Table of Contents
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, June 30, 2011 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 December 5, 2011 was 1,535,733.
Table of Contents
CARDINAL BANKSHARES CORPORATION
FORM 10-Q
June 30, 2011
Page | ||||||
Part I. | Financial Information | |||||
Item 1. | Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010 (Audited) | 3 | ||||
Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010 (Unaudited) | 4 | |||||
Consolidated Statements of Cash Flows for the six months ended June 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 | 14 | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 18 | ||||
Item 4. | 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 | ||||
20 | ||||||
CERTIFICATIONS |
Table of Contents
Explanatory Note
Cardinal Bankshares Corporation (the “Company”) files this Amendment No. 1 on Form 10-Q/A to amend its Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 that was originally filed with Securities and Exchange Commission on August 12, 2011 (the “Original Filing”.) We file this Form 10-Q/A to correct the inadvertent omission of the additional required disclosures regarding loans and the allowance for loan losses contained in Part I, Item 1, Note 2 of the Consolidated Financial Statements in the Original Filing. The appropriate information is set forth in the revised tables included in this Form 10-Q/A.
Other than the correction of minor typographical errors, no other changes have been made to the Form 10-Q. This Form 10-Q/A does not reflect events that may have occurred subsequent to the Original Filing and does not modify or update in any way other disclosures made in the Form 10-Q.
Pursuant to Exchange Act Rule 12b-5, new certifications by the Company’s principal executive officer and principal financial officer are filed or furnished with this Form 10-Q/A as Exhibits 31.1, 31.2, and 32.1.
Cardinal Bankshares Corporation and Subsidiary
Consolidated Balance Sheets
(In thousands, except share data) | (UnAudited) June 30, 2011 | (Audited) December 31, 2010 | ||||||
Assets | ||||||||
Cash and due from banks | $ | 3,355 | $ | 2,948 | ||||
Interest-bearing deposits | 271 | 7,792 | ||||||
Federal funds sold | 28,975 | 21,550 | ||||||
Investment securities available for sale, at fair value | 47,948 | 42,644 | ||||||
Investment securities held to maturity | 14,022 | 14,698 | ||||||
(fair value June 30, 2011 $14,408 – December 31, 2010 $14,780) | ||||||||
Restricted equity securities | 602 | 575 | ||||||
Total loans | 141,864 | 148,916 | ||||||
Allowance for loan losses | (3,054 | ) | (3,073 | ) | ||||
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Net loans | 138,810 | 145,843 | ||||||
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Bank premises and equipment, net | 2,963 | 3,846 | ||||||
Accrued interest receivable | 903 | 954 | ||||||
Foreclosed assets | 279 | 509 | ||||||
Bank owned life insurance | 5,359 | 5,279 | ||||||
Other assets | 2,745 | 2,430 | ||||||
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Total assets | $ | 246,232 | $ | 249,068 | ||||
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Liabilities and Stockholders’ Equity | ||||||||
Noninterest-bearing deposits | $ | 28,360 | $ | 28,264 | ||||
Interest-bearing deposits | 184,623 | 188,721 | ||||||
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Total deposits | 212,983 | 216,985 | ||||||
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Accrued interest payable | 87 | 111 | ||||||
Other liabilities | 541 | 85 | ||||||
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Total liabilities | 213,611 | 217,181 | ||||||
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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 | 13,960 | 13,439 | ||||||
Accumulated other comprehensive income, net | 379 | 166 | ||||||
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Total stockholders’ equity | 32,621 | 31,887 | ||||||
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Total liabilities and stockholders’ equity | $ | 246,232 | $ | 249,068 | ||||
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See Notes to Consolidated Financial Statements.
