Cardinal Bankshares (CDBK) 10-Q 2008 Q2 Quarterly report

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 June 30, 2008

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 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 July 30, 2008 was 1,535,733.

CARDINAL BANKSHARES CORPORATION

FORM 10-Q

June 30, 2008

INDEX

		Page
Part I.	Financial Information
Item 1.	Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007 (Audited)	3
	Consolidated Statements of Income for the three months and six months ended June 30, 2008 and 2007 (Unaudited)	4
	Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (Unaudited)	5
	Notes to Consolidated Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4T.	Controls and Procedures	14
Part II.	Other Information
Item 1.	Legal Proceedings	15
Item 1A.	Risk Factors	16
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3.	Defaults Upon Senior Securities	16
Item 4.	Submission of Matters to a Vote of Security Holders	16
Item 5.	Other Information	16
Item 6.	Exhibits	16

Cardinal Bankshares Corporation and Subsidiary

Consolidated Balance Sheets

(In thousands, except share data)	(Unaudited) June 30, 2008			(Audited) December 31, 2007
Assets
Cash and due from banks	$	4,713		$	4,526
Interest-bearing deposits		15,230			15,511
Federal funds sold		8,750			8,800
Investment securities available for sale, at fair value		27,357			26,312
Investment securities held to maturity (fair value June 30, 2008 $18,120 - December 31, 2007 $19,120)		18,096			18,990
Restricted equity securities		534			536
Total loans		134,419			124,452
Allowance for loan losses		(1,591	)		(1,669	)
Net loans		132,828			122,783
Bank premises and equipment, net		4,130			4,262
Accrued interest receivable		1,050			1,045
Foreclosed properties		212			212
Bank owned life insurance		4,856			4,757
Other assets		1,895			1,527
Total assets	$	219,651		$	209,261
Liabilities and Stockholders’ Equity
Noninterest-bearing deposits	$	31,185		$	29,562
Interest-bearing deposits		156,637			148,087
Total deposits		187,822			177,649
Accrued interest payable		215			211
Other liabilities		1,514			1,488
Total liabilities		189,551			179,348
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		12,157			11,789
Accumulated other comprehensive loss, net		(339	)		(158	)
Total stockholders’ equity		30,100			29,913
Total liabilities and stockholders’ equity	$	219,651		$	209,261

See Notes to Consolidated Financial Statements.

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Cardinal Bankshares Corporation and Subsidiary

Consolidated Statements of Income (Unaudited)

	Three months ended June 30,					Six months ended June 30,
(In thousands, except share data)	2008			2007		2008			2007
Interest income
Loans and fees on loans	$	2,302		$	2,260	$	4,598		$	4,536
Federal funds sold and securities purchased under agreements to resell		43			115		111			226
Investment securities:
Taxable		331			292		661			568
Exempt from federal income tax		230			220		468			440
Deposits with banks		97			369		231			661
Total interest income		3,003			3,256		6,069			6,431
Interest expense
Deposits		1,455			1,508		2,918			2,941
Borrowings		—			—		—			—
Total interest expense		1,455			1,508		2,918			2,941
Net interest income		1,548			1,748		3,151			3,490
Provision for loan losses		(75	)		—		(55	)		20
Net interest income after provision for loan losses		1,623			1,748		3,206			3,470
Noninterest income
Service charges on deposit accounts		53			62		106			112
Other service charges and fees		30			26		52			50
Net realized gains on sales of securities		7			—		7			1
Other operating income		209			81		295			362
Total noninterest income		299			169		460			525
Noninterest expense
Salaries and employee benefits		819			773		1,638			1,484
Occupancy and equipment		180			185		373			356
Foreclosed assets, net		—			—		—			—
Other operating expense		316			363		711			674
Total noninterest expense		1,315			1,321		2,722			2,514
Income before income taxes		607			596		944			1,481
Income tax expense		111			113		131			261
Net Income	$	496		$	483	$	813		$	1,220
Basic earnings per share	$	0.32		$	0.31	$	0.53		$	0.79
Diluted earnings per share	$	0.32		$	0.31	$	0.53		$	0.79
Dividends declared per share	$	0.29		$	0.28	$	0.29		$	0.28
Weighted average basic shares outstanding		1,535,733			1,535,733		1,535,733			1,535,733
Weighted average diluted shares outstanding		1,535,733			1,535,733		1,535,733			1,535,733

See Notes to Consolidated Financial Statements.

