##### Table of Contents





U. S. SECURITIES AND EXCHANGE
COMMISSION

Washington, D. C. 20549





FORM 10-Q





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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

Commission File No. 0-28780





CARDINAL
BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)







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

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

(Address
of principal executive offices)

(540) 745-4191

(Registrants telephone number)





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

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

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



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

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





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









---

##### Table of Contents

CARDINAL BANKSHARES CORPORATION

FORM 10-Q

March 31, 2011

INDEX



|               |  |                                                                                                      |    |      |    | 
|-------------- |  | ---------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|               |  |                                                                                                      |    | Page |   
|               |  |                                                                                                     
|Part I.        |  | Financial Information                                                                                |    |      |    | 
|               |  |                                                                                                     
|Item 1.        |  | Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010 (Audited)         |    |      | 3  | 
|               |  |                                                                                                     
|               |  | Consolidated Statements of Income for the three months ended March 31, 2011 and 2010 (Unaudited)     |    |      | 4  | 
|               |  |                                                                                                     
|               |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (Unaudited) |    |      | 5  | 
|               |  |                                                                                                     
|               |  | Notes to Consolidated Statements (Unaudited)                                                         |    |      | 6  | 
|               |  |                                                                                                     
|Item 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                |    |      | 14 | 
|               |  |                                                                                                     
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                           |    |      | 18 | 
|               |  |                                                                                                     
|Item 4T.       |  | Controls and Procedures                                                                              |    |      | 18 | 
|               |  |                                                                                                     
|Part II.       |  | Other Information                                                                                    |    |      |    | 
|               |  |                                                                                                     
|Item 1.        |  | Legal Proceedings                                                                                    |    |      | 19 | 
|               |  |                                                                                                     
|Item 1A.       |  | Risk Factors                                                                                         |    |      | 19 | 
|               |  |                                                                                                     
|Item 2.        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                          |    |      | 19 | 
|               |  |                                                                                                     
|Item 3.        |  | Defaults Upon Senior Securities                                                                      |    |      | 19 | 
|               |  |                                                                                                     
|Item 4.        |  | Removed and Reserved                                                                                 |    |      | 19 | 
|               |  |                                                                                                     
|Item 5.        |  | Other Information                                                                                    |    |      | 19 | 
|               |  |                                                                                                     
|Item 6.        |  | Exhibits                                                                                             |    |      | 19 | 
|               | 
|SIGNATURES     |  |                                                                                                      | 20 |     
|               | 
|CERTIFICATIONS |  |                                                                                                      | 21 |     



---

##### Table of Contents

Cardinal Bankshares Corporation and Subsidiary

Consolidated Balance Sheets



|                                                                                                       |  |               |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------ |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                       |  | (UnAudited)   |         |   | (Audited)        |  
|(In thousands, except share data)                                                                      |  | March 31,2011 |         |   | December 31,2010 |  
|Assets                                                                                                 |  |               |         |   |                  |   |         |  
|Cash and due from banks                                                                                |  | $             | 3,981   |   |                  | $ | 2,948   |  
|Interest-bearing deposits                                                                              |  |               | 543     |   |                  |   | 7,792   |  
|Federal funds sold                                                                                     |  |               | 27,000  |   |                  |   | 21,550  |  
|Investment securities available for sale, at fair value                                                |  |               | 45,974  |   |                  |   | 42,644  |  
|Investment securities held to maturity (fair value March 31, 2011 $14,227 - December 31, 2010 $14,780) |  |               | 14,029  |   |                  |   | 14,698  |  
|Restricted equity securities                                                                           |  |               | 605     |   |                  |   | 575     |  
|                                                                                                       |  |              
|Total loans                                                                                            |  |               | 145,091 |   |                  |   | 148,916 |  
|Allowance for loan losses                                                                              |  |               | (2,796  | ) |                  |   | (3,073  | )
|                                                                                                       |  |               |         |   |                  |   |         |  
|Net loans                                                                                              |  |               | 142,295 |   |                  |   | 145,843 |  
|                                                                                                       |  |               |         |   |                  |   |         |  
|                                                                                                       |  |              
|Bank premises and equipment, net                                                                       |  |               | 2,930   |   |                  |   | 3,846   |  
|Accrued interest receivable                                                                            |  |               | 895     |   |                  |   | 954     |  
|Foreclosed assets                                                                                      |  |               | 509     |   |                  |   | 509     |  
|Bank owned life insurance                                                                              |  |               | 5,318   |   |                  |   | 5,279   |  
|Other assets                                                                                           |  |               | 2,776   |   |                  |   | 2,430   |  
|                                                                                                       |  |               |         |   |                  |   |         |  
|Total assets                                                                                           |  | $             | 246,855 |   |                  | $ | 249,068 |  
|                                                                                                       |  |               |         |   |                  |   |         |  
|                                                                                                       |  |              
|Liabilities and Stockholders Equity                                                                   |  |               |         |   |                  |   |         |  
|Noninterest-bearing deposits                                                                           |  | $             | 29,392  |   |                  | $ | 28,264  |  
|Interest-bearing deposits                                                                              |  |               | 184,462 |   |                  |   | 188,721 |  
|                                                                                                       |  |               |         |   |                  |   |         |  
|Total deposits                                                                                         |  |               | 213,854 |   |                  |   | 216,985 |  
|                                                                                                       |  |               |         |   |                  |   |         |  
|Accrued interest payable                                                                               |  |               | 96      |   |                  |   | 111     |  
|Other liabilities                                                                                      |  |               | 641     |   |                  |   | 85      |  
|                                                                                                       |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                      |  |               | 214,591 |   |                  |   | 217,181 |  
|                                                                                                       |  |               |         |   |                  |   |         |  
|Commitments and contingent liabilities                                                                 |  |               |        |   |                  |   |        |  
|                                                                                                       |  |              
|Stockholders Equity                                                                                   |  |               |         |   |                  |   |         |  
|Common stock, $10 par value, 5,000,000 shares authorized, 1,535,733 shares issued and outstanding      |  |               | 15,357  |   |                  |   | 15,357  |  
|Additional paid-in capital                                                                             |  |               | 2,925   |   |                  |   | 2,925   |  
|Retained earnings                                                                                      |  |               | 13,762  |   |                  |   | 13,439  |  
|Accumulated other comprehensive loss, net                                                              |  |               | 220     |   |                  |   | 166     |  
|                                                                                                       |  |               |         |   |                  |   |         |  
|Total stockholders equity                                                                             |  |               | 32,264  |   |                  |   | 31,887  |  
|                                                                                                       |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                             |  | $             | 246,855 |   |                  | $ | 249,068 |  
|                                                                                                       |  |               |         |   |                  |   |         |  

