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U.S. SECURITIES AND EXCHANGE COMMISSION

~~Washington,~~WASHINGTON, D.C. 20549

FORM ~~10-QSB~~10-Q

ý~~QUARTERLY REPORT PURSUANT TO SECTION~~ Quarterly Report Pursuant to Section 13 ORor 15(d)
~~OF THE SECURITIES EXCHANGE ACT OF~~of the Securities Exchange Act of 1934

For the quarterly period ended ~~September 30, 2002~~March 31, 2004

o Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the transition period from to

Commission ~~File No.~~file number: 0-24557

CARDINAL FINANCIAL CORPORATION

(Exact ~~name~~Name of ~~registrant~~Registrant as ~~specified~~Specified in its ~~charter)~~Charter)

Virginia		54-1874630
(State or ~~other jurisdiction~~Other Jurisdiction of ~~incorporation~~Incorporation or ~~organization)~~Organization)		~~54-1874630~~ (I.R.S. Employer Identification No.)

8270 Greensboro Drive, Suite 500 McLean, Virginia		22102
(Address of Principal Executive Offices)		(Zip Code)

~~10555 Main Street, Suite 500, Fairfax, Virginia, 22030~~
~~(Address of principal executive offices)~~

~~Issuer's telephone number including area code:~~ (703) ~~934-9200~~584-3400

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the ~~Registrant~~registrant (1) has filed all ~~documents and~~ reports required to be filed by Section ~~12,~~ 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý Noo

~~On November 12, 2002, there were 10,044,345~~

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes o No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

18,371,395 shares of ~~Cardinal Financial Corporation Common Stock,~~common stock, par value $1.00 per share, ~~outstanding.~~
outstanding as of April 12, 2004

~~Transitional Small Business Disclosure Format: Yes    No~~ ý

CARDINAL FINANCIAL CORPORATION
INDEX TO FORM ~~10-QSB~~
10-Q
PART I—I – FINANCIAL INFORMATION
3

Item 1. Financial ~~Statements (Unaudited):~~Statements:

3

Consolidated Statements of Condition
~~September 30, 2002~~March 31, 2004 and December 31, ~~2001~~2003

1
3

Consolidated Statements of Operations
For the three ~~and nine~~ months ended ~~September 30, 2002~~March 31, 2004 and ~~2001~~2003

2
4

Consolidated Statements of Comprehensive Income (Loss)
For the three ~~and nine~~ months ended ~~September 30, 2002~~March 31, 2004 and ~~2001~~2003

3
5

Consolidated Statements of Changes In ~~Shareholders'~~Shareholders’ Equity
For the ~~nine~~three months ended ~~September 30, 2002~~March 31, 2004 and ~~2001~~2003

4
6

Consolidated Statements of Cash Flows
For the ~~nine~~three months ended ~~September 30, 2002~~March 31, 2004 and ~~2001~~2003

5
7

Notes to Consolidated Financial Statements

6
8

Item 2.

~~Management's~~ Management’s Discussion and Analysis of Financial Condition and Results of Operations

11
12

Item 3. Quantitative and Qualitative Disclosures About Market Risk

31

Item 4. Controls and Procedures

26
32

~~PART II—OTHER INFORMATION~~

27

~~Item 1.~~

~~Legal Proceedings~~

27

PART II – OTHER INFORMATION
33
Item 1. Legal Proceedings
33
Item 2.

Changes in Securities and Use of Proceeds

27
33

Item 3.

Defaults Upon Senior Securities

27
33

Item 4.

Submission of Matters to a Vote of Security Holders

27
33

Item 5.

Other Information

28
33

Item 6.

Exhibits and Reports on Form 8-K

28
33

SIGNATURES AND CERTIFICATIONS

29
34
i
2

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
~~September 30, 2002~~
At March 31, 2004 and December 31, ~~2001~~
2003
(Dollars in thousands, except share data)

(Unaudited)
September 30,
2002
December 31,
2001

Assets
Cash and due from banks $ 25,729 $ 11,446
Federal funds sold 61,186 23,013

Total cash and cash equivalents 86,915 34,459
Investment securities available-for-sale 137,945 34,147
Other investments 1,263 1,268
Loans held for sale — 4,732
Loans receivable, net of fees 216,355 200,911
Allowance for loan losses (3,073 ) (3,104 )

213,282 197,807
Premises and equipment, net 4,610 5,077
Goodwill and other intangibles 646 668
Accrued interest and other assets 2,141 1,426

Total assets $ 446,802 $ 279,584

Liabilities and Shareholders' Equity
Deposits $ 403,668 $ 246,024
Other borrowed funds 1,000 9,824
Accrued interest and other liabilities 1,404 3,112

Total liabilities 406,072 258,960
Preferred stock, $1 par value, 10,000,000 shares authorized Series A preferred stock, cumulative convertible, 1,364,686 and 1,364,714 shares outstanding in 2002 and 2001, respectively 1,365 1,365 ��
Common stock, $1 par value, 50,000,000 shares authorized, 10,044,345 and 4,294,323 shares outstanding in 2002 and 2001, respectively 10,044 4,294
Additional paid-in capital 51,231 38,488
Accumulated deficit (24,358 ) (23,249 )
Accumulated other comprehensive income (loss) 2,448 (274 )

Total shareholders' equity 40,730 20,624

Total liabilities and shareholders' equity $ 446,802 $ 279,584

March 31,
2004

December 31,
2003

(Unaudited)

Assets

Cash and due from banks

$
10,350

$
9,555

Federal funds sold

11,381

3,528

Total cash and cash equivalents

21,731

13,083

Investment securities available-for-sale

167,981

130,762

Investment securities held-to-maturity

154,140

142,852

Total investment securities

322,121

273,614

Other investments

3,986

3,517

Loans held for sale

688

—

Loans receivable, net of fees

334,476

336,002

Allowance for loan losses

(4,347
)
(4,344
)

Loans receivable, net

330,129

331,658

Premises and equipment, net

7,107

6,707

Deferred tax asset

4,111

4,473

Accrued interest and other assets

3,578

3,196

Total assets

$
693,451

$
636,248

Liabilities and Shareholders’ Equity

Deposits

$
525,931

$
474,129

Other borrowed funds

71,758

74,457

Accrued interest and other liabilities

2,422

2,250

Total liabilities

600,111

550,836

Preferred stock, $1 par value, 10,000,000 shares authorized; Series A preferred stock, cumulative convertible, 0 and 1,364,062 shares outstanding in 2004 and 2003, respectively

—

1,364

Common stock, $1 par value, 50,000,000 shares authorized; 18,371,395 and 16,377,337 shares outstanding in 2004 and 2003, respectively

18,371

16,377

Additional paid-in capital

92,552

86,790

Accumulated deficit

(17,895
)
(18,614
)
Accumulated other comprehensive income (loss)

312

(505
)

Total shareholders’ equity

93,340

85,412

Total liabilities and shareholders’ equity

$
693,451

$
636,248

See accompanying notes to consolidated financial statements.
1
3

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
~~For the three and nine~~
Three months ended ~~September 30, 2002~~March 31, 2004 and ~~2001~~
2003
(~~Dollars in~~In thousands, except per share data)
(Unaudited)

Three Months Ended
September 30,
Nine Months Ended
September 30,

2002
2001
2002
2001

Interest income:
Loans receivable $ 3,737 $ 3,879 $ 10,967 $ 11,074
Federal funds sold 260 218 613 926
Investment securities available-for-sale 1,471 95 3,284 285
Other investments 17 22 53 66

Total interest income 5,485 4,214 14,917 12,351
Interest expense:
Deposits 2,603 1,703 6,834 5,335
Other borrowed funds 40 122 208 368

Total interest expense 2,643 1,825 7,042 5,703

Net interest income 2,842 2,389 7,875 6,648
Provision for loan losses 95 190 134 375

Net interest income after provision for loan losses 2,747 2,199 7,741 6,273
Non-interest income:
Service charges on deposit accounts 133 102 363 271
Loan service charges 91 144 286 349
Investment fee income 188 472 754 1,560
Net gain on sales of loans 3 2 50 14
Net gain on investment securities available-for-sale 121 — 121 —
Net gain on sales of other assets — 1 39 5
Other income 192 133 553 277

Total non-interest income 728 854 2,166 2,476
Non-interest expense:
Salary and benefits 1,368 1,963 4,176 5,801
Occupancy 367 344 1,002 1,027
Professional fees 235 192 727 450
Depreciation 176 210 555 596
Writedown on WorldCom bond — — 1,660 —
Amortization of intangibles — 173 22 523
Other operating expenses 900 877 2,503 2,626

Total non-interest expense 3,046 3,759 10,645 11,023

Net income (loss) before income taxes 429 (706 ) (738 ) (2,274 )
Provision for income taxes — — — —

Net income (loss) $ 429 $ (706 ) $ (738 ) $ (2,274 )

Dividends to preferred shareholders 124 128 371 384

Net income (loss) to common shareholders $ 305 $ (834 ) $ (1,109 ) $ (2,658 )

Basic and diluted earnings (loss) per common share $ 0.03 $ (0.20 ) $ (0.15 ) $ (0.62 )

Weighted-average common shares outstanding — basic 10,044,345 4,256,797 7,243,053 4,255,432

Weighted-average common shares outstanding — diluted 10,142,930 4,256,797 7,243,053 4,255,432

2004

2003

Interest income:

Loans receivable

$
4,728

$
4,031

Federal funds sold

28

39

Investment securities available-for-sale

1,271

1,678

Investment securities held-to-maturity

1,350

—

Other investments

38

24

Total interest income

7,415

5,772

Interest expense:

Deposits

2,282

2,240

Other borrowed funds

300

73

Total interest expense

2,582

2,313

Net interest income

4,833

3,459

Provision for loan losses

74

80

Net interest income after provision for loan losses

4,759

3,379

Non-interest income:

Service charges on deposit accounts

170

134

Loan service charges

195

113

Investment fee income

178

126

Net gain on sales of loans

13

9

Net realized gain on investment securities available-for-sale

241

493

Other income

80

101

Total non-interest income

877

976

Non-interest expense:

Salary and benefits

2,140

1,649

Occupancy

496

480

Professional fees

154

369

Depreciation

310

196

Other operating expenses

1,455

1,171

Total non-interest expense

4,555

3,865

Net income before income taxes

1,081

490

Provision for income taxes

362

—

Net income

$
719

$
490

Dividends to preferred shareholders

—

124

Net income to common shareholders

$
719

$
366

Earnings per common share - basic

$
0.04

$
0.04

Earnings per common share - diluted

$
0.04

$
0.04

Weighted-average common shares outstanding - basic

17,461

10,046

Weighted-average common shares outstanding - diluted

17,885

10,171

See accompanying notes to consolidated financial statements.
2
4

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
~~For the three and nine~~
Three months ended ~~September 30, 2002~~March 31, 2004 and ~~2001~~
2003
(Dollars in thousands)
(Unaudited)

Three Months Ended
September 30,
Nine Months Ended
September 30,

2002
2001
2002
2001

Net income (loss) $ 429 $ (706 ) $ (738 ) $ (2,274 )
Other comprehensive income:
Unrealized gain on available-for-sale investment securities 1,581 62 2,722 —

Comprehensive income (loss) $ 2,010 $ (644 ) $ 1,984 $ (2,274 )

2004

2003

Net income

$
719

$
490

Other comprehensive income (loss):

Unrealized gain (loss) on available-for-sale investment securities:

Unrealized holding gain (loss) arising during the quarter, net of tax

976

(2,199
)
Less: reclassification adjustment for gains included in net income, net of tax

159

493

Comprehensive income (loss)

$
1,536

$
(1,216
)
See accompanying notes to consolidated financial statements.
3
5

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN ~~SHAREHOLDERS'~~SHAREHOLDERS’ EQUITY
~~For the nine~~
Three months ended ~~September 30, 2002~~March 31, 2004 and ~~2001~~
2003
(~~Dollars in~~In thousands)
(Unaudited)

Preferred
Shares
Preferred
Stock
Common
Shares
Common
Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total

Balance, December 31, 2000 1,411 $ 1,411 4,253 $ 4,253 $ 38,466 $ (10,022 ) $ 4 $ 34,112
Issuance of stock awards — — 3 3 3 — — 6
Stock options exercised — — 1 1 3 — — 4
Dividends on preferred stock — — — — — (384 ) — (384 )
Net loss — — — — — (2,274 ) — (2,274 )

Balance, September 30, 2001 1,411 $ 1,411 4,257 $ 4,257 $ 38,472 $ (12,680 ) $ 4 $ 31,464

Balance, December 31, 2001 1,365 $ 1,365 4,294 $ 4,294 $ 38,488 $ (23,249 ) $ (274 ) $ 20,624
Dividends on preferred stock — — — — — (371 ) — (371 )
Rights offering shares issued — — 2,437 2,437 5,462 — — 7,899
Public offering shares issued — — 3,313 3,313 7,281 — — 10,594
Change in unrealized gain on investment securities available-for-sale — — — — — — 2,722 2,722
Net loss — — — — — (738 ) — (738 )

Balance, September 30, 2002 1,365 $ 1,365 10,044 $ 10,044 $ 51,231 $ (24,358 ) $ 2,448 $ 40,730

Preferred
Shares

Preferred
Stock

Common
Shares

Common
Stock

Additional
Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income (Loss)

Total

Balance, December 31, 2002

1,365

$
1,365

10,044

$
10,044

$
51,231

$
(24,273
)
$
2,345

$
40,712

Stock options exercised

—

—

3

3

7

—

—

10

Dividends on preferred stock

—

—

—

—

—

(124
)
—

(124
)

Change in unrealized gain (loss) on investment securities available-for-sale

—

—

—

—

—

—

(1,706
)
(1,706
)

Net income

—

—

—

—

—

490

—

490

Balance, March 31, 2003

1,365

$
1,365

10,047

$
10,047

$
51,238

$
(23,907
)
$
639

$
39,382

Balance, December 31, 2003

1,364

$
1,364

16,377

$
16,377

$
86,790

$
(18,614
)
$
(505
)
$
85,412

Stock options exercised

—

—

23

23

66

—

—

89

Public offering shares issued

—

—

945

945

5,358

—

—

6,303

Preferred stock converted to common stock

(1,364
)
(1,364
)
1,026

1,026

338

—

—

—

Change in unrealized gain (loss) on investment securities available-for-sale

—

—

—

—

—

—

817

817

Net income

—

—

—

—

—

719

—

719

Balance, March 31, 2004

—

$
—

18,371

$
18,371

$
92,552

$
(17,895
)
$
312

$
93,340

See accompanying notes to consolidated financial statements.
4
6

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
~~For the nine~~
Three months ended ~~September 30, 2002~~March 31, 2004 and ~~2001~~
2003
(Dollars in thousands)
(Unaudited)

2002
2001

Cash flows from operating activities:
Net loss $ (738 ) $ (2,274 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation 555 596
Amortization of intangibles, premiums and discounts 626 548
Provision for loan losses 134 375
Originations of loans held for sale (4,369 ) —
Proceeds from the sale of loans held for sale 9,038 —
Writedown on WorldCom bond 1,660 —
Gain on sale of loans held for sale (50 ) (14 )
Gain on sale of investment securities available-for-sale (121 ) —
Gain on sale of other assets (39 ) (5 )
Increase in accrued interest and other assets (715 ) (125 )
Increase (decrease) in accrued interest and other liabilities (1,708 ) 889
Compensation related to stock awards — 6

Net cash provided by (used in) operating activities 4,273 (4 )

Cash flows from investing activities:
Purchase of premises and equipment (88 ) (412 )
Proceeds from sale of premises and equipment — 12
Proceeds from sale, maturity and call of investment securities available-for-sale 16,053 4,500
Proceeds from sale of other investments 188 349
Purchase of investment securities available-for-sale (131,129 ) (3,601 )
Purchase of other investments (184 ) (114 )
Redemptions of investment securities available-for-sale 11,736 1,043
Net increase in loans receivable (15,335 ) (42,448 )

Net cash used in investing activities (118,759 ) (40,671 )

Cash flows from financing activities:
Net increase in deposits 157,644 49,279
Net increase (decrease) in other borrowed funds (8,824 ) 4,069
Proceeds from rights offering 7,899 —
Proceeds from public offering 10,594 —
Dividends on preferred stock (371 ) (384 )
Stock options exercised — 4

Net cash provided by financing activities 166,942 52,968

Net increase in cash and cash equivalents 52,456 12,293
Cash and cash equivalents at beginning of period 34,459 29,488

Cash and cash equivalents at end of period $ 86,915 $ 41,781

Supplemental disclosure of cash flow information:
Cash paid during period for interest $ 6,947 $ 5,693

2004

2003

Cash flows from operating activities:

Net income

$
719

$
490

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation

310

196

Amortization of premiums and discounts

503

427

Provision for loan losses

74

80

Originations of loans held for sale

(2,569
)
(172
)
Proceeds from the sale of loans held for sale

1,894

172

Gain on sale of loans held for sale

(13
)
(9
)
Gain on sale of investment securities available-for-sale

(241
)
(493
)
(Increase) decrease in accrued interest, other assets and deferred tax asset

(20
)
3,419

Increase (decrease) in accrued interest and other liabilities

172

(17,415
)

Net cash provided by (used in) operating activities

829

(13,305
)

Cash flows from investing activities:

Purchase of premises and equipment

(710
)
(448
)
Proceeds from sale, maturity and call of investment securities available-for-sale

13,719

22,890

Proceeds from maturity and call of investment securities held-to-maturity

3,490

—

Proceeds from sale of other investments

261

—

Purchase of investment securities available-for-sale

(55,485
)
(71,017
)
Purchase of investment securities held-to-maturity

(18,487
)
—

Purchase of other investments

(729
)
(1,023
)
Redemptions of investment securities available-for-sale

3,602

11,537

Redemptions of investment securities held-to-maturity

5,389

—

Net (increase) decrease in loans receivable

1,274

(2,781
)

