<PAGE>


                                                                    EXHIBIT 13.1

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
2002 ANNUAL REPORT

TABLE OF CONTENTS

Selected Historical Financial Information..................................   2

Letter to Shareholders.....................................................   3

Independent Auditor's Report...............................................   4

Consolidated Balance Sheets................................................   5

Consolidated Statements of Income..........................................   6

Consolidated Statements of Changes in Stockholders' Equity.................   7

Consolidated Statements of Cash Flows......................................   8

Notes to Consolidated Financial Statements.................................   9

Management's Discussion of Financial Condition and Results of Operations...  27

Staff......................................................................  45

Directors and Officers.....................................................  46

Stockholder Information....................................................  47

MARKET FOR THE COMPANY'S COMMON STOCK, RELATED STOCKHOLDER MATTERS, STOCK PRICES
AND DIVIDENDS

The Company's common stock is traded on the OTC Bulletin Board under the symbol
CDBK. As of December 31, 2002, the Company had issued and outstanding 1,535,733
shares of common stock which were held by approximately 710 stockholders of
record.

Set forth below are the high and low (bid quotations/sales prices), known to the
management of the Company, for each quarter in the last three fiscal years,
adjusted for a 3-for-1 stock split, effected in the form of a dividend, on April
25, 2001.

                            2002               2001                2000
                     -----------------   -----------------   -----------------
                      HIGH       LOW      HIGH       LOW      HIGH      LOW
                     -------   -------   -------   -------   -------   -------
First Quarter        $ 17.00   $ 14.80   $ 13.33   $ 12.00   $ 12.25   $ 12.25
Second Quarter         23.00     15.25     15.00     12.67     10.33     10.33
Third Quarter          23.30     22.50     15.25     13.00     10.50     10.50
Fourth Quarter         23.47     22.35     16.00     15.00     11.33     11.33

Cash dividends paid in 2002, 2001 and 2000, were $691 thousand, $645 thousand,
and $582 thousand, respectively.

<PAGE>


CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
SELECTED HISTORICAL FINANCIAL INFORMATION

<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT SHARE AND PER
 SHARE DATA                                  2002            2001            2000            1999            1998
                                          -----------     -----------     -----------     -----------     -----------
<S>                                       <C>             <C>             <C>             <C>             <C>
SUMMARY OF OPERATIONS

   Interest income                        $    11,405     $    12,572     $    11,614     $    10,994     $    11,200
   Interest expense                             4,965           6,474           5,982           5,603           5,797
                                          -----------     -----------     -----------     -----------     -----------
         Net interest income                    6,440           6,098           5,632           5,391           5,403
   Provision for loan losses                      375             442             500             142             175
   Noninterest income                             806             594             500             442             462
   Noninterest expense                          3,756           3,528           3,307           3,076           2,970
   Income taxes                                   729             632             499             650             781
                                          -----------     -----------     -----------     -----------     -----------
         Net income                       $     2,386     $     2,090     $     1,826     $     1,965     $     1,939
                                          ===========     ===========     ===========     ===========     ===========

PER SHARE DATA/1/

   Basic earnings per share               $      1.55     $      1.36     $      1.22     $      1.28     $      1.26
   Diluted earnings per share                    1.55            1.36            1.22            1.28            1.26
   Cash dividends declared                       0.45            0.42            0.39            0.37            0.35
   Book value                                   15.12           13.97           12.81           11.57           11.28

YEAR-END BALANCE SHEET SUMMARY

   Loans, net                             $   113,324     $   113,207     $    92,602     $    87,685     $    85,810
   Securities                                  45,854          45,032          57,303          52,383          41,329
   Total assets                               189,378         185,798         163,240         158,140         153,410
   Deposits                                   165,392         163,468         143,033         139,808         135,211
   Stockholders' equity                        23,219          21,454          19,678          17,758          17,321

   Interest earning assets                $   176,798     $   176,599     $   154,883     $   148,878     $   147,666
   Interest bearing liabilities               144,356         143,361         124,687         123,024         119,657

SELECTED RATIOS

   Return on average assets                       1.3%            1.2%            1.1%            1.3%            1.3%
   Return on average equity                      10.6%           10.0%            9.8%           11.1%           11.5%
   Dividends declared as percent of
    net income                                   29.0%           30.9%           31.9%           28.9%           28.0%
</TABLE>

----------
   /1/  Adjusted for the effects of a 3-for-1 stock split, effected in the
        form of a dividend, in 2001.

                                        2

<PAGE>

                         CARDINAL BANKSHARES CORPORATION
                               Post Office Box 215
                              Floyd, Virginia 24091

To Our Shareholders, Customers and Friends:

It gives me great pleasure to report to you that 2002 was another record year
for Cardinal Bankshares Corporation. To reflect on what was the most profitable
year in our Company's history is particularly satisfying; especially considering
the year was saddled with a very sluggish economy and unsettling business
climate.

Net income for 2002 was $2.4 million, up from $2.1 million earned in 2001. Net
income per diluted share increased 14.0 percent to $1.55 compared to $1.36 for
the prior year. These results produced returns on average assets of 1.29 percent
and on average stockholders' equity of 10.63 percent.

Total assets at year-end were $189.4 million, up almost 2 percent even with the
lackluster business growth primarily attributable to the overall state of our
economy. Total deposits at year-end were $165.4 million.

Stockholders' equity on December 31, 2002 was $23.2 million and our book value
per share was $15.12. The Company's capital position remains strong, and at
year-end the equity to assets and risk-based capital ratios were 12.26 percent
and 19.80 percent, respectively.

Sharing the success of our Company with you, our shareholders, has remained a
high priority at Cardinal Bankshares. This commitment is evidenced by the
consistent growth in dividends, which your Board of Directors raised for the
11th consecutive year during 2002, with an increase of 7.1 percent compared to
2001.

The growth and success experienced in 2002 is the result of the level of support
given by you, our shareholders, customers and friends, and to the dedicated
officers and staff whose honesty, integrity and hard work have made this
organization what it is today. Our thanks are extended to each of you for your
support and for your continued confidence in Cardinal Bankshares Corporation.

Sincerely,


/s/Leon Moore
-------------
Leon Moore
Chairman, President & Chief Executive Officer

                                        3

<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

Board of Directors and Stockholders
Cardinal Bankshares Corporation
Floyd, Virginia

We have audited the consolidated balance sheets of Cardinal Bankshares
Corporation and subsidiaries as of December 31, 2002 and 2001 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cardinal Bankshares
Corporation and subsidiaries at December 31, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.


/s/Larrowe & Company, PLC
-------------------------
Larrowe & Company, PLC

Galax, Virginia
January 10, 2003, except for Note 17, as to which
 the date is February 26, 2003

                                        4

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS)                             2002              2001
-----------------------------------------------     -------------     -------------
<S>                                                 <C>               <C>
ASSETS
Cash and due from banks                             $       5,175     $       3,790
Interest-bearing deposits                                   8,065               196
Federal funds sold                                          8,650            18,990
Investment securities available for sale, at
 fair value                                                27,963            23,651
Investment securities held to maturity                     17,027            19,255
Restricted equity securities                                  864             2,126

Total loans                                               115,093           114,507
Allowance for loan losses                                  (1,769)           (1,300)
                                                    -------------     -------------
     Net loans                                            113,324           113,207
                                                    -------------     -------------

Bank premises and equipment, net                            2,160             2,302
Accrued interest receivable                                 1,049             1,071
Foreclosed properties                                         671                59
Bank owned life insurance                                   3,149                 -
Other assets                                                1,281             1,151
                                                    -------------     -------------
     Total assets                                   $     189,378     $     185,798
                                                    =============     =============

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Noninterest-bearing deposits                        $      21,036     $      20,107
Interest-bearing deposits                                 144,356           143,361
                                                    -------------     -------------
     Total deposits                                       165,392           163,468

Accrued interest payable                                      181               298
Other liabilities                                             586               578
                                                    -------------     -------------
     Total liabilities                                    166,159           164,344
                                                    -------------     -------------

Commitments and contingencies                                   -                 -

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                                           4,667             2,972
Accumulated other comprehensive income                        270               200
                                                    -------------     -------------
     Total stockholders' equity                            23,219            21,454
                                                    -------------     -------------
     Total liabilities and stockholders' equity     $     189,378     $     185,798
                                                    =============     =============
</TABLE>

See Notes to Consolidated Financial Statements

                                        5

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)         2002               2001             2000
-----------------------------------------------     -------------     -------------     -------------

<S>                                                 <C>               <C>               <C>
INTEREST INCOME
   Loans and fees on loans                          $       8,670     $       9,384     $       8,006
   Federal funds sold and securities purchased
    under agreements to resell                                208               277               275
   Investment securities:
      Taxable                                               1,434             1,916             2,349
      Exempt from federal income tax                          974               946               960
   Deposits with banks                                        119                49                24
                                                    -------------     -------------     -------------
         Total interest income                             11,405            12,572            11,614
                                                    -------------     -------------     -------------

INTEREST EXPENSE
   Deposits                                                 4,965             6,471             5,982
   Borrowings                                                   -                 3                 -
                                                    -------------     -------------     -------------
         Total interest expense                             4,965             6,474             5,982
                                                    -------------     -------------     -------------
         Net interest income                                6,440             6,098             5,632

Provision for loan losses                                     375               442               500
                                                    -------------     -------------     -------------
         Net interest income after provision
          for loan losses                                   6,065             5,656             5,132
                                                    -------------     -------------     -------------

NONINTEREST INCOME
   Service charges on deposit accounts                        312               281               233
   Other service charges and fees                              81                77                58
   Net realized gains on sales of securities                   24                44                 -
   Other income                                               389               192               209
                                                    -------------     -------------     -------------
         Total noninterest income                             806               594               500
                                                    -------------     -------------     -------------

NONINTEREST EXPENSE
   Salaries and employee benefits                           2,272             2,160             2,023
   Occupancy and equipment                                    541               523               511
   Foreclosed assets, net                                       3                 7                 1
   Other operating expense                                    940               838               772
                                                    -------------     -------------     -------------
         Total noninterest expense                          3,756             3,528             3,307
                                                    -------------     -------------     -------------
         Income before income taxes                         3,115             2,722             2,325

         Income tax expense                                   729               632               499
                                                    -------------     -------------     -------------
Net income                                          $       2,386     $       2,090     $       1,826
                                                    =============     =============     =============

Basic earnings per share                            $        1.55     $        1.36     $        1.22
                                                    =============     =============     =============
Diluted earnings per share                          $        1.55     $        1.36     $        1.22
                                                    =============     =============     =============
Weighted average basic shares outstanding               1,535,733         1,535,733         1,500,927
                                                    =============     =============     =============
Weighted average diluted shares outstanding             1,535,733         1,535,733         1,500,927
                                                    =============     =============     =============
</TABLE>

See Notes to Consolidated Financial Statements

                                        6

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                             ACCUMULATED
                                                                  ADDITIONAL                    OTHER
                                                       COMMON      PAID-IN      RETAINED    COMPREHENSIVE
(IN THOUSANDS)                                         STOCK       CAPITAL      EARNINGS    INCOME (LOSS)     TOTAL
--------------------------------------------------   ----------   ----------   ----------   -------------   ----------
<S>                                                  <C>          <C>          <C>          <C>             <C>
Balance, December 31, 1999                           $    5,118   $    2,925   $   10,515   $        (800)  $   17,758

COMPREHENSIVE INCOME
Net income                                                    -            -        1,826               -        1,826
Net unrealized securities gains arising during the
 period, net of taxes of $345                                 -            -            -             669          669
                                                                                                            ----------
Total comprehensive income                                                                                       2,495

Cash dividends declared ($0.39 per share)                     -            -         (582)              -         (582)
Common stock purchased                                     (201)           -         (585)              -         (786)
Common stock reissued                                       202            -          591               -          793
                                                     ----------   ----------   ----------   -------------   ----------
Balance, December 31, 2000                                5,119        2,925       11,765            (131)      19,678

COMPREHENSIVE INCOME
Net income                                                    -            -        2,090               -        2,090
Net unrealized securities gains arising during the
 period, net of taxes of $185                                 -            -            -             360          360
Realized securities gains, net of taxes of $(15)              -            -            -             (29)         (29)
                                                                                                            ----------
Total comprehensive income                                                                                       2,421

Cash dividends declared ($0.42 per share)                     -            -         (645)              -         (645)
Stock split, effected in the form of a dividend          10,238            -      (10,238)              -            -
                                                     ----------   ----------   ----------   -------------   ----------
Balance, December 31, 2001                               15,357        2,925        2,972             200       21,454

COMPREHENSIVE INCOME
Net income                                                    -            -        2,386               -        2,386
Net unrealized securities gains arising during the
 period, net of taxes of $44                                  -            -            -              86           86
Realized securities gains, net of taxes of $(8)               -            -            -             (16)         (16)
                                                                                                            ----------
Total comprehensive income                                                                                       2,456

