______ ______ ______ ______ ______ Net interest income $ 415 $ 69 $ 346 $ 39 $ (92) $ 131 ______ ______ ______ ______ ______ ______
1997 Compared to 1996 1996 Compared to 1995 ______________________ ______________________ Interest Variance Interest Variance Income/ Attributable Income/ Attributable Expense To Expense To Variance Rate Volume Variance Rate Volume ________ ____ ______ ________ ____ ______
Net Interest Income Net interest income, the principal source of bank earnings, is the amount of income generated by earning assets (primarily loans and investment securities) less the interest expense incurred on interest-bearing liabilities (primarily deposits used to fund earning assets). Table 1 summarizes the major components of net interest income for the past three years and also provides yields and average balances. Net interest income in 1997 increased by 8.43% to $5.40 million from $4.98 million in 1996 and $4.94 million in 1995. The increase in net interest income realized in 1997 was the result of an increase in the volume of net average earning assets and a 3 basis point increase in net interest margin. Competition for deposits and loans continue to be a major factor in net margins. The net interest margin for 1997 was 4.01% compared to 3.98% for 1996 and 4.09% for 1995. Net interest income in 1996 increased by $39,000, or .81%, over 1995. The increase in net interest income realized in 1996 was the result of an increase in net average earning assets which was also offset by an 11 basis point decrease in net interest margin. The effects of changes in volumes and rates on net interest income in 1997 compared to 1996, and 1996 compared to 1995 are shown in Table 2. Interest income for 1997 increased $.8 million to $11.1 million from $10.3 million in 1996. Interest income in 1995 totaled $10.0 million. The increase in interest income from 1996 to 1997 was the result of an increase in the volume of average earning assets and a 2 basis point increase in yield. The increase in interest income from 1995 to 1996 was the result of an increase in the volume of average earning assets which was offset by a 5 basis point decrease in yield. 25 Management's Discussion and Analysis ________________________________________________________________________________ Interest expense increased by $374,000 in 1997 to $5.7 million from $5.3 million in 1996 and $5.1 million in 1995. The increase from 1996 to 1997 was due to an increase in average interest bearing liabilities of $6.6 million to $112.4 million in 1997 at an increased rate of 5.06%, or 4 basis points higher than 1996. Interest expense increased by $247,000 from 1995 to 1996. The increase was due to the average interest bearing liabilities increasing by $2.2 million while the average rate paid on interest bearing liabilities increased by 13 basis points. Interest paid on time deposits, which make up the largest portion of interest- bearing deposits, increased $210,000, or 4.67% from 1996 to 1997. The average rate paid on time deposits decreased 4 basis points to 5.67% in 1997 from 5.71% in 1996 and 5.65% in 1995. Provision for Loan Losses The allowance for loan losses is established to provide for potential losses in the Bank's loan portfolio. Loan losses and recoveries are charged or credited directly to the allowance. Management determines the provision for loan losses required to maintain an allowance adequate to provide for any potential losses. The factors considered in making this decision are the collectibility of past due loans, volume of new loans, composition of the loan portfolio, and general economic outlook. In 1997, management increased the provision for loan loss reserve from $325,000 in 1996 to $500,000 in 1997. The provision for loan losses was $135,958 in 1995. The Bank's allowance for loan losses as a percentage of total loans at the end of 1997 was 1.67% as compared to 1.16% in 1996 and 1.42% in 1995. Additional information is contained in Tables 12, 13 and 14, and is discussed in Nonperforming and Problem Assets. Other Income Noninterest income consists of revenues generated from a broad range of financial services and activities. The majority of noninterest income is a result of service charges on deposit accounts including charges for insufficient funds checks and fees charged for nondeposit services. Noninterest income totaled $543,000 in 1997, an increase of 58.3% over the $343,000 recorded in 1996. Noninterest income in 1995 totaled $225,000. The majority of the increase in noninterest income from 1996 to 1997 is explained by a $233,000 gain on the sale of other real owned. Service charges on deposit accounts increased $30,000 during 1997 due to a $24,000 increase in returned check fees resulting from a $2 per item increase in returned check fees implemented during December 1996. The $34,000 increase in insurance commissions is due to an increase in dividends from title insurance sales by the Bank of Floyd's subsidiary. The primary sources of noninterest income for the past three years are summarized in Table 3. 26 Management's Discussion and Analysis ________________________________________________________________________________ Table 3. Sources of Noninterest Income (thousands) Service charges on deposit accounts $ 144 $ 114 $ 121 Other service charges and fees 36 27 13 Insurance commissions 46 12 12 Gain on the sale of securities 7 6 5 Gain on sale of other real estate owned 233 - - Other income 77 184 74 _______ _______ _______ Total noninterest income $ 543 $ 343 $ 225 _______ _______ _______