See Notes to Consolidated Financial Statements.



3



---

##### Table of Contents

Cardinal Bankshares Corporation and Subsidiary

Consolidated Statements of Income (Unaudited)



|                                                                       |  |                    |           |  |      |   |           |  
|---------------------------------------------------------------------- |  | ------------------ | --------- |  | ---- | - | --------- | -
|                                                                       |  | Three months ended |          
|                                                                       |  | March 31,          |          
|(In thousands, except share data)                                      |  | 2011               |           |  | 2010 |  
|Interest income                                                        |  |                    |           |  |      |   |           |  
|Loans and fees on loans                                                |  | $                  | 2,151     |  |      | $ | 2,168     |  
|Federal funds sold and securities purchased under agreements to resell |  |                    | 12        |  |      |   | 11        |  
|Investment securities:                                                 |  |                    |           |  |      |   |           |  
|Taxable                                                                |  |                    | 340       |  |      |   | 359       |  
|Exempt from federal income tax                                         |  |                    | 172       |  |      |   | 185       |  
|Deposits with banks                                                    |  |                    | 1         |  |      |   |          |  
|                                                                       |  |                    |           |  |      |   |           |  
|Total interest income                                                  |  |                    | 2,676     |  |      |   | 2,723     |  
|                                                                       |  |                    |           |  |      |   |           |  
|Interest expense                                                       |  |                    |           |  |      |   |           |  
|Deposits                                                               |  |                    | 789       |  |      |   | 1,133     |  
|                                                                       |  |                    |           |  |      |   |           |  
|Total interest expense                                                 |  |                    | 789       |  |      |   | 1,133     |  
|                                                                       |  |                    |           |  |      |   |           |  
|Net interest income                                                    |  |                    | 1,887     |  |      |   | 1,590     |  
|Provision for loan losses                                              |  |                    | 186       |  |      |   | 380       |  
|                                                                       |  |                    |           |  |      |   |           |  
|Net interest income after provision for loan losses                    |  |                    | 1,701     |  |      |   | 1,210     |  
|                                                                       |  |                    |           |  |      |   |           |  
|Noninterest income                                                     |  |                    |           |  |      |   |           |  
|Service charges on deposit accounts                                    |  |                    | 47        |  |      |   | 48        |  
|Other service charges and fees                                         |  |                    | 25        |  |      |   | 24        |  
|Sale of credit card portfolio                                          |  |                    |          |  |      |   | 15        |  
|Net realized gains on sales of securities                              |  |                    |          |  |      |   | 4         |  
|Other operating income                                                 |  |                    | 77        |  |      |   | 65        |  
|                                                                       |  |                    |           |  |      |   |           |  
|Total noninterest income                                               |  |                    | 149       |  |      |   | 156       |  
|                                                                       |  |                    |           |  |      |   |           |  
|Noninterest expense                                                    |  |                    |           |  |      |   |           |  
|Salaries and employee benefits                                         |  |                    | 792       |  |      |   | 730       |  
|Occupancy and equipment                                                |  |                    | 184       |  |      |   | 169       |  
|Foreclosed assets, Net                                                 |  |                    |          |  |      |   | 2         |  
|Loss on sale of fixed assets                                           |  |                    | 70        |  |      |   |          |  
|Other operating expense                                                |  |                    | 407       |  |      |   | 417       |  
|                                                                       |  |                    |           |  |      |   |           |  
|Total noninterest expense                                              |  |                    | 1,453     |  |      |   | 1,318     |  
|                                                                       |  |                    |           |  |      |   |           |  
|Income before income taxes                                             |  |                    | 397       |  |      |   | 48        |  
|Income tax expense (benefit)                                           |  |                    | 74        |  |      |   | (72       | )
|                                                                       |  |                    |           |  |      |   |           |  
|Net Income                                                             |  | $                  | 323       |  |      | $ | 120       |  
|                                                                       |  |                    |           |  |      |   |           |  
|                                                                       |  |                   
|Basic earnings per share                                               |  | $                  | 0.21      |  |      | $ | 0.08      |  
|                                                                       |  |                    |           |  |      |   |           |  
|Diluted earnings per share                                             |  | $                  | 0.21      |  |      | $ | 0.08      |  
|                                                                       |  |                    |           |  |      |   |           |  
|Dividends declared per share                                           |  | $                  |          |  |      | $ |          |  
|                                                                       |  |                    |           |  |      |   |           |  
|Weighted average basic shares outstanding                              |  |                    | 1,535,733 |  |      |   | 1,535,733 |  
|                                                                       |  |                    |           |  |      |   |           |  
|Weighted average diluted shares outstanding                            |  |                    | 1,535,733 |  |      |   | 1,535,733 |  
|                                                                       |  |                    |           |  |      |   |           |  

