================================================================================
1999 ANNUAL REPORT
--------------------------------------------------------------------------------


TABLE OF CONTENTS

Letter to Stockholders.........................................................1

Independent Auditor's Report...................................................2

Consolidated Balance Sheets....................................................3

Consolidated Statements of Income..............................................4

Consolidated Statements of Changes in Stockholders' Equity.....................5

Consolidated Statements of Cash Flows..........................................6

Notes to Consolidated Financial Statements.....................................7

Management's Discussion of Financial Condition and Results of Operations......23

Staff.........................................................................42

Directors and Officers........................................................43

Stockholder Information.......................................................44

<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS SUMMARY(1)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S>                                           <C>            <C>            <C>             <C>            <C>
                                              1999           1998           1997            1996           1995
                                          -----------     -----------    -----------    -----------     -------
SUMMARY OF OPERATIONS(2)

   Interest income                        $    11,060     $    11,269    $    11,078    $    10,289     $    10,003
   Interest expense                             5,603           5,797          5,681          5,307           5,060
                                          -----------     -----------    -----------    -----------     -----------
         Net interest income                    5,457           5,472          5,397          4,982           4,943
   Provision for loan losses                      142             175            500            325             136
   Other income                                   386             489            543            343             225
   Other expense                                3,086           3,066          2,934          2,823           3,088
   Income taxes                                   650             781            652            594             548
                                          -----------     -----------    -----------    -----------     -----------
         Net income                       $     1,965     $     1,939    $     1,854    $     1,583     $     1,396
                                          ===========     ===========    ===========    ===========     ===========

PER SHARE DATA(3)

   Basic earnings per share               $      3.84     $      3.79    $      3.62    $      3.09     $      2.73
   Cash dividends declared                       1.11            1.06           1.00            .94             .88
   Book value                                   34.70           33.84          31.22          28.38           26.62

YEAR-END BALANCE SHEET SUMMARY

   Loans, net                             $    87,685     $    85,810    $    85,305    $    85,372     $    78,630
   Securities                                  52,383          41,329         45,094         43,722          43,998
   Total assets                               158,140         153,410        145,072        136,422         130,901
   Deposits                                   139,808         135,211        128,189        118,424         116,537
   Stockholders' equity                        17,758          17,321         15,984         14,535          13,631

   Interest earning assets                $   148,878     $   147,666    $   140,397    $   130,458     $   125,121
   Interest bearing liabilities               123,024         119,657        115,960        108,639         105,669

SELECTED RATIOS

   Return on average assets                      1.3%            1.3%           1.3%           1.2%            1.1%
   Return on average equity                     11.1%           11.5%          12.0%          11.6%           10.7%
   Dividends declared as percent of
     net income                                 28.9%           28.0%          27.7%          30.3%           32.4%
</TABLE>

----------
   (1) In thousands of dollars, except per share data.
   (2) Reflects Bank of Floyd operations prior to formation of Cardinal
       Bankshares Corporation on March 12, 1996.
   (3) Adjusted for the effects of a four for one stock split in 1995 and 10%
       stock dividend in 1997.


<PAGE>
                        CARDINAL BANKSHARES CORPORATION
[GRAPHIC OF                   Post Office Box 215
 A CARDINAL                  Floyd, Virginia 24091
APPEARS HERE]                Phone: (540) 745-4191
                              Fax: (540) 745-4133

--------------------------------------------------------------------------------


March 28, 2000


Dear Shareholder:

We are pleased to present the annual report of Cardinal Bankshares Corporation.
The accounting firm of Larrowe and Company, PLC has certified our report.

We again can report to you of strong growth and record earnings. Net earnings
for 1999 ended at $1,965,133.00 with a return on average assets of 1.30%. This
is very favorable to our peer banks.

Total assets of Cardinal Bankshares Corporation ended the year at
$158,140,000.00 and total deposits topped $139,808,000.00.

Earnings per share reached $3.84 for the year, along with a dividend pay out of
$1.11 per share. This was the eighth consecutive year we have increased cash
dividends.

And yes, the dreaded Y2K is behind us. We are happy to report to you that no
disruptions occurred with our bank, and no major disruptions occurred in the
financial industry. The financial institutions emerged stronger than ever.

Truly, 1999 was a good year. But as much as we like to look at the past, we must
plan for our future. With the passage of the Gramm - Leach - Bliley Act in
November 1999, financial modernization became a reality. This act opens the door
to products and services the banking industry has proposed for the last twenty
years.

The 21st Century will bring change and many opportunities for the financial
industry. Community banking is alive and well.

A sincere thanks to our shareholders, staff and Board of Directors for an
eventful 1999.

Sincerely,

/s/Leon Moore                                            /s/J.H. Conduff
Leon Moore                                               J.H. Conduff
President and Chief Executive Officer                    Chairman of the Board

LM/avb
<PAGE>
[LOGO]
LARROWE & COMPANY, P.L.C.
  CPAs AND CONSULTANTS
=========================

Post Office Box 760
120 West Grayson Street
Galax, Virginia 24333
540-238-1800
Fax 540-238-1801


                          INDEPENDENT AUDITOR'S REPORT



Board of Directors and Stockholders
Cardinal Bankshares Corporation
Floyd, Virginia

We have audited the consolidated balance sheets of Cardinal Bankshares
Corporation and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cardinal Bankshares
Corporation and subsidiaries at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.


/s/ LARROWE & COMPANY, P.L.C.

Galax, Virginia
January 14, 2000


<PAGE>
================================================================================
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S>                                                                                  <C>                 <C>
ASSETS                                                                               1999                1998
                                                                                ---------------    ----------------

Cash and due from banks                                                         $     3,775,280    $      2,985,331
Interest-bearing deposits with banks                                                  2,000,000           7,100,000
Federal funds sold                                                                    6,975,000          11,825,000
Investment securities available for sale                                             33,213,933          25,981,443
Investment securities held to maturity                                               19,169,099          15,347,979
Loans, net of allowance for loan losses $1,661,521
   in 1999 and $1,668,201 in 1998                                                    87,684,925          85,809,506
Property and equipment, net                                                           2,444,355           2,173,693
Accrued income                                                                        1,173,115             984,457
Other assets                                                                          1,704,778           1,202,294
                                                                                ---------------    ----------------
                                                                                $   158,140,485    $    153,409,703
                                                                                ===============    ================

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Demand deposits                                                                 $    16,783,239    $     15,553,868
NOW deposits                                                                         10,767,129           9,991,178
Savings deposits                                                                     18,901,235          18,476,177
Large denomination time deposits                                                     18,142,525          15,666,927
Other time deposits                                                                  75,213,536          75,522,910
                                                                                ---------------    ----------------
     Total deposits                                                                 139,807,664         135,211,060

Accrued interest payable                                                                237,075             240,709
Other liabilities                                                                       338,149             636,809
                                                                                ---------------    ----------------
                                                                                    140,382,888         136,088,578
                                                                                ---------------    ----------------
Commitments and contingencies

STOCKHOLDERS' EQUITY
Common stock, $10 par value; 5,000,000 shares
   authorized; 511,771 and 511,911 shares
   issued in 1999 and 1998, respectively                                              5,117,710           5,119,110
Surplus                                                                               2,925,150           2,925,150
Retained earnings                                                                    10,514,759           9,123,733
Unrealized appreciation on investment securities
   available for sale, net of income taxes                                             (800,022)            153,132
                                                                                ---------------    ----------------
                                                                                     17,757,597          17,321,125
                                                                                ---------------    ----------------
                                                                                $   158,140,485    $    153,409,703
                                                                                ===============    ================
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       3
<PAGE>
================================================================================
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S>                                                              <C>                 <C>                 <C>
                                                                 1999                1998                1997
                                                            ---------------     ---------------    ----------------
INTEREST INCOME
   Loans and fees on loans                                  $     7,706,722     $     8,034,738    $      8,074,494
   Federal funds sold and securities purchased
     under agreements to resell                                     479,205             476,913             315,065
   Investment securities:
     Taxable                                                      1,903,517           1,843,843           2,159,381
     Exempt from federal income tax                                 773,233             625,769             491,074
   Deposits with banks                                              197,294             288,227              38,009
                                                            ---------------     ---------------    ----------------
                                                                 11,059,971          11,269,490          11,078,023
                                                            ---------------     ---------------    ----------------

INTEREST EXPENSE
   Deposits                                                       5,603,020           5,797,887           5,538,989
   Borrowings                                                             -                   -             142,467
                                                            ---------------     ---------------    ----------------
                                                                  5,603,020           5,797,887           5,681,456
                                                            ---------------     ---------------    ----------------
         Net interest income                                      5,456,951           5,471,603           5,396,567

PROVISION FOR LOAN LOSSES                                           141,721             175,000             500,000
                                                            ---------------     ---------------    ----------------
         Net interest income after provision
           for loan losses                                        5,315,230           5,296,603           4,896,567
                                                            ---------------     ---------------    ----------------

NONINTEREST INCOME
   Service charges on deposit accounts                              199,928             152,001             143,794
   Other service charges and fees                                    47,445              37,977              36,128
   Net realized gains on sales of securities                          4,768              27,315               7,018
   Gain on sale of other real estate owned                           10,000              89,637             232,732
   Other income                                                     123,814             182,435             123,313
                                                            ---------------     ---------------    ----------------
                                                                    385,955             489,365             542,985
                                                            ---------------     ---------------    ----------------

NONINTEREST EXPENSE
   Salaries and employee benefits                                 1,913,979           1,871,271           1,760,878
   Occupancy expense                                                162,744             136,641             115,612
   Equipment expense                                                282,646             274,861             273,026
   Other expense                                                    726,963             782,975             783,882
                                                            ---------------     ---------------    ----------------
                                                                  3,086,332           3,065,748           2,933,398
                                                            ---------------     ---------------    ----------------
         Income before income taxes                               2,614,853           2,720,220           2,506,154

INCOME TAX EXPENSE                                                  649,720             781,368             652,470
                                                            ---------------     ---------------    ----------------
         Net income                                         $     1,965,133     $     1,938,852    $      1,853,684
                                                            ===============     ===============    ================

BASIC EARNINGS PER SHARE                                    $          3.84     $          3.79    $           3.62
                                                            ===============     ===============    ================
WEIGHTED AVERAGE SHARES OUTSTANDING                                 511,801             511,904             512,090
                                                            ===============     ===============    ================
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       4
<PAGE>
================================================================================
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                      ACCUMULATED
                                                                                          OTHER
                                   COMMON                            RETAINED         COMPREHENSIVE
                                    STOCK           SURPLUS          EARNINGS         INCOME (LOSS)       TOTAL
                               -------------     -------------    --------------    -------------    --------------
<S>               <C> <C>      <C>               <C>              <C>               <C>              <C>
BALANCE, DECEMBER 31, 1996     $   4,655,360     $   1,200,000    $    8,585,007    $      94,552    $   14,534,919

COMPREHENSIVE INCOME
Net income                                 -                 -         1,853,684                -         1,853,684
Net change in unrealized
   appreciation on investment
   securities available for sale,
   net of taxes of $61,118                 -                 -                 -          124,851           124,851
Reclassification adjustment                -                 -                 -           (7,018)           (7,018)
                                                                                                     --------------
TOTAL COMPREHENSIVE INCOME                                                                                1,971,517

Dividends paid
   ($.51 per share)                        -                 -          (237,423)               -          (237,423)
10% stock dividend                   465,540         1,731,790        (2,197,330)               -                 -
Redemption of fractional shares       (1,790)          (6,640)                 -                -            (8,430)
Dividends paid
    ($.54 per share)                       -                 -          (276,432)               -          (276,432)
                               -------------     -------------    --------------    -------------    --------------
BALANCE, DECEMBER 31, 1997         5,119,110         2,925,150         7,727,506          212,385        15,984,151

COMPREHENSIVE INCOME
Net income                                 -                 -         1,938,852                -         1,938,852
Net change in unrealized
   appreciation on investment
   securities available for sale,
   net of taxes of $(30,525)               -                 -                 -          (31,938)          (31,938)
Reclassification adjustment                -                 -                 -          (27,315)          (27,315)
                                                                                                     --------------
TOTAL COMPREHENSIVE INCOME                                                                                1,879,599

Dividends paid
   ($1.06 per share)                       -                 -          (542,625)               -          (542,625)
Common stock purchased                (2,500)                -           (11,000)               -           (13,500)
Common stock reissued                  2,500                 -            11,000                -            13,500
                               -------------     -------------    --------------    -------------    --------------
BALANCE, DECEMBER 31, 1998         5,119,110         2,925,150         9,123,733          153,132        17,321,125

COMPREHENSIVE INCOME
Net income                                 -                 -         1,965,133                -         1,965,133
Net change in unrealized
   appreciation on investment
   securities available for sale,
   net of taxes of $(491,019)              -                 -                 -         (953,154)         (953,154)
                                                                                                     --------------
TOTAL COMPREHENSIVE INCOME                                                                                1,011,979

