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 September 30, 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  x.    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 November 9, 2011 was 1,535,733.

 

 

 

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CARDINAL BANKSHARES CORPORATION

FORM 10-Q

September 30, 2011

INDEX

 

				Page
Part I.		Financial Information
Item 1.		Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010 (Audited)			2
		Consolidated Statements of Income for the three months and nine months ended September 30, 2011 and 2010 (Unaudited)			3
		Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income as of September 30, 2011 (Unaudited)			4
		Consolidated Statements of Cash Flows for the nine months ended September 30, 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			18
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			22
Item 4T.		Controls and Procedures			22
Part II.		Other Information
Item 1.		Legal Proceedings			23
Item 1A.		Risk Factors			23
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			23
Item 3.		Defaults Upon Senior Securities			23
Item 4.		Removed and Reserved			23
Item 5.		Other Information			23
Item 6.		Exhibits			23
SIGNATURES					24
CERTIFICATIONS

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Cardinal Bankshares Corporation and Subsidiary

Consolidated Balance Sheets

 

		(UnAudited)				(Audited)
(In thousands, except share data)		September 30, 2011				December 31, 2010
Assets
Cash and due from banks		$	3,305			$	2,948
Interest-bearing deposits			8,879				7,792
Federal funds sold			33,400				21,550
Investment securities available for sale, at fair value			44,508				42,644
Investment securities held to maturity (fair value September 30, 2011 $14,685 - December 31, 2010 $14,780)			14,064				14,698
Restricted equity securities			596				575
Total loans			140,692				148,916
Allowance for loan losses			(3,169	)			(3,073	)
Net loans			137,523				145,843
Bank premises and equipment, net			2,918				3,846
Accrued interest receivable			742				954
Foreclosed assets			279				509
Bank owned life insurance			5,399				5,279
Other assets			2,559				2,430
Total assets		$	254,172			$	249,068
Liabilities and Stockholders’ Equity
Noninterest-bearing deposits		$	30,643			$	28,264
Interest-bearing deposits			189,716				188,721
Total deposits			220,359				216,985
Accrued interest payable			78				111
Other liabilities			667				85
Total liabilities			221,104				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			14,250				13,439
Accumulated other comprehensive income, net			536				166
Total stockholders’ equity			33,068				31,887
Total liabilities and stockholders’ equity		$	254,172			$	249,068

See Notes to Consolidated Financial Statements.

 

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Cardinal Bankshares Corporation and Subsidiary

Consolidated Statements of Income (Unaudited)

 

		Three months ended September 30,								Nine months ended September 30,
(In thousands, except share data)		2011				2010				2011				2010
Interest income
Loans and fees on loans		$	1,928			$	2,217			$	6,084			$	6,611
Federal funds sold and securities purchased under agreements to resell			13				11				37				33
Investment securities:
Taxable			340				321				1,025				971
Exempt from federal income tax			168				177				508				550
Deposits with banks			—				2				1				3
Total interest income			2,449				2,728				7,655				8,168
Interest expense
Deposits			754				1,109				2,291				3,352
Total interest expense			754				1,109				2,291				3,352
Net interest income			1,695				1,619				5,364				4,816
Provision for loan losses			76				90				515				361
Net interest income after provision for loan losses			1,619				1,529				4,849				4,455
Noninterest income
Service charges on deposit accounts			59				48				161				145
Other service charges and fees			33				27				89				97
Net realized gains on sales of securities			1				—				44				98
Other operating income			41				67				212				198
Total noninterest income			134				142				506				538
Noninterest expense
Salaries and employee benefits			886				836				2,501				2,378
Occupancy and equipment			155				186				467				517
Foreclosed assets, Net			4				48				37				51
Loss on sale of fixed assets			—				—				82				—
Other operating expense			386				361				1,212				1,182
Total noninterest expense			1,431				1,431				4,299				4,128
Income before income taxes			322				240				1,056				865
Income tax expense (benefit)			33				2				122				36
Net Income		$	289			$	238			$	934			$	829
Basic earnings per share		$	0.19			$	0.16			$	0.61			$	0.54
Diluted earnings per share		$	0.19			$	0.16			$	0.61			$	0.54
Dividends declared per share		$	—			$	—			$	0.08			$	0.08
Weighted average basic shares outstanding			1,535,733				1,535,733				1,535,733				1,535,733
Weighted average diluted shares outstanding			1,535,733				1,535,733				1,535,733				1,535,733

See Notes to Consolidated Financial Statements.

