Cardinal Financial 10Q 2005 Q3 Quarterly report

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2005

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 Number: 0-24557

CARDINAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

8270 Greensboro Drive, Suite 500
McLean, Virginia		22102
(Address of principal executive offices)		(Zip Code)

(703) 584-3400

(Registrant’s telephone number, including area code)

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

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

Yes ý No o

Indicate by check mark whether the registrant is a shell company (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:

24,357,955 shares of common stock, par value $1.00 per share,

outstanding as of October 31, 2005

CARDINAL FINANCIAL CORPORATION

INDEX TO FORM 10-Q

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements:	3

Consolidated Statements of Condition
At September 30, 2005 (unaudited) and December 31, 2004	3

Consolidated Statements of Income
For the three and nine months ended September 30, 2005 and 2004 (unaudited)	4

Consolidated Statements of Comprehensive Income
For the three and nine months ended September 30, 2005 and 2004 (unaudited)	5

Consolidated Statements of Changes In Shareholders’ Equity
For the nine months ended September 30, 2005 and 2004 (unaudited)	6

Consolidated Statements of Cash Flows
For the nine months ended September 30, 2005 and 2004 (unaudited)	7

Notes to Consolidated Financial Statements (unaudited)	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3. Quantitative and Qualitative Disclosures About Market Risk	41

Item 4. Controls and Procedures	42

PART II – OTHER INFORMATION

Item 1. Legal Proceedings	43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3. Defaults Upon Senior Securities	43
Item 4. Submission of Matters to a Vote of Security Holders	43
Item 5. Other Information	43
Item 6. Exhibits	43

SIGNATURES	44

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

September 30, 2005 and December 31, 2004

(In thousands, except share data)

			(Unaudited)
			September 30, 2005			December 31, 2004
Assets
Cash and due from banks			$	16,658		$	15,205
Federal funds sold			86,415			8,203
Total cash and cash equivalents			103,073			23,408
Investment securities available-for-sale			171,833			151,554
Investment securities held-to-maturity (market value of $118,875 and $136,609 at September 30, 2005 and December 31, 2004, respectively)			120,794			137,953
Total investment securities			292,627			289,507
Other investments			7,363			8,110
Loans held for sale, net			454,660			365,454
Loans receivable, net of deferred fees and costs			632,148			489,896
Allowance for loan losses			(7,706		)	(5,878		)
Loans receivable, net			624,442			484,018
Premises and equipment, net			17,591			15,531
Deferred tax asset			4,762			3,238
Goodwill and intangibles, net			20,644			14,694
Accrued interest receivable and other assets			14,464			7,616
Total assets			$	1,539,626		$	1,211,576

Liabilities and Shareholders’ Equity

Non-interest bearing deposits			$	128,467		$	105,424
Interest bearing deposits			965,924			718,786
Other borrowed funds			163,892			201,085
Warehouse financing			—			30,245
Mortgage funding checks			104,283			46,392
Escrow liabilities			9,626			3,020
Accrued interest payable and other liabilities			20,696			11,519
Total liabilities			1,392,888			1,116,471

Common stock, $1 par value	2005	2004
Authorized	50,000,000	50,000,000
Issued and outstanding	24,354,505	18,462,597	24,355			18,463
Additional paid-in capital			132,255			92,868
Accumulated deficit			(8,256		)	(15,145		)
Accumulated other comprehensive loss			(1,616		)	(1,081		)
Total shareholders’ equity			146,738			95,105
Total liabilities and shareholders’ equity			$	1,539,626		$	1,211,576

See accompanying notes to consolidated financial statements.

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three and nine months ended September 30, 2005 and 2004

(In thousands, except share and per share data)

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Interest income:
Loans receivable	$	9,365	$	5,826	$	24,979	$	15,425
Loans held for sale	6,101		3,268		14,117		3,268
Federal funds sold	208		49		346		96
Investment securities available-for-sale	1,414		1,536		4,376		4,360
Investment securities held-to-maturity	1,197		1,432		3,757		4,260
Other investments	56		78		183		162
Total interest income	18,341		12,189		47,758		27,571
Interest expense:
Deposits	6,782		3,668		16,989		8,448
Other borrowed funds	1,339		1,116		3,602		1,887
Warehouse financing	109		211		109		211
Total interest expense	8,230		4,995		20,700		10,546
Net interest income	10,111		7,194		27,058		17,025
Provision for loan losses	500		529		1,869		918
Net interest income after provision for loan losses	9,611		6,665		25,189		16,107
Non-interest income:
Service charges on deposit accounts	348		296		958		798
Loan service charges	771		129		2,015		414
Investment fee income	497		150		947		498
Net gain on sales of loans	4,752		1,398		12,368		1,460
Net realized gain on investment securities available-for-sale	—		3		33		245
Management fee income	969		802		2,467		802
Other income	12		6		19		9
Total non-interest income	7,349		2,784		18,807		4,226
Non-interest expense:
Salary and benefits	6,430		4,802		16,866		8,904
Occupancy	1,063		932		3,134		1,893
Professional fees	875		578		1,824		922
Depreciation	711		583		2,100		1,215
Data processing	233		255		1,227		647
Telecommunications	303		197		913		405
Amortization of intangibles	143		—		265		—
Other operating expenses	2,647		1,546		7,293		3,760
Total non-interest expense	12,405		8,893		33,622		17,746
Net income before income taxes	4,555		556		10,374		2,587
Provision for income taxes	1,570		172		3,485		850
Net income	$	2,985	$	384	$	6,889	$	1,737
Earnings per share - basic	$	0.12	$	0.02	$	0.32	$	0.10
Earnings per share - diluted	$	0.12	$	0.02	$	0.32	$	0.09
Weighted-average shares outstanding - basic	24,346,701		18,439,021		21,344,071		18,101,639
Weighted-average shares outstanding - diluted	24,631,402		18,697,179		21,606,448		18,361,013

See accompanying notes to consolidated financial statements.

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three and nine months ended September 30, 2005 and 2004

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004

Net income	$	2,985		$	384		$	6,889		$	1,737
Other comprehensive income:
Unrealized gain (loss) on available-for-sale investment securities:
Unrealized holding gain (loss) arising during the period, net of tax	(242		)	2,537			(513		)	(93		)
Less: reclassification adjustment for gains included in net income, net of tax	—			(2		)	(22		)	(161		)

Comprehensive income	$	2,743		$	2,919		$	6,354		$	1,483

See accompanying notes to consolidated financial statements.

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Nine months ended September 30, 2005 and 2004

(In thousands)

(Unaudited)

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

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

Stock options exercised	—		—			93	93		306		—			—			399

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 accumulated other comprehensive loss	—		—			—	—		—		—			(254		)	(254		)

Net income	—		—			—	—		—		1,737			—			1,737

Balance, September 30, 2004	—		$	—		18,441	$	18,441	$	92,792	$	(16,877	)	$	(759	)	$	93,597

Balance, December 31, 2004	—		$	—		18,463	$	18,463	$	92,868	$	(15,145	)	$	(1,081	)	$	95,105

Stock options exercised	—		—			106	106		544		—			—			650

Public offering shares issued	—		—			5,175	5,175		34,592		—			—			39,767

Shares issued in Wilson/Bennett Acquisition	—		—			611	611		4,251		—			—			4,862

Change in accumulated other comprehensive loss	—		—			—	—		—		—			(535		)	(535		)

Net income	—		—			—	—		—		6,889			—			6,889

Balance, September 30, 2005	—		$	—		24,355	$	24,355	$	132,255	$	(8,256	)	$	(1,616	)	$	146,738

See accompanying notes to consolidated financial statements.

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended September 30, 2005 and 2004

(In thousands)

(Unaudited)

	2005			2004
Cash flows from operating activities:
Net income	$	6,889		$	1,737
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation	2,100			1,215
Amortization of premiums, discounts and intangibles	1,357			1,557
Provision for loan losses	1,869			918
Loans held for sale originated and acquired	(3,902,910		)	(1,247,010		)
Proceeds from the sale of loans held for sale	3,826,072			900,999
Gain on sale of loans held for sale	(12,368		)	(1,460		)
Gain on sale of investment securities available-for-sale	(33		)	(245		)
Loss on sale of other assets	13			—
Increase in accrued interest receivable, other assets, and deferred tax asset	(8,372		)	(19,351		)
Increase (decrease) in accrued interest payable, escrow liabilities and other liabilities	15,778			(13,335		)

Net cash used in operating activities	(69,605		)	(374,975		)

Cash flows from investing activities:
Purchase of premises and equipment	(4,169		)	(9,425		)
Proceeds from sale, maturity and call of investment securities available-for-sale	6,000			14,000
Proceeds from sale, maturity and call of mortgage-backed securities available-for-sale	4,896			9,719
Proceeds from maturity and call of investment securities held-to-maturity	—			5,490
Proceeds from sale of other investments	8,353			7,442
Purchase of investment securities available-for-sale	(42,776		)	(6,000		)
Purchase of mortgage-backed securities available-for-sale	(12,715		)	(72,959		)
Purchase of investment securities held-to-maturity	—			(16,472		)
Purchase of mortgage-backed securities held-to-maturity	—			(14,042		)
Purchase of other investments	(7,594		)	(10,098		)
Redemptions of investment securities available-for-sale	22,990			22,817
Redemptions of investment securities held-to-maturity	16,594			21,089
Net cash (paid) acquired in acquisition	(1,379		)	27,599
Net increase in loans receivable, net of deferred fees and costs	(141,986		)	(103,592		)

Net cash used in investing activities	(151,786		)	(124,432		)

Cash flows from financing activities:
Net increase in deposits	270,181			345,805
Net increase (decrease) in other borrowed funds	(54,318		)	27,152
Net increase (decrease) in warehouse financing	(30,240		)	88,846
Net increase in mortgage funding checks	57,891			—
Proceeds from FHLB advances - long term	25,000			45,000
Repayments of FHLB advances - long term	(7,875		)	(7,875		)
Proceeds from public offering	39,767			6,303
Proceeds from trust preferred issuance	—			20,000
Stock options exercised	650			399

Net cash provided by financing activities	301,056			525,630

Net increase in cash and cash equivalents	79,665			26,223

Cash and cash equivalents at beginning of the period	23,408			13,083

Cash and cash equivalents at end of the period	$	103,073		$	39,306

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	20,867		$	9,622
Cash paid for income taxes	1,436			80

Supplemental schedule of noncash investing and financing activities:
On June 9, 2005, the Company acquired all of the issued and outstanding common stock of Wilson/Bennett Capital Management, Inc. In conjunction with the acquisition, the following noncash changes to our financial condition occurred:
Fair value of non-cash assets acquired	$	6,296
Fair value of liabilities assumed	33
Common shares issued in acquisition	4,862

On July 7, 2004, the Company acquired all of the issued and outstanding membership interests of George Mason Mortgage, LLC. In conjunction with the acquisition, the following noncash changes to our financial condition occurred:
Fair value of non-cash assets acquired				$	14,703
Fair value of liabilities assumed					338,232

See accompanying notes to consolidated financial statements.