Dividends paid
   ($1.11 per share)                       -                 -          (568,147)               -          (568,147)
Common stock purchased                (4,300)                -           (18,385)               -           (22,685)
Common stock reissued                  2,900                 -            12,425                -            15,325
                               -------------     -------------    --------------    -------------    --------------
BALANCE, DECEMBER 31, 1999     $   5,117,710     $   2,925,150    $   10,514,759    $    (800,022)   $   17,757,597
                               =============     =============    ==============    =============    ==============
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       5
<PAGE>
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S>                                                              <C>                 <C>                 <C>
                                                                 1999                1998                1997
                                                            ---------------     ---------------    ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                               $     1,965,133     $     1,938,852    $      1,853,684
   Adjustments to reconcile net income
     to net cash provided by operations:
       Depreciation and amortization                                190,905             176,587             190,065
       Accretion of discount on securities, net
         of amortization of premiums                                 55,795              68,587                 176
       Provision for loan losses                                    141,721             175,000             500,000
       Deferred income taxes                                         15,762             (82,635)           (213,850)
       Net realized (gains) losses on securities                     (4,768)            (27,315)             (7,018)
       Deferred compensation and pension expense                   (154,782)             65,599              70,748
       Changes in assets and liabilities:
         Accrued income                                            (188,658)            108,606             (39,487)
         Other assets                                               (26,954)             37,336             494,783
         Accrued interest payable                                    (3,634)            (28,323)             22,032
         Other liabilities                                         (143,878)            (59,198)            144,305
                                                            ---------------     ---------------    ----------------
           Net cash provided by operating activities              1,846,642           2,373,096           3,015,438
                                                            ---------------     ---------------    ----------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Net (increase) decrease in interest-bearing deposits           5,100,000          (2,100,000)         (5,000,000)
   Net (increase) decrease in federal funds sold                  4,850,000          (8,000,000)         (3,325,000)
   Purchases of investment securities                           (27,768,647)        (19,326,465)        (15,236,219)
   Sales of available for sale securities                           493,672              12,125           2,075,317
   Maturities of investment securities                           14,725,892          22,947,560          11,974,853
   Net (increase) decrease in loans                              (2,017,140)           (679,767)           (437,099)
   Purchases of property and equipment                             (721,860)           (922,050)           (317,342)
   Sales of property and equipment                                  260,293             259,629                   -
                                                            ---------------     ---------------    ----------------
           Net cash used in investing activities                 (5,077,790)         (7,808,968)        (10,265,490)
                                                            ---------------     ---------------    ----------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net increase (decrease) in demand, NOW,
     and savings deposits                                         2,430,380           5,361,101            (404,102)
   Net increase in time deposits                                  2,166,224           1,661,233          10,168,381
   Net increase (decrease) in short-term debt                             -                   -            (400,000)
   Net increase (decrease) in long-term debt                              -                   -          (2,400,000)
   Redemption of fractional shares                                        -                   -              (8,430)
   Dividends paid                                                  (568,147)           (542,625)           (513,855)
   Common stock purchased                                           (22,685)            (13,500)                  -
    Common stock reissued                                            15,325              13,500                   -
                                                            ---------------     ---------------    ----------------
           Net cash provided by financing activities              4,021,097           6,479,709           6,441,994
                                                            ---------------     ---------------    ----------------
           Net increase (decrease) in cash and
              cash equivalents                                      789,949           1,043,837            (808,058)

CASH AND CASH EQUIVALENTS, BEGINNING                              2,985,331           1,941,494           2,749,552
                                                            ---------------     ---------------    ----------------
CASH AND CASH EQUIVALENTS, ENDING                           $     3,775,280     $     2,985,331    $      1,941,494
                                                            ===============     ===============    ================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
   Interest paid                                            $     5,606,654     $     5,826,210    $      5,659,424
                                                            ===============     ===============    ================
   Income taxes paid                                        $       639,555     $       874,869    $        750,470
                                                            ===============     ===============    ================

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
   Other real estate acquired in settlement of loans        $             -     $             -    $          4,819
                                                            ===============     ===============    ================
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       6
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Cardinal Bankshares Corporation (the Company) was incorporated as a Virginia
corporation on March 12, 1996 to acquire the stock of The Bank of Floyd (the
Bank). The Bank was acquired by the Company on June 30, 1996.

The Bank of Floyd and its wholly-owned subsidiary, FBC, Inc., are incorporated
and operate under the laws of the Commonwealth of Virginia. As a state chartered
Federal Reserve member, the Bank is subject to regulation by the Virginia Bureau
of Financial Institutions and the Federal Reserve. The Bank serves the counties
of Floyd, Carroll, and Roanoke, Virginia and the City of Roanoke, Virginia,
through four banking offices. FBC, Inc.'s assets and operations consist
primarily of annuity sales and a minority interest in a title insurance company.

The accounting and reporting policies of the Company, the Bank and FBC, Inc.
follow generally accepted accounting principles and general practices within the
financial services industry. Following is a summary of the more significant
policies.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company, the
Bank and FBC, Inc.. All material intercompany accounts and transactions are
eliminated in consolidation.

BUSINESS SEGMENTS

The Company reports its activities as a single business segment. In determining
the appropriateness of segment definition, the Company considers components of
the business about which financial information is available and regularly
evaluated relative to resource allocation and performance assessment.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for loan and
foreclosed real estate losses, management obtains independent appraisals for
significant properties.

The majority of the Company's loan portfolio consists of loans in Southwest
Virginia. Accordingly, the ultimate collectibility of a substantial portion of
the Company's loan portfolio and the recovery of a substantial portion of the
carrying amount of foreclosed real estate are susceptible to changes in local
market conditions. The regional economy is diverse, but is influenced by the
agricultural, textile and governmental segments.

While management uses available information to recognize loan and foreclosed
real estate losses, future additions to the allowances may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as a
part of their routine examination process, periodically review the Company's
allowances for loan and foreclosed real estate losses. Such agencies may require
the Bank to recognize additions to the allowances based on their judgments about
information available to them at the time of their examinations. Because of
these factors, it is reasonably possible that the allowances for loan and
foreclosed real estate losses may change materially in the near term.

CASH AND CASH EQUIVALENTS

For purpose of presentation in the consolidated statements of cash flows, cash
and cash equivalents are defined as those amounts included in the balance sheet
caption "cash and due from banks."

                                       7
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

TRADING SECURITIES

The Company does not hold securities for short-term resale and therefore does
not maintain a trading securities portfolio.

SECURITIES HELD TO MATURITY

Bonds, notes, and debentures for which the Company has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity or to call dates.

SECURITIES AVAILABLE FOR SALE

Available-for-sale securities are reported at fair value and consist of bonds,
notes, debentures, and certain equity securities not classified as trading
securities or as held-to-maturity securities.

Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of stockholders'
equity. Realized gains and losses on the sale of available-for-sale securities
are determined using the specific-identification method. Premiums and discounts
are recognized in interest income using the interest method over the period to
maturity or to call dates.

Declines in the fair value of individual held-to-maturity and available-for-sale
securities below cost that are other than temporary are reflected as write-downs
of the individual securities to fair value. Related write-downs are included in
earnings as realized losses.

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal amount adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.

Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan. Discounts and
premiums on any purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts and premiums on any purchased
consumer loans are recognized over the expected lives of the loans using methods
that approximate the interest method.

Interest is accrued and credited to income based on the principal amount
outstanding. The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.

The allowance for loan losses is increased by charges to income and decreased by
charge-offs, net of recoveries. Management's periodic evaluation of the adequacy
of the allowance is based on the Company's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions.

PROPERTY AND EQUIPMENT

Land is carried at cost. Bank premises, furniture and equipment are carried at
cost, less accumulated depreciation and amortization computed principally by the
straight-line method over the following estimate useful lives:

                                                         Years
                                                         -----
                  Buildings and improvements             20-40
                  Furniture and equipment                 5-20

                                       8
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

FORECLOSED PROPERTIES

Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value less cost to sell at the date
of foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in loss on
foreclosed real estate. The historical average holding period for such
properties is in excess of 36 months.

PENSION PLAN

The Bank maintains a noncontributory defined benefit pension plan covering all
employees who meet eligibility requirements. To be eligible, an employee must be
21 years of age and have completed one year of service. Plan benefits are based
on final average compensation and years of service. The funding policy is to
contribute the maximum deductible for Federal income tax purposes.

INCOME TAXES

Provision for income taxes is based on amounts reported in the statements of
income (after exclusion of non-taxable income such as interest on state and
municipal securities) and consists of taxes currently due plus deferred taxes on
temporary differences in the recognition of income and expense for tax and
financial statement purposes. Deferred tax assets and liabilities are included
in the financial statements at currently enacted income tax rates applicable to
the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred taxes
assets and liabilities are adjusted through the provision for income taxes.

Deferred income tax liability relating to unrealized appreciation (or the
deferred tax asset in the case of unrealized depreciation) on investment
securities available for sale is recorded in other liabilities (assets). Such
unrealized appreciation or depreciation is recorded as an adjustment to equity
in the financial statements and not included in income determination until
realized. Accordingly, the resulting deferred income tax liability or asset is
also recorded as an adjustment to equity.

BASIC EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period, after giving retroactive effect to stock splits and dividends.

DILUTED EARNING PER SHARE

The computation of diluted earnings per share is similar to the computation of
basic earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if dilutive
potential common shares had been issued. The numerator is adjusted for any
changes in income or loss that would result from the assumed conversion of those
potential common shares. For the years presented, the Company has no potentially
dilutive securities outstanding.

COMPREHENSIVE INCOME

Annual comprehensive income reflects the change in the Company's equity during
the year arising from transactions and events other than investments by and
distributions to stockholders. It consists of net income plus certain other
changes in assets and liabilities that are reported as separate components of
stockholders' equity rather than as income or expense.

                                       9
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

FINANCIAL INSTRUMENTS

All derivative financial instruments held or issued by the Company are held or
issued for purposes other than trading.

In the ordinary course of business the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and commercial and standby letters of credit. Such financial instruments
are recorded in the financial statements when they are funded or related fees
are incurred or received.

The Bank does not utilize interest-rate exchange agreements or interest-rate
futures contracts.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate their fair values.

INTEREST-BEARING DEPOSITS WITH BANKS: Fair values for time deposits are
estimated using a discounted cash flow analysis that applies interest rates
currently offered on certificates to a schedule of aggregated contractual
maturities on such time deposits.

AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES: Fair values for securities,
excluding restricted equity securities, are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments. The carrying values of
restricted equity securities approximate fair values.

LOANS RECEIVABLE: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans are estimated using discounted cash flow
analysis, based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk characteristics.
Fair values for impaired loans are estimated using discounted cash flow analysis
or underlying collateral values, where applicable. The carrying amount of
accrued interest receivable approximates its fair value.

DEPOSIT LIABILITIES: The fair values disclosed for demand and savings deposits
are, by definition, equal to the amount payable on demand at the reporting date.
The fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated contractual maturities on such time
deposits. The carrying amount of accrued interest payable approximates fair
value.

SHORT-TERM AND LONG-TERM DEBT: The carrying amounts of short-term debt
approximate their fair values. The fair values for long-term debt are estimated
using discounted cash flow analysis, based on interest rates currently being
offered for loans with similar terms.


                                       10
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED

OTHER LIABILITIES: For fixed-rate loan commitments, fair value considers the
difference between current levels of interest rates and the committed rates. The
carrying amounts of other liabilities approximates fair value.

IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This Statement
(effective for fiscal quarters beginning after June 15, 2000) establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. While the Company has not
completed its analysis of all impacts of Statement No. 133, Management does not
believe that implementation of the Statement will be material to the financial
statements.

RECLASSIFICATION

Certain reclassifications have been made to the prior years' financial
statements to place them on a comparable basis with the current year. Net income
and stockholders' equity previously reported were not affected by these
reclassifications.

NOTE 2.  RESTRICTIONS ON CASH AND DUE FROM BANKS

To comply with banking regulations, the Company is required to maintain certain
average cash reserve balances. The daily average cash reserve requirement was
approximately $762,000 and $686,000 for the two week periods including December
31, 1999 and 1998, respectively.

NOTE 3.  SECURITIES

Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities and
their approximate fair values at December 31 follow:
<TABLE>
<CAPTION>

                                                   AMORTIZED        UNREALIZED       UNREALIZED           FAIR
1999                                                 COST              GAINS           LOSSES             VALUE
----                                             -------------    --------------    -------------    --------------
AVAILABLE FOR SALE
<S>                                              <C>              <C>               <C>              <C>
   U.S. Government agency securities             $  13,248,125    $        2,524    $     343,902    $   12,906,747
   State and municipal securities                      559,675                 -            6,350           553,325
   Mortgage-backed securities                       19,042,333            61,724          898,960        18,205,097
   Other securities                                  1,575,539             3,008           29,783         1,548,764
                                                 -------------    --------------    -------------    --------------
                                                 $  34,425,672    $       67,256    $   1,278,995    $   33,213,933
                                                 =============    ==============    =============    ==============
HELD TO MATURITY
   State and municipal securities                $  18,000,647    $       30,135    $     383,523    $   17,647,259
   Mortgaged-backed securities                         487,977             1,577            1,937           487,617
   Other securities                                    680,475                 -                -           680,475
                                                 -------------    --------------    -------------    --------------
                                                 $  19,169,099    $       31,712    $     385,460    $   18,815,351
                                                 =============    ==============    =============    ==============
</TABLE>

                                       11
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 3.  SECURITIES, CONTINUED
<TABLE>
<CAPTION>

                                                   AMORTIZED        UNREALIZED       UNREALIZED           FAIR
1998                                                 COST              GAINS           LOSSES             VALUE
----                                             -------------    --------------    -------------    --------------
AVAILABLE FOR SALE
<S>                                              <C>              <C>               <C>              <C>
   U.S. Government agency securities             $   7,897,742    $       34,315    $       1,070    $    7,930,987
   State and municipal securities                      560,796            20,319                -           581,115
   Mortgage-backed securities                       15,793,265           151,472           30,238        15,914,499
   Other securities                                  1,497,207            57,635                -         1,554,842
                                                 -------------    --------------    -------------    --------------
                                                 $  25,749,010    $      263,741    $      31,308    $   25,981,443
                                                 =============    ==============    =============    ==============
HELD TO MATURITY
   State and municipal securities                $  14,025,427    $      398,185    $       5,388    $   14,418,224
   Mortgaged-backed securities                         684,527             2,355            2,093           684,789
   Other securities                                    638,025                 -                -           638,025
                                                 -------------    --------------    -------------    --------------
                                                 $  15,347,979    $      400,540    $       7,481    $   15,741,038
                                                 =============    ==============    =============    ==============
</TABLE>

Investment securities with amortized cost of approximately $4,700,000 and
$4,400,000 at December 31, 1999 and 1998, respectively, were pledged as
collateral on public deposits and for other purposes as required or permitted by
law.

