##### Table of Contents





U. S. SECURITIES AND EXCHANGE
COMMISSION

Washington, D. C. 20549





FORM 10-Q





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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

Commission File No. 0-28780





CARDINAL
BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)







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

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

(Address of principal executive offices)

(540) 745-4191

(Registrants telephone number)





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

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

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



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

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





The number of shares outstanding of the issuers Common Stock, $10 par value as of November 11, 2009 was 1,535,733.









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##### Table of Contents

CARDINAL BANKSHARES CORPORATION

FORM 10-Q

September 30, 2009

INDEX



|               |  |                                                                                                                      |  |     
|-------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ----
|               |  |                                                                                                                      |  | Page
|Part I.        |  | Financial Information                                                                                                |  |     
|               |  |                                                                                                                     
|Item 1.        |  | Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and December 31, 2008 (Audited)                     |  | 3   
|               |  |                                                                                                                     
|               |  | Consolidated Statements of Income for the three months and nine months ended September 30, 2009 and 2008 (Unaudited) |  | 4   
|               |  |                                                                                                                     
|               |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008
(Unaudited)              |  | 5   
|               |  |                                                                                                                     
|               |  | Notes to Consolidated Statements (Unaudited)                                                                         |  | 6   
|               |  |                                                                                                                     
|Item 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                                |  | 14  
|               |  |                                                                                                                     
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                                           |  | 18  
|               |  |                                                                                                                     
|Item 4T.       |  | Controls and Procedures                                                                                              |  | 18  
|               |  |                                                                                                                     
|Part II.       |  | Other Information                                                                                                    |  |     
|               |  |                                                                                                                     
|Item 1.        |  | Legal Proceedings                                                                                                    |  | 19  
|               |  |                                                                                                                     
|Item 1A.       |  | Risk Factors                                                                                                         |  | 19  
|               |  |                                                                                                                     
|Item 2.        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                          |  | 19  
|               |  |                                                                                                                     
|Item 3.        |  | Defaults Upon Senior Securities                                                                                      |  | 19  
|               |  |                                                                                                                     
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                                                  |  | 19  
|               |  |                                                                                                                     
|Item 5.        |  | Other Information                                                                                                    |  | 19  
|               |  |                                                                                                                     
|Item 6.        |  | Exhibits                                                                                                             |  | 19  
|               | 
|SIGNATURES     |  | 20                                                                                                                  
|               | 
|CERTIFICATIONS |  | 21                                                                                                                  



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##### Table of Contents

Cardinal Bankshares Corporation and Subsidiary

Consolidated Balance Sheets



|                                                                                                  |  |                              |         |   |                           |   |         |  
|------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ------------------------- | - | ------- | -
|(In thousands, except share data)                                                                 |  | (Unaudited)September 30,2009 |         |   | (Audited)December 31,2008 |  
|Assets                                                                                            |  |                              |         |   |                           |   |         |  
|Cash and due from banks                                                                           |  | $                            | 3,506   |   |                           | $ | 3,299   |  
|Interest-bearing deposits                                                                         |  |                              | 484     |   |                           |   | 227     |  
|Federal funds sold                                                                                |  |                              | 20,175  |   |                           |   | 12,875  |  
|Investment securities available for sale, at fair value                                           |  |                              | 28,109  |   |                           |   | 28,868  |  
|Investment securities held to maturity                                                            |  |                              | 15,301  |   |                           |   | 16,506  |  
|(fair value September 30, 2009 $ 15,780 - December 31, 2008 $ 16,642)                             |  |                              |         |   |                           |   |         |  
|Restricted equity securities                                                                      |  |                              | 575     |   |                           |   | 534     |  
|                                                                                                  |  |                             
|Total loans                                                                                       |  |                              | 154,810 |   |                           |   | 147,921 |  
|Allowance for loan losses                                                                         |  |                              | (2,160  | ) |                           |   | (1,659  | )
|                                                                                                  |  |                              |         |   |                           |   |         |  
|Net loans                                                                                         |  |                              | 152,650 |   |                           |   | 146,262 |  
|                                                                                                  |  |                              |         |   |                           |   |         |  
|                                                                                                  |  |                             
|Bank premises and equipment, net                                                                  |  |                              | 3,847   |   |                           |   | 4,000   |  
|Accrued interest receivable                                                                       |  |                              | 947     |   |                           |   | 1,134   |  
|Foreclosed properties                                                                             |  |                              | 271     |   |                           |   | 289     |  
|Bank owned life insurance                                                                         |  |                              | 5,074   |   |                           |   | 4,951   |  
|Other assets                                                                                      |  |                              | 2,272   |   |                           |   | 2,095   |  
|                                                                                                  |  |                              |         |   |                           |   |         |  
|Total assets                                                                                      |  | $                            | 233,211 |   |                           | $ | 221,040 |  
|                                                                                                  |  |                              |         |   |                           |   |         |  
|                                                                                                  |  |                             
|Liabilities and Stockholders Equity                                                              |  |                              |         |   |                           |   |         |  
|Noninterest-bearing deposits                                                                      |  | $                            | 26,709  |   |                           | $ | 26,975  |  
|Interest-bearing deposits                                                                         |  |                              | 174,332 |   |                           |   | 162,038 |  
|                                                                                                  |  |                              |         |   |                           |   |         |  
|Total deposits                                                                                    |  |                              | 201,041 |   |                           |   | 189,013 |  
|                                                                                                  |  |                              |         |   |                           |   |         |  
|Accrued interest payable                                                                          |  |                              | 185     |   |                           |   | 222     |  
|Other liabilities                                                                                 |  |                              | 2,155   |   |                           |   | 2,359   |  
|                                                                                                  |  |                              |         |   |                           |   |         |  
|Total liabilities                                                                                 |  |                              | 203,381 |   |                           |   | 191,594 |  
|                                                                                                  |  |                              |         |   |                           |   |         |  
|Commitments and contingent liabilities                                                            |  |                              |        |   |                           |   |        |  
|                                                                                                  |  |                             
|Stockholders Equity                                                                              |  |                              |         |   |                           |   |         |  
|Common stock, $10 par value, 5,000,000 shares authorized, 1,535,733 shares issued and outstanding |  |                              | 15,357  |   |                           |   | 15,357  |  
|Additional paid-in capital                                                                        |  |                              | 2,925   |   |                           |   | 2,925   |  
|Retained earnings                                                                                 |  |                              | 12,568  |   |                           |   | 12,411  |  
|Accumulated other comprehensive loss, net                                                         |  |                              | (1,020  | ) |                           |   | (1,247  | )
|                                                                                                  |  |                              |         |   |                           |   |         |  
|Total stockholders equity                                                                        |  |                              | 29,830  |   |                           |   | 29,446  |  
|                                                                                                  |  |                              |         |   |                           |   |         |  
|Total liabilities and stockholders equity                                                        |  | $                            | 233,211 |   |                           | $ | 221,040 |  
|                                                                                                  |  |                              |         |   |                           |   |         |  

See Notes to Consolidated Financial Statements.