Cash dividends declared ($0.45 per share)                     -            -         (691)              -         (691)
                                                     ----------   ----------   ----------   -------------   ----------
Balance, December 31, 2002                           $   15,357   $    2,925   $    4,667   $         270   $   23,219
                                                     ==========   ==========   ==========   =============   ==========
</TABLE>

See Notes to Consolidated Financial Statements

                                        7

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (IN THOUSANDS)                              2002            2001           2000
--------------------------------------                          --------------   ------------   ------------
<S>                                                             <C>              <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                   $        2,386   $      2,090   $      1,826
   Adjustments to reconcile net income to net cash provided
    by operations:
      Depreciation and amortization                                        262            250            241
      Accretion of discount on securities, net of
       amortization of premiums                                             (5)            (9)            43
      Provision for loan losses                                            375            442            500
      Deferred income taxes                                               (171)           (36)           211
      Net realized (gains) losses on securities                            (24)           (44)             -
      Deferred compensation and pension expense                            (63)             6             (8)
      Changes in assets and liabilities:
         Accrued income                                                     22            217           (115)
         Other assets                                                     (756)         1,110           (999)
         Accrued interest payable                                         (117)            25             35
         Other liabilities                                                  71            316            (74)
                                                                --------------   ------------   ------------
            Net cash provided by operating activities                    1,980          4,367          1,660
                                                                --------------   ------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Net (increase) decrease in interest-bearing deposits in
    banks                                                               (7,869)          (196)         2,000
   Net (increase) decrease in federal funds sold                        10,340        (14,515)         2,500
   Purchases of investment securities                                  (17,255)       (10,266)       (11,237)
   Sales of available for sale securities                                2,020          1,000              -
   Maturities of investment securities                                  14,548         22,092          7,238
   Net increase in loans                                                  (492)       (21,047)        (5,673)
   Net purchases of property and equipment                                (120)           (65)          (283)
   Investment in bank owned life insurance                              (3,000)             -              -
                                                                --------------   ------------   ------------
            Net cash used by investing activities                       (1,828)       (22,997)        (5,455)
                                                                --------------   ------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net increase in noninterest-bearing deposits                            929          1,761          1,563
   Net increase in interest-bearing deposits                               995         18,673          1,663
   Dividends paid                                                         (691)          (645)          (582)
   Common stock purchased                                                    -              -           (786)
   Common stock reissued                                                     -              -            793
                                                                --------------   ------------   ------------
            Net cash provided by financing activities                    1,233         19,789          2,651
                                                                --------------   ------------   ------------
            Net increase (decrease) in cash and cash
             equivalents                                                 1,385          1,159         (1,144)

Cash and cash equivalents, beginning                                     3,790          2,631          3,775
                                                                --------------   ------------   ------------
Cash and cash equivalents, ending                               $        5,175   $      3,790   $      2,631
                                                                ==============   ============   ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
   Interest paid                                                $        5,082  $       6,449  $       5,947
                                                                ==============  =============  =============
   Income taxes paid                                            $          806  $         402  $         390
                                                                ==============  =============  =============

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
 Other real estate acquired in settlement of loans              $            -  $           -  $         256
                                                                ==============  =============  =============
</TABLE>

See Notes to Consolidated Financial Statements

                                        8

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Cardinal Bankshares Corporation (the "Company") was incorporated as a Virginia
corporation on March 12, 1996 to acquire the stock of Bank of Floyd (the
"Bank"). The Bank was acquired by the Company on June 30, 1996.

Bank of Floyd and its wholly-owned subsidiary, FBC, Inc., are incorporated and
operate under the laws of the Commonwealth of Virginia. As a state chartered
Federal Reserve member, the Bank is subject to regulation by the Virginia Bureau
of Financial Institutions and the Federal Reserve. The Bank serves the counties
of Floyd, Carroll, Montgomery, and Roanoke, Virginia and the City of Roanoke,
Virginia, through five banking offices. FBC, Inc.'s assets and operations
consist primarily of annuity sales and minority interests in an insurance
company and a title insurance company.

The accounting and financial reporting policies of the Company conform to
generally accepted accounting principles and general practices within the
financial services industry. Following is a summary of the more significant
policies.

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.

CRITICAL ACCOUNTING POLICIES

The notes to the Company's audited consolidated financial statements contain a
summary of significant accounting policies. Management believes the policies
with respect to the methodology for the determination of the allowance for loan
losses involves a high degree of complexity. Management must make difficult and
subjective judgments which often require assumptions or estimates about highly
uncertain matters. Changes in these judgments, assumptions or estimates could
cause reported results to differ materially. These critical policies and their
application are periodically reviewed with the Audit Committee and Board of
Directors.

BUSINESS SEGMENTS

The Company reports its activities as a single business segment. In determining
proper segment definition, the Company considers the materiality of the
potential segment and components of the business about which financial
information is available and regularly evaluated, relative to resource
allocation and performance assessment.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
the application of certain of its accounting policies that affect the reported
amounts of assets and liabilities, and the disclosure of contingent assets and
liabilities, at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. As a result of
unanticipated events or circumstances, actual results could differ from those
estimates.

Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for loan and
foreclosed real estate losses, management obtains independent appraisals for
significant properties.

The majority of the Company's loan portfolio consists of loans in Southwest
Virginia. Accordingly, the ultimate collectibility of a substantial portion of
the Company's loan portfolio and the recovery of a substantial portion of the
carrying amount of foreclosed real estate are susceptible to changes in local
market conditions. The regional economy is diverse, but is influenced by the
agricultural, textile and governmental segments.

                                        9

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

USE OF ESTIMATES, CONTINUED

While management uses available information to recognize loan and foreclosed
real estate losses, future additions to the allowances may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as a
part of their routine examination process, periodically review the Company's
allowances for loan and foreclosed real estate losses. Such agencies may require
additions to the allowances based on their judgments about information available
to them at the time of their examinations. Because of these factors, it is
reasonably possible that the allowances for loan and foreclosed real estate
losses may change materially in the near term.

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."

TRADING SECURITIES

The Company does not hold securities for short-term resale and therefore does
not maintain a trading securities portfolio.

SECURITIES HELD TO MATURITY

Bonds, notes, and debentures for which the Company has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity or to call dates.

SECURITIES AVAILABLE FOR SALE

Available for sale securities are reported at fair value and consist of bonds,
notes, debentures, and certain equity securities not classified as held to
maturity securities.

Unrealized holding gains and losses, net of tax, on available for sale
securities are reported as a net amount in a separate component of stockholders'
equity. Realized gains and losses on the sale of available for sale securities
are determined using the specific-identification method. Premiums and discounts
are recognized in interest income using the interest method over the period to
maturity or to call dates.

Declines in the fair value of individual held to maturity and available for sale
securities below cost, that are other than temporary, are reflected as
write-downs of the individual securities to fair value. Related write-downs are
included in earnings as realized losses.

LOANS RECEIVABLE

Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off, are reported at their
outstanding principal amount adjusted for charge-offs, the allowance for loan
losses, deferred fees or costs on originated loans, and unamortized premiums or
discounts on purchased loans.

Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan. Discounts and
premiums on any purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts and premiums on any purchased
consumer loans are recognized over the expected lives of the loans using methods
that approximate the interest method.

                                       10

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

LOANS RECEIVABLE, CONTINUED

Interest is accrued and credited to income based on the principal amount
outstanding. The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received. When facts and circumstances indicate the borrower has
regained the ability to meet required payments, the loan is returned to accrual
status. Past due status of the loan is determined based on contractual terms.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectability
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.

The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer and residential loans for impairment disclosures.

PROPERTY AND EQUIPMENT

Land is carried at cost. Bank premises, furniture and equipment are carried at
cost, less accumulated depreciation and amortization computed principally by the
straight-line method over the following estimated useful lives:

                                                         YEARS
                                                         -----
                  Buildings and improvements             20-40
                  Furniture and equipment                 5-20

FORECLOSED PROPERTIES

Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value less cost to sell at the date
of foreclosure. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of carrying amount or
fair value less cost to sell. Revenue and expenses from operations and changes
in the valuation allowance are included in operations on foreclosed real estate.
The historical average holding period for such properties is in excess of 23
months.

                                       11

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

PENSION PLAN

A noncontributory defined benefit pension plan is provided for all employees who
meet eligibility requirements. To be eligible, an employee must be 21 years of
age and have completed one year of service. Plan benefits are based on final
average compensation and years of service. The plan is funded in compliance with
the Employee Retirement Income Security Act of 1974 and the Internal Revenue
Code of 1986, as amended.

TRANSFERS OF FINANCIAL ASSETS

Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.

INCOME TAXES

Provision for income taxes is based on amounts reported in the statements of
income (after exclusion of non-taxable income such as interest on state and
municipal securities) and consists of taxes currently due plus deferred taxes on
temporary differences in the recognition of income and expense for tax and
financial statement purposes. Deferred tax assets and liabilities are included
in the financial statements at currently enacted income tax rates applicable to
the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred taxes
assets and liabilities are adjusted through the provision for income taxes.

Deferred income tax liability relating to unrealized appreciation (or the
deferred tax asset in the case of unrealized depreciation) on investment
securities available for sale is recorded in other liabilities (assets). Such
unrealized appreciation or depreciation is recorded as an adjustment to equity
in the financial statements and not included in income determination until
realized. Accordingly, the resulting deferred income tax liability or asset is
also recorded as an adjustment to equity.

BASIC EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period, after giving retroactive effect to stock splits and stock dividends.

DILUTED EARNINGS PER SHARE

The computation of diluted earnings per share is similar to the computation of
basic earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if dilutive
potential common shares had been issued. The numerator is adjusted for any
changes in income or loss that would result from the assumed conversion of those
potential common shares. For the years presented, the Company has no potentially
dilutive securities outstanding.

COMPREHENSIVE INCOME

Annual comprehensive income reflects the change in the Company's equity during
the year arising from transactions and events other than investments by, and
distributions to, stockholders. It consists of net income plus certain other
changes in assets and liabilities that are reported as separate components of
stockholders' equity rather than as income or expense.

                                       12

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

FINANCIAL INSTRUMENTS

Derivatives that are used as part of the asset/liability management process are
linked to specific assets or liabilities and have high correlation between the
contract and the underlying item being hedged, both at inception and throughout
the hedge period. In addition, forwards and option contracts must reduce an
exposure's risk, and for hedges of anticipatory transactions, the significant
terms and characteristics of the transaction must be identified and the
transactions must be probable of occurring. All derivative financial instruments
held or issued by the Bank are held or issued for purposes other than trading.

In the ordinary course of business the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and commercial and standby letters of credit. Such financial instruments
are recorded in the financial statements when they are funded or related fees
are incurred or received.

The Company does not utilize interest-rate exchange agreements or interest-rate
futures contracts.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

Cash and due from banks: The carrying amounts reported in the balance sheet for
these items approximate their fair values.

Interest-bearing deposits with banks: Fair values for time deposits are
estimated using a discounted cash flow analysis that applies interest rates
currently offered on certificates to a schedule of aggregated contractual
maturities on such time deposits.

Federal funds sold: The carrying amounts reported in the balance sheet for these
items approximate their fair values.

Available for sale, held to maturity and restricted equity securities: Fair
values for securities, excluding restricted equity securities, are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. The carrying values of restricted equity securities approximate
fair values.

Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans are estimated using discounted cash flow
analysis, based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk characteristics.
Fair values for impaired loans are estimated using discounted cash flow analysis
or underlying collateral values, where applicable. The carrying amount of
accrued interest receivable approximates its fair value.

Deposit liabilities: The fair values disclosed for demand and savings deposits
are, by definition, equal to the amount payable on demand at the reporting date.
The fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated contractual maturities on such time
deposits. The carrying amount of accrued interest payable approximates fair
value.

                                       13

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED

Short-term and long-term debt: The carrying amounts of short-term debt
approximate their fair values. The fair values for long-term debt are estimated
using discounted cash flow analysis, based on interest rates currently being
offered for loans with similar terms.

Other liabilities: For fixed-rate loan commitments, fair value considers the
difference between current levels of interest rates and the committed rates. The
carrying amounts of other liabilities approximates fair value.

RECLASSIFICATION

Certain reclassifications have been made to the prior years' financial
statements to place them on a comparable basis with the current year. Net income
and stockholders' equity previously reported were not affected by these
reclassifications.

NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS

To comply with banking regulations, the Company is required to maintain certain
average cash reserve balances. The daily average cash reserve requirement was
approximately $980 thousand and $857 thousand for the two week periods including
December 31, 2002 and 2001, respectively.