Gross realized gains and losses for the years ended December 31, 1999, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
<S>                                                                    <C>              <C>               <C>
                                                                       1999             1998              1997
                                                                  --------------    -------------    --------------

Realized gains, available for sale securities                     $        4,768    $      27,358    $        8,855
Realized losses, available for sale securities                                 -              (43)           (1,837)
                                                                  --------------    -------------    --------------
                                                                  $        4,768    $      27,315    $        7,018
                                                                  ==============    =============    ==============
</TABLE>

The scheduled maturities of securities available for sale and held to maturity
at December 31, 1999, were as follows:
<TABLE>
<CAPTION>

                                                       AVAILABLE FOR SALE                  HELD TO MATURITY
                                                 -------------------------------    -------------------------------
                                                   AMORTIZED           FAIR           AMORTIZED           FAIR
                                                     COST              VALUE            COST              VALUE
                                                 -------------    --------------    -------------    --------------
<S>                                              <C>              <C>               <C>              <C>
Due in one year or less                          $     802,746    $      796,149    $   1,367,121    $    1,367,902
Due after one year through five years               15,612,212        15,352,302        5,695,412         5,678,117
Due after five years through ten years               2,024,816         1,969,993        7,990,899         7,821,698
Due after ten years                                 15,985,898        15,095,489        3,435,192         3,267,159
Restricted equity securities                                 -                 -          680,475           680,475
                                                 -------------    --------------    -------------    --------------
                                                 $  34,425,672    $   33,213,933    $  19,169,099    $   18,815,351
                                                 =============    ==============    =============    ==============
</TABLE>


                                       12
<PAGE>

================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 4.  LOANS RECEIVABLE

The major components of loans in the consolidated balance sheets at December 31,
1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
<S>                                                                                     <C>               <C>
                                                                                        1999              1998
                                                                                    -------------    --------------
Commercial                                                                          $       4,326    $        5,630
Real estate:
   Construction and land development                                                        3,420             4,028
   Residential, 1-4 families                                                               24,664            24,545
   Residential, 5 or more families                                                          1,763             2,219
   Farmland                                                                                 3,767             4,134
   Nonfarm, nonresidential                                                                 40,117            32,794
Agricultural                                                                                1,133             1,140
Consumer                                                                                    6,004             7,244
Other                                                                                       4,436             6,057
                                                                                    -------------    --------------
                                                                                           89,630            87,791

Unearned discount                                                                               -                (7)
Unearned net loan origination costs, net of fees                                             (283)             (306)
                                                                                    -------------    --------------
                                                                                           89,347            87,478

Allowance for loan losses                                                                  (1,662)           (1,668)
                                                                                    -------------    --------------
                                                                                    $      87,685    $       85,810
                                                                                    =============    ==============
</TABLE>

Nonperforming assets at December 31, 1999 and 1998 are detailed as follows:
<TABLE>
<CAPTION>
<S>                                                                                     <C>               <C>
                                                                                        1999              1998
                                                                                    -------------    --------------

Nonaccrual loans and leases                                                         $   1,826,688    $       66,251
Restructured loans                                                                              -                 -
Loans past due 90 days or more                                                            975,373           343,225
                                                                                    -------------    --------------
         Total nonperforming loans                                                      2,802,061           409,476

Foreclosed, repossessed and idled properties                                               97,256           101,756
                                                                                    -------------    --------------
         Total nonperforming assets                                                 $   2,899,317    $      511,232
                                                                                    =============    ==============
</TABLE>

Leases receivable of approximately $1,021,000 are included in nonaccrual loans
and leases at December 31, 1999. The Bank discontinued this program in 1999 and
provided for estimated losses under these contracts in the allowance for loan
losses account.

Gross interest income that would have been recognized for each year if the
nonaccrual loans and restructured loans had been current in accordance with
their original terms and had been outstanding throughout the period or since
origination, if held part of the period, is detailed below. Applicable interest
income that was actually collected and included in net income for each year is
also summarized below:

                                          1999          1998         1997
                                       ----------    ---------    -----------

NONACCRUAL LOANS:
   Interest income, original terms     $  159,220    $   4,433    $   27,239
                                       ==========    =========    ==========
   Interest income recognized          $   81,339    $   1,140    $   20,840
                                       ==========    =========    ==========

RESTRUCTURED LOANS:
   Interest income, original terms     $        -    $       -    $        -
                                       ==========    =========    ==========
   Interest income recognized          $        -    $       -    $        -
                                       ==========    =========    ==========

                                       13
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 4.  LOANS RECEIVABLE, CONTINUED

An allowance determined in accordance with SFAS No. 114 and No. 118 is provided
for all impaired loans. The total recorded investment in impaired loans and the
related allowance for loan losses at December 31, the average annual recorded
investment in impaired loans, and interest income recognized on impaired loans
for the year (all approximate) are summarized below.
<TABLE>
<CAPTION>
<S>                                                                    <C>              <C>               <C>
                                                                       1999             1998              1997
                                                                  --------------    -------------    --------------

Recorded investment at December 31                                $    3,105,966    $   1,103,551    $    1,467,636
                                                                  ==============    =============    ==============
Allowance for loan losses                                         $      664,287    $     286,250    $      594,105
                                                                  ==============    =============    ==============
Average recorded investment for the year                          $    1,130,732    $     847,271    $      453,875
                                                                  ==============    =============    ==============
Interest income recognized for the year                           $      204,905    $     103,056    $      133,973
                                                                  ==============    =============    ==============

The Company is not committed to lend additional funds to debtors whose loans
have been modified.

NOTE 5.  ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses are as follows:
<CAPTION>
<S>                                                                                     <C>               <C>
                                                                                        1999              1998
                                                                                    -------------    ---------------

BALANCE, BEGINNING                                                                  $   1,668,201    $    1,452,126

Provision charged to expense                                                              141,721           175,000
Recoveries of amounts charged off                                                          13,472           117,917
Amounts charged off                                                                      (161,873)          (76,842)
                                                                                    -------------    --------------
BALANCE, ENDING                                                                     $   1,661,521    $    1,668,201
                                                                                    =============    ==============

NOTE 6.  PROPERTY AND EQUIPMENT

Components of property and equipment and total accumulated depreciation at
December 31, 1999 and 1998, are as follows:
<CAPTION>
<S>                                                                                     <C>               <C>
                                                                                        1999              1998
                                                                                    -------------    --------------

Land                                                                                $     377,612    $      377,612
Bank premises                                                                           2,630,155         2,301,028
Furniture and equipment                                                                 1,739,600         1,867,069
                                                                                    -------------    --------------
                                                                                        4,747,367         4,545,709
Less accumulated depreciation                                                          (2,303,012)       (2,372,016)
                                                                                    -------------    --------------
                                                                                    $   2,444,355    $    2,173,693
                                                                                    =============    ==============

</TABLE>
NOTE 7.  DEBT

The Bank has established various credit facilities to provide additional
liquidity if and as needed. These include unsecured lines of credit with
correspondent banks totaling $7,500,000 and a secured line of credit with the
Federal Home Loan Bank of Atlanta of approximately $19,000,000. Additional
amounts are available from the Federal Home Loan Bank, with additional
collateral. At December 31, 1999 and 1998, there were no amounts outstanding
under these agreements.

                                       14
<PAGE>

================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 8.  EMPLOYEE BENEFIT PLAN

The Bank has a qualified noncontributory, defined benefit pension plan which
covers substantially all of its employees. The benefits are primarily based on
years of service and earnings. The following is a summary of the plan's funded
status as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
<S>                                                                                     <C>               <C>
                                                                                        1999              1998
                                                                                    -------------    --------------

CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year                                             $   1,280,322    $    1,167,829
Service cost                                                                              101,604            88,222
Interest cost                                                                              95,711            87,570
Plan participants' contributions                                                                -                 -
Amendments                                                                                      -                 -
Actuarial (gain) loss                                                                      (4,432)           76,439
Acquisition                                                                                     -                 -
Benefits paid                                                                             (87,398)         (139,738)
                                                                                    -------------    --------------
Benefit obligation at end of year                                                   $   1,385,807    $    1,280,322
                                                                                    =============    ==============

CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year                                      $   1,022,036    $    1,156,480
Actual return on plan assets                                                              145,755             5,294
Acquisition                                                                                     -                 -
Employer contribution                                                                     153,998                 -
Plan participants' contributions                                                                -                 -
Benefits paid                                                                             (87,398)         (139,738)
                                                                                    -------------    --------------
Fair value of plan assets at end of year                                            $   1,234,391    $    1,022,036
                                                                                    =============    ==============

CHANGE IN PREPAID (ACCRUED) BENEFIT COST
Prepaid (accrued) benefit cost, beginning                                           $    (332,368)   $     (266,984)
Contributions                                                                             153,998                 -
Pension cost                                                                             (107,659)          (65,384)
                                                                                    -------------    --------------
Prepaid (accrued) benefit cost, ending                                              $    (286,029)   $     (332,368)
                                                                                    =============    ==============

Funded status                                                                       $    (151,416)   $     (258,286)
Unrecognized transitional net assets                                                      (40,285)          (44,313)
Unrecognized prior service cost                                                            71,750            77,729
Unrecognized net actuarial (gain) loss                                                   (166,078)         (107,498)
                                                                                    -------------    --------------
Prepaid (accrued) benefit cost                                                      $    (286,029)   $     (332,368)
                                                                                    =============    ==============

WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate                                                                                7.5%              7.5%
Expected return on plan assets                                                               9.0%              9.0%
Rate of compensation increase                                                                5.0%              5.0%
<CAPTION>
<S>                                                                    <C>              <C>               <C>
                                                                       1999             1998              1997
                                                                  --------------    -------------    -------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost                                                      $      101,604    $      88,222    $       86,171
Interest cost                                                             95,711           87,570            73,837
Return on plan assets                                                   (145,755)          (5,294)         (194,215)
Originating unrecognized asset gain (loss)                                54,148          (98,769)          109,015
Amortization                                                               1,951           (6,345)           (4,108)
                                                                  --------------    -------------    --------------
Net periodic benefit cost                                         $      107,659    $      65,384    $       70,700
                                                                  ==============    =============    ==============
</TABLE>


                                       15
<PAGE>


================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 9.  DEFERRED COMPENSATION AND LIFE INSURANCE

Deferred compensation plans have been adopted for certain members of the Board
of Directors for future compensation upon retirement. Under plan provisions
aggregate annual payments ranging from $1,568 to $8,482 are payable for ten
years certain, generally beginning at age 65. Liability accrued for compensation
deferred under the plan amounts to $117,681 and $117,625 at December 31, 1999
and 1998, respectively.

Charges to income are based on present value of future cash payments, discounted
at 8%, and amounted to $9,412, $9,572 and $9,404 for 1999, 1998 and 1997,
respectively.

The Bank is owner and beneficiary of life insurance policies on these directors.
Policy cash values, net of policy loans, totaled $35,093 and $26,785 at December
31, 1999 and 1998, respectively.

NOTE 10.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of the Company's financial instruments are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
                                                        DECEMBER 31, 1999                  DECEMBER 31, 1998
                                                 -------------------------------    -----------------------------
                                                   CARRYING            FAIR           CARRYING            FAIR
                                                    AMOUNT             VALUE           AMOUNT             VALUE
                                                    ------             -----           ------             -----
FINANCIAL ASSETS
   Cash and cash equivalents                     $       3,775     $       3,775    $       2,985    $        2,985
   Interest-bearing deposits with banks                  2,000             2,000            7,100             7,100
   Federal funds sold                                    6,975             6,975           11,825            11,825
   Securities, available-for-sale                       33,214            33,214           25,981            25,981
   Securities, held to maturity                         19,169            18,815           15,348            15,741
   Loans, net of allowance for loan losses              87,685            86,180           85,810            89,213

FINANCIAL LIABILITIES
   Deposits                                            139,808           139,451          135,211           136,993

OFF-BALANCE-SHEET ASSETS (LIABILITIES)
   Commitments to extend credit and
     standby letters of credit                               -                 -                -                 -
   Commercial letters of credit                              -                 -                -                 -

NOTE 11.  INCOME TAXES

CURRENT AND DEFERRED INCOME TAX COMPONENTS

The components of income tax expense (substantially all Federal) are as follows:
<CAPTION>
<S>                                                                    <C>              <C>               <C>
                                                                       1999             1998              1997
                                                                  --------------    -------------    --------------

Current                                                           $      633,958    $     864,003    $      866,320
Deferred                                                                  15,762          (82,635)         (213,850)
                                                                  --------------    -------------    --------------
                                                                  $      649,720    $     781,368    $      652,470
                                                                  ==============    =============    ==============
</TABLE>


                                       16
<PAGE>


================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 11.  INCOME TAXES, CONTINUED

RATE RECONCILIATION

A reconciliation of the expected income tax expense computed at 34% to income
tax expense included in the statements of income is as follows:
<TABLE>
<CAPTION>
<S>                                                                    <C>              <C>               <C>
                                                                       1999             1998              1997
                                                                  --------------    -------------    --------------

Expected tax expense                                              $      889,050    $     924,875    $      852,092
Tax exempt interest                                                     (280,737)        (233,669)         (186,555)
Other                                                                     41,407           90,162           (13,067)
                                                                  --------------    -------------    --------------
                                                                  $      649,720    $     781,368    $      652,470
                                                                  ==============    =============    ==============

DEFERRED TAX ANALYSIS

The components of net deferred tax assets (substantially all Federal) at
December 31, 1999 and 1998 are summarized as follows:
<CAPTION>
<S>                                                                                     <C>               <C>
                                                                                        1999              1998
                                                                                    -------------    ---------------

Deferred tax assets                                                                 $   1,140,978    $      739,541
Deferred tax liabilities                                                                  (75,904)         (149,997)
                                                                                    -------------    --------------
                                                                                    $   1,065,074    $      589,544
                                                                                    =============    ==============

The tax effects of each significant item creating deferred taxes are summarized
below:
<CAPTION>
<S>                                                                                     <C>               <C>
                                                                                        1999              1998
                                                                                    -------------    ---------------

Net unrealized appreciation on securities available for sale                        $     411,991    $      (79,301)
Allowance for loan losses                                                                 440,684           392,499
Other valuation reserves                                                                   91,671            85,520
Deferred compensation and accrued pension costs                                           100,372           152,998
Deferred loan fees                                                                         96,260           108,524
Depreciation                                                                              (66,976)          (47,774)
Accretion of discount on investment securities                                             (8,928)          (22,922)
                                                                                    -------------    --------------
                                                                                    $   1,065,074    $      589,544
                                                                                    =============    ==============
</TABLE>
NOTE 12.  COMMITMENTS AND CONTINGENCIES

LITIGATION

In the normal course of business, the Company is involved in various legal
proceedings. After consultation with legal counsel, management believes that any
liability resulting from such proceedings will not be material to the
consolidated financial statements.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, credit risk in excess
of the amount recognized in the consolidated balance sheets.