3



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##### Table of Contents

Cardinal Bankshares Corporation and Subsidiary

Consolidated Statements of Income (Unaudited)



|                                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|---------------------------------------------------------------------- |  | ------------------------------- | --------- | ------------------------------ | ---- | - | --------- |  | - | --------- | - |  | - | ---------
|                                                                       |  | Three months endedSeptember 30, |           | Nine months endedSeptember 30,
|(In thousands, except share data)                                      |  | 2009                            |           |                                | 2008 |   | 2009      |  |   | 2008     
|Interest income                                                        |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|                                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Loans and fees on loans                                                |  | $                               | 2,306     |                                |      | $ | 2,418     |  | $ | 6,644     |   |  | $ | 7,016    
|Federal funds sold and securities purchased under agreements to resell |  |                                 | 13        |                                |      |   | 43        |  |   | 37        |   |  |   | 154      
|Investment securities:                                                 |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Taxable                                                                |  |                                 | 263       |                                |      |   | 368       |  |   | 880       |   |  |   | 1,029    
|Exempt from federal income tax                                         |  |                                 | 187       |                                |      |   | 207       |  |   | 579       |   |  |   | 675      
|Deposits with banks                                                    |  |                                 |          |                                |      |   | 36        |  |   | 2         |   |  |   | 267      
|                                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Total interest income                                                  |  |                                 | 2,769     |                                |      |   | 3,072     |  |   | 8,142     |   |  |   | 9,141    
|                                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Interest expense                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Deposits                                                               |  |                                 | 1,251     |                                |      |   | 1,434     |  |   | 3,827     |   |  |   | 4,352    
|                                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Total interest expense                                                 |  |                                 | 1,251     |                                |      |   | 1,434     |  |   | 3,827     |   |  |   | 4,352    
|                                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Net interest income                                                    |  |                                 | 1,518     |                                |      |   | 1,638     |  |   | 4,315     |   |  |   | 4,789    
|Provision for loan losses                                              |  |                                 | 446       |                                |      |   | 78        |  |   | 576       |   |  |   | 23       
|                                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Net interest income after provision for loan losses                    |  |                                 | 1,072     |                                |      |   | 1,560     |  |   | 3,739     |   |  |   | 4,766    
|                                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Noninterest income                                                     |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Service charges on deposit accounts                                    |  |                                 | 48        |                                |      |   | 53        |  |   | 134       |   |  |   | 159      
|Other service charges and fees                                         |  |                                 | 29        |                                |      |   | 28        |  |   | 85        |   |  |   | 80       
|Net Realized gains on sales of securities                              |  |                                 | 27        |                                |      |   | 25        |  |   | 50        |   |  |   | 32       
|Other operating income                                                 |  |                                 | 84        |                                |      |   | 47        |  |   | 232       |   |  |   | 342      
|                                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Total noninterest income                                               |  |                                 | 188       |                                |      |   | 153       |  |   | 501       |   |  |   | 613      
|                                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Noninterest expense                                                    |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Salaries and employee benefits                                         |  |                                 | 892       |                                |      |   | 778       |  |   | 2,602     |   |  |   | 2,416    
|Occupancy and equipment                                                |  |                                 | 171       |                                |      |   | 172       |  |   | 495       |   |  |   | 545      
|Foreclosed Assets, Net                                                 |  |                                 |          |                                |      |   |          |  |   |          |   |  |   |         
|Other operating expense                                                |  |                                 | 323       |                                |      |   | 282       |  |   | 1,139     |   |  |   | 993      
|                                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Total noninterest expense                                              |  |                                 | 1,386     |                                |      |   | 1,232     |  |   | 4,236     |   |  |   | 3,954    
|                                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Income before income taxes                                             |  |                                 | (126      | )                              |      |   | 481       |  |   | 4         |   |  |   | 1,425    
|Income tax expense (benefit)                                           |  |                                 | (132      | )                              |      |   | 74        |  |   | (276      | ) |  |   | 205      
|                                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Net Income                                                             |  | $                               | 6         |                                |      | $ | 407       |  | $ | 280       |   |  | $ | 1,220    
|                                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|                                                                       |  |                                 |           |                               
|Basic earnings per share                                               |  | $                               |          |                                |      | $ | 0.27      |  | $ | 0.18      |   |  | $ | 0.79     
|                                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Diluted earnings per share                                             |  | $                               |          |                                |      | $ | 0.27      |  | $ | 0.18      |   |  | $ | 0.79     
|                                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Dividends declared per share                                           |  | $                               |          |                                |      | $ |          |  | $ | 0.08      |   |  | $ | 0.29     
|                                                                       |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|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) Nine Months Ended September 30,                          |  | 2009 |         |   | 2008 |  
|Cash flows from operating activities                                    |  |      |         |   |      |   |         |  
|Net income                                                              |  | $    | 280     |   |      | $ | 1,220   |  
|Adjustments to reconcile net income to net cash provided by operations: |  |      |         |   |      |   |         |  
|Depreciation and amortization                                           |  |      | 219     |   |      |   | 235     |  
|Accretion of discounts on securities, net of amortization of premiums   |  |      | 54      |   |      |   | 21      |  
|Provision for loan losses                                               |  |      | 576     |   |      |   | 23      |  
|Net realized (gains) losses on investment securities                    |  |      | (50     | ) |      |   | (32     | )
|Net realized (gains) losses on sale of foreclosed assets                |  |      | (5      | ) |      |   |        |  
|Deferred compensation and pension expense                               |  |      |        |   |      |   | 104     |  
|Changes in operating assets and liabilities:                            |  |      |         |   |      |   |         |  
|Accrued income                                                          |  |      | 187     |   |      |   | (136    | )
|Other assets                                                            |  |      | (417    | ) |      |   | (373    | )
|Accrued interest payable                                                |  |      | (37     | ) |      |   | 1       |  
|Other liabilities                                                       |  |      | (204    | ) |      |   | 87      |  
|                                                                        |  |      |         |   |      |   |         |  
|Net cash provided by operating activities                               |  |      | 603     |   |      |   | 1,150   |  
|                                                                        |  |      |         |   |      |   |         |  
|Cash flows from investing activities                                    |  |      |         |   |      |   |         |  
|Net (increase) decrease in interest-bearing deposits in banks           |  |      | (257    | ) |      |   | 9,716   |  
|Net (increase) decrease in federal funds sold                           |  |      | (7,300  | ) |      |   | 5,350   |  
|Purchases of available for sale securities                              |  |      | (12,584 | ) |      |   | (11,823 | )
|Sales of available for sale securities                                  |  |      | 1,988   |   |      |   |        |  
|Maturities, calls and paydowns of available for sale securities         |  |      | 11,698  |   |      |   | 8,179   |  
|Purchases of held to maturity securities                                |  |      | (1,209  | ) |      |   | (410    | )
|Maturities, calls and paydowns of held to maturity securities           |  |      | 2,411   |   |      |   | 2,712   |  
|Call (purchase) of restricted equity securities                         |  |      | (41     | ) |      |   | 2       |  
|Proceeds from the sale of foreclosed properties                         |  |      | 146     |   |      |   |        |  
|Net (increase) decrease in loans                                        |  |      | (7,087  | ) |      |   | (21,655 | )
|Net purchases of bank premises and equipment                            |  |      | (66     | ) |      |   | (26     | )
|                                                                        |  |      |         |   |      |   |         |  
|Net cash (used) by investing activities                                 |  |      | (12,301 | ) |      |   | (7,955  | )
|                                                                        |  |      |         |   |      |   |         |  
|Cash flows from financing activities                                    |  |      |         |   |      |   |         |  
|Net increase in noninterest-bearing deposits                            |  |      | (266    | ) |      |   | (1,675  | )
|Net increase in interest-bearing deposits                               |  |      | 12,294  |   |      |   | 8,238   |  
|Dividends Paid                                                          |  |      | (123    | ) |      |   | (445    | )
|                                                                        |  |      |         |   |      |   |         |  
|Net cash provided by financing activities                               |  |      | 11,905  |   |      |   | 6,118   |  
|                                                                        |  |      |         |   |      |   |         |  
|Net increase in cash and cash equivalents                               |  |      | 207     |   |      |   | (687    | )
|Cash and cash equivalents, beginning                                    |  |      | 3,299   |   |      |   | 4,526   |  
|                                                                        |  |      |         |   |      |   |         |  
|Cash and cash equivalents, ending                                       |  | $    | 3,506   |   |      | $ | 3,839   |  
|                                                                        |  |      |         |   |      |   |         |  
|                                                                        |  |     
|Supplemental disclosures of cash flow information                       |  |      |         |   |      |   |         |  
|Interest paid                                                           |  | $    | 3,864   |   |      | $ | 4,351   |  
|                                                                        |  |      |         |   |      |   |         |  
|Income taxes paid                                                       |  | $    | 14      |   |      | $ | 430     |  
|                                                                        |  |      |         |   |      |   |         |  
|                                                                        |  |     
|Supplemental disclosures of noncash activities                          |  |      |         |   |      |   |         |  
|Other real estate acquired in settlement of loans                       |  | $    | 123     |   |      | $ |        |  
|                                                                        |  |      |         |   |      |   |         |  