3
Table of Contents
Cardinal Bankshares Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(In thousands, except share data) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Interest income | ||||||||||||||||
Loans and fees on loans | $ | 2,005 | $ | 2,226 | $ | 4,156 | $ | 4,394 | ||||||||
Federal funds sold and securities purchased under agreements to resell | 12 | 11 | 24 | 22 | ||||||||||||
Investment securities: | ||||||||||||||||
Taxable | 345 | 291 | 684 | 650 | ||||||||||||
Exempt from federal income tax | 168 | 188 | 341 | 372 | ||||||||||||
Deposits with banks | — | 1 | 1 | 1 | ||||||||||||
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Total interest income | 2,530 | 2,717 | 5,206 | 5,439 | ||||||||||||
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Interest expense | ||||||||||||||||
Deposits | 748 | 1,109 | 1,537 | 2,242 | ||||||||||||
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Total interest expense | 748 | 1,109 | 1,537 | 2,242 | ||||||||||||
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Net interest income | 1,782 | 1,608 | 3,669 | 3,197 | ||||||||||||
Provision for loan losses | 253 | (109 | ) | 439 | 271 | |||||||||||
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Net interest income after provision for loan losses | 1,529 | 1,717 | 3,230 | 2,926 | ||||||||||||
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Noninterest income | ||||||||||||||||
Service charges on deposit accounts | 55 | 48 | 102 | 96 | ||||||||||||
Other service charges and fees | 31 | 31 | 57 | 70 | ||||||||||||
Net realized gains on sales of securities | 43 | 93 | 43 | 98 | ||||||||||||
Other operating income | 94 | 67 | 170 | 131 | ||||||||||||
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Total noninterest income | 223 | 239 | 372 | 395 | ||||||||||||
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Noninterest expense | ||||||||||||||||
Salaries and employee benefits | 823 | 812 | 1,615 | 1,542 | ||||||||||||
Occupancy and equipment | 135 | 161 | 312 | 330 | ||||||||||||
Foreclosed assets, Net | 27 | 1 | 34 | 3 | ||||||||||||
Loss on sale of fixed assets | 12 | — | 82 | — | ||||||||||||
Other operating expense | 419 | 405 | 826 | 821 | ||||||||||||
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Total noninterest expense | 1,416 | 1,379 | 2,869 | 2,696 | ||||||||||||
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Income before income taxes | 336 | 577 | 733 | 625 | ||||||||||||
Income tax expense (benefit) | 15 | 106 | 89 | 34 | ||||||||||||
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Net Income | $ | 321 | $ | 471 | $ | 644 | $ | 591 | ||||||||
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Basic earnings per share | $ | 0.21 | $ | 0.31 | $ | 0.42 | $ | 0.39 | ||||||||
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Diluted earnings per share | $ | 0.21 | $ | 0.31 | $ | 0.42 | $ | 0.39 | ||||||||
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Dividends declared per share | $ | 0.08 | $ | 0.08 | $ | 0.08 | $ | 0.08 | ||||||||
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Weighted average basic shares outstanding | 1,535,733 | 1,535,733 | 1,535,733 | 1,535,733 | ||||||||||||
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Weighted average diluted shares outstanding | 1,535,733 | 1,535,733 | 1,535,733 | 1,535,733 | ||||||||||||
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See Notes to Consolidated Financial Statements.
