Cardinal Financial (CFNL) 10-Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended September 30, 2007

or

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	(I.R.S. Employer
incorporation or organization)	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  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer  o        Accelerated filer  x    Non-accelerated filer  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  x

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

24,254,361 shares of common stock, par value $1.00 per share,

outstanding as of October 29, 2007

CARDINAL FINANCIAL CORPORATION

INDEX TO FORM 10-Q

PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements:
	Consolidated Statements of Condition
	At September 30, 2007 (unaudited) and December 31, 2006
	Consolidated Statements of Income
	For the three and nine months ended September 30, 2007 and 2006 (unaudited)
	Consolidated Statements of Comprehensive Income
	For the three and nine months ended September 30, 2007 and 2006 (unaudited)
	Consolidated Statements of Changes in Shareholders’ Equity
	For the nine months ended September 30, 2007 and 2006 (unaudited)
	Consolidated Statements of Cash Flows
	For the nine months ended September 30, 2007 and 2006 (unaudited)
	Notes to Consolidated Financial Statements (unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
SIGNATURES

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

September 30, 2007 and December 31, 2006

(In thousands, except share data)

Assets			September 30, 2007			December 31, 2006
			(Unaudited)
Cash and due from banks			$	17,860		$	24,585
Federal funds sold			25,750			11,491
Total cash and cash equivalents			43,610			36,076
Investment securities available-for-sale			343,517			231,631
Investment securities held-to-maturity (market value of $81,426 and $95,450 at September 30, 2007 and December 31, 2006, respectively)			82,740			97,665
Total investment securities			426,257			329,296
Other investments			12,674			9,158
Loans held for sale, net			144,448			338,731
Loans receivable, net of deferred fees and costs			973,518			845,449
Allowance for loan losses			(10,857		)	(9,638		)
Loans receivable, net			962,661			835,811
Premises and equipment, net			18,892			20,039
Deferred tax asset			6,600			6,415
Goodwill and intangibles, net			17,303			17,493
Bank-owned life insurance			31,931			30,646
Accrued interest receivable and other assets			13,224			14,764
Total assets			$	1,677,600		$	1,638,429
Liabilities and Shareholders’ Equity
Non-interest bearing deposits			$	127,119		$	123,301
Interest bearing deposits			1,010,751			1,095,581
Other borrowed funds			322,388			194,631
Mortgage funding checks			17,776			46,159
Escrow liabilities			1,594			3,229
Accrued interest payable and other liabilities			41,911			19,655
Total liabilities			1,521,539			1,482,556
Common stock, $1 par value	2007	2006
Shares authorized	50,000,000	50,000,000
Shares issued and outstanding	24,254,361	24,459,155	24,254			24,459
Additional paid-in capital			131,104			132,985
Retained earnings			3,074			705
Accumulated other comprehensive loss			(2,371		)	(2,276		)
Total shareholders’ equity			156,061			155,873
Total liabilities and shareholders’ equity			$	1,677,600		$	1,638,429

See accompanying notes to consolidated financial statements.

3

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three and nine months ended September 30, 2007 and 2006

(In thousands, except share and per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Interest income:
Loans receivable	$	16,551		$	13,495		$	46,568		$	37,522
Loans held for sale	4,256			5,193			13,954			14,746
Federal funds sold	70			181			1,220			915
Investment securities available-for-sale	3,606			2,834			9,496			7,525
Investment securities held-to-maturity	896			1,079			2,858			3,306
Other investments	166			84			442			262
Total interest income	25,545			22,866			74,538			64,276
Interest expense:
Deposits	11,378			10,678			35,188			27,605
Other borrowed funds	3,834			1,768			8,949			5,145
Total interest expense	15,212			12,446			44,137			32,750
Net interest income	10,333			10,420			30,401			31,526
Provision for loan losses	915			230			1,670			870
Net interest income after provision for loan losses	9,418			10,190			28,731			30,656
Non-interest income:
Service charges on deposit accounts	505			418			1,472			1,176
Loan service charges	365			386			1,187			1,567
Investment fee income	1,101			849			3,236			2,486
Net gain on sales of loans	2,093			2,455			7,157			7,753
Net realized gain on investment securities available-for-sale	—			66			14			66
Net realized loss on investment securities trading	—			—			(11		)	—
Management fee income	229			583			899			1,665
Litigation recovery on previously impaired investment	17			—			83			—
Increase in cash surrender value of bank-owned life insurance	428			212			1,285			212
Other income	5			(7		)	39			741
Total non-interest income	4,743			4,962			15,361			15,666
Non-interest expense:
Salary and benefits	5,592			6,195			18,237			18,224
Occupancy	1,362			1,399			3,989			3,902
Professional fees	770			456			1,686			1,677
Depreciation	748			831			2,345			2,369
Data processing	345			362			1,044			1,002
Telecommunications	278			316			856			937
Loss related to escrow arrangement	3,500			—			3,500			—
Amortization of intangibles	63			63			190			356
Impairment of goodwill and intangible assets	—			2,927			—			2,927
Other operating expenses	2,811			2,496			8,293			7,531
Total non-interest expense	15,469			15,045			40,140			38,925
Net income (loss) before income taxes	(1,308		)	107			3,952			7,397
Provision for income taxes	(702		)	(148		)	851			2,209
Net income (loss)	$	(606	)	$	255		$	3,101		$	5,188
Earnings per common share — basic	$	(0.02	)	$	0.01		$	0.13		$	0.21
Earnings per common share — diluted	$	(0.02	)	$	0.01		$	0.12		$	0.21
Weighted-average common shares outstanding — basic	24,253,187			24,430,917			24,424,037			24,411,330
Weighted-average common shares outstanding — diluted	24,253,187			24,917,422			24,900,401			24,970,941

See accompanying notes to consolidated financial statements.

4

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three and nine months ended September 30, 2007 and 2006

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Net income (loss)	$	(606	)	$	255		$	3,101		$	5,188
Other comprehensive gain:
Unrealized gain on available-for-sale investment securities:
Unrealized holding gain arising during the period, net of tax expense of $1.2 million and $163 thousand for the three and nine months ended September 30, 2007, respectively, and tax expense of $1.5 million and $26 thousand for the three and nine months ended September 30, 2006, respectively	2,230			2,851			307			97
Less: reclassification adjustment for gains included in net income net of tax expense of $5 thousand for the nine months ended September 30, 2007 and $23 thousand for each of the three and nine months ended September 30, 2006.	—			(43		)	(9		)	(43		)
	2,230			2,808			298			54
Unrealized gain (loss) on derivative instruments designated as cash flow hedges, net of tax benefit of $106 thousand and $218 thousand for the three and nine months ended September 30, 2007, respectively, and tax expense of $137 thousand and tax benefit of $31 thousand for the three and nine months ended September 30, 2006, respectively	(191		)	234			(393		)	(34		)
Comprehensive income	$	1,433		$	3,297		$	3,006		$	5,208

See accompanying notes to consolidated financial statements.

5

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Nine months ended September 30, 2007 and 2006

(In thousands)

(Unaudited)

												Accumulated Other Comprehensive
						Additional Paid-in			Retained Earnings
	Common		Common
	Shares		Stock			Capital			(Deficit)			Loss			Total
Balance, December 31, 2005	24,363		$	24,363		$	132,150		$	(5,269	)	$	(3,365	)	$	147,879
Cumulative effect at January 1, 2006 of change in method of quantifying errors	—		—			25			(438		)	—			(413		)
Stock options exercised	34		34			222			—			—			256
Payment of deferred compensation shares	—		—			(4		)	—			—			(4		)
Dividends on common stock of $0.03 per share	—		—			—			(732		)	—			(732		)
Change in accumulated other comprehensive loss	—		—			—			—			20			20
Net income	—		—			—			5,188			—			5,188
Balance, September 30, 2006	24,397		$	24,397		$	132,393		$	(1,251	)	$	(3,345	)	$	152,194
Balance, December 31, 2006	24,459		$	24,459		$	132,985		$	705		$	(2,276	)	$	155,873
Stock options exercised	19		19			82			—			—			101
Payment of deferred compensation shares	—		—			3			—			—			3
Purchase and retirement of common stock	(224	)	(224		)	(1,966		)	—			—			(2,190		)
Dividends on common stock of $0.03 per share	—		—			—			(732		)	—			(732		)
Change in accumulated other comprehensive loss	—		—			—			—			(95		)	(95		)
Net income	—		—			—			3,101			—			3,101
Balance, September 30, 2007	24,254		$	24,254		$	131,104		$	3,074		$	(2,371	)	$	156,061
See accompanying notes to consolidated financial statements.

6

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended September 30, 2007 and 2006

(In thousands)

(Unaudited)

	2007			2006
Cash flows from operating activities:
Net income	$	3,101		$	5,188
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	2,345			2,369
Amortization of premiums, discounts and intangibles	468			887
Impairment of goodwill and intangible assets	—			2,927
Provision for loan losses	1,670			870
Loans held for sale originated	(1,807,962		)	(2,277,231		)
Proceeds from the sale of loans held for sale	2,009,402			2,388,590
Gain on sales of loans held for sale	(7,157		)	(7,753		)
Proceeds from sale, maturity and call of investment securities trading	3,988			—
Purchase of investment securities trading	(3,999		)	—
Loss on sale of investments securities trading	11			—
Gain on sale of investment securities available-for-sale	(14		)	(66		)
Loss on sale of other assets	3			2
Increase in cash surrender value of bank-owned life insurance	(1,285		)	—
(Increase) decrease in accrued interest receivable, other assets and deferred tax asset	803			(13,065		)
Increase in accrued interest payable, escrow liabilities and other liabilities	20,668			7,086
Net cash provided by operating activities	222,042			109,804
Cash flows from investing activities:
Purchases of premises and equipment	(1,201		)	(4,568		)
Proceeds from sale, maturity and call of investment securities available-for-sale	33,946			—
Proceeds from maturity and call of investment securities held-to-maturity	4,000			—
Proceeds from sale of other investments	3,328			2,938
Purchase of investment securities available-for-sale	(130,758		)	(29,300		)
Purchase of mortgage-backed securities available-for-sale	(32,421		)	(62,568		)
Purchase of other investments	(6,844		)	(2,522		)
Purchase of Bank-owned life insurance	—			(30,212		)
Redemptions of investment securities available-for-sale	17,678			18,893
Redemptions of investment securities held-to-maturity	10,740			12,315
Net cash paid in acquisition	—			(339		)
Net increase in loans receivable, net of deferred fees and costs	(128,520		)	(100,913		)
Net cash used in investing activities	(230,052		)	(196,276		)
Cash flows from financing activities:
Net increase (decrease) in deposits	(81,012		)	106,987
Net increase in other borrowed funds - short term	39,882			21,757
Net increase (decrease) in mortgage funding checks	(28,383		)	3,758
Proceeds from FHLB advances - long term	115,000			15,000
Repayments of FHLB advances - long term	(27,125		)	(41,125		)
Stock options exercised	101			256
Purchase and retirement of common stock	(2,190		)	—
Deferred compensation payments	3			(4		)
Dividends on common stock	(732		)	(732		)
Net cash provided by financing activities	15,544			105,897
Net increase in cash and cash equivalents	7,534			19,425
Cash and cash equivalents at beginning of the period	36,076			36,589
Cash and cash equivalents at end of the period	$	43,610		$	56,014
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	43,693		$	32,942
Cash paid for income taxes	3,925			4,963
Supplemental schedule of noncash investing and financing activities:
Unsettled purchases of investment securities available-for-sale	$	413		$	1,419
Unsettled sale of investment securities available-for-sale	—			10,210
On February 9, 2006, the Company acquired certain fiduciary and other assets and assumed the liabilities of FBR National Trust Company. In conjunction with the acquisition, the following noncash changes to our financial condition occurred:
Fair value of non-cash assets acquired				$	507
Fair value of liabilities assumed				127

See accompanying notes to consolidated financial statements.

7

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

(Unaudited)

Note 1

Organization

Cardinal Financial Corporation (the ”Company”) is incorporated under the laws of the Commonwealth of Virginia as a financial holding company whose activities consist of investment in its wholly-owned subsidiaries. The principal operating subsidiary of the Company is Cardinal Bank (the “Bank”), a state-chartered institution. On July 7, 2004, the Bank acquired George Mason Mortgage, LLC (“George Mason”), a mortgage banking company based in Fairfax, Virginia. On June 9, 2005, the Company acquired Wilson/Bennett Capital Management, Inc. (“Wilson/Bennett”), an asset management firm. The Company also owns Cardinal Wealth Services, Inc. (“CWS”), an investment services subsidiary. On February 9, 2006, the Bank acquired certain fiduciary and other assets and assumed certain liabilities of FBR National Trust Company, formerly a subsidiary of Friedman, Billings, Ramsey Group, Inc.