See Notes to Consolidated Financial Statements.



4



---

##### Table of Contents

Cardinal Bankshares Corporation and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)



|                                                                        |  |      |        |   |      |   |        |  
|----------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|(In thousands) Three Months Ended March 31,                             |  | 2011 |        |   | 2010 |  
|Cash flows from operating activities                                    |  |      |        |   |      |   |        |  
|Net income                                                              |  | $    | 323    |   |      | $ | 120    |  
|Adjustments to reconcile net income to net cash provided by operations: |  |      |        |   |      |   |        |  
|Depreciation and amortization                                           |  |      | 63     |   |      |   | 56     |  
|Accretion of discounts on securities, net of amortization of premiums   |  |      | 95     |   |      |   | 56     |  
|Provision for loan losses                                               |  |      | 186    |   |      |   | 380    |  
|Deferred income taxes                                                   |  |      | 602    |   |      |   | (519   | )
|Net realized gains on securities                                        |  |      |       |   |      |   | (4     | )
|Loss on sale of fixed assets                                            |  |      | 70     |   |      |   |       |  
|Deferred compensation and pension expense (benefit)                     |  |      |       |   |      |   |       |  
|Changes in operating assets and liabilities:                            |  |      |        |   |      |   |        |  
|Accrued income                                                          |  |      | 59     |   |      |   | (8     | )
|Other Assets                                                            |  |      | (1,015 | ) |      |   | 534    |  
|Accrued interest payable                                                |  |      | (15    | ) |      |   | 23     |  
|Other liabilities                                                       |  |      | 556    |   |      |   |       |  
|                                                                        |  |      |        |   |      |   |        |  
|Net cash provided by operating activities                               |  |      | 924    |   |      |   | 638    |  
|                                                                        |  |      |        |   |      |   |        |  
|Cash flows from investing activities                                    |  |      |        |   |      |   |        |  
|Net increase in interest-bearing deposits in banks                      |  |      | 7,249  |   |      |   | (1,200 | )
|Net increase in federal funds sold                                      |  |      | (5,450 | ) |      |   | (1,075 | )
|Purchase of investment securities:                                      |  |      |        |   |      |   |        |  
|Available for Sale                                                      |  |      | (5,879 | ) |      |   | (2,871 | )
|Held to Maturity                                                        |  |      |       |   |      |   | (326   | )
|Purchase of restricted equity securities                                |  |      | (30    | ) |      |   |       |  
|Proceeds from maturity and redemption of investment securities:         |  |      |        |   |      |   |        |  
|Available for Sale                                                      |  |      | 2,541  |   |      |   | 1,994  |  
|Held to Maturity                                                        |  |      | 664    |   |      |   | 1,903  |  
|Net (increase) decrease in loans                                        |  |      | 3,362  |   |      |   | (624   | )
|Net (purchases) dispositions of bank premises and equipment             |  |      | 783    |   |      |   | 1      |  
|Proceeds from sale of foreclosed assets                                 |  |      |       |   |      |   | 2      |  
|                                                                        |  |      |        |   |      |   |        |  
|Net cash (used) provided by investing activities                        |  |      | 3,240  |   |      |   | (2,196 | )
|                                                                        |  |      |        |   |      |   |        |  
|Cash flows from financing activities                                    |  |      |        |   |      |   |        |  
|Net increase in noninterest-bearing deposits                            |  |      | 1,128  |   |      |   | 1,921  |  
|Net increase (decrease) in interest-bearing deposits                    |  |      | (4,259 | ) |      |   | (492   | )
|                                                                        |  |      |        |   |      |   |        |  
|Net cash provided by financing activities                               |  |      | (3,131 | ) |      |   | 1,429  |  
|                                                                        |  |      |        |   |      |   |        |  
|Net decrease in cash and cash equivalents                               |  |      | 1,033  |   |      |   | (129   | )
|Cash and cash equivalents, beginning                                    |  |      | 2,948  |   |      |   | 3,498  |  
|                                                                        |  |      |        |   |      |   |        |  
|Cash and cash equivalents, ending                                       |  | $    | 3,981  |   |      | $ | 3,369  |  
|                                                                        |  |      |        |   |      |   |        |  
|                                                                        |  |     
|Supplemental disclosures of cash flow information                       |  |      |        |   |      |   |        |  
|Interest paid                                                           |  | $    | 804    |   |      | $ | 1,110  |  
|Income taxes paid                                                       |  | $    | 173    |   |      | $ | 174    |  
|                                                                        |  |      |        |   |      |   |        |  
|Supplemental disclosures of noncash activities                          |  |      |        |   |      |   |        |  
|Other real estate acquired in settlement of loans                       |  | $    |       |   |      | $ |       |  
|                                                                        |  |      |        |   |      |   |        |  

