##### Table of Contents

---

U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



---



FORM 10-Q



---



QUARTERLY REPORT PURSUANT TO

SECTION 13 or 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the quarter ended March 31, 2005



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 an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).    Yes ̈.    No  x.



The number of shares outstanding of the issuers Common Stock, $10 par
value as of May 12, 2005 was 1,535,733.



---



---

##### Table of Contents

CARDINAL BANKSHARES CORPORATION



FORM 10-Q



March 31, 2005



INDEX



|         |  |                                                                                                      |  |     
|-------- |  | ---------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                      |  | Page
|Part I.  |  | Financial Information                                                                                |  |     
|         |  |                                                                                                     
|Item 1.  |  | Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004 (Audited)         |  | 3   
|         |  |                                                                                                     
|         |  | Consolidated Statements of Income for the three months ended March 31, 2005 and 2004 (Unaudited)     |  | 4   
|         |  |                                                                                                     
|         |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 (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 4.  |  | Controls and Procedures                                                                              |  | 11  
|         |  |                                                                                                     
|Part II. |  | Other Information                                                                                    |  |     
|         |  |                                                                                                     
|Item 1.  |  | Legal Proceedings                                                                                    |  | 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                                                  |  | 12  
|         |  |                                                                                                     
|Item 5.  |  | Other Information                                                                                    |  | 12  
|         |  |                                                                                                     
|Item 6.  |  | Exhibits                                                                                             |  | 12  



---

##### Table of Contents

Cardinal Bankshares Corporation and Subsidiary

Consolidated Balance Sheets



|                                                                                                          |  |                            |         |   |                       |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | --------------------- | - | ------- | -
|(In thousands, except share data)                                                                         |  | (Unaudited) March 31, 2005 |         |   | (Audited)December2004 |  
|Assets                                                                                                    |  |                            |         |   |                       |   |         |  
|Cash and due from banks                                                                                   |  | $                          | 5,210   |   |                       | $ | 4,162   |  
|Interest-bearing deposits                                                                                 |  |                            | 1,056   |   |                       |   | 3,602   |  
|Federal funds sold                                                                                        |  |                            | 2,450   |   |                       |   | 7,175   |  
|Investment securities available for sale, at fair value                                                   |  |                            | 20,568  |   |                       |   | 20,942  |  
|Investment securities held to maturity (fair value March 31, 2005 - $19,463; December 31, 2004 - $20,729) |  |                            | 18,985  |   |                       |   | 20,001  |  
|Restricted equity securities                                                                              |  |                            | 546     |   |                       |   | 603     |  
|                                                                                                          |  |                           
|Total loans                                                                                               |  |                            | 128,824 |   |                       |   | 124,673 |  
|Allowance for loan losses                                                                                 |  |                            | (1,635  | ) |                       |   | (1,631  | )
|                                                                                                          |  |                            |         |   |                       |   |         |  
|Net loans                                                                                                 |  |                            | 127,189 |   |                       |   | 123,042 |  
|                                                                                                          |  |                            |         |   |                       |   |         |  
|Bank premises and equipment, net                                                                          |  |                            | 4,173   |   |                       |   | 4,205   |  
|Accrued interest receivable                                                                               |  |                            | 916     |   |                       |   | 933     |  
|Foreclosed properties                                                                                     |  |                            | 2       |   |                       |   | 2       |  
|Bank owned life insurance                                                                                 |  |                            | 4,512   |   |                       |   | 4,483   |  
|Other assets                                                                                              |  |                            | 1,636   |   |                       |   | 1,441   |  
|                                                                                                          |  |                            |         |   |                       |   |         |  
|Total assets                                                                                              |  | $                          | 187,243 |   |                       | $ | 190,591 |  
|                                                                                                          |  |                            |         |   |                       |   |         |  
|Liabilities and Stockholders Equity                                                                      |  |                            |         |   |                       |   |         |  
|Noninterest-bearing deposits                                                                              |  | $                          | 26,950  |   |                       | $ | 27,211  |  
|Interest-bearing deposits                                                                                 |  |                            | 130,826 |   |                       |   | 134,044 |  
|                                                                                                          |  |                            |         |   |                       |   |         |  
|Total deposits                                                                                            |  |                            | 157,776 |   |                       |   | 161,255 |  
|                                                                                                          |  |                            |         |   |                       |   |         |  
|Securities sold under agreements to repurchase                                                            |  |                            | 2,075   |   |                       |   | 2,493   |  
|Accrued interest payable                                                                                  |  |                            | 136     |   |                       |   | 110     |  
|Other liabilities                                                                                         |  |                            | 989     |   |                       |   | 883     |  
|                                                                                                          |  |                            |         |   |                       |   |         |  
|Total liabilities                                                                                         |  |                            | 160,976 |   |                       |   | 164,741 |  
|                                                                                                          |  |                            |         |   |                       |   |         |  
|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                                                                                         |  |                            | 7,970   |   |                       |   | 7,444   |  
|Accumulated other comprehensive income, net                                                               |  |                            | 15      |   |                       |   | 124     |  
|                                                                                                          |  |                            |         |   |                       |   |         |  
|Total stockholders equity                                                                                |  |                            | 26,267  |   |                       |   | 25,850  |  
|                                                                                                          |  |                            |         |   |                       |   |         |  
|Total liabilities and stockholders equity                                                                |  | $                          | 187,243 |   |                       | $ | 190,591 |  
|                                                                                                          |  |                            |         |   |                       |   |         |  