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, 2007 are not necessarily indicative of the results to be expected for the full year ending December 31, 2007. 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, 2006.

Note 2

Summary of Significant Accounting Policies

Investment Securities Held for Trading

During the first quarter of 2007, the Company established a new investment securities category, investment securities held for trading. Investment securities held for trading are those securities for which the Company has purchased and holds for the purpose of selling in the near future.

Investment securities held for trading are carried at estimated fair value. Unrealized market value adjustments, fees, and realized gains or losses, net of applicable tax, on trading securities are reported in non-interest income.  Interest income on trading securities is included in interest income from investment securities within the consolidated statements of income.

8

Note 3

Stock-Based Compensation

At September 30, 2007, the Company had two stock-based employee compensation plans, the 1999 Stock Option Plan (the “Option Plan”) and the 2002 Equity Compensation Plan (the “Equity Plan”).

In 1998, the Company adopted the Option Plan pursuant to which the Company may grant stock options for up to 625,000 shares of the Company’s common stock to employees and members of the Company’s and its subsidiaries’ boards of directors. There were 16,371 shares of the Company’s common stock available for future grants in the Option Plan as of September 30, 2007.

In 2002, the Company adopted the Equity Plan. The Equity Plan authorizes the granting and award of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, phantom stock awards and performance share awards to directors, eligible officers and key employees of the Company.  The Equity Plan currently authorizes grants and awards with respect to 2,420,000 shares of the Company’s common stock.  There were 263,258 shares of the Company’s common stock available for future grants and awards in the Equity Plan as of September 30, 2007.

Stock options are granted with an exercise price equal to the common stock’s fair market value at the date of grant. Director stock options have ten year terms and vest and become fully exercisable at the grant date. Certain employee stock options have ten year terms and vest and become fully exercisable after three years. Other employee stock options have ten year terms and vest and become fully exercisable in 20% increments beginning as of the grant date. In addition, the Company has granted stock options to employees of the Company that have ten year terms and vest and become fully exercisable in 20% increments beginning after their first year of service. During 2005, certain stock options granted to employees had ten year terms and vested and became fully exercisable immediately.

The Company has only made awards of stock options under the Option Plan and the Equity Plan.

Total expense related to the Company’s share-based compensation plans for the three months ended September 30, 2007 and 2006 was $77,000 and $103,000, respectively. Total expense related to the Company’s share-based compensation plans for the nine months ended September 30, 2007 and 2006 was $256,000 and $250,000, respectively.  The total income tax benefit recognized in the income statement for share-based compensation arrangements was $27,000 and $36,000 for the three months ended September 30, 2007 and 2006, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $90,000 and $88,000 for the nine months ended September 30, 2007 and 2006, respectively.

There were no options granted during the three months ended September 30, 2007. The weighted average per share fair values of stock option grants made during the three months ended September 30, 2006 was $5.38.  The weighted average per share fair values of stock option grants made during the nine months ended September 30, 2007 and 2006 were $4.89 and $5.71, 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		Nine Months Ended
	September 30,		September 30,
	2006		2007		2006
Estimated option life	6.5 years		6.5 years		6.5 years
Risk free interest rate	4.69 — 5.02	%	4.81	%	4.44 — 5.03	%
Expected volatility	43.20	%	42.10	%	43.20	%
Expected dividend yield	0.50	%	0.40	%	0.50	%

9

Expected volatility is based upon the average annual historical volatility of the Company’s common stock. The estimated option life is derived from the “simplified method” formula as described in Staff Accounting Bulletin No. 107. The risk free interest rate is based upon the five-year U.S. Treasury Note rate in effect at the time of grant.  The expected dividend yield is based upon implied and historical dividend declarations.

Stock option activity during the nine months ended September 30, 2007 is summarized as follows:

					Weighted
			Weighted		Average	Aggregate
			Average		Remaining	Intrinsic
	Number of		Exercise		Contractual	Value
	Shares		Price		Term (Years)	($000)
Outstanding at December 31, 2006	2,419,274		$	8.70
Granted	500		10.18
Exercised	(18,946	)	5.31
Forfeited	(17,075	)	10.13
Outstanding at September 30, 2007	2,383,753		$	8.71	6.88	$	3,057
Options exercisable at September 30, 2007	2,137,675		$	8.39	6.71	$	3,428

Total intrinsic values of options exercised during the three months ended September 30, 2007 and 2006 were $12,000 and $5,000, respectively. Total intrinsic values of options exercised during the nine months ended September 30, 2007 and 2006 were $89,000 and $124,000, respectively.

A summary of the status of the Company’s non-vested stock options and changes during the nine months ended September 30, 2007 is as follows:

			Weighted
			Average
	Number of		Grant Date
	Shares		Fair Value
Balance at December 31, 2006	410,606		$	4.63
Granted	500		4.89
Vested	(158,828	)	3.42
Forfeited	(6,200	)	4.48
Balance at September 30, 2007	246,078		$	5.42

At September 30, 2007, there were $1.5 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. The cost is expected to be recognized over a weighted average period of 3.4 years. The total fair value of shares that vested during the three months ended September 30, 2007 and 2006 were $53,000 and $10,000, respectively. The total fair value of shares that vested during the nine months ended September 30, 2007 and 2006 were $578,000 and $368,000, respectively.

10

Note 4

Segment Information

The Company operates in three business segments: Commercial Banking, Mortgage Banking, and Wealth Management and Trust Services.

The Commercial Banking segment includes both commercial and consumer lending and provides customers with such products as commercial loans, real estate loans, business financing and consumer loans. In addition, this segment 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 Wealth Management and Trust Services segment provides investment and financial advisory services to businesses and individuals, including financial planning, retirement/estate planning, trust, estates, custody, investment management, escrows, and retirement plans.

Results related to the assets acquired, and liabilities assumed, from FBR National Trust Company are reflected in the Wealth Management and Trust Services segment since the date of their acquisition and assumption, February 9, 2006.

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, 2007 and 2006 is as follows:

11

At and for the Three Months Ended September 30, 2007 (in thousands):

					Wealth Management
	Commercial		Mortgage		and						Intersegment
	Banking		Banking		Trust Services			Other			Elimination			Consolidated
Net interest income	$	9,969	$	767	$	—		$	(403	)	$	—		$	10,333
Provision for loan losses	915		—		—			—			—			915
Non-interest income	1,029		2,601		1,101			12			—			4,743
Non-interest expense	7,533		2,697		4,363			876			—			15,469
Provision for income taxes	715		242		(1,222		)	(437		)	—			(702		)
Net income (loss)	$	1,835	$	429	$	(2,040	)	$	(830	)	$	—		$	(606	)
Total Assets	$	1,641,766	$	163,896	$	4,152		$	173,607		$	(305,821	)	$	1,677,600
Average Assets	$	1,650,498	$	239,395	$	4,247		$	173,802		$	(408,502	)	$	1,659,440

At and for the Three Months Ended September 30, 2006 (in thousands):

					Wealth Management
	Commercial		Mortgage		and						Intersegment
	Banking		Banking		Trust Services			Other			Elimination			Consolidated
Net interest income	$	9,565	$	1,126	$	—		$	(271	)	$	—		$	10,420
Provision for loan losses	230		—		—			—			—			230
Non-interest income	759		3,341		849			13			—			4,962
Non-interest expense	6,972		3,615		3,912			546			—			15,045
Provision for income taxes	893		305		(1,093		)	(253		)	—			(148		)
Net income (loss)	$	2,229	$	547	$	(1,970	)	$	(551	)	$	—		$	255
Total Assets	$	1,481,653	$	273,126	$	5,501		$	160,511		$	(371,646	)	$	1,549,145
Average Assets	$	1,470,211	$	276,383	$	7,602		$	158,898		$	(424,252	)	$	1,488,842

At and for the Nine Months Ended September 30, 2007 (in thousands):

					Wealth Management
	Commercial		Mortgage		and						Intersegment
	Banking		Banking		Trust Services			Other			Elimination			Consolidated
Net interest income	$	29,055	$	2,319	$	—		$	(973	)	$	—		$	30,401
Provision for loan losses	1,670		—		—			—			—			1,670
Non-interest income	3,052		9,036		3,236			37			—			15,361
Non-interest expense	22,693		9,045		6,267			2,135			—			40,140
Provision for income taxes	2,365		828		(1,283		)	(1,059		)	—			851
Net income (loss)	$	5,379	$	1,482	$	(1,748	)	$	(2,012	)	$	—		$	3,101
Total Assets	$	1,641,766	$	163,896	$	4,152		$	173,607		$	(305,821	)	$	1,677,600
Average Assets	$	1,628,777	$	265,305	$	4,680		$	169,925		$	(428,502	)	$	1,640,185

At and for the Nine Months Ended September 30, 2006 (in thousands):

					Wealth Management
	Commercial		Mortgage		and						Intersegment
	Banking		Banking		Trust Services			Other			Elimination			Consolidated
Net interest income	$	28,921	$	3,405	$	—		$	(800	)	$	—		$	31,526
Provision for loan losses	870		—		—			—			—			870
Non-interest income	2,527		10,618		2,487			34			—			15,666
Non-interest expense	20,077		11,604		5,543			1,701			—			38,925
Provision for income taxes	3,290		853		(1,071		)	(863		)	—			2,209
Net income (loss)	$	7,211	$	1,566	$	(1,985	)	$	(1,604	)	$	—		$	5,188
Total Assets	$	1,481,653	$	273,126	$	5,501		$	160,511		$	(371,646	)	$	1,549,145
Average Assets	$	1,417,778	$	268,592	$	7,397		$	159,849		$	(421,208	)	$	1,432,408

At September 30, 2007, the Company did not have any operating segments other than those reported. Parent company financial information is included in the “Other” category and represents

12

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 expense 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 5

Earnings Per Share

The following is the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2007 and 2006. 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 81,359 and 2,971 for the three months ended September 30, 2007 and 2006, 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 54,887 and none for the nine months ended September 30, 2007 and 2006, respectively.

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(In thousands, except per share data)	2007			2006		2007		2006
Net income available to common shareholders	$	(606	)	$	255	$	3,101	$	5,188
Weighted average common shares — basic	24,253			24,431		24,424		24,411
Weighted average common shares — diluted	24,253			24,917		24,900		24,971
Earnings per common share — basic	$	(0.02	)	$	0.01	$	0.13	$	0.21
Earnings per common share — diluted	$	(0.02	)	$	0.01	$	0.12	$	0.21

The following shows the calculation of diluted outstanding shares for the three and nine months ended September 30, 2007 and 2006:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(In thousands)	2007	2006	2007	2006
Weighted average shares outstanding — basic	24,253	24,431	24,424	24,411
Weighted average shares attributable to deferred compensation plans	—	185	210	175
Weighted average shares attributable to vested stock options	—	301	266	385
Incremental shares attributable to unvested stock options	—	—	—	—
Total weighted average shares — diluted	24,253	24,917	24,900	24,971

For the three months ended September 30, 2007, weighted average shares attributable to the deferred compensation plans and vested stock options were excluded from the diluted weighted

13

average shares calculation because they are antidilutive to the diluted earnings per share calculation due to the net loss recorded during the third quarter of 2007.

Note 6

Derivatives and Hedging Activities

The Company is a party to forward loan sales contracts, which are utilized to mitigate exposure to fluctuations in interest rates related to closed loans that are held for sale.

The Company designates these derivatives as cash flow hedges in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. These hedges are recorded at fair value in the statement of condition as an other asset or other liability with a corresponding offset to accumulated other comprehensive income in shareholders’ equity. Amounts are reclassified from accumulated other comprehensive income to the income statement in the period or periods that the loan sale is reflected in income.

At September 30, 2007, accumulated other comprehensive income included an after-tax unrealized loss of $394,000 related to forward loan sales contracts. Loans held for sale are generally sold within sixty days of closing and, therefore, substantially all of the amounts recorded in accumulated other comprehensive income at September 30, 2007 that is related to the Company’s cash flow hedges will be recognized in earnings during the fourth quarter of 2007. For the three and nine months ended September 30, 2007 and 2006, the hedge ineffectiveness recorded through earnings was immaterial.

At September 30, 2007, the derivative asset was $1.4 million and the derivative liability was $2.0 million. The Company had $95.1 million in loan commitments and $95.1 million in associated forward loan sales. The Company also had $106.9 million in forward loan sales contracts hedging the majority of its loans held for sale portfolio.