4
Table of Contents
Cardinal Bankshares Corporation and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
(In thousands) Six Months Ended June 30, | 2011 | 2010 | ||||||
Cash flows from operating activities | ||||||||
Net income | $ | 644 | $ | 591 | ||||
Adjustments to reconcile net income to net cash provided by operations: | ||||||||
Depreciation and amortization | 120 | 120 | ||||||
Accretion of discounts on securities, net of amortization of premiums | 185 | 195 | ||||||
Provision for loan losses | 439 | 271 | ||||||
Net realized (gains) losses on securities | (43 | ) | (98 | ) | ||||
Net realized (gains) losses on sale of foreclosed assets | 20 | 21 | ||||||
Deferred compensation and pension expense (benefit) | — | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Accrued income | 51 | (102 | ) | |||||
Other Assets | (444 | ) | (39 | ) | ||||
Accrued interest payable | (24 | ) | 7 | |||||
Other liabilities | 456 | (175 | ) | |||||
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Net cash provided by operating activities | 1,404 | 791 | ||||||
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Cash flows from investing activities | ||||||||
Net increase (decrease) in interest-bearing deposits in banks | 7,521 | (4,876 | ) | |||||
Net (increase) decrease in federal funds sold | (7,425 | ) | 2,425 | |||||
Purchases of available for sale securities | (13,063 | ) | (13,558 | ) | ||||
Sales of available for sale securities | 2,849 | 983 | ||||||
Maturities, calls and paydowns of available for sale securities | 5,101 | 8,937 | ||||||
Purchases of held to maturity securities | — | (1,306 | ) | |||||
Maturities, calls and paydowns of held to maturity securities | 605 | 2,308 | ||||||
Call (purchase) of restricted equity securities | (27 | ) | — | |||||
Proceeds from sale of foreclosed assets | 210 | 10 | ||||||
Net decrease in loans | 6,594 | 839 | ||||||
Net (purchases) dispositions of bank premises and equipment | 763 | (287 | ) | |||||
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Net cash provided (used) by investing activities | 3,128 | (4,525 | ) | |||||
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Cash flows from financing activities | ||||||||
Net increase in noninterest-bearing deposits | 96 | 1,188 | ||||||
Net increase (decrease) in interest-bearing deposits | (4,098 | ) | 2,007 | |||||
Dividends Paid | (123 | ) | (123 | ) | ||||
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Net cash (used in) provided by financing activities | (4,125 | ) | 3,072 | |||||
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Net increase (decrease) in cash and cash equivalents | 407 | (662 | ) | |||||
Cash and cash equivalents, beginning | 2,948 | 3,498 | ||||||
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Cash and cash equivalents, ending | $ | 3,355 | $ | 2,836 | ||||
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Supplemental disclosures of cash flow information | ||||||||
Interest paid | $ | 1,561 | $ | 2,235 | ||||
Income taxes paid | $ | 296 | $ | 213 | ||||
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Supplemental disclosures of noncash activities | ||||||||
Other real estate acquired in settlement of loans | $ | — | $ | 230 | ||||
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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 June 30, 2011 and December 31, 2010 are summarized below:
2010 | 2011 | |||||||
Commercial | $ | 6,573 | $ | 7,230 | ||||
Real estate | ||||||||
Construction and land development | 11,310 | 13,110 | ||||||
Residential, 1-4 families | 27,834 | 29,961 | ||||||
Residential, 5 or more families | 4,048 | 4,277 | ||||||
Farmland | 1,295 | 1,274 | ||||||
Nonfarm, nonresidential | 83,098 | 85,049 | ||||||
Agricultural | 52 | 72 | ||||||
Consumer | 2,839 | 2,923 | ||||||
Other | 5,162 | 5,388 | ||||||
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Gross loans | 142,211 | 149,284 | ||||||
Unearned discount and net deferred loan fees and costs | (347 | ) | (368 | ) | ||||
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Total loans | $ | 141,864 | $ | 148,916 | ||||
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As a part of the ongoing monitoring of the credit quality of the loan portfolio, management tracks 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 grade 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 June 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.
June 30, 2011 (In thousands) | Pass | Special Mention | Sub- Standard | Doubtful | Total Loans | |||||||||||||||
Commercial | $ | 6,405 | $ | — | $ | 168 | $ | — | $ | 6,573 | ||||||||||
Real Estate | 106,665 | 8,211 | 11,297 | 1,412 | 127,585 | |||||||||||||||
Agriculture | 52 | — | — | — | 52 | |||||||||||||||
Consumer | 2,839 | — | — | — | 2,839 | |||||||||||||||
Other | 5,162 | — | — | — | 5,162 | |||||||||||||||
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Total loans | $ | 121,123 | $ | 8,211 | $ | 11,465 | $ | 1,412 | $ | 142,211 | ||||||||||
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December 31, 2010 (In thousands) | Pass | Special Mention | Sub- Standard | 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 | |||||||||||||||
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Total loans | $ | 135,773 | $ | 4,940 | $ | 5,574 | $ | 2,997 | $ | 149,284 | ||||||||||
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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 thousand or more are reassessed on a quarterly basis. During this reassessment process individual reserves may be identified and placed against certain loans that are considered impaired.
