Cardinal Bankshares Corporation Reports Results for the Quarter ended September, 2014

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Dec 08, 2014, 06:18 ET

FLOYD, Va., Dec. 8, 2014 /PRNewswire/ -- Cardinal Bankshares Corporation (OTC-QB: CDBK), parent company of Bank of Floyd, announced today its consolidated financial results for the third quarter of 2014 and reported net income of $132 thousand, or $0.09 per share versus a $1.3 million net loss, or $(0.88) per share for the same quarter in 2013. Net income for the nine-month period ended September 30, 2014 amounted to $1.2 million compared to a net loss of $1.4 million in 2013.

The improvements in net income, year over year, are driven by the effects of asset quality improvement and investments in loan production personnel.

Financial Highlights:

Revenue and growth initiatives produce results

Total loans increased 10.09% from $146.0 million at the end of 2013 to $160.8 million at the end of the third quarter of 2014.
Interest and fees on loans increased 7.14% in the third quarter of 2014 when compared to the same quarter in 2013.
Net interest income increased 8.52% in the third quarter of 2014 when compared to the same quarter in 2013.

"The key to revenue growth is to grow the total number of businesses and households we serve, to increase the services per household and to grow our retail and commercial loan portfolios. Our investment in credit and lending personnel has begun to favorably impact interest income as we work to convert lower yielding bond assets to higher yielding loan assets," said Mark A. Smith, Interim President and CEO. "The Bank's traditional footprint in Floyd and Hillsville combined with our locations throughout the New River and Roanoke Valleys provide access to markets that we expect will allow the bank to pursue its growth strategy."

Initiatives to grow households produce results

516 net new checking accounts through the third quarter of 2014 versus 142 for the same comparable period for 2013.
34.00% increase in fees earned on deposit accounts during the third quarter of 2014 when compared to the same period in 2013.

"Our investments in products and technology have moved the bank forward in its ability to provide alternate ways for our customers to conduct their banking activities. Online and mobile solutions for consumers and desktop banking solutions for businesses now allow us to better meet the diverse requirements of our customers. In 2015 we will complete the installation of our interactive teller machines known as TellerVision™. We expect TellerVision™ to allow us to expand our customers' access to teller assisted transactions with a leading edge technology solution. While investments in technology have been important, the core of our service will continue to be our face to face interactions. Providing WOW customer service is what brings customers to the bank and makes them stay," said Smith.

Credit quality improves and we remain well capitalized.

The Company's ratio of nonperforming assets as a percentage of total assets at September 30, 2014, decreased to 1.26% compared to 3.29% one year earlier.
Total classified loans declined by 53.92% during the nine month period in 2014.
Both Bank and Company capital levels remain above regulatory defined well-capitalized ratios.

According to Smith, "following the 2007 financial crisis, many community banks experienced a cycle of problem loan clean-up, followed by a reassertion of business development activities to promote quality loan and deposit growth. While most banks began this multi-year cycle in 2008-2009 and have had the chance to return to more profitable operations in 2012-2013, Bank of Floyd got a later start in identifying and addressing these issues. As a result, the Bank has been delayed in its completion of this cycle when compared to its peers. We are making good headway in driving the metrics that favorably impact our profitability, but there is still work to be done."

Capital Levels

Both Bank and Company capital levels remain above regulatory defined well-capitalized ratios. The Company's consolidated Tier 1 risk-based and total risk-based capital ratios were 12.07% and 13.28%, respectively, at September 30, 2014.

Nonperforming and Classified Assets

The Company's ratio of nonperforming assets as a percentage of total assets at September 30, 2014, decreased to 1.26% compared to 3.29% one year earlier. Nonperforming assets decreased $5.5 million from $8.9 million at September 30, 2013 to $3.4 million at September 30, 2014. Nonperforming assets at September 30, 2014 consisted of nonaccrual loans of $3.1 million, foreclosed assets of $311 thousand, and no loans that were past due greater than 90 days and still accruing interest. Nonperforming assets at September 30, 2013 consisted of nonaccrual loans of $4.3 million, foreclosed assets of $2.9 million, and loans totaling $1.7 million that were past due greater than 90 days and still accruing interest.

Total classified loans (Substandard, Doubtful and Loss) declined 53.92% from $9.2 million at year end 2013 to $4.2 million at September 30, 2014.