Note 7

Goodwill and Other Intangibles

Information concerning total amortizable other intangible assets at September 30, 2007 is as follows:

					Wealth Management
	Mortgage Banking				and Trust Services				Total
(In thousands)	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Balance at December 31, 2006	$	1,781	$	445	$	795	$	433	$	2,576	$	878
2007 activity:
Customer relationship intangibles	—		148		—		30		—		178
Trade name	—		—		—		12		—		12
Balance at September 30, 2007	$	1,781	$	593	$	795	$	475	$	2,576	$	1,068

14

The aggregate amortization expense for each of the three month periods ended September 30, 2007 and 2006 was $63,000. The aggregate amortization expense for the nine months ended September 30, 2007 and 2006 was $190,000 and $356,000, respectively.

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

	(In thousands)
2007 (October — December)	$	63
2008	245
2009	238
2010	238
2011	238
2012	238
Thereafter	248

The carrying amount of goodwill at September 30, 2007 was as follows:

					Wealth
					Management
	Commercial		Mortgage		and Trust
(In thousands)	Banking		Banking		Services		Total
Balance at December 31, 2006	$	22	$	12,941	$	2,832	$	15,795
2007 activity	—		—		—		—
Balance at September 30, 2007	$	22	$	12,941	$	2,832	$	15,795

Goodwill of each of the Company’s business segments is tested for impairment on an annual basis or more frequently if events or circumstances warrant. During the quarter ended September 30, 2007, the Company performed an evaluation of the goodwill associated with its acquisition of George Mason, and no impairment was indicated.

Note 8

Commitments and Contingencies

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates up to one year 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.

Commitments to extend credit represent obligations of the Company to extend credit or guarantee borrowings and are not recorded on the consolidated statements of financial condition.  The rates and terms of these instruments are competitive with others in the market in which the Company operates.  These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Credit risk is defined as the possibility of sustaining a loss because the other parties to a financial instrument fail to perform in accordance with the terms of the contract.  The Company’s maximum exposure to credit loss under commitments to extend credit is represented by

15

the contractual amounts of those instruments.  The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company evaluates each customer’s creditworthiness on a case-by-case basis and requires collateral to support financial instruments when deemed necessary. The amount of collateral obtained upon extension of credit 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.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of the contractual obligations by 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. The Company holds certificates of deposit, deposit accounts, real estate or other appropriate forms of collateral supporting those commitments when collateral is deemed necessary.  The majority of these guarantees extend until satisfactory completion of the customer’s contractual obligations.

At September 30, 2007, commitments to extend credit were $440.6 million and standby letters of credit were $10.1 million. The fair value of the liability associated with standby letters of credit at September 30, 2007 was immaterial.

George Mason maintains a reserve for loans sold that pay off earlier than the contractual agreed upon period, thereby requiring that George Mason refund part of the service release premium and/or premium pricing received from the investor.  The reserve as of September 30, 2007 was $47,000.

The Company has derivative counter-party risk that may arise from the possible inability of George Mason’s third party investors to meet the terms of their forward sales contracts.  George Mason works with third-party investors that are generally well-capitalized, are investment grade and exhibit strong financial performance to mitigate this risk.  The Company does not expect any third-party investor to fail to meet its obligation.

Note 9

Capital Resources

In October 2007, George Mason and the Bank cancelled its one year $150 million floating rate revolving credit and security agreement with a third party. The purpose of this credit facility was to fund residential mortgage loans made by George Mason prior to their sale into the secondary market. However, we determined that as a result of the limited use of this credit facility and the available liquidity at the Bank, this credit facility was no longer needed.  At September 30, 2007, none of this line was utilized.

In addition to this facility, this same lender had also provided a $100 million facility that was utilized by George Mason to warehouse residential mortgage loans held for sale to this lender. Again, this credit facility was cancelled in October 2007 as a result of the limited use by George Mason of this facility and the available liquidity at the Bank.

16

Note 10

New Accounting Pronouncement

The Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 (“FIN No. 48”), Accounting for Uncertainty in Income Taxes, on January 1, 2007.  This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement principles for financial statement disclosure of tax positions taken or expected to be taken on a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

As of September 30, 2007, the Company had no unrecognized tax benefits.  The Company also had no interest expense and/or tax penalties during the three and nine months ended September 30, 2007.  If the Company had such expenses, they would be classified in the consolidated statements of income as part of the provision for income tax expense.

Note 11

Loss on Escrow Arrangement

The Company’s financial results for the three and nine months ended September 30, 2007 reflect a loss of $3.5 million that arose from an escrow arrangement with Liberty Growth Fund, LP and AIMS Worldwide, Inc on July 25, 2007.   The Company served as the escrow agent in connection with an equity financing transaction between Liberty Growth Fund and AIMS Worldwide.

In that transaction, Liberty Growth Fund had agreed to purchase from AIMS Worldwide shares of its preferred stock for $3.85 million.  AIMS Worldwide would then use these proceeds to fund its acquisition of two other companies, Target America and Ikon Public Affairs Group, LLC.

As provided in the escrow agreement, Liberty Growth Fund delivered a check to the Company in the amount of $3.85 million on July 24, 2007.  On July 25, 2007, the Company released funds totaling $3.85 million to AIMS Worldwide and certain of its designated beneficiaries and shares of AIMS Worldwide’s preferred stock and warrants to an agent of Liberty Growth Fund.  The Company then learned that Liberty Growth Fund had previously stopped payment on its check.  Liberty Growth Fund issued another check in the same amount, but that check was dishonored for lack of sufficient funds.

Promptly following the Company’s release of funds, the Company attempted to retrieve the funds from the persons and entities who had received them.  The recipients of the funds, however, refused to return the funds.  The Company also made an unsuccessful demand on Liberty Growth Fund and Philip A. Seifert, the principal of Liberty Growth Fund, for performance of Liberty Growth Fund’s obligations under the escrow arrangement and the payment of the proper amount into escrow.

On August 9, 2007, the Company filed a complaint against defendants Philip A. Seifert and Liberty Growth Fund, LP in the Circuit Court of Fairfax County, Virginia.  The complaint sets forth several causes of action including actual fraud and claims associated with the stopped payment check and dishonored check tendered to the Company.  The complaint seeks to recover the entire amount of the Company’s loss, interest and costs and, under the fraud count, punitive damages and attorneys’ fees.  The defendants filed an answer acknowledging that Seifert, on behalf of Liberty Growth Fund, did stop payment on the check delivered to the Company on July 24, 2007.  The defendants’ answer also admitted that the account on which the check was drawn lacked sufficient funds to pay the amount of the check, and that the defendants knew that at the time the check was tendered to the Company.

17

On September 17, 2007, the Company amended its complaint to add a claim for constructive fraud and to seek the imposition of a constructive trust on the shares of AIMS Worldwide’s preferred stock and warrants that the Company had released.  Those shares and warrants are currently being held in escrow by the Company pending resolution of certain disputes in a separate interpleader proceeding involving Seifert and his spouse, to whom Seifert had purportedly delivered the securities at issue.  The Company is a party to that proceeding in order to seek the constructive trust.

The Company had previously disclosed that the maximum amount of its exposure in connection with the escrow arrangement was $3.85 million.  Since that time, however, the Company has recovered the $350,000 brokerage fee and certain AIMS Worldwide warrants from Lerota, LLC, the broker who represented Liberty Growth Fund in the transaction with AIMS Worldwide.  The Company understands that Lerota voluntarily returned the fee and the warrants because the financing transaction between AIMS Worldwide and Liberty Growth Fund was never completed, given Liberty Growth Fund’s failure to make the required payment.   In addition, the Company continues to hold in escrow additional shares of AIMS Worldwide’s preferred stock that may be issued in a potential second round of financing with Liberty Growth Fund.

The Company will continue to take all steps necessary to resolve this matter with Liberty Growth Fund and Seifert and all other appropriate parties in order to recover the total amount that it is due.  These steps include litigation and any remedies available to a federally insured institution.  The Company has turned to the federal and local law enforcement authorities for assistance in this matter.  The Company has also made a claim to its insurance company in order to recover any amounts that may be covered.  The final resolution of this situation will not be known for several months or longer.

18

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, 2007 and December 31, 2006 and the unaudited results of our operations for the three and nine months ended September 30, 2007 and 2006. This discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report and 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, 2006.

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 our 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;

•risks and uncertainties related to future trust operations;

•changes in the operations of Wilson/Bennett Capital Management, Inc., its customer base and assets under management and any associated impact on the fair value of goodwill in the future;

•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.

19

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 Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006.

Overview

We are a locally managed financial holding company headquartered in Tysons Corner, Virginia, committed to providing superior customer service, a diversified mix of financial products and services, and convenient banking to our retail and business customers. We own Cardinal Bank (the “Bank”), a Virginia state-chartered community bank, Cardinal Wealth Services, Inc. (“CWS”), an investment services subsidiary, and Wilson/Bennett Capital Management, Inc. (“Wilson/Bennett”), an asset management firm. Through these three subsidiaries and George Mason Mortgage, LLC (“George Mason”), a mortgage banking subsidiary of the 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 25 branch office locations and seven mortgage banking office locations and provide competitive 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 February 9, 2006, we acquired certain fiduciary and other assets and assumed certain liabilities of FBR National Trust Company, formerly a subsidiary of Friedman, Billings, Ramsey Group, Inc. Our trust division acts as trustee or custodian for assets in excess of $6.02 billion as of September 30, 2007. Services provided by this division include trust, estates, custody, investment management, escrows, and retirement plans. The trust division is included, along with CWS and Wilson/Bennett, in the Wealth Management and Trust Services segment. In prior periods, this segment was called Investment Services or Trust and Investment Services.

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 exposure 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 inherent risks in the banking industry, and we attempt to limit our exposure to these risks by carefully underwriting and then 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, which includes trust revenues, gains and losses on sales of investment securities available-for-sale, gains on sales of loans, and management fee income.

20

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, judgments 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, in fact, 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, accounting for business combinations and impairment testing of goodwill, accounting for the impairment of intangible assets, 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 and industry-specific economic conditions, actual and expected credit losses, historical trends and specific conditions of individual borrowers.  Unusual and infrequently occurring events, such as 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.

For purposes of our analysis, we categorize our loans into one of five categories:  commercial and industrial, commercial real estate (including construction), home equity lines of credit, residential mortgages, and consumer loans. In the absence of meaningful 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 typically apply, in accordance with regulatory guidelines, a 5% loss factor to loans classified as special mention, a 15% loss factor to loans classified as substandard and a 50% loss factor to loans classified as doubtful. Loans classified as loss loans are fully reserved or charged off.

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 any particular time 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 segments, as appropriate, and would negatively impact earnings.

21

Accounting for Economic Hedging Activities

We account for our derivatives and hedging activities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Certain Hedging Activities, as amended, which requires that all derivative instruments be recorded on the statement of condition at their fair values. We do not enter into derivative transactions for speculative purposes. For derivatives designated as hedges, we contemporaneously document the hedging relationship, including the risk management objective and strategy for undertaking the hedge, how effectiveness will be assessed at inception and at each reporting period and the method for measuring ineffectiveness.  We evaluate the effectiveness of these transactions at inception and on an ongoing basis.  Ineffectiveness is recorded through earnings.  For derivatives designated as cash flow hedges, the fair value adjustment is recorded as a component of other comprehensive income, except for the ineffective portion which is recorded in earnings.  For derivatives designated as fair value hedges, the fair value adjustments for both the hedged item and the hedging instrument are recorded through the income statement with any difference considered the ineffective portion of the hedge.

We discontinue hedge accounting prospectively when it is determined that the derivative is no longer highly effective. In situations in which cash flow hedge accounting is discontinued, we continue to carry the derivative at its fair value on the statements of condition and recognize any subsequent changes in fair value in earnings over the term of the forecasted transaction. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, we recognize immediately in earnings any gains and losses that were accumulated in other comprehensive income.

In the normal course of business, we enter into contractual commitments, including rate lock commitments, to finance residential mortgage loans. 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 residential mortgage loans intended to be sold are considered derivatives and are marked to market through earnings.

To mitigate the effect of the interest rate risk inherent in providing rate lock commitments, we economically hedge our commitments by entering into a best efforts delivery forward loan sales contracts. During the rate lock commitment period, these forward loan sales contracts are marked to market through earnings and are not designated as accounting hedges under SFAS No. 133, as amended. The fair values of loan commitments and the fair values of forward loan sales contracts generally move in opposite directions, and the net impact of changes of these valuations on net income during the loan commitment period is generally inconsequential. At the closing of the loan, the loan commitment derivative expires and we record a loan held for sale and continue to be obligated under the same forward loan sales contract. 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.

