10-Q

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.

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

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.

2

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.

3

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.

4

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.

5

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.

6

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

7

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

8

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

9

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

10

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

11

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.

12

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.

13

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.

14

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

15

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.

16

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.

17

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.

18

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.

19

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.

20

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.

21

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.

22

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

23

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

24

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Ronald Leon Moore, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Cardinal Bankshares Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Rules 13a-15(f) and 15(d)-15(f) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles:

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which could adversely affect the registrant’s ability to record, process, summarize and report financial information and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2011

/s/ Ronald Leon Moore

Ronald Leon Moore

Chairman, President & Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, J. Alan Dickerson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Cardinal Bankshares Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Rules 13a-15(f) and 15(d)-15(f) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles:

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which could adversely affect the registrant’s ability to record, process, summarize and report financial information and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2011

/s/ J. Alan Dickerson

J. Alan Dickerson

Chief Financial Officer & Vice President

EX-32.1

Exhibit 32.1

CERTIFICATION

(Pursuant to 18 U.S.C. Section 1350)

The undersigned hereby certifies that (i) the foregoing Quarterly Report on Form 10-Q filed by November 9, 2011 for the quarter ended September 30, 2011, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.

Date: November 9, 2011	/s/ Ronald Leon Moore
	Ronald Leon Moore
	Chairman, President & Chief Executive Officer
Date: November 9, 2011	/s/ J. Alan Dickerson
	J. Alan Dickerson
	Chief Financial Officer & Vice President

XML

Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data	Sep. 30, 2011	Dec. 31, 2010
Consolidated Balance Sheets [Abstract]
Investment securities held to maturity, fair value	$ 14,685	$ 14,780
Common stock, par value	$ 10	$ 10
Common stock, shares authorized	5,000,000	5,000,000
Common stock, shares issued	1,535,733	1,535,733
Common stock, shares outstanding	1,535,733	1,535,733

XML

Consolidated Statements Of Income (USD $) In Thousands, except Share data	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 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

XML

Document And Entity Information	9 Months Ended
	Sep. 30, 2011	Nov. 09, 2011
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q3
Entity Registrant Name	CARDINAL BANKSHARES CORP
Entity Central Index Key	0001022759
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		1,535,733

XML

Fair Value

9 Months Ended

Sep. 30, 2011

Fair Value [Abstract]

Fair Value

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

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.

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.

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.

XML

Basis Of Presentation

9 Months Ended

Sep. 30, 2011

Basis Of Presentation [Abstract]

Basis Of Presentation

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.

XML

Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2011

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

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.

XML

Reclassifications

9 Months Ended

Sep. 30, 2011

Reclassifications [Abstract]

Reclassifications

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.

XML

Securities

9 Months Ended

Sep. 30, 2011

Securities [Abstract]

Securities

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

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.

XML

Consolidated Statements Of Changes In Stockholders' Equity And Comprehensive Income (Parenthetical) (USD $) In Thousands, except Per Share data	9 Months Ended
	Sep. 30, 2011
Consolidated Statements Of Changes In Stockholders' Equity And Comprehensive Income [Abstract]
Net Unrealized securities gains arising during the period, taxes	$ 206
Realized securities gains, taxes	$ 15
Cash dividend declared per share	$ 0.08

XML

Loans And Allowance For Loan Losses

9 Months Ended

Sep. 30, 2011

Loans And Allowance For Loan Losses [Abstract]

Loans And Allowance For Loan Losses

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

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

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

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

XML

Commitments And Contingencies

9 Months Ended

Sep. 30, 2011

Commitments And Contingencies [Abstract]

Commitments And Contingencies

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

XML

Employee Benefit Plan

9 Months Ended

Sep. 30, 2011

Employee Benefit Plan [Abstract]

Employee Benefit Plan

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.

XML

Consolidated Statements Of Changes In Stockholders' Equity And Comprehensive Income (USD $) In Thousands	Common Stock [Member]	Additional Paid-In Capital [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Total
Balance at Dec. 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 at Sep. 30, 2011	$ 15,357	$ 2,925	$ 14,250	$ 536	$ 33,068

XML

Consolidated Statements Of Cash Flows (USD $) In Thousands	9 Months Ended
	Sep. 30, 2011	Sep. 30, 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

XML

Consolidated Balance Sheets (USD $) In Thousands	Sep. 30, 2011	Dec. 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