                                       17
<PAGE>


================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 12.  COMMITMENTS AND CONTINGENCIES, CONTINUED

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK, CONTINUED

The Bank's exposure to loan loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as for on-balance-sheet instruments. A summary of the Bank's
commitments at December 31, 1999 and 1998, is as follows:

                                                 1999              1998
                                             -------------    --------------

Commitments to extend credit                 $  13,647,000    $    7,097,000
Standby letters of credit                           30,000           132,000
                                             -------------    --------------
                                             $  13,677,000    $    7,229,000
                                             =============    ==============

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the party. Collateral held varies, but may include accounts
receivable, crops, livestock, inventory, property and equipment, residential
real estate and income producing commercial properties.

Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Bank deems necessary.

CONCENTRATIONS OF CREDIT RISK

The majority of the Company's loans, commitments to extend credit, and standby
letters of credit have been granted to customers in the Company's market area.
The majority of such customers are depositors of the Bank. Investments in state
and municipal securities involve governmental entities within and outside the
Company's market area. The concentrations of credit by type of loan are set
forth in Note 4. The distribution of commitments to extend credit approximates
the distribution of loans outstanding. Standby letters of credit are granted
primarily to commercial borrowers. The Company, as a matter of policy, does not
extend credit to any single borrower or group of related borrowers in excess of
approximately $1,800,000. Although the Bank has a reasonably diversified loan
portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon economic conditions in and around Floyd, Carroll,
and Roanoke Counties and the City of Roanoke, Virginia. A significant amount of
the real estate loans set forth in Note 4 are secured by commercial real estate.
In addition, the Company has a loan concentration relating to customers who are
motel and bed-and-breakfast owners and operators. Total loans and loan
commitments to this industrial group amounted to approximately $10,800,000 and
$8,900,000 at December 31, 1999 and 1998, respectively.

The Company has cash and cash equivalents on deposit with financial institutions
which exceed federally-insured limits.

LEASES

The Bank's Willis office is leased under an operating lease at a yearly rental
of $1,500. The lease expires January 31, 2003. Rental expense was $1,500 for
1999 and 1998, and $1,125 for 1997.


                                       18
<PAGE>


================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 13.  REGULATORY RESTRICTIONS

DIVIDENDS

The Company's dividend payments are made from dividends received from the Bank.
The Bank, as a Virginia banking corporation, may pay dividends only out of its
retained earnings. However, regulatory authorities may limit payment of
dividends by any bank when it is determined that such a limitation is in the
public interest and is necessary to ensure financial soundness of the Bank.

INTERCOMPANY TRANSACTIONS

The Bank's legal lending limit on loans to the Company are governed by Federal
Reserve Act 23A, and differ from legal lending limits on loans to external
customers. Generally, a bank may lend up to 10% of its capital and surplus to
its Parent, if the loan is secured. If collateral is in the form of stocks,
bonds, debentures or similar obligations, it must have a market value when the
loan is made of at least 20% more than the amount of the loan, and if
obligations of a state or political subdivision or agency thereof, it must have
a market value of at least 10% more than the amount of the loan. If such loans
are secured by obligations of the United States or agencies thereof, or by
notes, drafts, bills of exchange or bankers' acceptances eligible for rediscount
or purchase by a Federal Reserve Bank, requirements for collateral in excess of
the loan amount do not apply. Under this definition, the legal lending limit for
the Bank on loans to the Company was approximately $1,300,000 at December 31,
1999. No 23A transactions were deemed to exist between the Company and the Bank
at December 31, 1999.

CAPITAL REQUIREMENTS

The Company is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory (and possibly additional discretionary) actions by
regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets, as all those terms are defined in the regulations.
Management believes, as of December 31, 1999, that the Bank meets all capital
adequacy requirements to which it is subject.

As of December 31, 1999, the most recent notification from the Federal Reserve
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.


                                       19
<PAGE>


================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 13.  REGULATORY RESTRICTIONS, CONTINUED

CAPITAL REQUIREMENTS, CONTINUED

The Bank's actual capital amounts and ratios are also presented in the table (in
thousands).
<TABLE>
<CAPTION>
                                                                                                  TO BE WELL
                                                                        REQUIRED               CAPITALIZED UNDER
                                                                       FOR CAPITAL             PROMPT CORRECTIVE
                                               ACTUAL               ADEQUACY PURPOSES          ACTION PROVISIONS
                                               ------               -----------------          -----------------
                                         AMOUNT         RATIO       AMOUNT        RATIO       AMOUNT        RATIO
                                         ------         -----       ------        -----       ------        -----
DECEMBER 31, 1999:
<S>                                          <C>         <C>           <C>          <C>         <C>          <C>
   Total Capital
     (to Risk-Weighted Assets)        $      14,100      14.5%  >$      7,765   >   8.0%  >$       9,706  >   10.0%
                                                                -               -         -               -
   Tier I Capital
     (to Risk-Weighted Assets)        $      12,881      13.3%  >$      3,882   >   4.0%  >$       5,824  >    6.0%
                                                                -               -         -               -
   Tier I Capital
     (to Average Assets)              $      12,881       8.4%  >$      6,172   >   4.0%  >$       7,716  >    5.0%
                                                                -               -         -               -

DECEMBER 31, 1998:
   Total Capital
     (to Risk-Weighted Assets)        $      13,501      15.1%  >$      7,159   >   8.0%  >$       8,948  >   10.0%
                                                                -               -         -               -
   Tier I Capital
     (to Risk-Weighted Assets)        $      12,376      13.8%  >$      3,579   >   4.0%  >$       5,369  >    6.0%
                                                                -               -         -               -
   Tier I Capital
     (to Average Assets)              $      12,376       8.2%  >$      6,066   >   4.0%  >$       7,582  >    5.0%
                                                                -               -         -               -
</TABLE>
NOTE 14.  TRANSACTIONS WITH RELATED PARTIES

The Bank has entered into transactions with its directors, significant
shareholders and their affiliates (related parties). Such transactions were made
in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features.

Aggregate 1999 and 1998 loan transactions with related parties were as follows:

                                               1999              1998
                                           -------------    --------------

BALANCE, BEGINNING                         $     772,353    $      926,805

New loans                                         40,966           590,946
Repayments                                       (57,986)         (693,999)
Relationship changes                                   -           (51,399)
                                           -------------    --------------
BALANCE, ENDING                            $     755,333    $      772,353
                                           =============    ==============


                                       20
<PAGE>


================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 15.   PARENT COMPANY FINANCIAL INFORMATION

Condensed financial information of Cardinal Bankshares Corporation is presented
as follows:
<TABLE>
<CAPTION>
                                 BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998
<S>                                                                                        <C>              <C>
                                                                                           1999             1998
                                                                                    -------------    --------------
ASSETS
   Cash due from banks                                                              $   2,999,652    $    3,011,801
   Loans, net of allowance for loan losses
     of $25,000 in 1999 and 1998                                                        2,622,629         1,722,064
   Investment in affiliate bank at equity                                              12,081,254        12,528,906
   Other assets                                                                            71,164            58,568
                                                                                    -------------    --------------
                                                                                    $  17,774,699    $   17,321,339
                                                                                    =============    ==============

LIABILITIES
   Accounts payable and other liabilities                                           $      17,102    $          214
                                                                                    -------------    --------------

SHAREHOLDERS' EQUITY
   Common stock                                                                         5,117,710         5,119,110
   Surplus                                                                              2,925,150         2,925,150
   Retained earnings                                                                   10,514,759         9,123,733
   Unrealized appreciation on affiliate's investment
     securities available for sale, net of income taxes                                  (800,022)          153,132
                                                                                    -------------    --------------
                                                                                       17,757,597        17,321,125
                                                                                    -------------    --------------
                                                                                    $  17,774,699    $   17,321,339
                                                                                    =============    ==============
<CAPTION>
                              STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<S>                                                                    <C>              <C>               <C>
                                                                       1999             1998              1997
                                                                  --------------    -------------    --------------
INCOME:
   Dividends from affiliate bank                                  $    1,500,000    $   1,500,000    $    1,100,000
   Interest on taxable securities                                        121,032          160,679           207,432
   Other income                                                                -            1,429                 -
                                                                  --------------    -------------    --------------
                                                                       1,621,032        1,662,108         1,307,432
                                                                  --------------    -------------    --------------
EXPENSES:
   Salaries                                                               98,232           88,078            27,166
   Management and professional fees                                       65,835           37,692           132,588
   Other expenses                                                         24,088           34,443            25,791
                                                                  --------------    -------------    --------------
                                                                         188,155          160,213           185,545
                                                                  --------------    -------------    --------------
              Income before tax benefit and equity in
                           undistributed income of affiliate           1,432,877        1,501,895         1,121,887

INCOME TAX (EXPENSE) BENEFIT                                              26,754             (720)           (8,308)
                                                                  --------------    -------------    --------------
              Income before equity in
                             undistributed income of affiliate         1,459,631        1,501,175         1,113,579

EQUITY IN UNDISTRIBUTED INCOME OF AFFILIATE                              505,502          437,677           740,105
                                                                  --------------    -------------    --------------
         Net income                                               $    1,965,133    $   1,938,852    $    1,853,684
                                                                  ==============    =============    ==============
</TABLE>


                                       21
<PAGE>


================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 15.   PARENT COMPANY FINANCIAL INFORMATION, CONTINUED

                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
<S>                                                                    <C>              <C>               <C>
                                                                       1999             1998              1997
                                                                  --------------    -------------    --------------

CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                     $    1,965,133    $   1,938,852    $    1,853,684
   Adjustments to reconcile net income to net
     cash provided by operating activities:
       Amortization                                                        5,929            5,929             5,929
       Provision for loan losses                                               -                -                 -
       Increase (decrease) in equity in undistributed
         income of affiliate                                            (505,502)        (437,677)         (740,105)
       Deferred income taxes                                                   -                -                 -
       Net change in other assets                                        (18,525)         (16,323)            2,096
       Net change in other liabilities                                    16,888           (7,454)            6,024
                                                                  --------------    -------------    --------------
         Net cash provided by operating activities                     1,463,923        1,483,327         1,127,628
                                                                  --------------    -------------    --------------

CASH FLOWS FROM INVESTING ACTIVITIES,
    NET (INCREASE) DECREASE IN LOANS                                    (900,565)          75,023           570,424
                                                                  --------------    -------------    --------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Dividends paid                                                       (568,147)        (542,625)         (513,855)
   Redemption of fractional shares                                             -                -            (8,430)
   Common stock purchased                                                (22,685)         (13,500)                -
   Common stock reissued                                                  15,325           13,500                 -
                                                                  --------------    -------------    --------------
         Net cash used by financing activities                          (575,507)        (542,625)         (522,285)
                                                                  --------------    -------------    --------------
         Net increase in cash and cash equivalents                       (12,149)       1,015,725         1,175,767

CASH AND CASH EQUIVALENTS, BEGINNING                                   3,011,801        1,996,076           820,309
                                                                  --------------    -------------    --------------
CASH AND CASH EQUIVALENTS, ENDING                                 $    2,999,652    $   3,011,801    $    1,996,076
                                                                  ==============    =============    ==============
</TABLE>


                                       22
<PAGE>


================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS

OVERVIEW

Management's Discussion and Analysis is provided to assist in the understanding
and evaluation of Cardinal Bankshares Corporation's financial condition and its
results of operations. The following discussion should be read in conjunction
with the Corporation's consolidated financial statements.

Cardinal Bankshares Corporation, the parent company of The Bank of Floyd,
currently operates four offices in Floyd, Roanoke and Carroll Counties of
Virginia. The main office is in Floyd with a limited service office in Willis.
The Roanoke office is in the Cave Spring area of Roanoke County. The Hillsville
office is located in Carroll County on Route 52 in Hillsville, Virginia.

