Attached files

file filename
EX-31.2 - SECTION 302 CFO CERTIFICATION - CARDINAL BANKSHARES CORPdex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - CARDINAL BANKSHARES CORPdex311.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - CARDINAL BANKSHARES CORPdex321.htm
Table of Contents

 

 

U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

Commission File No. 0-28780

 

 

CARDINAL BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Virginia   54-1804471
(State of Incorporation)   (I.R.S. Employer Identification No.)

101 Jacksonville Circle, P. O. Box 215, Floyd, Virginia 24091

(Address of principal executive offices)

(540) 745-4191

(Registrant’s telephone number)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x.    No  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨.    No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨.    No  x.

 

 

The number of shares outstanding of the issuer’s Common Stock, $10 par value as of May 11, 2011 was 1,535,733.

 

 

 


Table of Contents

CARDINAL BANKSHARES CORPORATION

FORM 10-Q

March 31, 2011

INDEX

 

          Page  

Part I.

   Financial Information   

Item 1.

   Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010 (Audited)      3   
   Consolidated Statements of Income for the three months ended March 31, 2011 and 2010 (Unaudited)      4   
   Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (Unaudited)      5   
   Notes to Consolidated Statements (Unaudited)      6   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      14   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      18   

Item 4T.

   Controls and Procedures      18   

Part II.

   Other Information   

Item 1.

   Legal Proceedings      19   

Item 1A.

   Risk Factors      19   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      19   

Item 3.

   Defaults Upon Senior Securities      19   

Item 4.

   Removed and Reserved      19   

Item 5.

   Other Information      19   

Item 6.

   Exhibits      19   

SIGNATURES

     20   

CERTIFICATIONS

     21   


Table of Contents

Cardinal Bankshares Corporation and Subsidiary

Consolidated Balance Sheets

 

     (UnAudited)     (Audited)  

(In thousands, except share data)

   March 31,
2011
    December 31,
2010
 

Assets

    

Cash and due from banks

   $ 3,981      $ 2,948   

Interest-bearing deposits

     543        7,792   

Federal funds sold

     27,000        21,550   

Investment securities available for sale, at fair value

     45,974        42,644   

Investment securities held to maturity (fair value March 31, 2011 $14,227 - December 31, 2010 $14,780)

     14,029        14,698   

Restricted equity securities

     605        575   

Total loans

     145,091        148,916   

Allowance for loan losses

     (2,796     (3,073
                

Net loans

     142,295        145,843   
                

Bank premises and equipment, net

     2,930        3,846   

Accrued interest receivable

     895        954   

Foreclosed assets

     509        509   

Bank owned life insurance

     5,318        5,279   

Other assets

     2,776        2,430   
                

Total assets

   $ 246,855      $ 249,068   
                

Liabilities and Stockholders’ Equity

    

Noninterest-bearing deposits

   $ 29,392      $ 28,264   

Interest-bearing deposits

     184,462        188,721   
                

Total deposits

     213,854        216,985   
                

Accrued interest payable

     96        111   

Other liabilities

     641        85   
                

Total liabilities

     214,591        217,181   
                

Commitments and contingent liabilities

     —          —     

Stockholders’ Equity

    

Common stock, $10 par value, 5,000,000 shares authorized, 1,535,733 shares issued and outstanding

     15,357        15,357   

Additional paid-in capital

     2,925        2,925   

Retained earnings

     13,762        13,439   

Accumulated other comprehensive loss, net

     220        166   
                

Total stockholders’ equity

     32,264        31,887   
                

Total liabilities and stockholders’ equity

   $ 246,855      $ 249,068   
                

See Notes to Consolidated Financial Statements.

 

3


Table of Contents

Cardinal Bankshares Corporation and Subsidiary

Consolidated Statements of Income (Unaudited)

 

     Three months ended  
     March 31,  

(In thousands, except share data)

   2011      2010  

Interest income

     

Loans and fees on loans

   $ 2,151       $ 2,168   

Federal funds sold and securities purchased under agreements to resell

     12         11   

Investment securities:

     

Taxable

     340         359   

Exempt from federal income tax

     172         185   

Deposits with banks

     1         —     
                 

Total interest income

     2,676         2,723   
                 

Interest expense

     

Deposits

     789         1,133   
                 

Total interest expense

     789         1,133   
                 

Net interest income

     1,887         1,590   

Provision for loan losses

     186         380   
                 

Net interest income after provision for loan losses

     1,701         1,210   
                 

Noninterest income

     