See Notes to Consolidated Financial Statements



5



---

##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Basis of Presentation

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

Principles of
Consolidation

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

Cash and Cash Equivalents

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

Subsequent Events

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

Note 2. Loans and Allowance for Loan Losses

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



|                                                       |  |      |         |   |      |   |         |  
|------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                                                       |  | 2011 |         |   | 2010 |  
|                                                       |  |     
|Commercial                                             |  | $    | 6,963   |   |      | $ | 7,230   |  
|Real estate                                            |  |      |         |   |      |   |         |  
|Construction and land development                      |  |      | 11,967  |   |      |   | 13,110  |  
|Residential, 1-4 families                              |  |      | 28,605  |   |      |   | 29,961  |  
|Residential, 5 or more families                        |  |      | 4,247   |   |      |   | 4,277   |  
|Farmland                                               |  |      | 1,320   |   |      |   | 1,274   |  
|Nonfarm, nonresidential                                |  |      | 84,119  |   |      |   | 85,049  |  
|Agricultural                                           |  |      | 17      |   |      |   | 72      |  
|Consumer                                               |  |      | 2,973   |   |      |   | 2,923   |  
|Other                                                  |  |      | 5,236   |   |      |   | 5,388   |  
|                                                       |  |      |         |   |      |   |         |  
|Gross loans                                            |  |      | 145,447 |   |      |   | 149,284 |  
|Unearned discount and net deferred loan fees and costs |  |      | (356    | ) |      |   | (368    | )
|                                                       |  |      |         |   |      |   |         |  
|Total loans                                            |  | $    | 145,091 |   |      | $ | 148,916 |  
|                                                       |  |      |         |   |      |   |         |  

Changes in the allowance for loan losses are as follows:



|                                             |  |      |       |   |      |   |       |  
|-------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|Three months ended March 31, (In thousands)  |  | 2011 |       |   | 2010 |  
|                                             |  |     
|Balance, at January 1                        |  | $    | 3,073 |   |      | $ | 2,670 |  
|Provision charged to expense                 |  |      | 186   |   |      |   | 380   |  
|Recoveries of amounts previously charged off |  |      | 5     |   |      |   | 2     |  
|Loans charged off                            |  |      | (468  | ) |      |   | (23   | )
|                                             |  |      |       |   |      |   |       |  
|Balance, at March 31,                        |  | $    | 2,796 |   |      | $ | 3,029 |  
|                                             |  |      |       |   |      |   |       |  



6



---

##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note 3. Commitments and Contingencies

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



|                             |  |      |        |  |      |   |        | 
|---------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|(In thousands)               |  | 2011 |        |  | 2010 |  
|                             |  |     
|Commitments to extend credit |  | $    | 11,704 |  |      | $ | 16,224 | 
|Standby letters of credit    |  |      | 500    |  |      |   | 858    | 
|                             |  |      |        |  |      |   |        | 
|Total                        |  | $    | 12,204 |  |      | $ | 17,082 | 
|                             |  |      |        |  |      |   |        | 