Loans are considered past due if the required principal and interest payments have not 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 June 30, 2011 and December 31, 2010.
Accruing Loans | ||||||||||||||||||||||||
June 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 | $ | 168 | $ | — | $ | 168 | $ | — | $ | 6,405 | $ | 6,573 | ||||||||||||
Real Estate | 4,060 | — | 4,060 | 8,417 | 115,108 | 127,585 | ||||||||||||||||||
Agriculture | — | — | — | — | 52 | 52 | ||||||||||||||||||
Consumer | — | — | — | — | 2,839 | 2,839 | ||||||||||||||||||
Other | — | — | — | — | 5,162 | 5,162 | ||||||||||||||||||
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Total loans | $ | 4,228 | $ | — | $ | 4,228 | $ | 8,417 | $ | 129,566 | $ | 142,211 | ||||||||||||
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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 | ||||||||||||||||||
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Total loans | $ | 2,596 | $ | — | $ | 2,596 | $ | 7,471 | $ | 139,217 | $ | 149,284 | ||||||||||||
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The following table details impaired loan data as of June 30, 2011 and December 31, 2010:
June 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 | 10,072 | — | 10,071 | 128 | 175 | |||||||||||||||
Agriculture | — | — | — | — | — | |||||||||||||||
Consumer | — | — | — | — | — | |||||||||||||||
Other | — | — | — | — | — | |||||||||||||||
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10,072 | — | 10,071 | 128 | 175 | ||||||||||||||||
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With an Allowance Recorded | ||||||||||||||||||||
Commercial | 168 | 65 | 170 | 6 | 3 | |||||||||||||||
Real Estate | 6,186 | 1,336 | 6,777 | 64 | 63 | |||||||||||||||
Agriculture | — | — | — | — | — | |||||||||||||||
Consumer | — | — | — | — | — | |||||||||||||||
Other | — | — | — | — | — | |||||||||||||||
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6,354 | 1,401 | 6,947 | 70 | 66 | ||||||||||||||||
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Total | ||||||||||||||||||||
Commercial | 168 | 65 | 170 | 6 | 3 | |||||||||||||||
Real Estate | 16,258 | 1,336 | 16,848 | 192 | 238 | |||||||||||||||
Agriculture | — | — | — | — | — | |||||||||||||||
Consumer | — | — | — | — | — | |||||||||||||||
Other | — | — | — | — | — | |||||||||||||||
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$ | 16,426 | $ | 1,401 | $ | 17,018 | $ | 198 | $ | 241 | |||||||||||
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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 | — | — | — | — | — | |||||||||||||||
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4,291 | — | 4,293 | 169 | 210 | ||||||||||||||||
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With an Allowance Recorded | ||||||||||||||||||||
Commercial | 152 | 17 | 167 | 12 | 12 | |||||||||||||||
Real Estate | 5,564 | 1,372 | 4,837 | 33 | 71 | |||||||||||||||
Agriculture | — | — | — | — | — | |||||||||||||||
Consumer | — | — | — | — | — | |||||||||||||||
Other | — | — | — | — | — | |||||||||||||||
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5,716 | 1,389 | 5,004 | 45 | 83 | ||||||||||||||||
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| |||||||||||
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 | |||||||||||
|
|
|
|
|
|
|
|
|
|
The following tables detail activity in the allowance for loan losses, segregated by class of loan, for the six-month periods ended June 30, 2011 and June 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.