Service charges on deposit accounts

     47         48   

Other service charges and fees

     25         24   

Sale of credit card portfolio

     —           15   

Net realized gains on sales of securities

     —           4   

Other operating income

     77         65   
                 

Total noninterest income

     149         156   
                 

Noninterest expense

     

Salaries and employee benefits

     792         730   

Occupancy and equipment

     184         169   

Foreclosed assets, Net

     —           2   

Loss on sale of fixed assets

     70         —     

Other operating expense

     407         417   
                 

Total noninterest expense

     1,453         1,318   
                 

Income before income taxes

     397         48   

Income tax expense (benefit)

     74         (72
                 

Net Income

   $ 323       $ 120   
                 

Basic earnings per share

   $ 0.21       $ 0.08   
                 

Diluted earnings per share

   $ 0.21       $ 0.08   
                 

Dividends declared per share

   $ —         $ —     
                 

Weighted average basic shares outstanding

     1,535,733         1,535,733   
                 

Weighted average diluted shares outstanding

     1,535,733         1,535,733   
                 

See Notes to Consolidated Financial Statements.

 

4


Table of Contents

Cardinal Bankshares Corporation and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

 

(In thousands) Three Months Ended March 31,

   2011     2010  

Cash flows from operating activities

    

Net income

   $ 323      $ 120   

Adjustments to reconcile net income to net cash provided by operations:

    

Depreciation and amortization

     63        56   

Accretion of discounts on securities, net of amortization of premiums

     95        56   

Provision for loan losses

     186        380   

Deferred income taxes

     602        (519

Net realized gains on securities

     —          (4

Loss on sale of fixed assets

     70        —     

Deferred compensation and pension expense (benefit)

     —          —     

Changes in operating assets and liabilities:

    

Accrued income

     59        (8

Other Assets

     (1,015     534   

Accrued interest payable

     (15     23   

Other liabilities

     556        —     
                

Net cash provided by operating activities

     924        638   
                

Cash flows from investing activities

    

Net increase in interest-bearing deposits in banks

     7,249        (1,200

Net increase in federal funds sold

     (5,450     (1,075

Purchase of investment securities:

    

Available for Sale

     (5,879     (2,871

Held to Maturity

     —          (326

Purchase of restricted equity securities

     (30     —     

Proceeds from maturity and redemption of investment securities:

    

Available for Sale

     2,541        1,994   

Held to Maturity

     664        1,903   

Net (increase) decrease in loans

     3,362        (624

Net (purchases) dispositions of bank premises and equipment

     783        1   

Proceeds from sale of foreclosed assets

     —          2   
                

Net cash (used) provided by investing activities

     3,240        (2,196
                

Cash flows from financing activities

    

Net increase in noninterest-bearing deposits

     1,128        1,921   

Net increase (decrease) in interest-bearing deposits

     (4,259     (492
                

Net cash provided by financing activities

     (3,131     1,429   
                

Net decrease in cash and cash equivalents

     1,033        (129

Cash and cash equivalents, beginning

     2,948        3,498   
                

Cash and cash equivalents, ending

   $ 3,981      $ 3,369   
                

Supplemental disclosures of cash flow information

    

Interest paid

   $ 804      $ 1,110   

Income taxes paid

   $ 173      $ 174   
                

Supplemental disclosures of noncash activities

    

Other real estate acquired in settlement of loans

   $ —        $ —     
                

See Notes to Consolidated Financial Statements

 

5


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all of the disclosures and notes required by generally accepted accounting principles. In the opinion of management, all material adjustments (which are of a normal recurring nature) considered necessary for a fair presentation have been made. The results for the interim period are not necessarily indicative of the results to be expected for the entire year or any other interim period. The information reported herein should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Certain previously reported amounts have been reclassified to conform to current presentations.

Principles of Consolidation

The consolidated financial statements of the Company include the accounts of the Company, the Bank and FBC, Inc. All material intercompany transactions and balances have been eliminated.

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”.

Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

Note 2. Loans and Allowance for Loan Losses

The major components of loans in the Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010 are summarized below:

 

     2011     2010  

Commercial

   $ 6,963      $ 7,230   

Real estate

    

Construction and land development

     11,967        13,110   

Residential, 1-4 families

     28,605        29,961   

Residential, 5 or more families

     4,247        4,277   

Farmland

     1,320        1,274   

Nonfarm, nonresidential

     84,119        85,049   

Agricultural

     17        72   

Consumer

     2,973        2,923   

Other

     5,236        5,388   
                

Gross loans

     145,447        149,284   

Unearned discount and net deferred loan fees and costs

     (356     (368
                

Total loans

   $ 145,091      $ 148,916   
                

Changes in the allowance for loan losses are as follows:

 

Three months ended March 31, (In thousands)    2011     2010  

Balance, at January 1

   $ 3,073      $ 2,670   

Provision charged to expense

     186        380   

Recoveries of amounts previously charged off

     5        2   

Loans charged off

     (468     (23
                

Balance, at March 31,

   $ 2,796      $ 3,029   
                

 

6


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 3. Commitments and Contingencies

The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance sheet instruments. A summary of the Company’s commitments at March 31 for the years indicated follows:

 

(In thousands)    2011      2010  

Commitments to extend credit

   $ 11,704       $ 16,224   

Standby letters of credit

     500         858   
                 

Total

   $ 12,204       $ 17,082   
                 

Note 4. Employee Benefit Plan

The Bank has a qualified noncontributory, defined benefit pension plan, which covers substantially all of its employees. Effective October 1, 2009 the Bank terminated its single employer plan with the Virginia Bankers Association (VBA). In conjunction with this transaction, the Bank adopted the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra), a multiemployer plan. All plan assets and liabilities were transferred from the VBA plan to the Pentegra Plan. GAAP states the determining factor for recording pension expense or a liability for employers participating in a multiemployer plan is the amount of the contribution required for the period.

As of March 31, 2011, the required employer contribution of $253 thousand for the plan year ending June 30, 2011, has been made. The Company expects contributions for the 2011-2012 plan year to be approximately $244 thousand.

Note 5. Fair Value

The estimated fair values of the Company’s financial instruments are as follows:

 

(In thousands)

   March 31, 2011      December 31, 2010  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Financial assets

           

Cash and due from banks

   $ 3,981       $ 3,981       $ 2,948       $ 2,948   

Interest-bearing deposits with banks

     543         543         7,792         7,792   

Federal funds sold

     27,000         27,000         21,550         21,550   

Securities, available for sale

     45,974         45,974         42,644         42,644   

Securities, held to maturity

     14,029         14,227         14,698         14,780   

Restricted equity securities

     605         605         575         575   

Total loans

     145,091         146,818         148,916         151,187   

Accrued interest receivable

     895         895         954         954   

Financial liabilities

           

Deposits

     213,854         215,042         216,985         218,256   

Accrued interest payable

     96         96         111         111   

Off-balance sheet assets (liabilities)

           

Commitments to extend credit and standby letter of credit

     —           —           —           —     

 

7


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 5. Fair Value (continued)

 

Generally accepted accounting principles (“GAAP”) provides a framework for measuring and disclosing fair value of assets and liabilities recognized in the balance sheet, whether the measurements are made on a recurring basis (for example, available for sale investment securities) or on a nonrecurring basis (for example, impaired loans).

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value. These levels are:

 

  Level 1   -   Valuation is based upon quoted prices for identical instruments traded in active markets.
  Level 2   -   Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
  Level 3   -   Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

 

8


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 5. Fair Value (continued)

 

Loans

The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principle will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represents loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observerable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.

Foreclosed Assets

Foreclosed assets are adjusted for fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset at nonrecurring Level 3.

Assets and Liabilities Recorded as Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis.

 

(In Thousands)                            

March 31, 2010

   Total      Level 1      Level 2      Level 3  

Government sponsored enterprises

   $ 3,808       $ —         $ 3,808       $ —     

State and municipal securities

     3,067         —           3,067         —     

Mortgage-backed securities

     36,338         347         35,991         —     

Other securities

     2,761         —           2,761         —     
                                   

Investment securities available for sale

   $ 45,974       $ 347       $ 45,627       $ —     
                                   

Total assets at fair value

   $ 45,974       $ 347       $ 45,627       $ —     
                                   
(In Thousands)                            

December 31, 2010

   Total      Level 1      Level 2      Level 3  

Government sponsored enterprises

   $ 3,724       $ —         $ 3,724       $ —     

State and municipal securities

     3,049         —           3,049         —     

Mortgage-backed securities

     32,823         1,040         31,783         —     

Other securities

     3,048         —           3,048         —     
                                   

Investment securities available for sale

   $ 42,644       $ 1,040       $ 41,604       $ —     
                                   

Total assets at fair value

   $ 42,644       $ 1,040       $ 41,604       $ —     
                                   

There were no liabilities measured at fair value on a recurring basis at March 31, 2011 and December 31, 2010.

