10-Q

U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO

SECTION 13 or 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2007

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, or a non-accelerated filer. (Check one):

Large Accelerated Filer  ¨    Accelerated Filer  ¨    Non-accelerated Filer  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 August 2, 2007 was 1,535,733.

CARDINAL BANKSHARES CORPORATION

FORM 10-Q

June 30, 2007

INDEX

		Page
Part I.	Financial Information
Item 1.	Consolidated Balance Sheets as of June 30, 2007 (Unaudited) and December 31, 2006 (Audited)	3
	Consolidated Statements of Income for the three months and six months ended June 30, 2007 and 2006 (Unaudited)	4
	Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006 (Unaudited)	5
	Notes to Consolidated Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	10
Item 4T.	Controls and Procedures	11
Part II.	Other Information
Item 1.	Legal Proceedings	12
Item 1A.	Risk Factors	12
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	12
Item 3.	Defaults Upon Senior Securities	12
Item 4.	Submission of Matters to a Vote of Security Holders	13
Item 5.	Other Information	13
Item 6.	Exhibits	13

Cardinal Bankshares Corporation and Subsidiary

Consolidated Balance Sheets

(In thousands, except share data)	(Unaudited) June 30, 2007			(Audited) December 31, 2006
Assets
Cash and due from banks	$	3,236		$	3,416
Interest-bearing deposits		28,144			21,135
Federal funds sold		8,750			8,800
Investment securities available for sale, at fair value		24,753			23,654
Investment securities held to maturity (fair value June 30, 2007 - $17,763 December 31, 2006 - $17,443)		18,363			17,248
Restricted equity securities		536			554
Total loans		121,037			122,974
Allowance for loan losses		(1,669	)		(1,640	)
Net loans		119,368			121,334
Bank premises and equipment, net		4,403			4,071
Accrued interest receivable		975			974
Foreclosed properties		212			212
Bank owned life insurance		4,662			4,789
Other assets		1,808			1,662
Total assets	$	215,210		$	207,849
Liabilities and Stockholders’ Equity
Noninterest-bearing deposits	$	27,993		$	28,279
Interest-bearing deposits		156,368			148,993
Total deposits		184,361			177,272
Accrued interest payable		230			221
Other liabilities		1,645			1,966
Total liabilities		186,236			179,459
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		11,243			10,453
Accumulated other comprehensive income, net		(551	)		(345	)
Total stockholders’ equity		28,974			28,390
Total liabilities and stockholders’ equity	$	215,210		$	207,849

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)	2007		2006			2007		2006
Interest income
Loans and fees on loans	$	2,260	$	2,267		$	4,536	$	4,583
Federal funds sold and securities purchased under agreements to resell		115		47			226		74
Investment securities:
Taxable		292		207			568		399
Exempt from federal income tax		220		213			440		431
Deposits with banks		369		85			661		196
Total interest income		3,256		2,819			6,431		5,683
Interest expense
Deposits		1,508		987			2,941		1,956
Borrowings		—		—			—		—
Total interest expense		1,508		987			2,941		1,956
Net interest income		1,748		1,832			3,490		3,727
Provision for loan losses		—		10			20		30
Net interest income after provision for loan losses		1,748		1,822			3,470		3,697
Noninterest income
Service charges on deposit accounts		62		64			112		132
Other service charges and fees		26		26			50		49
Net realized gains on sales of securities		—		—			1		3
Other operating income		81		92			362		222
Total noninterest income		169		182			525		406
Noninterest expense
Salaries and employee benefits		773		741			1,484		1,488
Occupancy and equipment		185		167			356		340
Foreclosed assets, net		—		(9	)		—		(9	)
Other operating expense		363		314			674		621
Total noninterest expense		1,321		1,213			2,514		2,440
Income before income taxes		596		791			1,481		1,663
Income tax expense		113		184			261		393
Net Income	$	483	$	607		$	1,220	$	1,270
Basic earnings per share	$	0.31	$	0.40		$	0.79	$	0.83
Diluted earnings per share	$	0.31	$	0.40		$	0.79	$	0.83
Dividends Paid Per Share	$	0.28	$	0.27		$	0.28	$	0.27
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,	2007			2006
Cash flows from operating activities
Net income	$	1,220		$	1,270
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		167			172
Net amortization (accretion) of bond premiums/discounts		19			11
Provision for loan losses		20			30
Net realized (gains) losses on investment securities		(1	)		(3	)
Net realized (gains) losses on sale of foreclosed assets		—			(9	)
Deferred compensation and pension expense		88			129
Changes in operating assets and liabilities:
(Increase) decrease in accrued interest receivable		(1	)		(21	)
Increase (decrease) in accrued interest payable		9			3
Net change in other operating assets and liabilities		(322	)		22
Net cash provided by operating activities		1,199			1,604
Cash flows from investing activities
Net (increase) decrease in interest-bearing deposits in banks		(7,009	)		1,604
Net (increase) decrease in federal funds sold		50			(1,475	)
Purchase of investment securities		(9,652	)		(4,327	)
Proceeds from sale of available for sale securities		—			—
Purchase of restricted equity securities		—			(8	)
Proceeds from redemption of equity securities		18			—
Proceeds from maturity and redemption of investment securities		7,107			3,713
Net (increase) decrease in loans		1,946			5,182
Net purchases of bank premises and equipment		(498	)		(93	)
Proceeds from sale of foreclosed assets		—			215
Net cash (used) provided by investing activities		(8,038	)		4,811
Financing Activities
Net increase (decrease) in noninterest-bearing deposits		(286	)		2,168
Net (decrease) in interest-bearing deposits		7,375			(7,948	)
Net increase (decrease) in securities sold		—			(134	)
Dividends paid		(430	)		(415	)
Net cash (used) provided by financing activities		6,659			(6,329	)
Net (decrease) increase in cash and cash equivalents		(180	)		86
Cash and cash equivalents at beginning of year		3,416			4,292
Cash and cash equivalents at end of year	$	3,236		$	4,378
Supplemental disclosures of cash flow information
Interest paid	$	2,932		$	1,953
Income taxes paid	$	444		$	314