June 30, 2011 (In thousands) | Beginning Balance | Charge- Offs | Recoveries | Provision | Ending Balance | |||||||||||||||
Commercial | $ | 99 | $ | 50 | $ | 1 | $ | 47 | $ | 97 | ||||||||||
Real Estate | 2,877 | 418 | 4 | 392 | 2,855 | |||||||||||||||
Agriculture | 2 | — | — | — | 2 | |||||||||||||||
Consumer | 34 | — | 3 | — | 37 | |||||||||||||||
Other | 61 | — | 2 | — | 63 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
$ | 3,073 | $ | 468 | $ | 10 | $ | 439 | $ | 3,054 | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
June 30, 2010 (In thousands) | Beginning Balance | Charge- Offs | Recoveries | Provision | Ending Balance | |||||||||||||||
Commercial | $ | 127 | $ | 19 | $ | 3 | $ | (33 | ) | $ | 78 | |||||||||
Real Estate | 2,373 | — | — | 304 | 2,677 | |||||||||||||||
Agriculture | 3 | — | — | — | 3 | |||||||||||||||
Consumer | 52 | 5 | — | — | 47 | |||||||||||||||
Other | 115 | — | 2 | — | 117 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
$ | 2,670 | $ | 24 | $ | 5 | $ | 271 | $ | 2,922 | |||||||||||
|
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|
|
|
|
|
|
|
|
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 June 30 for the years indicated follows:
(In thousands) | 2011 | 2010 | ||||||
Commitments to extend credit | $ | 10,559 | $ | 15,208 | ||||
Standby letters of credit | 500 | 629 | ||||||
|
|
|
| |||||
Total | $ | 11,059 | $ | 15,837 | ||||
|
|
|
|
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 June 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 $244 thousand.
Note 5. Fair Value
The estimated fair values of the Company’s financial instruments are as follows:
June 30, 2011 | December 31, 2010 | |||||||||||||||
(In thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Financial assets | ||||||||||||||||
Cash and due from banks | $ | 3,355 | $ | 3,355 | $ | 2,948 | $ | 2,948 | ||||||||
Interest-bearing deposits with banks | 271 | 271 | 7,792 | 7,792 | ||||||||||||
Federal funds sold | 28,975 | 28,975 | 21,550 | 21,550 | ||||||||||||
Securities, available for sale | 47,948 | 47,948 | 42,644 | 42,644 | ||||||||||||
Securities, held to maturity | 14,022 | 14,408 | 14,698 | 14,780 | ||||||||||||
Restricted equity securities | 602 | 602 | 575 | 575 | ||||||||||||
Total loans | 141,864 | 143,709 | 148,916 | 151,187 | ||||||||||||
Accrued interest receivable | 903 | 903 | 954 | 954 | ||||||||||||
Financial liabilities | ||||||||||||||||
Deposits | 212,983 | 214,086 | 216,985 | 218,256 | ||||||||||||
Accrued interest payable | 87 | 87 | 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) | ||||||||||||||||
June 30, 2011 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Government sponsored enterprises | $ | 3,943 | $ | — | $ | 3,943 | $ | — | ||||||||
State and municipal securities | 3,127 | — | 3,127 | — | ||||||||||||
Mortgage-backed securities | 38,624 | — | 38,624 | — | ||||||||||||
Other securities | 2,254 | — | 2,254 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Investment securities available for sale | $ | 47,948 | $ | — | $ | 47,948 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets at fair value | $ | 47,948 | $ | — | $ | 47,948 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
(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 June 30, 2011 and December 31, 2010.