NOTE 3. 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 at December 31 follow:

<TABLE>
<CAPTION>
                                            AMORTIZED      UNREALIZED      UNREALIZED        FAIR
2002 (IN THOUSANDS)                           COST            GAINS          LOSSES          VALUE
---------------------------------------   -------------   -------------   ------------   -------------

<S>                                       <C>             <C>             <C>            <C>
AVAILABLE FOR SALE
   U.S. Government agency securities      $       6,785   $          39   $          -   $       6,824
   State and municipal securities                 2,629              71              -           2,700
   Mortgage-backed securities                    15,641             353             54          15,940
   Other securities                               2,499              67             67           2,499
                                          -------------   -------------   ------------   -------------
                                          $      27,554   $         530   $        121   $      27,963
                                          =============   =============   ============   =============

HELD TO MATURITY
   State and municipal securities         $      17,017   $       1,017   $          -   $      18,034
   Mortgage-backed securities                        10               -              -              10
                                          -------------   -------------   ------------   -------------
                                          $      17,027   $       1,017   $          -   $      18,044
                                          =============   =============   ============   =============
</TABLE>

                                       14

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. SECURITIES, CONTINUED

<TABLE>
<CAPTION>
                                            AMORTIZED      UNREALIZED      UNREALIZED        FAIR
2001 (IN THOUSANDS)                           COST            GAINS          LOSSES          VALUE
---------------------------------------   -------------   -------------   ------------   -------------
<S>                                       <C>             <C>             <C>            <C>
AVAILABLE FOR SALE
   U.S. Government agency securities      $       2,850   $          51   $          -   $       2,901
   State and municipal securities                 1,480              19             33           1,466
   Mortgage-backed securities                    16,734             271             48          16,957
   Other securities                               2,284              65             22           2,327
                                          -------------   -------------   ------------   -------------
                                          $      23,348   $         406   $        103   $      23,651
                                          =============   =============   ============   =============

HELD TO MATURITY
   State and municipal securities         $      18,916   $         386   $        100   $      19,202
   Mortgage-backed securities                       339               1              -             340
                                          -------------   -------------   ------------   -------------
                                          $      19,255   $         387   $        100   $      19,542
                                          =============   =============   ============   =============
</TABLE>

Restricted equity securities consist of investments in stock of the Federal Home
Loan Bank of Atlanta ("FHLB") and The Federal Reserve 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 $11.2 million and
$10.5 million at December 31, 2002 and 2001, 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 years ended December 31 are as follows:

(IN THOUSANDS)                                     2002       2001        2000
----------------------------------------------   --------   ---------   --------

Realized gains, available for sale securities    $     24   $      44   $      -
Realized losses, available for sale securities          -           -          -
                                                 --------   ---------   --------
                                                 $     24   $      44   $      -
                                                 ========   =========   ========

The scheduled maturities of debt securities available for sale and held to
maturity at December 31, 2002, were as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)                               AVAILABLE FOR SALE               HELD TO MATURITY
--------------------------------------   --------------------------    -----------------------------
                                          AMORTIZED        FAIR          AMORTIZED          FAIR
                                            COST           VALUE            COST            VALUE
                                         -----------   ------------    -------------    ------------

<S>                                      <C>           <C>             <C>              <C>
Due in one year or less                  $       751   $        758    $         686    $        693
Due after one year through five years          6,619          6,699            5,257           5,553
Due after five years through ten years         3,184          3,241            6,826           7,289
Due after ten years                           17,000         17,265            4,258           4,509
                                         -----------   ------------    -------------    ------------
                                         $    27,554   $     27,963    $      17,027    $     18,044
                                         ===========   ============    =============    ============
</TABLE>

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

                                       15

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4.  LOANS RECEIVABLE

The major components of loans in the Consolidated Balance Sheets are summarized
below:

<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS)                                      2002              2001
--------------------------                                  ---------------  ----------------
<S>                                                         <C>              <C>
Commercial                                                  $         6,773  $          3,791
Real estate
   Construction and land development                                  2,188            13,263
   Residential, 1-4 families                                         29,811            30,475
   Residential, 5 or more families                                    3,238               842
   Farmland                                                           3,148             4,156
   Nonfarm, nonresidential                                           65,892            56,446
Agricultural                                                          1,082             1,069
Consumer                                                              3,069             3,998
Other                                                                   230               851
                                                            ---------------  ----------------
     Gross loans                                                    115,431           114,891
Unearned discount and net deferred loan fees and costs                 (338)             (384)
                                                            ---------------  ----------------
     Total loans                                                    115,093           114,507
Allowance for loan losses                                            (1,769)           (1,300)
                                                            ---------------  ----------------
     Net loans                                              $       113,324  $        113,207
                                                            ===============  ================
</TABLE>

NOTE 5.  ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (IN THOUSANDS)              2002              2001             2000
--------------------------------------         ----------------  ---------------  ----------------
<S>                                            <C>               <C>              <C>
Balance, at January 1                          $          1,300  $         1,134  $          1,661

Provision charged to expense                                375              442               500
Recoveries of amounts charged off                           190              208                58
Amounts charged off                                         (96)            (484)           (1,085)
                                               ----------------  ---------------  ----------------
Balance, at December 31                        $          1,769  $         1,300  $          1,134
                                               ================  ===============  ================
</TABLE>

The following is a summary of information pertaining to impaired loans at
December 31:

<TABLE>
<CAPTION>
(IN THOUSANDS)                                                                          2002             2001
-------------------------------------------                                       ---------------  ----------------
<S>                                                             <C>               <C>              <C>
Impaired loans without a valuation allowance                                      $             -  $              -
Impaired loans with a valuation allowance                                                     144               685
                                                                                  ---------------  ----------------
         Total impaired loans                                                     $           144  $            685
                                                                                  ===============  ================

Valuation allowance related to impaired loans                                     $            72  $            495
                                                                                  ===============  ================

                                                                      2002             2001              2000
                                                                ----------------  ---------------  ----------------

Average investment in impaired loans                            $             18  $           631  $          1,100
                                                                ================  ===============  ================
Interest income recognized for the year                         $             11  $            57  $             98
                                                                ================  ===============  ================
Interest income recognized on a cash basis for the year         $              9  $            35  $             99
                                                                ================  ===============  ================
</TABLE>

The Company is not committed to lend additional funds to debtors whose loans
have been modified.

                                       16

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6.  BANK PREMISES AND EQUIPMENT

Bank premises and equipment included in the Consolidated Balance Sheets are as
follows:

DECEMBER 31, (IN THOUSANDS)                        2002              2001
---------------------------                   ---------------  ----------------

Land                                          $           378  $            378
Bank premises                                           2,684             2,683
Furniture and equipment                                 2,147             2,028
                                              ---------------  ----------------
     Total                                              5,209             5,089
Less accumulated depreciation                          (3,049)           (2,787)
                                              ---------------  ----------------
     Bank premises and equipment, net         $         2,160  $          2,302
                                              ===============  ================

The Bank has entered into long-term leases for two of its branch banking
facilities under agreements accounted for as operating leases. These leases
expire between 2003 and 2006, including the exercise of renewal options ranging
from two to three years. Future minimum lease payments total $9 thousand
annually. Rental expense for 2002, 2001 and 2000 was $9 thousand, $9 thousand
and $8 thousand, respectively.

NOTE 7.  MATURITIES OF CERTIFICATES

The aggregate amount of time deposits in denominations of $100,000 or more at
December 31, 2002 and 2001 was $23.2 million and $26.5 million, respectively. At
December 31, 2002, the scheduled maturities of time deposits are as follows:

                                             (IN THOUSANDS)
                                           ----------------
                 2003                      $         59,929
                 2004                                16,721
                 2005                                 8,622
                 2006                                 3,722
                 2007                                 8,210
                                           ----------------
                 Total                     $         97,204
                                           ================

NOTE 8.  BORROWINGS

The Company has established various credit facilities to provide additional
liquidity if and as needed. These include unsecured lines of credit with
correspondent banks totaling $10.3 million and a secured line of credit with the
Federal Home Loan Bank of Atlanta of approximately $22 million. Additional
amounts are available from the Federal Home Loan Bank, with additional
collateral. At December 31, 2002 and 2001, there were no amounts outstanding
under these agreements.

                                       17

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9.  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 plan's funded
status:

<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS)                                                            2002              2001
---------------------------                                                       ---------------  ----------------
<S>                                                             <C>               <C>              <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year                                           $         1,665  $          1,541
Service cost                                                                                  113               117
Interest cost                                                                                 124               115
Actuarial (gain) loss                                                                         254              (102)
Benefits paid                                                                                 (41)               (6)
                                                                                  ---------------  ----------------
Benefit obligation at end of year                                                 $         2,115  $          1,665
                                                                                  ===============  ================

CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year                                    $         1,466  $          1,585
Actual return on plan assets                                                                 (103)             (224)
Employer contribution                                                                         142               111
Benefits paid                                                                                 (41)               (6)
                                                                                  ---------------  ----------------
Fair value of plan assets at end of year                                          $         1,464  $          1,466
                                                                                  ===============  ================

CHANGE IN PREPAID (ACCRUED) BENEFIT COST
Prepaid (accrued) benefit cost, beginning                                         $          (151) $           (170)
Contributions                                                                                 142               111
Pension cost                                                                                 (112)              (92)
                                                                                  ---------------  ----------------
Prepaid (accrued) benefit cost, ending                                            $          (121) $           (151)
                                                                                  ===============  ================

Funded status                                                                     $          (651) $           (198)
Unrecognized transitional net assets                                                          (28)              (32)
Unrecognized prior service cost                                                                54                59
Unrecognized net actuarial (gain) loss                                                        504                20
                                                                                  ---------------  ----------------
Prepaid (accrued) benefit cost                                                    $          (121) $           (151)
                                                                                  ===============  ================

WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate                                                                                 7.0%              7.5%
Expected return on plan assets                                                                9.0%              9.0%
Rate of compensation increase                                                                 5.0%              5.0%

                                                                      2002             2001              2000
                                                                ----------------  ---------------  ----------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost                                                    $            113  $           117  $            101
Interest cost                                                                124              115               103
Return on plan assets                                                        103              223              (185)
Originating unrecognized asset gain (loss)                                  (230)            (360)               75
Amortization                                                                   2                2                 2
Recognized net actuarial (gain) loss                                           -               (5)               (1)
                                                                ----------------  ---------------  ----------------
Net periodic benefit cost                                       $            112  $            92  $             95
                                                                ================  ===============  ================
</TABLE>

                                       18

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10.  DEFERRED COMPENSATION AND LIFE INSURANCE

Deferred compensation plans have been adopted for certain members of the Board
of Directors for future compensation upon retirement. Under plan provisions
aggregate annual payments ranging from $2 thousand to $8 thousand are payable
for ten years certain, generally beginning at age 65. Liability accrued for
compensation deferred under the plan amounts to $110 thousand and $114 thousand
at December 31, 2002 and 2001, respectively.

Charges to income are based on present value of future cash payments, discounted
at 8%, and amounted to $14 thousand, $12 thousand and $9 thousand for 2002, 2001
and 2000, respectively.

The Bank is owner and beneficiary of life insurance policies on these directors.
Policy cash values, net of policy loans, totaled $72 thousand and $55 thousand
at December 31, 2002 and 2001, respectively.

In 2002, the Bank adopted a supplemental executive retirement plan to provide
benefits for a member of management. Under plan provisions, aggregate fixed
payments of $45 thousand are payable for 20 years certain, beginning in 2007.
The liability is calculated by discounting the anticipated future cash flows at
6.10%. The liability accrued for this obligation was $76 thousand at December
31, 2002. Changes to income are based on changes in the cash value of insurance
which funds the liability.