See Notes to Consolidated Financial
Statements.



3



---

##### Table of Contents

Cardinal Bankshares Corporation and Subsidiary

Consolidated Statements of Income (Unaudited)



|                                                                       |  |                              |           |      |   |          
|---------------------------------------------------------------------- |  | ---------------------------- | --------- | ---- | - | ---------
|                                                                       |  | Three months ended March 31,
|(In thousands, except share data)                                      |  | 2005                         |           | 2004
|Interest income                                                        |  |                              |           |      |   |          
|Loans and fees on loans                                                |  | $                            | 2,002     |      | $ | 1,812    
|Federal funds sold and securities purchased under agreements to resell |  |                              | 26        |      |   | 22       
|Investment securities:                                                 |  |                              |           |      |   |          
|Taxable                                                                |  |                              | 210       |      |   | 238      
|Exempt from federal income tax                                         |  |                              | 239       |      |   | 224      
|Deposits with banks                                                    |  |                              | 17        |      |   | 10       
|                                                                       |  |                              |           |      |   |          
|Total interest income                                                  |  |                              | 2,494     |      |   | 2,306    
|                                                                       |  |                              |           |      |   |          
|Interest expense                                                       |  |                              |           |      |   |          
|Deposits                                                               |  |                              | 775       |      |   | 792      
|Securities Sold                                                        |  |                              | 12        |      |   | 9        
|                                                                       |  |                              |           |      |   |          
|Total interest expense                                                 |  |                              | 787       |      |   | 801      
|                                                                       |  |                              |           |      |   |          
|Net interest income                                                    |  |                              | 1,707     |      |   | 1,505    
|Provision for loan losses                                              |  |                              | 24        |      |   |         
|                                                                       |  |                              |           |      |   |          
|Net interest income after provision for loan losses                    |  |                              | 1,683     |      |   | 1,505    
|                                                                       |  |                              |           |      |   |          
|Noninterest income                                                     |  |                              |           |      |   |          
|Service charges on deposit accounts                                    |  |                              | 58        |      |   | 62       
|Other service charges and fees                                         |  |                              | 23        |      |   | 20       
|Net realized gains on sales of securities                              |  |                              | 3         |      |   | 4        
|Other operating income                                                 |  |                              | 85        |      |   | 75       
|                                                                       |  |                              |           |      |   |          
|Total noninterest income                                               |  |                              | 169       |      |   | 161      
|                                                                       |  |                              |           |      |   |          
|Noninterest expense                                                    |  |                              |           |      |   |          
|Salaries and employee benefits                                         |  |                              | 683       |      |   | 620      
|Occupancy and equipment                                                |  |                              | 192       |      |   | 139      
|Other operating expense                                                |  |                              | 311       |      |   | 285      
|                                                                       |  |                              |           |      |   |          
|Total noninterest expense                                              |  |                              | 1,186     |      |   | 1,044    
|                                                                       |  |                              |           |      |   |          
|Income before income taxes                                             |  |                              | 666       |      |   | 622      
|Income tax expense                                                     |  |                              | 140       |      |   | 129      
|                                                                       |  |                              |           |      |   |          
|Net Income                                                             |  | $                            | 526       |      | $ | 493      
|                                                                       |  |                              |           |      |   |          
|Basic earnings per share                                               |  | $                            | 0.34      |      | $ | 0.32     
|Diluted earnings per share                                             |  | $                            | 0.34      |      | $ | 0.32     
|Weighted average basic shares outstanding                              |  |                              | 1,535,733 |      |   | 1,535,733
|Weighted average diluted shares outstanding                            |  |                              | 1,535,733 |      |   | 1,535,733
|                                                                       |  |                              |           |      |   |          