 

9


Table of Contents

CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 5. Fair Value (continued)

 

Assets and Liabilities Recorded as Fair Value on a Nonrecurring Basis

The Company may be required from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U. S generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below:

 

(In Thousands)                            

March 31, 2011

   Total      Level 1      Level 2      Level 3  

Commercial

   $ 124       $ —         $ 124       $ —     

Real Estate

           

Construction and land development

     5,704         —           5,704         —     

Residential, 1-4 families

     19         —           19         —     

Nonfarm, nonresidential

     486         —           486         —     
                                   

Impaired Loans

     6,333         —           6,333         —     

Foreclosed assets

     509         —           509         —     
                                   

Total assets at fair value

   $ 6,842       $ —         $ 6,842       $ —     
                                   
(In Thousands)                            

December 31, 2010

   Total      Level 1      Level 2      Level 3  

Commercial

   $ 134       $ —         $ 134       $ —     

Real Estate

           

Construction and land development

     3,567         —           3,567         —     

Residential, 1-4 families

     115         —           115         —     

Nonfarm, nonresidential

     511         —           511         —     
                                   

Impaired Loans

     4,327         —           4,327         —     

Foreclosed assets

     509         —           509         —     
                                   

Total assets at fair value

   $ 4,836       $ —         $ 4,836       $ —     
                                   

There were no liabilities measured at fair value on a nonrecurring basis at March 31, 2011 and December 31, 2010.

 

10


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 6. 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 follow:

 

March 31, 2011 (In thousands)

   Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 

Available for sale

           

Government sponsored enterprises

   $ 2,847       $ 16       $ 9       $ 2,854   

State and municipal securities

     2,994         77         4         3,067   

Mortgage-backed securities

     36,036         436         133         36,339   

Other securities

     3,764         2         52         3,714   
                                   
   $ 45,641       $ 531       $ 198       $ 45,974   
                                   

Held to maturity

           

State and municipal securities

   $ 14,003       $ 304       $ 106       $ 14,201   

Mortgage-backed securities

     26         —           —           26   
                                   
   $ 14,029       $ 304       $ 106       $ 14,227   
                                   

December 31, 2010 (In thousands)

                           

Available for sale

           

Government sponsored enterprises

   $ 2,853       $ 30       $ 17       $ 2,866   

State and municipal securities

     2,994         66         11         3,049   

Mortgage-backed securities

     32,483         454         104         32,833   

Other securities

     4,063         15         182         3,896   
                                   
   $ 42,393       $ 565       $ 314       $ 42,644   
                                   

Held to maturity

           

State and municipal securities

   $ 14,672       $ 279       $ 198       $ 14,753   

Mortgage-backed securities

     26         1         —           27   
                                   
   $ 14,698       $ 280       $ 198       $ 14,780   
                                   

Restricted equity securities, carried at cost, consist of investments in stock of the Federal Home Loan Bank of Atlanta (“FHLB”) and The Federal Reserve Bank of Richmond (Federal Reserve), which are upstream correspondents of the Bank. The FHLB requires financial institutions to make equity investments in the FHLB in order to borrow from it. The Bank is required to hold that stock so long as it borrows from the FHLB. The Federal Reserve requires banks to purchase stock as a condition of membership in the Federal Reserve system.

Investment securities with amortized cost of approximately $6.1 million and $7.1 million at March 31, 2011 and December 31, 2010, 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 three-month period ended March 31, 2011 and 2010:

 

     Three Months Ended
March  31,
 
     2011      2010  

(In thousands)

     

Realized gains, available for sale securities

   $ —         $ —     

Realized gains, held to maturity securities

     —           4   
                 
   $ —         $ 4   
                 

 

11


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 6. Securities (continued)

 

The scheduled maturities of debt securities available for sale and held to maturity at March 31, 2011 were as follows:

 

     Available for Sale      Held to Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

(In thousands)

           

Due in one year or less

   $ 20       $ 20       $ 1,013       $ 1,027   

Due after one year through five years

     1,418         1,386         4,815         4,996   

Due after five years through ten years

     2,629         2,693         3,594         3,651   

Due after ten years

     41,574         41,875         4,607         4,553   
                                   
   $ 45,641       $ 45,974       $ 14,029       $ 14,227   
                                   

For mortgage-backed securities, the Company reports maturities based on anticipated lives. Actual results may differ due to interest rate fluctuations.

The following tables show the unrealized losses and related fair values in the Company’s held to maturity and available for sale investment securities portfolios. This information is aggregated by investment category and by the length of time that individual securities have been in a continuous unrealized loss position at March 31, 2011 and December 31, 2010 respectively.

