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U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



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FORM 10-QSB



QUARTERLY REPORT PURSUANT TO

SECTION 13 or 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the
quarter ended September 30, 2003



Commission File No.
0-28780



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CARDINAL BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)



|Virginia (State of Incorporation) |  | 54-1804471 (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)



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Indicate by a 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 ̈.



The number of shares outstanding of the issuers Common Stock, $10 par
value as of November 12, 2003, was 1,535,733.

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CARDINAL BANKSHARES CORPORATION



FORM 10-QSB



September 30, 2003



INDEX



|         |  |                                                                                                                      |  | Page
|-------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ----
|Part I.  |  | Financial Information                                                                                                |  |     
|         |  |                                                                                                                     
|Item 1.  |  | Consolidated Balance Sheets as of September 30, 2003 (Unaudited) and December 31, 2002                               |  | 3   
|         |  |                                                                                                                     
|         |  | Consolidated Statements of Income for the three months and nine months ended September 30, 2003 and 2002 (Unaudited) |  | 4   
|         |  |                                                                                                                     
|         |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 (Unaudited)              |  | 5   
|         |  |                                                                                                                     
|         |  | Notes to Consolidated Statements (Unaudited)                                                                         |  | 6   
|         |  |                                                                                                                     
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                |  | 6   
|         |  |                                                                                                                     
|Item 3.  |  | Controls and Procedures                                                                                              |  | 10  
|         |  |                                                                                                                     
|Part II. |  | Other Information                                                                                                    |  |     
|         |  |                                                                                                                     
|Item 1.  |  | Legal Proceedings                                                                                                    |  | 11  
|         |  |                                                                                                                     
|Item 2.  |  | Changes in Securities                                                                                                |  | 11  
|         |  |                                                                                                                     
|Item 3.  |  | Defaults Upon Senior Securities                                                                                      |  | 11  
|         |  |                                                                                                                     
|Item 4.  |  | Results of Votes of Security Holders                                                                                 |  | 11  
|         |  |                                                                                                                     
|Item 5.  |  | Other Information                                                                                                    |  | 11  
|         |  |                                                                                                                     
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                                     |  | 11  
|         |  |                                                                                                                     
|         |  | (a) Exhibits                                                                                                         |  | 11  
|         |  |                                                                                                                     
|         |  | (b) Reports on Form 8-K                                                                                              |  | 11  