9
Table of Contents
NOTES TO 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) | ||||||||||||||||
June 30, 2011 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Commercial | $ | 103 | $ | — | $ | 103 | $ | — | ||||||||
Real Estate | ||||||||||||||||
Construction and land development | 4,604 | — | 4,604 | — | ||||||||||||
Residential, 1-4 families | 12 | — | 12 | — | ||||||||||||
Nonfarm, nonresidential | 234 | — | 234 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Impaired Loans | 4,953 | — | 4,953 | — | ||||||||||||
Foreclosed assets | 279 | — | 279 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets at fair value | $ | 5,232 | $ | — | $ | 5,232 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
(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 June 30, 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:
June 30, 2011 (In thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
Available for sale | ||||||||||||||||
Government sponsored enterprises | $ | 3,980 | $ | 9 | $ | 46 | $ | 3,943 | ||||||||
State and municipal securities | 2,994 | 133 | — | 3,127 | ||||||||||||
Mortgage-backed securities | 38,146 | 592 | 114 | 38,624 | ||||||||||||
Other securities | 2,254 | 15 | 15 | 2,254 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 47,374 | $ | 749 | $ | 175 | $ | 47,948 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Held to maturity | ||||||||||||||||
State and municipal securities | $ | 13,997 | $ | 422 | $ | 37 | $ | 14,382 | ||||||||
Mortgage-backed securities | 25 | 1 | — | 26 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 14,022 | $ | 423 | $ | 37 | $ | 14,408 | |||||||||
|
|
|
|
|
|
|
| |||||||||
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 June 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 June 30, 2011 and 2010:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Realized gains, available for sale securities | $ | 43 | $ | 93 | $ | 43 | $ | 94 | ||||||||
Realized gains, held to maturity securities | — | — | — | 4 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 43 | $ | 93 | $ | 43 | $ | 98 | |||||||||
|
|
|
|
|
|
|
|
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 June 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 | $ | — | $ | — | $ | 1,012 | $ | 1,021 | ||||||||
Due after one year through five years | 1,416 | 1,383 | 4,813 | 4,993 | ||||||||||||
Due after five years through ten years | 2,994 | 3,110 | 3,592 | 3,727 | ||||||||||||
Due after ten years | 42,964 | 43,455 | 4,605 | 4,667 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 47,374 | $ | 47,948 | $ | 14,022 | $ | 14,408 | |||||||||
|
|
|
|
|
|
|
|
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 June 30, 2011 and December 31, 2010 respectively.
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
June 30, 2011 (In thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
Government sponsored enterprises | $ | — | $ | — | $ | 954 | $ | 46 | $ | 954 | $ | 46 | ||||||||||||
State and municipal securities | 267 | 10 | 411 | 27 | 678 | 37 | ||||||||||||||||||
Mortgage- backed securities | 10,393 | 77 | 1,843 | 37 | 12,236 | 114 | ||||||||||||||||||
Other Securities | 1,000 | 15 | — | — | 1,000 | 15 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total temporarily impaired securities | $ | 11,660 | $ | 102 | $ | 3,208 | $ | 110 | $ | 14,868 | $ | 212 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
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 June 30, 2011 the Company had 2 government-sponsored securities with an aggregate unrealized loss of approximately $46 thousand, 2 state and municipal securities with an aggregate unrealized loss of approximately $37 thousand, 30 mortgaged-backed securities with an aggregate unrealized loss of approximately $114 thousand and other securities with an aggregate unrealized loss of approximately $15 thousand. Management does not believe that gross unrealized losses, which totals 1.4% 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
In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-04,Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S GAAP and IFRSs. The amendments in this update explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The amendments are not expected to have a significant impact on the Company.
In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-05,Presentation of Comprehensive Income. This update seeks to improve comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. generally accepted accounting principles (GAAP) and International Reporting Standards (IFRS), the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in this update. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. 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 June 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.
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 June 30, 2011 were $246.2 million, a decrease of 1.1% or $2.8 million from year-end 2010. Total loans decreased 4.8% or $7.1 million during the first six months of this year to $141.9 million.
The investment securities portfolio reflected an increase of 8.0% or $4.7 million during the first six months of the year. Federal funds sold increased 34.5% or $7.4 million during the first six months of the year to $29.0 million. Interest-bearing deposits decreased 96.5% or $7.5 million to $271 thousand over year-end 2010 as a result of decreased deposits.