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)

Note 1

Organization

Cardinal Financial Corporation (the “Company”) was incorporated on November 24, 1997 under the laws of the Commonwealth of Virginia as a holding company whose activities consist of investment in its wholly owned subsidiaries. The Company opened Cardinal Bank, N.A. (the “Bank”) in 1998 and Cardinal Wealth Services, Inc., an investment services subsidiary, in 1999. In 1999, the Company opened two additional banking subsidiaries and, in late 2000, completed an acquisition of Heritage Bancorp, Inc. and its banking subsidiary, The Heritage Bank. These banking subsidiaries were consolidated into the Bank as of March 1, 2002. On April 15, 2004, the Company received approval from the Federal Reserve Bank of Richmond to be a financial holding company. Effective July 7, 2004, the Bank acquired George Mason Mortgage, LLC (“George Mason”), a mortgage banking company based in Fairfax, Virginia. In December 2004, the Bank converted to a state chartered institution and changed its name to Cardinal Bank. Effective June 9, 2005, the Company acquired Wilson/Bennett Capital Management, Inc. (“Wilson/Bennett”), an asset management firm based in Alexandria, Virginia.

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 U.S. generally accepted accounting principles 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, 2005 are not necessarily indicative of the results to be expected for the full year ending December 31, 2005. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (the “2004 Form 10-K”).

Stock-Based Compensation

At September 30, 2005, 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 18 of the 2004 Form 10-K.

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 utilize 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 share of common stock if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended, to stock-based employee compensation.

(In thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net income	$	2,985		$	384		$	6,889		$	1,737
Deduct: Total stock-based employee compensation expense determined under fair value- based method for all awards, net of tax	(215		)	(753		)	(3,987		)	(1,428		)
Pro forma net income	$	2,770		$	(369	)	$	2,902		$	309

Earnings per share:
Basic - as reported	$	0.12		$	0.02		$	0.32		$	0.10
Basic - pro forma	0.11			(0.02		)	0.14			0.02
Diluted - as reported	0.12			0.02			0.32			0.09
Diluted - pro forma	0.11			(0.02		)	0.13			0.02

The weighted average per share fair values of grants of stock options made during the three months ended September 30, 2005 and 2004 were $5.92 and $3.30, respectively. The weighted average per share fair values of grants made during the nine months ended September 30, 2005 and 2004 were $5.97 and $3.08, respectively. The fair values of the options granted for these periods were estimated as of the grant date using the Black-Scholes option-pricing model based on the following weighted average assumptions:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Estimated option life	10 years		10 years		10 years		10 years
Risk free interest rate	4.21	%	4.29	%	4.25	%	4.12	%
Expected volatility	43.11	%	11.80	%	43.11	%	11.80	%
Expected dividend yield	0.00	%	0.00	%	0.00	%	0.00	%

There were options to purchase 44,000 and 963,911 shares of common stock granted during the three and nine months ended September 30, 2005, respectively. Of those grants, 44,000 and 955,911 immediately vested on the grant date for the three and nine months ended September 30, 2005, respectively.

or a liability award. Equity classified awards are valued as of the grant date using either an observable market price or a valuation methodology. Liability classified awards are valued at fair value as of each reporting date. The Company intends to adopt FAS 123R using the modified prospective application method which requires, among other things, recognition of compensation costs for all awards outstanding at January 1, 2006 for which the requisite service has not been rendered. The Company estimates that this new standard will result in an increase in pretax expense of approximately $64,000 quarterly and $256,000 annually in 2006 based on the current stock options outstanding. Additional expense would be recorded for any future stock option grants. On October 19, 2005, the Company’s board of directors authorized that any existing outstanding options that are or become “underwater” (i.e., their per share exercise price is greater than the market price) before December 31, 2005 be amended to become fully vested. This modification will not result in the recognition of additional expense because the intrinsic value of the awards at the grant date was zero and the intrinsic value of these awards on the date of modification will also be zero.

Note 2

Acquisitions

On June 9, 2005, the Company acquired Wilson/Bennett for a total consideration of $6.5 million, which consisted of a payment of $1.6 million in cash and the issuance of 611,111 shares of its common stock valued at $4.9 million. This transaction was accounted for as a purchase and Wilson/Bennett’s assets and liabilities were recorded at fair value as of the purchase date. This transaction resulted in the recognition of $3.6 million of goodwill and $2.6 million of other intangible assets. Wilson/Bennett’s 2004 unaudited revenues were approximately $1.4 million. The Company anticipates that the acquisition of Wilson/Bennett will not have a material impact on 2005 earnings.

The primary shareholder of Wilson/Bennett at the time of its acquisition by the Company was, and continues to be, a member of the Company’s Board of Directors. The Company has entered into an employment agreement with this person which ends on April 30, 2008, with automatic one-year renewals beginning on that date and each April 30 thereafter unless notice of non-renewal is provided by either party.

The common stock utilized to complete this transaction is newly issued by the Company, is not registered with the Securities and Exchange Commission (the “SEC”), and therefore cannot be sold until so registered or sold pursuant to an exemption from such registration. Because of this trading restriction, the Company has valued for purchase accounting purposes the 611,111 restricted shares at 89% of the fair market value of its unrestricted shares.

The operating results of Wilson/Bennett are included in the Company’s consolidated operating results and its investment services segment information since the date of acquisition and are not separately material to consolidated operating results. The acquisition resulted in the recognition of the following intangible assets which are being amortized on a straight-line basis over the periods indicated:

Employment/non-compete agreement - $698,000 (4 years)

Trade name intangible-$46,000 (3 years)

Purchased customer relationships-$1,858,000 (10 years)

The transaction also resulted in the recognition of goodwill of $3.5 million. The Company used the assistance of an independent valuation consultant to determine the value assigned to identifiable amortizable intangibles. Goodwill will not be amortized but will be reviewed, along with the other identified intangibles, for impairment when evidence of impairment exists or, at a minimum, on an annual basis.

The Company has agreed to provide certain demand registration rights with respect to the 611,111 common shares issued. The owners of these shares have the right to make one written request to the Company for the registration of one-third of the shares under the Securities Act of 1933, as amended, to permit the resale of the shares. In the event that a change of control of the Company occurs, or the Company’s employment of its current chief executive officer terminates, both as described in a registration rights agreement, then the registration rights would cover all the shares. The purchase price has been increased by the estimated cost to register these shares with the SEC. At the end of two years, the shares will no longer be restricted.

On July 7, 2004, the Bank completed its acquisition of George Mason. George Mason was acquired in a cash transaction for $17.0 million and is operating as a subsidiary of the Bank. This transaction was accounted for as a purchase and George Mason’s assets and liabilities were recorded at fair value as of the purchase date. George Mason’s operating results are included in the consolidated results of operations since the date of acquisition. This transaction resulted in the recognition of $12.9 million of goodwill and $1.7 million of other intangible assets. George Mason’s primary sources of revenue include net interest income earned on loans held for sale, gain on sale of loans and management fees earned. Loans are made pursuant to purchase commitments and are sold servicing released. The Bank purchased George Mason primarily to diversify its sources of income, increase non-interest income and be a source of residential loans for its loans receivable portfolio.

The following unaudited pro forma condensed financial information presents the results of operations of the Company for the periods indicated as if George Mason had been acquired on January 1, 2004.

	Three Months Ended		Nine Months Ended
(In thousands, except share and per share data)	September 30, 2004		September 30, 2004
Net interest income	$	7,308	$	21,146
Non-interest income	4,605		23,157
Provision for loan losses	529		918
Non-interest expense	9,415		35,698
Net income before income taxes	1,969		7,687
Provision for income taxes	652		2,365
Net income	$	1,317	$	5,322

Earnings per common share - basic	$	0.07	$	0.29
Earnings per common share - diluted	$	0.07	$	0.29
Weighted-average common shares outstanding - basic	18,439,021		18,101,639
Weighted-average common shares outstanding - diluted	18,697,179		18,361,013

The unaudited pro forma results of operations summarized above are not necessarily indicative of the results that would have occurred if the acquisition had been consummated on January 1, 2004.

Note 3

Segment Information

Prior to July 7, 2004, the Company operated and reported in two business segments, commercial banking and investment services. As of July 7, 2004, the Company began operating in a third business segment, mortgage banking, with the completion of its acquisition of George Mason.

The commercial banking segment includes both commercial and consumer lending and provides customers with such products 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 mortgage banking segment engages primarily in the origination and acquisition of residential mortgages for sale into the secondary market on a best efforts basis. The investment services segment provides advisory services to businesses and individuals, including financial planning and retirement/estate planning. Wilson/Bennett is included in the investment services segment since the date of its acquisition, June 9, 2005.

Information about the reportable segments and reconciliation of this information to the consolidated financial statements at and for the three and nine months ended September 30, 2005 and 2004, is as follows:

(In thousands)

At and for the Three Months Ended September 30, 2005:

	Commercial Banking		Mortgage Banking		Investment Services		Intersegment Elimination			Other			Consolidated
Net interest income	$	8,544	$	1,780	$	—	$	—		$	(213	)	$	10,111
Provision for loan losses	500		—		—		—			—			500
Non-interest income	479		6,362		497		—			11			7,349
Non-interest expense	6,542		4,845		454		—			564			12,405
Provision for income taxes	659		1,153		3		—			(245		)	1,570
Net income (loss)	$	1,322	$	2,144	$	40	$	—		$	(521	)	$	2,985

Total Assets	$	1,409,575	$	467,261	$	7,330	$	(511,520	)	$	166,980		$	1,539,626

At and for the Three Months Ended September 30, 2004:

	Commercial Banking		Mortgage Banking			Investment Services			Intersegment Elimination			Other			Consolidated
Net interest income	$	5,716	$	1,583		$	—		$	—		$	(105	)	$	7,194
Provision for loan losses	529		—			—			—			—			529
Non-interest income	325		2,304			150			—			5			2,784
Non-interest expense	4,239		4,156			189			—			309			8,893
Provision for income taxes	402		(76		)	(15		)	—			(139		)	172
Net income (loss)	$	871	$	(193	)	$	(24	)	$	—		$	(270	)	$	384

Total Assets	$	1,075,460	$	356,438		$	677		$	(370,480	)	$	115,220		$	1,177,315

At and for the Nine Months Ended September 30, 2005:

	Commercial Banking		Mortgage Banking		Investment Services			Intersegment Elimination			Other			Consolidated
Net interest income	$	22,980	$	4,723	$	—		$	—		$	(645	)	$	27,058
Provision for loan losses	1,869		—		—			—			—			1,869
Non-interest income	1,325		16,512		946			—			24			18,807
Non-interest expense	18,008		13,223		999			—			1,392			33,622
Provision for income taxes	1,490		2,691		(35		)	—			(661		)	3,485
Net income (loss)	$	2,938	$	5,321	$	(18	)	$	—		$	(1,352	)	$	6,889

Total Assets	$	1,409,575	$	467,261	$	7,330		$	(511,520	)	$	166,980		$	1,539,626

At and for the Nine Months Ended September 30, 2004:

	Commercial Banking		Mortgage Banking			Investment Services			Intersegment Elimination			Other			Consolidated
Net interest income	$	15,493	$	1,583		$	—		$	—		$	(51	)	$	17,025
Provision for loan losses	918		—			—			—			—			918
Non-interest income	1,430		2,304			487			—			5			4,226
Non-interest expense	12,017		4,156			613			—			960			17,746
Provision for income taxes	1,313		(76		)	(45		)	—			(342		)	850
Net income (loss)	$	2,675	$	(193	)	$	(81	)	$	—		$	(664	)	$	1,737

Total Assets	$	1,075,460	$	356,438		$	677		$	(370,480	)	$	115,220		$	1,177,315

At September 30, 2005, the Company did not have any operating segments other than those reported. Parent company financial information is included in the “Other” category and represents an overhead function rather than an operating segment. 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 short-term investments and interest expense on trust preferred securities. The parent company’s non-interest expense is primarily non-allocable executive salaries and professional services related to the Company’s regulatory requirements.

Note 4

Earnings Per Share

The following is the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2005 and 2004. Stock options outstanding at September 30, 2005 and 2004 were 2,049,817 and 1,245,625 respectively. Stock options issued that were not included in the calculation of diluted earnings per share because the exercise prices were greater than the average market price were 27,363 and 29,000 for the three months ended September 30, 2005 and 2004, respectively. Stock options issued that were not included in the calculation of diluted earnings per share because the exercise prices were greater than the average market price were 28,357 and 22,000 for the nine months ended September 30, 2005 and 2004, respectively.

(In thousands,	Three Months Ended September 30,				Nine Months Ended September 30,
except share and per share data)	2005		2004		2005		2004

Net income available to common shareholders	$	2,985	$	384	$	6,889	$	1,737

Weighted average common shares - basic	24,346,701		18,439,021		21,344,071		18,101,639

Weighted average common shares - diluted	24,631,402		18,697,179		21,606,448		18,361,013

Earnings per common share - basic	$	0.12	$	0.02	$	0.32	$	0.10

Earnings per common share - diluted	$	0.12	$	0.02	$	0.32	$	0.09

Note 5

Derivatives and Hedging Activities

The Company accounts for derivatives and hedging activities in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. All derivatives are recognized on the consolidated statements of condition at their fair value.

In the normal course of business, the Company enters into contractual commitments to extend credit to finance one-to-four family homes. The commitments, which contain fixed expiration dates, become effective when the borrowers lock-in a specified interest rate within time frames established by the Company (“interest rate locks”). Interest rate risk arises if interest rates move adversely between the time of the lock-in of rates by the borrower and the sale of the loan. The interest rate locks related to loans that are intended to be sold are considered derivatives.

To mitigate the effect of the interest rate risk inherent in providing rate lock commitments, the Company economically hedges each commitment by entering into a best efforts forward loan sale contract. These forward contracts are marked to market through earnings and are not designated as accounting hedges under SFAS No. 133. The fair values of all loan commitments and all forward sales contracts generally move in opposite directions and, accordingly, the impact of changes in these valuations on net income during the loan commitment period is generally inconsequential.

Although the forward loan sale contracts serve as an economic hedge of interest rate risk from holding fixed-rate loans held for sale, these forward contracts have not been designated as accounting hedges under SFAS No. 133 and, accordingly, loans held for sale are accounted for at the lower of cost or market in accordance with SFAS No. 65, Accounting for Certain Mortgage Banking Activities.

At September 30, 2005, the fair value of interest rate lock commitments with a notional value of $156.2 million was $(1.1 million), and the fair value of forward sale commitments with a notional value of $519.0 million was $3.0 million. These derivatives are recorded in other assets and other liabilities on the consolidated statements of condition at their fair values. In addition to these market value adjustments for interest rate lock loan commitments and forward sale commitments at September 30, 2005, a basis adjustment of $(1.9 million) has been recorded related to the loans held for sale as of that date and is included in loans held for sale, net in the consolidated statements of condition.

Note 6

Goodwill and Other Intangibles

Information concerning total amortizable other intangible assets at September 30, 2005 is as follows:

	Mortgage Banking				Investment Services				Total
(In thousands)	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Balance at December 31, 2004	$	1,781	$	49	$	—	$	—	$	1,781	$	49
Customer relationship intangibles	—		148		1,858		58		1,858		206
Employment/non-compete agreement	—		—		698		54		698		54
Trade name	—		—		46		5		46		5
	$	1,781	$	197	$	2,602	$	117	$	4,383	$	314

The aggregate amortization expense for the three and nine months ended September 30, 2005 was $143,000 and $265,000, respectively. There was no amortization expense for the comparable periods of 2004.

The estimated amortization expense for the next five years is as follows:

	(In thousands)
2005 (October - December)	$	143
2006	574
2007	574
2008	565
2009	460
2010	384

The changes in the carrying amount of goodwill for year to date September 30, 2005 are as follows:

(In thousands)	Commercial Banking		Mortgage Banking		Investment Services		Total
Balance at December 31, 2004	$	22	$	12,941	$	—	$	12,963
Goodwill attributable to Wilson/Bennett acquisition	—		—		3,612		3,612
Balance at September 30, 2005	$	22	$	12,941	$	3,612	$	16,575

Note 7

Subsequent Event

On October 19, 2005, the Company’s Board of Directors declared a cash dividend of $0.01 per share of its outstanding common stock. This dividend will be paid on November 15, 2005 to shareholders of record as of the close of business on October 31, 2005. This represents the first dividend declared by the Company in its history.

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

The following presents management’s discussion and analysis of our consolidated financial condition at September 30, 2005 and December 31, 2004 and the unaudited results of our operations for the three and nine months periods ended September 30, 2005 and 2004. This discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report, the audited consolidated financial statements and the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004.

Caution About Forward-Looking Statements

We make forward-looking statements in this Form 10-Q that are subject to risks and uncertainties. These forward looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements.

These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by factors including:

• the ability to successfully manage our growth or implement our growth strategies if we are unable to identify attractive markets, locations or opportunities to expand in the future;

• changes in interest rates and the successful management of interest rate risk;

• risks inherent in making loans such as repayment risks and fluctuating collateral values;

• maintaining cost controls and asset quality as we open or acquire new branches;

• maintaining capital levels adequate to support our growth;

• reliance on our management team, including the ability to attract and retain key personnel;

• competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;

• changes in general economic and business conditions in our market area;

• demand, development and acceptance of new products and services;

• problems with technology utilized by us;

• changing trends in customer profiles and behavior; and

• changes in banking and other laws and regulations applicable to us.

Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results.

In addition, this section should be read in conjunction with the description of our “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2004.

Overview

Cardinal Financial Corporation, a locally managed financial holding company headquartered in Tysons Corner, Virginia, is committed to providing superior customer service, a diversified mix of financial products and services, and convenient banking to our retail and business consumers. We own Cardinal Bank (the “Bank”), a Virginia state-chartered community bank, Cardinal Wealth Services, Inc., an investment services subsidiary, and Wilson/Bennett Capital Management, Inc. (“Wilson/Bennett”), an Alexandria, Virginia based asset management firm acquired in June 2005. Through these three subsidiaries and George Mason Mortgage, LLC (“George Mason”), a mortgage banking subsidiary of Cardinal Bank, we offer a wide range of traditional banking products and services to both our commercial and retail customers. Our commercial relationship managers focus on attracting small and medium sized businesses as well as government contractors, commercial real estate developers and builders and professionals, such as physicians, accountants and attorneys. We have twenty-one retail bank office locations and provide competitive retail products and services. We complement our core banking operations by offering a full range of investment products and services to our customers through our third-party brokerage relationship with Raymond James Financial Services, Inc. and asset management services through Wilson/Bennett.

On June 9, 2005, we acquired Wilson/Bennett, for a total consideration of $6.5 million, which consisted of a payment of $1.6 million in cash and the issuance of 611,111 shares of our common stock which we valued at $4.9 million. This transaction was accounted for as a purchase and Wilson/Bennett’s assets and liabilities were recorded at fair value as of the purchase date. This transaction resulted in the recognition of $3.6 million of goodwill and $2.6 million of other intangible assets. We believe that the Wilson/Bennett acquisition furthers our strategies of enhancing fee income, diversifying our revenue stream, and the services we deliver to our customers. Wilson/Bennett uses a value-oriented approach that focuses on large capitalization stocks. Wilson/Bennett’s 2004 unaudited revenues were approximately $1.4 million. We anticipate that the acquisition of Wilson/Bennett will not have a material impact on our 2005 earnings.

On July 7, 2004, we acquired George Mason in a cash transaction for $17.0 million. This transaction resulted in the recognition of $12.9 million of goodwill and $1.7 million of amortizable intangibles. This transaction was accounted for as a purchase, and George Mason’s assets and liabilities were recorded at their fair values as of the purchase date. George Mason’s operating results are included in our consolidated results since the acquisition date. George Mason, based in Fairfax, Virginia, engages primarily in the origination and acquisition of residential mortgages for sale into the secondary market on a best efforts basis through eight branches located throughout the metropolitan Washington region. George Mason has approximately 200 employees and does business in eight states, including Virginia, Maryland and the District of Columbia. George Mason is one of the largest residential mortgage originators in the greater Washington metropolitan area, with originations of over $3.5 billion in 2004 and $4.5 billion in 2003. George Mason’s originations for the first nine months of 2005 were $3.3 billion.

George Mason’s primary sources of revenue include net interest income earned on loans held for sale, gain on the sale of loans held for sale and contractual management fees earned relating to services provided to other mortgage companies owned by local home builders. Loans are made pursuant to purchase commitments and are sold servicing released.