Net cash used in investing activities

(47,676
)
(40,842
)

Cash flows from financing activities:

Net increase (decrease) in deposits

51,802

(6,383
)
Net decrease in other borrowed funds

(7,074
)
—

Proceeds from FHLB advances - long term

5,000

25,000

Repayments of FHLB advances - long term

(625
)
(2,000
)
Proceeds from public offering

6,303

—

Stock options exercised

89

10

Dividends on preferred stock

—

(124
)

Net cash provided by financing activities

55,495

16,503

Net increase (decrease) in cash and cash equivalents

8,648

(37,644
)

Cash and cash equivalents at beginning of the quarter

13,083

63,371

Cash and cash equivalents at end of the quarter

$
21,731

$
25,727

Supplemental disclosure of cash flow information:

Cash paid during the quarter for interest

$
2,574

$
2,275

See accompanying notes to consolidated financial statements.
5
7

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~September 30, 2002~~
~~(Unaudited)~~
March 31, 2004
(Unaudited)
Note 1
Organization
Cardinal Financial Corporation (the ~~"Company"~~”Company”) was incorporated on November 24, 1997 under the laws of the Commonwealth of Virginia as a bank holding company whose activities consist of investment in its wholly-owned subsidiaries. ~~In addition to~~The Company opened Cardinal Bank, N.A.~~, which began operations~~ in 1998 and Cardinal Wealth Services, Inc., an investment services subsidiary, in 1999. In 1999, the Company opened ~~the following three~~two additional banking subsidiaries and, in ~~1999: Cardinal~~~~Wealth Services, Inc.~~,late 2000, completed an ~~investment subsidiary (as of February 1, 1999); Cardinal Bank—~~~~Manassas/Prince William~~~~, N.A. (as of July 26, 1999); and Cardinal Bank—~~~~Dulles~~~~, N.A. (as of August 2, 1999). On September 1, 2000, the Company completed its~~ acquisition of Heritage Bancorp, Inc. and its banking subsidiary, The Heritage Bank ~~headquartered in McLean, Virginia. The Heritage Bank was renamed and became the Company's fourth banking subsidiary, Cardinal Bank—~~~~Potomac~~(“Heritage”). ~~On November 1, 2001, the Company consolidated two of its~~These banking subsidiaries ~~Cardinal Bank—~~~~Dulles~~~~, N.A. and Cardinal Bank—~~~~Potomac~~,were consolidated into Cardinal Bank, N.A. Onas of March 1, ~~2002, the Company consolidated Cardinal Bank—~~~~Manassas/ Prince William,~~ ~~N.A. into Cardinal Bank, N.A., now the Company's only remaining banking subsidiary.~~2002.
Basis of Presentation

In the opinion of management, the accompanying consolidated financial statements have been prepared in accordance with the requirements of Regulation S-X, Article 10. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2002~~March 31, 2004 are not necessarily indicative of the results to be expected for the full year ending December 31, ~~2002.~~2004. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are presented in the ~~Company's~~Company’s Annual Report on Form 10-KSB for the year ended December 31, ~~2001.~~2003 (the “2003 Form 10-KSB”).
Stock-Based Compensation
At March 31, 2004, the Company had two stock-based employee compensation plans, the 1999 Stock Option Plan and the 2002 Equity Compensation Plan. These plans are described more fully in Footnote 14 of the 2003 Form 10-KSB.
As permitted under Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, which amended SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and related interpretations including Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB No. 25. The following table illustrates the effect on net income and earnings per common share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.
8

Three Months Ended March 31,

(Dollars in thousands, except per share data)

2004

2003

Net income to common shareholders

$
719

$
366

Deduct: Total stock-based employee compensation expense determined under fair value- based method for all awards

(595
)
(223
)
Pro forma net income

$
124

$
143

Earnings per common share:

Basic - as reported

$
0.04

$
0.04

Basic - as pro forma

0.01

0.01

Diluted - as reported

0.04

0.04

Diluted - as pro forma

0.01

0.01

The weighted average per share fair values of grants made for the three months ended March 31, 2004 and 2003 were $2.91 and $2.07, respectively. The fair values of the options granted were estimated on the grant date using the Black - Scholes option - pricing model based on the following weighted average assumptions:

Three Months Ended March 31,

2004

2003

Estimated option life

10 years

10 years

Risk free interest rate

3.99
%
4.25
%
Expected volatility

11.80
%
20.40
%
Expected dividend yield

0.00
%
0.00
%
There were 286,518 options granted during the three months ended March 31, 2004. Of those grants, 175,204 immediately vested on the grant date.
9

Note 2
Segment Disclosures
The Company operates and reports in two business segments, commercial banking and investment ~~advisory~~ services. The commercial banking segment includes both commercial and consumer lending and provides customers such products ~~such~~ as commercial loans, real estate loans, and other business financing and consumer loans. In addition, this segment also provides customers with several choices of deposit products including demand deposit accounts, savings accounts and certificates of deposit. The investment ~~advisory~~ services segment provides advisory services to businesses and individuals, including financial planning and retirement/estate planning.
6

Information about the reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the three ~~and nine~~ months ended ~~September 30, 2002~~March 31, 2004 and ~~2001,~~2003, follows:
~~For~~As of and for the Three Months Ended ~~September 30, 2002:~~March 31, 2004:

Banking
Investment
Advisory
Intersegment
Elimination
Other
Consolidated

(Dollars in thousands)

Net interest income $ 2,810 $ — $ — $ 32 $ 2,842
Provision for loan losses 95 — — — 95
Non-interest income 505 188 — 35 728
Non-interest expense 2,725 223 — 98 3,046

Net income (loss) $ 495 $ (35 ) $ — $ (31 ) $ 429

Total Assets $ 443,511 $ 332 $ (38,192 ) $ 41,151 $ 446,802
(Dollars in thousands)

Banking

Investment
Services

Intersegment
Elimination

Other

Consolidated

Net interest income

$
4,800

$
—

$
—

$
33

$
4,833

Provision for loan losses

74

—

—

—

74

Non-interest income

699

178

—

—

877

Non-interest expense

4,050

239

—

266

4,555

Provision for income taxes

462

(21
)

(79
)
362

Net income (loss)

$
913

$
(40
)
$
—

$
(154
)
$
719

Total assets

$
687,543

$
741

$
(88,338
)
$
93,505

$
693,451

~~For the Nine Months Ended September 30, 2002:~~

Banking
Investment
Advisory
Intersegment
Elimination
Other
Consolidated

(Dollars in thousands)

Net interest income $ 7,824 $ — $ — $ 51 $ 7,875
Provision for loan losses 134 — — — 134
Non-interest income 1,244 756 — 166 2,166
Non-interest expense 9,246 914 — 485 10,645

Net loss $ (312 ) $ (158 ) $ — $ (268 ) $ (738 )

Total Assets $ 443,511 $ 332 $ (38,192 ) $ 41,151 $ 446,802
~~For~~As of and for the Three Months Ended ~~September 30, 2001:~~March 31, 2003:

Commercial
Banking
Investment
Advisory
Intersegment
Elimination
Other
Consolidated

(Dollars in thousands)

Net interest income $ 2,387 $ — $ — $ 2 $ 2,389
Provision for loan losses 190 — — — 190
Non-interest income 350 474 — 30 854
Non-interest expense 2,671 480 — 608 3,759

Net loss $ (124 ) $ (6 ) $ — $ (576 ) $ (706 )

Total Assets $ 255,252 $ 421 $ (29,355 ) $ 32,319 $ 258,637
~~For the Nine Months Ended September 30, 2001:~~

Commercial
Banking
Investment
Advisory
Intersegment
Elimination
Other
Consolidated

(Dollars in thousands)

Net interest income $ 6,623 $ — $ — $ 25 $ 6,648
Provision for loan losses 375 — — — 375
Non-interest income 875 1,564 — 37 2,476
Non-interest expense 7,761 1,597 — 1,665 11,023

Net loss $ (638 ) $ (33 ) $ — $ (1,603 ) $ (2,274 )

Total Assets $ 255,252 $ 421 $ (29,355 ) $ 32,319 $ 258,637
7

(Dollars in thousands)

Banking

Investment
Services

Intersegment
Elimination

Other

Consolidated

Net interest income

$
3,432

$
—

$
—

$
27

$
3,459

Provision for loan losses

80

—

—

—

80

Non-interest income

850

126

—

—

976

Non-interest expense

3,389

168

—

308

3,865

Net income (loss)

$
813

$
(42
)
$
—

$
(281
)
$
490

Total assets

$
481,081

$
241

$
(36,866
)
$
39,739

$
484,195

The Company does not have any operating segments other than those reported. Parent ~~Company~~company financial information is included in the ~~Other~~“Other” category above and represents the overhead function rather than an operating segment. ~~Parent Company's~~The parent company’s most significant assets are its net investments in its subsidiaries. The parent company’s net interest income is comprised of interest income from federal funds sold and ~~investment securities.~~other investments.
10

Note 3
Earnings ~~(Loss)~~ Per Common Share
The following ~~discloses~~is the calculation of basic and diluted earnings ~~(loss)~~ per common share for the three ~~and nine~~ months ended ~~September 30, 2002~~March 31, 2004 and ~~2001.~~2003. Stock options outstanding as of ~~September 30, 2002~~March 31, 2004 and ~~2001 are 573,073~~2003 were 1,108,835 and ~~378,678,~~873,412, respectively. Stock options issued, which were not included in the calculation of diluted earnings per share because the ~~options'~~ exercise prices were greater than the average market price, were ~~474,488~~10,000 and 291,667 for the three months ended ~~September 30, 2002. Because~~March 31, 2004 and 2003, respectively.
(Dollars in thousands,
except share and per share data)

Three Months Ended March 31,

2004

2003

Net income

$
719

$
490

Dividends to preferred shareholders

—

124

Net income to common shareholders

$
719

$
366

Weighted average common shares for basic

17,461,000

10,046,000

Weighted average common shares for diluted

17,885,000

10,171,000

Basic earnings per common share

$
0.04

$
0.04

Diluted earnings per common share

$
0.04

$
0.04

Note 4
Goodwill
In 2001, the Company ~~has net losses for~~substantially eliminated the ~~nine months ended September 30, 2002 and for the three months and nine months ended September 30, 2001, all stock options issued have an anti-dilutive effect and, therefore, have been excluded~~goodwill attributable from the ~~earnings per share calculation for those respective periods.~~

Three Months Ended
September 30,

2002
2001

(Dollars in thousands)

Net income (loss) $ 429 $ (706 )
Dividends to preferred shareholders 124 128

Net income (loss) to common shareholders 305 (834 )
Weighted average common shares for basic calculation 10,044,345 4,256,797
Weighted average common shares for diluted calculation 10,142,930 4,256,797
Basic and diluted earnings (loss) per common share $ 0.03 $ (0.20 )

Nine Months Ended
September 30,

2002
2001

(Dollars in thousands)

Net loss $ (738 ) $ (2,274 )
Dividends to preferred shareholders 371 384

Net loss to common shareholders (1,109 ) (2,658 )
Weighted average common shares for basic and diluted calculation 7,243,053 4,255,432
Basic and diluted loss per common share $ (0.15 ) $ (0.62 )
8
~~Note 4~~
~~Adoption~~acquisition of ~~New Accounting Standards~~
Heritage. The initial investment in Heritage, which was subsequently renamed Cardinal Bank – Potomac, resulted in the Company recording $9.7 million of goodwill at the time of the acquisition. In ~~June~~the fourth quarter of 2001, an evaluation of 2001 losses and expectations of additional future losses indicated a potential impairment in the ~~Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."~~Company’s investment in Heritage. In compliance with SFAS No. 142 discontinues the practice of amortizing goodwill and requires that goodwill be evaluated at least annually for impairment by comparing its fair value with its recorded amount and written down when appropriate. SFAS No. 142 requires that other intangible assets that have been separately identified and accounted for continue to be amortized over a determinable useful life. SFAS No. 142 also requires disclosure of the changes in the carrying amounts of goodwill from period to period, the carrying amounts of intangible assets by major intangible asset class for those subject to and not subject to amortization, and the estimated intangible asset amortization expense for the next five years. The Company adopted SFAS No. 142 as of January 1, 2002, and, therefore, discontinued the amortization of goodwill on January 1, 2002. The Company has evaluated goodwill for impairment as specified under SFAS No. 142 and determined that goodwill under this statement is not impaired. Information on the Company's intangible assets is contained in the table below.

September 30, 2002
December 31, 2001

Gross
Carrying Value
Accumulated
Amortization
Gross
Carrying Value
Accumulated
Amortization

(Dollars in thousands)

Amortizable core deposit intangible $ 102 $ (102 ) $ 102 $ (80 )
Unamortizable goodwill (1) 646 — 646 —

Core Deposit
Intangible

Goodwill
Amortization expense:
Three months ended September 30, 2002 $ — $ —
Nine months ended September 30, 2002 22 —

Three months ended September 30, 2001

$
15

$
158
Nine months ended September 30, 2001 45 478

Estimated amortization expense:

Three months ended December 31, 2002 $ — $ —
For the years ended December 31,
2003 — —
2004 — —
2005 — —
2006 — —
2007 — —
9

Three months ended
Sept. 30,

Nine months ended
Sept. 30,

2002
2001
2002
2001

Reported net income (loss) to common shareholders $ 305 $ (834 ) $ (1,109 ) $ (2,658 )
Add: goodwill amortization — 158 — 478

Adjusted net income (loss) 305 (676 ) (1,109 ) (2,180 )

Reported basic and diluted earnings (loss) per share

$
0.03

$
(0.20
)
$
(0.15
)
$
(0.62
)
Add: goodwill amortization per share — 0.04 — 0.11

Adjusted basic and diluted earnings (loss) per share $ 0.03 $ (0.16 ) $ (0.15 ) $ (0.51 )
~~(1)~~
~~In December 2001,~~121, the Company wrote down goodwill by $8.3 ~~million.~~
million based upon a valuation obtained from an independent third party consultant. In 2003, the Company recognized the benefit of net operating loss carryforwards arising from the Heritage acquisition and, accordingly, this tax benefit of $624,000 was utilized to reduce the Heritage goodwill. Goodwill at March 31, 2004 and December 31, 2003 was $22,000.
10
11

Item ~~2. Management's~~2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
~~General~~

The following presents ~~management's~~management’s discussion and analysis of our consolidated financial condition as of ~~September 30, 2002~~March 31, 2004 and December 31, ~~2001~~2003 and the results of our operations for the three ~~and nine~~ months ended ~~September 30, 2002~~March 31, 2004 and ~~September 30, 2001.~~2003. This discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report.
Overview
Cardinal Financial Corporation, a financial services organization headquartered in Tysons Corner, Virginia, is committed to providing top quality customer service, a diversified product mix and convenient avenues for banking to consumers and businesses. We own Cardinal Bank, N.A., a nationally chartered community bank, and Cardinal Wealth Services, Inc., an investment services subsidiary. Through these two subsidiaries, we offer a wide range of banking products and services to both our commercial and retail customers. Our commercial relationship managers focus on attracting small and medium-sized business as well as commercial real estate developers and builders and professionals, such as physicians, accountants and attorneys. We have an expansive retail branch network and develop competitive retail products and services. We complement our core banking operations by offering investment products and services to our customers through our third-party brokerage relationship with Raymond James Financial Services, Inc.
Net interest income is our primary source of income. As discussed further in our interest rate sensitivity section, we manage our balance sheet and interest rate risk to enhance our net interest income. We do this by monitoring the spread between the interest rates earned on investment securities and loans and the interest rates paid on deposits and other interest-bearing liabilities. Changes in interest rates will affect our operating performance and financial condition. We attempt to minimize our exposure to interest rate risk, but are unable to eliminate it.   In addition to management of interest rate risk, we analyze our loan portfolio for exposure to credit risk. Risk of loan defaults and foreclosures are unavoidable in the banking industry, and we try to limit our exposure to this risk by monitoring our extensions of credit carefully. In addition to net interest income, non-interest income is a source of income for us and includes service charges on deposits and loans, investment fee income and gains on sales on investment securities available-for-sale.
Our business strategy is to grow through geographic expansion while maintaining strong asset quality and achieving sustained profitability. We completed a secondary common stock offering that raised $41.7 million in capital in December 2003 and an additional $6.3 million in capital following the exercise of the underwriters’ over-allotment option in January 2004. This capital is being used to support the expansion of our branch office network and balance sheet growth. We were able to increase our legal lending limit to over $12 million, which will allow us
12

to expand our commercial and real estate lending loan portfolios. We expect to increase our loan-to-deposit ratio and shift the mix of our earning assets to higher yielding loans. We intend to increase our selection of banking products and financial services in order to diversify our revenue base, increase fee income, and strengthen customer relationships.
Critical Accounting ~~Policies;~~ Policies
Accounting policies generally accepted in the United States are complex and require management to apply significant judgment to various accounting, reporting, and disclosure matters. Management must use assumptions and estimates to apply these principles where actual measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the consolidated financial statements. Actual results could differ from those estimates.
The accounting policies we view as critical to us are those relating to estimates and judgments regarding the determination of the allowance for loan losses and the valuation of deferred tax assets.
Allowance for Loan Losses
        ~~Our policy for~~We maintain the allowance for loan ~~loss calculation is to maintain the allowance~~losses at a level that represents ~~the~~management’s best estimate of known and inherent losses in the loan portfolio. Both the amount of the provision expense and the level of the allowance for loan losses are impacted by many factors, including general economic conditions, actual and expected credit losses, historical trends and specific conditions of the individual borrower. As a part of our analysis, we use comparative peer group data, duration factors and qualitative factors such as levels of and trends in delinquencies and nonaccrual loans, national and local economic trends and conditions and concentrations of loans exhibiting similar risk profiles to support our estimates. The loan loss provision was $95,000 and $134,000 for the three and nine months ended September 30, 2002 and $190,000 and $375,000 for the three and nine months ended September 30, 2001. The allowance for loan losses decreased slightly to $3.07 million as of September 30, 2002 from $3.10 million at December 31, 2001. The ratio of the allowance for loan losses to gross loans at September 30, 2002 was 1.42% compared to 1.55% at December 31, 2001. Additional information on the allowance for loan losses and provision expense can be found below under "Results of Operations".
Credit losses are an inherent part of our ~~business. Although~~business and, although we believe the methodologies for determining the allowance for loan losses and the current level of the allowance are adequate, it is possible that there may be unidentified losses in the portfolio that may become evident only at a future date. Additional provisions for such losses, if necessary, would ~~negatively impact earnings and would~~ be recorded in the ~~Commercial Banking segment.~~commercial banking segment and would negatively impact earnings.
        We
For purposes of our analysis, we categorize our loans into one of five ~~pools:~~categories: commercial and industrial, commercial real estate, home equity lines of credit, residential mortgages, and ~~consumer loans.~~consumer. Peer group annual loss factors (in the absence of historical results) are applied to all ~~pools~~categories and are adjusted by the projected duration of the ~~loan pool~~loans in a particular category and by the qualitative factors mentioned above. The indicated loss factors resulting from this analysis are applied to each of the loan ~~pools~~categories to determine a reserve level for each of the five ~~pools~~categories of loans. In addition, we individually assign loss factors to all loans that have been identified as having loss attributes, as indicated by deterioration in the financial condition of the borrower or a decline in underlying collateral values. Since we have limited historical data on which to base loss factors for classified loans, we apply, in accordance with regulatory guidelines, a 5% loss factor to all special mention loans and a 15% loss factor to all substandard ~~loans (in accordance with regulatory guidelines).~~
~~Financial Condition~~loans.
~~Total~~
13