The company recorded a provision (negative provision) for loan losses for the third quarter of 2014 of $(177) thousand, as compared to a provision of $1.2 million for the same period last year. Net charge-offs (recoveries) annualized as a percentage of average loans outstanding was 1.34% for the third quarter of 2014, compared to 2.67% for the same quarter in the prior year. Net charge-offs (recoveries) for the quarter ended September 30, 2014 were $508 thousand in comparison to $925 thousand for the same quarter one year ago.

The allowance for loan losses as a percentage of total loans decreased from 1.53% at September 30, 2013 to 1.37% at September 30, 2014. At September 30, 2014, the Company's total reserves were $2.2 million, which was comprised of $1.5 million in general reserves to cover estimated losses in the portfolio and $688 thousand that are allocated to specific credits.

Financial Position

At September 30, 2014, the Company's total assets were $269.7 million, total deposits were $231.7 million, total loans were $160.8 million and total stockholders' equity was $20.5 million. Compared with December 31, 2013, the Company's total assets increased $838 thousand or 0.31%.

Total deposits decreased by $10.0 million or 4.15%, while advances from Federal Home Loan Bank of Atlanta increased $8.0 million to $16.0 million as compared to December 31, 2014. The decline in deposits was driven by decreases in higher cost certificates of deposit. The certificates were replaced by lower cost Federal Home Loan Bank of Atlanta advances.

Stockholders' equity increased $3.2 million to $20.5 million at September 30, 2014 compared to $17.3 at December 31, 2013. Reduction of unrealized portfolio losses resulted in an increase to total equity of $2.0 million as compared to December 31, 2013. Net income of $1.2 million accounts for the remaining increase to equity.

Net Interest Income

The Company's net interest income was $1.9 and $5.6 million for the three and nine-month periods ended September 30, 2014, an increase of $151 and $370 thousand 8.5% and 7.0% compared to same periods of 2013. The increase resulted from an increase in interest income from new loan originations combined with lower-costs on deposits and debt.

Noninterest Income

Noninterest income increased $10 thousand for the three-month period ended September 30, 2014, compared to the same period last year, due to increased service charges.

Noninterest Expense

Noninterest expense for the third quarter of 2014 totaled $2.1 million, up $50 thousand (exclusive of foreclosed asset charges) compared to the quarter ended September 30, 2013. The increase in noninterest expense is due to salaries and employee benefits as a result of experienced personnel additions, occupancy and equipment expense as building improvements are ongoing, data processing services as technology services offered continue to expand and other operating expenses related to increased data transmission speeds.

A Warning About Forward-Looking Statements

This news release contains forward-looking statements. The Company may also make written forward-looking statements in 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 such 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 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.

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 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 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.

Consolidated Balance Sheets
(in thousands, except share data)

	September 30,	December 31,
	2014	2013
Assets
Cash and due from banks	$ 4,153	$ 3,339
Interest-bearing deposits in banks	4,290	6,757
Investment securities, available for sale	83,814	96,932
Investment securities, held to maturity	-	-
Restricted equity securities	1,355	999

Total loans	160,762	146,031
Allowance for loan losses	(2,200)	(2,862)
Net loans	158,562	143,169

Bank premises and equipment, net	4,843	4,971
Accrued interest receivable	683	910
Foreclosed assets	795	2,196
Bank owned life insurance	6,696	6,571
Deferred tax asset	5,866	6,891
Reserve deferred tax asset	(5,139)	(5,139)
Prepaid assets	1,203	800
Other assets	2,564	451
Total assets	$ 269,685	$ 268,847

Liabilities and Stockholders' Equity

*Liabilities*
Noninterest-bearing deposits	$ 39,138	$ 40,882
Interest-bearing deposits	192,569	200,861
Total deposits	231,707	241,743
FHLB advances	16,000	8,000
Accrued interest payable	58	65
Bank owned life insurance SERP	835	828
Other liabilities	569	891
Total liabilities	249,169	251,527

*Stockholders' Equity*
Common stock, $10 par value; 5,000,000
Shares authorized; 1,535,733 shares issued
Issued and outstanding	15,357	15,357
Additional paid-in capital	2,925	2,925
Retained earnings	3,641	2,440
Accumulated other comprehensive income	(1,407)	(3,402)
Total stockholders' equity	20,516	17,320
Total liabilities and stockholders' equity	$ 269,685	$ 268,847