The individual market conditions of each county vary from rural to urban with
Floyd County being the most rural and Roanoke the most urban. Each have their
own growth patterns which vary in intensity. The Bank of Floyd and bank
personnel work with local government and leaders in an effort to attract
industry to Floyd County.

The earnings position of the Bank continues to be strong. Cardinal Bankshares
Corporation experienced record net earnings for 1999, $1,965,133 compared to
$1,938,852 for 1998 and $1,853,684 in 1997. Return on average assets remained
constant at 1.3% for 1999, 1998 and 1997. During 1999, 1998 and 1997, revenues
from the Bank of Floyd represent over 95% of Cardinal Bankshares Corporation's
total revenues. All of these ratios compare favorably to members of our peer
group.

Average equity to average assets shows the Bank with a strong capital position
with a ratio of 11.4%. Our capital position continues to be above our peer
group's average.

The total assets of Cardinal Bankshares Corporation grew to $158,140,485 from
$153,409,703, a 3.08% increase, continuing our strategy to grow the Company.
Foreclosed properties were reduced by 4.4% to a balance of $97,256 at year end.

In 1999, a package of financial modernization laws were passed by the United
states Congress that were the most sweeping changes in our history. This
package, known as HR-10, opens many doors of opportuity and challenge to the
financial services industry. In the year 2000, we will be moving toward taking
advantage of the opportunities this legislation offers us.

Management continues to look at increasing market share by expanding to
contiguous markets as it becomes feasible, with capital generated through normal
earnings supporting growth of the Company. Management of Cardinal Bankshares
Corporation has no plans to raise new capital from external sources to finance
expansion activities in the foreseeable future.


                                       23
<PAGE>


================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
TABLE 1.  NET INTEREST INCOME AND AVERAGE BALANCES (THOUSANDS)
----------------------------------------------------------------------------------------------------------------------------------
                                                1999                         1998                           1997
                                    ----------------------------  ----------------------------     -------------------------
                                               INTEREST                      INTEREST                       INTEREST
                                    AVERAGE     INCOME/   YIELD/  AVERAGE     INCOME/    YIELD/    AVERAGE   INCOME/   YIELD/
                                    BALANCE     EXPENSE    COST   BALANCE     EXPENSE     COST     BALANCE   EXPENSE    COST
                                    -------     -------    ----   -------     -------     ----     -------   -------    ----
Interest earning assets:
<S>                                   <C>        <C>       <C>    <C>         <C>         <C>       <C>      <C>        <C>
  Deposit in other banks              $   394    $  197    4.99%  $ 5,278     $  288      5.46%     $ 652    $  38      5.83%
  Taxable investment securities        30,676     1,904    6.21%   28,845      1,844      6.39%    31,364    2,159      6.88%
  Nontaxable investment securities     16,848       773    4.59%   13,331        626      4.70%    10,183      491      4.82%
  Federal funds sold                    9,633       479    4.97%    9,040        477      5.28%     5,743      315      5.48%
  Loans, net                           84,920     7,707    9.08%   83,611      8,035      9.61%    86,528    8,075      9.33%
                                     --------    -------   ----- --------     -------     -----   --------   -------    -----
      Total interest-earning assets   146,021    11,060           140,105     11,270              134,470   11,078
                                    ---------    -------         --------     --------            --------  --------

      Yield on average
        interest-earning assets                            7.57%                          8.04%                         8.24%
                                                           =====                          =====                         =====

Noninterest-earning assets:
  Cash and due from banks               2,579                       2,150                           1,942
  Premises and equipment                2,398                       2,020                           1,593
  Interest receivable and other         5,629                       4,473                           3,524
                                    ---------                    --------                           -----
    Total noninterest-earning
      assets                           10,606                       8,643                           7,059
                                     --------                    --------                        --------

    Total assets                     $156,627                    $148,748                        $141,529
                                     ========                    ========                        ========

Interest-bearing liabilities:
   Demand deposits                  $  10,180    $  240    2.36%  $ 8,892    $   250      2.81%  $  8,766  $   253      2.89%
  Savings deposits                     18,945       569    3.00%   18,055        582      3.22%    18,096      582      3.22%
  Time deposits                        89,764     4,794    5.34%   88,100      4,966      5.64%    83,002    4,703      5.67%
  Other borrowings                          -         -    0.00%        -          -      0.00%     2,485      143      5.75%
                                     --------   -------    ----- --------     -------    -----     ------   --------   -----
    Total interest-bearing
      liabilities                     118,889     5,603           115,047      5,798              112,349    5,681
                                     --------   -------          --------    -------              -------   ------

    Cost on  average interest-
      bearing liabilities                                  4.71%                          5.04%                         5.06%
                                                       =========                         =====                         =====

Noninterest-bearing
  liabilities
    Demand deposits                  $ 18,669                      15,537                          12,863
    Interest payable and other          1,269                      1, 272                             908
                                    ---------                   ---------                          ------
      Total noninterest-bearing
        liabilities                    19,938                      16,809                          13,771
                                     --------                    --------                         -------
      Total liabilities               138,827                     131,856                         126,120

Stockholders' equity                   17,800                      16,892                          15,409
                                    ---------                   ---------                       ---------
      Total liabilities and
       stockholders' equity          $156,627                    $148,748                        $141,529
                                     ========                    ========                        ========

  Net interest income                        $    5,457                      $ 5,472                      $  5,397
                                             ==========                       ======                      ========

  Net yield on
    interest-earning assets                                3.74%                          3.91%                         4.01%
                                                       =========                         =====                         =====
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       24
<PAGE>


================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
 TABLE 2.  RATE/VOLUME VARIANCE ANALYSIS (THOUSANDS)
---------------------------------------------------------------------------------------------------------------------------
                                            1999 COMPARED TO 1998                        1998 COMPARED TO 1997
                                      -----------------------------------            --------------------------------
                                      INTEREST              VARIANCE                 INTEREST            VARIANCE
                                      INCOME/           ATTRIBUTABLE TO               INCOME/        ATTRIBUTABLE TO
                                      EXPENSE         -------------------             EXPENSE      ------------------
                                      VARIANCE        RATE        VOLUME              VARIANCE      RATE       VOLUME
                                      --------        ----        ------              --------      ----       ------

Interest-earning assets:
<S>                                   <C>            <C>           <C>                <C>          <C>        <C>
  Deposits in other banks             $   (91)       $ (18)        $  (73)            $   250      $ (20)     $  270
  Taxable investment securities            60          (57)           117                (315)      (142)       (173)
  Nontaxable investment securities        147          (18)           165                 135        (17)        152
  Federal funds sold                        2          (29)            31                 162        (19)        181
  Loans                                  (328)        (454)           126                 (40)       232        (272)
                                      -------        -----         ------             --------     ------     -------
    Total                                (210)        (576)           366                 192         34         158
                                      -------        -----         ------             ---------    ------     -------

Interest-bearing liabilities:
  Demand deposits                         (10)         (46)            36                  (3)        (7)          4
  Savings deposits                        (13)         (42)            29                   -          1          (1)
  Time deposits                          (172)        (266)            94                 263        (26)        289
   Other borrowings                         -            -              -                (143)         -        (143)
                                      -------        -----         ------             --------     ------     -------
    Total                                (195)        (354)           159                 117        (32)        149
                                      -------        -----         ------             --------     ------     -------
      Net interest income             $   (15)       $(222)        $  207             $    75     $   66     $     9
                                      =======        =====         ======             ========     ======     =======
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
NET INTEREST INCOME

Net interest income, the principal source of bank earnings, is the amount of
income generated by earning assets (primarily loans and investment securities)
less the interest expense incurred on interest-bearing liabilities (primarily
deposits used to fund earning assets). Table 1 summarizes the major components
of net interest income for the past three years and also provides yields and
average balances.

Net interest income remained constant in 1999 at $5.5 million, approximately the
same as 1998 and increased by $75,036 from 1997. The net interest income
realized in 1999 remained constant in spite of an increase in the volume of
average interest earning assets. Competition for deposits and loans continue to
be a major factor in net margins. Predatory pricing and competition from
unregulated organizations have also been a factor in the declining net interest
margin. The net interest margin for 1999 decreased by 17 basis points to 3.74%
compared to 3.91% for 1998 and 4.01% for 1997. The effects of changes in volumes
and rates on net interest income in 1999 compared to 1998, and 1998 compared to
1997 are shown in Table 2.


                                       25
<PAGE>


================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

Interest income for 1999 decreased $209,519 to $11.1 million from $11.3 million
in 1998. Interest income in 1997 totaled $11.1 million. The decrease in interest
income in 1999 from 1998 was the result of an increase in interest-earning
assets coupled with lower interest yields on loans. The lower yield on loans was
a result of maturing loans and refinancing of loans with higher rates. The
increase in interest income in 1998 from 1997 was the result of an increase in
the volume of deposits in other banks, federal funds sold and nontaxable
investment securities along with a 28 basis point increase in the yield on net
average loans.

Interest expense decreased by $194,867 in 1999 to $5.6 million from $5.8 million
in 1998 and $5.7 million in 1997. The decrease in 1999 from 1998 was due
primarily to lower rates paid on deposits. Interest expense increased by
$116,431 in 1998 from 1997. The increase was due primarily to a $5.1 million or
6.1% increase in the volume of time deposits. Interest paid on time deposits,
which make up the largest portion of interest-bearing deposits, decreased
$172,000, or 3.5% from 1998 to 1999. This decrease is due primarily to lower
rates in the market place. The average rate paid on time deposits decreased 30
basis points to 5.34% in 1999 from 5.64% in 1998 and 5.67% in 1997.

PROVISION FOR LOAN LOSSES

The allowance for loan losses is established to provide for potential losses in
the Bank's loan portfolio. Loan losses and recoveries are charged or credited
directly to the allowance. Management determines the provision for loan losses
required to maintain an allowance adequate to provide for any potential losses.
The factors considered in making this decision are the collectibility of past
due loans, volume of new loans, composition of the loan portfolio, and general
economic outlook.

In 1999, management decreased the provision for loan loss reserve from $175,000
in 1998 to $141,721 in 1999. The provision for loan losses was $500,000 in 1997.
The Bank's allowance for loan losses as a percentage of total loans at the end
of 1999 was 1.86% as compared to 1.91% in 1998 and 1.67% in 1997. When compared
to the most recent available peer bank information as of September 30, 1999 the
allowance for loan losses as percentage of total loans at the end of 1999 was in
the top 10% of all peer banks.

Additional information is contained in Tables 12, 13 and 14, and is discussed in
Nonperforming and Problem Assets.

OTHER INCOME

Noninterest income consists of revenues generated from a broad range of
financial services and activities. The majority of noninterest income is a
result of service charges on deposit accounts including charges for insufficient
funds items and fees charged for nondeposit services. Noninterest income totaled
$385,955 in 1999, a decrease of 21.1% from the $489,365 recorded in 1998.
Noninterest income in 1997 totaled $542,985. The majority of the decrease in
noninterest income from 1999 to 1998 is explained by a lower amount of gains on
the sale of other real estate owned and a lower amount of gains on securities.
Noninterest income also includes fees charged for services such as safe deposit
box rental fees, letters of credit fees, and gains realized on the sale of fixed
assets. The primary sources of noninterest income for the past three years are
summarized in Table 3.


                                       26
<PAGE>


================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

 TABLE 3.  SOURCES OF NONINTEREST INCOME (THOUSANDS)
--------------------------------------------------------------------------------

                                                1999         1998        1997
                                                ----         ----        ----

Service charges on deposit accounts           $  200       $ 152        $ 144
Other service charges and fees                    47          38           36
Insurance commissions                             82          54           46
Gain on the sale of securities                     5          27            7
Gain on sale of other real estate owned           10          90          233
Other income                                      42         128           77
                                               -----        ----        -----
 Total noninterest income                      $ 386        $489        $ 543
                                               =====        ====        =====

--------------------------------------------------------------------------------

OTHER EXPENSE

Noninterest expense for 1999 increased by $20,584 or 0.7% to $3.09 million.
Noninterest expense in 1998 was $3.07 million and $2.93 million in 1997 (see
Table 4). The overhead ratio of noninterest expense to adjusted total revenues
(net interest income plus noninterest income excluding securities transactions)
was 52.9% in 1999, 51.7% in 1998 and 49.4% in 1997.

While there were significant increases in items such as building depreciation
expense, $19,238, furniture and equipment, $18,000, telephone expense, $12,000,
and building insurance, $2,364, There were also significant decreases in items
such as education & seminars, travel and other operating expenses. The majority
of the increases were due to the renovations to the main building in Floyd which
were completed in 1999. The areas that saw decreases were the result of
management's cost control efforts.

Table 4 provides a further breakdown of noninterest expense for the past three
years.


                                       27
<PAGE>


================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
TABLE 4.  SOURCES OF NONINTEREST EXPENSE (THOUSANDS)
---------------------------------------------------------------------------------------------------------------
                                                              1999             1998               1997
                                                              ----             ----               ----

<S>                                                          <C>              <C>                <C>
Salaries & wages                                             $1,340           $1,386             $1,298
Employee benefits                                               574              485                463
                                                            --------        --------           --------
  Total personnel expense                                     1,914            1,871              1,761

Occupancy expense                                               163              137                116
Furniture & equipment                                           283              275                273
Printing & supplies                                              56               55                 44
FDIC deposit insurance                                           16               15                 14
Professional services                                           123              119                120
Postage                                                          78               76                 72
Telephone                                                        61               49                 40
Courier fees                                                     37               29                 21
Education & seminars                                              7               17                 20
Travel expense                                                    9               17                 21
Director fees and expense                                        43               48                 38
Advertising and public relations                                 33               33                 31
Insurance expense                                                30               33                 36
Capital Stock Tax                                                96               97                 77
Outside services                                                 30               28                 26
Other real estate expense, net                                    1                4                 46
Real estate loan servicing fee                                   13               16                 12
Other operating expense                                          93              147                165
                                                             ------           ------             ------

  Total noninterest expense                                  $3,086           $3,066             $2,933
                                                             ======           ======             ======

---------------------------------------------------------------------------------------------------------------
</TABLE>


                                       28
<PAGE>


================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

INCOME TAXES

Income tax expense is based on amounts reported in the statements of income
(after adjustments for non-taxable income and non-deductible expenses) and
consists of taxes currently due plus deferred taxes on temporary differences in
the recognition of income and expense for tax and financial statement purposes.
The deferred tax assets and liabilities represent the future Federal income tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.