See Notes to Consolidated Financial Statements.



5



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all of the disclosures and notes required by generally accepted accounting
principles. In the opinion of management, all material adjustments (which are of a normal recurring nature) considered necessary for a fair presentation have been made. The results for the interim period are not necessarily indicative of the results
to be expected for the entire year or any other interim period. The information reported herein should be read in conjunction with the Notes to Consolidated Financial Statements included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2008. Certain previously reported amounts have been reclassified to conform to current presentations.

Principles of Consolidation

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

Cash and Cash
Equivalents

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

Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure
through November 11, 2009, the date the financial statements were issued.

Note 2. Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:



|                                               |  |      |       |   |      |   |       |  
|---------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|Nine months ended September 30, (In thousands) |  | 2009 |       |   | 2008 |  
|                                               |  |     
|Balance, at January 1                          |  | $    | 1,659 |   |      | $ | 1,669 |  
|Provision charged to expense                   |  |      | 576   |   |      |   | 23    |  
|Recoveries of amounts previously charged off   |  |      | 10    |   |      |   | 9     |  
|Loans charged off                              |  |      | (85   | ) |      |   | (50   | )
|                                               |  |      |       |   |      |   |       |  
|Balance, at September 30,                      |  | $    | 2,160 |   |      | $ | 1,651 |  
|                                               |  |      |       |   |      |   |       |  

Note 3. Commitments and Contingencies

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



|                             |  |      |        |      |   |       
|---------------------------- |  | ---- | ------ | ---- | - | ------
|(In thousands)               |  | 2009 |        | 2008
|                             |  |     
|Commitments to extend credit |  | $    | 22,783 |      | $ | 13,140
|Standby letters of credit    |  |      | 924    |      |   | 326   
|                             |  |      |        |      |   |       
|Total                        |  | $    | 23,707 |      | $ | 13,466
|                             |  |      |        |      |   |       



6



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)



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 September 30, (In thousands) |  | 2009 |      |   | 2008 |  
|                                                |  |     
|Service cost                                    |  | $    | 45   |   |      | $ | 39   |  
|Interest cost                                   |  |      | 53   |   |      |   | 51   |  
|Expected return on plan assets                  |  |      | (37  | ) |      |   | (55  | )
|Amortization of net obligation at transition    |  |      | (1   | ) |      |   | (1   | )
|Amortization of prior service cost              |  |      | 1    |   |      |   | 1    |  
|Recognized net actuarial loss                   |  |      | 12   |   |      |   |     |  
|                                                |  |      |      |   |      |   |      |  
|Net periodic benefit cost                       |  | $    | 73   |   |      | $ | 35   |  
|                                                |  |      |      |   |      |   |      |  
|                                                |  |     
|Nine months ended September 30, (In thousands)  |  | 2009 |      |   | 2008 |  
|                                                |  |     
|Service cost                                    |  | $    | 135  |   |      | $ | 117  |  
|Interest cost                                   |  |      | 159  |   |      |   | 153  |  
|Expected return on plan assets                  |  |      | (111 | ) |      |   | (165 | )
|Amortization of net obligation at transition    |  |      | (3   | ) |      |   | (3   | )
|Amortization of prior service cost              |  |      | 3    |   |      |   | 3    |  
|Recognized net actuarial loss                   |  |      | 36   |   |      |   |     |  
|                                                |  |      |      |   |      |   |      |  
|Net periodic benefit cost                       |  | $    | 219  |   |      | $ | 105  |  
|                                                |  |      |      |   |      |   |      |  

As of September 30, 2009, the employer contributions amount of $254 thousand, previously
disclosed in the Company financial statements for the year ended December 31, 2008, has been made.