1997 1996 1995 ____ ____ ____
Other noninterest income was down $107,000 in 1997 to $77,000 from $184,000 in 1996 and $74,000 in 1995. Noninterest income includes fees charged for various bank services such as safe deposit box rental fees, letters of credit fees, and gains realized on the sale of fixed assets. Other Expense Noninterest expense for 1997 increased by $109,000 or 3.9% to $2.9 million. Noninterest expense in 1996 was $2.8 million and it was $3.1 million in 1995 (see Table 4). The overhead ratio of noninterest expense to adjusted total revenues (net interest income plus noninterest income excluding securities transactions) was 50.8% in 1997, 53.1% in 1996 and 59.8% in 1995. Furniture and equipment expense increased $43,000 or 18.7% to $273,000 in 1997 from $230,000 in 1996. This increase is due to increased depreciation expense due to the addition of the Willis Branch, the purchase of a new bank automobile and software purchases. In addition, ATM expenses were realized for a full year versus approximately four months in 1996. The bank also experienced an increase in equipment maintenance and repair expenses. 27 Management's Discussion and Analysis ________________________________________________________________________________ Table 4. Sources of Noninterest Expense (thousands) Salaries & wages $ 1,298 $ 1,242 $ 1,154 Employee benefits 463 512 422 _________ _________ _________ Total personnel expense 1,761 1,754 1,576 Occupancy expense 116 122 104 Furniture & equipment 273 230 183 Printing & supplies 44 54 64 FDIC deposit insurance 14 2 126 Professional services 120 177 176 Postage 72 69 62 Telephone 40 33 25 Courier fees 21 21 20 Education & seminars 20 13 17 Travel expense 21 27 25 Director fees and expense 38 40 31 Advertising and public relations 31 38 42 Insurance expense 36 37 33 Capital Stock Tax 77 98 100 Outside services 26 - 7 Other real estate expense, net 46 35 389 Real estate loan servicing fee 12 16 20 Other operating expense 165 58 89 _________ _________ _________ Total noninterest expense $ 2,933 $ 2,824 $ 3,089 _________ _________ _________
1997 1996 1995 ____ ____ ____
Other real estate expense increased $11,000 or 31.4% to $46,000 in 1997 from $35,000 in 1996. This increase is the result of increased reserves on various other real estate parcels. During 1997 management disposed of a number of properties reducing the net other real estate owned balance by $627,439 or 74.9% from $838,148 as of December 31, 1996 to $210,709 as of December 31, 1997. The sale of this property reduces the amount of nonperforming assets and also increases the amount of earning assets available to the bank. The 1995 other real estate expense balance of $389,000 was high due to the sale of one piece of property with a loss of approximately $298,000. Professional services expense, fees paid to attorneys, independent auditors, and state examiners decreased $57,000 or 32.2% to $120,000 in 1997 from $177,000 in 1996. This decrease is primarily the result of a $51,000 decrease in legal fees due to a decline in the number of foreclosures, a decrease in other real estate owned and a number of settled bankruptcies. Professional services expense totaled $176,000 in 1995. Capital stock tax expense decreased $21,000 from $98,000 in 1996 to $77,000 in 1997 representing a 21.4% decline. This decline is the result of a lower taxable capital base at the bank level due to dividends to the holding company. 28 Management's Discussion and Analysis ________________________________________________________________________________ Deposit insurance premiums paid to the Federal Deposit Insurance Corporation (FDIC) increased to $14,000 in 1997 from a low of $2,000 in 1996. The premium increases were due to the Financing Corporation (FICO) debt service assessments which went into effect on January 1, 1997. The FICO assessment is the result of the Deposit Insurance Funds Act of 1996 which requires that the Bank Insurance Fund (BIF) rate equal one-fifth the Savings Association Insurance Fund (SAIF) rate through year-end 1999, or until the insurance funds are merged, whichever occurs first. The increase occurring during 1997 in the remaining categories of noninterest expense were primarily attributable to the higher level of activity associated with the growth in deposits. Table 4 provides a further breakdown of noninterest expense for the past three years. Income Taxes Income tax expense is based on amounts reported in the statements of income (after adjustments for non-taxable income and non-deductible expenses) and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. The deferred tax assets and liabilities represent the future Federal income tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Income tax expense (substantially all Federal) was $652,000 in 1997, $594,000 in 1996 and $548,000 for 1995 representing 26.0%, 27.3% and 28.2% of income before income taxes, respectively. The Bank's deferred income tax benefits and liabilities result primarily from temporary differences (discussed above) in provisions for credit losses, valuation reserves, depreciation, deferred compensation, deferred income, pension expense, and investment security discount accretion. Net deferred income tax benefits of $468,000, $315,000 and $381,000 at December 31, 1997, 1996, and 1995, respectively, are included in other assets. At December 31, 1997, $110,000 of the total deferred tax liability is applicable to unrealized appreciation on investment securities available for sale. Accordingly, this amount was not charged to income but recorded directly to the related stockholders' equity account. 