Accounting for Business Combinations and Impairment Testing of Goodwill

We account for acquisitions of other businesses in accordance with SFAS No. 141, Business Combinations. This statement mandates the use of purchase accounting and, accordingly, assets and liabilities, including previously unrecorded assets and liabilities, are recorded at fair values as of the acquisition date. We utilize a variety of valuation methods to estimate fair value of acquired assets and liabilities. These methodologies are often based upon

22

assumptions and estimates which may change at a future date and require that the carrying amount of assets and liabilities acquired be adjusted. To support our purchase allocations, we have utilized independent consultants to identify and value identifiable purchased intangibles. The difference between the fair value of assets acquired and the liabilities assumed is recorded as goodwill. Goodwill and other intangible assets are accounted for in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. In accordance with this statement, goodwill will not be amortized but will be tested on at least an annual basis for impairment.

To test goodwill for impairment, we perform an analysis to compare the fair value of the reporting unit to which the goodwill is assigned to the carrying value of the reporting unit. We make estimates of the discounted cash flows from the expected future operations of the reporting unit. If the analysis indicates that the fair value of the reporting unit is less than its carrying value, we do an analysis to compare the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of the goodwill is determined by allocating the fair value of the reporting unit to all its assets and liabilities. If the implied fair value of the goodwill is less than the carrying value, an impairment loss is recognized.

Accounting for the Impairment of Amortizing Intangible Assets and Other Long-Lived Assets

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we continually review our long-lived assets for impairment whenever events or changes in circumstances indicate that the remaining estimated useful life of such assets might warrant revision or that the balances may not be recoverable. We evaluate possible impairment by comparing estimated future cash flows, before interest expense and on an undiscounted basis, with the net book value of long-term assets, including amortizable intangible assets. If undiscounted cash flows are insufficient to recover assets, further analysis is performed in order to determine the amount of the impairment.

An impairment loss is then recorded for the excess of the carrying amount of the assets over their fair values. Fair value is usually determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved.

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 more likely than not to be recovered. Increases or decreases in the valuation allowance result in increases or decreases to the provision for income taxes.

New Financial Accounting Standards

On July 13, 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN No. 48”), Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and

23

measurement principles for financial statement disclosure of tax positions taken or expected to be taken on a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006. The adoption of FIN No. 48 did not have any impact on our consolidated financial position or results of operations.

                In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and expands disclosures about fair value measurements.  The statement clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date.  The statement emphasizes that fair value is a market-based measurement and not an entity-specific measurement.  It also establishes a fair value hierarchy used in fair value measurements and expands the required disclosures of assets and liabilities measured at fair value.  This standard is effective for fiscal years beginning after December 15, 2007.  The adoption of this standard is not expected to have a material impact on our consolidated financial position or results of operations.

                In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FAS 115.  SFAS No. 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value.  If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings.  SFAS No. 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  We are currently evaluating the requirements of this standard.

Statements of Income

General

For the three months ended September 30, 2007, we recorded a net loss of $606,000 compared to net income of $255,000 for the three months ended September 30, 2006, a decrease of $861,000.  The net loss for the three months ended September 30, 2007 compared to the net income reported in the same period of 2006 is primarily a result of the loss we recorded on the escrow arrangement with Liberty Growth Fund, LP and AIMS Worldwide, Inc. (see note 11 to the notes to the consolidated financial statements for more information pertaining to this transaction).  In addition, our results for the three months ended September 30, 2006 were negatively impacted by the impairment charges to the goodwill and certain other intangible assets related to our acquisition of Wilson/Bennett.  Excluding the loss on the escrow arrangement during 2007 and the impairment charges recorded in 2006, we would have recorded net income of $1.9 million and $2.2 million for the three months ended September 30, 2007 and 2006, respectively, a decrease of $242,000, or 11%.  A reconciliation of these non-GAAP financial measures to our GAAP financial information is presented in Table 1 below.

Net interest income after provision for loan losses decreased $772,000, or 8%, to $9.4 million for the three months ended September 30, 2007 compared to $10.2 million for the same period of 2006.  The decrease in net interest income after provision for loan losses is primarily a result of an increase in provision for loan losses to $915,000 for the three months ended September 30, 2007, compared to $230,000 for the three months ended September 30, 2006, an

24

increase of $685,000.  The increase in provision for loan losses during the third quarter of 2007 was due to a charge-off of a nonaccrual loan totaling $417,000 and an increase in the reserve for loan losses as a result of net new loan growth during the quarter totaling $44.9 million.  In addition, net interest income for the third quarter of 2007 decreased $87,000 to $10.3 million as compared to $10.4 million for the same period of 2006 due to increases in interest expense that was greater than the increases in interest income as discussed below.

Non-interest income decreased $219,000 to $4.7 million for the three months ended September 30, 2007 compared to $5.0 million for the same period of 2006.  The decrease in non-interest income was primarily a result of decreases in net gains on loan sales of $362,000 and management fee income of $354,000 for the third quarter of 2007 as compared to the same period of 2006, due to tightening credit conditions within the mortgage industry and the slowdown in the regional housing market.  These decreases were offset by an increase in investment fee income of $252,000 and an increase in the cash surrender value related to our bank-owned life insurance of $216,000 for the three months ended September 30, 2007 compared to the three months ended September 30, 2006.

Non-interest expense increased $424,000, or 3%, to $15.5 million for the three months ended September 30, 2007, compared to $15.0 million for the same period of 2006.  The increase in non-interest expense is primarily related to the aforementioned loss on the escrow arrangement recorded during the third quarter of 2007.  Excluding the loss on the escrow arrangement during 2007 and the impairment charges recorded during the third quarter of 2006, non-interest expense would have decreased $497,000 to $11.6 million during the third quarter of 2007 as compared to $12.1 million for the same period of 2006.  A reconciliation of these non-GAAP financial measures to our GAAP financial information is presented in Table 1 below.

Basic and diluted loss per common share was $(0.02) for the three months ended September 30, 2007.  Basic and diluted earnings per common share for the three months ended September 30, 2006 was $0.01.  Excluding the aforementioned nonrecurring expenses during the third quarter of 2007 and 2006, basic and diluted earnings per common share for each of the three months ended September 30, 2007 and 2006 would have been $0.08 and $0.09, respectively.  A reconciliation of these non-GAAP financial measures to our GAAP financial information is presented in Table 1 below.

Net income for the nine months ended September 30, 2007 and 2006 was $3.1 million and $5.2 million, respectively.  The net income for each of these periods was impacted by the aforementioned nonrecurring expenses totaling $3.8 million and $2.9 million for the year-to-date September 30, 2007 and 2006, respectively.  Excluding these nonrecurring expenses, net income for the nine months ended September 30, 2007 and 2006 would have been $5.6 million and $7.1 million, respectively.  A reconciliation of these non-GAAP financial measures to our GAAP financial information is presented in Table 1 below.

Net interest income after provision for loan losses was $28.7 million and $30.7 million for the nine months ended September 30, 2007 and 2006, respectively.  The decrease in net interest income after provision for loan losses was a result of a decrease in net interest income of $1.1 million due to increased interest expense over interest income as discussed in more detail below.  In addition, provision for loan losses increased $800,000 during the nine months ended September 30, 2007 as compared to the same period of 2006.  The increase in provision expense was related to the aforementioned loan charge-off of $417,000 recorded during the third quarter of 2007 and the increase in the reserve for loan losses as a result of our net new loan growth of $128.1 million for the year-to-date 2007.

25

Non-interest income for the nine months ended September 30, 2007 and 2006 was $15.4 million and $15.7 million, respectively, a decrease of $305,000 or 2%.  The decrease was primarily attributable to decreases in gains on sales of loans and management fee income of $596,000 and $766,000, respectively.  These decreases were offset by an increase in investment fee income of $750,000 and an increase in the cash surrender value of our bank-owned life insurance of $1.1 million.  Non-interest income for the nine months ended September 30, 2006 included gains from the extinguishment of two borrowings totaling $769,000.

Non-interest expense increased $1.2 million, or 3%, to $40.1 million for the nine months ended September 30, 2007, compared to $38.9 million for the same period of 2006.  The increase in non-interest expense is primarily related to the aforementioned loss on the escrow arrangement recorded during the third quarter of 2007.  Excluding the loss on the escrow arrangement during 2007 and the impairment charges recorded during the third quarter of 2006, non-interest expense would have increased $294,000 to $36.3 million during the year-to-date 2007 as compared to $36.0 million for the same period of 2006.  A reconciliation of these non-GAAP financial measures to our GAAP financial information is presented in Table 1 below.

Basic and diluted earnings per common share were $0.13 and $0.12, respectively, for the nine months ended September 30, 2007.  Basic and diluted earnings per common share for the nine months ended September 30, 2006 was $0.21.  Excluding the aforementioned nonrecurring expenses during the third quarter of 2007 and 2006, basic earnings per common share for the nine months ended September 30, 2007 and 2006 would have been $0.23 and $0.29, respectively, and diluted earnings per common share for the nine months ended September 30, 2007 and 2006, would have been $0.22 and $0.28, respectively.  A reconciliation of these non-GAAP financial measures to our GAAP financial information is presented in Table 1 below.

Return on average assets for the three months ended September 30, 2007 and 2006 was (0.15)% and 0.07%, respectively. Return on average assets for the nine months ended September 30, 2007 and 2006 was 0.25% and 0.48%, respectively.  Return on average equity for the three months ended September 30, 2007 and 2006 was (1.54)% and 0.67%, respectively. Return on average equity for the nine months ended September 30, 2007 and 2006 was 2.63% and 4.58%, respectively.

Net income attributable to the Commercial Banking segment for the three months ended September 30, 2007 and 2006 was $1.8 million and $2.2 million, respectively.  For the nine months ended September 30, 2007 and 2006, net income attributable to the Commercial Banking segment was $5.4 million and $7.2 million, respectively.  The decreases in net income for the three and nine months ended September 30, 2007 compared to the same periods of 2006 in the Commercial Banking segment is primarily attributable to an increase in non-interest expense related to the additional branch offices opened over the past twelve months and an increase in our FDIC insurance premiums due to the change in the assessment calculations as a result of the deposit insurance reform implemented during 2007 by the FDIC.

Net income attributable to the Mortgage Banking segment for the three months ended September 30, 2007 and 2006 was $429,000 and $547,000, respectively.  For the nine months ended September 30, 2007 and 2006, net income attributable to the Mortgage Banking segment was $1.5 million and $1.6 million, respectively.  The decrease in net income for the three and nine months ended September 30, 2007 compared to the same periods of 2006 was primarily attributable to decreases in net interest income and non-interest income due to decreased loan sale volume when comparing the periods.

26

The Wealth Management and Trust Services segment, which includes CWS, Wilson/Bennett and the trust division of the Bank, recorded a net loss of $2.0 million for each of the three month periods ended September 30, 2007 and 2006.  For the nine months ended September 30, 2007 and 2006, this business segment recorded a net loss of $1.7 million and $2.0 million, respectively.  The losses recorded in the Wealth Management and Trust Services segment are directly related to the loss on the escrow arrangement recorded during the third quarter of 2007 and the impairment charges recorded during the third quarter of 2006.  Excluding these losses, this business segment would have recorded net income of $253,000 and a net loss of $67,000 for the three months ended September 30, 2007 and 2006, respectively.  For the nine months ended September 30, 2007 and 2006, the Wealth Management and Trust Services segment would have recorded net income of $545,000 and a net loss of $82,000, respectively, excluding the aforementioned losses.  The trust division of the Bank is included in the results of operations since the date of acquisition, February 9, 2006.  A reconciliation of these non-GAAP financial measures to our GAAP financial information is presented in Table 1 below.

We believe that, because the loss on the escrow arrangement during the third quarter of 2007 and the impairment charges recorded during the third quarter of 2006 were nonrecurring one-time charges to earnings, excluding these losses from our operating results supplements the GAAP financial information and provides more useful comparable measures of evaluating the operating results and any related trends that may be affecting our business.

27

Table 1.