Valuation of Deferred Tax Assets
We record a provision for income tax expense based on the amounts of current taxes payable (or refundable) and the change in net deferred tax assets ~~were $446.8 million at September 30, 2002 compared to $279.6 million at December 31, 2001, an increase~~or liabilities during the year. Deferred tax assets and liabilities are recognized for the tax effects of ~~$167.2 million or 59.8% due primarily to higher cash equivalents~~differing carrying values of assets and ~~investments. Investment securities available-for-sale increased by $103.8 million to $137.9 million at September 30, 2002 compared to $34.1 million at December 31, 2001 (see Table 1~~liabilities for ~~details~~tax and financial statement purposes that will reverse in future periods. When substantial uncertainty exists concerning the recoverability of a deferred tax asset, the carrying value of the ~~investment securities available-for-sale portfolio). Loans receivable, net of fees, increased~~asset is reduced by $15.5 million to $216.4 million at September 30, 2002 from $200.9 million at December 31, 2001 (see Table 2 for loan portfolio details). Total deposits increased by $157.7 million to $403.7 million at September 30, 2002 compared to $246.0 million at December 31, 2001 (see Table 3 for certificates of deposit of $100,000 or more) and total borrowings decreased by $8.8 million to $1.0 million at September 30, 2002 from $9.8 million at December 31, 2001. Deposits increased primarily in the retaila valuation allowance.
11

New Financial Accounting Standards
money market accounts and certificates of deposit categories due to the results of our advertising program. Total cash and cash equivalents increased to $86.9 million at September 30, 2002 from $34.5 million at December 31, 2001. The increase in cash and cash equivalents was primarily the result of increased deposit balances not yet invested as loans or securities by September 30, 2002. Shareholders' equity at September 30, 2002 was $40.7 million compared to $20.6 million at December 31, 2001, due primarily to our successful second quarter 2002 stock rights and public offerings which raised $18.5 million in new capital. Changes in the unrealized gain on investment securities portfolio amounting to $2.7 million more than offset the dividends on preferred stock and the net loss for the period. Book value per common share on September 30, 2002 was $3.38 compared to $3.21 on December 31, 2001.
~~Results~~On March 9, 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 105 (“SAB No. 105”), Application of Accounting Principles to Loan Commitments. SAB No. 105 provides guidance regarding loan commitments accounted for as derivative instruments, and is effective for quarters beginning April 1, 2004. The Company is currently retaining substantially all of the loans it originates and therefore SAB No. 105 is not expected to have a material impact.
Statements of Operations
        Net income before preferred dividends for the three months ended September 30, 2002 was $429,000, an improvement of $1,135,000 when compared to the same period of 2001, due to the impact of higher earning assets and reduced operating expenses. Net loss before preferred dividends for the nine months ended September 30, 2002 was $738,000, an improvement of $1,536,000 compared to the same period of the 2001. Our writedown of $1,660,000 of a Worldcom bond in the second quarter contributed to the loss for the nine months ended September 30, 2002.
        ~~Dividends to preferred shareholders were $124,000 and $371,000 for the three and nine months ended September 30, 2002 compared to $128,000 and $384,000 for the same periods in 2001.~~ Net income to common shareholders for the three months ended ~~September 30, 2002~~March 31, 2004 and 2003 was ~~$305,000~~$719,000 and ~~the~~$366,000, respectively, an improvement of $353,000, or 96.5%. The increase in net ~~loss~~income to common shareholders ~~was $1,109,000~~is primarily a result of increased net interest income. In addition, on March 29, 2004, our preferred stock automatically converted to common stock. As a result of the stock conversion, net income to common shareholders for the ~~nine months ended September 30, 2002, as~~first quarter of 2004 did not include expenses related to preferred stock dividends. Expenses for preferred dividends totaled $124,000 for the first quarter of 2003. Net income for the first quarter of 2004 also reflects an income tax provision of $362,000 compared to ~~losses of $834,000 and $2,658,000, respectively,~~no tax provision for the ~~three and nine months ended September 30, 2001.~~ same period in 2003. The 2003 results were not subject to a tax provision because of available net operating loss carryforwards.
Basic and diluted earnings per common share ~~increased by $0.23 per common share~~were $0.04 for each of the three months ended March 31, 2004 and 2003. These results are presented after the effect of dividends paid to ~~$0.03 as compared~~preferred shareholders in the 2003 period. Dividends to ~~a loss of $0.20~~preferred shareholders were $0 and $124,000 for the three months ended ~~September 30, 2002~~March 31, 2004 and ~~2001,~~2003, respectively. ~~Basic and~~Weighted average fully diluted ~~loss per~~ common ~~share~~shares outstanding for the ~~nine~~three months ended ~~September 30, 2002 was $0.15, an improvement of $0.47 when~~March 31, 2004 were 17,885,000 compared to 10,171,000 for the ~~nine~~three months ended ~~September 30, 2001.~~March 31, 2003.

Return on average assets for the three ~~and nine~~ months ended ~~September 30, 2002~~March 31, 2004 and 2003 was ~~0.41%~~0.43% and ~~(0.27%)~~0.42%, ~~respectively, compared to (1.15%) and (1.30%) for the three and nine months ended September 30, 2001,~~ respectively. Return on average equity for the three ~~and nine~~ months ended ~~September 30, 2002~~March 31, 2004 and 2003 was ~~4.33%~~3.14% and ~~(3.25%)~~4.81%, ~~respectively,~~respectively. The decrease in the return on average equity is a result of the increased equity in 2004 compared to ~~(8.77%) and (9.20%) for the three and nine months ended September 30, 2001, respectively.~~2003 from our common stock offering.

Net interest income ~~is our primary source of revenue and~~ represents the difference between interest and fees earned on ~~interest-bearing~~interest earning assets and the interest paid on deposits and other ~~interest-bearing~~interest bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates when compared to previous periods of operations. Net interest income for the three months ended ~~September 30, 2002~~March 31, 2004 and 2003 was ~~$2,842,000~~$4.8 million and $3.5 million, respectively, a period-to-period increase of $1.4 million, or 39.7%. The increase in net interest income is a result of the increases in the average volume of investment securities and loans receivable, net of the impact of decreased yields, during 2004, compared ~~to $2,389,000 for~~with the same period ~~ended September 30, 2001, an increase~~ of ~~19.0%. Net interest income for~~2003. These increases were funded through the ~~nine months ended September 30, 2002 was $7,875,000 compared to $6,648,000 of~~increases in total deposits, other borrowed funds and proceeds from the ~~same period ended September 30, 2001, an increase of 18.5% due primarily to the impact of higher earning assets.~~common stock offering.

Our net interest margin for the three ~~and nine~~ months ended ~~September 30, 2002~~March 31, 2004 and 2003 was ~~2.86%~~3.00% and ~~3.05%~~3.11%, ~~respectively, as compared to 4.34% and 4.26% for the three and nine months ended September 30, 2001,~~ respectively. The decrease in the net interest margin ~~can be attributed to~~was a result of the change in the mix of earning assets towards lower yielding ~~investments,~~earning assets and ~~also to~~ the ~~mix of interest-bearing liabilities~~decreased interest rate
14

environment. Tables 1 and ~~lower overall interest rates between September 2001 and September 2002. Tables 4, 4a, 5 and 5a~~2 present an analysis of average ~~interest-earning~~earning assets, ~~interest-bearing~~interest bearing liabilities and demand deposits with ~~the~~ related components of interest income and interest expense.
12

Average Balance Sheets and Interest Rates on Earning Assets and Interest - - Bearing Liabilities
Three Months Ended March 31, 2004, 2003 and 2002
(Dollars in thousands)

2004

2003

2002

Average
Balance

Interest
Income/
Expense

Rate

Average
Balance

Interest
Income/
Expense

Rate

Average
Balance

Interest
Income/
Expense

Rate

Assets

Interest-earning assets:

  Loans (1):

Commercial and industrial

$
59,327

$
796

5.37
%
$
53,060

$
833

6.28
%
$
54,760

$
964

7.04
%
Real estate - commercial

137,776

2,223

6.45
%
115,685

2,064

7.14
%
86,345

1,744

8.08
%
Real estate - construction

41,609

567

5.45
%
8,955

137

6.12
%
5,967

93

6.23
%
Real estate - residential

42,871

617

5.76
%
34,284

577

6.73
%
17,655

357

8.09
%
Home equity lines

44,829

363

3.24
%
28,352

241

3.40
%
21,615

226

4.18
%
Consumer

10,373

162

6.25
%
9,639

179

7.43
%
13,605

243

7.14
%
Total loans

336,785

4,728

5.62
%
249,975

4,031

6.45
%
199,947

3,627

7.26
%

  Investment securities available-for-sale

142,128

1,271

3.58
%
180,044

1,678

3.73
%
47,731

595

4.99
%
  Investment securities held-to-maturity

150,016

1,350

3.60
%
—

—

0.00
%
—

—

0.00
%
  Other investments

3,634

38

4.18
%
1,853

24

5.18
%
1,194

19

6.37
%
  Federal funds sold

12,146

28

0.92
%
13,503

39

1.16
%
37,961

154

1.62
%

  Total interest-earning assets and interest income

644,709

7,415

4.60
%
445,375

5,772

5.18
%
286,833

4,395

6.13
%

Non-interest earning assets:

Cash and due from banks

10,256

14,720

13,280

Premises and equipment, net

6,833

5,007

5,015

Accrued interest and other assets

7,234

5,113

1,836

Allowance for loan losses

(4,408
)

(3,397
)

(3,103
)

Total assets

$
664,624

$
466,818

$
303,861

Liabilities and Shareholders’ Equity

Interest - bearing liabilities:

Interest - bearing deposits:

Interest checking

155,523

529

1.36
%
139,080

638

1.83
%
69,762

516

2.96
%
Money markets

24,470

36

0.59
%
26,131

69

1.06
%
25,947

133

2.05
%
Statement savings

7,191

9

0.50
%
4,493

9

0.80
%
4,294

13

1.21
%
Certificates of deposit

237,562

1,708

2.88
%
173,249

1,524

3.52
%
115,538

1,262

4.37
%
Total interest - bearing deposits

424,746

2,282

2.15
%
342,953

2,240

2.61
%
215,541

1,924

3.57
%

Other borrowed funds

73,545

300

1.63
%
14,957

73

1.95
%
9,398

97

4.13
%

Total interest-bearing liabilities and interest expense

498,291

2,582

2.07
%
357,910

2,313

2.59
%
224,939

2,021

3.59
%

Noninterest-bearing liabilities:

Demand deposits

72,399

66,638

55,985

Other liabilities

2,204

1,588

2,308

Preferred shareholders’ equity

6,391

6,825

6,825

Common shareholders’ equity

85,339

33,857

13,804

Total liabilities and shareholders’ equity

$
664,624

$
466,818

$
303,861

Net interest income and net interest margin (2)

$
4,833

3.00
%

$
3,459

3.11
%

$
2,374

3.31
%
(1) Non-accrual loans are included in average balances and do not have a material effect on the average yield. Interest income on non-accruing loans was not material for the quarters presented.
(2) We do not have investments that have tax benefit attributes; therefore, there are no tax equivalent adjustments to our net interest income.
15

Rate and Volume Analysis
Three Months Ended March 31, 2004, 2003 and 2002
(Dollars in thousands)

2004 Compared to 2003

2003 Compared to 2002

Change Due to

Change Due to

Average
Volume

Average
Rate

Increase
(Decrease)

Average
Volume

Average
Rate

Increase
(Decrease)

Interest income:

Loans (1):

Commercial and industrial

$
98

$
(135
)
$
(37
)
$
(30
)
$
(101
)
$
(131
)
Real estate - commercial

394

(235
)
159

593

(273
)
320

Real estate - construction

500

(70
)
430

47

(3
)
44

Real estate - residential

145

(105
)
40

335

(115
)
220

Home equity lines

140

(18
)
122

71

(56
)
15

Consumer

14

(31
)
(17
)
(71
)
7

(64
)
Total loans

1,291

(594
)
697

945

(541
)
404

Investment securities available-for-sale

(353
)
(54
)
(407
)
1,649

(566
)
1,083

Investment securities held-to-maturity

1,350

—

1,350

—

—

—

Other investments

23

(9
)
14

10

(5
)
5

Federal funds sold

(4
)
(7
)
(11
)
(98
)
(17
)
(115
)

Total interest income

2,307

(664
)
1,643

2,506

(1,129
)
1,377

Interest expense:

Interest - bearing deposits:

Interest checking

75

(184
)
(109
)
521

(399
)
122

Money markets

(4
)
(29
)
(33
)
2

(66
)
(64
)
Statement savings

5

(5
)
—

1

(5
)
(4
)
Certificates of deposit

565

(381
)
184

656

(394
)
262

Total interest - bearing deposits

641

(599
)
42

1,180

(864
)
316

Other borrowed funds

286

(59
)
227

56

(80
)
(24
)

Total interest expense

927

(658
)
269

1,236

(944
)
292

Net interest income (2)

$
1,380

$
(6
)
$
1,374

$
1,270

$
(185
)
$
1,085

(1) Non-accrual loans are included in average balances and do not have a material effect on the average yield.
Interest income on non-accruing loans was not material for the quarters presented.
(2) We do not have investments that have tax benefit attributes; therefore, there are no tax equivalent adjustments to our net interest income.
16

Provision for loan losses for the three ~~and nine~~ months ended ~~September 30, 2002~~March 31, 2004 and 2003 was ~~$95,000~~$74,000 and ~~$134,000, respectively, as compared to a provision of $190,000 and $375,000 for the three and nine months ended September 30, 2001.~~$80,000, respectively. The decrease in provision is primarily driven by the reduction in our commercial loan portfolios and increases in our residential real estate loans and refinement of our loan loss reserve methodology during the fourth quarter of 2001. Our allowance for loan losses at ~~September 30, 2002~~each of March 31, 2004 and December 31, 2003 was ~~$3.07 million~~$4.3 million.    Our allowance for loan loss ratio at March 31, 2004 was 1.30%, compared to ~~$3.10 million~~1.29% at December 31, ~~2001. The ratio~~2003. We continued to experience strong loan quality with annualized net charged-off loans equal to 0.08% to total loans for the three months ended March 31, 2004, compared to 0.03% for the same period of 2003. Non-performing loans were equal to 0.07% of total loans at March 31, 2004, compared to 0.12% at December 31, 2003. Additional information on the allowance for loan losses, its allocation to the total loans ~~at September 30, 2002 was 1.42% compared to a ratio~~receivable portfolio and information on nonperforming loans can be found in Tables 3, 4 and 5.
Allowance for Loan Losses
Three Months Ended March 31, 2004 and 2003
(Dollars in thousands)

2004

2003

Beginning balance, January 1

$
4,344

$
3,372

Provision for loan losses

74

80

Loans charged off:

Commercial and industrial

(74
)
(60
)
Real estate - commercial

—

—

Real estate - construction

—

—

Real estate - residential

—

—

Home equity lines

—

—

Consumer

(1
)
(3
)
Total loans charged off

(75
)
(63
)

Recoveries:

Commercial and industrial

2

40

Real estate - commercial

—

—

Real estate - construction

—

—

Real estate - residential

—

—

Home equity lines

—

—

Consumer

2

2

Total recoveries

4

42

Net (charge offs) recoveries

(71
)
(21
)

Ending balance

$
4,347

$
3,431

March 31,
2004

December 31,
2003

Loans:

Balance at period end

$
334,746

$
336,002

Allowance for loan losses to loans receivable, net of fees

1.30
%
1.29
%
Annualized net charge-offs to average loans receivable

0.08
%
0.01
%
17

Allocation of ~~1.55% at~~the Allowance for Loan Losses
At March 31, 2004 and December 31, ~~2001. Tables 6~~2003
(Dollars in thousands)

March 31,
2004

December 31,
2003

Allocation

% of Total*

Allocation

% of Total*

Commercial

$
1,094

16.35
%
$
1,046

17.21
%
Real estate - commercial

1,532

40.81
%
1,662

41.56
%
Real estate - construction

552

12.92
%
497

12.57
%
Real estate - residential

436

12.93
%
418

12.64
%
Home equity lines

546

14.06
%
486

12.84
%
Consumer

187

2.93
%
235

3.18
%

Total allowance for loan losses

$
4,347

100.00
%
$
4,344

100.00
%
* Percentage of loan type to the total loan portfolio.
18

Nonperforming Loans Receivable
At March 31, 2004 and ~~7 portray the components and the allocation of the allowance for loan losses.~~December 31, 2003
(Dollars in thousands)

March 31,
2004

December 31,
2003

Nonaccruing loans

$
237

$
390

Loans contractually past-due 90 days or more

4

4

Troubled debt restructurings

—

—

Total nonperforming loans receivable

$
241

$
394

19

Non-interest income for the three months ended ~~September 30, 2002~~March 31, 2004 and 2003 was ~~$728,000 compared to $854,000 for the three months ended September 30, 2001,~~$877,000 and $976,000, respectively, a period-to-period decrease of ~~14.8%. For the nine months September 30, 2002, non-interest income was $2,166,000 compared to $2,476,000 for the same period ended September 30, 2001, a decrease of 12.5%~~$99,000, or 10.1%. The decrease in non-interest income ~~was~~is primarily ~~due~~attributable to ~~decreases~~the decrease in realized gains on sales of investment ~~fee income~~securities available-for-sale during the first quarter of ~~$284,000~~2004. These gains were recorded on sales of mortgage-backed securities with accelerated pre-payment speeds. Excluding the realized gains on the sale of investment securities of $241,000 and ~~$806,000, respectively,~~$493,000 for the ~~three~~first quarters of 2004 and ~~nine months ended September 30, 2002 as~~2003, respectively, non-interest income would have increased $153,000 to $636,000 for the first quarter of 2004, compared to $483,000 for the ~~three and nine months ended September 30, 2001. These decreases were partially offset by gains on investment securities and increases in service~~first quarter of 2003. Service charges on deposit accounts ~~and rental~~increased $36,000 to $170,000 for the three months ended March 31, 2004, compared to $134,000 for the same period of 2003. Loan service charge income ~~from~~increased $82,000 to $195,000 for the ~~subleases~~three months ended March 31, 2004, compared to $113,000 for the same period of ~~excess space in various locations.~~2003. Investment fee income increased to $178,000 for the three months ended March 31, 2004, compared to $126,000 for the three months ended March 31, 2003.

Non-interest expense for the three ~~and nine~~ months ended ~~September 30, 2002 totaled $3,046,000 and $10,645,000~~March 31, 2004 was $4.6 million, compared to ~~$3,759,000 and $11,023,000~~$3.9 million for the ~~three and nine months ended September 30, 2001, due primarily to lower staff related expenses. Due~~same period of 2003, an increase of $690,000, or 17.9%. The increase is attributable to the ~~adoption~~branch expansion we have completed over the past twelve months. We opened our twelfth branch on February 27, 2004 in Herndon, Virginia. In addition, our Tysons Corner, Leesburg and Woodbridge branches opened during the third and fourth quarters of ~~SFAS No. 142, amortization~~2003 and are not included in the non-interest expense for the three-month period of ~~intangibles decreased by $173,000~~2003. Expenses related to the branch expansion are represented in the increases in our salaries and benefits expense, occupancy expense and depreciation expense. Other operating expenses on our statements of operations includes business development, data processing and communications expenses, and office administration expenses.
The effective tax rate for the first quarter of 2004 was 33.5%, compared to 0% for the same period of 2003. The increase in the effective tax rate is a result of having recognized our deferred tax assets related to the net operating loss carryforwards during the fourth quarter of 2003. We recorded a provision for income tax expense of $362,000 for the three months ended ~~September 30, 2002~~March 31, 2004, compared to none for the same three-month period of 2003.    For more information, see “Critical Accounting Policies” above in ~~2001~~this discussion.
20

Statements of Condition
Total assets were $693.5 million at March 31, 2004, compared to $636.2 million at December 31, 2003, an increase of $57.3 million or 9.0%. This growth was driven by increases in total deposits and the proceeds raised in the common stock offering during December 2003 and the first quarter of 2004.
Investment securities were $322.1 million at March 31, 2004, compared to $273.6 million at December 31, 2003, an increase of $48.5 million or 17.7%. The investment portfolio consists of investment securities available-for-sale and investment securities held-to-maturity. Investment securities held-to-maturity are those securities that we have the intent and ability to hold to maturity and are carried at amortized cost. These securities are utilized for pledging of advances from the Federal Home Loan Bank and other borrowing activities. Investment securities available-for-sale are those securities that we intend to hold for an indefinite period of time, but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability strategy, liquidity management, interest rate risk management, regulatory capital management or similar factors. At March 31, 2004, investment securities available-for-sale were $168.0 million and investment securities held-to-maturity were $154.1 million. See Table 6 for additional information on our investment securities portfolio.
Investment Securities
At March 31, 2004 and December 31, 2003
(Dollars in thousands)
Available-for-sale at March 31, 2004

Amortized
Cost

Fair
Value

Average
Yield

Obligations of U.S. government-sponsored agencies and enterprises

Five to ten years

$
4,000

$
4,047

4.11
%
Total U.S. government-sponsored agencies

$
4,000

$
4,047

4.11
%

Mortgage-backed securities*

Five to ten years

$
15,659

$
15,724

3.79
%
After ten years

135,805

136,108

3.79
%
Total mortgage-backed securities

$
151,464

$
151,832

3.79
%

Corporate bonds

After ten years

$
10,000

$
10,016

2.42
%
Total corporate bonds

$
10,000

$
10,016

2.42
%

Treasury bonds

One to five years

$
2,044

$
2,086

2.63
%
Total treasury bonds

$
2,044

$
2,086

2.63
%
Total investment securities available-for-sale

$
167,508

$
167,981

3.70
%
Held-to-maturity at March 31, 2004

Amortized
Cost

Fair
Value

Average
Yield

Obligations of U.S. government-sponsored agencies and enterprises

One to five years

$
5,999

$
6,041

3.26
%
Five to ten years

16,977

17,119

4.51
%
After ten years

2,999

2,993

4.20
%
Total U.S. government-sponsored agencies

$
25,975

$
26,153

4.19
%

Mortgage-backed securities*

Five to ten years

$
9,069

$
9,078

3.08
%
After ten years

111,096

111,141

3.83
%
Total mortgage-backed securities

$
120,165

$
120,219

3.77
%

Corporate bonds

After ten years

$
8,000

$
8,003

4.21
%
Total corporate bonds

$
8,000

$
8,003

4.21
%
Total investment securities held-to-maturity

$
154,140

$
154,375

3.87
%

Total investment securities

$
321,648

$
322,356

3.78
%
* Based on contractual maturities.
21

Available-for-sale at December 31, 2003

Amortized
Cost

Fair
Value

Average
Yield

Obligations of U.S. government-sponsored agencies and enterprises

One to five years

$
3,000

$
3,016

3.92
%
Five to ten years

2,000

1,986

4.23
%
After ten years

1,000

1,027

5.79
%
Total U.S. government-sponsored agencies

$
6,000

$
6,029

4.33
%

Mortgage-backed securities*

Five to ten years

$
15,615

$
15,630

3.92
%
After ten years

97,865

97,041

4.02
%
Total mortgage-backed securities

$
113,480

$
112,671

4.00
%

Corporate bonds

After ten years

$
10,000

$
9,995

2.41
%
Total corporate bonds

$
10,000

$
9,995

2.41
%

Treasury bonds

One to five years

$
2,047

$
2,067

2.64
%
Total treasury bonds

$
2,047

$
2,067

2.64
%
Total investment securities available-for-sale

$
131,527

$
130,762

3.87
%
Held-to-maturity at December 31, 2003

Amortized
Cost

Fair
Value

Average
Yield

Obligations of U.S. government-sponsored agencies and enterprises

One to five years

$
4,000

$
3,951

3.39
%
Five to ten years

9,993

9,884

4.65
%
After ten years

2,999

2,950

4.20
%
Total U.S. government-sponsored agencies

$
16,992

$
16,785

4.27
%

Mortgage-backed securities*

Five to ten years

$
9,476

$
9,450

3.70
%
After ten years

108,384

107,547

4.01
%
Total mortgage-backed securities

$
117,860

$
116,997

3.98
%

Corporate bonds

After ten years

$
8,000

$
7,848

4.21
%
Total corporate bonds

$
8,000

$
7,848

4.21
%
Total investment securities held-to-maturity

$
142,852

$
141,630

4.03
%

Total investment securities

$
274,379

$
272,392

3.96
%
* Based on contractual maturities.
22

Loans receivable, net of fees, decreased slightly, by ~~$501,000~~$1.5 million or 0.5%, to $334.5 million at March 31, 2004 from $336.0 million at December 31, 2003 (see Table 7 for details on the loans receivable portfolio). We experienced decreases in our commercial and commercial real estate loan portfolios offset by increases in our construction, residential real estate and home equity loan portfolios. The decreases in our commercial and commercial real estate loan portfolios are the result of more paydowns than fundings in those loan categories. We expect increases within these loan categories over the next three quarters of 2004 due to our increased legal lending limit of $12.0 million and the volume of loans we have scheduled for funding.
Loans Receivable
At March 31, 2004 and December 31, 2003
(Dollars in thousands)

March 31, 2004

December 31, 2003

Commercial

$
54,723

16.35
%
$
57,854

17.21
%
Real estate - commercial

136,541

40.81
%
139,725

41.56
%
Real estate - construction

43,214

12.92
%
42,243

12.57
%
Real estate - residential

43,273

12.93
%
42,495

12.64
%
Home equity lines

47,049

14.06
%
43,176

12.84
%
Consumer

9,807

2.93
%
10,690

3.18
%

Gross loans

$
334,607

100.00
%
$
336,183

100.00
%

Add: net deferred (fees) costs

(131
)

(181
)

Less: allowance for loan losses

(4,347
)

(4,344
)

Loans receivable, net

$
330,129

$
331,658

23

Total deposits increased $51.8 million, or 9.9%, to $525.9 million at March 31, 2004, compared to $474.1 million at December 31, 2003 (see Table 8 for details on certificates of deposit with balances of $100,000 or more). We experienced increases in non-interest bearing demand deposits, money market and savings deposits and certificates of deposit. The increase in deposits is a result of new customers from our branch expansion and increased advertising efforts.
Certificates of Deposit of $100,000 or More
At March 31, 2004
(Dollars in thousands)
Maturities:

Three months or less

$
12,279

Over three months through six months

14,599

Over six months through twelve months

25,362

Over twelve months

63,885

$
116,125

24

Other borrowed funds decreased $2.7 million to $71.8 million at March 31, 2004, compared to $74.5 million at December 31, 2003. We had Federal Home Loan Bank advances that matured during the first quarter of 2004 and replaced them with lower cost borrowings from the treasury, tax and loan note option of the Federal Reserve System. Table 9 provides information on our short-term borrowings.
Short-Term Borrowings
At March 31, 2004
(Dollars in thousands)
Advance Date

Interest Rate

Term of Advance

Date Amount
Due

Outstanding

Dec-03

1.23
%
12 months

Dec-04

$
5,000

Jan-04

1.56
%
12 months

Jan-05

5,000

1.40
%

$
10,000

All other borrowed funds

61,758

Total other borrowed funds

$
71,758

25

Shareholders’ equity at March 31, 2004 was $93.3 million, an increase of $7.9 million, or 9.3%, compared to $85.4 million at December 31, 2003. The increase of $7.9 million from the prior year was primarily driven by the underwriters’ exercise in January 2004 of their over allotment option from the secondary offering in December 2003. The over-allotment exercise resulted in the issuance of an additional 945,000 shares of the Company’s common stock and the receipt of $6.3 million in total capital. Net income of $719,000 for the ~~year~~quarter ended March 31, 2004 also added to ~~date September 30, 2002~~the increase in shareholders’ equity for the period. In addition, the Company had a favorable market value adjustment of $817,000 on investment securities available-for-sale as of March 31, 2004. Book value per common share at March 31, 2004 was $5.08, compared to ~~the year to date September 30, 2001.~~$4.80 at December 31, 2003.
We have not recorded income tax expense or benefit due to the existence of net losses for the nine months ended September 30, 2002 and all prior years of operations. We have net deferred tax assets, including net operating loss carryforwards, all of which have a full valuation allowance as of September 30, 2002. A valuation allowance is established against a deferred tax asset when, in the judgment of management, it is more likely than not that such deferred tax assets will be realized. The benefit of our deferred tax assets will only be recognized when it becomes more likely than not that they will be realized.
Business Segment Operations

We provide banking and non-banking financial services and products through our subsidiaries. Management operates and reports on the results of our operations through two business segments, commercial banking and investment ~~advisory services.~~
services~~Banking~~.

Commercial Banking
The commercial banking segment provides ~~comprehensive~~a wide range of banking services to small businesses and individuals through multiple delivery channels. Services offered include commercial and consumer lending, deposit products ~~direct~~and banking via the ~~internet~~Internet or ~~telephone, and the funding of small business receivables through the Business Manager product.~~telephone.

For the three months ended ~~September 30, 2002~~March 31, 2004, the commercial banking segment ~~had~~recorded net income of ~~$495,000 and for the nine months ended September 30, 2002 net losses of $312,000,~~$913,000 compared to ~~net losses of $124,000 and $638,000~~$813,000 for the three ~~and nine~~ months ended ~~September 30, 2001.~~March 31, 2003, an improvement of $100,000. The improvement in earnings is a result of ~~higher~~increased net interest income, due to increased volume of earning assets ~~and lower operating expenses.~~for this segment. As of ~~September 30, 2002,~~March 31, 2004, total assets were ~~$443.5 million, while loans receivable, net of fees, were~~
13

~~$216.4 million and deposits were $403.7 million. As of September 30, 2001, total assets were $255.3~~$687.5 million, loans receivable, net of fees, were ~~$196.7~~$334.5 million and total deposits were ~~$212.7~~$525.9 million. As of March 31, 2003, total assets were $481.1 million, loans receivable, net of fees were $252.0 million and total deposits were $417.1 million.
Investment ~~Advisory~~ Services
The investment ~~advisory~~ services segment ~~offers~~provides investment and financial ~~and estate planning~~ services ~~centered on~~through an affiliation with a ~~group of products provided through a strategic alliance with Legg Mason Financial Partners, a wholly owned subsidiary of Legg Mason, Inc. Operations for this segment began February 1, 1999.~~third party broker-dealer.

For the three ~~and nine~~ months ended ~~September 30, 2002,~~March 31, 2004, the investment ~~advisory~~ services segment ~~had~~recorded a net ~~losses~~loss of ~~$35,000 and $158,000, respectively.~~$40,000, compared to a loss of $42,000 during the same period of 2003, an improvement of $2,000. As of ~~September 30, 2002,~~March 31, 2004, total assets were ~~$332,000~~$741,000 and total assets under management were ~~$102.2~~$175.8 million. ~~For the three months ended September 30, 2001, the net loss was $6,000 and for the nine months ended September 30, 2001, the net loss was $33,000.~~ As of ~~September 30, 2001,~~March 31, 2003, total assets were ~~$421,000~~$241,000 and total assets under management were ~~$133.8~~$84.6 million. ~~Fee income~~The revenues and assets under management from this business segment have increased for the three ~~and nine~~ months ended ~~September 30, 2002 decreased as~~March 31, 2004 compared to the same ~~three and nine month~~ period of ~~2001, due primarily~~2003 as a result of increased transaction activity and accumulation of assets under management through new customers to ~~reduced transaction activity.~~this business segment. The financial results of this business segment should continue to improve as the assets under management increase.
Information pertaining to both business segments can be found in Footnote 2 to the Notes to Consolidated Financial Statements.
26

Capital Resources
Capital adequacy is an important measure of financial stability and performance. Our objectives are to maintain a level of capitalization that is sufficient to sustain asset growth and promote depositor and investor confidence.
~~Shareholders'~~
Regulatory agencies measure capital adequacy utilizing a formula that takes into account the individual risk profile of a financial institution. The guidelines define capital as both tier 1 (primarily common shareholders’ equity, ~~at September 30, 2002 was $40.7 million compared~~defined to ~~$20.6 million at~~include certain debt obligations) and tier 2 (certain other debt obligations and a portion of the allowance for loan losses and 45% of unrealized gains in equity securities).
At March 31, 2004, our tier 1 and total (tier 1 and tier 2) risk-based capital ratios were 19.9% and 20.8%, respectively. At December 31, 2001. During the second quarter of 2002, we completed a stock rights and public offerings which raised $18.5 million in new capital and increased the total number of outstanding shares to 10,044,345 at September 30, 2002 as compared to 4,294,323 at December 31, 2001. Changes in the unrealized gain on investment securities portfolio totaling $2.7 million more than offset dividends paid on preferred stock and the net loss for the period. At September 30, 2002,2003, our tier 1 and total risk-based capital ratios were ~~14.0%~~19.7% and ~~15.2%~~20.7%, respectively. ~~At December 31, 2001, our tier 1~~Our regulatory capital levels for the bank and ~~total risk-based capital ratios were 9.0% and 10.4%, respectively.~~bank holding company meet those established for well-capitalized institutions. Table 810 provides additional information onpertaining to our capital ~~resources.~~ratios.
Capital Components
At March 31, 2004 and December 31, 2003
(Dollars in thousands)