 

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Cardinal Bankshares Corporation and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Unaudited)

 

(In thousands) Nine Months Ended September 30,		Common Stock				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total
Balance, December 31, 2010		$	15,357			$	2,925			$	13,439			$	166			$	31,887
Comprehensive income
Net Income			—				—				934				—				934
Net Unrealized securities gains arising during the period, net of taxes of $206			—				—				—				399				399
Realized securities gains, net of taxes of $(15)			—				—				—				(29	)			(29	)
Total comprehensive income																			1,304
Cash dividend declared
($0.08 per share)			—				—				(123	)							(123	)
Balance, September 30, 2011		$	15,357			$	2,925			$	14,250			$	536			$	33,068

See Notes to Consolidated Financial Statements.

 

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Cardinal Bankshares Corporation and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

 

(In thousands) Nine Months Ended September 30,		2011				2010
Cash flows from operating activities
Net income		$	934			$	829
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization			173				191
Accretion of discounts on securities, net of amortization of premiums			281				290
Provision for loan losses			515				361
Net realized (gains) losses on securities			(44	)			(98	)
Net realized (gains) losses on sale of foreclosed assets			20				69
Net realized (gains) losses on sale of fixed assets			82				—
Deferred compensation and pension expense (benefit)			—				—
Changes in operating assets and liabilities:
Accrued income			212				152
Other assets			(440	)			(16	)
Accrued interest payable			(33	)			8
Other liabilities			582				(71	)
Net cash provided by operating activities			2,282				1,715
Cash flows from investing activities
Net increase (decrease) in interest-bearing deposits in banks			(1,087	)			(9,304	)
Net (increase) decrease in federal funds sold			(11,850	)			1,975
Purchases of available for sale securities			(13,381	)			(15,683	)
Sales of available for sale securities			2,849				983
Maturities, calls and paydowns of available for sale securities			9,008				12,293
Purchases of held to maturity securities			(347	)			(1,306	)
Maturities, calls and paydowns of held to maturity securities			965				2,756
Call (purchase) of restricted equity securities			(21	)			—
Proceeds from sale of foreclosed assets			210				120
Net decrease in loans			7,805				(1,632	)
Net (purchases) dispositions of bank premises and equipment			673				(303	)
Net cash provided (used) by investing activities			(5,176	)			(10,101	)
Cash flows from financing activities
Net increase in noninterest-bearing deposits			2,379				1,497
Net increase (decrease) in interest-bearing deposits			995				7,096
Dividends paid			(123	)			(123	)
Net cash (used in) provided by financing activities			3,251				8,470
Net increase (decrease) in cash and cash equivalents			357				84
Cash and cash equivalents, beginning			2,948				3,498
Cash and cash equivalents, ending		$	3,305			$	3,582
Supplemental disclosures of cash flow information
Interest paid		$	2,324			$	3,344
Income taxes paid		$	358			$	251
Supplemental disclosures of noncash activities
Other real estate acquired in settlement of loans		$	—			$	437

See Notes to Consolidated Financial Statements.

 

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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. The December 31, 2010 information is derived from audited financial statements and the September 30, 2011 information is derived from unaudited financial statements.

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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 2. Loans and Allowance for Loan Losses

The major components of loans in the Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010 are summarized below:

 

		2011				2010
Commercial		$	6,304			$	7,230
Real estate
Construction and land development			11,083				13,110
Residential, 1-4 families			27,126				29,961
Residential, 5 or more families			4,749				4,277
Farmland			1,205				1,274
Nonfarm, nonresidential			83,024				85,049
Agricultural			5				72
Consumer			2,715				2,923
Other			4,814				5,388
Gross loans			141,025				149,284
Unearned discount and net deferred loan fees and costs			(333	)			(368	)
Total loans		$	140,692			$	148,916

As a part of the ongoing monitoring of the credit quality of the loan portfolio, management tracts certain credit quality indicators including trends related to (i) the risk grade assigned to commercial and consumer loans, (ii) the level of classified commercial loans, (iii) net charge-offs, (iv) nonperforming loans, and (v) the general economic conditions in the Company’s geographic markets.