In July 2004, we formed a wholly-owned subsidiary, Cardinal Statutory Trust I, for the purpose of issuing $20.0 million of floating rate junior subordinated deferrable interest debentures (“trust preferred securities”). These trust preferred securities are due in 2034 and pay interest at a rate equal to LIBOR (London Interbank Offered Rate) plus 2.40%, which adjusts quarterly. These securities are redeemable at a premium through March 2008 and at par thereafter. We have guaranteed payment of these securities. The $20.6 million payable by us to Cardinal Statutory Trust I is included in other borrowed funds in the consolidated statements of condition since Cardinal Statutory Trust I is an unconsolidated subsidiary (as we are not the primary beneficiary of this entity). We utilized the proceeds from the issuance of the trust preferred securities to make a capital contribution into the Bank.

Net interest income is our primary source of revenue. We define revenue as net interest income plus non-interest income. As discussed further in the interest rate sensitivity section, we manage our balance sheet and interest rate risk to maximize, and concurrently stabilize, net interest income. We do this by monitoring our liquidity position and the spread between the interest rates earned on interest-earning assets and the interest rates paid on interest-bearing liabilities. We attempt to minimize our exposure to interest rate risk, but are unable to eliminate it entirely. In addition to management of interest rate risk, we analyze our loan portfolio for exposure to credit risk. Loan defaults and foreclosures are unavoidable in the banking industry and we try to limit our exposure to this risk by carefully underwriting and monitoring our extensions of credit. In addition to net interest income, non-interest income is an increasingly important source of revenue for us and includes, among other things, service charges on deposits and loans, investment fee income and gains (losses) on sales of investment securities available-for-sale, gains on sales of loans held for sale, and management fee income. Our acquisition of George Mason in July 2004 has resulted in non-interest income becoming a larger component of our total revenues, and the acquisition of Wilson/Bennett in June 2005 has further contributed to this trend.

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 $39.8 million in capital during the second quarter of 2005. This capital is being used to support the continuing expansion of our branch office network and balance sheet growth. As a result of this increased capital and retained earnings, our legal lending limit increased to $18.7 million as of September 30, 2005, which allowed us to expand our commercial and real estate lending loan portfolios. In addition, we expect to increase our loan-to-deposit ratio and shift the mix of our earning assets to higher yielding loans.

Critical Accounting Policies

General

U. S. generally accepted accounting principles are complex and require management to apply significant judgment to various accounting, reporting, and disclosure matters. Management must use assumptions and estimates when applying these principles where precise 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 judgments,

assumptions and estimates may have a significant impact on the consolidated financial statements. Actual results could differ from initial estimates.

The accounting policies we view as critical are those relating to judgments, assumptions and estimates regarding the determination of the allowance for loan losses, accounting for economic hedging activities, and the valuation of deferred tax assets.

Allowance for Loan Losses

We maintain the allowance for loan losses at a level that represents management’s best estimate of known and inherent losses in our 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 individual borrowers. Unusual and infrequently occurring events, such as hurricanes and other weather related disasters, may impact our assessment of possible credit losses. As a part of our analysis, we use comparative peer group data 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.

Credit losses are an inherent part of our 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 at September 30, 2005 that may become evident at a future date pursuant to additional internal analysis or regulatory comment. Additional provisions for such losses, if necessary, would be recorded in the commercial banking or mortgage banking segment, as appropriate, and would negatively impact earnings.

For purposes of our analysis, we categorize loans into one of five categories: commercial and industrial, commercial real estate (including construction), home equity lines of credit, residential mortgages, and consumer. In the absence of historical loss factors, peer group loss factors are applied and are adjusted by the qualitative factors mentioned above. The indicated loss factors resulting from this analysis are applied for each of the five 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 value if the loan is collateral dependent. 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 loans classified as special mention, a 15% loss factor to all loans classified as substandard and a 50% loss factor to all loans classified as doubtful. Loans classified as loss loans are fully reserved or charged off.

Hedging

We account for our derivatives and hedging activities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.

In the normal course of our mortgage banking operations at George Mason, we enter rate lock commitments to extend credit to finance residential properties. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan

meets underwriting guidelines and closes within the time frame established by us. Interest rate risk arises on these commitments and subsequently closed loans if interest rates change between the time of the interest rate lock and the delivery of the loan to the investor. Loan commitments related to mortgage loans that are intended to be sold are considered derivatives in accordance with the guidance of SEC Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments. Accordingly, the fair value of these derivatives as of the end of the reporting period has been determined through an analysis of changes in market interest rates from the interest rate lock date to the loan closing date if the loan has closed and the period end if the loan has not closed.

To mitigate the effect of the interest rate risk inherent in providing rate lock commitments, we economically hedge each commitment by entering into a best efforts forward loan sale contracts. These forward contracts are marked to market through earnings and are not designated as accounting hedges under SFAS No. 133. The fair values of all the loan commitments and all forward sales contracts generally move in opposite directions and, accordingly, the impact of changes in these valuations on net income during the loan commitment period is generally inconsequential.

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 or liabilities during the year. Deferred tax assets and liabilities are recognized for the tax effects of differing carrying values of assets and liabilities for 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 asset is reduced by a valuation allowance. The amount of any valuation allowance established is based upon an estimate of the deferred tax asset that is probable of recovery. Increases or decreases in the valuation allowance result in increases or decreases to the provision for income taxes.

New Financial Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, Share-Based Payment: An Amendment of FASB Statements 123 and 95 (“FAS 123R”). This statement requires that companies recognize in the income statement the grant-date fair value of stock options and other equity-based compensation. It is required to be applied by us beginning January 1, 2006. This statement requires that stock awards be classified as either an equity award or a liability award. Equity classified awards are valued as of the grant date using either an observable market price or a valuation methodology. Liability classified awards are valued at fair value as of each reporting date. We intend to adopt FAS 123R using the modified prospective application method which requires, among other things, that we recognize compensation cost for all awards outstanding at January 1, 2006 for which the requisite service has not been rendered. We estimate that this new standard will result in an increase in pretax expense of approximately $64,000 quarterly and $256,000 annually in 2006 based on the current stock options outstanding. Additional expense would be recorded for any future stock option grants. On October 19, 2005, our board of directors authorized that any existing outstanding

options that are or become “underwater” (i.e., their per share exercise price is greater than the market price) before December 31, 2005 be amended to become fully vested. This modification will not result in the recognition of additional expense because the intrinsic value of the awards at the grant date was zero and the intrinsic value of these awards on the date of modification will also be zero.

Statements of Income

Net income for the three months ended September 30, 2005 and 2004 was $3.0 million and $384,000, respectively, an increase of $2.6 million, or 677%. The increase in net income for the three months ended September 30, 2005 compared to same period of 2004 is primarily a result of increased net interest income of $2.9 million and non-interest income of $4.5 million, partially offset by an increase in non-interest expense of $3.5 million. Net income for the nine months ended September 30, 2005 and 2004 was $6.9 million and $1.7 million, respectively, an increase of $5.2 million, or 297%. The increase in net income for the nine months ended September 30, 2005 compared to the same period of 2004 is primarily a result of increased net interest income of $10.0 million and non-interest income of $14.6 million, partially offset by an increase in non-interest expense of $15.9 million. The 2005 results include the operations of George Mason, whereas the three and nine months ended September 30, 2004 include the operations of George Mason only from the date of its acquisition, July 7, 2004. Net income attributable to George Mason for the three and nine months ended September 30, 2005 was $2.1 million and $5.3 million, respectively. For each of the three and nine months ended September 30, 2004, George Mason had a net loss of $193,000. In addition, Wilson/Bennett is included in the results of operations since the date of its acquisition, June 9, 2005. Net income attributable to Wilson/Bennett for the three and nine months ended September 30, 2005 was $34,000 and $51,000, respectively.

Both basic and diluted earnings per share were $0.12 for the three months ended September 30, 2005. For the three months ended September 30, 2004, both basic and diluted earnings per share were $0.02. Weighted average fully diluted shares outstanding for the three months ended September 30, 2005 were 24,631,402 compared to 18,697,179 for the three months ended September 30, 2004. Both basic and diluted earnings per share were $0.32 for the nine months ended September 30, 2005. Basic and diluted earnings per share were $0.10 and $0.09, respectively, for the nine months ended September 30, 2004. Weighted average fully diluted shares outstanding for the nine months ended September 30, 2005 were 21,606,448 compared to 18,361,013 for the nine months ended September 30, 2004.

Return on average assets for the three months ended September 30, 2005 and 2004 was 0.82% and 0.13%, respectively. Return on average assets for the nine months ended September 30, 2005 and 2004 was 0.71% and 0.27%, respectively. Return on average equity for the three months ended September 30, 2005 and 2004 was 8.10% and 1.60%, respectively. Return on average equity for the nine months ended September 30, 2005 and 2004 was 7.53% and 2.48%, respectively.

Net interest income represents the difference between interest and fees earned on interest earning assets and the interest paid on deposits and other 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. Net interest income for the three months ended September 30, 2005 and 2004 was $10.1 million and $7.2 million, respectively, a period-to-period increase of $2.9 million, or 40.5%. Net interest income for the nine months ended September 30, 2005 and 2004 was $27.0 million and $17.0 million, respectively, a period-to-

period increase of $10.0 million, or 58.9%. The increase in net interest income is primarily the result of an increase in the average volume of loans receivable and loans held for sale compared with the same periods of 2004. These increases were funded through the increases in total deposits and other borrowed funds.

Our net interest margin for the three months ended September 30, 2005 and 2004 was 2.92% and 2.55%, respectively. Our net interest margin for the nine months ended September 30, 2005 and 2004 was 2.89% and 2.74%, respectively. This compares to a net interest margin of 2.72% for the year ended December 31, 2004. The increases in the net interest margin for the three and nine months ended September 30, 2005 compared to the same periods of 2004 is a result of a higher volume of loans receivable and loans held for sale and an increased rate of interest earned compared with the interest rate paid on the increased volume of deposits and other borrowed funds. We remain asset sensitive and therefore anticipate that net interest margin will improve in a rising rate environment. Tables 1 through 4 present an analysis of average earning assets, interest bearing liabilities and demand deposits with related components of interest income and interest expense.