29 Management's Discussion and Analysis ________________________________________________________________________________ Management's Discussion and Analysis of Financial Condition Earning Assets Average earning assets increased 7.5% over the past twelve months. Total earning assets represented 95.0% of total average assets in 1997 compared to 95.3% in 1996. The mix of average earning assets changed slightly in 1997 with an increase in the mix of federal funds sold and a decrease in the mix of investment securities. Average federal funds sold accounted for 4.1% of total average assets compared to 2.4% in 1996. Average investment securities accounted for 29.4% of total average assets in 1997 compared to 31.4% in 1996. Average loans accounted for 61.1% of total average assets in 1997 compared to 61.5% in 1996. For 1995, average net loans represented 61.5% of average assets and average investment securities represented 28.9% of average assets. A summary of average assets for the past three years is shown in Table 5. Table 5. Average Asset Mix (thousands) Earning assets: Loans, net $ 86,528 61.14 $ 80,721 61.50 $ 78,673 61.47 Investment securities 41,547 29.36 41,200 31.39 36,825 28.78 Federal funds sold 5,743 4.06 3,187 2.42 5,475 4.28 Interest-bearing bank balances 652 0.45 - - - - ________ ______ ________ ______ ________ ______ Total earning assets 134,470 95.01 125,108 95.31 120,973 94.53 ________ ______ ________ ______ ________ ______ Nonearning assets: Cash and due from banks 1,942 1.37 1,912 1.46 1,998 1.56 Premises and equipment 1,593 1.13 1,572 1.20 1,487 1.16 Other assets 3,524 2.49 2,668 2.03 3,513 2.75 ________ ______ ________ ______ ________ ______ Total nonearning assets 7,059 4.99 6,152 4.69 6,998 5.47 ________ ______ ________ ______ ________ ______ Total assets $141,529 100.00 $131,260 100.00 $127,971 100.00 ________ ______ ________ ______ ________ ______
1997 1996 1995 _______________ _______________ _______________ Average Average Average Balance % Balance % Balance % ________ ______ ________ ______ ________ ______
Loans Average net loans totaled $86.5 million during 1997 an increase of $6 million or 7.2% more than 1996. The increase in average loans outstanding during the past year is due to increased demand. A significant portion of the loan portfolio, $67.0 million or 76.9%, is made up of loans secured by various types of real estate. Total loans secured by 1-4 family residential properties represented 29.4% of total loans at the end of 1997. The loans represented in the other loan classification in Table 6 increased by 130.9% during 1997 to a total of $4.4 million, or 5.0% of total loans outstanding compared to a total of $1.9 million at the end of 1996. The growth in the other loan classification is primarily the result of an increase in commercial loans to leasing companies. 30 Management's Discussion and Analysis ________________________________________________________________________________ The Bank makes both consumer and commercial loans to all neighborhoods within its market area, including the low- and moderate-income areas. The market area is generally defined to be all or portions of the Floyd, Roanoke, Montgomery and Carroll Counties of Virginia and the Cities of Roanoke and Radford, Virginia. The Bank places emphasis on consumer based installment loans and commercial loans to small and medium sized businesses. The local economy remains stable with a lower unemployment level. The Bank can expect to experience profitable growth in the loan portfolio during 1997. The amounts of loans outstanding by type at year-end 1997 and 1996, and the maturity distribution of variable and fixed rate loans as of year-end 1997 are presented in Table 6 and Table 7, respectively. Table 6. Loan Portfolio Summary (thousands) Construction and development $ 4,888 5.61 $ 5,610 6.46 Farmland 3,905 4.48 4,143 4.77 1-4 family residential 25,629 29.43 25,717 29.62 Multifamily residential 1,785 2.05 1,519 1.75 Nonfarm, nonresidential 30,795 35.36 30,970 35.66 ________ ______ ________ ______ Total real estate 67,002 76.93 67,959 78.26 Agricultural 1,815 2.08 1,766 2.03 Commercial & industrial 6,208 7.13 6,219 7.16 Consumer 7,689 8.83 8,999 10.36 Other 4,383 5.03 1,898 2.19 ________ ______ ________ ______ Total $ 87,097 100.00 $ 86,841 100.00 ________ ______ ________ ______
December 31, 1997 December 31, 1996 _________________ _________________ Amount % Amount % ________ ____ ________ ____