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, 2006. Certain previously reported amounts have been reclassified to conform to current presentations.

Note 2. Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

Six months ended June 30, (In thousands)	2007			2006
Balance, at January 1	$	1,640		$	1,427
Provision charged to expense		20			30
Recoveries of amounts previously charged off		14			23
Loans charged off		(5	)		(13	)
Balance, at June 30,	$	1,669		$	1,467

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 stand-by 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)	2007		2006
Commitments to extend credit	$	12,169	$	25,100
Standby letters of credit		1,126		471
Total	$	13,295	$	25,571

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)	2007			2006
Service cost	$	45		$	58
Interest cost		51			49
Expected return on plan assets		(54	)		(49	)
Amortization of net obligation at transition		(1	)		(1	)
Amortization of prior service cost		1			1
Amortization of net (gain) or loss		2			6
Total net periodic benefit cost	$	44		$	64

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Six months ended June 30, (In thousands)	2007			2006
Service cost	$	89		$	117
Interest cost		101			98
Expected return on plan assets		(107	)		(98	)
Amortization of net obligation at transition		(2	)		(2	)
Amortization of prior service cost		3			3
Amortization of net (gain) or loss		4			11
Total net periodic benefit cost	$	88		$	129

The Company previously disclosed in its financial statements for the year ended December 31, 2006, that it expected to contribute $175 thousand to this pension plan in 2007. As of June 30, 2007, no contributions have been made.

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, 2007, the Bank operated eight branch facilities in the counties of Floyd, Montgomery, Roanoke, Carroll, Pulaski and the City of Salem. 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. On May 1, 2007 the bank opened its eighth branch in Pulaski County, Virginia serving 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.

FINANCIAL CONDITION

Total assets as of June 30, 2007 were $215.2 million, an increase of $7.4 million from year-end 2006. Total loans declined 1.6% or $1.9 million during the first six months of this year to $119.4 million.

The investment securities portfolio reflected a net increase of $2.2 million. Federal funds sold declined $50 thousand during the first six months of 2007.

As of June 30, 2007, total deposits were $184.4 million, up approximately $7.1 million compared to year-end 2006. Non-interest-bearing core deposits declined $286 thousand to $28.0 million as compared to $28.3 million at year-end 2006. Interest-bearing deposits increased 5% or 7.4 million to $156.4 million. Deposits greater than $100 thousand amounted to $55.8 million at June 30, 2007 as compared to $52.0 million at year-end 2006.

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Stockholders’ equity was $29.0 million as of June 30, 2007 compared to $28.4 million as of December 31, 2006. Year-to-date net income of $1.2 million 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, 2007 of the Company’s regular semi-annual cash dividend totaling $430 thousand, and the decline in accumulated other comprehensive income of $206 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, 2007 was $483 thousand, down 20.4% compared to $607 thousand for the three months ended June 30, 2006. Diluted earnings per share decreased 22.5% to $.31 for the three months ended June 30, 2007. Diluted earnings per share for the same period a year earlier was $.40.

Total interest income for the three months ended June 30, 2007 rose $437 thousand to $3.3 million compared to $2.8 million the same prior year quarter. Noninterest income remained level compared to the same prior year quarter at $169 thousand. Total interest expense increased $521 thousand to $1.5 million reflecting an increase in deposits due to the effect of certificate of deposit promotions during the quarter and increased interest rates paid thereon. Noninterest expense increased to $1.3 million for the second quarter of 2007 as compared to $1.2 million for the second quarter of 2006 due to increased staffing and the addition of the Fairlawn branch.