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CONSOLIDATED BALANCE SHEETS

Cardinal Bankshares Corporation and Subsidiary



|                                                                                                               |  | (Unaudited)       |         |   |                  |  
|-------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | -
|(In thousands, except share data)                                                                              |  | September 30,2003 |         |   | December 31,2002 |  
|ASSETS                                                                                                         |  |                   |         |   |                  |  
|Cash and due from banks                                                                                        |  | $                 | 3,958   |   |                  | $
|Interest-bearing deposits                                                                                      |  |                   | 5,300   |   |                  |  
|Federal funds sold                                                                                             |  |                   | 9,175   |   |                  |  
|Investment securities available for sale, at fair value                                                        |  |                   | 21,977  |   |                  |  
|Investment securities held to maturity (fair value, $19,133  September 30, 2003; $18,044  December 31,
2002) |  |                   | 18,159  |   |                  |  
|Restricted equity securities                                                                                   |  |                   | 598     |   |                  |  
|Total loans                                                                                                    |  |                   | 120,100 |   |                  |  
|Allowance for loan losses                                                                                      |  |                   | (1,710  | ) |                  |  
|                                                                                                               |  |                   |         |   |                  |  
|Net loans                                                                                                      |  |                   | 118,390 |   |                  |  
|                                                                                                               |  |                   |         |   |                  |  
|Bank premises and equipment, net                                                                               |  |                   | 2,356   |   |                  |  
|Accrued interest receivable                                                                                    |  |                   | 1,012   |   |                  |  
|Other real estate owned                                                                                        |  |                   | 383     |   |                  |  
|Bank owned life insurance                                                                                      |  |                   | 4,276   |   |                  |  
|Other assets                                                                                                   |  |                   | 1,493   |   |                  |  
|                                                                                                               |  |                   |         |   |                  |  
|Total assets                                                                                                   |  | $                 | 187,077 |   |                  | $
|                                                                                                               |  |                   |         |   |                  |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                           |  |                   |         |   |                  |  
|Noninterest-bearing deposits                                                                                   |  | $                 | 23,055  |   |                  | $
|Interest-bearing deposits                                                                                      |  |                   | 136,340 |   |                  |  
|                                                                                                               |  |                   |         |   |                  |  
|Total deposits                                                                                                 |  |                   | 159,395 |   |                  |  
|                                                                                                               |  |                   |         |   |                  |  
|Securities sold under agreements to repurchase                                                                 |  |                   | 2,443   |   |                  |  
|Accrued interest payable                                                                                       |  |                   | 163     |   |                  |  
|Other liabilities                                                                                              |  |                   | 760     |   |                  |  
|                                                                                                               |  |                   |         |   |                  |  
|Total liabilities                                                                                              |  |                   | 162,761 |   |                  |  
|                                                                                                               |  |                   |         |   |                  |  
|Commitments and contingent liabilities                                                                         |  |                   |         |   |                  |  
|STOCKHOLDERS EQUITY                                                                                           |  |                   |         |   |                  |  
|Common stock, par value $10 per share, 5,000,000 shares authorized, 1,535,733 shares issued and outstanding    |  |                   | 15,357  |   |                  |  
|Paid-in capital                                                                                                |  |                   | 2,925   |   |                  |  
|Retained earnings                                                                                              |  |                   | 5,847   |   |                  |  
|Accumulated other comprehensive income, net                                                                    |  |                   | 187     |   |                  |  
|                                                                                                               |  |                   |         |   |                  |  
|Total stockholders equity                                                                                     |  |                   | 24,316  |   |                  |  
|                                                                                                               |  |                   |         |   |                  |  
|Total liabilities and stockholders equity                                                                     |  | $                 | 187,077 |   |                  | $
|                                                                                                               |  |                   |         |   |                  |  



See Notes to
Consolidated Financial Statements.



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CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

Cardinal Bankshares Corporation and Subsidiary



|                                                           |  | Three Months EndedSeptember 30, |           | Nine Months EndedSeptember 30,
|---------------------------------------------------------- |  | ------------------------------- | --------- | ------------------------------
|(In thousands, except share data)                          |  | 2003                            |           | 2002                          
|Interest Income                                            |  |                                 |           |                               
|Interest and fees on loans                                 |  | $                               | 1,947     |                               
|Interest on securities:                                    |  |                                 |           |                               
|U.S. government and agencies                               |  |                                 | 192       |                               
|States and political subdivisions                          |  |                                 | 229       |                               
|Interest on federal funds sold                             |  |                                 | 26        |                               
|Deposits with banks                                        |  |                                 | 13        |                               
|                                                           |  |                                 |           |                               
|Total interest income                                      |  |                                 | 2,407     |                               
|                                                           |  |                                 |           |                               
|Interest Expense                                           |  |                                 |           |                               
|Interest on deposits                                       |  |                                 | 905       |                               
|Interest on securities sold under agreements to repurchase |  |                                 | 15        |                               
|                                                           |  |                                 |           |                               
|Total interest expense                                     |  |                                 | 920       |                               
|                                                           |  |                                 |           |                               
|Net interest income                                        |  |                                 | 1,487     |                               
|Provision for loan losses                                  |  |                                 |          |                               
|                                                           |  |                                 |           |                               
|Net interest income after provision for loan losses        |  |                                 | 1,487     |                               
|                                                           |  |                                 |           |                               
|Noninterest Income                                         |  |                                 |           |                               
|Service charges on deposit accounts                        |  |                                 | 77        |                               
|Other service charges and fees                             |  |                                 | 21        |                               
|Securities gains                                           |  |                                 |          |                               
|Other operating income                                     |  |                                 | 136       |                               
|                                                           |  |                                 |           |                               
|Total noninterest income                                   |  |                                 | 234       |                               
|                                                           |  |                                 |           |                               
|Noninterest Expense                                        |  |                                 |           |                               
|Salaries and benefits                                      |  |                                 | 572       |                               
|Occupancy and equipment expense                            |  |                                 | 144       |                               
|Foreclosed assets, net                                     |  |                                 | 1         |                               
|Other operating expense                                    |  |                                 | 306       |                               
|                                                           |  |                                 |           |                               
|Total noninterest expense                                  |  |                                 | 1,023     |                               
|                                                           |  |                                 |           |                               
|Earnings                                                   |  |                                 |           |                               
|Income before income taxes                                 |  |                                 | 698       |                               
|Income tax expense                                         |  |                                 | 149       |                               
|                                                           |  |                                 |           |                               
|Net Income                                                 |  | $                               | 549       |                               
|                                                           |  |                                 |           |                               
|Earnings Per Share                                         |  |                                 |           |                               
|Net income per common share:                               |  |                                 |           |                               
|Basic                                                      |  | $                               | 0.36      |                               
|Diluted                                                    |  | $                               | 0.36      |                               
|Average shares outstanding:                                |  |                                 |           |                               
|Basic                                                      |  |                                 | 1,535,733 |                               
|Diluted                                                    |  |                                 | 1,535,733 |                               