Note 5. Fair Value

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



|                                                          |  |                    |         |                   |   |                |  |           |         |  |   |        
|--------------------------------------------------------- |  | ------------------ | ------- | ----------------- | - | -------------- |  | --------- | ------- |  | - | -------
|(In thousands)                                            |  | September 30, 2009 |         | December 31, 2008
|                                                          |  | CarryingAmount     |         | FairValue         |   | CarryingAmount |  | FairValue
|                                                          |  |                    |         |                  
|Financial assets                                          |  |                    |         |                   |   |                |  |           |         |  |   |        
|Cash and due from banks                                   |  | $                  | 3,506   |                   | $ | 3,506          |  | $         | 3,299   |  | $ | 3,299  
|Interest-bearing deposits with banks                      |  |                    | 484     |                   |   | 484            |  |           | 227     |  |   | 227    
|Federal funds sold                                        |  |                    | 20,175  |                   |   | 20,175         |  |           | 12,875  |  |   | 12,875 
|Securities, available for sale                            |  |                    | 28,109  |                   |   | 28,109         |  |           | 28,868  |  |   | 28,868 
|Securities, held to maturity                              |  |                    | 15,301  |                   |   | 15,780         |  |           | 16,506  |  |   | 16,642 
|Restricted equity securities                              |  |                    | 575     |                   |   | 575            |  |           | 534     |  |   | 534    
|Total loans                                               |  |                    | 154,810 |                   |   | 156,015        |  |           | 147,921 |  |   | 150,621
|                                                          |  |                    |         |                  
|Financial liabilities                                     |  |                    |         |                   |   |                |  |           |         |  |   |        
|Deposits                                                  |  |                    | 201,041 |                   |   | 203,361        |  |           | 189,013 |  |   | 191,267
|Off-balance sheet assets (liabilities)                    |  |                    |         |                   |   |                |  |           |         |  |   |        
|Commitments to extend credit and standby letter of credit |  |                    |        |                   |   |               |  |           |        |  |   |       



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)

Note 5. Fair Value (continued)



Effective January 1, 2008, the Company adopted FASB ASC Topic 820, Fair Value Measurements and
Disclosures (ASC 820), which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. ASC 820 requires disclosures about the fair value of assets and liabilities recognized in the
balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available for sale investment securities) or on a nonrecurring basis (for example, impaired loans).

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.

The Company utilizes fair value measurements to record fair value
adjustments to certain assets and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis.

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

Fair Value Hierarchy

Under ASC 820, the Company groups assets and liabilities at fair value in three levels, based on
the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value. These levels are:



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

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

Investment Securities Available for Sale

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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)

Note 5. Fair Value (continued)



Loans

The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is
probable that payment of interest and principle will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with the
Receivables Topic of the FASB ASC. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those
impaired loans not requiring a specific allowance represents loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. In accordance with ASC 820, impaired loans where an allowance is
established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observerable market price or a current appraised value, the Company records the loan as
nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as
nonrecurring Level 3.

Foreclosed Assets

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

Assets and Liabilities Recorded as Fair Value on a
Recurring Basis

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



|                                         |  |       |        |         |   |         |  |         |        |  |   |  
|---------------------------------------- |  | ----- | ------ | ------- | - | ------- |  | ------- | ------ |  | - | -
|(In Thousands) September 30, 2009        |  | Total |        | Level 1 |   | Level 2 |  | Level 3
|                                         |  |       |        |        
|Investment securities available for sale |  | $     | 28,109 |         | $ |        |  | $       | 28,109 |  | $ | 
|                                         |  |       |        |         |   |         |  |         |        |  |   |  
|                                         |  |       |        |        
|Total assets at fair value               |  | $     | 28,109 |         | $ |        |  | $       | 28,109 |  | $ | 
|                                         |  |       |        |         |   |         |  |         |        |  |   |  

Assets and Liabilities Recorded as Fair Value on a Nonrecurring Basis

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



|                                  |  |       |       |         |   |         |  |         |       |  |   |  
|--------------------------------- |  | ----- | ----- | ------- | - | ------- |  | ------- | ----- |  | - | -
|(In Thousands) September 30, 2009 |  | Total |       | Level 1 |   | Level 2 |  | Level 3
|                                  |  |       |       |        
|Impaired Loans                    |  | $     | 3,874 |         |   |        |  | $       | 3,874 |  | $ | 
|Other real estate owned           |  |       | 271   |         |   |        |  |         | 271   |  |   | 
|                                  |  |       |       |         |   |         |  |         |       |  |   |  
|                                  |  |       |       |        
|Total assets at fair value        |  | $     | 4,145 |         | $ |        |  | $       | 4,145 |  | $ | 
|                                  |  |       |       |         |   |         |  |         |       |  |   |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)