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Cardinal Bankshares Corporation and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

(In thousands) Six months Ended June 30,	2008			2007
Cash flows from operating activities
Net income	$	813		$	1,220
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization		158			167
Net amortization (accretion) of bond premiums/discounts		13			19
Provision for loan losses		(55	)		20
Net realized (gains) losses on investment securities		(7	)		(1	)
Net realized (gains) losses on sale of foreclosed assets		—			—
Deferred compensation and pension expense		69			88
Changes in operating assets and liabilities:
(Increase) decrease in accrued interest receivable		(5	)		(1	)
Increase (decrease) in accrued interest payable		4			9
Net change in other operating assets and other operating liabilities		(424	)		(322	)
Net cash provided (used) by operating activities		566			1,199
Cash flows from investing activities
Net (increase) decrease in interest-bearing deposits in banks		281			(7,009	)
Net (increase) decrease in federal funds sold		50			50
Purchase of investment securities:
Available for Sell		(7,482	)		(7,117	)
Held to Maturity		(410	)		(2,535	)
Proceeds from sale of available for sale securities		—			—
Purchase of restricted equity securities		—			—
Proceeds from redemption of equity securities		2			18
Proceeds from maturity and redemption of investment securities:
Available for Sell		6,166			5,692
Held to Maturity		1,302			1,415
Net (increase) decrease in loans		(9,990	)		1,946
Net purchases of bank premises and equipment		(26	)		(498	)
Net cash (used) provided by investing activities		(10,107	)		(8,038	)
Cash flows from financing activities
Net increase (decrease) in noninterest-bearing deposits		1,623			(286	)
Net increase in interest-bearing deposits		8,550			7,375
Net increase (decrease) in securities sold		—			—
Dividends paid		(445	)		(430	)
Net cash provided by financing activities		9,728			6,659
Net decrease in cash and cash equivalents		187			(180	)
Cash and cash equivalents, beginning		4,526			3,416
Cash and cash equivalents, ending	$	4,713		$	3,236
Supplemental disclosures of cash flow information
Interest paid	$	2,914		$	2,932
Income taxes paid	$	317		$	444

See Notes to Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all of the disclosures and notes required by generally accepted accounting principles. In the opinion of management, all material adjustments (which are of a normal recurring nature) considered necessary for a fair presentation have been made. The results for the interim period are not necessarily indicative of the results to be expected for the entire year or any other interim period. The information reported herein should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. 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”.

Note 2. Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

Six months ended June 30, (In thousands)	2008			2007
Balance, at January 1	$	1,669		$	1,640
Provision charged to expense		(55	)		20
Recoveries of amounts previously charged off		7			14
Loans charged off		(30	)		(5	)
Balance, at June 30,	$	1,591		$	1,669

Note 3. Commitments and Contingencies

The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance sheet instruments. A summary of the Company’s commitments at June 30 for the years indicated follows:

(In thousands)	2008		2007
Commitments to extend credit	$	17,002	$	12,169
Standby letters of credit		326		1,126
Total	$	17,328	$	13,295

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Note 4. Employee Benefit Plan

The Bank has a qualified noncontributory, defined benefit pension plan, which covers substantially all of its employees. The benefits are primarily based on years of service and earnings. The following is a summary of the components of the net periodic benefit cost.

Three months ended June 30, (In thousands)	2008			2007
Service cost	$	39		$	45
Interest cost		51			51
Expected return on plan assets		(55	)		(54	)
Amortization of net obligation at transition		(1	)		(1	)
Amortization of prior service cost		1			1
Recognized net actuarial loss		—			2
Net periodic benefit cost	$	35		$	44

Six months ended June 30, (In thousands)	2008			2007
Service cost	$	78		$	89
Interest cost		101			101
Expected return on plan assets		(111	)		(107	)
Amortization of net obligation at transition		(2	)		(2	)
Amortization of prior service cost		3			3
Recognized net actuarial loss		—			4
Net periodic benefit cost	$	69		$	88

The Company previously disclosed in its financial statements for the year ended December 31, 2007, that no employer contributions are expected to be paid in 2008. As of June 30, 2008, no contributions have been made.