See Notes to Consolidated Financial
Statements.



4



---

##### Table of Contents

Cardinal Bankshares Corporation and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)



|                                                                                  |  |      |        |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|(In thousands) Three Months Ended March 31,                                       |  | 2005 |        |   | 2004 |  
|Cash flows from operating activities                                              |  |      |        |   |      |   |        |  
|Net income                                                                        |  | $    | 526    |   |      | $ | 493    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |        |   |      |   |        |  
|Depreciation and amortization                                                     |  |      | 92     |   |      |   | 64     |  
|Net amortization (accretion) of bond premiums/discounts                           |  |      | 5      |   |      |   | (3     | )
|Provision for loan losses                                                         |  |      | 24     |   |      |   |       |  
|Net realized (gains) losses on investment securities                              |  |      | (3     | ) |      |   | (4     | )
|Deferred compensation and pension expense                                         |  |      | 51     |   |      |   | 50     |  
|Changes in operating assets and liabilities:                                      |  |      |        |   |      |   |        |  
|(Increase) decrease in accrued interest receivable                                |  |      | 17     |   |      |   | (30    | )
|Increase (decrease) in accrued interest payable                                   |  |      | 26     |   |      |   | 18     |  
|Net change in other operating assets and liabilities                              |  |      | (113   | ) |      |   | 76     |  
|                                                                                  |  |      |        |   |      |   |        |  
|Net cash provided by operating activities                                         |  |      | 625    |   |      |   | 664    |  
|                                                                                  |  |      |        |   |      |   |        |  
|Cash flows from investing activities                                              |  |      |        |   |      |   |        |  
|Net (increase) decrease in interest-bearing deposits in banks                     |  |      | 2,546  |   |      |   | (9     | )
|Net (increase) decrease in federal funds sold                                     |  |      | 4,725  |   |      |   | (4,975 | )
|Purchase of investment securities                                                 |  |      | (1,778 | ) |      |   | (4,399 | )
|Proceeds from sale of available for sale securities                               |  |      | 750    |   |      |   | 500    |  
|Purchase of restricted equity securities                                          |  |      |       |   |      |   | (5     | )
|Proceeds from redemption of equity securities                                     |  |      | 57     |   |      |   |       |  
|Proceeds from maturity and redemption of investment securities                    |  |      | 2,251  |   |      |   | 4,883  |  
|Sale of foreclosed properties                                                     |  |      |       |   |      |   | 358    |  
|Net (increase) decrease in loans                                                  |  |      | (4,171 | ) |      |   | 1,896  |  
|Net purchases of bank premises and equipment                                      |  |      | (60    | ) |      |   | (129   | )
|                                                                                  |  |      |        |   |      |   |        |  
|Net cash (used) provided by investing activities                                  |  |      | 4,320  |   |      |   | (1,880 | )
|                                                                                  |  |      |        |   |      |   |        |  
|Financing Activities                                                              |  |      |        |   |      |   |        |  
|Net increase (decrease) in noninterest-bearing deposits                           |  |      | (261   | ) |      |   | 4,238  |  
|Net (decrease) in interest-bearing deposits                                       |  |      | (3,218 | ) |      |   | (3,272 | )
|Net increase (decrease) in securities sold                                        |  |      | (418   | ) |      |   | 52     |  
|                                                                                  |  |      |        |   |      |   |        |  
|Net cash (used) provided by financing activities                                  |  |      | (3,897 | ) |      |   | 1,018  |  
|                                                                                  |  |      |        |   |      |   |        |  
|Net (decrease) increase in cash and cash equivalents                              |  |      | 1,048  |   |      |   | (198   | )
|Cash and cash equivalents at beginning of year                                    |  |      | 4,162  |   |      |   | 3,419  |  
|                                                                                  |  |      |        |   |      |   |        |  
|Cash and cash equivalents at end of year                                          |  | $    | 5,210  |   |      | $ | 3,221  |  
|                                                                                  |  |      |        |   |      |   |        |  
|Supplemental disclosures of cash flow information                                 |  |      |        |   |      |   |        |  
|Interest paid                                                                     |  | $    | 761    |   |      | $ | 784    |  
|Income taxes paid                                                                 |  | $    | 81     |   |      | $ | 146    |  
|                                                                                  |  |      |        |   |      |   |        |  