NOTE 11.  FAIR VALUE OF FINANCIAL INSTRUMENTS

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

<TABLE>
<CAPTION>
                                                              2002                               2001
                                                 -------------------------------    -------------------------------
                                                   CARRYING            FAIR           CARRYING            FAIR
DECEMBER 31, (IN THOUSANDS)                         AMOUNT             VALUE           AMOUNT             VALUE
---------------------------                      -------------------------------    -------------------------------
<S>                                              <C>              <C>               <C>              <C>
FINANCIAL ASSETS
   Cash and due from banks                       $       5,175    $        5,175    $       3,790    $        3,790
   Interest-bearing deposits with banks                  8,065             8,065              196               196
   Federal funds sold                                    8,650             8,650           18,990            18,990
   Securities, available-for-sale                       27,963            27,963           23,651            23,651
   Securities, held to maturity                         17,027            18,044           19,255            19,542
   Restricted equity securities                            864               864            2,126             2,126
   Loans, net                                          113,324           116,128          113,207           114,700

FINANCIAL LIABILITIES
   Deposits                                            165,392           171,822          163,468           166,378

OFF-BALANCE-SHEET ASSETS (LIABILITIES)
   Commitments to extend credit and standby
     letters of credit                                       -                 -                -                 -
   Commercial letters of credit                              -                 -                -                 -
</TABLE>

                                       19

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12. INCOME TAXES

The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (IN THOUSANDS)                               2002             2001              2000
---------------------------------------                         ----------------  ---------------  ----------------
<S>                                                             <C>               <C>              <C>
Current taxes - federal                                         $            900  $           668  $            288
Deferred taxes - federal                                                    (171)             (36)              211
                                                                ----------------  ---------------  ----------------
         Income tax expense                                     $            729  $           632  $            499
                                                                ================  ===============  ================
</TABLE>

A reconciliation of the expected income tax expense computed by applying the
federal statutory rate of 34% to income included in the consolidated statements
of income follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (IN THOUSANDS)                               2002             2001              2000
---------------------------------------                         ----------------  ---------------  ----------------
<S>                                                             <C>               <C>              <C>
Expected tax expense                                            $          1,059  $           926  $            790
Tax exempt interest                                                         (334)            (334)             (341)
Other                                                                          4               40                50
                                                                ----------------  ---------------  ----------------
         Income tax expense                                     $            729  $           632  $            499
                                                                ================  ===============  ================
</TABLE>

The tax effects of temporary timing differences that give rise to significant
portions of the net deferred tax assets and deferred tax liabilities are
presented below:

<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS)                                                             2002              2001
---------------------------                                                       ---------------  ----------------
<S>                                                                               <C>              <C>
Deferred tax assets
   Allowance for loan and other real estate losses                                $           436  $            308
   Deferred loan interest, fees                                                               143               131
   Employee benefit liabilities                                                               123                90
   Other valuation reserves                                                                    60                67
                                                                                  ---------------  ----------------
         Total deferred tax assets                                                            762               596
                                                                                  ---------------  ----------------

Deferred tax liabilities
   Net unrealized appreciation on securities available for sale                              (139)             (103)
   Depreciation                                                                               (79)              (84)
   Accretion of discount on investment securities                                             (34)              (34)
                                                                                  ---------------  ----------------
         Total deferred tax liabilities                                                      (252)             (221)
                                                                                  ---------------  ----------------

       Net deferred tax asset                                                     $           510  $            375
                                                                                  ===============  ================
</TABLE>

NOTE 13.  COMMITMENTS AND CONTINGENCIES

LITIGATION

In the normal course of business, the Company is involved in various legal
proceedings. After consultation with legal counsel, management believes that any
liability resulting from such proceedings will not be material to the
consolidated financial statements.

                                       20

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13.  COMMITMENTS AND CONTINGENCIES, CONTINUED

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, credit risk in excess
of the amount recognized in the consolidated balance sheets.

The Company's exposure to loan loss in the event of nonperformance by the other
party to the financial instrument 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 commitments at
December 31 is as follows:

DECEMBER 31, (IN THOUSANDS)               2002              2001
--------------------------           ---------------  ----------------

Commitments to extend credit         $         7,537  $         10,495
Standby letters of credit                        659               809
                                     ---------------  ----------------
                                     $         8,196  $         11,304
                                     ===============  ================

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary upon extension of credit, is based on management's credit
evaluation of the party. Collateral held varies, but may include accounts
receivable, crops, livestock, inventory, property and equipment, residential
real estate and income producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Company deems
necessary.

CONCENTRATIONS OF CREDIT RISK

The majority of the Company's loans, commitments to extend credit, and standby
letters of credit have been granted to customers in the Company's market area.
The majority of such customers are depositors of the Bank. Investments in state
and municipal securities involve governmental entities within and outside the
Company's market area. The concentrations of credit by type of loan are set
forth in the Loans Receivable note. The distribution of commitments to extend
credit approximates the distribution of loans outstanding. Standby letters of
credit are granted primarily to commercial borrowers. The Company, as a matter
of policy, does not extend credit to any single borrower or group of related
borrowers in excess of approximately $2 million.

Although the Company has a reasonably diversified loan portfolio, a substantial
portion of its debtors' ability to honor their contracts is dependent upon
economic conditions in and around Floyd, Carroll, Montgomery, and Roanoke
Counties and the City of Roanoke, Virginia. A significant amount of the real
estate loans set forth in the Loans Receivable note are secured by commercial
real estate. In addition, the Company has a loan concentration relating to
customers who are motel, hotel, and bed-and-breakfast owners and operators.
Total loans and loan commitments to this industrial group amounted to
approximately $17.7 million and $16.6 million at December 31, 2002 and 2001,
respectively.

The Company has cash and cash equivalents on deposit with financial institutions
which exceed federally-insured limits.

                                       21

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14.  REGULATORY MATTERS

DIVIDENDS

The Company's dividend payments are made from dividends received from the Bank.
The Bank, as a Virginia banking corporation, may pay dividends only out of its
retained earnings. However, regulatory authorities may limit payment of
dividends by any bank when it is determined that such a limitation is in the
public interest and is necessary to ensure financial soundness of the Bank.

INTERCOMPANY TRANSACTIONS

The Bank's legal lending limit on loans to the Company are governed by Federal
Reserve Act 23A, and differ from legal lending limits on loans to external
customers. Generally, a bank may lend up to 10% of its capital and surplus to
its Parent, if the loan is secured. If collateral is in the form of stocks,
bonds, debentures or similar obligations, it must have a market value when the
loan is made of at least 20% more than the amount of the loan, and if
obligations of a state or political subdivision or agency thereof, it must have
a market value of at least 10% more than the amount of the loan. If such loans
are secured by obligations of the United States or agencies thereof, or by
notes, drafts, bills of exchange or bankers' acceptances eligible for rediscount
or purchase by a Federal Reserve Bank, requirements for collateral in excess of
the loan amount do not apply. Under this definition, the legal lending limit for
the Bank on loans to the Company was approximately $1.4 million at December 31,
2002. No 23A transactions were deemed to exist between the Company and the Bank
at December 31, 2002.

CAPITAL REQUIREMENTS

The Company is subject to various regulatory capital requirements administered
by federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory (and possibly additional
discretionary) actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets, as all those terms are defined in the regulations.
Management believes, as of December 31, 2002, that the Bank meets all capital
adequacy requirements to which it is subject.

As of December 31, 2002, the most recent notification from the Federal Reserve
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.

                                       22

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14.  REGULATORY RESTRICTIONS, CONTINUED

CAPITAL REQUIREMENTS, CONTINUED

The Company and the Bank's actual capital amounts and ratios are also presented
in the following table.

<TABLE>
<CAPTION>
                                                                                                    MINIMUM
                                                                                                  TO BE WELL
                                                                         MINIMUM               CAPITALIZED UNDER
                                                                       FOR CAPITAL             PROMPT CORRECTIVE
                                               ACTUAL               ADEQUACY PURPOSES          ACTION PROVISIONS
                                      ------------------------  ------------------------  -------------------------
IN THOUSANDS                             AMOUNT         RATIO       AMOUNT        RATIO       AMOUNT        RATIO
------------                          -------------  ---------  -------------   --------  --------------  ---------
<S>                                   <C>                <C>    <C>                 <C>   <C>                 <C>
DECEMBER 31, 2002
   Total capital
     to risk-weighted assets
       Consolidated                   $      24,499      19.80% $       9,900       8.00%            n/a        n/a
       Bank of Floyd                         15,631      12.99          9,628       8.00  $       12,035      10.00%
   Tier I capital
     to risk-weighted assets
       Consolidated                          22,949      18.54          4,950       4.00             n/a        n/a
       Bank of Floyd                         14,124      11.74          4,814       4.00           7,221       6.00
   Tier I capital
     to average assets
       Consolidated                          22,949      12.37          7,424       4.00             n/a        n/a
       Bank of Floyd                         14,124       7.77          7,275       4.00           9,093       5.00

DECEMBER 31, 2001
   Total capital
     to risk-weighted assets
       Consolidated                   $      22,564      18.33% $       9,846       8.00%            n/a        n/a
       Bank of Floyd                         13,734      11.31          9,717       8.00  $       12,146      10.00%
   Tier I capital
     to risk-weighted assets
       Consolidated                          21,262      17.29          4,923       4.00             n/a        n/a
       Bank of Floyd                         12,457      10.26          4,859       4.00           7,288       6.00
   Tier I capital
     to average assets
       Consolidated                          21,262      11.60          7,334       4.00             n/a        n/a
       Bank of Floyd                         12,457       7.03          7,091       4.00           8,864       5.00
</TABLE>

                                       23

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. TRANSACTIONS WITH RELATED PARTIES

The Company has entered into transactions with its directors, significant
shareholders and their affiliates (related parties). Such transactions were made
in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features.

Aggregate loan transactions with related parties were as follows:

DECEMBER 31, (IN THOUSANDS)                 2002              2001
--------------------------             ---------------  ----------------

Balance, Beginning                     $           874  $            873

Additions                                          340               841
Repayments                                        (190)             (840)
Relationship changes                               153                 -
                                       ---------------  ----------------
Balance, Ending                        $         1,177  $            874
                                       ===============  ================

NOTE 16.  PARENT COMPANY FINANCIAL INFORMATION

Condensed financial information of Cardinal Bankshares Corporation is presented
as follows:

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS)                                                            2002              2001
--------------------------                                                        ---------------  ----------------
<S>                                                                               <C>              <C>
ASSETS
   Cash due from banks                                                            $         4,229  $          5,697
   Investment securities available for sale, at fair value                                    673                 -

   Total loans                                                                              2,535             3,095
   Allowance for loan losses                                                                  (25)              (25)
                                                                                  ---------------  ----------------
         Net loans                                                                          2,510             3,070
                                                                                  ===============  ================

   Investment in affiliate bank at equity                                                  14,435            12,659
   Other assets                                                                             1,374                52
                                                                                  ---------------  ----------------
         Total assets                                                             $        23,221  $         21,478
                                                                                  ===============  ================

LIABILITIES
   Other liabilities                                                              $             2  $             24
                                                                                  ---------------  ----------------
         Total liabilities                                                                      2                24
                                                                                  ---------------  ----------------

STOCKHOLDERS' EQUITY
   Common stock                                                                            15,357            15,357
   Additional paid-in capital                                                               2,925             2,925
   Retained earnings                                                                        4,667             2,972
   Accumulated other comprehensive income                                                     270               200
                                                                                  ---------------  ----------------
         Total stockholders' equity                                                        23,219            21,454
                                                                                  ---------------  ----------------
         Total liabilities and stockholders' equity                               $        23,221  $         21,478
                                                                                  ===============  ================
</TABLE>

                                       24

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16.  PARENT COMPANY FINANCIAL INFORMATION, CONTINUED

                              STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (IN THOUSANDS)                               2002             2001              2000
---------------------------------------                         ----------------  ---------------  ----------------
<S>                                                             <C>               <C>              <C>
INCOME
   Dividends from affiliate bank                                $            755  $         3,500  $            950
   Interest on loans                                                         225              211               179
   Interest on investment securities                                          54                -                 -
                                                                ----------------  ---------------  ----------------
         Total income                                                      1,034            3,711             1,129
                                                                ----------------  ---------------  ----------------

EXPENSES
   Salaries                                                                  190              182               176
   Management and professional fees                                           90               69                52
   Other expenses                                                             38               45                40
                                                                ----------------  ---------------  ----------------
         Total expenses                                                      318              296               268
                                                                ----------------  ---------------  ----------------

Income before income tax benefit and equity in
   undistributed net income of subsidiaries                                  716            3,415               861

Income tax Benefit                                                             5               29                34
                                                                ----------------  ---------------  ----------------
         Income before equity in undistributed
           net income of subsidiaries                                        721            3,444               895

Equity in undistributed net income of subsidiaries                         1,665           (1,354)              931
                                                                ----------------  ---------------  ----------------
         Net income                                             $          2,386  $         2,090  $          1,826
                                                                ================  ===============  ================
</TABLE>

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (IN THOUSANDS)                               2002             2001              2000
---------------------------------------                         ----------------  ---------------  ----------------

<S>                                                             <C>               <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                   $          2,386  $         2,090  $          1,826
   Adjustments to reconcile net income to net
     cash provided by operating activities:
       Amortization                                                            -                3                 6
       Equity in undistributed income of subsidiaries                     (1,665)           1,354              (931)
       Net change in other assets                                         (1,286)             762              (753)
       Net change in other liabilities                                       (22)              24               (17)
                                                                ----------------  ---------------  ----------------
         Net cash provided (used) by operating activities                   (587)           4,233               131
                                                                ----------------  ---------------  ----------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Net (increase) decrease in loans                                          560           (1,050)              603
   Purchases of investment securities                                       (750)               -                 -
                                                                ----------------  ---------------  ----------------
         Net cash provided (used) by investing activities                   (190)          (1,050)              603
                                                                ----------------  ---------------  ----------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Dividends paid                                                           (691)            (645)             (582)
   Common stock purchased                                                      -                -              (786)
   Common stock reissued                                                       -                -               793
                                                                ----------------  ---------------  ----------------
         Net cash used by financing activities                              (691)            (645)             (575)
                                                                ----------------  ---------------  ----------------
         Net increase (decrease) in cash and cash equivalents             (1,468)           2,538               159

Cash and cash equivalents, beginning                                       5,697            3,159             3,000
                                                                ----------------  ---------------  ----------------
Cash and cash equivalents, ending                               $          4,229  $         5,697  $          3,159
                                                                ================  ===============  ================
</TABLE>

                                       25

<PAGE>

CARDINAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17.  SUBSEQUENT EVENTS

During 2002, the Company entered into an agreement to merge with MountainBank
Financial Corporation, the holding company for MountainBank headquartered in
Hendersonville, North Carolina. At the Company's special meeting held on
February 26, 2003, the Company's stockholders failed to ratify and approve the
agreement and the merger.