Note 4. Employee Benefit Plan

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

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

Note 5. Fair Value

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



|                                                          |  |                |         |  |                   |   |         |                |  |   |           |  |  |   |         | 
|--------------------------------------------------------- |  | -------------- | ------- |  | ----------------- | - | ------- | -------------- |  | - | --------- |  |  | - | ------- | 
|(In thousands)                                            |  | March 31, 2011 |         |  | December 31, 2010 |  
|                                                          |  | CarryingAmount |         |  | FairValue         |   |         | CarryingAmount |  |   | FairValue | 
|                                                          |  |                |         | 
|Financial assets                                          |  |                |         |  |                   |   |         |                |  |   |           |  |  |   |         | 
|Cash and due from banks                                   |  | $              | 3,981   |  |                   | $ | 3,981   |                |  | $ | 2,948     |  |  | $ | 2,948   | 
|Interest-bearing deposits with banks                      |  |                | 543     |  |                   |   | 543     |                |  |   | 7,792     |  |  |   | 7,792   | 
|Federal funds sold                                        |  |                | 27,000  |  |                   |   | 27,000  |                |  |   | 21,550    |  |  |   | 21,550  | 
|Securities, available for sale                            |  |                | 45,974  |  |                   |   | 45,974  |                |  |   | 42,644    |  |  |   | 42,644  | 
|Securities, held to maturity                              |  |                | 14,029  |  |                   |   | 14,227  |                |  |   | 14,698    |  |  |   | 14,780  | 
|Restricted equity securities                              |  |                | 605     |  |                   |   | 605     |                |  |   | 575       |  |  |   | 575     | 
|Total loans                                               |  |                | 145,091 |  |                   |   | 146,818 |                |  |   | 148,916   |  |  |   | 151,187 | 
|Accrued interest receivable                               |  |                | 895     |  |                   |   | 895     |                |  |   | 954       |  |  |   | 954     | 
|                                                          |  |                |         | 
|Financial liabilities                                     |  |                |         |  |                   |   |         |                |  |   |           |  |  |   |         | 
|Deposits                                                  |  |                | 213,854 |  |                   |   | 215,042 |                |  |   | 216,985   |  |  |   | 218,256 | 
|Accrued interest payable                                  |  |                | 96      |  |                   |   | 96      |                |  |   | 111       |  |  |   | 111     | 
|Off-balance sheet assets (liabilities)                    |  |                |         |  |                   |   |         |                |  |   |           |  |  |   |         | 
|Commitments to extend credit and standby letter of credit |  |                |        |  |                   |   |        |                |  |   |          |  |  |   |        | 



7



---

##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note 5. Fair Value (continued)



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

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

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

Fair Value Hierarchy

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



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

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

Investment Securities Available for Sale

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



8



---

##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note 5. Fair Value (continued)



Loans

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

Foreclosed Assets

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

Assets and Liabilities Recorded as Fair Value on a Recurring Basis

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



|                                         |  |       |        |  |         |   |       |         |  |   |         |  |  |   |   | 
|---------------------------------------- |  | ----- | ------ |  | ------- | - | ----- | ------- |  | - | ------- |  |  | - | - | 
|(In Thousands)                           |  |       |        |  |         |   |       |         |  |   |         | 
|March 31, 2010                           |  | Total |        |  | Level 1 |   |       | Level 2 |  |   | Level 3 | 
|                                         |  |       |        | 
|Government sponsored enterprises         |  | $     | 3,808  |  |         | $ |      |         |  | $ | 3,808   |  |  | $ |  | 
|State and municipal securities           |  |       | 3,067  |  |         |   |      |         |  |   | 3,067   |  |  |   |  | 
|Mortgage-backed securities               |  |       | 36,338 |  |         |   | 347   |         |  |   | 35,991  |  |  |   |  | 
|Other securities                         |  |       | 2,761  |  |         |   |      |         |  |   | 2,761   |  |  |   |  | 
|                                         |  |       |        |  |         |   |       |         |  |   |         |  |  |   |   | 
|                                         |  |       |        | 
|Investment securities available for sale |  | $     | 45,974 |  |         | $ | 347   |         |  | $ | 45,627  |  |  | $ |  | 
|                                         |  |       |        |  |         |   |       |         |  |   |         |  |  |   |   | 
|                                         |  |       |        | 
|Total assets at fair value               |  | $     | 45,974 |  |         | $ | 347   |         |  | $ | 45,627  |  |  | $ |  | 
|                                         |  |       |        |  |         |   |       |         |  |   |         |  |  |   |   | 
|                                         |  |       |        | 
|(In Thousands)                           |  |       |        |  |         |   |       |         |  |   |         | 
|December 31, 2010                        |  | Total |        |  | Level 1 |   |       | Level 2 |  |   | Level 3 | 
|                                         |  |       |        | 
|Government sponsored enterprises         |  | $     | 3,724  |  |         | $ |      |         |  | $ | 3,724   |  |  | $ |  | 
|State and municipal securities           |  |       | 3,049  |  |         |   |      |         |  |   | 3,049   |  |  |   |  | 
|Mortgage-backed securities               |  |       | 32,823 |  |         |   | 1,040 |         |  |   | 31,783  |  |  |   |  | 
|Other securities                         |  |       | 3,048  |  |         |   |      |         |  |   | 3,048   |  |  |   |  | 
|                                         |  |       |        |  |         |   |       |         |  |   |         |  |  |   |   | 
|                                         |  |       |        | 
|Investment securities available for sale |  | $     | 42,644 |  |         | $ | 1,040 |         |  | $ | 41,604  |  |  | $ |  | 
|                                         |  |       |        |  |         |   |       |         |  |   |         |  |  |   |   | 
|                                         |  |       |        | 
|Total assets at fair value               |  | $     | 42,644 |  |         | $ | 1,040 |         |  | $ | 41,604  |  |  | $ |  | 
|                                         |  |       |        |  |         |   |       |         |  |   |         |  |  |   |   | 

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



9



---

##### Table of Contents

CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note 5. Fair Value (continued)