Reconciliation of GAAP to Non-GAAP Financial Measures

For the Three and Nine Months Ended September 30, 2007 and 2006

(Dollars in thousands, except per share data)

	Three Months Ended											Nine Months Ended
	September 30,											September 30,
	2007						2006					2007						2006
GAAP reported non-interest expense	$		15,469				$	15,045				$	40,140					$	38,925
Less nonrecurring expenses, pretax
Loss related to escrow arrangement	3,500						—					3,500						—
Legal expenses related to escrow arrangement	349						—					349						—
Impairment of goodwill	—						960					—						960
Impairment of customer relationships intangible	—						1,455					—						1,455
Impairment of employment/non-compete agreement	—						513					—						513
Non-interest expense without nonrecurring expenses	$		11,620				$	12,117				$	36,291					$	35,997
GAAP reported net income	$	(606				)	$		255			$	3,101					$	5,188
Less nonrecurring expenses, after tax
Loss related to escrow arrangement	2,293						—					2,293						—
Legal expenses related to escrow arrangement	229						—					229						—
Impairment of goodwill	—						624					—						624
Impairment of customer relationships intangible	—						946					—						946
Impairment of employment/non-compete agreement	—						333					—						333
Net income without nonrecurring expenses	$		1,916				$		2,158			$		5,623				$		7,091
GAAP reported net income per common share, basic	$			(0.02		)	$		0.01			$		0.13				$	0.21
Less nonrecurring expenses, after tax:
Loss related to escrow arrangement	0.09						—					0.09						—
Legal expenses related to escrow arrangement	0.01						—					0.01						—
Impairment of goodwill	—						0.03					—						0.02
Impairment of customer relationships intangible	—						0.04					—						0.04
Impairment of employment/non-compete agreement	—						0.01					—						0.01
Earnings per common share without nonrecurring expenses - basic	$		0.08				$			0.09		$		0.23				$	0.29
GAAP reported net income per common share, fully diluted	$			(0.02		)	$		0.01			$			0.12			$	0.21
Less nonrecurring expenses, after tax:
Loss related to escrow arrangement	0.09						—					0.09						—
Legal expenses related to escrow arrangement	0.01						—					0.01						—
Impairment of goodwill	—						0.03					—						0.02
Impairment of customer relationships intangible	—						0.04					—						0.04
Impairment of employment/non-compete agreement	—						0.01					—						0.01
Earnings per common share without nonrecurring expenses - fully diluted	$				0.08		$			0.09		$			0.22			$	0.28
Wealth Management and Trust Services Business Segment
GAAP reported net income	$				(2,040	)	$		(1,970		)	$				(1,748	)	$	(1,985		)
Less nonrecurring expenses, after tax
Loss related to escrow arrangement	2,293						—					2,293						—
Impairment of goodwill	—						624					—						624
Impairment of customer relationships intangible	—						946					—						946
Impairment of employment/non-compete agreement	—						333					—						333
Net income without nonrecurring expenses	$				253		$	(67			)	$				545		$	(82		)

28

Net Interest Income

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, 2007 and 2006 was $10.3 million and $10.4 million, respectively, a period-to-period decrease of $87,000, or 0.8%. Net interest income for the nine months ended September 30, 2007 and 2006 was $30.4 million and $31.5 million, respectively.  The decrease in net interest income is primarily the result of a greater increase in our cost of interest-bearing liabilities than our increase in the yields earned for average earning assets.  We have certain loans and investment securities for which a portion of the income realized is tax-exempt.  Net interest income on a tax equivalent basis for the three months ended September 30, 2007 and 2006 was $10.4 million and $10.5 million, respectively.  For the nine months ended September 30, 2007 and 2006, net interest income on a tax equivalent basis was $30.7 million and $31.6 million, respectively.

Our net interest margin, which equals net interest income divided by average earning assets, was 2.65% and 2.93%, respectively, for the three months ended September 30, 2007 and 2006. For the nine months ended September 30, 2007 and 2006, our net interest margin was 2.63% and 3.05%, respectively.  The decrease in the net interest margin for the three and nine months ended September 30, 2007 compared to the same periods of 2006 is a result of the higher increase in the cost of interest-bearing liabilities than the increase in yields earned for average earning assets.  Tables 2 through 5 present an analysis of average earning assets and interest-bearing liabilities with related components of interest income and interest expense on a tax equivalent basis.

Table 2.

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

Three Months Ended September 30, 2007, 2006 and 2005

(In thousands)

	2007							2006							2005
				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	$	108,266		$	2,132	7.88	%	$	86,592		$	1,649	7.62	%	$	67,519		$	1,089	6.45	%
Real estate - commercial	385,432			6,556		6.80		294,680			4,881		6.63		277,487			4,466		6.44
Real estate - construction	171,846			3,639		8.47		146,803			3,214		8.76		65,414			1,189		7.27
Real estate - residential	200,792			2,749		5.48		173,942			2,315		5.32		130,390			1,607		4.93
Home equity lines	72,365			1,323		7.25		71,888			1,339		7.45		68,624			927		5.36
Consumer	8,222			165		7.96		5,008			97		7.75		4,760			87		7.31
Total loans	946,923			16,564		7.00		778,913			13,495		6.93		614,194			9,365		6.10
Loans held for sale, net	233,646			4,256		7.29		275,885			5,193		7.53		468,808			6,101		5.21
Investment securities - trading	—			—		0.00		—			—		0.00		—			—		0.00
Investment securities - available-for-sale	293,554			3,696		5.04		243,259			2,891		4.75		149,207			1,414		3.79
Investment securities held-to-maturity	85,850			896		4.17		104,768			1,079		4.12		124,632			1,197		3.84
Other investments	10,944			166		6.05		5,584			84		6.03		6,718			56		3.31
Federal funds sold	5,003			71		5.69		15,219			181		4.71		23,863			208		3.46
Total interest-earning assets and interest income (2)	1,575,920			25,649		6.51		1,423,628			22,923		6.44		1,387,422			18,341		5.29
Non-interest earning assets:
Cash and due from banks	5,659							4,966							13,963
Premises and equipment, net	19,347							20,528							17,525
Goodwill and other intangibles, net	17,341							20,425							20,649
Accrued interest and other assets	51,685							28,265							21,119
Allowance for loan losses	(10,512		)					(8,970		)					(7,378		)
Total assets	$	1,659,440						$	1,488,842						$	1,453,300
Liabilities and Shareholders' Equity
Interest - bearing liabilities:
Interest - bearing deposits:
Interest checking	117,665			904		3.05	%	134,293			976		2.91	%	109,030			316		1.15	%
Money markets	53,155			345		2.58		89,179			517		2.32		223,210			1,570		2.81
Statement savings	359,379			4,226		4.66		232,930			2,802		4.78		9,979			29		1.14
Certificates of deposit	498,113			5,903		4.70		584,089			6,383		4.37		555,193			4,867		3.51
Total interest - bearing deposits	1,028,312			11,378		4.39		1,040,491			10,678		4.07		897,412			6,782		3.00
Other borrowed funds	319,767			3,834		4.76		154,047			1,768		4.55		258,735			1,448		2.22
Total interest-bearing liabilities and interest expense	1,348,079			15,212		4.48		1,194,538			12,446		4.13		1,156,147			8,230		2.82
Noninterest-bearing liabilities:
Demand deposits	123,178							119,448							124,553
Other liabilities	31,216							22,658							25,202
Common shareholders' equity	156,967							152,198							147,398
Total liabilities and shareholders' equity	$	1,659,440						$	1,488,842						$	1,453,300
Net interest income and net interest margin (2)				$	10,437	2.65	%				$	10,477	2.93	%	$	10,111				2.92	%

(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) Interest income for loans receivable, investment securities available-for-sale and fed funds sold (which includes investments in money market preferred stock) is reported on a fully taxable-equivalent basis at a rate of 35%.

29

Table 3.

Rate and Volume Analysis

Three Months Ended September 30, 2007, 2006 and 2005

(In thousands)

	2007 Compared to 2006										2006 Compared to 2005
	Change Due to										Change Due to
	Average			Average				Increase			Average			Average			Increase
	Volume (3)			Rate				(Decrease)			Volume (3)			Rate			(Decrease)
Interest income:
Loans (1):
Commercial and industrial	$	413		$		70		$	483		$	308		$	252		$	560
Real estate - commercial	1,503			172				1,675			277			138			415
Real estate - construction	548			(123			)	425			1,479			546			2,025
Real estate - residential	357			77				434			537			171			708
Home equity lines	20			(36			)	(16		)	44			368			412
Consumer	64			4				68			5			5			10
Total loans	2,905			164				3,069			2,650			1,480			4,130
Loans held for sale, net	(795		)	(142			)	(937		)	(2,511		)	1,603			(908		)
Investment securities - trading	—			—				—			—			—			—
Investment securities - available-for-sale	598			207				805			891			586			1,477
Investment securities held-to-maturity	(195		)	12				(183		)	(191		)	73			(118		)
Other investments	81			1				82			(9		)	37			28
Federal funds sold	(122		)	12				(110		)	(75		)	48			(27		)
Total interest income (2)	2,472			254				2,726			755			3,827			4,582
Interest expense:
Interest - bearing deposits:
Interest checking	(114		)	42				(72		)	73			587			660
Money markets	(206		)	34				(172		)	(942		)	(111		)	(1,053		)
Statement savings	1,539			(115			)	1,424			641			2,132			2,773
Certificates of deposit	(895		)	415				(480		)	255			1,261			1,516
Total interest - bearing deposits	324			376				700			27			3,869			3,896
Other borrowed funds	1,900			166				2,066			(586		)	906			320
Total interest expense	2,224			542				2,766			(559		)	4,775			4,216
Net interest income (2)	$	248		$	(288		)	$	(40	)	$	1,314		$	(948	)	$	366

(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) Interest income for loans receivable, investment securities available-for-sale and fed funds sold (which includes investments in money market preferred stock) is reported on a fully taxable-equivalent basis at a rate of 35%.

(3) Changes attributable to rate/volume have been allocated to volume.

30

Table 4.

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

Nine Months Ended September 30, 2007, 2006 and 2005

(In thousands)

	2007						2006					2005
			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	$106,764		$6,143	7.67	%	$80,964			$4,409	7.26	%	$65,077		$2,898	5.94	%
Real estate - commercial	354,731		17,815	6.70		281,599			13,940	6.60		249,501		11,738	6.27
Real estate - construction	164,295		10,393	8.43		138,066			8,596	8.30		67,582		3,451	6.81
Real estate - residential	199,342		8,156	5.46		166,637			6,470	5.18		108,084		4,201	5.18
Home equity lines	66,832		3,674	7.35		75,146			3,831	6.80		64,884		2,418	4.98
Consumer	7,020		424	8.08		4,825			276	7.63		5,195		273	7.03
Total loans	898,984		46,605	6.91		747,237			37,522	6.70		560,323		24,979	5.94
Loans held for sale, net	261,505		13,954	7.11		264,994			14,746	7.42		382,603		14,117	4.92
Investment securities - trading	15		1	4.61		—			—	0.00		—		—	0.00
Investment securities - available-for-sale	264,249		9,748	4.92		222,847			7,633	4.57		154,356		4,376	3.78
Investment securities held-to-maturity	91,343		2,858	4.17		108,927			3,306	4.05		130,479		3,757	3.84
Other investments	9,893		442	5.96		6,152			262	5.67		6,141		183	3.97
Federal funds sold	31,244		1,235	5.28		26,887			915	4.55		15,148		346	3.06
Total interest-earning assets and interest income (2)	1,557,233		74,843	6.41		1,377,044			64,384	6.23		1,249,050		47,758	5.10
Non-interest earning assets:
Cash and due from banks	7,297					6,766						8,906
Premises and equipment, net	19,835					19,560						17,288
Goodwill and other intangibles, net	17,403					20,514						17,613
Accrued interest and other assets	48,513					17,201						13,557
Allowance for loan losses	(10,096	)				(8,677		)				(6,643	)
Total assets	$1,640,185					$1,432,408						$1,299,771
Liabilities and Shareholders' Equity
Interest - bearing liabilities:
Interest - bearing deposits:
Interest checking	124,155		2,738	2.95	%	139,949			2,875	2.74	%	123,055		1,106	1.20	%
Money markets	57,531		1,076	2.50		133,062			2,480	2.49		144,187		2,852	2.64
Statement savings	357,343		12,641	4.73		107,484			3,703	4.59		9,279		75	1.09
Certificates of deposit	531,418		18,733	4.71		607,555			18,547	4.08		543,859		12,956	3.19
Total interest - bearing deposits	1,070,447		35,188	4.39		988,050			27,605	3.74		820,380		16,989	2.77
Other borrowed funds	264,551		8,949	4.52		157,372			5,145	4.37		223,562		3,711	2.22
Total interest-bearing liabilities and interest expense	1,334,998		44,137	4.42		1,145,422			32,750	3.82		1,043,942		20,700	2.65
Noninterest-bearing liabilities:
Demand deposits	123,621					114,889						113,634
Other liabilities	24,196					21,156						20,195
Common shareholders' equity	157,370					150,941						122,000
Total liabilities and shareholders' equity	$1,640,185					$1,432,408						$1,299,771
Net interest income and net interest margin (2)			$30,706	2.63	%				$31,634	3.05	%			$27,058	2.89	%

(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) Interest income for loans receivable, investment securities available-for-sale and fed funds sold (which includes investments in money market preferred stock) is reported on a fully taxable-equivalent basis at a rate of 35%.