See Notes to Consolidated Financial
Statements.



5



---

##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note 1. Basis of Presentation



The accompanying unaudited
consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all of the disclosures and notes required by generally accepted accounting principles. In the opinion of management,
all material adjustments (which are of a normal recurring nature) considered necessary for a fair presentation have been made. The results for the interim period are not necessarily indicative of the results to be expected for the entire year or any
other interim period. The information reported herein should be read in conjunction with the Notes to Consolidated Financial Statements included in the Companys Annual Report on Form 10-KSB for the year ended December 31, 2004. 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:



|                                             |  |      |       |   |      |   |       |  
|-------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|Three months ended March 31, (In thousands)  |  | 2005 |       |   | 2004 |  
|Balance, at January 1                        |  | $    | 1,631 |   |      | $ | 1,697 |  
|Provision charged to expense                 |  |      | 24    |   |      |   |      |  
|Recoveries of amounts previously charged off |  |      |      |   |      |   | 163   |  
|Loans charged off                            |  |      | (20   | ) |      |   | (18   | )
|                                             |  |      |       |   |      |   |       |  
|Balance, at March 31,                        |  | $    | 1,635 |   |      | $ | 1,842 |  
|                                             |  |      |       |   |      |   |       |  



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 March 31 for the years indicated follows:



|                             |  |      |        |      |   |       
|---------------------------- |  | ---- | ------ | ---- | - | ------
|(In thousands)               |  | 2005 |        | 2004
|Commitments to extend credit |  | $    | 16,161 |      | $ | 24,917
|Standby letters of credit    |  |      | 648    |      |   | 697   
|                             |  |      |        |      |   |       
|Total                        |  | $    | 16,809 |      | $ | 25,614
|                             |  |      |        |      |   |       



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 March 31, (In thousands)  |  | 2005 |         |   | 2004 |  
|Service cost                                 |  | $    | 44,275  |   |      | $ | 41,828  |  
|Interest cost                                |  |      | 43,907  |   |      |   | 40,623  |  
|Expected return on plan assets               |  |      | (42,622 | ) |      |   | (36,672 | )
|Amortization of net obligation at transition |  |      | (1,007  | ) |      |   | (1,007  | )
|Amortization of prior service cost           |  |      | 1,495   |   |      |   | 1,495   |  
|Amortization of net (gain) or loss           |  |      | 4,834   |   |      |   | 3,590   |  
|                                             |  |      |         |   |      |   |         |  
|Total net periodic benefit cost              |  | $    | 50,882  |   |      | $ | 49,857  |  
|                                             |  |      |         |   |      |   |         |  