Note 6. Securities

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



|                                  |  |               |        |                 |   |                  |  |           |       |  |   |       
|--------------------------------- |  | ------------- | ------ | --------------- | - | ---------------- |  | --------- | ----- |  | - | ------
|September 30, 2009 (In thousands) |  | AmortizedCost |        | UnrealizedGains |   | UnrealizedLosses |  | FairValue
|                                  |  |               |        |                
|Available for sale                |  |               |        |                 |   |                  |  |           |       |  |   |       
|Government sponsored enterprises  |  | $             | 3,916  |                 | $ | 8                |  | $         | 490   |  | $ | 3,434 
|State and municipal securities    |  |               | 2,418  |                 |   | 93               |  |           |      |  |   | 2,511 
|Mortgage-backed securities        |  |               | 19,151 |                 |   | 294              |  |           | 88    |  |   | 19,357
|Other securities                  |  |               | 3,054  |                 |   |                 |  |           | 247   |  |   | 2,807 
|                                  |  |               |        |                 |   |                  |  |           |       |  |   |       
|                                  |  | $             | 28,539 |                 | $ | 395              |  | $         | 825   |  | $ | 28,109
|                                  |  |               |        |                 |   |                  |  |           |       |  |   |       
|Held to maturity                  |  |               |        |                 |   |                  |  |           |       |  |   |       
|State and municipal securities    |  | $             | 15,268 |                 | $ | 513              |  | $         | 34    |  | $ | 15,747
|Mortgage-backed securities        |  |               | 33     |                 |   |                 |  |           |      |  |   | 33    
|                                  |  |               |        |                 |   |                  |  |           |       |  |   |       
|                                  |  | $             | 15,301 |                 | $ | 513              |  | $         | 34    |  | $ | 15,780
|                                  |  |               |        |                 |   |                  |  |           |       |  |   |       
|                                  |  |               |        |                
|December 31, 2008 (In thousands)  |  |               |        |                 |   |                  |  |          
|                                  |  |               |        |                
|Available for sale                |  |               |        |                 |   |                  |  |           |       |  |   |       
|Government sponsored enterprises  |  | $             | 6,733  |                 | $ | 30               |  | $         | 518   |  | $ | 6,245 
|State and municipal securities    |  |               | 2,918  |                 |   | 30               |  |           | 5     |  |   | 2,943 
|Mortgage-backed securities        |  |               | 16,942 |                 |   | 140              |  |           | 117   |  |   | 16,965
|Other securities                  |  |               | 3,049  |                 |   | 51               |  |           | 385   |  |   | 2,715 
|                                  |  |               |        |                 |   |                  |  |           |       |  |   |       
|                                  |  | $             | 29,642 |                 | $ | 251              |  | $         | 1,025 |  | $ | 28,868
|                                  |  |               |        |                 |   |                  |  |           |       |  |   |       
|Held to maturity                  |  |               |        |                 |   |                  |  |           |       |  |   |       
|State and municipal securities    |  | $             | 16,468 |                 | $ | 283              |  | $         | 146   |  | $ | 16,605
|Mortgage-backed securities        |  |               | 38     |                 |   |                 |  |           | 1     |  |   | 37    
|                                  |  |               |        |                 |   |                  |  |           |       |  |   |       
|                                  |  | $             | 16,506 |                 | $ | 283              |  | $         | 147   |  | $ | 16,642
|                                  |  |               |        |                 |   |                  |  |           |       |  |   |       

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

Investment securities with amortized cost of approximately $5.6 million and $7.0 million at September 30, 2009 and December 31, 2008,
respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

Gross realized gains and
losses for the three and nine-month periods ended September 30, 2009 and 2008:



|                                              |  |                                 |    |                                |   |      |  |      |    |  |   |   
|--------------------------------------------- |  | ------------------------------- | -- | ------------------------------ | - | ---- |  | ---- | -- |  | - | --
|                                              |  | Three Months EndedSeptember 30, |    | Nine Months EndedSeptember 30,
|                                              |  | 2009                            |    | 2008                           |   | 2009 |  | 2008
|(In thousands)                                |  |                                 |    |                                |   |      |  |     
|Realized gains, available for sale securities |  | $                               | 27 |                                | $ |     |  | $    | 48 |  | $ | 6 
|Realized gains, held to maturity securities   |  |                                 |   |                                |   | 25   |  |      | 2  |  |   | 26
|                                              |  |                                 |    |                                |   |      |  |      |    |  |   |   
|                                              |  | $                               | 27 |                                | $ | 25   |  | $    | 50 |  | $ | 32
|                                              |  |                                 |    |                                |   |      |  |      |    |  |   |   



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)

Note 6. Securities (continued)



The scheduled maturities of debt securities available for sale and held to maturity at
September 30, 2009 were as follows:



|                                       |  |                    |        |                  |   |               |  |            |        |  |   |       
|-------------------------------------- |  | ------------------ | ------ | ---------------- | - | ------------- |  | ---------- | ------ |  | - | ------
|                                       |  | Available for Sale |        | Held to Maturity
|                                       |  | AmortizedCost      |        | Fair Value       |   | AmortizedCost |  | Fair Value
|(In thousands)                         |  |                    |        |                  |   |               |  |           
|Due in one year or less                |  | $                  |       |                  | $ |              |  | $          | 863    |  | $ | 873   
|Due after one year through five years  |  |                    | 1,337  |                  |   | 1,139         |  |            | 5,159  |  |   | 5,371 
|Due after five years through ten years |  |                    | 3,820  |                  |   | 3,628         |  |            | 5,471  |  |   | 5,654 
|Due after ten years                    |  |                    | 23,382 |                  |   | 23,342        |  |            | 3,808  |  |   | 3,882 
|                                       |  |                    |        |                  |   |               |  |            |        |  |   |       
|                                       |  | $                  | 28,539 |                  | $ | 28,109        |  | $          | 15,301 |  | $ | 15,780
|                                       |  |                    |        |                  |   |               |  |            |        |  |   |       

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

The following tables show the unrealized losses and related fair values in the
Companys held to maturity and available for sale investment securities portfolios. This information is aggregated by investment category and by the length of time that individual securities have been in a continuous unrealized loss position at
September 30, 2009 and December 31, 2008 respectively.