Net income for the six months ended June 30, 2007 was $1.2 million, down 4.0% compared to $1.3 million for the six months ended June 30, 2006. Diluted earnings per share decreased 4.8% to $.79 for the six months ended June 30, 2007. Diluted earnings per share for the same period a year earlier was $.83.

Interest income for the six months ended June 30, 2007 was $6.4 million, up 12.3% from the $5.7 million reported a year earlier. This increase reflects the slight increase in overall portfolio yield when compared to the same period a year earlier. Total interest expense rose $985 thousand compared to the six-month period ended June 30, 2006. Net interest income after the provision for loan losses for the six months ended June 30, 2007 decreased $227 thousand to $3.5 million.

Total noninterest income for the six months ended June 30, 2007 showed an increase of $119 thousand due primarily to an increase in other operating income. Total noninterest expense for the comparable six-month periods ended June 30 increased to $2.5 million.

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 2007, the provision for loan losses was $20 thousand as compared to $30 thousand provision for the same period in 2006. Based upon management’s periodic reviews of the loan portfolio using the above mentioned factors, the current year increase in the provision for loan losses was felt appropriate. Management believes the provision recorded in 2007 maintains the allowance at a level adequate to cover potential losses.

The allowance for loan losses totaled $1.7 million at June 30, 2007. The allowance for loan losses to period end loans was 1.38% at June 30, 2007 compared to 1.33% and 1.18% at December 31, 2006 and June 30, 2006, respectively. The Company had net recoveries on loans in the amount of $9 thousand during the first half of 2007. This compares with net recoveries for the six months ended June 30, 2006 of $10 thousand.

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The allowance for loan losses represents management’s estimate of an amount adequate to provide for potential losses inherent in the loan portfolio. The adequacy of the loan loss reserve and the related provision are based upon management’s evaluation of the risk characteristics of the loan portfolio under current economic conditions with consideration to such factors as financial condition of the borrowers, collateral values, growth and composition of the loan portfolio, the relationship of the allowance to outstanding loans and delinquency trends.

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 $865 thousand as of June 30, 2007 compared to $869 thousand as of December 31, 2006. Management does not expect to incur any additional material losses related to nonperforming assets. As of June 30, 2007 the company’s impaired loans with a valuation allowance amounted to $3.0 million, down $400 thousand from December 31, 2006. The valuation allowance related to the loans was $758 thousand at June 30, 2007 and $743 thousand at December 31, 2006.

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 $29.5 million at June 30, 2007, or 21.01% of risk-weighted assets. Total risk-based capital was $31.2 million or 22.20% 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, 2007.

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, 2007, the Company’s leverage capital ratio was 13.96%.

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

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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

The principal goals of the Company’s asset and liability management strategy are the maintenance of adequate liquidity and the management of interest rate risk. Liquidity is the ability to convert assets to cash to fund depositors’ withdrawals or borrowers’ loans without significant loss. Interest rate risk management seeks to balance the effects of interest rate changes on assets that earn interest or liabilities on which interest is paid, to protect the Company from wide fluctuations in its net interest income.

Management must insure that adequate funds are available at all times to meet the needs of its customers. On the asset side of the balance sheet, maturing investments, loan payments, maturing loans, federal funds sold, and unpledged investment securities are principal sources of liquidity. On the liability side of the balance sheet, liquidity sources include core deposits, the ability to increase large denomination certificates, federal funds lines from correspondent banks, borrowings from the Federal Reserve Bank and the Federal Home Loan Bank, as well as the ability to generate funds through the issuance of long-term debt and equity.

Interest rate risk is the effect that changes in interest rates would have on interest income and interest expense as interest-sensitive assets and interest-sensitive liabilities either reprice or mature. Management attempts to maintain the portfolios of earning assets and interest-bearing liabilities with maturities or repricing opportunities at levels that will afford protection from erosion of net interest margin, to the extent practical, from changes in interest rates.

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The Company uses a number of tools to manage its interest rate risk, including simulating net interest income under various scenarios, monitoring the present value change in equity under the same scenarios, and monitoring the difference or gap between rate sensitive assets and rate sensitive liabilities over various time periods.