Consolidated Statements of Operations
(in thousands, except share data)

	Three Months Ended September 30,		Nine Months Ended September 30,
	2014	2013	2014	2013
Interest and dividend income
Loans and fees on loans	$ 1,937	$ 1,808	$ 5,550	$ 5,369
Federal funds sold	-	-	-	-
Investment securities	439	509	1,486	1,613
Dividend income	(2)	9	15	18
Deposits with banks	23	5	30	21
Total interest income	2,397	2,331	7,081	7,021

*Interest expense*
Deposits	468	553	1,432	1,745
Borrowings	5	5	14	11
Total interest expense	473	558	1,446	1,756
Net interest income	1,924	1,773	5,635	5,265

*Provision for loan losses*	(177)	1,171	(1,737)	2,289
Net interest income after provision
for loan losses	2,101	602	7,372	2,976

*Noninterest income*
Service charges on deposit accounts	67	50	150	132
Other service charges and fees	33	5	85	68
Net realized gains on sales of securities	-	(1)	(56)	813
Income on bank owned life insurance	41	40	125	128
Other income	22	59	164	125
Total noninterest income	163	153	468	1,266

*Noninterest expense*
Salaries and employee benefits	1,155	1,103	3,400	3,225
Occupancy and equipment	274	259	841	670
Legal and professional	97	186	239	433
Data processing services	154	111	419	276
FDIC insurance premiums	93	78	274	262
Foreclosed assets, net	37	79	476	275
Other operating expense	322	308	991	777
Total noninterest expense	2,132	2,124	6,640	5,918
Income (loss) before income taxes	132	(1,369)	1,200	(1,676)
Income tax expense (benefit)	-	(25)	(2)	(289)
*Net income (loss)*	$ 132	$ (1,344)	$ 1,202	$ (1,387)
*Basic earnings (loss) per share*	$ 0.09	$ (0.88)	$ 0.78	$ (0.90)

Cardinal Bankshares Corporation
Financial Highlights (Unaudited)
(in thousands)
	Three Months Ended		Nine Months Ended
	September 30, 2014	September 30, 2013	September 30, 2014	September 30, 2013

Per Share
Earnings per share, basic and diluted	$ 0.09	$ (0.88)	$ 0.78	$ (0.90)
Book value			$ 13.36	$ 15.53

Financial Ratios
Annualized Return on Average Assets	0.20%	-1.91%
Annualized Return on Average Equity	2.72%	-19.95%
Annualized Net Interest Margin for the quarter ended¹	3.02%	2.69%
Efficiency Ratio²	100.45%	106.12%

Capital Ratios
Tier 1 risk-based capital - Bank only	10.99%	12.18%
Total risk-based capital - Bank only	12.19%	13.35%

Tier 1 risk-based capital - consolidated	12.07%	13.53%
Total risk-based capital - consolidated	13.28%	14.77%

Allowance for Loan Losses at Beginning of Period	$ 2,884	$ 1,889	$ 2,862	$ 1,514
Loans Charged-off, net of Recoveries	(508)	(925)	1,075	(1,668)
Provision for Loan Losses	(176)	1,138	(1,737)	2,256
Allowance for Loan Losses at End of Period	$ 2,200	$ 2,102	$ 2,200	$ 2,102

Credit Quality Ratios
Nonperforming Assets as a % of Total Assets			1.26%	3.29%
Total Allowance for Loan Losses as a % of Total Loans			1.37%	1.53%
Total Allowance for Loan Losses as a % of Nonperforming Loans			71.11%	35.17%
Annualized Net Charge-offs as a % of Average Loans			1.34%	2.67%

Nonperforming Assets
Nonaccrual Loans			$ 3,094	$ 4,321
Loans Past Due 90 Days+, still accruing			-	1,656

*Total Nonperforming Loans*			3,094	5,977
Other Real Estate Owned			311	2,938
Total Nonperforming Assets			$ 3,405	$ 8,915

¹Net interest margin equals net interest income divided by interest-earning average assets.
²Efficiency ratio equals noninterest expense (excluding OREO valuations and OREO operating expenses) divided by net interest income plus noninterest income (excluding net realized gains on sales of securities).