|                                      |  |                     |       |                   |   |           |  |                  |       |           |   |                  |  |   |        |  |   |      
|------------------------------------- |  | ------------------- | ----- | ----------------- | - | --------- |  | ---------------- | ----- | --------- | - | ---------------- |  | - | ------ |  | - | -----
|                                      |  | Less Than 12 Months |       | 12 Months or More |   | Total    
|September 30, 2009 (In thousands)     |  | FairValue           |       | UnrealizedLosses  |   | FairValue |  | UnrealizedLosses |       | FairValue |   | UnrealizedLosses
|                                      |  |                     |       |                   |   |          
|Government sponsored enterprises      |  | $                   | 1,265 |                   | $ | 6         |  | $                | 516   |           | $ | 484              |  | $ | 1,781  |  | $ | 490  
|State and municipal securities        |  |                     | 776   |                   |   | 34        |  |                  |      |           |   |                 |  |   | 776    |  |   | 34   
|Mortgage- backed securities           |  |                     | 3,979 |                   |   | 43        |  |                  | 561   |           |   | 45               |  |   | 4,540  |  |   | 88   
|Other Securities                      |  |                     | 925   |                   |   | 109       |  |                  | 1,383 |           |   | 138              |  |   | 2,308  |  |   | 247  
|                                      |  |                     |       |                   |   |           |  |                  |       |           |   |                  |  |   |        |  |   |      
|Total temporarily impaired securities |  | $                   | 6,945 |                   | $ | 192       |  | $                | 2,460 |           | $ | 667              |  | $ | 9,405  |  | $ | 859  
|                                      |  |                     |       |                   |   |           |  |                  |       |           |   |                  |  |   |        |  |   |      
|                                      |  |                     |      
|                                      |  | Less Than 12 Months |       | 12 Months or More |   | Total    
|December 31, 2008 (In thousands)      |  | FairValue           |       | UnrealizedLosses  |   | FairValue |  | UnrealizedLosses |       | FairValue |   | UnrealizedLosses
|                                      |  |                     |       |                   |   |          
|Government sponsored enterprises      |  | $                   | 481   |                   | $ | 4         |  | $                | 486   |           | $ | 514              |  | $ | 967    |  | $ | 518  
|State and municipal securities        |  |                     | 3,413 |                   |   | 96        |  |                  | 645   |           |   | 55               |  |   | 4,058  |  |   | 151  
|Mortgage- backed securities           |  |                     | 3,409 |                   |   | 94        |  |                  | 1,545 |           |   | 24               |  |   | 4,954  |  |   | 118  
|Other Securities                      |  |                     | 1,135 |                   |   | 385       |  |                  |      |           |   |                 |  |   | 1,135  |  |   | 385  
|                                      |  |                     |       |                   |   |           |  |                  |       |           |   |                  |  |   |        |  |   |      
|Total temporarily impaired securities |  | $                   | 8,438 |                   | $ | 579       |  | $                | 2,676 |           | $ | 593              |  | $ | 11,114 |  | $ | 1,172
|                                      |  |                     |       |                   |   |           |  |                  |       |           |   |                  |  |   |        |  |   |      

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

At September 30, 2009 the Company had 4 government-sponsored securities with an aggregate unrealized loss of approximately $490 thousand, 2 state and municipal securities with an aggregate unrealized
loss of approximately $34 thousand, 14 mortgaged-backed securities with an aggregate unrealized loss of approximately $88 thousand and 6 other securities with an aggregate unrealized loss of approximately $248 thousand. Management does not believe
that gross unrealized losses, which totals 8.37% of the amortized costs of the related investment securities, represent an other-than-temporary impairment.

At December 31, 2008, the Company had 3 government-sponsored securities with an aggregate unrealized loss of approximately $518 thousand, 13 state and municipal securities with an aggregate
unrealized loss of approximately $151 thousand, 35 mortgaged-backed securities with an aggregate unrealized loss of approximately $118 thousand and 4 other securities with an aggregate unrealized loss of approximately $385 thousand. Management does
not believe that gross unrealized losses, which totals 10.5% of the amortized costs of the related investment securities, represent an other-than-temporary impairment.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)



Note 7. Recent Accounting Pronouncements

The following is a summary of recent authoritative pronouncements:

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards
CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles  a replacement of FASB Statement No. 162, (SFAS 168). SFAS 168 establishes the FASB Accounting Standards CodificationTM(Codification) as the source of authoritative generally accepted accounting principles (GAAP)
for nongovernmental entities. The Codification does not change GAAP. Instead, it takes the thousands of individual pronouncements that currently comprise GAAP and reorganizes them into approximately 90 accounting Topics, and displays all Topics
using a consistent structure. Contents in each Topic are further organized first by Subtopic, then Section and finally Paragraph. The Paragraph level is the only level that contains substantive content. Citing particular content in the Codification
involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure. FASB suggests that all citations begin with FASB ASC, where ASC stands for Accounting Standards Codification.
Changes to the ASC subsequent to June 30, 2009 are referred to as Accounting Standards Updates (ASU).

In conjunction with
the issuance of SFAS 168, the FASB also issued its first Accounting Standards Update No. 2009-1, Topic 105 Generally Accepted Accounting Principles (ASU 2009-1) which includes SFAS 168 in its entirety as a
transition to the ASC. ASU 2009-1 is effective for interim and annual periods ending after September 15, 2009 and will not have an impact on the Companys financial position or results of operations but will change the referencing system
for accounting standards. Certain of the following pronouncements were issued prior to the issuance of the ASC and adoption of the ASUs. For such pronouncements, citations to the applicable Codification by Topic, Subtopic and Section are provided
where applicable in addition to the original standard type and number.

In December 2008 the FASB issued FASB Staff Position (FSP)
SFAS 132(R)-1 (FASB ASC 715-20-65), Employers Disclosures about Postretirement Benefit Plan Assets, (FSP SFAS 132(R)-1). This FSP provides guidance on an employers disclosures about plan assets of a defined
benefit pension or other postretirement plan. The objective of the FSP is to provide the users of financial statements with an understanding of: (a) how investment allocation decisions are made, including the factors that are pertinent to an
understanding of investment policies and strategies; (b) the major categories of plan assets; (c) the inputs and valuation techniques used to measure the fair value of plan assets; (d) the effect of fair value measurements using
significant unobservable inputs (Level 3) on changes in plan assets for the period; and (e) significant concentrations of risk within plan assets. The FSP also requires a nonpublic entity, as defined in Statement of Financial Accounting
Standard (SFAS) 132, to disclose net periodic benefit cost for each period for which a statement of income is presented. FSP SFAS 132(R)-1 is effective for fiscal years ending after December 15, 2009. The Staff Position will require
the Company to provide additional disclosures related to its benefit plan.

The FASB issued SFAS 166 (not yet reflected in FASB ASC),
Accounting for Transfers of Financial Assets  an amendment of FASB Statement No. 140, (SFAS 166) in June 2009. SFAS 166 limits the circumstances in which a financial asset should be derecognized when the transferor
has not transferred the entire financial asset by taking into consideration the transferors continuing involvement. The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a
transferors beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The concept of a qualifying special-purpose entity is removed from SFAS 140 along with the exception from applying
FIN 46(R). The standard is effective for the first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited. The Company does not expect the standard to have any impact on the Companys financial statements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)

Note 7. Recent Accounting Pronouncements (continued)



SFAS 167 (not yet reflected in FASB ASC), Amendments to FASB Interpretation No. 46(R),
(SFAS 167) was also issued in June 2009. The standard amends FIN 46(R) to require a company to analyze whether its interest in a variable interest entity (VIE) gives it a controlling financial interest. A company must assess
whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to direct the activities of the VIE that significantly impact its economic performance. Ongoing reassessments
of whether a company is the primary beneficiary is also required by the standard. SFAS 167 amends the criteria to qualify as a primary beneficiary as well as how to determine the existence of a VIE. The standard also eliminates certain exceptions
that were available under FIN 46(R). SFAS 167 is effective as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and
for interim and annual reporting periods thereafter. Earlier application is prohibited. Comparative disclosures will be required for periods after the effective date. The Company does not expect the standard to have any impact on the Companys
financial position.