The Company uses a risk grading system to assign a risk grad to each of its loans. Loans are graded on a quantitative scale ranging from one through four levels of pass through doubtful.

The following table presents the loan portfolio by credit quality indicator (risk grade) as of September 30, 2011 and December 31, 2010. Those loans with a risk grade above special mention have been combined in the pass column for presentation purposes.

 

			0000000				0000000				0000000				0000000				0000000
September 30, 2011 (In thousands)		Pass				Special Mention				Sub- Standard				Doubtful				Total Loans
Commercial		$	3,441			$	—			$	2,863			$	—			$	6,304
Real Estate			104,764				2,542				19,881				—				127,187
Agriculture			5				—				—				—				5
Consumer			2,715				—				—				—				2,715
Other			4,814				—				—				—				4,814
Total loans		$	115,739			$	2,542			$	22,744			$	—			$	141,025

 

			0000000				0000000				0000000				0000000				0000000
December 31, 2010 (In thousands)		Pass				Special Mention				Sub- Standards				Doubtful				Total Loans
Commercial		$	7,077			$	—			$	153			$	—			$	7,230
Real Estate			120,313				4,940				5,421				2,997				133,671
Agriculture			72				—				—				—				72
Consumer			2,923				—				—				—				2,923
Other			5,388				—				—				—				5,388
Total loans		$	135,773			$	4,940			$	5,574			$	2,997			$	149,284

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 2. Loans and Allowance for Loan Losses (continued)

 

A loan’s risk grade is assigned at the inception of the loan and is based on the financial strength of the borrower and the type of collateral. Loan risk grades are subject to reassessment at various times throughout the year as part of the Company’s ongoing loan review process. Loans with an assigned risk grade of substandard or below and an outstanding amount of $500,000.00 or more are reassessed on a quarterly basis. During this reassessment process individual reserves may be identified and placed against certain loans which are not considered impaired.

Loans are considered past due if the required principal and interest payments have nit been received as of the date such payments were due. Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due or when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provision. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due.

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, as of September 30, 2011 and December 31, 2010.

 

			0000000000				0000000000				0000000000				0000000000				0000000000				0000000000
		Accruing Loans
September 30, 2011 (In thousands)		30-89 Days Past Due				90 Days or More Past  Due				Total Accruing Loans Past Due				Nonaccrual Loans				Current Loans				Total Loans
Commercial		$	2			$	174			$	176			$	—			$	6,128			$	6,304
Real Estate			2,138				—				2,138				12,327				112,722				127,187
Agriculture			—				—				—				—				5				5
Consumer			3				—				3				—				2,712				2,715
Other			—				—				—				—				4,814				4,814
Total loans		$	2,143			$	174			$	2,317			$	12,327			$	126,381			$	141,025

 

			0000000000				0000000000				0000000000				0000000000				0000000000				0000000000
		Accruing Loans
December 31, 2010 (In thousands)		30-89 Days Past Due				90 Days or More Past Due				Total Accruing Loans Past Due				Nonaccrual Loans				Current Loans				Total Loans
Commercial		$	50			$	—			$	50			$	—			$	7,180			$	7,230
Real Estate			2,546				—				2,546				7,471				123,654				133,671
Agriculture			—				—				—				—				72				72
Consumer			—				—				—				—				2,923				2,923
Other			—				—				—				—				5,388				5,388
Total loans		$	2,596			$	—			$	2,596			$	7,471			$	139,217			$	149,284

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 2. Loans and Allowance for Loan Losses (continued)

 

The following table details impaired loan data as of September 30, 2011 and December 31, 2010:

 