Income tax expense (substantially all Federal) was $649,720 in 1999, $781,368 in
1998 and $652,470 for 1997 representing 24.9%, 28.7% and 26.0% of income before
income taxes, respectively. The tax expense decreased $131,648 or 16.9% in 1999
from 1998.

The Bank's deferred income tax benefits and liabilities result primarily from
temporary differences (discussed above) in provisions for credit losses,
valuation reserves, depreciation, deferred compensation, deferred income,
pension expense, and investment security discount accretion.

Net deferred income tax benefits of $1,065,000, $589,000 and $468,000 at
December 31, 1999, 1998, and 1997, respectively, are included in other assets.
At December 31, 1999, $411,991 of the total deferred tax asset is applicable to
unrealized depreciation on investment securities available for sale.
Accordingly, this amount was not charged to income but recorded directly to the
related stockholders' equity account.

YEAR 2000 (Y2K) ISSUES

Y2K refers to the potential disruption to computers lacking the ability to
recognize years beyond 1999. During September 1997, management of the Bank
formed a Y2K committee to identify, monitor, and control the potential risks
associated with the Y2K computer problem. These risks included the inability to
process loan and deposit transactions such as payments and computation of
interest due to a computer failure. Another risk was a possible disruption to
bank operations due to the failure of equipment that relies on embedded
technology such as microprocessors. Other risks included disruptions in
operations of the bank's service vendors and large loan and deposit customers.

Total estimated expenses to assess and control Y2K risks were $180,000 for the
time period from September 1997 to December 1999. These expenses included the
following: (1) management time involved during risk assessment and testing, (2)
expenses for Y2K training conferences attended by management, (3) expenses for
seminars held by The Bank of Floyd for bank customers, (4) expenses for hardware
and software upgrades, (5) and increases in legal expenses.

Bank management established a Y2K plan with the following five phases:
awareness, assessment, renovation, validation and implementation. During the
awareness phase, management and the board of directors became aware of the Y2K
issue and potential risks. During the assessment phase, management identified
all hardware, software, and environmental systems such as security systems,
elevators, vaults and customer/vendor interdependencies affected by the Y2K date
change. These items and systems were prioritized by assigning a significance
rating of mission critical, mission necessary, mission desirable, or mission
unrelated. During the renovation phase management performed necessary computer
hardware and software upgrades and other system replacements.


                                       29
<PAGE>


================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

During the validation and implementation phase management tested all mission
critical applications. All mission critical systems were certified as Y2K
compliant as of January 18th, 1999. These mission critical systems included the
following items: mainframe hardware, software and interfaces with other bank
computer systems, the Federal Reserve Fedline system and new account and loan
processing systems.

The Y2K risks involved in a worst case scenario involved malfunctions with
mission critical or mission desirable applications and systems. For example, if
certain systems such as the mainframe computer were to malfunction it would be
almost impossible to operate the bank without a backup system. If certain loan
and deposit processing software were to malfunction it would be difficult to
extend loans and open deposit accounts without an alternate process. Other
disruptions beyond management control would include loss of electrical and
telephone service.

To deal with the worst case possibilities, bank management established a Y2K
contingency plan. This contingency plan included identifying and using other
vendors who were fully Y2K compliant for critical functions, and maintaining
supplies necessary to perform functions manually. To plan for a mainframe
computer malfunction, management had back up arrangements in place with a third
party to use a comparable mainframe. Management had in place manual, paper based
processes in the event of the failure of loan and deposit processing software.
Bank management maintained constant communication with electric and telephone
companies to evaluate their Y2K efforts and allow the Bank of Floyd to develop
needed plans. The Federal Reserve bank had the ability to ship extra currency to
various locations to cover any potential increased demand for currency.

During Y2K preparation period (September 1997 until present), the most well
informed people were available for guidance. Beginning in 1997, Mr. Moore,
President and CEO of Cardinal Bankshares Corporation, served on the American
Bankers Association (ABA) Task Force for Y2K Preparedness.

During the same period, Ms. Whitlock, Manager of Data Processing at the Bank of
Floyd, served as Technical Advisor for the ABA's Y2K training films. These
training films were used by banks nationwide to train their staffs how to handle
potential problems related to Y2K. Through these contacts with the ABA, the bank
had ready access to the most well informed people in the banking industry
regarding Y2K preparedness.

Fortunately for everyone, the millenium date change occurred with no problems
being encountered.


                                       30
<PAGE>


================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

EARNING ASSETS

One of the areas impacted by preparations for potential heavy cash demands near
the Y2K date change was earning assets. The extra cash on hand in anticipation
of heavier than normal demand amounted to approximately $1.8 million. For
approximately two months, this cash was not available for investing. As a
result, average earning assets increased only $1,212,000 (.8%) from the 1998
year-end. Total average earning assets represented 93.2% of total average assets
in 1999 compared to 94.2% in 1998. The mix of average earning assets changed in
1999 with an increase in average federal funds sold and investment securities, a
decrease in interest bearing bank balances and an increase in loans. Average
federal funds sold accounted for 6.2% of total average assets compared to 6.1%
in 1998. Average interest bearing bank balances accounted for 2.5% of total
average assets compated to 3.5% in 1998. Average loans accounted for 54.2% of
total average assets in 1999 compared to 56.2% in 1998. For 1997, average net
loans represented 61.1% of average assets. A summary of average assets for the
past three years is shown in Table 5.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
 TABLE 5.  AVERAGE ASSET MIX (THOUSANDS)
----------------------------------------------------------------------------------------------------------------------------


                                            1999                        1998                          1997
                                 --------------------------    ------------------------    -----------------------------

                                 AVERAGE                      AVERAGE                      AVERAGE
                                 BALANCE          %           BALANCE          %           BALANCE                %
                                 ----------   --------------  -----------   ------------   -----------   ---------------

EARNING
ASSETS:
<S>                              <C>               <C>         <C>            <C>        <C>                  <C>
  Loans, net                     $   84,920        54.22       $   83,611     56.21      $   86,528           61.14
  Investment securities              47,524        30.34           42,176     28.35          41,547           29.36
  Federal funds sold                  9,633         6.15            9,040      6.08           5,743            4.06
  Interest-bearing bank balances      3,944         2.52            5,278      3.55             652            0.45
                                    -------      --------          -------   ----------      -------       ---------
             Total earning assets   146,021        93.23          140,105     94.19         134,470           95.01
                                    --------- ------------       ---------   -----------     -------        --------


NONEARNING ASSETS:
  Cash and due from banks             2,579         1.65            2,150      1.44           1,942            1.37
  Premises and equipment              2,398         1.53            2,020      1.36           1,593            1.13
  Other assets                        5,629         3.59            4,473      3.01           3,524            2.49
                                 ----------     --------       ----------  ----------      ----------      --------
    Total nonearning assets           10,606        6.77            8,643      5.81           7,059            4.99
                                 -----------    --------       ----------  ----------      ----------      --------
      Total assets               $  156,627       100.00       $  148,748    100.00      $  141,529          100.00
                                 ==========     ========       ==========  ==========      ==========      ========

----------------------------------------------------------------------------------------------------------------------------
</TABLE>
LOANS

Average net loans totaled $84.9 million during 1999, an increase of $1.3 million
or 1.6% more than 1998. A significant portion of the loan portfolio, $73.7
million or 82.3%, is made up of loans secured by various types of real estate.
Total loans secured by 1-4 family residential properties represented 27.5% of
total loans at the end of 1999. The growth in 1999 and 1998 in loan
classifications, other than real estate, is primarily the result of an increase
in commercial loans to leasing companies (See Table 6). This leasing program has
been discontinued in 1999.


                                       31
<PAGE>


================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

The Bank makes both consumer and commercial loans to all neighborhoods within
its market area, including the low- and moderate-income areas. The market area
is generally defined to be all or portions of the Floyd, Roanoke, Montgomery and
Carroll Counties of Virginia and the Cities of Roanoke and Radford, Virginia.
The Bank places emphasis on consumer based installment loans and commercial
loans to small and medium sized businesses. Predatory pricing and competition
from unregulated organizations have also been a factor when generating new
loans. The amounts of loans outstanding by type at year-end 1999 and 1998, and
the maturity distribution of variable and fixed rate loans as of year-end 1999
are presented in Table 6 and Table 7, respectively.

--------------------------------------------------------------------------------
 TABLE 6.  LOAN PORTFOLIO SUMMARY (THOUSANDS)
--------------------------------------------------------------------------------



                                   DECEMBER 31, 1999       DECEMBER 31, 1998
                                   -----------------       -----------------


                                    AMOUNT      %          AMOUNT      %

Construction and development      $  3,420     3.82     $  4,028     4.59
Farmland                             3,767     4.20        4,134     4.71
1-4 family residential              24,664    27.52       24,545    27.96
Multifamily residential              1,763     1.97        2,219     2.53
Nonfarm, nonresidential             40,117    44.75       32,794    37.35
                                  --------   ------     --------   ------
  Total real estate                 73,731    82.26       67,720    77.14

Agricultural                         1,133     1.26        1,140     1.30
Commercial & industrial              4,326     4.83        5,630     6.41
Consumer                             6,004     6.70        7,244     8.25
Other                                  688     0.77            -       -
Leases                               3,748     4.18        6,057     6.90
                                  --------   ------     --------   ------
  Total                           $ 89,630   100.00     $ 87,791   100.00
                                  ========   ======     ========   ======
--------------------------------------------------------------------------------

Interest rates charged on loans vary with the degree of risk, maturity and
amount of the loan. Competitive pressures, money market rates, availability of
funds, and government regulation also influence interest rates. On average,
loans yielded 9.08% in 1999 compared to an average yield of 9.61% in 1998.


                                       32
<PAGE>


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MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
TABLE 7.  MATURITY SCHEDULE OF LOANS (THOUSANDS)
------------------------------------------------------------------------------------------------------------

                                                        CONSTRUCTION                        TOTAL
                                                           AND                          ---------------
                                                        DEVELOPMENT     OTHERS          AMOUNT     %
                                                        -----------     ------          ------   ------

<S>     <C>    <C>    <C>    <C>    <C>    <C>
Fixed rate loans:
  Three months or less                                  $     71       $ 1,196         $ 1,267      1.41
  Over three months to twelve months                           -         1,876           1,876      2.09
  Over twelve months to three years                        1,000         7,841           8,841      9.86
  Over three years to five years                               -         9,088           9,088     10.14
  Over five years to fifteen years                             -         8,512           8,512      9.50
  Over fifteen years                                           -         1,961           1,961      2.19
                                                        --------       -------         -------    ------

                  Total fixed rate loans                   1,071        30,474          31,545     35.19
                                                        --------       -------         -------    ------
Variable rate loans:
  Three months or less                                     1,817        11,248          13,065     14.58
  Over three months to twelve months                           -        12,321          12,321     13.75
  Over twelve months to three years                            -        18,415          18,415     20.55
  Over three years to five years                             194        12,355          12,549     14.00
  Over five years to fifteen years                           338         1,397           1,735      1.93
  Over fifteen years                                           -             -               -         -
                                                        --------       -------         -------     ------

                  Total variable rate loans                2,349        55,736          58,085     64.81
                                                        --------       -------         -------     ------

Total loans:
  Three months or less                                     1,888        12,444          14,332     15.99
  Over three months to twelve months                           -        14,197          14,197     15.84
  Over twelve months to three years                        1,000        26,256          27,256     30.41
  Over  three years to five years                            194        21,443          21,637     24.14
  Over five years to fifteen years                           338         9,909          10,247     11.43
  Over fifteen years                                           -         1,961           1,961      2.19
                                                        --------       -------         -------    ------

                  Total loans                           $  3,420       $86,210        $ 89,630    100.00
                                                        ========       =======        ========    ======
------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT SECURITIES

The Bank uses its investment portfolio to provide liquidity for unexpected
deposit decreases or increased loan generation, to meet the Bank's interest rate
sensitivity goals, and to generate income.

Management of the investment portfolio has always been conservative with
virtually all investments taking the form of purchases of U.S. Treasury, U.S.
Government agencies, Mortgage Backed Securities and State and local bond issues.
All securities are high quality and high grade. Management views the investment
portfolio as a source of income, and purchases securities with the intent of
retaining them until maturity. However, adjustments are necessary in the
portfolio to provide an adequate source of liquidity which can be used to meet
funding requirements for loan demand and deposit fluctuations and to control
interest rate risk. Therefore, from time to time, management may sell certain
securities prior to their maturity. Table 8 presents the investment portfolio at
the end of 1999 by major types of investments and maturity ranges. Maturities
may differ from scheduled maturities in mortgage-backed securities because the
mortgages underlying the securities may be called


                                       33
<PAGE>


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MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

or repaid prior to the scheduled maturity date. Maturities on all other
securities are based on the earlier of the contractual maturity or the call
date, if any.