                                       26

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

OVERVIEW

Management's Discussion and Analysis is provided to assist in the understanding
and evaluation of Cardinal Bankshares Corporation's financial condition and its
results of operations. The following discussion should be read in conjunction
with the Corporation's consolidated financial statements. Certain previously
reported amounts have been reclassified to conform to current presentations.

Cardinal Bankshares Corporation, the parent company of Bank of Floyd, currently
operates five offices in Floyd, Montgomery, Roanoke and Carroll Counties of
Virginia. The main office is in Floyd with a limited service office in Willis.
The Roanoke office is in the Cave Spring area of Roanoke County. The Hillsville
office is located in Carroll County on Route 52 in Hillsville, Virginia.
Montgomery County is served by the branch in Christiansburg, Virginia.

The individual market conditions of each county vary from rural to urban with
Floyd County being the most rural and Roanoke the most urban. Each has its own
growth pattern which varies in intensity. Bank of Floyd and bank personnel work
with local government leaders in an effort to attract industry to Floyd County.

Cardinal Bankshares reported net income for the year 2002 of $2.4 million, an
increase of 14.1% over the $2.1 million reported in 2001. Net income per diluted
share was $1.55, or $.19 above the $1.36 reported for the prior year.

Net interest income, on a taxable equivalent basis, was $6.8 million, an
increase of $329 thousand from $6.4 million in 2001, driven primarily by the
combination of the increase in average loans outstanding, and lower rates paid
on deposit accounts when compared to the prior year. Noninterest income grew by
35.7% to $806 thousand for 2002 compared to $594 thousand for 2001. Noninterest
expense increased by 6.5% to $3.8 million compared to $3.5 million in 2001.

Earning assets averaged $175.5 million, compared to $165.3 million in 2001, an
increase of 6.1%. Total loans increased by $2.5 million to $108.9 million on
average. Real estate loan categories acccounted for the majority of the loan
growth. Securities declined $3.7 million on average in 2002. Federal funds sold
and deposits in other banks inceased $6.2 million and $5.1 million,
respectively, on average.

Interest-bearing liabilities averaged $141.1 million, up $8.9 million or 6.8%
from 2001. Savings deposits accounted for a significant portion of the growth in
interest-bearing liabilities.

Stockholders' equity grew 7.1% to an average of $22.5 million in 2002 from $21.0
million in 2001. The return on average equity increased 66 basis points to
10.63% for 2002. The book value per share was $15.12 at December 31, 2002,
compared to $13.97 at year-end 2001, representing an increase of 8.2%.

                                       27

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

TABLE 1.  AVERAGE BALANCES AND INTEREST RATES (TAXABLE EQUIVALENT BASIS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
   (IN THOUSANDS)                                          2002                                    2001
                                           -------------------------------------     ---------------------------------
                                                         INTEREST                               INTEREST
                                            AVERAGE       INCOME/       YIELD/        AVERAGE     INCOME/      YIELD/
                                            BALANCE       EXPENSE        COST         BALANCE     EXPENSE       COST
                                           ---------     ---------     ---------     ---------   ---------   ---------
<S>                                        <C>           <C>                <C>      <C>         <C>              <C>
ASSETS:
Interest-earning assets:
  Deposits in other banks                  $   6,707     $     119          1.77%    $   1,620   $      49        3.02%
  Taxable investment securities               25,880         1,433          5.54%       29,669       1,916        6.46%
  Nontaxable investment securities            20,097         1,293          6.43%       20,001       1,268        6.34%
  Federal funds sold                          13,884           208          1.50%        7,644         277        3.62%
  Loans                                      108,898         8,672          7.96%      106,368       9,395        8.83%
                                           ---------     ---------     ---------     ---------   ---------   ---------
    Total interest-earning assets            175,466        11,725          6.68%      165,302      12,905        7.81%
                                           ---------     ---------     ---------     ---------   ---------   ---------
Noninterest-earning assets:
  Cash and due from banks                      3,027                                     3,567
  Premises and equipment                       2,263                                     2,534
  Other assets                                 5,318                                     3,356
  Allowance for loan losses                   (1,518)                                  (1,159)
                                           ---------                                 ---------
    Total assets                           $ 184,556                                 $ 173,600
                                           =========                                 =========

LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
  Interest checking                        $  12,538           116          0.92%    $  10,513   $     204        1.94%
  Savings deposits                            29,053           675          2.32%       20,195         620        3.07%
  Time deposits                               75,989         3,286          4.32%       77,663       4,423        5.70%
  Large denomination deposits                 23,518           888          3.78%       23,629       1,224        5.18%
  Federal Home Loan Bank borrowings                -             -             -           164           3        1.83%
                                           ---------     ---------     ---------     ---------   ---------   ---------
    Total interest-bearing liabilities       141,098         4,965          3.52%      132,164       6,474        4.90%
                                           ---------     ---------     ---------     ---------   ---------   ---------

Noninterest-bearing liabilities:
   Demand deposits                            20,184                                    19,020
   Other liabilities                             823                                     1,463
                                           ---------                                 ---------
    Total liabilities                        162,105                                   152,647
Stockholders' equity                          22,451                                    20,953
                                           ---------                                 ---------
    Total liabilities and
     stockholders' equity                  $ 184,556                                 $ 173,600
                                           =========                                 =========
    Net interest earnings                                $   6,760                               $   6,431
                                                         =========                               =========
    Net interest spread (1)                                                 3.16%                                 2.91%
                                                                       =========                             =========
    Net interest margin (2)                                                 3.85%                                 3.89%
                                                                       =========                             =========
    Taxable equivalent adjustment                        $     320                               $     333
                                                         =========                               =========
</TABLE>

YEARS ENDED DECEMBER 31,
   (IN THOUSANDS)                                  2000
                                           ------------------------------------
                                                          INTEREST
                                            AVERAGE       INCOME/        YIELD/
                                            BALANCE       EXPENSE        COST
                                           ---------     ---------     ---------
ASSETS:
Interest-earning assets:
  Deposits in other banks                  $     394     $      24         6.09%
  Taxable investment securities               35,992         2,349         6.53%
  Nontaxable investment securities            20,139         1,286         6.39%
  Federal funds sold                           4,503           275         6.11%
  Loans                                       89,752         8,021         8.94%
                                           ---------     ---------     ---------
    Total interest-earning assets            150,780        11,955         7.93%
                                           ---------     ---------     ---------
Noninterest-earning assets:
  Cash and due from banks                      2,472
  Premises and equipment                       2,513
  Other assets                                 5,188
  Allowance for loan losses                   (1,255)
                                           ---------
    Total assets                           $ 159,698
                                           =========

LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
  Interest checking                        $  10,673           249         2.34%
  Savings deposits                            20,614           688         3.34%
  Time deposits                               73,696         4,143         5.62%
  Large denomination deposits                 17,216           902         5.24%
  Federal Home Loan Bank borrowings                -             -            -
                                           ---------     ---------     ---------
    Total interest-bearing liabilities       122,199         5,982         4.90%
                                           ---------     ---------     ---------
Noninterest-bearing liabilities:
   Demand deposits                            17,518
   Other liabilities                           1,372
                                           ---------
    Total liabilities                        141,089
Stockholders' equity                          18,609
                                           ---------
    Total liabilities and
     stockholders' equity                  $ 159,698
                                           =========
    Net interest earnings                                $   5,973
                                                         =========
    Net interest spread (1)                                                3.03%
                                                                       =========
    Net interest margin (2)                                                3.96%
                                                                       =========
    Taxable equivalent adjustment                        $     341
                                                         =========

(1)  Net interest spread is the difference between the average interest rate
     received on earning assets and the average interest rate paid for
     interest-bearing liabilities.

(2)  Net interest margin is calculated by dividing taxable equivalent net
     interest earnings by total average earning assets.

                                       28

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

NET INTEREST INCOME

Net interest income, the primary source of the Company's earnings, is the amount
by which interest and fee income generated by earning assets exceeds the
interest paid on interest-bearing liabilities. Earning assets are comprised of
loans, securities, federal funds sold and interest-bearing deposits in other
banks. Interest-bearing liabilities consist of deposits and federal funds
purchased. The volume and the general level of interest rates among earning
assets and interest-bearing liabilities effect net interest income. Table 1
shows the average balance sheets for each of the years ended December 31, 2002,
2001 and 2000. In addition, the amounts of interest earned on earning assets,
with related yields, and the interest paid on interest-bearing liabilities,
together with rates, are shown. Loans placed on a nonaccrual status are included
in the balances and were included in the computation of yields, upon which they
had an immaterial effect. Interest on earning assets is on a taxable equivalent
basis, which is computed using the federal corporate income tax rate of 34% for
all three years.

Net interest income, on a taxable equivalent basis, was $6.7 million, an
increase of 4.0% from the $6.4 million in 2001. The net interest margin was
3.85% for 2002, down 4 basis points from the 3.89% reported in 2001. The growth
in net interest income was positively impacted by the increase in loan volume
and federal funds sold. While the overall yield on earning assets declined 113
basis points, the effect of the 138 basis point drop in cost of funds served to
offset the lower yield on earning assets and support the net interest margin.

During 2002, federal funds sold and interest bearing deposits in other banks
grew to an average of $13.9 million and $6.7 million, respectively. Total loans
rose $2.5 million with commercial and industrial loans accounting for the major
portion of the growth.

Total average interest-bearing deposits increased $9.1 million for the year 2002
to $141.1 million, an increase of 6.9% over the prior year. Savings deposits
increased 43.9%, averaging $29.1 million, and interest checking accounts grew
19.3%, averaging $12.5 million. Large denomination deposits remained essentially
unchanged from 2001 levels, averaging $23.5 million for the year.

TABLE 2.  RATE/VOLUME VARIANCE ANALYSIS (THOUSANDS)

<TABLE>
<CAPTION>
                                          2002 COMPARED TO 2001                2001 COMPARED TO 2000
                                      ----------------------------         -----------------------------
                                                INCREASE (DECREASE)                    INCREASE (DECREASE)
                                                      DUE TO                                 DUE TO

(IN THOUSANDS)                          TOTAL      RATE     VOLUME            TOTAL      RATE      VOLUME
--------------                        ---------  -------   --------        ----------   -------   ---------

<S>                                   <C>        <C>       <C>              <C>         <C>       <C>
Interest-earning assets:
   Deposits in other banks            $      70  $   (84)  $    154         $      25   $   (49)  $      74
   Taxable investment securities           (483)    (238)      (245)             (433)      (20)       (413)
   Nontaxable investment securities          25       19          6               (18)       (9)         (9)
   Federal funds sold                       (69)    (295)       226                 2      (190)        192
   Loans                                   (723)    (946)       223             1,374      (111)      1,485
                                      ---------  -------   --------        ----------   -------   ---------
     Total                               (1,180)  (1,544)       364               950      (379)      1,329
                                      ---------  -------   --------        ----------   -------   ---------

Interest-bearing liabilities:
   Interest checking                        (88)    (127)        39               (45)      (42)         (3)
   Savings deposits                          55     (217)       272               (68)      (54)        (14)
   Time deposits                         (1,137)  (1,042)       (95)              280        57         223
   Large denomination deposits             (336)    (330)        (6)              322       (14)        336
   Federal Home Loan Bank borrowings         (3)       -         (3)                3         3           -
                                      ---------  -------   --------        ----------   -------   ---------
       Total                             (1,509)  (1,716)       207               492       (50)        542
                                      ---------  -------   --------        ----------   -------   ---------
       Net interest income            $     329  $   172   $    157         $     458   $  (329)  $     787
                                      =========  =======   ========        ----------   =======   =========
</TABLE>

                                      29

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

PROVISION FOR LOAN LOSSES

The allowance for loan losses represents the amount available for credit losses
inherent in the Company's loan portfolio. Loan losses and recoveries are charged
or credited directly to the allowance. Management determines the provision for
loan losses required to maintain an allowance adequate to provide for any
potential losses. The factors considered in making this decision are the
collectibility of past due loans, volume of new loans, composition of the loan
portfolio, and general economic outlook. In 2002, the provision for loan losses
was $375 thousand, a decrease of $67 thousand from the $442 thousand recorded in
2001. After reviewing the modest growth in the loan portfolio, favorable changes
in the components of nonperforming loans, and general economic trends,
management felt the current year decrease in the provision for loan losses was
appropriate. Management believes the provision recorded in 2002 maintains the
allowance at a level adequate to cover potential losses. The Company had
recoveries, net of charge-offs, of $94 thousand during 2002, compared to net
charge-offs of $276 thousand during 2001. Management does not anticipate any
abnormal changes in the delinquency rates or charge-offs and recoveries in
connection with its normal lending activities.