The FASB issued ASU 200905, Fair Value Measurements and Disclosures (Topic 820)  Measuring Liabilities
at Fair Value in August, 2009 to provide guidance when estimating the fair value of a liability. When a quoted price in an active market for the identical liability is not available, fair value should be measured using (a) the quoted
price of an identical liability when traded as an asset; (b) quoted prices for similar liabilities or similar liabilities when traded as assets; or (c) another valuation technique consistent with the principles of Topic 820 such as an
income approach or a market approach. If a restriction exists that prevents the transfer of the liability, a separate adjustment related to the restriction is not required when estimating fair value. The ASU was effective October 1, 2009 for
the Company and will have no impact on financial position or operations.

ASU 2009-12, Fair Value Measurements and Disclosures (Topic
820)  Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), issued in September, 2009, allows a company to measure the fair value of an investment that has no readily determinable fair market value
on the basis of the investees net asset value per share as provided by the investee. This allowance assumes that the investee has calculated net asset value in accordance with the GAAP measurement principles of Topic 946 as of the reporting
entitys measurement date. Examples of such investments include investments in hedge funds, private equity funds, real estate funds and venture capital funds. The update also provides guidance on how the investment should be classified within
the fair value hierarchy based on the value for which the investment can be redeemed. The amendment is effective for interim and annual periods ending after December 15, 2009 with early adoption permitted. The Company does not have investments
in such entities and, therefore, there will be no impact to our financial statements.

ASU 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements  a consensus of the FASB Emerging Issues Task Force was issued in October, 2009 and provides guidance on accounting for products or services (deliverables) separately rather than as a combined
unit utilizing a selling price hierarchy to determine the selling price of a deliverable. The selling price is based on vendor-specific evidence, third-party evidence or estimated selling price. The amendments in the Update are effective
prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 with early adoption permitted. The Company does not expect the update to have an impact on its financial statements.

Issued October, 2009, ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other
Financing amends ASC Topic 470 and provides guidance for accounting and reporting for own-share lending arrangements issued in contemplation of a convertible debt issuance. At the date of issuance, a share-lending arrangement entered into on
an entitys own shares should be measured at fair value in accordance with Topic 820 and recognized as an issuance cost, with an offset to additional paid-in capital. Loaned shares are excluded from basic and diluted earnings per share unless
default of the share-lending arrangement occurs. The amendments also require several disclosures including a description and the terms of the arrangement and the reason for entering into the arrangement. The effective dates of the amendments are
dependent upon the date the share-lending arrangement was entered into and include retrospective application for arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009. The Company has no plans to
issue convertible debt and, therefore, does not expect the update to have an impact on its financial statements.

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



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##### Table of Contents

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

Cardinal Bankshares Corporation (the Company and Cardinal Bankshares), a Virginia corporation, is a bank holding company
headquartered in Floyd, Virginia. The Company serves the marketplace primarily through its wholly owned banking subsidiary, Bank of Floyd (the Bank), a Virginia chartered, Federal Reserve member commercial bank. The Banks deposits
are insured by the Federal Deposit Insurance Corporation (the FDIC) to the extent provided by law. Bank of Floyd is supervised and examined by the Federal Reserve and the Bureau of Financial Institutions of the State Corporation
Commission of the Commonwealth of Virginia (the SCC). At September 30, 2009, the Bank operated eight branch facilities in the counties of Floyd, Montgomery, Roanoke, Pulaski and Carroll. The main office is in Floyd with a limited
service office located in Willis. The Roanoke offices are in the Cave Spring and Tanglewood Mall areas of Roanoke County. The Salem office is located on West Main Street in Salem, Virginia. The Hillsville office is located in Carroll County. The
Christiansburg office serves Montgomery County. The Banks Pulaski County office is located in the Fairlawn community.

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

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

Critical Accounting Policy

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

FINANCIAL CONDITION

Total assets as of September 30, 2009 were $233.2 million, an increase of 5.5% or $12.2 million from year-end 2008. Total loans increased 4.6% or $6.9 million during the first nine-months of this year to $154.8 million due to increased
loan activity caused by financing of loans moved from other banks.

The investment securities portfolio reflected a decrease of 4.1% or $1.9
million during the first nine months of the year due to calls on securities for the purpose of refinancing at lower interest rates. Federal funds sold increased $7.3 million during the first nine months of the year as a result of increased deposits,
which management believes reflects the flight of depositors from banks which have suffered near catastrophic losses to smaller banks which are well capitalized and offer safety and soundness. In addition, due to low interest rates, many government
and municipal securities are being refinanced causing an influx of cash to the Company as these securities payoff early, which in turn makes finding securities to reinvest the cash within Company guidelines of safety, soundness, competitive interest
rate and reasonable time frame difficult during the current economic climate.

As of September 30, 2009, total deposits were $201.0
million, up approximately 6.3% or $12.0 million compared to year-end 2008. Non-interest-bearing core deposits decreased slightly to $26.7 million as compared to $27.0 million at year-end 2008. Interest-bearing deposits increased 7.5% or $12.3
million to $174.3 million due to depositors moving funds over concerns about investment markets and safety and soundness. Deposits greater than $100 thousand amounted to $73.0 million at September 30, 2009 as compared to $57.1 million at
year-end 2008.

Stockholders equity was $29.8 million as of September 30, 2009 compared to $29.4 million as of December 31,
2008. Net income of $280 thousand for the period less dividends paid of $123 thousand combined with a decrease in accumulated other comprehensive loss of $227 thousand accounted for the increase in stockholders equity.