 

     Less Than 12 Months      12 Months or More      Total  

March 31, 2011 (In thousands)

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Government sponsored enterprises

   $ 989       $ 9       $ —         $ —         $ 989       $ 9   

State and municipal securities

     4,125         69         398         41         4,523         110   

Mortgage- backed securities

     13,659         128         661         5         14,320         133   

Other Securities

     1,758         5         953         47         2,711         52   
                                                     

Total temporarily impaired securities

   $ 20,531       $ 211       $ 2,012       $ 93       $ 22,543       $ 304   
                                                     
     Less Than 12 Months      12 Months or More      Total  

December 31, 2010 (In thousands)

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Government sponsored enterprises

   $ 982       $ 17       $ —         $ —         $ 982       $ 17   

State and municipal securities

     5,559         158         387         51         5,946         209   

Mortgage- backed securities

     12,054         100         668         4         12,722         104   

Other Securities

     1,016         8         1,327         174         2,343         182   
                                                     

Total temporarily impaired securities

   $ 19,611       $ 283       $ 2,382       $ 229       $ 21,993       $ 512   
                                                     

Management considers the nature of the investment, the underlying causes of the decline in market or fair value, the severity and duration of the decline and other evidence, on a security-by-security basis, in determining if the decline in fair value is other than temporary.

At March 31, 2011 the Company had one state and municipal securities with an aggregate unrealized loss of approximately $9 thousand, 14 state and municipal securities with an aggregate unrealized loss of approximately $110 thousand, 37 mortgaged-backed securities with an aggregate unrealized loss of approximately $133 thousand and five other securities with an aggregate unrealized loss of approximately $52 thousand. Management does not believe that gross unrealized losses, which totals 1.3% of the amortized costs of the related investment securities, represent an other-than-temporary impairment. The Company has both the ability and the intent to hold all of these securities for a period of time necessary to recover the amortized cost.

At December 31, 2010, the Company had one government-sponsored securities with an aggregate unrealized loss of approximately $17 thousand, 21 state and municipal securities with an aggregate unrealized loss of approximately $209 thousand, 24 mortgaged-backed securities with an aggregate unrealized loss of approximately $104 thousand and six other securities with an aggregate unrealized loss of approximately $182 thousand. Management does not believe that gross unrealized losses, which totals 2.3% of the amortized costs of the related investment securities, represent an other-than-temporary impairment.

 

12


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 7. Recent Accounting Pronouncements

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting and or disclosure of financial information by the Company.

In January 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. Under the existing effective date in Update 2010-20, public-entity creditors would have provided disclosures about troubled debt restructurings for periods beginning on or after December 15, 2010. The amendments in this Update temporarily defers the effective date for interim and annual periods ending after June 15, 2011, enabling public-entity creditors to provide those disclosures after the Board clarifies the guidance for determining what constitutes a troubled debt restructuring. The deferral in this Update will result in more consistent disclosures about troubled debt restructurings. This amendment does not defer the effective date of the other disclosure requirements in Update 2010-20. The deferral in this amendment is effective upon issuance and is not expected to have a significant impact on the Company.

In April, 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This update provides additional guidance and amendments to Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist; the restructuring constitutes a concession, and the debtor is experiencing financial difficulties. The amendments clarify the guidance on a creditor’s evaluation of whether it has granted a concession, and on a creditor’s evaluation of whether a debtor is experiencing financial difficulties.

The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. An entity should disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired under Section 310-10-35 for which impairment was previously measured under Subtopic 450-20, Contingencies—Loss Contingencies. An entity should disclose the information required by paragraphs 310-10-50-33 through 50-34, which was deferred by Accounting Standards Update No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, for interim and annual periods beginning on or after June 15, 2011. The amendments are not expected to have a significant impact on the Company.

In April, 2011 the Financial Accounting Standards Board issued Accounting Standards Update 2011-3, Reconsideration of Effective Control for Repurchase Agreements. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. Other criteria applicable to the assessment of effective control are not changed by the amendments in this Update. Those criteria indicate that the transferor is deemed to have maintained effective control over the financial assets transferred (and thus must account for the transaction as a secured borrowing) for agreements that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity when all of the listed conditions have been met. The amendments are not expected to have a significant impact on the Company.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Note 8. Reclassifications

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.