Actual

For Capital
Adequacy Purposes

To Be Well
Capitalized Under
Prompt Corrective
Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

At March 31, 2004

Total risk based capital to net risk-weighted assets

$
97,352

20.84
%
$
37,363
>
8.00
%
$
46,704
>
10.00
%
Tier I capital to net risk-weighted assets

93,006

19.91
%
18,682
>
4.00
%
28,022
>
6.00
%
Total risk based capital to average total assets

97,352

14.65
%
26,585
>
4.00
%
33,231
>
5.00
%

At December 31, 2003

Total risk based capital to net risk-weighted assets

$
90,239

20.66
%
$
34,951
>
8.00
%
$
43,688
>
10.00
%
Tier I capital to net risk-weighted assets

85,896

19.66
%
17,475
>
4.00
%
26,213
>
6.00
%
Total risk based capital to average total assets

90,239

15.45
%
23,365
>
4.00
%
29,206
>
5.00
%
27

As of March 31, 2004, there were no material changes in our contractual obligations as presented in the 2003 Form 10-KSB.
Liquidity
        ~~Liquidity~~The objective of liquidity management is ~~an important element in determining~~to ensure the continuous availability of funds to meet the demands of depositors, investors and borrowers. Stable core deposits and a strong capital position are the current components of a solid foundation for our liquidity position. In addition, the availability of regional and national wholesale funding sources including federal funds purchased, negotiable certificates of deposit, securities sold under agreements to repurchase, and borrowings from the Federal Home Loan Bank enhance our liquidity. Cash flows from operations, such as loan payments and payoffs are also a significant source of liquidity. We have a contingency plan that provides for continued monitoring of liquidity needs and available sources of liquidity. We believe we have the ability to meet ~~normal deposit withdrawals while also providing for the credit needs of customers. At September 30, 2002,~~our increased liquidity needs. Liquid assets, which include cash and ~~cash equivalents~~due from banks, federal funds sold and investment securities available-for-sale totaled ~~$224.9~~$189.7 million, or ~~50.3% of total assets compared to $68.6 million or 24.5%~~27.4% of total assets, at ~~December~~March 31, ~~2001. The improvement in liquidity~~2004. We had investment securities that are classified as ~~compared to prior year is due to the availability~~held-to-maturity of ~~funds from the recent capital raising,~~$154.1 million at March 31, 2004. We also had $201.3 million of our total investment securities portfolio available as ~~well as higher deposit levels resulting from our advertising program.~~collateral for additional Federal Home Loan Bank borrowings. Management is committed to maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth and fully comply with all regulatory requirements.
Interest Rate Sensitivity
Asset/liability management involves the monitoring of our sensitivity to interest rate movements. In order to measure the effect of interest rates on our net interest income, ~~management takes~~we take into consideration the expected cash flows from the loan and investment securities portfolios and the expected magnitude of the repricing of specific asset and liability categories. Management evaluates interest sensitivity risk and then formulates guidelines to manage this risk based upon its outlook regarding the economy, forecasted interest rate movements and other business factors. ~~Management's~~
28

Management’s goal is to maximize and stabilize the net interest margin by limiting exposure to interest rate changes.

The data in Table 911 reflects the repricing or expected maturities of various assets and liabilities ~~as of September 30, 2002.~~at March 31, 2004. This ~~"gap"~~“gap” analysis represents the difference between interest sensitive assets and liabilities in a specific time interval. The interest sensitivity gap analysis presents a position that
14

existed at one particular point in time, and assumes that assets and liabilities with similar repricing characteristics will reprice at the same time and to the same degree.
~~Forward Looking~~Interest Rate Sensitivity Gap Analysis
At March 31, 2004
(Dollars in thousands)

Immediate
Repricing

2-90
Days

91-180
Days

181-365
Days

1-3
Years

Over 3
Years

TOTAL

Assets

Total investment securities and other investments

$
—

$
11,447

$
13,477

$
26,343

$
106,091

$
168,749

$
326,107

Federal funds sold

11,381

—

—

—

—

—

11,381

Loans held for sale

688

—

—

—

—

—

688

Loans Receivable, net of fees

Commercial & industrial

36

174,364

39

188

2,865

13,641

191,133

Residential

—

18,308

434

1,293

1,613

21,625

43,273

Home equity lines

—

42,040

3,929

1,080

—

—

47,049

Construction

—

30,754

456

6,118

5,886

—

43,214

All other

1,002

4,044

87

34

417

4,223

9,807

Total loans receivable, net of fees

1,038

269,510

4,945

8,713

10,781

39,489

334,476

Total earning assets

13,107

280,957

18,422

35,056

116,872

208,238

672,652

Cumulative rate sensitive assets

$
13,107

$
294,064

$
312,486

$
347,542

$
464,414

$
672,652

Liabilities

Deposits

Noninterest-bearing demand

$
—

$
—

$
—

$
—

$
—

$
81,466

$
81,466

Interest-bearing transaction accounts

36,658

18,329

18,329

18,329

18,329

73,316

183,290

Certificates of deposit - fixed

29

12,842

12,766

23,528

48,102

14,288

111,555

Certificates of deposit - no penalty

273

15,412

24,013

27,606

82,316

—

149,620

Total deposits

36,960

46,583

55,108

69,463

148,747

169,070

525,931

Other borrowed funds

24,425

625

4,625

19,250

6,000

16,833

71,758

Total deposits & other borrowed funds

61,385

47,208

59,733

88,713

154,747

185,903

597,689

Cumulative rate sensitive liabilities

$
61,385

$
108,593

$
168,326

$
257,039

$
411,786

$
597,689

Gap

$
(48,278
)
$
233,749

$
(41,311
)
$
(53,657
)
$
(37,875
)
$
22,335

Cumulative gap

(48,278
)
185,471

144,160

90,503

52,628

74,963

Gap/ total assets

-6.96
%
33.71
%
-5.96
%
-7.74
%
-5.46
%
3.22
%

Cumulative gap/ total assets

-6.96
%
26.75
%
20.79
%
13.05
%
7.59
%
10.81
%

Rate sensitive assets/ rate sensitive liabilities

0.21

5.95

0.31

0.40

0.76

1.12

Cumulative rate sensitive assets/ cumulative rate sensitive liabilities

0.21

2.71

1.86

1.35

1.13

1.13

29

Forward-Looking Statements

This Quarterly Report ~~on Form 10-QSB~~ contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are not historical facts, but rather are predictions and generally can be identified by use of statements that include phrases such as ~~"believe," "expect," "anticipate," "estimate," "intend," "plan," "foresee"~~“believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan, “ “foresee” or other words or phrases of similar import. Similarly, statements that describe our future financial condition or results of operations, objectives, strategies, plans, goals or future performance and business also are forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors, including those described in the 2003 Form 10-KSB under “Caution About Forward-Looking Statements,” that could cause our actual results to differ materially from those currently anticipated in these forward-looking statements. In light of these risks and uncertainties, ~~the~~ forward-looking events might or might not occur.
~~Important~~
30

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our Asset/ Liability Committee is responsible for reviewing our liquidity requirements and maximizing our net interest income, consistent with capital requirements, liquidity, interest rate and economic outlooks, competitive factors and customer needs. One of the tools we use to determine our interest rate risk is gap analysis. Gap analysis attempts to examine the volume of interest rate sensitive assets less interest rate sensitive liabilities in various time intervals. The difference is the interest sensitivity gap, which indicates how future changes in interest rates may affect net interest income. Interest sensitivity gap analysis presents a position that ~~could cause actual results~~exists at one particular point in time and assumes that assets and liabilities with similar characteristics will re-price at the same time and to ~~differ materially from those suggested by~~the same degree. Under our asset/liability policies, regardless of whether interest rates are expected to increase or decrease, the objective is to maintain a gap position that will minimize any changes in net interest income. A negative gap, or liability sensitive position, exists when we have more interest sensitive liabilities maturing within a certain gap interval than interest sensitive assets. Under this scenario, if interest rates were to increase, it would tend to reduce interest income.
We can reprice our interest checking, savings, and money market accounts at any time. We carefully analyze the impact of any decrease in interest rates on our deposits, as we may experience a runoff in deposit balances as a result of such changes in interest rates. Based on the degree and frequency of movement being limited in practice, we have classified 20% of these ~~forward-looking statements, and could adversely affect our future financial performance, include those referred to~~deposits in our ~~Annual Report on Form 10-KSB for the year ended December 31, 2001.~~
15
~~Table 1.~~
~~Cardinal Financial Corporation and Subsidiaries~~
~~Investment Securities Available-for-Sale~~
Asimmediate gap interval, 10% of ~~September 30, 2002 and December 31, 2001~~
~~(Dollars~~these deposits in ~~thousands)~~

Par Value
Amortized
Cost
Fair
Value
Unrealized
Gain/(Loss)
Average
Yield

As of September 30, 2002
U.S. government agencies and enterprises
One to five years $ 23,000 $ 22,988 $ 23,256 $ 268 3.90 %

Total U.S. government agencies $ 23,000 $ 22,988 $ 23,256 $ 268 3.90 %
Mortgage-backed securities
Within one year $ 3,784 $ 3,841 $ 3,884 $ 43 3.61 %
One to five years 97,595 99,386 101,458 2,072 5.16 %
Five to ten years 5,962 6,073 6,183 110 5.85 %
After ten years 342 360 360 — 9.69 %

Total mortgage-backed securities $ 107,683 $ 109,660 $ 111,885 $ 2,225 5.16 %
Corporate bonds
One to five years $ 2,000 $ 340 $ 260 $ (80 ) 0.00 %

Total corporate bonds $ 2,000 $ 340 $ 260 $ (80 ) 0.00 %

Treasury bonds
One to five years $ 2,500 $ 2,509 $ 2,544 $ 35 2.67 %

Total treasury bonds $ 2,500 $ 2,509 $ 2,544 $ 35 2.67 %

Total investment securities available-for-sale $ 135,183 $ 135,497 $ 137,945 $ 2,448 4.82 %

Par Value

Amortized
Cost

Fair
Value

Unrealized
Gain/(Loss)

Average
Yield

As of December 31, 2001
U.S. government agencies and enterprises
One to five years $ 3,000 $ 2,985 $ 2,950 $ (35 ) 4.15 %
Five to ten years 1,500 1,516 1,508 (8 ) 4.67 %

Total U.S. government agencies $ 4,500 $ 4,501 $ 4,458 $ (43 ) 4.32 %

Mortgage-backed securities
Within one year $ 182 $ 182 $ 183 $ 1 2.55 %
One to five years 11,210 11,456 11,383 (73 ) 5.22 %
Five to ten years 5,804 5,927 5,865 (62 ) 5.79 %
After ten years 4,849 4,965 4,926 (39 ) 5.96 %

Total mortgage-backed securities $ 22,045 $ 22,530 $ 22,357 $ (173 ) 5.51 %

Corporate bonds
One to five years $ 6,000 $ 6,154 $ 6,114 $ (40 ) 5.42 %
Five to ten years 1,000 986 969 (17 ) 6.98 %

Total corporate bonds $ 7,000 $ 7,140 $ 7,083 $ (57 ) 5.64 %

Treasury bonds
Within one year $ 250 $ 250 $ 249 $ (1 ) 1.87 %

Total treasury bonds $ 250 $ 250 $ 249 $ (1 ) 1.87 %

Total investment securities available-for-sale $ 33,795 $ 34,421 $ 34,147 $ (274 ) 5.36 %

16
~~Table 2.~~
~~Cardinal Financial Corporation and Subsidiaries~~
~~Loans Receivable~~
~~As of September 30, 2002 and December 31, 2001~~
~~(Dollars in thousands)~~

September 30,
2002
December 31,
2001

Commercial $ 52,717 24.37 % $ 57,665 28.71 %
Real estate—commercial 95,699 44.24 % 87,116 43.37 %
Real estate—construction 6,224 2.88 % 6,397 3.18 %
Real estate—residential 25,329 11.71 % 14,469 7.20 %
Home equity lines 24,776 11.45 % 21,299 10.60 %
Consumer 11,592 5.35 % 13,941 6.94 %

Gross loans $ 216,337 100.00 % $ 200,887 100.00 %

Add: unearned income, net

18

24

Less: allowance for loan losses (3,073 ) (3,104 )

Total loans, net $ 213,282 $ 197,807

~~Table 3.~~
~~Cardinal Financial Corporation and Subsidiaries~~
~~Certificates of Deposit of $100,000 or More~~
~~As of September 30, 2002~~
~~(Dollars in thousands)~~

September 30,
2002
Maturities:
Three months or less $ 8,356
Over three months through six months 8,918
Over six months through twelve months 19,675
Over twelve months 35,634

$ 72,583

17
~~Table 4.~~
~~Cardinal Financial Corporation and Subsidiaries~~
~~Average Balance Sheets and Interest Rates on Earning Assets and Interest—Bearing Liabilities~~
~~For the Three Months Ended September 30, 2002, 2001 and 2000~~
~~(Dollars in thousands)~~

2002
2001
2000

Average
Balance
Interest
Income/
Expense
Rate
Average
Balance
Interest
Income/
Expense
Rate
Average
Balance
Interest
Income/
Expense
Rate

Assets
Interest-earning assets:
Loans:
Commercial $ 49,780 $ 893 7.18 % $ 53,237 $ 1,115 8.38 % $ 33,601 $ 821 9.77 %
Real estate—commercial 94,614 1,887 7.98 % 77,165 1,673 8.67 % 33,901 633 7.47 %
Real estate—construction 6,675 100 5.96 % 6,044 127 8.40 % 3,373 85 10.12 %
Real estate—residential 19,103 369 7.72 % 17,864 384 8.59 % 19,746 460 9.33 %
Home equity lines 24,268 263 4.30 % 18,755 287 6.12 % 8,253 183 8.85 %
Consumer 11,884 225 7.51 % 14,911 293 7.86 % 9,635 216 8.95 %

Total loans 206,324 3,737 7.24 % 187,976 3,879 8.25 % 108,509 2,398 8.84 %

Investment securities available for sale 127,307 1,471 4.62 % 5,788 95 6.57 % 6,310 99 6.30 %
Other investments 1,199 17 5.67 % 1,319 22 6.67 % 1,036 16 6.24 %
Federal funds sold 62,104 260 1.66 % 25,168 218 3.44 % 22,906 391 6.85 %

Total interest-earning assets and interest income 396,934 5,485 5.53 % 220,251 4,214 7.65 % 138,761 2,904 8.37 %

Non-interest earning assets:
Cash and due from banks 19,861 10,706 5,711
Premises and equipment, net 4,678 5,572 4,678
Goodwill and other intangibles 646 9,167 3,300
Accrued interest and other assets 3,500 1,836 687
Allowance for loan losses (3,049 ) (2,138 ) (1,278 )

Total assets $ 422,570 $ 245,394 $ 151,859

Liabilities and Shareholders' Equity
Interest—bearing liabilities:
Interest—bearing deposits:
Interest checking 130,110 904 2.76 % 16,128 74 1.84 % 6,244 33 2.10 %
Money markets 32,019 151 1.87 % 26,350 185 2.82 % 16,169 136 3.37 %
Statement savings 4,287 13 1.24 % 4,502 24 2.16 % 2,216 16 2.97 %
Certificates of deposit 150,658 1,535 4.04 % 103,439 1,420 5.51 % 62,115 966 6.24 %

Total interest—bearing deposits 317,074 2,603 3.26 % 150,419 1,703 4.49 % 86,744 1,151 5.32 %

Other borrowed funds 4,065 40 3.93 % 10,912 122 4.45 % 6,875 117 6.83 %

Total interest-bearing liabilities and interest expense 321,139 2,643 3.27 % 161,331 1,825 4.50 % 93,619 1,268 5.43 %

Noninterest-bearing liabilities:
Demand deposits 60,161 49,337 27,053
Other liabilities 1,659 2,500 1,169
Preferred shareholders' equity 6,825 7,057 2,378
Common shareholders' equity 32,786 25,169 27,640

Total liabilities and shareholders' equity $ 422,570 $ 245,394 $ 151,859

Net interest income and net interest margin $ 2,842 2.86 % $ 2,389 4.34 % $ 1,636 4.72 %

18
~~Table 4a.~~
~~Cardinal Financial Corporation and Subsidiaries~~
~~Rate and Volume Analysis (Tax Equivalent Basis)~~
~~(Dollars in thousands)~~

Three Months Ended September 30,
2002 Compared to 2001
Three Months Ended September 30,
2001 Compared to 2000

Average
Volume
Average
Rate
Increase
(Decrease)
Average
Volume
Average
Rate
Increase
(Decrease)

Interest income:
Loans:
Commercial $ (72 ) $ (150 ) $ (222 ) $ 480 $ (186 ) $ 294
Real estate—commercial 379 (165 ) 214 808 232 1,040
Real estate—construction 14 (41 ) (27 ) 68 (26 ) 42
Real estate—residential 27 (42 ) (15 ) (43 ) (33 ) (76 )
Home equity lines 84 (108 ) (24 ) 234 (130 ) 104
Consumer (60 ) (8 ) (68 ) 119 (42 ) 77

Total loans 372 (514 ) (142 ) 1,666 (185 ) 1,481

Investment securities available for sale 1,995 (619 ) 1,376 (8 ) 4 (4 )
Other investments (2 ) (3 ) (5 ) 5 1 6
Federal funds sold 321 (279 ) 42 39 (212 ) (173 )