Average Balance Sheets and Interest Rates on Interest - Earning Assets and Interest - Bearing Liabilities

Three Months Ended September 30, 2005, 2004 and 2003

(In thousands)

				2005							2004							2003
				Interest							Interest							Interest
	Average			Income/				Average			Income/				Average			Income/
	Balance			Expense		Rate		Balance			Expense		Rate		Balance			Expense		Rate
Assets
Interest-earning assets:
Loans (1):
Commercial and industrial	$	67,519		$	1,089	6.45	%	$	60,086		$	767	5.11	%	$	45,983		$	708	6.16	%
Real estate - commercial	277,487			4,466		6.44	%	190,371			2,945		6.19	%	121,606			2,100		6.91	%
Real estate - construction	65,414			1,189		7.27	%	58,291			848		5.82	%	23,778			310		5.22	%
Real estate - residential	130,390			1,607		4.93	%	44,558			653		5.86	%	38,448			602		6.27	%
Home equity lines	68,624			927		5.36	%	55,039			486		3.50	%	34,873			289		3.29	%
Consumer	4,760			87		7.31	%	7,858			127		6.46	%	8,465			157		7.36	%
Total loans	614,194			9,365		6.10	%	416,203			5,826		5.60	%	273,153			4,166		6.10	%

Loans- held for sale, net	468,808			6,101		5.21	%	369,623			3,268		3.54	%	—			—		0.00	%
Investment securities available-for-sale	149,207			1,414		3.79	%	165,721			1,536		3.71	%	127,609			754		2.36	%
Investment securities held-to-maturity	124,632			1,197		3.84	%	154,229			1,432		3.71	%	121,343			1,207		3.98	%
Other investments	6,718			56		3.31	%	8,163			78		3.82	%	3,496			35		4.00	%
Federal funds sold	23,863			208		3.46	%	14,323			49		1.37	%	6,915			17		0.98	%

Total interest-earning assets and interest income	1,387,422			18,341		5.29	%	1,128,262			12,189		4.32	%	532,516			6,179		4.64	%

Non-interest earning assets:
Cash and due from banks	13,963							14,904							8,380
Premises and equipment, net	17,525							14,727							5,045
Goodwill and intangibles, net	20,649							15,129							646
Accrued interest and other assets	21,119							11,286							2,583
Allowance for loan losses	(7,378		)					(4,864		)					(3,650		)
Total assets	$	1,453,300						$	1,179,444						$	545,520

Liabilities and Shareholders’ Equity
Interest - bearing liabilities:
Interest - bearing deposits:
Interest checking	109,030			316		1.15	%	148,168			486		1.30	%	153,681			538		1.39	%
Money markets	223,210			1,570		2.81	%	28,065			42		0.60	%	28,765			43		0.59	%
Statement savings	9,979			29		1.14	%	7,827			16		0.83	%	5,741			8		0.53	%
Certificates of deposit	555,193			4,867		3.51	%	477,936			3,124		2.61	%	179,540			1,473		3.25	%
Total interest - bearing deposits	897,412			6,782		3.00	%	661,996			3,668		2.22	%	367,727			2,062		2.22	%

Other borrowed funds	258,735			1,448		2.22	%	315,712			1,327		1.68	%	63,882			279		1.74	%

Total interest-bearing liabilities and interest expense	1,156,147			8,230		2.82	%	977,708			4,995		2.04	%	431,609			2,341		2.15	%

Noninterest-bearing liabilities:
Demand deposits	124,553							94,995							72,819
Other liabilities	25,202							10,726							1,596
Preferred shareholders’ equity	—							—							6,824
Common shareholders’ equity	147,398							96,015							32,672
Total liabilities and shareholders’ equity	$	1,453,300						$	1,179,444						$	545,520

Net interest income and net interest margin (2)				$	10,111	2.92	%				$	7,194	2.55	%				$	3,838	2.88	%

(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.

Rate and Volume Analysis

Three Months Ended September 30, 2005 and 2004

(In thousands)

	Three Months Ended September 30, 2005 Compared to 2004									Three Months Ended September 30, 2004 Compared to 2003
	Average			Average			Increase			Average			Average			Increase
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
Interest income:

Loans (1):
Commercial and industrial	$	95		$	227		$	322		$	217		$	(158	)	$	59
Real estate - commercial	1,348			173			1,521			1,187			(342		)	845
Real estate - construction	104			237			341			451			87			538
Real estate - residential	1,258			(304		)	954			97			(46		)	51
Home equity lines	119			322			441			167			30			197
Consumer	(50		)	10			(40		)	(11		)	(19		)	(30		)
Total loans	2,874			665			3,539			2,108			(448		)	1,660

Loans held for sale, net	877			1,956			2,833			3,268			—			3,268
Investment securities available-for-sale	(153		)	31			(122		)	225			557			782
Investment securities held-to-maturity	(275		)	40			(235		)	327			(102		)	225
Other investments	(13		)	(9		)	(22		)	47			(4		)	43
Federal funds sold	33			126			159			18			14			32

Total interest income	3,343			2,809			6,152			5,993			17			6,010

Interest expense:

Interest - bearing deposits:
Interest checking	(128		)	(42		)	(170		)	(20		)	(32		)	(52		)
Money markets	288			1,240			1,528			(1		)	0			(1		)
Statement savings	4			9			13			3			5			8
Certificates of deposit	502			1,241			1,743			2,435			(784		)	1,651
Total interest - bearing deposits	666			2,448			3,114			2,417			(811		)	1,606

Other borrowed funds	(235		)	356			121			832			216			1,048

Total interest expense	431			2,804			3,235			3,249			(595		)	2,654

Net interest income (2)	$	2,912		$	5		$	2,917		$	2,744		$	612		$	3,356

(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.

Average Balance Sheets and Interest Rates on Interest - Earning Assets and Interest - Bearing Liabilities

Nine Months Ended September 30, 2005, 2004 and 2003

(In thousands)

	2005							2004							2003
				Interest							Interest							Interest
	Average			Income/				Average			Income/				Average			Income/
	Balance			Expense		Rate		Balance			Expense		Rate		Balance			Expense		Rate
Assets
Interest-earning assets:
Loans (1):
Commercial and industrial	$	65,077		$	2,898	5.94	%	$	58,937		$	2,318	5.24	%	$	49,883		$	2,356	6.30	%
Real estate - commercial	249,501			11,738		6.27	%	159,906			7,508		6.26	%	117,416			6,197		7.04	%
Real estate - construction	67,582			3,451		6.81	%	48,651			2,053		5.63	%	15,899			662		5.55	%
Real estate - residential	108,084			4,201		5.18	%	43,312			1,856		5.71	%	36,663			1,783		6.49	%
Home equity lines	64,884			2,418		4.98	%	50,316			1,255		3.32	%	31,729			793		3.34	%
Consumer	5,195			273		7.03	%	9,184			435		6.31	%	9,063			507		7.48	%
Total loans	560,323			24,979		5.94	%	370,306			15,425		5.55	%	260,653			12,298		6.29	%

Loans held for sale, net	382,603			14,117		4.92	%	124,175			3,268		3.51	%	—			—		0.00	%
Investment securities available-for-sale	154,356			4,376		3.78	%	163,009			4,360		3.57	%	168,735			4,047		3.20	%
Investment securities held-to-maturity	130,479			3,757		3.84	%	154,025			4,260		3.69	%	40,892			1,207		3.94	%
Other investments	6,141			183		3.97	%	5,464			162		3.95	%	2,648			90		4.53	%
Federal funds sold	15,148			346		3.06	%	11,695			96		1.09	%	11,601			98		1.12	%

Total interest-earning assets and interest income	1,249,050			47,758		5.10	%	828,674			27,571		4.44	%	484,529			17,740		4.88	%

Non-interest earning assets:
Cash and due from banks	8,906							12,050							10,376
Premises and equipment, net	17,288							9,893							5,091
Goodwill and other intangibles, net	17,613							5,100							646
Accrued interest and other assets	13,557							7,887							3,699
Allowance for loan losses	(6,643		)					(4,564		)					(3,511		)
Total assets	$	1,299,771						$	859,040						$	500,830

Liabilities and Shareholders’ Equity
Interest - bearing liabilities:
Interest - bearing deposits:
Interest checking	123,055			1,106		1.20	%	151,448			1,520		1.34	%	146,335			1,841		1.68	%
Money markets	144,187			2,852		2.64	%	26,418			116		0.58	%	26,588			168		0.84	%
Statement savings	9,279			75		1.09	%	7,535			38		0.67	%	5,210			27		0.69	%
Certificates of deposit	543,859			12,956		3.19	%	330,802			6,774		2.73	%	175,732			4,492		3.42	%
Total interest - bearing deposits	820,380			16,989		2.77	%	516,203			8,448		2.18	%	353,865			6,528		2.47	%

Other borrowed funds	223,562			3,711		2.22	%	161,866			2,098		1.73	%	35,980			470		1.74	%

Total interest-bearing liabilities and interest expense	1,043,942			20,700		2.65	%	678,069			10,546		2.07	%	389,845			6,998		2.40	%

Noninterest-bearing liabilities:
Demand deposits	113,634							82,839							69,087
Other liabilities	20,195							4,857							1,833
Preferred shareholders’ equity	—							2,123							6,824
Common shareholders’ equity	122,000							91,152							33,241
Total liabilities and shareholders’ equity	$	1,299,771						$	859,040						$	500,830

Net interest income and net interest margin (2)				$	27,058	2.89	%				$	17,025	2.74	%				$	10,742	2.96	%

(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 periods presented.

(2) We do not have investments that have tax benefit attributes; therefore, there are no tax equivalent adjustments to our net interest income.

Rate and Volume Analysis
Nine Months Ended September 30, 2005 and 2004
(In thousands)

	Nine Months Ended September 30, 2005 Compared to 2004									Nine Months Ended September 30, 2004 Compared to 2003
	Average			Average			Increase			Average			Average			Increase
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
Interest income:

Loans (1):
Commercial and industrial	$	241		$	339		$	580		$	428		$	(466	)	$	(38	)
Real estate - commercial	4,207			23			4,230			2,243			(932		)	1,311
Real estate - construction	799			599			1,398			1,364			27			1,391
Real estate - residential	2,776			(431		)	2,345			327			(254		)	73
Home equity lines	360			803			1,163			469			(7		)	462
Consumer	(189		)	27			(162		)	7			(79		)	(72		)
Total loans	8,194			1,360			9,554			4,838			(1,711		)	3,127

Loans held for sale, net	6,801			4,048			10,849			3,268			—			3,268
Investment securities available-for-sale	(231		)	247			16			(137		)	450			313
Investment securities held-to-maturity	(651		)	148			(503		)	3,339			(286		)	3,053
Other investments	20			1			21			96			(24		)	72
Federal funds sold	28			222			250			1			(3		)	(2		)

Total interest income	14,161			6,026			20,187			11,405			(1,574		)	9,831

Interest expense:

Interest - bearing deposits:
Interest checking	(287		)	(127		)	(414		)	65			(386		)	(321		)
Money markets	515			2,221			2,736			(1		)	(51		)	(52		)
Statement savings	8			29			37			12			(1		)	11
Certificates of deposit	4,335			1,847			6,182			3,988			(1,706		)	2,282
Total interest - bearing deposits	4,571			3,970			8,541			4,064			(2,144		)	1,920

Other borrowed funds	793			820			1,613			1,376			252			1,628

Total interest expense	5,364			4,790			10,154			5,440			(1,892		)	3,548

Net interest income (2)	$	8,797		$	1,236		$	10,033		$	5,965		$	318		$	6,283

(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 periods presented.