The interest rate environment in 1999 caused the average yield of the investment
portfolio to increase to 7.23% from 5.89% in 1998. At December 31, 1999, the
market value of the investment portfolio was $52.0 million, representing a $1.4
million unrealized depreciation below amortized cost. This compared to a market
value of $41.7 million and a $625,000 appreciation over amortized cost a year
earlier.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
TABLE 8.  INVESTMENT SECURITIES (THOUSANDS)
--------------------------------------------------------------------------------------------------------------------------------

DECEMBER 31, 1999
                                                AMORTIZED COST DUE
                                    --------------------------------------------
                                    IN ONE     AFTER ONE    AFTER FIVE     AFTER    RESTRICTED
                                   YEAR OR      THROUGH      THROUGH        TEN       EQUITY                MARKET
                                    LESS       FIVE YRS.     TEN YRS.      YEARS    SECURITIES     TOTAL     VALUE
                                    ----       ---------     --------      -------  ------------   ------   -------
INVESTMENT SECURITIES:
<S>                                 <C>            <C>           <C>          <C>        <C>        <C>        <C>
US Government Agencies
  and Mortgage Backed Securities   $ 870       $ 14,374      $ 1,465      $ 16,069    $   -       $ 32,778   $ 31,599
State and political subs.          1,300          5,357        8,551         3,352        -         18,560     18,201
Other                                  -          1,576            -             -        -          1,576      1,549
Restricted Equity Securities           -              -            -             -      680            680        680
                                 --------      --------     --------      --------   -------      ---------  ----------
    Total                        $ 2,170       $ 21,307     $ 10,016      $ 19,421   $  680       $ 53,594   $ 52,029
                                 ========      ========     ========      ========   =======      =========  ==========

WEIGHTED AVERAGE YIELDS:
U.S. Government agencies
  and Mortgage Backed Securities    7.26%          6.15%        6.68%         6.57%       -
States and political subs.          6.57%          6.89%        7.03%         6.93%       -
Other                                  -           6.65%           -             -        -
Restricted Equity Securities           -              -            -             -     6.89%

     Consolidated                   7.08%          6.33%        6.94%         6.64%    6.89%          6.52%
<CAPTION>
DECEMBER 31, 1998                                                                                   BOOK     MARKET
                                                                                                    VALUE     VALUE
                                                                                                    -----     -----
<S>                                                                                                 <C>         <C>
INVESTMENT  SECURITIES:
U.S. Government agencies and  Mortgage Backed Securities                                           $24,376  $24,530
States and political subdivisions                                                                   14,586   14,999
Other                                                                                                1,497    1,555
Restricted Equity Securities                                                                           638      638
                                                                                                   -------  -------
     Total                                                                                         $41,097  $41,722
                                                                                                   =======  =======

--------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       34
<PAGE>


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MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

DEPOSITS

The Bank relies on deposits generated in its market area to provide the majority
of funds needed to support lending activities and for investments in liquid
assets. More specifically, core deposits (total deposits less certificates of
deposits in denominations of $100,000 or more) are the primary funding source.
The Bank's balance sheet growth is largely determined by the availability of
deposits in its markets, the cost of attracting the deposits, and the prospects
of profitably utilizing the available deposits by increasing the loan or
investment portfolios. Market conditions have resulted in depositors shopping
for deposit rates more than in the past. An increased customer awareness of
interest rates adds to the importance of rate management. The Bank's management
must continuously monitor market pricing, competitor's rates, and internal
interest rate spreads to maintain the Bank's growth and profitability. The Bank
attempts to structure rates so as to promote deposit and asset growth while at
the same time increasing overall profitability of the Bank.

Average total deposits for the year ended December 31, 1999 amounted to $137.6
million which was an increase of $7.0 million, or 5.3% over 1998. Average core
deposits totaled $121.8 million in 1999 representing a 4.8% increase over the
$116.2 million in 1998. The percentage of the Bank's average deposits that are
interest-bearing decreased to 86.4% in 1999 from 88.1% in 1998. Average demand
deposits which earn no interest increased to $18.7 million in 1999 from $15.5
million in 1998 and $12.9 million in 1997. Average deposits for the past three
years are summarized in Table 9.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
 TABLE 9.  DEPOSIT MIX (THOUSANDS)
-------------------------------------------------------------------------------------------------------------------------------


                                              1999                      1998                        1997
                                    --------------------         -------------------       ---------------------

                                    AVERAGE                      AVERAGE                    AVERAGE
                                    BALANCE        %             BALANCE       %            BALANCE         %
                                    -------      -------         -------    --------        -------      -------

INTEREST-BEARING DEPOSITS:
<S>                                 <C>            <C>         <C>              <C>       <C>             <C>
  NOW accounts                      $ 10,180       7.40        $  8,892         6.81      $  8,766        7.14
  Money Market                         3,323       2.42           3,365         2.58         3,228        2.63
  Savings                             15,622      11.36          14,690        11.25        14,868       12.12
  Small denomination certificates     73,980      53.78          73,755        56.48        70,924       57.79
  Large denomination certificates     15,784      11.47          14,345        10.98        12,078        9.84
                                    -------      ------        --------       ------      --------       -----
    Total interest-bearing deposits  118,889      86.43         115,047        88.10       109,864       89.52
Noninteresting-bearing deposits       18,669      13.57          15,537        11.90        12,863       10.48
                                    --------      ------        --------       ------      --------      ------
    Total deposits                  $137,558     100.00       $ 130,584       100.00      $122,727      100.00
                                    =========    =======      =========       =======     =========     ========
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The average balance of certificates of deposit issued in denominations of
$100,000 or more increased by $1.4 million or 10.0%, in 1999. Much of the
increase in large certificates of deposit is from local government funds. The
strategy of management has been to support loan and investment growth with core
deposits and not to aggressively solicit the more volatile, large denomination
certificates of deposit. Table 10 provides maturity information relating to
Certificate of Deposits of $100,000 or more at December 31, 1999.


                                       35
<PAGE>


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MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
TABLE 10.  LARGE TIME DEPOSIT MATURITIES (THOUSANDS)
--------------------------------------------------------------------------------


ANALYSIS OF TIME DEPOSITS OF $100,000 OR MORE AT DECEMBER 31, 1999:

     Remaining maturity of three months or less                     $ 4,059
     Remaining maturity over three through twelve month               9,706
     Remaining maturity over twelve months                            4,378
                                                                    -------
                          Total time deposits of $100,000 or more   $18,143
                                                                    =======
--------------------------------------------------------------------------------

CAPITAL ADEQUACY

Shareholder's equity amounted to $17.8 million at December 31, 1999, a 2.5%
increase over the 1998 year-end total of $17.3 million. The increase was
primarily a result of earnings partially offset by dividends and a decrease in
the market value of available for sale securites. Average shareholders' equity
as a percentage of average total assets amounted to 11.3% in 1999 and 11.4% in
1998.

Regulatory guidelines relating to capital adequacy provide minimum risk-based
ratios which assess capital adequacy while encompassing all credit risks,
including those related to off-balance sheet activities. Capital ratios under
these guidelines are computed by weighing the relative risk of each asset
category to derive risk-adjusted assets. The risk-based capital guidelines
require minimum ratios of core (Tier 1) capital (common shareholders' equity) to
risk-weighted assets of 4.0% and total regulatory capital (core capital plus
allowance for loan losses up to 1.25% of risk-weighted assets) to risk-weighted
assets of 8%. As of December 31, 1999 the Bank has a ratio of Tier 1 capital to
risk-weighted assets of 13.3% and a ratio of total capital to risk-weighted
assets of 14.5%. These ratios continue to be equal to or above most of our peer
group.


                                       36
<PAGE>


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MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
TABLE 11.  YEAR-END RISK-BASED CAPITAL (THOUSANDS)
--------------------------------------------------------------------------------


                                                         1999              1998
                                                  -----------       -----------

Tier I capital                                    $    12,881       $    12,376
Qualifying allowance for loan losses
   (limited to 1.25% of risk-weighted assets)           1,219             1,125
                                                  -----------       -----------
Total regulatory capital                          $    14,100       $    13,501
                                                  ===========       ===========
Total risk-weighted assets                        $    97,062       $    90,000
                                                  ===========       ===========

Tier I as a percent of risk-weighted assets             13.3%              13.8%
Total regulatory capital as a percent of risk-
   weighted assets                                      14.5%              15.1%
Leverage Ratio*                                          8.4%               8.2%


* TIER I CAPITAL DIVIDED BY AVERAGE TOTAL ASSETS FOR THE QUARTER ENDED DECEMBER
  31.
--------------------------------------------------------------------------------

In addition, a minimum leverage ratio of Tier I capital to average total assets
for the previous quarter is required by federal bank regulators, ranging from 3%
to 5%, subject to the regulator's evaluation of the Bank's overall safety and
soundness. As of December 31, 1999, the Bank had a ratio of year-end Tier I
capital to average total assets for the fourth quarter of 1999 of 8.4%. Table 11
sets forth summary information with respect to the Bank's capital ratios at
December 31, 1999. All capital ratio levels indicate that the Bank is well
capitalized.

At December 31, 1999 the Company had 511,771 shares of common stock outstanding
which were held by approximately 622 shareholders of record.


NONPERFORMING AND PROBLEM ASSETS

Certain credit risks are inherent in making loans, particularly commercial and
consumer loans. Management prudently assesses these risks and attempts to manage
them effectively. The Bank attempts to use shorter-term loans and, although a
portion of the loans have been made based upon the value of collateral, it tries
to rely primarily on the cash flow of the borrower as the source of repayment
rather than the value of the collateral.

The Bank also attempts to reduce repayment risks by adhering to internal credit
policies and procedures. These policies and procedures include officer and
customer limits, periodic loan documentation review and follow up on exceptions
to credit policies.

Nonperforming Assets at December 31, 1999 and 1998 are analyzed in Table 12.


                                       37
<PAGE>


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MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
TABLE 12.  NONPERFORMING ASSETS
--------------------------------------------------------------------------------

                                           1999                   1998
                                        --------             ---------

Non-Accrual Loans                       $1,826,688           $  66,251
Loans Past Due 90 Days or More             975,373             343,225
Foreclosed Properties                       97,256             101,756
                                        ----------           ---------
                                        $2,899,317           $ 511,232
                                        ==========           =========
--------------------------------------------------------------------------------

Nonperforming assets at year-end 1999 were 3.2% of loans outstanding and 0.6% at
year-end 1998.

Leases receivable of approximately $1,021,000 are included in nonaccural loans
and leases at December 31, 1999. The Bank discontinued this program in 1999 and
provided for estimated losses under these contracts in the allowance for loan
losses account.

The allowance for loan losses is maintained at a level adequate to absorb
potential losses. Some of the factors which management considers in determining
the appropriate level of the allowance for loan losses are: past loss
experience, an evaluation of the current loan portfolio, identified loan
problems, the loan volume outstanding, the present and expected economic
conditions in general, and in particular, how such conditions relate to the
market areas that the Bank serves. Bank regulators also periodically review the
Bank's loans and other assets to assess their quality. Credits deemed
uncollectible are charged to the allowance. Provisions for loan losses and
recoveries on loans previously charged off are added to the allowance. The
accrual of interest on loans is discontinued on a loan when, in the opinion of
management, there is an indication that the borrower may be unable to meet
payments as they become due.

The provision for loan losses, net charge-offs and the activity in the allowance
for loan losses is detailed in Table 13.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
 TABLE 13.  LOAN LOSSES
-----------------------------------------------------------------------------------------------------


                                                           1999               1998           1997
                                                      -----------------  --------------  --------------
<S>                                                   <C>              <C>                <C>
Allowance for loan losses, beginning                  $  1,668,201     $   1,452,126      $ 1,002,455
Provision for loan losses, added                           141,721           175,000          500,000

Loans charged off                                         (161,873)          (76,842)         (68,249)
Recoveries of loans previously charged off                  13,472           117,917           17,920
                                                       -----------     -------------      -----------
   Net charge-offs                                        (148,401)           41,075          (50,329)
                                                      ------------     -------------      -----------
Allowance for loan losses, ending                     $  1,661,521     $   1,668,201      $ 1,452,126
                                                      ============     =============      ===========

-----------------------------------------------------------------------------------------------------
</TABLE>


                                       38
<PAGE>


================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

Net loan charge-offs as a percentage of average loans were .02% in 1999. Net
loan recoveries as a percentage of average loans were 0.14% in 1998 and net loan
charge-offs as a percentage of average loans were .06% in 1997. Gross
charge-offs during 1999 totaled $161,873 and consisted of $24,004 in installment
loans and $137,869 in leases. Recoveries during 1999 totaled $13,472 and
consisted of $7,965 in installment loans and $5,507 in leases. There were no
charge-offs or recoveries of real estate loans in 1999.

The loan portfolio also included loans to various borrowers (watch loans) at
year-end for which management had concerns about the ability of the borrowers to
continue to comply with present loan repayment terms, and which could result in
some or all of these loans being uncollectible. Management monitors these loans
carefully and has provided for these loans in the allowance for loan losses.

The allowance for loan losses was approximately $1.66 million, or 1.86% of gross
loans outstanding at December 31, 1999, an decrease of $6,680 below the 1.91%
reserve at December 31, 1998. Management realizes that general economic trends
greatly affect loan losses and no assurances can be made about future losses.
Management does, however, consider the allowance for loan losses to be adequate
at December 31, 1999.