			0000000000				0000000000				0000000000				0000000000				0000000000
September 30, 2011 (In thousands)		Impaired Balance				Related Allowance				Average Recorded Investment				Interest Income Recorded				Interest Income Collected
With No Related Allowance Recorded
Commercial		$	—			$	—			$	—			$	—			$	—
Real Estate			11,042				—				11,087				264				326
Agriculture			—				—				—				—				—
Consumer			—				—				—				—				—
Other			—				—				—				—				—
			11,042				—				11,087				264				326
With an Allowance Recorded
Commercial			185				53				182				10				4
Real Estate			9,479				1,424				9,967				43				95
Agriculture			—				—				—				—				—
Consumer			—				—				—				—				—
Other			—				—				—				—				—
			9,664				1,477				10,149				53				99
Total
Commercial			185				53				182				10				4
Real Estate			20,521				1,424				21,054				307				421
Agriculture			—				—				—				—				—
Consumer			—				—				—				—				—
Other			—				—				—				—				—
		$	20,706			$	1,477			$	21,236			$	317			$	425

 

			0000000000				0000000000				0000000000				0000000000				0000000000
December 31, 2010 (In thousands)		Impaired Balance				Related Allowance				Average Recorded Investment				Interest Income Recorded				Interest Income Collected
With No Related Allowance Recorded
Commercial		$	—			$	—			$	—			$	—			$	—
Real Estate			4,291				—				4,293				169				210
Agriculture			—				—				—				—				—
Consumer			—				—				—				—				—
Other			—				—				—				—				—
			4,291				—				2,293				169				210
With an Allowance Recorded
Commercial			152				17				167				12				12
Real Estate			5,564				1,372				6,556				33				36
Agriculture			—				—				—				—				—
Consumer			—				—				—				—				—
Other			—				—				—				—				—
			5,716				1,389				6,723				45				48
Total
Commercial			152				17				167				12				12
Real Estate			9,855				1,372				9,130				202				281
Agriculture			—				—				—				—				—
Consumer			—				—				—				—				—
Other			—				—				—				—				—
		$	10,007			$	1,389			$	9,297			$	214			$	293

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 2. Loans and Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses, segregated by class of loan, for September 30, 2011 and September 30, 2010. Allocation portion of the allowance to one category of loans does not preclude its activity to absorb losses in other loan categories and periodically may result in reallocation within the provision categories.

 

September 30, 2011 (In thousands)		Beginning Balance				Charge- Offs				Recoveries				Provision				Ending Balance
Commercial		$	99			$	50			$	1			$	35			$	85
Real Estate			2,877				419				42				480				2,980
Agriculture			2				—				—				—				2
Consumer			34				—				3				—				37
Other			61				—				4				—				65
		$	3,073			$	469			$	50			$	515			$	3,169

 

September 30, 2010 (In thousands)		Beginning Balance				Charge- Offs				Recoveries				Provision				Ending Balance
Commercial		$	127			$	19			$	4			$	(33	)		$	79
Real Estate			2,373				243				—				394				2,524
Agriculture			3				—				—				—				3
Consumer			52				5				—				—				47
Other			115				—				4				—				119
		$	2,670			$	267			$	8			$	361			$	2,772

 

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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 September 30, 2011 and December 31, 2010 are as follows:

 

(In thousands)		September 30, 2011				December 31, 2010
Commitments to extend credit		$	12,394			$	9,594
Standby letters of credit			384				503
Total		$	12,778			$	10,097

Note 4. Employee Benefit Plan

The Bank has a qualified noncontributory, defined benefit pension plan, which covers all of its employees hired before October 1, 2008. 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 September 30, 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 $252 thousand.

Note 5. Fair Value

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

 

(In thousands)		September 30, 2011								December 31, 2010
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial assets
Cash and due from banks		$	3,305			$	3,305			$	2,948			$	2,948
Interest-bearing deposits with banks			8,879				8,879				7,792				7,792
Federal funds sold			33,400				33,400				21,550				21,550
Securities, available for sale			44,508				44,508				42,644				42,644
Securities, held to maturity			14,064				14,685				14,698				14,780
Restricted equity securities			596				596				575				575
Total loans			140,692				143,808				148,916				151,187
Accrued interest receivable			742				742				954				954
Bank Owned Life Insurance			5,399				5,399				5,279				5,279
Financial liabilities
Deposits			220,359				221,404				216,985				218,256
Accrued interest payable			78				78				111				111
Off-balance sheet assets (liabilities)
Commitments to extend credit and standby letter of credit			12,778				12,778				10,097				10,097

 

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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.