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RESULTS OF OPERATIONS

Net income for the nine months ended September 30, 2009 was $280 thousand, down 77.0% compared to $1.2 million for the nine months ended
September 30, 2008. Diluted earnings per share decreased 77.2% to $.18 for the nine months ended September 30, 2009. Diluted earnings per share for the same period a year earlier was $.79. Net income for the quarter ended
September 30, 2009 was $6 thousand, down 98.5% compared to $407 thousand for the same quarter last year. Additions of $446 thousand to the provision for loan losses during the quarter ending September 30, 2009, representing a 471.8%
increase over the same quarter last year, was the primary factor in reduced earnings for the quarter. The decrease in net income for the first nine months of 2009 was the result of decreased earnings on deposits with banks and federal funds sold due
to continued historically low federal funds interest rates of between 0.00% and 0.25%, decreased loan income due to compressed interest margins, additions to the provision for loan losses, the expensing of the one-time special FDIC assessment paid
on September 30, 2009, and payment of the employer contributions for the defined benefit pension plan discussed in Note 4 above.

Total
interest income for the nine months ended September 30, 2009 decreased $999 thousand to $8.1 million, a decrease of 10.9% over the same prior year period. Total interest income for the quarter ended September 30, 2009 decreased $303
thousand to $2.8 million, a decrease of 9.8% over the same prior year quarter. This resulted primarily from decreased earnings on loans and loan fees due to compressed interest margins and decreased earnings on federal funds sold and deposits with
banks due to the continuation of historically low interest rates. Noninterest income for the nine-month period decreased 18.2% to $501 thousand versus the same time period for the prior year. Noninterest income for the quarter increased 22.8% to
$188 thousand versus the same prior year quarter. Prior year noninterest income included recognition of life insurance proceeds of $40 thousand and a reimbursement from the Commonwealth of Virginia Department of Housing and Community Development
Enterprise Zone Real Property Investment Grant of $69 thousand for the addition of the Fairlawn branch due to Pulaski County being classified as a distressed county due to high unemployment. Total interest expense for the nine-months period and
quarter decreased $525 thousand to $3.8 million and $183 thousand to $1.3 million, respectively; reflecting the decline of rates paid on interest-bearing deposits accounts even though total deposits increased. Noninterest expense increased $282
thousand to $4.2 million for the first nine months of 2009 as compared to the same period in 2008. Noninterest expense for the quarter increased $154 thousand to $1.4 million versus the same quarter in the previous year. The increase was the result
of an additional expense for the defined benefit pension plan contribution made in 2009 as a result of decreased earnings on assets already in the plan (See Note 4 above), increased FDIC premiums and the expense of the special FDIC assessment.

Due to decreased earnings for the quarter and nine month periods ending September 30, 2009, and the exemption of federal income taxes on
municipal investment securities held by the Company, an income tax benefit of $132 thousand for the quarter and $276 thousand for the first nine months of 2009 resulted. During the same periods for 2008, an income tax of $74 thousand and $205
thousand respectively, were expensed.

The FDIC has proposed a prepayment of the FDIC premium paid by banks for the
4thquarter of 2009 and the years 2010, 2011 and 2012, to
be paid on December 30, 2009, based on total domestic deposits as of the September 30, 2009 Call Report. In addition, the criteria for calculating the proposed premium includes annualized growth of 5% and an increase of 3 basis points of
the current FDIC premium rate for 2011 and 2012. Based on internal Company calculations the estimated prepayment would be $1.2 million. Due to the current economic climate and the number of banks anticipated to fail, the increased FDIC premium rate
is expected to stay in place for the foreseeable future along with the potential for additional special assessments.



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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 nine months of 2009 the provision for loan losses was $576
thousand as compared to $23 thousand provision for the same period in 2008. The provision was increased to offset $85 thousand in write-downs incurred during the first nine-months of 2009, $279 thousand for increased impaired loans and $190 thousand
in the general reserve due to continued economic uncertainty. 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 2009 maintains the allowance at a level adequate to cover potential losses.

The allowance for
loan losses totaled $2.2 million at September 30, 2009. The allowance for loan losses to period end loans was 1.40% at September 30, 2009 compared to 1.12% and 1.13% at December 31, 2008 and September 30, 2008, respectively. The
Company recovered balances previously charged off on loans in the amount of $10 thousand during the first nine months of 2009. This compares with recoveries for the nine months ended September 30, 2008 of $9 thousand. The Company charged-off
loans in the amount of $85 thousand during the first nine months of 2009 as compared to $50 thousand in charge-offs for the same nine months of 2008.

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

Nonperforming assets, which consist of nonaccrual loans, loans 90 days or more past due and other real estate owned, were $3.3 million as of
September 30, 2009 compared to $3.1 million as of December 31, 2008. The increase in nonperforming assets occurred in the nonaccrual category as the current economic climate persists, creating cash flow issues for certain loan customers.
Management is taking aggressive actions to mitigate any material losses related to nonperforming assets. As of September 30, 2009 the Companys impaired loans with a valuation allowance amounted to $4.4 million, an increase of $1.7 million
from December 31, 2008. The valuation allowance related to the impaired loans was $494 thousand at September 30, 2009 and $461 thousand at December 31, 2008.

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.



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CAPITAL RESOURCES

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

The Companys Tier I capital position was $30.9 million at September 30, 2009, or 18.46% of risk-weighted assets. Total risk-based
capital was $33.0 million or 19.75% 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 September 30, 2009.

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 September 30, 2009, the Companys leverage capital ratio was 13.58%.

During the first nine-months of 2009 Cardinal Bankshares has seen growth in both deposits and loans, in addition to increasing the provision for loan
losses, while maintaining its history of being well capitalized and maintaining strong liquidity far exceeding minimum standards and equal or greater than its peers.

A WARNING ABOUT FORWARD-LOOKING STATEMENTS

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

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

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

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

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



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##### Table of Contents

|Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

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



|Item 4T. | CONTROLS AND PROCEDURES
|-------- | -----------------------

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

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

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



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##### Table of Contents

Part II. OTHER INFORMATION



|Item:    1 | Legal proceedings - None
|---------- | ------------------------



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

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



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



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



|4 | 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 Chief Financial Officer
Pursuant To Rule 13a-14(a)

32.1  Certification of Chief Executive Officer and Chief Financial Officer Pursuant To 18
U.S.C. Section 1350



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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, President & Chief Executive Officer
|                                             
|/S/    J. ALAN
DICKERSON                     
|J. Alan Dickerson                            
|Vice President & Chief Financial Officer     

Date: November 11, 2009



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