 

13


Table of Contents

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cardinal Bankshares Corporation (the “Company” and “Cardinal Bankshares”), a Virginia corporation, is a bank holding company headquartered in Floyd, Virginia. The Company serves the marketplace primarily through its wholly owned banking subsidiary, Bank of Floyd (the “Bank”), a Virginia chartered, Federal Reserve member commercial bank. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the extent provided by law. Bank of Floyd is supervised and examined by the Federal Reserve and the Bureau of Financial Institutions of the State Corporation Commission of the Commonwealth of Virginia (the “SCC”). At March 31, 2011, the Bank operated seven branch facilities in the counties of Floyd, Montgomery, Roanoke, Pulaski and Carroll. The main office is in Floyd with a limited service office located in Willis. The Roanoke office is in the Cave Spring area of Roanoke County. The Salem office is located on West Main Street in Salem, Virginia. The Hillsville office is located in Carroll County. The Christiansburg office serves Montgomery County. The Bank’s Pulaski County office is located in the Fairlawn community.

Through Bank of Floyd’s network of banking facilities, Cardinal Bankshares provides a wide range of commercial banking services to individuals, small to medium-sized businesses, institutions and governments located in Virginia. The Company conducts substantially all of the business operations of a typical independent commercial bank, including the acceptance of checking and savings deposits, and the making of commercial, real estate, personal, home improvement, automobile and other installment loans. The Company also offers other related services, such as traveler’s checks, safe deposit boxes, depositor transfer, customer note payment, collection, notary public, escrow, drive-in and ATM facilities, and other customary banking services. Cardinal Bankshares does not offer trust services.

The following discussion provides information about the major components of the financial condition, results of operations, asset quality, liquidity, and capital resources of Cardinal Bankshares. The discussion and analysis should be read in conjunction with the Consolidated Financial Statements.

Critical Accounting Policy

Management believes the policy with respect to the methodology for the determination of the allowance for loan losses involve a high degree of complexity. Management must make difficult and subjective judgments, assumptions or estimates that could cause reported results to differ materially. This critical policy and its application are periodically reviewed with the Audit Committee and Board of Directors.

FINANCIAL CONDITION

Total assets as of March 31, 2011 were $246.9 million, a decrease of .9% or $2.2 million from year-end 2010. Total loans decreased 2.6% or $3.8 million during the first months of this year to $145.1 million.

The investment securities portfolio reflected an increase of 4.6% or $2.7 million during the first three months of the year. Federal funds sold increased 25.3% or $5.5 million during the first three months of the year to $27.0 million. Interest-bearing deposits decreased 93.0% or $7.2 million to $543 thousand over year-end 2010 as a result of decreased deposits.

As of March 31, 2011, total deposits were $213.9 million down 1.4% or $3.1 million compared to year-end 2010. Non-interest-bearing core deposits increased to $29.4 million as compared to $28.3 million at year-end 2010. Interest-bearing deposits decreased 2.3% or $4.3 million to $184.5 million. Deposits greater than $100 thousand amounted to $51.7 million at March 31, 2011 as compared to $60.9 million at year-end 2010.

Stockholders’ equity was $32.3 million as of March 31, 2011 compared to $31.9 million as of December 31, 2010. Net income of $323 thousand for the period combined with an increase in accumulated other comprehensive gain of $54 thousand accounted for the increase in stockholders’ equity.

 

14


Table of Contents

RESULTS OF OPERATIONS

Net income for the three months ended March 31, 2011 was $323 thousand, an increase of 169.2% compared to $120 thousand for the three months ended March 31, 2010. Diluted earnings per share increased 162.5% to $.21 for the three months ended March 31, 2011. Diluted earnings per share for the same period a year earlier was $.08. The provision for loan losses was increased $186 thousand during the three months ended March 31, 2011, representing a decrease of $194 thousand over the same period for the previous year. In addition, for the three months ended March 31, 2011, interest expense decreased $344 thousand, non-interest income decreased $7 thousand and non-interest expense increased $135 thousand due to a loss on sale of fixed assets due to the sale of the Tanglewood Branch of $70 thousand and increased salaries and employee benefits of $62 thousand.

Total interest income for the three months ended March 31, 2011 decreased $47 thousand to $2.7 million, a decrease of 1.7% over the same prior year period. This resulted primarily from decreased income on loans and fees on loans. Noninterest income for the three months period ended March 31, 2011, decreased 4.5% to $149 thousand versus the same time period for the prior year. The decrease was due primarily to no realized gains on sales of securities. Total interest expense for the three months period ended March 31, 2011, decreased $344 thousand to $789 thousand continuing the decline of rates paid on interest-bearing deposits accounts. Noninterest expense increased $135 thousand to $1.5 million for the three months ended March 31, 2011 as compared to the same period in 2010. Increased expense for salaries and employee benefits and loss related to the sale of the Tanglewood Branch accounted for the difference. Due to increased earnings for the three months period ended March 31, 2011, an income tax expense of $74 thousand was incurred versus an income tax benefit of $72 thousand for the same period in the previous year.