Interest rates charged on loans vary with the degree of risk, maturity and amount of the loan. Competitive pressures, money market rates, availability of funds, and government regulation also influence interest rates. On average, loans yielded 9.34% in 1997 compared to an average yield of 9.26% in 1996. 31 Management's Discussion and Analysis ________________________________________________________________________________ Table 7. Maturity Schedule of Loans (thousands) Fixed rate loans: Three months or less $ 1,213 $ - $ 1,301 $ 2,514 2.89 Over three months to twelve months 1,156 138 2,633 3,927 4.51 Over twelve months to three years 2,342 - 5,233 7,575 8.70 Over three years to five years 2,037 - 7,091 9,128 10.48 Over five years to fifteen years 2,840 - 3,366 6,206 7.13 Over fifteen years 443 - 2,462 2,905 3.32 ________ ________ ________ ________ ______ Total fixed rate loans $ 10,031 $ 138 $ 22,086 $ 32,255 37.03 ________ ________ ________ ________ ______ Variable rate loans: Three months or less $ 8,544 $ 1,762 $ 4,361 $ 14,667 16.84 Over three months to twelve months 6,422 1,068 6,200 13,690 15.72 Over twelve months to three years 13,841 1,780 7,797 23,418 26.89 Over three years to five years 1,888 140 801 2,829 3.25 Over five years to fifteen years 238 - - 238 0.27 Over fifteen years - - - - - ________ ________ ________ ________ ______ Total variable rate loans $ 30,933 $ 4,750 $ 19,159 $ 54,842 62.97 ________ ________ ________ ________ ______ Total loans: Three months or less $ 9,757 $ 1,762 $ 5,662 $ 17,181 19.73 Over three months to twelve months 7,578 1,206 8,833 17,617 20.23 Over twelve months to three years 16,183 1,780 13,030 30,993 35.59 Over three years to five years 3,925 140 7,892 11,957 13.73 Over five years to fifteen years 3,078 - 3,366 6,444 7.40 Over fifteen years 443 - 2,462 2,905 3.32 ________ ________ ________ ________ ______ Total loans $ 40,964 $ 4,888 $ 41,245 $ 87,097 100.00 ________ ________ ________ ________ ______
Construc- Commercial tion & Total Financial & Develop- ________________ Agriculture ment Others Amount % ___________ ________ ________ ________ _____
Investment Securities The Bank uses its investment portfolio to provide liquidity for unexpected deposit decreases or loan generation, to meet the Bank's interest rate sensitivity goals, and to generate income. Management of the investment portfolio has always been conservative with virtually all investments taking the form of purchases of U.S. Treasury, U.S. Government agencies, Mortgage Backed Securities and State and local bond issues. Management views the investment portfolio as a source of income, and purchases securities with the intent of retaining them until maturity. However, adjustments are necessary in the portfolio to provide an adequate source of liquidity which can be used to meet funding requirements for loan demand and deposit fluctuations and to control interest rate risk. Therefore, from time to time, management may sell certain securities prior to their maturity. Table 8 presents the investment portfolio at the end of 1997 by major types of investments and maturity ranges. Maturities may differ from scheduled maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid prior to 32 Management's Discussion and Analysis ________________________________________________________________________________ the scheduled maturity date. Maturities on all other securities are based on the earlier of the contractual maturity or the call date, if any. The interest rate environment in 1997 caused the average yield of the investment portfolio to decrease to 6.30% from 6.60% in 1996. At December 31, 1997, the market value of the investment portfolio was $45.3 million, representing a $507,000 appreciation over amortized cost. This compared to a market value of $43.5 million and a $121,000 appreciation over amortized cost a year earlier. Table 8. Investment Securities (thousands) December 31, 1997 Investment securities: U.S. Government agencies and Mortgage Backed Securities $12,439 $11,340 $3,090 $4,076 - $30,945 $31,178 State and political subs. 1,240 5,056 5,431 - - 11,727 11,916 Other - 1,489 - - - 1,489 1,574 Restricted Equity Securities - - - - 610 610 610 _______ _______ ______ ______ ____ _______ _______ Total $13,679 $17,885 $8,521 $4,076 $610 $44,771 $45,278 _______ _______ ______ ______ ____ _______ _______ Weighted average yields: U.S. Government agencies and Mortgage Backed Securities 6.59% 6.62% 6.84% 7.08% - States and political subs. 4.88% 4.76% 4.86% - - Other - 9.64% - - - Restricted Equity Securities - - - - 6.89% Consolidated 6.43% 6.35% 5.57% 7.08% 6.89% 6.30%
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: U.S. Treasury and Government agencies $ 979 $ 979 U.S. Government agencies (Mortgage Backed Securities) 29,739 29,760 States and political subdivisions 10,610 10,594 Other 2,075 2,191 _______ _______ Total $43,403 $43,524 _______ _______
Book Market December 31, 1996 Value Value _____ _____