 

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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 principal 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.

 

			000000				000000				000000				000000
(In thousands)
September 30, 2011		Total				Level 1				Level 2				Level 3
Government sponsored enterprises		$	1,957			$	—			$	1,957			$	—
State and municipal securities			3,547				—				3,547				—
Mortgage-backed securities			36,855				—				36,855				—
Other securities			2,149				—				2,149				—
Investment securities available for sale		$	44,508			$	—			$	44,508			$	—
Total assets at fair value		$	44,508			$	—			$	44,508			$	—

 

			000000				000000				000000				000000
(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 September 30, 2011 and December 31, 2010.

 

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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)
September 30, 2011		Total				Level 1				Level 2				Level 3
Loans:
Commercial		$	133			$	—			$	133			$	—
Real Estate
Construction and land development			4,442				—				4,442				—
Residential, 1-4 families			744				—				744				—
Nonfarm, nonresidential			2,868				—				2,868				—
Impaired Loans			8,187				—				8,187				—
Foreclosed assets			279				—				279				—
Total assets at fair value		$	8,466			$	—			$	8,466			$	—

 

(In thousands)
December 31, 2010		Total				Level 1				Level 2				Level 3
Loans:
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 September 30, 2011 and December 31, 2010.

 

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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:

 

September 30, 2011 (In thousands)		Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value
Available for sale
Government sponsored enterprises		$	1,982			$	22			$	47			$	1,957
State and municipal securities			3,311				236				—				3,547
Mortgage-backed securities			36,167				798				110				36,855
Other securities			2,236				3				90				2,149
		$	43,696			$	1,059			$	247			$	44,508
Held to maturity
State and municipal securities		$	14,040			$	629			$	9			$	14,660
Mortgage-backed securities			24				1				—				25
		$	14,064			$	630			$	9			$	14,685
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 $6.6 million and $7.1 million at September 30, 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 September 30, 2011 and 2010:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
(In thousands)
Realized gains, available for sale securities		$	1			$	—			$	44			$	94
Realized gains, held to maturity securities			—				—				—				4
		$	1			$	—			$	44			$	98

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 6. Securities (continued)

 

The scheduled maturities of debt securities available for sale and held to maturity at September 30, 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		$	—			$	—			$	768			$	773
Due after one year through five years			2,209				2,188				5,485				5,688
Due after five years through ten years			2,485				2,679				3,209				3,382
Due after ten years			39,002				39,641				4,602				4,842
		$	43,696			$	44,508			$	14,064			$	14,685

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 September 30, 2011 and December 31, 2010 respectively.

 

			00000				00000				00000				00000				00000				00000
		Less Than 12 Months								12 Months or More								Total
September 30, 2011 (In thousands)		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Government sponsored enterprises		$	—			$	—			$	953			$	47			$	953			$	47
State and municipal securities			274				3				432				6				706				9
Mortgage- backed securities			4,383				34				3,472				76				7,855				110
Other Securities			926				90				—				—				926				90
Total temporarily impaired securities		$	5,583			$	127			$	4,857			$	129			$	10,440			$	256

 

			00000				00000				00000				00000				00000				00000
		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 September 30, 2011 the Company had 2 government-sponsored securities with an aggregate unrealized loss of approximately $47 thousand, 2 state and municipal securities with an aggregate unrealized loss of approximately $9 thousand, 20 mortgaged-backed securities with an aggregate unrealized loss of approximately $110 thousand and 3 other securities with an aggregate unrealized loss of approximately $90 thousand. Management does not believe that gross unrealized losses, which totals 2.5% 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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 7. Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-08, Intangibles – Goodwill and Other Testing Goodwill for Impairment. The objective of this update is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in this update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two step goodwill impairment test as described in previous guidance under Topic 350. The amendments are effective for fiscal years beginning December 15, 2011. Early adoption is permitted. The amendments are not expected to have a significant impact on the Company.