Additional information regarding the Company's allowance for loan losses is
contained in Tables 12, 13 and 14, and in the discussion concerning
Nonperforming Assets.

NONINTEREST INCOME

Noninterest income consists of revenues generated from a number of different
financial services and activities. Service charges on deposit accounts including
charges for insufficient funds items and fees charged for nondeposit services
make up the majority of noninterest income. Noninterest income also includes
fees charged for services such as safe deposit box rentals, letters of credit,
and gains realized on the sale of securities. Noninterest income totaled $806
thousand in 2002, an increase of 35.7% from the $594 thousand recorded in 2001.
The single largest increase in noninterest income, $149 thousand, resulted from
income generated by the Company's investment in bank owned life insurance.
Noninterest income in 2000 totaled $500 thousand. The primary sources of
noninterest income for the past three years are summarized in Table 3 below.

TABLE 3.  NONINTEREST INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (IN THOUSANDS)              2002              2001             2000
-------------------------------------            -----------      -----------       -----------
<S>                                              <C>              <C>               <C>
Deposit fees and charges                         $       312      $       281       $       233
Other service charges and fees                            81               77                59
Gain on the sale of securities                            24               44                 -
Bank owned life insurance                                149                -                 -
Other income                                             240              192               208
                                                 -----------      -----------       -----------
     Total noninterest income                    $       806      $       594       $       500
                                                 ===========      ===========       ===========
</TABLE>

NONINTEREST EXPENSE

Noninterest expense was $3.8 million for 2002, an increase of $228 thousand over
the $3.5 million recorded in 2001. Higher salaries and benefits costs of $112
thousand accounted for most of the year-to-year increase. Merit increases and
higher medical insurance costs were the primary cause of higher salary and
benefits costs.

Table 4 provides a further breakdown of noninterest expense for the past three
years.

                                       30

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

TABLE 4.  NONINTEREST EXPENSE

YEAR ENDED DECEMBER 31, (IN THOUSANDS)        2002          2001         2000
--------------------------------------    -----------   -----------   ----------

Salaries and employee benefits            $     2,272   $     2,160   $    2,023
Occupancy and equipment                           541           523          511
Legal and professional                            189            91          113
Bank franchise tax                                110           108           99
Other operating expense                           644           646          561
                                          -----------   -----------   ----------
     Total noninterest expense            $     3,756   $     3,528   $    3,307
                                          ===========   ===========   ==========

INCOME TAXES

Income tax expense is based on amounts reported in the statements of income,
after adjustments for non-taxable income and non-deductible expenses, and
consists of taxes currently due plus deferred taxes on temporary differences in
the recognition of income and expense for tax and financial statement purposes.
The deferred tax assets and liabilities represent the future Federal income tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.

Income tax expense, substantially all Federal, was $729 thousand in 2002, $632
thousand in 2001 and $499 thousand in 2000 representing 23.4%, 23.2% and 21.4%
of income before income taxes, respectively. Income tax expense increased $97
thousand or 15.3% from 2001 to 2002.

Cardinal Bankshares' deferred income tax benefits and liabilities result
primarily from temporary differences in provisions for credit losses, valuation
reserves, depreciation, deferred compensation, deferred income, pension expense
and investment security discount accretion.

Net deferred income tax benefits of approximately $510 thousand and $375
thousand at December 31, 2002 and 2001, respectively, are included in other
assets.

                                       31

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

EARNING ASSETS

In 2002, average earning assets increased $10.2 million from the 2001 average of
$165.3 million. Total average earning assets represented 95.1% of total average
assets in 2002, essentially unchanged with the 95.2% reported in 2001. Increases
in average federal funds sold, deposits in other banks and loans, accounted for
an overall increase in total average earning assets of 6.1%. Average federal
funds sold represented 7.5% of total average assets compared to 4.4% in 2001.
Average deposits in other banks accounted for 3.7% of total average assets.
Average loans remained the largest component of earning assets, accounting for
59.0% of total average assets in 2002, although down slightly from the 61.3%
level reported in 2001. A summary of average assets for the past three years is
shown below in Table 5.

TABLE 5.  AVERAGE ASSET MIX

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (IN THOUSANDS)            2002                      2001                       2000
-------------------------------------     ----------------------    ----------------------    --------------------
                                            AVERAGE                   AVERAGE                   AVERAGE
                                            BALANCE        %          BALANCE        %          BALANCE        %
                                          ----------   ---------    ----------   ---------    ----------   --------
<S>                                       <C>              <C>      <C>             <C>       <C>            <C>
INTEREST-EARNING ASSETS:
   Loans, net                             $  108,898        59.0    $  106,368        61.3    $   89,752       56.2
   Investment securities                      45,977        24.9        49,670        28.6        56,131       35.2
   Federal funds sold                         13,884         7.5         7,644         4.4         4,503        2.8
   Deposits in other banks                     6,707         3.7         1,620         0.9           394        0.2
                                          ----------   ---------    ----------   ---------    ----------   --------
     Total interest-earning assets           175,466        95.1       165,302        95.2       150,780       94.4
                                          ----------   ---------    ----------   ---------    ----------   --------

NONINTEREST-EARNING ASSETS:
   Cash and due from banks                     3,027         1.6         3,567         2.1         2,472        1.5
   Premises and equipment                      2,263         1.2         2,534         1.4         2,513        1.6
   Other assets                                3,800         2.1         2,197         1.3         3,933        2.5
                                          ----------   ---------    ----------    --------    ----------   --------
   Total noninterest-earning assets            9,090         4.9         8,298         4.8         8,918        5.6
                                          ----------   ---------    ----------    --------    ----------   --------
     Total assets                         $  184,556       100.0    $  173,600      100.00    $  159,698     100.00
                                          ==========   =========    ==========    ========    ==========   ========
</TABLE>

LOANS

Average total loans were $108.9 million for 2002, an increase of $2.5 million or
2.4% over 2001. At December 31, 2002, the actual balance of loans secured by
real estate represented a significant portion of the loan portfolio at 90.6%.
Total loans secured by 1-4 family residential properties represented 25.9% of
total loans at the end of 2002 while nonfarm/nonresidential properties made up
57.3% of total loans.

                                       32

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

Bank of Floyd makes both consumer and commercial loans to all neighborhoods
within its market area, including the low-income and moderate-income areas. The
Company's market area is generally defined as the areas within the Virginia
Counties of Floyd, Roanoke, Montgomery and Carroll, and the Cities of Roanoke
and Christiansburg, Virginia. The Bank places emphasis on consumer based
installment loans and commercial loans to small and medium sized businesses.
Predatory pricing and competition from unregulated organizations have also been
a factor when generating new loans. The amounts of loans outstanding by type at
year-end 2002 and 2001, and the maturity distribution of variable and fixed rate
loans as of year-end 2002 are presented below in Table 6 and Table 7,
respectively.

TABLE 6.  LOAN PORTFOLIO SUMMARY (THOUSANDS)

<TABLE>
<CAPTION>
 DECEMBER 31, (IN THOUSANDS)                     DECEMBER 31, 2002         DECEMBER 31, 2001
 ---------------------------                 -----------------------    ------------------------
                                               AMOUNT          %          AMOUNT           %
                                             ----------    ----------   ----------    ----------
<S>                                          <C>                <C>     <C>               <C>
Real estate construction and development     $    2,188           1.9   $   13,263          11.6
Farmland                                          3,148           2.7        4,156           3.6
Real estate mortgage:
   1-4 family residential                        29,812          25.9       30,475          26.6
   Multifamily residential                        3,237           2.8          842           0.7
   Nonfarm, nonresidential                       65,893          57.3       56,446          49.3
                                             ----------    ----------   ----------    ----------
       Total real estate                        104,278          90.6      105,182          91.8

Agricultural                                      1,082           0.9        1,069           0.9
Commercial and industrial                         6,773           5.9        3,791           3.3
Consumer                                          3,057           2.7        3,998           3.5
Other loans                                          98           0.1          404           0.4
Leases                                              143           0.1          447           0.4
                                             ----------                 ----------
   Gross loans                                  115,431                    114,891
                                             ----------    ----------   ----------    ----------
Unearned income                                    (338)         -0.3         (384)         -0.3
                                             ----------    ----------   ----------    ----------
       Total                                 $  115,093         100.0   $  114,507        100.00
                                             ==========    ==========   ==========    ==========
</TABLE>

Interest rates charged on loans vary with the degree of risk, maturity and
amount of the loan. Competitive pressures, money market rates, availability of
funds, and government regulation also influence interest rates. On average,
loans yielded 7.96% in 2002, lower by 87 basis points when compared to an
average yield of 8.83% in 2001. The lower yield earned on the loan portfolio was
primarily the result of the continued lower interest rate environment.

                                       33

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

TABLE 7.  LOAN MATURITY SCHEDULE

<TABLE>
<CAPTION>
                                                                            2002
                                            --------------------------------------------------------------------
                                             COMMERCIAL     CONSTRUCTION
                                            FINANICAL AND       AND                        TOTAL
(IN THOUSANDS)                              AGRICULTURAL     DEVELOPMENT      OTHERS       AMOUNT         %
--------------                              -------------   -------------   ----------   ----------   ----------
<S>                                         <C>             <C>             <C>          <C>               <C>
Fixed rate loans:
   Within three months                      $          53   $       1,122   $      315   $    1,490          1.3
   After three but within twelve months             1,180             149        4,581        5,910          5.1
   After one but within five years                  2,437               -       12,428       14,865         12.9
   Over five years                                    375             390       20,337       21,102         18.3
                                            -------------   -------------   ----------   ----------   ----------
     Total fixed rate loans                         4,045           1,661       37,661       43,367         37.6
                                            -------------   -------------   ----------   ----------   ----------

Variable rate loans:
   Within three month                               4,336           1,081       17,092       22,509         19.5
   After three but within twelve months             1,544               -       11,200       12,744         11.0
   After one but within five years                  1,221             691       33,068       34,980         30.3
   Over five years                                      -               -        1,831        1,831          1.6
                                            -------------   -------------   ----------   ----------   ----------
     Total variable rate loans                      7,101           1,772       63,191       72,064         62.4
                                            -------------   -------------   ----------   ----------   ----------

Total loans:
   Within three month                               4,389           2,203       17,407       23,999         20.8
   After three but within twelve months             2,724             149       15,781       18,654         16.1
   After one but within five years                  3,658             691       45,496       49,845         43.2
   Over five years                                    375             390       22,168       22,933         19.9
                                            -------------   -------------   ----------   ----------   ----------
     Total loans                            $      11,146   $       3,433   $  100,852   $  115,431        100.0
                                            =============   =============   ==========   ==========   ==========
</TABLE>

INVESTMENT SECURITIES

The investment securities portfolio is managed to optimize the yield on excess
funds while providing liquidity for unexpected deposit decreases or increased
loan generation and diversification in the overall asset management of the
Company. At December 31, 2002, the Company had $28.0 million in securities
available for sale, compared to $23.7 million at year-end 2001. The yield on
taxable investment securities declined from 6.46% in 2001 to 5.54% in 2002 as a
result of maturities and calls of higher yielding securities.

Management of the investment portfolio has always been conservative with
virtually all investments taking the form of purchases of U.S. Treasury, U.S.
Government agencies, Mortgage Backed Securities and issuances of State and local
bond issues. All securities are high quality and high grade. Management views
the investment portfolio as a source of income, and generally purchases
securities with the intent of retaining them until maturity. However,
adjustments in the portfolio are necessary from time to time to provide a source
of liquidity to meet funding requirements for loan demand, deposit fluctuations
and to manage interest rate risk. Accordingly, to meet such objectives,
management may sell certain securities prior to their scheduled maturity. Table
8 presents the investment portfolio at the end of 2002 by major types of
investments and maturity ranges. Maturities may differ from scheduled maturities
in mortgage-backed securities because the mortgages underlying the securities
may be called or repaid prior to the scheduled maturity date. Maturities on all
other securities are based on the earlier of the contractual maturity or the
call date, if any.

At December 31, 2002, the market value of the investment portfolio was $46.0
million, representing a $1.4 million unrealized appreciation above amortized
cost. This compared to a market value of $43.2 million and a $590 thousand
appreciation above amortized cost a year earlier.