6



---

##### Table of Contents

The Company previously disclosed in its financial statements for the year ended December 31, 2004, that it expected to
contribute $204 thousand to it pension plan in 2005. As of March 31, 2005, $89 thousand of contributions have been made. The Company presently anticipates contributing an additional $115 thousand to fund its pension plan in 2005 for a total of $204
thousand.



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



Cardinal Bankshares Corporation (the Company and Cardinal Bankshares), a Virginia corporation, is a bank holding company headquartered in Floyd,
Virginia. The Company serves the marketplace primarily through its wholly owned banking subsidiary, Bank of Floyd (the Bank), a Virginia chartered, Federal Reserve member commercial bank. The Banks deposits are insured by the
Federal Deposit Insurance Corporation (the FDIC) to the extent provided by law. Bank of Floyd is supervised and examined by the Federal Reserve and the Bureau of Financial Institutions of the State Corporation Commission of the
Commonwealth of Virginia (the SCC). At March 31, 2005, the Bank operated seven branch facilities in the counties of Floyd, Montgomery, Roanoke 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.



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 March 31, 2005 were $187.2 million, a decrease of $3.3 million from year-end 2004. Total loans rose 3.3% or $4.2 million
during the quarter to $128.8 million.



The investment securities portfolio
reflected a net decrease of $1.4 million. This decrease was a result of the sale of one $750 thousand Mortgage Backed Security, maturity of a $519 thousand Municipal Security and usual pay downs in the amount of $1.7 million in mortgage-backed
securities offset by purchases of investment securities totaling approximately $1.8 million combined with the effect of normal issuer calls of investment securities. Federal funds sold declined approximately $4.7 million during the quarter as the
Company continues to strategically reduce rate sensitive deposit balances in light of continued moderate loan demand in its principal market area.



As of March 31, 2005, total deposits were $157.8 million, down approximately $3.5 million compared to year-end 2004. Non-interest-bearing core deposits remained level at
$27.0 million as compared to $27.2 million at year-end 2004. Interest-bearing deposits declined 2.4% or $3.2 million to $130.8 million. Due to the soft loan demand in the current economic environment, the Company has strategically remained less
competitive on rate sensitive deposits as reflected in the $5.1 million decline in large denomination deposits, those deposit accounts with balances greater than $100 thousand. Deposits greater than $100 thousand amounted to $38.9 million at March
31, 2005 as compared to $44.0 million at year end 2004.



7



---

##### Table of Contents

Stockholders equity was $26.3 million as of March 31, 2005 compared to $25.9 million as of December 31, 2004. Net
income for the quarter of $526 thousand principally accounted for the increase in stockholders equity.



RESULTS OF OPERATIONS



Net income for
the three months ended March 31, 2005 was $526 thousand, up 6.7% compared to $493 thousand for the three months ended March 31, 2004. Diluted earnings per share increased 6.3% to $.34 for the three months ended March 31, 2005. Diluted earnings per
share for the same period a year earlier was $.32.



Total interest income for
the three months ended March 31, 2005 increased $188 thousand to $2.5 million, an increase of 8.2% over the same prior year quarter. This resulted primarily from the effect of increased yields on loans with slightly increasing interest rates. The
increase in interest income was the principal contributing factor to improved profitability for the first quarter of 2005 compared to the first quarter of 2004. Noninterest income increased 5.0% to $169 thousand. Total interest expense decreased $14
thousand to $787 thousand, reflecting the effect of lower levels of interest-bearing deposits and interest rates paid thereon. Noninterest expense increased 13.6% to $1.2 million for the first quarter of 2005 as compared to the first quarter of
2004. The primary expenses that attributed to this noninterest expense increase are expenses in EDP services and supplies as related to the addition of new branches since the first quarter of 2004.