See Notes to
Consolidated Financial Statements.



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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Cardinal Bankshares Corporation and Subsidiary



|(In thousands) Nine Months Ended September 30,                                    |  | 2003 |         |   | 2002 |  
|--------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | -
|Cash flows from operating activities                                              |  |      |         |   |      |  
|Net income                                                                        |  | $    | 1,518   |   |      | $
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |         |   |      |  
|Depreciation and amortization                                                     |  |      | 200     |   |      |  
|Accretion of discount on investment securities                                    |  |      | (15     | ) |      |  
|Provision for loan losses                                                         |  |      | 30      |   |      |  
|Net realized (gains) losses on investment securities                              |  |      |        |   |      |  
|Deferred compensation and pension expense                                         |  |      | 134     |   |      |  
|Changes in operating assets and liabilities:                                      |  |      |         |   |      |  
|(Increase) decrease in accrued interest receivable                                |  |      | 37      |   |      |  
|(Decrease) in accrued interest payable                                            |  |      | (18     | ) |      |  
|Net change in other operating assets and liabilities                              |  |      | 157     |   |      |  
|                                                                                  |  |      |         |   |      |  
|Net cash provided by operating activities                                         |  |      | 2,043   |   |      |  
|                                                                                  |  |      |         |   |      |  
|Cash flows from investing activities                                              |  |      |         |   |      |  
|Net (increase) decrease in interest-bearing deposits in banks                     |  |      | 2,765   |   |      |  
|Net (increase) decrease in federal funds sold                                     |  |      | (525    | ) |      |  
|Purchase of investment securities                                                 |  |      | (14,815 | ) |      |  
|Sale of investment securities                                                     |  |      |        |   |      |  
|Proceeds from maturity and redemption of investment securities                    |  |      | 19,559  |   |      |  
|Proceeds from redemption of restricted equity securities                          |  |      | 266     |   |      |  
|Net (increase) decrease in loans                                                  |  |      | (5,096  | ) |      |  
|Net purchases of bank premises and equipment                                      |  |      | (395    | ) |      |  
|Investment in bank owned life insurance                                           |  |      | (1,127  | ) |      |  
|                                                                                  |  |      |         |   |      |  
|Net cash (used) provided by investing activities                                  |  |      | 632     |   |      |  
|                                                                                  |  |      |         |   |      |  
|Financing Activities                                                              |  |      |         |   |      |  
|Net increase in noninterest-bearing deposits                                      |  |      | 2,019   |   |      |  
|Net (decrease) in interest-bearing deposits                                       |  |      | (8,016  | ) |      |  
|Net increase in securities sold under agreements to repurchase                    |  |      | 2,443   |   |      |  
|Dividends paid                                                                    |  |      | (338    | ) |      |  
|                                                                                  |  |      |         |   |      |  
|Net cash (used) by financing activities                                           |  |      | (3,892  | ) |      |  
|                                                                                  |  |      |         |   |      |  
|Net (decrease) increase in cash and cash equivalents                              |  |      | (1,217  | ) |      |  
|Cash and cash equivalents at beginning of year                                    |  |      | 5,175   |   |      |  
|                                                                                  |  |      |         |   |      |  
|Cash and cash equivalents at end of year                                          |  | $    | 3,958   |   |      | $
|                                                                                  |  |      |         |   |      |  
|Supplemental disclosures of cash flow information                                 |  |      |         |   |      |  
|Interest paid                                                                     |  | $    | 2,962   |   |      | $
|Income taxes paid                                                                 |  | $    | 444     |   |      | $
|                                                                                  |  |      |         |   |      |  



See Notes to
Consolidated Financial Statements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note 1. Basis of Presentation



The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-QSB 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 for the year ended December 31, 2002. Certain previously reported amounts have been reclassified to conform to current presentations.