(2) We do not have investments that have tax benefit attributes; therefore, there are no tax equivalent adjustments to our net interest income.

The provision for loan losses for the three months ended September 30, 2005 and 2004 was $500,000 and $529,000, respectively. For the nine months ended September 30, 2005 and 2004, the provision for loan losses was $1.9 million and $918,000, respectively. The increase in provision expense for the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004 is primarily the result of the net increase of $142.3 million in the loans receivable portfolio during the first nine months of 2005. The allowance for loan losses at September 30, 2005 and December 31, 2004 was $7.7 million and $5.9 million, respectively. Our allowance for loan losses ratio to loans receivable, net was 1.22% at September 30, 2005 and 1.20% at December 31, 2004. We continued to experience strong loan quality with annualized net charged-off loans equal to 0.01% of total loans for the nine months ended September 30, 2005, compared to 0.04% for the same period of 2004. Non-performing loans were equal to 0.03% and 0.11% of total loans receivable at September 30, 2005 and December 31, 2004, respectively.

In 1999 and 2001, the Company purchased loan participations of approximately $12.3 million from a bank in New Orleans, Louisiana, which represented approximately 950 loans. At September 30, 2005, the total remaining balances on these participations were approximately $2.1 million and represented approximately 270 loans secured by various types of recreational vehicles. The borrowers are located in several southern states including Louisiana. Hurricane and other weather-related problems have disrupted the operations of the New Orleans bank, curtailed mail delivery and other communications in the area and caused wide-spread destruction in the gulf coast region. The Company has established an approximately $100,000 allowance for loan losses on these loans as of September 30, 2005. This allowance amount is based upon the best information that the Company was able to obtain from the New Orleans bank and included an analysis of the locations of the borrowers, with particular emphasis on areas known to be severely impacted by the weather, the borrowers’ recent payment histories and estimate of likely insurance recoveries, where applicable. Changes to the allowance for loan losses may be required as additional information becomes known.

Additional information on the allowance for loan losses, its allocation to the loans receivable portfolio and information on nonperforming loans can be found in Tables 5, 6 and 7.

Allowance for Loan Losses

Nine Months Ended September 30, 2005 and 2004

(In thousands)

	2005			2004
Beginning balance, January 1	$	5,878		$	4,344

Provision for loan losses	1,869			918

Loans charged off:
Commercial and industrial	(120		)	(101		)
Consumer	(8		)	(5		)
Total loans charged off	(128		)	(106		)

Recoveries:
Commercial and industrial	75			10
Consumer	12			2
Total recoveries	87			12

Net (charge offs) recoveries	(41		)	(94		)

Ending balance	$	7,706		$	5,168

	At September 30, 2005			At December 31, 2004
Loans:
Balance at period end	$	632,148		$	489,896
Allowance for loan losses to loans receivable, net of fees	1.22		%	1.20		%
Annualized net charge-offs to average loans receivable	0.01		%	0.02		%

Allocation of the Allowance for Loan Losses

At September 30, 2005 and December 31, 2004

(In thousands)

	September 30, 2005				December 31, 2004
	Allocation		% of Total*		Allocation		% of Total*
Commercial	$	1,169	10.22	%	$	963	11.53	%
Real estate - commercial	3,590		46.06	%	2,732		44.88	%
Real estate - construction	757		11.01	%	768		14.18	%
Real estate - residential	1,288		20.90	%	692		15.69	%
Home equity lines	747		11.12	%	612		12.32	%
Consumer	155		0.69	%	111		1.40	%

Total allowance for loan losses	$	7,706	100.00	%	$	5,878	100.00	%

* Percentage of loan type to the total loan portfolio.

Nonperforming Loans Receivable

At September 30, 2005 and December 31, 2004

(In thousands)

	September 30, 2005		December 31, 2004
Nonaccruing loans	$	220	$	547

Loans contractually past-due 90 days or more	—		—

Troubled debt restructurings	—		—
Total nonperforming loans receivable	$	220	$	547

Non-interest income includes, among other things, service charges on deposits and loans, gains on the sale of loans held for sale, investment fee income, and management fee income, and continues to be an increasingly important factor in our operating results. Non-interest income for the three months ended September 30, 2005 and 2004 was $7.3 million and $2.8 million, respectively, a period-to-period increase of $4.5 million, or 164%. Non-interest income for the nine months ended September 30, 2005 and 2004 was $18.8 million and $4.2 million, respectively, a period-to-period increase of $14.6 million, or 345%. The increase in non-interest income is primarily attributable to increases in net gains on sales of loans by George Mason of $3.4 million and $10.9 million for the three and nine months ended September 30, 2005, respectively, and increases in management fee income of $167,000 and $1.7 million for the three and nine months ended September 30, 2005, respectively. Management fee income represents the income earned for services provided by George Mason to other mortgage banking companies owned by local home builders. Included in the net gains on sale of mortgage loans are any origination, underwriting, and discount points and other funding fees received and deferred at loan origination. Costs include direct costs associated with the loan origination, such as commissions and salaries that are deferred at the time of origination.

Service charges on deposit accounts increased $52,000 to $348,000 for the three months ended September 30, 2005 compared to the same period of 2004. For the nine months ended September 30, 2005, service charges on deposit accounts increased $160,000 to $958,000, compared to the same period of 2004. Loan service charge income increased $642,000 to $771,000 for the three months ended September 30, 2005, compared to $129,000 for the same period of 2004. For the nine months ended September 30, 2005, loan service charge income increased $1.6 million to $2.0 million compared to $414,000 for the same year to date period of 2004. These increases are primarily related to the operations of George Mason.

Investment fee income increased to $497,000 for the three months ended September 30, 2005 compared to $150,000 for the same three month period of 2004. For the nine months ended September 30, 2005, investment fee income increased $449,000, to $947,000, compared to $498,000 for the same nine month period of 2004. The increases in investment fee income are primarily attributable to the acquisition of Wilson/Bennett in June 2005.

Non-interest expense includes, among other things, salaries and benefits, occupancy, professional fees, depreciation, data processing, telecommunications and miscellaneous expenses. Non-interest expense for the three months ended September 30, 2005 was $12.4 million, compared to $8.9 million for the same period of 2004, an increase of $3.5 million. For the nine months ended September 30, 2005, non-interest expense increased $15.9 million to $33.6 million, compared to $17.7 million for the same nine month period of 2004. The increases are attributable to the acquisition of George Mason in July 2004 and our branch office expansion during the past twelve months. Expenses related to the branch expansion are primarily represented in the increases in our salaries and benefits expense, occupancy expense and depreciation expense. We expect non-interest expense to continue to increase as we continue our branch expansion in 2005. We currently plan to open an additional branch during the remainder of 2005. The acquisition of Wilson/Bennett in June 2005 has also resulted in increased non-interest expense.

The effective tax rate for the third quarter of 2005 was 34.5%, compared to 30.9% for the same period of 2004. For the nine months ended September 30, 2005, the effective tax rate was 33.6%, compared to 32.9% for the same period of 2004. We recorded a provision for income tax expense of $1.6 million and $172,000 for the three months ended September 30, 2005 and 2004, respectively. For the nine months ended September 30, 2005 and 2004, the provision for income

tax expense was $3.5 million and $850,000, respectively. See, also, “Critical Accounting Policies – Valuation of Deferred Tax Assets.”

Statements of Condition

Total assets were $1.54 billion at September 30, 2005, compared to $1.21 billion at December 31, 2004, an increase of $328.1 million or 27.1%. This growth was driven primarily by increases in loans held for sale and loans receivable, which were funded by growth in our deposits and the proceeds from our secondary offering during the second quarter of 2005.

Investment securities were $292.6 million at September 30, 2005, compared to $289.5 million at December 31, 2004, an increase of $3.1 million. The investment portfolio consists of investment securities available-for-sale and investment securities held-to-maturity. 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 or regulatory capital management. 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. At September 30, 2005, investment securities available-for-sale were $171.8 million and investment securities held-to-maturity were $120.8 million. See Table 8 for additional information on our investment securities portfolio.

Investment Securities

At September 30, 2005 and December 31, 2004

(In thousands)

	Amortized		Fair		Average
	Cost		Value		Yield
Available-for-sale at September 30, 2005
Obligations of U.S. government-sponsored agencies and enterprises
One to five years	$	40,780	$	40,741	4.74	%
Five to ten years	2,000		1,987		4.00	%
Total U.S. government-sponsored agencies	$	42,780	$	42,728	4.71	%

Mortgage-backed securities*
One to five years	$	5,819	$	5,731	3.98	%
Five to ten years	9,321		9,155		3.87	%
After ten years	114,445		112,228		4.14	%
Total mortgage-backed securities	$	129,585	$	127,114	4.12	%

Treasury bonds
One to five years	$	2,019	$	1,991	2.63	%
Total treasury bonds	$	2,019	$	1,991	2.63	%
Total investment securities available-for-sale	$	174,384	$	171,833	4.25	%

	Amortized		Fair		Average
	Cost		Value		Yield
Held-to-maturity at September 30, 2005
Obligations of U.S. government-sponsored agencies and enterprises
One to five years	$	9,500	$	9,287	3.52	%
Five to ten years	13,020		12,881		4.35	%
After ten years	3,000		2,978		4.20	%
Total U.S. government-sponsored agencies	$	25,520	$	25,146	4.03	%

Mortgage-backed securities*
Five to ten years	$	8,490	$	8,387	4.13	%
After ten years	78,779		77,452		4.18	%
Total mortgage-backed securities	$	87,269	$	85,839	4.18	%

Corporate bonds
After ten years	$	8,005	$	7,890	4.21	%
Total corporate bonds	$	8,005	$	7,890	4.21	%
Total investment securities held-to-maturity	$	120,794	$	118,875	4.15	%

Total investment securities	$	295,178	$	290,708	4.21	%

* Based on contractual maturities.