                                       34

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

TABLE 8.  INVESTMENT SECURITIES

<TABLE>
<CAPTION>
DECEMBER 31, 2002 (IN THOUSANDS)                         AMORTIZED COST DUE
-------------------------------            ---------------------------------------------------
                                             DUE        AFTER ONE     AFTER FIVE
                                            WITHIN       THROUGH       THROUGH      AFTER TEN                    MARKET
                                           ONE YEAR     FIVE YEARS    TEN YEARS       YEARS         TOTAL        VALUE
                                           ---------    ----------    ----------    ----------    ---------    ---------
<S>                                        <C>          <C>           <C>           <C>           <C>          <C>
INVESTMENT SECURITIES
US Government agencies
  and mortgage backed securities           $     250    $    6,164    $    1,975    $   14,047    $  22,436    $  22,774
State and political subdivisions                 685         5,712         8,035         5,214       19,646       20,734
Other securities                                 501             -             -         1,998        2,499        2,499
                                           ---------    ----------    ----------    ----------    ---------    ---------
     Total                                 $   1,436    $   11,876    $   10,010    $   21,259    $  44,581    $  46,007
                                           =========    ==========    ==========    ==========    =========    =========
WEIGHTED AVERAGE YIELDS
U.S. Government agencies
  and mortgage backed securities                6.58%         3.79%         4.12%         5.33%
States and political subsdivisions              4.42          4.55          4.65          5.32
Other securities                                6.04             -             -          7.24
                                           ---------    ----------    ----------    ----------
       Total securities                         5.36%         4.15%         4.55%         5.51%        4.83%
                                           =========    ==========    ==========    ==========    =========

                                                                                       BOOK        MARKET
DECEMBER 31, 2001                                                                      VALUE        VALUE
                                                                                    ----------    ---------
Investment securities
U.S. Government agencies and  Mortgage Backed Securities                            $   19,922    $  20,197
States and political subdivisions                                                       20,397       20,668
Other securities                                                                         2,284        2,328
                                                                                    ----------    ---------
       Total                                                                        $   42,603    $  43,193
                                                                                    ==========    =========
</TABLE>

                                       35

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

DEPOSITS

Cardinal Bankshares relies on deposits generated in its market area to provide
the majority of funds needed to support lending activities and for investments
in liquid assets. More specifically, core deposits (total deposits less
certificates of deposits in denominations of $100,000 or more) are the primary
funding source. The Company's balance sheet growth is largely determined by the
availability of deposits in the markets it serves, the cost of attracting the
deposits, and the prospects of profitably utilizing the available deposits by
increasing the loan or investment portfolios. The sustained low interest rate
environment and other market conditions have resulted in depositors shopping for
deposit rates more than in the past. Increased customer awareness of interest
rates has added to the importance of effective interest rate management.
Accordingly, management must continuously monitor market pricing, competitor's
rates, and internal interest rate spreads to continue the Company's growth and
improve profitability. Cardinal Bankshares' interest rate management goals
include structuring rates in a manner that can promote both deposit and asset
growth while increasing overall profitability of the Company.

Average total deposits for the year ended December 31, 2002 rose $10.3 million
to $161.3 million, or 6.8% over 2001. The Company's average deposits that are
interest-bearing were at 87.5% in 2002, in essence unchanged from 2001. Average
demand deposits, which earn no interest, increased to $20.2 million in 2002 from
$19.0 million in 2001. Average deposits for the past three years are summarized
in Table 9 below.

TABLE 9.  DEPOSIT MIX

<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS)                              2002                      2001                      2000
--------------------------                      -----------------------   -----------------------   -----------------------
                                                 AVERAGE                   AVERAGE                   AVERAGE
                                                 BALANCE         %         BALANCE          %        BALANCE         %
                                                ----------   ----------   ----------   ----------   ----------   ----------

<S>                                             <C>              <C>      <C>              <C>      <C>              <C>
INTEREST-BEARING DEPOSITS:
   Interest checking                            $   12,538         7.77   $   10,513         6.96   $   10,673         7.64
   Money Market                                      7,629         4.73        6,163         4.08        5,842         4.18
   Savings deposits                                 21,424        13.29       14,032         9.29       14,772        10.57
   Time deposits                                    75,989        47.12       77,663        51.43       73,696        52.75
   Large denomination deposits                      23,518        14.58       23,629        15.65       17,216        12.32
                                                ----------   ----------   ----------   ----------   ----------   ----------
       Total interest-bearing deposits             141,098        87.49      132,000        87.41      122,199        87.46
Noninterest-bearing deposits                        20,184        12.51       19,020        12.59       17,518        12.54
                                                ----------   ----------   ----------   ----------   ----------   ----------
   Total deposits                               $  161,282       100.00   $  151,020       100.00   $  139,717       100.00
                                                ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>

The average balance of certificates of deposit issued in denominations of
$100,000 or more remained basically unchanged at $23.5 million compared to the
average for 2001. The Company maintained its strategy of supporting asset growth
with core deposits instead of aggressively soliciting more volatile, large
denomination certificates of deposit. Table 10 provides maturity information
relating to Certificate of Deposits of $100,000 or more at December 31, 2002.

                                       36

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

TABLE 10.  LARGE DENOMINATION DEPOSITS $100,000 AND OVER

ANALYSIS OF TIME DEPOSITS OF $100,000 OR MORE AT DECEMBER 31, 2002:

Time remaining to maturity:
    Less than three months                                     $       2,868
    Three through one year                                            11,721
    Over one year                                                      8,616
                                                               -------------
              Total time deposits of $100,000 or more          $      23,205
                                                               =============

CAPITAL ADEQUACY

The Company's capital serves to support asset growth and provide protection
against loss to depositors and creditors. Cardinal Bankshares strives to
maintain an optimum level of capital, commensurate with its risk profile, on
which an attractive return to stockholders can be realized over both the near
and long term, while serving depositors', creditors' and regulatory needs.

Common stock and capital surplus represents the stockholders' investment in the
Company and is a key source of capital. The largest component of capital for the
Company is earnings retained after payment of dividends to stockholders. Total
stockholders' equity was $23.2 million at December 31, 2002, an increase of $1.8
million or 8.2% compared with $21.5 million for the same period in 2001.

The FDIC has adopted capital guidelines to supplement the existing definitions
of capital for regulatory purposes and to establish minimum capital standards.
Specifically, the guidelines categorize assets and off-balance sheet items into
four risk-weighted categories. The minimum ratio of qualifying total capital to
risk-weighted assets is 8.0% of which at least 4.0% must be Tier 1 capital,
composed of common equity, retained earnings and a limited amount of perpetual
preferred stock, less certain goodwill items. Cardinal Bankshares had a ratio of
total capital to risk-weighted assets of 19.80% at December 31, 2002 and a ratio
of Tier 1 capital to risk-weighted assets of 18.54%. Both of these ratios well
exceed the capital requirements adopted by the federal regulatory agencies, and
continue to be equal to or above most of our peer group.

In addition, a minimum leverage ratio of Tier I capital to average total assets
for the previous quarter is required by federal bank regulators, ranging from 3%
to 5%, subject to the regulator's evaluation of the Company's overall safety and
soundness. As of December 31, 2002, Cardinal Bankshares had a ratio of year-end
Tier I capital to average total assets, as defined, of 12.37%. Table 11 below,
sets forth summary information with respect to the Company and the Bank's
capital ratios at December 31, 2002. All capital ratio levels indicate that
Cardinal Bankshares and Bank of Floyd are well capitalized.

                                       37

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

TABLE 11.  YEAR-END RISK-BASED CAPITAL

<TABLE>
<CAPTION>
DECEMBER 31, 2002 (IN THOUSANDS)                             2002                            2001
-------------------------------                  ----------------------------    ----------------------------
                                                                   BANK OF                         BANK OF
                                                 CONSOLIDATED       FLOYD        CONSOLIDATED       FLOYD
                                                 ------------    ------------    ------------    ------------
<S>                                              <C>             <C>             <C>             <C>
Tier I capital                                   $     22,949    $     14,124    $     21,262    $     12,457
 Qualifying allowance for loan losses
   (limited to 1.25% of risk-weighted assets)           1,550           1,507           1,302           1,277
                                                 ------------    ------------    ------------    ------------
Total regulatory capital                         $     24,499    $     15,631    $     22,564    $     13,734
                                                 ============    ============    ============    ============
Total risk-weighted assets                       $    123,752    $    120,351    $    123,078    $    121,464
                                                 ============    ============    ============    ============

Tier I as a percent of risk-weighted assets             18.54%          11.74%          17.28%          10.26%
Total regulatory capital as a percent of risk-
   weighted assets                                      19.80%          12.99%          18.33%          11.31%
Leverage ratio*                                         12.37%           7.77%          11.60%           7.03%
</TABLE>

*    Tier I capital divided by average total assets for the quarter ended
     December 31.

NONPERFORMING AND PROBLEM ASSETS

Certain credit risks are inherent in making loans, particularly commercial and
consumer loans. Management prudently assesses these risks and strives to manage
them effectively. The Bank seeks to use shorter-term loans and, although a
portion of the loans may be made based upon the value of collateral, it relies
primarily on the cash flow of the borrower as the source of repayment rather
than the value of the collateral.

The Bank also manages its repayment risks by adhering to internal credit
policies and procedures. These policies and procedures include officer and
customer limits, periodic loan documentation review and follow-up on exceptions
to credit policies.

Nonperforming assets at December 31, 2002 and 2001 are shown in Table 12 below.

                                       38

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

TABLE 12.  NONPERFORMING ASSETS

DECEMBER 31, 2002 (IN THOUSANDS)                     2002            2001
--------------------------------                 ------------    ------------

Non-accrual loans                                $          -    $         17
Loans past due 90 days or more                            100             636
Foreclosed properties                                     655              52
                                                 ------------    ------------
         Total nonperforming assets              $        755    $        705
                                                 ============    ============

Total nonperforming assets, which consist of nonaccrual loans, loans 90 days or
more past due, and other real estate owned were $755 thousand at December 31,
2002, an increase of $50 thousand from one year earlier.

ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses represents the amount available for credit losses
inherent in the Company's loan portfolio. The Company performs periodic
systematic reviews of its portfolio to identify these inherent losses, and to
assess the overall probability of collection of the portfolio. These reviews
result in the identification and quantification of loss factors, which are used
in determining the amount of the allowance for loan losses. In addition, the
Company also evaluates the prevailing economic and business conditions affecting
individual borrowers, changes in the size and characteristics of the loan
portfolio and other pertinent factors. The allowance is also subject to
regulatory examinations and determinations as to adequacy, which may take into
account such factors as the methodology used to calculate the allowance, and the
size of the allowance in comparison to peer companies identified by regulatory
agencies.

The Company is committed to the early recognition of problem loans and to a
conservative allowance. The Company believes the current allowance is adequate
to cover inherent losses in the loan portfolio. However, the allowance may be
increased or decreased in the future based upon management's assessment of the
factors outlined above. The allowance for loan losses was $1.8 million at
December 31, 2002 and $1.3 million at December 31, 2001. The allowance as a
percentage of period end loans was 1.54% at year-end 2002 and 1.14% at year-end
2001.

The provision for loan losses for the year ended December 31, 2002 was $375
thousand, a decrease of $67 thousand from the previous year. During 2002, the
Company saw modest loan growth of $586 thousand, or .5%, while the allowance for
loan losses increased 36%. After reviewing the growth in the loan portfolio,
changes in the components of nonperforming loans, and general economic trends,
management felt the current year decrease in the provision for loan losses was
appropriate. The provision recorded maintained the allowance at a level
considered adequate to cover potential losses.

                                       39

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

The provision for loan losses, net charge-offs and the activity in the allowance
for loan losses is detailed in Table 13.

TABLE 13.  LOAN LOSSES

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (IN THOUSANDS)                                2002             2001              2000
                                                                --------------    ---------------  ----------------
<S>                                                             <C>               <C>              <C>
Balance at beginning of year                                    $          1,300  $         1,134  $          1,661
Provision charged to expense                                                 375              442               500
                                                                ----------------  ---------------  ----------------
                                                                           1,675            1,576             2,161
Loans charged off:
   Commercial, financial and agricultural                                     44              322               740
   Real estate - mortgage                                                     27                -               294
   Real estate - construction                                                  -              129                 -
   Consumer                                                                   25               33                51
                                                                ----------------  ---------------  ----------------
         Total charge-offs                                                    96              484             1,085
                                                                ----------------  ---------------  ----------------
Recoveries of loans previously charged off:
   Commercial, financial and agricultural                                    186              205                52
   Real estate - residential mortgage                                          -                -                 2
   Real estate - construction                                                  -                -                 -
   Consumer                                                                    4                3                 4
                                                                ----------------  ---------------  ----------------
         Total recoveries                                                    190              208                58
                                                                ----------------  ---------------  ----------------
         Net (recoveries) charge - offs                                      (94)             276             1,027
                                                                ----------------  ---------------  ----------------
Balance at end of year                                          $          1,769  $         1,300  $          1,134
                                                                ================  ===============  ================
</TABLE>

                                       40

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

The Company had recoveries, net of charge-offs, of $94 thousand during 2002,
compared to net charge-offs of $276 thousand during 2001. Net loan charge-offs
as a percentage of average loans were 0.3% in 2001, and 1.1% in 2000. Gross
charge-offs during 2002 totaled $96 thousand compared to $484 thousand in 2001.
Recoveries during 2002 and 2001 totaled $190 thousand and $208 thousand,
respectively.