Assets and Liabilities Recorded as Fair Value on a Nonrecurring Basis

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



|                                  |  |       |       |  |         |   |   |         |  |   |         |  |  |   |   | 
|--------------------------------- |  | ----- | ----- |  | ------- | - | - | ------- |  | - | ------- |  |  | - | - | 
|(In Thousands)                    |  |       |       |  |         |   |   |         |  |   |         | 
|March 31, 2011                    |  | Total |       |  | Level 1 |   |   | Level 2 |  |   | Level 3 | 
|                                  |  |       |       | 
|Commercial                        |  | $     | 124   |  |         | $ |  |         |  | $ | 124     |  |  | $ |  | 
|Real Estate                       |  |       |       |  |         |   |   |         |  |   |         |  |  |   |   | 
|Construction and land development |  |       | 5,704 |  |         |   |  |         |  |   | 5,704   |  |  |   |  | 
|Residential, 1-4 families         |  |       | 19    |  |         |   |  |         |  |   | 19      |  |  |   |  | 
|Nonfarm, nonresidential           |  |       | 486   |  |         |   |  |         |  |   | 486     |  |  |   |  | 
|                                  |  |       |       |  |         |   |   |         |  |   |         |  |  |   |   | 
|                                  |  |       |       | 
|Impaired Loans                    |  |       | 6,333 |  |         |   |  |         |  |   | 6,333   |  |  |   |  | 
|Foreclosed assets                 |  |       | 509   |  |         |   |  |         |  |   | 509     |  |  |   |  | 
|                                  |  |       |       |  |         |   |   |         |  |   |         |  |  |   |   | 
|                                  |  |       |       | 
|Total assets at fair value        |  | $     | 6,842 |  |         | $ |  |         |  | $ | 6,842   |  |  | $ |  | 
|                                  |  |       |       |  |         |   |   |         |  |   |         |  |  |   |   | 
|                                  |  |       |       | 
|(In Thousands)                    |  |       |       |  |         |   |   |         |  |   |         | 
|December 31, 2010                 |  | Total |       |  | Level 1 |   |   | Level 2 |  |   | Level 3 | 
|                                  |  |       |       | 
|Commercial                        |  | $     | 134   |  |         | $ |  |         |  | $ | 134     |  |  | $ |  | 
|Real Estate                       |  |       |       |  |         |   |   |         |  |   |         |  |  |   |   | 
|Construction and land development |  |       | 3,567 |  |         |   |  |         |  |   | 3,567   |  |  |   |  | 
|Residential, 1-4 families         |  |       | 115   |  |         |   |  |         |  |   | 115     |  |  |   |  | 
|Nonfarm, nonresidential           |  |       | 511   |  |         |   |  |         |  |   | 511     |  |  |   |  | 
|                                  |  |       |       |  |         |   |   |         |  |   |         |  |  |   |   | 
|                                  |  |       |       | 
|Impaired Loans                    |  |       | 4,327 |  |         |   |  |         |  |   | 4,327   |  |  |   |  | 
|Foreclosed assets                 |  |       | 509   |  |         |   |  |         |  |   | 509     |  |  |   |  | 
|                                  |  |       |       |  |         |   |   |         |  |   |         |  |  |   |   | 
|                                  |  |       |       | 
|Total assets at fair value        |  | $     | 4,836 |  |         | $ |  |         |  | $ | 4,836   |  |  | $ |  | 
|                                  |  |       |       |  |         |   |   |         |  |   |         |  |  |   |   | 

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



10



---

##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note 6. Securities

Debt and equity securities have been classified in the consolidated balance sheets according to managements intent. The carrying amount of securities and their approximate fair values follow:



|                                 |  |               |        |  |                 |   |     |                  |  |   |           |  |  |   |        | 
|-------------------------------- |  | ------------- | ------ |  | --------------- | - | --- | ---------------- |  | - | --------- |  |  | - | ------ | 
|March 31, 2011 (In thousands)    |  | AmortizedCost |        |  | UnrealizedGains |   |     | UnrealizedLosses |  |   | FairValue | 
|                                 |  |               |        | 
|Available for sale               |  |               |        |  |                 |   |     |                  |  |   |           |  |  |   |        | 
|Government sponsored enterprises |  | $             | 2,847  |  |                 | $ | 16  |                  |  | $ | 9         |  |  | $ | 2,854  | 
|State and municipal securities   |  |               | 2,994  |  |                 |   | 77  |                  |  |   | 4         |  |  |   | 3,067  | 
|Mortgage-backed securities       |  |               | 36,036 |  |                 |   | 436 |                  |  |   | 133       |  |  |   | 36,339 | 
|Other securities                 |  |               | 3,764  |  |                 |   | 2   |                  |  |   | 52        |  |  |   | 3,714  | 
|                                 |  |               |        |  |                 |   |     |                  |  |   |           |  |  |   |        | 
|                                 |  | $             | 45,641 |  |                 | $ | 531 |                  |  | $ | 198       |  |  | $ | 45,974 | 
|                                 |  |               |        |  |                 |   |     |                  |  |   |           |  |  |   |        | 
|Held to maturity                 |  |               |        |  |                 |   |     |                  |  |   |           |  |  |   |        | 
|State and municipal securities   |  | $             | 14,003 |  |                 | $ | 304 |                  |  | $ | 106       |  |  | $ | 14,201 | 
|Mortgage-backed securities       |  |               | 26     |  |                 |   |    |                  |  |   |          |  |  |   | 26     | 
|                                 |  |               |        |  |                 |   |     |                  |  |   |           |  |  |   |        | 
|                                 |  | $             | 14,029 |  |                 | $ | 304 |                  |  | $ | 106       |  |  | $ | 14,227 | 
|                                 |  |               |        |  |                 |   |     |                  |  |   |           |  |  |   |        | 
|                                 |  |               |        | 
|December 31, 2010 (In thousands) |  |               |        |  |                 |   |     |                  |  |   |           | 
|                                 |  |               |        | 
|Available for sale               |  |               |        |  |                 |   |     |                  |  |   |           |  |  |   |        | 
|Government sponsored enterprises |  | $             | 2,853  |  |                 | $ | 30  |                  |  | $ | 17        |  |  | $ | 2,866  | 
|State and municipal securities   |  |               | 2,994  |  |                 |   | 66  |                  |  |   | 11        |  |  |   | 3,049  | 
|Mortgage-backed securities       |  |               | 32,483 |  |                 |   | 454 |                  |  |   | 104       |  |  |   | 32,833 | 
|Other securities                 |  |               | 4,063  |  |                 |   | 15  |                  |  |   | 182       |  |  |   | 3,896  | 
|                                 |  |               |        |  |                 |   |     |                  |  |   |           |  |  |   |        | 
|                                 |  | $             | 42,393 |  |                 | $ | 565 |                  |  | $ | 314       |  |  | $ | 42,644 | 
|                                 |  |               |        |  |                 |   |     |                  |  |   |           |  |  |   |        | 
|Held to maturity                 |  |               |        |  |                 |   |     |                  |  |   |           |  |  |   |        | 
|State and municipal securities   |  | $             | 14,672 |  |                 | $ | 279 |                  |  | $ | 198       |  |  | $ | 14,753 | 
|Mortgage-backed securities       |  |               | 26     |  |                 |   | 1   |                  |  |   |          |  |  |   | 27     | 
|                                 |  |               |        |  |                 |   |     |                  |  |   |           |  |  |   |        | 
|                                 |  | $             | 14,698 |  |                 | $ | 280 |                  |  | $ | 198       |  |  | $ | 14,780 | 
|                                 |  |               |        |  |                 |   |     |                  |  |   |           |  |  |   |        | 

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

Investment securities with amortized cost of approximately $6.1 million and $7.1 million at March 31, 2011 and December 31, 2010, respectively, were pledged as collateral on public deposits and
for other purposes as required or permitted by law.

Gross realized gains and losses for the three-month period ended March 31, 2011 and
2010:



|                                              |  |                              |   |  |      |   |   | 
|--------------------------------------------- |  | ---------------------------- | - |  | ---- | - | - | 
|                                              |  | Three Months EndedMarch 
31, |  
|                                              |  | 2011                         |   |  | 2010 |  
|                                              |  |                             
|(In thousands)                                |  |                              |   |  |      |   |   | 
|Realized gains, available for sale securities |  | $                            |  |  |      | $ |  | 
|Realized gains, held to maturity securities   |  |                              |  |  |      |   | 4 | 
|                                              |  |                              |   |  |      |   |   | 
|                                              |  | $                            |  |  |      | $ | 4 | 
|                                              |  |                              |   |  |      |   |   | 



11



---

##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note 6. Securities (continued)



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



|                                       |  |                    |        |  |                  |   |        |               |  |   |           |  |  |   |        | 
|-------------------------------------- |  | ------------------ | ------ |  | ---------------- | - | ------ | ------------- |  | - | --------- |  |  | - | ------ | 
|                                       |  | Available for Sale |        |  | Held to Maturity |  
|                                       |  | AmortizedCost      |        |  | FairValue        |   |        | AmortizedCost |  |   | FairValue | 
|(In thousands)                         |  |                    |        |  |                  |   |        |               |  |   |           |  |  |   |        | 
|Due in one year or less                |  | $                  | 20     |  |                  | $ | 20     |               |  | $ | 1,013     |  |  | $ | 1,027  | 
|Due after one year through five years  |  |                    | 1,418  |  |                  |   | 1,386  |               |  |   | 4,815     |  |  |   | 4,996  | 
|Due after five years through ten years |  |                    | 2,629  |  |                  |   | 2,693  |               |  |   | 3,594     |  |  |   | 3,651  | 
|Due after ten years                    |  |                    | 41,574 |  |                  |   | 41,875 |               |  |   | 4,607     |  |  |   | 4,553  | 
|                                       |  |                    |        |  |                  |   |        |               |  |   |           |  |  |   |        | 
|                                       |  | $                  | 45,641 |  |                  | $ | 45,974 |               |  | $ | 14,029    |  |  | $ | 14,227 | 
|                                       |  |                    |        |  |                  |   |        |               |  |   |           |  |  |   |        | 