	Amortized		Fair		Average
	Cost		Value		Yield
Available-for-sale at December 31, 2004
Obligations of U.S. government-sponsored agencies and enterprises
One to five years	$	3,000	$	2,947	3.33	%
Five to ten years	3,000		3,009		4.46	%
Total U.S. government-sponsored agencies	$	6,000	$	5,956	3.89	%

Mortgage-backed securities*
One to five years	$	2,161	$	2,131	3.59	%
Five to ten years	14,662		14,603		3.96	%
After ten years	128,477		126,846		3.97	%
Total mortgage-backed securities	$	145,300	$	143,580	3.96	%

Treasury bonds
One to five years	$	2,031	$	2,018	2.63	%
Total treasury bonds	$	2,031	$	2,018	2.63	%
Total investment securities available-for-sale	$	153,331	$	151,554	3.94	%

	Amortized		Fair		Average
	Cost		Value		Yield
Held-to-maturity at December 31, 2004
Obligations of U.S. government-sponsored agencies and enterprises
One to five years	$	6,500	$	6,427	3.36	%
Five to ten years	16,018		15,901		4.28	%
After ten years	2,999		2,962		4.22	%
Total U.S. government-sponsored agencies	$	25,517	$	25,290	4.03	%

Mortgage-backed securities*
Five to ten years	$	10,392	$	10,406	3.83	%
After ten years	94,039		92,990		4.04	%
Total mortgage-backed securities	$	104,431	$	103,396	4.02	%

Corporate bonds
After ten years	$	8,005	$	7,923	4.21	%
Total corporate bonds	$	8,005	$	7,923	4.21	%
Total investment securities held-to-maturity	$	137,953	$	136,609	4.03	%

Total investment securities	$	291,284	$	288,163	3.98	%

* Based on contractual maturities.

Loans receivable, net of deferred fees and costs, increased by $142.2 million, or 29.0%, to $632.1 million at September 30, 2005 from $489.9 million at December 31, 2004 (see Table 9 for details on the loans receivable portfolio). We experienced growth in our commercial and industrial, commercial real estate, residential real estate and home equity loan portfolios. We expect continued growth within these loan categories over the next quarter of 2005 due to our increased legal lending limit of $18.7 million and the volume of loans we have scheduled for funding. Real estate-construction loans decreased slightly by $117,000 and consumer loans decreased $2.4 million to $4.4 million from December 31, 2004 to September 30, 2005. In addition, we had $454.7 million in loans held for sale, net at September 30, 2005, compared to $365.5 million at December 31, 2004, an increase of $89.2 million. Loans that are held for sale, net are valued at the lower of cost or market value.

Loans Receivable

At September 30, 2005 and December 31, 2004

(In thousands)

	September 30, 2005					December 31, 2004

Commercial	$	64,664		10.22	%	$	56,512		11.53	%
Real estate - commercial	291,307			46.06	%	220,012			44.88	%
Real estate - construction	69,652			11.01	%	69,535			14.18	%
Real estate - residential	132,159			20.90	%	76,932			15.69	%
Home equity lines	70,320			11.12	%	60,408			12.32	%
Consumer	4,381			0.69	%	6,816			1.40	%

Gross loans	$	632,483		100.00	%	$	490,215		100.00	%

Less: net deferred fees	(335		)			(319		)
Less: allowance for loan losses	(7,706		)			(5,878		)

Loans receivable, net	$	624,442				$	484,018

Total deposits increased $270.2 million, or 32.8%, to $1.09 billion at September 30, 2005, compared to $824.2 million at December 31, 2004. We experienced increases in non-interest bearing demand deposits, interest-bearing money market deposits, savings deposits, and certificates of deposit (see Table 10 for details on certificates of deposit with balances of $100,000 or more). The increase in deposits is a result of new customers from our branch expansion and competitive deposit pricing, particularly of our Monster Money Market account, which we introduced in the first quarter of 2005, and increased advertising efforts. Our Monster Money Market promotion is a relationship account that offered and continues to offer an interest rate of 3.14% on balances over $25,000. Deposits in our Monster Money Market product at September 30, 2005 totaled $196.6 million. Brokered certificates of deposit decreased $66.5 million to $20.2 million at September 30, 2005 compared to $86.7 million at December 31, 2004.

Certificates of Deposit of $100,000 or More

At September 30, 2005

(In thousands)

Maturities:	Fixed Rate		No-Penalty*		Total
Three months or less	$	37,098	$	7,541	$	44,639
Over three months through six months	14,130		1,418		15,548
Over six months through twelve months	51,172		47,242		98,414
Over twelve months	70,716		47,829		118,545
	$	173,116	$	104,030	$	277,146

* No-Penalty certificates of deposit can be redeemed at anytime at the request of the depositor.

Other borrowed funds decreased $37.2 million to $163.9 million at September 30, 2005, compared to $201.1 million at December 31, 2004. We had Federal Home Loan Bank advances that matured during 2005 and were able to replace this funding source with other short term funding and as a result of our deposit growth. Table 11 provides information on our short-term borrowings.

Short-Term Borrowings and Other Borrowed Funds

At September 30, 2005

(In thousands)

		Date Amount
Advance Date	Term of Advance	Due	Interest Rate		Outstanding
Mar-03	3 years	Mar-06	2.33	%	$	1,000
Apr-04	2 years	May-06	2.58	%	2,000
Jul-03	3 years	Jul-06	2.07	%	6,250
Total short-term FHLB advances and weighted average rate			2.21	%	$	9,250

Other borrowed funds:
TT&L Note option			2.75	%	$	14,099
Trust preferred			5.57	%	20,619
Customer repurchase agreements			1.16	%	35,091
FHLB advances - long term			3.44	%	84,833
Total other borrowed funds			2.22	%	$	163,892

At September 30, 2005, mortgage funding checks increased by $57.9 million to $104.3 million, compared to $46.4 million at December 31, 2004. No warehouse financing was outstanding at September 30, 2005 compared to $30.2 million at December 31, 2004. These liabilities are related to George Mason and are used to fund the loans in process of being sold. George Mason has credit facilities with the Bank and also has a third party facility of $250 million. There were no borrowings outstanding under this third party facility at September 30, 2005.

Shareholders’ equity at September 30, 2005 was $146.7 million, an increase of $51.6 million, or 54.3%, compared to $95.1 million at December 31, 2004. During the second quarter of 2005, we completed a secondary common stock offering of 5,175,000 shares which netted proceeds of $39.8 million. In addition, we acquired Wilson/Bennett for $1.6 million in cash and 611,111 shares of common stock, which were valued at $4.9 million. The remaining portion of the increase from the prior year end was primarily net income of $6.9 million for the nine months ended September 30, 2005, partially offset by an unfavorable market value adjustment of $535,000 on investment securities available-for-sale as of September 30, 2005. Book value per share at September 30, 2005 was $6.03, compared to $5.15 at December 31, 2004. Tangible book value per share at September 30, 2005 was $5.18 compared to $4.36 at December 31, 2004.

Business Segment Operations

We provide banking and non-banking financial services and products through our subsidiaries. Prior to July 7, 2004, management operated and reported on the results of our operations through two business segments, commercial banking and investment services. With the acquisition of George Mason during the third quarter of 2004, we now operate in a third business segment, mortgage banking.

Commercial Banking

The commercial banking segment provides a wide range of banking services to small businesses and individuals through multiple delivery channels. Services offered include commercial and consumer lending, deposit products and banking via the Internet or telephone.

For the three months ended September 30, 2005, the commercial banking segment recorded net income of $1.3 million compared to $871,000 for the three months ended September 30, 2004, an increase of $451,000. The increase in third quarter net income for 2005 is primarily related to the increased volume and interest rates in the Bank’s loan portfolios. For the nine months ended September 30, 2005, net income for the commercial banking segment was $2.9 million compared to $2.7 million for the same nine month period of 2004. At September 30, 2005, total assets were $1.41 billion, loans receivable, net of deferred fees and costs, were $632.1 million and total deposits were $1.09 billion. At September 30, 2004, total assets were $1.08 billion, loans receivable, net of deferred fees and costs were $347.5 million and total deposits were $819.9 million.

Mortgage Banking

The operations of the mortgage banking segment are conducted through George Mason. George Mason engages primarily in the origination and acquisition of residential mortgages for sale into the secondary market on a best efforts basis. George Mason is included in this operating segment since the date of acquisition, July 7, 2004.

For the three months ended September 30, 2005 and 2004, the mortgage banking segment recorded net income of $2.1 million and a net loss of $193,000, respectively. For the nine months ended September 30, 2005 and 2004, the mortgage banking segment recorded net income of $5.3 million and a net loss of $193,000, respectively. The loss recorded during the three and nine months periods of 2004 was a result of loans held for sale and unfunded commitments being recorded at fair value at the time of acquisition of George Mason, which reduced net gain on sales of loans in the post-acquisition period. At September 30, 2005, total assets were $467.3 million, loans held for sale, net were $454.7 million and mortgage check fundings were $104.3 million. At September 30, 2004, total assets were $356.4 million, loans held for sale, net were $347.5 million and mortgage funding checks were $76.3 million.

Investment Services

The investment services segment provides investment and financial services through an affiliation with a third party broker-dealer. Wilson/Bennett is included in this operating segment since the date of its acquisition, June 9, 2005.

For the three months ended September 30, 2005, the investment services segment recorded a net income of $40,000, compared to a net loss of $24,000 for the same period of 2004, an increase in net income of $64,000. For the nine months ended September 30, 2005, the investment services segment recorded a net loss of $18,000, compared to a net loss of $81,000 for the same period of 2004. At September 30, 2005, total assets were $7.3 million and total assets under management were $333.4 million. At September 30, 2004, total assets were $677,000 and total assets under management were $161.6 million.

Information pertaining to our business segments can be found in Note 3 to the Notes to Consolidated Financial Statements.

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.

Regulatory agencies measure capital adequacy utilizing a formula that takes into account the risk profile of the financial institution. The guidelines define capital as both Tier 1 (primarily common shareholders’ equity, defined to include certain debt obligations) and Tier 2 (to include certain other debt obligations, a portion of the allowance for loan losses, and 45% of any unrealized gains in equity securities).

At September 30, 2005, our Tier 1 and total (Tier 1 and Tier 2) risk-based capital ratios were 14.62% and 15.40%, respectively. At December 31, 2004, our Tier 1 and total risk-based capital ratios were 12.7% and 13.4%, respectively. The increase in our regulatory capital ratios is

a result of the completion of our common stock offering during the second quarter of 2005 and our net income through September 30, 2005. Our regulatory capital levels for the Bank and bank holding company meet those established for well-capitalized institutions. Table 12 provides additional information pertaining to our capital ratios.

Capital Components

At September 30, 2005 and December 31, 2004

(In thousands)

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

At September 30, 2005
Total risk based capital/ Total capital to risk-weighted assets	$	155,528	15.40	%	$	80,799	>	8.00	%	$	100,999		>	10.00	%
Tier I capital/ Tier I capital to risk-weighted assets	147,710		14.62	%	40,400		>	4.00	%	60,599			>	6.00	%
Tier I capital/ Total capital to average assets	147,710		10.31	%	57,306		>	4.00	%	71,633			>	5.00	%

At December 31, 2004
Total risk based capital/ Total capital to risk-weighted assets	$	107,660	13.40	%	$	64,294	>	8.00	%	$		80,368	>	10.00	%
Tier I capital/ Tier I capital to risk-weighted assets	101,670		12.65	%	32,147		>	4.00	%	48,221			>	6.00	%
Tier I capital/ Total capital to average assets	101,670		8.83	%	46,075		>	4.00	%	57,594			>	5.00	%

Contractual Obligations

We have entered into a number of long-term contractual obligations to support our ongoing business activities. We anticipate that these contractual obligations will be funded through operating revenues and liquidity sources held or available to us. The required payments under such obligations are detailed in Table 13.