Note 5. Fair Value

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. SFAS 157 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, 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).

SFAS 157 defines fair value 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. SFAS 157 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.

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Fair Value Hierarchy

Under SFAS 157, the company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value. These levels are:

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

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

Investment Securities Available for Sale

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

Loans

The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and 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 in accordance with SFAS 114, “Accounting by Creditors for Impairment of a Loan,” (SFAS 114). 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. At June 30, 2008, substantially all of the totally impaired loans were evaluated based upon the fair value of the collateral. In accordance with SFAS 157, 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.

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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 and fair value. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset at nonrecurring Level 3.

Assets and Liabilities Recorded as Fair Value on a Recurring Basis

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

(In Thousands) June 30, 2008	Total		Level 1	Level 2		Level 3
Investment securities available for sale	$	27,357	2,537	$	24,820	—
Total assets at fair value	$	27,357	2,537	$	24,820	—

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 non- recurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below

In Thousands) June 30, 2008	Total		Level 1	Level 2		Level 3
Loans	$	2,674	—	$	2,674	—
Other real estate owned	$	212	—	$	212	—
Total assets at fair value	$	2,886	—	$	2,886	—

Note 6. Recent Accounting Pronouncements

The following is a summary of recent authoritative pronouncements:

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS 141(R)”) which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141(R) is effective for acquisitions by the Company taking place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a calendar year-end company is required to record and disclose business combinations following existing accounting guidance until January 1, 2009. The Company will assess the impact of SFAS 141(R) if and when a future acquisition occurs.

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Note 6. Recent Accounting Pronouncements (continued)

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Before this statement, limited guidance existed for reporting noncontrolling interests (minority interest). As a result, diversity in practice exists. In some cases minority interest is reported as a liability and in others it is reported in the mezzanine section between liabilities and equity. Specifically, SFAS 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financials statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests. SFAS 160 is effective for the Company on January 1, 2009. Earlier adoption is prohibited. The Company is currently evaluating the impact, if any, the adoption of SFAS 160 will have on its financial position, results of operations and cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improving the transparency of financial reporting. It is intended to enhance the current disclosure framework in SFAS 133 by requiring that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. This disclosure better conveys the purpose of derivative use in terms of the risks that the entity is intending to manage. SFAS 161 is effective for the Company on January 1, 2009. This pronouncement does not impact accounting measurements but will result in additional disclosures if the Company is involved in material derivative and hedging activities at that time.

In February 2008, the FASB issued FASB Staff Position No. 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP 140-3”). This FSP provides guidance on accounting for a transfer of a financial asset and the transferor’s repurchase financing of the asset. This FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS No. 140. However, if certain criteria are met, the initial transfer and repurchase financing are not evaluated as a linked transaction and are evaluated separately under Statement 140. FSP 140-3 will be effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years and earlier application is not permitted. Accordingly, this FSP is effective for the Company on January 1, 2009. The Company is currently evaluating the impact, if any, the adoption of FSP 140-3 will have on its financial position, results of operations and cash flows.

In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), “Business Combinations,” and other U.S. generally accepted accounting principles. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and early adoption is prohibited. Accordingly, this FSP is effective for the Company on January 1, 2009. The Company does not believe the adoption of FSP 142-3 will have a material impact on its financial position, results of operations or cash flows.

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Note 6. Recent Accounting Pronouncements (continued)

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.

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

Cardinal Bankshares Corporation (the “Company” and “Cardinal Bankshares”), a Virginia corporation, is a bank holding company headquartered in Floyd, Virginia. The Company serves the marketplace primarily through its wholly owned banking subsidiary, Bank of Floyd (the “Bank”), a Virginia chartered, Federal Reserve member commercial bank. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the extent provided by law. Bank of Floyd is supervised and examined by the Federal Reserve and the Bureau of Financial Institutions of the State Corporation Commission of the Commonwealth of Virginia (the “SCC”). At June 30, 2008, the Bank operated eight 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 offices are in the Cave Spring and Tanglewood Mall areas 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 could cause reported results to differ materially. This critical policy and its application are periodically reviewed with the Audit Committee and Board of Directors.