Average federal funds sold totaled $5.7 million in 1997 which represented an 80.2% increase from the $3.2 million in 1996. Federal funds represent the most liquid portion of the Bank's invested funds and generally the lowest yielding portion of earning assets. Management has made an effort to maintain these funds at the lowest level possible consistent with prudent interest rate risk management strategies. During 1997, average federal funds represented 4.1% of average earning assets, up from the 2.4% during 1996 (See Table 5). 33 Management's Discussion and Analysis ________________________________________________________________________________ Deposits The Bank relies on deposits generated in its market area to provide the majority of funds needed to support lending activities and for investments in liquid assets. More specifically, core deposits (total deposits less certificates of deposits in denominations of $100,000 or more) are the primary funding source. The Bank's balance sheet growth is largely determined by the availability of deposits in its markets, the cost of attracting the deposits, and the prospects of profitably utilizing the available deposits by increasing the loan or investment portfolios. Market conditions have resulted in depositors shopping for deposit rates more than in the past. An increased customer awareness of interest rates adds to the importance of rate management. The Bank's management must continuously monitor market pricing, competitor's rates, and internal interest rate spreads to maintain the Bank's growth and profitability. The Bank attempts to structure rates so as to promote deposit and asset growth while at the same time increasing overall profitability of the Bank. Average total deposits for the year ended December 31, 1997 amounted to $122.7 million which was an increase of $6.3 million, or 5.4% over 1996. Average core deposits totaled $97.8 million in 1997 representing a slight increase over the $95.7 million in 1996. The percentage of the Bank's average deposits that are interest-bearing decreased to 89.5% in 1997 from 90.5% in 1996. Average demand deposits which earn no interest increased to $12.9 million in 1997 from $11.0 million in 1996 and $10.5 million in 1995. Average deposits for the past three years are summarized in Table 9. Table 9. Deposit Mix (thousands) Interest-bearing deposits: NOW accounts $ 8,766 7.14 $ 8,263 7.10 $ 8,456 7.42 Money Market 3,228 2.63 3,417 2.93 4,061 3.56 Savings 14,868 12.12 15,113 12.98 16,860 14.79 Small denomination certificates 70,924 57.79 68,943 59.20 66,790 58.58 Large denomination certificates 12,078 9.84 9,687 8.32 7,325 6.42 ________ ______ ________ ______ _______ ______ Total interest- bearing deposits 109,864 89.52 105,423 90.53 103,492 90.77 Noninteresting-bearing deposits 12,863 10.48 11,043 9.47 10,523 9.23 ________ ______ ________ ______ ________ ______ Total deposits $122,727 100.00 $116,466 100.00 $114,015 100.00 ________ ______ ________ ______ ________ ______
1997 1996 1995 ______________ ______________ _______________ Average Average Average Balance % Balance % Balance % ________ _____ ________ _____ ________ _____
The average balance of certificates of deposit issued in denominations of $100,000 or more increased by $2.4 million or 24.7%, in 1997. The strategy of management has been to support loan and investment growth with core deposits and not to aggressively solicit the more volatile, large denomination certificates of deposit. Table 10 provides maturity information relating to Certificate of Deposits of $100,000 or more at December 31, 1997. 34 Management's Discussion and Analysis ________________________________________________________________________________ Table 10. Large time deposit maturities (thousands) Analysis of time deposits of $100,000 or more at December 31, 1997: Remaining maturity of three months or less $ 721 Remaining maturity over three through twelve months 8,959 Remaining maturity over twelve months 5,441 _________ Total time deposits of $100,000 or more $ 15,121
_________ Capital Adequacy Shareholder's equity amounted to $16.0 million at December 31, 1997, a 10.0% increase over the 1996 year-end total of $14.5 million. The increase was primarily a result of earnings and a $117,833 increase in the value of securities that are classified as available for sale. Average shareholders' equity as a percentage of average total assets amounted to 10.9% in 1997 and 10.4% in 1996. Regulatory guidelines relating to capital adequacy provide minimum risk-based ratios which assess capital adequacy while encompassing all credit risks, including those related to off- balance sheet activities. Capital ratios under these guidelines are computed by weighing the relative risk of each asset category to derive risk-adjusted assets. The risk-based capital guidelines require minimum ratios of core (Tier 1) capital (common shareholders' equity ) to risk-weighted assets of 4.0% and total regulatory capital (core capital plus allowance for loan losses up to 1.25% of risk-weighted assets) to risk-weighted assets of 8%. As of December 31, 1997 the Bank has a ratio of Tier 1 capital to risk-weighted assets of 13.0% and a ratio of total capital to risk-weighted assets of 14.3%. 35 Management's Discussion and Analysis ________________________________________________________________________________ Table 11. Year-end Risk-Based capital (thousands) Tier I capital $ 11,938 Qualifying allowance for loan losses (limited to 1.25% of risk-weighted assets) 1,146 _________ Total regulatory capital $ 13,084 _________ Total risk-weighted assets $ 91,680 _________ Tier I as a percent of risk-weighted assets 13.0% Total regulatory capital as a percent of risk- weighted assets 14.3% Leverage Ratio 8.2% _________________________ Tier I capital divided by average total assets for the quarter ended December 31, 1997.