Total interest income 2,686 (1,415 ) 1,271 1,702 (392 ) 1,310
Interest expense:
Interest—bearing deposits:
Interest checking 527 303 830 52 (11 ) 41
Money markets 40 (74 ) (34 ) 87 (38 ) 49
Statement savings (1 ) (10 ) (11 ) 17 (9 ) 8
Certificates of deposit 656 (541 ) 115 650 (196 ) 454

Total interest—bearing deposits 1,222 (322 ) 900 806 (254 ) 552

Other borrowed funds (77 ) (5 ) (82 ) 69 (64 ) 5
Total interest expense 1,145 (327 ) 818 875 (318 ) 557

Net interest income $ 1,541 $ (1,088 ) $ 453 $ 827 $ (74 ) $ 753

19
~~Table 5.~~
~~Cardinal Financial Corporation and Subsidiaries~~
~~Average Balance Sheets and Interest Rates on Earning Assets and Interest—Bearing Liabilities~~
~~For the Nine Months Ended September 30, 2002, 2001 and 2000~~
~~(Dollars in thousands)~~

2002
2001
2000

Average
Balance
Interest
Income/
Expense
Rate
Average
Balance
Interest
Income/
Expense
Rate
Average
Balance
Interest
Income/
Expense
Rate

Assets
Interest-earning assets:
Loans:
Commercial $ 52,156 $ 2,788 7.13 % $ 50,710 $ 3,345 8.80 % $ 27,978 $ 1,996 9.51 %
Real estate—commercial 89,634 5,408 8.04 % 67,475 4,445 8.78 % 30,020 1,696 7.53 %
Real estate—construction 6,185 282 6.07 % 5,538 374 9.01 % 1,990 146 9.78 %
Real estate—residential 17,448 1,033 7.90 % 18,062 1,133 8.36 % 15,068 1,012 8.96 %
Home equity lines 23,270 741 4.26 % 17,172 896 6.96 % 6,078 393 8.62 %
Consumer 12,864 715 7.43 % 14,965 881 7.85 % 9,428 566 8.01 %

Total loans 201,557 10,967 7.26 % 173,922 11,074 8.49 % 90,562 5,809 8.55 %

Investment securities available for sale 91,846 3,284 4.77 % 5,325 285 7.14 % 5,136 243 6.30 %
Other investments 1,197 53 5.90 % 1,427 66 6.17 % 971 49 6.68 %
Federal funds sold 49,428 613 1.66 % 27,223 926 4.55 % 19,245 961 6.66 %

Total interest-earning assets and interest income 344,028 14,917 5.78 % 207,897 12,351 7.92 % 115,914 7,062 8.12 %

Non-interest earning assets:
Cash and due from banks 16,955 10,207 4,499
Premises and equipment, net 4,843 5,649 4,496
Goodwill and other intangibles 652 9,337 1,108
Accrued interest and other assets 2,003 1,723 1,209
Allowance for loan losses (3,051 ) (2,038 ) (999 )

Total assets $ 365,430 $ 232,775 $ 126,227

Liabilities and Shareholders' Equity
Interest—bearing liabilities:
Interest—bearing deposits:
Interest checking 104,351 2,252 2.89 % 14,188 203 1.93 % 4,264 73 2.32 %
Money markets 28,229 424 2.01 % 24,485 617 3.39 % 12,666 336 3.57 %
Statement savings 4,275 40 1.24 % 4,396 88 2.70 % 1,096 26 3.23 %
Certificates of deposit 131,106 4,118 4.20 % 99,781 4,427 5.98 % 48,564 2,193 6.08 %

Total interest—bearing deposits 267,961 6,834 3.41 % 142,850 5,335 4.99 % 66,590 2,628 5.31 %

Other borrowed funds 6,802 208 4.09 % 9,817 368 5.02 % 6,261 309 6.55 %

Total interest-bearing liabilities and interest expense 274,763 7,042 3.43 % 152,667 5,703 5.00 % 72,851 2,937 5.43 %

Noninterest-bearing liabilities:
Demand deposits 57,915 44,566 21,517
Other liabilities 2,505 2,593 1,917
Preferred shareholders' equity 6,825 7,057 798
Common shareholders' equity 23,422 25,892 29,144

Total liabilities and shareholders' equity $ 365,430 $ 232,775 $ 126,227

Net interest income and net interest margin $ 7,875 3.05 % $ 6,648 4.26 % $ 4,125 4.74 %

20
~~Table 5a.~~
~~Cardinal Financial Corporation and Subsidiaries~~
~~Rate and Volume Analysis (Tax Equivalent Basis)~~
~~(Dollars in thousands)~~

Nine Months Ended September 30,
2002 Compared to 2001
Nine Months Ended September 30,
2001 Compared to 2000

Average
Volume
Average
Rate
Increase
(Decrease)
Average
Volume
Average
Rate
Increase
(Decrease)

Interest income:
Loans:
Commercial $ 95 $ (652 ) $ (557 ) $ 1,622 $ (273 ) $ 1,349
Real estate—commercial 1,460 (497 ) 963 2,116 633 2,749
Real estate—construction 44 (136 ) (92 ) 260 (32 ) 228
Real estate—residential (39 ) (61 ) (100 ) 202 (81 ) 121
Home equity lines 317 (472 ) (155 ) 715 (212 ) 503
Consumer (123 ) (43 ) (166 ) 332 (17 ) 315

Total loans 1,754 (1,861 ) (107 ) 5,247 18 5,265

Investment securities available for sale 4,631 (1,632 ) 2,999 9 33 42
Other investments (11 ) (2 ) (13 ) 23 (6 ) 17
Federal funds sold 755 (1,068 ) (313 ) 397 (432 ) (35 )

Total interest income 7,129 (4,563 ) 2,566 5,676 (387 ) 5,289
Interest expense:
Interest—bearing deposits:
Interest checking 1,300 749 2,049 172 (42 ) 130
Money markets 95 (288 ) (193 ) 315 (34 ) 281
Statement savings (2 ) (46 ) (48 ) 80 (18 ) 62
Certificates of deposit 1,400 (1,709 ) (309 ) 2,329 (95 ) 2,234

Total interest—bearing deposits 2,793 (1,294 ) 1,499 2,896 (189 ) 2,707

Other borrowed funds (113 ) (47 ) (160 ) 174 (115 ) 59
Total interest expense 2,680 (1,341 ) 1,339 3,070 (304 ) 2,766

Net interest income $ 4,449 $ (3,222 ) $ 1,227 $ 2,606 $ (83 ) $ 2,523

21
~~Table 6.~~
~~Cardinal Financial Corporation and Subsidiaries~~
~~Allowance for Loan Losses~~
~~For the Nine Months Ended September 30, 2002 and 2001~~
~~(Dollars in thousands)~~

2002
2001
Beginning balance, January 1 $ 3,104 $ 1,900
Provision for loan losses 134 375
Transfer to bank's liability on unfunded commitments (74 ) —
Loans charged off:
Commercial (63 ) —
Real estate—commercial — —
Real estate—construction — —
Real estate—residential — —
Home equity lines — —
Consumer (41 ) —

Total loans charged off (104 ) —

Recoveries:

Commercial 2 2
Real estate—commercial — —
Real estate—construction — —
Real estate—residential — —
Home equity lines — —
Consumer 11 —

Total recoveries 13 2

Net (charge-offs) recoveries

(91
)

2
Ending balance $ 3,073 $ 2,277

September 30,
2002

September 30,
2001

Loans:
Balance at period end $ 216,337 $ 196,668
Allowance for loan losses to period end loans receivable 1.42 % 1.16 %
22
~~Table 7.~~
~~Cardinal Financial Corporation and Subsidiaries~~
~~Allocation~~each of the ~~Allowance for Loan Losses~~
Asgap intervals from 2-90 days through the 1-3 year gap interval, leaving the remaining portion or 40% of ~~September 30, 2002~~these deposits in the over 3 year gap interval. We continue to analyze the activity in our deposit portfolio and ~~December~~make changes in our gap assumptions as the activity dictates. See Table 11 from our management’s discussion and analysis above, which reflects the repricing or expected maturities of various assets and liabilities at March 31, ~~2001~~
~~(Dollars~~2004. This “gap” analysis represents the difference between interest sensitive assets and liabilities in ~~thousands)~~

September 30,
2002
December 31,
2001

Amount
% of Total*
Amount
% of Total*
Commercial $ 948 24.37% $ 1,149 28.71%
Real estate—commercial 1,342 44.24% 1,270 43.37%
Real estate—construction 173 2.88% 34 3.18%
Real estate—residential 190 11.71% 98 7.20%
Home equity lines 198 11.45% 176 10.60%
Consumer 222 5.35% 377 6.94%

Total allowance for loan losses $ 3,073 100.00% $ 3,104 100.00%

*
~~Percentage of loan type~~a specific time interval. The interest sensitivity gap analysis presents a position that existed at one particular point in time, and assumes that assets and liabilities with similar repricing characteristics will reprice at the same time and to the ~~total loan portfolio.~~
23
~~Table 8.~~same degree.
~~Cardinal Financial Corporation~~
We also use a simulation process to measure interest rate risk and ~~Subsidiaries~~
~~Capital Components~~
Asthe impact of ~~September 30, 2002~~rate fluctuations on net interest income. These simulations incorporate assumptions regarding balance sheet growth and ~~December 31, 2001~~
~~(Dollars~~mix, and the re-pricing and maturity characteristics of existing and projected balance sheets. One of the ways we manage our interest rate risk is through an analysis of the relationship between interest-earning assets and interest-bearing liabilities to measure the impact that future changes in ~~thousands)~~

Actual
For Capital
Adequacy Purposes
To Be Well Capitalized Under Prompt Corrective Action Provisions

Amount
Ratio
Amount

Ratio
Amount

Ratio

As of September 30, 2002
Total risk based capital/ Total capital to risk-weighted assets $ 40,708 15.21 % $ 21,407 ³ 8.00 % $ 26,759 ³ 10.00 %
Tier I capital/ Tier I capital to risk-weighted assets 37,636 14.06 % 10,704 ³ 4.00 % 16,055 ³ 6.00 %
Total risk based capital/ Total capital to average assets 40,708 9.63 % 16,903 ³ 4.00 % 13,380 ³ 5.00 %

As of December 31, 2001
Total risk based capital/ Total capital to risk-weighted assets $ 23,333 10.42 % $ 17,909 ³ 8.00 % $ 22,387 ³ 10.00 %
Tier I capital/ Tier I capital to risk-weighted assets 20,230 9.04 % 8,955 ³ 4.00 % 13,432 ³ 6.00 %
Total risk based capital/ Total capital to average assets 23,333 8.57 % 10,891 ³ 4.00 % 13,614 ³ 5.00 %
24
~~Table 9.~~interest rates will have on net interest income. Using this relationship analysis, changes in interest rates and volumes are used to test the sensitivity of our net interest income. While we show liability sensitivity in the short term indicating that an increase in interest rates may negatively affect short-term net interest income, we would likely take actions to minimize our exposure to negative results and within a short period of time make adjustments so that net interest income would not be materially impacted.
~~Cardinal Financial Corporation~~
We expect our net interest income will be greater over the longer term at higher prevailing interest rate levels, although we may be negatively affected by rising rates in the shorter term. This is due to the large proportion of low-cost core deposits such as demand, interest checking, savings, and ~~Subsidiaries~~
~~Interest Rate Sensitivity Gap Analysis~~
~~As of September 30, 2002~~
~~(Dollars~~money market accounts comprising our funding sources, which tend to be less sensitive to rising rates and can be invested in ~~thousands)~~relatively higher yielding loans and investment securities.
31

Immediate
Repricing
2-90
Days
91-180
Days
181-365
Days
1-3
Years
Over 3
Years
TOTAL
Assets
Investment securities available-for-sale and other investments $ — $ 7,382 $ 6,018 $ 13,009 $ 65,206 $ 47,593 $ 139,208

Federal funds sold 61,186 — — — — — 61,186

Loans
Commercial & industrial 15,152 5,761 3,722 8,358 45,320 70,102 148,416
Residential 108 249 294 2,129 7,821 14,729 25,329
Home equity lines 4,471 20,305 — — — — 24,776
Construction 4,770 13 6 12 55 1,368 6,224
All other 1,706 555 397 711 2,416 5,806 11,592

Total Gross Loans 26,207 26,884 4,420 11,210 55,612 92,005 216,337

Total Earning Assets 87,393 34,266 10,438 24,219 120,818 139,598 416,731

Cumulative Rate Sensitive Assets 87,393 121,659 132,097 156,315 277,133 416,731

Liabilities

Deposits
Noninterest-bearing demand — — — — — 73,474 73,474
Interest-bearing transaction accounts 33,666 16,833 16,833 16,833 16,833 67,332 168,331
Certificates of deposit—fixed 104 8,611 5,487 22,485 50,451 16,209 103,347
Certificates of deposit—no penalty 116 7,395 9,973 16,404 24,628 — 58,516

Total Deposits 33,886 32,839 32,293 55,722 91,912 157,015 403,668

Other borrowed funds — — — 1,000 — — 1,000

Total Deposits & Other Borrowed Funds 33,886 32,839 32,293 56,722 91,912 157,015 404,668

Cumulative Rate Sensitive Liabilities $ 33,886 $ 66,725 $ 99,018 $ 155,741 $ 247,653 $ 404,668

Gap

$
53,507

$
1,427

$
(21,855
)
$
(32,504
)
$
28,906

$
(17,417
)

Cumulative Gap 53,507 54,934 33,079 575 29,480 12,063
Gap/ Total Assets 11.98 % 0.32 % -4.89 % -7.27 % 6.47 % -3.90 %
Cumulative Gap/ Total Assets 11.98 % 12.29 % 7.40 % 0.13 % 6.60 % 2.70 %
Rate Sensitive Assets/ Rate Sensitive Liabilities 2.58 x 1.04 x 0.32 x 0.43 x 1.31 x 0.89 x
Cumulative Rate Sensitive Assets/ Rate Sensitive Liabilities 2.58 x 1.82 x 1.33 x 1.00 x 1.12 x 1.03 x
25

Item 3.4. Controls and Procedures
~~Based upon an evaluation by our Chief Executive Officer and Chief Financial Officer within 90 days prior to the filing date of this Quarterly Report on Form 10-QSB, they have concluded that our~~
The Company maintains disclosure controls and procedures ~~as defined~~that are designed to ensure that information required to be disclosed by it in ~~Rule 13a-14(c)~~the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, including, without limitation, those controls and procedures designed to ensure that such information is accumulated and communicated to the Company’s management to allow timely decisions regarding required disclosures.
As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was carried out under the supervision and with the participation of the Company’s management, including the chief executive officer and chief financial officer. Based on and as of the date of such evaluation, these officers concluded that the Company’s disclosure controls and procedures were effective.
The Company also maintains a system of internal accounting controls that is designed to provide assurance that assets are ~~effective~~safeguarded and that transactions are executed in ~~ensuring that all material information required~~accordance with management’s authorization and properly recorded. This system is continually reviewed and is augmented by written policies and procedures, the careful selection and training of qualified personnel and an internal audit program to ~~be filed in this Quarterly Report has been made known to them in a timely fashion.~~
monitor its effectiveness. There were no ~~significant~~ changes in our internal ~~controls~~control over financial reporting identified in connection with our evaluation of it that occurred during our last fiscal quarter that materially affected, or ~~in other factors that could significantly~~are reasonably likely to materially affect, our internal ~~controls subsequent to the date of the evaluation referred to above.~~control over financial reporting.
26
32

PART II~~Part II—Other Information~~
– OTHER INFORMATION
Item 1. Legal Proceedings
~~From time to time, the Company is a party to legal proceedings in~~
In the ordinary course of ~~business. However, the Company is~~our operations, we may become party to legal proceedings. Currently, we are not ~~engaged in~~party to any material legal proceedings ~~of a material nature at the present time.~~and no such proceedings are, to management’s knowledge, threatened against us.

Item 2. Changes in Securities
and Use of Proceeds
(a)
~~None~~

None.
(b)
~~None~~

None.
(c)
~~None~~

None.
(d)
Not ~~applicable~~
applicable.
(e) None.

Item 3. Defaults Upon Senior Securities
(a)
None

(b)
None

Item 4. Submission of Matters to a Vote of Security Holders
        ~~The Company's Annual Meeting of Shareholders was held on July 22, 2002.~~
~~The following persons~~
No matters were ~~elected as directors for terms expiring in the year indicated:~~

Votes
Director
Term Expires
For
Withheld
Nancy K. Falck 2003 8,255,864 178,602
J. Hamilton Lambert 2003 8,214,501 219,965

Jones V. Isaac

2004

8,288,364

146,102

B.G. Beck

2005

8,288,364

146,102
William G. Buck 2005 8,288,364 146,102
Bernard H. Clineburg 2005 8,288,364 146,102
John W. Fisher 2005 8,255,864 178,602
Emad Saadeh 2005 8,288,364 146,102
        ~~The following directors have terms of office that continued after the meeting:~~
~~Director~~
~~Term Expires~~
~~Robert M. Barlow~~ ~~2003~~
~~James D. Russo~~ ~~2003~~
~~George P. Shafran~~ ~~2003~~
~~Wayne W. Broadwater~~ ~~2004~~
~~Sidney O. Dewberry~~ ~~2004~~
~~Harold E. Lieding~~ ~~2004~~
~~John H. Rust~~ ~~2004~~
        ~~The approval of the Cardinal Financial Corporation 2002 Equity Compensation Plan was voted on at the meeting and approved by~~submitted to a vote of ~~4,507,317 for, 445,230 against, with 605,135 abstentions.~~
27

        ~~Finally,~~security holders, through the ~~shareholders voted on and approved~~solicitation of proxies or otherwise, during the ~~appointment~~first quarter of ~~KPMG LLP as the Company's independent auditors by a vote of 8,415,648 for, 15,730 against, with 3,088 abstentions.~~2004.