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

 

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

INTRODUCTION

Organization

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 September 30, 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.

Services

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.

Overview

The management of Cardinal Bankshares, in conjunction with its Board of Directors, continues to focus on shareholder value while maintaining a safe and sound institution for its customers. Several aspects of Cardinal’s current financial condition demonstrate this core value.

Banks are evaluated in light of three major regulatory capital ratios. Cardinal maintains these ratios at multiples of least two times the minimum standards required for both the holding company and bank. While capital ratios are an excellent indicator of a bank’s financial strength they are also an indicator of a bank’s ability to withstand financial turmoil such as the recent economic recession.

Cardinal’s management recognized the increased level of risk inherent in lending due to the aforementioned recession. Accordingly, Cardinal has prudently increased its allowance for loan losses as necessary. This action has wisely prevented placing Cardinal in a vulnerable position. Cardinal’s capital position combined with its loan loss reserve allows the Company to address any actual or potential loan losses while continuing to maintain a solid financial position with which to serve its customers.

Cardinal maintains abundant liquidity in order to maintain adequate funding for customer withdraws, loans, investments and daily clearing of transactions. Although the amount of liquidity has some negative impact on earnings, the highly liquid position allows Cardinal to have great flexibility to react to economic conditions.

Cardinal has continued to be profitable on a consistent basis, with the after-tax profit for the first nine-months of this year 12.7% ahead of the same period last year. This consistent profitability has been achieved by effective cost control, attention to and adjustment of rates paid on deposits and sound conservative lending practices that have minimized credit losses. In addition, consistent profitability has allowed Cardinal to pay a regular semi-annual dividend while increasing equity and long-term shareholder value.

 

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During a period of prolonged economic distress, in which many banks have failed or are faltering, Cardinal has improved its capital ratios, continuously been profitable and has paid a dividend. Finally, the company has achieved a Return on Equity and Return on Investment on par or exceeding its peer group.

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 September 30, 2011 were $254.2 million, an increase of 2.0% or $5.1 million from year-end 2010. Total loans decreased 5.5% or $8.2 million during the first nine months of this year to $140.7 million.

The investment securities portfolio reflected an increase of 2.2% or $1.3 million during the first nine months of the year. Federal funds sold increased 55.0% or $11.9 million during the first nine months of the year to $33.4 million. Interest-bearing deposits increased 14.0% or $1.1 million to $8.9 million during the first nine months of the year.

As of September 30, 2011, total deposits were $220.4 million an increase of 1.6% or $3.4 million compared to year-end 2010. Non-interest-bearing core deposits increased to $30.6 million as compared to $28.3 million at year-end 2010. Interest-bearing deposits decreased 0.5% or $995 thousand to $189.7 million. Deposits greater than $100 thousand amounted to $51.9 million at September 30, 2011 as compared to $60.9 million at year-end 2010.

Stockholders’ equity was $33.1 million as of September 30, 2011 compared to $31.9 million as of December 31, 2010. Net income of $934 thousand for the period combined with an increase in accumulated other comprehensive income of $370 thousand less dividends paid of $123 thousand accounted for the increase in stockholders’ equity.