The Company has allocated the allowance for loan losses based on estimates of
the allowance needed for each component of the loan portfolio. The allocation of
the allowance as shown in Table 14. below should not be interpreted as an
indication that loan losses in future years will occur in the same proportions
or that the allocation indicates future loan loss trends. Furthermore, the
portion allocated to each loan category is not the total amount available for
future losses that might occur within such categories since the total allowance
is a general allowance applicable to the entire portfolio.

TABLE 14.  ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS)                       2002                    2001                    2000
--------------------------                 ---------------------   ---------------------   ---------------------
                                            AMOUNT    PERCENT/1/    AMOUNT    PERCENT/1/    AMOUNT    PERCENT/1/
                                           --------   ----------   --------   ----------   --------   ----------
<S>                                        <C>            <C>      <C>            <C>      <C>            <C>
BALANCE AT END OF PERIOD APPLICABLE TO:
Commercial, financial and agricultural     $    502         69.4   $    693         56.0   $    358         51.0
Real estate, construction                        65          1.9        118         11.6          -          8.1
Real estate, mortgage                           657         25.8        384         28.2        475         32.8
Consumer loans                                  510          2.7         43          3.8         44          6.8
Leases                                           35          0.1         62          0.4        257          1.3
                                           --------   ----------   --------   ----------   --------   ----------
   Total                                   $  1,769       100.00   $  1,300       100.00   $  1,134       100.00
                                           ========   ==========   ========   ==========   ========   ==========
</TABLE>

/(1)/  Represents the percentage of loans in each category to the total loans
       outstanding.

LIQUIDITY AND INTEREST RATE SENSITIVITY

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

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

The liquidity ratio, the level of liquid assets divided by total deposits plus
short-term liabilities, is considered to be adequate by management.

                                       41

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

TABLE 15.  INTEREST RATE SENSITIVITY (THOUSANDS)

<TABLE>
<CAPTION>
                                                                          DECEMBER 31, 2002
                                                                        MATURITIES/REPRICING
                                                     -------------------------------------------------------
                                                        1-3            4-12          13-60         OVER 60
                                                       MONTHS         MONTHS         MONTHS         MONTHS         TOTAL
                                                     ----------     ----------     ----------     ----------     ----------
<S>                                                  <C>            <C>            <C>            <C>            <C>
Earnings Assets:
   Loans                                             $   23,999     $   18,654     $   49,845     $   22,933     $  115,431
   Investments                                              380          1,056         11,876         31,279         44,591
   Interest-bearing deposits with other banks             8,065              -              -              -          8,065
   Federal funds sold                                     8,650              -              -              -          8,650
                                                     ----------     ----------     ----------     ----------     ----------
         Total                                       $   41,094     $   19,710     $   61,721     $   54,212     $  176,737
                                                     ==========     ==========     ==========     ==========     ==========

Interest-bearing deposits:
   Interest checking                                 $   13,341     $        -     $        -     $        -     $   13,341
   Money market                                           6,826              -              -              -          6,826
   Savings                                               27,117              -              -              -         27,117
   Certificates of deposit                               15,102         44,695         37,275              -         97,072
                                                     ----------     ----------     ----------     ----------     ----------
        Total                                        $   62,386     $   44,695     $   37,275    $         -     $  144,356
                                                     ==========     ==========     ==========     ==========     ==========

Interest sensitivity gap                             $  (21,292)    $  (24,985)    $   24,446     $   54,212     $   32,381
Cumulative interest sensitivity gap                  $  (21,292)    $  (46,277)    $  (21,831)    $   32,381     $   32,381
Ratio of sensitivity gap to total earning assets          (12.0)%        (14.1)%         13.8%          30.7%          30.7%
</TABLE>

Interest rate risk is the effect that changes in interest rates would have on
interest income and interest expense as interest-sensitive assets and
interest-sensitive liabilities either reprice or mature. Management attempts to
maintain the portfolios of earning assets and interest-bearing liabilities with
maturities or repricing opportunities at levels that will afford protection from
erosion of net interest margin, to the extent practical, from changes in
interest rates. Table 15 above shows the sensitivity of the Company's balance
sheet on December 31, 2002. This table reflects the sensitivity of the balance
sheet as of that specific date and is not necessarily indicative of the position
on other dates. At December 31, 2002, the Bank appeared to be
liability-sensitive with interest-bearing liabilities exceeding earning assets,
subject to changes in interest rates, for the first twelve months. Included in
the interest-bearing liabilities subject to interest rate changes within three
months are interest checking accounts and savings accounts which historically
have not been as interest-sensitive as other types of interest-bearing deposits.
The Bank appears to be asset-sensitive after the first twelve months.

Matching sensitive positions alone does not ensure that the Bank has no interest
rate risk. The repricing characteristics of assets are different from the
repricing characteristics of funding sources. Thus, net interest income can be
impacted by changes in interest rates even if the repricing opportunities of
assets and liabilities are perfectly matched.

                                       42

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

EARNINGS AND BALANCE SHEET ANALYSIS

2001 Compared to 2000 - On a tax-equivalent basis, net interest income for 2001
was $6.4 million, an increase of 7.7% from 2000. This growth resulted primarily
from the higher levels of loans achieved in 2001. Lower overall yields on
interest-earning assets during 2001, however, resulted in the Company's net
interest margin declining 7 basis points from 3.96% for 2000 to 3.89% for 2001.
Average interest-earning assets for 2001 increased $14.5 million, or 9.6%. This
growth produced approximately $1.0 million in additional income. Average
interest-bearing liabilities increased $10.0 million, or 8.2%, from 2000 and
interest expense increased $.5 million, or 8.2%, over 2000. The overall rate
paid on interest-bearing liabilities for the year 2001 remained unchanged from
2000; however, the increased volume of deposits taken as a whole generated a
higher level of funding costs for the year.

The Company's investment portfolio decreased by $6.5 million on average to $49.7
million for 2001, mainly due to securities being called or repaid prior to their
scheduled maturity dates.

In 2001, total loans grew $16.6 million, or 18.5%, to an average of $106.4
million. Nonfarm and nonresidential loans secured by real estate accounted for
the majority of this increase.

Total average deposits increased $11.3 million, or 8.1%, from 2000 to an average
of $151.0 million for 2001. Large denomination, time and demand deposits grew
$6.4 million, $4.0 million and $1.5 million, respectively.

Noninterest income increased $94 thousand in 2001 compared to 2000. Although
service charges on deposit accounts and other fees grew by $48 thousand and
securities gains increased $44 thousand, lower levels of other income offset
much of this growth. Noninterest expense was $3.5 million for 2001, an increase
of 6.7% over the prior year. Salaries and benefits, the largest component of
noninterest expense, grew principally due to normal merit increases.

The allowance for loan losses at December 31, 2001 was $1.3 million compared to
$1.1 million a year earlier. The allowance for loan losses as a percentage of
period end loans was 1.13% compared to 1.21% at year-end 2000. Net charge-offs
were $276 thousand in 2001, compared to $1.0 million in 2000. The higher volume
of charge-offs in 2000 were related to leases. Nonperforming loans totaled $705
thousand at December 31, 2001, a decline of 16.4% from 2000. This reduction was
primarily due to a decrease in nonaccrual loans and foreclosed properties of
$441 thousand.

A WARNING ABOUT FORWARD-LOOKING STATEMENTS

This annual report 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.

                                       43

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

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.

                                       44

<PAGE>

STAFF

                                    MAIN OFFICE
                                    -----------

       Sheena Akers                Ralph Edwards                Andrea Mollick
        Tara Akers                 Amanda Farmer                 Betty Moran
       Shelley Bond               Sandra Gallimore             Teresa Pendleton
      Jessica Bower                Regena Gibson                Gail Phillips
      Patricia Bower                Bud Gilliam                 Janet Roberson
      Regina Compton                 Gail Goad                    Jan Rorrer
      Beulah Correll                  Gay Grim                  Robin Sutphin
        Leslie Cox                  Lucy Harris                  Lisa Thomas
      Shelia Dehart                 Teresa Keith                Patsy Wallace
     Roger Dickerson             Michael McConnell                Gina West
      Vicky Diamond                Yara Middleton                Jeanne Woods

       CAVE SPRING                 CHRISTIANSBURG                 HILLSVILLE
    ----------------               --------------               --------------
      Heather Earley                Karen Bowman                Rebecca Adams
     Jessica Flinchum                 Kay King                   Louise Goad
       Kevin Harvey                 Sharon Zeman                Karen Pearman
    Jennifer Pastrana                                           Frances Sharpe

                                     WILLIS
                                     ------
                                  Karen Sutphin

                                       45

<PAGE>

BOARD OF DIRECTORS OF CARDINAL BANKSHARES AND BANK OF FLOYD

K. Venson Bolt                William R. Gardner, Jr.        Leon Moore

Joseph Howard Conduff         C. W. Harman                   Dorsey H. Thompson

                              Kevin D. Mitchell

<TABLE>
<CAPTION>
OFFICERS OF CARDINAL BANKSHARES
-------------------------------------------------------------------------------------------------------------------
<S>                                <C>                <C>
Leon Moore............................................Chairman of the Board, President, and Chief Executive Officer

K. Venson Bolt...........................................................................Vice Chairman of the Board

Ray A. Fleming.................................................Executive Vice President and Chief Financial Officer

Wanda M. Gardner................................................................Vice President and Internal Auditor

Annette V. Battle....................................................Executive Secretary and Secretary to the Board

OFFICERS OF BANK OF FLOYD

-------------------------------------------------------------------------------------------------------------------

                                    EXECUTIVE
Leon Moore.............................................Chairman of the Board, President and Chief Executive Officer

K. Venson Bolt...........................................................................Vice Chairman of the Board

Ray A. Fleming..................................................................Chief Financial Officer and Cashier

Fred L. Newhouse, Jr.......................................................................Executive Vice President

Dianne H. Hamm................................................................Vice President and Compliance Officer

Wanda M. Gardner................................................................Vice President and Internal Auditor

Sunny K. Cornwell........................................................Assistant Vice President and Credit Review

Annette V. Battle....................................................Executive Secretary and Secretary to the Board

C.W. Harman.......................................................................Assistance Secretary to the Board

                                   MAIN OFFICE

Marie V. Thomas..................................................................Vice President and Human Resources

Mary Ann Cox.............................................Assistant Vice President, Financial Products and Marketing

Lois A. Bond...............................................................................Assistant Vice President

Betty A. Whitlock..................................................Assistant Cashier and Manager of Data Processing

Patricia B. Spangler............................................................Assistant Cashier and Funds Manager

Ola Lee Driskell.................................................................Assistant Cashier and Loan Officer

Patricia K. Harris................................................................................Assistant Cashier

Carolyn W. Reed...................................................................................Assistant Cashier

Shelby L. Rutherford.......................................................................Administrative Assistant

                               CAVE SPRING OFFICE

Dennis D. McDaniel......................................................Assistant Vice President and Branch Manager

                              CHRISTIANSBURG OFFICE

Bill R. Hubble.............................................................................Assistant Vice President

                                HILLSVILLE OFFICE

Eugene G. Shockley......................................................Assistant Vice President and Branch Manager
</TABLE>

                                       46

<PAGE>

STOCKHOLDER INFORMATION

ANNUAL MEETING

The annual meeting of shareholders will be held Wednesday, April 23, 2003, at
2:00 p.m. in the Bank of Floyd's conference room, 101 Jacksonville Circle,
Floyd, Virginia.

REQUESTS FOR INFORMATION

Requests for information should be directed to Mrs. Annette Battle, Recording
Secretary, at Bank of Floyd, Post Office Box 215, Floyd, Virginia, 24091;
telephone (540) 745-4191. A copy of the Company's Form 10-KSB for 2002 can be
obtained from the Securities and Exchange Commission's website at www.sec.gov
after March 31, 2003 or upon request from the Company.

INDEPENDENT AUDITORS                                   STOCK TRANSFER AGENT

Larrowe & Company, PLC                                 Bank of Floyd
   Certified Public Accountants                        Post Office Box 215
Post Office Box 760                                    Floyd, Virginia  24091
Galax, Virginia  24333

FEDERAL DEPOSIT INSURANCE CORPORATION

The Bank is a member of the FDIC. This statement has not been reviewed, or
confirmed for accuracy or relevance by the Federal Deposit Insurance
Corporation.

                   Member of Federal Reserve Bank of Richmond.

                                   ----------

                  Member of Federal Home Loan Bank of Atlanta.

                                   ----------

                                 BANKING OFFICES
                                 ---------------

        FLOYD OFFICE                                   CAVE SPRING OFFICE
   101 Jacksonville Circle                              4094 Postal Drive
    Floyd, Virginia 24091                            Roanoke, Virginia 24018
       (540) 745-4191                                   (540) 774-1111
         ATM location                                     ATM location
                            CHRISTIANSBURG OFFICE
                            Post Office Box 6113
                       Christiansburg, Virginia 24068
                               (540) 381-8121

        WILLIS OFFICE                                  HILLSVILLE OFFICE
     Floyd Highway South                              185 South Main Street
   Willis, Virginia 24380                               (276) 728-2341
       (540) 745-4191                                    ATM location

                                       47