Item 5.5. Other Information

None

Item 6.6. Exhibits and Reports on Form 8-K
~~(a)~~
~~The exhibits filed as part of this report are listed below:~~
        3.1  Articles of Incorporation of Cardinal Financial Corporation (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form SB-2, Registration No. 333-82946, filed with the Commission on February 19, 2002 (the "Original Form SB-2")).
3.2  Articles of Amendment to the Articles of Incorporation of Cardinal Financial Corporation, setting forth the designation for the Series A Preferred Stock and other changes (incorporated by reference to Exhibit 3.2 to the Original Form SB-2) and Articles of Amendment to the Articles of Incorporation of Cardinal Financial Corporation, further setting forth the designation for the Series A Preferred Stock and other changes (incorporated by reference to Exhibit 3.2 to the Pre-Effective Amendment No. 1 to Form SB-2, Registration No. 333-82946, filed with the Commission on March 21, 2002 ("Amendment No. 1")).
(a)    Exhibits:
~~3.3  Amended Bylaws of Cardinal Financial Corporation (incorporated by reference to Exhibit 3.3 to the Form 10-QSB filed with the Commission on August 14, 2002).~~
3.1
Bylaws of Cardinal Financial Corporation (restated in electronic format to reflect all amendments through April 21, 2004)
31.1
Rule 13a-14(a) Certification of Chief Executive Officer
31.2
Rule 13a-14(a) Certification of Chief Financial Officer
32.1
Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
32.2
Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
        ~~4.1  Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Original Form SB-2).~~
        ~~10.1 Employment Agreement, dated as of February 12, 2002, between Cardinal Financial Corporation and Bernard H. Clineburg (incorporated by reference to Exhibit 10.1 to the Original Form SB-2).~~
        ~~10.2 Executive Employment Agreement, dated as of February 12, 2002, between Cardinal Financial Corporation and Carl E. Dodson (incorporated by reference to Exhibit 10.2 to the Original Form SB-2).~~
        10.3 Executive Employment Agreement, dated as of February 12, 2002 between Cardinal Financial Corporation and F. Kevin Reynolds (incorporated by reference to Exhibit 10.4 to the Original Form SB-2).
        10.4 Executive Employment Agreement, dated as of February 12, 2002, between Cardinal Financial Corporation and Christopher W. Bergstrom (incorporated by reference to Exhibit 10.5 to the Original Form SB-2).
        ~~10.5 Cardinal Financial Corporation 1999 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.7 to the Original Form SB-2).~~
        ~~10.6 Cardinal Financial Corporation 2002 Equity Compensation Plan (incorporated by reference to Exhibit 10.8 to the Form 10-QSB filed with the Commission on August 14, 2002).~~
        ~~99.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~
        ~~99.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~
(b)
Reports on Form 8-K

On ~~July 8, 2002 the registrant filed~~January 16, 2004 we furnished a Current Report on Form 8-K ~~attaching its July 3, 2002 press release concerning a writedown of a Worldcom bond.~~
28

dated January 14, 2004 to report under Item 12~~SIGNATURES~~
our financial results for the year ended December 31, 2003.

33

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant ~~has duly~~ caused this Report ~~on Form 10-QSB~~ to be signed on its behalf by the undersigned thereunto duly authorized.
CARDINAL FINANCIAL CORPORATION
~~(Registrant)~~

(Registrant)
Date: ~~November 14, 2002~~May 6, 2004

/s/ ~~BERNARD H. CLINEBURG~~
Bernard H. Clineburg

Bernard H. Clineburg
Chairman, President and
Chief Executive Officer

(Principal Executive Officer)
Date: ~~November 14, 2002~~May 6, 2004

/s/ ~~JOHN P. HOLLERBACH~~      Domingo Rodriguez
~~John P. Hollerbach~~
~~Executive~~
Domingo Rodriguez
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
29
Date: May 6, 2004

~~CERTIFICATION~~
        ~~I, Bernard H. Clineburg, Chief Executive Officer of the registrant, certify that:~~
        ~~1.    I have reviewed this quarterly report on Form 10-QSB of Cardinal Financial Corporation;~~
        2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
        3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
        4.    The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
        a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
        ~~b)    evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and~~
        ~~c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;~~
        5.    The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
        a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
        ~~b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and~~
        6.    The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
~~November 14, 2002~~ /s/ ~~BERNARD H. CLINEBURG~~
~~Bernard H. Clineburg,~~
~~Chairman, President and~~
~~Chief Executive Officer~~Jennifer L. Deacon
30

~~CERTIFICATION~~
        ~~I, John P. Hollerbach, Chief Financial Officer of the registrant, certify that:~~
        ~~1.    I have reviewed this quarterly report on Form 10-QSB of Cardinal Financial Corporation;~~
        2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
        3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
        4.    The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
        a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
        ~~b)    evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and~~
        ~~c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;~~
        5.    The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
        a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
        ~~b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and~~
        6.    The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
~~November 14, 2002~~
Jennifer L. Deacon
~~/s/  JOHN P. HOLLERBACH~~
~~John P. Hollerbach,~~
~~Executive~~
Vice President and
~~Chief Financial Officer~~ Controller
(Principal Accounting Officer)
31
34

~~QuickLinks~~
~~CARDINAL FINANCIAL CORPORATION~~
~~INDEX TO FORM 10-QSB~~
~~Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations~~
~~Item 3. Controls and Procedures~~
~~Part II—Other Information~~
~~Item 1. Legal Proceedings~~
~~Item 2. Changes in Securities~~
~~Item 3. Defaults Upon Senior Securities~~
~~Item 4. Submission of Matters to a Vote of Security Holders~~
~~Item 5. Other Information~~
~~Item 6. Exhibits and Reports on Form 8-K~~
~~SIGNATURES~~
~~CERTIFICATION~~
~~CERTIFICATION~~

Stock-Based Compensation

At March 31, 2004, the Company had two stock-based employee compensation plans, the 1999 Stock Option Plan and the 2002 Equity Compensation Plan. These plans are described more fully in Footnote 14 of the 2003 Form 10-KSB.

Note 2

Segment Disclosures

Note 3

Earnings (Loss) Per Common Share

Goodwill

Allowance for Loan Losses

Valuation of Deferred Tax Assets

New Financial Accounting Standards

Statements of Operations

Commercial Banking

Investment Advisory Services

Capital Resources

Liquidity

Interest Rate Sensitivity

PART I—I – FINANCIAL INFORMATION		3

Item 1. Financial ~~Statements (Unaudited):~~Statements:			3

	Consolidated Statements of Condition ~~September 30, 2002~~March 31, 2004 and December 31, ~~2001~~2003		1 3

	Consolidated Statements of Operations For the three ~~and nine~~ months ended ~~September 30, 2002~~March 31, 2004 and ~~2001~~2003		2 4

	Consolidated Statements of Comprehensive Income (Loss) For the three ~~and nine~~ months ended ~~September 30, 2002~~March 31, 2004 and ~~2001~~2003		3 5

	Consolidated Statements of Changes In ~~Shareholders'~~Shareholders’ Equity For the ~~nine~~three months ended ~~September 30, 2002~~March 31, 2004 and ~~2001~~2003		4 6

	Consolidated Statements of Cash Flows For the ~~nine~~three months ended ~~September 30, 2002~~March 31, 2004 and ~~2001~~2003		5 7

	Notes to Consolidated Financial Statements		6 8

Item 2.			~~Management's~~ Management’s Discussion and Analysis of Financial Condition and Results of Operations		11 12

Item 3. Quantitative and Qualitative Disclosures About Market Risk		31

Item 4. Controls and Procedures			26 32
~~PART II—OTHER INFORMATION~~		27
~~Item 1.~~		~~Legal Proceedings~~		27
PART II – OTHER INFORMATION		33

Item 1. Legal Proceedings		33
Item 2.			Changes in Securities and Use of Proceeds		27 33
Item 3.			Defaults Upon Senior Securities		27 33
Item 4.			Submission of Matters to a Vote of Security Holders		27 33
Item 5.			Other Information		28 33
Item 6.			Exhibits and Reports on Form 8-K		28 33

SIGNATURES AND CERTIFICATIONS			29 34

		(Unaudited) September 30, 2002			December 31, 2001
Assets
Cash and due from banks		$	25,729		$	11,446
Federal funds sold			61,186			23,013

	Total cash and cash equivalents		86,915			34,459
Investment securities available-for-sale			137,945			34,147
Other investments			1,263			1,268
Loans held for sale			—			4,732
Loans receivable, net of fees			216,355			200,911
Allowance for loan losses			(3,073	)		(3,104	)

			213,282			197,807
Premises and equipment, net			4,610			5,077
Goodwill and other intangibles			646			668
Accrued interest and other assets			2,141			1,426

	Total assets	$	446,802		$	279,584

Liabilities and Shareholders' Equity
Deposits		$	403,668		$	246,024
Other borrowed funds			1,000			9,824
Accrued interest and other liabilities			1,404			3,112

	Total liabilities		406,072			258,960
Preferred stock, $1 par value, 10,000,000 shares authorized Series A preferred stock, cumulative convertible, 1,364,686 and 1,364,714 shares outstanding in 2002 and 2001, respectively			1,365			1,365	��
Common stock, $1 par value, 50,000,000 shares authorized, 10,044,345 and 4,294,323 shares outstanding in 2002 and 2001, respectively			10,044			4,294
Additional paid-in capital			51,231			38,488
Accumulated deficit			(24,358	)		(23,249	)
Accumulated other comprehensive income (loss)			2,448			(274	)

	Total shareholders' equity		40,730			20,624

	Total liabilities and shareholders' equity	$	446,802		$	279,584

	March 31, 2004			December 31, 2003
	(Unaudited)
Assets

Cash and due from banks	$	10,350		$	9,555
Federal funds sold	11,381			3,528

Total cash and cash equivalents	21,731			13,083

Investment securities available-for-sale	167,981			130,762
Investment securities held-to-maturity	154,140			142,852

Total investment securities	322,121			273,614

Other investments	3,986			3,517
Loans held for sale	688			—

Loans receivable, net of fees	334,476			336,002
Allowance for loan losses	(4,347		)	(4,344		)

Loans receivable, net	330,129			331,658

Premises and equipment, net	7,107			6,707

Deferred tax asset	4,111			4,473
Accrued interest and other assets	3,578			3,196

Total assets	$	693,451		$	636,248

Liabilities and Shareholders’ Equity

Deposits	$	525,931		$	474,129
Other borrowed funds	71,758			74,457
Accrued interest and other liabilities	2,422			2,250

Total liabilities	600,111			550,836

Preferred stock, $1 par value, 10,000,000 shares authorized; Series A preferred stock, cumulative convertible, 0 and 1,364,062 shares outstanding in 2004 and 2003, respectively	—			1,364
Common stock, $1 par value, 50,000,000 shares authorized; 18,371,395 and 16,377,337 shares outstanding in 2004 and 2003, respectively	18,371			16,377
Additional paid-in capital	92,552			86,790
Accumulated deficit	(17,895		)	(18,614		)
Accumulated other comprehensive income (loss)	312			(505		)

Total shareholders’ equity	93,340			85,412

Total liabilities and shareholders’ equity	$	693,451		$	636,248

			Three Months Ended September 30,					Nine Months Ended September 30,
			2002		2001			2002			2001
Interest income:
	Loans receivable		$	3,737	$	3,879		$	10,967		$	11,074
	Federal funds sold			260		218			613			926
	Investment securities available-for-sale			1,471		95			3,284			285
	Other investments			17		22			53			66

		Total interest income		5,485		4,214			14,917			12,351
Interest expense:
	Deposits			2,603		1,703			6,834			5,335
	Other borrowed funds			40		122			208			368

		Total interest expense		2,643		1,825			7,042			5,703

		Net interest income		2,842		2,389			7,875			6,648
Provision for loan losses				95		190			134			375

		Net interest income after provision for loan losses		2,747		2,199			7,741			6,273
Non-interest income:
	Service charges on deposit accounts			133		102			363			271
	Loan service charges			91		144			286			349
	Investment fee income			188		472			754			1,560
	Net gain on sales of loans			3		2			50			14
	Net gain on investment securities available-for-sale			121		—			121			—
	Net gain on sales of other assets			—		1			39			5
	Other income			192		133			553			277

		Total non-interest income		728		854			2,166			2,476
Non-interest expense:
	Salary and benefits			1,368		1,963			4,176			5,801
	Occupancy			367		344			1,002			1,027
	Professional fees			235		192			727			450
	Depreciation			176		210			555			596
	Writedown on WorldCom bond			—		—			1,660			—
	Amortization of intangibles			—		173			22			523
	Other operating expenses			900		877			2,503			2,626

		Total non-interest expense		3,046		3,759			10,645			11,023

		Net income (loss) before income taxes		429		(706	)		(738	)		(2,274	)
Provision for income taxes				—		—			—			—

Net income (loss)			$	429	$	(706	)	$	(738	)	$	(2,274	)

Dividends to preferred shareholders				124		128			371			384

Net income (loss) to common shareholders			$	305	$	(834	)	$	(1,109	)	$	(2,658	)

Basic and diluted earnings (loss) per common share			$	0.03	$	(0.20	)	$	(0.15	)	$	(0.62	)

Weighted-average common shares outstanding — basic				10,044,345		4,256,797			7,243,053			4,255,432

Weighted-average common shares outstanding — diluted				10,142,930		4,256,797			7,243,053			4,255,432

	2004		2003
Interest income:
Loans receivable	$	4,728	$	4,031
Federal funds sold	28		39
Investment securities available-for-sale	1,271		1,678
Investment securities held-to-maturity	1,350		—
Other investments	38		24

Total interest income	7,415		5,772

Interest expense:
Deposits	2,282		2,240
Other borrowed funds	300		73

Total interest expense	2,582		2,313

Net interest income	4,833		3,459

Provision for loan losses	74		80

Net interest income after provision for loan losses	4,759		3,379

Non-interest income:
Service charges on deposit accounts	170		134
Loan service charges	195		113
Investment fee income	178		126
Net gain on sales of loans	13		9
Net realized gain on investment securities available-for-sale	241		493
Other income	80		101

Total non-interest income	877		976

Non-interest expense:
Salary and benefits	2,140		1,649
Occupancy	496		480
Professional fees	154		369
Depreciation	310		196
Other operating expenses	1,455		1,171

Total non-interest expense	4,555		3,865

Net income before income taxes	1,081		490

Provision for income taxes	362		—

Net income	$	719	$	490

Dividends to preferred shareholders	—		124

Net income to common shareholders	$	719	$	366

Earnings per common share - basic	$	0.04	$	0.04

Earnings per common share - diluted	$	0.04	$	0.04

Weighted-average common shares outstanding - basic	17,461		10,046

Weighted-average common shares outstanding - diluted	17,885		10,171

	Preferred Shares	Preferred Stock		Common Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2000	1,411	$	1,411	4,253	$	4,253	$	38,466	$	(10,022	)	$	4		$	34,112
Issuance of stock awards	—		—	3		3		3		—			—			6
Stock options exercised	—		—	1		1		3		—			—			4
Dividends on preferred stock	—		—	—		—		—		(384	)		—			(384	)
Net loss	—		—	—		—		—		(2,274	)		—			(2,274	)

Balance, September 30, 2001	1,411	$	1,411	4,257	$	4,257	$	38,472	$	(12,680	)	$	4		$	31,464

Balance, December 31, 2001	1,365	$	1,365	4,294	$	4,294	$	38,488	$	(23,249	)	$	(274	)	$	20,624
Dividends on preferred stock	—		—	—		—		—		(371	)		—			(371	)
Rights offering shares issued	—		—	2,437		2,437		5,462		—			—			7,899
Public offering shares issued	—		—	3,313		3,313		7,281		—			—			10,594
Change in unrealized gain on investment securities available-for-sale	—		—	—		—		—		—			2,722			2,722
Net loss	—		—	—		—		—		(738	)		—			(738	)

Balance, September 30, 2002	1,365	$	1,365	10,044	$	10,044	$	51,231	$	(24,358	)	$	2,448		$	40,730

	Preferred Shares		Preferred Stock			Common Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total

Balance, December 31, 2002	1,365		$	1,365		10,044	$	10,044	$	51,231	$	(24,273	)	$	2,345		$	40,712

Stock options exercised	—		—			3	3		7		—			—			10

Dividends on preferred stock	—		—			—	—		—		(124		)	—			(124		)

Change in unrealized gain (loss) on investment securities available-for-sale	—		—			—	—		—		—			(1,706		)	(1,706		)

Net income	—		—			—	—		—		490			—			490

Balance, March 31, 2003	1,365		$	1,365		10,047	$	10,047	$	51,238	$	(23,907	)	$	639		$	39,382

Balance, December 31, 2003	1,364		$	1,364		16,377	$	16,377	$	86,790	$	(18,614	)	$	(505	)	$	85,412

Stock options exercised	—		—			23	23		66		—			—			89

Public offering shares issued	—		—			945	945		5,358		—			—			6,303

Preferred stock converted to common stock	(1,364	)	(1,364		)	1,026	1,026		338		—			—			—

Change in unrealized gain (loss) on investment securities available-for-sale	—		—			—	—		—		—			817			817

Net income	—		—			—	—		—		719			—			719

Balance, March 31, 2004	—		$	—		18,371	$	18,371	$	92,552	$	(17,895	)	$	312		$	93,340