31

Table 5.

Rate and Volume Analysis

Nine Months Ended September 30, 2007, 2006 and 2005

(In thousands)

	2007 Compared to 2006									2006 Compared to 2005
	Change Due to									Change Due to
	Average			Average			Increase			Average				Average			Increase
	Volume (3)			Rate			(Decrease)			Volume (3)				Rate			(Decrease)
Interest income:
Loans (1):
Commercial and industrial	$	1,405		$	329		$	1,734		$		709		$	802		$	1,511
Real estate - commercial	3,620			255			3,875			1,504				698			2,202
Real estate - construction	1,633			164			1,797			3,601				1,544			5,145
Real estate - residential	1,270			416			1,686			2,273				(4		)	2,269
Home equity lines	(433		)	276			(157		)	382				1,031			1,413
Consumer	124			24			148			(19			)	22			3
Total loans	7,619			1,464			9,083			8,450				4,093			12,543
Loans held for sale, net	(194		)	(598		)	(792		)	(4,339			)	4,968			629
Investment securities - trading	1			—			1			—				—			—
Investment securities - available-for-sale	1,418			697			2,115			1,942				1,315			3,257
Investment securities held-to-maturity	(534		)	86			(448		)	(620			)	169			(451		)
Other investments	159			21			180			0				79			79
Federal funds sold	148			172			320			270				299			569
Total interest income (2)	8,617			1,842			10,459			5,703				10,923			16,626
Interest expense:
Interest - bearing deposits:
Interest checking	(334		)	197			(137		)	152				1,617			1,769
Money markets	(1,408		)	4			(1,404		)	(220			)	(152		)	(372		)
Statement savings	8,555			383			8,938			801				2,827			3,628
Certificates of deposit	(2,324		)	2,510			186			1,520				4,071			5,591
Total interest - bearing deposits	4,489			3,094			7,583			2,253				8,363			10,616
Other borrowed funds	3,504			300			3,804			(1,099			)	2,533			1,434
Total interest expense	7,993			3,394			11,387			1,154				10,896			12,050
Net interest income (2)	$	624		$	(1,552	)	$	(928	)	$	4,549			$	27		$	4,576

(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 years presented.

(2) Interest income for loans receivable, investment securities available-for-sale and fed funds sold (which includes investments in money market preferred stock is reported on a fully taxable-equivalent basis at a rate of 35%.

(3) Changes attributable to rate/volume have been allocated to volume.

32

Provision for Loan Losses

The provision for loan losses for the three months ended September 30, 2007 and 2006 was $915,000 and $230,000, respectively. For the nine months ended September 30, 2007 and 2006, the provision for loan losses was $1.7 million and $870,000, respectively.  The increase in provision expense for the three and nine months ended September 30, 2007 compared to the same periods of 2006 is primarily the result our charging-off one nonaccrual loan totaling $417,000 and net new loan growth in addition to our evaluation of the credit quality in our loan portfolio and the qualitative factors we use to determine the adequacy of our loan loss reserves as described above in “Critical Accounting Policies—Allowance for Loan Losses.” The allowance for loan losses at September 30, 2007 and December 31, 2006 was $10.9 million and $9.6 million, respectively. Our allowance for loan losses ratio to loans receivable, net was 1.12% and 1.14% at September 30, 2007 and December 31, 2006, respectively. Non-performing loans were equal to 0.01% total loans receivable for each of September 30, 2007 and December 31, 2006, respectively.

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 6, 7 and 8.

Table 6.

Allowance for Loan Losses

Nine Months Ended September 30, 2007 and 2006

(In thousands)

	2007			2006
Beginning balance, January 1,	$	9,638		$	8,301
Provision for loan losses	1,670			870
Loans charged off:
Commercial and industrial	(448		)	(42		)
Consumer	(3		)	(1		)
Total loans charged off	(451		)	(43		)
Recoveries:
Commercial and industrial	—			77
Consumer	—			—
Total recoveries	—			77
Net (charge offs) recoveries	(451		)	34
Ending balance, September 30,	$	10,857		$	9,205

	September 30,			December 31,
Loans:	2007			2006
Balance at period end	$	973,518		$	845,449
Allowance for loan losses to loans receivable, net of fees	1.12		%	1.14		%
Annualized net charge-offs to average loans receivable	0.07		%	0.00		%

Table 7.

Allocation of the Allowance for Loan Losses

At September 30, 2007 and December 31, 2006

(In thousands)

	September 30, 2007				December 31, 2006
	Allocation		% of Total*		Allocation		% of Total*
Commercial and industrial	$	1,573	10.99	%	$	1,670	12.09	%
Real estate —commercial	4,882		40.91		3,687		37.50
Real estate — construction	2,144		18.43		1,764		18.27
Real estate — residential	1,361		21.12		2,025		23.80
Home equity lines	713		7.71		384		7.75
Consumer	184		0.84		108		0.59
Total allowance for loan losses	$	10,857	100.00	%	$	9,638	100.00	%

* Percentage of loan type to the total loan portfolio.

33

Table 8.

Nonperforming Loans Receivable

At September 30, 2007 and December 31, 2006

(In thousands)

	September 30, 2007		December 31, 2006
Nonaccruing loans	$	86	$	82
Loans contractually past-due
90 days or more and still accruing	—		—
Total nonperforming loans receivable	$	86	$	82

Non-Interest Income

Non-interest income includes, among other things, service charges on deposits and loans, gains on the sale of mortgage loans, investment fee income, and management fee income, and continues to be an important factor in our operating results. Non-interest income for the three months ended September 30, 2007 and 2006 was $4.7 million and $5.0 million, respectively, a decrease of $219,000, or 4%. For the nine months ended September 30, 2007 and 2006, non-interest income was $15.4 million and $15.7 million, respectively.  Net gains on sales of loans held for sale by George Mason for the three months ended September 30, 2007 and 2006 were $2.1 million and $2.5 million, respectively, a decrease of $362,000, or 15%.  For the nine months ended September 30, 2007 and 2006, net gains on loans held for sale were $7.2 million and $7.8 million, respectively.  Included in the net gains on sales of loans held for sale 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.   Management fee income for the three months ended September 30, 2007 and 2006 was $229,000 and $583,000, respectively, a decrease of $354,000, or 61%. For the nine months ended September 30, 2007 and 2006, management fee income was $899,000 and $1.7 million, respectively.  The decrease in management fee income is directly related to the tightening credit conditions within the mortgage industry and the slowdown in the regional housing market.  Management fee income represents the income earned for services George Mason provides to other mortgage companies owned by local home builders and generally fluctuates based on the volume of loan originations and sales.

Service charges on deposit accounts increased $87,000 to $505,000 for the three months ended September 30, 2007 compared to $418,000 for the same period of 2006. For the year to date September 30, 2007, service charges on deposit accounts increased $296,000, or 25%, to $1.5 million from $1.2 million for the same period of 2006.  The increases in service charges on deposit accounts are primarily the result of an increased number of deposit accounts in 2007 compared to 2006. Loan service charge income decreased $21,000 to $365,000 for the three months ended September 30, 2007, compared to $386,000 for the same period of 2006.  For the nine months ended September 30, 2007 and 2006, loan service charge income was $1.2 million and

34

and $1.6 million, respectively, a decrease of $380,000 or 24%.  The decreases in loan service charge income for the three and nine months ended September 30, 2007 compared to the same periods of 2006 is related to a decrease in prepayment penalties incurred by the Bank’s loan customers and a decrease in service charges recorded in the mortgage banking segment, which is related to the slowdown in the regional housing market.

Investment fee income increased $252,000 to $1.1 million for the three months ended September 30, 2007 compared to $849,000 for the same period of 2006. For the nine months ended September 30, 2007, investment fee income increased $750,000 to $3.2 million from $2.5 million for the nine months ended September 30, 2006.  The increases in investment fee income are primarily attributable to the trust division whose operations are included for the full three and nine months ended September 30, 2007 as compared to eight of the nine months through September 30, 2006.

Non-interest income represented 31% and 32% of our total revenues for the three months ended September 30, 2007 and 2006, respectively.  For the nine months ended September 30, 2007 and 2006, non-interest income represented 34% and 33% of our total revenues, respectively.

Non-Interest Expense

Non-interest expense includes, among other things, salaries and benefits, occupancy costs, professional fees, depreciation, data processing, telecommunications and miscellaneous expenses. Non-interest expense for the three months ended September 30, 2007 was $15.5 million, compared to $15.0 million for the same period of 2006, an increase of $424,000, or 3%.  For the nine months ended September 30, 2007 and 2006, non-interest expense was $40.1 million and $38.9 million, respectively, an increase of $1.2 million, or 3%.  The increase in non-interest expense for the three and nine months ended September 30, 2007 compared to the same periods of September 30, 2006 was primarily attributable to the previously mentioned loss on the escrow arrangement and related legal fees totaling $3.8 million.   Excluding this loss and the impairment charges recorded during 2006, non-interest expense would have decreased $497,000 for the three months ended September 30, 2007 compared to third quarter results for 2006.  (See Table 1 for a reconciliation of non-GAAP financial measures to our GAAP financial information.)  This decrease is primarily due to a decrease in our salaries and benefits expense attributable to a decrease in the level of staffing and commission paid at our mortgage banking subsidiary.

Excluding the nonrecurring losses, non-interest expense would have increased by $294,000 for the nine months ended September 30, 2007 compared to the year-to-date 2006 results.  (See Table 1 for a reconciliation of non-GAAP financial measures to our GAAP financial information.)  Year-to-date non-interest expense has increased as a result of our branch office expansion during the past twelve months and an increase in our FDIC insurance premiums as a result of the deposit insurance reform implemented by the FDIC during 2007. In addition, non-interest expense related to our trust division, which we acquired in February 2006, are included for the full nine months period for 2007 along with additional investments made to this division over the past twelve months.

Income Taxes

For the three months ended September 30, 2007, we recorded an income tax benefit of $702,000, compared to an income tax benefit of $148,000 for the same period of 2006.  The benefits recorded during these reporting periods primarily resulted from the escrow arrangement loss recorded in the third quarter of 2007 and the impairment charges recorded during the third

35

quarter of 2006, each recorded with a tax benefit calculated at our statutory rate of 34.5% and 35% for the three months ended September 30, 2007 and 2006, respectively.  Our effective tax rate decreased in the third quarter of 2007 as compared to the same period of 2006 primarily as a result of our increase in tax-exempt investments over the past twelve months.

Provision for income tax expense for the nine months ended September 30, 2007 and 2006 was $851,000 and $2.2 million, respectively, a decrease of $1.4 million, or 61%.  For the nine months ended September 30, 2007 and 2006, our effective tax rate was 21.5% and 29.9%, respectively.  Each of these effective tax rates was impacted by the aforementioned tax benefits recorded at the applicable statutory rates in conjunction with the nonrecurring expenses reported in 2007 and 2006.  In addition, the effective tax rate decreased from 2006 to 2007 as a result of our adding tax-exempt investments during the second half of 2006 and continuing into 2007.  See also “Critical Accounting Policies — Valuation of Deferred Tax Assets.”

Statements of Condition

Total assets were $1.68 billion at September 30, 2007, compared to $1.64 billion at December 31, 2006, an increase of $39.2 million, or 2%. This growth was driven primarily by increases in loans receivable and investment securities portfolios, which were funded by growth in other borrowed funds. Total assets have decreased $100.3 million from September 30, 2007 as compared to June 30, 2007 primarily due to decreases in our loans held for sale portfolio and the funding which supported that portfolio.

Investment Securities

Investment securities were $426.3 million at September 30, 2007, compared to $329.3 million at December 31, 2006, an increase of $97.0 million, or 29%. The increase in investment securities was primarily a result of the additional liquidity we had as the volume of originations in our loans held for sale portfolio decreased due to the slowdown in the regional housing market.  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, 2007, investment securities available-for-sale were $343.5 million and investment securities held-to-maturity were $82.7 million. See Table 9 for additional information on our investment securities portfolio.

Investment securities with unrealized losses are investment grade securities.  Investment securities with unrealized losses have interest rates that are less than current market interest rates and, therefore, the indicated temporary losses are not a result of permanent credit impairment.  Mortgage-backed investment securities, which are the primary component of the unrealized losses in the investment securities portfolio at those dates, are primarily comprised of securities issued by the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage Association (GNMA).

Our investment portfolio consists primarily of securities backed or guaranteed by FNMA or FHLMC.  For all non government or agency securities, we complete reviews at least quarterly. As of September 30, 2007, our investment securities portfolio consists of all AAA rated securities.  Investment securities which carry a AAA rating are judged to be of the best quality and carry the smallest degree of investment risk.   We expect to receive full payment of interest and principal on the securities in the investment portfolio. The various protective elements on our non agency securities may change in the future if market conditions or the financial stability of credit insurers changes, which could impact the ratings of our securities.