Note 2. Allowance for Loan Losses



Changes in the allowance for loan losses are as follows:



|Nine months ended September 30, (In thousands) |  | 2003 |       |   | 2002 |  
|---------------------------------------------- |  | ---- | ----- | - | ---- | -
|Balance, at January 1                          |  | $    | 1,769 |   |      | $
|Provision charged to expense                   |  |      | 30    |   |      |  
|Recoveries of amounts previously charged off   |  |      | 17    |   |      |  
|Loans charged off                              |  |      | (106  | ) |      |  
|                                               |  |      |       |   |      |  
|Balance, at September 30,                      |  | $    | 1,710 |   |      | $
|                                               |  |      |       |   |      |  



Note 3. Commitments and Contingencies



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



|(In thousands)               |  | 2003 |       | 2002
|---------------------------- |  | ---- | ----- | ----
|Commitments to extend credit |  | $    | 3,132 |     
|Standby letters of credit    |  |      | 743   |     
|                             |  |      |       |     
|Total                        |  | $    | 3,875 |     
|                             |  |      |       |     



|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, 2003, the Bank operated five branch facilities in the counties of Floyd, Montgomery, Roanoke and Carroll. The main office is in Floyd with a limited service office located in Willis.
The Roanoke office is in the Cave Spring area of Roanoke County. The Hillsville office is located in Carroll County. The Christiansburg office serves Montgomery County.



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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, the making of commercial, real estate, personal, home improvement, automobile and other installment loans. The Company also offers other related services, such as travelers checks, safe deposit
boxes, depositor transfer, customer note payment, collection, notary public, escrow, drive-in and ATM facilities, and other customary banking services. Cardinal Bankshares does not offer trust services.



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



FINANCIAL CONDITION



Total assets as of September 30, 2003 were $187.1 million, down 1.2% from year-end 2002. Total loans grew by $5.1 million or 4.5% to $120.1
million, driven primarily by increased commercial real estate activity in the form of participation loans purchased from other financial institutions. The investment securities portfolio reflected a net decrease of $4.9 million due principally to
two factors that are the direct result of the sustained low interest rate environment. Issuer calls of U.S. Government Agency securities totaling approximately $6.0 million, and increased speeds with which homeowners are paying down their mortgages
resulted in a decline of approximately $10.1 million in the mortgage-backed securities portfolio. Purchases of investment securities totaling approximately $14.8 million partially offset the reduction in the overall portfolio brought about by these
two factors. Interest-bearing deposits held at the Federal Home Loan Bank were lowered by $2.7 million to $5.3 million due mainly to the Companys strategic reduction of rate sensitive deposit balances in light of continued moderate loan
demand.



As of September 30, 2003, total deposits were $159.4 million,
reflecting a decrease of $6.0 million, or 3.6% compared to year-end 2002. Non-interest-bearing core deposits increased $2.0 million, or 9.6%, while interest-bearing deposits declined $8.0 million, or 5.6% due in part to a shift of approximately $2.4
million in deposits to securities sold under agreements to repurchase. As mentioned previously, the remainder of the reduction in the rate sensitive liabilities or interest-bearing deposits was driven by the strategic position taken by the Company
to be less competitive on rate sensitive deposits in view of the modest loan demand that is felt to be primarily the result of the sluggish economy.



Stockholders equity was $24.3 million as of September 30, 2003 compared to $23.2 million as of December 31, 2002. The $1.1 million increase in stockholders
equity is the combined result of $1.5 million in net income and the declaration of $338 thousand in cash dividends during the nine months ended September 30, 2003.