Contractual Obligations

At September 30, 2005

(In thousands)

			Payments Due by Period
	Total		Less than 1 Year		1 - 2 Years		3 - 5 Years		More than 5 Years
Certificates of deposit	$	607,850	$	335,227	$	139,831	$	129,638	$	3,154

Brokered certificates of deposit	20,157		20,157		—		—		—

Advances from the Federal Home Loan Bank of Atlanta	94,083		9,250		15,250		49,583		20,000

Trust preferred securities	20,000		—		—		—		20,000

Operating lease obligations	13,348		3,902		3,477		4,878		1,091

Total	$	755,438	$	368,536	$	158,558	$	184,099	$	44,245

Financial Instruments with Off-Balance Sheet Risk and Credit Risk

In the normal course of business, we are a party to financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the balance sheet.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

At September 30, 2005, commitments to extend credit were $282.0 million and standby letters of credit were $6.9 million.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. Commitments generally have expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may or may not be drawn upon to the total extent of funding to which we have committed.

Standby letters of credit are conditional commitments we issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. We hold certificates of deposit,

deposit accounts, and real estate as collateral supporting those commitments when collateral is deemed necessary.

Liquidity

Liquidity in the banking industry is defined as the ability to meet the demand for funds of both depositors and borrowers. We must be able to meet these needs with cash on hand by obtaining funding from depositors or other lenders or by converting non-cash items to cash. The objective of our liquidity management program is to ensure that we always have sufficient liquid resources to meet the demands of our depositors and borrowers. Stable core deposits and a strong capital position provide the base for our liquidity position. We have demonstrated our ability to attract retail deposits because of our convenient branch locations, personal service and deposit pricing.

In addition to retail deposits, we have access to various wholesale funding markets. These markets include the brokered CD market, the repurchase agreement market and the federal funds market. We also maintain secured lines of credit with the Federal Reserve Bank of Richmond and the Federal Home Loan Bank of Atlanta. Having diverse funding alternatives reduces our reliance on any one source for funding.

Cash flow from amortizing assets or maturing assets can also provide funding to meet the needs of depositors and borrowers.

We have established a formal liquidity contingency plan which establishes a liquidity management team and provides guidelines for liquidity management. For our liquidity management program, we first determine our current liquidity position. Liquidity is then forecasted based on forecasted changes in the balance sheet. The Bank expects to maintain a certain liquidity cushion throughout the forecast period. In addition to the forecast, we also stress test our liquidity position under several different stress scenarios. Guidelines for the forecasted liquidity cushion and for liquidity cushions for each stress scenario have been established. In addition, one stress test combines all other stress tests to see how liquidity would react to several negative scenarios occurring at the same time. We believe that we currently have sufficient resources to meet our anticipated liquidity needs.

In September 2004, George Mason and the Bank entered into a one year $150 million floating rate revolving credit and security agreement with a third party. The purpose of this credit facility is to fund residential mortgage loans at George Mason prior to their sale into the secondary market. The credit facility requires, among other things, that George Mason and the Bank have positive quarterly net income and maintain specified minimum tangible and regulatory net worth levels. The Company has guaranteed repayment of this debt. The interest rate on this credit facility is LIBOR plus between 1.50% and 1.875%. We are currently in the process of renewing this line of credit for an additional one year term. We anticipate that this line of credit will be renewed. At September 30, 2005, none of this line was utilized.

In addition to this facility, this same lender has also provided a $100 million facility that is utilized by George Mason to warehouse residential mortgage loans held for sale to this lender. The terms of this facility are substantially the same as the above-referenced revolving credit and security agreement and the cost of this facility is netted against interest earned on the loans pending settlement with the lender. We are currently in the process of renewing this line of credit for an additional one year term. We anticipate that this line of credit will be renewed. At September 30, 2005, none of this line was utilized.

Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale totaled $274.9 million at September 30, 2005 or 17.9% of total assets. We held investments that are classified as held-to-maturity in the amount of $120.8 million at September 30, 2005. To maintain ready access to the bank’s secured lines of credit, the Bank has pledged the majority of its securities to the Federal Home Loan Bank of Atlanta with additional securities pledged to the Federal Reserve Bank of Richmond. Additional borrowing capacity at the Federal Home Loan Bank of Atlanta at September 30, 2005 was approximately $213.7 million. Borrowing capacity with the Federal Reserve Bank of Richmond was approximately $20.8 million at September 30, 2005. As noted above, George Mason has $250 million of lines of credit available to it. We are 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

We are exposed to various business risks including interest rate risk. Our goal is to maximize net interest income without incurring excessive interest rate risk. Management of net interest income and interest rate risk must be consistent with the level of capital and liquidity that we maintain. We manage interest rate risk through an asset and liability committee (“ALCO”). ALCO is responsible for managing the interest rate risk for the company in conjunction with liquidity and capital management.

We use a net interest income simulation model as our primary tool to measure interest rate sensitivity. Many assumptions are developed based on expected activity in the balance sheet. For maturing assets, assumptions are created for the redeployment of these assets. For maturing liabilities, assumptions are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that could reprice during the modeled time period. These assumptions also cover how we expect rates to change on non-maturity deposits such as NOW, Money Market and savings accounts. Based on inputs that include the current balance sheet, the current level of interest rates and the developed assumptions, the model then produces an expected level of net interest income assuming that market rates remain unchanged. This is considered the base case. Next, the model determines what net interest income would be given changes in interest rates. The rate simulations performed include a ramped rate change of down 200 basis points and up 200 basis points over a two year time period. In the ramped down rate change, the model moves rates gradually down 200 basis points over the first year and then rates remain flat in the second year. For the up 200 basis point scenario, rates are gradually moved up 200 basis points in the first year and then rates remain flat in the second year. In both the up and down scenarios, the model assumes a parallel shift in the yield curve. The results of these simulations are then compared to the base case.

At September 30, 2005, we were asset sensitive. Asset sensitive means that we had more assets maturing and repricing than liabilities. We have a significant portion of our assets as floating rate assets and we have taken a significant amount of term funding through fixed rate, fixed term, certificates of deposit. In a rising rate environment, net interest income should grow for an asset sensitive bank. In the up 200 basis point scenario for one year, net interest income improves by not more than 9% compared to the base case and by not more than 11% over the two year time horizon. Being asset sensitive, net interest income declines compared to the base case in the down 200 basis point scenario. At September 30, 2005, net interest income has a negative variance to the base case of less than 9% for the one year period and a negative variance of less than 13% over the cumulative two year period.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our asset and 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. Interest rate risk arises because the assets of the Bank and the liabilities of the Bank have different maturities and characteristics. In order to measure this interest rate risk, we use a simulation process that measures the impact of changing interest rates on net interest income. This model is run for the Bank by an independent consulting firm that was hired by the Bank in the fourth quarter of 2004. The simulations incorporate assumptions related to expected activity in the balance sheet. For maturing assets, assumptions are developed for the redeployment of these assets. For maturing liabilities, assumptions are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that reprice during the modeled time period. These assumptions also cover how we expect rates to change on non-maturity deposits such as NOW, Money Market and savings accounts. Based on inputs that include the most recent period end balance sheet, the current level of interest rates and the developed assumptions, the model then produces an expected level of net interest income assuming that interest rates remain unchanged. This becomes the base case. Next, the model determines the impact on net interest income given certain interest rate changes. The rate changes include a ramped rate change of down 200 basis points and up 200 basis points over a two year time period. In the ramped down rate change, the model moves rates gradually down 200 basis points over the first year and then rates remain flat in the second year. For the up 200 basis point scenario, rates are gradually increased by 200 basis points in the first year and remain flat in the second year. In both the up and down scenarios, the model assumes a parallel shift in the yield curve. The results for net interest income are then compared to the base case with a variance to the base case determined.

At September 30, 2005, we were asset sensitive. Asset sensitive means that we had more assets maturing or repricing than liabilities. We have a significant portion of our assets as floating rate assets and we have also taken a significant amount of term funding through fixed rate, fixed term, certificates of deposit. In a rising rate environment, net interest income should grow for an asset sensitive bank. In the up 200 basis point scenario for one year, net interest income improves by not more than 9% compared to the base case and by not more than 11% over the two year cumulative time horizon.

Being an asset sensitive bank, net interest income declines compared to the base case in the down 200 basis point simulation by less than 9% for one year and by 13% over the cumulative two year period.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that the information required to be disclosed by it in 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 its 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 safeguarded and that transactions are executed in accordance with management’s authorization and are 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 monitor its effectiveness. There were no changes in our internal controls over financial reporting identified in connection with our evaluation of it that occurred during our last fiscal quarter that materially affected, or are likely to materially affect, our internal controls over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of our operations, we may become party to legal proceedings. Currently, we are not party to any material legal proceedings and no such proceedings are, to management’s knowledge, threatened against us.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) None.

(b) Not applicable.

Item 3. Defaults Upon Senior Securities

(a) None.

(b) None.

Item 4. Submission of Matters to a Vote of Security Holders

(a) None.

(b) Not applicable.

(d) None.

Item 5. Other Information

(a) None.

(b) None.

Item 6. Exhibits

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

SIGNATURES

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

	CARDINAL FINANCIAL CORPORATION
	(Registrant)

Date: November 9, 2005	/s/ Bernard H. Clineburg
	Bernard H. Clineburg
	Chairman, President and Chief Executive Officer
	(Principal Executive Officer)


Date: November 9, 2005	/s/ Robert A. Cern
	Robert A. Cern
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)


Date: November 9, 2005	/s/ Jennifer L. Deacon
	Jennifer L. Deacon
	Senior Vice President and Controller
	(Principal Accounting Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Cardinal Financial (CFNL) Inactive 10-Q2005 Q3 Quarterly report

Content analysis

There were options to purchase 44,000 and 963,911 shares of common stock granted during the three and nine months ended September 30, 2005, respectively. Of those grants, 44,000 and 955,911 immediately vested on the grant date for the three and nine months ended September 30, 2005, respectively.

Note 2

Note 4

Earnings Per Share

Note 5

Derivatives and Hedging Activities

Note 6

Allowance for Loan Losses

Valuation of Deferred Tax Assets

New Financial Accounting Standards

Statements of Income

Business Segment Operations

Commercial Banking

Investment Services

Capital Resources

Liquidity

Interest Rate Sensitivity