36

Table 9.

Investment Securities

At September 30, 2007 and December 31, 2006

(In thousands)

	Amortized		Fair		Average
Available-for-sale at September 30, 2007	Cost		Value		Yield
U.S. government-sponsored agencies
One to five years	$	111,979	$	111,939	4.59	%
Five to ten years	45,660		46,098		6.03
Total U.S. government-sponsored agencies	157,639		158,037		5.01
Mortgage-backed securities*
One to five years	3,736		3,673		4.23
Five to ten years	11,846		11,599		3.85
After ten years	141,233		138,943		5.06
Total mortgage-backed securities	156,815		154,215		4.95
Municipal securities
After ten years	31,596		30,665		4.08
Total municipal securities	31,596		30,665		4.08
U. S. treasury securities
One to five years	598		600		5.06
Total U.S. treasury securities	598		600		5.06
Total investment securities available-for-sale	$	346,648	$	343,517	4.90	%

	Amortized		Fair		Average
Held-to-maturity at September 30, 2007	Cost		Value		Yield
U.S. government-sponsored agencies
One to five years	$	6,967	$	6,872	3.64	%
Five to ten years	11,012		10,912		4.50
After ten years	2,000		1,989		5.27
Total U.S. government-sponsored agencies	19,979		19,773		4.28
Mortgage-backed securities*
Five to ten years	6,357		6,234		4.18
After ten years	48,400		47,535		4.44
Total mortgage-backed securities	54,757		53,769		4.41
Corporate bonds
After ten years	8,004		7,884		4.21
Total corporate bonds	8,004		7,884		4.21
Total investment securities held-to-maturity	82,740		81,426		4.36
Total investment securities	$	429,388	$	424,943	4.79	%

37

	Amortized		Fair		Average
Available-for-sale at December 31, 2006	Cost		Value		Yield
U.S. government-sponsored agencies
One to five years	$	51,973	$	51,517	4.90	%
Five to ten years	15,520		15,480		5.72
Total U.S. government-sponsored agencies	67,493		66,997		5.09
Mortgage-backed securities*
One to five years	4,406		4,312		4.18
Five to ten years	10,599		10,291		3.76
After ten years	127,197		124,511		4.76
Total mortgage-backed securities	142,202		139,114		4.67
Municipal securities
After ten years	25,047		25,031		4.10
Total municipal securities	25,047		25,031		4.10
U. S. treasury securities
One to five years	489		489		5.14
Total U.S. treasury securities	489		489		5.14
Total investment securities available-for-sale	$	235,231	$	231,631	4.73	%

	Amortized		Fair		Average
Held-to-maturity at December 31, 2006	Cost		Value		Yield
U.S. government-sponsored agencies
One to five years	$	8,967	$	8,734	3.50	%
Five to ten years	13,018		12,777		4.44
After ten years	2,000		1,971		5.30
Total U.S. government-sponsored agencies	23,985		23,482		4.16
Mortgage-backed securities*
Five to ten years	6,702		6,544		4.21
After ten years	58,974		57,560		4.35
Total mortgage-backed securities	65,676		64,104		4.34
Corporate bonds
After ten years	8,004		7,864		4.21
Total corporate bonds	8,004		7,864		4.21
Total investment securities held-to-maturity	97,665		95,450		4.28
Total investment securities	$	332,896	$	327,081	4.60	%

* Based on contractual maturities

38

Loans

Loans receivable, net of deferred fees and costs, increased by $128.1 million, or 15%, to $973.5 million at September 30, 2007 from $845.4 million at December 31, 2006. See Table 10 for details on the loans receivable portfolio. We experienced growth in all of our loan types within our loan portfolio. We expect continued growth for the remainder of 2007 due to our increased legal lending limit of $23.4 million at September 30, 2007 and the volume of loans we have scheduled for funding.  In addition, we had $144.4 million in loans held for sale, net at September 30, 2007, compared to $338.7 million at December 31, 2006, a decrease of $194.3 million. Loans that are held for sale, net are valued at the lower of cost or market value. The decrease in loans held for sale at September 30, 2007 compared to December 31, 2006 is due to decreased loan origination volume as a result of the slowdown in the regional housing market and tightening credit conditions within the mortgage industry.

Table 10.

Loans Receivable

At September 30, 2007 and December 31, 2006

(In thousands)

	September 30, 2007					December 31, 2006
Commercial and industrial	$	107,059		10.99	%	$	102,284		12.09	%
Real estate - commercial	398,364			40.91		317,201			37.50
Real estate - construction	179,438			18.43		154,525			18.27
Real estate - residential	205,681			21.12		201,320			23.80
Home equity lines	75,098			7.71		65,557			7.75
Consumer	8,221			0.84		4,904			0.59
Gross loans	$	973,861		100.00	%	$	845,791		100.00	%
Net deferred (fees) costs	(343		)			(342		)
Less: allowance for loan losses	(10,857		)			(9,638		)
Loans receivable, net	$	962,661				$	835,811

Deposits

Total deposits were $1.14 billion at September 30, 2007 compared to $1.22 billion at December 31, 2006. We experienced increases in our non-interest bearing checking and savings products and decreases in our interest checking, money market and certificates of deposit products. The overall decrease in total deposits was primarily a result of losing high cost deposit balances to certain customers who were looking for increased yields on their funds.  As we saw our liquidity increase during the third quarter due to the large decrease in loans held for sale originations, we chose not to set premium tier pricing for our deposit products.  See Table 11 for details on certificates of deposit with balances of $100,000 or more. Our savings deposits continue to increase as a result of our Simply Savings product, which allows new customers to earn a yield of 4.51% on funds deposited with us.  We had brokered certificates of deposit of $10.0 million and $5.0 million at September 30, 2007 and December 31, 2006, respectively.

Table 11.

Certificates of Deposit of $100,000 or More

At September 30, 2007

(In thousands)

Maturities:	Fixed Term		No-Penalty*		Total
Three months or less	$	95,711	$	12,908	$	108,619
Over three months through six months	51,525		11,582		63,107
Over six months through twelve months	20,451		10,960		31,411
Over twelve months	19,446		435		19,881
	$	187,133	$	35,885	$	223,018

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

39

Borrowings

Other borrowed funds increased $127.8 million to $322.4 million at September 30, 2007, compared to $194.6 million at December 31, 2006. Treasury, Tax & Loan Note option borrowings increased $9.0 million to $14.0 million at September 30, 2007 compared to $5.0 million at December 31, 2006.  FHLB advances increased $76.9 million to $200.0 million at September 30, 2007 compared to $122.7 million at December 31, 2006. Customer repurchase agreements increased $11.4 million to $57.8 million at September 30, 2007 compared to $46.3 million at December 31, 2006.  In addition, we had federal funds purchased of $10.0 million at September 30, 2007 compared to none at December 31, 2006.  Broker dealer repurchase agreements were $20.5 million at September 30, 2007 compared to none at December 31, 2006.  The overall increase in our other borrowed funds was a result of the funding needed to support the growth in our loans receivable and investment securities portfolios during 2007.  Table 12 provides information on our borrowings.

Table 12.

Short-Term Borrowings and Other Borrowed Funds

At September 30, 2007

(In thousands)

Short-term FHLB advances:		Maturity or			Amount
Advance Date	Term of Advance	Call Date	Interest Rate		Outstanding
Dec-04	3 years	Dec-07	3.59	%	7,500
Sep-07	5 years	Mar-08	3.75		5,000
Apr-05	3 year	Apr-08	4.31		5,000
Apr-05	3 year	Apr-08	4.08		5,000
Jul-03	5 years	Jul-08	2.29		2,083
Total short-term FHLB advances and weighted average rate			3.76	%	$	24,583
Other short-term borrowed funds:
TT&L Note option			4.21	%	$	13,955
Customer repurchase agreements			2.92		57,751
Federal Funds Purchased			5.36		10,000
Broker dealer repurchase agreements			5.37		20,480
Total other short-term borrowed funds and weighted average rate			3.83	%	$	102,186
Other borrowed funds:
Trust preferred			7.88	%	$	20,619
FHLB advances - long term			4.37		175,000
Other borrowed funds and weighted average rate			4.74	%	$	195,619
Total other borrowed funds and weighted average rate			4.38	%	$	322,388

At September 30, 2007, mortgage funding checks decreased by $28.4 million to $17.8 million, compared to $46.2 million at December 31, 2006. These liabilities are related to George Mason and are used to fund the loans in process of being sold.

40

Shareholders’ Equity

Shareholders’ equity at September 30, 2007 was $156.1 million, an increase of $188,000, compared to $155.9 million at December 31, 2006. The increase in shareholders’ equity was a result of accumulated net income over the past nine months of 2007.  During the second quarter of 2007, we initiated our share repurchase plan and acquired 223,740 shares of our common stock for a cost of $2.2 million, which offset most of the increase seen in retained earnings.  Accumulated losses in other comprehensive income for the nine months ended September 30, 2007 were $2.4 million compared to $2.3 million at December 31, 2006.  Book value per share at September 30, 2007 was $6.43 compared to $6.37 at December 31, 2006. Tangible book value per share (which is book value per share adjusted for changes in other comprehensive income, less goodwill and other intangible assets) at September 30, 2007 was $5.82 compared to $5.75 at December 31, 2006.

Business Segment Operations

We provide banking and non-banking financial services and products through our subsidiaries. We operate in three business segments, commercial banking, mortgage banking and wealth management and trust services.

Commercial Banking

The Commercial Banking segment includes both commercial and consumer lending and provides customers such products as commercial loans, real estate loans, and other business financing and consumer loans. In addition, this segment also provides customers with various deposit products including demand deposit accounts, savings accounts and certificates of deposit.

For the three months ended September 30, 2007, the Commercial Banking segment recorded net income of $1.8 million compared to $2.2 million for the same period of 2006, a decrease of $394,000. For the nine months ended September 30, 2007, the Commercial Banking segment recorded net income of $5.4 million compared to $7.2 million for the same nine month period of 2006.  The decreases in net income are primarily related to decreases in net interest margin and increases in our provision for loan losses as a result of a charge-off of one nonaccrual loan totaling $417,000 during the third quarter of 2007 and the overall net new loan growth during 2007.  Provision for loan losses increased $685,000 to $915,000 for the three months ended September 30, 2007 compared to $230,000 for the three months ended September 30, 2006.  For the nine months ended September 30, 2007 and 2006, provision for loan losses was $1.7 million and $870,000, respectively.   In addition, non-interest expense has increased as a result of both the branch expansion that has occurred over the past twelve months and the increase in our FDIC insurance premiums resulting from the change in the assessment calculation as part of the deposit insurance reform during 2007.  At September 30, 2007, total assets for this segment were $1.64 billion, loans receivable, net of deferred fees and costs, were $973.5 million and total deposits were $1.14 billion. At September 30, 2006, total assets were $1.48 billion, loans receivable, net of deferred fees and costs, were $806.6 million and total deposits were $1.18 billion.

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.

41

For the three months ended September 30, 2007 and 2006, the Mortgage Banking segment recorded net income of $429,000 and $547,000, respectively. Year-to-date net income through September 30, 2007 was $1.5 million compared to $1.6 million for the same nine month period of 2006.  The decrease in net income is attributable to decreases in net interest income and non-interest income due to decreased loan volume over the comparable periods offset by decreases in non-interest expense.  Non-interest expense decreased $2.6 million, or 22%, to $9.0 million for the nine months ended September 30, 2007 compared to $11.6 million for the same nine month period of 2006.  At September 30, 2007, total assets for this segment were $163.9 million; loans held for sale, net were $144.4 million and mortgage funding checks were $17.8 million. At September 30, 2006, total assets were $273.1 million; loans held for sale, net were $258.1 million and mortgage funding checks were $45.4 million.

Wealth Management and Trust Services

The Wealth Management and Trust Services segment provides investment and financial services to business and individuals, including financial planning, retirement/estate planning, trusts, estates, custody, investment management, escrows, and retirement plans. Operations of the Bank’s trust division is included in this operating segment since the date we acquired certain fiduciary and other assets and assumed certain liabilities on February 9, 2006.