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

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



|                                      |  |                     |        |  |                   |   |     |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |     | 
|------------------------------------- |  | ------------------- | ------ |  | ----------------- | - | --- | --------- |  | - | ---------------- |  |  | --------- | --- |  | ---------------- | - | ------ |  |  | - | --- | 
|                                      |  | Less Than 12 Months |        |  | 12 Months or More |   |     | Total     | 
|March 31, 2011 (In thousands)         |  | FairValue           |        |  | UnrealizedLosses  |   |     | FairValue |  |   | UnrealizedLosses |  |  | FairValue |     |  | UnrealizedLosses |  
|                                      |  |                     |        |  |                   |  
|Government sponsored enterprises      |  | $                   | 989    |  |                   | $ | 9   |           |  | $ |                 |  |  | $         |    |  |                  | $ | 989    |  |  | $ | 9   | 
|State and municipal securities        |  |                     | 4,125  |  |                   |   | 69  |           |  |   | 398              |  |  |           | 41  |  |                  |   | 4,523  |  |  |   | 110 | 
|Mortgage- backed securities           |  |                     | 13,659 |  |                   |   | 128 |           |  |   | 661              |  |  |           | 5   |  |                  |   | 14,320 |  |  |   | 133 | 
|Other Securities                      |  |                     | 1,758  |  |                   |   | 5   |           |  |   | 953              |  |  |           | 47  |  |                  |   | 2,711  |  |  |   | 52  | 
|                                      |  |                     |        |  |                   |   |     |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |     | 
|Total temporarily impaired securities |  | $                   | 20,531 |  |                   | $ | 211 |           |  | $ | 2,012            |  |  | $         | 93  |  |                  | $ | 22,543 |  |  | $ | 304 | 
|                                      |  |                     |        |  |                   |   |     |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |     | 
|                                      |  |                     |       
|                                      |  | Less Than 12 Months |        |  | 12 Months or More |   |     | Total     | 
|December 31, 2010 (In thousands)      |  | FairValue           |        |  | UnrealizedLosses  |   |     | FairValue |  |   | UnrealizedLosses |  |  | FairValue |     |  | UnrealizedLosses |  
|                                      |  |                     |        |  |                   |  
|Government sponsored enterprises      |  | $                   | 982    |  |                   | $ | 17  |           |  | $ |                 |  |  | $         |    |  |                  | $ | 982    |  |  | $ | 17  | 
|State and municipal securities        |  |                     | 5,559  |  |                   |   | 158 |           |  |   | 387              |  |  |           | 51  |  |                  |   | 5,946  |  |  |   | 209 | 
|Mortgage- backed securities           |  |                     | 12,054 |  |                   |   | 100 |           |  |   | 668              |  |  |           | 4   |  |                  |   | 12,722 |  |  |   | 104 | 
|Other Securities                      |  |                     | 1,016  |  |                   |   | 8   |           |  |   | 1,327            |  |  |           | 174 |  |                  |   | 2,343  |  |  |   | 182 | 
|                                      |  |                     |        |  |                   |   |     |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |     | 
|Total temporarily impaired securities |  | $                   | 19,611 |  |                   | $ | 283 |           |  | $ | 2,382            |  |  | $         | 229 |  |                  | $ | 21,993 |  |  | $ | 512 | 
|                                      |  |                     |        |  |                   |   |     |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |     | 

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

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

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



12



---

##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note 7. Recent Accounting Pronouncements

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

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

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

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

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

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

Note 8. Reclassifications

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



13



---

##### Table of Contents

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

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

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

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

Critical Accounting Policy

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

FINANCIAL CONDITION

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

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

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

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



14



---

##### Table of Contents

RESULTS OF OPERATIONS

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

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

ASSET QUALITY

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

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



15



---

##### Table of Contents

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

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

LIQUIDITY

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

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



16



---

##### Table of Contents

CAPITAL RESOURCES

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

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

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

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

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

A WARNING ABOUT FORWARD-LOOKING STATEMENTS

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

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

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

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

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



17



---

##### Table of Contents

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Item 4T. CONTROLS AND
PROCEDURES

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

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

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



18



---

##### Table of Contents

Part II. OTHER INFORMATION

Item: 1 Legal proceedings - None



| | 1A. | Risk factors
| | --- | ------------

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



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



| | 3 | Defaults upon senior securities - None
| | - | --------------------------------------



| | 4 | Removed and Reserved
| | - | --------------------



| | 5 | Other information - None
| | - | ------------------------



| | 6 | Exhibits
| | - | --------



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



19



---

##### Table of Contents

SIGNATURES

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



|                                             
|---------------------------------------------
|CARDINAL BANKSHARES CORPORATION              
|                                             
|/s/ Ronald Leon Moore                        
|Ronald Leon Moore                            
|Chairman, President & Chief Executive Officer
|                                             
|/s/ J. Alan Dickerson                        
|J. Alan Dickerson                            
|Chief Financial Officer & Vice President     
|                                             
|Date: May 11, 2011                           



20