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
quarter of 2005, the provision for loan losses was $24.0 thousand as compared to no provision for the same period in 2004. 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 2005 maintains the allowance at a level adequate to cover potential losses.



The allowance for loan losses totaled $1.6 million at March 31, 2005. The allowance for loan losses to period end loans was 1.27% at March
31, 2005 compared to 1.31% and 1.55% at December 31, 2004 and March 31, 2004, respectively. The Company charged off balances on loans in the amount of $20 thousand during the quarter. This compares with net recoveries for the three months ended
March 31, 2004 of $145 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 $523 thousand as of March 31, 2005 compared to $418 thousand as of December 31, 2004. Management does not expect to incur any material losses related to nonperforming assets.



8



---

##### Table of Contents

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 $26.3 million at March 31, 2005, or 19.53% of risk-weighted assets. Total risk-based capital was $27.9 million or 20.75% of risk-weighted assets



Tier I capital consists primarily of common stockholders equity, while total risk-based capital includes the allowance for loan
losses. Risk weighted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet activities. To be well capitalized under current risk-based capital standards, all banks are required to have
Tier I capital of at least 4% and total capital of 8%. Based on these standards, Cardinal Bankshares is categorized as well capitalized at March 31, 2005.



In addition to the risk-based capital guidelines, banking regulatory agencies have adopted leverage capital ratio requirements. The leverage ratio  or core capital
to assets ratio  works in tandem with the risk-capital guidelines. The minimum leverage ratios range from three to five percent. At March 31, 2005, the Companys leverage capital ratio was 13.81%.



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



9



---

##### Table of Contents

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.



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 $773 thousand, or 11.98%, while a similar decrease in rates would result in a decrease in net interest income of $600
thousand, or 9.30%. 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.



10



---

##### Table of Contents

Additional qualitative information about interest rate risk is included in the Companys Annual Report on Form
10-KSB for the year ended December 31, 2004. There have not been any material changes since December 31, 2004.



Item 4. 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.



11



---

##### Table of Contents

Part II. OTHER INFORMATION



|Item:    1 | Legal proceedings
|---------- | -----------------



| | Cardinal 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 is seeking reinstatement, back pay and damages. The Company maintains that the independent members of Cardinals 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 Cardinals favor and
entered a decision in favor of the plaintiff in January 2004. Cardinal appealed that decision. The Administrative Review Board of the Department of Labor agreed to review the decision of the Administrative Law Judge in February 2004. Their decision
to review suspended the decision of the Administrative Law Judge prior to any determination of damages by the Administrative Law Judge. In May 2004, the Administrative Review Board within the Department of Labor determined that it had accepted
Cardinals petition for review prematurely.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Because of the uncertainty regarding the procedural handling of this case within the DOL, to preserve its ultimate ability to appeal to the Federal Courts, in June 2004, Cardinal
filed with the United States Court of Appeals for the Fourth Circuit a Petition for Review of the decisions of the United States Department of Labor. The appeal was determined to be premature. 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. The Companys management believes it has substantial grounds for a successful appeal of the decision in the plaintiffs favor and will pursue appeals vigorously.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | There have been no significant changes in the status of these legal proceedings since the filing of Cardinals December 31, 2004 10-KSB as filed on March 31, 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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 - None
|- | ----------------------------------------------------------



|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



12



---

##### Table of Contents

SIGNATURES



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



|                                                                 
|-----------------------------------------------------------------
|CARDINAL BANKSHARES CORPORATION                                  
|                                                                 
|/s/ Ronald Leon Moore                                            
|Ronald Leon Moore                                                
|Chairman of the Board, President and Chief Executive Officer     
|                                                                 
|/s/ Stephanie Kent                                               
|Stephanie Kent                                                   
|Senior Vice President, Controller and Principal Financial Officer
|                                                                 
|Date: May 11, 2005                                               



13