				2002			2001
Cash flows from operating activities:
	Net loss			$	(738	)	$	(2,274	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Depreciation			555			596
		Amortization of intangibles, premiums and discounts			626			548
		Provision for loan losses			134			375
		Originations of loans held for sale			(4,369	)		—
		Proceeds from the sale of loans held for sale			9,038			—
		Writedown on WorldCom bond			1,660			—
		Gain on sale of loans held for sale			(50	)		(14	)
		Gain on sale of investment securities available-for-sale			(121	)		—
		Gain on sale of other assets			(39	)		(5	)
		Increase in accrued interest and other assets			(715	)		(125	)
		Increase (decrease) in accrued interest and other liabilities			(1,708	)		889
		Compensation related to stock awards			—			6

			Net cash provided by (used in) operating activities		4,273			(4	)

Cash flows from investing activities:
	Purchase of premises and equipment				(88	)		(412	)
	Proceeds from sale of premises and equipment				—			12
	Proceeds from sale, maturity and call of investment securities available-for-sale				16,053			4,500
	Proceeds from sale of other investments				188			349
	Purchase of investment securities available-for-sale				(131,129	)		(3,601	)
	Purchase of other investments				(184	)		(114	)
	Redemptions of investment securities available-for-sale				11,736			1,043
	Net increase in loans receivable				(15,335	)		(42,448	)

			Net cash used in investing activities		(118,759	)		(40,671	)

Cash flows from financing activities:
	Net increase in deposits				157,644			49,279
	Net increase (decrease) in other borrowed funds				(8,824	)		4,069
	Proceeds from rights offering				7,899			—
	Proceeds from public offering				10,594			—
	Dividends on preferred stock				(371	)		(384	)
	Stock options exercised				—			4

			Net cash provided by financing activities		166,942			52,968

Net increase in cash and cash equivalents					52,456			12,293
Cash and cash equivalents at beginning of period					34,459			29,488

Cash and cash equivalents at end of period				$	86,915		$	41,781

Supplemental disclosure of cash flow information:
		Cash paid during period for interest		$	6,947		$	5,693

	Three Months Ended March 31,
(Dollars in thousands, except per share data)	2004			2003
Net income to common shareholders	$	719		$	366
Deduct: Total stock-based employee compensation expense determined under fair value- based method for all awards	(595		)	(223		)
Pro forma net income	$	124		$	143

Earnings per common share:
Basic - as reported	$	0.04		$	0.04
Basic - as pro forma	0.01			0.01
Diluted - as reported	0.04			0.04
Diluted - as pro forma	0.01			0.01

	Banking		Investment Advisory			Intersegment Elimination			Other			Consolidated
	(Dollars in thousands)
Net interest income	$	2,810	$	—		$	—		$	32		$	2,842
Provision for loan losses		95		—			—			—			95
Non-interest income		505		188			—			35			728
Non-interest expense		2,725		223			—			98			3,046

Net income (loss)	$	495	$	(35	)	$	—		$	(31	)	$	429

Total Assets	$	443,511	$	332		$	(38,192	)	$	41,151		$	446,802

(Dollars in thousands)	Banking		Investment Services			Intersegment Elimination			Other			Consolidated
Net interest income	$	4,800	$	—		$	—		$	33		$	4,833
Provision for loan losses	74		—			—			—			74
Non-interest income	699		178			—			—			877
Non-interest expense	4,050		239			—			266			4,555
Provision for income taxes	462		(21		)				(79		)	362
Net income (loss)	$	913	$	(40	)	$	—		$	(154	)	$	719
Total assets	$	687,543	$	741		$	(88,338	)	$	93,505		$	693,451

	Banking			Investment Advisory			Intersegment Elimination			Other			Consolidated
	(Dollars in thousands)
Net interest income	$	7,824		$	—		$	—		$	51		$	7,875
Provision for loan losses		134			—			—			—			134
Non-interest income		1,244			756			—			166			2,166
Non-interest expense		9,246			914			—			485			10,645

Net loss	$	(312	)	$	(158	)	$	—		$	(268	)	$	(738	)

Total Assets	$	443,511		$	332		$	(38,192	)	$	41,151		$	446,802

	Commercial Banking			Investment Advisory			Intersegment Elimination			Other			Consolidated
	(Dollars in thousands)
Net interest income	$	2,387		$	—		$	—		$	2		$	2,389
Provision for loan losses		190			—			—			—			190
Non-interest income		350			474			—			30			854
Non-interest expense		2,671			480			—			608			3,759

Net loss	$	(124	)	$	(6	)	$	—		$	(576	)	$	(706	)

Total Assets	$	255,252		$	421		$	(29,355	)	$	32,319		$	258,637

	Commercial Banking			Investment Advisory			Intersegment Elimination			Other			Consolidated
	(Dollars in thousands)
Net interest income	$	6,623		$	—		$	—		$	25		$	6,648
Provision for loan losses		375			—			—			—			375
Non-interest income		875			1,564			—			37			2,476
Non-interest expense		7,761			1,597			—			1,665			11,023

Net loss	$	(638	)	$	(33	)	$	—		$	(1,603	)	$	(2,274	)

Total Assets	$	255,252		$	421		$	(29,355	)	$	32,319		$	258,637

(Dollars in thousands, except share and per share data)	Three Months Ended March 31,
(Dollars in thousands, except share and per share data)	2004		2003

Net income	$	719	$	490

Dividends to preferred shareholders	—		124

Net income to common shareholders	$	719	$	366

Weighted average common shares for basic	17,461,000		10,046,000

Weighted average common shares for diluted	17,885,000		10,171,000

Basic earnings per common share	$	0.04	$	0.04

Diluted earnings per common share	$	0.04	$	0.04

	September 30, 2002					December 31, 2001
	Gross Carrying Value		Accumulated Amortization			Gross Carrying Value		Accumulated Amortization
	(Dollars in thousands)
Amortizable core deposit intangible	$	102	$	(102	)	$	102	$	(80	)
Unamortizable goodwill (1)		646		—			646		—

	Core Deposit Intangible		Goodwill
Amortization expense:
Three months ended September 30, 2002	$	—	$	—
Nine months ended September 30, 2002		22		—
Three months ended September 30, 2001	$	15	$	158
Nine months ended September 30, 2001		45		478
Estimated amortization expense:
Three months ended December 31, 2002	$	—	$	—
For the years ended December 31,
2003		—		—
2004		—		—
2005		—		—
2006		—		—
2007		—		—

	2004							2003							2002
	Average Balance			Interest Income/ Expense		Rate		Average Balance			Interest Income/ Expense		Rate		Average Balance			Interest Income/ Expense		Rate
Assets
Interest-earning assets:
Loans (1):
Commercial and industrial	$	59,327		$	796	5.37	%	$	53,060		$	833	6.28	%	$	54,760		$	964	7.04	%
Real estate - commercial	137,776			2,223		6.45	%	115,685			2,064		7.14	%	86,345			1,744		8.08	%
Real estate - construction	41,609			567		5.45	%	8,955			137		6.12	%	5,967			93		6.23	%
Real estate - residential	42,871			617		5.76	%	34,284			577		6.73	%	17,655			357		8.09	%
Home equity lines	44,829			363		3.24	%	28,352			241		3.40	%	21,615			226		4.18	%
Consumer	10,373			162		6.25	%	9,639			179		7.43	%	13,605			243		7.14	%
Total loans	336,785			4,728		5.62	%	249,975			4,031		6.45	%	199,947			3,627		7.26	%

Investment securities available-for-sale	142,128			1,271		3.58	%	180,044			1,678		3.73	%	47,731			595		4.99	%
Investment securities held-to-maturity	150,016			1,350		3.60	%	—			—		0.00	%	—			—		0.00	%
Other investments	3,634			38		4.18	%	1,853			24		5.18	%	1,194			19		6.37	%
Federal funds sold	12,146			28		0.92	%	13,503			39		1.16	%	37,961			154		1.62	%

Total interest-earning assets and interest income	644,709			7,415		4.60	%	445,375			5,772		5.18	%	286,833			4,395		6.13	%

Non-interest earning assets:
Cash and due from banks	10,256							14,720							13,280
Premises and equipment, net	6,833							5,007							5,015
Accrued interest and other assets	7,234							5,113							1,836
Allowance for loan losses	(4,408		)					(3,397		)					(3,103		)
Total assets	$	664,624						$	466,818						$	303,861

Liabilities and Shareholders’ Equity
Interest - bearing liabilities:
Interest - bearing deposits:
Interest checking	155,523			529		1.36	%	139,080			638		1.83	%	69,762			516		2.96	%
Money markets	24,470			36		0.59	%	26,131			69		1.06	%	25,947			133		2.05	%
Statement savings	7,191			9		0.50	%	4,493			9		0.80	%	4,294			13		1.21	%
Certificates of deposit	237,562			1,708		2.88	%	173,249			1,524		3.52	%	115,538			1,262		4.37	%
Total interest - bearing deposits	424,746			2,282		2.15	%	342,953			2,240		2.61	%	215,541			1,924		3.57	%

Other borrowed funds	73,545			300		1.63	%	14,957			73		1.95	%	9,398			97		4.13	%

Total interest-bearing liabilities and interest expense	498,291			2,582		2.07	%	357,910			2,313		2.59	%	224,939			2,021		3.59	%

Noninterest-bearing liabilities:
Demand deposits	72,399							66,638							55,985
Other liabilities	2,204							1,588							2,308
Preferred shareholders’ equity	6,391							6,825							6,825
Common shareholders’ equity	85,339							33,857							13,804
Total liabilities and shareholders’ equity	$	664,624						$	466,818						$	303,861

Net interest income and net interest margin (2)				$	4,833	3.00	%				$	3,459	3.11	%				$	2,374	3.31	%

	2004 Compared to 2003									2003 Compared to 2002
	Change Due to									Change Due to
	Average Volume			Average Rate			Increase (Decrease)			Average Volume			Average Rate			Increase (Decrease)
Interest income:

Loans (1):
Commercial and industrial	$	98		$	(135	)	$	(37	)	$	(30	)	$	(101	)	$	(131	)
Real estate - commercial	394			(235		)	159			593			(273		)	320
Real estate - construction	500			(70		)	430			47			(3		)	44
Real estate - residential	145			(105		)	40			335			(115		)	220
Home equity lines	140			(18		)	122			71			(56		)	15
Consumer	14			(31		)	(17		)	(71		)	7			(64		)
Total loans	1,291			(594		)	697			945			(541		)	404

Investment securities available-for-sale	(353		)	(54		)	(407		)	1,649			(566		)	1,083
Investment securities held-to-maturity	1,350			—			1,350			—			—			—
Other investments	23			(9		)	14			10			(5		)	5
Federal funds sold	(4		)	(7		)	(11		)	(98		)	(17		)	(115		)

Total interest income	2,307			(664		)	1,643			2,506			(1,129		)	1,377

Interest expense:

Interest - bearing deposits:
Interest checking	75			(184		)	(109		)	521			(399		)	122
Money markets	(4		)	(29		)	(33		)	2			(66		)	(64		)
Statement savings	5			(5		)	—			1			(5		)	(4		)
Certificates of deposit	565			(381		)	184			656			(394		)	262
Total interest - bearing deposits	641			(599		)	42			1,180			(864		)	316

Other borrowed funds	286			(59		)	227			56			(80		)	(24		)

Total interest expense	927			(658		)	269			1,236			(944		)	292

Net interest income (2)	$	1,380		$	(6	)	$	1,374		$	1,270		$	(185	)	$	1,085

	2004			2003
Beginning balance, January 1	$	4,344		$	3,372

Provision for loan losses	74			80

Loans charged off:
Commercial and industrial	(74		)	(60		)
Real estate - commercial	—			—
Real estate - construction	—			—
Real estate - residential	—			—
Home equity lines	—			—
Consumer	(1		)	(3		)
Total loans charged off	(75		)	(63		)

Recoveries:
Commercial and industrial	2			40
Real estate - commercial	—			—
Real estate - construction	—			—
Real estate - residential	—			—
Home equity lines	—			—
Consumer	2			2
Total recoveries	4			42

Net (charge offs) recoveries	(71		)	(21		)

Ending balance	$	4,347		$	3,431

	March 31, 2004			December 31, 2003
Loans:
Balance at period end	$	334,746		$	336,002
Allowance for loan losses to loans receivable, net of fees	1.30		%	1.29		%
Annualized net charge-offs to average loans receivable	0.08		%	0.01		%

	March 31, 2004				December 31, 2003
	Allocation		% of Total*		Allocation		% of Total*
Commercial	$	1,094	16.35	%	$	1,046	17.21	%
Real estate - commercial	1,532		40.81	%	1,662		41.56	%
Real estate - construction	552		12.92	%	497		12.57	%
Real estate - residential	436		12.93	%	418		12.64	%
Home equity lines	546		14.06	%	486		12.84	%
Consumer	187		2.93	%	235		3.18	%

Total allowance for loan losses	$	4,347	100.00	%	$	4,344	100.00	%

	March 31, 2004		December 31, 2003
Nonaccruing loans	$	237	$	390

Loans contractually past-due 90 days or more	4		4

Troubled debt restructurings	—		—
Total nonperforming loans receivable	$	241	$	394

Available-for-sale at March 31, 2004	Amortized Cost		Fair Value		Average Yield
Obligations of U.S. government-sponsored agencies and enterprises
Five to ten years	$	4,000	$	4,047	4.11	%
Total U.S. government-sponsored agencies	$	4,000	$	4,047	4.11	%

Mortgage-backed securities*
Five to ten years	$	15,659	$	15,724	3.79	%
After ten years	135,805		136,108		3.79	%
Total mortgage-backed securities	$	151,464	$	151,832	3.79	%

Corporate bonds
After ten years	$	10,000	$	10,016	2.42	%
Total corporate bonds	$	10,000	$	10,016	2.42	%

Treasury bonds
One to five years	$	2,044	$	2,086	2.63	%
Total treasury bonds	$	2,044	$	2,086	2.63	%
Total investment securities available-for-sale	$	167,508	$	167,981	3.70	%

Held-to-maturity at March 31, 2004	Amortized Cost		Fair Value		Average Yield
Obligations of U.S. government-sponsored agencies and enterprises
One to five years	$	5,999	$	6,041	3.26	%
Five to ten years	16,977		17,119		4.51	%
After ten years	2,999		2,993		4.20	%
Total U.S. government-sponsored agencies	$	25,975	$	26,153	4.19	%

Mortgage-backed securities*
Five to ten years	$	9,069	$	9,078	3.08	%
After ten years	111,096		111,141		3.83	%
Total mortgage-backed securities	$	120,165	$	120,219	3.77	%

Corporate bonds
After ten years	$	8,000	$	8,003	4.21	%
Total corporate bonds	$	8,000	$	8,003	4.21	%
Total investment securities held-to-maturity	$	154,140	$	154,375	3.87	%

Total investment securities	$	321,648	$	322,356	3.78	%

Available-for-sale at December 31, 2003	Amortized Cost		Fair Value		Average Yield
Obligations of U.S. government-sponsored agencies and enterprises
One to five years	$	3,000	$	3,016	3.92	%
Five to ten years	2,000		1,986		4.23	%
After ten years	1,000		1,027		5.79	%
Total U.S. government-sponsored agencies	$	6,000	$	6,029	4.33	%

Mortgage-backed securities*
Five to ten years	$	15,615	$	15,630	3.92	%
After ten years	97,865		97,041		4.02	%
Total mortgage-backed securities	$	113,480	$	112,671	4.00	%

Corporate bonds
After ten years	$	10,000	$	9,995	2.41	%
Total corporate bonds	$	10,000	$	9,995	2.41	%

Treasury bonds
One to five years	$	2,047	$	2,067	2.64	%
Total treasury bonds	$	2,047	$	2,067	2.64	%
Total investment securities available-for-sale	$	131,527	$	130,762	3.87	%

Held-to-maturity at December 31, 2003	Amortized Cost		Fair Value		Average Yield
Obligations of U.S. government-sponsored agencies and enterprises
One to five years	$	4,000	$	3,951	3.39	%
Five to ten years	9,993		9,884		4.65	%
After ten years	2,999		2,950		4.20	%
Total U.S. government-sponsored agencies	$	16,992	$	16,785	4.27	%

Mortgage-backed securities*
Five to ten years	$	9,476	$	9,450	3.70	%
After ten years	108,384		107,547		4.01	%
Total mortgage-backed securities	$	117,860	$	116,997	3.98	%

Corporate bonds
After ten years	$	8,000	$	7,848	4.21	%
Total corporate bonds	$	8,000	$	7,848	4.21	%
Total investment securities held-to-maturity	$	142,852	$	141,630	4.03	%

Total investment securities	$	274,379	$	272,392	3.96	%

	March 31, 2004					December 31, 2003

Commercial	$	54,723		16.35	%	$	57,854		17.21	%
Real estate - commercial	136,541			40.81	%	139,725			41.56	%
Real estate - construction	43,214			12.92	%	42,243			12.57	%
Real estate - residential	43,273			12.93	%	42,495			12.64	%
Home equity lines	47,049			14.06	%	43,176			12.84	%
Consumer	9,807			2.93	%	10,690			3.18	%

Gross loans	$	334,607		100.00	%	$	336,183		100.00	%

Add: net deferred (fees) costs	(131		)			(181		)
Less: allowance for loan losses	(4,347		)			(4,344		)

Loans receivable, net	$	330,129				$	331,658

Maturities:
Three months or less	$	12,279
Over three months through six months	14,599
Over six months through twelve months	25,362
Over twelve months	63,885
	$	116,125

Advance Date	Interest Rate		Term of Advance	Date Amount Due	Outstanding
Dec-03	1.23	%	12 months	Dec-04	$	5,000
Jan-04	1.56	%	12 months	Jan-05	5,000
	1.40	%			$	10,000
All other borrowed funds					61,758
Total other borrowed funds					$	71,758