1997 ____
In addition, a minimum leverage ratio of Tier I capital to average total assets for the previous quarter is required by federal bank regulators, ranging from 3% to 5%, subject to the regulator's evaluation of the Bank's overall safety and soundness. As of December 31, 1997, the Bank had a ratio of year-end Tier I capital to average total assets for the fourth quarter of 1997 of 8.2%. Table 11 sets forth summary information with respect to the Bank's capital ratios at December 31, 1997. All capital ratio levels indicate that the Bank is well capitalized. At December 31, 1997 the Company had 511,911 shares of common stock outstanding which was held by approximately 583 shareholders of record. Nonperforming and Problem Assets Certain credit risks are inherent in making loans, particularly commercial and consumer loans. Management prudently assesses these risks and attempts to manage them effectively. The Bank attempts to use shorter-term loans and, although a portion of the loans have been made based upon the value of collateral, it tries to rely primarily on the cash flow of the borrower as the source of repayment rather than the value of the collateral. The Bank also attempts to reduce repayment risks by adhering to internal credit policies and procedures. These policies and procedures include officer and customer limits, periodic loan documentation review and follow up on exceptions to credit policies. Nonperforming Assets at December 31, 1997 and 1996 are analyzed in Table 12. 36 Management's Discussion and Analysis ________________________________________________________________________________ Table 12. Nonperforming Assets Non-Accrual Loans $278,782 $139,161 Restructured - - Foreclosed and In-Substance Foreclosed Properties 210,709 838,130 ________ ________ $489,491 $977,291 ________ ________
1997 1996 ____ ____
Nonperforming assets at year-end 1997 were 0.6% of loans outstanding and 1.1% at year-end 1996. In addition to the nonperforming assets, loans which were 90 days and over past due amounted to $312,332 at December 31, 1997 and $215,000 at December 31, 1996. The allowance for loan losses is maintained at a level adequate to absorb probable losses. Some of the factors which management considers in determining the appropriate level of the allowance for loan losses are: past loss experience, an evaluation of the current loan portfolio, identified loan problems, the loan volume outstanding, the present and expected economic conditions in general, and in particular, how such conditions relate to the market areas that the Bank serves. Bank regulators also periodically review the Bank's loans and other assets to assess their quality. Credits deemed uncollectible are charged to the allowance. Provisions for loan losses and recoveries on loans previously charged off are added to the allowance. The accrual of interest on loans is discontinued on a loan when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. The provision for loan losses, net charge-offs and the activity in the allowance for loan losses is detailed in Table 13. Table 13. Loan Losses Allowance for loan losses, beginning $ 1,002,455 $ 1,134,182 $ 1,264,798 Provision for loan losses, added 500,000 325,000 135,958 Loans charged off (68,249) (495,201) (287,919) Recoveries of loans previously charged off 17,920 38,474 21,345 ___________ ___________ ___________ Net charge-offs (50,329) (456,727) (266,574) ___________ ___________ ___________ Allowance for loan losses, ending $ 1,452,126 $ 1,002,455 $ 1,134,182 ___________ ___________ ___________
1997 1996 1995 ____ ____ ____
37 Management's Discussion and Analysis ________________________________________________________________________________ Net loan charge-offs as a percentage of average loans were 0.06%, 0.57% and 0.34% in 1997, 1996, and 1995, respectively. The loan portfolio also included loans to various borrowers (watch loans) at year-end for which management had concerns about the ability of the borrowers to continue to comply with present loan repayment terms, and which could result in some or all of these loans being uncollectible. Management monitors these loans carefully and has provided for these loans in the allowance for loan losses. The allowance for loan losses was approximately $1.5 million, or 1.67% of gross loans outstanding at December 31, 1997, an increase of $449,671 above the 1.16% reserve at December 31, 1996. Management realizes that general economic trends greatly affect loan losses and no assurances can be made about future losses. Management does, however, consider the allowance for loan losses to be adequate at December 31, 1997. The allocation of the reserve for loan losses is detailed in Table 14 below: Table 14. Allocation of the Reserve for Loan Losses Commercial, financial and agricultural $ 194 9.21 $ 93 9.24 $ 108 9.51 Real estate, construction 60 5.61 65 6.49 50 4.42 Real estate, mortgage 1,089 71.32 723 72.19 852 75.15 Installment loans to individuals, other 109 13.86 121 12.08 124 10.92 ______ ______ ______ ______ ______ ______ Total $1,452 100.00 $1,002 100.00 $1,134 100.00 ______ ______ ______ ______ ______ ______ ___________________ Percent of loans in each category to total loans.