The earnings simulation model forecasts annual net income under a variety of scenarios that incorporate changes in absolute level of interest rates, changes in the shape of the yield curve and changes in interest rate relationships. Management evaluates the effect on net interest income from gradual changes in the Prime Rate of up to 200 basis points up or down over a 12-month period. The current model indicates that an increase in rates of 200 basis points over the next twelve months would result in an increase in net interest income of $926 thousand, or 12.74%, while a similar decrease in rates would result in a decrease in net interest income of $866 thousand, or 11.90%. The model also incorporates management’s forecasts for balance sheet growth, noninterest income and noninterest expense. The interest rate scenarios are used for analytical purposes and do not represent management’s view of future market movements. Rather, these are intended to provide a measure of the degree of volatility interest rate movements may apply to the earnings of the Company. Modeling the sensitivity of earnings to interest rate risk is highly dependent on numerous assumptions embedded in the simulation model. While the earnings sensitivity analysis incorporates management’s best estimate of interest rate and balance sheet dynamics under various market rate movements, the actual behavior and resulting earning impact likely will differ from projected.

Additional qualitative information about interest rate risk is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. There have not been any material changes since December 31, 2006.

Item 4T. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, including internal controls and procedures for financial reporting. Our principal executive officer and principal financial officer supervised this evaluation and have concluded that our disclosure controls and procedures are effective. Subsequent to this evaluation, (i) there have been no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures and (ii) we have not taken any corrective actions with regard to our disclosure controls and procedures to correct any significant deficiencies and weaknesses.

The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goal under every potential condition, regardless of how remote. In addition, the operation of any system of controls and procedures is dependent upon the employees responsible for executing it. 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.

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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 (“DOL”) in 2002 under Section 806 of the Sarbanes-Oxley Act relating to so-called “whistleblowers”. The Company’s position is that the former employee was lawfully terminated by the Company’s Board of Directors and that Section 806 of the Sarbanes-Oxley Act did not apply to his termination. The Company’s position was initially upheld by the DOL but a DOL Administrative Law Judge (ALJ) reversed the earlier decision and entered a decision in favor of the former employee. The ALJ, among other things, ordered the employee to be reinstated while the case was awaiting final decision by the DOL. The Company appealed the ALJ decision to the DOL’s Administrative Review Board (“ARB”), which accepted the appeal. The Company refused to reinstate the former employee pending a final decision by the DOL. The former employee twice filed suit against the Company in the US District Court in Roanoke to enforce the ALJ’s so called preliminary order of reinstatement. The Company and its Board of Directors vigorously opposed these efforts and in each case the District Court refused to enforce the ALJ’s preliminary order. The DOL and the former employee appealed the last of these District Court decisions in favor of the Company to the United States 4^th Circuit Court of Appeals. While this appeal has been pending, the DOL, through the ARB issued a final decision on May 31, 2007 dismissing the former employee’s Sarbanes-Oxley complaint in its entirety and rendering a final decision in the Company’s favor. Because of this final decision, the Company has moved to dismiss as moot the 4^th Circuit appeal by the former employee and DOL relating to the District Court’s refusal to enforce the ALJ’s preliminary reinstatement order now that the DOL has issued a final decision in the Company’s favor. The former employee has appealed to the 4^th Circuit the DOL’s final decision throwing out his Sarbanes-Oxley complaint. The Company intends to intervene in and vigorously oppose the former employee’s appeal.

1A. Risk factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

2 Unregistered sales of equity securities and use of proceeds – None

3 Defaults upon senior securities – None

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4 Submission of matters to a vote of security holders

On April 25, 2007, the issuer held its 2007 Annual Meeting of Shareholders. At the meeting, the following seven persons were elected to the Board of Directors of the issuer until the 2007 Annual Meeting. The results of the vote were as follows:

	For	Withheld
Dr. Joseph Howard Conduff, Jr.	1,063,856	139,601
William Gardner, Jr.	1,063,856	139,601
Kevin D. Mitchell	1,063,856	139,601
Ronald Leon Moore	1,066,263	137,194
Dr. A. Carole Pratt	1,062,653	140,804
Dorsey H. Thompson	1,063,856	139,601
G. Harris Warner, Jr.	1,080,704	122,753

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 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 and Chief Financial Officer

Date: August 8, 2007

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EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Ronald Leon Moore, certify that:

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

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

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

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

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

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

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

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

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

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

Date: August 8, 2007

/s/ Ronald Leon Moore

Ronald Leon Moore

Chairman, President & Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, J. Alan Dickerson, certify that:

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

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

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

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

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

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

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

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

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

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

Date: August 8, 2007

/s/ J. Alan Dickerson

J. Alan Dickerson

Vice President & Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION

(Pursuant to 18 U.S.C. Section 1350)

The undersigned hereby certifies that (i) the foregoing Quarterly Report on Form 10-Q filed by August 14, 2007 for the quarter ended June 30, 2007, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.

Date: August 8, 2007	/s/ Ronald Leon Moore
	Ronald Leon Moore
	Chairman, President & Chief Executive Officer
Date: August 8, 2007	/s/ J. Alan Dickerson
	J. Alan Dickerson
	Vice President & Chief Financial Officer