RESULTS OF OPERATIONS



Net income for the three months ended September 30, 2003 was $549 thousand compared to $659 thousand for the three months ended September 30, 2002. Diluted earnings per
share were $.36 for the three months ended September 30, 2003 compared to $.43 for the same prior year period.



Net income for the nine months ended September 30, 2003 was $1.5 million compared to $1.9 million for the nine months ended September 30, 2002. Diluted earnings per share were $.99 and $1.22 for the nine months ended
September 30, 2003 and 2002, respectively.



The decline in net income and
profitability for the nine-month period ended September 30, 2003 was primarily attributable to two events, both of which are considered to be uncharacteristic of the Companys normal results of operation. The first is the Companys
recognition during the period of approximately $255 thousand, or $168 thousand net of taxes, in expenses related to the proposed merger with MountainBank Financial Corporation. On February 26, 2003, the Registrants shareholders failed to
ratify and approve the proposed merger. The second event relates to expenses incurred defending a complaint filed with the U.S. Department of Labor (DOL) by a former employee claiming that his discharge violated the Sarbanes-Oxley Act of
2002. Based upon information provided by Cardinal Bankshares and



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the former employee, the DOL dismissed the claims on March 18, 2003, finding that the employee was not dismissed for
protected activity but for legitimate business reasons. The employee subsequently appealed the dismissal. Under DOL procedures, the appeal automatically resulted in a trial of the former employees allegations before an administrative law
judge. The trial took place in late August after extensive discovery and briefing by the parties. No decision has yet been rendered by the court, although the Company believes that the former employees allegations have no merit. Expenses
related to this matter, principally legal, totaled approximately $136 thousand, or $90 thousand net of taxes, for the nine-month period ended September 30, 2003. The combined cost of these two events totaled approximately $390 thousand, or $258
thousand net of taxes. Excluding the effect of the proposed merger expenses and the costs associated with the employee matter; Cardinal Bankshares would have reported net income of $1.8 million, or $1.16 per diluted share.



Total interest income for the three months ended September 30, 2003 declined $423 thousand to
$2.4 million, a decrease of 14.9% over the same prior year quarter. This was primarily the result of the 50 basis point decrease in the prime rate of interest from the second quarter of 2002 to the third quarter of 2003. Noninterest income increased
25.1% to $234 thousand, with residual income from leasing activities and income from bank owned life insurance generating the majority of the increase. Total interest expense decreased $246 thousand to $920 thousand, reflecting the effect of lower
levels of interest-bearing deposits and interest rates paid thereon. Noninterest expense increased $145 thousand, or 16.5%, to $1.0 million for the three months ended September 30, 2003, due primarily to the increased legal expense mentioned above,
higher pension plan expense and the effect of an increase in the 2003 medical insurance premium rate of approximately 21% over the 2002 rate.



Interest income for the nine months ended September 30, 2003 was $7.5 million, down 14.2% from the $8.7 million reported a year earlier. As mentioned previously, this is
largely the combined result of the continued weakening of loan demand in the market Cardinal Bankshares serves, and the effect of the overall lowering of interest rates on the variable or floating rate portion of the Companys loan portfolio as
it re-prices in the current declining rate environment. While total interest expense fell $897 thousand for the comparative nine-month period ended September 30 2003, the decline was not sufficient to offset the $1.2 million reduction in interest
income that drove the decline of $342 thousand in net interest income for the period. Total noninterest income grew $124 thousand, or 24.8% to $624 thousand primarily due to increased residual income from leasing activities and income from bank
owned life insurance. Total noninterest expense increased to $3.2 million, up $690 thousand from the $2.5 million reported a year earlier. As mentioned above, the merger related expenses and the legal expense incurred regarding the matter related to
the former employee accounted for the largest portion of the increase. Premiums paid on bank owned life insurance policies, purchased subsequent to the first quarter of 2002, and increased pension expenses were the main reasons for the
period-to-period increase. While these uncharacteristic expenses dampened the Companys reported earnings for the periods being reported, Cardinal Bankshares core earnings remained sound during what has been one of the most extended
challenging interest rate and restrained economic environments in recent banking history.



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.