FINANCIAL CONDITION

Total assets as of June 30, 2008 were $219.7 million, an increase of $10.4 million from year-end 2007. Total loans increased 8.0% or $10.0 million during the first six months of this year to $134.4 million.

The investment securities portfolio reflected a slight increase of $149 thousand. Federal funds sold declined $50 thousand during the first six months of this year.

As of June 30, 2008, total deposits were $187.8 million, up approximately $10.2 million compared to year-end 2007. Non-interest-bearing core deposits increased 5.5% or $1.6 million to $31.2 million as compared to $29.6 million at year-end 2007. Interest-bearing deposits increased 5.8% or $8.6 million to $156.6 million. Deposits greater than $100 thousand amounted to $55.1 million at June 30, 2008 as compared to $57.3 million at year-end 2007.

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Stockholders’ equity was $30.1 million as of June 30, 2008 compared to $29.9 million as of December 31, 2007. Year-to-date net income of $813 thousand accounted for the major portion of the change in stockholders’ equity occurring over the first six months of the year. Other factors affecting the change in stockholders’ equity were the payment on June 30, 2008 of the Company’s regular semi-annual cash dividend totaling $445 thousand, and the decline in accumulated other comprehensive income of $339 thousand caused by a decline in the market value of the available for sale portion of the Company’s investment portfolio. Management believes this decline in market value is a temporary decline.

RESULTS OF OPERATIONS

Net income for the three months ended June 30, 2008 was $496 thousand, up 2.7% compared to $483 thousand for the three months ended June 30, 2007. Diluted earnings per share increased 3.2% to $.32 for the three months ended June 30, 2008. Diluted earnings per share for the same period a year earlier was $.31.

Total interest income for the three months ended June 30, 2008 decreased $253 thousand to $3.0 million, a decrease of 7.8% over the same prior year quarter. This resulted primarily from the effect of decreased earnings from federal funds sold and deposits with banks due to declining interest rates. Noninterest income increased 76.9% to $299 thousand primarily due to income from bank owned life insurance of $40 thousand and a grant for $69 thousand from the Commonwealth of Virginia for reimbursement of construction costs for the Fairlawn location in Pulaski County. Total interest expense decreased $53 thousand to $1.5 million, reflecting reduced interest rates paid on interest-bearing deposits accounts. Noninterest expense decreased $6 thousand or .5% to $1.3 million for the second quarter of 2008 as compared to the second quarter of 2007.

Net income for the six months ended June 30, 2008 was $813 thousand, down 33.4% compared to $1.2 million for the six months ended June 30, 2007. Diluted earnings per share decreased 32.9% to $.53 for the six months ended June 30, 2008. Diluted earnings per share for the same period a year earlier was $.79.

Interest income for the six months ended June 30, 2008 decreased $362 thousand to $6.1 million, a decrease of 5.6% over the same prior year quarter. This resulted primarily from the effect of decreased earnings from federal funds sold and deposits with banks due to declining interest rates. Total interest expense decreased $23 thousand to $2.9 million compared to the six-month period ended June 30, 2007. Net interest income after the provision for loan provision losses for the six months ended June 30, 2008 decreased $264 thousand to $3.2 million.

Total noninterest income for the six months ended June 30, 2008 showed a decreased of $67 thousand primarily due to a reduction in other operating income relating specifically to decreased BOLI income. Total noninterest expense for the comparable six-month periods ended June 30 increased to $2.7 million with the primary factors being increases in salaries and employee benefits.

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 half of 2008, the provision for loan losses was $(55) thousand as compared to $20 thousand provision for the same period in 2007. 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 2008 maintains the allowance at a level adequate to cover potential losses.

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The allowance for loan losses totaled $1.6 million at June 30, 2008. The allowance for loan losses to period end loans was 1.18% at June 30, 2008 compared to 1.34% and 1.38% at December 31, 2007 and June 30, 2007, respectively. The Company recovered balances previously charged off on loans in the amount of $7 thousand during the first half of 2008. This compares with recoveries for the six months ended June 30, 2007 of $14 thousand.

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.