1997 1996 1995 ___________________ __________________ _________________ Balance at end of period applicable to Amount Percent Amount Percent Amount Percent ______ _______ ______ _______ ______ _______
Liquidity and Sensitivity The principal goals of the Bank's asset and liability management strategy are the maintenance of adequate liquidity and the management of interest rate risk. Liquidity is the ability to convert assets to cash to fund depositors' withdrawals or borrowers' loans without significant loss. Interest rate risk management balances the effects of interest rate changes on assets that earn interest or liabilities on which interest is paid, to protect the Bank from wide fluctuations in its net interest income which could result from interest rates changes. Management must insure that adequate funds are available at all times to meet the needs of its customers. On the asset side of the balance sheet, maturing investments, loan payments, maturing loans, federal funds sold, and unpledged investment securities are principal sources of liquidity. On the liability side of the balance 38 Management's Discussion and Analysis ________________________________________________________________________________ sheet, liquidity sources include core deposits, the ability to increase large denomination certificates, federal funds lines from correspondent banks, borrowings from the Federal Reserve Bank, as well as the ability to generate funds through the issuance of long-term debt and equity. The liquidity ratio (the level of liquid assets divided by total deposits plus short-term liabilities) was 18.9% at December 31, 1997 compared to 18.0% at December 31, 1996. These ratios are considered to be adequate by management. Table 15. Interest Rate Sensitivity (thousands) Earnings Assets: Loans $ 17,134 $ 22,641 $ 42,914 $ 4,408 $ 87,097 Investments 1,145 12,534 17,885 13,207 44,771 Interest-bearing deposits with other banks 5,000 - - - 5,000 Federal Funds Sold 3,825 - - - 3,825 ________ ________ ________ ________ ________ Total $ 27,104 $ 35,175 $ 60,799 $ 17,615 $140,693 ________ ________ ________ ________ ________ Interest-bearing deposits: NOW accounts 8,924 - - - 8,924 Money market 3,339 - - - 3,339 Savings 14,168 - - - 14,168 Certificates of Deposit 11,799 41,263 36,467 - 89,529 Other borrowings - - - - - ________ ________ ________ ________ ________ Total $ 38,230 $ 41,263 $ 36,467 $ - $115,960 ________ ________ ________ ________ ________ Interest sensitivity gap $(11,126) $ (6,088) $ 24,332 $ 17,615 $ - Cumulative interest sensitivity gap $(11,126) $(17,214) $ 7,118 $ 24,733 $ 24,733 Ratio of sensitivity gap to total earning assets (7.9)% (4.3)% 17.3% 12.5% - Cumulative ratio of sensitivity gap to total earning assets (7.9)% (12.2)% 5.1% 17.5% 17.5%
December 31, 1997 Maturities/Repricing ________________________________________ 1-3 4-12 13-60 Over 60 Months Months Months Months Total ______ ______ ______ ______ _____
Interest rate risk is the effect that changes in interest rates would have on interest income and interest expense as interest-sensitive assets and interest-sensitive liabilities either reprice or mature. Management attempts to maintain the portfolios of earning assets and interest-bearing liabilities with maturities or repricing opportunities at levels that will afford protection from erosion of net interest margin, to the extent practical, from changes in interest rates. Table 15 shows the sensitivity of the Bank's balance sheet on December 31, 1997. This table reflects the sensitivity of the balance sheet as of that specific date and is not necessarily indicative of the position on other dates. At December 31, 1997, the Bank appeared to be cumulatively asset-sensitive (earning assets subject to interest rate changes exceeding interest-bearing liabilities subject to changes in interest rates). Included in the interest-bearing liabilities subject to interest rate changes within 39 Management's Discussion and Analysis ________________________________________________________________________________ three months are NOW accounts and savings accounts totaling $23,092,000 which historically have not been as interest- sensitive as other types of interest-bearing deposits. Therefore, the Bank is asset sensitive in the three month or less time period; liability sensitive in the four to twelve months time period and asset-sensitive in the thirteen to sixty months time period and over sixty months time period. Matching sensitive positions alone does not ensure that the Bank has no interest rate risk. The repricing characteristics of assets are different from the repricing characteristics of funding sources. Thus, net interest income can be impacted by changes in interest rates even if the repricing opportunities of assets and liabilities are perfectly matched. Table 16. Key Financial Ratios Return on average assets 1.3% 1.2% 1.1% Return on average equity 12.0% 11.6% 10.7% Average equity to average assets 10.9% 10.4% 10.2%
1997 1996 1995 ____ ____ ____