The allocation of the reserve for loan losses is detailed in Table 14 below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
 TABLE 14.  ALLOCATION OF THE RESERVE FOR LOAN LOSSES
------------------------------------------------------------------------------------------------------------------------

                                                  1999                   1998                         1997
                                          ------------------     -------------------         -----------------------

BALANCE AT END OF PERIOD APPLICABLE TO    AMOUNT    PERCENT(1)   AMOUNT     PERCENT(1)          AMOUNT    PERCENT(1)
                                          ------    --------     ------     --------          ---------    --------

<S>                                       <C>        <C>         <C>         <C>           <C>               <C>
Commercial, financial and agricultural    $  427     10.29       $  502      12.42         $   194           9.21
Real estate, construction                      -      3.82            -       4.59              60           5.61
Real estate, mortgage                        681     74.24          657      67.84           1,089          71.32
Installment loans to individuals, other      113      7.47          120       8.25             109          13.86
Leases                                       441      4.18          389       6.90               -           0.00
                                          ------  --------       ------     ------           -----          -----
     Total                                $1,662    100.00       $1,668     100.00           $1,452        100.00
                                          ======    ======       ======     ======           ======        ======

(1) Represents the percentage of loans in each rategury to the total loans
outstanding.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

LIQUIDITY AND INTEREST RATE SENSITIVITY

The principal goals of the Bank's asset and liability management strategy are
the maintenance of adequate liquidity and the management of interest rate risk.
Liquidity is the ability to convert assets to cash to fund depositors'
withdrawals or borrowers' loans without significant loss. Interest rate risk
management balances the effects of interest rate changes on assets that earn
interest or liabilities on which interest is paid, to protect the Bank from wide
fluctuations in its net interest income which could result from interest rates
changes.

Management must insure that adequate funds are available at all times to meet
the needs of its customers. On the asset side of the balance sheet, maturing
investments, loan payments, maturing loans, federal funds sold, and unpledged
investment securities are principal sources of liquidity. On the liability side
of the balance sheet, liquidity sources include core deposits, the ability to
increase large denomination certificates, federal


                                       39
<PAGE>


================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

funds lines from correspondent banks, borrowings from the Federal Reserve Bank
and the Federal Home Loan Bank, as well as the ability to generate funds through
the issuance of long-term debt and equity.

The liquidity ratio (the level of liquid assets divided by total deposits plus
short-term liabilities) is considered to be adequate by management.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
 TABLE 15.  INTEREST RATE SENSITIVITY (THOUSANDS)
----------------------------------------------------------------------------------------------------------------

                                                                     DECEMBER 31, 1999
                                                                    MATURITIES/REPRICING
                                                 ----------------------------------------------------
                                                    1-3         4-12         13-60           OVER 60
                                                  MONTHS       MONTHS        MONTHS          MONTHS         TOTAL
                                                  ------       ------        ------          ------         -----
Earnings Assets:
<S>                                             <C>          <C>            <C>             <C>          <C>
  Loans                                         $ 13,729     $ 22,053       $46,190         $ 7,374      $  89,346
  Investments                                      1,141        5,923        21,875          23,444         52,383
  Interest-bearing deposits with other banks       2,000            -            -                -          2,000
  Federal Funds Sold                               6,975            -             -               -          6,975
                                                --------     --------        ------         -------       --------
    Total                                       $ 23,845     $ 27,976       $68,065         $30,818      $ 150,704
                                                ========     ========        =======        =======       ========

Interest-bearing deposits:
  NOW accounts                                  $ 10,767     $      -      $      -         $     -      $ 10,767
  Money market                                     3,931            -             -               -         3,931
  Savings                                         15,113            -             -               -        15,113
  Certificates of Deposit                         17,981       40,901        34,332               -        93,214
                                                --------     --------       --------       --------       --------
Total                                           $ 47,792     $ 40,901       $34,332         $     -      $123,025
                                                ========     ========        =======        =======       ========

Interest sensitivity gap                        $(23,947)    $(12,925)      $33,733         $30,818      $      -
Cumulative interest
  sensitivity gap                               $(23,947)    $(36,872)      $(3,139)        $27,679      $ 27,679
Ratio of sensitivity gap
  to total earning assets                          -15.9%        -8.6%         22.4%           20.4%            -
Cumulative ratio of
  sensitivity gap to
  total earning assets                             -15.9%       -24.5%         -2.1%           18.4%         18.4%

-------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest rate risk is the effect that changes in interest rates would have on
interest income and interest expense as interest-sensitive assets and
interest-sensitive liabilities either reprice or mature. Management attempts to
maintain the portfolios of earning assets and interest-bearing liabilities with
maturities or repricing opportunities at levels that will afford protection from
erosion of net interest margin, to the extent practical, from changes in
interest rates. Table 15 shows the sensitivity of the Bank's balance sheet on
December 31, 1999. This table reflects the sensitivity of the balance sheet as
of that specific date and is not necessarily indicative of the position on other
dates. At December 31, 1999, the Bank appeared to be cumulatively
asset-sensitive (earning assets subject to interest rate changes exceeding
interest-bearing liabilities subject to changes in interest rates). Included in
the interest-bearing liabilities subject to interest rate changes within three
months are NOW accounts and savings accounts totaling $25.9 million which
historically have not been as interest-sensitive as other types of
interest-bearing deposits. Therefore, the Bank is asset sensitive in the three
month or less time


                                       40
<PAGE>


================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

period; liability sensitive in the four to twelve months time period and
asset-sensitive in the thirteen to sixty months time period and over sixty
months time period.

Matching sensitive positions alone does not ensure that the Bank has no interest
rate risk. The repricing characteristics of assets are different from the
repricing characteristics of funding sources. Thus, net interest income can be
impacted by changes in interest rates even if the repricing opportunities of
assets and liabilities are perfectly matched.

--------------------------------------------------------------------------------
TABLE 16.  KEY FINANCIAL RATIOS
--------------------------------------------------------------------------------



                                          1999            1998          1997
                                        -----------    ----------    ----------

Return on average assets                  1.3%            1.3%         1.3%
Return on average equity                 11.1%           11.5%        12.0%
Average equity to average assets         11.4%           11.4%        10.9%

--------------------------------------------------------------------------------


                                       41
<PAGE>


--------------------------------------------------------------------------------
STAFF
--------------------------------------------------------------------------------

                               MAIN OFFICE
                               -----------

CUSTOMER SERVICE               LOAN OPERATIONS            SECRETARIES
----------------               ---------------            ----------------
Diane Bishop                   Renee Akers                Beulah Correll

Sherrie Janney                 Debra Funkhouser           Michelle Harris

Betty Moran                    Gail Phillips, Supervisor  Donna Prescott

Sharon Zeman                   Jan Rorrer
                                                          DATA PROCESSING CENTER
                               Karen Sowers, Supervisor   ----------------------
                                                          Jill Caldwell
PAYING AND RECEIVING TELLERS   Gina West
----------------------------                              Leslie Cox
Jessica Bower
                               COLLECTIONS                Judy Durham
Karen Bowman                   -------------
                               Ralph Edwards              Gail Goad
Kay Chaffin
                                                          Gay Grim
Regina Compton                 CREDIT CARDS
                               ------------               Lisa Thomas
Regina Gibson                  Shelia DeHart

Wendy Taylor                                              CUSTODIANS
                               ACCOUNTING                 ------------------
Patsy Wallace                  -------------              Roger Dickerson
                               Yara Middleton
                                                          Lucy Harris

 CAVE SPRING OFFICE             WILLIS OFFICE         HILLSVILLE OFFICE
 ------------------             -------------         -----------------
 CUSTOMER SERVICE                                     CUSTOMER SERVICE
                                 HEAD TELLER          -----------------
 Margaret Caldwell              -------------         Frances Sharpe
                                Karen Sutphin
 PAYING AND RECEIVING                                 PAYING AND RECEIVING
 -------------------------                            --------------------
 Kevin Harvey, Head Teller                            Rebecca Adams

 Paula McDaniel                                       Karen Arnold

                                                      Louise Goad, Head Teller


                                       42
<PAGE>


================================================================================
BOARD OF DIRECTORS OF CARDINAL BANKSHARES AND THE BANK OF FLOYD
--------------------------------------------------------------------------------

K. VENSON BOLT           C. W. HARMAN            LEON MOORE
J. H. CONDUFF            KEVIN D. MITCHELL       DORSEY H. THOMPSON
WILLIAM R. GARDNER, JR.
<TABLE>
<CAPTION>
OFFICERS OF CARDINAL BANKSHARES
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>
J. H. CONDUFF.................................................................................CHAIRMAN OF THE BOARD
LEON MOORE....................................................................PRESIDENT AND CHIEF EXECUTIVE OFFICER
DAVID E. WELCH.................................................ASSISTANT VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
WANDA M. GARDNER................................................................VICE PRESIDENT AND INTERNAL AUDITOR
ANNETTE V. BATTLE....................................................EXECUTIVE SECRETARY AND SECRETARY TO THE BOARD

<CAPTION>
OFFICERS OF THE BANK OF FLOYD
-------------------------------------------------------------------------------------------------------------------
                                    EXECUTIVE
                                    ---------

<S>                                                                                                <C>
J. H. CONDUFF.................................................................................CHAIRMAN OF THE BOARD
K. VENSON BOLT...........................................................................VICE CHAIRMAN OF THE BOARD
LEON MOORE....................................................................PRESIDENT AND CHIEF EXECUTIVE OFFICER
FRED L. NEWHOUSE, JR.......................................................................EXECUTIVE VICE PRESIDENT
DAVID E. WELCH........................................ASSISTANT VICE PRESIDENT, CASHIER AND CHIEF FINANCIAL OFFICER
LEE NAFF...................................................................................ASSISTANT VICE PRESIDENT
C. W. HARMAN..............................................................................................SECRETARY
SUNNY K. CORNWELL........................................................ASSISTANT VICE PRESIDENT AND CREDIT REVIEW

                                   MAIN OFFICE
                                   -----------

LOIS A. BOND...............................................................................ASSISTANT VICE PRESIDENT
PATRICIA B. SPANGLER............................................................ASSISTANT CASHIER AND FUNDS MANAGER
PATRICIA K. HARRIS................................................................................ASSISTANT CASHIER
CAROLYN W. REED...................................................................................ASSISTANT CASHIER

                               CAVE SPRING OFFICE
                               ------------------

PATRICIA A. BOWER................................................................ASSISTANT CASHIER AND LOAN OFFICER
KEVIN W. HARVEY...........................................................................BRANCH OPERATIONS MANAGER

                                HILLSVILLE OFFICE
                                -----------------

EUGENE G. SHOCKLEY......................................................ASSISTANT VICE PRESIDENT AND BRANCH MANAGER

                                 ADMINISTRATIVE
                                 --------------

MARIE V. THOMAS..................................................................VICE PRESIDENT AND HUMAN RESOURCES
MARY ANN COX.............................................ASSISTANT VICE PRESIDENT, FINANCIAL PRODUCTS AND MARKETING
ANNETTE V. BATTLE..........................................ASSISTANT SECRETARY TO THE BOARD AND RECORDING SECRETARY
SHELBY L. RUTHERFORD.......................................................................ADMINISTRATIVE ASSISTANT

                                     LENDING
                                     -------

DIANNE H. HAMM......................................................ASSISTANT VICE PRESIDENT AND COMPLIANCE OFFICER
OLA LEE DRISKELL.................................................................ASSISTANT CASHIER AND LOAN OFFICER
DENNIS D. MCDANIEL...............................................................ASSISTANT CASHIER AND LOAN OFFICER

                                   OPERATIONS
                                   ----------

BETTY A. WHITLOCK..................................................ASSISTANT CASHIER AND MANAGER OF DATA PROCESSING

                                      AUDIT
                                      -----

WANDA M. GARDNER................................................................VICE PRESIDENT AND INTERNAL AUDITOR
</TABLE>


                                       43
<PAGE>


================================================================================
STOCKHOLDER INFORMATION
--------------------------------------------------------------------------------

ANNUAL MEETING
--------------

The annual meeting of shareholders will be held Wednesday, April 26, 2000, at
2:00 p.m. in the Bank of Floyd's conference room, 101 Jacksonville Circle,
Floyd, Virginia.

REQUESTS FOR INFORMATION
------------------------

Requests for information should be directed to Mrs. Annette Battle, Recording
Secretary, at The Bank of Floyd, Post Office Box 215, Floyd, Virginia, 24091;
telephone (540) 745-4191. A copy of the Company's Form 10-KSB for 1999 will be
furnished, without charge, after March 31, 2000 upon written request.

INDEPENDENT AUDITORS                                STOCK TRANSFER AGENT
--------------------                                --------------------

Larrowe & Company, PLC                              The Bank of Floyd
   Certified Public Accountants                     Post Office Box 215
Post Office Box 760                                 Floyd, Virginia  24091
Galax, Virginia  24333


FEDERAL DEPOSIT INSURANCE CORPORATION
-------------------------------------

The Bank is a member of the FDIC. This statement has not been reviewed, or
confirmed for accuracy or relevance by the Federal Deposit Insurance
Corporation.



                   Member of Federal Reserve Bank of Richmond.

                               ------------------

                  Member of Federal Home Loan Bank of Atlanta.

                               ------------------

                                 BANKING OFFICES
                                 ---------------


     FLOYD OFFICE                                   ROANOKE OFFICE
     101 Jacksonville Circle                        4094 Postal Drive
     Floyd, Virginia  24091                         Roanoke, Virginia  24018
     (540) 745-4191                                 (540) 774-1111
     ATM location                                   ATM location

     WILLIS OFFICE                                  HILLSVILLE OFFICE
     Floyd Highway South                            185 South Main Street
     Willis, Virginia  24380                        Hillsville, Virginia  24343
     (540) 745-4191                                 (540) 728-2341
                                                    ATM location

                                       44