The allowance for loan losses totaled $1.7 million at September 30, 2003. The allowance for loan losses to period end loans was 1.42% at September 30, 2003 compared to 1.54% and 1.51% at December 31, 2002 and
September 30, 2002, respectively. Net charge-offs for the nine months ended September 30, 2003 were $89 thousand compared to $62 thousand for the corresponding 2002 period.



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



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provision are based upon managements evaluation of the risk characteristics of the loan portfolio under current
economic conditions with consideration to such factors as financial condition of the borrowers, collateral values, growth and composition of the loan portfolio, the relationship of the allowance to outstanding loans and delinquency trends.



While management uses all available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in economic conditions. Various regulatory agencies, as an integral part of their examination process, periodically review the Companys allowance for loan losses. Such
agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.



Nonperforming assets, which consist of nonaccrual loans, loans 90 days or more past due, and other real estate owned, were $3.2 million as
of September 30, 2003 compared $755 thousand as of December 31, 2002. Approximately $2.8 million of the nonperforming asset total relates to one loan which has an 80% SBA guarantee. Management does not expect to incur any material losses related to
nonperforming assets.



LIQUIDITY



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



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



CAPITAL RESOURCES



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



The Companys Tier I capital position was $24.1 million at September 30, 2003, or 18.90% of risk-weighted assets. Total risk-based capital was $25.7 million or
20.15% 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. Under
current risk-based capital standards, all banks are required to have Tier I capital of at least 4% and total capital of 8%.



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, 2003, the Companys leverage capital ratio was 12.78%.



A WARNING ABOUT FORWARD-LOOKING STATEMENTS



This Form 10-QSB 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 such management. Forward-looking statements include statements preceded by, followed by or that include the words believes, expects,
estimates, anticipates, plans, or similar expressions. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update publicly any of them in light of new
information or future events.



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



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



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



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



|Item 3. |  | CONTROLS AND PROCEDURES
|------- |  | -----------------------



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



The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goal under every potential condition, regardless of how remote. In addition, the operation of any system of controls
and procedures is dependent upon the employees responsible for executing it. While we have evaluated the operation of our disclosure controls and procedures and found them effective, there can be no assurance that they will succeed in every instance
to achieve their objective.



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Part II. OTHER INFORMATION



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



David
E. Welch, former Assistant Vice President, Chief Financial Officer, and Cashier of both Cardinal Bankshares and Bank of Floyd was discharged on October 1, 2002, by the Cardinal Bankshares Board of Directors.



Welch subsequently filed a complaint with the U.S. Department of Labor
(DOL) and served it on or about December 12, 2002, claiming that his discharge violated the Sarbanes-Oxley Act of 2002. Based upon information provided by Cardinal Bankshares and Welch, the DOL dismissed the claims on March 18, 2003,
finding that Welch was not dismissed for protected activity but for legitimate business reasons. Claims against Bank of Floyd were dismissed for the additional reason that Bank of Floyd is not a public company and is not subject to the Act.



Welch subsequently appealed the dismissal. Under DOL
procedures, the appeal automatically resulted in a trial of Welchs allegation before an administrative law judge. No decision has yet been rendered by the court. Cardinal Bankshares believes there is no merit in Welchs allegations.



| | 2 | Changes in securities  None
| | - | ----------------------------



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



| | 4 | Results of votes of security holders  None
| | - | -------------------------------------------



| | 5 | Other information  None
| | - | ------------------------



| | 6 | Exhibits and Reports on Form 8-K
| | - | --------------------------------



(a)
Exhibits 



|31.1  |  | Certification Pursuant To 18 U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|------ |  | --------------------------------------------------------------------------------------------------------------
|       | 
|31.2  |  | Certification Pursuant To 18 U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|       | 
|32.1  |  | Certification Pursuant To 18 U.S.C. 1350, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



(b)
Reports on Form 8-K - None



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SIGNATURES



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



|CARDINAL BANKSHARES CORPORATION                             
|------------------------------------------------------------
|                                                            
|/s/    Ronald Leon Moore                                    
|                                                            
|Ronald Leon Moore                                           
|Chairman of the Board, President and Chief Executive Officer



|                                                    
|----------------------------------------------------
|                                                    
|/s/    RAY A. FLEMING                               
|                                                    
|Ray A. Fleming                                      
|Executive Vice President and Chief Financial Officer



Date:
November 12, 2003



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