As of June 30, 2011, total deposits were $213.0 million down 1.8% or $4.0 million compared to year-end 2010. Non-interest-bearing core deposits increased to $28.4 million as compared to $28.3 million at year-end 2010. Interest-bearing deposits decreased 2.2% or $4.1 million to $184.6 million. Deposits greater than $100 thousand amounted to $52.6 million at June 30, 2011 as compared to $60.9 million at year-end 2010.
Stockholders’ equity was $32.6 million as of June 30, 2011 compared to $31.9 million as of December 31, 2010. Net income of $644 thousand for the period combined with an increase in accumulated other comprehensive income of $213 thousand less dividends paid of $123 thousand accounted for the increase in stockholders’ equity.
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RESULTS OF OPERATIONS
Net income for the six months ended June 30, 2011 was $644 thousand, an increase of 9.0% compared to $591 thousand for the six months ended June 30, 2010. Net income for the three months ended June 30, 2011 was $321 thousand, a decrease of 31.8% compared to $471 thousand for the three months ended June 30, 2010. Diluted earnings per share increased 7.7% to $.42 for the six months ended June 30, 2011. Diluted earnings per share for the same period a year earlier was $.39. Diluted earnings per share decreased 32.3% to $.21 for the three months ended June 30, 2011. Diluted earnings per share for the same period a year earlier was $.31. The provision for loan losses was $439 thousand during the six months ended June 30, 2011, representing an increase of $168 thousand over the same period for the previous year. The provision for loan losses was $253 thousand during the three months ended June 30, 2011, representing an increase of $362 thousand over the same period for the previous year. In addition, for the six months ended June 30, 2011, interest expense decreased $705 thousand due to decreased rates paid on deposits, non-interest income decreased $23 thousand due to decreased net realized gains on sales of securities, and non-interest expense increased $173 thousand due to a $73 increase in salaries and employee benefits, loss on sale of other real estate owned of $34 thousand 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 June 30, 2011, interest expense decreased $361 thousand due to decreased rates on paid on deposits, non-interest income decreased $16 thousand due to decreased net realized gains on sales of securities, and non-interest expense increased $37 thousand due to loss on sale of other real estate of $27 thousand and loss on replacement of ATM’s of $12 thousand.
Total interest income for the six months ended June 30, 2011 decreased $233 thousand to $5.2 million, a decrease of 4.3% 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 June 30, 2011, decreased $187 thousand to $2.5 million, a decrease of 6.9% over the same prior year period.
Due to increased earnings for the six months ended June 30, 2011, an income tax expense of $89 thousand was incurred versus and income tax expense of $34 thousand for the same period in the previous year. Due to decreased earnings during the three months ended June 30, 2011, an income tax expense of $15 thousand was incurred versus and income tax expense of $106 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 six months of 2011 the provision for loan losses was $439 thousand as compared to $271 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 $3.1 million at June 30, 2011. The allowance for loan losses to period end loans was 2.15% at June 30, 2011 compared to 2.06% and 1.96% at December 31, 2010 and June 30, 2010, respectively. The Company recovered balances previously charged off on loans in the amount of $10 thousand during the first six months of 2011. This compares with recoveries for the six months ended June 30, 2010 of $5 thousand. The Company charged-off loans in the amount of $468 thousand during the first six months of 2011 as compared to $24 thousand in charge-offs for the same six months of 2010.
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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 $8.7 million as of June 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 $715 thousand, which included write-offs of $418 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 June 30, 2011 the Company’s impaired loans with a valuation allowance amounted to $5.0 million, an increase of $626 thousand from December 31, 2010. The valuation allowance related to the impaired loans was $1.4 million at June 30, 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.
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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 $32.2 million at June 30, 2011, or 20.72% of risk-weighted assets. Total risk-based capital was $34.2 million or 21.98% 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 June 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 June 30, 2011, the Company’s leverage capital ratio was 13.02%.
During the first six months of 2011 Cardinal Bankshares has seen a decline in deposits, loans and 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.
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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 4. 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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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 | ||
101 | – | The following materials from the Company’s 10-Q Report for the quarterly period ended June 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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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: December 5, 2011
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