For each of the three month periods ended September 30, 2007 and 2006, the Wealth Management and Trust Services segment recorded a net loss of $2.0 million. For the nine months ended September 30, 2007, the net loss for this business segment was $1.7 million, compared to a net loss of $2.0 million for the same nine month period of 2006.  The losses recorded were primarily a result of the aforementioned loss on the escrow arrangement during the third quarter of 2007 and the impairment charges recorded during the third quarter of 2006.  For the three months ended September 30, 2007 and 2006, non-interest income was $1.1 million and $849,000, respectively.  For the nine months ended September 30, 2007 and 2006, non-interest income was $3.2 million and $2.5 million, respectively.  The increases in non-interest income are primarily attributable to the trust division whose operations are included for the full three and nine months ended September 30, 2007.  At September 30, 2007, total assets were $4.2 million and managed and custodial assets were $6.2 billion. At September 30, 2006, total assets for this segment were $5.5 million and managed and custodial assets were $5.9 billion.

Information pertaining to our business segments can be found in Note 4 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 individual risk profile of the financial institution. The guidelines define capital as both Tier 1 (which includes common shareholders’ equity, defined to include certain debt obligations) and Tier 2 (which includes certain other debt obligations, a portion of the allowance for loan losses, and 45% of any unrealized gains in equity securities).

At September 30, 2007, our Tier 1 and total (Tier 1 and Tier 2) risk-based capital ratios were 12.49% and 13.34%, respectively. At December 31, 2006, our Tier 1 and total risk-based

42

capital ratios were 13.25% and 14.06%, respectively.  Our regulatory capital levels for the Bank and bank holding company meet those established for well-capitalized institutions. Table 13 provides additional information pertaining to our capital ratios.

Table 13.

Capital Components

At September 30, 2007 and December 31, 2006

(In thousands)

										To Be Well
										Capitalized Under
					For Capital					Prompt Corrective
Cardinal Financial Corporation	Actual				Adequacy Purposes					Action Provisions
(Consolidated):	Amount		Ratio		Amount			Ratio		Amount			Ratio
At September 30, 2007
Total risk-based capital/ Total capital to risk-weighted assets	$	171,944	13.34	%	$	103,088	>	8.00	%	$	128,860	>	10.00	%
Tier I capital/ Tier I capital to risk-weighted assets	160,904		12.49	%	51,544		>	4.00	%	77,316		>	6.00	%
Tier I capital/ Total capital to average assets	160,904		9.80	%	65,684		>	4.00	%	82,105		>	5.00	%
At December 31, 2006
Total risk-based capital/ Total capital to risk-weighted assets	$	170,457	14.06	%	$	97,010	>	8.00	%	$	121,263	>	10.00	%
Tier I capital/ Tier I capital to risk-weighted assets	160,656		13.25	%	48,505		>	4.00	%	72,758		>	6.00	%
Tier I capital/ Total capital to average assets	160,656		10.68	%	60,180		>	4.00	%	75,225		>	5.00	%

											To Be Well Capitalized Under
	Actual					For Capital Adequacy Purposes					Prompt Corrective Action Provisions
Cardinal Bank:	Amount			Ratio		Amount			Ratio		Amount				Ratio
At September 30, 2007
Total risk-based capital/ Total capital to risk-weighted assets	$		155,816	12.12	%	$	102,824	>	8.00	%	$	128,531		>	10.00	%
Tier I capital/ Tier I capital to risk-weighted assets	144,776			11.26	%	51,412		>	4.00	%	77,118			>	6.00	%
Tier I capital/ Total capital to average assets	144,776			8.83		65,590		>	4.00	%	81,988			>	5.00	%
At December 31, 2006
Total risk-based capital/ Total capital to risk-weighted assets	$	141,885		11.73	%	$	96,742	>	8.00	%	$		120,927	>	10.00	%
Tier I capital/ Tier I capital to risk-weighted assets	132,084			10.92	%	48,371		>	4.00	%	72,556			>	6.00	%
Tier I capital/ Total capital to average assets	132,084			8.80	%	60,038		>	4.00	%	75,048			>	5.00	%

43

Contractual Obligations

We have entered into a number of long-term contractual obligations to support our ongoing business activities. 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 14.

Table 14.

Contractual Obligations

At September 30, 2007

(In thousands)

			Payments Due by Period
	Total		Less than 1 Year		1 - 2 Years		3 - 5 Years		More than 5 Years
Certificates of deposit	$	475,790	$	427,835	$	32,479	$	15,476	$	—
Brokered certificates of deposit	9,950		4,995		—		4,955		—
Advances from the Federal Home Loan Bank of Atlanta	199,583		24,583		—		55,000		120,000
Trust preferred securities	20,619		—		—		—		20,619
Operating lease obligations	19,734		4,826		4,475		6,227		4,206
Total	$	725,676	$	462,239	$	36,954	$	81,658	$	144,825

Commitments and Contingencies

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 represent our obligation to extend credit or guarantee borrowings that are not recorded on the consolidated statements of financial condition.  The rates and terms of these instruments are competitive with others in the market in which we operate.  The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition.

The Bank’s maximum 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, 2007, commitments to extend credit were $339.9 million and standby letters of credit were $10.1 million. The fair value of the liability associated with standby letters of credit at September 30, 2007 was immaterial.

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 and require collateral to support financial instruments when deemed necessary. The amount of collateral obtained upon extension of credit 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.

Standby letters of credit are conditional commitments we issued to guarantee the performance of the contractual obligations by 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

44

of credit is essentially the same as that involved in extending loan facilities to customers. We hold certificates of deposit, deposit accounts, real estate or other appropriate forms of collateral supporting those commitments when collateral is deemed necessary.  The majority of these guarantees extend until satisfactory completion of the customer’s contractual obligations.

George Mason maintains a reserve for loans sold that pay off earlier than the contractual agreed upon period, thereby requiring that George Mason refund part of the service release premium and/or premium pricing received from the investor.  The reserve as of September 30, 2007 was $47,000.

We have counter-party risk that may arise from the possible inability of George Mason’s third party investors to meet the terms of their forward sales contracts.  George Mason works with third-party investors that are generally well-capitalized, are investment grade and exhibit strong financial performance to mitigate this risk.  To date, none of our investors have failed to meet its obligations, nor do we expect any third-party investor to fail to meet its obligation.

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 by obtaining funding from depositors or other lenders or by converting non-cash items into cash.  The objective of our liquidity management program is to ensure that we always have sufficient 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 believe we have demonstrated our ability to attract deposits because of our convenient branch locations, personal service and pricing.

In addition to 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 and then forecast liquidity based on anticipated changes in the balance sheet. In this forecast, we expect to maintain a liquidity cushion. 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 have sufficient resources to meet our liquidity needs.

In October 2007, George Mason and the Bank cancelled its one year $150 million floating rate revolving credit and security agreement with a third party. The purpose of this credit facility was to fund residential mortgage loans made by George Mason prior to their sale into the secondary market. However, we determined that as a result of the limited use of this credit facility and the available liquidity at the Bank, this credit facility was no longer needed.  At September 30, 2007, none of this line was utilized.

45

In addition to this facility, this same lender had also provided a $100 million facility that was utilized by George Mason to warehouse residential mortgage loans held for sale to this lender. Again, this credit facility was cancelled in October 2007 as a result of the limited use by George Mason of this facility and the available liquidity at the Bank.

Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled $387.1 million at September 30, 2007 or 23% of total assets. We held investments that are classified as held-to-maturity in the amount of $82.7 million at September 30, 2007. To maintain ready access to the Bank’s secured lines of credit, the Bank has pledged the majority of its investment securities to the Federal Home Loan Bank of Atlanta with additional investment securities pledged to the Federal Reserve Bank of Richmond. Additional borrowing capacity at the Federal Home Loan Bank of Atlanta at September 30, 2007 was $151.9 million. Borrowing capacity with the Federal Reserve Bank of Richmond was $12.7 million at September 30, 2007. We anticipate 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 in conjunction with liquidity and capital management.

We employ an independent consulting firm to model our interest rate sensitivity.  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, savings accounts and certificates of deposit. 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 based on specific changes in interest rates. The rate simulations are performed for a two year period and include ramped rate changes of down 200 basis points and up 200 basis points. 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, 2007, we were liability sensitive for the entire two year simulation period.   Liability sensitive means that we had more liabilities repricing than assets. We have more of our liabilities in non-maturity or short-term deposit products than we have in floating rate assets.  In a decreasing interest rate environment, net interest income would grow for a liability sensitive bank.  In the down 200 basis point scenario, net interest income improves by not more than 10.8% for the one year period and by not more than 13.9% over the two year time horizon.

46

In the up 200 basis point scenario, for a liability sensitive bank, net interest income should contract in a rising rate environment.  In the up 200 basis point scenario, net interest income declines by not more than 6.2% in the first year and declines by not more than 8.8% over the two year time horizon.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

                Our Asset/Liability Committee is responsible for reviewing our liquidity requirements and maximizing our net interest income consistent with capital requirements, liquidity, interest rate and economic outlooks, competitive factors and customer needs. 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. 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, savings accounts and certificates of deposit. 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 specified changes in interest rates. The rate simulations are performed for a two year period and include ramped rate changes of down 200 basis points and up 200 basis points. 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 of these simulations are then compared to the base case.

At September 30, 2007, we were liability sensitive for the entire two year simulation period.   Liability sensitive means that we had more liabilities repricing than assets. We have more of our liabilities in non-maturity or short-term deposit products than we have in floating rate assets.  In a decreasing interest rate environment, net interest income would grow for a liability sensitive bank.  In the down 200 basis point scenario, net interest income improves by not more than 10.8% for the one year period and by not more than 13.9% over the two year time horizon.  In the up 200 basis point scenario, for a liability sensitive bank, net interest income should contract in a rising rate environment.  In the up 200 basis point scenario, net interest income declines by not more than 6.2% in the first year and declines by not more than 8.8% over the two year time horizon.

                See also “Interest Rate Sensitivity” in Item 2 above for a discussion of our interest rate risk.

47

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 control 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 control over financial reporting.

48

PART II — OTHER INFORMATION

Item 1.  Legal Proceedings

In the ordinary course of our operations, we may become party to legal proceedings.

On August 9, 2007, the Company filed a complaint against defendants Philip A. Seifert and Liberty Growth Fund, LP in the Circuit Court of Fairfax County, Virginia.  Additional information on this proceeding, including the underlying facts, is set forth in Note 11 to the consolidated financial statements and incorporated by reference into this Item 1.

Item 1A.  Risk Factors

Our operations are subject to many risks that could adversely affect our future financial condition and performance and, therefore, the market value of our securities.  The risk factors that are applicable to us are outlined in our Annual Report on Form 10-K for the year ended December 31, 2006.  These risk factors have not changed as of the date of this report.

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

(a)  None.

(b)  Not applicable.

(c)  We did not purchase any shares of our common stock during the three months ended September 30, 2007.

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.

(c)  None.

(d)  None.

Item 5.  Other Information

(a)On November 7, 2007, we entered into an Executive Employment Agreement with Kendal E. Carson, who serves as our President and is Senior Executive Vice President of Cardinal Bank.  The initial term of his agreement, which is retroactively effective as of March 6, 2006, is three years commencing on that date, and the agreement automatically renews for successive one year periods up until March 6, 2011.  The agreement provides for an annual base salary, and he is eligible for an annual merit increase, performance bonus and stock option grants on the same basis as similarly situated executive officers of the Company.   Mr. Carson may also receive severance payments in the event of a change in control of us or a termination of his employment by us for reasons other than cause, as provided in the agreement.  The agreement contains non-competition and non-solicitation covenants.  A copy of Mr. Carson’s employment agreement is attached as Exhibit 10.1 to this Form 10-Q and is incorporated by reference into this Item 5.

Mr. Carson also participates in our supplemental executive retirement plan, effective as of June 5, 2007. Upon retirement at age 65 and based on his period of service with us, Mr. Carson will be entitled to an annual retirement benefit as provided in the agreement.  The benefits in the plan vest incrementally based on his years of service to us.   A copy of the Supplemental Executive Retirement Plan that we entered into with Mr. Carson on November 7, 2007 is attached as Exhibit 10.2 to this Form 10-Q and is incorporated by reference into this Item 5.

(b)  None.

Item 6.  Exhibits

10.1	Executive Employment Agreement, dated November 7, 2007, between Cardinal Financial Corporation and Kendal E. Carson.
10.2	Supplemental Executive Retirement Plan, dated November 7, 2007, between Cardinal Financial Corporation and Kendal E. Carson
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

49

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 8, 2007	/s/ Bernard H. Clineburg
	Bernard H. Clineburg
	Chairman and Chief Executive Officer
	(Principal Executive Officer)
Date: November 8, 2007	/s/ Mark A. Wendel
	Mark A. Wendel
	Executive Vice President and Chief Financial
	Officer (Principal Financial Officer)
	Mark A. Wendel
Date: November 8, 2007	/s/ Jennifer L. Deacon
	Jennifer L. Deacon
	Senior Vice President and Controller
	(Principal Accounting Officer)

50