ASSET QUALITY

The allowance for loan losses represents management’s estimate of an amount adequate to absorb potential future losses inherent in the loan portfolio. In assessing the adequacy of the allowance, management relies predominately on its ongoing review of the lending process and the risk characteristics of the portfolio in the aggregate. Among other factors, management considers the Company’s loan loss experience, the amount of past-due loans, current and anticipated economic conditions, and the estimated current values of collateral securing loans in assessing the level of the allowance for loan losses. In the first three months of 2011 the provision for loan losses was $186 thousand as compared to $380 thousand provision for the same period in 2010. Based upon management’s periodic reviews of the loan portfolio using the above-mentioned factors, the current year decrease in the provision for loan losses was felt appropriate. Management believes the provision recorded in 2011 maintains the allowance at a level adequate to cover potential losses.

The allowance for loan losses totaled $2.8 million at March 31, 2011. The allowance for loan losses to period end loans was 1.93% at March 31, 2011 compared to 2.06% and 2.01% at December 31, 2010 and March 31, 2010, respectively. The Company recovered balances previously charged off on loans in the amount of $5 thousand during the first three months of 2011. This compares with recoveries for the three months ended March 31, 2010 of $2 thousand. The Company charged-off loans in the amount of $468 thousand during the first three months of 2011 as compared to $23 thousand in charge-offs for the same nine months of 2010.

 

15


Table of Contents

The allowance for loan losses represents management’s estimate of an amount adequate to provide for potential losses inherent in the loan portfolio. The adequacy of the loan loss reserve and the related provision are based upon management’s evaluation of the risk characteristics of the loan portfolio under current economic conditions with consideration to such factors as financial condition of the borrowers, collateral values, growth and composition of the loan portfolio, the relationship of the allowance to outstanding loans and delinquency trends. In addition, management took into account not only the current state of the economy, but information from various sources, including government economic data, Federal Reserve economic reports, the local economy including local real estate activity and safety and soundness discussions with Primary Regulators, which not only expected the current economic downturn to persist, but also expected continued significant losses in commercial real estate. Geographic location was taken into account regarding the depth of economic decline, valuation for certain loans and corresponding collateral. Management also collected additional financial data from certain customers to ascertain current financial strength and cash flow Finally, management maintained the historical overall conservative approach of the Company in calculating additions to the allowance for loan losses. While management uses all available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

Nonperforming assets, which consist of nonaccrual loans, loans 90 days or more past due and other real estate owned, were $7.6 million as of March 31, 2011 compared to $8.0 million as of December 31, 2010. The decrease in nonperforming assets occurred as a result of the write-off of two nonaccrual loans totaling $411 thousand that were fully reserved. Management is taking aggressive actions to mitigate any material losses related to nonperforming assets. As of March 31, 2011 the Company’s impaired loans with a valuation allowance amounted to $6.3 million, an increase of $2.0 million from December 31, 2010. The valuation allowance related to the impaired loans was $1.1 million at March 31, 2011 and $1.4 million at December 31, 2010.

LIQUIDITY

In determining the Company’s liquidity requirements, both sides of the balance sheet are managed to ensure that adequate funding sources are available to support loan growth, deposit withdrawals or any unanticipated need for funds.

Securities available for sale that mature within one year, or securities that have a weighted average life of one year or less are sources of liquidity. Anticipated mortgage-backed securities pay downs and maturing loans also generate cashflows to meet liquidity requirements. Wholesale funding sources are also used to supply liquidity such as federal funds purchased and large denomination certificates of deposit. The Company considers its sources of liquidity to be adequate to meet its anticipated needs.

 

16


Table of Contents

CAPITAL RESOURCES

Cardinal Bankshares’ capital position provides the necessary assurance required to support anticipated asset growth and to absorb potential losses.

The Company’s Tier I capital position was $32.3 million at March 31, 2011, or 20.35% of risk-weighted assets. Total risk-based capital was $34.0 million or 21.61% of risk-weighted assets

Tier I capital consists primarily of common stockholders’ equity, while total risk-based capital includes the allowance for loan losses. Risk weighted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet activities. To be well capitalized under current risk-based capital standards, all banks are required to have Tier I capital of at least 4% and total capital of 8%. Based on these standards, Cardinal Bankshares is categorized as well capitalized at March 31, 2011.