40 Title page for Personnel 41 ________________________________________________________________________________ Staff ________________________________________________________________________________ Main Office ___________ Customer Service Loan Operations Secretaries ________________ _______________ ___________ Diane Bishop Renee Akers Beulah Correll Sherrie Janney Ola Driskett, Manager Yara Middleton Betty Moran Debra Funkhouser Lisa Thomas Sharon Zeman Gail Phillips, Supervisor Data Processing Center ______________________ Jan Rorrer Paying and Ruth Anders Receiving Tellers Karen Sowers _________________ Gail Goad Collections Karen Bowman ___________ Gay Grim Regina Compton Ralph Edwards Alva Mae Harman Regina Gibson Credit Cards Patricia Whitlock ____________ Jennifer Hollandsworth Custodians Shelia Dehart __________ Anthony Nolen Accounting Roger Dickerson Helen Roberson __________ Lucy Harris Tammy Rutrough Deborah Reed Patsy Wallace Cave Spring Office Willis Office Hillsville Office __________________ _____________ _________________ Customer Service Head Teller Branch Manager ________________ ___________ ______________ Margaret Caldwell Karen Sutphin Eugene Shockley Paying and Receiving ____________________ Kevin Harvey Paula McDaniel 42 ________________________________________________________________________________ Board of Directors of Cardinal Bankshares and The Bank of Floyd ________________________________________________________________________________ K. Venson Bolt C. W. Harman Leon Moore J. H. Conduff Kevin D. Mitchell Dorsey H. Thompson William R. Gardner, Jr. J.T. Williams, Jr. Officers of Cardinal Bankshares _______________________________ J. H. Conduff Chairman of the Board Leon Moore President and CEO Christopher B. Snodgrass Financial Officer Wanda M. Gardner Internal Auditor Annette V. Battle Secretary Officers of The Bank of Floyd _____________________________ Executive _________ J. H. Conduff Chairman of the Board K. Venson Bolt Vice Chairman of the Board Leon Moore President and Chief Executive Officer Lawrence M. Renfroe Executive Vice President Christopher B. Snodgrass Assist. V.P. and Financial Officer C. W. Harman Secretary G. Albert Owen, Jr. Vice President and Cashier Ron Doane Assist. Vice President and Branch Administrator Sunny K. Cornwell Assist. Vice President and Credit Review Main Office ___________ Lois A. Bond Assistant Vice President Patricia K. Harris Assistant Cashier Carolyn W. Reed Assistant Cashier Cave Spring Office __________________ Larry J. Hurt Assist. Vice President and Branch Manager Kit C. Edwards Branch Operations Officer Administrative ______________ Marie V. Thomas Vice President Mary Ann Ayers Marketing Officer Annette V. Battle Assist. Secretary to the Board & Recording Secretary Patricia B. Spangler Administrative Assistant Shelby L. Rutherford Administrative Assistant Lending _______ Dianne H. Hamm Assist. Vice Pres. & Compliance Officer Patricia A. Bower Assistant Cashier Troy L. Abell Assist. Vice President and Loan Officer Operations __________ Betty A. Whitlock Assist. Cashier & Manager of Data Processing Audit _____ Wanda M. Gardner Assist. Vice President & Internal Auditor 43 ________________________________________________________________________________ Stockholder Information ________________________________________________________________________________ Annual Meeting ______________ The annual meeting of shareholders will be held at 2:00 p.m. on April 22, 1998, in the community room at The Bank of Floyd, 101 Jacksonville Circle, Floyd, Virginia. Requests for Information ________________________ Requests for information should be directed to Mrs. Annette Battle, Recording Secretary, at The Bank of Floyd, Post Office Box 215, Floyd, Virginia, 24091; telephone (540) 745-4191. A copy of the Company's Form 10-KSB for 1997 will be furnished, without charge, after March 31, 1998 upon written request. Independent Auditors Stock Transfer Agent ____________________ ____________________ Larrowe, Cardwell & Company, LC The Bank of Floyd Certified Public Accountants Post Office Box 215 Post Office Box 760 Floyd, Virginia 24091 Galax, Virginia 24333 Federal Deposit Insurance Corporation _____________________________________ The Bank is a member of the FDIC. This statement has not been reviewed, or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation. Federal Home Loan Bank ______________________ The Bank of Floyd is a member of the Federal Home Loan Bank of Atlanta. Federal Reserve _______________ The Bank of Floyd is a state-chartered bank and a member of the Federal Reserve Bank of Richmond. Banking Offices _______________ Floyd Office Roanoke Office ____________ ______________ 101 Jacksonville Circle 4094 Postal Drive Floyd, Virginia 24091 Roanoke, Virginia 24018 (540) 745-4191 (540) 774-1111 Willis Office Hillsville Office _____________ _________________ Floyd Highway South Opening Spring 1998 Willis, Virginia 24380 185 South Main Street (540) 745-4191 Hillsville, Virginia 24343 (540) 745-4191 EX-27 2 ARTICLE 9 FDS FOR 10-KSB
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CARDINAL BANKSHARES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 12-MOS DEC-31-1997 DEC-31-1997 1,941,494 500,000 3,825,000 0 31,663,068 13,430,624 13,614,488 86,756,865 (1,452,126) 145,072,317 128,188,726 0 899,440 0 5,119,110 0 0 10,865,041 145,072,317 8,074,494 2,650,455 353,074 11,078,023 5,538,989 5,681,456 5,396,567 500,000 7,018 2,933,398 2,506,154 2,506,154 0 0 1,853,684 3.62 3.62 4.01 278,762 312,332 0 0 1,002,455 68,249 17,920 1,452,126 1,452,126 0 0
-----END PRIVACY-ENHANCED MESSAGE-----