RESULTS OF OPERATIONS

Net income for the nine months ended September 30, 2011 was $934 thousand, an increase of 12.7% compared to $829 thousand for the nine months ended September 30, 2010. Net income for the three months ended September 30, 2011 was $287 thousand, an increase of 21.4% compared to $238 thousand for the three months ended September 30, 2010. Diluted earnings per share increased 13.0% to $.61 for the nine months ended September 30, 2011. Diluted earnings per share for the same period a year earlier was $.54. Diluted earnings per share increased 18.8% to $.19 for the three months ended September 30, 2011. Diluted earnings per share for the same period a year earlier was $.16. The provision for loan losses was $515 thousand during the nine months ended September 30, 2011, representing an increase of $154 thousand over the same period for the previous year. The provision for loan losses was $76 thousand during the three months ended September 30, 2011, representing a decrease of $14 thousand over the same period for the previous year. In addition, for the nine months ended September 30, 2011, interest expense decreased $1.1 million due to decreased rates paid on deposits, non-interest income decreased $32 thousand due to decreased net realized gains on sales of securities, and non-interest expense increased $171 thousand due to increased salaries and employee benefits and a loss on sale of fixed assets of $82 thousand due to the sale of the Tanglewood Branch and replacement of ATM’s. During the three months ended September 30, 2011, interest expense decreased $355 thousand due to decreased rates on paid on deposits, non-interest income decreased $8 thousand due to decreased net realized gains on sales of securities, and non-interest expense remained unchanged at $1.4 million.

Total interest income for the nine months ended September 30, 2011 decreased $513 thousand to $7.7 million, a decrease of 6.3% over the same prior year period. This resulted from decreased income on loans and fees on loans as the loan portfolio decreased due to continued poor economic conditions. Total interest income for the three months ended September 30, 2011, decreased $279 thousand to $2.4 million, a decrease of 10.2% over the same prior year period.

 

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Due to increased earnings for the nine months ended September 30, 2011, an income tax expense of $122 thousand was incurred versus and income tax expense of $36 thousand for the same period in the previous year. Due to increased earnings during the three months ended September 30, 2011, an income tax expense of $33 thousand was incurred versus and income tax expense of $2 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 nine months of 2011 the provision for loan losses was $515 thousand as compared to $361 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 increase 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 $3.2 million at September 30, 2011. The allowance for loan losses to period end loans was 2.25% at June 30, 2011 compared to 2.06% and 1.84% at December 31, 2010 and June 30, 2010, respectively. The Company recovered balances previously charged off on loans in the amount of $50 thousand during the first nine months of 2011. This compares with recoveries for the nine months ended September 30, 2010 of $8 thousand. The Company charged-off loans in the amount of $469 thousand during the first nine months of 2011 as compared to $267 thousand in charge-offs for the same nine months of 2010.

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 $12.8 million as of September 30, 2011 compared to $8.0 million as of December 31, 2010. The increase in nonperforming assets occurred as a result of a net increase in the nonaccrual loans of $4.8 million, which included write-offs of $469 thousand and an increase in over 90 days old loans of $174 thousand and a decrease in other real estate owned due to sale of $230 thousand. Management is taking aggressive actions to mitigate any material losses related to nonperforming assets. As of September 30, 2011 the Company’s impaired loans with a valuation allowance amounted to $8.2 million, an increase of $3.9 million from December 31, 2010. The valuation allowance related to the impaired loans was $1.5 million at September 30, 2011 and $1.4 million at December 31, 2010.

 

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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.

CAPITAL RESOURCES

Cardinal Bankshares and Bank of Floyd capital positions provide the necessary assurance required to support anticipated asset growth and to absorb potential losses.

The Cardinal Bankshares Tier I capital position was $32.5 million at September 30, 2011, or 20.84% of risk-weighted assets. Total risk-based capital was $34.5 million or 22.10% of risk-weighted assets. The Bank of Floyd Tier I capital position was $23.0 million at September 30, 2011, or 15.41% of risk-weighted assets. Total risk-based capital was $24.9 million or 16.66% 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, both Cardinal Bankshares and Bank of Floyd are categorized as well capitalized at September 30, 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 September 30, 2011, Cardinal Bankshares and Bank of Floyd leverage capital ratios were 13.06% and 9.48%, respectively.

During the first nine months of 2011 Cardinal Bankshares and Bank of Floyd have seen an increase in deposits and provision for loan losses and a decrease in loans, while maintaining their 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.

 

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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.

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.

 

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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

3.1 Articles of Incorporation – filed as exhibit to the Registrant’s Registration Statement on Form 8-A filed with the Commission on August 16, 1996.

31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1359, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101 - The following materials from the Company’s 10-Q Report for the quarterly period ended September 30, 2011, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) the Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.*

 

*	Furnished, not filed

 

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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: November 9, 2011

 

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