In addition to the risk-based capital guidelines, banking regulatory agencies have adopted leverage capital ratio requirements. The leverage ratio – or core capital to assets ratio – works in tandem with the risk-capital guidelines. The minimum leverage ratios range from three to five percent. At March 31, 2011, the Company’s leverage capital ratio was 12.92%.

During the first three months of 2011 Cardinal Bankshares has seen a decline in deposits, a small decrease in loans and a decrease in the provision for loan losses, while maintaining its history of being well capitalized and maintaining strong liquidity far exceeding minimum standards and equal or greater than its peers.

A WARNING ABOUT FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements. The Company may also make written forward-looking statements in periodic reports to the Securities and Exchange Commission, proxy statements, offering circulars and prospectuses, press releases and other written materials and oral statements made by Cardinal Bankshares’ officers, directors or employees to third parties. Statements that are not historical facts, including statements about the Company’s beliefs and expectations, are forward-looking statements. These statements are based on beliefs and assumptions of the Company’s management, and on information currently available to management. Forward-looking statements include statements preceded by, followed by or that include the words “believes,” “expects,” “estimates,” “anticipates,” “plans,” or similar expressions. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update publicly any of them in light of new information or future events.

Forward-looking statements involve inherent risks and uncertainties. Management cautions the readers that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, the following: competitive pressures among depository and other financial institutions may increase significantly; changes in the interest rate environment may reduce margins; general economic or business conditions may lead to a deterioration in credit quality or a reduced demand for credit; legislative or regulatory changes, including changes in accounting standards, may adversely affect the business in which Cardinal Bankshares is engaged; changes may occur in the securities markets; and competitors of the Company may have greater financial resources and develop products that enable such competitors to compete more successfully than Cardinal Bankshares.

Other factors that may cause actual results to differ from the forward-looking statements include the following: the timely development of competitive new products and services by the Company and the acceptance of such products and services by customers; changes in consumer spending and savings habits; the effects of competitors’ pricing policies; the Company’s success in managing the costs associated with the expansion of existing distribution channels and developing new ones, and in realizing increased revenues from such distribution channels, including cross-selling initiatives; and mergers and acquisitions and their integration into the Company and management’s ability to manage these other risks.

Management of Cardinal Bankshares believes these forward-looking statements are reasonable; however undue reliance should not be placed on such forward-looking statements, which are based on current expectations.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results and stockholder values of Cardinal Bankshares may differ materially from those expressed in forward-looking statements contained in this report. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict.

 

17


Table of Contents

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Under the filer category of “smaller reporting company”, as defined in Rule 12b-2 of the Exchange Act, the Company is not required to provide information requested by Part I, Item 3 of its Form 10-Q.

Item 4T. CONTROLS AND PROCEDURES

As of the end of the period to which this report relates, the Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures in accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”).

The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, there can be no assurance that any design will succeed in achieving its stated goal under every potential condition, regardless of how remote. While we have evaluated the operation of our disclosure controls and procedures and found them effective, there can be no assurance that they will succeed in every instance to achieve their objective.

Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in enabling us to record, process, summarize and report effectively and in a timely manner the information required to be disclosed in reports we file under the Exchange Act. There have not been any changes in our internal control over financial reporting that occurred during the last quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

 

18


Table of Contents

Part II. OTHER INFORMATION

Item: 1 Legal proceedings - None

 

  1A. Risk factors

Under the category of “smaller reporting company”, as defined in Rule 12b-2 of the Exchange Act, the Company is not required to provide information requested by Part II, Item 1A of its Form 10-Q.

 

  2 Unregistered sales of equity securities and use of proceeds - None

 

  3 Defaults upon senior securities - None

 

  4 Removed and Reserved

 

  5 Other information - None

 

  6 Exhibits

 

  31.1   – Certification of Chief Executive Officer Pursuant To Rule 13a-14(a)
  31.2   – Certification of Chief Financial Officer Pursuant To Rule 13a-14(a)
  32.1   – Certification of Chief Executive Officer and Chief Financial Officer Pursuant To 18 U.S.C. Section 1350

 

19


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

 

CARDINAL BANKSHARES CORPORATION

/s/ Ronald Leon Moore

Ronald Leon Moore
Chairman, President & Chief Executive Officer

/s/ J. Alan Dickerson

J. Alan Dickerson
Chief Financial Officer & Vice President
Date: May 11, 2011

 

20