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 $458 thousand as of June 30, 2008 compared to $858 thousand as of December 31, 2007. Management does not expect to incur any material losses related to nonperforming assets. As of June 30, 2008 the Company’s impaired loans with a valuation allowance amounted to $2.7 million, a decrease of $600 thousand from December 31, 2007. The valuation allowance related to the loans was $463 thousand at June 30, 2008 and $703 thousand at December 31, 2007.

LIQUIDITY

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

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

CAPITAL RESOURCES

Cardinal Bankshares’ 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 $30.4 million at June 30, 2008, or 20.23% of risk-weighted assets. Total risk-based capital was $32.0 million or 21.29% of risk-weighted assets.

Tier I capital consists primarily of common stockholders’ equity, while total risk-based capital includes the allowance for loan losses. Risk weighted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet activities. To be well capitalized under current risk-based capital standards, all banks are required to have Tier I capital of at least 4% and total capital of 8%. Based on these standards, Cardinal Bankshares is categorized as well capitalized at June 30, 2008.

In addition to the risk-based capital guidelines, banking regulatory agencies have adopted leverage capital ratio requirements. The leverage ratio – or core capital to assets ratio – works in tandem with the risk-capital guidelines. The minimum leverage ratios range from three to five percent. At June 30, 2008, the Company’s leverage capital ratio was 14.19%.

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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.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Under the newly created 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 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 Principal 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”).

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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 Principal 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.

Part II. OTHER INFORMATION

Item: 1 Legal proceedings

The Company was named as a defendant in a complaint filed by a former employee with the United States Department of Labor under Section 806 of the Sarbanes-Oxley Act. The plaintiff alleged in his complaint that his termination in October 2002 violated the Act. He sought reinstatement, back pay and damages. The Company maintained that the independent members of its Board of Directors terminated the plaintiff lawfully because he refused to comply with the directives of the Audit Committee in their attempt to look into certain matters raised by the plaintiff. The Audit Committee, after full investigation, later concluded that the matters raised by the plaintiff had no merit. The Board’s decision was initially upheld by the Department of Labor. The plaintiff appealed that decision. The Department of Labor Administrative Law Judge reversed the earlier decision in the Company’s favor and entered a decision in favor of the plaintiff in January 2004. The parties submitted evidence to the Administrative Law Judge of damages without a further hearing in December 2004 and January 2005. The Administrative Law Judge rendered a Supplemental Recommended Decision and Order in February 2005, which awarded damages to the plaintiff of $65 thousand, plus attorney’s fees of $108 thousand, and ordered the plaintiff’s reinstatement. The Company filed a petition for review to the Administrative Review Board of the Department of Labor. The case was accepted for review by the Administrative Review Board in March 2005. On May 31, 2007, the Administrative Review Board reversed the decision of the Administrative Law Judge and denied Welch’s complaint. This was a final order of the Department of Labor. Welch appealed the adverse final decision of the Department of Labor to the United States Court of Appeal for the Fourth Circuit on July 19 2007. The appeal has been fully briefed and was argued orally before a panel of the Fourth Circuit on May 14, 2008 but no decision has been announced. Cardinal believes its likelihood of success on the appeal is good.

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1A. Risk factors

Under the newly created 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 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 Submission of matters to a vote of security holders

On April 23, 2008, the issuer held its 2008 Annual Meeting of Shareholders. At the meeting, the following six persons were elected to the Board of Directors of the issuer until the 2009 Annual Meeting. The results of the vote were as follows:

	For	Withheld
Dr. Joseph Howard Conduff, Jr.	1,053,261	102,399
Mr. William Gardner, Jr.	1,054,581	101,079
Mr. Kevin D. Mitchell	1,054,581	101,079
Mr. Ronald Leon Moore	1,014,752	140,098
Dr. A. Carole Pratt	1,052,658	103,002
Mr. G. Harris Warner, Jr.	1,050,788	104,872

5 Other information - None

6 Exhibits

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

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SIGNATURES

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

CARDINAL BANKSHARES CORPORATION

/s/ Ronald Leon Moore

Ronald Leon Moore

Chairman of the Board, President and Chief Executive Officer

/s/ J. Alan Dickerson

J. Alan Dickerson

Vice President & Chief Financial Officer

Date: July 30, 2008

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